Mayne Report's 2008 year ender and last minute sell-down
February 2, 2010
Dear Mayne Reporters,
I was on ABC local radio's Nightlife with Tony Delroy's summer fill-in Rod Quinn from 10-11pm on Monday, December 29, and the brief was very broad: let's review the year on everything. Have a listen to what turned into quite an interesting discussion, including talkback.
Getting ready for such a gig inevitably requires lots of back reading of the major events, which we've turned into this comprehensive retrospective on 2009 for Mayne Report subscribers.
Global financial crisis
Whilst Obama was huge, the biggest story of the year was undoubtedly the global financial crisis. The capitalisation of US equities almost halved from $US20 billion to $US10 billion and the Australian market was down 50% at the peak and ended up losing 41% for calendar 2008. Wall Street has just had its worst year since the Great Depression. Never before have we seen wealth destruction on a scale like this.
How it started
Excessive, reckless and sometimes fraudulent sub-prime lending to millions of Americans was the trigger for the crisis. Sub-prime lending soared during the credit bubble and peaked at more than $US1.3 trillion in March 2007 with about 7.5 million loans outstanding. These were packaged up and sold all over the world, triggering the first truly global financial crisis when the US housing market declined and delinquincies soared.
Whilst the demise of Bear Stearns on March 17 was a portent of things to come, the commodities bubble continued. It wasn't until July that the oil price peaked at $US147 billion a barrel and then we all sat back and marvelled at the arrival of China during the Beijing Olympics from August 8-24.
The Russian-Georgian war broke out during the Olympics and many observers now believe the slowdown in Chinese production caused by the Olympics was another contributor to the commodity bubble bursting.
After bailing out the likes of Bear Stearns, the sub-prime losses kept coming to the point where Lehman Brothers was allowed to collapse on September 14, the same time that Bank of America bailed out Merrill Lynch. Two days later the US government lent $US85 billion to ailing insurance giant AIG and took an 80% stake as a tsunami exploded around the world because no institution could be trusted any more.
Geared to the eye-balls and gone
In just one year we've seen long established institutions wiped out in the blink of an eye. Gearing was the biggest problem and you shouldn't forget that Bear Sterns was leveraging its capital 60 times and Lehman Brothers 30 times. That won't ever be allowed to happen again.
The Lehman CEO Richard Fuld copped a grilling in front of a Congress committee but is still worth hundreds of millions whilst pondering why everyone else except his firm was bailed out. It's a question which has never been properly answered.
The biggest insurer has gone in AIG, along with $US150 billion of American taxpayer dollars. Whilst the 9 biggest American banks were forced to take a government injection of more than $100 billion at the same time, the biggest American bank Citigroup got a subsequent and additional injection of more than $US20 billion, plus Uncle Sam agreed to stand behind $US300 billion in troubled Citi ssets. Wow.
Even the biggest American company, General Electric, has been badly wounded by its finance arm. After paying $500 million for Wizard in Australia it is now exiting with little more than $50 million from Aussie Home Loans and its 33% shareholder, The Commonwealth Bank.
Properly pricing risk
There were many causes of this financial calamity but the slack lending standards around sub-prime mortgages was only one of them. Alan Greenspan's loose monetary policy to support the 2003 Iraq invasion triggered an unprecedented credit bubble that saw US junk bonds being priced at a skinny 2% over government bonds. These days it is a 15%-plus premium for junk as the market classically overshoots. It's time to buy junk-rated debt.
Other causes included the lack of transparency around credit-default swaps, blind faith in rating agencies and confidence in any product touted by Wall Street investment banks. Even Australian councils and charities put up about $2 billion through Grange Securities which was then bought by Lehman Brothers before it collapsed, such that there isn't much left to sue.
There have been several sovereign victims as well. Iceland attracted plenty of attention after it defaulted and nationalised its failed banks, but numerous other countries like Ukraine and Indonesia have also gone cap in hand to the IMF or the World Bank. Others, such as South Korea, have boosted liquidity with the help of a swap facility from the US Federal Reserve, which is printing record amounts of money.
Charlie Aitken's prediction on NSW nationalisation
It was interesting to see Charlie Aitken from Southern Cross Equities make the following 20 predictions in the final Eureka Report of the year:
1. The state of New South Wales will be “nationalised”.
2. Wayne Swan will be replaced by Lindsay Tanner as federal Treasurer after delivering a “surprise” budget deficit of $10 billion.
3. Sol Trujillo will leave Telstra and Telstra will be awarded the national broadband network contract.
4. Australian chief executives will realise Business Class actually isn't that much worse than First Class.
5. The Reserve Bank will cut cash rates to 3.75% in February and that will be the end of the cutting cycle.
6. Gold will peak at $1100 an ounce (from about $845 at Christmas) then fall to $500 in the second half of the year.
7. There will be an auction of Babcock & Brown memorabilia.
8. CSL will announce IVIG is a cure for Alzheimer's Disease.
9. The new Rio Tinto chief executive will announce a £10 billion rights issue in the first half.
10. A residential housing construction cycle will commence in Australia.
11. A lone real estate agent will acknowledge there has actually been a correction at the high end of the Australian residential property market.
12. That same real estate agent will be mysteriously taken by a shark in the first fatal shark attack on a Sydney beach in 40 years.
