Saving Gunns? Time for a bailout, there’s an election in Tasmania and one federally this year and the biggest flashpoint in the state is Gunns’ pulp mill. Time for the stricken company to play the “collapse card”? Gunns this week shocked the market with a surprise 98% plunge in profit. It’s restructuring (don’t they all) to try and give the pulp mill a chance to survive. Fat chance. After a 32% drop in the price of its shares since Monday, the market is betting Gunns hasn’t got a hope of getting the mill up and is worried the company might crash. Gunns got queried by the ASX over its appalling disclosure, but the company claimed it was well-known that wood chip prices were weak, but not 98%-plunge-in-profit weak. The company has four months to find a solution before loan covenant breaches become a possibility. That puts it into the election campaigns. If the Free To Air TV got $250 million without strings, why not a well-connected Tasmanian “champion”. What do Bob and Christine think?
Paying the toll at Toll: More than $1 billion was cut from Toll Holdings’ market value yesterday after the transport and logistics company surprised the market with a 32% drop in net profit (and 16% fall before one-off items). Revenue fell 6% as the company’s Asian expansion plan was battered by the economic slump. Toll shares fell 18%, or $1.55, to a six-month low of $7.10. What happened to disclosure? Like Gunns there was no update ahead of the result. It’s inconceivable that Toll management didn’t have a good idea that revenue and earnings were falling well before the end of the reporting period on December 31. Gunns copped a please explain from the ASX, Toll should get one as well today, with a request as to why there was no update earlier this month when the company announced a US acquisition.
RBA watchers alert: Those capital spending figures for 2011, especially for mining, are enormous. If you think about it, it’s the Australian economic dilemma; can we handle investment rising at 15% or more a year, with mining investment hitting 6% of GDP next year, without pushing up interest rates, costs and inflation? Every monthly speculation ahead of the Reserve Bank board meeting (the next is on Tuesday) will waltz around this point. Can we handle the boom? RBA governor Glenn Stevens has made it the central policy task for the bank, supported by other senior officials. The election will be all about debt, debt and deficits, handling the boom will be the big issue. The Howard Government (and state Labor governments) struggled up to 2008. Will the mob in Canberra, whoever they are, do any better after the poll?
January lending grows: Good news from figures from the Reserve Bank this morning. Lending is starting to accelerate, with credit provided in January rising 0.4% from December (which was up 0.3% from November). In fact that was the best monthly growth since January, 2009, when lending was about to collapse. Over the year to January credit rose 1.3% after the 1.5% annual growth in December. Housing credit rose 0.7% in the month to be up a solid 8.2% in the year. Lending to owner-occupiers rose 0.7% in January from December, to be up 9.9% over the year. Personal credit also rose, up 0.5% and 0.2% for the 12-month period. The laggard was business lending, which was still weak, down 0.1% in January (but better than the 0.3% fall in December), for an annual decline of 7.8%. Now for the monthly health check on Tuesday with the monthly RBA decision on the cash rate, and the quarterly health checks of our trade position (also Monday) and the entire economy with the December quarter and 2009 national accounts and growth figures.
Central banker speak: They are notorious for their opacity of thought as they comment on all things economic. But now some direct talk. With Greece sliding and worries about the recovery in Britain, Europe and the US some of the globe’s “Lords of Finance” (to use the title of the best book on world finance written for years) have summed up the health of their respective economies in the past week. Pick the one where you want to live.
US Fed chairman Ben Bernanke told Congress this week “notwithstanding the positive signs, the job market remains quite weak,” he said in reference to the loss of 8.4 million jobs since December 2007″. The FOMC continues to anticipate that economic conditions — including low rates of resource utilisation, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” he said, echoing the Fed’s most repeated phrase (in bold) for some time.
Bank of England governor Mervyn King: “My particular concerns at present derive from the state of the world economy.” “Recovery in our largest export market — the euro area — appears to have stalled.” “To maintain levels of economic activity around the world, high-savings countries must expand their domestic demand while low-savings countries are reducing their net borrowing from abroad. At present there is little evidence that this is taking place.” And on spending and deficits: “I think we would have seen a very serious monetary contraction (in the UK). We were seeing a very big monetary squeeze of a type we have not seen — probably ever.” “The crisis did not originate in the non-financial sectors of the economy but that is where most of the costs are falling. You don’t need me to tell you that its impact is not just economic but also social and political in nature.”
Glenn Stevens: “We are located in the part of the world that is seeing the most growth. And in terms of fiscal sustainability, Australia’s position is, by any measure, very strong indeed. We think on the basis of available data that real GDP grew by about 2% through 2009. We expect that it will grow by a bit over 3% for 2010 and about 3½% in 2011 and 2012. This situation is quite different from those faced by the major countries. Whereas many of them had their worst recession since World War II, Australia probably had its smallest.” I’ve made up my mind, have you?
What do you call a collective of private equity groups? This report in the Financial Times is another good example of the collective incompetence of private equity groups and why they need cheap money and good times to thrive. Houghton Mifflin Harcourt is an education publisher taken private a few years ago by a group that included Paulson and Co, the hedge fund run by John Paulson who is currently being lauded in the American press, Apollo, Blackrock, Guggenheim Partners, Fidelity and Avenue Capital. The vendor was Reed Elsevier, which sold the business to CEO Barry O’Callaghan, who was then supported by the various PE groups. It had gross debt of $US7 billion, with annual cash and share payments to the PE groups and their banker mates of $US800 million. But it was too much. Confronted by the spectre of bankruptcy, the groups got together and agreed all equity holders (Reed, Bazza the CEO and others) will be wiped out as debt is cut by $US4 billion to $3 billion. The investors in the various PE funds will wear losses, as will the various banks. Will the PE groups return their fees and other charges they levied on investors and others for the very doubtful benefit of their very doubtful advice? What do you call a collection of private equity groups, an incompetency?
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