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12 Rebound hopes for three small cash cows By Brendon Lau Three stocks that are trading at or below their cash backing. 14 Cheap coal ignites energy battle By Tim Treadgold Coal is no longer a dirty word for some. Its the low-cost fuel of choice.
26 Balancing out SFGs bid withdrawal By Tom Elliott SFG has taken its bid for WHK off the table ... but it may be worth holding. 28 Ask Max: Your questions answered By Max Newnham Contributions before the budget, corporate trustee costs, franking credits, and more. 30 Collected Wisdom By Cliona ODowd
16 Will Apple spur an Australian train reaction 32 Research Watch 2 Have the big banks had their day? Not likely. By John Abernethy By Luke McKenna Apple has done it ... and Australia should get on 5 Carrs Call: The trouble with the bubble 35 Letters of the Week board the low-cost debt train as well. call By Eureka Report Subscribers By Adam Carr 19 Australian growth a developing story Credit growth is due for a rebound and this By Adam Carr should further fuel the banks. The advanced economies still matter to us but our biggest partners are now developing 7 Banks not cheap, but no hold-up imminent economies. By Roger Montgomery The banks are out of value territory but dont 21 Grim Reaper threat to SMSF property expect a fall. By Bruce Brammall Dont let your partners death destroy your 8 Ready to propser Caltex changes tack SMSF property dreams. By Robert Gottliebsen Operational changes at Caltex should 23 SMSF property the NRAS way eventually flow to earnings, and dividends. By Paul Thewlis and Margaret Hardy A government scheme has potential to add 10 Built up too much? value to the SMSF property equation. By Ian Verrender The building materials group Boral is finding the market conditions tough.
Publisher: Alan Kohler | Managing editor: James Kirby | Editor: Tony Kaye | Investment strategist: Adam Carr | Superannuation editor: Bruce Brammall | Chief reporter: Cliona O'Dowd
Eureka Report is published by Eureka Report Pty Ltd Swann House, Level 7, 22 William Street, Melbourne VIC 3000 Telephone 61 3 8624 3000 Facsimile 61 3 8624 3088 www.eurekareport.com.au
No they arent. They may be more expensive than banks in other developed nations, depending on how you measure expense. But Australian banks didnt follow their global peers into the abyss during the boom years because the Australian market is fundamentally different from those in other developed nations. So why compare them now? On a simple price earnings ratio, Australian banks are trading at 15.1 times this years earnings and 14.5 times next years projected earnings. Thats above the long-term average, the bubble heads claim, even nudging record levels. True. But it conveniently ignores the fact that interest rates not only are well below the longterm average but are sitting at record lows, with every indication they will trend even lower. In addition, Citigroup research indicates that our banks were trading at 16.1 times earnings in 2011 and 15.7 times earnings in 2012. On that measure, theyve actually become cheaper. If you compare the price of our banks to the overall market, again they are cheaper. The banking index is priced below the ASX 200 average of 15.6 times this years earnings and a whisker above next years projected 14.4 times earnings. The banks are much cheaper than industrials, priced at a whopping 16.5 times this years earnings and slightly better value than resources, which traditionally trade at a discount. 2. Credit growth has stalled
You cant argue with that. The latest figures from the Australian Bureau of Statistics and the Australian Prudential Regulatory Authority indicate that business lending has gone backwards and that growth in residential housing is the slowest on record. The only problem with that line of thinking is that it ignores the simple fact that, since the takeovers of BankWest and St George, just four banks dominate the domestic market, making international comparisons redundant. Unlike other jurisdictions, Australian banks are not price takers and have greater pricing power than their American and European counterparts. They hold 83% of all household mortgages. They have the wealth management industry tied up. They have large and increasing market shares in insurance. As a result, margin expansion is far more critical to earnings than volume growth. That explains the endless round of record profits during the past three years from each of the major banks during a period when almost every other industry outside of resources has been in crisis mode. Both ANZ and Westpac improved their margins during the March half and judging from Westpacs Gail Kellys comments last week, they plan to continue that trend. Apart from overall market growth, the stars have aligned for our big banks on almost every other measure. Impairments continue to improve. The domestic real estate market has stabilised and is showing nascent signs of
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recovery. Efficiency and cost cutting continues apace as the expansions of the immediate post-financial crisis era are integrated. While the European debt crisis continues to flare, the acute phase of the crisis has passed and Australian banks have used periods of relative calmness to lock in lower offshore funding costs. 3. Dividends are stretched Which bank?
How They Compare ANZ Price/Earnings 2012 15.1 2013E 14.1 2014E 13.5 Dividend Yield % 2012 4.6 2013E 4.9 2014E 5.2 Source: UBS CBA 17.0 16.0 15.2 4.5 4.9 5.2 NAB 14.2 13.8 13.4 5.3 5.5 5.6 WBC 16.2 15.1 14.5 4.9 5.1 5.4
No they are not. Payout ratios by our big banks have averaged around 75% of earnings. Traditionally, the ANZ has paid the least at around 65% or less but last week indicated it would lift that ratio closer to its upper limit of around 70%, indicating less likelihood of a major acquisition in Asia. Westpacs payout ratio last week lifted to as much as 85% for this year, although that was bumped up by a special dividend. Perversely, the slow credit growth the biggest alarm bell for the bubbleheads has allowed the banks to pay higher dividends. 4. The Australian economy is facing a possible recession
Commonwealth Bank It is difficult to find an analyst recommending CBA as a screaming buy. While most recognise it is well run and well capitalised, its share price performance of late has many thinking it is overvalued. But slow volume growth has paved the way for capital management in the form of a special dividend and it could follow Westpacs lead with the announcement of a special dividend on its full year results. CBA leads its peers on the number of products sold to customers, its cost to income ratio has declined, deposit funding has lifted and it retains the largest market share of home mortgages at more than 25%. Further official rate cuts therefore deliver the opportunity to expand margins which flow directly to the bottom line. As a negative, the Commonwealth is most exposed to share market volatility because of its position in wealth management and funds management operation. Westpac Long criticised for its multi-branding strategy, Westpac surprised investors with its improved earnings and special dividend last week. The analysts mostly rate it a hold. Like CBA, it has worked at cost reduction, margin expansion and balance sheet strengthening through improved deposit funding. While it as reduced its impaired loans to the best since the onset of the financial crisis, they are still well above pre GFC levels delivering the opportunity to further improve earnings. It also has surplus franking credits creating the possibility of further special dividends in the future. ANZ ANZs much vaunted Asian expansion strategy and its proposed transformation into a regional bank has held the promise of fabulous long term rewards while simultaneously restraining its share price growth. While the strategy has been in place for at least four years, a major acquisition has not eventuated and the bank instead has pursued its growth strategy in a far more measured manner. Its improved payout ratio indicates that it intends to continue along this path, thus diminishing the execution risk on a multi-billion dollar takeover. Greater competition in Asian markets, however, would mean that its regional operations may not deliver the type of returns available in Australia.
