Bull bounce in bear market

The Australian sharemarket is up almost 20 percent from the lows made just over a month ago chart. We've had a bull move in a bear market. More often then not referred to as a Bear Trap. Many market commentators are asking if this is the bottom? Whether it’s the bottom or not is trivial. Traders can make just as much money in a falling market than one which is rising. We should be more concerned about the fundamentals of the world economy. The structural problems of the broken world monetary system and the solvency of the United States and other countries.

Chart 1: The All Ords is up around 20 percent in the last month.

Chart 2: Longer-term, the 200 moving daily average provides a major resistance point.

Predictions

Short-term: If the All Ords can hold and stay above 3700, it will likely then push over 3900. Most likely, the All Ords will push back towards 3300 and resume its sideways channel.

Longer term: Expect the All Ords to push sub-3000 as the world economy slips closer to depression.

Longer-longer term: The printing presses are continuing to run hot and the paper will eventually find its way into the sharemarket (property market, commodities etc).


Some good news

Some of the best moves in the last month have come from the resources sector, in particular, copper companies. On the rocket list include: PNA, ABY, KZL, IVA.

If we examine the latest LME warehouse charts (below), its interesting to note that copper, zinc and lead have all made a plateau (in supply). Could it be that enough mines have closed to bring supply and demand into equilibrium? If so this could continue to be a short-term positive for the sector.

Chart 3:Copper, Lead and Zinc have plateau in stockpiles (for now) while nickel and aluminium are still in oversupply.

Some bad news

Much of the gains in the last month have come from stocks you wouldn't want to be holding in a bear market: the banks, property trusts, and other high debt or high liability companies (eg. RIO, OZL).

[As a rule of them, you need only look at what the top 4 banks, and BHP do on any given day, week or month to find out a general direction for the market. BHP alone makes up around 10 percent of the All Ordinaries Index)].


More bad news

We are now heading into the reporting season in the United States. There will be surprises. White elephants will continue to fall from the sky. Will the US actually let more big companies fail? Will they finally let GM die soon?


Add a little G20

The recent talkfest at the G20 nations meeting should provide little confidence to the world markets. The G20 is a farce. It's made up of debtor nations and printing presses. Their goal is to reinflate the world economy to create the next bubble, to create the next imaginary wealth effect. Instead of making structural adjustments to the monetary system, they think it will be easier to reinflate asset prices at the cost of taxpayers. Their actions will only worsen the current economic situation and intensify the structural problems of the world monetary system.

One of the outcomes of the G20 meeting:

use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries

In otherwords, continue to use IMF as a pawn (much like the World Bank) to provide more loans (debt) to poor nations, so that they remain in debt.

The other key point is that the G20 (particularly led by the US) need to keep the gold price down. A surging gold price threatens the viability of the current monetary system and purchasing power of the world's fiat currencies. The US, UK and many other G20 countries (including Australia) have already sold much of their gold reserve holdings over the last 20 years. The IMF must pull its weight… (the longer they can keep gold price down, the more time there is for private investors to accumulate).

Over $2 Trillion has been pledged by G20 nations in the last year! This does not include any additional 'quantitative easy' (printing money). What will the number be in a years time? (about $5 trillion perhaps..)

See this article on what each G20 nation has committed so far.


The Banks

The following chart visualises what has already happened to to some of the world's largest banks.

Chart 4:
Ausrtalian Banks

In contrast, the Australian banks have held up well, albeit they have fallen less than most banks worldwide and they are still alive and profitable. Indeed, the Australian banks may look tempting to an investor. The sector (XFJ.ax) has risen some 36 percent in the last month as the following chart illustrates.

Chart 5: Our banks are up, but still in a bear trend.
Australia's top four banks are now amongst the largest in the world. In late January 2009, the Australian reported that the big four were now in the top 20 banks world wide by market cap.

Westpac - 9th, worth of $US28.2 billion ($43.2 billion)
Commonwealth - 15th
NAB - 17th
ANZ - 19th

All four banks are ahead of previous mega-banks: Citigroup (US), Morgan Stanley (US), Barcalays (UK) and Deutsche Bank (Germany). It's almost the last man standing! Something is wrong... very wrong...


Lets say they got lucky

Former RBA Chairman Ian Macfarlane recently stated this about why the Autsralian banks are holding up so well (see the Business Spectator for full article).

the relative health of Australia’s banks is not much a result of their superior management, but pure luck: that they aren’t allowed to take each other over, and they haven’t had enough funds to invest in US sub-prime mortgages and CDOs.

There is probably a lot of truth to this statement. Australia and our banks have been somewhat lucky so far. I feel a lot more nasty surprises to come out in the next couple of years (B&B, Allco, ABC Learning types). The biggest ongoing concern by far is the property market (commercial, industrial and importantly, residential markets).

The Intelligent Investor has a great article which examines the balance sheet of Westpac in 2008 and compares it to 1989 (just before the last recession). Here are some of the key, concerning points.

1) Westpac no longer has any gold bullion
2) Is heavily exposed to the housing market. (54% of all loans in 2008 compared to 25% in 1989)
3) Now has tens of billions in Derivatives

Further:

The result would be devastating if Westpac were to write off 8.9% of its loan book over the next four years, as it did in the four financial years from 1990 to 1993 (see Table 3). Taking 8.9% of Westpac’s $313.5bn of loans and acceptances as at 30 September 2008 would imply $27.9bn of provisions.

Something smells funny

We can’t say categorically that Australia’s banks are making grave errors in their risk modelling. But we can say that something smells funny when the most a bank thinks it can lose on a $145bn mortgage portfolio in stress is $201m, or 0.14% of the portfolio. In fact, it sounds eerily similar to the thinking in North America before its real estate collapse.

At the least, it’s sensible to countenance the possibility that the banks have underestimated the risks, or perhaps the correlation of certain economic and financial factors under extreme scenarios. That being the case, the recent rally in bank stocks may provide a great opportunity to revisit your portfolio’s weighting in this sector.

Yes, I think Australia has been somewhat lucky so far, but its now starting to set in as the newspaper fill their front pages with job loss reports. Today it was Qantas (1,750 jobs gone). Just wait till the papers start reporting daily on the housing (price) crisis.

Cheers
Scott