Insightful Insights

We have been watching with some interest the attempts by the Steelmakers Australia consortium to engage with the Arrium board (not that we have ever owned shares in Arrium).

Often in an unsolicited takeover offer, the initial bid will be a “sighting shot”, which the board will quickly reject. According to the conventional storyline, the bidder then ups the offer, the target board relents, and shareholders are left with the impression that the board has managed to secure a better deal for them.

In the case of the Arrium bid, Steelmakers Australia appears to have diverted somewhat from the standard script. They have come back with some modifications to their original proposal (shorter due diligence, evidence of funding capacity), but have not lifted the price.

This is not be a good sign for the Arrium board, nor its shareholders. It indicates that Steelmakers Australia sees itself having a strong negotiating position.

The reason for this may be the $2.14b of debt on Arrium’s books. Steelmakers Australia may expect that Arrium’s directors will be reluctant to negotiate too hard lest the offer disappear, leaving the debt problem to be resolved by the board.

by Roger Montgomery Posted in Insightful Insights, Manufacturing.

• save this article
• POSTED IN Insightful Insights, Manufacturing

With all the talk of productivity, cost competitiveness, the currency and interest rates, and because we are rolling over tens of millions in TD’s (that were paying five per cent) I thought it worth sharing what Term Deposit (TD) rates are on offer now (see ‘More’ below).  We have written extensively about the loss of purchasing power now affecting hundreds of thousands of retiring boomers so the low rates are nothing short of shocking and understandably force many investors to buy high yielding stocks like Telstra.

continue…

by Roger Montgomery Posted in Insightful Insights.

• 6 Comments
• save this article
• POSTED IN Insightful Insights

In this Australian article published 27 October 2012 Roger discusses how behaving counterintuitively may result in better performance for your portfolio. Read here.

by Roger Montgomery Posted in In the Press, Insightful Insights, Investing Education, Market Valuation.

• save this article
• POSTED IN In the Press, Insightful Insights, Investing Education, Market Valuation

From Roger Montgomery & Russell Muldoon.

Although we are asked regularly to give our opinion on where we think the stock market is heading, we are loathe to make such predictions because we simply don’t know how to accurately and consistency forecast short term share prices. As you know, we believe that in the short run share prices are moved by unintelligent and emotionally unstable influences and these are unpredictable.

Furthermore, it’s the performance of the businesses that we hold that will determine the return to our investors over the longer run because over longer periods of time, prices follow business performance. The direction of largest two hundred market-weighted stocks that make up the index are not going to help us so predicting the direction of the index is a bit of a waste of time. Usually.

On a few occasions throughout the years, we have sounded a cautionary alarm when the aggregate market price of our portfolio is either at, or has exceed, the valuations of its constituents.

This week, of the 16 completed holdings in The Montgomery [Private] Fund, more than half are now trading at, or in excess of our assessment of fair value. This is the result of strong price appreciation in the past two months.

continue…

by Roger Montgomery Posted in Insightful Insights.

• 5 Comments
• save this article
• POSTED IN Insightful Insights

I was interested to read the recommendations from Infrastructure Australia of selling $220 billion of “lazy assets owned by the federal and state governments to plug the nation’s infrastructure gap, reduce debt and lift productivity”.  82 profit-making government assets could be sold relatively quickly, according to the report.

Meanwhile, I hope our nations political leaders are paying attention to another report; one which puts Australia’s positioning into a global context.  According to the World Economic Forum, Australia has slipped in terms of the global competitiveness index, from 16th place (out of 142 countries) in 2010/2011 to 20th place in 2011/2012.  In terms of quality of infrastructure we rank a disappointing 37th place, with the quality of our ports coming in at 40th place, a travesty for an island continent dependent on commodity exports.

While Australia ranks highly in health and education, in the category of “burden of government regulation”, Australia unsurprisingly is placed below half-way in 75th place.

Regarding key performance indicators (KPI’s) for our political leaders, I believe their focus should be on laying out and executing a plan for taking Australia from 20th place in the global competitiveness index to a top ten place over the balance of this decade.

by David Buckland Posted in Insightful Insights.

• 1 Comments
• save this article
• POSTED IN Insightful Insights

Last week on 2GB I didn’t speak to Ross Greenwood as I normally do. He was off in New York for Channel Nine. Instead I had a terrific chat with my friend and former fund manager Matthew Kidman.

As usual we didn’t have a great deal of time but I asked Matthew whether he was seeing much value and his reply was telling. Like me, it seems to Matthew that value was getting thin on the ground, particularly among the higher quality companies.

