THE DISTILLERY: MacBank musing

Now this is the sort of week to expect for investors, markets and the jottery: active, full of issues, reports and stories, many requiring explanation, not herd behaviour. So let's see how our covery of commentators  analyse the RBA meeting, US jobs, central bank meetings in Europe, bank profits and a bit of bashing in Australia, some important statistics later in the week and whatever else is thrown up over the week. Tomorrow's RBA board meeting is the leading issue. Rate Rise Looms, anyone? Not quite yet, but it's getting closer, some argue.
 
The Australian Financial Review said: "There appears little likelihood that the federal government will deliver its budget in the shadow of a rate rise, with the Reserve Bank board widely tipped to leave rates on hold on Tuesday." And The Australian added its bit: "Tougher language could be on the cards from the Reserve Bank of Australia tomorrow, despite the general consensus by economists that interest rates will be left on hold. HSBC Australia and New Zealand chief economist Paul Bloxham said "the CPI numbers last week were a significant upside surprise, which is likely to see the tone of RBA's post-board comments a bit more hawkish."
 
And Terry McCrann was more certain about the direction of interest rates in the News Ltd Sunday tabloids: "Interest rates are going up again. The Reserve Bank will make that very clear in its statement on Tuesday. The first increase could come as early as next month. Indeed, but for the surge in the value of the Australian dollar, the first increase could have – would have – come next Tuesday. The dollar's rise is like a rate increase as it reduces the price of imports and makes it tougher for local producers to put up prices."
 
The Australian reported today that: "Treasury has warned the government of the danger of high inflation as the resources boom powers a return to high growth over the next two years. Senior government sources say next week's federal budget will include Treasury forecasts showing that inflation will rise at rates of about the top of the Reserve Bank's 2 to 3 per cent target band throughout the next two years. The government will argue that the threat of inflation, as the economy approaches the limits of its capacity, is the reason for spending cuts and sticking to the target 2012-13 date for returning the budget to surplus." This is not new news; a reading of the various post-meeting statements and minutes from RBA board meetings would give you the same outlook.
 
The Weekend Australian's John Durie looked at the Macquarie result and wrote: "Nicholas Moore did his very best to show his eternal optimism by paying a large dividend on the promise that better earnings this year will bring the payout ratio back to size. Punters were clearly impressed with Macquarie, one of the few bright spots in a market that has gone from bewilderment to outright concern at the rapid appreciation of the Australian dollar. The way Moore sees it, the Aussie's level has a lot more to do with trading fundamentals than actual fundamentals, but that is the new reality and, for Macquarie, the impact can be severe – with a 10 per cent rise in the currency equating to a 6 per cent fall in net profit."
 
And the AFR's Chanticleer wrote on Saturday: "There are two schools of thought about Macquarie Group's decidedly ordinary annual profit results. Neither version inspires confidence that a stock which once flirted with $100, will get back to that level soon." Good points. Let's see what the ANZ, Westpac and NAB do this week.
 
And Fairfax's Danny John observed this morning: "Another set of half-year earnings figures; another lot of record results for the big four banks. Come the end of this week, the majors will have chalked up nearly $12 billion in additional profit for the first half of their 2011 financial years. The Commonwealth Bank, the biggest of the four by market capitalisation, set the benchmark in February with a $3.3 billion result for the six months ending December 31. Now it is the turn of ANZ, Westpac and National Australia Bank, which from tomorrow onwards will respectively produce net cash earnings of $2.75 billion, $3 billion and $2.5 billion for their half-years to the end of March."  And then on Friday a spot of bashing with the Senate inquiry into banking due to report.
 
Business Spectator's Stephen Bartholomeusz wrote: "Macquarie Group's expansion spree during the financial crisis may yet to be fully reflected in its financial performance but there were some encouraging signs in the sharp second half pick-up in its earnings. While its full-year results might have been down 9 per cent on the prior year to March, second half profit was up 37 per cent relative to the first half and, encouragingly, there were almost none of the massive revaluations of asset values in both directions that have characterised its results in recent years. It was a cleaner and higher quality result. Macquarie needs to demonstrate that the strategy of globalising some of its specialist areas of expertise during the crisis can deliver decent returns on capital, not just to prove the new model and satisfy its shareholders but to be able to justify the kind of investment bank compensation levels that would enable it to retain, if not all, then most of the better extra staff it now employs."
 
Fairfax's Adele Ferguson wondered about the health of Qantas this morning: "As Qantas faces some potentially explosive industrial action over the next few weeks, analysts have been taking the knife to their forecasts, particularly as oil prices continue to rise and speculation grows of an equity raising. With so much negativity, the company's shares drifted down to $2.11 a share on Friday, a whisker away from its $2 issue price when it listed more than 15 years ago. Tough times have long been a recurring theme at Qantas and the latest round of challenges – rising oil prices, threats of industrial action and a string of midair emergencies last year – are nothing new. What is new, and which could be the biggest threat to the airline, is the damage to its brand."

The AFR also reported this morning: "India and Australia are to launch formal trade negotiations that could add more than $40 billion to each economy, following a decision in New Delhi to seek a comprehensive deal on trade between the countries." 
 
The Herald Sun in Melbourne has been listening to the fee merchants: "Speculation is intensifying that a foreign predator could swoop on one of Australia's best-known companies – Foster's – now the demerger of its beer and wine businesses is almost complete. Takeover talk has increased since shareholders overwhelmingly backed the split on Friday. Overseas media reports at the weekend again touted British drinks giant SABMiller as a potential bidder for Foster's beer assets." What about the strength of the Australian dollar?
 
