Marcus Padley
December 26, 2008
AS WE slide into 2009, the strategists are predictably optimistic, with one survey of predictions showing the average expectation is for a 25 per cent equity market bounce. Yeah, right.
But the main feature of the forecasts for 2009 is not the average but the huge diversity of opinion. There are those who predict financial Armageddon and others who predict "the bottom". The reality is no one knows and no one's opinion really matters much.
In my book, a belief in the trend is going to be more reliable than some utopian belief in a miraculous bottom and I will be assessing things every day until there is enough evidence of return versus risk to warrant having a lash. The higher your risk profile the earlier you will jump. After that it will all come down to having enough discipline, cynicism and lack of faith to allow you to cut everything when the market proves you wrong.
Here are some of the main issues for next year and a few comments that you may find realistic where they fail to be optimistic.
CHINESE ECONOMIC GROWTH The average forecast would be up 7 per cent but the risks are surely to the downside. Jim Walker of Asianomics in Hong Kong, "voted the best regional economist in Asia for 11 years in a row" and a leading China watcher, recently predicted Chinese economic growth at 2 to 4 per cent, with a "30 per cent chance it will actually have negative numbers". If he's right, the resources bust is bust and will continue to bust and Australia will slide into recession as well.
AUSTRALIAN ECONOMIC GROWTH Centrebet is offering only $1.22 for those betting on a recession in 2009 and more than $4 for those willing to bet against one. The writing is on the wall. On current trends, Australia is heading for recession.
HOUSE PRICES Employment is the key to the housing market and house prices. In Australia, the last thing we don't pay is our mortgage and we will continue to do so if we have income. But if the income disappears the property market will fall. Next year it will be exacerbated by retirees downsizing to compensate for their lost income on superannuation and by investment properties hitting the market in a dash to beat falling asset values.
If I were thinking of buying a house, I would be waiting until 2010 and pouncing only when I saw the sharemarket, a lead indicator of the other markets, rally. I was talking to an estate agent at the weekend and he says the current stage of the cycle is the worst for agents — sellers still have "peak prices" in the back of their minds and nothing will sell at those prices. It will take some months for sellers to adjust to lower prices and the liquidity to pick up again. He reckoned the average price of $900,000 in his world is down to below $700,000 already and he sees it going lower.
Everyone, including estate agents, is praying for world markets to bottom or lead the property market out. But the reality is that the trend is the other way going into 2009. On that basis, his advice is "don't rush". If you miss a house today there'll be another 10 next month. Prices are heading down and there's no reason to believe they are going to suddenly go up. The suburbs that will fall the most first are the premium suburbs, because these are the suburbs that are the most heavily geared. These suburbs will also rebound the fastest and offer the best bargains at the bottom.
INTEREST RATES IN THE US Already at zero to negative and they should stay there. The Federal Reserve is all out of ammunition. Looks like a Japanese-style long-term malaise at the moment.
INTEREST RATES IN AUSTRALIA The most common official forecast is that Australian official rates will bottom at 3.5 per cent. Some of the headline grabbers expect a 2 per cent bottom on rates sometime in the second quarter. All you need to know for now is that they are going lower. I have never made money fixing a mortgage rate and wouldn't bother now. If we end up in recession, which looks likely, the Reserve Bank could just throw the kitchen sink at the problem, which would mean that rates go even lower than 2 per cent.
THE SHAREMARKET I was once asked in the morning meeting for my forecast for the market for the year ahead. I could have made up some number — up 12.45 per cent came to mind — but instead I told the truth. Forecasting the market is a joke. Do you know how many factors go into driving the All Ords index? Are you really going to believe someone who purports to estimate the fortunes of 486 companies, the movement in 486 share prices, the influence of global markets, and all the other unknowns that are going to hit us in the next 12 months? Come on.
"But we're in the business of advising clients what will happen," piped up one colleague. OK, that may be so, but let's show people some respect by not guessing and not holding out that we know. Making it up is not advice, it's reckless deception that is likely to be relied on. There is a lot more to looking after a customer in this industry than making reckless guesses and having them put their family's future on it. Forecasts create inflexibility, pride and prejudice.
So, apologies if I tell you that for next year I shall remain open-minded, flexible and reactive. Those who hazard a guess about next year's market and are in hindsight proved correct will receive the glory, be lauded for their opinion and be asked for their guess and believed the year after that. And that's finance. Who you believe and for how long can they keep coming up with black or red.
INFLATION You will hardly hear the word in 2009.
