Not dead yet!

You might've noticed that the stock market has become a little nervous as oil prices fall to the low $US60 a barrel region and other resource prices take a tumble. And while I've been alluding to a day of reckoning for resource prices and stocks, the question is, is it here now?

After three years where general share prices seemed to have only one direction - of course, Telstra shareholders had a different experience! - volatility is now the name of the game. However, a positive vibe remains with those courageous analysts who work the crystal balls and then the media.

The dive in prices of resources and their related shares is linked to recession questions about the slowing US economy and its impact on China's economic growth rate.

US down, Asia reacts
Chief economist at BT Financial Group, Chris Caton, has done the numbers and says a 1% fall in US economic growth will reduce Asian economic growth by 1.25%. Recently, US growth fell from an annualised rate of 5% to around 2.5% and this explains, in part, why resource prices have headed south.

Oils well
Also, the supply of one-time scarce resources is improving and this has seen oil head towards $US60 a barrel. The oil watchers suggest the Organisation of the Petroleum Exporting Countries (OPEC) will cut production at this price and so there will be a floor under these falls unless a big, worldwide recession results.

Not a bumpy ride
But I wouldn't reach for the wrist-slitting razor blade yet, with the International Monetary Fund (IMF) giving the next two years a solid economic rating despite a negative view on the US economy ahead.
A soft landing is expected there and the end of interest rate rises should work to eventually rebuild momentum in the US economy.

Is he kidding?
No one is tipping that resources and their related shares are going to zoom off again but, since May, many stocks have been dumped and some respected analysts think it has been overdone. The likes of BHP Billiton and Rio Tinto are still seen as 'buys' at current prices.

CommSec economist Craig James has chimed in with some interesting analysis of share prices telling us that they are at - wait for it - pretty low levels! Yes, despite three years of a rising stock market he says shares look attractive.

"The Australian share market is currently at the cheapest levels in 15 years," James declared recently. "At the same time, as share prices are trending largely sideways, companies are posting solid growth in earnings. The price-earnings ratio for the All Ordinaries stands at 12.87 - the lowest result since July 1991."

And he stuck his neck out to tell us: "We expect the ASX 200 to reach 5400 by June 2007."

For those who have lost track of the ASX 200, as I write it is 5056, and that means a 7% increase over the next 9 months. On top of that, dividend results are the best in a year and a half.

Why buy?
Delving into why the price/earnings (P/E) ratio is telling us to buy shares, James points to valuations that are at the cheapest levels seen in 15 years. This has come about because the market has been spooked by lower resource prices, which has taken share prices down while profits or earnings reported by many companies have been rising.

The P/E factor
Generally when a P/E approaches 20, some investors become wary. So as it's now only 12.87 (for the All Ords as a whole), this number should raise confidence.

Now for something entirely different
Of course you still have to pick the right shares but that's always the challenge for the intrepid investor who plays the stock market. As a Monty Python sketch might put it: "Resources are not quite dead yet!" But I'd be surprised if they startle us with their back from the dead performance.

Click here to visit Peter Switzer's website