The real estate “bubble” is global

The real estate “bubble” is global

21 Mar 2019

In my round-up of Q4 2018 I mentioned three risks that I intended to keep an eye on. Here are three really bad things that could happen in 2019 or preferably later. 1) London house prices fall by 20% rapidly or 40% gradually (or both) 2) A major issuer of government debt suffers a catastrophic collapse in confidence or actually defaults (will the person who said “China” see me afterwards?) 3) A neo-Marxist garden gnome becomes Prime Minister of Great Britain. Numbers 2) and 3) remain of great interest but now I want to update myself on the developing story of property prices. Two observations are becoming quite well known: the apparent insanity of new high rise apartments shooting up all over Zone 2 London and the decline in turnover of the traditional property market. FLIPPERING HELL The FT had a good article on 20 February entitled “London’s property ‘flippers’ forced to sell at a loss”. Flippers are speculators who buy flats off-plan before construction has begun. It seems that they are often individuals either originating from or actually still living in Asia. They are probably rather ignorant about what they have agreed to buy. According to the FT, someone lost £770,000 buying and selling an uncompleted apartment in One Blackfriars, a monstrous glass eyesore (obviously that’s just my unsophisticated opinion) towering over the Thames (which has surely been punished enough). “In 2014, 21 per cent of resales in recently completed developments were sold at a discount, according to property research company LonRes. Last year that number had more than trebled, to 67 per cent. At the same time, the size of discounts has ballooned. From an average of 2.2 per cent in 2014, to 13.1 per cent last year.” To be brutally frank, most Londoners just find these stories of burnt speculative fingers quite satisfying. Some might say that it’s payback for despoiling our historic city with your greed and ignorance. Others might suggest that this attitude is somewhat hypocritical, given that mutual self congratulation about how much everyone had made on their houses was the backbone of London dinner parties for about three decades. PENSION PURGATORY Over those years many representatives of...

Report on Q4 2018 – full of sound and fury

Report on Q4 2018 – full of sound and fury

5 Jan 2019

Over the first nine months of 2018, the UK stock market was barely changed. In Q4 the world’s obsession with uncertainty overtook it. Trump took on China again, Trump took on the Fed, Congress took on Trump, the ECB took on Italy, the Conservative party took on Theresa May, everyone took on Saudi Arabia and the oil price took fright. While a falling oil price is sometimes considered broadly beneficial to the world economy, it is currently identified as a harbinger of global recession. The FTSE 100 fell by 10.7% in Q4, the 250 by 13.9% and the All Share by 13.1%. The rule that in nervous times investors favour large international shares (i.e. the FTSE 100) overall held good, though not on a scale to promote rejoicing or relief. For roughly the 17th time since the financial crisis the fear of impending inflation faded away. The underlying assumption that we are living in long-term deflationary times held good again. Government bond yields have duly subsided again. The US ten year yield has slipped from 3.0% to 2.6%, the UK 10 year gilt yield is now c.1.2% as opposed to 1.5% three months ago. It is times such as this (when the Japanese stock market’s daily change is one of the news headlines on the Today programme) that it is most important to remember our (or my) basic investment rules. Sharp and extensive falls in the price of classes of assets are caused only by the forced capitulation of unwilling and unhappy sellers. Great market collapses are invariably accompanied by the realisation that something that everyone took for granted is no longer true. Black Monday in 1987 was, with hindsight, a financial services event. Stockbrokers, fuelled by American money following Big Bang, were being paid more than bank directors had earned only a few years before. It was the time of Loadsamoney (Harry Enfield), Money (Martin Amis) and Serious Money (Caryl Churchill) and I am prepared to say without embarrassment that it was bloody marvellous to be part of when you were in your mid twenties. But when it was over you knew it was over. When the DotCom bubble burst in 2000 it...

