Kohler's Week: Greece signs a deal, Zero rates, The US market, Seek, Freelancer, Telstra, Reporting season, Rio Tinto

Last Night

Dow Jones, up ~0.81 per cent
S&P 500, up ~0.55 per cent
Nasdaq, up ~0.59 per cent
Aust Dollar, US78c

Greece signs a deal

The Eurogroup of finance ministers has just released a statement this morning agreeing to an extension of Greece’s bailout for another four months, and to keep recapitalisation funds available for Greek banks during the extension.

As I write, Wall Street and the Euro are rallying hard on the news, which had leaked out earlier via Bloomberg and Dow Jones but was only confirmed a few minutes ago. I still haven’t seen the full statement, just a few snatches. But I’ve seen enough: this is a huge moment, not just for Greece, but for the global financial system. Grexit, as it’s called, is now off the table and Greece will stay in the Eurozone.

The chairman of the Eurogroup, Dutch finance minister Jeroen Dijsselbloem says the deal is that Greece has committed to “broader and deeper” structural reforms, and to ensure that there is a primary fiscal surplus (before interest payments), “taking into account economic circumstances in 2015”. Bank recap funds cannot be used to finance the Greek Government, and Alexis Tsipras has to present his first list of reform measures on Monday.

Obviously Tsipras and Yanis Varoufakis have decided not to leave the Eurozone and instead to agree to more reforms in order to stay in. That became perfectly clear from the letter they wrote to the Eurogroup on Thursday, which ended with these words: "the Greek government expresses its determination to cooperate closely with the European Union's institutions and with the International Monetary Fund in order: (a) to attain fiscal and financial stability and (b) to enable the Greek government to introduce the substantive, far-reaching reforms that are needed to restore the living standards of millions of Greek citizens through sustainable economic growth, gainful employment and social cohesion.” Here’s a link to the full thing.

Germany immediately took a hard line and restated its position that any extension must be accompanied by full adherence to the conditions of the current programme. It seemed battle lines were drawn between Athens and Berlin, but both sides have now compromised, which is what had to happen.

As it happens I’m reading Thucydides’ History of the Peloponnesian War (between Sparta and Athens) for book club this month, and last night I waded through Pericles’ long funeral oration, which helped me understand the Greeks a little better. It is a remarkable, bombastic, speech, not just an ode to the dead but to Athens itself. Greek PM, Alexis Tsipras, and the finance minister Yanis Varoufakis, and the whole Greek nation for that matter, have probably got it by their bedside for motivation, although this morning’s deal would not have been approved by Pericles.

For example:

“Our system of government does not copy the institutions of our neighbours. It is more the case of our being a model to others, than of our imitating anyone else. Our constitution is called democracy because power is in the hands not of a minority but of the whole people."

“Our love of what is beautiful does not lead to extravagance; our love of the things of the mind does not make us soft. We regard wealth as something to be properly used, rather than as something to boast about.”

“The Spartans (read: Germans?), from their earliest boyhood, are submitted to the most laborious training in courage; we pass our lives without all these restrictions, and yet are just as ready to face the same dangers as they are. Here is proof of this: when the Spartans invade our land, they do not come by themselves, but bring all their allies with them; whereas we, when we launch an attack abroad, do the job by ourselves…"

Tsipras and Varoufakis, by themselves, are together doing battle with Germany and its allies in the Eurogroup of finance ministers.

Pericles goes on later: “I declare that in my opinion each single one of our citizens in all the manifold aspects of life, is able to show himself the rightful lord and owner of his own person, and do this, moreover, with exceptional grace and exceptional versatility.” (Gawd.)

Greece has had a very rough, even tragic, seven years since the GFC and has had to learn some humility. Just look at this graph from The Economist comparing its economy since 2008 with the US after 1929:

But as you can see the line is starting to turn up for Greece – it grew 0.8 per cent last year, having contracted 25 per cent in the previous five years, with unemployment growing to 27 per cent. Then in the last quarter of 2014, it contracted again by 0.2 per cent.

The Athens Stock Exchange index fell 46 per cent in the second half of last year but so far this month it has rallied 20 per cent on optimism that the austerity will be over and a deal will be done that allows the Greek economy to grow while staying in the euro so that its banks don’t all go broke.

It would be doubly tragic for Greece if it fell back into depression because no deal could be done that gave it half a chance. I think Greece would be better served in the long run if it exited the euro and devalued its currency, but the short term consequences of that would be very painful indeed, which is why they are trying to do a deal that releases pent up demand and business investment. The Athens stock market rally is a sign that there is plenty of money looking to invest in Greece, but at this stage investors are playing with fire – if Grexit happens they would lose a lot of money.

