April 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

Talking of short termism: “analysts are stupid” and can’t see beyond quarterly results, or so said a leading captain of industry yesterday.

Sir Nigel Rudd, boss at Alliance Boots, reckons that the rationale for the merger of Boots and Alliance Unichem was obvious: “Healthcare is a growing business, people are getting older, they need more medicine.” And yet the city just doesn’t seem to be able to see it.

It’s this short sightedness from the city that eventually prompted deputy chairman Stafano Pessina to give up on the city, and throw his lot in with Kohlberg Kravis Roberts (KKR).

Sir Nigel told the FT: “When I did the Alliance Boots deal, everyone hated it. The greatest pleasure out of all of this has been the analysts#133;I actually love that. They are so stupid most of them… they are very bright or stupid.”

KKR might be the private equity company that was first named as the ‘Barbarians at the Gate’, but don’t forget that Rome had become tired and chaotic, and had stopped innovating before the Barbarians moved in and conquered.

But, in a way, if Sir Nigel is right that’s a good thing for private investors.

The private investor is often in a position to see trends, before analysts. The smart investor could have predicted the years of problems that befell Marks and Spencer just by shopping there. The recovery was also obvious to those who visited the store with a critical eye in the months before results started to improve.

Sometimes analysts are too pre-occupied with numbers and can ignore the bigger picture, one that Mr and Mrs commonsense can identify with ease.

April 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

It’s amazing how times change.

Not so long ago the hedge funds were held up as the scourge of business. In some cases, companies saw their share price fall in the wake of speculators shorting their stock - selling shares in a company they had not yet bought.

It seemed that a listing on a stock market brought with it an unhealthy pre-occupation with the short term, with speculators sometimes bringing a share price right down - just because the short term results were not so good.

But now, we have gone the other way. According to today’s FT, short sellers lost money in March, and April is expected to be even worse.

For one thing, they got it wrong with Amazon. The dotcom star was a victim of short selling earlier in the month, with many expecting results to be down on predictions. But, as we reported last week, results were much better than expected, the share price soared and all those speculators who went short found themselves in the unenviable position of having to buy shares they had already sold, but this time at a much higher price.

But, according to the FT, another problem is private equity. These days, if companies are under reporting, the private equity boys often move in. This has kept up the share price in companies that would previously have made nice little victims for the short sellers.

While some say private equity is like a swarm of locusts, it appears a more apt description to say that they are like a locust pesticide.

In the world of agriculture, we understand it is all but impossible to stop a swarm of locusts. But maybe, in business we have found the answer: private equity.

April 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

It didn’t take much. Last week, audited accounts from Valencian real estate developer Astroc were out, and it was the small print that raised alarm. Apparently, some of last year’s profits came from the sale of Astroc assets to its chairman. This immediately led to fears that the company had been deliberately trying to distort figures, artificially keeping the share price up. On that news, shares in the company fell dramatically. But, it didn’t stop there. The shares in other Spanish real estate companies fell too, and suddenly, headlines proclaimed that the Spanish property market was about to crash.

Fears about the vulnerability of the Spanish economy have been doing the rounds for some time. In May last year, for example, we wrote about the enormous level of debt that has built up in the country. Also last year, we warned about the country’s balance of payments deficit. As a percent of GDP, in 2006 this was higher than in the US.

Then there’s the property market. House prices have doubled since 2000. Every year, 620,000 new properties are being built, which is four times the level seen in the UK. This, in turn, has encouraged Spanish consumers to put it on the plastic, and household debt is now running at over 120 per cent of income.

Many blame the euro. The problem is this: the rate of interest has to be at a level that is appropriate right across the eurozone. In practice, this has meant rates that were too high to kick start the Germany economy, and far too low for Spain, which was in danger of overheating as it was.

So, with all these doubts lurking, a whiff of a scandal, and suddenly, there’s a queue of analysts wanting to predict doom for Spain.

But not everyone agrees it’s curtains for the Spanish market.

For one thing, house prices are already falling. Last week also saw the revelation of the latest property price data in Spain. Some took fright when they saw the figures: the annual rise in house prices slowed from 9.1 to 7.2 per cent in the first quarter of this year, that’s the lowest level of inflation in the market since 1999. Others, however, saw hope, saying the market is slowing, not crashing; that Spain is enjoying the much sought after soft landing.

In fact, the property market has seen prices increase by an ever falling level for three years now - again, a sign of a soft landing.

The sub-prime market in Spain, while growing, is a minnow compared to the market in the US. Again, a sign the market can withstand shocks.

