April 26, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

If the company can do this in challenging times, just imagine what it could do when things are good?

Tesco revealed its profits for the year just gone yesterday, and they were up 17% to £2.25bn and yet its boss Terry Leahy described the period as a “challenging year.”

Like for like sales in the UK were up 7.5%

Tesco, might be a giant in the UK, with its sales accounting for 3% of GDP, but worldwide Wal-Mart and Carrefour of France are bigger. In fact the UK accounted for 79% of sales last year, with Asia having 10% and Europe making up the rest.

But, overseas the company is growing. The retailer opened 238 new stores overseas last year and plans a further 419 international store openings in the current year. It’s moving in on the US market, with a convenience store business, and states side, the press have been describing the Tesco move as a threat to the dominance of Wal Mart.

Tesco is raising £5bn from the sale and lease back of land holdings, and while some of this will be spent on share buybacks there will have plenty of cash in the coffers to ramp up its oversees push.

The company has also announced a £100mn environment fund, to invest in projects such as wind turbines and solar panels.

But there is a cloud looming. The Competition Commission is about to kick off yet another investigation into supermarkets. And Tesco’s land bank will come under the spotlight. There’s a suspicion, that Tesco is holding billions of pounds worth of strategically positioned land, just to stop rivals from moving in on its turf. Tesco denies this, but the competition commission might well disagree

April 26, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

We will say one thing for those Americans, they are nothing if not optimistic.

With the US balance of payments deficit making the UK shortfall seem like a walk in the park, and with consumer debts at truly terrifying levels, consumer confidence has just hit a four year high,

The US Consumer Confidence Index, as defined by the Conference Board, has hit 109.6, from 107.5 in March. That’s the highest level since May 2002.

Lyn Franco, director of the Conference Board Consumer Research Center said: “Recent improvements in the labor market have been a major driver behind the rise in confidence in early 2006. She added: “However, expectations for the economy and labor market have been trending downward since peaking in 2003. And while prices at the pump have yet to impact confidence, further increases could dampen consumers’ mood.”
Americans might be optimistic, but they like their oil too. Next month the recent hikes in black gold will be reflected in the index. Is this likely to lead to a fall?
But as serious a threat to the US economy as the high price of oil is the danger of a fall in house prices. Many fear that a UK style soft landing in house prices would have a catastrophic effect on Uncle Sam’s economy.

Capital Economcis said of the latest Conference board figues:” Existing home sales increased to 6.92m at an annualised pace in March, from 6.90m. The markets were sensibly expecting a fall to 6.66m, based on the reported drop in pending sales. (See Chart.) Existing sales cannot defy gravity forever and are likely to experience the sort of sharp declines already reported for sales of new homes soon. Despite the overall optimism of consumers, they have only been less inclined to buy a house in the next six months on one occasion (November 2004) since the Conference Board started asking that question in 2000.”

April 26, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

We are buying more than we are selling. Last year the UK bought £65.6bn more goods than it sold, and the overall balance of payments deficit on current account was £31.9bn, or 2 1/2% of GDP. That means a crisis is heading our way, right? According to the Bank of England’s MPC member, Stephen Nickell, the answer’s no, and unless there is a drastic change, there is no crisis looming.

The explanation for this no crisis scenario lies in an apparent contradiction.

Since the mid ’80s, the UK has been consistently running a deficit on its current account. Year in year out, we have been buying more than we have been selling and that means money must have been flowing into the UK, either in the form of debt or investment, to finance this yearly shortfall.

And if money is coming in, assets must be going out. We must have been selling the UK’s family silver to fund this spending.

But here’s the strange quirk of economics. The balance of payments current account is not just trade in goods and services, another important element is net income flow. That’s money received from investments minus money paid out on liabilities. And over the last ten years, a period remember when the total value of our investments should have been shrinking in comparison to the total value of our liabilities, the UK’s net income flow has been soaring.

Over the last ten years there was just one occasion when net income flow was negative, and over each of the last three years it’s been a stunning 2.3% of GDP.

How can our net income from investments be rising, when the net value of investments is falling?

