Global markets, depressions and so on...

While global central banks acted relatively quickly to the credit crisis, we are only now getting data on just how badly it is affecting the global economy. The speed and size of falls in production have been surprising and forecasters, such as the IMF, are rapidly downgrading their forecasts for global growth. In October, the IMF thought there was a 60% chance of a recession. After several revisions, the IMF are now forecasting a deep downturn. World growth is expected to fall by 0.5% over 2009, the lowest rate since World War II. For advanced economies the fall is greater, with a 2% contraction expected over 2009.

In our view, one thing the past teaches us is that unless the financial sector is repaired, no amount of monetary or fiscal easing will bring about a lasting recovery. So we think it is encouraging to see further steps by Obama to quarantine toxic assets.

While Australia’s overall financial system is in better shape than many others, collapsing world trade means that both export volumes and prices will fall. The unwinding of the terms of trade boom and difficulty in accessing capital will likely lead to a sharp fall in business investment.

Expressions on Recessions and Depressions

So, what is the difference between a recession and a depression? The old joke states: "A recession is when your neighbour loses their job. A depression is when YOU lose your job". On a more serious note, whilst there is no agreed definition, a depression may be defined as a recession where real GDP falls by more than 10%. The last one in larger developed economies was the Great Depression of the 1930s, where unemployment in Australia got to 20%. Recovery from this was patchy, with another less severe depression during 1937-1938. Normal economic activity did not return until 1940-1941. Since then the US has not had anything close to a depression. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent.

Given the sober global outlook for 2009, a reasonable projection is that Australia will have a mild recession with the second half of 2009 starting to see positive growth returning. Year-on-year GDP growth for 2009 should be just positive (could possibly turn out to be slightly negative), with positive growth for 2010. Therefore, we are of the view that this is NOT a depression. Whilst we believe unemployment may hit 7% at its worst, with 93% of Australians still employed, this is not near depression levels.

The Logic of Staying the Course - Interest rates do count

It appears that investor psychology is divided amongst those who are resigned to staying the course, having lived through their portfolio falling, and those who are more prone to panic. Cashing in growth assets at this point in the cycle (arguably close to or at the bottom) is not sensible, if history is anything to go by.

Example: If your equity portfolio has lost 50%, and you decide to move your funds into cash, with interest rates at 3.25%, it would take nearly 30 years for your portfolio to recover and with no tax relief through imputation credits / capital gains tax discounts (of course interest rates are likely to rise at some stage in the future).
On the other hand, over the last nine bear markets in Australia it has taken between 15 months and just under eight years for portfolio values to be restored. On average around three and half years. Part of the reason this is the case is that once the sharemarket reaches a bear market or recession low, it typically bounces back reasonably dramatically in the first year (on average, 32% over the last nine bear markets).

Whilst investors may feel "damned if they do and damned if they don't" in this negative market, the logic is on the side of staying the course; particularly with interest rates so low (even five year Government Bonds offer little relief at around 3.2%).

Stop Reading the Paper! Six Good Reasons to be Cheerful:

• The Australian economy is in better shape than most of the developed world.
• Although it looks like Australia may have a mild recession, the economy should bounce back, as it always has done in the past.
• Recessions represent an opportunity for investors to buy good assets at great prices looking forward to the next boom.
• Sharemarkets typically bounce back well before the recession is over.
• The sharemarket has always bounced back to new highs, although this may take some time.
• Most Australians have long-term superannuation assets that will grow over the long-term and are not forced to sell at rock bottom prices.

Aussie Reserve Bank and Government Act

It is likely that today will be remembered as the day that the Australian economy got a massive policy jolt. On the fiscal policy side, the Government followed up on the October Economic Security Strategy, worth $10.4 billion, with today's announcement of its Nation Building and Jobs Plan, worth $42 billion over the next three and half years. The stimulus is broadly split between a $28.8 billion spend on infrastructure and a further $12.7 billion of one-off cash handouts to low and middle income households, starting from March - April this year.

The $28.8 billion spend on various infrastructure initiatives, given the longer lead times for these projects, will be spent from 2009 - 2010 onwards with $16 billion of the $28.8 billion projected to be spent during that period. The Treasury estimates that the total package will add around 0.5% to growth in 2008 - 2009 and 0.75% to 1% over 2009 - 2010.

On the monetary policy side, the Reserve Bank of Australia (RBA) today eased by 100 basis points, reducing the cash rate to 3.25%; the lowest level in the modern monetary policy era. The RBA said today, “the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad”.

In the market, the $Aussie liked the move at first – probably just a little relief rally – then changed its mind. At around 63-64cents, the market is really not telling us too much.



The stock market chose to ignore the news, having a rather flat day.

InterOil Technical Analysis

The recent pullback in the price for InterOil creates an interesting picture on the charts. After reaching highs above $20, the pullback seen in the last few days takes the market back to near the 50% Fibonacci retracement level around %15.78. It's a crucial area for the near term. Support seen near here will be seen as a positive while a fall below 61.8% level at $14.19 will move the view back to neutral. On the upside, expect any near term gains to test and move likely break resistance bank of $20-21.

POMSoX Update

LOCAL STOCKS
The local share market had a calm day on Wednesday, with most of the stocks seeing less or no trades. BSP maintained its stance at K1.00 with average volume changing hands. IOL closed lower at US$17.34 in the AMEX, while NBO advanced 0.02 percent to end at STG2.20.

OSH this morning opened at A$4.34 while on the local market, the pre-open phase has bids for HIG at K0.14 while the offers are as low as K0.20.

PNG NEWS
LGL: the GM for Corporate affairs Joe Dowling provided an update on the interruption of mine operations in Lihir that LGL and the peak land owners are into talks to resolve the matter.

