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The ASX All Ords, the Dow Jones and other charts to watch.

March 30th, 2010 · Greg Atkinson · 15 Comments

As the Australian ASX All Ordinaries Index slowly crawls towards the 5000 level again, now is a good time to look at how some stocks have come through the global financial crisis. Does it look like a global recovery has finally taken hold, and is the Australia stock market poised to surge higher over the next few weeks?

Firstly let’s have a look at how our stock market has faired compared to the U.S. stock market by looking at the charts of the All Ordinaries Index vs the Dow Jones Industrial Average. (Dow Jones)

All Ordinaries (XAO) vs Dow Jones Industrial Average (DJIA)

xao-vs-djia-3-year-chart-mar-10

Now according to many financial commentators in Australia our economy is now closely aligned with the Chinese economy and therefore no longer coupled to a large extent with the U.S economy.

Well if that is true, somebody forgot to tell the stock market and stock investors, because over the last 3 years the ASX All Ordinaries and the Dow Jones Industrial Average has moved in pretty much the same pattern as you can see clearly from the chart above.

But hold on? Didn’t the U.S economy suffer a major recession? Didn’t the U.S. housing market fall into a heap? Isn’t unemployment at record levels in America? So why isn’t the U.S stock market trailing our stock market by a big margin?

In fact, over the last 3 years the Dow Jones has outperformed the All Ordinaries..surprising isn’t it?

Of course the U.S. Government has borrowed a massive amount of money and thrown that into the economy to try an limit the damage caused by the recession, so this may be one reason U.S. stocks are holding up surprisingly well.

Another reason is that many American companies have still been doing quite well in recent times, Apple Inc for example. The U.S. economy may not be doing so well now, but it is still the world’s biggest by quite a considerable margin.

But to be honest the chart above looks different to what I expected and actually I am surprised by how our stock market has fared compared to the Dow Jones. If anyone can shine some light on why this is happening then I am all ears as they say.

So what is going on with the Australian share market?

Well stocks like the Commonwealth Bank (CBA) and Westpac (WBC) are not holding back the ASX All Ords as the chart below illustrates.

Commonwealth Bank (CBA) vs Westpac (WBC) vs All Ords (XAO)

cba-vs-wbc-3-year-chart-mar-10

In fact both these stocks are getting back to near their pre-crisis levels, and much of this has to do with the strength of the housing market in Australia.  The fact that many small non-bank leaders were squeezed out of the home loan market has also helped the big four banks. I guess it all looks pretty good for the major banks as long as their loan books stay in fairly good shape.

On the commodities front we have been lucky so far in that demand and prices for the things we export like iron ore and coal have held up fairly well, whereas the price for oil is still below the highs of 2008.

Australian World Wide Exploration (AWE) vs BHP Billiton (BHP)

awe-vs-bhp-3-year-chart-mar-10

The chart above shows how well a commodities play would have worked out if you had purchased a stock like BHP during the dark days of late 2008/early 2009.

But you had to ride the right company as the share price of the oil and gas exploration company Australian Worldwide Exploration (AWE) illustrates. Just for the record I have generally been selling BHP as the stock price has risen and be buying a stock like AWE, simply because I think oil/gas prices will run up again. (and also because I think the Chinese appetite for commodities will come off the boil soon..although few people seem to agree with me)

Finally let’s have a look at two blue chip Australia stocks that have not been doing too well over the last 3 years.

Telstra (TLS) vs Qantas (QAN)

tls-vs-qan-3-year-chart-mar-10

Telstra (TLS) and Qantas (QAN) shares have really struggled over the last few years and are examples of the major stocks which are holding back the overall rise of the ASX All Ordinaries and S&P/ASX 200.

Telstra is in a tough spot at the moment since the Federal Government apparently believes it is a good idea to undermine an Australian company, in order to help two major foreign companies like Vodafone Huthison and Optus.

Qantas on the other hand is an example of how tough the airline business is and even though oil prices are down, the company is still finding it hard to get people to fly at the pointy end of the aircraft.

