Your share of investment news and views

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: A tale of two trade crises: UK jumps from bottom, China flirts with hard-landing. Buffett backs equities over dangerous bonds. Pensioners in the spotlight as Bank of England announces QE. LinkedIn sees revenue surge. Companies in the news: Rio Tinto, Vodafone, pub sector, Mitchells & Butler.

A tale of two trade crises: UK jumps from bottom, China flirts with hard-landing

In December, the UK posted its smallest trade deficit in goods and services in nigh on nine years, or so revealed data from the ONS yesterday. In January, both Chinese exports and imports fell compared with this time last year.

UK sees boost

The news from Blighty was very encouraging, although, as ever, it wasn’t all good. The UK trade deficit in goods and services was just £1.1bn in December. You would have to rewind the clock back all the way to April 2003 to find the last time it was so low.

The good news on trade was partially down to manufacturers, who at long last seem to be trading their way to growth. Data from the ONS on industrial production (also out yesterday) revealed a 0.5 per cent rise in industrial production in December, with manufacturing surging by a healthy 1 per cent.

For some time, people have been saying the only real hope for the UK is an export led recovery. Although, with sterling so much cheaper compared with the euro, it has been somewhat disappointing that it has taken so long for any real signs of this recovery to appear. However, in the final quarter of last year, goods exports rose by 3.8 per cent. Imports fell 0.6 per cent.

Exports add to GDP. Import subtract from it. And in the final quarter of last year, net trade contributed 1 per cent to growth in GDP. As you may recall, the UK contracted by 0.2 per cent in the final quarter of 2011, so since exports added to GDP, this means internal demand must have subtracted from it.

And that is quite interesting. Yes, UK exports had a good quarter. But internal demand pretty much crashed. This may be interesting, but it is hardly surprising. With real wages falling and credit being so scarce, it is really quite hard to see how consumer spending could have helped boost GDP.

So, in many ways, this is how it should be. For too long UK consumers spent too much, and exporters sold too little.

Bear:  However, there are three reasons for doubt. First of all, while the net trade account looked encouraging, a big chunk of the improvement was down to falling imports. Secondly, trade in oil was the major factor behind rising exports, and this is notoriously volatile. Finally, there is the Eurozone.

Take the UK’s ten top export markets. In order of size they are: the US, Germany, France, the Netherlands, Belgium, Ireland, China, Italy, Spain and Sweden. Of these top ten countries, in December 70 per cent of the UK’s exports were to the seven countries that are in the Eurozone.

The UK is horribly exposed to the Eurozone.

China sees both exports and imports shrink

Meanwhile, in China everything was the wrong way round. We need consumer demand to rise faster than China can export abroad, and ‘we’, on this occasion, applies to the West and China. In December it was not like that. China’s exports fell by 0.5 per cent in January compared with the year before. But imports fell by a disastrous 15.3 per cent. The trade surplus rose, hitting $27.3bn – a six month high.

It’s not been a good week for data on China’s economy. Earlier this week, a surprise rise in its inflation rate was announced.

Bull:  But the figures may not be quite as bad as they seem. They were heavily influenced by the timing of the Chinese New Year. Last year, the celebration season was in February, this year it was in January, and so by comparing the trade figures with this time last year, we are not comparing like with like.

Conclusion:

But the data makes it clear that it is too soon to say whether China is set to avoid a hard-landing.

Unfortunately, we will have to wait for another two months before we can see year on year figures for trade that are not distorted by the timings of Chinese New year celebrations.

Buffett backs equities over dangerous bonds

“They are among the most dangerous of assets,” said Warren Buffett yesterday. Mr B is worried about the effect taxes and inflation will have on investors who leave their money in bonds. He was quoted in ‘Fortune’ magazine, but his comments were an adaptation from his forthcoming shareholder letter. He said: “Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal.”

For more, click here Warren Buffett: Why stocks beat gold and bonds

Pensioners in the spotlight as Bank of England announces QE

An advisor to David Cameron has the solution to the crisis of how we can fund the needs of our pensioners. The advisor David Halpern reckons that if pensioners can go back to work, not only will they have more money, but the problem of their loneliness will also be dealt with. He also thinks they should downsize, and move into smaller homes.

