The "R" Word

October 7th, 2008  by Cale McCulloch

Closing Data

	Current	Change	%
Dow Jones	9,956	-369.9	-3.60%
NASDAQ	1,863	-84.4	-4.30%
S & P 500	1,057	-42.3	-3.90%
FTSE 100	4,589	-391.1	-7.90%
All Ords	4,545	-158.1	-3.40%
SPI Futures	4388	-178	-3.90%
Nikkei	10,473	-465.1	-4.30%
Oil	88.15	-5.76	-6.13%
Gold	851.7	16.9	2.02%
Silver	11.29	0.2	1.80%
Copper	5657	-428	-7.03%
Aluminum	2204	-91.25	-3.98%
Lead	1615	-87	-5.11%
Nickel	14080	-845	-5.66%
Tin	16210	-810	-4.76%
Zinc	1530.75	-50.25	-3.18%

The "R" Word

Early yesterday evening I was watching one of the financial stations that featured a number of analysts and fund managers in the US. One of the more conservative was very nervous about the state of the Global Economy, to the extent that he called what is happening a "full fledged global recession". He then went on to explain that the markets are forward thinking and he will be wanting to invest well before the economy actually recovers, he went as far to say that somewhere around the low 9000 mark on the DOW would be his buying point. Well we almost got there over night as the DOW plummeted as far as 9525 mid session before the market clawed back almost 500 points to settle at 9955.

It all began with a major sell off in Europe, as concerns mounted that Europe is the next disaster zone from the financial fall out. With the FTSE tumbling 7.85%, its largest one day fall since 1987. Contributing to this decline was a major sell off in raw materials. In London BHP and RIO fell 9.9 and 15% respectively. The issues in the financial system have led a number of European governments to take steps to Guarantee private savings in the Banks in order to halt the fear of people leading to a bank run.

Fear took hold in New York, and a slump in Oil below the USD 90 a barrel mark didn’t help as it was a result of concerns that tight credit conditions and a global slowdown will lead to a fall in demand for Oil. After the bell in New York, Bank of America (BOA) surprised the market as it came out and released Quarterly earnings earlier than expected, but the surprise was not all that pleasant. As the result detailed a fall in earnings to 15c per share versus 80c in the corresponding period last year, and with a consensus estimate of 60c per share by analysts for the quarter the stock fell a further 7% in late trading on top of the 6.6% decline during the regular session. BOA said it would be raising USD 10 Billion through the sale of common shares and slash it’s dividend by 50%.

BOA said that in these uncertain times action was needed to shore up capital, so it is fair to say that there will be many more to come.

Arcelor Mittal, on of the worlds largest steel mills also tumbled as it expressed concerns for the situation that the Global Steel industry has found itself in on the back of the tight credit conditions, as demand from customers faltered, the stock fell 15% in New York.

So what should you be looking to do?

The near 500 point rally of the lows of the night shows support for a large number of Blue Chip stocks on a fundamental basis, as Discounted Cash Flow (DCF) valuations become unreasonable for many. This is a good sign, and you will see the same on the Australian market. As we have said in the past, some will hold up better than others. Provided that you are invested in solid companies that are unlikely to cut dividends, you are well positioned. Obviously that is a million dollar question, and the best strategy will be to diversify your portfolio across a number of stable Australian companies.

There will also be opportunities arising. Take the falling Australian Dollar for example, this will partially offset the falling oil price for Australians Oil producers that have removed hedging earlier this year. The Australian Gold miners are in the same boat here, even though they often react more than proportionately to changes in the price of Gold itself.

If possible, take steps to deleverage your portfolio, particularly if you have borrowed directly against the stock, and of course reduce your exposure to short dated warrants.

I would most certainly not recommend panic selling, but would not be afraid of adjusting a portfolio to suit the changing times we are living in. I said a couple of weeks ago that there was money to be made, Lou put out a buy recommendation last week on IPR at 11c which is now trading at 13.5c while the market has fallen over the same period.

Take Care!

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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