Reparation Time

1st October 09 – Reparation time

The anniversary of the collapse of Lehman Brothers seems to have cemented the surge in equity markets to a degree that company boardrooms plus advisors are hell-bent on repairing their balance sheets. A secondary influence is the ongoing squeeze of bank lending (see yesterday’s statistic on bank deposits with the B of E). The reparation is taking the form of rights issues and share placings. In one 48 hour period, no less than £3bn was gleaned from investors.

Overall, some £60bn has been raised in the UK market this year or is imminent. In order of magnitude the repairers are:-

• HSBC bank

• Rio Tinto mining

• Lloyds Banking Group bank

• Wolseley plumbers merchants

• Standard Chartered bank

• Liberty International property

• Songbird property

• Land Securities property

• British Land property

• 3i Group investors

• Barratt builders

• Hammerson property

• Yell media

• Redrow builders

Quite a list and highlighting the sectors worse hit particularly banks and property related (11 out of the 14).

But it is an ill wind. Guess what. The banks that advised and underwrote the cash call for just one of the above, namely Barratt, including HSBC, Lloyds Banking Group and RBS will collect £27m in fees. And, according to research from Thomson Reuters, banks have billed £455m in fees from the top 20 UK deals this year. Underwriting fees on right issues (was underwriting really necessary given the heavy discount to current share prices?) have increased from 1.5% to circa 4% before being passed on to sub-underwriters at about 1.75%.

Bank competition aint wot it used to be.

Contrary Goldman Sachs

30th September 09 – Contrary Goldman Sachs

Hardly had the little grey cells stopped bobbing up and down on the pound-to-euro parity prophecy trampoline than up pops Goldman Sachs claiming that currency investors have exaggerated the risk faced by UK banks from the credit crunch. Goldmans went on to say that the currency players had punished sterling because a high proportion of Britain’s overseas assets are in equities. But, they claim, this makes no sense due to global stock markets recovering strongly. Quite a contrary view.

Britain will transform itself from chronic over-spender to a global surplus country as the weak pound revives its export industry: so says a new Goldman report.

Ben Broadbent, the bank’s UK economist, said that the 20% slide in sterling over the past year was “enough to push the UK’s current account into comfortable and permanent surplus.” Such a durable current account surplus has not occurred in living memory. On the back of this theory, Goldmans issued an alert advising its clients to build up sterling positions. The UK economy was in better shape than it looked, with public debt likely to peak at under 80% of GDP – lower than either Germany or France. “The UK data continues to exceed the Bank of England’s projections on the upside. We expect interest rates to rise from next spring.”

One foundation for the positive currency theory is that the UK economy is already expanding at a 2% pa rate and inflation is “sticky” (a new adjective) compared with the rest of Europe. Consequently, Goldmans expect the pound to strengthen and not weaken against the euro over the next three months. It predicts a worth of 84 pence and not 90p as now or £1 as predicted by e.g. BNP Paribas.

As regards reserves for the next rainy day, the amount of cash held by UK based banks in their reserve accounts at Threadneedle Street has reached the equivalent of 10% of UK GDP (5% US, 3% Europe and 3% Japan).

Wow, what a relief.

More at www.jgwalkersmith.co.uk

Rents Backtrack 20 Years

29th September 09 – Rents backtrack 20 years

Due to the perceived global recovery in economic conditions and more specifically to a dearth of new developments in the City of London, new research by Knight Frank, the UK property agent, suggests that rents in the City will rise next year. Such an event would be ahead of the date of recovery feared until only recently.

Space in the City of London is now available at the cheapest rents since 1989 and in the West End since 1996. The agents found that concerns that there would be a major increase in businesses sub-letting unwanted space have been largely unfounded. The forecast is for City rents to rise by 4% in 2010 to £44 per sq ft to follow the 21% decline this year.

Specialists seem to confirm that the rent trough has been reached. Will Beardmore-Gray, head of City leasing said “The City has seen a marked increase in activity since its low point in quarter one. There is a definite upwards trend in activity emerging – it is certainly not a fresh boom, but it is a steady return to normality. The current wave of demand is partly driven by Asia-Pacific financial firms, like Bank of China, Daiwa Securities, Bank of Tokyo, Mitsubishi, Macquarie Group and Nomura. I see the City as benefiting from its status as a hub in the system of global trade.”

Of course, there may be an element of self-fulfilment in such research and opinion. Still, a base line reaching back to 1989 cannot be a bad starting point for a revival and one thing is certainly not pie-in-the-sky. Nomura, the Japanese bank, has agreed the largest rental deal this year, moving into the new Watermark Place on the banks of the Thames.

Come on banks and the rest of you. Sock it back to them!

