Fantasy Land in the Aussie Financial Sector

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It’s bizzaro world in the Aussie market today. Financial shares got a boost from a merger bid. The Prime Minister moves down the track toward price controls to bring local petrol down during a global oil crunch. And the RBA says only “risky borrowers” are facing tighter credit conditions these days.

Is everyone living in fantasy land around here?

Local stocks got a boost yesterday (especially the financial shares) by insurance giant QBE’s $7.4 billion bid for IAG. Meanwhile, the Age reports that ANZ (ASX: ANZ) was loaning money to a Melbourne broker with a similar business model to Opes Prime at the same time Opes was imploding.

“ANZ offered as much as $1.5 billion to companies associated with stock lender Chimaera Capital during February as pressure mounted on two other bank clients with similar business models,” reports Marc Moncrief in today’s Age. Hmm. That’s an interesting business decision.

When something is not quite right with a business, it sometimes shows up in the chart before it shows up in the paper. Don’t ask us precisely how this happens. But it is one of the great benefits of market pricing.

Though not perfect, the market price reflects the collected knowledge of all the buyers and sellers in a market. An efficient market-and not all markets are efficient, and even efficient markets are not always efficient-will tell you more about what’s going on with a business than any one person can tell you. All you have to do is look at the price and the chart.

Our chart guy sits about four feet away. We asked him to take a look at the financials and ANZ and tell us what he saw.

“They all have been hammered since October 2007,” Gabriel Andre writes. “The whole sector has fallen lower as the figures of losses generated by the credit and financial crisis were revealed. In the US and in Europe, several banks and financial institutions have already collapsed.” And locally?

“In Australia, banks were obviously less exposed to the subprime risks but also face the growing mistrust of the world financial system. The ASX financial stocks are therefore in a painful configuration. Fundamentally, no recently released or coming news or data are potentially supportive for this sector. However technically, investors can take advantage of rebounds and countertrends.”

Gabriel makes a good a point. In terms of improving business conditions, it’s hard to think of a good reason why bank earnings will go up in 2008. But large blue chip shares have large institutional investors. These investors often look for attractive entry points in which to establish long-term positions.

That doesn’t mean it’s a good idea, mind you. But there’s a plodding method to their investment madness, and the chart informs that method. Gabriel used our new charting software to take a look at ANZ.

“The stock recently failed to rebound beyond the 61.8% Fibonacci retracement of the fall between the high of February 4 at 27.5 and the low of March 11 at 19.5. The price came back around the 20 level. However the short-term seems to be oversold. The Stochastic Oscillator is at its lower levels and the %K line is rising above the %D line, which are bullish signals as they detect turning points. The next main resistance is the 61.8% retracement at 24.5, whereas the main support is at 19.5, the low posted in March.”

That was technical speak. Not French. Gabriel brings a different perspective to our ruminations, as well as a different language. We are thinking of starting a new e-letter based only on looking at the market from a technical perspective. It would cover the All Ordinaries, the ASX/200, and sectors, as well as particular stocks. Let us know what you think of the idea by writing to us at dr@dailyreckoning.com.au

On the issue of “risky borrowers” being the only ones affected by the credit crunch, doesn’t this depend on what version of reality you choose to acknowledge? True, the credit crunch hasn’t resulted in massive sub-prime losses for Aussie banks. But indirectly, the bear market in credit has caused massive trouble for Aussie banks and shares.

Who needs a sub-prime housing boom when boutique brokerages flog securities lending on clients and leverage up share market returns? America’s housing boom was a borrowed (and bogus) boom. How much of the out-performance of the Aussie share market in the last three years (relative to the S&P 500) has been result of investors buying shares with money they didn’t have?

You can’t get something for nothing, whether it’s the house of your dreams or share market gains. There’s always a price be paid, a reality check, always a day of reckoning.

Here’s something to watch for in the futures markets: increased margin requirements. Regulators shattered the Hunt brothers in the Silver market in the early 1980s by raising margins so much that all but the most cashed-up speculators had to flee their long positions. When the highly-leveraged buyers left the market, the futures price collapsed.

Could the same thing happen today with wheat, corn, soy, and rice? Regulators could easily raise margin requirements in these markets. But it’s not as clear that that action would lead to lower prices, or more importantly cheaper and more abundant food for the world’s six billion people. The futures markets are much deeper and more liquid these days. Market manipulation by regulation may be harder to achieve, especially when it flies in competes with the forces of physical reality.

And besides, it would only work if you assume global food prices are rising as a result of financial speculation. That is obviously not the case. Exporters are hoarding crops, shopping for higher prices (or being forced by governments to sell product into the local market to satisfy the crowds in the streets.) The fundamental problem is in the allocation of global resources. We have a lot of people on this old furry ball, and we’re all starting to wonder if we cooked enough food for our dinner party.

Speaking of regulatory plans that gleefully ignore physical reality, Kevin Rudd’s new plan to have petrol stations report their prices at the end of the day to the government is absurd. He’s assuming that better pricing information will lead petrol stations to keep prices lower than they otherwise might. This assumes the problem in the petrol market is too little information and price gouging, rather than too little refined fuel for growing global demand.

It’s true that the more incomplete information is in a market, the larger profit margins are for sellers. This is why websites that allow consumers to compare prices have flourished. That’s a valuable service, and leads to competitive pricing. When prices are transparent, producers most compete.

