February 28, 2007 | posted by Michael Baxter in IABN | comments (0) |

Imagine the glee in the Branson household on Monday. Imagine the tension in the Murdoch abode.

On that day trade secretary, Alistair Darling gave out instructions to Ofcom, and the ramifications are potentially very far reaching indeed.

You may recall when NTL, which now trades under the name of Virgin Media and has enlisted the help of Uma Thurman to educate us, tried to buy ITV. BSkyB rather took the wind out of its sales, however, when it acquired a 19.7 percent stake in the UK’s biggest independent terrestrial TV broadcaster

Of course, content is all important these days for TV companies. And the Achilles heel of Virgin Media is content. The purchase of ITV would have represented an obvious answer.

It goes without saying that the BSkyB purchase left Branson hopping mad. And you can see why.

Since then a row has broken out over broadcasting Sky channels over the Virgin Media network. Maybe if Virgin had owned ITV, it would be a different story.

Never mind. Now Mr Darling has asked the industry’s regulator, to investigate whether the share purchase “raises public interest concerns about the number of different owners of media enterprises”.

February 28, 2007 | posted by Michael Baxter in IABN | comments (0) |

While the falls in London were far more modest than those seen in the US yesterday - the FTSE 100 fell by 148 points - it’s worth remembering it hadn’t risen so high in the first place.

Still, London’s biggest index is well down on the dizzy heights seen on the last day of 1999, when it closed at 6930 - now 643 points higher than yesterday.

On the other hand, the FTSE 100 is still 65 points up on the start of year position.

Two more points to bear in mind, however.

Firstly, Alan Greenspan’s comments came too late to affect the UK market, but, on the plus side, valuation to profits are still modest by historical standards.

Compare the FTSE 100’s problems with the woes of the NASDAQ, however, and it feels like London is merely suffering from the slightest of hangovers, easily cured by a couple of paracetamols, while the US technology biased index languishes with its king-sized migraine.

The NASDAQ hit a score of 5132 on March 10 2000. After yesterday’s 96 point fall, the index was standing at just 2407.

It is worth remembering, at this point, that after the Wall Street crash of 1929, it took markets 25 years to fully recover.

Have we enjoyed a three year bull run, that has just taken a knock, or was the last three years little more than a short term recovery - a blip - in the first great bear run of the millennium.

February 28, 2007 | posted by Michael Baxter in IABN | comments (0) |

Time was when former Fed chairman Alan Greenspan worried about the markets. He warned of irrational exuberance, and then the wild rises of the late’ 90s would sometimes reverse, while his thoughts were digested. Then, after a day or two, sometimes after a few hours, it was business as usual, and the party atmosphere continued.

But, it appears Mr Greenspan became a convert to the cause; his warnings of doom became less frequent, and, as the phrase, “it’s a new paradigm now” was used more and more to explain it all, Mr Greenspan said little to contradict the optimism. Meanwhile, others, argued that the internet, and low rate of interest had created a new environment in which higher share prices were justified.

Of course the argument was wrong. The rate of interest argument is only valid if real rates are lower. If that is the case higher shares prices are justified because the relationship between valuation and profits reflects the fact that the bond markets offers less return on capital. But, if rates are low because inflation is low, then it’s a different story. And markets seemed to overlook this fact.

Despite this, Mr Greenspan kept his sage-like veneer, and, today, when he speaks, the world listens.

And yesterday he spoke. He warned that the US could fall into recession by the end of 2007, and, on the day markets crashed in the east, buyers became sellers, the bulls turned tail like horned beasts retreating from the china shop of exuberance, leaving a battered market in their wake.

In fact, the Dow Industrial Average fell by 416 points - the biggest daily fall since markets returned to work after the events of September 11 2001. It was the seventh worst day ever recorded, although, at one point, things were even worse. The Dow staged an end of day comeback.

The losses comfortably wiped all of the year’s gain, in one day. The index started the year with an all time high, and by last week was 323 points up on the start of year opening position.

But, so far, the Dow is still way above the level seen on December 14 2000, when it peaked at 11722. That is 494 points below yesterday’s closing point. The index passed the December 14 milestone again last Autumn.

February 28, 2007 | posted by Michael Baxter in IABN | comments (0) |

History tells there have been two types of bubble. There’s the bubble when madness and greed beget a child. And then there’s that which is born of reason, but finds itself adopted by the parents of its more insidious rival.

