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

So interest rates are set to rise. Some are predicting rates of six percent by the year end, and remember rates were at just 4.5 percent last July. So, if these gloomy predictions prove true, that would mean a highly significant jump in mortgage payments.

And yet buy-to-let investors still seem to be showing no sign of selling. According to Paragon Mortgages, 92 percent of respondents to its latest survey say demand from tenants is stable, growing or booming. Apparently it’s the second highest reading from the five-year-old Paragon index yet recorded. (Although we have a natural distrust of indices that put stable, growing and booming under one heading.)

But, if you don’t believe Paragon, then let’s see what Mintel has to say.

Mintel reckons the number of landlords operating in the buy-to-let market is set to double. According to Mintel’s Paul Davies: “The buy-to-let mortgage market has experienced meteoric growth since the late 1990s, outperforming the wider mortgage market over the past few years,” and he “expects the market to continue to grow at a healthy rate over the coming years, driven by the expected expansion in the population and the continuing strong demand for rented accommodation.”

In fact, Mintel says three percent of home owners are thinking of buying a property to let between now and 2010.

It’s heady stuff. Of course, as house prices soar, more and more property owners are finding they can raise the capital to buy another property and get the mortgage funded by the tenant. This, in turn, is creating an upwardly spiralling circle.

Do bear in mind the following, however.

First of all the buy-to-let market is only around ten years old. Sure, it’s grown fast, but then it’s quite easy to grow from zero. Of course this market is growing, it’s a long way from reaching maturity, and much of the expansion in buy-to-let has come as properties that were already available to rent were mortgaged for the first time.

Also remember upwardly spiralling booms always end. Tears are nearly always the result.

A market that is being propelled by its own inertia is a market that is not based on solid foundations, no matter how sound the bricks and mortar the properties are built with.
Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved

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

There’s more than one halo at stake.

Once again, profits at Apple have soared. This time profits during the latest quarter were up 88 percent on the same period last year; iPod sales were up from 8.5 million a year ago to 10.5 million units, while the Mac saw a sales lift from 1.1 million to 1.5 million units.

All that, and we are still waiting for the iPhone to have an impact.

For some time now, when analysts have been talking about Apple they have referred to a halo effect. This is the idea that customers are so chuffed with their iPods they go out and buy a Mac. In the UK, we have seen this opportunity reinforced with those ads featuring Mitchell and Webb emphasising the Mac’s application in the home - and as a consumer product - perhaps targeting buyers of iPods.

But, there are people in this equation too - serious heavyweight people.

First there is Al Gore, former vice president, the man who tells us an inconvenient truth, and a man whose halo seems to shine out from a country not known for its proactive approach to the environment.

Then there is Eric Schmidt, CEO of Google. Since Google can apparently do no wrong - at least as far as investors are concerned - its chief executive too seems to walk in business circles with a round ring circulating a few inches above his head.

But if Gore and Schmidt are heroes, what does that make Steve Jobs? Every time we say anything that is the tiniest bit negative about Apple, we get bombarded with emails correcting us for having heretical thoughts.

We have said that until Steve Jobs walks on water, we will include a note of scepticism when considering whether the company’s good fortune can continue, to which we have been told ‘too late, the company’s boss already strides atop the flowing streams and rivers of business.’

Maybe Jobs, who is also a key influencer at Disney these days, has the brightest halo of the lot; the star of corporate America - except he isn’t that corporate.

But then maybe all those saints could get vilified.

Earlier this week, former Apple CFO, Fred Anderson, said he had warned Jobs of the dangers in backdating stock options.

But now, with their halos shining bright, Gore, Schmidt and four other Apple board members have signed a statement of confidence in Jobs.

The statement said: “The SEC investigated the matter thoroughly and its complaint speaks for itself, in terms of what it says, what it does not say, who it charges, and who it does not charge#133;.We have complete confidence in the conclusions of Apple’s independent investigation, and in Steve’s integrity and his ability to lead Apple.”
So that’s okay then. If Al Gore and Eric Schmidt say Jobs is in the clear, he must be.
Mind you, can Apple manage without its boss? In those years of wilderness when Jobs was out of the loop, the company went close to total failure. If Fred Anderson is right - and we are not saying he is - then that would be a truth that is far too inconvenient to contemplate?
Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved

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

The Dow Jones passed yet another record last night, this time closing at 13,089. That’s 135 points up on the day, 626 points up on the year and a staggering 1038 points up on the year low, set on 5th March.

It has taken the index just six months to jump 1,000 points; it broke through 12,000 on October 19th. In contrast, the index took seven years to move from 11,000 to 12,000, although in the mid nineties it doubled in value in less than four years - moving from 5,000 on November 21st 1995 to 10,000 on March 29th 1999.

Yesterday there were good results from Boeing, ConocoPhillips and Pepsi that helped to boost the index. Also, surging profits at Intel (up 19 percent), and better than expected performances from big banks including Citigroup and JPMorgan Chase Co (which helped ease fears over the US sub-prime crisis hitting profits), all helped give the bulls reason to stamp and holler with glee.

According to Bloomberg, 19 of the Dow’s 30 members have announced their results so far in the Q1 reporting round, and, on average, profits have been up 18.4 percent. And while shares have been rising, they have not been keeping pace with the jump in profits, so that the average ratio between stated profits and market valuations, or historical pe, is now 17.7, against 22.5 last October when the index powered through the 12,000 barrier.

And yet the Dow run comes at a time of doubt.

The US economy is limping. The latest piece of official data - the so-called beige book - painted a slightly more rosy picture than had been expected. With it describing inflation and growth as moderate, speculation that the Fed will be lowering rates soon was encouraged, but even so doubts linger. The last data on the property market has shown only a mild improvement in new homes after February’s abysmal figures. In fact, sales of new homes were 23 percent down on March 2006, and the second worst month (after February 2007) since 2001.

Capital Economics has taken various economic indicators and concluded that GDP growth slowed to a mere 1.5 percent in the first quarter, and will slow by even more in the next period.

But then again, the Dow has been helped by the falling dollar. According to Bloomberg, 41 percent of 2006 revenue enjoyed by the companies making up the Dow came from overseas. The US might be suffering, but the rest of the world isn’t, and that’s good news twice over for the big US exporters. It’s good because the markets the US sells to are booming; it’s good because the weak US economy is pulling down the dollar.

But if one was to cast the net wider than just the Dow, and look instead at the SP 500, things are nowhere near as impressive. This index still hasn’t passed the previous high set in 2000, and this despite 14 quarters that have seen average profit growth in double figures. But moving forward, it is thought average profit growth of SP companies will be much more modest, with Thomson Financial estimating overall first-quarter earnings growth of about seven percent, slightly better than expected, but well down on previous quarters.
Then there is the NASDAQ. At 2547, this index still hasn’t managed to reach half the level of 5132 seen on March 10th 2000.
In the past, stock market crashes seemed to come ahead of economic recessions. They were a sign of things to come. It seems more likely than not that the US will avoid recession this year - Alan Greenspan puts the chances at a third - but it is undeniable that the US economic machine is set to splutter. And yet the markets just keep on rising.
Is this a sign that corporate America is less reliant on Mr and Mrs American consumer, and is instead more in tune with the global economy, or is it a sign of irrational investors?

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

April 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

For every extra year we live, the UK private sector pensions have to find an extra £15 billion, or so says a report from KPMG.

In fact, the report said that “UK private sector companies have added around £30 billion to the level of pension liabilities shown in their accounts over just two years due to increases in life expectancy for their pension scheme members. This compares with the current total UK private sector pension liability of around £500 billion.”

Alastair McLeish, head of KPMG’s Pensions practice explains: #147;When increasing life expectancy and falling market returns started putting a strain on companies’ finances, many closed their defined benefit schemes. But this is not always the best solution. Defined benefit schemes, whether they are based on final salary or career-average earnings, are highly valued by employees as part of an overall benefit package.
#147;Companies are increasingly looking at new ways to approach defined benefit pensions risks. Some have introduced ways of sharing the risk of longer lifetimes with members, for example by setting employee contributions or the level of future benefits to change in line with changes in life expectancy. Other employers are considering hedging their pension liabilities using emerging life expectancy derivative products. Whatever strategy is adopted, there is always going to be a need to keep up to date with current thinking in this area and to ensure that the approach to pensions continues to fit with the overall business needs.#148;

April 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

Sales of new homes saw their biggest fall in 18 years last month, but maybe things are not quite as bad as they seem.

Of course the sub-prime crisis is taking its toll, although strangely David Lereah, the chief economist at Realtors’, the people who published the figures said “We may be seeing some losses as a result of the subprime fallout” but added “It’s too early to measure a significant impact.”

While times are clearly tight in the US right now, the figures didn’t really tell the full story.

For one thing data on existing sales lags approximately two months behind new homes sales. And therefore, the figures just out relate to February, a month of particularly bad weather in the US, and one already recognised as a bad performer.

Evidence since has suggested the market is stabilising. As Mr Lereah said, the data was “masking improved fundamentals in the housing market.”

Even so, you can’t completely explain away the biggest fall in 18 years with bad weather. And, if markets are stabilising at a level that is already very low, then things are not so good. Last year economists warned that even a static US housing market would have a massive negative impact on US growth. Most now seem to think prices will fall, albeit by only a small amount.

The US economy is far from out of the woods

April 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

So the price was just too much and the two horse race became a one horse romp to victory.

Yesterday the consortium of investors including Terra Firma, Wellcome Trust and HBOS dropped its interest in Alliance Boots.

In a statement it said “We are pleased that the shareholders of Alliance Boots have received a significantly higher price due to our interest, and we wish the company and all its stakeholders well under new ownership.”

Terra Firma may be led by Mr Success, Guy Hands, but it still seemed like a forlorn struggle.

The rival bid, from Kohlberg Kravis Roberts and Boots deputy chairman Stefano Pessina seemed to have an almost unassailable lead.

For one thing it had 26 percent of the business, and according to a report on the BBC this morning, the stake is now 29.3 percent. It also had the backing of the Alliance Boots board, and then there was Mr Stefano.

The Alliance Boots Deputy chairman is dynamo of the world of pharmaceutical retail.

The former nuclear energy engineer has successfully managed to engineer some corporate fusion, through taking his father’s little pharmaceutical business in 1976 and growing it until it merged with UniChem in 1997. Last year, the company was merged with Boots, but still Mr Pessina wanted more.

Moving forward, he feels the company is being held back by the need for quarterly reporting, and what is required now is a plan for expansion that can be enabled without the company having to worry about analysts scrutinizing its day to day operations like they were trying to split the atom.

April 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

When Amazon first announced a quarterly profit, it seemed dotcoms had come of age. No longer was the Internet a pipe dream that went bust with the dotcom crash, instead it seemed to be a business that could make hard bucks.

That was the quarter relating to Christmas 2001. In the final quarter of that year the company made its first ever profit, announcing net income of £5 million.

Of course, for a bookseller, Christmas is the key period and it wasn’t until the third quarter of 2003 that the company made a profit without the benefit of Christmas.

Now forward wind the clock a couple of years. It seemed that Amazon had managed another first. It was the first of the big dotcoms to hit maturity. By that we mean operating in a mature market subject to only small increases in profit year on year.

In fact you have to go back to Christmas 2004 to find the company’s record quarter - although that performance was exaggerated by a massive $239 million income tax benefit in that period.

But all in all it has been a story of a company that just didn’t seem to be able to re-live the heady growth days of the early noughties.

For further signs of Amazon’s maturity we need to look at its main rivals. In the UK, Amazon’s biggest rival is probably Waterstones, the bricks and mortar book retailer, that has been blaming Amazon and Tesco for its struggling performance.

When a dotcom is so big that it is making a major dent on the High Street, you know it must be close to maturity.

But then in the quarter just gone, Amazon seemed to stage a nostalgic return to the good old days. Net income in Q1 was $144 from $96 million a year ago. In fact, it was by far the company’s best ever quarter that did not relate to Christmas. And for the first time we have seen Q1 profits that are actually higher than profits achieved in the previous Q4.

It wasn’t just overseas sales that contributed to the bottom line. Sales in the US and Canada were up 35 percent.

But what is especially interesting about the Amazon performance is this. It has got other plans too.

It wants to go head to head with Apple in the sales of music, and its video on demand plans are well advanced.

It as if the company conquered one niche - book selling, took a pause for breath during which time profits started to fall, but now having taken a rest itself and having recovered from the heady growth of earlier years, is ready for stage 2.

But this time around the competition is tougher. In the world of book sales over the Internet it is the undisputed king. But in the markets it is now moving into it has competition galore. And the fight is only just beginning.

April 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

And as oil fell, so did profits.

Profits at BP were down 17 percent in the first quarter, with replacement profits coming in at $4.36 billion.

The company’s best ever quarter was Q3 last year when it rattled up replacement profits of $6.97 billion.

The fall comes as no surprise. As BP itself said, the price it received for its oil was down four percent.

But it wasn’t just cheaper oil that did it.

It is also costing more to find and then exploit oil, says the company.

Then there’s that matter of safety costs. After that fire in Texas, and a succession of reports each apparently more damning than the one before, the company has been tightening up on safety. There’s even been talk of linking Lord Browne, its chief executive’s controversial pay packet to safety.

You may recall earlier this year, a report produced by former Secretary of State, James Baker, at the request of the US Government’s Chemical Safety Board was published.

It said the company had a “corporate blind spot relating to process safety,” and slated the company saying “While BP has an aspirational goal of ‘no accidents, no harm to people,’ BP has not provided effective leadership in making certain its management and US refining workforce understand what is expected of them regarding process safety performance.” The report added “BP mistakenly interpreted improving personal injury rates as an indication of acceptable process safety performance at its US refineries.”

April 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

While the Bank of England tries to tell us inflation is under control, the CBI says the opposite.

The latest CBI industrial trends survey is out, and once again it’s good reading. In fact the CBI said “Growth in manufacturers’ total new orders is stronger than at any time in the last decade, other than during a short period in 2004.” And despite the high value of the pound the CBI added ” Levels of export orders have so far withstood the strengthening pound to remain steady over the last three months.”

But the data also revealed an unhappy trend.

The CBI index for measuring costs paid by manufacturers was down, from plus 18 to 11. But, the prices paid balance remains very close to January’s 11.5 year high. In fact, at 14, the prices paid index is consistent with a 3.5 percent rate of output inflation.

April 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

When we checked the value of the pound this morning we had expected to see it lower against the dollar. But instead, it was actually slightly higher.

The reasons for our expectation?

Yesterday Bank of England governor Mervyn King was talking to the Treasury Parliamentary Committee, and he seemed to make it quite clear. “There could be a sharp fall in inflation in the next four to six months,” he said.

Just about everyone expects to see the rate of interest go up soon. But the real debate is over what will happen next, and there’s growing speculation that there could be more hikes to follow given that the pound has been climbing so high against the dollar.

But yesterday Mr King seemed to give more ammunition to the doves, by saying, “Most of the measures of inflation expectations remain close to the target#133; There could be quite a sharp fallback in inflation over the next four to six months. We are completely determined to bring inflation back to target. That’s our purpose in life.”

He was joined by Kate Barker. First she seemed to give more fuel to the hawk’s fire when she said ” Minor changes in the housing market are not going to make us change interest rates but the fact that the housing market has picked up strongly over the last year is significant.”

But then she added the big level of debt was not a “big concern for monetary policy”.

While there is little doubt inflation will fall back over the next few months, others have feared that the rapid growth in money supply could spell problems for the future. That’s why a group of economists warned of the danger of encroaching inflation yesterday. In fact, Tim Congdon, former professor at the London School of Economics and one of the former wise men of the Treasury in the late ’80s and early ’90s said he believed rates might need to rise to 7.5 percent.

Yesterday, however, MPC member Paul Tucker had an answer. He told the Treasury committee that “I don’t think the relationship between money and inflation data over the past 30 years has been particularly reliable.” He likened the current rise in the money supply to an amber light.”