Sunday, 30 November 2008

XAO Has Worst November in 25 years

Although October was a horrible month for stocks, the last week of the month saw the market rally hard and look likely to set the stage for a sustained rally in November. A lot of fears eased and confidence returned. At the time I made the comment that I get suspicious when others get comfortable.

That suspicion was warranted as the XAO fell a further -7.8% in November and at one point being down more than double that amount. What happened? Well it appears that US government, far from having solved the current crisis, is simply making it up as they go along. Citibank, after repeated claims that they were fine, wasn't and has now essentially been nationalized.

Australian banks too, made visits to the confessional about exposures to failed institutions. Allco Finance Group (AFG) appointed a voluntary administrator in early November followed a couple of days later by ABC Learning Centres (ABS) with Babcock and Brown (BNB) soon to follow I suspect. Even with the rally in the last week of November it was the worst November in the last 25 years surpassing the -7.3% decline in November 1988.

But thankfully, president elect Obama rode to the rescue and has appointed a wonderful economic management team to save the day. Yes, in case you are wondering, I'm being sarcastic. The idea that a guy at the center of action over the past 18 months, Timothy Geitner, is well equipped to take over the reigns of Treasury Secretary is counter intuitive.

The logic goes that Geitner has been in the thick of things starting with the LTCM bailout in 1997 right up to the present day bailouts of Bear Stearns, Fannie and Freddie and Citigroup. He is someone who is "not afraid to take action" and will get the job done. Yes but what good is taking action and getting the job done if the job you do is second rate? I'd actually prefer someone who took no action. The time to take action was years ago. Where was Mr "not afraid to take action then?" Anyway, enough of that rant.

What can we expect in December? As we did in October, we ended November on a positive note. Volatility has declined and a semblance of confidence has returned to the markets. Still, even with the rally in the last week of November, the XAO is down a monumental -30% since the end of August. One aspect of the current bear market that has been missing since that time is a sustained bear market rally lasting a number of weeks rather than the 4 or 5 day rallies to date.

Once again I have no strong convictions about short term market movements, nor does my investment philosophy depend on it. During October, the XAO was officially down more than -50% from the November 2007 peak. Was that the bottom? We won't know until well after the fact. I suspect it won't be. When the market comes to grip with the fact that Obama has no silver bullet to fix all that ails us and the analysts get their head around how bad earnings will be in 2009, I think we will at the very least, retest the lows seen in October sometime in the next few months.

However, Since we have not had a sustained bear market rally for some time, I think December could be it. Therefore I'm going to call the XAO higher in December but ultimately it will prove to be just another bear market rally. Also, Don't forget to have your say in this month's poll.