The South Sea and Tulip bubbles of bygone years clearly fall into the former category. The 1929 crash, which was followed by a very nasty economic depression in the US, did at least start from a level of rationality. The decade that preceded that dark period did see remarkable advances in manufacturing - not to mention the revolution that was the motor car - but too much hope, too much expectation, and too much irrationality created an economy that had grown at an unsustainable rate, and a stock market that exceeded any kind of rational expectation.

Then there was the dot.com bubble. Again, there was some reason behind the madness. Recent experience has, after all, shown the internet could indeed change the world. It’s just that when greed and madness get hold of a good idea, it can be twisted and pulled into a shape that is unrecognisable from reality - often tarnishing the good ideas and the business plans that really were well thought through and perfect for exploiting the new medium. It left only the inspired, such as the people who chose to back Google during this chaotic era, seeing the reason behind the insanity.

But then you have falls that turn out not to be a bursting bubble at all. They are merely corrections. Maybe the stock market crash of 1987 was such an animal; after all, it took very little time before indices were once again passing the ‘87 peaks

The question then is this: which one did we see yesterday? And who knows, by the time you read this, which one are we seeing today?

Maybe the answer is both.

Maybe in China we are seeing a correction. The economy has grown at an unprecedented rate, but (assuming US paranoia does not enforce a period of self-destructive barriers to trade, throwing the world into recession), this is set to continue - albeit at a less exponential rate. Yesterday’s falls were little more than the market seeing reason creep in, and an adjustment as markets discount some of the overexcitement.

But remember, the Chinese stock market is tiny in comparison to the markets in the US, Japan, and UK. It’s a minnow. In such small markets volatility is often much greater, and both swings up and down can be more dramatic than usual.

Is it really rational for the giant markets of the US, UK and Japan to react the way they did yesterday, just because China saw a correction?

The danger is this: while China sees little more than a correction, in the west we are witnessing the beginning of a bursting of a very unpleasant bubble indeed.

This bubble is a cousin to the dot.com and stock market crash seen earlier this decade, but its parents are not the same.

This bubble was created as central banks across the globe reacted to the troubles of irrational exuberant ’90s buying, of fear created by 9/11, and the paranoia of financial scandals that brought down Enron and Worldcom, by pumping money into the world, and by slashing the rate of interest.

And thanks to China, the internet, and all the other forces of globalisation creating a deflationary environment, we were lulled into a false sense of security. Growth followed expansionary monetary policy as surely as day follows night, but inflation stayed coiled up in its prison, under the watchful eyes of wardens Eddie George and Alan Greenspan, and then Mervyn King and Ben Bernanke.

But if the economy is a vessel brimming over with liquid iron pyrites, and globalisation stops it from leaking out at the obvious point, it has to give somewhere else.

The danger is that in the US, yesterday, that’s what we started to witness. Could it be, that is when the great asset bubble of the noughties finally began to burst.

This analysis may, of course, be wrong. But, as we warned yesterday, as we live longer and the birth rate falls, coupled with the fact that pension funds no longer enjoy the meteoric growth they once did, we sit on a pension time bomb, ticking ever louder in our ears like an iPod playing the tune of no hope.

To counteract this impending disaster, we need to download the saving song. But then it’s been consumption, and the reckless buying of US and UK citizens and governments, while the relatively high rate of interest kept the dollar and pound too high and created massive balance of trade deficits, that has propped up the global economy in recent years.

Can we really solve the deeper underlying problem without causing a major global slowdown?

That brings us back to China. Our big hope lies beyond the Great Wall. Maybe the growth in developing economies can bail us out. And yet US senators look behind their shoulders at this growing economic power and see threat and menace, and the need to protect their local business.

Do you see why we fear that yesterday’s crashes in the US could spell so much more than just the whisper of a Chinese correction?

February 27, 2007 | posted by Michael Baxter in IABN | comments (0) |

Price, as you know, is determined by supply and demand. And that brings us to house prices.

These days prices are so high, that things for the first time buyer are nigh on impossible, and it seems hard to believe price can go on defying gravity forever.

But supposing supply is even lower, that the level of housing stock means supply still struggles to meet demand. Under those circumstances, price, of course, goes up.

Now, Kate Barker, she of the Bank of England Monetary Policy Committee member, not to mention guru on the UK’s shortage of housing - has spoken again.

