THE DISTILLERY: Rate floodgates

Trying to pick the Reserve Bank's next course of action has long been a national pastime for many commentators and market economists. Usually it's the most fruitless game in town, only the RBA knows what will happen and it does do a good job of explaining its actions. The floods and their impact on food prices and consumer inflation have added spice to this almost unseemly rush of blather of the usual 'Rate Rise Looms' nature. Adding to it yesterday was the release of the so-called inflation gauge from TD Securities which showed a big rise in its latest monthly report. Naturally that got the pack a 'howling with speculation aplenty about the impact of the floods on the economy.

But Fairfax's Ian Verrender made a timely contribution, pointing to what is the RBA's continuing concern: "In the past week or so, most pundits correctly have pointed to a looming inflation problem. Shortages in fresh fruit and vegetables already have prompted soaring prices in produce markets. You can expect that situation to worsen in coming months as the full extent of crop losses becomes apparent. That has led some forecasters to predict that, given inflation levels could be pushed beyond the Reserve Bank's comfort zone of between 2 and 3 per cent, the central bank could be tempted to raise interest rates in the near term. Wrong. If anything, the price rises for food and fuel are more likely to placate the central bank.. While the chances have dimmed for an interest rate rise in the next few months, as the nation recovers from the hit to income and from higher food prices, the prospect of a wages breakout later in the year will be weighing heavily on the minds of the central bankers."

That was a different stance to this report in Melbourne's Herald Sun which is typical of the current analysis and is an early starter in the annual 'Rate Rise Looms" eggbeater award for 2011: "The flood crisis threatens to aggravate Australia's pressure-cooker economy, fuelling inflation and all but guaranteeing a rise in interest rates. And prices of imported goods are declining too slowly to counteract inflationary pressures entrenched even before floods struck in recent weeks, economists say. Prominent HSBC economist Paul Bloxham yesterday increased his inflation forecast, warning of renewed wages pressure as Queensland in particular rebuilds." Meringues anyone?

But according to this report in The Australian this morning, the floods will only deliver a passing blow to the economy: "Flood damage will put only a short-term dent in the relentless growth of Australia's economy, according to Coface, one of the world's largest trade credit insurers. The French firm's analysts yesterday rated Australia as one of the 10 strongest economies in the world, in terms of the risk of its companies defaulting on business deals, even though the current floods will shave at least 0.5 per cent off the economy this year. Coface had planned to lift its projection for Australian economic growth to 3.4 per cent in 2011, compared to 3.2 per cent in 2010, but the floods led it to trim that forecast by 0.5 or 0.6 per cent."

The Australian Financial Review says: "Federal and state leaders have foreshadowed major reforms to the insurance industry to ensure policies properly cover flood damage as the Queensland clean-up continues and the flood threat in Victoria worsens." Let's hope's a comprehensive review and includes a long term national disaster protection scheme. The paper also reported: "Australia will need to urgently reassess current infrastructure projects designed to accelerate the nation's economic growth in favour of rebuilding road, rail, water and power utilities damaged or destroyed by floods."

In other news, the AMP is moving closer to getting its hands on AXA Asia Pacific and creating a so-called fifth pillar of Australian financial services. But as Stuart Washington of The Sydney Morning Herald argues, this will not be a bank, just a bigger fund manager: "AMP, we were told, would create a fifth pillar, a term that held the promise of shelter against the banks and their rampaging quest for profits. Feeling despondent about your mortgage interest rate? Don't worry, there's a fifth pillar coming. Except Dunn knew the fifth pillar offered by the merger was of a very limited type. Not so much a column of the Doric or Corinthian variety; more like a purpose-built stanchion. The pillar-like claim is solely focused on the merged entities' wealth management businesses, not its banking capabilities. The difference between a fifth pillar and a stanchion was made even clearer in yesterday's explanatory memorandum, which confirmed the difficult environment facing AMP Bank."

