Which Aussie Icon is on the Ropes?

Much as we suspected in yesterday’s Money Morning, we’ve already seen the first stages of the institutionalisation of blatant money printing.

And not surprisingly it came from the market drones and Federal Reserve cheerleaders at CNBC.

Your editor wasn’t quick enough with the notepad and pen to jot down exactly what ‘Squawk on the Street’ host Erin Burnett said, but it went something like this:

“The Fed hasn’t actually increased the size of its balance sheet, it’s just going to keep it at the same level.”

As I say, that wasn’t exactly what was said, but it’s the gist of it.

Yet again the mainstream press willingly does the dirty work – and it is dirty, filthy in fact – of the government and the central bankers.

Blindly telling the masses that creating money from thin air to pay off debt and bail out a thieving government is good for you. It’s what the economy needs, they say. And surely what’s good for the economy is good for you.

Right? Right!

Er, wrong.

It’s good for some though, we’ll give them that. It’s good for the governments that get to postpone the day of reckoning until another day in the not-so-distant future, after they’ve left office if they’re lucky. It’s good for the corporate fat cats who get to decide their own incomes irrespective of how a company performs.

And it’s good for the banks – such as Commonwealth Bank of Australia [ASX: CBA] – as they get to borrow at artificially low rates and then lend the cash out to desperate borrowers.

Borrowers who are desperate because of the policies that have been implemented by the government and which have been cheered on by the fat cats and the bankers.

That’s why the CBA announced a $6.1 billion profit yesterday. In our mind, the mainstream Australian banks are worse than a loan shark or a payday lender.

If you go to a firm such as Cash Converters for a payday loan, sure you may get stung with a high annualised interest rate, but the reality is that most of these loans are short term. Usually no more than a few weeks, so the annualised rate is pretty irrelevant.

Borrow $200 and pay back $220 two weeks later doesn’t sound that bad. Except the mainstream numpties will scream and shout that it’s the equivalent of a 160% interest rate. That’s shocking, they say.

In contrast, the average mortgage in Australia right now is over $300,000. And while the interest rate may be much lower than for a payday loan, the length of the loan is over 25 or 30 years, meaning you’ll pay back about $300,000 in interest on top of the principal.

But that’s to buy a house, so that’s OK. Because house prices never fall, and anyway, there’s a chronic housing shortage don’t you know…

Oops! “Supply outstrips demand as market slows: new research”.

How’d that happen? We though there was a shortage RIGHT NOW of 200,000 homes. And that according to the Real Estate Institute of Victoria this was going to increase to over 400,000 home by 2020.

Now there’s an oversupply. Doesn’t make sense does it? Unless of course there’s always been an oversupply and that the banks and property spruikers have just mean leading gullible borrowers on a merry dance to hock themselves up to the eyeballs.

Anyway, we’ll have more on property tomorrow. Including our take on Australian Securities Exchange plans to introduce a tradeable house price index.

But even worse than that, we don’t see too many payday lenders enticing you to take out a loan. Sure they advertise their services, but you don’t get the constant drivel from them that you get from the banks.

You don’t hear the payday lenders telling you that you’ll become wealthy if you take out a loan with them. They don’t tell you to take out a loan today because tomorrow will be too late.

They don’t tell you that because they know it’s not true and they know you’d just laugh at them.

Yet when it comes to the banks, they’ve got their so-called economists spruiking night and day about how great the Australian economy is and how right now is the best time to buy a house – and naturally take out a $300,000 loan to pay for it.

Look, we’ve got no problem with companies making big profits – super profits even. You know that. But we do have a problem with an inherently insolvent banking system being underwritten by the taxpayer and then spreading nonsense about how safe Australian banks are and how property prices will never fall.

Because make no mistake, the great Aussie banks that the mainstream commentators have fallen in love with, make profits in one way only, and that’s by encouraging their customers to go further into debt.

The more indebted the population, the bigger the banks’ profits. And it’s all virtually risk free for the banks – or that’s what they think anyway – because they’re certain the government will bail them out again if things go pear-shaped. And they’re certain the government won’t allow property prices to crash.

What they’re yet to realise is that ultimately it’s all out of the government’s hands. All the government can do is delay a depression, it can’t prevent it.