Contagion

Contagion

16 Oct 2018

  “The least thing upset him on the links. He missed short putts because of the uproar of the butterflies in the adjoining meadows. ” PG Wodehouse Financial contagion is a phrase employed by those who try to explain a fall in an asset price that they didn’t see coming.  If it means anything, which is not certain, it describes the fallout from the volatility that results when any market falls because people are forced sellers. This is prone to cause panic which in turn means that the attraction of holding cash rises. Given that no one likes to sell a falling asset (a psychologically taxing experience) people prefer to raise money by selling things that haven’t fallen in price but look potentially vulnerable (especially if viewed with a newly sceptical eye). As the quote from PG Wodehouse shows, when things go wrong we tend to cast around for something to blame. Bad things happen to relatively overpriced assets and the nature of the event that triggers their decline is really of no consequence. The need to explain what happened is driven by a reluctance to take responsibility for a poor investment decision. Hence we are allegedly the victim of the devaluation of a currency, the collapse of an obscure foreign bank, the failure of a harvest or the uproar of beating butterflies’ wings. In reality, contagion is not a hidden threat but a constant reality that we should never forget. All assets are in competition all the time, subject to perceived risk and liquidity. All asset values are relative to each other. The most crass mistake that financial analysts make (and I certainly write from experience) is to compare the price of an asset with its own history and to declare that this proves it to be cheap or expensive. Here are ten assets in which you, if your assets and liabilities are UK based, might conceivably invest, ranging from cash (the most liquid) to commercial property arguably the least liquid). Note that all savings are investments, even cash.   Gross yield Cost of ownership Net yield Capital gain/loss? Building society 2.0% 0.00% 2.0% No Government Gilt 1.7% 0.25% 1.5% No Cash 0.0%...

Populism explained!!

Populism explained!!

21 Dec 2017

The causes of the financial crisis have not been properly addressed. In particular, the perpetrators are widely and correctly seen as having got away with it. This, in my view, lies behind the populist behaviour that keeps giving us “anti-establishment” election results like Brexit, Trump and Corbyn. That’s the conclusion of this essay. Here are my arguments, looking at what happened in the US, the EU and the UK and the common failures of leadership in all three territories. WALL STREET AND THE FINANCIAL CRISIS I think we all know that the financial crisis involved junk debts being packaged by rogues as AAA and sold to idiots. Faults on both sides, no doubt. US officials are relatively good at hammering those considered dispensable. (Bernie Madoff was sentenced to 150 years at the age of 71. That showed him). But the biggest banks were considered “too big to fail”. They operated with an implicit guarantee that, no matter what, they would be bailed out by the state. This was extended to the claim that they were “too big to jail”. It has been said that it would be destabilizing to the financial system if the senior management of a major institution were taken on the “perp walk”, handcuffed in front of a global TV audience. At the same time, the alumni of US investment banks seem to penetrate government at the highest levels. The original bailout was presided over by the Treasury secretary Hank Paulson, once of Goldman Sachs. Also from a Goldman career is the current Treasury secretary, Steve Mnuchin (there are limits to President Trump’s populism). You can read plenty about Goldman Sachs here. US politicians who complain about the big banks tend to stand out because they are unusual. Bernie Saunders and Elizabeth Warren are portrayed as “progressive liberals” (that’s an insult in establishment parlance) and possibly anti-capitalist or un-American. It is estimated that the US banking lobby spends more than $100 million a year fighting attempts to regulate it.    In 2011 the Occupy Wall Street movement claimed to represent “the 99%” against income inequality and corporate influence. President Obama said perceptively that: “I think it expresses the frustrations the American...

WE NEED TO TAX ASSETS

WE NEED TO TAX ASSETS

20 Jun 2017

Nearly every commentator admits that he or she was wrong about the recent election, in particular their belief that no one with a modicum of responsible judgement would vote for Jeremy Corbyn. I also was wrong when I wrote this: Just as the Labour party cannot afford to be a blunt advocate of public spending because it knows that government debt is critically high, the Conservatives are no longer perpetually calling for lower taxes because they know that services to which we all think we are entitled are going to become yet more expensive. So the result is that the debate at this election has become a little more subtle than usual. As it happened, Labour produced a costed manifesto in which 80% of the extra revenue was to come from corporations or rich people, those joint gold medallists in legal tax avoidance. This was anything but subtle (“people in suits can pay”) and was effectively trashed by the party itself when, in response to complaints from students who have already incurred high debts that their successors would benefit from Labour’s plan to abolish fees in future, Jeremy Corbyn promised to “deal with it”. Dealing with it sounds expensive and was not covered by the manifesto. By contrast, the Conservatives decided that it was a good time to have a grown-up conversation about relieving young people from the burden of paying for the care of the elderly by tapping the assets of the elderly themselves. It turns out that the country is not ready for this discussion which is a great shame. Time is running out. Between now and 2030, for every net person joining the major income tax paying years of 30-59, there will be nine (net) joining the over 75s. The Conservative MEP Daniel Hannan has this plausible explanation for the surprising performance of a Labour movement led by its left wing. No, I’m afraid we’re down to the simplest and most depressing explanation. Quite a few voters will support any party that seems to be offering them free stuff. Labour’s manifesto was a ridiculous list of public handouts. More money was promised for healthcare, schools, the police, public sector pay rises,...

