Markets Live: BHP splits

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A rally in mining heavyweight BHP Billiton’s shares ahead of its earnings report alongside a raft of well-received profit results helped buoy the local market, offsetting Commonwealth Bank of Australia going ex-dividend.

The benchmark S&P/ASX 200 gained 36.7 points, or 0.7 per cent, to finish the day at 5623.8, chalking up a fourth straight session of gains. The broader All Ordinaries lifted 37.8 points, or 0.7 per cent, to 5618.4.

Investors forecasted a strong performance from BHP’s full-year results, pushing shares to a three-year closing high, up 1.4 per cent to $39.68. BHP reported an net full-year profit of $US13.8 billion, up 23.2 per cent.

Rival Rio Tinto was also buoyed, up 1.6 per cent to $66.40.

Earnings season has been relatively solid so far but revenue growth is getting harder to find, Paterson’s Securties strategist Tony Farnham said.

The market was able to push ahead despite one of the ASX200’s largest companies, CBA, going ex-dividend. Bendigo and Adelaide Bank, as well as Computershare also traded ex-dividend.

“The top down thematic is that there is going to be, for a period of time, a GDP growth environment below trend – not massive below, but below trend,” Mr Farnham said, echoing the message from the Reserve Bank of Australia’s August minutes, which were published this morning.

The expectation was that consumer spending would pick up the slack from the mining sector, but the market was still waiting for that story to come through, Mr Farnham said.

“I would like to think it will happen over the next few quarters. We’d have to hope that it’s going to be in place by the time we get to the second half of fiscal 15 because that’s a key component of the fiscal 15 budget forecasts we saw in May,” he said.

Read more.

rba

Intensifying competition among banks to sell cheaper mortgages to homeowners and buyers has taken pressure off the Reserve Bank of Australia to cut interest rates further amid concerns of sluggish domestic and world growth. 

In the minutes of its August 5 meeting - where board members voted to hold interest rates at 2.5 per cent - the RBA noted that lower policy rates had begun feeding through to borrowers. 

Australian banks have this year stepped up their campaign to win new business, taking advantage of cheap wholesale funding from around the world and discounting variable-rate loans and cutting rates on fixed-term mortgages.

This battle for business has taken pressure off the RBA to cut its cash rate even further than its current record low of 2.5 per cent in the face of rising unemployment and tepid consumer sentiment.

"Average lending rates on housing and business loans in Australia continued to edge down over July, mainly owing to the ongoing replacement of more expensive fixed-rate and discount variable-rate loans from previous years," the RBA said in its minutes.

"Overall, cumulative movements in interest rates since the start of the year amounted to a noticeable easing in financial conditions.

"Financial markets continued to expect the bank to leave the cash rate target unchanged at the August meeting and over the year ahead," it said.

Economists seized on the comments as a bright spot in what was a relatively flat assessment of economic and financial conditions in Australia and around the world.

Read more.

Intense competition for mortgages has helped ease the pressure on the RBA's official cash rate.
Intense competition for mortgages has helped ease the pressure on the RBA's official cash rate. 
analysis

In non-BHP related news, here are the best and worst stocks in the ASX 200 today.

A bunch of the top performers reported earnings: Arrium, InvoCare, GWA Group, Monadelphous, Toll, Amcor and Cardno.

Those that disappointed with their profits numbers (as measured by the share price reaction) were: Transpacific Industries, Oil Search and Sonic Healthcare.

Best and worst performers in the ASX 200 today.
Best and worst performers in the ASX 200 today. 
earnings

BHP Billiton will push ahead with a demerger of non-core assets that will include coal mines in Australia's Illawarra region, after reporting a better than expected full year profit.

The natural resources giant reported underlying earnings of $US13.4 billion, which was lower than the $US13.58 billion predicted by a consensus of analysts surveyed by Bloomberg.

The underlying result was about 10.1 per cent better than last year, despite prices for some of BHP's most important commodities - particularly iron ore and copper - trending lower during the 2014 financial year.

