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I predict that......
Posted by
Mike
at 17:07 PM Fri, 19 Dec 2008
Would anybody like to give me some predictions about what might happen next year in the world economy? Before you jump into the exercise feet first, think about this. In 2008
The ASX 200 dropped 60% from peak to low
Australian interest rates fell 45% when pundits were forecasting 10% rates
RIO was heading for $200 a share but has traded at less than $30 and at a PE ratio of 3
US interest rates fell from 6% plus to zero
US treasuries are offering a negative yield
Oil was definitely going to above $200 per barrel and is now definitely going to trade at $14. Just ask the experts.
Lehmann brothers is too big to fail
The Commonwealth Bank will stub its toes badly
The US will bail out every company in the US –“ just ask for cash with a tear in your eye and mean it”
Sovereign countries will go bankrupt – just ask Iceland, Pakistan, Serbia, Hungary, Ukraine and (the USA but, keep that quiet)
“Twiggy” Forrest will lose $9 Billion that he didn’t have
BHP did not take over RIO and RIO shareholders are really happy
Governments have learned to create policy on the fly. Ban short selling now. Save the banks, no save the motor industry, no what about ….
China’s economy was derailed and even Australia is being affected.
Now its your turn. But maker sure you are as accurate as last years forecasters.
Ted Szkuta Chief Investment Officer
Credit Default Insurance
Posted by
Mike
at 15:15 PM Thu, 18 Dec 2008
Despite what you may describe as a less volatile equity market, the real story at the moment is in the fixed interest bond market, and the cost of issuing debt.
Headline interest rates may be coming down but Companies need to pay a much higher margin to issue debt. The cost of insuring debt is on the increase.
Insurance for a Countries debt is increasing. The cost for the US has gone up by .30% per annum to .65%. So the cost of insuring a $10m 5 year US Government Bond is $65,000 per annum, or $330,000.
These rates are the real fear index. Look at Australia. The cost has risen from .75% per annum to 1.38% pa. The cost of insurance for a Company like the Westfield Trust is 8.77% pa.
The high returns in the Debt market is more attractive to investors than the equity market. The debt market is trading at better price earnings ratios than you would have expected from a well performing company in 2007. Remember also that a Company's debt ranks ahead of the shareholders, so it is much better security.
This is also why Companies are rushing to issue as much Equity as possible. Notice the spike in Equity issues from a range of companies. The CBA disastrous equity raising highlights a lot of these issues. CBA had to issue, and therefore immediately relaunched their $27.00 share issue at $26m, at a cost of $70m. If it is a choice between debt or equity for any company, equity is the clear choice. If RIO has huge debt on its books, the market knows that when the debt comes to be renegiotated, RIO will pay up for it, placing strains on the cash flow and therefore the returns to the shareholders. The market will punish any company until debt is paid down, either through asset sales or issuing equity.
CBA pulls $2B Capital Raising
Posted by
Mike
at 11:23 AM Wed, 17 Dec 2008
CBA is in a trading halt pending an announcement, according to Michael West from The Age and Dow Jones, that they have been forced to cancel a $2B capital raising, due to bad debt disclosures after the placement was made.
There is no better way to upset Institutional investors than to go cap in hand for a large placement, and immediately afterwards making negative material disclosures. It doesn't inspire confidence in the decision making process of the Bank, who would be naive to think the Investors wouldn't notice. I am sure the major broking houses were surprised when Merrill Lynch surprised the market with the $2B placement, which was so close to the $750m raise last week. You would think they would get it all off in one go, rather than continually go piecemeal to the market, leaving everyone to question whether they will be back for more.
News just to hand has UBS now doing a placement at $26.00 per share. Talk about confusing.
Bernanke's last stand
Posted by
Mike
at 10:23 AM Wed, 17 Dec 2008
Well - you really can't drop rates much below zero, can you. After throwing the kitchen sink at the problem, the Fed pretty much has socialized the American banking industry in the hope that they can hand the batten back to Private Enterprise when it is profitable to do so. The cynical would suggest that the only game in town is arbitraging against the Fed itself. In the old days the "carry trade" was borrow funds from a disfunctional economy whose interest rates were zero (Japan), and lend to the US Government. The trick now is too borrow at zero from the Fed, and lend to the Fed for 10 years, or to the Government Guaranteed Fannie/Freddie bonds.
