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Nov 18, 2009
via Breakingviews

M&S makes smart buy from Morrisons

(Refiles on October 19, 2010 to add disclaimer for author’s personal investment.  Neil Collins owned shares in Marks and Spencer when he wrote this article.)

The market’s reaction to the defection of Marc Bolland from William Morrison to Marks & Spencer looks the right one. Morrisons has a fresh headache, and may not have internal talent of sufficient quality to plug the gap quickly. Meanwhile, Bolland’s record should give him the confidence to deal with the egos at M&S.

Nov 16, 2009
via Breakingviews

The FTSE 100 isn’t fit for purpose

“…and in London, shares were up. The FTSE100 index added 57 points to…” Thus do news readers round the world tell listeners what’s happened in the UK stock market. The index of the 100 most valuable British-listed companies is 25 years old, and showing its age. Increasingly, its fortunes have nothing to do with Britain.Next month, travel group Thomas Cook will be replaced in the index by a company you’ve never heard of, and can hardly pronouce. Into the alphabet soup that is today’s FTSE100 is coming Petropavlovsk. It will join Xstrata, Kazakhmys, Antofagasta, Fresnillo, Vedanta, Eurasian Natural Resources, Randgold and Lonmin as ingredients in the British benchmark index.They reflect the fact that London is the capital of the world’s mining industry, but none has more than a modest office in the UK, and their fortunes have no measurable impact on the domestic economy. They are in the index because the FTSE rules selects membership by market value, and as a result the miners are starting to dominate it. From just two representatives (Rio Tinto and English China Clays) in 1984, there will shortly be a round dozen.Despite its Russian name, Petropavlovsk has a better claim to be British than some of the other recent entrants. It has grown out of Peter Hambro Mining, the eponymous gold miner set up 20 years ago by Peter Hambro when he decided not to work for anyone else.Yet the same criticism is valid. In part, the transformation represents the consolidation of business; of the original constituents, half have been acquired over the quarter-century. The index itself has multiplied a little more than five times, but the value of the 100th stock has risen from 100 million pounds then to over 2 billion pounds today.Yet just as the FTSE eclipsed the FT30 share index in 1984, so we need a new and better benchmark today to reflect what’s going on in the UK economy, as opposed to what’s going on at the top of the UK stock market.Thanks to their size, BP, Shell, Vodafone, Glaxo and HSBC dominate the 100, but less than a quarter of their sales are in the UK.  Oddly enough, the answer is already there if we chose to look. The FTSE250 index is far more representative of the businesses that employ people in the UK and make their profits in Britain. It’s also comprehensively outperformed its bigger relative over the years. Yet somehow, it will never have the same clout with the newsreaders.

Nov 12, 2009
via Breakingviews

Who’s in charge? I am, says Bank Governor

British opposition leader David Cameron wants to scrap Quantitative Easing as soon as possible, but on Wednesday the Governor of the Bank of England signalled pretty clearly that it’s none of his business. If a Conservative government wants to control what the Governor called “the decision about asset purchases” then it will have to change the law.Cameron’s Conservatives are strong favourites to return to power in an election that must be held by next June.Asked whether Cameron could tell him when to withdraw the monetary stimulus, Mervyn King replied: “Not unless the arrangements for monetary policy and independence of the Bank of England change, and that’s up to parliament to decide. But given the current arrangements, then that’s a matter that we decide.”The Monetary Policy Committee always takes care to couch its comments on QE in monetary language, but printing money is not a policy that was envisaged when the current arrangements were enshrined in law. There seems little doubt that QE has had a dramatic effect; shares and house prices have had a wonderful six months, while commercial property seems to have turned from slump to boom with scarcely a moment between.The threat of deflation has faded, and on the UK government’s chosen measure, prices have not actually fallen at all. Even on the more objective measure of the Retail Prices Index, the biggest annual decline was just 1.5 percent. Wednesday’s Inflation Report from the Bank sounded almost complacent about the prospects of keeping CPI inflation close to its target of 2 percent.So it’s all a great success? Well, not exactly. A new paper from the Centre for Policy Studies worries that the Bank is straying too far from the remit of the MPC, and that QE looks uncomfortably like fiscal, rather than monetary, policy. In three previous examples where printing money was official policy to stave off British financial crises, there were parliamentary debates, proper legislation and continuing oversight of the process. Even so, two of the episodes were followed by rampant inflation.As author George Trefgarne points out, the latest version of running the printing press faster relies on a questionable interpretation of the Act supporting the MPC. There has been no proper debate, nor any clear line of accountability. The Bank Governor is allowed to make up policy as he goes along, punctuated only by light grillings from the Treasury Select Committee.This sort of enlightened autocracy may turn out to be the best form of government, but if King’s committee (there’s no doubt that he dominates the MPC) decides next year that QE must end, and that interest rates must rise sharply because this week’s inflation forecasts turn out to be wildly optimistic, it won’t be just David Cameron asking who’s in charge of the UK economy.

