Monday 31 January 2011

Trading / Predictions Update: Oil, Gold, Silver

So Brent hits $100 for the first time since the 2008 silly season. Thinking back to Predictions time, this sits nicely with:

"Oil to be in 3-digit territory by year-end - and to stay there forever. It will cross the 100 line earlier than that, but there is scope for some dithering on either side initially."

So my $98 March is looking OK.

How about the bullion ? Noticeably down since year-end and I have taken that as a cue to move in, to silver. For the record my average buy-in price was £585/kilo. Don't see any near-term shortage in the Bad News that is my rationale.


BP: Dancing with the Bear is fraught with danger

BP has found out today that it's much praised deal to get into bed with Rosneft has severely weakened its position in Russia.

The current TNK-BP Oligarchs are not keen on stopping BP issuing a dividend to shareholders with their money. They are not very happy about BP getting into bed with Prime Minister Putin's state champion, Rosneft.

Nor would they be, as Russia has a strange set of company laws that are routinely ignored by the Government when it suits. Even President Medvedev was accosted by a brave English Investor at Davos last week. Russia cannot escape this reputation as it is well earned. Abroad, Russian companies act strategically but not comercially, see Gazprom in the UK as a great example.

Indeed, BP must have thought about what it was doing when it took a 5% share investment from Rosneft, but the future will now be shrouded with a long road ahead of political intrigue and deal doing ahead. BP will argue this is the price to pay for getting access to the new North Sea in Russia's Arctic. It does not do much for their shareholders in the short-term. Already smashed by the accident in the Gulf of Mexico the answer has been to start dancing with the Bear.

This never ends well for the foreign companies involved; it does not encourage me to buy any shares in BP.

Sunday 30 January 2011

Sympathy for Tony Blair

I never thought I would, but I did. Reading Andrew Rawnsley's 'The End Of the Party,' I actually felt a great wave of sympathy for Tony Blair.

I'd put off reading it. 820 pages of New Labour seemed a chore.And the book came out almost a year ago. What's the point? However the Quango rule is one fiction novel, one non-fiction; and the other fiction was 'Cameron:The rise of the New conservatives,' which looked even less appealing. TEOTP looked the lesser of two evils.

I've only read about 50 pages but Rawnsley's book is magnificent. It captures the feeling of 9/11 far better than history book. Reading the words I was transported back to that day almost a decade ago. The absolubte horror. And then the realistation that the world was changed. Maybe not like for our Grandparents when Chamberlain announced war with Germany. But something similar.

George Bush had gone missing. The President, locked up in a bunker by the secret service who had conflicting reports about more attacks, hadn't said anything.
He was also George Bush. "I know they call me the Toxic Texan" he'd told Blair.

His presidency had been a poor one. He'd left the undeliverable Kyoto document unsigned, which was pretty brave, considering that for world leaders Green was the new Black. But instead of a compromise, or even a concession he'd offered nothing.

He was already the 'cowboy' president. "Gaffe" prone to an alarming degree. The left were outraged that their man Al Gore had had his election stolen. Labour had backed Gore. Even including Blair personally, so sure were new Labour that he would win. So far from being Bush's poodle, he was rooting for the Democrats.
Blair wasn't first to meet the new president. That was Chirac.
The first Blair/Bush conference ended with a ridiculous press conference after the summit. When asked what the two leaders had in common Bush said "We both use Colgate toothpaste."
Blair was already a world statesman. And good at that role. Bush looked like an idiot.

So with some justification when the Prime minister arrived at Whitehall on sept 11, he expressed his fears several times. "I hope the Americans don't something knee jerk."
On BBC radio the report of the falling towers ended with the chilling " .. another 10 airliners are in the air and are still unaccounted for."

That was the fear on the day and after. That's what I remember most. The fear that the Americans might declare war on Islam or something. As I drove past the American community school, which was covered with flowers, I really thought that they might. This was war. This might even be nuclear war..Why not? if there's one country on earth that could be hit by nuclear missiles and not made much worse its Afghanistan.
And Bush, whose British media image was the gun totin', sixshooter redneck was just the man to do it.

Blair was desperate to speak to Bush. To express sympathy and also to reassure. But also to try and head off any precipitate action. To try and exert a calming influence on a wounded ally.
Even after his first telephone conversation with the president, when Bush had said ' Don't worry. We're not going to pound sand,' Tony wasn't convinced.
"I need to look him in the eyes." Blair drafted a memo designed to 'steer Bush and keep him on the rails. We should try and get them to agree a measured response, focused on the Taliban, and keeping public support."

Blair could already see this as a world changing event. He was already telling ministers that he knew if this enemy.."had chemical or biological or nuclear weapons, they would use them Use them against our cities without a second thought."

That was the feeling in the country at the time too. That we would be next. That a mushroom cloud would soon float up over Canary Wharf. An Anthrax release at Heathrow. A cargo ship packed end to end with TNT and gas cannisters would detonate in the docks and destroy Liverpool.
And to be fair to Tony Blair, the fact that those things didn't happen is not because the threat didn't exist. Mumbai, Bali, London tube, Madrid train bombings, Moscow airport were successful. Many, many more weren't.. Shoe bomber. The underpants bomber. The liquids on airlines explosives. The bomb in Seattle a few weeks ago. The bombs in Soho. Glasgow airport...
Blair was right about intention. Just wrong about the terrorists capability.

If you think back ten years the west was suddenly under seemingly unprovoked attack. If the intelligence services were saying.. 'Iraq has the weapons the terrorists want..Iraq doesn't like us..It's a way for them to strike out..much like the Libyans in the 1980's. Iraq needs the cash..." then Blair was right to be very concerned.

