Update No. 30 – 23/10/11

I mentioned in my post a fortnight ago that US housing starts were expected to continue their strong upward trajectory, well they were reported through the week here:

“Privately-owned housing starts in September were at a seasonally adjusted annual rate of 658 000. This is 15.0 percent (±13 7%) above the revised August estimate of 572,000 and is 10.2 percent (±13.3%)* above the September 2010 rate of 597,000.”

Notwithstanding the strong signs that the US is turning the corner, markets continued their downward trajectory this week, Europe is the big concern.  The key European powers are meeting over the weekend to propose a ‘solution’.  It remains entirely likely that nothing will come of it; a properly catastrophic failure (such as the Lehman collapse in 2008) is probably required to force action.

Despite all the calls for action, I think inaction and allowing events to run their course without significant political interference would likely have the greatest long-term benefits.  Unfortunately, our political leaders the world over need to be seen to be ‘strong & decisive’ and this causes them to act even when inaction is the prudent course.

The more I think about it, the more it puzzles me that we fail to accept the inherently cyclic nature of the (predominantly) capitalist world we live in. Don’t get me wrong, I understand the political motivation that drives the interventionist behaviour, I just think it is not in our best interests. For many years, a good savage downturn cleaned out inefficient/marginal industries in a country, driving productivity increases as the truly competitive industries thrived when conditions turned.  Too often interventionist policies are blunting the natural regenerative properties of capitalism.

To our holdings – although we have been performing (in respect of price) only marginally better than the market, the AGM season has provided some very ‘upbeat’ commentary about our holdings.  An example from one AGM this week is:

“At the end of the first quarter of FY2012, order intake is up 65% and unit sales are up 25% on the first quarter of FY2011.  As a result, our order bank at the end of September 2011 is up 155% on the order bank at the end of the prior corresponding period”

Now the prior period was an historically weak one for the above business and I had this firm pencilled in for significant sales and operational improvement this year.  I didn’t however picture anything like a 155% growth in back-orders, that type of superior business performance materially increases the intrinsic valuation and we already acquired them at less than half my previous estimate of IV!  The gains will come, of that I am very confident, but the present sentiment dulls the response even to such positive announcements.  Unfortunately the gains in some of our holdings have been offset by the ongoing takeover saga surrounding one of our largest holdings.  An AGM must be called soon and we should get a better understanding of exactly what’s happening there – Tony Hansen 23/10/2011.

EGP Fund No. 1 Pty Ltd. Down by 7.33%, leading the benchmark by 1.30% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 0.45%, leading the benchmark by 12.75% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 10.46%, lagging the benchmark by 2.83% since July 1^st.  Since inception the EGP20 is Down by 20.88%, lagging the benchmark by 8.58% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 8.63% since July 1^st. The benchmark is Down 12.30% all-time (since April 1^st 2011).