The Champagne Is on Ice…

  • Almost there…
  • Read the fine print
  • Caveat Tesla
  • Last chance for priority access

Overnight, the Dow Jones Industrial Average fell 91.22 points, or 0.52%.

The S&P 500 index fell 7.59 points, or 0.37%.

In Europe, the Euro Stoxx 50 index dropped 37.21 points, for a 1.26% loss.

The FTSE 100 fell 1.82%, while Germany’s DAX index lost 1.48%.

In Asian markets, the Nikkei 225 index is up 30.54 points, or 0.18%. China’s CSI 300 index is down 0.36%.

In Australia, the S&P/ASX 200 index is up 16.16 points, or 0.3%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$48.55 per barrel. Gold is trading for US$1,256 per ounce.

The Aussie dollar is worth 72.32 US cents.

Almost there…

If you’ve paid close attention to Port Phillip Insider, you’ll know that we pay close attention to the government’s ongoing debt position.

The latest news from the Australian Office of Financial Management (AOFM) is that the federal government is in debt to the tune of $435.4 billion:

chart image

Source: AOFM
Click to enlarge

Excellent work!

In further news, the Federal Treasury released the latest forecasts for future budget deficits.

The forecasts are as follows:

  • 2016/17: $37.1 billion deficit
  • 2017/18: $26.1 billion deficit
  • 2018/19: $15.4 billion deficit
  • 2019/20: $5.9 billion deficit

Who would have guessed? The number keeps getting smaller, even as government spending is forecast to grow, and as Australia’s economy looks set to enter recession.

‘The Lucky Country’ strikes it lucky again.

But of more interest to your editor is the simple math. These deficits add up to a total of $84.5 billion. If we add those deficits to the government’s current outstanding debt, you have a total of $519.9 billion.

That’s half-a-trillion dollars, thank you very much.

Of course, the total of $84.5 billion in cumulative deficits assumes the Australian economy grows as expected. According to the Treasury outlook:

In real terms, the Australian economy is forecast to grow by 1½ per cent in both 2015–16 and 2016–17 — then to pick up to 3 per cent in 2017–18 as the detraction from falling mining investment eases.

That’s a nice bit of forecasting. But how have they stacked up in the past?

We decided to do a bit of grunt work, checking out the past two pre-election budget forecasts. Here’s what the 2013 report had to say:

The Australian economy is forecast to grow by 2½ per cent in 2013–14 and 3 per cent in 2014–15. Against the backdrop of a still challenging global outlook, the Australian economy is expected to transition away from resource-investment led growth towards broader based growth, although this transition may not occur as smoothly as forecast.

In our humble opinion, we’d say it’s still transitioning. But no matter. That was the forecast; what was the reality?

Close, but no cigar. Rather than 2.5% in 2013–14, the economy actually grew 2.4%. We’ll give them that one. What’s one-tenth of one per cent between friends?

As for the 2014-15 forecasts, they’ll get no better than a rap across the knuckles. 3% was the forecast, 2.3% was the outcome.

In financial journalism parlance, I believe they call that ‘a miss’.

Going back to the 2010 pre-election forecast, the Treasury said:

The Australian economy is expected to grow by 3 per cent in 2010–11 and 3¾ per cent in 2011–12, returning to around full capacity over the next year. Fiscal and monetary stimulus is being withdrawn and there are early signs that private sector activity is picking up, although the transition to private sector led activity is proving to be a little slower than expected.

3% and 3.75% were the forecasts respectively; 2.3% and 3.4% were the reality ‘dis-respectively’.

But what if government receipts are less than expected, and payments are more than expected?

In the 2013 pre-election outlook, the Treasury forecast receipts to be $423.4 billion in the 2015–16 fiscal year. It forecast payments to be $424.9 billion.

How did things pan out in reality? Well, we’ll give them a gold star for the payments prediction. Payments totalled $425 billion.

However, they get a stinking brown blob for the receipts prediction. Government revenue totalled just $387.9 billion.

In 2013, the Treasury predicted payments for 2016–17 to be $443.2 billion, just shy of the current estimate of $445 billion. But it forecasts receipts of $450.8 billion, as opposed to the current estimate of $411.3 billion.

So, as the Australian federal government debt pile marches on towards half-a-trillion dollars, we look at the current forecast…and we look at previous forecasts…and we wonder…could we get there sooner than the Canberra bureaucrats think?

We’ll put some champagne on ice, ready to blow the cork when the debt level breaches half-a-trillion.

I’m sure you’ll join us for the drink.

Read the fine print

An email arrived in your editor’s inbox today from a well-known discount online broking firm, touting the issue of Westpac Capital Notes 4.

An inviting prospect they are too, paying interest estimated at 4.9%–5.1% above the 90-day bank bill rate. That current rate being around 2% per annum.

Who can argue with that when a term deposit will likely yield you little more than 3%.

But as always, caveat emptor (buyer beware), or caveat litteras parum* (beware of small letters — fine print). The terms note:

In the event of a Winding Up, if the Notes are still on issue and have not been Redeemed or Converted, or otherwise had the rights attaching to them terminated, they will have priority over Ordinary Shares and rank equally with certain other Capital Securities issued by Westpac, but they will be subordinated to claims of Senior Creditors. However, it is likely that a Capital Trigger Event or Non-Viability Trigger Event would occur prior to a Winding Up and the Notes would have been converted into Ordinary Shares or otherwise had the rights attaching to them terminated.

In other words, if the bank gets into strife, it will likely trigger conversion of the notes into stock anyway — putting the investor at the end of the claims queue.

In the Intelligent Investor, Benjamin Graham argues that ‘preferred stock’ (not too dissimilar from this type of security) is the worst of both worlds.

If the company does well, the preferred stock owner misses out on the gains made by ordinary stock owners. And if the company does poorly, preferred stock owners rank below all other creditors, and certain trigger events will likely result in the investor being no better off than stockholders.

Perhaps making this issue worse is the fact that the Notes are perpetual, meaning they don’t have a date on which the bank has to redeem them.

Again, that could mean that, during a bear market or a troubling time for the bank, the value of the notes could mirror the share price and fall. In that respect, not only do the note holders not benefit from gains made by stockholders but, to rub the salt in, they don’t benefit from any downside protection if things go bad.

Despite the tasty looking yield, we’ll pass up the opportunity and allow others to enjoy it. Of course, if you’re thinking of investing in the Westpac notes, you should do your own research.

Caveat Tesla

According to Reuters:

Tesla Motors has raised $1.46 billion in fresh capital from the sale of its 6.8 million new common stock offering…

Tesla seeks to finance a plan to expand production of its electric vehicles to 500,000 a year by 2018.

We wonder just how much cash Tesla Motors Inc. [NASDAQ:TSLA] will keep demanding from investors and creditors.

Over the past six years, the company has lost a cumulative US$2.1 billion. At the same time, it has raised a total of US$4.3 billion in debt, and issued US$2.7 billion-worth of stock.

At what point, we wonder, will shareholders ask, ‘When do you plan on turning a profit?’ Or maybe the Tesla ‘fanboys’ don’t care. As long as the company’s PR machine can keep making well-timed announcements on big new capital spending projects, the market seems to love it.

But it wasn’t just the dollar aspect of the capital raising that caught our eye.

The Reuters report also notes:

The shares were priced at $215 by lead managers Morgan Stanley, Goldman Sachs, Deutsche Bank, Citigroup and Bank of America Merrill lynch.

What a coincidence. It turns out that, after three years of rating the company’s stock as a ‘hold’, Goldman Sachs earlier this week changed their rating to a ‘buy’:

chart image

Source: Bloomberg
Click to enlarge

We shall pass no further comment on the matter.

As for Tesla, we wish investors good luck. But recently, whenever we think of Tesla Motors, the words ‘DeLorean Motor Company’ springs to mind.

Like Tesla, DeLorean cars had a sleek, fresh, and high-tech appeal.

Like Tesla, DeLorean Motor Company didn’t sell as many cars as the company had hoped.

And like Tesla, DeLorean Motor Company couldn’t quite figure out how to…err…make money.

We shall continue to watch the company’s and the stock’s performance with keen interest.

Last chance for priority access

The priority invitation for the 2016 Port Phillip Publishing investment conference is due to be delivered tomorrow afternoon.

If you haven’t yet joined the list, it’s not too late to do so. Go here. There’s no obligation once you’re on the list. You simply get to be among the first to see the conference details in full.

Details here.



* The Latin translation came virtue of Google Translate. We look forward to a flurry of disgusted letters from Latin professors correcting our grammatica.