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Economics
Time to Batten Down the Hatches
June 26, 2008
Clifford Bennett, Chief Economist, Sonray Capital Markets

Reality Check:
1. US Recession Unavoidable, and stagnant growth could remain for up to 18 months.
2. Rest-of-World will fare better but also at a reduced speed.
3. Demand for commodities will nonetheless continue to increase.
4. Oil will remain above 110, perhaps above 130. Tests toward 150 or higher are likely by year end.
5. Financial sector will continue to reel from falling US home prices. In fact the worst of the fallout among financial institutions has yet to be seen. The second wave of right downs in H2 could be as severe, or larger than that already seen.

Market Outlook:
1. Equity markets still have vulnerability to the downside. See Dow Jones chart.

2. The US dollar is likely to experience further sharp falls.

3. Oil will remain firm as mentioned above.

4. Gold will shine again, not so much as an inflation hedge, as a safe haven from global turmoil.

5. As economic uncertainties rise, so too will the desire to own commodities at their source.

6. Australian dollar outlook unchanged since 2006. The combination of points 2, 4, and 5 above, along with high RBA rates, lead the AUD to US$1.01 in 2008, and perhaps 1.0800 in 2009.

Opportunity:

The history of the wealthy families and corporations of the world are full of stories of having the right market approach at the right time in the midst of a major recession or depression. Such turbulence can be seen as a shaking of the capitalist tree that allows some to climb to a previously occupied higher branch. On this occasion liquidity and the ability to respond quickly to market developments remain key. The playing field has never been so level, courtesy modern communications and the internet. We all can respond to news and markets as quickly as the biggest market participants. In fact the smaller you are at the moment in terms of position trading, perhaps the greater the advantage. Risk management through the personal ability to occasionally take a loss rather than just wait it out, is likely to provide an edge.

My view is that buy and hold is not necessarily the appropriate strategy for current markets. Buy and be prepared to cut at any sign of trouble, may allow one to live to fight another day.

Equities: In the confusion a lot of resource stocks will probably be marked down that should not be. Also global corporations with income streams from Europe and Asia, not just the US, may become under-valued. Looking for these opportunities, yet monitoring your total risk exposure at all times, could prove a successful equity market strategy. Again please see DJ comment below.

Currencies: Look to sell the US dollar buy the Euro and Australian dollar, but not without respect for the occasional bout of fear of intervention, or actual intervention when we get near Euro 1.6200 1.6400. I would not be surprised to see the Reserve Bank of Australia intervening in a mistaken attempt to cap the Australian dollar near .9965, in order to cover the error of their un-necessary 2008 rate hikes.

Commodities: Oil is still a buy, but it will also continue to be a volatile ride and needs to be handled as the flammable product it is. Either have small positions with wide stops, or very tight stop control levels. Gold might be the only buy and hold product on the market, especially if my above scenario of opportunity is correct. Nevertheless I would reassess even this market view if Gold fell below US$830, early warning US$850. A move above US$915 should confirm the favoured sustainable up-trend view toward US$1,140.

The Dow Jones could decline further, to perhaps 9,800, if support at 11,600 gives way. This 11,600 support area represents the highs/resistance of 1999 and early 2006. For the market to fall back into that previous major consolidation range would allow a further unwinding of investments taking the market at worst case to 9,800. The support area shown on the chart around 10,600 would hopefully contain the market, as people became more confident that while the US economy remains in serious trouble through the rest of 2008, and perhaps all of 2009, the rest of the world will continue to grow strongly albeit at a less aggressive clip.

If the Fed were to raise rates at any time this year, in the mistaken belief that it can impact a form of inflation that is in fact beyond its control, then that 9,800 level would become a greater risk/opportunity. I expect the Fed to remain on hold, squeezed between poor growth and inflation.

Clifford Bennett, Chief Economist, Sonray Capital Markets.

Disclaimer: This recommendation has been issued on the basis that it is only for the information and exclusive use of the particular person to whom it is provided by Sonray Capital Markets Pty Ltd ABN 18 104 482 993, AFSL 231151. These recommendations are current as at the date of issue. Past performance is no guarantee or reliable indication of future results. Trading in derivatives may involve a high degree of risk and significant loss, and is appropriate only for persons who can assume risk of loss in excess of funds deposited. This recommendation is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of any investment for your circumstances. Although the information in this recommendation has been obtained from sources considered and believed to be both reliable and accurate no responsibility is accepted for any opinion expressed or for any error or omission that may have occurred herein.