There wasn’t much of a cheer this week when Britain posted its first annual fall in prices since the one-month wonder in March 1960. We’ve got used to the idea of things getting cheaper and besides, it’s only the Consumer Price Index that’s in negative territory, and by the smallest measurable amount.

The Retail Prices Index, maligned by the purists, includes a better measure of house prices, which the Office for National Statistics reckons have jumped 9.6 per cent in a year. The RPI is not perfect, but it’s a much better measure of the changing cost of living, and it’s still rising, by 0.9 per cent in the last 12 months.

Even measured by the CPI, the fall in prices will be short and shallow. The slump in the cost of crude or the wars in the supermarkets are hardly comparable to, say, the impact of the development of the railways on the price of domestic coal. That was a genuine gain in efficiency, while oil is already rising again and grocers will eventually rebuild their margins.

In anticipation that deflation will be as fleeting as it was 55 years ago, fixed interest stocks are themselves deflating. Since the start of the year the 30-year gilt has fallen by over 11 per cent, half of that in the last month. These bonds are used to determine the “risk-free” rate of return, although in reality it’s anything but risk free, as the recent buyers discovered. They have lost the equivalent of three years’ dividends in five months..

Like inflation, the cycles of rising and falling bond prices are measured in decades. In the 1970s, inflation appeared resistant to all efforts at control. Then along came Mr Hu He with his billion brothers and sisters, and the price of all sorts of goods wilted in the glare of globalisation. Today, the efforts of the world’s central banks are concentrated on preventing deflation. If the recent sharp rises in bond yields are any guide, the danger ahead is that they become too successful.

Contemporary, or just temporary

It’s not only government stocks where the investment risk is highest when it seems lowest. The anonymous buyer who paid $179m for Picasso’s Les femmes d’Alger at least has the comfort that the painter is no longer composing, so to speak, and that the supply of Picassos, while considerable, is at least fixed.

The purchaser of Christopher Wool’s confusingly-titled Untitled (RIOT) has no such assurance. Like a mini central bank, the 61-year-old Mr Wool can produce as much scrip as he likes, or as much as the market will bear. If he can get $30m a pop, as he did earlier this month, there’s quite an incentive to keep up production.

The cannier artists are even more like central bankers, since they produce a series of essentially the same work, sometimes with little more variation than is found in the serial numbers of bank notes. The buyers of contemporary art are adding the risk of further supply to that of fickle fashion. Nonsense, says Larry Fink, the CEO of fund manager Blackrock (salary $22.9m last year), contemporary art is one of the world’s two great stores of wealth, along with apartments in London and New York.

The image-conscious squillionaire may believe this, or view his purchases as a way to keep the score and show off to his peer group, but none of them likes losing money. Perhaps Mr Wool’s next work could be a series featuring a giant picture of a black tulip.

Change the recipe

As another chief executive departs from Thorntons, prompting one wag to remark that the key qualification for his successor will be the ability to have a pretty box full of creative but plausible excuses for failure at the ready. This little company has a miserable history of promise deferred, strategies abandoned and a share price below where it stood in the last century. But maybe the problem is not with the management, strategy or distribution. It’s just that Thorntons’ chocs are not very, well, chocy. They might be made of vegelate. Could the recipe have been wrong all along?

This is my FT column from Saturday (before they cut the jokes)



If you’ve ever wondered why non-executive directors of banks are paid five times the national average wage for a (very) part-time job, the Prudential Regulation Authority may have an answer: it’s danger money. Under proposals covering the so-called Senior Manager’s Regime, non-execs could find themselves threatened with bankruptcy or even jail if their bank fails.

The proposals spring from the understandable resentment that the non-execs failed to spot anything amiss in the run-up to the banking crisis. Where they should have been restraining, or at least challenging the exuberence of the executives, they nodded everything through and collected the fees.

Most of them have now gone, but the current generation of noddies is apprehensive. They worry about personal liability, and can point to a consultation paper from the PRA last year which suggested that senior managers could face prosecution. But cheer up: such prosecutions are “likely to be rare”, because bank failures are so unlikely now the regulations have been tightened up.

