The United States housing market, which has been the main cause of the financial crisis, remains in the doldrums.

Figures released in the US last night show that the S&P/Case-Shiller Home Price Index, which is the most widely used measure of house prices, declined by a further 1.8% in September.

The index, which measures prices in 20 large cities, was down 17.4% on a year on year basis and 21.8% from its July 2006 peak.

Housing markets throughout the US are very mixed with conditions in Southern California, Nevada and Florida particularly depressed while markets in Texas and a number of the northern states are holding up.

The worst performing markets over the past twelve months, in terms of prices, have been:

Phoenix, Arizona -31.9%
Las Vegas, Nevada -31.3%
San Francisco, California -29.5%
Miami, Florida -28.4%
Los Angeles, California -27.6%

The best have been:

Dallas, Texas -2.7%
Charlotte, North Carolina -3.5%
Denver, Colorado -5.4%
Boston, Massachusetts -5.7%

Michael Hill’s relatively subdued mood at today’s annual meeting was a realistic reflection of the state of the retail sector. Sales are depressed and most companies are hoping for, rather than forecasting, a good Christmas period.

Hill told shareholders - rather tongue in cheek - that he is optimistic about the next few months because he expected individuals to stop buying yachts and purchase jewellery instead.

Figures in the following table show that the listed retail sector is depressed, particularly as far as the New Zealand operations of NZX listed companies are concerned.

On Monday Briscoe reported that group sales for the quarter ended 26 October were down 11.2% compared with the same period in the previous year, with Homeware sales off 10.2% and Rebel Sports 13.3%. Managing Director Rod Duke said August and September were poor but October was a bit better.

The Government’s financial accounts for the three months ended 30 September were better than expected from an operating point of view. However the post-election government, whether it is National or Labour-led, won’t have a lot of money to play with.

The Governments actual OBEGAL (operating balance before investment gains and losses) was $891 million for the three months ended September compared with a forecast surplus of $424 million for the same period. This also compares with an actual surplus of $1,522 million for the corresponding period last year.

 An OBEGAL deficit of $64 million is forecast for the June 2009 year compared with an actual surplus of $5,637 million for the June 2008 year and a surplus of $5,860 million for the twelve months ended June 2007.

The basic problem is that social welfare (which includes national superannuation), health and education expenditures are growing more rapidly than tax revenue and these three areas represent around two-thirds of the Crown’s core expenditure.

Contact Energy chairman Grant King hit New Zealand minority shareholders for six at this morning’s annual meeting.

The Australian swung a big bat, in the form of proxies representing over 50% of the company, and showed no sympathy for the views of minority shareholders.

The main issue was the proposed increase in directors’ fees from $770,000 to $1,500,000. King argued that Contact’s board fees were in the bottom quartile as far as Australasian companies of a similar size were concerned and it needed to pay more to attract high quality directors. He also said that the company may only utilise 25% of the increase in the June 2009 year with the remainder being held back for future years.

Shareholders took the view that it was inappropriate for directors to promote a 95% increase in the current environment and if the company wasn’t going to use it all, why didn’t it go for a 25% rise now to be followed by further increases in the years ahead.

One shareholder made a passionate appeal for King to rise above the situation and take the big picture view. He pleaded “Do the right thing, Grant”. But King was totally unmoved. He said he had thought about the issue and decided that a 95% fee increase was in the best long-term interest of Contact Energy.

The partial sale of a number of Government owned commercial assets would be a better way for the Crown to raise new funds instead of directing the New Zealand Superannuation Fund to invest a higher percentage of its money in the domestic economy.

As at June 30 the New Zealand Government had total assets of $200.8 billion of which $14.8 billion was represented by the Super Fund. Thus only $12 billion or 6% of the total Crown’s assets were held offshore because most of the non-Super Fund investments are in the New Zealand.

The Super Fund was established to help partly fund the country’s escalating national superannuation bill. It also gives the Government the opportunity to diversify its asset base, particularly from a geographical point of view.

In addition offshore investments generate overseas earnings. These have a positive impact on the country’s bourgeoning balance of payments or current account deficit.

The preferred option would be for politicians to sell minority stakes in a number of state-enterprises to the New Zealand public. This would have a number of positive features;

- It would help maintain the independence and integrity of the Super Fund

- It would allow the Government to raise money to reinvest in the domestic economy

- It would boost the NZX

We continue to have a very cautious outlook for the global economy and global financial markets.

