Compare and contrast: The Competition and Markets Authority has allowed BT, Britain’s monopoly fixed-line operator, to buy the absurdly-named EE, Britain’s biggest mobile supplier, without conditions. Any time now the other big UK telecoms deal, the proposal to merge Britain’s third and fourth mobile networks, may run into too many conditions to make it worth doing. Never mind the curious carve-up of responsibilities between the European Union commission and the CMA,  the EU’s tiger mom, Margrethe Vestager, may conclude that 02 into 3 doesn’t go.

The deal’s proponents, not all of them with life-changing fees in prospect, reckon three mobile networks is enough. Common sense and Ms Vestager both suggest that it is easier to raise prices against two competitors than against three, and that she should require some mind-concentrating conditions if she is to allow more consolidation to proceed.

Step forward Xavier Niel, whose Iliad group is upsetting France’s mobile markets with Free – surely just the name to trigger a price war. He is looking across the channel with a view to picking up any spectrum which Ms Vestager might force 3O2 to surrender. The merging pair might feel that letting in a fourth player would rather defeat the object of the exercise, and that abandoning the deal might be more profitable than letting Mr Niel in.

Things do not stand still for long in the febrile world of telephony. The next question is whether BT should be forced to split off Openreach, its subsidiary that so often fails to fix that fault in your broadband (whoever provides it). Long dubbed Openwound in the trade, there is a danger that Ofcom might now seek to correct the CMA’s curious indifference. However, an independent Openreach would still be a monopoly. Better to keep the political pressure on BT to improve it. After all, two wrong (numbers) don’t make a right.

Hinkley Pointless

Well, they funked it, and it is not hard to see why. The make-up-your-mind board meeting at EDF Owas supposed to press the nuclear button on Hinkley Point, until the directors finally realised that it is so financially radioactive that it could bankrupt the company. The two similar power stations it is currently building are years late and billions over budget – one may never finish – and the balance sheet is already creaking.

Even with the 35-year UK state guarantee of twice today’s price for electricity, Hinkley’s construction risks mean lenders are too scared to finance this £25bn financial black hole. Last October, during the government kow-tow to Xi Jinping, we were told that the Chinese were fully committed. This has turned out to be yet another example of the sort of PR spin that characterised the Blair administration. Even if the Chinese premier was on the point of signing then, he is surely well away from it now.

Fortunately for everyone connected to the mains in Britain, the serious money has not yet been spent. Writing off the odd billion in sunk costs is a small price to pay for abandoning this ill-starred venture. A fraction of  the money saved would build enough gas-fired power stations to keep the lights on, assuming a rational pricing regime. If it means we need to burn coal for longer, that is better than making a multi-billion, 35-year mistake.

Tony to Mike: don’t do it

Tony Shiret really dislikes Sainsburys’ proposal to buy Home Retail. His pessimistic assessment of the Argos owners: “We have received no co-operation from Home in our analysis, which…may limit the accuracy of our conclusions” and  “We assume that Sainsbury has probably done the same work we have managed in a couple of days over the last six months.” This should upset both sides ahead of next week’s put-up-or-shut-up deadline to bid.

He thinks Sainsburys’ CEO Mike Coupe should call the whole thing off, and investors with a big short in Home desperately hope he does. Mr Shiret’s employer, Haitong Securities of Shanghai, is not exactly an investment banking heavyweight over here, but he is one of the City’s most respected analysts. Mr Coupe ignores him at his peril.

For a man in charge of one of the world’s largest mining groups, Andrew Mackenzie seems curiously slow on the uptake. A share in BHP Billiton, the company he runs, yields almost 12 per cent at 640p, as it bounced off its lowest level for 12 years last week. Except, of course, that it doesn’t. If Mr Mackenzie really believes he can declare an unchanged interim payment next month, then his fellow directors might wonder whether he can do simple maths.

