March 29, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

There are green shoots everywhere, or at least this morning brings more cause for optimism than in a while with good news from the US, Germany and Italy.

Across the pond, consumer confidence is now at its highest level since 2002. The consumer sentiment index as measured by the Conference board is now at an impressive 107.2, from 102.7 last month, and is now at its highest level since May 2002.

And while US consumer confidence soars, the Federal Bank has upped rates again; it’s the fifteenth time on the trot, and the US short term rate of interest has risen from just 1% in May 2004 to today’s 4.75%.

US rates are now higher than in the UK, and the feeling is that the Fed has got at least one more hike left to make. With many still predicting the Bank of England will lower rates again at some point this year, the differential between US and UK rates of interest is likely to grow, perhaps putting pressure on Sterling.

Fed new boy, chairman Ben Bernanke, is known to be something of a plain speaker, and has said that future fed plans over the rate will be kept in the open. And yesterday, the Fed issued a statement saying: “Some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.”

And while the US rate of interest moves north of the UK level, signs are emerging that the ECB may follow suit.

There was in fact good news and bad from Italy yesterday. The bad news, growth in GDP in the last quarter of 2005 was zero. Another quarter like that and the economy will be in technical recession. But the runes are saying otherwise. Italian business confidence is a good indication of growth in the months ahead, and it is now at its highest level for five years.

But while the US sees consumer confidence hit a 4-year high, and business confidence in Italy soars to a five-year high, these achievements seem like nothing compared to the rise in confidence indices in Germany.

The German business climate index has hit a 15 year high, jumping from 103.4 last month to 105.4 in March. And yet the consensus forecast was for a fall in the index.

Put all that news from Italy and Germany together and what do you have? According to Capital Economics several more jumps in the Euro zone rate of interest, reaching 3.75% from the current level of 2.75% by the year-end.

The fall in the rate of interest differential between the UK and Euro zone could also put Sterling under pressure. Before the Bank of England lowered rates last summer, the UK short-term rate of interest was 2.75% higher than the euro zone level. If predictions prove accurate, and both euro zone rates rise and the UK level falls with predictions, this differential could be as little as 0.5% by the year end.

With the consumer all but satiated with retail therapy, and with Gordon Brown finally putting the reins on government spending, the UK is reliant on business investment, improvements in productivity, and increases in exports to get GDP growth up to government’s targets.

You can be forgiven for being cynical about productivity or investment improving, but at least the latest confidence indexes suggest a slightly easier time for our exporters to some of our main trading partners.

Sources
Fed raises rates again
CNNMoney
Consumer Confidence Index highest since 2002
CNNMoney

March 28, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Ben Bernanke will be in the limelight again today.

The new governor of the Fed will probably be telling us that US rates will be going up again, this time to 4.75%. If he does do what is expected, it will be the 15th rise in a row. US rates will also overtake the UK rate; currently they are both 4.5%.

March 28, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Why is the UK outperforming most other G7 economies? Some argue that this isn’t saying much anyway, and that as three of the members are in the Eurozone, and therefore little more than has beens, and another member is ‘dire straights Japan,’ really we should be comparing our performance with economies outside of the G7.

And while the government keeps talking about low inflation and high employment, others say, yes but why is our productivity so low?

Employment in the UK is at near record levels, and while unemployment has been rising of late, there are so many more people at work these days that the UK’s GDP has continued to rise.

Others fear that with employment so high, the UK output gap - that’s the difference between out potential output and what we actually do produce - is so low, that there’s little scope for substantial growth in the years ahead.

The UK’s low level of productivity per worker is one of those great imponderables.

Why is it so much lower than productivity in that industrial relations crisis hot bed of discontent, protectionist France?

The latest report from the Economist Intelligence Unit might shed some light.

The EIU has the UK falling from fourth to seventh place in its league table of most attractive locations for foreign investment.

Philip Whyte, EIU’s senior economist for western Europe, said: “The attractiveness of the UK’s business environment is threatened by sizeable macroeconomic imbalances, an increasingly complex and burdensome tax system, weak productivity and a sub-standard transport infrastructure.”
Mind you, given that 82 countries make up the survey, seventh place still isn’t bad. Mr Whtye said the UK remains a “very attractive place” for investment.

