The O'Brien Column: Expect Shell to re-try Fletcher bid despite the doom-mongers

Friday 20th October 2000

October is becoming dire for investment markets just over halfway through the month.

Inflation for the year ended September was around 3%, the dollar shows few signs of an early recovery, the sharemarket is weak, oil prices continue to rise in the wake of more Middle Eastern troubles and some investors got a shock - probably misguided - when the Commerce Commission declined approval for Shell-Apache to acquire Fletcher Challenge Energy.

All that might suggest the end is nigh but there were some bright spots, particularly on the prediction front.

A fair number of New Zealand investors would be tucked up in their cots at midnight, so they probably missed an interview on US network ABC's World News Tonight on October 12/13.

The business section of the newscast carried an interview with Goldman Sachs strategist Abby Joseph Cohen about the likely direction of Wall Street.

Ms Cohen has built an impressive, some might say awesome, reputation for accurate predictions of movements in US equities. Last week she said the Dow Jones industrial index could hit 12,600.

That was a big call, considering the Dow Jones was at 10,034 as she spoke. The index had to rise 25% to prove Ms Cohen's prediction correct.

Assuming that happened, our market could get some spin-off but the possible downside would be the effect on the New Zealand currency because such a rise in the Dow Jones would signal continuing economic growth and higher corporate profitability in the US.

Recent movements in the New Zealand sharemarket were related, in some places, to weakness in a handful of shares.

A look at what happened so far this month suggests the decline went beyond a few shares.

The comparison of the number of rises and falls on each trading day, known as the "breadth of market," shows in the 10 trading days in October to last Friday falls outnumbered rises on nine occasions, and on four days the proportion was more than two to one.

Leading stocks set the pattern, which may have flowed on to smaller companies but the regular substantial gaps between falls and rises suggested the downturn was wider than a few key shares.

The 3% inflation figure for the year ended September was expected, given the increases in oil prices and the substantial hike in tobacco products.

Figures for the period to September did not bring in higher prices for home appliances, other products with a high imported content and the imminent rise in many foodstuffs and general groceries. They will be in the statistics for the quarter and year ended December.

Retailers will watch the trend closely because they are entering the most important period of the trading year.

Some reactions to the Commerce Commission's decision on the Shell-Apache-
Fletcher Challenge Energy situation were uninformed at best and mischievous at worst.

Reports that some Asian operators saw the decision as more government interference in business, and similar comments from New Zealanders who should know better, were indicative of what happens when market "experts" engage their mouths and sell orders before their brains.

There was an amusing side to criticism from Asia about supposed political interference in business, given the record of that region over the years.

The Commerce Commission has made some decisions over the 25 years of its existence that upset parties arguing before it.

No informed, as opposed to biased, observer of the commission's activities has ever accused it of being subject to political manipulation, irrespective of what they thought about the merits of particular decisions.

Shell will probably go back to the commission with a revised proposal or proposals and may go back more than once.

It would not be the first time people had to revise their opening stance to get a deal approved.

There were some favourable developments among the apparent carnage.

Shareholders in South Port and DB Group got good news. The former will offer to buy back two shares for every nine held at $1.10 as part of a programme to replace some capital with interest-bearing debt and achieve a more efficient balance sheet.

DB will have a 1:2 share cancellation and repay $3 for each cancelled share. Shareholders will receive $151.3 million from proceeds of the Corbans' Wines sale.

What the shareholders will do with the money is another issue. The brave could take up other equities but the cautious could be inclined to put the cash in the bank.

Notes:

* There was a mistake in last week's column regarding a devaluation in 1973. It was a revaluation of the dollar and the figure was a 10% revaluation, not a 19% devaluation. There was a devaluation in 1974.

* Two weeks ago in an article about price:nta ratios, AMP Office Trust's figure was given as 0.55. The company disputed the figure, which was taken from the share table. It says the figure failed to take account of convertible capital notes, which should be diluted for conversion.

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