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Left hand down, hold on for the ride

Posted by on 14 Nov 2019

On 9 November, Prof. Brian Cox who is a professor of particle physics and a TV and radio presenter responded to the news that credit rating Moody’s downgraded the outlook for the UK’s debt with this Tweet: “Neither Labour nor the Conservatives will be able to borrow all the money they are pledging if international investors take fright.” Pausing only to note that anyone who relied on Moody’s credit ratings probably got wiped out years ago, Prof. Cox’s view does not seem outrageously controversial to me. Yet he was buried by a landslide of comments such as: “Don’t you just love it when experts step out of their areas of expertise and talk bollocks.” In essence the message is that if Brian Cox thinks that interest rates might rise, then he must be an economic dumbo. But the important point is not whether the professor is a financial simpleton or not but that the crowd is so emphatically behind a view that would quite recently have been unthinkable. Groupthink now knows that interest rates will never rise and that governments can...

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Quarterly review

Report on Q3 2019

Posted by on 1 Oct 2019

At the end of Q2 I wrote that part of my brain wanted to go on an equity buying spree but I wasn’t sure which part that was. It seems to have been the part that wants a quiet life because the FTSE 100 was unchanged over the last three months. The broader FTSE 250 rose by 2.4%, perhaps due to takeover activity. Sterling rose by 0.7% against the euro which is effectively also unchanged. The political noise of the last three months happened in a wind tunnel as far as the financial world was concerned (though that may change, especially if Britain’s MPs continue to risk their own legitimacy). As the global economic news continued to deteriorate government bond yields fell again. The US 10 year yield fell by about 0.25% to 1.75%. 10 year gilt yields dived from 0.86% to 0.55% and the German Bunds now have an even more negative yield (-0.30% to -0.57%). If these are unprecedented scary times, this is the reason. In my recent post entitled “Equities are the new junk bonds” I pointed out...

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Companies

ON BELIEF – LISTEN TO YOURSELF, TRUST YOURSELF

Posted by on 4 Feb 2019

There is a classic episode of Yes Prime Minister (“The Bishop’s Gambit”) in which Jim Hacker has to choose between two problematic candidates for a vacant bishopric. One is a “modernist” and the other is a “separatist” (of church and state). There is a famous exchange that runs as follows: Sir Humphrey : “The Queen is inseparable from the Church of England” Hacker: “What about God?” Sir Humphrey: “I think he’s what is known as an optional extra”. Sir Humphrey explains that a “modernist” is a coded word. “When they stop believing in God they call themselves modernists”. Theists tend to prefer the word “faith” to “belief”. Much blood has been spilled across the centuries over the question of whether the wafer and wine offered as part of holy communion are really the body and blood of Christ or merely symbols. If you think that the answer to that question is obvious (and the chances are 1000-1 on that you do) that is because you can’t help yourself. Belief is not a result of choice. It’s something that happens to you...

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Big picture

Left hand down, hold on for the ride

Posted by on 14 Nov 2019

On 9 November, Prof. Brian Cox who is a professor of particle physics and a TV and radio presenter responded to the news that credit rating Moody’s downgraded the outlook for the UK’s debt with this Tweet: “Neither Labour nor the Conservatives will be able to borrow all the money they are pledging if international investors take fright.” Pausing only to note that anyone who relied on Moody’s credit ratings probably got wiped out years ago, Prof. Cox’s view does not seem outrageously controversial to me. Yet he was buried by a landslide of comments such as: “Don’t you just love it when experts step out of their areas of expertise and talk bollocks.” In essence the message is that if Brian Cox thinks that interest rates might rise, then he must be an economic dumbo. But the important point is not whether the professor is a financial simpleton or not but that the crowd is so emphatically behind a view that would quite recently have been unthinkable. Groupthink now knows that interest rates will never rise and that governments can...

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Recent Posts

Sex and money – we need to talk

Sex and money – we need to talk

10 Mar 2015

Calm down now. This post does not address the alleged aphrodisiac qualities of wealth or any other aspect of paying for sex. It is about taboo subjects. A combination of embarrassment and distaste tends to prevent the discussion of topics that should properly be addressed. Hence our nation’s ludicrous history of sexual secrecy with its toxic residue of unplanned pregnancies, sexually transmitted diseases and child abuse. Absurdly, forty years after homosexuality was legalised in England, the CEO of BP felt it was necessary (in 2007) to go to court to stop himself being “outed”.   You might think that the sexual inclination of a CEO or any employee is of no interest to anyone else. But a judgemental attitude persists in the UK and it motivates people to behave as if work relationships have to be furtive. Indeed, many organisations take this much further and require all relationships between employees to be confessed. The implication is that such behaviour is sinful. It is quite true that good or bad relationships, sexual or otherwise, can influence the way that people behave at work. And it is essential that unwanted sexual attention is prohibited. But this no excuse for prurient gossip dressed up responsible human resource management. A purely practical point is that many single people who work long hours will spend half their waking time in the company of colleagues. It is nonsense to pretend that professional relationships will not merge with personal life. But I have known couples who have gone to extreme and potentially damaging lengths to disguise relationships that started at work. And once the lying starts it is hard to stop. You think that employment law gives protective rights to woman who become pregnant? It doesn’t if they feel that they must retire to protect the identity of the father whom they met at work. I know of a case just like this. In the UK, a similar damaging reluctance accompanies discussion of financial affairs. While a certain restraint is appropriate when discussing both sex and money – as the Facebook generation might find out to its cost – there is nothing shameful about needing either. And need is not greed. It...

The ECB, QE and the waiting game

The ECB, QE and the waiting game

12 Feb 2015

Quantitative easing is a process by which a central bank buys relatively safe assets (mostly government bonds) and thereby puts cash into the hands of the newly-ex owners of those assets. In the early years of the financial crisis, this was effectively a life-support system for financial institutions which, post-Lehman Brothers, looked like they might fall domino-style. As the central bank bids up asset prices it creates a rising tide that floats many boats. One side effect of this is that the wealthy become wealthier. QE is quite tricky to justify from this point of view. If it is necessary to prevent the collapse of the banking system it is a jagged pill that needs to be swallowed. As I have written before, this is broadly how the Bank of England justified QE in 2009. “Purchases of assets by the Bank of England could help to improve liquidity in credit markets that are currently not functioning normally.” But gradually, while the music remained the same the lyrics changed. Expressing an idea that was essentially imported from the US, the justification from the Bank in 2011 was quite different. “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand.” You see what they did there? Once again, it was party time in financial markets. Bonds and equities were rising nicely. Bonds were rising because the Bank was buying them and other people were buying them because the Bank was buying them and equities were rising because they looked cheap compared to bonds. And property in the areas where financial people live began to go up again, despite the fact that prices appeared to require mortgages that quite high incomes could not plausibly service and that damaged banks could not reasonably be expected to offer. My friends and I have done splendidly from this once we had “got it”. And although I don’t know any influential people, some of my friends do. Call me a conspiracy theorist if you want but these influential people soon popped up all over the place saying how brave and wise central bankers were to extend QE. THE HIGH MORAL...