It has been obvious for months that BHP’s policy of “progressive” (ie rising) dividends is unsustainable. The Samarco dam disaster in Brazil presented a perfect opportunity for him to make a virtue of necessity by showing that BHP felt the pain of the victims. Yet the website still boasts about its dividend policy, despite the grim $7.2bn writedown of its shale interests in the US. The operational review merely hinted somewhat cryptically that “we are also committed to protecting our strong balance sheet.”

Protecting the balance sheet is surely a primary duty of any CEO, almost as important as keeping the shareholders informed about the business. Displaying that ability to state the obvious that marks so much brokers’ research, Credit Suisse now say: “We think management will use the upcoming interim results to put a line in the sand and reset the investment case.” Oooh, that’s telling them.

CS add that even a halved dividend would be uncovered by free cash flow at today’s prices for iron ore, copper and oil. The brokers suggest replacing part of the cash dividend with new shares. This would preserve the delusion that the payout was somehow being maintained, but in today’s panicking markets, few investors would be fooled by what is, in effect, a mini rights issue. BHP, which once considered itself the top dog miner, should suspend dividend payments until it is clear how much it can afford to pay. If that means Mr Mackenzie has to go too, it would be a just reward for failing to take the chance when it presented itself.

Carneyage in the markets

Michael Saunders, the veteran economist at Citi, describes the latest pronouncement from the governor of the Bank of England as a “fairly elegant swerve”. Please do not call it a U-turn, an embarrassing failure, or suggest that a decent period of silence would be welcome from Mark Carney when it comes to forecasting.

Six months ago, Mr Carney was hinting strongly at a rise in interest rates around now, saying that the decision would be thrown into “sharp relief”. Well, not so sharp and no relief would be a better description of where we are now. No rate rises today, thank you very much, or for some months ahead, at least.

Economic forecasting, like long-range weather forecasting, is an amusing diversion from reality. Every year the Sunday Times rates dozens of well-paid experts who have been trying their luck. The OECD, that Paris-based leftover from another era, propped up the table for 2015, scoring 2 out of 10. RBS came closest to the actual out-turn. After Mr Carney’s comments, they see no rate rises before next February.

As for the Bank, it is no more likely to be right than the other punters. Unlike them, Mr Carney has no need to offer us forward guidance. He has other problems at his Bank, and rather than having to execute elegant swerves as his forecasts fail, he could concentrate on solving them.

A more elegant swerve

Mr Carney’s predecessor is about to take on an even more daunting task than trying to predict interest rates – saving Aston Villa from relegation. They may have struggled past Wycombe Wanderers (at the second attempt) this week in the FA cup, but the football team of Mervyn King’s life are six points adrift at the foot of the Premiership. When governor, he organised a charity match between the Bank’s employees and some Villa veterans. Now it seems that he will be joining the board. His football management skills may not be particularly obvious, but nobody can claim that he lacks experience in dealing with crises.

This is my FT column from Saturday

James Anderson reckons that energy will essentially be free by 2035, that two-thirds of the world’s biggest companies are doomed, and that Amazon shares are going from $625 to $4000. Perhaps the maker of such outlandish forecasts should stick to fast bowling, except he’s not that James Anderson, but the manager of the £3.5bn Scottish Mortgage Investment Trust.

Its splendidly stodgy name belies a racy portfolio and a performance (doubled asset value per share in five years) to match, while Mr Anderson has put his shareholders’ money where his mouth is, with Amazon its biggest holding. Conspicuous by their absence are the UK companies that are the usual suspects in investment trust portfolios, because Mr Anderson believes the internet, battery technology and gene sequencing will wipe them out.

Of course in any 20 year period, many big companies fail or disappear (think BTR, ICI, Woolworth) but predictions of free energy are reminiscent of the broken promise from nuclear power half a century ago. It may be fashionable to predict the end of the oil age, but it is no more likely than earlier predictions that we would run out. Oil powers the world economy. and big oil has survived much lower prices than today’s. The biggest casualties of cheap crude, if it lasts, will be the battery and solar power industries.

