Economic Rigor

No joy on the surplus for Wayne Swan, who has finally woken from his self imposed economic data coma and discovered that you can't polish a turd. But the adage rings true. You elect the Liberals to save and Labor to spend!

Interesting stats from an environmental survey from the abs.gov.au released yesterday. Here are % concerned based on weekly income Generally you would expect that as income rises, people would care more about the environment (either through knowledge or Maslow's pyramid of needs). And generally the results of the survey reflect this. But not for climate change where the rich care the second least (only the second percentile of income has a worse result). Interesting.

Sorry, back to cricket again, but had to respond to this statement by Phil Hughes "Top-order batsmen - all batsmen - get caught behind, in the cordon or by the keeper,'' he said Yes, but not all the time Phil. Lets go to the stats shall we. Phil Hughes has had 32 innings (31 dismissals and 1 not out) and of those, 26 times he has been caught. That is a grand total of 84% of dismissals. Compare that the Adam Gilchrist (61% from a high risk player), Michael Clarke (55%) and Ricky Ponting (55%) Phil Hughes has a problem with his technique. I wouldn't bet on him scoring too many runs.

To celebrate Australia's continuance in a fairly ineffective treaty, I am listing our fellow travellers in the Kyoto Protocol (and their share of global carbon emissions...emissions data is from 2009 but it hasn't changed that much) 1. Germany (2.5%) 2. UK (1.7%) 3. Australia (1.4%) 4. Italy (1.3%) 5. France (1.3%) 6. Spain (1.1%) 7. Poland (0.9%) 8. Ukraine (0.8%) 9. Netherlands (0.8%) 10. Kazakhstan (0.6%) 11.Belgium (0.5%) 12. Greece (0.3%) 13. Czech Republic (0.3%) 14. Romania (0.3%) 15. Austria (0.2%) 16. Belarus (0.2%) 17. Portugal (0.2%) 18. Finland (0.2%) 19. Sweden (0.2%) 20. Hungary (0.2%) 21. Denmark (0.2%) 22. Switzerland (0.2%) 23. Bulgaria (0.2%) 24. Ireland (0.1%) 25. Norway (0.1%) 26. Slovakia (0.1%) 27.Croatia (0.1%) 28. Estonia (0.1%) 29. Slovenia (0.1%) 30. Lithuania (0.1%) 31. Luxembourg (Negligible) 32. Cyprus (Negligible) 33. Latvia (Negligible) 34. Iceland (Negligible) 35. Malta (Negligible) 36. Monaco (Negligible) 37...

So after all the crap over the last month, we have the Coalition extending their lead over the 4 poll averages. Seems like the public didn't like the allagations against Gillard. At the very least, her actions were unethical, and not quite up to the conduct most expect from the PM. Just because you haven't broken the law, doesn't mean you haven't done anything wrong.

Lots of talk around Australia's lack of Gross National Income over the last quarter. Let's not get too excited. Not a trend at this stage.  Here is the Real Gross National Income change from the 80's to now (data from the abs as always) So while we have dropped a little below 0, we are not at GFC/Banana Republic or Dotcom bomb levels just yet.

In honour of the the crazy predictions of 5 degree increases in global temperature averages coming out of the Doha climate change conference, I present the following graph showing the current state of play regarding climate change and changes in global average temperature since 1910 (the mean temperature during the period 1880-1909 being classified as the "pre-industrial average"). Figures are from NASA GISS. To get to 5 degrees higher by 2100, some crazy stuff has got to happen as in 101 years of throwing CO2 in the air, we have only increased the global average by 0.79 degrees.

I think this one is a no brainer for the Reserve. Reasons :- No wage inflation at the moment and a decrease in home approvals. Flat retail sales, a reserve bank board loaded with retail guys who need a big christmas and the GDP figures out tomorow (who wants to be proved wrong?). Taxation returns down 16% for the quarter, and a 13 billion blowout in the Net Government operating balance means there won't be a lot coming from the fiscal side of things. Add in increase in the current account deficit (due to everyone attracted to our AAA rated high interest earning Government bonds) and a high dollar, and it's looking like the Reserve will hit the "Oh Shit!" button sooner rather than later.

