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

Read the press, and you could be forgiven for believing all is woe in the US. But take a look at the consumer confidence figures from the Conference Board, and quite a different story is told.

With markets sliding, and the sub-prime mortgage crisis threatening to overspill, US consumer confidence fell in March.

According to the Conference Board, its main index dropped to 107.2, from 111.2 in February.

This is no surprise. If US consumer confidence hadn’t fallen, then something very strange must have been going on.

Well, maybe something strange has been going on anyway.

Sure the index was down, but then February saw a five year high, and even after the big fall reported yesterday, it still stands near the top of the range seen over the last few years.

Cast your mind back to the beginning of this year. Many feared the US was in danger of hitting recession, even the optimistic were predicting a sharp slowdown, and although the sub-prime crisis had not emerged, many talked about serious problems ahead for the US housing market. Add to that the record levels of consumer and government debt, and the massive US balance of trade deficit.

Yet, what does consumer confidence do? It hits a five year high.

Then, in March, despite the market turmoil and sub-prime woes, it falls back slightly.

What was that we said earlier about a hint of madness creeping in?

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

So what do you think of as poverty? No doubt you conjure up images of Africa, of starving children, flies circulating around emaciated individuals too tired to swat them away.

But that is absolute poverty. There is such a thing as relative poverty too. What do we mean by relative poverty? Well here is one commonly used definition:

Put all the households from end to end in order of income, and smack bang in the middle you have the median. Relative poverty applies to any household whose income per head is less than 60 percent of the median per head.

And, according to the Institute of Fiscal Studies (IFS), in the year 2005/06 relative poverty rose across the whole population for the first time since Labour came to power, while child poverty also rose for the first time in six years.

Why is that? Apparently, the year in question saw a relatively small rise in benefit and tax credit payments. The IFS says that: “increases were also relatively modest in 2006/07 and are set to be so again in 2007/08, suggesting that poverty may get worse before it gets better.”

The IFS said: “The number of people in poverty AHC (After Housing Costs) rose from 12.1m in 2004/05 to 12.7 million in 2005/06…This is the first such increase since 1996/97.

“The number of people in poverty BHC (Before Housing Costs) rose from 10.0 million in 2004/05 to 10.4 million in 2005/06…This is the first such increase since 1997/98.”

According to IFS, by 2010/11 the government wants to cut child poverty before housing costs to half the level in 1998/99. But “having cut child poverty by less than 100,000 a year in the first seven years, it now needs to cut it by more than 200,000 a year over the next five to meet the target. The measures announced in last week’s Budget were probably sufficient to lift 200,000 children out of poverty, but on existing policies it is still likely to fall 800,000 short of the target in 2010/11.” IFS estimates: “that the Government would have to spend a further £4 billion on help for poorer families by 2010/11 to have a 50/50 chance of success.”

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

Is that a hint of madness creeping in? Yesterday saw the emergence of five different stories relating to the UK and US property markets, and they run the full gamut of extraordinary growth to disaster in the making, with a great deal of scepticism in between. But, or so it feels, maybe lurking beneath the surface is a market going mad.

Let’s get the extraordinary growth bit out of the way first. According to estate agent Savills, luxury homes in London are set to rise by another 20 percent this year. This follows a 27.6 percent rise over the 12 months to the first quarter of this year. Harriet Black, an associate director of research at Savills, said: “There is no end in sight for the supply-demand mismatch that drives the market.” She added: “In many people’s eyes, London has taken over from New York as the address of choice. The vibrant, cosmopolitan environment is attracting people from all over the world.”

So, if your name is Roman Abramovich or Lakshmi Mittal , what’s few million pounds? After all, you can settle into a new London pad for less than it would cost to buy a football player, or a blast furnace.

But what about your Mr and Mrs Joe Average. Surely, this couple is not immune to the recent rises in the rate of interest. At last evidence is mounting to suggest the property market, outside the bubble that is Chelsea and Notting Hill and similar neighbourhoods, is slowing. The latest body with some research to support this idea is the British Bankers Association (BBA).

At first glance, the BBA data doesn’t seem to say anything to write to you about. The number of mortgages approved in February was roughly at the same level as last year. But, once the data has been seasonally adjusted, February saw the second lowest level of loans for house purchases since July 2005.

Perhaps, of more significance are the comments from Bank of England governor Mervyn King. Yesterday he said there was evidence that demand for houses was at last beginning to slow. He was quick to say, however, that there is no evidence that the US sub-prime crisis could spread here.

Maybe he is right, but yesterday there was more news to suggest the US sub-prime crisis is perhaps in worse straits than we thought. Meanwhile, a report published earlier this week has urged European lenders to look at emulating the US sub-prime market.

Pause a second, and re -read that last sentence.

Datamonitor has put out a press release suggesting western Europe poses significant potential for the expansion of sub-prime lending.
The release says: “The advent of sub-prime lending began in the US during the early 1990s. As the mainstream lending market became increasingly competitive and saturated, lenders began to look to as-of-yet unexplored niche markets that would give them higher profit margins and a greater pool of customers. With US sub-prime lenders expanding into the UK, and because developments in the UK retail banking market tend to follow that of the US, the UK has since become a highly developed sub-prime lending market, with Canada and Australia going in the same direction as well.”
But, after turning its attention to Western Europe, the release continues: “Sub-prime lending markets remain small, and as such, pose opportunities to lenders looking to get involved. In fact, a number of lenders have set up operations”, but Datamonitor expects “many of these markets to become significantly bigger over the next decade.”
Finally, and at last, Datamonitor warned of the dangers in this approach. It said: “To be successful, lenders should study the US as an example of which mistakes not to make, such as easing lending criteria too much or going after market share. Indeed, lenders should always bear in mind that sub-prime lending is a more risky enterprise than mainstream lending, even in the midst of a favourable economic cycle.”

At first, it might seem strange to advocate the further uptake of sub-prime lending, just as the wheels have come off in the US, but actually Datamonitor does have a point.

Unfortunately, markets tend to exaggerate developments. Witness the dot com explosion and crash of the late ’90s and beginning of this decade as an example. One moment the internet was greater than sliced bread, and anyone who was anyone was investing in it, and the next, in investment circles dotcom seemed to have turned into a dirty word - very much yesterday’s false dream. The reality of course, was that the internet did indeed represent an outstanding opportunity. It’s just that markets had gone too far, and, in the aftermath of the crash, opportunities were lost.

A similar danger lies with sub-prime. Just because over exuberant lenders created an unsustainable bubble in the US, it doesn’t mean that sub-prime is bad per se. If European markets react to the US crisis by significantly cutting back on sub-prime loans, then that could actually be a disaster.

And finally, we come to perhaps the most damning report on the US housing market we have seen to date.

In the US, some people have written off the current sub-prime crisis by saying, “ah yes, but at least sub-prime loans have created new home owners, people who wouldn’t otherwise have been able to buy a property”. In the US the Center of Responsible lending quoted one media publication as saying: “Yeah, people got bad mortgages. But others were able to finally buy a home.”

Well, it appears that analysis is wrong. Apparently, $2 trillion in loans have resulted from the US sub-prime market over the last nine years. But, says the Center of Responsible lending: “contrary to industry assertions, these loans have not resulted in a net gain in homeownership.” The problem is this: the majority of sub-prime loans were made to people who already had a mortgage. And the number of people who have suffered from foreclosures, was actually greater than the number of first time buyers who bought their property with a sub-prime mortgage.

The Center says: “Sub-prime loans made during 1998-2006 have led or will lead to a net loss of home ownership for almost one million families. In fact, a net home ownership loss occurs in sub-prime loans made in every one of the past nine years.”

The Center concludes: “Regulators and Congress have hesitated to curb abusive and reckless lending practices, citing a concern that stronger consumer protections might reverse the gains in home ownership. The poor record of sub-prime loans shows that this fear is misplaced. In fact, states that have passed stronger laws in recent years have reduced targeted practices without reducing access to home loans. By acting now, policymakers will help ensure that mortgage loans pave the way to sustainable home ownership that truly benefits families and their communities.”

The real problem with the US sub-prime crisis is that loans were made with incredibly low introductory rates. By all accounts, these loans were sold hard too. But, when the introductory period ended, the rates rose as was expected, but by then the market rate of interest in the US was much higher. Disaster was as inevitable as England’s woes on the football pitch.

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

The price of oil was up again yesterday, this time to the highest level this year.

There are no prizes for guessing why - the latest crisis in Iran over the detention of British troops.

Oil has now swung from just $60 a barrel at the year’s beginning, to just a smidgen over $50 last month, to $62.67 at the time of writing.

Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved

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

Here’s a question for you. What does the legend MG stand for? Morris Garages? Wrong. Apparently it stands for ‘modern gentlemen.’ At least, that’s what Nanjing Automobile Group Corp is telling its public.

Today, the MG is back, but this time in China.

The plan is to produce 200,000 new cars over the next five years at its swanky new production facility.

And yet, the MG curse seems to strike again.

For in China, it’s been reported that Nanjing, which you may recall beat fellow Chinese firm SAIC to the punch when it bought the rights to the car, is struggling to raise the necessary finance.

Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved

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

Maybe the adage is set to change. Today, for younger people, it may be more appropriate to say an Englishman’s home is his landlord’s.

Now, research from the Department for Communities and Local Government has found that for the first time since records began in 1939, there has been a fall in the number of owner occupiers in the UK.

In fact from 2005 to 2006, the total number dropped 25,000 to 14.62 million. That, at a time when the total number of households was increasing, hitting the 20.8 million mark.

Back in the 1950s, 50 percent of households rented, but that number went into steady decline as more and more Englishmen ascended the property ladder. They found themselves in a castle of financial security as inflation sided with them, reducing the cost of payments over the term of the mortgage.

But today, the drawbridge seems to be up between those with property and those without. While buy-to-let investors are able to use the capital growth in their properties to borrow some more, the would-be first time buyer is being left paying for the landlord’s mortgage.

Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved

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

If you have kids you will know the feeling. “Can I have some money for my mobile phone please?”

But, there is a solution, or at least there may be.

Blyk, reckons it has the answer: advertising.

The company, which is based in Finland, was founded by ex Nokia stalwart Pekka Ala-Pietil#228; and TV and ad man Antti #214;hrling. It’s big idea is to fund the cost of a mobile phone call through advertising. The end result is free calls, although you will have to put up with the intrusion of advertising on your personal phone. But since this product is aimed at the 16 to 24 year old market, maybe that won’t matter.

And, once when ‘Aprill with his shoures soote The droghte of March hath perced to the roote’, it appears the UK will get the Blyk treatment.

Yesterday, the company was in Cannes, at the Venture Market Europe conference, where it announced advertising deals with Buena Vista, Coca-Cola, I-play Mobile Gaming, L’Oreal Paris, StepStone and Yell.com to advertise on the UK service when it is launched.

These days, the 16 to 24 market is difficult for advertisers to reach, and that simple fact reveals Blyk’s USP.

David Gosen, CEO of I-play Mobile Gaming, put it neatly when he said: “Blyk provides visibility on who and when people are playing mobile games, information which the industry has been sorely in need of. CRM is a basic business principle to driving revenues and building loyalty and we haven’t been able to put this in place until we have access to real data on what our customers are doing. Now, thanks to Blyk’s offering, we can start to have some transparency on this issue.”

Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved

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

Yesterday, the Works Foundation revealed their thinking on private equity. It’s good and bad, they said. When private equity buys into a company and keeps the management in place, then more jobs are the result. But, if it replaces the management team, then jobs fall.

Will Hutton, chief executive of the Work Foundation, said: “Private equity firms pride themselves on their ability to squeeze performance from the organisations they own, and they turn up the pressure on individuals in order to do so. When private equity backs an incumbent management team the result can be improved productivity and higher employment. But we are concerned that often, the price that is paid by workers is too high and that levels of trust between workers and managers suffer.”

While, on the face of it, the Works Foundation report seemed to strike a balanced position, with pros and cons for private equity, others are not so sure.

After all, Mr Hutton added: “There is now an urgent need to ensure private equity firms throw open their books to proper public scrutiny, that they pay appropriate levels of tax, and that the growth of private equity is not exposing the entire British economy to a risk of instability due to the levels of debt the industry takes on as it grows.”

Well, let’s examine the Works Foundation research.

It found that if private equity replaces management, job losses follow. All we can say to that is ‘duh’.

Of course job losses follow. If private equity feels management needs replacing, then the chances are that it’s not happy with the way the firm is run at all.

The higher level of gearing that private equity purchase entails, does bring with it dangers.

But then so too, does the current way. British business remains relatively poor in terms of productivity, and we face more and more competition from abroad. Private equity holds part of the answer.

