Markets Live: Week ends with a bang

That's it from us for this week - thanks everyone for reading this blog. We'll be back on Monday for the next flood of earnings.

Here's the weekly wrap.

Have a great weekend!

Some final words for the week from Bell Potter's Charlie Aitken:

Here are today's biggest winners and losers among the top 200:



market close

The local sharemarket has closed higher, extending this week's strong run.

The benchmark S&P/ASX200 rose 18 points, or 0.3 per cent, to 5566.5, while the broader All Ords added 16.7 points, or 0.3 per cent, to 5559.6.

Among the sectors, materials jumped 1.1 per cent thanks to an afternoon rally in BHP, after the miner flagged that it may spin off assets in a demerger. Financials gained 0.2 per cent and industrials added 0.1 per cent.

Over the week, the ASX200 rose 2.4 per cent, posting its biggest weekly gain since February.


As today's session comes to an end, here are some investor thoughts on this afternoon's big news, the potential demerger of BHP:

Jamie Nicol, director of funds manager Dalton Nicol Reid

  • We think it’s certainly a positive announcement. It’s as much about the message that it sends to shareholders about them focusing in on trying to unlock shareholder value.
  • They’ve probably spent the last year, year and a half, reducing costs, reducing capex, there’s talk about buybacks, demerger. It’s quite a shift that’s been occurring under new management away from grow at all costs and more about delivering shareholder value.
  • I think they’re just looking at alternative options but I think the market has been speculating that this would be a likely option.
  • We suspect it’s going to be aluminium, nickel, perhaps lead, zinc and silver. Probably leave iron ore, copper, coal and petroleum in the main group.
  • Often some of these small entities struggle to get the board and senior management to focus on them. As they’re spun out a bit more effort and attention can come onto the demerged entities and enable them to perform well.

Andrew Corbett, global resource analyst at Perpetual Investments

  • It’s a big portfolio of assets, even some of the assets within the 4 or 5 pillars could be stripped out. For me what’s key is whatever assets do go into this that it’s a sustainable business that can stand alone. As a shareholder of the new company we want it to be appropriately geared with the right management and sustainable earnings.
  • I don’t know how well it’s going to go but as long as the new co has the right management is a sustainable business and is geared appropriately, that’s the best way to create long-term shareholder value. That allows new management to run that business and create value.
  • It’s probably going to focus the market on assets that it doesn’t value at the moment. There must be assets in the portfolio that BHP think the market does not value at all and if they were stand-alone with a dedicated management team then a dedicated management team can do something with them.
  • The value is there it’s just at the moment the market’s not paying for them, the market’s not recognising that value.
  • My experience to date has really been through Orica where they demerged Incitec and Dulux and that was a good experience from both the parent and the listed co. They created value for both parties and enabled the new listed co to go onto bigger and better things.


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In a perfect world, any investment should pay dividends, in a sense. But for shares it’s become critical, the AFR's Phil Baker writes:

A good example of how important dividends are was the reaction this week to Telstra’s $1 billion share buyback and increased dividend.

At least initially, any concerns that the company’s money-spinning mobile division could be hit by a slowdown in subscriber numbers over the next few years were easily forgotten. The buyback and total increase in the dividend to 29.5¢ was the major focus.

Dividends have always been important for sharemarket investors. According to AMP Capital Investors, dividends have delivered just over half of the 11.8 per cent a year total return from shares over the past 114 years. That’s not a bad track record.

But there’s a couple of lessons to remember when it comes to dividends.

It’s slightly misleading to suggest investors looking for dividends should go after the highest-yielding stocks. Yield and income are two different things and yet they are often bundled together.

Yield is an abstract number derived from two other dollar values. It’s a number at a point in time and tells nothing about the growth or sustainability in the underlying income.

Investors can be better off in stocks that initially yield only 1 per cent as they can from being in a stock yielding 8 per cent. It all depends on the time frame and growth opportunities.

Within reason, the lower the initial yield, the greater the income received if it’s a better-run company with an A-grade game plan.

Read more ($)


BHP Billiton considering a demerger of some of its smaller resources businesses confirms a strategic course the market will welcome, Malcolm Maiden comments:

It suggests that, one way or another, BHP’s alumina-aluminium, nickel and manganese operations will go. BHP is not saying that they will all be placed out to its shareholders in a demerger, however.

If it does choose the demerger path it says is its preferred option, it will want to create a new vehicle for its shareholders that makes sense as a business and has strong prospects.  
Weaker businesses and ones that don’t fit could be offloaded separately.

BHP’s board will meet next Tuesday to sign off on the group’s June 30 year profit result. If it decides to go ahead with its demerger plan, it is likely to announce it at that time, along with details of what will be included in a demerger.

Both sides of the deal are likely to be welcomed. It would focus BHP on its biggest and most competitive operations – iron ore, copper, coal and petroleum.

Uniquely in the resources sector, petroleum would continue to smooth out the mining commodity price cycle for the group, and BHP would also have its Canadian potash play in the wings as a potential fifth pillar.

Shareholders would get ownership of a separately listed new company that owned the smaller assets that BHP spins out. It would be independently run and financed and history tells us that business liberated by demergers prosper.

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world news

The interesting dynamic has been the fall in bond yields, with a number of countries seeing record low borrowing costs, IG’s Chris Weston writes:

  • We have seen periods throughout the last couple of years where bond yields have fallen, coinciding with good buying in equities; however that was driven predominately by central bank liquidity.
  • This time around, things look very different; while the question of the day is why Warren Buffett doesn’t undertake a stock split, the more pressing concern suddenly seems to be around global growth. It’s this issue, along with poor, and in many cases negative real wages, that is causing yields to fall.
  • At the same time, investors and traders alike are scanning the capital markets and seeing little alternatives other than global equities, especially on a risk-adjusted basis.
  • The US then seems in a better spot with such a strong snap-back in Q2 growth, but we have seen terrible growth numbers in Japan; Europe looks weak, while the July financing numbers in China have led to concerns about China’s Q3 numbers. Of course you can also add in the technical recession in Italy and deflationary environment in Spain, Portugal and Greece as well.

Goldman Sachs has asked financial companies across Wall Street to invest $US5 million to $US6 million each to create a new online chat service, as an alternative to Bloomberg’s instant messaging, the FT is reporting.

The new service was believed to involve fusing Goldman’s own in-house messaging technology, known as Live Current, with software developed by Perzo, a California-based start-up founded by former Thomson Reuters executive, David Gurle.

Now, Goldman has approached companies including BlackRock, JPMorgan Chase, Morgan Stanley, HSBC, Bank of America and Bank of New York Mellon to invest as much as $6m apiece in the Perzo project, according to people familiar with the matter, the FT says.

The online chat project was initially given the internal code name “Babel” at Goldman – leading some at rival banks to refer to it as “Babble”.

It has since been named “Symphony” and may launch as early as the second quarter of next year.

Here the full story ($)


Shanghai rebar steel futures have dropped close to their lowest on record on weak demand that has spurred Chinese producers to cut production, with the benchmark price of raw material iron ore set for its biggest weekly fall in two months.

Steel stocks in the world's biggest consumer fell to 12.78 million tonnes last week, according to industry consultancy Mysteel, the lowest since December 2012 as traders continued to run down inventory in response to seasonally slow demand.

"Traders are still destocking and I expect this will continue until the end of August. It's the weak season and construction is really slow," said Helen Lau, analyst at UOB-Kay Hian Securities in Hong Kong.

Lau said weak financing conditions are also discouraging any restocking. A gauge of money flowing into China's economy fell to the lowest since October 2008.

The most-traded rebar contract for delivery in January on the Shanghai Futures Exchange touched a low of 3014 yuan ($US490) a tonne, before paring losses to 3030 yuan by midday. Construction-used rebar fell to 3010 yuan on June 17, the lowest for a most-active contract since the bourse launched rebar futures in 2009.

For the week, rebar was down nearly 2 per cent, its biggest weekly loss since mid-May.

Slower demand had prompted Chinese mills to curb production last month, with crude steel output dropping to 2.20 million tonnes a day in July from a record 2.31 million tonnes in June.

Buying interest for spot iron ore cargoes was tepid this week and supplies remained high, traders said. Top miner Vale is selling a cargo of 64.08 per cent grade Brazilian iron ore fines at a tender closing later on Friday, they said.

Benchmark 62 per cent grade iron ore for immediate delivery to China's Tianjin port was unchanged at $US93.20 a tonne on Thursday. That level was the lowest since June 20.  For the week so far, iron ore was down 2.6 per cent, its biggest such loss since mid-June.

"We are not in a hurry to sell and we want to see where the market goes," said a Shanghai-based trader who has 700,000 tonnes of cargoes arriving over the next three months.

