Friday, 29 February 2008

Friday Freude

Careful where you get your policies from, Madam

The week ends on a great note with a major victory in the EC’s battle against the big European energy companies seeking to retain their de facto monopolies on supplying small customers. One of the largest, E.ON of Germany has at last agreed to divest its electricity grid from its electricity generation and supply business - ‘unbundling’ in the jargon. This has been shown in market after market to be a vital step in the introduction of true competition. It is one which the old British Gas took voluntarily over a decade ago when it separated into BG plc, Transco and Centrica, greatly to the benefit of the UK gas market - and of its own shareholders, as the unbundled value of the company proved to be greater than when it was integrated.

Significance for the UK is that until the continentals open their markets, (particularly for gas) we will be at the mercy of (e.g.) spikier marginal prices on cold days and other market-distorting inefficiencies, that all add up to boost our prices unnecessarily. E.ON's move is a step in the right direction.

Are we allowed a little Friday Schadenfreude ? When still in “no way” mode E.ON, which has huge political clout, lobbied the German government to line up against the EC; and Merkel duly formed an unholy alliance with Sarkozy (at his nationalistic worst on this kind of issue) and 6 other refusenik countries to resist Competiton Commissioner 'Steely' Neelie Kroes. Merkel is not best pleased now to find herself undercut by E.ON. There’s a lesson here, Madam …

Oh, and gold at a new record price too. Extra flowers all round for Mothering Sunday – and a good weekend to everyone !


Thursday, 28 February 2008

Northern Rock opinions

Quick post - noticeable how Northern Rock is fading from the headlines now as the news cycle moves on.

However, last week's poll was how long do we think the NR will be under public ownership for?

Up to a year
0 (0%)
2 years
3 (6%)
2-4 years
8 (17%)
More than 5 years
34 (75%)

The result does not surprise me, even though no one thinks we will be shot of it by this time next year (I guess no one is doing the extreme testing of imagining the government being unable to fund continuing operations.....).

5 years is about right though as I see it. Even if the bank is sold to the private sector there will be significant Government backing for years to come; 5 years might be optimisitic!

Wednesday, 27 February 2008

Inflation warning

Over the last few months we have been warning of a sharp rise to come in inflation. Even Rachel Lomax at the Bank of England suggested as much just yesterday.

But a revised set of our own is due out later today. Here is the link to the data from last month on producer prices. These are the prices of goods as they are made, so this data provides the best leading indicator of where prices are going to go over the next quarter or so. Below is the graph from the ONS:

Note the large upward spikes starting last August. Generally inflation can take a year to 18 months to feed through the whole system. The second graph implies rising energy costs are the main cause, which may well be true, when you look at the graph below produced by EDF:

Note how the price is 87% higher for electricity than a year ago. EDF has raised customer prices by around 25% during in this time, so perhaps we have not seen the last of these price rises.

Finally, the other key energy component is oil, there is a great chart here from the excellent

Note the spike at the end and that oil prices have increased another 10% since the graph was last updated a month ago.

Finally, things are also looking bad for our friends across the pond, see this insightful piece in the Wall Street Journal that looks at precious metals prices too. there is a super graph too on what inflation really means to your income too.

Conclusion: We have mentioned stagflation before and now this is inevitable. What we are increasingly seeing in the numbers though is a much higher level of inflation than is currently being forecasted. Alistair Darling thinks 3% is unacceptable - we may get to double that before 2010. Don't count on interest rates falling much further this year and next year they will have to rise significantly - which will prolong the downturn/recession.

Tuesday, 26 February 2008

‘Sovereign’ means . . . Sovereign !

Here’s a mighty exercise in self-delusion. The EC is hoping to persuade the owners of gigantic sovereign wealth funds to sign up to a code of conduct. El Presidente Barroso has pronounced:

We cannot allow non-European funds to be run in an opaque manner or used as an implement of geo-political strategy.

"We will not propose European legislation”, he graciously declares: but he's not to be trifled with: “we reserve the right to do so if we cannot achieve transparency through voluntary means"

This 'we' who *cannot allow* would be the ‘we’ who have been rushing round soliciting sovereign dosh to bail out our failing banks, I take it. Presumably Barroso imagines the Chinese are awaiting the EC’s proposals with trepidation, and that when he tells them to behave like Norway – his chosen model for a Sovereign – they will be keen to fall in line. Or something...

