Insightful Insights

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.

by Roger Montgomery Posted in Insightful Insights.

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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.

by Roger Montgomery Posted in Insightful Insights.

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Following on from Tuesday’s 0.25% rate cut, economists expect the Reserve Bank of Australia to again cut by 0.25% in November 2012. The cash rate would then stand at 3.00% which is the same rate we saw at the low point of the GFC. This should give readers some insights into the slowdown being recorded at present. And as some commentators are predicting Australia’s terms of trade to soon decline by 15%, year on year, there is no pickup in sight.

This is reflected in Australia’s ten year Government Bonds currently yielding 2.93% which compares 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. Whilst this is great news for anyone with debt, savers are being punished and are earning less than the long term rate of inflation. Worse when taxation is taken into account. We believe investors in Australian and indeed the world are in one of the greatest bubbles in the financial markets today. One in which they are happy to take negative returns but yet still face the risk of losing a lot of their capital when inevitably one day economies get moving again.

This to us is not a viable investment strategy.

by Russell Muldoon Posted in Insightful Insights.

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Roger Montgomery discusses how he engages with his investors in this Professional Planner Online video. Watch here.

by Roger Montgomery Posted in Insightful Insights, Intrinsic Value, TV Appearances.

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The $0.75 bid for Arrium Limited (ARI), formerly One Steel, by a Korean Consortium including their largest steelmaker, Posco, values the company at $1.0 billion. Including the $2.2 billion of debt, Arrium has an Enterprise Value of $3.2 billion. Forecasts for the year to June 2013, has Revenue of $8.7 billion, Net Profit of $210m and an after tax return on equity of 4.6%. The Arrium share price has declined from more than $7.00 in mid-2008. A number of brokers are now valuing the Company north of $1.00 per share.

This bid is also raising the question as to whether BlueScope Steel (BSL) will propose a merger with Arrium. “Mergeco” would have $17 billion of annualised revenue.
BlueScope has also seen its share price smashed, down from $8.00 in mid-2008 to the current $0.43 per share. Its market capitalisation is $1.44 billion, and with a forecast net debt of $380 million, BlueScope’s Enterprise value is $1.82 billion. BlueScope has recorded an extraordinarily disappointing four year period to June 2012, with after tax losses aggregating to $2.5 billion while the tripling of their shares on issue to 3329 million shares has been associated with an additional $2.7 billion of capital put into the company.

Arrium and BlueScope were downgraded to below “investment grade” by the Skaffold screening process in 2005 and 2008, respectively.

by David Buckland Posted in Insightful Insights, Intrinsic Value, Manufacturing, Skaffold.

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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.

by Roger Montgomery Posted in Consumer discretionary, Insightful Insights, TV Appearances.

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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.

continue…

by Roger Montgomery Posted in Energy / Resources, Insightful Insights, Value.able.

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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.

by Roger Montgomery Posted in In the Press, Insightful Insights.

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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.

continue…

by Roger Montgomery Posted in Companies, Insightful Insights, Market Valuation, Skaffold, Value.able.

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After jumping nearly 20% over the September 2012 Quarter, Wednesday saw the leading 50 European blue chip stocks from 12 Eurozone countries, as measured by the STOXX, decline by 2.7%. The Spanish market, which had rebounded 35% from its low point in early July, fell 3.9%. On Thursday, Spanish Prime Minister Rajoy announced his fifth austerity package in nine months of Government. The target is to cut the budget deficit from 6.3 percent in 2012 to 4.5 percent in 2013.

Economists responded by saying “they’ve increased the taxes for next year and cut spending but they didn’t change the growth forecast”. Economists expect the Spanish economy to contract around 1.5%, while the Government is forecasting a contraction of only 0.5%. With their ten year bonds selling above 6%, Spain will likely need to raise the white flag and go “cap in hand” to the European Central Bank for another bail-out. Spain’s declining property market and 25% unemployment is causing a significant solvency issues for their banking system, as the contraction of private sector lending continues.
continue…

by David Buckland Posted in Insightful Insights, Market Valuation, Value.able.

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