Measuring the market meltdown so far…

Measuring the market meltdown so far…

It's been a little over year since the All Ordinaries hit its highest point of 6873 on 1 November 2007. On Friday 21 November 2008 it hit a low of 3201 – a fall of 53 percent.

Chart 1 shows the All Ordinaries (the main index for the Australian Sharemarket XAO.ax) in the last 18 months. The earliest and strongest signal that we were entering a bear market was back in January 2008. Since January, the market has tried to find a bottom. After falling, only 2 possible outcomes are possible - i) pause and go sideways ii) Go UP. On each occasion, the XAO paused, then broke support (the green cross), in the search for a new bottom. A bottom has still not been made!

Chart 1: All Ords in last 18 months
As the following chart 2 shows the current financial bear market is rivaling the 1929 crash in speed and depth, so far. With the 1929 crash, heavy losses came straight away, whereas the current bear market had a small correction before it started in August 2007, then a decent crash in Dec-January 2008, then in July-August-September. If we are to follow 1929 from here, there is still some pain to come before the bottom. The current bear market is already worse then the early 1970s (first oil shock) and the Dot Com crash.

Chart 2: Alan Kohler, ABC News 24 Nov 2008
* Note however, that after the initial crash in 1929, from November to January of 1930 the US sharemarket rebounded some 50%, before resuming its major bear market. December-January periods tend to be good months for the sharemarket historically, but not always so (like last Dec-Jan).

Chart 3: in The Financial Review 24 Nov 2008
Chart 3 compares all the bear markets in the 1900s showing the mean percent decline and magnitude (over days). This chart shows that it is comparitable with 1901, 1906, 1919, 1937, and 1973 - but the duration of the current bear market is much much shorter to reach this decline. Only 1929 stands out. Could the ultimate bottom be somewhere near 1929...? and in what time frame?

Comparing the meltdown in terms of Gold and Silver

In the last year the All Ords has gone down some 53 percent measured in terms of Australian Dollars (the stock are measured in $AUD p/share). When you measure the All Ords in terms of gold or silver though(or any other commodity such as wheat, oil or other tangable no-liability (no debt) asset), you will see that the sharemarket has been crashing for several years, going back to the Dot com days. In 1999, 1 point of the Dow Jones could buy you 45 ounces of gold. Today 1 point of the Dow Jones can buy you around 9.5 ounces of gold. In these terms, the Dow has crashed by over 72 percent so far. A similar picture is happening to the housing market in the US (and in Australia), which I will touch on in a future post.

To measure the All Ords, I merely used historical year end gold/silver data (in tons) with year end All Ords data. The charts speak for themselves.

The unique qualities of gold and silver is that it accounts for all the debt and money created throughout time. When sharemarkets, real estate and credit markets bubble, people flock to undervalued gold and silver.

Chart 4: Gold vs All Ords
Notice in the 1970s and early 1980s, gold quickly fell to its overvalued region. Then the sharemarket became undervalued. The All Ords peaked in 1999 (same as Dow Jones) in terms of gold.

Chart 5: Silver vs All Ords
Like gold, silver did the monetary accounting in the 1970s and early 1980s, however today is a very different picture. Silver is extremely out whack and very undervalued compared to gold in Chart 4. The All Ords looks very expensive in terms of silver.

Eventually gold and silver will go back to the expensive levels at the bottom of the charts - but there is some way to go yet!

More good stories to come on gold (and particularly) silver...

Commonwealth Bank now has larger market capitalisation than Citibank

Last Friday, as one market commentator pointed out, with the falling shareprice of Citibank below US$5 per share, the market capitalisation of the Commonwealth Bank (CBA.ax) is now larger then Citibank, once one of the world's largest banks, and still huge in terms of Tier 1 capital and revenue.

Shareholders are now betting the bank will be bailed out by the US Government and that equity holders would be wiped out. As I write this, there are news clips coming out saying the US Government will guarantee close to $US300 billion ($475.3 billion) of Citigroup's assets with an additional an additional $US20 billion in capital to help it stay alive (for now). **insert more fuel to the world economic fire**

Still to come: Housing bubble in Australia, and my thoughts on Obama's Presidential win (in an world economic/monetary viewpoint).

Cheers,
Scott

ABC, Allco, FreightLink collapse

This week we have seen a string of large companies go into administration and further declines in employment across the economy, particularly in manufacturing and resources industries.

ABC Learning

On Thursday 6 November 2008 ABC Learning, Australia's largest childcare provider (1200 centres in Australia and NZ) fell into administration.

The big 4 banks have had huge exposure to ABC:
CBA: $240 million
NAB: $140 million
WBC: $200 million
ANZ: $182 million

The exposure will go much further then the banks. Already toy wholesaler Funtastic said its earnings will likely be adversely affected by the events at ABC.

I believe if the banks are pulling the pin now, they will be more than unlikely willing to throw more money in later after the administration processes run there course.

The overall impact on the Australian taxpayer (the Australian Government) is yet to be played out in full… So far the Government is assuring to keep the childcare centres open for ABC Learning's 16,000 staff and 120,000 children under care until the end of 2008 (at a cost of A$22 million). At the end of day the Government will give way to pressure to provide certainty for the industry over the longer term. ABC's downfall has left a big void in the industry, and who can raise debt and equity in today's market to buy their assets?

Could ABC Learning also be one of the first direct exposures of the financial crisis on everyday life of Australians? Most Australian’s suspect something has been wrong with the world economy, but few are yet to feel it because they might still have their home, their job, their large credit cards and everything else. If the Government didn’t throw $22 million to keep ABC going till Xmas, then 100,000s of Australian families would certainly be in an awkward position with their childcare arrangements. More large business failures in the future will make ABC Learning look like a drop in the ocean in its size and its impact on Australian communities.

