Caught in the crash

All the signs suggest we may not have seen the last of the blood on the stock exchange floor, which is bad news for small investors.

The Australian retail sharemarket investor was caught this week like a damsel in distress tied to the railway tracks in front of a big, unstoppable, steam train.
Except in this movie the damsel got run over. And the freight train, in the shape of a thundering global credit crisis now threatening the US economy, is still a runaway threatening further havoc.
After the reckoning following a 7 per cent fall on Tuesday - the worst one-day fall since October 1989 - Andrew B, a Melbourne trader, who asked that his surname not be used, said he had lost about $250,000 from his portfolio of speculative resource stocks since its peak of $700,000 at the top of the market.
His experiences tracked those of thousands of other investors, who were delighted when galloping share prices pushed the ASX 200 to an all-time high of 6828.7 on November 1.
Those investors were not nearly so delighted this week when share prices had fallen by 24 per cent from their peak, after the worst 12-day losing streak since 1982, which was only partially regained in the market rebound of the past few days.
John Pascall, a retired defence consultant turned keen investor who lives in Maroubra, says simply: "It's painful as all hell. Everybody likes to see themselves going forward."
He was among the lucky ones. Because he does not use any debt, Pascall was not among those to receive a dreaded "margin call" as banks sought to police the loans extended to people to buy shares. As the share price falls, the banks want more security for the loans they have made. You can either pay up or sell some shares.
On Tuesday alone online the brokerage and margin lender CommSec made more than 2100 margin calls, up from a normal day of 30 calls, relating to loans worth $40 million.
And, as in the engine room of a steam train operating under great pressure, unexpected things happened. CommSec - or CommSuc, as it was dubbed by frustrated traders - froze for 25 minutes as thousands of investors tried to gain access to the site to sell their shares. In all 666,700 trades were made on the stock exchange, a record.
One share trader with a margin loan from Westpac's margin lending business complained on the chatroom HotCopper that he had been asked to meet the margin call and "the buffer". It simply means the trader needed to tip in more money than usually expected or face the forced sale of shares.
"I have pumped $70,000 into the account over the last couple of days to keep it within the buffer but, according to them, I need to put in another $40,000 by noon tomorrow," the trader, "Nimo", posted on the chatroom on Tuesday.

A Westpac spokeswoman said this was a "situation management approach" adopted during a "market event". Traders' war stories give a vicarious tremor of the kind of self-induced perils faced by the trading community (where would you find $40,000 by noon tomorrow?).
But the damsel had been given plenty of warnings about the steam train's imminent arrival.
In fact the appearance of the global financial crisis in Australia - and its blowing of the whistle on the heady days of cheap debt and easy finance - had been accurately predicted in some quarters, well before it burst into view on the market last August in a first round of sharp share price falls.
"Some of the highest valuation ratings [are] currently afforded to many highly leveraged, weaker and in some cases even compromised business models," Macquarie Bank's equity strategy team, Tanya Branwhite, Neale Goldston-Morris and David Macri, wrote last June.
At the time the bulls were rampant and the stockmarket had reached new highs. But the team was in the bearish camp: in June it was predicting a 6 per cent fall in the index.
Their view was that the stockmarket valuations, at a price/earnings ratio of 17, were at historical highs. People were not receiving the necessary returns for the risks they were being asked to take.
Indeed, "repricing of risk" stands as a handy catchphrase of what has happened globally, in a tidal wave of turmoil moving progressively from investors in US subprime mortgages to the world's debt markets and now into the world's sharemarkets.
Australian investors have been able to watch this re-pricing coming their way ever since. There was the collapse of the highly leveraged hedge fund operated by Basis Capital in July, the gutting of the Rams Home Loans Group in August because of an inability to find finance for $6 billion in loans, the shock announcement of difficulties in refinancing $3.9 billion in short-term debts by Centro Properties Group last month and the loss of confidence experienced due to the debts of the tourism operator and fund manager MFS this month.
Now investors are left with few places to hide. Macquarie's Branwhite predicts market volatility will be the order of the day over the next six months until it becomes clear whether or not the US has fallen into recession.
Property, a haven for investors when the sharemarket turned bad, has had a long shadow cast over it from the debt-related meltdown of Centro. Additionally, higher interest rates tend to increase the costs of investing in property directly.

And fixed interest securities? With the fallout from US subprime mortgages knocking confidence in ratings agencies' abilities, any form of souped-up securitised offering is not being touched with the proverbial barge pole. Then there is the cloud a US recession would throw over US corporate bonds, and wobbles of two US mortgage insurers causing further headaches for fixed income managers.
With other escape avenues closed off, many have simply made a dash for cash.
Peter Hunt, the executive chairman of the investment bank Caliburn, says: "Sitting on cash and getting 6 per cent … you appreciate cash in this environment. Six per cent looks pretty good."
In any case the days of easy double-digit returns for investors since the start of the current bull market are over. What's more, things could be about to get much worse.
The Reserve Bank governor, Glenn Stevens, does not lightly raise the spectre of the hyper-inflation experienced in the 1970s. But in a speech eight days ago he said: "The synchronised nature of the (inflation) increases has been quite marked as well, in a fashion eerily reminiscent of the early 1970s."
And Stevens has committed to vigorously fighting inflation, whether or not that suits investors, who perceive higher interest rates as putting a lid on the sharemarket by forcing up the cost of company funding and eating into profits.
The uncomfortable position for the Australian economy is outlined by Doug McTaggart, chief executive of Queensland Investment Corp, who has warned of the dangers of global inflation and reduced QIC's exposure to equities before the August correction.
He highlights the role of central banks in cutting interest rates, which fell as low as 1 per cent in the US in 2003, in encouraging the era of cheap credit.
"[The former Federal Reserve chairman) Alan Greenspan, in particular, and Western central bankers, pumped up global liquidity for a long time," he says. "Normally you would expect that to be inflationary, but over the last 15 years those inflationary pressures have been tempered by the export of deflation from China, India and other emerging economies."
However, this situation is coming to an end as China and India start facing rising costs, particularly through higher wages as a result of skills shortages, and they start exporting inflation.
McTaggart also says risks are posed by the US Federal Reserve cutting interest rates to ensure the stability of the markets, as it did with a 0.75 per centage point rate cut on Tuesday morning. The phenomenon came to be referred to as the "Greenspan put" - an assumption the central bank would cut rates to help out the markets.

"What we saw in the Western world was excess liquidity building up in asset price bubbles; the equity bubble of the late 1990s, various house price bubbles around the world," McTaggart says.
"We're seeing the unwinding of those asset price bubbles and, ultimately, of course, through the subprime crisis, the subsequent repricing of risk."
These thoughts are being picked up more widely.
The trader Andrew B says: "The Fed cutting rates to that extent sends the wrong signal to the market. Misprice risk and we will bail you out. Now they are just attempting to reinflate the bubble. Perhaps it would be better to let the market take its medicine and then move on with a clean slate."
As a sign of how far the debate has moved since those seemingly rosy days last June, inflation is very much on the minds of market analysts.
"People to some extent took their eye off the ball," Branwhite says.
"In the 1960s inflation really built over a long period of time. You would almost say we're in the same kind of time-frame now … inflation has been building over the last five or six years."
Even stagflation - the toxic mix of high inflation combined with stagnant economic growth or outright recession - is being talked about as a possible outcome.
"It's the worst of all worlds - low growth and high inflation," Branwhite says.
There are other things to keep one awake at night.
The pressure on Centro Properties Group has shown that when it comes to being under pressure with a lot of debts, unexpected things start happening. Its hedging arrangements over currency started falling down; classification problems with its debts came to light. And investors sold down heavily.
In the same way, there are fears that debt pressures could bring to grief other participants with damaging effects to the market. As the sorry procession of collapses and near collapses has shown, there will be problems as highly leveraged companies with short-dated debt try to get refinanced.
There will also be a near-fanatical obsession in the February profit results period with what was an oft-heard phrase following the 2000 tech wreck: "quality of earnings".
Matthew Quinn, the chief executive of Stockland Group, says there will be a return to the basics of investing. "The previous five years was all about the financial engineering; the next five years is about what I would call the the property fundamentalist."
The role of hedge funds has also concerned some observers.

Kim Jacobs, the managing director of the boutique small-cap adviser Inteq, says there are fears of sell-downs by debt-heavy hedge funds.
The scenario goes like this: hedge funds are hit by withdrawal requests from nervous investors. But because of the recent falls, exacerbated by high levels of debt, there is insufficient cash to meet the calls. The hedge fund either sells its holdings at what are now fire-sale prices, or it freezes redemptions.
"I think there's still room for heavy selling," Jacobs says.
Caliburn's Hunt calls into question the role of hedge funds by "shorting" to profit on stock prices falling, and questions whether some market information is deliberate misinformation to achieve those goals.
"It is more extreme, and yes, it does concern me," Hunt says.
Nevertheless, many investors are reasonably cheerful, taking into account the strong returns they have enjoyed in the bull market. Pascall says: "Last year I did a lot of volatile trading. It was a phenomenal year."
But perhaps the greatest impact to be felt in the market, and shortly afterwards in the real economy, is a congealing of activity in fundraising and lending as investors and banks are captivated by the spectre of risk.
Jacobs says: "Institutions we talk to, they are all sitting there and saying, all we can see is blood all over the screens. They are not panicking, but they want to sit back and watch it."

