Out of favour sectors?

[thereslifeafter87]

We all know that the resource companies are running red hot, but it seems to me as if most other companies I've looked at are either reasonably valued or over-valued, or if trading at a discount it is generally because the company in question is an illiquid small-cap.

Are there any truly out of favour sectors in this current frothy market?

I'm talking out of favour like the debt collectors were in 2002/2003, or like resource companies were during the late nineties/early 2000's.

Is there a sector that's currently trading at a discount to the rest of the market? and what are the best companies in that sector?

The only possibility that springs to mind (admittedly without much research being done on the market in general) is the MIS industry. However, this industry is faced by a lot of problems, not the least of which is the court battle facing the companies over the ATO's interpreation of what "carrying on a business" means.

I would appreciate the input of others into market sectors they consider to be undervalued.

[COLIN]

Pit-bull breeders!!!!!!! (But don't know of any that are listed!)

[SEC]

The wine sector. Australian 07 winegrape crush down 29% from 06, that wine lake is going to evaporate away a lot faster than expected. All wine stocks have been battered in the past 2 years. Have a look at McGuigan Simeon (MGW), Evans and Tate (ETW), Cockatoo (CKR). Only MGW is 'liquid' enough to interest me though, am intersted if it falls to $2.20.

SEC

[shasta]

SEC

How has the South Australian wine industry gone during 2006/07 given the drought Australia is in.

Any reduced demand/quality evident?

Delegats "DGL" on the NZX has had a great run since listing & Fisher Funds bought into this right from the IPO.

Am thinking of adding an Australian wine company to my portfolio, especially any from the Barossa Valley area.

Will look into the stocks you have mentioned above.

Thanks for your post

[SEC]

Shasta, I suspect the SA wine industry has suffered as badly as elsewhere in Australia.

CKR is based in the Barossa Valley, and MGW has vineyards and wineries there. ETW is based at Margaret River.

Check the Australian Wine and Brandy website for the winegrape crush stats and comment.

SEC

[shasta]

Thanks Sec

Will check out that site.

[Flying Goat]

Perhaps managed forestry investments?

For example GTP or TFC.

Obvious problems at the moment but both had very good and very underrated business models, in my opinion, that have achieved strong return on invested capital and grown annuity revenues through managing plantations. Furthermore they have strong net tangible assets backings with vast land and cash etc.

Disc: hold TFC and am continually impressed by flesh in the game of GM who keeps buying at market and also has interests as investor in final product, also have GTP on watch pending tax and draught outcomes - yes more risky, but also trading at discount to land value and cash in the bank.



Mike

[SEC]

quote:Originally posted by Flying Goat

Perhaps managed forestry investments?

For example GTP or TFC.


Also Timbercorp (TIM) or Select Harvests(SHV) if looking at managed plantations in general. Just pray for rain.

SEC

[patsy]

quote:Originally posted by SEC

[quote]

Also Timbercorp (TIM)




There is tons of value in this company but care should be taken before the taxation situation is clarified. TIM has been severely hammered recently as a result of the taxation review of forestry investments.

[Flying Goat]

quote:Originally posted by patsy

[quote]Originally posted by SEC

[quote]

Also Timbercorp (TIM)


There is tons of value in this company but care should be taken before the taxation situation is clarified. TIM has been severely hammered recently as a result of the taxation review of forestry investments.


yep, most stocks in this industry are being hammered at the moment, my question is, have they been sold beyond the value of less favorable tax treatment. What i mean by that is, if you look at say GTP and you consider worst case tax review scenario - is there still value there.

My understanding of this company is very basic so I don;t know the answer to that question, but purely on basis of net tangible asset backing exceeding market cap, and gauaranteed plantantion management cashflow, would have thought the downside is almost limited??

Note: TFC on the other hand continues to perform well but this is a different beast in my understanding as: a) tax laws will continue to favour them, and b) they have award winning irrigation/water management systems in place being less vulnerable to lack of rain. Also the potential upside for the vertical integration in Indian Sandalwood product is pretty huge, and this is being recognized., imo...


Mike

[thereslifeafter87]

quote:Originally posted by Flying Goat

Perhaps managed forestry investments?

For example GTP or TFC.

Obvious problems at the moment but both had very good and very underrated business models, in my opinion, that have achieved strong return on invested capital and grown annuity revenues through managing plantations. Furthermore they have strong net tangible assets backings with vast land and cash etc.

Disc: hold TFC and am continually impressed by flesh in the game of GM who keeps buying at market and also has interests as investor in final product, also have GTP on watch pending tax and draught outcomes - yes more risky, but also trading at discount to land value and cash in the bank.



Mike



See my initial post where I mentioned the MIS industry as a possibility.

[thereslifeafter87]

quote:Originally posted by Flying Goat


quote:Originally posted by patsy

[quote]Originally posted by SEC

[quote]

Also Timbercorp (TIM)


There is tons of value in this company but care should be taken before the taxation situation is clarified. TIM has been severely hammered recently as a result of the taxation review of forestry investments.


yep, most stocks in this industry are being hammered at the moment, my question is, have they been sold beyond the value of less favorable tax treatment. What i mean by that is, if you look at say GTP and you consider worst case tax review scenario - is there still value there.

My understanding of this company is very basic so I don;t know the answer to that question, but purely on basis of net tangible asset backing exceeding market cap, and gauaranteed plantantion management cashflow, would have thought the downside is almost limited??

Note: TFC on the other hand continues to perform well but this is a different beast in my understanding as: a) tax laws will continue to favour them, and b) they have award winning irrigation/water management systems in place being less vulnerable to lack of rain. Also the potential upside for the vertical integration in Indian Sandalwood product is pretty huge, and this is being recognized., imo...


Mike



GTP's "real" NTA is less than that reported for a number of reasons.

[Halebop]

While there are always exceptions, both the ASX and NZX are generally over valued. We now have an instance of both higher interest rates and lower discount rates on investments. This contradictory confluence is normally best exhibited at the tail end of a boom. Another "tail end" factor are headline grabbing takeover offers and talk of industry consolidation. This probably occurs because things have not yet gone bad for predator companies, their cash flow remains strong but to continue growing in a harder market they must purchase something - and they must compete against other would be predators for the same diminishing pool of "value" targets. Unfortunately, to purchase a good sized bargain in the current market is near to impossible, even companies with solid track records of making value enhancing acquisitions can be sucked in by Mr Market.

The best "out of favour sector" is cash and contrarian restraint.

[Flying Goat]

quote:

GTP's "real" NTA is less than that reported for a number of reasons.


Okay, that is a start, do you mind elaborating on that? This is something I am trying to understand.

[thereslifeafter87]

quote:Originally posted by Halebop

While there are always exceptions, both the ASX and NZX are generally over valued. We now have an instance of both higher interest rates and lower discount rates on investments. This contradictory confluence is normally best exhibited at the tail end of a boom. Another "tail end" factor are headline grabbing takeover offers and talk of industry consolidation. This probably occurs because things have not yet gone bad for predator companies, their cash flow remains strong but to continue growing in a harder market they must purchase something - and they must compete against other would be predators for the same diminishing pool of "value" targets. Unfortunately, to purchase a good sized bargain in the current market is near to impossible, even companies with solid track records of making value enhancing acquisitions can be sucked in by Mr Market.

The best "out of favour sector" is cash and contrarian restraint.


You're at somewhat of a disadvantage holding cash though HB - with reasonable inflation levels you're already losing 3-4% per year. When you factor in that the market is generally still climbing, combined with your inflation losses through purely holding cash, and if you assume that so long as you exercise disciplined investment strategy your holdings should fall less than the general market in event of a correction, then it is hard to argue against holding reasonably priced growth stocks.

The market has arguably been "overvalued" for a couple of years (or 15 take your pick). At the moment I'm content to buy fast growing small companies on reasonable PE's, but would normally prefer to buy similar types of companies on low PE's - hence wanting to look at out of favour sectors.

[thereslifeafter87]

quote:Originally posted by Flying Goat



quote:

GTP's "real" NTA is less than that reported for a number of reasons.


Okay, that is a start, do you mind elaborating on that? This is something I am trying to understand.


From memory it's because the land is encumbered by long term leases to growers. Any sale of the land would have to be at a reduced price due to the lease encumbrance.

[Halebop]

I wrote a big long point by point rebuttal and then decided why bother? If you can't see the car wreck approaching then enjoy the ride. The fact that you asked this question should be warning enough on where the market is sitting.

Good luck. [8]:)

[Mick100]

HB - does gold have a place as a defensive investment in your senario - afterall, gold is money (cash)

What about oil or a basket of commodities - any place for them in your opinion.
.

[wns]

Halebop – if you came across a company today that meets all your qualitative criteria, met your value criteria and the share price was in an uptrend – would you buy?

Or would you refrain from buying because the market in general is “toppy”?

[Halebop]

quote:Originally posted by wns

Halebop – if you came across a company today that meets all your qualitative criteria, met your value criteria and the share price was in an uptrend – would you buy?

Or would you refrain from buying because the market in general is “toppy”?

I'd probably buy albeit I'm less than enthused by the very strong market conditions (particularly in the face of rising interest rates) so am unwilling to spend on anything less than perfect. Am having a tough time meeting the valuation criteria on acceptable targets right now. Have still been trading though but with only smallish portions of capital risked.

[Halebop]

quote:Originally posted by Mick100

HB - does gold have a place as a defensive investment in your senario - afterall, gold is money (cash)

What about oil or a basket of commodities - any place for them in your opinion.

I'm a bit of a gold bug at heart but I don't see it as a suitable replacement for currency (I like gold just because it's a romantic concept to go somewhere remote and unloved and dig up something valuable). Governments would legislate price and/or ownership if the gold price became an issue. As such I think the safety of gold is a mirage.

Oil bottlenecks have nothing to do with a lack of oil so I think oil is overdone but don't have a strong opinion on any pending correction or further bull run. Good for alternative fuels though and I think the whole point of the USA stirring up a cr@p fight in the middle east has been to encourage investment in alternative energy and thereby do something to improve American Sovereignty - This is probably the reverse of what Muslim states and various USA haters believe but to me it seems every time something goes quiet on the PR front the USA go out of their way to hit the rattlesnake with a stick. If the end result is a world that runs cars on water or coal or crops then we will better meet the demands of economic growth in a world where Asia is as rich as Europe or the USA.

[SEC]

quote:Originally posted by Halebop

I wrote a big long point by point rebuttal and then decided why bother? If you can't see the car wreck approaching then enjoy the ride.


To be largely or wholly in cash as you suggest and practice is a bit of a copout IMHO. Cash has only outperformed other investment vehicles once in the past 20 years.

From memory you've been cashed up for about a year now. As such, you've sacrificed a year of stellar returns on the ASX or other international stockmarkets. Given your recent record is pretty good on the stockmarket (80+% pa for the past 2 - 3 years?), that's a LOT of upside you've missed out on in your fear of the markets retracing perhaps 25%.

Don't get me wrong, I also think the market is a bit toppy. It's been a while since I've invested more cash in the stockmarket. As such I have more cash in absolute terms than ever before. But I'll never be 100% cash and in an absolute worst case scenario I'll convert to enough cash/bonds to live comfortably off the interest. The surplus will still be invested in carefully chosen stocks.

But we're not at that stage yet. There's still some upside for a while and while my stockpicking skills enable my returns to comfortably exceed cash I'll still have considerable exposure to the stockmarket.

