Mail From Our Dear Readers

Today’s Markets and Money is brought to you by your fellow readers. That is, your editor has been busy putting the finishing touches on the January issue of Diggers and Drillers. In the meantime, you can read some of the wit and wisdom of the DR Australia’s world-wide fan base. Happy Australia Day and see you Monday!


“Have been trying to get my head around this for over a year as I my only real investment is in a small commercial property and of course my very small home.

“You would have to assume that Australia will follow the rest of the world’s asset deflation but here in Melbourne, we have a severe housing shortage which could keep the prices from falling too far. I have read that in the US there is an oversupply of housing which has contributed to the fall in values. I don’t know about the UK though. You had one horrific story in Markets and Money about a house in Ireland falling to 25% of its value in one year!

“Personally, I have factored in a 30% to 40% drop in Melbourne house prices but I am unsure about small commercial properties. Because the rent is comparatively low on the very small properties there is usually someone around who will give it a go. Considering that my commercial property is a recording studio whose clients never have any money anyway, it might not be so bad.

“Then again, when there is no money to borrow, it doesn’t matter what you think the property is worth does it? And with talk of the credit crunch returning to the ‘dark days of 2008’ there might not be any money to borrow.

“I actually don’t mind at all if values fall up to 40% because my friends and family who do not yet own a property might have a chance to buy and let’s face it, the prices were totally out of control anyway.

Caulfield South, Vic.

“I was recently in Noosa, one of the higher end property markets in Queensland. My wife and I stayed with a friend who is a real estate agent. We looked at several properties. One waterfront property that we liked was on the market for $1.495 mn … and it was by far the best value among what we saw. The owners had been realistic and reduced the asking price to somewhere near the market.

However, subsequently I learned that of 13 prestige properties that went to auction later that week, NOT ONE sold. Needless to say, it will take a lot lower price than $1.495 mn to get me remotely interested in the property I looked at.

The agent suggests $1.35 mn. I don’t think so. Standing aside is the best thing to do right now if you ask me.

My view is that the fate of Australian residential property market will be determined by the employment figures.


1. Residential property will only collapse if there are more sellers than buyers.

2. If prices start falling, people will only sell if they NEED to.

3. People will only NEED to sell their house if they can’t afford their repayments.

4. Anyone with an existing mortgage and an existing job will be paying less on their repayments now than a year ago because of significant and continuing interest rate cuts.

5. So the only way that repayments will become unaffordable will be if you lose your job.

6. Keep your job, keep your house.

7. Therefore, if employment figures stay reasonably good, housing market won’t collapse.

But, if it does collapse, I think I have a pretty secure job and I am more than happy to pick up some reasonably priced property when everyone else defaults.

Simon C.

On the length of the Markets and Money

Hi just to let you know that some of us enjoy your emails as they are please don’t change them, for me they cut out a lot of the noise and get as near to the truth as possible they also get me thinking about the financial future more clearly.

Also keep the humour up the remarks are bang on everybody running around like Mr. Magoo, one thing this credit situation has taught me is that there are only a handful of people who know what they are talking about.

Share forum ay maybe they don’t want to hear what you’re saying, now options forum that might be different! Just to finish with maybe you could call it a Mr. Creosotes Barfatorium depression or bubble do you think we’ve had the after dinner mint yet!

Regards Terry.


I think one of the best moves I made in 2008 (albeit late in the year) was to subscribe to Markets and Money.

I get the information the media in Australia seems reluctant to supply. People I speak to don’t seem to believe that, economically, we’re in deep shit. How can so many people have their heads so deep in the sand without choking. It amazes me, but then I never did think that highly of the general populace.

Markets and Money keeps me up to date with the world situation and I usually get a laugh out of a couple of jibes sprinkled through the doom.

Great work and thanks

Jane (BB)

Mr. Denning

I’m dropping you a line to compliment you on your publication. I pay for a lot of more expensive stuff like Gavekal and Gartman but the Markets and Money is the only thing I actually read every day. I came by the Markets and Money after reading a book I found on my brother’s shelf a couple of yrs ago now called The Bull Hunter. I thought you articulated the commodity bull story particularly well and I wished that I had read the book much closer to its initial publication. I was pleased to find that when I’d looked you up you’d been true to your words at the end of that book and moved to Australia.

Subsequently, the disaster in structured credit hit and I’ve found your writing pretty useful in difficult markets. I manage a $600m credit portfolio, mainly in HY bonds and derivatives and leveraged loans so I’ve been in the middle of the turmoil since June 2007. I started selling loans pretty aggressively in July but it was hard to avoid losses. The shift in supply and demand in leveraged loans was unprecedented in any market I think. With 70% of loans bought and held by CLOs and 70% of CLOs funded by AAA that turned off instantly when the banks blew up the illiquid tranches by creating and selling the very liquid ABX index.

