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Australian stocks aren’t bouncing, they’re limping.

November 29th, 2011 · Greg Atkinson · 12 Comments

If you were to believe some of the ramblings on mainstream media sites you might get the impression that Australian stocks have on occasions bounced back strongly and that in some way this is a reflection of how well the Australian economy is doing. However the reality is that the Australian stock market has been trending downwards since July and many stocks are simply limping from one week to the next.

As stock market investors we have to deal with reality and not hype. The reality is that just about everything that could go wrong is going wrong. The political environment in Australia is toxic, the Government is clueless, the Reserve Bank have been asleep at the wheel and the debt mess in the U.S. & Europe will weigh down the global economy for years.

Also as I have been warning about for more than a year, the Chinese economy cannot keep surging ahead whilst it’s major export markets struggle. The reality is that the Chinese economy is definitely slowing and I expect that it will slow further. The notion that domestic consumption will be able to make up for the decline in exports is a desperate wish from those China super bulls who can’t deal with the impending slowdown.

If we look at the chart for the ASX All Ordinaries Index the downwards trend is pretty obvious.

ASX All Ordinaries Index – 6 month chart

all_ords_6_month_chart_nov11

Since the beginning of July the All Ords (XAO) has been heading downwards apart from rallying back near 4400 in October.  Clearly the idea that Australia is somehow immune from the financial problems in the Eurozone and the U.S. is absolute nonsense.

One major reason the Australian stock market has been sliding is that commodities prices have been declining.  This decline in prices was inevitable as I have discussed several times over the last two years or so.  Quite simply the the current commodities boom is coming to an end.

Commodities Futures Prices – November

commodities_futures_nov_11

As we can see from the chart above, commodity price futures (and this includes both hard & soft commodities)  suggest that the downwards trend is still in place and I expect prices will keep trending downwards at least into early next year.

The decline in commodities prices has hit a range of mining related stocks and a good example to look at is Rio Tinto. (ASX:RIO)

Rio Tinto Limited (ASX:RIO) 6 month chart

rio_tinto_6_month_chart_nov11

I recently read a report saying that Rio Tinto will ramp up production next year because they still see strong demand for commodities like iron ore.  All I can say is good luck to them as it sounds pretty risk to me in the current environment. Meanwhile Rio’s share price keeps falling and it seems likely we will see its stock price nudge $50 if the slowdown in China gathers pace.

Finally an interesting chart to look at is the Australian All Ords (XAO) versus the U.S. Dow Jones Industrial Average (DJIA).

ASX All Ords (XAO) versus Dow Jones (DJIA) 10 year chart

all_ords_vs_djia_10_year_chart_nov11

On the chart above I have drawn a few black bars simply to show the gap between the All Ords and Dow Jones at various points during the last bull market and now during the era of the financial crisis.

This gap has largely been created by the commodities boom although of course these are many other factors at play so I am oversimplifying things a touch.

But this chart does indicate how the Australian stock market has relied on commodities prices to drive it higher during the bull market years.  Then during the height of the financial crisis, mining stocks helped support the market largely thanks to the massive economic stimulus program in China.

Now as coal, iron ore and copper prices for example continue to slide the performance gap between the All Ords and Dow Jones has gradually decreased.  It is quite possible I believe that in the years ahead we will see the All Ords under-perform the DJIA which in turn probably won’t be doing that well either.

Anyway let’s hope that sometime in 2012 we see some light at the end of the tunnel and let’s also hope that this light doesn’t turn out to be an oncoming train!

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


12 responses so far ↓

  • 1 Stillgotshoeson // Nov 29, 2011 at 2:24 pm

    RIO, BHP and the banks, ANZ, CBA, NAB and WBC have such a large weighting on the ASX that further declines in stock prices in just these 6 stocks will have ramifications to the ASX Charts.

    Continued slowdown in China due to the troubles in Europe and US, our banks are frozen out of overseas credit markets (have been since August) I said last year that the banks would be on a hiding to nothing this year and it has started, they have some liquidity to carry them through the earlier part of 2012 but the situation is looking grim for the banks.

    The market is going to rise and fall relative to the news released, good news up, bad news down however down trend I feel is going to continue for some time yet.

  • 2 Plornt // Nov 29, 2011 at 3:43 pm

    We are likely in the Doubt and suspicion phase, from my biased view:
    http://www.investmentpostcards.com/wp-content/uploads/2010/04/Snap3.jpg

    New lows are possible, but there are plenty of stocks out there that have made major lows that have a high probability of holding the major lows set for their respective historical price data.
    I feel the previous major intraday low (XAO) set on 9th Aug 2011 @ 3829 will hold, or if broken; downside will be limited.

