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

Germany and the UK had quite different experiences in
between the last century’s World Wars. Germany had runaway inflation, the UK high
unemployment. Both vowed never again, and the rest is history.

As a result, Germany has never been a country to see prices runaway with
themselves. Given the way Germany has kept a lid on inflation - when elsewhere it was
hitting double figures and more - perhaps it’s not surprising that, in recent months, while
economies have warned rising prices were back on the agenda, its Consumer prices
index, or HICP plummeted. In September, the headline rate was a mere one percent,
while the core level was even lower. Back at the tail end of 2004 in Germany, the core
rate of inflation was hardly rampant, but at 1.5 percent, it was three times higher than the
level seen today.

It’s a good example of how Germany has, in reality, suffered from the Euro. While
Spain overheats, with the euro rate of interest sitting at levels that are just too high for our
amigos, in Germany the Euro rate needs to fall. Instead, it’s expected to rise to 3.5
percent in December.

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

Not many were surprised by the Fed yesterday. It elected
to keep the rate of interest on hold for the third time in succession, and, in so many ways,
it seemed like a carbon copy of the last meeting.

The Fed has a hawk. Richmond Fed President Jeffrey Lacker has been a lone voice
among the other members, and has voted to raise rates at every meeting, when the
consensus was to keep them on hold. And yesterday’s meeting was no exception.
The Fed changed its working from last month, but only slightly. It told us that
“Economic growth has slowed over the course of the year,” as if we didn’t already know
that. “Going forward,” said the Fed, “the economy seems likely to expand at a moderate
pace.” So no news there then either.
What does all this mean? Many believe that the US rate of interest has peaked, and
no further rises are on the horizon. But Capital Economics has gone one better. “We still
anticipate that a much more substantial slowdown in GDP growth will force the Fed to
cut rates aggressively to 4.0% by the end of 2007 and probably further in 2008,” said the
esteemed economic consultancy.

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

Private equity firms are hungry. The buying habit seems
to be becoming frenzied, and what do the ads say you should do when you are feeling
peckish? Why they say “p p p pick up a Penguin,” and that’s what Blackstone and PAI
have done.

The two private equity firms are buying up United Biscuits - the company behind
McVities and Hula Hoops, Jacob’s Cream Crackers, Jaffa Cakes, Phileas Fogg, KP Nuts,
and, of course, the Penguin bar.

The company is number two in the European league of biscuit companies, with the
French company Danone holding number one slot.

In all, the deal is worth £1.6 billion, with PAI Partners upping their stake from 40 to
50 percent, and Blackstone taking the rest.

But “what about the pensioners?” say the Unions. “You Private equity firms just
worry about short-term deals.” Strangely, an opposite claim made by many says private
equity scores over stock market listings, because the management can focus on the long-
term and not see the company examined in minute detail by analysts every quarter.

Brian Revell, a spokesmen from the Transport and General Union, said: “Private
equity deals are invariably struck for quick returns for shareholders. But the TG’s
view is that the workforce and their pensions must be taken into account. That’s why we
believe there should be a cash injection to show this is not a quick-fix deal, but a longer
term investment.”

But United Biscuits retaliated with a spokesmen saying: “As part of the agreement
with our new shareholders, a significant lump sum payment will be made to the pension
plan and a commitment to an accelerated programme of contributions to cover the
remaining deficit has been agreed.”

But while the Unions might not be sweet on the deal, United Biscuit’s problem
moving forward is that it is too sweet. These days, the demand is for healthy snacks, and
“choccie” biscuits are not the rage any more. And for Blackstone and PAI, the challenge
must be to come up with healthy biscuits that sell in the kind of numbers its more well
known brands once enjoyed. A biscuit containing the elixir to eternal life, perhaps would
do the trick.

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

The big fear concerning the US economy relates to
house prices. The debate mirrors the arguments put forward in the UK a while ago: will
they crash, or will there be a soft landing? If they crash, a US recession could follow,
that’s how serious this is.

