Kreston marker update week ending Friday 30th October 2009

Kreston ANZ

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News 2009

Kreston Dormers

Kreston Dormers Financial Services Pty Ltd

Please find below and attached our 'Weekly Market Update'.

We are continuing to get feedback and suggestions for improvement on the report, so if you have any suggestions please let us know

If you would like to discuss this email in more detail, please contact your financial adviser, Mark Johnson or Nick Pike on 1800 064 959.

Market Summary

The market fell again with the S&P/ASX 200 down 4.7%. The weakest sectors were Financials (down 5.1%), Materials (down 6.3%), Energy (down 6.9%) and Property (down 7.4%).

	Friday	Week	%
All Ordinaries	4,632	-228	-4.7
S&P / ASX 200	4,630	-230	-4.7
Property Index	974	-70	-7.4
Utilities Index	4,211	-115	-2.6
Financials Index	4,747	-253	-5.1
Materials Index	11,214	-757	-6.3
Energy Index	15,586	-1151	-6.9

The Australian market fell in sympathy with the US S&P 500 which fell –2.4% for the week and the UK FTSE was -1.3% weaker. In Asia the Nikkei fell -3.1% and Hong Kong’s Hang Seng fell -4.3%.

Business news centred on individual companies this week and in the feature section we review some key stocks and interest rates.

Following a request from a client, we have included a new “Terminology Section” which this week discusses ‘yield’. (We always appreciate feedback and suggestions from our readers).

Overseas News

Good news on the US housing front, which continued with the well regarded Case-Schiller index for home prices rising 1% in August from the previous month (seasonally adjusted). One of the ‘authors’ Karl Case stated that ‘it really looks like the bottom’ of the housing price falls.

This index measures house price movement in 20 cities across the US on a 60 day delay. The August result saw rises in 17 cities and fall in only 3, Las Vegas, Charlotte & Cleveland. The strongest rises were in San Francisco & Minneapolis.

According to the index, US house prices bottomed in February 09, and have improved steadily since then.

Norway became the first European country to increase interest rates, when it recently lifted its official rate by 0.25% to 0.5%.

The Norges Bank cited a stabilisation in the world economy and signs of inflation as the main reasons for lifting rates. Norway is an oil exporting nation and used its oil fund to support the economy last year. Whilst the trend will not affect the European Central Bank (ECB), the decision will impact the December meeting of the ECB as it debates continued financial support for member countries, following last years collapse.

Norway is the 3rd country behind Israel in August, and Australia in October, to lift rates.

Australian News

The negotiations, or should I say public posturing, of Telstra (TLS) and the government over the price that should be paid for Telstra’s fixed line network continued this week. The fixed lines (i.e. the copper cables to your home) have a replacement value of $33 billion according to Telstra, or $27 billion if you use less ducts & pipes.

Unfortunately Senator Conroy’s office released an email which indicated the ACCC values the network at between $7 and $17 Billion, depending on how you treat depreciation.

Negotiations are continuing, and these are expected to conclude a price by December. The Government is keen for as much of the agreed purchase price to be in equity to Telstra. CFO, John Stanhope, on Wednesday said "We would consider vending assets for an appropriate consideration of cash that's fair value, or even equity if there was some form of guarantee on return".

To a stock in a different market sector, Worley Parsons (WOR) at its AGM on Tuesday warned of further negative impacts from the stronger AUD:

‘the strong appreciation of the Australian dollar has had a negative impact on translation of foreign currency earnings. If today’s currency rates <continue> for the remainder of the financial year, the expected net profit impact for the full year would be in the order of $35 to $40 million’.

CSL also warned recently of the impact of the AUD on its projected profit and as discussed in last week’s update, other exporters will also be adversely impacted. ING Industrial Fund (IIF) announced a long awaited 1 for 1 entitlement issue for $700m at $0.48. (The current price is $0.51 cents). This will reduce debt from 53.9% to 33.5% and the issue is fully underwritten.

IIF held out on raising additional capital when other funds were doing so in late 2008 and early 2009. The result was that the market could see IIF needed more capital and thus pushed down the share price in the expectation that IIF would raise capital at a discount. However once the price fell (down to less than $0.10 at one stage) the discount that would be required to attract new investors would be a huge % of the company’s worth – in effect ‘giving away’ the company.

