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Lateline Business -

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'Lateline Business'. Thanks.

Tonight a reprieve for Babcock

& Brown as its bankers ease

their loan conditions. I think this announcement has restored

a lot of faith. It's removed

one of the biggest risks to

investing in Babcock &

Brown. Takeover target, global

steel giants increase their

stake s in Macarthur Coal. I

think they're going to learn to

short-term. Each one of those co-exist, at least in the

companies has their longer term

objectives. And rocky road as

the financial year draws to a

close, where to for the stock

market? We're in for a sequence

of lower highs, lower lows and

I suspect strongly we'll be

lower at the end of the year.

To the markets - local shares

dropped half a per cent today

poting their worst financial

year performance in more than

25 years despite a strong

showing by resources. The all

ords lost 17 points, on the

final trading day of the

financial year the ASX 200 fell

22 points.

Shares in investment bank

Babcock & Brown soared 18%

today after its bankers gave up

repayment of the company's their right to force early

debt. In return, Babcock &

Brown agreed to pay a higher

interest rate, up half a per

cent on nearly $3 billion in

loans. Babcock says the new

arrangement demonstrates its

bankers' confidence in the

business. After 3 weeks of

talks with its financial

backers Babcock & Brown now

appears to be off the critical

list. Babcock's Banking

syndicate has removed a clause

that allow add review of the

firm iffis market value fem

below $2.5 billion. That

happened 3 weeks ago, but the

lenders have now also decided

to waive their right to a

review. I think this

announcement has restored a lot

of faith. It's removed one of

the biggest risks to investing

in Babcock & Brown. I guess the

dark cloud of hanging over

their head of having a

four-month review and what that

might result in has now been

lifted and one can look at

investing in the company on a

more fundamental basis. Babcock

& Brown says it's been taking a

proactive approach to dealing

with market conditions

including a program of asset

sales to retired debt. In the

course of this process, the

syndicate Banks were provided

with an update of the business

and detailed financial

information to reach this

agreement. We certainly believe

that their decision underscores

the quality of our business.

The group is also sticking by

its profit guidance of $750

million for the 2008 financial

year. In particular, our

primary business's

infrastructure real estate,

transport leasing, we believe

we tone sto to have strong

global market positions and

sdem straited competitive

advantages. I think it looks

rosier for Babcock & Brown and

for the overall financial

sector. This would suggest that

the banks feel credit market

issues are starting to ease.

They're also confident in

taking a longer term outlook in

terms of asset markets as

well. Today's news triggered an

18% surge in Babcock & Brown's share price, it's satellite

funds had a mixed set of

results. Lincoln indicators

elio depeculiaritio says it's

too early to say whether

Babcock's survival is

assured. Buying and selling

assets often using a lot of

debt through highly engineered

structures in order to be able

to make money. Obviously with a

reduction in access to not only

capital markets globally but

also the increased cost in

access that debt, unfortunately

that causes some pressures on

someone like a Babcock &

Brown. Babcock's agreement with

the banks comes at a cost, repaying $400 million of its

corporate facilities and has

agreed to an extra half a

percentage point on the

interest rates its lenders

charge. Babcock estimates that

will cost up to $10 million over 3 will cost up to $10 million over 3 y

is fully drawn. Based on

today's market reaction

investors seem to think that's

a small price to pay for the

concession that is Babcock has

won. Babcock & Brown were

fairly quaifrlr careful to

point out the increase of 50

basis points on top their of

their margin they pay to the

banks won't have a material

impact. I think it will have

sorm impact on the cost ever

fubldsing but nothing overall

onerous for them. Analysts say

achieve ing the rapid profit

growth of previous years will

be nearly impossible given the

current market sentiment. The

credit crunch which has

occurred and this cre

re-classification of debt

globally isn't going change in

the short-term. We know they're

still going to be some asset

sales, some write-downs in

their property and other

assets. And the prospect of

future asset write downs will

continue to weigh on investor

confidence among financial

engineers like Babcock & Brown

and its bigger rival, the

Macarthur Coal - the Macquarie

Group. The battle for Macarthur

Coal is heating up. Founder Ken

Talbot is seeking to offload.

