Rudi On Thursday

This story features AURUMIN LIMITED, and other companies. For more info SHARE ANALYSIS: AUN

(This story was originally published late on Wednesday November 5 but was at the time only available for paying subscribers. It has now been republished without any such restriction.)

Change has come to America on this historic day.

Listening to the victory speech of newly elected US President Barack Hussein Obama it is not difficult to see how this man can possibly inspire a whole nation out of the economic trough. Despite all the pre-election talk about how Wall Street feared the prospect of more governmental intervention, and of more taxes, it gradually became clear that Obama’s Republican opponents really didn’t stand a chance. And that was before we had seen one single ballot result.

I spotted a deja vu with last year’s elections in Australia. Not that Kevin Rudd can be compared to Barack Obama, but as far as electoral victories go, Kevin’s probably came as close to Obama’s as any other we’ll ever see from such close distance.

Similarly, stockbrokers and fund managers in Australia couldn’t help but send around emails prior to last year’s elections about how foreign funds would flow out of the Australian share market in case anyone would have any ideas about voting incumbent John Howard out of office. As things went, foreign funds did flow out of the Australian share market. However, I have little doubt that everyone agrees it would be a tough call linking this directly to last year’s election result.

Change has come to America. I have little doubt that in a while from now we will all look back at the events of today and we’ll agree in unison that something out of the ordinary happened on the 4th of November 2008 (5th of November in Australia). Having said all of the above, however, the tasks that lie ahead for the new US Presidential team are equally extraordinary.

Of equal importance is the fact that economies can stumble and fall very rapidly, as witnessed by recent economic data in Australia (as well as mostly elsewhere), but it takes time for measures and fixes to work through the system and boost the ill animal back to solid footing. As such I don’t think that Obama can turn water into wine, or split the sea to provide his nation a safe passage. Between here and The Promised Land lie at least two quarters of negative growth, and not just for the United States.

Share markets can be awkward animals to watch. On Tuesday the Reserve Bank of Australia delivered a bigger than expected 75 basis points rate cut, following on from an equally surprising 100 basis points cut at the previous meeting. The share market rallied, as expected. More rate cuts mean more stimulus for the economy and this means things should be looking better in the future.

All this is true, but under different circumstances the market would have zoomed in on the reasons why the Reserve Bank has decided to come out with a bigger than expected rate cut, and become worried. I am not trying to spoil anyone’s party here, and neither do I seek the title of Dr Gloom, but with at least two negative quarters ahead in the world’s largest economy, and with economic data in Europe, Japan, China and Australia delivering much worse readings of underlying health than expected, it seems but normal to anticipate that -at some point- reality will hit home. The effect from lower interest rates only kicks in after some nine months.

There is a reason why governments and central banks in most economies are (or soon will be) embarking on a policy of stimulating and repairing economies. This process is too early still for share markets to continue looking through. This is why I can empathise with chartists who believe share markets still have one more downward leg in front of them.

On the other hand, with interest rates nearly everywhere on the way down, cash will rapidly become a much lesser king.

I assume you can all see where this is heading: a point will come when share markets will look a lot less scary than they did last week, and cash will look a lot less attractive.

It’s still a bear market and as such I would feel inclined to stick to my analysis from earlier in the year (as can also be found on the DVD “Dealing With The Bear” we launched two weeks ago): only enter the share market with the mindset of going in for a short time. In other words: you ride the rallies and you damn well know that’s what you are doing.

On the other hand, and given all of the above, I realise some of you might be starting to look at “investing” in the share market again (as opposed to “trading”). I am not in a position to give you any advice, but if I were in your shoes I’d be taking a look-through-the-coming-year approach and zoom in on dividends.

This year’s sell-off has pushed share prices to such depths that dividend yields on many quality stocks are unusually high. Not only does this provide investments with a built-in cushion against potential share price weakness in the medium term, investors don’t need rising share prices to actually receive a return on their investments. (Think about this for a minute before reading on).

As such, and I am using the following companies only to illustrate my thoughts above, I find it difficult to share any of the brokers’ enthusiasm towards Austar ((AUN)). With the immediate outlook for consumer spending looking tough, the company will have to do more than just its best to grow profits next year. It may well achieve this, we don’t know yet. But because it doesn’t pay any dividends shareholders have to rely 100% on share price appreciation for their return and this, I think, remains a high risk strategy.

I’d be far more attracted to a company such as David Jones ((DJS)). Same sector, same basic challenges, but with a whopping 8.3% dividend yield for the present fiscal year, expected to rise to near 9% for the following.

(Always keep in mind these figures are estimates. So a question one would have to ask is how big is the risk that these forecasts will prove nothing but aspirations over time? As it happens, analysts covering the stock appear pretty certain about their case, projecting further dividend growth for FY11. But, of course, there never, ever is a watertight guarantee on any investment in the share market, or elsewhere for that matter).

Just for reasons of comparison: Harvey Norman ((HVN)) shares are currently trading on an implied dividend return of 4.4% (FY09) and 5% (FY10).

As a matter of fact, I was going through our Stock Analysis section on the website recently, for different reasons, but I saw there are quite a few resources stocks as well that carry unusually high estimated dividend returns. Shares of Centennial Coal ((CEY)) are pretty close to what David Jones has to offer. Has anyone looked at the forecasts for New Hope Coal ((NHC)) for this year and next?

As said above, none of the names mentioned should be considered financial advice. These are simply the sort of investments I’d be looking at with a through-the-coming-year focus. (Consider this as an invitation to do your own research on our website).

If you’re not ready to start “investing” yet, I’d say: don’t miss those rallies!

With these thoughts I leave you all this week.

Till next week!

Your editor,

Rudi Filapek-Vandyck
(as always firmly supported by Grahame, Greg, Andrew, Chris, Joyce, Pat and George).

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