The only way to have a quick war is to lose it. In the boardrooms of the world’s top trio of iron ore miners, the directors have decided that they are not going to lose. Rio Tinto has announced another mine in Western Australia. Not to be outdone, BHP updated its plans to expand, to get its cost of production below that of Rio.

Meanwhile in Brazil, Vale is exploiting its weak currency and ramping up output. This mining machismo makes for a truly horrible outlook. Goldman Sachs estimates that 165m tonnes more ore will be mined next year than the market needs.

The price has already slumped to $72 a tonne, a five-year low, and since commodities swing violently around equilibrium, it won’t stop there. Citicorp’s forecast of $65 next year looks optimistic. The big boys’ plan is to force the smaller miners out of business, and since most of them are already losing money, they won’t last long.

Or will they? The biggest consumer of iron ore is China, and it’s the high-cost local miners which are supposed to close. If the price falls far enough for long enough, they will, but not before the Chinese authorities finally give up hope of an upturn.

To be fair to the big three, they have the prisoner’s dilemma. If one scrapped its expansion plans, its own cost per tonne would not fall, while the higher price would allow the other two to clean up. You can see why clever Ivan Glasenberg wanted to put us Rio shareholders out of this misery by taking the company over and stopping the producers “killing the supercycle”.

Instead, the west’s miners will hand their efficiency gains to Chinese consumers. Perhaps the maxim in those boardrooms should be: If you’re in a hole, stop digging.

Budget leak

A page from an early draft of the Autumn Statement has fallen into my hands

Mr Speaker, I come now to the nation’s finances.

My Treasury colleague, the chief secretary, has remarked on our deficit reduction plans for after we win the next election. He said they were “simply not credible”. This does him no credit as a member of the government.

However, today I can announce a single measure to transform the public finances.

The Bank of England’s programme of Quantitative Easing has required it to purchase £375 bn of government securities. This has enabled Britain to mitigate the effect of the recession that has so damaged our trading partners in Europe.

It is an experiment that is widely held to have worked. Today I can go further.

One result of QE is that 28 per cent of the National Debt is now owned by the Bank. The Bank itself is owned by the taxpayer. Accordingly, I have instructed it to destroy its entire stock of government securities. This will require some technical adjustments to the Bank’s balance sheet.

The move may be seen as controversial. So was that of QE itself when we embarked on it. But of course there is no question of the Bank being unable to meet its obligations as they fall due. It can print its own currency, unlike our less fortunate European neighbours.

When our economy recovers to the point where inflation is a danger, new Treasury stock can be created and sold as necessary.

As it always has been in the past.

As a result of this action, Britain’s National Debt will fall from 80 per cent of our gross national product to under 60 per cent. A lower figure than almost all our international competitors.

I turn now to our scope for tax cuts…

Who’d have thought it?

You can’t beat social science for increasing the sum of human understanding, and here are two fine examples. Bankers, according to some researchers at the University of Zurich, lie for financial gain.

Meanwhile, their colleagues across the border at the Universite de Bretagne-Sud have been amusing themselves observing the impact of women wearing high heels on the male psyche. They’ve found that we pay more attention. Coming next: research on defecating bears in woods.

This is my updated FT column from Saturday


Long ago, the redevelopment of Canary Wharf was conceived as a sort of back office centre, one step up from warehouses. Then the Reichmann brothers stepped in, and while their business failed, the Canary flew.

Last week its quoted parent, Songbird Estates, did too. A  295p-a-share “indicative offer” from its biggest shareholders was quickly rejected, and the price has soared to 342p, as the market spotted what the Qatar Investment Authority and its partner Brookfield of Canada already knew.

Canary Wharf is about to take flight again, with rents rising and the seemingly-endless Crossrail project becoming reality. Its station, 330 metres long under four decks of retail space, topped with a mini version of Cornwall’s Eden Project, is nearing completion. From 2018, trains from Canary Wharf will reach Bond Street in 13 minutes and Heathrow in 39.

