Another Tough October

By Jason Fittler

The market opened the month at 4800 only to fall to a low of 3800 being a drop of 20% during the month. We finished the month on a strong note with the market rallying back to 4000 closing down 17% for the month.

In Japan the market fell to 26 year lows while in the US the market fell back to 2003 levels.

There was also a large increase in margin calls during the month (not amongst our clients). The big story on this front was a local firm which converted all of their clients into cash. To do this at the bottom of the market is simply a measure to prevent margin calls which once again highlights the danger of high gearing levels. Now that these highly geared investors are out of the market this is a strong indicator that we should see a rally in the short term.

Have we seen the bottom? In the short term I expect so, however in the longer term we could see further market weakness.

What should we expect to see from here, in terms of the market? I expect to see a Bear Market rally which may get us back to around 5000 points. The time frame for this will be the next couple of months. However, when we take a look at the longer term being the next 2 years I would expect to see further weakness in our market.

The facts are that we are moving into a recession or at minimum, a slow down. The Reserve Bank will cut interest rates to soften this fall but it will happen all the same.

Why will there be a slow down?

1. The major players world wide are slowing down, this can be seen clearly in America.

2. Unemployment is historically low running at 4%; we can expect to see this rise. One of the leading indicators of this is the 50% drop in job ads.

3. Credit is tight, the policies the governments have put in place around the world to stimulate credit will work, but it will take a number of years.

4. Retail sales dropped 1.1% in September, in Queensland this figure was 5.3%. This is larger then the drop seen after GST was introduced in 2000. The concern is what the October figures will show.

5. Housing prices are also falling down 1.8% in the third quarter; this is the biggest fall since the mid 1980s.

6. The resources boom is slowing, base metals prices are coming off and steel production is down. Expansion projects have ceased, construction companies who feed off the resources sector are reporting a major slow down in their pipeline.

7. The average Australian is poorer today then they were this time last year as such we can expect a further slow down in consumption as they put of those larger purchases.

The Positives

1. Bear markets run for around 2 years and what we do know is that when the markets recover you will see fantastic gains.

2. Stocks are yielding high incomes at present; there is plenty of opportunity to receive an 8% return just on the income.

3. Using derivatives, you’ll be able to boost your returns in a very safe manner. For clients whose investing style suits, we will look at covered call strategies to boost returns in the coming two years.

The next two years will be a tough time but there will be plenty of opportunity to produce a great return. Remember a return above 8% per annum on average is considered a great return.

Until next week.