Lex needs a new calculator

“In the UK interest rate cuts since the start of the crisis have delivered the average £103,000 floating rate mortgage holder an annual saving of £4,635.Against that the government estimates the net cost of bailing out the financial system at £10bn or £400 per household.”  Lex in the Financial Times today.

There are 26m households in the UK.

But only 11.1m of households have a mortgage and of those, only 55%, or 6 million, are on variable rates.

In other words 100% of households paid £400, but only 23% received savings of £4,635.

Plus all households shared (via pension and other indirect and direct holdings), in the loss of £5bn of dividend income from Royal Bank of Scotland (£3bn dividends in 2007, nil in 2009) and Lloyds (£2bn dividends in 2007, nil in 2009) = £192 per household.

All households via pension other indirect and direct holdings, shared in the loss of billions of market value of the UK quoted bank sector. The £30bn loss of market value of Royal Bank of Scotland alone amounted to £1,150 for every household.

So without really trying I am already up to £1,742 for every household.

Is Lex spinning or being economical with the truth?

Who gains from the gross misrepresentation of the facts?

Follow the money?

Lex, care to calculate what the total reduction in the value of UK bank shares was, divided by households? Who do you think bore that cost? Maybe you need new batteries for your calculator?

Bun rating – Zero,  too much smoke and too many mirrors to see if there is a pattie

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Lex – no point to make with a blunt pin

Lex, today attempts to prick the commodity bubble with a blunt pin.  In “Reading the commodity leaves”,  Lex suggests that the relationship between actual changes in  demand for commodities and the prospects for growth in world manufactures mean that there is scant justification for the current commodities price level.

But Lex could make this observation currentlyabout most other investment capital asset indices.  Neither does he show awareness that it is only relatively recently that the prices of commodities have been determined to a unquantifiable but significant extent by  ‘investment’  demand, and not just end-user demand.

The one year commodity index chart (S&P/GSCI), looks just like most  other capital asset indices one year charts, i.e. united by similar levels of capital asset price inflation.

Common sense suggests that the driver that links all investment asset classes price levels must be liquidity and credit levels.  Since Lex (nor anyone else) does not understand precisely how credit and  capital asset price inflation act on each other,  it would be helpful if Lex would just shut up.

Bun rating: 0 but waffles are available instead.

Lex – who is being stuffed?

Lex writes about the proposed Lloyds capital raising –  the world’s largest – but misses the opportunity for deserved excoriating criticism on behalf of the poor bloody individuals who are the being plucked and stuffed by the fund managers gifting  their savings.

Here is a quote from yesterday’s “HM Treasury – Government Announcement on Banks. Implementation of Financial Stability Measures for Lloyds Banking Group and Royal Bank of Scotland”:

 “The remaining risks are better shared with private sector shareholders – for Lloyds, the private sector will provide £15bn of capital and for RBS, the first loss on the remaining £282bn of contingent liabilities has increased to £60bn. “

But the ‘private sector’ in this instance comprises mainly the same taxpayers who will now take on additional Lloyds liabilities via their pension and savings products which will be stuffed by their managers with unwanted bank shares. You can be certain that the individual pension and savings participants will not be asked if they want to support the capital raising, and if they were,  it isn’t difficult to imagine the answer.

Why would a rational investor buy new Lloyd’s bank shares?  There is no visible or certain investment return. On any criterion the rights issue from Lloyds would normally be considered a high risk investment.

The truth is the rights issue is an indictment of the present financial system, whereby a minority of savings controllers can misrepresent the interests of the majority participant investors , the disenfranchised suppliers of capital, to acheive their own narrowly profitable ends. See also https://fabooks.wordpress.com/2009/09/01/the-disenfranchisement-of-capital-%e2%80%93-how-the-city-stole-your-vote/

Bun rating: 100% the world’s largest stuffed bun

 

Lex – the way to better buttock care?

There have been many rights issues during the past few months. Most of them would have been repulsive to individually franchised rational investors because they are really fee-fertile rescue issues in disguise (BDEV, SHI, NTG, YELL, etc, etc, etc).

Some financial columnists writing in 2009 about rights issues hint at the reality, speculating about the prospects of ‘getting them away’ (i.e. ‘getting away with them’) or focus on the fat underwriting fees and issue expenses .  I can’t recall once having seen an objective piece of analysis of a rights issue from an investment perspective. Probably because no case can be made in most instances.

Issues are subscribed by institutions on behalf of (in theory),  the myriad individual investors they collectively represent. However the  individual constituent investors  are never consulted, reminiscent of the once notorious block vote wielded at labour party conferences by the trades unions, where constituent members were not consulted before their votes were assigned to whatever barmy cause the leaders supported.

Why would real investors, by real I mean individually franchised rational investors with their own money at stake, subscribe to new shares in banks?  World markets are already awash with bank shares. Even in the UK there are billions of them already available.

Lex tries to say something about the possible Lloyds rights issue. As usual the sum of the comment is zero. On the one of Lex’s hands:

“A successful cash call would enable a beefed-up Lloyds to avoid the government’s asset protection scheme, so saving a £15.6bn insurance premium. It would still have to pay a break fee for APS cover over the past six months, rumored to be £2.5bn. On top of that, Lloyds must pay advisory and underwriting fees, perhaps another £300m. The net saving, therefore, may be about £13bn. Not bad.