The tactic is to kick start the economy, but the price of an economy feeding on itself will produce unknown disasters if the strategy doesn't work. Where to from here? Well the Fed will continue purchasing a range of assets, the Fed's balance sheet will continue to grow, and the main victim will probably be the US dollar. The Aussie dollar has risen 4%, Gold is trading towards $860, and the main support this morning has been in the material stocks. A pump primed world economy will probably help the Material sector more than the financial sector, since the financials are still dealing with deteriorating credit quality, and the need to raise capital.
The overall strategy is to inflate asset prices so as to counteract negative equity caused by Asset prices falling while debt increases. This means, in the long run, that inflation will be next major headache we will be dealing with, probably not dissimiliar to the inflation of the 1970's. This problem may not manifest for 12 to 18 months. My risk management strategy over the next 6 months will be to take advantage of locking in long term interest rates for the house mortagage. I can afford to be wrong if interest rates fall another 1%, but I can't afford to be wrong if they go back to 10%.
CBA is doing a Capital Raise
Posted by
Mike
at 20:24 PM Tue, 16 Dec 2008
As expected, and with not much time until the Christmas break, CBA did what it had to do, and announced a $2B Capital raise. Institutions were being offered shares at $27.00, a $2.15 discount to today's closing price.
CBA's Tier 1 capital was around 7.6%. Its banking competitors' Tier 1 capital was over 8%. CBA did not have a choice in this enviroment. It needed to raise capital or watch it's share price go down until it did. On about $500B in assets, the $2B share issue gets it above 8%.
This follows on Monday's announcement that the Bank raised $2.7B in 3 year and 5 year funding. The fixed and floating rate bonds were issued with the Australian Government's guarantee. Even with the Guarantee, CBA had to pay 2.17% above the rate the Government would borrow at for 5 years fixed, highlighting the tightness for funding in the wholesale market, and the need for CBA to re-inforce it's funding book.
Rumors are that RIO needs to raise $9B, despite denials from the Company. Rio Tinto Ltd has already reduced its forecast production estimates for 2008 by 10 percent to around 175 million tonnes and said output would grow by only about 3 percent next year. GSJBW says Rio looks cheap but its exposure to aluminum is not desirable and debt levels limit the company's options. GSJBW says under a spot price scenario, Rio could struggle to refinance its debt in 2010.
Where did all the money go??
Posted by
Mike
at 17:03 PM Tue, 16 Dec 2008
I am sorry that I am concentrating so much on the US, but unfortunately, it seems that as in all previous years they hold the levers when it comes to the world economy. In the present situation they have to extract themselves from the deep hole they dug for themselves before we see some light at the end of the tunnel.
Let’s have a look at where they are heading. With the advent of the redraw facility on residential property, US households probably funded their equities and property investments, as well as their consumption needs with the proceeds of the redraw facility. This presents a major problem for any government trying to stimulate the economy with the injection of cash. Much of what has already been pumped into the economy has been used by householders to pay off the debts backing falling asset prices, with little stimulatory impact. Add to this a lengthening unemployment line, very high foreign debt and several expensive wars and suddenly we have a multi-trillion dollar deficit which the Government has to fund.
In this environment it is almost incomprehensible that investment managers the world over are buying huge amounts of US paper with ridiculously low yields. This activity has been inflating the value of the US dollar. At the same time the Reserve has been happily issuing government debt at unprecedented rates.
The music must stop sometime and the Government will have to start printing money to support the situation. What will this create? INFLATION!
At some time soon everyone will realize that a ZERO yield is unsustainable and the US currency will be sold down. At that time undervalued equities, commodities (particularly Gold) and other currencies will become more favoured until US interest rates start to rise again.
BUT THEN AGAIN THE MARKETS MAY CONTINUE TO OPERATE IN THEIR NORMAL, RATIONAL WAY.
Ted Szkuta
Chief Investment Officer
The US car industry bailout revisited..
Posted by
Mike
at 15:04 PM Fri, 12 Dec 2008
I was rather negative about the proposed bailout of the failing US car industry in a previous article in these pages. Although the proposal has initially been knocked back by the US Senate I believe it will eventually go through albeit with some difficulty. What positives can be taken out of the way a bailout is structured?