So maybe we will need to look elsewhere for the paradox of our low productivity. If you are reading this newsletter this morning from the comfort of your desk, the reasons might not be obvious, but if you read it in the afternoon because that nasty traffic jam has made you run late all day - then maybe you have experienced first hand one of the core problems which we think impedes UK productivity.

March 28, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Young people today, they know nothing! At least that’s one-way of interpreting the latest idea from the Financial Services Authority.

Apparently, when it comes to personal finance the 18-40s just don’t know their stuff, or to put it another way, they don’t know their ISAs from their “I ‘s a going out for some retail therapy.”

The FSA teamed up with academics from Bristol University, and quizzed 5,000 consumers about their knowledge of all things financial.

It emerged that half a million households are in debt, the Brits are no good at saving for the future, and 42% of working adults do not have a pension.

The report also found that 40% of holders of personal equity plans don’t appreciate it could go down in value.

Don’t fear, the FSA has the answer. It’s forking out £10mn for training courses, in which it will go to the place of work and offer free advice, and even introduce individuals to financial advisors.

Surely, consumers’ attitudes are determined by their experiences. The UK has grown non-stop since the early ‘90s, employment has hit record levels and has stayed there- more or less. This has created an implicit belief amongst consumers that things will always get better. Why save for a rainy day, when you have only known clear skies.

This is the stuff that economic cycles are made of. We wish the FSA well, but changing people attitudes through talk is a tough challenge.

March 28, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

When Skype founders Niklas Zennstroem and Janus Friis were attempting to raise first round funding for their company, they trawled Europe looking for investors for over a year, and yet says the Swedish entrepreneur Zennstroem, “If we were a Silicon Valley company, it probably would have taken us one month.”

The VoIP star was talking to European business and EU officials ahead of a summit next week to discuss reforms to make Europe more competitive. But Mr Zennstroem said the problems in Europe run deep. He said: “In the U.S. for example, if you have a start-up and it doesn’t work out, you have gained an experience. In Europe, you have made a mistake.” He added that there is a cultural problem in Europe and people “want to keep all their comforts, all their security, vacations, all their job packages.”

Meanwhile, Barclays has released a report showing a big fall in the number of new start-ups in 2005. But don’t panic says the bank, 2003 and 2004 were exceptional years, and despite the 13% drop, the biggest fall this decade, the year was still in alignment with the historical average, and in any case, the second half of the period saw a sharp improvement.

In all, there were 388,300 new firms started up in 2005, compared to 446,500 in 2004.

John Davis, local business marketing director for Barclays said: “The number of businesses started last year moved back to more typical levels after a couple of boom years. The 13 per cent fall in start-ups in 2005 in effect is a large drop from a record couple of years. The underlying market in start-ups is still reasonably strong as was evidenced by the start-up numbers recovering during the second half of 2005.”

It does occur to us that there could be a link with the fall in new start-ups and the end of the house price boom recorded last year. . After all, some British entrepreneurs are not afraid of a risk, and instead of using the extra wealth they have seen accumulating through the rise in price of their house on a jolly, they have used it to the gain leverage for bank borrowing for their business.

We also noticed, looking at the Barclays figures broken down by sector, there was no reference to technology. Business and Financial services topped the list, with the motor trade in second, and construction in third. Yet why is it that there is such a dearth of technology start-ups? Where’s the next Skype, or Google?

Okay, no doubt Barclays included technology based ventures within the general sector - even so the lack on any reference to technology based starts up in the report- when this is the very area which has underpinned US growth over the last few years - was conspicuous by its absence.

Maybe it’s got something to do with the perceived higher risk in technology business, and maybe it’s got something to do with the nature of a technology business in which the assets relate to knowledge and software that has little intrinsic value outside of the business.

In the construction business, for example, the business assets could be land- so the business itself could be the collateral for a loan. In the motor trade the stock of cars could provide the security required, but in technology - or a dot-com type business, the fit is just not right.

Now what was it that Niklas Zennstroem said about Europeans being averse to risk.

Sources
Skype CEO: Europe Start-ups Suffer From Risk Fear
PC Magazine
Business starts down in 2005
Barclays

March 27, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

According to British Wind Energy Association (BWEA) “By 2010, the onshore wind industry will generate 50 per cent more electricity than previously predicted, and will have installed 6,000 megawatts (MW) of wind power capacity, generating almost 5% of UK electricity supply, avoiding up to 13 million tonnes of CO2 emissions and delivering nearly half of the Government’s 2010 renewable energy target.”