In fact Qantas shares have underperformed Telstra shares over the last few years and since these are widely held stocks in Australia, this must be hurting a lot of self funded retirees and share market investors.

Overall what the charts suggest to me is simply what most people already know – that the Australian economy is still weak and that housing, commodities and government spending is what is keeping the GDP numbers positive.

Therefore I don’t see Australian stocks surging ahead in the next few weeks and would say that the chances of another little sell off/correction are pretty high.

But that is how I think the situation is now, what do other people think? Perhaps I am being too cautious?


15 responses so far ↓

  • 1 Anon // Mar 31, 2010 at 2:42 am

    “But to be honest the chart above looks different to what I expected and actually I am surprised by how our stock market has fared compared to the Dow Jones. If anyone can shine some light on why this is happening then I am all ears as they say.”

    Interest rates are higher in Oz, so theres less need to chase risk as people can still get decent yields at the bank? Well thats my theory anyways.

    GDP contraction ahead?
    http://www.consumerindexes.com/GDPvsDGI.gif

    http://cij.inspiriting.com/?p=1225

    I strongly suspect (altho we can never be sure) there will be a Japanese type effect on our markets, re: stimulus withdrawl. Need to be very careful here, especially in the 2nd half.

    Atm this rally looks like a fear rally. People are chasing risk for fear of missing out and people are getting short squeezed bigtime.

    Not advice, just chatter, see a financial adviser for decisions and advice.

  • 2 Greg Atkinson // Mar 31, 2010 at 7:35 am

    Anon…ah yes, interest rates…they are probably another reason for the relative strength of the Dow Jones…good point!

    I also think you might be onto something about the fear rally. Quite clearly it is not a broad based rally as many major stocks/companies are still struggling.

    If we get just a whisper of the Chinese economy slowing then I reckon the fallout in Australia will be quite significant.

    The Chinese government has already started to tighten up property lending so I think it is pretty clear that the stimulus measures they introduced won’t last forever.

  • 3 Anon // Mar 31, 2010 at 9:48 am

    Yep the Oz economy is doing well lol:

    Retail trade:
    “seasonally adjusted estimate decreased 1.4% in February 2010. This follows a 1.1% increase in January 2010 and a 0.8% decrease in December 2009.”

    http://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyReleaseDate/EF17062215CACFFECA2576BF0014D444?OpenDocument

    “The seasonally adjusted estimate for total dwelling units approved fell 3.3% and has fallen for two months.
    The seasonally adjusted estimate for private sector other dwellings approved fell 10.9% and has fallen for two months.”

    http://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyReleaseDate/0545FFC6A101264DCA25719F007F6F1F?OpenDocument

    Not advice, just chatter, see a financial adviser for decisions and advice.

  • 4 Greg Atkinson // Mar 31, 2010 at 2:33 pm

    Anon, firstly thanks for the links. I like the idea of tracking business activity in real time using actual transactions over the Internet. The method might have some flaws but it has to be better than surveys and other methods which are dated by the time the results are published.

    As for the Oz economy, well we expected to see housing activity dip after the first home buyers grant effect faded and this is what is happening. I would expect prices to fall next.

    The tax incentives for businesses to spend also ended late last year so I would expect business investment will also fall.

    Like we have ranted on about for months on this site, economic stimulus is a short term (and expensive) way to artificially prop up the GDP numbers. Let’s see how GDP hold up now as the cash splash comes to an end…well at least I hope it is coming to an end!

  • 5 Anon // Mar 31, 2010 at 3:47 pm

    “Anon, firstly thanks for the links. I like the idea of tracking business activity in real time using actual transactions over the Internet. The method might have some flaws but it has to be better than surveys and other methods which are dated by the time the results are published.”

    No problems, you and others have provided very good info on this site, so happy to do my bit for everyone on here.
    It is a very worrying chart though; if its accurate, theres some serious problems on the horizon.