And now news out of the US reveals that over the last year, the median house prices
fell 2.2 percent. Two percentage points hardly makes a crash, but because this has been
recorded over a full year, many have been spooked. A drop over a month or two can be
explained away as a temporary blip, but a fall sustained over a year - and remember the
rate of interest was much lower at the beginning of this period - is much more serious. In
fact, it was the first annual fall seen in eleven years. And remember, a national average
does not tell the full story. In some regions, the reductions were more severe, perhaps
already at crash proportions.

Home sales are down Stateside too. Sales of existing homes in September fell at an
annualised rate of 6.18 million, from August’s 6.3 million.

Some good news was lurking in the report, however, there has been a reduction in the
number of buyers too.

Ultimately, in the US, as is the case with the UK, the market’s fate depends on how
willing home owners are to stay still. If they put any idea of moving on hold until the
cycle swings in their favour, a crash will probably be avoided. But, if the cost of
financing the mortgage forces then to downsize, as happened in the UK in the early ’90s,
then prices will tumble.

In the UK, a crash in house prices has been avoided because home owners have
stayed away. So that, after taking into account immigration, supply has been lower than
demand. But that doesn’t mean the cost of funding a mortgage isn’t worryingly high. It is.
And how long can people avoid moving?

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

Yesterday it was the FTSE’s turn. The Dow Jones
has been hitting new highs with such regularity, that it’s no longer news. The FTSE 100, on the other hand,
is still 715 points short of the all time high of 6930.2, set on the last day of the last
millennium, but it’s getting closer. Ten days ago it passed the five year market high, that
had previously been set in May, which meant it had recovered from the spring crash in
just a few months. Since then, it has risen a further 51 points. It’s not the heady stuff seen
in the US, where the Dow is now more than 400 points above the former all time high of
11722 set on January 14 2000 (and which had remained as an elusive record for over six
years until early October). Even so, it’s still a good run, and who knows, the FTSE could hit a record by the year’s end. But the question is this: when
the US economy is expected to slow, and when the UK economy is doing okay, but by no
means booming above trend, why are the markets so strong?

In part, of course it’s down to corporate results, which are doing very nicely. But
maybe there’s more.

In the long term, shouldn’t there be a relationship between a
company’s profitability and earnings and the rate of interest? Remember, the rate of
interest just offers a yield, say 5 percent. If a company is generating a profit in excess of
five percent of its market valuation (so that’s a pe ratio of 20), that company should
represent an attractive alternative to a cash investment. But take into account that you
would expect the profitability to grow each year - then the equity investment should win
hands down.

And yet, in recent years, while the rate of interest has been low (it’s still relatively
low in historical terms), pe ratios have been relatively low too. You would perhaps have
expected the opposite.

BDO Stoy Hayward produce some definitive data on historical pe ratios. And they
show that, in the second quarter of this year, the average pe ratio for a non financial
company, at 14.4, was the lowest level for at least nine years. (The data available doesn’t
go back any further).

The charting web site Trade 10 indicates that typical pe ratios for the Standard and
Poor 500 are at their lowest this decade.

Combine this with data showing that the money supply is growing, and perhaps you
can begin to understand why private equity acquisitions are all the rage.

And, as often as not, company acquisitions, whether they are private equity, or
corporate, such as the impending takeover of Corus by Indian company Tata, often
involve borrowing to fund the deal against the assets of the company they are buying. How can they
do this? Because the rate of interest, relative to the pe ratio, is low.

Maybe this, in part, builds upon the carry trade, which is based on the idea that the
excess liquidity sloshing around the economy at the moment has its routes in Japan,
where the rate of interest is much lower. So people borrow in Japan and lend elsewhere.

So, while company valuations are soaring, the pe ratios are not.

But take a different perspective and, instead of examining quoted companies, have a
look at unquoted businesses.

If you are looking to sell your company, you may be interested to know that typical
pe ratios for unquoted companies sold, is now approaching a record. According to BDO
Stoy Hayward, this ratio is now 14.4 - it has been higher, hitting 14.7 in 2000 - but, that
aside, it’s the highest level seen since 1997.