The Wharf’s long-serving boss, George Iacobescu, can scarcely contain his excitement. He has seen his project rise into the sky, and now plans a proper city centre where people will want to live. He may even succeed.

The QIA owns 29 per cent of Songbird while Brookfield has 22 per cent of Canary Wharf. The next three biggest holders could deliver control of the £2.5bn market cap company, but the likes of Standard Life, with 3.5 per cent, will be watching carefully to see the rules are followed.

Despite the elevated share price, there seems little downside. Brokers Oriel see 14 per cent compound annual growth even before the trains arrive, and a take-out value nearer 400p for “arguably the best large-scale developer in London.” A catfight over the Canary surely looms.

Mr Nobody is to blame

Did you see all those forex traders being marched off to clink this week for crimes against customers and shareholders? Did you note the names in the Financial Conduct Authority’s report into market rigging? No, you didn’t miss them. There was no “perp walk” parading the suspects in handcuffs past the cameras, and no names in the shocking findings from the FCA.

This omission, like the findings themselves, follows a pattern that has become wearily familiar. Those at the top express shock and sadness that their employees could behave as such self-interested brutes. The brutes have all been “let go”,  and in future there will be better behaviour, tighter controls, care for customers, etc etc…

Too often the new employees are just other banks’ brutes, and the fact that the forex fix took place after so many other scandals had been exposed betrays what the senior bankers really think about reform. Why should they care, when it takes only a few years to make enough in bonuses to be set up for life?

There’s a danger, too, that the regulators and their governments start to view the continuing fines as nice little earners at the expense of the banks’ shareholders. Until the bigger holders among them insist on reform rather than wilful ignorance of how the money is earned, this cycle will continue.

A golden opportunity

Only in Switzerland. In a fortnight’s time, the populace is invited to force their central bank to hold at least a fifth of its assets in gold. A yes vote would signal the turn in the market as surely as Gordon Brown did when he dumped 400 tonnes of Britain’s gold reserves 15 years ago.

The price then was at a 20-year low, and it subsequently multiplied seven-fold. It’s since come back to a mere four times Gordon’s sale price, but a yes vote would oblige the Swiss National Bank to put a rocket under it.

Last year, calculates Grant’s Interest Rate Observer, the world’s central banks bought a net 368 tonnes. For the SNB to hit a 20 per cent target, it would have to buy 2,500 tonnes. No point in paying with all those billions of euros in the bank, either, since that would only drive up the price of the Swissie still further.

The SNB already owns 1,040 tonnes, and the referendum also demands repatriation. Since much of the world’s gold is tied up as collateral (some pledged many times over) few counterparties have deliverable bullion on this scale. “Yes” would mean a very nasty bear squeeze.

This is my FT column from Saturday

Last week’s announcement from HSBC covered 32 pages – positively skinny when set against August’s half time report. That ran to 293 pages, but then the latest one was merely an interim management statement, a snapshot of trading in the arid wastes between actual trading statements.

So how’s it going for Britain’s biggest bank? Not that well, judged by the headline pre-tax profit of $4.6bn, which was an eighth below outside estimates. Rather swimmingly, judging by adjusted pre-tax profit of $6.6bn, which was roughly the same distance ahead.

Which is the “underlying” profit figure, and which merely lying? Who knows? Disclosure on this scale, even the 32-page mini, effectively robs the numbers of their meaning. More compensation here, a new threat of fines there, a writeback of some provisions, and the numbers can be tortured to confess to almost anything.

The professionals struggle to see what’s really going on, while the rest of us have no hope. We were grateful for Terry Smith’s simplified Lloyds Banking balance sheet in the FT last Saturday, just three lines to demonstrate how high-risk these businesses really are. Thirty years ago as a bank analyst, he could deconstruct their balance sheets with confidence, something he says is not possible today.

The top executives pretend they understand, but they don’t. These institutions are simply too big and complex for the human brain to grasp, as CEO Stuart Gulliver effectively admitted as he abandoned his cost efficiency target. At HSBC’s British rival, Standard Chartered, Peter Sands has found that even after seven years as CEO, he couldn’t see what was coming in the eighth.

