Thursday, 26 February 2009

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.

Wednesday, 25 February 2009

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.

Monday, 23 February 2009

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: 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.

Friday, 20 February 2009

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.

Thursday, 19 February 2009

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.

Wednesday, 18 February 2009

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:

Tuesday, 17 February 2009

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.

Friday, 13 February 2009

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.

Thursday, 12 February 2009

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.

Wednesday, 11 February 2009

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.

Tuesday, 10 February 2009

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
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.

Monday, 9 February 2009

The Skeptical Empiricist

self proclaimed skeptical empiricist Nasim Nicholas Taleb, author of the Black Swan, gives an interview on Bloomberg. You could watch a years worth of CNBC and you wouldn't learn as much as you will from listening to 15 minutes of Taleb speak. He questions conventional thinking and debunks bogus economic forecasts with his alsways original viewpoint. Click the image to listen to the interview.

Job Ads, Business Conditons Slip Further in January

The monthly ANZ job ad series was released today showing job ads fell a seasonally adjusted -6.3% in January after falling -10% in December. Total job ads are now -33.7% lower than the same time last year.

Newspapers ads increased 12.3% in January to following a -13.5% drop in December. Newspaper ads are currently -40.7% lower than in January 2008.

Internet job ads fell -7.3% in January after a -9.8% fall in December and are now down -29.1% from a year ago.

The rise in newspaper ads should be viewed with caution, the December numbers were extremely low so a bounce was not unexpected. The health of newspaper job ads is reflected better by the year over year numbers.

Also out today the Dun and Bradstreet business expectations survey, that not surprisingly shows a deteriorating Australian business environment in 2009.

From the report, expectations for the March 2009 quarter are as follows:

The D&B index for expected sales is down 17 points to -39, with 15% of executives expecting an increase in sales and 54% expecting a decrease. The profits index is down 16 points to -47, with 12% of executives expecting profits to rise and 59% expecting a fall.

Employment expectations are unchanged at an index of -14, with 6% of executives expecting an increase in staff and 20% expecting a reduction. Capital investment expectations are down one point to an index of minus seven,with 3% of executives expecting an increase and 10% expecting to cut spending.

More news on jobs will come with the monthly abs labour force data on Thursday.

Saturday, 7 February 2009

January Jobs Disaster

The US economy shed -598,000 jobs in January according to a BLS report released on Friday. Also January is the month when the BLS does its annual revisions which covers the previous 5 years of data. The effect of the revisions showed that job losses in 2008 were -311k more than expected.

As you can see from the table above, it is important to pay attention to revisions. In the first half of 2008 I was forecasting 6 digit declines in employment, although it took until the middle of the year to see them. However after the revisions we can see that payroll was declining by more than -100k per month from February.

In the past 12 months since the recession began 3.6 million jobs have been lost in the US economy, half of that total happened in the last 3 months. The official unemployment rate jumped to 7.6% in January, the highest since May 1992.

As mentioned previously an alternative measure of unemployment is U-6 which takes into account all the people that want a job but gave up, all the people with part-time jobs that want a full-time job and all the people who dropped off the unemployment rolls because their unemployment benefits ran out you get an unemployment rate is of 13.9%.

At some point drops of half a million jobs will subside to smaller numbers but it is conceivable that we can get a few more months of such drops before things start to improve. With job losses expected to extend into 2010 the notion of the official unemployment rate breaking into double digits is becoming a larger possibility.

Friday, 6 February 2009

RBA Put's Lipstick on the Pig

The RBA released it's quarterly statement on Monetary Policy today. Amongst their usual waffle the RBA released significantly revised GDP and inflation numbers but of course stopped short of forecasting negative growth or recession. The table below comes from the report.

Again it should be remembered that the RBA is a reactionary institution, you should not look to the RBA for guidance on where the economy is headed only where it has been. Just a few months ago the RBA was dribbling on about inflation and forecasting just a moderation in growth.

As the RBA acknowledges, that private sector surveys of economic conditions have fallen significantly. The AIG surveys out this week showed that the manufacturing, services and construction sectors declined for the 8th 10th and 11th consecutive months respectively. NAB surveys show confidence levels are now weaker than in the early 1990's recession.