The blow in basis between CDS and cash that occurred this year and is ongoing was another challenge for leveraged funds like my own as you could easily lose a lot of money even when calling markets right directionally. Still it helps to have an idea of which what broader investors are thinking and especially this year the meaning and possible consequences of actions and events and for that the Markets and Money has been pretty good. I was a bit surprised by the apology a few weeks ago for getting the decoupling call wrong. Firstly, because an apology from commentators is unusual, they mostly pretend it didn’t happen and emphasis the occasional thing they get right. But secondly, because I thought at one point at least you made a very timely call on commodity stocks. Soon after the market started pricing the economy into commodities the Markets and Money said something like if you own the commodities stocks in 6mths you’ll feel like an idiot, if you own them in 12 mths you’ll feel like killing yourself. That’s how I remember it anyway.

On markets now, maybe because I’m too close to some of the problems but I’m more negative than seems to be the consensus. In fact, I think I could have done a pretty good keynote speech at your recent Doomer’s Ball (if I wasn’t fairly inarticulate and scared of public speaking that is !!). I don’t think the extent of the future decline in corporate earnings is yet appreciated by equity markets. Credit markets are pricing in a much more dire scenario with the xover cds index implying 50% default within 5 yrs and HY bonds implying around 70pc defaults.

CDS after outperforming most of this year, was moving wider quickly in November and December suggesting problems for corporate credits are just beginning not ending. Even utility cds is blowing up now. Spanish utility Endesa was rumoured to be acquiring recently and the CDS blew out from about 250bps to 580bps, making any acquisition nearly impossible to fund. This did not used to be the case as banks would fund where they wanted, ignoring cds levels.

However now banks use cds as spread as minimums, and, in several cases in the US, have linked future funding levels directly to cds. Corporate funding costs will go higher and higher, thought at least the banks will make more money and rebuild capital.

Maybe the credit markets are just two negative but increasingly the most bearish predictions are coming true. Commodity chemicals are first out of the block. Two of the big four global chems trade in European credit markets. Ineos and Basell. It was reported last week that Ineos EBITDA dropped to zero in October. That was from LTM EBITDA of around E1.7b I think last time I checked. Ineos issued the biggest HY Bond in Europe, about E1.7b, it now trades at 15cents. Last night Basell filed in the US that is was pushed back fees on its bridge loan and has appointed advisors to restructure its debt. Both these companies have too much debt (although Ineos was only 3.5x levered coming into this) but still operations are falling apart and yet the listed chems are chilled. Trading up mostly.
The problems with Ineos and Basell also highlight the global destruction of wealth. Radcliff who owns Ineos is still touted as one of the richest men in Britain.

I don’t know his circumstances but am guessing most of wealth is in Ineos equity that now worthless. Blavatnik, the Russian who owns Basel through Access Industries is one of world’s richest men in theory. Early this year he apparently put in place a $900m overdraft at Basell to fund oil inventories as oil spiked. That sort of money doesn’t seem to be forthcoming now, just a few months later. Andrew Forest was Australia’s richest man, we know how that’s been diluted. (I met Andrew Forest over here when he raised the $ bonds, was amazed at his ambition and persistence after failing with his last project). I come from NZ myself. The richest guy there is assumed to be Graeme Hart. However, he seems to have 3 main assets. SIG in Switzerland that he paid 7x EBITDA for at top of mkt and bonds now traded 38cents.

Carter Holt Harvey that he also leveraged up (and a company I remember as reliably a dog ever since I was a kid), the debt there trades at about 50cents. And the bottle top business he bought, was it from Alcoa, around the top of the market also. Not sure how much equity value left in any of these, at least on today’s market prices. When you add in Princes going broke in the Middle East and Russian Oligarchs asking for bailouts, there doesn’t seem to be much cash around anymore at the rich sponsor level.

I guess the lack of cash is pretty obvious. Just the fact that Hedge Funds, at least fixed income hedge funds like myself, can no longer get any leverage from the prime brokers must take a lot of potential investment out. The fact that banks still talk about selling 100b’s more assets is obviously a problem. And the fact that there are still housing markets like Australia and NZ that are blatantly the wrong price is an accident still waiting to happen.

Maybe this stuff is all just too obvious and the bear market rally will be big as everyone seems to expect. For me though, I think another new year crash. That takes the ASX down another 20pc and then I’ll be signing up for Diggers and Drillers and picking up some cheap commodity stocks. Nice.

Anyway, thanks very much for your entertaining and informative commentary this year and good luck for the next.


Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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2 Comments on "Mail From Our Dear Readers"

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Ah Simon C.., your point number 4 is completely flawed. Who is going to set those interest rates? You? Banks set rates independent of the RBA, they are just playing ball with the gov for now.

Totally agree with you Jane (BB), this site saved me from October 08’s mess.


Regarding Sunshine Coast and Noosa in particular. “Values” are not real. A mate has been up there most of this century and rents (OK has to move evey few years). Current place 30sq 4bd, marble, pool, mooring etc on tidal ( not mosquito breeding) canal at Mooloolaba pays AUD600pw. so owner probaly clears 18,000pa (agent, maintenace,rate land tax etc).

Is that worth the asking 1.8??

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