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New slump means shares in bear market rather than correction

By Simon Louisson of NZPA

Friday 18th January 2008

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A further slump in share prices today erased doubt the market is officially in a bear phase, rather than a mere "correction".

The benchmark index dived another 2.2% today, extending its losing streak to 12 days, during which the benchmark index has slumped over 10% and wiped $5 billion off values.

Since its peak in mid-October, the market has lost 15%. A market "correction" officially occurs when it falls 10% from a peak, but this slump is far worse than that.

However, it has had nothing of the drama and panic of the 1987 sharemarket crash when Wall Street fell 23% in a single session. Volumes were moderate. Even so, sentiment has been knocked heavily.

"Investor confidence is being severely tested by almost the despair that is becoming evident in the US," First NZ Capital broker Barry Lindsay.

His firm is advising Mum and Dad investors to sit tight so long as they think each stock they are invested in can weather a storm.

Local firms in general had strong balance sheets and were trading well, he said. Bearish sentiment was being driven by the credit crisis in the US that had seen banks write down over $US500 billion in bad debts.

There was another ugly session on Wall Street today, which saw key indices slump 2 to 3%.

Stocks there dropped heavily as data showing a plunge in regional factory activity and news of a hefty loss by brokerage firm Merrill Lynch & Co fanned worries about the economy.

Merrill Lynch fuelled more concerns about the health of the financial sector when it reported about $US16 billion ($NZ21b) in mortgage-related write-downs and adjustments in the worst quarter in the company's history.

The Dow Jones industrial average ended down 307.03 points, or 2.46%, unofficially at 12,159.13 while the broader Standard & Poor's 500 Index plunged even more heavily, down 39.91 points, or 2.91%, to finish unofficially at 1333.29.

"Fear and pessimism is really beginning to dominate Wall Street," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.

"More data showed weakness in the economy, and Merrill Lynch took a write-down the size of which, until recently, would have seemed unfathomable."

Here, the local NZSX-50 index fell 82 points to 3648, its lowest in 15 months. The index, begun in December 2000, has never before had more than seven losing sessions in succession. It has fallen from 4062 since December 27 and from 4332 in October.

Not one stock in the top 50 index.

Market leader Telecom was down 13c to $4.00, No 2, Fletcher Building down 25c to $9.95 and No.3 stock, Contact Energy was down 15c to $7.60.

Lindsay said there were growing signs from leading indicators that the US was sliding into recession.

"That's what's troubling investors. It's given rise to a bear market. I thought for a while it was just a correction. The extent of the losses has gone beyond a correction into a decline."

Corrections are often described by analysts as "healthy" before an uptrend resumed. But bear markets are something else, where sentiment overwhelms fundamentals and economics and few are willing to predict when the bottom will be reached.

Lindsay said local investors had been sanguine and no panic evident. But many had been ringing for advice.

"We are having to do a bit of reassuring," he said. He said it was senseless to sell because everyone was. The more prolonged the fall the more risky it was to sell.

Institutions, were likely to be selectively buying stocks into the fall, he said. "For every seller, there is a buyer."

US Federal Reserve Chairman Ben Bernanke today echoed the bleak assessment of the economy in comments to lawmakers, reiterating that the Fed was ready to act aggressively and throwing his support behind other efforts to counter the risk of recession.

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