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Friday, 4 November 2011

An SMS from Ernst (19): Short Messages Service

It is the season for the Q3-results of companies and there is also some important macroeconomic news this week. Therefore I bring you again my 'SMS from Ernst (19)'.

American unemployment

Today is an important day for the American economy. While Q2 and the first two months of Q3 seemed to fuel the thoughts of a double dip, there were some cautiously positive voices on the US economy lately.

Better than expected Q3 results of important companies and satisfactory macroeconomic data make people hope that a double dip can be avoided after all, in spite of the growing acrimony on the financial industry and the soaring protests, as represented by the now almost worldwide operating Occupy […] movement.

But the real barometer for the state of the economy are the unemployment figures as presented by the Bureau of Labor Services ( this afternoon (at 14.30 CET).

While analysts in The Netherlands forecast a stable unemployment rate of 9.1% and an increase in the number of jobs of 90,000, it will be interesting to look at the real data.

If the labor data is much worse than aforementioned, this could lead to a small panic at the stock exchanges, as the American economy is then not yet as strong as people hoped for.

However, when the labor data is (much) better, this could lead to the start of a year-end rally, as:
·     the European debt crisis can be avoided for a few weeks or months without the Greek referendum;
·     the Italian situation might improve slightly under the (officially denied) watchful eye of the IMF;
·     the US economy would seem on track for some careful economic growth.

But beware: to really get the US unemployment problem under control, the monthly number of new jobs should increase by much more than 90,000 jobs; probably by at least 200,000 for a series of months. And the unemployment figure should drop by 0.2% for at least five consecutive months. I don’t see this happen very soon; especially as the problems on the American housing market are alive and kicking.

Therefore today’s BLS data is probably rather the start of a year-end rally than the end of the depression that is haunting us since mid-2008.

German unemployment

German unemployment made a sudden change of direction in September: after two years of declines, the German unemployment rose by 10,000. The following comes from Het Financieele Dagblad (

Unexpectedly the unemployment in Germany increased in October. This made an end to the descending unemployment trend that lasted for more than two years. Last the month, the number of unemployed rose by a seasonally adjusted 10,000, where analysts reckoned with a decline of 10,000.

According to the Federal Labor Bureau, 7.0% of the labor population is now unemployed. In September this number was still 6.9%. Analysts forecasted an unchanged number in advance.  

German entreprenteurs have become much more careful in recruiting new personnel , because of the debt crisis in Europe and the worldwide stalling economic growth. Economists argue that the increase should not be exaggerated. ‘One month of increasing unemployment is not enough for rewriting the scenario on steadily declining unemployment in Germany’, according to Christian Jasperneite of M.M. Warburg & Co in Hamburg.

Germany accounted for 2,737 mln unemployed last month, a decrease of 204,000 YoY.. These numbers have not been seasonally adjusted.

Harmonized to international standards, the German unemployment amounted to 6% in August. Internationally the country is doing quite well. The percentages are 9.1% in the US, 9.9% in France and 7.9% in Italy.

The economic institute DIW from Berlin forecasted recently that growth in the current fourth quarter would stall. In 2012 the German GDP would rise by only 0.8%, while growth was 2.9% in 2011.

For me it is not a surprise that the German unemployment suddenly stopped decreasing.

The Germany auto industry has had a good year with the surge in demand for powerful, but very fuel efficient premium cars, that don’t look like a steam iron without the handle. Also German exports were in 2011 coming close to the record levels of 2008.

However, the Greek, Spanish and Italian debt problems and especially the indecisive, contradictory and counter-productive reactions to it from the European government leaders, sent shockwaves through Europe and made people feel worried on the coming economic period. And worried people don’t spend their money on luxury goods.

Besides that, the worrisome economic situation of these three countries (+ Portugal) and the deteriorating economy of China further reduced the German export possibilities.

Therefore I’m not as optimistic as Christian Jasperneite on the German economy: German and Dutch consumers still sit too much on their money and the South-European countries will probably vanish as large buyers of German luxury goods. That will leave Brazil, Russia and India as the only real growth markets for Germany.


The FD ( brings also the quarterly results of the Anglo/Dutch corporation Unilever (Foodstuffs, detergents and personal care products).