There’s probably a petrol station (or a dozen) that raises prices because consumers can’t easily compare prices. But you have to wonder if more transparent pricing will lower prices…or raise them. Retailers forced to report prices lose the flexibility of raising or lowering prices in response to wholesale prices (market forces).

So what will they do? They will go for price certainty and keep prices at the high end. Our prediction: the system will go national and petrol prices will go up, not down.

Anytime you hear the world “unfair” in a discussion of prices you know you’ve departed the realm of reason for the realm of political fantasy land. Prices are what they are, all things being equal, because they reflect supply and demand.

Fuel prices are not unfairly high. They are inconveniently high. But the life of convenience made possible by cheap fuel is ending, ladies and gentlemen. Wishing it was otherwise-or running to the Big Nanny State Momma for relief-is not going to change reality.

Of course crude oil prices are going up. They traded as high as $114 in New York. Refiners pay for crude oil to turn it into petrol. If their prices are going up, why wouldn’t petrol go up? And why wouldn’t petrol prices go up when crude oil production is peaking in places like Russia?

Global demand is growing. The supply of cheap stuff is not. Put that on your 2020 agenda Mr. Rudd. And take a serious look at generating base load electricity from geothermal and using more plug-in hybrid cars to reduce reliance in imported refined fuels.

You’d think Rudd would have learned a thing or two from John Howard’s mistakes. Howard promised to keep interest rates low and they went up anyway. He made a promise that was beyond his control to keep. Rudd promised an investigation into lower petrol prices. He has about as much influence over this as he does over the price of tea in China.

But politicians are fond of making promise they know they can’t keep. They can’t help it. They are pathological over promisers, eager to please and be liked. They believe-based on their exalted opinion of their own intellects-that they know how things should be and have the power to make them that way. Morons, but dangerous morons.

Price controls never work. They exacerbate shortages and lead to higher prices. Even a career diplomat can figure that out. What we need to do is listen to what price signals are telling us. They are telling us that there isn’t enough cheap oil to meet growing demand.

We either find more oil and pay what it takes to find it, or we reduce consumption and look for substitutes. Prices don’t lie. We just don’t always like what they say.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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8 Comments on "Fantasy Land in the Aussie Financial Sector"

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anthony pix
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spot on Dan, well articulated once again

Diggin it!
Guest

Australia has no sub prime but we do have low doc and no doc and brokers are trying to cash in on as many of these loans as they can before the inevitable happens[ the Aust-credit collapse ]The inevitable could be 12 to 18 months away and will be saturated with mortage and credit card default [ wake up Australia ]

william
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“””””Fuel prices are not unfairly high. They are inconveniently high. But the life of convenience made possible by cheap fuel is ending, ladies and gentlemen. Wishing it was otherwise-or running to the Big Nanny State Momma for relief-is not going to change reality.”””””” I beg to differ.we are tied to world parity pricing set by businessmen with their snouts in the trough. our beloved governments gouge 60 plus percent of the per litre price to fund their drunken sailor policies.our prices could and should be a hell of a lot lower with decent political management and a view doing the… Read more »
Andy
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I say let the prices go up. Only crisis will result in change. The high petrol prices will benefit the cause of solar and public transport and shank’s pony.
On a different note it was intersting to read the Daily Telegraph today – most NSW government ministers have a string of investment properties. Well if the Feds are the same then we have Buckley’s chance of altering the current status quo in the housing market with negative gearing and the divide between the haves and haves-not.

ron
Guest

You are quite right Mr Denning, a Fuel Watch system is not going to counteract peak oil.
What it has done in the west, has reduced the tiresome conspiracy theories about petrol prices and
maybe toned down the intra-week variations in pricing.
It is also not price control, it is just information.
Even a specialist in small-caps can figure that one out.

Tom
Guest

Those who want petrol taxes reduced are fools. They should be increased to internalize the externalities of petrol consumption. We are living unsustainably. Higher prices for fuel and energy will enable a gradual transition away from fossil fuels, instead of the inevitable chaos which will occur when the fossil fuels run dry.

Anthony at Cronulla
Guest
Hi Dan I have been watching the emerging geothermal industry in Aus since mid 2007, its a facsinating oppportunity for Australia. When I read your article “Fantasy Land in the Financial Sector” 16th April this year and came across your sentence “Global demand is growing. The supply of cheap stuff is not. Put that on your 2020 agenda Mr. Rudd. And take a serious look at generating base load electricity from geothermal and using more plug-in hybrid cars to reduce reliance in imported refined fuels.” it exactly mirrored what I have been thinking since around September 2008. If we had… Read more »
Dudley Gray
Guest
Hi Dan, I’m fascinated by Geothermal solutions to our fossil dependence in the U.S.Calpine is out of bankruptcy and several small Canadian companies are developing Geo in the geyser fields of northern Ca. and in the area encompassing northern Nev. and southern Id. Ormat (ORA) in Reno, Western Geopower, Nevada Geothermal are drilling and purchasing generating equipment for 35 to50 MW plants. It is difficult to find much detail about development except that start up funds came from Glitnir Bank (Iceland) subsequently financed by JPM .Does anyone have any thoughts about this? Dudley
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