Economic Rigor

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...