For further information

Private Equity Price IndexBDO Stiy Hayward

Price Earnings Ratio
Trade10.com

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

Are things NICE again. The four letters sum up one of the economic world’s most contrived acronyms, ‘non inflationary consistently expansionary’, and for the years of the Blair and Brown double act, and for that matter, for the latter years of the Major premiership, have summed up the UK economy.

But of late, this seemed to be changing. Inflation was building, just as growth was falling. It was like the bad old days, or to put it into terms that would make an acronym, ‘Corrections Recessions And Payback’.

But now, the ITEM club, from Ernst and Young, has presented its latest research into the economy, and it’s good news, twice over.

It’s predicting a rise in GDP growth to 2.9% next year and continuing into 2008, while CPI inflation falls back into line with the 2% target.

“The economy is being pushed along by buoyant money and credit conditions, which are stimulating property, equity and other asset markets. Increases in asset prices and transactions make people feel better off and stimulate earnings and employment in business and financial services”, says the ITEM club. Under normal conditions, this would also be a recipe for inflation. But not this time, theorises the report, because the strength in demand is being matched by supply, coming “both by higher participation and by immigration over the last two years.”

As for the rate of interest, it’s predicting that rates will hit 5 percent, but then just about every economist, and their dogs, expect this to happen next month anyway, but then, says the ITEM club, things are finely balanced and it’s not yet clear whether there will be further hikes.

If house price inflation accelerates, interest rates are likely to be increased further next year. On the other hand, if demand weakens next year, interest rates could be cut as the CPI falls.

The UK is producing below capacity, says the ITEM Club. Labour supply is up 1 percent, adding that to growth in productivity, then the UK should have been able to chug along at 2.75 to 3 percent over the last 12 months. But, in fact, growth fell to 1.9 percent, below par, and leaving output consistent with stable inflation.

But, it wasn’t all good news. August saw the biggest leap in the money supply since the early ’90s, with the M4 money supply accelerating to 13.7% in the year to August (up from 6.3% in August 2003). At the moment, economists are scratching their heads over this. The Bank of England is not sure why, but if the rise seen in August starts to become a trend, then prices will come under pressure.

But, while the bulls at the ITEM club make these nice forecasts, things are not so rosy, if you listen to the CBI in its latest Industrial Trends survey. Every month it asks manufacturers whether order books are up on last year. And over the last three months the balance between those saying it was up and those saying it was down was minus five. That’s worrying. But even more worrying has been how rapidly the monthly index has been declining, with October seeing the monthly index fall to minus 20, from just minus in September.

The CBI also reckons price pressures are building and warns that: “Firms are still hoping that they will be able to pass on some of their higher costs to UK customers next quarter - a balance of plus 12 expects average domestic prices to rise.”

The CBI puts the fall in its index down to the declining US economy - which is in extraordinary contrast to the buoyant markets stateside - see above.

For further information

Economic Outlook for BusinessITEM Club

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

Have you noticed how new media companies are looking at old fashioned business models? Google has been looking hard at harnessing traditional media as an advertising model. Carphone Warehouse’s big USP in the battle to dominate broadband comes in the shape of its High Street presence. And then there’s ‘3′. The mobile phone network company is strengthening its High Street muscle.

It’s taking over 95 stores from Link and 02. It’s a big ramp up for the company, since up to now it has had just 30 retail stores, although it does have 130 concessions.

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

What have the following dates got in common; 3rd, 4th 5th, 6th 10th, 12th, 13th, 16th, 18th, 20th 24th and last night the 25th October? Answer: each of these days saw the Dow Jones Industrial average close at a new all time high.

The index now stands at more than 400 points above the high set on January 14th 2000, which until the beginning of this month was the highest closing level ever recorded.

It’s a staggering performance by the Dow, especially in view of the expected economic slowdown in the US.

It’s been helped along by the falling price of oil, and by a growing consensus that the US slowdown will not be as bad as originally feared - although frankly, these more optimistic sentiments are still quite debatable.

But investors who fear the market is overheating should bear this in mind. Company valuation in proportion to profits projections are much lower today than back in 2000, when markets crashed. In fact company valuations relative to forward profit projections are at a ratio of just 15, compared to typical ‘PEs’ of 25 back in 2000.

