Australian Market Notes – 10 November 2006

MELBOURNE AUSTRALIA, 10 November 2006 - Your correspondent almost succumbed to a moment of weakness yesterday. Maybe it was the warm weather, perhaps it was dehydration due to a lack of rain, but whatever it was, it nearly caused us to spend money that could be better utilised elsewhere, such as tearing it up and throwing it down the toilet.

Fortunately, this momentary lapse in concentration, this brief period of madness or hysteria was short-lived and we believe we have made a full (arguable) recovery.

Our crime? Well, being an existing Telstra (ASX: TLS) shareholder - from the T2 allocation no less - it suddenly dawned upon yours truly that we hadn't received any documentation about an entitlement for T3. With the 4pm deadline fast approaching there was no time to lose.

A quick search of the interweb took us swiftly to the T3 website and a contact phone number was duly displayed. We were helpfully informed by the customer service person that all we had to do was enter the registration number into the website and make a payment for up to a maximum of 3,000 shares by BPAY. It couldn't be any simpler.

As luck would have it, we came to our senses in plenty of time, quickly closing our web browser and breathing a deep sigh of relief.

However, it seems as though we may be in the minority. Or are we? Reports heard on yesterday mornings ABC News Radio suggested that there had been a big demand for Telstra shares... from brokers for their clients. The retail offering had, according to the report been less successful.

Why would that be we wonder? Telstra, although it is still almost the monopoly telecommunications provider, that monopoly exists in the sector of the market that can best be described as 'legacy' services, eg. The fixed line copper network, local calls and complex data. The growth areas of the market, internet, wireless, broadband, mobile, etc., are markets where Telstra does not have a market dominance. For instance, in mobile telephony it now accounts for less than 50% market share despite it having a clear advantage when the mobile network was first implemented over twenty years ago.

Not only is its market share falling but its revenues are falling too, so much so that it has had to cancel the special dividend for which it was borrowing to pay for, and the regular dividend is by no means a certainty after the next financial year. It has even scoured the Australian market far and wide to find ways of diversifying its business. It has bought the Trading Post classified advertisements paper, and has long been linked with a move into broadcasting with Fairfax as the likely target.

So, in a nutshell, Telstra is a business with falling customers, falling market share, falling revenues, falling profits, and no real guidance as to what it wants to be.

That it would seem, makes it a perfect investment if the broker take-up is anything to go by. The same brokers that have avoided Telstra stock like the plague over the last two years.

So what could the reason be for their sudden excitement? Ah yes, that's it, the 2% stamping fee for broker 'firm bids.' The dividend story probably makes it one of the easiest sales pitches of all time, "forget what I said last year about Telstra being crap, it now has a 14% fully franked yield... how many would you like?"

Face it, for a broker to be able to charge 2% on any transaction is a rarity these days with the amount of competition. Average commission charges in the full service broking industry are more likely to be closer to 1.25% or 1.5%.

If we roll the clock forward two years, after the second installment has been paid, will we see Telstra shares soaring above $7 per share, or will they still be languishing sub-$4. By that time it may not even have the yield story to support it.

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