That was the general reaction from the press when US food giant Kraft launched its first bid for British confectioner Cadbury less than two months ago. Pundits spewed out potential target prices like bingo numbers – £8, no £10, no £12! – and analysts scribbled out scenarios involving white knights and rival bidders from across the globe.

Reality has been a little more disappointing. Despite attempts to talk up the deal, no rival bidders have come forth. And yesterday Kraft came back to the table with an offer that can only be described as – as Cadbury’s board put it – ‘derisory’.

It’s just another sign that there’s a vast gap between conditions in the financial world and those in the ‘real’ world…

Market hopes are stretched far beyond reality
The Cadbury / Kraft bid saga shows just how far market hopes are stretched beyond reality.

Right up to yesterday’s bid deadline, analysts and investors were clearly expecting Kraft to pull some rabbit out of the hat that would give them an excuse to drive the confectioner’s share price higher from its already optimistic level of around 760p.

Instead, Kraft came back with an offer that suggested that, frankly, they can take Cadbury or leave it. The bid terms were exactly the same, which – because Kraft’s share price has fallen since the original bid was made – meant that the actual per share value had fallen, from the equivalent of 745p to 717p.

Yet, the Cadbury share price is still hovering pretty much exactly where it was yesterday. You can read more about the background to the story, and what we reckon Cadbury shareholders should do now, in my colleague David Stevenson’s blog on the topic.

What’s perhaps more interesting about this bid battle is what it says about the bigger picture and the market’s psychology right now. When this deal was first announced, the excitement in the City pages was palpable. This was the return of big deals, a sign that the recovery was on track.

Click here to finish this article at Money Week UK.

This from John:

It’s too early to say if it’ll be any more correct this time round. It certainly feels like the biggest disaster so far. And more to the point, it has the element of surprise which earlier events didn’t. Everyone knew Lehman Brothers was in trouble, but the assumption was that it would be bailed out, just as everyone assumed Frannie and Bear Stearns would be saved.

However, now we’ll get to see what a major investment bank failure looks like at firsthand. Sure, it’s Chapter 11 bankruptcy, which is very different to liquidation – half the US airline industry (or it seems like it at least) is in Chapter 11 at any given moment in time – but it’s still bankruptcy.

“We will be entering uncharted territory,” Ladenburg Thalmann & Co analyst Richard Bove told Bloomberg. “Forcing liquidation will set off problems in other companies and markets everywhere.” But then, as Gilbert Schwartz of Schwartz & Ballen puts it, “if every time a big institution went bust the markets expected the government to step in, no one would ever adapt.”

This is the thin silver lining on this particular blow-up. The market’s worst fears have been realized. The event that governments, regulators and finance bosses have been trying to avoid has finally happened, and the market is just going to have to deal with the fallout.

Source: Lehman Collapse: It’s Bad and It’s Going to Get Worse

Of course, Mr Darling does have to make the rather embarrassing admission that his earlier forecast for 2-2.5% economic growth this year, was so off-the-scale wrong as to be in the realms of surreal fantasy. So it’s best if he tries to look as if he knows what he’s talking about now.

And it’s hardly breaking news. House prices have already fallen faster and harder than at any time since records began. Anyone who’s still trying to compare this favourably to the 1990s recession is way behind the times.

But credit where credit’s due. Mr Darling may finally be facing up to reality. Shame his colleagues aren’t quite there yet…

Darling is finally facing up to the harsh reality

I’m no great fan of Alistair Darling, but I have to say he came across well in his “controversial” Guardian interview at the weekend. Granted, the paper was never going to give him a hard time. But to hear a member of the Cabinet dispense with the Orwellian New Labour-speak and just admit things were awful was refreshing.

That said, I’m not daft. I suspect Mr Darling’s attempts to tell it “straight” and play up the image of the hard-working but slightly naïve politician, who doesn’t quite understand the world of spin, is all part of some devious Gordon Brown election strategy. You know the kind of thing I mean. “Who do you want running the country? I, prudent Gordon Brown, with my straight-talking down-to-earth team, who tell it like it is? Or smarmy professional politicians like Miliband and Cameron?” Call me cynical, but you don’t survive in the Cabinet as long as Mr Darling has without knowing how to play the game.

But still, compare Mr Darling’s blunt appraisal of the British economy with the defensive gibberish spouted by Hazel Blears, the communities secretary. Ms Blears told The Times that “we know things are tough and understand that people are worried. But Britain’s economy is fundamentally strong.”

This is just patronising rubbish, and voters are rightly irritated by it. She may not realise it, but she’s effectively saying: “you’re all panicking over nothing. The economy’s basically fine and you’re just stupid people who are taken in by all these nasty newspaper headlines.”

Read the full article

Source: Things Must be Bad, Politicians are Telling the Truth

It could be because the sector in question has had a miserable few years itself, while almost every other industry was partying. But now, at last, after a long stay in the doldrums, the biotech sector is finally coming back into the spotlight.

There has been a mass of deals in the US, while on this side of the Atlantic, a number of attractive little biotech stocks have been approached or agreed bids in the last couple of months.

And the good news is, it’s still not too late to join in the party…

Biotech sector is undergoing a merger boom

It’s been a great couple of months for biotech stocks. In the US, Swiss group Roche made a $43bn bid for biotech giant Genentech (NYSE:DNA) last month (since rejected), while Bristol-Myers (NYSE:BMY) offered $4.5bn for fellow biotech ImClone.

And over here, vaccine specialist Acambis (LON:ACM) has agreed a 190p-a-share offer from France’s Sanofi-Pasteur. Meanwhile both Protherics (LON:PTI) and Oxford Biomedica (LON:OXB), a couple of other small pharma stocks, have revealed bid approaches.

I hold both Protherics and Acambis in my own portfolio, and they’re stocks I’ve tipped in the past. However, just to demonstrate what a volatile sector biotech can be, when I last tipped Protherics in MoneyWeek in February, the shares were trading at around 50p. By the time the bid news had came around, they had slipped – for no particular reason – to as low as 27p at one point. They’re now at around 56p – but that’s a lot of volatility to endure for a 10% gain or so.

What does this show (apart from that share tipping is a mug’s game)? Well, while anyone who bought Protherics at the low has now doubled their money, the chances of most of us getting that lucky are low. And even if you do it once, chances are the next biotech you stick your money into will turn out to be a complete dud. As Andy Smith, manager of the Axa Framlington Biotech fund, told me last week: “I see 400 companies a year. Every one of their chief executives reckons they’ve got a $1bn product.” That’s what’s known as a blockbuster in the pharma trade. But “the truth is that most drugs fail.”
Read the full article

Source: The Best Way to Buy Into the Biotech Boom

Manny Fontenla-Novoa, chief executive of travel operator Thomas Cook, reckons he’s seen no evidence of consumers cutting back or trading down on their annual holidays. In fact, he’s even planning to stick prices up by 8% next year.

In this morning’s Telegraph, Richard Fletcher muses that while consumers are willing to put off replacing their sofa or their car, “the holiday… is sacrosanct, or so it seems. Even in a downturn, there are winners and losers.”

There sure are. But holiday companies won’t be among them. Here’s why…

The boom’s over. Most people probably accepted that around about the end of last year, as it became obvious that house prices weren’t rising anymore. And as the year has worn on, they’ve also accepted that the wider economy is in trouble. House prices are tanking. Credit is getting harder to come by. Energy bills are shooting up – and it looks like their monthly payments may well jump too when they have to remortgage.

All of that is enough to make people feel that bit poorer. And what’s the first thing you cut back on when you feel poorer? Impulse buying. Think about it. If you take a stroll down the High Street on a Saturday morning, with money in your wallet, safe in the knowledge that your house price rose by another £1,000 last month, then you’re very open to temptation. New pair of jeans? It’s only £40. New flat-screen telly? Stick it on the house.

