Market Wrap - Week Ending Friday 19th Oct 07

What a difference a week can make, this week we’ve seen John Howard come out and offer tax cuts, then RIO’s third quarterly report was not received well by the market. The banks in the US had large profit down grades due to sub-prime, while the tech stock produced outstanding profit results. Oil kept pushing new highs as we all looked to trade in the SUV and buy a scooter.

We’re now just starting to hear a faint cry from Wall Street saying that perhaps the Sub-Prime could be bigger than first expected. Something we have been saying for some time now. Our market closed down for the week and this could be the start of the correction.

Of special interest; it was 20 years ago we saw the start of the 1987 stock market crash. So what do most of us know about the cash?  It was bad and a lot people lost money but mostly people fear that this could all happen again.

When we take a closer look we see that preceding the crash there was a mega bull market which started around October 1986. During this rally the market rose 80% in one year. In the three months leading up to the crash the market rose 23%.

Anyone and everyone were investing, fundamentals were thrown out the window and it was easy money, people were borrowing large sums of money to invest and gearing themselves to the last penny. Sound familiar, we are seeing a similar thing now but in the residential housing market.

Then the market fell over 30% in one day and people started to find out what a margin call was all about. Over the coming weeks the market fell all the way back to 1300, which is where it started just a year before in October 1986?

For long term investors it was a great ride and I have no doubt that their brokers took some profits for them along the way. Their portfolio was now worth the same as it was worth only a year before. If you had in fact not been paying attention to your portfolio over that year you wouldn’t have even known that this had all happened.

For the short term and first time investor riding the wave of Euphoria it was a financial disaster most of whom would never invest in the stock market again. Nor would their children or anyone they came in contact with. The wipe out destroyed their faith in the Australian Stock Markets, just think of the millions they’ve missed out on since. For those who bought shares at the top of the rally it would have taken 10 years before they broke even.

The lesson, investing is a full contact sport, be sensible and listen to your advisers because when the music stops someone will be left without a seat.

Should you have any queries please contact your adviser on 07 4771 4577.