Global growth is weak and forecasts again have been reduced. Commodity prices are under pressure, problems are emerging in Chinas economy, the resources investment pipeline is about to peak and with the Australian dollar refusing to budge, the nation faces rising unemployment and shrinking corporate earnings. Anything is possible. But that worst-case scenario assumes the domestic currency will never fall, that lower interest rates will have no effect on non-resource industries and that the acute shortage of labour dogging our resources industry which is capital intensive rather than labour intensive suddenly will re-emerge as an oversupply of labour. Even if this scenario eventuated, it is likely the banking sector would ride out the storm better than almost any other. Each of the big four banks are well capitalised and barring a complete collapse of the Australian property market, are well positioned to ride out a recession. 5. Diversify your portfolio, reduce your weighting to banks
Into what precisely? Many industrials are more expensive, with even less reliability in regards to earnings and dividends. Resource giants are looking cheap. But a great deal of uncertainty over the direction of commodity prices has seen stock prices heading south for most of this year. BHP is looking particularly undervalued and the time may be approaching when shifting weightings into the big miners is appropriate but not just yet. Term deposits offer safety. But the yield is lower and there is no opportunity for capital gain. The return on government bonds offers the greatest safety. But the yield is at record lows and the opportunity for capital gains is limited precisely by those record low yields. There is not a great deal of fat left.
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With less reliance on residential mortgages and hence more exposure to business lending, ANZ is expected to benefit from any pick up on corporate lending. National Australia Bank The bank with the most attractive yield, NABs Achilles heel is its UK franchise. With the UK entering a possible triple dip recession, NAB appears stuck with the underperforming assets. But that delivers the possibility of capital growth as the UK eventually improves. In addition, on the domestic front NAB is heavily geared towards business lending and is the bank considered to best benefit from a recovery in this area. It recently, although quietly, abandoned its ambitions to be the lowest cost bank for consumers, indicating it was paying more attention to margin than volume growth. Macquarie The investment bank has shifted ground from entrepreneurial wheeler dealer to yield play. Lifting its payout ratio to 80% last week, the bank enjoyed solid investor support, and has seen a 45% lift in its share price in the past six months. Staff remuneration, however, remains exceptionally high, even for investment banks although Macquarie has reduced this and cut costs through a series of heavy staff layoffs. Its strategy of expanding into traditional investment banking in the US and Europe in the wake of the financial crisis delivers it significant earnings improvement potential in the longer term but has left it overexposed to the worst performing areas of the global economy in the immediate future.
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Similarly, there are simply no constraints on the demand side. The myth of heavily indebted Australian households has been well and truly smashed. Two-thirds dont have a
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mortgage or much in the way of meaningful debt, and of the 30% or so who do have a mortgage, the average debt outstanding is $200,000 and RBA estimates suggest 50% are ahead on their repayments 20% by one year or more. More to the point, and after yesterdays decision to cut interest rates to record lows, the capacity to service debt is the best it has been on record.
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Roger Montgomery is the founder of The Montgomery Fund. To invest, visit www.montinvest.com
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For the last two or three years Caltex has been spending retained earnings to send up more and more distribution centres to increase its share of the more lucrative oil supply
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contracts. And that process is going to continue, but it doesnt require virtually anything like $1.30 a share to fund. The best way to show the way Caltex is looking at its future business is to look at a series of charts which highlight just what is ahead of this company.
Look at that growth rate in marketing and distribution in chart 2. That growth is likely to continue.
I must emphasise that in the year ahead there will be big charges as a result of Kurnells closure, and the reduction in stock level is a cash item which does not boost the bottom line. I cant see any great immediate joy in dividends, but the momentum is clearly there and this is a stock that could easily move itself up to 15 times current earnings and pay $1 a share in fully franked dividends. The gross yield would exceed 6% and, as the graph above shows, this is a company that has grown regularly over a long period of time in its marketing and distribution, but this growth rate has been absolutely masked by the fluctuations in the oil refinery business. That is about to stop. There are very few companies in Australia that are growing and that are set to pay much higher dividends, albeit in a few years time. What can go wrong? It is possible that the majors like Shell and BP and Mobil could suddenly start a price war, but I dont think that is likely.
Not many companies have such a strong and consistent growth rate for two of their three main products, and with the third product (gasoline) people are moving to higher-quality higher-margin forms see graph number four .
The price wars are taking place in the gasoline business, but even there the supermarkets are not as aggressive as they were in years gone by. So Caltex is not a stock where somebody wants to make a quick dollar, but it is the sort of stock you can put in a portfolio and know that once the Kurnell turmoil situation is out of the way it will be a stock that will grow profits and grow dividends with not a great deal of risk. It is one for the oak chest.
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Boral Earnings/share Dividend/share EPS growth DPS growth Price/Earnings Dividend Yield Source: Broker consensus 2013 11.4c 9.1c -52.2% -17.6% 39.2 2.0% 2014 26.0 14.3c 129.1% 57.9% 17.1 3.2%
Among the analysts, opinion is deeply divided, although the optimists at this stage hold sway. Despite this weeks downgrade, three major broking houses, Deutsche Bank, UBS and Credit Suisse, continue to rate the stock a buy, with target share prices ranging between $5.10 and $5.38. JP Morgan upgraded its recommendation to hold in the wake of the announcement with a $4.40 price target while BA Merrill Lynch downgraded to a hold. Those in the buy camp firmly believe that recovery in Borals key markets will fuel a sharp rise in earnings which, when coupled with the companys strong focus on costs, will deliver the goods for shareholders. And if this weeks interest rate cut has the desired effect, boosting housing and construction while weakening the dollar and improving Borals foreign earnings position, then the company may see serious benefits. The most bearish is Citigroup. It has long had a sell recommendation on the stock, with a target price of $3.40. While noting the cost savings program is well underway, the broker questions what the position would be like without it. It adds that the key reasons for its negative view of Boral and the sector in general has been not just the weak housing market, but increased competition from existing and new entrants and from imports and the difficulty that will present in terms of future price rises.