The answer is this: Typically, the money coming in has been in the form of debt. We are borrowing more. But the capital flowing out has been in the form of investment. And that tends to carry much higher long-term return.

Capital investments are measured at book value, not market value, and this is highly significant because the market value tends to be much greater.

The bad news; 2005 saw a net investment flow going in the wrong direction, with the likes of Santander buying Abbey. But overall, the trend has been for investments abroad rising. “Indeed,” says Mr Nickell “the purchase of Mannesmann by Vodaphone and of Atlantic Richfield by BP Amoco in 2000 represented more outward investment by UK companies than the entire total of inward direct investment by foreign companies in the three years 2001-3.”

Mr Nickell said: “Given the speed with which much of the existing positive position developed (ie. over ten years) and given the small reversal of this position in 2005, it is conceivable that this situation could completely reverse. However, the adjusted positive position in direct investment is now of the order of £500bn. To turn this into a negative direct investment position of £200bn, say, would at current prices, require foreign residents to purchase all the top UK companies in every market sector except Banking, Oil and Mining. This would include BAE, Rolls-Royce, Diageo, BT, Tesco, Unilever, National Grid, Marks and Spencer, Reckitt, BAA, Aviva, B Sky B, Vodafone, Glaxo Smith Kline, Astra Zeneca, BAT, as well as over 35 other major companies. Despite the current attraction of UK companies to foreign residents, the notion that UK residents would cease foreign direct investment while foreign residents bought even a significant proportion of the above-mentioned companies seems somewhat improbable.”

Sources

The UK Current Account Deficit and All That Stephen Nickell

April 25, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

12 months ago, BT spooked markets, and provoked all kind of pension related fears when it announced a £4.7bn pension deficit. Today, the deficit could be a little as £0.5bn, but the UK government a lot worse off.

The company had managed to slash the deficit through a combination of growth in the value of the fund through the rise in equities and a series of capital injections. Then yesterday it revealed news of a “Crown Guarantee.” Apparently, when the company was privatised in 1984, the government agreed to back the pensions of all those working for the company at the time, in the event that the firm went bankrupt.
The Dti is not over keen on this revelation and is likely to do al it can to fight this claim.
In fairness we should point out, that this deficit relates to what would be owing should the company go bust. Stranger things have happened, but this is not especially likely, and BT chairman Sir Christopher Bland, said: “BT stands fully behind its pension promise to pensioners and members. The existing Guarantee, which applies only on a winding up of the company, represents an added reinforcement to the company’s covenant and an extra layer of security for BT’s pensioners. The scheme is well-managed and assets have grown very strongly in recent years.”

April 25, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

It seems to us that there are two titans in the UK book retail trade. And both are in danger of being consigned to Hades, or wherever it is titans go when they are finished with.

First there is Tim Waterstone, who founded the Watertown’s book chain, which today has 200 stores, 25 years ago. In his previous incarnation. Mr Waterstone had worked for WH Smiths, he was fired, and while the sleeping giant snored, the dynamic entrepreneur applied modern day marketing techniques to the sale of highbrow academic and literary books to launch his eponymous bookstore. Many of his early stores were based near universities, and in 1993 he sold to WH Smith, who in turn sold to HMV.

Then there is Ottakar’s which was founded in 1987 by James Heneage and today has 137 stores.

But in recent times, the magic touch seems to have gone out of both retailers. Competition from supermarkets and online book sellers has hit the bottom line of both companies.

Then last year, Heneage attempted to put together a ‘management buy out’ that would have seen him run the store the way he thought it should be run. Some hailed this as an opportunity for Ottakar’s to get back on track, but instead he was outbid. HMV offered more, and recently the regulator has approved the merger.