OIL…….Something Happened

OIL…….Something Happened

7 Jan 2015

The recent sharp fall in the price of crude oil is one of those rare financial events whose importance is appropriately reflected in press headlines.  Oil has a strong claim to be the world’s most important commodity and also the most political. OPEC was founded in 1960 by the charming quintet of Iraq, Iran, Saudi Arabia, Kuwait and Venezuela. According to its website: “OPEC’s objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.” Were these companies rather than sovereign nations, this would be an illegal price rigging cartel subject to enough lawsuits to employ every lawyer until the end of time. As it is, it’s a legal price rigging cartel that everyone else has to live with if they wish to continue consuming oil. In 1973, OPEC became explicitly political when the US supported Israel in the Arab-Israeli war. It banned exports to the US and the barrel price of crude quadrupled from $3 to $12. It was a shocking inflationary impact that the world did not need. The Iranian revolution in 1979 saw a further leap from $14 to $40. The next great move came in the 21st century as global economic growth was propelled by developing countries such as China and India that became huge importers of oil. The price touched $140 until the financial crisis torpedoed the world economy in 2008 and the price fell right back to the 1979 price of $40. It is worth making a couple of points here. One is that the oil price has shown itself to be very volatile with changes in marginal demand having a huge impact. The other is that, partly thanks to OPEC, the market’s opinion of whether oil is cheap or expensive has largely relied on referencing its own history – the most unsophisticated way of valuing anything. That having been said, it is obvious that oil over $100 makes costly oil supply viable, notably from Canadian oil sands but also from fracking. The world...

Report on Q4 2014

Report on Q4 2014

5 Jan 2015

In a confusing financial and political world in Q4, the UK stock market offered small but notable evidence of calm in as much as the FTSE 250 (+4.5%) easily outpeformed the FTSE 100 (-0.9%), reversing the trend seen in Q2 and Q3. Normally, larger shares perform better in nervous times as they are seen as safer havens. In the case of this quarter, the collapse of oil and oil sensistive shares (including other resource and energy related companies) may have delivered a particular blow to the FTSE but I am still inclined to take the 4% gain in the FTSE 250 at face value. For 2014 as a whole, the FTSE fell by 2.7% following a rise of 13.9% in 2013. Once again, major governmrnt bond yields provided a supportive background. German 10 year Bund yields fell in the quarter from 0.93% to 0.54%. A year ago they were 1.96%. 10 year Gilt yields have fallen from 2.88% to 1.72%. While these seems incredibly low to anyone who has followed gilts over the years, it could be seen as high when compared to the equivalents in Spain (1.62%) and Ireland (1.25%) and France (0.83%). Last quarter I wrote that “bond markets are shrieking the news that global growth has made a long-term shift to lower levels”. The fall of nearly 30% in the oil price in Q4 appears to confirm this view, though it can be argued that a cut of this scale in the price of such a key commodity will ultimately benefit the economies of all countries that do not depend on oil revenues.Initially, though, the effect is more likely to be felt by oil producers and will play out as generally negative in the short term. See my next blog post for more discussion on this. In the UK, the political future appears more important than usual. But it does not seem likely that a change of government would result in a great expansion of government spending. Nor does it seem probable that a referendum would result in a vote for the UK to leave the EU. Most of the political outcomes that frighten investors are highly unlikely and their probability...

The paradoxical results of education for the masses

The paradoxical results of education for the masses

2 Dec 2014

The Churchill wartime government was kicked out by the electorate less than three months after the German surrender in May 1945. Labour won a huge majority and set about a radical socialist programme of nationalisation of key industries and the creation of the NHS and the welfare state. That story is quite well known. What will surprise many people now is that Churchill’s government managed to pass one dramatically progressive piece of parliamentary law in 1944: Rab Butler’s Education Act. There would be free education for all with selection at the age of 11. Children who passed the 11 Plus were eligible for places in grammar schools – it was intended that the top 25% should reach that standard. Places for the other children were to be offered at either secondary modern schools or technical schools which specialised in scientific and mechanical skills. Sadly technical schools were expensive and hard to staff and there were few set up. This gradually created the impression that the majority of children “failed” at the age of 11 and were sent to schools for underachievers. The 1944 act also allowed for the creation of comprehensive schools that could incorporate all standards. Perhaps grammar schools were burdened with having been promoted by a Conservative politician, but socialist politicians grew to dislike their perceived elitism and the Wilson governments of the 60s and 70s embarked on a determined programme of abolition. This culminated in an education act in 1976 which stated that state education “is to be provided only in schools where the arrangements for the admission of pupils are not based (wholly or partly) on selection by reference to ability or aptitude.” The class warrior secretary of state for education leading this was Shirley Williams (St Paul’s School for girls and Somerville College, Oxford). It is a matter of wonder that the most privileged members of the establishment tend to be dismissive of grammar schools and the upwards social mobility that they seem to offer. Our Old Etonian Prime Minister called arguments about grammar schools “splashing around in the shallow end of the educational debate” and “clinging on to outdated mantras that bear no relation to the reality of...

Turning a good idea into an investment

Turning a good idea into an investment

29 Oct 2014

This is the transcript of a speech I made this week at the smartfuturelondon conference How to turn a good idea into an investment What makes a good idea?  If everyone agrees that change is inevitable and ‘it’s only a matter of time’, it always seems to take a very long time. Having heard yesterday’s presentation on smart energy – hands up if anyone thinks that’s a bad idea – I suspect that a common drag on the development of really good ideas is that everyone wants a piece. I was watching The Man With The Golden Gun on TV the other day. It was made in 1974 when the world was suffering the first OPEC oil shock. So in the tradition of the James Bond series to be topical, they shoved in a sub-plot in which the Golden Gun Guy steals the Solex Agitator, a device that turns the sun’s rays into energy.  What a great idea. Someone should try that. When mobile payments were agreed to be a good idea in 1997, there were more than 100 companies represented in the first mobile forum. That year, Coca Cola built a vending machine that accepted payment from a Nokia phone. Around 2005 I attended a presentation about mobile payment at which someone said that there was a Coca Cola vending machine in Helsinki. Everybody was trying to get a piece of mobile payments – and it was all taking a very long time. Sometimes, great ideas are just too early. Twenty years ago, Larry Ellison of Oracle thought that the PC was an absurd device, being limited by its own processing power and memory. “Put it on the internet” he said. So Oracle launched what we would now call the first netbook. Unfortunately, the internet was too slow at the time. The Oracle NC failed. But one of Ellison’s managers thought it was a great idea. He was Marc Benioff and he left to found Salesforce.com in 1999. It is now the reference business cloud computing company and has a market cap of $37 billion or 7x forecast revenues. The best and most valuable ideas seem to come from nowhere and often evolve...

Report on Q3 2014

Report on Q3 2014

4 Oct 2014

The stock market remained nervous, reportedly seeing below-average turnover in Q3. The trend that began in Q2, of the shares of smaller companies performing worse, continued. The FTSE 100 fell by 1.7% and the FTSE 250 by 2.9%. For the third quarter in a row, yields on European government bonds fell to previously unimaginable lows. German 10 year Bund yields have fallen below 1% (now 0.93%). To put this in some context, 10 year Japanese bond yields were around 1.9% before the financial crisis bit in 2008. Japan is considered to be the reference case of a country suffering from long-term deflation. Its 10 year yield is now 0.53%. Since June 2008, Japanese yields have declined by 72% and German by 80%. As I have noted before, the bond markets are shrieking the news that global growth has made a long-term shift to lower levels. Many will argue that this is bound eventually to be reflected in lower corporate profits. It is hard to argue with that but wrong to assume that share prices are consequently too high. When yields on all financial assets are falling, investors are paying higher prices for them. A dollar of corporate profit literally becomes more valuable than it used to be. Many stock market commentators, seemingly obsessed with short-term news and the aphrodisiac of growth, appear to be incapable of understanding this. Given that the cloud of deflation continues to hang over the world (see above), the traditionally nervous month of October will probably produce plenty of gloomy headlines. In my post about the supermarkets, I pointed out that, when operating leases are included as liabilities, Morrison was much cheaper that Tesco and Sainsbury. Well, the gap has reduced but not necessarily as anticipated. Morrison’s price has fallen but the others have fallen further. Tesco’s accounting practices have caught up with it and I must say that, as yet, there is no price at which I would buy it. At last I have noticed the beginning of a backlash in the press against Lidl and Aldi – our nostalgia for the 1970s must surely be limited. Sainsbury has promised a strategic review, a development that appears to have...

The dead constituency

The dead constituency

24 Sep 2014

There is a widespread view in what passes for middle-England that people have a right to leave their wealth to their descendants. It seems odd that, in a country where demonising privilege has persisted as a mainstream political sport, we mostly seem to be more than comfortable with the idea that success or fortune should pass from one generation to another. But it turns out that even ideological turkeys do not vote for Christmas. “According to May 2014 research by Skipton Financial Services Limited, 48pc of under 40s expect to receive a large inheritance from their parents. Of these people, one in five are banking on an inheritance to get onto the housing ladder, and 17pc are relying on it because they have no pension set up. Other stated reasons for hoping for an inheritance include starting a family.” Daily Telegraph, 1 Sept 2014 Accordingly, politicians are frightened of this subject. David Cameron has called the desire to pass on your (hard-earned, responsibly saved) money to your children as “the most natural human instinct of all”. It’s parenthood from beyond the grave. It was reported that in 2007 the opposition Conservatives scared off Gordon Brown from calling a snap general election by pledging to raise the inheritance tax threshold from £325,000 to £1 million. Although Labour pointed out that this was a policy designed to benefit a relatively few relatively wealthy families, it backed off in the face of evidence that the Conservative pledge was popular. (To this day it remains no more than a pledge – it did not survive the coalition government). At present, the law says that an individual may leave £325,000 tax free above which level the rest of the estate is taxed at 40%. At first glance this is generous. Then one looks at UK property prices, particularly those in London and the South East. The average property price in London is now £499,000, in the rest of the South East it is £326,000 (source: ONS, June 2014). If the “family home” is worth the London average of £500,000, it will be liable to £70,000 of inheritance tax when the last exempt person (e.g. spouse or civil partner) has...

Moral money

Moral money

21 Aug 2014

What do Iran, Syria, Zimbabwe and North Korea have in common? There may be several answers but one is that, along with 145 other nations, they are recipients of UK Official Development Assistance (ODA). In 2012, total UK aid was £8.766 billion or 0.56% of gross national income. According to the press, this may have risen to 0.70% in 2013, which is the target suggested by the UN for members of the OECD Development Assistance Committee (DAC). In 2012 the average DAC member trailed well behind the 0.70% target at 0.30% (the US and Japan were both well below the average, the Scandinavian countries were well above). So, if the UK has hit 0.70%, it will be awarding itself a gold star. All UK politicians (with the exception of UKIP) seem to believe that ODA emits a moral glow, in which light they can disport themselves to effect. Doubtless they can’t help themselves and, though a fairly revolting sight, it beats fighting wars.   But I find myself wondering what sort of policy determines the choice of ODA recipients. In 2012, India topped the list with 7.9% of total bilateral aid. (NB bilateral aid is what we give directly – about half of our aid budget is multilateral which means that we donate to international organisations which then pass it on however and wherever they deem best).  India is one of the IMF’s official emerging nations. Is it the most deserving charitable destination in the world? Clearly, a better way to understand these figures is to look at ODA per head. On that basis, India falls to 67th (still in the top half) and above Burundi and Niger, two of the poorest countries of all, both with average annual per capita incomes of less than $1000. The top per capita recipient of UK ODA is barely believable. St Helena is a British Dependent Territory with a population of around 4500. In 2012 the UK gave bilateral aid of £106 million or c.£23,500 per head. Apparently we are building them an airport so that they can become a tourist destination. I have read in the press that the total cost of this airport (not yet...

Report on Q2 2014

Report on Q2 2014

3 Jul 2014

I have noted before that it is generally the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. In Q2, the FTSE 100 rose by 2.2% but the FTSE 250 (companies 101-350) fell by 3.4%. There has been widespread profit taking from the shares where much of last year’s good stock market performance was concentrated. This is evidence that nervousness is about. As was evident in Q1, the prices of assets regarded as safe continue to rise and the definition of “safe” to become less demanding. I mentioned the marked fall in European government bond yields in my Q1 report and returned to the theme in June. Irish 10 year bond yields fell from 3.43% to 2.83% in Q1 and have since declined to 2.37%; Portuguese from 5.9% to 3.73% and now to 3.66; French from 2.46% to 1.99% to 1.61%; and so, it seems, it goes on. Nervousness among equity investors is generally a good thing. Complacency is dangerous but very hard to spot. (An interesting philosophical question is: can one simultaneously be complacent and recognise one’s complacency?) It is only when nervousness turns to panic and rout that it becomes destructive. There is a stock market saying to the effect that a bull market climbs the wall of worry. I find this quite wise. There is another well-known traditional piece of advice – “Sell in May and go away” with its less famous follow up – “Come back on St Leger’s day”. The St Leger is a horse race which falls this year on 13 September. I have always felt that this is suspiciously convenient for City types who want to go to Wimbledon, Lords, Henley and the south of France. Certainly share volumes fall in the summer and market moves can be exaggerated. It’s a nasty thought that your portfolio might misbehave if you are not there to look after it. So, by all means, make up a little rhyme to justify some profit taking. I have certainly questioned the level of my shares that have done well and have taken profits in some. But I have failed...

The eurozone is the frozenzone

The eurozone is the frozenzone

19 Jun 2014

The yields of bonds issued by government are broadly influenced by three factors: the performance of the underlying economy; the outlook for the currency in which the bonds are denominated; and the probability of default. Eurozone government bonds have demonstrated all three factors at work since the financial crisis hit in 2008. The story can be traced by the changing yields offered by (for example) Italian 10 year government bonds since 2008. In the first half of 2008, yields rose as the market worried that governments would have to issue more debt to bail out a few troubled financial institutions. This was widely expected to be inflationary (bad news for bonds). By mid-2008, worries began to be directed towards the probability that the crisis was going to cause recession and that interest rates were heading down. For two years, Italian bond yields fell. Then the story changed again. The possibility that Italy (and a number of other Eurozone countries) might default caused near panic. Finally, in late 2011, the ECB began to convince investors that a solution would somehow be found. The second blip in yields in the summer of 2012 coincided with much wild talk of the break-up of the euro causing some panicky types to worry that Italy et al would honour their debt in a new made-up currency that they could “print” themselves. This was an irrational fear, not least because much of the German and French banking system was a huge holder of such debt and would have been effectively destroyed. Through the rest of 2012 and 2013, Italian government bond yields normalised, offering a consensus view that the economy was poor, inflation low and the government unreliable but unlikely actually to default. In 2014, something quite different has happened. Yields on Eurozone bonds have started to deliver a single rather shocking message – low economic growth and low inflation are here to stay for years and years. Assuming that an investor is happy to disregard the risk that the Italian government will default, we must contemplate the fact that he apparently believes that a 2.6% return on Italian assets is enough to justify a ten year investment. As the...

Patriotism, protectionism and AstraZeneca

Patriotism, protectionism and AstraZeneca

15 May 2014

Boswell attributed to Dr Johnson these well-known words: “Patriotism is the last refuge of a scoundrel.” I suppose there is some merit in this view if you accept that the great tyrants of history have tended to claim to be patriots (though “scoundrel” seems a mild word to apply to the men responsible for the Holocaust, Collectivisation and The Great Leap Forward). Johnson actually wrote at length on the subject of patriotism, specifically in opposition to American independence. “He that wishes to see his country robbed of its rights cannot be a patriot. That man, therefore, is no patriot, who justifies the ridiculous claims of American usurpation; who endeavours to deprive the nation of its natural and lawful authority over its own colonies; those colonies, which were settled under English protection; were constituted by an English charter; and have been defended by English arms.” I think the key sentence here is the first. It raises the interesting but complicated notion that a nation can have rights, beyond the aggregated individual rights of its citizens. It is a potentially dangerous idea and has been the cause of many international disputes, some farcical, others calamitous. After a couple of world wars and a widespread if not ubiquitous international consensus in favour of eliminating racial discrimination, patriotism is a trickier position to hold than it once was. Patriots use their support for sport as a way of expressing themselves. I found the chauvinism during the 2012 London Olympics somewhat distasteful (being of the opinion that hosts have the obligation to put the interests of their guests first) but certainly not dangerous or harmful. If crowd behaviour limits itself to sport, we should be thankful. In 2014, financial patriotism has started to feature in political debates. We have become accustomed to being told that e.g. Romanian families will travel 2000 kilometres in order to claim state benefits in the UK. (I find this hard to believe. How many Britons would emigrate to Romania on the promise of living in poverty for free?) Now, somewhat bizarrely, some people object to foreigners bringing too much wealth to the UK. They are supposedly buying our trophy assets, aided by the fact...

Report on Q1 2014

Report on Q1 2014

22 Apr 2014

The FTSE 100 fell by 2.2% in the quarter. The FTSE 250 (that’s companies from 101 to 350) rose by 2.1%. I wrote in the Q4 report that it is generally the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is worth noting that in the first three weeks of April, FTSE 250 shares have become more jittery, falling by 2.2% compared to a modest 0.4% recovery in FTSE 100 stocks. It looks as if there has been plenty of profit taking in the best performing shares of the past year, many of which are those of FTSE 250 companies. These were relatively trivial ups and downs in UK equities. Of more consequence for relative valuations is the continued strength of major government bonds. Yields on US, German and UK 10 year bonds have continued to fall, despite much talk of stronger economic data and falling unemployment. More impressive still has been the rebirth of demand for the bonds of Greece (yield on 31 December 2013, 8.41%; today, 6.12%), Portugal (5.9%; 3.73%), Ireland (3.43%; 2.83%) and even France (2.46%; 1.99%). Cash continues to chase yield and is becoming less fussy. At a time when the price of assets regarded as safe continues to rise, it would seem irrational to turn negative on the shares of established and financially sound companies. On that basis, this year’s flat equity market is probably resting rather than expiring. Turning to shares that I have recommended, in December I highlighted four companies with long-term strategies. UBM, whose share price is nearly unchanged since then, has just acquired a new CEO. I must admit that I had missed the declared intention of the CEO David Levin to retire in 2014. He has now been replaced by Tim Cobbold, ex-CEO of De La Rue. There is no reason to think that this will change the company’s long-term strategy. UBM raised its dividend slightly in 2013 and, with its low capex requirements, is confident of maintaining its “progressive” dividend policy. But, there is inevitably a risk that a new CEO will surprise investors (new managers are usually...

Grocers minced

Grocers minced

24 Mar 2014

“FTSE 100 sees supermarket shares shelved as Morrisons wages price war.” Last Thursday week (13 March), shares of William Morrison fell by 12% to 206p. They have fallen by 32% since their 2013 peak of 302p in September. In a show of empathy, Sainsbury’s shares were -8% and -26% from last year’s high and Tesco’s -4% and -23% respectively. The strategic announcement from Morrison has emphasised what we already knew – that discounters like Lidl and Aldi have been winning market share from the “Big 4” supermarkets (the other one, Asda, is a subsidiary of the US giant Walmart). This stock market fallout has delivered some shares that ostensibly now look cheap. As ever, the way to judge is to ask what the valuations tell us about the outlook for the businesses and to decide whether this view is realistic, optimistic or pessimistic. But first, some background. Due to the fact that we all go shopping, my observation is that people tend to overestimate the value of their own opinions about retailers. (This is true of many other topics: house prices, because we all live somewhere; climate chance, because we all notice the weather; healthcare, because we all get ill; bankers, because we all use banks.) On that basis, I must assume the same is true of me. So let’s get my prejudices out of the way. First, Lidl and Aldi are private companies from Germany. In my experience, which is somewhat out of date, shopping in Germany is a grim experience, evocative of Britain in the 1970s. If German retailers compete on scale and price, it is because they have nothing else. It is still the case that the collective German psyche has a horror of inflation (I have a 50 million mark note from the 1920s on my desk) and until 10 years ago, the law regulated prices and shop opening times in a way that suggested that shoppers needed to be protected from greedy retailers. The only Lidl outlet I know (in rural France) usually has just one member of staff on the checkout and the last time I was there (buying Chardonnay at less than €3 a bottle) the customer...

Are RBS shares on a dotcom!!! valuation?

Are RBS shares on a dotcom!!! valuation?

28 Feb 2014

You might have heard that The Royal Bank of Scotland (RBS) delivered some disappointing results yesterday. Underlying operating profit fell by 15% to £2.5 billion and the shares fell by 8%. But you might be surprised that it made a profit at all, given that the reporting of the figures and the interviewing of the latest CEO were generally hostile. Well, here’s a point. The net result, discouragingly referred to as “attributable to ordinary shareholders” was rather a long way shy of the £2.5 billion underlying operating profit – it was in fact a loss of £9 billion. If you want to know how these figures are related, the earnings release has 225 pages to help you get up to speed. But before you do that, I would like to draw your attention to the report for 2008. Over a mere 99 pages, a modest underlying operating profit of £80 million somehow delivered a loss of £24 billion to those very ordinary shareholders. If you are wondering what damaged that hapless underlying profit so badly, it included: “Credit market write-downs and one-off items, purchased intangibles amortisation, write-down of goodwill and other intangible assets, integration costs, restructuring costs and share of shared assets”. Stuff, essentially. In case you think that the bank is putting a deceptive spin on its results, it explains itself as follows. “The financial information on pages 23 to 81, prepared using the Group’s accounting policies, shows the underlying performance of the Group on a managed basis which excludes certain one-off and other items. Information is provided in this form to give a better understanding of the results of the Group’s operations.” In other words, if you think that the bank made £2.5 billion rather than lost £9 billion, you will be understanding it better. You will be better informed than the FT (“Royal Bank of Scotland slides to £9bn loss for 2013”) and the BBC (“RBS shares fall after biggest loss since financial crisis”). The dictionary definition of “underlying” is interesting. 1. Lying under or beneath something: underlying strata. 2. Basic; fundamental. 3. Present but not obvious; implicit: an underlying meaning. 4. Taking precedence; prior: an underlying financial claim. I think...

Jittery January

Jittery January

6 Feb 2014

“The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery.” The dangerously alluring feeling of comfort that I wrote about in my Q4 report did not last long. Major stock markets have fallen this year: FTSE -4%, Dow Jones -6%, Nikkei -13%. Many financial commentators are saying that this is the result of weakness in emerging markets which are in danger of being starved of investment dollars as the Federal Reserve continues its tapering policy. Even writing that makes me feel slightly ridiculous. It is typical of the confusing non-explanations offered by the financial services industry, helping only to encourage ordinary punters in the belief that all this is far too hard for them to understand. “Emerging markets” is an inherently biased way of referring to exotic countries in need of investment.  The term seems to have been invented in the 1980s. According to Wikipedia, prior to that the label Less Developed Countries (LDCs) was used. In 2012, the IMF identified 25 emerging markets. For the record: Argentina;  Brazil; Bulgaria; Chile; China; Colombia; Estonia; Hungary; India; Indonesia; Latvia; Lithuania; Malaysia; Mexico; Pakistan; Peru; Philippines; Poland; Romania; Russia; South Africa; Thailand; Turkey; Ukraine; Venezuela Note, sadly, that that the only African country is RSA. Looking again at the list, if you are particularly attached to democracy, private ownership rights or tolerance of homosexuality, you might find the thought of investing in some of these countries hard to digest. You might also ask how many countries have succeeded in emerging since the 1980s. The answer to that would appear to be zero. Foreign investment in emerging markets tends to be tidal: it flows in and it flows out again (if it can). Why then should this concern the risk-averse investor? There are two reasons, one specific and one general. The specific reason is that businesses in which we might be invested could be hit by diving emerging market economies. Global companies that sell consumer products are especially prone to this. Last week, Diageo the drinks company reported weakness in China and Nigeria. The general reason is that nervousness is infectious (especially in the banking industry). Undoubtedly, we have both these...

Report on Q4 2013

Report on Q4 2013

7 Jan 2014

The FTSE 100 rose by 4.4% in the quarter for a full year gain of 13.9%. The FTSE 250 (that’s companies from 101 to 350) performed twice as well in 2013, rising by 28.8%. There are never truly hard factual reasons why share prices move but it generally remains the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is also probably the case that smaller companies are less well known and consequently deliver more surprises. Note that in bad times they typically deliver more bad surprises which point takes us back to why large stocks do better when investors are nervous. It is reasonable to conclude that confidence improved in 2013. The mood implied by the yields offered by government bonds rose from clinically depressed to merely grumpy – in the case of the UK this was from 2.0% in January 2013 to 3.0% now. In the US the rise was slightly sharper, from 1.8% to 3.0%, but it was much the same story. The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery. Analysts sometimes name this “Goldilocks” (not too hot, not too cold) and it feels like a very comfortable investment environment. Comfort eventually causes complacency and this is exactly why it is wrong to commit one’s investment strategy to an opinion about the future, no matter how tempting. Investment is always about how probability is priced. Consensus rarely offers compelling value. I am pleased though not surprised to say that my satellite index of companies with female executives quite dramatically extended its outperformance against the FTSE 250. After the first nine months of 2013, the FTSE 250 was +25% but the 27 companies with female executives had risen by 35%. After the full twelve months, those numbers were +29% and +46% respectively. As for the shares that I recommended this year, in Q3 I wrote that I was surprised that Enterprise Inns rose by 40% in Q3. In Q4 it was much quieter, rising by 6.5%. I am not attracted by the value of the company now and I don’t...

Calmly seeking companies with long-term strategies

Calmly seeking companies with long-term strategies

6 Dec 2013

It may seem odd but it is harder than you might think to find companies with clear and measurable strategies. It is depressing how many listed companies offer nothing but a “mission” to be the “best of class”, to be “passionate about their customers” (yuk) and to pursue “value for all stakeholders”. In these challenging times when (thanks to QE) all assets are being priced as if they offer outstanding long-term value, I am inclined to seek companies with reasonably clear medium to long-term strategies. These generally feel obliged to keep their shareholders up to date with progress. Their executives generally accept that their careers depend on their achievements. If the strategies are realistic, they should be quite easy for investors to understand. To be fair, it is easier for a business to offer a clear strategy if it needs to undergo some kind of transformation. It is tougher for e.g. Coca Cola whose strategy understandably consists of flooding ever more of the world with its yummy syrup. The same could be said of Microsoft which has torched billions and billions of dollars trying to add other products to its ubiquitous desk software. There is no call to criticise successful businesses for failing to reinvent themselves – all we need to do is to check their attitude to shareholder value. But if we want to make serious money we should be looking for successful transformations. The simplest but most dangerous transformations are those, like Enterprise Inns, that involve financial rehabilitation. Share investors can be well rewarded if the equity portion of the business rises as the debt decreases. The purpose of this piece is different. It is to look for companies that are taking on the challenge of adapting their business model to changing times. Beware of companies that focus purely on financial targets, especially when these are linked directly to executive remuneration. A German company that I once followed made a quite inexplicable acquisition. While the company’s core business was in software with an operating margin of 25%, it bought a ragbag IT service company with a margin of approximately 0%. The justification offered by the management in defence of the deal was...