Matthew Stevens wrote in The Weekend Australian: "The dire state of the Foster's wine business, over the past half-decade at least, has cost one chief executive his job and blown at least $5 billion of shareholder value because of writedowns of excessively expensive acquisitions in Australia and the US. Hindsight is a wonderful thing, but you only have to graze the Treasury Wine Estates demerger document to understand just how fatally flawed Foster's $7 billion wine strategy was."
 
And Fairfax's Malcolm Maiden: "But every financial folly has a silver lining. The construction and deconstruction of the beer and wine group over a decade has made a fortune for a small army of advisers, for one thing. And after yesterday's near-unanimous agreement of Foster's shareholders to the latest step – the spinout of Foster's wine business into a separately listed company, Treasury Wine Estates – they are waiting for the phone to ring again. Yesterday was a whistlestop in a longer journey that will probably see at least one of the devolved businesses fall to a global acquirer. Where to now? The beer and wine businesses will be better for their drawn-out divorce, more tightly focused on their respective markets. And there could still be a foreign bid for either of them. But unless the bidder or bidders make the same mistakes that Foster's did, takeovers won't reclaim the value that has been destroyed in the past decade."

The Australian Financial Review's usual spruiking of the business begging bowl ahead of the budget contained this odd request on Saturday: "Business groups are calling on the federal government to provide relief in the budget to non-resource sectors hard hit by the high Australian dollar and weakening consumer demand." Poor dears, if the dollar fell sharply and they benefited, you can bet they wouldn't hand it back. And this was a central request: "The soaring value of the Australian dollar is helping fuel a concerted push-back against the trade liberalisation policies that have been accepted as a central part of economic policy for nearly three decades." The poor, poor dears.
 
The AFR also reported: "NBN Co and Telstra Corporation are seeking to conclude delayed talks on their historic $11 billion deal over the next two weeks in the hope of a definitive announcement before the end of May."
 
Nabila Ahmed wrote this morning in The Australian: "As a rudderless Goodman Fielder continues its search for a chief executive and grapples with last week's downgrade, investors are thought to be cranking up pressure on chairman Max Ould. They are frustrated that Ould hasn't found a leader in the 3 1/2 months since Peter Margin announced his departure and believe he has failed to adopt a bolder strategy for a company being squeezed by rising input costs and a more aggressive stance by retailers."
 
And Tracy Lee in the same paper says: "The market will be closely watching the half-year financial results of explosives maker Orica today to see if the rising Australian dollar has affected the company's healthy appetite for acquisitions. Orica has made two acquisitions in Europe in the last half year and continues to press ahead with plans to bid for Western Australia's Burrup Fertilisers later this month. In January, Orica acquired Sociedade de Explosivos Civis of Portugal and last month it secured Belgium-based Titanobel for €25.3 million ($34 million)." 
 
Durie also pointed out that while Foxtel looks the big winner from the AFL rights deal, it may have lost another battle: "Foxtel's Kim Williams has played a masterful role in this round, but of course also faces the same competitive threat from offshore rivals next time round, sponsored by NBN. He has paid more money but has better content, better technology through digital services and, unlike Telstra, a proven ability to monetise monopoly content. If talks with Austar ever amount to anything, the AFL deal will make the Australian Competition and Consumer Commission think twice before approving the monopoly. Foxtel's argument is that Austar doesn't compete with anywhere, including the market for sports rights, which has now opened through the inclusion of online coverage."
 
Fairfax's Ian Verrender was critical on the weekend about the pay rise for RBA Governor, Glenn Stevens at a time when the bank might has to start lifting interest rates again in response to higher wage claims: "it has emerged that our governor, Glenn Stevens, is the nation's highest-paid public servant, pulling in $1.05 million a year. He was awarded that sum in 2008 as global financial markets were imploding, when the weight of the world was on the shoulders of that small band of central bankers. Stevens's pay packet, while astronomical, falls well short of those in the private sector. Arguably, his job is far more important and in many ways the commercial banks are beholden to the Reserve. It will be Stevens or his successor who will bail them out if ever they come to grief. But merit, as a yardstick for reward, was abandoned long ago in most fields of human endeavour." Hmmm, I think the real object of criticism on this story should be the RBA board's so-called business directors. They are supposed to know all about this stuff. Clearly they didn't. 
 
Michael Pascoe wrote yesterday on smh.com.au that there's a case the federal government's financial reforms didn't go far enough: " The life insurance and financial planning industries won't give up the thick end of half a billion dollars in commission without an almighty fight – yet life insurers themselves are primarily to blame for a rorted system that monumentally fails consumers and cries out for further reform. Most planners and the insurance giants are already looking for ways around the new rules proposed by Assistant treasurer Bill Shorten, while mounting a rearguard action through the delicately poised federal Parliament. The longer reform is delayed, the more chance Labor won't be in power to do it. The immediate response of the opposition is to oppose, singing the industry's tune."
 
And The Australian reports: "Prominent stock picker Charlie Aitken has signalled it is time for investors to take trading profits and increase cash holdings and other defensive assets. The strategy change is flagged in a note to clients that expresses concern about the state of the US economy following weak gross domestic product figures, and ratings agency Standard & Poor's downgrade of US debt. "I must stress that despite my naturally bullish disposition I am getting pretty uncomfortable with all this and genuinely feel it's time for a far greater degree of portfolio conservatism, particularly in Australia where the currency... is causing dislocation," the Southern Cross Equities executive director said."