20/06/2006 - 22:00

Blowing the froth off the boom market

20/06/2006 - 22:00

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Blowing the froth off the boom market

Feeling poorer? Don’t worry, you’re not alone. Everyone feels poorer after a market correction, though it must be said, if you’re less than 30 years old this is probably your first serious correction after a wonderful bull run that can be traced back to the late 1980s.

To cheer you up, now that some of the froth has been blown off the stock market, you can look forward to the next phase of an exciting experiment being closely monitored by Briefcase – to see whether property prices follow the stock market.

True believers in property, who claim that land values never fall, will recoil in horror at this financial heresy. Calmer observers, however, have noted a correlation in the past, simply because all asset classes are intimately connected by a common factor – the cost of money, and a closely associated subject, the availability of money.

As VI Lenin, admittedly a man not known for his understanding of the capitalist system, once famously remarked: “everything is connected with everything else”.

To aid readers in understanding interconnectivity, and the time we’re passing through, it’s best to ask two simple questions – are we different and is anything different this time?

First, consider the stock market, and the role it plays in a wild west boom town such as Perth. It is not exaggerating to say that Perth has a higher proportion of speculators than any other Australian city though, to be fair, Perth people actually believe that buying shares in penny dreadful mineral explorers is a genuine investment, and not a form of gambling.

Second, consider what happens when the value of a share portfolio dominated by explorers comes crashing down by 30 per cent, and more.

If you think Briefcase is embellishing its argument because the All Ordinaries index on the Australian Stock Exchange has only dropped by 10 per cent since mid-May, then think again. The materials index, which incorporates all mining companies, is down closer to 20 per cent and a flock of small miners are off by 30 per cent, and more.

Lucky devils who own stocks such as Consolidated Minerals (down 63 per cent from its peak price of the past 12 months), Kingsgate Consolidated (down 34 per cent), and Oxiana (28 per cent) know what Briefcase means – though that’s nothing alongside Cazaly’s 88 per cent plunge, courtesy of an over-promoted claim to an iron ore tenement.

Big stock market falls make banks nervous, especially when there is any debt involved. Margin calls, a process by which a bank demands extra cash from a borrower to protect its exposure to a loan, have been made on clients over the past six weeks, and that has meant the liquidation of other investments to satisfy the bank.

Naturally, this process is being played out in silence because it is human nature that we only talk about our wins (in sport or on the stock market) and rarely our losses.

But the stock market’s correction, and the pain of margin calls, is being felt at a time when the Perth property market continues to behave as if it is not connected to asset values anywhere else in Australia, and possibly the world.

Over time, especially if interest rates ratchet up, the Perth property bubble will be exposed for what it is – a bubble.

Contrary to what real estate agents claim, property in Perth is connected to asset values elsewhere – and they are falling.

Defenders of Perth property, who say the resources boom means that values will rise forever, also argue that property is the last thing people sell. It is, in effect, a very sticky asset.

The response from Briefcase is that sticky assets have a nasty habit of simply delaying, and compounding, the effect of the price correction when it comes. Rather than deflating with little pain, they tend to pop, like any speculative market.

•••

On the subject of ‘are we different?’, there was another event that caught the eye of Briefcase and caused a moment’s thought about where we’re heading. According to an interview with Lord Rothermere, the 38-year-old British chap who controls the London-based Daily Mail group, the world’s last remaining evening newspaper, the Evening Standard, is losing money.

For non-media types this snippet probably falls into the ‘so what’ category. For anyone watching the dramatic way in which the media is changing, the decline of the Standard represents the end of an era – and a warning that the same deadly process is being played out with morning newspapers.

While television was the technology that killed evening papers around the world, the technology playing havoc with their morning cousins is the internet.

A generation ago, it was old people who stopped buying the Daily News and other evening papers because they could get their dose of news and entertainment off the box when they got home. Today, it’s the youth of the world rushing towards an electronic fix.

Are we different in sleepy old Perth? No way, Jose. The net is global, it’s a phenomenon and it is changing everything.

•••

As a final thought on difference, Briefcase can confirm that there is also no difference in the wine industry of Australia and wine industry of the rest of the world – it’s deeply depressed, everywhere.

This may be consoling for Frank Tate as he watches the firm his father co-founded, Evans & Tate, lurch from crisis to crisis, complete with a share price that has plunged from around $1 a year ago to eight cents today.

In Europe it’s a similar story with the European Union activating a plan to convert part of its wine lake into industrial alcohol to help reduce surplus stock.

Meanwhile, on the London Stock Exchange, shares in the Perth-based wine maker and fund manager, Palandri, continue to slide lower. At the latest sale price of 6.75 pence Palandri is down around 30 per cent on the start of 2006, and a somewhat more painful 57 per cent on the 16 pence the stock reached last July.

Further proof that Lenin was right?

•••

“Self respect (is) the secure feeling that no-one, as yet, is suspicious.” HL Mencken

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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