An “Investment Experience” from Commonwealth Bank

This morning we’ve left Fitzroy Street and have headed into town to catch up with our old pal Chris Mayer, the US based editor of Capital & Crisis.

He’s brought a bunch of American investors over for a tour of Australia and New Zealand so we thought we’d drop in to see what they’re talking about.

I’ll fill you in on any details in the next few days if there’s anything you should know.

Until then…

Last Thursday we wrote: “Short sell CBA – but not just yet!”

At the time Commonwealth Bank shares were trading at $56.75.

Last Friday Commonwealth Bank of Australia wrote: “The Commonwealth Bank (the Group) today announced it expects to report unaudited cash net profit after tax (NPAT) for the half year ended 31 December 2009 of approximately $2.9 billion. This result is significantly above the prior comparative period and well ahead of current analysts’ consensus of approximately $2.7 billion.”

Ten minutes later the share price closed at $58.10.

On Saturday morning we were glad we put the “but not just yet!” rider on our tip. Today we don’t care as the excitement over CBA’s increased profit forecast has disappeared with the price closing yesterday at $56.64.

CBA on ‘Short Sell’ watch

But anyway, regardless of the share price action, the profit guidance from CBA is surely final fact that the banking and financial and economic crisis is over.

I mean, $2.9 billion of profits for half a year can’t be bad can it?

Fortunately, we don’t believe a word of the spin. In fact, it convinces us even more to put Commonwealth Bank shares on ‘short sell’ watch.

I’ll explain what I mean in a moment. And before you think it, don’t. We’re not being contrarian against the banks just for the sake it, to prove a point. We’re contrarian on the banks because their entire structure and business model is weaker than a house of cards with an elephant perched on top.

But one statement from CBAs press release did amuse us. It was the following:

‘Improving equity markets, contributing to a turnaround in “Investment Experience” of approximately $240 million post tax.’

What the blazes does “Investment Experience” mean? The fact that they’ve shoved it inside inverted commas suggests even they realise some definition of “Investment Experience” will be required.

Actually, we’ll make it one of our tasks today to contact Bryan Fitzgerald, CBA’s head of communications, to find out what “Investment Experience” means. Prepare to be either amazed… or bored!

What about the “Investment Experience” at Colonial?

Anyway, it would be delightfully ironic if any of the “Investment Experience” has come from its funds management branch, Colonial First State.

Because on the day that we placed Commonwealth Bank shares on short sell watch, and the day before their profit upgrade, Colonial First State told investors to get stuffed because it was freezing its $850 million mortgage fund.

This is what I’m referring to when I say don’t believe the spin from the banks and the mainstream economists about the worst being over. If the worst was over, the Commonwealth Bank wouldn’t have to freeze redemptions on its mortgage fund.

We’ve written before that these mortgage funds should be called out for what they are – insolvent. And the CBA is aiding and abetting its subsidiary by approving the non-payment of due debt.

You can only imagine how much money investors are trying to draw down. For a $850 million fund to halt redemptions, the withdraw requests must be huge. There’s little doubt that we’re not talking a few million.

For the fund to be frozen again the outstanding redemptions must surely be in the hundreds of millions. In fact, odds are that if the fund was opened up for all withdrawals, the entire balance would probably be drawn down by investors.

Aside from the scandal that a fund is exempt from the insolvency laws that cover every other business, doesn’t it tell you something about the state of Commonwealth Bank’s finances that the bank isn’t prepared to underwrite the withdrawals?

According to the CBA’s last financial report it had more than $11 billion in cash on the books. Plus another $49 billion in investment securities such as bonds.

What’s a tiny $850 million to salvage your business reputation?

Well, it’s obvious isn’t it? The CBA knows it already has a balance sheet full of mortgage crap. The last thing it wants to do is bring another $850 million of mortgage crap onto its books.

Especially seeing as it probably sold the stuff to Colonial’s investors in the first place!

It’s time for Colonial and CBA to pay up

Gee, it would be nice to quarantine debt obligations like the banks can. Imagine if you just stopped paying your gas bill. Or imagine if you went to restaurant, ate the food and then told them you can’t pay the bill.

What do you think would happen? I can tell you what would happen, the gas company would cut you off and then send round the debt collectors, and the restaurant owner would probably take you out the back and give you a swift kicking.

Unfortunately, if you’re an investor in the Colonial mortgage fund you’re screwed. You want your money back? Tough, Colonial will pay you when they’re ready.

And Commonwealth Bank have the cheek to claim “Improving equity markets, contributing to a turnaround in “Investment Experience” of approximately $240 million post tax.”

It’s time Colonial and CBA put their money where their mouth is. If the bank is so sure that the Australian property and mortgage market is healthy why doesn’t it offer to underwrite the mortgage fund?

As I wrote last year, surely these “great” assets would be snapped up by an eager fund manager if they were any good.

CBA could make a killing on this by offering to pay investors 80 cents on the dollar. Retirees who rely on these funds for income would probably be grateful to have the certainty of 80 cents now rather than $1 in whenever.

And if these mortgage assets really are as great as everyone tells us, and the economy really is recovering, then surely a big and secure bank like CBA can afford to carry them.

When the economy returns to normal it could then sell them off to investors at face value.

Why doesn’t CBA do that? It’s only $850 million.

We know exactly why…

The words “funny” and “money” spring to mind. We can’t wait to see what the CBA has to tell investors about its “Investment Experience” when it reports on 10th February.

Cheers.
Kris.

 

60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 finished the trading day in the red, down by 1.02% to close at 4,861.20. Today Westpac and the Melbourne Institute release the Survey of Consumer Sentiment for January.

The American market returned from the long weekend with a bang. The Dow Jones Industrial Average was up 115 points, closing at 10,725.78. Certain health care reforms are being debated in Congress and this saw healthcare stocks all finish in the black. Read what else drove the US market here.

In the UK overnight, the FTSE finished at 5,513.14, higher by 18 points.

The Nikkei closed down to 10,764.90, a drop of 90 points. Japan Airlines [T: 9205] filed for bankruptcy yesterday, announcing ¥1.5 trillion (AUD $17.8 billion) of debt. The government is stepping with restructuring plans for the company allowing Japan Airlines (JAL) to continue to trade. The Japanese government has bailed out this airline three times in the past decade. Read more about JAL here.

The price of spot gold in Australian dollars is trading at $1,232.69 while in US Dollars it is trading at $1,138.53. The price of silver in Aussie dollars is $20.32 and in US Dollars it is $18.77.

The Aussie dollar versus the US dollar is trading at USD$0.9229, and against the Japanese Yen JPY84.12

Crude Oil was up overnight, closing at USD$78.91

For the biggest movers on the market yesterday click here…


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


Money Morning Australia