Australia’s fiscal problems

January 27, 2013 4 Comments

I have just seen Australian political opposition leader, Tony Abbott announce the Liberal Party’s new “Real Solutions” Plan.

While such publications cover various issues ranging across healthcare, foreign policy and labour markets, this post is not about addressing any of those topics and nor do I know enough in order to offer intelligent advice, BUT from a financial perspective, this is what I think needs to change in Australia.

Housing is unaffordable and the increasing cost of residential rent is ridiculous.
Personal taxes are too high
Corporate tax rates are globally uncompetitive
The re-unionisation of industrial workers is dangerous
High wages are prohibitive
A strong Australian Dollar is nothing to cheer about
Attitudes about innovation & entrepreneurism need to improve

There is a whole generation who have never seen a recession (which was at least 20 years ago) or been fired from a job.

With the decline of the manufacturing sector, it seems like Australia will end up selling tourism experiences along with financial services and insurance.

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The great U.S. corporate bond issuance

January 24, 2013 Leave a comment

Singularly, you may not have noticed various U.S. companies either re-finance existing debt or importantly issue new debt, over the past year or so.
Collectively, it is a monumental amount of debt.

Cleverly, these companies have taken advantage of the almost perpetual low yields of the government benchmarks, upon which they can base their spreads against.

Companies such as Oracle, Amazon & Goldman Sachs have issued bonds either secured or unsecured against their equity at historically low yields; which is brilliant financial strategy for these companies.

With interest rates at such low levels, probability and cycles suggest that rates will rise in the coming 6 years or so.

When 10 year benchmark rates are 6% and not 2%, I can’t see a 10 year 2.5% coupon Oracle Corp. bond being redeemed early, meaning bond holders will probably suffer capital losses unless held until maturity. Just imagine holding a bond that yields 2.5% into the latter half of this decade while others are earning twice or three times that amount?

Although, we are seeing a great bond issuance cycle, capital markets will most likely miss out on the next re-financing cycle.

What happens then?

Perhaps, companies will payout maturing debt by selling their own shares, which incidentally, they accumulated in share buy-backs conducted in 2012/2013 using the cheap money that they obtained from the same investors who bought their bonds?

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Charlie Munger on Margin of Safety (the Fourth Essential Filter)

January 21, 2013 Leave a comment

Charlie Munger on Margin of Safety (the Fourth Essential Filter).

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Rio Tinto’s writedown is an example of Management Risk

January 21, 2013 Leave a comment

I appreciate the operational leverage and potential returns that a company can provide its shareholders but last week’s news of Rio Tinto $14 billion writedown on its assets illustrates the handicaps that a company’s management can provide.

The result of such an announcement is that the CEO merely resigns.

Two years ago, bets were made in acquiring a coal business for $4 billion and today its value has been written down by $3 billion. Three-quarters of this coal business has been lost in 2 years, which is yet another example of company executives making large acquisitions in order to grow their business, with shareholders money.

When playing with large sums of company money, there is no downside for these executives other than losing their jobs, but their reward is large, financially and for their own personal career and resume improvement.

For these poor operational and investment decisions, management is paid very well. In Rio’s outgoing CEO’s case he also provided shareholders with a total share performance return of 2.5% during his 6 year tenure.

In Rio Tinto’s case, financial analysts are now speculating that it may embark on a $2-$4 billion share buyback to “make up for the losses”.

Rather than investing in its existing businesses, increasing its dividend payout or sheepishly attempt another equity destroying takeover, Rio Tinto could buyback its own shares, which in turn will improve the “Earnings Per Share” metric which hopefully is a benchmark that executives have their compensation incentives tied to.

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World Economic Outlook – IMF – Oct ’12

January 9, 2013 Leave a comment

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Lazy Corporate Monopolies Are Why America Can’t Have Nice Things « naked capitalism

January 9, 2013 Leave a comment

The attached link is an interesting post that appeared on the Naked Capitalism blog.

Lazy Corporate Monopolies Are Why America Can’t Have Nice Things « naked capitalism.

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David Tepper interview – Dec 2012

December 18, 2012 Leave a comment

Below is a link to an interview broken into 3 parts on the CNBC website featuring hedge fund manager, David Tepper.

If you really, really listen, he’ll tell you a lot about investing

 

http://video.cnbc.com/gallery/?video=3000134410

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Contrarian Snippets

December 12, 2012 Leave a comment

As a contrarian investor, some of my recent observations of sentiment and price include:

  • Australian Small Cap Resources Index is trading at levels seen 4 years ago
  • Gold doesn’t seem as popular
  • Uranium and Coal remain unloved
  • Investors are upset that their cash deposits are earning so little but they are buying plenty of bonds.
  • S&P 500 is touted as being expensive because it’s trading at 1,430
  • Retail, Airlines and Media equities are out of favour
  • China is apparently heading for a melt-down and the Shanghai Composite Index trades at the same level as 2008

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Own that which has little supply

November 20, 2012 Leave a comment

When investing, I think there is merit in understanding what has great demand but perhaps more importantly, where there is ample or excess supply.

Some of my recent thinking on this topic has moved away from commodities but into financial securities or instruments.

If the world has so much government debt on issue, why would you want to own something that is so abundant? Yet bonds are being bought and sought and prices continue to rise.

Inversely, the supply of equities continue to shrink, driven by mergers, stock consolidation, lack of new issues and growing amounts of share buy-backs.

The growth of share buy-backs has been occurring by stealth. Many companies are choosing to buy their own shares back with their excess cash, for reasons that I can’t see as positive.

Perhaps this means management from a particular company can’t find appropriate investments or they are cautious about deploying more capital into their existing business, but either way, it improves a company’s “earnings per share” data. This in turn helps executives meet share performance data tied into their compensation.

In fact, with money so cheap, it’s actually accretive to borrow money and buy your shares back.

Putting manipulation aside, there is a shrinking supply of equity and especially in Australia where the amount of amount of excellent companies with high quality of earnings are diminishing.

This is a positive, for that huge pool of superannuation money in Australia will only ever invest within its own shores.

 

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The Protest Vote Is Over

November 7, 2012 1 Comment

Make Our Votes Fair

Make Our Votes Fair (Photo credit: cliffjamester)

2012 has been a big year for elections around the world, especially amongst G-20 countries.

It seemed that the first half of 2012 saw a rise in a “protest vote” against the incumbent leader for reasons that may have included a disapproval of how politicians reacted to the effect of the global financial crisis and an emotional spillover from citizen uprisings such as the ones seen in the Arab world.

Voters decided that “they’ll show ’em” by voting for the opposition, as we saw in Spain & France but their citizens haven’t seen any improvement to their woes.

The shift that I noticed in the 2nd half of 2012 was to re-elect the devil that one already knows, as seen in Mexico, Venezuela & the U.S.A.

If this trend continues, it’ll bode well for the re-election chances of Julia Gillard & David Cameron.

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