This is hardly reassuring, and so next month a posse of City bankers will meet the Bank of England to argue that the pendulum has swung too far. Bankers may remain hate figures in the public eye (there’s much to hate) but they seem to have a point here.

As we have so painfully learned in the last decade, banks are too complicated for their executives to understand. Matt Spick, the banking analyst at Deutsche Bank, has bravely admitted that reporting “has become so complex it has spiralled out of control”, citing the 868 page blockbuster that is UBS’s report and accounts. If he’s struggling, there’s not much hope for the rest of us.

Non-execs are not paid to win Mastermind on credit derivative swaps. They are there to ask awkward questions, offering support to the execs while restraining their more megalomaniac or self-serving impulses. Even at five times the national average wage, few suitable people will step up to take the risk of personal ruin if their bank fails. Putting the assets into your spouse’s name somehow won’t quite do.



Life in annuities after all

Just Retirement Group, the impaired life annuity provider,  suffered a very impaired corporate life when the chancellor scrapped compulsory annuities last year. From that near-death experience, the shares have recovered half their collapse, as it seems that the demise of annuities had been greatly exaggerated. As sales slumped, the company has scrambled into the business of bulk annuities. Chief executive Rodney Cook sounded quite chipper in the latest trading statement. He’s looking forward to the proposed secondary market in annuities.

Pensions expert Ned Cazalet points out that annuities may get a second life as insurance policies, since today’s fit 65-year-old can expect half of his remaining life to be “impaired”. For a buyer at, say, 85, each year makes death (cheap) or geriatric care (expensive) more likely, allowing the likes of Just Retirement to offer attractive terms.

At 65, by contrast, annuities really are the terrible value they look at first sight, especially the inflation-proofed policies. Mr Cazalet calculates that if inflation is 3 per cent, our annuitant would not be better off taking the best indexed policy on today’s market unless he lives to age 101.

The perils of high pay

The confusingly-named High Pay Centre is not a club for over-rewarded executives, but a think-tank that casts a critical eye on fat-cat emoluments. It has concluded that long-term incentive plans (LTIPs) are a bad idea. Furthermore, it suggests that bonuses should be paid in cash not shares.

The HPC argument is that the focus on profits and earnings per share – the standard ingredients in LTIPs – so distort the executives’ decision-making that the interests of the business they run are undermined. Moreover, deferring rewards has just meant they are bumped up to compensate for the delay in getting them.

If the HPC is right, it’s an example of changes producing the opposite effect to that intended. However, the suspicion is that like so many others, it can’t see why the rewards are so high in the first place. Were they less egregious, nobody would much mind how they were structured.

This is my FT column from Saturday

Ah, infrastructure. The cure for our third-world airports, potholed roads, delayed trains…Everyone’s in favour of building the urban environment we feel we deserve. The last government promised to deliver 500 building projects to drag the economy out of recession. It seems to have dragged itself out, despite capital investment actually falling from £57bn to £42bn in the last four years.

The Treasury has a plan totalling a spuriously-accurate £466bn, but it’s a fantasy. The political mileage lies in announcing schemes to great fanfare before shelving them in the face of pressure for spending cuts. The vast majority of those 500 remain unbuilt. Still, we would be grateful to be spared some of them.

The finest candidate for the chop, the biggest, whitest elephant of the lot, is HS2. If there is an economic case for this fresh £50bn slash through the Chilterns, it hasn’t been made, as a robust analysis from the House of Lords committee concluded in March. Next comes the Thames super-sewer, a £4.2bn dig for a marginally cleaner river at a cost of £80 a year onto Thames Water’s customers’ bills, promoted by the specialist financial exploiters of public utilities.

Then there is the smart meter project, which will somehow magically give us all lower energy bills, although it is so unattractive that the companies won’t do it for themselves. The estimated cost is £11bn, and the document that underpins the claims of savings of £17bn reads as though the the case has been constructed to fit the conclusion. In contrast, a recent analysis for the Institute of Directors picked the argument apart and reckoned that the savings are illusory. The meters, by the way, are not all that smart, either. That’s a total of £65bn for a start.

