December 19, 2006 | posted by Michael Baxter in IABN | comments (0) |

1929 wasn’t a good year for the global economy, and it was especially tough on the US. This morning we have noticed two different theories emerge, looking at the economy from quite different perspectives, but both drawing parallels with that awful year.

First there’s US corporate profits. Recently Fortune Magazine’s Justin Fox wrote one of those seminal articles - which seems to have set alight a blog fire- where an increasing number of web sites have suddenly leapt on the article to proclaim economic doom.

Mr Fox’s article revealed disturbing news, like a black hole, when all around are shining stars of economic promise.

The US markets are soaring, the Dow Jones Industrial Average has been breaking all time records with such regularity that it’s no longer making headlines. The NASDAQ has passed its five and a half year high, but can it continue? Supporters of theories of economic gravity think it must end - saying the rises can’t go on forever. The counter argument is many fold, and has been rehearsed here many times. But here are two key reasons why markets may continue to boom. Firstly, gravity is not as yet stretched - don’t forget we are only seeing the Dow hit levels, which are around 700 points or so up on the highs reached on January 14 2000. In percentage terms, that’s a tiny increase of around 5.8 percent, so compare today’s levels with the scores seen in the late ’90s and early few weeks of this millennium, then the rises have hardly been the stuff of gravity defying leaps.

Then there’s the ratio between profitability and valuation. Forward pe ratios, are, so it is understood, around their lowest levels seen this decade. So despite the big jump in equities seen since markets hit their lows three years ago, market valuations as a function of projected profitability are quite modest.

Bear in mind the rate of interest is, in historical terms, quite modest. If rates are low, you would have thought pe ratios would be high, - after all, the ratio of profitability to valuation should really be to the equity investor what the rate of interest is to a bond investor. Since equity investment and bond investment are in competition, the current phenomenon of low pe ratios is at odds with the continued economic environment of a low rate of interest.

But, according to Justin Fox, corporate profits (that’s after paying tax) are now running at 10.1 percent of US GDP. The ratio has never been so high - at least Commerce Department’s data, which goes back 87 years, have never recorded it so high. But it did come close to the current level once before; back in 1929 the ratio of profits to GDP hit 8.9 percent.

Quite ironic that, when you think about it. Corporate profits rise - suggesting healthy economic fundamentals, and fears grow of a 1929 style depression.

The other theory doing the rounds at the moment lies in the idea of peak debt. If you were to track debt as a percentage of GDP, you would see extraordinary rises over the last decade or so. If you believe that this has to come to an end, and US consumers are going to have to cut debt and save more, then we are approaching a peak. According to blog producer, Jas Jain, who describes himself as the prophet of doom, the last time we saw peak debt was in 1929.

But, we don’t want to leave these nasty parallels with 1929 in your heads over the Christmas period.

Even if there is a lot of truth in these miserable comparisons, it is worth recalling that there is one big difference today. Back in 1929, not only was the US the world’s biggest economy, in a way it was a developing economy too. The US was also the engine of global growth.

Today, the global economy seems to rotate around many axis, and the emergence of China, and in its wake India, as global economic powers, could mean that this time it’s different, and that factors that in the past spelt disaster ahead, may only have a muted effect this time.

Bear in mind also, that technology has helped promote a productivity boom of unprecedented proportions. This, in part, helps explain the high level of profitability, while high debt is perhaps more manageable given relatively modest interest rates.

For further information

More cream for the fat cats
CNNMoney

Peak DebtThe Market Oracle

December 18, 2006 | posted by Michael Baxter in IABN | comments (0) |

Our Gordon is good with statistics. They say there’s lies, damned lies and statistics, and it does sometimes feel as if the greatest number manipulator of them all is Mr Brown. You know the golden rules will never be broken, because if things look tight, the rules will be changed - but in a way which suggests we all misunderstood them in the first place.

Then there’s economic growth - Treasury forecasts seem to come under criticism from a bewildering array of economists, think tanks and analysts.

But, Mr Brown hides behind complexity - to show that actually he was right all along.

But, now it’s different. Apparently, the Bank of England, which uses Treasury forecasts when making its rate of interest judgements, is finding the data unreliable. At least that’s what the House of Lords Economic Affairs Committee has said. It reckons growth forecasts have been too optimistic, making the Bank of England’s task even harder than it should be.