The Paradox Of Thrift

28th September 09 – The paradox of thrift

“Any attempt to reduce consumption is likely to push down on output and hence household incomes. That could actually make it harder for households to increase their savings – known as the paradox of thrift.”

This statement is contained within the latest Quarterly Bulletin issued by the Bank of England. Because consumer spending accounts for two-thirds of total spending in the UK, household decisions on whether to spend or save have a major impact on the economic outlook in this, hopefully, emergence from the credit crisis.

The dichotomy is expressed by the Bank by saying that even if households saved as much as 10% of income, it would take nine years to bring wealth to the average of the last 20 years. That really is quite some paradox considering that spending led to the crisis in the first place. The two big factors quoted as most likely to lead to a reluctance to spend again at previous levels are:-

• Credit conditions remaining tight

• Job insecurity

The B of E’s bulletin does, however, find some helpful signs. Most financial asset prices have continued to increase over the third quarter of 2009 and conditions in bank funding markets have improved. Also, sentiment has allowed analysts to revise upwards their expectations for short-term corporate earnings. Equity prices continue to rise and as at today the FTSE is sitting at 5,133 a twelve month peak.

There is one final paradox. In the period July 24 to August 4th the B of E did not buy any corporate bonds after receiving no offers in five consecutive auctions. No sellers means no QE. No QE must mean there is enough dosh out there somewhere. Surely that is a trigger point. Even so, many people will be reluctant to spend again and not least the army of public workers.

Pound To Euro Parity

25th September 09 – Pound to Euro parity

Four euros for a small cup of black coffee seems quite a lot of money converted back to UK pounds. But that is what it cost this week in a small town in Germany. Two years ago at a rate of 65p to the euro, £2.60 would still have been steep and last year at 79p, even more so. But now, at about 91p, it is positively expensive.

I mention this not to gain sympathy, that can be left to the family with a few children in tow that have to eat, but because currency experts are predicting that the pound will reach parity with the euro within the first three months of 2010. The factor chiefly to blame is said to be the loose monetary conditions in the UK relative to the eurozone. In turn, the main cause of that looseness is debt, as commented upon yesterday.

Currency experts at BNP Paribas said “Sterling is likely to be the underperformer among the majors, despite a favourable global financial market environment, as the UK domestic picture is set to deteriorate with the fiscal/monetary mix in particular working against sterling.”

The big issue is that the eurozone is a major source of imports to the UK and a weaker pound makes such goods (many often just passing through) more expensive in pound terms and thus not helping when inflation times return. But, by the same token, the eurozone is the largest export market for UK businesses. Exported goods become cheaper to the buyer if invoiced in sterling and so on balance UK Ltd ought to come out on top (much to the annoyance of our German friends).

The cynical will say that this is all very well but unfortunately Britain’s export industry is shot to ribbons. To them I would reply that the first posh shop window we looked at in Rottweil help shoes. The shop was full of high quality shoes. Shoes made by Clarke of UK fame, the biggest shoe manufacturer in the world.

The moral to this story is, sell like there is no tomorrow to Europe, but tomorrow – do not go there.

Pearl of the week

“The European Union faces a quasi-existential crisis”

Mario Monti

Between A Rock And A Hard Place

24th September 09 – Between a rock and a hard place

The optimism of recent times could not last, at least not in terms of the balance sheet of UK Ltd. The total tax take in the five months of this fiscal year to the end of August 09 was 11.4% down on the equivalent period last year (the rock). Government spend on social benefits was 9.5% higher (the hard place). What are the consequences of this two-way stretch? In a word: debt.

The UK’s government borrowing is two and a half times higher that at the same point last year due to a record £16.1bn borrowed in the month of August 09. For perspective, this sum represented an increase of 63% on August 08 and it was the largest August deficit since records began in 1993. The UK has borrowed £65.3bn since the start of the financial year in April 09 compared with £26.1bn in the comparator. How would you feel if your personal borrowings mirrored these percentages? Try to feel it for the nation, your children will.

John Hawsworth, head of macro economics at PricewaterhouseCoopers, said “The figures confirm the dire state of the public finances. It seems likely budget deficits will overshoot Treasury forecasts not only in 2009/10 but for some years to come, resulting in pressure to tighten fiscal policy by more in the medium term than the Treasury’s Budget plans suggested.” He estimated that Government borrowing could reach as much as £200bn in the full fiscal year. Jonathan Loynes at Capital Economics went further by thinking that there would be an overshoot in the Treasury estimate of £50bn to reach a staggering sum of £225bn.

That the Bank of England is on the other end of this borrowing by printing cash to gobble up the gild-edged securities issued to effect the borrowing is hard to fathom since broad money supply in August 09 grew by just 0.1%.

A rock, a hard place and a dollop of QE. Quite a witch’s brew.

