KEY POINTS:
The high drama in the world of international finance this past week has sent sharemarkets sprawling, with the NZX no exception.
The comparisons with 1987 and 1929 are flying although Stock Takes has yet to hear anyone liken the current meltdown to the US Panic of 1893, or even Europe's "Long Depression" of 1873 to 1896 precipitated by the collapse of the Vienna Stock Exchange.
As central bankers and politicians have pointed out in the past week, so far at least, this is a financial crisis, rather than an economic one.
While there will inevitably be some flow through to the real economy, there is - fingers crossed - no indication we're likely to suffer a similar fate to that which developed in the aftermath of the 1987 crash when unemployment in New Zealand reached 11 per cent, and that was by all accounts a picnic compared with the Great Depression.
There's little point in hitting the panic button at this stage, as one fund manager told Stock Takes this week.
"If you really believe these real armageddon scenarios, what are you meant to do? Switch entirely into cash and hide? Do you really want to manage your portfolio for that 5 per cent risk that you can't really do a lot about anyway?
"We tend to try and focus on the fundamentals and assume mean reversion."
COULD BE WORSE
Continuing to at least try and look on the bright side, even after the events of the past week, during which our market experienced two of its worst one-day drops since the September 11 attacks, the NZX-50 index still remains above the five-year low of 3040 it hit in July.
Still, this week's losses are cruel given the recovery since then and a tentative sense that the worst of the credit crunch might have been over.
Hamilton Hindin Greene broker James Smalley points out that the July low point marked a period when the NZX was suffering a lot more than overseas markets, including the US.
In fact, despite our lack of direct exposure to Wall St's financial crisis, our market continues to suffer a proportionately larger loss than the benchmark S&P 500 or even Australia's ASX200. Things would look even worse if not for the way our NZX-50 index flatters the underlying market by including dividend payouts.
Smalley says in the current market, investment fundamentals have gone out the window and its capital flows are driving much of the action.
Essentially, spooked offshore investors are bringing their money back home, exiting far-flung markets and assets like the NZX and the kiwi dollar.
IT'S TOUGH AT THE TOP
While we have no listed banks or highly leveraged and elaborately engineered investment companies amongst them, our top stocks have taken a hammering.
That's understandable to some extent with the likes of Fletcher Building, which with Formica paid a pretty penny to gain a hefty exposure to the US housing market just before it tanked.
Closing 32c lower at $6.95 yesterday, Fletcher Building shares have lost 46 per cent since their peak of $12.95 in July last year but are still above last month's $6.04 low.
Former "market gorilla" Telecom's pelt is looking a little threadbare too. Sure, its customers will still be talking to each other on the phone no matter how much the economy slumps but it does have what one market watcher called "a challenged business model".
Telecom has lost about 37 per cent over the past 12 months and continues to hit lows not seen since the early nineties, closing 8c lower at $2.73 yesterday.
Contact Energy would appear to have a lot more going for it. None of us are going to stop consuming electricity any time soon and, what's more, it is boldly striding into a low carbon future with gigawatts of renewable generation on the drawing board.
By comparison with Telecom, which it now rivals in terms of free float market capitalisation, it is doing pretty well. Closing 15c lower at $8.61 yesterday, it is closer to its 12-month high of $9.70 than its 12-month low of $7.13.
DIMINISHING FINANCE
A Dominion Finance Holdings insider tells Stock Takes the company's owners are intending to go ahead with their bid to avoid receivership for subsidiary Dominion Finance Group.
Trustee Louise Edwards has already called in the receivers but Dominion's major shareholders, including Terry Butler, also hold sufficient debenture stock, they believe, to force Edwards to allow management's plan for an "orderly realisation of assets" to be voted on by debenture holders, including themselves presumably.
Stock Takes has been assured by the Dominion insider that Butler and other shareholders are not so much interested in trying to preserve their equity as salvaging some pride.
They believe management have a better chance than receivers Deloitte of realising the value of the company's assets and Stock Takes hears the company's staff have been angered by Deloitte's attitude.
However, the fact is, Edwards and her counterpart at Covenant, Graham Miller, are in a better position to assess these companies' prospects than most debenture holders ever will.
Sometimes you just have to swallow your pride.
THE TARNISHED DONUT
With the credit crunch swamping wannabes such as Allco and Babcock & Brown should we be surprised Australia's flagship listed investment bank Macquarie Group also now appears to be taking on water?
Macquarie has this week suffered a rating downgrade and slump in the value of its shares.
While Macquarie differs in some respects from its imitators in that it has an APRA supervised banking operation which should lend it some strength that others lacked, it is highly leveraged and needs to refinance about A$5 billion ($5.95 billion) in debt in coming months.
Recent market action suggests that will be far from easy and far from cheap.
Data indicating the increasing cost of wholesale funding for a range of banks supplied by the Reserve Bank a couple of weeks back showed Macquarie Bank had been hard hit over the last year.
Interestingly the worst hit bank on the Reserve Bank's list was Lehman Brothers, followed by Merrill Lynch.
Macquarie issued A$600 million in convertible preference shares in July. Yesterday the A$100 notes traded as low as A$76 each.
The market is clearly pricing in a high likelihood of default. What's more, at that price the notes' yield to maturity is 14.8 per cent. If the notes are repaid at full face value the overall yield is 19 per cent.
Macquarie is going to find it tough to refinance at realistic rates if investors can get that sort of yield on the company's debt in the market.
GLASS IS HALF EMPTY
Paul Glass of Brook Asset Management put as much of his portfolio into cash as he could some time ago and virtually sold out of New Zealand shares completely.
"So you come into work on a day like today, and it's not so bad," he said yesterday when the market was down 3.5 per cent.
Glass' predictions of a widespread meltdown in the finance company sector a year ago seemed somewhat overdone at the time, but not anymore.
Glass, whose Brook Alpha Fund has been one of the top performers in this country for more than a decade, made his move into cash not because of any particular concerns about sub-prime, which hadn't even been heard of at the time, but because he felt easy credit conditions had led to overstretched valuations on a range of assets including equities and housing.
"Personally, I sold every asset I had in May 2007."
The key now, he says, is choosing when to get back into the market. Now isn't it.
"I'm probably the most pessimistic guy in the market. I have been for the last 18 months, and I don't see a lot of reason to change my view."
Glass is convinced New Zealand will have "quite a major housing correction" similar to those in other western economies, except worse.
"We have one of the most overvalued markets in the world." Along with a collapse in house prices he sees rising unemployment.
"It's time to remain very cautious."