13. Gerry Harvey will stop whining.
14. The shorting ban on Australian financials will be extended indefinitely.
15. Those still left at Macquarie Bank will cheer.
16. Don Argus will anoint former Ford chief Jac Nasser as BHP chairman.
17. The Australian financial press will write a positive story.
18. Your children will start asking you, ‘Daddy, what was private equity'?
19. Followed by, ‘Daddy what was 2 and 20'?
And, wait for it …
20. The benchmark ASX 200 will close the year up 20% at 4300, led by financials!
Whilst Charlie is jesting with much of these, I agree with his prediction about NSW. With the states collectively attempting to borrow more than $20 billion in 2008-09, the Feds will definitely have to explicitly guarantee future state government borrowing or at the very least buy up tens of billions of dollars worth of their paper, a process which it has already started in a modest way.
And with the NSW economy already in the worst shape of any state, the time will surely come for some serious efficiency drives in the bloated public sector because revenue measures are difficult when you already run the highest taxing state in the country.
The global recession
Most of the world's major economies are now in recession and even China's growth has slowed to about 7%. Who says China can't go negative like the rest of the world? We've already seen demand for Australian commodities crash through the floor since the Olympics.
Prices in all asset classes falling simultaneously has led to extraordinary pump-priming with Keynesian economics back in favour. However, even the $US700 billion TARP plus talk of another $US700 billion stimulus package from President-elect Obama and US official interest rates at 0.25% hasn't done the trick yet.
We're still going through the world's biggest margin call and the world's biggest debt for equity swap, but as long as the crisis doesn't trigger too much geo-political conflict, the long bull market based around productivity gains from technological innovation should see the world economy pick up steam over time once confidence in the financial system is rebuilt.
How Australia is weathering the storm.
Australia is suffering just like everyone else, especially because we are highly dependent on foreign capital and have been hit extremely hard by the bursting of the resources bubble.
Who would have thought oil would crash from $US147.27 on July 11 to a low of just $US33, although the latest war in Gaza has temporarily pushed it back above $US40 a barrel.
Indeed, some of key commodity exports have been hammered as follows:
Nickel: $US33,400 a tonne in March to just $US9625, a drop of 71%
Copper: $US8730 a tonne in April to just $US2845, a drop of 67.4%
Who can forget BHP announcing price increases of up to 240% for its Queensland coking coal back in April 2008. And how about this June 23 announcement from Rio Tinto revealing Baosteel had agreed to a near doubling of prices for Pilbara lump iron-ore. These will surely be largely reversed by the time the next contracts kick in come April and May 2009.
Currencies are the ultimate measure of national strength and ours has crashed from more than US98c on July 16 to a low of almost US60c on October 28.
However, unemployment is still officially only 4.4% and official interest rates have been slashed from 7.25% to 4.25% since March, saving households almost $30 billion on the frightening $1 trillion of debt they carry. With the Aussie dollar back up near US70c, the Reserve Bank does have the capacity to further cut official interest rates if things get really bad in 2009.
But the biggest risk of all remains a significant increase in unemployment leading to huge bad debt write-offs in the banking sector, which traditionally is the last to cut dividends during the economic cycle.
I reckon industrial and resource stocks have largely bottomed but there's a chance banks could shed 20-30% from here courtesy of annual bad debt write-offs leaping from $3 billion in 2005-06 to more than $20 billion in the year to September 30, 2009.
Coming changes to global financial regulation
The days of cowboy capitalism are long gone and we're already seeing the largely un-regulated hedge fund industry get smashed. If the shadow banking system disappeared with Bear Stearns and Lehman Brothers, don't expect the completely un-regulated credit default swap market to survive in any form other than as a licensed, transparent, capital-backed, over-the-counter exchange-traded system.
With governments around the world bailing out or guaranteeing their banking systems, the banking masters of the universe will no longer enjoy a free lunch courtesy of the rest of us. Financial services companies peaked at about 43% of the Australian equities market and about 30% globally. With more than $US1 trillion already written off, expect it to settle back at about 15% as banking returns to being a utility that services the rest of the economy.
Never again will someone like Hank Paulson, who made more than $US500 million as CEO of Goldman Sachs, finish up running the US Treasury and advocating no rules capitalism and the mantra of enlightened self-interest Similarly, Alan Greenspan's legacy has been junked and even Bill Clinton is looking stupid for repealing the Glass-Steagall Act in 1999, which facilitated the creation of all these financial monoliths.
The final nail in the coffin of no rules financial markets has come from none other than former NASDAQ chairman Bernie Madoff, whose extraordinary $75 billion Ponzi scheme has caused financial extraordinary devastation, especially in New York.
What the GFC means for global politics
Remember Georgia. Russia, with $US500 billion-plus in foreign reserves, was going to make the Georgians pay for their Olympic incursion into South Ossetia. Now, with oil crashing 70% from the peak, Russia has been one of the biggest victims of the GFC.
Still the Georgian war was quite dramatic as The Irish Times explains:
Georgia foolishly started it by bombarding the South Ossetian "capital" Tskhinvali with BM-21 multiple rocket launchers during the night of August 7th-8th, and sending Georgian ground troops into the breakaway enclave they had lost in the early 1990s. Backed by the Russians, the South Ossetians had provoked the attack by shelling Georgian villages, but Saakashvili fell into their trap.