Of course some mega-projects really are worth doing. The return on another runway in the south east is far greater than its cost, but the most likely next step is yet another enquiry. Reliable, universal, fast internet coverage would repay itself in no time. Skimping on road maintenance and improvement is plain foolish.

The transformation of London’s transport system in recent years indicates the gains that this sort of low-key spending on improved efficiency can bring. But where’s the fun in that, compared to announcing a new tube line?

A lifeline for life insurers

It’s barely two months since the UK government borrowed 53-year money at 2.62 per cent, and if any single event rang the bell for the end of the generation-long bull market in bonds, this was surely it. Since then the buyers of these “risk-free”assets have already lost the equivalent of four years’ income as the price has fallen.

It could have been worse. It’s less than a month since the yield on German 10-year debt hit 0.05 per cent. Despite the European Central Bank’s bond purchases, that yield has jumped to 0.7 per cent, as dearer oil has encouraged optimism (sic) that inflation is coming back. This is still a pretty skinny return (the UK equivalent yields 2 per cent) but it’s a tiny step in the right direction for the life assurance companies.

The IMF highlights the plight of the German companies which guarantee 1.25 per cent returns, far above the yield on bunds. Life offices take cash now for returns often far into the future, and the IMF reckons that miniscule yields are producing a “high and rising risk of distress” in weaker players in the industry.

So far, there are few signs of contagion in large UK companies, but “high and rising interconnectedness” across the whole industry is a worry. After all, a life assurance contract is the ultimate expression of trust from the consumer in the provider. This crack in the bond market from recent silly prices could hardly have come at a better time.

Never say never

Once upon a time, long, long ago, a bank called HBOS almost collapsed. What is now the Financial Conduct Authority launched a review. From the minutes of its March meeting: “The board received an oral update from Sir Brian Pomeroy on the progress of the report, the likely timing for approval and publication.” This year, next year, sometime…?

This is my FT column from Saturday


If you like your annual reports full-fat, glutinous and larded with humbug, then feast your eyes on the latest offering from Wm Morrison. It, ahem, takes the biscuit on the crowded shelf of corporate waffle(s). Morrison had a miserable year last year, posting a “reported loss” of £792m and paying a dividend which the company admits is unsustainable.

In the report full of the traditional smiley happy people, this is described as “a strong platform” by its finance director. The aptly-named Trevor Strain gushes about “investing in our customer proposition”, the standard supermarket-speak for cutting prices. His new boss, chairman Andrew Higginson, a Tesco lifer, is full of praise for his predecessor, but noticeably cooler in marking the departure of CEO Dalton Philips, fired after five difficult years.

Mr Philips’ departure provides a little insight into why politicians of all hues see votes in bashing business. His pay package in his final year added up to £2.1m. The remuneration committee decided that he had hit enough targets to justify 60 per cent of his maximum bonus, including  for his “personal” attributes, whatever they were. Because he’s classed as a “good leaver” he will collect a year’s salary and will keep the right to future share payments, which could add up to another £2m as a going-away present.

Remuneration committee chairman Johanna Waterous explains Morrison’s delicious confection of salary, bonus and LTIPs, incentives “designed to align with the delivery of short and long term objectives”. Mr Philips, we’re told, did a fine job in trying circumstances.

Sir Ken Morrison once famously said he could hire two shop assistants for the price of a non-executive director, and they would be more use to the business. Today Mr Higginson could hire twice as many for the £92,000 paid to Ms Waterous, a 22-year veteran of Mckinsey,  and still get change.

The point here is less the reward for failure – since Mr Philips was headhunted from the comparative safety of the Weston family group, he could demand tough terms – but the sheer scale of those rewards and the oleaginous corporate-speak of today’s annual reports. As so often, words and figures hardly seem to agree. At last year’s AGM Sir Ken compared the output from his herd of bullocks favourably to Mr Philips’ presentation. Mr Higginson should brace himself.

