Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Tuesday, 23 December 2014

CBA Smashes Record High (Again)

CBA up Another 5 percent in a Week

Another calendar year ticks by and it was yet another absolute rip-snorter for Commonwealth Bank (ASX: CBA) which recorded a statutory net profit after tax (NPAT) of $8,631 million in FY14 (+13 percent) or a cash profit of $8,680 million (+12 percent).

Cash return on equity was 18.7 percent - not too shabby at all!

There has been a lot of talk about a "bank bubble" over recent years, which is turning out to be a real fizzer as the banking behemoth just keeps on churning out chunky franked dividends like an ATM on steroids.

CBA closed at a new all-time record high $85.35 yesterday, up 5 percent in just a week as flailing fund managers look for something - anything! - to drag their returns up to par as year-end bonus targets loom large. 

Value or Strategy?

Granted CBA certainly doesn't represent "value" as analysed here previously in terms of its PE ratio, its price-to-book or indeed any other traditionally favoured valuation metric. 

And it is certainly the case that low interest rates have meant that the prevailing PE is now higher than might otherwise be the case at 15 (not that mid-teens is a typical "bubble-like" valuation for any strongly expanding company, but one assumes the 'bubble' argument was founded upon a scepticism related to the sustainability of the "E" as opposed to the multiple of the "P").

Shorters Smoked

Stocks such as CBA and monoline mortgage insurer Genworth Australia (GMA) are frequently targeted by short-sellers and are seen as worthwhile proxies for the health or otherwise of the residential property market given their respective exposures to that asset class.

This week's price action for CBA takes the market capitalisation or valuation of the bank to an almighty figure at well over $137 billion, making even resources giants such as BHP Billiton appear minnows by comparison.

Whatever your view, if it this is a bubble it is certainly a bubble that is taking one hell of a long time to pop. 

Our chart packs don't even track back far enough to show just how long...

Timing the Market...or Time in the Market?

The principal problem with waiting for share markets to crash is that this strategy can take years and years out of your investing life, as investors in the US who bought into the stock crash theory have been discovering to their utter despondency since 2009.

US stock valuations have soared to yet another record high overnight, the S&P 500 taking out another new record close.

Worse still the Dow Jones Industrial Average (DJIA) index has boomed from ~7000 to all but ~18,000 since February 2009 with another 13 percent of gains in this calendar year.

The reality is that the more an investment strategy relies on guessing what markets will do next, the greater the chance of a sub-optimal outcome.

It's all very well to say "wait for the crash" - as there will of course be a correction at some point - but at what point does one start buying and at what quantum (the same point applies for capital city housing markets for that matter)?

An averaging approach into "all caps" or the index is much easier for most average investors, although one may of course attempt to skew purchasing by loading up or buying harder when PE ratios are in single digits. 

Keeping some of your powder dry naturally helps this approach.

Focus on Income

Of course, the increasing share price valuation of CommBank is only the icing on the cake for investors.

The real value has been in the fully franked dividends.

The CBA Board declared a final FY14 dividend of $2.18 per share, which was a tidy increase of 9 percent on the prior year. The total dividend for the year to 30 June 2014 was a very attractive $4.01.

Holders over the last decade have seen almost the value of their entire investment return in a tax-favoured income stream. 

Valuation Keeps Rising

A number of commentators have predicted that the bank will be hit hard by a property market correction - some even said it could be thrown into insolvency.

In the event recent figures from Fitch's index instead revealed that mortgage arrears in Australia have in fact fallen to their lowest level in 7 years thanks to declining variable mortgage rates. 

CBA is hardly a minnow or an unknown quantity - its financials are arguably analysed by more brokers, analysts, "instos" and fund managers than probably those of any other stock in the XJO (ASX 200) - if any stock in the Aussie share market should be be priced efficiently in the true spirit of the EMT hypothesis, then CBA is that stock.

And that market is now pricing Commonwealth at its highest ever valuation...more than $137 billion.


I don't tip or recommend stocks to invest in. Engage a licensed financial advisor before making investment decisions.