Bull and Bear: IMF drives a coach and horses through Osborne plan – the only snag is that the coach and horses were miniature - The Share Centre Blog

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Michael Baxter

Bull and Bear: IMF drives a coach and horses through Osborne plan – the only snag is that the coach and horses were miniature

Written by: Michael Baxter on May 23rd 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: IMF drives a coach and horses through Osborne plan – the only snag is that the coach and horses were miniature. Blow to ARM: Samsung tablet may have Intel inside. Bernanke in double hint. Eurozone’s recovery: from crutches to limping?  Companies in the news: Great Portland Estates, Capita

IMF drives a coach and horses through Osborne plan – the only snag is that the coach and horses were miniature

If George Osborne was a Martian (not likely) and had spent the last few years on Mars, then he may have been surprised by the latest idea put forward by the IMF for the UK economy. Nonetheless the chances of him implementing the International Monetary Fund’s – or IMF – plans seem about as likely as discovering intelligent life on Venus.

“The United Kingdom could boost growth by bringing forward measures already included in its fiscal plan, such as spending on infrastructure and job skills,” said the IMF yesterday.

There is a sense of no brainer about this. If it is merely suggesting that the spending be bought forward, such a plan will not damage the UK’s long term efforts to reduce government debt. But such a plan should boost GDP directly by pumping money that is otherwise lying idle into the economy, and if the spending results in better infrastructure, it may also have an additional effect of improved productivity, which may have longer term benefits for UK plc.

One of the great economic benefits of capital spending is that it tends to have a higher multiplier across the economy than departmental or welfare changes – at least that’s what Capital Economics has worked out. This year the government plans to enforce around £10 billion worth of cuts via welfare and department spending. Let’s say that every pound spent in these areas tends to boost GDP by about 60p. So £10 billion worth of cuts will knock £6 billion off GDP.

In contrast, every pound spent on infrastructure,  says Capital Economics, is more likely to boost GDP by around the same amount, ie one pound. Therefore, the impact on GDP of £10 billion worth of cuts planned can be cancelled out by spending £6 billion on infrastructure.

It’s a neat bit of maths, and if that is right, why doesn’t Mr Osborne implement the IMF’s recommendations?

Mr Osborne may worry that this one-off stimulus will become hard to reverse. He could bring forward expenditure, but when we get to the period we have taken such spending from, the pressure may be on for him to maintain it. The markets may react negatively to such a plan, because they may fear precisely the same danger.

The other possibility is that Mr Osborne simply cannot apply IMF recommendations without a loss of face. And that is not a good reason.

Blow to ARM: Samsung tablet may have Intel inside

Talk is that the New Samsung tablet – the Galaxy 10.1 – will contain the Intel Atom CloverTrail+ chip.

So what is that when it’s at home? Well, maybe the precise specs do no matter too much; the point is that Atom’s chips are the products that Intel is hoping will lead its charge on the tablet and mobile market. If the rumours are true and Samsung does indeed choose this chip, that will be a blow for ARM.

ARM, as you probably know, is a chip design company, which grew out of the old Acorn computers, and has worked very closely with Apple for many years. ARM’s strength is that it has very low overheads because it licences its technology to third parties – typically companies such as Samsung or Apple. It weakness is that, because of the nature of its business model, given the number of devices across the world that contain ARM technology, it has surprisingly low revenue.

In many ways ARM symbolises both the strength and weakness of the UK. Within its sector, the company leads the world, and yet it employs only a small number of people, and its contribution to the UK economy is probably much smaller than Intel’s contribution to the US economy.

ARM technology is known for its efficiency and low power consumption. As such it is ideal for products running off batteries.

Intel has tended to focus more on raw power. Intel has said is trying to combine both raw power and energy efficiency.

ARM is a good company, but from an investor’s point of view, the fear is that it may be overvalued. Its pe is off the charts – market cap $14 billion, from £89 million profits in Q1. No less than 2.6 billion devices worldwide contain ARM technology, but does that mean there is little scope left for growth?

The big hope for ARM is that we are set to enter a stage when mobile technology becomes even more important, with computers on our wrists, in our shoes, monitoring our heart, calorie intake – the list goes on.

The fear for ARM is that with its valuation being so high, there is little scope for revenue growth to falter, and if Intel can muscle in on Intel’s backyard – as it were – then that is not so promising.

Bernanke in double hint

Early on in the day yesterday, Fed Chairman Ben Bernanke had the air of a man in a dovish mood. By the end of the day the Fed had a distinctly hawkish look about it.

This is how the story unravelled.

First off, Mr Bernanke was having a jolly good natter with the congressional Joint Economic Committee. He acknowledged that “a long period of low interest rates has costs and risks,” but said “a premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.” So that was Bernanke the dove.

Then the minutes from the latest Fed meeting – or FOMC which is the Fed’s equivalent to the Bank of England MPC  – were revealed. The minutes stated that “despite some softness in recent economic data…a number [of FOMC members] expressed willingness to adjust the flow of purchases downward as early as the June meeting.”

So there you have it. The economic data has been soft, but despite this, the Fed is moving around to possibly putting an end to QE.

With the latest measure of US consumer confidence from the University of Michigan at a near five year high, there are reasons to think the US economy is turning.

Just as Japan adopts QE with a vengeance, and just as the likes of Mark Carney call for the ECB to be much more dove-like, the Fed appears to be turning hawkish.

At the moment the general feeling is that if the Fed does start to rein back on QE, it won’t do so until the last few months of the year.

But to what extent does QE lie behind recent rises in equities? How reliant is the economy on the Fed’s asset purchases? No one really knows, but we may get a partial answer in a few months’ time.

Sell on St Leger’s Day and don’t come back until May, could be the answer.[J1]

Eurozone’s recovery: from crutches to limping?

Scan the first few sentences of the latest flash Purchasing Managers’ Indices covering the Eurozone and it is enough for the bulls to charge. The composite index measuring manufacturing across the region hit a three month high. The composite index measuring services across the region hit a three month high. And, perhaps not surprisingly, the composite index measuring both manufacturing and services hit a three month high.

So far so good.

It is just that over the last three months the indices have been awful. As Markit said: “The latest reading is merely in line with the average seen during the first quarter, a period when the region’s economy contracted 0.2 per cent. The ongoing downturn signalled by the PMI therefore suggests that the euro area’s recession will have dragged on into a seventh successive quarter in the second quarter of 2013.”

Chris Williamson, Chief Economist at Markit, said: “Weakness remains broad-based, with Germany stagnating, France contracting steeply and the rest of the region also clearly entrenched in an ongoing downturn of worrying severity, although some signs of the recession easing in the periphery were seen in May.

“Signs of deflationary pressures were also evident, highlighting just how weak demand is at the moment. Both manufacturers and service providers cut their prices in the vain hope of stimulating sales.”

Companies in the news

Bull and bear:    Great Portland Estates came under the microscope from Tempus in the ‘Times’ this morning. Tempus said the firm is essentially a big bet that the London office market will continue to thrive in the long-term.

Over at the ‘Telegraph’, Questor reviewed Capita, which has just agreed a telecoms deal with 02. It has also won around half of all public sector awards over the last year said Questor. With top line growth accelerating, 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: ARM Samsung Intel, Bernanke Fed QE, Capita, Great Portland Estates, PMIs eurozone

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