Market Corrections Oct 2005

The Australian stockmarket has shed about $40 billion since reaching its all-time high on Friday, September 30, with October again living up to its reputation as the most volatile month.
The 5 per cent fall is the sharpest since the terrorist attacks of September 11, 2001. The pullback was not, however, totally unexpected. Fund managers have been saying that the market had run ahead of fundamentals.
Both the Australian economy and corporate profitability remain in good shape, with the only risk being the high price of oil.
Last week the Reserve Bank's deputy governor, Glenn Stevens, warned that soaring petrol prices could re-ignite inflation.
The Australian stockmarket has been growing at an unsustainably high rate, putting on more than 50 per cent over the past two years.
It was always going to take just one trigger for some of the "hot" money to go out of the market. As it turned out, that trigger was fears in the US over the possibility of higher interest rates. Share investors get spooked by the prospect of higher interest rates, because it slows economic growth and reduces companies' profits.

Colin Cruickshank, a private client adviser with Baillieu Polkinghorne, says: "It is good to see a correction, because the All Ords has been been going up in a straight line and it was getting difficult to find value." Cruickshank says the correction "injects a note of caution for those who were getting carried away".
Brian Eley, the co-founder of the boutique fund manager Eley Griffiths Group, a specialist in Australian small companies funds, says that in the early phases of any sell-down there tends to be "indiscriminate" selling.
That is because investors are sitting on good gains and do not want to risk giving up those gains in a correction, if it were to become protracted.
While some commentators are saying that it will be a short and sharpish correction, some fund managers say the volatility could last for many weeks.
"I think it is a natural correction for a market that has moved ahead of its fundamentals," Brian Eley says.
"The market does not correct in a week; it takes a few weeks before figuring out what is really going on and investors feel confident enough to go back in."
Stockbroker Marcus Padley, the author of the Marcus Today newsletter, says in the absence of profit warnings or concerns over the economy, the correction will most probably be short-lived. He says the correction has everything to do with the "herd" mentality of investors and nothing, at this point, with fundamentals.

Bob Van Munster, the head of Australian equities at Tyndall Investment Management, says the performance of a market index can be a bit misleading.
He says the strong run of the Australian stockmarket, particularly over the past 12 to 18 months, has been led by the resources and energy sectors, and that few other stocks have participated.
"It is really only a handful of stocks that have been [boosting] the indices over the past year ... and the correction has really only been in these high-flying sectors," Van Munster says.
The major casualties have been those that enjoyed the biggest increases since the beginning of this year.
They include the big resources stocks, on the the back of high commodity prices, and others such as Babcock & Brown and Macquarie Bank.
Babcock & Brown, Woodside Petroleum, Macquarie Infrastructure Group, Macquarie Bank, BHP Billiton and Iluka Resources are each down more than 5 per cent from their September 30 prices.
But shareholders in these stocks continue to sit on big capital gains and the latest correction may prove to be only a hiccup.
Babcock & Brown's share price has almost doubled since the beginning of this year to September 30. Woodside had increased by almost 80 per cent and Macquarie Bank by more than 60 per cent. BHP Billiton and Iluka Resources each increased by about 40 per cent.
The boutique fund manager Investors Mutual is holding relatively high levels of cash in its Australian shares funds. "We realise our investors want us fully invested, but they do not want us fully invested into an overvalued market," says Andrew King, a portfolio manager at Investors Mutual.
"The market is correcting, but we do not think that the optimism is out of the market yet," he says.
Tyndall's investment mandate is to stay fully invested in the market, and Van Munster and his team are continuing to invest in companies with relatively defensive earnings.
The big "mum and dad" stocks have been mostly spared during the latest sell down. Telstra's share price has been on the slide for months. Among the stocks widely held by small investors, Insurance Australia Group and Woolworths have each lost more than 5 per cent.
Commonwealth Securities' chief equities economist, Craig James, says the economic fundamentals have not changed.
And he says small investors who invest on fundamentals do not have to do anything, as it is unlikely they will be hurt by the correction.
James says that October is the most volatile month of the year for the sharemarket.
Two of the biggest crashes since the end of World War II occurred in October 1987 and October 1997.
James says that on average over the past 20 years, the All Ordinaries has swung in the range of 10 per cent during October, compared with a normal monthly range of about 5 per cent.
The effect is one of volatility in share prices, and does not necessarily mean lower prices, and the effect occurs on all major sharemarkets.
The reason for the October effect is unknown. Perhaps it is just the psychology of investors knowing that most of the biggest sharemarket crashes, including the 1929 Wall Street crash, occurred in October.
James says it may be that October is when traders and investors in the northern hemisphere return to work after the summer holidays and reposition their share portfolios.
Eley Griffiths' Brian Eley is not yet buying shares for his fund and is happy to allow cash build up in his fund. He expects it could be a few weeks yet until the picture on the Australian market becomes clearer.
In the last correction, in March this year, the Australian market slid almost 10 per cent over two months, before going on to record record highs.
Eley says with the annual general meeting season upon us, the market will get a much better picture of how companies are travelling. Companies with June 30 financial years will report their results - the majority of all listed companies.