MD writes...

Three topics readers interested in investing in UK plc might consider going forward into 2005:

Cash Flows
It is alleged that UK plc cash flows are very strong and that cash is piling up. Well, maybe. The Times ran a stupendously fatuous piece yesterday 28/12/04 entitled “UK plc builds up cash pile” by Gary Duncan. Under a graph entitled Leading Cash Rich Companies he chose to measure high free cash flow as a percentage of enterprise value. Knock me over with a feather – since when was this a recognised measure? Still, what do I know - the widely ridiculed EBITDA is still regularly quoted as well. Clearly the article / idea was planted by the scientists at the “investment banks”. Stars were M&S, BAE, and others no doubt all being touted as buys or takeover plays in 2005.

Share Buy Backs
The saddest statistic I’ve seen recently (also in The Times 28/12/04) was biggest share buy-backs of 2004 and I quote:

Vodafone £3,268m
BP £2,894m
M&S £1,755m
GSK £1,100m
AstraZeneca £1,099m
BAT £1,036m
Centrica £1,000m

Some of these companies sold part of the family silver to do this. But to what end? Note also that the much maligned Shell is no where to be seen on this list. Yet, despite its troubles, Shell is up 9% on the year vs. BP at 14%. BP Amoco is supposedly the better run company and has not had the reserve crisis of its rival. However, I question if £2.9bn is worth the candle. Certainly, pension fund trustees at some of these firms may have their doubts that buy-backs are the best use for "surplus" cash.

Shares are typically issued for 3 reasons, viz; to buy a company; to get out of gaol (otherwise known as remedying past mistakes); and to further reward already overly-well rewarded directors and senior staff. Let anyone who says that they have no cost study the above statistics.

Dividend Cover
I’ve taken a look at UK plc dividend cover. In contrast to the cash flows optimism noted earlier it makes sorry reading. When the scribe was lad it was a rule of thumb that sufficient dividend cover was not less than 3x. Here’s a surprise: hardly any of the FTSE 100 are anywhere near 3x covered. Most hover between 1 and 2. Bloody hell! Not much being held back for investment, nor for rainy days. Another price to pay for share buy-backs?

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Investing in China: a follow-up

Wednesday, December 29, 2004 | 0 comments »

Yesterday's piece was written blind. That is to say, without knowledge of the recent happenings involving China Aviation Oil, which now lend the article more resonance. The first paragraph from the Interfax report Feature: China Aviation Oil - China's "Barings" (link available via the China Aviation Oil news page below) sums up the scandal neatly:

"Last week, shocking news hit the world's financial market. China Aviation Oil (Singapore) suddenly submitted a voluntary bankruptcy petition and debt reorganization plan to avoid liquidation. According to the disclosure, CAO Singapore had incurred huge losses of USD 550 mln from oil options trading. More seriously, as a publicly traded company, its parent company, the state-owned and Beijing-headquartered China Aviation Oil Group, sold a large number of shares in the company, accounting for 15% of the total stake, on October 21, 2004, obtaining proceeds of SGD 196 mln in the process. Because this sale took place after the losses were made but before the information was disclosed, CAO may be guilty of fraud. Right now, an investigation is underway by the Singapore regulatory authorities."

The words "state-owned" just seem to jump off the page.

Here are a few more related links, none so fascinating as the near sadistic pleasure China Aviation Oil takes in lighting up its own web pages with the media coverage:

China Aviation Oil News Page
Le directeur de China Aviation Oil arrêté à Singapour (in french)
Losses at China Aviation Oil Investigated

And no, Capital Chronicle finds no joy in the story. Who would want to be in CEO Chen Jiulin (pictured above) shoes when he gets back home?

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Tsunamis do happen

Tuesday, December 28, 2004 | , | 0 comments »

(A late addition to the 2004 collection)

The big winner amongst emerging markets in 2004 was Egypt. Investors would have seen their money return over 119% (as of 27 December 2004). Contrastingly, China, everyone's favourite - or so it often seems - fell nearly 15%.

Chinese economic growth has been astounding in recent times, and state marshalling of resources has played a significant role. Equally striking have been the social gains as measured by ratios such as life expectancy (72 years) and child mortality (25 per 1000 live births).

But economic and social gains do not always walk hand in hand. The most recent work arguing this is perhaps the New York Times video report, China's Great Divide. The bottom line is that China today is in many ways a contemporary re-enactment of the worst of the Industrial Revolution in 19th century Great Britain.

But with an important difference: there is no sign of a nascent free-press or political opposition developing in China. The non-growth economic consequence of having a supreme political monolith such as the Chinese Communist Party is the constant risk of misallocation of resources and associated risk of disaster.

It was misallocation - a large increase in state procurement of foodgrains during a poor harvest year - that severely aggravated the Great Famine (1958-1961). Grain was exported while rural communities had no food. Depending on which estimate is believed, 16.5 million to 28.5 million people starved to death. A free-press and active political opposition would surely have mitigated the human and economic catastrophe.

In terms of increased transparency, accountability and justice have matters evolved meaningfully since then? On a balanced reading of recent history the idea does not bear scrutiny. Resource misallocation continues by definition and there has been, to borrow a phrase, no great leap forward. The implications for foreign investment are significant. How would a business crisis, especially in the financial industry, pan-out in this Chinese system?

No, when something goes wrong in China, it goes wrong in a big way. Foreign investor hopes of consistently fair legal recourse and unfettered access to markets (WTO 2006 notwithstanding) ought to be seen in that light. It does not mean money cannot be made, but it does mean accepting the risk of a potentially very Bad Investment Tsunami.

(NB: life expectancy and infant mortality data for this article taken from the CIA World Factbook)

Post-script: readers may be interested in this follow-up piece which covers recent allegations of fraud on the part of a Chinese state-owned company against foreign investors.

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To Magic Moments in 2005

Wednesday, December 22, 2004 | 0 comments »

This is the final post for 2004, and it's a short one.

As an undergrad in the United States, I had a calculus professor who was also a Vietnam veteran. He invariably offered his students the following advice before exams:

"Now y'all remember - protect the perimeter"

Made little sense then, much like the calculus. But seems apt now.

Many thanks to everyone who has visited the site these last 6 months, raise your glasses and let's toast a Merry Christmas and a Happy New Perimeter-Protected 2005.

To 2005.

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Several companies were commented upon in the 26 November Capital Chronicle article Exploiting the dollar's drop. One of these was Standard Chartered Bank plc. At the time, the bank was trading at 1,002 pence per share.

Standard issued a market update on 8 December. It was not well received by most analysts who cited the following negatives:

  1. Projected increases of investment costs linked to the firm's goal of expanding its consumer banking business in countries like India and Indonesia will narrow its revenue/cost ratio

  2. Currency concerns as the dollar falls

  3. The suspect capacity of Standard to compete against giants HSBC and Citigroup both of whom trumped the firm in recent acquisition auctions in South Korea

  4. Standard is only going to make its revenue number by reducing allowances for bad and doubtful debts

There are always at least two ways of interpreting things. Let's look at that list again:

  1. The revenue/cost ratio may narrow. But these costs are investment for future growth. Unless there is evidence the money is being poorly spent it makes little sense to punish the shares because the near-term impact is a rise in cost ratios. Is the board truly expected to make an instantaneous return on investments?

  2. This is a real concern, but Standard Chartered earns approximately 30% of its revenue from its Hong Kong (HK) operations. The HK dollar is pegged to the US dollar, a natural hedge to US currency movements and, when the US$ falls, assistance against other Asian currencies. Moreover, Standard Chartered is a non-tradeable and should not be directly affected by non-HK Asia's comparative disadvantage in the export sector as the dollar falls

  3. Being outgunned by bigger rivals is a constant risk, not a new one. Yet Standard Chartered has still managed to become the largest foreign bank in India (around 10% of its revenues) holding the top spot in credit card lending and the number four slot in mortgage lending. It has also managed to develop its China operations with a 19.99% stake in newly established Bohai Commercial bank. The significance of a "new" bank is that it comes with no hidden luggage and is likely to provide Standard with a greater management role

  4. True enough. But the lower bad debt allowance is a direct result of early repayment of HK mortgages. The accounting is not gimmickry.
Standard Chartered is a defensive in the current environment, notwithstanding the constant of political risk, but carries also exposure to growing emerging asian markets. At 12x 2005 earnings it trades at a premium to UK and European banks (typically 9x-11x) but is at a modest discount to Asian counterparts (at 12x-19x). The same pattern holds for the price/book ratio. The company yields 3.3% denominated, sadly, in $US and modestly covered 1.6 times.