Global steel giant Arcelor

Mittal has increased its stake

to nearly 20%. Posco's move

makes it the third overseas

investor to hold a major stake

in the company. The last 3

months the Macarthur Coal

founder has been selling off

his majority stake in the

company. Ken Talbot stood down

from the board a week ago, so

he could independently deal

with jostling steel giants. You

would expect their objectives

are to not let Macarthur Coal,

who has been a reliable

supplier to them, get into

other hands which they may seem

as not in their best interests.

So that's what they're more

concerned about, rather than

getting some special deal..

they certainly want supply.

But... And they would see that

having a good shareholding

there and stopping someone else

from owning 100%, taking over

interests. But that's for them the company, may be in their

to say not us. Long time

Macarthur Coal customer Posco

has joined its share register,

the South Korean steel maker

plans to pay Ken Talbot $20 a

share for a 10% stake, on top

of Arcelor Mittal increasing

its investment from nearly 15%

to 19.9%. They join Chinese

investment group sittic which

owns 18% as the company's 3

major shareholders. I think

they're going to learn to

co-exist, at least in the

short-term. Each one of those

companies has their longer term

objectives. The news of the

Posco stake dashed hopes of a

possible takeover premium.

Investors sold off Macarthur

Coal stock and shares ended

down to $16.87. The global

price of all four grades of

coal have more than tripled

over the past year, hopefully

now Macarthur Coal can leave

its share register battles and

focus on selling coal. They'll

see significant growth over the

next 2-3 years, roughly

doubling to about 7 million

tonnes per annum from what is

this year going to be under

3.5. Thrst there has never

been a better time in the - in

history than now to be a coal

miner. We just think it's a

wonderful time. We're well

placed to benefit both in terms

of having the coal, having the

access to the asset s as they

come on stream, port and rail,

good quality coal and strong

relationships with our

customers. We can't wait to get

at it. Arcelor Mittal is also

reportedly looking at another

local miner, the 'The

Australian Financial Review' -

the Financial Times has

reported the steel maker has

considered entering the

takeover battle for Rio

Tinto. Again wanting to give

themselves a seat at the

bargaining table, pretty much

similar to what the Chinese

have done. At the end of the

day it doesn't guarantee them

any offtake but it gives them a

position of influence, I guess.

While the jockeying continues

for a seat at the Macarthur

Coal table, Ken Talbot still

holds just under 5% of the

company. To the other major

movers today - coming out of a

trading halt ABC Learning lost

1%. Friday it -list lost 13%.

Evans and

Centro Properties fell more

than 6% despite today's

mail-out to investors outlining

its efforts to cut debt. Credit

warriors hurt Banking stocks.

Westpac was the worst hit of

the big four.

Gold has risen to a 1 month

high. In New York, heightened

tension between Israel and Iran

has pushed crude oil higher.

High commodity prices are

keeping the Australian dollar

at a 25-year high against its

US counterpart.

