The miners have supported the ASX in the last month and are largely responsible for its resilience in the face of the wider sell-off in the global stock markets. But with Rio (ASX:RIO) putting on a stiff defense against BHP’s (ASX:BHP) bid, we wonder if the base metals support for the big indices might finally be giving way.
The all ordinaries would have to fall about 11% from their current level to give back this year’s gains. That would be on top of the 6.2% decline that has occurred since the benchmark closed at 6,853 on November 1st. So, if you’re scoring at home, that would be about a 17% decline, which is somewhere between a correction and a bear market.
Speaking of such things…“Japan’s Topix Stock Index’s Drop Signals Bear Market,” reported Bloomberg late last week. “Japan became the first of the world’s 10 biggest stock markets to enter a bear market since the summer’s US subprime-mortgage collapse after the Topix index declined 21 percent from its 2007 peak.” Hmmn.
Both the S&P and the Dow are now down more than 10% from their highs in early October. This passes as a “correction”. But it may also mean that the optimism about the end of the credit crisis in early October was…badly misplaced. We hesitate to say the market was clueless…because who are we to argue with the market?
The Fed, by the way, was quite active in the market yesterday, trying to reassure investors that it stood ready to lend money to anyone who needed it. A New York Fed official told the Financial Times, “we hope to reassure market participants of our commitment to providing sufficient balances at that time by starting to provide these balances now.”
The S&P’s fall of 2.3% on the day suggest that investors were not reassured at all. Or that stocks as an asset class are being abandoned for near-cash bonds and Treasuries. This would be consistent with the flight from high-yield junk bonds and credit default swaps that our friend John Mauldin mentioned today.
Risk is in retreat. It’s been relatively orderly. But we are also reminded of Hemingway’s description of the Italian retreat from Caporetto in November of 1917. The retreat was a disaster and nearly cost the Italians the war against the Germans and Austrians.
So what? “A Farewell to Arms” was published in 1929. Here is one of our favourite quotations from the book, which we consider Hemingway’s best novel: “The world breaks everyone and afterward many are strong in the broken places. But those that will not break it kills. It kills the very good and the very gentle and the very brave impartially. If you are none of these you can be sure it will kill you too but there will be no special hurry.”
Bear markets hurt everyone. The man who leases least wins. If we are on the verge of a bear market—an epic one even—don’t let it kill you.
But let’s not call the undertaker just yet. There could be life in this old resource bull yet. Reuters reports that, “China Investment Corp (CIC), the country’s new sovereign wealth fund, is considering teaming up with major steel producers to counter offer about $US200 billion ($227 billion) for Rio Tinto, according to a Chinese newspaper.”
Chinese authorities later denied the rumour. But maybe it will take three to tango to make the BHP-Rio merger happen. Rio has made a strong case that its assets and its imminent production are worth far more than BHP offered. A Chinese counter offer would seem to confirm that…or might simply raise Rio’s price beyond what BHP is willing to pay and thus, thwart the merge, which you suspect would not make the Chinese too unhappy. We’ll see.
Markets and Money