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A matter of time

I must admit I had one of my worst Saturday mornings in quite a while last weekend, though I didn't expect it when I got up and turned the TV on at five in the morning! Wall Street was down 200 points and they had received the worst jobs numbers in 34 years!
The Yanks even had the highest percentage of delinquent mortgages on record. Over the week, they learnt that they had been in recession for over a year. This was not a great week yet, Wall Street headed up.
Why a bad jobs number helped the market up!
The Dow Jones Industrial Average gained 259.18, or 3.1 per cent, to close at 8635.42, after being down as much as 200 earlier. The S&P 500 index gained 3.7 per cent, while the Nasdaq also finished higher, up 63 points or 4.4 per cent to 1,509.
One of the New York Stock Exchanges' old traders, Art Cashin of UBS, saw some light in the stock market tunnel.
"We probably have a couple more days or weeks to go through this but it's encouraging that we continue to look like we're in the bottoming process," he told CNBC.
On a weekly basis, the Dow fell about 200 points or 2.2 per cent. The other indexes had similar losses. But still the market ended up with many experts saying the seeds for a recovery had been planted.
Some 16 hours before, Anton Tagliaferro had emailed me to say he wanted to ring the bell at the end of the bear market.
Unfortunately for him my Money Makers show is on holidays until late January, so I didn't have a show for him to ring the bell, but it was a timely email.
He thinks resource stocks will still struggle, but he likes industrial stocks at these valuations.
Indicating a change of sentiment, consumer-discretionary stocks were the week's best performer - up 4%.
Away from America, one of my big complaints for a few months - the economic leadership in Europe - showed signs of improvement with big interest rate cuts for the Eurozone.
The ECB played ball with market expectations by reducing its interest rate by 0.5 per cent, while the Bank of England shocked analysts by lopping 1.5 per cent off official interest rates. The Poms and the
Europeans are getting serious about beating their recession demons.
This is good for the global economy and an exporting country like Australia.
So, lets get back to the seeds of a recovery.
First, T-bills in the USA are yielding close to zero per cent. With these sorts of yields, shares with good yields in safe industries must look appealing to cautious investors.
What companies are safe?
In the USA, there are two companies that have risen on the market throughout all of this turmoil. Wal-Mart is up 23 per cent and McDonald's is 6 per cent higher for the year!
Remember a stock market looks 6 to 9 months down the track and America has been in recession for 12 months already. Meantime, lots of developments that help a recovery are falling into place.
Petrol prices and most commodities have become much cheaper for consumers and business.
Lower LIBOR rates and other measures of the cost of money indicate that the credit markets are better.
In the USA they are finally offering lower mortgage rates to Americans and the corporate bond market is coming out of its freeze too.
Also soon there will be Obama's massive stimulus package which will help US consumers and businesses.
Finally share valuations are so low now, many investors fear missing out on the opportunity of a lifetime!
CommSec's Craig James makes a similar point for local investors.
"Understandably there will be cynicism that the market has bottomed as there have been false dawns in the past six months," he said. "But investors certainly do need to be alert; especially as Australian share market valuations have hit a fresh 28-year low of 8.46."
CNBC had a nice take on the market response to the bad jobs number.
"This number is a unique number because it reflects an unprecedented economic situation, which began with the bankruptcy of Lehman on Sept 15," says long-time Fed watcher David Jones, of DMJ advisors.
"The economy has never been shut down as quickly as it was following that bankruptcy. The economic response to that cut off in credit is unprecedented."
This should be considered in concert with this from Robert Brusca, chief economist at Fact & Opinion Economics.
"Severe drops like this (the Sept.-Nov payrolls) cannot be sustained - it suggests we are getting so weak there will be a turnaround."
In the interests of being a two-handed commentator I should say that my technical expert still thinks we have not bottomed.
I'm not ringing the bell, but I think we are close and I am looking for great companies at ridiculous share prices.

Meanwhile, don't forget the Yanks are famous for New Year market rallies. Let's hope it will be a bull market rally! 

Published on: Saturday, December 20, 2008

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