Report on Q4 2016

Report on Q4 2016

13 Jan 2017

The UK stock market continued to climb the wall of fear or crawl forward in the sea of uncertainty or whatever you will in Q4. The FTSE 100 outperformed the FTSE 250 for the third time (out of four quarters) in 2016. Rising interest rates helped the UK banks index rise by 16% in the quarter. Some people think that lending margins will improve as interest rates “normalise”. Good luck to them. I will not be making that trade. Over the year as a whole the FTSE 100 rose by 13.9% having fallen by 4.8% in 2015. The FTSE 250 was up by 3.5% after +8.4% in 2015. The bond market was a bigger story in many ways with the 10 year gilt yield falling from 1.93% in December 2015 to 0.58% in August and then back up to 1.41% in December 2016. That is quite a rollercoaster dip. Many people believe (or hope) that the rise in interest rates will continue.  In many ways it would be helpful if they did (to help savers rather than borrowers) but I am not convinced that it is going to happen. The trading statements that January has seen have mostly been very encouraging. Marks & Spencer actually sold more clothes. I must admit I didn’t see that coming. I was less surprised that Morrisons sold more food. That has been a slow burner for me but it has started to come good. Let me say that I bought both these shares because of their financial strength (M&S’s cash flow, Morrison’s balance sheet) on the assumption that they would have the time to sort out their retailing problems. I know next to nothing about retailing but I can see that burdensome debt must make it much harder (eg Tesco). I was also amused and pleased to see that Sainsbury is now being helped by its acquisition of Argos. That stock (Home Retail Group) was my one attempt to take a view on a retail model and I just got away with it. The post that is most often called to mind at present is Four kinds of bias from May. The selective use of facts is all...

How QE plays out – and other guesses

How QE plays out – and other guesses

15 Sep 2016

This is a follow up to my last post about how QE is a wrecking ball that distorts financial markets and economic decision making. I have no opinion – despite a sceptical mindset – about whether QE is being applied correctly or about whether it will work. I doubt if even hindsight will allow people to agree about whether it succeeded. As an investor I need to weigh the probable outcomes of the distortion itself. Even this is not the same as making a definitive call on what will happen. That is gambling. As always, investing is about probability. THE WEALTH GAP – ONLY SHARES ARE CHEAP As long as QE carries on and the pool of safe assets shrinks further, savers in search of yield will keep chasing other assets. The stock market has been climbing the wall of fear this year. Before the referendum vote, George Soros and others forecast a decline of up to 20% in UK shares. Chancellor Osborne did not rule out suspending stock exchange trading in the face of the expected panic. With the atmosphere so full of “markets hate uncertainty”, that notorious cliché so readily embraced by third rate market commentators, many people will have assumed that the stock market would have performed its patriotic duty and dived after Brexit. But shares are cheap and quick to buy and sell, five days a week. I have just been offered a two year fixed rate bond by a building society that yields 0.95%. That’s a decision that ties up my money for two years. Were I to choose to buy Marks & Spencer shares instead I could get a dividend yield of more than 5% – and if I change my mind and decide that M&S is too racy, I can sell it in two minutes. Back in verdant Blackheath and vibrant Lewisham near to my house, yields on buy-to-let properties are between 3.6% and 4.5% (source portico.com). That seems like a lot of cost, time and risk compared to being a passive and better-rewarded owner of M&S. There is no hint that QE will be curtailed or reversed. On the contrary, the central banks of the UK...

QE : a wrecking ball to crack a nut

QE : a wrecking ball to crack a nut

3 Sep 2016

On 4 August 2016, the Bank of England expanded the QE (quantitative easing) programme that it had begun in 2009. This expansion, which now includes corporate bonds as well as gilts, is ostensibly in response to the Brexit referendum result on 24 June. The Treasury and the Bank had warned that Brexit could lead to a bad recession. You might need reminding that the official purpose of QE, since 2011, has been to stimulate the UK economy. You might think that, if this policy has been a success, it is rather a slow burner. But Andy Haldane (Bank of England Chief Economist) is in no doubt that it is the right thing to do and that this is no time to be faint hearted. “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison.”   Mr Haldane may be an economist but he knows how employ a ridiculous metaphor to make a point. And although he – incredibly – affects populist ignorance of financial matters (giving interviews in which he says that pensions are too complicated to understand), he does not lack respect for his own ability. He explained that the decision to cut interest rates by 0.25% was in order to save hundreds of thousands of jobs, though whether this included his own was not clear. QE actually commenced in 2009 as an emergency measure to prop up asset prices in a (so far) successful attempt to save the banking system. The banks held vast amounts of tradable assets that could become vulnerable to crises of confidence – so the central bank stepped in as a very public buyer and calm was largely restored. Phew. The official line that this was a form of monetary policy that could stimulate economic growth snuck in later and is much more challenging to justify. It seems to me to be a rather strained argument. Here is the latest official serving. BoE report 4 August 2016 The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that...

