Firestorm abroad hides real concerns at home

This is no sharemarket for amateurs or the fainthearted. There is money to be made by those who know what they are doing and big gains (or losses) to be had for those prepared to take big bets - it's a punter's paradise.

This is no sharemarket for amateurs or the fainthearted. There is money to be made by those who know what they are doing and big gains (or losses) to be had for those prepared to take big bets - it's a punter's paradise.

It is a market better suited to psychologists than financiers as it's being driven more by sentiment than by fundamentals - and one that is affected as much by the policies of various governments as by particular economies.

Sure, many European countries and the US are carrying too much debt - and need to restructure their sovereign balance sheets.

But as various world economies teeter on the edge of recession, or at the very least experience a significant slowdown in growth, it is a lousy time to cut back on spending. Some have no choice, but Australia is not one of them.

Returning the budget to surplus at this time seems both unnecessary and increasingly difficult. In the first instance, if the economy slows and corporate earnings follow suit, the corporate tax take will come under enormous pressure.

The Gillard government will need to cut even deeper to obtain that outcome. Already it is clear tax derived from big areas such as manufacturing and retail will fall. The government must already be factoring this in and Treasury must be on the cusp of revising down its growth forecasts.

The five-year and three-year Aussie bond rates are now below the Reserve Bank cash rate, which is sending a very clear message that the bond market believes the Reserve Bank will lower interest rates by the end of the year.

There is only one reason for this - the markets see the economy is slowing and monetary policy will be needed to stimulate it. Under normal circumstances this would provide the trigger for the government to increase spending - but it has constricted its action for the sake of adhering to earlier political promises to produce a surplus by 2013.

All that the government has left in its armoury are the profits from the resources sector, which to date have been potent. Rio Tinto produced a buoyant earnings result last week and other miners will follow through the reporting season.

The question mark lies over whether these resource companies can continue to grow strongly and feed the economy and the government's coffers.

The likes of Rio and BHP Billiton are sticking to the stronger-for-longer scenario but the validity of this optimism is in the hands of the Chinese and the political will of China to stimulate its domestic economy if its export earnings flag as US demand for its products recedes.

Views on this issue are divided. If the price China is paying for our major exports, coal and iron ore, fall, the rest of the script writes itself.

(And, of course, the mining tax will earn just enough for Wayne Swan's lunch and new shoes for Julia Gillard.)

Back in the local market, equities are already being priced for an economic slowdown. But this does not mean stocks won't fall further.

In a bear market, share prices routinely fall below what is considered fair value. By their nature, bear markets ignore fundamentals and any positive news and react (or overreact) to any negative news.

Yesterday morning's 5 per cent fall in stock prices was driven initially by the futures market - prices were predestined to crash on the opening of trade. The fall's intensity just caused more panic selling and a series of "get-out-at-any-price" trades.

The computerised, algorithmic trading switched in and, as stocks fell to certain levels, this triggered new waves of selling. In these instances, volumes are generally thin - as they were yesterday.

Those that copped the biggest beating in early trade were singled out for a variety of reasons. Some, such as Seven West Media and Fortescue, have higher debt levels others, such as Origin and Santos, had committed to large capital projects and investors were worried about their future returns.

Other victims of the selloff were companies that had simply not previously fallen in line with the market. To the extent that there was a broader theme, it was the growth stocks that were hit hardest and the recession-proof non-cyclicals that escaped the worst of the ravaging.

The recovery by mid-afternoon was as arbitrary. Bargain hunters tipped the scales and started to pick up quality stocks - starting with the Australian banks.

But don't go breathing that collective sign of relief - the gyrations are far from over. Even as the world sharemarkets recover from the downgrading of US debt, that will only serve to turn attention back to the struggling European economies that lurch from crisis to bailout-driven respite to new crisis.

There is enough fear from Europe alone for the international investment community to share.

It is only when this dissipates that we will get a clear view of the real damage that has been suffered by some Australian companies.

None of this damage has anything to do with the global debt crisis but rather is to do with structural changes in various industries that are taking place regardless.

Large parts of local manufacturing will find it hard to recover from the impact of the high dollar.

Media and retail companies are paddling hard to address the massive wave of new competition brought on by the internet.

The present sharemarket hysteria just diverts attention from many of the real and underlying issues faced by many Australian companies.

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