 Subscribers, meanwhile, would increase their bet on the UK’s largest domestic retail banking franchise. If they share chief executive Eric Daniels’ optimism that bad loans have peaked, the mega-bank may finally start to deliver earnings too. There are cost savings from the HBOS merger, and reduced competition could spell meatier margins. One day, Lloyds’ dividend might reappear.”

And on the other of Lex’s hands:

“But loan losses could still rise, not least in HBOS’s private equity and property lending areas. The European Commission is likely to force disposals. Removing, say, the branch networks of Cheltenham & Gloucester and Lloyds in Scotland would lop some £300m off earnings. Eventually, the government will also sell its 43 per cent stake, a huge overhang. Finally, the UK economy, to which Lloyds is fully exposed, remains flat on its back.”

Lex, would you buy Lloyds shares?  We should be told.  

Bun rating: 200% bun. A bun filled with another bun, placed under Lex’s bottie for cushioning the effects of all that fence-sitting.

Lex – once rumoured to be authoritative

Alexander Justham of the FSA’s markets division has  said: “Spreading false or misleading rumours about companies, particularly in volatile or fragile market conditions, can be a very damaging form of market abuse. While we pursue individual cases of rumour-mongering, it is of equal concern to us that market practitioners handle rumours properly and avoid giving credibility to false stories.”

 There are a deluge of rumours in the financial press recently concerning the actual size, or existence of a potential Lloyds Group “arrangement fee” to exit from participation in the government’s Asset Protection Scheme. Lloyds Group have made no statement about the possible amout of an arrangement fee, so all comment must surely be rumour?

The FT’s report in today’s main paper states that

 ‘one person familiar with the government’s stance on the issue said a £1bn fee, which would be in lieu of the support that has already been provided to Lloyds was “definitely the floor”

and later in the same report:

“one person close to the government” described reports that the fee could be as high as £2bn as “understandable”

For some reason though, Lex in the same FT edition, quotes Bloomberg as the source of the rumour that “the Treasury may be eying as much as £2bn”.

As so often, I have been unable to find any substance in the Lex commentary. But since the actual amount, if any, of the ‘arrangement fee’, if there is one,  for Lloyds exiting, if it does,  the ASP,  is acutely material to the market value of Lloyds shares, this is one area where facts, not more speculation by once respected commentators are required.

Bun rating:  One person close to the kitchen is reported to have suggested that the bun, if there is one,  may contain 1% meat.

Lex – embedded in the new Pravda?

The military have learned to exert some control over media reports of their operations by ‘embedding’ journalists into operational units. Embedded journalists are not free to choose where they go and what they see, instead they have to remain with the unit they are embedded into and to the extent that they identify with the culture of the unit they are in, they lose a critical measure of objectivity.

Currently, the crisis of the financial establishment is largely reported in the financial press and financial columns by journalists effectively embedded in the financial establishment. This is exemplified clearly in the extent to which the Lex column has itself, become embedded in the financial establishment. Who benefits from the absence of  robust criticism of a rotten system?

Is The Financial Times is an example of a newspaper dependant upon the financial establishment for sources of news.  Is the F.T. the new  Pravda* ?

Today, Lex writes about the revival of the ‘carry trade’. The borrowing of low-yielding currencies to buy in a higher yielding one. After a rambling account of the current revival Lex concludes without an explanation. But Lex comes close to stumbling on the only rational explanation when he states:

“For the truth is that carry trade opportunities should not exist at all: the whole point of flexible exchange rates is to rebalance things when interest rates get out of whack”

There is only one explanation which fits and that is for one significant investing class, the carry trade is a penalty free trade.

A carry trade by a fund whose managers would keep 20% of any profit but would bear no personal losses if it became loss making.

It’s called a hedge fund stupid!

 *Pravda (Russian: Правда, “Truth”) was a leading newspaper of the Soviet Union and an official organ of the Central Committee of the Communist Party between 1912 and 1991

Bun rating, 10% meat but no gut is embedded in the steak.

Lex, let Wittgenstein be your guide: “Whereof one cannot speak, thereof one must be silent.”

 This is Lex on the 24th September:

“But the frightening reality is that bank lending is contracting faster than the Fed is buying assets from the non-bank private sector, as part of its efforts to lower yields and revive failed markets. No matter how much the Fed seems to do, banks are not extending loans. US consumer credit, for example, fell at an annualised 10 per cent in July. Total debt outstanding is where it was a year ago.

Some wonder about the wisdom of attempting to mend the wreckage of a debt bubble with yet more debt. Even so, the economic consequences of shrivelling broad money do not bear thinking about – the long-term growth rate of M2, for example, is normally about 10 per cent per year. So forget about inflation. Goldman Sachs notes that inflation has the highest correlation to broader measures of money supply. Best ask for that pay rise now.”

Is Lex saying deflation is coming? I think so, but how can anyone know?

What I know is that there will be deflation, inflation or something in between, and that we will make heroes of the lucky pundits, economists, or punters who guessed right.

Bun rating: 99% bun from the harvest of 2012, if there is one.