At C@W we have been writing about the Sovereigns since the days when everyone else was worrying about private equity. Let’s get the basics straight. If ‘we’ continue to dismantle our economies and pour trillions of money into the hands of the nations in question, then there is going to be a shift in the balance of power. We don’t like it ? Fair enough, but let’s not embarrass ourselves with this posturing.

Opaque ? Tool of geo-political strategy ? Yes indeed: they ain’t called ‘sovereign’ for nothing !


Monday, 25 February 2008

Steel and Gold: a new derivatives product – and a C@W predictions update

An important ‘business-as-usual’ development: the London Metals Exchange has brought out a steel futures contract which, amazingly has not previously existed. Volatility in world steel prices should amply justify this move and, provided enough creditworthy (!) players enter the LME’s famous Trading Ring to provide liquidity, it looks like a good move. Plenty of commodity traders have been doing nicely, thank you, so this shouldn’t be a problem.

Also doing nicely have been steel manufacturers, given China’s insatiable appetite and other booming areas of demand such as the energy sector. Whisper it softly, and no names, but there’s a bit of *ahem* a ‘sellers’ market’ out there, particularly in speciality grades, and buyers are not at all pleased. ‘Nuff said.

Some relief is on hand, however, in the form of fast-reducing dry bulk shipping costs, which have been at very high levels and representing a huge proportion of costs in the iron and steel industry. As forecast in the C@W Predictions for 2008, freight rates have been slumping - no mystery, a glut of new ships being built.

And a couple of other Prediction updates:

- GOLD blipped above $ 950 this morning (we predict it topping $ 1000)

- CHINESE food price inflation is 18.2% (we predict a riot ...)


Monday Joke

The NHS are announcing £ 3,000 'golden hello' payments for former midwives to return to practice. Surely, these should be called golden retrievers ?

. . . OK OK, it's Monday morning


Goldie image from Demented Pixie

Sunday, 24 February 2008

Return of the Sunday Round-up

After a couple of weeks off,time for a business round-up again. This week has been dominated by Northern Rock yet again. However, as time goes on we are also at a very key point in the year. The markets are very much down and a rally should be on the cards, but we will see as some more key results come out this week.

Also the high street continues to be a difficult place along with the housing market. It is still hard to say whether we will have an outright recession this year, but we'll have a much better idea by the end of February:

Virgin steroetypical - In a classic piece of 'Virginisim,' Branson today announces a plane that will test a single engine on biofuel. It all sounds green and ahead of the market. An excellent piece of marketing with no chance of it becoming reality for decades, if ever.

Lawyers in Love - this is one group who will just love sub-prime fall-out. It will all end in the courts no doubt and lawyers will as usual clean up. Don't expect to see them firing staff this year.

Nuclear option - Directors to be held accountable for waste and decommissioning programmes.

XstrataVale next? - the mega-deals in mining and resources roll-on, bolstering this sector on the markets.

High street heartache - A thin story on a couple of bad weeks at John Lewis, but trend consumer spending is clearly sharply falling.

RBS results - After Barclay's and Lloyds, next up is RBS. One of the most highly traded stocks on the UK market. The weekend puff pieces suggests no rights issue. Let's hope so, bad news here would stop the market in its tracks; good news and the re-bound continues.

LTSB rampage - As I have said elsewhere, the disaster that was Lloyd's Scottish Widow's mess prevented them from getting into securitisation of mortgages. As such they now look rosy and are set for an acquisition spree - genius and luck are hard to tell apart.

Video of the week - Interview with John Studzinski, the foremost banker in the UK and a key participant in all major deals, including Northern Rock. Worth it to see what makes the guy tick.

Non-Doms - This issue is big in the papers this weekend. Rich foreigners clearly have the ear of UK journalists and so have made sure this issue stays high on the agenda. As much as I am against taxes, the idea that somehow the idea that the super-rich will all leave over £30,000 is somewhat disingenuous. As for the non-super rich hit, do we not have 1.5 million Brits out of economic employment to fill the space?

VW off - Great scandal in Germany, always a fun reaed when the world of business apes the world of Z-list celebs.

Friday, 22 February 2008

Friday Joke

A party of economists was climbing in the Alps . After several hours they became hopelessly lost. One of them studied the map for some time, turning it up and down, sighting on distant landmarks, consulting his compass, and finally the sun. Finally he said, ' OK see that big mountain over there?' 'Yes', answered the others eagerly. 'Well, according to the map, we're standing on top of it.'

