All data in this piece are from, or derived from, the Energy Information Administration of the United States Government.

There is a distinct impression from the outpourings of wisdom on and gnashing of teeth over oil prices that demand - China is often cited - is the number one driver behind crude's appreciation. James Picerno over at the Capitalist Spectator quotes a Barclays Capital analyst saying as much. Here is a snapshot of the demand data:

Exhibit 1, Oil Demand, Millions of barrels per day:



Chinese demand is hefty and not a one-off event: year to date 2004, China's consumption has increased more than 23% compared to 2000; and its share of the total oil patch has moved from 6.2% to 7.6%.

It's a fair assumption then, that production volumes have not kept pace with this growth in demand. Indeed, that's often been the supporting idea to the demand argument; as has been the view that exploiting new oil reserves in deep water is uneconomic, even at today's prices. Here's some production data:

Exhibit 2, World Oil Production & Demand, Millions of barrels per day:



*"Production" includes crude, natural gas plant liquids, other liquids and refinery processing gain
**2004 "Demand" uses Q1 data

Odd, isn't it? Production supply is running ahead of demand for the first time since 2000 and yet the oil price is spiking. It's not easy to argue "terrorist premium", "Iraq", "Nigeria" et al since none of these are particularly new phenomenon. There is always something going on. So from where might the roots of the spike be drawing sustenance?

Inventory drawdown seemed a good candidate. Unfortunately, OECD inventory has in fact risen year-over-year to May 2004. Which brings us to:

Exhibit 3, Oil Refining Capacity & Demand, Millions of barrels per day



2004 is the first year over the last five that refining capacity is less than demand. It's not merely that demand has risen, or that there is a bottleneck. Global refining capacity has dropped every year since 2000.

The scribe is not an oil analyst. Nuance in the sector is usually lost on him. Nonetheless, the key to oil's rise appears to be the contraction, in world terms, of refining capacity. Refiners, it would seem, are not convinced oil price rises are sticky enough to render the capital expenditure required in plant profitable (if NIMBY/environmental interests cleared them to build in the first place, that is). And why should they? The oil price, inflation adjusted and in 2004 dollars, has averaged $35.58 since 1970.

$60, here we come.

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Crude oil related journalistic output rises in direct proportion to the commodity's price. But how about stock markets?

It's tempting to say the non-scientific trading knowledge in this area now has a basis in hard academic study with this draft paper entitled Striking Oil: Another Puzzle by Driesprong, Jacobsen and Maat. But it's still reassuring to see academia tackle intuitive method.

This paper is from the Social Science Research Network, an unbelievable resource for the curious.

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Our Canadian correspondent, Tattva, writes:

At a cool C$1.4 billion Fido is one expensive pooch! On the other hand, this pooch is a significant player – albeit a struggling one - in the Canadian wireless telecommunications industry. Both Telus and Rogers Wireless are sniffing around Fido. Telus offered a paltry C$1billion so who can blame the board for cocking its leg in response to this offer. Fido (wireless brand of Microcell) seems keen to hump Rogers’ leg, bidder of the C$1.4 billion.

Why the bid?
Contrary to what one may hear during a tender moment, it appears that:

(a) size does matter: If the deal gets approved then Rogers Wireless becomes the biggest player in the Canadian market with more than 5.1 million customers;

(b) not every one likes a Virgin: The bearded maestro Richard Branson and his Virgin brand is teaming up with Bell Mobility to target Canadian teens (note Bell and Rogers are arch-rivals in the Canadian cable/satellite and wireless markets). Rogers however, don’t want their potential young customers to be touched for the very first time by this competitive duo;

(c) penetration is important: Canada has a wireless penetration rate of 46 per cent, which is low compared to the over 100% in Sweden and Japan (editor: who needs more than one cell phone?) So there still appears to be long-term potential in the Canadian wireless market. But will it be Rogers or Bell who rises to the occasion?

(d) younger is better: A recent report from Solutions Research Group of Toronto revealed that 12 to 29 year olds represent C$1.5 billion of Canada's C$8 billion wireless market. This market is expected to grow twice as fast as the overall market in the next three years.