    We are entering a buy and hold cycle. Trading creates frictional costs and markets will probably be less volatile going forwards given the extent of the volatility thus far, and as issues gain more clarity and work towards a resolution for which the market can look ahead with confidence. I am attempting to avoid subjecting myself to the pitfalls associated with rear view mirror investing.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 3 Greg Atkinson // Nov 29, 2011 at 8:37 pm

    Yes the banks and miners basically send the All Ords and ASX 200 up or down. It’s a sad reflection regarding the lack of diversity in the Australian economy.

  • 4 Ned S // Nov 29, 2011 at 9:23 pm

    Chinese Vice-Premier (Wang Qishan) called a “chronic” global recession (ie a loonnngggg one) a week or so back:

    http://english.caijing.com.cn/2011-11-21/111429568.html

    I’ve also read they plan to stimulate to the tune of USD 1.7 trillion over the next 5 years (as a direct consequence I gather.) But have the suspicion it mightn’t be as postive for the Oz economy as the last lot of stimulus was.

  • 5 Greg Atkinson // Nov 29, 2011 at 9:41 pm

    Ned I reckon the leaders in Beijing are getting a touch worried about how to handle an economic slowdown. Sure they can keep building mega cities, but eventually that just isn’t going to be enough.

  • 6 Ned S // Dec 1, 2011 at 3:18 pm

    These rescues are getting closer together all the time. It was only a month ago the Europeans saved the world by announcing banks were going to get to take a 50% haircut. And Soros said the move was good for between 1 day and 3 months. (It was good for 2 days is my recollection?)

    http://www.telegraph.co.uk/finance/financialcrisis/8857456/George-Soros-attacks-Brussels-rescue-deal.html

    Now a bunch of central banks (principally the Fed I gather) announce they stand united in saving the world. In the hope that’ll be good for a week until 9 December maybe? With 9 December being when the Europeans have their next gum-fest:

    “Olli Rehn, the European Commission vice-president responsible for economic affairs, warned that a summit of Europe’s leaders on Friday Dec 9 was now crucial.

    “We are now entering the critical period of 10 days to complete and conclude the crisis response of the EU,” he said.

    Herman Van Rompuy, the EU’s president, said that Europe’s governments needed to “confront” a looming catastrophe.

    “The trouble has become systemic. We are witnessing a full-blown confidence crisis,” he said.”

    http://www.telegraph.co.uk/finance/financialcrisis/8927148/Britain-has-entered-second-credit-crunch-confirms-Downing-Street.html

  • 7 Greg Atkinson // Dec 1, 2011 at 3:58 pm

    Just in case that doesn’t worry you Ned Jim Chanos is warning about China on a weekly basis now.

  • 8 Lachlan // Dec 1, 2011 at 7:59 pm

    China loosened by cutting it’s ratio of obligatory bank reserves yesterday.

  • 9 Firebug // Dec 7, 2011 at 7:01 pm

    Hi Greg,

    I took the kids to the city to see the Christmas tree at Martin Place last Sunday night, never saw that many “For Lease” signs in the city ever.

    I was made redundant three weeks ago. The sales in H2 this year is 14% below that of the same period last year, consider it was a billion dollar company, not a good sign at all. This in some ways contributed towards my downfall.

    My brother works in one of the vendors, they look to expand as Australian Office and Pelikan are struggling. The talk is AO will shut their Melbourne paper mill, the carbon tax doesn’t help!

    I was listening to the radio this afternoon about that silly ban on cattles to Indonesia earlier this year. The farmers had it tough! It appears the government is just incompetent in managing economy.

  • 10 Greg Atkinson // Dec 7, 2011 at 8:30 pm

    Sorry to hear about the redundancy Firebug. I disliked the downsizing cycle when I was a corporate guy as it usually involved plenty of office politics.

    I think we will look back in the years ahead and wonder why we didn’t do more in Australia to look after our manufacturing sector. If the government has a plan for managing the economy then they have kept it to themselves. They seem to have been wasting money when they should have been cautious and are now cutting spending at a time when they should probably be doing the opposite.

  • 11 Ned S // Dec 7, 2011 at 10:42 pm

    Firebug: “The farmers had it tough!”

    Being a farmer is a hard game:

    “Farm male owners and managers commit suicide at around twice the rate of the national average.”

    http://www.aghealth.org.au/blueprint/

  • 12 Stillgotshoeson // Dec 8, 2011 at 2:39 pm

    Firebug, I am in a similiar position. Work has said we are ok until April, after that they are not sure. Could be out of a job soon as well.

    Interest rates are falling and unemployment rate is rising, it is unfortunate, however the two usually go hand in hand.

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