OSH: Oil Search limited released its 4th Quarter results highlighting that oil and gas production for the quarter was 2 percent up likewise the full year earnings for 2008 closed stronger by 13 percent from 2007 to US$811.6 million, driven by strong oil prices even though a sharp decline in the fourth quarter.

MOVERS
Nil movers on the bourse yesterday.

Falling vol, positive signs emerging

A great deal has been said in the media about the performance of stock markets during 2008, and also about the reversal of fortune since the lows of November 20. After $30 trillion was wiped out from world equities during 2008, stock markets closed the year with a few up-days (albeit on thin volume).

If nothing else December was a month of recovery for many markets. Although few stocks markets had significant movement, volatility, a key issue for 2008, fell substantially over the month.




Global market view: The returns in the table below are given in the local currency of the various countries for different measurement periods ended 31 December.




Although developing markets have outperformed mature markets from the bull market highs of October 2007, the picture has changed since October 2008, as seen from the declining trend of the relative-strength graph of the MSCI World Index versus the MSCI Emerging Markets Index. This may be an early indicator of investors returning to riskier assets, or just a short term blip.




Notwithstanding the rallies since the troughs of November 20, all global stock markets were still massively down by year-end from their respective bull market highs, as well as since the start of 2008.

The worst performers since their peaks were Ireland (-76.5%), China (-70.2) and Russia (-68.2%). The 2008 performance of some of these countries is shown in the graph below.





With the indices of a number of individual countries having breached the 50-day moving average (and after year-end also having taken out the December peaks), the next target is the November 4 highs, followed by the key 200-day average. On the downside, the December 1 and the all-important November 20 lows must hold for the uptrend to remain intact. Source: NAB

Well you couldn't be bored could you?

Well if you thought October was a dramatic month, November put that one to shame. It was nothing short of hectic with something significant hitting the headlines almost every day. There are not too many brokers/investors/punters out there right now with smiles on their faces.

So much has been happening on a daily basis in the financial markets right now that it is worth a quick recap of November’s events:

• Barack Obama was elected President in a convincing victory.
• European Central Bank cut rates by 0.5% to 3.25%.
• UK’s Bank of England cut rates by a surprise 1.5% to 3%.
• The Aussie RBA cut interest rates early in the month by a surprise 0.75% to 5.25%.
• US unemployment hit 6.7%.
• Most major economies (except Australia, so far) including US, Japan, UK, Germany, fell into recession.
• GM and Ford pleaded for a Government rescue. US Government bailed out Citigroup.
• US Government announced another initiative (“TALF”) to prop up consumer loans.
• World Bank said China’s growth to slow to 7.5% for 2009.
• Terrorist attacks in Mumbai.
• China cut rates by 1.08% to 5.58%.
• Aussie PM Kevin Rudd announced $15 billion spending package.

Australian interest rates cut by another 1% ‐ cash rate now at 4.25%
As broadly expected by the markets, having priced in a 1% cut, the Reserve Bank of Australia (RBA) cut official interest rates to 4.25%. This is the same level that helped the Australian economy to get through the deflation risk period of late 2001 and represents the biggest about face on monetary policy in recent history.

The RBA has moved quickly and with several large banks immediately announcing that they will bepassing on all, or most, of the cut, it should be welcome news for Australian households in the lead up to Christmas. Together with the spending measures announced by the Government, and a large fall in the Australian dollar exchange rate, significant policy stimulus should support demand over the year ahead. There is still room for further easing in the first half of 2009, with the official cash rate likely to dip below 4%.

Bursting the latest bubble – the “bubble” of pessimism
Despite equity markets in Australia and the US being up around 10% for the last week of November, people may assume that bull markets are forever dead.

So, how do we burst the bubble of pessimism? Keeping it simple, here are four key points:

1. Unlike the 1930s, the stimulus being applied to economies is decisive, massive and creative. This will make a difference.
2. Markets have fallen to such an extent to have priced in a major global depression. This is an extreme view and unlikely to happen.
3. Throughout history, the Australian share market (as based on the All Ordinaries Index) has always bounced back from big falls to reach new highs. Should this time be any different?
4. Investors who panic at these times tend to miss out over the longer‐term by selling assets at low prices and missing the opportunity to buy back in. Staying calm, if you have a diversified, high quality portfolio, will be a good long‐term strategy.

The key of course, is timing. There have been several examples during the year of what looked to be excellent buying opportunities. There were technical examples, fundamental examples, put/call ratios, government stimulus packages and a myriad of other measures. The market glanced at them and continued on its downward path.

So when will the market turn? That’s the $64billion question. Traditionally, equity markets put on a Christmas rally following the seasonally weak months of September and October. Will that follow through this year?

Just ignore it and it might go away...

US: A very strong US Dollar and tumbling Oil prices and gave Wall Street a boost last week.

The market appeared to shrug off an announcement from mortgage finance giant Fannie Mae that it had sustained a quarterly loss of 2.3 billion dollars. Fannie Mae reported a loss per share of 2.54 dollars, compared with projections of 0.69 dollars, which it mainly attributed to provisions for losses related to the US housing downturn.

The credit crunch continues to plague major banks as UBS said it had struck a deal with US regulators under which it has agreed to buy back 19.4 billion dollars' worth of tainted securities.

There will be extended focus on the banking sector in the coming week following Citigroup's deal on Thursday with regulators to buy back billions of dollars in securities in a similar deal.

Analysts predict that other large banks and brokerages will soon strike similar settlement deals with the SEC and other regulators in relation to their marketing of such securities.

The reaction to all of this seems rather subdued...