So that's why I rediscovered sympathy for the former Prime Minster. He didn't know what was coming next and his job was to stop anything coming next at all.

But then he goes and blows it all on the plane to Washington on the very next page..

"The British Ambassador to the United States, Christopher Meyer, was having a screaming fit and threatening to resign . Tony Blair's special chief of staff, Jonathan Powell, had told him that he had been bumped from a seat at the Washington dinner with Bush to make way for Alistair Campbell."

Tony ! spin obsessed monster.

Fighting in the Streets ... Dominos ... Tunisia ... Egypt ...

On a bad day I'm a fighting-in-the-streets apocalypse-monger. And we all know how things can get right out of hand in the me-too department - cf 1848, 1968, 1989. It's even a branch of sociology apparently: Chris Dillow wrote about it recently. I tend to reckon dominos fall at a leisurely pace, but 1989 is always salutary.

So there's a squat-load of unwashed angries wondering if they are brave enough to go equipped on 26 March, and what's this on their website ..? Solidarity with Egyptian Uprising !

So who knows ? For what it's worth, I still consider the coalition (or we might say, all of us) struck it lucky with the inept studenty-type demos last year: random, unrepresentative vandalism with the main perps quickly identified, turning themselves in, & dealt exemplary if not summary justice. For all the hyper-ventilating about undercover operatives, err, penetrating the fragrant ranks of the anti-coal mob (are we allowed to say that?- Ed), I should imagine Old Bill has 26 March fairly well covered.
(I bet PC Plodette is glad she doesn't have the less-than fragrant Greenham Common lot to contend with these days ...)

But we shall see. Democratic mandate meets demagogic madness on the streets of London. Somehow I can't see Cameron needing to seek a bolt-hole in Saudi. But we know they wobble.


Saturday 29 January 2011

Saturday Song: Rupert's In Town ...

... and its business.

Who wants to spend a year in gaol ?
Who wants their bid for Sky to fail ?
Who wants the bother of a big public fuss ?
A big public fuss is no good for us !

Who wants bad headlines ev’ry day ?
When Chinese markets are in play ?
Who wants shame and opprobrium too ?
And I don’t, cos all I want is Hu

Who wants the wretched BBC ?

Who wants his stuff online for free ?
Who wants to burden Fox with neutrality ?

What, neutrality ? that’s no use to me !
Who wants to bother with the facts ?
Who wants to pay out any tax ?
Who cares for human rights, or for Liu ?
And I don’t, cos all I want is Hu


first hosted by the esteemed Anna

Friday 28 January 2011

Fuel Duty: A Significant Straw in the Wind

A fortnight ago on Newsnight, some neanderthal union leader assured us that within 3 weeks the fuel depots of Britain would be blockaded until the government cut fuel duty. So we await next week with trepidation.

Perhaps Boy Osborne is also fearful, because yesterday he told us that he might use the Budget to cancel the next already-legislated fuel duty increase, scheduled for April. Vince Cable, who clearly reads C@W, was a bit sniffy about this idea but acknowledged that the practicalities of devising a working model for the so-called "Stabilizer" mechanism, Osborne's silly stunt when in opposition, were proving "tricky". (Pity the civil servants who are set on to such ridiculous tasks - is Osborne really the genius his admirers tell us ?)

If he does indeed scrap the April hike,
it has a significance even greater than the £500 million tax revenues foregone thereby. Because the underlying reason for the series of fuel duty increases is "Green Taxation" - making energy consumption ever more expensive, to force us into efficiency measures.

But as such measures go, one penny on petrol pales into insignificance compared to what Huhne has planned for our electricity bills. He intends the 'decarbonisation' of the UK by 2050, for which purpose (a) most transport and space-heating must switch from oil and gas respectively, to electricity; and (b) said electricity must not emit CO2, i.e. it must be renewables and/or fossil-fueled with carbon-capture.

To called this far-fetched would be very restrained. However, there's not a moment to lose and Huhne proposes to start by 'reforming' the electricity market with a slew of complicated interventions, all of which will result in increased electricity prices - and by a great deal more than £500 million p.a., as £200 billions are required for the madcap schemes he has in mind. Now that's real Green Taxation.

If, in the face of our Newsnight neanderthal and a bit of bad news on the GDP and inflationary front, Osborne shows immediate signs of backing down on fuel duty - what prospects for Huhne's plans ? Electricity bills - involving grannies and hypothermia - are every bit as emotive as petrol.

Let's see if Huhne can - or even tries to - defend Green Taxation at the petrol pumps. It has long been my view that when push comes to shove, GDP trumps GHG. There are more votes for granny too, than there are for decarbonisation.


Thursday 27 January 2011

Question time quiz

David Dimbleby is joined in Cambridge by

Chris Huhne MP,{Mr Drew's favourite Energy and Climate Change minister. Like last week's Mr Hughes, he is a twice failed Lib Dem leader challenger. Waiting for the third time?}
Chuka Umunna MP,{the original young, gifted and black, according to Wiki. Lawyer and Osborne basher and Ed Miliband voter.}
Edwina Currie, {Still known as the Eggwoman. Wonder what messages her email account might have contained?}
Kate Hopkins {not sure why she gets airtime. She sold her apprentice story to the News of the World? She uses fake tan? She's suing the Met? That'll be it!}
and Will Self. { Languid, opinionated, superior intellectual and author. Brighter than a Swedish tourist's back-pack. A sort of anti-Stephen Fry. Always good viewing.}

YOU choose what you think the panel may be asked by the audience.
YOU put those guess questions into the comments... points are awarded for accuracy, style, exclusivity, humour and sometimes just randomly.