Barclays Are At It Again

23rd September 09 – Barclays are at it again

My favourite maverick bank, that can only be Barclays (please read my earlier entries in this diary or think back to the TV documentary on the collapse of Lehman Brothers in which the boss of Barclays, Bob Diamond – an American – played quite a starring role) have pulled another flanker.

Britain’s second-largest bank has “sold” £7.5bn of its riskiest assets to a new company called Protium (the most common isotope of hydrogen) Finance. The new company is registered in the Cayman Islands and will be run by two former Barclays investment bankers and 43 colleagues, all of whom have resigned from Barclays Capital on completion of the deal and will charge Barclays $40m annual management fee, including office costs. If this all sounds somewhat surreal, then that is probably because it is.

The detail of how Barclays pulled off this deal are complicated but very interesting and may provide a blueprint for similar transactions in the future and not necessarily linked to Barclays toxic assets. Barclays has provided Protium with a 10-year, $12.6bn loan to buy the assets. The sale allows the bank to “derecognise the assets” by shielding it from any further falls in their “mark-to-market” value. Ian Gordon of Exane BNP Paribas said that the deal will provide “a boost to its capital strength by punting the issue into the long grass.”

The loan from Barclays to Protium is unusual. It will earn interest at 2.75% above the US inter-bank rate. This interest (which could accumulate to $3.9bn over the 10 year life) will be paid after investor returns. These investors, as yet unknown, are injecting $450m to earn 7% a year.

So far as I can see, the transaction will remove volatility from Barclays’ balance sheet, but the bank’s regulatory capital will not be changed until the loan is repaid on a gradual basis.

All seems like a return to the old days. Have the bad assets gone away?

Selecting Reverse Gear, US Style

22nd September 09 – Selecting reverse gear, US style

The motoring theme has tended to dominate this diary in recent times (and the Canadian Magna outfit with its Russian supporters has finally won the Opel/Vauxhall stakes) but this reverse gear has nothing to do with driving. Rather it is about money supply.

One of the biggest crutches applied to the US financial market following the collapse of Lehman Brothers a year ago was a $2,500bn guarantee for the money market mutual fund industry. This guarantee is to be allowed to expire on schedule this month. In addition, there is to be a review by the Federal Deposit Insurance Corporation that is likely to lead to funding guarantees for banks either to end completely or be restricted to emergency cases.

Tim Geithner, the US Treasury secretary said “As we enter this new phase we must begin winding down some of the extraordinary support we put in place for the financial system. We must continue reinforcing recovery until it is self-sustaining and led by private demand.”

Commentators think that whilst the timing of the strategic shift towards pulling back support is symbolic, it is a fact that US banks have repaid more than $70bn of the emergency bail-out funds. It is estimated that a further $50bn will be repaid over the next 12 to 18 months. The size of the Federal Reserve emergency fund loan programmes has diminished greatly with commercial paper funding facilities down 87% from the peak and the cash auction scheme down 57%.

Only time will tell if these first reversals of the emergency moves last year will prove to be timed correctly or be premature. Certainly, initiatives to mitigate home foreclosures and increase available credit to small businesses is continuing. Professor Tim Congdon referring to bank loans in the US falling at 14% in the quarter to August 09 said “The rapid destruction of money balances is madness.”

Money Magic

Money magic

The illusion starts with my daughter-in-law explaining how she got £300 worth of wine for “free”.

Julia and I do not normally shop at Tesco, primarily since if time is worth spent physically shopping as distinct from on-line, then one might as well spend plenty of money. Therefore we go to Waitrose.

Nevertheless, having bought a new TV set on-line from Tesco due to the offer of a free installation of Sky (a deal pointed out to me by my son), we received “points” that themselves turned into vouchers with a value. We also got a little colourful booklet entitled “How to double up your vouchers on all this and more”. Page 2 of the booklet explained a 4-stage process:-

• Choose the department you want to spend your rewards tokens in

• Decide where you want to use your tokens (in-store, wine by the case, Tesco direct or grocery delivery charge)

• Decide how many Clubcard vouchers you want to exchange

• Take your Clubcard vouchers to the Clubcard desk at your local store, where a customer service assistant will exchange them for double up rewards tokens.

“Make sure you don’t go straight to the checkout as your vouchers cannot be doubled up there.”

Seems simple enough if unduly complicated. The customer service assistant has a face glowing with rouge and bonhomie and explains that my £10 voucher can be doubled up – no problem there. My £5 voucher can be doubled up – no problem there. But, my £4 voucher cannot be because it is less than £5. Therefore she can turn £15 into £30’s worth of rewards tokens and I can use the £4 just as a straight voucher discount, understand? Yes I think I have it and please proceed.