Bring on the girls

Bring on the girls

5 Nov 2013

A few weeks ago, I listened to Carolyn McCall, CEO of Easyjet, choosing her Desert Island Discs on Radio 4. After her first 18 months in the job, the shares have taken off, soared and flown since the start of last year (+187% as I write). I found myself thinking that she had timed that career move perfectly – there has been a tremendous cyclical recovery in many airline stocks. Then I wondered if I was being a little harsh. We will never know, obviously, but would things have gone so well if Mr Buggins in a suit and tie had been appointed instead? Then a week ago a friend e-mailed me to ask what I think of Mitie shares and I replied: “I’m ok with Mitie. It’s run by women”. He thought I was being humorous and in a way he was right. It was a true but unserious answer. Yet it had emerged from my sub-conscious and caused me to wonder whether I might prefer companies with female executives. (Mitie is a stand-out as both the CEO and CFO are women). I have as many unsubstantiated and uninteresting views on the different qualities of the sexes as anyone but I do not make investments on the basis of generalisations like that. I want to see some statistics. So I went looking for some. First, some background about where we are, in the UK, on this topic. Girls are now outperforming boys academically and I read a comment piece the other day saying effectively that we should now be more worried about the fate of our young men. Be that as it may, it is widely recognised that the scarcity of women at board level is egregious. Many people would say that it is unfair and proof of discrimination. I would say that it is prima facie evidence of a damaging waste of talent that, as an investor, might well be costing me money. In February 2011, the government published a document entitled “Women on Boards”. Britain is the only country that could commission a report on “diversity” from a white chap known as Lord Davies of Abersoch CBE but this quote from...

The big lie that makes them rich

The big lie that makes them rich

11 Oct 2013

Last week, one of the most successful hedge funds apologised to its investors. “The Pershing Square funds declined by more than 5% during the third quarter of 2013 generating flat performance net of all fees for the first nine months of the year.” This is an unaccustomed setback for Bill Ackman, the founder of the fund, whose personal net worth, according to Wikipedia, is $1.2bn. It is not news that the most successful few hedge fund managers make money on this scale, nor that the fees charged by hedge funds are high (typically, 2% of funds under management and 20% of gains, sometimes above a benchmark level, annually). So it’s turning out to be a bum year for Bill. To mitigate his shame and sorrow, Mr Ackman includes the performance of his fund since inception on 01/01/2004. Its gross return is 780% which is very impressive but less striking than its net return, after fees. That is 433%. Mind the gap. Every time that the investor, who is putting his money at risk, has made a dollar, Mr Ackman has made 80 cents. Never mind. Investors since inception have had a wonderful performance and would probably have bitten your arm off if offered those returns and those fees at the beginning. But that’s not quite the end of the story. Were a terrible and unimaginable financial event (say, a default by the USA) to happen, resulting in a devastation of the fund’s performance, that 433% return after fees could start to shrink rapidly. But the fees themselves are safe. They have been paid, in cash. The last paragraph of my last investment rule states: Always be thinking about how and when you are going to get paid out. Mr Ackman is a highly talented investment professional, who, like all hedge fund founders, probably thinks about this question a great deal. He is all over it. I fear that one cannot say the same for his investors. The dollars they have made are accounting profits whereas the fees they have paid are in cash. I have picked on Pershing Square because it has been very successful. Most hedge funds are not. A paper last year...

Report on Q3 2013

Report on Q3 2013

2 Oct 2013

The FTSE rose by 3.9% in the quarter (Q1 +8.7%, Q2 -3.0%) meaning that year-to-date it is +9.2%. I didn’t recommend a single new share in the quarter. This is partly because I was away in France, but is also because no compelling new ideas turned up. City analysts are expected to come up with recommendations (usually ‘Buy’s) regularly but real people don’t have to. To some extent, this reflects my current view of the stock market. The most likeable companies are generally priced accordingly. As I mention repeatedly, value is always relative and shares must always be compared to other asset classes. On that basis, there is not so much to worry about. UK house prices are creeping higher from unaffordable levels, encouraged by the government’s reckless Help to Buy scheme. (I heard the PM complain that the average income is unable to buy the average house. You might think that the solution is to raise the average income or lower the average house price or preferably both, but the answer from our government is to play “let’s pretend” and to forward the problem into the future, as usual). With growing numbers of people hooked up to the life support of the 0.5% Bank Rate, the chance of regular savings accounts bidding for your money are also about 0.5%. The only practical rival to equities in Q3 was, surprisingly, government bonds. On 10 September I recommended one. UNITED KINGDOM 1 3/4% TREASURY GILT 22 was trading at 92 then. This is an investment to tuck away for the long term but in the short term it has risen to 93.78, which, for a gilt, is pretty exciting. Shortly before the end of Q2 (12 June), I suggested a yield portfolio of twelve shares. From that date, they have returned 6.1% (including dividends) against 2.3% for the FTSE. So my implied caution has worked out quite well. The only stinker was Ladbrokes, thanks to a profit warning derived from its concerning failure to manage its online business. That having been said, its cash flow remains good and it has pledged to maintain the dividend. Today (167p) it yields more than 5% so I am,...

The savers’ lament

The savers’ lament

10 Sep 2013

Your savings have gone down the plug ’ole, Your savings have gone the plug… I am giving up on saving with the UK retail banks and building societies. I can potentially live with low interest rates if the service is competent and not annoying, but it appears that customers willing to be paid badly are losers who must expect to be treated badly. Last week a young man who was not born when I started working in the City told me that I would need to book a 30 minute appointment with him on a different day in order to be offered 1.7% on a two year fixed bond. In a rival establishment, another half hour appointment was required if I wanted to switch out of a savings account that pays 0.2%. In each case, the only convenient option was to close the account. This is fine with me, but why does it seem to be what the retail banks want? Here are three reasons. First, the bank rate is at a record low (0.5%) and the new Governor of the Bank of England is very keen to convince us that it is going to stay there. The experiences of the last few years have lowered savers’ expectations and have caused them, understandably, to be suspicious of those who offer surprisingly attractive interest rates. Why are they bidding for our money? Surely it must be safer to deposit our hard-earned with those who appear to be indifferent to it? Secondly, the regulations introduced to protect us from unscrupulous financial advisers have caused many of the banks to withdraw from the advice business. Since 1 January, independent financial advisers have to charge a fee rather than take a commission out of what they sell you. If banks were ever pretending to offer independent advice, they cannot do so now. A person with financial flair and ambition would not stick it for long as a customer advisor in a retail bank reading out the small print and asking us to sign here and here. Consequently, nobody working in the local branch of your bank really gives a toss what you do with your savings. Thirdly, another...

