The market is down 117. The SFE Futures were down 103 this morning.

The Dow Jones closed down 419 overnight. It was down 529 at worst. The German market fell 5.82%, France down 5.48% and the FTSE dropped 4.49%, as concern grew over the health of European banks. Weak economic data renewed fears of another recession in the US – Philadelphia Fed index disappointed, existing home sales and jobless claims both under expectations. The oil price was down $5.20 to $82.38. Gold up $28.20 to a new high of $1822. The A$ is buying 103.36c down from 105.10c.

In the news today…

  • ANZ Banking (ANZ) — 3Q underlying profit was $1.4bn, up 1.3% from the 2nd Q and up 7.7% from the same period last year. Underlying profit for the nine months to June is up 16% at $4.2bn. ANZ says it has good reason for optimism in Australia, New Zealand and Asia despite the market turmoil. The result was described by one broker as “mildly disappointing”. ANZ down 4.1% to 1959c.
  • Billabong (BBG) — Annual profit fell 18% with cash flow was down 87%. Billabong said it had been hurt by the strong Australian dollar and a weak retail environment. They withdrew earlier EPS guidance for the current year due to significant deterioration in trading conditions. Declared a final dividend of 13c, compared to 18c last year. BBG down 20.5%.
  • QBE Insurance Group (QBE) — First half profit up 53% to $US673m. Revenue from ordinary activities was up 34%. Investment income more than made up for the surge in natural disaster related claims. They said in the 2nd half “premium income will benefit from the full year development of the US crop insurance portfolios, the acquisitions of Balboa and Renaissance Re in the US and CUNA Mutual in Australia”. QBE down 6%.
  • Santos (STO) announced a first half profit of $504m, up from $198m and was ~13% better than consensus estimates. They benefited from the sale of a stake in the Gladstone LNG project. Sales revenue of $1.1bn was in line with the corresponding period, helped by high commodity prices, but offset by the strong dollar and lower sales volumes. Declared an interim dividend of 15c, fully franked. STO down 3.4%.
  • Sedgman (SDM) Annual profit up 4.2% to $26m exceeded consensus estimates and came in at the top of the company’s guidance range. SDM down 2.7%.
  • Super Retail Group (SUL) profit is up 46.1% to $55.6m. Revenue up 16.5% to $1.09bn, on the prior year. Declared a final dividend of 17.5c, fully franked. SUL down 2%.
  • Spotless Group (SPT) full year net profits were down 0.5% to $42.8m, and underlying profit up 1.4%, but they say their 2half results show a significantly improved performance.  Revenue was up 10.9%. The company declared a final dividend of 6c, 60% franked.

I have had a series of emails about Hybrids. Most emails ask…”Are they safe,” and whether they are a sell.

Hybrids are only a sell if you think financial system confidence (GFC) issues are going to go re-emerge – they were not immune in the last GFC. But GFC aside, they are OK.

So if you are worried about a GFC style event (a loss of confidence in the financials) be prepared to get out. As usual, the best indicator will be the prices, not research or valuations, it is sentiment you will be dealing with first and the experience from the last sentiment crash was that sentiment can destroy hybrids as well. So be prepared to get out … there is nothing sacred about anything in a GFC.

Without a GFC they are simply income investments and you won’t need to sweat. But because they are NOT immune from risk and there’s no guarantee and you have to stay awake not forget. Bottom line … it will take an extreme situation to smash their prices but it can happen.

If they do fall over the other experience from the GFC was that almost all of these instruments came rushing back, they did not disappear, they did not default, and they did not miss payments. They came back. They proved to be your typical long term “value” style investment.

So if a GFC style drop does occur again…buy when others are fearful, as they come back quickly when the dust settles. But as always … keep awake and use stop losses.

We have a Fixed Interest section in the Marcus Today Portfolio Section. In there we list almost all the hybrids with explanations of their main terms as well as a description of what hybrids are and a glossary of hybrid jargon. It includes Preferred Recommendations.  You can view this section by joining up for a free trial or subscribing HERE.

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Peter Fray

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