Like it or not, when the bear growls, the bulls will hibernate.
And so it is at the moment. This homespun piece of market lore is the dominant thinking after last week when our market fell sharply, joining foreign markets which underwent a purging as investors fled easy credit, high-yield bonds, private equity and anything to do with risky investments.
The US bond market saw a huge rally with the yield on the key 10-year bond finishing at 4.76%, down from 4.95% at the end of the previous week. That was the bond market's biggest rally in 10 months.
Our market faces a difficult day today with the Dow falling more than 200 points on Friday, ending its worst week in well over 4 years.
The Dow Jones industrial average plunged 208 points or 1.5% and ended the worst week for the index since March 2003. The Dow topped the 14,000 mark only on July 19.
The S&P 500 lost 4.9% in the week, its biggest weekly fall since 2002
The S&P 500 lost 1.6% while NASDAQ slipped 1.4%.
For the week, the Dow fell 4.2% and NASDAQ, 4.7%.
For the year so far, the Dow is up 6.4%, the S&P 500 is up 2.9% and NASDAQ is up 6.1%.
The Australian market fell 5.1% last week on the All Ords; that was the biggest sell-off since September 11. The loss on the ASX 200 was 5.3% and the overall market is now up around 7.5% this year.
And yet, on the face of it Friday's reaction was odd.
Fears on Thursday that the US economy was slowing with no easing of inflation, were reversed Friday with news that economic growth hit an annual rate of 3.4% in the second quarter (better than the 3.2% rate forecast by economists), with a key inflation indicator showing a surprise moderation in price pressures.
And such was the sudden switch to bearishness, that that good news wasn't enough to save US markets from another sharp fall, especially in the last couple of minutes when it fell 40 points.
Confidence in credit markets, private equity, structured finance, sub-prime mortgages and the housing sector crisis are all obviously more important drivers for US investors at the moment than any good news on the economy.
Some optimists say the fear of risk is stronger than the reality, which may be true, up to a point.
But what many investors fear is that all previous forecasts that the sub-prime mortgage crisis and problems in housing, would not spread, have been shown to be false.
The huge private buyout industry is dead for a while, killed in a week; deals are falling over left right and centre and no one knows who will be the winners and losers, and where the next problems may erupt.
Unbridled fear has replaced unbridled optimism which has to work its way through the system before being replaced by some hard-eyed realism.
And just as one-eyed optimism had dominated thinking for the last three years, the huge swing to pessimism and fear is also over the top.
But that won't change until investors of all shapes and sizes can see an accounting for the damage becoming clearer; this could include senior executives being sacked, banks and others losing more money and legal action over dodgy dealings, of which there has been quite a few.
(Remember the US Securities and Exchange Commission has at least a dozen probes on the sub-prime mortgage business underway.)
In the most worrying development on Friday, the biggest buyout deal, the $US15 billion buyout of Cadbury Schweppes' North American beverage unit (which produces Dr. Pepper and Snapple), has collapsed with two private buyout groups (which included KKR and Blackstone) failing to find financial backers to provide the loans to start the deal, or buy the financing bonds.
Aluminium group, Alcoa Inc, was the single biggest loser in the S&P 500 as investors realised the chances of a big buyout at high prices, had evaporated. It still doesn't rule out a bid at lower prices.
Rio Tinto might be worth watching: its share price has weakened sharply and there is now a feeling that it is paying way too much for Alcan at $US38.1 billion. But it is stuck for the time being. Best read the 'outs' in the offer document.
Another situation to watch is the Coles Group bid from Wesfarmers, which is going to now offer a cash alternative to its shares and cash offer.
The cash option will put a limit on how low the Wesfarmers/Coles share prices will go. There are other buyouts where there's a lot of cash involved, such as the Healthscope-Symbion and the Flight Centre deal with Pacific Equity Partners.
These deals involve billions of dollars in cash and loans and any move to tighten lending rules will make the deals more expensive, even in Australia.
There are also fears now in the US about the banks, with the bonds of a wide range of institutions sold off; Westpac surprisingly was mentioned in market reports on Bloomberg over the weekend.
US real estate trusts are also worth watching as there are suggestions the credit crunch could extend to more traditional forms of finance, such as lending on property and related deals. Australian companies have been the biggest property investors in US retailing in the past two years and have a lot at stake.
Analysts say there has been a major change in credit markets: not only has risk been reassessed and restored to something approaching normal levels in transactions (i.e., 'how risky is this deal' is now the question rather than 'how much money do we make'), power has moved from the borrower (such as private equity groups) to lenders.
That's belated and quite a few lenders seemingly are trying to re-write deals by tightening conditions and insisting on more money.
Meanwhile, figures out late Friday in the US showed that American investors voted with their wallets last week with almost $US20 billion flowing out of funds as the markets fell.<