Clutching my 3 times £10 rewards tokens tightly in a sweaty hand (still thinking about what the customer service assistant will be doing after her shift ends) and putting the £4 voucher in a safe pocket, I proceed post haste to the wine section. What my daughter-in-law had explained is really true. There are shelves of wine at half price (that is how £300 worth was obtained with just £75 in vouchers – get it?). However, my eye is caught by a 3 bottles for £10 offer. Seems too good to miss and so I choose two separate white wines and grab 3 of each.

To insure against the 3 for £10 stuff not being up to quality standard, I then spot a marvellous New Zealand Marlborough that will have previously been priced “at some Tesco stores” at £9.99. It is now half-price at £4.99 (we can forgive the odd half-pence error). I go for 2 bottles thinking that I have more or less spent the £30 rewards tokens (6 bottles from 3 for £10 and 2 bottles at a fiver each).

About to leave the wine counter, I suddenly remember the £4 voucher. Nearly made a mistake. I grab thankfully a lovely Isla Negra Chilean Chardonnay at £3.99, half price. That should just about do it. On the way to the checkout I collect 4 large potatoes for tonight’s steak dinner and a large jar of Nescafe coffee priced at £3.

I enquire of the checkout assistant if she wants the rewards vouchers and the token before of after the checkout routine (must not make a mistake at this stage as I recall the threat note below the 4 options outlined in the booklet). She confirms “at the end” and wants my Tesco clubcard to award more points for this purchase basket. Amazing really.

The net cost to me, and I have studied the till roll now for over half an hour and am still no wiser on how it happened, is £2.08. What I forgot to mention was that the jar of coffee is for our local village hall of which I am chairman. The £3 mentioned on the till roll will be reimbursed to me by the treasurer.

In conclusion, I bought from our local Tesco 9 bottles of good wine, 4 large potatoes and a large jar of coffee for -92p. Can anyone beat that? First thing Monday morning I intend to dump my Tesco shares on the basis that the purchase of a TV was a one-off, my wife will still shop at Waitrose and the world has gone completely and utterly mad.

Jgs -20 September 2009

Banking’s Bigger Buffers

21st September 09 – Banking’s bigger buffers

For the second time, this diary can capture the deliberations of a bi-annual meeting of the finance ministers of the G20 group of nations. The main outcome of the decisions taken this time around is that banks will have to maintain bigger buffers under the new framework now agreed, once the financial crisis has passed.

Unlike the US and UK’s banking capital provisions, those of European mainland banks have buffers made up of so called “hybrid” securities that are more like debt than equity. Analysts believe that some European banks have met as much as half of existing regulatory requirements on capital buffers this way. Bernd Brabander, MD for economic affairs at the Association of German Banks said that proposals to cap the overall level of debt that a bank could hold in relation to its size, could put European banks at a competitive disadvantage.

Another principle established at the latest meeting of the G20 was that complex financial institutions should develop “living wills” to plan for their unwinding. Thirdly, banks will have to retain some portion of the loans they repackage and sell as asset-backed securities.

Bernd Brabander also said of the new proposals “The bit about leverage ratios really makes me a bit nervous.” Having just passed the anniversary of the collapse of Lehman Brothers, that must be the jaw-dropping mollification of the decade.

Motoring From US via Sweden to China.

18th September 09 – Motoring from US via Sweden to China

This is a credit crunch tale that started way back, is still motoring and may yet take an unexpected turn. It is anchored on the data that Chinese car sales surged 90% in August 09 year-on-year. For the whole of 2009, sales of vehicles in China could reach 12 million and if so, it will attain the top spot as the world’s biggest auto market, taking the crown from the US.

This diary has reported earlier about the impending fate of the quality, design-led Saab marquee on the back of the demise of the US’s General Motors who drew the brand away from Sweden some years ago. Now it could return home. A Swedish “supercar” maker called Koenigsegg is on the cusp of buying Saab via a consortium. The consortium includes Beijing Automotive Industry Holdings. And this is where the circle forms.

GM, newly emerged form Chapter 11 bankruptcy, is doing very well out of the Chinese vehicle sale boom using its joint ventures where sales are up 40% this year. So, GM ditches one to benefit with another. But, that is not the end of the Swedish tale.

Ford owns Volvo, the second and more safety conscious if less designer Swedish brand. Where is Volvo being driven? You guessed it, China of course. Geely Automobile Holdings is apparently working with Chinese state investment companies on a bid for the whole of Volvo. Volvo manufactures in both Sweden and Belgium but the US is its biggest market.

The draw back of big luxury cars in the US is not a problem for the emerging middle-class of China. The real evidence for this is Buick, retained by GM but now sold to those affluent Chinese gentlemen.

US to China via Sweden seems an improbable outcome of the credit crisis, but it could happen.

Pearl of the week

“Customers want a choice, they do not all want small cars – and neither do they all want big cars.”