The regulators are doing their best, with the ECB’s stress tests and the Bank of England’s leverage ratio designed to force better behaviour than in the past. Alas, it’s like training tigers to be vegetarian. Whatever the CEO tells them, bankers will find ways to game the system at the expense of customers and shareholders, and complexity is their camouflage stripes.

The solution is the same as it’s been since the start of the crisis: break the banks into businesses simple enough for managements to understand, and small enough to fail without bringing the house down. Until then, expect many more 293-page statements, and no three-line balance sheets.

Clip that hedge

Why do airlines hedge their fuel costs? Almost all of them do it, and last week Ryanair, the smartest of the lot, announced that it had bought 90 per cent of its expected needs until 2016 at an equivalent $93 a barrel.

This may look quite clever if the crude price dances away next year, but so far it’s merely locked in a 10 per cent loss on the cost of the company’s most important raw material. The pat answer is that hedging reduces uncertainty, allowing better forecasting, although Ryanair issued its third  reverse profit warning of 2014 after the business had a better summer than it had expected.

Hedging costs money, since there’s never a perfect match between forward contracts and actual fuel use, and those poor market traders have to make a living. It’s hard to disagree with the conclusion of a study eight years ago by Peter Morrell at Cranfield University: “Hedging may be a zero-cost signal to investors that management is technically alert. Perhaps this is the most compelling argument for airline hedging. However, it lies more in the realm of the psychology of markets than the mathematics.”

If it costs nothing…

There’s no such thing as free banking, and no such thing as a free email account, but if you’re not paying, it feels that way. Provide you keep your current account in credit, there is little incentive to switch.

This hidden subsidy has driven sneaky behaviour by the banks, but the idea that without it they will behave better is as laughful as the Competition and Markets Authority forcing consumers to pay for something which currently costs nothing.

Without such a diktat, the first bank to scrap free-in-credit current accounts would see a stampede for the exit by their core customers. Alex Chisholm, the CMA’s boss, grumbles that too few people change their bank account, but recent changes make that pretty simple. He should be careful what he wishes for.


This is my FT column from Saturday

Share buybacks, that process of paying some shareholders to go away at the expense of those who remain, is getting a bad name. It’s deserved. Buybacks’ principal effect is to pretty up the earnings per share, a key measure for executive bonuses. They also help disguise the dilution caused by employee share awards, while producing a nice little earner for the company’s brokers.

The general rule is to announce the sum to be spent, and to keep buying almost regardless of the price, until it’s all gone. At the height of the last crisis, some boards took fright and suspended their programmes, only to resume at dearer prices when the market recovered.

Returning excess capital to shareholders makes obvious sense. It allows the owners to squander their money rather than have the directors do it for them. Mechanisms to do this, through special dividends or capital distributions, are uncontroversial, but the buyback fails to treat all shareholders alike.

As so often, Simon Wolfson at Next is showing how to do it. Last year the management’s projections indicated that the shares were too expensive to justify using the company’s money to buy them, so shareholders got a special dividend instead. As markets plunged last week, the price has come back into range, and Next spent £32m on its own shares.

This increases Lord Wolfson’s grip on the business, since he doesn’t sell shares in what he sees as his family company. However, as the perspicacious Nick Bubb points out in his Daily Retailer blog, the buying also indicates that Next is avoiding the weather woes of others in the high street and that the management views today’s price as fair value.What’s not to like?

Jam tomorrow

“Let’s put the cars of tomorrow on the roads of today” gushes the headline of Shell’s latest ad campaign, boasting with unfortunate timing about how far a single litre of fuel could take you.

Unfortunately, the roads of today have quite enough cars on them already, with congestion in London costing £5.3bn last year. According to Inrix, a “traffic information provider,” each car-commuter in the capital wasted £2,700-worth of time in jams, a sort of rough equality of misery with train-commuters. Across the country, the estimated figure is £13bn, and rising fast.

