It’s a story more worthy of note for our sibling publication The Daily Reckoning, but we thought we’d mention it anyway. Bloomberg News tells us that Home-Safe Sales Surge as a greater number of people distrust the safety of banks.
We aren’t quite sure how we should react to a story like that. Do we disregard it as irrelevant? Or do we see this as another example of an over-reaction by investors that surely means the market is at or near the bottom?
We’ll know things are really bad if we see mattress sales rise as a result of people choosing that as a way to tuck away their savings.
Takeover in the Energy Sector
There are bargains to be had in the energy sector. Having been gazumped by ConocoPhillips [NYSE: COP] for a stake in Origin Energy [ASX: ORG], the UK’s BG Group [LON: BG] (formerly the state owned British Gas) is set on buying Queensland Gas Company instead [ASX: QGC].
According to the Australian Financial Review, BG Group has already agreed to buy AGL’s stake in QGC for around $5.45 per share. The total takeover value is expected to be $5 billion.
What will BG Group get for its money? It will gain access to the coal-seam-gas sector which QGC is involved with in the Surat Basin.
A takeover bid for QGC at $5.45 puts the price up towards the high that it reached of $6.39 earlier this year. Given the current performance of this stock and others it would seem unlikely that shareholders could resist a price that would be 50% higher than where it closed last week.
Real Economy Meets the Other Economy
It seems that the “real” economy and the “financial services” economy have finally met. We were a little bit dubious about the idea that there was no connection between what was happening on Wall Street and what would happen on the High Street.
Based on all the statistics that have been filtering through in the last few weeks it looks as though the charade of keeping them separate is over.
It wasn’t a completely illogical argument to say that all the dodgy inter-dealings between Wall Street firms wouldn’t have any impact on the wider economy. To begin with that seemed to be the case. Merrill Lynch, Lehman Brothers and Bear Stearns all fell over without huge disruption.
That was until everyone realized the rubbish these banks were selling to investors was actually rubbish coming from the “real” economy – bad mortgages, credit card debt, vehicle financing, corporate financing, etc.
It is now apparent that if it wasn’t for the willingness of Wall Street to buy up all these debt instruments the money would not have been made available. Therefore economic growth would not have expanded so much so quickly.
Now it’s just a case of how long it will take for the bad news to fully impact business and consumers. The market needs confidence that it can see past the bad news and see a return to earnings growth. Until that happens, markets will remain volatile and range bound.
Executive Hand-Outs
Those that have been clamouring for government intervention in the financial markets should take a deep breath. Months into the credit freeze and it seems that anything the governments have promised is either yet to be implemented or it already has been done but with no effect.
Yet it isn’t stopping corporations from lining up at the door of government to plead for bail-outs. Are these executives really concerned about saving the economy or are they more concerned with saving their skins?
Australian Dollar Crashes
If you want to see in pictures how the deleveraging of the markets is having a real impact look no further than the performance of the Aussie dollar against the Japanese Yen.
The ‘carry trade’ had been in place for years thanks to the large difference between interest rates in Australia and interest rates in Japan. Earlier on this year commentators were telling us how the carry trade was unwinding. Yet that was nothing until the real action started in July. Swarm Trader Gabriel Andre takes a look at the chart below.
As a quick refresher, the carry trade involved investors borrowing in Yen where interest rates were low and then converting those borrowed funds into Australian dollars. Once here they were then invested in higher yield bonds, or in other Australian dollar denominated assets such as shares.
This works fine until the JPY starts to appreciate against the AUD. When that happens, investors close out their Australian assets and repatriate the funds back into Yen. However they now receive less Yen for their dollar. This means that they don’t have enough Yen to pay back the borrowings leading to a loss.
Imagine if you were an investor that bought the Aussie dollar at 105 Yen and then had to repatriate it back at only 55 Yen! That’s nearly a 50% loss without taking into account any losses made on the Australian asset during the intervening period.
Cheers.
Kris.
