A good rule for the cautious investor is never buy a share until the company has been publicly listed for at least a year – doubly so for businesses being sold by private equity. These holders are natural sellers and their skills include prettying up companies first. They have no long-term interest in the prospects for the business, and they know much more about those prospects than you do.

Rising share prices have presented the opportunity to the owners of Misys, Biffa and Hollywood Bowl among others. It may be that Misys is so transformed that a financial software business bought for £1.2bn in 2012 is worth £5.5bn today, or that this time, waste disposal really will prove that where there’s muck there’s money, or that we are going back to the future with sweaty shoes and ten-pin bowling.

However, there is an exception to test every rule, and this year’s monster flotation, O2, may be it. We have the inestimable Margrethe Vestager, the European Union competition commissioner who vetoed the purchase of O2 by 3 to thank for the opportunity. This ‘orrible merger would have cut the number of significant players in UK mobile telecoms from four to three, something that is self-evidently anti-competitive.

O2’s owner, Telefonica of Spain, is essentially a forced seller, struggling under a E53bn debt mountain. It has yet to commit formally to a public offering, but is widely expected to float the business this autumn. The price agreed with 3 was £10.25bn, which provides a good idea of the float price. Telefonica has said it plans to keep a majority holding,  another powerful incentive to see share trading off to a good start, since it would make the rest easier to sell in the future.

The offer also presents a fine chance to win some customer loyalty in an industry which generally treats users with indifference bordering on contempt. Unfortunately a retail offer, let alone one targeted at O2’s 25m customers, is unlikely because the bankers see it as too much like hard work. Still, a big company priced to go is a rarity. Pay attention.

How to get Grayling off the hook

Whisper it, but the government may actually decide where to build London’s next runway. There is something of a high-stakes poker game going on at Heathrow, between the official proposal (a third runway) and the unofficial “Heathrow Hub” which extends one, and potentially both, runways westward. The Hub is much cheaper, would cut the early morning aircraft noise over west London, and redeem the (previous) PM’s promise of “no third runway.”

Heathrow’s owners have cold-shouldered the hub. Ferrovial of Spain overpaid for BAA, the airport’s owner, in 2006, and today’s shareholders also include China Investment Corporation, Qatar Holding and the Singapore government.  A go-ahead for the third runway would dramatically raise the airport’s Regulated Asset Base, boosting what is a large long-term, low-risk investment.

However, Gatwick is winning the PR battle, and the danger for Heathrow’s shareholders is that the best may be the enemy of the good. Were they to formally embrace the hub as an acceptable second-best expansion, they might yet allow transport minister Chris Grayling to announce an elegant solution to this interminable problem.

Mine’s a gamble, not an investment

Now that shares in the big mining companies have soared from their January lows, the analysts are saying investors should buy them. There is something about this industry which wrong-foots experts and executives alike, as illustrated by the boom-bust-recovery at Glencore.

Floated in 2011 at the peak of the commodity boom, the shares dribbled down from 550p to a little more than £3 in 2014. Claiming they were cheap, the company then spent the next year and $1bn buying its own shares. They were nothing of the kind, and six months later Glencore was forced into an emergency equity issue to raise more than twice as much at less than half the price.

Soc Gen had decided Glencore shares were cheap at 180p and last week Liberum agreed that they are now too expensive to sell (sic) at today’s 210p. Goodness, dividend payments might even resume next year. Plenty of scope for trading, then, but please don’t call it investment.

This is my FT column from Saturday

Last Thursday was Pension Awareness Day, perhaps to make up for the other 364 days of the year when we are blissfully unaware. Still, it’s over now, so we can continue to pretend that saving pennies from our wages will somehow transmute into world cruises when we retire.

Auto-enrolment, the mechanism for collecting the pennies, has now extended its baleful shadow over even the smallest, most transient businesses. At first, sacrificing 1 per cent of your gross salary is merely an irritant, but by 2018 it will be 4 per cent, a nasty kick in the take-home pay when wages are rising at half that rate.

