Ishrc � Discussion Threads

[simon gordon] 08/6/2007 18:31

Jeremy Warner in the Indie - 6/6/07:

Stock markets around the world took a beating yesterday as investors fretted about the impact of higher interest rates. The European Central Bank obliged by raising its benchmark rate to 4 per cent. The Bank of England is due to decide today on whether to follow suit with another rise to 5.75 per cent.

Few in the City expect the British increase to happen quite so soon, but nobody any longer doubts that there will be at least one more hike before the end of the year, and the case for acting sooner rather than later is actually a rather stronger one than generally appreciated.

Notwithstanding forecasts of lower inflation from here on in, the Bank is determined to dampen rising inflationary expectations after a prolonged period in which prices have been growing at well above target. As my colleague, Hamish McRae, argues on page 43, for this purpose alone the Bank would be well advised to act now. The world economy is heading for its fourth year of robust growth. Both externally and domestically generated inflationary pressures are only too apparent.

Yet higher interest rates only have implications for share prices if they dramatically slow economic growth or otherwise damage prospects for corporate profits. Signs of overheating in the world economy abound. That's what the present round of tightening is intended to address. Yet interest rate rises of an order of magnitude that would plunge the world economy into recession seem quite unlikely. In other words, a controlled tightening phase shouldn't undermine the present bull market.

That's not to say there's not going to be a correction in share prices. Throughout bull markets there are always corrections, which become progressively more frequent as the cycle matures. These are prompted by bouts of nerves, and occur at trigger points when fear of losing hard-won gains overcomes the hunger for more. Yet at the moment, we are still in that phase of the bull market where setbacks are more of a buying opportunity than a run-for-the-hills, long-term sell signal.

Yesterday's wobble coincided with the publication of a couple of relatively bearish circulars from the investment banking community. One from Morgan Stanley warned that all three of the bank's market indicators - valuation, risk and fundamentals - were saying sell. This has apparently happened on only five occasions over the past 27 years, and on each of these occasions the market fell 15 per cent over the next six months.

The other circular, from ING Wholesale Banking, casts doubt on the supposed strength of US corporate earnings growth and draws a parallel with the late 1990s when there was a similar mismatch between reported earnings in the markets and the rather weaker position recorded by the official figures, which also cover unlisted companies and take account of the issuance of stock options.

If corporate profits are peaking, or, as occurred in the late 1990s, being artificially inflated to please the markets, then that obviously changes the picture considerably. Earnings multiples are no more than their long-run average right now, but they would plainly soon be much higher if profits went into freefall.

This point is underlined by adjusting profits for the ups and downs of the economic cycle. Cyclically adjusted earnings multiples are at record highs. What's more, actual multiples would look quite a bit higher, at least in the London market, if you remove the distorting effects of oil and natural resources companies, where multiples are well below the market average. The reason? Investors don't buy the idea of a super-cycle and are already anticipating an end to the current commodities boom.

Even so, to me the bear case for equities still looks flawed. Parallels with the bubble of the late 1990s are misleading. Back then, it was a comparatively small number of glamour sectors revolving around the new communications technologies that fed the frenzy.

Many of these stocks subsequently lost all or most of their value. Stripped of TMT - technology, media and telecommunications - the market multiples that existed around the turn of the century didn't look nearly so challenging, and for many shares there wasn't much of a subsequent bear market.

A little bit of that turn-of-the-century froth has now returned to markets, particularly on anything to do with the internet, but it is not as bad as it was back then and is better underpinned by the fundamentals. To the extent that there was ever a justification for the insane valuations that ruled on communications stocks in the late 1990s, it was that the world had changed, allowing these new industries to make substantial inroads into world markets and therefore enjoy sustained growth. Some of that promise is now finally coming to fruition.

Today's "new paradigm" revolves around the integration of China and India into the world economy. This is arguably a much more dramatic, world-changing event than the invention of the internet, and certainly its economic and geopolitical consequences are going to be a lot more far-reaching. This may be a Panglossian view, but there is also good reason to think it might lead to a permanent structural shift for the better in corporate productivity and profitability.

This is not just because of the development of new and fast-growing markets, but also because globalisation and technology allow companies to deconstruct themselves and outsource the bits they don't do well to more efficient, expert, and low-cost providers. What is occurring is nothing short of a new industrial revolution. Barring a sharp deterioration in international relations, it ought to sustain the bull market a while longer yet.

[simon gordon] 18/4/2007 13:17

King Tries to Turn Down the Heat by Ambrose Evans-Pritchard in the Telegraph:

Mervyn King, the Governor of the Bank of England, has once again failed to achieve his ambition of making monetary policy boring.

As shocks go in banking circles, news that British inflation had reached a decade high of 3.1pc in March is about as bad as it can get. The rate of RPI inflation, which includes house prices, hit 4.8pc in March, the highest since 1991.

A vast unscrambling of positions in the currency and credit markets occurred within minutes as the dreadful figures flashed across traders' screens.

Sterling smashed through $2 for the first time since the ERM debacle in 1992 and the futures markets instantly adjusted to the new reality of 5.75pc interest rates by the end of the summer. The yield on 2-year bonds reached the highest since November 2000. As far as the global markets are concerned, Britain is now on the cusp of overheating.

Mr King issued soothing words in his unprecedented letter to the Chancellor, predicting that inflation would subside again "within a matter of months" as the effects of gas and electricity prices drop out of the picture.

"Yes, inflation will fall back sharply at first, but this is not benign," said Michael Saunders, UK economist for Citigroup. "We're seeing a gradual rise in non-energy in inflation which will pick up later in the year. I think it is conceivable that the Monetary Policy Committee will raise rates a half point in May," he said.

