It's Trench Warfare

October 28th, 2008  by Lou Muddaris

Closing Data

	current	change	%
Dow Jones	8175.77	-203.18	-2.4%
NASDAQ	1505.9	-46.13	-3.0%
S P 500	848.92	-27.85	-3.2%
FTSE 100	3852.59	-30.77	-0.8%
Nikkei 225	7162.9	-486.18	-6.4%
SPI Futures	3793	2	0.1%
All Ords	3,768.30	-63.3	-1.7%
Oil	63.34	-3.83	-5.7%
Gold	729.3	0.05	0.0%
Silver	9.01	-0.02	-0.2%
Aluminium	1886	10	0.5%
Copper	3686	-35	-0.9%
Lead	1206	66	5.8%
Nickel	9800	990	11.2%
Tin	12460	1110	9.8%
Zinc	1076.5	14	1.3%

One of my favourite comedies is Black Adder(starring Rowan Atkinson) and in particular the series when it was based on WW2 and featured life in the trenches. Every show was funny except for the final one when he and his men were ordered to leave their trenches and charge at the enemy; it was filmed in slow motion which made it even more exceptionally moving... Now think Stock markets. It is identical. The  "good guys"  are the investors/traders and  the  "bad guys"  are the Hedge and Mutual Funds. These Funds are under orders to sell; they have no choice. So they liquidate  stocks, commodities, currencies and anything else they hold. Last month alone redemptions(withdrawls) amounted to $43 billion, to put that in perspective the average daily volume on the N.Y.S.E is 1.8 billion shares. Thus, it's not difficult to see why any rally is being "gunned down" and why we can't hold rallies for more than 2 days. The month of October has been the worse since 1936 so I can't wait to see the total redemptions made. So when does this stop? Who knows as you can't quantify panic and human psychology.

We believe we are floating along the bottom now.Investors know that the world is in recession, all we are trying to work out now is "How long will it last?". With the stimulus provided by the world's Central Banks and Governments we believe the answer is "not more than 2 quarters.". Therefore we think markets will rally in late November/December,obviously to nowhere near their previous highs, but significantly.

The G7

Yesterday the group of 7 issued a statement saying "the recent moves in the Yen have been excessive". This is G7 speak for "we are going to intervene to sell the U.S $". Remember this currency move is causing all other markets to react negatively, thus IF, (and it is a big IF) the U.S $ can reverse it's unreal strength then that will show investors are becoming more risk tolerant and less risk averse.

The currency market is by far the biggest market in the world and the most influential. It is also the most volatile and hardest to predict. The overwhelming consensus is the US $ is currently unstoppable.

OK I'm going to adopt the contrarian view (for many reasons) and recommend the currencies are now a buy, which will also mean the stock markets are a buy. There is one maxim I have learnt and that is "NEVER FIGHT THE FED!"

It is a fact that the Central Banks over the long term make money via intervention; the RBA for example was a huge buyer of the Aussie/U.S $ around 50 cents back in 2000 and they were huge sellers recently between 90 and 95 cents. So in conclusion if we see coordinated intervention then eventually both currencies and stocks will rally. Eventually!

EMERGING MARKETS

The Indian stock market has fallen 20% in 2 days. China fell 6.3% to its lowest level in 2 years. The more mature markets like Japan hit its lowest level since 1982! The Hang Seng (Hong Kong) fell over 12%. Europe wasn't any prettier with falls of between 5 and 7%.

Interestingly and a positive, Reuters completed a survey asking the top 100 U.K Fund managers whether they are actually investing in shares for themselves…a whopping 84% said yes. Now they are very wise men.

With Emerging markets at their lows now is a good time to investigate the Freeman Fox Funds, especially the "Emergent Fund"

BHP

Yesterday BHP issued a surprisingly upbeat bullish outlook for petroleum and iron ore. The CEO of BHP Australia, Phil Byrne, said they had "outstanding" local opportunities with 5 major projects under consideration. He also repeated long-term demand for commodities would remain strong.

We maintain our buy on BHP around current levels. The charts certainly show a major support level at $24 still holding; we have tested that level 4 times over the past 4 years and rallied thereafter to $45 plus.

Have a great day.

Quote of the day: Lady Attersley to Churchill; "If I were your wife I would poison your tea" Churchill replied, "Lady, I can assure you if you were my wife I would drink it"

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

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