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While the investment world fixates on Warren Buffett’s Berkshire Hathaway stock cracking $US200,000 ($214,740) a share for the first time, here are some other listed companies for which you would get little change for that kind of money.

Take US-based Bactolac Pharmaceutical. Picking up one of the 9467 available shares on offer in the vitamin and supplement maker costs a cool $US120,000 – at least it did the last time there was a registered transaction in the stock, which Bloomberg says was in March.

Next priciest is Chocoladefabriken Lindt & Spruengli AG – better known as Lindt Chocolate. The Swiss-based confectioner’s shares go for $US63,250 each, or you could instead plump for close to 16,000 blocks, or around 1600 kilos of the good stuff – which is the better investment?

Sporting clubs feature strongly in the top 10 priciest stocks in the world, which we have put together using S&P/Capital IQ data (see table), limiting the universe to primary listed, common or preferred stock. The currency is US dollars, to keep it comparable with Berkshire’s landmark achievement.




More details of the possible BHP demerger coming in: the miner says it has considered many options, but it ultimately prefers bundling its laggard commodities into the single demerged entity.

''The board has continued to study various structural alternatives including at its meeting this week. A demerger of a selection of assets is our preferred option," the statement says.

"The board expects to consider this, and other matters, when it reconvenes next week. If any material decisions are made they will be announced immediately.''

BHP is scheduled to publish its full year financial results on Tuesday.

Most of the poorly performing assets came to the company via the merger with Billiton, a fact that has emboldened rumours the demerger is effectively an undoing of what happened in 2001.

Here's more

Meanwhile, the AFR writes chief Andrew Mackenzie is preparing to unveil a new $14 billion resources giant that will instantly become one of Australia’s biggest miners.

A demerger would see BHP’s Australian and South African shareholders gifted the dual-listed resources company, to be headquartered in Perth.

BHP chief financial officer Graham Kerr is understood to have been anointed to take the helm.

The BHP board is expected to agree to release details of the demerger, dubbed Project River, when it meets ahead of Tuesday’s full-year results announcement.

It is understood the new leadership dream team also includes Brendan Harris, BHP’s head of investor relations. He is frontrunner for CFO of the new company.

BHP is understood to view the spin-out as a strategic necessity, and believes it will unlock huge shareholder value. It is a move that could see other diversified global miners follow suit.

Read more ($)

shares up

Investors have bid up BHP shares as news breaks the miner would prefer a demerger over asset sales.

BHP shares have lifted on news the mining giant would prefer a demerger over asset sales.
BHP shares have lifted on news the mining giant would prefer a demerger over asset sales. 
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This just in: BHP Billiton has confirmed months of speculation by saying a demerger is its preferred way of simplifying its global portfolio.

While no decision has been made to push ahead with a demerger, BHP published a statement to the ASX confirming the demerger was preferred over simple asset sales.

The demerged entity is likely to include aluminium assets at the very least.

Read more (to come).

BHP has been looking to simplify its portfolio of resources assets.
BHP has been looking to simplify its portfolio of resources assets. 

Japanese stocks are snapping a four-day winning streak, as investors take a breather ahead of the weekend though Sony rose on a report that it will enter the automotive image sensor market.

The Nikkei is down 0.2 per cent after rising for four consecutive days on easing tensions in Ukraine and anticipation that Japanese public pension funds will buy domestic shares.

For the week, the index has gained more than 3 per cent. Analysts said that the Japanese market is likely to stay resilient given its underperformance this year compared to other major markets.

"When you think globally, the Japanese market falls behind its peers," said Hiromitsu Kamata, head of Japanese equity target department at Amundi Japan.

The Nikkei has dropped 6 per cent since the beginning of the year.

A positive for Japanese stocks is the prospect of increased buying from the $US1.2 trillion Government Pension Investment Fund, Amundi's Kamata said. The fund is expected to announce more allocations to domestic stocks later this year.

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Self-managed super funds are in the box seat to take advantage of Telstra’s $1 billion-dollar off-market buyback thanks to a structure that includes a huge fully-franked component and an extra dividend.

Telstra will take at least 926 shares each from successful applicants and, on our numbers, SMSFs in pension phase should be able to sell them back to Telstra for somewhere between $5268 and $5991 in a little over two months' time.

Andrew Moir, executive director at boutique wealth manager Evans & Partners, said the buyback which includes a fully-franked dividend that could be “grossed up” and will be especially attractive for investors such as self-manager superannuation fund members in retirement.