Mr Anderson is surely right about the impact of the internet and the sky-high rated companies that dominate it. Social networks will change our lives as surely as the motor car did, while economic statisticians struggle to try and capture those changes which escape conventional measures of growth and wealth.

He might even be right in another of his contentions, that gene sequencing will bring down the cost of healthcare. For investors, the tougher question is whether today’s giddy ratings mean these exotic stocks are simply too dear. His response: “Our portfolio hasn’t got more expensive, it’s that its hypotheses have become more likely.” So he’s a salesman too, then.

No accounting for complexity

So another useful accounting dodge is blocked. From 2019, the full liability of operating leases must be put on the balance sheet. Financial leases are already there (as you know) since they are more like the hire-purchase agreements that put millions of washing machines into homes in the 1960s. Operating leases are the mainstay of shops, airlines and hotels, which frequently own little more than their logo. Now everyone will have to come clean.

In theory, this will provide investors and creditors with a clearer view of the financial health of the company. It may even do so, but complexity breeds opportunity for mischief. Modern accounts are bloated and (for non-accountants) almost impossible to read. The audit report drones on interminably. After struggling for decades, legislators and the International Accounting Standards Board may have succeeded in making company accounts perfectly accurate and completely incomprehensible.

Compulsory saving = taxation

It is such a comfort to learn that the new boss of the National Employment Savings Trust feels she can cope with the millions of new entrants this month. Small companies which must now become entangled in compulsory employee contributions may not agree. Nest is the default home for “automatic enrolment”, the law that forces every employer to push all his workers into a pension scheme.

If you thought we already had one, called National Insurance, you’d be right. We now have two,  effectively making three income taxes, all levied at different rates and bands. To avoid rioting in the streets, the new one starts at 2 per cent, but it rises rapidly to hit 8 per cent in 2018.

Nest’s new CEO, Helen Dean, frets that you may not have noticed that you’ll have to pay up for your nanny and gardener as the tiniest businesses become enmeshed during 2016. It matters not whether you (or they) have more pressing financial demands, or how long the employment lasts, the money must be deducted. We have “Red” Adair Turner to thank for this cuckoo legislation. Ms Dean is now in the Nest, while Lord Turner has turned his fine mind to climate change. We have been warned.

This is my Financial Times column from Saturday


I am a marketmaker, you are a trader, he is a price manipulator. Everywhere, investors bemoan the decline in liquidity; even US Treasuries, the world’s most liquid market, is less deep than it was. On bad days such as we have seen this week, it can be almost impossible to trade many securities at other than fire sale prices.

Coincidentally, this week also saw yet another probe by the Financial Conduct Authority, this one into whether a trader at Lloyds Bank manipulated the UK gilts market. The bank is helping the financial police with their enquiries, but the trader is now back at work, indicating Lloyds’ view of his behaviour. The gilts market is smaller than that for US Treasuries, but it is wide and deep. Manipulating it is a formidable challenge.

Any trader who tried to push prices out of line would quickly find others rushing in to take advantage. Moreover, trying to buy cheaply and sell dearly is what traders are paid to do. Making a two-way market is not easy when you have no idea whether the next deal will turn you a profit or merely make your position worse.

Markets, even the most liquid ones, are not smoothly-flowing streams, but are lumpy and unpredictable. Without marketmakers prepared to take the lumps, there is no market. With the authorities demanding more and more capital backing for institutions that are prepared to risk market-making, and keen to jump on anyone suspected of “manipulation”, small wonder that liquidity is drying up.

Shooting the lights out

Slightly belated congratulations to the the Rt Hon Edward Jonathan Davey, who received a New Year knighthood for services to the dirty diesel generation industry. As Ed Davey himself admitted, this is not a service he was trying to encourage when he was energy secretary in the coalition government. He got himself into such a tangle that the dirty diesels are stopping the construction of the (relatively) clean gas-powered stations needed should the weather ever have the temerity to turn cold.

