Month: March 2012

This tenth trading week of 2012 comes to a close with investors keeping a close eye on oil prices and unfolding events in Greece. Hi.

The past week in monetary policy and central banking saw just one central bank change interest rates, with Brazil cutting rates 75 basis points to 9.75%.  Meanwhile those that held interest rates unchanged were: Australia 4.25%, Kenya 18.00%, Poland 4.50%, New Zealand 2.50%, EU 1.00%, UK 0.50%, Korea 3.25%, Serbia 9.50%, Peru 4.25%, Canada 1.00%, Malaysia 3.00%, and Indonesia 5.75%.  The Reserve Bank of India also made headlines, cutting its Cash Reserve Ratio by 75 basis points to 4.75%.

Looking at the central bank calendar, the main event next week is the US Federal Reserve’s FOMC (Federal Open Market Committee), Wall Street will be watching the release closely for any signs of further Quantitative Easing e.g. “QE3” or even sterilized quantitative easing. The Bank of Japan meeting and Swiss National Bank meetings will also be worth watching.

By MoneyMorning.com.au

In 1998, upmarket US department store chain, Nordstrom [NYSE: JWN], launched its online shop. It was one of the first big department stores to move from catalogue shopping (a large American trend in the 1990s) to internet sales.

And now, a decade later, this transition has paid off. It has created a shopper-friendly website, helping online sales top $1 billion dollars last year. About 10% of Nordstrom’s total revenue. The stock price hasn’t done too bad either.

Nordstrom [NYSE:JWN] stock up 267.78% since the web store launch

Click here to enlarge

Gerry Harvey (owner of the Harvey Norman retail chain) argued back in March 2011 that goods bought online from overseas merchants don’t have GST on top of the price… This makes them cheaper for Aussies to buy, which, Harvey says, is stealing sales from Aussie-based retailers.

But perhaps Aussie retailers don’t have that to worry about after all…

The Australian Communication and Media Authority’s (ACMA) ecommerce report on internet shopping habits for Australians had some surprising results.

According to the ACMA’s latest ecommerce report…

• 59% of Australians shop online
• Online shopping is up 53% from two years ago
• 70% of Aussies in remote locations buy stuff on the web
• And, surprisingly, 53% of Aussies like to buy from Aussie retailers

The evidence from the ACMA report clearly suggests Aussies want to buy from domestic companies. But big Australian retailers, like Myer, David Jones and Harvey Norman have been slow to embrace this.

Probably because no one wanted to make the first move into the market after the dot-com crash of 2000…

No Aussie business wanted to be the first to invest heavily in another ‘dot-bomb’ enterprise.

Maybe it was fear. Or retailers were too late to capitalise on a growing trend. But by letting the chance slip past, retailers such as Harvey Norman, Myer and David Jones have seen their stock prices tank.

But that may be about to change…

Since Nordstrom announced its $1 billion sales success using the web, David Jones [ASX: DJS] has decided it wants to copy Nordstrom’s model. ‘They’ve been operating an online business for just over a decade and they’re doing about 10 per cent of sales and about 20 per cent of EBIT (earnings before interest and tax) which has come from online,’ said CEO of David Jones, Paul Zahra, on Nordstrom’s online turnover
The thing is, DJs has dabbled in online retail before.

It set up an online shop in 2000. But after the dot-com crash, DJ’s management shut down the shop front. That seems a waste, considering the company spent $28 million to set up the site.

But the ‘relaunch’ of the David Jones online store (in November 2010) hasn’t done much to boost investor sentiment. Since the web shop started up, the David Jones share price is down 44.46%.

DJs may want to copy Nordstrom’s $1 billion turnover, but reaching 10% internet sales might be harder than it thinks. For the 2011 financial year, David Jones turned over $2.017 billion. Internet sales for the company accounted for just 0.2% of revenue. Barely $3 million. In order to reach 10%, it’s going to need to increase its online sales 5,000%.