BHP was able to boost exports and cut costs sufficiently to overcome the slide in commodity prices. 

The focus now turns to the package of shareholder returns announced, particularly the demerger.

The new entity will be chaired by long serving director David Crawford, as predicted by the Australian Financial Review.

It will house BHP's existing aluminium, manganese and nickel assets.

Investors rushed to buy BHP shares ahead of today's results, with the company's Australian shares higher by about 1.1 per cent for most of Tuesday's trading session.

The stock has risen by more than 3 per cent since BHP formally flagged its desire to conduct a demerger on Friday afternoon, and is testing its highest levels since September 2011.

Interest in the demerger was so strong that BHP's website crashed around the time the result was due to be published.

BHP chief executive Andrew Mackenzie is scheduled to address the media and members of the investment community shortly.

Read more (to come). 

BHP chief executive Andrew Mackenzie talks with workers.
BHP chief executive Andrew Mackenzie talks with workers. 
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Takeover

From an ASX announcement:

BHP Billiton today said it plans to create an independent global metals and mining company based on a selection of its high-quality aluminium, coal, manganese, nickel and silver assets.

Separating these businesses via a demerger has the potential to unlock shareholder value by significantly simplifying the BHP Billiton Group and creating two portfolios of complementary assets.

Once simplified, BHP Billiton will be almost exclusively focused on its exceptionally large, long-life iron ore, copper, coal, petroleum and potash basins. With fewer assets and a greater upstream focus, the Group will be able to reduce costs and improve the productivity of its largest businesses more quickly. As a result, its portfolio is expected to generate stronger growth in free cash flow and a superior return on investment.

Many of the assets selected for the new company (‘NewCo’) are among the most competitive in their industries.

In addition, we are pleased to announce that Graham Kerr, our chief financial officer,would assume the role of chief executive officer and Brendan Harris, head of investor relations, would be chief financial officer, both based in Perth, Australia.

forecast

In case you're wondering where the BHP numbers are - so are we. They were supposed to be posted at 4pm, but it appears they're having some communications issues. This the latest from their website:

BHP's website has crashed due to popular demand...
BHP's website has crashed due to popular demand... 
market close

Great day on the bourse, with the ASX 200 and the All Ords jumping 0.7 per cent, or by 37 points, to 5623.8 and 5618.4, respectively.

Investors reacted positively to the avalanche of earnings numbers, while BHP was bid up (by 1.4 per cent) to multi-year highs ahead of its imminent earnings announcement. Rio also gained 1.6 per cent and Fortescue advanced 2.2 per cent ahead of its profits announcement tomorrow.

The big four banks were mixed, with CBA trading ex-dividend and declining 1.7 per cent and NAB down 1.7 per cent, while Westpac jumped 1.6 per cent and ANZ added 0.8 per cent.

Bendigo & Adelaide Bank and Computershare also went ex-dividend and fell.

dollar

The last Aussie bull among the big four has caved in: Commonwealth Bank is losing faith in the ability of the local dollar to extend its world-beating gains this year.

Since April, CBA was alone among the big-four banks to predict the Aussie would add to a rally that saw it jump 4.5 per cent against the US dollar this year through the end of last week.

Then, last week the nation’s largest lender cut its year-end forecast to 94 US cents, compared with 93.25 US cents in New York yesterday and down from an earlier estimate of 97 US cents.

The change in sentiment shows how Australia’s economy is struggling amid decade-high joblessness, with CBA now saying policy makers may delay raising interest rates until 2015.

‘‘The rise in the unemployment rate’’ probably means ‘‘the RBA stays on hold a lot longer,’’ says Richard Grace, Commonwealth Bank’s chief currency and interest-rate strategist. ‘‘We still see Aussie dollar upside, just not as much as before.’’

The cut in the bank’s Aussie forecast brings it more in line with its three main peers, which yesterday reiterated their year-end estimates of 85 cents to 90 cents.

