the climax is near

Robert Gottliebsen
The climax is near
The Spectators

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 have put their heads up as a buyer has been mown 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 Rio in freefall as revealed by Nick Way this morning (Rio's looming industrial nightmare, October 10).

In essence our share market has the same problem as New York. The hedge funds have to find cash and they are selling our stock regardless of value. In Australia the focus has been on BHP, Rio Tinto and the banks. Smaller miners like Fortescue are 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 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 keeping 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 gong 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 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.