Moving back down the ASX 5000 levels

Hows that anti-property sentiment going for you there CRC?

 

I think Leveraged Equities etc will be making a LOT of phone calls today!!!

This had to happen sooner or later.... Hope everyone survives!?

 

I would be happy to start margin lending in 08

 

Peter Spanns reply to the current market conditions:

No cause for panic
by Peter Spann
21st January 2008
I have had feedback from my team that a lot of clients are concerned about the current state of
the market and would like an update from me.
I must admit the “concerns” came as a surprise to me, after all I have been saying in Investor
Updates for over a year that this was likely to happen and it was likely to be temporary. So I can
only guess that the concerns are coming from clients who did not attend the updates.
SubPrime
Made Simple
Regardless the “sub‐prime” crisis could be seen a mile off by any economist worth their salt and
has been detailed by me in investor updates dating back to 2006.
Simply put, sub‐prime loans are like “no‐doc” loans here but unlike Australia where even “no‐doc”
lending practices are subdued and most people pay their loans regardless in the US ridiculous
competition sprung up to get loan business.
Super discount loans allowed people to buy property with interest rates as low as 1% for 3 years
with no credit checks and no need to prove ability to repay. Many people “overstretched” – the
temptation was large given that you could buy a million dollar house for just $192 per week! Not
only were these loans readily available they were aggressively promoted.
None of this was a problem while the property boom continued. Like Australia it was fuelled by
cheap interest rates and investor demand but without our far stricter consumer protection
around loans mortgage providers handed out massive loans to just about anybody. With the
broad economy at a standstill it had to end and end it did.
Blind Freddy could see that when interest rates reverted to “standard variable” a massive 3.5
times the “honeymoon” interest rate (3.5% was the variable rate in the US at the time this all
started) there were going to be issues, let alone when after 6 successive interest rate rises people
paying $192 per week were now up for more like $1,346 per week!

Obviously people started defaulting, and not just a few. They started defaulting in droves. To
simplify matters a bit in the US the loans were attached to the property themselves and were
non‐recourse which allowed people to default with relative impunity. Yes, a black mark would be
put on their credit rating but they would not have to continue making payments if they
surrendered the property. In fact in many jurisdictions the only thing you have to do is put the
keys in the mail box and advise the lender you are walking away!
This produced an excess of supply and prices plummeted further exasperating the issue.
At first it was only the mortgage companies that were affected but people had traded the money
markets and taken long positions and they hurt as well. Most of that is now “out of the system”
but the impact we are feeling now is from a far different effect. Now everybody is nervous about
lending money and the ready supply of easy credit has dried up.
In the best case companies that were using that credit to expand and grow now will have to curb
their growth plans. With a lot of that growth factored into the share prices of those companies
the market has had to adjust to lower expectations.
In the worst case companies (like RAMS and Centro) who had to refinance large tranches of
funding taken out in the “good times” suddenly found there was no money available (and these
are only local examples – it is far, far worse in the US).
These three issues (traders caught short on lending companies and the money market, companies
lowering growth targets leading to reduced share prices and companies being unable to refinance
debt) has sparked the sell‐off in the share markets in the US and to a lesser extent here in
Australia.
So as early as late 2006 I was predicting that 2007 would be a year of increased volatility in the
markets with a slow‐down of returns. At the time I said over‐borrowing in the US and growth in
company profits catching up with share prices would be the reason for this. At investor updates
in 2007 I said that the latter half of the year (2007) would see increased volatility and a selloff of
up to 10% to 15% in the Australian market. This is why I was surprised that so many people
(according to my team) are concerned. To me it’s just exactly what I expected ‐ forewarned is
forearmed.
I suggested that people adjust their strategies by diversifying their asset base, decreasing margin
positions (preferably swapping altogether to warrants), decreasing LVR’s in property and keeping
cash aside.
If you have followed this advice you are probably weathering the storm pretty well.

What now for the US and Australia
OK, so with all the headlines screaming “recession” and “end of the world” in the US how likely is
that and what impact will it have on Australia?
For the sake of brevity I am again going to simplify but there is more than enough out there to
read if you need more information – just read it with your neutral glasses on rather than from a
point of view of concern and you will soon see there’s more to this than the headlines are letting
on. With even reputable “rags” like the AFR writing sensationalist headlines it’s easy I guess to
get caught up in the hype.
The US market has come off significantly and the Australian market has gone down with it. Many
sectors of the Australian market have been oversold however. Many people (including me) had
hoped over the last few years that Australia’s days of being a slave to the US market were over
but in the last few months the ASX has pretty much done exactly what the US market has done.
And this is somewhat ridiculous because we have totally different market drivers here.
Contrary to popular opinion though just because Wall Street is having some problems doesn’t
mean that companies can’t make profits in the current environment. In fact many companies are
doing very well. US housing downturns do not always lead to recessions, and the credit crunch
has so far been restricted to certain sectors. And of course the Australian market has been
buoyed by ongoing demand for commodities.
Australia will not escape a US recession unscathed but our economy is being driven more by our
Asian neighbours than the US.
The Share Market
Volatility is a natural part of the share market.
It certainly has been absent for a number of years but there should be no surprise that it has
returned.
OK, so the market is spooked and it may be quite a few months before it recovers to the
stratosphere but smart investors seek times of chaos to take advantage of the fear of others who
are panic selling quality assets.
To be absolutely clear I do not think this is the beginning of a major bear market. It is a natural recorrection
in pricing levels.