Within three days, the Georgian army was routed by far superior Russian forces. Under the watchful eye of Russian officers, the South Ossetian, Cossack and Chechen militiamen of the "North Caucasus Volunteers" continued to "ethnically cleanse" Georgian villages in South Ossetia through the second week of August.
However, whilst the US and European military support for Georgia looked weak, foreign capital fled Russia and then Vladimir Putin's failure to devalue the rouble saw more than $US200 billion of reserves spent propping up the currency.
All this talk of Russian expansionism looks dead as nations increasingly rely on foreign capital to prosper and punchy Putin is not attractive to anyone, especially with this latest plug pulling exercise with Europe over gas supplies. Rupert Murdoch summed it up best on the conference call for his June quarter earnings when he said this two days before the Georgian war errupted:
"The more I read about investments in Russia, the less I like the feel of it. The more successful we'd be, the more vulnerable we'd be to have it stolen from us."
If Rupert won't deal, you must be really bad and the Russians have taken quite hit this year.
The Obama ascension
The biggest political story of 2008 was undoubtedly Barack Obama's stunning election victory, which completely re-wrote the campaigning handbook for the internet age.
David Axelrod was the key journalist turned lobbyist who joined at the outset and produced that first 5 minute internet video when the campaign was launched in January 2007. Axelrod and Obama first met in 1992 and Axelrod read drafts of Obama's books and was consulted before that famous 2002 anti-war speech.
Whilst Hillary Clinton ran a traditional campaign with celebrity endorsements, big donations and a focus on experience, Obama captured the grassroots support and pushed his message of "change" to maximum effect.
Obama mobilised millions of people and he grabbed early momentum by winning 38% of the vote at the Iowa caucuses in January 2008.
Obama's money-making machine
The Presidential candidates across both parties spent $US1.7 billion in total, up from $US500 million in 2000 and $US820 million in 2004.
Obama broke all the records with $US740.6 million, eclipsing the combined $US646.7 million that George W Bush and John Kerry spent in 2004, with $US367 million by Bush then a record. Obama accounted for 44% of the money spent by the 2008 candidates and refused any public funding. Incredible stuff!
Whilst the majority of the money came from people donating more than the disclosable $US200 minimum, there was an estimated 3 million internet contributions worth $US500 million, an average of just $US166 each.
And he did it from the very start, raising $US24.8 million during the first three months of 2007, compared with $US19.1 million for the Clinton machine.
Republican troubles and the Palin effect
With the Republicans embarrassed by George W Bush's woeful record, the GOP was left with little choice but to go with its biggest internal maverick, Arizona Senator John McCain. Whilst history now suggests the Republicans made a terrible choice in backing Dubya over McCain in 2000, the critics are divided about the impact of Alaskan governor Sarah Palin as vice-presidential nominee.
Her convention speech on September 4 energised the Republican campaign, although the best remembered line is that now famous joke: "What's the difference between a hockey mom and a pit bull? Lipstick."
Palin ran into trouble on questions around substance with that now notorious Katie Couric interview when she fumbled her explanation about Alaska's proximity to Russia somehow boosting her foreign policy credentials.
In the end it was the global financial crisis that derailed McCain, Palin and the Republican campaign, especially the collapse of Lehman Brothers on September 14, just 10 days after her cracking convention speech. The Repubicans never recovered, although it did rely on Obama not stumbling during the three televised debates with John McCain. Mr Cool never missed a beat and was well-practised after more than 20 debates with Hillary Clinton.
How has Obama managed the transition
No incoming US President has ever hit the ground so fast as Barack Obama. How's this for a roll call of major appointments:
Treasury Secretary: New York Federal Reserve President Timothy Geithner, who is widely respected.
National Security Adviser: James Jones, 4-star general from US marines, plus former commander for Europe and Bush's special envoy on the Middle East.
Secretary of State: Hillary Clinton, Obama shows he can bury the hatchet and keep his talented opponents close.
Defence Secretary: Robert Gates to continue for a period, showing bipartisanship where merited.
SEC Commissioner: Mary Shapiro, who has 20 years experience heading financial regulators including two earlier stints at the SEC for Ronald Reagan and George Bush senior. Currently in charge of the Financial Industry Regulatory Authority, overseeing securities firms.
Obama is running the www.change.gov website, complete with regular weekly Youtube addresses, the usual email gathering techniques, plus very impressive disclosure on every meeting being held by the transition team.
Americans want to respect their President and the world has tremendous goodwill for Obama, so the big question is whether he can turn this into psychological recovery for the economy and even a peace dividend for the globe.
As it stands, Obama simply won't be able to keep spending $US500 billion a year on defence and deliver his broader program such as healthcare cover for all Americans and a tax cut for 95% of American families, whilst also balancing the budget over time.
The year in terror, folly and dictators
The extraordinary attacks on four sites in Mumbai by 10 Pakistani terrorists was a previously unseen form of terror that killed at least 173 people.
However, for sheer bastardry the bloody-mindedness of Robert Mugabe hanging onto power in Zimbabwe is hard to go past. Having clearly lost the elections held on March 29, Mugabe has refused to cede power as the Zimbabwe economy collapsed around the intractable political stalemate.
Whilst Iraq became seemingly more peaceful after the troop surge, citizen protection strategy and unlikely alliance with the Sunni militia, problems multiplied in Afghanistan.
