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Perfect storm not as windy as GFC

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by Peter Switzer

The resource super profits tax is a big deal for Australian investors and our political parties as well as their enamoured supporters but it remains a sideshow to the real drivers or destroyers of stock market confidence and share prices.

Regular readers know I’m not a fan of the tax in its current form as its effective tax rate hit is too harsh. I also think the timing stinks given the fragility of both the economic and stock market recovery. And I do think the Rudd Government will change aspects of the tax but will not change the 40 per cent slug because backdowns and backflips have been ruled out by the Caucus.

However, a compromise will result and that will bring back some lost overseas investor support and improve but not restore the share prices of many of the affected stocks. But it will take some time and other things will have to be thrown into the mix.

Market gain ahead?

My optimistic guess is that we will see a late-year rally that could knock our socks off but we’re bound to go through some ups and downs for a few months.

Clifford Bennett from Herston Economics, who boldly called an end to the bear market in the first week or so of the March 2009 share price rebound, also remains positive.

“There is little doubt we will be seeing the same kind of bear market rally suggestions for this fresh bull market, as we saw all the way up that great rally last year,” he proclaimed recently in his newsletter. “What, in fact, we just had was a bull market correction.”

He insists the actual economic situation is more stable than the current, very volatile market predicament.

“The real economy, where people go about their everyday lives, buying and selling goods and services, is remarkably robust globally,” he insists. “The S&P/ASX 200 rallied 2000 points, and then corrected 850 points.”

His optimism is shown in his S&P/ASX 200 target of 5200. This is now around 4400.

And his confidence extends to our dollar.

“The Australian dollar rallied 34 US cents, and then corrected 13 US cents,” he pointed out. “The Australian dollar will move to 96 US cents by year end.”

That’s a big and bold call.

Euro-drama

So, will he be right? And what has to happen to see this all come true?

The markets are rocked at the moment by the European debt drama and the associated euro contagion, which has seen the euro dumped. This is actually a good thing for Europe as the exchange rate will help these countries boost their exports. It will help Germany and France in particular, which are the stronger economies.

But the European Union has to sort out the confidence concerns over their debtor nations. Spain has voted in an austerity program but it did so by one vote and led Fitch, a ratings agency, to downgrade the country’s credit rating. This sparked a sell off on Wall Street, which I thought was a bit rich.

The Spaniards did vote for austerity and it was a step in the right direction but it was not a big enough one and that’s what Europe has to do — take bigger steps to allay debt default concerns.

The European leaders created this market confusion and KO’d the confidence of investors which made it easy for bears, short-sellers and hedge funds to rock stock markets.

Over in the US

All of this was not helped by the US Congress looking at tough laws to rein in financial institutions. There was even talk of stopping banks from selling derivatives which would hurt profits and explains why US financial stocks have been hit hard.

This has spilled over to our banks. It’s a global trend that says if banks are beaten up in the US then banks worldwide can cop it. Similarly, if telcos in the US are trashed, then it can be mirrored here.

Also these developments are posing threats to the US recovery but, more importantly. the global recovery, with Europe’s role in this mess of paramount importance. This then threatens banks’ profitability by reducing global demand as well as business and/or driving up the cost of funds in a more credit scared world of bankers.

This is why stock markets are nervous and selling off more than they’re buying.

Perfect storm

Throw in the oil leak problem in the Gulf of Mexico and the bottom-line hit to BP, which has seen US$70 billion wiped off the company’s market cap, and you can see why oil companies have felt some of the ill-will from the tragic event.

Then you have to add in the airline, travel and business challenges from the Icelandic volcano and you can see we’re facing a perfect storm on global stock markets right now. In fact, given the pile of problems, the actual sell off says there are some pluses out there. It also says this perfect storm is not as windy and reckless as the GFC one in 2008. Thank the god of materialism for that grace.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Tuesday, June 08, 2010