Probably the biggest story this week was the end of what was destined to be the merger of the century. Aside from all the why’s and wherefore’s about what went wrong with the merger, it also elicited the greatest number of marriage/engagement/divorce metaphors in the history of journalism.
That is quite some feat. We write of course, on the subject of the BHP Billiton/Rio Tinto story.
Aside from all the benefits that a takeover would have brought to BHP, the big point to take from it is that even mega companies are reluctant to add debt to their books at the moment. And it also gives an indication that if it is troublesome for the likes of BHP and Rio to raise money in this market, think about the smaller companies and how they must be faring.
An example of this is one of the companies in our Australian Small Cap Investigator (ASI) portfolio. Last week it released details of a new joint venture deal it had entered into. Three days later the window closed for shareholders to pick up more stock in a capital raising.
The result was that the company raised less than 40% of the capital is was hoping for. If it was twelve months ago we are sure they would have raised the full amount. Fortunately, the company in question does have a Plan B. But many small companies out there don’t. If they can’t borrow from banks and can’t raise additional capital from shareholders, it makes it very hard for smaller companies to invest in growing their business.
On the other hand, that is one of the reasons why rather than stepping back from looking at new investments for ASI, we are actually ramping up the coverage in the New Year.
The credit markets will eventually recover, but it may be slow. However, even before this becomes obvious to the market many small cap companies will have already taken advantage and should surge ahead in price.
In our view, we believe the next six months will be the best time in years to pick up undervalued small cap companies.
Cheers.
Kris.
Money Morning Uncertainty Index
|
Period |
Number of Days Where Close is 50+ Points Higher/Lower than Previous Day Close |
Number of Days in Period |
%age of 50+ Days |
%age of 50+ Days 1 Week Ago |
|
Aug to Nov 2008 |
51 |
66 |
77.27% |
77.27% |
This weeks’ most important story: Markets are uncertain. Inflation. Deflation. Stagflation. Unemployment. Credit meltdown. In times of uncertainty where are investors putting their money? Gold seems to be a popular place once more. Although it is down about 20% from the peak it has still greatly outperformed stock markets. This week our Swarm Trading analyst Gabriel Andre looked at the gold price on his charts to see which way the shiny metal could move next. Click here for more…
Highlights from last week:
Monday: “It looks as though Australia’s gold production for the full 2008 year will be the lowest since 1989. It will be somewhere between 25 to 30 per cent lower than the peak year of 1997.” Click here for more…
Tuesday: According to the short report over four million shares in Fairfax were traded short yesterday. Again, as a percentage of its total outstanding shares it is only 0.26%. Yet, as a percentage of yesterday’s traded volume of about 5.5 million shares it equates to 73%. Click here for more…
Wednesday: We’ve got no idea what is going on in the mind of Don Argus and Marius Kloppers, but we would be surprised to see BHP come back with a new deal once the market has steadied and once Rio has tidied its books up. Click here for more…
Thursday: As any self respecting investor knows, share prices are merely a reflection of how ‘valuable’ the market considers a company to be. If they ‘value’ it then they will buy it and the price will rise. If they don’t, then the opposite will happen. Click here for more…
Friday: Deep underground, one small firm - ‘unofficially’ sanctioned by the Australian government - has discovered a way to turn Australia’s abundant, dirty coal reserves into 100% usable diesel fuel! Click here for more…
