May 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

The government’s decisions to opt for the nuclear energy option has raised hackles with some, but drawn reluctant support from others.

But at Greenpeace it appears the shackles have risen as high as a wind turbine above the flatlands.

Greenpeace said government statistics were misleading - no surprise there then. It said “Nuclear power provides 19 per cent of our electricity but - much more importantly for both climate change and energy security - only 3.6 per cent of our energy. By just talking about electricity instead of energy, Blair’s ignoring all the energy that’s used to heat our homes, businesses and water, mostly provided by gas.”

It then lambasted the government for using nuclear power as a short term fix. It said: “The government keeps warning us about an impending energy gap in 2015 - and suggesting nuclear power as the answer. But, by the industry’s own estimates, the first new nuclear reactor in the UK wouldn’t be “taking effect” (the industry’s words) until 2017 and the full fleet wouldn’t be completed until 2025-2030. At the earliest. And, providing only 3.6 per cent of our energy needs, nuclear power would do almost nothing to plug the energy gap.”

Greenpeace added: “A new nuclear power station has never been built on time and on budget, anywhere in the world. In fact, the average nuclear power station is finished four-years late and 300 per cent over budget. Building a new fleet of new power stations will cost, based on past experience, between £20 and 40 billion - and that’s ignoring the billions that will be spent on operation, waste management and decommissioning. Research from the US found that every pound spent on nuclear would deliver 10 times the cut in carbon if it was spent on efficiency instead.”

But yesterday, taking a quite different view, Richard Lambert, the CBI’s director general, said “Only a combination of nuclear and renewable sources, alongside more efficient gas, coal and oil generation, can deliver the reliable energy supply we need whilst tackling carbon emissions. With a third of UK power plants due to be replaced by 2025, time is against us if we are to avoid power shortages.

“The White Paper suggests the government understands what is needed to avoid this energy crunch, and to make the UK system more secure and more environmentally sustainable. The real test now will be in delivering these proposals.”

But, actually, there is another solution. Greenpeace says that by having energy generated across the community, efficiency would be much greater. The trouble is this: everything has a price. And the price for more efficient and less polluting energy generation often entails building a new renewable form of energy generation in your area.

Local communities often react to the idea of a wind farm, by saying something like, “oh yes, we agree with the idea, but it would be inappropriate for this area.”
Greenpeace says the UK’s current system of developing energy is vastly inefficient. It generates electricity, sure, but heat is just let loose. It says that decentralised energy could double the efficiency of our power stations: “It’s helped Woking Council cut its carbon emissions by 77 per cent. It already provides over 50 per cent of Denmark’s electricity supplies.”

May 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

The Bank of England Monetary Policy Committee (MPC) has doves and hawks. They don’t mix well; while the hawks swoop and pounce upon us carrying away interest rate rises in their talons, the doves coo away in their cotes calling for falls.

The bank’s arch dove is David Blanchflower. He voted against the August, October and January hikes in interest rates, and, in March voted to lower the cost of borrowing.

But earlier this month, when the committee met, he along with every other member of the MPC voted to raise the rate of interest to 5.5 per cent.

Dove had become hawk, and hawks have seemingly mutated into some new screeching monster of the skies. For while Mr Blanchflower finally appeared to drop his calls for lowering rates some members of the committee actually contemplated raising rates by half a per cent, or so said the minutes of the last meeting, which were published yesterday.

Most economists now expect rates to rise at least once more, maybe next month, and a growing number are now predicting six per cent interest rates by the summer’s end.

It does occur to us that this softly softly approach to upping rates every few months is not really achieving that much. Maybe it’s time the Bank of England tried to shock inflation fears out of the system, by upping rates by half a per cent, and getting it over and done with. Maybe if rates had risen by half a per cent, instead of a quarter, back in August and October last year, then all of today’s fears would have receded, inflation would have been nipped well and truly in the bud, and we would be looking forward to falling interest rates.

May 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

Where do you want to go today? What do you want to buy? Where do you want to go on holiday? Google reckons it should be able to tell us. It wants to save us all that shopping around, and just give us what we want, first time.

Its CEO, Eric Schmidt, is in London, and yesterday he said: “We cannot even answer the most basic questions because we don’t know enough about you. That is the most important aspect of Google’s expansion.”

He added: “The goal is to enable Google to be able to ask the question such as ‘What shall I do tomorrow?’ and ‘What job shall I take?”

Google of course, follows the mantra “do no evil”. Perhaps we should be grateful that the company who wants to know so much about us, is run by such kind benevolent souls.

May 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

The latest anti private equity meeting, sorry European Trade Union Confederation, is in full swing.

And once again, TUC general secretary Brendan Barber is taking a swipe at private equity. This time he is worried about that poor, beleaguered system, known as capitalism.

The TUC, which has always been such a staunch supporter of capitalism, said “The rise of super-rich private equity players are beginning to fundamentally change the nature of British and European capitalism.”
Mr Barber added “A new super-rich elite can suck value out of companies without even paying proper UK tax on their windfalls or disclosing what they are doing. Meanwhile, the rest of us face possible reduced returns on our pension investments, the risk of economic slowdown if the takeover debt bubble bursts, and - if we are unlucky enough to work for a takeover target - real threats to jobs, pensions and living standards.
“The government cannot just sit back worried that action might make it appear anti-business. Taking action on private equity would be ‘pro’ all the businesses that think long term, have to fully report what they do and whose owners pay proper tax on their investments.”
It is worth bearing in mind, that these so called tax breaks don’t really take money from the exchequer. Companies only pay corporate tax on profits, once interest payments on loans have been deducted. So companies which are backed by borrowed money, make less taxable profit.

Bear in mind, however, that the resulting profits that are enjoyed by the banks are taxed.

It is also worth remembering that the real beneficiaries of private equity’s success are its backers. - typically pension funds, which we all share an interest in.

It is true that the UK is seeing wealth re-distributed. Wealth is being transferred from workers to capital, in the form of higher profits, and from consumers to capital in the form of higher profit margins. Who owns this capital? Why its investors in pension funds.

Earlier this month we reported on the findings of Abbey, who said “UK’s 50 plus generation is now worth £5.16 trillion. That’s greater than the combined GDP of Japan, Germany, the UK and France, and, if growth continues, could outstrip US GDP - six-fold - by 2012″

Mr Barber continues to slate private equity with every opportunity. It is true, there is a danger a bubble is developing, that too much money is being paid, and that as a result, private equity owned companies could hit problems down the line, especially if interest rates move up.

But, many argue private equity, through creating greater efficiencies is actually creating employment, and making the UK richer.

There is a lot wrong with private equity, but then it does have a lot to commend itself.

Don’t fall into the trap of agreeing with Mr Barber that it is simply, bad, bad, and bad.

May 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

At last, she has done it. This year has seen the Dow Jones set new highs with such regularity that we have stopped reporting it. But, until this week, when examinng the SP 500, we had to look back seven years to recall its record.

The record was set on 24 March 2000, with the index closing at 1,527.46. By the autumn of 2002 the index had collapsed, down 49 per cent on that happy day 19 months earlier.

Slowly but surely it has crept back, and then on Monday it happened, but alas, only for a short while.

By lunch time on Monday the SP 500 had hit its intraday high. It still managed to close a couple of points shy of the record, however. Tuesday was almost a carbon copy, once again passing that 2000 peak, only to finish at 1,525.10. So a new all time high has been set, but the highest ever closing price still remains the level set in 2000.

The question then, what is next?

The SP total market capitalisation to projected profits, or p/e ratio, is now 34 per cent below the average for this decade. But, then again, for 14 successive quarters corporate profits have been growing faster than shares.

Last December, we reported that US corporate profits to GDP were at the highest level ever recorded (although the ratio was almost as high in 1929), one assumes that since then the ratio has increased by even more.

But now, expectations for profits are down. So, sure p/e ratios are relatively low, but then, you would expect them to be.

Now all eyes turn to private equity, will the their frenzy for eating public companies continue?

May 23, 2007 | posted by Michael Baxter in IABN | comments (0) |

When was the last time you went into a shop and ordered, say, a new sofa? Before you could obtain this sofa were you then required to pay for a pack to indicate it had been properly made? Were you required to pay for a survey, to show that the retailer selling the sofa really did own it in the first place?

The answer, of course, to both these questions is no. The seller has certain obligations, certain standards it must reach, and so deeply enshrined is this principle, that we don’t even think about it.

But, in the property market it’s different. When you buy a house, the cost of obtaining this basic information is with the buyer. We make an offer for a house without really knowing what we are buying. Once an offer has been accepted, money is then spent on surveys, mortgage valuations and searches. Sometimes, we are so non-plussed with the information revealed we withdraw the offer. When the property is then put back on the market, subsequent purchasers have to pay for exactly the same information. It’s difficult to see who could possibly benefit from this, except of course surveyors and lawyers.

And that in a nut shell explains the big rationale behind Home Information Packs. And exactly the same arguments apply to energy certificates. Under EU law, energy surveys will be compulsory. In any case, in the fight against climate change, and in this new enlightened era when we have discovered we can actually save money through energy efficiency, these surveys are very much in the “customers,” interest.

What impact can HIPs have on house prices? Since they are designed to help the buyer, it seems difficult to see how they can have any impact on the market other than helping demand, and perhaps reduce supply, higher prices maybe more likely.

This argument that the HIP could cause a property market crash seems to be straight out of the Mickey Mouse school of economics.

And yet, to listen to the industry, you would have thought this HIP idea was hatched by the devil incarnate himself.

Let’s be clear. The government, as is its want, has messed up. Its eleventh hour delay in the introduction of the HIP cannot really be described adequately in a publication that is sent by email, because the appropriate words one would like to use to describe the government’s ineptitude would fall foul of every firewall out there.

Furthermore, to really rub salt into the wound, when the packs are introduced on August 1, they will only be made compulsory for houses with four bedrooms or more.

The government’s about turn has caused chaos. The Association of Home Information Pack Providers said: “We must also consider the thousands of individuals, many of whom are RICS members, who have invested their time and in many cases, their own money, in training to become home inspectors and domestic energy assessors. Many home inspectors have already been let down by the July 18th u-turn, which saw the Home Condition Report (HCR), a hugely beneficial element of the pack, made voluntary and now they will feel the same way about the latest delay”

Perhaps the government had no choice but to postpone the introduction. After all, a judge had ruled in favour of the Royal Institute of Charted Surveyors, (RICS) and said the energy certificates should be left out of the packs for the time being.

RICS has rightly slammed the government for a series of changes straight out of the premier league of incompetence. First the government decided to exclude the Home Condition Report, then it dropped local authority searches and then leasehold information.

This means said RICS, that the HIP now contains only the Energy Performance Certificate (EPC), the title deeds (if the property is registered), a sales statement and the pack index. RICS said “It is essentially an empty pack.”
But then again, RICS is not arguing for the abolishment of the HIP. Merely, that it should be “delayed until all the documents that a buyer will need can be obtained quickly and easily by the seller”
According to this morning’s FT: “One in four people selling a house will have to get new searches to update their home information packs.” But then the paper also added, “Officials last night said there was no requirement to update the pack and that some providers were already offering to update searches for free.”
It seems to us that in principle the HIP is a good idea. Sure the government has mishandled its introduction, but then that’s par for the course. But, the ranting in the media is ill thought through.
It’s is difficult not to conclude that the property industry is too preoccupied with the needs of sellers, while buyers, and in particular the First Time Buyer seems forgotten.
They say the customer is always right, yet on this occasion, through the media induced anti HIP hysteria, we seem to have forgotten about the customer altogether.

May 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

Whichever way you look at it, private equity companies are capitalist all right. You might hate them, or you might think they offer the panacea for future economic growth - but you won’t deny their modus operandi is capitalism in its purest form.

It’s all the more strange then when we look at the imminent flotation of Blackstone, and discover that no less than 10 per cent of the shares coming on the market will be handed over to the communists.

Yes that’s right: paranoid US politicians won’t need to look under their beds any more; instead all they will have to do to find the commies is look at the make-up of shareholders in one of the great bastions of capitalism.

You see China is set to invest $3bn into Blackstone. This from the country that has the effrontery to enjoy startling economic growth without aid from the IMF and World Bank. It has been able to flood the US market with its imports through keeping its currency low against the dollar, and, to cap it all, has possibly been subsidising goods it sells to the land of the free and massive agricultural subsidies.

Where is the money coming from? Why from no other place than its massive foreign reserves. The huge Chinese balance of trade surplus means money is flooding in and, to keep the currency low, it has been busy buying US assets - mainly low risk, low return US Treasury bills.

US politicians don’t like the idea that China is in part bankrolling their public deficit, and they hate the idea that of losing jobs to China.

A Chinese trade delegation is currently in the US for talks with US authorities, but they could yet end in failure. Washington is certainly talking tough.

And yet, by throwing some of its money into private equity, once again we see how China is joining the rest of the world.

Rome was not built in a day, and the complete destruction of the Chinese great economic wall will take many years, even decades. But as the barriers come down (as the report from the Item Club above makes abundantly clear), and surely Blackstone would agree, the capitalist free trading world can only benefit.

The Chinese currency will rise. This is inevitable. But let’s hope the US does not force an unnecessary economic trade war, perhaps reducing global GDP growth, just because it is impatient to see the inevitable.

May 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

Those two old timers of the High Street are back. This morning Marks and Spencer announced a 28.5 per cent jump in profits, taking them to within a whisker of the highest results ever posted by the company, while Sainsbury’s announced a 42 per cent jump in profits at the end of last week.

With Myleene Klaas and Brian Ferry joining the likes of Twiggy and Erin O’Connor as the faces of MS, the company has seen underlying sales jump by 6.1 per cent, while its share of the clothing market has increased by 0.7 per cent to 11.1 per cent, and food sales now account for 4.3 per cent of the market, up by 0.2 per cent.

In all, profits came in at £965.2m, just shy of the £1bn profit enjoyed in 1998 - in the good old days before the company got lost under changing management and a confused strategy, which, before Stuart Rose took over, seemed to suggest the company had lost sight of its core values.

Meanwhile, two thirds of the way though its three year recovery programme, Sainsbury has revealed a new three year plan.

The company has seen profits jump to £380m with sales rising by 6.9 per cent.

But the big question is this: what’s the company planning to do with its £8.6 billion property portfolio? Recently, Qatari-owned Three Delta bought a 17 per cent stake in the company. The property investment firm presumably expects Sainsbury to sell off its property assets. Maybe it’s after the assets itself; maybe it was hoping for a bumper dividend payment.

If it is the latter, then Three Delta will be disappointed. Sainsbury’s chief executive Justin King said: “Because we are launching ambitious plans to develop the business further, including investing in 50 per cnet of the existing estate, now would not be the right time to signal any special return to shareholders.”

Its seems that while all around retailers are discounting prices like there is no tomorrow, MS and Sainsbury’s - both seem to feel that there really would be no tomorrow if they joined the ranks of price slashers - have achieved profit growth largely though returning to the way they used to do things.

In short, they have worked out what gave them a unique advantage and tried to emphasise this. This may seem obvious but it was their failure to implement this approach in the past that led to their respective problems earlier this decade.

May 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

“Continues to be outstanding, ” is a good way to start a report. For that is the UK’s accolade from one of the country’s top economic forecasting groups. It also makes a good end-of-school report for our Gordon, as he busily orders the removal lorry to take him all the way next door. Oh, and since he already lives at number 10 will he actually be moving, does anyone know? He and Tony chose to rearrange the living arrangements, since Mr Blair had a bigger family and number 11 has more accommodation, but of course there are more Browns out there these days too, so maybe he will want to move to number 11!

Ernst and Young’s Item Club, which is the only economic group to use the same data as HM Treasury and is headed by the much respected Peter Spencer, kicked off its latest report by saying this: “UK economic performance continues to be outstanding. GDP has now increased in each of the last 59 quarters - a much longer period of sustained economic expansion than in any of the other major economies. And UK growth is set to be the fastest of all of the major economies in 2007, so that average living standards are set to rise even further ahead of those in Germany and France, having lagged well behind a decade ago.”

Not bad huh?

In fact the report makes a fascinating point. Back in 1990, our GDP per capita was a miserly 13,379 euros, compared to over 18,000 euros in both France and Germany. Today, the UK enjoys GDP per head of 29,740, compared to 27,122 and 28,372 in Germany and France respectively.

But the data begs two questions: why have we done so well, and will it continue?

At face value, the success becomes hard to understand when we hear manufacturing has hardly witnessed any growth in output since 1997. But, then again, once man’s poison is another man’s meat, and while manufacturing has been tottering, our services sector has boomed. In fact, says the Item Club, the UK service sector has outpaced its competitors in the other major economies including the US since the early 1990s.

And if you strip out the data relating to the public sector, you find that the financial and business services sector has seen average growth of around five per cent a year in real terms (i.e. over-and-above inflation) since 1995.

Apparently, the private sector for business and financial services has contributed 60 per cent of the growth in GDP over the last five years, and as a result, its share in GDP has risen to almost 30 per cent today from less than 20 per cent in 1990 and just 14 per cent in 1980.

Similarly, the sector now accounts for 20 per cent of all jobs in the UK, up from 15 per cent in 1990 and just 11 per cent in 1980. Indeed, half of the net new jobs created in the UK in the last decade have been in this sector. That is a big contrast with the manufacturing sector, where the trend in employment has been strongly downwards. The sector is now a bigger employer than manufacturing in all of the UK regions with the exception of Wales and the East Midlands, says the Item Club.

But there is another key point relating to this sector. What’s the big curse of the British economy? Our productivity is low. We simply produce less per head than most of our main economic rivals. But it’s not so with services. According to the Item Club, this area of the economy enjoys gross value-added per worker of £50,000; that’s 40 per cent higher than across the economy as a whole.

It’s also a sector that is providing one of the few rays of hope for our balance of payments, contributing a net surplus worth $36bn a year.

But will it continue? The Item Club warns that the move towards off- shoring does pose a threat, but the UK has much more to gain from the emergence of economies such as China and India than it stands to lose through off-shoring. It says China’s main imports are raw materials, intermediate goods, and capital equipment. So, there is a problem that China today is not buying much of what the UK is good at exporting. But that will change as China grows and its citizens become wealthier, and also as China’s markets become more open to foreign investors.

The Item Club warns, however, that to see a continuation of this growth, the sector needs more investment in skills and training, more investment in infrastructure, and not too much regulation.

But there is a disadvantage to all this.

Booming services are forcing up house prices, creating shortages of labour for other sectors and helping to maintain the high value of the pound. The Item Club said: “Manufacturers are finding it particularly difficult to compete with services for skilled labour such as graduates. Advanced engineering companies like Rolls Royce say they are increasingly having to look overseas for employees.” It added “The City is
like the cuckoo in the nest, growing ever larger and crowding out others that might be viable elsewhere.

May 22, 2007 | posted by Michael Baxter in IABN | comments (0) |

There may be lots of economic clouds on the horizon, what with the rate of interest expected to rise and all, but we have managed to find a lining made of 24 carat gold.

Under the official measures used to quantify these things, company pensions in the UK are in surplus for the first time ever.

Before we go any further, it may be wise to define what we mean by “ever.” On this occasion we are not tracing records back to the big bang, or the time of dinosaurs, or even to 4000 or so BC - the date creationists might consider the key. No, on this occasion, we are talking June 2001.

The Financial Reporting Standard 17 (FRS17) was introduced 18 months into this millennium. This is the standard that requires pension funds to account for future payment commitments in their balance sheets, and when it was introduced crisis descended upon the industry like a big clunking fist.

It was unfortunate this scheme was introduced at a time when the stock market was in freefall, shares were plummeting in value and pension managers, in an effort to secure solvency, sold equities and bought bonds. This, in turn, forced shares to fall even further, increased the danger of insolvency further still, and then forced companies to sell even more equities.

So, the crisis compounded itself.

But finally, when markets dropped to values that even the most pessimistic thought were cheap, the recovery started. Now the FTSE 100 is only a few hundred points shy of its all time high, while last year the FTSE 250 recovered all that lost ground it suffered during the first half of this millennium. And with it, pension funds saw their values soar.

Maybe pension fund valuations would have risen even further if solvency rules hadn’t forced them to buy bonds, meaning that some sold at bottom, and bought back only when markets were rising.

But, be that as it may, according to Aon Consulting, yesterday the UK enjoyed an aggregate UK pension accounting surplus for the first time since FRS17 was introduced. Apparently, this marks more than a £50bn improvement in FRS17 scheme net valuations in two months.

According to Aon: “There has been a remarkable degree of volatility in the aggregate deficit over the last three months, commencing with the largest single day increase in pension deficits of £11bn after market turmoil in China on 27 February 2007. At its recent peak, the aggregate deficit stood as high as £50bn in March 2007.”

Aon says that the aggregate deficit for the 200 largest pension funds has cleared, whilst equivalent figures for FTSE 100 companies also show an improvement to a surplus of £1bn. The improvements in the aggregate position for UK pension schemes has arisen primarily from increases in bond yields - the benchmark measure of pension scheme deficits for accounting purposes - although strong investment performance has also served to improve the position.

Commenting on these improvements Marcus Hurd, senior consultant actuary at Aon Consulting, said: “This is a momentous day for UK pension schemes, because the average UK pension fund is now likely to be in surplus. Whilst FRS17 is only one measure of the pension funding position, this is clearly a significant move towards avoiding a future pensions crisis. Attention will now focus on those schemes, which are not in surplus and have uncovered pension liabilities of £18bn. With several equity markets at their highest level for several years and remarkable volatility in FRS17 valuations, it remains to be seen if the aggregate pension surplus will persist, but for now today is a good day for UK pension schemes.”