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While the company has a fairly clean balance sheet, it has $5.7 million worth of intangibles sitting on its books that is related to goodwill on acquisitions. The intangibles constitute 34% of Richfields total assets. On the upside, Richfield managed to post a 68% increase in net profit to $272,000 in the financial year ended December 2012, even as the shipping industry was hammered by the slowdown in global trade and oversupply of vessels. The turmoil caused Richfields revenue to fall 8% to $6 million, but good cost control enabled the company to bolster margins considerably. That is quite impressive given that 65% of its listed global peers posted a loss for the latest reporting period. Jetset Travelworld (JET) The travel agency is not only trading at a similar level to its cash backing as Macmahon, its also in the midst of a restructure to cope with challenging industry conditions. A drop in the price of airfares, intense online competition, and big cuts in government spending on air travel (government is a large client of Jetset) contributed to an 11% drop in its first half total transaction value (TTV, value of airline tickets, accommodation bookings, etc that is processed through Jetset) to $2.5 billion and a 5% dip in adjusted profit before tax to $18 million. I cant see these pressures abating significantly over the medium term, but unlike media, we know that the traditional travel agency model can work, thanks to Flight Centre. To Jetsets credit, it has achieved cost savings above what most analysts had expected, and this meant its margin between revenue and TTV expanded 0.3 of a percentage point to 5.4% for its retail division and 0.5 of a percentage point to 13.7% for its wholesale business. I dont see a positive re-rating of the stock happening anytime soon given that it will take two years for Jetset to complete its strategic review; but the fact that it has nearly $170 million cash, no net debt, a cache of well-known brands, an expected grossed-up yield of around 9%, and a modest forecast price-earnings multiple of 6.5 times for 2013-14 means it might be worth buying if the share price dipped towards 35 cents. The illiquid stock closed at 40 cents on Tuesday. Jetsets top three shareholders hold around 86% of the stock. Richfield International (RIS) The microcap shipping services company is a more extreme example as it holds three times as much cash as its $3.2 million market cap. One would think debtless Richfield would make a tempting takeover target just for its bank balance alone, if not for its managing direction, Chak Chew Tan, controlling around 37% of the company. Tan and his wife are on the company board and the next three biggest shareholders have another 46% of the stock. But liquidity is not my biggest concern its transparency. Richfield declined an interview request and not much is known about its Singapore-based management team or its other key Asian investors. Richfield is leveraged to any improvement in shipping demand and management is expecting moderate growth in shipping this year. The 26% rebound in the Baltic Dry Index, which reflects the price to ship cargo internationally, seems to support managements outlook. Management better be right. If conditions deteriorate, there is a real risk that Richfield will have to write down a portion of that large intangible that is on its balance sheet. Risk tolerant investors who are unconcerned about potential governance issues might find the stock an attractive addition to their small cap portfolio, but for the rest of us, Richfield should be kept on a watch list for the next six months to see if management has a plan to unlock shareholder value at the next annual general meeting. The stock has doubled in the past 12 months and is trading around 5 cents, but this is still well below the companys net tangible asset value of 12 cents a share.
Brendon Lau is the editor of Uncapped and may have interests in some of the stocks mentioned in the article.
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The European experience is the best example of whats happening, and a pointer to what might happen in Australia because of plans to link the local carbon emissions price to that of Europe. The coal price has collapsed there, thanks to a combination of recession and an excess supply of carbon emission certificates. Five years ago, a certificate to emit one tonne of carbon dioxide (with coal the major producer of that gas) cost 35 and acted as a major disincentive to investing in coal-fired power stations. Last week, the price of a certificate was around 3, close to a record low and a price which incorporates a 35% fall on a single day, April 16. On that day, the European Parliament voted down a plan to temporarily withdraw 900 million carbon emission certificates, partly because of concern that such a move would force up the price of electricity and prolong the regional recession a prime case of economy vs environment. One result of this botched government policy is that big energy producers were encouraged to invest heavily in environmentally-friendly power sources, only to find that they are now in financial trouble because their wind, solar and gas power cannot compete with coal, because carbon emission permits are cheap. Last month Reuters reported that power generators were losing almost 14 per megawatt hour from electricity produced using gas, but making a profit of 10 per megawatt hour from burning hard coal and 20 per megawatt hour from burning the cheapest and most polluting form of coal, lignite (or brown coal). Germany, the renewable energy leader in Europe, has been forced to turn increasingly to coal to achieve power-system reliability, mining 5% more coal in 2012 than in the 2011. The biggest electricity generator, RWE, has started production from a big new lignite-fuelled power plant near Cologne. Australia's coal outlook Australia is yet to feel the effects of Europes collapsing carbon emissions system because our system is still operating at a fixed price of $23 a tonne, which is set to rise
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over the next two years before becoming a freely-traded system in 2015. But, without more government tinkering with the system, the Australian carbon price could collapse as it has in Europe with one consultancy, RepuTex, forecasting a possible fall to as low as $1.50 a tonne, triggering a recovery in local coalfired power generation. Europe and Australia are not alone in struggling to manage energy policy in a world facing a glut of energy rather than the shortfall predicted by Peak Oil. In the US coal is also making a comeback after last years demand crash caused by a collapse in the price of natural gas. This reflected that countrys shale-gas revolution, which encouraged power generators to switch from coal to gas. Over the past few months, the price of gas has doubled from its low of less than $US2 per million British Thermal Units to more than $US4/mbtu, largely as a result of the recovery underway in that countrys economy with low energy costs a contributing factor. Railway cargoes are a clue to the return of coal in the US, with carloads of coal carried on the seven major rail systems up 22% in mid-April compared to the coal-car count at the end of 2012. Without the same government interference in the power or carbon-emissions market US electricity generators are reacting purely to price signals, and right now coal is a clear winner compared to other fuel sources. For Europe whats happening in the US is compounding an already tricky situation, with major industries such as Dow Chemical shifting production capacity back to the US to capitalise on power prices which are up to 50% less than whats being charged in Europe. It was partly fear of losing more industry to the US that caused members of the European Parliament to vote down the plan to withdraw the 900 million carbon emission permits because it would make European electricity event more expensive as the US drives down its power prices. Champions of renewable energy and opponents of coal are facing stiff headwinds in their crusade against a polluting fuel, and while its too early to say theyre losing the battle there is mounting evidence that industry and households prefer cheaper power (even if coal-fired) to high-cost but ethically-pure renewable power. Asian customers for Australian coal do not appear to be even considering the moral dimension, with demand for steelmaking (metallurgical) and electricity generating (thermal) coal continuing to rise. A healthy appetite Yesterday, the chief executive of the small underground coal gasification developer, Cougar Energy, predicted a healthy appetite for Australian coal in Asia. Rob Neill said he had received a strong response from potential Asian investors in Cougars planned metallurgical coal mine in Queenslands Bowen Basin. That view sits comfortably alongside Whitehaven Coal reporting record monthly rail shipments as it finalises construction of its new underground mine at Narrabri in NSW, despite (or perhaps because of) the thermal coal price sitting at a low $US87 a tonne making it an extremely competitive fuel. Clouded as it is by market and government pressures, the outlook for coal as an investment is not as grim as it might have appeared last year when carbon emission prices appeared to be rising (but are now falling) and Australian exporters were being hit by the low coal price and high Australian dollar. The dollar problem has started to ease thanks to yesterdays interest rate cut, and could ease further if the Reserve Bank becomes fully engaged in the global currency war. Coal demand, if not yet price, is reacting to Europes renewed appetite for coal as a low-cost power source, while the threat of US coal exports hitting world markets is easing as its power utilities switch back from gas to coal. Forecasts for coal prices remain subdued. Commonwealth Bank, in an April 30 research report into Whitehaven Coal (which included a neutral rating) tipped thermal coal to trade around $US89 a tonne this year, rising next year to $US96/t, and $US99/t in 2015. In an earlier report on BHP Billiton, CommBank tipped metallurgical coal to fall from $US183/t this year to $US169/t next year before rising to $US192/t in 2015. Environmentally, coal might be public enemy No.1 but, in the real economy, it is reclaiming its status as the low-cost fuel of choice with government attempts to price it out of the market proving futile, so far.
