Fundamental Analyst Moves to Wordpress

Hi all, I finally forked out and got my own domain and hosting service. Thus I have relocated this blog to Wordpress. Below is a screen shot of the new site, please click here to go directly to http://www.thefundamentalanalyst.com.

I've slacked off on the posting in recent months as I tried to learn more about building websites. After building half a site I realized that I didn't need an entire site with multiple pages, just a more flexible and attractive (hopefully) blog and an idea about how to draw more visitors to get more discussion going in the comments.

Anyway, please take a visit and let me know what you think. All prior posts and comments have been copied over to the new blog. Put comments on the new blog if possible but if not here is fine. Comments, criticism, praise, nude pictures (women only) are all welcome.

The Age of Hubris Comes to a Head

Despite collapsing earnings, shattered stock prices, ousted CEO’s, bankruptcies and quasi bankruptcies in the case of Citigroup, Bank of America and AIG, the hubris and arrogance of former financial masters of the universe continues.

As if Merrill Lynch rushing through bonuses before announcing massive losses was not enough, AIG has just upped the ante in the sheer arrogance stakes by taking US taxpayer money and paying bonuses to the very people who blew the place up. Not only that, it seems that some so-called retention bonuses are being paid to employees that are being dismissed, from the NYT:

Mr. Cuomo did not name the bonus recipients, but the numbers are eye-popping, given A.I.G.’s fragile state. The highest bonus was $6.4 million, and six other employees received more than $4 million, according to Mr. Cuomo. Fifteen other people received bonuses of more than $2 million, and 51 people received bonuses of $1 million to $2 million, Mr. Cuomo said. Eleven of those who received “retention” bonuses of $1 million or more are no longer working at A.I.G., including one who received $4.6 million, he said.

How’s that for hubris? Retention bonuses for people who weren’t retained. There goes the argument that you need to pay people bonuses to keep them. However it appears that AIG may have gone too far with this latest tactic. Outrage is being expressed by every politician up to and including the President. Public outrage is reaching a crescendo and to make matters worse, every time AIG makes a statement they just incite more loathing.

Take for example the latest justification for paying derivatives traders bonuses. “It’s in their contracts and the contracts cannot be reneged upon”, “if the American government starts interfering with contracts and changing the rule of law, the U.S. will be no better than a banana republic.” But hold on, isn’t the US government, aka U.S taxpayers, the majority shareholder?

Consider what would have happened if the government had not bailed out AIG . They would have gone into bankruptcy and then all contracts could be legally modified or completely voided. But for some reason we must obey the rule of law because the company whilst for all intents and purposes is insolvent, is not officially in the hands of receivers. Was it not Adam Smith who opined that an economic system that is allowed to operate without a moral foundation would soon lead to an amoral, if not immoral, society?

But why so much outrage over $165 million in bonus payments when we also now know that approximately $49.5 billion of taxpayer money was used to make counter-parties whole to CDS contracts written by AIG? From the FT.com:

AIG paid out $22.4bn of collateral related to credit default swaps, $27.1bn to help cancel swaps and another $43.7bn to satisfy the obligations of its securities lending operation. The payments were made between September 16 and the end of last year.

Goldman Sachs, which has also accepted US government support, received payments worth $12.9bn. Three European banks – France’s Société Générale, Germany’s Deutsche Bank and the UK’s Barclays – were paid the next-largest amounts. SocGen received $11.9bn; Deutsche $11.8bn; and Barclays $7.9bn.

Can anyone really register surprise that Henry Goldman Paulson was in charge as Goldman Sachs became the biggest beneficiary of public funds injected into AIG? Tim Geithner is not without blood on his hands in all this either and if the policy of privatizing the profits and socializing the losses is to change, Geithner needs to go, simple as that.

Scandals such as Enron and Worldcom pale in comparison to the magnitude of what is currently unfolding. Whilst it is now obvious to all and sundry that the global financial complex grew too large and powerful, it is not yet obvious the extent to which public outrage will compel lawmakers to act.

It is no longer useful to talk about lack of transparency or poor risk management. From Countrywide to Bear Stearns, Lehman, Merrill Lynch, Citigroup, Fannie and Freddie and AIG there has been lies, obfuscation and outright fraud. The age of hubris cannot come to a close until the executives of financial institutions are held accountable for their actions. It remains to be seen whether the level of public outrage is sufficient and the political will exists to make that happen.

Toughest Times Ahead Says CBA's Norris

Addressing the American Chamber of Commerce in a function today, CBA's Chief Executive Floyd Norris has this to say:

"There's no doubt that the toughest period in the Australian economy still lies ahead of us," Mr Norris told an American Chamber of Commerce in Australia function on Tuesday.

Norris also went on to say that he couldn't rule out a cut in the final dividend for this year. after ANZ and more recently NAB have said they will cut dividends by about 25%.

Amongst other things, Norris said that funding costs remain high and thus further interest rate cuts could not be guaranteed to be fully passed on to customers. In addition CBA was seeing a uptick in delinquent loans but that it was not yet significant.

There's not much in Norris' comments that should be surprising to anyone with their finger on the pulse. Rudd's handout programs will do little more than cushion a deteriorating economy. As the government digests that reality in the second half of this calendar year, the will be calls for Rudd stimulus mark before the year is out.

