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Lateline Business -

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(generated from captions) That's all from us. If you'd

like to look back at tonight's

interview with Stephen Smith or

review Lateline's stories or

transcripts, you can visit our

website. Virginia Trioli will

be with you tomorrow night and

I'll be back next week. But

for now 'Lateline Business'

with Ali Moore. Tonight -

don't blame us, ASIC says the

recent market turmoil is not

its fault. I don't think

there's any basis for the

statement that what's occurred

with Opes Prime and some of the

other issues that occurred in

the market that are regulatory

driven. Wages break-out - fears

the tight labour market will

lead to higher pay deals. The

unemployment rate is far below

what any economist would

estimate to be the natural rate

of unemployment. That means

all of the pressure on wages

really is to the upside at the

moment. Debt lifeline, Centro's

bankers give the property group another chance to stay

afloat. If one lender pulls the

pin it's one in, all in. One

in all in, in terms of granting

extensions. Also tonight - we

talk to the experts about the

outlook for company earnings and where to invest your money.

First, though, to the markets

and ignoring an overnight

stumble on Wall Street, Australian shares overcome a

poor start to finish in the

black. Led by gains in

financial stocks, the All Ords

added 43 points. The ASX200

rose 1%, recovering the losses

of the previous two sessions.

In Japan the Nikkei went in the

other direction, falling 1%.

Hong Kong's Hang Seng lost 160

points and in London, the FTSE

is little changed. The head of

ASIC has rejected accusations

it didn't do enough to prevent

the collapse of stockbroker

Opes Prime. The corporate

watchdog has been criticised

for failing to warn investors

about the company's woes. But

in a media briefing to discuss

the completion of a strategic

review to which very few media

organisations were actually

invited, the chairman said the

regulator was not responsible

for the failure of Opes Prime

and the recent market

volatility. You need to

understand at the end of the

day that CEOs, directors design

business models and people buy

them. In a sense, there's a

responsibility at that level

for when some of these collapses occurred and at this

stage, there is in my mind no

real evidence this was

regulatory failure. As part of

the strategic review, ASIC will

appoint an external panel to

advise it on market developments, cut senior management positions and devote

more resources to supervising

traders. Despite the

controversy, overshort selling,

margin lending, ASIC says it

sees no need for tougher laws. Australia's labour market

continues to power ahead with

25,000 new jobs created in

April - mornl double market

expectations. But the latest

figures have reignited concerns

about the potential for a wages

break-out. Earlier this week

Victorian teachers won a 15%

pay rise. Now there are fears

other unions will try to follow

suite. Neal Woolrich reports.

The global economy might have a

case of the jitters but the

Australian labour market is

going from strength to

strength. The Bureau of

Statistics is reporting 25,000

new jobs in April, more than double the consensus forecast.

The real risk here is that

the Australian economy is

operating at high capacity

constraints so there's not a

lot of incentives for employees

to let go of staff at the

moment. We think, if anything

the labour market could

surprise on the upside. The

continuing strength of the

labour market is fuelling fears

of a wages break-out. Earlier

theesh Victorian teachers were

awarded a 15% pay rise. Media

reports suggest other workers

will push for a similar amount

plus 4% to cover inflation.

Not so, says the ACTU. I think

people need to calm down a bit.

The fact is that there's been a

settlement in respect of

Victorian teachers that's got

some publicity. But other

wages in other industries and

even with that industry will be

bargained on the basis of the circumstances of each

industry. Business groups are

urging

restraint. Productivity-based

bargaining, which is based

around reasonable expectations

and sensible management

bargaining is the way to go,

not some general call for ambit

or extreme wage rises which

purport to be based on a

catch-up, but which are nothing

out of the system as they more than trying to get as much

can. But the union movement

argues too much of the burden

is being placed on low-income

earners. What we have in this

community is people who call

for restraint. Who want to

restrain minimum wages so that

those who are at the bottom of

the labour market shouldn't get

an increase when they don't exercise restraint themselves.