Ian Robertson, BMW’s head of sales

GM Europe Still Not Sorted

17th September 09 – GM Europe still not sorted

It seems ages since we wrote about the Canadian/Russian solution to how General Motors would off-load its European business featuring the marques of Opel and Vauxhall. But, having successfully passed through Chapter 11 bankruptcy in it home US territory, GM has not managed to pull the deal off.

Talks between GM (chief negotiator is John Smith) and the German government have stalled notwithstanding the Germans putting up 1.5bn euros as security. From a UK perspective, this leaves the 5,000 Vauxhall workers still in no-man’s land. The spoiling factor has been a rival bid from RHJ International, the Belgium investors. This bid has been finally rejected by the German government since it prefers the original deal with Magna of Canada and its Russian banking investor.

Intertwined with the commercial case for resolving the future ownership aspect of GM Europe is a political one. Germany goes to the polls in late September and obviously the question of jobs is key especially during these hard times for employment. The original deal was likely to save most jobs. On the other hand, the Americans are worried about the risk of technology transfer and future competition from Russian interests. It is no coincidence that the re-born Chrysler business is currently aiming a small car at mainland Europe.

GM would appear to have three alternatives with its European business:-

• Agree a compromise with Magna (the Canadians)

• Refinance Opel and Vauxhall

• Restructure the business through some form of insolvency.

The back rooms are likely to be buzzing at the Frankfurt Motor Show which starts today. If the German government decides to up-front the whole finance for Magna, the US and UK administrations are likely to have a headache whether tea or German beer is consumed in those back rooms.

Out In The Cold – Still.

16th September 09 – Out in the cold – still

Iceland with its funny banking system and outrageously entrepreneurial businessmen was the first economy to slide down the credit crisis pan. It was not just latitude that made that remote island so cold, and it remains out in the cold.

Data just released shows that Iceland’s GDP shrank by 6.5% in the quarter to June 09 compared to a year ago and, indeed, fell by 2% in the quarter alone. The country’s central bank has forecast that the economy will shrink by 9% this calendar year and as contributory factors, household spending will be down 19.7% and fixed investment will collapse by 48.4%. These are big, big numbers for any sovereign state.

Icelandic interest rates still hover around the 12% mark and controls still stop capital from flowing outwards. The IMF had to bail out the country with a $5.1bn aid package and three of its leading banks, Glitnir, Landsbanki and Kaupthing all failed.

Many of us can remember the somewhat surreal “cod war” when little Iceland actually went onto the offensive against the UK in an attempt to expand the territory of its greatest fishy asset. Now the Icelanders, who previously enjoyed an extremely high standard or living, have something even more fishy on their hands. There are 20 “suspicions of criminal activity” cases in process relating to the banking system. A leaked list of recipients of huge loans has not helped the confidence of Iceland, not least since the security taken is said to be dodgy at best or non-existent at worst.

In the early days of the credit crisis, Iceland complained about the use against them by the UK of legislation drafted originally to prevent terrorism. Assets were “frozen” and deposits placed with Icelandic banks had to be redeemed by the UK taxpayer. Paying this money back to the UK is a condition of the IMF support scheme for Iceland.

The only question in doubt now concerning how the UK reacted initially, is the definition of terrorism.

Down With Commercial Property

15th September 09 – Down with commercial property

One aspect of the credit crisis that has not been touched on so far is how commercial property has fared. In a word – badly.

The benchmark Investment Property Databank (IDP) Monthly Index peaked in July 2007. Since then, it has fallen by more than 35% and at a faster rate than in the previous property downturn in 1990/1991. For those largely conservative investors in this “safe as houses” sector things got worse. Many open-ended investment companies and unit trusts punters have been unable to withdraw money since funds could not sell underlying properties to raise cash to meet redemptions. Others, locked into closed funds, such as investment trusts, may be looking to take their money and depart the scene.

However, there are signs that the worst is over and the performance of property shares has often been a leading indicator of change. Since March 09, the FTSE Real Estate sector has gone up by more than 50% and property companies have started to raise funds to allow them back into developments and to take advantage of distressed sellers. And, there is one most important factor bringing the commercial property market back to life.

Foreign, often sovereign, funds have begun to weight up “trophy assets” in the UK and specifically London. Last week, China and Qatar invested in Canary Wharf and an Asian consortium is thought to be interested in bidding for British Land the second largest property company in the UK. Now, the National Pension Service of Korea (NPS) says it wants to invest in “landmark” London office and retail properties.

So, commercially speaking, what went down must come back up even if in the most unlikely of places. Who would have thought it – South Korea

Buyers Back In Business

14th September 09 – Buyers back in business

There is a highly respected index that has pretty much universal recognition. It measures whether purchasing activity and therefore factory output is expanding or contracting. The break point being 50. In most countries it is known as the PMI (purchasing managers’ index) although in the US it is the index of factory output as issued by The Institute of Supply Management. For the UK, a combination of the PMI’s for different industrial sectors is regarded as a good indicator of GDP movement.

