The Alinta mess

How patronising...shareholders don't know what's good for them and can't be relied upon to take the money and run. That's the message from the Alinta Board in rejecting Macquarie's bid. It's absolute rubbish. Seriously, if shareholders can't be bothered taking an interest in their investment it's their problem, go and buy managed funds.

I'm quite happy to take the cash and bolt for the exit, I've got zero interest in taking shares in various structured entities of which I have no idea how to value: are we seriously expected to take the word of B&B that these companies are worth what they say? Talk about conflicts of interest.

There's probably a few Fincorp investors on the Alinta register too. Bet they'd be keen to get their hands on the cash so they can throw it at some other dodgy scheme.

Weird trading in Super Cheap Auto

Since I purchased shares in Super Cheap Auto mid way through last year the company has had a great run, doubling in price in a short space of time. But during this run I've noticed some strange trading patterns: small parcels of stock traded, often on an up-tick. There's been plenty of occasions where the shares have traded up strongly against the trend but on quite low volume.

I think the first time I really paid attention was around Christmas, but just put it down to the lack of liquidity over the holiday season. Well, it's on again. Here's some screen shots off E*Trade from trading yesterday (29/03/07). Firstly around 10.30 then around lunchtime.


You can see in the course of sales the very small parcels going through, quite a few of just one share. Not long after the second screen shot was taken a seller of 2 shares went in at 4.32.

Is it a coincidence that the two times I've noticed this have been around the end of a quarter?

I can't think of too many good reasons to be selling lots of 1 or 2 shares at a time, unless of course your goal is to get the price to a particular level, or keep it there. For example, if you were facing margin call, trade a small amount of volume at a higher (or lower) level. If that's the case, it's a form of market manipulation and ASX should be onto the case.

Although if it is an attempt at market manipulation it's a pretty amateurish one. Regardless, I am curious to know exactly what is going on here. If you've got any ideas let me know.

I still like the company on a fundamental basis though, as I don't think it's overpriced despite the good run. In reality it was heavily oversold and should never have fallen as far as it did.

Will the last Alinta bidder please turn out the lights?

So Bob Browning's jetting off to Mobile, Alabama to mess about with boats and Leighton's allegedly not playing. This should put Macquarie in a good position, assuming they can figure out a package that can be sold to co-investors (read patsies) as not being too greedy.

Alinta's shares have fallen off a bit back to $14 or so, so presumably all that talk of a 'killer' bid a couple of weeks ago - the stories suggested $9bn versus $7bn currently - was just that. Other media stories claimed the sources had mucked up Singapore dollars and Aussie dollars...nice work.

No doubt it will be something incredibly complex that involves pulling bits apart, reassembling them and relisting them with a couple of transaction fees in between. I'll be glad when the saga is over, can't wait for the bidding period to close and get out. Not that I, or any, Alinta shareholder should have too many financial complaints, the shares have done extremely well. Now, where to put the money? That is a problem for sure, but a nice one that I'm happy to have (kind of like a tax problem towards year end)

Rates up once? anyone for twice?

Well we're nearly back to 6000 courtesy of a 1.5% gain on Wall St which in turn was in response to Fed comments that seem to indicate the tightening bias might be over. In turn US rate cuts could be on the agenda...I don't think they'll get back to 1% again but one or two moves might be in order.

Meanwhile Australia could be going in the reverse direction. The normally staid interest rate markets went into a flat spin last Friday morning after comments by RBA Assistant Governor Edey were interpeted to mean our cash rate may yet move up again, getting it to 6.50%. Talk about turmoil...we've gone from 'rates are going nowhere' to ' rates are going up' in a flash. This has been good for the Aussie dollar, which has gone through US80 cents and even spiked a bit after the Fed's comments overnight. Hmmm, that's not doing my overseas plans much good!

Theoretically, rising rates should put a crimp on valuations. But in practice, the long end of the yield curve hasn't risen as much as the short with the gap between long and short rates widening quite a bit. So that probably means it's not going to do too much damage from that perspective. Even though corporate gearing is increasing, either as a way to to fend off private equity raiders or because of them, one more RBA move won't cause interest expenses to dampen profits too much.

Of more concern would be the possible effect on household demand and the flow on effect to sales. Given the strength of household demand - just look at the last set of national accounts, and look around you at the new plasma screen the Jones' have just bought - maybe one more hike won't be enough, maybe the momentum we've got will require the RBA to act twice, or more! Now that would be interesting: two rate rises, in an election year, with an election budget coming up in May (and I don't care what Costello says, there's no way that budget is going to be disciplined, not with Rudd creeping up in the polls!)

Shared equity open for business

Also yesterday we saw the release of another shared-equity style home loan product. This one is offered by the Macquarie-backed Rismark via Adelaide Bank. From an investment perspective I like these ideas because I think they have the potential to open up a new frontier (how exciting!). St George and Australand also announced a variation that splits the mortgage between two titles.

I have never seriously considered investing in property mostly because I don’t want to deal with tenants and the transaction costs really scare me off even with tax benefits and the excellent returns that have been generated. Not to mention the enormous punt you are taking on your ability to pick a half-decent property.

Obviously this mindset has cost me a mountain of money in the past five or six years (add that to the behavioural finance list of problems). So I think the prospect of property market indices and a related derivatives market is enticing. I’m assuming you could leverage up at the same ratios you would for standard property. There’s no reason why you shouldn’t be able to, particularly if you can spread your risk across different cities. I guess you miss out on rental income as there doesn’t seem to be an imputed rent attached but you should be able to still gain tax benefits.

Back to the share market, and one company front of the queue to benefit is RP Data. They are involved with Rismark and the property derivatives market. RPX were listed by way of a sell down by Macquarie and another shareholder at $1.25 last year. Currently the share price is around $1.83 and the growth that’s priced in doesn’t appear overly excessive for a company that might just be at the cutting edge of a new market. Property price information is an area where I think there are large barriers to entry – gathering the information and expertise, quality etc – while complimentary innovations such as Google Earth help to add value to their services (have a look at propertyguru.com.au for what I’m talking about).

More small cap action

Yesterday I took advantage (I hope) of weak pricing for one of my favourite small caps and bought some more. So far so good: no sign of any buyer’s remorse although at the time of writing the market hasn’t opened and I see the SPIs are down 90pts after more excitement overseas. I may be singing a different tune this afternoon!

The fundamentals of this particular company are excellent and my weighted average entry price is well below my valuation so even if it sinks further I’m quite happy to buy more and wait it out. The half year result last month gave all the indications they are on the right track, financially and operationally. Wish me luck.

Time for an update

Thought it was time for an update to some of the issues that have been kicked around over the past couple of months.

Let’s start with Qantas. As expected, the Federal Government has given the seal of approval to the takeover of Qantas by the private equity consortium. Despite this the prospect of two institutional shareholders refusing to accept means that the bid still isn’t seen as a certainty, leaving the share price at a 21c discount to the dividend-adjusted bid price of $2.45. So buying now could deliver a gain of approximately 4% assuming the takeover goes through. Qantas lost 7c on Friday and if the drop became a bit overdone it could be worth a go.

Cardno was flagged as a stock for the watchlist with the caveat that it was priced for growth. In my opinion the company needed to deliver EBIT growth of 17% p.a. over the next decade to justify a then-share price of $6.10. Since then it has released some half yearly results which seemed to indicate that EBIT grew by only 6.3% for the half. NPAT on the other hand was up 16.3% with the bottom line benefiting from lower effective tax rate and lower financing costs. It looked like the company’s financial position improved over the half with debt servicing stronger and working capital improvements. I am a bit puzzled with one aspect of its cashflow so that will need a bit more investigation. However the bottom line is the share price had a bit of a run up leading to the profit release, hitting $6.50 albeit on light volume. Since then it’s fallen perhaps 10% and now trades at $5.87. In my opinion it’s still overpriced but I’m happy to keep an eye on it.

Towards the end of January I looked at BHP, then trading at $25.33, from which point it’s since rallied perhaps 10-15% and still seems to be a broker favourite.

And lastly, I’ve talked about my reasons for selling one of my small cap stocks. It was a tough decision but one I’m glad I made. The little fellah has lost 15% since I bailed.

Actually on the topic of small caps during the correction at the end of February I noted in a post that liquidity in my small caps just evaporated – in a couple of cases it hasn’t returned. Spreads are still enormous and there’s no volume to speak of. Maybe it’s stock specific? I’ll have a look around, but if anyone else has noticed this with their favourites please let me know (no, you don’t have to tell me what they are). There might be some good companies on the cheap in that segment so I’m going to put some energy into that over the next few weeks.

Just a pitstop on the road to prosperity?

Rather than simply repeat what’s happened this week, I’d prefer to try and figure out if it actually means anything or whether it’s just another pitstop on the road to prosperity.

Personally I don’t buy the broker-spin peddled in some news outlets about it being a “healthy correction”. I think it’s a warning sign that things in the ‘hood aren’t going to quieten down in a hurry. After all, something of an overreaction don’t you think? An over-inflated market has a rumour-driven sell off yet investors from New York to Sydney start having kittens. I believe the problems are deeper than the toasting of some Chinese retail investors and the ubiquitous hedge funds. Several aspects of it are troubling and I’m still organising my thinking but here’s where I’m at:

• The yen carry trade is a big source of liquidity for global markets. Yen-denominated borrowings are invested in securities of higher yielding currencies (AUD, USD, NZD for example)
• The US sub-prime residential mortgage backed securities (RMBS) market is in trouble. HSBC has taken a huge write down on its portfolio ($US10bn!), defaults are increasing and lenders are getting into trouble. Read this opinion piece for more information, it’s a good article and even if you’re not familiar with all the jargon you’ll still get the picture. Locally, arrears on non-conforming RMBS are also creeping up (as reported by S&P)
• Asset backed securities have been a destination of choice for carry-trade proceeds so when those same securities start losing their value quickly thanks to defaults, how will the yen borrowings be repaid? By selling other securities, that’s how
• The yen has had a bit of a rally lately, reflecting many of these factors. If it gains momentum it will simply exacerbate some of the problems
• And because so many investors, funds and banks have put on this trade, if there are forced sales then it will get nasty

The key point is that if risk increases, valuations for many securities decrease even when business fundamentals don’t change. In a leveraged environment that often means margin calls.

I’ll be interested to hear from anyone who thinks none of the above is a big deal.

Meanwhile I’ll continue mulling this over to try and organise my thoughts a bit better. Until then, some of my observations from this week:

Firstly, who looked at their small cap stocks? Spreads ballooned from maybe 3-5 cents out to 30 cents+ as liquidity just vanished. A few of mine were down dramatically on miniscule volume thanks to what must have been a panicky retail investor selling everything that moves. I kind of hope we get some more of this because there will be some great little companies available for good prices, provided you can be patient.

Secondly, the enormous gaping flaw of using online brokers was again exposed: when things are bad, you haven’t got a hope of getting reliable service from their website. E*trade was having problems and I gather Commsec was too. More upgrades I guess. Anyone know exactly when E*trade’s new new website will finally be launched?

Most people I spoke to didn’t seem too fussed about it all, repeating what they’ve heard on the news and thinking about buying opportunities (not just stocks, jetskis, plasma TVs, whatever). They all seem to think that it’s all onward 7,000. If ever you needed a larger, yellower more fluorescent warning device then what you really need is a white stick and a Labrador.

No doubt the party will continue for a while, I’m sure there will be a sucker rally and we’ll once again crest the 6,000 mark quite happily. But there’s a pretty good chance it won’t stay there.

Tired of the doom and gloom? Here’s an alternative point of view, this Reuters columnist thinks now will prove to be a good buying opportunity.

On that note, enjoy the weekend.