A holder of sterling, Capital Chronicle watches the share price decline with serious interest. The shares are trading at 958 pence at the time of writing.

The author has no shares in Standard Chartered plc at the time of writing

Further related dollar comment: although it has recovered over the last couple of days, perhaps due to short covering, downside risks remain. Macro factors apart, the US retains its laissez-faire policy; and OPEC members are happy to unload the currency as its depreciation hits their huge balances. OPEC are even making noises about pricing their product in euros.

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Wednesday, December 01, 2004 | 0 comments »

Time out.

Take a sample basket of currencies to see how they performed recently against the United States dollar.

Conclusion? Well, it's an interesting week when the Iraqi dinar, the Haitian gourde and the Zimbabwean dollar all appreciate versus the greenback.

Exhibit A: What does US1$ buys against the...

23 November
Iraqi dinar=1,461.2
Haitian gourde=35.57
Zimbabwean dollar=5,751.6

30 November
Iraqi dinar=1,454.9
Haitian gourde=35.50
Zimbabwean dollar=5,656.8

Source:, currency converter

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Exploiting the dollar's drop

Friday, November 26, 2004 | 0 comments »

You have £50 to invest and, amid the currency turmoil, wonder "what to do?"

No-brainer number one is to look at US exporters at the expense of their Asian counterparts; and number two is to consider Asian (and, for the eternal optimists) euro domestic firms - that is, the non-tradeables. Sectors like telecoms, real estate, banking and the like spring to mind as candidates able to profit from cheaper imported inputs and/or the relative decline of value to be found in alternative foreign investments.

Consider a couple of Asia plays to test the thesis.

KT Corporation (aka Korea Telecom before marketing convinced everyone that the new name was a great way to sex-up the firm) is a no growth enterprise that dominates its home market but pays a handsome dividend. It bears the weight of an unpredictable regulator on its shoulders and faces increasing competition. Oh, and it's up over 10% since 11 November on the back of this currency rotation and an analyst upgrade. That's some serious gunslinging. [Editor: you did confirm that peace hadn't broken out with N Korea before coming up with that, right?]

How about Asian banking, then? Fortunately, some sanity prevails here. HSBC, Standard Chartered and the lesser known but striking prospect Bank of East Asia Ltd have not gone mad on the dollar's swoon. But, alas, they were already so generously valued (relative to many international peers) that they remain glued to the non-gunslinger's "watch" list.

And it goes on thus, leading mostly back to "what to do?" Frankly, if this is the long-heralded unwinding of the international current account imbalances, it's distinctly underwhelming. There is surely greater fall-out to come.

Amid all the early shooting, hold your fire.

The author has no investments in any companies mentioned in this article.

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Il faut sortir un peu les dimanches say the French, and indeed the scribe must be living a sheltered life not to have heard of this corner of the investment industry before now.

Particular admiration is reserved for the use of the phrase "...the combined, multi-layered, and non-homogeneous networks with activation (or transfer) rates that re-adjust themselves as a part of the learning process." Terrific stuff, but why, oh why, spoil a great sales pitch with defeatist talk of a learning process?

From our friends at "The Fund of Temporal Researches."


Neuro Hit! 1.0
Author: The Fund of Temporal Researches
Supported languages: English Supported OS: Win95 / Win98 / WinME / Windows2000

Free Neuro Hit! download - 5.09 Mb Neuro Hit! is a fully functioning advanced Financial Astrology program based on a sophisticated neural net. It can be used for the NN forecasting of financial indices and for the quotations of bonds, stocks and other securities based on astrological data. This system helps to create combined, multi-layered, and non-homogeneous networks with activation (or transfer) rates that re-adjust themselves as a part of the learning process. Neuro Hit! boasts an 70-80 % accuracy rate for forecasts of basic securities indices and quotations for a three-week period. The accuracy rate drops for longer periods. In this program, traders will find familiar analysis tools used in the technical evaluation of financial markets. Be one step ahead of the market!

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...and the same is true for tops." Jim Rogers

This being a serious political economy blog (well, some of the time) readers will know that Jim Rogers was not challenging the orthodoxy of a different, entirely unrelated and politically incorrect topic. In fact, the point Jim was making is that in excessively depressive or ecstatic circumstances actors in the economic and financial markets temporarily forget the laws of supply and demand and become blinded to changes in trends.

Last week Alan Greenspan spoke at the European Banking Congress in Frankfurt and traders used his comments about the potential dangers of the American current account deficit as an excuse to sell the US dollar. This was slightly odd. The great majority of what was said was yet another repetition of earlier speeches such as that Mr Greenspan made in March to the Economic Club of New York. But here's the thing. Right at the top of his remarks Mr Greenspan said "I should emphasize that I speak for myself and not necessarily for the Federal Reserve."

What? This is the first time in 2004 that in discussing the current account deficit Mr Greenspan has invited his audience to guess which sections of his remarks might not be endorsed by the Fed. However, since he also spoke for the first time this year of the dangers of "cumulative" deficits, reasonable guesses can be made. But who knows for sure.

In the greater speculative scheme of things, though, might this evolution of Chairman Greenspan's current account rhetoric mark a step towards fulfillment of the Large Bottom Law? In other words, now that even America's Central Banker has tossed fodder to dollar bears, there will be yet more folks on the already crowded sell-side of dollar trades.

Speaking of a turn is premature: right now it's a struggle looking at a picture of the euro/dollar rate to spot even a pert Minogue-esque dollar bottom (see below), much less anything of J-Lo proportions. In fact, it's been pretty much a dollar slide since the euro's introduction. Nonetheless, it is the case that to sell dollars is to sell the world's largest, most resilient and most dynamic economy.

And that's why it's long been the view of this correspondent that the unwinding of the current account deficit in the US represents a great opportunity for steady buyers of a weakening dollar to position themselves for eventual US equity purchases.

But it's a long game.

Note that Jim Rogers has been recently quoted as being a dollar bear too, and that for the next 20 years .

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RJH writes...

My youngest son, two, is ill. He's been in hospital for five days; he's suffered a battery of blood tests; he's exhausted from seven days of constant fever; he's unable to eat without pain, so does not; he's on two drips; he's lost over 6% of his body-weight; and is still having more blood tests. Yet, pre-hospital, he had already seen three doctors, all of whom diagnosed him with reassuring certainty, but none correctly.

How curiously similar this medical compulsion for certainty is to that frequently manifested by market experts. Financial journalists daily offer up to audiences the old saw "markets hate uncertainty" and summon experts to diagnose matters. And, lo, the duck-call scarcely warbled but the sky darkens as the experts touch down, waddle up to the mike and - the bulk of the flock anyway - quack their way through a few eminently forgettable minutes of air-time.

Now, some of the quacking is entertaining; some informative; some thought-provoking; and so on. But not one of the experts wants to appear indecisive: after all, they are selling - either their reputation, or their service, or both. That bias is built-in, and it is exceedingly rare that it does not get in the way of the expert. The result? Frequently under-thought, but reassuringly orthodox and confident, quack-bites.

Where the notion of an alternative hypothesis is admitted by an expert its probability is frequently lightly-weighted by the language of presentation: "barring a force majeure event", "there are always unknowables", "historically unlikely" and that old reliable "on current trends". Sometimes the speaker utters these as a warning (good); but more often as reassurance (not good).

Difficult, then, to escape the conclusion that many experts are more interested in covering themselves and attracting clientele than in admitting to any ignorance. On the rare occasions there does appear an expert prepared to use the vastly under-rated words "I don't know, but here are the probabilities", we should listen carefully: those who recognise their own fallibility reveal open minds and a willingness to both study and learn.

So there it is. Markets may love certainty, but uncertainty is all they have. "The market will fluctuate" was the extent of JP Morgan's classic market diagnosis and it's still valid. The rest is research, an open mind, probability and cutting losses early when the plan goes awry.

Tell your doctors. Please.

The confluence in this article of the words "doctor", "quack" and "expert" is obviously purely coincidental and implies nothing, although it may appear to. Seriously expert specialists exist in all fields. But they are thin on the ground.

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    Capital Chronicle writes on the likely demise of the Queen's broker as it seeks to consummate its joint venture with JP Morgan...