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Noteworthy is that Apple was able to set a weighted average bond maturity for $17 billion at a weighted average yield of 1.811%. In this raising people masquerading as capital managers provided Apple with $3 billion for 30 years at 3.85% fixed. The money was not raised by Apple for investment but rather to return capital to shareholders. That alone should have resulted in Apple paying substantially more for this debt then it did. But we live in absolutely crazy times and it suggests an immense opportunity for the Australian government. My point is simple. If world capital managers are so bereft of places to invest, then the Australian government should have the fortitude to access this capital at historically low rates. For instance, imagine if the Australian government borrowed $50 billion of 30-year capital to create a fund for the National Infrastructure and Development. The cost of funds of (say) 3.5% p.a. fixed for 30 years should be well covered by the returns on strategic investments across roads, rail, ports, airports, learning institutions and hospitals. Those strategic investments would propel growth, generate employment and translate into higher tax revenue. The investment returns above cost could be diverted into our National Disability Scheme. Economic growth and a significant social policy initiative could be funded away from simply raising taxes. Sounds logical, but dont expect that to be announced next Tuesday night. The missing link in the worlds QE policy is the direction of the newly created capital into growth projects. Filling the debt holes of governments is not enough. History shows that government debt can only be dealt with in two ways. The preferred route is via growth, and the alternative is default. In 1945 Australian government gross debt stood at over 150% of GDP. That debt did not stall Australias growth and we did not default. Rather, a sustained period of economic growth resulted in the debt being easily managed down.
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Australia was then, and is still now, a developing economy that is hampered by a lack of vision rather than a lack of opportunity. European solution creates a bond asset bubble The low-cost borrowing opportunity above is absolutely caused by QE across the world. Indeed, last week the ECB introduced a new concept that has potential to blow more air into yield markets, and investors need to be aware that interest rates may well go lower. John Abernethy is the chief investment officer at Clime Investment Management. If you are a sophisticated investor, wholesale investor or have $500,000 or more to invest, Clime is offering you a free portfolio assessment or opportunity to discuss your portfolio and investment options with John Abernethy. Click here to register your details.
Source: ECB, Fulcrum Asset Management The above chart shows that the ECB has a number of arms to its policy settings. In particular, it sets the rates it will pay on bank deposits with it (now zero) and the rate it will lend to banks who need liquidity (1.5%). Last week the ECB declared that it will consider dropping deposit rates to a negative rate and said it is prepared to lend unrestricted amounts to banks for as long as the debt crisis is maintained. These are extraordinary statements and it explains why the junk government bonds of Europe are rallying. Italian 10-year bonds are now yielding below 4% despite the massive government debt load and its declining economy. A similar picture is seen in Spain despite its 26% unemployment. In normal circumstances default would be very possible in Italy and very likely in Spain but these are not normal times. The ECB is deliberately driving European banks away from depositing funds with it and pushing them into bonds across Europe. Further, its unlimited lending facility is presenting banks with an interest margin when they buy high-risk bonds. But these high-risk bonds are underwritten by the ECB and so we have a fortuitous circle that has no end in sight. The result is that yields in Europe are tumbling as they are in the US and Japan. Apple cleverly became a beneficiary and so will the owners of the securities held in my income fund. Indeed, after a brief pause I suspect that high-yielding shares will go higher and the perpetual hybrids of Australand (ASX:AAZPB) and Multiplex (MXUPA) will also move much higher in price. Remember, this is not about the rationale pricing of risk but the perverse result of monetary policy that is not supported by fiscal strategy. There will be a time to jettison yield securities for either the safety of cash or better, pure equity opportunities but not just yet.
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You can see from the chart that when the advanced economies go into recession (the shaded columns) we tend to too. Of the five synchronised global recessions since the 1960s, weve shared in three of them. The 2000-01 period and the GFC were the major exceptions, although our economy didnt escape unscathed and slowed sharply. Now, look to the far right of the chart and note the divergence in growth rates. Australia is still experiencing reasonable growth rates while the advanced economies (as a group) struggle. In addition to that, both the International Monetary Fund and OECD dont expect much to change, with growth rates over the next two years averaging 1.7% (1.2% this year and 2.2% next). These are still effectively recessionary growth rates. This bodes ill for us, as historically Australia has only been able to maintain solid growth rates if advanced economies posted growth of 3% or more. Now, of course, many of you will have probably already noted the fatal flaw in the above its outdated and reflects the old world. In the new world, we must include the rise of the developing world China, India, Brazil etc. As we already know, China et al have changed the world enormously over the last decade and the above chart no longer captures the true dynamics. This doesnt stop people trying to dismiss this fact though by noting that China is not immune to economic cycles, or that it is headed for slower growth anyway even a hard landing. Again, comments like these miss the point, as will become clear below. Chart 1 made sense, and our current economic obsessions with austerity and stimulus and the old world (and so tepid global growth) could be justified, when the advanced economies made up the vast bulk of the global economy. Over the decades it has fluctuated between something 7590% of the global economy and about the same again terms of a contribution to growth. The thing is, these days the advanced economies make up only 50% of the global economy, and in recent years have only provided about 15% of its growth.
