Six months ago, the FT’s analysis of BP’s latest numbers began, Bob Dudley stated that the company had reached a “definite turning point”. How right he was. Unfortunately, the turning was down rather than up. The shares are not quite plumbing the ocean floor of the panic which followed the Macondo well disaster, but despite higher oil prices, the slowly clearing fog of litigation and the continuing sales of assets at prices well beyond book values, they have still managed to plunge by 13 percent in the last two months. The fall neatly reflects this week’s news of a 13 percent decline in first-quarter profits, while the other oil majors were cleaning up, so to speak. The most charitable description of BP is that it is a company in recovery mode, while us long-suffering shareholders (sic) wait for Dr Dudley’s medicine to take effect. A less charitable conclusion would be that the patient has such a chronic sickness that only major surgery will cure it.
It’s been puzzling me since the start of the financial crisis: why can incontinent governments like, say, the UK’s, borrow almost unlimited amounts at interest rates far below inflation? Stephen King at HSBC has been thinking about this, and has come up with a suitably apocalyptic (he has a reputation to defend, after all) explanation for the silly prices of government debt. Rather than addressing the problem of too much of it, he points out that governments across the West are instead finding ways to force it down the buyers’ throats regardless of the price. Sadly for the struggling members of the eurozone, they can’t pull off this trick because they don’t control their domestic currency, but the proud printers of other major currencies are pulling it off like mad.
Do not Forseke me, oh my darling, as Frankie Lane might have sung, had he been an Alliance Trust shareholder. That’ll be Karin Forseke, the new chairman, and next Friday is High Noon (GMT) as the outlaws from Laxey Partners renew their efforts to shoot their way into the Dundee citadel of Britain’s largest investment trust. Colin Kingsnorth and his gang have already spurred Alliance into a frenzy of activity, overturning the habit of several lifetimes and buying in shares for cancellation, but now the gang is demanding a “comprehensive review of the company”. There is something to be said for this. Alliance has struggled to make its diversifications (including the excellent Alliance Trust Savings) into profit centres, and even if ATS finally does turn the corner, it will be years before it has any impact on Alliance’s net asset value, the measure by which investment trusts are judged. The suspicion remains that its moves away from managing the main fund are to give the executives under Katherine Garrett-Cox the prospect of growing the business.
It’s been a really bad week for a pair of household names, and next week promises to be pretty awkward for a third. The eclipse of Nokia is set to become a classic business school study. From the world’s fifth most valuable brand in 2006, and a market value of E100 billion in 2007, no fashionable mobile-toter would be seen with one today, and the business is now valued at E12 billion. The fall of Sony has been no less dramatic. The producer of the best telly in nthe world, in the shape of the Trinitron, has reached the point where it is contemplating stopping production altogether. The shares have also lost nine-tenths of their value since 2007, and have fallen by two-fifths since the start of last year. The two companies have little else in common, but in both cases the managements ignored the signals from the customers. In 2006, Nokia’s position seemed as unassailable as, say, Apple’s does today. It not only had a dominant share of a growing market, it had margins twice those of its nearest competitor (remember Motorola?). It could outspend and thus out-develop any company which threatend its hegemony.
It takes time, money and commitment to take on the dogs of the investment company sector. Colin Kingsnorth has all three, which is perhaps why he’s picked fights with its two biggest canines. On the one hand, here is 3i, a perfectly decent business wrecked by the o’ervaulting ambition of the previous management under its chairman Sarah Hogg. She is old enough to remember it as the Industrial and Commercial Finance Corporation, a decently dull business providing long-term equity finance to small businesses – rather what’s needed today, in fact. Its management had craved the excitement of big-ticket private equity, and got it, though not in a way the shareholders would appreciate. 3i piled into dot-com just in time for the millennium bust, and Baroness Hogg’s reign that followed culminated in the unedifying spectacle of an investment company forced into an emergency rights issue at a massive discount to net asset value (NAV). Even that did not mark any sort of turning point, and the discount widened to 40 percent. Last week the chief executive resigned.