This could be used as an opportunity to reinvigorate enterprise and business in the US and maybe in many other countries. Executives and directors have taken the view that they have the right to demand exorbitant incentive and salary packages from the companies they lead without any personal equity risk. Without equity risk many of these managers failed to appreciate the cost of capital and the return that should be generated for shareholders. By not taking equity risk, these executives have ostensibly ignored the risk taken by equity in the formative years of a company’s development.
Warren Buffett was recently asked what he would do in relation to the car industry if he were President of the USA. Amongst other recommendations, he stated. “I would require that all Board members and executives put up 75% of their individual net worth to back their plans. I would be happy to incentivise their equity so that success would generate a good return for these people. But if they fail, then they will share the pain.”
This is a very different scenario from the norm in public companies today where most of the equity risk is based on equity given to executives via bonus payments.
Ted Szkuta
Chief Investment Officer
Is Finance becoming more readily available
Posted by
Mike
at 16:23 PM Wed, 10 Dec 2008
The NAB Business Survey has questioned business about how business is viewing credit availability in the current credit crisis. The chart below shows that the situation is not improving even with the best efforts of Government and Regulators.
11% of those surveyed are finding it significantly more difficult to obtain finance and 16% are finding slightly more difficult to obtain finance. That means that 27% of businesses are experiencing more difficulty. Those experiencing most difficulty are Finance, Property and Business Services and significantly about 30% require no finance at all and 41% have experienced no change.
In Australia, it therefore appears that the availability of credit is not the underlying reason for the deterioration in business conditions, but the reduction in demand is. Hence the reason for the stimulatory actions being taken by Government.
Ted Szkuta
Chief Investment Officer
Opes Prime revisted
Posted by
Mike
at 16:15 PM Wed, 10 Dec 2008
ANZ Bank and Merrill Lynch are inflicting the most appalling legalised cruelty upon the unfortunate souls who chose Opes Prime as their stockbroker. - Alan Kohler - Business Spectator.
There is plenty of press regarding how the most unimaginable pain is being inflicted on former clients of Opes Prime by Opes' Receivers, acting within their sanctioned legal entitlements, but without a whisper of support from any so called protectors of consumer rights.
Read the detail, but here is the gist of it. Let us say you owned 20,000 Babcock shares, which in April 2008 were trading at $12.50, or $250,000 worth. Let us say you had a $100,000 loan with Opes Prime. ANZ actually legally owned the shares - you didn't. So ANZ sold your shares at $12.50, and received $250,000.
Through a twist of logic though, you were not deemed to have sold the shares on the day ANZ sold them. Justice Finkelstein, in the Federal Court, had ruled that the “performance date” for determining its debts would be the date of the liquidation. That date was October 15. The Babcock share price was $1.49. So 20,000 shares at $1.49 equals $29,800.
But your loan is $100,000 (plus interest). You owe the Receivers $70,200 plus interest accruing at 6.25%.
"Opes clients did not invest in many ASX 200 stocks; they went for high return, high risk species. Between March 27 and October 15, the Small Ordinaries index fell 33 per cent – half as much again as the ASX 200. And many small stocks have dropped much, much more during that time. For example, Kagara Zinc and Timbercorp are down 94 per cent, FKP Property 90 per cent, Straits Resources and Mirabela Nickel 87 per cent, and so on. I don’t know whether these specific stocks are part of the ex-portfolios, but it’s a demonstration of what could have happened." (Alan Kohler).
So this is the picture of our Society. Everyone is acting properly, and within their legal entitlements. But is it fair? The biggest victim in this downturn has been the concept of Trust.
Interest Rates
Posted by
Mike
at 11:51 AM Wed, 10 Dec 2008
The June 2009 90 Day Bank Bill rate has dropped below 3.00% to 2.98%. This is historically a significant number, since sub 3% bank funding cost has rarely been seen before.
| INTEREST RATE UPDATE - 10:30am 10-DEC-2008 | Today |
| February 2009 Cash Rate | 3.31 |
| March 2009 90 Day Bank Bill Rate | 3.13 |
| June 2009 90 Day Bank Bill Rate | 2.98 |
| December 2008 3 Year Government Bond | 3.48 |
| December 2008 10 Year Government Bond | 4.33 |
.