BP Update: Time to buy yet?

Tony Hayward announced this morning on the UK Andrew Marr TV show that the new cap put in place by the company is bringing up 10,00 of barrels of oil per day. This is most likely the majority of the oil and BP are working to optimize the rest over the next few days.

This is the first piece of good news for BP for weeks. Although the terrible catastrophe that was unleashed will remain as an environmental challenge for years to come.

Also there are now some good contrarian indicators coming into place. The US President has been talking about taking every penny from BP and stopping dividends. The UK bank analysts have been talking up the prospect of a take-over. When things get this bad you are normally at the nadir of a crisis.

Earlier in the week I said I would buy BP at under £4.00, but with this news and the price at £4.33 now may be a good chance to pile in. I don't doubt the dividend is going to get cut for political purposes if nothing else. just like Tony Hayward will get sacked.

This will mean the long-term share price of BP is not going to recover towards £6.00, however, at £5.00 with an 8-10% dividend that will be a pretty good investment.

Equitable Life, JP Morgan: The Regulators Rumble On

So Equitable Life auditors Ernst & Young are to be fined £500,000 by the accountants' Disciplinary Tribunal (reduced on appeal from £4.4 m); and JP Morgan docked £33 m in a (final ?) flurry of activity by the unloved FSA.

Some disparity, surely ? JPM's offence was that they did not segregate clients' funds - which is pretty outrageous and certainly put them at risk, but in the event did not give rise to actual losses.

By contrast, E&Y's failing can be seen as contributory to huge losses on the part of many of Equitable's customers. One is reminded of Seller and Yeatman's masterful summary of Magna Carta which provided, inter alia, "that the Barons should not be tried except by a special jury of other Barons, who would understand".

So the Equitable pensioners await the new compensation scheme promised by t'Coalition: and we all await the dawn of a truly punitive regulatory regime that makes financial players think twice before misbehaving.

ND

Another Reason Why Murdoch's Paywall Will Fail

. . . is that the writing is garbage. This, from today's Times:

"It is understood that John Gerson, BP’s director of security and public affairs and a former deputy head of MI6, will appraise officials from the No 10 Policy Unit"

Will he indeed ? We await his appraisal with interest: perhaps in due course the Times will let us know what he finds.

In the meantime, you won't catch me paying for that.

ND

Question Time quiz

David Dimbleby is joined in Brecon, Powys by David Willetts, Diane Abbott, Leanne Wood, Matthew Parris and Kelvin MacKenzie.

Need an Aegis missile carrier to shoot at all of this weeks targets. And look at the gifts on the panel!

Q1. Shooting spree and firearms.
Q2. Israel and sea blockade and what the hell is going on?
Q3. David Laws outed. Was it right?
Q4. Diane Abbott's leadership ambitions
Q5. Cuts and Welsh cuts. {Leanne wood is Plaid Cymru}

Bonus point for BQ if someone mentions Red or Dead Redemption being somehow responsible for this weeks slaughter.
{it is worth its 9.5/10 review}

Usual rules. Up to six questions to predict. Winner gets to choose the England starting eleven.

These are not the Kumquats you are looking for

The rise of the self-scanning machines

Tesco announced another bumper year with £3.4 billion of profits. The supermarket giant marches on.
Tesco announced a lot of Gordon brown sounding initiatives in its Corporate Responsibility Report.

Tesco's intention is to become a zero-carbon business by 2050. It also indicated that it will open what it claims to be the world’s first zero-carbon store in Ramsey, Cambridgeshire. Additionally the firm aims to grow sales of local produce by more than 20% in the UK, and is on track to reach £1 billion this year. As part of this Tesco is to hold 100 “community fairs” this year, giving local food manufacturers and good causes a platform to display goods and appeal for volunteers.

All very good sounding news. Less good sounding is a community of nuns who have incurred the wrath of Whitby by wishing to sell of their land to the Tesco megacorp.

The BBC has a report that reads suspiciously like a press release, "More than 2,000 people have signed a petition against the development, which would create about 300 jobs also include 90 affordable homes and benefit shoppers."

The Order of the Holy Paraclete refused to comment.

The thing is Whitby isn't small. The Whitby parish has a population of 13,594. It has rail,road, bus and sea links. Its a seaside town. Tesco have gone to places smaller than this. West Byfleet has a Tesco {mini}and a Sainsbury's for a population of around 5,000.

5,000 is the sort of low base starting point for a Supermarket. Whitby seems big enough to cope.

