The Monday Report

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This story features ORICA LIMITED, and other companies.
For more info SHARE ANALYSIS: ORI
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Post Budget Blues

The bank tax has to be paid for by someone, either bank customers or bank shareholders. The ACCC will supposedly be tasked with making sure the banks don’t lump the cost on customers through the obvious avenue of mortgage rate repricing, although with the banks already in repricing mode, how one makes the distinction is unclear. Bank customers would rather see shareholders carry the can, through lower dividends.

This is very popular with the man on the street. But as I have pointed out before, to have a mortgage you must have a job. If you have a job you have compulsory superannuation. Every standard superannuation fund in the country is invested in Australia’s banks. The Big Four alone make up 25% of the ASX200. In other words, bank customers are bank shareholders.

Thus the bank tax is a tax on everyone, as will be the increased Medicare levy. The tax increase comes at a time households are already overburdened with debt, and the RBA continues to warn of a consumer recession as household budgets are steered towards repaying debt and away from discretionary spending.

The consumer discretionary sector fell -2.1% on Friday. Staples fell -0.6%. Healthcare is one sector that came away from the budget relatively unscathed, but it is still a sector driven by consumer spending. It fell -1.3%. Telcos fell -0.9%. The government is attempting to ensure the energy companies don’t make too much money through exports. Energy fell -1.1%.

And of course the banks fell another -0.5%. Three of the Big Four are in the process of going ex-dividend – ANZ last week, NAB this week and Westpac shortly to follow – and typically investors shift out of these three once the money is in the bag. It’s one reason cited as why Sell in May actually does have grounds in Australia. Normally they switch into CBA, which runs on a different dividend cycle. But that wasn’t happening last week.

The only ray of light in Friday’s session was materials, but only because it closed flat thanks to some stability in the gold price. Otherwise, perhaps we can be thankful that the index finished only -41 points down, having been down over -60 points after lunch.

It was a Friday capitulation session, reeking of nothing to look forward too. As support is coming into view at 5800, the expected goal of 6000 is looking further away.

Drift Away

Another Wall Street session, and another mild fall for the Dow. Friday’s session was the thirteenth in a row the S&P moved less than 0.5% in either direction, the longest such streak since 1995. Yet last week was still the first down-week for Wall Street in a month.

On Friday the Dow closed down -22 points or -0.1% while the S&P lost -0.2% to 2390. The Nasdaq rose 0.1%.

The big tech sector is one of the few sources of comfort as the rest of Wall Street waits and frets over tax reform. Investors just can’t get enough of Amazon, Apple and co as they look into the future. Retail spending is very much part of that future, and there the landscape is shifting.

JC Penney was the latest old-world department store chain to post weak sales for the quarter on Friday, and subsequently fell -14%. The question was asked all week: Are department stores dead? Managements were putting a brave face on it but when one considers the surging fortunes of Amazon, the answer is clearly a resounding “yes”. Get on, or get out of the way.

For US consumer spending itself is not the issue. It rose 0.4% in April. It was a tad under the 0.5% forecast but at 4.5%, the annual rate is healthy. The March result was also revised up from -0.2% to plus 0.1%. This will flow through to the first revision of US March quarter GDP, the initial estimate of which was a tepid 0.7% growth.

The US headline CPI rose 0.2% in April as expected, having fallen -0.1% in March. A 0.1% rise in the core rate fell short of expectation. The core rate is running at 1.9% annual.

The Fed prefers the personal consumption & expenditure (PCE) measure of inflation but the market still took slower than expected underlying inflation growth as hinting the Fed may not need to be too aggressive in its tightening plans. The US ten-year bond yield fell -7 basis points to 2.34%.

News broke on Wall Street late on Friday of the global randomware attack. The attack was underway just as stocks markets in the UK and Europe were winding up for the weekend. They finished on a strong note, so it remains to be seen whether the attack has an impact tonight.

It also remains to be seen how Wall Street will react tonight to North Korea’s latest missile test on the weekend. Or are we all just becoming a bit bored with it?

Commodities

The US dollar index fell -0.5% on Friday night to 99.19 on the weaker core CPI read. This didn’t do much for gold, which rose only a little to US$1227.70/oz.

West Texas crude also stood still, a few cents higher at US$47.87/bbl.

Base metals were mixed, with the main movers lead down -2.5% and zinc down -1.5%.

Iron ore fell -US$1.00 to US$59.50/t.

The Aussie is 0.1% higher at US$0.7384.

The SPI Overnight closed up 6 points on Saturday morning.

The Week Ahead

China will release April industrial production, retail sales and fixed asset investment data today.

The US will see housing sentiment and the Empire State activity index tonight, housing starts and industrial production tomorrow, and the Philadelphia Fed activity index on Thursday.

Locally we’ll see the increasingly important monthly housing finance data out today, which will no doubt be a topic of the minutes of the RBA meeting, due tomorrow. The most important number of the week will be the March quarter wage price index on Wednesday, while seemingly important but ever less so are the unemployment numbers, due on Thursday.

Orica ((ORI)) will report earnings tomorrow, DuluxGroup ((DLX)) on Wednesday and James Hardie ((JHX)) and AusNet ((AST)) on Thursday.

National Bank ((NAB)) will go ex tomorrow.

Rudi is currently in Melbourne, preparing for his presentation at the ASA National Conference. He will appear on Sky Business on Thursday at noon and again between 7-8pm for the Switzer Report.

On Friday, he'll connect via Skype with Sky Business to comment on broker calls.
 

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