THE DISTILLERY: Buy but don't hold
John Durie of The Australian and Chanticleer (Alan Jury) of The Australian Financial Review both find operational reasons for Telstra's poor customer service today. According to Durie, “The problem with the industry is it sells fast-changing technology in an industry where media and telecommunications are converging, which makes it confusing to sellers and buyers alike.” According to Chanticleer, “the issues afflicting Telstra’s customers stem from the poor work practices deeply ingrained in Telstra’s psyche during decades of government ownership.” Both see the appointment of Robert Nason to head a new special purpose unit called “customer satisfaction, simplicity and productivity” as significant enough to warrant comment, though Durie is somewhat less enthusiastic. Neither of these excuses cuts any mustard. Telstra was privatised twelve years ago. Surely this is enough time to transform company culture. One wonders how many employees even remain from the public-ownership era. For Durie’s excuse to make sense, no telco anywhere would ever be any good at what it did.
The truth is much simpler. Several former senior managers of different telcos have confessed to this columnist over the years that the objective of every telco is the same: to be the ‘least worst’ at everything they do. This is a consequence of an effectively duopolistic industry structure. If one has only one competitor, that is one’s only benchmark for success. That leaves only the media to shame companies into a better effort. Yet a meagre seven months into the tenure of a new Telstra CEO we have a naive fourth estate rolling out excuses like a red carpet. Telco services are going to remain lousy so long as this structure remains.
Excusing Australian company transgressions is a specialty in certain parts of our media. As this column has pointed out before, none is more adept than Matthew Stevens of The Australian. Stevens leads today’s Dubai wrap-up with a world-weary performance that leaves this columnist cold. “Here, again, we were running the risk of a corporate collapse that threatened to release the sort of liquidity freeze which brought the financial world to its knees last October. Once again, the world had turned to government to provide the bail-out ... it became apparent that Abu Dhabi was very likely to step up to the plate here if only because – and again we are in familiar territory here – Dubai World is simply too big to fail.” This column is wondering how Stevens can be so weary of debt, bubbles, too-big-to-fail banks and bailouts and yet in the very same breath glowingly endorse the “on-market announcements by both the Commonwealth and ANZ banks”. This is bizarre and hypocritical schadenfreude.
No such problem afflicts Adele Ferguson of The Age, who sifts the Dubai rubble and finds strong home-grown connections. “The central bank of the United Arab Emirates might have thrown a pacifier to global markets by promising to prop up the banking system in Dubai, but it will want heads on sticks and plenty of asset sales to try to rebuild investor confidence in the Gulf. The fact that it took the UAE so long to come up with a unified response to the Dubai government-owned Dubai World's debt problems, speaks volumes about the UAE's relationship with Dubai and what it will want in return. These demands are speculated to include the replacement of Chris O'Donnell, the Australian chief executive of the property company and developer Nakheel, where many of Dubai World's problem liabilities are festering. Nakheel and Chris O'Donnell did not return calls ... O'Donnell joined Nakheel in 2006 after a speckled career in Australia, where he ran Investa Property Trust, overpaying for various property trusts and assets, including Clarendon Homes and Principal Office Funds. When he joined Nakheel, he rushed into outlandish property developments with his ears pinned back ... He also hit the headlines in Australia when he started building a stake in Mirvac Group at $6 a share. His support of the stock, at a time when listed property trusts were diving, kept Mirvac's share price artificially high. He eventually sold the stake at $1.10 a share, torching hundreds of millions of dollars of Nakheel's money.” It seems Australia’s corporate white-shoe brigade is leaving an indelible global mark. Ferguson concludes her piece with an observation that is truly redolent of last year’s derivative-driven market collapse, “While equity markets behaved yesterday like everything was back to normal and the problems in Dubai had been contained, the chilling reality is nobody really knows. There is very little transparency in these businesses, the sovereign wealth funds are opaque, and the economies less than clear.” The whole piece is worth reading.
The risks posed by Dubai-like opacity are playing out in those very derivatives once more. And Glenn Mumford tracks them nicely in the AFR Market Wrap. According to Mumford, “ ... the credit default swap market is suddenly coming in for much attention ... Most of the interest of late has been centred on the sovereign default market ... a recent focus has been the deteriorating outlook for two European members, Greece and Ireland. The top six candidates for default are Ukraine, Venezuela, Argentina, Pakistan, Dubai and Latvia. It’s from this list that we’re most likely to see the first sovereign failure of the current crisis emerge.” Mumford may be right. The irony is that he may be so in some small part simply because he says it. A global financial system that includes opaque instruments, limited capital requirements and open borders is based upon nothing but sentiment. Contagion is a greater risk today than ever. This column continues to think global liquidity will overwhelm this risk until the US itself runs into more trouble, but Mumford’s conclusion cannot be dismissed: “Dubai may of itself have been a non-event. But as a pointer to unresolved system risks, it still looks capable of proving the catalyst for a more meaningful market correction.”
On the subject of the strength of global liquidity, we’ll conclude with a laudable piece by Ian Verrender of The Sydney Morning Herald. “Warwick McKibbin, a Reserve Bank of Australia board member who will sit down this morning with his counterparts to consider lifting domestic interest rates yet again, yesterday raised concerns about the state of global financial markets. Low interest rates, he argued, were creating a bubble in financial markets ... The big concern, according to McKibbin, was that some emerging economies had pegged their currencies to the US dollar, which meant they had imported a US monetary policy totally unsuited to their own circumstances. Who on earth could he be talking about? China, of course ... For most of this year, we have been thanking our lucky stars that China's booming economy has pulled us out of the mire. Not only did we avoid an official recession, we emerged from the downturn before just about everyone else. That's why our interest rates are heading back to normal levels. But there is precious little that is normal about the global economy and financial markets right now. Uncertainty rules.” Absolutely right. This is a brave new world where bad news is good news because it keeps rates low. Our new bubble: zero US interest rates, emerging market currency pegs, unprecedented global liquidity. Add the US dollar carry trades for a temporary virtuous cycle – though not a cycle to buy and hold.