Retail figures to paint a grim picture. The updates this week from major retailers Harvey Norman, Woolworths and David Jones will tell us if the sagging performance in the first quarter has spilled over into October and November, as many investors and analysts suggest. That has been the experience in the US, UK and European retailing sectors. All three hold their annual meetings this week — David Jones is also expected to release first quarter sales figures ahead of the meeting later in the week. Harvey Norman will provide another weekly update tomorrow on its sales performance till yesterday. So far in the past two months, the country’s biggest electrical retailer hasn’t experienced a week of positive sales growth on a comparative (or same store) basis. David Jones has already warned at its profit statement that it was expecting sluggish sales growth this year and expects a quarter or two of no growth — it wouldn’t surprise is the retailer does worse than that because the retail sales figures from the ABS have been flat to negative: growth of just 0.1% in the September quarter and indications of a 1% fall in September alone. Woolworths has already reported solid first quarter sales figures, compared to the final quarter of 2008. But Woolies sales were down on the September quarter of 2007, although it still reckons it will meet profit guidance. We will also get updates from the Australian Bureau of Statistics (ABS) on construction activity, business investment, home sales and private sector credit will be released. — Glenn Dyer

The Reserve Bank’s credit figures. on Friday for October will give us the first glimpse as to whether the credit freeze offshore has had a significant spillover here, as anecdotal reports suggest. The credit figures will go well with the retailing updates from those three major groups. The experience in the US was that October was a black hole with retail sales down a record 2.8% and job losses escalating. This week the personal income and consumption figures could be tragic. AMP’s Shane Oliver says we should keep an eye on the capital spending plans. (The Reserve Bank will be.) “So far they have held up reasonably well but it’s likely they will now show deterioration on the back of the slump in business confidence, the deteriorating profit outlook and the increasing difficulties involved in securing finance. The slump in investment plans is likely to be greatest in the mining sector where projects are being cancelled left right and centre in response to falling commodity demand,” he said on Friday. We got a hint of the slowdown from last week’s update on mining and energy projects from ABARE, the Federal Government’s prime resources adviser. — Glenn Dyer

Waiting for Black Friday. This week will also see the tone set for US activity up to year’s end with the start of the traditional post-Thanksgiving retail selling season. In the lead up to Thursday it’s all about turkey and the trimmings; a day later it’s all about shopping, but not this year. This coming Friday is traditionally known as “Black Friday” (ie. “in the black”, a positive connotation) when many retailers turn a profit, (for many, the major profit for the year) which hopefully continues until Christmas. But the mood in America’s shops looks “black” for the wrong reason. A state of recession rules. The US consumer isn’t in the mood — they account for 70% of US economic activity and they have been battered by the sub-prime crisis, foreclosures, falling house prices and job losses. With sales down in October and almost certainly this month, it’s shaping up as perhaps the worst festive season for US retailers since the recession in the early 1980s. In addition to Black Friday, there’s the second reading of the third quarter economic growth figures: the first was a fall of 0.3%, now US analysts on Bloomberg reckon it could be a fall of 0.5%. As well we will get figures on personal income and consumer spending. The spending figures for October will be very ugly after the 32% drop in car sales and the record 2.8% fall in retail sales (2.2% excluding cars and petrol) in the same month. — Glenn Dyer

Wesfarmers defends Coles purchase. Wesfarmers boss, Richard Goyder, went on the front foot this morning, providing an interview to Simon Evans of the Australian Financial Review, defending the company’s controversial purchase of Coles. Despite Wesfarmers’ scrip dropping from $45 shortly before the acquisition to only $19 last week (a fall of 57%), Goyder noted that he “didn’t concur” with the notion that he had turned Wesfarmers “from a dependable company into a destroyer of value with one transaction.” In answering claims that Wesfarmers overpaid for Coles, Goyder claimed that it was important to “consider that all but $4 of the purchase price] was in our scrip.”

Goyder’s claim ignores two factors. Firstly, paying in scrip is not free. Wesfarmers traded its own assets (which delivered return-on-equity of upwards of 25%) for Coles’ assets. While Wesfarmers’ coal assets have depreciated significantly since last year, the company also gave up an interest in the well performed Bunnings business (which delivered strong earnings growth again in 2007/08). Further, the $4 per share in cash translated to increased debt of $9 billion (compared to Wesfarmers’ market capitalisation of approximately $15 billion). Therefore, despite Goyder’s protestations, at this point in time, it appears that Wesfarmers has abandoned its fine history of prudence and capital management to undertake a debt-funded acquisition at the height of an equity and credit boom.

