Interesting Piece from Peter Spann on the stimulus package
Double Whammy! Pow! Pow!
Double Whammy! Pow! Pow!
Hello,
History judges days like today.
A massive stimulus package from the government - POW! Followed by a massive rate cut from the RBA - POW!
Are these the knockout punches that will get us back on track?
In 20, 50, 100 years time a day like today will be judged as the day that turned the tide or a massive failure. And unfortunately we won't know which.
Stimulus Package at a Glance
$14.7b for schools - $200,000 each for maintenance and repairs
$6.6b for 20,000 new homes
$3.9b to insulate 2.7m homes - roof insulation
$890m for road repairs and infrastructure
$2.7b small business tax break
$12.7b for cash bonuses of up to $950
The Government lined up today to spend $42 Billion on "nation building and jobs". It's a bit of a surprise. Personally I LIKE that labour governments try to spend their way out of recessions. We do get schools, and roads and (in this case) cleaner skies (more insulation, less air-conditioning, lower green house gasses - but $3.9b?) and I am sure everybody who gets $950 deposited into their accounts will be very happy - all good labour government stuff but where's the grand plan, the big (Snowy River, Hoover Dam) scheme, the huge vision? Perhaps that's just asking too much of pollies these days?
Five one-off cash bonuses worth up to $950 will be paid to middle- and low-income workers and families, children going back to school, farmers in hardship and people undertaking training.
The package also gives $200,000 to every school for maintenance, spends $890 million on regional roads and black spots, will build 20,000 new homes, boosts rebates for solar hot water and gives tax breaks to small business.
The Treasurer, Wayne Swan, claimed 90,000 jobs would be created by the package over the next two years, but, despite this, the unemployment rate was predicted to jump to 7 per cent by next year.
And there's the grind - I think the unemployment figures we are seeing at the moment are way behind reality. I think they could be up to double what the indicators are showing. It really is suck up to your boss and work back late time.
Another Massive 1% cut from the RBA
At its meeting today, the Board of the Reserve Bank decided to reduce the cash rate by a further 1%, to 3.25 per cent.
Glen Stevens, Governor of Monetary Policy went on to say "There was a significant deterioration in world economic conditions late in 2008. The effects on household and business confidence of the financial turmoil following Lehman's collapse, and continuing strains on major financial institutions, saw a significant downturn in demand around the world. As a result, the major advanced economies contracted sharply in the December quarter, as did a number of emerging market economies. The Chinese economy, though still growing, has slowed markedly. Global inflation, having reached high rates during the middle of 2008, is now declining.
Measures to stabilise financial systems have contributed to an improvement in the functioning of credit markets over the past couple of months. This, in conjunction with expansionary macroeconomic policy measures being taken around the world, should assist in promoting global recovery over time. But the near-term outlook for the global economy is the weakest for many years."
This rate cut is good news for just about everybody. Businesses borrowing money will be relieved, easing pressure on them and people owning property will jump with joy.
I'm going to go out on a limb here and predict a small but temporary improvement in both the property and share markets over the next few months to the end of the financial year but it's not the time to get too exuberant.
Small ongoing investments into equities based funds are still the best way to take advantage of the current situation.
Here's why...
More Ugly to Come
I wish I had good news but I think there's a lot more ugly news to come out. Listed companies will have a big decision to make:
1. Get all the bad news, all the announcements, job cuts, production cuts, decreases in profit and turnover forecast, plant closures etc done in one financial year, take whatever hit the market gives them and start with a clean slate next year (companies that are not relying on their share price to prop up debt will most likely bite the bullet and do this) or...
2. Drag it out, sneaking in the bad news over an extended period of time and hope nobody notices they are fudging (companies whose share price is precarious will probably take this approach).
The fact is choice 1 is best for the company, the market and the economy and my guess is that most companies who can afford to will take this approach. In the long run it's best to take a hit on the share price now and start building the profits as soon as possible. In fact companies can even take advantage of the recession by using it as an excuse to trim back costs, let go of non-performing staff, divisions, factories etc without fear of recrimination from the Press, governments, and unions.
In a perverse way the market could actually reward companies when they make these announcements, especially if it's not as bad as everybody expects. The share market is a forward looking instrument and it has already priced in bad news. That's why it falls so rapidly. The share market is predictive, the property market backward looking.
The share market prices in what will happen in the next 9 months, the property market prices in what happened in the last 9 months.
