Private equity fuelling sharemarket run

[Ghostwriter]

Stocks close on record high


THE share market has closed at another record high, buoyed by market leader BHP Billiton and a strong showing from banks and insurers.

At the 1615 AEDT close, the benchmark S&P/ASX200 index was up 48.1 points to 5,607.8, breaking the previous record of 5,591.40 set on Monday, December 18.

It also closed at a new intraday high, beating its earlier high of 5,597.20, set on Monday as well.

The all ordinaries gained 45.3 points to 5,586.90, likewise surpassing its previous closing high of 5,572.2 and beating the previous intraday high of 5577.30.

Both records were also set on December 18.

CMC Markets senior dealer Phil Martin said the big miners had led the market up despite small falls in base metal prices overnight.

"BHP was the biggest one causing the market to head higher,'' Mr Martin said.

"Most of the metals were slightly lower but oil moved sharply higher, which would have helped BHP a little.

"But Rio's also up, so it looks like gains have come on the back of some positive general sentiment.

"The time of year always helps, and yesterday we had a few stocks down so people are seeing some cheaper stocks around the market.

Mr Martin said the banks had performed well, particularly National Australia Bank and Commonwealth Bank.

So too had the insurers, with Suncorp and Promina the big winners after their $7.9 billion merger was today approved by the Australian Competition and Consumer Commission (ACCC).

BHP added 45 cents to $25.77 and Rio Tinto lifted 81 cents to $76.39.

Suncorp rose 45 cents to $20.25 and Promina jumped 22 cents, or 3.28 per cent, to $6.92.

Other insurers also rose with QBE firming 52 cents to $28.62, AMP growing six cents to $9.80 and Axa Asia Pacific advancing 24 cents to $7.09.

National Australia Bank made 31 cents to $40.11, Commonwealth Bank lifted 93 cents to $48.85, ANZ was steady at $48.85 and Westpac climbed eight cents to $23.94.

St George Bank put on 22 cents to $32.70 after announcing today that it remains on track for to meet targets of 10 per cent cash earnings per share growth for 2007 and 2008.

Macquarie Bank gained 94 cents to $75.55.
End.

I think it is, not a lot of other good news in the market, seems everyone is waiting for the next PE bid, a bubble is being created.

 

[Papa G]

Indeed it is. Could be a crash. Could also lead to more bank defaults with all this borrowed money being used.

We haven't had a recession for 15 years or so. I reckon that may change. Gen Y get ready for something you have not experienced before.

 

[Scratcher Gillespie]

Some thoughts from thedailyreckoning.com about this very phenomenon.

*** The hottest new thing in capitalism is the rise of "private equity."
Groups of rich investors pool their money, borrow still more money, and buy companies. Ten years ago, these groups gathered together only about $10 billion; today, the figure is higher than $300 billion.

Michael Lewis comments:

"Even those gargantuan numbers fail to do justice to this peculiar financial event. Private equity is not served up without piles of debt - the typical debt-to-equity ratio of a company after it has been bought by a private-equity firm is two-to-one - and so the actual purchasing power in the hands of private equity fund managers is something like three times as much as they have in their bank accounts. It's as if a giant and especially successful new stock market has been created alongside the old one."

Our Australia-based correspondent, Dan Denning, adds this:

"The tech bubble may turn out to be a dress rehearsal for an even bigger bubble and threat now. Why do I say that?

"Here's the difference between today and 2000. Seven trillion dollars was wiped out when the tech bubble burst, proving that it was largely fictitious wealth. The real economy didn't really miss a beat...because the money people lost was not money people really had.

"It was paper gains, never realized, and ultimately lost...So all in all, for the most part, it was easy come, easy go.

"Today is much different. People have more at stake (the roof over their head), and less margin for error (fewer real assets on the balance sheet, more liabilities) and there is a connection between private equity/money shuffling capitalism and the housing markets...the connection is debt. And the debt is what makes this bubble different and worse than the last bubble.

"All that is at the household level. If the private equity boom continues (as I believe it will), it will also leave a mountain of debt rubble after the bubble bursts at the corporate level. It's odd, of course, that something as ephemeral as a bubble can leave real debt. Yet because the private equity guys are paying 40 cents for a $1.20 worth of future earnings (making up the difference with borrowed money), the newly-private companies are saddled up with debt they wouldn't have otherwise taken on before. This is, as the article notes, not real investment in new productive assets. It's debt that merely facilitates the transfer of ownership of the company's assets.

"And if all these smart, well-paid, even better-tailored, and perfectly coiffed money shufflers get it wrong - synergies not realized, profits not optimized, value not extracted - then you get a company performing worse than before, with considerable liabilities, and no recourse to additional sources of capital.

"This is probably when the private equity guys will try to re-float the company on the gullible public (if they are not fired or jailed first).
But who is going to buy a freshly disorganized, debt-ridden company as a new public offering? It's like expecting to see a brad new baby boy come out of the womb...and seeing Frankenstein instead...a not-quite stillborn abomination of corporate parts, crudely reassembled (after) being disassembled, and presented as a new life.

"Some schmuck or lump will ante up. There's always an idiot. But there is something different about this bubble that's sinister and dangerous. And it does remind me that Mary Shelley was making a good point with Frankenstein...science in its hubris sometimes forgets that there's a lot it doesn't know. It messes with the laws of nature and the results are invariably bad. Financial innovation may have reached that point too...where we've disfigured the institutions of capitalism so badly that we are bound to get a monster in short order.

"We've gotten used to thinking financial crises can happen and be ameliorated with more liquidity. Peso Crisis, Russian default, Amaranth...none of them brought down the house. We have become desensitized...or blasé about real risk. For most of us, the riskiest thing we do in any given week is cross the street or drive a car. We're not going to starve, or be killed by a neighboring tribe (unless you are in Iraq), or fall victim to cholera.

"Of course we are not immune to the effects of a genuine financial pandemic. And this latest strain of affluenza saddles up private and public balance sheets with huge liabilities to go along with declining asset values.

"It's the kind of trade only a very stupid or very immoral man could make.
Unfortunately, there are a lot of both in the world right now. And most of them are living in the best apartments in Mayfair, Manhattan, and Manley Beach...for now.

"It wasn't really until today that I ever thought I'd actually live through something as audacious and destructive as John Law's Banque Royale and the Mississippi or South Sea Bubbles. But I think we're watching it happen right before our eyes.

"Biggest...Bubble...Ever."

 

[navier-stokes equation]

What happens to interest rates during a recession? Does the rental market suffer or boom? How long does a recession normally last for?

 

[R00StaR]

Its will be interesting how it all pans out that’s for sure. I don’t see it creating a bubble in the short term. Many of the takeovers are done by very astute people, taking on solid companies that have performed well over the long term. Even if they do come back to the market as a failed venture later on (5- 10 years?) they surely wouldn’t command the PE ratios they once did.

What I wonder is where will all the fund managers put their money after we lose say 40 of the top 100 companies to these deals? If we lose 40 then another 40 weaker companies come into the ASX 100/ 200/ 300 to replace them. If all this money from the sold 40 companies tries to find homes within the ASX, we could well get a bubble then. But that could mean a massive run up from where we are currently.

 

[Ghostwriter]

Have a look at this, I know its easy to say the market will crash and then in x years time it does and you can say you predicted it, well I'm gonna say I predicted it.

 

[nokiacasio]

If your powers of prophecy are so good, you should be on the trade floor short selling.

 

[Ghostwriter]

Sorry to re bump this thread, but I just re-read the article from dailyreckoning.com, they got it spot on.

 

[hilly]

I am predicting future tensions in the Middle East, remember you read it here first.