We need to remember, though, that this morning’s deal is just a four month extension. There is still a long way to go and a lot of difficult negotiations still to be had.

Zero rates

Dave Rosenberg the well-known analyst from Canadian broker, Gluskin Sheff, says this is the most important graph in the world right now:

Rosenberg says: "I don't know whether to feel good or uneasy about the fact that 90% of the industrialized world economy is now anchored by near-zero or negative short-term rates. At one level, this should be supportive of risk assets; at another level, it is a symbol of how fixed-income investors and central banks see the world ― deflation at a time of ultra-low rates is certainly not a confidence builder."

This is probably the key big picture issue for investors right now: are low interest rates – both cash and bonds – good for investors because they tend to drive up share prices, or bad because of what they signify. Unfortunately no one knows.

The US market

Here’s another important graph:

The ratio of US market cap to global GDP has repeatedly shown resistance at around 35 per cent, and it’s at that level once again. Arguably it is more useful and relevant than US stock market to US GDP, since so many American companies are now multinationals and as a whole they make about a third of profits abroad.

Of course this ratio could break out to the upside again, as it did in 1998-2000, because US companies could do better than their global peers, or the US economy could outpace the rest of the world (quite likely) or because low interest rates (see above) could result in higher valuations than would normally be justified by the current rate of GDP growth. On the other hand, the US dollar is strong, which is making it harder for US companies to increase market share through pricing, the Fed is talking about raising rates, and US equity valuations are pretty high.

As with the fact that 90 per cent of the world has zero interest rates, I don’t know what to make of this and I think it’s pointless trying to predict anything these days. We each just need to try to understand what’s going on and draw our own conclusions. Mine are that risks are increasing and some extra cash at the moment is making me feel a bit better, although I’m happy to remain invested in a domestic US stock (Whole Foods Market) as well as a New York-listed Indian one (Tata Motors).


Seek is becoming a Chinese business, and as with Toll Group, it may be that the potential growth in China is not in the share price. CEO Andrew Bassat says that when he talks to Australian institutions they only want to talk about the Australian business, and why there is a difference between Seek’s volume growth and jobs growth in general, and foreign institutions only want to talk about Asia and China in particular.

The problem with Seek's Chinese operation is that it’s much lower margin – 27 per cent versus 57 per cent in Australia. But as Andrew explains in my interview with him for Eureka Report, he is closing in on the market leader in China, the Nasdaq-listed 51job, and expects to be the market leader before long. He says the volume potential in China will overwhelm the lower margin, so the profit from China will soon be larger than Australia.

You can watch, and read, my interview with Andrew here. As always, it's not a recommendation, just an interview.


One of the firms trying to be the future Seek is Matt Barrie’s Freelancer.com, which listed at the end of 2013. They only floated about 10 per cent of the stock: Matt still owns 47 per cent and Simon Clausen has 40 per cent.

Anyway, it listed at 50c, promptly shot to $1.60 and has been drifting lower ever since, getting as low as 52c last November. It’s back at 76c having rallied nearly 30 per cent this month, quite a bit of that BEFORE Monday’s profit report.

Revenue went up 39 per cent but the company made a loss of $1.5 million versus a profit of $1.1 million, because Matt is investing for growth.

Matt Barrie is my second CEO interview this week. In it he explains Freelancer’s business model and where he’s going from here (he says he’s the eBay of jobs). Should you invest in it? Don't know, but Matt's worth watching - here.

By the way, if you’re interested in seeing Matt, he’s speaking at a conference in March called "Creative Innovation 2015: From Disruption to Sustainable Growth”. Here’s the link to the conference’s website: ci2015.com.au.


David Thodey has done a terrific job running Telstra and has navigated the appearance of the NBN and then its remodelling by Malcolm Turnbull brilliantly. So he’ll be missed as CEO but David, Catherine Livingstone and the board should be congratulated for their succession planning – it’s a model of its type. David didn’t hang around too long, and there’s a good replacement ready to go: Andrew Penn was CEO of AXA Asia Pacific before it was sold to the French and he’s been a solid No. 2 and CFO to David for the past three years.

As investors we can be confident that Andy Penn, as everyone calls him, knows how to be a CEO and that the board knows what it’s doing.