BQ chooses
1. Phonegate. How smug are the BBC? Murdoch threat recedes.
2. Andy Coulson and Alan Johnson quitting leaves only the Oxbridge set in government.
3. -0.5% growth. Is this better than 0% growth? Is it time to stop the cuts that the government haven't started yet, that have caused this decline.
4. Should men be sacked for being sexist pigs? I'm reminded of Larry Miller - "if women really knew what we were thinking they would never stop slapping us"

5. Control orders - A lot of fuss for 8 people?

Week 3.League Table

BQ -- 10
Miss S-J -- 8.5
Timbo614 -- 8
Botogol - 7.5
Miss CD --6.5
Malcolm Tucker -- 6
Hovis - 6
Hatfield girl --5.5
Nick Drew --5.5
Budgie 2.5
CU - 2.5
Andrew --2
Blue Eyes - 1

Phone Hacking: This Is Business!

There is so much at stake for so many players in the phone hacking saga, it will make MPs' expenses look like kindergarten stuff:

> Murdoch knows this could doom his Sky plans & more - and just watch the old bugger move ! This is a man who will use every lever (just look the way Pesto was got onside). No holds barred.

> exclusive to all other papers: they were doing it too - and, hey!, there's gaol awaiting! Gaol! Even bankers don't go to gaol.

> the BBC sees a potentially favourable new front opening up in its long-running battle for survival (though there are dark hints that one or two of their own household names might be wondering about prison mattresses)

> the Met is clearly in Big Trouble - & who knows what they will do to wriggle off the hook ? That's one big gorilla, if it lashes out

> Cameron having painfully lanced his own boil, look who Miliband has just appointed as spin-doctor ...

> Max Clifford is on the case

Alastair Campbell, who sees paid BBC interviews on the subject stretching from here to Xmas, is just one of several players who have every reason to pursue this one like the DTel on Expenses, or the Grauniad on Wikileaks. He and others will have all manner of scores to settle.

Seriously ugly, I should say.


Wednesday 26 January 2011

Mr Huhne Goes To (Radioactive) Hinkley

Readers will know of the high esteem in which we hold Chris 'Crapper' Huhne. Join us, then, in our devout hope that his visit this week to Hinkley Point hasn't injured his health.

For this is the site of one of EDF's recently-acquired nukes (Hinkley 'B'), and also where they intend to build Hinkley 'C' (this year, next year, some time, never). 'A' was
a grotty old Magnox reactor, decommissioned in 2000.

As part of its preparation for the new plant, EDF commissioned engineering firm AMEC to carry out a survey of radioactiv
ity at the site surrounding the existing plant. The survey & data are in the public domain, and have been independently assessed by one Prof Chris Busby, whose conclusions are potentially alarming for the citizens of Somerset (including some of this blog's nearest, dearest, and good friends).

He reckons that the ra
diation there exceeds background levels for that part of the world; and that the readings indicate the presence of rather a lot of enriched uranium - which doesn't occur in nature. The only obvious source would be Hinkley 'B' (which uses enriched uranium, whereas 'A' didn't). But how would it have got into the ground outside the power plant ?

Well I certainly don't know. 'A' and 'B' both had their share of leaks and accidents over the years - past standards were pretty lax - but large amounts of enriched uranium would seem unlikely. We should also note that Prof Busby is by no means uncontroversial, & that's putting it mildly.

The immediate responses from EDF and the Environment Agency have been just bluster, but one imagines they will be scurrying around behind the scenes to come up with a proper answer to the prima facie case made by Busby.

In the meantime, let's all hope Huhne hasn't been harmed, eh ?
(& not forgetting the population of West Somerset). Ironically, Huhne has just signalled a significant increase in the cap on cleanup liabilities for nuclear generators: his EDF hosts will be hoping they aren't the first to wear this new £1 billion cap.


Bear Baiting

After yesterdays shock news on the economy, came Mervyn the Wrong's comments on the UK economy. Now, some people who have read this blog for a while will know that we are no fans of the Bank of England here. The Bank was far too complacent before the financial crisis.

Today though, there are bears running riot in every paper and on the Opposition benches. The UK is doomed, the economy is weak beyond belief, everything is terrible.

However, this is far from the truth. No one knows what happened in the figures produced yesterday and they may yet turn out to be well off the mark. Business confidence is at a high level, fewer companies are going bust, people are repaying their debts. Of course, some of this is going to look like GDP fall, but by most measures this is a rebalancing of the economy away from Government debt splurging.

In fact, even the Government borrowing was under the expected amount for December.

Things just are not so grim in the UK to get too over-excited about one GDP number. And Mervyn's point about living standards is correct, which is why having assets like shares, precious metals and commodities is so important to maintain above inflation returns; but we have known this for a long time now.

The real threat to the UK comes from a sclerotic Europe and weak Euro. This is our export market, if the Euro crumbles and Sovereign debt concerns rise about Spain then the UK is next in line and I will be a lot more worried.

Tuesday 25 January 2011

UK GDP shock; -0.5% contraction

Sadly this is pretty bad news for the UK economy. There was a very bad piece of wheather but that does not really explain over a 1% move in GDP over three months. On the plus side there was a big hit from reduced Government spending and a big gain of over 1.4% for Manufacturing. As the economy rebalances perhaps we will see more of this.
One thing is for certain, there won't be any imminent interest rate rises now, as predicted here last week - albeit for different reasons.

PS The pic is that one the ONS website - shame they have not been able to update their own charts, eh?

