THE DISTILLERY: Testing the bull

News that the Federal Reserve is reviewing QE3 spooked the Australian sharemarket badly yesterday. It just goes to show how much this rally – a low-volume one – is based on money printing and not corporate earnings. This gets an investigation in Friday's slammer from The Distillery, along with the half-year results from Qantas Airways and Origin Energy.

Fairfax's Malcolm Maiden is the one to note the observation of ASX chief Elmer Funke Kupper that the bull market rally has been on low volumes.

"The average daily number of ASX sharemarket trades in the December half was 7 per cent lower than it was in the June half, however, and 12 per cent lower than in the December 2011 half. The average daily value of trades in the latest half was $3.77 billion, down from $4.37 billion in the June half. Average trading values ranged between $6 billion and $7 billion a day at the height of the sharemarket boom in 2007, and $5 billion and $6 billion days were common in 2010 and 2011.”

The Australian Financial Review's Philip Baker says yesterday's session amounts to this bull market's first real test. "And it didn't do so well,” writes Baker.

The Australian Financial Review's Chanticleer columnist Michael Smith says it was an interesting tone at the Qantas Airways results yesterday, as chief Alan Joyce could boast an emerging solution for the carrier's international arm, but had to concede that its domestic business is taking a hit.

"While yesterday's better than expected half-year profit was buoyed by a handsome compensation payment from plane maker Boeing, it also highlighted the real progress Joyce has made in fixing the international business, which looked like a lost cause a year ago. It was Qantas's domestic business which bore the brunt of the bad news. This is out of character for the company, where growth in its home market is usually nothing to worry about.”

Fairfax's Adele Ferguson explains how Qantas has pumped 10 per cent extra capacity in the domestic market, sacrificing $100 million in profit to do so, to keep Virgin away from its 65 per cent market share.

"Put simply, if Qantas hadn't retaliated, or only half retaliated by pumping 5 per cent extra capacity into the market in the past six months, its group profit would have looked between $50 million and $100 million better than it did…It is based on a belief that the airline industry works on the ‘S-Curve' phenomenon, which measures capacity share against revenue share. The theory is there is a certain profit optimisation point where if you add more capacity you get little in the way of increased revenue, but if you lose capacity, revenue falls off a cliff.”

The Australian's John Durie describes Origin Energy's Grant King's situation as a "classic bind,” where he's stuck between his long-term strategy and the sharemarket's short-term focus.

"That's what happens when you issue a second downgrade in a matter of months, deliver a weaker-than-expected profit, admit to yet another cost blowout in the transformational Gladstone gas project and fail to meet expectations of further asset sales. In short, King committed all of the key possible cardinal investor-relations sins.”

The Australian Financial Review's Matthew Stevens says the slap from the market yesterday was well deserved; the numbers simply weren't good enough.

"More routinely, the puppet master of growth and fulfilled expectations, King yesterday delivered an interim result jolted by a concert of misfortunes, a downgrade of Origin's already trimmed full-year profit outlook and then confirmed a 7 per cent increase in the costings of his engine of future growth, the Australian Pacific LNG project. Now, some of the setbacks were firmly within Origin's ability to better control, and King made it clear enough they have been. Others, though, are not likely to be within King's ability to fix quickly, if at all. They are therefore likely to persist and will require deeper than expected mitigating cost management strategies.”

Staying with company news, The Australian's Bryan Frith makes mention of the unusual phenomenon of a hostile takeover being announced yesterday and the share prices of both companies rising. But it happened yesterday with Equity Trustees revealing a scrip offer for Trust Co.

And finally, The Australian's Glenda Korporaal notes comments from Financial Services Council chief John Brogden that the superannuation industry isn't the kind of sector to mount mining tax-style campaigns against the government. But the writer adds that it might have little choice, given the government's movements around super.