Following the Money


Australia’s corporate behemoths are publishing results left right and centre. It’s tough to know what to make of the deluge of information, and there’s a lot of shuffling going on. But a few clear trends are emerging.

The big story is that BHP is forging on with its venture into the fertiliser ingredient potash, despite the misgivings of analysts. You can understand why a miner would want to diversify when the media won’t stop writing about the end of the mining boom. BHP managers even spoke of potash becoming the ‘fifth pillar’ of the company, with iron, copper, coal and petroleum being the others.

But $2.6 billion is a rather large investment to make in Canadian mine shafts hoping to find a substitute for chicken poop. Especially when your earnings just came in $800 million lower than expected and profit fell 30% from last year.

It’s not just the mining industry that’s looking shaky.

Suncorp Group’s statutory net profit fell 32% after making a $632 million loss on the sale of its bad loans to Goldman Sachs. Why would a bank take a $600 million plus hit on loans in a healthy mortgage market? It wouldn’t.

Meanwhile, QBE upped its mortgage insurance premiums big time. The reason for the 9% increase is fear. The company is forecasting ‘volatility’ in the housing market in the next few years. And we know what can happen to financial insurers during ‘volatility’ in the housing market, don’t we AIG?

Banking Day is reporting that QBE will stop offering mortgage insurance in New Zealand altogether. Given the collapse of the debenture market over there, that’s not a surprise. As Greg Canavan asked in an email round robin this morning, is New Zealand the canary in the coalmine for Australia’s mortgage market? We’re getting enough hints from failing debenture companies here in Australia. And now a major bank and a mortgage insurer are twitching.

In case you’re wondering, mortgage insurance protects banks from loan defaults. Part of our story on the LAF scandal is that mortgage insurers are being shafted. They think they’re insuring bundles of prime loans based on the mortgage paperwork, when all that paperwork is fiction. As a UK mortgage broker admitted, mortgage brokers were specifically trained in how to turn their subprime borrower into a prime one by falsifying income. One imaginative method includes inserting a ‘1’ in front of you borrower’s $30,000 income, suddenly making them able to afford a $400,000 loan. The same is going on here in Australia.

So when vast amounts of borrowers begin defaulting, who will pick up the tab? Will the insurance companies go after the banks and mortgage brokers for misleading them?

If there’s going to be ‘volatility’ in the housing market, the builders will suffer too. Surprise, surprise, Boral’s statutory net loss came in at $212 million. It’s our biggest building materials provider and it’s struggling in an economy with overpriced housing.  In every other market, high prices boost supply and profits for suppliers.

It’s not all bad news though. The gas pipeline company APA Group saw its recent takeover of the Hastings Diversified Utility Fund pay off, with profit more than doubling. The company also dominates the gas infrastructure which Australia’s gas boom will be using to send its energy overseas.

So the miners and banks are showing signs of a slowdown while gas is becoming rather profitable.

Then again, all this is just accounting. To illustrate how much you can trust earnings information, here are a pair of headlines from the Age and Business Day:

  • Boral posts $212m loss
  • Cost cutting buoys Boral profit

The second article doesn’t even mention the actual final result after asset write downs and layoff costs!

A figure that’s a little tougher to massage than profit is dividends. But there’s something odd going on there too. Coca-Cola Amatil, Suncorp and BHP all increased dividends in the face of falling profits. Suncorp’s final year dividend was up 50% after a 20 cent special dividend, Coca-Cola Amatil declared a special 2.5 cent dividend, pushing its half year payout up 10% from last year and BHP’s dividend rose a tad too.

Value investor Greg Canavan would probably see higher dividends in the face of falling profits as a bad sign. When a company can’t reinvest its earnings profitably that’s a sign of lack of confidence, assuming management are focusing on genuine capital management.

Or perhaps they are just being cynical and hoping to make the most of the hunt for yield. Companies that pay a dividend will be more popular if the Reserve Bank keeps cutting interest rates. But that’s just short-termism and will come back to bite them in the years ahead. Australian Small-Cap Investigator Kris Sayce saw the trend to increase dividends early and added a bundle of small-caps to his portfolio because he thinks their dividends will make them more attractive to investors. Think of it as a leveraged play on the hunt for yield.

Companies aside, there are completely different flows of money going on, on the other side of the world. But they’re far more intriguing.

Gold is flying out of the UK at a surreal pace — 17 times as fast as last year. London is the West’s gold trading hub, so this could be interpreted as a rush by foreign gold buyers to get their hands on the physical rather than trading in paper markets. Australia’s Macquarie Bank reckons much of the gold is heading straight to Switzerland, a popular place to keep your physical gold for reasons the Second World War illustrated nicely. Meanwhile, gold ETFs are reducing their holdings.

This could be the beginning of a split in the gold market between the financial paper version and the hard stuff. If the price of physical gold diverges significantly from the price quoted on financial markets, that would signal a major crisis of trust in the financial system. And a big profit opportunity for anyone owning real gold.


Nick Hubble+
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From the Archives…

Foreigners Turning on the US
16-08-2013 – Greg Canavan

Silver, The Devil’s Metal
15-08-2013 – Greg Canavan

Detroit, Demographics and Detonation
14-08-2013 – Vern Gowdie

Why Gold Has an Interesting Tale to Tell
13-08-2013 – Bill Bonner

China’s Economy… Stabilising, Bottoming, Rebounding
12-08-2013 – Greg Canavan

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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3 Comments on "Following the Money"

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3 years 2 months ago

Boral; my old place of employment, Nick. Did you look at its sister company, Blue Circle Cement? always a good bellwether.
As for the the gold exodus from London, what have I been saying for months now? stay away from that paper con., mind you, the real stuff dosen’t half wear holes in the pockets.

So, buy gold, lots of it. Oh! you can’t can you, Kev wants to know how much so he can confiscate it when he feels like it, Hmm, tricky that.

3 years 2 months ago

Yes shortchanged. I’ve been saying that too. They know who has the gold and by golly gee if the SHTF they’ll be implementing the legislation to make you cough it up. History never repeats?

3 years 2 months ago

Nice to know some one thinks as I do annie, it can feel lonely in the wilderness. By the way, the law is already passed, it just has to be ‘ratified’, a technical term, meaning scribbled on, to be enacted.
Here in the old country, we can buy and sell gold without those pesky forms and authorities, no one wants to know who(m) you are, or cares. A real ‘free’ country, and if you don’t vote, no one is knocking your door down to fine or arrest you.

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