Stanlib's Weekly Focus 01 December 2008

Market weekly

SOME PERSPECTIVE ON TODAY’S BEAR MARKET: 1974 GLOOM & DOOM REVISITED

• 34 years ago, amidst the 1974 bear market, the Chairman of one of the top US asset management companies wrote a letter to his clients. What follows are some excerpts from this letter:
• “One significant reason why there is such an extreme degree of bearishness, pessimism, bewildering confusion and sheer terror in the minds of brokers and investors alike right now, is that most people today have nothing in their own experience that they can relate to which is similar to this market decline.”
• “Today people are saying that there are so many bewildering uncertainties and so many enormous problems still facing us – both long and short-term – that there is no hope for more than an occasional rally…”
• “I don’t know if we have seen the absolute bottom of this prolonged bear market, although I think we’ve seen the lows for a lot of individual shares.” It turned out that the market had in fact bottomed the month before (October 1974).
• One could probably say the same about our JSE…that many shares have already seen their lows.

2008 SITUATION

· The US economic situation looks decidedly bleak (banks terrified of lending and consumers dealing with the bursting of credit and housing bubbles) and the rest of the world is also weakened by the credit crisis.

• One could spend days listing all the bad news.
• However, IF global efforts to stabilize finance, housing and consumer spending are beginning to work, then it is not impossible for the US economy to stop contracting in six to seven months time.
• Already we have experienced the worst bear market since the 1930’s as shares have discounted a very ugly scenario. So it is just possible that the worst is already discounted by share prices. The VIX or “fear index” is showing a possible double top, which could be confirming this.
• Given that shares anticipate events six months ahead of time, we may have seen the start of a very good rally last week.

WORLD FACING A DEFLATIONARY ENVIRONMENT?

• The 30-year US government bond yield has broken downwards from a gently declining 22 year old channel. After yielding 15% in 1981, this bond is now yielding 3.5%
• The good news is that the 27 year old bull market (declining yields/rising values) remains intact and that inflation is clearly not an issue at all.
• The bad news may be the threat of deflation, which is a bigger problem than inflation, because the prices of goods and services decline, which means that salaries, wages and profits may also decline.
• Should the US government refuse to bail out GM and Ford later this week, the argument for deflation would be enhanced, because it is estimated that for every job that GM and Ford creates, they generate another six or seven jobs in the economy. So if these jobs are lost, the effect on the economy would be severe, to say the least.

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