In the absence of a large nasty event we are unlikely to see another rate cut of the magnitude of the last 4. The market currently expects a 50bps cut at the next RBA meeting. As I said back in January my earlier prediction of the RBA cash rate bottoming at 3% now looks to be on the high side with the market pricing in 2.5% by the middle of the year. That still has risks to the downside in my opinion.

Hopes now rest with the pass through effects from significant rate cuts and the fiscal stimulus package to be implemented in coming months. My opinion remains to be that monetary policy will fail to be stimulative in a deflationary debt unwind as we saw play out in the US and can only cushion the severity of the decline.

That leaves Rudd's handouts which may prop things up for a while but investors banking on a second half recovery in the economy will be sorely disappointed.

Thursday, 5 February 2009

Writedowns Another Name for Mistakes

"Restructuring, that's a word for mistakes" - Warren Buffet

Yesterday BHP reported a -56% decline in half year profits because of approximately $3.5 billion in writedowns. Call them writedowns, abnormals unusual items or whatever other name management manufactures, the fact is, such charges are admissions of prior mistakes. Brian McNiven in his book MARKET WISE put it like this;

Evidence of false profit declarations in previous years becomes apparent when a company announces significant asset revaluations. Write-offs and write-downs that quite obviously cannot be entirely attributed to the current accounting period are due to a lack of adequate provisioning in earlier years. When deferred provisions of this nature are labelled as restructuring, rationalisation, abnormals, non-recurring costs or non-operating costs - so as to give the impression that they are not part of the normal cost or risk of running the business - management is attempting to camouflage accounting oversights or misrepresentation.

You should not give companies a pass because a write-off is claimed to be a one-off. Before investing in such companies you should have a good look at the details of such writedowns, mining companies are notorious for such practices. There will be plenty of opportunity to scrutinize the nature of writedowns as companies will be reporting a slew of them this earnings season.

MQG Warns on Profit

Macquarie pre-announced earnings today citing further writedowns and forecasting a full year result which takes the company back to profit levels last seen in 2005. From the announcement:

  • Currently anticipate FY09 profit being approximately $0.9b after allowing for an additional $900m in writedowns and impairment charges for the second half (after $1.1b of writedowns and impairment charges in the first half)
  • Operating income (before impairments) is expected to be down 15%
  • Outlook remains subject to significant swing factors including market conditions, asset realisations, completion rate of transactions and asset prices

The important point is that MQG has a business model that thrives in an environment of cheap credit and rising asset prices but that suffers enormously in an environment of deflating asset prices and tighter access to funding.

This is not a temporary blip for MQG, their profits this year will be half their record earnings of last year. It is doubtful that MQG can return to that record level of profitability for some years to come, a statement that you can make about all the major Australian banks and insurance companies.

Stephen Roach on Global Outlook

Stephen Roach is Managing Director and Chief Economist of Morgan Stanley,based in Asia. He has been known as somewhat of a permabear but has been vindicated for his views in light of recent events. He dismissed the de-coupling thesis very early on and he has definitely been proven correct on that call.

ADP - Half Million US Job Losses in January

The ADP report released on Wednesday estimated that non-farm employment decreased -522k in January following a revised -653k in December.The ADP data suggests the peak of monthly job losses may have been in December.

However that may be thrown off by the survey week which has some seasonal anomalies around the early part of the year and the fact that the BLS does it's yearly revision with the January NFP report. Below is an excerpt from the ADP report:

January’s ADP Report estimates nonfarm private employment in the service-providing sector fell by 279,000. Employment in the goods-producing sector declined 243,000, the twenty-fourth consecutive monthly decline. Employment in the manufacturing sector declined 160,000, its twenty-eighth decline over the last twenty-nine months.

Large businesses, defined as those with 500 or more workers, saw employment decline 92,000, while medium-size businesses with between 50 and 499 workers declined 255,000. Employment among small-size businesses, defined as those with fewer than 50 workers, declined 175,000. Sharply falling employment at medium- and small-size businesses clearly indicates that the recession continues to spread well beyond manufacturing and housing-related activities.

The emphasis in bold is mine. Also out on Wednesday, the monthly Challenger Gray and Christmas report showed 45% more layoffs in January than December with retailers announcing their biggest number of layoffs ever.

All data points to a nasty NFP report on Friday,economists are expecting around around -525k jobs lost with the unemployment rate rising towards 7.5%.

