THE DISTILLERY: What budget?

Budget, what budget? The tabloids got out the mixmaster and attempted to keep the love alive this morning, giving us a foretaste of what Tony Abbott will say tonight, but in the real world the northern hemisphere has given us another bout of market instability to wake up to and remind us that life beyond our shores is still volatile. These developments came too late for our jotters who concentrated on updates from the department store twins, David Jones and Myer, the update from the CBA, a new chairman for Westpac and the ending of a couple of messy deals and bids. Today we get labour force data for April and the NSW Supreme Court judgement in Seven versus Warburton.
 
After two days of sunshine, the gloom has returned: Chinese inflation remains high, output is down, Asian markets were bright, Europe less so, but the US saw a repeat of the big sell down of last Thursday as oil led commodities lower. The Australian Financial Review reported this morning on its website that "US economic growth is still too weak to significantly dent unemployment, and higher oil prices and renewed housing weakness pose added risks, Atlanta Fed president Dennis Lockhart says." And "The Bank of England warned Wednesday that inflation could hit 5 per cent this year, raising the likelihood that the central bank will lift its main interest rate from the record low level of recent years." And the BOE said the UK economy faces a long, tough, hard period of little growth. The Aussie dollar fell by 1.5 per cent to under $US1.07 this morning.
 
Fairfax's Elizabeth Knight found some light in retailing yesterday: "For the first time in a year both of Australia's large upmarket department store businesses, David Jones and Myer, reckon they can see to seeing a glimmer of hope in retail sales, with signs of improvement over the past couple of months. It was enough to keep investors happy – the share price of each business improved on the release today of sales figures. According to the statements, David Jones had a good April thanks to some cold weather and a better Easter. Myer's boss Bernie Brookes said he saw moderate and steady improvement in sales as the third quarter progressed, and he said the mid-season sale was pleasing."
 
But this morning Knight reports there was nothing in the budget: "There was little if anything in the budget Wayne Swan delivered on Tuesday that would provide comfort for the two upmarket department store chains, Myer and David Jones, which yesterday released sales numbers that are sliding backwards. Their retail bosses had not been through the budget papers comprehensively when they fronted the media and analysts yesterday – but nothing positive had jumped off the pages from their brief perusal. Had they looked at the detail from Canberra, they would have been more dismayed than pleased."

And News Ltd's Terry McCrann wrote: "The budget assumes strong growth in the economy as we ride the China boom. The soggy sales figures from Myer and David Jones seem to query that. Interestingly, DJ and Myer reported the same sales experience. They said their like-for-like sales were down 3.1 per cent in the three months to the end of April compared with a year ago. They also said the best performing categories were womenswear and menswear. DJ added accessories and childrenswear; Myer added cosmetics and youth categories. That's where the exact similarities though ended. At the all-important bottom line, Myer said it expected full-year profit to be "up to 5 per cent below" last year's. DJ in contrast reaffirmed its 5-10 per cent likely profit increase."
 
But this morning a gloomy Malcolm Maiden shook his head and wrote: "The slight uplift in discretionary retail trading conditions that Myer chief executive Bernie Brookes and David Jones chief executive Paul Zahra say they noticed last month is unlikely to survive the budget settings that Treasurer Wayne Swan unveiled on Tuesday night. On any measure, department store sales remain weak, however. And with interest rate rises still on the horizon, April's glimmer of light is unlikely to become a profit beacon."
 
Fairfax's Ian Verrender took another poke at the Commonwealth Bank after its third quarter update yesterday: "The Commonwealth Bank reported a $1.7 billion profit for the March quarter. That would be roughly 13 weeks. That would be close to $130 million each week. It was only a decade ago that the Commonwealth took a full year to earn profit of such magnitude, which back then was hailed as a stupendous achievement. With a full quarter to go, CBA this year has already piled up $5 billion in profits in its vault, making it a certainty to outstrip last year's $6.1 billion bonanza. And still, the analysts and most commentators were taken in by the usual assortment of dire warnings about a bleak future that now routinely accompany such results."
 