Also out today, the RBA released the minutes of their March meeting laying out their reasons for leaving interest rates unchanged. As usual I don't recommend you read the minutes unless you want to go to sleep so here is crux of it.

The question for policy was whether further stimulus should be added at this meeting, or whether, having reduced rates at each meeting since September, the Board should pause for a further evaluation of the situation. Members could see reasonable cases for both courses of action.

On balance, they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. Members believed this would leave adequate flexibility for policy at future meetings.

Clearly the RBA is leaving the door open, my expectation continues to be that the RBA will cut to at least 2% before we reach a cycle trough. The one bright spot the RBA mentioned and which has been reinforced by the data in recent months is housing activity, especially in the First Home Buyers segment.


In recent months there has been a bump in the dollar amount of lending finance for new and established dwellings whilst finance for investment properties has fallen back to levels last seen in November 2002. The RBA commented that:

In a sign of increased demand for housing, patterns of housing finance indicated an increase in housing loan approvals of about 10 per cent over the past few months, partly spurred by the increased incentives for first home buyers to enter the market. However, credit growth had remained low as borrowers had evidently taken advantage of the extra cash flows created by lower lending interest rates to increase debt repayments.

Further signs of an increased level of activity in the secondary housing market were significant rises in auction clearance rates in both Sydney and Melbourne in February, and a component of the Westpac-Melbourne Institute consumer sentiment survey indicated that current conditions were conducive to buying a dwelling.

Increasingly we hear calls from those in the real estate industry that home buyers should get in now while interest rates are near historic lows, clearly some are listening to that call. However I can't help think that some buyers are being sold a lemon.

I continue to believe that the housing industry is only being propped up by the FHB grant and handouts from the Rudd the redistributor. It will be interesting to see if the increase in the FHB grant is extended beyond June and to what extent the Housing market can continue to hold up. I get the feeling there will be more than a few cases of buyers remorse in the next 12 months or so.

Major US Banks Are Profitable....... Oh Puhlease!

Putting aside the media's facile obsession with explaining every tick of the tape with an event, lest''s examine the supposed reason for the beginning of this rally. The idea that Citi was profitable in the first two months of 2009.

The argument goes that writeoffs are non-cash and therefore don't affect cashflow or profitability. That's great if you ignore the balance sheet. Remember write-offs are euphemisms for mistakes and in this case it is the reversal of falsely booked profits in prior years.

Write-offs are taken through the P&L and then written off against equity in the balance sheet and if a company has no equity it's out of business, especially if it is a bank that has to maintain a certain level of equity. Where would Citi be if it didn't get $45 billion of equity injections and $300 billion of assets guaranteed by the government.

As for excluding credit losses that argument is even more ridiculous, a bank is in the business of extending credit and thus credit losses are part of the business, how can you possibly exclude them? That's like saying GM is profitable if you exclude what it costs to make cars.

Anyway Krudlow the Clown and his clueless minions Jerry the echo Bowyer and Dick Bove bought into the whole scenario. Luckily Joe B was there to tell them what morons they are. Remember that Dick Bove was the same guy that said a year ago to buy Citigroup at $30, that they didn't need to cut their dividend and that the credit crunch was over! This guy is a bank analyst and yet he clearly doesn't know how banks work. Watch this incredible display below:

Market Rally Continues

ps. I said something else in that post a year ago and that is that I watch too much CNBC, some habits are hard to break.

Cramer vs Stewart Showdown

The much awaited showdown between Jim Cramer and Jon Stewart aired on the Daily show on Thursday night. I thought that Jon Stewart might make it lighthearted and go easy on Cramer but thankfully he did not. In fact quite the opposite.

I think it is fair to say that there has been a growing divide between main street and Wall Street. There is a growing revulsion for those that made millions, walked away when the music stopped and left the taxpayer on the hook. Jon Stewart hit that chord beautifully on Thursday night.

The only thing I will say is that was disappointing is that not more light was made of the lack of accountability of more of the hosts. For example that complete and utter moron Dennis Kneale, who should be gagged and thrown in the East River, Michelle Caruso Cabrerra who like Kneale has an opinion on everything and knows nothing but most importantly Larry Kudlow, or is that Kuntlow?

Not only is Krudlow the Clown a right wing nutjob but he has been completely and utterly wrong on everything for the last 2 years. 18 months ago Krudlow would arrogantly deride anyone with a bearish opinion backed up by his trio of idiots, Don Luskin, Brian Wesbury and Jerry Bowyer all who have been completely discredited but who interestingly continue to get invited back on the show whilst people like Mike Panzner and Barry Ritholtz who got it right, haven't been seen for the best part of a year. Anyway that's my rant over, enjoy the videos.

Part I

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Unedited Interview Pt. 1

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

Part II

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Unedited Interview Pt. 2

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

Part III

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Unedited Interview Pt. 3

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

Full-time Jobs Getting Harder To Find For Aussies

Australian employment rose by a tepid 1,200 jobs in February but as always a grain of salt needs to be taken with these numbers in light of the sampling error that states the real number could lie with 60,000 either side of the actual number reported. of the actual number reported.

However the real story is the growing divergence between full-time and part-time employment. full-time employment decreased by -53,800 the biggest decline since November 1991, whilst part-time employment increased by 55,600.


