Economic drivers make rise right

ANYONE who didn’t see higher interest rates coming should not be allowed to drive a car. The Reserve Bank of Australia had cut the price of money to the bone as an insurance policy against global recession. There was no claim, so we no longer have to pay the premiums. The domestic economy looks like chalking up back-to-back 4 per cent annual growth rates, fuelled by robust consumer spending, a rebound in business investment and the prospect of stronger exports.

But RBA governor Ian Macfarlane is fretting about spiralling property prices and a borrowing frenzy that might stretch household debt, push up wages, and capsize the ship. He may also have looked at the stock market, where speculators betting on a good year for shares have borrowed $10 billion in margin money. Competition to lend it to them is so hot that an outfit called Leveraged Equities offers clients Qantas frequent flyer points. In what it calls investment power ‘take off’, the bigger the loan, the higher you fly.

Unfortunately, a jolt to confidence has led to a number of market favourites suffering pancake landings. Many bull punters now have a choice of cutting their losses, or paying interest rates north of 7 per cent to hold their positions. The All Ordinaries index is only down 3 per cent so far this year. But some traders have come up with a new wheeze. They sell the shares of companies immediately before their profit reports. If they miss market expectations, the shares drop like a stone. In the current nervous conditions, even if earnings come up to scratch, they are likely to stand still or lose ground. Winners for the ‘short’ brigade include beaten up Mayne Group, Coles Myer, Southcorp and ResMed.

There also is a recent fad for selling high price/ earnings ratio stocks like Wesfamers, Patrick Corp and James Hardie. Big institutions are saying they will no longer pay up for quality earnings growth – these are the folk who sold much of our gold industry to the South Africans, five minutes before the surge in the gold price.

We have all heard of a ‘jobless’ economic recovery, is this one going to be a ‘profitless’ one for investors? Not necessarily. This is still a safe haven, with good companies offering fair dividend yields.

The 0.25 percentage point hike in interest rates is neither here nor there. But analysts were spooked by the distinctly hawkish tone in the RBA bulletin. Some are predicting a steady series of rises taking the cash rate from 4.5 per cent now to 6 per cent this time next year.

That will not happen if global growth goes pear shaped again, or inflation does not take off next year, as Macfarlane evidently fears.

Meanwhile, the Aussie continues to trade well over US54 cents. This will hold down the imports bill, and make your Christmas ski holiday in Aspen cheaper.

Full points scored for a top floor routine

IT is difficult to escape the conclusion that Senator Richard Alston has been dragged by the ear into John Howard’s office and asked if he was still playing on the same team as the Government. The communications minister had joined ACCC boss Allan Fels in enthusiastically kicking the share price of Telstra while it was down. Last week, Senator Alston’s backflips formed part of a gymnastic routine worthy of a perfect score. No, he did not want to see Telstra regulated to death. That would be “unhealthy”. Yes, he was fully committed behind the efforts to float off the remaining 50.1 per cent of the carrier.

No, his recently proposed regulatory changes were not designed to further increase the power of the ACCC. A reasonably attentive fly on the wall in the boardroom of the Macquarie Bank would have heard Senator Alston make these comments at a private lunch for fund managers. Participants were asked not to talk to the media about the briefing. Why?

Telstra shares, weighed down by poor sales, political torpedoes, and general negativity, are treading water at $4.740.

They will not assume an upward trajectory until Ziggy Switkowski pulls a rabbit from a hat. Sadly, many in the stock market do not think he even has a hat.

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