Just as the stock markets around the world appear to be saying that the worst of the credit crisis is over (see the diary entry dated 11th September), so PMI’s are singing the same tune. August 09 figures compared to July are reported as follows:-

• USA 52.9 (48.9)

• China 55.1 (52.8)

• Taiwan 55.0 (53.8)

• South Korea 53.6 (54.0)

• France 50.8 (48.1)

• Germany 49.2 (45.7)

There are countries that have not broken through the 50.0 barrier including the UK (49.7), Italy and Spain. In the UK, the index was dragged down by substantial job losses with the labour market contracting for the 17th month in a row.

Although the UK appears to be lagging behind the likes of the US and China, it is important to note that for the first time in living memory, the British saved more than they spent. In other words they preferred to pare down debt rather than spend in the shops. This in turn helps the lenders repair their balance sheets.

Who can remember Aesop’s fables? The tortoise won the race. Slowly get better. Go out and spend later.

The Really Big Picture

11th September 09 – The really big picture

Two days ago this diary covered the story of a resurgent UK stock market and gave passing reference to some global markets. Since then I have been searching for a really big picture to reinforce a view that the credit crunch crisis is actually turning the corner on a global scale.

What I have found is the Morgan Stanley Countries Index (MSCI) World Index. This index tracks the composite of 22 component stock markets, alphabetically starting with Australia and ending with the USA. The vital factor is the moving average and specifically the 50 day and 200 day. The graph starts in January 98 and progresses quarterly.

The theory is that when the 50-day moving average rises above the 200 day one, equity investors have good vibes and when the opposite occurs, it is time to sell. Looking back at the two trend lines, one certainly could have done worse than to follow this rule doggedly. From January 98 to October 00 the signal (with one exceptional quarter) was “buy.” From then until June 03 it was a “sell” phase. But then the lines turned again and one would buy equities until February 08 (recall that that was the boom phase) before getting well and truly out of the markets until – guess when? August 09.

Anyone actually following the graph closely would have spotted the 50 day line turning sharply upwards from March 09, when of course the rally started. The big message though is that the time to buy equities on any of the 22 world stock markets has returned. Furthermore, the indexes that monitor buying activity support a view that the worst is over (see entry to come dated 14th September).

Pearl of the week

“The majority of cars made in the UK are exported abroad.”

Angela Monaghan reporting in the Daily Telegraph

Reasons To Be Cheerful, Part 3

10th September 09 – Reasons to be cheerful, part 3

In my continuing quest to be cheerful, I have found something. Not much, but something. In the second quarter ended June 09, the UK GDP did not as reported earlier fall to -0.8%. Rather it fell to -0.7%. I did say it wasn’t much!

The reasons for the betterment were said to be:-

• A 0.8% rise in government spending (that is better!!)

• The success of the “cash for clunkers” car scrappage scheme

• More manufacturing output

• More energy extraction and supply

• A positive contribution from net trade as imports fell more than exports

The Society of Motor Manufacturers and Traders (SMMT) supplied figures showing that car and commercial vehicle production increased 38% between May and June 09 noting that the majority are exported. Still trying to be up-beat, taken on an annualised basis, the UK’s economy has proved more resilient than for Japan and Germany since their GDP has fallen more.

As reported yesterday, those driving the FTSE 100 liked the news and sent the leading index up 6.5% in the month of August alone closing at 4909. Reaching a psychological 5,000 could trigger more cheer.

What else can we find? Most commentators think that UK GDP will return to positive territory in the third quarter. Whoopee. If that happens, it will be the fourth reason to be cheerful. But best not get carried away.

Reasons To Be Cheerful, Part 2.

9th September 09 – Reasons to be cheerful, part 2

Since the diary entry of 14th August (the worst is over) things economic have spiralled downhill. But, unless my faithful friend the UK stock market is leading me up the garden path, there just has to be some reasons to be cheerful to build on the indicators set out in that earlier item. After all, the FTSE 100 is up 38% since early March and yet has 20% further to rise to reach the point it was at just one year ago. The stock market looks forward. Can we find pointers to its optimism?

We can think about contrarian investors (a definition of which can be found elsewhere on this website). A contrarian might look for two flashing green lights. First, experienced investors holding record levels of cash. Secondly, private investors being extremely pessimistic. According to Alan Steel, chairman of Alan Steel Asset Management Ltd, a survey some six months ago showed that experienced investors had the highest level of cash on the sidelines at 45% (almost exactly mirroring my own position). This figure compared with 11% in the late Nineties just before the dotcom bubble burst. The moral is – low cash equals euphoria and high cash extreme pessimism. Two weeks ago, cash levels had fallen to 25%.