Year over year full-time employment is now down -0.5% whilst part-time employment is up 3.6%. The chart above shows that in previous recessions and downturns there is a wide divergence between full and part time employment. This is obviously not a good trend if full-time jobs are being replaced by part-time jobs.


The unemployment rose to a 3 year high of 5.2% largely due to some 48,000 new entrants entering the workforce although it needs to be remembered the Australian economy needs to create 15 - 20k jobs per month just to keep up with the growth in the labour force and prevent the unemployment rate from rising.

Large drops in full-time employment is obviously not a good sign and serves to reinforce the more leading indicators of employment from the ANZ job ad series and the DEEWR Monthly Leading Indicator of Employment as well as the AIG industry surveys that have shown employment contracting for months.

From the abs data, the number of people employed in the Australian economy peaked in October, that is probably as good a time as any to date the start of the current recession from. The Australian unemployment rate looks set to blow through 7% by the end of the year and punch through 8% sometime in 2010. Where it peaks depends a lot on policy responses by governments both overseas and domestically.

However that is not to suggest that the government can prevent unemployment from rising significantly with any old fiscal response, such as throwing money at people so they can go a buy a flat screen TV for their 2nd bathroom.

Jim Cramer vs Jon Stewart Continues

NBC are pulling out all the stops having Jim Cramer go on 2 shows on the NBC network to help salvage his reputation. Anyone with a brain can see through the pathetic PR exercise. NBC doesn't seem to realize that the more they go on about it the worse they make it.

On the Daily Show on Tuesday, Jon Stewart pointed out how ridiculous the shills at NBC and Cramer look. The thing I took away from the clip was the look on Cramer's face, the guy is obviously really suffering, and I don't feel one ounce of sympathy for the fraud.

The Daily Show With Jon StewartM - Th 11p / 10c

Basic Cable Personality Clash Skirmish '09

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Economic Crisis

Here is Cramer's denfense, absolutely pathetic the guy is a complete charlatan,and the dozy bitch that often appears with him on CNBC Erin Burnett is not much better.

John Stewart Exposes The Charlatan Jim Cramer

Hat tip to Deano for spotting the latest skewering of CNBC and more specifically Jim Cramer on The Daily Show. After the great job they did on CNBC just a few days ago, Jim Cramer tried to defend himself in an article on mainstreet.com. Read Cramer Takes on the White House, Frank Rich and Jon Stewart.

However Cramer would have been better off shutting his mouth and taking his medicine as The Daily Show absolutely tore him a new arsehole in their latest segment and showed him up as the true charlatan that he is. Once thanks again to Deano for the links and the heads up.

The Daily Show With Jon StewartM - Th 11p / 10c

In Cramer We Trust

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Joke of the Day

ANZ Job Ads Show Biggest Monthly Decline Ever

Last month I noted that the increase in newspaper ads in December should be viewed with caution. That turned out to be on the money as newspaper ads fell -25.2% in February, wiping out all the gains in January and then some and are now down -55.4% from a year ago.

Internet ads which make up for 95% of all job ads fell -9.4% in February and are now -38.6% lower than they were a year ago. The combined total of ads from both internet and newspapers fell -10.4% in February, the biggest single monthly drop since the combined series began in 1999. Also the year over year decline of -39.8% is also the largest since the series began.

ANZ's Head of Australian Economics, Warren Hogan, had this to say:

The trends in job advertising in Australia suggest a substantial rise in the unemployment rate is likely. We have revised up our unemployment rate forecasts. We now expect the unemployment rate to reach 6½% by the end of 2009 and 7½% by mid 2010. These job advertisement numbers, based on historical relationships, suggests the risks to our forecasts are for higher unemployment.....

...Our assessment is that the latest job ad results are consistent with employment contracting at a 2% annualised pace over the second half of 2009. This in turn suggests that the current downturn in the economy is likely to last throughout 2009, with little prospect of a meaningful recovery before 2010. Recent trends in job advertising are consistent with other indicators which suggest that the Australian economy entered recession in late 2008 and remains in recession in early 2009.

Well fancy that, a mainstream economist is now playing catch-up with a deteriorating economic picture. Welcome to the recession camp Warren, you may be late but you won't be the last. Note that Hogan say risks to his unemployment forecasts are to the upside. I concur.

Also out today, NAB's monthly survey of business conditions which fell to -20, a reading not seen since 1992. NAB Chief Economist Alan Oster had this to say, from The Australian:

"There is little in the survey to suggest that activity levels might be bottoming with continuing falls in mining and manufacturing activity very prominent,"

"Nor is there much solace to be found in the employment, forward order and capex data in the survey."

The bank has lifted it forecast for the nation's jobless and now sees it at 6.5 per cent by the end of 2009 and 7.5 per cent in 2010

The NAB survey showed the employment index fell by 10 index points to minus 27 points in February, the largest fall in the survey's history to level last touched in December 1991.....

...."Our forecasts imply a moderate recession in 2009 - it would no longer be appropriate to classify these forecasts as a mild recession," he said.

NAB expects the Reserve Bank to cut the cash rate to 2 per cent by late 2009, from 3.25 per cent currently.

Seems Allan Oster and Warren Hogan are now smoking from the same hookah pipe (click the link if you don't know what a hookah pipe is). Yes I know, what use are economists in telling you what you already knew 3 months ago ? None, charlatans the lot of em.