Inflation continues to run

well above the Reserve Bank's

comfort zone according to a

private sector survey. TD

Securities latest survey shows

the annual inflation rate has

hit 4.8%, but that's been

offset by official figures

showing growth in home lending

in May fell to its lowest level

in 16 years. That's something

the Reserve Bank will be

keeping in mind at tomorrow's

board meeting on interest

rates. It's been the financial

year of living dangerously -

the Australian share market

finished 15.5% down over the

past 12 months, the worst

performance in 26 years and bad

news for super funds. The acid

test for many members will be

whether their account balance increases. No sure thing

considering fund returns are

expected to range from minus 2

to minus 10%. Extra cash will

come courtesy of tax cuts. An

$8 billion injection amongst

the biggest in 3 years. Access

Economics says it's a lot of

money. About an extra 1% to the

disposable incomes of

Australians or it's the

equivalent of about 3 interest

rate rises being unwound all in

1 day. It comes on top of a

private inflation survey from

TD Securities which shows

surging rents and petrol prices

caused inflation to accelerate

in June, to an annual rate of

almost 5%. Adding tax cuts to

the inflationary mix of petrol,

food and rent prices, doesn't

scare everyone. Because the

surging costs are also

crippling. In this sort of

environment people are going to

be paying down their debts

rather than spending it up at

the department stores. That's

what's worrying the industry

that employs one in five

Australians. Things have

tightened up considerably in

the last 6 months, people are

watching every dollar they

spend. The Reserve Bank board

decides on interest rates

tomorrow, it's genly considered

it will keep interest rates on

hold because it has more to

observe the competing economic

forces play out. On the last

day of the financial year the

Australian market closed in the

red a fitting end to our worst

financial year performance

since 1981. Overall, the ASX

200 lost nearly 17% over the

past 12 months. Where to to for

the new financial year? For

their thought I was join add

short time ago by Morgan

Stanley's Gerard Minack from Tokyo

and in our Sydney studio Grant

Harman, Citigroup. If I can

start with a quote from a

speech tonight by the Head of

the Bank of International

Settlements, "With a

significant... Compounded by

sharply rising inflation in

many countries, fears building

the global economy might be at

some kind of tipping point.

These fears are not

groundless." Graham Harman, are

we at a tipping point and if we

are, what does that mean? I

don't think we are. My main

reasons for confidential on

that would firstly be that the

economies of the world are much

more diversified than they were

ten, 20, 30 years ago, China,

oibldsia, America, Europe,

Japan, emerging nations are

much more balanced in

proportionality which is a

positive thing. The seconds

reason for confidence would be

within a lot of interest rate cuts from the US Fed in

particular, the chances of a

policy mistake are zero. It

might not work but they've done

all they can. They've thrown

all the lick writ widity they

can at it. Would you say

chances are snreero? No, I

wouldn't. I am particularly

bearish on the Angelo - Anglo

economies. In terms of America

specifically, I think the

chance of something really bad

happening is greater today than

we've probably seen in 60

years. They've start this had

downturn with more leverage in

the US economy than they had

even in the leadup to Great

Depression with emerge ing

signs monetary policy isn't

workinging. The Fed has cut the

overnight funds rate but

mortgage rates are above where

they were when the Fed started

to cut rates. Corporate bond

rates are above where they were

when the Fed started to cut

rates. The simple point is

no-one really is receiving the

benefit of Fed easing, you have

this backdrop of massive

leverage and if that starts to

cascade in a deleveragic cycle

then yes we could hit a tipping

point. Not my base case but I'd

put it well above a zero

risk. What is your base case

for the US? That we see a

proper recession. We haven't

seen a proper recession yet,

all we've seen is pockets of

weakness. If you exclude home

building and car making from US

GDP growth to March was 8.3%.

The market has reflected that

very lop-sided performance,

we've seen a sell-off in some

sectors, notably financials.

Most of the rest of the market

has done that badly. which

makes me think if they start to

see a broad based recession

it's not in the price of

equities, I guess my base case

is that what we will start in

the new financial year is

effectively a second bear

market. The first bear market

last year's bear market was all

about a Western world financial

crisis. The next bear market as

I see it is a about a full

blown US recession and global

growth slowdown which means

there's earnings risk not just

in the US, not just in the

Anglo economies but right

around the world. Let's take a

step back, what do you say to

the theory that we're gonna get

a proper recession in the US?

