January 31, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Imagine a dog chasing a cat chasing a mouse. The latest takeover talk reminds us of that scenario, not that the company at the bottom of the chain is a mouse, in fact we rather like Ottakar’s.

Yesterday, HMV confirmed it has received a bid. The rumour mill was grinding away long before the HMV announcement, and it seems certain the suitor is private equity group Permira.

HMV is facing challenging times. It faces competition from the supermarkets and electronic music stores such as iTunes. As for its subsidiary, book store Waterstones, it faces a similar challenge, but this time the Internet threat comes from the likes of Amazon. It discounted like nobody’s business over Christmas, selling some books for less than it paid for them.

But reports of the death of conventional retail are greatly exaggerated. Sure Tesco et al, and the Internet companies pose a threat, but shopping remains a popular pursuit. In a society that uses the phrase “retail therapy,” it seems unlikely that High Street shopping will ever die out, or ever lose its appeal, as some seem to think.

And perhaps a good example of why shopping can be fun, lies with Ottakar’s. Stores in the chain we are familiar with offer a relaxed and enticing environment. That was why we were sorry to hear about the bid approach from HMV and cheering for the book authors when they clubbed together to try and stop the takeover. It’s too early to tell whether the HMV takeover by a private equity group will affect the Ottakar’s bid, but it would appear, that the rules have now changed.

January 31, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Imagine the scene, you are having a nice lunch with the boss of a rival company, and just in passing, while you are taking a sip of your aperitif, your companion lets it slip that he is thinking of buying you out. “How’s £13bn?” Why, what an affront! It must have spoilt your meal!

And that was just one of the many gripes Steel maker Arcelor has against the bid by Mittal Steel.

In fact Arcelor’s boss, Guy Dollé, had this to say of the bid: that it’s “destructive, prejudicial, threatening and unbalanced”. But apart from that he quite liked it.

The gist is as follows: because of the way the bid was announced, Arcelor says too much damage has been done, and there is no way a deal can now be reached. That Arcelor’s safety standards are not up to scratch, and that Mittal is no more than a cheap commodity maker, whereas Arcelor makes premium products.

A statement issued on behalf of Mittal said: “It is odd for Arcelor to claim the bid came without warning and then come out with a fully fledged defence document, which it said it had been working on for eight months.”

January 31, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Do you remember the Autumn of 1987? Blightey got hit by a hurricane and the stock market crashed. No doubt Alan Greenspan remembers that time well too. He hadn’t been governor of the US Federal Bank for five minutes when shares went a tumble.

In fact, a change over at the Fed often seems to be accompanied by turmoil. Before Greenspan, it was Paul Volcker, who took up his seat in 1979, and faced with high inflation, upped rates leading to a nasty recession.

And now some fear the next changeover could herald a rough time.

It seems certain that Mr Greenspan, who is most remembered for his irrational exuberant warnings before the dot com bubble burst, and most often criticised for going too far after the events of September 11 2001 and boosting the economy too much, will leave his successor, Ben Bernanke, due to take over tomorrow, with one present. The US rate of interest is set for its 14th rise in succession today,

Spelling champ, Bernanke, - as a boy he was the South Carolina spelling champion, is known as a blunt speaker. No coded messages from him, if rates need to go up, he will say so.

But just as there is a chink in his armour, (for the hapless Mr Bernanke did not reach the US national spelling final, because he was unable to spell that word which is so crucial to running a central bank - he mis-spelled the word ‘edelweiss’); there is also a chink in the legacy left to him by Mr Greenspan.

Many describe Greenspan as the best Fed governor ever, but he hands over at a time when the US consumer is in crisis. Last year the US savings rate was negative. That is to say, Americans spent more than they earned, creating a savings rate of -0.5%. It’s the first time that has happened since 1932-33.

January 31, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

The record has gone. The largest ever annual corporate profit was made by Exxon Mobil last year.

For much of the year, and frankly, at the tail end of 2004 too, many were saying the high price of oil is just a temporary phenomenon, that there’s a $10 terror premium built into the price, and that normal service and prices will be resumed soon. But this temporary blip has lasted over 18 months now, and as of this morning, the dollar price per barrel is only a couple of dollars below last year’s all time high.