For those who decry the rise of the checkouts there is more bad news. The World Cup is moments away, the weather is good and last summer was bad. {The May super heatwave was coming to an end this time last year}. The previous World Cup tournament in Germany was worth £1.25 billion pounds to the UK economy, according to the British Retail Consortium. Tesco earn something like £1 for every £7 spent in shops in the UK, May/June is going to show a large increase in sales. Especially for Tesco.

Does Vince understand business?

Vince Cable is going to give his update today on how the new Government sees UK PLC developing. There are likely to be some very welcome developments, such as the stopping of Lord Mandelson's crazy idea of picking winners and throwing subsidies at private companies with no promise of any economic return.

One issue though is that Vince is very keen to get banks to lend more to small and medium sized businesses. However, this is very much an economist talking. In aggregate he sees the drop in money supply and a credit squeeze. This needs to be loosened to we get Quantitative Easing and pressure on the banks to lend more.

What it ignores is Reality. In reality the UK corporate sector is awash with leverage, this is one of the main reasons the recession was so painful. The UK as a whole is awash with private debt and public debt. The concept that somehow more debt in the system is the answer is ridiculous. The Government itself is about to start making cuts (therefore another fall in demand, hence economist Vince seeing that we need more private debt to cover this contraction).

What the UK needs is over time to reduce if private, personal and public sector debts. sadly, this entails years of retrenchment - on the plus side with debt, the sooner you start paying it off the easier it gets as the principles are reduced.

Finally, the UK banks re keen to lend, but not to throw good money after bad. Should we really be encouraging state owned enterprises to lend to risky business where the money lent may not be recovered, let alone with interest? How is this a sensible way of nursing the banks back to health and off the public sector balance sheet.

Anecdotally it seems that Barclays, a private sector bank, is more or less closed to new business and has been for a long time. HSBC loves mortgages but no SME lending. leaving RBS and Lloyds already making up more than their fair share

Nuclear Ball-and-Chain for Huhne

As new brooms often do, “nuclear sceptic” Chris Huhne has swept around a little and found – who’d have guessed it – a £4bn black hole in unavoidable nuclear de- commissioning and waste costs ! He has been statesmanlike enough not to make this an anti-nuclear issue per se, but to blame it squarely on his predecessors. From the Graun:

“In [the] current financial year the Nuclear Decommissioning Authority's budget is expected to be in balance. From 2011-12, the deficit suddenly rises to £850m, in 2012-13 the gap increases further to £950m and then to £1.1bn in the two subsequent years. If the Treasury refuses to shoulder the full costs, Huhne's department would have to make cuts with possible implications for energy efficiency and climate change programmes”

Quoth Huhne:

“This is a fairly existential problem. The costs are such that my department is not so much the department of energy and climate change, as the department of nuclear legacy and bits of other things"

Now Chris Huhne may be ‘just’ a canny politician doing what spending departments always do, but we are told that Osborne is fairly cute himself. So there’s a bit of an opportunity here, notwithstanding that the process may need to be intermediated by the new and untried (LibDem) Chief Secretary Danny Alexander.

My solution: yes, you guessed - two birds with one stone. (a) extra nuke costs to be borne from existing budgets - at the expense of the more fatuous renewables projects: (b) increase the liabilities on would-be nuke developers, to cater for the fact that clean-up, like an Olympic stadium, always costs more than anyone thinks. Thus making life more difficult for two undeserving groups of subsidy-wallahs.

The difficult bit may be (a), because most renewables subsidies, being levied via electricity bills, aren't from the same pot of £££ as nuke decommissioning. But hey - what's a clever Chief Secretary for ?! The other problem will be the Civil Service instinct to take out onion and sadly declare the nuke bill will have to be met from cuts in the energy efficiency budget - which is the very thing that is most deserving of public cash.

But ... get this right, and there could be a very satisfactory outcome here.

ND

How fare the Gold bugs?

James Higham has asked my views on Gold. It is a long time since I wrote on the Gold price. In 2006-8 I was a huge holder of gold, it was my biggest asset by far and it did well during that time too - in both ETF's and Funds. Subsequently I shorted it through the financial crisis and timed a repurchase well at $700 an ounce. Then I sold out at $900 an ounce to get into shares at the beginning of 2009.

Now on reviewing the above I see that the calls made were all good. Even the sale at $900 was OK, because although I missed another 50% increase my shares that I bought at that time went up over 300%.

