Author: rogerwlawson

The Outlook for Stock Markets and Bank Runs

It’s that time of year when financial commentators like to pontificate on the future for the stock market in the coming year and tip sheets give their hot share tips for the New Year.

As regards economic forecasts and how the stock market will perform I can do no better than quote John Littlewood in his book “The Stock Market”:

“The sequence of bull and bear markets in the 1950s shows a reasonably strong correlation with changes in the direction of Bank rate. This most simple of yardsticks has been underestimated as a guide to the direction of equity markets. It was to prove to be the perfect indicator in 1958 when there were 4 further reductions in Bank rate, in half-point steps, to 4% on 20 November 1958, and the FT Index established a new all-time high of 225.5 on literally the last day of the year, passing its previous peak of 223.9 set 3.5 years earlier in July 1955.

The reason for a correlation between changes in direction of Bank rate and the occurrence of bull or bear markets is simple. Bank rate sets the interest rate for money on deposit and the yield earned on government securities. If it falls from, say, 4% to 3%, yields will settle at lower levels, prices of government securities will rise, and money on deposit will earn less. Conversely, if Bank rate is increased from 5% to 7%, as happened late in 1957, yields rise, the prices of government securities fall sharply and money on deposit earns more.

Two consequences follow for equities. There is always some broad correlation between the yields on equities and government securities, and equity yields will move upwards or downwards in the same direction as government securities. Second, if money on deposit earns more, it will make equities seem less attractive and cash more attractive, or if it earns less it will make equities look more attractive and cash less attractive. Subsequent changes in Bank rate will also tend to move in the same direction, upwards or downwards, and will further enhance the strength or weakness of equities”.

I shouldn’t need to tell readers that we are in a period of rising bank interest rates as the Bank of England tries to clamp down on inflation. That does not bode well for stock market indices although some of this has already been anticipated. The S&P 500 is down 20% over the past year which tends to lead the UK market and the FTSE-Allshare is down 2%.

Another consequence of rising bank interest rates is that high yielding shares will be favoured over those yielding little or nothing. We have already seen this process at work.

With more rises in bank rate forecast (as it should be as it is irrational that it should be lower than the rate of retail price inflation) this process is likely to continue. But readers are warned that all economic forecasts are subject to gross error so the key is to simply follow the trend. In other words, this might not be the time to be putting more money into stock markets.

I am not suggesting that investors should move wholesale out of equities and into gilts and bonds. Equities provide the best long-term hedge against inflation while fixed interest bonds lost value in high inflation periods.

As regards share tips these are subject to even bigger errors than economic forecasts although they can be worth reviewing. As someone who always falls for a good story I know not to plunge into large purchases of new share tips. I might buy a small holding and wait to see the direction of travel while I learn more about a company and its management. In other words, I buy more of the winners while selling the losers in my portfolio. This might not maximise my returns but it ensures the avoidance of big mistakes which can be so damaging to one’s wealth.

For similar reasons I never publish share tips. If I do comment on companies, it is simply to report on news, good or bad, not to try and predict the future.

Bank Runs

One of my favourite films was shown on Christmas day television. Namely “It’s a Wonderful Life”. It stars James Stewart as the manager of a small town savings and loan bank which runs into a cash flow crisis as an employee mislays $8,000 on the day a Bank Examiner visits. A run on the bank follows as news spreads around and folks queue to withdraw their savings. Stewart has to tell people that their money is not in the bank but is out on loan to people to buy their houses. Bank runs are still taking place but latterly on cryptocurrency exchanges.

The film reminded me of a seminar I attended during the crisis at Northern Rock which likewise faced a temporary cash flow problem. The panel of speakers from the financial media, including Andrew Neil, were opposed to any Government bail-out. But one member of the audience asked “would they have let Bailey savings and loan go bust? This question stumped the panel as they did not understand the reference which was a pity because the answer from anyone who had remembered the film would have been “NO” because the bank was clearly a positive contributor to the community and was only suffering from temporary problems.

