Bank shareholders should feel dudded

1. Why shareholders shouldn't like bank buybacks 

2. Qantas has its wings clipped, but is it fair?

3. Warren Buffett ready to haunt Berkshire Hathaway

4. Hybrids are the answer, at least in Australia

THIS WEEK'S BIG STORY

Interest rates on hold for the rest of the year

Michele Bullock has been Governor of the Reserve Bank since September 2023, though she has been at the bank her whole working career. Unlike previous Governors, she now meets the media after rate decisions, and this week she reinforced that anything could happen to interest rates. They could go up or down, and in no way had she suggested rates were going down this year. Bullock also expressed frustration at just how hard it is to slow inflation.

What did the RBA do?

Nothing, at least when it comes to interest rates. The official cash rate sets the rate that banks lend to each other, thereby setting the base rate for mortgages, credit cards, home loans and other sorts of lending. It remains where it has been since October last year, at 4.35 per cent, a 12 year high. The surprise this week was that the central bank wasn't more hawkish, or overtly worried, about recent readings on inflation, which have come in higher than expected.

Interest rates are on hold for the foreseeable future. There is definitely a chance that they will rise again later in the year, depending on the next quarterly inflation figure, which we won't get until the end of July. But the most likely scenario, according to market economists, is that the next move in rates will be down, possibly at the end of this year but more likely sometime early in 2025.

How's the economy going?

The Reserve Bank reset its economic forecasts, and now says inflation will come in not much under four per cent this financial year. That's a significant upgrade and not good news for people needing a rate cut. It also slightly downgraded its economic growth forecast, and said unemployment is less likely to rise as quickly as previously forecast. Inflation is a problem but getting price rises lower without sending the economy into a recession would be a very good outcome.

What's it mean for rates?

BEST OF THE WEEK

IF YOU MISSED THIS GUEST, CATCH-UP NOW

Luci Ellis was Assistant Governor at the Reserve Bank until late last year. Now she's Chief Economist at Westpac, and joined Sean Aylmer to talk about what interest rates will do, and what she thinks of the 'new' RBA.

CALL IT FOR WHAT IT IS

BEST SOCIAL CALLOUT 

 

 

Jamus:

"I made financial decisions based on 7.1% I pulled money out of the mortgage to pay off HECS. Now that's just cost me money."

 

 

Anon:

"Thank you thank you thank you. This makes such a massive difference to me. It’s incredible when govt functions for the people."

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Thanks for reading my opinions on the week's biggest stories.

- Sean Aylmer

I always feel slightly dudded when a large company does a share buyback, and this past week, National Australia Bank ($1.5 billion), Westpac ($1 billion) and ANZ ($2 billion) have all announced big share buybacks. A buyback is exactly what it sounds like - the company, in this case the banks, buy back their own shares. It means fewer shares are on issue and profit doesn't change. The value of each individual share - earnings per share - should rise. But it also suggests that management and the board haven't found anything better to do with the money. They aren't spending it on new businesses, or expanding old businesses, to improve earnings. A buyback might look good in the short term, but they do little to grow a business. Add to that the fact that these share buybacks are happening when bank share prices are very high and I'm feeling just a bit dudded.    

The national carrier this week conceded, rather than admitted, it had misled customers last year when it sold tickets to 8,000 flights it already knew had been cancelled, affecting 86,000 passengers. It was a very bad look but I do have some sympathy for Qantas. If the national carrier can manage its fleet, and mostly fly full planes, then that might be a good thing for passengers, because it could keep airfares lower. Flying half-empty planes doesn't do much to keep costs down and Qantas operates to make a profit. Keeping flights full, and assuming there is competition on routes from Virgin, means customers could end up paying less for a ticket. Qantas manages thousands of flights over many months simultaneously. I'm happy to give them some leeway around exactly what time a flight will leave especially if it keeps airfares lower. OK, I concede not many will agree with me and it's a tough argument to make at the pub. But the bottom line is I want cheaper airfares and with a little tweaking of process, maybe Qantas doesn't need to be as exact about leaving times when it sells tickets.  

Lithium explorer AVZ Minerals is a very sorry tale. By the end of the story, it may be the largest wipeout of shareholder wealth ever on the ASX, or perhaps second to HIH Insurance. Around 21,000 shareholders could be left with nothing. In April 2022 AVZ's valuation hit $4.6 billion on hopes it would secure a licence to mine the Manono lithium deposit in the Democratic Republic of Congo. The deposit is twice the size of the largest deposit in Australia. One month later, in May 2022, it said it was in a dispute with the Congolese government over those rights and was suspended from the ASX. It hasn't traded since and this week management said it will delist on May 13. But what about all that shareholder equity? It's probably gone. AVZ is in legal battles with Congolese and Chinese mining rivals over ownership rights. It faces legal disputes across the globe and the $4.2 million in cash it has will likely be eaten up pretty quickly. The tale ain't over yet, but it is headed for a bad ending.

Car buyers, including all the tradies, have spoken. Hybrid vehicles are the answer in this wide brown land of ours, not electric vehicles. The top selling vehicle last month was the Toyota RAV4, one of the nation's most popular hybrid cars. Toyota still leads the way among the manufacturers. Tenth on the list last month, and falling down the rankings, was Tesla with a market share of 2.1 per cent. In April, hybrids and plug-in hybrids made up 18.3 per cent of sales, according to the Federal Chamber of Automotive Industries. That was up from 7.5 per cent a year earlier. The tradies matter because the next two highest selling vehicles were the Ford Ranger and Toyota HiLux. They are tradie vehicles and always among the highest selling vehicles. The problem for tradies is that with big loads, EVs don't work. Australia is a hybrid country, not an EV country. 

Warren Buffett, the greatest investor of his generation, presided over the Berkshire Hathaway annual meeting over the weekend. The 93-year old did it without his old friend Charlie Munger, who died last November aged 99 years. Much of the discussion was around who will eventually replace Buffett. Greg Abel, a sprightly 61-year old, is the anointed one. Buffett even threatened to haunt Berkshire's board if they go against his wishes after he dies. (We also found out that Berkshire is now sitting on $US189 billion in cash and Buffett can't find anywhere better than government bonds to invest it.) Buffett is synonymous with the rise of American capitalism, post WWII. He has invested in companies and then held on to the stock, waiting for them to appreciate. Since he took over Berkshire in 1965, its share price is up 4,384,748 per cent, or almost 20 per cent compounded annually. My favourite Buffett quip, which I still think about today, is: "Never invest in a business you cannot understand." 

5. The AVZ of disasters

And the Governor said?

Big response to our TikTok video on the Government's decision to tie indexation of HECS debts to either inflation or wages growth, whichever is lower. It's backdated to last year - so a 3.2% rise, instead of the record 7.1% increase.