Alaska Might Be Next ?

April 27, 2014 Leave a comment

It’s quite simple.

Starting a war is generally good for the economy of the aggressor. Just think of how World War II mobilised the American economy. Putin needs a war to keep his people occupied and distracted from their ailing economy. Putin and his government have talked of a “New Russia”. I think it’ll be Russia who decides whether to start a war, not the United States.

What is more complicated to understand is how and when countries go to war when you consider their debt position, electoral cycle, policies and the effect on their economies.

Sanctions:

I’m not sure that sanctions will work on a country with a relatively large population, land mass and economy (or in Russia’s case, possessing vast commodity resources). Funnily, I find it interesting that the United States government is much more involved in the Russia, Ukrainian & Crimea story that it was or has been in the Syrian civil war.

Oil & Gas Prices Will Rise:

If America places heavy sanctions on Russia, the price of oil will go up. If Europe is not happy with Russia’s territorial expansion, then the price of gas will rise too.

The U.S. Dollar Will Rise:

Money is leaving Russia and it won’t be converted into Euros, especially with it trading around the 1.38 mark. You may see the Swiss Franc and British Pound rise, but Billions of Rubles will be converted into US Dollars by global money managers. A rising USD will disrupt the currently sweetened competitive position of U.S. products in the global markets. War with Russia won’t help an indebted United States especially given that they have been financing military exercises for the past 12 years.

Please Consider The Neighbours:

Picking a war on Russia will somehow involve China, North Korea & Iran. This will test the various Asian Pacific relationships that the U.S. has been nurturing. Indirectly, it will involve Venezuela too, who will add to the pressure on the oil price. Russia will have little trouble financing a war.

Russia may be pursuing an old imperial model of domination by land acquisition.

As investors, we need to understand the effect on various assets and which ones to own if a scenario of war develops, ’cause China may not choose to buy anymore U.S. government debt and even elect to sell its current holdings.

Imagine if China sold a lot of their Treasuries thus placing pressure on bond prices, which would send U.S. interest rates higher. Consider this in tandem with a rising U.S. Dollar and coupled with rising oil prices. Now that would be interesting.

As a closing tidbit, the U.S. acquired Alaska in 1867 for $7.2 million which is equivalent to 2 cents per acre. Alaska has no naval base and has barely 20,000 U.S. military personnel.

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More Immigration = Lower Wages = Being Competitive

April 1, 2014 1 Comment

It should be simple to understand.

When the labour market is tight, the price of that labour rises.

Australia along with other countries such as Norway, Netherlands and Switzerland all have low unemployment rates. They also have some of the highest average annual wages and minimum wages amongst OECD member countries.

Tight workplace capacity (whether that means offices, factories or other facilities) and a unionised workforce can also add to the cost of labour.

When people earn more, the prices of other products can afford to rise too, simply because rising disposable income means there is more demand for the staples and non-discetionary items.

But today, Australian business operators are complaining that the cost of paying staff is becoming a heavy burden and nationally, we do understand that high wages are making us uncompetitive. They are asking the government for help.

Government doesn’t control the price of labour, so they can’t actually manipulate this price directly. What is confusing furthermore, is that businesses are happy to benefit from the positives of a free market economy, yet they are not willing to accept the cost that comes from such capitalism.

What needs to be done? What help can government provide ?

I would like your comments too.

If  the labour market is tight, then open it up. Allow more immigration. Australia is so large we can easily fit 100 million people here. Make the labour market more competitive and its price will fall. More people will also send the cost of other products down. If there are more consumers, then supply will meet the demand and price equilibrium will weave its magic.

Government needs to take a stronger line on unions and labour contract employment reform. Employees need to be convinced that the statute law passed which governs our land will be steadfastly upheld. The honouring of these laws doesn’t really require the oversight nor lobbying of a union because the “checks and balances” of democracy, its electoral constituents and the Westminster parliamentary system already exist.

I think its time we spoke truthfully about why the cost of labour is high. The headline unemployment rate isn’t the only things that matters, although government seems to think this is the major topic that will keep them elected.

The United States, Spain, Italy & Korea all have higher unemployment rates, noticeably lower wages, export more product (in dollar value), comparatively similar sized GDP per capita and much larger populations.

 

 

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The surprising truth about what motivates us – video

March 10, 2014 3 Comments

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Abnormal Dividend Payments Aren’t Good

February 17, 2014 Leave a comment

The dominant conversation that prospective clients are having with me is about their desire to earn a higher yield on their money.