Combine the high price of oil, with the fact that Exxon Mobil is the most profitable oil company, and all of a sudden we have a record breaker. The company made a total profit of $36.1bn for the year, or $33.9bn after excluding special items. Its performance in the last quarter was a record too, making £10.7bn for the three-month period.

The annual results smashed the record set by the same company a year ago, when it made $25.9bn,

At $371bn, its turnover was larger than the GDP of Indonesia, an OPEC member with a population of almost a quarter of a billon.

But some question how long it will last. While the company is currently benefiting from the fact that demand is growing faster than supply, some fear that in the year ahead it will struggle to supply oil in sufficient quantities to keep the profits up.

In the past, the oil price cycle has been characterised by oil companies cutting back on exploration when the price is low, which leads to a shortage and to a higher price, an increase in exploration follows, causing a glut of oil, leading to a fall in price, and the beginning of a new cycle.

And true to cyclical form, the company is investing heavily right now. But this time, maybe it will be different; maybe this time demand is rising so fast that no amount of further exploration will be enough.

Only time will tell whether this is just another cycle, or the beginning of a new era. One thing though is for sure, we will run out of oil eventually; the oil cycle will not last forever.

January 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

In its recent report, the Institute of Fiscal Studies, in addition to looking at Gordon Brown’s golden rule, uncovered some interesting facts on productivity. And alas, it was bad news for the UK. After giving the UK a score of 100, the report found that productivity in the US per worker was 22% higher and 10% higher in France.

But then take into account how hard the Brits work, and the figures are even worse. For every hour worked, the French produce 29% more, the Americans 14% more, and even the Germans on this scale produce more.

A partial explanation for this is that the pound is overvalued. And that thanks to our oil exports this has been the case for a long time.

January 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Brace yourself for some surprising news. France doesn’t like it when foreign companies try to buy out its own. And France certainly does not like the sound of Mittal’s bid for Arcelor.

Not that Arcelor is specifically French. While it employs 30,000 workers in France, if any country can claim domain, it’s little Luxembourg. The state there is the single biggest shareholder, with a 5.6% stake, and the company employs 6,000 workers in Luxembourg, making it the country’s third largest employer. And there’s a special relationship between the steel maker and Luxembourg too.

So when Mittal Steel, which is based all the way across the world in Rotterdam, made its €18.6bn (£12.8bn) bid, there were cries of no thank you, both from the Luxembourg government and from Arcelor’s board. The French have not yet made their pronouncement over the deal, but if they give it the thumbs up it would be a bigger surprise than the news this weekend that Pink Floyd are touring again.

Steel is a commodity, and the price, after moving through the roof a couple of years ago, has been falling. And the answer to the problem of a falling commodity is usually consolidation in the industry.

Mittal Steel reckons that by merging with Arcelor, the resulting company will then control 10% of steel production, and be three times bigger than their main rival, big enough to give it bargaining strength with customers. Mittal also says that cost savings resulting from the merger will amount to $1bn, without job losses, but in Luxembourg, France and Belgium too, ministers are asking how can this be so?

As for Arcelor, its statement said the board had “concern regarding the severe consequences that Mittal Steel’s proposal could have on the group, its shareholders, employees and customers….The continuation of Arcelor’s present strategy offers the best guarantee of value creation for shareholders.”

An Arcelor spokesman put it more strongly, however. He said: “That Mittal needed Arcelor more than it needed Mittal,” arguing that the predatory company was reliant on steel production in areas of less political stability, whereas 80% of Arcelor’s steel production is in the EU.”

The predatory steel company’s eponymous boss, Lakshni Mittal, the richest man in Britain and the third richest man in the world, is in further meetings with ministers from France and Belgium this week.

January 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

It happened with barely a whimper, with no publication we are aware of noticing it, but in the fourth quarter of last year the UK grew at a faster pace than the US.

The US economy grew at the annualised rate of just 1.1% in the quarter just completed, compared to 4.1% in the quarter before; that’s the slowest rate of growth for three years. But the US Treasury tried to put a positive gloss on the figures, with Treasury Secretary John Snow saying: “The preliminary estimate of fourth quarter 2005 GDP is inconsistent with the underlying strength of the U.S. economy… I would not read too much into today’s numbers. They are somewhat anomalous, reflecting some special factors. They are not consistent with other data on the U.S. economy which paint a picture of good growth.”