The Americans still have 130,000 troops in Iraq and just 30,000 in Afghanistan but already the big three American network have withdrawn their full time war correspondents from Iraq, a sign of the shifting focus to Afghanistan and Pakistan.
A recently leaked US National Intelligence Estimate suggested the war against the Taliban is being lost because of "a lack of Afghan competence; a half-hearted Pakistani commitment to the fight; a shortage of American, NATO and International Security Assistance Force troops; too few aid workers; and nation-building programs that were designed for peacetime and are rife with inefficiency and fraud."
Reviewing Rudd's performance
Compared to John Howard's first year in office, Kevin Rudd has left him for dead with very little political controversy compared with a succession of ministerial scalps.
The early symobilism of Kyoto, the apology and our first female Governor General in Quentin Bryce, subsided with a series of global jaunts and reviews, although we ended the year with an extraordinary burst of activity which saw the surplus entirely spent, the banking system guaranteed and a cautious carbon trading model unveiled.
On the corporate governance front, Rudd really hasn't done anything yet, despite all this rhetoric about executive salaries. Here's hoping we get a lot more on this front in 2009.
The year in culture
The death of Heath Ledger on January 22 from a cocktail of prescription drugs was one of the two big popular culture stories of the year. Ledger was the 9th youngest person nominated for a best actor Oscar in 2006 for his performance in Brokeback Mountain.
And whilst Ledger's death produced no end of speculation and drama over his will, daughter Matilda Rose will inherit his entire estimated $US20 million fortune after an extraordinary act of generosity by the Ledger family.
The other big popular culture story for Australian this year surrounded artist Bill Henson, whose photographs of teenage girls were deemed offensive and removed from Australian art galleries.
On 22 May, the opening night of Henson's 2007-2008 exhibition at the Roslyn Oxley gallery in Sydney, 8 complaints were made to police about am email invitation depicting a nude 13 year old girl. Hetty Johnson from Braveheart and Fairfax columnist Miranda Devine whipped up a storm and police were quick to act such that the show was cancelled and several images were confiscated with a view to charging Henson and or his gallery for "publishing an indecent article" under the Crimes Act.
Kevin Rudd declared the images to be "absolutely revolting" with "no artistic merit" although Malcolm Turnbull provided some rare political support and confessed to owning two Henson photographs.
The NSW DPP eventually decided against laying charges and the images were given a PG rating by the office of film and literature classification. However, controversy flared again when David's Marr's book, The Henson Case, revealed that Henson had visited St Kilda Park Primary School to pick out potential models for his art work, and was escorted around by former principal Sue Knight. Another big storm errupted but eventually the department found the principal had no case to answer.
The year in sport
Usain Bolt's extraordinary world record double in the 100m and 200m finals at Beijing was the ultimate "hello world" statement and Michael Phelps jagging 8 golds to beat Mark Spitz's 1972 record of 7, also created history.
The rise of China was perhaps best demonstrated by the host nation's efforts in winning the gold medal count with 51 compared with 36 for the US, although the Americans topped the overall tally with 110 to China's 100.
In other sporting action, the Victorians did well with Hawthorn taking the AFL flag but Melbourne Storm fell short again at the hands of Manly in the NRL grand final.
Whilst Australia did finish 6th on the medal tally in Beijing, we had a dreadful year for sporting achievement. Heaven forbid, even the Kiwis beat us 34-20 to take the rugby league world cup final in Brisbane and now the South Africans has imposed our first home test series defeat since the West Indies beat us in 1992-93, just as Shane Warne was arriving as a test cricket force.
The Canterbury Crusaders beat the NSW Waratahs 20-12 in the Super 14 rugby union final and the Wallabies barely got over Wales 20-18 in a recent test match.
In tennis we finished the year with no player ranked in the top 50. Lleyton Hewitt is at 67 and Samantha Stosur at 52. And after winning 8 of the 10 previous grand slams going into this year's Australian Open, Roger Federer could only snaffle the US Open in 2008 as Rafael Nadal and Novak Djokovic really took it to him. Nadal's defeat of Federer at Wimbledon this year will also go down as one of the great matches in history.
At least in golf we've got five men in the top 50 golf rankings and Karrie Webb is hanging on in the top 10 for now. But didn't Greg Norman take us back to the banana republic days of the mid-1980s with that choking performance in the final round of the British Open.
Some last minute selling
Finally, I should let you know there's been some last minute selling of stocks since Christmas as follows:
Bendigo & Adelaide Bank: bought 700 shares at $10 in SPP and sold 660 today at $11.20, crystallising an $820 profit.
Quickstep Holdings: sold 2493 at 18c - lost about $300
Resmed: sold 100 at $5.40 - broke even
Clinuval: sold 1516 at 22c - lost about $200
Hill End Gold: sold 2000 at 17c - loss of $160
Carindale Property Trust: sold 114 at $3.31 - small loss
National Can Industries: sold 295 at 84c - loss of about $200
The Reject Shop: sold 41 at $9.90 - small loss
Newmont Mining: sold 104 at $5.70 - small profit
Andean Resources: sold 280 at 89c - lost about $200
Gowings: sold 137 at $2.69 - lost about $150
Allied Gold: sold 625 at 39c - lost about $200
As you know, I'm a little bearish and am keen to reduce the margin loan so it was nice to get a good SPP profit today from Bendigo Bank to offset most of those other losses.
That's all for now.
