US traders cautious ahead of Fed decision

Wall Street traders were still cautious overnight, Australian time, as they waited to see if the Fed would again lower US interest rates.

As a result, the Dow Jones industrial index fell 39.81 points to 12,831.04.

The S&P 500 also dropped 5.43 pints to 1,390.94.

But the tech heavy NASDAQ composite rose 1.7 points to 2,426.10.

Perhaps the most spectacular movement, though, was in oil futures. These fell $US3.35 a barrel to $US115.40.

There was little in this fall, though, to cheer Australia’s long suffering motorists.

Most of it was due, instead, to a strengthening of the US dollar.

The greenback recovered a little of its old clout on expectations that the Fed will cut US interest rates by 0.25 percentage points.

If it does, though, the cut would probably be the last in the current round.

US traders are, finally, responding positively to good news in the market.

Office Depot shares, for example, rose 8.7 per cent overnight after it reported strong profits.

And Mastercard shares jumped 13 per cent after it, too, pleased with higher profits.

Confidence down, but growth should be strong:NAB

Although business confidence has slumped, Australia’s economic growth is expected to remain quite high, at 3.5 per cent.

How can that be?

The economists, who compiled the National Australia Bank’s latest quarterly business survey, found that the Australian economy is “weakening faster than expected.”

But they also saw special factors, which should sustain growth.

They said these included:-

• higher terms of trade
• tax cuts and
• a rebound in farm production, after Australia’s long drought.

High demand from China for basic Australian exports, like iron ore,is keeping prices very high. Most economists expect that to continue, at least for a while, even if global demand eases. They say that China, in particular, has many domestic projects to complete.

The first tranche of the Federal government’s promised $31 billion worth of tax cuts – which looked positively inflationary just a few months ago – now appear much less dangerous. Almost necessary, in fact, as recent interest rate rises bite.

And the good start to the new season, that many Australian farmers are now, finally, enjoying is also likely to help.

Economic management, though, is likely to become even more difficult.

The NAB’s survey results confirm that Australia could well be headed for a recession, if it wasn’t for the strong resource industries, which still seem likely to surge ahead.

Business confidence, for example, is back at 1991 levels. That is back to the levels last seen during the tech wreck of those times.

But the NAB economists are still predicting 3.5 per cent economic growth. Although below recent levels, that is still quite high.

So what’s the catch?

Well, the resource States, Western Australia and Queensland are likely to get the lion’s share of that growth. So a two speed national economy is a significant risk.
Growth could well slump in Australia’s most heavily populated States, New South Wales and Victoria.

So the years ahead will still have their problems, for most Australians.

Sinosteel’s Midwest bid seen as a marker

The proposed takeover of the Australian company Midwest Corporation will be worth watching.

The putative buyer, Sinosteel, is effectively offering $6.38 a share in a revised bid worth some $1.36 billion.

If the bid succeeds, Sinosteel would become the first Chinese company to achieve such a take-over in Australia.

It would then own a big slice of the iron ore in the mid-west of Western Australia.

Success seems likely as the Midwest corporation is recommending the bid to its shareholders.

But there are still hurdles.

Sinosteel needs to secure more than 50 per cent of Midwest’s shares to succeed.

And it must win the approval of the Federal government.

That would seem to be no great problem, as the Prime Minister, Kevin Rudd, has assured Chinese leaders that they will not strike discrimination in their business dealings in Australia.

However, several similar proposals are now banked up, awaiting approval.

And Chinese officials are starting to suspect that the Rudd government is, indeed, reluctant to approve their plans for participation in Australia’s resource industries.

The delays are said to be occurring in the office of the Treasurer, Wayne Swan, rather than in the processes of the Foreign Investment Review Board, which is part of the Federal Treasury.

So far, the government has offered no explanation.

Officials have said, though, that it will not apologise for taking the time necessary to properly assess applications of this kind.

Tax dodging gets riskier

Police and revenue officials launched a high profile swoop on suspected tax dodgers yesterday in three countries, Australia, New Zealand and Vanuatu .