Tuesday, 3 February 2009

RBA Slashes Rates, Rudd Attempts to Stimulate

The RBA cut interest rates by a full percentage point to 3.25% at its board meeting today. The official cash rate is now at it's lowest level since 1964.

The accompanying statement didn't say much, not that it ever does, citing all the obvious events of the last quarter including a significant deterioration in global economic conditions and falling inflation.

The statement also made mention of the Government's fiscal stimulus package. It appears that if you know how to to install insulation you'll have a job for the next few years. Also you can expect to see a lot more of those fellas on the road holding lollipop signs as 10 of his mates stand around watching 1 bloke dig a hole.

Also the construction industry will get a boost from the upgrade of schools and a new community housing project. There are some small tax breaks for small businesses but of course they need to spend money to get a rebate.

Spend $2000 on a computer and you can get $600 bucks back. But then again, if you are a struggling small business why not keep your old computer and save yourself $1400?

If you thought that didn't sound too bad, this might change your mind. $12.7 billion or 30% of the whole package will go in handouts to low income earners and families. The government just can't fight the urge to be the redistributor of income in chief.

As Ross Gittins said in the smh today, at least there is no denial about the current economic predicament, the government and the RBA are taking action, but they can do little more than cushion the blow of a global recession.

Monday, 2 February 2009

Australian Home Prices Fall Slightly in Dec Quarter

December quarter 2008 home prices were released by the abs today showing Australian home prices fell -0.8% nationally from the September quarter and are down -3.3% from a year ago. From their peak, Australian home prices are now down -4.0% on a national basis.

By state, Perth not surprisingly has sustained the biggest falls now down -6.7% from their peak in December 2007 whilst Darwin is the only city still setting new highs, although it should be noted that Darwin figures are highly unreliable given the low number of sales.

So whilst the Housing industry shills keep telling everyone that now is the time to buy, it appears that low interest rates and Rudd's handouts for home buyers are only serving to prevent even bigger falls in home prices.

It would seem unlikely that Australian House prices are going to fall off a cliff anytime soon with home buyer grants in place. However it will be interesting to see what the government decides to do when those grants lapse in June as the economy deteriorates and unemployment rises.

Sunday, 1 February 2009

Any Truth to the January Effect?

The XAO defied my expectations falling -5.0% in January. As I've been saying since December, it is my belief that we will breach the lows made last November sometime this year. However I didn''t think it would be as early as January, the XAO falling to a new closing low of 3300 on January 23rd.

That new low was short lived and we have since rebounded a little more than 5%. However, whilst my prediction that the XAO would go lower in 2009 was vindicated, that brief fall below the November lows is not enough to convince me that the worst is over yet. So I'll be looking for the XAO to go lower still sometime in 2009.

Readers may be aware of a phenomenon in stock market lore called the "January effect" which goes something like the following; "as goes January so goes the year", which means if the market performs poorly in January it will do badly for the whole year and vice-versa.

This is one of those little nuggets of wisdom that seems to gain credence the more times it is repeated. However Mark Hulbert has a good article on why the January effect has little evidence to back it up based on US market data. Click here for the article.

Examining All Ordinaries data for the past 25 years shows that January finished down 10 times. Of those 10 times that January was a negative month the All Ordinaries was negative for the entire year on just 2 of those occasions, they being 1992 and of course 2008.

Interestingly of the 15 times that the XAO finished in positive territory in January, the market finished the year in negative territory 4 times. So somewhat ironically the market is more likely to be down for the year if January finishes up rather than down, based on that sample of 25 data points.

As usual though, we shouldn't put too much faith in the past when forecasting the future. So what will February bring? This much we know, the coming earnings season for corporate Australia will be bad, and that's putting it mildly, we will see numerous earnings disappointments and hear CEO's talk about poor outlooks for the remainder of the year.

We will also get a sizeable interest rate cut from the RBA as they will be forced to acknowledge a deteriorating economic environment and the spectre of deflation. I don't expect them to talk about deflation in their statement but they will defintely be thinking about it.

On the international front, the US will again provide us with some nasty employment data next week. The resolution of the good bank, bad bank proposal could give some short term direction to the market but at the end of day I again have to acknowledge that I have little insight into such matters.

However, I'll make a call that the XAO finishes lower in February as the bad news on the earnings and economic front continue to outweigh any positives. Also as usual, have a vote in this month's poll.