Week ending 26th April 2013

A year ago it looked as though the end game was in sight for the euro, then things quietened down.  The general view was that somehow the Eurozone would muddle its way through to a solution over time.  However the Eurozone reappeared last week in the business, economic and political sections of the media and it seems nothing much has changed or is likely to and the slide continues.

Mrs. Merkel mentions the war

Spain’s unemployment has continued to rise and hit a new record of 27% with 57% of under 25s out of work.  Italy has finally cobbled together a government which includes Silvio Berlusconi’s party so not much change there.

Stern Auntie Angela is once again pushing for stricter Europe-wide control over national budgets, still pursuing the idea that if only everyone could be more like the Germans then all would be well.  This is diametrically opposed to the French position that wants banking union or in other words if only everyone could be more like the French then …. Well you get the picture.

The ability of the Eurozone politicians to come up with policies and proposals that effectively cancel each other out is not altogether surprising if you look at European history.  Differences like this arose regularly sometimes leading to war which would sort it out one way or the other.  Now that option is not available (thankfully) but the Eurozone doesn’t seem to have found an alternative that works so the differences and the problems they cause rumble on.

Of course this is what the euro was supposed to be all about.  A common currency leading to “ever closer union” would be the mechanism by which all differences would be resolved.  Indeed Auntie Angela has warned sternly of the risk of a return to conflict between European countries if the euro fails.  However it is clear from a number of developments from last week that the pressure on the euro is building.

Austerity light

With GDP throughout the Eurozone falling and even the German economy feeling the pinch it seems everyone (apart from stern Auntie Angela) is questioning whether austerity has gone too far.  Almost any country that cares to ask is being granted an extension to deficit reduction targets.  The IMF came out with a strange argument that George Osborne was “playing with fire” by pursuing the current rate of deficit reduction in the UK and that there is the “fiscal space” in the UK to indulge in a bit of “fiscal loosening”.   The mood appears to be swinging towards the idea that some sort of “light touch” austerity is the answer because austerity itself has become the problem.

All this is a classic and big scale example of tackling symptoms rather than the core problem which is the euro itself.  In fact it’s worse than that.  When you tackle symptoms and this produces consequences you don’t much like this causes you to tackle these symptoms as well, so you get further and further away from the core problem.

No FTT no €30bn

An example of the Eurozone focusing on symptoms and not the problem is the attempt by Germany and 10 other countries to introduce a Financial Transactions Tax (FTT).  As the tax will apply to trades across the world if they originate in one of these 11 countries it is not surprising that many other countries including the US and UK are against it.  A Swedish minister has warned that it will be a disaster and will not work.  He should know as he actually introduced it in Sweden and found it was a disaster and didn’t work.

Last week Jens Weidman President of the Bundesbank no less announced that “From a monetary policy point of view, the FTT in its current form is to be viewed critically”.  He also warned that it could raise the costs of government borrowing and outweigh the revenues raised by the tax.  I think we can take that as a “nein”.

The only argument I have found in favour of the FTT is that it could raise up to €30bn which would be used to …lower government deficits!  Well perhaps, but if it raises borrowing costs then once again the EU will have cancelled itself out and long since lost sight of the real problem.

George Osborne has taken to matter to the European courts.  It would be rather good if he could get the European Court of Human Rights to rule against FTT.  Would be almost worth putting up with Abu Qatada to win that one.

Whatever it takes or whatever it costs?

One of the moves that kept the lid on the whole mess for a while was the European Central Bank (ECB) becoming in effect the lender of last resort in the Eurozone.  Last summer it launched its emergency rescue strategy, Outright Monetary Transactions (OMT), buying up the bonds of countries like Spain and Italy and bringing about a spectacular fall in their borrowing costs.  This followed Mario Draghi’s statement that he would do “whatever it takes” to deal with the Eurozone’s sovereign debt problems.

