Markets Live: Six weeks of gains

And that's the week from us here at Markets Live. Thanks for being with us, have a great weekend.

Click here for a full wrap of the day's session

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Boart Longyear is living on the edge, Michael West writes in this very readable analysis of the drilling services provider's woes:

If Boart Longyear was a mate down at the pub, he’d be the sort of mate who’d hit you up for a few dollars, just to tide him over. Then he’d nip down to the TAB, punt the lot on the fourth at Doomben and be back in no time at all with another hard-luck story.

But shareholders in the world’s largest drilling services company are unlikely to be quite as kind and patient as the proverbial mate at the pub.

The stock went into a trading halt this morning. Another debt deal was struck overnight in the US to keep it afloat but the pricing is yet to be revealed. And even when it is, Boart Longyear’s survival is not assured, except perhaps in the optimistic eventuality of a sharp rebound in demand for drill rigs.

The stock, nicknamed Borat by its investment bankers, continues to live on the edge. It may well be the biggest mining services player in the world, providing machinery to the likes of BHP Billiton and Rio, but it has always been a punt with shareholder funds.

And so it is a good thing that new boss Richard O’Brien formerly headed up gold juggernaut and Boart customer Newmont Mining before assuming what might uncharitably be deemed one of the great hospital passes of the Australian sharemarket. Boart shareholders need all the experience O’Brien can offer.

O’Brien can blame his predecessors for his present travails, and he has bought Boart some time with this week’s refinancing. Yet his challenge, whatever the result of this latest debt raising, is nowhere better enshrined than in the company’s earnings trajectory.

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In a trading halt: Boart Longyear.
In a trading halt: Boart Longyear. 

And for the week:

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Here are the best and worst performers for the day from the ASX200:

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japan

Japan's Nikkei share average fell 0.2 per cent, stepping back from two-month highs as investors locked in profits on recent gainers before a long weekend.

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analysis

After all the excitement we saw in late US trade and into Asian trade yesterday, flows on the desk have been more reserved today, IG's Chris Weston notes:

  • Perhaps this has been a reflection of the efficient re-pricing of asset classes after the Fed’s uber-dovish stance.
  • Maybe it’s a reflection that the Fed are keeping the balance sheet constant, because of the fiscal issues of which we are seeing front and centre today, with the House set to vote today on stopgap measures linked to Obamacare defunding.
  • Clearly the potential government shutdown is holding the bulls back despite monetary conditions positive for a further rip higher in equities. The overnight rise in yields probably didn’t help either.
  • We have seen no expression of concern from clients at all around the German elections (ED: on Sunday; Merkel tipped to win but may have to enter a 'grand coalition' with the Social Democrats).
market close

The stock market has closed lower, trimming some of the strong gains sparked by yesterday's surprise Fed decision to hold off on tapering stimulus.

The benchmark S&P/ASX200 index fell 18.8 points, or 0.4 per cent, to 5276.7, while the broader All Ords lost 17.8 points, or 0.3 per cent, to 5270.8.

Among the major sectors, materials slid 0.9 per cent, financials lost 0.4 per cent, while consumer staples gained 0.5 per cent and energy stocks added 0.4 per cent.

Despite today's losses, the ASX managed to put on 1 per cent for the week, notching up a sixth straight week of gains.

euro

And here's another pessimistic, and slightly controversial prediction (hey, it's Friday): the partial break up of the eurozone is inevitable, but it's unlikely to happen soon, Colonial First State chief investment officer, fixed interest and credit Paul Griffiths says:

  • I think what you'll get is a core group. I'm not going to name the countries because I don't want to miss one but if you take that group of countries generally in northern Europe.
  • If you take those economies, they move in lock-step with one another and that is the pre-condition I'm talking about. There will be, what should have happened originally, a group of countries who are aligned and that can work.
  • They will put huge resources on keeping Portugal, Greece and Ireland inside.
  • I think ultimately a monetary union without fiscal or political union is doomed to failure.
  • I do see that ultimate euro crisis coming, if you really push me for a date, I would put it in a multiple year time-frame.
quote

Only fools ignore bubble trouble, Christopher Joye writes over at the AFR:

With a new housing cycle comes yet another heated debate that is already flushing out manifest errors and conflict-driven deceptions. Should we care? My word.

Residential property is the biggest source of household wealth and underlies the most important asset – home loans – held by Australia’s colossal and concentrated banking industry, which accounts for 30 per cent of the sharemarket’s value. There is $4 trillion of housing and $1.3 trillion of debt held against it. It is our most significant investment class. So are we in the throes of a bubble, and should we worry about the risks of one materialising?