Thursday, 21 February 2008

Jérôme Kerviel: he was poor, but he was honest ... (?)

It's the same the whole world over
It's the poor wot gets the blame
It's the rich as gets the pleasure
Ain't it all a cryin' shame !

Yesterday it was reported that Bob Diamond received a bonus of £ 14.8 million for growing profits at BarCap by £ 1 billion in under 4 years.

Seems only fair. But wait, what’s this ? The SocGen enquiry into Jérôme Kerviel’s misdeeds finds that the little Gallic rascal was given a beggarly €300 k bonus for the €1.4bn profit he made in 2007 - in a single year ! – before it all went so very wrong. That’s just £ 225 k: BarCap Bob got 66 times as much ! And he had a whole team, and several years, to make as much profit.

One can’t but sympathise with the injustice suffered by poor Jérôme. Have the French really so little understanding of the Anglo-Saxon business model ?


What is Sub-prime and Securitisation?

Via a valued reader here is a great slideshow on the sub-prime crisis. Kudos to anyone who can point me to the person who wrote it; very smart indeed!

Or you can see it here

Wednesday, 20 February 2008

Northern Rock Laws: Why the Government went OTT

Many have pointed out that the Government seems to have taken really quite excessive powers in its Bill to nationalise Northern Rock.

It has said that the emergency powers could be applied to any financial institution in the next 12 months. This gives it the potential leeway to nationalise other banks too.

Rather than this be the start of a real roll-back to mass state ownership, it reflects another core failing of the Government.

They know that the tripartite system of regulation by The Treasury, Bank of England and FSA was a failure in both allowing Northern Rock to run on a crazed business model and the cack-handed backing of it in September which has led to the current situation. (Remember the Finance Director Bob Bennett resigned citing the mains problems in January 2007, not that the FSA noticed.)

However, the Government does not know what to do about this. This design was Gordon Brown's own in 1997. There is disagreement and inertia in Westminster about where to go next.

As a result it is clear that if another Northern Rock emerged out of the blue, then the problems would be the same. As such the Government would be forced into another nationalisation.

This is the reason for the draconian powers now in the hands of our Government.

Tuesday, 19 February 2008

The Left in defence of Darling

The article below contains some of the most excreable statements made by lefties trying to defend the Northern Rock debacle; worthy of a rare fisking by myself:

Having nationalised Northern Rock, why doesn't the government just run it down? That is to say: why not ban the bank from making new loans, close its branches, and order a skeleton staff to concentrate solely on recovering the £110bn of outstanding loans?

Yes, good start.

This idea represented the most potent line of attack against the chancellor yesterday since the thought behind it carries some economic and political weight. Why, for example, should Northern Rock's more successful rivals suffer competition from a state-backed organisation with access to cheap funding?


And, if the quality of Northern Rock's loan book is as high as we are told, where would the danger for the taxpayer lie? The public money would come back slowly, but the vast bulk would be returned within five years. That's how long it would take for most fixed-price deals to expire. When they do, borrowers could be offered uncompetitive rates to persuade them to take their business elsewhere.

Certainly the basic premise has been grasped here, of not distorting the market even further in these awkward circumstances and of not risking even more taxpayers money.

Those arguments are tempting, but let's be clear - in the real world, banking doesn't work that way. To place Northern Rock into run-off - in effect, to nationalise the bank in order to kill it - would open up new dangers.

Here we go...

For a start, the day-to-day difficulty of managing operations would be magnified. Most of the head office staff would be made redundant immediately since most are employed to process new mortgage applications, not to collect monthly payments.

They can be paid bonuses to stay on, or alternatively, what is the harm in this. Top managers will soon get new jobs.

Most of the branches would also have to be axed. The savings base might become unstable again. The shock might be so great that Northern Rock would be unable to perform even its new humdrum role effectively.

Branches to close; good, less money spent on taxpayers behalf. Savings to become unstable, what has that got to do with anything, we are trying to run the business down after all? The final sentence is just meaningless and shows how far any coherent argument has declined already...

There would also a political risk. Not every borrower with a Northern Rock mortgage would be welcome elsewhere. The taxpayer might be left with a rump of poor-quality loans via a process bankers called "adverse selection" - in other words, the good business walks away, and the bad business stays.

