FTSE 100, Dow, NASDAQ, 2008-03-31
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 5692.9 | -24.6 |
| Dow | 12216.4 | -86.1 |
| NASDAQ | 2261.2 | -19.6 |
Oil, gold, pound, dollar, euro, 2008-03-31
| Rates | Close | Change |
|---|---|---|
| Oil | 104.89 | -2.01 |
| Gold | 938.3 | -12.2 |
| $ to £ | 1.9912 | -0.0139 |
| € to £ | 1.2614 | -0.0086 |
| $ to € | 1.5786 | -0.0002 |
Have Tesco’s US plans hit the buffers?
Re-invention is perhaps the mother of survival. Most obvious examples are from the world of pop, where the likes of Madonna and David Bowie changed their persona at regular intervals and probably extended their shelf-life in the process. In the world of business it’s harder, but the successes can be spectacular. There is no better example than the Finnish maker of gun boots, that diversified into electronics, to then become the world’s leading manufacturer of mobile phones – Nokia.
For other companies, the re-invention was more subtle, BT and IBM’s shift towards consultancy, for example.
Apple got it right too with the iPhone. We remember the successes, but the failures tend to be forgotten. A rock star who re-invents him or herself and then has a string of hits is a genius, but one who gets it wrong, and whose career ebbs away, is dismissed as having lost the plot.
The truth is, however, that luck plays a role. To hit upon the right business model is incredibly difficult, but the laws of statistics say some will be successful. For a successful business to then diversify and move into new areas is also tough. Of course some will manage the changeover, but others won’t.
At the beginning of the last century, the economist Alfred Marshall drew up a list of the top 100 companies. Mr Marshall was no mean economist, he wrote perhaps the first-ever textbook on the subject that was commonly quoted, and he counted among his pupils John Maynard Keynes.
So large and powerful were the companies on Marshall’s list, he argued, that they would probably survive indefinitely. He referred to them as the Californian Red Woods – trees that can live for so long that to us humans, with our short life-span, they practically appear immortal. Red Woods have in fact been known to live for over 2,000 years.
But in 1999, the economist L Hannah revisited the Marshall list, and discovered that of the 100 largest firms in 1912, 29 had, by the time of the study, gone bankrupt, 48 had disappeared, and just 19 of them were still in the US top 100.
The truth is that nothing lasts forever – and for business, which depends on ideas, the life-span can be especially short.
And that takes us to Tesco.
In the UK, Tesco has seemed liked a miracle store. It has grown while all around there has been disarray, it has posted record profits while the High Street has been infested with gloom. It seemed irrepressible. And when Tesco announced its move on the US, even Wal Mart trembled.
Tesco had been busy. As HG Wells might have put it, the US market had been “scrutinized, as someone with a microscope studies creatures that swarm and multiply in a drop of water.”
But the conquest of earth proved too difficult for the super-advanced aliens from Mr Wells’ classic novel, they were defeated in the end by the bacteria that life on earth had immunity to.
Will the conquest of America prove equally tough for the mighty Tesco?
In recent months, we have become aware of growing negative sentiments associated with the Tesco US stores, Fresh and Easy.
In the US the grocery scene really is in two halves. At the Wal Mart out-of-town type giant stores – it’s your classic supermarket type experience – pile them high and sell them cheap – and let the customers do their own packing. But with the local stores, it’s the opposite. Indeed, it is not uncommon for customers to have their groceries taken out to their car for them.
So the Tesco Fresh and Easy approach must have come as something of a cultural shock.
For Tesco, it’s a high risk strategy. That does not mean it is wrong – merely that the odds of failure must be quite high.
Later this month we will get the latest Tesco results – and that will give us an indication of how successful the venture has been so far. But, right now, the tea-leaves (that’s Tesco’s own brand of tea-leaves) are not looking promising.
Earlier this month, an analyst at Piper Jaffray said that sales to date from the Fresh and Easy stores are around a third of the level the company expected. Then, during the last few days, a blog on the company’s web site from Fresh Easy’s marketing director Simon Uwins confirmed that the company is taking a three-month break from openings.
At the moment there are 60 Fresh and Easy stores in Los Angeles, Phoenix, Las Vegas and San Diego.
So does that mean it’s curtains for the Fresh and Easy plan?
Of course not; making these stores a success was never going to be easy, and overnight success never likely. For Tesco, this is a long haul, a few weeks of sluggish sales do not make a disaster.
But equally, there is no guarantee the venture will be a success. Business ventures fail more often than they succeed, and just because Tesco, by adopting one approach in the UK has proven to be a formidable force , it does not mean Tesco in the US, with a quite different model, will also be a success.