Good luck to those taking the CFA Exams tomorrow!! . I'll be one of the masses at Darling Harbour myself. Having taken the test once already (and not quite making the grade), I have a few exam tips based on hard won experience. 1. READ THE QUESTION!!!!! 2. READ THE QUESTION!!!!! 3. Watch your time 4. READ THE QUESTION!!!!! At least the exam will be in the city this time, as opposed to the wasteland of Homebush Bay (on a Sunday!!!) where it was impossible to get a coffee.

Forgive me a non-economic post. Going to be talking about the cricket. Ricky Ponting, one of the greats of the game in Australia and around the world has declared that today's test match in Perth will be his last. Sad days. The question I ask is if his form is bad enough to warrant the retirement (though at age 37, he probably just wants a rest). Lets go to the graph. Using Michael Clarke as the control as he is the "in form" batsman in Australia at the moment (and also the player that replaced him as Australian captain.) While there was a bit of an uptick in the final year, it was pretty clear that Punters best days were in the rear vision mirror. Time to go.

Looks like Australia's Sovereign risk is back to it's long term average after a few years of surging. Hopefully this bodes well for future investment. The formula I am using is Sovereign risk = (Spread between 10 year Australia government bond and US 10 year Government bond)* STDEV(ASX200 returns)/STDEV(Australia 10 year bond yields). Get the following graph for the last 10 years

Don't really have a lot of time for Technical trading, but one thing it is good for is picking up indicators of bad news. Someone always knows. My favourite indicator is the 12 day ROC. When it goes under 1 (consistantly), it is a sign that all is not well and some bad news is heading down the pipe. Just look at Melburne IT. Things were sounding great, but as early as late October, the ROC fell below 1 (indicating some sell pressure) Would have been a good time to sell on the 26/10/2011 (at $1.80) instead of now (at $1.53)

An update to my previous post. I have found Australian dollar values and also added some more floats to the list. Here are the biggest IPO's by real value since 1993 (in 2012 dollars) 1. Telstra 1 - $25,350 million 2. Telstra 3 - $8,745 million 3. Telstra 2 - $5,909 million 4. AMP - $4,368 million 5. Optus - $2,182 million 6. Boart - $1,333 million 7. QR National - $1,324 million 8. Woolworths - $975 million 9. Promina - $821 million 10. Myer - $791 million

I was reading in the AFR today about the top 10 IPO's in Australia. They published a table from DEALOGIC that listed them in order (in US dollars) 1. Telstra - 9997 million 2. QR National - 3997 million 3. Westfield Retail Holdings - 2038 million 4. Myer Holdings - 1862 million 5. Boart Longyear - 1857 million 6. Goodman Fielder - 1594 million 7. AMP - 1465 million 8. Optus - 1273 million 9. Promina - 1210 million 10. Spark Infrastructure - 1197 million Problem is is that IPO's all occurred on different years making it difficult to compare unless you use real terms rather than nominal. So as an exercise, I put them all into 2012 dollars. Now we have the best sellers list of 1. Telstra - 17690 million 2. AMP - 2590 million 3. Optus - 1395 million 4. QR National - 1306 million 5. Boart Longyear - 1054 million 6. Myer - 718 million 7. Westfield Retail 666 million 8. Promina - 529 million 9. Goodman Fielder - 472 million 10. Spark Infrastructure - 354 millio...

Should we be worried? Yield curve 2012 looks similar in shape to Yield curve 2001 and Yield Curve 2008. And we know what happened to the Australian economy in htose times. Not Great!

Been running the ruler over the Corum Group. This is a company that develops Ehealth Software and Point of Sale software. Has experienced a huge surge in it's share price this year and I'm curious as to why. Firstly the positives. Huge cost savings (and reduction in debts) have increased the Net Profit ratio from 12% to 23% in the last year. The company reports Net Income to be around $6 million, however $1.1 of that income appears to be a reversal of a provision regarding a court case. So not sustainable earnings in my opinion. Call it $4.8 million sustainable profits. Then we have ROE of 45% (which is also the Sustainable Growth Ratio as there is no DPO) and a ROA of 32% (up from 17% in 2011) Now to the negatives 1. While average sales growth is around 3% pa over the last 5 years, revenue has decreased for the last three years (at -3% and - 0.8%). While cost cutting can help you in the short to medium term, it is sales growth that gets you long term value. ...