    Sold on the cheap appears to be the consensus opinion of City comment over the weekend.

    Contrary to some of the gushing and fatuous PR comment reported at the week-end ("it looks like we're taking them over"), reaction through much of the company was muted and the deal was not immediately regarded as a cause for celebration. The Extraordinary General Meeting, when it comes, may well be very interesting if, as one suspects, there are a number of unhappy shareholders.

    Some points of note:

    * the process leading to this point was kicked-off, apparently, by a McKinsey report; and what makes the consultants qualified brokerage experts this time around is questionable;

    * it appears the business rational has not been effectively articulated to some members of staff who ought to have been briefed; and

    * joint ventures (JVs) are operationally challenging to make effective, to put it mildly.

    Many of the stated aims of the exercise could have been achieved without the JV and it's associated costs in fees to lawyers and accountants. The same goes for the minimisation of the stated risks - what now, for example, is the career path for the young stars at Caz to be? Equally, much of the financial reward could be have been passed to the existing owners by means of a special dividend of, say, 50p per share in addition to the normal dividend. Further, some of the other excess capital (convertible preference shares) could have been repurchased early, further improving the ROE.

    In addition, the protagonists allege that the sum of the parts will be greater. Well, maybe. What they haven't addressed is that there is nothing really wrong with the current business model. Impartial advice is a key niche.

    Indeed, what might have been examined properly by Cazenove are the huge opportunities there will be in Germany as middle sized firms sell up and the likes of Commerzbank retreat; and in the newly emergent countries in Eastern Europe - in particular the Czech Republic, Hungary, Poland and Romania. Granted, Cazenove has an office in Germany, but it is small, and opened only in late 2000.

    Finally, the Mayhew succession. This is a non-issue - he could easily become a part-timer and supervise the Company for years to come. But, frankly, no one is indispensable and, sadly, it looks like his legacy will be the one of the man who sold the bank on the cheap.

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    Carnival of the Capitalists

    Monday, November 08, 2004 | 0 comments »

    The November 8th edition is up and over Incite, and this week there's alot of breadth of topic to enjoy.

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    Well, it had to happen. The Sod's Law/Murphy's Law equation made it certain. Wachovia called 110,000 and the sound of poultry wings flapping on arrival at their headquarters was heard.

    Non-farm payrolls swooped in at 337,000, much higher than the consensus of 175,000. Maybe that optimistic model was not so bad after all.

    Follow this link for background.

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    This Friday sees the monthly release of non-farm payroll data. The consensus is for an increase of 175,000 jobs.

    Wachovia are forecasting an increase of 110,000. Clearly, a virulent strain of pessimism has hit the firm given the inaccuracy of their recent previous calls. But if it's broke, try to fix it.

    Perhaps this is an appropriate time to re-introduce all forecasters to Sod's Law. In this context it states that Wachovia, having called much too high several times in sequence and then adjusted the model severely downwards to compensate, will now see Friday's non-farm payrolls number come in much stronger than even the 175,000 consensus. Thus validating their previous approach. Or so it may seem.

    Helpfully, British Gas Plc (an energy supplier, not a national characteristic) have spent shareholders money commissioning the development of a formula for Sod's Law. The firm's Board having decided wisely they cannot invest the cash more profitably. Here's the result:

    ((U+C+I) x (10-S))/20 x A x 1/(1-sin(F/10))


    A=Aggravation (a constant 0.7)

    Excel was rolled out to apply the formula to the concept of persistently successful economic forecasting. Despite using reasonable sensitivities, the results were not promising.

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    "Democracy passes into despotism" - Plato

    What stock-market junkie loves not liberty? It is one of humanity's Great Ideals. Not to mention a cornerstone of a modern capitalist economy.

    One of the guarantors of liberty in the United States is the characteristic of its democracy to deliberate at length before making a decision; and once the decision is taken, discussion halts and majority rule is respected. This is an under-rated yet colossal power of a people confident in their political system.

    Standing against this unified tide is to ask for trouble; and few do. The unfortunate by-product is that a lack of diverse and independent opinion of any serious influence becomes the norm. That's been a criticism made often enough, and especially by foreigners. One of the best known of these, de Tocqueville, made it especially memorably in Democracy in America, coining the phrase "tyranny of the majority".

    To witness the upheaval wrought in US society over the morality of the country's Vietnam policy was to see this "tyranny" in action. Standing against the government's - and hence the majority's - line on this issue was not, for a long time, a comfortable place to be. The issue reverberates still in the argument that a President John Kerry will prove too soft on America's "enemies". His 1971 testimony that US soldiers committed atrocities has been portrayed by opponents as a betrayal, strictly for base political motives, of brother veterans. Without doubt, this idea has become one of the key struts against which is propped the Big Election issue of Terrorism.

    Yet, is it terrorism that is the main threat today to all free nations?

    Chances are that most who hit this blog and others of its type are entrepreneurial in spirit and live in a place where there are free elections providing meaningful choices; where there exist elected bodies of representatives wielding real power on behalf of citizens; where there is the rule of law under which every citizen is equal and entitled to due process; and where the press is free and a citizen can speak his mind without fear of reprisal. These are the chief characteristics of a free society and one in which free enterprise thrives. If history teaches us anything, it is to remember that these traits, together with the economic benefits derived from them, were hard-won.

    The media, and many blogs, are replete with the implications of a Bush or Kerry victory. For investors it's a fertile field for speculation. But the stakes this time around are bigger than that; and everyone, capitalists included, ought to pay careful attention. Alzahr submits that the greatest danger facing free societies today is not the threat of terrorism, but how free societies react to the threat of terrorism. There is not only the safeguarding of life and limb to consider: it is, in fact, the fuzzier issue of ensuring security without disturbing core democratic rights earned over many years that is at the heart of the matter.

    How are the guarantees, mores and customs of the world's various democratic, capitalistic systems to be honoured whilst calls are made for the implementation of apparently painless solutions in the name of "security"? These calls have already demanded, sometimes with success, the imposition of seemingly reasonable curbs on democratic privileges - especially the legal ones. Advocates for wrap the argument in "the ends justify the means" language; and it's easy to succumb so far as one's own interests are, it would seem, unaffected. But to agree these types of measures is is to step out onto a slippery slope endangering the basis of the entire system.

    This Tuesday 2 November there will occur a renewal of a great political system, developed by the special circumstances, history, habits and customs of Americans. It was built on the ideals of the rights to life, liberty and the pursuit of happiness but is confronted today by a corrosive terror threat. Alzahr endorses no candidate; he hopes merely that whatever government assumes power is aware of danger without, and within.

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    MD writes...

    Flog Watch
    An occasional tabulation of the main losses to UK plc: 2004 to date.


    Westland Augusta plc; Buyer: Finnemeccanica
    Abbey plc; Buyer: Grupo Santander
    RMC plc; Buyer: Cemex
    South Staffs Water plc; Buyer: First Islamic


    Ah. None.

    The City
    Muted howls of anguish from the City this week. This correspondent was somewhat surprised that the “great and good” of the City thought that a UK banker would head up Abbey once the Spanish had taken over. What on earth were they thinking? The first rule of a takeover is that all the top jobs go to the winning side (maybe not immediately but over time). Titular local heads may be put in place but the power invariably lies behind the throne. It is something that the City and more importantly HMG would do well to learn.

    So another great UK Company will shortly get gobbled up – in this instance the company has fallen (unopposed) not because it isn’t world class – it is; and not because it was too small to compete it isn’t. New readers please note that both are typical “investment banker” well argued (sic) justifications spouted when they want to flog something! The company is “truly international” to quote the Daily Telegraph. Unfortunately it appeared cheap to the Mexicans (ergo it probably was) and had the added benefit of allowing them to consolidate their foothold in Europe and elsewhere. No prizes for guessing what nationality senior staff will soon be; nor where HQ will migrate to. I’d guess Spain, since you asked, as they already have significant operations there.

    Why do we keep doing this to ourselves? Moreover why do HMG and specifically the DTI and the Treasury continue to let it happen without so much as saying a word?