January Trading Update

First trading update on the year and there is good news and bad news. On the plus side a good start to the year with the portfolio up over 10% in the first month; the bad news is that it had been as high as 30% but a big fall in EMED (whihc also accounts for the growth) has seen some not so nice days in the markets this last few days.

However, much of the portfolio is set for the year so I don't expect to do quite so many trades this year. At the end of 2010 I consolidated into fewer long term plays.
Over the next month I hope that Xcite Energy will release its report into its recent find. This confirmation should push the price up to over £4 again. However, I am beginning to think an offer for the company is quite likely this year and so 100% gains are still possible from here, despite the steep rise from 70p since September last year. Also I expect EMED to move forward in getting some more key steps for re-opening its mine approved and these will support the shareprice.
Ascent resources, a relatively small holding, is due to get news on its drill in Eastern Europe, this will do the usual of doubling the price of halving it. If it doubles I may sell down as still on my watch list are CAZA, AEY and CGL.

Monday 24 January 2011

The Chinese, By Stealth

Learning from Wikileaks. Or not

A nice example of how even the skeptical, worldly-wise, wiki-leaking press still swallows everything whole. The Grauniad covers the news that China's new stealth fighter may be based on technology obtained by reverse-engineering bits of a US stealth plane shot down over Serbia. Charmingly, it goes on to say:

"The Chengdu J-20 made its inaugural flight on 11 January, revealing dramatic progress in the country's efforts to develop cutting-edge military technologies. It is at least eight or nine years from entering service."

At least 8 or 9 years, eh ? And you knew this by, err, looking at it, right ? You can just sort of tell.

And this would be the Chinese who couldn't feed themselves, so they definitely couldn't develop an H-bomb ? The Chinese who would crush Hong Kong's business activity by their heavy-handed takeover ? The Chinese who would struggle to industrialize because they have no oil ?

Oh dear oh dear.


Sunday 23 January 2011

Will they won't they for UK Banks?

The first impressions of the Vickers report do not make good reading for Bank shares in 2011. The Commission won't report until later in the year, but will make some meaty decisions. This means that one way or another Banks are goin to have to re-organise themselves going forward.

For HSBC and BarCap this will mean a costly re-organisation.
For RBS, maybe a sale of their Investment Bank?
For Lloyds - a sale of big chunks of HBOS (surely they would sue the Government if made to do this?)

All in all, there is no good news for their share prices this year. It won't be an exciting year for their investors either.

Fun and Games at the Banking Commission

There were early signs that the Independent Commission on Banking has great potential, when Clare Spottiswoode mouthed off before Xmas. And yesterday, this from the ICB Chairman Sir John Vickers

"Systemically important institutions now have an implicit state guarantee for risk taking activities, particularly those related to and/or inseparable from retail banking. This distortion, which is also a distortion to competition with other institutions, should be neutralized or contained."

Go, Vickers ! By the lights of the usual weasel-wording we are accustomed to, this is plain speaking of the highest order and, in theory, just what Osborne set them on for. Likely to prove a hot potato, though, as the months roll on. Can Sir John and his gang be 'encouraged' to be a bit more flexible and diplomatic ?

Hopefully not. Public life does not have many honours left to dangle in front of a man who is already Warden of All Souls. He is also delightfully academic: here's another extract from yesterday's speech -

"Then a necessary condition for U to fail is that R or I fails, but this is not a sufficient condition unless R and I both fail if either does"

What a man ! Now academics as a breed are hardly incorruptible, but the better of them are pretty damned obdurate. I look forward to many months of fun while Sir John, La Spotti, Martin Wolf et al go about their vital business. Let's see what neutralized or contained really means.


Saturday 22 January 2011

Bloody Blair Again

Saturday Poem Re-Mix
How timely to be reminded what a real scandal looks like. Flashback: here's how we covered it first time around.
= = = = = = = = =
They went to war in a Sieve, they did,

In a Sieve they went to war:

In spite of all Hans Blix could say,

At Bush’s command on that fateful day
In a Sieve they went to war!
But when no weapons were found in the place

And every one cried, “You have no case”
Said Tony Blair “we’re trusting to luck”

We don’t care a button! we don’t give a f***!
In a Sieve we’ll go to war!’

Far and few, far and few,
Are the scruples of Tony Blair;

His lies are bold and he's shameless too,

And they went to war in a Sieve.

They went to war in a Sieve, they did
And totally unprepared
With not enough armour for soldiers to don
With too few choppers – the list it goes on
But Blair, he never cared.
And every one said, who saw them go,

"O won’t they be soon undone, you know!

For the list of shortcomings is terribly long,
And happen what may, it’s extremely wrong
To send our boys unprepared!”

Far and few, far and few,
Are the scruples of Tony Blair…

The casualty figures soon started to rise,

The coffins they soon came in;
So to cover his arse he lied and lied
(No sign of remorse for the many who died)
And he gave the order to spin!
And he hunkered down at Number 10
And he lied and he spun and he lied again
”Though the charges against me be ever so long

Yet I’ll never admit I was rash or wrong.
While I have breath, I spin!”

Far and few, far and few,
Are the scruples of Tony Blair …

(apologies to Lear)


Friday 21 January 2011

Silver: Trading Update

When we last posted on this, James H sagely commented that silver is a stacked game, only for the brave. Right on cue, something odd is happening - silver has lurched into backwardation.

I don't rule out for a minute that hanky-panky is afoot, which is reason enough for great caution. Nevertheless, for myself, I am still taking this as a buying opportunity: I'll let you know my average buy-in price in due course.