Going back to my point about

the greater balance we have in

world economies, the US is not

the be all and end all of the

economy it was. We also have a

cushion on the currency from

the US dollar and in terms of

the shift such as Gerrard

described remember some of the

commodity dollars, the Petro

dollars cycling apron the world

it's almost like the 70s

revisited, the Petro dollars go

to the Middle East, then''

available for investing in

capital reconstruction for the

US Banks. The risks are

definitely there, don't get me

wrong. We are not optimistic at

all about the growth path of

the US economy in the Nicks 1-2

years but not a disaster. Let's

pull this back to the equityity

market In your scenario, the US

market the Dow is currently

down 19.9%. It became in

official bear market territory,

down 20%. Where do you think

it's going? It's a battle

between momentum and value,

I'dic pretty pessimistic about

earnings revision from the US

and much of the anglo world as

Gerrard describes it. We are

cutting down grades across a

lot of that region. However, if

we look at going back to my

point about money stimulus. I

have never seen anything like

this degree of relative value

for equities in 25 years. Where

do you think it will be at the

end of calendar year? Calendar

year we could see a 10-15%

bounce from these levels. It

will be up and down, up and

down? Yeah, roller-coaster

stuff. Not a one way measure.

Subject to all those words of

caution, where do you think the

Dow is going, another 15%? Yes.

Down. No, down. Down am my

case. I keep on insisting to people one of the unusual

things about this cycle and it

makes it very different for the

last cycle, the last cycle was

a PE bubble. We had a massive

boom in Tech stocks that had no

earnings. This cycle we have an

earnings bubble. The huge boom

in earnings and the market

looks relatively cheap. The big

risk for investors at this

stage in my view is so-called

value traps. You see a market

that's down. It looks fairly

cheap. What you misunderstand

is the fact that earnings could

keep on falling. A lot of the

valuations we hear are based on

what I'd consider to be way too

optimistic earnings forecasts

and it's another symptom in my

view that a recession is not in

the price. Let me give you one

statistic - if you exclude

financials from the S&P 500 the

current consesous earnings

forecast is for 25 EPS growth

over the next 2 years. That's

why the market looks cheap. If

we get a recession I think a

much more likely outcome is we

get down 15, 20% on earnings.

Over a 2-year period we have a

couple ultive earnings mist. I

think the Dow and S&P continue

to head lower in the second

half of the year. Can we bring

it into an Australian context -

we've had a raft of down grades

in this country. What do you

think is happening to earnings?

Do you think we are in for

substantially lower earnings

and if so what impact is that

going to have on the market? I

think what... Relative to

what's in the market consensus,

down grades are out there for

Australia in the same way as

we've just heard for the

US. More to come? More to come.

Yeah, we've clocked up a 100th

company gown doup grade dpo

this year of the stocks we

follow - downgrade. My concern

is earnings have doubled in the

last 4, 5 years in Australia.

Consensus estimates on a stock

by stock basis call for another

20% growth over the next 2, 3

years again as Gerrard

described. Even if you don't

get a recession I would've

thought there was a good chance

things come in flat rather than

up, you don't have so to juggle

hard to get figures down as

opposed to up. Why so

optimistic in your forecast for

our market? I know... 52.15,

your forecast is 57.50. What's

going to drive that? Couple of

points ever on that - one would

be if you look at - the last

five experiences over the last

25 years of these extended

periods of earnings

disappointment earnings falls,

they last 24 months typically,

no quarrel on that. Over the

same period very reliably

you've had five multiple points

increase on the world market

PE. To get a bounce in the

Australian market certainly not suggesting this is going to be

earnings driven. It would rely

on some PE expansion and the

second related thing is that

sentiment is on its knees. If

you just have sentiment goings

from white knuckles to pink

knuckles you can still have a

degree of worry there and get a

bounce as we did in that

March-April period. The market

went up a thousand points. That

was not on the back of good

news. Up 15%, since then we're

down 12. What do you make of

that assessment? Markets never

move in a straight line is the

last 3 months have illustrated.

I think we're in for a sequence

of lower highs, lower lows, I

suspect very strongly we'll be

lower at the ends of the year

then continue a bear market

even into next year. What's yet

to come is the slowdown we are

likely to see in Australia courtesy of

courtesy of the RBA and what

that will do to earnings.

