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Weekly commentary

Weekly commentary

Economy: The only data released last week was the Retail sales figures, which rose 5.4% for 12months to August. The RBA followed the lead of the U.S Federal Reserve, & left official interest rates unchanged. The RBA will be looking at future data in particularly CPI figures with higher Oil prices & weaker $A forcing them to move on interest rates if CPI rises more than expected.

Equities: With the Olympics influencing trading over the past fortnight, volumes have been very thin. Most attention has been directed towards the Telco sector with the two leading companies having different factors determining their share price. Investors are cautiously awaiting the outcome of the PCCW deal, as management tries to re-negotiate the deal. The market would be very happy if Telstra walked from the deal or at the very least the most favourable outcome for Telstra. Meanwhile speculation regarding break valuations of Optus continue to determine the price volatility of the share. Rotation in retail stocks continue as investors roll out of Woolworths & into Coles Myer on the speculation of a share buy back by CML using their excess franking credits. While the banking sector gained momentum as investors believe this sector is well protected against any further interest rate rises.

Resource stocks slipped as commodity prices traded lower, while Oil stocks continued their volatile run as speculation mounts on further reserves being released into production.



Telstra Instalments

What are my options?

The final payment on Telstra 2 is now pending, and you may be wondering what to do since the share price is trading at a 30% discount to your original outlay of $4.50. There are a few options investors can opt for, however you must select the one that best suits your investment needs.

Barra Consensus Research currently shows Brokers recommending Telstra have:

7 Strong Buy

1 Moderate Buy

4 Hold

Detailed below are the options you may consider:

1. Pay Instalment

This requires the payment of $2.90 (discount) or $3.05. Therefore your net cost would be $7.40 or $7.45 a 22% discount to the current price. You would require a long-term view on the stock if you were to look at this option.

2. Sell Instalments

You sell your holding in Telstra 2 into the secondary market. This would realise a loss of around 30%. This should only be considered if you require a tax loss for taxation purposes or you require the proceeds from the sale for personal use.

3. Forfeit Payment

This means you have elected not to pay the final instalment & not to sell into the secondary market. Therefore, the Trustee has the right to sell your shares and deduct all relevant costs from your consideration. This sale will be in the form of an auction. Therefore your price will not reflect the price of the secondary market.

4. Derivative Roll-over

This product enables you to defer the payment of your instalment for anywhere up to 36mths. The process involves you selling your instalments to the issuer who will replace your holding with an instalment warrant. This warrant will have an expiry date (when the instalment is due) & a fixed amount payable on this date. This fixed amount will have interest & costs factored into it. The warrant entitles you to all the dividends & entitlements, while there is a secondary market established for liquidity. The warrant price should track the movement of the Telstra shares. Currently, Macquarie Equities, UBS Warburg, ANZ & BNP Paribas are offering these roll-over alternatives.

Note: You should seek professional advice before entering any of these strategies.



Retail Sales Impact on Retail Shares

Retail sales rose 5.4% in nominal terms for the 12 months to August. This was after the GST introduction in July, which saw some weakness after the strong month in June.

Key observations:

* Supermarkets unaffected with yearly growth of 4.9% in nominal terms (up 8.1% for the month of August). WOW and CML continues to gain market share.

* Furniture and Hardware strength seems to have come off. As we have previously flagged, housing cycle downturn has reflected in ABS numbers with Furniture and Floor coverings down 1.4% in August. This has implications for HVN and FFL.

* Hospitality seems to have bounced back up 11.4% for August after weakness in the June quarter. This is a key measure for underlying discretionary spending.

Company implications

* Coles Myers: 60% of earnings are from supermarkets which have held up well. Good department store numbers bode well.

* Woolworths: Much higher leverage to supermarkets with 85% of earnings. Earnings growth going forward will come from a combination of cost savings initiatives and underlying sector growth.

* Harvey Norman: With furniture and floor coverings looking to trend downwards, questions HVN prospect of maintaining growth. 50% of group's product mix is leveraged to housing cycle (particularly in furniture and whitegoods).

* Howard Smith: Slowing housing cycle to affect Hardwarehouse.

* David Jones: Department store growth & sales continue to remain strong despite environment.

* Foodland: Little inference can be arrived from these numbers, as 75% of FOA EBIT is derived from New Zealand. Sales growth has been disappointing.

* Freedom Group: Effectively the most leveraged to housing, as 100% is in the furniture category. With slowdown signs evident, expect sales growth to be minimal.

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