Nov 11, 2009
via Commentaries

Triple-A rated tripe from the ratings agencies

How the ratings agencies must love Stephen Lewis, the lugubrious economics guru from Monument Securities. He’s spotted that two views make a market, even in the whacky world of these bodies who must judge how creditworthy borrowers really are.Lewis points out that on November 3, a Fitch analyst fretted about China’s property bubble and the risks to its banks. Six days later, rival agency Moody’s decided to raise China’s sovereign debt rating from stable to positive.On November 6, Moody’s managing director of sovereign credit risk said that the UK was among the more resilient of the small but happy band of triple-A rated countries. Four days later, those party-poopers from Fitch warned that the UK was the most likely of them all to lose that coveted status.It’s unlikely that the Chinese care either way, with more dollars in their reserves than they can count, but Britain is another matter. Its government is between the Scilla of spending its way out of recession and the Charybdis of keeping the confidence of its army of foreign creditors. That’s why, as Lewis adds, the Fitch warning on the UK was the comment that grabbed the headlines.

Nov 9, 2009

Irene presses the snooze button on Cadbury: Neil Collins

LONDON, Nov 9 (Reuters) – Perhaps Irene Rosenfeld and her
colleagues had had such an exhausting weekend agonising over
what to do about Cadbury <CBRY.L> that they were unable to set
their Monday alarms earlier than 8 a.m. New York time.

Thus it wasn’t until lunchtime in London that her
colleagues at Kraft Foods <KFT.N> set off their
post-bonfire-night damp squib, formally committing the company
to the same indicative terms it first offered two months ago.

Nov 9, 2009
via Breakingviews

Irene presses the snooze button on Cadbury

Perhaps Irene Rosenfeld and her colleagues had had such an exhausting weekend agonising over what to do that they were unable to set their Monday alarms earlier than 8am New York time. Thus it wasn’t until lunchtime in London that her colleagues at Kraft Foods set off their post-bonfire-night damp squib, formally committing the company to the same indicative terms it first offered two months ago.The move starts the takeover clock, but the terms offer precious little chance of winning, while the banks will now need to be paid their commitment fees, and the advisers will be rubbing their hands.So far, Kraft has been anything but krafty. Despite having the advantage of surprise, the timing of the approach looks poor. A savvier operator than Rosenfeld would have produced some fizzy figures to support the share price, rather than last week’s rather curled-up cheese slices. Cadbury, on the other hand, has engineered some decent results, and has twitched its guidance up for the near future. It took only minutes for the board to roll out its preprepared “derisory” startement of rejection. In short, the first two months of what promises to be a long campaign have been wasted. Kraft may have demonstrated that it’s the only bidder in town, but surely bid-’em-up Bruce would have played this particular hand rather better had he lived. He’d certainly have got up earlier.

Nov 9, 2009

Banks bully, brokers bleat: Neil Collins

LONDON, Nov 9 (Reuters) – It’s just not fair. Those beastly
banks are snatching the bread from our mouths, chorus three of
London’s mid-cap broking houses.

“Taxpayer supported banks” (do they by any chance mean
Lloyds <LLOY.L> and Royal Bank of Scotland? <RBS.L>) are
strong-arming the clients of Panmure Gordon, Numis and
Evolution into steering lucrative rights issue underwriting
their way.

Nov 9, 2009
via Breakingviews

Banks bully, brokers bleat

It’s just not fair. Those beastly banks are snatching the bread from our mouths, chorus three of London’s mid-cap broking houses. “Taxpayer supported banks” (do they by any chance mean Lloyds and Royal Bank of Scotland?) are strong-arming the clients of Panmure Gordon, Numis and Evolution into steering lucrative rights issue underwriting their way.The trio are so upset at the sight of this lovely business disappearing that they have written to Paul Myners, the government’s Minister for the City, to complain about “anti-competitive behaviour.” It’s “stifling competition in the capital markets.” Anecdotal evidence from twitchy businesses in thrall to their banks suggest they are right.It’s not just the “taxpayer supported” banks who can see the opportunity. Switching lenders in today’s conditions is tricky, and both sides know it. Underwriting equity issues, as practised nowadays, is a wonderful business to be in. The days when the new shares were offered at close to the pre-issue market price are gone. Typically, issues are priced at as much as 40 percent below the price the shares should command after the issue.In other words, for the underwriters to lose money, the market value must be significantly less after the issue than it was before, despite the infusion of new money. The obvious answer is to dispense with underwriting altogether. If the story is convincing enough, the brokers should find enough support from investors.The brokers counter that a company in distress needs a prior agreement from its lending banks that they will support it after the issue, rather than simply pull the plug and take the new money. The banks will not agree without the issue being underwritten, especially if they get a slice of the fees. In one recent case, says a seasoned broker, three banks each demanded 20 percent of the underwriting fees, although they were careful not to take any sub-underwriting, which is where the work to find the buyers has to be done.This conflict is not new, but the way the banks are using their muscle is. The simple solution would be for Myners to read the letter (it’s short, Paul) and pick up the phone to the banks where the government is the dominant shareholder to tell them he doesn’t want to receive a follow-up complaint. Unfortunately, political life is seldom so simple. We have become used to bad behaviour from the banks, and they are unlikely to produce a pleasant surprise this time .