The thing to note is that their forecasts continue to get worse, just 3 months ago, most thought we could scrape through and avoid a recession. a month ago it was maybe a mild recession and now its a moderate recession. Give them a few more months and it will be a severe recession with unemployment forecasts over 8% in 2010. But since you know that already, it won't be a surprise when the media excitedly announce it.

Geithner Gone By June?

Chris Whalen of Institutional Risk Analytics says that Tim Geithner will be gone by June. Also in this brief piece, he says Citigroup will be resolved by some kind of liquidation process, about time. Let's hope he's right on both scores but I have a feeling we may be disappointed.

February Another Horrible Month for US Jobs

US non-farm payrolls shed 651k jobs in February. However, as usual the more interesting numbers are the revisiosn and they shoeed a continuation of an already bad trend. The trend in recent months is for revisions to be on the downside and this month was no exception.

December payrolls were revised from a loss of -577k to a loss of -681k whilst January was revised from a loss of -598k to a loss of -655k. Job losses are clearly worse than the headline number indicate. Revisions to January (each month undergoes two revisions) and February could easily push losses for those months in excess of 700k.

In the past 4 months, 2.6 million jobs have been lost, the most in any 4 month period since the 4 months from June to September 1945 when 2.8 million jobs were lost.

Of course that needs to be put into perspective. 2.8 million jobs in 1945 amounted to a massive 6.8% of the labor force whereas the current 4 month contraction amounts to 1.9%. That is not meant to minimize the current situation, the US economy is shedding jobs at an alarming rate.


The US unemployment rate leapt to 8.1% in February, surpassing the peak of the early 90's recession and reaching heights not seen since December 1983. If you include people who currently want a job but are not actively looking and those working part-time but that would like to work full-time, the unemplyment rate is 14.8%.



The US employment picture gets more grim with each passing month. Job losses are intensifying although an absolute peak in monthly declines may not be too far off. At current rates it is clear that the US unemployment rate is set to push through 9% by the summer and looks likely to hit double digits by the end of the year or early in 2010.

However, as employment is a lagging indicator of interest will be when the monthly declines peak and start getting smaller, that still appears to be a few months away and wll only be obvious after revisions come through to prior months.

The Daily Show Rips CNBC Apart

Absolutely one of the best clips I've seen in a long time. A host of CNBC muppets really get their commuppance on this clip although you'd need a movie length version to do it justice

The Daily Show With Jon StewartM - Th 11p / 10c

CNBC Gives Financial Advice

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Joke of the Day

Jim Chanos on Incompetence and Criminality

Always worth listening to, Jim Chanos on the distinction between incompetence and criminality. Basically Chanos says we should expect to see Enron style investigations into some of the wildly misleading statements by bank executives over the last couple of years. Chanos reveals how some institutions were pricing securities using two sets of books to make their financial position look better as just one example.

Australian Economy Contracts -0.5% in 4Q08

Back in December in The Recession We Couldn't Avoid, I wrote the following:

"There is no doubt in my mind that the Australian economy is now in recession."

The evidence back then showed that the manufacturing, services and construction sectors had all been contracting for at least 6 straight months each and that surveys of business conditions confidence were at recessionary levels. Today we got more confirmation that a recession has been underway for a least a quarter with the latest GDP numbers.


After tepid GDP growth of just 0.1% in 3Q08, Australian GDP contracted for the first time in 8 years falling -0.5% in the fourth quarter. This would seem at odds with what the RBA announced just yesterday after their decision to leave interest rates unchanged at their March meeting:

"on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere".

True, Australia hasn't seen declines as big as Japan or the US, but the fact is demand is undergoing a significant contraction in the non-farm sector. Excluding the farm sector, GDP was down -0.8% in the fourth quarter.

Also of interest in the above quote is the phrase "currently available data", as noted yesterday, the RBA is a data dependent and therefore a backward looking gauge of the economy. Remember that less than a year ago, the RBA was still waffling on about the threat of inflation and last March actually raised interest rates.

The RBA's ability to forecast the future is no better than anyone else's and so whilst they may be able to formulate a coherent narrative of where we have been, their forecasts for the future should be taken with a large grain of salt.


Year over Year GDP growth rose a paltry 0.3% in 4Q08 the slowest pace since the -0.9% recorded in the 12 months to December 1991, not surprisingly occurring just after the end of the last recession.

Despite the Rudd Stimulus package in December and consecutive interest rate cuts the Australian economy has been unable to avoid a contraction in the fourth quarter of 2008. Whilst Rudd Stimulus mark II will get underway in March and April it is unlikely that these measures can do more than soften the decline in economic activity in 2009.

RBA Keeps Rates Unchanged

The RBA decided to leave the cash rate unchanged at 3.25% at their board meeting today. From the statement by RBA Governor Glenn Stevens it seems clear that the RBA wants to sit back and evaluate the effect of the interest rate cuts and fiscal policy to date.

As usual, the RBA is behind the eight ball. The Rudd Government throwing money at people so they can buy houses and other stuff they can't afford and the RBA cutting interest rates when monetary policy is all but impotent, is not a recipe for an economic recovery.

As the global and therefore Australian economy continues to deteriorate into 2009, the RBA's hand will be forced into cutting interest rates again. To be clear, I'm not arguing that the RBA should have cut rates. I beleive, as was borne out in the US recently, that interest rate cuts do very little in a deflationary debt unwind.