The employer must contribute at least as much, turning the whole exercise into a new payroll tax at 8 per cent, on top of income tax and National Insurance. Worse still, this sacrifice will not fend off poverty in old age. The Bank of England rather let the moggie from the box this week. Its pension scheme is in surplus, unlike a rapidly-rising number of corporate schemes, but to achieve this, it paid in 54.6 per cent of the salary bill last year.

Fortunately for the BoE employees, they contribute nothing directly from their own pay, or they could scarcely afford to get to work. The scheme is particularly helpful to the top executives. For example Andy Haldane, its chief economist, will retire on an inflation-proofed £84,000 a year, enough for plenty of cruises, if not quite his own yacht.

Despite this, Mr Haldane does not think much of conventional pensions as the best way to save, telling The Sunday Times that he prefers property, while appearing to have only the vaguest idea of the true value of his promise to pay from the BoE. Now Mr Haldane is supposed to be one of the bright sparks of Threadneedle Street. Featured in Time magazine’s Top 100 most influential in 2014, he was expected to bring new ideas to bank regulation.

If he had any, he has run out of them now. His admission that he plumps for property is hardly an endorsement of government policy, while his justification of the last rate cut as “jobs before savers” is  laughable. It merely gives another twist to the house price spiral, puts bank margins under more pressure, and undermines the solvency of pension funds.

The Monetary Policy Committee demonstrated again this week that it really has no more idea of what to do than the rest of us, reduced to hinting at another futile cut in Bank Rate before Christmas. Like his colleagues, Mr Haldane is insulated from the consequences of his actions, but he at least should see what is happening away from government-backed pension promises, among those who cannot take advantage of the ballooning asset prices the BoE’s policies have spawned.

It would be a comfort to the rest of us if the B0E’s chief economist had enough confidence in these policies to put his savings to productive use. Adam Smith, and many others since, pointed out that property by itself does not generate wealth. Such an old-fashioned view, yes?

Bandits at 10 O’clock high

Should John Devaney, the chairman of Cobham, find the air refuelling group at the wrong end of an incoming fighter, as was suggested last week,  he can always turn to Bank of America Merrill Lynch to repel boarders.

The bankers have faithfully supported Cobham through its troubles. They advised on the transformational $1.5bn purchase of Aeroflex in 2014, which brought, ahem, grave financial and operational issues which somehow escaped the due diligence. In addition, the bankers’ financing was not as clever as it might have been.

Still, when it all went terribly wrong, there was BofA on hand to organise a £500m rescue rights issue. The bankers helped underwrite the offer, and helped themselves to £20m for taking the risk that the price would plunge by 45 per cent in a fortnight, to 89p, and nobody would want the shares. They never got below 135p. Even following a new profit warning last month, the shares are 169p.

After such disasters, it is hardly surprising that both CEO and finance director have had to eject, and the talk is, inevitably, of an offensive from another defence company. Still, never mind. Mr Devaney can always rely on his friends at BofA for their valuable advice.

This is my FT column from Saturday

Such a comfort to know that the governor of the Bank of England is “absolutely serene”. If banking is all about confidence, then central banking is about national confidence, and Mark Carney, apparently, believes he has it. Please do not label the halving of Bank Rate, the expansion of quantitative easing and the buying of big company debt as a panic reaction to the people voting the wrong way.

It was, Mr Carney told parliament last week, a measured response and, golly gee, look how successful it has been in combatting the terrors of Brexit. See, houses are still being sold, people are still shopping, company buyers are still buying. It’s all thanks to the BoE’s prompt action. Even the pound has perked up.

If Mr Carney really believes that a trivial cut in Bank Rate, the farcical shenanigans in the gilts market and the offer to buy a few investment-grade private sector bonds have prevented the meltdown his former boss predicted, then he is not so much serene as delusional.

Shaving a quarter-point off the official cost of money makes no practical difference to borrowers.  Pushing gilt yields into negative territory merely compounds the already dire problems facing pension funds, while intensifying the margin squeeze on the banks. The suggestion that another cut in Bank Rate may follow shows how little our monetary masters have learned.

