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Resource Prices Never Lower

Long term investors have great difficulty getting value from a resource investment.

Investor Confidence: How Companies and Analysts Collude

Private investors, unsuspectingly, have become the losers in the relationship between companies and analysts.

Employee Share Options: Too Quick to Judgement

The move to expense employee share options is a knee-jerk reaction which fails to come to terms with the fundamental problem.

Weak Australian Corporate Profitability

The underlying profitability of the Australian economy still seems inadequate for the level of the Australian market.

Economy Not Helping US Market (and vice versa)

Weakening US manufacturing conditions are signaling further weakness in US equity markets.

Declining Commodity Prices: More Evidence

There is broad evidence of a long-term decline in commodity values.

Housing: Yes, There Will Be A Fall!

History says that the housing market will weaken but not until interest rates begin to rise.  Could some of the more dire warnings of housing price falls come to pass?  The answer is ‘yes’.

Required Returns: Investment v Speculation

Investors need to have a clear view of their required rate of return to be able to make effective investment decisions.  Having a target or required rate of return differentiates investment from speculation.

Equity Valuation Guideposts

A stable or appreciating Australian dollar could persuade overseas investors that the risks from investing in the Australian market have diminished.  The prospect of the Australian market rising at a faster rate that the underlying growth in profitability might become a realistic expectation.

Growth and Returns: How the Companies Line Up

Equity market valuations have become more reasonable but the growth expectations implied by current prices are still likely to be testing.

'Market Darlings' to 'Fallen Angels': How Investors Can Cope

Several pending corporate restructures highlight how short-lived is the success of the typical Australian listed company.  This should be a genuine concern for long-term equity investors because it affects adversely the overall valuation accorded the Australian market.

Beating The Expectations

Once information comes to hand which changes views about the sustainable potential growth rate, the higher the previous growth expectation the more dramatic will be the price effect.

Bond Yield Guideposts

Cyclically higher inflation in the USA which would tend to drive rates higher would be offset by a decline in the Australian yield premium as the relative inflation performance converges.

Vale: Australian Resource Investments

The foreshadowed merger of MIM Holdings with Xstrata, a Swiss-based resources company, highlights how the Australian resource major, like the dinosaur, has failed to cope with its environment and is disappearing.

Still Awaiting the e-commerce Revolution

The build-up in e-commerce sales in the USA remains slow.

Government Changes Forecasts

With prices now expected to be increasing at a rate of 2½ to 3 percent and output growth around three per cent, underlying profit growth could be expected to be 5½ to 6 per cent, substantially below the longer-term average.

How Can Hedging be Harmful?

The term ‘hedging’ has been used misleadingly by companies to describe outright speculative activities which add risks shareholders might never have envisaged.

Australian Profit Update

There has been above average profit growth reported for the September quarter.

Asset Allocation Review

thebigpicture asset allocation model suggests maintaining a relatively modest exposure to domestic equities at the beginning of 2003 with cash levels remaining relatively high.

A Takeover: Then Comes The Real Decision

Investors should have mixed feelings about a takeover bid for any of their shares.  Takeovers might induce higher share prices but, once completed, the investor must choose alternative investments.

Parking Funds: The Risk With Bonds

Investors using the bond market as a safe harbour while awaiting a return to equities might be incurring some additional risks.  Cash might be the place to stay if short-term equity risks are perceived to be too high.

thebigpicture Themes Still Relevant

thebigpicture top ten themes reflect the views of the author about some of the longer-term trends which are affecting investment market outcomes.  The themes, originally published last year, have been reviewed with no changes.

Gold Prices: Irrelevant But Fascinating

There is probably no financial market indicator so widely reported and as irrelevant as the gold price.  Even so, it continues to fascinate.

Restructuring: Another Company Falters

There was yet another example in the past week of a company unable to cope with the aftermath of its own bold strategy.  This time it was Southcorp.  There is a bigger picture behind the demise of its chief executive.

High Growth Stocks: The Risk Revealed

The beginning of the half-year reporting season has immediately highlighted the riskiness attaching to companies whose share prices imply high growth rates.

Share Repurchases: The Safest Investments

With lower share prices extending across the market, companies will begin to consider more actively the possibility of buying back their own shares.

Dividends: The New Emphasis on Income

The fall in Australian share prices (and apparent absence of prospective capital gains) has placed more emphasis on dividend yield as a guidepost for stock choice.  Dividends are now approaching the yield available to investors from government bonds.

Whither Internet Retailing?

Use of the internet for retail transactions is growing but, having started from nothing, it is still far from making a meaningful contribution to commercial activity.

Housing: The Price Cycle Continues

The Australian housing cycle is an unintended beneficiary of Iraq failing to disarm.

Equities: The Value Gap Closes

Relatively resilient corporate profits and a weaker equity market are achieving the adjustment which was necessary to realign equity values.

e-Commerce: Dominated by B2B

e-commerce has been adopted far more widely for transactions between businesses than by consumers seeking to purchase goods or services.  The extent of the difference has again been highlighted by some recent statistics from the US Census Bureau.