James Stewart aims to commit suicide but is rescued by an angel when shown the negative consequences if he had never lived. It’s an emotionally warming story that is marvellously well acted and directed. One of those films one can watch several times over the years and still weep with joy at the happy ending. The outcome at Northern Rock was much sadder of course as the Bank of England chose not act.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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PRIIPs Consultation Response, Market Close and BHP Legal Case

With the market winding down I have had the time to write a response to HM Treasury’s public consultation on the PRIIPs regulations. They include the requirement for KIDs (Key Information Documents) which I now completely ignore because there are better sources of the required information on funds and trusts.

My consultation response is present here: https://www.roliscon.com/PRIIPS-Consultation-Response.pdf . I agreed with most of the recommendations.

There is a complementary consultation on the “Future Disclosure Framework” from the FCA which I may or may not get around to over the holiday period.

The UK stock market has just closed for Christmas. If there was a “Santa Claus” rally it was barely perceptible in my portfolio. There was a minor hiccup after the announcement that there will be a court hearing next April to determine whether BHP Group should face a trial over the damn burst in Brazil many years ago.

There are 400,000 Brazilian claimants and it will be the largest group litigation in English civil court history if the case proceeds. BHP said: “BHP fully refutes the claims made by the English plaintiffs and will continue to defend itself in the case, which we believe is unnecessary as it duplicates issues already covered by the existing and ongoing work of the Renova Foundation — under the supervision of the Brazilian courts — or are objects of legal proceedings in progress in Brazil”. Looks like a beanfeast for lawyers that will run for years.

As a holder of BHP shares I doubt BHP will have a problem with this lawsuit so I will continue to hold until more information comes to light.

I will probably give a full analysis of my stock market portfolio later in the New Year as I do a calendar year analysis and it takes me some time to do a full analysis.

I look forward to the New Year with my usual perennial optimism and I hope my readers have a good Xmas.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Review of the Year – But It Could Have Been Worse

Not many stock market investors will have come out ahead this year. At the time of writing, the FTSE-250 is down 17.5% over the past year, the FTSE-AIM index is down 30% and the FTSE-100 scraped in a small rise of 1.8%. The last one was driven by rises in commodity prices which benefited oil/gas companies and big miners which dominate the index.

With war in Europe, political turmoil at home, inflation that grew out of control, strikes by nurses, train staff, postmen et al, the country is grinding to a halt. Interest rates are rising to levels not seen for years meaning mortgages will soon be a lot more expensive and house prices therefore forecast to fall killing off the buy-to-let market. And taxes are rising sharply to pay for pandemic costs and wage inflation.

It’s all very depressing. But before the gloom overwhelms you here’s a reminder that the country has been in a far worse position in the past but did recover.

I have mentioned the book “The Stock Market” by John Littlewood before and have just finished reading the first few chapters that cover the years 1945-1960.

In 1945 the country was hugely in debt due to paying for the Second World War. From a position of having massive overseas investment assets they were wiped out and more by debts incurred. The country was effectively bust and was only rescued by loans from the USA. Then surprisingly a Labour government got elected with a very socialist mentality. Company dividends were anathema and companies were persuaded not to raise them under threat of legislation. Any increases in company profits were discouraged by an “excess profits tax” on any rises. With income tax and surtax, the wealthy could be paying 95% tax on their incomes.

The Government then proceeded to nationalise whole swathes of the economy including coal mining, railways, gas and electricity distribution, and the steel industry. The country ran a massive balance of trade deficit as imports exceeded exports and rationing of basic commodities was in place for years as a result. Petrol was rationed and the ration for private motoring was nil. The pound was eventually devalued making exports more competitive but raising the price of imports.

Borrowing by individuals was severely limited and foreign exchange controls meant foreign holidays were effectively constrained. Stamp duty was doubled to 2% which damaged the stock market.

Nationalisation actually strengthened the unions because they had to combine to negotiate with the new company owners as opposed to the previous fragmented company and union structures leading to two decades of strikes and restrictive working practices that damaged industrial competitiveness.