Commonwealth Bank sees policy makers raising their benchmark rate in February, after previously expecting a November increase.

shares up

BHP shares are up a solid 1.5 per cent at $39.74, bringing them within a whisker of a three-year high, ahead of the miner's earnings report, which is due to be released in 15 minutes.

Investors are anticipating a solid result but are also eagerly awaiting the confirmation of a corporate spin-off, which was hinted to the market on Friday.

For more details on what to look out for in the report, click here.

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analysis

Those brainiacs at boutique long/short fund manager Auscap Asset Management have created a nice chart (below) which shows that over 20-year periods there are many more good years for equity investors than bad ones.

The fund managers went through the last hundred years of data and put together a number of charts that look at investor returns if one had invested at the start of any given year and held the All Ordinaries Accumulation Index for 20 years.

This is what they find:

  • If you were invested in the All Ordinaries Accumulation Index for any 20 year period from 1914, the average nominal return was 13.0% per annum, which equates to a 1057% return over 20 years (that’s 10.6x your initial investment!).
  • The median return was 12.7% per annum, or 988% over 20 years.
  • The highest return offered was 18.1% per annum, if you were lucky enough to invest at the start of 1975 after the market meltdown of 1973-74.
  • Perhaps more significantly, the lowest 20 year return was 8.9% per annum, or 446% over 20 years, if you invested in 1992 and therefore suffered from four market corrections over 20 years, including the dotcom crash of 2002, the global financial crisis of 2008 and the market corrections of 1994 and 2011.

 

The analysis does not include any investment period starting post 1994, since there is not 20 years of data for these periods. 

The Auscap team reckon the market now is trading at around its historical average, trading at 14 to 15 P/E.

They are happy to admit that over the short term they have no idea where the market will go, but their point is "history suggests that worrying about short term market movements might prevent an investor from making significant real returns over the medium to long term".

Shares tend to be a great investment over the longer term: over two decades most years will return between 10% and 15%. ...
Shares tend to be a great investment over the longer term: over two decades most years will return between 10% and 15%. Source: Auscap Asset Mgt 
budget

Most Australian businesses are clueless about free-trade agreements despite many eagerly anticipating such a deal with China, according to research from the world’s second biggest bank.

HSBC has found that just 19 per cent of Australian companies are using the nine free trade agreements the government has signed with countries including New Zealand, Singapore, the US, and Chile.

The bank’s research found that many businesses had limited or no understanding of one or more of Australia’s FTAs, saying the agreements were too complex to understand.

But James Hogan, HSBC’s head of commercial banking in Australia, said once understood and adopted into business strategies, FTAs delivered handsome benefits.

Of the companies using FTAs, 75 per cent said their exports had grown, thanks to having access to new markets an business opportunities and a wider client base, he said.

“Clearly, there is a knowledge gap amongst Australian businesses on how to make the FTAs work for their business,” Mr Hogan said.

Australian Fashion Labels is one business that admitted to having little knowledge about how to take advantage of an FTA.

Read more.

Many businesses are excited about the potential of free trade agreements but not sure how to access the benefits.
Many businesses are excited about the potential of free trade agreements but not sure how to access the benefits. Photo: AFP
healthcare

The effect of the proposed $7 co-payment for medical care is already being felt with Sonic Healthcare chief executive Colin Goldschmidt linking weak growth in the company’s pathology division to patients putting off tests.

Dr Goldschmidt said he did not have hard evidence but said media coverage of the federal budget proposal was “possibly” discouraging completion of pathology referrals. He said doctor visits at Sonic’s bulk-billed clinics had also been weak.

“Many people think the co-payment went into effect on 1 July this year,” he said. “If the co-payment legislation goes through as proposed it will have far reaching effects for general practice, pathology and radiology.”

Dr Goldschmidt said patients’ health could be at risk. “My view is that if patients have a pathology referral it means they need to have the test done,” he said.

