THE DISTILLERY: Thwacking Thodey

Where have all the profit smiles gone? Suddenly it's not so sunny in our goldilocks market. CBA gloom, Telstra doom. Investors yawned when Qantas sighted a break in the clouds (but no dividend), Transurban saw games at the top. When two of our major listed stocks tell us that 2011 is going to be rough, and slow, it's time to ignore the resources boom, the moaning of money-making miners, big and small, and start paying attention to what's happening a little closer to our bank accounts. The biggest surprise was from Telstra.

Business Spectator's Stephen Bartholomeusz: "The market didn't like that guidance, but Thodey really has no choice. He has to build Telstra's non-PSTN revenues, but he also, to maximise the value of the $11 billion deal in principle with NBN Co, needs to retain and better still expand the customer base that he will migrate across to the NBN. It became evident earlier this year that Thodey, having finally dealt with the system issues that restricted Telstra's ability to be flexible and timely in its launching and pricing of products, was becoming more aggressive."

Fairfax's Elizabeth Knight felt the pain of the telco's shareholders: "How much more can Telstra shareholders bear? How many times is Telstra going to transform itself? How much should each transformation cost? The share price tanked by more than 7 per cent on the announcement of a weak profit and the prospect of an even weaker one in 2011. The market was taken by surprise at the company's announcement that it needed to reinvent its newly reinvented self and that the investment required to achieve this would mean its earnings would go backwards by a high single digit amount." That was yesterday. Her comment this morning asked whether the NBN deal was better for Telstra than anything from the Opposition: "Could it be that Labor's policy to force Telstra to exit its old fixed-line network and compensate it with an $11 billion cheque is now considered a better business outcome for Telstra? And could it be that Telstra management has come full circle and would now embrace Labor policy? The result the telco released yesterday demonstrates all too clearly that the fixed line (PSTN) network (that Labor wants to close down) is continuing to experience revenue decline at a rapid rate."

Fairfax Insider David Symons sees possible contagion for the telco sector from Telstra's latest sniffles: "Revelations that David Thodey's strategic tweaking has Telstra heading for a 'high single-digit-percentage decline' in earnings before interest, tax, depreciation and amortisation caused the industry giant's shares to slide 9.5 per cent, but there is a risk that its sneeze will quickly have most of the telco sector in bed with the flu." Optus's June quarter report was sparkling compared with Telstra's, with solid earnings growth on a small rise in revenue.

The Australian Financial Review's Chanticleer suggests Telstra and its CEO are haunted by the ghost of Sol Trujillo (aren't we all?) and that the Telstra chief executive was promising a price war in mobiles and fixed-line broadband.

The Australian's Matthew Stevens pointed to the future of Telstra's fat dividend: "Thodey caught his investment community totally on the hop yesterday ... with the bleak 2011 guidance that raises serious questions over whether Telstra can afford to maintain its 28c dividend next year."

The Australian's John Durie also looked at Telstra in his comment today: "After a $20 billion investment with little or nothing to show for it, the stark reality is the company has to start all over again. Chief executive David Thodey was right to draw a line in the sand and set new, significantly lower benchmarks for the company. But the near 10 per cent fall in the share price, wiping $3.9bn from the company's value, tells you shareholders have had enough."

That was after he said in his comment yesterday that David Ryan jumped from the chairmanship of Transurban before he was pushed: "Ryan has left the company in good financial shape, with record earnings before interest tax, depreciation and amortisation of $629.9 million last financial year, but a sharply divided share register.... Ryan was also chair of failed bull market darling ABC Learning, which has left him protecting himself from a scandal he blames on others. Sadly, the buck stops somewhere and that's around the chairman's seat at the table." The Australian's Bryan Frith echoed Durie's comments: "Yesterday, Ryan resigned as chairman and a non-executive director of Transurban. Had he not done so, he almost certainly would have faced a move to unseat him at this year's annual meeting, even though he was not due to come up for re-election. Moreover, there was every chance that this time around he wouldn't have survived and would have suffered the ignominy of being voted off the board." And The Age's Ian McIlwraith has some advice for new chairman Lindsay Maxstead: "Transurban's newly promoted chairman, Lindsay Maxsted, should brace himself for a solid 'welcome to the big league' hip-and-shoulder bump from investors when he runs on to the ground at the annual meeting."

On Qantas, Fairfax's Malcolm Maiden: "On a gloomy day for investors after Wall Street's plunge, Qantas boss Alan Joyce has provided some clearer skies. The statutory result the group reported didn't look that flash. Net profit for the year to June 30 was $112 million, down marginally on a statutory profit of $117 million in 2008-2009. But the underlying pre-tax profit was $377 million, within the band of $300 million to $400 million that Qantas had been predicting, and up from an underlying profit of $100 million last year. The underlying result is the one Joyce and his management uses to run the airline, and it's a better guide to how Qantas is flying. Qantas nevertheless seems to see a continuing recovery in conditions. The group says trading conditions 'steadily improved' during the year. Business travel is bouncing back here in Australia and overseas, says Joyce, and the group's yields are recovering from crisis lows."

Offshore the big story is sliding markets and economic outlooks. Mohamed El-Erian, CEO and co-CIO of PIMCO, the huge fixed-interest investor (owned by Allianz of Germany) on the reaction to this week's Fed meeting statement: "Most likely, markets will remain nervous and volatile in the weeks ahead. We should expect further downward revisions in analysts' growth, revenue and earning projections. It will take time for markets to adjust to the reality of a flatter expectation distribution and fatter tail. And the probability of deflation (which my gut tells me is 25 per cent) will have an impact even though it's not dominant." And it's not just America where the growth numbers are being wound back, Greece's second quarter growth fall was worse than expected. We find out about the rest of Europe tonight. And on the 0.1 per cent fall in European industrial production in June that surprised the market (forecast, a rise of 0.6 per cent), the main driver was falling output of consumer goods (capital goods rose), which tells us there's more pain ahead for the Eurozone in the northern autumn and winter as consumers keep their wallets closed. Sounds a bit like the news here this week, doesn't it?