City feels the pinch
Credit crunch, what crunch? While the City moans, the rest of the British economy seems to be doing all right. This has led some to claims that the banks have become too pre-occupied with their own problems and can’t see that beyond their own narrow existence, things are pretty good.
Well, there is one snag with that analysis. There are time lags involved. Mainstream business will feel the heat – just give it time.
The latest Financial Services Survey from the CBI and PricewaterhouseCoopers LLP revealed that lending to industrial and commercial companies continued to increase in January.
But it’s the futures where the prognosis is not so good. “A balance of 8 per cent expect lending to these customers to contract in the next three months,” the survey found.
Furthermore, 90 per cent of financial services firms questioned believe the credit squeeze will last longer than six months, compared with 70 per cent last quarter, despite firms being a further three months into its effects. Nearly all businesses (97 per cent) believe that credit conditions will get worse in the next six months – 35 per cent said it was a ‘high’ likelihood and 62 per cent saying it was ‘medium’.
The growing impact of the credit squeeze is also evident in the proportion of firms saying their ability to raise funds will be a constraint on business growth in the coming 12 months. Forty per cent of firms saying this would be the case, up from 24 per cent last quarter, is the second-consecutive record figure reported.
More to the point, a net 25 per cent of respondents said they had cut jobs over the past three months, which is the highest rate since March 2003, and against expectations that numbers employed would increase marginally.
It seems likely that US banks operating in the UK are especially likely to shed jobs, which will clearly have a knock-on effect elsewhere.
Ian McCafferty, CBI Chief Economic Adviser, said: “It is clear that the credit crunch has worsened over the first three months of this year. The interbank markets have become more gummed up, with banks even more unwilling to lend, and credit spreads have widened.
“While liquidity injections and interest rate cuts by the Bank of England will help shore up the system, neither will solve the fundamental problem of restoring trust within the markets. Credit markets are unlikely to return to anything like normality for some time to come.
“And even when they do, we will not see a return to the very favourable lending conditions that existed before August. We can expect further tough times in the financial sector, as this feeds through into the wider economy, will inevitably be felt through slower economic growth this year and next.”
Eurozone inflation hits highest level since 1992
What a dilemma. It seems the Fed made two mistakes. First, it let the rate of interest fall far too low earlier this decade – fuelling a consumer borrowing boom and a bubble in asset prices. But, maybe more recently it was too slow to lower interest; as a result, the most recent cuts in rates seem to be having limited effect. A stitch in time saves nine, and it appears by lagging behind the curve, the Fed has left itself with lots of rapid stitching, in an apparently vain attempt to fix the threadbare fabric of the US economy.
But now, all eyes turn to the UK and Europe. Many argue that the Bank of England and European Central Bank need to embark both on rate cuts, and on pumping money into the economy now, and in the process avoid the apparent panic that has become endemic at the Fed.
But inflation in Europe is on the up.
Many think the rate of inflation in the UK could once again move by more than a full percentage point above its inflation target within the next few months, thus promoting another of those embarrassing letters from the Bank’s governor to the chancellor. In such an environment, how can the Bank of England start lowering rates?
Then this morning, news came in telling us that the CPI rate of inflation in the Eurozone is now 3.5 per cent, up from 3.3 per cent in February.
It now stands at the highest level since March 1992.
It’s a tough one.
If the global economy is set to slow dramatically, then that will presumably mean lower demand, and prices will then fall. Think ahead, say those itching for rate cuts, inflation is up simply because of one-off effects. When they ease out of the system, inflation will fall rapidly – now is the time to allow for this.
But it appears a new school of thought is growing. This school says first of all that in future, central banks must take into account inflation of asset prices when setting rates.
Furthermore, goes the argument, the period of low inflation was not caused so much by low demand – which usually requires cuts in interest rates, but was simply down to external factors - one-offs, for example, advances in productivity and cheap imports. It may be be a mistake to keep rates high now, because inflationary pressures are down to one-offs, but equally it was a mistake to let rates fall so low earlier this decade because low inflation was down to one-offs.
Maybe, then, monetary policy has got it completely wrong. Rates were cut when demand was already too high. Now rates are too high, when demand is falling off the edge of a cliff.
It’s all very well of course, but we are being wise after the event.
The conclusion: we now need to stitch this idea into economic thinking going forward, but it may not be that relevant to solving the crisis we are in right now.
