Monthly Archives: February 2009

February 28th Why I am in favour of a witch hunt

As the row rumbles on about Fred Godwin’s pension after his disastrous spell in charge at Royal Bank of Scotland, I’ve got to admit I am increasingly staggered and infuriated at the circumstances surrounding this mess.

First off it seems that the Government was in such a blind panic last October, that no-one bothered to check whether or not Godwin was entitled to such a large pension (c. £630,000pa), or, perhaps more crucially, whether he was entitled to take it early (he is only 50 years old). As it turns out it appears that the decision to allow Godwin his pension early, was an arbitrary one to encourage him to resign. Forgetting for a moment that he should have been sacked, the same Government decision makers who missed this are also “masterminding” the largest bailout, this country has ever seen. This oversight is not exactly confidence-inspiring (and I haven’t even mentioned the Lloyds/HBOS debacle).

Next I really want to understand what RBOS’s remuneration committee was thinking when “negotiating” Godwin’s package. Why did they think it a good idea to grant him such generous terms without including clauses to limit them in the event of poor performance? Had such clauses existed, would Godwin have tempered some of his more profligate characteristics? Probably not, but the existence of such generous retirement terms and their early granting, smacks heavily of boardroom nepotism.

With respect to the man himself, Godwin clearly has no honour. If you haven’t read his letter to Lord Myners, defending his pension and declaring that he will not voluntarily give it up you should — Judging by the tone of his correspondence, this is not a man who feels the slightest bit responsible for overseeing the collapse of a 300 year old institution and the huge strain this has put on the public purse and British economy.

The early award of such a large pension to Godwin is an affront to us all. As I hear more and more stories of RBS abruptly pulling lending facilities from businesses my disgust intensifies.

However it is not only personal feelings of distaste that convince me Godwin must be stripped of this pension and made to fight as long and exhausting a legal battle over it as he has the stomach for.

Quite simply the Credit Crisis needs personal examples, to shape future behaviour.

As the Credit Contraction bites home, it is clear the Global Economy is in dire need of a drastic overhaul. I sincerely hope that this restructuring will lead to a reappraisal of boardroom behaviour. It has long been a problem that many FTSE 350 directors, hold multiple positions in multiple listed companies. This has given rise to the suspicion that these board members are somewhat lax in their oversight of matters relating to pay and performance, in the interests of self-preservation.

Of course proving such suspicions is nearly impossible, but the example of Fred Godwin is difficult to explain in other way.

If the Government now stands fast and makes an example of Fred Godwin, by revoking his pension, this will serve as a valuable lesson for other remuneration committees. As should be plain to all of these people we do not live in a World of no consequences. Success and failure should carry the same relative rewards or penalties. The culture of greed and self-interest, which has corrupted our financial services sector cannot be tolerated again.

25th February A Tale of Two Testimonies

Sometimes I wonder how sad my life is as I really seem to enjoy, what should be mind-numbingly boring. The last two days in particular have provided manna from heaven for my nerdier instincts.

On either side of the Atlantic regulators have been hauled in front of politicians to explain exactly how the Credit Crisis happened and what will be done about it.

In the USA Ben Bernanke, Chairman of the Federal Reserve, gave his report to Congress over two days, whilst over here, Adair Turner, Chairman of the Financial Services Authority, was questioned by the Treasury Select Committee this afternoon.

The complexity of the topic being discussed could fill months of blog-writing, but there is bound to be a lot of commentary in the coming days about both testimonies, so I will resist the urge to repeat verbatim what was discussed. However if you have the slightest interest in how we ended up in the mess we are in, the viewing was compelling.

What was perhaps most interesting was the consistency between Bernanke and Turner’s responses to difficult questions. Both men tried to build the case that the Credit Crisis came about because regulators lacked the authority, legal backing and political support to do their jobs effectively. While both acknowledged failings in their respective systems, they both felt that their organisations will be “fit for purpose” in the not too distant future.

I am not so sure.