We’re seeing that right now in the United States. The US government and Federal Reserve prevented the Great Depression of 2008 from wreaking its full havoc. But all it did is impoverish its citizens and postpone it so it will become the Great Depression of 2010 or 2011.

And I’m afraid to say we’re seeing early signs of the same depression here. Banks are profiting, thanks to the increased indebtedness and misery of the population. While genuine businesses, businesses that actually provide a service or product that doesn’t cause misery – Telstra excepted, that’s always a miserable experience dealing with those clowns – are scratching around trying to make a buck.

For instance, let me ask you this. Has there been a day or month this year that Myer hasn’t had a sale on? Stocktake sales, summer sales, winter sales, Easter sales, the list goes on. We’ve seen similar perpetual sales in other stores we pass and pop into at the Bayside Shopping Centre in Frankston.

But just to see how corporate Australia has been affected, look no further than the terrible full year results from Aussie icon Qantas Airways Limited [ASX: QAN].

The headlines from Dow Jones don’t sound too bad, “Qantas Airways FY Net Profit -4.3% at A$112M” and “1H FY11 Pretax Profit May Be Materially Stronger On Year”.

But just as a newly polished car may look good on the outside, it’s only when you look under the bonnet that you can see what’s really going on.

In the case of Qantas, forget the net profit amount and the forecast for the first half of the 2011 financial year, that’s just the lovely polished finish. If you want to look at the engine you need to look at the company’s cashflow.

And that’s where you can see the engine has almost seized up…

You see, while Qantas reports a $112 million profit, if it wasn’t for proceeds from borrowings of $1.352 billion, Qantas would have had negative cashflow for the year to the tune of $1.265 billion.

In other words, just like the Aussie battler who needs to go to a payday lender in order to cover the cost of a gas or electricity bill, Qantas has had to go to its payday lender and draw down from a debt facility in order to pay its bills.

This is despite supposedly having $3.7 billion of cash in the bank.

But you can see why Qantas went down the road of increasing its borrowings rather than drawing down on cash. Minus the borrowings, Qantas’ cash holdings would have decreased by around a third. Doubtless the analysts wouldn’t have liked that as it would have played havoc with a bunch of cash based ratios.

Much better to go further into debt instead. Just like the rest of the population. Debt is all the rage after all. $1 trillion of household debt can’t be wrong!

The rotten state of the company’s cashflow is evident elsewhere too, such as the decision not to pay a dividend for the third half-year in a row.

Which is hardly surprising considering on a per-share basis Qantas earned just 4.9 cents per share, or earnings of 1.9% of the share price.

When a company’s earnings are that low, and it needs to borrow money in order to be cashflow positive it’s not hard to figure out that the company is in terrible shape.

So much so that it’s not only a stock I wouldn’t buy if you paid me, but it’s a stock that we’d suggest short selling – providing you use appropriate risk management tools to guard against a potential move to the upside.

The way I see it is that airline stocks along with retailers and the banks present the perfect opportunity to short sell the economy heading into a depression – and perhaps the new ASX housing index if that ever gets off the ground. Although given the ASXs history in new product development I wouldn’t hold my breath for that one.

Qantas is clearly suffering from competition and the inability to increase airfares as much as it would like. And if Virgin Blue [ASX: VBA] is successful in its pitch to snaffle a bigger share of the business market then that’ll spell even worse news for Australia’s supposed national carrier.

But look, as you can see from the chart below, Qantas is by no means at a high point:

The best time to short sell this stock may have passed, but quite frankly as an out and out punt – and you know we like a punt – there still looks to be room for a further move to the downside. Perhaps even challenging the low point from early last year.

Broking firm Morgan Stanley recently cut its target price on Qantas to just $3.05, that’s about 20% above the current share price. We’d say that’s overly generous. 20% to the downside is our bet.

Best case for a short seller would of course be for the airline to go bust. And if their cashflow doesn’t improve then that isn’t entirely out of the question.

Although we can’t honestly believe any Australian government would allow Qantas to go broke. Not without finding some way of pouring taxpayer dollars in to prop it up just as it did with the banks.

Even so, a medium term price target of somewhere between $2 and $1.50 makes this a worthwhile punt – but make sure you protect against losses if the stock rallies higher…

Cheers.
Kris Sayce
For Money Morning Australia

Tagged as: bank, debt, economy, government, house, market, property