Time has elapsed now, and the bidding process needs to start a fresh, but until yesterday it seemed inevitable that the struggling Waterstones and Ottakar’s will soon become one. Their uniqueness, and perhaps their dynamism will be lost, the Authors Guild, who objected to the merger in such strong terms, will be disappointed, but at least, or so it seemed, the newly enlarged company will have bigger buying muscle
But yesterday, a spanner was thrown into the works, as Tim Waterstone offered £280mn to buy the company he founded. And as for the Ottakar’s merger he said, “We’re completely opposed to it. Waterstone’s is in trouble and its market share is declining. The relationship it has with publishers has deteriorated and is now so awful that far from being able to get better terms from them, they will probably go up.”
“Ottakar’s is also in trouble and what’s the point of putting two troubled companies together?”
Mr Waterstone is teaming up with Anthony Forbes Watson, the former Penguin Group chief executive. They made their initial offer in February, but have not yet had a response, and fearing that HMV was trying to buy time to prepare its new big for Ottakar’s have decided to go public.
Mr Watersone said, ” It really depresses me that it has seriously lost its way. It is not being well run and its results are truly awful. It needs to get back to being the best bookseller in the world.”
As for Ottakar’s it appears the circle of business is just rotating. WH Smith who bought and later sold Waterstones, is now the favourite to pick up that particular booty.”

April 25, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

House prices might already be through the roof, the ratio between average income and average house price might be at a near all time high, the recent surge in property prices might have fuelled over borrowing, leading to a sharp consumer slow down, but according to the president of the National Association of Estate Agents (NAEA), house prices could double over the next ten to fifteen years.

In fact, NAEA has rattled off a whole set of bullish points, detailing why the UK housing market is in rude health.

“House sales have increased by an astounding 40% since January #91;this year#93;, from an average of 10 sales to 14 per agent in March; this is a 16% rise on March 2005. This surge in the property market has been assisted by reported increases in house prices by 3.4% in February, alongside cheaper borrowing with fixed mortgage interest rates reported to be at 4.72% on average in February 2006 compared to a rate of 5.23% March 2005,” said a NAEA statement.

The NAEA went on to proclaim an 11.7% rise in the number of buyers in March and a 4.9% fall in the number of houses available. Even the species that other reports, warn could become extinct - the First Time Buyer - is apparently returning, with their share of the market jumping from 7.8%, to 8.9%. The Buy-to-let Market, says the (completely neutral and not at all biased) NAEA, is also seeing renewed interest. It says that individuals who are worried about their pensions are ploughing their money into property as an alternative form of investment

It’s president, Christopher Hall said, “In January I commented that I was confident average house prices would increase by up to 100% over the coming 10 to 15 years. Looking at the latest figures I believe we are still well on track for this.”

The NAEA report is at odds with other surveys doing the rounds. And whilst penning this article, gazing out the window to observe, gracefully in smooth flight, a flock of pigs, we wondered how this was possible.”

The viewpoint that the low rate of interest will mean that we are into a new paradigm, and mortgages owners can now afford bigger mortgages simply because the rate of interest is so low, does not take into account the downside to low inflation. Wages don’t rise like they used to, in the long term a mortgage for a given rate of interest is more expensive, than it used to be

As for the return of ‘first time buyers’, even the NAEA admitted that at just 8.9% of the overall market, their number is well below the normal average.

And just suppose rate of interest starts to rise again. As Capital Economics says “The speed and scale of the housing market slowdown in 2004H2, when base rates rose to just 4.75%, suggests that even a modest rise in interest rates would, as a minimum, act as a significant brake on house price inflation.”

In fact Ed Stansfield of Capital Economics said “Once we take affordability into account, the potential for house price growth to continue to outstrip average earnings growth, likely to be in the 4-5% year on year range, seems limited. Over the past 30 years, payments in the first year of a new mortgage have absorbed around 38% of take-home pay for a borrower on average earnings. At present, that figure stands at just over 43%. If mortgage rates were to remain at current levels, a doubling of house prices over the next 10 years would push first year payments to 56% of take home pay. If mortgage rates were just 100 basis points higher (i.e. 1%) on average than over the past decade, that figure would be 64%.”

Granted, this measure of affordability peaked at more than 68% in 1990Q1. However, since that was swiftly followed by a housing market crash, such comparisons provide little comfort. In addition, with inflation set to remain low, the real burden of mortgage payments will not fall back anything like as quickly as it did in the past. Some further acceleration in house price inflation over coming months cannot be ruled out. But, the combination of an overvalued market, higher interest rates and the fact that affordability is already stretched will prevent house prices rising by anything like 7% a year over the next 10 years.”