Primary Health Care CEO Edmund Bateman has said pathology is the sector most vulnerable to the co-payment.

The softness in the Australian pathology volumes, along with higher costs due to a costly collection centre roll out, caused Sonic to be “prudent” in its guidance of 5 per cent growth in group EBITDA in the coming year, he said. “Our guidance for FY15 might had been a little higher had we not been a bit conservative on Australian pathology,” he said.

Read more.

Sonic Healthcare reported a 12.3 per cent rise but didn't wow investors. Company CEO says the medical co-payment could ...
Sonic Healthcare reported a 12.3 per cent rise but didn't wow investors. Company CEO says the medical co-payment could be a factor. Photo: Robert Pearce
tech

Tiger Woods had a small stake. So did Shaquille O’Neal, Henry A. Kissinger and Arnold Schwarzenegger. But Warren Buffett said he didn’t want to buy any shares in the Google initial public offering, that celebrates 10 years of being a listed company today, the AFR's Phil Baker notes:

The “Sage of Omaha”, and one of the world’s best investors, has a famous aversion to technology, and said at the time it was a fabulous business, but his guess was that it also came at a fabulous price, which put him off buying any stock.

“We’d never buy a public offering,’’ said Buffett in May 2004. “The chances of buying something undervalued in a public offering, it’s not our game.”

Despite a few glitches before its debut, the stock rose on its first day of trading on the Nasdaq at $US100.33, up $US15.33, or 18 per cent, from the $US85 offering price set late and in a flurry the day before.

When the float was first announced, an indicative price range of between $US108 and $US135 a share was given. They have since done a 2 for 1 split and from day one, the stock has never looked back.

But it’s worth remembering that at the time the IPO valued the company at $US23 billion after just five years of being started and with the price earnings ratio of 80 times earnings.

On Monday, the stock closed at $US592.70, with a market cap of almost $US400 billion, a gain of 1294 per cent since the first day of trading, which compounds to around 30 per cent per annum return. That compares to 6 per cent from the S&P 500, but 46 per cent per annum, or 4419 per cent, from Apple.

Read more ($)

Oh, to have bought Google shares 10 years ago...
Oh, to have bought Google shares 10 years ago... 
quote

Great piece from NY Times columnist Carl "the Sketch Guy" Richards on how to spice up your investing life:

Let’s say that you’re truly bored with your investments, and you simply have to spice things up a bit. I have a few suggestions for you if you’ve completely forgotten the visceral feeling of outsize risk.

1. Buy a bunch of shares of your favourite internet company. Make sure it is something you use all the time. Something like Facebook, Google or even Apple. Those are great because then you get the added benefit of being able to tell people you own them. In fact, Twitter might be the best. Everyone knows Twitter is cool.

2. Get a T-shirt that declares your purchase. Personalize it with “I own 100 shares of Twitter! How do you like me NOW?” That way people will see your shirt and congratulate you on your exciting investment.

3. Buy at least one book about trading options. Option trading is where non-boring investors go for real excitement. You can learn about naked puts, long straddles and iron butterflies. It’s definitely not boring!

4. Replace your money market fund with a junk bond exchange-traded fund. I saved the best for last. Right now, your boring money market fund might be yielding less than 1 percent annually. If you swapped it out for the products Michael Milken made famous in the 1980s, things can get exciting real fast. Just add your money to the more-than $12 billion that is in the iShares High Yield Corporate Bond ETF. Its symbol is HYG, and it is currently yielding more than 5 per cent annually!

Of course, all of these things come with huge risk, but how else are you going to avoid being bored by your investments? What fun would it be if there weren’t t at least a chance of losing vast amounts of money at any moment?

Nothing is more exciting than logging in to your brokerage account to see if there’s still anything there.

Just think: It’s like Christmas, only in reverse.

Read more at The NY Times.

Read more at the NY Times.