Still, next month the much-trumpeted investment in transport infrastructure is due to start. So, new roads, big improvements or new river crossings, then? Sadly not. Contracts worth £10bn are to be let for HS2, even though the gargantuan enabling Bill is not even law yet.

It’s hard to disagree with Edmund King (of the road) at the AA , that this new train set will make a minimal impact on the capital’s congestion. Unfortunately, new roads are even less popular than new railways, and those who are directly affected by the building works can cause serious damage at the ballot box. With politicians completely focused on next May, it seems Shell is right after all. However fuel-efficient, the cars of tomorrow will be stuck on the roads of today.

 Better to tax the dead

It’s often said that inheritance tax is only paid by those who trust their relatives less than they trust the taxman. To which could be added: it’s only paid by the middling-rich slice of the population. The poor escape, and the seriously-rich buy expensive and ingenious schemes to avoid it.

Paying tax when dead certainly sounds better than paying it while still alive, and if we want a meritocratic society, the logic is unassailable. There’s even less logic in allowing those swept up the property wave into taxable territory to pass the family home on to their undeserving offspring.

The prime minister says he wants to raise the current threshold. This is a handy benefit for elderly voters (the Office for Budget Responsibility expects 200,000 of them to die in the four years after the election) but a rational policy would cut the rate to 10 per cent and make everyone pay it on death, without exception. It would no longer be worth while for the rich to avoid it, and might even yield more than the £3.4bn, or a half of one per cent of all taxes, that IHT raised last year.

This is my FT column from Saturday





The conventional view of a city is of a commercial and industrial centre, surrounded by houses, schools and open spaces. The price of land is supposed to be the driver, and the essentially radial transport links reinforce it. But something odd is happening in London, as commercial activities in the inner city are being forced out by the rising price of housing.

Last year the planning rules were relaxed to allow conversion, to encourage residential use of unwanted offices and run-down premises. It hasn’t quite worked that way. Commercial landlords of occupied offices are seeing the chance to serve notice, convert and bank the gains from London’s hot residential property market.

This process is irreversible, as the City Corporation and some inner London boroughs successfully argued when they won exemption. An office block can be redeveloped, while a block of leasehold flats is, effectively, forever.

The cost of commercial space is rising as the amount available falls, and concentrations of innovative or valuable businesses are at risk, threatening the future of the City, according to the property lobbyists. Their industry has become accustomed to commercial space being more valuable than residential.

Yet this is not obviously the terrible disaster they seem to think. The value of housing is high because people want to live where the jobs are, in London. A market force that replaces the daily tide of workers into the centre and out again with a multi-directional scramble will ensure a better use of London’s crowded streets and trains.

Increased local residential space has helped transform the City of London in the evenings and weekends, as well as making it a better place to work. Planners everywhere love drawing neat zones on their maps, but most of the zones they now want to protect have sprung up without their help. Reality is much more organic and more interesting. Rather like London itself.


Not Premier league

It’s seven months since the rescue of Premier Foods, the owners of brands old enough to make your eyes, if not your mouth, water. Ambrosia, Mr Kipling, Oxo, Angel Delight and 16 others still turn over £700m-worth a year between them. The rescue was described here as a fine example of the financial confectioner’s art, with a happy ending, of sorts, for the poor shareholders.

Alas, it’s not been that happy. In July CEO Gavin Darby was trying to stay positive despite a 6.1 per cent fall in first half sales. His fellow executives bought shares in the summer. Unfortunately, others have been only too happy to sell them, and at 30p, the price is now just half that paid for the king-size pile of shares issued in the reconstruction.

The analysts mostly disagree with the market, with Jefferies the latest broker to decide the shares really are worth 60p each. Just why Premier is unloved may become apparent later this month with the interim management statement. It’s unlikely to make cheerful reading. The food retailers will be passing the pricing pain to their suppliers, wiping out any gain from lower commodity prices. Shareholders look likely to need that branded comfort food.

