BHP and Woodside Energy Announcements

There were announcements this morning (30/8/2022) from BHP Group (BHP) and Woodside Energy (WDS). Many BHP shareholders will also hold Woodside following the merger of the BHP oil/gas operations into Woodside. I continue to hold both having decided that now was not the time to exit a major gas producer. Institutional investors who wanted out of the sector due to their focus on ESG will surely have been regretting it.

Woodside announced half-year results and their Underlying Net Profit After Tax was up 414% on the prior half year. Obviously there was a positive impact from the merger but the major impact was from higher realised prices for their products which more than doubled to $96.4 per barrel of oil equivalent. If your home heating bills are going up, you can see why! Worldwide gas prices have risen mainly due to the reduction in supplies from Russia after the invasion of Ukraine.

Some 70% of Woodside’s portfolio is in gas production and they continue to invest in new gas developments. But they are also now investing in hydrogen production and carbon capture and storage. You can see a presentation from their CEO on the results here: https://webcast.openbriefing.com/8864/player/?player_id=48929

The announcement from BHP was about three requisitioned resolutions that will be put to the Annual General Meeting. All three are advisory resolutions related to ESG aspects. Resolution 1 simply allows shareholders to express an opinion which is probably harmless.

Resolutions 2 and 3 are more problematic. Resolution 2 requests that the company proactively advocate for Australian policy settings that are consistent with the Paris Agreement objective of limiting global warming to 1.5 degrees C. Resolution 3 ensures reporting against the objective of Resolution 2.

I shall be voting against the latter 2 resolutions because there may be no direct connection between the company’s operations and the Paris Agreement to limit carbon emissions. Australia can limit carbon emissions by law if it considers it necessary to do so and in any case a substantial proportion of Woodside’s operations are outside Australia.

Resolution 2 attempts to impose an obligation on the company to interfere in what are political matters in Australia and hence I consider it as unreasonable. It is also unreasonable because more gas production might offset the use of coal for power generation and hence be beneficial in reducing carbon emissions. In reality these resolutions might be impossible to implement in any sensible way.

In summary these resolutions seem to be more about posturing on environmental commitments than practical objectives that the company could implement. They are attempting to force the management to make decisions on what may be best for the business.  

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

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Book Review: The Price of Time

The Price of Time is a recently published book by Edward Chancellor. Its subtitle is “The Real Story of Interest” which makes it very topical as bank interest rates are being raised in both the USA and UK in an attempt to damp down inflation. After an era when interest rates have been at their lowest levels in the last 5,000 years, and have even gone negative in some countries, a historic review of the impact of interest rates through booms and busts is certainly worth reading. But this is a difficult book in some ways.

It’s too long at 400 pages for one thing for all but the most avid reader of economic history. Why do publishers (in this case Allen Lane part of Penguin) insist on their authors padding out their manuscripts to such length? This book would have been much better at 200 pages than 400. It attempts to cover too much ground and in too much detail while not getting the key messages across.

It covers some ancient history but really gets going in a good explanation of how Scotsman John Law rescued the French economy in the 1700s by lowering interest rates and issuing paper money – similar to the modern Quantitative Easing. But thereafter that economic experiment ended in tears. The book covers the economic booms and busts in the Victorian era forward through the depression in the 1930s to the banking crisis in 2008, and the reaction of Governments.

The book attempts to answer the question of whether there is a natural rate of interest, i.e. one that would apply if the Government did not intervene as they have persistently done throughout history – from the imposition of usury laws, through debt forgiveness to modern central bank base rates.

Why is interest paid? Because an investor holding cash needs some return for the uncertainty of being repaid when money is lent. If the risk is higher then the interest paid has to be higher to attract lenders. In times of economic uncertainty such as wars, interest rates are raised.

Historically when there was a surplus of cash in the economy, interest rates would fall as there might be more lenders than borrowers. High interest rates are likely to reduce economic activity as borrowers are put off from investing in new developments such as buildings or machinery. Low interest rates should encourage economic activity and the circulation of money as opposed to the hoarding of assets.

