I know that the AFR runs toxic “business” cheerleading identity politics but sometimes you have to take marvel at the scope and idiocy of it. The top column in Australian business today writes this:
Almost halfway through the profit reporting season, it is clear the three big corporations that prop up the performance of the S&P/ASX200 are going to expand their dominance of investment flows from passive and active funds.
BHP, Commonwealth Bank of Australia and CSL are the well-oiled machines that have shown through their full-year results a combination of operational excellence, clarity of strategy and competitive advantage.
Let’s leave CSL out of it. It’s a very expensive firm with still bright prospects, not least as the Australian dollar is gutted in the years ahead as BHP and CBA die.
Cripes. CBA is the most expensive bank in the known universe (that I can find). At 20x NTM it is literally off the chart in terms of its peers and GSIB group. Yet it has almost no international business and is yoked to a steadily dying economy that will shortly require margin-crushing negative interest rates to grow at all. Take a look at what that did to European banks to get an idea.
Sure, it is ahead of competitors in the BNPL space but that is pure cannibalism for its own credit card business.
Finally, it may be protected by public fiat but that is slow-motion death, not disruptive life.
As for BHP, mother of god, it is entering a period of crisis. Iron ore made up 80% of its recent earnings. This is going to halve next year. Over the long term, it’s going to drop 90%. Good luck offsetting that with Jansen guano.
But wait, there’s more, the share price hasn’t collapsed owing to this strategic bind, it’s just hedge funds! From Jonathon Shapiro:
Ever since the DLC came into being in 2001, hedge funds and proprietary traders have bet on the spread between the London-listed BHP “plc” price and the ASX-listed “Ltd” price converging when it gets too wide, or widening when it gets too tight.
…The collapse of BHP’s DLC looks like it will end, not with a whimper, but with a spectacular bang.
In the lead up to BHP’s decision, brokers and traders lined up, effectively shorting the more expensive Ltd and buying the cheaper plc. They were confident that the return was higher than ever.
The overriding thesis of the trade was that as BHP evolved, the contribution to profits from plc diminished. This created capital management complications that led to a build up of about $US11 billion in franking credits, as Ltd was forced to distribute to plc shareholders.
There was no way to pay dividends and clear the balance of franking credits. One option of buying back Ltd shares with excess capital made the situation even worse, as it reduced the share count and increased both the profits and the franking balance.
…the hedge fund sideshow may be about to end, but for most Australian investors, the big fella is only going to get bigger.
No, it isn’t. It’s going to get much smaller. It already is. Are hedge funds the story when the Australian price is crashing as well?
When your political economy is dedicated to backslapping instead of critical thought, mediocrity is a self-fulfilling prophecy.
