Economy 2010: Taking the long way

Further to a post I made yesterday about opportunities to buy cheaper stocks, I touched briefly on the state of the economy.

Let me expand on that if I may today and we will forget it again for another 6 months, because I know it is easy to bitch and moan about this stuff as I have done on a number of occasions.

In my opinion the current economic downturn is going to take years to recover from. We have seen a relaxing of the fervour that started in September 2008, following the collapse of big financial institutions the world over and since then we have had an apparent lift in confidence due to trillions of dollars of borrowed and the printing of currencies (cheers China!) and a subsequent lift in various financial indicators; slow down in jobless growth, small GDP growth, global trade improving, etc, etc.

As I said above though, this move towards the positive is based on borrowed money and it has to be paid for, eventually.

As many of you will know, including myself, a mortgage like that can be hard to pay back when your income might now be less than it once was and while you are paying that back other forms of spending will be cut back and clearly that impacts on the economy. This huge unprecedented debt is going to constrain the economy in New Zealand and in every other country deep in debt. Even China, who is the lender, will be impacted because we wont be buying as much of their quality produce - only a hint of sarcasm there.

Most of us, but not all, will need to be prudent to survive the next 5 years. Cut back where we can and pay down debt if and when we get the chance. More debt taken on during this time will merely postpone the inevitable hounds at the door. It aint hard, it just takes some discipline.

While we are not in a 1930s depression era economic downturn, we are going to suffer, I think, economically for as long as those folk in the 30s did, in our own way. Constraint, low or no growth and inconsistent and unsustainable upturns will be the order of the day, until that debt is discharged.

There are also other shocks to come from the heady days of economic growth during the 20 years pre 2008. Complex derivatives failures and commercial property shocks look set to come and spoil what confidence we may have gotten back.

This is all part of the economic cycle however and is nothing new and there will be opportunities to buy as others must sell cheaply to pay down debt levels.

On that last positive note, for me anyway, I will bring an end to my gloomy outlook - see you back in 6 months for an update.


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Market Correction: Excitement Building!

Once again global stockmarkets are rightly nervous about the so-called economic recovery in the United States, with Obama acting like Robin Hood without an arrow and rumblings of credit clampdowns in China, the DOW has lost almost 5% in one week as a result.

It is bloody exciting!

I was getting sick of the disconnect between the reality of a debt led "recovery" and the fantasy of investors in stockmarkets like the DOW, who have pushed that particular market up by over 40% in less than a year -incidentally that is the largest bull run since the 1929 Wall Street crash and we know what happened after that particular market "recovery".

Yep 40%, does anyone think we are doing that much better now than we were this time last year?

Not this fellow.

I last bought stocks in July and haven't felt tempted yet until The Warehouse Group [WHS.NZ] shares took a dive recently, simply because some companies are overvalued compared to 12 months ago.

The excitement is building now for me as there looks like reality could have dawned on some and they could be rushing for the exits as I am happily ready to enter the market again at a better price.

One the economic outlook, there is anecdotal evidence on my part - I tend to trust that more accurately than what economic soothsayers are being paid to say - that the economy in New Zealand, while not completely buggered, is still hanging on a knife edge between growth and recession and it appears that any growth is going to be sporadic and a long time coming.

There just isn't any money out there.

A good time to buy assets if you do have some moola and the NZX is likely to take its lead from the US market where it dropped by over 200 points last Friday.

Happy buying.


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c Share Investor 2010

Fletcher House is built on hard times

Fletcher Building Ltd [FBU.NZ] will be one of the biggest recipients of the New Zealand Government pulling out all the stops to get infrastructure built to "stimulate" the economy and whatever your political views on Government economic stimulus', as a shareholder you would have to be pretty pleased with taxpayer dollars coming Fletcher's way.

Fletcher Building made much of the fact earlier this week when releasing their latest profit result that they are now celebrating their 100 year anniversary.

This is clearly significant because over this time the company has weathered countless recessions, a depression and two world wars.

During the Great Depression, Fletcher Building constructed buildings such as the Auckland Civic Theatre, The Auckland University Arts Building and Wellington Railway Station.

In the late 1930s Fletcher's mobilised themselves quickly enough to become the dominant force in the newly created "government housing" sector and when WW2 hit they ameliorated raw material supply problems somewhat by simply manufacturing their own building products.

My point is here that they manged to get through the depression, so far the worst economic downturn in living memory, there is no reason to believe that they cant do the same during this big downturn.

As at 6:15 pm, 13 Feb


To a certain extent the bad times have made the company what it is now and as history repeats itself Fletchers are set to build from this once again and move towards another upturn.

I have pointed out before that every cloud has a silver lining and in Fletcher's case it is infrastructure.

Even before the big downturn that started in September 2008 and the recession that bit in New Zealand in January 2008, Fletchers had a massive backlog of commerical and infrastucture building on their books.

Thanks to cash being thrown at infrastructure in New Zealand, Australia, America and other markets that they operate in, that list of infrastructure is going to grow.

In fact Fletcher Building is somewhat of a barometer when it comes to the health of the economy as a whole.

Building companies are the first to feel the effects of a downturn and the first to show the inevitable turnaround.

Fletcher Building's profit announcement last week was as expected, marked down, and the outlook for the next year looks uncertain at the moment but as I said earlier the money being thrown around in Fletcher Buildings operating markets looks set to push them through the hard times.