Much of the data the Reserve Bank of Australia uses to better understand housing dynamics come from companies I worked with. This information and analysis once gave me cautious optimism about the outlook. But I am more worried today. And I’d submit that anyone not investing serious time contemplating housing hazards, including the prospect of destabilising bubbles, should wake up.

What gives me pause is that national house price growth now looks to be running at three times wages. In Sydney the gap is even greater. And what is unprecedented is that Australia’s housing upswing is coinciding with the cheapest mortgage rates ever. In the boom of the early 2000s, discounted home loan costs troughed at 6.15 per cent, or 100 basis points higher than current rates.

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Growing faster than wages
Growing faster than wages 
airlines

Flight Centre is altering its name to highlight that it offers more than airfares.

The company will be known as Flight Centre Travel Group, if shareholders approve the change at an annual general meeting in October.

Managing director Graham Turner said the new name would reflect the company's growth into a retailer of many holiday and corporate travel products.

The decision isn't helping its share price - Flight Centre is down 1.9 per cent.

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Telco

National Australia Bank is set to launch a new push into digital payments through a product called NAB Flik, as competition heats up in mobile banking.

This month NAB has registered a trademark for the logo  ‘‘NAB Flik’’ with IP Australia, including an icon that appears to have been designed for a smart phone. The bank has also registered a website under the same name.

A spokesman for the bank would not comment on the initiative when contacted by BusinessDay today. However, the service is tipped to be another push by a bank to win over consumers through mobile digital payments technology, which gives customers the ability to carry out a growing range of financial tasks on the go.

dollar

The dollar is taking a break after yesterday's rally, trading around 94.5 US cents, with dealers saying it it's being contained by speculation its recent gains could see the Reserve Bank cut interest rates again to cushion the economy.

The Aussie spiked to a three-month high of 95.30 yesterday after the US Federal Reserve surprised markets by leaving its stimulus intact. Even after pulling back from that peak, the Aussie is still up more than 5 cents this month.

"It wouldn't have been happy with the Aussie around 95.5 cents and I expect the RBA will have an easing bias at its policy meeting on October 1," Joseph Capurso, a rate strategist at Commonwealth Bank.

earnings

Ikea founder Ingvar Kamprad was forced to hand over billions of dollars to his sons following a bitter family feud, according to a new book on the global furniture giant.

The revelation appeared yesterday in business daily Dagens Industri which published excerpts from Ikea on the Road to the Future, co-authored by former Ikea executive Lennart Dahlgren, journalist Stellan Bjoerk and economist Karl von Schulzenheim.

The book, due to go on sale on September 27, contradicts the official version of the company's history which holds that Kamprad signed over his empire to a complex network of overseas foundations in 1982.

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Family feud: IKEA founder Ingvar Kamprad.
Family feud: IKEA founder Ingvar Kamprad. Photo: AP

One of Gina Rinehart’s closest lieutenants in the Hancock Prospecting empire warned her son he would be hunted down like Christopher Skase unless he ceded control of the family’s multibillion dollar trust to his mother.

Hancock Prospecting chief financial officer Jay Newby sent a series of explosive emails, which were lodged as part of the court case, to John Hancock a day after the mining magnate warned her four children they would be bankrupted if the trust was allowed to vest on September 6, 2011.

In one email, dated September 4, Mr Newby wrote to Mr Hancock and copied Mrs Rinehart:

"Remember what happened to Skase when he tried to escape being brought back to Australia when bankrupt. The government simply doesn’t let people off for not paying due taxation."

Christopher Skase became a fugitive when he fled Australia for Spain in 1991 after his business empire collapsed.

In the same email, Mr Newby says: "Please don't think for one second this means you can enjoy your Thai palace should a court appointed designate be appointed for your bankruptcy."

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Private Rinehart emails revealed

Adele Ferguson gives a preview of her weekend story about the Rinehart family feud, which will include private emails between John Hancock, his mother and the CFO of Hancock Prospecting.

Short seller ... Jim Chanos
Short seller ... Jim Chanos 

Shares in Fortescue are still being sold short by New York hedge fund manager Jim Chanos, putting him at odds with the vast majority of the local investment community.

Speaking one year after Fortescue lurched into a liquidity crisis during September 2012, Mr Chanos said he still believed Fortescue was vulnerable to a slowdown in China, despite the recent strength of the iron ore price and the rapid growth of Fortescue's iron ore export volumes.

"If you believe as we do strongly that the Chinese credit driven investment boom has to ultimately come to no good, then there is probably no better place to be short than iron ore," he said, as part of an in-depth look at Fortescue's debt challenge that will be published in BusinessDay on Saturday.

Today, Fortescue shares are down 1.9 per cent to $4.495.

