Australia's villainous dollar about to turn heroic BY: JOHN DURIE From: The Australian April 25, 2012 12:00AM Increase Text Size Decrease Text Size Print
THE resource-sector-inflated Australian dollar has ironically cleared the path for an almost certain interest rate cut next week.
The 2.1 per cent underlying inflation rate for the March quarter was the lowest reading since the September quarter in 1999 due in large part to the weak economy.
But a key factor behind the lower than expected prices was a decline in so-called tradeable goods, which are everything from consumer electronics to cars, clothes and fridges.
So arguably, while the Australian dollar has been villain No 1 in Australia, next week it will be a hero (of sorts).
There is scope for the Reserve Bank to cut rates by 50 basis points, given the economy has slowed to 1.6 per cent growth in the December quarter.
But the RBA will await the coming federal budget before cutting rates any further than next week's 25 basis points.
The looming rate cut helped the stockmarket avoid the global fall based on renewed concerns about lack of progress in Europe.
Lower rates will help boost consumer confidence but now it's over to Canberra to come up with a credible budget to clear the way for further rate cuts.
Campaign takes off
COLES is happy with the early response to its new Flybuys campaign, with about 200,000 applications an hour being processed.
Part of the campaign gives 10 per cent off five nominated products provided $50 is spent.
The three most popular products nominated are milk, bananas and mince meat.
All three are so-called power products that fill supermarket baskets and are in the fresh produce part of supermarkets.
This suits Coles because right now it lags Woolies in fresh produce, liquor and hardware.
Yesterday's inflation report and the almost certain rate cut will provide a needed boost to consumer confidence that needs all the help it can get right now.
The folk at Coles may even claim some credit, given inflation peaked in March 2008 at about 4.7 per cent.
That was about the time Ian McLeod arrived at Coles and revived competition in the supermarket sector.
There is some evidence to support the Coles claim but more at the margin.
Over the past four years, bread prices have fallen 11 per cent but in the same period tea and coffee have gone up 8 per cent, soft drinks by 14 per cent, alcohol by 14 per cent, cereal by 5 per cent, cheese by 7 per cent and jams and spreads by 4 per cent.
A point of caution in measuring food prices at supermarkets: more than half their sales come from special promotions, which means shelf prices are not so relevant.
Coles argues it now matches Woolies in customer traffic, not in absolute terms, but proportionally.
Woolies is also 10 to 15 per cent better at so-called basket size: how much people spend when they come into the store.
The game for Coles is to get people to put more in the basket when they get to the store and it would seem Coles will be pushing for better margins on those goods.
The official line from Coles says its liquor management is doing well, but it has a lousy store network to work with, which explains its chronic underperformance.
There are more Dan Murphy stores in better locations than any of the Coles offerings.
This is only part of the equation because Woolies is increasing its lead over Coles Liquor.
Bunnings boss John Gillam is on the other side of the equation.
While last-quarter sales were relatively weak, the reported $20 million in earnings per store for Masters shows it has work to do.
Over the next few years, Gillam plans to add 91 stores to the 294 in existence, a 31 per cent increase in floor space.
That is a big increase and, assuming Bunnings is not over-expanding, the outdoor-living category must be also be growing fast.
In his June investor day briefings, Wesfarmers boss Richard Goyder will detail what will be the cost impost suffered from the new carbon tax.
Market talk suggests Coles has told suppliers it will not pay any increases in price caused by the carbon tax, so just what the impact will be remains to be seen.
Talking down coal
WESFARMERS boss Richard Goyder went out of his way to talk down coal earnings forecasts this year, based on higher costs and some remaining issues with the $260m wash plant.
The resources division reported $36m in earnings last year and $250m for the first half, but full-year earnings will fall below the market high estimates of about $575m.
Downgrades can be expected from the market, but the company insists that while costs pressures remain, the wash plant issues are short term.
In the past six years, earnings from the division have ranged from a low of $165m in 2010 to a high of $885m in 2009.
The carbon tax will cost the division about $40m.
Divisional manager Stewart Beutel will be under pressure to get the house in order.
Claims on capital
BIOTA chairman Jim Fox's line about lack of support for biotech in Australia has plenty of merit but there are also some company-specific issues.
The reality is (as a flood of emails confirmed yesterday) the right companies have successfully raised money in Australia.
Mesoblast is a $2bn company that started life with a market value of $100m.
Bell Potter raised $80m in Australia for the GI Dynamics float last year with the vendors being in part US venture capital.
The firm makes a device to treat diabetes and obesity.
Starpharma has doubled in market value to more than $500m in 12 months and Phosphagenics has done likewise to increase its value to $234m.
Brokers such as Bell Potter have specialised in the sector and are helping to raise awareness.
This is not to deny Fox's argument that there is simply more capital available in the US. And there is also no denying that institutional investors who stray too far from the index run the risk of losing mandates in Australia.
By US standards there is not much by way of a venture-capital market in Australia and the ASX is dominated by index huggers.
Spotless offers
HAVING successfully forced Spotless to the bargaining table by detailing its plans through the media, the question now is whether PEP will be prepared to bridge the $32m gap between the two sides.
The so-called alternative offers on the table such as asset sales and note variations are just bargaining tools and, in truth, the same offer is on the table as has been there virtually from day one in November. The notion that Spotless takes the risk on an asset sale to lower the price of the deal is absurd unless a firm buyer is signed up.
There is 12c between its $2.68 offer and the $2.80 line in the sand from Spotless chairman Peter Smedley, who will fold if PEP gives him a higher offer, even if it falls below the $2.80 he was demanding.
Having made all the noise now, it's time to see if there is any action to follow PEP's talk, and given the difference is so small on a $1bn deal, the odds must favour a deal.
Anzac Day has featured the odd game of two-up in the past and this time serves as a convenient break allowing extra time for a deal to be done by Friday.
SPL Price at posting:
$1.80 Sentiment: Buy Disclosure: Held
