THE DISTILLERY: Anxiety rules

Profit season rolls on and it appears the theme du jour is anxiety. Ian Verrender of The Sydney Morning Herald is nervous about where the stock market is headed. "A glance at some of last week's results indicate that many companies are outperforming expectations not because of improved sales but through cost cutting. Analysts refer to this type of trend as a shift to 'lower quality' results; where costs are cut faster than revenue falls." As Verrender points out, this same pattern is apparent in the US. He also notes growing skepticism about China, the effect of ballooning public debt, shaky global debt markets and bank re-regulation leading to higher costs for all.

Stephen Bartholomeusz of Business Spectator agrees, making the point that these forces have been damaging "for a generation of executives raised in an environment where credit was always available". For them, he says, "the crisis has been a sobering experience."

Alan Jury (Chanticleer) of The Australian Financial Review chimes in as well. He pushes lack of clarity about earnings further, to the implications for continuous disclosure. "Australian Securities Exchange regulations [which] impose a responsibility on companies to provide guidance when a company's own internal estimates depart too much from the market consensus." Jury reckons "... it's an issue that requires a commonsense convention more than a black-letter solution, but unless corporate Australia – led from the top – can find one, we may just find the current appetite for more regulation attempts to fill the void.”

This column will add a couple of observations. First, John Durie of The Australian detected this market anxiety several weeks ago, though he didn't define it quite so precisely. Second, although it is natural that local CEOs feel thrifty after the crisis, Australia is not (yet) suffering a balance sheet recession like the US. House prices remain strong and, so long as they do so, a modicum of demand can be expected to substitute the inventory cycle and declining stimulus. Barring an offshore calamity, CEO moods will then improve and so will profits off a lower cost base. The US, on other hand, is going to bump along the bottom as consumers repair their balance sheets by cutting debt. Executives there are headed for a nasty bout of depression. For more on this don't miss Richard Koo. 

A different kind of anxiety has grabbed Paul O'Malley, CEO of Bluescope. According to Matthew Stevens of The Australian the cause is "...the pace of consolidation of his key raw materials suppliers and their embrace of 'short-term, real-time' pricing models.” Stevens acknowledges that "BlueScope and others have every reason for immediate concern about a shift to daily fixed price. The current supply-demand dynamics mean they are going to pay more for iron ore.' 

But committing that age-old ad hominem fallacy, Stevens then shifts focus from the ball to the man. "BlueScope's decision to join the hue and cry is a bit of a surprise both because it has been, both publicly and privately, essentially agnostic about supplier consolidation ... BlueScope, for example, did not even bother to make a formal submission to ACCC when the competition regulator reviewed BHP's bid 2007 bid for Rio.”

This column will simply observe that the BHP/Rio merger is a different proposition to a revolution in market pricing so Stevens' point is doubly irrelevant. In fact, by the end of the piece, O'Malley's straight shooting overwhelms Stevens' usual pro-BHP tone. "O'Malley and the industry he was representing yesterday do not accept the producers' idea that flexible pricing will create a more stable, efficient pricing regime ...because they feel increasingly vulnerable to gouging by mega-miners”. 

This boosts a point made yesterday by this column that relations with China are about to take a turn for the worse. If Bluescope, a local company with direct and friendly links to the iron ore majors feels this threatened, imagine how upset China is. And there is one more point here. The BHP/Rio production merger may have outsmarted the EU commission, at least temporarily, with the move to market pricing for iron ore. Anti-competitive behaviour is no longer a problem in the company's separate marketing arms. It's at the production level, where they will merge operations and control supply, that price will now be determined. 

This column is experiencing iron ore monopoly anxiety reminiscent of 2008. For a walk down memory lane to that heady time, try Thomas Palley.

In contrast to the nervous zeitgeist, the bald-faced confidence of Bendigo Bank has left several commentators all the more anxious. Adele Ferguson of The Age turns x-ray vision upon what appears a good result for the mid-tier bank and is unimpressed. She sees "a lack of organic growth, the relatively small level of provisions .... to the collapsed Great Southern management investment scheme, rising costs and intense competition in home lending and deposit taking ... Importantly, residential loans fell 2.7 per cent over the six months, consumer loans flatlined and the two businesses that did grow, margin lending and commercial loans, were the direct result of acquisitions.”

Ferguson also sees increasing funding costs in securitisation and deposits "eating away at the margins”. She also notes "tomfoolery” in the accounts. "Bendigo opted to reduce its provisions, which enabled it to book a profit of $3 million, but it increased its general reserves for bad debts by $15 million, which goes through the balance sheet. As Axiome Equities noted in an email to clients: 'It does seem that Bendigo likes to provide for bad debts as an allocation of capital rather than a deduction from profit. What makes this decision all the more curious is that impaired loans increased by $22 million to $253 million and it booked net write-offs of $25 million.'” Ferguson shows particular concern over the treatment of bad debts arising from the collapse of Great Southern. "Bendigo had just $29 million allocated in specific and collective provisions ... No provision is made for people who can afford to pay but refuse to ... there are now $148 million loans in arrears. This is up 855 per cent on the previous six months and 2172 per cent on the previous corresponding period, which was $6.5 million loans in arrears.”

John Durie of The Australian agrees "...there is a sense of incredulity about the small, bad and doubtful debt charges at a time when impaired loans increased by $22 million”. He also agrees that Bendigo will need "the securitisation market to open more to allow them to really put their foot on the accelerator.” And notes, Bendigo "is relying on service to charge a touch more than NAB on mortgages and a touch less than the majors for deposits, but the fact is he faces negative spreads against the majors on every source of funding, so he needs more to go his way. Bendigo's return on assets is 0.57 per cent against 0.7 per cent for the majors and its return on equity is around 8 per cent against close to 19 per cent for the world's best bank.”

Finally today, on emotions and business, the AFR runs an interesting op-ed by Andrew Leigh, Professor in the Research School of Economics at the ANU. He argues that new research shows women are less likely to make it to the top in business because they are less driven by competition than men. Moreover, this may be environmental not genetic. He quotes research that suggests girls attending single-sex schools are more competitive and likely to make it. He concludes "...to smash the glass ceiling, we may also need to improve female confidence about risk-taking”. Given we are all living with the fallout from excessive risk-taking, this column would rather see women encouraged in as is.