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Confusion and misinformation…

Confusion and misinformation…

I was surprised to read mainstream financial commentary today, suggesting today’s sell off reflected a “shrugging off” of a “solid” domestic labour report, and that instead, the market focused on disappointing earnings reports from large cap domestic companies and growing fears Greece is moving closer to default.  Putting aside the fact you’d go nuts trying to make sense of every zig and zag of the market, lets examine the influences todays market gyrations are being attributed to and come up with a better approach to investing.

First regarding Greece:  They ARE BANKRUPT.  If a country needs $171 big ‘B’ billions in rescue funds, they are bankrupt.  The reports that suggest they will default in mid March “if” they don’t get the money means THEY DONT HAVE THE MONEY!  And generally, if you don’t have the money to make interest payments or pay out maturing loans, you call in the administrators, receivers of liquidators.

Deputy RBA governor Guy Debelle told me this week that if you owe the bank $100 its your problem but if you owe them $100 billion, its the banks problem.  Not quite sure why this should give us any comfort – its a problem.  Suffice to say officialdom is sanguine about the risks in Europe and believe the worst is over thanks to the ECB’s unlimited cheap 5-year facility offer last year.

Turning locally and I thought it worth thinking about that “robust” labour situation in Australia and mentioned above:  Jobs are being shed in manufacturing, financial services, banking, retailing and in Qantas’ing.  I am getting calls from analysts all over who are being made redundant and looking for work (and I can think of nothing better than taking them all on to create the an Equities Newsletter the likes of which this country has never seen.  Lets park that.  It beggars belief that anyone would suggest that employees on the east coast of Australia are content and secure.  And don’t forget that when one person loses their job, they commiserate with friends and they all stop spending “just in case” it happens to them too.

Permabear Steve ‘Kosciusko’ Keen looked even deeper at this and particularly at the following quote from the RBA’s decision last week not to raise rates; “Information on the Australian economy continues to suggest growth close to trend… the unemployment rate increased slightly in mid year, though it has been steady over recent months…With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment.”

But Steve noted:  the “steady over recent months” phenomenon that the RBA referred to above was entirely due to a fall in the participation rate. Had this remained at the November level, the ABS unemployment rate would have jumped to 5.6 per cent last month.

“And that’s the good news: as was widely reported, employment fell by almost 30,000 last month, so that net job growth in 2011 was zero – the worst outcome in 20 years.

Secondly, a broader measure of unemployment maintained by Roy Morgan Research hit 10.3 per cent – 5 per cent above the ABS figure. The ABS ludicrously treats someone who has worked for one hour in the previous two weeks or someone who has worked without pay in a family business as employed. The ABS also does not consider unemployed someone who is not actively looking for work even though they don’t have a job.  Steve notes; “surely if someone is not working, is looking for work and considers themselves to be unemployed, then they should be considered unemployed regardless of whether they happen to have done a couple of hours work here and there during the month?”
Roy Morgan defines any respondent who is not employed full or part-time and who is looking for paid employment as being unemployed.  And as their chart shows, our anecdotal insight from all the headline-grabbing job shedding (what of all the non headline grabbing job losses?) has a better take on whats going on – unemployment is around 9% or 10%.
Finally, the company results we are seeing are at worst, mixed.  While Qantas (SQR: B3) reported underlying profit before tax down 52 per cent, AMP (SQR: A3) reported an 11 per cent decline in net profit, QR National (SQR: A3) reported a 32 per cent drop in net profit to $189 million for the six months to December 31 and Goodman Fielder (SQR:C4) reported a 76.9 per cent drop in net profit, Brambles (SQR:C4) however reported a 9 per cent increase in its interim net profit and Wesfarmer’s (SQR: A2) Coles supermarkets profits rose 10.9 per cent and margins increased from 4.1 per cent to 4.3 per cent.  In the latter two cases however, analysts had higher expectations.  So even the ok results were ‘bad’.
But there have been some really good results amid the carnage.  Dominoes (SQR: A2), The Reject Shop (SQR: B3), Credit Corp (SQR, A2), Webjet (SQR, A2) all had great results.
If you are an investor, don’t be distracted by all the noise nor the commentary.  Sure conditions aren’t great, but you will pay a very high price if you wait for a cheery consensus and there are businesses that are kicking serious goals right now.  If you can pick them up cheap enough (and its quite possible the negativity may generate lower prices), let the markets nervousness produce opportunities for you.
Seen any results that have impressed?  Know anyone who is laying off staff or anyone that is now looking for work?  Share your insights and experiences here.
Posted by Roger Montgomery, Value.able and Skaffoldauthor and Fund Manager, 16 February 2012.


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.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. I certainly believe that BGG (Blackgold International Holdings) has a fantastic future ahead of it and still trading at a huge discount.
    Wondering if anyone else has recently bought or looking to buy?