Pension these people off

It’s a decade since “Red” Adair Turner’s Pensions Commission started on its journey that has given us the joys of “auto-enrolment”, obliging every business to push all employees into a pension scheme. The Commission was wound up, but an uncomfortable alliance of vested interests wrote this week asking for it back.

The bosses of the Trades Union Congress, the National Association of Pension Funds, and the Association of British Insurers want a permanent version “for the politics of pensions to work better”. All three trade bodies can sense their power and influence waning and don’t much care for it. Trades unions are effectively confined to the public sector, where pension reform has barely started.

The NAPF and ABI represent the collective investment industry, which has produced magnificent returns for those running the money, and a spectrum of fair to awful returns for the beneficiaries.  The new rules on commissions, the constant fiddling with pension tax relief, and the rise of Individual Savings Accounts are combining to slow down the fund management gravy train. No wonder they want the commission back.

Puzzle corner

The consensus forecasts for last week’s first quarter results from Royal Dutch Shell and BP were wildly out, as both companies declared profits far in excess of the expectations of the army of oil analysts. This failure is relatively new, since in the past the forecast numbers had mysteriously closed to nearer the actual figure in the weeks before the announcement.

Is this (a) because today’s analysts are hopeless at the task of forecasting or (b) because the penalties for breaking the rules restricting “guidance” to the analysts are now much more severe. And the tie-breaker: Is the danger of a false market in the shares ahead of the announcements raised or lowered as a result of the restrictions?

This is my FT column from Saturday

Rather like its product, Sky is a real Marmite of a stock. Depending on your point of view, Sky TV has either opened up the vista of sports across the world to a grateful public, or it has helped the British to pile on the pounds while wasting their lives consuming a smorgasbord of pointless activities.

The sport that really counts is, of course, football, that game the inventors (us) seem so hopeless at playing. In terms of Sky’s financials, nothing else much matters, and the message from the latest numbers is that the financials don’t seem to matter much to the punters. “Sky can raise prices and pass through increased programming costs because they offer differentiated services. It all comes back to the same thing. Content is King. Stay long.” Thus the enthusiastic Neil Campling at brokers Aviate.

He might have said footy is king, and that’s the problem, say his rivals at Stifel. Sky will pay £1.4bn a year from 2017, or £330m more than it had expected. The company plans to squeeze £200m out of costs, with the rest recouped from further price increases. With BT now in the game and (presumably) about to absorb EE, the brokers don’t believe Sky’s growth is sustainable.

The bear case says the technology that has already made those dishes obsolete will allow the clubs to by-pass Sky completely within a decade. History says that Sky has bet twice on changing technology and won both times, which suggests that the management has not been merely gambling. It is also a formidable marketing machine (something BT has never been) with a proven capacity to innovate.

There has got to be a limit to how much the great British couch potato is prepared to pay for his habit, but so far there is little evidence that Sky has reached it. That existential threat is real enough, but may always be a decade away. Marmite indeed.

How not to invest £250bn

Expect Wednesday’s annual meeting of Aviva to be enlivened as usual by the irrepressible Philip Meadowcroft, a shareholder who still thinks of it as Norwich Union. Last year Aviva was “freeing people from the fear of uncertainty”. This year they will be freed from the uncertainty of the identity of their next chairman, now that John McFarlane is taking on the burden at Barclays.

This should allow CEO Mark Wilson to concentrate on knocking Aviva Investors into shape. The returns for with-profits policyholders have been mostly without-profit, while the shareholders have hardly cleaned up. Last year’s 11 per cent rise in the MSCI world index seems to have passed Aviva Investors by: it contributed just 1 per cent of the cash remitted up to the parent, and paid £150m, or 10 times as much, in fines and policyholder compensation.