Where has been the restraint

with respect to profits or dividends paid? Whatever

increases are awarded, whether

they're to executives or

whether they're in union

bargaining are based on

performance and productivity

and if unions can justify

claims by reference to performance and productivity,

then there'll be a basis for

wage increases that are non-inflationary. In recent

years economists have been

surprised by how well contained

wage growth has been. The wage

price index was 4.2% last year,

one percentage point above the

inflation rate. ANZ's Katie

Dean warns that may not

last. The danger is we may

approach a tipping point. The

unemployment rate is far below

what any economist would

estimate to be its natural

rate, the natural rate of

unemployment and that means that, you know, all of the

pressure on wages really is to the upside at the

moment. Market watchers will be

keenly awaiting next week's

report on earnings growth when

the Bureau of Statistics

releases the wage price index

for the March quarter. And the

ABS itself is under pressure.

It says budget constraints will

force it to reduce the number

of people it surveys each month

to compile employment figures.

The embattled Centro Properties

Group has won another reprieve

from its bankers. Its

financiers have given the group

until mid-December to repay

billions in loans. But the

extension comes with conditions

which must be agreed to by the

end of this month. Desley

management has Coleman reports. Centro's

management has been granted

some more breathing space. An

announcement made after the

market closed confirmed a

highly conditional reprieve

from the group's lenders. The

extension of the debt deadline

to December hinges on all the

banks agreeing on more than $2

billion in short-term loans

will be serviced. If one lender

pulls the pin,

pulls the pin, it's one in all

in. By the end of May the army

of lenders including NAB, ANZ,

Commonwealth, St George and

German lender WestLB must agree

to provide liquidity facilities

of $155 million. That's to

cover adviser fees and

additional lending costs. They

also must ensure they all agree

on arrangements, including the consent consent process for refinancing

and the sale of assets. The

issue here is that the whole

Centro Group is very complex

and, therefore, I think there

is a reason for all the

safeguards to be put in place

and, of course, the higher the

level of complexity the more

safeguards are probably

required. It's understood Australian banks are Australian banks are

comfortable granting Centro

more time. Its relatively

small lender WestLB holding up

the process. The German lender

is owed $200 million, but the

sticking point is its parent

company caught up in its own

credit crisis requiring an $8

billion bailout package from

the EU. Today's extension will

give Centro more time to work out how to

out how to stay afloat. The

group will continue to reduce

debt through asset sales and

that must be finalised by the

end of September under the new

lending conditions. But that

isn't expected to be a smooth

process. It, in fact, doesn't

own clean title on the

underlying real estate. It has

to deal with other shareholders

or other investors in that real

estate. And it's also also

trying to maintain or trying to maintain or retain

property management rights

which is one of the underlying,

I guess, intrinsic values of

the services business. So it's

in a very difficult position in

trying to sell clean title, or

get clean title to effect the

sales. Clinging to survival,

Centro shares will commence

trading tomorrow morning. News

Corporation has tripled third

quarter earnings thanks to the

sale of its stake in DirecTV to

Liberty Media's John Mallone.

Higher advertising sales

boosted returns helping profit

rise by 16%, and the company is

standing by its forecast for a

similar rise in full-year

earnings. Andrew Robertson

reports. It may be News

Corporation's third straight

quarter of strong growth but research recognises research recognises the biggest

threat to future earnings is

the sluggish US economy. There

is no doubt that the consumer

economy is stressed and you're

seeing that reflected in

advertising, more short-term planning, short-term bookings.

In Australia, it's just

booming. It's going up all the

time. News Corp's earnings time. News Corp's earnings of

$2.7 billion were boosted by

its sale of DirecTV. Removing

that one-off, operating income

was up 16% to $1.4 billion on revenue which was also up 14%.

The result was helped by Fox

TV's Super Bowl coverage which

was America's most watched

program and 'American Idol' the

country's most popular TV country's most popular TV

series. When you've got a

couple of headline acts so to

speak that drag in big and

broad numbers, advertisers

respond to that. The market

responds to that and that

certainly has been the flavour

for Fox. The US free-to-air

television division was the standout performer in the

quarter with a 53% lift in

earnings.

