US debt deal can't stop Dow Jones slide

The Dow Jones closed down 265 overnight for its eighth straight fall and is down 6.9%

The market is down 91. The SFE Futures were down 76 this morning.

The Dow Jones closed down 265 overnight for its eighth straight fall and is down 6.9%. Legislation was passed to raise the US debt ceiling. Moody’s didn’t cut the US’s AAA debt rating but assigned a “negative outlook” to it and said they would make the downgrade if conditions deteriorate. Meanwhile the trail of weak US economic releases continued as consumers unexpectedly cut their spending for the first time on two years, while personal income growth dropped to the lowest level since September. The oil price fell $1.10 to $93.79 and Gold was up $22.70 to $1643.10. The Aussie dollar fell to 107.60c from 109.72c not helped by the RBA meeting yesterday.

In the news today…

Retail Sales numbers are disappointing this morning down 0.1% against an expected rise of 0.3%. They support the RBS’s decision yesterday to leave interest rates unchanged.
Downer EDI (DOW) said it has been approached by parties interested in buying its consultancy practices. GSJB Were have a 470c target price and say it’s a HOLD. DOW down 1c to 397c.
News Corp (NWS) down 4.7% after a former editor at the News of The World was arrested and answered police question for about eight hours and as Gillard went for a “chat” with the Australian bosses.
Charter Hall Office REIT (CQO) has been placed in a trading halt at the request of the company. Last traded at 330c.
Ramelius Resources (RMS) said they expect full year profit to be “substantially higher” than the previous full year. They expect profit before tax of $90m on gold revenue of $147.6m, for a 300% year on year rise. RMS up 3.2%.
Newcrest Mining (NCM) is up 1.7% to 4072c this morning after the gold price jumped to a new record high.
Telstra’s (TLS) plan to put its $11bn deal with the federal government to a shareholder vote at its AGM in October looks increasingly unlikely as competitors raised objections which may see regulators force TLS to modify its structural separation. TLS down 2c to 299c.
Following the RBA decision to leave interest rates on hold yesterday, the IMF has warned Australia that rates will at some point have to rise in response to the mining boom. They also said that the A$ was 20% over-valued and urged the government to speed-up tax reform to avoid any further split to a two speed economy.
Deloitte has found that the Internet economy contributes almost as much to economic growth as the retail sector. They say that in 2010 the Internet contributed $50 billion to the economy, or 3.6% of GDP.

Let’s call the ball for today. When the US market falls almost 3% in a day and 6.9% in eight days it is not the time for more misplaced optimism and a bunch of equity market soothers from people whose living relies on the market going up and you remaining positive and active, it is time to start worrying about protecting yourself from a potential GFC 2 or a Japanese style malaise (down 80% in 20 years).

I wrote an article last week called The Wisdom of Hindsight about what to do in the GFC. Here are the bones of it (I was limited to 700 words….could have written a few thousand):

Capital is more important than income. Protect capital at all costs. This comment is born out of our experience with the bank sector in the GFC. We all held onto the banks for income, telling everyone the dividends would be OK. We lost 55% of our capital. A focus on the income from equities rather than the importance of the capital tied up in them was a big mistake. Never again. Capital first. Income second. The only defensive stock is cash.
No room for faith. I know many of you will disagree but the concept of “Set & Forget” died in the last GFC. You have to protect yourself from events like 2008 and you cannot do it with your head in the sand about the “Long Term”. Just ask any Japanese retail investor. Be prepared to sell because no one has enough money to shut the market for ten years and not worry about it, that’s bollocks. And anyway, you can always buy back.
Research let us down. It did not lead. It was biased to optimism. There was no help there.
You cannot believe companies. Even companies acting in good faith did not understand their own exposures to sub-prime. How many understand their exposure to companies exposed to companies exposed to companies exposed to a European debt default. Not many.
Run stop losses on all holdings, no matter what you consider to be the long term prospects. You need some, any, discipline and it needs to be developed in advance. Markets fall three times faster than they rise. If the worst happens you will need a pre-conceived mechanism because by the time you consider all the options it’ll be over. You need to sleep.
Listen to the market. No-one predicted the GFC until it was too late. The only signs we could trust came from the charts, the share prices and the commodity prices, not the propaganda. The market talks and we should listen. Develop a useful respect for the technical picture whatever your fundamental faith. Yes it has its weaknesses but it also tremendous strength. A share price doesn’t lie and a falling share price and especially a falling market tells you something and it’s not “Buy me”.
The decision to sell has to be yours. The financial industry is there to suck you in not let you out. If you think it is time to sell your financial professional will resist you with the lines that cost you so much in the last GFC, the two most notable being “The market has already fallen” and “It’ll be alright in the long term”. If it comes to it the decision to sell will have to be yours and you will have to persevere to get it done.

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