Monthly Archives: January 2015

ELECTION 2015

There is little precedent for the General Election we are about to experience here in the UK. 1974 is the closest parallel we have. This resulted Conservative failure to form a stable minority government and a second Election in the Autumn – leading to the disastrous Labour administration that sowed the seeds for Thatcher’s triumph five years later. Today, a combination of coalition fatigue and malcontent with our political leaders means I see little appetite for a second election this year – however inconclusive a result we get on 7 May.  And Dear God In Heaven inconclusive it is set to be. Below I examine the political landscape as I see it and some of the trends I expect to see over the next 3 months.

 

What has happened since May 2010?

While the polling gap between the Tories and Labour has closed in recent months, remember that the Election result achieved by the Tories in 2010 was against a backdrop of consistent polling around 40% – a level they have been nowhere near since 2012. The chart below shows how the haemorrhaging of Lib Dem support after 2010 went, on average, to Labour (Wave 1) – (unfortunately cannot be displayed). It has shown little sign of returning since or going over to the Tories. This will be key on May 7th because much of the subsequent movement in the polls are, in my opinion, temporary and likely to be reversed on Election Day.

 

The initial rise of UKIP (Wave 2) looks like being disaffected Tories frustrated by coalition and Cameron’s leadership. By contrast the second rise of UKIP (Wave 3) looks much more like they came from Labour voters disillusioned with Miliband’s leadership – captured succinctly by that infamous Emily Thornbury tweet. Finally Wave 4 has seen Labour voters move to the Greens. This has coincided with Ed Balls’ rhetoric on fiscal restraint in the next parliament and has disillusioned the core Labour vote.

 

So how many of these ‘waves’ are set to be sustained on May 7th?

Our First Past the Post electoral system here is key. With limited winnable seats for UKIP and the Greens I expect waves 2,3 and 4 to return to their original voting intentions in the marginal seats where the voting really matters. The problem the Tories face therefore is the swing back to Labour that this will trigger. It would also be further reinforced if, as I expect, the UKIP manifesto matches the views of their wealthy benefactors and aligns itself with the right-wing Tory view – this means Wave 2 may be more sticky. Labour face the same problem with Wave 4 if they produce a more centrist manifesto – and it is this latter reason that is behind Cameron’s desperation to have the Greens in the TV debates.

 

 

 

The Lib Dems remain key for the Tories – and the SNP have made it so

In marginal constituencies including student-heavy Sheffield Hallam (Nick Clegg’s seat) the sustainability of the Lib Dem vote, and their existing seats is key in May’s race for power. While there are regional examples (South West England) where the collapse of the Lib Dems may play to the Tories there are also London seats where this will let Labour in. The excellent Joe Murphy summarises this here: http://www.standard.co.uk/news/politics/exclusive-election-poll-labour-could-seize-eight-london-target-seats-as-lead-grows-10002698.html . The Mansion Tax is not nearly as unpopular as many believe and Labour have a 10 point lead in London – they had 2pp in 2010 and still won 38 seats to the Tories 28.

 

The reason for the enduring relevance of the Lib Dems in this campaign is the changing politics in Scotland. With Labour poised to be all but wiped out this, perhaps paradoxically at first glance, lessens the chances of a Tory Government. Its impact is to bring the SNP in as the likely kingmaker, overtaking the Lib Dems as the third largest parliament (graphic below). As the SNP have categorically ruled out a deal with the Tories this puts Labour at a significant, if unenviable advantage. Yes a Labour agreement with the SNP (either coalition or more likely as an issue-by-issue supporter in a minority government) is fraught with risk for the Labour party – but ask yourself would Labour voters be any more forgiving if they failed to form this coalition and let the Tories back in for a second term? Expect the wily old fox Salmond to use “vote SNP and get our voice heard in Westminster” and for this to be deeply effective in sustaining the SNP lead. This narrative appeals to Unionists as much as it does Separatists.

 

 

 

The Numbers Game

The big thing that is so often overlooked is the electoral arithmetic that provides an inherent bias to Labour. This from Mark Field’s (Tory MP for the City of London) excellent website:

 

7.3%: This was the extent (in percentage terms) of the Conservative lead over Labour in the national vote in 2010. So remember – a Tory lead anything smaller than this in May implies a net loss of seats to the main opposition party. There is a tendency to lull ourselves into a false sense of security when looking at opinion polls as if being level pegging with Labour is somehow a competitive performance. In fact, even a 3.5 per cent Conservative lead (not something we have achieved in a single opinion poll since before the Budget of 2012) would imply a swing to Labour of almost two per cent, which repeated on a uniform basis across the UK would make them (just) the largest party in parliament.

 

The biggest mistake that Cameron made was not brokering a deal on electoral reform that addressed the innate bias in the system – should he fail to recover and leaves office in May I suspect he will confirm this in his inevitable memoirs.

 

The story you have to believe in to see a Conservative government, as I do is that Miliband has a “Kinnock moment” and the Lib Dems fight tenaciously in their incumbent constituencies. Not impossible, and indeed with a growing economy and the inherent nervousness around left of centre governments you would expect support to return to the Tories… but certainly the odds are against this scenario as we stand here today.

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OPEN LETTER TO GREEK GOVERNMENT FINANCE TEAM

Attention: Giannis Dragasakis, Yanis Varoufakis, Euclid Tsakalotos

 

We have long been critics of the severe conditions imposed by the Troika on Greece.

 

In our view, loans should only be made on terms that are affordable by the borrower or not at all. Thus, we have been suggesting, since 2011, that all the loans to Greece should be swapped by the holders in exchange for 20-year Zero-Coupon Bonds at a 50% discount to face value – equivalent to approximately 3% per annum compound interest.

 

This would remove the heavy burden on cash flow of Capital and Interest payments over a significantly long period to assist Greece with its financial repairment programme. We believe that it is totally absurd for the EU to insist on terms that they know are not deliverable. As an aside, we wonder why Germany insists on “the rules must be kept” when their debt to GDP is 80% as against the Maastricht Treaty 60%!

 

I attach one of our articles on this subject.

 

I wish you all well for the future prosperity of Greece and successful negotiations with the Troika.