It's quite possible that the Australian economy could sail through to the middle of the year on the back of Rudd Stimulus mark II in relatively good shape. January's retail sales numbers out today were no doubt buoyed by Rudd Stimulus no. 1.


However, once it becomes clear that the second half of 2009 is going to be worse than the first half, (I think it's already clear but the RBA will wait for the data to tell them it is) the RBA will be cutting rates again.

XAO Makes it 6 in a Row in February

The All Ordinaries fell -5.2 in February after a -5.0% fall in January. That makes the sixth consecutive month decline in the XAO which is the first time that has happened in the last 25 years. The XAO has shed -9.9% for the year so far which, from the glass half full perspective, is slightly better than 2008 when the XAO shed -11.6% in the first 2 months of the year.

Once again a new closing low was made in February (although the intraday low was not breached). However, those new lows remain only slightly below the lows of November last year. It is still my belief that we will close significantly lower than the current closing low of 3281.5 at some stage this year, more than likely below 3000.


As mentioned many times before, a common feature of bear markets is a series of short sharp rallies that fail and ultimately end in lower lows. As shown by the shaded area on the chart above, a rally of the short sharp kind has been noticeably absent since the market rallied about 14.5% in the space of 7 trading days from the November intraday low.

There has been a lot of talk about the market being oversold and that we are therefore due for a rally. I tend to agree, however remember last year that there was a lot of talk about needing a final cathartic sell-off to make a bottom, we got the sell-off in November, but not the bottom. Stock market lore is full of such platitudes just waiting to be debunked.

The point is, just because we are due for a rally does not necessarily mean we will get one. That said I believe we will finish higher in March. Whilst the fundamental picture for the global economy and corporate earnings continues to deteriorate, I believe some type of rally is in order. As usual though my predictions should be taken with a grain of salt....and don't forget to vote in this months poll.

ANZ to Cut Dividend 25%

It was just a year when I first asked the question Time To Buy The Big 4? My answer at the time was no. Then 6 months later I offered that it still wasn't time to buy banks.

I say this not to boast. but to point out that, what was said then still applies now. That is, in a weakening economic environment where credit growth slows and bad debts are on the rise, bank earnings will weaken.

Today ANZ was the first Australian Major Bank to announce that they are cutting their dividend (although CBA has alluded to doing as much). The company said that dividends for 2009 would be cut by approximately 25%. Michael Pascoe has this to say in the smh:

So the market knows what's happening in Australian banking and the ANZ's highly paid CEO does not. That's the kind reading of Mike Smith's announcement of a 25% cut in the bank's dividend.

In this space on November 19, I translated the banks' share prices thus:
The market is telling the CEOs: ''You're wrong. You don't know how to run a bank. You think Australia is going to have a soft landing when it's really going to crash. You're incompetent or you're lying and you'll cut your dividends.''

This was the month after the CEOs placed their hands on their hearts and more or less said they wouldn't be cutting dividends as the scrambled to raise capital. Here's part of the transcript from Smith's post-profit analyst briefing on October 25:

Mike Smith: I felt the market just would not accept a dividend cut right now and I didn't think we needed it right now. The issue is, what are the alternative means of raising capital in the future, so it's a bit of a balancing act. What I'm hoping is that the market will move and/or there will be opportunity to do other things.

Analyst: Won't you have to cut the dividend in the future?

Mike Smith: No.

There were similar conversations with the other banks, but the November 19 article focussed on Westpac and ANZ as they respectively represented the market's first- and fourth- rated banks.

On October 30, not only was Gail Kelly boasting about having just increased the divy, but she waxed lyrical about maintaining that trajectory of higher dividends.

It was amazing stuff and the market simply didn't believe either of them. In the ANZ's case at least, we know the market was right.

Misled or mishap

So the question then arises: was Smith attempting to mislead the market or simply incompetent in not being able to adequately assess his bank's outlook when the entire investment community could.

If it was the first, he should of course be sacked immediately. If it's the second, it doesn't inspire much confidence in his leadership. A pay cut matching the dividend reduction - 25% - would seem entirely appropriate.

Can't disagree with that. The market has been well ahead of the CEO's of Australian banks. In addition to the dividend cut, ANZ announced that their provision for bad debts is set to rise by about $500m from last year to approximately $2.4 - $2.5 billion and that they would be taking a mark to mark charge of approximately $370m on what they call "credit intermediation trades" which I'm guessing is another name for stupid bets on credit default swaps.

So who's next is the question, CBA has already hinted that they will be cutting their dividend, surely NAB's is on the chopping block as well? It's been the right call to bet against the banks for last 18 months and given the current outlook, I see no reason to change that view.

Shiller on P/E Ratios

Bob Shiller one of the foremost experts on P/E ratios, argues for using a 10 year average of earnings to get a more smoothed P/E ratio.

No Sign of Abatement for US House Prices

US Home Prices continued their downward spiral in December 2008. On a year over year basis, both the the 10 city and 20 city indexes showed of -19.2% and -18.5%. Both indices have declined for 29 consecutive months. Both the 10 City and 20 City indices are now back to levels last seen in the fourth quarter of 2003.


Only two metro areas have fallen less than -10% from their peak whilst half of the 20 metro areas have experienced declines of -20% or more and 5 have fallen more than -40%. Year over year declines have stopped accelerating but US house prices still show no signs of stabilizing in the near term.