There is still a few pockets of value and we named a few stocks. Matthew mentioned that he also predicted that the market would now strengthen and stocks that are fairly valued may continue to rally well beyond fair value.

I am less able to predict stocks and their short term price direction. To reduce risk what we do is simply analyse those companies that come into value as their prices, values and quality scores change.

continue…

by Roger Montgomery Posted in Companies, Insightful Insights, Intrinsic Value, Skaffold.

• 3 Comments
• save this article
• POSTED IN Companies, Insightful Insights, Intrinsic Value, Skaffold

Yesterday Marius Kloppers was reported in the Oz as saying “the record prices we experienced over the past decade, driven by the ‘demand shock’, will not be there to support returns over the next 10 years”

Additionally he revealed that the mining industry collectively has not learned anything from past booms and busts when he explained that to meet the rising demand mining companies had yet again taken a “volume over cost” approach, adding “improving productivity played second fiddle to speed to market for many in the industry”.

While we can give ourselves a little ‘we-said-it-here-first’ pat on the back for spotting the coming slump in iron ore prices a year ago and protecting our investors from it, the bigger picture is more important;  Where is the industry’s equivalent of the Thomas the Tank character – the Fat Controller?  Why is there no ‘OPEC’ for iron ore and coal producers?  Would it help if there was?

The lessons of each boom/bust cycle are lost with each generation’s death and the mistakes repeated again. Only those who study history can hope to beat this cycle because caught in its spotlight are prone to declare this time is different.

An argument we heard this time was “it can’t fall below $100/t because China’s cost of production is higher”. Yet anyone with more than a few minutes experience in commodity markets can tell you that just about every commodity has traded below its cost of production and sometimes for many years.

While we believe we are able to spot these cycles developing, we must ask the question, what will be put in place to ensure that next time billions are again not wasted?  Or is this the ugly wart on capitalism’s nose that cannot be removed?

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

• 6 Comments
• save this article
• POSTED IN Energy / Resources, Insightful Insights

Since June 2012, the ASX 200 Index has risen from a low of 4,000 points to the current 4,500, despite the deteriorating global growth outlook.  In a research paper from the Strategist at Deutsche Bank, Tim Baker points out this 12.5% rally is based on a 20% expansion in the Australian prospective PE ratio from 10.7X to 12.8X over this period.  In fact forecast earnings over this period has declined by 8% while the Resource Sector has recorded a 23% decline in its forecast earnings.  The ratio of downgrades to upgrades is running at 2 to 1.  Despite brokers using the Earnings Yield (7.8%) to Bond Yield (3.0%) Gap (4.8%) as an argument to buy the market, earnings growth will need to come through at some stage for the rally to continue.

by David Buckland Posted in Insightful Insights.

• 6 Comments
• save this article
• POSTED IN Insightful Insights

Do CSL (CSL, Silverlake (SLR), FKP (FKPDA), Breville Group (BRG), Codan (CDA), QBE Insurance (QBE), NAB (NAB), Wesptac (WBC), AMP (AMP), ALS (ALQ), Prima (PRR), Rio Tinto (RIO), Lynas (LYC), or Mesoblast (MSB) achieve the coveted A1 grade? Watch this edition of Sky Business’ Your Money Your Call 17 October 2012 program now to find out, and also learn Russell’s insights into the commodities sector. Watch here.

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

• save this article
• POSTED IN Companies, Financial Services, Insightful Insights, Intrinsic Value, TV Appearances

Didn’t think a free blog could be a valuable use of your time?

Back on 13 July 2012 (read here), we warned that Iluka Resources announced their 2012-2014 Key Physical and Financial Guidance previously released in February 2012 was “now redundant and as such no longer applicable”. Management had said volumes for the December 2012 half-year were indicating “lower ordering patterns or an unwillingness to commit to volumes except on an “as needed” basis”.

As with other miners described here at the blog over the last year, the boom appeared to be over and reports were confirming our earlier appraisal of the likely impact from a China – led slowdown. Iluka’s exposure is both direct and indirect and the grim conditions were confirmed yesterday with the release of the Iuka Resources September Quarterly report. Combined sales volumes of zircon, rutile, synthetic rutile and ilmenite at 306,300 tonnes, were down 29% on the September Quarter 2011. Revenue at $225m was down an extraordinary 58% from $533m recorded in the September Quarter 2011. This means the average selling price for Iluka’s mineral sands declined by 41% year on year. In response, the Iluka share price fell 6.6% to $9.00 and is back to trading where it was in February 2011. Essential reading indeed.

by Roger Montgomery Posted in Companies, Insightful Insights.

• 3 Comments
• save this article
• POSTED IN Companies, Insightful Insights