"We've learned from past experience that it is best to do these things quickly, otherwise the risk of boom and bust gets greater."

Graham Secker, UK equity strategist at Morgan Stanley, said the banks such as HSBC and Royal Bank of Scotland would suffer the biggest hit from higher interest rates, followed by travel and real estate.

"The big losers from the high pound are the pharmaceutical companies that generate half their sales in North America, as well as oil companies at 40pc. Clothing retailers like Next that source supplies in dollars may benefit," he said. British exports to the US are £54bn a year.

The groups with the highest sales to North America are the fund management firm Amvescap (77pc), Shire Pharma Group (76pc), Cambridge Antibody Tech (71pc), Sportingbet (70pc), and Pearson (69pc).

"The fundamentals for the UK equity market are looking quite poor," said Mr Secker. "Inflation is proving sticky, bond yields are going higher, and stocks are very expensive by many measures. All we've got driving this bull market now is a powerful flow of M&A money but that is fickle."

Stephen Lewis, chief strategist at Insinger de Beaufort, said the MPC had reignited the housing boom by cutting rates prematurely in August 2005 (a move opposed at the time by Mr King) and may have let inflation gain a foothold in the economy.

"I think this situation may turn out to be less benign than Mervyn King thinks. His letter was remarkably low key and I'm not sure people will find it persuasive. You can't blame this on special factors: food prices are rising much more rapidly in the UK than elsewhere in Europe. The CPI food index rose 5.1pc in the year to March, compared to 1.9pc in the euro-zone. And there has been a sharp increase in the cost of household goods," he said.

Almost every central bank in the world has been caught flat-footed by inflation over recent months, and the Bank of England has been one of the quickest to adapt.

Mr King has the unenviable task of steering policy at a delicate time for the global economy, before it is clear whether the US housing slump will trigger a deeper recession, and at a time when Asia's "savings glut" is flooding the world with liquidity and blunting the key instruments used by the Bank of England.

It takes 18 months for the full effects of monetary tightening to bite, so the three rate rises since last summer have yet to feed through the economy. The risks of overkill are just as great as responding too late.

Mr King's letter said the inflation rise was "in part" the result of a 25pc oil spike since early February and a "weather-induced global reduction in supply" of food, but only in part. He also flagged the "continuing rapid growth of money and credit".

But he warned that the MPC was on high alert to "upside risks" to inflation and would ensure that expectation remained anchored on the 2pc target. "It is important to prevent that anchor from dragging," he said.

Mr King was too polite to point out that the Bank of England is rowing against a strong current, forced to tighten monetary policy to offset the inflationary effect of Gordon Brown's spending policies.

Britain's fiscal deficit of around 3pc of GDP is arguably the worst in the developed world, given the late stage of the economic cycle.

[simon gordon] 09/4/2007 07:45

Winning is not merely a desirable thing, it's everything by Rosabeth Kanter

For many years I have observed the ups and downs of organisations as well as countries and also life. During up-times it's clear that confidence swells and people feel they can do anything, which motivates feats of high performance, because confidence is just an expectation of a positive outcome. When I have confidence, I believe that success is possible, and so those with confidence put in the effort to do the work. It's really the work that produces success.

During downtimes, confidence ebbs. People, organisations and whole countries get depressed, defeatist and they stop trying. The task of leaders is to produce confidence, to motivate performance, and that requires an organisational culture with certain underpinnings and foundations in place that produce a culture of confidence not just for individuals but confidence in the team, confidence in the system and confidence by investors, stakeholders and the public that the organisation will deliver on its promises.

I have studied the difference between sustained success, or what I call "winning streaks", just like in sports, and perpetual mediocrity or decline, or as I call them, "losing streaks", again like sports. I have studied this in businesses such as Gillette, Siemens, Seagate Technology, General Electric, Continental Airlines, the BBC. I have studied this in community and government organisations and in whole countries. I have looked at this phenomenon in microcosm in sports teams, where we can draw many lessons that are applicable to business.

First, winning is a whole lot better than losing. Think about it a moment: it's not just, of course, the obvious, that we all want success in our organisations and all of our endeavours, but it's also that the very fact that winning, succeeding, produces better behaviour. It produces better behaviour that will help the team or the organisation perform better in the future.

First of all, people are in a better mood and when people are in a good mood they're attracted to one another, they want to gather, they want to talk over the past performance. Therefore, they get all of the advantages of learning because they are comparing notes: on how did we win that big sale, how did we make the acquisition, how did we accomplish that incredible conference? When they do that, they have the advantage of learning, whereas losers slink off into the corner, don't want to talk about it and, therefore, have no opportunity to learn. It only reinforces them in their depression.

Winning brings greater resources, investment by external people. It brings better press. Winning provides more opportunities to be part of better networks, to get better deals. Those who are seen as successful often get bigger discounts. They get sponsorship opportunities. They get first crack at the best people. They get invited to receptions or parties or events where they're going to meet other people, gain business intelligence and, therefore, have an advantage for the next race.

A second lesson about the difference between sustained success and mediocrity or perpetual failure is that winning is boring. That is, winning can lull people into false complacency or overconfidence. Instead of building their confidence that they can go on to the next victory, they become arrogant and, therefore, stop trying, and that's one of the reasons that winning streaks end or that success comes to an end.

Also, I say that winning is boring because it's really hard work. It's not a matter of doing things that are flashy or dramatic. It's a matter of constant discipline and professionalism all of the time. It was interesting when I talked to some leaders of sports teams. In teams that had sustained high performance, very long winning streaks, including one team that had a record for the only undefeated season in its sport, when we asked the coach "How did you feel about that undefeated season?", he said: "The interesting thing about that season was that there was nothing interesting about it. All the players did was get up every day, practise hard, then come to work and win games". They practised all the time and they held themselves accountable for performance. Leaders have to model this.

