19/04/2005 - 22:00

Tim Treadgold: Briefcase - Wait for petrol price flow-on effects

19/04/2005 - 22:00

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Petrol at $1.10 a litre, and more, is a pain in the pocket, as we all know. Less well known is the changes it brings to the way we think, and act.

Petrol at $1.10 a litre, and more, is a pain in the pocket, as we all know. Less well known is the changes it brings to the way we think, and act.

And, even further down the knowledge tree is the effect high fuel costs have on virtually every fact of life, including investment decisions.

Property prices are good starting point to trigger a bit of activity in the grey cells.

It is not rocket science to figure out that living 30 kilometres from where you work is manageable when petrol costs 60c a litre (remember those days?).

Double the cost of fuel and you start to think about shifting the location of your home (or work).

That sort of thinking, and it is a direct re-run of what we saw in previous periods of high oil prices, is just starting in Perth, and every other city in the world.

For people living here it means pondering whether it is really worth buying a house at the edge of the metro area or whether to live closer to the city centre.

The upshot, of course, is that prices on the fringe will be pushed lower, and those in the inner city will be pushed higher.

Knock-on effects can be seen, or projected across the economy, and society.

Consider these thoughts from Briefcase as conversation starters – and feel free to add your own.

• Airline shares are a disaster area happening before your eyes; sell now (or yesterday, if possible) simply because fuel is their biggest single cost.

• Big mining companies that process a lot of ore are facing sharply higher operating costs, a point just being discovered by the market.

• Big cars, especially heavy brutes such as the Nissan Patrol and/the Toyota LandCruiser, will be falling sharply in value as their running costs rise.

• Domestic tourism businesses will blossom as locals holiday close to home. Foreign travel will nose dive.

• Alternative fuel stocks will enjoy a moment in the sun, but most are so silly that they can be safely ignored.

• Telephone company shares are a safe bet because we will all discover that it is just as easy to do business over the ‘phone, or by broadband links, as it is to travel to Sydney for a meeting.

• Imports, as a general rule, will become more expensive, creating opportunities for local manufacturers in travel (time) sensitive areas, such as food.

• And, the one which most fascinates Briefcase, simply because few people seem to agree (yet) is the question of road accidents, especially road fatalities.

In previous oil shocks, not that anyone studied the effect too closely, it appeared that higher petrol prices produced a situation of less time on the road, more careful driving, and slower average speeds.

So far there is nothing to support this theory, though it can be argued that the number of fatalities in the year so far (49 as at April 11) is identical to the corresponding period of 2004.

Undeterred by an inability of statistics to support its hare-brained theories, Briefcase reckons this is actually not a bad result considering the record level of car sales over the past 12 months, which has resulted in there being anywhere from seven to 10 per cent more cars on the road.

In memory of Benjamin Disraeli’s famous comment about “lies, damned lies, and statistics”, Briefcase is prepared to argue that the road toll is statistically down on last year – a claim in the drawing-a-long-bow category.

Whatever anyone believes about the road toll, there is a situation of significant change emerging, a situation which will become more socially and economically important if fuel prices stay higher for longer.

Of course, there is also the argument that oil prices have topped, the world economy is plunging into recession, and the boom-bust cycle is simply repeating itself.

Never say Briefcase doesn’t cover all bases – in the name of encouraging open thought (and covering its rear end).

•••

The big share market shake-out which started rumbling around the world last week is a long overdue event, and one Briefcase has been tipping for some time because it is simply impossible to have rising interest rates, rising oil prices and a rising stock market.

Even Homer Simpson would have rated that equation “doh”.

But as we plunge to a new, and sustainable, level of value, say 10 to 15 per cent off the April high point, a strange new game begins called ‘when do I buy back’.

With all the usual advice along the lines of ‘Briefcase doesn’t give advice’ and ‘if you follow what is about to be said, then you’re a blithering idiot’ (haven’t seen that one in ASIC’s notes on investment advice), it might be time to consider some of the thoughts of that wily old gold fox, John Jones.

With a lifetime in the gold (and nickel) industries, Jones recently carried out a classic back-of-the-envelope analysis of the gold market and found that most Australian gold producers had fallen sharply in price – long before the rest of the market corrected.

The average downward price movement (to April 6) had been 34 per cent, but at a time when the gold price itself had barely moved.

There are two possible explanations of this phenomenon:

• gold shares had risen too far, too fast in the 2004 flush of irrational exuberance; or

• gold shares have been punished for not being very exciting when compared with alternatives classes of investment.

Jones, naturally, subscribes to the second theory and reckons that the market for gold shares has entered a period of excessive correction.

In plain English, they have fallen too far and are ready for a comeback.

The potentially profit-making key to that argument is to see what happens to the gold price during the current period of asset-value adjustment, smooth talk for a big fall.

If gold does not suffer too badly, and exchange rates continue to move favourably for exporters, then it is reasonable to see a bit of gold stock bounce this year.

•••

“Existence is just a brief crack of light between two eternities of darkness.” Vladimir Nabokov

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