The dangerous comfort of crowds

The dangerous comfort of crowds

30 Aug 2013

The British football season is back. After a few weeks’ break, perhaps spent on surprisingly hot beaches, the fans have returned to the comforting warmth of whichever partisan crowd they belong. The Latin for crowd is “vulgus” and the word “mob” derives from “mobile vulgus” meaning, roughly, a movable (or swayable)crowd. When waging war, nations need to mobilize their armies – effectively to persuade crowds of generally quite harmless people to unite with the intention of killing other people. Armies are notoriously intolerant of any individual considered to be breaking rank. In WWI, the British executed 306 men for “desertion”. Almost all were young men from non-commissioned ranks and their punishment was seen as exemplary in the most sinister way. DH Lawrence, who was, awkwardly, a pacifist married to a German, wrote of the “vast mob-spirit” of the war. Those lucky enough to survive WWI were sent home to lives of economic uncertainty and a widespread fear of Bolshevism, which meant that organised labour was regarded with hostility by what we can call the ruling classes. The hindsight of history judges that the ordinary “heroes” of WW1 were treated pretty shabbily. Their experience was called being “demobbed”. Crowds are needed to fight wars and insult referees but what else are they good for? Political extremism and hard-line religion spring to mind. Come to think of it, these sometimes result in wars too. In all cases, the crowd induces people to behave in a way that might not seem obvious or even wise to according to rational introspection. This is an investment website and it must be obvious where I am heading but there is one general point that I would like to emphasise: crowds are comforting to belong to and can be uncomfortable (to say the least) to be excluded from. This leads straight to what is, in my view, the saddest sentence ever written about professional investors. “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” J M Keynes (The General Theory…) What a bleak observation of human mediocrity. Long before Keynes (in 1841), a Scot called Charles Mackay published “Extraordinary Popular Delusions and the Madness...

Report on Q2 2013

Report on Q2 2013

5 Jul 2013

The FTSE fell by 3% in the quarter meaning, obviously, that the easy wins of Q1 (+8.7%) were unavailable. My Q1 recommendations of Enterprise Inns and Go-Ahead trod water. Home Retail Group fell after its last trading update, apparently on the basis that the rain kept people away from Homebase. Such absurdities provide buying opportunities for investors and would-be barbecue chefs. At 138p it has a historic FCF yield of 29% (admittedly 2012 was an exceptionally good year for its free cash flow.) In May, I updated on ICAP which was still at 327p. The volatility of this share can be unnerving but right now it is 15% higher at 378p and it has maintained and paid its large dividend. In May I wrote that I would not be buying FirstGroup at its ex-rights price of 111p. At today’s price of 97p I am still not buying but I’m still watching. I also offered a list of twelve yield stocks. So far, so good. Ten are essentially unchanged or higher compared to a slight (0.8%) fall in the FTSE. Only UBM and Royal Dutch are down (I don’t know why). For anyone fretting about my worst ever investment (in Taylor Wimpey), it just released a positive trading statement and is trading at just over 100p – and yes, I have sold some. In April I wrote dismissing gold as an investment after it fell below $1400 an ounce. It is now $1242 and as unappealing as ever, in my opinion. My view on QE, available here and there, is that it probably does nothing to stimulate economic growth but that it will continue to be favoured by the Treasury which influences the Bank of England decisively. Yesterday the MPC under its new Governor Carney stated that: “..the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.” In other words, the Bank Rate is going nowhere from its 0.5% base and QE is safe in their hands. The stock market duly rose 3% in...

How I Learned to Stop Worrying and Love QE

How I Learned to Stop Worrying and Love QE

3 Jul 2013

The recent correction in world stock markets was widely attributed to comments made by Ben Bernancke on 22 May, such as this: Asked whether the Fed would curtail the pace of its bond purchases by the September 2 Labor Day holiday, Bernanke said simply: “I don’t know.” The word of the moment is “taper” meaning “to reduce gradually” indicating that one day the Fed will buy fewer long dated assets through its QE programme until the day arrives when it will buy none at all. This vague prospect is thought to have caused the US S&P 500 to fall by 6%, the FTSE 100 by 12% and the Japanese Nikkei 225 by 20%. In theory QE might be reversed. Instead of being a buyer of assets the Fed might dispose of them as confidence rises. That day is hard to imagine now, given the panic that would presumably ensue. Financial markets in the US speak very loudly to the senior executives of the Federal Reserve and the recent historical evidence of the latter standing up to the former is negligible. This implies to me that QE asset purchases are likely to be strung out for as long as financial credibility permits and that many of the purchased assets will be held to redemption. The persistence of QE provides short-term gratification to financial markets (the words “short-term” are probably redundant – markets know no other kind of gratification) but as I have argued elsewhere it probably has a negative effect on the rest of the economy – liquidity turns to ice when its primary purpose is to prop up zombie banks. All this and more applies in the UK. The Bank of England’s relationship with HM Treasury (effectively the government of the day) has long been the subject of interesting debate but in practice it has been subjected to increasing statutory control since it was nationalised by the Atlee government in 1946. The Blair government famously gave it the power to set interest rates, a move that was spun as allowing it to pursue monetary stability independent of interference from politicians. Yet, read the bank’s own summary of that 1998 act: In 1997 the new...

Yields are usually for a reason

Yields are usually for a reason

12 Jun 2013

Investment is betting on probabilities, not on outcomes. How can we judge if the probability of an event is over-priced or under-priced? Do not try to guess the probability of an outcome with a view to pricing it. Do ask when the price is telling you about the probability – then ask yourself if this is reasonable. For obvious reasons, investors are now very interested in dividend yield but they also have reasons to be worried about the stock market. Commentators seem to be evenly split between those who are looking down and suffering vertigo and those who say that equities continue to offer attractive value compared to what else is on offer. According to my own investment rules, you will find me in the second camp for as long as that proposition continues to be true. Dividend yields are as reliable a measure as any for judging what the market thinks of a company. Then, as the quotation from my fourth investment rule (Probability) says, we can ask ourselves whether this is reasonable. Below is a table of current dividend yields from shares that I follow. There is a wide range which, if the market is efficient, should tell us that we can choose between relatively safe companies with relatively low yields and relatively risky with commensurately high returns. Before I discuss any individual stocks, I will characterise what these various yields imply.     Price Yield BG 1165 1.4% Fuller Smith & Turner 925 1.5% Domino’s Pizza 670 1.5% Travis Perkins 1520 1.6% Experian 1175 1.9% Regus 165.00 1.9% Home Retail Group 152 2.0% Diageo 19.15 2.2% Interconti Hotels 1835 2.2% Smith & Nephew 755 2.3% Rentokil 88 2.4% Millennium 549 2.5% Cranswick 1120 2.7% Stage Coach 287 2.7% Kingfisher 344 2.8% Hays 90 2.8% BT 312 2.8% Synthomer 194 2.8% Sage 348 3.0% Rexam 505 3.0% Micro Focus 659 3.1% Unilever (€) 31.4 3.1% Reed 736.0 3.1% Tate & Lyle 811 3.2% Greencore 130.00 3.3% St Ives 160 3.3% Greene King 750 3.4% Debenhams 92 3.6% Morgan Crucible 277 3.6% M&S 448 3.8% Pearson 1173.0 3.8% UBM 690.00 3.9% Mitie 253 4.1% Costain 254 4.2% Tesco 343 4.3% Marstons 142 4.4%...