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of our major trading partners was 4%, we would have all been very excited and we should be as equally excited now.
This suits Australia perfectly, because we need to remind ourselves that the vast bulk of our trade is actually with the developing world now almost two-thirds. Thats a far cry from the previous 50 years or more when at least 50%, sometimes as high as 70% of our exports, went to the UK and US. Even in the 80s the US, Japan and UK accounted for 50% or so of our exports cheque, and two-thirds of our exports went to a US-centred OECD . Thats now something like 40%. That were not reflects in part the fact that weve become conditioned to extraordinarily strong growth outcomes for some of our larger new trading partners in the developing world, and especially China. It also in part reflects our inability to adapt to the new global economic reality. Were used to double-digit growth rates in some cases, and anything below that is disappointing. But this is unreasonable, as it overlooks the extraordinary wealth gains weve seen for those countries over that time. Chinas economy, for instance, is more than twice the size it was in 2005. The developing world has grown so fast that it is now as wealthy in terms of GDP as the developed world and this has all happened in less than a decade . So does it matter that average growth will slow to 4.1% from a pre-GFC average of 5.5% over the next two years, when countries like China are twice the size? No. And, in any case, our major trading partners arent just developing countries. The above growth rate of 4% includes some big advanced economies as well the US, UK and Japan. Even so, were still pumping out 4% growth in aggregate and are hitting that magic 4% line that you see in chart 1. The implications for growth here are fantastic, whichever way you cut it. If you recall last week, in my article Recession calls are ringing hollow, I discussed the idea that a recession in Australia was a low probability, even in the absence or unwinding of the mining boom. Mining investment only accounts for 6% or so of our economy after all, and while we may have had 100% growth per year for nearly 10 years on the way up, you can appreciate were not going to see falls of 100% per year. Thats not mathematically possible. The fact that our trading partners, who provide the vast bulk of global growth, are now expected to post ongoing strong growth is another reason not to expect weak growth outcomes over the forecast horizon.
Thats not to say the advanced countries are unimportant Japan is still our second-largest export partner (22%) and the US and the UK between them take an additional 10%. But the developing world is by far the greatest share of our export wealth, and the US isnt doing badly in any case as we found out on Friday. Now, at this point we need to take another look at chart 1. You can see that when the growth of our major trading partners, or what used to be our major trading partners back then (the advanced economies) experienced growth of around 4%, we typically had strong growth in Australia. Boom times actually. The good news for Australia now is that this is exactly what is forecast not for the advanced economies as a collective, but for our new major trading partners. In the table below Ive shown growth of our major trading partners as forecast by the IMF (reweighted according to their importance to Australia as an export destination) alongside advanced economy growth. As you can see, growth is expected to be around 4% over the next two years. Dont forget, our major trading partners collectively account for over 50% of the global economy and closer to 90% of its growth. They take the vast proportion of our exports. So does it matter that they will grow at 4% over the next few years? You bet. The position is very similar to that of the OECD though the 1960s, 70s and 80s. Back then, if growth
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It wouldnt be in the realms of the ridiculous that Jim could lose the vast majority of his $200,000 in super. Potentially, if gearing was included and the stars werent aligned, he could potentially lose all of it. For example, if, due to a property market downturn, the property had dropped by 20%, then it is now only worth $400,000. There were $15,000 in sales costs (and $30,000 was already blown up in stamp duties on purchase). Jim could suddenly have to pay out nearly $400,000 (probably to himself as dependant), but a good portion of his $200,000 could have been lost in the transaction fees. Imagine then, if the whole thing had have been magnified by gearing. Instead of it being a $600,000 super fund on which $500,000 was spent on a property, take a $300,000 super fund on which $200,000 was spent on the deposit of a super fund that, with a loan, had purchased the $500,000 property. And then, the property market had collapsed and Jane had died. There may be no equity left in the investment property itself. Jim might be paying himself out something, but there would be little to nothing left of his own super. The solution Insurance that is structured and owned correctly. Please note: This is a particularly complex area. And anyone seeing some danger signs in their own circumstances from todays column is advised to seek independent financial advice. A solution is for Jim to own some life insurance on Janes life in the SMSF to ensure liquidity in the event of her death. That is, an insurance contract for $400,000 on Janes life, owned by Jim, would then be payable to the SMSF, specifically to Jims superannuation account. The insurance is then used to, in effect, swap the property ownership that Jane had for the insurance sum. This may allow her super account death benefit to be paid out in the event of her death, without the property being sold. It will come down to the ownership of the insurance policy itself and potentially the flexibility of the rules of the trust deed, in whether it will allow ownership of the insurance premium by another member over another members life. Check your trust deed You will also need to check the rules for your super fund trust deed, as to what they allow for when it comes to insurance, various ownership options and the allowability, potentially, for liquidity reserves. In some cases, for insurance strategies to work properly, the trust deed will need to allow for the segregation of assets between members.
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In any case, the huge surge in interest in property ownership in super is, undoubtedly, a good thing. However, it brings with it many risks. The increased risks associated with gearing is a major new issue. But even if you get all of those things right, with the right intentions, a badly timed call from the heavens could send your best laid plans into a tailspin.
The information contained in this column should be treated as general advice only. It has not taken anyones specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance. Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au
The Institute of Public Accountants (IPA) says Australians need to think about how the compulsory superannuation guarantee charge (SGC) rate, due to increase from 9% to 9.25% on July 1, will be funded when it comes into effect. There are only two possible avenues for funding the increase in the SGC; one, employers will do so, adding to their cost structure or two, employees must sacrifice some of their pay packet, said Andrew Conway, chief executive of the IPA. Self-managed super fund (SMSF) administrator SuperGuardian has launched a second SMSF product in a bid to attract investors looking to take control of their investments. Called Xpress Super, it will provide an SMSF service to rival the top end of the market with fees positioned at the lower end, said chief executive officer Olivia Long. La Trobe Financial has announced the winners of its annual CIO/COO awards, with a presentation at Melbournes Eureka Tower. Chief Investment Officer of the Year went to Gerard Parlevliet, chief investment officer of Commonwealth Bank Group Super, while Graeme Arnott of First State Super took home the award for Chief Operating Officer of the Year.