With interest rates at this level, monetary policy is powerless to influence the behaviour of companies and individuals, whatever Mr Carney may think. The power is firmly back in the hands of the treasury, and if the new chancellor knows what to do, he might tell us on November 23. It may not suit Mr Carney to admit as much, but rather than pretend that he is really making a difference to people’s lives, he might remember the words of Leslie O’Brien, one of his predecessors: “The role of the Governor is to exude confidence without actually lying.”


More breakages for Hammond to fix

The art of taxation is extracting the maximum amount of feather with the minimum amount of clucking. In his attempts to squeeze more revenue from stamp duty on housing, George Osborne seems to have got this the wrong way round. The chickens are clucking like mad, yet the harvest of feathers is shrinking.

We may not feel too sad about Berkeley Group suspending work on a £20m development in Barnes (supposedly to allow to allow buyers to customise their apartments and not because they have the post-Brexit blues) or the fact that unaffordable properties in London are becoming marginally less unaffordable.

Out in the world away from London, the contradictions of the government policies are stark. Barratt Homes, Britain’s largest housebuilder, reported that 30 per cent of its sales were to those using the subsidised Help to Buy scheme, where buyers need find only 5 per cent of the price. The demand thus created allowed Barratt to raise its prices by twice that amount.

The combination of steep charges to purchasers of expensive homes and penalties for buyers of second homes are not making existing houses any cheaper either. The costs are merely gumming up the market,with fewer houses on agents’ books. Lower volume means less tax paid. The old system was silly, with its step changes of rates of duty, but Mr Osborne has demonstrated once again that there is no situation so bad that government interference cannot make it worse.

He hadn’t got a clue

When Gordon Brown took bank supervision away from the Bank of England and sent it to the Financial Services Authority, it looked at the time more like punishment than policy. So it proved. Stanislas Yassukovich, a giant in the eurobond market which had laid the foundation for London’s financial supremacy, relates in his memoir Two Lives how he was interviewed by a pimply youth from the FSA. Did he understand what his dealers were doing? As a tease, Stanni replied: “Actually, I find the cricket scores easier to understand.” The youth merely ticked the box and moved on to the next question. No wonder the FSA went sleepwalking into the banking crisis.



Justin Bowden wants the new prime minister to stop faffing about. The urban dictionary defines faffing as time-wasting. It has overtones of useless activity, of excuses to put off doing something. The faffing Mr Bowden wants to stop is over Hinkley Point, which would provide thousands of jobs for members of the GMB trade union he heads.

In his world, that is sufficient reason to commit to a failing project. It would be more interesting work than digging holes and filling them in, but as a way to destroy national wealth, proceeding with this nuclear power station would set new records. Better to keep faffing about, or better still, to study the report from the Energy and Climate Intelligence Unit, which claims we can manage without it and save £1bn a year.

There is something wearily familiar here. British governments faff about for years and then decide to build the wrong projects. Hinkley is the most egregious example, but the list includes HS2, the Thames super-sewer, the Swansea Bay barrage and so-called smart electricity meters. In each case the costs are understated, the benefits exaggerated, and the alternatives ignored. It is not quite too late to stop the sewer, now the National Audit Office is investigating its “unusual” financial structure.

These vanity schemes will soak up talent and skilled labour which is in short supply for the new infrastructure Britain really needs. As has been pointed out here the housebuilding companies are happy with the housing shortage, and have no motive to end it. More direct state intervention will be needed if supply is really going to step up. Elsewhere, there are hundreds of road widening or rail improvement schemes which will comfortably pay for themselves, and the case for national high-speed internet is overwhelming.

While the conditions for financing long-term projects have never been more favourable, the government seems afraid to pay directly. Instead, it has acquiesced to expensive ways to disguise the cost, while pretending that the risk is not being borne by the taxpayer.

