BT's dividend signal

In Topic 9 of the second edition of the book I took a look at the very important subject of dividend policy. In the introduction to this section I discused the clientele effect and the information that can be contained in the dividend announcement. A good example of these two factors in practice came along in last Friday's FT (page 20 Companies and Markets) with Andrew Parker discussing BT's latest figures which showed a 71% increase in pre-tax profits for 2010/11. However, of even more significance for their shareholders was the group's hint that dividend policy might be more generous in the future as a result of a sharp fall in their pension fund deficit. With the company generating £2.2bn of free cash flow it was able to raise the annual dividend by some 7% to 7.4p per share. This was contrasted with BT's decision to cut their dividend payouts two years ago due to lower than expected earnings and the need to increase the company's payments into the pension fund. It is now expected that the pension scheme is in far better financial shape and it is against this background that the company can now look to signal a more generous dividend policy in coming years. So if we take the dividend announcement as "an important signal to investors" BT is presenting an optimistic viewpoint.

UK Borrowing pressures ease (a little!)

The latest data just published shows that the UK Government has borrowed less money from the financial markets than had been expected. The hard figures revealed in today's FT (page 2, FT, 1/9/10) indicates that the UK will now borrow some £45bn in the next four months as opposed to the expected £55bn in this period. The borrowing process is managed by the Debt Management Office (DMO) and it has taken advantage of the strong demand from large institutional investors and consequently sold more UK bond issues than was initially scheduled at this stage of the financial year. This has been made easier by the sharp fall in UK bond yields which has resulted in lower government borrowing costs. According to the FT article the average yield fell to under 3% at the end of June 2010. You can read more about the underlying economics of Government finances in Topic 11 of Reading and Understanding Economics.

German GDP points to better times ahead in the eurozone...

In a week of generally bad financial and economics news stories there was a glimmer of hope on Friday with the release of better than expected data with a pick-up in German economic output resulting in a 1% rise in gross domestic product (GDP) across the eurozone. However, the detailed numbers showed a sharp contrast between the robust data from Germany and France and the continued weakness in the so called "Club-Med countries" like Spain, Italy and Greece. This prompted an excellent story in the weekend FT with the author (Stanley Pignal) pointing to the emergence of a divided eurozone with the healthy core countries and the much weaker southern zone in dire trouble. It seems that while the likes of Germany have enjoyed a surge in exports resulting from the depreciation in the euro the same cannot be said for countries like Spain who predominantly trade within the eurozone. Against this background the next few months could see a period of further pressures on eurozone financial markets as investors remain concerned about the financial state of many of the weaker economies.

Celtic tiger out of recession!

In Article 17 of Reading and Understanding Economics I have given a definition of an economic recession (page 121) and then this is discussed in relation to the performance of the US economy at that time. Remember that economists define a recession as a severe economic slowdown normally defined as two or more successive quarters of negative growth. The recent data has just shown that the Irish Republic officially moved out of recession in the first quarter of 2010 with the latest data showing that gross domestic product grew by 2.7% during that period compared to the last three months of 2009. However, there is little real cause for optimism in relation to their other economic data. The number of people claiming unemployment benefit rose by 5,800 in June to hit a total of nearly 445,000. That left June's estimated unemployment rate at some 13.4% of the labour force.

Growth in India still robust but worries about the negative impact from the Eurozone

In these worrying times for the Eurozone economy it might be encouraging to see that India's economy grew at an annual rate of 8.6% in the three months to March 2010. This economic strength was largely based on a buoyant manufacturing sector. This data will support a continued tightening in monetary policy with the Reserve Bank of India (RBI) likely to raise interest rates further in coming months. It has already moved interest rates higher in March and April in an attempt to curb high levels of price inflation. The worry for the Indian economy must be that it starts to suffer in the wake of the sovereign debt crisis hitting the European economy. If these governments continue to raise taxes and cut public spending this is likely to have a domino effect across the globe with trade levels suffering and consumer confidence hit badly.

Eurozone unemployment trend deeply worrying

In Topic 9 of Reading and Understanding Economics I examine macroeconomic policy. This includes articles on unemployment, inflation and economic growth. In the introduction I explain that high employment is a key policy goal for many governments across the globe. Sadly the latest data from Spain shows that key parts of the European economy are suffering badly. Spain's unemployment rate has hit a staggering 20% for the first time in nearly 13 years.
The jobless rate in Spain has risen sharply during the economic downturn and is the highest in the eurozone. The latest data shows that the overall eurozone unemployment rate remained unchanged at 10% in March. This means some 16m people are unemployed across the eurozone. These figures show the real cost of the economic recession in terms of the impact on the eurozone labour market.

