21 December 2023
Bond-related yields vis a vis Share market returns
Stock markets reflect global uncertainty with the Russian war against Ukraine and the Hamas terrorist attacks on Israel being prime causes of current global markets uncertainty augmented by huge government debt in the USA, Europe, the UK and Australia. High government debt-funded spending drives up interest rates and keeps rates higher for longer. Government lack of budget discipline is a prime cause of inflation. There is always a price to pay.
We may be nearing a point where share prices fall to a price at which returns comparable to bond yields attract investors back to the market.
For the past three years our family superannuation fund has had well over 50 percent of capital invested in a combination of cash (mainly Macquarie Accelerator account) and an extensive group of bank hybrid securities issued by the four major Australian banks plus Macquarie Group. These are issued at a specified margin above the Bank bill swap rate (BBSR) a rate closely related to bank bill rates which in turn relate to Australian government bond rates. At present these are paying returns above 7 percent. It is expected that the time to shift the balance toward more shares will occur after another interest rate increase by the US Federal Reserve causing a further firming of interest rates.
The Ukraine War
Sifting through competing claims suggests that neither Russia nor Ukraine is likely to achieve a substantial victory until well into the North European spring and summer in 2024 at earliest.
The Gaza War
The horrific slaughter of Israel citizens by Hamas has resulted in a massive Israel operation to rid it of the Hamas threat. When and how it will end is perplexing. Operations against deeply embedded tunnel networks are among the most difficult military operations. When those tunnel networks have been located under a densely populated area with access points beneath civilian infrastructure, the difficulties are profound. Hamas has put the Gaza population at risk to mask its attacks on Israel. The Vietnam war experience of Vietcong emerging from tunnels behind US/Australian/South Vietnamese lines is an example of use of tunnels in warfare. Another was the Allied and German forces tunneling against each other on an extensive basis on the Western Front in World War One. It is difficult to comprehend how Israel could do other than attack Hamas and its’ tunnel network inside the Gaza Strip given the extent of the Hamas slaughter of its citizens. There is going to be a huge price to pay regardless of temporary cease fires. The big remaining question is who and how will Gaza be governed and rebuilt in the future.
The outbreak of anti Semitism in Australia is extremely troubling
One of my degrees contained a double major in history which enforces recognition of historical rules of evidence. It is troubling that teachers who should know better fail to provide students with proper historical context which in the case of Israel and Palestine is at least several thousand years old. The area we know as Israel and Palestine has had the experience of being invaded many times over thousands of years but there have been Jewish people living in the area since ancient times. Invaders/occupiers have included Persians, Syrians, Egyptians, Romans, Muslims, Christian Crusaders, Turks and World War One allies led by the British who defeated the Turks and this is a vast simplification of history. British rule gave way to the UN partitioning into Israel and Palestinian portions in 1947. Almost immediately the surrounding Arab nations declared war on the infant state of Israel, which against overwhelming numbers and global surprise Israel won leading to Palestinian refugees, and so began a recurring pattern of wars and troubles.
The Mount on which a sacred Muslim site rests was once the site of the Jewish temple built by Solomon which was demolished by the Romans following the Jewish insurrection against Roman rule. Jewish, Christian and Muslim sacred sites exist in close proximity. The foundations of Christianity began with the followers of Jesus Christ and his original disciples who were Jewish. The Christian, Muslim and Jewish religions all have Abrahamic roots.
Australian political rebalancing
The Albanese Government invested a lot of its political capital in support of the Yes vote at the recent referendum and finds itself midway through this term of government with political problems mounting. The paradox is that well-to-do suburban areas which historically were Liberal territory have swung to Teals, Greens and Labor, while traditional working-class areas are swinging toward the Liberals. Will the next election result in a hung parliament or Labor/Green coalition? Or a narrow Liberal/National coalition win? In 1924 the Albanese Government needs to reset itself in preparation for an election by May 2025.
Record immigration is blamed for a housing crisis with the government target of 1.2 million new homes over five years already well behind schedule. Attacks on rental housing with greater regulation favoring tenants and higher land tax has seen Victorians shedding ownership of rental housing at an unprecedented rate. The flow on impact is in high rise development. Developers have traditionally been able to count on 50 percent of units being purchased by investors to rent but that market has effectively been destroyed in Melbourne. Developers are required to have in the order of 70 percent of units presold on binding contracts before banks will finance construction which creates a substantial impediment to building. This has a flow on impact in a rapidly growing housing shortage.
Federally the government is facing emerging resistance to its industrial relations changes with strong opposition from business particularly from mining and agriculture on which Australia depends for exports and much of its government tax revenue.
The energy transition faces a myriad of problems ranging from environmental objections to high voltage power lines destroying Koala habitat, farmers objecting to the impact on valuable but scarce farmland, Newcastle and NSW central coast objections to huge wind powered generators off the coast in the path of whale’s migration paths. As well the Snowy part 2 pumped hydro scheme is many $billions over budget and years behind schedule. Minister Bowen keeps talking up the 2030 target but is increasingly unlikely to achieve his projections. He has now announced newly increased subsidies for new energy projects but has refused to tell the taxpayers what those subsidies are! Not exactly the government behavior expected in a democracy.
Can the Albanese Government reset and ward off an emerging threat by the less than popular Dutton?
Ekera Dental sale on hold; Private equity pass the parcel tactics drying up
The Australian 21 November reports that “The Growth Fund” has placed its sale plans for Ekera on hold. Apparently initial bids for it did not meet expectations.
Meanwhile a variety of private equity owned businesses have suspended sale processes as debt has become significantly more expensive with interest rises globally post the Covid period of extremely cheap money. In this environment potential buyers cannot make profit projections match their expensive funding as main stream banks avoid risky deals and alternate lenders demand much higher rates.