While the lack of regulation fostered an environment, which was clearly too complex to survive, these same men and their colleagues have been advocates and architects of the failing bailouts. I have always found the notion of bailouts as unsettling as I do not believe they have come to terms with the real demands of our current travails – a radical overhaul of our financial system.

By definition a bailout is designed to preserve or save the status quo. What should be clear by now is that the status quo was unsustainable at best, downright destructive at worst.

To be fair Adair Turner went some way to recognising this point, when he made the mild accusation of the utter intellectual failure of Alan Greenspan’s prevailing philosophy of as light touch regulation as possible. Turner articulated Greenspan’s view as relying on self-correcting market-mechanisms to counter-balance financial innovation.

As things turned out Greenspan had something of a point. The collapse of the financial industry is perhaps the most savage example of the market correcting against insatiable excess.

The intellectual failure occurred when the same supporters of Greenspan’s philosophy advocated, designed and enacted the immense bailouts we have witnessed in the last twelve months.

Time will tell about the wisdom of these moves, but until someone starts to present a workable model for global finance in the future, I fear things are bound to get a lot worse.

As a final thought, I will quote one of my favourite lines from the last two days. Under pretty severe questioning from the Conservative MP, Michael Fallon (who actually appears to be one of the few MPs, who has the slightest understanding of what is going on), Turner made the following comment about the banning of the more exotic financial innovations, which have brought down the financial system;-

“They did not act to the sum total of human welfare and their disappearance we should not regret”

If the re-fashioned financial services industry is designed on the basic, philosophical presumption of adding to the sum total of human welfare, then perhaps the future is not as bleak as it might appear now…..

Markets collapse and UK tax revenues plummet

I have held off writing for the past couple of weeks as a wave of pessimism has engulfed the economy. Things felt really bad in January, but February has been awful. Even the passing of Obama’s stimulus package served only to catalise a further 10% drop in equities.

In case you missed it the Dow is now at 7400, having fallen another 100 points overnight. If the market closes below 7500 tonight, then this will be the worst level in 8 years. It is very hard to see anything to be optimistic about at the moment. The “critical” 8000 level I wrote about has now been well and truly breached and we could really see another 10-15% decline from here. If you turn on any financial television channel or read any commentary the mood is exceptionally dark.

So is there anything we can cling onto? Perceived market wisdom dictates that the best time to buy shares is when pessimism is strongest. In such a climate, the sheer volume of selling makes it inevitable that there are bargains to be had. However, buying is not for the faint of heart.

Trying to assess “value” is extremely difficult. P/E ratios have to be disfigured, beyond the point of usefulness, in current conditions. Past performance tells us nothing about how difficult things are likely to become. Equally forward P/E ratios have to be discredited for the same reason.

There is also the genuine risk of business failure. A lot has been made of the troubles in the automotive industry. Were it not for the huge bailouts, then some household names are almost certain to disappear. How much longer can it be before we start to hear of similar stories in other sectors? How much longer can it be before we start to hear the clamouring of other Chief Executives demanding the same level of state aid that the banks have received?

So if we are to start buying, what should we focus on?

My instincts tell me that oil and mining stocks and companies that supply them have to be good areas to look at. The only caveat I would suggest at this stage is to avoid any company that has over-leveraged itself with too much debt. While the underlying fundamentals of a company might look sound, if they are beholdent to the banks for working capital then this is clearly a cause for deep concern.

With respect to the benchmark indices (e.g. the Dow, the FTSE100, the S&P500 etc.) have all flattered to deceive. They have consistently been pummeled and their recovery looks unlikely in the near term. Any rally is likely to be met with more selling. This said I am going to conduct some more analysis into these as we are now at 52 week lows, which might provide something of a base.

One index I am pretty much certain to avoid is the FTSE250. The FTSE250 is meant to be far more representative of UK Plc than the FTSE100.

Yesterday we heard that £7billion less in tax was collected in January. Of course this comes at a time of record Treasury borrowing. This pincer movement on public finances is going to have a profound effect on the next decade. It has to.