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Shareholders should look for companies with fiscal disaster plans

One thing to consider for shareholders with stocks in New Zealand listed companies is managements planning for and reaction to the current credit crises and its associated recession-the one we are currently experiencing is the work of Michael Cullen, New Zealands Finance Minister.

The current recession is going to get worse because of the downturn in the global economy and that is clearly going to affect business in this country and our business leaders, CEOs and directors are going to be soundly tested over the next couple of years as they try to manage their businesses through a recession that could be worse than the one in the 1970s if not managed properly and may very well last longer.

How well have our CEOs prepared for this?

The recession in New Zealand has been indicated by the economic numbers for more than 6 months, so as shareholders we should expect that prudent managers have put the necessary groundwork into a business plan that will get them through the hard years coming.

What plans should they have made?

Well, clearly cutting any unnecessary costs first would be a priority, but there are a number of other things that could and should still be done and you should do some thorough research into our NZX listed companies above and beyond the normal facts and figures one looks at. How management have spent their shareholder dollars in the past and whether they even have plans to get them through a recession are a couple of good points to start on.

Pay down that outstanding debt as much as possible and cut back dividends (I know, that is hard to say) to shareholders and use that to pay down debt in the future-interest rates are set to rise and the terms of lending and the ability to borrow will be tougher.

Cull company middle management as much as possible, little is done by middle management anyway so they wont be missed and the company team will be able to communicate better and more efficiently without them.

Forgo massive directors fee price hikes. Now isn't the time for a pay rise and the next reporting season in February isn't likely to make shareholders think you deserved a rise anyway.

On average, of the 18 odd companies that I have shares in, directors are asking for around 25% more than last year. They don't deserve that much based on the August reporting season, let alone next years results.

Contact Energy for example are asking for 100% more in directors fees! I know, its more over the top than a pregnant Dolly Parton.

Re-visit contracts with suppliers and negotiate lower prices for future contracts where possible. The current economic climate will mean that some companies will do better deals just to do business-hopefully not the one that you own shares in though.

Put off non-core related capital spending-those company Commodores will last another few years more and image isn't everything if it means there is no company left because you just bought or leased 50 spanking new Toyota Prius'.

Good management will be cost conscious even at the best of economic times and that is clearly the best preparation for the tough times.

Some Kiwi listed companies that have done this well are Mainfreight, Freightways, Michael Hill International and Hallenstein Glasson.

Companies that have done this poorly include Sky City Entertainment, Auckland International Airport ,The Warehouse and Contact Energy.

I am a little annoyed that along with the vast amount of shareholder correspondence that we have all received this reporting season, scant column inches have been devoted to mapping out a plan for individual companies and how they will deal with a long economic downturn.

Yes, it would be nice to know our companies have a plan.

Good fiscal management should be a matter of course for all companies, countries, finance Ministers and individuals because living beyond ones means can get one into trouble and planning before a downturn hits can be crucial for company survival.

But even as we continue our way through the recession continued financial prudence is needed, even by those who have already prepared.

For those who haven't?

Well, some are definitely going to fail and that is just the way it should be.

Disclosure: I own Mainfreight, The Warehouse, Michael Hill, Freightways, Sky City, Auckland Airport and Hallenstein shares.

c Share Investor 2008

Why I am optomistic about the global recession

I have worked very hard for the last 15 years to accumulate the assets that I have.

I have sacrificed a social life, a family life in the early years and have saved well during the "good" years.

I get the working like a dog part from my Dad and the saving part from my Mum-my Dad was a hopeless saver.

It is hard to watch those assets lose value from day to day but the corollary of that of course is the years that those same assets increased in value.

That is the risk and reward from investing. I know that. Asset values fluctuate from day to day and year to year and there are economic and business cycles that affect our wealth as well.

The latest global banking problems though are new to me but in the back of my mind when I wrote this back in March, I had the feeling something like this might happen.

I have been investing in the stockmarket for 10 years and I am 42 years old, so have lived through a big recession in the 1970s, one in the early 1980s, the early 90s and an impending global something.

I clearly knew nothing about the first two recessions and only had a vague inkling of the 1987 crash which caused an economic meltdown in New Zealand that took ten years to recover from.

Speaking to a 92 year old the other day who lived through the depression of the 1930s, she seemed to think things "were not so bad", her dad kept his job and they were well fed and cared for, so I think we will all be okay whatever happens.

At the end of every downturn is the beginning of an upturn and another economic boom.

Clearly the US and European banking collapses are going to have severe impacts on a New Zealand economy that is already in a dire state, thanks to the profligate spending of the current government, and that is just the way it has to be. There are no free lunches.

My sacrifice over the last 15 years has put me in good stead though. I didn't buy a flat screen TV, I didn't buy another new car, an investment house and all those lovely new consumer goods that others now have financial indigestion from.

I bought items related to productive investment, made my money off them and invested it and I am now in a position to profit from others greed and stupidity.

Unfortunately some of those that took risks are going to be bailed out of their stupidity and greed via taxpayer moola but that is another story. Don't get me wrong, I feel sorry for them but this is what capitalism is about-the exchange of assets for an agreed price.

I have cash ready to buy assets. I don't think the low is going to be reached any time soon but my history of frugal living has put me in a position now when I am excited by the potential bargains that will be put up for sale by those in debt.

I will be looking for more shares and a nice cheap house and will be looking in my home region of Hawkesbay for something.


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c Share Investor 2008