Capital Economics concluded this: “However, fears of a ‘hard landing’ are probably overdone. In all, then, we expect Spanish GDP growth to slow to around 3.2 per cent this year. This entails a marked slowing in the average quarterly GDP growth rate to 0.7 per cent from last year’s 1.0 percent. But Spanish growth is still likely to be comfortably above the euro-zone average this year. As such, we still expect Spain to make a healthy contribution to euro-zone GDP growth in 2007.”

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April 30, 2007 | posted by Michael Baxter in IABN | comments (0) |

Let’s give Mervyn King, governor of the Bank of England, credit where it’s due. He voted against the move. Sometimes, though, disagreeing with something is not enough. He was the boss, and the organisation he headed made a mistake; the buck stops with him, even if the man said no.

Back in August 2005, the Bank of England lowered the rate of interest. It was a move that had been expected by just about the entire community of economists, and it was warmly welcomed by organisations such as the CBI, British Retail Consortium and Unions across the land. Many argued it did not go far enough. Capital Economics, whose top man Roger Bootle is currently arguing rates may hit six percent soon, said at the time that the rate of interest would keep falling, eventually hitting 3.5 percent. And yet it was a mistake, or so says the National Institute of Economic and Social Research (NIESR). On Friday, it claimed that if the UK’s central banks had upped the rate of interest back then instead of lowering it, inflation would now be a tenth of a percentage point lower, and there would have been no need for the bank to have written a letter to Gordon Brown two weeks ago.

It’s easy to be wise in hindsight, but, in fairness, Mr King and three of his colleagues Rachel Lomax, Andrew Large and Paul Tucker voted against the drop. In fact, it was the first time the Bank of England’s Monetary Policy had voted against the chairman.

At the time, some members of the press argued against the move too. For example, writing in the Business Paper, Alistair Heath said: “Mervyn King#133; has also taken a potentially serious gamble.”

To put the rate drop of August 2005 in historical context, the UK was struggling at the time. Growth in the previous quarter was at the lowest level since 1993, the high street was in crisis, and the voices calling out for a fall in rates had risen to a deafening roar.

It was as if the bank had forgotten its job was to keep a lid on inflation, and it temporarily succumbed to trying to boost the economy - something it was not supposed to do. At the time we headlined: “rates dilemma between the devil and the deep blue sea”, and it seems we had a point. The economy needed to see a fall in rates, but inflation was far from licked, and there were dangers implicit in the move.

And what lessons can be learnt for today? Aside from the obvious conclusion that the Bank of England is not infallible, it also perhaps shows how many have been underestimating the dangers of inflation.

Government and consumer borrowing has been too high for some time. In any other era, inflation would have been much more serious by now. But today - thanks to globalisation and the internet - prices on the high street have stayed muted, and we have seen prices pick up elsewhere instead. One type of product, whose price is less sensitive to the forces of global competition, has seen inflation soar - we refer of course to the property market.

The idea that house prices could have enjoyed such extraordinary growth without other parts of the economy seeing inflation occurring eventually, is absurd.

On Friday, the NIESR predicted CPI inflation will top two percent, that’s the Bank of England’s target level, for at least a year.

Elsewhere there seems to a growing feeling that CPI is too narrow a target for the Bank of England. This morning Bloomberg quoted Tim Drayson, an economist at ABN Amro, as saying: “In a few years’ time, people will find that inflation targeting is flawed,” he added: “The Bank of England’s inflation focus has been too narrow. It’s too late to engineer a soft landing now.”

But it seems to us that with the money supply growing and many consumers still spending more than they earn, the big danger is that the UK economy will start behaving the way it always used to - and then inflation will continue northwards, but over the longer term.

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

Back in July last year, a home owner with a £150,000 mortgage would have faced mortgage payments of £918, or so says the Nationwide in its latest housing report. Today the payments would be £977, but if rates go up again next month (which just about everyone, including the Nationwide expects) monthly payments would jump to £1,000.

But if rates were increased by one percent by the end of 2007. as some predict, the monthly costs would soar to £1,071. Last week we told how some leading economists said rates should hit 7.5 percent, that’s 2.25 per cent up on the present level. The Nationwide has calculated that the monthly payments, on a 25 year mortgage, if rates were two per cent higher than present would be £1,169.

What does all that mean in terms of the property market? Nationwide says this: “With the market already showing signs of cooling, too sharp a rate hike could undermine market confidence and dry demand up swiftly. But on top of this, they could also lead to widespread payment difficulties which, in an illiquid market, could precipitate price falls.”

Ummm. So does that mean it’s time to take the hemlock? Relax, says Nationwide, in a calming tone when it said “In our view, the talk of rates climbing to 6 per cent and beyond are overblown.”

So what of the here and now? House prices jumped again in April, says the building society. “The pace of house price growth almost doubled during April to 0.9 per cent, up from 0.5 per cent in March. This brings the annual rate of inflation back into double digits at 10.2 percent and the price of a typical house up to £180,314, which is £16,741 higher than at this time last year,” said Fionnuala Earley, Nationwide’s chief economist.