This is indeed a problem - why the nationalisation was a bad idea in the first place as compared to a liquidation. Keeping the bank open to make more dodgy loans is not really the answer though is it?

That sounds like terrific news for rival lenders, but not for the taxpayer or for borrowers.

The borrowers in the above definition have been mis-sold too, Nils wants more of this does he?

In the end, a fudge - expressed by the chancellor's "business as usual" phrase - is probably the most practical solution, even if it feels unsatisfactory. Of course, Alistair Darling doesn't mean his words exactly: operating within EU rules on state aid is not normal business for most organisations. But we know what he was getting at: Northern Rock's new mission is to return to being a provincial medium-sized bank as quietly as possible.

Eh? This had not been explicitly stated anywhere (certainly not in the legislation), no one knows what Ron Sandler is going to do. The idea that the Rock can become a provisional bank with £100 billion of taxpayers money backing it is simply fantastical.

If that is the course set by Northern Rock's new chairman, Ron Sandler, many of the grumbles heard yesterday will fade. The European Union is highly unlikely to rock the boat. It does so only when France and Germany protest, and those two countries may be looking to bail out some of their own banks before long. It is not as if Northern Rock, as a purely UK lender, threatens foreign banks.

The EU has already bailed out the European banks and I don't see where the confidence comes from that there is no desire to poke the awkward man of Europe. I would expect nothing less of the French.

Rival high-street banks in the UK would also be well advised not to complain too loudly. They haven't been put out of business by other state-supported enterprises such as National Savings and the Post Office. If Northern Rock settles for a quieter life as a smaller operation, that is not such a bad outcome for the big boys: an upstart will have been put back in its place.

So everyone should accept market distortion as fair enough? Is it not enough that the banks already had to compete with a competitor who was breaking the rules and was not monitored closely enough by the FSA? No the socialists say time to settle down and just accept fate; right at the beginning of the house market downturn too. Easy to give advice when it is not yourself affected?

The open question is whether Sandler will play along. Yesterday he boasted that Rock would "compete vigorously" within EU rules. We shall see, but the comment seemed designed primarily to sustain morale internally.

Sandler will say what he is told to by his puppet masters, of course.

The reality, as Sandler will soon have to acknowledge, is that substantial redundancies are inevitable and that Northern Rock will have to fund its mortgage activity more conservatively. That will mean shrinking the business - but not shrinking it out of existence to satisfy an economic theory that wouldn't help taxpayers in practice.

The concept of going concern, one of the first principles of accounting, seems to be passed by here. Shrinking the Rock is happening by market forces anyway - with the real market sure to bankrput the bank, anything the government does is simply life-support for a John Doe.

No compensation

It is easier to answer the other question left open yesterday - what should Northern Rock's shareholders get? The answer is nothing. The shares were worthless without government support so investors deserve no compensation. It's as simple as that.

Or you could argue, that the shares became worth nothing BECAUSE of the bungled Government intervention; as I am sure the litigants will be doing. I don't see the European shareholders having been left out to dry in the same way.

The hedge funds can argue that the assets are worth 400p or so, but that's a book value.

If the asset sales cover more than all the outstanding liabilities then they should be paid. But we won't find out now, because there will be no asset sales until the court cases are dismissed.

Value on the ground depended on Northern Rock being in business and being viable. Without support from the Bank of England - support that went well beyond the role of "lender of last resort" - Northern Rock's fate would have been administration. In that event, shareholders would have stood firmly at the end of the queue.

Yes, but as above, that does not mean you get nothing Nils; such a lack of understanding here it is frightening.

It's tough on small shareholders, but the Johnny-come-lately hedge funds pushed their luck too far. Threatening to vote down the Virgin deal was a dumb tactic.

They took a risk and now will have to fight the hard way, I certainly don't write-off entirely their chances yet. The Virgin deal was clearly the best idea of late, but Brown hates the idea of profits or success for anyone but himself. Now we are landed with all the risk and with little hope of reward.

Monday, 18 February 2008

Barclay's to end the credit crunch gloom?

With the Government stepping in to Northern Rock it has been a bit depressing really from a taxpayer perspective recently.

So to lighten the mood a little it is good to see that the market reaction today was quite positive and banks shares increased. Perhaps now we all know they will never be allowed to fail by the government shrewd investors have spotted a sure thing?

