THE DISTILLERY: Eyes wide shut

A quiet Monday ahead of the storm of June 30 full-year and interim profits starting this week, and yet comment on one of the more important stories for Australia was largely absent. This was the continued slowing in Chinese manufacturing. The AFR and Herald Sun had reports, The Australian a Wall Street Journal report designed for American readers, not Australians. It should have done better seeing as it aspires to be the national Australian business daily.

The Financial Times this morning in its Asian edition in Australia pointed out that the Chinese figures add to fears of a global slowing after the US growth in the second quarter fell to an annual rate of 2.4 per cent from an annual rate of 3.7 per cent in the first quarter (which was revised up from 2.7 per cent). As well, Japan's industrial production surprisingly fell in June, unemployment surprised by rising to a seven-month high (exports also fell from May) and deflation continues to grip the economy. And you would have been hard pressed to find much coverage of Japan on Saturday after the figures were released on Friday. And yet China, Japan and the US are in the top six of our trading partners. No one pulled these strands together in a larger report or commentary.

The fate of of Telstra is another story being avoided by the business and political media. Sure, the $43 billion broadband is getting some mention, but Telstra's $11 billion payout is being threatened, which should thrust the telco back to the centre of the political debate, but that seems not to have happened. Telstra has a dividend yield of 8.7 per cent, and is the one company most affected by the August 21 result. Something has to give.

So it's not surprising that Telstra's late profit downgrade on Friday escaped some of the Fairfax media over the weekend, but not News Ltd, where The Australian's John Durie wrote: "Telstra has confirmed market fears with a profit downgrade after the market closed yesterday, blaming a $170 million impairment charge for its Hong Kong mobile phone business. Given the company was forecasting 'low single digit' earnings before interest, tax, depreciation and amortisation for the 2010 year, the definition of single digit has taken on a whole new meaning."


Perhaps exhaustion can explain why the Telstra profit news slipped by some papers. Friday was a big news day, one of the biggest for a month or more. We saw several other profit downgrades or falls (ERA, Programmed) and of course the biggest one, Macquarie Group, which produced a sort of guidance statement that was Macquarie at its opaque best, and a big merger. That deal attracted a lot of attention.

The Australian's Matthew Stevens: "Alison Watkins was supposed to be spending July with her kids down on the family cattle farm in Victoria's Western District. She wanted a family holiday before starting a new job on August 9 as GrainCorp chief executive. Yesterday was officially day one of the Watkins era at Graincorp. And she started with a fair flourish, leading the public confirmation of the $2 billion 'merger' of GrainCorp with controversy-stained wheat exporter AWB. The deal is a game changer for GrainCorp and looms as a game ender for brand AWB, once the emperor of the Australian wheat business."

Business Spectator's Stephen Bartholomeusz took the same angle on the story: "Alison Watkins is never going to forget her first day in her new job as chief executive of Graincorp, marked by the creation of a new national agribusiness champion through a $2 billion merger with AWB." Wheat prices jumped more than 40 per cent last month in the single largest month's rise for 50 years. Surely that changes the dynamics of this deal?

This morning, Scott Murdoch in The Australian says Macquarie plans to go into lending its spare cash in a big way (gee, why not, it's a bank!). "Macquarie Group plans to use its powerful balance sheet to do more corporate lending deals to regain its competitive advantage." But the reason for this rediscovery of basic banking can be found in this comment in Friday's trading update from CEO Nick Moore: "High levels of cash continue to impact current earnings". In other words, Macquarie is being prudent by holding lots of cash on its books, but that's cutting profits, so now it wants to get that surplus loot working and returning something more than just a few per cent interest. And the AFR's Due Diligence column has a good piece under the accurate headline "Macquarie's fading aura".

Elsewhere, Fairfax broadsheet columnist Adele Ferguson has a scoopette on what could be a very important story for investors, especially those in failing companies: "The Senate inquiry into the insolvency industry is expected to release a damning report on the business and the corporate regulator within the next two weeks as industry speculation mounts that the report will make at least two bombshell recommendations. The first is that the Australian Securities and Investments Commission should be stripped of its powers and a new industry-specific regulator created under separate legislation with beefed up powers and penalties. The second is that the insolvency industry's cosy monopoly be busted open to competition."

Political/business comment today comes from Fairfax's economics editor, Ross Gittins: "Elect Gillard and what you'll get is Abbott populism at one remove. What you won't get is a government with the confidence to decide for itself what the economy needs and what is politically achievable, if there is a willingness to put up a fight and lose a bit of skin." Gittins also wrote on Saturday: "Strange things happen in election campaigns. When we learnt this week that consumer prices rose only modestly in the June quarter, the media greeted this as great news for Julia Gillard and even for the Reserve Bank Governor, Glenn Stevens. But no one observed it was great news for all those voters who, the pollies inform us, have been whingeing loud and long about the rising cost of living. And you wouldn't believe it: Joe Hockey portrayed it as bad news for voters. Proof positive they had plenty to whinge about."

And on Saturday, The Australian's economics editor, Michael Stutchbury, nicely listed some of the decisions both sides in the campaign had to make to lift Australia: "Tax reform and improved infrastructure are among tough political decisions that must be made... Change the story: Kevin Rudd got it right on a 'big Australia'. But both Julia Gillard and Tony Abbott are competing to cut immigration and population and so ease pressures on urban infrastructure and congestion. They've got it the wrong way round. A wealthier Australia will need many more workers. The issue is how to best provide the infrastructure and other services required by a bigger population, not to crimp the economy by cutting immigration. This requires a lot of tough political decisions that both sides are postponing until after the election. If well planned, bigger cities can support more urban amenities, such as public transport."

And there are few mentions of tomorrow's RBA board meeting this morning, except in "week ahead" reports and a commentary from David Uren in The Australian warning that the RBA shouldn't be fooled by the low inflation report: "If there is one thing that will leave the Reserve Bank board uneasy about keeping interest rates steady at tomorrow's meeting, it will be the fear of repeating its experience of early 2007," Uren wrote, saying two low quarterly inflation reports in late 2006 and 2007 encouraged the central bank not to move rates when other indicators were telling us the economy was "stretching capacity". But there is one thing that could help and that's reform of our inflation reporting – changing it to monthly instead of quarterly reports from the Australian Bureau of Statistics. The RBA wants it, the ABS is reviewing it, but what's happening?