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.

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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 it’s the capital stupid!

Lex writes today about ‘Executive compensation’.   But ‘Executive compensation’ is to income, what Harry Potter is to literature.

Traditionally and in most people’s minds, income is earned from employment to fund current consumption, though some may be deferred (savings).

Anyone fortunate enough to have experienced a steady ascent from average income to say, ten times average income, will have discovered that income has limitations.  Each increase results in a diminishing pool of useful spending options.  But the main limitation of income is that you have to keep clocking in to get it.

The acquisition of and ownership of capital opens up many more possibilities.  Capital is necessary to live comfortably and be free of work. Capital buys status. Capital buys power and influence. Capital buys security.

The open goalpost financial culture has led to a new shadow industry.  This industry’s objective is the application of entrepreneurship by employees to find increasingly inventive ways  to extract capital from it for their personal use.

Lex suggests that shareholders can vote for change.  Lex : ‘it is helpful to establish principles on which shareholders can act, especially on dubious practices like golden parachutes, tax gross-ups, and personal perks’

But shareholders, in the real world Lex, are effectively disenfranchised (see my thoughts on this at  https://fabooks.wordpress.com/2009/09/01/the-disenfranchisement-of-capital-%e2%80%93-how-the-city-stole-your-vote/

We really need you to sharpen up – we private shareholders, who own most of quoted UK PLC – need a champion, not a lackey.

Bun rating, 95% dough, meat extracted 5%

Does Lex need a dentist?

Commercial property investment and development is a simple cyclical business. Success or failure depends upon timing entry and exit points in the cycle to gain maximum advantage from differences between interest rates and property capitalisation rates.

Rocket science it is not.

Very highly paid directors of commercial property PLCs should get the timing right. If they can’t do this, they shouldn’t be there, should they Lex? British Land share price reach £24 in the final quarter of 2007. A very good time to launch a rights issue, instead they waited as the share price sank steadily before launching a rights issue at 225p in February 2009 . In 2007 the commercial property market was at a high, the perfect time to dispose of investments, instead British Land waited until now to sell Broadgate.

British Land has now ‘off-loaded’ (Lex’s words, is he hinting at British Land’s alleged astuteness?) half of its Broadgate property to Blackstone. That is British Land has chosen to sell a substantial commercial property investment at the bottom of the market. Worse, the purchasers are doing what British Land should be doing at this stage of the cycle, taking a highly leveraged bet (Blackstone are only putting in £75 million of equity) on a cyclical recovery in commercial investment values, which has already commenced.

If ever shareholders needed an angry and unequivocal comment on the judgement of the directors of a major quoted property PLC it is now.

I looked in vain for some harsh words from Lex on behalf of the poor bloody shareholders, instead Lex presents the deal as nice for both parties. For British Land it is ‘insurance cost against further market falls’ and for Blackstone ‘hopes it has called the bottom of the market’

Bun rating, 90%. With flour suitable for toothless mouths, and 10% meat which may or may not be there depending on whether you are buying or selling.