My reasoning ? Purely MHO, but I take the view that (a) strategically, there is probably a decent floor (Chinese at al diversifying) and (b) technically, I'd generally interpret backwardation as a signal of near-term shortage - though admittedly it has been coupled with spot-price softening in both gold and (to a lesser extent) silver itself.

So - a potential danger-signal for sure, but personally it suits me OK at the minute (see the 2011 predictions).


Thursday 20 January 2011

Question time quiz

David Dimbleby is joined in Burnley by

Simon Hughes MP {Coalition irritant,twice rejected Lib leader but must be hopeful of third time lucky. Biding his time.}

Caroline Spelman MP, {Nannygate and rural food minister... or something..}

Alastair Campbell, {holder of the Chemical Ali propaganda award 13 years running. tells the most blatant porkies with straight faced conviction...major enthusiast for existing state schools }

George Galloway {Broadcaster.Bonkers ex-labour, ex-respect and ex-cat impersonator.. Friend of the Middle East, excluding Israel. Hoping to regain a place at the trough in the upcoming Scottish elections.} Always very reasonable when on QT. Usually a good performer.

Clarke Carlisle { Burnley footballer ..? Very religious..aah, I get it now..}
Beeb producers are giggling at their own cleverness this week.

YOU choose what you think the panel may be asked by the audience.
YOU put those guess questions into the comments... points are awarded for accuracy, style, exclusivity, humour and sometimes just randomly.

BQ chooses
1. Big society keeps getting bigger. NHS reform
2. The law says you must allow gays in your B+B but bans fags? Is this right?
3. EMA cost £50 million to deliver the measured £1 million of success it claims. Campbell says its worth it.
4. Chilcot investigation enters its 100th year.
5. Prisoner votes. Now a lot more MPs are in jail, should they welcome them?

Week 2.League Table
Miss S-J -- 6.5
BQ -- 6
Timbo614 -- 5.5
Botogol - 4.5
Malcolm Tucker -- 4
Hatfield girl --3.5
Hovis - 3
Miss CD --3
Nick Drew --3
Andrew --2

Wednesday 19 January 2011

The H.M.Flee continues

"HMV suppliers have credit insurance withdrawn"

Shares in HMV Group are expected to fall on Wednesday morning after suppliers of CDs and DVDs to the retailer had their credit insurance on future sales withdrawn."

Credit insurance is to enable suppliers to be protected from a company going bankrupt. It puts off new suppliers and makes old ones very wary about delivering stock. But no one wants to be solely dependent on the small profit margin from online and supermarkets.

It doesn't spell the end for HMV. Topps Tiles had credit insurance withdrawn and noticed no ill effects. It was restored soon enough. But it finished off MFI who collapsed soon after. So not the end but it isn't a good sign.
On the message board seems traders are having profits with HMV shares fluctuating between 24-26p.
Blaming Peston, which is a bit unfair. He's just passing on the message.
I wouldn't wish to be holding them in the morning!

Still, it could be worse. Take a look at Borders in the USA

No UK interest rate rise in 2011

To build on a theme started at the weekend, there is clearly an inflation problem building in the UK with CPI at 3.7% yesterday. The morning papers today are full of doom and gloom about interest rate rises. With UK rates at -3% due to Quantitative easing then it would seem sensible for the Bank of England to act.

There are two complicating factors though, first is the impact of global commodities, whose price is in a speculative bubble and are not a good determinant for long term inflation (see 2008 spikes in Oil etc which quickly tailed off). Secondly is the presence of Quantitative Easing by the Bank of England. The Bank of England has a helpful pamphlet explaining QE to the masses; I note it does not have a similar one explaining how this wondrous mechanism can be unwound. Charlie Bean of the Bank of England last year said that the bank has a choice in either raising rates or removing Quantitative Easing first. This was to allay fears in the Gilt market about a bond glut as the Government continues with its record breaking PSBR.

So the Bank, assuming it decides to ignore commodity prices is left looking at the UK economy for some guidelines as to whether to raise rates, leaven them or undo QE. Some of the recent figures in monetary terms make for poor reading too. The November MQ, M2, M3 and M4 measures of money in the economy all fell - not consistent with strong growth in the economy and we have had a harsh winter since then too.

City Analysts too are stuck as to what to suggest, although The FT has quotes today from a number of City economists, amongst which there is a great divide but one has some answers on the Bank of England current thinking:

"Philip Shaw, economist at Investec, is far from convinced that the UK economy is yet robust enough to withstand rate increases. He suggests that one solution to the MPC’s dilemma could be to keep interest rates steady, but to start to reverse some of the “quantitative easing” asset purchases undertaken through 2009 and 2010.
“This would represent a change in the MPC’s exit strategy, which is to move interest rates up to a certain level first, and then to start selling gilts – but we think this would be a way of maintaining its credibility while capping the downside risks to the real economy.
“The MPC could quite easily reverse £25bn-£50bn over a three-month period, which would give it some breathing space.”

The Bank has a big dilemma though, raising rates slows private sector borrowing down, reversing QE pushes long term market rates up as gilt yields rise as the price of gilts falls due to over supply in the market. Both kind of achieve what the bank wants; but both also reduce the velocity of money in the economy which does not seem sensible if the monetary base of the Country is falling; an economy can't grow if there is no new money being created.

As such, the Bank will leave rates and QE unchanged for a few more months yet. Then as Phillip Shaw says the temptation to slowly unwind QE will be big. Firstly it can be done in small amounts and secondly it is more PR friendly and 99% of people don't understand what it is anyway. Finally, QE is very distorting to the economy and so reducing it will be a good first step to normalising the UK economy (not good for CU's share portfolio though!).