The diesels had a bit of a run on a mild day last November, when four power stations had to be shut down unexpectedly, wiping out the grid’s margin of supply over demand and forcing heavy users to call on the dirty stand-bys. A cold February day with little wind would mean that the diesels, er, clean up.

This regime is only one of Sir Edward’s triumphs. The political momentum which is making the construction of Hinkley Point, that financial nuclear bomb, appear inevitable regardless of cost, is mostly his doing (though it’s still not too late to abandon the £25bn project). This power station is costing the equivalent of $150 a barrel oil, or more if the inevitable cost over-runs fall on the taxpayer.

Yet that looks like a bargain when compared to the cost of the proposed Cardiff Bay barrage. Like Hinkley Point, it would need 35 years of public subsidy to persuade private sector investors to start building. Hinkley Point requires a  £92.50 per megawatt hour guarantee, but the barrage wants £168 to make the sums add up, or around four times today’s wholesale price for electricity.

Finally, the programme to force “smart meters” into every home is in trouble even before it gets properly under way. This is supposed by its promoters to save £17bn because we’ll be able to see how much electricity we are using, but the only certainty is its £11bn cost, and fresh proposals from the European Union may send that bill much higher.

It may be unfair to lay all these blunders at Davey’s door, but he was in charge at the time, and more than anyone else he made the decisions which promise to make British electricity among the most expensive in the world. Quite a knight, then.

Father Christmas has left the building

Remember the Santa rally? How long ago it seems, those few days before Christmas when your fund manager massaged his 2015 numbers by topping up on his favourite stocks to raise the value of the whole portfolio. If it helped him to qualify for a performance bonus, well that’s just a lucky coincidence.

This is my FT column from Saturday



At 8am the car park at Lidl is already starting to fill up. It’s impossible to say whether all the shoppers have abandoned Asda to be there, but clearly a good many of them have. Its slice of the supermarket cake according to Kantar  is a distinctly thin 16.2 per cent, the lowest for nine years.

Aldi and Lidl have prospered since the recession destroyed Tesco’s strategy of buying up suitable sites to keep others out, but none has suffered quite like Asda, which now has a market share below Sainsburys and is easily the worst performing big grocer. This will not have escaped Asda’s owners, Walmart. It’s surely only a question of time before the empire strikes back, and it has enough financial firepower to absorb the pain.

Morgan Stanley’s analysts are expecting a response from Bentonville any month now. As they say: “Should Asda decide to sacrifice 200 bps of operating margin (which stood at 5.3% in calendar 2014) to drive market share gains, that could potentially wipe out half of the industry’s profit pool.”

That pool is not exactly brimming today, and the concern that it might have the plug pulled on it again should Asda “invest” in lower margins has spooked investors who were already nervous at the pace of deflation in food prices. Tesco shares, after a brief rally this week, have slumped again, and at 145p they are cheaper than at any time this century. Unless and until Dave Lewis can find a way to stop the rot, they are not obviously a Christmas bargain.

However, Tesco still has 28 per cent of the UK grocery market, with the economies of scale that brings. It faces more misery before things can get better, but the same may not be true of the weakest of the big four, Wm Morrison. It looks woefully exposed.


An Alliance of interests, we hope

A Christmas update arrives from Alliance Trust, following Katherine Garrett-Cox’s cheery message last week. There’s still no date for her to step down from the board, while her husband has raised £1.5m from selling trust shares. This is despite her determination to see “moments of genuine positivity” in Alliance’s unhappy year, so an unkind soul might consider the sale as running away money, or ask whether a man who is tired of Dundee is tired of life.

His wife is in a sort of limbo. After the board was forced to accept Rory Macnamara and Anthony Brooke (not Chris Samuel and Karl Steinberg, also new appointments, as stated here last week) as directors, she promised to stand down, while carrying on as chief executive. Her package of handsome salary and two types of incentive awards, as transparent as a mobile phone tariff, is apparently under review, although the new structure means the trust has no obligation to reveal the result.