Consumer Groups Unhappy
There are mixed feelings about whether wireless rates will rise as a result of the takeover. Michael Janigan, executive director of the Public Interest Advocacy Centre, said there is a good chance rates would rise. "We've seen where there is an effective duopoly now in broadband between the two local telephone companies that there's not much difference in the service price; both seem to follow each other in tandem."

Tattva says “Who do these consumers think they are? If you want cheap wireless rates move to India. Cell phone service is so cheap that even the rickshaw drivers are busy chatting with their homies.”

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Discovered in A History of Interest Rates by Sidney Homer is the nugget that in ancient Babylonia the Code of Hammurabi permitted the pledging of a wife against a debt.

United States refiners may not have had to pledge their wives (whatever the appeal therein) but they have benefited from a crude oil loan from the US Strategic Petroleum Reserve. The goal is to iron out supply disruptions in the wake of Hurricane Ivan’s rampage through the Caribbean Sea and Gulf of Mexico.

The fact is that Hurricane Ivan is hardly relevant as a price driver in the oil markets. Oil has been hot over the last year or so on the back of huge demand from the United States, China and Japan. In the absence of mitigating downturns in any major economic block production and refining capacity - if reports are accurate - are running at close to 100% capacity. That's why a storm and any other supply issues (Yukos, Iraq, which side of the bed Chavez wakes up on etc) are having a disproportionate impact on market psychology and the price of oil.

Are these rises of the sticky and persistent variety that will crimp global economic growth, or worse? As Mr Rumsfeld might say, that's a known unknown. A known known, thanks to Northern Trust research is this: adjusted for inflation, and in 2004 dollars, the average price of crude oil since 1970 is $35.58. That's including the oil crisies of 1973-75 and 1979-81. Drop those and since 1988 the average price of crude has been $27.10. Take your cue from that and the inflexibility of the laws of demand and supply - it's only a matter of when and by how much production and refining capacity expands to meet demand.

Finally, back to Babylonia. In the event of a debtor defaulting, his pledged wife could be seized by his creditor. However, Hammurabi's Code demanded that she be treated well and be returned after three years in as good a condition as when she was taken. Hmm.

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MD writes:

Tesco

Tesco reported another sparkling set of results this week and they do look like they now have critical mass, much like Wal-Mart in the US. One can assume that for at least the next 2-3 years they will continue to consolidate their position, as for example they were doing this week with the purchase of 9 Safeway stores from Morrison’s.

So what about the rest? The jury’s out for Sainsbury’s – they should reclaim some lost ground as the favorite of the Middle Classes despite the steady progress of Waitrose. Why? Well, Waitrose is too expensive and they lose out in the smart suburbs where M&S have the Simply Food format. There is also a whiff in the air of a Sainsbury’s fight back: stores are beginning to show the benefits of investment – they’re cleaner, the trolleys work and the car parks are looking less of a shambles. As for the rest, Morrison’s will turn the corner with the Safeway acquisition and continue to (re) gain market share.

What of the losers? Strangely (and against market sentiment) it may well be Asda, owned by Wal-Mart. The stores are dowdy, their ranges are at the cheap end and their previously effective "knocking" ad campaign looks to have lost its edge. All in all, they’ve gone quiet because the results haven’t been quite so good lately and they won’t beat Tesco - much as K-Mart can’t compete with Wal-Mart in the States. In addition, they will be pressured at the top end by Sainsbury’s and at the bottom by both Morrison’s and Tesco.

Jaguar
It’ll be a sad day when car-making stops at Jaguar’s Browns Lane plant. Modern pundits like to argue that if the brand is strong enough it doesn’t matter where the cars are built. They say look at BMW and Mercedes who both successfully build cars in the US and elsewhere. Well, up to a point. What these arguments miss is that BMW & Daimler-Benz remain headquartered in Munich and Stuttgart, and they very definitely continue to make cars at their HQs (where one assumes the “je ne sais quoi” of a car, its DNA, resides). Poor Jaguar were saddled with the Halewood plant at Ford’s behest when they already had Browns Lane and Castle Bromwich and were producing comfortably less than 100,000 cars per year. What on earth did they need Halewood for? Miles from HQ to boot? As opined by the FT (23/9/04 edition), once landed with the huge fixed cost of Halewood it’s no wonder they’re losing money. Something had to give, and it’s Browns Lane.