So you see, the solution really is quite simple. With all those kids going to university these days, you would have thought someone would have thought of this idea by now. Or maybe, unemployed undergraduates are too worried about whether they will ever find work to fret about pensioners.

But then again, after the Bank of England duly revealed another £50bn of QE yesterday, at least one person was unimpressed. The disappointed fellow was Ros Altmann, director-General of Saga, who said: “The Bank of England has consistently ignored the dreadful damage that its QE policy has inflicted on anyone coming up to retirement. During 2012, record numbers of people will reach age 65 and many will need to buy an annuity. Around half a million annuities are sold each year and, since 2008, annuity rates have fallen by about 25 per cent, most of which is due to the effect of QE. That means more than a million pensioners will be permanently poorer for the rest of their lives, as they have bought an annuity at rates that have been artificially depressed by the Bank of England.”

Of course he is right. But then the retirement of the baby boomers was always going to inflict massive damage on the economy. Working until they are older is a partial fix, although it is not very palatable, and besides, right now, there isn’t exactly an abundance of jobs. Downsizing is a logical thing for many baby boomers. Over 6 million owner-occupiers in the UK live in homes with two spare bedrooms or more, whereas very few people who rent have spare rooms. It seems reasonable to assume that many of the people who live in larger properties than they need, see their home as an investment. They are being influenced by the speculative motive.

And it is this reluctance to downsize, rather than planning restrictions, that has led to a shortage of housing supply in the UK.

LinkedIn sees revenue surge

Net income at LinkedIn was $6.9m in its final quarter compared to $5.3m in the same period last year. Revenue shot up 101 per cent.

And shares jumped 7 per cent on the news. Before the latest results had been announced, the share prices had surged 70 per cent since IPO back in May last year.

Mind you, for a company with market cap of £7.45b, giving it a p/e of around 1,000, that growth rate doesn’t feel so good.

Maybe this is a stock that is due a big fall.

Bull:  Don’t you believe it. LinkedIn has around 150 million members. That is less than 20 per cent of the Facebook user numbers, but Facebook is valued at around 12 times more.

Facebook is more advanced in monetising its user base, but don’t let that fool you. Facebook’s revenue plans hinge on its ability to take information from its users and push ads at them based on that information. This is a strategy that may prove unworkable.

But LinkedIn is a business to business site.

Business to business ads usually carry a much higher premium than consumer ads. It is possible to target ads at LinkedIn users, for example sector specific ads, without being so intrusive in the way data is collected.

It is true that LinkedIn users are perhaps not quite so enthusiastic about making use of the service as Facebook users, but that is a problem that may well get fixed.

The barriers to entry, or perhaps exit, are another key point. B2B users are typically less fickle than consumers; business products go out of fashion less quickly. Facebook faces serious competition from Google Plus, and who knows what’s around the corner? LinkedIn’s position is more solid.

Companies in the news

Bull:  Rio Tinto got the thumbs up from Questor in the ‘Telegraph’. Sure, the purchase of Alcan is not looking like a good move. In fact, it was a move so poor that its two most senior execs have agreed to forgo their bonuses. But then again, Questor reckons the company is cheap, yield is attractive – at least for a miner – but above all Questor is bullish because it thinks it is now clear that China will avoid a hard-landing – well, maybe.

Tempus in the ‘Times’ is a tad perplexed. Vodafone, it reckons, is sitting pretty, what with its rather promising position in the likes of India and Turkey. The latest results were okay, but shares rose by the tiniest amount after falling 3 per cent over the last year. And yet, reckons Tempus, shares trade at a mere 11 times earnings and yield is a whopping 8 per cent. It says: ”buy”.

Bull and bear: Meanwhile, the ‘Independent’ took a look at the pub sector, where debt has been an issue of late. It is worried about Enterprise Inns. Challenging appears to be the consensus, and this is in spite of it hoping to sell £200m worth of assets. But then Punch is busy trying to sell pubs to reduce debt. On the other hand, it is a bit more positive about Greene King, but wait until the shares have lost “a bit of froth.” Fuller Smith and Turner appeals, but the ‘Independent’ worries about the share price. The same is true of Wetherspoons. But the stock in the sector that the newspaper likes best is Mitchells & Butler.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees