Bleak house on Wall Street as 11-week fall reflected on world equities markets

By Neville Bennett

Friday 21st June 2002

A persistent slide in global equity markets is threatening to touch the low of last September. Business confidence is suffering.

It is also adversely affecting the New Zealand outlook. Economist Mark Benseman, for example, rates New Zealand equities as fully priced and predicts the index will decline.

Tom Calandra, in CBS Marketwatch, sums up by saying the people who invested in the market expecting to take cruise-ship holidays may have to wait 20 years for their boat to come in.

Why have the markets lost forward momentum? Some negatives include terrorist threats, tension in South and West Asia from Palestine to Kashmir, and corporate chicanery.

But the US, the EU and Japan are in low growth mode, with weak retail sales, producer prices and consumer sentiment.

The ailing market also impedes recovery. Falling stocks undermine investor wealth, cutting confidence and spending. This curbs demand and sales, hurting business profits and leaving an inventory overhang.

This creates a climate not conducive to investment. In the US, business is operating at only 75% capacity and more jobs may be shed. There is low investment and few new issues.

Economies are driven by demand. Demand comes from either the government or the private sector. Private sector demand is divided between consumables and investment. Except for housing, demand is weak at present.

In the past decade the economy has been driven on the margin by demand for "new economy" goods and services. This has reached saturation, with some overcapacity, especially in computers and telcos. There are no comparable revolutions on the horizon. A period of consolidation is in order.

The market is finely tuned to future development. Its present message is not difficult to discern. It is over-bought.

There are some bulls that sometimes have their day but the trend is negative. The Dow Jones is at a seven-month low and the Nasdaq is close to its September nadir. Other indices have buckled and broken below the September horror. These include the Amex Biotech, Amex Pharmaceutical, Dow Jones Utility and the CBOE Software indexes.

Investor confidence has been dented by corporate malfeasance. Enron set a benchmark for bad conduct, including paying its chief executive, Ken Lay, $US103 million in his last year. Andersen has brought great shame on the accounting profession. Tyco executives have given greed a bad name.

Financial managers and advisers have proved too self-interested to give sound advice. The Wall Street scandal has unleashed a flood of litigation.

Merrill Lynch is in trouble in the US, the UK and Japan. Last year its London subsidiary settled out of court, for an estimated $US100 million, a charge that it had incompetently managed the Unilever Pension Fund. More recently, it was dropped by the Cooperative Group as the manager of its $US730 million pension fund.

Merrill is also closing most of its offices in Japan. It recently tried to boost Japanese stocks by saying they were cheap in view of an impending recovery.

The Nikkei rose briefly in response to this flattery and an inflow of foreign capital. It has since lost heavily.

Last week it lost 500 points (4.5%) to rest at 10,920. It may lose more as a stronger yen hurts exporters and investors wait for a clear policy direction from the government.

UK shares are also expected soon to test their September low of 4430. The FTSE lost 5.9% last week to reach 4630. It has lost a third since its near-7000 high in 1999. It has traded in a narrow range for some time and chartists expect it to break out sharply lower.

Wall Street remains the key. It has declined in 11 of the past 12 weeks. Except for gold, most sectors are weak. An FX Concepts newsletter finds a slowing of credit "chilling" and is "worried" by a vanishing pile of money in cash balances at US broker/dealers.

The pile was enormous in October; it has now disappeared. The market has gobbled it up but not put on any weight. Do not expect equities to surge until the pile is restored.

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