Companies in Australia are still doing too well commercially for this to spill over into a full on
downward spiral. While market sentiment (which currently is negative) is always the biggest
short term driver of share prices fundamentals eventually win and fundamentals broadly are still
sound.
Some sectors of the market have been unduly harshly dealt with, those being Property Trusts (or
REIT’s as they are called overseas) and Financial Services (particularly hedge funds).
Property Trusts
There has been an assumption by the markets that ALL REIT’s are over geared and there has been
little distinction between them. For example Westfield has fallen almost 30% and it is one of the
best run, conservatively geared and certainly largest Property Trusts in the world. Over gearing is
an issue for trusts (as we have seen with Centro) but the sector as a whole is not over geared and
we are very confident in the Property Trusts we have recommended to our clients despite some
of them taking a hit to their unit price.
When I have talked about Property Trusts I have consistently said they are capital volatile and
income stable and this has not changed. Unfortunately this style of investment has always been
subject to wild fluctuations in their capital price however I would suggest the current overselling
is a good buying opportunity for the astute.
I personally have no concerns about my investments in Property Trusts and I am a long term
holder of this style of investment. And I cannot see any justification for selling quality Property
Trusts at the moment.
Financial Services
Again, while justified in many cases the selloff in financial services companies has been significant.
Look at NAB – down to $35.20 at close of trade today from a high of almost $45. CBA is down
from a high of $61.50 to less than $51. Or at the small cap end HFA which is down from $2.76 to
$1.17 and Count Financial down from $3.50 to $2.10.
Now I am not saying HFA or Count are in the same league as NAB but surely this sell down is
extraordinary. HFA has funds that are doing well, there are no profit warnings or anything to blot
their copybook and are still getting inflows. Count is sitting on residual income that most
companies would envy and again no obvious signs of weakness.
NAB and CBA are unlikely to be massively impacted by a US downturn and are cash cows that spin

off massive profits. All of this seems to have the smell of a buying opportunity to me with the
only concern being where do I get the cash from? In 10 years time I am confident I would be
laughing if I bought NAB at 35 bucks even if there is more potential downside.
Commodities
Most market forecasters are saying that demand for Australian commodities will actually continue
to rise this year and with pricing stable that is good news for commodities companies.
With BHP down over $15 and RIO down over $30 again this seems like a potential buying
opportunity when prices stabilise.
Cashed up investors will be having a field day.
Margin
As I mentioned earlier I have been suggesting for over 12 months now that non‐protected margin
lending is not the best way to be at the moment.
To me Warrants offer the best way to leverage into Blue‐Chip shares with non‐recourse, no
margin calls and if you use self funding warrants no out of pocket cost.
However if you do find yourself in a margin position you need to clean it up urgently. Don’t panic
and oversell but reducing exposure to lending during times of volatility is sensible investing.
Property
Property always temporarily has a bit of a spike during uncertainty in the share market but I don’t
believe this will be the start of a broad revival.
Lifestyle suburbs will continue to do well but if interest rates continue to rise (as undoubtedly
they will here) then a dampening factor has to come into play soon.
Interest Rates
The previous Government, despite their rhetoric, actually encouraged spending and therefore
inflation through tax cuts, infrastructure spending, first home owner schemes, and stimulus
economics.

In fact just about the only thing they did to curb it was encourage the Reserve Bank to raise
interest rates.
Unfortunately if the Rudd Government only lives up to a fraction of their election promises (which
were a fraction of the last ditch panic pork‐barrelling of Howard) inflation is unlikely to come
under control any time soon, and that means ongoing interest rate rises.
If you are paying P&I on your loans banks have started offering attractive long term (10 year) fixed
interest rates. These are certainly worth considering. If you are paying Interest only you may
have to grin and bear interest rate rises. However at the moment banks are falling over
themselves for business so negotiating hard can get a good result.
So, what now?
Sit tight!
There’s certainly no need to panic or do anything silly (like sell perfectly good shares, get out of
well managed funds or sell all your investment properties).
If you have margin loans take advantage of upwards swings to ease your position.
If you have cash take advantage of downward swings to add to your positions.
While there is a chance that the US could slip into recession I believe once the election sorts itself
out (or even if there emerges some front runners) and the sub‐prime mess settles down it will be
back to business as usual. When? Well later this year makes a lot of sense to me.
In the mean time hang on and enjoy the ride!

 

speaking to Steve Navra this morning (pre market opening) he made similiar comments to Peter Spann .

would be interested if Peter had to sit down to write the article now with the market down 4.6%, whether his sentiments would be the same

 

they would be the same... he was expecting a 'correction' so all this is part of it.. At his investor updates he said following this, the market will run again before the 2012 'depression' at which we will enter the 'cash cycle'

 

What is the economic definition of a depression?

Newspaper columnist Sidney J. Harris distinguished terms this way: "a recession is when you lose your job; a depression is when I lose mine."

LOL!!!

 

Good one !!!!!!

 

Sim, are you still with us?

 

I would not want to be holding property over the next 12 months!!

 

Is that like "Do you still have a pulse?"

It's time like these that you just have to say, "Thank God I'm still breathing."

 

Someone needs to find him so he can change the thread topic from 5000 to 4000

 

I do have a pulse, but I'm annoyed at the time it takes to get out of managed funds.. I was supposed to be out last week down to 25% of my orginal holding.. now I'm taking todays fall as well. when I should be holding a minimal position.

 

nah, I think 3700 is where it will bottom out.

 

Stocks tumble 7pc in selling frenzy | The Australian

Amid growing concerns a US recession would cause a wider global economic slowdown, markets across Asia were also sharply lower. India and South Korea temporarily closed their exchanges after big losses.

 

What numbers are you using to generate that trendline in your graph?

 

This is what I hate about unlisted funds... The days it takes them to process it may cost you thousands... You have no control

Almost 400 points down - owch

 

almost?

408 points down buddy..

{edit} you must be looking at the ASX200

 

I Look at XJO - But close enough - -393.6

 

XJO weekly (2003-2008).