The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) continued to rally for a second day in a row on Thursday after the ASX shed more than $52 billion in value on Tuesday led largely by the commodity sector which was sold off after Glencore's share price plunged 30% with some commentators describing events as a Lehman Brothers moment for the commodity sector.
The marked increase in volatility in September which saw the Australian share market post its worst quarter in four years certainly highlights the disparate views of investors with momentum swinging widely between buying and selling on a daily basis.
One investor who firmly believes now is not the time to buy
This week billionaire activist investor Carl Icahn released a 14 minute video titled "Danger Ahead" in which he delivered a message detailing his concerns about the US economy and his worry about the state of both equity and debt markets in the US and the potential for these markets to be headed for an imminent catastrophe.
Amongst the key concerns of Icahn are:
- The real earnings of US listed companies have not grown in the past three years
- Companies continue to manufacture headline earnings growth thanks to low interest rates which allow them to undertake mergers and acquisitions (M&A) and buy back shares
- Icahn was damning and described reported earnings as a "mirage" with earnings guidance not including stock compensation, intangible assets, restructuring costs and takeover costs
- Icahn points the finger at low interest rates for creating a potential catastrophe which has led to corporate America having a short term thinking mentality
- Junk bonds are now a $2.2 trillion market which is higher than it was in 2008 when the global financial crisis (GFC) hit and Icahn believes this sector could be the trigger for a dramatic pullback
Icahn's major concern appears to be on the build-up of risks within the financial sector which were also at the heart of the problems that caused the GFC. If his concerns turn out to be accurate then it is likely that from an Australian point of view some of the stocks which would see the most selling pressure would be all of our bank stocks including Macquarie Group Ltd (ASX: MQG) – which is arguably more exposed to the US economy than its peers – along with companies with significant business operations in the US that are slanted towards the financial sector such as QBE Insurance Group Ltd (ASX: QBE).
Icahn is (of course) not alone in pointing out the dangers present in markets at the moment with the Chief Economist at CommSec Craig James recently stating that: "European and US sharemarkets remain overvalued and investors are on the lookout for downside, rather than upside risks."
Investors could be well served to consider the downside risks which could be building both within markets at large and within their own portfolios specifically.