A good article on the rise and fall of ABC can be seen:
http://www.businessspectator.com.au/bs.nsf/Article/ABC-Learning-L53L5?OpenDocument&src=sph

Allco Finance Group

On Tuesday 4 November 2008, Allco Finance fel into administration. Like ABC Learning, Allco was in the ASX100 this time last year. Allco was also part of a consortium to takeover Qantas last year, and almost succeeded.

Allco Trusts

The latest reports and rumours are that Allco's listed real estate trusts: Rubicon Japan Trust, Rubicon America Trust and Rubicon Europe Trust Group may also default on their debt facilities, following the collapse of its parent arm. All three trusts are currently in a trading halt.

Other related entities including:Allco HIT, Record Realty, Allco Max Securities and Mortgage Trust and Allco Hybrid Investment Trust are also in trading halts pending possible implications with Allco Finance Group,

FreightLink

This week we also saw FreightLink fall into administration. FreightLink is better know as the railway built connecting Darwin to Adelaide. The company has been for sale for sometime, but has no fallen through. It is said that FreightLink has debts outstanding in excess of $500 million (incurred to fund the construction of the railway). The project received both State and Commonwealth Government funding to get off the ground.

There will be a lot more to follow

How long before the banks pull the pin is pulled on Centro Properties and Babcock and Brown…? There will be many, many more to come in the next couple of years. I really think one to watch for in a years time is Wesfarmers, who bought Coles Group at the top of the market and geared it full of debt. If it did go into trouble, who could complain if Coles group was broken up? We really do need greater competition in food retailing in Australia.

Be werey of Property Companies

Other companies at risk is anything to do with propery. Currently in the ASX100 there is about 10 listed property trusts (known as REITS). Centro has already left the index, and probably had the largest amount of short-term debt on its books. Valad Property (again entered ASX100 about 6 months ago) is in a lot of trouble. There will be many more to follow as the property market (commercial, residential, industrials everything) in Australia starts to fall heavily within the next 12 months.

Put GM and Ford into Administration already

Meanwhile in the United State, the US Government just can’t come to terms with the financial health of General Motors and Ford. They should have been allowed to fail a couple of years ago. Instead they are burning cash, and essentially running while insolvent. Their only life line is the US Government, which gave the US auto industry around US$24 billion in the week leading up to the US$700 bn bail out. Apparently they are now burning US$1 billion per week! No company can do this for too long.

~ Scott

Australia splurges on Melbourne Cup all the while...

Melbourne Cup & Interest Rate Cut

First Tuesday of Novemeber each year is Melbourne Cup - the race that stops the nation.

Only 30 mins before the race begun, the Reserve Bank of Australia (RBA) cut the official interest rate by 75 basis points to 5.25%. This follows a string of bad news starting to filter out about the fragility of the Australia economy. Despite all signs pointing to a economic recession ahead for Australia, we managed to spend over A$100 million on the Melbourne Cup day, a record amount. The winner of the cup was Viewed - at odds of 41 to 1 - Perhaps the same odds of Australia and the world going through a mild world recession.

It was Only a couple of weeks ago the Australia Government announced a $10.4 billion economic stimulus package, and in doing so, halved the avaliable surplus. Could it be that Australia spent a lot of its stimulus package on the gallops today... and whats left over will help pay for Xmas pressies. Afterall, the Government wanted to stimulate the economy. Perhaps they have helped filled the pockets of the bookies instead, and we all know that will somehow help GDP and employment figures...

Bad news Monday (3rd Nov)

Performance of Manufacturing Index (PMI)

The AiG Performance of Manufacturing Index was released yesterday which showed the worst result for manufacturing in Australia for 16 years (since the PMI started in 1992).

Summary:

- this month’s result reflects a combination of the uncertainties and loss of confidence associated with the worsening of the global financial crisis, slower world growth, particularly in the developed economies, and weaker domestic consumer demand.
- These factors were reflected in declines across all components of the Australian PMI® in October. Production fell for the fifth consecutive month and more strongly than in recent months. This reflected the ongoing decline in new orders, which fell for the sixth consecutive month. In line with the easing of production, employment fell for the eighth month in October and at a more rapid pace.
- On the positive side, input and wages costs growth eased significantly in October, while selling price growth also eased solidly.
- Inventories and supplier deliveries fell markedly. Exports fell.
- Manufacturing activity fell in all states.

Housing prices suffer record quarterly fall

Also yesterday the Australian Bureau of Statistics (ABS) released housing activity for the September 2008 quarter.

Last (Sept) Quarter:

- House prices fell by 3.3 per cent in Brisbane, 2.5 per cent in Canberra, 1.9 per cent in Melbourne, 1.8 per cent in Sydney, 1.1 per cent in Perth and 0.1 per cent in Adelaide.
- House prices rose by 0.7 per cent in Hobart and 0.1 per cent in Darwin.

For the 12 months till end of September 2008:

- Perth recorded the biggest annual fall in house prices of any capital city in the year to the September quarter, down 4.1 per cent compared with a 2.8 per cent increase nationally.
- Brisbane's 12 month growth is 5.6 per cent.
- Adelaide has the strongest housing market, growing at 9.7 per cent over the year.
- Melbourne grew by 8.1 per cent over the last year.

So the longer term growth numbers still look rosey and distort the falls over the last 3 months. If the Sept Qtrly figures continue, we could see falls in housing prices across Ausrtralia of 10-15 per cent (mininium) by this time next year.

My next post will go into more detail about the outlook for housing in Australia and why debt levels are of a huge concern...

Cheers,
Scott

(Lets hope my gloomy economic predictions are wrong like my Melbourne Cup picks - Zipping and Mad Rush)