Ekera Dental which has 46 dental clinics is owned by Australian private equity firm “The Growth Fund” and were reported as seeking to sell for up to $300 million, an astonishing figure. Crescent Capital, owner of National Dental Care apparently withdrew from pursuit of Ekera.
These corporate games are a reminder of the failed 1980’s entrepreneurs who bought and sold businesses with mountains of debt but were eventually wiped out post the 1987 global stock markets crash, after which buyers for their price inflated assets disappeared and one by one the entrepreneurs collapsed.
The fundamental weakness of these corporate dental models is that they cannot achieve significant staff savings because a dental team of dentist and chairside assistant can only treat one patient at a time. Teaming up with health funds to milk fees from patients with ancillary health cover has severe limitations. With a nation-wide cost of living squeeze ancillary (extras) health cover membership is at risk of substantial contraction. The $300 million price tag on Ekera appears to be fanciful in the extreme. There are shades of Alan Bond paying $1 billion for Kerry Packers Sydney and Melbourne TV stations. Packer predicted that he would buy them back in several years for a fraction of what he had received. He did even better as the buyback included Bonds’ Brisbane and Perth TV stations as well. The heavily in debt Bond with many other debt-financed businesses was swallowed up by rising interest rates and declining business values. He was bankrupted and also spent time in jail. Packer laughed all the way to the bank.
EBOS walks away from $3.75 billion Greencross veterinary and pet products business. Candidate for bellyflop of the year
Support from institutional investors was insufficient leaving too many shares to be soaked up by retail investors putting the deals underwriters at risk. The underwriters Macquarie and UBS would not have risked having to buy a big shortfall and effectively carry a loss. The usual excuses and platitudes disguise the fact that the markets appetite for buying/financing overpriced assets has diminished in a period of monetary tightening and rising interest rates. A series of public floats leaving investors out of pocket had soured the market. It is likely that Macquarie and UBS were unable to get sufficient sub-underwriters to 3rd party off the risk, a sure sign that the market for these over-priced over-hyped deals has evaporated. Private equity firms are now under increased pressure to sell assets and reduce debt
Recent accounts reveal that Greencross had geared up with almost $1 billion of external debt having paid back loans from TPG its majority private equity owner. Its other major shareholders are Australian Super and the Healthcare arm of Ontario (Canada) Pension Plan. See Australian Financial Review 23/11/23. With hardware giant Bunnings carrying an increasing range of pet products, as are supermarket chains, the pet products arm of Greencross, the Pet Barn business, faces stiffer competition. EBITDA rather than profit multiples are cited in these deals with the ‘I’ for interest being played down but rising interest costs causes profit to plummet.
Greencross was formerly listed before private equity buyout and the assumption that it was worth much more when being re-sold into a stock market listed vehicle is reminiscent of the entrepreneurial pass the parcel games played by failed 1980’s entrepreneurs.
Rooftop solar is destroying energy markets! Industry rumors of fire sales of some wind and solar farms
The problem is that our roof top solar is generating its maximum power production in the middle of the day and undercutting wholesale power prices but is not producing at night when our usage peaks. The more household solar panels the greater the impact on wholesale electricity prices making solar and wind farms uneconomic. See AFR22/11/23.
There is also growing strong opposition to building high voltage trunk electricity lines through prime agriculture land as well as the destruction of timberland habitat of threatened species.
There is increasing awareness that we need nuclear power which can be brought on line quickly at peak usage times and which if plants are situated near existing coal fired plants enable existing electricity trunk distribution networks to be used.
Sale of electric vehicles will be far below 2030 target
Recent projections foresee electric motor vehicle acquisition being less than one third of the 2030 target figure. Problems include battery fires resulting in write offs, external damage and very high insurance premiums while the heavy weight of the vehicles increase tire costs and wear. Additionally recharging batteries on long trips remains a huge impediment.
Origin Energy Sale flop of the year
A proposed sale fell through amongst much acrimony. Industry Super funds were not supportive of a deal which would have delisted this major company from the ASX. The funds are coming to the realization that it is essential that our market contain sufficient spread of large companies to enable them to price members superannuation assets reliably. The funds are already under sustained criticism concerning the timing and accuracy of valuations on unlisted assets.
Accounting bodies make huge losses!
The professional bodies of the chartered accountants and its rival certified practicing accountants have both been reported as having huge losses which raises the question as to how good accountants are at business. The answer sadly is that most are not.
Financial Success for Dentists
Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:
· Understand key practice valuation criteria.
· Learn how some dentists inadvertently reduce the value of their practice by $500,000
· Avoid long term errors when purchasing your practice.
There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.
I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.
A complete and comprehensive career guide for mature and aspiring dentists.
Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.
—Merv Saultry, Founder Dental Innovations Network
To Obtain a Copy:
· Go to the Delany Foundation website at http://www.delanyfoundation.org.au
· Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.
· Email graham.george.middleton@gmail.com confirming that your donation has been made, as well as your name and mail address
· A copy of the book will be mailed directly to you
All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.
The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.
Please Pass On
If you like these newsletters, please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly at graham.george.middleton@gmail.com
Independence And Disclosure
I am not a representative of any accounting practice, financial planning firm, business or marketing consultancy. I spent 33 years as a business and financial adviser to mainly dental, medical and veterinary specialist and general practitioners. Since I retired as a director of a financial services group, of which I had been a founder, on 30 June 2020, I am no longer licensed as an investment adviser. Readers should treat the above as general advice and take professional advice as required.
General Advice
I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. My website is now available at grahammiddleton.com.
Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.
Best wishes to all
Graham Middleton