But The Treasury has its rebuff. “Fiscal and economic forecasting is complex” it said.

Strange, we thought Gordon was good with complex.

December 18, 2006 | posted by Michael Baxter in IABN | comments (0) |

Have you taken a look at the Nintendo Wii yet? It’s big USP is its games controller. It can simulate a tennis racket, table tennis bat, sword, golf club, or any number of sharp and blunt implements via a wrist strap which connects to the controller. Only time will tell whether this is a gimmick, or a genuinely new innovation, that will make video games seem more real than ever.

The Wii is not available over here yet- but already there’s a snag, and Nintendo has had to offer to swap 3.2 million straps for a new stronger variety. Apparently, it’s not just the straps that have been breaking; there has even been damage to TVs caused by flying straps.
We are sure this is a just a temporary blip. But if this controller really does take hold, we wonder if this is a USP that will be specific to Nintendo for a limited period of time. There are a mass of companies based in the Far East who produce games controllers, and its seems inevitable that other products, using different technology so they get around Nintendo patents, but offering similar game interaction, will soon find their way to market, enabling PC, PlayStation and Xbox owners to have a similar experience.

December 18, 2006 | posted by Michael Baxter in IABN | comments (0) |

Meanwhile, while some fret over the future of AIM, the market formally known as Ofex, has been making waves. Next year will see the introduction of the Markets in Financial Instruments Directive - also rather catchily known as MiFID. This is the directive that will permit trades independent of a stock exchange. So, for example, Peter sells his shares in an LSE listed company to Paul, and the trade is not shown up on the London Stock Exchange. To an extent this already happens, if both Peter and Paul use the same bank, then the trade could be conducted “off book” with the stock exchange none the wiser. But the new directive could take this practice to its logical conclusion.

This directive is causing something of a hoohah. Recently, seven investment banks announced plans to offer an alternative trading platform to the existing stock exchanges, and ICAP (the world’s number one interdealer broker) has been making noises in that direction too.
Now it’s the turn of Plus Markets, the exchange that emerged like a phoenix from Ofex.
As it prepares for MiFID, it has announced plans to raise £25m in what some press are hailing as an attempt to create a genuine rival to the LSE. It has taken on two new directors too, former deputy chairman of the LSE, Ian Salter, and Giles Vardy, the man behind LSE’s SETS electronic trading system. There’s a plan to use the platform to offer the chance to trade shares in FTSE 100 and 250 companies too.

Ironically, the company is gunning for a listing on the LSE .
MiFID does not mean companies won’t be so keen to have a listing on the LSE, or another major European stock exchange, rather it could mean the shares will be traded independently of the exchange, and in the process dramatically undermine the LSE, as well as Euronext and Deutsche B#246;rse business models.
At this point it might be worth reminding ourselves of the comments made by Suzanne Dence of the IBM Institute for Business Value. She said: “The big question is not which exchanges are going to win or where these exchanges will be based. The real question is what will exchanges look like in 10 years’ time and will there be any need for them at all. While exchanges provide a level of unique value in providing surety about the counterpart that you are dealing with, much of the rest of their service is little more than a glorified Ebay.”

December 18, 2006 | posted by Michael Baxter in IABN | comments (0) |

London Stock Exchange Chief Executive, Clara Furse, seems to be one of those people with a press induced suffix. Like the person who occupies the position of director general at the CBI, whether it be Sir Digby Jones or Richard Lambert, the press always seems to prefix the word ‘furious’. For example a furious Sir Digby Jones said….Ms Furse seems to have a similar fate, it’s just that in her case the word is formidable… It’s not uncommon for the UK press to apply such titles to female bosses - but in the case of Ms Furse, she will need all of her formidability over the coming weeks.

The NASDAQ is closing in; it already has a 28.75 percent stake in the LSE, and now says it only wants to up its share to 51percent - see Wednesday’s story. So with the US exchange so close to victory, it’s been revealed that there will apparently be no job for the formidable one. In a recent filing, a NASDAQ statement said: “Nasdaq will seek the participation of existing members of the LSE board, in particular the LSE chairman, on the new independent LSE board. In any event, Nasdaq is confident that it can recruit appropriate individuals to form the remainder of the independent LSE board.” And that had the warning bells ringing, why did a statement that was so specific fail to mention Ms Furse? There can only be one explanation.