Everyone's talkin' about Earnings

Recently I've been writing about the dismal earnings outlook for the S&P500 and that based on current and forward earnings the broad market cannot be considered cheap. Two of my favourite financial commentators both wrote about earnings and market valuations this week. Firstly John Hussman of Hussman Funds had this to say:

....to match the worst historical troughs of market valuations, the S&P 500 would have to decline to between 10 and 11 times bottom-channel earnings, and between 5.5 and 6 times top-channel earnings. That would currently translate to somewhere between 500 and 550 on the S&P 500 Index. These levels are emphatically not forecasts – they represent extreme outcomes. Unfortunately, they also cannot be ruled out in the context of a deleveraging cycle plagued by utterly misguided policy responses.

It is essential to understand, however, that at those levels on the S&P 500, stocks would be priced to deliver total returns over the following decade in the likely range of 14-17% annually. The current economic downturn requires us to suspend any optimism that earnings will recover quickly in the coming years, but the iron law of finance – that lower valuations imply higher long-term returns – is likely to endure, as it did even during the Great Depression.

Bottom line don't expect an earnings recovery anytime soon and the risk to the market is clearly to the downside. John Maudlin also had a lengthy and not so optimistic piece on earnings and valuations. Here is an excerpt:

The 20-Year Horizon
The higher the P/E ratio, the lower (in general) the subsequent 20-year average return. Where are we today? As I have made clear in my last two letters, we are well above 20. Today we are over 30, on our way to 45. In a nod to bulls, I agree you should look back over a number of years to average earnings and take out the highs and lows of a cycle. However, even "normalizing" earnings to an average over multiple years, we are still well above the long-term P/E average. Further, earnings as a percentage of GDP went to highs well above what one would expect from growth, which is usually GDP plus inflation. Earnings, as I have documented in earlier letters, revert to the mean. Next week, I will expand on that thought.

And given my thesis that we are in for a deep recession and a multi-year Muddle Through Recovery, it is unlikely that corporate earnings are going to rebound robustly. This would suggest that earnings over the next 20 years could be constrained (to say the least).

Again as I've been stressing for some time, the market has to adjust to the realization that earnings are not going to recover this year or next, the best you can hope for is some stabilization and that analysts stop slashing forecasts, although if you wait for analysts to start revising estimates up you will probably miss the turn.

For more insight on the earnings, valuation and P/E multiple issue, do yourself a favour and read both of the linked articles cited above.

REF 1H09 Earnings Drop Cuts Dividend

As indicated in their profit warning, REF recorded 1H09 NPAT of $7.9m a -22% drop from the previous year. The company put the decline in earnings down to a fall in call volumes in both Australia and the U.K as well as increased marketing expenses and start up costs for the Irish operations. A strong AUD/GBP didn't help much either.

The company also announced a $0.09 fully franked dividend. For anyone buying at today's price that represents a more than 9% yield for the half year. However, that dividend is unlikely to be maintained as they continue to pay out more than they earn.

A couple of concerns about REF's health should be noted. The company previously was debt free. On a net basis (cash minus debt) that is still the case. However short term debt has increased to $4.1m. Why is that? Well, when you are paying out significantly more in dividends than you are generating in free cashflow you need to get it from somewhere.

Dividends are paid out in the subsequent period after profits are made. Thus REF paid out $11.1m in dividends in 1H09 whilst only making $7.9m. Thus the rate the company is generating free cashflow is not keeping up with cash needed to cover the divivdend and thus they need to borroiw to cover the shortfall. Clearly this is unsustainable as retained profits are depleting and debt levles grow larger.

The company described the drop off in call volumes as a dip. What does that mean exactly? It dipped and has now stabilized or are volumes still on the decline? The company is stepping a marketing campaign in both Australia and the UK in the next couple of months, however it is not clear if earnings will hold up at current levels.

Clearly I have been too optimistic on the company's earnings outlook. The question now is what is a sustainable level of earnings and thus dividends for REF going forward?

For 2009, I am assuming full year NPAT of $15m, with the second half showing more weakness. However into FY10, to be conservativeI'll assume earnings fall to $12m. for the full year. I'll also assume the the company does not continue paying out more than it earns. The company could at that time pay out $0.12 per share in dividends for the full year. Based on today's prices that represents a yield of slightly more than 12.0%. Much better than any bank is offering.

Still, the economic performance of the business is deteriorating and I would like to get some assurances from management that call volumes are showing signs of stabilising and that they don't intend to rack up more debt just to continue paying out an unsustainably high dividend. I will be followiung up with management on these issues in the enar future.

Stocks Far From Cheap

Last week I wrote about a US Corporate Earnings Collapse in which I commented that the 4Q08 S&P500 earnings both on an operating and as reported basis would be the worst quarter so far in this cycle. Just one week later and it has gotten worse still.

To put it in perspective, 4Q08 Operating earnings are now expected to be $5.29, that is the worst quarterly performance since September 1992. Not only that, reported earnings are now expected to be -$11.03 the worst quarter ever recorded.

Turning to PE's the 12 month trailing PE ratio for S&P operating is approximately 16.5x to the end of Dec 08. When the S&P500 peaked in August 2007 the P/E was approximately 17.0x times so despite the index halving, the overall market multiple has barely contracted.