We now have a new administration which has abandoned the absurd folly of balancing the books at a time when money is almost free. It is an opportunity that may not recur. Our prime minister does not seem the type to be seduced by vanity projects, but Mr Bowden is right. It is time to stop faffing about with the likes of Hinkley Point and start the schemes we need.

Electric cars? No thanks

How big a bribe do you need to buy an electric car? The answer, it seems, is a good deal more than the current £4,500 (plus zero road tax and free parking). Yet only one new motor in a hundred sold in the UK is electric. The MPs on the environmental audit committee blame the lack of charging points and “range anxiety”, the worry that the car will conk out before you get home.They would rather not admit that petrol and diesel are far better suited to transport than clunky batteries.

Unfortunately, Britain is committed to an 80 per cent cut in CO2 emissions by 2050. At the time, this was a cost-free promise for the Blair administration, an irresistible combination of green votes and a “legally binding” commitment half a century away.

There is no realistic prospect of meeting this commitment. Fortunately, independence from the EU provides parliament with the opportunity to abandon this arbitrary timescale. One day batteries may catch up with internal combustion, but the current scheme, due to end in 2018, should be allowed to die quietly.

A corker from O’Leary

There are few greater enthusiasts for the European Union than Michael O’Leary. It allowed him to fly to airports less than a day’s drive from your destination, and to create a world-scale airline. Now Britain is preparing to depart, he’s so cross he’s threatening to chop back his UK expansion plans.

As you might expect, he also has a robust view on Apple’s little local difficulty with Margrethe Vestager , the EU’s competition commissioner. He suggests the Irish government tells the EU where to get off. At least, that’s the gist of what he said. Not so communautaire, after all.

This is my column from Saturday’s FT (with apologies for late publication)

Persimmon, the company named after a racehorse, is Britain’s second biggest housebuilder. Last week it reported  sales of 7,238 homes in its latest six months at prices  6 per cent higher, adding that nobody seems to have told the enthusiastic site visitors that we’re all doomed after Brexit.

It also acquired enough land to replace the houses sold, and could build 93,519 more before running out of plots. It is making 27 per cent gross margins and 35 per cent on capital employed. Conventional economics says it should be expanding fast and attracting competition like wasps to a jamjar.

Instead, it is paying money back to the shareholders – not just dividends, but massive amounts of capital, over £1bn (and counting) under its current repayment plan. As CEO Jeff Fairburn put it: “We are confident that our long term strategic focus will continue to deliver strong returns for our shareholders.”

This is the point. Persimmon encapsulates Britain’s housing crisis. It is not up to Mr Fairburn or his competitors to solve it.He has no intention of quickly building out Persimmon’s 100,000 plots, because steady expansion already produces lovely returns. The very small number of big housebuilders who dominate the industry are happy the way things are: steady build-out with modest inflation, a constantly topped-up land bank and a market chronically short of properties.

They remember the near-death experience of some of them in the financial crisis. For many smaller housebuilders it was actual financial death, and they are an endangered species today. The survivors lack the skills or the capital to negotiate the planning labyrinth, or to comply with increasing regulation of both construction and labour. The small sites which they used to exploit are often not worth the bother for the big companies.

Any attempt by the government to fix this broken market is fraught with political traps. Measures like Help to Buy stoke demand and do nothing for supply. Homeowners enjoy house price inflation because it makes them feel clever, while Nimbies have votes which they are keen to use. Besides, Britain cannot produce enough bricks for today’s demand, let alone enough to build more.

In the “unsafe havens” portfolio constructed here last month following the Brexit panic, Persimmon shares cost £13.60. At £18.80 they are still not dear. But the political risk to this cosy, informal cartel is rising all the time.

Send no money now

The prices and recent gains for the holders of government debt defy parody. UK government seccurities, which looked expensive (to some of us) a year ago, have delivered extraordinary gains to those who happily accepted negative interest rates.

This cannot go on indefinitely, but while it does, there’s an opportunity. So with thanks to Grant’s Interest Rate Observer, here comes the “No Money Down Negative Yield Sovereign Bond Income Fund.”