The BWEA study also concluded that: “Onshore wind alone can deliver almost half of the Government’s 10 per cent renewable energy target by 2010 and that the electricity generated will power 3.3 million homes, equivalent to the domestic population of London and Glasgow combined.”
BWEA claims that by producing electricity from 6,000 MW of onshore wind energy, the UK will displace six million tonnes of coal burned in power stations and avoid 13 million tonnes of CO2 emissions or alternatively displace 2.9 billion cubic metres of gas, reducing imports, and avoiding six million tonnes of CO2 emissions.

March 27, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Greg Dyke and ITV boss Charles Allen have locked horns before. Back in 1994, Dyke called the shots at LWT before it was bought out by Grenada, with its then young Mr Allen the Finance Director at the predatory company which finally won its bid. But Mr Dyke, it appeared, was not impressed, and in his autobiography described Grenada as a cost cutting caterer.

Since then the market has consolidated, and Grenada and Carlton have become one with ITV the resulting giant.

But now the boot is on the other foot. And this time, former BBC director general Greg Dyke is leading the consortium of bidders including private equity investors Apax Partners and Blackstone and Goldman Sachs.

But round one went to ITV, turning down the bid asking for cash, not just a paper for paper share swap. But, it appears that while it’s possible the offer could be increased, cash it not likely to be available.

ITV under the new consortium would see a dramatic rise in its balance sheet debt, costs would be cut by 25%, and its ITV would broadcast more repeats and more US imports.

In the brave new world of Internet TV the likes of Google and perhaps BT could become the front end for TV viewers. TV channels could be replaced by Internet portals and content will become key.

Mr Dyke is a clever man who knows the TV business, but we are not sure that cutting costs and generating less original material is the right thing to do as we stand on the cusp of the Internet TV era.

March 27, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Two newspapers, two experts, two different perspectives: but the implications of their statements were equally serious for the housing market.

First the Nationwide. The Building Society has been one of the housing market’s bulls, a strong advocate of the soft landing theory, and its index has seen strong rises in recent months, showing a 1.4% rise in prices in January, for example.

But four weeks ago its monthly report into house prices showed a modest fall. At the time this was dismissed by most analysts as a statistical quirk, and it seemed that the trend was clear; the housing market was enjoying a 2006 renaissance.

Nationwide will be reporting again this week, but in the meantime, the Observer reported its chief economist and housing guru Fionnula Earley as saying: “We’re at turning point… I think we are at the stage where affordability constraints are biting - and there are other things on the horizon that will stop people splashing out: higher utility bills, rising unemployment.”

Last time the Nationwide reported on the market, its senior economist Greg Fuzesi, said: “There are two reasons why the pickup in activity this spring may not turn out to be strong. Firstly, many first-time buyers continue to be priced out of the market. Secondly, uncertainty about the strength of the economy may lead to the delay of some house purchase decisions. A complicating factor is that buy-to-let investors seem to have been behind some of the increase in recent activity. This situation makes forecasts more difficult.”
Meanwhile, the Sunday Telegraph reported a foretelling of doom from Morgan Stanley property analyst Martin Allen. In fairness we should point out that Mr Allen was talking about shares in property companies and was commenting on the implications of the Chancellor’s budget move to improve conditions for REITs (Real Estate Investment Trusts), but even so the quote must have property market investors a little spooked. Mr Allen said: “I’ve been a property analyst for 18 years and this is the fourth property share bubble in that time… I know a property share bubble when I see one and it doesn’t matter whether we’ve got Reits or not. Property shares are over priced.”
At Investment and Business News we have never understood how property analysts could be so confident that the housing market would remain stable in the years ahead. Low wage inflation means that in the long term, for any given rate of interest, mortgages are more expensive than they used to be, and that the current low rate of interest merely brings short term gains. But over time, the benefits of the low interest rate might well be lost, as the true cost of a mortgage is no longer rapidly eroded by inflation.
Add that to the fact that First Time Buyers are finding it increasing more difficult to jump on the property ladder; meaning that the market has become reliant on Buy to Let Investors, and the longer term prognosis seems far from certain.