I’m talking yield in terms of income.

A couple years ago they were earning 6% on their Australian Dollar cash held in the bank but now they are earning 2.7% and so the chase for yield begins, mainly via sub-standard, riskier assets in order to satisfy their single, blinding and qualifying criteria of income yield.

Surely, I must have written about that particular angle previously.

But the current trend amongst listed companies who are holding excess cash or re-generating pre-crisis levels of free cash flow – is to return cash to their shareholders.

We know that over the past couple years companies have “returned cash” by re-purchasing company shares. Appropriately, they have also re-financed debt at cheaper rates. This has also improved their “earnings per share” data which the stock market and analysts have loved.

Today’s trend is to return cash by increasing the company’s dividends at larger increments than in the past. Some companies are even making interim (or extraordinary) dividends in addition to their normal payment schedule.

Is this corporate board room’s new “increasing the share price” strategy? Raise your dividends abnormally, so those who are chasing yield will buy your shares and thus send your share price higher.

This also serves management handsomely, especially if they have share price performance linked remuneration (options, bonuses etc.), but I think this is also exhibits management’s laziness for their lack of ability to find ideas on how to use their company’s money to grow the business.

Company management would be quick to suggest that “this is in the best interest of shareholders”.

I don’t like this strategy, whether it’s from a corporate or an investing perspective.Historically, I have seen this occur before.

Today, the company appeases the market by handing out the cash and Tomorrow, it needs cash again; which is when they either issue new shares (which dilutes existing holders) or borrow money (often at interest rates higher than a couple years ago) which usually equates to a higher gearing ratio in their balance sheet.

One of our investing themes is to look for companies that are retaining their earnings. Our preference is to keep the money in the balance sheet and then deploy that capital to grow the business.

All this talk of corporate activists demanding cash being returned and balance sheets being lazy – blah, blah, blah.

I’d rather see the excess money left in the company’s bank accounts instead of leaving. If the board and management can’t develop a strategy on how to use that money appropriately, then they should be leaving, not the company’s money.

I think this is better for shareholders.

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At Least 70% Didn’t Chuck A Sickie

February 17, 2014 2 Comments

TOYOTA, A TELLING TALE…

from The Pickering Post

http://pickeringpost.com/story/toyota-a-telling-tale-/2759

“Two years ago we were working so hard to create conditions whereby we could stay in this wonderful country and produce cars.

“We had restructured the business and, despite acceding to recent union demands for even better wages and conditions, we were seeing a dim light flickering at the end of the tunnel.

“We were honest with our employees and had explained the seriousness of the company’s economic plight.

“They had assured us of their cooperation, so we determined to all pull together in a desperate attempt keep the company viable.

“There was an air of camaraderie, a feeling of hope.

“It was Australia Day that week and it fell on a Thursday. On the Friday, thirty percent of our workforce didn’t turn up, thirty percent called in sick.

“That’s when I finally realised we were stuffed.”

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Spend 30% of your revenue on Advertising

February 16, 2014 Leave a comment

Zillow and Trulia are competing to become the major force in the U.S. online real estate industry.

I think they are still in the early stages of large marketshare opportunity as Americans quickly catch up to (and are surpassing) how Australians have used the internet when searching for houses to buy or rent.

These internet based companies have recently announced plans to spend $65 million and $45 million on national advertising in 2014.

These advertising budgets equate to 32% of Zillow’s and 27% of Trulia’s 2013 revenue.

These are online businesses that dominate their industry space and yet they feel the need to increase their advertising budget in order to grow. I would also bet that advertising using “traditional” media will receive its fair share of revenue, in the manner which online dating agency and online gaming/betting advertise using television and print to get their message across.

Surely these figures are only for their advertising budgets and wouldn’t include the salaries of their in-house marketing staff.

Now 20% or 30% of your revenue being spent on advertising seems exceptionally high so I have listed some companies that continue to spend even though they already have large, visual and dominate brands.

Samsung spends $4.3 billion per year on advertising. This is equal to 3% of their current annual gross revenue.

Coca Cola spends $3 billion (6% of 2013 revenue)

Microsoft & Google part with $2.5 billion each (both accounting for 4% of revenue in each company)

McDonalds outlays $1 billion (also 4%)

and Apple’s advertising budget just hit $1 billion which represents 0.6% of their annual sales.