Governments have taken a stance in recent years that lowering interest rates must be good to maintain a healthy economy but the result has been asset inflation. From stock market booms to house price inflation, if you can borrow money at very low rates it encourages speculation and the borrowing of money to buy assets.

Lenders also need a return to cover the future value of the money lent. If inflation is high, then interest will be high. Recently the Bank of England has had an inflation target of 2% while interest rates have been less for many borrowers. That made little sense. Inflation has now got out of hand but real interest rates are still effectively negative. That is essentially irrational.

The book covers the history of Government and central bank interventions in interest rates and the economy, often with unintended consequences. In that regard, it is a good education on what should or should not be done. One message is clear – artificially low interest rates are as bad for the economy as high interest rates.

The book is very well researched with numerous apposite quotations. I would recommend it to anyone interested in economic history and the trends that have made the modern world. But it could do with being shorter and having a more defined structure.

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

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The Productivity Puzzle and Fixing the Energy Crisis

There was an interesting article by Arthur Sants in last weeks Investors Chronicle. He highlighted the productivity problem in the big tech companies such as Apple, Meta, Alphabet and Microsoft. Part of the reason is that their workforces have been increasing and revenue per employee has been falling.

It is suggested that part of the problem is that to develop new products and services requires a lot of staff hacking code. Automation of manufacturing processes is relatively simple in comparison with developing programs that can write other programs – they are an order of magnitude more difficult to create.

This has been the Achilles heel of the software industry for the last 50 years. It remains a very labour-intensive industry when it need not be. The technology of software development has changed little since my era when I was involved in it – there are still too many people writing code.

Is this one reason why productivity in the UK and other developed countries has not been improving as it should have been? It’s been too easy to hire bright young things to write code because labour has been cheap. We need to make it more expensive to ensure tools to automate their work are developed with a concentration on the development of standards to assist. Teaching children to write code in schools is not the answer.

Richard Tice on the Energy Crisis

I watched a webinar presented by Richard Tice of the Reform Party this morning. He pointed out the energy crisis the country is facing and what his Party would do about it. He argues that this is not a short-term problem but that we face a long-term global energy war so vigorous action is required – in effect putting our energy economy on a wartime basis.

He presented some interesting data to support his arguments and made more sense than many politicians on the issue in my view.

You can watch in on the Reform Party’s Facebook page: https://www.facebook.com/TheReformPartyUK

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

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Transparency Task Force Attacks FCA and Sophisticated Investor/HNWI Status

Following on from the BBC Panorama programme on the Blackmore Bond scandal the Transparency Task Force have launched an attack on the incompetence of the Financial Conduct Authority – see https://www.transparencytaskforce.org/letters-to-mps-about-blackmore-bond/ . It includes a letter you can send to your Member of Parliament asking for some reform.

I agree with most of their recommendations on how matters can be improved.

One issue I would also raise is that the Panorama programme made it clear that risky and unregulated investments were sold to individuals who would not normally have qualified as “sophisticated investors” or as high net worth individuals, as is required.

It is possible to ‘self-certify’ yourself as a HNWI or a sophisticated investor. To self-certify as a HNWI you have to earn at least £100,000 per year or have net assets (excluding your property, pension rights and so on) of at least £250,000.

To self-certify as a sophisticated investor you must: have been a member of a business angels network for at least six months; or have made at least one investment in an unlisted security in the previous two years; or have worked in a professional capacity in the provision of finance to small- or medium-sized businesses in the last two years or in the provision of private equity; or be or have been within the last two years a director of a company with a turnover of at least £1m.

These are quite low hurdles and as the investor is only making the declaration with no checks necessary or evidence provided it is wide open to abuse. The company accepting the certification only has to have a reasonable belief that it is correct.

I suggest the HNWI limits should be raised and that those who claim to be sophisticated investors actually pass a simple examination on financial matters or have a recognised business/accounting qualification to prove what they are claiming.

There are simply too many cases of dubious investments being sold to widows and retired folks who have no way to judge the prudence of the matter.

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

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Panorama Attacks FCA over Mini-Bond Failures

The BBC’s Panorama programme last night did a good job of pointing out the failure of the Financial Conduct Authority (FCA) to prevent fraud on investors in “mini-bonds”. In this case the focus was on the collapse of Blackmore Bond where 2,000 people lost £46m when the company collapsed. But there have been several other similar cases.

Mini-bonds are unregulated investments so should only be sold to “sophisticated” investors who might understand the risks. In this case people who clearly were not were persuaded to invest in property developments with “guaranteed” returns of up to 10%. Who was providing the guarantees? A company based in Costa Rica. A lot of the investors’ money was wasted on marketing costs and management fees paid to the directors. The investors were lured into putting money in via boiler rooms and internet advertising.

The FCA were told about the abuses but apparently did very little to stop it. Andrew Bailey who headed the FCA at the time failed to act. He subsequently has been made Governor of the Bank of England – a reward for failure it seems.

For more details see:  https://www.bbc.co.uk/news/business-62504445

Comment: It is surely wrong for the FCA not to have taken action on this matter when it was first brought to their attention. Many investors put money in after that and when it was obviously a dubious investment scheme.

The FCA simply says it was outside their remit to step in as it was not a regulated business registered with the FCA but that is not good enough. In fact the promotion of mini-bonds is a regulated activity. But any action taken by the FCA was too little and too late. See https://commonslibrary.parliament.uk/research-briefings/cbp-9272/ for more background.

This is in essence another example of the managerial incompetence of the FCA in the same way that it has failed to prevent a number of frauds on stock market investors, or tackle them when they have become apparent. Likewise the promoters of the Blackmore Bonds do not appear to be facing any legal penalties.

SNP MP Peter Grant said this in Parliament: “in 50 years from now or 100 years from now, our successors will be in the successor to this Parliament bemoaning the fact that billions of pounds have been taken out of the pockets of hard-working people and used to fund a luxury lifestyle for charlatans, crooks and conmen”. That’s a fair summary of the reality.

How to ensure you don’t fall victim to such promotions? I suggest the following:

  1. Don’t put all your life savings into unregulated investments and diversification is the key.
  2. Don’t fall for promises that are unlikely to be achieved – such as promising a “safe” return of near 10% when big financial institutions are offering much less. This tells you that they are high risk investments.
  3. Make sure you have widespread investment experience before you dabble in unregulated investments such as in mini-bonds and EIS companies.
  4. Don’t trust anyone, however glib they are. Make sure they have a track record of managing money responsibly.
  5. Flashy web sites and glossy literature are warning signs, not positive endorsements.

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

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Rain and Other Good News

Rain, rain don’t go away, and come again another day. After three months of no rain in the London area we certainly need more rain.

The news from BHP Group (BHP) this morning was also good with record profits, a raised dividend and a positive outlook for the future. The share price is up 4.8% today at the time of writing. I continue to hold the shares.

Meanwhile ill-educated politicians continue to call for a rise in the energy price cap as it looks like the typical household will face a doubling or more in their bills over the next winter. But there is a very good article published by the Financial Times by Cat Rutter Pooley headlined “The energy price cap is a relic of another era”. She explains that when it was first introduced, the UK energy price cap aimed to solve the problem of the “loyalty penalty” — higher prices for people who didn’t regularly shop around for a new supplier. What it wasn’t designed for is the conundrum we now face: unaffordable energy prices.

Government attempts to control prices ultimately never work. The suppliers of goods such as energy will not sell at prices that mean they lose money, or can earn less than they can earn selling the same goods elsewhere. It’s a world economy and it’s the world market price of gas that is inflating energy prices. We have already seen multiple energy supply companies going bust with the largest being bailed out by the Government (i.e. by us taxpayers).

What is Cat’s solution to the problem? She says: “The price cap as it stands isn’t a sustainable solution to problems in the energy market that are likely to endure for some years to come. Some households will have to adapt to higher prices. Extra efficiency measures will need to be introduced. It is hard to argue against introducing some form of social tariff for the poorest consumers akin to that which exists in the broadband market. In the short-term, some kind of assistance with bridging the affordability gap will be required given the price shock consumers already face. In the longer term, the price cap needs to go back to being a market backstop, not its primary feature”. I completely agree.

