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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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.
Roger Montgomery discusses why using themes as an investment strategy is fraught with danger in this Australian article published on 29 September 2012. Read here.
Chalk up another win for Skaffold members.
Substantial capital losses are difficult to make back and irrespective of whether you are still in accumulation mode, retiring or retired it is essential to avoid major losses. One way to do this of course is to diversify and ensure that losses are mitigated through position sizing. Another technique and the one we will discuss here, is to simply avoid the companies most likely to collapse.
This week Gunns (ASX:GNS), was placed into voluntary administration and happily for Skaffold members it is unlikely that anyone owned shares.
Gunn’s was never investment grade. Anyone who purchased the stock from 2003 onwards were taking a massive risk and Skaffold can explain why.
Skaffold’s Verdict (Figure. 1) is a picture of danger.
Do Sedgman (SMD), Decmil Group (DCG), cochlear (COH), Seek (SEK), IAG (IAG), Resolute Mining (RSG), Magellan Financial Group (MFG), Syrah Resources (SYR), ASG (ASZ), Goodman Group (GMG), Silex Systems (SLX), AMP (AMP) or Service Stream (SSM) achieve Roger’s and Tim’s coveted A1 grade? Watch this edition of Sky Business’ Your Money Your Call broadcast 25 September 2012 program now to find out, and also learn Tim’s insights to the outlook for Cabcharge (CAB). Watch here.
Recently the media cottoned onto the fact that the Australian stock market, as measured by the major indices, has not kept pace with the US market, which is now hitting all time highs (on a total return basis). You can see from Chart 1 that the US market is most certainly outperforming the Aussie market and it seems all the ‘Go Australia’ cries are falling on deaf ears. Indeed, Australia really needs to be shouting ‘Go China’ but more on that in a minute. Since June 2011 the US market has been pulling away. The reports did not go on to explain the reason for the divergence however we have previously explained that with credit growth virtually non existent the banks would not be able to justify sustained substantial gains and with our thesis on iron ore calling for much lower prices, we couldn’t see how the big material stocks were going to rise. Combined the banks and materials stocks account for a significant portion of the index weighting and without those sectors running, there is no way the All Ords can. We also think China has a little to do with it all.
Chart 1
Take a look at Chart 2, which plots the Aussie market against the Chinese Shanghai index. Since about the same time last year, the Chinese market has been falling and given that are large part of our economy is tied to the fortunes of China, it makes sense that the prices of those companies with direct (and indirect through consumer sentiment) exposure and a significant weighting to the index locally, would have an adverse influence on the Australian market.
What is also clear is that our strong Australian dollar is not reflecting foreign demand for our shares. And what does that tell you?
Chart 2
This week David Jones announced their 2012 results and reported a 40% decline in profit. The only positive was that 4th quarter sales fell by just 1% on pcp whereas 1st quarter sales had fallen 11% on pcp. Actually there was another positive; the 35% decline in earnings per share was inline with expectations.
Separately the company also provided an update to its property strategy. Investors should understand that anything DJS does with its properties is simply a takeover defence against private equity (or Premier Investments perhaps) pulling off the same stunt that was done on Myer. That is; launch a takeover, succeed, sell off the property portfolio and get the business cheaper. if DJS shows it is proactive in this area it becomes much harder from Private Equity to argue that they are “adding value”.
DJS intrinsic value (see Fig. 1) has now not increased since 2004 and according to Skaffold.com DJS’s intrinsic value is not expected to rise at all over the next two years.