You can see why the NASDAQ is so keen to grab itself a slice of London’s zone of Sarbanes Oxley free trading. According to a report published this morning by Ernst and Young, the London Stock Exchange accounted for 15 percent of all IPOs across the globe so far this year. Only Hong Kong performed better than that. And of the top ten IPOs seen in 2006, three were in London. Yet, the US could only manage one, that was MasterCard, languishing in eighth place- and that wasn’t the NASDAQ - rather it was listed on the rival Dow Jones.

But if NASDAQ is successful, it has been speculated that we could see an end to AIM. Perhaps the AIM market is overtly competitive with areas of the NASDAQ and, or so it is understood, AIM is not an especially profitable area for its parent company.

More bad news came for AIM yesterday, with a story in yesterday’s Sunday Telegraph, quoting a letter from Simon Littlewood of London Asia Capital, that said: “AIM is trying to become an international market on the cheap, with advisers happy to charge inflated fees for a listing but not willing to invest in the infrastructure required to ensure investors’ money is protected.”

Yet, the same newspaper also told us more than 20 Indian firms are expected to float on AIM next year, raising £2.5 billion.

The AIM market might not be as profitable as its bigger sister, - but, for the LSE it could be useful for spotting talent, and getting this future potential under the wing. Companies from the likes of Russia and India may have been using it as a cheap way to raise money, but in the long run, some of these companies may well be promoted to the ranks of London’s great and good, with main listings. Any whiff that a NASDAQ bid could spell curtains for this market is potentially very serious.

December 18, 2006 | posted by Michael Baxter in IABN | comments (0) |

Crack open the vintage champagne, Uncle Sam is back. The tail end of last week saw good news on the US economy come in bucket loads. First there were the markets, with the Dow Jones Industrial Average finishing at an all time end of day high on both Thursday and Friday. The NASDAQ came within a whisker of hitting its five and half year record, while US consumers went out and spent, with November seeing a 0.9 percent rise in core retail sales- that’s excluding gasoline and autos. But the real good news came from the US Labour Department. - It would appear US inflation is dead. Both the CPI index, and the underlying core rate of inflation were zero in November. At last that nasty beast called inflation seems to have been defeated. But, what’s this? While the economic bubbles fizz up the US inflation flute to the surface, some economists still seem to be practising their dismal science over half empty glasses, sipping at luke warm cheap plonk. It appears that despite the headline grabbing nature of all that good news- there’s still plenty of reason to worry.

First of all there’s the pick up in retail sales. November was a good month relative to the previous two, - but then again, September and October were real dog’s dinners of economic months. So, in rising, November was merely making up for the two months just gone. In fact we have just witnessed big falls in the price of gas - so that should make consumers feel better off; while in tandem, price discounting in retail land meant a plethora of bargains out there. Many argue that given these benign conditions, we should actually have seen a much higher rise in sales.

Then, there’s the troubled US housing market. November saw promising news here too, with weekly mortgage applications soaring. But alas, the consensus seems to be that this was a one-off, caused as much by the quirks of statistical timing as anything. Assuming that this late autumn surge was a one-off, and things will soon be back to their sliding trend again, then one would expect a major cut back in expenditure to follow some time later. As Paul Ashworth of Capital Economics put it: “Unlike stock prices, house prices are not listed daily in newspapers…It takes time for homeowners to recognize that the value of their asset has changed.” Looked at in reverse, if house prices rise in value, owners will convert some of this extra net wealth into liquid assets, but only after a significant time lag. So, while it is tempting to proclaim the US has shaken off the effects of a weak housing market and gone out and spent, the timing is all wrong. According to The National Association of Realtors, the October median price of existing US homes saw its biggest monthly fall ever recorded. But, the impact on retail sales is not likely to be felt until several months into next year.

It also appears that much of the recent price discounting is temporary - and just as the special offers come to an end it appears the cost of fuel is going back up again - so shoppers are likely to soon release their feet from the spending gas.