In an interview with Bloomberg, she said: “The fundamental problem of housing supply will indeed take a long time to solve. It’s unlikely we will see it solved in the southeast.”

Ms Barker said: “We are going to have to think hard about the planning system. We all feel very crowded today, and one reason might be that we have built within urban boundaries. We’ve also been tending to live in places where the space is smaller than it used to be because of expensive land.”

February 27, 2007 | posted by Michael Baxter in IABN | comments (0) |

Fifty years. That’s a long time. No doubt, just like the writer of this article, it will see you through to your 71st birthday. By then, China will probably be the richest country in the world, India might well be second, and we will know the truth about global warming. Maybe by then we will be sunning it in Greenland, and swimming in the sea off the shores of the Alps. By then, the latest corporate bond, announced yesterday, and fully subscribed within a few hours, will have expired.

These days Tesco has an A star credit rating from Standard and Poor, while pension companies are keen to purchase assets that match their long-term liabilities. Put that together and what do you get? Answer: a 50-year bond, carrying a coupon of 5.2 percent, from the UK’s largest supermarket.

Tesco is raising around £500 million through the bond, and the proceeds will be used to re-finance existing debt.

It was 1994 the last time the UK saw the release of a 50-year bond, when British Gas employed a similar approach.

Actually, it seems to us that such an investment is actually quite risky. Aside from the argument that no one knows what the world will be like in 2057, speculating on which way the rate of interest will go between now and then is anyone’s guess.

February 27, 2007 | posted by Michael Baxter in IABN | comments (0) |

If it’s produced in China or subject to the forces of global competition, then it would appear that price pressure is forcing the bottom line downwards. If it’s a service, especially with a distinctly local feel, then inflation still hovers and threatens and bullies us.

Take Council Tax, as an example. According to the Times, a survey of more than 200 authorities has revealed that the average bill is likely to rise by 3.8 percent this year.

But the Times tells us that, in fact, this represents the lowest annual rise since Labour came to power, and that next year it’s likely to see a bigger jump.

Meanwhile, here is some news to shake you up.

Apparently, some people, who wish to communicate with others, do a rather strange thing. They print out their communication, or - even more oddly - on occasion actually hand write it using an implement called a pen. They then put the resulting parchment in a flat paper bag, which they seal using saliva from their tongue. They then place a picture of the queen on this bag, and put it inside a red box.

And now, these unfortunately afflicted individuals are going to have to pay more for their trouble. According to the FT, the Royal Mail wants to up the price of first and second class stamps by 6p.

The FT quoted Adam Crozier, Royal Mail’s chief executive, as saying its “rivals are cream skimming all the profitable mail”, and the changes are required to enable the Royal Mail to be able to compete.

Of course, greater competition is supposed to mean lower prices, but you can see where Mr Crozier is coming from. The Royal Mail has to provide the same service to everyone, regardless of where they are based.

February 27, 2007 | posted by Michael Baxter in IABN | comments (0) |

Oil found itself all the way back up at $61#43; a barrel over the weekend.

Black gold has now fully regained the price losses seen during the first few weeks of this year.

Bad weather was the cause. With the Midwest knee deep in the white flaky stuff, Americans turned up their heating, and more of the black runny stuff was turned into carbon dioxide.

At $61.51, at the time of writing, oil is still $18 below the peak of last summer.

In terms of oil’s effect on inflation, it should be remembered that inflation is down to rising prices, not high prices. The fact that oil is well below the peak of eight months ago means that it is currently exerting a downward effect on inflation.

In the longer term, however, we have always questioned whether the rising price of oil was inflationary anyway. One-off price hikes do not usually lead to inflation, and since oil is a product we all use, it could be argued that the high price of oil was having a deflationary effect on the economy because it was making us feel worse off.

February 27, 2007 | posted by Michael Baxter in IABN | comments (0) |

The pension deficit for all FTSE 100 companies has now fallen to the lowest level ever recorded, says Watson Wyatt, but, alas, the surging stock market isn’t helping workers’ pay packets. According to research from AON Consulting, employers are squeezing employees’ wages in order to fund final salary pension schemes.

Mind you, the finding of the latest research from AON might not be palatable, but it’s hardly surprising.