Most of the cash used in the latter part of that six month period to end August 09 went back into equities. What this means is that for private investors in the market, the extreme pessimism had turned to something approaching a dismissal of all the economic indicator woes. Furthermore, global economic indicators do support a view that the worst is over. For the first time ever, all 39 countries’ composite leading indicators recorded monthly increases. The aggregate increase is the highest since records began 47 years ago.

My personal shares portfolio is up 21% in the last three weeks. I am determined to be cheerful. What else can I find?

Business Investment Down The Pan

8th September 09- Business investment down the pan

The Office for National Statistics (ONS) has reported that business investment fell by 18.4% in the second quarter of 2009 compared to the same period last year to stand at £29.9bn. The result represented the largest annual decline since records began in 1965. Yesterday this diary highlighted the plight of the manufacturing sector and of course, the two subjects of failures of businesses that make things and investment by businesses are entwined.

The ONS cited the unsavoury cocktail of falling profits, poor credit availability, the high cost of capital and weak company liquidity as causal factors for the fall-off of new investment. While the reduction in investment was broadly based, it fell particularly sharply within private sector services and construction.

David Kern, chief economist at the British Chamber of Commerce, commenting on the figures said “The further sharp decline in business investment signals serious threats to Britain’s long-term recovery. In the face of weak demand and mounting financial pressure, businesses have little choice but to cut investment and stock. Unless this trend can be reserved, the long-term productive capacity of the economy will be damaged, and the country will lack the necessary capital stock to sustain a recovery….”

Such fine words from Mr Kern but to state the obvious is one thing, to effect a reversal, quite another. We could always champion key high quality business sectors, form a national bank and make it invest in those sectors rather than print money to buy back Government debt. Make any sense?

Manufacturing More Woes

7th September 09 – Manufacturing more woes

The manufacturing sector amounts to 13% of the British economy and still employs 2.6 million people. Compared to a year ago, production is down 10%.

Manufacturing businesses that have fought to survive during the recession are on their last legs and 2,460 are expected to fail this year. A report by accountants BDO Stoy Hayward and the Centre for Economics and Business Research (CEBR) puts this figure as a forecast to compare with 1,600 failures in 2008 (up 54%). The average number of failures in the decade 1997 to 2007 was 1,263 so that if the forecast number materialises for this year, it will represent an increase over that ten-year period average of 95%.

Richard Snook, the senior economist at the CEBR, said “Business failures, like unemployment, generally lag the recession because businesses hang on as long as they can, but in many cases they run out of money.” How sad, how true. According to the Engineering Employers Federation, almost two-thirds of companies have frozen pay to avoid redundancies and cut costs as they fight for survival during the recession.

As has been noted earlier in this diary, it had been expected (hoped) that a weaker pound would boost exports of UK manufactured goods but so far there has been no real pick-up. As we have learned during the course of the last nine months or so, those developing economies such as China, have counter-balanced a drop off in exports with huge internal stimuli programmes of infra-structure capital projects. This has not happened in the UK where monetary policy has been adopted in the hope that eased credit channels would lead to self-help.

So far the only self-help seems to be one-way traffic. One way to the high-street bank.

Looking To The Future

4th September 09 – Looking to the future

If we have turned the corner in the credit crisis, the question inevitably arises as to what can be put in place to avoid a repeat performance. The deputy governor of the Bank of England has been putting his mind to this and had some thoughts for a conference held in Barcelona.

Charles Bean referred to a “tumultuous” two years for the global economy and went on to say that “pre-emptive action” would be needed to cool future credit and asset price booms. “We have seen the eruption of a systematic financial crisis of quite unusual intensity and international reach. The nearest precedent is probably the widespread closing of international capital markets on the eve of the First World War.”

Mr Bean had two proposals:-

• The introduction of pro-cyclical capital requirements for banks. They would be required to build up extra capital during a credit and asset price boom and which could be run down in the event of a bust

• Increase the risk weights attached to lending when calculating how much capital a bank requires.

Placed in an historical context, Mr Bean proffered this view, “In all probability, the Great Panic and the Great Contraction of 2008 will join the Great Depression of the 1930’s and the Great Inflation of the 1970’s as discipline defining events.” One other constructive thought was that such financial crises should be treated as a central feature of capitalist economics and factored into economic models accordingly. They should not be explained away as “pathologies that happen at other times or in other places.”

Not one to overstate the case, the deputy governor also told the conference that the initial response to the B of E’s QE programme had been “moderately encouraging.”

£175bn sounds a lot of money for moderation.

Pearl of the week

“You have a financial system that creates products which at one level help you to hedge volatility but which can also be used in ways that create more volatility. I don’t know whether that means the world would have been better off without any credit default swaps, or simply some”.