Sources
Brown makes reit move for property investors
Investment and Business News
Brown gets REITs right
Telegraph

March 27, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

style=”color:#666666″>Some predict doom for the pub trade. Smoking has been banned from pubs, restaurants and that public place where you like to relax, and the pro smoking lobby and David Hockney predict the end of civilization.
Much of the fears from the pub trade relate to the Irish experience.
Recently at a gathering of the Scottish pub industry, Tadg O’Sullivan, chief executive of the Vintners’ Federation of Ireland, said that the ban in Ireland had been an “absolute disaster” for publicans, with 600 closures and 12,000 mainly full-time job losses. In fact the Licensed Vintners Association has released figures showing that in Dublin sales rapidly fell by 16% and employment levels reduced by 14%.
Erudite artist David Hockney put it in more personal terms, when in a recent letter to the Guardian he said: “Gordon Brown is a prig P.R.I.G., a dreary atheistic Calvinistic prig, who I’m sure will never be elected in England. He goes along with a “health lobby” whose view of life itself I detest.”
“I have utter contempt for it. I feel I am entitled to my opinion. I don’t mind prigs but when they want to take my little corner as well, I have a right to argue against their dreary view of life contaminating mine.”
“This utterly over the top legislation is tyrannical (mine Host gone for a Burton) and is spreading a dreadful intolerance.”
Reading between the lines, and allowing for the language of diplomacy then, we deduce that Mr Hockney is against the ban.
Yet there is another side to the argument. According to the Irish Central Statistics Office, bar sales in Ireland have continued to rise steadily since the ban. And according to the office of National Statistics, 20% of people said they would visit pubs more often if smoking was restricted, while only 4% would visit less often

In the UK, press attention has been focused on the Irish experience, but while the world - and Dame Edna at the closing ceremony of the Commonwealth Games criticise Americans for not considering the outside world, it does seem that the UK press is equally guilty of not taking into account what happens stateside.
In fact the US experience has been quite different from what the pessimists expect in Scotland. Smoking was banned in New York, for example, on March 30 2003 and a year on, business tax receipts from restaurants and bars were up 8.7 percent from the previous year.
In California, smoking was banned in 1997 and both restaurant and bar receipts have improved every year since.
As for Mr Hockney’s call for freedom to smoke, and the threat to our liberties the ban represents, it could equally be argued that smoking in pubs is a threat to the freedom of non smokers’ rights to breath clean air. And then there’s the health implications.
According to a report entitled “Lifting the smokescreen: 10 reasons for a smoke free Europe” published by the Smoke Free Partnership (not altogether neutral then) 79,000 people die each year throughout the EU as a result of passive smoking.
Just like smoking, going to the pub for many people is a habit. A habit that many non-smokers just don’t have. After a ban, gradually over time, we suspect a gradual influx of new regulars as they find the clean air pub habit.
But in the short term, it would appear that business will probably take a turn for the worse. And the pattern will no doubt be repeated in England when the ban is enforced south of the Scottish border.
And some pubs will struggle as a result, with many going out of business.
Our biggest fear is this. The pubs that survive will probably be the ones owned by companies with greater resources. And the danger then is more privately owned pubs being replaced by nationwide clones.
Sources
Now we see the light
Herald
10 Reasons For A Smoke Free Europe - New Report Issued In The European Parliament
Medical News Today

March 24, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Toshiba said to Sony, anything you can delay, we can delay better. Although, no doubt Sony could retort, “no you can’t”; we can delay our new PlayStation 3 six months, thanks to problems defining Blu-ray DVD, you can only manage a delay of a month.”
Yesterday, the “New DVD” war was put on hold, as Toshiba announced a delay of its new HD DVD player to the middle of April. It was due for launch next week.
A Toshiba statement said: “In order to maximise the launch of HD DVD, we intend to synchronise the launch of our players with HD DVD title releases.” Recently it emerged that Time Warner will not be releasing HD DVD versions of The Matrix Reloaded, Harry Potter 4 and Million Dollar Baby until April 18. No doubt Toshiba is going for a simultaneous launch.
Meanwhile, the first Blu-ray DVD titles are due to go on sale in May. Although the Blu-ray’s Trojan horse, the PlayStation 3 will not be available in Japan until the Autumn, with the UK not seeing the wonder machine until next year, dedicated Blu-ray machines are slated for launch soon.