While the prospect of a complete meltdown of the global financial system has diminished the global economic outlook remains poor.

The reality is that the unwinding of high consumer leverage will take time.

Savings rates need to increase to offset wealth destruction from housing and financial markets.

Moreover, confidence is likely to remain weak and rising unemployment will impact negatively on economic growth.

Asia is not immune from a global slowdown although strong fiscal positions may allow governments to provide some stimulus and falling inflation should also help.

China has eased policy but still faces the reality of lower growth rates.

The European outlook has also weakened considerably.

On the plus side, compared to the US, Europe has room to reduce interest rates as inflation falls and its equity valuations appear more reasonable.

Poor global growth should lead to lower inflation and interest rates and eventually provide a stimulus for some economies.

Falling petrol and food prices should also be a boost for consumers but problems with high debt levels, lower house values and rising unemployment are likely to dominate consumer sentiment and depress consumer spending for some time.

The government guarantee for banks, building societies, credit unions and finance companies has brought some relief to financial markets after last week’s depressing news. The only good news for New Zealand investors was that the NZX performed relatively better than most other markets last week and has fallen 35.4% from its high in May 2007 compared with an average decline of 46.4% for the other eight markets included in the table below.

The Government guarantee is a positive move but more than 100,000 finance company investors will be asking why it doesn’t apply to their investment.

South Canterbury Finance, Fisher & Paykel Finance and Marac Finance, owned by Pyne Gould Corporation, are covered by the guarantee but Hanover Finance, Dorchester Finance and Dominion Finance, amongst many others, are not because they have defaulted. If the directors and management of the last three companies had been able to hang on just a little bit longer then their companies would probably be safe.

This demonstrates the importance of having a strategy that enables a company to prosper in good times but survive any downturn.

One of the more important lessons from the initial US$700 billion bailout rejection in the House of Representatives last week was that the business community doesn’t have unlimited goodwill.

When business people abuse their goodwill, as Wall Street executives have with the American public, then the consequences can be severe.

Telecom, under the stewardship of Chairman Sir Roderick Deane, abused its goodwill with New Zealand politicians and shareholders are now paying a huge price.

Contact Energy, which has its head in the sand as far as shareholders and politicians are concerned, could be heading in the same direction.

The problem with Contact Energy is that it is almost totally insensitive to the interest of outside parties.

The company continues to have Phil Pryke and Tim Saunders on its board when a majority of shareholders do not appear to want them.

Saunders was only re-elected as an independent director at last year’s annual meeting because of the support of majority shareholder Origin Energy.

The company is also proposing a massive increase in directors’ fees, from $770,000 to $1,500,000, at the 23 October annual meeting.

A 95 per cent fee hike is insensitive in a recessionary environment.

However, the company hit a new low last week when it announced a 10 per cent to 12 per cent price increase for Wellington and parts of the South Island.

New Zealand’s balance of payments figures for the June 2008 quarter demonstrate once again that the country’s weak balance sheet – the difference between offshore assets and liabilities – is the main contributor to the burgeoning current account deficit.

Statistics New Zealand reported a current account deficit of $15.0 billion for the June 2008 year compared with $14.2 billion for the March 2008 year and $14.1 billion for the year ended June 2007.

The main contributor to the deficit is investment – the difference between dividends and interest paid and received – which accounted for $13.9 billion of the $15.0 billion June 2008 year deficit.

The main contributor to the deficit is investment – the difference between dividends and interest paid and received – which accounted for $13.9 billion of the $15.0 billion June 2008 year deficit.

Welcome to the first edition of Guinness Peat Group Watch. The Watch will be published on a regular basis because of serious concerns over the governance, performance and strategy of the widely held investment company.

The first point to note is that GPG has been one of the worst performing NZX companies in the two years to 31 August 2008 with a negative gross return of 29.4%. GPG was the second worst performing company, after F&P Appliances, when compared with the NZX10 Index component companies (see below).

GPG is listed on three stock exchanges and they performed as follows over the same two year period: the NZX fell by 4.5%, the ASX rose by 2.7% and the London Stock Exchange declined by 4.6%.