Friday, 1 February 2008

Worst January for XAO in at least 24 years

Last month I expected the XAO to fall in January 2008, however the depth of the decline took me and everyone else by surprise plunging -11.3% in sync with a global stock market rout. That makes it the worst January in the last 24 years (all the years I have data for).

That also makes 3 consecutive months of negative month over month declines for the XAO. The graph above shows the last time that happened was Dec 2002 - Feb 2003. The last time the XAO declined 4 or more months in a row was Jun 1992 - Oct 1992 when the XAO fell for 5 straight months.

So what will this month bring? It's reporting season in Australia this month, we will get a slow trickle of reports next week and then expect a deluge from the week beginning Feb 11th. Australian company profits should reflect a strong Australian economy.

Corporate profit growth for XAO companies should be well into the double digits. However, given the current volatility and uncertainty, any company that disappoints on either earnings or in their outlook will get severely punished by the market.

In the US we have the looming threat of recession which some believe has already begun. Corporate earnings are horrible and economic data continues to deteriorate. Tonight the most anticipated (and one of the most unreliable) economic data points is released - non farm payrolls.

The BLS typically puts through revisions in January and it is my belief that they have been overestimating job growth in 2007 since their controversial birth death adjustment is not attuned to picking up economic turning points.

Credit problems continue to show up everywhere, S&P released a report yesterday announcing that they expect subprime related losses to top $265 billion, approximately double that recorded to date. The Monoline Insurers are teetering on the brink of bankruptcy, the US consumer is increasingly feeling the pinch and commercial real estate investment is following residential into the toilet. On balance there is a lot more negative news than positive to come.

I've had a good run of predicting the directional movement of the XAO in recent months, but that doesn't make this month's forecast any easier. History doesn't favour another down month as 4 or more consecutive monthly declines have only occurred twice in the last 24 years. However, as I believe the current environment is one in which investors should expect the unexpected, I'm going to speculate the XAO will finish lower in February .