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comparison that the property is a new one purchased off the plan. The purchase price is $300,000 plus there are additional costs of $10,000 (egg. stamp duty and legal costs) and the SMSF borrows at an 80% loan-to-value ratio LVR. Once the purchase is settled, the SMSF is left with a $300,000 property, $130,000 in cash and a $240,000 loan. Thats a net asset position of $190,000 with $10,000 lost in acquisition costs. The income of the SMSF in this second option includes the same employer contribution. Income from the cash is reduced because some of it has been spent on the property but the SMSF is now earning rental income. Gross income of the SMSF has therefore increased from $20,800 to $32,300. However this isnt the full story, as we need to look at expenses and tax. The property and loan incur costs including interest, agent fees, rates and maintenance. In summary the SMSF earns more gross income, has more expenses, pays less tax and earns less after-tax compared to our benchmark option. The after-tax income after buying the property is $11,171, compared to our benchmark that was $17,680. Therefore after the first year the SMSF has a closing balance on its assets thats over $16,000 less than the benchmark option. Finally we have the NRAS option, where the property the SMSF purchases is exactly the same as the previous property but is approved for inclusion in the scheme. The purchase costs are the same but the rent is reduced by 20% and the SMSF receives in return the NRAS incentive (which is $9,981 this year). We see the SMSF earns a lower gross income than the previous property option, has similar expenses and pays the least tax of all three options. The after-tax income of $18,602 is about $1,000 higher than the benchmark option. Therefore, taking into account the purchasing costs of the property, after our first year the SMSF has a closing balance on its assets thats about $9,000 less than the benchmark option. OPENING ASSETS Property Cash TOTAL Employer super Investment income Rent income GROSS INCOME Deductible interest Rental expenses Depreciation TAXABLE INCOME Tax (15%) Add back depreciation NRAS incentive AFTER TAX INCOME CLOSING ASSETS Property Cash Loan TOTAL $217,680 $0 $217,680 $300,000 $141,171 $201,171 $300,000 $148,602 $208,602 $0 $200,000 $200,000 $10,800 $10,000 $0 $20,800 $0 $0 $0 $20,800 -$3,120 $0 $0 $17,680 $300,000 $130,000 $430,000 $10,800 $6,500 $15,000 $32,300 -$17,040 -$3,000 -$5,000 $7,260 -$1,089 $5,000 $0 $11,171 $300,000 $130,000 $430,000 $10,800 $6,500 $12,000 $29,300 -$17,040 -$3,000 -$5,000 $4,260 -$639 $5,000 $9,981 $18,602 No property Non-NRAS NRAS property property
-$240,000 -$240,000
At this stage weve shown that NRAS property is looking better than non-NRAS property, but it still doesnt look too attractive against our benchmark non-property option. But here enters the juiciest part of the SMSF property story leveraged capital growth. Lets take the example weve been using where the SMSF is investing $70,000 in either property or some other asset. For ease of comparison, lets assume both the property and the unleveraged equity grow at 5% per annum. In the graph below youll see the property equity is behind in year two because of purchase costs, but when the SMSF invests in property its benefiting from growth on a larger asset (5% of $300,000) compared to unleveraged equity (5% of $70,000). The property option in this example sees the SMSF over $100,000 ahead at year 10.
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direct property investment as too much work but for those who know and love property investing, the SMSF route could be very advantageous and an NRAS property could be the icing on the cake. Those approaching retirement age in a decade or so are realising their 9% super contributions into retail or industry super funds just wont be sufficient. The leveraged growth of property and the advantageous cash flow and tax benefits of NRAS could combine to give their super a strong push to retirement.
Reproduced with permission from Australian Property Investor magazine. www.apimagazine.com.au. Paul Thewlis and Margaret Hardy are partners at Onyx Wealth. Property and other equities dont grow at the same rate at the same time. So potentially a non-property asset could grow faster than property. How much would the SMSFs unleveraged equity need to grow to match the property? The answer is 13.3% over 10 years, which experience suggests would be an extraordinary performance. Its possible the SMSF would need to invest in high-risk assets to obtain this result. The leaves us with the NRAS story, which says the NRAS property offers the same leveraged growth but with better cash flow potential. One outcome of this better cash flow position is that a SMSF can often borrow at a higher loan to valuation ratio when buying an NRAS property than a nonNRAS property. The Balancing Act To make the NRAS property investment scenario work there are a number of factors to consider when setting it up. 1. 2. 3. A higher loan LVR will give higher leverage. The value of non-property assets needs to be high enough to allow the SMSF to be liquid. Income (egg. member contributions, rent, dividends and interest earned) into the SMSF needs to be high enough to ensure it meets the lenders serviceability requirements. Enough negative gearing to reduce or eliminate the SMSFs tax obligation may be advantageous. Too much negative gearing will mean the SMSF is unable to access tax benefits by having ongoing tax losses. Positive cash flow property is preferable as its adding to your SMSFs assets, not using them up in holding costs. The property sale should be timed to obtain the desired capital gains tax position.
4. 5.
6.
7.
Each SMSF will need to balance these factors to optimise the outcome and an NRAS property will have a different balancing position to non-NRAS property. To make this all work you really need to know what youre doing. You need to work with a professional who has experience in SMSFs and property. The choice of investing in property or any investment does come down to the personal choice of the members of the fund. Some will see
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Tom Elliott, a director of Beulah Capital and MM&E Capital, may have interests in any of the stocks mentioned.
