After peaking around 16% in 1982, the yield has been in long term decline, interrupted by the savage bond bear market of 1994. The decline in bond yield has been largely the result of a structural decline in global inflation. At least, this was the explanation until the last few years. Over the last 10 years, the bond rate has averaged 5.5%. But since the onset of the GFC in 2008, we have seen record new lows, culminating in the present rate of 3.25%. This is extremely low, even compared with the current official cash rate of 3.75%, creating an inverse yield curve – usually a predictor of a slowing economy.

On the upside, the Australian sharemarket is currently trading on an historic dividend yield of around 4.4%, plus franking credits (approximately 70% of market dividends are franked). Looking forward, the dividend yield is closer to 6.0%. Compared with recent history, this is a very large premium to the bond rate, and indicates that shares are cheap compared to bonds (or bonds are expensive compared with shares).

Greece is headed for a fresh general election after political leaders failed to agree on a proposal by the country’s president to form a technocratic government with a limited mandate. Greek President Karolos Papoulias has been meeting with political leaders this week after the inconclusive election on 6 May failed to produce a government. A second election threatens to extend the country’s political gridlock and has reignited speculation Greece will renege on its pledges to cut spending, required by the terms of its 240 billion euros in bailouts. This suggests Europe’s sovereign-debt crisis will worsen.

Greece’s options are bleak. By following the EU-IMF austerity program, Greece will probably endure years of depression, an inevitable euro exit and a possible breakdown of democracy. Possibly the best option would be a strategy to continue with austerity measures in the short term while ratcheting up the social safety-net and growth rhetoric,  and then to default on all outstanding foreign debt in an orderly manner two or three years down the track.

According to polls, the hard-left Syriza party, led by Alexis Tsipras (aged just 37), who favors defaulting and an end to economic austerity, would be the winner if fresh elections were held now. Tsipras wants Greece to cancel the austerity program immediately, reverse some reforms and consider a default on remaining foreign debt. He claims this would not lead to an exit from the eurozone, and that the EU is bluffing. Maybe he is right. It is understandable that Greeks would vote for Tsipras when the alternative offers pretty much no hope at all.

The frightening aspect of the Greek drama is the resultant political polarisation – with the extreme right and left taking support from the centre; it reminds one of Germany in the early 1930s. Unemployment in Greece is over 20%, and the suicide rate has risen alarmingly. Remember Greeks fought a vicious civil war from 1946 to 1949 in which around 20,000 people died, and divided the Greek people for decades.

The European treaties have no provision for euro members to leave the single currency and no provision to expel a member. The treaty also says the currency of the EU is the euro. Technically, the European Central Bank could decide not to accept Greek bonds as collateral and refuse to grant further emergency liquidity assistance. Greece would then have little choice but to leave “voluntarily”. Of course, there are uncertain risks of financial contagion, with bond rates rising sharply in Spain over recent days.

In France, the tremors from Greece ended any honeymoon for new French President Francois Hollande, thrusting the growing risks to the eurozone to the top of the agenda for his first meeting with German Chancellor Angela Merkel. In his inaugural address, Hollande called for a European pact to revive growth and temper German-driven austerity measures, seeking to change the direction of eurozone economic policy.

“I will propose to our partners a pact that will tie the necessary reduction of our public debt to the indispensable stimulation of our economies,” Hollande declared, saying Europe needed “projects, solidarity and growth”.

Hollande’s view is that France, and the eurozone, must pursue both budgetary discipline and a complementary growth package. Observers worry when Hollande speaks about “renegotiating” the European fiscal pact. However, the issue is probably more symbolic and semantic than real. Presumably any growth package would focus on funds to finance reforms in labour markets, product markets and higher education, while expanding efforts in “industrial policy”, such as issuing “project bonds” that would finance industrial projects in say, information technology, clean energy and infrastructure.

Unfortunately, this is not convincing. Spending on infrastructure is a standard solution for an economy that is caught in a downward recessionary spiral. Under normal circumstances, such spending might be a great idea. In Europe, however, there are plenty of reasons to be sceptical. If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming. The past 30 years have seen a huge splurge in infrastructure spending, often funded by the EU. But this kind of spending has done very little to change the fundamental problems that now plague both Greece and Spain – in particular, high debt and unemployment.

Fortunately, Australia is spared from the really difficult choices facing Europeans. We get to worry about rather more mundane matters, such as the direction of interest rates (still going down), the A$ (falling below parity with the US$), commodity prices (they have peaked), and whether or not Julia Gillard’s government will survive a full term. The budget surplus convinced few that it is actually achievable, with its heroic assumptions and smoke and mirrors – but at least we are spared the horrors of being part of the Greek tragedy.

Share Price: $1.58

Industry: Funds Management

2012 Dividend: 10.5c (Fully Franked)

WAM Capital Limited is a Listed Investment Company (LIC) that invests in ASX listed securities and is one of three investment vehicles offered by the Wilson Asset Management group. WAM is focused on achieving absolute returns and the preservation of capital.

A LIC is an attractive way to invest in that it allows the investor to gain immediate exposure to a portfolio managed by an experienced portfolio manager. The LIC structure is arguably better than a unlisted managed fund because the manager is investing permanent capital and is not affected by redemptions.