  2. Seen any results that impress? Roger I have to thank you for your article a while back about the IV of Apple. It made me have a good look at them and I proceeded with a purchase at $US340. Looking at their results since your article is very, very impressive.

    I am waiting with enthusiasm for Skaffold to include US markets.

  3. I just bailed on GR Engineering. I believe that the Board has breached its duties in not reporting the “margin pressures” being experienced earlier and the fact that the company has declined to the point that it is only making 50% of the money that it had made in the prior year. They have also not provided adequate explanations or an outlook statement that is quantifiable for future years. I am quite disappointed with the regulatory system in Australia in general because I feel this is not right and there are few meaningful penalties for directors. I am wondering if Slater and Gordon will be starting a class action like the one we just won against Oz Minerals. Its sad that these actions can only go after the company though, and not the directors. My proceeds are going into Cedar Woods – a much more reliable business with good management.

    • I feel your disappointment David. It is very frustrating getting poor treatment from management as owners in a business. GR Engineering is one, Northern Star is another (If you are making so much cash, why bother diluting your current owners? To make an acquisition….another risk which I hope you handle better than you do your shareholders. Ok maybe they need to if you look at the reserve/production ratio) TSM is another which disappoints with another capital raising. They say they prefer to grow by cash, which is a little different to what I had in mind if they think they mean the cash in my wallet. With TSM it is good to see the broadening of the potential market, but another part of me says I am in a business without full cognisance of what their off balance sheet funding and interest rate risks really means.

      It is really hard to guard your portfolio from these sorts of actions, but then one way is to look at track record and invest in companies such as ARP that keep on honestly keeping on, year after year.

      Vocus paid down a hefty chunk of debt and that opened my eyes to see what currency risks are there until they pay that off in a couple of years. Hopefully the resource boom holds out long enough for them to pay that off. If not then another stalwart in CSL will definitely flourish when the US dollar finds some strength again. Strong underlying earnings from them.

  4. Hi Roger
    Another great post thanks.
    I was looking at some US stocks over the weekend (can’t wait for NZ and other international stocks to be added to Skaffold) and caluclating some IV’s the “old fashioned way” using Value.able. There seem to be some good stocks – 3M, Microsoft and RCP (oil exploration services) to name a few. The latter 2 have ROE around 45%, low debt/equity and good earnings/growth history. I think with the exchange rate it is a good time to be looking.
    Just to finish – I think 3M is a fascinating company and their attitude to R&D and creating new products (32% of their sales are from new products) is wonderful.

  5. Hi Roger and Others
    I don’t see any real buys at the moment I think they are fully priced and considering the flighty market which has had a good run may be coming down again. The political position is not helping also and many are waiting for Mr Rudd to make a move – but don’t underestimate that there is a third person that may come to the fore.
    Does anyone believe that the unemployment rate is at 5.1% this govt. like the previous like to massage the figures to suit.
    Do you get the feeling many investors do not want to believe the dire financial position and that Greece WILL default.
    I have noticed that my fellow Aust. are not as happy as they once were and are stressed due to debt. and the pressure on them.

  6. MIN ticks a lot of boxes. If the analysts are to be believed;
    – Sales per share look like doubling over the 3 years to 2014.
    – 2012 operating cash flow almost covers 2012 cap-ex
    – low gearing
    – ROE > 25%pa for past 3 and next 3 years
    – attractive dividend yield at current price, on 50% POR
    – current price offers a safety margin below 2012 IV
    – past excellent IV growth looks like it will be maintained over next 3 years

    There must be a catch. Hopefully you will find it.

    • Hi Martin,

      MIN is increasingly becoming a miner, rather than a service provider to miners. This means that to be confident of their future revenue / profits, you also have to be confident about the future prices of commodities.

      Something to think about.


      • CEO Chris Ellison said last year “We’re not a long-term owner of iron ore assets”. The strategy is to get out before the boom goes bust. So I expect the mining assets to be sold for a profit in the next 2 years.

  7. Hi Roger,

    Thought this article from the Herald sun was an interesting one:

    Basically the article is about ANZ boss (Mike Smith) taking 100 staff & their guests (200 passengers) on a luxury “cruise of a lifetime of Malaysia’s Langkawi islands”, with each of the guests having a personal butler at a total cost of $1.75 million just weeks after axing 1000 workers to save money. The Herald Sun article states: “I would like them to walk a mile in the shoes of their customers who have been told their interest rates have to go up because of their increased funding costs”. The “lucky” 100 staff are made up of ANZ’s CEO recognition program, which does not involve senior staff, the article states “the program recognises ANZ’s top 100 per-formers who are mostly junior staff who often get little recognition for the job they do”.