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Will overseas income be included under the proposed $100,000 earnings tax change? My husband and I are Australian citizens and residents but receive lifetime annuities from overseas, which are currently fully taxed at our marginal tax rates, apart from a small deduction based on the undeducted purchase price of these annuities. Under the proposed new rules, would the taxation of our overseas annuities remain the same? We have also established a DIY super fund here in Australia. Would the earnings from our overseas funds we do not know what these are as we do not receive them be added to the earnings of our DIY fund in determining our overall earnings above the $100,000 limit? Answer: Under the proposed policy the $100,000 relates to the income earned on an individuals pension superannuation account within an Australian superannuation fund. The income you earn from your foreign pension must be included on your personal income tax return, but has no effect on the income earned by you in your pension account in your SMSF. Can my fund buy my daughters unit? My daughter is in a unit she owns and is in the process of selling it to move to a bigger house due an addition to the family. I would like to buy it outright at market value from my pension fund of the SMSF, which I jointly hold with my wife. The unit will then be part of my portfolio and will be rented properly at market value through an agent to a third party unrelated or known to us. The rent will be credited to our SMSF as an income. Am I doing this within the rules of the SMSF? Answer: There is a specific ban on superannuation funds buying assets and investments from members and related parties. The only exceptions to this rule are publicly listed investments, such as shares, and commercial real estate property. Your daughter would be regarded as a related party of yours, which means that your SMSF could not buy the unit she owns. It would not matter if a market valuation is obtained for the unit and the market rent that needs to be charged, and that the unit will be left through an agent to an independent third party. If your SMSF purchase the unit you would be in breach of the investment rules and would be forced to either dispose of the unit or could be classed as a non-complying fund. When this occurs the income and all of the assets of the fund has tax levied on it at 46.5%. When is the 45-day holding period calculated from? When you purchase shares, is the 45-day holding period calculated from the date the shares were purchased or the settlement date? Answer: According to the ATO, when calculating the 45-day holding period you should not count the day on which the shares are purchased and the day on which they are disposed. This in a practical sense means, taking into account that the shares must be purchased on day one, that to meet the 45-day rule the shares could not be sold until after day 46. Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Note: We make every attempt to provide answers to readers questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation. Do you have a question for Max? Send an email to askmax@eurekareport.com.au
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30 Collected Wisdom
By Cliona ODowd
Summary: Analysts rate Woodside a buy, but recommend selling JB Hi-Fi, while Tabcorp, GPT Group and AGL are holds, the newsletters say. Key take-out: There has been much debate over the big fours rising share prices, but analysts say ANZ still has more to give. Key beneficiaries: General investors. Category: Portfolio management. This is an edited summary of Australias best-known investment newsletters and major daily newspapers. The recommendations offered represent the views published in other publications and may not represent those of Eureka Report. Woodside Petroleum (WPL) Investors on the hunt for yield are viewing Woodside Petroleum in a new light following its decision to increase its target dividend payout ratio from 50% to 80% and its plans to maintain the higher payout ratio for several years. The oil and gas player certainly delivered the goods in its latest trading update, tempting investors further with a oneoff fully franked dividend of $US63 cents per share. The share price surged above $38 as investors rushed to buy in before the ex-date on April 30. But for those who missed out on the special dividend, fear not. The newsletters are convinced Woodside has more to give and say those seeking a balanced portfolio should consider buying in. Forecasts indicate shareholders could see a yield of about 5% to 6% this year. Leaving dividends aside, Woodside saw a solid increase in production in the March quarter. Production rose 55.3% on the previous corresponding period, to 21.9 million barrels of oil equivalent (MMboe). The production results were largely due to its new $US14.9 billion Pluto liquefied natural gas (LNG) project in Western Australia, which is at 90% capacity, and continued strong performance of the North West Shelf business, the oil and gas player said. The investment press has also taken the news on the deferral of projects in a rather positive light, noting that shareholders can reap the benefits of the higher dividends now, and be somewhat assured that Woodside will pursue development opportunities at a time when costs arent so high. Tabcorp (TAH) Tabcorps third quarter trading update broadly met market expectations last week. For now, the newsletters place the gaming business in the hold category due to modest growth and stable revenue. Revenue increased to $480.3 million in the quarter, a 2.6% rise on the previous corresponding period, while year-to-date revenue came in 2.2% higher, at $1.5 billion. The company looks to have largely shrugged off last years loss of the Victorian pokies franchise, with its new gaming services division tracking along at a healthy pace. Tabcorp holds a number of long-term licenses that ensure continued reliable earnings and cash flow. In April, the Queensland government extended Tabcorps license to operate Keno in the state until 2047, while it holds similar licenses in New South Wales and Victoria that expire in 2022. However, the newsletters note the increased competition penetrating the market through the internet as consumers increasingly make use of mobile devices and are concerned over the effect it will have on Tabcorps numbers in the future.
GPT Group (GPT) In its first quarter trading update, GPT Group reiterated its target of full-year earnings-per-share (EPS) growth of at least 5%. The group confirmed the distribution payout ratio will remain at 80% of realised operating income (ROI) ie profit less non-recurring items. The group has suspended its dividend reinvestment plan for now, and distribution for the quarter was 5.1 cents per share, a rise of 10.9% on the corresponding period in 2012. GPT also announced a move to half-yearly distributions from July 1, which it said would deliver cost savings. The newsletters broadly view GPT as a hold for the time being. The groups total portfolio performed well in the quarter, with the retail property portfolio recording continued high occupancy of 99.7%. The logistics portfolio occupancy came in at 98.5%, while occupancy for the office portfolio was slightly lower at 95.7%. Investors and newsletters keen for any further comment on the status of its takeover bid for Australand got some insight from chief executive Michael Cameron. He said GPT is committed to advancing a proposal, but it is important to remind you that we don't have to actually do the deal to achieve our strategic goals, he said.
AGL Energy (AGK) AGL Energys share price took a hit last week after the company lowered its profit guidance for full-year 2013 on the back of increased retail competition and soft wholesale market conditions. The newsletters still see potential, and rate AGL a hold. Underlying profit for the full year is now expected to be in the lower half of the guidance range of $590 million to $640 million. AGL said in the update that it had seen unprecedented customer churn volumes in Victoria and New South Wales due to intense competition and has started to place more emphasis on retention to counter heavy
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competitor discounting. There are reports that Origin is offering discounts of up to 25%. Separately, the energy retailer noted increased solar penetration and declining manufacturing as reasons behind the softer wholesale prices. Still, the newsletters say there are a number of reasons to remain positive on AGL. These include the recently purchased Loy Yang generator, which has provided benefits of scale and improved coverage of retail load with owned and controlled, South Australias recent deregulation of electricity pricing, and its position as one of the countrys biggest renewable energy generators.
JB Hi-Fi (JBH) JB Hi-Fis update to its full-year guidance came on the back of stronger-than-expected sales in the half year to date. Its share price rose sharply on the news, but the newsletters are less than convinced and rate it a sell. The retailer said that sales in fiscal 2013 are now expected to be around $3.3 billion and net profit after tax (NPAT) is forecast to be between $112 million and $116 million. This represents a 7% to 11% increase in NPAT on the previous year. Although the retailer recorded a lift in sales in the first four months of the second half, year-to-date sales are down 1.3% due to a 3.4% decline in like-for-like sales in the first six months. Despite its low-cost business model delivering a competitive advantage over its peers, the newsletters believe increased competition and price deflation remain long-term risks. Online competition is seen as a big threat, as consumers increasingly take advantage of the cheaper products on offer, while plans by retail giants Costco and Woolworths to compete aggressively in the sector are viewed as a further negative. The newsletters are also unsure of what growth opportunities lie ahead for the retailer apart from the rollout of new stores, and rate the investment risk as high.
Watching the Directors Caltex Australia managing director and chief executive Julian Segal was a big seller last week, offloading 325,412 shares at $20.90 apiece, bagging himself a healthy $6,833,066. Elsewhere, M2 Telecommunications founder Vaughan Bowen sold 1,000,000 shares, collecting $5,445,377 in the process, while chairman Craig Farrow offloaded 95,000 shares for $527,250. Bowen still holds over $28 million worth of stock, while Farrow holds about $3 millions worth. Finally, Atlas Iron managing director, Kenneth Brinsden, bought 212,000 shares for $183,486 in on-market trades during the week.