Report on Q2 2016

Report on Q2 2016

6 Jul 2016

On the face of it, the quarter was dominated by the UK Brexit referendum decision on 24 June though, in the main, trends were consistent throughout the quarter. The FTSE 100, which delivers its rare moments of outperformance in times of nervousness, had continued to do better than the FTSE 250 up to 23 June. After the referendum result this trend was dramatically extended, partly fuelled by the sharp fall of sterling against the US dollar. At the close of business on 30 June, the 100 was up by 4.9% in the quarter and the 250 was down by 4%, a huge difference in fortunes. (Despite this, over the last 5 years the 250 is +35% and the 100 just +8%). If this signalled nervousness about the future viability of the UK there was no sign of that in the performance of gilts. 10 year gilts yielded c.1.50% three months ago. Now they pay just 0.80%. What this seems to tell us that a prolonged depression is more likely than either a renewal of inflation (normally a probable result of currency devaluation) or a default by the UK government (even though we don’t really have a government at present). The message from elsewhere, especially the EU, is the same. 10 year bund yields were 0.14% three months ago. They are now, as predicted, negative (-0.17%). In Switzerland, even 30 year government bonds yield less than zero. This seems to be confusing aversion to risk with a disinclination to continue to remain alive. The future is unknown. Get over it. I sold some shares ahead of the referendum result on the mistaken view that we would probably vote to Remain. I think that the EU economy is burdened by many problems – unreformed labour markets, burdensome state pension liabilities, unfavourable demographics and ailing banks. European politicians have been allowing the ECB to carry the burden with its “whatever it takes” monetary policy. As I wrote before, “QE looks desperate and desperation does not promote confidence”. It is the banks that really concern me. The share prices of some of Europe’s best known banks are trading near or even below their financial crisis lows. Deutsche Bank...

Four kinds of bias

Four kinds of bias

30 May 2016

1)      SELECTIVE USE OF FACTS It is not news to say that people will select facts and opinions that appear to favour their side of an argument. There was a good example last week from the pro-Remain CBI which wants to demonstrate that the possibility of Brexit is already hurting investment. “Overall, surveys of investment intentions have shown a deterioration in investment plans, particularly in the services sector. Some of this is likely to be related to uncertainty ahead of the EU referendum. Although our April investment intentions data for the manufacturing industry actually strengthened, anecdote from the sector suggests some specific factors at play – in particular, replacement spending in the food & drink sector (following flood-related damage earlier in the year) and buildings investment by chemicals manufacturers looking to expand production on the back of solid export demand.” CBI Economic Forecast 16th May 2016 Did you get that? The latest data suggest that their view is wrong so they have concluded that the data are wrong. The CBI is supposedly a highly respectable organisation (so respectable that the EC contributes money to fund some of its publications) and can get away with substituting anecdote for data, or so it seems.    The Leave side is mostly less respectable and, partly by virtue of the necessity that it is promoting something of a leap in the dark, rarely seems to attempt to employ hard facts. But you can be sure that it is highly selective in what it says. You would imagine that the UK is full of people who are deeply worried about immigration. According to a survey that goes back to 1962, the peak year for UK citizens thinking that there are too many immigrants was 1970 when the level reached 89%. In 2014 it was 54%. Enoch Powell’s infamous “rivers of blood” speech was made in 1968 and probably contributed to the high level of antipathy to immigration that the chart shows. During the speech, Powell quoted a white constituent (in Wolverhampton) as saying: “In this country in 15 or 20 years’ time the black man will have the whip hand over the white man.” As it happened, the period...

BREXIT special. Does politics affect asset prices?

BREXIT special. Does politics affect asset prices?