And the AFR reports this morning: "Australia's big four banks have cut their exposure to commercial real estate by more than $25 billion in the past 18 months."
 
The Australian's John Durie said in his column this morning: "CBA's trading update yesterday concluded a mostly positive reporting season for the big banks, with profits up despite slow volumes and little evidence of any dramatic uptick any time soon. A somewhat predictable round left analysts looking for a story to tell so an uptick in potentially problematic mortgages was a convenient peg, even if the trend is simply seasonal."

On Monday the Redflex private equity bid failed and Spotless told Blackstone, no thanks to an offer. And yesterday there was more according to Fairfax's Insider, Ian McIlwraith: "Two deals collapsed yesterday, and their demises were largely the right outcome for independent investors, even if share price movements are not reflecting that. First, BC Iron revealed that it was terminating its merger scheme with Hong Kong's Regent Pacific Group, because the independent expert KPMG had concluded the plan was neither fair nor reasonable. BCI shares fell only 5 cents to $2.80, suggesting the market expected it. Minutes later, the rare earths miner Lynas and the exploration tiddler Forge Resources, both under the control of the ex-Macquarie banker Nick Curtis, revealed their $30 million asset deal had been abandoned."
 
The Australian's Bryan Frith looked at one of those deals that went bad this morning: "Reading between the lines, it would appear the $345 million cash bid for BC Iron by the Hong Kong-based Regent Pacific was scrapped because the independent expert upped its valuation of the target company. BCI yesterday announced that it had terminated the proposed scheme of arrangement after the expert, KPMG, concluded the $3.30-a-share offer price was neither fair nor reasonable, and therefore not in the best interests of the shareholders. As a result of the expert's report, the BCI board had withdrawn its previously unanimous recommendation of the offer, backed by a written opinion from senior counsel, which gave it the right under the scheme implementation agreement to terminate the scheme."
 
And the rump of another deal that went bad was seen yesterday, according to Fairfax's Michael Evans: "He may have lost the battle but John Kinghorn has had one last, very profitable, laugh. Two weeks after shareholders rejected his proposal for a low-ball buyout at RHG Ltd, the rump of the failed RAMS Home Loans business, Mr Kinghorn has taken advantage of a rising share price to dump his stake. Mr Kinghorn, who founded the RAMS business and remains chairman of RHG, has pocketed $44.2 million from the sale of his remaining 35 million shares, or 11 per cent of the company." The Woody Allen approach to investment: take the money and run.
 
But as those deals die, another is developing, as the papers reported this morning, including Nabila Ahmed of The Australian: "It was almost five years ago that Sydney millionaire bookmaker Con Kafataris floated the family's sports betting business on the stock exchange at $2 a share. After an auction process that first became public in October 2009, Centrebet announced yesterday that it was in advanced discussions with London-listed Sportingbet. The price being offered to shareholders is "at or around $2". While that doesn't sound too good, it's worth noting the company has paid out 44.8 cents in dividends over its listed life, generating a 22 per cent return over five years for investors." Odds on?

Business Spectator's Stephen Bartholomeusz assessed the retailer and CBA reported: "Myer, David Jones and Commonwealth Bank all referred to a modest improvement in conditions as the year has progressed. There were, however, no references to the implicit caveat – what the Reserve Bank might do with interest rates. The third quarter sales declines reported by the retailers, and an increase in CBA's cash earnings in the quarter that appears to have been entirely driven by a continuing improvement in its charge for bad and doubtful debts and therefore reflect little if any growth in income and lending, indicate that consumers and businesses are still acting very cautiously. The retail malaise was triggered by the implosion in confidence and spending that occurred after the Reserve Bank surprised with its November rate rise last year, the impact of which was amplified by the decisions of the major banks to raise mortgages rates by more than the increase in official rates."

