The United States housing market, which has been the main cause of the financial crisis, remains in the doldrums. Figures released in the US last night show that the S&P/Case-Shiller Home Price Index, which is the most widely used measure of house prices, declined by a further 1.8% in September.

The Government’s financial accounts for the three months ended 30 September were better than expected from an operating point of view. However the post-election government, whether it is National or Labour-led, won’t have a lot of money to play with.

The partial sale of a number of Government owned commercial assets would be a better way for the Crown to raise new funds instead of directing the New Zealand Superannuation Fund to invest a higher percentage of its money in the domestic economy.

Government guarantees – But what about my finance company?

It’s been a year since we launched the Milford Aggressive and Peak unit trusts and the Aon KiwiSaver Milford Aggressive Fund and what a year it has been!  The market volatility has been extreme and as bad as we have experienced over our many years in financial markets.   The good news from our perspective is that the Milford funds have substantially outperformed the Australian and New Zealand sharemarkets over the past 12 months.

Welcome to the first edition of Guinness Peat Group Watch. The Watch will be published on a regular basis because of serious concerns over the governance, performance and strategy of the widely held investment company.

There is no guarantee that mortgage rates will fall when Dr Alan Bollard cuts interest rates, as expected, on 11 September. This is because of the international credit crunch which has widened the gap between official central bank interest rates and mortgage rates over the past twelve months.

Recent announcements by Merrill Lynch and National Australia Bank provided specific information on how bad things have got in the collateralised debt obligation (CDOs) market.  Their announcements were a more realistic approach to valuations in the current market environment and provide a guide on the extent of the write-downs that still need to be made by some overseas banks and for some investment vehicles that New Zealanders have invested into.

The composition of the Capital Market Development Taskforce shows once again that politicians have no idea how capital markets work. They continually look at one side of the equation but totally disregard the other, which is the investor.

We continue to have a cautious view on the global economic and market outlook as:

Milford’s three Portfolio Investment Entity (PIE) funds, which were launched on 1 October 2007 to take advantage of the new tax free capital gains regime, have continued their  strong start, relative to a very tough sharemarket environment.

The lack of response to the finance company failures by the Government, Reserve Bank, Securities Commission and Companies Office is a disgrace. The protection of depositors is the foundation of any financial system yet our politicians and regulators failed to anticipate the finance company meltdown.   Why haven’t we learned from our past mistakes?

The response to Mark Stewart’s purchase of a 15.2% stake in Wakefield Health, at $9.00 a share, indicates that investors are sceptical he can produce the same magic at the Wellington hospital group as he did with Abano Healthcare.

Voting figures from the Guinness Peat Group annual meeting, which was held in London on 13 May, indicate that shareholders are becoming increasingly dissatisfied with the group’s poor sharemarket performance.

Yesterday’s Australian Budget demonstrates once again why many high skilled New Zealanders are leaving the country to live and work across the Tasman. Basic tax rates are lower in Australia and they will drop again after Labour’s first Budget there for 13 years.

Today’s announcement from BG Group (BG) was vague and didn’t have much positive news for Contact Energy shareholders.  BG stated that if its offer for Origin Energy is successful the company will be required to make a cash bid for Contact within one month. The Contact bid will have to be at the value per share attributed to Contact by the BG Group in its Origin offer and will have to be verified by an independent expert.

The best thing one can say about the railways is that they lasted longer under private control than Air New Zealand.

Local investors have suffered a rude awakening over the least six months realising that many so-called low risk fixed income investments are not always what they appear.  Income (and capital!) can be significantly at risk if the deposit-taking institution faces liquidity and/or confidence problems.  By contrast, dividends paid by listed New Zealand companies look increasingly attractive and are generally underpinned by strong cash flow and therefore may offer some comfort in nervous markets.

GPG’s gravy train just keeps on rolling with the recent issue of a further 4.15 million options to directors.  The five directors now have 57.7 million options between them with Sir Ron Brierley having 2.9 million, Graeme Cureton 13.4 million, Tony Gibbs 13.8 million, Blake Nixon 13.1 million and Gary Weiss 14.5 million.

At the start of this year we said that the 2008 year could be a tale of two halves with economic and corporate news from the United States and New Zealand likely to be ugly through the first and second quarters but possibly starting to improve as the year goes on.  Unfortunately this is probably now the best case scenario with significant potential head winds in place for the local and global economies that may stretch into 2009. 

Current Account Deficit – A temporary improvement?

The Canadian Pension Plan Investment Board (CPPIB) has passed the first hurdle as far as Auckland International Airport (AIA) is concerned but the next barrier, the political one, may be the hardest.

The dramatic decision to change the Overseas Investment regime during the takeover offer for Auckland International Airport is a frightening reminder of the Robert Muldoon era.

Auckland International Airport’s (AIA) latest recommendation on the Canada Pension Plan Investment Board’s (CPPIB) partial offer indicates that the directors want a two way bet.

The collapse of The Joneses gives a clear message that entrepreneurs should take a long term view when contemplating stock exchange listing and independent advisers must adopt a more cautious approach when valuing loss making companies.

Tower chairman Tony Gibbs was in great form at today’s annual meeting as he batted away a large number of questions on costs, staff levels, dividend policy, potential takeover offers, KiwiSaver and the group’s exposure to credit markets.

The debacle over MFS Pacific Finance highlights the problems associated with related party transactions and the difficulty in obtaining full value for these arrangements.  MFS Pacific Finance is 100% by owned by the NZX listed MFS New Zealand with the latter being 38.5% owned by the ASX listed MFS.

Sanford’s annual meeting, which was held in a sweltering tent under the mid-day sun, was not an optimistic start to the 2008 corporate year.

The sharp decline in Metlifecare’s share price, from $7.00 to $5.25 yesterday, reflects the difficulty of selling large share parcels in a thin market.

Milford’s three Portfolio Investment Entity (PIE) funds, which were launched on 1 October to take advantage of the new tax free capital gains regime, have had a strong start under difficult sharemarket conditions. For the December quarter the Milford Aggressive Fund had a positive return of 7.3%, the Milford Peak Fund 3.3% and the Aon Kiwisaver Milford Aggressive Fund 7.5%. This compares with a 5.6% decline in the NZX 50 Gross Index over the same three month period, a 5.3% fall in the NZX Portfolio Index and a 4.3% contraction in the Australian All Ordinaries Index (in New Zealand dollar terms).