Its Not Harry

Comment and opinion for retail investors in the UK

Mark Potter

Monday Mash Up 003

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This week starts with British politics in such a state the word ‘febrile’ is getting seriously overused. In the US, there are more and more hints of reasons to impeach the president and a war in the Middle East is being openly discussed. Some major new long heralded stick market flotations have been postponed.

Not the rosiest of times for investors one might imagine. But stock markets seem to be happy range trading as they have been for weeks. A diversified portfolio will see modest gains over one period and then see the short term profit evaporate.

I am an avid reader and have found it fascinating of late to dip into the diary extracts of people who kept a personal record of history (the source is the outstanding anthology The Assassin’s Cloak). One can learn of lot from looking back on real peoples’ ‘live’ observation of history.

Maybe we detect a change in the climate but is it not human nature to hope for the best?

Today is Holocaust Remembrance Day when I will visit is small patch of land in the forest about a mile from where I am now and contemplate how 1400 men women and children were machine gunned to death in the pit they had been forced to dig. Diary entries I have read of Jewish people all over Europe reveal that many took the gradual increase in Nazi hostility with resignation and never saw the ‘final solution’ coming until it was upon them.

This is a sad source for a lesson in human nature, I realise, but it should not be forgotten. When a situation deteriorates slowly, we tend to ‘get used it’ and are unprepared for a truly disastrous shock that we ought to have seen coming. Such progressive scenarios often occur in stock markets.

East vs West – a tale of two rip-offs

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Here are a couple of real scenarios for you to compare and use in your assessment of the way the world economy works. You need to be sceptical!

Ripping people off is done differently depending on cultural norms.

The Story from East of the old Iron Curtain

A private bank is set, takes money from depositors with aggressive marketing, sports sponsorship and by issuing debt securities (bonds). It opens lots of modern looking offices and carries on normal retail banking.

It also lends large sums without much real due diligence to businesses closely associated with the founder and his (it has ways been male in the cases I know of) friends. The owners of these businesses get large salaries and perks or even more brazenly loans that they will never repay and they quickly join the oligarch class.

Then the bank regulator discovers that the bank has billions in bad debts and is insolvent. It is now so large a supplier of services to the ordinary public that the only option is to nationalise it.

Result: People who pay tax as decent citizens have been robbed by a few crooks who now live elsewhere, ideally where there is no extradition treaty.

…and from the West

If you tried hard enough, you could see it coming….

A flamboyant character and a few nerdy mates set up a company with a novel idea that attracts customers because it is priced so that it seems free, or very cheap. It may exploit others to actually supply the service that the founders ‘piggy back’ on, for example in the ‘gig’ economy, which keeps the price low, but even then it still makes no profits.

It pays other companies owned by the founders and their associates large fees for doing things that appear to be of very little value, or which would have been cheaper elsewhere. It also gives giving the founders bucket loads of share options at virtually no cost.

Offering a service at an unprofitable price will usually suck in customers because established businesses that need to make money to live can’t compete. So the user base grows and the company is able to borrow vast amounts from venture capitalists who are often investing other people’s money, but who expect to get paid back handsomely when the company is floated on the stock exchange.

The company floats publishing a prospectus that predicts losses for years ahead but a pot of gold at the end of the rainbow. The shares are bought at patently silly prices by institutional investors with the pension funds and savings of ordinary people and by small investors who like to play the stock market. The venture capitalists unload their stakes, as do the founders who now have huge shareholdings to sell – and go away with billions. This is sometimes called a Unicorn.

Over time the share price falls dramatically and in some cases the firm goes bankrupt or is taken over at a bargain basement price (possibly even by the same people that filled their boots when the stock market floatation happened).

Result: Millions of people who have been saving a bit of their hard earned incomes over years lose a chunk of their savings and a few youngish billionaires set up trusts in the Cayman Islands and other exotic places to avoid giving back anything to society by way of taxes.

You tell me which model you prefer. I think the Western model has the advantage of being more discrete – people actually keep feeding the scam willingly!

Layout Change

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I have made some slight changes to the site presentation, now that there is a reasonable number of regular users. Some of the permanent pages have been relegated to menu items and the latest blog takes centre stage with more recent ones listed below.