The Very Big Picture

The events in the middle East might have obscured how long term trends underlie many of the economic and political developments which affect investment markets.

thebigpicture Investment Decision Model

Now that the Iraqi war is all but over, investors might be tempted back to equity markets.  To avoid the risks of irrational exuberance they will need some valuation guideposts.

The Shrinking Australian Market

Pan Pharmaceuticals, MIM Holdings, OPSM, AMP and Neverfail: more companies which have either fallen from grace or which seem destined to be put out of the reach of Australian investors.

The Australian Market Shrinks….Again

The destruction of value at AMP, once one of Australia’s leading financial institutions, throws up further questions about the Australian continuous disclosure regime.  It also highlights that strategic failure, once evident, is not easily rectified.  And, of course, it is yet another example of Australia’s golden rule of corporate behaviour: when in doubt, restructure!

Using Debt: It May Be Too Late

Recourse to debt funded education significantly changes the balance of individual finances.  A higher debt tolerance might reflect the peculiar experience of those currently making policy.  It might be inappropriate for a subsequent generation.

Getting Used To A Higher Dollar

Economic conditions justify a more buoyant Australian dollar.  However, the world economy has a vested interest in a strong US dollar and, longer term, upward pressure on its value could well resume.  For investors, the stronger Australian dollar is beneficial because it makes Australia a less risky destination for offshore capital.

The Profit Risk

Recognition that profit sensitivity to exchange rate movements will be affected by how a company organizes its production and sales activities is necessary for effective risk management.

Conspirators or Markets?

Are copper miners conspiring or simply doing what the market requires?

The ASX: Improving US$ Returns

The stronger Australian dollar should provide a fillip to the Australian equity market. Overseas investors will see that some of the risk from investing in Australian equities has been taken away.

e-Commerce: The Christmas Effect

The latest report by the US Department of Commerce on the uptake by consumers of e-commerce has shown that there has been little progress.

Housing: Too Protected?

In Australia, the housing market exerts a strong influence on monetary policy. It might be time for housing to lose its privileged position and stop disadvantaging other parts of the economy.

Inflation For Investors

Four times a year we are told what Australia’s inflation rate has been in the prior quarter. What should investors be looking for when they pore over these numbers?

Setting Standards: Accounting v Value

Australia’s accounting standards do not measure up according to an international accounting expert. Australian equity investments risked being ostracized. But do accountants really know what constitutes value? That is the key issue

for an investor trying to judge the debate.

Biotechs: Boom Or Malaise?

With around 80 companies listed on the Australian stock market making a bid for medical history, investor excitement should be running high. However, the experience of Australian biotech companies is a sobering mixture of failure, disappointed promise and, at best, modest accomplishment.

No More Earnings Surprises ?

Companies, not analysts, are now responsible for profit forecasts. This is one of the significant changes to occur as the reporting and disclosure regime has evolved in recent years.

Another Fad: Lose The Property

An emerging fad among companies is to separate property assets from operating businesses. Does this make sense for shareholders? What are the guideposts which investors should apply in deciding whether restructuring in this way adds to the value of the company?

Metal Prices: Some Things Don’t Change

Higher metal prices are a respite for mining companies but no escape from the long-term pressures dogging the industry. For some, rising prices are also a sign that the international economy is about to turn for the better. This interpretation of what is happening might be too optimistic.

Older And Less Profitable

An aging population and slowing economic growth could halve the rate of company profit growth.

Info-Tech Companies: Signs Of Life

Prices of information technology stocks have been rising. Demand for their products and their services has been strengthening. thebigpicture highlights a way of measuring the improvement in conditions.

Corporate Returns: Working Assets Harder

Improved financial returns from Australian listed companies have come from working existing assets harder. Business expansion has not been important. And, despite some improvement in returns, larger industrial companies are barely adding value for shareholders.

Company Growth Expectation Lowered

The stock market has been downgrading the growth prospects of Australia’s larger companies. That is probably good: the overall outlook is now more realistic when viewed against potential business conditions.

Company Growth Expectations

Measured against the growth prospects of the Australian economy, overall growth rates expected for larger Australian companies are now more sustainable. The disparity among companies’ growth prospects remains high with investors

needing to make choices about management capacity to deliver.

Free Trade: What’s In It For Investors?

With the Australian economy having been opened to more competition over the last two decades and Australia's corporate regulatory regime progressively harmonised with that of the USA, the impact here of a trade agreement is likely to be quite limited.

The Angels Keep Falling

One of the most perplexing challenges for an Australian equity investor is dealing with the propensity for self inflicted wounds among Australian companies. The frequent conversion of market icons to fallen angels damages the standing of the Australian equity market and complicates investment decision making.

International Equities More Attractive

thebigpicture half yearly review of market conditions shows a macro environment more favourable for international equities. International equity market conditions will help support the Australian market but domestic profit momentum will be constrained by monetary policy changes.

Fed v RBA: Who’s Right?

