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

It was another stunning set of results from Apple. Q3 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. There seems no stopping the company which has seen profits leap from loss making at the beginning of 2003 and double digits for the following 6 quarters. Mac sales have risen from 733,00 in the first quarter of 2004 to 1.3 million in the period just gone.

On the other hand, there are signs of a slowdown and hints that the future is not quite so glossy. Profits and sales were much greater six months earlier. Is the company pausing for breath after a period of such exhausting growth, or is the halo finally slipping?

Actually, if you compare the Apple results with the previous quarter, the only area that saw significant improvement was in Mac sales, which rose from 1.12 million units to 1.3 million. It was the best three months at Apple for the Mac for a long time.

But has the iPod peaked? Sales in the last three months were only slightly more than half the levels achieved in the first quarter and while the first quarter included Christmas, as the chart shows, in previous years Q1 and Q3 sales were at a similar level.

The problem with the iPod is that it is a fashion accessory. Fashions come and go; the company needs to build upon the iPods success and encourage as many other companies, and very much the mobile phone producers, to make their products iPod compatible. As if to confirm this danger, a degree of negativity has crept into iPod bulletin boards of late.

Apple’s muscle in the music industry is now so great that it can dictate pricing but a new battle front is opening up. Video downloads are set to become the new ‘must have,’ and MP3 features will all come as part of the package. Any company that can dominate the video download business could potentially wrestle control of the music market from Apple.

The mobile phone companies and now Microsoft all want to make the video market their turf. It seems to us, that in Microsoft, Apple faces formidable opposition for its iPod and video iPod.

We wonder whether the charts shown here will look decidedly flat this time next year.

July 19, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Mintel puts it down to competition between broadband suppliers, and With BSkyB finally joining the frey yesterday, there’s no doubt about the level of competition. And while our High street still struggles in the low gears, the electronic High Street sees another bumper year.

According to Mintel, Internet sales hit 9.79 billion euros last year, seeing the UK eclipse Germany as the biggest online retail market. Germany could only muster 9.71 million euros of online sales.

Across the UK, France and Germany, the market expanded by 51 percent over the year, and Mintel reckons that by 2010 it will treble in size.

Mintel puts the growth down to competition between the broadband players, saying “Greater competition among UK broadband providers has led to falling prices and faster Internet speeds, which has ultimately been the major driver of growth in terms of Internet penetration in the last 12 months.”

And talking of this competition, BSkyB finally came clean with its offering yesterday. It talked price, saying how its prices are much lower than the opposition’s. (Although how you can go lower than free - which is what Carphone Warehouse claim - we are not sure.)

BSkyB are certainly not shy about putting their money into the quest to being number one. It’s forking out £400 million, and wants three million subscribers by 2010.

One of the services on offer will feature free broadband, plus a one off £40 connection charge.

It’s fast looking as if the big weapon in this battle will be content. For at least three of the protagonists, NTL, BT and BSkyB, the tie with TV and video content will be key.

We are still not convinced by this business model. Ultimately we see web sites offering TV and video style content, and because of this the dynamics of the market could change to something that we would find unrecognisable today. The TV channels of the future might well be search engines. Just as AOL has given up using proprietary content to differentiate itself from the rest, we wonder whether the use of video content will prove equally inappropriate.

Finally, returning to online retail sales. They always used to say that the key requirement for success in retail were the three Ps. Position, position and position. These days, for an online retailer, its ranking on Google seems more important. Maybe online advertising and marketing will replace rent in the balance sheets of Internet retailers.

July 19, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

The Bulls were saying “told you so” yesterday. Inflation in the UK is up - hitting 2.5 percent in June, way above the Bank of England’s official inflation target of 2 percent, which means that a rate of interest rise is inevitable, they say.

But, in reality, it’s nowhere near as bad as the headlines would make you believe. Sure, CPI inflation is up, and the old fashioned Retail Price Index soared to 3.3 percent, too, but, strip out energy and food from the mix, and the CPI rate was a mere 1.2 percent, okay, that was up on last month, but only just, and even so 1.2 percent is, if anything, too low

Fortunately for us, the Bank of England doesn’t tend to make it up as it goes along. It does not believe in fly-by-the-seat-of-your-pants economics for the moment. Instead, the Bank likes to know what the long-term trend is.

Its recent inflation report predicted that June CPI inflation would be higher than the statistics released yesterday said. So, if anything, rather than talking doom and gloom, market commentators should perhaps be celebrating the fact CPI inflation was lower than the bank forecast.

With migration keeping the supply of labour up, there is no sign as yet of a secondary wage increase caused by the higher price of oil.

For now, at least, things are better than the cynics proclaim. Let see what next month brings before we talk of an odds on certainty of a rate rise.

July 19, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

When the US sneezes the rest of the world catches a cold. That’s how it used to be, but these days there’s a bit more to it. As this century moves on, China and India will become at least as important, while today, what happens in China is already important enough.