This may be why its £250bn under management gets just three pages out of 300-odd in the annual report. Now Mr Wilson has made his own task harder by adding the £70bn run by Friends Life. The gains from combining life offices have proved illusory in the past, especially at Aviva, so Mr Wilson might explain why it’s different this time (he’s good at this). Still, shareholders focussing on portfolio performance makes a change from a row over pay. Except that we might get that too.

Name those muppets!

Fund managers, says Mick Davis, think that the mining sector is run by a bunch of muppets. Goodness, where did he get that idea from? Surely not from Rio Tinto’s disastrous takeover of Alcan? How about the “merger” of Xstrata, then run by Mr Davis, with Glencore which its CEO Ivan Glasenberg turned into a duck shoot of Xstrata execs? Then there is BHP’s takeover of Billiton, now reversed and opening a rich seam of fees in the process.

Mr Davis reckons the fund managers are not prepared to take the long view necessary to bring a mine to fruition. Perhaps, but the problem with miners is that they like mining. When metal prices rose, they talked of a “supercycle” and sunk the profits into more mines. Now there’s a world glut of iron ore. Definitely not muppets, though.

They’re a thorough lot at the Competition and Markets Authority. They want to know what £1 plus 99p makes, with Poundland’s bid for 99p Stores, since around 80 of the cheaper stores are conveniently close to the others. Put the pair together, and Poundland might raise prices, although not, presumably, to £1.99.

To which Poundland’s response should be: other retailers are available, even though they may charge more for that essential Febreze Fabric Refresh Spray (375ml). Perhaps the CMA has to be seen to be doing something for the consumer, since when it comes to the rather more signficiant matter of the collapsing competition in telecoms, the regulators are strangely acquiescent.

Not long ago there were five main UK mobile operators. Then Orange and T-Mobile merged, with scarely a murmur from anyone, into the ridiculously-named EE.Now O2 is being bought by Three (O3?), while BT is gobbling EE (BEET?). Vodafone is the odd name out (so far). The good news for the bewildered consumer is that less choice means less homework, and the boss of Three says it intends to compete aggressively. BT, fresh from raising its costs with the deal to offer “free” football, has warned shareholders that mobile charges could be cut.

The bad news is that these two combinations mean less competition, or as the analysts at Jeffries put it: “Consolidation clearly enhances pricing prospects for UK mobile.” Indeed. The O3 combo is being looked at the European Commission, which promises many months of jolly tough negotiation followed by capitulation by the regulator.

BEET is set to be a domestic affair. The CMA has been gathering ammo from the likes of Vodafone and Talk Talk to help it decide what to do. The best guess is for more regulation of BT’s wholesale business, following the current belief across the political spectrum that regulation works better than competition. In practice, it spells yet more complexity in a big, important industry which is evolving rapidly. No wonder the CMA likes the look of adjudicating on a couple of simple retailers.

It’s gold, man, not iron

Jealous rivals to Goldman Sachs who like to use the bank’s “Conviction Buy/Sell” list as a fine contra-indicator have a splendid opportunity. Goldman is shockingly bearish on iron ore, seeing the price slumping to $33 a tonne by 2017. At that price all but the lowest-cost producers will have given up the unequal struggle, since the five biggest will be capable of delivering the entire world demand.

Rio Tinto, BHP, Vale, Anglo American and Fortescue Metals may still be standing, but they will be in pretty poor shape. Some may continue to pay dividends, says Goldman, but the market won’t be fooled if they’re not being earned, and they won’t support the share prices.

It’s certainly true that the producers have been purblind to the obvious signs of slowing demand from China. Investment cuts have been trivial, and “it’ll be interesting to see how the companies respond to protect their [credit] ratings without annoying equity investors”, as a note from Citigroup contends. It sees “the end of the iron age”, with all the gains from the super-cycle squandered in over-production. That would be really bad news for us shareholders – except that those “conviction sell” notes sometimes really do work as contra-indicators.

Just my interpretation

If your idea of an exciting opportunity is to work as a treasury regulatory interpretations manager, then you’re in luck. Headhunters Robert Walters say a “global investment bank” wants one, and is prepared to pay six figures. Of course you’ll need to know what LCR, NFSR and US 5G stand for, but the giveaway is in the job title.

