**25/08/10 - 8.20am - by James Gerrish**
US stocks were down again overnight and this is going to filter through to our market this morning with Futures pricing in a drop of 57 points when trading gets under way.
The DOW JONES lost -133 points or -1.32% to 1040. The FTSE 100 ended down -78 points or -1.51% to 5155.
It was the Marco issues that the market focussed on last night with the US housing sector showing signs of increasing weakness. It was this sector that caused the first recession in the States and now some commentators are adament that this sector will cause a second and more protracted downturn.
Step into the shoes of a US citizen for a second. During the good times, your job was relatively stable down at the local Kwik-E-Mart and you decided it was time to buy a house. With the banks being quite generous and lending 100% of the purchase price you thought it was a great deal - after all, real estate always goes up! Then it hit... the Global Financial Crisis and the demand for over priced slurpees plummeted. Apu could no longer keep you on so you lost your job and were unable to make mortgage repayments - but not to worry!
Unlike in Australia, the Banks in the US only take security over the house so you can wash your hands of the problem and move on. The house becomes the banks problem now. Times this by millions and it certainly becomes clear that the US housing market is likely to be under pressure for some time yet. The supply of houses is huge and demand just hasn't rebounded yet and this is a product of high unemployment. We need to see US employment improve which will underpin a recovery in other areas of the economy.
During the recent US reporting season, we saw strong results (broadly speaking) from corporate America and this prompted buying into equities (and other risk assets) and selling in Treasuries (and other defensive assets) . This is now a distant memory and the market is focussed on broader Macro Economic data that are coming in well below expectations. Last nights data that showed sales of existing homes fell 27% in July came on the back of slowing manufacturing numbers and a rise of jobless claims last week. This has prompted buying into Treasuries with yields on the 10 year at 17 month lows. (when demand is high, prices rise reducing the yield that the security pays).
I continually stress the importance of navigating money away from US exposed investments as well as companies with European exposure. Thats why ANZ remains our preferred pick in the banks and companies with Asian exposure are where we want to put money. We might be able to do this at lower prices in the coming weeks - BHP in particular.
Technically, the market looks bearish. The charts are saying that we're likely to trade lower from here and I'd have to agree. On the S&P/ASX 200 the key level remains at 4200. Bear in mind that corporates have repaired balance sheets (high amounts or cash), M & A is picking up ($89 billion worth of deals announced last week) and the Australian economy is progressing well. Its not all DOOM & GLOOM..!