There is a difference between the US Federal Reserve Board and the Australian Reserve Bank in the conduct of economic policy. The Fed seems more investor friendly than the RBA.

Free Trade? Not Really

The Australian government has done a market access deal with the US administration. The US has conceded on matters which are not important to it. The Australian side has conceded on some of its priorities. Free trade it is not.

IPO’s: Track Records Count Most

IPO’s may be an overrated investment opportunity. Changing pricing arrangements are making them less attractive. Now, research from the USA shows up a need for investors to be very choosy: a company’s history says a lot about its post-IPO risk of failure.

Private Equity: More To Come?

Big gains are being realised by private equity investors as they sell some of their holdings through public listings.  Many of the high profile transactions are not repeatable.  Returns reflect additional risk and are likely to decline.

What Is Shareholder Value?

Shareholder value is a term bandied around investment markets by companies and investors without a lot of agreement about its meaning.  There is a clear-cut definition which investors should bear in mind when making their decisions.

Value: Growth v Inflation

The good news in the USA about its economic performance has prompted some selling of equities.  This seemingly perverse reaction illustrates the trade-off between growth and inflation.

International Investment: How Much?

Fund managers encourage people to invest in international equities.  The argument that they are going to be better off if they go offshore is an enticing one but is not as clear-cut as the marketers suggest.

P/E’s: Easy But Useless?

The p/e is widely used as an investment decision making tool but it is not the simple valuation indicator many pretend.  It can be very useful in some very limited circumstances.  Under most other conditions, its usefulness is limited.

US Elections: Adding Value

The US electoral cycle does have an effect on equity markets.  Returns are more likely to be positive and above average in 2004 because a presidential election is due in November.

Commodity Prices: ‘The Quick and the Dead’

High commodity prices have raised expectations about the performance of resource sector equities. However, some forecasters are expecting commodity prices to weaken in the 12 months ahead. This is the riskiest part of the cycle for equity investors despite company earnings looking so buoyant.

Australian Elections: The Market Wins

As in the USA, the Australian electoral cycle does appear to affect equity prices.  Elections are good.  The aftermath is not.

It’s My Value Chain

Control of the value chain is an important indicator of business sustainability.

Financial Reporting: What To Look For

Deciding what to look for in the mountain of information which comes with the annual reporting season is a challenge for an investor.  Here are some guideposts to help take the value investor to the peak and back safely.

Commodity Price Strategies

BHP Billiton (BHP) has made it clear that, in acting to maximise its own value, it is likely to put downward pressure on commodity prices. 

Accounting Standards: Benefits Questioned

Companies are presently channelling more resources into their accounting functions to make their public reporting conform to international accounting standards.  This is to make them more attractive to offshore investors.  However, investors want more than a change in accounting practices.

Profits Deliver Valuation Boost                           

Accelerating profit growth in the June quarter makes Australian stock market valuations more attractive.

Company Results: Returns Up                            

Australia's larger listed companies significantly improved their financial performance in the past year. They continued their relatively conservative approach, relying more on better use of existing assets than expansion of their asset bases to boost results.

Equity Return Analysis                            

Looking at value from the perspective of the return on equity also highlights how managers have been working to get more from physical assets but have been reluctant to use gearing aggressively to add value.

Share Buybacks: Sell & Win; Stay & Lose?                

Share buybacks are not what they were originally intended.  Amidst the current share buyback fad, there might be as many benefits for a departing shareholder as one remaining.  

Share Buybacks: Where Is The Value?                        

A company can raise its equity market value by widening the spread between its return on funds and its cost of capital. This is the underpinning for a share buyback.

Stock Picking Might Never Be Easier                            

There should be little excuse for active fund managers failing to beat the market in the last quarter. Unless a fund manager had a manic attachment to the banking sector, stock selection should have been relatively straightforward and rewarding.

Midcaps Raise The Standard                                           

The improvement in the financial performance of Australia’s smaller companies has been a feature of the Australian market in the past year.

Banks: Not ‘Which’ But ‘How Much’  

In making a bank investment, an investor needs to make a stock selection and an asset allocation decision.

Yes, You Can Learn   

Individuals do learn from their investing experiences.

Midcaps: Margins Deliver Value

The sharp improvement in the financial performance of Australia’s smaller companies, driven by margin improvement, has made these companies more secure investments.

Exchange Rates: What To Do?

As the Australian economy has become more sophisticated, the winners and losers from an exchange rate appreciation are harder to fathom. 

Telstra: Setting The Tone 

Telstra has hit the headlines again as it fights to extricate itself from a web of poor governance practices, structural failings and populist policy making.  The bigger picture is that its behaviour will have an impact on how people around the world judge the Australian market.

Amcor: Boxed-in By Circumstances

Amcor’s position in the industrial value chain might have had something to do with its recently disclosed trade practices predicament.

Directors Take A Stand On Value

National Foods showed that there is a different way of handling an unwanted takeover bid.  But it requires directors to be confident about the value of their company.  Few appear to be.