Nov 6, 2009
via Breakingviews

Shareholders bear the privatised pensions pain


It’s a long time since Cable & Wireless and British Airways were sold off by the UK government, in that helpful confluence of party ideology and the need for money that gave the world privatisation. Yet only now is the true cost of promises made to their employees a generation ago becoming apparent.On Friday, buried deep in its long, gloomy statement, BA revealed the latest state of its old, closed pension funds. It’s not a pretty sight, with an actuarial deficit of 2.66 billion pounds in one fund — more than BA’s market cap, and even this probably understates the gap. (The other fund is almost in balance). The triennial valuation is under way, and there’s not much scope for good news.The previous day C&W had produced some unconvincing guff about its much-trailed demerger, splitting the cable from the wireless, so to speak. We may struggle to see the point of severing the link, but if the management thinks it’s a good idea to cut the tie between the West Indies and Europe, then the legacy pension problem should not be allowed to stop them.In contrast to BA, C&W’s 305 million pound deficit is not life-threatening, although today’s C&W is generating almost no cash on its European sales, and Morgan Stanley questions whether the scheme trustees could sanction a break-up under these conditions.For both companies, the pension deficit has widened dramatically between March and September, despite the dramatic recovery in the stock market.The consolation is that the new figures may be no more accurate than the old, since they are derived from the actuaries’ black arts. Both companies have cut the discountrate, from 6.9 percent (BA) and 6.7 percent (C&W), to 5.4 percent, to reflect the fall in yields on investment-grade bonds.With the liabilities stretching out decades into the future, the present value is highly sensitive to small changes in this rate. The deficits would collapse should long-term rates rise significantly. Unfortunately, that would be a signal of deteriorating economic conditions, and hardly good news.Yet that’s not really the point. BA is now effectively a pension fund which runs an airline, and BT — another privatised business — is a pension fund with a telco attached. The managements of both are severely constrained as a result.In the public sector, whence these companies came, the bill for pension promises is just coming over the political horizon, and future governments will do everything they can to wriggle out of it. For the long-suffering shareholders in these privatised companies, there is no escape.

Nov 6, 2009
via Commentaries

Is UBS’s 8 million pound fine enough?

Not long ago, UBS was the pride and joy of its Swiss home. There it was, slugging it out with the big boys, and making a fair fist of joining the bulge bracket banks from New York.That was before it all started to go wrong. The banking crisis produced a loss of $52 billion, but much worse has been the reputational damage done in that most Swiss of financial services, the discreet management of private fortunes.The US authorities forced UBS to disgorge names of their citizens suspected of failing to pay enough tax on their hordes, squeezing a $780 million fine out of the bank in settlement.Set next to that, the 8 million pounds that Britain’s Financial Services Authority has just extracted looks derisory. On Thursday the FSA revealed that UBS clients in London had lost 42 million dollars through the misuse of their accounts. The method was simple and old-fashioned; the employees would make a forex trade, and wait to see whether it was profitable before allocating it to an account. Heads they won, tails the client lost.The bank has shut the stable door, and “deeply regrets” the affair (although not deeply enough to put a statement on its website). By 2007, when it took place, even the doziest compliance department should have long since ensured that this practice was impossible. Compliance at UBS was so fast asleep that they only woke up when a whistleblower told them. Bleating that the bank “has already taken full remedial steps” merely sounds pathetic.Fining companies for the sins of their employees is always problematic, since the shareholders are footing the bill. In this case, the FSA might have insisted that UBS pursue the miscreants through the courts. That won’t bring back the $42 million, but it would force the bank to wash its dirty linen in public, as well as discouraging others who might be tempted to cheat this way elsewhere.As it is, UBS is more likely to want to bury the affair with minimum publicity. A court case would cause even more of its valuable private clients flee to better-managed businesses, and who could blame them?.

    • About Neil

      "City Editor, The Daily Telegraph 1986-2005 City Editor, The Sunday Times, 1984-1986 City Editor, Evening Standard, 1979-1984 Director Templeton Emerging Markets Investment Trust plc, Finsbury Growth and Income Trust plc Passion: fly fishing (and wife Julia and seven-year-old twins)"
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