Apparently, 49 percent of companies surveyed feel that the increased costs of funding their defined benefit pension scheme has impacted negatively on the remuneration packages their company is able to offer. Almost the same number (48 percent) feel that this will continue to be the case in the future.

Or, to put it another way, we sit on a pension time bomb in the UK, and now AON has found that, in order to fight this bomb and mitigate its impact, we are going to have to fork out. Strange, we thought the solution to the pension crisis lay with a deft swing of the economic magic wand.

And yet it’s not all doom and gloom. Maybe the magic wand has been working after all.

Private equity companies, those bogey men of the modern world, may not have endeared themselves to unions, but they have helped ensure the continuation of the stock market bull run, and, with that, pension deficits have plummeted.

According to Watson Wyatt, the combined pension deficit for all FTSE 100 companies is now £31.8 billion, compared to £90 billion in March 2003.

But don’t get too excited about the news “it’s the lowest deficit ever recorded”. The FRS17 accounting standard, which brought with it harsh new rules for solvency, was introduced in 2002. Records only go back to the inception of this new standard - not very far - and 2002 fell into that rather nasty and protracted bear market,- so it’s hardly surprising the deficit has improved.

The higher rate of interest has helped too. It may seem back to front, but actually, when you think about it, it all makes total sense. The higher rate of interest might be bad news for economic growth and corporate profitability - not that either have suffered much of late - but it is good news for savers and pension companies.

As Stephen Yeo, senior consultant at Watson Wyatt, put it: “Accounting standards require that all the liabilities are valued using bond yields, so deficits are particularly sensitive to them. Although low long-term interest rates are good news for borrowers, they increase the value of pension liabilities for accounting purposes. If recent rises mark a return to the higher yields that used to prevail that will be good news for companies operating defined benefit pension schemes and their members.”

So, for your typical employee it’s all rather mixed. The pension deficit is improving - yippee - but this is, in part, down to the higher rate of interest - groan - and in any case, employers are making you pay more for your pension.

But there’s room for one more cheer. Lurking within the news that employers are making their staff pay more for their pensions shines a bright new star. Apparently, things are getting better. Back in 2006, 50 percent of companies were concerned that the increased cost of funding their defined benefit scheme was already negatively affecting their ability to compete effectively, but, today, that percentage figure has dropped to 31.

But Paul McGlone, principal and senior actuary at Aon Consulting, stuck a down note when he said of his company’s findings: “Based on the survey results, the message from the employers seems to be that the cost of pension deficits is most likely to be met by changes to employee remuneration, with customers being hit second, and shareholders suffering least from the pension debts. It is logical that companies will take this approach given that employees are the ones who will benefit from the pension scheme. However it will still grate with some employees and unions.”

Actually, moving forward, the government faces a huge dilemma. In order to fight the impending pension crisis, we all need to save more. But it’s been low saving and high spending that has kept the good ship UK plc speeding so fast of late. How can the UK possibly initiate the greater saving so desperately required, without hitting that iceberg out there on the horizon?

For further information

to view a chart plotting the improving deficit since 2002 click hereWatson Wyatt

February 26, 2007 | posted by Michael Baxter in IABN | comments (0) |

Here’s an idea to help make an unpopular cause a hit.

As a general rule of thumb, it would appear that those who worry about the environment often tend to be the most anti private equity.

But, supposing the private equity brigade embrace the green agenda; supposing they become eco warriors.

In the furore over private equity, it is often overlooked that one of the oldest criticisms of stock markets - one often made by trade unions - is that share holders force companies to focus on the short term.

Too much emphasis is placed on quarterly reporting, they say.

Google endeared itself to many, with its “do no evil slogan” and refusal to make revenue and profit projections.

Ironically, though, there are similarities between the thinking behind Google, the strategy that makes it so popular with investors who like to think of themselves as ethical, and private equity.

And, then there’s the environment. You don’t get much more long term than fighting against global warming. It’s a miracle quoted companies pay it any heed at all.

But now, Kohlberg Kravis Roberts and Texas Pacific, the two US private equity giants looking to buy Texas based energy company TXU, in what would be the biggest private equity deal ever, have waved the green flag.

The talk is that the two private equity companies have been courting the green lobby, and plan to withdraw plans for TXU to build pulverized coal plants in Texas.

All of a sudden, private equity threatens to be the hero of the planet, and in doing so, will have scored a major PR coup in the battle against the antis.