    Shell recently announced a shake up to it's 100 year old corporate structure and in so doing capitulated to ill informed scribblers - mostly London based analysts and journalists in the City. Well chaps you got what you wanted, but will you still want to hold the shares? The new company Royal Dutch Shell plc to be based in the Netherlands (with a listing in London) is effectively a takeover by any other name of Shell Transport & Trading plc. No doubt the Dutch home (despite most activities currently being run out of London) is tax-driven (certainly not cost driven), and it means a significantly lesser influence for the UK. The operations in the UK will just become another rather small subsidiary. Whether all UK funds that currently hold shares will continue to be able to hold shares is a moot point. Quite what it will bring in terms of efficiencies will be limited; no management will have changed; and the company will continue to be run by committee - how else can it be run? UK shareholders should vote against this proposal when the opportunity comes in 2005.

    Still no sense from HMG on this potentially devastating issue for many individuals and their families. Other than a vague suggestion that we should all save more and, by they way, put it into equities. My question is which and how if every thing of importance and quality has been sold overseas?

    Clearly the “investment bankers” have nothing better to do than continue the slow drip of damaging nonsense about Sainsbury’s. Yes, there’s a job to do there but let the new team get on with it. Not more than a few months after the authorities have pronounced on the UK market than they’re stirring it up again suggesting that Wal-Mart (who have their own troubles in the UK) and/or the dream team of Leighton and Norman will return to front a leveraged bid. Why would they do any better? And why would the authorities allow further consolidation? Things have changed out there since Norman and Leighton last walked the aisles. Tesco is likely to remain number one but there will be at least two very strong challengers out there; pick any couple from Asda, Morrison’s and Sainsbury’s. By the way chaps – some market intelligence – Tesco too has empty shelves!

    Very interesting short article on GM in the FT last Saturday (see John Plender’s column). Just a 0.25% downward revision in the assumptions for the pension fund rate of return which determines the contribution level (they assume 9%) would increase pensions liabilities to the equivalent of GM’s shareholder funds! One wonders how the auditors of GM and Ford can sign off the accounts on a going concern basis. Time for some major surgery, mostly in the US!

    Makes you wonder how many other US companies use similarly heroic assumptions.

    Those of us without a marketing qualification perhaps wondered why Unilever chose to concentrate on 400 brands. They perhaps silently questioned why so many fewer brands (they started with something like 1600) really were better; those of us who have actually lived abroad (and not necessarily so far from these shores) value the differences and more importantly the choice. The beauty of breadth is just that breadth – it does provide cover for when the mega brand collapses and, incidentally, makes nice niche market profits. Look at the success Premier Foods has made of allegedly minor “has been” British brands. I’m not suggesting there wasn’t some room for consolidation. But the world is a very big and diverse place and a focus on only 400 brands for a company as big as Unilever is too few!

    Watch this space for an about turn on strategy. Remember - you saw it here first!

    Signing off, stock pickers.

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    Carnival of the Capitalists

    Wednesday, October 27, 2004 | 0 comments »

    This week Capital Chronicle was fortunate enough to have a piece published in the Carnival of the Capitalists feature hosted this time around by Barry Ritholtz of The Big Picture. Many thanks, Barry.

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    RJH pens a "What if..." feature.

    Moderator: Gentlemen, let's kick this off. Sigmund, let's start with you.

    Sigmund Freud: Vell, Sviss, it is my belief zat ze yield curve may be regarded as the financial representation of investor's neurosis and its very construction reveals strong erotic roots. Initially strongly aroused, it stands erect and positive.

    Swiss Toni: Ah, yes. It's obviously closely related to investing in equities. Which is, of course, really very much like making love to a beautiful women. You have to be able to look beyond the upfront sales data usually thrust out so invitingly and truly appreciate the assets. Take time to carefully explore and tease these out. Some may be hidden, so explore lovingly every nook and cranny of the accounts. Make sure you can live with any kinky off-balance sheet arrangements you might discover. Once fully aroused to its potential then - and only then - enter into and consummate the transaction with great gusto.

    SF: Yet, Sviss, as ve find vith all neurotics, having "let ze monkey out of its cage" as you might say, investors detach their libidos with unending vissitudes surrounding their confabulated "is this still profitable?" thoughts. Zey turn their emotional cathexes into demons.

    ST: Uh, quite, quite. But you know, Sigmund, investors are so often duped, strung-along and then jilted by cold hearted CFOs. It's hardly shocking they entertain doubts about their investments, is it?

    SF: Vell, Sviss, zey also dupe themselves. This can be seen ven ze yield curve flattens indicating a divergence of investors' ego and super-ego. In fact, a sense of guilt begins to strain ze relationship between these egos. Eventually, ze point arrives at vich guilt and inferiority become entangled and ze yield curve inverts and takes the shape of an atrophied penis.

    ST: [Pause] Never experienced that myself, of course. Man of vast todger reliability.

    SF: Sviss, it's an universal theory. Your denial is merely a self-defence mechanism. Please, I can help you. Tell me about your mother.

    Moderator: Ah, OK. The open beckons which is a natural point to draw this discussion to a close. Thanks so much to both of you and I hope you'll be listening in next time when Maximus of Gladiator fame, Mother Theresa and Don King debate the topic "Are integrity and profit-maximisation compatible?"

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    The World's Greatest Forecaster

    Thursday, October 21, 2004 | 0 comments »

    It's a slow day in Bearland...

    There's a scene in Butch Cassidy and the Sundance Kid where pursuers corner the pair on the edge of a cliff. Frantic, Butch says the only escape is to jump into the raging torrent 50+ metres below them. The Kid tells him he doesn't know how to swim. Butch, flabbergasted, replies

    "Are you crazy?! The fall'll probably kill ya!"

    Is this story relevant for forecasting? Can the Red Sox come back from 3-0 down? Is the West Indies about to become a test match cricket leviathan again? I don't/didn't/still don't know. It's just a great film moment and I've been waiting for an opportunity to mention it. But I do recall that Butch and Sundance made it alive out of that fix despite their pessimism.

    The point is that I've felt bad since I wrote that piece on Wachovia's forecasting. I sniped and I want to do pennance and Feel The Pain every forecaster knows about. So I've built two models of extreme complication and plan to sell their output to all and sundry. If you're interested you'll need to be quick - I've already had the marketing departments of several investment banks on the phone. By the way, I also have a number of early 1990's computer hardware components on offer too.

    Without further ado, I forecast that:

    * on Tuesday 9 November West Texas light sweet crude (surprisingly refreshing both neat and with a chaser) will hit $60. It's at $54.92 now. Having noted the average fuel consumption of my Honda at idle; my recent electricity bills; how long the neighbours keep their lights on across the valley here; as well as numerous other things (sorry, I mean "variable factors") such as the impact of lint on the consumption rate of the cooling fan inside my pc, I am able to publish this astounding to-be fact with a high degree of statistical and personal confidence.

    * And that's not all. I further forecast that on Monday 22 November the sterling/USD rate will breach the $1.85 level from the $1.8281 it's on as I type this. This is based on a revolutionary piece of econometric insight that accounts for the rate at which London tourists are increasingly ripped off by cambio booths. It includes a formula to establish a "leakage rate" calculated as the absence (in hourly terms of course, man) from the money supply of those coins used to operate the chemical toilets across the nation's capital.

    Please don't abuse the comments option with expressions of admiration. Rather, I am interested in your own amazing economic forecasts. Special consideration will be made for the inclusion of estimates regarding the length of time Senator John Edwards is able to maintain his full smile at one sitting. But you must, I'm afraid, show full algebraic logic for admission into this category.

    Prizes are forecast.

    Yes, this is a serious post.

    Have a nice day.

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    Tattva, keen student of the Canadian economic, property and loan/mortgage scene, writes

    Over the coming weeks Tattva would like to share his perspective on Canada - provided of course the great and wise RJH (you gotta humour him) allows me to. In which case it’s a case of “dearly beloved we are gathered here today to join RJH and Tattva in holy blogship”. [Editor: I must be a soft touch to put up with this].

    Why would anyone care about, as Homer Simpson puts it, “America Junior”? Although Canada represents only 3% of the world’s stock market capitalization and does 87% of its trade with the US, it does have some huge attractions. [Editor: Pamela Anderson gag censored in the interests of good taste. But I did like it.] But seriously, it is one of the few countries running budget surpluses, has relatively cheap real estate and, as noted previously in Capital Chronicle, good growth prospects in wireless telecommunications. And that's but a few of the country's current attractions - there's also the politicians with a sense of humour to consider.

    Interest Rising
    RJH, amongst other things, asked for my views on the Canadian interest rate cycle. Are rates rising or falling? Did the Federal Government surplus imply downward pressure? Is the property sector generating decent yields? Take a deep breath, RJH, and calm down! Even my partner lets me get a word in edgewise. Well, sometimes anyway.

    My definitive answer is yes and no [Editor: definitive? Imagine working with him]. Barring unexpected 9/11 type shocks the only way is up for interest rates. And no, I don’t believe the surplus will trigger interest rates reductions. There's also the pressure on the minority government to think about - they will be drawn more and more to bribing the electorate (sorry, please read "fulfilling promises") by increasing health and education spending and through tax cuts. This with the probable intent of calling a general election sometime in the next 24 months.

    So ultimately these factors mean the debate really rests on when and by how much rates will rise. There are also the wildcards of Alan Greenspan’s interest rate decisions; the impact of oil prices; the strength of Canadian dollar; and the nation's economic growth.

    [Editor: Don't know about everyone else, but I'm looking forward to Tattva's "definitive" guidance on the current attractions of the Canadian property sector.]

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    During the scribe's university days he, a Close Friend and a few units of alcohol were watching a documentary in the genre of 60 minutes and Panorama. The topic centred upon the Dangers of Promiscuity.

    During the course of the program there appeared on-screen a young man exhibiting a near complete want of physical attractiveness. He duly recounted his own sorry, cautionary tale and concluded with the words "And that's why I have decided to remain celibate."

    Close Friend took a swig and then said:

    "Like he has a choice."

    That evening came back to the scribe reading the text of Alan Greenspan's remarks to the National Italian American Foundation on 15 October. Notable were the remarks made on the refining issues driving oil prices which neatly (plug alert) supplemented CC's own research. Mr Greenspan identified the lack of refining capacity for the heavier grades of crude as key, but was sanguine in saying free-market competition would come to the rescue in the "short-term".

    Who wants to bet the farm on defining "short-term" when it comes to refiners deciding to make the large capex investments required to ease the bottleneck? It's not rocket science: finance guys don't make large capex outlays for short-term profits. They may first have to believe that oil price rises are going to remain persistently high - and that in a world where they have averaged $35.58 since 1970 in real 2004 dollars.

    Put another way, this means that continued expansion and the avoidance of a meaningful crisis in the economies of the three largest oil consumers - the USA, Japan and China - must be perceived as a credible long-term proposition.

    Mr Greenspan often gets sneered at these days as cheerleader. Yet, most of his utterances are educational, concise and worth reading if only to better understand How Things Work. Nonetheless, there is also truth in the idea that his speeches are skilfully spun to calm the fevered brows, in this case, of SUV drivers everywhere.

    But at this juncture he has little choice, right?

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    The Lion of Yonibana is back with a report on the St Louis debate.

    To score the first half of the match up, or if you like, the middle rounds of the heavyweight bout for the American presidency between President George W Bush and Senator John F Kerry, a brief recap of the economic and political events in the week that ended on Friday October 8 2004 is required; as well as a recap of the outcome of the first debate in Miami. Do not forget, also, that we have framed our analysis of the debates using metaphors in the American football and boxing.

    Three events preceding St. Louis offered opportunities and pitfalls for both men:

    (1) the Department of Labor reported almost 100,000 new nonfarm jobs, a healthy figure, but short of both Bush administration forecasts and economists expectations, cementing the fact that the President will preside over a net job loss during his term, the first incumbent to do so in almost three-quarters of a century;

    (2) Charles Duelfer, investigating weapons of mass destruction (WMD) in Iraq, concluded that sanctions had eliminated Saddam Hussein's WMD in Iraq, but that he retained the capability and intention to reconstitute the threat; and

    (3) the former viceroy of Iraq, Paul Bremer, implicitly criticized the war in Iraq by saying the US did not have enough troops on the ground immediately after the fall of Baghdad. He did, however, later softened the blow with the declaration of unwavering support for the President's decision to invade.

    I think it is fair to say that the most indelible image out of Miami was that of the challenger standing toe-to-toe with the President and offering a solid alternative to his policies. John Kerry finally made believers of his own crowd and actually forced many in the other or undecided camp to take a second look at him. Thus it was when we arrived in St. Louis.

    The President was champing at the bit in St. Louis. Like most quarterbacks who find their jobs in jeopardy, he responded with fervor. Like most champions who are wounded by a blow, he came out with the intent to taking the fight to the challenger. He was more focused and forceful, had a point or counterpoint all evening, and took notes furiously. He clearly left the scowls in Miami and even offered a joke here and there. By the same token, I thought he was a bit edgy, overeager and bulldoggish. This was most evident with the use of the "liberal" label, reminiscent of 1988, when Bush Snr attacked Michael Dukakis throughout their contest with the same label. The key question for the President is this one: did he do enough to quiet the crowd and send the backup QB back to holding the clipboard?

    As for John Kerry, his task was a bit simpler, albeit not simple. He had to make sure that the image that emerged in Miami was real. I thought Kerry kept up the pressure on the President and did not give him any significant opening. He continued to demonstrate his capability to analyze policy and offer solutions and did nothing to dissuade the crowd that he would be a capable commander-in-chief or backup QB if he is given the chance. Overall, he broke no significant new ground; but neither did he sit on his slight lead out of Miami. He did stumble a few times, none more notable than his answer to a question on abortion, which reinforced the perception that he is capable of taking both sides of an issue. For the challenger, the key question is this one: did he make the crowd believe that the Kerry they saw in Miami was real?

    The first thought that came to my mind after watching the debate was this: did the thirty-two page agreement on the debate format include a formula to break a tie? I am sure there was none but I kept hoping they had one a la College football; continue in overtime - alternating possession - until a winner emerged.

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    The data, just released, shows 96,000 jobs were added. Consensus was 150,000.

    As this scribe wrote with some surprise on Tuesday, Wachovia were forecasting 250,000. Wachovia have been persistently and seriously over-optimistic with their forecasts for the last 3 months of nonfarm data. Time for a model rebuild.

    Of note was the downward revision of August nonfarm jobs to 128,000 from 145,000; it is more manna for Kerry to go into tonight's debate with.

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    Our guest columnist today rejoices in the moniker Lion of Yonibana. RJH's friend since Econ 101, he writes from South Carolina.

    Two sports metaphors came to my mind after watching the first of the three American presidential debates. The analogies are not perfect, but they give a good explanation of the debate and its outcomes. The first comes from American football and the second, boxing.

    In football, the quarterback is clearly the most celebrated position, with the incumbent perhaps receiving too much credit when things are going well and too much blame otherwise. But more relevant to my analysis is the fact that the backup QB is always the most popular guy in town when the team is not winning. I believe John Kerry'’s debate performance has made him the de facto backup QB on a team - Team USA - that is not on a winning streak in Iraq, the war on terror nor the economy. Until the debate he had only de jure status in the minds of most voters, including many in his own party. His performance may now result in more people to asking for him to be given an opportunity to lead the team.

    There are two ways in which the first presidential debate resembled boxing. Firstly, when the bell rings in boxing, there is nowhere to hide; it is just two people, mano-a-mano, out to deliver as many crippling punches as possible; there are no handlers; the contestants must venture away from script; and they must react to unforeseen circumstances. Secondly, when a challenger and reigning champion meet in a boxing match, the champion almost always initially has the grace of the judges. He is given more room for error and the opponent must deliver a knockout blow or several series of highly damaging blows to wrest away the crown.

    In my mind, the President was clearly hit damaging blows. But I would never question the heart of a head of state, whatever one may think of his policies. The President still has a reservoir of courage and strength from which to draw; he knows he has a fight on his hands and will come out swinging in St. Louis this Friday.

    Equally, it would be wrong to underestimate the damaging capacity of hubris on the part of a challenger. It is natural to protect a lead, and Kerry, it has been said, has a history of gloating and overconfidence. If he is to win the match and not just a few rounds, he must put the afterglow of the first debate behind him and focus on how he can take some of the tactics of a winning performance in Miami into the final two rounds.

    One of the lessons of Miami is that the candidates must ignore the press clippings and polls about where their strengths, and those of their parties, traditionally lie - for example, domestic policy for John Kerry and the Democrats, and foreign policy for President Bush and the Republicans. We saw John Kerry carve out a stake on foreign policy in Miami. But President Bush can surely counter the blow with a great showing in St. Louis - to be set in his preferred "town-hall" format - on domestic issues. It would be an interesting irony if the candidates and parties were vanquished in the subject areas traditionally considered to be their fiefs.

    While it is late in the campaign itself, it is only the first quarter - or early rounds - in terms of the debates. There is still a lot to play for in Missouri and Arizona. But the first debate surely has greatly increased voter interest and will influence the final outcome.

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    RJH writes...

    Napoleon Bonaparte. Invaded Russia with 650,00 men. Returned with less than 40,000. Blamed the disaster entirely upon an early winter. The French call that culot (nerve) and, unsurprisingly, was yet another reason the fellow enjoyed some notoriety both at home and away.

    Wachovia Securities. Forecasting nonfarm payroll gains of 250,000 in September (data to be released this Friday). Consensus is 150,000 to 155,000. Wachovia have hedged their number, blaming in advance this year's hurricanes as "a real wild card". More culot, given the Wachovia August and July predictions: both monthly calls were optimistic - wildly so for July - and significantly above consensus.

    Having written about this previously I can confirm, again, that forecasting is just a teeny-weeny bit difficult. Especially when it's about the future. However, there is demand for it and those convinced by the analysis of the Wachovian chief and senior economists should without delay buy cfds, calls, Bush-futures and whatever else is for sale. Bet the farm if you have faith because an actual this Friday of 250,000 will cause more than an upward ripple. And it will win the Wachovia economists some Napoleonic-like fame.

    But if they are spectacularly wrong and strong again, clients may soon forget them as: upon the death of Napoleon, George IV was told "Majesty, your worst enemy is dead." His reply was "Is she, by God!"

    Touchingly, his thoughts had turned first to his Queen, Caroline.

    Postscript: The data showed 96,000 jobs added. Time for a model rebuild. If they must.

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    All data in this piece are from, or derived from, the Energy Information Administration of the United States Government.

    There is a distinct impression from the outpourings of wisdom on and gnashing of teeth over oil prices that demand - China is often cited - is the number one driver behind crude's appreciation. James Picerno over at the Capitalist Spectator quotes a Barclays Capital analyst saying as much. Here is a snapshot of the demand data:

    Exhibit 1, Oil Demand, Millions of barrels per day:

    Chinese demand is hefty and not a one-off event: year to date 2004, China's consumption has increased more than 23% compared to 2000; and its share of the total oil patch has moved from 6.2% to 7.6%.

    It's a fair assumption then, that production volumes have not kept pace with this growth in demand. Indeed, that's often been the supporting idea to the demand argument; as has been the view that exploiting new oil reserves in deep water is uneconomic, even at today's prices. Here's some production data:

    Exhibit 2, World Oil Production & Demand, Millions of barrels per day:

    *"Production" includes crude, natural gas plant liquids, other liquids and refinery processing gain
    **2004 "Demand" uses Q1 data

    Odd, isn't it? Production supply is running ahead of demand for the first time since 2000 and yet the oil price is spiking. It's not easy to argue "terrorist premium", "Iraq", "Nigeria" et al since none of these are particularly new phenomenon. There is always something going on. So from where might the roots of the spike be drawing sustenance?

    Inventory drawdown seemed a good candidate. Unfortunately, OECD inventory has in fact risen year-over-year to May 2004. Which brings us to:

    Exhibit 3, Oil Refining Capacity & Demand, Millions of barrels per day

    2004 is the first year over the last five that refining capacity is less than demand. It's not merely that demand has risen, or that there is a bottleneck. Global refining capacity has dropped every year since 2000.

    The scribe is not an oil analyst. Nuance in the sector is usually lost on him. Nonetheless, the key to oil's rise appears to be the contraction, in world terms, of refining capacity. Refiners, it would seem, are not convinced oil price rises are sticky enough to render the capital expenditure required in plant profitable (if NIMBY/environmental interests cleared them to build in the first place, that is). And why should they? The oil price, inflation adjusted and in 2004 dollars, has averaged $35.58 since 1970.

    $60, here we come.

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    Crude oil related journalistic output rises in direct proportion to the commodity's price. But how about stock markets?

    It's tempting to say the non-scientific trading knowledge in this area now has a basis in hard academic study with this draft paper entitled Striking Oil: Another Puzzle by Driesprong, Jacobsen and Maat. But it's still reassuring to see academia tackle intuitive method.

    This paper is from the Social Science Research Network, an unbelievable resource for the curious.

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    Our Canadian correspondent, Tattva, writes:

    At a cool C$1.4 billion Fido is one expensive pooch! On the other hand, this pooch is a significant player – albeit a struggling one - in the Canadian wireless telecommunications industry. Both Telus and Rogers Wireless are sniffing around Fido. Telus offered a paltry C$1billion so who can blame the board for cocking its leg in response to this offer. Fido (wireless brand of Microcell) seems keen to hump Rogers’ leg, bidder of the C$1.4 billion.

    Why the bid?
    Contrary to what one may hear during a tender moment, it appears that:

    (a) size does matter: If the deal gets approved then Rogers Wireless becomes the biggest player in the Canadian market with more than 5.1 million customers;

    (b) not every one likes a Virgin: The bearded maestro Richard Branson and his Virgin brand is teaming up with Bell Mobility to target Canadian teens (note Bell and Rogers are arch-rivals in the Canadian cable/satellite and wireless markets). Rogers however, don’t want their potential young customers to be touched for the very first time by this competitive duo;

    (c) penetration is important: Canada has a wireless penetration rate of 46 per cent, which is low compared to the over 100% in Sweden and Japan (editor: who needs more than one cell phone?) So there still appears to be long-term potential in the Canadian wireless market. But will it be Rogers or Bell who rises to the occasion?

    (d) younger is better: A recent report from Solutions Research Group of Toronto revealed that 12 to 29 year olds represent C$1.5 billion of Canada's C$8 billion wireless market. This market is expected to grow twice as fast as the overall market in the next three years.

    Consumer Groups Unhappy
    There are mixed feelings about whether wireless rates will rise as a result of the takeover. Michael Janigan, executive director of the Public Interest Advocacy Centre, said there is a good chance rates would rise. "We've seen where there is an effective duopoly now in broadband between the two local telephone companies that there's not much difference in the service price; both seem to follow each other in tandem."

    Tattva says “Who do these consumers think they are? If you want cheap wireless rates move to India. Cell phone service is so cheap that even the rickshaw drivers are busy chatting with their homies.”

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    Discovered in A History of Interest Rates by Sidney Homer is the nugget that in ancient Babylonia the Code of Hammurabi permitted the pledging of a wife against a debt.

    United States refiners may not have had to pledge their wives (whatever the appeal therein) but they have benefited from a crude oil loan from the US Strategic Petroleum Reserve. The goal is to iron out supply disruptions in the wake of Hurricane Ivan’s rampage through the Caribbean Sea and Gulf of Mexico.

    The fact is that Hurricane Ivan is hardly relevant as a price driver in the oil markets. Oil has been hot over the last year or so on the back of huge demand from the United States, China and Japan. In the absence of mitigating downturns in any major economic block production and refining capacity - if reports are accurate - are running at close to 100% capacity. That's why a storm and any other supply issues (Yukos, Iraq, which side of the bed Chavez wakes up on etc) are having a disproportionate impact on market psychology and the price of oil.

    Are these rises of the sticky and persistent variety that will crimp global economic growth, or worse? As Mr Rumsfeld might say, that's a known unknown. A known known, thanks to Northern Trust research is this: adjusted for inflation, and in 2004 dollars, the average price of crude oil since 1970 is $35.58. That's including the oil crisies of 1973-75 and 1979-81. Drop those and since 1988 the average price of crude has been $27.10. Take your cue from that and the inflexibility of the laws of demand and supply - it's only a matter of when and by how much production and refining capacity expands to meet demand.

    Finally, back to Babylonia. In the event of a debtor defaulting, his pledged wife could be seized by his creditor. However, Hammurabi's Code demanded that she be treated well and be returned after three years in as good a condition as when she was taken. Hmm.

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    MD writes:


    Tesco reported another sparkling set of results this week and they do look like they now have critical mass, much like Wal-Mart in the US. One can assume that for at least the next 2-3 years they will continue to consolidate their position, as for example they were doing this week with the purchase of 9 Safeway stores from Morrison’s.

    So what about the rest? The jury’s out for Sainsbury’s – they should reclaim some lost ground as the favorite of the Middle Classes despite the steady progress of Waitrose. Why? Well, Waitrose is too expensive and they lose out in the smart suburbs where M&S have the Simply Food format. There is also a whiff in the air of a Sainsbury’s fight back: stores are beginning to show the benefits of investment – they’re cleaner, the trolleys work and the car parks are looking less of a shambles. As for the rest, Morrison’s will turn the corner with the Safeway acquisition and continue to (re) gain market share.

    What of the losers? Strangely (and against market sentiment) it may well be Asda, owned by Wal-Mart. The stores are dowdy, their ranges are at the cheap end and their previously effective "knocking" ad campaign looks to have lost its edge. All in all, they’ve gone quiet because the results haven’t been quite so good lately and they won’t beat Tesco - much as K-Mart can’t compete with Wal-Mart in the States. In addition, they will be pressured at the top end by Sainsbury’s and at the bottom by both Morrison’s and Tesco.

    It’ll be a sad day when car-making stops at Jaguar’s Browns Lane plant. Modern pundits like to argue that if the brand is strong enough it doesn’t matter where the cars are built. They say look at BMW and Mercedes who both successfully build cars in the US and elsewhere. Well, up to a point. What these arguments miss is that BMW & Daimler-Benz remain headquartered in Munich and Stuttgart, and they very definitely continue to make cars at their HQs (where one assumes the “je ne sais quoi” of a car, its DNA, resides). Poor Jaguar were saddled with the Halewood plant at Ford’s behest when they already had Browns Lane and Castle Bromwich and were producing comfortably less than 100,000 cars per year. What on earth did they need Halewood for? Miles from HQ to boot? As opined by the FT (23/9/04 edition), once landed with the huge fixed cost of Halewood it’s no wonder they’re losing money. Something had to give, and it’s Browns Lane.

    Still, we should not ignore the genuine strides made with Jaguar. When Ford bought them 15 years ago, they were struggling to produce 50,000 cars a year, quality was poor and the plant antiquated (editor: some Ford execs said at the time they had not seen similar factory conditions outside Eastern European). All this has changed. But unfortunately for Jaguar, whilst Ford revamped the range, they did not invest in a diesel. BMW and Mercedes volumes are impossible without them, however good the product. At the same time, Ford persisted in setting unrealistic targets. They also ignored that the German brands’ massive sales did not happened overnight – they are the product of continuous investment in product, marketing and a careful widening of their ranges and markets.

    Finally, let’s be very clear, Ford would love to shut up the manufacturing shop in the UK, and sooner rather than later. Successive UK Governments have shown a willful neglect of manufacturing (as well as R&D, science and pure research) which, together with increasing red tape, gradually results in the country no longer being a good place to do business in.

    Saab (GM)
    So GM needs to cut 3,000 jobs in Europe? The Saab plant at Trollhatten is apparently threatened despite having a significantly greater productivity per worker than the Opel plant at Russelheim (124k car with 3,200 workers vs. 141k cars with 5,400 workers).

    If Trollhatten goes then GM might as well write off the whole investment in Saab (see DNA above). One might argue that this should have happened years ago given that GM wanted Saab and then failed to make the necessary long-term investments. Yes, they have invested and heavily. But they never seriously said "where do we want to be 10 years from now and how do we get there?" What Saab has had are emergency injections of funds to support losses. And now, after 15 years of control GM is saying Saab needs to broaden the range if they are to achieve critical mass. Well ‘scuse me! But any fool could have told them that 15 years ago. GM just doesn’t get it!

    British Energy
    “Man bites dog!” Well not quite, but the board is playing tough with the hedge funds who now control what remains of the British Energy equity And about time too, some would argue. The hedge funds have had things too easy for too long – wanting the rewards of ownership (cash) without the responsibility.

    This saga continues to drag its way through the courts and some pundits say the shareholders are getting a rough deal. Well, maybe. But the British taxpayer is effectively bailing them out rather than leaving them with nothing. And do those same shareholders seriously expect 20-25% of the country’s energy supply to be allowed to go to the wall overnight? Get real. No, let’s give it another 5 years and then start turning the lights out gradually (witness the UK Gov’t view that we can do with nuclear and rely on wind farms). Much better that way.

    This contributor is considering investing a small amount in a stakeholder pension (editor: just how many pension plans do you now have?!”) and was astonished to find that he was required to identify himself in order to satisfy anti-money laundering legislation! Er, is it me? The only laundering happening here is of the poor sap that invests his funds only to find 20 years hence that they are worth half what he put in! But seriously - would a money launderer want or need a pension? And could he wait that long? As Homer Simpson would say “Doh! It just gets worse and worse!”

    Can’t think why, but those rocket scientists in the City are against DFS being taken private (at least at the price being offered by Lord Kirkham). One must assume that they have a suspicion that they’re being stiffed. The market allegedly only looks forward, so remove those rose tinted specs, lads. The shares at £4.52 are at a 52-week high. It’s a no brainer: Kirkham’s offering £4.89 - take the money and run! If the management and their bankers are foolish enough to want to take the company private, then let them. The furnishings sector is badly exposed to any petering-out (editor: collapse?) of the house-buying surge - shareholders might well rejoice at Lord Kirkham's efforts.

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    Source, AFX News - what he said: "Sure enough, our economy is coming back. Now, we're beginning to do very well and the outlook is good. Our economy has found solid footing and is certainly heading in the right direction."
    - US Treasury Secretary, John Snow

    Capital Chronicle - what he meant: "I'm a savvy political operator - recognise, please, that I have to say this in an election year."

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    In July when CC wrote its piece on Marks & Spencer's decline from proud British retailing icon to back-with-the-pack British retailer, it was argued that M&S no longer had the business model it rose to fame on and that its management appeared to be at sea. In that light, the offer of 400 pence a share from Philip Green looked fair. M&S management rejected this without putting it to shareholders, a curious decision which generated speculation about their motives.

    Yesterday M&S gave a sales update. The Daily Telegraph headline sums it up well - 'Appalling M&S sales anger its shareholders'. There is no reason to change the tenor of the original CC article. If anything, there are additional concerns - is a return of shareholder funds via a tender sound business sense, or merely a device (now become an albatross) the board adopted during the takeover battle in order support the share price?

    Hope otherwise, but expect a full take-up of the tender and, in due course, more hefty payoffs substantially divorced from performance.

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    Funny things polls. Not always with explication, they can be all over the place, stretching the pollsters' credibility. But do gambling odds offer a more reliable guide?

    Don't bother entertaining this idea at a pollsters' convention. Pollsters go all out to find representative samples for their data and to statistically validate their methods. They are understandably pissed-off at people who don't like the results they produce. All they do is take a picture - it's not their fault if the data displease. Now they have to hear, heresy, that betting spreads might be more accurate?

    JM Keynes (rhymes with "brains" his father used to tell him) compared picking winning investments to a beauty contest - you don't pick the girl you think most attractive. You go for the one you think the others will vote for. That's what people do when their money is involved and it's reasonable to argue that odds thus reflect a candidate's "value" accurately.

    It's a cute idea. But what happens when the poll is seriously out of whack with the spread?

    Consider the most recent poll for Maryland, by Survey USA, which reveals a shocking deterioration of support for Kerry. The president is now tied with his challenger in a state that looked done and dusted for the democrats. On the face of it, a hard to believe change of trend, reflected by the spread for Maryland - Kerry to win 86-90.

    Now check out the Maryland Department of Labor. Maryland is the number one ranked state for job-creation over the last year. That factor will have the greatest influence on the election result by the reckoning of the model used by this website.

    Maybe it's me, but the possibility that the spread is lagging an obscure state dynamic deserves examination. Risk is low - it would be hard for the spread to punish a speculator from where it sits now.

    Ah, did I mention that Nader just got on the Maryland ballot?

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    The Choice
    Between a rock and a hard place? Cazenove is corporate broker (a legal requirement for quoted companies in the UK) to over 40 of the FTSE100 companies, and also to many other smaller caps. Despite its other banking activities this work is what its overall prestige and value sits on; and clients it brokers to are paying for its independence and ability to read financial markets.

    Unfortunately, even for Cazenove, brokering is not especially profitable in investment banking's scheme of things. Hence the search for capitalisation via a floatation, sale or partnership to get in amongst the bigger margins the global investment banks enjoy.

    A buyer or partner, on the other hand, looks at the Cazenove client list and sees a prime marketing channel for its large-margin product portfolio.