David Morgan, a reader of this newsletter, and MD of Infotec Financial (UK) Ltd reckons: “Where a private equity company retains a management team, this indicates that it has bought into not only a set of assets, but also the current strategy of the business.” “But where,” he continues, “a private equity owner replaces a management team, the implication is that the new owner has not bought into the current company strategy. This implies major changes under the new management team, probably involving the sale or closure of sizeable areas of business activity. Also, a frequent perceived shortcoming of the previous management in such circumstances is that it was too ’soft’: it wasn’t ’sweating its assets’ sufficiently, i.e. the company was overmanned. So here are two potential reasons for major job cuts under this management-replacement scenario, both of which may be valid in order to ensure the long-term health of the business.”

Agree or disagree? Tell me what you think on the editor’s blog at Find.co.uk

Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved

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

Back in January, if you had been traversing the UK’s M40, and you decided to stop for a break at the service station, you may have spotted two smartly dressed gentlemen huddled in a corner engrossed in conversation. If you had been able to listen in, you might have heard them say something like this:”you’ve got the brains, I’ve got the brawn, let’s make lots of money.”

Well no doubt the two men - that’s chief executives Ian Smith of housebuilder Taylor Woodrow and Peter Redfern of rival George Wimpey - were more circumspect in the way they worded it. But they were talking complementary strengths, and discussing the merits of a merger. And, in effect, the words from the Pet Shop Boys single summed it all up pretty well.

Taylor Woodrow has lots of land sitting there waiting to be built upon.

George Wimpey, on the other hand, seems to be more skilful at getting the cost of building down. To put it in percentage terms, at George Wimpey the cost of building is 51.4 percent of turnover, but 55.5 percent at Taylor Woodrow.

In the UK, the two companies occupy the number three and four slots in the housing building league. But in the US, they are comparative minnows. A merger of the two firms would see them leap up the US rankiings

So put all those areas of complementary strengths together and what do you have? Mr Smith put it this way yesterday: “A marriage made in heaven.”

In fact Ian Smith said: “We have an underperforming UK business, with margins at the lower reaches of the industry and some investor impatience with performance,” while his opposite number at George Wimpey said: “Together it is a significantly better business than either company on their own. We both had improvement plans. We can now get those plans to move more quickly.”

So that’s the reason. What does it mean?

The plan is for this to be a merger done on paper only, no money will change hands and Taylor Woodrow will end up with 51 percent on the new firm, but its chief exec, Ian Smith, who is still relatively new in the hot seat, will be off to pastures new. (Although he will be getting a sizeable pay cheque for his endeavours.)

The combined workforce of the new company will be 14,000, with only a relatively modest number losing their jobs.

The newly formed business will be listed on the FTSE 100, and will boast a turnover in excess of £6 billion a year.

Last month, a deal was announced for the merger of Barratt Development and Wilson Bowden.

Once the dust has settled, and assuming both mergers go through, then the Wimpey Woodrow combo will entail a slightly higher build level than the rival Barratt and Wilson Bowden company

But all this leaves one question hanging. Why merge now when the US market is in such a state and many fear the UK property sector has peaked? The BBC quoted a Taylor Woodrow spokesman as saying the UK needs 200,000 new homes a year and only 150,000 are being built - meaning that, fundamentally, the UK market is strong.

Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved

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

These days it all seems upside down. In Japan, where the balance of payments is in surplus, the yen is relatively cheap. In the UK and US, where balance of payment deficits seem to break more records than a vinyl crushing machine, the respective currencies stay strong.

Part of the reason lies with the rate of interest. It is much lower in the economy of the rising sun, therefore money flows out into the UK and US in a business called the carry trade.

However, of late, the dollar has been falling, but the pound has remained strong.

It is worth bearing in mind, that while the UK deficit is high, as a percentage of GDP is only half the level seen stateside.

But according to ING Financial Markets, the pound could be in for a slide soon.

Chris Turner, ING’s London head of currency strategist, said: “A potential slide in the pound versus the euro is a risk for a European corporation that will receive payments denominated in pounds at the end of the year.”

ING also reckons the Bank of England will up the rate of interest this year, but will then cut it back again by the year end, so that the UK rates will be 5.25 percent. At the same time it expects the euro rate to hit four percent.

Currently the rate of interest in the UK is 1.5 percentage points higher than in the eurozone. But this time last year the difference was 2.25 percent. If ING is right, by the year end the gap will be just 1.25 percent. It’s this falling differential, at a time when the balance of payments are posting such high deficits, that could put the pound under pressure.

Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved