elchagie, I'd be wary about using these types of reports to...

elchagie, I'd be wary about using these types of reports to guide your investing.
You seem to like posting bullish sentiment, however you never seem to take the whole view correctly. There are also numerous articles written by highly respected people which suggest that this is more than just a correction.

"The problem is, no one really knows who is carrying the risk of these loans because the banks that write them bundle the mortgages up and sell them to the likes of global investment and finance giant Bear Stearns.

"I've been here for 22 years, and this is as bad as I've seen it in the fixed-income markets," said Bear Stearns chief financial officer Samuel Molinaro, comparing the crisis with 1998 when hedge fund Long-Term Capital Management collapsed and Russia defaulted on its debt.

Diana Choyleva of Britain-based research house Lombard Street Research likens the crisis to that faced by Japan in 2001 when its banks were saddled with an unknown number of bad loans.

It wasn't until three years later when its central bank quantified the bad loans that the sector turned around.

"The removal of uncertainty was instrumental in the Japanese stockmarket recovery that followed," Ms Choyleva said.

"But, as yet, no one knows the true size of the problem (in the US). Such conditions are classic breeding ground for a further increase in risk aversion.

"The close integration of the global financial system must mean that these developments will be unfolding on the world stage."

Although Australia's strong financial sector and robust economy should shield it from many of the problems in the United States, a couple of local hedge funds, the nation's largest investment bank, Macquarie, and Melbourne-based credit union Members Equity (see story at right) have experienced the fallout.

"Two weeks ago, markets around the world were at or near record highs," Mr James said. "But when you get to a market top, investors start to ask 'where do we go from here?'

"Once you get a piece of bad news, it just confirms investors' suspicions that the only way for the market to go is down."

In Asia, stocks fell for the second week, with the Japanese Nikkei 225 Stock Average sliding 1.8 per cent and the Morgan Stanley Capital International Asia-Pacific Index dropping 1.1 per cent.

Steven Wright, ABN Amro Morgan's Australian director of fixed interest, said the falling equity markets reflect investors' reduced appetite for risk, which will affect all asset classes.

And while the market fundamentals are more solid in Australia than in the US, inevitably our market will adjust as investors go looking for value.

"Clearly our markets are very nervous," said Anton Tagliaferro, investment director of Investors Mutual. "But everything's got to be put in perspective.

"We've had four great years of double-digit returns on the sharemarket. The US economy's got some challenges ahead and that anxiety is going to be reflected in our market for a while."

Since the correction started, the price-to-earnings valuation of the Australian market has fallen to 14.6 times and could reach as low as 14 times before it is over, presenting buying opportunities for savvy investors.

With signs the US economy is slowing, compounded by concerns about the housing sector, the US Federal Reserve may need to ease interest rates when it meets this week. Luckily for Australia, this will have the effect of stabilising the local dollar, which has also suffered a volatile ride since the subprime crisis emerged.

When the Reserve Bank meets on Tuesday, it will have to balance the global credit squeeze against concerns of an inflation break-out.

Still, Mr Wright said Reserve Bank governor Glenn Stevens was keeping an eye on the strength of the Australian dollar, and the deflationary impact that will have, and might be convinced to hold off on a rate rise, even into the new year.

Mr James described Tuesday's decision as "the closest decision we will have had in years".

"It would be a very courageous Reserve Bank that lifted rates if the market falls sharply on Monday or Tuesday," he said.

"It really is a question of whether the Reserve sees this as simply a market correction or the start of something worse."

Mr Tagliaferro agreed that this week was not the best time for a rate hike.

"It's a difficult decision for them," he said. "They'd be wise to hold off for a month and see what happens."

The US jitters are bad news for the speculative-end of Australia's sharemarket, Mr Tagliaferro said. "It's fair to say some of our valuations are excessive and have been excessive for a while — we need a bit of a reality check.

"Too many people have forgotten about the risk element of the sharemarket, and the sharemarket has a habit of reminding people it doesn't only move in one direction."

He warned that dozens of speculative mining companies, yet to produce any money, could bite investors.

"There's clearly a resources boom, and China is growing at a great rate but, at the end of the day, a highly speculative mining company shouldn't be valued at a billion dollars."

While the sharemarket's volatility would challenge Australian investors, the prospect of an interest rate rise would focus the minds of those with onerous mortgages, MWE Consulting director Mike Ebstein said.

He believed Australian credit card debt was at manageable levels. Nevertheless, while the convenience of plastic money was here to stay, he expected debit cards to grow in popularity as the economy became more uncertain.

"The overwhelming evidence is that Australians, by and large, are using their credit cards in a controlled and prudential fashion," he said.

"We have come out of five years of the most favourable conditions you can imagine. What we're starting to see now — with pressure in interest rates and volatility in equity markets — is that as people become more averse to debt, we've started to see a slight shift away from credit cards to debit cards."

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