Slightly more credible are the rumours that Barclay's will announce a good set of results tomorrow and perhaps even raise the dividend. This could be the beginning of the end of the credit-crunch if true. If big banks' like Barclay's and Lloyd's can get through this past 1/2 year intact then we are not in a Japan-like situation with endless depression ahead of us due to bad credit issues at the major banks.*

There are still plenty of problems facing the economy and prospects for the year, but some good reporting news from the banks is a good sign; especially if you happen to work in one (which I don't btw).

*One lesson from Japan though is that a densely populated country stuck with high demand for property and low supply can still suffer monumental crashes if things get out of control enough - an argument often made by the uninitiated as to why the UK will escape a US style property collapse.

UPDATE: Well the news was OK from Barclay's but not enough to sustain the rally, then Credit Suisse has come out with even more unexpected write-downs - over the hump but not free and clear yet!

Sunday, 17 February 2008

Darling and Brown go mad; Northern Rock Nationalised

Firstly apologies for the lack of a business news round-up, but with today's events there seems little point in reviewing the fish and chip wrappers of tomorrow. Back to normal service next week.

Well it is all over the news and I am quite shocked that it has come to this. Sadly, I have to eat my hat (hat-tip istockphoto) as I was sure that Virgin would win the bid. Instead, the Government has decided it knows how to run a bank better than private sector bankers.

The decision really beggars belief and although I will post on this later this week, but here are 5 key points to remember:

1. All the Minister's talking on the news bulletins today talk about a temporary nationalisation. This is a cruel play on words, what they mean is it is not for all time. However, it is hard to see the taxpayers getting our money back within a 5 year horizon; so don't be fooled by the piece of spin.

2. The idea of NR being 'run at arms length' is ludicrous. Gordon Brown likes to have everything within swiping distance and seeing as this crazy idea was his, he will interfere as much as he can. I would not be surprised to see some of the parachuted in executives leave within a few months.

3. If Olivant and Virgin could not make the sums add up, then whay can the Government? To second guess private enterprise invites another whole PFI type disaster upon the taxpayers.

4. The Northern Rock brand was already ruined, now it is to be owned by socialists who have never had a private sector job anywhere near finance(Darling and Brown have these resumes). Branson said the brand was wrecked and it still is, how to keep this business a going concern will be the real priority.

5. The shareholders will sue the government and they might well win, in which case the debts will grow even further rather than shrink.

Domino Update: Unexpected Consequences #1

A propos of the Enron Dominos piece below, Jeremy Jacobs asked in the Comments:

why so negative Nick?

Answer: it’s how I see things for the medium-term – and I write about it because I tremble for individuals and families who aren’t prepared.

Here's an example: the Los Angeles Daily News reports that there has been a 40% rise in West Nile disease in California, caused by “mosquitoes breeding furiously in the foetid water of untouched swimming pools: people unable to keep up their repayments on sub-prime mortgages have simply walked away from thousands of houses, leaving them neglected while the slow process of foreclosure plays out.”

From finance meltdown to public health problems in just a few weeks … even in California. Am I being negative ?


Friday, 15 February 2008

Another Pension time-bomb

This story has been doing the rounds in the media today. Effectively the pensions regulator is berating actuaries, again, for not being very good at their jobs, i.e. predicting the future.

As such companies may well be asked to use more conservative estimates of life expectancy which will feed into calculations of pensions defeicits.

The last time this happened with the change of accounting rules to FRS17, nearly the whole UK pension sector was ruined (for employees) by the switch away from final salary schemes.

What companies will do this time to limit exposure will have to be even more drastic, ouch.

Just to compound this, the real problem not highlighted by this Government funded body is for state sector pensions. The impact on the future national finances will be horrendus, with our children asked to pay out even more form their incomes for our [useless] generations (i.e. public sector pensioners) comfy retirements. All the while our own retirements will be less than fun without some serious discipline upon ourselves to save.

Which is extra nice given the speech of earlier this week by Mervyn King saying that we should all expect falling incomes in the immidiate future.

Enjoy your weekend!

Thursday, 14 February 2008

Lesson from Enron: How the Dominos Fall

Writing as someone who witnessed the Enron saga from *ahem* very close proximity, I learned an important lesson. Well several actually, but this one is to do with how the dominos fall, and the answer is – surprisingly slowly. Enron, the pre-eminent market-maker in the global energy sector, went under in October 2001. This brought down the vast and burgeoning ‘merchant energy’ sector, and after that the project finance sector; and at the time I assumed this would happen in weeks, if not days.

