Upsy Downsy

The FTSE is "enjoying" an up and down day, flirting with being a bear and now staging a modest recovery.



It appears that there are rumours of further quantitative easing ahead.

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Dubai's Dead Cat Bounce

It seems that the fear and panic, that the media would have us believe was going to envelop the world this week (when the Dubai markets opened again) hasn't happened yet.

Markets across Europe and Asia have in fact rebounded today.

The intervention by the Central Bank of the United Arab Emirates, to provide an emergency liquidity facility for local lenders, seems to have calmed everyone's jittery nerves for the time being.

As to whether this is will prove to be only a dead cat bounce, remains to be seen.

Seemingly the authorities in Dubai have been tring to remove newspapers, that discuss the crisis, from newsagents. A heavy handed and idiotic attempt to shore up public sentiment, it will backfire.

Either the economy is in good shape, or it isn't.

You can't eat sand, nor should you waste money buidling houses on it.

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Rip Off Britain

Selftrade, the online stockbroker, has added its name to the financial services industry hall of shame for ripping customers off.

As from 1 July this year, it will charge its hapless customers an annual management fee of £40. They are taking advantage of the fact that their rules mean in order to transfer stocks some customers could be charged as much as £100, ie their customers are locked in and ripe for being ripped off.

My advice to its customers is to sell your shares before 1 July, and look for a better deal before buying back into the market (if this is financially feasible without losing more than the £40 charge).

Don't let Selftrade get away with it.

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Green Shoots, or A Dead Cat Bounce?

The FTSE broke through the 4000 barrier this morning, in response to tentative signs that the economy may be stabilising. House prices rose for the first time in 16 months, and the Bank of England claim that they expect banks to increase lending over the coming months.

These signs augur well.

However, all will be as dust if Merkel and Sarkozy have their way, and bury "unfettered capitalism".

They should remember that "unfettered capitalism" has for the last few centuries been the bedrock on which the growth and development of the European economies has been based.

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HSBC Cash Call Drags Market Down

HSBC's record cash call of £12.5BN, aside from causing the collapse of its own shares by 9% today (down by 46p to 445.25p), also dragged the FTSE down by 3% to a six year low of 3700.

Meanwhile, doing the rounds, is this rather amusing take on the banking bailout:

Bailout

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L&G Play Ostrich

Legal & General (L&G) have been acting like an ostrich recently, as they have put off telling investors in their structured products backed by Lehman Brothers that they may lose up to 20% of their investment.

L&G finally told 2,300 individuals the "good" news last week. This is of course a tad tardy, as Lehman Brothers went into liquidation three months ago. Indeed, the delay is even more surprising given that other structured products providers such as Meteor, NDFA and Arc warned investors within weeks of Lehmans' failure that their investments were at risk.

Why would L&G put off what was clearly inevitable?

Seemingly, according to some financial advisers, L&G wanted to avoid the negative publicity around Lehman Brothers.

I can't say that has worked, if that really was the reason, given that L&G now look rather foolish to say the least.

The two L&G plans affected are the Protected Capital and Growth Plan four and the Accelerated Growth and Investment Plan two. The plans were backed by Lehman Brothers, Barclays, Yorkshire Building Society, Citigroup Funding and Dresdner Bank.

Investors will now only be able to recover 80% of their capital in July 2011 if, when their plans mature, the FTSE 100 is below the level set when they were launched in July 2005.

I wonder if the FSA will look into this, given that financial markets are meant to be transparent?

Were I an investor in one of these products I most certainly raise this matter with the FSA.

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Down Down Down

The FTSE fell 8% this morning, as the UK entered its first recession in 16 years.

Alistair Darling told BBC News:

"It's obvious now that our economy, other economies across the world, are moving into recession.

Yes, it's going to be difficult, yes it's going to be tough, but we can get through it."

Therefore why is the Bank of England still sitting on its hands, and not cutting interest rates more aggressively?

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The Dead Cat Bounce II

Lats week I wrote about the rebound in shares, in response to the US bailout of the financial system, being a "dead cat bounce".

It would seem that I was right.

Shares in London and Asia have fallen sharply, as doubts grow about whether the $700BN bailout will work. At the time of writing:

-The FTSE is down 2%
-The CAC down over 1%
-The MSCI index of Asia-Pacific shares (excluding Japan) down 2%
-The Dow down over 3%

The package proposed by Henry Paulson, US Treasury Secretary, is expected to face opposition from members of Congress about how to pay for the plan.

Additionally, other American industries outside Wall Street have begun to ask for similar assistance; eg bans on short-selling have been requested by car and real estate companies.

Senator Richard Shelby, the leading Republican on the Senate Committee on Banking, Housing and Urban Affairs, said in a statement yesterday that the proposal was "neither workable nor comprehensive".

"I am concerned that the Treasury's proposal is neither workable nor comprehensive, despite its enormous price tag. In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted, and may actually cause the Government to revert to an inadequate strategy of ad hoc bailouts.

Given that markets have recently taken confidence in the prospect of government involvement, I believe Congress must immediately undertake a comprehensive, public examination of the problem and alternative solutions rather than swiftly pass the current plan with minimal changes or discussion. We owe the American taxpayer no less."

That is all very well, but the issue is one of confidence. A lengthy review will sap the confidence and destroy the financial system before any "cure" is discovered.

I noted last week:

"The actions taken may well soften the blow from the fallout of the sub prime crisis. However, the market cannot be bucked. There is a massive repricing of risk being undertaken which will negatively impact the share prices of financial institutions and, by definition, their willingness and ability to take on risk.

No matter what governments do this repricing will happen and the effects will be felt by everyone, from the CEOs of the leading banks to the ordinary man in the street seeking credit to buy a car or home.