    “The method might have some flaws but it has to be better than surveys and other methods which are dated by the time the results are published”

    It seems this method might challenge your vaunted BDI ;).

    “Like we have ranted on about for months on this site, economic stimulus is a short term (and expensive) way to artificially prop up the GDP numbers. Let’s see how GDP hold up now as the cash splash comes to an end…well at least I hope it is coming to an end!”

    Yep, just a waiting game re: GDP performance. I’m not short anything and i closed my remaining longs a few days ago.

    Not advice, just chatter, see a financial adviser for decisions and advice.

  • 6 Anon // Mar 31, 2010 at 10:06 pm

    ADP employment report disappoints:

    “Highlights
    ADP is calling for a disappointing 23,000 decline in private payrolls for March. A gain was expected. Stocks are falling and money is moving into Treasuries following the results. Commodities first declined but quickly recovered as the dollar moves lower.”

    http://mam.econoday.com/byshoweventfull.asp?fid=442770&cust=mam&year=2010#top

    Not advice, just chatter, see a financial adviser for decisions and advice.

  • 7 Senator13 // Apr 1, 2010 at 10:29 pm

    Looks like trading volume is dropping away a little as the All Ords approach 5000. This little run may be running out of steam.

  • 8 Greg Atkinson // Apr 2, 2010 at 11:37 am

    Many market commentators seem to be getting a bit carried away and think that a 10% or so rise off a very low base in exports or manufacturing is something to get excited about.

    The global economy seems to be coming off a bottom, but remember a huge amount of money has been used by governments around the globe to achieve this so I remain cautious.

    Let’s see what happens when the economic stimulus measures around the place start to be scaled back.

  • 9 Anon // Apr 5, 2010 at 3:03 am

    Kinda rattles home what we’ve been chatting about on here, but I thought it was very well presented:

    http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2010/04/02/is-this-a-recovery.aspx

    “The End Game

    Something has to change. We have two paths to choose from. We can either slowly bring the US budget deficit back into balance (or at least to a level less than the growth in nominal GDP) or we can continue on the current path and become Greece or Japan. (Again, go the archives and search for “Japanese Disease”.)

    The first choice is a bad one, but the latter choice would be disastrous. If we take the first choice, which I call the Glide Path Option, a meaningful reduction would have to be on the order of $200-250 billion a year. That, along with reduced spending by state and local governments could (and probably will) amount to reducing spending by a little more than 2% of GDP.

    I have written several letters on the equation GDP = C (consumer and business consumption) + I (investments) + G (government spending) + E (net exports) (again, searchable). The Keynesians point out that when “C” is reduced in a recession, “G” should be increased to offset the effects of reduced consumption. And they are correct that a deficit will help overall GDP in the short run.

    But we are coming to the end of the Debt Supercycle. There are limits to what even the US government can borrow, and the sooner we recognize that as a nation the better off we will be in the long run.

    But if we start to reduce our deficits (the “G”), it will be a short-term drag on GDP. There is no way around it. That means that if inflation is 2% and we have a reduction in “G” of 2% of GDP, then the nominal growth in GDP will have to be 6% in order to achieve after-inflation growth of 2%. Two percent as in Muddle Through.

    But wait, John, didn’t we just grow at 5.6% last quarter? Why are you being so gloomy? For several reasons. First, the growth was largely statistical. Part of it came from inventory accounting, as inventories had got as low as they could go. Note that an increase in inventories will increase GDP but possibly result in a lower future GDP as the excess inventory is depleted. And inventories are still rising, but not by as much.

    Secondly, a significant portion of the increase in GDP came from the stimulus. As noted above, an increase in “G” will be reflected in current GDP. This stimulus begins to go away in the second half of the year, and I think there is little reason to believe there will be anything other than an extension of unemployment benefits past two years, by way of “stimulus” this year.

    I rather think the last half of the year will show a slowing (though still positive) economy.”

    Not advice, just chatter, see a financial adviser for decisions and advice.