SEC

[thereslifeafter87]

quote:Originally posted by Halebop

I wrote a big long point by point rebuttal and then decided why bother? If you can't see the car wreck approaching then enjoy the ride. The fact that you asked this question should be warning enough on where the market is sitting.

Good luck. [8]:)


Hi HB.

Even if there is a train wreck approaching, there's no guarantee when it will hit.

I agree with you that everything is starting to look expensive, but then I take a look at stocks in the US market, and Aussie seems cheap again.

The market was looking expensive a couple of years ago, and since then it has gone on and on to new highs. If one had stayed out over that time, significant profits would have been missed.

Even a massive decline now would probably only take the market back to 2005 levels - effectively providing no benefit to the person who "saw the crash coming" back in 2005 and got out.

The big bloodbath sector will obviously be resources once new supply comes online and investors realise that low PE's don't help when commodity prices are falling and margins are wiped out.

Personally I can't see too much downside in the industrials I invest in that are growing quickly and trade on low PE's.

Stocks like those below do not present a great deal of risk to my mind, and their movements upward in value are generally in response to earnings announcements rather than the state of the overall market:

-ATR (reversing previous margin declines, exploring potential sale of its Chinese operations)

-ITD (tripling production capacity)

- MVP(growing very quickly but still with plenty of spare capacity in a business with recurrent revenue streams)

- ESS(low priced recurrent revenue, admittedly somewhat exposed to a fall in resource exploration activity)

- UOS (many projects on the go including one building that will have a market value on completion greater than UOS' current market cap, conservatively geared).

I'm not too worried about temporary swings in market prices so long as the price is right when I purchased, and the company is sound.

[thereslifeafter87]

I'm in agreement with SEC.

[duncan macgregor]

quote:Originally posted by Mick100

HB - does gold have a place as a defensive investment in your senario - afterall, gold is money (cash)

What about oil or a basket of commodities - any place for them in your opinion.
.
MICK, Gold is no better or worse than having a wad of bank notes from different currencies. Gold is the leveling gauge we use thats all, Its not worth anymore than a bit of paper with promise to pay on it. A gold nugget is worth no more than it was worth five hundred years ago, infact if anything its real value might have gone down. If you want to stand still without losing your nest egg, then buy gold. During a depression property is what to buy for a long term hold if you have the money. Silver is a much more usefull metal so try convincing your wife on that one. Macdunk

[SEC]

quote:Originally posted by duncan macgregor

A gold nugget is worth no more than it was worth five hundred years ago


...and would have paid absolutely no interest throughout that time.

I suspect Halebop, in turning ultra-conservative, is after an investment vehicle that at least pays risk-free interest.

SEC

[Halebop]

quote:Originally posted by SEC

To be largely or wholly in cash as you suggest and practice is a bit of a copout IMHO. Cash has only outperformed other investment vehicles once in the past 20 years.

From memory you've been cashed up for about a year now. As such, you've sacrificed a year of stellar returns on the ASX or other international stockmarkets. Given your recent record is pretty good on the stockmarket (80+% pa for the past 2 - 3 years?), that's a LOT of upside you've missed out on in your fear of the markets retracing perhaps 25%.

SEC, if equities so regularly beat cash, how could recommending cash possibly be a "copout"? That cop-out seems like a strongly contrarian neck exposing call rather than a meek cop-out.

I've probably averaged 80 to 90% cash in the last 18 months. At times I've been the reverse but generally for only short periods. Normally if I'm happy to buy something and it is liquid enough I'd put up to 100% of my financial net worth into a single asset but generally up to 25% to 50%. In the last 18 months with only 2 exceptions my trading has been restricted to no more than 10% in a single asset (and often much less). I've also admittedly spurned a couple of opportunities that I probably should have purchased with hind-sight as well. Consequently, my returns have been restricted, where outsized 80 and 100% gains have only delivered 4 or 5% growth to the entire value and regular gains have made very little impact. I'll just live with the consequences of that caution but my returns have still beaten my benchmark ASX and NZX.


quote:Originally posted by SEC

...But we're not at that stage yet. There's still some upside for a while and while my stockpicking skills enable my returns to comfortably exceed cash I'll still have considerable exposure to the stockmarket.

The question is how much of the returns being generated by you, me and Barry Baby Boomer are due to superior stock picking skills and how much to benign environment and momentum. We now have people who purchased their first investment dwelling with bank financing in 2003 "teaching" others how to make wealth based on their "experience". We have people who have unknowingly mortgaged the house to trade arcane financial derivatives. We have people who have bought speculative explorers and top of cycle miners on the back of boom who have no idea that mining is a historical no mans land of lower than cost of capital returns. We have people who source their investment advice from online contributors with unknown agendas.

I'm going stick with my "cop out" prognosis.

[duncan macgregor]

quote:Originally posted by SEC


quote:Originally posted by duncan macgregor

A gold nugget is worth no more than it was worth five hundred years ago


...and would have paid absolutely no interest throughout that time.

I suspect Halebop, in turning ultra-conservative, is after an investment vehicle that at least pays risk-free interest.

SEC
The interest that the money made mostly gets lost with inflation. In other words interest only keeps you standing still exactly in a similar way gold does. Macdunk

[Halebop]

Only a rough back of the envelope guess because I don't actually know what my cash holding was but I think my cash has beaten inflation by about 0.5%.

[SEC]

quote:Originally posted by Halebop

The question is how much of the returns being generated by you, me and Barry Baby Boomer are due to superior stock picking skills and how much to benign environment and momentum.


Halebop, reading between the lines it looks as if you've outperformed the sharemarket (in good and bad times) over a number of years so what happened to you 18 months ago to make you decide your stock picking skills were no longer good enough to beat cash?

Did Warren Buffett ever sell up his stake in various companies and flee to 100% cash when he thought the market looked toppy? Instead, he's probably looking at purchasing companies in out of favour sectors, the exact topic of this thread.

SEC

[lakedaemonian]

quote:Originally posted by SEC


quote:Originally posted by Halebop

The question is how much of the returns being generated by you, me and Barry Baby Boomer are due to superior stock picking skills and how much to benign environment and momentum.


Halebop, reading between the lines it looks as if you've outperformed the sharemarket (in good and bad times) over a number of years so what happened to you 18 months ago to make you decide your stock picking skills were no longer good enough to beat cash?

[b]Did Warren Buffett ever sell up his stake in various companies and flee to 100% cash when he thought the market looked toppy?[b/] Instead, he's probably looking at purchasing companies in out of favour sectors, the exact topic of this thread.

SEC


No He didn't, BUT..........he had the good fortune to purchase companies that generate cash like printing presses(insurance underwriters) for him to invest.

[Mick100]

quote:Originally posted by Halebop
[

The question is how much of the returns being generated by you, me and Barry Baby Boomer are due to superior stock picking skills and how much to benign environment and momentum. We now have people who purchased their first investment dwelling with bank financing in 2003 "teaching" others how to make wealth based on their "experience". We have people who have unknowingly mortgaged the house to trade arcane financial derivatives. We have people who have bought speculative explorers and top of cycle miners on the back of boom who have no idea that mining is a historical no mans land of lower than cost of capital returns. We have people who source their investment advice from online contributors with unknown agendas.



Yes, I agree with most of what your saying here.
Although the US looks as if it could be heading for a reccession, I don't see evidence stacking up for a global melt-down - yet
China now has a middle class of 300m people (people who earn 10,000 usd, pa) so the growth of their economy is becoming less relient on the US as domestic consumption picks up. Sure, the US economy is looking sick but the rest of the world looks OK to me.
.

[Flying Goat]

Thanks thereislifeafter87, think you are right on the button as my brother explained the very same thing to me yesterday. I have another question then, there are quite a few funds around around trading quite below nta, such as CYA/MMA - are they not reasonably good value when they are essentially a basket of reasonably high quality stocks??

Thanks
Michael



quote:

From memory it's because the land is encumbered by long term leases to growers. Any sale of the land would have to be at a reduced price due to the lease encumbrance.

[Flying Goat]

quote:
-ITD (tripling production capacity)



Agree and think this company is better much than cash right now.

-----------------------------


quote:


- MVP(growing very quickly but still with plenty of spare capacity in a business with recurrent revenue streams)



Perhaps but is this not still quite risky in the sense that the full extent of using Methoxyflurane on the the vital organs is still not know?



-------------------------



quote:


- ESS(low priced recurrent revenue, admittedly somewhat exposed to a fall in resource exploration activity)




I agree and hold many of these, great price big potential and according to TBQ has been making money for each of the last fifteen years even at the depths of the mining recession....

---------------------------



quote:

- UOS (many projects on the go including one building that will have a market value on completion greater than UOS' current market cap, conservatively geared).



This looks interesting, do you know where I can find out more about this company other than the obvious places? Cannot even find their website, but according to balance sheet in latest annual report quite a discount to nta?


PS forgive my obsession with discount to nta, but have been revisiting all the classic old texts lately in need of inspiration!

M

[Halebop]

quote:Originally posted by SEC

Halebop, reading between the lines it looks as if you've outperformed the sharemarket (in good and bad times) over a number of years so what happened to you 18 months ago to make you decide your stock picking skills were no longer good enough to beat cash?

For the same reason that when I was generally "passively long" (rather than actively long and short now) in the market, particularly 2002, 2003, 2004, & 2005, returns were superior because the economics of investing were also superior. I could buy the same solid performers the market holds literally dearly today, at a fraction of earnings, at a fraction of earnings multiples (Unlike TLA87 prognosis I thought there were enough companies whose values were cheap to fair during this period). Both earnings and price to earnings ratios expanded - particularly for growth companies which were somewhat out of favour after the dot.com crash dissuaded a lot of would-be growth investors. That gap has now been filled by eager "me too" investors who helped deliver those earlier returns. Companies are taking bigger risks to deliver growth, are just not delivering the sort of growth their valuations demand or are priced for perfection because they are still yet delivering growth. The risk of over paying is expanded under all 3 scenarios. What works in one market cycle will generally not work as it comes to an end, so to keep doing the same thing is to me a folly. I now think being cashed up will leave me in a superior position than exposing myself to what will in many cases prove to be unsellable penny shares

Like Buffett, failing a growth strategy I'll accept a cigar butt one. But even those ugly ducklings are being priced like performers. Serious market downturns are always underestimated. All the "experts" (like those 4 year property "gurus") will rationalise why their circumstances holds them above others - that superior skills makes them more nimble or somehow they are able to outwit physics or they are modestly geared or the quality of their investments is higher than norm or that there is a new economic paradigm or... etc. Consequently, like Buffett before the last major correction, I will remain conservative and stick to the game plan of investing rather than speculating. Unlike Buffett, I have the (lamentable) benefit of not needing to move billions. This allows me the luxury of either being "all in" or sitting this hand out and changing my mind about the same fairly quickly.

I've offered cash as an "out of favour sector" (and the sharemarket as a whole as a very in favour one). So far the characterization offered for my choice leaves me more rather than less convinced.

[tricha]

Good for you Halebop, "The trick is when there is nothing to do, do nothing" by the Master!

I wish I had your patience!

Out of favour, hmm, JBmurc is on to it ;)

Cheers[B)][}:)]

[SEC]

quote:Originally posted by Halebop

This allows me the luxury of either being "all in" or sitting this hand out and changing my mind about the same fairly quickly.