It must have come as quite a shock to the FSA apparatchiks when Ian Hannam turned on them. The accepted procedure following the ritual humiliation, fine and brutal publicity that accompanies a critical report is for the miscreant to issue a more-in-sorrow-than-anger statement, and express a desire to move on. Hannam, though, is made of sterner stuff, and the FSA will now be forced to justify its action in front of an independent tribunal. It promises to be quite a scrap. The 24-page Decision Notice is not one of the FSA’s finest documents. The logic is thin, relying on arguments like:
It’s hard to see the point of some businesses. This week the particularly pointless Resolution produced an interminable, impenetrable statement. Its bosses have decided that something must be done, and breaking it up is something, so it must be done. Resolution calls this a “self-managed exit plan”. It’s tough on the shareholders, who had been anticpating their own exit plan, in the form of a £250m cash return which they had been half-promised by the management. Alas, the markets have been too choppy for the lash-up that is SS Resolution to remain seaworthy without the £250m, so the company is to be split between a business which may or may not have a future, and one which definitely doesn’t. It may even add value for shareholders, despite what are delicately described as “dis-synergies arising from separating into two separate businesses” but it would be unwise to bet on it.
Bad news for hairdressers in the UK Budget: VAT is to be applied to the rental of the chairs the customers sit in while they are asked whether they want something for the weekend. Makers of cable based transportation systems carrying fewer than 10 people must now pay VAT at 5% after the majesty of HM Treasury has once again been brought to bear on anomalies and loopholes in the VAT system. At 20%, of course, it’s worth straining every sinew to get your product taken out of its scope. And, goodness me, “some businesses have actively pushed at the boundaries to secure zero-rating or exemption for their products”. The VATmen cannot mean the likes of Greggs, suppliers of fat’n’carbs to the masses on the move. The idea is to “clarify the treatment of catering to ensure that all hot takeaway food is taxed”. This could be quite a tough one. VATman: “This bun is warm.” Greggs baker: “It’s just come out of the oven.” VATman: “If you sell it before it’s reached ambient temperature, you’ll have to pay VAT – and keep proper records.”
The concept of Ivan Glasenberg on a charm offensive is hard to grasp. Charm is not generally considered one of the key characteristics needed to be a top trader, but he’s going to need all that he can find to push through the shotgun merger of Glencore, the business he built, with Xstrata. There’s an awful lot riding on this $90bn deal, not least the estimated $100m payday for those poor, starving investment bankers who are desperately trying to get it done. Alas for Ivan, the omens look poor, thanks to an extraordinary blunder designed to save a relatively trivial amount of tax. The preferred route, a scheme of arrangement, escapes the stamp duty that would be payable in a conventional takeover. In a scheme, approval by 75% of shareholders who vote clinches the deal, but Glencore itself cannot vote its 34% shareholding in Xstrata. It needs a maximum of 16.5% of the shares to be voted against for the deal to fail. In practice, something like 12% against would probably scupper it, since not every share will be voted.
One of the mysteries, to me, of the Greek crisis has been why there should be any deposits left in the local banks. All those with more euros than they need in order to eat and stay warm and dry should have moved their savings to, say, Deutsche Bank in Frankfurt, while they still can. The answer, of course, is that they have. The Greek system has only survived this slow-motion bank run thanks to the German banks sending it right back to them, via the Bundesbank, through the Trans-European Automated Real-Time Gross Settlement Express Transfer. What, never heard of TARGET? Do keep up. It’s an international version of the transmission system which allows money deposited in Barclays in Leeds to be drawn out of Lloyds in Luton. It matters not if money is consistently drawn from Luton and consistently deposited in Leeds, since other mechanisms cycle the money round, whether by Lutonians buying things made in Leeds, or by the state’s great tax and spend machine.
Vedanta Resources is creating happiness. This might seem like a tall order for a mining group, but it must be true because the company tells us how it’s sent some nascent film-makers around India to snap pictures of smiling kiddies. It’s also pledging to present itself in an open and transparent manner. It must be true, because the company’s global communications head tells us. Despite its prominent position in the FTSE100, Vedanta has found happiness elusive and transparency hard. On Tuesday, it felt moved to put out a statement after the shares jumped 7%. Here it is, in full: “Vedanta notes media speculation regarding a potential group restructuring. Vedanta’s stated strategy is to simplify and consolidate its corporate structure. Management reviews options to deliver this strategy on an ongoing basis and will update the market as appropriate.”