  • 10 Greg Atkinson // Apr 5, 2010 at 2:58 pm

    The “rebound” we have seen has to be taken into context as the post above suggests. We were always going to have a “recovery” at some point, but as I wrote a while back in a post, a recovery to what? See: http://www.shareswatch.com.au/blog/stockmarket/a-global-economic-recovery-does-not-mean-business-as-usual/

    I think most people are still pretty worried about the health of the U.S economy over the next few years at least.

  • 11 Anon // Apr 5, 2010 at 5:12 pm

    Yep that article is basically right on the money Greg. Ahead of the masses as usual ;).
    Altho, in September, the sugar hit was still below its full effect ( see: http://www.consumerindexes.com/GDPvsDGI.gif ), and so there was still room to move re: US GDP growth…I must admit i got swept up into the economic recovery story — very hard thing to avoid when the masses are spruking it everywhere.
    So now we are near or at the point of peak effectiveness from economic stimulus; i guess the question is now (especially in the second half)…how far will GDP fall…not if?

    Not advice, just chatter, see a financial adviser for decisions and advice.

  • 12 Greg Atkinson // Apr 5, 2010 at 5:39 pm

    Anon still a lot of hard yards ahead of us. Much of the pick up in manufacturing from what I can see if simply a recovery from ridiculously low levels; consumption in the U.S. (and other countries) took a tumble, but people did not stop consuming full stop.

    So eventually inventory levels ran down and reached a level where companies simply had to re-order stuff to satisfy whatever demand there is out there but…how strong is this demand, how sustainable is it and how much if it is being fueled by borrowed Government money?

    Give me enough money and I can stimulate demand in any sector of the economy or across the whole economy, but if underlying demand is not present then this demand will fall away when I run out of money to throw around.

    So I wonder how much more money Obama and others are prepared to borrow and spend? Are they digging an economic hole for future generations in order to prop up their own political fortunes?

  • 13 Anon // Apr 5, 2010 at 6:40 pm

    Yes I think, at best, one could hope for sluggish GDP growth (with less “G”) over the next several years. Alot of hard yards indeed.
    The sustainability question is a good one. In a perfect world one would hope government stimulus would provide the spark to the economy. And once removed, it would have enough momentum and fuel to stand on its own two feet. As you mentioned, this approach doesn’t work if underlying demand isn’t there…all it does is increase Government debt, for short term fixes, and increases the burden towards future generations. They ARE digging an economic hole for political gain; but can you really blame them? If you need to earn a salary, would you really sacrifice your career for future gains, possibly decade(s) out, that may or may not financially benefit you? Tough ask!

    I think I agree with Marc Faber — everytime the economy tumbles they will just throw more and more money at problems. I dont think anyone has enough motivation nor will power to get the deficit and debt under control, over the longer term, in any economy. Albeit some symbolic, superficial and temporary acts to calm the masses. I noticed some of Warren’s investments seem to be directed towards US stimulus. So perhaps this is the investment strategy for the next decade(s)? Find out where Governments are stimulating…get in early…then get out before the sugar wears off.

    Not advice, just chatter, see a financial adviser for decisions and advice.

  • 14 Greg Atkinson // Apr 5, 2010 at 7:07 pm

    Anon it is a tough call. I don’t think we can expect (or want) Governments to sit back and do nothing when the economy hits a tough spot so I disagree sometimes with the approach suggested by Marc Faber and others.

    We want our Governments to try and ease human suffering and that is a good thing, my main problem with economic stimulus spending is that much of the money is wasted and we don’t get a good enough bang for our buck.

  • 15 Anon // May 11, 2010 at 6:57 am

    DJIA currently 71% correlation with 1937-39. There was a ~20% correction in the DJIA in March…could we be following suit?

    DJIA currently 71% correlation with 1937-39. There was a ~20% correction in the DJIA in March…could we be following suit?

    See chart:
    http://www.mrci.com/special/ddji39.gif

    Not advice, just gambling and speculation. Always see a financial advisor for decisions etc.

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