“There are a lot of people in zero tax environments these days,” Moir says. “For those who have been in Telstra for a long time, participating in an initiative like this would make a lot of sense.”

For these investors, the additional franking credits will be returned in the form of a cheque from the ATO, enhancing a marginal (or even loss-making) strategy to produce an outstanding return between 3 per cent and 16 per cent.

Wealth Partners Financial Solutions Andrew Heaven said the buyback will not appeal to investors paying marginal rates of tax, but shareholders in low-tax brackets would also benefit, just not to the same extent as zero tax payers.

“If you are at a top marginal tax rate, you are better off selling your shares on market. But if you are making less than $37,000, you should take a very good look at it” he said.

So, how exactly does it work?

The good news is that you have until next Tuesday to buy shares before the offer closes.

Read more at Smart Investor.

US news

Looks like George Soros is turning bearish on US stocks.

Business Insider is reporting that the legendary investor just upped his short positions in the benchmark S&P500 index by a whopping 605 per cent to $US2.2 billion, according to a recent regulatory filing in the US.

Even though he is still net long stocks, this took the short position on the S&P 500 from 2.96 per cent of his Soros Funds Management Portfolio to a whopping 16.65 per cent, the website writes.

‘‘The size and percentage of this put position suggests that Soros is getting worried about the market and where the S&P is going to head in the months ahead when the fed ends QE.’’

Here the story

Is Soros souring on US stocks?
Is Soros souring on US stocks? Photo: Reuters

The Commonwealth Bank's position as one of the world's most profitable lenders has been underlined by new analysis showing it is enjoying the second-strongest growth in operating profit among big global banks.

After CBA this week delivered record full-year earnings of $8.68 billion, new research from UBS measures its earnings growth against that of big global banks.

To do that, analyst Jonathan Mott compared profits over the last two years, stripping out tax costs and bad debts, to produce a measure known as operating profits or "pre-provision" profits. This gives investors an idea of the underlying performance of the business.

The comparison found that CBA's $1.9 billion expansion in operating profits over the period was the second strongest in the world. Only Britain's Lloyds Banking Group, which is benefiting from an economy rebounding out of recession, expanded earnings by a larger amount.

ANZ and Westpac's operating profit growth in the last two years was also ahead of most global peers, while NAB's went backwards.

The UBS figures help to explain investors' strong attraction to CBA shares - which caused the stock to hit a record high of just under $84 at the end of last month.

However, analysts are debating whether banks can sustain their growth in an environment of tighter regulations and fierce competition in mortgages.

Although Commonwealth Bank's total banking income grew 8 per cent in the year, it slowed to 1 per cent in the second half, and analysts say the outlook for retail banking profits is looking tougher.

Citi analyst Crag Sainsbury also said in a note that credit quality - which has boosted bank earnings in recent years - may have peaked and it could be difficult for banks to prevent bad loan costs from rising.




Billionaire property developer Lang Walker reckons home prices in Sydney and Melbourne have climbed too much, and says he is turning his focus to investments in Malaysia instead.

"Sydney is a little too hot at the moment," Walker said. "Melbourne has gone through a period of intense growth and that's plateaued off." However, the residential market in Brisbane still has some potential, he said.

Walker, whose company is behind Sydney's King Street Wharf and Main Drive Kew in Melbourne and has $12 billion of property projects in the pipeline, is looking to increase investments in southern Malaysia, where he turns prawn-feeding farm land into swish apartments.

"It's the leverage off Singapore," Walker said. "Singapore is very expensive. We can create and produce a product which is similar to what you get here in Singapore or Australia."

Billionaire developer Lang Walker is now betting on investments in Asia.
Billionaire developer Lang Walker is now betting on investments in Asia. Photo: Arsineh Housplan
shares up

Ahead of its results next Wednesday, biotech Sirtex has pushed through the $20 price level as it heads further into the stratosphere.

"The company is within six months of the announcement of data on the efficiency of its SIR-spheres, an unconventional treatment for liver cancer," says Bell Potter analyst John Hester, one of the few analysts who follow the company.

"The latest spurt in the share price follows strong June quarter sales and a lot of people think it is worth a lot more than I do."

Bell Potter has a $21.19 price target for Sirtex shares.

The analyst warns the stock is not without risk, since the data from the large trial at present underway could fall short of expectations,

"We've done a lot of work trying to figure out whether it will work," Hester said. "We remain a buyer of the stock."

The stocks is currently up 3.3 per cent at $20.04.

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