Dead ‘ead Ed

Grasping reality has never been Ed Davey’s strong suit, but it’s sheer bad luck that he finds himself cheerleader for Britain’s latest nuclear adventure. Given the glacial progress of Hinkley Point C power station, it could have fallen to almost any of his long line of predecessors as Energy Secretary to force some enthusiasm for this radioactive white elephant.

However, if the European Commission’s rubber-stamp implies agreement “that this is a good deal for consumers”  then Concorde was a great commercial success. When it’s finally generating, Hinkley C is guaranteed twice today’s price for its output, index-linked.

Last year EDF, the French builders who were the only credible contractor, costed it at £16bn. The Commission’s figure is £24.5bn, Ah, yes, but that £16bn was in 2012 pounds, and excluded interest payments, guv. It’s another example of the old adage that a builder’s estimate is a sum equal to half the final cost.

Still, ‘Eadless Ed need not fuss with facts. He’s only in charge of the shambles that passes for Britain’s energy policy until next May.

You might have thought that investors would happily never look at a bank share ever again. Lloyds Banking shares once fetched more than £5 each (77p now) while Royal Bank of Scotland, 370p today, reached (an adjusted) £68 in 2007. You would, of course, be wrong.

So keen are the buyers that Lloyds last week knocked out another £160m-worth of the TSB shares it must sell by the end of next year. This is a mere amuse-bouche ahead of the sale of more of the state’s 25 per cent stake in Lloyds itself, which will come when the Bank of England decides it can afford to restart dividend payments.

Then there is the latest wave of “challenger banks”, starting with Virgin Money, with Aldermore, Shawbrook and Santander UK to follow. They’ve all hit on the brilliant idea of trying to be nice to the customers. Never mind that the last lot of challengers were called building societies, and we know how that ended. As John Quinton, then head of Barclays, remarked at the time: “We’ve got lots of customers that we’ll happily give them.”

Looming in the distant background is RBS itself, four-fifths owned by the taxpayer. Even at today’s depressed price, that stake is worth £33bn, a handy sum for the next government to pretend it can spend.

So there’s no prospect of a stock shortage.But why buy? Banking is not as simple as it looks, but is not as complicated as the big banks made it. Their punishment is a cat’s-cradle of regulations, and the prospect of escalating fines for past sins. As RBS showed recently, the crisis did not induce better behaviour.

The fines will be a drain on profits, but are insignificant compared to the costs of pruning the branches and upgrading the technology. Vince Cable remarked to Alphaville last month that parts of their operating systems are not just years, but decades behind current demands. Unpicking TSB from Lloyds while maintaining 24-hour services was so complex that it may have cost shareholders more than the proceeds from the sale.

All this must be paid for by the interest rate margin, the gap between the derisory rate paid on deposits and the usurious rate charged for advances. Into this gap are stepping the web-based  providers of alternative finance. Peer-to-peer lending is running at £150m a month, The £200m P2P Global is an investment trust standing at a premium to net asset value. These, and many other similar businesses, are currently merely nibbling the edge of the big banks’ smorgasbord. One day, though, they’ll eat their lunch.

On the Blinkx

Life’s never dull at Blinkx, whose “technology leverages speech recognition, text and image analysis to deeply understand the meaning and context of video content to generate improved search relevancy for consumers and a brand safe environment for advertisers.”

This week’s excitement was another profit warning, as the business reached an “inflection point” with “adjusted EBITDA” forecast at zero for the first half-year. Added to the challenge of working out what Blinkx does is that of keeping track of the interests of Subhransu Mukherjee and Suranga Chandratillake, its two principal executives.

A cascade of stock vestings, awards, purchases and sales have helped swell the issued share capital by 10 per cent in a year. The pair’s share sales at over £2 in January look inspired, unlike their purchases at less than half that in February.

Still, those shares cost just 30p today. There’s 17p a share of cash left for inflection, which shows the value of paying executives with scrip instead of (more) money.

They think it’s all over...

but it’s only begun. Referendum relief is fading for many Scottish-registered companies as they realise that the issue is far from settled. The boardroom question is: aside from the (significant) one-off costs of moving south, are there any advantages to staying here?

