During the last few months we’ve shamelessly written that we believe the market has bottomed out. But just like the patient who is on life support, it is too early to tell whether it really will improve from here or whether it will have another cardiac arrest.
The only sector of the market we have been cautious on is financials. The banks especially. But now we are tempted to start whistling a different tune.
It’s risky because the Australian banks are not out of the woods yet. In fact some of them are only just starting to admit they have been hiding in the woods. Commonwealth Bank [ASX: CBA] springs to mind.
And we also shouldn’t forget that ‘being too big to fail’ is of no comfort to shareholders. You only have to look at Northern Rock in the UK. The bank was nationalised to protect depositor’s funds, yet shareholders saw the share price fall to zero.
And there could be worse to come for the banks. In his address to its annual general meeting, CBA chairman John Schubert told shareholders “it will be some time before the critical element of confidence is restored and recovery in the broad economy commences. We therefore remain cautious about the general outlook for the economy for at least the next 18 months.”
That is hardly a ringing endorsement for a more bullish view on the stock market. As we write the Dow Jones Industrial Average has gained by 6% this morning and the Australian market looks certain to open higher.
That doesn’t necessarily mean that it will only go up from here. But it does add some weight to the argument that the market is settling into a trading range. And it is starting to look like this is as low as it’s going to go.
We only hope we don’t get our fingers burnt.
When a Rating is Not a Recommendation
Yesterday the Treasury and ASIC released a joint report. It wasn’t on short selling, it was on a “Review of credit rating agencies and research houses.”
To be honest, we were quite staggered to find out that the three credit rating agencies that operate in Australia – Standard & Poor’s, Moody’s and Fitch are not required to have an Australian Financial Services License (AFSL).
As a bit of background, any organization that is offering any sort of financial service, especially if it is offering advice, is required to have an AFSL. Port Phillip Publishing has an AFSL as we offer general advice through our newsletters – Australian Small Cap Investigator and Diggers & Drillers.
However, for some reason the ratings agencies have been exempt from this provision. The report states that because ratings agencies do “not typically include a recommendation to ‘buy’, ’sell’ or ‘hold’ a financial obligation” and that a credit rating “is not an opinion about an obligation’s value”. So the agencies don’t need licenses.
To us that appears to be an extraordinary standpoint. It is correct that a credit rating does not give an explicit recommendation. Butit does give implicit advice on how secure a company is.
You only have to look at recent history with AIG in the United States. When the ratings agencies downgraded AIG the immediate reaction by stock holders was to sell. The credit downgrade cast doubt on the ability of AIG to meet its obligations.
In effect a credit downgrade to such a degree can be viewed the same way as a research house changing their view from ‘buy’ to ’sell.’
We are sure the agencies won’t kick up too much fuss, they are probably just grateful they got away with it for so long.
$2.8 Billion in Revenue and Nothing to Show For It
While the share market was plummeting to earth over the last couple of days, at least one stock was bucking the trend. Asciano [ASX: AIO]. Earlier this week it fell from $1.75 to 50 cents. In the following two sessions it has recovered most of that ground to close at $1.50 yesterday.
On Tuesday, broking firm Citi cuts its price target on Asciano. It previously had a buy recommendation and a target price of $6.08. As of Tuesday this changed to a sell and a target of 82 cents.
The gist of the research from Citi is that Asciano has too much debt . Not only that , but its earnings are likely to be impacted in a slowing economy.
The sucker punch though was the comment in the first paragraph of the report which said “the stock is worthless.”
Ouch! No wonder the price fell out of bed.
So, is it all doom and gloom for Asciano? Or does the quick price rebound qualify it as one of our ‘Bounceback Belters’? Our first cautionary note is not to forget what happened to Babcock & Brown [ASX: BNB].
If you recall, back in September the B&B share price slumped from $2 to about 70 cents in a matter of days. In the following couple of weeks it clawed its way back to $3. Part of that was thanks to the introduction of the short selling ban. Surely it would be plain sailing now without the evil short sellers around. Now everyone could focus on the fundamentals of B&B, which everyone had told us were sound.
Not that we believed them.
Well, it turns out that the market did focus on the fundamentals. And it turns out those fundamentals were just plain mental. Since then the share price has re-slumped back down to yesterday’s closing price of 55 cents.
As we take a look through the Asciano annual report – all 152 pages – we see that for the last financial year it had a financing expense of $401 million. That’s thanks to loans exceeding $4.6 billion.
A further look at the balance sheet doesn’t paint a pretty picture at all. Total assets of $7.4 billion, which includes goodwill of $4.3 billion. How much will that be worth if the company is put through a fire-sale? Not $4.3 billion is our guess.
The income statement (or profit and loss for us old timers) isn’t much to shout about either. The profit before financing costs was only $422 million, so if you take out the financing costs and a bunch of other things the company had nothing to show for $2.8 billion of revenue.
Asciano may have been a bargain at 50 cents for a short term trade. But anyone thinking it is still a bargain at $1.50 shouldn’t be surprised if it pays a visit back to 50 cents in the near future.