just received an email from Business Spectator...The climax is...

just received an email from Business Spectator...

The climax is near

I have just put the phone down from a veteran stock broker who has been sitting and watching this fall for months. He has been waiting for the big one – "the day of no hope". Today he told all his old clients and long term investors to pin their ears back, take courage and start buying.

At last we have had a decent fall forcing investors in weaker positions, led by the hedge funds and shareholders who bought on margin, out of the market. He says this may not be the bottom but it represents amazing value. But everyone will need to grit their teeth when Wall Street opens tonight.

Throughout this fall I have been comparing our current predicament with the big share market falls in both 1987 and 1960. But they were both more sudden affairs. This slump has been relentlessly grinding out all the optimism and hope. Anyone who has put their heads up as a buyer has been mowed down.

All those buying Australian shares today know that they face another session in Wall Street tonight, where opening bell will be like removing a cork that unleashes a wave of shortselling. As I write our market is still falling as was oil and copper. The Australian dollar slumped below US 67c. BHP held firm for a while before capitulating. Rio Tinto’s industrial relations problems left its stock in freefall (Rio's looming industrial nightmare, October 10).

In essence our share market has the same problem as the US. The hedge funds have to find cash and they are selling our stocks regardless of value. In Australia the focus has been on BHP, Rio Tinto and the banks. Smaller miners like Fortescue are being hammered because they will not have access to capital.

While the shape of the fall is different, that feeling of complete helplessness is now exactly the same as what we saw 1987 and 1990. I have often characterised that feeling of utter helplessness and dismay as the “day of no hope” . Share value seems destined to evaporate like boiling water.

Yet all around me I see signs of hope ranging from China's efforts to stimulate its economy to the coordinated attempt by central banks to keep money running around the banking system. The G7 will act and in time these forces will stabilse the economy.

But first we must sell out the hedge funds and adjust our earnings estimates for a tougher economy and a new reality. We also have to realise that we are going to see many companies fail. Land developers on the Gold Coast who were relying on nonbank financing didn't last long when the funding dried up, however this is going to become a global phenomenon. Last night I heard a whisper that a big city property might not be able to be settled because the buyer could not find the money. That may send the seller to the wall.

We have to be comfortable that the share market has adjusted values to cater for an increasing number of these kinds of events. In the US the official story is to blame the sell-off on the pending failure of Ford and General Motors. That should have been anticipated by all and sundry. Another reason for the fall is a broad sell-off from hedge funds trying to raise cash. They are under enormous pressure and are being squeezed by the shorters who can smell blood.

It is possible that today is "the day of no hope". If it isn't then it is not far away.

But first we need to rid the market of the reckless hedge funds. We are flushing them out at low prices right now, which is good news. Their leverage is causing their backers to suffer huge losses. It will be a long time before they are back.