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

What’s happening to Blightey? We keep reading about this crisis, and that disaster. We hear rates are going to rise and about how the poor old consumer is at the end of his or her tether and yet every time new data is released, it’s good news.

Last week we heard how retail enjoyed its best rate of quarterly growth since 2001 in the period to the end of June. Earlier in July we heard how manufacturing is finally climbing out of years of malaise and is helping boost our exports, now it’s news on our GDP that should be making us sit up.
According to the Office of National Statistics, second quarter growth was an impressive 0.8 percent. That’s the best score in two years.

Of course, in economics good news is often followed by bad, and many immediately assume that the combination of all these positve developments, plus data to suggest inflation is on the up again, spells an inevitable an imminent rise in the rate of interest.
But so far, though, things are on par with predictions. For some time now, the BDO Stoy Hayward Business trends report has predicted strong growth but modest inflation this year, while both the latest inflation and GDP data are in line with what the Bank of England had forecast before it last met, and before it last chose to keep rates on hold.

But while we celebrate the good, the ITEM club, from Ernst and Young, has got news to dampen our spirits. It says Britain has had “seven years of plenty,” caused by strong consumer spending, but that it’s over. The chief economic advisor, Peter Spencer predicts a much weaker second half of the year. He also said that rising energy prices, contrary to fears expressed by many, is not inflationary at all. In fact, these higher prices are squeezing incomes and will end up being deflationary, negating the need for interest rate rises.

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

It wasn’t a good week for market leaders amongst the techs. But was it a sign of bad times, or just growing competition?

Intel saw second quarter profits slide 57 percent to $885mn. Part of the blame lies with AMD. The smaller PC chip maker, Intel’s faint shadow for so long, has seen profits soar from just $11 million in the second quarter of last year, to $89 million for Q2 2006. Then again, even AMD was a little disappointed, with sales lower than originally predicted. PC prices are falling, causing margins to slide and that means more unit sales are required to keep revenue up.

Then, there’s Dell. On Friday, the world’s leading PC maker gave its second profits warning in three months, and shares fell to a five year low. Results for the latest quarter are not in yet, but last time around the profits warning was followed by the announcement of a 30 percent fall in profits. And Dell, just like Intel, is facing threats on two fronts. HP, its main rival has got its act together. Its period of profits warnings seem to be over and, under its new boss Mark Hurd, the company has slashed costs, and in the process is presenting itself as more formidable opposition. And also like Intel, Dell too is suffering from the ever eroding price of PCs.

Then there’s Microsoft. Its second quarter profits were 24 percent down on a year ago. For the software giant, though, it’s not so much competition which is hitting its bottom line, it’s delays to software releases and the burden of fines Microsoft are being forced to pay because its rivals just can’t compete.

It’s an important time for Microsoft with it’s new “Zune” iPod-bashing product, the new Windows operating system, growing rivalry from Google with free applications online. 2007 will tell us a lot about whether the company has a future of world dominance to look forward to.

Even Apple disappointed a little. Apple’s year is out of sync with most other companies. When most announced second quarter results, Apple announces its third quarter. And its third quarter, was good, on the face of it. Profits were up to $470 million, from $320 million a year ago, while iPod sales were up to 8.1 million in the quarter, from 6.2 million. But, the again, profits six months ago were much better and there are signs of a slow down in iPod sales, which were much higher six months earlier.

With Yahoo disappointing too, you could be forgiven for thinking all is woe in tech land.

Big Blue did alright. The mighty IBM, which these days it no longer a PC manufacturer saw profits jump from $1.8 billion a year ago to just over $2 billion. Also, Google goes from strength to strength seeing profits more than double, soaring to $742 million.

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

When Bob Geldof, Bono and their chums from the music industry filled Hyde Park to represent our wealthy collective conscience, worrying about poverty became fashionable. But, a year on, and with another crisis in the Middle East, with the price of oil breaking records, with markets still shaking after crashing just two months ago, and with energy and the rate of interest hogging the headlines, Africa and the least developed countries across the globe have slowly slipped off the agenda.

Maybe we don’t need to worry about the poor. After all, 2004 saw the world’s 50 least developed countries (LDCs) grow by 5.9 percent, the highest growth rate in twenty years and the doubling of aid to the levels seen in the ’90s.