The absent of any blockbuster

movies from 20th Century Fox

saw a 36% fall in the film division. New businesses are

doing better than the old traditional businesses,

notably, newspapers, magazines

and book publishing are doing

less well than were the

marketplace. This forecasts in the

marketplace. This is the first

quarter that News Corporation

has operated the 'Wall Street

Journal' after completing the

purchase of what's widely

regarded as one of the world's

finest newspapers. Research

believes in coming years it

will be one of the biggest

contributors to earnings,

particularly from its already

large and growing online

reedership. The more time I

spend working with the company,

improving the more opportunities I see

improving and expanding current

businesses. Small acquisition

relative to market

capitalisation. It is potentially transformative on

many levels. The only black

spot for News is it's revised

down its full-year revenue

forecast for interactive media

which includes the MySpace

purchased in 2005. It's too

soon to start milking this

thing for margin. It's more important to important to keep focussed on

growth both internationally and

in terms of tools and

applications for users here in

the US. Despite its desire to

expand its Internet presence,

research says News Corporation

has no intention of making a

bid for Yahoo although he is

confident of adding New York's

'News Day' newspaper to his

empire within the next seven

days. Back to local stocks now

and David Jones is feeling the

pain as shoppers continue to

tighten their belts. Sales

growth slowed to just under 4%

to $453 million. Chief

executive Mark McInnes says the

figures reflect the slowdown in

scurp spending with big-ticket

items hardest hit. People items hardest hit. People just

want to see the end of the bad

news before they get back to their normal shopping

pattern. The up-market retailer

maintained its forecast for second-half earnings growth of

between 8-13%. Shares closed

flat at $3.606789 David Jones

investors weren't the only ones

on the receiving end of bad

news today. Boral slashed

profit forecast for the year by

as much as 8%, citing ongoing as much as 8%, citing ongoing

weakness in the US housing

market. Shares in the building

products maker which earns

about a fifth of its sales in

America closed nearly 1% weaker

at $5.90. Despite record oil

prices, refinery shutdown saw

first quarter earnings at

Caltex plunge 34%. Shares

closed 6% closer at $12.47. As

earlier this week we saw today with Boral and

earlier this week with St

George, it is the season for

profit downgrades but can we

expect more to come? Just how

great are the head winds facing

Australian companies and as we

head towards the new financial

year where are the best sectors

and stocks to put your money?

For their views I was joined by

Glenn Rosewall the managing

director of BBY and Graham

Harman the head of investment

strategy at Citigroup. Gentlemen, welcome to Lateline

Business. Right now, there are

a lot of stocks that have

earnings forecasts that seem to

be suggesting a fairly rapid

upswing in the coming year, are

we heading for fairly big

disappointments? Graham

Harman? I think we must be

particularly on the 09 numbers,

numbers for the 08 year have

been scaled back from 8-9% been scaled back from 8-9%

growth to 2-3 only but looking

for 10% growth in 09. Given we

know things are getting worse,

why should they get better in

an earnings sense. A lot of

companies must be vulnerable. What do you think

is a more likely scenario? On

those core industrial stocks, I

think if you just came down you

can do 2% again that would can do 2% again that would make

a lot of sense. Bear in mind

that there are still a big

chunk of the economy where they

have been delivering 40%

growth. It's slowing to 20 and

there's less risk there in a

slowdown being factored in.

There's cycles within

cycles. Glenn Rosewall, do you

agree? We've seen a couple of

key downgrades. St George Bank

as well as Boral today. Do you think we're entering think we're entering the

confession season? Well, it is

actually typically the time of

the year where we see more

downgrades and I agree with

Graham in the sense we have

seen analysts trimming their

earnings forecast. We think 09

is around 7% and I guess in

terms of risk it's really on

the margin side. We've seen

head winds facing the market

for a while in terms of the Australian dollar and the

labour costs. I'm not sure

analysts have the margin

contraction quite right. They

have to traple with what's

happening with volumes at the

present time. You talk about

the head winds and I will look

sector by sector. It obviously

depends on what sector you're

dealing with. But overall,

what are the biggest risks? Is

it domestic demand? US

exposure? Is it credit? Is it

you the Australian dollar, what do

you think are the biggest

risks? We've been facing a

higher Australian dollar for

some time. Analysts have been

slow to factor that in. Also

on the energy side analysts

have been slow to factor in

higher energy costs for a

number of years. I think on

the labour side we've seen

certainly, you know, tight

labour markets for some time.