But now to today, where is Gold going now? It is flat on the year so far.

Well, the end game for the West is still inflation, in the UK we seem to be getting there early. Massive debts can't be paid and the in some ways the most equal way of sharing out the remaining wealth will be through a period of high inflation. Much like the 1970's. In fact we are going to have stagflation, a prediction made here long before the financial crisis.

As such, Gold is going to be a good store of value, but then again Shares will be too as they outpace inflation. Indeed anything that is not cash is going to be a good investment. So Gold will go higher, maybe even to $2000 at some point next year (one for the 2010 predictions), but other investments will be too. On the other hand, if the World Economy collapses and we do end up with deflation then Gold will only do OK relative to other assets.

With this in mind I own shares in (potential) Gold miners such as EMED, but am not heavily into Gold. I prefer Oil, it has more practical use and will only get more expensive as we pass peak oil. Co-Capitalist Nick Drew takes a very different view. Given he is more successful and wise than me, probably best you read his posts on Gold too!

(The real trick is going to be to get debt now, fixed at a good rate, that I can then invest in more profitable ventures. Normally I would be erring to get free from debt slavery, but not now. Just as in March 2009 I called to buy shares, now I will try to fix debt for the inflation ride to come - thinking of it as my revenge on the Banks).

Time to fix BP - but not time to buy.

Prompted by an email from long-time reader Steven L, it is time to discuss how on Earth BP are going to get out of the mess that they have created in the US.

Firstly, this is going to pan out as amongst the worst environmental disasters ever. A truly epic failure to manage to blow a rig pumping so much oil directly in the Ocean. The effect on the US coast is and will be awful and I feel sadness that such a fine place, which I have visited a few times, will have to cope with such a disaster for years to come.

However, despite the current news, it reflects badly on the US government that they are so critical of BP. After all, they do not have the technology or know-how to try and stop this disaster and are reliant on BP to fix it. Shouting at them in a pure populist driven mania is all very well, but really if they think BP that are doing all they can what can they do? Nationalise them?

From BP's perspective they need to do a few things:

1 - Be honest, don't try and spin things as this will get found out by a hostile US media.
2 - Sack Tony Hayward. In the US the bad guys in movies are always well spoken Brits. As such appointing Bob Dudley the new CEO, an all-round American good guy, is just a sensible thing to do. Moreover, Hayward has made a few gaffes under huge pressure; most people would, but now is a good time as a sacrificial lamb is required.
3 - Don't worry about costs, as a super major, BP can cope with multi-billion losses. It is self insured anyway, acting in the interests of its customers rather than shareholders is the way to go in this situation.

BP's share price is under huge pressure after the failure of the top kill method for blocking the well. With all that is going on it can't be a good time to buy yet; also the dividend is going to take a big hit from all the costs of dealing with the above. That said, as a Super Major BP will be back, if it starts to touch its bear market lows of under £3.90 per share then it will be worth a look for the long-term - that is just 10% down from where it is now.

It's The Poor What Gets The Blame

So - while Baroness Scotland got off with a slap on the wrist, Loloahi gets banged up ! How we need some of that Freedom, Fairness and Responsibility ...



I got her from a bar down in old Soho
Where you don’t stay long
Or you catch a dose of Ebola
E-B-O-L-A Ebola

She walked up to me and she asked for a job
And I asked her name
And in a dark brown voice she said Loloahi
L-O-L-O Loloahi

Well she’d left Tonga just a week before
And I’d never ever hired illegals before
But Loloahi smiled and she looked the part
And said ‘OK lady, when do I start?’

Well I’m not the sharpest knife in the tray
But when she showed me her papers, they looked OK
They said ‘Loloahi’

I fired her today
I rushed to see Gord
I begged and implored
I got down on my knees
And he said I have his full support

Well I’m not the world’s most clever QC
But I know why Gordon appointed me …

The rules are the rules but it’s just a mistake
I got mixed up, muddled up in good faith
Over Loloahi ...


(apologies to Ray Davies)

ND

Dead Tree Press Post Election Update

All change in the UK Media already. On Thursday the Daily Mail and General Trust announced a return to profit after a poor couple of years. Advertising has recovered a little, the expensive jaunt that was London Lite has been stopped and the website has lots of hits with its solid concentration on celebrity lite news. There were also 680 redundancies. Still, at least the future look stable.