But there is another side. Recently we reported on how the City of London is pulling in highly qualified individuals from across the globe. With the Sarbanes-Oxley regulations in the US, introduced to avoid Enron style collapses, but in practice making the US Stock market a much less attractive place for an Initial Public Offering, London is apparently moving up the value chain, and the indigenous population can’t supply enough talent. This clearly does have implications for the housing market in London at least.”

Sources
HOUSING MARKET ZOOMING AHEAD IN FIRST QUARTER OF 2006 NAEA
London in 2015 - the centre of the global economy, or nowhere? Investment and Business News

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

The Dow Jones is now within a whisker of hitting an all time high.
In January 2000, when shares in Dotcoms were booming, and Google was a little known company, the Dow Jones Industrial average stood at 11750.
When markets realised that the Internet was a dream, and that online advertising and shopping would never take the world by storm, markets crashed. Some drew analogies with the crash of 1929, and reminded us that it took the Dow 25 years to return to the level it stood at before the crash. Could history repeat itself, they asked?
Without wanting to predict market movement, it would appear pretty safe to say these doomsayers were wrong.
The Dow Jones Industrial average is now just 150 points from the record. It hit another five year high at close of play on Friday.
But spare a thought for the NASDAQ. Dotcoms might be booming again, Internet advertising and shopping has proven to be reality after all, and Google might be making more money than even the wildest bulls dreamed possible a few years ago, but at 2342 points, the US market primarily for techs and other fast growth stocks is still less than half its peak value.
Don’t be surprised later this week, however, to hear mass media coverage of the Dow Jones hitting an all time high.

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

As the tabloid press scream about immigration and talk of refugees from the war torn corners of the earth sponging off the UK’s system of benefits, remember there is another side to the argument.
Immigration could, after all, provide a short-term fix to the looming pension crisis and give the UK the time it needs to solve the problem altogether, as it delays the date at which the number of retired people outnumber those in work.
Now, research from Ernst and Young’s Item Club has found that immigration is boosting the UK’s economy, and helping keep a lid on inflation and facilitating the low rate of interest.
The Item Club’s Peter Spencer said: “We are on the crest of a new immigration wave#133;The steady flow from most recent accession countries to the UK has proved remarkably positive for the economy.”
“As a direct result, the UK workforce has become younger, more flexible and economical, easing the pensions burden and keeping interest rates lower than many commentators would have predicted.”
The Item club calculates that around 300,00 migrant workers have taken jobs in the UK, and that contrary to commonly held perception, one in three or these Eastern Europeans are taking up positions in management
The economic think thank, which uses the same model for the economy as the Treasury, reckons that thanks to these migrant workers, the UK’s GDP will be 0.2% bigger this year, 0.4% bigger next, and contribute £300mn to the Treasury’s tax receipts.
Meanwhile, as Eastern Europeans set up roots in the UK, Peugeot has dismantled roots in the UK and firming up in Slovakia, the Czech Republic and France.
Some blame the EU, saying its EU subsidies are the reason for the Peugot switch.
Don’t you believe it, says the EU commission, with a spokesperson saying: “There are strict state aid rules. When a member state gives state aid it must notify the Commission and each case is analysed before agreement is - or is not - given.”
“Money from EU structural funds cannot be injected in the form of state aid and there are very strict controls showing how money is used for specific programmes and projects.”
“All this is monitored by the Commission and the member states.”