She added, however: “While the monthly rise in prices is stronger than the MPC would have liked to see, it can take some comfort from the fact that the underlying trend is softening and the return to double-digit annual growth largely reflects a weak period this time last year. The three-monthly growth rate, which smoothes the volatility of the monthly series, is still cooling in response to the earlier rises in interest rates. The latest figures show prices increased by 2 per cent between February and April, the lowest three-monthly growth rate since last August.”

What about the poor, beleaguered first time buyer? Ms Earley said: “Affordability for those entering the market has deteriorated and led to a fall in the numbers jumping onto the housing ladder more recently. Between December 2006 and February 2007, 3,200 fewer first-time buyers managed to get onto the ladder compared with the same period a year earlier. Even demand from movers may now be beginning to moderate with 2,500 fewer movers in February compared with the previous month.”

We still remain sceptical about the so-called strength in house prices. If history has taught us anything, it is this: when prices rise above historical averages, they always come down - eventually. This argument that the measure which really counts is affordability, rather than price of property to income, is a false argument. For one thing, low inflation means that the true value of a mortgage is not eroded by rising wages as it used to be. For another thing, changes always happen. For as long as total price to income is so high, house prices will be vulnerable to a change in economic fundamentals. Who can say what next year, or 2009, will really bring?

One thing is for sure. The 15 years of uninterrupted economic growth may well continue for a few more years, but the run will end eventually. What then for house prices?

And don’t forget comments relating to the level of debt in the UK, made by the Item Club last week: “We are all skating - if not wobbling - on thin ice,” it said.

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

Lord Sainsbury recently kicked private equity into touch, leaving it with a nasty flea in its ear. “Sainsbury’s success has been based on a strong balance sheet and a largely freehold property base. Eroding these attributes will make the company more vulnerable to competitive pressures which is not in the best long-term interests of the company, its customers, its staff, its shareholders or its pensioners,” said recently.

And with those words, it seemed Sainsbury, as a plc backed by a valuable property portfolio, was secure.

Private equity may have had a flea in its ear, but the prospect of the company selling its property has come back, like a persistent fly, circling above the ointment.

Throughout this week, a Qatari investment fund, which boasts Qatar Prime Minister Shaikh Hamad bin Jassim bin Jabr Al Thani as a backer, has been building a majority stake in the business. And now it’s been confirmed, the investment fund, Three Delta, in conjunction with the Qatar Prime Minister, now owns 17.4 percent of the supermarket.

Although it is unlikely the investment company is planning to make a bid for Sainsbury’s, it seems likely it’s after the property portfolio.

Another major shareholder in the UK retailer is Robert Tchenguiz, and, funnily enough, Delta Three is run by Paul Taylor, who used to work for Mr Tchenguiz.

There is something else Tchenguiz has in common with the Qatari investment fund. He, too, wants to see the property portfolio sold off.

So you see, may be private equity is not quite the asset stripper its detractors accuse it of being. It’s merely ahead of the game, initiating strategies that market forces were going to force through sooner or later anyway. Perhaps it’s always better to do it sooner.

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

Rijkman Groenink, chief executive of Dutch Bank ABN AMRO explained it to shareholders yesterday: “As human beings and responsible citizens,” he said, “we have the obligation to look farther than the last quarter.” Perhaps more tellingly, he added, “Price isn’t the only thing that counts.”

Mr Groenink wants to sell to Barclays, and the CEOs at the trio of banks contemplating an alternative bid - that’s RBS, Spanish bank Santander and Fortis of Belgium - don’t seem to be on Mr Groenink’s Christmas card list.

It’s possible this consortium could offer a high price - currently the offer from Barclay is £45 billion, but the RBS led consortium is mooting £49 billion. Although, at this stage it’s still just talk. The consortium have only just been given opportunity to visit ABN’s books so a lot depends on what they see.

But, RBS wants to get its claws on ABN’s US subsidiary LaSalle. In fact, its perhaps the main factor behind the banks’ interest. ABN, on the other hand, is trying to push its sale of LaSalle to Bank of America. If that went through, RBS would pull out and the consortium would collapse.

Shareholders are furious. That regular agitator, the innocently named hedge fund, The Children’s Investment Fund has led the rebellion.

But this time, the most ardent critic is Peter Paul de Vries, the director of the VEB investor group. “Aren’t you just using sleazy tricks?” he asked Rijkman Groenink at a shareholder meeting yesterday.

And with the inevitable rebuke De Vries added “I’m more than happy to withdraw the sleazy if you’re willing to put the LaSalle sale to the shareholders.”

