THE DISTILLERY: Carrot and stick

It's one of those mornings, a bit here, a bit there, no theme, some of the commentary a bit light on, others loud (yes, News Ltd columnists!), some rehashing of leftover ideas from earlier. In fact a bit of a bubble and squeak for the jotterariatti this morning. First, let's note the speech in New York early this morning by RBA head, Glenn Stevens.
 
The Australian Financial Review reported on its website that "Reserve Bank of Australia governor Glenn Stevens has called for a multilateral approach to the heated US-China trade dispute amid concerns Australia could be hurt in the crossfire between two of its biggest trading partners.
 
Don't tell all the debt worryworts and housing bubble finders, but Australians are cutting their debt, as Melbourne's Herald Sun (among other papers) pointed out: "Our low confidence, however, has paid off in the debt stakes with Australia's private debt falling 6.2 per cent during the three months to December – the biggest fall in nine years." And The Sydney Morning Herald said this morning: "Total borrowing by individuals and corporations is down 11 per cent over the year, the biggest slide on record."
 
Meanwhile, the AFR says: "Analysts at UBS are among those starting to ring the alarm bells on the resources sector after its "mining overheating index” slipped into the danger zone." Second, again, Goldman Sachs has already got there first with its warning earlier in the week.
 
With Leighton Holdings due to come out of a trading halt today, The Australian's John Durie wrote this morning: "There are two schools of thought about the Leighton capital raising. One says every bit of the $757 million is needed and more, while others say the funds are there to make management's life easier. The latter view won some market support when the unwanted 500,000 rights sold yesterday at $24.50 a share – or $2 more than the rights issue price of $22.50 a share."
 
Fairfax's Elizabeth Knight says retailers are worried about the carbon tax: "In a broader sense, there is a view among retailers that when coupled with a flood levy the effect will be to further dampen consumer confidence at time when it is at a particularly low ebb. The Myer chief, Bernie Brookes, says it's hard to take a view on how it will effect consumers without knowing the details of the tax and the compensation. However, any impost by the government over and above the existing tax burden on consumers will clearly impact discretionary spending."
 
The AFR's Chanticleer says: "When Rio Tinto plc holds its annual general meeting in London today, chief executive Tom Albanese might feel on top of his game." Fancy that, a mining company with its biggest earner in Western Australia meeting UK shareholders first to discuss matters. How typical. 
 
The Australian's Bryan Frith looks at the manoeuvring for control of RHG by Sydney businessman John Kinghorn: "Will chairman John Kinghorn and his son Geoffrey stand by their stated intention not to vote on the controversial buyback proposal for RHG – the rump of the failed RAMS Home Loans group – now that dissident shareholders are seeking to replace most of the RHG board? Shareholders have been told that because the Kinghorns don't intend to participate in the buyback they will abstain from voting on the proposal "in the absence of any material change in circumstances" so that the decision would be made by a majority of unassociated shareholders. That would apply where the material change of circumstances necessitated RHG providing supplementary disclosure, and any change to the non-voting undertaking would be set out in that supplementary disclosure. It must be wondered whether the Kinghorns will view an attempt to change the control of the RHG board as a material change of circumstances which would free them from their undertaking and enable them to vote on the buyback proposal."
 
And in another controversial situation, The Australian's Nabila Ahmed says: "It's the carrot and stick approach. If Centro shareholders and hybrid security holders don't like that the company (led by chief Robert Tsenin) and its senior lenders have decided they can have $100 million between them as part of the property group's rescue restructure, they'll just get the stick. In a similar deal struck by Alinta Energy's debt holders, led by private equity giant TPG in this year's $2 billion bailout of that company, Centro's senior lenders have organised what's called a "pre-pack credit bid", which will allow them to push on with the amalgamation of Centro Properties Group and Centro Retail Group with or without stakeholder consent."
 