Not a bit of it: the big energy merchants crashed at the rather leisurely rate of one per month, until the final bankruptcy (TXU Europe) a full year after Enron. Project finance hit its nadir the year after that.

There isn’t space here to discuss why this happens in such slow motion. The point is that what we are currently seeing on the vastly greater theatre of world finance, indeed the global economy, needn’t be anything other than protracted agony. We can expect wave upon wave of Bad News, each time emanating from some new and unexpected quarter. IMHO, we’ve only just begun.

And today’s news ? Well, B&B of course, and Mervyn King’s pronouncement, and US student loans: but also this. Fitch, the ratings agency, has analysed US corporate debt (you can register free to get the report) and finds that over half a trillion dollars of bonds are scheduled to mature over the coming year. For the one-third of this that is speculative grade, where spreads have doubled or more over the past six months, “issuers will face substantially higher borrowing costs in 2008” – a bit like home-owners facing renewal of their previously low fixed-rate mortgages. Oh, and they calculate that bond rating downgrades are happening at more than 4 times that of upgrades – it’s 6 times greater downgrades for investment-grade debt.

Yup, we’ve only just begun. Happy Valentines !


Wednesday, 13 February 2008

Northern Rock: Spin cycle begins

Late last night, (ignoring traditional rules about making announcements prior to the stock exchange opening, but who in the Treasury cares about that) the Government announced that unless Virgin and the Northern Rock management improved their bids, then Northern Rock will be nationalised.

Given that the Rock is already on the public accounts, this is a mis-statement at best. The Rock is already nationalised, all the government are saying is that they will exclude private sector intervention from the future unless the terms are improved.

In the media this morning I see that Brown is ' bullish' about prospects for continuing with the nationalisation. My gut feel is that this is pure bravado, the government is desperate to get this issue over and done with and handing the Rock to the Bank of England is not going to do that.

Also, Olivant have already walked away because they could not work out a way to make profits without undue risk. So the chances of Virgin really improving their offer is minimal. However the threat may be designed to try and quieten the shareholders from pressing the legal button, fat chance)

Perhaps some 'movement' will be created that allows Brown to look like he actually negotiated something and Virgin to get their hands on The Rock.

It all smells of spin as normal. I will eat my cyber-hat if the government go insane and really do try to run The Rock.

Tuesday, 12 February 2008

The Saviour of Omaha

Warren Buffet today made a huge announcement, that Berkshire Hathaway is going to effectively underwrite the monoline insurers. Complex though the situation is (and Robert Peston does actually do a good job of putting this in English on his blog) this is big news.

Much of the downturn in markets in February has been down to a great fear that these insurers would be downgraded and with it all the associated CDO's and bonds that the banks are sitting on. The net result would have been billions more write-offs for the banks and pushing the worst cases, like Citigroup and UBS, close to the edge.

Instead, into town comes America's greatest living businessmen, spots an opportunity and saves the day. No doubt he will make a pretty penny by taking on so much risk, however the very fact that such a conservative financier would do this has pushed the markets up hugely.

Perhaps a floor has now been added to the market collapse?

Monday, 11 February 2008

Go Gold ! Predictions Update #1

At the end of December, C@W made our annual predictions for 2008. One has already transpired - that oil would briefly reach $ 100 - but to be honest it was a bit of a no-brainer.

Slightly bolder was $ 1,000 gold. Only mid February, and it's looking good !

Sticking our necks out still further, we forecast that sub-prime write-offs would hit $ 500 billion. At the time, the banks were only admitting to less than one fifth of that, but the latest estimates have now reached 80% of our predicted amount. Pity no-one was opening a spread-bet book on that (though you can always short the banks ...)

What of the others ? There were 20 sooth-sayings in all, and several more look to be in good shape. Barak Obama is making headway: Sterling, house prices and the
FTSE are all on their way to the pit (Heaven help us all). And of course Northern Crock is still set fair for full nationalisation. We'll revisit these and the others periodically.

Any danger of us getting a bit smug here at C@W ? No chance: you won't see much smirking here while augury #3
remains good - Brown to remain PM ...