Reporting Season

Craig James of CommSec has surveyed the results so far and here are his key findings:

- After stripping out big companies and outliers with big losses, aggregate earnings per share is up 7.1 per cent

- 72 per cent of companies have increased revenue

- Aggregate revenues have lifted around 2 per cent

- 74 per cent of companies have increased costs

- Aggregate expenses/cost of sales have lifted around 5.5 per cent

- 86 per cent of companies have produced a profit

- Of those reporting a profit, 76 per cent have increased profits

- Excluding outliers, bottom line profits have risen around 9 per cent

- 82 per cent of companies have lifted dividends

- Of those issuing a dividend, 66 per cent of companies have lifted dividends

- Aggregate cash levels have fallen by almost 7 per cent compared with a year ago

- 56 per cent of companies have lifted cash but 44 per cent cut cash.

Rio Tinto

A note from a former Rio Tinto staffer following my comments on the company last week:


Ref your comments about Rio Tinto and the recent performance...

I am glad you have realised Tom Albanese was an idiot – this was apparent during most of his way too long tenure. Why he didn’t get sacked a lot earlier by Jan du Plessis remains a complete mystery:

1. Lack of any true vision for the company in terms of the unquote compete advantage which arose from the early move to recognise native title and communities issues – the so-called developer of choice strategy was rejected and then pissed up against the wall over his tenure by inappropriate wastage of people.

2. The wrong vision was embraced – “stronger for longer” in a commodities business is the rantings of an idiot – remember the China cycle was going to last 20 years and aluminium would follow steel on that beautiful curve

3. He overrode sound analysis to create scenarios which suited his growth ambitions – hence the Alcan disagreement where due process was thrown out the window in their rush to do a bad deal which ignored the fundamentals of the cycle. Too much believing his own bullshit.

4. He might present well to outsiders but internally he did not talk to people other than in glib soundbites – basically an introvert out of his depth except when he had a script.

It is a shame to see the decline of a once-great company. It still has great assets, but while cutting costs, Sam Walsh would do well to take great care to also rebuild the competitive edge which made Rio once a great company.

Readings & Viewings

Video of the Week: This is truly revolutionary: how smartphones are changing medicine.

These two are very funny. Two women called Kate, doing a cooking show on YouTube called The Katering Show.

“What ISIS really wants”: this Atlantic magazine cover story is very important, and worth spending time on. For example: “Muslims can reject the Islamic State; nearly all do. But pretending that it isn’t actually a religious, millenarian group, with theology that must be understood to be combatted, has already led the United States to underestimate it and back foolish schemes to counter it.”

Peggy Noonan in The Wall Street Journal says it is going to change the debate (it ought to become a book, she says).

Islam in France (the article is called "France on Fire"): “It is hard to escape the feeling that a major battle is beginning and that it will overshadow economic and other issues here for months and years to come. And the battleground, as is typical in France, will be the schools."

The Greek finance minister, Yanis Varoufakis explains his position – and how game theory applies to what he’s doing, in an op-ed piece in The New York Times.

And here he is on video.

David Kotok and Bob Eisenbeis of Cumberland Advisors are always worth listening to. Here they are doing an interview on Bloomberg TV.

Speaking of people always worth listening to – here is Lacy Hunt and Van Hoisington’s fourth quarter review: "The proximate cause for the current economic maladies and continuing downshift of economic activity has been the overaccumulation of debt.” (It’s a PDF.)

Timothy Geithner: The end of capitalism as we know it.

Greens Senator and former stockbroker and economist, Peter Whish-Wilson, on the financial planning battleground.

This is an academic paper that shows that cricketers are the worst at putting personal glory ahead of the team, no matter what they say.

Interesting piece on Greece’s problems, including this gem: "Governments are usually right at the top of the list of weak institutions.”

It seems to Paul Krugman that Germany is trying to force Greece out of the euro.

John Mauldin on the Eurozone’s problems.

A sidelight to the Greek tragedy – Cyprus, an island in search of saga.

A guide to Australia’s think tanks (PDF).

The simple path to stable absolute returns is not simple.

Worried about deflation – just look at the hand. The Fed puts the emphasis on alternative price measures.

Peter Oborne: why I resigned from the Telegraph (this was a bombshell, not only for the Telegraph, but also HSBC, which he effectively accused of bullying the newspaper into burying its coverage of the tax evasion scandal involving HSBC).

This was a very good speech by the Member for Kooyong and Parliamentary Secretary to the Treasurer, Kelly O’Dwyer, in which she produces some facts about inequality and fairness.

My piece during the week on the bond bubble.

Barrie Cassidy: we are world leaders in political posturing.

The great frozen berry scare: here’s what you need to know about Hepatitis A.

Gary Shilling: why you should own bonds.

Happy birthday the wonderful Andrés Segovia (he passed away in 1987). Here he is doing Leyenda by Albeniz.

This might be a big call, but I think Segovia lies behind all of today’s great guitarists, including these two fantastic electric blues guitarists: Larry Carlton and Robben Ford, seen here jamming together on stage.

