The RBA Tells You What You Already Know
The Reserve Bank released its Statement on Monetary Policy for August yesterday, reader. It took 25,254 words, 76 graphs and 17 tables for our monetary authority to tell you everything you already know about Australia’s economy and financial markets.
Only 28 of those words meant anything to anyone.
“On the assumption that the subdued demand conditions are likely to continue, scope to move to a less restrictive monetary policy stance in the period ahead is increasing.”
It all boils down to that. The RBA only really needed three words: “interest rate cut”. That would’ve done it.
The rest of the publication is a recap.
Fuel costs are high. Asset prices are falling. Economic growth is slowing everywhere. Inflation is high. The credit crunch isn’t over. Business conditions are deteriorating. Retail spending is falling.
So it looks as though we’ll be getting an interest rate cut. Money markets and analysts are taking it as a given now.
Then again, central bankers have resorted to threats and games before. We guess we’ll find out in a month.
But there was one optimistic point from the RBA’s letter. Australia’s terms of trade are increasing, thanks to coal and iron prices. Buy the ‘Out Economy’, we say.
Another Chance to Buy the ‘Out Economy’…at a 34% Discount
How can you do that? Well, here’s a thought. Iron companies have lost chunks of market value in the last two months.
Fortescue’s (ASX:FMG) down 34% from its high.
Murchison’s (ASX:MMX) off 43%.
Mount Gibson’s (ASX:MGX) 41% lower.
They could go lower.
But the iron business is still a gold rush in its own right, whatever the share prices are doing. Fortescue announced yesterday that plans to double its iron production are ahead of schedule. We asked Gabriel what he thought of the stock. He was pretty keen. Scroll down for the full story.
Meanwhile, fellow iron ore producer Mount Gibson announced a record net profit of AU$113 million. The market didn’t even glance up. The stock traded flat.
You buy when there’s blood in the streets. What about when there’s utter indifference in the streets? What about when the streets are flush with beige?
It’s uninspiring to see investors shun good results. It’s not like insiders anticipated this either. Mount Gibson has been trading lower for the last month. But markets change. It’s handy to get in before that happens.
A Correction in Bank Pain
The market isn’t entirely indifferent these days, though. It shrieks and leaps up on a chair every time another company confesses sub-prime blues.
But as we’ve said before, sub-prime losses aren’t the best measure of how Australian banks are travelling. It’s how much their funding costs rise.
And, as you can see from our Bank Pain Index to the right, funding costs are back to where they were this time last year.
Maybe it’s tempting to think that the credit whipping is over. Especially when Bendigo and Adelaide Bank (ASX:BEN) posts solid, 40% growth in annual profit.
Don’t be fooled though. This isn’t permanent. As we said above, money markets have factored in a rate cut. Probably a double-slash of about 50 basis points. That’s how the RBA usually kicks off the cutting party. It likes to loosen things up with a double-shot of financial liquidity.
But if the RBA makes its move and cuts…don’t expect money markets to follow the cash rate down any further. And that’ll leave banks with a big spread between the cash rate and their own funding costs. A big, nasty, expensive spread.
Or, the alternative…the RBA doesn’t cut rates and money markets skip back up to nosebleed highs. Someone hand ANZ a tissue.
Babcock, the Life of the Party
After looking at that Mount Gibson result, it seems like investors are bored with the share market, reader. And every time things get boring, Babcock and Brown (ASX:BNB) likes to step in and liven the place up a little. Like the attention-seeking guy at a party who loves to make a spectacle. Usually at his own expense.
Right on cue…Babcock’s tipping next half’s profit will be down 40%.
Investors’ lives suddenly became instantly interesting. They had purpose. They had a mission. Their mission was to sell the stock down 12% for the day.
Credit crunch? Not over.
Money Weekend editor Kris Sayce has been all over this story. Babcock’s paying for establishing a high-debt business model that doesn’t work when the cost of debt goes up. And the money markets continue to flog companies like Babcock into submission. It’s not over.
Gold Cheapens to US$828
Meanwhile, gold took a big fall last night reader. It’s gone all the way down below US$830. Gabriel’s trying to figure out whether traders will support it from here, reader. He’ll let you know tomorrow.
Remember…gold’s one of the best ways to sell the financial crisis. This is just a correction. And in a financial crisis this huge, there’s more to come. Watch for gold to move up again later this year.