Have a great New Year celebration and just keep doin' ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.
I was on ABC local radio's Nightlife with Tony Delroy's summer fill-in Rod Quinn from 10-11pm on Monday, December 29, and the brief was very broad: let's review the year on everything. Have a listen to what turned into quite an interesting discussion, including talkback.
Getting ready for such a gig inevitably requires lots of back reading of the major events, which we've turned into this comprehensive retrospective on 2009 for Mayne Report subscribers.
Global financial crisis
Whilst Obama was huge, the biggest story of the year was undoubtedly the global financial crisis. The capitalisation of US equities almost halved from $US20 billion to $US10 billion and the Australian market was down 50% at the peak and ended up losing 41% for calendar 2008. Wall Street has just had its worst year since the Great Depression. Never before have we seen wealth destruction on a scale like this.
How it started
Excessive, reckless and sometimes fraudulent sub-prime lending to millions of Americans was the trigger for the crisis. Sub-prime lending soared during the credit bubble and peaked at more than $US1.3 trillion in March 2007 with about 7.5 million loans outstanding. These were packaged up and sold all over the world, triggering the first truly global financial crisis when the US housing market declined and delinquincies soared.
Whilst the demise of Bear Stearns on March 17 was a portent of things to come, the commodities bubble continued. It wasn't until July that the oil price peaked at $US147 billion a barrel and then we all sat back and marvelled at the arrival of China during the Beijing Olympics from August 8-24.
The Russian-Georgian war broke out during the Olympics and many observers now believe the slowdown in Chinese production caused by the Olympics was another contributor to the commodity bubble bursting.
After bailing out the likes of Bear Stearns, the sub-prime losses kept coming to the point where Lehman Brothers was allowed to collapse on September 14, the same time that Bank of America bailed out Merrill Lynch. Two days later the US government lent $US85 billion to ailing insurance giant AIG and took an 80% stake as a tsunami exploded around the world because no institution could be trusted any more.
Geared to the eye-balls and gone
In just one year we've seen long established institutions wiped out in the blink of an eye. Gearing was the biggest problem and you shouldn't forget that Bear Sterns was leveraging its capital 60 times and Lehman Brothers 30 times. That won't ever be allowed to happen again.
The Lehman CEO Richard Fuld copped a grilling in front of a Congress committee but is still worth hundreds of millions whilst pondering why everyone else except his firm was bailed out. It's a question which has never been properly answered.
The biggest insurer has gone in AIG, along with $US150 billion of American taxpayer dollars. Whilst the 9 biggest American banks were forced to take a government injection of more than $100 billion at the same time, the biggest American bank Citigroup got a subsequent and additional injection of more than $US20 billion, plus Uncle Sam agreed to stand behind $US300 billion in troubled Citi ssets. Wow.
Even the biggest American company, General Electric, has been badly wounded by its finance arm. After paying $500 million for Wizard in Australia it is now exiting with little more than $50 million from Aussie Home Loans and its 33% shareholder, The Commonwealth Bank.
Properly pricing risk
There were many causes of this financial calamity but the slack lending standards around sub-prime mortgages was only one of them. Alan Greenspan's loose monetary policy to support the 2003 Iraq invasion triggered an unprecedented credit bubble that saw US junk bonds being priced at a skinny 2% over government bonds. These days it is a 15%-plus premium for junk as the market classically overshoots. It's time to buy junk-rated debt.
Other causes included the lack of transparency around credit-default swaps, blind faith in rating agencies and confidence in any product touted by Wall Street investment banks. Even Australian councils and charities put up about $2 billion through Grange Securities which was then bought by Lehman Brothers before it collapsed, such that there isn't much left to sue.
There have been several sovereign victims as well. Iceland attracted plenty of attention after it defaulted and nationalised its failed banks, but numerous other countries like Ukraine and Indonesia have also gone cap in hand to the IMF or the World Bank. Others, such as South Korea, have boosted liquidity with the help of a swap facility from the US Federal Reserve, which is printing record amounts of money.
Charlie Aitken's prediction on NSW nationalisation
It was interesting to see Charlie Aitken from Southern Cross Equities make the following 20 predictions in the final Eureka Report of the year:
1. The state of New South Wales will be “nationalised”.
2. Wayne Swan will be replaced by Lindsay Tanner as federal Treasurer after delivering a “surprise” budget deficit of $10 billion.
3. Sol Trujillo will leave Telstra and Telstra will be awarded the national broadband network contract.
4. Australian chief executives will realise Business Class actually isn't that much worse than First Class.
5. The Reserve Bank will cut cash rates to 3.75% in February and that will be the end of the cutting cycle.
6. Gold will peak at $1100 an ounce (from about $845 at Christmas) then fall to $500 in the second half of the year.
7. There will be an auction of Babcock & Brown memorabilia.
8. CSL will announce IVIG is a cure for Alzheimer's Disease.
9. The new Rio Tinto chief executive will announce a £10 billion rights issue in the first half.
10. A residential housing construction cycle will commence in Australia.
11. A lone real estate agent will acknowledge there has actually been a correction at the high end of the Australian residential property market.
12. That same real estate agent will be mysteriously taken by a shark in the first fatal shark attack on a Sydney beach in 40 years.
