The Impact of the New Century Financial Collapse on the Australian Market

MELBOURNE AUSTRALIA (Markets and Money): We can truly say that we never cease to be amazed by the apparent lack of interest taken by the market when news that could be of a severe magnitude hits the market. 

Take for instance this whole subprime lending fiasco in the United States.  The news on this isn’t new.  The first signs of a problem emerged about a week ago when subprime mortgage lender New Century Financial (NYSE: NEW) announced that it may not be able to meet all of its obligations.

The result?  The share price collapsed by 70% on the day of the announcement to below USD$5.  Since then it has almost been obliterated from the market.  It last traded at USD$1.66 before it was suspended from trading.  Only one month ago it was trading at USD$30, and six months ago it reached a 52 week high of USD$51.97.

In other words, the market capitalisation of New Century Financial had fallen by a massive 97% in around six months.  Doesn’t that sound like a problem?  Wouldn’t that warrant a miniscule amount of interest in the overall health of not only the mortgage market but also of the entire financial markets?

The answer to that was pretty much a big fat NO!  Most of the commentary from market analysts took the view that subprime lending represented such a small amount of mortgages that even a meltdown would not have an impact to any relevant degree.

But forward the market went, looking at far more important things such as whether a particular stock missed/exceeded its profit forecasts by 1 cent.  If it was a surprise to the upside then it’s worth piling into.  1 cent to the downside then it should be treated like a leper.

Then all of a sudden, about a week after the news first emerged, the penny drops and the market panics.  Maybe this subprime mortgage malarkey is a bit more serious than first thought!

So anyway, what, if anything does this mean for Australian companies.  Not surprisingly, those companies with significant exposure to North American property markets suffered a torrid time of it during trading yesterday.

While the All Ordinaries Index fell by a hefty 2%, building supplies companies Boral (ASX: BLD) and Rinker (ASX: RIN) fell by 3% and 2.6% respectively.  While shopping centre builder and owner Westfield Group (ASX: WDC) dropped by 3.1%.

Shane Oliver from AMP Capital Investors told Bloomberg News “There’s concern if the US slows it will affect the rest of the world.  It’s a continuation of the correction that never really ended.”

Brent Mitchell, head of research at Shaw Stockbroking in Sydney told Reuters, “Given the rise in the Australian market over the short to medium term, any significant fall in global markets will have a short-term effect on sentiment and create some short-term volatility.”

We remember musing not so long ago about whether the influence of the US on global markets was a thing of the past, whether the emerging dominance of China would usurp the American economy, and whether Australia’s reliance on the export of resources to China would insulate it from any downturn in the US economy and financial markets.

It would seem plain to all that although the US may not be quite as influential as it was ten years ago, the power of their consumers and businesses still holds a massive sway over world markets.  Only the foolhardy would discount current events as a storm in a teacup.

Kris Sayce
for Markets and Money

Kris Sayce

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005.
He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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