New measures for inflation...

In Article 16 (page 111) I set out to show how inflation is measured in the UK. When you read the analysis of this article you will see that there are three different measures of inflation published by the office for national statistics (ONS). The main measure of inflation is the consumer price index (CPI) which the Bank of England is supposed to keep at annual rate of 2%. This measure is regarded by many commentators as being a far from perfect figure as it excludes the housing costs which have been such a very important economic variable in recent times. On the 15th March the ONS updated the basket of goods and services that are included in the calculation of the CPI. In came hair straighteners, lip gloss and still mineral water and out went toilet soap, baby food and pitta bread. Based on this information I am even more convinced that the ONS bases the annual re-weighting exercise solely on my own household spending. With a wife and two University-age daughters I can count three hair straighteners currently around the place while it is a long time ago that baby food featured in our shopping baskets! If you want to find out more information about the re-weighting go the following website www.statistics.co.uk. Have fun!

UK Trade figures...

If the Government were hoping for some good news to help their election chances yesterday was another severe setback for them. The latest UK balance of payments data (see Article 21, page 153 of Reading and understanding Economics for more info) was truly shocking. The figures showed that exports fell by 7% in January. This was much worse than analysts had expected. The result was a further sharp fall in sterling on the FX markets with the pound slipping back below $1.50.

The really disturbing aspect of these numbers is that you might expect to see the sustained fall in the pound boosting UK exports and inhibiting the level of imports coming into the economy. The depreciation in the currency pushes up the cost of imports and makes UK exports cheaper on World markets. While the higher price of imports does seem to be increasing domestic inflation the more favourable rise in exports does not seem to be coming through. There had been a hope that the improved competitiveness of the UK's manufacturing sector would help to rebalance the economy with exports and investment compensating for weaker consumption and government spending. Sadly the latest data suggests that this is not happening. The next concern for the Government will be the latest GDP data released on the 23 April 2010. This might show that the UK is back in recession which will hardly be good news just a month or so ahead of the election.

Fed makes surprising move...

Late last Thursday night the Fed announced that they would be raising the interest rate it charges banks looking for emergency loans. The 25 basis points increase in the discount rate took it to 0.75%. This is a clear signal from the Fed that it thinks that there is some evidence that the US economy is really starting to recover Such a move had been expected at some point in 2010 but the timing caught the markets by surprise. As a result we saw a jump in the US dollar as well as some gains in the major stock market indices. We are probably some way away from a movement upwards in the far more significant Fed Funds Rate but some increase is possible in the early summer. For Fed watchers it is going to be an interesting year ahead.

Obama acts to cut back on bank risks

Yesterday the US President announced plans to limit the risks taken by major US financial institutions. This came as a complete surprise and as a result we saw sharp falls in the shares of several banks including JP Morgan Chase and Morgan Stanley. The key measure is that US banks that take ordinary personal deposits will be forced to close or sell off their proprietary trading operations. This is the type of activity that got banks like Bear Stearns (see page 197 of "Reading and Understanding Economics") into severe trouble in 2008. Put simply, the bank's prop trading desk is involved in taking bets on financial markets using the its own money rather just than carrying out a trade for a client in which only the client's money is at risk. This type of activity has been associated with the creation of clear conflicts of interest with some banks encouraging their clients to buy financial products that the banks had a stake in. It is now expected that the UK Government will follow this lead and introduce similar measures in the near future.

Doves versus the Hawks!

The latest minutes (November meeting) from the Bank of England's Monetary Policy Committee (MPC) highlight some clear divisions among its members in relation to the future direction of UK monetary policy. Seven members voted for the further £25bn boost to the quantitative easing (QE) programme which took the total to date up to £200bn. One dovish member (David Miles) actually wanted the QE to amount to some £40bn. In contrast one other hawkish member (Spencer Dale) wanted no further QE at all. These divisions reflect the wider view of the City economists. In recent weeks we have seen some of them arguing that we should do more to promote growth and that any inflationary threat was minimal. In contrast some others now feel that the Bank's actions have gone too far. They fear that we could see a serious rise in UK inflation next year. To be honest it is hard to decide which side of this argument that I feel most comfortable to support. There are clearly some inflationary pressures mounting reflected in higher oil prices and the more confident tone of the stock market. Against that there is clearly a risk that the economic recovery could hit the buffers during 2010. If that happens the risk of higher inflation will soon disappear. We live in interesting times!