Meanwhile the Guardian, so long the darling of the left, is in rather a lot of trouble. Not only are losses expected to be bad this year, but they backed the Liberal Democrats into the Government. Their repayment seems to be the Liberal acquiescing to the Tory plan of setting up an in-house Government jobs website. This will be catastrophic for the ad revenue of the Guardian as many of its ads are purely for Government work. And those that are not often publish Government advice and Quango self-justification adverts.

All in all, another victory for the Right wing over the Left. Shame in some ways, even as a right winger I know which paper I would rather read (if forced). Still, onward march market forces, at last.

Apple vs Microsoft: Short-Term Thinking ?

A common criticism of Wall Street is that it is fixated on short-term results. Well, most recently Microsoft has been, errr, twice as profitable as Apple in absolute terms. But somehow Apple has overtaken MS in terms of market cap.

The reason generally given is that Apple has the better long-term prospects !

Things are always a bit more complex than they are painted ... long gold**, me.

ND


** no financial advice here, of course

Capital Gains Tax up: Where are the cuts?

Now, I have read John Redwood's letter to the treasury on Capital Gains Tax and it makes a lot of sense, as per usual from John Redwood. His basic idea is that we up the rate for CGT, but not for investments then cut that for investments of a year or more.

However, when it comes to shareholding I don't think this makes the slightest bit of difference to FTSE companies. Whether you hold Aviva for a year or more does not help Aviva in our wild markets. They are far more dependent on bank finance which is another issue altogether. Similarly speculative punts on AIM shares are not made the better for sealing them in for the long-term. In fact, selling on bad news is crucial to preserving your wealth in this way.

Also, Vince Cable, wrong on so many issues and not long for the Government I imagine, has a point about people using Capital gains to shelter from income tax. All in all, it should be equalised, but indexed so that you don't pay tax on gains made only due to inflation.

There I said it. There is though a massive quid pro quo. CGT will raise about another £2 billion in tax. This means we need another £8 billion in spending cuts to keep the 80:20 ratio. The Budget needs to identify these cuts.

My biggest fear is that the Government will shy from large cuts and instead content itself with raising taxes. I can see £25-50 billion of tax rises and then another similar amount of cuts to achieve the deficit target.

Back to John Redwood, in the above environment you can forget an entrepreneurial led expansion of the UK Economy with that weight of tax burden on this.

A Good News Story From Jaguar Land Rover

. . . and an excellent lesson for subsidy-wallahs everywhere.


Jaguar Land Rover is owned by Tata of India - which, incidentally, doesn't bother us at C@W, despite the steam we see coming out of some people's ears.

Anyhow.

Tata is apparently re-thinking its plans to shut one of the UK plants. Lo and behold, Jaguars and Land Rovers are selling well - it can be done ! - in those parts of the world that are coming out of recession the most strongly, or indeed were never in recession in the first place. Yes, it can be done - with the right products, management and sales-force.

And indeed the right attitude, for get this:

"It had been thought that any reprieve would be dependent on what government assistance could be secured. But Jaguar Land Rover has no plans to approach the new government knowing that in the current climate financial support is extremely unlikely"

It is earnestly to be hoped that this message sweeps the boardrooms of Britain like wildfire. Mandy and his wretched, atavistic pick-the-winners government are gone. So get stuck in.

For far too long, far too many players in British 'industry' have operated under the slogan: why do a hard day's work when you can lobby for a hand-out instead ? Nowhere is this more pronounced than in the 'green energy' sector: don't invest now, there will be an even bigger subsidy coming along soon ! (And, I am sorry to say, if you read the bad bits in that lengthy Energy section of the Coalition Programme, you can see why they will be taking this view for a while to come.)

Good for Tata !

ND


Update: may have spoken too soon ...

Question time predictor.

David Dimbleby is joined in Gravesend{Gaysend on the website?}in Kent by Alastair Campbell, Piers Morgan, John Redwood, Max Hastings and Susan Kramer.

Guess the questions that the panel will be asked. Score bonus points for correct phrases and defence lines. Guessing the attack lines with Campbell in mind will be class based.

Questions

1. 6 billion of almost insignificant cuts. Hitting the poorest families?
2. Eu Levy on the banks. Tories won't implement protecting their toff mates.
3. John Redwood and capital gains. Tory landowners won't pay their share of taxes
4. Lisbon treaty to be renegotiated. Tories split over Europe.
5. Schools and how the new proposals will only benefit rich toffs
6. Alistair's 'real' diaries still seem a bit redacted?

