Primary Bear Markets

A primary bear market is the long downward movement interrupted by important rallies. It is caused by various economic ills and does not terminate until stock prices have thoroughly discounted the worst that is apt to occur. There are three principal phases of a bear market: the first represents the abandonment of hopes upon which stocks were purchased at inflated prices; the second reflects selling due to decreased business and earnings; and the third is caused by distress selling of sound securities, regardless of their value, by those who must fund a cash market for at least a portion of their assets.

Defintion by Robert Rhea

To leave you in no doubt whatsoever, for the time being, there is no major global stock market that this newsletter considers safe. We are still in the second stage and panic is yet to arrive. When it does, watch out!

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*** Since the previous Onassis issue, the news has swung violently from the enthusiastic reaction to London's successful bid to host the 2012 Olympics followed the next day by the awful London suicide bombings. Such events, good and bad, have a short-term impact upon markets largely because speculative traders see them as opportunities to scalp the market.

Stock markets have moved further ahead with FTSE 100 making a technical break above 5,078. The next key resistance level above here is at 5,416 which was the very important level of 2001/2002 and will, if FTSE 100 reaches that point, represent considerable technical resistance. This recent break to the upside is not entirely mirrored in the US; the long-term range in force for the Dow Jones Industrial Average since the end of 2003 continues and will, when it ends, give THE decisive signal.

We believe the right approach is to patiently wait for the stock market to offer above average yields, of 6% pa or higher, and then from that point, build long-term stock market holdings that should deliver exceptional above average long-term growth for many years.

Recently Wimpey said that conditions were tough and sales were slowing. This week, McCarthy Stone were forced to warn on profits, saying that their business is dependent upon elderly buyers being able to successfully sell their existing home.

High street conditions remain tough and anyone looking for a reason why, needs only to learn that in the first quarter 2005 equity withdrawals were only £6.4bn, 12-months ago, for the same period, they were £15.9bn. A major change has taken place, some consumers at least, have stopped borrowing and spending and have started to save.

From a purely technical point of view, FTSE 100's move up does represent a short-term buy signal but at RHAM we continue to believe that the overwhelming bearish fundamentals prevail. We are confident in the belief that when the UK stock market yields as little as 3% pa (currently the UK All Share Index yields 3.03% pa), there is no genuine long-term investment opportunity. Historically, it has invariably been the case that when yields have been at such a low level that over the ensuing period, yields have risen significantly, usually to about 6% pa.

When the yield is very low, this represents a high point for stock market valuations and when the yield is very high, this represents a low point for stock market valuations. Yields at such a low level as now do not offer an attractive long-term investment opportunity.

Although unemployment is still very low, the number of unemployment claimants in June rose for the fifth consecutive month, the first time this has happened since December 1992.

All of the above was sufficient for Sir Digby-Jones, the Director General of the CBI, to call for lower interest rates to help the economy, this request followed the recently published retail sales figures showing the worst year-on-year decline for 22 years.

In the final analysis, the global economy depends upon the American consumer, whose willingness to borrow and spend on the back of rising house prices seems to have no limit except, of course, it has! According to Ned Davis Research, total credit market debt, as a percentage of GDP is 305%, higher than at any time before. The previous high was in 1929 at approximately 255%.

Stephen Roach of Morgan Stanley, says that economic growth comes in two types: 'good growth', which is well supported by internal income generation and saving and the 'bad growth', which is driven by asset bubbles and debt. He goes on to say that a US bad growth binge has been underway for nearly ten years, especially the last four years and that the rest of the world depends upon US 'bad growth'. It is, he says, a false prosperity.

If, against our expectations, stock markets of the world are to enjoy yet another surge upwards of meaningful proportions, then investment opportunities will arise. We, at present, prefer to look at global markets centred on Asia. Most portfolios already have exposure to this region via the Gartmore China Opportunities Fund.

Currently, the Japanese stock market is moving towards a long-term buy opportunity. Foreign investment in Japan has doubled and their retail sector is moving ahead. Additionally to that, after many years, Japanese householders are making net withdrawals from bank deposits moving into other investments, for example, 12.5% more into investment trusts. If globally stocks markets continue to benefit, then the major Japanese Nikkei Dow Stock Market Index will deliver a very important buy signal on breaking above 12000. This could signify that their long-term primary bear market since 1990 is over

By R H Asset Management, in the Onassis newsletter

For more from RHAM, visit www.rhasset.co.uk