Can You Smell The Deception & Misdirection

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.

Learn To Like The Services Industries

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?

The numbers say it all

Heard a radio story yesterday that was interviewing a knitwear manufacturer in Melbourne, Australia.
At his factories peak production several year ago, it employed 70 workers and now he employs 20 people.
To knit and assemble a jumper (sweater for North American readers) in his Australian factory, excluding the cost of the raw material, the cost is between $30 & $35.
In China, the cost of manufacturing the same garment is between $7 and $8, while it’ll cost you a $1 in Cambodia or Bangladesh.
In a globalised world of free trade, it’s difficult to argue against the numbers.
Import Tariffs anyone?

Putting China in context – Part 1

Today, China’s Shanghai Stock Exchange Composite Index (SHCOMP) is trading at 2,200 which is the same level seen in 2011, 2008 and 2006,

You can buy the Chinese stock market today for the same price that it was 7 years ago.

Furthermore, it’s trading at one-third of its 6,124 point high seen in October 2007 with a Price/Earnings Ratio of 11 and Dividend Yield of 2.3%.

Economists are suggesting that for China to move it’s into next phase of expansion and prosperity, the economy would need to move from bing dominated by manufacturing  into one that is driven by domestic consumption. I think this argument is irrelevant.

Sometimes too much analysis can be counter-productive.

I don’t think pundits were wondering when America was going to morph from its industrial manufacturing roots into a consumer society back in 1910. As The Roaring ’20’s came around, it just happened.

Interestingly, many developed economies now yearn for a return of their manufacturing economy.

Recently, the SHCOMP fell 2% because China only reported GDP growth of 7.7% rather than the consensus expectations of 8%. Analysts then expressed their “disappointment” and promptly wrote reports re-iterating their case for a decline in China’s economics.

Many countries could only wish for the growth that China has.


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