Then there’s inflation: It’s not unusual for the US monthly CPI index to go to zero, or even hit negative territory. It’s a notoriously volatile index- but it’s a lot more unusual for the core rate- that’s with food and energy taken out, to be flat. The fear, however, is that it’s improvement has been temporary, caused by price discounting and special offers. If these fears are well founded, then inflation will soon start to pick up again.

Now we must wait until the New Year before we can ascertain whether the recent good news is just a blip on the economic landscape, or whether we are witnessing something more permanent. And right now- we can’t tell whether our crystal ball is half full or half empty; it’s far to murky to see.

December 15, 2006 | posted by Michael Baxter in IABN | comments (0) |

Consultants- well we won’t knock them too much - after all you may be one; but according to the latest data from the National Audit Office, central government spent around £1.8 billion on consultancy in 2005-06, with total public sector spending on consultants estimated at around £2.8 billion for 2005-06.

Actually, the year saw a slight decrease in spending on consutlants by central government, but then again, spending on these venerable people across the public sector has risen by 33 per cent between 2003-04 and 2005-06, largely because of increased spending in the NHS. Over the past three years, two of the services most consistently bought in by central government have been programme and project management and IT.
Are these consultants working for the government? The National Audit report certainly thinks it could do better, and said government departments rarely make a proper assessment of whether internal resources could have been used instead of consultants. It also said that for the most part, departments don’t collect adequate information on their use of consultants, such as performance reviews, to improve their buying decisions and understand better the benefits they bring. They don’t usualy actively engage with key consulting firms to understand how they work; and neither do they regularly plan for and carry out the transfer of skills from consultants to internal staff to build internal capabilities.

December 15, 2006 | posted by Michael Baxter in IABN | comments (0) |

Surprisingly good news from the High Street came yesterday, as the Office of National Statistics revealed a year on year rise in sales of 3.2 percent. The data was at odds with figures from the CBI and the British Retail Consortium.

In part - the explanation for this lies with the internet. ONS figures include online sales- while surveys from BRC, the CBI and Footfall indexes don’t.

But, the data has more surprising news, which is not so easily explained away. Despite reports, and indeed the evidence of our own eyes, on store discounting, the ONS had annual retail price inflation rising 0.3 percent from 0.1 percent in October

December 15, 2006 | posted by Michael Baxter in IABN | comments (0) |

BT made markets sit up yesterday, after it announced that its retail division is expecting profits to be three times higher than previously thought. It also reckons 2007 will continue the revival.
Recently, the former state monopoly announced a string of deals for its new TV service, including premiership football coverage. Earlier this month it announced a deal with Setanta to show live FA Premiership football from next season. The company says that in combination with BT’s existing FA Premiership rights, the deal means that BT Vision customers can watch three quarters of all next season’s Premiership matches in full.

December 15, 2006 | posted by Michael Baxter in IABN | comments (0) |

As the New Year beckons, the Dow Jones presented traders with an early Christmas present last night, with the Dow Jones Industrial Average closing at 12,416.76, a new all time high.

The index finished the day 99.26 points, or 0.8 percent up. It was 74 points up on the previous high set on the 1st November, an impressive 69 points up on the high set on January 14th 2000, and more than 1500 points up on the start of year level.

Good news from the banking and technology sector, plus news that US unemployment figures had improved, were behind today’s rises.

But the December party on Wall Street was not quite so joyous when applied to the NASDAQ. It finished the day 12 points below its 2006 peak, but given the NASDAQ once stood at 5132 (that was back on March 10th 2000), it isn’t even half the all time high level.

Then there’s the FTSE 100. - While the Dow has been busy setting new records- the FTSE 100 still languishes way behind the record it set on the last day of the last millennium. Back then the index closed at 6930. In the Autumn, when it passed its five and half year high, it seemed as if the index could rise, phoenix like, past that record set during the heady days of the dot com boom. But instead, since then it’s been rather dull. Sure, last night’s close was only little more than 20 points short of the year high set in late November, but it remains 702 points below that 2000 record.

Alas, unless Santa can bring London’s traders a present to remember for years- it seems inevitable that the time frame between record highs will stretch beyond seven years.

Can 2007 do better?