I detect a 'I deny I exited soon and I'll be proved right....... one day' mentality here and the problem is that you could be 'sitting this hand out' for two years, three years or longer. I'm sure Buffett would never condone this, whether or not he had to move billions. He would become more conservative as you indicated, but not move out of the market altogether.

As for your concerns about PE expansion, PEs cannot be looked at in isolation (bond prices are increasing too). Have a look at the Fed Ratio and it's gone up far more slowly than PEs and is still lower than it was on 2002 or 2003. Furthermore, some sectors like mining have had PE contraction since 2003.

When there is 'spiralling' PE expansion as occurred in 86-87 or the dot.com era, then it's time to reduce exposure. When there is clear evidence the global supply response to the commodities boom has finally started to kick in, then it's time to reduce exposure. Neither are evident (yet), and until then I will continue having considerable exposure to the stockmarket.

SEC

[thereslifeafter87]

quote:Originally posted by Flying Goat





This looks interesting, do you know where I can find out more about this company other than the obvious places? Cannot even find their website, but according to balance sheet in latest annual report quite a discount to nta?


PS forgive my obsession with discount to nta, but have been revisiting all the classic old texts lately in need of inspiration!

M

[/quote]

www.uoa.com.my

Closed end funds generally always trade below NTA - though if you can find one trading at a significant discount in comparison to its peers it might be worth a look.

[Halebop]

quote:Originally posted by SEC

I detect a 'I deny I exited soon and I'll be proved right....... one day' mentality here...

Really?


quote:Originally posted by Halebop

I've probably averaged 80 to 90% cash in the last 18 months. At times I've been the reverse but generally for only short periods. Normally if I'm happy to buy something and it is liquid enough I'd put up to 100% of my financial net worth into a single asset but generally up to 25% to 50%. In the last 18 months with only 2 exceptions my trading has been restricted to no more than 10% in a single asset (and often much less). I've also admittedly spurned a couple of opportunities that I probably should have purchased with hind-sight as well. Consequently, my returns have been restricted, where outsized 80 and 100% gains have only delivered 4 or 5% growth to the entire value and regular gains have made very little impact. I'll just live with the consequences of that caution but my returns have still beaten my benchmark ASX and NZX.

[tricha]

Out of favour, hmm, JBmurc is on to it, has been for a few monthes

Yep Black Gold and yes [:p] worth more than it's weight in gold. The world runs on it and with out it, our world will come to a screaming halt [V]

Yep if any one of seven deadly sins in the oil market come to fruition, then $100 a barrell.[:p]I am banking on at least one.

Myself, sold DLS due to big increase in share price and reinvested into BPT and bought more today, excellent quarterly report out yesterday.
Adds to my ARQ shares also going places re yesterdays annoncement.

Leave no stone unturned [B)][}:)]

[Stranger_Danger]

The thing with holding cash at the tail end of boom times like Halebop is doing is you always look like an idiot when investors with 2 year "track records" are kicking your ass performance wise by operating at the speculative edge.

It is a little like putting a weekend walker against a 100 metre sprinter on steroids to see who is fastest, then saying "man, that walker dude is a loser, look how slow he is going!".

One's perception is only altered when the steroid abuser has a heart attack and dies at 33 or something.

For me, I'm currently at 55% cash. I do NOT have a "cash policy" and dearly wish I was 100% invested.

My position has come about through

(a) Various takeovers releasing capital and minimal decent reinvestment opportunities.
(b) Slowly and calmly selling stocks that for various reasons no longer appeal.

Despite posters comments about "missing out", I'm intrigued to see that when I look at the 8 stocks I have sold in the previous 18 months (some examples would be HBY, STU, TWR etc) not one is trading above the price I sold at.

Also, with 1 exception, the stocks sold were at gains of between 100% and 800% and even the exception was sold at a profit. Making money is NOT easy and these gains should be (and are) appreciated, but you only have to look at the resources bunnies to see an *expectation* that stocks are something you buy that then go up 5-fold.

It ain't that simple.

Furthermore, the reason often given for holding a stock like STU in this environment - the dividend - starts to look very shaky as the risk free rate of return begins to approach its dividend yield.

STU is a good well run company, but I cannot rationalise why either a fundamentalist OR a chartist would hold a stock of this nature at present - and I can think of literally 100's of similar situations.

As profits slowly fall, and the price slowly falls, and the dividend slowly falls, the dividend yield stays roughly the same, but if one is keeping half an eye on their capital, then they're bloody expensive dividends.

Despite that, I'm certainly not in "the sky is falling" mode.

I'm always on the lookout for new opportunities and in this environment my criteria is almost down to two items

(a) A strong balance sheet
(b) A *clear* set of catalysts for significantly improved REAL cash earnings in the next 1-3 years, at a fair price.

One of the few stocks to have met this criteria in the last year is Air NZ although this is certainly no retirement stock!!

Bottom line is, I don't enjoy holding cash, and remain ready and keen as good opportunities present themselves.

However, given a choice of selling to private equity funds and the "other peoples money" industry, or competing with them to buy (which, in effect, you are doing vigourously in the sexy sectors at present) I'm very clear where I stand.

Disc : AIR

[Flying Goat]

quote:Originally posted by Stranger_Danger

The thing with holding cash at the tail end of boom times like Halebop is doing is you always look like an idiot when investors with 2 year "track records" are kicking your ass performance wise by operating at the speculative edge.

It is a little like putting a weekend walker against a 100 metre sprinter on steroids to see who is fastest, then saying "man, that walker dude is a loser, look how slow he is going!".

One's perception is only altered when the steroid abuser has a heart attack and dies at 33 or something.

For me, I'm currently at 55% cash. I do NOT have a "cash policy" and dearly wish I was 100% invested.

My position has come about through

(a) Various takeovers releasing capital and minimal decent reinvestment opportunities.
(b) Slowly and calmly selling stocks that for various reasons no longer appeal.

Despite posters comments about "missing out", I'm intrigued to see that when I look at the 8 stocks I have sold in the previous 18 months (some examples would be HBY, STU, TWR etc) not one is trading above the price I sold at.

Also, with 1 exception, the stocks sold were at gains of between 100% and 800% and even the exception was sold at a profit. Making money is NOT easy and these gains should be (and are) appreciated, but you only have to look at the resources bunnies to see an *expectation* that stocks are something you buy that then go up 5-fold.

It ain't that simple.

Furthermore, the reason often given for holding a stock like STU in this environment - the dividend - starts to look very shaky as the risk free rate of return begins to approach its dividend yield.

STU is a good well run company, but I cannot rationalise why either a fundamentalist OR a chartist would hold a stock of this nature at present - and I can think of literally 100's of similar situations.

As profits slowly fall, and the price slowly falls, and the dividend slowly falls, the dividend yield stays roughly the same, but if one is keeping half an eye on their capital, then they're bloody expensive dividends.

Despite that, I'm certainly not in "the sky is falling" mode.

I'm always on the lookout for new opportunities and in this environment my criteria is almost down to two items

(a) A strong balance sheet
(b) A *clear* set of catalysts for significantly improved REAL cash earnings in the next 1-3 years, at a fair price.

One of the few stocks to have met this criteria in the last year is Air NZ although this is certainly no retirement stock!!

Bottom line is, I don't enjoy holding cash, and remain ready and keen as good opportunities present themselves.

However, given a choice of selling to private equity funds and the "other peoples money" industry, or competing with them to buy (which, in effect, you are doing vigourously in the sexy sectors at present) I'm very clear where I stand.

Disc : AIR




Nice post Stranger, know what you mean.

Mike

[SEC]

quote:Originally posted by SEC

As for your concerns about PE expansion, PEs cannot be looked at in isolation (bond prices are increasing too). Have a look at the Fed Ratio and it's gone up far more slowly than PEs and is still lower than it was on 2002 or 2003. Furthermore, some sectors like mining have had PE contraction since 2003.

When there is 'spiralling' PE expansion as occurred in 86-87 or the dot.com era, then it's time to reduce exposure.


Alan Kohler elaborating in today's Age on how any PE expansion has to be taken in context:

http://www.theage.com.au/news/business/history-shows-theres-a-long-way-to-go/2007/04/27/1177459980761.html

[i]
History shows there's a long way to go

Alan Kohler
April 28, 2007

WITH the Dow Jones Industrial Average having passed through 13,000 for the first time this week, the pricing of US equities versus bonds is once again at an extreme, as it was in 2000. But not in the way you think.

And, if history is any guide, the ASX S&P Index will also hit 13,000 in a year.

At the peak of the Dow in 2000 the US equity yield was 3.2 per cent (based on a trailing price earnings ratio of

31.3 times) and the US 10-year bond yield was 6.5 per cent. Shares were obviously expensive, bonds were cheap; and so it turned out.

Now the average P/E ratio in the US is 18 times, producing an earnings yield of 5.5 per cent. The 10-year US bond yield has fallen to 4.7 per cent. Shares are now cheap, despite the dramatic new record on the Dow, and bonds are expensive.

Much the same is true of Australia, although we are better off using comparisons with September 1987 rather than 2000, since our market didn't really participate in the dotcom bubble, because we didn't have many dotcoms.

But it's a similar story. In 1987 the trailing price earnings ratio of the Australian market was 20.4, which produces an earnings yield of 4.9 per cent. The 10-year bond yield was then 12.5 per cent.

Today the earnings yield is 6.4 per cent and the bond yield 5.9 per cent. The so-called Fed model says that the two yields should be roughly equal, so while the relationship between them in September 1987 indicated that shares were very expensive (and/or bonds were cheap), the reverse is now true.

As we stand here with the Dow at 13,000 and the ASX S&P 200 at 6150, shares are cheap.

That might seem a strange thing to say after three years of 20-25 per cent capital gains from the Australian sharemarket, and a 10 per cent gain so far this year.

But today's graph, prepared for me by Shane Oliver of AMP Capital Markets, proposes another view via history.

Shane has matched the two low points of the market in the 1980s and 2000s — August 1982 and March 2003 — which is when the two bull markets began.

It is now equivalent to about December 1986. History never repeats itself exactly, of course, but if it did, the Australian index would hit 13,000 next January before crashing.

The point is that the sharemarket has not yet had the price earnings multiple blow-off that usually marks the end of the bull market.

The 1987 blow-off only took the average P/E ratio to 20.4 because inflation was 8.5 per cent and the bond yield was 12.5 per cent — more than double what it is now. But that P/E was double the then 10-year average. Now the trailing P/E is 18 times, but inflation is 2.7 per cent and the bond yield 5.9 per cent (3.2 per cent real versus 4 per cent real in 1987).

Times change but, in my view, people do not. At the end of a long bull market, with abundant cash and rampant optimism, people tend to go nuts. They start extrapolating existing growth forever and price assets accordingly.

That has not happened yet: share prices have merely kept pace with earnings as they are now, not what optimistic

[Halebop]

An interesting piece of statistical smoke and mirrors to say predicting the market will go up takes courage. On balance, share markets return around 11 to 12% over time, they rise more often and by more than they fall. To say they will go up is a statistical probability, not a brave call. Predicting the market will rise is just as susceptible to this alleged date creep as well - if the market doesn't rise this year but does early next, a pundit can still point and say "see I was right".