Read the Full Article

Source: Why You should Sell Travel Stocks Now

Cheap money gave us many things, including a global property bubble, and a £1.4 trillion debt mountain for UK consumers. Another noticeable trend was a taste for exotic new investment classes, from Iraqi government bonds to obscure derivatives.

All of these trends were the result of falling risk aversion. Investors believed that central bankers, lead by Alan Greenspan, now had complete control of the global economy. Globalisation would ensure economic growth went on forever. And if it didn’t, a soft landing could be engineered by judicious use of the emergency interest-rate cut button on Greenspan’s miraculous economic control panel.

As investors became bolder, and focused entirely on returns, rather than risks, one brave new investment class, invented entirely by a man working at Goldman Sachs (NYSE:GS), benefited more than most.

It was called the Brics…

The Brics were a great investment, when risk didn’t matter

The Brics – as you probably know by now – was a catchy acronym for Brazil, Russia, India and China. Jim O’Neill at Goldman Sachs coined the term in 2003, and predicted great things for these four countries.

And he was right. They’ve all benefited from booming commodity prices (in the case of Brazil and Russia), or booming US consumption (China), or the outsourcing boom (India). But another point has also worked in their favour.

Low interest rates pushed returns down too. As more and more money chased each new investment opportunity, yields fell on all major asset classes. That drove investors, particularly adventurous new players like hedge funds, into ever-more outlandish investment areas.

Risk took a back seat – political risk in particular. No one batted an eyelid at putting money into once-frontier markets. “China? Sure, it’s a totalitarian regime. And yes, communists have never quite got to grips with the idea of privately-owned property. But this is a globalised economy now. The government won’t want to upset investors. Especially not ahead of the Olympics.”

Why China and Russia have now become very risky for investors

But free and easy money has vanished now. Now some of the best returns you can get are in good old-fashioned hard cash. And when your best returns come from risk-free assets, suddenly things like political risk matter again.

That’s bad news for most emerging markets. And it’s a worry for the Brics too, all of which have seen their stock markets take a hit this year.

But it’s worse for China and Russia. Brazil and India have their problems, and plenty of them. India in particular has a fractious democracy, terrible infrastructure and chronic corruption. But at their core, they believe in democracy as a model for society, so the chances of dangerous social upheaval are comparatively low.

In China, the chances of a civil breakdown are higher. Economic problems tend to lead to unrest. The uprising in Tiananmen Square occurred at a time of high inflation, for example. We’ve more on China and the troubles it faces in the current issue of MoneyWeek. If you’re not already a subscriber, you can get your first three issues free.

But Russia’s probably the most risky for investors. The country is a basket-case in many ways. It has appalling social problems including high levels of alcoholism, HIV infection and suicide. And while surveys suggest that the Chinese population seems largely comfortable with the idea of capitalism, ordinary Russians seem to pine for the good old days.

Read the full article

Source: How the Cheap Money Era Led to the War in Georgia

The rebound was driven by a slump in crude oil prices (partly down to a leap in the dollar), which has pundits on both sides of the Atlantic getting excited. Lower oil prices, means lower inflation, which means lower interest rates, they argue. And it also reduces one of the pressures on consumer spending.

So can the collapse in oil prices save the economy from recession? Sadly not. The rising oil price was a symptom, not a cause, of the unchecked global boom that lead us here. And the fact that it’s falling now is merely a sign that we’re already in the grip of a huge downturn…

Why falling oil prices won’t save the economy from recession

The main reason why falling oil prices won’t save the global economy is that high oil prices were never the problem in the first place.

Oil prices rose for many reasons. Pure demand was one reason, as more and more people used less and less energy-efficient cars, more people took flights, more industries were set up, more goods were made, etc.

Supply was another, as low oil prices meant that oil companies didn’t invest in finding more. That means it takes a while to catch up by the time prices have shot up far enough to encourage new investment.

And speculation has definitely played a role. The jury is out on the precise mechanism by which pure investment money has had an impact on oil prices, but it seems madness to suggest that you can pump all those extra billions into a market without having some effect on it.

