Pull as Hard as You Can

Friday, 18th March, 2016
Albert Park, Australia
By Kris Sayce

  • Cult of the masterminds
  • Takeovers coming
  • We’ll take this gain
  • The best in Australia

The Aussie dollar’s march higher continues.

Like Ernest Shackleton trudging headlong into blizzard conditions across Antarctica, the Aussie dollar rises against all the odds.

The heroic Shackleton. The heroic Aussie dollar.

It wasn’t so long ago that all the talk was of the Aussie dollar falling to 50 US cents. Now it has reversed course.

According to a headline from Bloomberg today, ‘Aussie at 80 Cents by June Before RBA Gets Involved: Macquarie’.

Who would have believed it?

Not many. Not when commodity prices were sinking from lofty heights to desperate depths.

But in recent weeks, commodity prices have turned up a notch. From fears/hopes that oil could sink to US$20 per barrel, it’s now trading at US$40.22.

From the scary lows below US$40 in December, iron ore is now above US$56 per tonne.

Copper, the famed barometer of economic health, has risen from below US$2 per pound in January to US$2.30 per pound today.

Even natural gas, which seems to be in a perennial supply glut, has risen from a 52-week low of US$1.51 per mBtu, to US$1.93 per mBtu.

Battered down commodities stocks have been fighting back. At the time of writing, BHP Billiton Ltd [ASX:BHP] is trading at $18.07. Fortescue Metals Group Ltd [ASX:FMG] is trading at $2.76.

All is right with the world, for the Aussie economy. And if all is right with the Aussie economy, the same must go for the Aussie dollar.

So, is this finally the commodities rebound your editor has predicted each year for the past four years? Based on the evidence we’ve just given you, there can only be one answer: yes.

Except — as you know — all is not as it seems. As much as it would be great to talk up the resilience of the little Aussie battler, that ain’t the truth.

As Bloomberg reports today:

Actions by central banks to stimulate growth has fuelled a rebound in risk assets from equities to raw-material prices, after almost $9 trillion was erased from global stocks at the start of the year. The Fed’s updated projections on Wednesday implied two quarter-point increases this year, down from four forecast in December…

“This is a strong rally and the main catalyst is the return of easy money,” said John Kilduff, a partner at Again Capital LLC… “The Fed announcement yesterday was the latest sign that central banks are going to continue with stimulus. This is putting downward pressure on the dollar, which favors commodities.”

There you have it. I knew there was a good reason for spending two-and-a-half hours at the bullion dealer’s yesterday afternoon.

The central bankers won’t stop until the whole darn system collapses.

Buy gold. Hold it. Don’t sell it.

Cult of the masterminds

We often refer to Richard Maybury’s ‘Cult of the Masterminds’ essay. It’s a free market classic.

It’s the notion that those in government and in central banks think they can micromanage an economy, and the actions of tens or hundreds of millions of people, simply by pulling levers and pushing buttons.

This excerpt from a speech today, by the Reserve Bank of Australia’s Luci Ellis, is a wonderful example of the ‘cult of the masterminds’:

If policy can’t do away with recessions completely, and recessions are the main cause of financial distress, neither can policy entirely eliminate that distress. But the Australian (and Canadian) experience does suggest that policy and institutional settings can make those episodes of distress less frequent and less painful.

Pull that lever hard, Luci, pull it hard.

Markets

Overnight, the US Dow Jones Industrial Average index gained 155 points, or 0.9%.

The S&P 500 index gained 0.7%.

In Brazil, the Ibovespa index gained a whopping 6.6%, while Argentina’s Merval index added 3.4%.

Earlier, in Europpe, the FTSE 100 index gained 0.4%, while the German DAX index fell 0.9%.

Takeovers coming

Things are beginning to hot up in the Aussie media industry.

As the Australian Financial Review reported late yesterday afternoon:

Nine Entertainment Co is understood to have taken a 9.9 percent stake in Southern Cross Media Group after Macquarie Group kicked off a selldown of its shareholding in the national radio andn regional television group.

If you’re new to this story, the Australian federal government has indicated that it may relax the ‘reach rule’. This is a rule that prevents capital city broadcasters from broadcasting to more than 75% of the Australian population.

It’s why the likes of channels Nine, Seven, and Ten don’t have their own operations in regional Australia.

Instead, they partner with regional broadcasters, to syndicate the capital city broadcasters’ programming.

It’s a fairly straightforward series of relationships. Channel Seven works with Prime; Channel Nine works with WIN; and Channel Ten works with Southern Cross.

There are a few blurred lines, but that’s the basic shape of it.

But all that could change if the government abolishes the ‘reach rule’.

Without the ‘reach rule’, there wouldn’t be a limit on where the capital city broadcasters could broadcast.

It would be open season.

In a way, the ‘reach rule’ is on the way to obsolescence even without government changes.

The rule only applies to broadcasts using traditional television signals.

It doesn’t apply to that new-fangled concept of online streaming.

That’s the real issue for the regional broadcasters, and why they now want the ‘reach rule’ abolished as much as the capital city broadcasters.

The problem for the regional firms is that, even though they have syndication rights to broadcast a program over the TV airwaves, they don’t own the rights.

The rights ownership stays with Seven, Nine, and Ten. That means Seven, Nine, and Ten can make the programs available for streaming online, and potentially sell advertising revenue against that programming.

The regional channels can’t.

The question now is what will that mean for the main media firms in Australia?

As it happens, this was the theme of the January 2016 issue of Tactical Wealth. Our view is that the industry will consolidate. The city and regional broadcasters already have long-standing business relationships. It seems only a matter of course for them to strengthen those relationships through mergers and acquisitions.

While I believe that will happen, nothing is certain.

For a start, the capital city broadcasters may not think it’s worthwhile. After all, they’ve already got exposure to 75% of the population through the traditional networks, and a percentage of the rest through online streaming.

The capital city broadcasters could just choose not to play the game.

However, that’s a risky route. Because it’s not just the major TV networks that could bid for the regionals. There are the ‘new media’ businesses too.

(It seems ridiculous to use the term ‘new media’, given the maturity of online businesses.)

Optus won a bit of a coup last year when it outbid Foxtel for the rights to English Premier League games. Most had considered that Foxtel had locked that deal up for life.

Not so. Now Optus will show EPL games. And if the only reason for having Foxtel was for the EPL coverage, many subscribers will no doubt reconsider the value of that subscription.

So, could that mean Telstra, or Optus, or TPG, or some other online firm could make a grab for a traditional TV network? It’s possible. Quite what value they’ll get from it is another story.

But then again, 10 years ago, who would have thought that Netflix Inc [NASDAQ:NFLX] would commission its own original programming, and that Amazon.com’s [NASDAQ:AMZN] Prime service would do likewise?

The market changes all the time. Perhaps Nine Entertainment Co [ASX:NEC] can see that. It has chosen to take a 9.9% stake in Southern Cross Media Group Ltd [ASX:SXL], even though its primary regional partner is WIN.

Is there anything significant in that? Is Nine lining up for a full takeover if the media laws change? Or is it just taking a strategic position in the event that another firm decides to take a tilt at buying Southern Cross?

Takeover warning

I know one thing: I never buy into a stock purely for the takeover potential. As I warned Tactical Wealth subscribers last week, the world is awash with takeover moves gone bad — remember AOL and Time Warner?

Instead, it’s best to look at the opportunity on its own merits.

Most takeover rumours never turn into reality. If you’re buying a stock, buy it because you like the business for what it is, rather than for what it could become after a takeover.

As I say, most takeovers never happen, or they’re not as lucrative to investors as the hype suggests.

We’ll take this gain

One of the stocks we backed in Tactical Wealth to play the abolition of the ‘reach rule’ was Seven West Media Ltd [ASX:SWM]. It has done well so far. Subscribers who followed the advice could be up around 35%.

The other stock we backed was Prime Media Group Ltd [ASX:PRT]. That hasn’t played out quite so well yet. We’re down 18%.

All up it’s an average return of 8.4%. We’ll take that for now.

The best in Australia

A couple of months ago, Sam Volkering told his Australian Small-Cap Investigator subscribers to take profits on Bellamy’s Australia Ltd [ASX:BAL].

The stock was riding high, but he said take profits. He copped some flak for doing so, especially after the share price continued to rise.

But today, the share price is well below Sam’s recommended exit point. Subscribers who followed his advice to sell should have pocketed a nice gain.

Well, Sam has other opportunities for investors to consider in Aussie small-caps. If you don’t yet subscribe to what I believe is the best small-cap service in Australia, look out for details in your email inbox tomorrow.

Cheers,
Kris

……………………………………………………………………………………………………..

 

End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 27 stocks, including Catalyst Metals Ltd [ASX:CYL], Costa Group Holdings Ltd [ASX:CGC], Mayne Pharma Group Ltd [ASX:MYX], Orocobre Ltd [ASX:ORE], and Orora Ltd [ASX:ORA].

52-week lows: 28 stocks, including 1-Page Ltd [ASX:1PG], Huon Aquaculture Group Ltd [ASX:HUO], New Hope Corp Ltd [ASX:NHC], Urbanise.com Ltd [ASX:UBN], and Virgin Australia Holdings Ltd [ASX:VAH].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.