However he omitted to mention that his plan required the German taxpayer to “pay whatever it takes”.  Last week the Bundesbank having poo pooed the FTT did the same to OMT, taking it apart point by point.  Germany’s constitutional court is due to rule on the legality of OMT in June.  If it rules against OMT it pretty much means the end of the euro.  With stakes that high the markets seem confident the court will find some formula to avert that kind of crisis.  However it does show just how close run this is all getting.

Italian job

Now that we have a new Italian government perhaps we will see some action to stop the Italian economy choking to death.  However be careful what you wish for.  Strangely Italy is not fundamentally a basket case, its problem being lack of competitiveness brought about by letting its labour costs race 30pc ahead of Germany’s.  In particular it has a primary surplus of 2.5pc of GDP (something George Osborne can only dream about currently).  This means Italy could leave the EMU and regain competitiveness without facing a funding crisis.

So why doesn’t Italy do just that?  Mainly because its political leaders have not so far been prepared to play rough.  The latest PM Enrico Letta does not look like the man to change that and the government he now heads is unlikely to last long enough to achieve anything meaningful.  But even with a PM who was very nearly named after a cup of weak coffee, you never know.

Why does all this matter

You may be wondering why I am boring you all to death with this stuff.  Last week the UK GDP figures were published and apparently we managed a whole 0.3pc growth in the last quarter, avoiding the triple dip, which sounds more like the latest offer from KFC than a meaningful economic concept.  Also it was reported that many businesses are sitting on mountains of cash and are reluctant to invest and even more reluctant to borrow to invest.  Behind the flat economy and reluctance to invest is uncertainty and that uncertainty is all about what’s going to happen in the Eurozone.  Even when nothing does happen what might happen is scary enough to keep most CEs and FDs awake at night and holding on to their cash cushions.

So the crisis and the uncertainty are set to continue. The UK’s and indeed the world economy cannot recover properly until the EU faces up to the fact that the euro in its current form just cannot work.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

That was week ending 23rd November 2012

What goes down must come up

I have emphasised before that I am not any kind of expert on the stock market. If I was, I would not be writing these articles every week. However I have learnt that in general good news from a company tends to lead to a rise in the share value and bad news to a fall.

So what do think might happen to a company that has issued 5 profit warnings since May, whose loss will now be 6 times higher than it forecast in July and is under investigation by the FSA for how it handled inside information? Following the fifth profit warning its shares increased last week by 17pc!

The company is Lamprell an oil rig maker and wind turbine installer. This story seems to demonstrate that you can't have too much of a bad thing. However incoming Chairman John Kennedy has moved fast and cleared out the former CEO, CFO and COO. He also brought in PwC to give the big projects a good going over and although this produced a lot more bad news the markets seem to prefer to know the worst. The better news is that there is still a pretty good and now verified order book and the company’s bankers are supportive.

Now this may not last and I for one will not be piling in to the shares any time soon. However maybe the lesson is that if you have the courage to front up on all the bad news and to take decisive action then this just might be the beginning of some good news.

Did, didn’t, did, didn’t

By far the biggest business story last week has been the Hewlett Packard (HP) Autonomy pantomime. HP paid $10.4.bn for Autonomy in 2011, an 80% premium and 34 times projected revenues! Then in May, just seven months later, HP announced a disappointing quarter for Autonomy and 25,000 job losses, including Autonomy founder and CEO Mike Lynch. Last week they went further and alleged that Autonomy had misrepresented its financial results resulting in HP paying more than the company was worth. Not surprisingly Lynch disagrees, claiming that HP has mismanaged the business.

HP have taken an $8.4bn ($5.4bn for Autonomy) write down and their shares fell 10% to their lowest for a decade. Naturally investors are hopping mad and are asking about what happened with the due diligence. The list of advisers (and £40m of fees) appears to back Meg Whitman’s (HP’s CEO) claim that “we did a whole host of due diligence”, there were certainly enough of them. However she went on to say “it is a little challenging to go in and say gee we need to double check Deloitte (Autonomy’s auditors)”. This must qualify as the “I wish I hadn’t said that” CEO quote of the year.