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32 Research Watch
By Luke McKenna
Summary: This weeks Research Watch covers a range of investment snippets, including the top dividend destinations, banks vs resources, small caps, the Nikkei and short skirts, Dow 15,000, Dr Copper, and Buffetts market forecasts. Key take-out: Credit Suisse analysis shows the Australian market offers the fourth highest dividend yield and the highest payout ratio within the G20 markets. Key beneficiaries: General investors. Category: Portfolio management. Despite all this talk about the hunt for yield, it turns out you dont need to venture too far at all. Credit Suisse has just named Australia among the top dividend destinations in the developed world, and lists the individual stocks that will help you capitalise. There arent any banks on that list, which could give weight to Goldman Sachs call to make the switch from hell out of our big four, and into mining shares although others suggest you should be thinking much smaller. Meanwhile, what Dow 15,000 means for you, and what Nikkei 13,000 means for a pop group that uses the index as a wardrobe cue. Dr copper looks ill and margin debt is hitting new highs, leading hedge fund manager Leon Black to sell everything thats not nailed down. But on video, fresh from Berkshire Hathaways annual meeting, Warren Buffett makes a case for stocks at record levels (he remembers Dow 100). The best dividend stocks in one of the best-yielding markets... Companies present in both the capex and upside screens: Adelaide Brighton (ABC), AGL Energy (AGK), Brambles Limited (BXB), Fantastic Holdings (FAN), OrotonGroup (ORL), Pacific Brands (PBG), Premier Investments Ltd (PMV), Qantas Airways Ltd (QAN), Rio Tinto (RIO). (Credit Suisse, May 7) Avoid the bank bubble with the switch from hell...
The banks will go higher if the US keeps running, but their long period of outperformance for the banks Id say its over or very near an end. Banks have outperformed resources by +97% in the last 28 months and its time to chase these (very) cheap resources. For me its time to begin the switch from hell time to go back into those beaten up resources do you seriously see this going too much further!!!! (Richard Coppleson of Goldman Sachs, May 6) But dont neglect the small caps...
The Australian market offers the fourth highest dividend yield and the highest payout ratio within the G20 markets. We have screened Credit Suisse coverage according to whether they offer high and sustainable dividend yields. Predictably, Banks, A-REITs, Healthcare and defensive exposures screen well on this basis. In addition, we have asked Credit Suisse stock analysts which of these stocks could deliver an upside dividend surprise in the short term.
Since 1972, the S&P 500 increased nearly 5,000%. Yet, owning the top stock in the S&P 500 by market capitalisation increased in value approximately 400%. (John Del Vecchio of The Active Bear ETF, May 1)
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Long bets, short skirts Perhaps its not such an impressive record after all...
Kanon Mori, Yuki Sakura, Hinako Kuroki and Jun Amaki have been following the Nikkei 225 stock average obsessively since Prime Minister Shinzo Abe took office in December. The oldest of the foursome is Mori, but she is still only 23. The youngest is Kuroki, 16 and still in high school. None of them are studying for a degree in economics, let alone playing the stock market. Instead, the four are members of a new idol group, Machikado Keiki Japan, and stocks play an important part in their performances. We base our costumes on the price of the Nikkei average of the day. For example, when the index falls below 10,000 points, we go on stage with really long skirts, Mori explained. The higher stocks rise, the shorter their dresses get. With the Nikkei index ending above 13,000, the four went without skirts altogether on the day of their interview with The Japan Times, instead wearing only lacy shorts. (The Japan Times, May 2) What does Dow 15,000 mean?... Technically: Technically, theres isnt much to the mark. These big, round numbers dont mean anything technically, as Tomi Kilgore pointed out. The Dow is already above its 50-, 100- and 200-day moving averages, three closely watched technical markers. Psychologically: The effect of something like Dow 15000 usually is more psychological. Big, round numbers always attract interest. The difference is that during the past few decades, it was an article of faith that the market represented the economy, or even that the market was the economy. The aftermath of the Crash of 2008 has severely disabused most everybody of that notion, one reason why interest in the market, and trading volumes, remain so lacklustre even as the indexes hit fresh records. Its hard for most people to get excited about new highs in the stock market when theyre still trying to rebuild the wealth they lost from the 2000 and 2007 stock crashes... Valuation: Weve become so bubble battered over the past 13 years, that its natural to think any rising asset must be in a bubble, but its relatively easy to make a case that stocks are fairly valued. The simple forward-year PE ratio on the S&P 500 is a hair under 15, roughly in line with the long-term average. (Wall Street Journal Money Beat, May 7)
Edwards central argument is that just as both the US and Europe are slipping towards outright deflation, investors have convinced themselves they just have to participate in the liquidity fuelled frenzy offered by unlimited QE. But the copper price is saying something different and it offers a solid reminder that liquidity itself can disappear very quickly indeed, as it did when Edwards last drew our attention to Dr Copper back in January, 2007. (Albert Edwards of Societe Generale via FT Alphaville, May 2) And with leverage running hot...
Its rather alarming to see NYSE margin debt just shy of its all-time high as of the March reading. My guess is weve actually already surpassed the all-time high though we wont officially know until April data is released. Fun times knowing
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we live in a world that is built on such a fragile foundation. (Pragmatic Capitalism, May 5) It might be time to sell everything thats not nailed down... Its almost biblical. There is a time to reap and theres a time to sow, Leon Black, chairman and chief executive of Apollo Global Management declared to the Milken Institutes global conference in Los Angeles, alluding to that same Scriptural passage. We are harvesting, he added pointedly. That is, the private-equity giant is a net seller because things simply cant get much better. We think its a fabulous environment to be selling, he says, noting Apollo has sold about $13 billion in assets in the past 15 months. Were selling everything thats not nailed down. And if were not selling, were refinancing. Thats because there has never been such a good time to borrow -- which is raising warning flags for Black. The financing market is as good as we have ever seen it. Its back to 2007 levels. There is no institutional memory, he observed, referring to the peak of the last credit bubble. That was when then-Citigroup CEO Chuck Prince famously said that as long as the music was playing, bankers had to keep dancing -- which they did, with disastrous consequences when the band stopped. (Barrons, May 4) Video of the Week: Although Buffett says markets will go a lot higher... Youll see numbers a lot higher in your lifetime, says Buffett, joking about watching the Dow cross 100.
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