WAM has delivered a positive return to investors since inception (August 1999). Performance to 30 April 2012 has been positive, having outperformed the All Ords Accumulation Index by 6.6%, 9.9% & 7.7%% over the past 1, 3 and 5 years respectively. This has been achieved by focusing on the identification of mispricing that often occurs in the small to mid-cap end of the market.

As at 30 April 2012, WAMs top 10 holdings were LDW, RKN, ELI, BRG, IBC, CCQ, MMS, CBAPB, SKE, EPX.

On 1 April 2012, the board announced a 1 for 1 bonus issues of options to acquire ordinary shares in the company at an exercise price of $1.60 and can be exercised at any time on or before 31 July 2013.

While mispricing often exists in the LIC space, with many currently trading at steep discounts to NTA the gap that was present on WAM shares has recently been bridged. As at 30 April 2012, WAMs after tax NTA was $1.57 while its shares were currently trading at $1.58. (As at close 10^th May 2012)

Unlike managed funds, an investment in a LIC allows the investor to gain the benefit of franking on the dividends they receive. WAM has consistently paid dividends since inception and at current prices is yielding 6.65% pa (fully franked).

We have consistently maintained that solid and growing dividend income streams are an important element of the total investment return.

Each week we provide focus on one solid companies which offer investors with strong growth and/or income attributes at fairly attractive prices to value.

Find out our pick of the week

The number of people employed increased by 15,500 to 11,501,000 in April. The increase in employment was driven by increased part-time employment, up 26,000 people, and was offset by a decrease in full-time employment, down 10,500. The increase in employment was mainly driven by an increase in male part-time employment.

The number of people unemployed decreased by 28,800 people to 598,200.

This improvement in the jobs market comes as a surprise, with the unemployment rate now at the lows of the cycle. It suggests a tentatively improving jobs trend despite this being somewhat at odds with anecdotal evidence of a still struggling non-resources economy. For the RBA looking for evidence that inflation is low and likely to remain depressed in line with weaker demand, unemployment below 5% probably leaves them somewhat ambivalent about significant further rate cuts.

First, the Australian Labor Government has after 4 years actually realised that it is a Labor Government. Having won successive elections by moving into the centre and becoming indistinguishable from the Opposition, it has now decided to move back towards its historical roots. The electorate now has some sort of choice, if it is indeed interested, between the parties. Although as we will argue later the Government hasn’t actually strayed too far!

Second, the Government and its Treasury advisors have meticulously divided the household sector into 3 groups. They are….

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Sky Business News – Part I
Sky Business News – Part II
Sky Business News – Part III

Clime Asset Management founder John Abernethy has called on companies hit by the government’s controversial mining tax to immediately disclose the financial impact on their business or face reprimands from the Australian Securities & Investments Commission.

Mr Abernethy, the executive director and chief investment officer of Clime Investment Management, said it was important the government reveal in tomorrow’s budget papers how the tax will be modelled so companies can better assess the impact it will have on their profitability.

“We need to know how these taxes will be collected, on what basis and what the assumptions underpinning them are,” he said.

“And if that detail is not in the budget papers then there is something seriously wrong with this tax. At the moment, no one really knows how this tax is going to work and perhaps the budget will clarify it but if the government refuses to outline the assumptions and modelling that this tax is based on, then obviously that tax is a complete joke.

“How can the government be putting a dollar figure on the resource rent tax in their budget if the companies paying it don’t even know how much, and if, they have to pay it. There’s a complete disconnect.”

Mining companies, such as emerging ore producer BC Iron, have yet to commit if they will be required to disclose any impact the Minerals Resource Rent Tax might have on their businesses because many of the assumptions and financial modelling that underpins the tariff have been kept secret.

Fund managers are hoping the budget will demystify some of those unknown inputs so investors are able to make better informed investment decisions.

“If there is clarity in the budget about this tax then companies should be forced to come clean as soon as possible if it affects them,” Mr Abernethy said.

This formed the genesis of the billing software division and now 72% of revenue is derived through developing and providing billing system software for the utilities (electricity, gas and water) and telecommunications industries.

Hansen continues to provide tailored outsourcing and facilities management solutions across a range of market segments, contributing 28% of revenue.

Hansen listed in June 2000 for $1.00.

Key Points

• Hansen has achieved a consistently high NROE, averaging 33.4% over the preceding 5 years.
• Cashflow has approximated NPAT over the long term which has allowed operations to self fund the investing and financing activities.
• It is encouraging to see that over the last 5 years only $1.75M of new equity has been raised from shareholders. A further positive sign is the $9.83M of equity that has been bought back from shareholders.

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The UK is officially in a double dip recession, after having contracted by 0.2% in the March quarter following a 0.3% decline in the last 3 months of 2011. A second consecutive drop leaves the UK meeting the technical definition of recession.

Charts shows the recovery since March 2008 has actually been slower than the recovery in the 1930′s Great Depression era, as well as slower than the other recessions on record.

The NAB noted that the UK commercial property market has also double dipped. Hence the bank is moving its commercial property loans into the consolidated balance sheet. It will then run these down and out of the books by 2018. The NAB will take a goodwill write off and increase provisions for bad debts. In summary the down turn in the UK (which represents just 6% of NAB’s assets) has effectively offset the market share growth achieved by NAB in Australia over the last 6months. Positively the NAB proposes an increased interim dividend which reflects a strong Tier 1 capital ratio. It looks likely that there will be dividend increases from all the major banks and this will be positive for share valuations.

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