HP has been thrashing around for years trying to find its way to a future away from the dwindling PC and IT peripherals market. The future is software they decided hence the purchase of Autonomy, which they appeared determined to do at almost any price. This is just the latest in a series of expensive accidents for HP. It demonstrates they simply don’t have the capability to make the changes needed in their own business, much less be capable of taking on other businesses they knows nothing about.

Whether HP’s allegations or Mike Lynch’s claims of mismanagement are eventually proved to be right is frankly irrelevant, this result was always going to be the same. Ms Whitman insists that Autonomy will remain a key part of HP’s future. However with Autonomy personnel leaving in droves as I say, the result is always going to be the same.

Euro Crash?

I was at the CBI conference on Monday to hear speeches from David Cameron and Ed Milliband and to witness a “performance” from Boris Johnson. (If you want to see Boris’ speech there is a link to CBI website below)

Both Cameron and Milliband had much to say about Europe. Cameron talked tough playing shamelessly to the euro sceptics even though he has no intention of taking Britain out of Europe. Milliband talked about how he would not let the country “sleepwalk towards the exit” and the need for Britain to be “in the room and at the table”. Quite how much of this is Milliband’s sincere belief and how much is political opportunism to prise open the cracks in the coalition and the Tory party on Europe is hard to tell. His answer to the short comings of Europe and the Eurozone is that he would seek to bring about reform. He did not explain what reforms or how they might be achieved. The fact that the European commission is building itself palatial new premises in Brussels and the wine served to Europe’s leaders this week cost £120 a bottle might give him some idea of the challenge involved.

The sentiment amongst the business people at the conference was to support what Milliband had to say. Most, though not all UK business leaders do not want us to end up outside of Europe.
However what nobody appears prepared to talk about is the very real possibility of the Eurozone imploding. Greece is supposed to have run out of money this month, yet still the tranche of bailout funds they need to avert this has not been cleared, even though the Greek government managed to get its latest austerity measures through its parliament. Several other countries are just spiralling down with no bottom to their economic well in sight. France lost its AAA credit rating last week, mainly because there is no sign the French government has even recognised, much less is prepared to deal with its fundamental uncompetitiveness.

If the roof does fall in then I would rather be near the exit or even through it. Could it happen? Maybe, maybe not. However remember when Russia defaulted everyone said it would never happen and it did, in just one day!

Boris at CBI

Is it a bird, is it a plane? No it’s a black swan

Talking of the unexpected and unthinkable last week Nassim Nicholas Taleb published a new book – “Antifragile”.  This is the latest of his extended argument about the requirements for business success in our modern world.  Starting with “The Black Swan”, he has now produced a number of densely written and intensely demanding publications. A reviewer pronounced “Antifragile” as probably a good idea but almost unreadable.

For me, this is maddening and frustrating – because Taleb is right but has failed to communicate an immensely important idea that I and my business partners identified in 2004 and have been promoting from our tiny corner ever since! So I am able to explain a concept that could really matter for your survival and prosperity in this uncertain world and save you reading a series of books and still being none the wiser for it.  Here goes –

Idea 1 -– Unexpected things are inevitable and can have totally unpredictable consequences.  Taleb calls these Black Swans.  We say S*** Happens!

Idea 2 – A few Organisations can withstand unexpected events substantially better than most others.  We call this Competitive Strength, (Taleb’s “Antifragile”)

Idea 3 – Outfits with outstanding Competitive Strength have extraordinarily agile, adaptive and flexible mindsets, combined with superb operational competence (i.e. not HP!) and so deal rapidly and effectively with whatever happens – either bad news (Black Swans) or good news (Market Opportunities).  We call this Changeability, (Taleb conflates this into “Antifragile”, wrongly)

And there you have it, 3 challenging ideas you should pay attention to and no need to read 4 or 5 challenging books on the subject. The future is massively uncertain, S*** Will happen. Only outstanding Competitive Strength can deliver the Changeability to secure the future for you and your business in an uncertain world.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

That was week ending 20th July 2012

G4 what?