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

It looks like the tide has changed for the oil companies. Yesterday BP revealed its third quarter results, and they appeared to indicate a company standing at the turning point in the oil cycle.

Profits were up by 58 percent, but only because of asset disposals. Strip these out of the equation, and it was a different story, with BP’s CEO Lord Browne saying: “The outlook is for a rather different set of market circumstances - a more difficult trading environment…no one should expect that the absolute levels of performance, which we have recently seen, will be sustained. ”

BP’s replacement profit actually came in at $7 billion, compared to just $4.4 billion in the same quarter last year. BP did not publish the underlying profit, and analysts were left to work that out for themselves. But the consensus was that the underlying figure was around $4.65 billion, less than the estimate for last year. BP’s profit attributable to shareholders came in at $6.23 million a tad lower than a year ago.

The company has been beset with problems. It’s still paying the cost of the 2005 hurricanes, which caused its Thunder Horse refinery platform to wilt, and as yet the cost of replacing some of the parts is still unknown.

Then there’s the corrosion of pipes in Prudhoe Bay, Alaska, which led to the company shutting down the eastern part of the field, costing 27,000 barrels per day, averaged over the quarter.

BP’s oil output is down too, with Lord Browne saying: “Shorter term, annual production for ‘06 is expected to average around 3.95 million barrels of oil equivalent per day, down from the level of 4.014 in ‘05″. He did say, however, that the company expected the price of oil to remain above $40 a barrel in the medium term.

What with allegations of improper trading in the US, and compensation claims relating to the Fire in Texas when 15 people died, it’s been a troubled few months for the company, and some say that with Lord Browne due to retire in 2008, it’s beginning to spoil his legacy.

But then there are pastures new. Lord Browne said: “In Solar, we commissioned the first 25-MW cell line expansion at our Madrid facility. In Wind, we concluded the Greenlight transaction that provided a 4500-MW development portfolio. In Hydrogen power, our joint venture with GE is starting to take shape. In gas-fired power, we began commercial operations at the second unit of our 1.1-GW K-Power combined cycle gas turbine project in South Korea, and broke ground on our 250-MW Texas City steam turbine project. ”

But what about Shell. Speculation is rife that BP and Royal Dutch Shell are planning to merge. And to that, the company’s CEO sounded a little like Francis Urquhart from the TV series House of cards when he said: “I am aware that many people are talking about it but I have no comment to make.” But then he waved a red flag to the bulls, when he said: “Even the biggest companies have small market shares. Looking at it from 50,000 feet you’d have to say there’s an awful lot of players dealing with very small pieces of an industry which probably in the fullness of time will change shape.”

For further information

BP Third Quarter 2006 ResultsBP

Lord Browne’s statementBP

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

We have said before how in the long term OPEC doesn’t want the price of oil to be too high. And the oil sands of Alberta Canada are a case in point.

There’s a lot of oil lurking in Alberta, perhaps more oil than has yet been discovered from the rest of the world put together. But it’s expensive stuff, and yet, according to Shell, as long as oil is over $30 a barrel, it’s viable.

More to the point, practise makes perfect, and as the oil companies develop the oil sands, the price of extracting it should start to fall.

In Canada, however, Royal Dutch Shell doesn’t own all of Shell. Twenty two percent of shareholders in the Canadian subsidiary are independent, but not for much longer.

The company is forking out £3.7 billion to buy then out.

But, is this a bet on oil sands, and an investment for the future? Or is it something else?

The Canadian subsidiary owns 60 percent of Athabasca Oil Sands, and it’s thought this field has the potential to produce half a million barrels a day. And remember, after the fiasco of two years ago, the company has a lot less oil than it used to say it had, and is busy trying to rebuild reserves.

There’s another theory doing the rounds, however. Is Shell tidying itself up, sorting out its shareholdings (remember the Dutch and British boards were united, only recently) in an attempt to make itself look attractive in the mergers and acquisitions market. Some speculate that Shell is in fact preparing for the day it can walk down the aisle with BP, with the two merged companies wallowing in oil sands and renewable forms of energy, as if it were confetti.