DJs isn’t alone in the below expectations internet revenue department either.

Australia’s other major department store chain, Myer [ASX: MYR], launched its limited online store in 2007 (selling mostly perfumes and gift cards). And the full shopping website came online in March last year. In 2011, internet sales accounted for $5 million of Myer’s sales… on par with David Jones at a small 0.18% of revenue. And the share price has tanked 35.73% in that time.

And what about Gerry Harvey? He had high hopes of Harvey Norman [ASX: HVN] capturing 5% of revenue through online sales… and less than two months since its launch, internet sales make up 0.5% of sales.

Of course, it’s still early days. And given the time to grow and develop, Gerry could one day make 5% of all his sales through the internet. When that will be, who knows?

The fact is, the opportunities for online sales were there a decade ago. Yet the major Aussie retailers just weren’t interested

Sure, growth in retail is small, coming in at 0.1% for the December quarter last year. But would these companies’ revenues and stock prices have suffered as much if they had developed an online shopping outlet sooner?

As you’ve probably seen in the past, taking chances can pay off. And it certainly did for this one small Aussie company who made the move online and returned higher revenues and a much higher stock price to investors.

Oroton Group [ASX: ORL] isn’t an everyday company. It specialises in luxury items. Handbags, wallets, belts, small luggage bags, heck even a key ring from the company will set you back a pretty green $100 note. The average handbag from Oroton costs about $500.

In 2006, when Oroton Group Ltd’s share price was scraping around the bottom, the company took a gamble. It launched a website to sell its goods online. Since then, its share price has moved 346.93% higher.

And despite offering leather goods that cost more than a set of tires for a small car, it was able to report a 12% increase in revenue for 2011.

Sally MacDonald, the chief executive for the company, confirmed its commitment to its online presence rather than physical stores.

‘Online is giving access to a consumer pool that their store network previously did not allow for, which is bringing very strong sales through their online channel.’

In fact, the company plans to close less profitable stores when leases expire and invest that money back into web sales.

In 2010, the Oroton online store became one of the company’s ‘top 5′ most profitable stores. Reducing business costs along the way.

And even though the company has distribution rights to another luxury brand, Ralph Lauren in Australia and New Zealand, the Oroton online store accounted for more than 6% of total brand sales last year.

Not only has there been significant capital growth. Investors have seen the dividend grow 10 times – from 5 cents to 50 cents – since the company introduced web sales.

The market presented an opportunity and the Oroton Group took the risk.

Let’s say, that Oroton ‘read’ the market right. And Myer, David Jones and Harvey Norman got it wrong. Judging by the way the market is pricing them right now, they’ve paid the price.

Does that mean you should snap up these beaten-down retail stocks now, in the hope their new web presence will turn sales and sentiment around? After all, now they know what went wrong, they’ll fix it and before you know it… they’ll report triple-digit gains?

Not likely.

They’re behind the times. The internet is old. Mobile technology is growing. These companies aren’t leading the pack. They’re chasing the crowd.

If you’re looking to bag yourself an explosive triple-digit winner, you should look at companies willing to try something new. Something innovative. Not another ‘me-too’ company chasing after the game changers.

Like Oroton, those companies are out there. But you have to find them. And investing in them means you take on the risk that they’ll fail – and if they do, you’ll lose your money or get stuck with a worthless stock.

But, they could turn out to be onto something… something the consumer wants.

And if the company calls it right, buckle in and enjoy the triple-digit ride.

Shae Smith
Editor, Money Weekend

The Most Important Story This Week…

The worst enemy of every investor is usually themself. Because investors almost always allow their emotions to run riot in the very moments that call for calculation and logic. The fact that every investor is aware of this phenomenon doesn’t alter the crowd response. People sell in bear markets and buy in bull markets. But to “buy low and sell high”, you need to do the opposite – accumulate beaten down shares in the bear market and sell in the bull.