Manufacturing output improving?

Yesterday we saw the publication of some slightly more encouraging data on the UK's manufacturing sector. The Chartered Institute of Purchasing and Supply's Purchasing Managers Index (PMI) rose to 53.7% in October. This compared to a figure just below 50% in September. In the United States the equivalent PMI is a major economic release and this would have hit the headlines. However, in the UK this data is more low key. The significance of the data is that any figure above 50% indicates that this sector is growing. So the rise from below 50% to 53.7% in October could be taken a clear sign that the worst is over. However, we should wait to see this trend confirmed with November's data published in early December.

Investment Banks drive stock market indices forward!

Today Goldman Sachs, the US Investment Bank, announced that their profits had hit over $3.2bn in the third quarter compared to a year ago. This followed on from Wednesday's numbers showing that JP Morgan Chase had earned $3.6bn net income in the three months to the end of September 2009. This was way better than the analysts had expected and the outcome was that the Dow Jones Industrial Average (DJIA) went above 10,000 for the 1st time in a year. The broadly based rally in stock prices also reflected some very good retail sales numbers and some encouraging figures from Intel. The big question is can this stock market confidence build further taking the DJIA to even higher levels. For what it is worth I would not be too surprised to see some slight fallback in share prices as traders become more cautious perhaps deciding to sell some stock and take some profits. They have after all seen a 50% rise in the main stock market indices since March of this year. So keep an eye on all the key indices which are shown on the front page of the main section of the FT.

G20 take centre stage!

In recent days the actions of the G20 leading economies have dominated the news agenda. One aspect of this has been the various statements made by some of the key players on the need to clamp down on the level of bankers' bonuses and the activities of hedge funds in an attempt to avoid some of the causes of the credit crisis. There has, however, been a clear divide between those leaders representing continental Europe (Angela Merkel and Nicolas Sarkozy) and the those representing the Anglo-US axis (Brown and Obama). The former advocate much tougher financial regulation including explicit measures to limit bankers' pay in the future while the latter favour lighter regulation on financial institutions. There is little doubt that both Brown and Obama are facing stiff opposition from the city of London and Wall Street to any attempt to come down too harshly against the banks. This will be a debate that will continue for some time....

The problems in measuring unemployment in the UK

The UK Government is somewhat confused by the latest unemployment data. The problem is caused by the two different measures of unemployment that they publish. The first is based on the number of people claiming job seekers allowance (JSA). This indicates that unemployment is rising but at a relatively modest rate of around 120000 in the latest three months. In contrast the alternative measure is based on a survey conducted by the International Labour Organisation's (ILO) count. This focuses on those people looking for work. The ILO's latest data shows an increase of some 400000 people unemployed over the same period. The Government has announced an urgent enquiry to try to find out the reasons for the large difference. One very likely explanation is that a number of those people currently becoming unemployed were second earners and they are not bothering to sign on for unemployment benefits. They are living off their partner's income. In addition it seems likely that many migrant workers are registering as unemployed on the ILO survey but they are not entitled to receive JSA. Hopefully in a few months we will get to the full truth behind the UK unemployment data!

Chinese Inflation falls again...

In Article 18 in the book I looked at the reasons behind the sharp rise in inflation that China experienced last Spring (2008). A year on and it is such a very different picture. The latest data for their consumer price inflation showed a fall for the fourth successive month. Once again the key factor was the sharp declines in non-food items although the price of China's most key meat, pork, also fell by a third compared to a year ago. The main reason for the decline in China's inflation rate is mainly the impact of the World recession which has led to much less demand for their exports to overseas markets. So China's producers and retailers must cut their prices to compete overseas and also to sell more at home.

Leading indicators...

The recent recovery in stock markets across the World suggests that investors are starting to think that we can now start to look forward to some kind of economic recovery later this year. With this in mind all eyes will be on the Leading Indicators series which is published by the Conference Board in the US. The aim of this particular release is to predict the state of economic conditions in the near future. It has an excellent track record going all the way back to the 1950s. When this data is published you actually get three different economic series:

1) The Conference Board Leading Economic Index - this is the most important as it tries to predict the future.

2) The Conference Board Coincident Economic Index - this is the next in line as it says what is going on now.

3) The Conference Board Lagging Economic Index - this is the least important as it tells us where we have been in the past.

For investors all eyes should be on the first series - leading indicators.