A third lesson about the difference is that it's not the talent; it's the talent in the team. There's an obsession in organisations today with talent, with individuals. But most people who meet the threshold of talent will either play above their game or below their game, depending on the culture that surrounds them. On winning teams it's the team, not the talent. Losing teams and declining organisations often have stars but the stars are out for themselves. They're looking at their own résumés. They're trying to promote their own careers rather than promoting the team as a whole.

The fourth difference between sustained success and mediocrity is that winners think small as well as thinking big. Of course you want some big goals, but you also need a constant series of small wins in an organisation. You need many people in unexpected places developing ideas that you didn't even know were there.

The BBC needed a bit of a turnaround in the early 2000s because in the late 1990s it had been losing audience share and there were concerns about its creativity. A new chief executive set in motion a system of brainstorming meetings and other ways to empower people. Under this new environment, a relatively new trainee was given a budget to create a training film for a new orientation programme. Part of the goal in that era was to create one BBC instead of a set of fragmented divisions: radio versus television news versus sport, and so on. So his job was to create a film that would tell people about life in the organisation. He took that budget and made a film that turned out to be the pilot for The Office, the BBC's biggest hit comedy since John Cleese in Fawlty Towers. Unexpected, and a small win that turned into a big victory.

The fifth difference between winners and losers is that the secret of winning is how you handle losing. What organisations need most is resilience. Every person is subject to what I call Kanter's law. Kanter's law says that nearly everything, especially if it's new and different, can look like a failure in the middle. If we stop, then by definition it's a failure. If we have the confidence of winners and the culture of the organisation or our team behind us, we can often convert near-misses or near-disasters into opportunities for improvement, and that's what winners do.

[simon gordon] 21/3/2007 10:34

Expert View: Why the rate rise? We haven't got a runaway economy
Exclude energy, and inflation in December would have been 2.1%

By Mark Tinker

Published: 21 January 2007

The consumer price index is at 3 per cent and we know what must be done, don't we? Raise interest rates, stop the over-heating, slow this runaway economy. On with the hair shirts, listen to the economists.

Except that is exactly the wrong thing to do. There is a serious risk of overkill and it makes sense to look a little more carefully at the facts and to question the remedies being proposed - for not only do they address the symptoms rather than the cause, but they risk making the patient worse not better.

The underlying thesis is that the economy is growing too fast and is therefore causing inflation. The widely accepted solution is to raise interest rates to slow it down. But if we look at the parts of the economy where there is inflation, it's difficult to see how it is caused by booming demand. The largest impact - two thirds of the rise, in the December CPI - was from transport costs, principally petrol and fuel duty going up. For the year as a whole, the biggest rise has been in electricity and gas, up over 30 per cent. Here again, it's difficult to see how that is due to runaway UK demand. If we exclude energy, the December inflation rate would have been 2.1 per cent not 3 per cent - and everyone would be talking about rates going down this year.

Which leads us to the other issue: the difference between the official rate of inflation and the cost of living. This is not semantics; the CPI is what the Bank of England should focus on in judging whether the economy is growing too fast, while the cost of living reflects people's disposable incomes - how well off they feel.

And here they are right to feel aggrieved. For many people, their mortgage is their biggest single cost of living and this was up almost 20 per cent before the latest rate rise. This is the Achilles' heel of the UK economy: in order to slow demand at the margin, everybody gets hit. In almost every other economy, once you take out a long-term loan, you know what your monthly payments are going to be. Not here. For most of his term, Gordon Brown has benefited from rates falling, boosting consumption. Now it is going the other way. At the same time, fuel and lighting is up almost 30 per cent, council tax is apparently up 5 per cent and rail fares 4 per cent - though most people would argue that the last two are up far more.

None of these price rises have anything to do with a runaway economy; people have no choice but to pay them. They are, in effect, taxes. And actual taxes are also going up: the latest figures show disposable income growing at a mere 0.4 per cent in the third quarter, and that is in nominal terms.

The economists at the Bank fear a wage-price spiral. And this is the real problem. Prices are not rising in the private sector, or anywhere where there is competition. But they are rising rapidly in the public sector and it is here where there is risk of a wage-price spiral since the public sector imposes its higher costs on the rest of us. And the only policy being applied is higher interest rates, which destroy disposable income and create deflation in the competitive sector to offset the inflation in the non-competitive sector. In effect, the Bank is trying to run an incomes policy.

Mr Brown didn't cure boom and bust. Our crazy mortgage system gave him a boom that obscured the structural problems being created by the rapid expansion of the non-competitive economy. Unfortunately, by following the same monetary rules that gave us a boom, the Bank is now in danger of giving us a bust. But I'm sure it will say it's for our own good.

Mark Tinker is a global fund manager for Axa Framlington. The opinions expressed are his own

[simon gordon] 09/3/2007 07:22

From the Economist:

WILL the past week's market sell-off prove to have been a seven-day wonder? The investment community quickly split into two camps. One group, which made frequent appearances on CNBC, a financial news channel, argued that the fall in share prices was a freak event. It maintained (unconsciously echoing President Herbert Hoover after the 1929 crash) that the "fundamentals of the economy are sound".

The more bearish seized on the crash as a sign of a coming apocalypse. A notable member of this camp was Andrew Smithers, of Smithers & Co, who said the fall "could be the start of the second leg of the major bear market which started at the end of March 2000."

Whether or not Mr Smithers turns out to be right, investors need to be wary of relying too much on economic fundamentals as a guide to the market's immediate outlook.

For a start, the market is supposed to be a forecasting mechanism, so it may be warning of economic problems ahead. There were few signs of economic problems in March 2000 when the dotcom bubble popped, but a mild recession duly followed.

Second―a point made by Bill Gross, a bond guru at Pimco, a fund management firm―these days it is often the financial markets that are driving the economy, rather than the other way round.

Think about the rise in profits as a percentage of GDP in America and elsewhere. That has enriched companies and their shareholders at the expense of workers. But if workers are being squeezed, why hasn't consumer demand been hit? Because consumers still feel wealthy thanks to the rise in share and (until recently) house prices.

Furthermore, look at the extraordinary success of the financial sector. Profits have been rising relentlessly and bonuses have been exceptional. In the UK, the financial sector is a vital driver of the economy, which is why the current government would be mad to drive it away by, for example, capping bonuses or attacking private equity.

But the financial sector's success is driven by 20 years of rising asset prices and falling interest rates. Remember how the Federal Reserve rushed to cut rates when the financial sector was hit in 1998 and 2001. Think, also, how the Japanese economy struggled through the 1990s, thanks to its ailing banking system.

So it is the mechanics of the financial system itself that will determine the prospects for the markets. Here there are dangers. Banks have been disintermediated. They can no longer rely on taking deposits from retail customers and lending the proceeds at higher rates to business.

The corporate sector borrows from pension funds, insurance companies and the like. The banks merely arrange the deals. This transaction activity, covering everything from stockmarket flotations to complex derivatives, is a vital source of income, as is the trading of those instruments when issued.

Any shock that dries up liquidity is a threat to the financial sector, and the markets. Reduced liquidity means less issuance. A reluctance to hold illiquid assets means lower prices, a blow to the trading arms of the banks.

Hedge funds also provide liquidity to the markets, because they trade much more often than traditional investors. Dresdner recently estimated hedge funds delivered 15-20% of investment banking revenues. Hedge funds are natural buyers of illiquid assets (where prices are most likely to be incorrectly set) and also sellers of volatility.

Those who sell volatility (the equivalent of writing insurance on financial markets) receive a steady stream of premium income that looks impressively smooth to investors. Liquid and less volatile markets look safer and appear to justify higher prices.

We thus create a virtuous circle in which investment banks and hedge fund together drive volatility down and liquidity and prices up. But at some stage, this process cannot be pushed any further.

The risk is what happens when the process unwinds. Prices fall, causing hedge fund and investment banks to retreat from the markets; this reduces liquidity, implying lower prices and so on.

Perhaps the shock of February 27 was insufficiently drastic to send the process into reverse. But that is the risk that investors should be most concerned about. In the next few weeks, they should be looking for signs of distress in some of the less liquid areas of the markets, such as high-yield bonds and credit derivatives.

[simon gordon] 05/3/2007 17:25

From the Telegraph:

After 17 years as the First Lord of world finance, Alan Greenspan must have known what he would unleash by mumbling his few words about a "possible" US recession this year.

It was a none too-subtle message to successor Ben Bernanke that the time had come to ditch ideology and slash interest rates before a grave policy error is committed. Indeed, it may already have been committed after 17 rate rises in two years.

Mr Greenspan's comments flashed across trading screens at a delicate moment, as markets were fretting over the collapse of the ABX index of low-grade mortgage securities following the bankruptcy of 27 sub-prime lenders in the US this year.

If they still had any doubts, the 7.8pc plunge in US durable goods orders in January settled the argument. World markets were not "priced" for this upset to the Goldilocks thesis.

The week before, risk appetite had reached record extremes as measured by the VIX index, or by the willingness of investors to accept spreads on junk bonds of a sliver over LIBOR, or by their kamikaze urge to squeeze the last few drops of profit out of the "carry trade" by pushing the Japanese yen to the lunatic zone of yen160 to the euro (it was 90 in 2001).

It took five trading sessions for the elastic to snap back. The yen rose 4pc against the euro, enough to do damage in a world where outstanding derivative contracts have reached $370 trillion - and which may or may not add up.

We'll find out soon where the cadavers lie in hedge fund land. Exuberant bourses from Sao Paolo to Istanbul and Bombay have had a 8pc haircut.

"We believe the 'great unwind' has now started," said the bears at Dresdner Kleinwort. They have been waiting a long time for this moment. "Extremely high levels of risk appetite have begun to shift. The 'markets-buoyed-by-ample-liquidity' arguments will now be shown to be the total and utter tosh they are," they said.

What to do? Batten down the hatches, buy bonds, and sell equities. The trend support lines for stock markets are about to break, said Dresdner.

David Bloom, currency chief at HSBC, said investors had woken from a trance. "The numbers coming out of the US are absolutely atrocious.

"The market has suddenly discovered that the emperor has no clothes and it's caused a whole reassessment of the macro-picture," he said.

This then is the "Greenspan Break", reminiscent of the "Babson Break", according to Brian Reading of Lombard Street Research.

Roger Babson was the stock guru who thundered on September 5 1929 that "sooner or later a crash is coming.

"Factories will shut down, men will be thrown out of work, the vicious circle will get in full swing and the result will be a serious business depression".

News was thin that day, so it made front page headlines in the New York press, though he had said such things before. By then, for no obvious reason, Wall Street was ready to listen.

The Dow began to bounce up and down violently in a spasm of volatility before diving on Black Tuesday, October 29 1929.

Mr Greenspan, by contrast, has not spoken of recession before. In November he was still assuring America that the housing hiccup would soon be over. His capitulation is a thunderclap.