If S&P500 earnings forecasts are to be believed, the forecast Dec09 PE falls to about 12.0 times. However as we know those forecasts should not be believed. Do we really think that an earnings recovery is going to get underway in the second quarter of this year? If you do I have bridge I'd like to sell you.

On the question of whether stocks are cheap or not the chart below is interesting. It shows the S&P500 P/E on an as reported basis from 1936. The average P/E over that 72 year period is 15.8x . The forecast P/E on an as reported basis to the end of 2009 is currently 24.3x times and out to December 2010 is just 19.9x. Hardly what you would call cheap.



Note in the chart above that the P/E stayed in a range between 8x and 22x for approximately 50 years. In the 90's and then 2000's P/E's got out of hand. If I put a graph up leverage ratios and corporate profits over the same period I think it is safe to say you would see the same trends.

If the leverage ratios of old are not coming back in the forseeable future then we are looking at a lower level of corporate profits and thus even with the S&P500 hovering around the 800 level, it is not yet pricing in that lower level of corporate profits.

Inside The Meltdown

Worth a watch if you don't know what happened in the second half of last year and if you do it's still worth a watch. From the PBS show Frontline:

How To Deal With An Economic Crisis

You just couldn't make this sort of stuff up. It seems Japan's economic woes finally got to the Japanese Finance Minister,Shoichi Nakagawa who went on TV out of his tree.



Absolutely brilliant performance, I think he should be guest speaker at Davos next year for a seminar on how to deal with an economic crisis. Click on the story from Bloomberg below to read about Japan's worst quarterly GDP performance since 1974.

Japan Economy Goes From Best to Worst on Export Slump

Japan’s economy, only months ago forecast to be the best performing among the world’s most advanced nations, has become the worst.

Gross domestic product shrank an annualized 12.7 percent last quarter, the Cabinet Office said yesterday. The contraction was the most severe since the 1974 oil crisis and twice as bad as those in Europe or the U.S.

PWK 1H09 NPAT Up 57%, Another Capital Raising

Pipe Networks (PWK) recorded a rise in 1H09 NPAT of 57.1% from the previous year to $5.5m, eps rose 41%. The domestic Australian business continues to perform strongly with growth across all business sectors.

Also announced was a share placement of 3.5m shares at a price of $2.80 to raise $9.8m. In addition, details of a share purchase plan for existing shareholders was released whereby existing shareholders would be eligible to subscribe for up to $10,000 worth of new shares prices at $2.80.

According to the latest Annual report there are about 2200 shareholders, so if we assume most, say 2000 of them subscribe, that would raise an additional $20m. So altogether we have an additional $30m or about 10.6m shares. That is about 20% of the current share capital of the company.

That of course means quite a big dilution for current shareholders. Analysts will need to cut their earnings forecasts from current consensus of about 22.0 cps to 20.0 cps for FY09. By pumping in new capital you reduce the overall return on equity and thus the value of the business. Based on Profit forecasts for FY09 and FY10 I value PWK at approximately $2.60.

Of course PWK is undertaking a massive project for a small company by building the undersea cable PPC-1 and it has to be paid for somehow. Raising capital in the short term drives down overall returns on capital and thus the value of the shares.

Thus for long term investors making an investment today, they have to believe that future returns on capital will increase once the cable is paid for and fully operational. Given the potential of PPC-1 I believe that to be the case.

Also in the capital raising announcement The company outlined how they intend to pay for the rest of the PPC-1 project and it appears that sales from PPC-1 are expected to cover it and thus no more additional capital needs to be raised.

That would be good news for investors because at the end of the day, you want to invest in businesses that can manage above average rates of organic growth without the need for continual infusions of capital to support that growth.

Flat Australian Job Market in January

Growth in seasonally adjusted employment grew by 1,200 in January according to the abs. Reversing the previous months trend, the rise in full-time employment of 33,700 was offset by a fall in part-time employment of -32,600. If you want to take a positive out of this report it is that full time jobs have been added in January and job losses have been mainly part-time.


The unemployment rate jumped to a seasonally adjusted 4.8% from 4.5% in December, the highest level since June 2006. The jump in the unemployment rate was due mainly to the rise in the number of people looking for work.

That said it should be noted that the Australian economy needs to produce approximately 15 - 20k jobs per month just to keep the unemployment rate steady. So even if employment levels stay flat, the unemployment rate will continue to rise.

Still, with the unemployment rate at 4.8% the Australia economy looks relatively healthy compared to it's OECD counterparts. How long that will remain the case is yet to be seen.

US Corporate Earnings Collapse

Back in November I warned of an Imminent Earnings Meltdown. At that time I argued that despite optimistic forecasts of US corporate earnings showing growth in 4Q08 I was convinced that they would actually decline given that the economic deterioration had spread to the broader economy.

As has been the case on previous occasions, my seemingly bearish outlook proved to be overly optimistic. With a little more than 70% of S&P500 companies having reported, operating earnings for 4Q08 are expected to decline a whopping -46.2% from the previous year. That is all the more stunning when you consider that 4Q07 was the worst quarter in the current cycle up until now.


Analysts have also been busy slashing their forecasts for the rest of 2009, 1Q09 and 2Q09 operating earnings are both expected to decline, with earnings picking up in the second half.