13. Gerry Harvey will stop whining.
14. The shorting ban on Australian financials will be extended indefinitely.
15. Those still left at Macquarie Bank will cheer.
16. Don Argus will anoint former Ford chief Jac Nasser as BHP chairman.
17. The Australian financial press will write a positive story.
18. Your children will start asking you, ‘Daddy, what was private equity'?
19. Followed by, ‘Daddy what was 2 and 20'?
And, wait for it …
20. The benchmark ASX 200 will close the year up 20% at 4300, led by financials!
Whilst Charlie is jesting with much of these, I agree with his prediction about NSW. With the states collectively attempting to borrow more than $20 billion in 2008-09, the Feds will definitely have to explicitly guarantee future state government borrowing or at the very least buy up tens of billions of dollars worth of their paper, a process which it has already started in a modest way.
And with the NSW economy already in the worst shape of any state, the time will surely come for some serious efficiency drives in the bloated public sector because revenue measures are difficult when you already run the highest taxing state in the country.
The global recession
Most of the world's major economies are now in recession and even China's growth has slowed to about 7%. Who says China can't go negative like the rest of the world? We've already seen demand for Australian commodities crash through the floor since the Olympics.
Prices in all asset classes falling simultaneously has led to extraordinary pump-priming with Keynesian economics back in favour. However, even the $US700 billion TARP plus talk of another $US700 billion stimulus package from President-elect Obama and US official interest rates at 0.25% hasn't done the trick yet.
We're still going through the world's biggest margin call and the world's biggest debt for equity swap, but as long as the crisis doesn't trigger too much geo-political conflict, the long bull market based around productivity gains from technological innovation should see the world economy pick up steam over time once confidence in the financial system is rebuilt.
How Australia is weathering the storm.
Australia is suffering just like everyone else, especially because we are highly dependent on foreign capital and have been hit extremely hard by the bursting of the resources bubble.
Who would have thought oil would crash from $US147.27 on July 11 to a low of just $US33, although the latest war in Gaza has temporarily pushed it back above $US40 a barrel.
Indeed, some of key commodity exports have been hammered as follows:
Nickel: $US33,400 a tonne in March to just $US9625, a drop of 71%
Copper: $US8730 a tonne in April to just $US2845, a drop of 67.4%
Who can forget BHP announcing price increases of up to 240% for its Queensland coking coal back in April 2008. And how about this June 23 announcement from Rio Tinto revealing Baosteel had agreed to a near doubling of prices for Pilbara lump iron-ore. These will surely be largely reversed by the time the next contracts kick in come April and May 2009.
Currencies are the ultimate measure of national strength and ours has crashed from more than US98c on July 16 to a low of almost US60c on October 28.
However, unemployment is still officially only 4.4% and official interest rates have been slashed from 7.25% to 4.25% since March, saving households almost $30 billion on the frightening $1 trillion of debt they carry. With the Aussie dollar back up near US70c, the Reserve Bank does have the capacity to further cut official interest rates if things get really bad in 2009.
But the biggest risk of all remains a significant increase in unemployment leading to huge bad debt write-offs in the banking sector, which traditionally is the last to cut dividends during the economic cycle.
I reckon industrial and resource stocks have largely bottomed but there's a chance banks could shed 20-30% from here courtesy of annual bad debt write-offs leaping from $3 billion in 2005-06 to more than $20 billion in the year to September 30, 2009.
Coming changes to global financial regulation
The days of cowboy capitalism are long gone and we're already seeing the largely un-regulated hedge fund industry get smashed. If the shadow banking system disappeared with Bear Stearns and Lehman Brothers, don't expect the completely un-regulated credit default swap market to survive in any form other than as a licensed, transparent, capital-backed, over-the-counter exchange-traded system.
With governments around the world bailing out or guaranteeing their banking systems, the banking masters of the universe will no longer enjoy a free lunch courtesy of the rest of us. Financial services companies peaked at about 43% of the Australian equities market and about 30% globally. With more than $US1 trillion already written off, expect it to settle back at about 15% as banking returns to being a utility that services the rest of the economy.
Never again will someone like Hank Paulson, who made more than $US500 million as CEO of Goldman Sachs, finish up running the US Treasury and advocating no rules capitalism and the mantra of enlightened self-interest Similarly, Alan Greenspan's legacy has been junked and even Bill Clinton is looking stupid for repealing the Glass-Steagall Act in 1999, which facilitated the creation of all these financial monoliths.
The final nail in the coffin of no rules financial markets has come from none other than former NASDAQ chairman Bernie Madoff, whose extraordinary $75 billion Ponzi scheme has caused financial extraordinary devastation, especially in New York.
What the GFC means for global politics
Remember Georgia. Russia, with $US500 billion-plus in foreign reserves, was going to make the Georgians pay for their Olympic incursion into South Ossetia. Now, with oil crashing 70% from the peak, Russia has been one of the biggest victims of the GFC.
Still the Georgian war was quite dramatic as The Irish Times explains:
Georgia foolishly started it by bombarding the South Ossetian "capital" Tskhinvali with BM-21 multiple rocket launchers during the night of August 7th-8th, and sending Georgian ground troops into the breakaway enclave they had lost in the early 1990s. Backed by the Russians, the South Ossetians had provoked the attack by shelling Georgian villages, but Saakashvili fell into their trap.