 

The coolest way to risk your retirement. Source: The NY Times
The coolest way to risk your retirement. Source: The NY Times 
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rba

Here's a round-up of economists' reactions to the RBA minutes this morning:

RBC Capital Market’s Su-Lin Ong:

  • The August RBA minutes shed limited new light but uncertainty appears to have stepped up, hinting at a central bank that is likely to sit on its hands for even longer.
  • As we have often argued in the past, the RBA tends to sit on its hands when it is uncertain, awaiting further data and developments. This appears to be very much the case well into 2015.

 

Michael Workman, CBA:

  • We still believe that the question the RBA will be likely to debate early next year is “does it make sense to keep cash rates at record lows in an economy running near trend growth and where the desired growth transition is underway?”  We will have to wait for the next few jobs market figures to determine whether the July unemployment rate of 6.4% was an aberration or the new norm. If the unemployment rate falls back to 6% we would see it as supporting our argument.
  • Our somewhat ambitious call remains in place. We expect the RBA is likely to begin “normalising” monetary policy in early 2015. The next major parts of the economic jigsaw are the second quarter Capex survey and, in the following week, second quarter GDP. Both have some downside risk.

 

Felicity Emmett, ANZ Research:

  • Of most interest were the comments about easier financial conditions. Board members noted there had been a “noticeable easing in financial conditions” since the beginning of the year, pointing out the fall mortgages rates. Both 3-year fixed rates and standard variable mortgage managers’ rates are down 20bps over the past six months, while average lending rates on business loan have also edged down. This effectively amounts to a quasi-monetary policy easing, and suggests that market pricing of a 45% chance of a rate cut by early next year looks stretched.
  • From our perspective, we continue to expect that the Bank will stay on hold until May next year, after which time they will gradually increase the cash rate by 100bps over the year.

 

Ben Jarman, JP Morgan:

  • It is clear that the Board would clearly prefer not to have to ease policy again, and some combination of lower AUD and movements in market rates are the hoped-for support mechanisms.
  • The labour market data in particular over the next few months will be important in dictating whether the Governor has the patience to wait for these external adjustments to occur.
RBA members "noted the significant uncertainties around the growth forecast and the importance of considering the risks ...
RBA members "noted the significant uncertainties around the growth forecast and the importance of considering the risks to the forecast as well as the central projection." Photo: Rob Homer
forecast

Australia’s biggest company will do much more than simply publish a profit figure when it hands down its full year financial results at 4pm this afternoon.

BHP Billiton is tipped to begin rewarding shareholders, and could also break-off its least productive divisions to form a brand new company owned by BHP shareholders.

Here are five things to watch out for when BHP reports:

1. Turning the profit corner

BHP is expected to report underlying earnings of $US13.58 billion. The improved result has come after a year when prices for BHP’s most important commodities slipped lower, meaning the result is due to higher exports, cost-cutting and a lot of hard work.

2. Spinco

BHP has far more investment options on its books than it could ever hope to fulfill, which is partly why it will likely spin-out a collection of non-core assets into a new company this afternoon.

The Aluminium, Manganese and Nickel divisions are tipped to dominate the new entity, but don’t be surprised to see a sprinkling of more viable assets thrown in to sweeten the deal.

BHP shareholders will be given an instant stake in the new company, which would likely rank among the top five miners in Australia by market capitalisation if, as expected, it is listed here.

3. Shareholder returns

Two years of brow-beating is about to pay off for shareholders, whose loyalty is set to be rewarded with more than the usual ‘‘progressive dividend’’.

BHP has promised to launch a round of shareholder returns once its debt falls to $US25 billion, and many expect the miner to be close to that number by this afternoon.

Original expectations were for BHP to start $US3 billion worth of share buybacks today, and gradually roll out more buybacks over coming years. But that picture has been blurred by Spinco, which in itself will likely be considered a return to shareholders.

4. New spending

BHP may have cut back spending on new projects and exploration by more than 25 per cent over the past couple of years, but it is still expected to have about $US15 billion to play with over the next 12 months.

