The Week: 17 - 21 November
Drawing the line
Every time it looks as if we can start to put the banking scandal behind us, more bad news seems to crop up.
The downturn in the UK housing market continues to cast its pall. This morning’s report that people in larger houses are trying to downsize is particularly depressing. In the past, the top end of the market has tended to hold up better. Wherever you are in the world, there are always people with money. If those who are more comfortably off are struggling, heaven help the poor.
People in larger houses generally have more equity in them. They have usually owned a smaller property in the past and traded up, putting the profit from the previous home into the new one.
The one hope is that this shift will at last get the bottom end of the housing market moving, with the ripples ultimately spreading upwards. However, with buy-to-let borrowers running into difficulties and mortgage lenders still reluctant to take risks, that looks to be a long way off.
Northern Rock has decided to draw a line under its commitment to Granite, a subsidiary used to lend money without the loans appearing on the bank’s balance sheet. While this does put ?bn of taxpayers?money at risk, given Granite’s comparatively high level of mortgage arrears, perhaps there is a glimmer of hope in Rock’s action.
Rock has put cash and mortgages into Granite and its decision to call a halt means that the fund will be wound up. Institutional investors also put cash into Granite and they will be paid first if there is a shortfall.
But at least the bank feels it can take its chances and put a limit on its potential losses.
Meanwhile the restructuring process in the banking sector, however unpalatable, is going through. RBS, the bank that has managed to apologise, has had its fund raising approved. Lloyds TSB shareholders have voted heavily in favour of merging with HBoS and HBoS shareholders will surely do likewise, whinging as they go.
Barclays has produced a sop to UK institutional investors by offering them a tranche of the lucrative bonds that are going mainly to Middle Eastern interest. There is nothing for the private shareholders who solidly supported the last share placing. However, there can be no doubt that the capital raising will be approved and small shareholders will have to lump it.
However unpalatable these capital raisings may be, at least when they are done and dusted the sector can start to move forward again.
Woolies thinking
I have long banged on about the wonder that Woolworths is still with us. If former chief executive Trevor Bish-Jones could not turn it round - and he couldn’t ?it was hard to see who could. His departure was dressed up to make it look as if the High Street disaster was his fault whereas the retail chain simply has no niche in modern retailing.
There are two Woolworths. One is the profitable and expanding wholesale side comprising DVD publisher 2entertain and specialist distributor EUK. The other is the 800-store retail chain which loses money for three quarters of the year and makes profits only in the run-up to Christmas. With Christmas looking problematic this year, that is ominous.
We have already seen the likes of Marks & Spencer and Debenhams launching the January sales in mid-November. The downfall of Woolies can be seen in the fact that it makes Debenhams look like a solid investment.
The shares have fallen 87% in the past 12 months. It is only the hope that the retail chain can be dumped for a nominal amount that has prevented it from joining the 90% club. Perhaps by the time you read this it will have done.
Hopes deflated
Call me an old misery, but I am disappointed in the October inflation figures.
The drop from 5.2% in September to 4.5% is admittedly a hefty fall, and a greater one than economists had expected, but I had actually hoped for better considering the way that oil in particular and commodities in general have fallen in price over the past few months. US inflation fell by a whole percentage point.
I appreciate that it took several months for inflation to gather momentum as oil and commodity prices rose and no doubt deflation will take time to feed through. Nonetheless, the consumer price index stands at more than double the 2% target rate and is still way above the 3% ceiling that the Bank of England is supposed to keep it below.
The way things are going it will take at least another couple of months to get back within the target range.
Experts are now talking of the prospect of deflation in anxious tones. As with house prices, everyone grumbles about rising prices yet bringing prices down is regarded in equal or greater fear.
Perhaps we have lived in inflationary times for so long, since the second world war, that we cannot contemplate the concept of even modest deflation. Yet try explaining to a non-economist that falling prices would be a bad thing. It isn’t easy.
Panel beating
I was pleasantly surprised to see quite a high turnout at the World Money Show in London last weekend, given the blows that have rained down on investors. The panel that I sat on attracted an audience of well over 100, not bad going as this was the final session on Saturday afternoon in direct competition with football scores and Rugby Union internationals.
There was, though, a different atmosphere to last year, a more subdued one. Also, judging from people who talked to me on the Global Investor bookstand, there was a much greater preponderance of experienced investors.
I hope that the less sophisticated have not given up. While current stock markets require courage, they offer opportunities for those with even the most basic idea of what they are doing.
This article originally appeared on Hemscott.com. Morningstar and Hemscott are now one company. You can see the original version of this article on the Hemscott web site.