Forget the budgets, just how much is being spent on defence by Australia since the 60's? (Stats from the ABS National Accounts as always) Lets not get too excited by claims the US is unhappy with our defence spend. We are spending at tail end Vietnam War levels! (which is about right since we have troops deployed in the Middle East)

Time for another Goatweter update regarding the 2PP The 4 poll running averages are as follows Newspoll           48.75/51.25       Coalition Essential            47.00/53.00       Coalition Roy Morgan      48.25/51.75       Coalition Leads to the inevitable Average of the three polls. Goatmeter           48.00/52.00       Coalition So definitely some more movement towards Labor (an increase of 0.2%)

I read with amazement that the American Virginia-class nuclear submarine is being considered as an option for Australia's submarine force. We have such delusions of grandeur don't we? While there is no doubt the Virginia class sub is a quality piece of kit (and cheap for a sub), for Australia, it's not just about range and refuelling options. It's also complement. Australia has had a lot of trouble crewing it's existing Collins Class subs. The Collin's class sub has a complement of 58. The Virginia class needs 120 (plus 14 officers). When we can't even crew our smaller subs, why try and purchase (or lease) boats that we we will never be able to put to sea (we want 12 of the bloody things). The best sub for Australia is one that is heavily armed and heavily automated. It doesn't need heavy water.

A lot of attention has been paid to the recent Newspoll which puts the Gillard Government at "Even Stephens" with the Coalition based on 2 Party Preferred vote...50% each. And while it is true that this poll is a bit of a fillip for Labor, the Goat wonders if this is really an accurate measure of the state of play regarding Gillards support. One thing that should always be considered when looking at Polls is the threat of outliers. To combat that I will use a 4 poll average to try and smooth away any potential one off bumps in the polls. Using the last 4 News poll results, we find that the 2PP vote is actually 47.75 % to Labor and 52.25% to the Libs/Nationals. Not looking so good now for the Government. But maybe that is just the News Poll. My favourite forecaster, J Scott Armstrong, recommends using a combination of predictions and then weighting them equally to gain the most accurate forecast. To do this, I have taken the last 4 poll averages for the two other ...

Take away's from this graph :- 1. The rise of construction, Financial Services and Professional, scientific and technical services. 2. The massive reduction in output from Manufacturing. 3. The flatness of two industries that are traditionally pointed to as sources of growth; Education and training and Ownership of dwellings 4. The flatness of the IT industry after the IT crash of 2001. 5. The mining boom may just be a recovery from a slump in 2003. 6. Health care and social assistance could be the major growth areas in future due to the aging population.

The highest quarterly increase in the price of electricity in 32 years! Thanks Labor!

Might have been in 2007 and again in 2009, but not any more. According to the graph above, prices haven't really consistantly increased in the last 10 years. Every increase has been met with a correction. No wonder the RBA isn't that concerned. Be interesting to do the same for the other states.

Looking at the MYEFO released yesterday, most of the attention has been on the Baby Bonus reduction, and the Company Tax change to pay monthly instead of quarterly. But for mine, the biggest (and dodgiest) change is the change to the inactive Superannuation account rules. Basically the change is the Government authorizing the compulsory transfer of more small and inactive super accounts to the ATO by changing the definition of what a small, inactive account is. The change is from the previous rule of a balance of under $200 that hasn’t been touched in 5 years to a balance of under $2000 that hasn’t been touched in 1 year. This is dodgy enough. But what really annoys me is the fact that while the Government has said it will pay interest at a rate of CPI, the interest only starts accruing in July 2013 (while the confiscation of the funds from the Super Accounts takes place in December 2012). So effectively, Swan is helping himself to an interest free lo...