A good film on this subject is “I’m all right Jack” which is a satire on the lunacy of UK industrial relations. When I was a student at Birmingham University I lodged with a landlady whose son was a toolmaker. He got a new job at the Longbridge car factory. When he turned up for work on the first day he found he was on strike.

In 1946-47 there was a very cold and snowy winter. The country was heavily dependent on coal for all heating and electricity generation and supplies ran low plus distribution on railways was disrupted. Power stations shut down and many industries were disrupted or moved to short-time working.

Unlike today the Labour Government chose to keep Bank interest rate at 2% despite the run on the pound and rising inflation, preferring to use taxation to limit personal expenditure and dampen inflation.

There were some popular moves including the foundation of the NHS to provide universal health care, effectively nationalising hospitals, but in reality it established a very large and bureaucratic organisation that formed the basis of our current problems in the NHS. As in other nationalised businesses, targets and controls managed by many thousands of bureaucrats became the norm instead of the profit motive being used to incentivise people.

Reading the book “The Stock Market” makes you realise how our current economic problems are not nearly as bad as they looked in the post-war years. But it does show how damaging socialist dogma was in that period while other countries rapidly recovered from the war.

It’s a very educational book which helps to put our recent difficulties into perspective.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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EDGE Performance VCTs, REITs and Paypoint

I am glad to read that Edge Performance VCT (EDGH) is planning to wind-up. I have written about this VCT several times in the past despite never holding it and I always considered it a basket case which seemed to be run more in the interests of the management and advisors than shareholders. ShareSoc ran a campaign on the company to try and get it reformed, but ultimately without success.

It has now been revealed that they paid dividends illegally for which they are asking shareholders to vote through a “whitewash”. The latest announcement also says: “As Shareholders will be aware, the Company’s net asset value has significantly reduced in recent months, with, among other things, market-related reductions in the portfolio valuation, a dividend paid on 6 May 2022, share buy-backs and the payment of advisers’ fees having substantially depleted the Company’s cash. As a result, the Board and the Investment Manager are of the opinion that the Company is sub-scale and that the Company’s ongoing charges ratio will be too high at approximately 14.89 per cent.

Following lengthy discussions with the Investment Manager as to the Company’s current position and the overall market outlook, the Board does not foresee any reasonable opportunity for the Company to grow in the short term. Accordingly, after careful consideration the Board believes that it is in Shareholders’ best interests that the Company be placed into a members’ solvent voluntary liquidation, with the intention that there will be an orderly winding down of the Company, realisation for cash of the Company’s assets and a return of that cash to Shareholders in a manner which will be intended to preserve VCT tax-reliefs”.

This decision is several years too late in my view while in the meantime managers and advisors have extracted large amounts of cash.

On another subject, my portfolio is down again today mainly because the share prices of property funds/trusts including REITs have fallen sharply. This is no doubt due to the rise, and prospective more rises, in interest rates. This might impact property companies when their debts need to be refinanced. This has affected all property companies, even those who have fixed their interest on debt at low levels and have many years to run before they need refinancing.

In a few years time, the position on interest rates may be very different as inflation is forecast to fall rapidly next year. Property companies should be long-term holding so I won’t be panicking over the latest share price falls.

Another share that has fallen today is Paypoint (PAY) which I hold. That’s despite recent director share buying including another deal today. What do they know that I don’t is the question one asks oneself in such circumstances. Perhaps they are convinced that the recently announced bid for another company is really a good deal when the market seems to think otherwise.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Interest Rate Rise, Strikes and Xmas Reading

I am still hoping for a Santa rally in share prices but they are certainly not happening today. The Bank of England raising interest rates by 0.5% to 3.5% has surely had a negative impact. These are some of the depressing comments made by the Bank:

“Bank staff now expect UK GDP to decline by 0.1% in 2022 Q4, 0.2 percentage points stronger than expected in the November Report. Household consumption remains weak and most housing market indicators have continued to soften. Surveys of investment intentions have also weakened further”; and “The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response…..The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target”. In other words, more interest rate rises are likely to follow.