The biggest winner out of the Coles purchase appears to be Dick Goyder himself. Goyder’s remuneration in 2007/08 was $5 million, with Goyder also receiving 100,000 performance rights which are able to vest after three to six years, subject to a return-on-equity hurdle which Wesfarmers refused to disclose to shareholders. Goyder is also able to receive an additional 100,000 performance rights for each 1% in ROE achieved over the mystery ROE hurdle. Wesfarmers shareholders weren’t overly appreciative of the company’s generosity, voting down its remuneration report two weeks ago. —  Adam Schwab

The rise and fall of Jeremy Reid. The collapsing share market has claimed may victims, Eddy Groves, Phil Sullivan and Michael King to name but a few. However, another collapse which has garnered less public attention has been the swift rise and even more rapid fall of young Sydney entrepreneur, Jeremy Reid. Reid burst onto the BRW Young Rich List in 2006 with an estimated net worth of $50 million. In 2007, BRW claimed that Reid was worth $200 million, largely based on his share holding in hedge fund-of-funds manager, Everest Babcock & Brown. Hedge funds benefit in some ways from a market slump, large because they have the ability to go ‘short’ (albeit, that facility has been restricted recently). However, the spate of redemptions and liquidity concerns, coupled with regulatory constraints has meant that the hedge fund industry globally is now out of favour. This has certainly not helped Reid’s fortunes. While not quite at Eddy Groves levels yet, Reid’s stake in EBB has slumped from $180 million in June 2007 to around $2.7 million last week (which is less than the $5 million initially provided by Reid’s father-in-law to invest). On Friday, EBB announced that it would write down the value of its intangible assets from $186.3 million to zero and change its name to Everest Financial Group. — Adam Schwab

Rubin under the microscope. While former US Fed chairman, Alan Greenspan, receives most of the blame for the property and credit bubble, the role of former treasury secretary, Robert Rubin, is also coming under close consideration. Rubin was previously the co-chairman of Goldman Sachs and since 1999 been a senior adviser and director of Citigroup. Citi shares closed last Friday at $3.77, down from $55.70 in December 2006). In a scathing expose, the New York Times reported that Rubin “helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.” The wolf was well and truly in the henhouse – while at Citigroup, Rubin was allegedly a key figure in the aggressive push to “bulk up the bank’s high-growth fixed-income trading, including the C.D.O. business.” As Citi’s CDO business generated significant (albeit unsustainable) profits, Citi executives were enriched. Thomas Maheras, Citi’s trading boss collected $30 million during the peak of the boom, while Maheras’ friend and deputy, Randolph Baker (who helped oversee the bank’s calamitous mortgage-related security business), reportedly “drew pay totaling $15 million to $20 million a year, according to former colleagues.” As noted by TheStreet.com, Since Rubin arrived at Citi, the bank has “suffered through (in no particular order): a research scandal (remember Jack Grubman?), unfavorable ties to Enron, CEO Chuck Prince’s sub-prime lending spree, thousands of employee layoffs and, most recently, billions of dollars in writedowns due to the housing bust…. In reward for overseeing — or perhaps overlooking — this high profile string of failures, Rubin has pocketed more than $118 million in salary, bonus and stock-based compensation.” — Adam Schwab

Shorting of Citi should be prevented. Speaking of Citigroup, my learned colleague, Glenn Dyer, cited the Citi example as a reason why the nefarious activity of short-selling should be banned. On Friday, Dyer claimed that;

Six days ago [Citi] was valued at $US52 billion, so its value has halved, helped by the shorts, mostly in the past two days.  It’s more evidence that the process of shorting is destructive and an easy way for wayward brokers, stock exchanges and hedge funds and their mates to make money, at a time when making money is tough and the hedge fund industry is collapsing. It’s illogical to think that shorting adds value.

Dyer’s view with regard to shorting is correct with regard to Citi, but by accident. As this column noted last week, the market fell significantly more when shorting was banned than when it was permitted. However, there is a valid argument to restrict shorting of banks and financial stocks (like Citi), if only because taxpayers are now on the hook for such collapses. Dyer however, advocated a short-selling ban for the wrong reasons, noting that:

If the market is right and Citigroup has no value (as established by the shorts) then consider the fallout. It means no bank around the world has value, nor has BHP, nor has GM, nor has Telstra, Wesfarmers.

To claim that no bank (or even industrial company like BHP or Telstra) has value simply because Citi does not survive is a fallacy. Citi has proved to be an incompetently run business – in 2007, Citi held upwards of US$50 billion of sub-prime holdings on its balance sheet. It remains a shambles of an organisation, an ungodly mix of commercial bank and investment bank, a financial supermarket whose employees didn’t know the contents of the other aisles. Former CEO, Charles Prince, was allegedly unaware of the risks attaching to sub-prime securities as recently as 2007. About the only thing Citi did well was pay its executives, like Sandy Weill collected US$43 million in 2004, or Prince US$53 million to run Citigroup into the ground. Citigroup is most likely “too big to fail” and therefore, any collapse will be ultimately funded by taxpayers – it is for that reason that shorting of Citi should be prevented. But to claim that no company has any value because Citigroup is nearing insolvency is to unjustly absolve the poor performance of Citi management. — Adam Schwab

Disclosure: The author successfully took legal action against Citigroup last year in relation to an illegal penalty fee.

Peter Fray

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