So that's why I think the share market may get a small (if volatile boost) that may accelerate towards the end of the year - as bad news comes out, if it is not as bad as expected, share prices will start to rise.
Property will get a bump too - it's very hard to imagine how it could not with lower interest rates, rising rents, subsidy after subsidy, but I would use that bump to sell, not to buy, yes sell.
At the moment it's all about low debt, liquidity, and being nimble. The bargains in the property market are yet to be seen. While I guess it is possible I don't think this year is the year we all look back on and say (in residential property) "I wish I got in".
But it may well be the year that we do look back upon and said "I bought XYZ share at (insert low price here)".
So investors are more and more turning to the bargains being presented in the share market. That's not to say it isn't going to be a bumpy ride - it will be, and certainly act with caution.
Here's a couple of examples of what I am talking about...
Myer goes all in. CBA announces profit
The Government's plan is to get us lending and spending once again. Obviously Myer CEO Bernie Brookes thinks it's possible. He's just announced they're doubling their marketing budget in spite of gloomy expectations for retail. Brookes admits it's a risky plan but believes the rewards will be there. It's true, they'll either lose their shirts for picking our sentiment wrong or they'll gain valuable market share when it's there for the taking.
Ford did this during WW2 - kept advertising even though most people couldn't buy its product. People laughed at the time but Ford was the first to recover and profit when consumers started spending again. I hope it works for Myer although I suspect they have even more fundamental issues to deal with.
I thought it was also interesting that yesterday the CBA announced its banking profit for the first half of the year will be up by 20%. Yes, a profit! Speaking of market share, the big 4 are having a field day - regaining all that business they lost when the lending market was more competitive and at margins that make it worth their while from a profit perspective.
But there are a few things going on at the moment that make it difficult to pinpoint how everything will play out. The biggest elephant in the room is unemployment - if people aren't able to count on job security, they're less likely to borrow money. Having said that, if corporates start to expand again (and perhaps the CBA and Myer are leading the charge), unemployment becomes less of an issue, borrowing increases and we're on the up and up again.
So we await an outcome. Will a competitive rental market and a very generous First Home Owners grant (if it continues) outweigh concerns about unemployment and stimulate the economy? Possibly. I think it's more likely to be towards the end of 2011 that we see a sustained recovery.
Government grant encourages first home owners
So far, the combination of the First Home Owners Grant and low(er) interest rates has produced the intended outcome - lending to buy owner occupied properties increased in November. All other lending was down.
Total personal finance commitments fell 1.8 per cent in November whereas housing finance for owner occupation rose 1.4 per cent to $12.460 billion in November.
Corporate finance and leasing were also down in November which is no surprise given that businesses have pulled back expansion plans and are aiming to reduce debt.
This is all good news.
China growth slows but far from stopped
Interest rates are at historic lows around the world as Governments attempt to stimulate sluggish economies. The usual (intended) impact of lower interest rates are short term share market increases (especially financial stocks), increased property values, increased spending and increased borrowing.
It's a similar situation around the world however some countries do seem to be in better shape than others. Fortunately for Australia, it looks like China could be one of them. Of course growth there is down, but 9% for last year and the 8% target for this year will still far outpace any developed country. And thats the thing... China still has plenty of developing to do and she'll need LOTS of materials to do it!
For now, weaker demand for Australian commodities in China has hurt us but there is some compelling evidence to suggest it might be only temporary.
Steady demand for commodities should resume
First, Chinese steel factories are currently running on reserves accumulated earlier. While demand is likely to remain subdued in the first part of the year, there's potential for a recovery in the latter part of the year as reserve levels fall and activities pick up momentum.
Then there's the 4 trillion yuan (AUD$893.3 billion) stimulus package already announced that includes a massive rail infrastructure plan. This should also drive new demand for resources and energy, putting upward pressure on prices.
The Chinese government has stressed on several occasions the need to promote steady and rapid economic growth in order to maintain a "harmonious and stable social climate". In order to achieve this, we should also see monetary policy continuing to ease. For us, the renewed demand for commodity exports might be the soft landing we've been hoping for. Either way, China will continue forward and that will be good for us. EMERGENT is now positioned to increase exposure in China and India as both economies are showing signs that they're faring better than just about everyone else.
Let's see how many more profit announcements we have over the next few weeks. A few consistent signals will be a welcome change.
Cheers,
Peter Spann