Probably. If you believe in "Regression to the mean" based on real price levels, it would seem to indicate that a correction will occur in 2013 (especially if CPI remains low)

Was looking at Bloomberg today and I chanced upon the Chinese Domestic Hot Rolled Steel price. On SSeptember 2011, the price was $4837. Today, it is $3362. That is a drop of 30% in a year (and shows no signs of improvement at this stage) Such a large drop in price can only mean one thing. External and Internal demand for Chinese Domestic Hot rolled steel is dropping. I can't see historical production levels of steel continuing at that price. Chinese Steel producers will go out of business. As two of the main factors of production for steel is cooking coke and iron ore, the two largest exports of minerals for Australia, this reduction in price will have a huge effect on the Australian economy and the major coal and iron ore producer's share prices. Share prices are all based on future earnings and China is a big customer of these miners. A slowdown in Chinese steel production will hurt these future cash flows I would not be buying into coal or iron ore mine...

I was reading a blog the other day (one particular site that is popular with the Left wing political junkies) and one of the commentators was stating that the Howard years were alot more wasteful than first thought. The reason he claimed that was due to the fact that Howard retired $96 billion in debt by selling off assets worth $240 billion. Hence a wastage of  $144 billion. Is that really true? Well firstly, lets look at the asset sales. From the www.finance.gov.au website, we can find all asset sales from when Howard was in power (Dec 1996- Jan 2007). This includes three IPO's (Telstra 1,2 and 3) and 20 trade sales of government companies and assets (the airports etc). In Nominal terms, this works out to be 56 billion. However, if you apply real measures to the asset sales (by using 1996 June CPI as the base year, and use the June CPI for subsequent years to calculate the deflator), you do get the total real revenues from asset sales to be $240 billion (most of...

Was reading the IT section of the Financial Review the other day and noticed there was an article showcasing the ASG Group. This is an IT services business that is investing heavily in "Cloud computing", which is the new thing in delivering IT services to the masses. A few things stood out in the article, especially the statement from the CEO that investors don't understand the IT industry in Australia. This was in response to the ASG Share price reducing from $0.85 to $0.76 in a day in response to the latest financial report (share price it is now at $0.66....22% drop in a week). The danger is that I think they understand it very well. How having worked in the IT biz for a while, especially in Australia, it concerns me that ASG Group believe they are the leader in "cloud". I would say that Fujitsu is very much the leader in Australia who have also recently opened up a new data centre in Perth and is aggressively looking for customers to fill ...

About time to do another estimate of the Market Risk Premium of the ASX. Using the ASX200 index as my proxy for the market, I have downloaded daily prices of the index from yahoo finance. Dates used are from 1 Jan 2009 to yesterday (approx 2.5 years worth of data) Using this data, I calculated the logarithmic returns for each day and found the average return (which turns out to be 0.02% (go team!). However, this is the average daily return and so we want to annualise it (by multiplying it by the number of trading days per year (which is 256). This gives us an average annual return of 5.6%. However, this does not take into account dividends (which I did not include in my previous post...doh!). Using the RBA figures for dividend yield since 2009, we have an average dividend yield of 4.38%. Thus total market return = 9.98% (not too bad). We then need to calculate the risk free rate. Using the RBA website again to download the average 10 year Bond rate since 2009, w...

Been running the numbers of the latest Qantas report...some troubling things for current/future investors Apart from the losses, which are bad enough, there are some questions on the Balance Sheet. Current Ratio has dropped to 0.7 and Debt/Equity has hit over 2 for the first time in a while (2.4). This has got to put some pressure on the credit rating. Wouldn't surprise me if the credit agencies start sharpening the pencils. The old sell and lease back trick was performed (in the cash flow statement) to create 258 million of cash through the Financing section. Not a great sign. Cash flow from Investing activities (usually an indicator of future revenue growth) also decreased. Back on the Income Statement, operating costs grew at 9.5%, but revenues grew at only 5.6%. All up, it seems there might be some pressure on financing in the future. Could explain why Joyce has deferred spending on new capital for a couple of years. Maybe the banks said "No more debt for you"...