John Durie pointed out in The Australian in his daylight comment that AXA AP CEO, Andy Penn stands to rake in a tidy sum from the AMP takeover offer: "AXA boss Andy Penn could collect total termination benefits of about $17 million if shareholders approve the AMP takeover. The decision by investors will be taken during the scheme meeting, due in March. The figures included in the company's information memorandum for the meeting comprise of about $8 million in performance rights and $9 million in termination benefits for the 20-year company veteran. Penn has made no statement about what he will do assuming the deal goes through and he loses his job. But it is highly likely he will take some time off."

And this morning Durie says the ANZ is looking to boost its online banking arm: "ANZ is about to launch a major upgrade of its online banking functions. Australian boss Phil Chronican is planning to spend $100 million on the revamp, which aims to improve the functionality of ANZ's online offering to create more sales opportunities. His boss, Mike Smith, has talked about revamping the online offering since he started in September 2007, but issues like Asia have taken precedence. ANZ's two to three-year revamp will start shortly."

Michael Pascoe warned on SMH.com.au that all is not on the level among our real estate investment trusts. There's a bit of funny business about: "In most takeovers it's rather normal for punters to expect to receive a premium or at least the full value of net tangible assets. After all, except in a distressed situation when you're desperate for money, you'd be a mug to sell for less than your board, management, valuers and auditors have confidently told you your investment is fundamentally worth. But apparently that's not the case with Australian real estate investment trusts – which might bring into question the credibility of the aforementioned boards, managements, valuers and auditors. Now, with gearing reduced and a brighter economic outlook for Australia, relative calm has returned to the sector. Investors might expect unit prices would steadily recover towards their NTA backing, but instead there are suspicions of a wave of sub-NTA takeover activity as raiders capitalise on the discount while it lasts." Another issue for the bods, (plods) at ASIC as they view the results of their usual start of year PR campaign in the media?

And speaking of ASIC, another strategic leak to the AFR which reported this morning: "The Australian Securities and Investments Commission will target stockbrokers and futures traders in a crackdown on insider trading and market manipulation." Gee, you would have thought that's where all market-related inquiries would start anyway? And The Australian reported: "In its first supervision report since taking over from ASX Limited on August 1, ASIC commissioner Shane Tregillis warned of "a number of potential market abuses" and noted that algorithms can damage the integrity of the market. The regulator appears to be battling two problems as algorithmic trading spreads: incorrect orders, both deliberately and accidentally placed. "We're working actively with people who we believe are using anything from inefficient to defective algorithms," said Greg Yanco, the former ASX executive who now heads ASIC's surveillance operation." ASIC's charm offensive continues.

Fairfax's Ian McIlwraith has spotted some odd action in Australia's other stockmarket, the NSX: "Forget about the ASX being swallowed by the Singapore Stock Exchange. The lively end of market activity here is in environmental and carbon-type trading and exchanges. A substantial shareholding notice filed yesterday for NSX, otherwise known as the National Stock Exchange, revealed that custom-bottle designer Vitron Werkbund Sud Australasia now owns 25 per cent of the alternative capital market. Vitron is really just another arm of irrepressible futures trader Brian Price's mini-empire, under the Iron Mountain Group banner. He has now assembled a fascinating grab-bag of market platforms, green brokers and acronyms while everyone else is watching the ASX-SGX, or even rival Chi-X, games."

And Michael Evans of The Sydney Morning Herald wonders about the ability of investment managers: "Investors have been left to scratch their heads about the value of paying professionals to build their savings after Australian funds managers chalked up a year of poor returns in 2010. And some of the biggest names were among the laggards. The median fund in the Mercer scorecard of more than 100 funds underperformed the broader market by 0.6 percentage points. While the ASX300 returned a muted 1.9 per cent in 2010, the median fund rose 1.3 per cent. The benchmark ASX200 index fell about 2 per cent." The AFR also reported: "The median Australian share fund manager posted a return of 1.1 per cent last calendar year to narrowly underperform the S&P/ASX 300 index's 1.9 per cent gain, with scant difference between the top and bottom quartile performers in a sideways market." Odd how the ASX 300 is the benchmark, while the more accepted ASX 200 isn't.