The Church in medieval times was the era's super-multinational - revenue streams flowed in from all across the known western world. Amongst the biggest earners were holy relics: a relic attracted pilgrims; pilgrims brought money; and that money super-charged the local economy. Holy relics were the equivalent (sort of) to modern-day Toyota factories.

And so it is, too, with the US quarterly GDP figure. Just replace "pilgrims" with "investors" and "local economy" with "equity markets".

Exhibit A, below, explains: the S&P500 performance and the level of quarterly GDP growth are 37% correlated over the last 10 years to Q1 2005. Not everyone may have complete faith in the link, but who wants to ignore it?

Exhibit A: quarter-over-quarter GDP & S&P correlation, 1995-2005 + forecast

But here's the funny bit: use the previous 10 year period (1985-1995) and the data produces a negative correlation of -35%. And over the whole period 1985-2005 the link is a paltry 6.3%.

Annual data provides a better feel - but only if the S&P data is advanced a period. Exhibit B illustrates:

Exhibit B: year-over year GDP & S&P correlation, 1960-2005 + forecast

Decade by decade the relationship has been:

1961-1970 = 74.3%
1970-1980 = 63.5%
1980-1990 = 2.6%
1990-2000 = 61.4%
2000-2005 = 68.6%

Which, despite the severe breakdown over 1980-1990, suggests the S&P has been highly predictive of the economy, as measured by changes in GDP. GDP forecasts, therefore, become especially valuable so long as their credibility in equity markets remains good.

Unfortunately, though, these data cannot provide a touchstone for measuring fair-value in the market. And, whether it is shares in General Electric or a lock of St Jude's hair, buyers are supposed to ensure they do not pay over the risk-free rate for their investment returns.

Both replacement-cost and normalised p/e value models show the S&P 35% to 50% above trend (exhibit C, for example, uses Tobin's Q to show fair value versus US equities prices). On these measures equities are generally poor value; and so it is a stretch for this scribe to become too enthused by the latest positive US GDP revision (Q1 2005).

Context, eventually, matters.

Exhibit C: Tobin's Q measure of fair value, 1900-2005

Sources: Yahoo Finance; US Bureau of Economic Analysis; Philadelphia Federal Reserve Board; Smither's & Co. website

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Un internaute français a récemment demandé une traduction Google d’un des articles de ce blog sur la société GPG plc (connu grâce au miracle des "hitcounters").

Je sais par expérience que les traductions faites par Google massacrent le texte d’origine. Sans doute encore plus que si je l'avais traduit moi-même.

Donc, si un visiteur francophone désire me poser une question sur les sujets ci-inclus, j’essayerai de répondre pour que le résultat ait un sens.


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The betting is open: how long will it take before this is becomes part of a quid pro quo deal linked to China's currency peg.

And what impact on international textile companies (such as Guinness Peat Group's subsiduary Coats, much written of herein)?

Editor: with Coats' global spread, probably not alot. But once again evolving political risk illustrates its elusive quality when it comes to quantifications.

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Company briefs

Monday, May 16, 2005 | 0 comments »

CC's UK correspondent writes:

The eponymous retailer is again in the press because of the ludicrous situation (partly fostered by "Good Corporate Governance" gurus) where the senior non-executive director, K. Lomax, who was previously asleep on the job (in the Vandervelde days) is objecting to the appointment of Paul Myners the acting chairman. Myners has, by all accounts, has done an excellent job - beating off one Philip Green in the process. Lomax should (be told to) get on and appoint Myners before quietly resigning. With things so bad out there M&S clearly doesn't need further upheaval.

The fallout from Elliot Spitzer's investigation continues for AIG with a major restatement of their accounts for 5 years. A billion here, a billion there, pretty soon you get to a know how it goes. What's worse is that they and the auditors believe it's been going on for longer than that. I suspect they haven't the energy to look further. Greenberg continues to protest his innocence but I note he has transferred his $2bn (!!!!) fortune into his wife's name. If Sarbanes Oxley means anything this man should, on the face of it, have his collar felt.

The Prudential
Jonathan Bloomer the outgoing head of Prudential PLC the UK insurer and fund manager gave a valedictory speech at last weeks AGM. You have to have some (or maybe not) sympathy and wonder if at the very least the Chairman, one David Clementi, should also go. This jot remains hopeful that the architect of the stupendous losses at Egg - Paul Gratton - will get his just deserts. Now that would have cheered up the AGM.

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[See also related and more recent article of September 13 2005: Guinness Peat interims: cause to doubt ]

Longer post than usual; regular readers will know CC's interest in Guinness Peat Group (GPG); this article reports on the company's Annual General Meeting (AGM)

Post summary & conclusion:
Based on the AGM and the preliminary 2004 unaudited accounts, Coats alone still makes GPG worth buying. The goodwill adjustments are non-cash (though confusing), the accounts are clean, the operations nearly so and, anecdotally, the "new" Coats is whirring smoothly in the post-Multi Fiber Agreement environment. Coats is still 30% of GPG assets, with cash about that too (given the De Vere sale). So, as is, where GPG's next few accounting periods end up looks to be largely in the hands of Coats' managers.

Coats is a market leader, newly re-tooled and in a growing sector. If management is unable to take their existing 22% world market share and apply it to the incremental quota-free (or quota-reduced) world market plus something more from less-muscled competitors it would be quite amazing (as well as a future case-study in failure for business schools).

The deteriorating global economy might slow the return (it's jittery out there, after all), but shareholders should hold and consider buying more, portfolio balance permitting. The temptation may be to buy on stockmarket weakness. That's individual choice - just remember to buy the company, not the picture.

Background & scene-setting:
On 11 May, GPG held its AGM at the Army & Navy Club in Pall Mall, London.