IIF had to wait for the share price to rise (to $0.60) before it could raise new capital at a reasonable price. It was relying on its bankers during that time to continue supporting the company.

What we see now is a “normalisation” of the fund, with the support of its bankers and asset sales. After this reconstruction the fund has significant headroom to its loan covenants.

IIF also announced the recommencement of quarterly distributions from 1 January 2010 with guidance of 3.21 cents per unit for the year. This represents a yield of 6.23%.

National Australia Bank (NAB) cash profit fell a respectable 1.9% to $3.84 billion, in line with last year and the underlying profit, which excludes bad debt provisions, increased 14.6% to $9.3 billion. There were no ‘adverse’ surprises with most profit items falling slightly from the previous half year.

NAB’s revenue was up 9.7% over the year, following strength in the Australian banking sector and strong trading in nabCapital & Treasury.

The bad and doubtful debt charge was increased by $2.3 billion to $3.8 billion. Pleasingly, the half year dividend was held steady at $0.73, against our forecast of $0.68 cents.

ANZ Bank (ANZ) reported a fall in statutory (net) profit of 11% to $2.94 billion. This captured newspaper headlines, but what didn’t get highlighted was the 10% increase in underlying profit to $3.77 billion, which was above market expectation.

Across the group revenue was up 17%, underlying earnings per share rose 4% and net interest margins increased by 16 basis points. The key area of concern was New Zealand with an increase in impairment charges and a profit decrease of 34%. This was offset by an 82% increase in institutional profit and an 81% increase in the Asia Pacific Regional profit.

In Australia, the retail division grew 3 times faster than costs, increasing profit after tax by 13%. The Bank confirmed a dividend of 53 cents against our lower forecast of 46 cents.

One of the constant features of today’s media is the focus on Australia’s greenhouse gas emissions, particularly in the lead up to the debate on the Emissions Trading Scheme (read tax). The general inference is that Australia’s greenhouse gas emissions continue to rise.

With the Global financial crisis and world economies falling into recession over the past year, you would expect to see a fall in greenhouse gas emissions as industrial production fell.

The Climate Group measures Australian Greenhouse emissions on a weekly basis state by state, and the results are published in the weekend Australian as a graph on the back of the business section, each Saturday.

They also have a website at :
www.theclimategroup.org/data/the_greenhouse_indicator

This shows that contrary to media speculation and consistent with slower economic activity, Australia’s greenhouse emissions have been falling over the past year. The major contributions to Australia greenhouse gas are coal fired electricity generation, particularly in Victoria.

New Section - Investment Terminology

We have had some much appreciated feedback from clients over recent weeks, particularly from one who suggested we include some explanations of some of the terminology we use. It is very easy for us to revert to words or concepts that we use every day because we work with them daily, but quite simply may be unintelligible to others.

So feel free to request an explanation of those things that have puzzled, confused or even annoyed you from the Weekly Update or other sources.

This week we describe yield.

‘Yield’ = annual income received from an investment usually expressed as a percentage of the prevailing security value.

Generally, ‘income’ is considered to be the dividends or interest received. So the yield on a share is equal to the expected dividend divided by the prevailing price of the share.

In the case of a Term Deposit, the yield is simply the interest rate per annum.

We also refer to ‘Grossed Up’ yields with respect to shares. In this case we are referring to the cash you receive by way of a dividend plus the tax rebate you receive from franking credits. This rebate is the government giving you back the tax the company has already paid on your dividend. The government then taxes the ‘grossed up’ dividend in your hands (at a 0% tax rate if your superannuation is in pension phase).

Finally, you will often hear about gross yields and net yields. Gross yield is the income you receive before costs whereas the net yield is the income less costs. A good example is the gross yield you receive on a rental property of perhaps 4% or 5%. The more important net yield is the 3% or 4% you receive after taking into account management costs, rates, insurance, repairs and maintenance.

Franking credits = are the credit for tax paid, and received by you as the owner of the dividend as explained above. This franking credit is used to reduce any tax liability owing. If there are surplus franking credits, these are refunded to you by the Tax Office when you lodge your tax return.