With major strikes by train staff, NHS staff and postal workers, you can see why there is gloom in the market. Are the strikes justified? My personal view is that NHS nurses deserve some increase to reverse the erosion of their real pay over the last ten years and to make the job more attractive. I visited my renal consultant on Monday and she was not happy to be providing cover for striking nurses in the next few days. But will I need to cross a picket line for my next appointment? It’s almost 50 years since I had to last do that when HM Customs & Excise staff were on strike but it was all very civilised in reality.

As regards train staff I am not convinced that they are justified in disrupting another essential service for a pay rise and for their demands over working practices. They are already highly paid in comparison with other workers and they should not be trying to dictate how management run the operations. There are also suspicions of a political undertone to their actions.

I issued a tweet saying the strikers should be give an ultimatum to work normally or be sacked. Rather surprisingly I got a response from the RMT which said “In your haste to sound draconian you’ve not considered who would staff the railway or train the replacements if you’ve fired them all? Nothing would move for years!!”.

My response was “Well it worked when Ronald Reagan did it for air traffic controllers, did it not?”. This refers to the events in August 1981 in the USA. To quote from Wikipedia: “After PATCO workers’ refusal to return to work [over a pay dispute], the Reagan administration fired the 11,345 striking air traffic controllers who had ignored the order, and banned them from federal service for life. In the wake of the strike and mass firings, the FAA was faced with the difficult task of hiring and training enough controllers to replace those that had been fired. Under normal conditions, it took three years to train new controllers. Until replacements could be trained, the vacant positions were temporarily filled with a mix of non-participating controllers, supervisors, staff personnel, some non-rated personnel, military controllers, and controllers transferred temporarily from other facilities”.

The US airlines continued operations with minimal disruptions and the Reagan move had a significant impact on union activities in other organisations effectively resetting labour relationships in the USA. Strikes fell in subsequent years. From 370 major strikes in 1970 the number fell to 11 in 2010, and it had a positive effect in reducing inflation.

Just as Margaret Thatcher handled the coal miners in the UK, Reagan’s firm resolve on facing up to the unions created a new and better culture.

As regards postal workers the picture is not so clear. The average postman salary in the United Kingdom is £47,500 per year but the average for all postal workers is much less. But there is one thing for certain, Royal Mail Group will be badly hit by the strikes and customers will reduce the number of letters they send even more and switch parcels to another provider. Postal workers are cutting their own throats by continuing strikes. Here also the dispute is not just about pay but also working practices.

This is another essential service which should not be disrupted. Legal notices get delayed, dividend cheques go missing and letters re hospital appointments and medication deliveries are held up.

It’s all gloom on the political and economic fronts at present. But I am getting ready for the xmas holidays by stocking up on books to read. In fact I have already started reading “The Stock Market” by John Littlewood which covers how capitalism has worked in the UK in the last 50 years. Not well in summary is the answer as it has been driven by political dogma from one extreme to another. The author points out the difference from the USA where the major political parties have always supported capitalism rather than socialism.

Other books I have ordered are “Fall” – a biography of arch fraudster Robert Maxwell, “The Anglo-Saxons: A History of the Beginnings of England”, “Power Failure: The Rise and Fall of General Electric”, and “The World: A Family History” by Simon Montefiore. They should occupy me for a few hours!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson   )

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The Cult of We – Book Review

If you want a good read over Christmas, I can highly recommend the book “The Cult of We” by Eliot Brown and Maureen Farrell. It covers the history of the WeWork company (later renamed the We Company) and its founder Adam Neumann.

WeWork was valued at over $50 billion at the peak of euphoria and received many billions of dollars in venture capital funding from Softbank and other private equity investors. It eventually ran into difficulties as the funding failed to keep pace with mounting losses. Indeed apart from it’s very early years it is doubtful it ever made a profit.

This was a company that pretended to be a technology business but in reality was simply leasing large office space and sub-letting it to small businesses and start-ups. One might say it was leasing long and letting short as there was a high churn of customers.

Adam Neumann was a messianic character who promoted the idea that he and his wife were inventing a new social order with a focus on “we” not “me” where small business could share resources and build a social network. In reality they barely talked to each other.