If the Barclays bid goes through, job cuts will result. But if the consortium is successful and the Dutch bank is then split up, it seems probable that many more jobs will go. Perhaps that is why management at ABN is gunning for Barclays. Proportionally, the Barclays bid will involve less cash too, so it’s more of a long-term game for shareholders.

But another interesting slant on the whole issue is this. Yesterday, Business Week considered the merger of Barclays and ABN as the first true pan European banking merger; a direct result of closer European integration. “A monster bank merger of this scale promises to hasten the long-awaited financial integration of Europe, and with it the creation of a zone of financial power that is the logical outcome of a continent-wide trading bloc with a common currency,” said the publication in its editorial. ABN shareholders then, will be left with shares in the first great European bank.

And yet, suppose the three way consortium wins the day and ABN is split up. What does that say about European integration? Instead of two banks coming together, selling off some US assets and creating the first true European bank, we will see the break up of a once mighty banking empire. The European integration of three banks into one temporary consortium will have resulted in the aforementioned dream, remaining just that - a dream.

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

Cast your mind back three years. At that time, or so it appeared, Microsoft was far too big for its own good, and it dwarfed the likes of Apple, Google, and Yahoo to such an extent that it was barely worth mentioning the software giant and the three smaller rivals in the same breath. In fact, in the first quarter of that year, Microsoft enjoyed profits of $2.61 billion, whereas the aforementioned trio could only manage $228 million between them.

Forward wind the clock to today, and analysts are celebrating the return to form of Microsoft.

The company has just unveiled record quarterly profits of $4.93 billion, up from $2.98 billion a year ago. Now these figures were flattered slightly by money that had been deferred from previous quarters relating to promotional programs for Vista and Office - in all accounting for around a quarter of the profits. Even so, it’s heady growth, especially for such an old timer, which is now reaching the ripe old age of 32.

But contrast these results with those comparative minnows of three years ago. In the quarter just gone, Apple brought in $770 million, Google $1billion, and Yahoo $142 million in profits. That totals $1.912. Okay, that’s still less than half the level seen at Microsoft, but then, three years ago, the ratio was nearer ten to one. But, if Yahoo had been able to match Google’s growth, or even if it had been able to stay at level footing with Google - after all its profits were almost double the size of Google’s three years ago - then after deducting the amount Microsoft earned from deferrals, the trios’ earnings would actually have been within a few hundred million. There would have been just a fist full of dollars separating the old giant from the three pretenders.

It’s not difficult to see why Microsoft is doing so well compared to last year. It’s down to Vista. It was a long time in the making, but it’s here now and doing very nicely, thank you. Chief financial officer Chris Liddell told Reuters that consumer sales of Vista surpassed the company’s own expectations by $300 million. In fact, the company’s client division, which includes Vista, enjoyed sales of £5.27 billion, compared with $3.125 billion a year ago.

But the good news was not restricted to Vista. The company said it sold 500,000 units of the Xbox 360 in the quarter - and its online division saw revenues grow by eleven per cent, with advertising revenue up by 23 per cent.

You can see how the Xbox provides scope for growth in the years ahead. The company has not yet produced a portable version of the product. Furthermore, the Xbox does provide the company with its own halo effect, with many users being ardent fans.

But here’s the rub. The company has no answer to Google; it doesn’t even have an answer to Yahoo, and still lags in a sorry third place in the search engine market.

That’s why some are speculating that the smart move would be for the company to buy Yahoo.

Imagine the complaints if that idea had been mooted three years ago. “The company is far too powerful as it is,” they would have said. But today, the big fears seem to relate the size of Google.

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

Should equity investors consider returning to the technology theme?The technology sector has been relatively neglected by the investment community partly because
other sectors have seen better earnings growth and less demanding multiples, but also because
the collapse from 2000 to 2003 meant that technology has remained somewhat of a “dirty word” for
private investors since then. This has meant technology funds have not seen large inflows of
capital from retail customers - with a similar attitude of “once bitten twice shy” from many
institutional investors.
For full article click here - Thought for the dayRed Tower Research

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

Seconds out round two, or is that round 3 - or maybe four?

The saga of ABN AMRO rumbles on. This time RBS, Santander and Belgium’s Fortis have said they are considering making an offer that would trump the Barclays bid by around 13 percent.

It all comes down to LaSalle. The ABN subsidiary is being sold to Bank of America, but RBS wants it. In fact, without LaSalle ABN loses its attractiveness.

And now, reluctantly, kicking all the way, ABN AMRO has agreed to make its books available to the RBS-led consortium.

The trouble is this: no formal offer has been made and yet once this consortium has finished its book viewing, a good portion of the banking world will know ABN’s business.

ABN clearly wants to do the Barclays deal, and right now the RBS consortium is viewed with suspicion. Only until, if at all, a formal offer is on the table will this change.
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