FTSE 100, Dow, NASDAQ, 2008-03-28
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 5717.5 | 57.1 |
| Dow | 12302.5 | -120.4 |
| NASDAQ | 2280.8 | -43.6 |
Oil, gold, pound, dollar, euro, 2008-03-28
| Rates | Close | Change |
|---|---|---|
| Oil | 106.9 | 0.48 |
| Gold | 950.5 | -7.1 |
| $ to £ | 2.0051 | -0.0014 |
| € to £ | 1.2700 | 0.0003 |
| $ to € | 1.5788 | -0.0015 |
House prices close to tipping point
So it’s five months in a row. The Nationwide now has monthly house price inflation in negative territory for five successive months. It has recorded annual house price inflation at just 1.1 per cent, the lowest level in 12 years, and now has house prices at the lowest level since last April.
Intriguingly, the Nationwide seems to have changed its tune slightly, but is not admitting it. “Some of the downside risks we identified …[previously]… have become a reality,” it said, and added “however, the path for house prices in 2008 still looks set to remain within our forecast range. We expect a modest fall in house prices during the year.”
The Nationwide has not predicted a fall in house prices for a very long time – and although it is emphasising words like ‘modest,’ and saying its latest forecast is compatible with previous forecasts, because in the past it warned of downsides to its projections, it is nevertheless quite an admission.
Mind you, it is quite curious that it is talking about only modest falls. Of course, modest is a relative term. Given that house prices have risen by 198 per cent since 1997 (according to the Nationwide), presumably a fall of 30 per cent could be described as modest.
The Nationwide itself carries out consumer confidence surveys, and its latest findings are that consumers who were willing to quantify their expectation, on average, expect an annual fall in house prices of around 3 per cent in six months’ time. The Building Society’s Chief Economist Fionnuala Earley said, “If prices were to fall in line with consumers’ expectations, they would still be higher than two years ago. A moderate fall in prices at this stage should not be unwelcome and should help to ensure greater stability in the market going forward.”
So while it denies it has changed its mind, it seems to be suggesting a fall of 3 per cent is both modest and would be welcome. Now that’s interesting, because Capital Economics is considered to be an arch bear of this market, and it expects prices to fall by 5 per cent this year.
More interestingly still, Capital Economics reckons 2009 will be worse. And quite frankly, we think they are right. If the UK is lagging a year behind the US, then 2009 will correlate to 2008 in the US. So if even the Nationwide is now contemplating a 3 per cent fall this year, then the omens for 2009 are not good.
But perhaps even more light can be shone on to the property market’s less-than-gleaming surface, it we take a gander at the latest report from the British Bankers Association.
Mortgage approvals for house purchase came to 43,870 in February. They have been lower, last month 43,732 were approved, and the month before that just 42,189, but that’s it. The BBA data we have access to goes back to September 1997, and there have been no other occasions during that period when mortgage approvals for house purchase have been lower.
If you look at re-mortgages, it is another story. In fact, January saw the highest number of re-mortgages since 2003, and while February saw a fall – from 79,926 to 72,193, it was nevertheless a busy month.
There are no prizes for guessing why. It’s those mortgage re-sets. You may recall, 1.4 million people are due to come off fixed rate mortgages this year, and this important movement is showing up in the data already.
This is made all the more significant when you see this news in the light of announcements yesterday from both the Nationwide and Halifax. The Bank of England recently lowered rates, and it is widely thought it will lower them again, and yet, yesterday, the Nationwide increased the interest on its tracker mortgage by 0.57 per cent, Halifax subsidiary if.com upped one of its rates by half a per cent and First Direct withdrew one of its cheaper mortgage packages.
Perhaps the most telling comment sat in the headline in The Times. “Nationwide and Halifax put up mortgage rate to deter new customers.”
The real key to all this, though, surely relates to something the Nationwide said. “The overall impact this will have on the housing market will depend on how much consumers think that prices will change,” said their Ms Earley.
The idea that house prices only ever go up is deeply embedded into the British mentality. The realization that prices can fall too will only dawn upon people slowly. The danger has to be, however, that eventually the British public will overreact. As we told yesterday, overreaction from the individuals involved is about the one thing all economic cycles, booms and crashes have in common.
The real danger sits with buy-to-let investing. A recent report from the Halifax found that the average total return for a buy-to-let investor was 16.3 per cent in the year to December 2007. Of that return, 5.4 per cent came in the form of yield.
Now, let’s assume that voids, agent fees, and maintenance costs come to, say, 1 per cent of a property’s value. If Capital Economics is right, and house prices fall by 5 per cent this year, then buy-to-let investing, even for investors who don’t even have a mortgage, will make a loss.
In an environment in which demand for properties is low, it will only take a small rise in supply to tip the market over the edge. If some buy-to-let investors conclude that house prices are likely to fall, and that their business will make a loss for a couple of years, they may well be tempted to liquidate.
This could in turn lead to even bigger falls, creating even less confidence. Capital Economics’ projections of 8 per cent falls next year could end up looking like naive optimism.