Still, we should not ignore the genuine strides made with Jaguar. When Ford bought them 15 years ago, they were struggling to produce 50,000 cars a year, quality was poor and the plant antiquated (editor: some Ford execs said at the time they had not seen similar factory conditions outside Eastern European). All this has changed. But unfortunately for Jaguar, whilst Ford revamped the range, they did not invest in a diesel. BMW and Mercedes volumes are impossible without them, however good the product. At the same time, Ford persisted in setting unrealistic targets. They also ignored that the German brands’ massive sales did not happened overnight – they are the product of continuous investment in product, marketing and a careful widening of their ranges and markets.

Finally, let’s be very clear, Ford would love to shut up the manufacturing shop in the UK, and sooner rather than later. Successive UK Governments have shown a willful neglect of manufacturing (as well as R&D, science and pure research) which, together with increasing red tape, gradually results in the country no longer being a good place to do business in.

Saab (GM)
So GM needs to cut 3,000 jobs in Europe? The Saab plant at Trollhatten is apparently threatened despite having a significantly greater productivity per worker than the Opel plant at Russelheim (124k car with 3,200 workers vs. 141k cars with 5,400 workers).

If Trollhatten goes then GM might as well write off the whole investment in Saab (see DNA above). One might argue that this should have happened years ago given that GM wanted Saab and then failed to make the necessary long-term investments. Yes, they have invested and heavily. But they never seriously said "where do we want to be 10 years from now and how do we get there?" What Saab has had are emergency injections of funds to support losses. And now, after 15 years of control GM is saying Saab needs to broaden the range if they are to achieve critical mass. Well ‘scuse me! But any fool could have told them that 15 years ago. GM just doesn’t get it!

British Energy
“Man bites dog!” Well not quite, but the board is playing tough with the hedge funds who now control what remains of the British Energy equity And about time too, some would argue. The hedge funds have had things too easy for too long – wanting the rewards of ownership (cash) without the responsibility.

This saga continues to drag its way through the courts and some pundits say the shareholders are getting a rough deal. Well, maybe. But the British taxpayer is effectively bailing them out rather than leaving them with nothing. And do those same shareholders seriously expect 20-25% of the country’s energy supply to be allowed to go to the wall overnight? Get real. No, let’s give it another 5 years and then start turning the lights out gradually (witness the UK Gov’t view that we can do with nuclear and rely on wind farms). Much better that way.

Pensions
This contributor is considering investing a small amount in a stakeholder pension (editor: just how many pension plans do you now have?!”) and was astonished to find that he was required to identify himself in order to satisfy anti-money laundering legislation! Er, is it me? The only laundering happening here is of the poor sap that invests his funds only to find 20 years hence that they are worth half what he put in! But seriously - would a money launderer want or need a pension? And could he wait that long? As Homer Simpson would say “Doh! It just gets worse and worse!”

DFS
Can’t think why, but those rocket scientists in the City are against DFS being taken private (at least at the price being offered by Lord Kirkham). One must assume that they have a suspicion that they’re being stiffed. The market allegedly only looks forward, so remove those rose tinted specs, lads. The shares at £4.52 are at a 52-week high. It’s a no brainer: Kirkham’s offering £4.89 - take the money and run! If the management and their bankers are foolish enough to want to take the company private, then let them. The furnishings sector is badly exposed to any petering-out (editor: collapse?) of the house-buying surge - shareholders might well rejoice at Lord Kirkham's efforts.

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Source, AFX News - what he said: "Sure enough, our economy is coming back. Now, we're beginning to do very well and the outlook is good. Our economy has found solid footing and is certainly heading in the right direction."
- US Treasury Secretary, John Snow

Capital Chronicle - what he meant: "I'm a savvy political operator - recognise, please, that I have to say this in an election year."

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In July when CC wrote its piece on Marks & Spencer's decline from proud British retailing icon to back-with-the-pack British retailer, it was argued that M&S no longer had the business model it rose to fame on and that its management appeared to be at sea. In that light, the offer of 400 pence a share from Philip Green looked fair. M&S management rejected this without putting it to shareholders, a curious decision which generated speculation about their motives.


Yesterday M&S gave a sales update. The Daily Telegraph headline sums it up well - 'Appalling M&S sales anger its shareholders'. There is no reason to change the tenor of the original CC article. If anything, there are additional concerns - is a return of shareholder funds via a tender sound business sense, or merely a device (now become an albatross) the board adopted during the takeover battle in order support the share price?

Hope otherwise, but expect a full take-up of the tender and, in due course, more hefty payoffs substantially divorced from performance.

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Funny things polls. Not always with explication, they can be all over the place, stretching the pollsters' credibility. But do gambling odds offer a more reliable guide?

Don't bother entertaining this idea at a pollsters' convention. Pollsters go all out to find representative samples for their data and to statistically validate their methods. They are understandably pissed-off at people who don't like the results they produce. All they do is take a picture - it's not their fault if the data displease. Now they have to hear, heresy, that betting spreads might be more accurate?

JM Keynes (rhymes with "brains" his father used to tell him) compared picking winning investments to a beauty contest - you don't pick the girl you think most attractive. You go for the one you think the others will vote for. That's what people do when their money is involved and it's reasonable to argue that odds thus reflect a candidate's "value" accurately.

It's a cute idea. But what happens when the poll is seriously out of whack with the spread?

Consider the most recent poll for Maryland, by Survey USA, which reveals a shocking deterioration of support for Kerry. The president is now tied with his challenger in a state that looked done and dusted for the democrats. On the face of it, a hard to believe change of trend, reflected by the spread for Maryland - Kerry to win 86-90.

Now check out the Maryland Department of Labor. Maryland is the number one ranked state for job-creation over the last year. That factor will have the greatest influence on the election result by the reckoning of the model used by this website.

Maybe it's me, but the possibility that the spread is lagging an obscure state dynamic deserves examination. Risk is low - it would be hard for the spread to punish a speculator from where it sits now.

Ah, did I mention that Nader just got on the Maryland ballot?

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The Choice
Between a rock and a hard place? Cazenove is corporate broker (a legal requirement for quoted companies in the UK) to over 40 of the FTSE100 companies, and also to many other smaller caps. Despite its other banking activities this work is what its overall prestige and value sits on; and clients it brokers to are paying for its independence and ability to read financial markets.

Unfortunately, even for Cazenove, brokering is not especially profitable in investment banking's scheme of things. Hence the search for capitalisation via a floatation, sale or partnership to get in amongst the bigger margins the global investment banks enjoy.

A buyer or partner, on the other hand, looks at the Cazenove client list and sees a prime marketing channel for its large-margin product portfolio.

Fallout?
A sale or joint venture raises a bit of a problem. How independent can Cazenove remain in its clients' eyes once Other People's Money is financing the firm's expansion plans? The very move may mark the moment of disintegration of its core appeal to all those clients it brokers to.

No doubt David Mayhew has taken client polls the results of which may be of some actual comfort. John Kerry's been there too, but his future is looking less than assured right now.

Alternative?
This part is best left to MD, a Cazenove shareholder. But perhaps that float idea wasn't so bad; and it would be a shame to make a dog's dinner of this decision. After all, Cazenove is very, very good at brokering - anecdotal proof is on offer at this unlikely source, the Alba Game Fishing website.