The Maestro is not to everybody's taste. As wags put it, he is handy with a sand-iron from bunkers, but wild with the driver.

His great sin - deplored by grown-ups at the Bank for International Settlements - was to hold interest rates below equilibrium level, locking imbalances ever deeper into the system.

He did it in the 1990s, and again this decade, keeping US rates at 1pc until June 2004 when GDP was surging at 5pc. This policy, widely copied, is poisonous.

Known as "inter-temporal misallocation", it feeds asset bubbles and steals prosperity from the future. In the end, the future arrives.

That said, Mr Greenspan has a sixth sense for impending trouble. The Fed minutes of November 2000 reveal how he talked his colleagues out of a rate rise, warning them that a crunch was coming - whatever the Fed staff model purported to say.

Specifically, he said the Fed model was useless at turning points because it was "linear". Recessions, of course, are "non-linear".

Within two months, the Fed had to rush through an emergency cut of 0.5pc.

The slump had begun. "Everything was pointing up and, all of a sudden, everything started pointing down," said Governor Edward Gramlich afterwards. Up to a point, Mr Gramlich.

We can be pretty sure that if Mr Greenspan were at the Fed today he would again be telling the board to ignore the model.

Instead we have Professor Bernanke, wedded to his Princeton theories, pushing the doctrine of "inflation targeting" just as central banks across the world are turning against it as a perilous misadventure. One has to ask whether the Bernanke Fed is emerging as the monetary counterpart of the neo-cons in foreign policy.

True to form, Mr Bernanke told Congress last week that nothing was changing in the economic outlook, and that "there's a reasonable possibility that we'll see some strengthening of the economy some time during the middle of the year."

He had better be right. If not, if he holds rates at 5.25pc deep into a bust, he may face calls for his impeachment.

[simon gordon] 20/2/2007 07:27

From the Telegraph:

Inflation warning as Bank predicts volatility

The Bank of England has issued a stark inflation warning, telling markets to prepare for many more years of volatile prices and economic growth. The Monetary Policy Committee (MPC) added that it expects sterling to take a tumble at some point, as the record UK current account deficit unwinds.

In written evidence for the Commons' treasury select committee, the MPC urged markets and the public not to assume that it would be able to replicate the steady performance of the past decade.

In a blow to Gordon Brown, who has often claimed full responsibility for the low inflation since 1997, the submission also ruled out the possibility that this "great stability" was purely a product of the Chancellor's decision to grant the Bank independence to set interest rates. "We cannot guarantee that the next 10 years will be so 'nice'," it said. "Many of the benefits of globalisation have already worked through, and the adverse impact on commodity prices of the development of China and India is now being felt.

"The effective labour force is unlikely to grow as rapidly as it has done over the past decade or so. Moreover, some aspects of the global economy look unsustainable, particularly the pattern of global current account imbalances and the low level of real interest rates and risk premia. So the macroeconomic context is likely to be somewhat less benign."

The warning echoes those made in the past by governor Mervyn King, who has said that the forthcoming decade was likely to be characterised by more volatility than in the past.

The evidence also contained an explicit warning about the likelihood that the pound will weaken significantly. It said: "At some stage the current account will probably need to close. At that point, in order to shift resources from the non-tradable sector of the economy into the internationally tradable part, some depreciation of the real exchange rate will probably be necessary."

The pound, which has weakened considerably in recent weeks, after January's inflation figures came out lower than expected, dropped another quarter of a cent against the dollar yesterday to $1.9476.

Michael Saunders, chief UK economist at Citigroup, said: "If sterling stays around current levels, then (barring other changes) the MPC's growth and inflation forecasts will rise further and the Committee could have to shift back to tightening more than markets currently project."

The submission concluded: "The present policy framework should have the capacity to withstand more turbulent times."

However, in separate evidence for the Parliamentary Committee's inquiry into the first 10 years of the MPC, some of its former members warned that the opaque way the Chancellor selects its constituents needs to be overhauled.

Recent members Stephen Nickell and Marian Bell called for a more formal and transparent appointments procedure.

[humphbumph] 19/2/2007 09:46

Thanks, Simon. I can have a good read now!

[humphbumph] 18/2/2007 01:18

Simon, in your opening post you have a link to the Daily Telegraph. It is quite a long link. If one is using Mozilla Firefox, as I am, for some reason it doesn't 'wrap'(?), i.e. it causes the page to widen considerably. In turn this means that we have to scroll horizontally Right to Left, Left to Right to read every line. Are you technically adept enough to do something to the link? (Shorten it, perhaps?)

Many thanks: I've just dipped my toe for the first time in this sort of instrument.

humph

[prokartace] 15/2/2007 09:42

Bit of buying for the divi maybe? In the meantime the chart shows a very positive outlook

[lennox_lnx_multibagg] 11/2/2007 23:59

LENNOX IS SET TO ERUPT..PLEASE REVIEW THIS COMPANY

FACT: MARKET CAP.ONLY 0.3 MILLION.
FACT: SHARES IN ISSUE ONLY 24 MILLION.
FACT: OVERHANG NEARLY GONE. BUY LIMIT LAST WEEK WAS 500,000 @1.6P NOW ONLY 75000K @ 1.6P.
FACT: SELL LIMITED WAS 50,000 @ 1.09P AT THE START OF THE WEEK, NOW 250,000 @ 1.09P. MMS WANT CHEAP STOCK.
What does this mean? A few buys LNX will explode.

Last RNS
Lennox to carry out full review in difficult trading conditions; MD retires

FACT. The review is expected to be completed in early March.

FACT ANYTHING SLIGHTLY POSITIVE LNX WILL ERUPT.

PROJECTIONS ANYWERE FROM 200%-10000%

FACT. 500,000 SHARES BOUGHT AT A MID PRICE OF 1.5P IN THE LAST FORTNIGHT, A LOT FOR LNX.

OPINION: PRICE BEING HELD BACK AS BUYER ACCUMULATES.

OPINION: IF TRUE THEN IT REFUTES THE NOTION THAT LNX ARE GOING BUST.

OPINION: EVEN IF THEY ARE, WHAT A CHEAP SHELL TO GET YOURSELF LISTED ON AIM.

OPINION: BY APRIL LNX WILL BE 15P-60P


OPINION LNX ARE THE BEST BUY ON AIM TODAY FOR MULTIBAGGER REWARDS.

[simon gordon] 06/2/2007 14:58

'Merrill Lynch has warned of a global credit crunch as central banks in Europe and Asia tighten monetary policy, advising clients to shun risk and switch to safer assets over the forthcoming months.

Presenting its strategy for 2007, the US bank said the world boom is clearly giving way to a slowdown that will shake up markets and punish smaller equities, industrial metals, and lower-tier assets of almost every kind.

Money can still be made as the cycle turns, chiefly by rotating into short-term cash deposits and quality stocks with good dividend yields such as AstraZeneca, Barratt Developments, Sweden's retailer H&M, or Spain's Banco Popular Espanol - along with a few bars of gold bullion.

The bank said 2007 would be the "year of the dividend", with fear returning as the VIX and VDAX volatility indexes - widely used in option trading - rise from record lows.

"We think global interest rates are going to rise a lot more than investors are discounting, and this is a worrisome outlook for profits," said Khuram Chaudhry, chief European strategist.

"We've seen liquidity everywhere, in equities, property, bonds. It's been a one-way bet for investors, and they've taken on a lot of risk. But they're not looking beyond the news to the slow drip-drip effect of interest rates. It matters when central banks tighten monetary policy," he said.

The US Federal Reserve has raised interest rates 17 times already since June 2004 from 1pc to 5.25pc, but Europe has been slower and the Bank of Japan is still holding rates at 0.25pc - offering hedge funds an alternative window of easy money. This last window is about to close, albeit slowly.

Global liquidity - the monetary juice that fuels the system - reached a peak growth rate of 22pc at the end of 2005, even higher than the 15pc peak just before the dotcom bust in 2001.

The rate has since plummeted to around 10pc, and may have further to go. Mr Chaudhry said the suddenness of the fall matters more than the absolute level, typically serving as a warning signal with a lead time of 12 to 18 months.

It slid in a similar fashion in 2000, and before both the 1998 Asia crisis and the US Savings and Loan crisis in the 1980s.

Merrill Lynch said it was cutting back on British equities, viewed as too exposed to resource, energy, and mining stocks that have already seen the best of the cycle.

Britain is now one of the most heavily indebted countries in the world, leaving little scope for equity growth. Total loans amount to 162pc of GDP, compared with 111pc in the US and just 27pc in Poland. "The UK is going to struggle," said Mr Chaudhry.

Merrill Lynch is betting on banks in Eastern Europe, a "trend growth" story for the medium to long-term with plenty of staying power as credit use catches up with the West.

For those willing to dabble in Chinese equities, it suggests a switch from exporters to companies that serve local consumers as China's urban youth - Generation Y - catch the bug for western lifestyles. If in doubt, opt for the Chinese banks. They will fund the consumer revolution.

Ultimately, no country is immune to a liquidity crunch if central banks tighten too far, as they often do. "We can debate whether it's going to be a soft landing or a hard landing, but the bottom line is that we face a landing," said Mr Chaudhry.'

[simon gordon] 05/2/2007 08:18

From the BBC:

'Strong chance' of UK rates rise

The Bank of England's rate rise in January came as a surprise
There is a "strong possibility" that interest rates in the UK will rise in February, according to a report.

Research by BDO Stoy Hayward, which unites the UK's main business surveys, shows that inflation expectations have "shot to a two-year high".

The Bank of England's Monetary Policy Committee (MPC) can up rates to tackle inflation or use a risky "wait and see" stance, BDO said.

The report comes after January's unexpected rate rise from 5% to 5.25%.

Business confidence

A rate rise in February "while the economy is able to absorb it, is the likely option", said BDO.

Despite economic growth being tipped to increase by 3% in the first six months of 2007, the report also showed a less positive outlook by firms.

"Worries over further interest rate rises are starting to dent business confidence", said BDO.

The rise in inflation has been especially obvious in the service sector.

Higher pay demands at the start of the year, as well as the impact of rising oil prices on travel costs and heating, have fuelled the rise.

"The economic news over Christmas and New Year pointed to strong activity in the UK", said Douglas McWilliams, chief executive of the Centre for Economics and Business Research (CEBR), a consultancy which prepares research for BDO.

The report concluded that "while inflationary pressures remain, more rate hikes are likely this quarter".

Recent figures from the Office for National Statistics (ONS) showed the UK economy grew at its fastest pace in two-and-a-half years for the last three months of 2006, spurred by demand for services.'

[simon gordon] 02/2/2007 12:12

Bears in retreat, is it an inflexion point? - from the Times:

'Bears are at bay. Last week arch-pessimist Tony Dye decided to wind up his hedge fund because of his ill health, but only after his bearish stance on shares brought poor returns to investors last year. Unfortunately for them, the upturn in world stock markets is still intact four years on.

Now Sushil Wadhwani, one of the most highly rated market economists of the age, is closing his flagship hedge fund. Named after economist and speculator Maynard Keynes, it attracted $1 billion when launched four years ago.

