July 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

What have the Brits, the Danes, the Swedes the Norse and the Kiwis all got in common? Answer, according to credit ratings agency Fitch, these are the countries most vulnerable to a potential crash in house prices.

And on that list of potential trouble, the UK sits rather ignominiously in third place.

According to Fitch, your average property in the UK is 20 per cent overvalued. Its arithmetic is fairly simple. In the UK over the last 10 years house prices have grown by 210 per cent, income by 53 per cent.

But it’s not just the high price of house prices that are a problem, apparently house prices are overvalued in France too, but the level of personal debt in France is more modest. The Brits, along with our Scandinavian friends and the New Zealanders are all made vulnerable by high levels of debt, or so says Fitch

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

July 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

Talking of the Murdochs, while James busily buys Amstrad, the News Corp $5 billion purchase of The Wall Street Journal has hit a hurdle.

You may recall that the Wall Street Journal has a rather peculiar structure - its founding family the, Bancrofts, have this idea of preserving editorial integrity. The firms’ owners are not allowed to influence editorial decisions.

But, Mr Murdoch seems to have convinced the, that under his control, the Wall Street Journal would remain a paragon of editorial integrity - a bit like the Sun then.

But, to do the deal, Mr Murdoch wants as many member of the Bancroft family as possible to be supportive.

But the family is split. Some have argued strongly against the bid - and time is running out - and some reports are suggesting Mr Murdoch is close to giving up.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

July 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

Imagine the meeting. The man waits out side, on the surface calm, inside he is churning, and as a visible sign of his inner turmoil he scratches his beard.

The boss, James, asks him to come into the board room. “What I don’t understand” he begins “is this.” Your company used to be innovative, clever marketing saw you dominate the UK business for word processors before the PC became ubiquitous. You dominated the UK personal home computer scene, you even bought out Sir Clive Sinclair, and then you turned the British PC market upside down when you launched cut prices PCs.” But what do you do now, all you can really manage of any significance is a set top box, and you are far too reliant on just the one customer. You are fired. ”

Of course, it won’t be quite like that, but it would be kind of droll if it was.

BSkyB, which is headed by Rupert’s son James Murdoch, has offered £125 million for Amstrad and the famous boss of the set top maker, Sir Alan Sugar, has accepted the bid.

Sir Alan, who is a sort of eponymous boss, in the sense that Amstrad stands for Alan Michael Sugar Trading, currently owns 29.7 per cent of the business.

It seems the rational for the deal is fairly straight forward. BSkyB already accounts for 30 per cent of Amstrad sales of set top boxes, and it wants an in house RD facility.

In the six months ended 31 December 2006, Amstrad reported a profit before tax of £10.5m on sales of £40.6m profits were less than the same period a year earlier, when they came in at £12.5 million.

These days, though, for Sir Alan, Amsprop, a property business is where the Sugar wealth really sits.

It seems he saw the writing on the wall a long time ago. He realised that Amstrad could not compete against the big boys in the computing world, and it would appear he correctly foresaw the property boom.

At the time of going to press, full details of the deal had not been announced - and it’s not clear what role Sir Alan will have with Amstrad, moving forward.

Steve Jobs, was once famously sacked from Apple, the company he founded. While it is quite pleasant to fantasise about Sir Alan getting the kind of treatment he has dished out to apprentices on his TV show, it seems likely that the reality will be quite different.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

July 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

Right now it feels as if the global economy is in two halves. On one side you have got the US, struggling under the weight of its massive trade deficit, which has borrowed itself to the point of crisis.

On the other hand, you have got the brave new world: India and China et al promise the potential of great riches.

It’s a good time to be a bank called the Hong Kong and Shanghai Banking Corporation. It’s a good time to be a bank that has been around since Victorian times, and has detailed understanding of the Asia Pacific region.

The trouble is it’s not called that anymore. It bought the Midland Bank, and changed its name to HSBC, and then the US became a vital part of the business. In fact, in the first half of 2006, the US brought in more profit than any other region for the bank. The US made a $3.74 billion profit for the bank during that period, which came in at 29.9 per cent of all profits.

But then today, it’s a different story. In the first six months of this year, US profits slumped to $2.43 billion, and more to the point, as the US sub-prime woes hit the bottom line, the bank has been forced to increase its charges for bad debts to $6.35 billion, this is 63 per cent up on a year earlier.

But, meanwhile, profits in the Asia Pacific Region, Hong Kong and Europe all grew dramatically. In fact profits in Hong Kong jumped from $2.7 billion a year ago to $3.3 billion, while the rest of Asia Pacific saw profits jump from $1.7 billion to $3.3 billion.

A year ago Hong Kong and the rest of Asia Pacific made up 34 per cent of total profits, in the half year just ended they made up 47 per cent.

Europe did well too. Despite incurring £116m through the cost of dealing with UK customers claiming they had been overcharged, profits in Europe jumped to just over $4 billion from $3.6 billion in the same period last year.

In all, HSBC made a profit of $14.15 billion, before tax, compared to $12.517 billion this time last year.

As for the future, HSBC, seems sure to be put a lot more emphasis on what those four letters relate to H-S-B-C - Hong Kong and Shanghai Banking Corporation.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

July 31, 2007 | posted by Michael Baxter in IABN | comments (0) |

“It’s the business model we don’t like,” said the private equity company that had been looking at Virgin Media. Even so, considering all this talk about a credit crunch, about how all of a sudden private equity is struggling to raise the funding, one can’t help the suspicion there’s a little more to it than that.

The last few hours has seen a change in the makeup of business apparently looking at Virgin Media.

According to the Times, TPG - formerly known as Texas Pacific Group, has pulled out of the bidding circus. The newspapers said that it was understood TPG’s decision had nothing to do with the reported shortage of funding, which has been behind the stock market tumble seen in the last few days. Rather, the private equity group had misgiving about the Virgin Media business model.

And as they all move over and one falls out, another company has jumped into the marital bed in making, or at least rumours suggest this.

But on this occasion, the new bidder comes from within the industry. Liberty Global Inc. is one of those old fashioned types of bidders. It’s listed on the NASDAQ. For a chance the public can actually buy a piece of the action.

Liberty describes itself as “the leading international cable operator offering advanced video, telephone, and broadband Internet services” and makes much of the fact it operates communications networks in 17 countries principally located in Europe, Japan, Chile, and Australia. It employs 20,000 people.

But the real colour with Liberty comes in the shape of its long standing chairman John Malone. Mr. Malone is something of an enigma. He is known for his ordinary ways, for example he often stops off at truck stops while traveling in his camper van, but his negotiating style has earned him the nickname of Darth Vadar.

So the question is this, how will Darth Vadar and Sir Richard Branson hit it off?

The other party reported to still have amorous intentions regarding Virgin Media is the Carlyle Group - which is a private equity business to its core.

And so it may come down to straight battle between a business empire trying to expand, and what is often seen as the complete opposite, private equity - which is all about stripping assets to the profitable core.

On the other hand, neither Carlyle nor Liberty have confirmed they are definitely making an offer. And given the current market climate, it would appear that Virgin Media has once again got its timing wrong.

It timed its bid for ITV in such a way that BSkyB was able to swoop in and pick up stock in the TV broadcaster, making the Virgin bid untenable.

Now, it’s put itself up for sale, just as it appears the bottom is falling out of mergers and acquisitions.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

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

Speculation is beginning to bubble on what the Bank of England will do next.

The Bank of England, as you know, meets on the second Thursday of every month to decide the rate of interest for the next month. Well, actually, sometimes it meets on the first Thursday, and this week will contain one of those Thursdays.

The majority of economists think rates will go up soon, so why doesn’t the Bank of England just get on with it, to really try to get to grips with inflation? If it had upped rates more aggressively last year, perhaps the interest rate cycle would have peaked by now, and inflation would not have been given so much opportunity to gather momentum.

Even so, to up the rate of interest in the wake of such stock market turbulence would be a brave move indeed.
This weekend, David Kern, economic advisor to the British Chambers of Commerce said “The recent floods are putting severe pressures on business, while internationally we are witnessing a sharp deterioration in the global credit markets, which has eroded confidence and has triggered widespread falls on most stock markets.”
“Against this background, it would be very dangerous to contemplate interest rate increases. It is important to avoid an overreaction, which could cause serious economic damage.”
Then again, to steal a motto: he who dares, wins the fight against inflation. gt;

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

One can assume a lot of writers for the Sunday papers made a lot of money last week.

Many columnists went into “told you so” mode, so presumably as they had been so confident markets were about to fall, they had put their money on derivatives, betting on market falls.

Don’t be surprised then to see a seat change in the names of journalists writing for the investment pages of newspapers and magazines; no doubt they are already planning their early retirement in the Bahamas.

On the other hand, if you find that the names haven’t changed, maybe there was a lot of wisdom in hindsight permeating the pages of the Sunday newspapers this weekend.

Sure, there were plenty of reasons to expect equity prices to fall. Rising inflation has caused the rate of interest to increase, which in turn has drawn into question the ability of some borrowers to repay their debt. This has led to re-assessment of risk. All of a sudden lenders want a better return on their money.

This was foreseeable and the writing has been on the wall and in these pages for many months.

On the other hand, there are still optimists out there, and they have certain evidence to back up their belief.

For one thing, US earnings in the latest quarter are up 9 per cent so far, valuations remain relatively modest, the global economy is expected to carry on growing at near record pace, and China still has enough money in its foreign reserves to keep the global economy pumped up with credit for the foreseeable future.

For all that, the Dow Jones still managed to fall another 200 points on Friday. That means it has lost 677 points, or ten per cent in 5 days - just under 5 per cent on the day.

Interestingly enough, one of the comments that sparked off the fall was speculation by Bill Gross, manager of the $103.1 billion PIMCO Total Return Bond Fund, and one of the great gurus of the investing world, who said he believed markets were overvalued by between five and 10 per cent.Well, since the Dow fell 5 per cent during the days after Mr Gross’s comments, it would appear the sell off has already returned company valuations to the higher end of what Mr Gross thought was reasonable.

For a detailed analysis of last week’s sell off see Friday’s issue.

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

Well it is nearly August. That parliamentary committee that has been grilling the private equity boys is shutting down along with parliament until the Autumn. In the meantime it has made a decision - not to decide - yet. John McFall, chairman of Parliament’s Treasury Committee put it this way. He said “many aspects of the private equity industry are highly complex and a short inquiry cannot do full justice to them. We have been correspondingly cautious.” So, it’s been decided then, to give this a lot more thought.

There are three aspects of private equity that are set to come under the spotlight.

Firstly, it’s the way private equity managers are remunerated, via carried interest payments. This means that they pay capital gains tax, rather than income tax, meaning they qualify for taper relief, meaning their tax bills are often quite modest in proportion to their salary.

Secondly, in the way private equity companies can deduct the interest payments on the money they borrowed to buy a company from the profits that company made.

Thirdly, many don’t like the way the British tax system only taxes foreigners resident in the UK on their earnings in the UK. This aspect of British tax law is not specific to private equity, but it’s a tax benefit often enjoyed by private equity’s cohorts.

Others fear that private equity companies strip firms of their assets, making their balance sheets weaker and less able to withstand shocks.

On the other hand, there is also evidence to suggest private equity run businesses become more efficient, and ultimately, are able to build upon that efficiency and then actually employ more people than if they had stayed a PLC.

The truth is, however, that right now evidence either way is inconclusive.

No wonder the parliamentary committee wants a lot more time. No doubt, it will eventually conclude that a more thorough investigation is needed.

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

It was a kind of begrudging nod to RBS and its consortium.

ABN Amro rather liked the 66 billion euros bid it received from Barclays. And it talked about how the synergies were there, how the strategic vision at the two banks fitted neatly together, but then money is money. The bid from the consortium of three banks, RBS, Fortis and Santander is worth $71 billion, and this weekend ABN’s supervisory board sat and cogitated and decided it could no longer recommend the Barclays offer.

“ABN Amro will further engage with both parties with the aim of continuing to ensure a level playing field,” said a statement from the bank.

It was a busy weekend for the bank, for while its supervisory board is trying to decide its fate, it also had to worry about its quarterly profits. This morning these were revealed and they were down 7.1 per cent on a year ago.

This is a bank that needs to sell out and start enjoying synergies before profits fall even further, but with Chinese money about to flood into Barclays’ coffers, and the tide apparently turning against fundraising for leveraged buyouts, the battle to win ABN is not over yet.

In order to cough up its share of the money on the table to buy ABN, the Belgian Dutch bank Fortis is planning a rights issue. But first it has to clear the hurdle of an AGM - scheduled for next Monday - and given the recent market conditions, it’s by no means certain its plan will get the nod from shareholders.

Right now, liquidity is being squeezed. Private equity firms are finding it tougher to raise the money they require; problems with the buyout of Chrysler, Alliance Boots and the US drinks arm of Cadbury’s Schweppes offer testimony to this. Even for the three banking giants who make up the consortium, raising $71 billion is far from a walk in the park.

But, if there is one area where there isn’t a shortage of cash, it’s China. With its $trillion plus worth of foreign reserves, China wants to find a home for its money which pays a better return than US treasury bills.

That’s why it wants to invest in Barclays, and that’s why Barclays may yet prove to have the trump card.

It’s not over until the fat lady sings, and ABN has not even begun to warm up its voice yet.

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

Do you know what, the property industry doesn’t do bad news.

Take the Halifax for example. Recently it said this “Homeowners who took out a fixed rate deal two years ago will face higher mortgage payments when they re-mortgage. A borrower with a £114,000 mortgage, taking out a two year fix in 2005 at 5.08 per cent, faces an increase in monthly payments of around £65, or 10 per cent, when the deal expires this year. The overwhelming majority of these borrowers are expected to be able to absorb the increase in payments. Most people’s earnings will have risen since they took out the mortgage - average earnings have increased by 7 per cent in monetary terms over the past two years - providing more income to finance the higher interest payments. ”

So that’s it then. Rates rise from 4.5 per cent to 5.75 per cent in less than year, and your average borrower who took out a fixed mortgage 18 months or so ago, will only have to fund an extra £65 a month. No wonder the property market analysts are so positive.

And yet it doesn’t make sense. How can the rise be so little? Well, the Halifax assumed the mortgage lender jumped from fixed to standard variable mortgage carrying the lowest rate of interest - although it didn’t take into account one off charges.

But supposing you decide to take out another fixed rate mortgage. You may reason, that with the rate of interest going up, it is better to be safe than sorry. Then of course, the mortgage payments are much, much higher.

Take another example. Recently the Birmingham and Midshires published a report saying that your average buy-to-let investor enjoyed returns of 13 per cent over the last year. Not bad considering rates are rising so fast.

Tim Crawford, Group Economist at Birmingham Midshires, said “The fundamentals underpinning the buy-to-let sector remain sound. While house-price growth in the sector is expected to be more subdued near term, reflecting the impact of higher interest rates, the potential for further increases in rents should encourage long term investors.”

And yet this is what Capital Economics had to say “The sluggishness of rental growth meant that gross rental yields fell to 5.3 per cent in the second quarter, down 0.5 percentage points from the same period last year. After allowing for voids, maintenance etc., but not mortgage costs, we estimate that net yields are just 3 per cent. With mortgage rates at 5.5 per cent, a new buy-to-let (BTL) investment will only cover its costs from day one if financed with a mortgage equivalent to just 55 per cent of the property’s value or less, down from 70 per cent a year ago.”

In other words, unless they put down a massive deposit, new buy-to-let investors will not cover mortgage costs from rent.

So why then would a buy-to-let investor jump into the market? Because he or she expects house prices to go up. But who is pushing house prices up? Why it’s the buy-to-let investor. Does that have bubble written all over it or what?

Sure tenants are paying out more in rent, but the rise in rent is not keeping pace with the rise in the cost of servicing mortgages.

The question is, what will a buy-to-let investor do if house prices stop rising, or only rise by a small amount? It seems likely that many, especially those who are highly geared, will sell. Indeed, there has been evidence that his has been happening, in a small way already.

But if some buy-to-let investors sell, house prices may well fall. This will make buy-to-let investing even less tempting, and more will sell - you can guess what will happen next.

Yesterday, the Nationwide released its latest housing market report. It has house prices rising by just 0.1 per cent in July. April 2006 was the last time the Nationwide had prices rising so modestly.

And yet, the full implications of the recent rises in the rate of interest have not been felt yet.

Capital Economics says “the strain on housing affordability is growing with every interest rate rise. On our forecasts, the percentage of take-home pay absorbed by a new mortgage will be almost 40 per cent worse than its 30-year average by the end of the year.

“A mortgage based on 5 times income and a 6.5 per cent mortgage rate absorbs more than 52 per cent of take-home pay. For mortgage payments to be 40 per cent or less of
take-home pay (roughly a 30-year average) with mortgage rates at 6.5 per cent, income multiples would need to be less than 4.

“A withdrawal of mortgage offers based on income multiples of 5 or even 4.5 would
seriously undermine the ability of buyers to support house prices at current levels, let alone
continue to push them higher. A stabilisation of house prices at their current level would
improve affordability gradually. Even so, by the end of 2010 it would remain high relative
to a 30-year average.”

House prices are too high. For many, it is just impossible to jump on the property ladder.

At the current rate of interest, new buy-to-let investing is not profitable.

High house prices were sustainable when the rate of interest was so abnormally low but, if we are about to see an era of higher inflation, and higher market rates set by a change in risk assessment, we are in for an era of paying a lot more for our credit.

It does not seem likely house prices can be sustained in this environment for an extended period of time.
Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved