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."