Certainly tight labour markets

in the mining belts and I just

think that analysts have been a

little bit slow there as

well. Graham Harman, do you agree? All of those core things

- none of them are new? That's

true. There are two main

drivers for this potential

disappointment. One is that

the revenue line squeezes on a

fixed cost base and you lose

profitability. We know costs

are coming through. As Glenn describes, describes, not so much labour

costs, there's not a wages

break-out in Australia at

present. Not yet anyway? It's

been remarkable. We have the

strongest labour market in

almost a lifetime and you look

at all the survey data and the enterprise bargaining

agreements are holding the line

on wage pressure. But all

those other things, absolute

disaster breaking out all over

so even if the revenue line

growth holds up it's possible profit

growth just evaporates. Let's

look at some of the sectors and

start with building materials.

Boral expects earnings to fall

by 20% because of exposure to

the US. Do you think that is

representative of what's to

come from many of the companies

exposed to America? Yes,

although bear in mind that the

recession in US housing is 2-3

years old already. We have one

of of these cycles that's

asymetrical with other things

going on. The other point

about Boral would be mixed results within various

divisions based on which part

of Australia, which part of the

US, mixed rather than

universally disastrous. Krity

analysts have good growth for

cyclical the sector, don't they? For a

cyclical industry, fixed costs,

usual input costs, you just

look at the high growth and you think question mark. You

agree? I think the US economy

is a big economy and clearly

whilst Graham said the housing

side of things has been slow

for a couple of years, they

still have a fair way to go

before they work their way

through the problems of excess

debt. So all Australian

companies that are exposed

you'd be

you'd be paring back? I think Australian companies that have

US exposure you have to be

careful with. You have to

distinguish between what's happening with earnings and share prices. For example,

Boral came out today and

confirmed they'll be delivering

earnings at the lower end of

the range yet the share price

didn't tumble, it declined 80

basis points. Share prices

over the last six months have

started to factor in a fair

amount of bad amount of bad news. Let's look

at resources. There's two

sides, resource companies are

enjoying the benefit of high

commodity prices but also

seeing massive costs and we've already had that flow-through

in earlier earnings. In terms

of what's going to happen in

08-09, where do you think

resource stocks are

sitting? For the sector as a

whole we've had so much

positive momentum in bulk

commodity prices be it iron

ore, coal, aluminium, ore, coal, aluminium, oil, gold

- it's going to sweep all

before it. But focus in on a

stock like alumina for example.

We know that caustic soda, big

driver, price, a lot of pressure there. All these

companies are going to have

fuel costs, wage costs as Glenn

described. It's starting to

become a race between the costs

and the revenues. Glenn

Rosewall, can you name what you

like in

like in resources? On the big

stocks we've seen earnings

upgrades for Rio and BHP

Billiton. We don't think

they're expensive stocks. We

think they have to be attracted even though they're fighting

amongst each other. In terms

of other companies Fortescue

we've followed since early 2005

and I think the share price has

increased by 36 times. As

Graham said, a lot of good news

in that share price. We wrote

the stock as a hold at the

present time. We like a present time. We like a lot of

the emerging mining companies.

Some of the emerging mining

companies are cheap, companies

like myrrh chason's metals.

There's plenty of buying

opportunities out there. Where

do high commodity prices leave

coke EvoGenics Coca-Cola Amatil

and also, of course, a stronger

dollars - where do those types of companies of companies sit? I'd be

concerned about the downstream

half of the Australian economy

which are users be it tin plate

or fuel to truck the stuff

around, any sort of input.

Given that the CPI may well be

going from 4-5%, but if your

costs have gone to 10% it's got

to be hard not to be

squeezed. Which stocks do you

steer clear of? Anything that

is exposed to the Australian

consumer I would be concerned

about. There's a... the issue

is do we have a variable cost

business or a fixed cost

business? For example, for

stocks like Woolworths and

MetCash we're positive that the

whole price goes up, they're

taking a cut on that and,

therefore, the actual value of

the cut goes up in an

inflationary environment.

