US recovery- Reading the rising breezes in between the hurricanes

The Great Financial Crisis also produced a crisis of confidence among investors. Investors want to see something at least resembling a normal market. A US recovery is the only working mechanism able to provide that reassurance. Everybody, from day traders to managed funds, wants to see solid gains and solid growth.

The “mixed signals” issues- Where the breezes are coming from

The US economy has been sending a very garbled series of messages. They may be accurate, they may be subject to interpretation, but the fact is that they’re also making market analysis pretty difficult.

For example:

Employment

Employment figures have been erratic, including some big spikes and periods when the US employment market looks positively comatose. There’s an issue here, and the issue is that the US employment market is no longer the industrial market it once was. It’s a services market, and its behavior is quite different to most of the conventional models.

Employment figures underpin major capital in domestic economics, including the manufacturing, auto, consumer goods, retail and housing sectors. The recovery has been slow, but there are signs that the New Economy business models are taking hold, supporting more trade and professional services. That’s a breeze which will definitely grow into a gale in the US. All global economies are taking up the new business approach, and many are taking big market shares. 

Housing

The US housing market was effectively hit by a dinosaur-killing asteroid in 2008. Confidence in the market has been propped up by low prices, not hype, and that’s been an almost unreadable factor in market analysis. Nobody, understandably, wants to make predictions in an environment where figures like 3 million more foreclosures are expected in 2011.

This has been a very ill wind, which will eventually blow a hurricane of good for some investors. There’s only one truly obvious factor involved in the current US housing sector- The current big surge in investment in foreclosures and bargain basement properties is the forerunner of an eventual upsurge.

From the market’s point of view, an upswing in the property sector translates into an upswing across the board, from finance to construction materials. This is a gigantic capital market, and when it comes back onstream, the US recovery will be truly underway.

Politics and the US budget

The market has naturally been highly sensitive to US government issues. This particular hurricane has arguably done more damage to market confidence than anything else. Big budget cuts, even to defense, have been foreshadowed as the US battles its huge national debt. 

The good news is that nations can’t be governed purely by self-serving verbosity. Revenue must become more than a football. Clear fiscal policies must be in place. These breezes are still blowing in multiple directions, but the inevitable outcome must be a solid blast of fresh air to restart America. When that happens, the markets will respond rapidly.

Best practice for investors is therefore to position for growth, while avoiding risk. There may not be too many “get rich quick” options on the board now, but they will be there, so get ready.

As the world attempts to emerge from the global financial crisis, much has been said of the nations that are left with major debts. While several countries’ names are often repeated, exactly which countries are the most indebted? We investigate the major economies of the world to see which debts are proportionally high, as compared to each country’s GDP. So long as businesses and individuals continue to run on deficits, debt collection will continue to be an important service.

Ireland
Ireland is a member of a club no-one wants to be in. It is one of the PIIGS. This acronym stands for several European Union member countries that have been deemed to have weak economies and large debt loads. The countries are Portugal, Italy, Ireland, Greece and Spain.

Ireland has the ignominy of being the country with the highest external debt, that is, the highest foreign liabilities in the world as a percentage of its Gross Domestic Product (GDP). GDP measures a country’s total economic output. By comparing GDP to a nation’s external debt, one gets an idea of the ability of a nation to manage such debts.

Ireland’s external debt is an outrageous 13 times it’s annual GDP, or expressed as a percentage, an incredible 1300%. That’s well over half a million US dollars of debt for every Irish man, woman and child! Ireland’s problems stem to a large part from a property bubble that has now burst. Irish banks lent heavily to property developers who attempted to sell land at overinflated prices; prices which have now collapsed. Property developers are teetering on insolvency, and struggling to repay loans. Banks have been left with these large bad debts, leading to nationalisation of one Irish bank. This in turn has further indebted the government.

United Kingdom
At number two, and also in deep external debt trouble is the United Kingdom. External debt runs at over four times annual GDP, or around US$150,000 per UK citizen.

Switzerland
Rounding out the top three is Switzerland, with a similar amount of external debt per capita as the UK, but with a lower total of 3.8 times annual GDP.

The United States Of America
There has been plenty of talk about large debt levels in the world’s biggest economy. Many have also pointed the finger at the US for having helped create the global financial crisis through lax lending policies to uncredit-worthy American home buyers, leading to an inflated property bubble that eventually burst. One would think that the USA must surely be somewhere near the top of the list? Interestingly, the USA only comes in at number 20, with external debt essentially matching annual GDP (i.e. 100%). While this is high, the countries highlighted above are arguably in substantially worse predicaments.

The Global Financial Crisis caught many countries unawares. Some may have believed that easy credit would continue indefinitely. With slumping demand, fearful consumers and rising unemployment, many nations attempted to spend their way out of trouble. This debt financed spending attempted to stimulate economies, but has left major debts for future taxpayers, meaning there will be plenty of pain to come. The private sector in the above countries have also spent beyond their now reduced means, meaning that debt recovery will become an important service in chasing those than cannot manage their debts.

After having exited recession only recently, the UK is now ‘on the road to recovery’ – a different story entirely to the one in the US, where the recession ‘unofficially’ ended in the third quarter of last year.

So, with both economies returning to growth, it’s time to take a look back and pick out what actually happened… was the recession in the UK that different to the recession in the US?

Well, to start off with, the US was only in recession for four consecutive quarters (12 months) – which is better than Britain, which remained in recession for a further two consecutive quarters (so 18 months in total), meaning the UK economy was the last major economy to come out of recession (behind Japan, China, France and Germany).

It all started for the US economy when economic growth fell by 0.3% during the third quarter of 2008 – after increasing by 2.8% during the previous three-month period. While for the UK, the economic heartache began when gross domestic product (GDP) fell by 1.5% during the final quarter of 2008. 

Fast forward several quarters of economic uncertainty, and…

In the third quarter of 2009, the US economy posted a better-than-expected annualized growth rate of 3.5% – marking the first positive quarter since Q2 2008. Meanwhile, in the final quarter of 2009, the UK economy posted a weaker-than-expected growth of 0.1% – barely making it out of recession.

Despite the weak economic growth in the UK, Chancellor of the Exchequer Alistair Darling said he was confident that the UK is now “on a path to recovery”.

Over the course of 2009, residents of both countries felt the effects of the recession. In the UK, for example, the number of people declared insolvent reached an eye-watering 134,142 – this was made up of 74,670 bankruptcies, 47,641 IVAs (Individual Voluntary Arrangements)* and 11,831 DROs (Debt Relief Orders)**. While in the US, up until the 30^th September 2009, there were 1,402,816 filings for bankruptcy – this figure included 989,227 chapter 7 filings, 14,745 chapter 11 filings, 487 chapter 12 filings and 398,210 chapter 13 filings.

*An IVA is an alternative to bankruptcy, offering borrowers the chance to clear unmanageable unsecured debts in five years, and have the debt they can’t afford to repay written off.

** A DRO is also an alternative to bankruptcy, and was introduced on April 6^th 2009. It is designed to help people who have very few assets and debts of less than £15,000.

So, now both economies are ‘officially’ out of recession, can we expect things to stay this way?

Although it is hard to predict what may lie ahead for both economies, many experts are expecting a slow recovery from the two countries. This isn’t to say that they won’t dip back into recession though, which is always a possibility when economic growth, particularly in the UK, has been so weak

Europes 2nd biggest oil company BP Plc has said their profit fell 53% on lower energy prices.  They have said that there is “little evidence” of a recovery.

Their 2nd quarter net income has fallen to $4.39 billion, or 23.16cents a share, from $9.36 billion, or 49.23cents, in the earlier period.

CEO Tony Hayward of BP said that estimated cost cuts would exceed an earlier target as it increased production to more that 4,000,000 barrels a day.   There has been “significant falls” in the first half and the recovery will be “long and drawn out” as the demand stabilizes said Tony.

An analyst from Panmure Gordon and Co recently said in an interview “I have serious concerns about the operating environment and that the oil price may come under pressure.”

Later this week BP’s rivals will be releasing their results which are Spains Repsol YPF, Total SA of France, Royal Dutch Shell PLC.

U.S oil futures averaged $59.79 a barrel in the 2nd quarter, 52% lower than a year earlier, while gas futures slumped 67%.  NY oil futures have rebounded 53% since the beginning of 2009 and traded at $68.44 today.

Irish flight company Ryanair is cutting the number of flights from Stansted airport by 40%.  This will start this winter from October 2009 to March 2010.

Currently they have 40 aircrafts at Stansted airport and this will be reduced to 24 by winter.

The reason for the cutbacks is because Standsted is one of their most expensive bases.  They tried to persuade BAA to cut hight passenger fees this winter but failed.

The 16 aircrafts to be cut will be moved to other european bases.

CEO of Ryanair Michael O’Leary said “Sadly UK traffic and tourism continues to collapse while Ryanair continues to grow traffic rapidly in those countries which welcome tourists instead of taxing them”.

This just goes to show how damaging the governments £10 tourist tax and BAA high airport charges are damaging the UK tourism and the economy.

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Sports Car Manufacturer Porsche SE is close to reaching an agreement with Volkswagen AG with regards to a merger.  CEO Wendelin Wiedeking has sain recently in an interview “I think all the details, later on within the next days” will be resolved.  Wiedeking has said that the deal to sell Porsche to Volkswagen “its already on the table” meaning the sale is very close to agreements.

Qatar Investment Authority has put an offer to buy a stake in Porsche’s holding company and options in Volkswagen stock.  Porsche currently has a 51% stake in Volkswagen which has put them in 9 billion Euros worth of debt. 

Juergen Meyer a portfolio manager at SEB Asset Managment firm in Frankfurt has been quoted saying “The most reasonable solution would be that Porsche sells its call options on Volkswagen shares to Qatar and Volkswagen acquires a stake or 100% of Porsche’s car business”.

Cheif Executive Officer Wiedeking became CEO in 1993 and has transformed the company of the 911 and the Cayenne, which when he started the manufacturer was almost bankrupt.  He has turned the company around into the industry’s highest profit margin company.  In was’nt until 2005 he began using cash from the business to buy shares in Volkswagen, a company that builds more cars in a week than Porsche does in a year.

The family owners and Qatar have been asked to participate in a planned five billion euro share sale at Porsche, people familiar with the talks said this week.  Qatar may pay 2 billion euros for a stake, one of the peoples said.

If Persian Gulf were to invest this would leverage to negotiate a deal to merge with VW.  An agreement between the families earlier this year in May with VW to pursue a merger to create a 10 brand behmoth that would include Audi luxury division of VW as well as the Skoda and Seat mass market units.

The 2nd largest US bank JPMorgan has announced that profits have risen for the first time since 2007.  This has beat all estimates from analysts putting a smile back on investors faces.

Second quater earnings had increased to $2.7 billion, which is 28 cents per share.  Compared to $2 billion, 53 cents per share a year earlier.

14 analysts who surveyed the company estimated an average price share of 5 cents a share a while back.  Investment banking revenue from trading and stock and bond underwriting is helping offset rising defaults on consumer loans, such as mortgages and credit cards.  This has allowed Jamie Dimon (CEO) to post net income during every quarter of the US recession that started back in 2007.  JPMorgan is the only bank within the nations top five to manage that feat.  Lets hope the others are soon to follow.

Charles Bobrinskoy who is vice chairman of Ariel Investments in Chicago said “This is a real tribute to Jamie Dimon” in a recent television interview.

JPMorgans 15 percent gain this year on the New York Stock Exchange is the 2nd best performance in the 24 company KBW Bank Index just behind State Street Corp.  The stock climbed 4.5% to $36.26 in composite trading yesterday.

The bank has made $1.47 billion in profit which has quadrupled since last years 2nd quarters earnings.  The boost in profit was from fees from underwriting stock and bond deals and fixed income trading. 

Goldman Sachs Group Inc recently said on july 14 that it made $3.44 billion in the quarter from trading and underwriting stock.  Revenue was up from $9.43 billion last year to $13.8 billion this year ending month June 26.

It has been reported that Royal Bank of Scotland (RBS) are to spend £300,000 at Wimbledon on their company exectutives dispite the company being in a financial mess.  This has caused fury as tax payers bailed out the bank with £20billion only last year.

An MP was quoted for saying that he felt the extravgence of RBS is “disgusting” at the amount of money they are laying on for a few days at Wimbledon.

The bank is currently 70% owned by the state and taxpayers are also guaranteeing more than £325billion in toxic assets.

LDV was put into administration last week and is in talks with Phones4U owner John Caudwell as a possible takeover bid.

The billionaire has asked his team to look into the company and review the situation and then will bring in new management to take the company to new life.

John sold Caudwell Group telecoms business in 2006 for £1.46 bn which at the time was the top of the market.  This will be his first step back into the industry since 2006.

John sees LDV has a lot of potential as the demand for vans overseas is still very high, particulary in third world countries he says.  He is still in early talks with pricewaterhousecoopers and hasn’t signed a non-disclosure agreement yet.

In 2003 Mr Caudwell sold his Singlepoint telecoms business to Vodafone  for £400m and Caudwell Holdings, including Phones 4U, to a private equity consortiumthree years later.

At the moment Caudwell spents most of his time working with the Caudwell Children charity which is near to the LDV Midland base.

After the sale of the Caudwell group he has invested £15m in advanced marine propulsion system and a further £100m into commercial property which are both managed by business associates.

Another firm interested in LDV is Malaysian firm Westar.  They pulled out of a deal early this month which forced LDV to go into administration but they say they are still interested in the firm.

Also another firm called Nanjing which are a chinese manufacturer which bought MG Rover in 2005 are also said to be interested in LDV.  Indian conglomerate Mahindra Group are also said to be interested.

By the looks of things it could turn into a bidding war for the LDV company.  PriceWaterHouseCoopers said it had 3 interested parties but would not comment on Caudwells approach.