The AGM was small with not more than 70 attending - and much of that was GPG staff. CC went hoping to be able to squeeze in a few questions in what he expected to be a busy meeting for the reknown activist investor GPG. As it turned out (ironically), there was only one other shareholder with a query, and that was about potential dilution from options issues to directors. This is clearly a theme some shareholders have warmed to: pre-meeting a retiree bounded up to ascertain if he was with a fellow shareholder and then disclosed that the directors overpay themselves ("they take too much") and he was getting out. Curiously, he did not speak out at all during the AGM.

Sir Ron Brierley sped through the resolutions bit of the meeting and was actually winding up when it dawned on this scribe that it was now that questions to the board were to be put. Expectations of a Q&A slot following the formalities evaporated. Thus there was some surprise when your correspondent ventured "Ah, actually Mr Chairman I have a few questions". Given this came from the only person in the room not wearing dark blue/black business attire or a navy blue blazer (yes, the casual khaki trousers and dark brown jacket were broken out for the occasion) and was delivered with an unfamiliar accent it was likely a spectacle for them. More so as it later emerged that last year's AGM lasted 17 minutes - this one stretched to an hour.

Coats' goodwill questions:
Sir Ron said the fair value adjustments amounted to "hundreds of overs and unders" with no one item or set of items featuring particularly. The scribe pointed out that it meant goodwill was rising from 5% to 20% of total Coat assets. Sir Ron replied that they had taken a conservative approach; and his repeated message was that they were accounting adjustments (and he would not/was unable to give examples) made after a very rigourous clean-up of the books.

CC's resident accountant believes the adjustment process will have been:

  • identify net assets of company, tangible and current less creditors
  • adjust for accounting treatment (application of relevant policies acquiring co. vs seller co.)
  • amount paid
  • net assets less amount paid = goodwill

That may or may not explain the mechanics in this case. Either way, it does not help interpret the magnitude of the ups and downs. But at least it's all non-cash.

Coats trading questions:
Again stopping Sir Ron winding up, ("sorry Mr Chairman, just a couple of other points") the scribe asked about Coats and the end of the Multi Fiber Agreement. Specifically was Coats taking or making prices in the current environment. There was some emphasis in the GPG Summary Accounts on Coats' working cap (squeezing receivables and inventory) but none on the top line.

Sir Ron deferred to Dr Gary Weiss (Coats' Chairman) but said first they were concentrating on working capital but of course wanted sales to grow. Dr Weiss spent a good two minutes and several hundred words saying that it was too early to tell anything from Coats 2005 trading. Yet it's May 2005 and the company has more than a full quarter's trading behind it: this line of reply was overly cautious.

Shareholders ought not to demand hostages to fortune from their boards; and directors are wary about trading statements/stock exchange regulations. But an entirely non-committal response to fellow owners is not satifactory.

Generally, Sir Ron seemed subdued and tired but engaging nonetheless.

CC spoke briefly with directors Tony Gibbs and Blake Nixon afterwards. In the non-official margins of the AGM they both sounded, in general terms, encouraging about Coats' 2005 trading and indicated that the integration/restructuring plan was only slightly behind schedule.

The writer personally owns GPG shares; his company does not.

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From our UK man:

Well, wadda ya' know?

To the surprise of no one but the city analysts and the more bullish city commentators Joe Public is keeping his hands in his pockets. This continuing trend (almost a habit now) is borne out by the latest sales data for UK high street, which shows an alarming fall: April sales were down 4.7%, the worst result on record.

Dixons the high street PC, mobile phone and household electrical retailer confirmed this trend in a results update out yesterday (11.05.05).

When will it stop? Well, not for a while as many low rate fixed mortgage deals have still to work their way through the system. This, combined with continuing manufacturing job losses and a general lack of confidence, means that there won't be a let up for a while.


[Editor]: (Belatedly?) Citigroup Smith Barney have lowered their forecasts across the retailing sector thus:

  • Sell Boots (target price cut to 550p from 575p);
  • Buy GUS (1025p price target), Marks & Spencer (price target cut to 370p from 390p), Next (target price cut to 1600p from 1700p) and Halfords (target price cut to 320p from 340p); and
  • Hold Kesa Electricals (target price cut to 255p from 300p), MFI Furniture (target price cut to 100p from 125p) and Woolworths (target price cut to 33p from 53p).

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UK scribe awakes after his hols:

Whilst the Editor has been away sampling the delights of West Indies cricket and generally been on the tiles in the Caribbean, world markets have continued their merry way oblivious to his plight...(ie: Will they win this week? Should I go for a swim? Or have another Daiquiri?)

Allied Domecq - taking the proverbial?
Seasoned and wiser observers than most in the City (Ed - "It's all about a quick buck 'innit!") have mused why Allied Domecq - the number 2 spirits /wine company in the world - has put itself up for sale by agreeing to be purchased (but with a pre-nuptial break fee) by the number 3 company, Pernod-Ricard. The sceptics wonder why 3 is after 2 and not the other way around.

What's wrong with the status quo? Or growth by small acquisitions and good marketing? The usual guff is put about; synergies; Allied is tired; Allied couldn't take over Pernod because of the family shareholding (though, note, it is a long way from control); and so forth. So one heavily indebted company gets to take over a better company with a little help from their friends.

Here are the real answers:

  • Fat fees for the investment banks - so they are driving the deal
  • Short term investment gains for the "investment community"
  • The CEO, Mr Bowman, gets £15m plus here and now with no tedious wait to get a lesser sum as the options gradually vest and no need to grow the business himself (well you would too, wouldn't you!)

Now call me old fashioned but not one of the above reasons does anything for the employees who will lose their jobs, HMG Exchequer or UK plc.

More jottings shortly...

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