The data series is based on some of the following economic/financial information:

•Average workweek in manufacturing.
•Average weekly initial U/E claims.
•Manufacturers’ new orders for consumer goods
•The S and P 500 stock market index.
•M2 money supply data.
•Housing permits.
•Consumer expectations.
•Manufacturers’ new orders for non-defense capital goods.
•Spread between 10-year Treasury bonds and Fed Funds Rate etc.

The last set of data showed a contiuned decline with the Conference Board Leading Economic Index decreasing by 0.3 percent in March. The next set of data for April will come out later this month.

You can access it via this link:
http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1

Back to the 1970s

The latest UK unemployment data was published yesterday just as the Chancellor was getting ready to deliver his 2009 budget speech. It showed the current dire state of the UK labour market. The headline unemployment rate increased to 6.7% . The even more accurate claimant count (this is explained on page 103 of the book) rose by 74,000 in March. There is no doubt, however, that the most worrying figures were those that showed that we now have 820,000 aged under 25 who are unemployed and that there was a big increase in the number of long-term unemployed. If we put these two things together the data showed that we now have 100,000 people aged from 18-24 who have been unemployed for at least a year. This is very bad news for them and for us all eventually as the impact of being unemployed for a long time is very serious. It ca have a long-lasting impact on those involved. This issue is explored on page 101 of the book ("Reading and Understanding Economics").

"Unemployment causes great suffering to those involved particularly when a severe economic downturn results in a sharp rise in those people out of work. The misery inflicted is particularly severe because the incidence of unemployment among individuals and households is very unequal. While some people will go through their entire working life without ever suffering a spell unemployed others will have to endure regular periods of economic inactivity. The longer someone is unemployed the worse it gets. They are likely to suffer a loss of self-esteem and maybe find themselves eventually cut-off from the labour market for ever".

All the evidence shows that a period of long-term unemployment is especially harmful to the young. It is essential that the Government acts swiftly to reverse this trend before those affected suffer irreversible damage. The Chancellor did announce some new initiatives to offer training or education to the young people involved. These are reminiscent of schemes like the 1970s Youth Opportunity Programme (YOP) that offered the young unemployed chances to sweep leaves or clean the streets. The problem is that the young unemployed need far more than this work experience can offer. They need the opportunity for real work that is properly paid. If this is not forthcoming we could end up with a generation that will be permanently blighted by having endured this early period of unemployment. We need the Government to show real leadership in this area and this must be done quickly.

A time of austerity in Ireland now and coming to the UK vey soon

The credit crunch has had a serious impact on public finances right across the globe. In response to their deteriorating budget position the Irish Finance Minister Brian Lenihan unveiled a series of tough measures designed to bring the Country's budget deficit back under some kind of control. The fiscal moves included sharply higher income taxes, higher rates of Capital Gains Tax and Capital Acquisitions Tax, rises in excise duties on cigarettes and size able cuts in unemployment benefit. In terms of the economy he had a gloomy forecast with output expected to contract by 8% this year. What is happening in Ireland now could soon move onto the UK in a year or so. The UK's fiscal position has also deteriorated badly in the wake of falling revenue (due to lower incomes and profits) and rising expenditure (the bailouts and higher benefits). So it is likely that just as the UK is coming out of recession in 2010 there will be the need to raise taxes and slash government spending. This could act to halt any recovery that is starting to show at that time. No wonder that the stock market remains very nervous. If investors expect 2010 to be the start of another period of rising economic activity with higher corporate profits and dividends they might well be disappointed.

Deflation gets closer...

In the opening section of Article 16 I explain the various measures of inflation used in the UK. It might be useful to illustrate the main two definitions with reference to the latest inflation data which was published today. The headlines will be dominated by the Retail Price Index (RPI) which fell to 0% in February on an annual basis compared to 0.1% in January. This is a wide measure of inflation that includes housing costs. The sharp fall in mortgage rates in the last year has driven this measure of inflation to the lowest level in nearly 50 years. However, the annual rate did not turn negative as many commentators had predicted.

The Government's preferred measure is the Consumer Prices Index (CPI) and this actually rose unexpectedly from 3% to 3.2%. As a result the Bank of England's head Mervyn King will have to write again to the Chancellor (Alistair Darling) explaining why inflation is more than one percentage point above the government's own 2% target.

Against this background the FT-SE 100 index has fallen back slightly this morning which is not that surprising as we have seen a strong rebound in the UK equity market in the last few days.