My early morning gloom & doom (reality) post...

  1. 1,816 Posts.
    Sitting here in front of my computer in the early hours of the morning, i feel two emotions; vindication and despair.

    The Dow is down close to 200 points as i speak. The rally that many had hoped would carry the Dow over 8,000 has not eventuated- that's where the despair comes from.

    What i believe i'm witnessing is the slow destruction of the US economy. The US equity markets- which are a proxy of the economy are painting very bleak picture. Very, very bleak.

    Slowly but surely, as every quarter passes, we're witnessing an endless grind down in equity markets.
    The Dow has fallen from 11,700 at its peak to below 8,000. That's a fall in excess of 35%. The other major indicies (Nasdaq, SP500, Wiltshire 5000) have fallen even more.

    Will this affect Australia? Is this a concern for Australian investors??

    The conventional answer will be no, but the practical answer is clearly yes.

    The All Ords is current fighting a monumental battle between two schools of thought.

    One school of thought says that the Australian economy and market are mostly independent from the girations in America. We've got an economy that's plodding on very well, and many companies that are still reporting earnings growth... so why worry??

    The other school of thought agrees with this thesis, but adds a couple of additional conditions.

    1. We are 'plodding on well' at the moment... but that not an excuse for complacency. We' re an economy that's very much globalised. Many of our listed (and private) companies derive a large percentage of their earnings from exports, and operations in foreign markets. We're thus very exposed.

    2. The equity markets, just like the markets for goods and services is globalised. Parity pricing is a reality in the globalised economy, and this includes parity pricing of financial securities. This means that global investors applying a higher required return from equities in future (ie. a greater risk premium) will apply this attitude to ALL equities in all western economies. There will be some exceptions, but they are likely to be in economies that have a concentration of industries that are exhibiting high growth, or economies that are insulated from trade in goods and finance (ie closed economies like India). Australia is very unlikely to be an exception.

    The battle between these two schools of thought is being fought out by big money in the market, read: the super funds. It's what's containing the market at current levels. Those that believe that this is just the panic before the new bull market next year are buying every dip below 3,000... but in recent times it seems that even they are exhibiting some doubts- buying strength is weakening.

    A downside break (below 2,800) looks close to a certainty to me.

    Let's wait and see...
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