Nervy Times, Shaky Situations.

Nervy Times, Shaky Situations.
February 18th. 2008 - Australasian Investment Review. – (AIR)

We could be in for another rough week, perhaps as volatile as the week of January 22, with a number of high profile situations still on the boil.

Investors should keep in mind that it is a holiday in the US tonight so any build up of selling pressure around the world won’t have any release in American markets for two days: that’s one of the reasons why the January 22 slump was so exaggerated.

With Allco Finance Group due produce interim results and a statement about its immediate health today; Centro winning a two month reprieve, bank shares under pressure, and a number of highly priced and high profile corporates reporting in the next five days, it will be a tough time.

Short term interest rates are rising sharply, adding to pressures on indebted companies and their banks, and home loan rates and there’s been a noticeable upturn in company failures.

The NSW-based Pubboy Group hotel group failed last week with debts said to be around $20 million an the National Auto Parts group failed with debts of around $52 million last week.

National Parts’ assets, including six distribution centres, 144 AutoPro retail stores and stock, are on the market.

A NZ- based structured residential property investor called Blue Chip Financial Solutions is due to make a statement this week on its future after its shares were suspended last week amid stories of problems in his business. A dozen NZ finance companies and other leveraged financial groups have collapsed in the past two years.

On Tuesday Blue Chip halted trading of its shares, pending an announcement on its future, but then it moved to a full suspension of quotation of the shares on Thursday and promised something this week.

Its website claims it has “2500 investment property portfolios, with a value of over $900 million (as at 1 June 2007).”

Today’s problem will be the future of Allco Finance Group (AFG) which has promised a statement on its 2007 first half financial results, as well as word about its financial health and future.

The results will be useless given the battering the company’s shares and management (which are the major shareholders) have taken over the past month to six weeks. With no word except last week’s request for a suspension in trading in its shares, and then a notice seeking an extension from last Friday to today for the release of the results, AFG has not communicated with the market.

There’s talk of asset sales, the major bank lenders sent an insolvency team into the company last week to check the figures and it’s suggested a combination of asset sales and loan restructurings might be revealed today. Certainly the management were caught short by a margin call on their shares, but couldn’t recover the shares pledged as security in some sort of confusion involving Tricom and its main bank, the ANZ.

A clean, understandable and convincing report will be needed from Allco and its associates today, as well as from its banks: failure to convince increasingly sceptical investors will damage the market’s confidence in the company and all of those associated with it at the moment.

Macquarie Group shares plunged 5.6% on Friday to $55.50 when it became known it was sniffing around parts of Allco and its aircraft and ship leasing businesses. Babcock and Brown are said to be sniffing as well: their shares were weak Friday ahead of this week’s interim earnings release.

After last week’s battering of performers like David Jones, Leighton Holdings, the Commonwealth Bank (Macquarie Group on Friday), JB Hi-Fi and the likes of United Group, Mirvac,and ASX also sold off despite good earnings reports, we could be in for more of the same this week.

Telstra, Crown, Amcor, Babcock And Brown, Bendigo Bank, Newcrest Mining, Santos, CSL, Perpetual, APN, OneSteel, Woodside, Virgin Blue, Brambles, Toll, Qantas and Fairfax are among the more high profile stocks to be producing interim or final figures this week and everyone of them could be battered by aggressive selling by hedge funds and other smart alec investors short selling (naked or covered).

It will only take one example of a high profile company falling short of forecast earnings for the period or for the next half, and the market sentiment will be tested as it was in the wake of reports last week from the likes of JB Hi -Fi, the CBA , Credit Corp, Cochlear and United Group.

The future of struggling margin broker, Tricom will also overhang the market’s confidence. Tricom is looking for a new owner with deep pockets but there are reports of unfinished transactions with clients.

Not only was Tricom margin lending for clients, but it was also big in the borrowing or lending of shares to investors who had shorted a stock.

As well, short term interest rates in the professional money markets are heading for 8% after another big rise Friday for 180 day bank bills: a situation that is placing renewed strains on indebted companies, their financiers and on the funding of home loan mortgages. 180 days finished Friday at 7.96% and 90 day bills at 7.80%.

That’s a rise of 0.26% for the 90 day bills and 0.44% in the 180 day bills since the RBA lifted the cash rate to 7% on February 5.

Before the credit crunch started last August bills used to rate around 0.20% above cash, sometimes 0.30%: they are now 0.80% and 0.96% and that is signally the need for another rise in mortgage rates if there is not an easing very soon.

Besides this pressure, the Reserve Bank will not let off in its campaign to lower inflationary expectations: its most senior economist (apart from Governor, Glenn Stevens) is Dr Malcolm Edey who is Assistant Governor (Economics). He’s due to make a major speech in Sydney tomorrow which will look ahead into 2008.

It will go over and reinforce the hawkish elements of last Monday’s Monetary Police Statement from the RBA, as well the release Tuesday of the board minutes from that February 5 meeting that lifted the cash rate to 7%.

Westpac led the market downwards Friday, falling 80c, or 3.3%, to $23.36 while the Commonwealth fell another 1.4% to $46.38% (down 7.5% over the week), ahead of it going ex-dividend on Monday. (That will drop the price by more than a dollar which will confuse nervy investors for a short while).

The ANZ and National Australia Bank both ended more than 2% lower while St George plunged by 3.4%.

The two to eight month extension of Centro to settle $3.9 billion in debt through asset sales, should give it enough time to come to an agreement with its bankers, if the credit crunch doesn’t intervene.

There’s more and more bad news in the US and Europe on growing pressures in existing credit markets with rates rising, more losses being reported by banks and other funders, and concern about small niche players and markets, such as the $US330 billion auction rate bond market in America which froze last week threatening massive losses and sackings across hundreds of towns, cities and local government bodies across the country.

More bank restructuring are being rumoured, with analysts preparing markets for another round of write-downs and losses next month.

The British Government yesterday decided to Nationalise the Northern Rock mortgage bank when it couldn’t ge enough money for it. The Government has lent well over $115 billion to keep Northern Rock afloat.

There will be more losses reported by major European banks this week and there could be some clarity about the beleaguered French giant, Societie Generale.

US banks are being told by lawyers it will be cheaper to walk away from deals rather than deal and try and sell bonds and other securities already showing losses.

One thing to look for today is the result from Bendigo Bank today: it merged with Adelaide Bank last year and Adelaide had one of the bigger margin lending books in the country and was a major funder of plain label mortgages from independent brokers and originators.

It was starting to feel the pain from the credit crunch when the merger happened late last year.

This article is contributed by Australasian Investment Review – (AIR) You can subscribe for their free newsletter at

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