But put it this way: were an executive to be promoted to a main board as CEO, would she not expect a pay rise? The last accounts have pretty little charts signalling that many of the criteria for future payment of awards are being met, despite Alliance’s mediocre investment performance. This just goes to show how important it is to pick the right criteria in the first place.

If you have tears to shed…

Much (synthetic) wailing and gnashing of teeth at the halving of the interest rate on pensioner bonds. These were a bare-faced pre-election bribe for the oldies, and now there’s no longer an election to win, there’s no need to go on paying the bribe. The 2.8 per cent interest on one-year money was way out of line with market rates, which is why buyers had to be restricted to £10,000 each.

So when the year is up, the lucky pensioners will have earned a maximum of £280, or £224 after basic rate tax. Many with a spare ten grand will be higher rate taxpayers, which means £168 after tax. Holders who do nothing when the bond matures will be paid 1.45 per cent – slightly below the best rates elsewhere – and so will see the income on their £10,000 fall by about half that ridiculous winter fuel bung. Goodness, no wonder Age UK is complaining.

This is my FT column from Saturday



Andrew Tyrie is probably the smartest MP outside the Cabinet. Here he is: “The further policymakers lose sight of simplicity, the more taxpayers are forced to spend money on the only people capable of making sense of their affairs.” Mr Tyrie is the Tory chairman of the Treasury select committee, and he has written to the chancellor savaging the changes to inheritance tax.

Like Gordon Brown before him, George Osborne cannot resist the temptation to fiddle. IHT used to be a relatively straightforward tax, paid by the affluent middle classes who trusted their relatives less than they trusted the taxman. The rich, of course, never paid it. Now that domestic property has been elevated to the status of a British national religion, the rules are being changed to treat houses as little financial temples.

Avoid dying before 2017, and your beneficiaries will be rewarded with an extra £175,000 individual transferable tax-free allowance on the family home. This will allow a couple to pass on a £1m house tax-free, but be careful lest your castle becomes too valuable, or the relief disappears. Be careful, too, to leave it to a “direct descendant.” This is a bonus to those wanting to live with their siblings in their late parents’ semi in an agreeable outer London borough. To the rest of us it’s just another tax-driven distortion to an increasingly disfunctional property market.

Rather than fiddle with IHT, the chancellor could cut it to, say, 10 per cent and make everybody pay it when they died. He might even find the yield from the tax going up as the rich ditch their expensive avoidance schemes. Instead, as Mr Tyrie says, Mr Osborne’s changes are “a mess of complexity and uncertainty.” Suddenly, you can see why he is not a member of this administration.

Heathrow: the government decides

The government has made up its mind on London’s next runway. The predictable decision, is to decide not to decide. Just as it has been for many decades now, the problem is too difficult, even for a prime minister who will not face another general election. Further studies are promised, as they always will be.

Some had expected Heathrow Hub, the imaginative proposal to extend a runway west to create a new one, to be thrown out, in order to produce the illusion of progress by narrowing the choices down to two. The hub proposal does at least allow David Cameron to argue that he is sticking to his pledge of no third runway at Heathrow, although the idea of two planes on the “same” runway spooks many people.

Meanwhile HS2, that white elephant on rails, is going ahead, bludgeoning through all opposition, and regardless of expense. The return on this project is so poor that the private sector will not risk a bean. Heathrow, on the other hand, is such an attractive asset that even a few landing slots are considered good enough collateral for Virgin Atlantic to raise £220m in long-term debt at “very attractive” rates. Go figure.

That’s more than enough from her

‘Ping! It’s a cheery Christmas message from Katherine. That’s Katherine Garrett-Cox, the Empress of Dundee, telling us shareholders that 2015 has been an eventful year for Alliance Trust, including the appointment of new board members. Ms Garrett-Cox cannot bring herself to welcome the arrival of Chris Samuel and Karl Sternberg, probably because she and her fellow directors fought hard to keep them off until they realised that the shareholders disagreed.

