Investors Think Again After Rush For Bargains

The Age

Saturday August 25, 2007

Vanessa Burrow

THE "R" word has reappeared, this time trotted out by the CEO of troubled US mortgage lender Countrywide Financial.

Angelo Mozilo said the US housing downturn and "subprime" mortgage market defaults could lead to a recession.

Countrywide Financial has already been badly squeezed by a lack of available credit, but the comments suggest that what at the moment is contained might damage the wider US economy.

Not surprisingly, investors who had temporarily forgotten the "subprime" mortgage crisis, retraced some of their steps.

The S&P/ASX 200 Index broke a four-day winning streak, losing 71.2 points, or 1.2 per cent, to 6088.5.

In the negative column was BHP Billiton, with a pared down weekly gain of more than 12 per cent, at $36.60. The diversified miner's strong profit and a positive outlook for commodities had pushed the stock more than 16 per cent higher at one stage.

Regardless, this week's returns were the best in 32 years and outstripped even this year's weekly losses (see graph). CommSec chief equities economist Craig James said the market's 7.4 per cent rise was the biggest since January 1975 when the former benchmark, the All Ordinaries, rose by 12.3 per cent.

Deutsche Bank strategist Tony Brennan said the market bounce seemed premature. Investors should expect further volatility, because the extent of losses tied to US credit markets had not yet been determined.

Mr Brennan said the market's performance would depend on "how quickly normal credit conditions returned to certain markets, the degree to which credit standards were tightened and . . . the possible impact on consumer and/or business spending".

In a note to clients, Merrill Lynch equity strategist Daniel Blake said the Australian asset-backed commercial paper (ABCP) market had been "hit hard by the crisis in money markets . . . leaving them dangerously exposed to a withdrawal of short-term credit".

For example RAMS Home Loans, which yesterday fell 5 per cent to $1.14 a share, has been forced to extend its short-term ABCP loans and to pay a higher rate of interest because of a lack of willing lenders.

With renewed credit concerns, investors punished below-par profit results.

Surf-wear company Billabong International slumped 88?, or 5.4 per cent, to $15.44 after disappointing analysts with a $76.9 million rise in second-half profit.

Macquarie Bank lost $2.60 to $74.60 and shares in Insurance Australia had their biggest fall since October 2002 after a 31 per cent drop in second-half profit, well below expectations. The stock dropped 42?, or 7.3 per cent, to $5.30.

But positive profit results sent oil refiner Caltex 79?, or 3.4 per cent, higher to $23.76 and pallet-maker Brambles up 19?, or 1.4 per cent, to $13.47.

Victorian companies enjoyed a particularly positive week, with the 171 members of the Deloitte Victorian Index adding 7.5 per cent, or almost $40 billion, to their value.

Deloitte partner Grant Hyde noted that BHP had climbed 12.3 per cent after its "fantastic result" this week.

Biopharmaceutical company CSL also had a big rise, up 14.2 per cent on stronger profit results, Orica gained 16.3 per cent, Rio Tinto moved 10.8 per cent higher and Zinifex added 13.4 per cent to its market capitalisation.

Austock Securities resource analyst Hunter Hillcoat said yesterday's dips on mining stocks were merely a pull-back after an unusually strong period. But some smaller resource stocks, and those that had not secured funding for expansion, had not recovered the losses incurred earlier in the month, he said.

© 2007 The Age

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