You've got to be careful of

anything with a whiff of not being able

being able to pass on those

costs. You know, the commodity

prices swing beneath you and you're really

squeezed. Glenn? I think

probably the best analogy I've

used in the last few months is

that Americans are going to go

back to one Starbucks a day and

drinking tap water and I think

that's the environment we're

in. It was interesting

Starbucks came out with an

earnings downgrade the other earnings downgrade the other

day. All consumer, all food? A

lot of consumer and

unfortunately, quite frankly

there's a lot of small owner

operator businesses will be

hurt. You'll see anecdotal

evidence about the cafe shop

owner doing it tough. When you

look at that we have seen

massive rises for wheat and

where does that leave companies

like Goodman Fielder? It's a

good question. That's a

classic example of a company

that's faced increases on the

input side. They'll have to

push up bread prices to pass it

along. If you look at

individual operators out there,

they're facing the same

difficulties. We are rapidly

running out of time. I can't

go without asking you about

financials. We've seen the

Commonwealth and Westpac make reassuring statements today, reassuring statements today,

how are the banks looking? For

the National Bank you'd have to

worry about the UK exposure

where clearly things are in a

bit of a black hole, but the

main positive is they're

washing their face in terms of

recouping rising funding costs

and it's five basis points here

or there, but they are pushing

through that cost onto the

consumer. Do you think we've

got all the bad news? If you

listen to our banking analyst

he believes strong double digit

returns over the next 12

months. He likes all the

banks. What happens today in

the marketplace because you

have so many boutique managers

and hedge funds that have the

ability to respond quickly to

changes in the macro scene, bad

news is factored in quickly.

There has been an

overreaction. If I can ask you

top three stocks for performance in the coming financial year? Very financial year? Very much away

from the consumer and going

upstream. Santos, Leighton

Holdings perhaps Orica. We've

just published a report called

the need to feed and it's based

on phosphate and the demand for

fas fete. How strongly it's

going, so Incitec Pivot is a

key player in Australia and

there are a number of emerging

companies that we like as well.

Outside of that, we like

Australian Wheat Board which we

think is

think is mispriced. High wheat

prices. All of the issues,

exactly. Thank you both for

joining us. To the other major movers on our market today:

For some it's always the

economy stupid, but what's the

best way to judge how it's

faring? The housing market, the

sharemarket or the size of

programs down the street.

Tracey Kirkland reports. -- Tracey Kirkland reports. --

prams down the street. It's

always been straightforward to

determine how the economy is

doing. Probably the main

indicator is the national kkts,

the Consumer Price Index. The

labour market figures... In

recent years companies have

come up with indicators like

the Big Mac Index or CommSec's

Ipod Index to compare how the

Australian dollar is faring

overseas. What if you could tell

tell how well the economy was

doing by looking around you?

Maybe you can, simply by

examining basic changes to

people's habits. Perhaps you've

got the liquor store and

they're buying expensive

bottles. In the car game,

they're downscaling. Callers to

a recent ABC Radio poll said

they could tell when times they could tell when times were

tough. In good times a teacher

saw cup cakes and juice, in bad

times sayo and water. What's

your indicator? What about the

Aldi shopping index? The number

of people shopping at the cheap supermarket doubled. Has

doubled over the last three

months. Or the petrol station

queue index The Tuesday queue

is long. Yeah, last couple is long. Yeah, last couple of

weekses, it's terrible. One

baby store manager has a pram

index. Six months ago we were

selling $1500 prams without any

problem. Now I think people

might step back a bit. Others

believe the coffee index says

it all. In a week I'd probably

have a coffee a day like out in

a shop, but in a bad week, I'd

probably have maybe one or

probably have maybe one or two. Comparing the regular

economic indicators to the

real-life indicator a similar

picture emerges. The housing

market, down, the sharemarket

down. Length of queue on a

Tuesday bad, very long. Once

again the 702 economic

indicator has done an accurate

reading of what's happening in

our economy in real every day

terms and it's coming up

bad. It seems we just need to use

use our eyes to make those

crucial financial judgments.

And it's so much easier.

A look at what's making news

in tomorrow's papers.

Both the Bank of England and

the European Central Bank have

left their interest rates

unchanged. The FTSE is down 13

points and the Dow Futures are

up 21 just minutes before the

opening. We'll be back on

Monday. I'm Ali Moore, goodnight.

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