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UK Equities: Jottings Update

Saturday, September 18, 2004 | | 0 comments »


Abbey
So Banco Santander looks to be in the frame for an unopposed takeover. As predicted previously this is likely to be better for the UK consumer as choice is safeguarded, as are the employees. Savings required will be less (as no party has overbid) and there won’t be (m)any messy branch closures. So, rejoicing all round except in the City where "Investment" bankers are crying all the way to Corney & Barrow to drown their sorrows (on expenses) at their failure to con all the other proper banks into paying their outrageous fees.

Northern Rock
Silliest story of the week was the announcement from Northern Rock on Monday (13/9/04) that they had appointed Citibank as advisors (not that they were considering bidding for Abbey you understand – they're too small) but because “"t would be imprudent not to have advice at times like this". Citibank clearly saw them coming - to quote W.C. Fields "Never give a sucker an even break"!

Corporate Excess
So Sir Peter Davis is to get his fee, albeit slightly reduced and he does have to "earn" some of it by forfeiting the balance of the next year’s salary should he become re-employed. As we’ve said before it certainly beats working! Still, when asked for a quote it appears Sainsbury’s are pleased to be shot of him… when asked as to why he left they simply said: “He was dismissed!” Toot, toot!

Intercontinental Hotels
Well, well, a boardroom coup. What joy – the value destroyer North has gone. One assumes the management woke up to the fact under North there would soon have been no business left – except for a rather flaky franchise. The thing about hotels is that they are very cyclical – yes sell a few properties at the peak, but keep the cash to buy more (bigger and better on the dips)…and certainly don’t give it back in the form of a share buy back – this is real cash here! By the way, North’s previous record is questionable – he was one of the team (along with the collusion of the fee driven "investment" bankers) who destroyed Bass.

Cazenove / JP Morgan
So it seems that the boys in Blue may finally succumb to some fiendishly complex joint venture with J.P.Morgan. Frankly this ludicrous charade is unseemly and worse, unnecessary. If the franchise is really bust – as some allege – it is certainly not borne out by results. Further, if it really were the case they would have succumbed years ago.

Shell
I see the first suit has arrived on Shell's desk from a group of litigious US lawyers. They allege that they have lost as a result of the "overbooking" of reserves. Eh? Excuse me, we won't know what has been lost for decades or even whether or not these were aggressive or conservative estimates. Butt knowing Shell, I'd plump for the glass half full view. Someone cleverer than me will also be able to establish quite clearly that the Shell share price now is in its normal range vs. its peers even now after the "scandal".

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In the optimists versus pessimists debate over the state of the US economy neutrals ask just why are twin deficits supposed to be so threatening. With last week's (non-partisan) Congressional Budget Office projection that the federal budget deficit is set to hit $422 billion it's a topical question.

Deficits are not always Bad. Budget deficits, for example, are generally Good when used as a short-term macroeconomic tool to stimulate a weak economy that has idle capital and labour capacity. Similarly, the current account deficit (at least, the trade element) is not automatically Bad. It's like any lender situation: if the borrower believes his investment will return more than his cost of capital, he has a leveraged investment opportunity. If the lender agrees, the transaction occurs.

It tends to be sustained deficits that are Bad. In the case of the US, pessimists argue that demographics are likely to turn the current federal budget deficit trend - described by its friends as a Good short term stimuli - into something much Naughtier. That's due to more baby boomers hitting retirement and consequently jacking up the Medicare and Social Security budget requirements. Meaning, don't expect US debt sales to ease off any time soon.

The pressure of such a persistent debt is that much greater, with the existing low domestic savings rate causing domestic investment to decline further. Concurrently, there is upward pressure on interest rates in order to attract the missing savings. That bites on investment at home although it does attract international finance. And it is that foreign financing that creates the link between the federal budget and the current account (see our article on some of the dangers of large current account deficits here).

Uh, and that's about it for the good news. The bad news is that Europe and Japan have baby boomers too, and their governments run current account surpluses. They happen to hold a great deal of US debt and equity already (Federal Funds data show that net foreign claims on US assets are 21% of GDP), and are still buying. What happens if (really "when" as there is not much point saving madly beyond retirement) they, and/or their governments sell up to buy goods and services from China, India et al like the US is currently doing? What happens is that there will be an awful lot of US assets and debt for sale at the same time. And this brings us to an important non-economic side-effect of persistent deficits.

Pure economics does not entirely capture one aspect of persistent budget deficits on financial markets - uncertainty. It is uncertainty that plays on the minds of creditors and investors reflecting their certain knowledge that the degree of political difficulty of adopting policies (read higher taxes and reduced spending programs) to right the ship is high.

Faced with a glut of US asset and debt sales by fun-loving baby boomers the world over, buyers would be foolish not to recognise the dangers of the US federal government adopting a weak dollar inflationary policy in order to reduce the real value of its debt. Such an outcome might mean that buyers simply do not show up. The risk of panic selling increases. Dollar depreciation might loom together with markedly higher US interest rates. There could be knock-on effects on domestic confidence and investment.

So the central question in the debate becomes will buyers of US assets and debt come to the point where they begin to back off. Pessimist says it's coming. Optimists laugh and call Charles Schwab.

It may be true that the twin deficits are entirely sustainable in economic terms - the US is after all the largest and most dynamic economy in the world. The greatest danger for investors and creditors nonetheless remains the psychological pressure of the twin deficits on financial markets. And don't think your portfolio is panic-proof: when the police raid the brothel, all the girls get taken away.

Well, at least for awhile.

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"Single moms are a sacred thing - a real man wouldn't shop-lift the pooty". So said Cuba Gooding Jnr to Tom Cruise in the 1996 film Jerry Maguire and it is perhaps a fitting riposte to Governor Schwartznegger's amusing "economic girlie-man" references made during his Republican Convention speech.

What the US economy needs (at least, one of the things it needs) is some fiscal restraint on the part of the federal budget. Unfortunately, what the electorate is getting are promises of tax-cuts from both candidates. The pooty is in danger of begin shop-lifted.

Of course, there are major differences between campaigning and governing. Were Kerry to win, he might try to clean up the twin deficit mess since it was not of his making. But who ever heard of a candidate winning an election on that platform? With a Bush victory it is likely to be more of the same, and the President said as much at the Republican Convention.

Since the previous Capital Chronicle (CC) update IGsport have seen their spreads move in favour of a Bush victory. The president is now at 275-283 in terms of Electoral College votes (259-267 last time with 270 required for victory); and the republicans are 60-64 to win the White House (50-54 last time with winning bets settled at 100).

This represents an alignment of the gambling money with the political fundamentals, as applied by the CC model.

Is there still value in the 60-64 spread line, this blog's previous recommendation? Yes, and perhaps a great deal if you believe that the Pentagon's announced intention last week to investigate Kerry's war record can only be very bad news for the democrats. Were it to emerge, or be successfully spun, that Kerry has embellished his service record the spreads will likely skew to Bush dramatically. For the democrats, it is tough to see where they can find a knock-out blow.

There are other interesting spreads for both republican and democrat bettors. The mid-west battleground carries four particularly interesting lines entitled "Kerry to win":

  1. Ohio 33-38
  2. Michigan 64-69
  3. Pennsylvania 55-60
  4. West Virginia 35-40
Ohio and West Virginia represent fair bets for Kerry fans. The former has lost jobs over the last year; and the latter is not natural republican territory nor has it seen any significant job growth in its dominant manufacturing-based economy. Polls indicate both are swing states. However, if Kerry continues to mismanage the war-record debate there is not a lot of point putting money here.

For Bush, Pennsylvania is clearly a great bet. Over 36,000 jobs added since 2003 and the prospect of his challenger fading badly. Michigan is riskier with poor job growth on a manufacturing economic base in a state carried with a 5% margin by Al Gore in 2000.

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MD writes:

Banks:

Banks world-wide appear to be growing profits strongly, as reflected by their positive share price movements. The only problem with this is that many are not really growing the top line; and the positive news is due to the release of provisions. All well and good - but how many of those provisions cover companies that are really basket cases just hanging on until the next downturn? Still, this could be too gloomy a prognosis and we may be in for a round of consolidation although probably not cross border. Except possibly for Europeans buying in the US; and the possibility of more UK banks becoming vulnerable if Banco Santander are successful with their Abbey bid.