Been studying fixed interest securities lately (it was one of my weaker areas of Finance, as confirmed by my pathetic performance in that section of the CFA exam). Anyway, I noticed Crown is going to issue some subordinated notes soon. These notes are a form of fixed interest security (the fixed rate being the BBSW (or Australian risk free rate) + 5% or so depending on the book build). Sounds pretty good? It isn't a bad yield at the moment. Problem is the securities have a maturity of 60 years...which is a long time for a note. Also the coupon payment can be deferred, both at Crown's discretion (optional deferred) or when certain criterior are fulfilled (mandatory deferred) For the optional deferment, there is a dividend stopper in place which stops crown paying dividends/buying back shares from the ordinary shareholders until the deferred interest is paid. However, there is no obligation for Crown to pay the interest until maturity...a long way away. For the mandatory ...

After Australia's pretty ordinary performance at the London Olympic Games, I have been trying to analyse just how bad we went. I have created myself a forecasting model to try and predict how many medals we should have got, based on the Team Size, the fact that we are not China, the US or Russia and how many medals we won in the previous games (in Beijing). Based on this formula, the Total Medal Tally should have been:- 1. US                103 Medals 2. China              91 Medals 3. Russia             82 Medals 4. GB                  47 Medals 5. Australia          40 Medals 6. Germany          37...

The Goatameter is reporting some upturn in the economic conditions over the last month. Therefore there will be less incentive for the Reserve to do anything to rates today. Though who knows with this board. I was wrong last month. I predicted a cut, but the board adopted a wait and see approach. Which goes back to the basic conservativism of the board. If you look back to all the decisions made by the board since 1990, if you predicted "No change" for every monthly board meeting, you would have been right the majority of the time. Out of 264 board meetings, there has only been a change to rates 60 times. So if you predicted "No change" you would have been right around 77% of the time (though only running at 60% since March). That's equal to my Goatameter's run so far (which is also 60% since March, but a lot more time consuming to calculate) The wonders of forecasting. As my favourite forecaster implies (J Scott Armstrong if you must know), you can have t...

Been looking into a little more detail regarding the carbon Tax. For those not on the QT, it is basically a tax on those companies that have Scope 1 carbon emissions of more than 25,000 tonnes of CO2. Scope 1 emissions (as defined by National Greenhouse and Energy Reporting Regulations 2008) "Meaning of emissions (2) Emissions of greenhouse gas, in relation to a facility, means the release of greenhouse gas into the atmosphere as a direct result of 1 of the following: (a) an activity, or series of activities (including ancillary activities) that constitute the facility (scope 1 emissions); (b) 1 or more activities that generate electricity, heating, cooling or steam that is consumed by the facility but that do not form part of the facility (scope 2 emissions)." So basically any emissions that come out as a result of a facility (rather than an electrical bill) For those companies, they have to pay $23 for each Tonne emitted. That payment goes straight into the Federa...

Gutsy prediction this, but the Goat-a-meter still thinks things are pretty bad. Inflation expectations have dropped into the low twos (2.16%), Commodity prices have also dropped. On the plus side (comparatvely speaking), unemployment has increased but still pretty low. If I was the reserve, I would be thinking of dropping another quarter of a percent.But then again, they may be adopting a wait and see approach. I guess we will see this afternoon!

Was surprised to see the announcement yesterday that SEEK was "seeking"  to issue debt in the form of subordinated notes. Reasons? 1. I.T companies are usually high risk so demand for debt issues would be pretty low. These sort of companies are usually funded by equity rather than debt 2. The price (5-5.5%+Swap rate) is pretty generous for debt. You are looking at potential yields of 9% or so (which is more that equity at the moment) So I decided to put my financial analyst hat on and go looking into the Annual report of SEEK for 2011. A few things found 1. Not a big fan of how SEEK put "Share of profits of associates and jointly controlled entities accounted for using the equity method" straight into the front part of the Consolidated income statement. Under IFRS, I thought that this should go into the "Other Comprehensive Income" section. I believe this addition over inflates the Net Profit after tax figure. If y...

Impressive figures for GDP. So why are people complaining that times are tough? Well when you look at the state final demand since 1985, you can see that the two most populous states aren't going the best. Pretty much illustrates the "two speed economy" Its all WA and QLD baby!

Having a bit of interest in the sustainability business world, I've been looking at the Annual Report of Co2 Group, Australia's largest Carbon Offset provider (and one of the few that are listed). One thing I have been curious about is how they have been recording increased revenues in their Statement of Financial Performance but the cash flows from the cash flow statement haven't quite been meeting up. Specifically, how in the last year, their operating cash flow/Net income ratio was below 1. Based on my CFA Level 1 studies, this is usually a sign of aggressive accounting policies and/or earnings manipulation. Now, I am not about to accuse CO2 of that, but I delved a little deeper into the 2011 annual report and found these two items in the notes (ii) Project revenue Carbon sink project revenue is recognised in proportion to the work performed in relation to the product development and the various stages of completion of the carbon sinks. Work performed that has n...

I was reading an article the other day about solar power and how a lobby group for this power industry was saying that PV power had obtained grid parity in Australia (i.e it was now the same price to add Solar Power to the grid as it was for Coal power). This was obviously a ridiculous statement in my opinion (coal power in Australia is the cheapest there is at the wholesale level), but there was another question when it is put as "socket parity". i.e is it as cheap for the consumer to put solar cells on their roof and have a reduction in their power bills as it is to just keep on buying power from the major suppliers. It's obviously an interesting question, but impossible to answer without knowing what the Weighted Average Cost of Capital (WACC) is for the average household in Australia. The reason we need to know this value is so we can discount the future cash flows of the savings in power to see if these cash flows in the future do in fact exceed the Present value o...

Not bad...Goatameter is 3 for 4 since March! (though I missed the really good one) Sensible decision by the Reserve in my opinion.

It's that time again. The Goat-a-meter is still leaning towards the negatives...if anything, negative sentiment has increased since last month. Inflation expectations are not high, and while employment is holding up, the financial markets and the world economy are not not looking good. However, I do believe it will be only a 0.25% decrease, rather than the 0.50% being bandied about by the punters.One would hope the reserve has learned it's lesson after last month. We will see.

Found a very nice data series from the ABS. It's the extended Labour Series data set (6291.0.55.001 - Labour Force, Australia, Detailed - Electronic Delivery, Apr 2012 ) It gives a very detailed snapshot of the Labour force and employment, breaking down into age, sex and marital status Been playing around with some of the data to see if there really is a "man drought". This is the perception that there are less men than women in the optimum dating/marriage years.Women are always complaining of this effect, so I'm curious whether this is actually true or not based on the statistics. To calculate this, we will first make some assumptions (like good little economists we are):- Assumption 1: Prime dating/marriage years are 20-34 for both Male and Female. Assumption 2: We are assuming that all males and females are heterosexual. Obviously this is not totally correct (most studies put the level of homosexuality in a population at 2%), but if we apply this to both men...

As the inevitable hype recedes and sanity takes hold, it is important to revist the valuation of the Facebook shares. From the get go, the IPO issue price of $38 a share was ridiculous. To get that valuation, you would be looking at 100% earnings growth for the first two years, plus a terminal growth rate of 20%. Not going to happen in this economy. For mine, this price was pure hubris from Facebook (or more likely, their investment banker partners, looking for fees) Anyway, I updated my valuation, as Facebook ended up selling more shares through the IPO than was previously expressed. Due to the increase in shares (Class A and Class B) outstanding to 2,138,085,037 but with the same residual income method, cost of capital and earnings growth, I now have a share price of $17.90 per share. Still below the current Facebook market price of $34.02 so I would expect some softening of the share price still.

Been having a look at historical returns and variance of returns over the last 10 years for the ASX 200. Here is what I have come up with. Quite interesting. Show just how bad a year 2008 was for the stock market in Australia. Huge risk and a huge negative return. And just how good the three years 2003, 2004 and 2005 were...good returns and low risk. 2012 is looking a lot like 2006 so far...low returns and risk slightly lower than the norm. Not a great time to be throwing money at the share market in my opinion, especially as I can only see the risk increasing over the short to medium term. The graph also shows a bit of a negative correlation between returns and risk. The higher the risk, the more negative the return.

Source : ABS 6202.0 Labour Force Australia Interesting to see the growth in Female employment since 1978, especially compared to Male employment which has been flat since the early 80's.Shows that the vast majority of growth in employment has been due to the ladies entering the workforce. Also interesting to see the effect since the GFC...basically no employment growth. However, that is still better than the US and Europe so we shouldn't complain too much

Wow...Got that one wrong didn't I. I guess the business heads on the Reserve Bank Board were able to convince the rest that such a huge cut was warrented. For mine, I do believe this was an emotional reaction to the inflationary figures. In my opinion, the economy that doesn't really deserve such stimulus, especially with the Carbon Tax due any minute now which will certainly add to price levels. Better to have waited to see the effect of that and then hit the monetary price lever. A case in point is the recent Unemployment data which stated that seasonally adjusted unemployment dropped 0.2% to 4.9% for April (trend was unchanged at 5.1%). Hardly the figures for a looser monetary policy. I think the Reserve go it wrong.

This prediction could be wrong. For the first time in two months, the Goat-a-meter is pointing to the negative as far as interest rates are concerned....but only just. Because of the small amount of negativity, I believe the Reserve will hold their fire this time, but if there is a second negative month, I will definitely be predicting a cut next month. Anyway, the goat is going out on a limb here. Every economist seems to be pointing to a cut this month. It will all depend on the business people on the board. Which brings me to the board. Who would be voting.... Glenn Stevens (Economist) Philip Low (Economist) Martin Parkenson (Government) John Akehurst (Energy) Jillian Broadbent (Retail) Roger Corbett (Media, Pharama, Retail) John Edwards (Academic) Heather Riddour (Business) Catherine Tanna (Gas)

Shock news today over the CPI figures. Surprisingly low, mainly due to the segments "Food and non alcoholic beverages" and "Recreation and Culture" (which both experienced drops of over 2% for the quarter) Pundits are now factoring a cut of 0.25% at the May Reserve Bank Meeting with a 100% probability However, looking at the raw figures from the ABS, the biggest drop (of over 30%) was in Fruit products. This strikes me as a movement to normal prices after the temporary effect of the Queensland Floods/Hurricane of 2010/2011 (which elevated fruit prices in 2011). The "Recreation and Culture" drop was mainly caused by international and domestic travel prices effects (probably due to the increase in the Australian dollar and the fact the rest of the world is in the toilet) So in my opinion, this low number could be construed as just a return to equilibrium. I wonder if th Reserve will see it that way. Anyway, according to my model, I still have t...

Some articles in today's press moaning about IT product pricing in Australia and how we are being ripped off by unscrupulous global IT vendors like Apple and Adobe. A Federal parliamentarian is even called for another inquiry into IT pricing. For mine, it's just calling for more money thrown into dodgy reports that will offer no real solutions. Save the 5 million and go back to basics. The fact of the matter is every economist/financial analyst knows why it’s more expensive in Australia than the American markets (IT centric, but you can apply these rules to any industry) 1. Size of the market : Bigger market = more suppliers = more competition = reduced markups = lower prices 2. Lack of a domestic IT investment: Australia has basically no domestic IT market to counteract the offshore providers and so is in no position to influence prices with lower priced local competitors. 3. WACC – With interest rates high relative to the US, the average cost of capital in Australia is h...

What is Fairfax doing? News today indicates that the printed version of the Sydney Morning Herald has increased 20 cents from $1.50 to $1.70. That is a price increase of 13.33% over two years (as the previous increase was in early 2010) When inflation in Sydney is running at around 3.2 a year , this is a blatant cash grab by Fairfax. And ultimately, it will affect circulation. Price elasticity of newspapers, while quite inelastic originally, has become a lot more elastic due to increase in substitutes (the Internet is mainly to blame for that). Also, I have noticed the quality of the SMH has decreased in recent times, with more bylines from Associated Press and Agence France-Prees articles being added to the international news sections, instead of their own journalists. Not only that, advertising space in the newspaper has increased rather than decrease. It is not unusual to see a large amount of full page ads in the paper everyday. I have been buying ...