 

Kind regards

 

Graham Reid

 

 

——————————————————————————————–

Haircut; “short back & sides” or “comb-over”?

By Graham Reid & JR Max Wheel

October 28 2011

 

I’m afraid it’s a bad comb-over with all the bald patches shining through for those who dare to look.

 

The plus side of the Brussels Grand Plan is that it has a faint possibility of fooling enough people to defer the problem for a month or two at best. The negative is that it fails dismally to address the root cause of the problem and provide a lasting solution, not even one for Greece. In fact, albeit that we are still left without any detail, their statements lead us to believe that they have made matters worse.

 

For example;

 

Who will now trust a CDS contract on peripheral Europe Sovereign debt?

If it is this easy to halve your debt (just say you can’t pay!) who trusts the value of Italian, Spanish, Portuguese or Irish bonds? Maybe markets will drive these down to levels whereby they can’t pay the interest.

Does anyone believe that the proposed level of capital raising by the banks will be enough to cover the write-downs on Sovereign debt to realistic levels and increase capital ratio to 9%?

 

We make no apology for repeating what we have been saying for the last 2 years, namely:

 

Greece is insolvent

The main purpose is to “rescue” the shareholders of mainly French and German banks, not Greece

Greece will never recover if they are forced to accept these high rates of loan interest, short term repayment and severe austerity programmes – their situation can only worsen month by month

The Euro was a political fudge from outset with no economic sense

The Eurozone countries have no financial commonality that can ever support a single currency unless the entire block is centrally governed and that is politically unacceptable to its peoples.

Whilst Germany, Holland and some others have benefited hugely from the Euro, Club Med has suffered by comparison, partly due to its inability to match efficiency and performance

The necessity for so many meetings and the fudged “solution” (sic) is a direct result of upcoming elections in France & Germany where Sarkozy/Merkel are fighting for their political skins rather than saving the Euro or Greece

 

So, where should they go from here?

 

If they are serious about keeping Greece afloat long enough to decide the fate of the Euro and its membership, they have to take steps to convince the market that their solution will work and that it will provide a sensible template for any other country in difficulty.

 

It appears that banks have already been forced to accept a 50% haircut but why on earth use that acceptance to worsen Greece’s problems and throw good money, and lots of it, down the drain. Let’s be honest and admit that Greece cannot pay the interest on the loans without being given/lent the required sum by the IMF – what a waste of precious cash resources. Obviously it also has no hope whatsoever of repaying the capital in the timespan without yet more loans and no real effort has been made on post 2015 projections anyway – what does that tell us!

 

Once these facts are acknowledged, what should they do? Give Greece a chance albeit with a necessary level of internal re-adjustment to bring the budget deficit back to zero in a reasonable amount of time. We suggest swapping all current Government bonds for new 20 year zero coupon bonds at a 50% discount. This means exchanging a Euro100m existing bond for a Euro 200m new 20 year zero – this is 3.5% imputed interest BUT Greece would not have to pay it for 20 years. It would be better still if the IMF either guaranteed these new bonds or issued them itself on Greece’s behalf.

 

With careful budgeting, and regulation from the IMF, Greece would have up to 20 years to recover giving both the market confidence that a real solution had been constructed and the Greek people the ambition to make it succeed rather than, justifyingly taking to the streets to complain against the appalling treatment meted out to them – yes they have been profligate; yes they fail to pay taxes; yes they should never have joined in the first place, but the rest of the Eurozone should be ashamed at its failure to challenge its admittance and total failure to monitor their finances and rein them in or indeed to accept that there was a deliberate fudge of the figures, that was known and admitted by Romano Prodi last night.

 

This solution has the added advantage of the bank balance sheets being significantly improved. At the moment, they have to value Euro 100m of Greek debt at Euro 50m maximum (in truth probably 35m would be more realistic). Under this scheme, they could value the new Zeros at Euros 100m. So, less money to raise to meet the 9% target. We fear that many banks will use this 9% ratio to shrink their balance sheet by reducing loans and driving their economies nearer to recession. It will also give time for reflection on the future of the Euro – more of that from us in another article!

 

We say to the ill-named “leaders” of Europe, you have a chance, before your meeting in Cannes, to come to your senses, admit the truth about Greece and take these steps to calm markets and provide hope for the citizens of Greece. Step up to the plate, give leadership and honesty for once and do the decent thing before it is too late.

 

TOAY’S FAYRE

 

TODAY’S FAYRE – Wednesday, 29th January 2015

 

 

“Thou comest, Autumn, heralded by the rain,

With banners, by great gales incessant fanned,

Brighter than brightest silks of Samarcand,

And stately oxen harnessed to thy wain!

Thou standest, like imperial Charlemagne,

Upon thy bridge of gold; thy royal hand

Outstretched with benedictions o’er the land,

Blessing the farms through all thy vast domain!

Thy shield is the red harvest moon, suspended

So long beneath the heaven’s o’er-hanging eaves;

Thy steps are by the farmer’s prayers attended;

Like flames upon an altar shine the sheaves;

And, following thee, in thy ovation splendid,

Thine almoner, the wind, scatters the golden leaves!”

 

Henry Wadsworth Longfellow – poet – 1807-1882

 

 

Phone hacking is illegal and is not an attractive occupational hazard.  However when one reads that Jude Law has sired his fifth child not all progeny from the same mare, you could be forgiven from thinking that news of this nature was in the public interest. I know Mr Law is entitled to damages for having his phone hacked.  However he and the likes of Hugh Grant invite intrusion by the unorthodox manner they lead their private lives.  If you are a celebrity and you spread your pleasure about town indiscriminately, you must expect your jaunts to grab the headlines!

 

 

“I think equity markets will get devastated!” – Thus spake the famed £9bn hedge fund manager Crispin Odey recently in his latest letter to investors. Having been one of the biggest bulls of this particular central bank artificially-driven-bull cycle, his dramatic bearish outlook will not go unnoticed. Finally, Odey fears major economies will be entering a recession that will be “remembered in a hundred years,” adding that the “bearish opportunity” to short stocks looks as great as it was in 2007-2009.

 

The FOMC started its two-day meeting yesterday and the comments that emanated from this august gathering were relatively benign without any real guidance as to when interest rates would go up, with Chairman Yellen insisting that the US Central bank was happy to pay a waiting game. I think the Street of Dreams had heard all this rhetoric before and consequently decided to focus their attention on more immediate issues such as the strength of the Dollar affecting earnings going forward, with companies such as Microsoft, Pfizer, Procter & Gamble and McDonald’s being adversely affected. A very weak oil price, which was affecting the share price of oil and energy companies, also contributed fundamentally to yesterday’s reversals.

 

When stumps were drawn on Wall Street, the DOW had surrendered 290 points 1.13%, the S&P 500 has eased by 1.35% and the NASDAQ gave up only 0.03% thanks to the strength of Apple, which added 6.4% on their stellar results. Commodity shares and the oil sector fell by an average of 1.6% – Chevron and Exxon Mobil both falling by a similar amount. Yesterday Facebook beat the ‘Street’ with EPS coming in at 54 cents against expectations of 48 cents. Yahoo! was 1.7% to the good. Boeing’s efforts attracted another 4.8% in value. It may be of some comfort to know that of those S&P 500 companies that have so far reported 77% have beaten their profits forecast. Today FORD, ZIMMER, RAYTHEON, CONOCO-PHILLIPS, HERSHEY, PULTE, VIACOM, NORTHROP GRUMMAN, ABBOTT LABS, VISA, GOOGLE and AMAZON step up to the plate!

 

Investors tend to look at the DAX, CAC and FTSE to feel the market’s pulse. Though those two European bourses fell a tad with the FTSE 100 ending the session up 14 at 6825, all eyes were on Greece and the astonishing comments made by the good looking matinee idol Greek PM Tsipras. To tell the world in your first policy statement that you are going to raise pensions and create more public sector jobs strikes me as an odd way to win friends and influence people, when your country is in debt to the tune of €260 billion. PM Tsipras is either bold, naïve or just plain stupid! Perhaps he is trying ‘call Chancellor Merkel’s bluff’ on austerity in the hope that the Troikas will capitulate and cobble together a sweet deal in rescheduling their debt as well writing some of it off. I know Greece substantially holds Germany responsible for forcing it into the EU, when the criteria could not be met. However markets left Greece in no doubt what it thought of Tsipras’s outburst. The Athens exchange fell 9% yesterday, with banks being clattered. Piraeus Bank lost 29% in value. Bond yields leapt like grilse – 5 year yield to 13% and 10 year yield to 10.17%, suggesting default cannot be ruled out. Maybe Greece wants to head for the EU exit, allowing the Drachma to be reintroduced devalued by 40%, which would inject life in to its tourism, the export of booze and agricultural produce. Greece exit could also attract international businesses to set up operation in Greece with attractive currency and tax considerations. If that is not Greece game it setting about life in a very ham-fisted manner. A lack of coordination could trash many banks in Europe, triggering massive losses. I fear there will be more losses to Greek banks.

 

Yesterday concern was expressed towards Wm Morrison and shares fell away by 6%. On the bright side SAB Miller was up over 4% thanks to bid gossip attributed in the direction of InBev. Today Royal Dutch Shell disappointed with income 20% lower than expected for the quarter – $3.3 billion against expectations of $4.1 billion. EPS was only 52 cents against estimates of 64 cents. The company will keep dividends flat for 2015. The company may reduce its buy-back programme, which will be dictated by the price of oil. Diageo’s numbers were neutral with sales down by 0.1% and volumes down by 1.9%. The dividend will be increased by 9% to 21.5p.

Deutsche Bank’s quarterly numbers were much better than expected – a profit of €438 million against a loss of €289 million. Trading in FX and fixed income was bountiful. The main four divisions did well though investment banking looked a little weak.

  

UK companies posting results and trading statements –  Thursday – ROYAL DUTCH SHELL, RPC, 3iii, DIAGEO, FULLER, SMITH & TURNER, Friday – BT GROUP, VEDANTA RESOURCES – Economics BBA mortgage applications

 

US companies posting interim results tomorrow – XEROX, MATTEL, MASTERCARD and CHEVRON.

 

 

David Buik

Market Commentator

 

+44 (0)20 7886 2775

Panmure Gordon & Co  One New Change | London | EC4M 9AF | United Kingdom  www.panmure.com

TODAY’S FAYRE

TODAY’S FAYRE – Wednesday, 28th January 2015

 

 

Ask me no more: the moon may draw the sea;

The cloud may stoop from heaven and take the shape,

With fold to fold, of mountain or of cape;

But O too fond, when have I answer’d thee?

Ask me no more.

 

Ask me no more: what answer should I give?

I love not hollow cheek or faded eye:

Yet, O my friend, I will not have thee die!

Ask me no more, lest I should bid thee live;

Ask me no more.

 

Ask me no more: thy fate and mine are seal’d:

I strove against the stream and all in vain:

Let the great river take me to the main:

No more, dear love, for at a touch I yield;

Ask me no more.”

 

Emily Dickinson – poet – 1830-1886

 

 

Three years ago in May my wife and I spent a weekend in Krakow with my dear friend David Schwartz; sadly no longer with us and his wife. As you can imagine the most poignant, painful, devastating and shattering day was spent visiting Auschwitz and Birkenau.  Need I say more?  It is impossible to adequately describe the feeling of depravity, wantonness and human wickedness.  This is no time for avid descriptions.  Suffice to say that it was a horrendous experience – one we shall never forget for the rest of our days. Everyone should visit this desolate area of Poland, lest we ever forget. Yesterday was the 70th anniversary of the closure of this most fearful of concentration camps.

 

 

 

I wasn’t a great day for equities yesterday. The dapper Alexis Tsipras, the youthful Greek PM – he with the matinee idol good looks – was putting his Cabinet together and a few well worded ‘Ya! Boo! Sucks!’ were being filtered out in to the market that Greece would happily dictate terms to the EU about its plight with austerity, debt and the threat of default. In fact according to them everything in the garden was rosy! I don’t think so! Anyway there are a few weeks before Greece has to come up before the beak in the form of the Troikas, which will decide their economic and financial fate and whether this beautiful country is pointed in the direction of the EU exit door. Yesterday the DAX lost 1.57%, the CAC 1.09% and the FTSE 100 – a mere bagatelle – just 40 points to 6811 (-0.6%). In London most of the companies posting results were just medium sized with perhaps easyJet posting the most pleasing effort. With the Euro having dropped like a stone in recent months and with oil at less than $50 a barrel and the UK economy in relatively chipper nick, if easyJet and Ryanair don’t ‘make a little hay whilst the sun shines’, they never will.

 

 

The Street of Dreams had wound themselves up for the mother and father of all snow storms which never really materialised; thank goodness. However some of the earnings were less than impressive, particularly Microsoft, whose profits fell by 10%, saw its shares ease by 7%. Caterpillar fared little better – shares down 8%. When the bell finally clattered Wall Street was in a modest pickle – DOW -1.65%, S&P 500 -1.34% and the NASDAQ -1.89%. Yahoo! served notice to float its 15% stake in Alibaba in to a company called SPINKO! One must surely be forgiven for thinking that Yahoo! looks a little vulnerable. Procter & Gamble, thanks to currency head winds, reported second quarter fiscal year 2015 core earnings per share of $1.06 versus $1.15 the prior year. P&G’s shares fell by 3%.  

 

 

Then after hours Tim Cook, Apple’s CEO blew the market apart with what can only be described at stellar numbers. In the last quarter Apple sold 74 million units – circa 18million iPhone6, 21 million iPads and 5.5 million Macs. Revenues came in at $74.6 billion with a 7.3% increase in profits to $18 billion! – The largest quarterly profit posted by any company. EPS was $3.06. Apple’s relationship with China is clearly paying handsome dividends probably to Samsung’s chagrin. However some fresh innovation from Apple will be required before too long as the likes of Google’s android is gathering momentum. These were outstanding numbers. The shares moved forward by 6.2% to $115.40. It was only last April that shares were split – 7 for 1 to $75 each!  

 

 

This morning Asia, after a fairly neutral start saw the ASX close 0.10% and the NIKKEI +0.15%. However just after lunch the Shanghai Composite was down 1.71%, thanks to a decline in profitability of industrial companies, though the Hang Seng was up 0.30%. This morning results from Anglo-American with unspectacular production numbers, but two upgrades, have been posted this morning, Antofagasta and Sage (unch at the open) were being closely scrutinized. H&M believe that January sales will increase by 14% and there are plans to open another 400 shops!! These shares have rallied 17.9% in the last year. What an outstanding retail success – same mold as Inditex and Next!  

 

 

UK companies posting results and trading statements – Wednesday – ANGLO AMERICAN, ANTOFAGASTA, PREMIER FARNELL, JOHNSON MATTHEY, SAGE, BREWIN DOLPHIN, Economics – FOMC Thursday – ROYAL DUTCH SHELL, RPC, 3iii, DIAGEO, FULLER, SMITH & TURNER, Friday – BT GROUP, VEDANTA RESOURCES – Economics BBA mortgage applications US companies posting interim results –Wednesday – BOEING, FACEBOOK, GENERAL DYNAMICS, Thursday – FORD, ZIMMER, RAYTHEON, CONOCO-PHILLIPS, HERSHEY, PULTE, VIACOM, NORTHROP GRUMMAN, ABBOTT LABS, VISA, GOOGLE, AMAZON, Friday – XEROX, MATTEL, MASTERCARD, CHEVRON.

 

 

David Buik

Market Commentator

 

+44 (0)20 7886 2775

Panmure Gordon & Co  One New Change | London | EC4M 9AF | United Kingdom  www.panmure.com

POST GREEK ELECTION – A GREAT PLAN BY TWO FINANCIAL ENGINEERS

Greece Post the Election

“Force has no place, where there is a need for Skill”Herodotus

by Graham Reid & JR Max Wheel

 

 

Of late, we have kept our counsel, whilst watching open-mouthed as one disaster follows another in the great political Euro project. In Greece, a left-wing party, [with minority right-wing support] has now been elected with a mandate to repeal austerity, even repudiate its debts, if no reasonable accommodation can be found amongst the Troika grouping -the EU, ECB and IMF.

 

This is just the latest evidence of the trail of destruction left behind in the wake of the dysfunctional governance of the Single Currency.

 

Greece matters for a number of reasons; it has effectively torpedoed the EZ/EU elite’s strategy of demanding reform simultaneously with modest debt relief, it has endured a collapsed economy (-25% GDP), hunger, violence and protest. How they got there through dodgy deals to conceal the real level of deficits, the corruption and appalling governance now hardly matters. Much of this was known (admitted by Romano Prodi) when they joined the Euro or intuited from the behaviour of past Greek Governments.

 

Greek total debt is estimated at €317bn (€247bn to the troika), following the current bailout packages, but is still 177% of GDP, the IMF and ECB are owed €58bn, which neither side intends to renegotiate unless the Greeks stick to their rules, the private sector still owes approx $82bn.. The IMF does not do restructuring on its loans and the EU has indicated that it will not, which ties the hands of the ECB.

 

A stand-off of this type was inevitable, firstly because Greece went into the Euro with an annual debt of some 12.7% of GDP rather than the mandated 3% according to Maastricht rules and obviously because yoking an economy like Greece with Germany was clear lunacy. So bizarre are the rules by which the EU and EZ in particular play that even zero-coupon bonds must according to Maastricht criteria be recorded at their face value. This is madness of the first order.

 

It is also of interest to note that the ruling Germans insist on the rules being kept as a matter of discipline. How then do they explain their own 80% debt to GDP when the Maastricht rules say 60% maximum?

 

Note also, that of the € 252billion of “rescue” funding, €150billion has been paid straight back as repayment of capital (€96bn) and interest (€54bn) – how clever is that? Great for the French and German Banks who received so much of it but not great for the people of Greece!

 

Greece has been pushed beyond its effective limits, consistent with some semblance of democracy and those who did the pushing are obligated to redress the balance. Tsipras is perfectly aware of this as are the EZ paymasters. Rather than waiting to see who blinks, it makes sense to accommodate.

 

We repeat our mantra that no-one wins unless the solution is affordable by the payer. In the case of Greece, and to a lesser extent Italy, Spain, France and Portugal, the only solution is to extend the payback over a much longer and affordable period and at much lower interest. For Greece particularly, this should be deferred interest in the form of roll-up through a Zero Coupon.

 

Contagion is both very quick and destabilising. Despite that Brussels thinks it is a containable problem, it is not. It will spread quickly to Italy, Spain and possibly France now that minority extremists can be seen to win elections.

 

Most will agree that Greece does not need endlessly more Government officials, it already has more than the Netherlands and other aspects of the Syriza programme are inconsistent, what it does need is money in the hands of the ordinary people, quite how that gets there is for the present irrelevant. The insistence that relief must be accompanied by austerity and reform will have to wait.

 

Germany went through a major write-off of its debts in the Andenauer years of the 1950s and also bent the rules in the aftermath of the Faustian pact between Mitterand and Kohl over German reunification. Greece is a bare 3% of EZ output; it is a convenient fiction to forget or worse ignore one’s own economic history. Countries which cannot pay cannot achieve reform, growth or job creation. Far better an accommodation, which dumps the stupid Maastricht rules, to which no one adheres, restructure the debt into LT bonds and then make the changes necessary to ensure proper tax collection, less offshore economy- shipping, property and hotel magnates.

 

Keynes might now argue that the EU’s disastrous insistence on the Euro standard is “worth it” and the pain “temporary”, but when a general cause operates, those (causes) which are deemed weak (for other reasons) topple over. This was also the deal to which Germany signed up; the piper is waiting to see who, if anyone pays to call the tune.                                                                                               27.01.15

Market update

At 2.45pm the FTSE 100 is down 70 at 6780. One could hardly call it a ‘shake-out’, but investors’ resilience and the euphoria post QE and the advent of a new though maybe not fresh Greek government was bordering on ‘Lalaland!’ However some indifferent earnings in the US – Microsoft down -7% and Caterpillar down 8% – plus concern over snow storms in New York, which will inevitably curtail activity, has taken DOW down 290 points at the opening – -1.7%.

 

Volumes in London have not been monumental and some have started to wake up to the fact that Greek Tragedy is far from played out! The slightly disappointing GDP number for 4th quarter of 0.5% should not have made any difference as 70% of earnings from FTSE 100 are Dollar or Euro related. Year on year GDP is running at 2.7% – the best year since 2007.

 

Energy stocks are down between 0.5% and 1.5%. Mining stocks are easier by an average of 1.5%. Insurance has been very strong all month. The sector is taking a breather – down 1.5%. Royal Mail Group, after a downgrade by RBC Capital, is down 1.5% having been easier by 3.5%. Weir still falls – down another 3.5%. Utilities have been perky – Centrica up 3% after a Credit Suisse upgrade. Of those companies reporting today, Crest Nicholson is +3%, easyJet is +1.5%, having been 3.5% to the good. British Land is down 1.2% and PZ Cussons +2.5%.

TODAY’S FAYRE – EU, RUSSIA & GREECE

TODAY’S FAYRE – Tuesday, 27th January 2015

 

Because I could not stop for Death –

He kindly stopped for me –

The Carriage held but just Ourselves –

And Immortality.

 

We slowly drove – He knew no haste

And I had put away

My labor and my leisure too,

For His Civility –

 

We passed the School, where Children strove

At Recess – in the Ring –

We passed the Fields of Gazing Grain –

We passed the Setting Sun –

 

Or rather – He passed us –

The Dews drew quivering and chill –

For only Gossamer, my Gown –

My Tippet – only Tulle –

 

We paused before a House that seemed

A Swelling of the Ground –

The Roof was scarcely visible –

The Cornice – in the Ground –

 

Since then – ‘tis Centuries – and yet

Feels shorter than the Day

I first surmised the Horses’ Heads

Were toward Eternity –

  Emily Dickinson – poet – 1830-1886   

 

Last night I went to listen to a typical barnstorming speech made to supporters of ‘Business for Britain’ by Lord Digby Jones, the hugely respected former Director General of the CBI. Much of the delivery style I had heard many times before, particularly his perennial pop at the ‘French!’ What I admire most about Lord Digby is that he is apolitical. Every speech he makes is on behalf of ‘Business!’ – No political persuasion recognition! Though his locks continue to flow, he is, with age, getting thinner on top, perhaps some of his thatch has worn thin through frustration watching the EU’s feudal attitude to business. Coupled with its bloated bureaucracy, the EU is losing market share to China, the US and others willing to be more competitive.

 

Lord Jones was adamant that the EU constituent countries had their own agenda and that Brussels’ intransigence was bringing the economy of 500 million heading into the vortex of despair. Approach competition using every country’s best attributes. “Remember the population is getting older”, he said and “we cannot afford to pay for dotage when sustaining gargantuan debt.” That was Lord Jones’s message. He also begged all governments to remember that the public sector does not create growth; business does! That is where tax comes from; so stimulate business opportunities and stop hammering them in to the ground! If Cameron or any other PM failed to deliver radical change in areas of immigration, CAP, taxation and regulation, Lord Jones would reluctantly recommend that the UK should leave the EU, but not before a hell of a fight!

 

The poll of polls for the General Election posted today did not make great reading for business. My colleague, economist, Simon French shrewdly points out, and this has been his concern for some time, that if the SNP gain a forecasted 53 seats, coupled with Labour not necessarily being the largest party, would muster sufficient seats to form an anti-business administration. This would be unwelcome news, just as the UK is more together economically than it has ever been.

 

I find it staggering as to how ambivalent everyone is to the current plight of the Russian economy. Russia’s downgrade to junk status is far more significant than any fall-out from Greece insolvency. Russia relies on oil! At $48 a barrel that is hopeless for balancing the books. Also if Russia is incapable of borrowing at competitive rates, this will not augur well and will incur the wrath and indignation of Putin, who politically will probably thrash out with more troops and tanks being planted in Ukraine. I do wish President Obama would engage!

 

Just after 5.00am this morning some charming Australian wag was so chilled out about Greece’s plight commenting on CNBC, I thought he was going to keel over! We were not to worry for the following reasons. Firstly he said QE provided a brilliant cushion allowing struggling countries to relax a bit more. Secondly Spain, Italy and Portugal were in much better economic condition than a year ago – maybe true but still drowning in debt and massive unemployment. Thirdly the EU banking system was much stronger – I doubt that very much – and finally the fall in oil prices was a terrific boost for recovery. I wondered if this very erudite bloke had been brought up on the Planet ‘Zog!’ I’d love to know what ant-depressants he is on! Can I have some, please? Greece’s €260 billion worth of debt is measurable and should not be treated glibly! The story will run its race and there will be sorrow and tears at the day of reckoning.

 

Today everything in the garden looks rosy. Yesterday European bourses had a great day of consolidation, apart from Greece, whose ASE shed 3%. Greece’s 10-year bond yield has rallied uncomfortably to 9.41%. You could add another big figure and as an investor I would still be disinterested. Yesterday Wall Street had a rather nebulous session, as snow threatened to envelop the capitalist centre of the Universe. Trade, understandably was not brisk. Today is a huge reporting day with CATERPILLAR, PFIZER, LOCKHEED MARTIN, PROCTOR & GAMBLE, BRISTOL MYERS SQUIBBS, AMGEN, APPLE, YAHOO! and AT&T all supposed to be stepping up to the plate. Some may not be able to make it through the snow. Remember what happened last year. The inclement weather saw the US post -2.9% for the first quarter GDP!!

 

In Asia, Tokyo cracked on but poor industrial company profits saw losses posted by the Shanghai Composite and the Hang Seng. This morning EU bourses were in the doldrums. Despite decent numbers from Novartis and Siemens and questionable efforts from Ericsson and Phillips EU bourses lack momentum. Even though there is plenty of M&A talk and gossip about – Shire, IAG, and Three/02 etc – the FTSE is down 20 points at 6830. EasyJet, PZ Cussons, Crest Nicholson and British Land pleased their respective acolytes. It was rumoured that PostNL of the Netherlands has expressed an interest in buying the Royal Mail. Yesterday RMG’s shares popped 2% on the rumour. This morning they are down 3% thanks to an RBC Capital downgrade for under-performance. Even if the interest was real I doubt the unimaginative Dr Cable would countenance such as sale.

 

This morning 4th quarter GDP was slightly disappointing at +0.5% – for 2014 2.6% and for the year 2.7% – the best since 2007! Rule Britannia!

 

 

 David Buik

Market Commentator

 

+44 (0)20 7886 2775

 

Panmure Gordon & Co  One New Change | London | EC4M 9AF | United Kingdom  www.panmure.com

TODAY’S FAYRE

TODAY’S FAYRE – Sunday, 25th January 2015

 

 

Poet of Nature, thou hast wept to know

That things depart which never may return:

Childhood and youth, friendship and love’s first glow,

Have fled like sweet dreams, leaving thee to mourn.

These common woes I feel. One loss is mine

Which thou too feel’st, yet I alone deplore.

Thou wert as a lone star, whose light did shine

On some frail bark in winter’s midnight roar:

Thou hast like to a rock-built refuge stood

Above the blind and battling multitude:

In honoured poverty thy voice did weave

Songs consecrate to truth and liberty,–

Deserting these, thou leavest me to grieve,

Thus having been, that thou shouldst cease to be.”

 

  Percy Bysshe Shelley – poet – 1792-1822  

 

Fifty years ago on Tuesday I joined a queue with friends, which went over Westminster Bridge then meandered past St Thomas’s Hospital, and then went over Lambeth Bridge, then slowly passed College Green before being allowed to enter St Stephen’s Hall in the Palace of Westminster, to pay homage and give thanks for the life of Sir Winston Churchill, who was lying in state, before his funeral on Saturday 30th January 1965. It took 5 hours. The temperature was below freezing. I remember having no coat – just a large scarf! Though an occasion of mourning, it was also a celebration of the life of the most inspirational person of my lifetime.   

 

Greece and its future will be at the top of the financial agenda this week. Expectations for the introduction of QE by the ECB last week could be described as stratospheric that equity markets rose sharply with bond yields falling measurably. Last week the S&P 500 added 2%, the FTSE 4.3%, Euro stocks an average of 5.1% and the NIKKEI 3.8%. Since the 6th January, when it became clear that QE was more than a live threat, the FTSE has added 7%, the DAX 11%, the CAC 12% and Euro Stoxx 600 11%! Now it’s all about the implementations of QE against a background of fierce resentment and opposition to QE by Germany and its supporters. It would appear that Chancellor Merkel and ECB President Draghi are not the best of friends at present.  This is also a huge week for earnings both sides of the ‘Pond.’

 

Apart from Greece there are a fair few events worth watching – The acquisition of 02 by Hutcheson Lampoa’s “Three.”, the tenuous future of Standard Chartered’s CEO, Peter Sands – We suspect his days are numbered. Finally having declines to make hostile overtures in the direction of Debenhams, Sports Direct may buy Evans Cycles for about £100 million.  

 

UK companies posting results and trading statements – Monday – AVEVA, Tuesday – CREST NICOLSON, PZ CUSSONS, GEM DIAMONDS, FOXTONS, CARPETRIGHT, EASYJET, BRITISH LAND, Economics – 4th quarter UK GDP, Wednesday – ANGLO AMERICAN, ANTOFAGASTA, PREMIER FARNELL, JOHNSON MATTHEY, SAGE, BREWIN DOLPHIN, Economics – FOMC Thursday – ROYAL DUTCH SHELL, RPC, 3iii, DIAGEO, FULLER, SMITH & TURNER, Friday – BT GROUP, VEDANTA RESOURCES – Economics BBA mortgage applications 

 

US companies posting interim results – Monday – DR HORTON, CITIZENS, MICROSOFT, TEXAS INSTRUMENTS, Tuesday – CATERPILLAR, COACH, PFIZER, LOCKHEED MARTIN, PROCTOR & GAMBLE, BRISTOL MYERS SQUIBB, AMGEN, APPLE, YAHOO!, AT&T, Wednesday – BOEING, FACEBOOK, GENERAL DYNAMICS, Thursday – FORD, ZIMMER, RAYTHEON, CONOCO-PHILLIPS, HERSHEY, PULTE, VIACOM, NORTHROP GRUMMAN, ABBOTT LABS, VISA, GOOGLE, AMAZON, Friday – XEROX, MATTEL, MASTERCARD, CHEVRON.

 

 

David Buik

Market Commentator

 

+44 (0)20 7886 2775

Panmure Gordon & Co  One New Change | London | EC4M 9AF | United Kingdom  www.panmure.com

HIS GREEK TRAGEDY – IS THERE ANY WAY OUT?

 

The article below, concerning Greek debt and possible default was written and published on the www.avenews.org.uk website in 2011 by two outstanding financial engineers – Graham Reid & Max Wheel. Clearly there is bad blood between the EU (Merkel) and the ECB’s controversial QE plans posted last Thursday.

 

So, as we await the fall-out from the Greek election and the possibility of ‘GREXIT’ the advice proffered in this article still stands up to fairly close scrutiny. Assuming that Syriza of the ‘left’ lands the spoils, though ‘austerity’ begins with an ‘A’ I doubt the new government will be able to spell it, nor will they much care about ‘default’, despite expressing no desire to leave the EU. So I suspect equity and bond markets may be very volatile early next week.

 

 

If you have time, please read the article and then the comments made by the authors at the end. You may think that the beginning of the article is marginally out of context, but pick it up from ‘GREECE IS INSOLVENT’ and it will all make great sense! The Troikas (ECB, EU and IMF) could do worse than adopt this plan as part of its negotiations with Greece!

 

 

 

 

Haircut; “short back & sides” or “comb-over”?

 

By Graham Reid & JR Max Wheel

 

October 28 2011

 

I’m afraid it’s a bad comb-over with all the bald patches shining through for those who dare to look.

 

The plus side of the Brussels Grand Plan is that it has a faint possibility of fooling enough people to defer the problem for a month or two at best. The negative is that it fails dismally to address the root cause of the problem and provide a lasting solution, not even one for Greece. In fact, albeit that we are still left without any detail, their statements lead us to believe that they have made matters worse.

 

For example;

 

Who will now trust a CDS contract on peripheral Europe Sovereign debt?

If it is this easy to halve your debt (just say you can’t pay!) who trusts the value of Italian, Spanish, Portuguese or Irish bonds? Maybe markets will drive these down to levels whereby they can’t pay the interest.

 

Does anyone believe that the proposed level of capital raising by the banks will be enough to cover the write-downs on Sovereign debt to realistic levels and increase capital ratio to 9%?

 

We make no apology for repeating what we have been saying for the last 2 years, namely:

 

Greece is insolvent

 

The main purpose is to “rescue” the shareholders of mainly French and German banks, not Greece

 

Greece will never recover if they are forced to accept these high rates of loan interest, short term repayment and severe austerity programmes – their situation can only worsen month by month

 

The Euro was a political fudge from outset with no economic sense

 

The Eurozone countries have no financial commonality that can ever support a single currency unless the entire block is centrally governed and that is politically unacceptable to its peoples.

 

Whilst Germany, Holland and some others have benefited hugely from the Euro, Club Med has suffered by comparison, partly due to its inability to match efficiency and performance

 

The necessity for so many meetings and the fudged “solution” (sic) is a direct result of upcoming elections in France & Germany where Sarkozy/Merkel are fighting for their political skins rather than saving the Euro or Greece

 

So, where should they go from here?

 

If they are serious about keeping Greece afloat long enough to decide the fate of the Euro and its membership, they have to take steps to convince the market that their solution will work and that it will provide a sensible template for any other country in difficulty.

 

It appears that banks have already been forced to accept a 50% haircut but why on earth use that acceptance to worsen Greece’s problems and throw good money, and lots of it, down the drain. Let’s be honest and admit that Greece cannot pay the interest on the loans without being given/lent the required sum by the IMF – what a waste of precious cash resources. Obviously it also has no hope whatsoever of repaying the capital in the timespan without yet more loans and no real effort has been made on post 2015 projections anyway – what does that tell us!

 

Once these facts are acknowledged, what should they do? Give Greece a chance albeit with a necessary level of internal re-adjustment to bring the budget deficit back to zero in a reasonable amount of time. We suggest swapping all current Government bonds for new 20 year zero coupon bonds at a 50% discount. This means exchanging a Euro100m existing bond for a Euro 200m new 20 year zero – this is 3.5% imputed interest BUT Greece would not have to pay it for 20 years. It would be better still if the IMF either guaranteed these new bonds or issued them itself on Greece’s behalf.

 

With careful budgeting, and regulation from the IMF, Greece would have up to 20 years to recover giving both the market confidence that a real solution had been constructed and the Greek people the ambition to make it succeed rather than, justifyingly taking to the streets to complain against the appalling treatment meted out to them – yes they have been profligate; yes they fail to pay taxes; yes they should never have joined in the first place, but the rest of the Eurozone should be ashamed at its failure to challenge its admittance and total failure to monitor their finances and rein them in or indeed to accept that there was a deliberate fudge of the figures, that was known and admitted by Romano Prodi last night.

 

This solution has the added advantage of the bank balance sheets being significantly improved. At the moment, they have to value Euro 100m of Greek debt at Euro 50m maximum (in truth probably 35m would be more realistic). Under this scheme, they could value the new Zeros at Euros 100m. So, less money to raise to meet the 9% target. We fear that many banks will use this 9% ratio to shrink their balance sheet by reducing loans and driving their economies nearer to recession. It will also give time for reflection on the future of the Euro – more of that from us in another article!

We say to the ill-named “leaders” of Europe, you have a chance, before your meeting in Cannes, to come to your senses, admit the truth about Greece and take these steps to calm markets and provide hope for the citizens of Greece. Step up to the plate, give leadership and honesty for once and do the decent thing before it is too late.

 

Accept that the Greeks took advantage of the opportunities that were dangled in front of them by the EU after the EU had fudged all the figures to have them admitted to the club.

Greece was bust BUT French and German Banks (+others) had taken advantage of the higher interest rate they got on Greek Euro bonds and were then squealing about the losses.

 

The so-called “solution” for Greece was a solution for the French and German Banks NOT Greece.

OUR SOLUTION would have helped both Greece and the French/German Banks – it was :

Swap the Greek Sovereign Debt in those Banks (which should have been valued at zero in their Balance Sheets) for 20-year Zero coupon Bonds – each Euros 100 million swapped for 200 million payable in 20 years (or earlier if both agreed) – this is approx 3% compound interest payable on maturity.

 

Then – Greece is relieved of interest payments for 20 years giving them the opportunity to get their economy moving and also allows the other Euro Banks to value their Bonds at par – great news for B/S and Capital requirements. Best if the Zeros were IMF/World Bank issued.

 

If you look at the current situation, Greece is now in “primary” surplus – positive excluding debt interest – so our solution would have made the situation very promising. 

 

It could still be done and would be a great way to use the Euros trillion being printed!

 

If the ‘new’ Syriza led-Greek coalition government wishes to stay in the EU, I suggest that the TROIKAS (EU, ECB & IMF) take a look at this possible and plausible solution to the debt issues.

 

It is utterly ridiculous/stupid/self-defeating to create an even larger problem by lending funds to an indebted borrower at rates of interest that they could never hope to pay. Hence our concept of Zero coupon bonds at a “reasonable” rate to give them time to recover and the lenders a reason to be able to value the debt at a higher figure than should otherwise be possible.

TODAY’S FAYRE

TODAY’S FAYRE – Friday, 23rd  January 2015

 

 

Turning and turning in the widening gyre    

The falcon cannot hear the falconer;    

Things fall apart; the centre cannot hold;    

Mere anarchy is loosed upon the world,    

The blood-dimmed tide is loosed, and everywhere    

The ceremony of innocence is drowned;    

The best lack all conviction, while the worst    

Are full of passionate intensity.

 

Surely some revelation is at hand;    

Surely the Second Coming is at hand.    

The Second Coming! Hardly are those words out    

When a vast image out of Spiritus Mundi    

Troubles my sight: a waste of desert sand;    

A shape with lion body and the head of a man,    

A gaze blank and pitiless as the sun,    

Is moving its slow thighs, while all about it    

Wind shadows of the indignant desert birds.

 

The darkness drops again but now I know    

That twenty centuries of stony sleep    

Were vexed to nightmare by a rocking cradle,    

And what rough beast, its hour come round at last,    

Slouches towards Bethlehem to be born?  

 

William Butler Yates – poet – 1865-1939   

 

Like many others, I am deeply saddened by the death of Lord Leon Brittan and the fact that he did not have his day in court to defend himself against vicious rumours concerning his private life. Also so sad for those poor children who suffered from paedophilia will not benefit from Lord Brittan’s evidence as a key witness.   

 

Post the ECB QE announcement yesterday, you would be forgiven for thinking everything in the garden was rosy! European bourses rallied by over 1% and look as if they will crack on today, perhaps with a degree of caution. New York and Asia also enjoyed all the fun of the fair last night and this morning – DOW +1.48%, S&P 500 +1.53%, NASDAQ +1.78%. To date the ASX is +1.51% and NIKKEI +1.05%. Shanghai Composite has tumbled from a bright start to be down 0.10% at lunch, after weaker than expected data (stalling factory growth), though the Hang Seng is still up 1.14%. 

 

How long can this equity euphoria last is anyone’s guess. The Euro is at its lowest level against the Greenback in 11 years and 7 years against Sterling. Exports should be very cheap and the tourist industry should boom this summer. However is this QE too little too late. Some economist felt that Euros 2-3 trillion was nearer the mark. Draghi has implied – “I have done my bit! Now you politicians, make it work!” There seems to be some major disagreement with what the ECB wants and what Chancellor Merkel wants. She seems very insistent that a serious degree of austerity must be maintained and government debt must be cut. Draghi has implied that the liquidity provided to stave off deflation and create growth must not end in banks’ coffers to buy equities. It must be used to lend to SMES and infrastructure projects within the EU, which might help alleviate the desperate levels of unemployment in Greece, Spain, Portugal and Italy in particular and France is far from out of the woods. We need to remind ourselves that unemployment in Greece is 26%, Spain 24% and in Italy 12% – horrendous. This QE will only work if unemployment is dealt with – by building roads airports schools and hospitals etc.  

 

Sunday’s Greek election will sort the men out from the boys. Syriza seems to have stretched its lead in the polls to 6%. So a left-wing coalition seems likely. Austerity? Not sure Syriza can spell it! Debt? Not sure that Syriza cares! Greece will want some of this debt written off. Spain and Italy will be watching carefully to see how the Troikas deals with Greece’s demands. If there is any softening in attitude on austerity and debt repayment by the authorities, other Mediterranean countries will want a piece of that action.   

 

Sadly King Abdullah of Saudi Arabia died last night aged 90, to be succeeded by his half-brother Prince Salman aged 79, with Prince Muqrin now becoming crown Prince. Oil spiked by 2% – probably only a knee-jerk reaction. However policy is unlikely to change. Saudi has an ageing population and 80% of people are employed in the public sector. Oil at $48 a barrel will become painful for Saudi before too long!  It was confirmed that Li Ka-Shing and Hutcheson Lampoa are in exclusive talks to buy 02 from Telefonica for about $13.9 billion.    

 

UK companies posting results today – PREMIER FOODS, CLOSE BROTHERS US companies posting interim results – Friday – BANK OF NEW YORK MELLON, HONEYWELL, MCDONALD’S, STATE STREET. Next week, APPLE, GOOGLE & MICROSOFT post their interim results  

 

 

David Buik

Market Commentator

 

+44 (0)20 7886 2775

Panmure Gordon & Co  One New Change | London | EC4M 9AF | United Kingdom  www.panmure.com