We’ve a full deck for you this morning reader. Commonwealth Bank, BHP Billiton, Road Taxes, and the next Government bribe we warned you about several months ago.
So, where to begin?
In fact, there’s so much to get through we may not manage it. But let’s see how we go…
We’ll start with the Big Daddy of the Australian market – BHP Billiton.
BHP Billiton’s results always gets big coverage in the mainstream press, so let’s give you the numbers and then something a bit extra.
Revenue down 15.6% to USD$50.21 billion.
Net profit down 63% to USD$5.88 billion.
Earnings per share down 61% to $1.05
You’d hardly call that a spectacular year. But there’s a bit more to it than that.
As anyone will tell you, cash flow rules in any industry. The resources sector is no different. You only have to look at the number of mining companies that went to the wall, or nearly went to the wall during the last twelve months.
For a time it seemed as though capital raisings were a daily occurrence. And for many of the small miners they didn’t have the luxury of an underwritten capital raising either.
In other words, there was no guarantee of enough funds arriving to keep the debt collectors at bay.
Fortunately, that was never going to be a problem for BHP. Even with revenue down 15.6% there was still a large enough buffer for it to record a profit of nearly $6 billion.
But of course, all this is history now. The analysts will take a look at the results and compare it to their forecasts. Then they can work out whether the stock is still worth buying.
Don’t forget, since the March lows, BHP shares have risen from below $28. And also don’t forget that BHP was trading for a bargain basement price of just $20 back in November.
The real issue is whether there is enough real development and expansion in the global economy to support production levels.
That’s something Dan Denning has been ruminating over upstairs at Diggers & Drillers, and on a smaller level that I’ve followed in Australian Small Cap Investigator.
As I wrote in last week’s research report to Australian Small Cap Investigator subscribers:
“According to the Australian Bureau of Agricultural and Resource Economics (ABARE) Iron ore exports in 2006-07 totalled 257.3 million tonnes. In 2007-08 it was 294.2 million tonnes. And so far for 2008-09 it’s standing at 234.4 million tonnes. Remember that’s after only nine months.”
Sure, the price of iron ore may have dropped, but the actual export levels are still running strong. And that’s despite the global economy experiencing its worst downturn in seventy years.
And my tip is for this strong growth to continue. The next resources Bull Run is upon us.
What makes us so sure?
The ‘Wealth Effect’ in Asia. Look, we’re not even talking economics here, we’re talking human nature. At some point, even the Chinese government is going to get fed up holding worthless bits of US Treasury paper.
As it’s already started doing, it’s investing in its own economy, and that will flow through to surrounding Asian economies.
Just as Australians, Americans and Britons decided they no longer wanted to work in factories and they no longer wanted to clean toilets, so Chinese workers will start to ‘upgrade’ their employment prospects.
They’ll also want to work in the cleaner and ‘nicer’ service industries. They’ll want to take university courses in Travel & Tourism and Media Communications rather than going to work in the local factory.
The development of the Chinese and Asian economies will be no different to how Western economies developed. In years to come China will also export jobs. And where will those jobs go?
Most likely to other Asian economies, or perhaps to even cheaper economies in Africa.
As for Western economies, well unless those economies are producing things the rest of the world wants or needs then they’ll spiral into a near-terminal decline – the UK and US spring to mind.
As I’ve written before, Australia’s the lucky one. We’ve got the resources industry. But the important fact is that the resources sector isn’t something for the Australian economy to fall back on.
The resources sector IS the Australian economy. It’s the driving force that has kept Australia going while other Western economies have fallen out of bed.
But contrast the BHP results with the Commonwealth Bank results. We’ll admit it, we tried to sit through the analyst presentation yesterday morning, but to be honest, it was just too boring and predictable.
Not surprisingly, the fund managers and analysts have loved the results. The bank’s shares were up slightly yesterday, and have added another 2% already this morning.
The big thing to take out of comparing BHPs results with CBAs is that BHPs revenues and profits were crushed due to the economic downturn. There was no government bailout and so BHP felt the full force of the economy.
CBA on the other hand has been firmly in the pocket of the government. It’s received bailout after bailout after bailout. So what happened to CBAs revenues and profits?
Operating income up 14%, and a Statutory Net Profit down just 1%.
What it proves beyond doubt is the banks received financial support to prevent them from collapsing. Not that the banks will admit that of course. Mike Smith at ANZ Bank for instance continues to claim the banks haven’t received “$1″ in government support.
Literally he’s right, because it’s multi-billions of dollars they’ve indirectly received.
But what the CBA result shows you is how desperate the bank is to prevent the housing market from collapsing. The image below shows CBAs exposure to residential mortgages:
There you have it, 56% of CBAs exposure is mortgages to the residential property market.
Of course this should be worrying for investors and the mainstream media, but it isn’t.
Because they point at the “fact” that property prices always rise so therefore CBAs 56% exposure represents a “conservative portfolio.”
Oh boy! We think we’ve heard it all now.
For anyone who believes the property slump has already happened, don’t believe a bar of it. The past twelve months ain’t been a slump at all. The property spruikers are already talking up the property market predicting big gains over the next twelve months.
We’ll admit we’re not game enough to put a specific date on when it will all come crashing down. The fact is, trying to predict a specific date for anything – property, shares – is fraught with danger.
What we do know is the facts. The property market is over-priced. The property market is the most manipulated market in existence. And that very soon the attempts to manipulate property prices higher will end in disaster.
When property is viewed as an investment rather than a dwelling it will react like an investment – an excessive valuation will correct to the downside. It won’t be the calm ‘soft landing’ the mainstream media is predicting.
And the banks will suffer more than most.
[We'll hold over the Government bribes and road taxes until tomorrow]
Other Stuff on the Markets
The S&P/ASX200 climbed 0.26% yesterday, while overnight on Wall Street the Dow Jones Industrial Average added 1.30%. In Europe the FTSE100 gained 0.97% and the CAC40 added 1.48%.
The price of gold in Australian dollars is trading at $1,138.60, while in US Dollars it is trading at $949.02.
The Aussie dollar strengthened slightly versus the US dollar and Japanese Yen, trading at USD$0.8331, and JPY80.16.
Further strength for Crude oil overnight, closing at USD$70.46.
For the biggest movers on the market yesterday click here…
