KEY POINTS:
A couple of unusual and fascinating dispatches have emerged from the front lines of the crisis in the past week or so, one of them from the Sage of Omaha Warren Buffett, urging investors to "Buy American. I Am" in an op ed piece in the New York
Times.
To his credit Buffett has shown considerable leadership in publicly buying up chunks of stock, including in investment bank Goldman Sachs on which he is already under water.
Having committed his vast Berkshire Hathaway holdings to philanthropy, Buffett is now buying on his own account.
"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors."
Over the long term, he argues, as long as you don't lose your head during the bad times, you can't lose by investing in the American sharemarket.
Who would argue with such a successful investor?
Then again, having made more money than anyone would have any reasonable use for, and being of advancing years, Buffett might have concerns other than long-term returns on his mind.
Helping to mitigate a highly destructive sharemarket panic in the industry and nation that has allowed him to achieve so much is not an inconsiderable legacy in itself.
Buffett's op ed piece can be found at www.nytimes.com.
CONTACT SPORT
Having last week addressed Contact Energy's hike in directors fees, Stock Takes is loath to keep on putting the boot in, but Massey University's newsletter Massey News has an article too pertinent not to share.
The university's accountancy professor, Paul Dunmore, who you would assume knows a thing or two about this, is quoted as saying the way Contact and other power companies report their financials understates their return on equity.
Contact reported a June year net profit of $237 million in August on shareholders' equity of $2.9 billion, giving a fairly modest 8 per cent return on equity.
But Dunmore says Contact chooses to revalue its major assets using "the optimised deprival valuation method, which in practice means the value reflects the future cash flows to be expected from using these assets".
Under this method, Contact's assets have been revalued by $1.9 billion since 1999 to about $4.4 billion and Dunmore estimates this increased the company's reported depreciation expense by $50 million or $60 million to $148 million.
"Based on what Contact's shareholders paid for the assets when they were acquired, Contact's profits would be around $290 million on shareholders' equity of $1 billion," says Dunmore.
"This is a return on equity of 29 per cent. The average over the last five years has been 27 per cent."
Furthermore, tariff increases boost operating cash flows "and so the optimised deprival value of its assets automatically increases".
"Under the accounting policies that Contact follows, this offsets what otherwise would have been an increase in reported profits and return on equity, providing justification for further price increases.
"In this way, accepted accounting practice provides cover for Contact and other energy companies to increase prices."
Contact shares closed down 29c at $7.02 yesterday.
DODGING A DRENCHING
At risk of coming up with yet another premature call that the worst of the credit crisis has passed, it is encouraging to see key rates in the US and European interbank markets easing, for eight days on the trot now.
Even another day of what is now fairly routine carnage on Wall St - a 5.7 per cent drop in the Dow - didn't stop the Libor from easing yesterday.
The Libor measures what banks charge each other for short-term loans. It seems safe to assume there will be further volatility to come, particularly in equity markets, but it's the credit markets that really matter at this point.
One factor helping to restore confidence is the US Treasury's US$540 billion ($913 billion) plan to purchase US commercial paper.
Big US fixed-interest manager Pimco will be acting as an adviser on the programme.
Pimco manages US$900 billion worldwide and about $2.5 billion in New Zealand and is looking to do more business here, particularly with KiwiSaver providers.
The company's Tokyo-based Asia Pacific managing director Douglas Hodge, who was here this week, told Stock Takes that while the crisis originated in the very markets in which Pimco plays, the company hasn't taken a bath.
"It's been both good and bad. It's a hurricane, but we're not in the eye of the hurricane; we're not even in the centre of the storm, but we are wet."
Pimco owns bonds issued by banks that have now failed, and some of the asset-backed securities whose prices have dropped "precipitously" .
However, Hodge notes most of these securities remain "money good" meaning the cash will still probably be repaid.
"There are times when you're concerned about the return on your money and times when you're concerned about the return of your money. As long as we get the return of our money then our performance is going to begin to recover."
OUT WITH A BONG
A successful figure in US capital markets is former hedge fund manager Andrew Lahde.
Santa Monica, California-based Lahde Capital Management reportedly posted an 870 per cent gain last year using credit derivatives to bet that the value of bonds and loans including sub-prime mortgages would tank.
However, Lahde has now wound up his company and returned cash to his clients, saying the market is too risky given the likelihood of collapse among the counterparties he dealt with.
He said farewell in an open letter published last week, and it's a doozy.
"With all due respect, I am dropping out," he writes, sarcastically thanking the Ivy League-educated investment bankers and the like who were "stupid enough to take the other side of my trades".
He also suggests George Soros "sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles".
He rounds things out with a call for legalisation of cannabis, or more particularly hemp, as a partial answer to America's dependence on imported energy and pharmaceutical antidepressants. A hat tip to Wellington blog The Dim-Post for spotting this. Lahde's letter can be viewed in full at us.ft.com.
RAINY DAYS
Fletcher Building continued last year's tradition of releasing two documents instead of a single annual report.
Fletcher spits out a glossy "annual review" of about 30 pages which has the light and fluffy stuff and pretty pictures.
Then it issues a much less-seen "annual report" which has all the details and notes to the financial accounts.
Is the building heavyweight being mindful of the environment or cost-control measures? Martin Farrell, Fletcher company secretary and general counsel, explained yesterday that it was more a cost issue and simple common sense.
Only 2500 people requested the full annual report, he said.
Little point then in boring folk with statements of accounting policies and regulatory disclosures.
The front cover of the 107-page annual report is this year sporting a muddy brown rain-spotted picture showing work at Fletcher's Tauranga harbour link project and headed "building resilience".
When asked if the gloomy image reflected sentiment, Farrell was quick to respond: "Only a passing storm!"
- Anne Gibson
ROD'S RICHES
Talking of Fletchers, the non-glossy annual report revealed the company paid $1,196,469 to non-executive directors in the year to June 30, 2008.
Chairman Rod Deane got a whopping $330,000, three times more than the rest of the non-exec board who got a standard $110,000 each as a base fee plus a few add-ons.
Deane lucked out on earning committee fees - a sum given to all the other directors who got around $28,000 each. Aussie Ralph Waters, former Fletcher chief executive, was paid $110,000 as a base fee, topped up with $23,500 in committee fees and $12,000 for "other fees".
Mind you, the sharp-tongued Waters does have to abandon Sydney to get to Penrose for board meetings.
Other non-executive Fletcher board members are Paul Baines (paid $149,000), Hugh Fletcher ($138,500), newcomer John Judge (just $7969 but he hasn't had his feet under the boardroom table long), Geoff McGrath ($145,500), Sir Dryden Spring ($141,500) and Kerrin Vautier ($138,500). The directors' Fletcher shareholdings are also listed in the report.
- Anne Gibson
CHANGE OF DIRECTION
Could shares in Rakon, the Mt Wellington-headquartered electronics business, be about to recover on the back of great geek news?
The stock has tumbled from more than $5 to a meagre $2 lately but Rakon was reported this week as being poised to ride the smartphone wave because it makes oscillating crystals - those cunning tiny thingies used in GPS systems, including those in smartphones.
- Anne Gibson
