I missed this yesterday, but it’s important so I’ll bring it up briefly before getting stuck in to market related stuff.
If you subscribe to The Daily Reckoning view that the political situation in Australia is about as bad as the form of the Carlton Football Club, then you’ll be pleased to know you’re not alone.
Earlier this year, the Business Council of Australia (BCA) commissioned research to help it understand the public’s attitudes towards tax reform. But what it actually discovered was a deep anxiety about the direction the country is headed.
From the Australian:
‘The Textor research shows that 82 per cent of people think the Australian economy is stable, bad or getting worse and 53 per cent think life in Australia is stable, bad or getting worse. A huge 94 per cent believe the nation “needs a better plan for its long-term future”.
‘The project, conducted for the Business Council of Australia earlier this year, reveals a growing apprehension on the community’s part, with 83 per cent of people saying that “a worsening of economic conditions in Australia will affect them personally”.
‘One of the most worrying but unsurprising findings is disillusionment and distrust of the political system. People doubt whether it is strong enough to preside over the necessary changes needed. This public sentiment confirms the notion of a growing “crisis of the system”.
The President of the BCA, Catherine Livingstone, said this level of concern was unprecedented in more than 30 years of polling.
So if you’re concerned about this great nation…you’re not alone. Many other Australians also see that politics is out of control. Its prime function is now to pander to Australia’s army of rent seekers and special interest groups, instead of governing for the benefit of all.
This is why the next 10 years will be such a challenge. The fruits of the mining boom are over, yet the spending from the boom remains. Sadly, our political leaders just aren’t up to the challenge…and many Aussies recognise this.
In the absence of leadership and smart policy, it comes down to the RBA to ‘do something’. And so all eyes will be on the Bank this afternoon at 2:30 to see whether interest rates fall another 25 basis points or stay put.
Actually, there will be plenty of people looking to movements in the Aussie dollar at 2:29 for clues about the rate decision. Just prior to the last few decisions, sharp movements in the Aussie dollar successfully guessed which way interest rates would go. This led to concerns about a leak from the RBA Board.
Today’s Financial Review quotes RBA ‘shadow’ board member Warwick McKibbin as saying that a lot more people know what the RBA is thinking than you would hope. That’s not a good look.
McKibbin also says that ‘governor Glenn Stevens is being forced by the law governing his job to make a potentially risky bet that another official interest rate cut won’t add to already inflated stock and property prices…’
Of course another rate cut will add to stock and property values. When you lower the discount rate, you increase the asset value. It’s an iron law of finance.
Perhaps that’s why the market rose yesterday. Weak Chinese manufacturing data led to an initial sell-off. Then it dawned that this was good news, because it would increase the chance of the RBA (or the People’s Bank of China…take your pick) lowering interest rates.
Westpac’s first half results, announced yesterday, probably helped the interest rate cut crowd too. It came in a little weaker than expected. But the commentary that accompanied the result was first class PR.
Westpac said that they will apply tougher new tests to property investors, and will also tighten lending to foreign investors. Why now? The regulator, APRA, wrote to them in December asking them to pull their head in.
Ever canny, the banks now realise that the greatest impediment to further interest rate cuts is the growth of their mortgage lending books. If you tell the market you’re tightening lending standards, irrespective of what the RBA does, it might just make it easier for the RBA to justify a cut.
Which is of course what the banks want. Lower rates are always good for business. It encourages borrowing and keeps default rates low. In ANZ’s results release this morning, bad debt charges fell another 3% as the benign credit cycle continued.
ANZ reported a healthy 5% growth in cash profit, or 4% growth before bad debt charges.
Westpac, on the other hand, saw a 10% increase in bad debts compared to six months earlier. Rising bad debts in a falling interest rate environment is a poor outcome for the bank and points to lax lending standards. Perhaps that’s why it’s now promising to ‘tighten lending standards’? Maybe that means it will no longer hand out money to whoever walks in the door…
Elsewhere in the market, there are signs of belt tightening. One of Australia’s largest and most successful engineering companies, Worley Parsons, took a $125 million hit to earnings yesterday and announced the loss of up to 2000 jobs from its global operations.
Then there’s the news of Woolworths’ increasing home improvement nightmare, Masters. After ploughing $3 billion into the venture, it is years away from turning a profit. And there are concerns that profitability may never reach expected levels, given its main rival, Bunnings, had such a head start in snapping up all the prime big box locations.
If that’s the case, it’s a lot of wasted capital for Woolworths’ shareholders, and will bring an end to a very long reign of excellent profitability for the company. In years gone by, Woolworths regularly generated a return on equity of 30% plus. But according to forecasts, it will fall to around 20% by 2017.
My mate and publisher of The Daily Reckoning, Kris Sayce, reckons this negativity presents a buying opportunity for the stock. He wrote about it recently in his Tactical Wealth Newsletter. Kris has a knack for contrarian stock picks, and this might just be another one to add to his list of successes.
But if a giant like Woolworths can get into trouble, then anyone can. If you can’t rely on Woolies delivering the goods, who can you rely on?
It’s why diversification and spreading your bets is the way to go in this market. Lower interest rates will keep the market as a whole propped up. But they won’t stop individual companies from hitting the wall from time to time.
Which is why you should also save some room for a well considered punt. This is exactly what Jason Stevenson over at Resource Speculator does. Last night, he published a report highlighting two tiny stocks that could soar hundreds of percent very soon if their exploration activities pay off.
Not all of these punts work out, but when they do, they make it worthwhile. You can check out Jason’s work here.
for The Daily Reckoning Australia