Market volatility points to profit and cashflow turmoil in 2009: Gottliebsen

Amid all the confusion and sharp fluctuations, sharemarkets are telling us a story about what is likely to happen in calendar 2009, particularly towards the end of the year.

Amid all the confusion and sharp fluctuations, sharemarkets are telling us a story about what is likely to happen in calendar 2009, particularly towards the end of the year.

The long-term future trend of share prices depends on whether current share prices fully reflect how that story unfolds. By the time the events that the sharemarket is forecasting take place, the market should be starting to move on and be telling us what is likely to happen in 2010 and beyond.

So what are some of the messages that the sharemarket is trying to convey to us?

The obvious one is that we are headed into a downturn that will affect profits and cashflow. However, the forecasting process goes further, as the mechanism that is pulverising share prices affects the total community.

The damage to the global banking and finance industry has caused a big fall in the amount of money available to lend. The most severe initial effect of this finance change is to trigger massive deleveraging of shares and commodities, causing prices to slump. But it will spread to other parts of the community.

The sell off of oil and metals hits small producers that are either high-cost or who have debt. Accordingly, the share prices of small miners have been decimated and we are seeing OZ Minerals now struggling with debt levels that seemed minor 12 months ago.

The market is telling us that many other miners will have the same problem and a lot will go to the wall. Those with key assets may be picked up by the majors at low prices. The stronger ones will survive. The Perth boom will collapse.

But the sharemarket is also telling us that the problem among the miners will be duplicated through the community. Commercial property prices are going to fall, because there is less lending available to maintain the values. In addition, the withdrawal of equity funds from property, plus the economic slowdown are together throwing large amounts of commercial property onto the market.

The property price fall will not just occur in large office blocks, but will extend to shops and factories. Lower interest rates will help cushion the fall, but not prevent it. The sharemarket trend believers say a fall of 30% is likely but, as always takes place, in some areas the fall will be in excess of 50% while in others it will be much lower. These properties represent the security smaller and medium sized businesses use to back their overdrafts. So those that have cashflow problems caused by the economic downturn will suddenly find themselves under severe pressure. There will be large losses for banks.

The big fall in bank shares is telling us that the market does not think they will be able to continue their dividends. All the bank CEOs will tell you that is rubbish, but the market is very rarely wrong in big calls like this. If the sharemarket is right then banks will require more capital to cover the losses.

The only bank that believed what the sharemarket was saying was NAB, which managed to raise $3 billion. If the sharemarket is right, then it will need all of it.

This article first appeared on Business Spectator