My guess is that this will take place in the Spring and Summer and at the same time the Bank can see whether its inflation predictions are right or wrong as usual. What this does mean though is that interest rate rises on a big scale are very unlikely. There maybe one 0.25% or so to show willing but nothing more.

I am not panicking today because the paper are talking about 175 basis point rises; it just won't happen that way in this financially crashed economy.

Tuesday 18 January 2011

Fisking Chris Huhne

As a prelude to taking a look at his alarming plans for the UK electricity sector, I thought I’d give Chris a brisk fisk. Now obviously there are those – Mrs Huhne included – that would like to fisk Crapper Huhne with the spiky end of a bogbrush (only joking, Big Brother). But after his masterly ratiocination on ‘what is a subsidy’,* we do need to examine his words rather warily. And this is what he has to say on the subject of oil prices, in answer to an FT EnergySource question:

Qn: Does the UK govt believe an oil shock is likely before 2014?

CH: "
The costs and risks of fossil fuel production are only going to increase in the future, as is the demand from growing economies such as India and China."

Increasing costs and risks of oil production are pretty much a given: likewise demand from growing economies.
So far, so boring. Note, he doesn’t say ‘prices’, or mention gas (see yesterday).

"The oil price is factored into the government’s wider economic thinking."

No, really, Minister ?

"The new Office for Budget Responsibility published … an assumption that future oil prices will rise year on year. This leads me to the conclusion that a shift towards non-fossil fuels is in our long-term national interest, as well as the interests of the planet."

Bit of a non-sequitur there. Firstly, we know this was your ‘conclusion’ long before the OBR opined. Secondly, you don’t say you agree with the ‘assumption’ – probably because, as an experienced businessman, you know that prices don’t always follow from costs and risks. The price of oil today is far higher than its cost, and (OPEC permitting) could fall tomorrow. So it’s handy the OBR gives you the thing you need to hang your hat on; but you can pin it on them if things turn out differently.

"Once we have a decarbonised electricity system in place, the prices we pay for supply will be lower and far more stable than they would be if we resigned ourselves to an oil and gas dependent future."

A non sequitur to make the first one look pretty puny. But it is a tremendously important feature of his current line on why we need to turn our electricity industry upside down and shake it. If hydrocarbon fuel prices were to rise indefinitely, it would indeed eventually become cheaper to generate electricity by other means.

A big ‘if’, that – because gas prices may be set to demolish the assumption, as noted yesterday - and with it Huhne's supposed rationale. A neat little piece of sophistry, Chris, but it not a sound foundation for wrecking our electricity market. Watch this space.


*“Arguably, few economic activities can be absolutely free of subsidy in some respect, given the wide ranging scope of state activity. Our ‘no subsidy’ policy [for nuclear power] will therefore need to be applied having regard to proportionality and materiality” - Huhne. I think we know what this means ...

Shale Gas: The Nonsense Commences

The story so far: shale, an 'unconventional' source of natural gas, has long been known about but only latterly exploited. It is now being produced in such quantities in the USA that, far from their needing imports (as universally predicted until very recently), they have started exporting the stuff once again - including turning around US-bound cargoes of LNG to Europe. In so doing, the price of natgas in N.America has been cratered, and in Europe has remained much softer than would otherwise have been the case. Naturally enough, folk are now looking for shale gas all over the world, and it turns out there is loads of it. Now read on ...

Shale gas is a game-changer, because while oil prices have risen mightily since 2009 & one can envisage them increasing steadily hereafter (provided no double-dip) - gas prices have not, and it is entirely possible they stay 'de-coupled'. We've been covering this since the recession first blew away industrial gas demand in late '08.

The renewables lobby have not been slow to spot that continuation of this trend courtesy of shale gas will significantly undermine the already chronic economic case for their beloved projects. So they have gleefully jumped on a rumbling bandwagon that finds fault with some of the US industry's shale production practices. Protest is spearheaded by the lurid, Michael Moore-style Gasland film, which - yes, you guessed - has arrived in the UK to coincide with (a) the announcement of some shale gas in Lancashire and (b) a report, sponsored by the Co-op (sic), on the wickedness of it all.

And so the sophistry, non-sequiturs and outright disinformation begin. There will be so much in the coming months and years it will be difficult to keep up. Here's just one. From the chap responsible for the Co-op's involvement in this:

"It's like tar sands in your backyard, both in terms of local pollution and in terms of carbon emissions"

But from the very report he commissioned:

"shale gas extraction, at a global level, does not involve the high energy and water inputs at the scale of other unconventional fuels, such as oil derived from tar sands" (my emphasis)

Don't expect the level of debate to get any better.


Footnote: anyone wanting to read up on shale gas should go to NoHotAir, a somewhat monomaniac site which covers all aspects of this topic really well.

Monday 17 January 2011

Caption Contest – The Winner

Guido Fawkes' Friday caption contest '...was the usual mix of bile, bad jokes and mindless nonsense, but there is always one caption that makes Guido chuckle. Congratulations to Bill Quango MP for a copy of Big Brother Watch, The State of Civil Liberties in Modern Britain – a collection of essays edited by Alex Deane. The winning entry:'

“The Presidents rush to see if its really true. Labourlist has gone off message.”

Blow that trumpet. Only won it once before.

{personally, I liked R.McGeddon's}

"Pandemonium breaks out as the two Presidents realise that Carla and Michelle have been left alone with Berlusconi….."

E&Y lay into the Conservatives

Peter Spencer of E&Y has opened up in the normally politically neutral E&Y item Club. First he berates the Prime Minister for daring to comment on Inflation, saying he is cutting across the Bank of England's remit; they are independent after all.