The poor figures were party due to a rush of special promotions in the previous quarter; effectively bringing forward spending, and many economists said the figures gave no real cause for concern.

Other are not so sure, with the US rate of interest heading north, the US consumer is in debt, and just like in the UK house prices are overvalued, although the market over there would appear to be around nine months behind the UK market.

It seems to us that central bankers have underestimated the importance of house prices. The Bank of England used to insist that a slowdown in house prices would not impact on consumer spending, but it did. And while it’s possible that the US slow down is just a blip, and normal service will be resumed throughout 2006, it is equally possible the US economic cycle is following the UK, and that just as the consumer lost the ability to prop up the UK, maybe the same too is happening in the US.

Back in the late ’80s, when Nigel Lawson started upping the rate of interest, he said it would not cause serious economic problems; “there would be no recession,” he said. But just as recession followed the interest rate hikes then, economic slowdown followed the much more recent hikes in the UK. It’s not illogical to assume the same will happen in the US. Policy makers don’t seem to get the psychological importance of rising house prices. As house prices go up, we feel richer and credit card borrowing soars.

That’s why talk that house prices will not crash, because you need a recession first, is rubbish. In the Anglo Saxon world, falling house prices cause economic recessions, not the other way round.

January 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

The UK press do like to build you up and knock you down. But normally, that approach is reserved for celebrities and the gossip pages. But now even the business pages seem to be going that way. Google is getting the treatment, thanks to its agreement to provide a censored search engine for the Chinese market. The Google founders of Brin and Page set the company motto of “do no evil”, yet goes the argument, by curtailing to the Chinese government, they “forfeited the right to our trust”. Which newspaper expressed that opinion? It’s no trick question; the answer is what you would imagine. It was the Observer.

Of course there is an alternative point of view. Much of the press and indeed politician’s reaction to China’s growth seems to border on paranoia. But it could equally be argued the that the answer to China is to embrace it and let the West’s values of democracy and freedom of speech gradually work their way in. Building a great wall of our own, against China’s growing strength will do no more than delay the inevitable, but in the process we lose any form of influence.

January 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

The talk is that oil could go through another rise in price soon. The Observer reported on the opinion from the commodities editor of the economist intelligence unit that oil could hit $90. But on the CNN site, the predictions were even worse. According to Bill Browder, who manages the Moscow based Hermitage fund, which has seen 1780% growth in ten years, oil could hit $262 a barrel. Mind you that would require a series of global oil shocks. In a more realistic scenario, in which Iran declares an oil embargo, Mr Browder predicts oil jumping to $131.

But, at the other end of the scale, Tim Cejka, president of Exxon Mobil Exploration Company, recently told Reuters: “We primarily don’t believe the price will stay this high. The oil business is cyclic … Our expectations are that prices will drop.”

January 30, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

We have often argued that in the property market every chain needs a beginning. If that beginning does not come from First Time Buyers, then it must come from Buy to Let investors- or maybe purchasers of second homes.

The recent report from the Halifax that first time buyers are now at their lowest level since 1980, is in our view both highly significant, but not at all surprising, but then, neither is it new. The imminent extinction of that species known as the First Time Buyer has been reported many times in recent years.

The question is this: what do those poor souls who cannot afford to jump on the property ladder do? Do they rent, live with parents, or buy a property in conjunction with friends.

This is the key, because if it’s the former, then demand for properties will remain high. If it’s stay with parents, or mortgage share with friends, then the underlying demand for houses will be less than the expected level. And don’t forget, the big rationale for house prices remaining strong has been demographic: that people need to live somewhere, and houses are in short supply.

Buying to let is not as popular as it was a year or so ago. According to RICS, in a recent survey it carried out, Buy to Let investors are not selling, but they are not buying more either. And when the most optimistic reports are predicting only muted house price rises for the foreseeable future, why should they return?

Put all that together, and we see the property market as no more than a money merry go round. With inflation so low, there’s no underlying reason for this circle to expand outwards.

Meanwhile, Hometrack has issued its latest report into the market. It has prices up 0.2% in January, following December’s 0.1% rise, its first reported rise since June 2000. Richard Donnell, director of research at Hometrack said: “The pick up in activity levels and prices over the final quarter has created optimism that values will continue to rise slowly over the year ahead…The recovery in London is set to continue and spread to the Southeast over the year.”