At least two of these factors – demand, and speculation – have been driven to a greater or lesser extent by the availability of cheap money. Commodities have been turned into consumer goods in the East, which were then bought with borrowed money by the West. The East then used this money to build more factories to make more consumer goods, which the West then bought with more borrowed money, much of which also came from the East.

But the days of cheap money are gone. And so it seems, are the days of rocketing oil prices. A barrel of crude is trading below $120 now, after peaking at just above $147 earlier in the year.

None of the central banks is serious about fighting inflation

Now what’s the good news? Well, a fall in the oil price might help to prevent the inflation problem from growing any worse, certainly. That’ll allow central banks to cut interest rates, say the pundits, and we can then set the whole ball rolling again.

But the idea that central banks even care about inflation is a farce. The European Central Bank puts up the best front of all the major central banks, but none of them is serious about fighting inflation.

For example, by holding the base interest rate at 5%, while inflation keeps rising, the Bank of England has been allowing real interest rates to fall for months now. If Consumer Price Index inflation hits 5% as many analysts believe it will by the end of the year, we’ll have our very own zero interest rate policy here in the UK.

Meanwhile, in the States, the Federal Reserve has already slashed nominal interest rates to 2%, which means that real interest rates have been negative for some time (headline annual CPI inflation in the US is standing at 5%). So central banks have been doing as much as they can to loosen monetary policy – yet it hasn’t helped matters.

Read the full article

Source: The Slump in Oil Prices is a Bad Sign

However, the markets tell a different story. Two benchmark Russian share indexes – the RTS index and the MICEX index – hit their lowest levels in nearly two years yesterday.

John Stepek in Money Morning UK is bearish on Russia. He says the country is a basket case built mainly on petrodollars. This leaves it particularly vulnerable to a long-term correction in crude oil prices…

Some of the best returns you can get are in good old-fashioned hard cash. And when your best returns come from risk-free assets, suddenly things like political risk matter again.

That’s bad news for most emerging markets. And it’s a worry for the Brics too, all of which have seen their stock markets take a hit this year.

But it’s worse for China and Russia. Brazil and India have their problems, and plenty of them. India in particular has a fractious democracy, terrible infrastructure and chronic corruption. But at their core, they believe in democracy as a model for society, so the chances of dangerous social upheaval are comparatively low.

In China, the chances of a civil breakdown are higher. Economic problems tend to lead to unrest. The uprising in Tiananmen Square occurred at a time of high inflation, for example.

But Russia’s probably the most risky for investors. The country is a basket-case in many ways. It has appalling social problems including high levels of alcoholism, HIV infection and suicide. And while surveys suggest that the Chinese population seems largely comfortable with the idea of capitalism, ordinary Russians seem to pine for the good old days.

Above all, Russia’s recovery from bankruptcy in the 1990s has been built on the soaring oil price. China makes things for US consumers; Brazil has a broad range of commodities for sale; and India has a bright, cheap white-collar workforce. All of those are under threat from the global slowdown, but none quite as much as the price of oil.

All those petro-roubles pouring into the coffers have given Russia back its swagger. But as the deflating credit bubble leads to global economic downturn, the oil price is already falling. That’s why if Russia wants to press home its advantage, it needs to do it now.

Hence the stepping up in state rhetoric and confiscation of assets, and its action in Georgia. What’s the US going to do after all? America doesn’t have any money – and all the funds it could borrow are being spent in Iraq. Who’s going to risk distracting the army’s attention from that over a minor satellite state?

As for investors – well, Russia’s got what it needed from them. It doesn’t have to indulge them anymore. And that means that investors can no longer ignore political risk in the country. If I was you, I’d take any Russian profits you’ve made off the table. The time will come to get back in, but it’s not now.

PS: There is more on China and the troubles it faces in the current issue of MoneyWeek. If you’re not already a subscriber, you can get your first three issues free by clicking here.

Hedge fund manager Crispin Odey has paid himself £28m after his hedge fund made £55m from betting against the sector. And well done to him. After all, plenty of banking executives got hefty bonuses last year for losing money, so people can hardly complain when someone gets a bonus for actually doing his job competently.

Now Mr Odey was apparently a bit early in his call. “We had a very average 2006 because he was positioned and it wasn’t working yet,” Odey Asset Management chief executive David Stewart told The Telegraph.

But it shows that it’s not true that no one saw the credit crunch coming. Sure, we may not have known exactly how the blow-up would manifest itself. But it was obvious to many people in the City and on Wall Street that something had to give.

The bad news for the banks is that it seems Mr Odey reckons there’s still a lot of money to be made from betting against them

There is more weakness ahead for the banks

Sources “close to” Odey Asset Management tell The Telegraph that “we can see why there might be a rally [in banking stocks] in the short term, but in the longer term we see more weakness ahead. Banks will need a lot more capital.”

It is certainly going to be tough out there. HSBC (LON:HSBA), one of the most resilient banks of the past year, reported more write downs yesterday (see: Why there’s more bad news to come from the banks for more). But perhaps the most worrying aspect of its results statement was its warning on the outlook for Asia.

Banks with emerging market exposure have been seen as sheltered from much of the carnage. But as HSBC chairman Stephen Green put it: “I don’t believe the emerging markets have completely decoupled. There is no way a serious downturn in the US will leave Asia immune.”

The group still expects the region to grow, but “with less momentum than in the recent past.” Profits at its Hong Kong unit fell 8% to $3.1bn, where “it is apparent that corporate activity in some sectors is slowing.”

Read the full article

Source: There’s Still Money to Be Made from Banks

Prices fell by 1.2% in July, says Hometrack, picking up speed from June’s 1% fall, and a 0.5% slide in May. Meanwhile, Bank of England data out tomorrow is likely to show that the number of new home loans approved hit a record low in June.

But could we be on the verge of a turnaround? The weekend press was full of the news that some mortgage lenders are actually starting to trim rates. A few commentators even suggested that it was nearly time to go bargain hunting.

It’d be nice if it was true, and that this was the quickest ever property bust in history. Sadly, it’s just wishful thinking – here’s why…

Mortgage rates are falling – so is it time to go bargain hunting?

Property prices in Britain are collapsing. But the news that some lenders are starting to trim rates again has the optimists out in full flood.

Swap rates (the interest rates banks have to pay to borrow money, basically) have fallen back below 6% in recent weeks. This has allowed a number of lenders, including Nationwide (NYSE:NFS), Halifax (AMEX:HX) and Abbey, to start trimming their mortgage rates.

The average two-year fixed rate being offered by the five biggest lenders has fallen from 7.01% at the start of this month, to 6.78% now, says Moneyfacts.

A number of pieces in the weekend money pages tentatively started to suggest that this might be the time for bargain hunting. The basic point is – sure, lots of people still won’t be able to afford to buy, but for those who can, it might be time to do so.

One writer suggested that “there is still huge pent-up demand for buying property. First-time buyers, bargain hunters, and professional investors are all eagerly waiting in the wings for a sniff of recovery.”

The suggestion is that if these new buyers start to “make their move” as mortgages become more affordable, then the trickle of interest “could soon gather momentum as those who have been holding our act fast to avoid missing out on a bargain.”

This idea of mortgage demand being like a vast reservoir only being held back by the dam of the credit crunch is quite appealing. But it makes no sense.

“Pent-up demand” is a nonsense concept, economically speaking. Almost anyone will buy almost anything at the right price. You could say there’s a lot of pent-up demand for a Ferrari that costs less than £10,000. You could say there’s a lot of pent-up demand for free pizza.

What the writer really means is that people haven’t yet reached the “revulsion” stage of the bust. That is, the point at which they have had their fingers burned so badly by property that they would rather throw their telly out of the window than watch another episode of “Location, Location, Location” ever again.

Certainly, attitudes are changing. You don’t hear the old “renting is dead money” cliché half as much these days. But there probably are plenty of would-be bargain hunters still trawling around in buy-to-let land, hoping to “buy on the dips”, as stock market traders would say.

Read the full article

Source: Falling Mortgage Rates Won’t Stop the Housing Bust