FirstGroup – watching with the wolves

FirstGroup – watching with the wolves

21 May 2013

Back on 14 February, when I wrote recommending Go-Ahead Group, I included summaries of my views on the other transport stocks, including this on FirstGroup: At 189p, FirstGroup has a market capitalisation of £911m but an enterprise value of £3357m due to £2446m of net debt (including pension liabilities). Its historic dividend yield of 12.5% tells us that the market expects the company to cut or skip its dividend (decision due in May). This would be a speculative investment and is too dangerous for my taste. With revenues of £6500m, this business is not going to disappear but the risk is that it will end up being mostly owned by creditors rather than current owners of the equity. And so, it came to pass, more or less. Yesterday equity owners were asked to put up a fresh £615m to defend the equity’s role in the company’s balance sheet against the creditor wolf pack: or as the rights issue press release coyly puts it – to “support the Group’s objective to remain investment grade”….Let’s hear it for investment grade! Yay! The poor shares swooned yesterday – down by 30% to 156p. It’s strange how bad news seems harder to predict than good, no matter, apparently, how explicit the evidence of publicly available facts. It may be that the terms of the rights’ issue – 3 new shares for every 2 existing shares at 85p each – were pitched at such a low level that the odour of desperation was repellent. In passing, fees of £30m (nearly 5% of gross proceeds) for an issue that surely does not need to be underwritten demonstrate that there are still bankers out there whose skills surpass mortal understanding. Never mind. It is not immoral to make a mistake, nor to be stupid, nor to wonder whether new investors might at some point take advantage of the pain of others. At today’s cum-rights price of 156p, FirstGroup has a market cap of £750m and net debt (including pension liabilities) of £2280m for an enterprise value of £3030m, or 0.44x revenues. These ratios will change after 11 June, when the shares trade ex-dividend but, on the face of it, the value...

The Big Easing – QE and the big picture

The Big Easing – QE and the big picture

15 May 2013

The financial press always loves to offer sage rationalisation for asset price movements after the event. (Have you ever tried forecasting the future? It’s darned tricky). Today, we have enjoyed months of a rising stock market. Sub-investment grade financial analysis always thinks it is wrong (possibly morally wrong) for share prices not to reflect the perceived state of the economy. The UK economy has barely avoided a triple-dip recession but the FTSE 100 is +14% in the last six months. Problem for Johnny Journo. Someone or something must be blamed for this abuse of reason. Consequently, the financial commentating community now “gets” quantitative easing (QE). There is the basic point that central banks buy “safe” long term assets (government bonds) for cash, thereby simultaneously supporting the price of those assets and putting cash in the hands of the sellers. The theoretical justification for this is that it curbs panic in a time of crisis and keeps the banks (which invariably own mountains of junk assets at the top of the market) solvent while someone works out whether they are worth saving. The second rationalisation of QE is that eventually it will stimulate growth. With savings rates driven down, all those liquid assets will start to be spent. The third rationalisation, favoured by fans of conspiracy, is that QE will boost inflation and reduce the real value of public and private debt at the expense of prudent savers. As far as the rise of the stock market is concerned, the first rationalisation of QE looks good. Japan announced at the start of this year that it will significantly expand QE (so-called Abenomics) and its stock market is has jumped by 45%. Inevitably, there is much discussion trying to justify this economically – for some it is Yen devaluation, for others, domestic spending stimulation – but why go beyond the observation that there is extra cash chasing a diminishing supply of financial assets? In the UK, the high prices and low yields of government bonds still make the value of equities relatively attractive. Obviously that attractiveness diminishes as share prices rise but there are still plenty of financially sound companies yielding >3%, which, with inflation at...

ICAP – a secret utility company?

ICAP – a secret utility company?

14 May 2013

ICAP released its 2012 results today. They were agreeably dull after a number of blows to the share price coming from stories about regulatory investigations including reports that it was being linked to the Libor scandal. At first sight, the statement from CEO Spencer suggests a pretty bad year: This has been an extraordinarily tough year in the wholesale financial markets. Trading activity across all asset classes was negatively affected by a combination of cyclical and structural factors including the depressed global economy, a low interest rate environment and lack of clarity around some aspects of regulatory reform. ICAP’s financial performance reflects these extremely challenging conditions. So how bad were the numbers? The answer is that compared to the mood of that statement (“extraordinarily tough year…..extremely challenging conditions”) they were delightful. Operating cash flow was down from 25% of revenues in 2011 to 24% i.e. it was high by the standards of most businesses. The dividend is maintained (for a yield of >7% at yesterday’s close) and after the payment of dividends, capex and restructuring charges, net debt fell by £100m (ICAP now has a net cash position). ICAP is treated by the stock market as if it is a cyclical business (and Michael Spencer does not seem to discourage this view) but its numbers say that it is practically a utility company. A conventional utility company also produces reliable operating cash flow but is burdened with much higher capex requirements. National Grid makes a somewhat higher operating cash flow margin (33%) but invests a formidable 25% of its revenues in capex. Centrica, which is highly regulated (and regularly grilled on the Today programme,) makes an operating cash flow margin of just 13% and will generally invest 5% of its revenues in capex. ICAP spends 3-4% of its revenues on capex but therefore retains much more of its 24% operating cash flow margin for other purposes (shareholders). Moreover, the ICAP capex is directed at electronic trading platforms which, other things being equal, continue to raise group operating margins. Every time I write about ICAP it is trading at around 327p though it has ranged from 280p to 355p this year. I am in the...

Gold rolled over

Gold rolled over

16 Apr 2013

The falling gold price is making the headlines and has reportedly caused a well-known hedge fund manager, John Paulson, to lose $1billion of his clients’ money. Another very smart guy named David Einhorn has also suffered heavy losses on behalf of his investors, according to reports. These men made their names and presumably their fortunes by betting against sub-prime mortgages and the banks that owned them. It is disappointing to see heroic figures such as these getting tripped up like this. I wonder if investors who have a great success begin to believe that they can make something happen through the power of their own genius. Great investing is all about getting the big picture right – but this is very, very difficult and the correct pricing of probability must never be neglected. Gold bugs often display fanatical tendencies and a fondness for historical destiny (I’m not sure what that is but it looks quite profound so I shoved it in). They seem to incline to the belief that there is a morally correct price for gold (and today’s price always falls short of it) and that not owning gold is an omission that comes close to being a sin. I suppose that the notion of gold as an investment for the righteous derives from its former role as the ultimate reserve currency. A century ago, nations were supposed to limit their issuance of paper currency to the size of their gold reserves. Notes were theoretically certificates that could be exchanged for gold equal to their face value. This stopped governments from printing money as they wished, which was understandably regarded as irresponsible (sinful, even) but might also have prevented desirable monetary expansion in times of economic hardship.  Keynes wrote in 1924: “In truth, the gold standard is already a barbarous relic.” Yet the world returned to it, frightened by the inflation of the Weimar republic, with the USA running the dollar as the global reserve currency, backed by the contents of Fort Knox. You may remember that Goldfinger planned to render the contents of Fort Knox radioactive and untouchable for decades, assuming that the United States would be forced to purchase gold on...