It’s also Nina Simone’s birthday (she died in 2003). I once went to a concert of hers in Paris, very excited, but unfortunately she was pissed. Mumbled a few songs, fell over, went off. Oh well. Here she is doing I Put A Spell On You.

And yesterday was Kurt Cobain’s birthday. He killed himself in 1994, tragically. Here is “Smells Like Teen Spirit” with one of the great lines of modern rock: Here we are now, entertain us.

Last Week

By Shane Oliver, AMP

Investment markets and key developments over the past week

While US and Australian shares were little changed over the last week, other markets managed good gains. Eurozone shares were helped by optimism a Greek deal would be reached and better economic data and Japanese shares broke out to a 15 year high. Chinese shares also rose ahead of the Lunar New Year holiday. Australian shares saw more mixed earnings results but were supported by the takeover of Toll by Japan Post and expectations there may be more such deals. Bond yields rose but despite the risk-on tone commodity prices fell slightly. The $A managed to get back just above $US0.78.

Greece getting closer to an interim loan deal. Greece has now put in a request for a six-month extension to its interim loan program that appears to meet most of the conditions set by Eurozone finance ministers. While there is more to go before an extension is agreed the Greek back down suggests an agreement is in reach. Once it is agreed attention will then turn towards negotiating a longer term program and this is likely to allow Greece to run a somewhat lower budget surplus. However, there will be a long way to go before agreement on that is reached – so Greece will remain in the headlines for a while yet. However, with other peripheral countries now in better shape, Italian and Spanish bond yields around record lows and Eurozone economic data continuing to point to improved growth we don’t see a major threat to Europe. In fact, Eurozone shares continue to look relatively attractive.

The Australian December half profit reporting season is now 60% done. While we have seen the usual pattern of good results being released early resulting in some deterioration over the past week, overall results remain better than feared. 57% of results have beaten expectations against a norm of 45%, 68% have seen profits rise from a year ago, 54% have seen their share price outperform the day results were released and 62% have increased their dividends. Key themes have been falling profits among resources and mining services companies, but continued strength for the banks, ongoing cost control and solid growth in dividends. With the share market now trading on an above average forward PE of 15.5 times, the market has become very sensitive to companies that under or over deliver relative to expectations and so we have seen some significant share price reactions. Through all the noise though consensus earnings expectations for this financial year and next are little changed from where they were before the results started to flow. The consensus is for earnings growth this financial year of 1% with resources -25% but industrials 10% and banks 8%.

Major global economic events and implications

In the US, the minutes from the last Fed meeting offered little that was new. The Fed is clearly grappling with cross currents in terms of economic activity data and inflation and feels that it can be patient in moving to raise interest rates. Arguably there was a slight bias away from June for the first rate hike out to around September. Economic data released in the US if anything added to the case for a later move. While jobless claims fell, the NAHB home builders survey, housing starts and permits and a couple of regional manufacturing conditions surveys all softened slightly, industrial production rose less than expected and both headline and core producer prices came in weaker than expected.

The Eurozone continues to look like it’s picking up pace with another improvement in the ZEW investment analysts' survey and in consumer confidence supporting this.

After the sales tax driven recession mid last year, Japan has returned to growth. However, December quarter GDP was weaker than expected at just 0.5% quarter on quarter. While the Bank of Japan made no changes to monetary policy as they are still waiting to assess the impact of the expanded measures announced last November, more easing is likely to be required this year which in turn is likely to maintain downwards pressure on the value of the Yen.

Chinese residential property prices continued to fall in January but at a slower pace. Average prices fell 0.4% month on month, compared to 1% monthly falls earlier last year and tier 1 cities saw a 0.1% price gain. However, while property price declines have slowed prices are still falling and pose a threat to the economy. Given the soft start to growth indicators and inflation this year we remain of the view that further Chinese monetary easing is likely ahead.

Australian economic events and implications

The minutes from the last RBA Board meeting offered little that was new and in any case they were pretty dated anyway given that the Statement on Monetary Policy and Governor Steven’s Parliamentary testimony had been released since. It’s not really surprising to learn the RBA had debated whether to ease in February or March – many of those looking for an easing grappled with the same issue. The RBA’s sub-trend outlook for growth, low inflation and assessment that a lower $A is likely needed all point to an easing bias. We continue to see another rate cut in the months ahead.

Next Week

By Craig James, CommSec

Business investment grabs local attention

In Australia over the coming week, the highlight is the latest data on business investment. In China, the focus is on the “flash” manufacturing gauge – which will give a sense about how the economy is faring. And in the US, there is a plethora of data for investors to digest, with a focus on the housing market, economic growth and inflation. In addition the Federal Reserve Chair Janet Yellen delivers testimony on the economy over two days.