Friday, 8 February 2008

Vested Interests on The March

The vested interests of the European energy industry are on the march, threatening us all with doom and citing “green-influenced legislation … regulatory uncertainty … (and) plans to auction pollution permits …”

But this is smokescreen: after the farce of the first round of the ETS they know full well why another wave of free CO2 allowances is out of the question. Here’s the real issue:

"Eight countries, led by France and Germany, have attacked the central pillar of the commission's liberalisation package. This involves forcing the big continental players to unbundle, or sell their gas and electricity transmission networks/pipelines to independent operators and allow new players to enter a more competitive market … The eight, backed by big groups such as E.ON, France's EDF and GDF, and Italy's Eni, have formed a blocking minority within the council of ministers."

And cheering on from the sidelines: Russia, whose Gazprom “will also strongly resist the initiative”.

For once, the Commission is on the side of the angels, and has finally settled on the most effective way of busting these recalcitrant monopolies.

They and their dirigiste governments need to be faced down. Pure and simple.


FOOTNOTE: here’s a little irony – a display at the RA of French and Russian ‘masterworks’, sponsored by - the aforementioned E.on ! whose German gas arm Ruhrgas is heavily dependent on Gazprom, and whose UK CEO Paul Golby says:

"At a time when the energy relationship between Europe and Russia continues to deepen, E.ON is delighted to help foster a similar relationship in the world of art."

There are no coincidences …

Thursday, 7 February 2008

Mortgage bliss; Badgernomics

The Bank of England has reduced interest rates again today to 5.25%. The most interesting note that I saw on the release was that there is a high expectation, even by the Bank, that inflation will rise over the next few months; Unless there is a really severe downturn.

However, if you are a mortgage owner with years to yet until the mortgage is paid off, think how well you will be doing. Interest rates are low, meaning your payments are down, meanwhile inflation is relatively high meaning that the overall capital you owe is decreasing quite rapidly.

If you are a pensioner or saver then of course the situation of low-level stagflation is a disaster; but if you are either of those no doubt you vote Tory anyway so Brown and Badger don't care about you.

Think of all those happy people in houses with 100% mortgages benefiting instead. Makes on proud to be British, eh Gordon?

Wednesday, 6 February 2008

Poll Results - Ken to go!

Harriet Harman
11 (42%)
Simon Hughes
2 (7%)
Ken Livingstone
12 (46%)
Ian Blair
1 (3%)

Well this week's poll was a little off topic, driven by last week's exposure of our egregious politicians. With so many political scandal's whirling around it is difficult to know what will happen next.

I even put Ian Blair in as a make-weight and hey presto we have the bugging inquiry in which he well may be implicated as the man who authorised the bugging.

However, after a close vote with Harriet Harman, seemingly closing in on official Police questioning (after Wendy Alexander has been collared this week), could only come second.

Instead, my dear Mayor, Ken Livingstone is voted the most likley to be living on borrowed time. Somehow my hunch says he will weasel his way past the allegations; I forsee less success for him against Boris in May though!

Tuesday, 5 February 2008

Inflation or Deflation ? The Market Speaks

Do the math ...

Readers of the excellent
Bearwatch (now sadly in some kind of semi-limbo) will have enjoyed the debate over whether the next economic cycle will be inflationary or deflationary. I tend to expect the former, and the unhappy Mitchells & Butlers saga gives us an interesting market data-point that reinforces this view.

Recall that M&B put on a huge 30-year derivative position to provide an inflation hedge for a putative but ultimately illusory property deal. The strike was 3.1775%, the 'hedge' became stranded, and was finally liquidated when £391 million out-of-the-money last week. M&B had
bought the fix, so OTM for them means implied RPI is higher than the strike.

So - do the math, as they say. Principal was £ 240 million and it's an interesting question as to what we assume is the relevant risk-free discount rate: but if we say 5%, doing some simple sums,
the implied 30-year RPI is 3.7% ! (it's fairly robust: +/- 50 basis points on the risk-free rate results in only +/- 5 bps on the implied rate)

And 30 years is a long time ! OK Gordon, that's what it costs to hedge out your stable economy these days - where's your economic miracle now ?


Monday, 4 February 2008

No Olivant branch for Northern Rock

In addition to the poor pun; this is quite bad news for the government and taxpayers. Olivant was the financial engineering bid, the one that would make the numbers add up before all else.