The G4S story was all over the headlines at the beginning of the week, but had faded out almost completely by the weekend. The media had moved on to looking for other potential Olympic disaster stories. Watch out for reports of missing toilets rolls and any other minor shortcomings which the British press will project as a national disgrace that we are somehow all to blame for.

However a question occurred to me about the G4S debacle which I thought worth exploring. That question is did G4S think it was contracted to provide security guards for the Olympics or did it think it was contracted to provide security?

It is still not clear exactly why G4S failed so badly. However there are two factors that appear significant. First following a review of the security requirements by the government they significantly increased the number of security personnel they required from G4S. This was the security requirements driving the numbers of guards to be recruited. Thereafter the recruitment process became entangled in the training process which could not train recruits in sufficient numbers.

Now you may think this does not matter because, at the end of the day G4S failed to recruit enough security staff which means they would not deliver on the security requirements either. However I think it is significant because it could have affected the way G4S approached delivering the contract. If the primary driver of its process was the recruitment of security guards then they would be less likely to anticipate the potential for the need to increase numbers nor the implications of the training that would be required.

I have seen many instances of failure to deliver caused by a supplier not fully understanding what it is the customer really wants as opposed to what it seems they have requested. I would not be surprised if this turns out to be the route cause of G4S failure on their Olympics contract.

Eurozone – the beginning of the end?

A few weeks back I wrote about how none of us could predict what was going to happen in the Eurozone but that the signs were that something was going to happen and it might happen soon. Curiously since then not a lot has happened and there has been very little coverage in the media, until towards the end of last week.

Last week Eurozone finance ministers unanimously approved €100bn bailout for Spain’s banks. In spite of this Madrid’s 10 year bond yield jumped back above 7pc and yields on short term debt are now a fifth higher than 6 weeks ago. The Spanish government introduced austerity measures that are much tougher than the Spanish Prime Minister claimed would be required when the loan agreement was announced. This pattern follows that of Greece, Ireland and Portugal so brings Spain close to the point of needing a full scale sovereign bailout. The Eurozone could rescue Spain but the next in line Italy, is just too big. Last week 10 year yields on Italian bonds climbed sharply, peaking at above 6pc and Sicily became the first Italian region to appeal for government help to prop up its finances.

The Eurozone is fast running out of workable and politically feasible options for saving the Euro. “Fiscal union”, which is the only option really likely to work, is simply not going to happen whatever the IMF says, so that leaves the breakup of the Euro as the increasingly likely outcome. By simultaneously sending their governments on holiday they have ensured that nothing can be decided and therefore nothing can happen (they hope) until the autumn. However we are probably about 3 months away from the “beginning of the end” for the Euro.

Some of the way with UKBA

The proposed strike during the Olympics by UK Border Agency staff has been condemned almost unanimously as everything from unpatriotic to opportunistic. Despite only 10% of staff voting for action the PCS union is to press ahead with the walkout.

Whilst I share the general disapproval I do have some sympathy with the front line staff involved. The standard of leadership in UKBA is so bad that if I had to work there I would be sufficiently hacked off by now to want to take it out on someone. It is not only rubbish in UKBA itself but it is compounded at the political level by Theresa May the home secretary who continues to flounder. The coalition only seems ready to accept removing a minister from their job if they have been involved in something underhand. Incompetence and failure it seems is not a reason to move a minister to where they can do less damage.

Solid Wood

On a more cheerful note and talking of leadership, best wishes to Sir Ian Wood who has retired as Chairman of Wood Group after 48 years with the company. During this time he has guided the company to become a global energy services group employing over 41,000 people in 50 countries. A great example of growing a successful business through engineering, rather than financial engineering.

With Sir Ian stepping down there is some speculation that the company could now become a bid target. No one could blame Sir Ian and the Wood family who still own s substantial share of the business from thinking about realising at least some of the value of this shareholding. However I hope that if the company is sold that the new owners will recognise the skills and culture of the people in the business that have been crucial to its success and build on this. It would be a great shame if the value created by Sir Ian and his team were be squandered as a consequence of a change of ownership.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

That was week ending 15th June 2012

Looking back on the week before this week there is one question that seems to run through many of the news stories and that is “what is going to happen”?

