Macro Investor: Macquarie short

By Chris Becker

Macquarie Group (MQG) – the Silver Donut – the Millionaires Factory – whatever you want to call it, is the the best risk proxy to announce if the ASX200 is having a bull market or not:

Today the Donut Factory announced that its securities unit will likely post a second consecutive yearly loss as it euphemistically says “Europe’s debt crisis dents investor appetite for trading and share sales”. From Bloomberg:

Macquarie reiterated a forecast that the group’s result will improve from the prior 12 months. “The securities group is suffering,” Chief Executive Officer Nicholas Moore said on a conference call with reporters. “You know the drought will turn, but you don’t know when.” Describing the market as “very, very tough,” Moore said he’s not expecting the European crisis to improve any time soon.

MQG posted a nearly $200 million loss last financial year – why? Its main driver is the meta markets – deals, takeovers, IPO’s, structured investments, retail investors leveraging up to buy stocks off institutional investors who are selling etc etc ad nauseam. MQG is profitable in a bull market and then hugely profitable in a classic Minskian “ponzi bull” market.

But when those conditions don’t exist, the group struggles, and this affects their valuation. FARM (Macro Investor’s proprietary database and investment tool) current estimate is $22.16 moving to $22.88 per share for 2013.

Consensus forecast estimates for next year and further out are hugely ebullient, and in my opinion, delusional, at $2.61 per share for 2013 and $3.38 per share for 2014, instead FARM has calculated modest growth from $2.10 currently to $2.20 and $2.30 per share:


Beyond the fundamentals, both the market condition (as measured by our proprietary risk indicator) is bearish and the medium term technical setup had also moved to a classic short setup, which is why we suggested such a trade in MQG in last week’s edition of Macro Investor:

  • The millionaire factory remains out of favour in the bear market and is setting itself up for a short.
  • A breakout price movement from January has stalled and the stock is now forming a head and shoulders pattern.
  • Any break below $25 could see the silver doughnut fall sharply to $20, forming in our view, a tasty short.

Which was triggered on the 18th of July at $24.98 and as of 11.30 this morning, MQG is trading at $23.66 per share. Yes, we’re makin’ bacon:

As explained in the trade report, risk management is tight on such a trade but it appears for now the fundamentals are supporting the price view, ie. a big squishy boot on top of the Donut Factory, not grubby hands of every man wanting to buy stocks.

Chris Becker is an investment strategist at Macro Investor, Australia’s independent investment newsletter covering stocks, trades, property and fixed interest. Each week Macro Investor publishes tables on the top ten most undervalued and overvalued stocks on the ASX. A free 21-day trial is available at the site. You can follow Chris on Twitter.

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  1. tsport100MEMBER

    Fortuitous timing by MAC hosting (sponsoring??) the Glenn Stevens cheer leading speech the day before they go public with crap results.

    My bet is Mac is the first OZ bank to either go down or get a bail-out… seeing as they’re in bed with the AOFM on a few Billion worth of Sub-Primes that the High Court recently gave mortgagees the green light to discharge!

    • The Donut Factory always put on gigs like this, its part of the fund management/financial industry salesmanship/spruiking culture to do this.

      Its how I became a professional pie eater, having been to many many MacBank, UBS, Citi and other insto functions. After the GFC, they became a bit more austere, i.e Aussie labelled wines, gourmet sandwiches instead of 3 course 4 star meals, etc.

      I miss those days…but the local bakery here is good, if expensive…

  2. Any institution that choose not to castigate the press and its own employees for referring to it as “the millionaires factory” has major issues.

    A more interesting post would be on where MQG senior and sub cds’s trade. The credit markets have always had a more rational view of the company. The lemming equity “analysts” who cover it have for the most part been delusional for the last 5 years.

  3. I think these guys may end up merging with a tier 2 bank if this environment continues. Would give them access to capital and make them less volatile as a business.

    They also seem to be buying businesses geared to a pick up in equity mkts,…… a big ask .

  4. Nick1970MEMBER

    I used to like the Blackrock boys – always had a nice wine at lunch! Sadly it is just the odd coffee with a BDM now!

  5. A substantial proportion of the losses they are making are the result of the unconscionable salaries they pay themselves. Accustomed to paying themselves 10-100 times what they are worth, based on the commissions they could tweak from their various schemes, they continue to overpay themselves at the shareholders cost.

  6. Yes times are tough in all Financial Service related businesses it’s not just Macquarie. As a component of GDP this sector has dwarfed the contribution of the mining sector and has been the most significant tax source over the past decade. I would also guess that the bonuses paid within the industry have been a significant driver of real estate prices in most of the inner city suburbs of Sydney and Melbourne.
    Mosman for instance has long been considered the preferred suburb for Mac Bankers, well go and look at the listings on Real Estate.Com it looks like a rush to the exits.