This is how it works: you line up commitments, say $10m each, from investors, who do not actually put up any money. The NMDNYSBIF buys no bonds, either. The management calculates the negative interest cost of the notional portfolio, say 0.25 per cent, so after a year the notional $10m has cost the investor $25,000. Split that 50-50, and the clients beat the market while the promoters make $12,500.

It is absurd, of course, but hardly more so than the prices of one-third of the world’s government bonds which guarantee to cost the holders money, or the sight of the Bank of England bidding up the price of bonds beyond reason in its ideological commitment to Quantatitive Easing..


Such a gamble, these shares

Now that the bizarre bid for William Hill, elegantly described by its chairman as “based on risk, debt and hope” has collapsed, the analysts at Barclays can get back to the routine business of rating the shares. Armed with the new, improved guidance from the company, the analysts plump for “overweight”, with a target price of 340p. It hardly seems worth putting on the avoirdupois, with the bookies’ shares at 325p, but the Barclays boys understand that betting is a risky business, so they have studied the form to assess the odds. Their conclusion?  “Our upside case implies 42% upside and our downside case implies 41% downside.” This is one bet they should get right.

It will be hard to better this week’s example of the Alice-in-Wonderland world that is today’s fixed interest market. Last Tuesday, the Bank of England bought in £1.18bn of long-dated UK government stock. On Wednesday the Treasury sold £1.25bn of long-dated UK government stock. On Thursday the traders opened the Krug to toast the taxpayer.

You need a heart of stone not to laugh at this ridiculous charade. The BoE pretends that it is boosting the economy through Quantitative Easing, while the Treasury pretends that it is financing the government’s deficit. Those in on the game hope that the technical complexities of the market will prevent the rest of us from spotting that the government is trading with itself, paying a handsome bung to the professionals in the middle.

This is expensive enough for the taxpayer, but in today’s zero-yield world, it is positively ruinous for company pension funds. Trustees have been bullied by their actuaries into believing that shares are nasty, risky things, while government debt is “risk-free”, even if “reward-free” would be a better description at today’s prices. Only investment-grade bonds will do to match the company’s liabilities.

Such bonds are rare and return hardly more than government stocks. Companies could issue many more of them (for the pension funds of other companies to buy) providing low-cost capital for expansion. Few are doing so. We are faced with the paradox that while money has never been so cheap, boards seem unable to find anything constructive to spend it on. They are reduced to purchasing their own company’s shares or buying up other companies to reduce competition.

Both activities provide a short-term boost to profits and fat fees for their advisers. Andrew Smithers, a wise veteran observer of markets, has a rather less cynical answer to this reluctance to borrow. Noting that unquoted companies invest at twice the rate of comparable quoted companies, he blames the bonus culture that has infested British boardrooms.

No self-respecting group of directors would be seen nowadays without their remuneration consultants. If those consultants say the boss is overpaid, they are likely to be replaced by a firm with more imagination.Aided by complexity and a little corporate mumbo-jumbo, the consultants can almost guarantee high rewards, come what may.

Today’s CEO, over-rewarded and over-worked, knows that his time at the top is short, and behaves accordingly. Incentivised to maximise earnings, executives will avoid the short-run hit to profits that longer-term investment inevitably entails. This, Mr Smithers believes, also explains why productivity growth has stalled.

Describing the executive pay problem is easier than solving it. Longer-term incentive plans can even be counter-productive if they encourage the CEO to accept a headhunter’s offer, complete with compensation for leaving his plan early.

Bonuses paid in shares which must be held for, say, a decade would help align the interests of the executives with longer-term shareholders. This might even encourage our CEO to borrow at today’s rate and invest for tomorrow’s profits. It would certainly have more impact than near-meaningless cuts in interest rates, or this pointless round-tripping in the gilts market.

One dam thing after another

The running sore that is the Samarco dam disaster for BHP Billiton was painfully displayed last week. Perhaps fortunately, there were other sores which contributed to a monster $7bn of impairment charges, from slumping metal prices and writedowns of oil assets. These latter are painful, but healing, while the $2.2bn for Samarco looks like a down payment.