Unilever reported a sales growth of 7.8% in Q3, mainly as a result of higher product prices. However, this is insufficient to improve the profitability of the maker of Dove soap and Knorr soups for this year.

Unilever raised its prices by 5.8% and sold 1.9% more goods in Q3 YoY, according to the Anglo/Dutch corporation in a press statement this Thursday.

This led to a sales increase of 7.8%, exclusive acquisitions, disinvestments and currency effects. That was more than the 6.3% that was forecasted by a group analysts, when asked by the FD.

Unilever started at the beginning of this year with raising its prices, due to an increase in the costs of palm-oil, tomatoes and tea. By transfering these increased costs to its customer, Unilever tries to diminish its expenditures.

According to Unilever, these higher prices do not directly add to profitability. Therefore Unilever expects that the operational margin will be equal to or slightly lower than in 2010.

Earlier Unilever strived for letting the operational margin increase over the whole 2011, after it dropped by 20 basis points in the first six months.

Net revenues of Unilever amounted to €12.1bln in Q3; the company aims in due course for yearly revenues of €80bln. Just like its main competion Procter & Gamble, Nestlé, Danone, L’ Óreal and Reckitt Benckiser, Unilever aims at expanding in the BRIC-countries (Brazil, Russia, India and China), where a rising population and growing prosperity stimulate the demand for Sunlight soap and Lipton tea.

After a number of years with soaring commodity prices, price wars and heavy promotion of their own private labels at the supermarkets, the margins of Unilever’s premium brands diminished strongly.

Since then, Unilever fights an enduring battle with the powerful supermarket chains and with its competition for increased profitability and for the best spots on the supermarket displays. This battle is not yet won.

On the other hand: already a number of years ago Unilever invested heavily in strongly decreasing the number of brands, in order to focus their marketing attention on a few dozen ‘winners’. This operation is (as far as I know) finished now and might guide the brand into better results in the coming years.

Logica (ICT services and consultancy)

The Anglo/Dutch ICT service provider Logica presented also its Q3 results on Wednesday. Again the FD:

ICT service provider Logica plc (LOG.LN) presented 6% higher sales in Q3 and expects sales to grow by more than 3% in 2011 as a whole. The adjusted operational margin is planned to be between 6.5% and 7.0%.

Q3 sales was £914 mln, against £863 mln one year earlier. Sales increased by 8% at the business line Outsourcing, while Consulting and Professional Services had slightly declining sales, especially due to weak demand from the financial industry..

Where the United Kingdown showed again growth after a few weak quarters – the strongest growth of all regions where Logica is active, sales in the Benelux declined on autonomous basis.

Year to date, Logica showed a decline of sales by 3% in the Benelux, where especially the financial industry was weak and the public sector declined by 6% in Q3. Logica stated in respons that sales is stabilizing. Also margins are under pressure.

Q3 yielded an order portfolio of £799mln, against £788mln in 2010Q3.

I know Logica quite good, as my company and Logica often work together at the large Dutch banks, pension funds and insurance companies.

The sheer size of the company of 41,000 people worldwide makes it extremely important to have not too many consultants without an assignment, during economic bad times. Jobless consultants eat away all the profits that the working consultants and succesful business lines make.

After the company already got rid of 1500 jobless consultants during the last two years, the solution of choice for Logica has been:
·     to strive for call-off contracts with the largest companies in the most important industries; when necessary in exchange for substantially reduced prices.
·     to sell their premium consultants and services for a premium price at the same companies.

Although the company succeeded with this strategy in the Benelux and it has a moderate percentage of jobless consultants, the price it paid was high: many consultants are working for little more or even less than cost price.

Especially the large banks in The Netherlands have been masters of putting their suppliers under pressure for reduced prices: whether you are in with them or you’re out. This, combined with the deteriorating economic circumstances, puts a sustaining pressure on profitability in the Benelux. And it might take a while to change, as long as the debt crisis in the Euro-zone remains.

And it's also not clear if the improved results in the UK will remain if the economy further deteriorates.

Disclaimer: All non-italic texts in this article reflect the opinion of the founder of this site: Ernst Labruyère

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