When investor sentiment turns to fear, risky small cap stocks are crushed. For certain companies, prices drop far below fair value. These are the very winners that will rise the highest in the next bull market. But you need to buy them when you natural reaction is to want to play it safe on the sidelines. As Kris Sayce writes in Why I Couldn’t Care Less About The Next Bailout When it Comes to Buying Shares, with an appropriate risk management strategy, the rewards for courage can be staggering gains.

Other Highlights This Week…

Dan Denning on Why Energy Resources Are The Only Reason to be Invested in This Market: “If you’re going to be in the market at all right now, you might as well own companies that give you the chance to make five or 10 times your money in the next five years. Unconventional energy stocks fit that description. In the bigger picture, you want an investment portfolio you can sleep with at night.”

Matthew Partridge on Even China Admits a Hard Landing is Getting More Likely: “On the one side, you’ve got those who think the Asian giant is going to keep growing, growing… and growing. Others point out that China is not immune from the rest of the world’s woes – and that it has its own batch of problems to deal with on top. We’re in the bearish camp.”

David Stevenson on A Warning From Warren Buffett’s Top Economic Indicator: “That’s why it’s worth keeping an eye on what Buffett is doing – and on what he’s watching. So today we want to take a look at Buffett’s favourite economic indicator. It’s the one that tells him all he needs to know about the US economy. And it’s not looking good…”

Greg Canavan on Using Aussie Dollar Gold to Hedge Against Deflationary Turmoil “So don’t be seduced by the price action. Be wary of the crowd. Stay away from the running, blundering herd. And most of all, be patient. It won’t be long before deflation rears its head again. At which time steel yourself to wade into the market and buy some very undervalued companies.”

Dr. Alex Cowie on why This Could Be A Very Profitable Couple of Months for Small-Cap Mining Stocks: “You just have to look around the market to see that we are back into a market where risk-tolerant investors can make good money on explosive moves. It’s not just gold, silver and oil stocks. One copper explorer has jumped 109% in eight trading days… Put another way, this intersection contains more copper than the result that put Sandfire Resources on the map.”

Why it May Be Too Late for Retailing Slow-Coaches to Get Online

Ford (NYSE:F) CEO Alan Mulally reaped the benefits of breathing life back into the downtrodden car maker, receiving $58.3 million in stock as part of a plan from 2009.Ford compensated the CEO over $100 million in stock over the prior 2 years.Ford Motor Company designs, manufactures, and services cars and trucks. The Company also provides vehicle-related financing, leasing, and insurance through its subsidiary.Ford Motor is currently above its 200-day moving average (MA) of $11.80 and should find resistance at its 50-day MA of $12.17. In the last five trading sessions, the 50-day MA has climbed 1.04% while the 200-day MA has slid 0.34%.

Indonesia’s central bank, Bank Indonesia, held the BI rate unchanged at 5.75%.  The Bank said: “To control short-term temporary inflation pressure, the policy will be focused on strengthening monetary operation and managing short term excess liquidity. Besides strengthening policy coordination with the government at national level as well as at regional level through TPI and TPID forums. Although there is a tendency of inflation to go beyond the target due to temporary impact of government policy on fuel subsidy, with various policy implemented by Bank Indonesia and the coordination with the government, Bank Indonesia is confident that inflation in 2013 will return to its range of 4.5% ±1%.”

The Bank cut the rate by 25 basis points at its previous meeting, and cut the interest rate by 50 basis points at its November 2011 meeting, and also cut the key monetary policy rate (the BI Rate) by 25 basis points to 6.50% at its October meeting.  Previously the Bank raised the BI rate by 25 basis points to 6.75% in February 2011.  Indonesia reported annual inflation of 3.56% in February, compared to 3.7% in January, 4.1% in November, 4.61% in September, 4.79% in August and July, 4.61% in June, 5.98% in May, 6.16% in April, and 6.65% in March, and just below the inflation target of 5% +/-1% in 2011 (which changes to 4.5% +/-1% in 2012).  