It’s a great example of how investors can be fooled by a glib and charismatic personality. Investors jumped in for fear of missing out (FOMO) in the boom years of venture capital funding without doing proper due diligence or standing back and looking at the reality of the business model.

There was certainly a demand for these kinds of “serviced” offices for small businesses or large ones that urgently needed more space. But it was an easy concept to copy with many imitators quickly springing up. No barriers to entry is the key phrase!

The story of wasted cash with non-existent corporate governance takes some beating. A private jet purchased, big parties with free booze for staff, pot smoking by Adam, and other uncontrolled excesses make for amusing reading. Diversifications into schools for kids (WeGrow) and other unrelated ventures followed.

But it’s not only a good story about the growth and collapse of a company but a good overview of the US venture capital industry in the last 15 years and some of the personalities involved. We may not see the like again I suspect.

I won’t tell you how the story ends so as to avoid spoiling your enjoyment of the book, but there is certainly much to be learned from it. One is beware of charismatic founders/CEOs. They are not all as visionary as Steve Jobs and can easily become megalomaniacs.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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The Death of KIDs

HM Treasury have announced plans to revoke the PRIIPs regulations which will likely mean the death of KIDs (Key Information Documents).

KIDs are imposed and regulated under the PRIIPs regulation as devised by the EU for packaged investment products such as funds and trusts. KIDs give basic financial information, risk indicators and likely future performance based on past performance. Those who purchase investment trusts for example will be asked to confirm they have read the KID before purchasing a holding. But in reality KIDs are grossly misleading for many investment trusts.  This is because their estimate of future returns are based on short-term historic data. This has caused many fund managers of investment trusts to suggest that they should be ignored and investors should look at the other data that the companies publish to get a better view of likely future returns. This writer certainly ignores the KIDs for the investment trusts I hold and I doubt most retail investors took much notice of them.

KIDs were a typical example of complex financial regulations that were misconceived by EU bureaucrats while imposing substantial costs on investment trusts which they no doubt passed on to investors.

The Treasury have issued a public consultation on what might replace KIDs – see https://www.gov.uk/government/consultations/priips-and-uk-retail-disclosure . It explains exactly why KIDs need scrapping.

I may respond in some detail to the consultation as I might have time over Xmas to do so.

In the meantime I am still waiting for the usual Santa rally in share prices. Perhaps I am just being impatient and Santa Claus may arrive in the last few days before Christmas. I hope so but the market has already gone quiet with prices stabilising. I guess folks might be too busy attending parties and doing Xmas shopping to spend time on share trading.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Should You Invest in Disreputable Companies?

Yesterday Glencore (GLEN) announced that it had agreed to pay US$180 million to the Democratic Republic of Congo to settle claims of bribery and corruption. This follows an investigation by US, UK and Brazilian authorities over the activities of the company. The result included a $1.1 billion payment over the US claims. But the impact on Glencore and its shareholders was not high because Glencore is making many billions of profits from coal mining – which many people see as a disreputable business even though it is not illegal.

Leaving aside the issue that it is mainly the shareholders who are suffering these penalties when it should be the individuals involved in bribery and corruption the question one has to ask oneself is should I invest in a company with a historic poor reputation? It looks very cheap on a prospective p/e of 4.4 and yield of 8.4%.

I have decided to hold by nose and buy a few shares in the company. In reality there are few large mining companies that do not have some skeletons in the cupboard. BHP was blamed for a major dam failure in Brazil which created an environmental disaster and has also admitted to a culture of sexual harassment of staff. Rio Tinto managed to destroy the Juukan Gorge in Australia in 2020 – a major cultural heritage site for aborigines for which Rio has been apologising ever since and paying compensation.

BHP and Rio Tinto have taken steps to ensure similar problems do not happen in future and Glencore likewise claim to have reformed. Let us hope they have done so.

I see Purplebricks (PURP) have received a requisition for a general meeting to remove the existing Chairman, Paul Pindar, as a director. Given the financial track record of the business this is not at all surprising. The requisitioners claim that since its flotation the company has raised £200 million of equity capital of which approximately £40 million remains and the company continues to lose money.