For some time, many economists have been fearing a Chinese downturn, bringing with it economic slowdown in the region, possible spilling over to affect us all. But the news from China yesterday, told a different story, “slowdown - not here, thank you.”

According to official figures releases yesterday, the economy from behind the Great Wall, saw its fastest growth in the three months to the end of June in 12 years.

It’s annual growth was an impressive 11.3 percent.

In China, its all about investment. Investment soared at an extraordinary 30 percent over the last year, and yet exports during the last quarter actually fell.

China has been here before. Back in the ’90s, it grew too fast, and inflation hit 28 percent. But somehow the Chinese authorities managed to engineer a soft landing for the economy.

Even so, economists fret that sooner or later it will all come to a sudden halt, and the longer growth is around 10 percent, the bigger the fall. According to Julian Jessop at Capital Economics China needs to raise the rate of interest from the current level of 5.58 percent to nearer ten percent, and this is clearly not going to happen. The alternative option is to let the renminbi appreciate. As Mr Jessop said yesterday ” However, Beijing continues to regard the value of the renminbi as primarily a political rather than an economic tool. The government is well aware of the sensitivity of the renminbi-dollar exchange rate, particularly in the US. It may therefore be saving its political capital for when it is most useful, perhaps to head off renewed protectionist pressures in the run up to the US mid-term elections later this year.”

July 19, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

The trouble for Yahoo, is that its weak in the one area where Google is strong. Key word sponsorship has underpinned the explosion in Internet advertising, making Google the company it is today. But, for Yahoo this is the problem area. As Susan Decker, chief operating officer at the firm said to Reuters yesterday, if it wasn’t for search monetization the company would be very strong. It’s a bit like saying, apart from the clash between Israel and Hezbollah, Lebanon is a peaceful country at the moment.

The markets were prepared to forgive Yahoo’s troubles with key word sponsorship, because it had a new ad word search system lined up. But yesterday, we heard that its been delayed by a quarter, and will now only be available towards the tail end of this year.

Combine all this with the news that Yahoo’s second quarter’s sales were $1.12 billion, which was less than expected, and news that its projections for the next quarter were lower than expected, and you see why markets gave the company a big thumbs down and shares slid 13 percent in after-hours trading

Strangely, Google suffered too. Seeing its shares slide 3 percent was odd - why would Google lose out, because Yahoo was not matching it?

Bear in mind that Yahoo’s second quarter net income was 78 percent down on a year earlier, and you could be forgiven for thinking all is woe at Yahoo.

It’s an easy conclusion to draw, but it’s the wrong conclusion.

First of all things were not as bad as the markets reaction would have you believe. Sure, net income at $164 million was down, but then a year ago the company had sold shares in Google. Take that out of the mix, take into account a change in the way share options are reflected in net income so that you are comparing like for like, and all of a sudden, things look good. On that basis, net income a year ago was just $152 million.

Sales might have been lower than expected, but net revenue was still up 28 percent on a year earlier.

But, to quote Ian Drury, if we are looking for reasons to be cheerful about Yahoo, then there’s another very interesting development.

Yahoo might be weak where Google is strong - key word sponsorship, but it’s strong where Google is weak. For Yahoo is big on brand advertising

It is still the case that Internet advertising revenues per read are much lower than with a paper magazine. And much of the reason for this lies in the fact that advertisers have still not embraced the Net as a medium for brand advertising.

But this will surely change, and if it does, then Yahoo is sitting very pretty

July 18, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

It will be the fifth biggest IPO ever, behind NTT Do Co Mo, Enel, Deutsche Telecom and the Bank of China, but the Rosneft float will not be without its moments.

Strangely though, in some ways it’s less controversial than how the Russian oligarchs acquired their wealth in the first place.

Most became rich by picking up state assets on the cheap. Rosneft, which after the float will still boast the Russian state as its biggest stakeholder, became so big because the state acquired private assets.

Whether it acquired these assets on the cheap depends on who you believe. Is Mikhail Khodorkovsky guilty of tax evasion, and did he get what was coming to him, or was he merely guilty of having political ambitions at odds with those in charge at the Kremlin?

Either way, Yukos, the company Khodorkovsky headed before he found himself in jail, wants to stop the float. Yesterday, Clare Montgomery QC, argued in court whythat to allow the IPO to go ahead would be to ” turn the LSE into a thieves’ bazaar”.

July 18, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

Every month the Royal Institute of Chartered Surveyors asks its members whether house prices were up or down. The difference forms the RICS index. It’s an index we like, and in the past has proved a reliable indicator of what the future may bring. It went negative in the summer of 2004 when most other surveys, contrary to anecdotal evidence, were showing prices moving upwards. The RICS index stayed in negative territory until last Autumn, and accurately foretold a pick up in the market.

Now the figures for June are out, and the RICS index hit 28, the highest score since May 2004.