For the big banks, the answer is obviously No. RBS is run from London and could reincorporate here as National Westminster. Other businesses, faced with a left-leaning administration with tax-raising powers, might consider it prudent to leave quietly.

Ironically, an exodus could help cement the Union, if Quebec’s history is any guide. A wafer-thin majority in 1995 to remain Canadian saw businesses decamping, exposing the costs of independence. Last April, the Parti Quebecois was heavily defeated in Quebec’s general election.

This is my FT column from Saturday

The capital markets hate the thought of new taxation. They much prefer to impose taxes of their own, and last week it was the turn of the shareholders in Mothercare to pay their dues to the great financial machine.

Moth is a mess, as Mark Newton-Jones, its new chief executive, readily admits. He was appointed immediately after the board had rejected a somewhat dubious  300p-a-share takeover proposal from the US, and has now decided the business needs a capital transfusion.

Only too happy to help, say Numis, JP Morgan Cazenove and HSBC. We like Mr Newton-Jones’s plan to bring Mothercare, squalling like an infant, to the digital age, where it can exploit what is still a pretty powerful brand for an easily-identified target audience. So do they want to get aboard for the ride? Goodness me, where have you been?

That was in the old days of rights issues, where new shares were issued at a small discount, offering little dilution to the existing shareholders, with a realistic chance that the underwriters would end up on the share register. This forced them to consider whether the new shares were worth holding, before accepting the risk.

It’s all different now. The last thing today’s backers want is the actual stock, so this issue is nine-for-10 at 125p, half the market price of the existing shares, or a 34 per cent discount to the adjusted ex-rights price.

In other words, Mothercare shares must tank by a third in the next five weeks for the underwriters to be liable for a penny. Since the rights issue was not exactly unexpected, it’s hardly surprising that the shares quickly rallied after the news.

For their risk, the helpful broker and banks are charging £5m, or 5 per cent of the £100m proceeds of the issue. There is no attempt to justify this fee. It’s just the tariff for the job. A private sector tax on the Mothercare shareholders by any other name.

Goldilocks v Gaddafi

At first sight, the courtroom clash between Goldman Sachs and the Libyan Investment Authority brings to mind Henry Kissinger’s comment on the Iran-Iraq war – “If only they could both lose”. The Libyans have portrayed a Gaddafi-era deal that went terribly wrong as the vampire squid sucking the blood from innocent desert Arabs.

The chargesheet against Goldman includes  training programmes, gifts, overseas trips and the offer of a highly prized internship at the bank. Typical bad behaviour, just what you’d expect from a top investment bank; run rings round unsophisticated hicks, lay off the risk and collect the fees.

Except that it doesn’t seem that way any more. The gifts, according to Goldman, were chocolate and aftershave (were they trying to say something?), the training programmes were an attempt to help the client understand the not-terribly-complicated derivative transactions, the overseas trips were to attend the programmes, and the internship came after the deal had closed.

This defence is a great disappointment for those who want to see nothing but greed and evil inside the big investment banks. The Libyans may have further evidence of bad behaviour to present, but chocs away and a splash of aftershave really won’t move the dial on the bribery meter.

Wham bang thank you NRAM

Patience and inactivity are the two hardest disciplines in investment, and for us long-standing investors in NRAM 12 5/8 per cent perpetual subordinated units, the disciplines may be about to pay off. This curious stock is one of the few shoots left from the forest of fixed-interest stocks issued by Northern Rock before it was felled in 2007, and after they were all dumped into NRAM, the bad bank in the government’s reconstruction, the price plunged to £16.

The bad bank has turned out to be not so bad after all, and this week the European Commission removed the restrictions on interest payments for Northern Rock and Bradford & Bingley debt, accepting the argument that keeping the restrictions will cost more than removing them.

The dated stocks can be redeemed, but the 12 5/8 is a former PIB and undated. The price jumped to £149 on the news (though there’s hardly any market) which still doesn’t look enough to give up a yield of 8 1/2 per cent a year for ever…

This is my FT column from Saturday


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