No joy for bulls

Only the wildest contrarian would bet on a rally today. A pause in the breathtaking surge in commodities prices, and an oil price slipping from its all-time high, don't even make the resources sector a safe place to hide.

Despite the modest respite last night from Wall Street's Friday rout, the big question now is, not whether we are in a bear market, but just how deep is it going to be?

The stockmarket is simple in one respect: share prices rise and fall on what people believe company earnings are going to do. The rest is hard.

It doesn't look too hard though to make the call that interest rate and growth fears globally, and company earnings forecasts locally, are just about to put more pressure on the market. We are now in ''confession season''; the season when companies fess up that their profits will depart materially from previous expectations.

Combine this with the Aussie dollar hit for exporters, the inevitability of a deepening recession in the US, the impact of rising oil costs, June year-end tax-loss selling and a likely round of hosed-down 2009 forecasts from industrials and there is not a lot of joy out there for the bulls.

In fact, the ranks of the bulls are rapidly depleting.

Already the confessions have cut a swathe through retail stocks which had been travelling quite nicely on the sales front as little as three months ago.

Retail stocks were smashed last week on earnings downgrades to Clive Peters and Fone Zone. They followed confessions from Fantastic Furniture and Nick Scali.

Just as investor sentiment in the US is capitulating to the apparent inevitability of a ''hard-landing'', consumer demand has been hit here in Australia. Higher interest rates are biting. Worse, inflation remains a threat; but not only here. In the US, where they are forced to deal with the moral challenge of bailing out Wall Street ahead of fighting inflation, stagflation is rearing its ugly head.

And in Europe late last week, head of the European Central Bank Claude Trichet made some worrying comments which augured for a possible rate rise in July.

Thankfully, the drop in the local stockmarket over the past couple of weeks has already seen a fair discount factored into share prices already. But we look forward, and the next stop is 2009 earnings outlook. The outlook statements from full-year profit seasons will be the next body of evidence from which sentiment will swing.



Unfortunately, things are pretty ugly just about everywhere you look. Although the present dizzy heights of the oil price appear to be overdone, driven by commodity fund speculators, their impact on earnings is yet to be fully felt.

Airlines, Qantas and Virgin Blue will therefore remain under pressure. Then there are the big oil users. Again, much of the damage is factored in though any respite to the pressure on transport stocks would be brief until the oil price dropped at least $US20 a barrel.

Exporters are no place to hide either with the high $A putting heat on the likes of QBE, Amcor and Cochlear: anything which derives a good part of its earnings from offshore.

Since January this year when the market began to tumble, the iron-clad market play has been to buy resources and sell industrials, particularly financials.

This would still appear to be the play. However, once global economic woes start to undermine confidence in the resources stocks, and speculators pull the pin on commodities, there is a long way to come down for second tier resource stocks. This is the next bubble which is bound to be pricked.

At least the big resources stocks are underpinned by earnings _ albeit earnings which are plagued by margin pressures thanks to high input prices. The faith built into the second tier, not to mention explorers, is an accident waiting to happen.

The ructions of the past couple of weeks came because a raft of data emerged indicating things were getting worse, particularly in the engine room of the world economy, the US. Indeed more investors came around to the view that the US might be facing a deep recession.

Some who had been calling for a shallow recession were now crying deep recession and the ranks of the bulls which had until now clung to the buy-the-dip view - that is no recession at all - were appearing very thin indeed.

Last night's news that Wall Street bank Lehman Brothers had made a loss and would tap the market for $US6 billion will not assist any prospective bottom pickers in the financial sector. The official line from Lehman had been that it did not need any new capital. Then it went and put its hand up. Surely people will be asking, who's next?

As far as broader sentiment goes, confidence in an early recovery is being sapped by the day, by ugly economic data, and by the fact that every bruising hit shakes the resilience out of a market which had become inured to correcting.


Markets do get it right, over time. Generally, however, the stockmarket has been tardy in reacting to other markets and broader indicators of a global economic downturn. This will only make the downturn more savage.

When credit markets stopped dead mid-last year you could have expected share prices to spiral lower. After all, corporate and consumer debt had been building relentlessly, there were signs of inflation and higher rates which generally spell poor news for equities. Access to cheap debt funding vanished, spelling doom for leveraged growth models.

Instead, the market blipped down for a few days then blithely marched on higher until its peak in early November. Wall Street's ructions in January sent the stockmarkets globally into a tail spin in January, finally, after months of credit market mayhem. Then talk of recovery lifted spirits and equities bounced again on the proviso that the worst was over.

It now appears that equities are capitulating. That suggests they will swing too far to the downside, as markets inevitably do. The big danger for the local market is the resources boom story. Has Asia really ''decoupled'' from the US and Europe? Will domestic Asian economies really pick up the slack from evaporating demand in the West?

It is almost iconoclastic to challenge the cherished belief that the boom in China and India.

The US consumer has, more than any other factor, propped up the world economy over the past decade. That prop is gone. Cheap and abundant debt are gone. Falling sales and rising commodity prices will squeeze company earnings. The question is by how much.

Then there is oil. Present prices do look overdone and ironically the pessimism in the US and probable hard-landing there may be the one thing to take the heat out of the oil price. Were it not for the spectre of Israel bombing the daylights of Iran in the dying days of the Dubya regime, the oil price might already be in significant decline.