It was almost a throwaway remark from Sir Mervyn King. At the end of another uncomfortable press conference, he floated the idea that the 2 per cent inflation target has had its day. In the real world, the target had it quite a while ago, given how long it is since prices were rising that slowly, but to hear the Governor of the Bank of England suggest it is as surprising as to hear the German Chancellor urging Greece to get on and devalue (just you wait). The series of letters from the Governor explaining why inflation control failed stretches so far as to have lost all capacity to shock. Besides, there is now a sporting chance that the Bank will actually hit the target at some point later this year, a moment which would provide a suitable excuse to abandon it. The A-word wouldn’t be used, of course. Instead, there would be much talk of “broadening the remit” of the MPC to take into account credit conditions, growth and unemployment, rather as the Treasury used to claim it was doing when it dictated Bank Rate to the Bank.
Andrew Osborne is justified to feel hard done by. A single four-word remark in a long phone conversation has cost him a small fortune. The words were “something like 350 sterling”, an amount which bears a curious symmetry to the £350,000 fine which the FSA has just levied on him. Given his long years and senior position, he can probably pay it without having to eat bread and water, but it’s still pretty eye-watering. It also looks like rough justice, as he himself claims. Osborne was a managing director at Merrill Lynch, the brokers with the unenviable task in 2009 of trying to restore financial stability to the pub chain Punch Taverns, a confection of debt built on a sliver of equity. For months, it had seemed odds-on that Punch would collapse, but the “dash for trash” in the spring that year propelled the share price up from 40p to around 160p, and offered a get-out-of-gaol opportunity.
If he’s selling, I’m not buying. This was an excellent plan with last year’s public offer of Glencore shares. Dazzled by the fees and muzzled by the conflicts of interest, very few mining analysts were in a position to say what they thought. The result was a high pressure sales pitch, a willing suspension of disbelief among investors, and a 530p launch price that’s never been reached since. So what about the converse – if he’s buying, should I be selling? Ivan Glasenberg, the architect of today’s Glencore, clearly yearns to merge. It’s not yet a year since the botched flotation, but so keen is he that he’s yielded the posts of chairman, chief executive and finance director to Xstrata as the price of agreement. This is either a demonstration of what a warm-hearted, selfless individual he really is, or a tacit admission that Glencore’s years of making killings from commodity trading are coming to an end.
Every government needs a thick slice of luck, and this week’s has come as Chris Huhne slid off the political road into the ditch. Ed Davey has a golden chance to drive away from an energy policy which might have been designed to make energy expensive and electricity unreliable. This deadly combination might be called the Windmill Solution to oil and coal dependency, and the former Energy Secretary spent his last months flailing around like a demented turbine trying to make the numbers add up. While Huhne was tilting at windmills, the energy game has been changed utterly by the emergence of shale gas. This rapidly emerging technology promises relatively cheap and abundant natural gas for at least the next two decades. It has already broken the link between oil and gas prices. It promises to turn the US into an energy exporter, and remove the dependency on Russian gas for the states on its borders.
It’s been a gruesome week in the mobile phone market. The almost embarrassing dominance of Apple (ideas for spending $90bn of spare cash, anyone?) provided a cruel contrast to the desperate plight of the opposition. The maker of Blackberrys ditched its founders. Nokia, the one-time rubber-boot manufacturer, tried to stay positive, boasting that it had sold a million Windows-based Lumia phones in the last three months. During that time Apple shipped 37m iPhones. It has sold 315m of them worldwide. The eclipse of Nokia is one of the wonders of the age, providing fodder for business school studies for decades to come. At the turn of the century, its position in the burgeoning mobile phone market seemed unassailable. Its combination of market dominance and mouth-watering margins meant that it could outspend and out-develop any competitor who came up with a better product. It sold its billionth phone in 2005, and in late 2007, deemed the world’s fifth most valuable brand, the business was valued at €100bn.