15 Mar 2016

A STUPID ARGUMENT THAT YOU WILL CERTAINLY HEAR ENDLESSLY One of the most commonly and confidently asserted falsehoods is that markets hate uncertainty. Without uncertainty there would be nothing for markets to price. The pricing of assets is about probability. All questions of probability involve uncertainty. If you ever meet someone who believes in certainty sell them something because they will overpay. Politicians, particularly conservative or establishment ones, often try to scare voters with the unknown. In the current “Brexit” debate, the stayer camp is accused of conducting a Project Fear campaign. One of the central points of this argument is that foreign investors will be put off by the uncertainty that would result from Britain voting to leave the EU. This ignores the fact that almost everything in Britain already seems to be owned by foreigners. Politicians and other public commentators like to pretend that trophy assets are quintessentially British long after they have been sold off.  Witness the farcical outbreak of faux patriotism when a takeover of AstraZeneca by a U.S rival was suggested. The reason why there has been so much foreign investment in Britain is, ironically, politics. More specifically, it has been the lack of interference by politicians in ownership rights. British politicians do not, by and large, confiscate privately owned assets. The downside of this is that rather a large number of exotic individuals with wealth accumulated in dubious circumstances are attracted for this very reason. And there are more on the way, according to today’s news. “Ultra high-net-worth investors from Iran are poised to go on a buying spree of properties around the world – and London is likely to be the top location.”  City A.M. 15 March 2016 This is in many ways very annoying and even shameful unless you happen to be the legal vendor of an asset that has just been sold for a price beyond your greediest dreams. We can’t have it both ways, though it would be gratifying if there were some kind of effective test to verify that the funds used for the purchase had been lawfully acquired. This is supposed to be the function of money laundering laws but these appear...

OSTRICH POST II – DADT

OSTRICH POST II – DADT

25 Jan 2016

Don’t Ask, Don’t Tell (DADT) was a (now repealed) US official policy that insisted that gays serving in the military must take part in a cover-up. On the grounds that they kept their sexual preferences a secret they were excused from being openly bullied, discriminated against and dismissed. Something that everyone knew to be untrue (the idea that the US military was staffed entirely by patriotic heterosexuals) was sanctioned in a big game of “let’s pretend”. If everyone acted as if it were true it would be just as if it were actually true. But DADT turned out to be too convenient a device to be confined to such a narrow issue. It was perfect for the treatment of subprime mortgages! It was clear to many insiders that people who had no realistic chance of repaying were being granted loans to buy properties that had to rise in value to bail out the borrower, that these debts were being insured on terms that didn’t come close to reflecting their risk and that the loans were being repackaged and sold on, backed by credit agency ratings that were uninformed and irresponsible at best. Yet even when the crisis was unfolding at speed, banks and other financial institutions were saying publicly that everything with which they had been stuffed was AAA quality. Check out The Big Short for a great explanation of the story. The trouble with DADT is that it is like a Ponzi scheme. Once you have started to pretend, you have to keep going. The morons working at the soon-to-be rescued banks did not mean to buy toxic junk. But once the mistake was made the easier option was to keep playing along. Like a trader who hides loss-making positions in the bottom drawer (or a secret computer file), the final thing you can try to buy is time. You literally decide to wait for a miracle.    Something like this is going on with Quantitative Easing (QE = DADT). As I have pointed out elsewhere, the truth that QE was a device for inflating asset prices in order to save the banks from marking them to market was spun into an officially...

Our fictitious “housing crisis”

Our fictitious “housing crisis”

6 May 2015

IT’S NOT ABOUT HOMES, IT’S ABOUT HOUSE PRICES Politicians, journalists and sundry do-gooders seem, against the odds, to have discovered one fact on which they all agree. It seems that Britain has a housing shortage and, to paraphrase the late Vivian Nicholson, we must build, build, build. Whenever an opinion, no matter how compellingly simple, is presented as a fact with which no one could disagree it is wise and even compulsory to question it. I bought a dead tree copy of the Times last week (28 April 2015) and there was an opinion piece about housing that contained this sentence: “It’s reckoned that we need about 250,000 new homes a year”. It didn’t add who reckons that or why. But once you start googling “250000 new homes” you quickly light upon a report written in 2003 by Kate Barker, a one-time stalwart of the Bank of England Monetary Policy Committee. It is reckoned, as they say, that this report demanded 250,000 new homes a year and eleven years on that has not been achieved once. It would appear that the nation has accumulated a bit of a backlog: to be more precise, a backlog of 845,000, that being the difference between the actual number of completions and 2.750,000 (11x 250,000). So what did the esteemed Kate (now Dame) Barker actually say in her report? Did she really demand that 250,000 new homes should be built every year? (Spoiler: no). The first line of the report is this: “The UK has experienced a long-term upward trend in real house prices.” And there’s a clue. I think it is fair to say that the primary motivation of this report is to make housing more affordable by increasing the supply in order to restrain prices. Here is the section that deals directly with the question of how many new houses are desirable: “Looked at purely from the perspective of the UK economy, more housing would be beneficial. Different approaches to measuring the shortfall, produce a range of estimates: • projections of population growth and changing patterns of household formation (a proxy for future demand), compared to current build rates implies there is a current shortfall of...

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...

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 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...

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...

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...