05/11/2009 - 00:00

Government’s carbon hand not so good

05/11/2009 - 00:00


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The financial success of ‘green’ companies has not quite lived up to the hype.

POLITICS and business never mix, as everyone who lived through the corrupt WA Inc. years knows. Despite that we are seeing a clumsy government attack on Telstra, and an attempt to promote environmental businesses, which are doomed to fail.

For investors there is a simple remedy for dealing with any business that gets too friendly with government – sell.

There is also a flipside to this theory and that is to buy what government dislikes. For proof look no further than banking, tobacco and gambling.

Government views all three as enemies, requiring heavy regulation, which does nothing more than protect their outrageous profits and fat dividends – yum!

What started Bystander down this philosophical road of why a sensible investor always avoids what government likes is the appalling state of the so-called environmental industry.

Renewable power companies, promoted as the answer to depleting oil reserves, have been a collective disaster. Whether it be in the fields of wind, solar, or bio-diesel, it is hard to find a genuine business success story.

It might be possible to demonstrate technical success, but rarely financial success.

Last week’s second “Carbon Expo” on the Gold Coast provided the latest demonstration of money and the environment proving as impossible to mix as oil and water.

Despite heavyweight sponsorship, which included the Australian and Queensland governments, Macquarie Bank, the global law firm, Baker & McKenzie, the global accounting firm, Ernst & Young, and the British government sponsoring dinner (how very British!), it was a flop. Numbers attending were down and the financial community stayed away in droves.

One report on the event noted how a “green energy” promoter said he was: “sick of talking about it, let’s just get on and do something”. Do what, you might ask, hand him a fresh government subsidy for adding the word carbon to the name of his firm?

The primary complaint at the expo was about the lack of progress with Australia’s emissions trading scheme, or carbon tax to be more honest and to evade the ‘weasel words’ favoured by people who see a new government tax on industry as a way to make their own profits.

Sadly, as the Copenhagen climate change summit gets closer we are going to suffer a blizzard (sorry about that word, we’re supposed to be warming, not cooling) of stories about the environment, carbon dioxide, melting ice, polar bears – and silly advice on why you should invest in carbon-based and carbon-trading products.

Perhaps some of these new forms of government-sponsored business will work, though Bystander finds that hard to believe as he looks back at the financial wreckage of the last crop of environmental industries which were launched with the best intentions but ruined a lot of people.

Whoever first said ‘the road to hell is paved with good intentions’ knew exactly what he was talking about, so when a government-approved carbon salesman comes knocking, don’t answer.

Don't worry

If freshly-formed carbon schemes are financial rubbish, and yields on conventional investments are down, where does a sensible investor turn?

Correct answer: nowhere. Why? Because a sensible investor can see through the recent stock market recovery and appreciate that the best measuring tool of the market, the price-to-earnings ratio, is set for boom conditions – and we are miles away from a boom.

The PE ratio, which is viewed by some investment advisers as being an antiquated method of measuring a market, is actually the most accurate because it draws a direct line between the earnings of a business with the share price.

In the US, which remains the centre of global business despite doubts about its dollar, the latest view of the PE ratio is sobering, not just because it is dangerously high but because it encompasses 130 years of data and was compiled by Robert Shiller, a professor of economics at Princeton University.

Shiller’s latest PE graph (pictured) shows an eye-catching upward move in the PE of US companies after last year’s crash which, it might be argued, was actually nothing more than an extension of the year 2000 tech-wreck.

Back in 2000 the PE for US stocks soared above 40, defying gravity, because the long-run average (and 130 years is definitely a long run) is around 16, and anything above 20 is a ratio normally only seen in the final years of a boom – and in October the US was just above 20, and a boom it is not.

A reasonable interpretation of Shiller’s graph, based on conditions in the global economy, is that we are more likely to retract to a PE of 10 (as seen in the dull years of the 1970s) than rush much further above 20.

Translated: that means be happy with a modest investment return, which mirrors real growth in the economy of around 5 per cent, and not the paper inflation of the past decade.

Eye spy

Humour is not something Bystander expects from the pseudo-cops who police stock market activity on the Australian Securities Exchange.

Last week was different because the ASX said one of its top priorities was monitoring the quality of the rush of private companies planning to float as economic recovery gathers pace.

Bystander might be old-fashioned but isn’t that merely saying that ASX staff propose to continue doing the job they’re employed to do?

Of equal importance, and presumably the ASX is doing this too, is the job of monitoring the alarming number of small mining companies reporting cash balances as low as $500,000, enough to make payments on the chief executive’s BMW and his West Perth office.

Asylum facilitators?

A FINAL, politically incorrect thought.

If people on boats heading for Australia are asylum seekers and not potential illegal immigrants, how can the organisers of these ferry rides be people smugglers, a name which implies transporting illicit cargo. Surely people smugglers are simply asylum facilitators?

c c c

“An expert is a man who has stopped thinking. Why should he think? He’s an expert.” Frank Lloyd Wright.


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