This is an odd argument, as Prime Minister Mr. Cameron should be able to comment how he likes, and the Bank of England are free, due to their Independence, to ignore him if they so wish. The concept of Free Speech here, so long put down under Labour, is clearly troubling for some people. Perhaps the underlying point, that Cameron can see inflation as a problem which the mainstream economists keep denying, is the more important factor.

Building on this comment, Mr Spencer then has harsh words re potential interest rates rises, arguing that with already fiscally conservative VAT hikes, interest rates rises are the last thing we need. Of course, he does not make the point that perhaps not increasing VAT and raising interest rates is the thing to do.

Also ignored by everyone at the moment is what are we going to do with £200 billion of QE bought Gilts? Surely these have to be bought back (or monetised...) before we can contemplate interest rate rises. It is this latter point that personally holds me back from moving to a fixed rate mortgage. Why is this being ignored?

Sunday 16 January 2011

BP and the Bear

BP isn't the first of the oil majors to make an attempt on Russian riches - they've all proved embarrassingly willing to hurl themselves into this riskiest of regions. Political risk, that is: Russians hate bargaining from a position of weakness (as they were forced to a decade ago in all manner of transactions) and will always undo such deals ruthlessly as soon as the opportunity presents - as Shell, Exxon, Texaco, Marathon, ... and indeed BP themselves have learned to their cost.

Yes, BP has been here before, and not very long ago, with TNK-BP, a venture carried through in spite of many voices warning of the downside. It didn't last long in its original form, before the Russians 'renegotiated' it.

This time, of course, BP was in a poor position from the start, which is how Russians like things. But that doesn't mean it's a bad deal. BP isn't the first player to essay the "with one bound, he was free" strategy. Enron, for example, was nearly out for the count in 1987, but rolled the dice one last time - or rather, twice - with bold moves overseas and into financial trading, both entirely new ventures for an over-extended US gas pipeline company. They paid off.

What BP has done is something that is always attractive to the Russians, who truly hate parting with cash. They have handed over a slice of something tangible & strongly cash-generative (i.e. BP itself) in return for a hard-to-value Russian upstream asset, of which Mr Putin has more than enough. E.on, Russia's long-time best friend in Germany (a dubious honour) has regularly done the same thing: it always goes down well in Moscow, playing strongly to their pride as well as their parsimony.

And sometimes it even pays off ! Not necessarily beyond the wildest dreams of avarice - that would trigger another 'renegotiation', but the upside could potentially be solid.

The downside, of course, as many have quickly said, is that it pisses off the Americans good and proper.

Mr Putin likes that, too.


Saturday 15 January 2011

Bank of England; History says they will get it wrong on interest rates

Two charts for the weekend. One shows UK GDP since before the recession and the other the Bank of England reaction with interest rates.

The key part to look at is the timing in 2007/8. Northern Rock went under in 2007, that was the start of the credit crunch. Yet, despite calls from all sides, the Bank of England was concerned at rising inflation and raised rates. In fact, only the Lehman crash made them take any action. Suffice to say this is not a glorious phase in the Bank's history.They did better in the crisis, but now that is over, its 1-1 with 20 minutes still to play.

It does signal how slow the Bank of England are to sense the change in the macro-inflationary environment; which bodes ill for the end of the current recession. The Bank seemed fixed on not raising rates for some time to come, yet inflationary factors are everywhere. Apparently not people's pay, but that can change in an instant.

History says the Bank are too slow to move, and it does look like history will repeat itself. of course, this is GREAT news for those who are heavily indebted as the price of money is held low their real debt is eaten up. Less good for savers, as has been the trend for sometime now.

Friday 14 January 2011

Trading Silver Again: Some Risk Principles

Comments following Tuesday's post on silver focused on my preference for investing in the actual physical stuff. I replied in the comments on 2 risk aspects, and for completeness I thought I'd summarise my views on some of the range of risk issues involved, as bullion neatly illustrates quite a few. For avoidance of doubt, these are strictly generic and academic 'Risk 1.01' views that you'll find in any (good) textbook ...

1. Price risk
: pretty obviously, investing in bullion represents outright speculation, with all the attendant exposure (unless it is part of a hedged strategy). I often describe gold etc as a 'hedge against Bad News', but that should be seen for what it is - a very loose use of the word 'hedge'. There is no precise inverse correlation of the sort that true hedging implies: it's a 'dirty hedge' at best.

2. Basis risk
: investors wanting exposure to (say) the gold price, but not knowing how to get direct exposure, have often bought (e.g.) gold mining stocks as a proxy. Only empirical analysis can determine how closely the prices of gold and mining stocks are correlated (answer - not very highly, by risk-management standards): and even if two things have been very well-correlated for a long period, this correlation might subsequently collapse - I could cite many cases. This is an example of what is known in the trade as Basis Risk.

3. FX risk
: if something is denominated in a currency other than your own, this can open up another source of risk. Of course, gold, though generally quoted in USD is readily quoted in all currencies, and anyway FX itself is an ultra-liquid market; so is gold 'really' denominated in USD? An interesting question, not easily answered. But we could fairly say that oil is definitely denominated in $, FX notwithstanding, because its price formation is driven inter alia by the dollar itself.

4. Credit risk
: when you want to cash out, can you ? and with what certainty ? This is where serious DD really counts, & it leads directly to some other risk considerations ...

5. 'Wrong-way' risk
: where the credit standing of your counterparty is related to the very economic conditions your investment is concerned with. If you buy an out-of-the-money put from an oil company, you'll be wanting to exercise it when oil prices crash. But that's just when the oil company will be in trouble ... The same might be true of (e.g.) an ETF, relative to Bad News - Alphaville has published long articles on this.