But just because it’s not fashionable to worry about something, it doesn’t mean the problem has gone away. UNCTAD, that’s the United Nations Conference on Trade and Development has at last come up with solid ideas about how the LDCs can actually grow and pull out of poverty in a sustainable way.

The big underlying problem is this: poor productivity. During 2000-2003, it required five workers in LDCs to produce what one worker produced in other developing countries and 94 LDC workers to match the productivity of one worker in a developed country. It is basic infrastructure that is really holding the world’s poorest back. Apparently, the stock of roads in in 1999 was worse per capita than in 1990, while access to electricity is poor. The average number of years schooling of adults in the LDCs was just three years in 2000, which that was less than the level achieved by other developing countries in 1960.

And when education is good, brain drain saps the skill base. In 2000, one in five of the stock of LDC workers with tertiary educations was working in an OECD country.

In the developed world, if a business wants to grow, first port of call is the bank. But, bank credit to the private sector in LDCs was only 15% of GDP 2003, compared with 60% in low - and middle-income countries.

And, perhaps not surprisingly, given the low level of bank funding available, machinery and equipment imports into LDCs were at almost the same level in real per capita terms during 2000-2003 as they were in 1980.

When countries start to grow, they can often enjoy a virtuous circle. Extra growth creates more wealth, consumers go out and spend, creating more potential profit for producers, leading to greater investment. But at the moment, the LDCs are just not seeing this upward spiral in wealth. Where growth does occur, if it’s not coming from aid, it’s being isolated in those countries which have strong natural resources. Unfortunately, this is not the kind of growth that is sustainable. Leakages back into the economy are smaller when oil exports grow compared with a boom in the manufacturing sector.

So, whenever the world’s leaders talk about increasing aid, or whenever you read about LDCs receiving benefit from the high price of oil, just remember that what these countries need is investment in infrastructure, and until this happens, they are destined to remain poor.

For further information

The Least Developed Countries Report, 2006 UN

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

Time was when tech companies didn’t do share buy backs or dividend payments. That was the preserve of traditional mature companies, operating in established markets. Tech companies were all about the future, and growth. This started to change when Microsoft announced a big share buyback some time ago. At the time its seemed unprecedented, but it’s beginning to look a little like a big tech giveaway. Yesterday we brought news of eBays’ plans to buy back $2 billion in shares. Today it’s Microsoft’s turn, again.

The software giant has announced its second share buy back of the year, this time, it’s forking out $20 billion buying shares worth 8 percent of total stock. The move gave the Microsoft share price a big lift in after hours trading, it was exactly the fillip the stock needed, because, yesterday, the company also announced a 24 percent fall in quarterly profit.

In all, net income came in at $2.38 billion. But there was nothing too sinister behind the fall in profits. Microsoft blamed legal expenses and higher costs, in fact sales were up, with fourth quarter revenue of $11.80 billion, that’s 16 percent up on a year ago.

In addition to the $30 billion share buy back that has already gone through, and the $20 billion just announced and which is due to go ahead in August, the company also announced plans to buy back a further $20 billion shares between now and 2011.
As for the future, its chief financial officer Chris Liddell was bullish. . “Our upcoming launches of Windows Vista, Microsoft Office 2007, Exchange Server 2007 and other key products position us to continue to deliver strong revenue growth in 2007,” he said.

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

This July, while we sit behind fans, taking respite from the heat, we could be forgiven for saying “phew, it’s a scorcher out there.” But back in June, retailers across the land, were no doubt saying “phew” the good times are back.
June saw a 0.9 percent rise in sales while the three month period to the end of June saw sales 2.1 percent up on the previous three month period. That was the highest rate of three monthly growth seen since June 2001. But, with the good news on sales came bad news on prices. The retail price deflator, sank from -0.4 percent to -0.9 percent.

It’s perhaps too early for retailers to be cracking open the champagne, and for interest rate watchers to be drowning their sorrows in predictions of rate hikes. Much of the High Street boom was down to the football with beer and LCD sales booming, for example.
But its hard to believe such a significant uplift in sales was down solely to the World Cup. Next months figures, then will have added significance.

