Rio’s real result. We know iron ore prices are at a five-year low — we are told that virtually every day. In fact, iron ore prices have been falling through a succession of five-year lows for much of the past nine to 10 months. Terrible damage has been wrought on companies, large and small, among miners (several tiddlers have gone broke). Chinese mines have closed, services companies have slashed jobs as their contracts have been cut — in fact the recent experience of the iron ore industry is analogous with the pain and agony in the oil industry since November. And there’s worse to come, so the miners and forecasters tell us (many of whom failed to pick the 2014 price slide). Rio Tinto, the world’s second-biggest miner, recorded an 18% fall in earnings from the company’s huge Western Australian iron ore operations. But don’t think for a moment that the company has fallen on hard times. In fact, we can ignore all the “times are tough” guff from Rio and BHP Billiton. They are doing just fine. And if you want the evidence, delve into the profit statement from Rio yesterday afternoon.

Revenue from the WA iron ore mines in 2014 amounted to US$21.5 billion, down from US$23.6 billion. Earnings before interest, tax, depreciation and amortisation also dipped (naturally) to US$13.7 billion, from US$16.5 billion. The gross profit margin fell to 63.7% from 69.8% in 2013, which is hardly the breadline for this minerals multinational. Rio remains, even in these days of five-year price lows, among the most profitable businesses in this country — and a better gross margin than the Commonwealth Bank (58% in the six months to December). No wonder Rio sprinkled gold dust on shareholders — a 12% boost in dividend and a US$2 billion share buyback. But most of the shares will be bought in London (around US$1.6 billion). There are more shares in London, and bigger whingers among institutions. Despite the slide in iron ore prices, Rio still made enough money from iron ore to shut them up with the buyback.

One for the stewards? Oh dear, more doubt and delay for those few optimist shareholders left among the shareholders of the very embattled education group Vocation. The shares will remain in a trading suspension for a further 10 days as the company attempts to finalise talks with bankers and potential acquirers of some of its businesses. That’s three weeks now the shares have been suspended. Vocation told the ASX yesterday that asset sale talks needed more time, along with serious discussions with its bankers. It had been due to update the market by the opening of trading this morning about an extensive review of its financial situation. The company had all the right phrases in its release, telling anyone bothered to read it that it was in “positive discussions” with bankers (NAB, Westpac and the Commonwealth) and the interest from potential acquirers was still high, but extra time was vital: “… there continues to be strong interest from a number of credible parties” in the acquisition of some of the company’s businesses. The shares first went into a trading halt, and then went into a trading suspension after closing at 25 cents on January 19. The new deadline is February 23, and in the meantime there’s talk the company is chatting to co-founder and 15% shareholder Brett Whitford, who fell out with the old management last year. The company has blown up more than $700 million in sharemarket value and over $300 million in funds raised from investors. — Glenn Dyer

Sweden goes negative and joins the QE club: At one stage, a few years ago, the Swedish central bank was among the austeritists, putting up rates in an attempt to crunch inflation (which failed to appear), as the government cut spending. That, unfortunately, had the effect of flattening the economy, and last year the central bank slashed its key interest rate several times to zero to fight off, firstly, disinflation and then deflation tot keep the economy from collapsing into a Japan-like crevasse. So far the economy is not going backwards, but debt has risen sharply (and deflation has increased the effective cost of that debt).

For those who believe in cutting spending and crunching demand in fear of inflation, and to cut deficits and debt, it was a humiliating retreat. Last week it sold a government bond to the market at negative interest rates and last night it went further and cut its key interest rate to negative territory (minus 0.1%), joining Switzerland and Denmark in doing so, and started a very modest version of quantitative easing by launching a 10 billion krona campaign to buy government bonds. Analysts say the interest rate cut is not enough — it should have been around 0.25%, and believe the Swedes will be sure to follow Denmark’s lead in cutting rates again. And the 10 billion purchase of government bonds was derided as being significantly too small — some analysts say it should be that much per month.

Sweden joins the UK, the eurozone and  Japan in running a program of quantitative easing, while the US has had three programs and is looking to lift interest rates mid year. The Bank of England joined the US Federal Reserve last night by dropping a big hint that the next move in rates in the UK would be up, from the record low of 0.50%. But it also said there was a strong chance inflation in the UK could fall past zero. Economists reckon the two don’t mix and say the BoE has gotten it wrong, again. — Glenn Dyer

An Apple a day keeps the bears at bay. Let’s hope Apple doesn’t get a worm which ruins the current party, otherwise it will be misery time for markets. The tech giant shares were up more than 1% to just over US$126, giving it a value of US$727 billion, and a greater weighting in the key Standard & Poor’s index. According to US analysts, Apple is now worth more than 3% of the S&P 500, and the biggest component of the stock index. If Apple had not risen 15% this year, the S&P would have been broadly flat so far, according to Howard Silverblatt of S&P Dow Jones Indices. With Apple the rise is around half a per cent. Tech stocks would be down 2.5% without Apple, up 0.3% with the company included in the index. So an earnings stumble, or muffed new product launch in 2015 and its get out of the way as Apple brings the market down … — Glenn Dyer

And finally … the Aussie dollar-UK pound rate crossed the very special $2 level overnight (its just under $1.99) to hit a peak of $2.029. It was last at these levels five years ago. That 5 pound flat white is now a $10 flat white.

Peter Fray

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