Abbey:

So Banco Santander are trying to speed up their takeover. Could it be that they find the glare of publicity in the UK market somewhat uncomfortable and hope that revelations about corporate excess, nepotism and the like will die down once that takeover is completed? Pissing into the wind on that count so don't bet on the proposed London listing lasting any longer than it has to. If UK fund managers dump the stock ‘cos they don’t want exposure to Spain (read can'’t be bothered to find out) then the listing will swiftly wither.

Corporate Excess:

It seemed that the Banco Santander method of not giving a sacked exec a pension after a stupendous payoff might be one approach to adopt in the UK. Ah, except for the discovery that some of their ex execs are still entitled to pensions even after the said payoff. And these at the same level for surviving spouses. Nice work chaps. Also amused (editor: surely you mean envious?) to read of the payoffs for the Banco Hispano execs when the bank merged to create the current Banco Santander. £100m gives a new meaning to "stupendous"!

HBOS:

Have to say whilst it would be disappointed to see Abbey go abroad, a bid by HBOS (from an investor's perspective) may not be the answer: they (not to mention the other UK banks) will be tempted to overpay. For the consumer nothing will be improved by a UK combination - service for certain won'’t improve. For the workers there will be job cuts and "offshoring" undoubtedly to India. So not much benefit there for UK plc. Except, of course, for our chums running M&A in the “investment” banks.

Copper:

Prices continue to rise, but with news of China possibly stockpiling oil (well, they have to do something with all the dollars their exports earn) it wouldn’t be surprising to find that copper too is being stockpiled. Be prepared for sharp falls in the price in early '05.

£/$:

Is it time for the £/$ rate to turn? The pound has – to some eyes at least – been overvalued vs. the greenback (not to mention vs. the Euro) for sometime. Unfortunately, the UK has similar structural issues to the US economy (see our feel-good articles on these here and here) so it’s relative strength is puzzling. But it maybe that the prevailing rate reflects the view that US is so very much worse than in the UK. Just a thought, keep your eyes peeled.

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As long as the credit of this bank subsisted, if appeared to the French to be perfectly solid. The bubble no sooner burst, than the whole nation was thrown into astonishment and consternation. Nobody could conceive from whence the credit had sprung; what had created such mountains of wealth in so short a time; and by what witchcraft and fascination it had been made to disappear in an instant, in the short period of one day.
Sir James Steuart, An Inquiry into the Principles of Political Oeconomy (1770)

In reply to pessimistic argument ad nauseum about debt levels, housing bubbles, static asian export models, current account deficits, artificial dollar strength and so forth, comes the reasonable "look, there is always something to worry about - but that does not mean impending catastrophe" school of thought. That's true.

Turning points and catastrophe do not always strike in one day, though. They may do, as has happened in both John Law's and our own time. But sometimes the inflexion point takes the stealth bomber route with realisation dawning on the bombarded after the fact. The absence of fear exhibited by Alan Greenspan and the regional Fed banks regarding, in particular, the sustainability of the current account deficit is contributing to that syndrome this time around.

With no credible authority, be it leading central banks or politicians, ringing the economic alarm a large moral hazard has built up. Little alarm increases the likelihood that a Houston-we-have-a-problem moment is creaping up. In the meantime onlookers continue to take on financial risks that they surely would not have had policy makers been more assertive regarding the state of the global economy before senate committees, the press and voters. Instead, there are a lot of happy unbroken eggshells.

Nonetheless, many equity holders have been distributing shares since April/May. Consequently longer term moving averages now clearly show major equity market indicies to be in two minds over this debate, but with a perceptible southerly bias. Markets may have predicted 8 of the last 5 recessions, as the saying goes, but caution carries its own rewards.

That's the backdrop to this week's keenly anticipated non-farms payrolls data. Just don't draw the Big Picture with one data point.

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