Economic Rigor

You know the greenies have infiltrated the Climate Change Authority when you read the following in their recent draft report Australia's commitment to Kyoto was to keep our emissions to 108% of 1990 levels. While you wouldn't read about it, we are actually ahead of the game. Our emissions are actually at 105% of 1990 levels. Well done team! The thing is, that gives us around 91 MT of emissions we could carryover into our new emissions target if we decided to sign up to the new Kyoto protocol. That's great. Start on the front foot, ahead of the game. But guess what I found in the report They are recommending we take the 3% and create an even more aggressive target to try and influence other countries to take on more aggressive targets! As if. We have zero influence with the developing world on this regard and China would laugh at us if we decided to suggest they sign up to these aggressive targets. It could be worse of course. Some of the recommendations offered by Gre...

Been having a look at the Reserve Bank of Australian assets after our new Treasurer, Joe Hockey decided to grant the bank a capital injection of 8.8 billion. Nice. I was wondering why that may be the case. Reserve banks can operate with negative capital reserve if required as they can also print their way out of debt if required (though obviously not in times of higher inflation). In fact, the best time to do that might be at the moment, with inflation fairly low. But another reason may be sensitivity to interest rates and or foreign currency. The days of Reserve Banks having gold as their main reserve has long gone. It's usually foreign currency and bonds now. So I wanted to see what affect changes of foreign currency, domestic interest rates and gold prices have on the Total Reserves. So I regressed percentage changes in Total Assets against % changes in those other elements and got the following (Since 2005) %TR = -0.87*%AUD/US +0.07*%10 years AUS BOND (I removed gold as...

Looking in more detail as to why the sell off of CarSales...I think it's all panic selling. The CEO mentioned subdued conditions, but this is a company who pays out 90% of profit as dividends and still has a sustainable growth rate of 5% (due to a ROE of over 50%!). Even the ROA is pretty impressive (34%) Easily making the cost of equity of 10.5% over the last two years. As for growth, car sales are a pretty good model as they are linked to economic growth but a site like this also links to the secondary market (used cars) which does better when times are tough. A bit of exposure to underdeveloped car markets like Brazil and Thailand completes the picture. Sure, the model isn't exactly competition free. Lots of potential competitors out there, but with a good, experienenced board well versed in car sales and dealerships, I think this is still a business with potential. In fact, if I do my calculation of FCFE using the gordon growth model, I have a price target of $12.69. ...

Carsales has appeared on the ROC radar last night...seems to be a bit shunned for some reason. Big volumes of sales over the last couple of days (average daily volumes is around 800,000, but last two days sold off around 3 million shares a day). Wonder why? Most technical indicators seem to indicate a buy. ROC below 90, price at the bottom of the bollinger bands etc. Could be an opportunity. Or does the market know something I don't (probably lots). Will have to investigate a little more, but low 10's for this stock seems great value at first look.

Have heard about the novel security being offered in the US concerning the NFL star Arian Foster. He has decided to sell the rights 20% of future earning for the upfront price of $10,000,000. The company that has bought the rights, fantex has in turn decided to issue 1,000,555 shares at $10 a pop to people who want to invest. Interesting stuff. The question I have is if it is a good investment. So I checked out the IPO docs. Couple of red flags 1. Firstly, this is not a growth stock. Arian Foster is 4 years into a NFL career and is currently at the peak of his powers. His previous contract (in the 2nd year of a 5 year one) is probably his best (as he is 27 and when he comes off the current one, he will be 30-31....and definitely on the decline. Post career earnings are unlikely to be as good as his NFL earnings (especially as the deal with FanTex deliberately excludes investment income) 2. As shareholders, you actually are shareholders of a company FanTex Limited rather than Arian ...

While this is primarily a finance/economic blog, occasionally I will comment on other subjects that might be indirectly related to economics, like Climate Change. Another area is marriage. Generally speaking marriage is good for an economy in that it promotes population growth and civil order, two things important for economic growth. Same Sex Marriage is a little different. Certainly doesn't promote population growth (hard to have kids when a key component to a process is missing) but there may be an argument for civil order. Love is always a consideration, but as an economic dry, I'm leaving it out of the equation (One cannot live on love alone as they say). Human Rights, while important, is also not really an issue (as while Marriage is defined as a Human Right, the definition of marriage and who is eligible has always been left to country to decide under international law treaties) Now in the last few days, the Australian Capital Territory has passed a law allowing S...