IRON ORE PRICE NEGOTIATIONS Broker forecasts are for a 30 per cent fall in iron ore prices this year. But if the producers escape with that it will be a miracle. Just to return to 2007 prices, which involves removing the 85 per cent price increase Rio Tinto got this year, would require a 46 per cent fall in the iron ore price.
Whatever it is, it is likely to be a bigger cut than 30 and is possibly going to start from January 1 instead of April this year. That'll cost the producers even more (there are suggestions it would cost BHP and Rio Tinto $2 billion in lost revenue). The Chinese steel industry has six months of iron ore stockpiles at current production levels. If the Chinese economy weakens then they have even more than that. Fortescue is coming under pressure and their debt position looks like becoming an issue. If they are struggling to develop a project digging up iron ore in the Pilbara with infrastructure already in place, you have to ask: What of the others? That Peruvian iron ore deposit in the Andes is looking less viable every day.
CREDIT MARKETS Credit markets are likely to remain bottlenecked for now but if they remain on trend they will ease further, not tighten from here. The TED Spread is 100bp down from over 300bp. Normal is 15bp. But the interbank lending market is not really the point. The credit markets have changed at every level. My builder mate recently lost a job because the customer's finance fell through. A 10 per cent deposit was no longer enough and the property valuation came in well under expectations.
And this is the reality. The banks are destroying their share prices in a dash for cash, issuing shares at a 10 per cent discount to the market at a 10-year low after 55 per cent share price falls, and they are not about to lend that out again to some dill. The credit markets may ease but the availability and appetite for credit at all levels is changing. It will be harder to get. That affects ambition, opportunity, price and the chance of excessive prices. Try extending your mortgage and you'll find out. The year ahead will be a transition for credit attitudes. As one fixed interest guy said to us this week: "If you already have debt, well done. Pay it off and keep the facility. You will be one of the few people in a position to gear up when the good times start again".
SHORTING You probably saw this morning's email. We now have three options when we put on an order, not two. "Buy" and "sell" has been replaced by "buy", "sell long" and "sell short". Perhaps they should have a couple of options for buyers as well — "I am buying with my own money" and "I am buying with borrowed money". It's the same thing isn't it? Either way, shorting is here as long as the market falls, and in the words of one hedge fund manager mate who shorts: "2008 is the greatest bull market shorters will ever see".
THE BANKS I was chatting to one bank analyst this week and he believes the banks are going to be raising capital to maintain capital ratios again and again, or at least as long as the credit markets are tight and the bad loans continue to deteriorate. He thinks the balance sheet problems at the banks are the untold story. What are the banks seeing on their balance sheets that we aren't? Things that prompt them to smash their shareholder base with equity issue after equity issue. He reckons the dividend is irrelevant. You will lose more in capital waiting for an imprudently held dividend than you will benefit in income from a held dividend.
ANOTHER VIEW I was talking to an Ameriican last week and he asked: "Am I missing something? You Australians buy equities for yield. Why? Equities are for capital growth not income. You want income, you buy a bond. That's what the bond market is for". Whereas we are worried about the banks cutting dividends, he reckoned that in the US, bank shares would collapse if they upped the dividend. Paying a dividend is an admission that the company has no better way to employ their retained earnings than to return it to shareholders. That's an admission of defeat.
It is a sign that the company can't grow and a sign that you should move your capital somewhere more rewarding. It's why Microsoft didn't pay dividends for years. Who would invest in a company that thought shareholders could get a better return by giving them the money back? He said the most costly assumption in the Australian market is that you can have your cake and eat it — that you can have income and capital growth. It is an assumption built on 10 years of unique performance from the monopoly that is the Australian banking sector. He says we are now paying the price for assuming that what the banks did for the past 10 years was normal and would endure. It wasn't and it won't. His final message: If you want income, buy bonds. If you want growth, buy equities. If you want income and growth, buy bonds and equities.
You can pray for "the bottom" if you like and no doubt one day, hopefully soon, someone will buy 50 houses in Florida, make money, and create it. Until then, the only thing to do is watch and wait. The biggest buying opportunity in our lifetimes should follow the worst sharemarket collapse in our lifetimes. Someone just has to go first.
After you.
Marcus Padley is a stockbroker and the author of the daily stockmarket newsletter Marcus Today. For a free trial of the Marcus Today newsletter please go to marcustoday.com.au
[ 本帖最后由 wil 于 2008-12-29 17:55 编辑 ] |