Today’s rules need an ology in compliance to guide the boys who generate the fees, but “interpretations” can range from “What on earth does this mean?” to “How can I claim that what I’m going to do anyway complies?” Here, as a hypothetical example is Al Noor Hospitals, where a broker may have been left with stock from a placing this week. The stock is now xd, so where does the dividend cash go? See, a really exciting opportunity…

This is my FT column from Saturday

Ben van Beurden is incredibly excited. He’s also being bold, visionary and transformational. He’s not quite walking on water yet, but he hopes to be walking on oil, figuratively speaking, as he takes Royal Dutch Shell to the top of the big oil premier league. We are all shareholders in Shell, either directly or indirectly, and when it has swallowed BG Group, it will be responsible for one pound in every nine of total dividends paid by UK companies.

This is uncomfortable, at best. The key to dividends is not this year’s payment, nor even next year’s, but whether the business is capable of sustaining (let alone increasing) the amount of cash it can distribute to the shareholders annually. For an oil company, one of the key metrics of sustainability is whether its reserves are rising or falling. In Shell’s case they are falling, and BG’s Australian gas and Brazilian deepwater oil will reverse that trend.

The logic of buying BG has fuelled fantasy M&A for decades. The operational fit is almost painfully good, in that the duplication of  skilled geologists promises job losses in a market where almost everyone is already cutting back. The price of being bold and visionary will be a loss of diversity of skills in the UK, and the price which Mr van Buerden is prepared to pay for BG leaves him no choice but to hammer down on costs. He’s also trying to offload $30bn of assets into a depressed market. Good luck with that.

Asset sales and cost cuts will not be enough to sustain the dividend after this deal. It requires a rebound in the oil price, since those mouth-watering Brazilian reserves are barely profitable at $50 a barrel. At $90, the boss would look like a true visionary, but in truth Mr van Buerden has little more idea of what will happen than anyone else – BP’s 2014 annual oil bible completely missed the price impact of shale.

Deals which are described in the glowing terms being applied to this one seldom produce the glittering gains anticipated in the incredibly exciting moment of the drama. The Shell share price has lost 10 per cent, or £17bn, this week because its dividend looks rather less sustainable than it did last Saturday.

Lost in the woods

John Prescott was in no doubt. “Absolute bloody rubbish”  was his response to the evidence that the “£60,000 homes” built on his initiative as deputy prime minister were falling apart just seven years after they had been built. The Oxley Woods development in Milton Keynes is architect designed, award-winning and seemingly popular with the residents despite its local nickname of Legoland. There’s just one snag – the snags.

Every new house needs snagging, but the small print of the 2014 annual report from the builders, Taylor Wimpey, reveals provisions of £12.4m last year, much of which is for Oxley Woods’ 122-home development. Cladding panels have fallen off, allowing the weather in, triggering wet and dry rot. Everyone is blaming everyone else, from architects Rogers Stirk Harbour to various contractors. Legal action is looming.

This will be wearily familiar to anyone with a building dispute, but it’s more tragedy than farce. All parties tried to build something interesting and innovative at a price which wasn’t beyond the dreams of half the population. If you wonder why housebuilders prefer to pepper the countryside with little boxes made of ticky-tacky, Oxley Woods provides some of the answer.

Speak up or lose out

The countdown to the election is under way. No,.not that one, but the annual meeting of Alliance Trust, which promises a real beano in Dundee on April 29, as the directors try to repel boarders from Elliott Advisors. Alliance has quite successfully painted them as pirates intent on pillage or worse, even though the trust’s own defences look decidely wobbly. ShareSoc, which champions the sort of individual investors who are Alliance shareholders, describes Elliott’s tactics as “perfectly reasonable”. However, we have yet to hear from the marauders’ nominees for the board, Anthony Brooke, Peter Chambers and Rory Macnamara. The Alliance board doesn’t really deserve to win, but unless we do hear, the trio deserves to lose.

This is my FT column from Saturday


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