FY09 operating earnings are now expected to come in at $68.88 per share, that is down from over $100 just 4 months ago. As stated many times, I do not buy into the second half recovery. Back in November I estimated that FY09 operating earnings will be closer to $60, I believe now it will be closer to $40.

And if you think that's bad consider reported earnings, that is earnings before bad stuff (writedowns etc.) for 4Q08 are expected to be -$8.73. That is not a misprint, the combined earnings of all publicly listed companies in the United States add up to a loss. When was the last time that happened you ask? Never, that has never happened before since S&P has been recording data.

We should be clear, we are not going back to record earnings in 2009 and you can forget about it in 2010. Corporate profits have to some extent been driven in recent years by the excessive amounts of easy credit and massive amounts of leverage in the financial sector in particular.


We are making a secular shift to an economy built on much lower leverage and thus the inflated corporate profits of recent years are not going to come back for years to come. I still believe, despite massive downgrades by analysts that the market still has not priced in the full extent of the decline to a lower level of corporate profits in coming years.

Geithner's Farcical Non-plan Plan

Did anyone actually watch the farcical theatre that was supposed to be Tim Geithner's coming out party yesterday? Geithner was expected to give us a comprehensive plan for dealing with the current banking crisis, more specifically a resolution to the toxic assets on bank balance sheets.

What we got was, well we've been kicking around a few ideas but we haven't decided on anything yet. No specifics just some broad brush ideas that clearly haven't been fleshed out in any detail. I found the whole thing quite stunning and so did the stock market, promptly selling off about -5%. Yves at Naked Capitalism summed it up well.

Geithner Plan Smackdown Wrap

I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan. Even the horrific TARP, which showed utter contempt for Congress and the American public was in some ways less troubling....

....Treasury Secretary Geithner presented today what in essence was a plan to come up with a plan. I now understand why he is so loath to have government run banks. He presumably sees himself as an elite bureaucrat, as his glittering resume attests. Yet the man has a deadline to come up with a proposal, yet puts off presenting it twice (the "oh he has to work on the stimulus bill" is as close to "the dog ate my homework" as I have ever seen in adult life). What he served up as an initiative is weeks to months, depending on the item, away from being operational (if even then; the public-private asset purchase program will either not see the light of day, or be far narrower and smaller than what is needed).

And in case you think I am being unfair, yesterday I got an e-mail from a political consultant who got a report on the Senate Banking Committee briefing by the Treasury the night before the announcement. No briefing books, no documents. He deemed it to be no plan. That assessment was confirmed today by a participant at the session, who said that the details were so thin that one staffer asked, "So what, exactly, is the plan?" and repeated questions from one persistent Senator got "absolutely no answers".

Click on the link for the full article, it is well worth a read. I don't envy Geithner's job, the task is enormous but this was a huge PR faux pas. This from the administration that ran the most flawless presidential campaign in history.

The troubling thing is that the current administration, just like the previous one, is too frightened to put down their foot, close some of these clearly insolvent banks, wipe out the shareholders and bondholders. Instead the government seems to want to sustain it's own version of the Japanese zombie banks of the 1990's.

Another Demonstration of Media Idiocy

Came across this story from Talking Points Memo. It is emblematic of the cluelessness of mainstream media. Read the quote below and then watch the video.

TPM Reader JC sent me to this interview with Nouriel Roubini and Nassim Taleb on CNBC. Here's what JC wrote: "In this clip, Nouriel Roubini and Nassim Taleb are still being treated as a circus sideshow by CNBC... They're predicting the end of finance, and offering the only clear path out of this mess that I've seen offered (with the knowledge to back it up), and CNBC keeps asking them for stock tips. It's ludicrous. Wall Street media -- CNBC at least -- doesn't realize how bad this is yet. They're stuck in a bubble where they think everything will go back to normal in a few months...."

He hits it spot on. These two guys are talking about a deep structural crisis in the world economy. And these CNBC yahoos can't stop asking for stock tips. Really surreal.

I'm watching it again now. This is a seminal piece of video. You have to see it. I'm not sure I've seen anything that captures -- albeit unintentionally -- the vast disconnect over what is happening today in the US economy.

Predicting Crisis: Dr. Doom & the Black Swan

Not much actually gets me angry but I believe if I saw Dennis Kneale in person I would smash his face into a bloody pulp and Michelle Carusso Cabrerra would only avoid the same fate because she is a woman but she would get a stern talking to.

JBH Posts Strong 1H09 Results But Where to Now?

JB Hi-fi Limited (JBH) reported strong 1H09 results despite a tougher retail environment. NPAT was up41% on the prior years result and the dividend was raised by 50%. Other encouraging signs were that gross margins held up and the company paid down $55m in debt from $125m - $75m whilst building cash reserves to $90m. Thus on a net basis the company is debt free.

Looking ahead the company affirmed it's previously announced guidance of 28% sales growth or approximately $2.35 billion. At the time of company AGM's in November last year, JBH sounded the most optimistic of the retailers and that point of view has been vindicated.

However, the question is how well JBH will continue to do in an environment of declining business and consumer confidence. The Rudd stimulus plan should keep consumers spending through the end of fiscal 2009 but the outlook from there remains uncertain.

My take is that the Australian economy will have another leg down in the second half of calendar year 2009 along with the rest of the world as the realization that there will be no second half recovery sets in. After a more than 50% rally off the November lows, JBH stock is not looking particularly cheap. at current levels.