Within three days, the Georgian army was routed by far superior Russian forces. Under the watchful eye of Russian officers, the South Ossetian, Cossack and Chechen militiamen of the "North Caucasus Volunteers" continued to "ethnically cleanse" Georgian villages in South Ossetia through the second week of August.
However, whilst the US and European military support for Georgia looked weak, foreign capital fled Russia and then Vladimir Putin's failure to devalue the rouble saw more than $US200 billion of reserves spent propping up the currency.
All this talk of Russian expansionism looks dead as nations increasingly rely on foreign capital to prosper and punchy Putin is not attractive to anyone, especially with this latest plug pulling exercise with Europe over gas supplies. Rupert Murdoch summed it up best on the conference call for his June quarter earnings when he said this two days before the Georgian war errupted:
"The more I read about investments in Russia, the less I like the feel of it. The more successful we'd be, the more vulnerable we'd be to have it stolen from us."
If Rupert won't deal, you must be really bad and the Russians have taken quite hit this year.
The Obama ascension
The biggest political story of 2008 was undoubtedly Barack Obama's stunning election victory, which completely re-wrote the campaigning handbook for the internet age.
David Axelrod was the key journalist turned lobbyist who joined at the outset and produced that first 5 minute internet video when the campaign was launched in January 2007. Axelrod and Obama first met in 1992 and Axelrod read drafts of Obama's books and was consulted before that famous 2002 anti-war speech.
Whilst Hillary Clinton ran a traditional campaign with celebrity endorsements, big donations and a focus on experience, Obama captured the grassroots support and pushed his message of "change" to maximum effect.
Obama mobilised millions of people and he grabbed early momentum by winning 38% of the vote at the Iowa caucuses in January 2008.
Obama's money-making machine
The Presidential candidates across both parties spent $US1.7 billion in total, up from $US500 million in 2000 and $US820 million in 2004.
Obama broke all the records with $US740.6 million, eclipsing the combined $US646.7 million that George W Bush and John Kerry spent in 2004, with $US367 million by Bush then a record. Obama accounted for 44% of the money spent by the 2008 candidates and refused any public funding. Incredible stuff!
Whilst the majority of the money came from people donating more than the disclosable $US200 minimum, there was an estimated 3 million internet contributions worth $US500 million, an average of just $US166 each.
And he did it from the very start, raising $US24.8 million during the first three months of 2007, compared with $US19.1 million for the Clinton machine.
Republican troubles and the Palin effect
With the Republicans embarrassed by George W Bush's woeful record, the GOP was left with little choice but to go with its biggest internal maverick, Arizona Senator John McCain. Whilst history now suggests the Republicans made a terrible choice in backing Dubya over McCain in 2000, the critics are divided about the impact of Alaskan governor Sarah Palin as vice-presidential nominee.
Her convention speech on September 4 energised the Republican campaign, although the best remembered line is that now famous joke: "What's the difference between a hockey mom and a pit bull? Lipstick."
Palin ran into trouble on questions around substance with that now notorious Katie Couric interview when she fumbled her explanation about Alaska's proximity to Russia somehow boosting her foreign policy credentials.
In the end it was the global financial crisis that derailed McCain, Palin and the Republican campaign, especially the collapse of Lehman Brothers on September 14, just 10 days after her cracking convention speech. The Repubicans never recovered, although it did rely on Obama not stumbling during the three televised debates with John McCain. Mr Cool never missed a beat and was well-practised after more than 20 debates with Hillary Clinton.
How has Obama managed the transition
No incoming US President has ever hit the ground so fast as Barack Obama. How's this for a roll call of major appointments:
Treasury Secretary: New York Federal Reserve President Timothy Geithner, who is widely respected.
National Security Adviser: James Jones, 4-star general from US marines, plus former commander for Europe and Bush's special envoy on the Middle East.
Secretary of State: Hillary Clinton, Obama shows he can bury the hatchet and keep his talented opponents close.
Defence Secretary: Robert Gates to continue for a period, showing bipartisanship where merited.
SEC Commissioner: Mary Shapiro, who has 20 years experience heading financial regulators including two earlier stints at the SEC for Ronald Reagan and George Bush senior. Currently in charge of the Financial Industry Regulatory Authority, overseeing securities firms.
Obama is running the www.change.gov website, complete with regular weekly Youtube addresses, the usual email gathering techniques, plus very impressive disclosure on every meeting being held by the transition team.
Americans want to respect their President and the world has tremendous goodwill for Obama, so the big question is whether he can turn this into psychological recovery for the economy and even a peace dividend for the globe.
As it stands, Obama simply won't be able to keep spending $US500 billion a year on defence and deliver his broader program such as healthcare cover for all Americans and a tax cut for 95% of American families, whilst also balancing the budget over time.
The year in terror, folly and dictators
The extraordinary attacks on four sites in Mumbai by 10 Pakistani terrorists was a previously unseen form of terror that killed at least 173 people.
However, for sheer bastardry the bloody-mindedness of Robert Mugabe hanging onto power in Zimbabwe is hard to go past. Having clearly lost the elections held on March 29, Mugabe has refused to cede power as the Zimbabwe economy collapsed around the intractable political stalemate.
Whilst Iraq became seemingly more peaceful after the troop surge, citizen protection strategy and unlikely alliance with the Sunni militia, problems multiplied in Afghanistan.
The Americans still have 130,000 troops in Iraq and just 30,000 in Afghanistan but already the big three American network have withdrawn their full time war correspondents from Iraq, a sign of the shifting focus to Afghanistan and Pakistan.