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

Is this really the time for Nokia to panic? The Finnish company that dominates the global mobile phone market enjoyed a 43 percent jump in second quarter profits, while unit sales have jumped from 60.8 million in the second quarter of 2005 to 78.4 million in the three month period recently ended. Its market share is now 33.3 percent, from 32.5 percent a year ago, and yet#133;

Nokia faces an ever growing challenge, from Motorola. The US company has enjoyed a 52 percent growth in sales over the last year, and its market shares has risen from 18.1 percent, to a more threatening 22.1 percent.

The company which compiles these statistics, is Strategy Analytics, and according to its Associate Director of the Wireless Device Strategies (WDS) Neil Mawston, “If Motorola can continue this breakneck pace - a stretch, but not totally inconceivable given the strength of their core designs - it would overtake Nokia in the first half of 2007. The stars would need to align for Motorola on additional new products, 3G, and component supply, but this should be a strong warning for Nokia which should feel pressure to more rapidly improve both entry- and mid-tier product offerings in terms of both designs and numbers.”

Also doing well is Sony Ericsson. The company jumped back into fourth position for the first time in 2 years, as demand surged for its Walkman music phones. Chris Ambrosio, Director of the Wireless Device Strategies (WDS) service, added, “Sony Ericsson is another vendor who has achieved both balanced product design and brand relevance with its Walkman products, resulting in record highs for the joint venture in shipments, revenues and profits. The important story for Sony Ericsson is the notable improvements in getting new products out and into channel on time - and profitably. If Sony Ericsson can continue in this area, where it has struggled in the past, the Walkman and Cybershot brands from Sony have legs to provide strong growth well into 2007.”
Change in fashion is always a threat to the status quo. Apple spotted the need for a trendy MP3 player, and in no time the iPod eclipsed Sony’s Walkman, as the number one music player. In the mobile phone world, it’s a similar story. Video and music play back, email, etcetera, thanks to new applications this market is still wide open.

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

All good things must come to an end, and we al know that Google’s startling run of growth must falter, and eventually stall altogether. However, for the time being at least, the company continues its staggering march forward.

In the quarter just gone, profits were double the level seen 12 months ago. At $721million, the quarter even trounced the previous 3 month period, which back in the middle of April, itself seemed a remarkable performance.

But Google does face a growing challenge. A challenge it’s well aware of. And in attempt to fight of this threat, the company plans to spend $1.2 billion on RD, this year, that’s 148 percent up on 2005. But, it may not be enough.

Google’s big threat, comes in the form of a new rapidly growing company from Mountain view California, set up by two universities whiz kids in the late ’90s called Brin and Page. For the big danger that faces the company, is that it will become a victim of its own success.

The company earned massive revenue, $2.46 billion, which was 77 percent up on a year ago, and yet, 99 percent of this revenue comes from one area, those little text based ads you see next to search enquiries. It’s an incredible business model. Unlike many other companies that generate revenue from advertising, with Google, advertising revenue builds upon the intrinsic part of the product. With most media companies, advertising is a hit and miss affair. And yet, as any consultant would tell you, any business that is reliant on one source of income is sitting in a precarious position.

From online spreadsheets, to Google’s rival to Paypal, Google Checkout, the company is trying to build upon its success.

But, for the time being, the company remains a one trick pony. It’s a trick it is performing with remarkable dexterity, leaving Yahoo, which recently disappointed analysts with its results, in the shade, but unless the company can diversify, its growth will be limited by the growth in the market for search engine sponsorship. And remember, if search engines were able to throw up perfect results, and deliver the precise information the user wants, no one would ever click on the ads down the side.

And just as search engine sponsorship has come from nowhere to the dominant advertising medium it is today, it could also lose its appeal. Users might grow cynical.

One of the reasons why Internet advertising has such incredible potential lies with online shopping. In the old days, a retailer had to rely on its position on the High Street to draw in traffic. These days, for the new breed of online retailers, it’s internet advertising. And at the moment, Google is the key. An online retailer can draw in big sales, just by getting its Google marketing right. But portal sites and price comparison products might undermine Google’s strength. The company is aware of this challenge, hence the big RD spend, and plans to diversify, but so far, only one rabbit has been pulled from the hat. Only time will tell if others will come bursting forward.