6. Illiquidity: at the best of times, some markets / asset classes are more liquid than others, & in troubled times this can become acute. Bid-offer spreads can become ugly, too. The latter can also result from volatility which of itself, for the trader, is not always a bad thing in terms of opportunities presented. But wide bid-offers only favour market-makers.

7. Premium on physical
: this is where we came in. For several of the above reasons, commodity buyers (both private investors and industrial end-users) prefer owning the actual stuff, even if (on a good day) paper 'equivalents' have a near-identical financial performance. Of course, owning the actual stuff often comes with additional costs and complexities of its own - who can handle 1,000 tonnes of coal, or 1 MWh of electricity ? Typically, only a specialist player.

But it also comes with a greater measure of certainty, which in difficult times can be a serious advantage. Related to what is termed the 'convenience yield', it can frequently outweigh the 'cost of carry', amounting to a premium on holding the actual, physical commodity - particularly when credit issues abound, and there is reason to be suspicious of contractual performance.

Sound familiar ?
Back to doing your own DD, chaps.


Thursday 13 January 2011

Question fest

The return of the never understood,rarely missed, Question Time guessathon, quiz.
YOU choose what you think the panel may be asked by the audience. YOU put those guess questions into the comments... points are awarded for accuracy, style, exclusivity, humour and sometimes just randomly. For our readers without a telly..its just like 'any questions' only less middle class.

This season totals will be kept and updated each week
YOU decide!

David Dimbleby is joined in London by

Michael Gove MP,{This baby's all for turning. Gaffer Gove is ed-sec.}
Diane Abbott MP {education minister with education she says very little on schools.}
Charles Kennedy MP,{ taking a tough stance on con-lib unity while stabbing himself through the kneecaps with his pen muttering I warned you Nick..I warned you..}
Jeanette Winterson{lesbian novelist..sermoniser. You'd never guess.}
James Caan {eldest son of Vito Corleone, cruelly slain. Or possibly that entrepreneur/ philanthropist bloke of the Dragon's program}

BQ predicts.

1- Bank bonuses are out of control
2- Corrupt MPs are out of control
3 - School league tables are out of control
4 -Lib Dem vote share is collapsing out of control
5 -Fuel prices are out of control.

Inflation watch

Shop price inflation rate increases

The rate of inflation of goods sold in shops increased in December and consumers were warned that more price hikes are on the way.
Shop prices were 2.1% more expensive in December than a year ago, as the rate crept up from 2% in November, driven by the rising cost of non-food items..
Food price inflation remained at 4% in December, but non-food inflation increased to 1.1% from 0.9% the previous month, pushed upwards by toiletries, cosmetics, DIY and home furnishing products.
January's rise in VAT from 17.5% to 20% and further hikes in the price of commodities, such as oil, wheat and corn, are expected to lead to more pain for consumers in 2011.

Its not clear if the lower VAT rate last Christmas, 15%, is allowed for in these figures, but any increase in November December when discounting was all the rage is most unwelcome.

HMG has left interests alone at 0.5% again.
For how much longer though? Another month. Six months more? The January rates are probably not going to panic anyone too much because many non-food retailers, including some very large chains, didn't bother with hiking prices in line with new VAT rate. Food and fuel will have pushed up inflation though.
But by March all new goods will have had the increase added. Spring rise? Buried among the Royal wedding at the end of April?

Wednesday 12 January 2011

Can Gartmore de-rate a whole sector?

In 2009, at the height of the recession the US Banks, BoA, Morgan Stanley, Citi and UBS bravely brought a UK Fund Manager to the IPO market. Gartmore was a long established brand, but as with many floats, had no real reason to go to the Public Markets except to allow the management to get shares and cash out.

Here we are just into 2011, barely 2 years later and Gartmore, floated at 220p has been bought out by Henderson for the equivalent of 92.1p. A spectacular loss for the Investors and at a time when the FTSE and other main markets have risen 50% - so a double whammy.

Gartmore had a horrific time as a Public Company, there were staff fights and FSA investigations followed by inevitable client withdrawals, effectively crippling the business until a buyer could be found.

What this does show is a number of things:

Firstly, never buy companies that don't need the IPO money. If management wants a payout they should wait for the revenues to come and pay themselves dividends or sell the business entirely. IPO's for this reason distract management and ruin businesses; Gartmore is a text book case of this.

Secondly, there have been in the last 2 years some truly terrible IPO's in the UK and far fewer successful ones. Again, the Investment Banks play fast and loose with the companies to get them away and secure their fees. The prices are often not so much too high, the recession has put paid to that, but the Risks are under-rated and future performance over-rated.

Thirdly, Gartmore is a business where the key assets are people held to contracts which they can easily break under employment laws - or as in the case of Gartmore's Roger Guy, they can face professional or personal issues at any time that undermine their role. This then has a catastrophic effect on the business. Fund managers are prone to this; as are Hedge Funds, Lawyers etc. Businesses that reply for revenue generation on a few key people simply are not suited to the public markets and Gartmore again is a classic case of why this is so. The only other key asset is the 'Brand' which itself is tied up with the people who live it. In this deal it should be noted that Henderson is ditching the now toxic Gartmore brand instantly; again accountants put high intangible values on Brands but they are prone to instant devaluation in these types of businesses.

As such I expect there to be a de-rating of Fund managers as an sector and certainly would not invest in this business. The staff are get the rewards, not the shareholders who simply hold the risk on behalf of the staff.