Branson's bid has a big element of investing faith in the Virgin brand to make a turnaround. We know that this does work spectacularly sometimes, but there are a quite number of failures on the route too. I don't see too many crowing about the Virgin Media success story.

As for the idea that the current Northern Wreck management will be allowed to run with their own ideas is very unpalatable. Politically, I cannot see how this would work and surely at this point the Government would rather nationalise.

So this leaves Branson in a great negotiating position as the only true bidder. If he pushes to hard no doubt we will be back to a nationalisation programme - however his fantastic track record of slick negotiation means I will be sticking with my prediction that Virgin Money will take-over Northern Rock.

What I can't attest to is whether its rather optimistic business plan will stand-up in the medium term and ensure taxpayers get their money back. The treasury is going to have to get up to some serious off-balance sheet accounting to hide this mess for years to come.

Sunday, 3 February 2008

Sunday Business Round Up - Big February

It is Super Tuesday next week in the US, but in economic terms it is Big February all round. A horrendous start to the year on the markets, lots of banks with massive rights issues to announce this month, a decision on Northern Rock to be made finally.....and that is just the stuff we know about.

Big February it will be, as this month will determine how bad the downturn is for the rest of the year.

Here are some quick links to some of the more interesting business stories I have spotted in the papers:

British Land devalued - A great pointer the woes of the property sector.

Punch Drunk - on buying up fallen Mitchell's and Butler's. More is generally better in such a low margin sector; except for consumers who don't want an even smaller selection of drinks.

Whining about Wine - The trade makes a play against higher taxes. They are right of course, as if the government would listen.

Microsoft/Yahoo - West coast Amercia teams up against Google. Perhaps the only mega-deal that is likely to happen this year and not in the mining sector.

US jobs - Data is still bad, will the crazed slashing of interest rates work on the wider economy when it is designed to save the capital ratio's of wall street banks?

King to slim The Bank - Expect more major changes to to the structure over the course of the year.

Trading Risk - The Independent has a good piece on the possibilities of rogue traders in the City.

Egg on Face - Egg becomes the first credit card company to take action where it is needed and restrict credit to save its tiny margins. Labour MP's and customers complain as one would expect.

IPO no more - Global IPO's are hugely down, a key indicator of market risk approaches.

No win for BA - Despite huge progress in results, the perenially troubled airline is still punished because of high fuel bills. Alot depends this year of what BA makes of the new terminal 5 which it exclusively operates at Heathrow.

Saturday, 2 February 2008

Blair for President ! Oh, wait a minute …

Blair wants to be
full-time president of the EU council (“if it comes with real powers”), but according to the Gruaniad there’s a problem - because he’s such a principled chap and

if the commission president, José Manuel Barroso, wanted to remain in post for a second term, it would be difficult for Blair, a political ally and previous advocate for Barroso, to hold the parallel job”

yeah right, ask Gordon …


Friday, 1 February 2008

Light blogging

Still having huge problems with the increasingly dismal Tiscali broadband service blogging will be light for the next few days; I will try to do the Sunday Business review at the least.

U & Us - parted from honesty (UBS)

Much of the focus of the UK stock market at the moment is the scale write-downs due out of RBS, Barclays, HSBC etc. The speculation alone on the major banks accounts for over 1% of movements in the market on any day in January. Volatility rules the day.

Yet the banks quell speculation by saying nothing is wrong, whilst doing little to prove nothing is wrong and as we all know actions speak louder than words. I am awaiting RBS's results at eh end of this month with much anticipation. A disaster there and this really will be a bad year.

However, spare a thought for shareholders in UBS. The worst affected bank in Europe in terms of exposure to sub-prime lending. A group of intelligent shareholders clubbed together to demand an independent audit of its overall sub-prime position in order to finally get to the bottom of how much mess the bank was in. The Management are strongly against this; does not leave room for much hope there does it? The share price is dropping still, down nearly 40% year on year.

To add to this, UBS has also tapped up a sovereign wealth fund- Singapore in this case, to urgently hand over some money to repair its balance sheet. However, the nice preferential rate of interest given to Singapore is denied to all other shareholders and there is a vote today for its 'alternative capital structure.' Again management are so desperate they will agree to anything in return for large dollops of money.

UBS is in a very bad place indeed this week, having announced huge write-offs too. Somehow I don't think they will be running their cheesy adverts again anytime soon.