A recently leaked US National Intelligence Estimate suggested the war against the Taliban is being lost because of "a lack of Afghan competence; a half-hearted Pakistani commitment to the fight; a shortage of American, NATO and International Security Assistance Force troops; too few aid workers; and nation-building programs that were designed for peacetime and are rife with inefficiency and fraud."
Reviewing Rudd's performance
Compared to John Howard's first year in office, Kevin Rudd has left him for dead with very little political controversy compared with a succession of ministerial scalps.
The early symobilism of Kyoto, the apology and our first female Governor General in Quentin Bryce, subsided with a series of global jaunts and reviews, although we ended the year with an extraordinary burst of activity which saw the surplus entirely spent, the banking system guaranteed and a cautious carbon trading model unveiled.
On the corporate governance front, Rudd really hasn't done anything yet, despite all this rhetoric about executive salaries. Here's hoping we get a lot more on this front in 2009.
The year in culture
The death of Heath Ledger on January 22 from a cocktail of prescription drugs was one of the two big popular culture stories of the year. Ledger was the 9th youngest person nominated for a best actor Oscar in 2006 for his performance in Brokeback Mountain.
And whilst Ledger's death produced no end of speculation and drama over his will, daughter Matilda Rose will inherit his entire estimated $US20 million fortune after an extraordinary act of generosity by the Ledger family.
The other big popular culture story for Australian this year surrounded artist Bill Henson, whose photographs of teenage girls were deemed offensive and removed from Australian art galleries.
On 22 May, the opening night of Henson's 2007-2008 exhibition at the Roslyn Oxley gallery in Sydney, 8 complaints were made to police about am email invitation depicting a nude 13 year old girl. Hetty Johnson from Braveheart and Fairfax columnist Miranda Devine whipped up a storm and police were quick to act such that the show was cancelled and several images were confiscated with a view to charging Henson and or his gallery for "publishing an indecent article" under the Crimes Act.
Kevin Rudd declared the images to be "absolutely revolting" with "no artistic merit" although Malcolm Turnbull provided some rare political support and confessed to owning two Henson photographs.
The NSW DPP eventually decided against laying charges and the images were given a PG rating by the office of film and literature classification. However, controversy flared again when David's Marr's book, The Henson Case, revealed that Henson had visited St Kilda Park Primary School to pick out potential models for his art work, and was escorted around by former principal Sue Knight. Another big storm errupted but eventually the department found the principal had no case to answer.
The year in sport
Usain Bolt's extraordinary world record double in the 100m and 200m finals at Beijing was the ultimate "hello world" statement and Michael Phelps jagging 8 golds to beat Mark Spitz's 1972 record of 7, also created history.
The rise of China was perhaps best demonstrated by the host nation's efforts in winning the gold medal count with 51 compared with 36 for the US, although the Americans topped the overall tally with 110 to China's 100.
In other sporting action, the Victorians did well with Hawthorn taking the AFL flag but Melbourne Storm fell short again at the hands of Manly in the NRL grand final.
Whilst Australia did finish 6th on the medal tally in Beijing, we had a dreadful year for sporting achievement. Heaven forbid, even the Kiwis beat us 34-20 to take the rugby league world cup final in Brisbane and now the South Africans has imposed our first home test series defeat since the West Indies beat us in 1992-93, just as Shane Warne was arriving as a test cricket force.
The Canterbury Crusaders beat the NSW Waratahs 20-12 in the Super 14 rugby union final and the Wallabies barely got over Wales 20-18 in a recent test match.
In tennis we finished the year with no player ranked in the top 50. Lleyton Hewitt is at 67 and Samantha Stosur at 52. And after winning 8 of the 10 previous grand slams going into this year's Australian Open, Roger Federer could only snaffle the US Open in 2008 as Rafael Nadal and Novak Djokovic really took it to him. Nadal's defeat of Federer at Wimbledon this year will also go down as one of the great matches in history.
At least in golf we've got five men in the top 50 golf rankings and Karrie Webb is hanging on in the top 10 for now. But didn't Greg Norman take us back to the banana republic days of the mid-1980s with that choking performance in the final round of the British Open.
Some last minute selling
Finally, I should let you know there's been some last minute selling of stocks since Christmas as follows:
Bendigo & Adelaide Bank: bought 700 shares at $10 in SPP and sold 660 today at $11.20, crystallising an $820 profit.
Quickstep Holdings: sold 2493 at 18c - lost about $300
Resmed: sold 100 at $5.40 - broke even
Clinuval: sold 1516 at 22c - lost about $200
Hill End Gold: sold 2000 at 17c - loss of $160
Carindale Property Trust: sold 114 at $3.31 - small loss
National Can Industries: sold 295 at 84c - loss of about $200
The Reject Shop: sold 41 at $9.90 - small loss
Newmont Mining: sold 104 at $5.70 - small profit
Andean Resources: sold 280 at 89c - lost about $200
Gowings: sold 137 at $2.69 - lost about $150
Allied Gold: sold 625 at 39c - lost about $200
As you know, I'm a little bearish and am keen to reduce the margin loan so it was nice to get a good SPP profit today from Bendigo Bank to offset most of those other losses.
That's all for now.
Have a great New Year celebration and just keep doin' ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.