Sharemarket bulls on way to abattoir

The bears may not be roaming the forest in great numbers yet, but the bulls are almost certainly on the way to the abattoir.
The 12-session losing streak on the Australian sharemarket that culminated this week in a bloodbath on Tuesday - wiping more than seven per cent or nearly $100 billion off its value - marked the end of a long run upwards.
Investors now face a period of volatility and uncertainty, after a 20 per cent-plus fall in the equity market since its all time peak in November last year.
"The normal indications of a bull market have broken down," AMP Capital Investors chief economist Shane Oliver said.
"The 20 per cent-plus fall, plus the fact that we went below August's low suggests to me that the bull market is over."
Brokers says a bear market looms, even though the stock market has made up most of Tuesday's losses.
"We're now no longer 20 per cent down from the top , and if the market rebounds and goes back up again, most people will look back and say: `that wasn't a bear market, it was just a fall'," Dr Oliver said.
"But it's more severe than a bull market correction.
"I think we're in for at least another six months of tough times ahead on the share market."
Dr Oliver said markets around the world that were pummelled on Tuesday, on fears of a recession in the United States and a consequent slowdown in global growth, were oversold.
Global stock markets are now experiencing a bounce upwards, following the surprise decision by the US Federal Reserve to cut interest rates by 75 basis points to calm jittery investors.
"If it is a bear market, it is quite normal to have quite sharp rallies," Dr Oliver said.
"These bounces can be quite sharp - five to 10 per cent - then the downturn resumes again.
"I think we will see the market come back down to the lows we saw on Tuesday in the next few months and possibly go a bit lower."
Even though the US Federal Reserve's action is supportive of growth in the US, it might not be enough to stop a downturn.
The flow of economic data coming out of the US, European and Japanese and other Asian economies over the next few months was likely to be negative, ensuring a rough ride for sharemarkets.
The local market's key focus going forward would be on the US, but if Asia also softened markedly, Australia would be vulnerable, simply because Chinese demand for resources has been a great driver of the Australian economy.
Confidence could return in the second half of the year as the impact of the aggressive easing of interest rates was felt, and interest rates in Europe and Japan were also likely cut.
"And then we'll start to see a sustained rally through the second half of the year in anticipation of better economic growth through 2009," Dr Oliver said.
The Australian company reporting in February and March may give the local bourse a lift, but was likely to remain a sideshow to events in global markets.
"It will have an impact though on which companies do well," Dr Oliver said.
"A lot of stocks out there have been massively and unfairly sold."
A potential interest rate rise in Australia after the release on Wednesday of higher-than-expected inflation figures, could also adversely affect the Australian share market.
Dr Oliver said the high inflation rate suggested there was a strong case for a rate hike by the Reserve Bank of Australia (RBA), but the deterioration in the world economy could not be ignored.
"It knows that that will have some impact on Australian growth say in 12 months' time, and that in turn will help take some pressure off inflation," he said.
The RBA would also take into account recent decisions by Australia's major banks to raise their variable home loan rates by more than central bank movements, to offset higher funding cost.
"I think the RBA is between a rock and a hard place, and I have a leaning towards them leaving rates on hold and waiting for the next meeting to see how global conditions unfold," Dr Oliver said.
Professor Robert Brooks of Monash University's Department of Econometrics and Business Statistics said the stunning falls on the Australian stock market and other global markets this week had complicated the outlook for interest rates.
The inflation data released this week would have reinforced the RBA's predisposition toward another rate increase.
"The factors that would moderate a rate increase are the turbulence in international financial markets, the fallout from the US sub-prime issue ... and the increase in the cost of funds for the banks and in particular the non-bank mortgage providers," Prof Brooks said.
Prof Brooks said the RBA would want to look at the effect on the housing market of the rise in variable home loan rates earlier this month.
"If they can get some data on that, if there's some choke-off in demand - that's going to be critical information," he said.
"I think they will look a little bit at the financial markets.
"The markets are going to be volatile and have ups and downs between now and when the RBA board meets.
"They'll want to know what financial markets are doing, what the housing market is doing ... the inflation pressure is still a big issue.
"The possibility of a rate rise in February is mixed.
"It could go either way."
Prof Brooks said while the US sub-prime mortgage crisis had spurred volatility in stock markets, investors shouldn't be surprise by whippy trading conditions.
"When they get in real trouble is when their liquidity disappears," he said.
"Prices falling show you that there is not liquidity at where the prices were yesterday, but the fact is that markets in Australia and the US and other developed countries have stayed liquid.
"There's still been institutional investors and other investors looking for bargains when the market falls."
Prof Brooks said stock market volatility served as a reminder that there were risks associated with the pursuit of high investment returns.