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

When the Bretton Woods agreement of fixed exchange rates was launched after the second World War, it was hailed as representing the end of the era of economic cycles.
But later, and despite the efforts of two of Britain’s greatest, Keynes and Churchill, it was seen by many as the instrument by which the final nail was banged into the coffin for UK’s economic dominance, ceding absolute power to the US.
The architects of the agreement were Henry Dexter of the US and Keynes (pictured). Today, John Maynard Keynes stands above the discipline of economics like a titan, in a similar way that Darwin stands above the idea of evolution.
At the time of of Bretton Woods, Keynes, like all the other world economists, had a nasty taste in his mouth. He was remembering the bad old days of the 1920s in the UK, the 1930s in the US, and the economic turmoil in Germany between the wars, when economic depression and mass unemployment had created a political scene ripe for revolution.
The gold standard was held up to blame by many. The system by which currencies were linked to the value of gold, and backed by the gold sitting in vaults was then considered to have had a catastrophic effect on the global economy.
A new system of cooperation was envisaged, and at Bretton Woods was launched.
And the twin pillars on which the supposed new era of economic stability was built were the IMF and World Bank.
In fact the economics institutions that were created were not entirely to Keynes’ way of thinking. His ideas were bolder and more far-reaching. He wanted to create a global reserve currency and set up a model in which countries with big trade surpluses bought more goods from the countries with large deficits.
The US distrusted the idea, especially as Keynes was British and Britain was near bankrupt, and his idea would have preserved much of Britain’s might.

Yet ironically 60 years on, the very idea Keynes came up with to help the UK would apply to the US today, as it now suffers from a massive trade deficit, in this case with China.
In the early days, the IMF was there to police the system of fixed exchanges. And in 1945, there were 4.03 dollars to the pound. This was reduced to 2.8 in 1948, and 2.4 in 1967, when Harold Wilson famously said this will have no affect on the “pound in your pocket.”
But with the collapse of Bretton Woods in 1971 and the move to floating exchanges, it became more like an old fashioned bank manager, with the power to make chancellors from powerful but struggling economies, such as the UK in the mid ‘70s, sweat as they hopefully and pleadingly held out the begging bowl.
Now the IMF is to change again. This time it is to let the likes of China and India into its club.
Gordon Brown is behind the idea. Yesterday he said: “We resolve to make the IMF more fit for purpose in a global economy and more able to address challenges that are quite different from those of 1945, when the IMF was created.” He added: “Specifically, we agree the IMF must focus more on crisis prevention as well as crisis resolution.”
From his lofty position astride his soap box, Mr Brown added: “This is not simply the IMF accepting responsibility for multilateral surveillance. This is about individual economies of the world … accepting that we have responsibilities to each other and that they have to be addressed.”
IMF Managing Director, Rodrigo Rato said: “I have spoken several times about the need for increases in voting power for some countries, including a number of emerging market economies, to ensure they have a role in the fund’s decision-making process that accords with their increased importance in the world economy#133;This is an institution based on the representation of countries based on their economic weight in the world economy. The world economy is not a frozen thing, it changes over time.”
Some are hailing the change in the way the IMF will operate as the most significant development since 1945. Just remember that the 1945 agreement was later considered to hasten the economic hegemony of the US and the loss of British status. Today’s economic problems, and in particular the massive US trade deficit with China, are in some ways similar to the economic balance between the UK and US 60 years ago.
A new look IMF could later come to symbolise the end of the US as the world’s dominant economic power.

Sources
For a fascinating 2 minute video news reel type broadcast on the formation of Bretton woods click here pbs
The Bretton Woods System Wikipedia
The Road to Bretton Woods:
Winston Churchill and Imperial Finance Winston Churchill.com

April 21, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Yesterday we told how US inflation is picking up, and how individuals think inflation is higher than it really is.

For those who are confused about how inflation can be so low, when they seem to be forking out more money for their council tax and utility bills and baby sitting and petrol, here’s some more news to confuse you.

According to the Office of National Statistics, CPI inflation fell to 1.8% last month; that’s the lowest level for a year.

It’s down in Europe too, with the eurozone rate down to 2.2% from 2.3%.

Yet according to the Bank of England, people’s perception of inflation is that it’s around 2.8%.

There are several explanations

One is that the ONS is wrong, and that the basket of goods it uses to measure the price index is not made up appropriately.

Another is that inflation is higher in some regions - the South East for example, - making perceptions in these regions out of step with national average.

Another is that individuals are wrong; that we all tend to moan, and only ever notice bad news.

But whichever it is, the danger is the higher perceptions will become a self fulfilling prophecy, as wages rise to meet expectations.