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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Nokia surprises, Tesco hits back, Bonds surge as statisticians put appearance before numbers


Nokia surprises

Analysts were pinching themselves yesterday.  Some thought they might be dreaming. Some feared it may have been some kind of mass hypnosis. Conspiracy theorists may have concluded the water had been contaminated with hallucinogenic drugs.  Because it turned out that Nokia did better than expected in Q4, and may (note that: MAY) have made a profit.

Okay, net sales from Nokia’s key Devices & Services division were down 35 per cent from Q4 last year. But, even so, this was better than expected – a possible profit. No wonder analysts were pinching themselves.

In all 86.3 million devices were sold in the quarter.

The snag:  most of Nokia’s business is still coming from the less sexy side of the business.

At the moment Nokia has two key products. There are the Lumina, and Asha smartphones. The company sold just over 4 million Lumina phones in the quarter, but 9.3 million Asha touch phones.

Nokia’s CEO Stephen Elop said: “We focused on our priorities and as a result we sold a total of 14 million Asha smartphones and Lumia smartphones while managing our costs efficiently.”

But let’s take a close look at these Asha smartphones. You may find this review informative: Nokia Asha 306 review: Smartphone Ash-pirations

The Asha products are like cheap smart phones; they don’t have  anywhere near the functionality of Lumina, Android or iPhone, but then this product is not aimed at feature hungry users. It may even be designed as a kind of back-up phone, a second phone.

That does not sound very hopeful. Is Nokia really pinning its hopes on a phone designed as kind of emergency phone, in case the main one’s battery has gone flat? Does such a niche exist? If so, is it big enough to sustain a company like Nokia?

Smart phones, of course, are where the margins and real future growth lies. In a few years’ time it is hard to imagine anyone settling for less than a proper smart phone. It is good to see the Lumina sell better than expected, but don’t lose sight of the fact that Apple is expected to sell between 43 and 63 million smart phones in Q1 of this year (yes estimates really are that diverse).

Nokia is a long way from making any kind of significant impact on the smart phone business.

PS: By the way, Apple is planning a cheaper version of its iPhone for the Asian market. The likes of Samsung already have their cheaper offerings. But the Nokia Asha appears to be aimed at the next market down, an even cheaper product. Who has the right strategy?

Tesco hits back

At face value, Tesco did better than Sainsbury’s this Christmas. Like for like sales were up 1.8 per cent.

Philip Clarke, Tesco’s Chief Executive, said the company was “back to form.”

Sainsbury’s in contrast, only saw a 0.9 per cent rise in like for likes.

It is just that in this case the like for likes data may not be comparing like with like.

Tesco’s figures related to a six week period; Sainsbury’s to a 14 week period. But the difference does not end there.

Sainsbury’s reckons Tesco is manipulating its data by including club card vouchers. In an email sent to city analysts and leaked to ‘Sky News’, the head of investor relations at Sainsbury’s Adam Wilson Katsibas said: “I thought it worth pointing out that the UK like-for-like sales number of 1.8 per cent that Tesco are reporting this morning is non-IFRIC compliant….This is a bit disingenuous. They should use the 1.4 per cent number in their headline. All of our reported numbers are IFRIC compliant, as they have to be.”

Perhaps it should also be pointed out that Christmas 2011 was pretty awful for Tesco, so year on year growth was cleared flattered by the comparison with the year ago figures.

Does it not feel just a little like tittle tattle?

The real riches for Tesco lie abroad. Over the same period Tesco’s overseas sales grew 3.4 per cent, up 7.6 per cent in Asia, and down 0.6 per cent in Europe.

It’s well known that Tesco may pull out of the US. Now some analysts are talking about the company eventually exiting the European market.

But the real potential for Tesco is global. Is it more likely to fulfil global potential by focusing on high growth markets, such as in Asia, and moving out of markets that are not so profitable? Or do you think that Tesco needs presence everywhere in order to achieve the buying power required to compete with a more global looking Walmart.

Bonds surge as statisticians put appearance before numbers

The story of whether the means by which we measure RPI inflation has been told here before. See:  Carli, Dutot and Jevons: is the government trying to cheat us with stats, or is it just a case of good maths? 

Here is the relevant extract. Imagine you have two products: one rises in price by 25 per cent, the other falls by 20 per cent. Let’s call product A ‘coke’ and say its price rose from 100 to 125. Product B is called ‘pepsi’ and fell from 100 to 80. That means under the RPI index the combined indices have increased from 200 to 205, meaning inflation is 2.5 per cent. But let’s assume that in the next period ‘coke’ falls by 20 per cent, and ‘pepsi’ rises by 25 per cent. If the limited brain of this writer understands this scenario correctly, under the RPI system that would mean two successive periods of 2.5 per cent inflation. But under the CPI system, which uses the Jevons formulae, in period two ‘pepsi’ rises by 25 per cent, returning to 100, and coke falls by 20 per cent, retuning to 100, meaning that inflation has been zero.

The truth is that the current system we have for measuring RPI Inflation is flawed. The current statistical approach drawn upon the Carli formulae – and let’s be clear – is broken. The CPI uses the Jevons formulae.

It is just that if the way we measured RPI was changed so that is applied data more accurately, the effect would have been to record lower inflation. “Foul” cried pensioners, holders of fixed income bonds, commuters and workers whose annual wage increases are linked to RPI. And so the ONS decided to stay put. The logic of numbers might say the measure needs changing. The PR says otherwise. It’s a blow for the government, of course, because it means it will be forking out more money on index linked bonds.

On the news, investors ploughed money back into fixed income bonds, and yields fell sharply. In fact it was one of the biggest daily falls on record.

Looking away from fixed income bonds, the yield on UK ten year treasuries has been creeping up of late. It passed 2 per cent at the beginning of the year, and has been hovering in the region of an eight month high.

This begs the question: why? Why has the yield on non-index linked bonds been creeping up?

The bulls argue we are seeing a return to equities.

Maybe, but a more likely explanation is that recent minutes from the Fed hinted that the era of QE may be drawing to an end.

It is interesting to note, however, that Bill Gross, the co-founder of Pimco, and manager of Pimco’s Total Return Fund – the world’s largest mutual fund – has been buying back into US treasuries.

In December he increased the proportion of US treasuries in his fund to 26 per cent, which was the highest level since July last year. In November the proportion of the fund made up of  US treasuries was 23 per cent.

But Gross is still fretting over long term inflationary risks caused by QE. He said that investors should avoid longer maturity debt.

The current yield on 50 year fixed income bonds over and above inflation is currently zero.

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.


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