One in 20 hedge funds are wound up each year, but these two closures are connected. Mr Wadhwani has also been taking a bearish line that failed to pay off. A member of The Times Monetary Policy Committee, he was advocating a UK rate cut as late as June. He opposed both the August and November Bank Rate increases imposed by the Bank of England's MPC, on which he formerly sat. UK growth and inflation have proved higher and more persistent than he or others expected. The slowdown in America has not been as pronounced as he, like many economic forecasters, feared.

Defeat of the bears is always comforting to the majority of investors, who by definition are holders of financial assets. But it is worth remembering that Tony Dye finally quit his previous job as chief investment manager at Phillips & Drew, after his prolonged bear position led to heavy defections by clients, just two weeks before the dot-com bubble definitively burst. The bears will, eventually, have their day, if not as soon as expected. Hence Paul Samuelson's old gag: economists have correctly predicted nine of the last five recessions.'

[simon gordon] 02/2/2007 11:22

'Fears of the first back-to-back increase in interest rates for nearly three years rose dramatically yesterday after news of a jump in pay deals in the crucial January bargaining round.

The average settlement in the three months to January was 3.5 per cent, up sharply from 3.05 per cent in the previous three months, according to data leaked from Incomes Data Services. Although they briefly touched this level in 2001, pay deals have not been at or above 3.5 per cent for a sustained period since 1998. The average was based on 64 January settlements compared with a final total of 225 last year.

Ken Mulkearn, the editor of IDS Pay Report, predicted a further increase. "Many of the January awards included in our latest snapshot were reached before inflation rose sharply to 4.4 per cent, and it would be reasonable to expect that this figure will be a key influence on settlements concluded after it was announced," he said. British Airways awarded its staff an inflation-busting 4.6 per cent pay rise this week.

The figures will be uncomfortable reading for the Bank of England's Monetary Policy Committee, which is concerned that the rising cost of living may spark a wage-price spiral. Alan Castle, an economist at Lehman Brothers, said they increased the probability of a rate rise at next week's MPC meeting from 20 to 33 per cent.'

[simon gordon] 01/2/2007 11:41

Written by Bill Jamieson - 1/2/07:

'Two immediate issues will be critical to prospects for British inflation and interest rates in the second half of the year.

One is the outcome of wage bargaining. If settlements push 4%, the Monetary Policy Committee (MPC) may well be toying with two further rate rises in the spring, not just one, which would take rates all the way up to 5.75%, against 5.25% today. Inflation expectation, as translated by the public in wage settlements, is the crucial warning sign highlighted by some economists, such as Citigroup's Michael Saunders.

Second, events in America. A deepening slowdown spreading from the housing market would work to cool global inflation pressure as domestic demand declines, helping both America and Britain to rate cuts by the year-end. Unlike most forecasters, Roger Bootle, head of Capital Economics, sees British base rate down to 4.25% by the year-end and inflation on the official consumer price index (CPI) measure tamed to 2.2%, predicated on an American downturn which markets are in danger of under-estimating. He sees growth in America slowing to 1.5% and in Britain slowing to 2.2% over the year – both notably below consensus forecasts.'

-----

From the Indie:

'Home repossessions surged by a massive 65 per cent last year as thousands of households buckled under a mountain of debt and the burden of rising interest rates.

Warning that the situation was set to worsen, the Council of Mortgage Lenders said 17,000 homes were repossessed in 2006, up from 10,310 in 2005. That meant one in every 690 mortgage holders was unable to keep up with repayments and had their home seized.

Michael Coogan, the CML's director general, said he expected repossessions to climb further this year and next - to 19,000 in 2007 and 20,000 in 2008 - as an increasing number of households struggled in the face of higher mortgage costs. The Bank of England unexpectedly raised interest rates by a quarter-point to 5.25 per cent in January, the third such increase since August. Most analysts expect at least one more hike this year. Adding to the pain, consumers are tottering under a record £1.3 trillion of debt.'

----

From the Times:

'Borrowers have become so complacent about debt that they risk financial ruin, the City watchdog said.

The Financial Services Authority has calculated that a million adults fall behind regularly with payments on bills and credit cards. A further two million are "constantly struggling" to make ends meet.

Successive rises in interest rates and increases in utility bills could leave more people unable to meet their financial commitments, the watchdog cautioned yesterday.

"Fewer consumers now believe in the value of saving, and many consumers, particularly younger age groups, have a 'live for today' attitude.

"Against the backdrop of economic and financial stability, there is a real concern that many consumers hold an overconfident view about the future and would be ill-prepared if the economic conditions were to deteriorate."

A separate report from the Institute of Fiscal Studies yesterday showed that payments of debt and interest now consume more of the average family's income than since the recession of the early 1990s.'

[simon gordon] 30/1/2007 16:31

From the BoE:

'...monetary policy operates with a time lag of about two years, it is necessary for the MPC to form judgments about the outlook for output and inflation. The MPC uses a model of the economy to help produce its projections. The model provides a framework to organise thinking on how the economy works and how different economic developments might affect future inflation. But this is not a mechanical exercise. Given all the uncertainties and unknowns of the future, the MPC's forecast has to involve a great deal of judgment about the economy.'

[simon gordon] 30/1/2007 09:11

Probable reason for rise this morning:

'Houseprices had their smallest increase in January for eight months, which Nationwide sees as the latest evidence that Britain's booming property market is starting to slow.

In its monthly survey of the market, Nationwide found that house prices across the UK rose by an average of 0.3pc, which dragged the annual rate of growth for the month down to 9.3pc from 10.5pc in December.

"The slowdown in the rate of house price growth adds to the growing list of cooling indicators," Nationwide said. "It is likely we will now begin to see a weakening in demand as a result of stretched affordability and rising interest rates."

The Bank of England shocked most City economists by pushing up rates earlier this month to 5.25pc in an effort to prevent inflation edging further beyond 3pc. Most economists expect the Bank to raise rates at least once more, albeit later in the year rather than next month.

Nationwide is now forecasting that the market will slow more quickly than it forecast at the start of the year, with house price growth likely to end up closer to the lower end of its 5pc-8pc range.

However, Nationwide also cautioned that: "The main risk is that sentiment and expectations change abruptly in response to the rate rises leading to a severe loss of confidence."

The increasing exclusion of first-time buyers and a reduction in expected capital gains for new owners should drag prices lower this year, Nationwide said.

While acknowledging the threats to the market, the mortgage lender also echoed the view of others in the housing industry that a shortage of supply and economic growth will prevent prices from falling.'

[simon gordon] 28/1/2007 09:39

From the Sunday Times:

YOU know when you see a light flashing on your car's dashboard that you should take a look under the bonnet to check everything is okay. The same is true with the UK economy. I'm not suggesting the engine is about to blow up, far from it - there is still too much liquidity in global money markets for that to happen - but there are some sobering facts both on a valuation and at an anecdotal level.

Did you know, for example, that the world's third-largest bank, the Industrial and Commercial Bank of China, is trading on a price-to-earnings multiple of 21. Okay, I accept it reflects the huge growth opportunities and the bank's monopoly position. But the multiple is nearly double that of HSBC - the world's fourth largest. What is even more staggering is that ICBC's return on assets (a key measure of profitability) is less than 1%.

ICBC's share price is a reminder that China's stock market is overinflated and looks vulnerable to a correction. If that happens it will have a direct impact on global equity markets.

For another sobering fact, just look at some of the share prices the City's favourite takeover candidates are trading at. Shares in Whitbread, the leisure group, closed on Friday at £16.26 - just shy of the £17.35 sum-of-the-parts valuation put on it by its house broker Deutsche Bank. The same applies to a raft of utility stocks.

Despite the bid speculation, most of these companies, unless you build in some heroic assumptions, are now out of the reach of any rational bidder. For many UK stocks, their prices are at levels which in the medium term are as good as they are going to get. No wonder a few hedge-fund managers have liquidated their holdings and headed for early retirement.

The valuation argument certainly applies to the housing market. One of the City's leading investment bankers, who has just pocketed a tidy bonus, told me last week that even he couldn't afford to buy the family house he has lived in for the past decade. If he can't afford it, imagine the difficulties overseas banks are going to have subsidising senior staff who they want based in London. The Square Mile is Britain's best asset, but we are in danger of pricing it out of the market.

Investment banks still say they have a good pipeline of business and the market still has a head of steam. But share prices are getting to a level where it is hard to see value.

[alun rm] 26/1/2007 17:14

Recent rate rises starting to filter through?

[simon gordon] 26/1/2007 14:56

Consensus seems to be 5.5% will be the peak. With a rise in Feb. or March. With cuts starting in the 2nd half.

This view can change if data is strong or weak.

Some think rates are at a peak now and that inflation data will start to moderate and fall rapidly.

Some think it is heading to 6%.

If it went to 6% a lot of people would be in serious trouble and it could spark a hard landing.

5.5% looks more feasible for a softer landing: but if public sentiment/confidence changed and the Feel Good Factor died the economy would contract.

Another great unkown is that if the Markets become more risk averse the City could lose its lustre - just last week ITV did an hour special on City traders spending big - normally a sign of a top.

It could all go very pear shaped as the Blair Boom ends and the Brown One takes over just as Governement spending slows and house prices stop rising.

I am feeling more Bearish as Britain has been on a spending spree and the cash has been gushing - normally it ends in tears.

[alun rm] 26/1/2007 14:45

Thanks Simon,

So I guess the real question is, have we come to the top of the interest rate cycle??

This is where we have to put on our macro economic hats and read all the signs.

At this stage, with recent rises still to filter through into the economy, it is difficult to judge. Certainly, the value of the bonds is still dropping - as we can see with the ishare slipping in price over the past few weeks.

So, I assume that the markets still think that rates could rise again??

What do you think Simon?

Alun

[simon gordon] 26/1/2007 08:35

I think the current yield is 5.38% - paid quarterly.

Your analysis is spot on.

Bonds are a potentially profitable buy, if you think the UK economy is going to contract and interest rates cut.

Then when equity is being sold cheap, a la TK Maxx, you buy, buy, buy. Many of the Small Caps right now are priced, a la Bond Street. Could soon be Easy Street.

Growl!

[alun rm] 25/1/2007 21:28

Hello Simon,

I am interested in investing some of my portfolio in bonds and this ishare seems to be one way of getting in, without too many costs, stamp duty or a large spread.

If I understand things correctly (and please correct me if I am wrong) then this fund of bonds will pay a guaranteed dividend (in effect interest on the investment) paid quaterly.

Can you please tell me what the current rate is?

On top of this the value of the fund changes as the value of the bonds that underpin the fund change. This is where I get cloudy. The bond values depend upon what the bond market expects to happen to interest rates in the future.

So for example, if inflationary pressure is building and expectations of a rate rise build, then the value of bonds drops - and so the value of the ishare drops. However, if interest rates have peaked and inflationary pressures ease, then the price of the bonds starts to rise, as expectations of lower interest rates start to filter into the bond market.

Have I got it right? If so, then it strikes me that investing in this ishare at the right moment (i.e. when interest rates are at their peak and the ishare is at a low) should yield both a good dividend and some capital gain as well.

I am on the right track???

Thanks, Alun