On another subject, it’s not often that one wakes up in the morning to find that medical research has found a solution that might help to keep one alive. That happened to me yesterday with the news reports that a way has been found to change the blood type of a donated kidney (see https://www.kidneyresearchuk.org/2022/08/15/transplant-hope-for-minorities-as-researchers-change-kidney-blood-type/ ). Differing blood types can prevent kidney transplants from volunteers and is a particular problem for black and other minority groups which mean they typically have to wait a long time for a transplant when transplants are a key to providing a normal lifestyle and a longer life by avoiding dialysis treatment.

I have had a kidney transplant for over 20 years now but I need another one soon. I have a volunteer donor but he is the wrong blood type. There is a way around that by a pooled matching system but being able to change the blood type of a kidney would be a great step forward. It will need some clinical trials before it can be widely used but it could be a real game-changer. The research has been funded by charity Kidney Research UK – please support them – see https://www.kidneyresearchuk.org/support/donate/

Back to financial matters. The AIC have issued a press release on the subject of the cost of graduate student debt which apparently is as high as £45,800. This high figure is putting off people from attending university and those already attending are not optimistic they will ever be able to repay the debts they incur.

More grandparents are helping to take the strain apparently which I can quite understand. With one grandson already at university and two more possibly needing to do so in a few years’ time, this is something to consider. Discretionary trusts and Junior ISA contributions are two ways we have tackled the problem but the AIC does of course suggest that investing in investment trusts is worth considering. They point out that a monthly investment of £100 in the average investment company over 18 years would have generated £59,018.

The message is to start saving for your offspring at an early age. See https://www.theaic.co.uk/aic/news/press-releases/debt-worries-weigh-heavily-as-a-level-results-day-approaches for more information.

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

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Treatt Profit Warning

It has been suggested by articles in Investors Chronicle that now might be the time to venture back into the small cap market after a big fall in the share prices of such companies in the last year (the FTSE-AIM index is down by 27%). But investors in Treatt (TET) might not agree. After a profit warning this morning the share price is down by 31% at the time of writing.

Treatt is a supplier of natural flavouring and fragrances and has been highly rated in the last few years because of its apparent strong market position in the sector (a forecast p/e of over 27 before this warning).

What is the reason for the profit warning? Well there are a whole rag-bag of excuses including lack of anticipated performance in Tea blamed on poor US consumer confidence, volatility in FX movements, significant input cost inflation and Covid-19 restrictions in China.

Has poor US consumer confidence really impacted the consumption of that horrible beverage iced tea or was the company just being over-optimistic in sales forecasts? I suspect the latter.

Note I do not currently hold Treatt although I have done in the past. I eventually came to the conclusion that the share was too optimistically priced as I was not convinced it had as strong a market position as suggested and was vulnerable to competition.

Another small-cap company reporting today was Up Global Sourcing (UPGS) which I do hold. They issued a pre-close trading update in which they: “Unaudited Group revenues increased 13% to a record £154.2m (FY21: £136.4m), driven by the earnings enhancing acquisition of Salter, and a resilient performance of the core business, with underlying organic growth of 1.0% to £137.9m (FY21: £136.3m). Growth has been particularly strong with our supermarket customers, which now represent our largest sales channel”.

But with organic growth only 1.0% and a looming recession that will no doubt impact consumer goods purchasing, the share price has only risen slightly today. On a prospective p/e of 9 that is certainly looking cheap in comparison to what it was a year ago but I am not yet convinced it’s time to pile into such small cap stocks. The future needs to be clearer, particularly re supply chain costs ex China and consumer confidence in the UK.

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

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Am I Living in an Alternative Universe?

My share portfolio jumped up by 1.3% yesterday. But the national media news was full of gloom on energy prices and the drought. The NHS is collapsing and the war in Ukraine continues. Bad news has always sold newspapers and the same goes for clicks on social media channels. I have the feeling I am living in some alternative universe where economics and the stock market are completely uncoupled.

The same thing happened after the gloomy prognostications of the Governor of the Bank of England. It’s rather like the “Backwards” episode of Red Dwarf where everything was in reverse and time ran backwards.

All this bad news is surely going to have an impact sooner or later. Come winter many people won’t be able to heat their homes and the coming recession will mean many people will become unemployed. This might put a damper on inflation but the stock market cannot stay immune from these economic trends for ever.

It reminds me of the infamous comment by Chuck Prince just before the financial crash of 2008 – “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance”.

I may be sceptical about future prospects for shares, particularly those in certain sectors, but I won’t be selling shares just yet. I will continue to follow market trends as always until I think valuations are completely irrational on individual stocks.

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

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Northern 2 VCT AGM Report – Far From Perfect

I attended the Annual General Meeting of Northern 2 VCT (NTV) today (10/8/2022). This is a Venture Capital Trust with a decent long-term performance but last year the total return was only 0.8% after a very good prior year.

I made some negative comments two years ago about how the AGM at this company was run – I called it “totally undemocratic”, and that didn’t really change this year. This was a “hybrid” AGM in that there were a few shareholders in attendance in person but I attended via Zoom. That did allow me to ask questions but not to vote on-line which had to be done in advance.

I’ll give some very brief notes on the meeting:

There was a presentation by Peter Dines from the fund manager (now Mercia). He said net assets fell last year partly due to the fall in the share price of Music Magpie. This was put down to a reduction in the forecast margin. But note they made a large gain on that stock when it listed on AIM in an IPO. However from reading a popular blog, there seems to be some doubt about the quality of this business which more likely contributed to the 75% fall in the share price. Mr Dines covered new investments which are mainly in the software/electronic sector and also covered the exits.

The Chairman, David Gavells, then covered the pre-submitted questions. I actually specifically asked for a justification of the reappointment of F.Neale who has been on the board since 1999 and can therefore no longer be considered to be independent. This is a breach of the UK Corporate Governance Code. Mr Gavells did not answer my specific question at this point but did waffle on about board succession.

There were a few other questions pre-submitted and from those physically present, but none of great consequence.

As my pre-submitted question was not specifically answered I put it in again via the Zoom Q&A function. Mr Gavells claimed he did not waffle but just reiterated that there will be continuing changes to the board but there was no specific commitment to replace Mr Neale.  However he did get 439,000 votes against his reappointment on the proxy figures.

All the resolutions were passed on a show of hands vote of those physically present – no on-line votes permitted. This is very unsatisfactory. If a hybrid AGM is run then votes should be taken on a poll as few people are likely to be physically present.

Altogether not a particularly useful meeting with no discussion of the overall issues faced by VCTs and I suggest more thought should have been given to how a hybrid AGM is run. It is also very easy for Chairmen to duck answering specific questions in such a format.

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

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Gore Street Energy Fund Dividend Waiver and Directors’ Jobs

At the forthcoming Annual General Meeting of Gore Street Energy Storage Fund (GSF) in addition to the usual resolutions shareholders are asked to approve a “whitewash” of the illegal past payments of dividends (`resolution 15). This regularly happens when a company fails to file a statement of distributable reserves at Companies House showing it has sufficient reserves to cover the dividend. It seems to happen about once per year to my holdings for example. In fact it happens so often that one would have thought the company directors and auditors would be careful to check that issue before the dividend is approved.

It is interesting to note the number of jobs or roles that the directors have in this company. The Chairman Patrick Cox seems to have a multitude of appointments – too many to be detailed in fact. Likewise Caroline Banksy, who chairs the Audit Committee has 5 directorships and the other directors are not short of positions either.

Personally I think the work involved in being a director or a public company means that it is difficult to do the job properly if someone has more than 3 or 4 such commitments. Maybe that is why the issue of the dividend payment was overlooked.

There is no reason to vote against resolution 15 but I think shareholders should consider whether they should vote “FOR” all the directors.

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

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