An article written by George Boykin from Demand Media expanded on this topic by writing;

“The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales (and your net margin is 10-12% after expenses), while some marketing experts advise that start-up and small businesses usually allocate between 2 and 3 percent of revenue for marketing and advertising, and up to 20 percent if you’re in a competitive industry.

In 2010 the Chief Marketing Officers, or CMO, Council conducted a survey of its 6,000 chief marketing officer members to assess marketing and advertising spending across a wide range of industries. The survey results revealed that 58 percent of chief marketing officers spent less than 4 percent of gross revenue on marketing, 16 percent spent between 5 and 6 percent, 23 percent spent more than 6 percent, while 2 percent spent more than 20 percent. This survey seems to suggest that if you set your spending level between 0 percent and 6 percent of gross revenue, you will be in good company that includes 74 percent of the CMO Council membership.”

Source: http://smallbusiness.chron.com/percentage-gross-revenue-should-used-marketing-advertising-55928.html

Obviously, many businesses aren’t in the league of Coca Cola in terms of brand recognition nor marketshare or pricing power but it seems for ambitious companies seeking growth such as Zillow & Trulia, spending the suggested “mean” of 3% of their revenue on advertising and marketing will probably result in a mediocre payoff.

 I am wondering three things:

1) If the adage of “spend more and you’ll get more” holds true, then why do people attend seminars on “How To Advertise Successfully For No Money” ?

2) I don’t think many companies (large or small) even spend 3% of their revenue total on advertising yet they are quick to complain about the lack of sales.

3) How much thought does a company actually give to figuring out how to deliver their message in a competitive and crowded world, where others are also seeking attention.

Is placing an ad in your local newspaper, paying for Google Adwords, begging or buying for “Likes” on Facebook effective advertising?

Is this going to provide you with a Return On Investment?

If you answer “no” or “not sure”, then you are wasting your money and time.

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Can You Smell The Deception & Misdirection

January 26, 2014 Leave a comment

This is a periodical post about things that I see in the financial press, which I tend to interpret differently. When managing investors money, you need analyse the news and not just simply read it because you can’t assume you are getting to the truth.

Firstly, Jakarta warns Australia they are prepared to “clash” over border violations incurred by the Australian Navy. Australia best heed their warnings and wipe that smirk off your face because 300 million Indonesians should send your xenophobic fears into overdrive. I hope our government isn’t pinning all of our defensive hopes on U.S. Marines stationed in Darwin?

But equally Telstra is looking to form a 50/50 venture with Telekom Indonesia. Can David Thodey please be our next foreign minister?

I can’t believe why any company in the world wants to pay that much for a small insignificant business such as Warrnambool Cheese & Butter. Good luck to them.

Panic, Panic – protestors block Bangkok streets and the Thai Prime Minister is suspected of corruption. The Thai stock market has risen 9% in 10 days since this story picked up steam.

Alex Waislitz’s Thorney Group raises $68 million. Now I’m not sure what their raising target was but from a distance, their reputation could have easily raised 4 times that amount. My point is, would-be stockbroking firm geniuses should keep in mind that it’s difficult to raise money from the public.

With 65% domestic market share, Qantas still thinks it plays on an uneven playing field.

Franchisee of Australia’s 370 Burger King stores, Competitive Foods Australia, posts revenue of $1.03 billion for fiscal year 2013 and makes $21.4 million profit. That’s a lot of invoices and money to handle in order to make a 2% net profit margin. Last year, revenue was $935 million and profit was $8 million. Hey Jack, I see that cost cutting program is working?

Australian rail operators (in the Pilbra, Western Australia) are complaining that truckers have got an unfair price advantage when they transport iron ore. If trucking iron ore is cheaper than by rail, then the iron ore giants should then give their competitors access to their railroads. Umm, I didn’t think they would.

Various interviewees in newspapers are wishing for a weaker Australian Dollar. Be careful what you wish for. When you see commodity prices rise, it is usually accompanied by a higher Australian Dollar. In Australia we mainly export commodities, ’cause we don’t manufacture things such as cars, televisions or clothes anymore. So if the AUD remains weaker, we can sell US Dollar denominated commodities and receive a lot of AUD once its converted but it’s also good for overseas money to buy up Australian assets (see Australia is “on sale”).