Andrew Mackenzie, BHP’s chief executive, learned something from BP’s experience with the Macondo oil blowout, by taking personal control of the aftermath. He should have learned rather more. BP was eventually forced to cut the dividend, long after doing so would have helped the politics of the catastrophe.

Had Mr Mackenzie announced the suspension of payments promptly, it would have been a concrete sign that he did indeed feel the villagers’ pain. Never mind that the dividend looked  unsustainable at the time, the move would have garnered goodwill when it was badly needed. As it is, the previous “progressive” payout plan has since been scrapped, replaced by a (much lower) meaningless mixture of “minimum payment” and “additional amount”. A special prize, then, for anyone who can calculate the forward yield on BHP shares.

This is my FT artcile from Saturday

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Forecasting is always difficult, especially for the future, as the old saw has it. This difficulty does not seem to put off Mark Carney, who despite his record of failure, is set to try his luck again. The experts at Bond Vigilantes think he may have a “whatever it takes” moment on Thursday, cutting interest rates and ordering the Bank of England to buy more government debt.

Such moves, if we see them, would reflect the blue funk that has overtaken the Remainders since the referendum, rather than a logical reaction to events. There is no useful data about the impact of the vote on the behaviour of companies or individuals; people still want to buy Taylor Wimpey’s houses, while GlaxoSmithKline has decided that Britain is not a basket case after all. There was a conspicuous absence of teeth-gnashing or garment-rending in this week’s avalanche of corporate results.

Cutting Bank Rate from 0.5 per cent would be a futile gesture. The big banks have already inserted clauses warning commercial customers that they might be charged for holding their cash, provoking understandable fury. In the real world, halving the rate would make no difference to confidence or the plans of borrowers. As for more Quantitative Easing, the BoE already owns a third of the national debt. Buying more would drive down yields still further, intensifying the pain in the pension funds, and forcing companies to compete with the BoE to buy more “risk-free” bonds instead of investing in productive assets.

This is the economics of the madhouse. Our new prime minister and her chancellor have sensibly abandoned the misguided, impossible goal of balancing the state’s books by 2020. When her government can borrow at 1.5 per cent for 34 years, there is a golden opportunity to finance the thousands of capital schemes which produce a sufficient return to make the country richer over time. Nearly all of them are relatively small – road improvements, council housing, schools and clinics.

We do not need vanity projects. It is still not (quite) too late to avoid the financial disaster that is the Hinkley Point nuclear power station, and the new government can easily scrap HS2 in favour of upgrades to make the existing railways work better. None of this requires gesture rate-cutting or more QE. When the future is so obscure, masterly inactivity is often the best policy. This week we may see if Mr Carney can manage it.

Force the shareholders to decide

It is hand-wringing time again on executive pay. The latest waffle is served on behalf of the Investment Association. This trade body, there to protect the vested interests and privileges of highly-paid investment professionals, finds that boards should “explain why they have chosen their company’s pay level with consideration of relativities.”

That’s telling ’em. The explanation promises to be as complex as the package, and nobody – possibly not even the executives themselves – will understand either. Exhortation of restraint has had the opposite effect, as if talent at the top was as rare as world-class footballers.

Here’s a suggestion: no contract for a director should be binding on the company until shareholders have approved it in general meeting. The voting should also be transparent, to expose the block votes of the investment professionals. A few good men might choose not to serve, but the measure might at least slow down this runaway train.

Please don’t shout

Finally, a curiosity: a company is coming to the Aim market which is not a speculation in gas, oil or minerals, nor is it in financial services or some obscure corner of the technology market that normal mortals cannot hope to understand. Autins Group actually makes things – to reduce noise in expensive cars – and there’s not a trace of private equity.

Sales were £20m last year, profits £910,000 and with £14m of new money, the market is expected to value it at around £40m. Noise is one of the curses of the age, and products to reduce it have a fine future. Autin could be an attractive stock – provided its debut doesn’t make so much noise that the price runs away.

This is my FT article from Saturday