This weeks prize is to get to design the coalition logo

Osborne is Right, EC Wrong on Use of Bank Levy

We don't expect always to agree with young George around here, but he's got this one right. If there is to be a Europe-wide special levy on banks, its application should be to general funds at the national level - by way of repayment for the bailout, if one likes to see it that way - rather than as a communal rescue fund for future bailouts. Even the Grauniad agrees on this one.

A year ago, the Turner Review mused on the idea that fully 'socializing' the ultimate risks of bank collapse might be "the optimal and only defence against system failure".

It isn't, and it couldn't be. As we said at the time:

"Conventional risk management can do much better than this without recourse to ‘state insurance’ ... What ‘society’ should demand is not the dubious privilege of socializing ultimate risk, but the proper implementation of conventional risk management between the consenting adults involved"

This is basic conservative philosophy. If you absolve anyone of taking care of their own business, they will at very least tend to be more casual about their affairs. We require property owners to confront the risks of fire personally, to arrange their own fire prevention, on pain of burning to death. The fire brigade (funded from general funds) is primarily there to stop fire spreading. Likewise, we must require banks, and their stake- holders, to confront their own capital adequacy - and the cost thereof - on their own. That is how risk will be driven out.

Michel Barnier, the EC commissioner responsible, is using the wrong analogy. "I believe in 'the polluter pays' principle", says he - and thinks that the payment should be into a government-held reserve. He should remember how this works in the realm of environmental pollution: unless firms are forced to curb their emissions specifically, they evaluate whether the fine is cheaper than the clean-up, and often opt to pay the fine.

You will not be surprised to learn that in the long run M. Barnier, statist froggie that he is, wants the reserve funds to be held by the EU itself. There is nothing more important for Osborne to resist than EU-wide (or even worse, UN-wide) tax-gathering, for banking, environmental, or any other purpose.

Hang tough, George, and you'll win C@W round yet.

ND

Thorntons Easter eggs failed to hatch

Thorntons revealed last month that it suffered disappointing trade in the key Easter period, with like-for-like shop sales down 4.6% in the 14 weeks to April 17th, greater than the 2.4% decline seen in the previous six months.
It already reduced its pre-tax profits guidance for the year to £7.5 million in April, but today's news means expectations will come down even lower.

Thorntons said it had "continued to experience a tough trading environment", with like-for-like sales declines in its stores and higher than anticipated discount costs on clearing excess stocks.

Thorntons was in trouble last year as we posted here. They had been trying to discount their way out the recession. Reducing profits but increasing turnover. Unless there is a very, very high and fast turnover like on foods or newspapers then this strategy is always high risk. Sales shot up but at the end Thorntons seemed surprised they hadn't made any money.

This time its just lower overall sales and the necessity a perishable trader has of moving stock by discounting before its sell by.

Retail news has been reported fairly positively recently but the deeper data to pick a winner isn't very convincing. M+S were celebrating £630 million profit. But in 2008 it was over a billion. French Connection were up 1.9% which is marginal on their poor 2009 figs. Mothercare announced excellent sales figs up 21.4% but that includes over a hundreds new store openings. Like for like sales are up just a respectable 3%.

Nothing very exciting anywhere.

Ashes to Ashes: Mega Bear Markets and the Shape of 'Recovery'

As promised, a further contribution to the grim picture CU painted yesterday. 'V'-shaped recovery ? Get a sense of perspective. Quite hard to find even a decent 'W' here ...

H-T dshort.com

ND

is this capitulation?

The FTSE is down another 2.5% today? With all the bad news around like North Korea considering war with South Korea, and the Euro crisis, it fees like capitulation.

On the other hand red line on the chart on the right shows the bull/bear/bull market. We have only just fallen below the 200 day moving average - suggesting a prolonged period of falling FTSE or else a big bounce.




However, no bounce is very bad news as it could mean the end of the QE Bull market and either a long period of stagnation or another bear market being born. not good for the savers who piled out of 0.5% savings and into shares.

I have no insight to offer in such a volatile market. Suffice to say my 30% profits on the year are down to 5%!

BP = Beyond Parody: Mandy on Manoeuvres

When we read a carefully-planted newspaper story that Mandy is being considered as a replacement for Tony Hayward at BP, we may be fairly sure that he is (in the immortal words of William Hague) on manoeuvres.

Let's see if this self-serving little rumour bubbling up from the darkest depths does anything to halt the leakage in BP's market cap, which has lost $47 billion since the oil-spill became public knowledge.

ND