This is fast turning into a January to forget for investors. Let’s just hope it doesn’t get any more memorable.
Yesterday and today have pretty well confirmed what we’ve been saying for the past year. Australian stocks are following U.S. stocks down as global investors finally factor in a bear market in global credit to share prices. The question now is where the floor will be for equities…and which sectors will find it first. Energy and gold-last year’s darlings, are leading contenders.
It probably won’t be big tech. Intel disappointed investors with earnings below what analysts expected. And thus the theme that multinational technology companies would lead the entire back to the promised land (above 14,000) is dead. It lasted exactly one day, hardly long enough to even trade.
But wait, we are being presumptuous. The Dow must first claw its way back to 13,000 before it gets to 14,000. Locally, the direction of the major indices doesn’t interest as much as the direction of the resource stocks.
From our vantage point in St. Kilda today, it looks like this will be the year for speculators in gold stocks. The blue chips are boring, underperforming, and face a tough earnings environment. Gold, despite losing US$10 in New York trading, is nearing its euphoria phase where people buy it because it’s going up. Not exactly rational. But useful to know if you’re looking for punts in the share market this year.
Shares or property? We’ve been told by some readers that Aussie investors don’t care about gold. It’s either shares or property, and there seems to be an impression that if one isn’t going up, the other must. Shares down? Buy property. Property down? Buy shares!
If it were that simple, we’d all be rich and you wouldn’t be reading this. You’d be at the tennis in Melbourne Park, avoiding clouds of pepper spray. Or perhaps at the beach. But of course it is not that simple.
For five years, all asset classes rose simultaneously with easy global credit conditions. Those conditions aren’t easy anymore. They’re very hard. Citigroup reported the biggest lost its 196-year history yesterday. It lost nearly US$10 billion in the fourth quarter and wrote down another US$18 billion in dodgy mortgage debt. Don’t worry, there’s more where that came from.
More financial losses will be realized as the fake wealth from the global credit boom goes up in digital smoke. The important thing to realize is that globally, this change in credit conditions isn’t the type of thing you can respond to with an axiom. “The share market is slowing down after a global credit boom and China’s epic industrialisation. It must be time to buy property!!”
The trouble with housing here in Australia and all the Anglo-Saxon economies is that it became financial zed. The link between financial innovation and the real economy was established in the mortgage market. It’s true here. It’s true in the U.K, in the States, and even Holland and Spain.
Protecting your capital, then, is not just an easy question of asset allocation. It involves thinking about how the world is changing and where the risk and opportunities really are. Right this moment, there are more risks than opportunities. But we’ll keep looking.
And here’s an idea. If Ben Bernanke wants to really help Wall Street, he can hire all those bankers Citigroup (NYSE: C) is about to fire and use them to hand out all the money he’s going to print later this week. After all, these are people who are used to giving away money indiscriminately. And it will save on fuel costs for Bernanke’s fleet of helicopters. Ben’s Banking Brigades…on the march to market near you soon!
Markets and Money