KEY POINTS:
With the US sub-prime problem showing signs of intensifying, nervousness is rife in equity markets around the world.
While most of the damage so far has been to the financial sector in the United States and Europe, there are fears this mess will spread from Wall St to Main St and into the wider economy.
Lloyd Morrison's Infratil, with businesses in Europe and Australia as well as in New Zealand, is clearly mindful of the threat.
When the infrastructure company briefed analysts and media on its first half result this week, Morrison said a factor that contributed to a 50 per cent fall in net profit was the cost of some Standard & Poor's 500 put options - financial instruments that will make money for Infratil if the benchmark US stock index falls.
At the company's September 30 balance date it had invested US$5 million in the instruments which at that point had made a mark-to-market loss of $1.5 million. Since then Infratil has invested a further $13.5 million, which by Monday had made a mark-to-market gain of $2.4 million.
"The rationale is reasonably simple," says Infratil's Tim Brown. "We perceive there to be financial market risk and we can insure against this, so we are.
"Because you can't just buy such insurance off the shelf you are obliged to invest in a suite of options rather than just pay a premium."
Brown said the options were intended to mitigate against the general effect of a US sharemarket correction would have on economies and therefore its various businesses. Infratil has no direct exposure to the US market. Apart from the options, Infratil's recent $88 million equity raising was also done with trouble in mind.
"We want to be as well equipped as possible to take advantage of any major market correction, should this occur. It may never happen, but the best time to buy is when everyone else is selling."
So what are the chances of a major meltdown? "Impossible to quantify, but enough to make a very conservative approach warranted."
Infratil shares closed down 3c at $2.82 yesterday.
Misery loves company
The New Zealand market has not been immune to Wall Street's woes and the NZX-50 is again back around the levels where it began the year and down 6.6 per cent of its high of 4342.7 in May.
Nevertheless, most market-watchers remain fairly sanguine, saying the dearth of liquidity in the market of late shows most local investors are hunkering down and largely holding positions in sound, domestically focused companies until things blow over, or putting excess cash into bonds where longer-term interest rates are looking pretty attractive.
Of course if you're an outfit that invests in other listed companies, things are looking dire.
Fisher Funds' Kingfish is one of those. It hit a 20-month low of $1.18 this week from a peak of $1.66 in May.
Fisher's Barramundi Australian growth fund, which itself has taken a hit after one of its biggest investments, CreditCorp, came out with a big earnings downgrade, debuted a year ago at a premium to its issue price.
Fisher Funds' latest offering, Marlin, which invests in companies outside Australasia and made its debut three weeks ago, disappointed by immediately falling below its $1 issue price. Yesterday it was trading at 83c.
"Is it a case of too many punters buying into Marlin for a quick flick [hoping for a Barramundi premium] or a case of the market disappointed with the Fisher fund performances this year?" one market watcher wonders.
Good for some
On the other hand, it is, as they say, an ill wind. Sky TV pays for much of its programming in US dollars and ABN Amro analyst Carolyn Holmes has upgraded the broadcaster on the strength of her firm's currency forecast.
The ABN Amro FX team has boldly lifted its average full year 2008 NZ/US dollar exchange rate to US76.9c from US72.5c and its full year 2009 pick to US75.8c from US68.2c.
That has seen ABN Amro raise its forecast earnings per share by 0.8 per cent for full year 2008 and a healthy 5 per cent for 2009. Holmes says that would raise Sky TV's 2008 full year net profit by $400,000 to $101 million and full year 2009 by $6 million to $131.5 million.
ABN Amro's 12-month target on the stock has gone up 3c to $7.07. Yesterday Sky TV's shares closed at $5.69.
Holmes says the risk to her firm's Sky TV forecast is NZ/US dollar weakness. That's no negligible threat. The FX market is a fickle beast. Most of the major bank forecasters got it wrong in the middle of last year by predicting further falls when the kiwi dollar headed briefly below US70c and on their analysis more than a few businesses failed to hedge at what now look like pretty attractive levels.
Are ABN Amro's currency forecasters any more accurate than their trading bank counterparts?
AXE ups ante
As reported last month in the Business Herald, the launch of AXE ECN - NZX's assault on the ASX's Australian market monopoly - has been delayed until early next year because of regulatory issues.
The Australian Securities and Investment Commission (ASIC) found the initial model proposed by AXE ECN, which exclusively targets large off-market trades or "crosses", was pretty fiddly to accommodate. It has in effect now decided that AXE ECN should meet the requirements of a full service trading platform.
AXE ECN in turn has decided that if it has to meet those requirements, it may as well provide a sharply priced full trading service. It had planned to do so, says AXE chief executive Greg Yanco, but ASIC has effectively brought those plans forward. It will now provide full trading in the September quarter next year.
According to NZX chief executive Mark Weldon, AXE ECN would "provide a competitive offering to the ASX that will win business through a combination of better pricing for customers, better technology and market design".
ASX isn't just sitting around and has cut charges for crossings by almost 75 per cent.
Meanwhile, NZX and AXE have accused ASX of attempting to stifle competition, particularly via their submissions to ASIC on the matter.
"ASIC have rejected ASX's posturing and come out with a sound, well-reasoned response," said Weldon yesterday.
But ASX corporate relations manager Matthew Gibbs refused yesterday to rise to the bait. "ASX is pleased there is greater understanding of what the key issues are. We will continue to play a leading role in shaping a fair, workable and integrity-preserving regulatory framework."
To be successful, AXE ECN needs to capture only a small fraction of ASX's business. Given the venture is backed by leading investment banks Citigroup, CommSec, Goldman Sachs JBWere, Macquarie Securities and Merrill Lynch, its chances are looking pretty good.
NZX shares closed down 5c at $9.50 yesterday.
Place your bets
Next Tuesday marks the deadline for offers for SkyCity and the company's board will consider them at its meeting on December 5 or 6.
Stock Takes understands there are up to three potential bidders, one of which has completed due diligence. The second is partway through the process and may not be finished before the board meeting. There's been no word as to when or if the third party will even have begun the process by then.
Nevertheless, SkyCity's board hopes to update the market on potential bidders before Christmas, analysts are told.
SkyCity shares were down 16c at $5.18 yesterday.
Roller-coaster dollar ride painful
Market ructions have dragged the New Zealand dollar off its July highs but the bird is still flying at altitude.
Headlines containing the words "Dollar", "Exporters" and "Pain" have appeared frequently enough in the Business Herald over the last year for the odd curmudgeon to finger them as unimaginative cliches.
The fact is those words encapsulate a story which is more than ever showing up in companies' earnings.
Even market star Rakon, which reported results this week, has been feeling the pinch.
Its revenue of $89.9 million was well up on $50.5 million last year, but the market has high expectations of the company and its shares fell 65c to $4.50 on the day and a further 24c the next. It closed yesterday at $4.31.