Eurozone debt crisis

We would all like to know what is going to happen with this one. Or rather we all want to know what someone (anyone) is going to do about it.  So let’s have a go at working out what is going on.
First we have Ireland, Portugal and Greece who receive bailouts of various sizes and implemented a range of austerity measures to put their public finances in order. Then Greece says it likes the money but not the austerity so holds a series of inconclusive elections in the hope this will achieve a different result. What this different result might be is not clear even to the Greeks so it’s no good asking them what is going to happen.
In the meantime the bailouts for Portugal and Ireland appeared to be working. Then suddenly they might not be working and then again they might be. So the Irish and Portuguese are confused as well.

Spain absolutely definitely did not need a bailout but wouldn’t mind a bit of help to sort its banks out. This “bit of help” turns into a €100bn loan with no new austerity strings attached according the Spanish Prime Minister. For a very brief moment it seemed as if the Eurozone had at last actually come up with a solution for one country at least.  However all this did was to move the problem off the Spanish banks’ balance sheets and on to the Spanish government, demonstrating once again that filling a black hole with thin air leaves you with … a black hole. So the Spanish still do not know what is going to happen, even with the €100bn!
Then we have Italy who can’t even understand why they might have a problem at all and finally France. They elected a socialist government mainly to punish previous President Sarkozy for agreeing to austerity measures which were not first thought of by the French. The French belief is that there is no crisis in France and even if there was then only French solutions can be contemplated. Last week these included lowering the retirement age from 62 to 60 “in the interests of social justice” and making it much more difficult and costly for businesses to shed employees. Quite how this is part of a solution is something only the French can understand so not helpful for the rest of us.
And then we come to Germany whose Chancellor Angela Merkel has the answer which is that everyone else should become more like the Germans. What she has overlooked is that one, everyone else is starting from a different place and two, its never going to happen!
All of which means that looking to the Eurozone to provide the answer to “what is going to happen” will get us and them nowhere.

Meanwhile … back in the UK

Our government’s approach is that it is much more important to hold an inquiry into press standards and relationships with politicians than to address the needs of the economy. Indeed politicians from all sides seem to support this, as last week we even had Alex Salmond and Ed Milliband in front of Leveson.  The PM spent 5 hours there which, with all the rehearsal time he would have had to put in must have pretty much wiped his week out.

It does connect to the question “what is going to happen”?  In the case of Leveson the questions are can anyone remember what the point was of setting up this enquiry and has anyone any idea of what will happen at the end of it all, if we ever get there? Or will it just go on and on until every man, woman and child in the land has been questioned?

However in the middle of the week George Osborne (who I think has not so far appeared before the Leveson Inquiry) popped up to announce £145bn of cheap money for the banks. Wow that’s a big number, eat your heart out Espana! If George had this amount stashed away somewhere you would think he might have mentioned it before now. I mean it’s not the sort sum you would find down the back of a sofa.

Initially headlined as a boost to growth it quickly became apparent that it was actually pre-emptive action to help the UK economy deal with whatever fall out from whatever eventually happens in the Eurozone whenever that may be. Whilst this might seem a sensible and even bold step to take when it comes to the debt crisis you can think of a number, any number and it will still not be enough. However it is at least a signal from the UK government that something is going to happen and maybe soon.

So …..?

So that is all we have. Something is going to happen and it might happen soon. Nobody knows what will actually happen so it’s pointless worrying about what is going to happen until something does.

Is there anything the rest of us can do? The evidence is that there will be little or no growth in the UK or the world economy overall for the foreseeable future. What I believe we must do is to ensure we are “moving our businesses forward”, deliberately and effectively. This means defining what “moving forward” would mean for any particular business. This is not the same as the simplistic concept of business growth, or though that might well be an outcome of “moving forward”.

So have a think about what “moving your business forward” would look like for your business and why this could be the best way to cope with “what is going to happen”.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

That was week ending 18th may 2012

Eurozone crunch

Greece and the Eurozone occupied so much of the business, economic and political headlines last week. As no one can possibly know what is going to happen this has allowed many learned and not so learned people to speculate on what might happen, so we feel entitled to join in.