Australia’s stock market falls due to weak Chinese data. Yup, heard this one before. Just like other brokers who actually ask me if I’m staying up late to watch the U.S. unemployment numbers. It doesn’t really affect the earnings of the shares in the companies that I and my clients own but if you need to justify a movement in the stock market with some sort of news, good luck and be my guest. Please continue to manage your investments on the basis of “jumping at shadows”.

Finally, this week, not a single economist who provided an estimate on the Australia Consumer Price Index reading got it correct and Deutsche Bank posted a “surprise” $1.15 billion quarterly loss.

Whether these professionals continually get their ‘calls” incorrect, can’t make money themselves or continue to pay fines for manipulation & price rigging, yet people still give these investment firms their money to manage.

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Learn To Like The Services Industries

January 21, 2014 Leave a comment

We have become a nation of services industries.

More than 75 per cent of employment in Australia comes from the services sector, according to data from the OECD. In comparison, services account for 81.1 per cent of employment in the US, 79.7 per cent in the UK and 34.6 per cent in China.

I find that when I discuss the economy of a particular country, often the conversation involves how “we don’t manufacture anything, anymore”. But some of those service companies do produce a product, although its not made of wood, cement steel or plastic.

Why do we place such a premium on manufacturing jobs and industries?

Is this “premium” due to historical reasons, ’cause my dad worked at Ford Motor Company and thus it’s noble and good?

Is it because they are “things we can touch”?

Does it make it more believable and trustworthy that it actually exists, if you can “touch” it?

Does having plant and machinery make managers and investors feel better because its a tangible asset on their balance sheet?

Financially speaking, service businesses surely have higher margins, less fixed costs, require a smaller amount to get started and seem to be more flexible, while the manufacturing industry seems to have the opposite attributes.

Unless you wish to live in a socialist economy (whilst lining up for your weekly ration of bread & milk), free market capitalism and its forces determine the most efficient place (source, cost & delivery) where manufacturing takes place.

Has it been that terrible to have lived in those clean, free, safe, progressive, enriching and prosperous high service employment countries that I mentioned earlier?

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Investing doesn’t need reinventing – just remember some rules

January 12, 2014 Leave a comment

Successful investing is a product of joining many variables together. Many of which we can actually control such as the decisions we make, the risk we take and the investment rules and disciplines we follow.

Here are some of my favourite investing quotes that I keep handy and refer to. They are easy to understand but many investors find them a lot harder to stick to or follow.

1. Over the long run, prices revert to their mean and their fundamentals.

2. Don’t follow the herd. The herd applies optimism at the top and pessimism at the bottom.

3. The safest and most profitable investment is to buy when no-one likes it. Patient opportunism (waiting for bargains) is often the best strategy.

4. Time is your friend, impulse is your enemy. Don’t be captivated by the siren song of the market.

5. Buy assets that appear to offer an attractive return for the risk incurred and sell the asset when the return no longer justifies the risk.

6. Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands.

7. Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

8. I have never heard of a forced buyer.

9. When searching and analysing investment ideas, individual curiosity and intellectual honesty is required.

10. The trick of being a successful investor is to sell when you want to, not when you have to.

11. Do not be fearful or negative too often because bear markets aren’t forever.

And finally

12. Do your homework or hire experts to help you.

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There is little substitute for doing your own homework.

December 26, 2013 Leave a comment

Regular readers of this blog would notice that I like to highlight the idiocy of financial journalism and they continue to make it easier for more of us to not take them seriously.

A dominating observation in 2013 has been how journalists used Twitter and Facebook posts as sources for their information and quotes.

Mainstream journalists have become even lazier when researching a news story that they even don’t bother to call people in order to seek a quote, instead finding a satisfactory version using social media.

Don’t get me wrong, I like the information that I see on social media as I think it’s a terrific aggregator of opinions too. In fairness, I can’t pick on journalists solely because social media’s contributors mainly come from the broader population.

But I wonder…..

Where are these people getting their facts?
Is what they write, actually correct?
If it’s an opinion, what is the basis behind their views?
What are their motivations or biases?

Here lies the opportunity.

Fewer investors are actually doing any or requisite amounts of “work” when researching and analysing investment opportunities.

A couple ways that I try to succeed when investing my money is to search where others aren’t looking and out work the others.

Although we have been taught by elders and peers that you shouldn’t simply believe everything that you read, yet it seems that we continue to believe the typed word without exercising much individual curiousity or intellectual honesty.

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