The company is likely to spend more than a $US1 billion on further ‘‘debottlenecking’’ in the Pilbara, where iron ore export gains are being achieved by improving the efficiency of the transport system rather than any glamourous new project.

5. Potash

BHP’s push into the potash market ramped up one year ago today, when it announced it would gradually spend $US2.6 billion developing a mine in Canada.

The play was always described as a gradual move, that was focused on producing some time around 2020.

The miner promised to spend about $US800 million each year on the project known as Jansen, but many believe the actual spend for the 2015 financial year could be lower than that.

Read more.

Any demerged BHP entity still has to make sense as a business.
Any demerged BHP entity still has to make sense as a business. 
shares up

Construction and property developer Watpac has said its full-year after tax profit soared 482 per cent to $17.9 million from $4.5 million a year ago and despite an 18.5 per cent decline in revenue to $1.2 billion.

Underlying net profit after tax came in at $18.4 million. It will pay a final, partially franked, dividend of 3.5¢ a share on September 19, taking the full year payout to 6¢ a share. It is the first time the company has paid a final dividend since September 2011, chairman Chris Freeman said.

The result has pushed the company’s shares 5 per cent higher to 94¢.

world news
Keep an eye out for unusual behaviour in markets. PHOTOGRAPHER: MATTHEW TABACCOS/BARCROFT MEDIA/GETTY
Keep an eye out for unusual behaviour in markets. PHOTOGRAPHER: MATTHEW TABACCOS/BARCROFT MEDIA/GETTY 

Last week saw a dynamic in financial markets that, not long ago, would have been deemed quite unusual: prices of all kinds of assets, from safe government bonds to risky stocks, rose together, Pimco's former chief Mohamed El-Erian writes over at BloombergView:

The movements continued to confound the once-traditional pattern, in which bond prices rise and stock prices fall when investors expect the economy to perform poorly, and vice versa. There are various explanations, some more consequential than others.

One interpretation is that investors expect hyperactive central bankers to remain their best friends, buoying markets with continued unconventional policies. Last week's disappointing economic data out of the US and Europe would support this view, putting pressure on the Federal Reserve and the European Central Bank to be more accommodative than they otherwise would.

That's the optimistic view. It is also valid and, given how well it has played out, deeply entrenched in markets. But it may be only part of a less comforting explanation relating to the view that, at current valuations, bond investors may be reacting to something that the stock market has yet to recognise.

Bond investors tend to be more risk averse than equity investors, and thus reposition earlier in response to a higher probability of a market sell-off. This is in part because they are more focused on the macroeconomic picture, and in part because bonds have a different risk-reward profile: they ultimately pay only their face value, whereas stocks can keep going up.

This interpretation is bolstered by the fact that the stock market is also subject to demand influences that could prove temporary. The boom in merger and acquisitions, for example, has pumped a lot of cash into the market, helping to push prices higher than what the performance of the economy would justify.

If this complementary interpretation is correct, it's just a matter of time before the correlation between risky and riskless assets starts returning to its historical pattern.

Here's the whole article

eco news

Consumer confidence rebounded 3.7 per cent to 112.5 in the week ending August 17 to be just below long-run average levels, according to the weekly ANZ-Roy Morgan measure.

This jump follows a sharp 5.7 per cent fall the previous week which likely reflected negative newsflow surrounding the spike in the reported unemployment rate, share market losses, and heightened geopolitical tensions.

The forward-looking sub-indices were the key drivers of the improvement, while perceptions of current conditions were more subdued, ANZ says. Household perceptions about their ‘financial situation compared to a year ago’, the subindex most closely correlated with consumer demand, fell by 4.8 per cent.

“Consumer confidence has stabilised near its long-run average level in August," says ANZ chief economist Warren Hogan. "Along with low interest rates and a gradual improvement in the labour market this should support house prices and retail spending as we head into spring.”

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