Since then Karin Forsake has forsaken the chair, and Ms Garrett-Cox herself has slipped from chief executive to the same title at Alliance’s principal subsidiary. It’s not obvious why or how this token move will improve the poor performance of the trust’s portfolio, but in between the “real challenges” she can see “moments of genuine positivity” even if others cannot.

She concludes that Alliance is “transforming into a company that will be ideally positioned to deliver for its shareholders for the long term.” Perhaps. But after seven unsuccessful years as Queen Bee, the delivery might be better managed without her. Time to say Goodnight, Katherine.


This is my FT column from Saturday

There is still time, if he is quick, for BHP’s’ chief executive Andrew Mackenzie to make a virtue of necessity. The company’s dividend is clearly unsustainable, and trying to pretend otherwise threatens to do more harm than good to the business. Just how unsustainable is shown by the historic yield of over 10 per cent with BHP shares at £8. No share anywhere has a sustainable yield in double figures.

Mr Mackenzie has a choice. He could cut the payment, accompanied by the usual blather about a new base dividend, confidence in future increases and more talk about how BHP is such a low-cost producer that everyone else will fall down first. Since metal prices have confounded all the big miners, we should take his predictions with a tonne of $40 iron ore.

However, should he say instead that the Samarco dam disaster is deeply shocking to such a responsible company as BHP, that lessons will be learned, and that it would be most inappropriate to pay dividends until they have been, he might just manage to keep BHP’s credit rating, the company’s reputation in Brazil, and his job. Better get on with it, though.

One of these prices is wrong

It seemed like a good idea at the time. The Enquest 5.5 per cent 2022 retail bond had fallen to £65. It would repay £100 in seven years, with a yield of 8.5 per cent in the meantime. What could possibly go wrong?  The oil price, that’s what. It carried on down, and Enquest, a sort of North Sea scavenger, has carried on down with it.

The retail bond can now be picked up for less than £40, a price that says us holders won’t see £100 in 2022, or at all. Next month’s update will make pretty grim reading, since at $40 the oil price now barely covers the marginal cost of getting the stuff out, let alone contributing to any return on the sunk capital. Yet if the bonds are worth less than half par value, surely the shares should be worthless?  They did come down with a bang last year, but at 23p Enquest is still capitalised at £180m, implying rather more than option value for the equity.

This disconnect between bond and share markets is not that rare. Gulf Keystone Petroleum’s bonds have been signalling corporate distress for months, yet it’s only this week, as the Kurds missed an agreed payment for GKP’s oil, that the share price finally fell below 20p. The company is still capitalised at £200m. As with Enquest, either the bond prices are wrong, or the share prices are..

.No point sugaring this pill

“The collection of any taxes which are not absolutely required, which do not beyond reasonable doubt contribute to the public welfare, is only a species of legalised larceny.” Little has changed since President Calvin Coolidge argued thus nearly a century ago. As chancellor, Nigel Lawson had an admirable policy of scrapping at least one tax in each Budget – abolishing capital gains tax on government securities actually increased revenues, thanks to gilts’ long-term bear market.

None of his successors has seen fit to follow, and it’s dispiriting to see the Financial Times advocating yet another new tax. The latest suggestion for “legalised larceny” is the proposal for a sugar tax, dressed up as a contribution to the public welfare by the Commons health committee. That the committee also wants to control all “unhealthy” food and drink betrays just how much the members are itching to tell us what to do.

Specific taxes are nearly always a bad idea. They raise little, have marginal impact unless applied at tobacco-sized draconian rates, and are expensive to administer. Even defining a plastic carrier bag took four parts, 19 paragraphs and seven schedules. We British do indeed eat too much sugar – we eat too much of almost everything except fruit and green vegetables. Lawson’s mantra says that taxes should be simple, low and compulsory. That is a case for imposing VAT on all food, as other countries have done without starving the poor, but a sugar tax would be a bad precedent for a negligible impact on our excess avoirdupois.


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