Market Wrap... Back to the 1930s

By Jason Fittler

Note to Readers:  You can listen to the audio of this report by clicking on the video at the bottom of this post.
Stock prices have more than halved since peaking last year, eclipsing the short, incredibly sharp decline seen in the ’87 crash and overtaking the decline seen in the Great Depression (unless they soon find a floor, prices will quickly overtake the record drop seen in the OPEC oil shock of the early 1970s).

The collapse in share prices has had a major effect on wealth, reinforced by falling house prices, and we estimate that net household wealth will end this year about 10% lower, which is a massive turnaround from last year when it posted a 15% gain.

There has been nothing like this in the past fifty years for which we have data, and we suspect that this is the biggest drop in wealth since the 1930s when stock prices almost halved, rallied and then almost halved again, and house prices fell by about one-third.

In real terms, the estimated fall in wealth of 12% should have a major effect on the economy – given wealth is almost eight times consumption, then if the marginal propensity to consume out of wealth is five cents in the dollar, the drop in wealth would take 4.75% off spending over the long term. This is a very large long-term effect, although it does not take into account any residual boost from last year’s surge in wealth. Combined with rising unemployment, it points to pending the remaining under extreme pressure despite the benefit of falling interest rates and petrol prices and also points to the RBA slashing rates into next year.

Last week was a down week with the market starting the week at 3700 and finishing at 3400 with a low of 3226. Friday gave us the bottom of 3226 while at the same time gave us hope that the lows could be in. Our market rallied strongly on Friday afternoon which was followed on by a strong night in the US. Monday saw the market sit flat as investors are not sure what to do.

What we know, is that the market is cheap right now and at some point in the future we will look back and kick ourselves for not spending more. But right now it is a good idea to be controlled about what you buy as we are certainly in difficult times

Advice where do you get yours?

Over the past 5 years of a raging Bull market everyone quickly became an expert on the market. People no longer wanted to pay for advice from advisers as they did not see a need or place any value on the advice. Now in the falling market, people want the help of advisers; there is a clear increase in the number of people contacting advisers either for help or simply comfort. But this time their reason for not wanting to pay for advice is because that can not afford it. So what is your adviser worth?

Below I will cover two recent examples of what an adviser is worth.

1.    Brisconnection – this is the big dud float of 2008, which is a big deal, given 2008 results. The float was in two parts, $1 up front on the float and a second payment of $2 later. The stock price has fallen to 1c. Someone who trades through a discount broker purchased 5 million shares at 1c, my guess looking for a spike. Unfortunately those in the know were happy to sell to get out of having to pay the second instalment of $2. This discount broker client is now on the hook for $10,000,000. Yes, the underwriters will come looking for they money and NO you will never get this back. So the would be trader saved $50 in brokerage and cost himself everything he has.

2.    Gearing in Retirement – in a bull market gearing is great it doubles your gains. But there is a catch; in a Bear market it doubles your losses. Worse still if you do not have any income the banks may call in your loan and force you to sell your house. In retirement your income comes from your investments, if you have lost most of your investments due to a fall in the market you have also lost most of your income and now the bank will want your house. The cost for a plan which would have advised against borrowing in retirement $2000. The cost of not getting this, your house.

Good advice is like good coaching; with out it you will never be a top performer. The gains will always outweigh the costs.

When you need advice, we are always ready to listen and help.
Give us a call (07) 4771 457