    Roger, you mentioned in your article “Qantas (SQR: B3) reported underlying profit before tax was down 52 per cent”, maybe the 750k (estimated cost of return flights to Singapore for the cruise guests) may help out Qantas’s 2nd half results :)

    I remembered this article about Mike Smith where in a previous position as chief of HSBC operations in Argentina, Smith implemented some personnel changes the locals didn’t like. The result was that he actually copped a bullet to his thigh!! Hopefully for his sake the Australian ANZ customers (& sacked ANZ staff) aren’t so emotive!

    Interesting times in the banking industry!!!!
    Kind regards Janette

  8. Hi Roger,

    Yes when people loose their jobs and its reviberates, it causes an issue. The other issue is complete lack of business and consumer confidence outside mining.

  9. It is very true that one redundancy effects the behaviour of many more. I work in a large (not one of the big 4) banks (and insurance) and there is a constant trickle of redundancies (often due to off-shoreing / partnering / out sourcing – what ever they want to call it). This has the effect of everyone making contingents in spending, savings, holidays etc etc. It is almost as if everyone is just waiting for the tap on the shoulder (including me). I have paid my mortgage down – closed the margin loan – hold much more cash and am just bunkered down. Probably all the fears are in my own head. But if our unemployment rate is really so high and those employed are reducing spending, what is going to break the funk?

  10. it has been about as good as expected so far for me. Some of mine which i am keeping a close eye on are still yet to report however such as David Jones, Oroton, REA, SEK, WTF, FLT etc. Most of these i am not too optimistic about considering the current macro factors but i am still pretty positive about their long term investment worth.

    Perhaps one surprise was Qantas, i wasn’t expecting it to make any profit at all. Can’t say i am really impressed, just surprised. As always though if you strip away the frequent flyer arm and look only at the airline operations it paints a different story.

  11. Hi Roger,

    Just back from attending a Jobs Expo on the Mid North coast in Rob Oakshotte land, I’m sure you know where that is, and the place was packed and humming. Job seekers of all ages looking very very hard.
    My reason for being there – end of Federally funded contract this week. Two others from my office also out in the cold as well.

    Ironically for the past two years have been working with young 17-24 year unemployed advising them how to get jobs.
    It ain’t easy out there and particularly so in regional Australia

    I am really pleased to see your commentary on the ABS definitions of employed and unemployed. It rarely gets much press and effective action on the issue is nil.
    Nice work Roger… now how do we fix it?

      • An articulate presenter with a high media profile, a strong grasp of economic theorem with an ability to advocate and prosecute an argument to those in powerful positions.
        It is not me…..sounds like someone who wrote a book, started a blog, manages funds, talks to Deputy Reserve bank people etc, etc! Sound familiar Roger?

        Also I found it interesting that the first few contributions to this post on misinformation and confusion last week “stepped over” the Greek bankruptcy and Australian unemployed and went straight for the market info. Hmmm…

    • I happen to be in WA right now, and the story is different. My nephew is in the landscaping business in an area south of Perth, and his customers tend to be the likes of Alcoa, who hold large chunks of land that require land management. The nephew is inundated with work, but cannot find the people to do it. He now employs about 12 people, and needs another 5 in a hurry.

      yesterday I discussed my nephew’s position with a man who is in a related line (he supplies trees to landscapers), and he said two of his Geraldton-based clients have the same problem. One is simply rejecting deals for the want of people to do the work, and the other is exploring the idea of flying to the Philippines to recruit employees to work in Geraldton.

  12. Disappointed with the Forge result on an EPS basis. I am a little concerned that they will really need to do something big in the second half just to meet earnings consensus, let alone beat it, so IV expectations could fall. Perhaps its possible and the order book might sustain them in coming years. I agree that MIN was good per usual. I just wish I could get it at a discount to IV as I have a feeling that its a better quality company than Forge in the long run, but I may be wrong. I think Credit Corp has been the only other good report that I have seen for a stock below IV at present. I can’t see how on current performance our market can rise substantially higher, but I guess the outlook in the US might just drag our expectations up a bit.

    Wow, an investment newsletter sounds great. Skaffold is awesome, but to hear expert opinions, insights and research would be another piece in the puzzle. Keep up the good work Roger & team.

  13. I thought the Forge result indicated Forge was growing very quickly. This makes their future ROE difficult to estimate, but their order book has grown dramatically and their profit result seems to have been effected by re-investment to prepare for this growth.

    • I was very impressed with the Forge result. Strong profit result, lots of work in hand, maintaining margins, and great positive cash flow. This is one company I am very happy to hold.

    • I agree with the effect that FGE’s capex spend has had on its profit growth which was unchanged from the same period last year. I just hope that the contract work comes through.

  14. dear roger ,
    regarding forge , i think revenue is more concentrated to the second half of financil year . all of these new contracts will come to fruition over the next 18 mths i am stll sticking with them

  15. Hi Roger

    Only had a brief look so far but thought MIN was above average. ARP and FGE didn’t exactly knock me over.
    COH appears good as does CBA. Would appreciate your thoughts


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