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rba

One of the key questions that we have touched on over the past day after the Fed's decision pushed the dollar higher is whether the RBA is set to cut rates again.

Economists have been mixed in their reactions. Citi economists say that markets will price in some risk of another rate cut by the RBA as the US and Australian economies remain mixed and the Australian dollar hovers at elevated levels. A jump in the unemployment rate and soft CPI data could make a November cut possible, they say.

But they stress that "the bar for another cut is now much higher than previously"

"We expect the RBA to remain on hold and continue with its guidance that it neither closes off the possibility of reducing rates further nor wishes to signal an imminent intention to reduce rates.

"If the Fed’s decision this week only represents a tactical delay to tapering and the related lift in the AUD is temporary, then the RBA can remain more neutral," they write in a research note today.

In contrast, Macquarie Securities' analysts take the opposite view (bear in mind that Macquarie has been more bearish about the Australian economy).

"In our view, the RBA would need to alter its rhetoric from the 'glass-half full' approach that it has maintained over the last two years," they state in a research note.

housing

ANZ analysts say now might be the best time for borrowers to fix their rates while they are "very low and the potential for rates to move a lot higher is evident from history".

Interest rate strategist Zoe McHugh and currency strategist Andrew Salter have crunched the numbers on the RBA's easing and tightening cycles. They say while ANZ economists are forecasting a last 25 basis points rate cut in November, markets are almost fully priced for such an outcome and that any last easing would not lower term rates further.

"Ignoring the possibility of one further cut, as the RBA last cut rates in August this year, it is reasonable based upon history to expect it to be on hold until April 2014, which could be as early as January or late as September next year. Using this metric, the market’s expectation that the first hike comes in February 2015 (fully priced) does not appear to be too tight," MrHugh and Salter write in a research note today.

"We recognise that at this point in the cycle, the timing of the last cut is very important to market pricing and the RBA still has an easing bias while the data have been unable to yet confirm that rate hikes are imminent. Nonetheless, term rates are very low and the potential for rates to move a lot higher is evident from history."

Data from the RBA yesterday showed borrowers have been using the low rates to pay down their mortgages quicker.

dollar

NAB's currency strategists have updated their year-end forecasts for the Australian dollar after the Fed's decision to push back a cut to its stimulus program saw the currency rise above 95 US cents.

NAB's new year-end forecast for the AUD/USD now stands at 92 US cents, as compared to their previous expectation of 86 US cents.

They've also revised up their forecasts for 2014: 

  • March: From 84 to 90 US cents
  • June: From 83 to 88 US cents
  • September: From 81 to 86 US cents
  • December: From 80 to 84 US cents

The lift in the forecasts - which still seen the Australian dollar on a downward trend - reflect the support for emerging markets that the Fed's decision has given, which removes one source of recent Australian dollar weakness, NAB's Ray Attrill says.

gas

Resources giant BHP Billiton has opened a $US1.5 billion gas plant it says will supply 20 per cent of Western Australia’s domestic gas for the next two decades.

The first gas started flowing in August, almost three years after BHP gave the green light to develop the Macedon field, about 100 kilometres off the north west coast of Western Australia.

The Macedon plant includes four offshore production wells and an onshore gas treatment plant at Onslow.
It has a production capacity of up to 200 terrajoules of gas per day, making it the company’s largest domestic gas operation.

BHP Billiton’s global head of conventional oil and gas, Steve Pastor, said the Macedon project was expected to supply domestic gas for the wholesale market in Western Australia until at least 2033.

BHP shares are down 1 per cent to $36.32.

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So it begins. WA Premier Colin Barnett has started a political process that will inevitably lead to significant tax reform, including his desired increase in the GST's scope and/or rate, writes BusinessDay's Michael Pascoe.

How long the process takes will depend upon the integrity of our state and federal politicians. Yes, it is likely to be many years.

Barnett called for leadership on the GST issue from Tony Abbott, but it's not the federal government that needs tax reform, let alone the political cost of broken promises and scare campaigns. The “leadership” is going to have to come from those who most urgently require it – the states. Only when the states unite in demanding change will Abbott be able to wash his hands of it, pointing out as his treasurer already has that the GST is the states' tax merely administered by the commonwealth.

One of the achievements of the 2011 tax summit (that the then-opposition childishly snubbed), was to spell out that the states are all hurtling at varying speeds towards a fiscal brick wall. They've trashed their own tax bases and show little inclination to take politically unpopular decisions to fix their inequitable and damaging revenue sources, but they're all facing soaring health, education and infrastructure needs. Which is why it has been argued here before that we'll only get serious about changing the system when the states demand it.

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