Two solid FTSE stocks, covered by a total of more than 50 analysts, fell by 15% in a day during the first couple of weeks of January. It would have been downright spooky for any of Carnival’s crew of followers to have predicted the bizarre sinking of the Costa Concordia, yet it is astonishing that nobody anticipated the news from Tesco. Both companies dominate their industries, both have suffered severe reputational damage, but the longer-term impact on each is likely to be dramatically different. The loss of a huge new cruise liner is obviously far worse than the admission that profits might not grow for a year. Any loss of life, however small in the context of thousands of passengers successfully rescued, is a tragedy for those concerned. The realisation that the sea is always capable of springing nasty surprises will at least dampen the enthusiasm of holidaymakers to go cruising.
Alex Salmond looks smug as a bug right now. His popularity in the Scottish polls is approaching that of Nicolai Ceausescu when he was running Romania. He should be careful what he wishes for. His pick’n’mix approach to Scottish independence plays straight to the xenophobic basic instinct of the complaining Scot, but when it comes to the details, things are likely to get very awkward. The biggest asset at stake here is North Sea oil, still valuable after all these years. The SNP likes to draw an east-west line through Berwick on Tweed, which puts about 90 per cent of the reserves in Scotland. However, the line of the existing boundary follows the Tweed in a north-easterly direction. Project it into the North Sea, and Scotland’s share drops below 60 per cent. That could spell the difference between solvency and permanent austerity for Scotland, so it’s unlikely that the two sides will easily agree.
So even Royal Dutch Shell has decided that the oil business is hard enough, without running a life assurance scheme for employees on the side. There is now not a single company in the FTSE100 index which offers a final salary pension scheme to new employees. This is the unintended consequence of well-meaning governments piling obligations onto the schemes, while moving them up the batting order of corporate creditors. Thus, in little more than a generation, a system which allowed most businesses to look after long-serving employees in retirement has been destroyed. There will be wailing and gnashing of teeth, especially since Shell’s decision is a cold commercial one, rather than a necessary part of a survival plan. Yet we shouldn’t get too upset. The old system never worked as well as its advocates now claim. Long-serving employees become addicted to final-salary schemes, unable to leave because no new employer can afford to match their accrued benefits. In a world where companies’ life expectancy can be less than that of their employees, this makes no sense.
Ebenezer Draghi sighed. These bank books would never come out right, and it was Christmas Eve already. As he struggled, the numbers began to swim before his eyes. So many hundreds of billions of euros, so many classes of security, collateral, refinancings… He started to doze. He found himself back a decade, in that glad, confident morning when the world was fresh and new, and the first currency to be entirely illustrated by pictures of fantasy bridges was sprung on a delighted world. How wonderful life was then! Those perfidious Brits had, predictably, declined to join the euro, but we’d show ‘em! The single currency would be the cement that held Europe together, financially as well as symbolically, and would soon threaten the greenback as the world’s premier medium of exchange. Knocking the Yanks off their perch while leaving Britain in the slow lane. What’s not to like? Within a decade the economies of north and south would have converged into one magnificent powerhouse. The euro would have become a deutschemark with a suntan.
Life’s a beach (or not) Ah, the holiday season. Dreams of surf, sea, sand – and soggy share prices, or so it must seem to the bewildered shareholders in Thomas Cook. The travel agent’s “amendment to bank facilities” on 21 October lasted just 38 days before the business fell into the arms of its 17 banks, who put up £200m in emergency funding to tide it over until the summer.
Ah, the Stability and Growth Pact. You remember. Joining the SGP, members promised fiscal restraint, and in return were allowed to junk their soggy old currencies for a Deutschemark with a suntan. They all promised to keep the gap between revenue and spending to below 3 per cent of GDP, or if they weren’t quite there, they’d get there jolly soon, and never mind if they had to invent the numbers to do so. So, your starter for 10: which country was the first to exceed the 3 per cent limit? No, not Greece, Italy, Spain, Portugal or Ireland, but Germany. Oddly, there were no calls for austerity measures in Berlin. A decade on, and the game’s up. Fiscal continence in the periphery is a distant dream, so to save the euro we’re promised the European Stability Mechanism and a new “fiscal compact”, which looks like the SGP, but without the growth or stability.
