Glencore is a business built on its executives’ ability to read markets. They proved how good they were at it in 2011 by persuading investors to pay 530p a share in the initial public offering, but since then it’s been downhill all the way, and not just for the share price. This week’s market slump exposed the fragility of its model, questioning whether CEO Ivan Glasenberg and his executives really know what they’re doing.

As a private company, Glencore had an awesome reputation, but in December 2008, at the height of the last financial panic, the spread on its money market paper suddenly ballooned out past 3000bp, usually considered the point where the issuer is a goner.

Glencore wasn’t, but its executives had looked over the edge. They concluded that they needed permanent capital, and the IPO was the end result. Last August, having swallowed Xstrata, Glencore launched a $1bn share buyback, and by March all the money had been spent at either side of £3 a share. Mr Glasenberg justified paying those shareholders to go away by arguing that Glencore shares were cheap.

If they were cheap then, they’re half-price now. They are there for the same reason as Glencore’s credits collapsed in 2008. A trading business needs cheap working capital, and its grim results comprehensively disproved the theory that the company’s traders can make money in bear markets as easily as in booms. Today, Glencore needs at least a sharp rally in commodity prices if it is to avoid a threat to its investment grade status.

The good news, such as it is, is that two senior directors thought the shares cheap enough after the figures to buy with their own money, although the price has fallen further since then, to just 145p. Oddly enough, there is no mention of any new buyback programme for these even cheaper shares.

Driving us mad

There’s something about motor insurance that drives bad behaviour. The industry standard business model demands high spending on advertising and low premiums to bring in the punters, followed by ruthless price gouging of those customers who have more interesting things to do than an annual shop-around.

This punishment of loyalty may help foster our amoral attitude to claims. Whiplash appears to be a particularly British problem, almost as if it was a consequence of driving on the left, and the ambulance-chasing lawyers find ways round the rules faster than the government can tighten them up.

All the insurers claim to take a “disciplined approach”, but seem incapable of resisting the urge for more market share. The results from the industry are all over the place. Admiral seems to be doing fine, while Esure and Direct Line have both disappointed.

As usual, we’re being softened up with warnings of higher premiums. Texting while driving, higher repair costs and medical advances are the current justifications for charging more. Rewarding loyalty rather than punishing it, and spending less on meerkats and cod opera singers, might benefit both shareholders and customers.

It’s insurance, but not as we know it

Gervaise Williams, the manager of Diverse Income Trust, has 10 insurance stocks in the portfolio, but his real insurance is a FTSE 100 put. He’s been running it for some years now, and last month he renegotiated the terms.

Diverse’s holdings are mostly in smaller companies with limited liquidity, where selling in anticipation of falling prices would be as difficult as buying back in lower down. Not that Mr Williams is gloomy – he just likes a little protection.

He used July’s frisson of euphoria on the latest Greek bailout to raise the exercise price to 6000 and extend the term to March 2017. The lack of volatility then led to attractive terms, but after last week’s roller-coaster, they look inspired. The value of the option has doubled, from the £5m he paid to £10m now, helping to offset the falls in the portfolio.

As the annual results explain, this cover effectively costs 0.06 per cent of the portfolio per month. He says he has no present intention of cashing in, but his tip is the price of the renminbi. If it falls again, watch out.

 

This is my FT column from Saturday

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