A Tug of War

December 2nd, 2008  by Cale McCulloch

Closing Data

	current	change	%
Dow Jones	8149.09	-679.95	-7.7%
NASDAQ	1398.07	-137.5	-9.0%
S P 500	816.21	-80.03	-8.9%
FTSE 100	4065.49	-222.52	-5.2%
Nikkei 225	8397.22	-115.05	-1.4%
SPI Futures	3567	-114	-3.1%
All Ords	3619	53.7	1.5%
Oil	49.34	-5.87	-10.6%
Gold	776.8	-42.2	-5.2%
Silver	9.38	-0.85	-8.3%
Aluminium	1701	-19.5	-1.1%
Copper	3581	-84	-2.3%
Lead	1080	-6	-0.6%
Nickel	9705	-455	-4.5%
Tin	12310	-390	-3.1%
Zinc	1185	-28.5	-2.3%

As we said last week, the volatility in the share market will not disappear as the "negative economic data continues to spark selling on fears about the global recession". This was the case overnight, as data released early in the US session showed factory activity dropped to its lowest level since 1982, sparking a round of profit taking as investors scrambled to lock in some of last weeks 19% gains before they disappear. Later in the session the Fed chairman said in a speech that the US economy would remain weak for some time even if the credit crises eases.  This, combined with the announcement from the National Bureau of Economic Research saying that the US economy officially entered a recession in November 2007 was apparently cause for an escalation in selling towards the close, to finish down almost 700 points.

The Australian market finished lower yesterday as weakness in the resources and banking sectors dragged the index down.

Fears about the strength of the Chinese economy escalated yesterday as Hu Jintao (Chinese President) cited the weakness in the global financial system as "threatening to undermine the strength of the Chinese economy".  Chinese manufacturing contracted by the most on record as export orders plunged. Adding fuel to the fire is concerns about the impact of recent turmoil in India, the new destination for Australian Ore that was, until recently, meant to be heading to China. It is important to note that most analysts are more concerned about the potential social unrest in the region that may result from the rising unemployment than they are about the strength of the economy itself, as it is still along way from negative growth.

Today, we have the RBA rate cut announcement at 2.30 AEDST, with most economist forecasting a 75 basis point cut. However, the recently released Producer Manufacturing Index (PMI) data that showed a fall to the lowest level since 1992, reduces the RBA’s fears that excessive rate cuts may cause inflation. This combined with the fact that the RBA will not meet in January and so the next potential cut cannot be made until February, OPEC are reluctant to cut oil production, and of course all consumer spending on the other side of Christmas will be at the sales and hence is not inflationary, give the RBA the capacity to cut rates by as much as 125 basis point.

Although the consensus among economists is 75 bps, this is fully priced in already and as such, failure to at least meet the consensus will be negatively received by the market as a whole.

As for the title – well I was referring to the tug of war that we have seen, and will continue to see, between the negative economic data that will continue as the real economy moves through a recession, and the positive sentiment that is trying to return to the market given that it does lead the real economy itself.

As we have said on many occasions, use market strength to reduce holdings in substandard companies and to deleverage positions (and warrants expiring in the next two months).  Use the market weakness to buy Blue Chip stocks that will be the first to recover as the market stabilises.

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

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