The market will not be bucked. The surge in share prices is in effect a dead cat bounce, not a long term rally."

The bailout will not stop shares falling, but it will stop the world wide financial system from collapsing by giving it a much needed boost of confidence.

Testing times require bold measures.

Now is not the time for dithering and navel gazing.

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The Dead Cat Bounce

Share prices are surging today on reports of a massive bailout of toxic debt by the US government, coupled with the ban by the FSA on short selling of financial stocks.

At the time of writing, the FTSE is up over 7%, the DAX up by almost 4% and the CAC up by 6%.

Talks are being held between the US Treasury Department and the Federal Reserve to examine proposals to move illiquid toxic assets, backed by mortgage debt into a government backed vehicle; ie they will be taken out of the balance sheets of the banks and financial institutions that created them.

In the event that this this scheme is put into action, this will be the largest bailout in American history.

The actions taken may well soften the blow from the fallout of the sub prime crisis. However, the market cannot be bucked. There is a massive repricing of risk being undertaken which will negatively impact the share prices of financial institutions and, by definition, their willingness and ability to take on risk.

No matter what governments do this repricing will happen and the effects will be felt by everyone, from the CEOs of the leading banks to the ordinary man in the street seeking credit to buy a car or home.

The market will not be bucked. The surge in share prices is in effect a dead cat bounce, not a long term rally.

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London's Reputation Tarnished

London's reputation as the world's leading financial centre was further tarnished yesterday when the London Stock Exchange suffered its worst systems failure in eight years, forcing it to suspend trading for seven hours.

To add to the woes of those trying to trade yesterday the crash happened on what would have been one of the busiest days of the year, hot on the heels of the news over the weekend that Fannie Mae and Freddie Mac had been bailed out.

A cynic might argue that the system was deliberately shut down, so as to avoid a massive spike in bank shares occurring.

Reuters quoted one trader as saying:

"We have the biggest takeover in the history of the known world ... and then we can't trade. It's terrible."

Another said:

"This halt today clearly has once again damaged (the LSE's) reputation as a leading exchange, especially on a day like today, highlighting that it may have been unable to handle the volumes this morning."

The LSE have not given an explanation for the crash, traders though are demanding an explanation.

LSE Chief Executive Clara Furse wrote to the FT on Monday, somewhat ironically, and said that the system used by the LSE was "the cutting edge".

This is just one of a string of issues that has tarnished the City's reputation. Other include; the endowment scandal, fat cat bonuses for failed executives, Northern Rock, excess bank and credit card charges, the mortgage drought, mis-selling of mortgages, PPI mis-selling etc.

The great and the good of the City should bear in mind that reputations are hard to earn, but easy to lose.

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Pensions Black Hole

As the economic downturn continues, and negatively impacts the FTSE, pension schemes are feeling the effects.

Actuarial consultants Lane Clark & Peacockfell, report that pensions went into a £41BN deficit in mid-July, reversing last year's £12BN surplus.

The effective and efficient management of pensions require a very long term view of market ups and downs. Unfortunately, current pension reporting requirements introduced in 2002 do not take a the long term view and encourage short termism of the worst kind.

A major overhaul of pension reporting is required urgently.

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Rock To Be Dropped

In a fresh humiliation to the dying corpse of this once strong and respected institution, Northern Rock is set to be dropped from the FTSE 100.

This should come as no surprise, as the bank has been destroyed by the previous board.

Once kicked out of the FTSE 100, the share price will fall further as investment funds are forced to adjust their books and sell their holdings.

I have warned on numerous occasions that this stock will end up the play thing of speculators, nothing better than Marconi shares. The company is dead, yet to be buried, the sooner the sale is agreed and finalised the better for everyone.

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Virgin Takes a Punt on Northern Rock

Sir Richard Branson's Virgin group is trying to take a punt on the corpse of Northern Rock. Virgin has put together a consortium to take control of Northern Rock.

It is in the public domain that there are two other bidders for the Rock, private equity firm JC Flowers and hedge fund Cerberus.

Virgin's consortium includes AIG, the insurance company, and the London hedge fund Toscafund which is headed by the former Royal Bank of Scotland chairman Sir George Mathewson.

In order to boost its credibility, wrt being able to pull off the bid, the consortium are looking for a well respected banking veteran who could take control of the Northern Rock board and reassure regulators, politicians and the financial markets.

The Virgin wishlist, according to the Guardian, includes Sir Brian Pitman and Sir Peter Ellwood ex ceos of Lloyds TSB, former Bank of Scotland chief Sir Peter Burt and HBOS chief executive James Crosby.

The Virgin consortium says that it will inject around £1BN in cash into Northern Rock, together with the Virgin Money business (estimated to be worth £200M).

The consortium would be issued new shares, at a deep discount to the current price, giving it around 50% of the bank. The Northern Rock name would be killed off and the new bank would be called Virgin Money.

JC Flowers and Cerberus have made it clear that current shareholders would receive very little in the event of a takeover.

Given the public offers on the table, and the fact that the sharehodlers are clearly not going to receive very much, it is very surprising to see how the shares have rallied last week. This morning they have fallen by 27% to 199p.

However, anyone currently holding shares in this company must face the reality that the current price may now be incredibly volatile and not necessarily reflect the true "value" of the company; as Northern Rock is now the plaything of the speculators.

As I have already noted several times before, this share now strongly resembles the dying days of Marconi's listing on the FTSE.

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Money

Those who occupy the top positions in Britain's boardrooms have had rather a pleasant year. The BBC report that directors of Britain's leading companies saw their pay jump 37% over the past year.

Those in charge of firms listed on London's FTSE 100 index earned, for the first time, more than £1BN in total for the 12 months to the end of June.

The best place to be is, of course, a bank - Barclays Bank.

Now you know why banks need to keep their charges so high!

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