Greece may or may not default and leave the euro. Either way this is not going to be Greece’s decision, much as some of their politicians might like to think so. Even pretending they haven’t got a government so there is no one to talk to for another month will now make little difference to the outcome. The election of François Hollande may or may not result in renegotiation of the fiscal pact. As it is entirely unclear who, apart from Germany has actually agreed with the existing pact this may or may not make much difference.

So basically no one will know what is going to happen till it happens. We advise businesses to prepare for a sharp post Lehman style tightening of credit. So if you are negotiating a facility with your bank right now it would be good idea to conclude those discussions now.  However there are two factors that don’t seem to feature yet in all this.

The first is that the banking system has a whole still has huge hidden liabilities, that they and the politicians have not owned up to yet. It may even be difficult to indentify exactly what some of these are. Either way this situation is a major drag on growth as it perpetuates the tightness of credit markets. One perverse benefit of a final crunch in the Eurozone is that it could finally force governments and central banks to turn on the money hoses and get to grips with fixing this problem. At least they would know where the fires actually were.

The second factor which is hardly mentioned in the austerity vs. growth debate is competitiveness. Unless the developed economies can regain their competitiveness to world class standards not only will fixing the debt problem be more difficult and prolonged but the decline will continue.

Which brings us to a bit of good news for the UK.

Three cheers for Ellesmere Port.

GM has confirmed new investment for Vauxhall's Ellesmere Port plant, including the creation of up to 700 new jobs. This also confirms that Ellesmere will be part of GM Europe’s future. The plant closures that GM needs to balance supply with demand will take place elsewhere.
Divisions of major international businesses have to compete just as hard internally for investment as they do externally to win sales and customers. Several commentators have pointed out that the Ellesmere project is a text book example of an “industrial growth strategy” in action and we agree. Make it clear that the sector is a key part of the UK’ economic future, back the key players in that sector, including the supply chain and the development of the skills required and you give confidence to the investors that you are serious.
This set the framework for unions and employers at Ellesmere Port to deliver what GM needed, including flexible working and a two year pay freeze and hey presto, you get the investment and the job security that goes with it.
UK Governments have been reluctant to be seen to be “picking winners”. This is mainly due to the disastrous track record of attempting this in the 1950s 60s and 70s. Ellesemere Port is one of the most productive automotive plants in the world. So this is about “backing winners” especially those who are already winners. Perhaps the government should try the same approach to other sectors, such as aviation where right now you would hardly have the confidence to land a plane in the UK much less run an airline service from here.

Facebook IPO – no surprises

Facebook’s IPO went much as predicted on Friday, resulting in a business that started just 10 years ago and making $1bn profit being valued at $100bn. What did not go as predicted was the expectation that the shares would pretty quickly trade at a premium.  Apart from a brief flurry by the end of trading they were back to the IPO price. This had the effect of lowering stock prices of other internet companies such as Groupon because the markets had expected a Facebook premium would benefit their share price.
It’s still pretty impressive but we have to say we are not impressed. Facebooks’s founder, CEO and still the majority shareholder says that making money doesn’t really interest him. Now he has a lot of other people’s money in the business is this really the right attitude to have?

One comment we noted was that “Facebook is a pretty new business and it is too much to expect brands and Facebook to have totally resolved what the new business model is”. Well at a valuation of 100 times annual pre tax profit we would have expected them to be pretty clear on this by now. GM seems to have made its mind up as they pulled their advertising off Facebook on the Tuesday before the IPO.

We are not saying that Facebook is not a good business now, or that it may not have potential to be a great business. However it is not there yet nor has it demonstrated its capability to be a great business so it is not worth $100bn. We see our old friends fear and greed at work here. The fear of missing out on the “next big thing” seems to be greater amongst the investment community than the fear of losing the money it has to bet on this company outperforming almost anything that has come before it.

But we shall see.


So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.