“When things get back to normal…” How many times do you hear people saying that?

We all crave normality, particularly after a bit of a shock. “Business is back to normal and residents are breathing a sigh of relief,” the San Bernadino Sun reported earlier this week, after Tuesday’s mini-earthquake in Southern California which thankfully resulted in no casualties. But the paper also warns: “City leaders say the quake is a good wake-up call for all to start planning for the Big One”.

The financial markets have had plenty of wake-up calls in the past year or so. Yet markets adapt rapidly. We’re growing to accept things as normal which once would have seemed unthinkable. Massive bank bail-outs, property prices crashing at their fastest rate in decades – and after each new shock, the optimists raise their heads again, and say that we must surely be near the end of the bad news. Things might be bad, but they can’t get any worse. All the bad news is priced in.

This attitude is dangerous. Because rather than kidding on that things can’t get any worse, smart investors should be getting themselves ready for the Big One…

More dreadful results coming from every corner of the economy

Any hope that this financial crisis will all be over by Christmas should by now be dead in the water.

For starters, UK house prices declined the most in almost two decades in July, reported Nationwide yesterday. Prices fell 1.7% from June and are now 8.1% down on a year ago.

It looks like the pace of decline is accelerating. And it’s having a big impact on our attitudes. British consumer confidence has now hit its lowest point since records began in 1974, according to GfK/NOP, having plunged again last month. It’s now well below even the worst level reached in the early 1990s recession. “With the growing spectre of the UK going into recession”, says GfK researcher Donna Culverwell, “people are pessimistic and concerned about their future”.

The survey’s measures of people’s feelings about the general economic situation and the climate for major purchases like houses also slipped to their worst levels on record. Perhaps in the wake of this week’s revelations that the CBI’s retail sales index for July plummeted to its lowest point in 25 years, and the 72% collapse from the peak in UK mortgage approvals, that’s no shock. But again, all this doom and gloom, which just a year ago would have been unthinkable, is fast going mainstream.

Then there are the bank results. Earlier in the week, Lloyds TSB (LON:LLOY) kicked off the reporting season with a 70% first-half profit slump, after a £585m asset write-down and a warning about rising mortgage bad debts. And yesterday it was HBoS’s turn, serving up numbers a mere 56% lower.

No doubt there’ll be more of the same as the rest of the results roll in. Loads more write-offs due to stupid lending decisions from the people who used to think they could lecture you about financial rectitude. Yet, despite the dreadful results, the market thinks that it’s got the bad news priced in.

Hargreaves Lansdown analyst Richard Hunter said the HBoS results contained no negative surprises. Indeed “the actual profit figures were slightly ahead of expectations, suggesting that another contribution to the beginning of the end of the credit crunch may have been made”.

This blithe acceptance of once-unthinkable financial carnage is not restricted to us Brits. Across the channel, the eurozone’s in the same boat.

Spanish banks are in big trouble as the country’s house prices crash even faster than the UK’s – they’re down 34% from the peak, according to this week’s official data. So Spain’s banks needed almost to triple their borrowings in the last year from the European Central Bank to $74bn, said Bloomberg this week.

That’s the fastest increase in Europe. And what’s the ECB done? Answer: happily coughed up the cash to the Spaniards.

Read the full article

Source: Don’t Be Fooled, the Bad News Isn’t Priced in Yet

Bill Gates, of Microsoft and ‘world’s richest man’ fame snapped up 3% of the high-street retailer Carpetright (LSE: CPR) through his Cascade Investment fund. The move has given shares in the FTSE 250 stalwart a boost.

Gates’ £15m investment comes at a time of great turbulence for the group. So, why has the Microsoft maestro opted for a stock that has (carpet) bombed in the last year?

Having fallen 28% since June 2007 the carpet and floorings retailer disappointed the City in April. A so-so trading statement suggested that profits for the year would be ‘in-line with expectations’ but that the trading environment is deteriorating.

Group-wide sales increased by 5.6% and Carpetright widened their net, boasting 675 stores, but the three months to April saw sales growth of only 0.6%… raising the spectre of a profit warning to an already panicky investor base. Niche broker Pali International suggested the shares look overvalued and according to Retail bulletin, it was one of the most shorted stocks in the bearish sector with as much as 22% of the stock ‘on loan’ to traders driving down the price.

Investors are also quizzical of where exactly the company is going. Lord Harris had to scrap plans for an £800 million buyout in December as a result of the credit crunch. He wanted to take the business private to speed up expansion in the UK and abroad, thus escaping the constant scrutiny of the press, “Every six weeks I have to think about what I’m saying to the City in six weeks’ time” said Harris.

Perhaps Gates’ foray into the world of carpet will facilitate the move? Or Bill could be taking advice from his old pal Warren Buffett whose Berkshire Hathaway owns Shaw Industries, the world’s largest carpet maker. They may not be as flashy as you’re average oil explorer but way-ahead in terms of consistency… Bill could be onto something. Take a look at the firm’s prospective revenue stream:

2006: £451.4m 2007: £475.9m 2008: £514.8m* 2009: £527.1m* 2010: £550.0m*

* Analysts’ Estimates

Exciting, it ain’t… but it’s not difficult to see what’s caught Mr Gates’ eye here. As retail goes, Carpetright operates in a fairly defensive, counter-cyclical part of the sector.

The allure of boring stocks

American fund manager Allan Roth made a career out of boredom. His ‘Dare to be Dull’ mantra is the foundation of his firm Wealth Logic. He says that if you are having fun investing, and if you find it exciting, you are probably doing, or are about to do, something wrong. In his world, investing should be as dull as receiving interest payments from the bank… only more lucrative!

Now it’s not a panacea, in fact following this belief would have prevented you from getting into the uber-exciting energy and mining stocks that have yielded triple digit returns over the past few years. However, it also would have saved you from buying investment banks with their mysterious, clever-sounding structured investment vehicles that have turned out to be very costly duds.

So what other dreary deals can we find on the UK market?

Paypoint (LSE: PAY)

Another member of the steady incline club, Paypoint’s revenue and earnings charts look very appetising, much more interesting than the business model anyway… Paypoint operates thousands of chip & pin terminals and ATMs around the country. Their latest set of figures showed strong growth in sales and profits thanks to a 22% jump in transactions.

“We expect further growth in revenues in the UK by increasing market share in bill and general payments, mobile top-ups, ATMs and from Post Office closures,” it said. The group is also to install 1,500 terminals in Romania this year, adding that current trading is in line with growth expectations.

Lloyds TSB (LSE: LLOY)

As investment strategies go, sitting on your hands seems to be working for Lloyds TSB. The credit crunch has been the bane of the banking sector, but Lloyds’ business has been left relatively unscathed. They’ve not had to boost capital via a rights issue, and they’re not going to either according to Sanlam’s Kokkie Kooyman.

In his view Lloyds will escape the crunch, due to a lack of exposure in mortgage-backed assets and structured products, hence limited related losses. Described as a safe haven, Lloyds revealed a fair set of figures and Collins Stewart promptly upped their target price for the high-yielder to 609p.

Speaking of boring, my colleague Ben Traynor has just informed me about a recent Fleet Street Letter tip that specialises in a unique arm of the retail market. Like Carpetright, they have managed to dodge much of the fallout of the credit crunch and look good value at today’s prices. Check out his free pack today…

Theo CaseySource: Bill Gates Buys Stake In Carpetright