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Michael Baxter

Bull and bear: Now Buffett has caught the bug. It’s the merger season: does that mean boom times are returning?

Written by: Michael Baxter on February 15th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Now Buffett has caught the bug. It’s the merger season: does that mean boom times are returning? Currency wars, race to bottom: does that mean gold’s time is set to return? The Euro’s GDP woes. Portugal says: “I am back”. Social media is good for trust. Companies in the news: Aberdeen Asset Management, Pennon, AMEC

Now Buffett has caught the bug. It’s the merger season: does that mean boom times are returning?

First there was US Airways and American Airlines; the merger will create a new airline giant worth around $11 billion.

The merger may, depending on your point of view, be testimony to the US system of bankruptcy protection. For American Airlines’ parent company filed for bankruptcy protection two years ago. Most of the shareholders in the newly formed company will be creditors of American Airlines. According to a new film doing the rounds at the moment – called ‘Warm Bodies’ – there is hope for zombies because they can fall in love. The US, through its willingness to embrace creative destruction, shows the benefits of culling zombie companies, and letting something new grow in their place.

The second merger relates to all investors’ friend Warren Buffett, because he is buying Heinz. Actually the purchase is really being completed by Berkshire Hathaway and investment firm 3G Capital, which is led by Brazilian billionaire Jorge Lemann.

It’s a classic Buffett move. Here is an old company with a highly valuable brand name, and with tremendous growth potential into emerging markets. The Brazilian involvement gives an interesting twist, especially given the BRICs opportunity for Heinz.

Buffett and his partners in the venture are paying a 20 per cent premium over the Heinz share prices. Some shareholders may feel the company is being sold to too cheaply, but then again with the share price having enjoyed a strong run in recent months, they have done pretty well out of the deal.

What is quite interesting is the p/e ratio that the offer entails. The price values the company at around 20 times 2013 earnings.

Does that mean food companies with low p/e than that are cheap?  Or has Buffett got this one wrong? Some might say Buffett will bleed over this deal. Others might say that’s not blood, it is just ketchup.

Currency wars, race to bottom: does that mean gold’s time is set to return?

It’s the G20, and currency wars are set to dominate talks. Japan is under the cosh. Indeed it seems to be heading up the naughty list, and could be sent to the back of the G20 class, with a hat saying dunce.

But then again, there is an argument to say Japan is doing the right thing. It is trying to put an end to 20 years of anaemic growth. Japan may be set to lead the next great experiment – monetising debt by using QE to fund fiscal stimulus measures. For a country that has suffered deflation for the best part of two decades, one assumes it is not worried that such a tactic will lead to runaway inflation. And indeed, if there is little sign of internal demand creating inflation, what is stopping central banks across the world from using QE to fund government spending?

But don’t forget that all that Japan has said so far is that it planning to target 2 per cent inflation. It is a bit rich for the rest  of the world to criticise Japan for targeting an inflation rate that is pretty much in line with the rest of the developed world. And when the US criticises Japan, it is being a tad hypocritical. After all some say the Fed’s own QE has amounted to little more than a back door effort to devalue the dollar.

Still, at least it takes the spotlight off China. You may recall that Mitt Romney had promised to label China a currency manipulator if he got into the White House. Obama isn’t quite that hawkish, but when US politicians are not busy trying to throttle each other, they turn to China’s currency policy and blame it for all their ills.

So, it seems that, with the exception of Germany, just about everyone wants a cheaper currency.

The countries that are especially put out by QE, which they say is a key weapon in the war of currencies, are the big commodity producers. So in the G20, that is Brazil and Russia. There are countries, by the way, that have much higher inflation rates than Japan.

There is an irony here. Some critics of QE say will it creates hyperinflation. But if that is a risk, then it is surely only a risk in that money created by QE may percolate around the global economy, pushing up global demand, and creating inflation in commodity prices. So presumably, when Brazil and Russia criticise QE they do so for quite different reasons from those who say it will lead to inflation.

If currency wars are real, and we are set to see a race to the bottom, then the winner may be gold.

But are they real?

Julian Jessop, Chief Global Economist at Capital Economics, was distinctly cynical about the whole thing earlier in the week. He said: “The headlines are running well ahead of the reality. The slump in the yen against the euro in particular could reverse quickly if, as we fear, the Bank of Japan disappoints the markets’ high expectations and the crisis in Europe flares up again.”

The Euro’s GDP woes

Yesterday, it was referred to briefly, but here is some more detail on the Eurozone’s pretty horrible Q4.