    A sale or joint venture raises a bit of a problem. How independent can Cazenove remain in its clients' eyes once Other People's Money is financing the firm's expansion plans? The very move may mark the moment of disintegration of its core appeal to all those clients it brokers to.

    No doubt David Mayhew has taken client polls the results of which may be of some actual comfort. John Kerry's been there too, but his future is looking less than assured right now.

    This part is best left to MD, a Cazenove shareholder. But perhaps that float idea wasn't so bad; and it would be a shame to make a dog's dinner of this decision. After all, Cazenove is very, very good at brokering - anecdotal proof is on offer at this unlikely source, the Alba Game Fishing website.

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    UK Equities: Jottings Update

    Saturday, September 18, 2004 | | 0 comments »

    So Banco Santander looks to be in the frame for an unopposed takeover. As predicted previously this is likely to be better for the UK consumer as choice is safeguarded, as are the employees. Savings required will be less (as no party has overbid) and there won’t be (m)any messy branch closures. So, rejoicing all round except in the City where "Investment" bankers are crying all the way to Corney & Barrow to drown their sorrows (on expenses) at their failure to con all the other proper banks into paying their outrageous fees.

    Northern Rock
    Silliest story of the week was the announcement from Northern Rock on Monday (13/9/04) that they had appointed Citibank as advisors (not that they were considering bidding for Abbey you understand – they're too small) but because “"t would be imprudent not to have advice at times like this". Citibank clearly saw them coming - to quote W.C. Fields "Never give a sucker an even break"!

    Corporate Excess
    So Sir Peter Davis is to get his fee, albeit slightly reduced and he does have to "earn" some of it by forfeiting the balance of the next year’s salary should he become re-employed. As we’ve said before it certainly beats working! Still, when asked for a quote it appears Sainsbury’s are pleased to be shot of him… when asked as to why he left they simply said: “He was dismissed!” Toot, toot!

    Intercontinental Hotels
    Well, well, a boardroom coup. What joy – the value destroyer North has gone. One assumes the management woke up to the fact under North there would soon have been no business left – except for a rather flaky franchise. The thing about hotels is that they are very cyclical – yes sell a few properties at the peak, but keep the cash to buy more (bigger and better on the dips)…and certainly don’t give it back in the form of a share buy back – this is real cash here! By the way, North’s previous record is questionable – he was one of the team (along with the collusion of the fee driven "investment" bankers) who destroyed Bass.

    Cazenove / JP Morgan
    So it seems that the boys in Blue may finally succumb to some fiendishly complex joint venture with J.P.Morgan. Frankly this ludicrous charade is unseemly and worse, unnecessary. If the franchise is really bust – as some allege – it is certainly not borne out by results. Further, if it really were the case they would have succumbed years ago.

    I see the first suit has arrived on Shell's desk from a group of litigious US lawyers. They allege that they have lost as a result of the "overbooking" of reserves. Eh? Excuse me, we won't know what has been lost for decades or even whether or not these were aggressive or conservative estimates. Butt knowing Shell, I'd plump for the glass half full view. Someone cleverer than me will also be able to establish quite clearly that the Shell share price now is in its normal range vs. its peers even now after the "scandal".

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    In the optimists versus pessimists debate over the state of the US economy neutrals ask just why are twin deficits supposed to be so threatening. With last week's (non-partisan) Congressional Budget Office projection that the federal budget deficit is set to hit $422 billion it's a topical question.

    Deficits are not always Bad. Budget deficits, for example, are generally Good when used as a short-term macroeconomic tool to stimulate a weak economy that has idle capital and labour capacity. Similarly, the current account deficit (at least, the trade element) is not automatically Bad. It's like any lender situation: if the borrower believes his investment will return more than his cost of capital, he has a leveraged investment opportunity. If the lender agrees, the transaction occurs.

    It tends to be sustained deficits that are Bad. In the case of the US, pessimists argue that demographics are likely to turn the current federal budget deficit trend - described by its friends as a Good short term stimuli - into something much Naughtier. That's due to more baby boomers hitting retirement and consequently jacking up the Medicare and Social Security budget requirements. Meaning, don't expect US debt sales to ease off any time soon.

    The pressure of such a persistent debt is that much greater, with the existing low domestic savings rate causing domestic investment to decline further. Concurrently, there is upward pressure on interest rates in order to attract the missing savings. That bites on investment at home although it does attract international finance. And it is that foreign financing that creates the link between the federal budget and the current account (see our article on some of the dangers of large current account deficits here).

    Uh, and that's about it for the good news. The bad news is that Europe and Japan have baby boomers too, and their governments run current account surpluses. They happen to hold a great deal of US debt and equity already (Federal Funds data show that net foreign claims on US assets are 21% of GDP), and are still buying. What happens if (really "when" as there is not much point saving madly beyond retirement) they, and/or their governments sell up to buy goods and services from China, India et al like the US is currently doing? What happens is that there will be an awful lot of US assets and debt for sale at the same time. And this brings us to an important non-economic side-effect of persistent deficits.

    Pure economics does not entirely capture one aspect of persistent budget deficits on financial markets - uncertainty. It is uncertainty that plays on the minds of creditors and investors reflecting their certain knowledge that the degree of political difficulty of adopting policies (read higher taxes and reduced spending programs) to right the ship is high.

    Faced with a glut of US asset and debt sales by fun-loving baby boomers the world over, buyers would be foolish not to recognise the dangers of the US federal government adopting a weak dollar inflationary policy in order to reduce the real value of its debt. Such an outcome might mean that buyers simply do not show up. The risk of panic selling increases. Dollar depreciation might loom together with markedly higher US interest rates. There could be knock-on effects on domestic confidence and investment.

    So the central question in the debate becomes will buyers of US assets and debt come to the point where they begin to back off. Pessimist says it's coming. Optimists laugh and call Charles Schwab.

    It may be true that the twin deficits are entirely sustainable in economic terms - the US is after all the largest and most dynamic economy in the world. The greatest danger for investors and creditors nonetheless remains the psychological pressure of the twin deficits on financial markets. And don't think your portfolio is panic-proof: when the police raid the brothel, all the girls get taken away.

    Well, at least for awhile.

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    "Single moms are a sacred thing - a real man wouldn't shop-lift the pooty". So said Cuba Gooding Jnr to Tom Cruise in the 1996 film Jerry Maguire and it is perhaps a fitting riposte to Governor Schwartznegger's amusing "economic girlie-man" references made during his Republican Convention speech.

    What the US economy needs (at least, one of the things it needs) is some fiscal restraint on the part of the federal budget. Unfortunately, what the electorate is getting are promises of tax-cuts from both candidates. The pooty is in danger of begin shop-lifted.

    Of course, there are major differences between campaigning and governing. Were Kerry to win, he might try to clean up the twin deficit mess since it was not of his making. But who ever heard of a candidate winning an election on that platform? With a Bush victory it is likely to be more of the same, and the President said as much at the Republican Convention.

    Since the previous Capital Chronicle (CC) update IGsport have seen their spreads move in favour of a Bush victory. The president is now at 275-283 in terms of Electoral College votes (259-267 last time with 270 required for victory); and the republicans are 60-64 to win the White House (50-54 last time with winning bets settled at 100).

    This represents an alignment of the gambling money with the political fundamentals, as applied by the CC model.

    Is there still value in the 60-64 spread line, this blog's previous recommendation? Yes, and perhaps a great deal if you believe that the Pentagon's announced intention last week to investigate Kerry's war record can only be very bad news for the democrats. Were it to emerge, or be successfully spun, that Kerry has embellished his service record the spreads will likely skew to Bush dramatically. For the democrats, it is tough to see where they can find a knock-out blow.

    There are other interesting spreads for both republican and democrat bettors. The mid-west battleground carries four particularly interesting lines entitled "Kerry to win":

    1. Ohio 33-38
    2. Michigan 64-69
    3. Pennsylvania 55-60
    4. West Virginia 35-40
    Ohio and West Virginia represent fair bets for Kerry fans. The former has lost jobs over the last year; and the latter is not natural republican territory nor has it seen any significant job growth in its dominant manufacturing-based economy. Polls indicate both are swing states. However, if Kerry continues to mismanage the war-record debate there is not a lot of point putting money here.

    For Bush, Pennsylvania is clearly a great bet. Over 36,000 jobs added since 2003 and the prospect of his challenger fading badly. Michigan is riskier with poor job growth on a manufacturing economic base in a state carried with a 5% margin by Al Gore in 2000.

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