Is this a management problem or simply that the business model has never worked? I suspect the latter in which case changing the Chairman may not improve matters. To quote Warren Buffett: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.

I only held shares in Purplebricks very briefly and I sold because of concerns about the reputation of the business and some of the decisions it made. I was never convinced it would make a profit.

What should shareholders in Purplebricks do now? Certainly there is little point in allowing the current board to continue in the vain hope of a recovery. A revolution is the only likely way forward so if I was a shareholder I would vote for the general meeting resolutions.

Postscript: Glencore is giving a presentation today (an “Annual Investor Update” – available from here: https://www.glencore.com/publications ) that gives a good background on how the business is developing. There was an emphasis on the worldwide shortage of copper production which makes for a huge opportunity for the company. They are also aiming for a “responsible” decline in coal production – halving production by 2035. Overall they aim for net zero carbon by 2050 and claim to be more advanced than their major competitors in that regard. They are clearly saying all the right things to improve their reputation.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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VCT Investor Workshop

Today I attended a VCT Investor Workshop on-line run by the British Smaller Companies VCTs (BSV and BSC). These are two of the better performing generalist VCTs managed by YFM. It was a disappointing event.

There were presentations from investee companies Unbiased and SharpCloud which gave a general overview of the businesses but no financial information – such as sales, profits and what the VCT’s valuation is based upon. In other words, the key information about a business that any investor needs.

As I got the impression from other VCT managers that a year or two back the valuations of new deals were rising to levels that might reduce future returns I asked this simple question: “Are you paying less for new investments as I get the impression the market had become over-heated?”

The question was not answered. In fact few questions were answered, perhaps because the time allotted was minimal – perhaps 10 minutes which turned into 5 minutes in reality as other sessions overran.

I really don’t see the point of running events when not enough time is allowed for questions and key issues are ignored.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Strix Shares Crash, GB Group Results and Segro Bond Issue

Shares in kettle control supplier Strix Group (KETL) fell by 40% this morning after they published a trading update. It reported that the Covid lockdowns in China had adversely affected their major OEM customers. Along with negative comments about the future impacts and “continued macroeconomic and political uncertainty” you can see why investors are nervous.

I used to hold this stock but sold the shares in May and August last year – at a small loss I hasten to add – as growth prospects seemed to be weakening and the valuation seemed too high. So I am currently suffering from schadenfreude – pleasure in escaping from that disaster.

Yesterday GB Group (GBG) issued an interim statement which received some negative comments. This is what Graham Neary said on Stockopedia about it: “…. the outlook statement tells us that H2 has started in line with expectations, and there is no change to forecasts. Net debt currently sits at around £118m. This is a large and reputable business providing advanced digital intelligence services to some of the world’s biggest businesses. However, there are many different moving parts to understand, and I perceive it as a black box type of investment. It is in my “too difficult” tray at this time”.

My response to some of the other posts was “Re all the comments on GB (LON:GBG) the accounts are complex but it helps to watch the company’s presentation here: https://www.gbgplc.com/en/investors/ . There have clearly been negative impacts from declines in cryptocurrency and internet companies generally but I am not as negative as others about prospects.  A lot of the issues are one-offs and judging a company on one half-year’s results is not wise in my view. I am a long-term holder and am likely to remain so”.

This is clearly one company affected by all the negative reports on cryptocurrency trading and the collapse of several companies operating in that sector (FTX etc). It appears there are many fewer people opening crypto trading accounts and needing to have their identity verified – surely a good thing.  

Another company announcement of interest today was from property company Segro (SGRO). It said it is issuing a 19-year bond with an annual coupon of 5.125%. It was six times oversubscribed apparently. This shows that property companies can still raise debt easily which was one concern affecting their share prices recently but it seems they now have to pay a lot more in interest on such debt than they have been doing of late. If they need to refinance existing debt it is clearly going to be at much higher rates. Can they still make a profit if debt is that much more expensive? They surely can if inflation is running at 10% and rents they can charge are up to match.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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