Bank Indonesia has previously forecast GDP growth of 6.3-6.8% in 2011 and 6.4-6.9% in 2012 for the Indonesian economy, meanwhile Indonesia reported annual GDP growth of 6.5% in the June quarter last year. The Indonesian Rupiah (IDR) has weakened by about 5% against the US dollar over the past year, while the USDIDR exchange rate last traded around 9,135.  Bank Indonesia next meets on the 12th of April this year.

The Bank Negara Malaysia kept its Overnight Policy Rate (OPR) steady at 3.00%.  The Bank said: “Headline inflation is expected to moderate in 2012. Nevertheless, upside risks to inflation could emerge arising from the risk of supply disruptions and the possible financialisation in commodity markets, which would result in higher energy and commodity prices. In the MPC’s assessment, while global financial conditions have improved, downside risks to the global economy remain. The high global commodity prices continue to pose risks to inflation. The MPC will continue to carefully assess these evolving conditions and their implications on the overall outlook for growth and inflation.”

The Bank Negara Malaysia previously kept the rate unchanged at its February meeting, and last increased the OPR by 25 basis points to 3.00% in May last year, it also increased the Statutory Reserve Requirement (SRR) by 100bps to 3.00% at that meeting, and increased the SRR again in July by 100bps to 4.00%.  Malaysia saw inflation of 2.7% in January, down from 3.4% in September, 3.3% in August, 3.4% in July, 3.5% in June, 3.3% in May, 3.2% in April, and 3.0% March.  

Green Mountain (GMCR) was downgraded today by Bank of America/Merill Lynch (BAC) to neutral with a price target of $63, as new Starbucks (SBUX) offerings could create new competition. Shares are lower by over 15.6 percent.

The Bank of Canada held its target for the overnight rate at 1.00%.  The Bank noted on the Canadian economy: “Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.”

Previously the Bank of Canada also held the target interest rate unchanged at its January meeting; it’s last move was a 25 basis point increase to 1.00% in September last year.  Canada reported annual CPI inflation of 2.5% in January, compared to 2.9% in November and October, 3.2% in September, 3.10% in August, 2.7% in July, 3.1% in June, 3.7% in May, and 3.3% in April, the same as March, according to Statistics Canada.  The Bank of Canada has an inflation target of 2 percent over the medium term.  

Tri Continental Corporation (TY) announced its quarterly dividend of 10.5 cents per share, an increase of about 40% over its prior dividend in December of 7.5 cents. Dividends on Common Stock will be paid on March 29, 2012 to Common Stockholders of record on March 20, 2012.

The Bank of Korea maintained its 7-day repurchase rate unchanged at 3.25%.  The Bank said: “Although construction investment has been sluggish, consumption and facilities investment have increased and exports have shown a steady expansion. On the employment front, the uptrend in the number of persons employed is being sustained, led by the private sector. The Committee anticipates that the domestic economic growth rate will gradually return to its long-term trend level going forward, although viewing downside risks as likely to remain high for some time due mostly to the impact of external risk factors.”

At its January meeting the Bank of Korea also held the interest rate unchanged at 3.25%, after increasing the 7-day repurchase rate by 25 basis points to 3.25% at its June meeting.  South Korea reported a steady consumer price inflation of 3.1% in February, compared to 3.4% in January, 4.2% in November, 3.9% in October, 4.3% in September, 5.3% in August, 4.7% in July 4.4% in June, 4.1% in May, and 4.2% in April. 

The inflation rate is currently just within the Bank’s inflation target of 2%-4% through 2012.  The South Korean economy grew 0.4% in Q4 (0.8% in Q3, 0.9% in Q2), placing annual GDP growth at 3.4% (3.5% in Q3, 3.4% in Q2).  The South Korean Won (KRW) has gained about 1% over the past year against the US dollar, while the USDKRW exchange rate last traded around 1,117.