Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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Investors in the Montgomery [Private] Fund recently received the latest monthly investment report.
We will not normally publish our thoughts from our monthly reports as these are reserved exclusively for investors, however the impact of the RBA’s interest rate decisions affects all investors and savers and the government should be on notice…
On Tuesday October 2, 2012 the Reserve Bank of Australia cut its target for the cash rate. This is the rate at which banks borrow from and lend to each other on an overnight, unsecured basis. The rate was reduced to 3.25%. Another cut by 25 basis points would take the rate to the 3.00% we saw at the low point of the GFC. This is astounding because Canberra has long had us believing the economy was on a dream run. As you know we have not held that view and these cuts along with the latest rounds of quantitative easing in the US and unlimited bond buying in Europe only serve to remind us that all is not well and there is no pickup in sight.
More concerning for investors and retirees is the fact that Australia’s ten year Government Bonds now yield 2.93%. While this rate compares favourably with ten year Government bond yields in Japan, Germany, the US and the UK of 0.8%, 1.5%, 1.6% and 1.7%, respectively, there is nothing favourable about working one’s whole life to accumulate $1 million (and be labeled a millionaire) only to have it earn $29,300 per year for a decade. Government bonds are supposed to be low risk but there is nothing riskier than being guaranteed to lose purchasing power.
The unintended consequence of low rates of course is to punish those who have been prudent with their finances and reward those who are profligate. But low rates are a necessary evil if economic activity is sought to be activated. The only problem in our view is that rates are inelastic in their effect on spending and investing intentions as they go lower. If a 3.25% doesn’t spur you into action and borrow money – assuming of course the banks are willing to lend it – then a 3.00% rate isn’t going to make much difference.
What is needed is confidence. Only confidence will end the great deleveraging we are witness to and which we have described previously. And only when the deleveraging ends will investors, who are less selective than us about which stocks they buy, see returns better than the guaranteed losses they currently prefer by investing in cash, bonds and annuities.
News of a new debt facility of $400 million for Qantas should send investors zipping up their wallets. Qantas Group is Australia’s largest domestic and international airline.
Back in 2000 the balance sheet of Qantas comprised:
› $2.8 billion of shareholders equity
› $3.1 billion of bank debt
For financial year 2000, Qantas reported earnings of $517 million giving an ROE of 17.45%.
But more recently, Qantas recorded a normalised loss of $16.3 million. The 2012 loss follows the $317 million profit of 2011, the $175.2 million profit of 2010 and the $164.6 million profit of 2009. All of these were lower than what the business reported its earnings to be in 2000 – eleven years ago.
The company however has seen its debt balloon in that time to $6.5 billion and shareholders equity is at $5.9 billion. Meanwhile any simple bank account, with an additional $12.4 billion of capital injected, would be earning more than it did a dozen years ago.
Owners have put in another $3 billion of equity on top of the $2.8 billion injected by 2000. But despite the life support, the company still lost $16 million in 2012.
Even with the very best management running the show and the most generous bankers, there’s no escaping these economics.
Yesterday, Sirtex Medical Limited (SRX) announced, for the September 2012 Quarter, dose sales of its SIR-Spheres microspheres targeted radioactive liver cancer treatment grew 37 per cent on the previous corresponding quarter.
This was the 33rd consecutive quarterly increase in dose sales achieved by the Company.
The US recorded a 42 per cent increase, Europe, the Middle East and Africa (EMEA) was up 26 per cent while Asia Pacific grew by 33 cent.
In the year to June 2012, Sirtex Medical’s revenue was $86.6m (+19%) on dose sales of 6,141 (+ 23%). Each dose sold for an average of A$14,000.
The SRX share price jumped 10.3% yesterday to $10.18 and has increased 67% from $6.09 since 30 June 2012.
Both the Montgomery [Private] Fund and The Montgomery Fund are shareholders in Sirtex Medical Limited.
September was a challenging month for investors but Montgomery chalked up another outperformance in both The Montgomery [Private] Fund and The Montgomery Fund (see figure 1).
Of course in the short term the performance of share prices can be attributed to noise and randomness and so the bigger question is always; which businesses will be worth substantially more in the future?
What is your suggestion for the best performing stock for the next nine months to June 30, 2012?
Pick the best performing stock in the next nine months and gain fame and notoriety, kudos and credit.
Each month we’ll track the list and present the table until June 30, 2012.
All the best and stay tuned.
Roger Montgomery discusses how he engages with his investors in this Professional Planner Online video. Watch here.
Roger Montgomery has some clear insights into the challenges facing Australian department stores, and he provides them to Ticky Fullerton on ABC’s The Business broadcast 26 September 2012. Watch here.
Roger provides his insights on gold miner Codan’s shiny prospects in his October 2012 Money Magazine article. Read here.
If you think the declines so far in iron ore are significant, you ain’t seen nothing yet.
I think the declines we have seen in commodity prices still have a long way to go.
We’ve long argued that a classic supply response would follow the massive investment in exploration and production that itself followed a surge in demand from China that caused prices to reach historic highs.
But China’s demand – itself was based on unsustainable growth in fixed investment spending – is now fading. China represents less than 11% of the global economy, but it commanded 30% to 40% of total global demand for copper and 60% of total global demand for cement and iron ore thanks to the massive social modification projects that required bridges, roads, ports, cities, subways and skyscrapers.
This is not sustainable and so demand for the raw ingredients will decline. Additionally, the nature of future growth will change and more consumer driven growth will again demand less materials.