It’s London where the big upward movement is occurring. The RICS index suggested June saw the highest level of house price rises in the capital for six and a half years, while the gap between London and the rest of the country is the highest on record.

History tells us that the UK property market cycle starts with London.

It could be that we are at the beginning of a new cycle, and that the previous rotation of the property market wheel ended with a genuine, bona fide, soft landing.

It’s just that with sentiment so down in the dumps at the moment and with markets full of nerves, it’s hard to believe house prices are about to boom.

The low level of inflation means that wages are not going up fast enough to make house prices affordable again for first time buyers.

What house prices do have going for them, however, is this: for investors, property may represent a safe haven. With equities in disarray, at least a home should represent capital accumulation and bring in a yield if it’s rented out in the meantime. Maybe, houses are the modern day gold - a safe refuge in times of trouble.

July 18, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

The headline rate of Eurozone inflation hit 2.5 percent in June. No wonder they are panicking in some circles. The Euro interest rate, they proclaim, is going to go up and up, and the economy will fall downwards with it.

In fact, if you scratch beneath the surface, things are not so bad. The Eurozone headline rate of inflation was 2.5 percent last month and 2.2 percent a year ago, so there’s hardly been a massive hike.

Strip out food, energy, tobacco and alcohol from the mix, and you are left with core inflation, the index that many feel really matters. This is just 1.4 percent, a mere tenth of a percentage point up on a year ago, and less that last month’s score.

While economists expect euro rates to rise - probably hitting 3.5 percent, many believe rates will drop soon afterwards.

July 18, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

There’s a lot of hysteria in the press. This weekend, The Sunday Times led on the dangers of an economic hard landing across the world and the chattering class of web sites jumped on the bandwagon.

We don’t want to detract in any way from the seriousness of the current crisis in the Middle East, but as things stand at present, the economic impact is likely to be muted.

Julian Jessop at Capital Economics put it quite nicely yesterday. After acknowledging that it’s quite likely oil will rise by several more dollars a barrel, he said: ” To put this in context, oil prices have already risen from $26 in late 2003 to around $76 today: it is hard to see why another $5-10 per barrel should make that much difference when the world economy has already weathered an increase of $50.”

And while the recent rises in oil have been down to security fears, fundamentally the problem lies with success. Oil supply is at its greatest level ever. Fears over terrorism, conflict, or even that the North American hurricane season, due to kick off soon, may mean oil flow might fall slightly, but only to the extent that it will be slightly lower than the all time record.

The underlying reason why oil is doing well, is due to demand being at an all time high, and that’s a sign of a booming global economy.

And while graduates of the Mickey Mouse school of economics worry about the high price of oil leading to runaway inflation, leading to a rapid escalation in the rate of interest, it’s worth remembering that the recent oil rises are only inflationary if there is a secondary effect.

In fact, the high price of oil is having a dampening effect on demand. It could be argued the high price of oil is deflationary.

There’s a caveat. Should the conflict between Israel and Hezbollah escalate and bring the whole region into the affair things would, of course, become extremely serious. But Mr. Jessop, in language that an economist writing for an independent group like Capital Economics can use, but which would be taboo to a diplomat, said: “Of course, things could be different if the conflict was to spread across the region, and oil prices spiked above $100. However, this would be very much a worst-case scenario. Simple geography suggests that if the conflict does spill over into other countries, it is much more likely to drag Syria in than Iran. This could still have some important repercussions, but Iran is by far the more important oil producer (as well
as the greater military threat). What’s more, there are several precedents where Israel has attacked militant targets or civilian infrastructure in Lebanon (notably in 1993 and 1996), with little international fall-out. Unfortunately these sorts of episodes are “business as usual” in the region.”

July 17, 2006 | posted by Michael Baxter in Uncategorized | comments (0) |

There was a slight fall in the number of profit warnings in the second quarter of this year, but the overall number was still high. According to research released this morning by Ernst Young, 84 profit warnings were issued by UK quoted companies during the period. That’s one less than Q1 2006 and down by 12.5 per cent on quarter two of 2005.

“Difficult trading conditions” were blamed for the profit warnings by 43 per cent of the companies involved, compared to 31 per cent last quarter. 20 per cent reported “contract delays and cancellations” and 11 per cent cited “increased overheads”, down from 22 per cent last quarter, as primary reasons for warnings.

Interestingly, 61 per cent of profit warnings came from AIM (Alternative Investment Market) listed companies. However, the increase in AIM warnings should be taken in context. The 51 warnings from AIM-listed companies in quarter two still represents less than 5 per cent of all AIM-listed companies, and the market remains an effective way for companies to raise capital.

Keith McGregor, Corporate Restructuring partner at Ernst Young says: “A key feature of the last quarter has been an uncertain economic environment, with volatility in the global equity markets, due in part to resurgent inflation. And while the global economy is growing, rising prices, with associated interest rate rises, are still creating a feeling of uncertainty.”