I have written many times that a major problem with all of the job losses that have been announced is that they have been almost universally in the private sector. In the last 10 years of Gordon Brown’s economic miracle the majority of the 2 million jobs created, were in the public sector. The private sector supports these jobs through taxation. Now that the private sector is collapsing around us, substantial public sector job losses must follow soon. Given the levels of union protection and activism in this area, this has the makings of serious social unrest.

I don’t envy the jobs policy makers have at the moment, but they have to act more decisively. The Government-backed £1billion loan scheme is fast degenerating into a joke. If the Financial Times is to be believed only £12million of this money has been released so far ( British companies are in desperate need of working capital and if they don’t start to get it soon, then we are going to read horrendous headlines this time next year, about the current tax crop.

Update on positions and are we due an equity rally

So far my plan is working perfectly. I closed out my long Cable position (Sterling/Dollar) immediately after the US payrolls data was announced. The data was actually far worse than expected with the US economy shedding 593,000 jobs in January and the unemployment rate leaping to 7.6%. Apparently this was the worst jobs report since 1974.

Given how dire this news was, the immediate reaction on the currency markets has reinforced my view of what is likely to happen to Sterling in the coming week. Although it did spike against the Greenback, this was not a very strong move and it reversed almost immediately. I have taken this as a signal to open my first position. I have committed 1/3 of this week’s profits to this position. I am going to watch what happens over the course of the day, but I think it likely I will commit another 1/3 tonight. I am banking the remaining 1/3.

Moving over to equities the Dow is still hugging 8,000. I have talked about using this level as a point to go long stocks. I have decided to hold off on this for the time being. While 8,000 clearly is a critical level and there are strong arguments for starting to accumulate equity at this point, I am content to focus on currency for the time being. If I had more to trade with, I probably would buy, but I don’t so I won’t.

If you get a chance to look at the Dow Futures’ charts, you will see that the immediate reaction to the dreadful employment report was also benign. This data, should have hammered stocks. While there is still the rest of the day to go, if we stocks put in a decent performance then this has to be a positive sign. On another front I also heard more reports today of Warren Buffet accumulating more stock. Who knows, perhaps an equity rally is just around the corner…..

Same Cable trade as last month and possibly long US stocks

I haven’t written for over a week, as there really hasn’t seemed much point. Economic and earnings news continued to worsen and there has been little movement in anything. Although Obama’s stimulus package made it through the Congress, its passage wasn’t as smooth as hoped. In particular it has acquired some protectionist features, which are ruffling a few international feathers. It still has to pass through the Senate to become law, so there is time for it to be improved.

Meanwhile in the UK today it is widely expected that the Bank of England will cut rates to 1%. I feel it repetitive to criticise this move again, but I can’t see this being anything other than a counter-productive move. While Sterling has rallied 8-9% over the last 10 days, I think this is more due to events elsewhere than a sense that the outlook is improving here.

Don’t forget that January’s payroll data is announced in the States. Once again the expectations are for another 500,000 retraction in the US labour market.

Looking at the Sterling/Dollar pairing’s (“Cable”) reaction to the BoE and US payroll announcement in the last 3 months I think it a fair bet to expect Sterling to continue to rally until tomorrow, hit a ceiling and then start to decline. If last month is anything to go by then next week is likely to be another tough week for the Pound. Of course last month’s declines were exacerbated by the latest bank bailout package and near nationalisation of Royal Bank of Scotland, but we can expect further downward pressure this month, thanks to likely announcements of quantitative easing.

So my plan is once again to go long Sterling/Dollar after today’s announcement. I intend to hold my position until after tomorrow’s US payroll data at 1.30pm, see the immediate market reaction and then probably close my position and go short.

I will also take a close look at US stock levels on Friday afternoon. There has been ample more evidence of the significance of the level 8,000 for the Dow as this has been held for the last 2 weeks. The likely retraction in the US job market in January must be further suppressing it. I didn’t go long the weekend before last as I wanted to wait until tomorrow. I will probably now take the plunge tomorrow afternoon and open up a long Dow position in anticipation of positive news this month for Obama’s stimulus package. As this trade is a clear expression of hope over expectation, I certainly won’t be risking much on it.

Hopefully I will have some Cable profits to play with….