Share Market Wrap 16th Feb 07

The new RBA figures show that Australia is fast becoming a nation of debt, but is this a good thing? If you are an investor, then creating positive debt is good as it has the potential to increase your asset base at a marginal cost, and if your assets rise by more than the costs, you win. Unfortunately, the majority of Australians are creating what is known as ‘negative debt’, which means they are borrowing money to maintain their lifestyle rather than to increase their net wealth.

The RBA figures show that the ratio of debt to annual income is around 160%, which reportedly is 50% higher than 5 years ago. What this indicates is that many Australians are beginning to experience a cash flow squeeze where they simply do not have enough cash flow to fund their debt. The end result will be either voluntary or forced liquidation of assets, which will see the property and share markets fall away. How long before this happens is anyone’s guess, but given that analysts are predicting the ratio of debt to income to increase, it may happen sooner rather than later.

So what’s happening on the market this week?

As expected the market has risen strongly making new all time highs, and it is coming close to breaking 6000 points for the first time. For those who have been reading my report over the last month, you will remember that I have been expecting the market to find resistance around mid-February and fall away. I still believe this will occur and given that today is the 16th of February it is highly likely that this will happen very soon, with the market likely to fall for 1 to 2 weeks into what I believe will be a minor correction in the current bull market. Following this, I believe the market will return to being bullish and rise up making new all time highs into April or May, which I suspect will be the yearly high for 2007.

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