Westpac is to have a new chairman and The Australian's John Durie wrote on the paper's website yesterday that: "Former KPMG boss Lindsay Maxsted will be the new chair of Westpac after Ted Evans steps down at the company's annual meeting later this year. The move is a model of good governance in stark contrast to what is believed to be under consideration at Leighton, which may appoint Wal King after 34 years at the company. Maxsted would be expected to wind back his corporate advisory functions once he takes the helm at Westpac given he has just joined the BHP board and also is chairman of Transurban. He is a high quality successor to Evans but two chairs and one active big company board role stretches the limit of what could be expected to properly serve shareholders of all three companies. King, of course, is mooted to be considering a role as chair of Leighton with the backing of 54 per cent shareholder Hochtief and its new owner ACS."
 
But this morning a slightly different tack from Durie on Mr King: "Lindsay Maxsted's elevation to the chair of Westpac after Ted Evans steps down at the annual meeting later this year is a model of good governance. It contrasts to former Leighton boss Wal King's possible return to his employer of the last 34 years. To be fair to King, he would not see it in this light. He would frame any return as intended to rescue the company from any present turmoil. Suffice it to say, at this stage of the game, with reportedly no firm offer on the table, King is yet to commit to anything." Hmmmm.
 
And the AFR's Chanticleer says "Lindsay Maxsted's appointment as chairman of Westpac heralds a shift in boardroom dynamics that is likely to see the bank go back on the acquisition trail." Just where Westpac goes is the question.

Meanwhile, The Australian's Tim Boreham joined the rest of the market in having a yawn about the impact of the federal budget: "For listed stocks, the budget wash-up suggests a set of largely irrelevant disclosures, apart from the high-level tampering with deficit and GDP forecasts and the like. We don't hear too many execs scrambling to join pregnant teenagers, malingerers and soon-to-be redundant defence civilians in the fallout shelter. On balance, there's a modestly positive effect for healthcare, infrastructure and workplace recruiters."
 
And still on the budget, The Australian's Matthew Stevens reports this morning: "In the wee hours after Wayne Swan bet his return to surplus on the sustainability of China's transformation and the resources boom it has created, a collection of the world's most powerful, adept and intuitively conservative miners pumped audiences in Barcelona with evidence that should buttress confidence in the revenue side of the Treasurer's forecasts. Which doesn't mean we should be anything less than sceptical about the Swan's ability to generate the promised $3.5 billion surplus by 2012-13, given his failure to bring the commonwealth's outgoings under control. But pretty much every word uttered at the annual gathering of resources leaders at the Bank of America Merrill Lynch mining conference in the Catalan capital reinforced Treasury's optimism about the expanding fiscal footprint of Australia mining sector." I wonder what the gloomsters elsewhere on the paper think of that report?
 
One of those is the paper's economics editor, Michael Stutchbury, who wrote this morning: "Tony Abbott's attack on Labor's modest tightening of middle-class welfare confirms a blunt budget truth. Despite their antagonism, Labor and the coalition are in a conspiracy to hide their shared blame for leaving Australia's budget hostage to our China luck. Wayne Swan's budget offered $22 billion in four-year "savings", including by shaving tax-and-churn middle class welfare. But then he soaked up $19 billion of them in new "spends", including by boosting family tax benefits for older teenage students. The budget betrays a weak government clinging to minority power." And China has been driving our economy now for five years, and will continue to do so.
 
And Fairfax's Michael Pascoe found something to gnaw at in the federal budget on smh.com.au yesterday: "There's something sad about politicians and immigration – they just can't help fudging the numbers. Or maybe there's one part of the budget that just doesn't add up. The government was right to make increased workforce participation, assisted by increased migration, the centre piece of the budget as it is actually much more important right now than surplus worship. Except that it looks like Labor is still gun shy after the miserable role immigration and dog whistle politics played in the last election.