Ann: Update - Notification of buy-back - CPU, page-3

The CPU price is currently heavily influenced by US interest rates due to its margin income take on huge deposits of client funds in North America. This margin income was virtually nothing for many years in the extended low interest rate environment but the global inflation problem and resulting higher interest rates provided CPU with a massive inflow of virtually free revenue (above and beyond their normal earnings from core business activities).

Analysts have for over a year been expecting US interest rates to fall back quickly and this bonus revenue to start to be reduced. In August the Fed dropped the interest rates so it looked like the reduction had started but then came Trump ......

Trump has been promising to put massive tariffs on Chinese imports. Irrespective of your political position on this its undeniable that this tax placed on imports of huge amounts of goods would flow through to prices at the checkout. We aren't talking small percentages either. Higher prices on consumer goods means higher inflation. Higher inflation suggests higher interest rates for longer.

CPUs share price started to surge as it started to look like Trump may win the election and confirmation of that continued to drive the SP forward in anticipation that the tariff rhetoric will be ramped back up not long after the election high fives have ended. This may spook the Fed back into a watch and see stance and flow through to lending markets.

Higher interest rates for longer is like large dollops of cream for CPU profits. Margin income has virtually no operating cost to earn so flows through to profit. Its like free money falling from the sky and thanks to US voters it looks like the next 4 years may bring lots of extra cream.

And don't forget the exchange rate implications of all this. CPU reports in USD because so much of its income comes from the US and doing so minimises exchange rate variances creating wild swings in its financial reporting, however as the CPU shares are listed here in AU and traded in AUD, that USD income starts to look even better when the AUD drops against the USD.

The massive rally in the AUD to almost 70c ended weeks ago as Trump's chances started looking better. Markets started betting that the August Fed rate drop may be paused or even reversed in time causing a rally in the USD.

So in short CPU are caught in the perfect storm. Free money thrown their way is part of the economic cycle but usually it is short lived and only happens once a decade or so but global politics risks freezing the cycle and holding it at the perfect point for CPU for quite a while. At the exact same time these same forces may cause a higher USD thus magnifying the value of the cream to Aussie investors.

Obviously CPU management would much rather tell you the SP hike its all because of their brilliant cost out strategy blah blah blah. Reality is CPU management could be in a coma and these rivers of gold would still be flowing.

I wouldn't expect a profit upgrade for quite a while because the nature of the incoming President is somewhat unpredictable but the more Trump threatens tariffs the higher the risk of inflation, higher interest rate, higher USD and all that entails for investment positions.

Of coarse this all sucks for US consumers and property market but its their call. Democracy at work. Every choice has consequences.