What an utterly depressing start to winter. If the cold weather wasn't enough, Wall Street's 279 point overnight reverse chilled the bones of already depressed investors.
The S&P/ASX 200 is currently down 2.6% in 2011 and has pretty much flat-lined since September 2009. All that iron ore, all that coal, all that speculation, all has counted for nowt over the last 20 months.
The good times have well and truly come to a halt. Gone are the days of one-way markets, when everything from gold to shares to commodities and the Teflon Aussie dollar rose in unison.
If ever there was any doubt, days like today show how difficult it is to make a few bucks out of short-term trading. Stating the obvious, unless you are short everything, today will be messy for most traders.
We're happy to leave the highly leveraged speculators and day traders to get on with digging themselves out of today's hole. Good luck, and let us know how you get on.
Fear, yes…
"Fear re-emerges as offshore stocks plunge" says The Age.
"Wall Street tumbles 279 points on US fears" goes The Australian.
"June begins ominously for teetering Wall St" says Reuters.
I think you get the message. Overnight was Wall Street's worst session since August last year. In the trade, we call it a shocker. You might use more colourful language.
On the contrary however, when we see the word "fear" bandied about so readily, we actually get secretly excited. Fear does strange things to otherwise totally rational investors.
Fearing more losses, they sell, regardless of the underlying value of a company. Fearful of a falling market, they stop buying shares, regardless of the underlying value of a company.
At times like these it's good to remember that share prices can and do change far quicker than the underlying value of a company.
Has David Jones (ASX: DJS) suddenly lost $21 million of value in just one trading day? Or has Cochlear (ASX: COH) lost $90 million of value in the blink of an eye?
We don't think so. Yet that's what happened to their respective market capitalisation's yesterday.
As to whether David Jones is worth $2.15 billion and Cochlear $4.5 billion, that is an altogether different proposition, and one we won't tackle here today.
Bring me the crystal ball
Business focused investing is all about determining the future value of a company.
If you can do that accurately, and then buy shares in those companies when they are trading at a significant discount to their underlying value, you'll be on your way to generating significant wealth from the share market.
It won't happen overnight, and there will be bumps along the way, like the one we're staring at today, but if you remain disciplined and focused on the value of a company, and ignore the manic machinations of the daily stock market, you should do well.
That said, we totally recognise it's easier said than done. Valuing a company requires looking deep into the future, trying to predict a company's earning power over the next 5, 10 or 20 years. And as we all know, the future is never certain.
Dark clouds ahead
Still, it's fun trying to predict the future. Stock markets do it every single day. Today, they are looking into the future and see only dark clouds ahead.
They see a U.S. economy struggling to recover, grinding to a halt. Not even Ben Bernanke's printing press and zero per cent interest rates can seemingly kick-start the economy.
On Bloomberg, Peter Boockvar of Miller Tabak & Co. was a little less flattering…
"…it's clear that QE2 has been a complete failure in helping the actual economy."
Tell us what you really mean, Peter.
QE2, or the U.S. Federal Reserve's second round of asset purchases, a tactic known in economic circles as quantitative easing (we simply call it printing money, or cooking the books), has helped Wall Street traders get rich, but not helped the poor Detroit factory line worker get a job.
Australia: An economic giant
Here in Australia, we've a different problem. Compared to U.S unemployment of around 9%, our less than 5% unemployment rate makes us look like an economic colossus.
Of course it helps immensely when China will buy as much iron ore, and coal as we can dig out of the Western Australian and Queensland ground, regardless of the prevailing price. Now that's what we call pricing power.
Which is all well and good, until China doesn't want quite as much 'stuff' as they want now.
Who knows if that day will come? The great urbanisation of China continues unabated, yet according to The Australian, the Chinese central bank said today it "will further tighten its credit supply to energy-intensive industries and industries with overcapacity."
Slowdown here we come? Maybe.
The Aussie problem
The problem with Australia is we're not spending. And who can blame us? House prices are falling. Interest rates are predicted to rise. And we can earn 6.5% interest by sticking our money in the bank.
In such conditions, why would you spend? And why would you invest money in the stock market?
The Aussie economy shrunk 1.2% in the March quarter, the largest fall in gross domestic product (GDP) since March 1991. If nothing else, you'd reckon such a reversal would put paid to any imminent interest rates rises.
But not so fast. The Australian Financial Review says "The prospect of a near-term interest rate rise has not been meaningfully dulled by the biggest quarterly contraction in growth in 20 years."
We all know the Queensland floods had a large negative one-off effect on our national accounts. But, do we need higher interest rates to slow down an otherwise stuck economy?
Myer was their store
Australia amazingly dodged a recession during the GFC. We may not technically be in recession now – although we are only one more negative quarter away from one – but try telling that to struggling retailers like Myer (ASX: MYR) and their hordes of private investors.
If it looks like a recession, feels like a recession, then it must be a recession.
The Myer share price, having slumped from its float price of $4.10 all the way down to $2.80, is in full blown recession. Today's lesson for Myer shareholders: Beware when well-dressed private equity executives sell out at the top.
The R word
In The Age, Adele Ferguson says "…it isn't a big leap for Australia's so-called miracle economy to be staring down the barrel of a technical recession in the June quarter."
Slumping stock markets do little to the confidence of consumers. Although it gives us the opportunity to buy shares cheaper, the reality is most people focus on the amount of money they just 'lost' when markets fall.
Of course, you only lose money when you sell, but unless we're leaving all our cash to the lost dog's home and the kids, we all have to sell sometime.
Too bad if you meant to sell yesterday, or indeed in October 2007 when the S&P/ASX 200 was trading at 6,750, a far cry from today's 4,620.
Oh for being able to predict the future…
Bruce Jackson does not have an interest in any of the companies mentioned above. The Motley Fool has a predictably sensible disclosure policy.
