Australia… the Easy Money Country

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Someday, we promise, turning over all the rocks, kicking down doors and doing proper diligence on public companies will be important again. The last few years, we admit, it’s been easy to get it right in Australia – the easy money country. But we think it’s getting harder with each passing day. The sector is segmenting… especially with new listings on public markets each day, the chance of buying a dog of a resource stock increases if you haven’t down your homework.

But no one seems to working terribly hard these days in order to produce big returns. You simply get on the back of the resource bull and hang on. Oh to have be invested in a superannuation fund five years ago, at the birth of Australia’s resource boom. “An investor starting with a $50,000 super balance at the beginning of 2002, earning $50,000 a year and receiving the mandatory 9 per cent employer contributions would have more than doubled his or her money to $101,030 by the end of December this year,” reports Brendan Swift in today’s Financial Review.

Super funds will deliver their third straight year of double digit returns this year, provided the market doesn’t tank in the next two weeks. In 2004, the median return was 14.9%. In 2005, it was 13.7%. And in 2006, the median return is on track to come in at about 11.6%.

We’re not one to quibble with double digit, after tax rates of return. But we can’t help noting a trend here…returns are getting smaller, bit by bit. And here’s all we ad to that. After fifteen straight years of growth, there’s going to be a recession, sooner or later. Maybe not in the first quarter. Maybe not even next year. But it will come on. And then, it will pay to have done your homework and sorted the winners from the wannabes. At least that’s our story…and we’ll be sticking with it.

Car parts maker Repco Corporation Ltd. (ASX: RCL) is taking a bow from the public stage and going with Australian private equity. CCMP Capital Asia made Repco’s investor a $300 million offer, which comes out to about $1.75 per share, or a 22% premium to the current share price. Sounds like a good deal to us, if you’re already a Repco shareholder.

We’ll operating pirately offer Repco a competitive advantage it does not currently enjoy? Maybe. But the real story here is that pirate equity is looking further and deeper into the market for “value” to extract. Unless liquidity completely dries up in 2007, it could be a record year for the Pirates of the Share Market.

The baby boomers are “cashed up” and ready to spend on things like botox injections, “maintaining their health, fitness, and good looks…cosmetic procedures, health clubs, etc” reads an article in today’s Australian. The National Centre for Social and Economic Modeling tells us all sorts of new economic industries will emerge as the boomers migrate from being selfish and narcissistic in the workplace to selfish and narcissistic in retirement.

But we’re not so sure the Boomer’s will have the time to spend all that spare money, instead of gifting it on to their 2.1 children. Nobody lives forever. Bodies start to breakdown, get sick, and die. We speak from experience. Not our own, however.

Unfortunately, we recently learned our father, in the bloom of health and life, discovered he had prostate cancer. The doctors initially assured him he’d be able to live an active and healthy lifestyle, undiminished by the cancer cells in his body, with the right meds. But the rosy scenario turned out thorny…and one day he woke up, unable to feel his legs.

Your financial plans are revised quite quickly in that kind of situation. And we learned first-hand just how much of his financial future our father and planned for. His plans were, shall we say, not well developed. And just as war plans seldom survive the first contact with the enemy, we suspect many boomer environment plans will not survive their first contact with the reality of ageing.

We enjoyed a conversation about ageing with indignity with Bill Bonner who arrived in Melbourne last night. He met us in the lobby of the Crown Hotel and as we walked along the Yarra towards Federation Square, looking for a bite to eat, he asked, “Wow, how did all these people get so rich. It’s a lot different than Bombay.”

“Housing boom. Property boom. Everything boom,” we answered.

“Oh. Well those never last,” he replied.

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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