Record Close for the All Ordinaries, All Eyes on Telstra

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MELBOURNE AUSTRALIA 22 January 2007 – After the scorching days of the last week we can head back to normality – grumbling about the unseasonally cold weather.

But someone not grumbling are the millions of Australian investors who have poured their cash and superannuation into the stock market.  Last Friday saw the All Ordinaries make a late surge to close the week at another all time record high, closing at 5,652.10, a gain of 0.7% for the week.

The continued slide in the crude oil price and other commodity prices has contributed to the poor performance of the BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Woodside Petroleum (ASX: WPL) share prices.  The companies share performances for the week were -1.2%, -2.6% and 0.0% respectively.

Meanwhile, a company which has performed well above your correspondents expectations – and for that fact the expectations of the analysts that also were recommending a sell – is of course Telstra (ASX: TLS).  The share price continues to go from strength to strength, gaining by 5.6% last week.

For some investors Telstra has been an unmitigated success.  The majority though, are likely to still be well under water.  But nevertheless, since the low point last August, Telstra has managed to add 26%, significantly outperforming the All Ordinaries and probably the majority of other blue chip investments.

The new T3 installment receipts have put in an even more concerted effort, gaining by nearly 50% from the $2 retail offer price.

It was even able to receive broker upgrades following this meteoric rise.  The question now though it whether the analysts have jumped onto the bandwagon just as the wheels are starting to feel a little wobbly.  JPMorgan analyst Laurent Horrut is still unconvinced.

Horrut has put the Telstra shares onto the ‘underweight’ list for its clients.  He said, “this re-rating has occurred with no fundamental incremental news in the stock for the last few months.”

So, what direction will Telstra move in next?  From the moment the T1 share offer went to market, there has been a love-hate relationship between investors and Telstra shares.  On the one hand everyone hates Telstra as a company, preferring to use alternative services wherever possible.  On the other, millions of investors, despite their loathing of it, think that Telstra’s monopoly position will see it in good stead for many years to come.

At the moment, it is the latter that is in the ascendency, but whether this will last or not if Telstra’s next profit release is below expectations is difficult to believe.

Something else that was difficult to believe last week was the power cut supposedly caused by the bush fires in north-eastern Victoria.  As we mentioned at the time we do not profess to be the expert in the field of electricity generation.  However, someone who does seem to be an authority is Melissa Perrow, who may or may not have anything to do with NEMMCO, the National Electricity Market Management Corporation.

Melissa writes to tell us that the Generators need to receive a steady income means it “creates a need to enter into over the counter (OTC) derivative deals with counterparties which act to hedge the floating pool price against a fixed price.”

And that “Cutting electricity supplies serves neither the interests of the retailers or the generators.  Retailers lose customer revenue while the generators lose revenue from not generating.”

Our response would be that to say that there is a “hedge” in place doesn’t necessarily mean that there cannot be any losses from either the physical and/or the hedge transaction.  For a start, we don’t know precisely what the “hedge” contracts are, only that they are probably some combination of SWAPS or Options, or some other derivative, the upside and downside risk of which we don’t know.

And finally, we would also make the comment that the famous energy trading company Enron was also in the habit of running positions to speculate and hedge the energy and electricity market and look where it got them.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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