But that spectacular operation, which has already led to one arrest, is just one part of a broadly co-ordinated, high tech attack on revenue fraud, that is now rolling in Australia.

The government described the man, who has been arrested, as a scheme promoter, based in Western Australia, where many people, on high incomes, believe they are paying too much tax.

But paying the right amount of tax is still important.  And a statement issued jointly, by no less than eight Federal ministers, warned that several other people, caught up in the swoop,  will be summonsed to appear in court “shortly.”

They said search warrants had been executed in all three countries.

“The Australian Taxation Office is also conducting 80 audits examining allegedly false deductions exceeding $80 million,” the eight ministers, led by Treasurer Wayne Swan, said in their statement.

“People who avoid tax through the use of abusive tax haven schemes place an unfair burden on the vast majority of the Australian community who do the right thing,” they added.

The swoop was part of Project Wickenby, the ATO’s attack vehicle, which has its guns trained squarely on rich tax dodgers.

But, if you think that the taxman isn’t interested in any little schemes, practiced by those on less spectacular incomes, you would be wrong.

Indeed a new report, published by the Australian Audit, applauds the Tax Office for the developments it is pursuing, in high tech data matching operations.

It suggests that any-one indulging in a little tax fiddling would be wise to review their operations, immediately.

The report reveals that Tax Office now has new – and very powerful – weapons to detect tax fraud.

“Although traditional semi-automated data matching has been a feature of tax administration since the 1970s, the Tax Office has only recently developed … more comprehensive data matching and analytics capability,” the Auditor General said.

The AG’s report says this has given the tax man “scope to more efficiently and more quickly identify a range of compliance risks.”

That’s a clear warning.

Disclosure documents “unreadable:”Sherry

Nick Sherry is scathing in his assessment of the way the way financial products are presently explained to potential investors.

“Disclosure documentation is lengthy, complex and unreadable to the average investor and consumer,” the Federal minster for Superannuation and Corporate Law said yesterday.
“It may as well be in Latin for its readability,” he added.

“Simple, short and standard disclosure is vital to inform decision-making and greater competition,” Senator Sherry declared.

Many investors, who have seen shares they thought they owned seized by at least one major bank, as loan security, would heartily endorse those sentiments.

Senator Sherry was addressing a conference entitled “Accounting Shenanigans, Executive Pay, Class Actions and Takeovers” that the Riskmetrics Group staged in Melbourne.

He acknowledged the present volatility in financial markets, but said the government is “well aware of the need for caution” before introducing new regulation.

Sherry  said financial market reforms must be “comprehensive, effective and – above all – sustainable.”

He said the government must not act in haste.

“While the Government needs to be responsive, it is important that we do not have a knee-jerk reaction to the current market turmoil,” Sherry said.

“This is why I believe in taking the longer-term view.

“And this is why I am committed to ensuring that we develop a comprehensive, effective, and resilient corporate governance framework that will stand us in good stead in the future.”

But he gave reckless directors a blunt warning.

Sherry said the government would be looking a imposing “personal liability” on directors in cases of “corporate fault.”

However he added that the government would not be attempting to set directors’ pay levels.

3,000 Federal public service job cuts predicted

Kevin Rudd is said to be planning to slash 3,000 jobs from Australia’s Federal public service.

This is not official information.  The ACT’s Chamber of Commerce made the prediction at the weekend. Its chief, Chris Peters, is confident that he has a reliable budget leak.
The government will not confirm – or deny – this report until Budget night, on May 13.  But it has made no secret of the fact that it has been looking, very hard, for ways in which it can cut Federal spending.

John Howard also slashed public service jobs, when he took office, back in 1996.  By the end of his first year, 9,277 public sector jobs had gone.  By the end of his second year, he had slashed 22,344 jobs.

And the ACT economy had sunk into recession.  It was almost as hard, back then, to sell a house in Canberra as it is to sell one in Cincinatti now.

John Howard’s cuts would have pleased Peter Walsh, though.  The former Finance Minister, in the Hawke and Keating governments, had always said, privately, that he could see no reason why Australia should have a Federal public service that was as bloated as that of an oil  rich Arab kingdom.

