What will the RBA do in March?
Welcome back!
Well March is just around the corner and the next RBA meeting will decide on monetary policy for another month. Since September 2008 the RBA have cut rates by 400 basis points, what does March have in order for home owners, investors and the economy?
Glenn Stevens perhaps has one of the hardest jobs in Australia. Stevens has to decide if enough liquidity has been pumped into the local economy with recent interest rate cuts or if more is required to stimulate domestic demand.
The result by Harvey Norman and the halving of profit is an omen for the consumer hed Australian economy and an indication that things are likely to get much worse before they get better.
Consumer demand despite government stimulation before Christmas has failed to bounce post Christmas as households tighten belts with increasing job losses and negative sentiment affecting the economy.
The RBA boss has already indicated that he would like to sit back and assess the economy in light of all the recent economic stimulants announced by the government and any future rate cuts are unlikely to be as big as recent cuts.
I suspect we will see a cut of 50 basis points in March that will take us to a cash rate of 2.75%. Future cuts will likely continue to occur and could take us down to 2.00% in the coming months but Stevens will be monitoring the economy for worsening economic news before he pulls the trigger for big future cuts.
Wall Street hits lows of 1997
Wall Street fell overnight to a low last reached in April 1997 amid the worsening performance of the US economy.
On a seasonally adjusted basis the US GDP for October to Decelier fell by 6.2% annualised. The contraction in the US economy was far worst than first thought and reflects the pain occuring in the world’s largest economy. The decline in the GDP was the worst performance since 1982.
The Dow Jones slumped 1.66% to 7062.93 to take the loss for the week to in excess of 4% as the economy sees no end in sight to the gloom. Dragging the market lower was the performance of Citigroup and General Electric. The market also had its worst February in over 70 years as the market tumbled 12%.
Where will the ASX bottom?
How much more will the ASX and the leading stocks in the Australian market fall? Well this is the question virtually ever investor would love to have an answer for but one thing could be said the market will head lower in the near term.
To presume the market has bottomed would be incorrect, the S&P ASX200 index is at 3402.4 while the broader All Ordinaries index is 3353.
Many factors are likely to impact the market in the near term the least of them being global markets which have fallen more heavily in recent times than the Australian market. The Australian market has held up relatively well but that has created a false expectation for investors as some have re-entered the market.
The sharemarket is likely to head lower and 3000 is not unrealistic in the months ahead as investors realise the market will not bounce back to it’s highs anytime soon. The market will need to find it’s own levels based on forward earnings potential and an increasingly jaded investors who are feeling poor from the lose of value to their investments.
Just as in boom times investors feel wealthy from their rising portfolios they become greater consumers and splash out, the same happens in reverse when the economy is tanking and investors are losing money, they stop spending.
The next few months will test the resolve of investors and I suspect we will see a low on the S&P 200 around 2800 most likely during 2009. I don’t necessarily think like we will see a solid recovery in late 2009 like many analysts are forecasting. 2009 will be a tough year for investors.
Australian Bank Watch will increase it’s focus on the sharemarket in the coming months to monitor movements and trends that may affect the economy and sharemarket in 2009.
Westpac Retail Share Offer
The Westpac retail share offer opened on 5 January 2009 and closes for existing eligible shareholders on 30 January 2009. The Westpac offer will raise approximately $500 million from retail investors and will boost the banks capital levels.
The retail offer supplements the recent $2.5 billion institutional share placement that boosted Westpac’s tier one capital levels to in excess of 8%.
Westpac are offering retail investors shares at $16 with the option to obtain them lower should the share price fall below $16. Westpac will determine the share price of the offer based on the daily volume weighted average of the share price of the 5 trading days up to and including the 30 January 2009. Thus shareholders will pay $16 at the most.
Shareholders have been offered to take up parcels of $1000, $2500, $5000, $7500 or $10,000. Shares will be alloted on 11 February.
Westpac have attached one proviso to the offer that if in excess od $500 million is subscribed for in the offer they reserve the right to scale back applications.
The offer will dilute the earnings per share for 2009 by several percent but will not have any impact on the Westpac dividend unless Westpac change the payout ratio. This would be very unlikely and would result in a heavy sharemarket sell-off should such an action occur.
Westpac shares sink below retail offer
As part of Westpac’s $2.5 billion capital raising during the week the company announced a retail share offer to allow existing retail shareholders to subscribe for additional shares in the company.
On Friday the Westpac share price closed at $16.03 after hitting a low of $15.88 on the day as the stock fell 52c. The fall will put further pressure on the retail offer to succeed as other stocks such as Incitec recently announced a heavily undersubscribed retail offer on a similar retail shareholder raising.
Shares in Westpac are likely to slip further as the market continues to adjust to the faltering world economy and the continual bad news each day.
Shareholders no doubt consider why they should invest today when they can buy stocks cheaper tomorrow.
Upcoming Bank Profit Announcements
The next two weeks will see all the major Australian banks except the Commonwealth Bank announce interim profit figures. This will be a very important guage to determine the health of the Australian banking system and is likely to reveal the actual pain the banks have been undergoing.
Of course this will not stop the banks from making huge profits but no doubt a number of them in particular NAB and ANZ will take a hit from the economic implosion. That said, we are lucky to have such well run banks in Australia and this will provide some insulation for the issues affecting banks overseas.
Westpac will be the best performer based on the strong domestic focus and focused management. St George are also likely to fair well in the reporting season.
The reporting calender is
23rd October 2008 - ANZ Bank - Annual Profit Announcement
29th October 2008 - St George - Annual Profit Announcement
30th October 2008 - Westpac - Annual Profit Announcement
31st October 2008 - NAB - Annual Profit Announcement
The Commonwealth Bank will report their interim profit announcement on 11th February 2009.
We will report on the banks profit announcements as they are announced.