Qantas, of all companies, appeared on my ROC scanner last night...it has dropped a fair bit of value over the last couple of days since the AGM. Currently sitting at $1.30. So I'm curious...is it worth a buy. Fundamentals don't look great. Making a minimal ROE of 0.1% (or basically nothing). Compared to the WACC I have calculated of around 6% (way below the 10.5% used by Qantas themselves), it still isn't making it's costs of capital meaning that ultimately, the book value will continue to drop. Current tangible book value for share is $2.42, but I'm not surprised that it isn't trading at that. If a company doesn't make its WACC, book value only goes one way....down. All that said, $1.30 does look cheap. Using DCF methods using FCFF of $330 million and the WACC of 6% and a growth rate of between (-2% to -3%....the guidance given for yields at the AGM), I have a price target of between $1.80 and $1.58...at least a 21% premium to the current price. Boa...

Was reading the AFR as usual, and discovered an article about QLD rail (now known as Aurizon), specifically the WACC estimate. Weighted average costs of capital are important in Government regulation as most regulations allow monopolies to earn at least their WACC in regards to prices. So the higher the WACC, the more the monpoly can charge. Aurizon believe their WACC is 8.17%, Queensland Resources Council (a lobby group for miners who pay to use the trains) believe it is 5.6%. You know what, I recon it is right in the middle. Lets see. Formula for the WACC is usually the (weighted interest rate of borrowings)*(1-TaxRate)*(% of Debt on Capital) + (Cost of Equity Capital)*(% of Equity on Total Capital). Firstly, from the Annual report: Average weighted interest rate of Aurizon borrowings over the last 2 years = 0.055. Tax Rate = 0.3 (Australian Company tax rate) Average Borrowings over the last two years (from 2013 Annual report) = $1.84 Billion Average Equity Shares Outsta...

The first in a series of posts comparing the Twitter IPO to Facebook. First up, the board of Directors Facebook :- Mark Zukerberg Sheryl K. Sandberg Erskine B. Bowles Marc L. Andreessen James W. Breyer Susan D. Desmond-Hellman Donald E. Graham Reed Hastings Peter A. Thiel Vs Twitter :- Peter Fenton Richard Costolo David Rosenblatt Evan Williams Peter Chernin Peter Currie Jack Dorsey Comments : All star cast of Facebook vs some quality at Twitter. 22% of women on Facebook vs 0% on the Twitboard. At least three IT visionaries on the Facebook board in Zukerberg, Andreesen and Hastings, plus serious political clout in Bowles and Sandberg. Winner is : Facebook!

Oroton, the luxury goods brand has come onto the Goat's ROC tracker as a possible undervalued company, but I'm starting to think it looks more trash than treasure. A few reasons :- Firstly, being a luxury goods company, generally not recession proof. In Australia, unemployment is predicted to rise and economic growth to reduce, not ideal conditions for a high end retailer. Secondly, they just lost the Ralph Lauren Licence which provided close to 50% of revenue. The replacement, Brooks Brothers has come on line, true, but lets be honest, Brooks Brothers is no Ralph Lauren. Thirdly, take out discontinued operations and the 12 million they received from Ralph Lauren and the profits look to be falling and cash flow starting to turn south again. Fourthly, they have limited exposure to Asia (just 3% of group sales) Lastly, the board has no women on it, since the departure of the CEO last year. Not a good look for a company that caters primarily to women. So all, up I won...

Well obviously! But what I really wanted to know if it affected the share price. Lets look at some comparisons. Here are the stcks prices of Apple (and others) in comparison with the Dow Jones Industrial Average with the base year being October 2009 (monthly stock prices, no dividends) So as shown, if you invested in Apple or Amazon, you would have outperformed the Dow by around 60%. Go team. The others, you would be treading water a bit, with the exception of Microsoft where you would be off roughly 20%. Poor Bill Gates! However, if you make the date of Steve Job's death the base year (October 2011), it gets a little murkier On this reading, Apple is pretty much treading water with the index, along with Microsoft, IBM is 20% off the Dow and it's Google and Amazon that are outperforming the market by around 16%. So I don't think there is any doubt that Steve Jobs' death has made Apple a less attractive proposition from an investor point of view (even with that...

Time for another update of the ASX Market Risk Premium. I would assume there has been some improvement here as the ASX has increased in value. So using our 2.5 years of daily returns of the ASX200, I calculate a capital gain p.a of 2.68%. Combined with the average dividend yield over this period of 4.64%, that gives us a market return of 7.34% (not too shabby) Looking at the average 10 year government bond rate over the period as a proxy, we have our risk free rate being 3.82% Which means that our market risk premium is now 3.52%