The Goatameter continues to be proved right with 2/2 correct decisions regarding the Reserve Bank. This prediction isn't as comprehensive as the last one as pretty much every economist picked it. Still, not bad for a new model. Will see if I can three out of three next month.

The Reserve Bank meets again tomorrow to determine whether interest rates should increase or not. Again, not much doing using the Goatameter... Been some slight signs of recovery though. Unemployment still in the low 5's. Commodity prices have decreased over Feb. Spreads between 10 year bonds and indexed bonds have increased slightly to 2.43%, but still below 3. Based on these figures, the indicator is slightly up for interest rates. But for now, I believe the Reserve will hold it's powder dry and sit on it's hands. We will see tomorrow how right I am!

I have been doing some analysis of the ASX All Ordinaries to value some bank stocks recently ( particularly NAB which has released it's results). But to value stocks, generally you want to know what the ROE is so you can discount the future cash flows. ROE is generally found by using the CAPM (or the Capital Asset Pricing Model). This is of the form R = rf + Beta(rm- rf ) where rf = Risk free rate (generally 10 year government bond rate) and Beta (the correlation between the return of the Asset you are looking at and the return on the market). rm- rf is generally known as the market risk premium. Now a lot of this info is available at Yahoo finance/Google Finance, but I always like to check the stats myself to ensure it is correct. Using OLS regression with ALLORD returns VS NAB monthly returns annualised (from Yahoo Finance), we find the Beta of NAB is 0.36 (fairly low risk). Risk free rate ( Aus Govt 10 year bond) at the moment is 0.038. All that is left is to calculate...

Looks like my model isn't too bad after all! Still one swallow does not make a summer and all that. Highlights from the Reserve Bank seem to indicate 1. US and China going ok 2. Europe has improved, but still on death watch 3. Australian GDP growth close to trend. 4. Commodity prices still high (but my model indicates this is negatively correlated to interest rates..might need to investigate this. Might be some multicollinearity in my model) 5. Inflation not a problem 6. Unemployment flat 7. Credit Growth slowly increasing, but retail rates close to long run average 8. Housing prices stable 9. Terms of trade down, but Australian dollar still high.

I have been doing some modelling to determine if I can accurately predict the Reserve Banks intentions regarding the cash rate. Based on Historical time series data, I have come up with the following factors that affect interest rates :- 1. 1 month lag in change of difference between 10 year bond and indexed bond (increase puts positive pressure on interest rates) 2. 2 month lag in change of difference between 10 year bond and indexed bond (increase puts positive pressure on interest rates) 3. Previous two Reserve Bank decisions on Interest rates (increase puts positive pressure on interest rates) 4. Commodity prices (increase puts negative pressure on interest rates) 5. Unemployment (increase puts negative pressure on interest rates) Based on todays data, while there was an decrease in Interest rates last December by the reserve, the fact that the last two months spread change on Government bonds vs index bonds were both "+" and commodity prices have been decreasing and unem...

I have been doing a few "back of the envelope" calculations on the Facebook IPO . At the moment, details are a bit sparse vis a vis the price of shares and the number of shares to be issued in the IPO . All we really know is that the total value of the shares in the IPO will be US$5,000,000,000 (5 billion). So how do we value the company based on this info? By making some assumptions. Note: In this valuation, we will be making some early assumption about the IPO (which may change). So watch these pages in the future as I will update as more info is released to the SEC. First Assumption - Book Value will be doubled after IPO . One thing that stands out about the Facebook SEC filing is that the current book value of the company at 31/12/2011 is roughly the same size as the total value of the IPO . (Book Value of company,or net assets = $4,899,000,000) So I believe that the investment bank assigned to float the company will be looking to double the size of the business. Th...