There is one big difference in Price Earnings ratios right now versus 2000 or 1987 though - oil and mining companies are riding on cyclical high earnings but superficially less demanding PE ratios. Also an interesting omission to not compare the ASX's 2000 performance too. "Dot Com" is not a reason to discount the statistical validity of a given PE range. The reverse is true. Looking at the range of a whole market just looks to the earnings that market will buy - not the specific source(s). With M&A activity and receiverships, demographic and social change, the specific makeup of earnings is not comparable.... In 1987; Telstra was not listed. Wesfarmers was still in co-op training pants. Woolworths was losing money. BHP was Australian, not Anglo-Australian. The banks had a much smaller sharemarket foot print etc. Yet no attempt to invalidate 1987's data for it's differences...

...but then to include the 2000 data would invalidate a fatuous valuation argument.

[SEC]

quote:Originally posted by Halebop

An interesting piece of statistical smoke and mirrors to say predicting the market will go up takes courage. On balance, share markets return around 11 to 12% over time, they rise more often and by more than they fall. To say they will go up is a statistical probability, not a brave call. Predicting the market will rise is just as susceptible to this alleged date creep as well - if the market doesn't rise this year but does early next, a pundit can still point and say "see I was right".


For shares to rise in value over time is a given. To predict shares will continue to rise after 4 years of double the long term average takes courage and conviction since ultimately the return has to converge to the long term average at some point.


quote:Originally posted by Halebop

Also an interesting omission to not compare the ASX's 2000 performance too. "Dot Com" is not a reason to discount the statistical validity of a given PE range. The reverse is true. Looking at the range of a whole market just looks to the earnings that market will buy - not the specific source(s). With M&A activity and receiverships, demographic and social change, the specific makeup of earnings is not comparable.... In 1987; Telstra was not listed. Wesfarmers was still in co-op training pants. Woolworths was losing money. BHP was Australian, not Anglo-Australian. The banks had a much smaller sharemarket foot print etc. Yet no attempt to invalidate 1987's data for it's differences...

...but then to include the 2000 data would invalidate a fatuous valuation argument.


I don't know why Kohler omitted the 2000 data, but he should have since it would have added more substance to his argument that the sharemarket is currently not expensive. The PE in 2000 was around 20 (5%) and govt bonds were about 6.5%. Thus according to the Fed Model ASX shares were about 30% more expensive in 2000 than today. Perhaps Kohler was trying to show the ASX is still far below an 'extreme' valuation that occurred in 1987.

Halebop, what would make you change your mind on holding cash? Has the ASX got to drop to ~4000 (I think this was your target). What if it doesn't do so within a certain timeframe?

I've already stated my view on what it would take for me to change my mind about market valuation and start taking profits (and at least I have a strategy that admits the stockmarket cannot continue at this pace forever). Never 100% cash though.

1. Spiralling PE multiples. If the ASX continues up another 25 - 30% without eps increases.
2. Resource supply/demand equilibrium. My gut feeling indicates this may happen a few months prior to the 2008 Olympics when all the infrastructure is finally in place and metals demand will start falling at the same time some major mining developments start coming on line.

Perhaps both these events may occur at about the same time!

SEC

[SEC]

quote:Originally posted by SEC

Halebop, what would make you change your mind on holding cash? Has the ASX got to drop to ~4000 (I think this was your target). What if it doesn't do so within a certain timeframe?


Halebop, I note you haven't answered these questions. Do you actually have a re-entry plan for the equities sector, or any other investment sector?

SEC

[Halebop]

The market is fundamentally overvalued. The thing that will make me change my mind is a correction or an improvement in the earnings mix. Resource and associated cyclical company earnings (Steel, Engineers, Contractors, Consulting Cos etc) are riding an earnings wave that due to cyclical and structural factors are not worth as much as more defensive industries. The lack of qualitative focus skews your quoted PE to OCR valuation model, particularly compared to the year 2000 when would-be miners were exiting the industry and going broke.

Unfortunately, defensive industries like Supermarkets, Insurance, Banking, Property Trusts etc are mostly priced like sexy growth companies, leaving little recourse for value and defensive investors in times of trouble. As a back up I'll technical trade whatever seems to be going up but I don't pretend to think that's much of an investment strategy. After that, "going small" is pretty much all that remains, and going small tends to be suicidal in a true bear market. I've been looking to markets outside the ASX and NZX again and perhaps that's where I might hide, but for my preferred "Anglo-centric" markets I'm suspecting it's a case of same sh!t, different bucket.

Good luck with the growth strategy. My contrarian pick is still cash.

[thereslifeafter87]

quote:Originally posted by Halebop

The market is fundamentally overvalued. The thing that will make me change my mind is a correction or an improvement in the earnings mix. Resource and associated cyclical company earnings (Steel, Engineers, Contractors, Consulting Cos etc) are riding an earnings wave that due to cyclical and structural factors are not worth as much as more defensive industries. The lack of qualitative focus skews your quoted PE to OCR valuation model, particularly compared to the year 2000 when would-be miners were exiting the industry and going broke.

Unfortunately, defensive industries like Supermarkets, Insurance, Banking, Property Trusts etc are mostly priced like sexy growth companies, leaving little recourse for value and defensive investors in times of trouble. As a back up I'll technical trade whatever seems to be going up but I don't pretend to think that's much of an investment strategy. After that, "going small" is pretty much all that remains, and going small tends to be suicidal in a true bear market. I've been looking to markets outside the ASX and NZX again and perhaps that's where I might hide, but for my preferred "Anglo-centric" markets I'm suspecting it's a case of same sh!t, different bucket.

Good luck with the growth strategy. My contrarian pick is still cash.


Halebop,

The big problem for investors as I see it is that every asset class seems to be at historically high prices. The stock market, the real estate market, commodities market... All seem to have experienced a huge bull run. There doesn't seem to be anywhere better to park my money than in the share market.

IMO massive global liquidity has created asset price inflation that has by far exceeded the rate of general inflation. More money is competing for returns than ever before. What this means in the long term I don't know, but it is a factor that needs to be considered.

We can actually look at the period from 1980 to today as an unbroken bull run. Sure, there have been temporary corrections (1987, 2001-2003), but for the most part if you have avoided the companies that are horrendously mispriced - the entrepreneurs in the eighties and the tech stocks later on - then the trend has been up.

I pose a question - can all the capital currently looking for a home suddenly disappear?

This to me is fundamental to the question of whether the market will "crash" and if so for how long.

It seems to me that with seemingly all asset classes currently highly priced, institutions that control the massive amounts of capital do not have much room to chase returns outside of the sharemarket - or at least not for very long.

What I am saying is that I think it is a strong possibility that in the event of a "crash", the panic will be reasonably shortlived (as in the US in 1987) and fund managers will start to look at all the bargains created by the rush for the exits and jump back in, drving the market back up again.

Of course, I could be horrendously wrong, so to compensate for that I will be sticking to fundamental value criteria (that goes beyond what the PE ratio is currently).

Your opinions?

[SEC]

quote:Originally posted by Halebop

The market is fundamentally overvalued.


Compared to what sector? Compared to when and on what basis? Compared to the average PE over the past 100 years? Compared to recession-type PE multiples? So far you haven't given any quantitative evidence to back up this sound-byte. Nor have you quantified a suitable entry point - eg are you going to wait for single figure PE multiples again like in 1990? If so I think you'll be waiting a long while.

At least I've come up with a counter-argument that the market is not overvalued compared to the average and to other bubbles and backed it up with facts, which you've discounted because you're making the flawed argument the resources sector (a large component of the ASX, even back in 2000) cannot be included in such an analysis.


quote:Originally posted by Halebop

The lack of qualitative focus skews your quoted PE to OCR valuation model, particularly compared to the year 2000 when would-be miners were exiting the industry and going broke.


In 2000, RIO and BHP were both trading at PE multipes of 17 vs overall PE of 20. So the big miners traded at a discount to the market in 2000 like they do today. So if you take out the resources sector the market was even more overvalued in 2000 using the valuation model.


quote:Originally posted by Halebop

Unfortunately, defensive industries like Supermarkets, Insurance, Banking, Property Trusts etc are mostly priced like sexy growth companies, leaving little recourse for value and defensive investors in times of trouble.


OK so let's have a look at some blue chip co's in the sectors you've mentioned and see if they're now rated like 'sexy growth companies' when compared to 2003 when the ASX was barely above 3000 (coincidentally when bond prices were going through the roof).

<pre id="code">
PE03 PE07
ANZ 12.2 14.5
Fosters 16.7 18.6
Macquarie Bank 15.9 16.7
QBE 14.6 17.1
Stockland 15.0 19.6
Woolworths 21.1 26.1
</pre id="code">

Perhaps an overall 15 - 20% PE increase from 2003 (multi-year) lows, not exactly spiralling out of control! The biggest expansion has been in the property trust sector which I agree is significantly overpriced since rentals have not kept pace with asset values.

Another point where I agree with you is the effect of recent M&A activity tending to overinflate valuations. If I did the same analysis on the above blue-chip companies in September 2006 the PEs would have been similar to what they were in 2003! However you've been arguing the market has been overvalued since before this spate of M&A so you can't use this reason to justify your exit from the sharemarket.

Good luck on your cashed up strategy. I'm sure you'll be proved right..... one day.

SEC

[Stranger_Danger]

SEC,

I do take your point - P/E ratios are not totally out of whack, nor are most other decision making tools.

With regards the "E" in your calculations, and looking to the future, are you giving any weight to the possibility of the reverse wealth effect?

In other words, an argument could be made that the "E" at many companies is not sustainable should we have a property market where consumers buy as little as possible in order to try and hold on to their negative equity homes, as opposed to recent times where many were able to borrow against the new equity rising prices had given them to buy consumer goods.

Believe me, I'm no ultra bear, pretty much for the reasons you cite.

With few exceptions (Uranium?) I don't see dot com madness out there.

With few exceptions (private equity?) I don't see large scale 1987 financial engineering either.

However, I'm not sure it is wrong of Halebop to be cautious at this juncture. I suppose the only question is whether he is too cautious, and time will tell.

[Mick100]

quote:Originally posted by SEC
you're making the flawed argument the resources sector (a large component of the ASX, even back in 2000) cannot be included in such an analysis.




I have been following the disscussion with interest

Halebop has expressed his belief that the rise in commodity prices is just a "flash in the pan" and is not sustainable over med to long term. I think this belief is at the heart of this discussion.
I, personally believe that this bull market in commodities has got another 10 yrs to run - but not for all commodities - they will each have there turn under the spotlight. So far base metals have dominated the bull run - it won't remain this way for the entire length of the bull market.

There will probably be a major correction in commodities at some stage - worse than last years correction, however this will not spell the end of the bull market.

So, if you don't believe that the commodities bull is a long term trend, (Halebop) and that countries such as australia, NZ and canada will be the most prosperous, among the developed countries, in the world for the forseeable future, then cash is probably a good option.
,

[SEC]

quote:Originally posted by Stranger_Danger

In other words, an argument could be made that the "E" at many companies is not sustainable should we have a property market where consumers buy as little as possible in order to try and hold on to their negative equity homes, as opposed to recent times where many were able to borrow against the new equity rising prices had given them to buy consumer goods.


Many (if not most) of the ASX listed companies have exposure to the global market. If domestic consumers tighten up on spending, is that going to make a significant impact if the global economy continues to move forward and ASX companies "E" continues to move upwards? Indeed, that's been a major factor to the DOW continuing to new highs despite weakness in the USA housing market.

