ASIC vs Twiggy Forrest: understandable but pointless. The Financial Review reported last week that Australia’s richest man, Andrew Forrest, is still very much in ASIC’s cross-hairs, with his trial for misleading and deceptive conduct set to commence next April. ASIC is prosecuting Twiggy for comments he made in 2004 when the former stock-broker claimed that Fortescue Metals had entered into binding agreements with Chinese entities to build and finance railways (it turned out the contracts weren’t binding in a literal sense).

Despite Fortescue’s subsequent success, Forrest remains a much maligned figure in business circles, partly for his controversial exit from laterite nickel miner, Anaconda, and partly due to the tall-poppy syndrome. Perhaps Twiggy just got too rich too quickly – nobody in the refined halls of Melbourne and Sydney like to see a smooth-talking Perth stockbroker (albeit one who is a descendant of a WA Premier) as Australia’s richest man.

As for ASIC’s action, well, it remains a little strange. While in a technical sense, the case against Forrest may appear reasonably solid, one would wonder exactly why ASIC is bothering. Fortescue has been one Australia’s greatest success stories. It’s share price has risen more than 100 times since Forrest’s comments, and despite their apparent inaccuracy, few investors would have actually suffered any loss as a result. Further, there are plenty of companies who regularly provide information which is completely incorrect to the market without ramification. ASIC doesn’t appear to be taking any action against the likes of Allco, ABC Learning, MFS or Centro, all companies whose financial reports were flawed and who have collectively destroyed more than $15 billion worth of shareholders funds. — Adam Schwab

Everest Babcock & Brown expert at losing money. Amid the media focus on Phil Green’s imploding Babcock & Brown empire, Jeremy Reid’s hedge fund business, Everest Babcock & Brown, did its part to aid to calamity. Last week, Everest’s June 30 financials confirmed a bottom-line loss of $131 million for the six months ending 30 June 2008 — an impressive performance given the company only had revenues of $17 million (the loss had been first announced in late July).

Of course, the loss was a non-cash item, with Everest suffering from a write-down of intangibles of $142 million. On an underlying basis, earnings slipped by a meager 35% to $9 million. Things don’t seem to be on the improve, with the company acknowledging that performance fees won’t be forthcoming for a while. The Everest Absolute Return fund is down 11.37% this year, most likely before the impact of the fund’s exposure to Babcock & Brown’s portfolio of US Multi-family apartment buildings is considered (The Absolute Fund increased its interest in US apartments earlier this year as the US property market continues to slump). EBB’s Master’s Fund performed better, losing only 9.54% this year, but has returned long-time investors only 5.25% since inception. — Adam Schwab

While on the topic of Everest Babcock & Brown … We couldn’t help but notice the optimism displayed by Everest in its March 2008 report to holders of its “Income Fund”. Announcing a small negative return for the March Quarter, EBB noted that:

During this [most recent] period the share price of Babcock & Brown Power declined by 42%, Babcock & Brown Infrastructure declined by 26%, Babcock & Brown Structured Finance Fund declined by 30%, and Babcock & Brown Air declined by 10.7%. At current price levels, these listed stocks are generating an average running yield of over 15% pa and in our view, are undervalued. The Fund will benefit in performance as these equity positions recover over the medium term.

Clearly, nobody told the rocket scientists at Everest that yields above 10% are usually unsustainable – not because the share price will go up, but because the earnings will go down. This has been borne out relatively quickly. In the five months since EBB claimed that their holdings in other Babcock satellites were “undervalued” the performance of those satellites has been less than stellar. Babcock Power has slumped a further 90% while BBI is down more than 50%. B&B Air has out-performed, dropping only 25%.

Everest’s Income fund has returned investors around 1.2% so far this calendar year – not too poor a result compared with the equity market, but far worse than other income assets, like a term deposit, which would have returned around 5.5% in that time. — Adam Schwab

Economists look to expand GDP to count ‘quality of life’. For decades, the gross domestic product has been the premier means of measuring a country’s economic vitality. It is a celebrity among statistics, a giant calculator strutting about adding up every bit of paid activity. In the United States, the $14 trillion total marks the country as the world’s most prosperous – measured in money.

In the absence of any statistic of comparable cachet, however, the GDP is regularly asked to do more than it was designed to do. It measures output just fine, but as a stand-in gauge for a country’s overall well-being, this supernumber is less than perfect. Or, as Robert Kennedy put it 40 years ago while seeking the Democratic presidential nomination, the GDP “measures everything, in short, except that which makes life worthwhile.” – International Herald Tribune

Interest rate cut puts NAB’s Fahour in favour. Today’s Reserve Bank of Australia rate cut will be formally passed on by the banks within seconds of RBA governor Glenn Stevens’ statement — but the next round is more problematic. When NAB’s Ahmed Fahour hit his soap box demanding tax relief on bank deposits last month, he broke new ground in promising to immediately pass on any 25 basis point rate cut. The rate cut took the headlines but the clear message was that long-term funds were now more expensive and as they accounted for 20 per cent plus of costs, the banks could not guarantee passing on the full amount of any further rate cuts.

The issue of banks passing on rate cuts is of course highly political and Fahour ensured that Treasurer Swan knew exactly what he was about to say. It was no surprise, then, that within an hour of the Fahour grandstanding, out came Swan in support of his commitment. – John Durie, The Australian

Peter Fray

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