Monday Morning so I thought I would indulge in a little conspiracy theory for readers who like that kind of thing.
Lloyds have prided themselves on being the most boring bank in the UK, forever extolling the virtues of ignoring the wiles of the international arena in favour of domestic simplicity. Share holders must therefore be rather distraught at the unpalatable fact that their shares have performed just as badly as even the most reckless of investment bankers. A few months ago they were sailing along, albeit rather uncomfortably, until the FSA suddenly announced that they were increasing Tier 1 capital requirement to 9-10pc. At the time the chances of Lloyds being able to tap into the market for more capital were as close to zero as makes no difference after Lehman had gone pop and RBS and B&B had shown the follies of getting involved in rights issues.
But, not to worry, the Government would be the underwriter. Then came the sting in the tail. The Prince of Darkness, no less, indicated that Lloyds would not get the State guarantee if the HBOS merger (initially proposed, if you remember, by ‘Our Gordon’ no less) did not go through. The woes of HBOS have now dragged Lloyds into the abyss and then, to add insult to injury, two (or was it three) days after Lloyds had finalised the deal and could no longer pull out the FSA pops up and states “oh! Actually chaps you all misread the small print. We did not mean that you needed 9-10 pc Tier 1, in extremis you could all have got by on as little as 4pc”. Lloyds need never have required the extra capital but the government got itself out of paying for HBOS by using up Lloyds shareholder capital.
A bit tough on poor old pension funds and private shareholders but ‘what the hell’ it got the Scottish banking sector out of one of the holes it has dug for the UK economy and at the expense of the Auld Enemy to boot.
This morning is a bit surprising. I was fully expecting the markets to open on the strong side in early action but the Far East has taken a deal of the shine off things and the FTSE is called back down at around 4025, off 30 points.
As mentioned last week the FTSE seems to be struggling to hold below 4000 and, conversely, stay above 4350. Friday’s action yet again backed this up with early trading taking the index down to 3950 only for buying to arrive to ‘save the day’. In truth the support still looks good and every failure to break makes it stronger. Clients continue to take any approach towards the 4000 level and below as a buying opportunity and it is now quite sometime since our traders saw any net short positions on the FTSE Index.
On the other hand…. For the first time ever, in our company’s history, our clients are now short individual stocks (and this is nothing to do with banking stock as they are massively long of RBS, Barclays, Lloyds etc). For those of you who like to think that the majority view is generally wrong this might be the indication that the market might, finally, be ready to rally(!??). For those readers with very long memories you might remember an article I wrote back in the summer of ’07 revealing that clients were 15 to 1 in long positions versus short. Representing the biggest bull percentage position ever taken by our punters (normally single stock bets are around 8 or 9 to 1 long). My prognosis then was that this was as good a bear signal as you were likely to get as when too many people are in one direction then the pressure reverts to the opposite trend. The converse may well hold true here in that we have now got so bearish that the pressure could well start to reverse.
The press continues to pound into Barclays and it is difficult to know who to believe. If Varley and Diamond are lying about position of the bank then they would be risking prosecution but the whispers continue, unabated, about lack of visibility of loan book valuation. Either the stock is the buy of the century or we should be shorting the stock with a vengeance. The Barclays board state that the authorities are fully apprised of the underlying book values etc and if this is indeed the case one wonders why the FSA or some such does not (just for once) back them up. It would hardly undermine their independence but might be just the prop that the financial sector needs to get back on its feet.
The pound is also getting a hammering in early action and this does seem odd as well after the currency survived such heavy attacks towards the end of last week to end with some solid buying. Trading is now at around 1.3620 having hit as low as 1.3550 in the small hours. The only small piece of comfort might be that if the move today proves to be abortive then Sterling may find some buyers in the short/medium term. The Euro, Dollar and Yen are not risk free either (in fact, politically, the Euro might be considered even weaker) and with France now spending feely to prop up various sectors (auto and press so far) other nation states may be tempted to join in. President Obama’s huge fiscal stimulus may not be successful and may just throw even more good money after bad and Japan will struggle to export profitably with the Yen at such an extended valuation.
Fear does seem to be stalking the markets once more but prudent contrarian outlays would appear to have risk/reward on their side. Just for once.
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