Higher insurance, anyone? Adele Ferguson wrote on smh.com.au yesterday: "Key executives from Australian insurance companies are understood to have gone cap in hand to London last week to meet with underwriters to renew their July reinsurance contracts. Post the visit, speculation is intense that reinsurance rates could easily go up more than 50 per cent in some categories. While this will blow out costs for the many general insurers, the bigger concern being raised in London is the amount of retention they will be required to run. Australian insurers have enjoyed very low retentions – the level at which reinsurers pick up the tab – for a long time and the shock for them will be a combination of much higher retentions as well as higher reinsurance costs." The rest of the chattery will get this story later in the year.
 
Fairfax's Ian Verrender says incoming Woolies CEO Grant O'Brien faces a big problem: Woolies is too big for Australia to maintain its strong growth of the past decade. "There is an old adage that says when you are on top, there is only one way to go – down. That has not happened with Woolworths so far. It is still far and away the leader in its field and is likely to remain in that position for quite some time. But under the current chief, Michael Luscombe, the growth momentum has faltered, a situation that has attracted the ire of some major shareholders, particularly after the company recently unveiled its first earnings downgrade in more than 20 years."
 
The Australian's Tim Boreham wrote yesterday that that he's confused about the market, so he has asked for an explanation: "Dear market, criterion awaits vainly for the occasion when you explain a chunky sell off along the lines of "I just felt like it" or "I got out the wrong side of bed this morning". Oil prices tumbled 3 per cent in New York – bringing the two-day loss to 5.8 per cent – while Wall Street lost one per cent in concert. There's a number of "explanations" for the falls: the International Monetary Fund downgraded the world's economic outlook, the US trade deficit hasn't improved to the extent expected and the US March import index was above expectations (because of higher food and, contradictorily, oil prices). Then there's the Fukushima nuclear drama which has been upgraded to grade-seven Chernobyl standard (not that the media has much interest left in the topic)." And so on.
 
Business Spectator's Stephen Bartholomeusz wrote yesterday: "Almost lost in the tide of disappointment that followed the release of Alcoa's first quarter earnings earlier this week was the news that China plans to put on hold all planned new aluminium smelters in an attempt to tackle over-capacity and manage its energy consumption. The disappointment in the Alcoa result was a lower-than-expected quarter-on-quarter five per cent increase in revenue, even though the group's bottom line number – a profit from continuing operations of $US317 million – was better than anticipated. Of greater longer term significance, however, both demand and prices for aluminium and alumina are continuing to increase, with prices realised for the primary metal up 7 per cent between the December and March quarters and alumina prices up 15 per cent." So much for all that talk about Australian carbon consuming companies heading offshore for China. 
 
Warning, News Ltd's Terry McCrann is angry again. The carbon tax has upset him, again. "Would you buy a used tax from Greg Combet and his mates Bob Brown and Julia Gillard? It's only been slightly used, only been driven so to speak on Sundays, by its former owner named Kevin – before his best mates Julia and Wayne persuaded him to garage it. And then, promptly 'locked' him in, or out, with it. Because if you do, I've got a certain bridge in a city on the harbour to sell you. Newly painted and all. Just how stupid does the prime minister and her climate minister think you are? Pretty damn stupid has to be the answer. " Another column that yells at you.
 
And another News Ltd scribbler, Matthew Stevens of The Australian, is another writing loudly about the carbon tax: "So Greg Combet reckons a $20 a tonne carbon dioxide tax supported by a full 94.5 per cent assistance rate is going to add only $2.80 a tonne to the the price of an $800 tonne of steel and $18.70 to the cost of a tonne of aluminium. "In other words, the carbon cost relating to the core pollution activity for steel would be one-third of 1 per cent of the value of a tonne of steel and three-quarters of 1 per cent of the value of a tonne of aluminium," the Climate Change Minister reassured the National Press Club yesterday. Here I was thinking that Combet's carbon tax threatened the viability of an Australian steel industry, whose earnings have been squeezed by rising raw materials prices and a surging Australian dollar."