Jed Rakoff is quite the hero. A New York District judge, he has done what the rest of us would love to do, and busted a cosy deal between bankers and their regulators. In early 2007, just when everything was starting to slide, the caring, sharing boys at Citigroup assembled a $1bn fund of, ahem, less-than-prime mortgage-backed securities. As Judge Rakoff explained. That allowed [the bank] to dump some dubious assets on misinformed investors. This was accomplished by Citigroup’s misrepresenting that the fund’s assets were attractive investments rigorously selected by an independent investment adviser, whereas in fact Citigroup had arranged to include in the portfolio a substantial percentage of negative projected assets and had then taken a short position in those very assets it had helped select.
At first sight, this looks mad. Lending to the UK government, in charge of the clapped-out British economy, now returns less than lending to Europe’s most successful country. Worse still, the yields on gilts are measured in sterling, a chronically weak currency, so not only does your money earn less, you’ll be repaid in something which history says will have been devalued by the time you get it back. Oh, and by the way, inflation is 3 per cent above the yield, making the internal devaluation painful, too. Something is seriously awry here, and two events this week offer clues to why German government 10-year paper yields more than the equivalent UK stock. On Wednesday the markets were spooked by the failure of an auction of 10-year German debt. Those in this arcane world struggled to understand what it meant, so there’s little hope for the rest of us. It’s either bad news, or very bad news, probably depending on whether you’re short of German bonds.
When you’re short of money, the odd £747m always comes in useful, but it doesn’t go far these days. It’s enough to finance the UK state spending machine for about nine hours. The government had spent more than the proceeds from the sale of Northern Rock before it could read the reaction to it in Friday’s papers. The sale is almost irrelevant to the future of British banking. The price isn’t bad, in the circumstances, even if the taxpayers have lost nearly half the money we put in to rescue the Crock in the first place. But it speaks volumes about value in the rest of the sector.
Goodhart’s Law, as refined, states that when a measure becomes a target, it ceases to be a good measure. Charles Goodhart coined it (the law, rather than anything else) at the Bank of England. At the time the Bank was targetting M3, the broad measure of money supply, as a means of controlling inflation. Soon afterwards, the correlation between M3 and inflation collapsed. Targetting inflation directly worked for almost a decade, but today that result looks more like luck than judgment. The FTSE100 index is the commonest snapshot of the state of the London stock market. When introduced in 1984, it was a huge improvement on the old FT30. For many years its mechanical approach to who was in and who was out, weighted by the value of each company, provided a useful measure of market movements in London. It has now become a target, and Goodhart’s Law is kicking in.
Good news: pay to bankers is falling. Bad news: having wiped out the shareholders, they’re still eating all the pies. Morgan Stanley and Citigroup reported tolerable figures only thanks to FVOOD, a piece of accounting nonsense which turns the bank’s deteriorating credit quality into earnings because the market value of its debt has fallen. Goldman Sachs has lost money for only the second quarter in its quoted history. RBS is preparing to swing the axe among its poor bloody infantry. But among the top ranks, life remains pretty good, if not quite as good as when they were trashing the world’s economy four years ago. We shall have to wait and see whether the profit prestidigitation at Citi and MS is miraculously transformed into bonuses, but the rewards in the industry still reflect the bankers’ belief that they are somehow superior beings deserving of seven-figure sums. Ian Gordon of Evolution reckons that 90% of RBS’ income will have disappeared in costs when the nearly-nationalised bank reports its full-year figures – and he’s an apologist for the banks.
– By Neil Collins – Once upon a time, Max Rayne ran London Merchant Securities much as he wanted to. Many years later, it now seems that his son, Robert, would rather like to do the same with LMS Capital, the investment company which LMS begat, where he is chairman, and where he and his chums speak for 35 per cent of the shares.