But let’s start with the financial news first. Macquarie Group (ASX:MQG) told investors yesterday that its profit fell by 43%, thanks to write downs in assets. It was the first time since going public twelve years ago the “Millionaire Factory” has reported an earnings decline. Still, the $604 million profit number was higher than what analysts were expecting ($594 million) and the stock finished up over 16.5% on the day.

In the revenue results and write downs you can see how the decline and fall of the investment banking model has hit Australian shores. MQG reported a 13% decline in fee and commission income (to a paltry $2.2 billion). Trading income fell by 14% to $722 million. The big one was the 43% decline in income from asset and equity investments.

There were some strange assets in the back rooms of the Factory. The company took over a billion dollars in write downs on its Italian mortgages and fund management assets. It did not, however, take any write downs on Macquarie Airports or Macquarie Infrastructure Group. Hmmn.

Picture the good ship Macquarie Group as something like a Noah’s Ark/Pirate Ship full of a menagerie of debt-financed assets. Under Captain Allan Moss as CEO, Australia’s version of Goldman Sachs sailed the high-seas of global finance, buying assets with borrowed money, bundling them into funds, and then charging retail investors fees to invest in the funds. It’s the sort of business those Somali pirates who hijack oil tankers should look into. Far more lucrative.

Twelve years of collective booty and swag gave the Factory quite a collection of eccentric and fee-generating assets. Some of those assets are not ageing so well. But you’ll note the company chose not to mark down the value of its infrastructure or airport funds, the two big ones.

It claims the current market value of those assets isn’t what they are really worth. The book value is more accurate. In the meantime, it is throwing other less attractive assets overboard. Deck chairs…Italian mortgages…extra chickens…everything must go!

There’s no doubt that asset values are likely to fall more next year and that revenues will continue to fall too. Still, the company says it will sell $15 billion in assets and then set sail, on the lookout for more acquisitions again. Garn!

It’s looking to sell its margin lending book. And new CEO Nick Moore said it will securitise its motor vehicle loan book, move it off the balance sheet, and sell it off. Thus the liquidation continues in the financial world. Loss-making assets are written down or thrown overboard at…er…fire sale prices.

What’s really happening, mixed metaphors aside, is that the Millionaire Factory model is giving way to deleveraging reality. In a world with falling asset values and tighter bank credit, it’s harder (and much less profitable) to build a cleverly constructed portfolio of assets and generate fee income from operating them.

In the post-credit crunch world (or post-Deluvian, if you accept the nautical metaphor), you have to focus on cash, not debt. One example would be Cash Converters, a sort of Main Street Macquarie, without the debt, and substituting Italian loafers for Italian mortgages. Cash Converters buys low and sells high. It’s the perfect business for the first world depression.

Cash Converters helps people turn lazy assets (guitars, mobiles, stereos, old harmonicas) into cash. And what is that but the liquidation of the consumer spending boom? Of course, most stuff isn’t worth as much people think it is. When you own something, you tend to think it’s worth more than everyone else.

Then you try and auction it on eBay or take it to a pawn shop or Cash Converters. There, you find that it’s worth a lot less than you believed in your heart. Such is life, as Ben Cousins and Ned Kelly might say. Kris Sayce at the Australian Small Cap Investigator (whom we often call the Ned Kelly of the Old Hat Factory) has been looking at Cash Converters as an example of what he calls “Main Street Stocks.”

We’ll let you know what he’s up to…but we think it has something to do with companies that actually do more business in a recession and increase both revenues and earnings-without relying on debt. If you have your own suggestions for “Main Street Stocks,” let us know at dr@dailyreckoning.com.au

Dan Denning

Source: Macquarie Group (ASX:MQG) Profits Fall By 43%

Zinc also traded up in the pre-dawn hours before falling to under $0.81/lb. A late rally salvaged the day as the metal surged up 3 ½ cents, 4.3%, to $0.8584/lb. Nickel tracked the movements of copper and zinc, riding a late rally to close at $8.3983/lb., up 14 ¾ cents. Aluminum rose steadily throughout the day, finishing up almost 2 cents, at $1.3453/lb. Lead also had a great day, breaking through $1 barrier once again to end at $1.0183/lb., up 4 ½ cents.

The main impetus for the rise in the base metals was the combination of dollar’s weakness coupled with rising oil prices. These factors served to make the base metals, and commodities in general, an attractive hedge against inflation for investors.

Lead’s gain, its largest in two weeks, was fueled by news that China, the biggest producer and consumer of the metal, will increase imports.

According to Jim Lennon and Adam Rowley of Macquarie Group Ltd. (ASX:MQG), “domestic lead demand [in China] has remained strong in 2008.” They continued that “a large increase in LME-canceled warrants in Singapore was reportedly due to market participants looking to move metal from the LME (CVE:LME) to China, selling the material for a profit.”

Despite the overwhelmingly good news on the day, there was some cause for concern for copper. A report by the U.S. Commodity Futures Trading Commission showed that hedge funds and large speculators cut net-long positions on the metal by 67%, only a week removed from a 54% decline.

“The funds are pulling out of copper and the other metals because of this picture of slowing demand and growth,” remarked Ron Goodis of Equidex Brokerage Group.

Source: Base Metals All Up

Nickel was up during the pre-dawn hours, but descended through the day in choppy trading to close at $9.6993/lb., down 6 1/3 cents. Zinc was off sharply at the open after a slow pre-dawn decline but recovered nicely to end at $0.8479/lb., down less than two-tenths of a cent. Aluminum touched $1.40 but fell steadily from there to just off its intraday low at $1.3736/lb., down 2 cents, while lead dropped a penny and two-thirds, to near its intraday low, at $0.8068/lb.

Traders were wary ahead of the opening of today’s FOMC meeting.

While few are predicting a change in interest rates, the market is “still nervous about policy language, and in particular, about how forceful the Fed’s inflation wording would be,” said MF Global analyst Edward Meir.

“Stronger language could send the dollar higher once again, creating more downward pressure on metals. Language about flagging growth could, in turn, open the door to further rate decreases, pressure the dollar, and send most commodities higher,” Meir said.

China is being closely watched.

“The Shanghai [copper] price still is at a discount to London, which tells us the Chinese are not very active buyers,” said Adam Rowley, of the Macquarie Group (MQG) in London. “Prices are high but without any real upward impetus.”

With economic growth slowing in the US, Japan and the Eurozone, demand for the major products that contain industrial metals such as copper — vehicles and new homes — is on the decline as well. Any demand dropoff in China would be poison for the market.

Former market darling lead continues to be the worst performer among the industrial metals. With demand for the metal used in car batteries sagging, stockpiles have more than doubled this year. Inventories monitored by the LME rose another 1,100 tons yesterday, to 96,750 tons.

Source: Base Metals in the Red - Lead Prolongs Decline as Stockpiles Soar