THE BIG PICTURE: Cash falling at the top end of town

The Australian profit reporting or earnings season has come to an end. Overall we have tracked the results of 131 companies from the ASX 200 index that reported half-year results and aggregate profits for the six months to December totalled $26.7 billion, up just 5.5% on a year earlier. Revenue (sales) totalled $251.1 billion, up 8.9% on a year ago with cost of sales (expenses) totalling $206.2 billion, up 9.8%.

A notable feature of the earnings season has been the number of companies issuing write-downs or “abnormals”, muddying the waters of the bottom-line profit results. In many cases, companies are merely taking the advantage of strong accounts to “tidy up” balance sheets.

Across our sample of large companies, average earnings per share were 24.8 cents, almost unchanged on the previous year. But dividends were higher with aggregate interim dividends up 7% on a year earlier (or up around 5% in average terms).

Another notable feature of the earnings season has been the drop in cash reserves. Of the companies reporting half-year results, aggregate cash reserves fell between the end of June and the end of December by 14.1% to $55.7 billion. However, BHP Billiton drove the result: excluding BHP Billiton, cash balances were actually up by 7%. But, across the board, the performance was mixed with 48% increasing cash holdings and 52% cutting cash levels. Still, given that aggregate profits for the period totalled $26.7 billion, it is clear that companies remain conservative.

As always, a number of positive and negative influences can account for the reduction in cash levels. Some companies have become more confident about the outlook and are opting to put the cash to work in other parts of the business. Companies, as well as consumers, have maintained higher-than-normal cash reserves over the past few years. On a more negative tack, other companies have been faced with a combination of rising costs and cautious businesses and consumers – a clear outworking of “challenging” business conditions – and thus have trimmed cash holdings. But the result could prove encouraging for banks if companies return to debt markets again.

The week ahead

Brace for the autumn avalanche. Each change of seasons is ushered in with a barrage of new economic data and autumn is no exception. Around a dozen key indicators are expected to be released in Australia over the next week with an interest rate announcement thrown in for good measure. In the US, the monthly job figures (released on Friday) dominate attention.

In Australia, the week kicks off on Monday with a plethora of data offerings. The ANZ Bank releases its job advertisements series with the TD Securities/Melbourne Institute monthly inflation gauge out the same day together with the ABS Business Indicator series (includes data on sales, profits and inventories) and Performance of Services index from Australian Industry Group and CBA.

The Business Indicator publication is basically ancient history although inverse from the monthly inflation gauge.

On Tuesday, the Reserve Bank Board meets to decide on interest rate settings. No change in rates is expected with the Reserve Bank clearly indicating that it is content with the current level of interest rates. The Governor was at pains to point out that he hadn’t expected banks to pass on all the rate cuts last year. Also on Tuesday, government finance data is released alongside tourist arrivals figures and the balance of payments – the broadest measure of our trade and debt position.

On Wednesday, the National Accounts will be published – a report that contains the latest economic growth estimates among other measures such as productivity. The economy is in good, but not great shape, up 2.5% on a year ago. On the same day the Performance of Construction index is issued and Reserve Bank Deputy Governor Philip Lowe delivers a speech.

On Thursday, the February jobs data is released – containing new estimates on employment, unemployment and hours worked. And all three need to be monitored together. In January, employment rose, unemployment fell, but hours worked also fell. In February, employment is tipped to lift by 15,000 with the jobless rate steady at 5.1%.

On Friday the January trade figures are issued with a surplus around $1.4 billion expected.?
In the US, the week starts with the release of factory orders data on Monday together with the ISM services gauge. Factory orders probably rose by 0.5 % with the ISM well above the ‘advance decline’ line of 50 at a reading of 56.8.

On Wednesday, the ADP national employment report is released, covering private sector employment trends. Economists tip a 210,000 lift in jobs in February. Data on productivity and consumer credit will also be released the same day.

The Challenger job layoff series features on Thursday together with weekly data on unemployment insurance claims.

And, on Friday, the spotlight will shine on the non-farm payrolls (employment) report. In recent months job growth has been encouraging with unemployment dropping sharply. In February, economists estimate that 200,000 jobs were created with unemployment unchanged at 8.3%. Monthly trade figures are also released on Friday and a deficit near US$49 billion is expected.

Also of note in the coming week there is a procession of central banks with interest rate setting meetings on Thursday including the UK, Eurozone, New Zealand and Canada. Austria, the UK, Germany and Sweden are amongst countries to issue government bonds over the week.

Sharemarket, interest rates, currencies & commodities

How quickly things change. Late last year the doomsters concluded the world was ending (again) with the European debt crisis expected to usher in a new global recession: But disaster was avoided (again) and it is clear that economic growth will prove healthy in 2012 in the US and Asia. Partly in response to firmer demand, oil prices have lifted sharply.

Supply issues have also conspired to push oil prices higher, with the focus largely on Iran. Western nations continue to oppose Iran’s nuclear ambitions and have boycotted oil exports from the recalcitrant nation. But Saudi Arabia has indicated that it is pumping more oil to cover the market shortfall. And there is speculation that the US could release oil from its strategic reserves if necessary to keep prices low.

Every recession since the 1970s has been accompanied by a sharp run up in the oil price, so it is a price to keep your eyes on.

In Asia, the key Tapis oil quote stands at US$131.69 a barrel. Just below the high of US$132.93 set last April. Before that you need to go back to August 2008 to find higher prices. The Singapore gasoline price is also at 10-month highs. The hope in Australia is that the Aussie dollar will continue to track higher, providing some insulation for motorists from the higher global cost of fuel.

The Reserve Bank Board meets on Tuesday, but interest rate markets are only factoring in a 20% chance of a rate cut. One rate cut of 25 basis points is factored in by markets over the next six months.

Craig James is the Chief Economist of CommSec.


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