THE DISTILLERY: O'Farrell's belt

There are a couple of standard issues covered today by our jotters. They are: all discounting by retailers is bad for us consumers because we will all pay in the end. The politicians and media know that and want us not to enjoy these price cuts in case we get to like them. That's again in the mix this morning among our scribblers. The second is the amazing discovery in Sydney late yesterday by the new NSW chief astronomer (aka Premier Barry O'Farrell). He found a black hole that seems to have sucked in all thought around it. These black holes are a staple discovery of every election win. Punting on that being found by the new Liberal/National Party NSW government was a dead-set cert, one follows the other as night follows day.
 
Ever the cynic, Fairfax's Ian Verrender assesses Barry O'Farrell's first day in office as the new New South Wales Premier: "And after 16 years of ALP rule and economic mismanagement there is only one possible thing an auditor with even a modicum of self-respect possibly could uncover – a budget black hole. The BBH is a vital weapon in any incoming political leader's arsenal. For a start, it delivers a great deal of latitude on when or even whether to honour any outlandish promises made in the heat of an election battle. And it gives the new leader carte blanche to hire any number of mates as consultants to help fix the problem. That usually involves sacking the mates of the previous incumbents who were brought in to fix their very own BBH."
 
And guess what, a BBH was quickly found, as another part of the Herald reported: "The Premier, Barry O'Farrell, has announced the discovery of a $4.5 billion hole in the budget hours after taking office, and accused Labor of ''cooking the books like never before'' to hide the true financial position of the state. In one of the first signs of a shake-up to the senior ranks of the public service following the election, the secretary of the Treasury, Michael Schur, has been sent on ''immediate leave'' while an audit of the state's finances is carried out by Michael Lambert, a former Treasury secretary." This is perhaps the fastest discovery in the history of politics, another first for NSW. Mr O'Farrell should become a geologist. The Australian reported the hole as $4.3 billion, ahh, what's $200 million between governments?
 
The Australian Financial Review's Alan Mitchell wrote this morning: "The deterioration in the NSW budget outlook will push the O'Farrell government further in the direction of privatisation of government programs." Everybody had commentaries on the news of the deficit this morning. So was it new news, or just what we now expect after an election where there is a change of government?
 
But The Australian's economics editor, Michael Stutchbury, sums up the ALP's ultimate incompetence: "The thumping repudiation of NSW Labor came amid a triple A-rated economy that expanded faster than the national average over the past year. That generated the state's strong 4 per cent employment growth and 4.8 per cent jobless rate, the nation's second lowest behind Western Australia. So, along with the political debauchery and the policy corruption, the story of NSW Labor's humiliation is its failure to manage a growth economy. Whether O'Farrell has the growth economy answers is unclear. He opportunistically opposed electricity privatisation when it counted." Good column, the sort of analysis missing yesterday. 
 
And the AFR wrote this morning about change in Martin Place: "The Gillard government is moving to put its own stamp on the Reserve Bank board with speculation that Treasurer Wayne Swan will today announce two new members, including a key Labor adviser."
 
Fairfax's Adele Ferguson went shopping, again, this morning: "The Senate inquiry into supermarkets begins today with the Coles boss, Ian McLeod, and a couple of executives from Woolworths bracing for a shellacking over the recent milk and beer wars. The issue for the supermarket chains is that some of the senators are from the Nationals, including John Williams, a former pig farmer who knows firsthand the impact the supermarket chains can have on rural Australia. As flagged in this column, Coles will argue it is the people's supermarket, creating price deflation, and that competition has been reborn despite Coles being part of a duopoly. It will even try to argue that the farmers are not being adversely affected because Coles has fully absorbed the retail price cut in a lower milk profit margin."
 
Meanwhile, Fairfax's Liz Sexton reports that a NSW court was told yesterday: "Matching the low milk price being offered by Woolworths and Coles is costing Franklins $20,000 a week, its acting managing director has told the Federal Court. In an affidavit tendered yesterday in the competition regulator's case to block Metcash's $215 million purchase of Franklins, Roni Perlov said the NSW supermarket chain was ''no longer viable'' because ''it is incapable of competing sustainably, in particular with Coles and Woolworths''. Franklins made a net profit of $2.5 million in the year to February 2010 and a net loss excluding exceptional items of $4.1 million in the six months to August 2010."
 
And the Fairfax press reported: "Fresh chicken will be the next front in the battle between Australia's two biggest supermarket chains. On the eve of his Senate inquiry appearance into the grocery price war, the Coles chief executive, Ian McLeod, has declared its pricing campaign will continue, despite a backlash from farming groups and government. "The latest product to have prices reduced as part of our 'Down, Down' campaign is fresh Coles chicken, and we have more price-cuts planned in the next few weeks," said Mr McLeod, who is due to pick up a $38 million bonus from parent company Wesfarmers should Coles overcome its performance hurdles. Coles has defended its price war with Woolworths, claiming its customers have saved more than $800 million on their grocery bills in the past 12 months." It's taken the media a while to get onto this story, seeing Coles has been advertising cheap chicken (at $4.99 a kilo) for at least five days now.
 
The AFR said traders were surprised by the strength of the Australian dollar, which hit a new high overnight: "High commodity prices, rising interest rates and a re-emerging appetite for risk could push the dollar to record levels against the United States currency in coming months." Pacific Peso no more!
 
Nufarm produced an interim profit, but The Australian's John Durie wasn't impressed: "Nufarm's boss Doug Rathbone is fighting a wall of worry in the market that is partly out of his control but in large part created by his continued faith in blue sky over reality. His stock price lost 2.8 per cent yesterday to $5.20 a share on concern over the quality of a half-year profit result that was to have marked the beginning of the turnaround in the company's fortunes."
 
The Herald Sun's Terry McCrann writes: "US economist David Hale has delivered a huge warning to Australia overall and to BHP Billiton and Rio Tinto in particular. It is all about China. It was ironic and indeed telling that his warning coincided with the Australian dollar hitting $US1.03 – its highest point in the 28 years since the 1983 float of the currency. That rise and rise in our dollar is built on the China-driven commodity boom. Hale's big warning was that China's spectacular growth might – indeed, would – slow. If it ended up slowing dramatically – not Hale's prediction – our dollar would clearly plunge. Hale is now the Commonwealth Bank's global economic adviser. And he was sharing his thoughts yesterday in Melbourne with the CBA's customers at lunch." 
 
The AFR also reported today: "Small companies could be granted exemptions from tough admission rules, and junior mining stocks could be spun off into a separate trading board as part of proposals to attract investors." And the paper's Chanticleer columnist wrote: "Moves by ASX boss Robert Elstone to make it easier for up and coming mining companies to list in Australia is a smart initiative that should be viewed through the prism of global securities market consolidation."
 
AAP reported yesterday that: "The sharemarket is another indicator of the stultifying impact the high Australian dollar and caution among households and businesses are having on the economy. Australia's sharemarket has underperformed over the past year, with the underperformance worsening since last August, according to UBS Securities Australia strategists David Cassidy and Dean Dusanic in a strategy note. Not only has the local market underperformed global equities in local currency terms, the same can be said for each of its most important sectors." Typical of analysts, they all moan about weak currencies, inflation dangers and the like, but when the dollar rises, suddenly it's a new version of the sky is falling. Henny Pennys the lot of them! 
 
The Australian's Bryan Frith writes that the proposed reshuffle and asset sale at the troubled Centro group is causing waves: "A disgruntled investor in Centro Properties (CNP) is considering applying to the courts for an order to inspect the books of entities in Centro in relation to the proposed restructure of the group. The discovery that CNP is not proposing to seek securityholder approval to the asset sale has angered the Centro Shareholders Association and many CNP securityholders. One of them, Smartec, which is owned by Asian investors, is considering doing something about it and is proposing to approach the court to seek an order under Section 247A of the Corporations Act. It is considering taking this action because, after an acerbic exchange of correspondence between its lawyer Atanaskovic Hartnell and CNP's lawyer Freehills seeking further information about the proposal and the reasons for not seeking securityholder approval for disposal of the US assets, Smartec is not satisfied with the responses."

John Durie gave us the cynics' guide to investment performance in his daytime column yesterday: "Month-end beckons, offering the best chance for traders to try a final ramp to lift monthly and quarterly figures into positive territory amid 15 months of zero gains on the overall market. As pre-lunch drinks were being poured, the S&P 200 index was trading at about 4733 points, which is roughly where it was in January 2010 and where it has traded in the seven months since then, around a mean index level of 4661 points. There was a rally to 4944 points in February, after which the market shed 467 points, or 9 per cent, before climbing back to present levels, still some 4 per cent below the near-term peak. The problem of course is, once you put the big resources companies to one side, there is zero growth in the Australian stock market."
 
And Tim Boreham wrote: "Here's hoping Sigma Pharmaceuticals "stabilisation phase" is more convincing than that of the Fukushima reactors, which continue to emit troublesome levels of radiation despite the air of crisis abating. Sigma CEO Mark Hooper this morning declared the worst of the company's three-year woes are behind it, despite reporting a $235.4 million loss after a $258 million non-cash goodwill impairment. But underlying EBIT came in at $129 million – the top end of the guided $120-130 million – and management rewarded long-suffering holders with a 15 special dividend, fully franked. The symbolism of the payout is not lost on Hooper. "
 
Fairfax's Insider, Ian McIlwraith reports that: "Taubmans and Dulux have shouldered rival Wattyl out of the paint aisles of Wesfarmers' Bunnings Warehouse chain with hefty discounts and ''exclusive'' deals. Paint is a hardware equivalent of supermarket milk or bottle shop beer – it brings in customers who will hopefully linger and buy more. The question is whether Bunnings' decision to move to two paint suppliers was made in the normal rough-and-tumble of retailers placing a high price on access to their shelves, or whether it is connected to the fact that Wattyl is owned these days by US group Valspar. Valspar just happens to be the paint supplier of choice to US hardware chain Lowe's, which has teamed up with Woolworths to try to knock Bunnings off its perch as hardware supremo."