Particularly financial sector

earnings as I think we start to

get some of the credit problem

that is have already afflicted

the US, starting to appear in

the Australian economy. If

that happens then - If I can

ask you about your forecast.

You showed a very

uncharacteristic hint of

optimism recently, you raised

your target but it only went

from 3,000 to 3,500. Today the

market finished at 5,200. 3,500

when? And when do you think it

could start to turn on the up?

That big picture call reflick

my view I think what we ended

last year was the fifth

greatest super cycle in Aussie

equities, the busts that follow

those peaks typically last 2, 3

years, I think we're likely to

make a low second half of next

year or possibly 2010. The

typical bust is bear market of

55%. I've upgraded a little bit

because I'm becoming a little

bit more optimistic on the

meedsium term outlook for our

resource sector. I'm becoming a

bit more mess my it can on the

s were pect for our banks.

Largely because of these credit

concerns. You paint a far more

optimistic scenario. Partly

because I'm looking 3-6 months

out. If you look at the lated

est round of March bank results

I think the squeeze in terms

ever funding costs, the credit

increase of costs, was no more

than 10, 20 basis points, that

is wa recopped pretty quickly,

wer see ing the market share of

the banks increase sharply. The

other thing point I'd make on a

3-6 month view we've got rising

house prices, rising rents,

strong employment, 60ist p of

the Banks' book is two

mortgages, it's hard to see

them losing munitiy on that in

that environment. Give me

another one-two years and the

unemployment rate goes to 6en 7

which it might do, that's why

you have a problem. This is a

two-year horizon. The points I

make to people is that a lot of

people acknowledge we have some

risks in the Aussie economy,

but the trigger we need to see

is job losses, my view is such

is the imbalances in the

economies when we do start to

see some job losses then in an

economic sense all hell breaks

loose. I think the job losses

will come. You were nodding.

You've been nodding at Gerrard

as been talking about job

losses. Potentially down the

track, 1-2 years things are not

looks as rosy? The other thing

to bear in mind is if you go

into a department store and see

the people serving you it might

be only 10, 20% of those people

are full-time permanent

employees. We have already seen

a marked cut in the number of

hours people are working, just

because there is flexibility in

the labour force and that's not

a lot of fun if you're the

person earning that money.

There is a silver lining to

that, dare I say it, it's hard

to see a wages blow-out. If you

look at some of the problems

and some of the profit bubble

bursts we've had in previous

times wig wages blow-out, it's

hard to see, we're just not

seeing it. Do you hole the

market, cash out and put your

money into cash? Cash is king.

Risk free, 7.5%. I do that at

trade every day at the

moment. Hold or cash? Hold the

market here, but cash holdings

are a good risk reward bet.

Thank you very much for

joining us. Thank you. Thank

you. Tasmania's government has

given forestry group Gunns a

final deadline for taxpayers

support for the company's

planned pulp Mill. Premier

David Bartlet has agreed to a

request from Gunns to extend

the startup deadline for the

project until the end of

November. We need to see real

progress and real financial

close on this project before

the 30th of November. Gungs

says it's confident

construction will begin before

the deadline. The date is a

crucial condition for a $15

million wood supply agreement.

Dr John Duran, the Chief

Executive and founder of Roc

Oil has died. Dr Duran who

appeared earlier this month on

'Lateline Business' passed away

from I day after a short

illness. Roc Oil says the

doctor was the driving force

and will be greatly missed. Chief Operating Officer Bruce

Clement was appoint as acting

CEO last week.

Price Waterhouse Coopers performance of manufacturing

index is released. The Bank of

Japan's quarterly report on

business sentiment is out.

Let's look at what's making

news in the business sections

of tomorrow's papers.

That's all for tonight. The

Dow futures are down 15 points

and the FTSE is trading up 53.

Thank you for watching.