Pick of the week – Fair value of our market 6300.

The word recession has been used abundantly over the past 6 months, at present our Chief Economist is of the opinion that the US is indeed in a recession. Do not get confused with recession and depression. A recession is the slowing of the economy and at this point in time there is no doubt that the US has slowed down, brought about by the unchecked lending policies of the banks over the past decade.

What does this mean for the US?  The Feds will continue to cut rates and the Government will continue to look to stimulate the economy. Combined, these efforts will work, but it will take time. At this point we should see the US start to recover in 2009.

Now compare this to the Aussie market, we are in a situation of high inflation, meaning that the Reserve Bank will continue to raise interest rates in an effort to slow spending and reduce house hold debt. Again there’ll be a lag time before we see the effects of the interest rate raise, at this point I wouldn’t expect to see spending slow down until the start of 2009.

What does this mean for our market? 
First our market is undervalued, second our economy is still strong, third we can expect to see these Australian companies continue to produce good income, growth and dividends for some time.  And finally I would expect that due to the issues in the US we can expect to see our market trade below its fair value of 6300 for at least a couple more months.