In Australia, the week kicks off on Tuesday when ANZ and Roy Morgan release the weekly consumer sentiment index. Confidence levels have declined in the post-rate cut environment. Notably the sizeable lift in fuel prices and slide in the Australian dollar seems to be playing a major role dampening sentiment.

Also on Tuesday the Australian Bureau of Statistics (ABS) releases preliminary data on the balance of payments for the December quarter. The data is mostly of use for economists in starting to estimate the trade (exports and imports) contribution to economic growth in the December quarter.

On Wednesday, the ABS releases preliminary data on construction spending in the December quarter. The estimates of residential building completions feed into the calculations of economic growth in the quarter. And the commercial and engineering data provides early indications of the following day’s business investment figures. Home building is once again expected to be the key driver offsetting some of the weakness in engineering activity.

Also on Wednesday the main measure of wage growth in Australia – the wage price index – is issued. In the September quarter, annual wage growth was just 2.6 per cent – a record (17-year) low. We expect that wage growth was even lower in the December quarter – up 0.6 per cent in the quarter and up just 2.5 per cent over the year – another reason why the Reserve Bank can afford to remain dovish on interest rates.

On Thursday the ABS releases Private Capital Expenditure and Expected Expenditure – business investment or just business spending. The data is broken up into “building & structures” and “equipment” and refers to business spending on longer-lasting assets. However as the title suggests the data covers not just actual spending but also planned spending over the next 18 months.

In the September quarter, investment lifted by 0.2 per cent, underpinned by outlays on equipment. The lift in spending was a little surprising and we think that spending eased 5 per cent in the December quarter.

But probably more important than the December quarter results are the forecasts for investment in both 2014/15 and the 2015/16 year. If planned investment lifts – especially outside the mining sector – then the Reserve Bank will think harder about the need or timing of another rate cut.

The ABS releases another measure of wages on Thursday – average weekly earnings – a measure that provides dollar estimates on wages across industries and states and territories.

And on Friday the Reserve Bank will release data on loans outstanding – or private sector credit. It is clear that consumers and businesses are borrowing again. In December, credit rose by 0.5 per cent, taking annual growth to 5.9 per cent – the strongest growth in nearly six years. Another lift in lending of around 0.4-0.5 per cent is expected in January.

US Federal Reserve Chief to face a grilling; China “Flash” manufacturing in focus

Turning attention overseas, the week kicks off on Monday in the US when data on existing home sales is issued together with regional activity gauges from Chicago and Dallas.

On Tuesday, the Federal Reserve Chair, Janet Yellen, delivers testimony to the US Senate Banking committee and follows this up on Wednesday with testimony to the House of Representatives Financial Services committee.

In terms of economic data, on Tuesday, Standard & Poor’s/Case Shiller release measures on home prices while data on consumer confidence is issued together with a regional activity gauge from Richmond. The home price index should confirm that modest growth is occurring.

On Wednesday the usual weekly data on home purchase and refinancing is issued with January figures on new home sales. The complication with the home sales data – and common to other indicators at present – is the impact of the severe winter weather in crimping activity. Home sales are expected to have fallen by 1.3 per cent.

On Thursday, data on durable goods orders is issued together with the consumer price with the usual weekly data on claims for unemployment insurance and the Kansas City regional survey. The headline measure is expected to show price deflation – prices falling by 0.5 per cent in January – largely due to the slide in the gasoline prices. The core CPI (excluding food & energy) may have lifted 0.1 per cent in January, keeping the annual rate near 1.5 per cent. Durable goods orders is expected to show a healthy 1.7 per cent lift after falling by 3.4 per cent in January.

And on Friday, the second (preliminary) estimate of economic growth in the December quarter is released with pending home sales, consumer sentiment and the Chicago purchasing managers index.

The focus in China will be the “flash” manufacturing gauge for February to be released on Tuesday. Once again a mild contraction is forecast with a reading of 49.5.

Sharemarket, interest rates, currencies & commodities

The Australian profit reporting season rolls into its last official week.

Among companies expected to report on Monday are Beach Energy, Caltex, GPT Group, Lend Lease, Spark Infrastructure Group, and UGL.

On Tuesday, BHP Billiton, Oil Search, and QBE Insurance are scheduled to issue results.

On Wednesday, APA Group and Westfield both report earnings.

On Thursday a healthy dose of companies report including Atlas Iron, Qantas, Ramsay Healthcare and Sydney Airport. Woolworths issues results on Friday.

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