Of course the cuts, predicted now, would be much smaller than those John Howard made, in his early years in government.

Naturally, though, Canberra’s public servants are still upset and worried.  Job security has always been a high priority, in their lives.

In fact, a survey conducted by the Public Service Commissioner’s office, itself, showed that the prospect of job security was the main attraction of public service life, to no less than 61 per cent of its recruits.

But the job market in Australia now is much stronger than it was back in 1996.

So strong, in fact, that the ACT’s Chief Minister, Jon Stanhope has already declared that he would like to hire some of those Federal public servants, who lose their jobs.

Their would be strong competition, too, from private employers.

In the longer term, though, job prospects in the Federal public service still look good.

Despite those savage cuts, in his early years, John Howard still ended his11 year term with almost 12,000 more public servants, on his payroll,  than he had started with.

11,876, to be exact.
But long term prospects still don’t pay short term bills. So do be kind to the next Federal public servant you see.

Reserve Bank sees “no major problems” as 45,000 famlies slide into the red

At least 45,000 Australian families are now in arrears with their home loan repayments, according  to the Reserve Bank.

The bank also admits that home loan repayments are swallowing more of Australian family incomes than ever before. purchase.

In fact, it has has calculated that a typical Australian family, buying a mid priced house now, would have to set aside close to  40 per cent of its disposable income, to meet the repayments.

The top safe level was once thought to be no more than 30 per cent.

Yet the Reserve Bank also says that “from a macroeconomic perspective, there do not appear to be any major problems here.”

Its Deputy Governor also describes the situation with arrears on home loan repayments as “relatively benign.”

Mr Battelino does admit that rents are high. But he says that happened, largely, because they have been so low, in the past, that there was little incentive in Australia to build rental housing.

He concedes, though, that “financial pressures” for new home owners are “concentrated” in particular areas, such as Westerm Sydney.

And he says there are “significant pockets” in which family budgets are “relatively tight,”
Mr Battelino says debt servicing ratios, in those areas, are “relatively high.”

He admits, too,  that the proportion of families, in those areas, who behind in their  home loans loan repayments is  higher than for the Australian community as a whole.

However Battelino also signallled that the Reserve Bank is not, unduly, worried about the big bite that home loan repayments are now taking out of Australisignalan family budgets.

He said  the 30 per cent safe mark had been set in 1991 aand much had changed since then.

Incomes had increased so much, that typical families could now spend bigger slices of what they received on home loan repayments and still maintain satisfactory standards of living.There are now signs, though, that many Australians are not as comfortable and relaxed about the nation’s property market, as the Reserve Bank seems to be.

Buyers are now so scarce in Melbourne for example, that local real estate agents are repprting  significant falls in house prices.

The once-hot  housing market in Canberra, too, is now said to have cooled.

Wall Street “panic phase over”

US stocks took off last night – after a rough start – as the aviation giant Boeing reported better results.

The Dow Jones industrial index closed 42.99 points higher at 12,763.22.

Improved sales, reported by MacIntosh, also helped.

The tech heavy NASDAQ composite index rose 28.27 points to 2,405.21.

The S&P 500 also gained ground, rising 3.99 points to 1,379.93.

Boeing’s profits were better than expected.

And one optimistic analyst said the “panic phase” of the credit meltdown is “now over.”

The Australian dollar also enjoyed a brief triumph overnight, rising above 95US cents, before falling back to 94.90.

Oil futures also fell back overnight, but were still at $118.20, after coming within cents of $US120 a day earlier.

And that is worrying news, especially as Australia’s inflation rate hit 4.2 per cent yesterday, with price rises in all capital cities now well above the Reserve Bank’s target range of 2-3 per cent, over the course of a business cycle.

Normally, that would have the Reserve Bank board reaching for the interest rate button.

Yet, even though the price of a loaf of bread jumped by 9 per cent, over the past year, that may not happen this time.

That’s because the US credit crunch is doing the Reserve Bank’s job for it.

Early signs suggest that both business and consumer spending has fallen sharply over recent weeks.

And another rate rise, in present circumstances, would be dangerous.