Public Loads Up On Telstra As Share Price Melt Up Continues


The melt up in share prices continues. But rather than just using the same phrase to describe what’s going on (melt up!), we thought we’d take a closer look at the mechanics of the boom. What’s really causing it?  Is it too little thought? Or is it too much money? Or, is it too few assets?

Alan Kohler of the Eureka Report, writing before the Easter break, explains it this way, “The asset shortage hypothesis has been put forward by the economists at Morgan Stanley, who have focused mainly on the dwindling supply of sovereign debt around the world as more and more governments run budget surpluses. We are quite familiar with this in Australia, where the Government bond market has virtually disappeared thanks to a decade of surpluses and debt repayment.”

Perhaps this explains why the public is loading up on Telstra shares. With its reliable dividend (paid for with cash of suspicious origin), owning Telstra is, now that we think about it, a little like owning a government bond. That is, you are the proud owner of the liability of a large, bumbling organization trying to make its way in the 21st century. You are compensated for its periodic missteps with a nice dividend and lately, a rising share price.

The key difference between a sovereign government bond and shares in a public company is that the government collects its revenues (taxes) at the barrel of a gun, while the public company (except for quasi-monopolies like Telstra) must compete for the consumer dollar. That means owning shares in a public company is not as risk-averse as owning stodgy old government bonds.

But hey, when you have cash in your pocket and you’re looking for an asset to buy, you take what you can get.

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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