I myself have thought it slightly odd that we don’t have a ‘home’ tab, but is is actually there – you just have to click on my iconic head!

Monday Mash Up 002

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I am writing this on a Tuesday, having had the mildly optimistic feeling that arose from the changes listed below rather deflated by the oil refinery bombing in Saudi Arabia.

Those of us who were adults in the 1970’s are very aware that rapid and dramatic rises in oil prices will threaten a long recession. However, until now the problem for the oil industry was surplus supply, so the immediate spike in prices might be short lived. If not, the already fragile global economy might stumble into a deep recession.

Help from central bankers means they are worried!

More Help From The ECB

The European Central Bank has decided to open back up its bond buying programme (quantitative easing), a reversal of policy much as has already happened in the USA.

What this means is that interest rates in Europe are going to be effectively negative at an institutional level which is an economic stimulus.

It occurs to me that we are in a situation where the politicians are like hopeless learner drivers in the dual control cars of their national economies and central bankers are the instructors jumping on the brakes and hauling back on the steering wheel to protect the public from disaster!

We (might not) Work

The latest fantasy based IPO (offer of new shares to the public) of the US office space business WeWork has been pulled after investment banks at last baulked at the underlying highly questionable business model and dominating behaviour of the charismatic founder.

If this is the end of vast amounts of capital being diverted into chancy business ventures, to be burned up at astonishing rates by founders who manage to become personally super rich without ever making a cent of profit, then that is good news.

The money that would have been burned on hopeless enterprises might now get used to buy shares in boring profitable businesses that have been useful to humanity for decades.

Monday Mash Up 001

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This is a new idea, with me posting snippets of news that I have picked up in my skimming, or even deep reading of the vast amount if financial information I see every week. The selection is based on what I think might be useful to my subscribers but access will not be restricted.

I don’t promise to write every Monday, or even to always publish on Monday! But this will be a regular feature.

Premier and Miton to Merge

These are 2 medium sized investment houses, both of which have already absorbed smaller boutique investments houses in the past. Both have allowed individual managers to run funds with unusual specialisms (eg Premier Defensive). Miton have been using external Authorised Corporate Directors (which is why there have been varying initials in front of their name) so one would imagine there will be some economies of scale.

Fund manager mergers almost always see someone or some people’s noses put out of joint and some job losses as similar funds are merged, so if you own a Premier or Miton fund, you need to see if there are any changes later. Overall, I would personally see the merger as positive, creating a more effective market player.

An index for Trump!

I have written about the way President Trump’s tweets make global stock markets move and even said, slightly tongue in cheek, that one could develop a trading pattern to make money on the resulting short term volatility. Now JP Morgan are devising a specific volatility index (Volfefe) to measure this effect, presumably so an exchange traded product can be constructed to invest in the potential!

Brexit and markets

There has been a clear assessment in both currency and equity markets that a no deal Brexit (NDB) is less likely following the rather fractious political events of the last few days. Of course, this is just a short term change in sentiment. Improved UK growth figures just published should not be seen as telling us anything, given that another burst of stock building was likely as the October 31st deadline sunk in.

It pays to remember that no Brexit at all is highly unlikely (sorry Remainers, I am one of you), so even if a deal is done the UK and European economies will be subject to not altogether predictable stresses.

Anti-Trust

No, not more about Trump or Brexit, but about the US legislation, developed to control the appalling monopolistic practices of the US corporate rogues in the oil industry originally and later applied to the Bell telephone business and in my time at college, IBM.

I have said before that it was fortunate for the huge tech companies, some of which are clearly monopolistic and adopting unfair trading practices to eliminate competitors, that under President Trump the public protection agencies of the US government were getting their teeth gradually knocked out! The tech barons may have seen control of the media as giving them a better chance of keeping public opinion on their side, but as we know, dear Donald is best mates with an old fashioned media mogul and propaganda pirate, Rupert Murdoch. So he actually dislikes the media organisations owned by the tech outfits.

Perhaps it is not surprising to now read that the anti-trust machinery is being wound up to have a go at the likes of Facebook and Alphabet (Google). This will in time impact on their share prices and given that big corporate break up sometimes release large amounts of extra value, the outcome could actually be positive. Innovation and tech fund managers will be paying close attention, we hope.