Q4 growth across many of the key economies in the region was as follows:

First here is Q4 growth on Q3

Eurozone:             -0.6 per cent
Germany:            -0.6 per cent
France:                 -0.3 per cent
Italy:                      -0.9 per cent
Spain:                    -0.7 per cent
Netherlands:     -0.2 per cent
Belgium:              -0.1 per cent
Austria:                -0.2 per cent
Portugal:              -1.8 per cent.


Second, here is Q4 growth on Q4 2011

Eurozone:             -0.9 per cent
Germany:            +0.4 per cent
France:                 -0.3 per cent
Italy:                      -2.7 per cent
Spain:                    -1.8 per cent
Netherlands:     -0.9 per cent
Belgium:              -0.4 per cent
Austria:                +0.4 per cent
Portugal:              -3.8 per cent.

So, did any countries do well?  On a quarter on quarter basis, the winner was Lithuania, with growth of 1 per cent. On an annual basis the spoils went to Latvia, with growth of 5.7 per cent.

Outside the Euro area, the UK contracted by 0.3 per cent quarter on quarter and was flat (zero growth year on year).

Please note, data for Greece, Ireland, Denmark, Luxembourg, Malta, Poland, Slovenia, and Sweden is not yet available.

But, to finish on a bullish point, there are signs Germany is now improving, and will probably avoid recession.

Portugal says: “I am back”

Or to be precise it said I am coming back. Its debt agency has said that Portugal is set to regain full access to bond market funding.

Portugal was one of the countries to enjoy (not really enjoy, more accept reluctantly) bail-out money from the likes of the Eurozone/IMF/EU programme EFSM.

Yields on Portuguese ten year bonds fell to 5.74 per cent this week, a 26 month low.

So that is good, Portugal can avail itself of monies provided by the markets again.

Arnie was back this month too. Arnold Schwarzenegger starred in his first film in a very long time called ‘The Last Stand’. But it enjoyed only a fleeting run at UK cinemas. So he may have said: “I am back”, but he appears to be gone again.

With growth contracting by 1.8 per cent in Q4 compared to the previous quarter, let’s hope that little things like reality don’t make Portugal’s return to the markets a fleeting visit.

Social media is good for trust

In yesterday’s Thought for the Day the topic was trust. Yes, it is an economic idea, and there are lots of theories to show trust promotes growth. Se:e Is the problem that we don’t trust anyone any more?

Well, here are couple of appendices, as it were.

First, this report from PwC talks about something quite similar – the cult and culture of transparency. We hear a lot about the dangers of Facebook, about the eroding of our privacy and so on. But if you take time to read any of the advice offered by these so called social media gurus, they emphasise things like trust and honesty. Trust may not be what it used to be, and may lie behind the horsemeat scandal, the fact that car insurance premiums are rising because of too many compensation claims, and lack of trust may be the number one problem facing banks. But don’t blame social media. Here is the PwC report. Social media: The cult and culture of transparency

Still on trust, but moving away from Facebook and co, did you hear the one about Eric Daniels and PPI? The former Chief Exec of Lloyds  (Lloyds TSB as it then was) appeared before MPs yesterday and he said that up to 50 per cent of PPI claims made to Lloyds were bogus. He also said (but put no numbers behind his statement) that a number of pay-outs were for bogus claims.

“Serves them right,” you might say, but don’t you think claiming for PPI has become a game? Hold on a second, the phone is ringing.  What was that? “This is an important announcement about your Personal Protection Insurance.” How many calls do you get like that? Tempting to make a claim up isn’t it? Of course you won’t because you can be trusted.

Companies in the news

Bull:       At the ‘Times’, Tempus turned its attention to Aberdeen Asset Management. Its value has risen sharply over the last few months, meaning that some fear it is now too pricy.  But Tempus reckons that the fund manager’s business is dominated by handful of players and it says Aberdeen will be one of them.

Bull and bear:But Tempus was less sure of Pennon (owner of South West Water). Typically, the company pays out lower dividends than other players in the sector, but shares have fallen of late. As a result, its dividend yielded around 4.4 per cent in the latest quarter. But Tempus still fears the company may have more shocks to come and concluded “hold”.

Finally, at the ‘Telegraph’, Questor took a look at AMEC (engineering and project management services to the world’s oil and gas). The latest results were encouraging, but investors are becoming nervous about the prospects for this year, and its falling profit margin. Questor said “hold”.


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

Tags: Aberdeen Asset Management, Amec, currency wars, Euro GDP, Pennon, Portugal bonds free market, Trust and PPI, Trust and Social Media, US Airways and American Airlines, Warren Buffett Heinz Jorge Lemann

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