Note that the ability of listed companies to not only increase profits (or even have static profits) but to *upgrade* profit guidance is a major driver of share price. If the market (especially the big caps) starts making net profit downgrades then that's a signal that market "E" is not sustainable. It happened from 2001 - 2003. There's been net profit upgrades since then and there's no indication it's going to reverse (yet).

SEC

[thereslifeafter87]

Another point to add to this thread. A fall in global commodities prices should be at least partially offset in its impact on the ASX by increased profits for major manufacturers due to lower input costs.

Also, any fall in commodities could weaken the Australian dollar.

It could therefore be worthwhile owning Australian manufacturers that export to the US - though there are many concerns about the US dollar due to the large twin deficits. Possible small cap targets: ARP, ITD.

There are too many variables to consider in macro factors, which is why I tend to focus on the bottom up approach, with an eye to the macro factors currently influencing a specific company.

[SEC]

quote:Originally posted by SEC

OK so let's have a look at some blue chip co's in the sectors you've mentioned and see if they're now rated like 'sexy growth companies' when compared to 2003 when the ASX was barely above 3000 (coincidentally when bond prices were going through the roof).

<pre id="code">
PE03 PE07
ANZ 12.2 14.5
Fosters 16.7 18.6
Macquarie Bank 15.9 16.7
QBE 14.6 17.1
Stockland 15.0 19.6
Woolworths 21.1 26.1
</pre id="code">

Perhaps an overall 15 - 20% PE increase from 2003 (multi-year) lows, not exactly spiralling out of control! The biggest expansion has been in the property trust sector which I agree is significantly overpriced since rentals have not kept pace with asset values.

Another point where I agree with you is the effect of recent M&A activity tending to overinflate valuations. If I did the same analysis on the above blue-chip companies in September 2006 the PEs would have been similar to what they were in 2003!


I've updated my PE analysis of so-called 'sexy growth companies' to see if there's any 'takeover premium' now factored into current valuations. Since we've moved on 3 months and are now into FY08 forward PE reduces by default. So for a more comparable analysis to PE03 I've based 'E' on CY07, taking the average PE for FY07 and FY08 for co's that report from July-June. The results are very interesting:

<pre id="code">
PE03 PE07(1) PE07(2)
ANZ 12.2 14.5 12.7
Fosters 16.7 18.6 15.9
Macquarie Bank 15.9 16.7 13.2
QBE 14.6 17.1 13.7
Stockland 15.0 19.6 17.3
Woolworths 21.1 26.1 22.4
(1): based on FY07, May 4.
(2): based on CY07, July 27.
</pre id="code">

It looks as if takeover/big growth premiums have largely evaporated from current valuations (except for the listed property sector). Indeed, the market is now *discounting* Macquarie in historical terms.

I consider the market to now be 'fair value' based on the ASX200 around the 6000 mark, although even when it was near 6500 the valuations were never really stretched.

Having said that I note with interest I've not made an on-market purchase of a non-resource related company since before September 2006 because I couldn't find anything that in *my* terms was sufficiently undervalued. I see that changing now, the next short while may provide a good buying opportunity for companies in 'defensive' sectors.

SEC

[steve fleming]

Nice work SEC.

However given the signifcant accounting policy changes since 2003 a $ of earnings in 2003 is not directly comparable to a $ of earnings in 2007.

Be also interesting to look at the relative 10 yr bond rates over the periods.

MBL is going to be good buying soon. It will be unfairly over-sold in any 'correction', when in reality it has zero exposure to the US subprime markets and a good proportion of it's income is now annuity based. Currently trading at levels where it was at beginning of the year - while Q108 came in way ahead of the PCP. All the DCF's i've seen recently on MBL are all $100-$110+ so $80 represents a nice discount.

[SEC]

quote:Originally posted by steve fleming

However given the signifcant accounting policy changes since 2003 a $ of earnings in 2003 is not directly comparable to a $ of earnings in 2007.

Be also interesting to look at the relative 10 yr bond rates over the periods.

True re GAAP vs IFRS but has anyone fully analysed how much different IFRS PE ratios would be to GAAP PE ratios? In any case accounting methods don't affect cashflow (and the ability to pay dividends).

I had a look at bond vs equity yields a while ago and found equities are cheaper now (Fed Model analysis) than they were in 2002/2003.

SEC

[OneUp]

quote:Originally posted by SEC
Note that the ability of listed companies to not only increase profits (or even have static profits) but to *upgrade* profit guidance is a major driver of share price. If the market (especially the big caps) starts making net profit downgrades then that's a signal that market "E" is not sustainable. It happened from 2001 - 2003. There's been net profit upgrades since then and there's no indication it's going to reverse (yet).

SEC


Totally agree.

[steve fleming]

quote:Originally posted by OneUp


quote:Originally posted by SEC
Note that the ability of listed companies to not only increase profits (or even have static profits) but to *upgrade* profit guidance is a major driver of share price. If the market (especially the big caps) starts making net profit downgrades then that's a signal that market "E" is not sustainable. It happened from 2001 - 2003. There's been net profit upgrades since then and there's no indication it's going to reverse (yet).

SEC


Totally agree.


With reporting season only a couple of weeks away, there doesn't seem to be much market concern as to earnings going forward, (well until last Wednesday at least!)

Relatively few profit warnings to date based on unauditeds, and of those that have down-graded the majority were company specific (ie BOL, CEY) rather than macro driven.

With BHP set to record by far and away Australia's highest profit ever, it should set a positive tone.

[Dazza]

i have done some research a bit of ta a bit of fa and a bit of buffet

have narrowed it to MBL / QBE / WOW

i can only buy 2 though

MBL and QBE has the highest eps growth rates around 40% and 30% respectively

WOW only 20%

For intrinsic value minus current share price MBL and QBE out pace over WOW.

Im keen for MBL definately

QBE... i like insurance eh, hong kong insurance companies has sky rocketed, and buffett always likes reinsurance companyes

yet QBE for the entire 2007 period has been range bound? pretty much 30-33 stuck there eh, not LT trend at all

Im more inclinced to go for MBL and WOW i guess

mbl - finance, wow - consumer staples

suggestions anyone?

[Stranger_Danger]

From what I can tell MBL has built a culture comparable only to Enron.

I'm NOT arguing they are a candidate for the same outcome, nor talking about balance sheets and dodgy dealings - but I'm unconvinced the "millionaire's factory" will run as well in any environment as it has in the immediate past, nor that the culture or expectations of those within in could easily change, should change be required.

Disc : No MBL

[Dazza]

stranger let me guess u read the article?

or ur just as smart as Jimmy :P

i read the article eh, and am having doubts about purchasing MBL

the business i guess isnt that easy to understand

for sure they buy /sell assets etc but yeah that article was a really good read

[Stranger_Danger]

nope, haven't seen an article? Would be interested in the link, now I'm curious!

[Dazza]

this was in may

some peeps have said they should look into US banks rather ie the ones who invested in sub prime mortgages.

mbl's subsidaries has tonnes of cash - mig and map for instances.

anyhow i brought today at 79.80 so meh :D

Enron Prophet of Doom, Jim Chanos, Down on Macquarie Bank...Uh Oh THE DAILY RECKONING - 28/05/2007


Jim Chanos has Macquarie Bank (ASX: MBL) in his sights. Uh oh.
You may not know Chanos. But he's sort of infamous on Wall Street. And when he talks about stocks he hates, people listen.

Chanos went from reputable short-seller to stock market legend with his call to go short on the Houston-based energy trader Enron in late 2000.
It turned out to be the call of the decade. Enron blew up in spectacular fashion. Cameras flashed. Congressmen bellowed. Investors howled. The stock plummeted.

With Enron, Chanos spotted the special purpose entities (SPEs) that were at the heart of the company's balance sheet chicanery. The SPEs were used to borrow money that didn't show up on the parent company's balance sheet.

Privately, the company's insiders said SPE stood for "s*** piled everywhere." What it meant is that investors never had a clear picture of just what the internal finances of the company were until it was way too late.

We aren't suggesting that Mac Bank is the next Enron. But at an event in New York last week, Chanos is said to have highlighted the fact that the bank, "relies heavily on off-balance sheet financing and related party transactions," says Alistair Barr at Marketwatch.com.

Frankly, we are baffled by the financial engineering that takes place today. We wonder if anyone understands it. The buying and selling of assets is a tricky business. Macquarie did well enough at it the first half of the year, with AUD$733 million in net income. But with AUD$30 billion in buyouts, short-sellers are beginning to wonder if the bank has paid too much for acquisitions and whether it will be able to flog off assets for a profit.

There's no doubt MacBank is the poster child for modern financial engineering in Australia. It's got a growing portfolio of global assets and a much higher public profile abroad. Such a high profile, in fact, that one of the world's best short-sellers has taken notice.

This prompts an open-ended question for you, dear reader: Is it now time to look at short-selling Aussie stocks? If Chanos is down on MacBank, what about resource stocks? Base metals prices are high. But rising energy costs must certainly be set to cut into profit margins for Rio, BHP, and others. Hmm.

Could revenues continue to grow for Aussie blue chips, while net income declines? The answer to that story will be found in the monthly cash-flow reports for Aussie companies.

Also See -

Macquarie Bank: Cheap Credit Makes Asset Valuation Difficult

PM - Monday, 28 May , 2007 18:42:00
Reporter: Stephen Long
MARK COLVIN: Remember the $33-million man? Two weeks ago Macquarie Bank was riding high after reporting a 60 per cent rise in net profit. Now its reputation and its share price are under assault.

The reason, that the investor who first predicted the collapse of Enron has turned his sight on Macquarie.

He's the US hedge fund manager Jim Chanos.

Economics correspondent Stephen Long reports.

STEPHEN LONG: You might not have heard of Jim Chanos, but Wall Street has. And when he talks, people listen.

Mr Chanos runs a hedge fund called Kynikos.

He's famous for being the first big investor to say publicly that there was something wrong with Enron's accounts.

Jim Chanos makes his money by short selling, picking high-priced stocks that are headed for a dive.

Dan Denning, an Australian correspondent for the Baltimore-based newsletter The Daily Reckoning, has followed his career.

DAN DENNING: Chanos is a short seller, that's what he specializes in and he looks for companies where something's either critically wrong with the business or where he thinks that something's catastrophically wrong with the accounting.

STEPHEN LONG: Late last week Jim C

[Stranger_Danger]

Thanks Dazza, very interesting.

[steve fleming]

quote:Originally posted by steve fleming


quote:Originally posted by OneUp


quote:Originally posted by SEC
Note that the ability of listed companies to not only increase profits (or even have static profits) but to *upgrade* profit guidance is a major driver of share price. If the market (especially the big caps) starts making net profit downgrades then that's a signal that market "E" is not sustainable. It happened from 2001 - 2003. There's been net profit upgrades since then and there's no indication it's going to reverse (yet).

SEC


Totally agree.


With reporting season only a couple of weeks away, there doesn't seem to be much market concern as to earnings going forward, (well until last Wednesday at least!)

Relatively few profit warnings to date based on unauditeds, and of those that have down-graded the majority were company specific (ie BOL, CEY) rather than macro driven.

With BHP set to record by far and away Australia's highest profit ever, it should set a positive tone.


Ouch.

RIO missed its consensus target by a cool $200m.

& Downer downgrades again today.

Just what the market didn't need.

[winner69]

So RIO do the old 4.00 pm announcement trick eh

What'll happen tomorrow steve

[steve fleming]

quote:Originally posted by winner69

So RIO do the old 4.00 pm announcement trick eh

What'll happen tomorrow steve


Yep, surprised they didn't wait till Friday to do it!

top line OK...then all pretty much downhill from there.

"Industry wide cost pressures impacted the business in the first half, reducing underlying earnings by $503 million, adjusted for inflation."

I don't think we'll be seeing $100 again in the near future.

[Halebop]

Meanwhile in retail / distribution...

I was talking to a guy who runs a division of an Australasian distributor of consumer electronics. He noticed that marketing budgets (his and competitors) started drying up about 3 months ago. Although his business has recently snagged a new big account to prop up the numbers, pricing and competition has been unusually harsh for 6 months and particularly the current quarter, although volumes have remained steady.

Personal Lines Insurance...

Margins are crap and growth has gone negative for anyone trying to protect their profitability. This has a particular poignancy for companies that have been acquired, as their new masters are typically expecting early dividends to prove their empire building kung fu. Those going for market share are achieving it by not making any money (or those who have made a balls up of pricing have gained market share by accident). Claims cost increases, particularly on building work, continues to impact margins. The Weather in Australia and New Zealand has been less than useful too. One insurer told me that the recent Northland (New Zealand) floods were their most expensive "disaster" category claim event on record ever - and they don't even have a heavy exposure to the area compared to some. It pales it comparison to some exposures coming out of the UK though - but don't be surprised if we see some consequences through reinsurance arrangements - perhaps even corporate failures overseas and potential costs been thrown back on local underwriters.

[SEC]

quote:Originally posted by winner69

So RIO do the old 4.00 pm announcement trick eh

What'll happen tomorrow steve


Not much by the looks of it, RIO up +0.3% on the FTSE.

[Flying Goat]

Dazza

That is very interesting - sorry mate but must say I'm with Chanos and Williams on this one!



[quote]quote:Originally posted by Dazza

this was in may

some peeps have said they should look into US banks rather ie the ones who invested in sub prime mortgages.

mbl's subsidaries has tonnes of cash - mig and map for instances.

anyhow i brought today at 79.80 so meh :D

Enron Prophet of Doom, Jim Chanos, Down on Macquarie Bank...Uh Oh THE DAILY RECKONING - 28/05/2007


Jim Chanos has Macquarie Bank (ASX: MBL) in his sights. Uh oh.
You may not know Chanos. But he's sort of infamous on Wall Street. And when he talks about stocks he hates, people listen.

Chanos went from reputable short-seller to stock market legend with his call to go short on the Houston-based energy trader Enron in late 2000.
It turned out to be the call of the decade. Enron blew up in spectacular fashion. Cameras flashed. Congressmen bellowed. Investors howled. The stock plummeted.

With Enron, Chanos spotted the special purpose entities (SPEs) that were at the heart of the company's balance sheet chicanery. The SPEs were used to borrow money that didn't show up on the parent company's balance sheet.

Privately, the company's insiders said SPE stood for "s*** piled everywhere." What it meant is that investors never had a clear picture of just what the internal finances of the company were until it was way too late.

We aren't suggesting that Mac Bank is the next Enron. But at an event in New York last week, Chanos is said to have highlighted the fact that the bank, "relies heavily on off-balance sheet financing and related party transactions," says Alistair Barr at Marketwatch.com.

Frankly, we are baffled by the financial engineering that takes place today. We wonder if anyone understands it. The buying and selling of assets is a tricky business. Macquarie did well enough at it the first half of the year, with AUD$733 million in net income. But with AUD$30 billion in buyouts, short-sellers are beginning to wonder if the bank has paid too much for acquisitions and whether it will be able to flog off assets for a profit.

There's no doubt MacBank is the poster child for modern financial engineering in Australia. It's got a growing portfolio of global assets and a much higher public profile abroad. Such a high profile, in fact, that one of the world's best short-sellers has taken notice.

This prompts an open-ended question for you, dear reader: Is it now time to look at short-selling Aussie stocks? If Chanos is down on MacBank, what about resource stocks? Base metals prices are high. But rising energy costs must certainly be set to cut into profit margins for Rio, BHP, and others. Hmm.

Could revenues continue to grow for Aussie blue chips, while net income declines? The answer to that story will be found in the monthly cash-flow reports for Aussie companies.

Also See -

Macquarie Bank: Cheap Credit Makes Asset Valuation Difficult

PM - Monday, 28 May , 2007 18:42:00
Reporter: Stephen Long
MARK COLVIN: Remember the $33-million man? Two weeks ago Macquarie Bank was riding high after reporting a 60 per cent rise in net profit. Now its reputation and its share price are under assault.

The reason, that the investor who first predicted the collapse of Enron has turned his sight on Macquarie.

He's the US hedge fund manager Jim Chanos.

Economics correspondent Stephen Long reports.

STEPHEN LONG: You might not have heard of Jim Chanos, but Wall Street has. And when he talks, people listen.

Mr Chanos runs a hedge fund called Kynikos.

He's famous for being the first big investor to say publicly that there was something wrong with Enron's accounts.

Jim Chanos makes his money by short selling, picking high-priced stocks that are headed for a dive.

Dan Denning, an Australian correspondent for the Baltimore-based newsletter The Daily Reckoning, has followed his career

[Stranger_Danger]

Regarding MBL, for what its worth I saw on the aussie business news the other day that Bethany McLean, the business reporter who first spoke up about Enron and co-authored "The Smartest Guys In The Room" has been in Australia looking into MBL's off balance sheet items. Hmmmm.

MBL did not bounce back up with the rest of the market yesterday.

[winner69]

quote:Originally posted by Stranger_Danger

Regarding MBL, for what its worth I saw on the aussie business news the other day that Bethany McLean, the business reporter who first spoke up about Enron and co-authored "The Smartest Guys In The Room" has been in Australia looking into MBL's off balance sheet items. Hmmmm.

MBL did not bounce back up with the rest of the market yesterday.



Oh no .... not off balance sheet debt and all that sort of carry on.

I doubt even many in Macbank know how much debt there is floating around inthe whole network

Like the story that when they acquired (with Cintra) the Indiana Toll Road MIG put in $300M and borrowed $1.7 billion to fund the day. Thats some leverage but if you can pump up the valuation shortly afterwards no problems eh

But then MBL collected $millions in fees and have of course hefty ongoing management fees

Go for it dazza --- billions floating around and they are not called the Wizards of Oz for nothing

[SEC]

quote:Originally posted by steve fleming

Ouch.

RIO missed its consensus target by a cool $200m.


But the market was unfazed, and analysts are only trimming annual profit forecasts by 2 - 4%. So reaction not as bad as expected.

SEC

[steve fleming]

SEC

May we have an update on your PE analysis please??

ASX 200 average fwd PE (13) now significantly below the last 10 year average.

[Halebop]

My CCCC (Contrarian Copout Cash Call) remains in the black. :p

[thereslifeafter87]

My CCCC (Contrarian Copout Cash Call) remains in the black. :p

Well done HB.

That piece of market timing should make you a mint!

At what point will you be back in?

[SEC]

I've argued for a while that listed property trusts have been overvalued. Now with Centro imploding I think that sector will end up out of favour, even to the point of being fairly valued wrt the ASX, but it's still got a way to go even now. Worth watching.

SEC

[Halebop]

A gratifying read a few months on.

There are one or two out of favour sectors now huh? My cash is still cash.

[Huang Chung]

Listed property....I took a punt yesterday on Aspen Group. Looks fairly conservative, beaten down price and a good yield.

Also put my big toe in the water with Austin Engineering (ANG), Neptune Marine (NMS) and Tox Free (TOX) in the small cap space, as well as CBA under $39 and NAB under $26. None of these are big bets...just a nibble. All beaten down in the current market shake out.

Buying in too early??? Maybe, but who ever picks the bottom.

The only one that I'm having second thoughts about at this stage is TOX, which is taking on a pile of debt to buy Barry Bros. from Programmed Maintenance Services. If they can handle the debt, they should do well.

Probably some short term pain coming my way, but hopefully not too much.

[redzone]

I jumped into CEU this morning...78 cents with 10cent divi

[soulman]

The financials are out of favour ATM. I don't think anyone can time anything these days.

I bought too early and got trap by the bear trapped rally last month. Significantly, no one knows which coy will get smash with big intent like FCL today and BNB last week. PPT and LLC included.

This is already a bear market where you don't have to look too far for coy yielding more than 10%. The usual caveat is that if they can retain those yield and paying dividends via operating cash flows, not debt. Just like TCL. I see it at $3.00 soon.

The chart signals possibly 4800 but who can wait for the bottom because it might just never come. Buy quality and buy at good prices, that's all we can do. Pain might come but no one ever make money without taking on the pain barrier.

[Huang Chung]

Listed property....I took a punt yesterday on Aspen Group. Looks fairly conservative, beaten down price and a good yield.

Also put my big toe in the water with Austin Engineering (ANG), Neptune Marine (NMS) and Tox Free (TOX) in the small cap space, as well as CBA under $39 and NAB under $26. None of these are big bets...just a nibble. All beaten down in the current market shake out.

Buying in too early??? Maybe, but who ever picks the bottom.

The only one that I'm having second thoughts about at this stage is TOX, which is taking on a pile of debt to buy Barry Bros. from Programmed Maintenance Services. If they can handle the debt, they should do well.

Probably some short term pain coming my way, but hopefully not too much.

Continued the shopping spree today. Bought some shares in Industrea (IDL), which is a mining services company. Doing some interesting business selling directional drilling and coal degasification systems to the Chinese. Plenty of other interesting stuff as well.

[bermuda]

Everything apart from oil , gas and coal.

If you are in anything else you should do some research and consider oil , gas and coal.

[bear]

So many lovely things for sale ...

I have been buying listed property companies in the retirement space all year. Price keeps shrinking :-( so I keep buying :-) FKP has turned out nicely, but still have APZ, BEC, ILF, to go! Got a big shock yesterday when my portfolio dropped 7% in one day, but then realised that all 4 companies went ex-dividend together. Big pile of cash on the way :-)

Also have a few residential developers too - this is the biggest building supply shortfall in years, so when all the govts start throwing money/land/tax exemptions etc at them, the building industry should take off again. Either that or people will begin living in caravan parks (which I own too, courtesy of APZ :-)

I'm looking at Cardno (CDD) at the moment too. Profit upgrade last month, big price fall this month. WTF and SEK are also coming down nicely but still on the watch list only at this stage. IIN has also dropped to bargain bin status. Looking to top up here.

KW and others - any thoughts on Valad Property Group (VPG)

Heard it mentioned a while back (can't remember where) as a good yield and way under valued. Have some reasonable commercial assets in NZ Aust and UK and has lowish gearing

haven't been following property much lately

thanks in advance Bear

[bear]

Everything apart from oil , gas and coal.

If you are in anything else you should do some research and consider oil , gas and coal.

could add mining and oil servicing to that list bermuda

some other very small niche areas are doing well

bear

[SEC]

I've argued for a while that listed property trusts have been overvalued. Now with Centro imploding I think that sector will end up out of favour, even to the point of being fairly valued wrt the ASX, but it's still got a way to go even now. Worth watching.

SEC

It's about time the LPT sector finally came down crashing to realistic valuations. It took a GPT profit downgrade to achieve this. Whereas PE ratios across most of the stockmarket did not overinflate during the bull market they certainly did for property stocks. With the rest of the stockmarket already trading at well below historical PEs I expect the LPT sector to follow suit. Still worth watching but not buying yet.

SEC

[Dr_Who]

It's about time the LPT sector finally came down crashing to realistic valuations. It took a GPT profit downgrade to achieve this. Whereas PE ratios across most of the stockmarket did not overinflate during the bull market they certainly did for property stocks. With the rest of the stockmarket already trading at well below historical PEs I expect the LPT sector to follow suit. Still worth watching but not buying yet.

SEC


Why buy LPT when you can go out and buy the physical property itself. Banks usually are more than happy to lend you 50% for commercial and more for residential.

I still think it is too early to enter the property market. This cycle is one of the worst I have seen for many years and will have a long term effect. I cant see it recovering anytime soon.

[SEC]

It's hard to see LPTs as overvalued. They are generally around 30 - 40% below net assett backing. There should be no disagreement between NTA and share price, and C and I properties have not dropped in value, and unlike residential, will not have a major correction.

The property assets on the books may have a certain value but those values are proving outdated, way too high and probably not arrived at independently. The market is devaluing those assets because it sees an ultimate 30 - 40% correction in NAVs. Let's see a few genuine independent property transactions to see if the LPT directors or the market have got it right.

Prepare for asset writedowns and plenty of them.

SEC

[SEC]

I note there have been some recent property sales quoted in the LPT sector at about 10% below asset value. However if the relevent LPT is highly leveraged the discount to NAV magnifies significantly, to perhaps 30% or more depending on gearing. So market discounts of 30 - 40+% to NAV for some LPTs may not look so cheap.

Having said all that I admit some of the yields in the LPT sector are starting to look enticing. As always caveat emptor and DYOR, one has to ask questions like 'are the dividends sustainable'? What's the debt loading and maturity dates? Is the dividend derived purely from operating cashflow or is there some asset churn?

SEC

[steve fleming]

I note there have been some recent property sales quoted in the LPT sector at about 10% below asset value. However if the relevent LPT is highly leveraged the discount to NAV magnifies significantly, to perhaps 30% or more depending on gearing. So market discounts of 30 - 40+% to NAV for some LPTs may not look so cheap.



SEC

Agree with SEC on this.

The A-REITS are a real concern.

Westpac Office Trust last week announced a major write down in asset portfolio values, with one of their properties falling in value by almost 10% since December 2007 (ie in 6 months).

Today we saw Multiplex Prime Fund (so premium quality property) announce a 8.7% fall in the value of their properties over the last 6 months….the Value of their (A++) EY Centre in Sydney is down 12% in 6 months….it really is amazing stuff.

Cap rates are increasing across the board, by up to 1.5%bp on some properties, meaning that values are going to be cut big time.

So headroom in their banking facilities ( as SEC alluded to) , that is already borderline, is going to be under incredible pressure.

The one saving grace, at least in the Australian market, is rents are increasing, offsetting the climbing cap rates…if it wasn’t for that we would be seeing devaluations closer to the 20% mark rather than 10%.

And that’s just the asset side.

On the earning side, a lot of the diversified stapleds with their fund management/ property management / development management operations are going to be hit going forward just like all the other fund managers / banks exposed to a deteriorating economic environment…plus you have interest rates at between 2-3%bp higher than they were this time last year.

Just look at how many of the A-REITS have suspended dividend payments this year – I can count 6 at least.

[steve fleming]

I saw some analysis this afternoon from UBS (who are the best rated property analysts).

Of the 48 A-REITs in the ASX 300, UBS have a buy on 42 of them. Centro and Goodman are the only 2 they have sells on.

[SEC]

I saw some analysis this afternoon from UBS (who are the best rated property analysts).

Of the 48 A-REITs in the ASX 300, UBS have a buy on 42 of them. Centro and Goodman are the only 2 they have sells on.


Presumably they had a buy on Australand? What a disaster that's been.

Asset revaluation down of just 2% erases nearly 80% of net profit. They claim some of the writedowns are 'one-offs' - yeah right.

They didn't (couldn't?) retire $275M of hybrid debt, decide to reset at an extra 250bp and pay that out of a whopping 1:1 capital raising at near 40% discount to the prevailing price (ie operating cashflows insufficient to cover debt payments?)

Just shows you how overinflated asset prices (and subsequent writedowns) and overleveraging are a toxic mix and it is true for ALL property classes.

There'll be more heavily discounted capital raisings to come for the A-REITs, speculation that some of the overgeared Macquarie trusts as well as Goodman and GPT to follow suit. In the meantime I'll continue to watch this sector from the sidelines.

SEC

[Huang Chung]

SEC, if you've got the time and/or inclination, I'd love you to have a squiz at Aspen Group (APZ). They seem to be doing everything right, but your critical eye might pick up on something I'm not.

As I said, if you've got the time and inclination.....


Cheers H.C.

[SEC]

I've updated my PE analysis of so-called 'sexy growth companies' to see if there's any 'takeover premium' now factored into current valuations. Since we've moved on 3 months and are now into FY08 forward PE reduces by default. So for a more comparable analysis to PE03 I've based 'E' on CY07, taking the average PE for FY07 and FY08 for co's that report from July-June. The results are very interesting:



PE03 PE07(1) PE07(2)
ANZ 12.2 14.5 12.7
Fosters 16.7 18.6 15.9
Macquarie Bank 15.9 16.7 13.2
QBE 14.6 17.1 13.7
Stockland 15.0 19.6 17.3
Woolworths 21.1 26.1 22.4
(1): based on FY07, May 4.
(2): based on CY07, July 27.


It looks as if takeover/big growth premiums have largely evaporated from current valuations (except for the listed property sector). Indeed, the market is now *discounting* Macquarie in historical terms.


Almost a year to the day since I did my last analysis on the sexy growth company group, I've done an update which makes for interesting reading:



PE03 PE07 PE08(1)
ANZ 12.2 14.1 8.5
Fosters 16.7 18.5 14.0
Macquarie Bank 15.9 12.5 8.8
QBE 14.6 14.6 10.5
Stockland 15.0 19.4 10.3
Woolworths 21.1 21.9 21.0
Average 15.9 16.8 12.2
(1) Based on CY08, July 31.


Based on CY08 PEs the current valuations are averaging 23% below that in the last bear market of 2002-03 and reinforces how the ASX is trading at decade+ low PEs. Even if the "E" for FY09 reduces by 10% from consensus for this group of co's (or the ASX in general) it would still be 15% below previous bear market valuations.

Also interesting to note that Woolworths PE has not changed much since FY07, which makes it expensive in the current market, while the listed property sector has gone from premium to discount (for the reasons I've already detailed on this thread).

SEC

[Halebop]

Woolworths is quality but been a long time since it looked cheap.

I'm liking the insurance sector - defensive but tarnished with the financial sector brush and suffering from recent weather events. ...premium rates are looking like hardening in Australia and New Zealand after several years of market share led mis-pricing. QBE isn't my short term favorite because I'm nervous of the North American cycle and their appetite for acquisitions but they are probably the best Australian company in the sector. IAG are a dog and I would buy only as a quick and dirty cyclical play when the time was right but even then I'm not enthusiastic - some big cultural changes required to get them rationally pricing risk (I think QBE are better off with franking problems rather than IAG related merger integration ones). If you can handle the thought of a regional banking exposure within deflationary investment markets Suncorp (SUN) would be my pick but I'm still watching the technicals rather than jumping in.

[SEC]

If you can handle the thought of a regional banking exposure within deflationary investment markets Suncorp (SUN) would be my pick but I'm still watching the technicals rather than jumping in.

Suncorp eh? Just come out with a big profit downgrade. However you put in the 'watching the technicals' caveat as you have to do in a bear market.

I'm not a fan of insurance companies in this environment. They're glorified funds management companies which underperform in a bear market even if the insurance claim environment is benign - which it's not at the moment.

SEC

[Halebop]

Suncorp eh? Just come out with a big profit downgrade. However you put in the 'watching the technicals' caveat as you have to do in a bear market.

I'm not a fan of insurance companies in this environment. They're glorified funds management companies which underperform in a bear market even if the insurance claim environment is benign - which it's not at the moment.

SEC

The insurance cycle and investment markets are typically inverse. Current insurance results are based on the pricing and underwriting decision of 2 years ago, the weather of the last 12 months and investment markets as at 30th June. Rates are now hardening, particularly in response to weather and IAG's internal problems. Less disciplined underwriters who were making good coin from investments 2 years ago are now adjusting rates because their technical funds have become too costly.

On top of the insurance cycle, Suncorp have a number of structural factors I find interesting, albeit tempered by my bias against banking.

I'd be very surprised if I didn't at least trade an insurance company in the next few months and my interest in actually holding one as a bona fide investment is increasing day by day.

[macduffy]

Interesting post, SEC.
Just points out how much some of the Aussie leaders have been mauled by the bear.
A lot of potentially good buying there but I'll be waiting for an upturn in the trend.


:)

[SEC]

The insurance cycle and investment markets are typically inverse. Current insurance results are based on the pricing and underwriting decision of 2 years ago, the weather of the last 12 months and investment markets as at 30th June. Rates are now hardening, particularly in response to weather and IAG's internal problems. Less disciplined underwriters who were making good coin from investments 2 years ago are now adjusting rates because their technical funds have become too costly.

On top of the insurance cycle, Suncorp have a number of structural factors I find interesting, albeit tempered by my bias against banking.

I'd be very surprised if I didn't at least trade an insurance company in the next few months and my interest in actually holding one as a bona fide investment is increasing day by day.

The insurance and investment markets may be typically inverse but as you pointed out the insurance co's underpriced premiums when they were making money from their managed funds and only now increasing premiums. So if it takes 2 years for underwriting decisions to kick in it could be FY2010 before it starts flowing to the bottom line and by that time the markets (and hence the managed fund component) may be recovering too so the insurance and investments may run in tandem for a while.

Definitely a sector to look at in the next 12 months but perhaps not before the reporting season is over (and of course add the obligatory 'wait till the technicals improve' caveat).

SEC

[thereslifeafter87]

I wrote a big long point by point rebuttal and then decided why bother? If you can't see the car wreck approaching then enjoy the ride. The fact that you asked this question should be warning enough on where the market is sitting.

Good luck. [8]:)

HB, Not sure if you're still around, but I happened to be on here looking at some past posts, and came across a few gems on this thread. I had it right, but didn't know what I had. You had it down pat. Wish I'd taken your advice! I did alright out the other end, but it was a bad couple of years! How'd you fare?

[thereslifeafter87]

Hi HB.

Even if there is a train wreck approaching, there's no guarantee when it will hit.

I agree with you that everything is starting to look expensive, but then I take a look at stocks in the US market, and Aussie seems cheap again.

The market was looking expensive a couple of years ago, and since then it has gone on and on to new highs. If one had stayed out over that time, significant profits would have been missed.

Even a massive decline now would probably only take the market back to 2005 levels - effectively providing no benefit to the person who "saw the crash coming" back in 2005 and got out.

The big bloodbath sector will obviously be resources once new supply comes online and investors realise that low PE's don't help when commodity prices are falling and margins are wiped out.

Personally I can't see too much downside in the industrials I invest in that are growing quickly and trade on low PE's.

Stocks like those below do not present a great deal of risk to my mind, and their movements upward in value are generally in response to earnings announcements rather than the state of the overall market:

-ATR (reversing previous margin declines, exploring potential sale of its Chinese operations)

-ITD (tripling production capacity)

- MVP(growing very quickly but still with plenty of spare capacity in a business with recurrent revenue streams)

- ESS(low priced recurrent revenue, admittedly somewhat exposed to a fall in resource exploration activity)

- UOS (many projects on the go including one building that will have a market value on completion greater than UOS' current market cap, conservatively geared).

I'm not too worried about temporary swings in market prices so long as the price is right when I purchased, and the company is sound.

Funny reading this post today. MVP has finally come right. Pity I sold out well before it came right... ATR I made some money when they sold their zirconium business. Luckily I sold. The mine they're building that was supposed to be producing in 2008 is still in the conceptual stage.

ITD. Basket. Case. From memory I made some money, can't remember why I sold. Probably should've noted it down. Actually, maybe I lost some money...

ESS. I sold near the top. Then watched it go to 20cents during the GFC, at half NTA I figured it must be ok given a reasonable business. It got taken over at 70 something.

UOS. The one stock I've had in my portfolio since 2004. Love those little thieving Chinese dudes in Malaysia. They steal from the dumb shareholders every year by having a DRP at a 10% discount to the SP, and constantly buying back shares below NTA. I love having these guys on my side. They've made an absolute killing for themselves, and for me in the process. Bought at the equivalent of 10 or 11, have had about that in dividends and capital returns, and its now trading in the 50s as they list their property development business. You can say its luck riding the EM propery boom. I say, I bought this thing at half NTA with no debt, lots of cash, and on a pe of 4 or so from memory. I think that luck kinda makes itself...

[thereslifeafter87]

SEC, if equities so regularly beat cash, how could recommending cash possibly be a "copout"? That cop-out seems like a strongly contrarian neck exposing call rather than a meek cop-out.

I've probably averaged 80 to 90% cash in the last 18 months. At times I've been the reverse but generally for only short periods. Normally if I'm happy to buy something and it is liquid enough I'd put up to 100% of my financial net worth into a single asset but generally up to 25% to 50%. In the last 18 months with only 2 exceptions my trading has been restricted to no more than 10% in a single asset (and often much less). I've also admittedly spurned a couple of opportunities that I probably should have purchased with hind-sight as well. Consequently, my returns have been restricted, where outsized 80 and 100% gains have only delivered 4 or 5% growth to the entire value and regular gains have made very little impact. I'll just live with the consequences of that caution but my returns have still beaten my benchmark ASX and NZX.



The question is how much of the returns being generated by you, me and Barry Baby Boomer are due to superior stock picking skills and how much to benign environment and momentum. We now have people who purchased their first investment dwelling with bank financing in 2003 "teaching" others how to make wealth based on their "experience". We have people who have unknowingly mortgaged the house to trade arcane financial derivatives. We have people who have bought speculative explorers and top of cycle miners on the back of boom who have no idea that mining is a historical no mans land of lower than cost of capital returns. We have people who source their investment advice from online contributors with unknown agendas.

I'm going stick with my "cop out" prognosis.

I don't really need to add anything to this summation.

[thereslifeafter87]

Halebop,

The big problem for investors as I see it is that every asset class seems to be at historically high prices. The stock market, the real estate market, commodities market... All seem to have experienced a huge bull run. There doesn't seem to be anywhere better to park my money than in the share market.

IMO massive global liquidity has created asset price inflation that has by far exceeded the rate of general inflation. More money is competing for returns than ever before. What this means in the long term I don't know, but it is a factor that needs to be considered.

We can actually look at the period from 1980 to today as an unbroken bull run. Sure, there have been temporary corrections (1987, 2001-2003), but for the most part if you have avoided the companies that are horrendously mispriced - the entrepreneurs in the eighties and the tech stocks later on - then the trend has been up.

I pose a question - can all the capital currently looking for a home suddenly disappear?

This to me is fundamental to the question of whether the market will "crash" and if so for how long.

It seems to me that with seemingly all asset classes currently highly priced, institutions that control the massive amounts of capital do not have much room to chase returns outside of the sharemarket - or at least not for very long.

What I am saying is that I think it is a strong possibility that in the event of a "crash", the panic will be reasonably shortlived (as in the US in 1987) and fund managers will start to look at all the bargains created by the rush for the exits and jump back in, drving the market back up again.

Of course, I could be horrendously wrong, so to compensate for that I will be sticking to fundamental value criteria (that goes beyond what the PE ratio is currently).

Your opinions?

I think I got this mostly right... I just didn't realise the extent of the "crash"!

[thereslifeafter87]

I just had a look at the AREIT index - the value of the entire industry is now less than what it was in 2001. Does anyone actually believe that all Australian property can be bought cheaper today than in 2001?

Australia also does not suffer from an oversupply of property in the same way as the US and UK. We have the opposite problem, in that there is a massive undersupply of housing, coupled with high levels of migration and family formation. Consequently, growth opportunities still abound, we just have to wait out the "sky is falling" scenario.

I think the LPT market has massively over-corrected.

While this post was right in intent, it fails to distinguish between Market Cap, and EV. Remember that an enterprise has to pay back debt financiers before it can pay equity financiers. Therefore its value is debt + market cap. On that basis, maybe the LPT sector wasn't undervalued or historically out of whack here? Easy to say with hindsight!

[Halebop]

HB, Not sure if you're still around, but I happened to be on here looking at some past posts, and came across a few gems on this thread. I had it right, but didn't know what I had. You had it down pat. Wish I'd taken your advice! I did alright out the other end, but it was a bad couple of years! How'd you fare?

Hi TLA87, as long as you did alright in the end then that is all that matters. I recall this series of posts but the one that really sticks in my mind relate to a Gold Coast financier and a miserable understanding of risk.

...But yes, avoided the crash, made a few coins short selling falling stars then missed the bulk of the 'sharp' stage of the recovery. Due to personal circumstances and priorities have made very few investments other than cash over the last 2 years so my current results have been woeful vs benchmarks. Am just more seriously getting back into it now but am still getting my bearings.

Conversely my girlfriend has done well sticking to her knitting of unleveraged residential property here and overseas and hasn't changed her approach through or after the GFC. She did take some hits, particularly in NZ dollar terms, but her income has continued to grow thanks to a low risk approach.

[thereslifeafter87]

Are you referring to City Pacific?

I think I was in that well before the boom for a little bit, lost a small amount, then stayed away following that.

If you're talking about MFS - I looked at it, but never bought. I couldn't get over the idea that if they couldn't raise capital anymore, their business model imploded...

[drillfix]

Hi folks,

As posted in the XAO (asx) section/thread, here are some charts that reflect a comparison between the XAO grouped into 2 groups.
(as it would not let me add more on each chart).

So, compare away as this will be appropriate for the heading of this thead.

PS: All Ords is the Black Bold line.


XAO vs Aus Sectors Group 1 >>> http://www.imageurlhost.com/images/d4a7isy80wcakwygzyc_Aus-Sectors1.png


XAO vs Aus Sectors Group 1 >>> http://www.imageurlhost.com/images/nfgnwwubb9oiobbirva_Aus-Sectors-2.png


Enjoy~!

[JBmurc]

Well currently you would have to say the ASX Gold, resources ,Energy sectors are about as far out of favour as they can get .....the last 2yrs has just been one big kick in the guts for Shareholders in these sectors with far to few successive growths in value ,,,,just a few I've followed over the years that look to be at all time lows

May 2011-13

-Gold sector-

RMS $1.20 to 21c
TRY $4.22 to 1.81
KCN $5.62 to $2
NCM $25 to $17.50

-Silver-

CCU 62c to 14.5c

-Resources-base metal,Iron ore Nickel etc

PAN $1 to 29c
CFE 49c to 14c
AGO $2.50 to 99c
WSA $4.60 to $2.94

Energy

SSN 8.5c to 2.5c
PDN $1.40 to 90c
AWE $1.67 to 1.25
MPO 62c to 29c

these are just a few that have been smashed last 24months

[BIRMANBOY]

First comes the smashing, then the pummeling followed by abject panic....after that comes the buying.
Well currently you would have to say the ASX Gold, resources ,Energy sectors are about as far out of favour as they can get .....the last 2yrs has just been one big kick in the guts for Shareholders in these sectors with far to few successive growths in value ,,,,just a few I've followed over the years that look to be at all time lows

May 2011-13

-Gold sector-

RMS $1.20 to 21c
TRY $4.22 to 1.81
KCN $5.62 to $2
NCM $25 to $17.50

-Silver-

CCU 62c to 14.5c

-Resources-base metal,Iron ore Nickel etc

PAN $1 to 29c
CFE 49c to 14c
AGO $2.50 to 99c
WSA $4.60 to $2.94

Energy

SSN 8.5c to 2.5c
PDN $1.40 to 90c
AWE $1.67 to 1.25
MPO 62c to 29c

these are just a few that have been smashed last 24months

[Halebop]

First comes the smashing, then the pummeling followed by abject panic....after that comes the buying.

Nice : )

So just at the pummelling stage then?

I can recall creating angst on this thread with a prognosis that cash was the out of favour sector. I'm beginning to have similar feelings...

[JBmurc]

Some good bounces in the gold sector today SBM up 20% KCN 8% NCM 2%

Not that there hasn't been some good investment in the bear sectors NST,ROC,OSH a few I can think of ..........

but compared to the higher yield hot sectors Banks,telec's,industry etc ....there way behind the general markets

[Stranger_Danger]

Nice : )

I can recall creating angst on this thread with a prognosis that cash was the out of favour sector. I'm beginning to have similar feelings...

Bingo. Join the club.

Am moving slowly further into cash each week.

[BIRMANBOY]

Who really knows? All I know(believe) is if you buy true value in a share at a reasonable price and it drops eventually any and all wrongs will be righted...if you buy shares on SP and price movement criteria with scant regard to fundamental value all bets are off.
Nice : )

So just at the pummelling stage then?

I can recall creating angst on this thread with a prognosis that cash was the out of favour sector. I'm beginning to have similar feelings...

[janner]

Who really knows? All I know(believe) is if you buy true value in a share at a reasonable price and it drops eventually any and all wrongs will be righted...if you buy shares on SP and price movement criteria with scant regard to fundamental value all bets are off.

Amen .. to that BIRMANBOY

[JBmurc]

Cash the out of favour sector..... right .....the banks worldwide have never had more on their balance sheets...we are talking trillions in deposits over loans highest ever...then you have many bonds at 300yr highs.....deposit rates at record lows
I remember reading recently how some banks in the US are charging customers to hold their cash ....(also Aussie bank have some of there highest amounts on deposit on record)
I myself just changed banks as another offered me $3,250 to shift to them with no fixed time frame .... just bring your debt and we give you free cash....

And you just think cash is a great place to be LOL

the Big three ECB JCB FED all believe in creating more CASH to the tune of hundreds of billions per month

jeez I could ring up and get 10k 2.99%etc for 6-8months pretty much straight away on one of the bank credit card offers (have done before)

[JBmurc]

Warning bells going off in my head right now in regards to stock constant uptrend, real estate always up faster and faster, OCR rise in imminent future, Forex rate etc.. "When others are greedy, be fearful..."

OCR rise in imminent future ......Very unlikely