Record breaking stock market Vs the Sub Prime Fallout

With yet another record-breaking day on the Australian Stockmarket it is difficult to reconcile the strength of the investment dollars flowing into the market with the tally of scalps claimed by the sub-prime crisis. The outpouring of lending dollars by the institutions to anybody with a pulse reaped massive bonuses for the corporate sales teams and associated lenders, mainly in Wall Street, however the true cost of this lending splurge continues to be felt across the globe. Up to now, without the banks and other institutions around the world fully disclosing the cost of holding sub-prime related loans and mortgages on their balance sheets the crisis has racked up losses in excess of US$50 billion.

As an indication of how rampant the market was and the exuberance that accompanied it there have been in excess of 20 hedge funds that have imploded, amongst them Cheyne Finance and Basis Capital management, there is also a hedge fund called Pirate Capital LLC, with account names like 'Jolly Roger', that held $1.8 billion of funds under management that dropped in value by 80% in a year.

Many of the large investment banks and broking groups have announced their losses and heads have rolled. The US$5.5 billion Merrill Lynch loss announcement, which cost 3 top executives their jobs, is second only in size to HSBC Finance Corporations' US$10 billion loss, these losses join Bear Stearns, Lehman brothers, Goldman Sachs, Morgan Stanley, Citigroup, Deutsche Bank and UBS, revealing an additional total in excess of US$14.5 billion of write downs. We still have not heard final figures from Bank America and JP Morgan.

The mortgage companies and banks are also feeling the pain; In the USA GE Money subsidiary WMC has cost its parent US$1 billion and Washington mutual is likely to add another US$1 billion, hopefully they will not collapse like the American Home mortgage company and 2 local banks. Australia has had Rams show the effects of the lack of lending liquidity and the UK saw panicked Northern Rock customers queing down the street to extract deposits. The Europeans first felt the effect of the crisis when the German state-backed Landesbank and IKB were the recipients of a US$5 billion bail out. Other large European institutions such as AXA and BNP Paribas have also succumbed to a degree.

Optimism Rules in a World-wide Bull market

With all of these losses and write-downs made public, and more set to be announced as debt obligations mature, what is driving the markets?

Obviously the world's major Central Banks have been in close contact and activate in pulling levers to stimulate global economies. This 'intervention', coupled with the continuing optimism of a global bull market saddled to the growth of the BRIC countries (Brazil, Russia, India and China), the sub prime seems to have at worst softened world-wide growth.

Given these factors, investors are prepared to commit because they see long-term global growth continuing. This doesn't mean there won't be hiccups ahead if we see global inflation rising, the prospect of rising middle-east tensions, a rash of more negative sub prime news or simple normal market nervousness creep in. What has been obvious is that there is underlying confidence in the Australian bourse and until that confidence is quashed or our market becomes over-stretched, the losses seem set to be absorbed.