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July 20, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

It was day two yesterday. The Q2 results season was got under way as Big Blue pleased markets, and Yahoo disappointed.

Then yesterday, Apple and Motorola pleased while Intel disappointed with lower than expected sales.

But, after Apple, perhaps the next most interesting stock was eBay. Interesting, because it did very little.

Q2 profits at eBay were down on a year earlier, from $291.6million to $250 million. That’s okay, no one was surprised by that. In fact the best phrase that could be used to describe eBay’s growth over the last 18 months or so, would be “as flat as a pancake.”

It’s as if the company has done what it was going to do out of online auctions

Indeed, as yesterday it announced a $2 billion share buyback, which is what you expect mature companies to do, not high growth techs.

Does that mean eBay’s days as an exciting growth stock are over? Of course not. Paypal saw a 44 Percent rise in customer numbers, while Skype saw revenue rise 26 percent to $44 million.

VoiP is no longer a market which is dominated by Skype. It’s a sector which sees an extraordinary variety of competitors, from Tesco and DSG (formerly Dixons) to Google.

But it’s also an incredibly important business, which is set to transform communication. eBay owns the company which is still the market leader. The current loll in growth is, in our view, little more than the eye of the hurricane that is eBay.

July 20, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

One could be forgiven for thinking no one likes Microsoft. Such is the venom of some anti-Microsoft journalists, and such is the reverence with which Apple is held by some, that it is as if the nerds of the technology world believe the larger company is a real life evil empire, and that Jedi Master Jobs fights it with only the Force (and a little help from the EU) as his ally.

But news in this morning informs us that in fact Microsoft is the UK’s favourite brand.

According to a study from YouGov, Microsoft is top, one place up on the BBC. Also in the top twenty was Google, vying for recognition in our hears and minds alongside Marks and Spencer and Heinz.

It’s a different story in the US, however. According to Harris Interactive, the top brand across the pond is Sony. Dell was second, and Coca-Cola was third. But, stateside, while Apple made it to the top ten, there was no sign of Microsoft.

Is this a case of the UK lagging behind the US, or on this occasion, is it the reverse?

July 20, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Some people blame plain-speaking Ben Bernanke for the recent market turmoil. The problem is this. The Fed governor likes to tell it like it is. If he is worried about inflation, he tells us. If he is unsure, he sends out mixed messages, unlike the previous head man at the Fed, Alan Greenspan, who created this veneer of being an all-seeing sage of economics. There’s nothing wrong with being uncertain. Inflation is an awkward beast.

The truth is that Greenspan didn’t have any better idea than Bernanke, it’s just that he kept his doubts to himself. They used to say he liked to keep the markets guessing but, maybe, he just kept quiet because he didn’t know.

Yesterday, though, Mr Benrnanke, seemed to come clean, and to have nailed his colours firmly to the dove camp. He said “Our baseline forecast is for moderating inflation.” The media jumped on the dove bandwagon, the FT headlined, for example, “Fed chief says inflation expected to fall”, while CNN Money said “Bernanke: Inflation under control.”

The markets celebrated, and yesterday the Dow enjoyed its best one day performance this year, passing 11000 points. However, it’s worth noting that it passed 11600 back in May.

But, then again, Bernake’s comments weren’t altogether un-ambiguous. He also said “some inflation risks remain” and “persistently higher inflation would erode the performance of the real economy and would be costly to reverse.”

So while most of the commentators celebrated his words, others reacted differently. The BBC, for example, reported on the Bernanke comments soon after they were made and headlined “US Fed warns of inflation risks” - that’s the danger in trying to be first with your stories, you don’t have the chance to study the consensus.

And while Bernanke spoke, the US Bureau of Labor Statistics gave us some data.

This time, it was not so good. US inflation was 4.3 percent percent over the last year, although June did see a fall, with prices up just 0.2 percent in the month. But the real worry is with inflation after food and energy is taken out. This has been at 0.3 percent for four months now, which is simply too high.

Then again, inflationary pressures often build up long before inflation sets in. The current high standing of the CPI index was partially caused by what happened 18 months or so ago. The recent increases in the US rate of interest will not have had their full effect yet.

Analysts are sure the Fed will up rates again, but a growing view is that there might be only one more 1/4 percent hike to follow, and then they will have peaked.