Lord Turner of Ecchinswell – Chairman of the FSA

Stock Markets Saw It First

3rd September 09 – Stock markets saw it first

This diary has been remiss in not reporting sooner how the author’s favourite baby has been growing. Stock markets (a brief history of the UK one can be found on the main website) look forward. They are disinterested in history and have only a casual relationship with the present. Corny perhaps, but true.

Yesterday we dealt with the emergence from a hole. Actually it was follow-my-leader. The FTSE 100 is up 40% since the nadir of March 09 and enjoying its strongest summer run in 25 years. For we close-watchers, the surge has started each trading day with the Far East. This is due partly to timing, i.e. where the sun rises first, and partly to the lower impact the credit crisis has had on Japan and China. As this piece is being written, the Nikkei is closing up 3.4% and the Hang Seng is up by half that percentage. In fact anyone betting on the Chinese stock market this calendar year can now go out and buy up all those vacant apartments/flats on those desirable water-side complexes.

Markets are global and what starts in the Far East is repeated at a slightly lower key in Germany, France, the UK and then the US as the sun moves Westward. Talking of betting on China, Simon Denham, MD of spread-betting firm Capital Spreads said “With yet another month almost over (sic) without some horrendous thing going wrong, I suppose it is natural that more and more of the fence-sitters are tempted, finally, to dip a toe into the water.”

It is worth saying too that the recovery in equities is pretty much across the board. I have a portfolio centred largely on “yields” since liquidating some two years ago. The stocks therefore are mainly on the conservative side. Even so, in the last three weeks the value has risen by 21%. All I need now is a further 26% and I have my money back!

In A Hole, But Emerging

2nd September 09 – In a hole, but emerging

Hollywood could not have script it better. They met in a hole. Jackson Hole, Wyoming as it happens. In this most aptly named of towns within a rocky cowboy state, Ben Bernanke, chairman of the US Federal Reserve, told leaders of the world’s central banks that “Prospects for a return to growth in the near term appear good.”

On this side of the pond, Kenneth Rogoff, Harvard professor and former chief economist of the IMF voiced his opinion that there was “no question the global economy is healing and emerging from recession.” Furthermore, according to a German purchasing managers’ survey, business confidence in August hit its highest level since January 2006 and led to Klaus Baader, chief European economist at Societe Generale to utter the immortal words “The recession is over.”

So there we have it then, the world has emerged for its (Jackson) hole.

But what about the UK specifically? Our man in the frame, namely Mervyn King, Governor of the Bank of England, is more head-scratchy and cautious. He is focusing on the threats that remain and emphasising that even if recovery has started, the major tests lie beyond 2009 when stimuli are unwound and consumers have lost their appetite to spend. He backed up his caution by wanting more QE than he got at the last meet of the Monetary Policy Committee.

In many ways the apparent conflict of view between those in the hole and those in central Europe with the UK, is not conflict at all. It is more an issue of emphasis. Things may not look as bad as they did, but we still have to pay for the rescue. We still have to emerge from the hole.

Chelsea Have Done It Again.

1st September 09 – Chelsea have done it again

In the early days of this diary, I wrote a scathing piece on the Chelsea Building Society. It was triggered following my research into the revelation that Chelsea was amongst those who had done business with the Icelandic banks. Remember that it was the lack of standards within the Icelandic financial system that was one of the first stories to break once the era of credit crunch had dawned.

My interest was personal having a good sized deposit with them. I pawed them on a number of fronts:-

• The Icelandic escapade

• Turning to the wholesale money market in hot pursuit of Northern Rock

• Suffering substantial write-downs

• Having to pay exceptionally high rates to attract new deposit money

• Paying the directors bucket loads of dosh

• Not being in, or anywhere near, Chelsea.

What I didn’t know at the time, since it has only just been uncovered following a review by accountants KPMG, was that the Chelsea has been hit by an alleged fraud during the period 2006 to 2008. Stuart Bernau, the new Chairman, has said “Obviously it’s criminal activity. We have insurance and will try to recover what we can but I’d rather we were up front with the charge.”

In the six months to the end of June 09, the society reported a £26m loss. The main cause of this loss was a bad debt charge of £53m and the main part of that arose from its buy-to-let book where the mortgage fraud is suspected to have occurred. Mr Bernau stressed that there is no suggestion that any Chelsea employee committed fraud, but did admit to “questions about our lending policies.”

Just a few weeks ago, my one-year bond with Chelsea matured having paid out 6.75%. A staggering rate of interest in the current climate. I declined the offer to renew and placed the cash elsewhere.

One other thing I did not know earlier is that the society was founded in 1875 as the Camberwell and South London Building Society. I bet the Victorians felt comfortable with that working-class sounding solid name that would lend out from the deposits it had taken. Thinking about the founding fathers, the words “turning” and “grave” spring to mind.