Lexington Wealth Management

3 Years of Investment performance to be proud of

2010-03-04T15:03:00.002Z

Investment performance over the last 3 years has been good. Hard work, carefull monitoring and common sense has proven to give almost 100% return. I'm proud of that! And my clients are pleased too. www.Lexingtonuk.com or 01793 771093 for further details.

WARREN SHUTE CFP
Chartered Financial Planner
Lexington Wealth Management

REVERSING THE DEADLINE FOR MUTUALS?

2010-02-23T20:28:00.002Z

A great history but in a tough environment. The world of mutuals has not been an easy one. Many have glorious chronicles of the past dating back into the developing financial world in the Victorian era. The concept has been robust and certainly the view of shared ownership has been attractive to businesses in various areas of commerce. From the Co-Operative movement which covers virtually everything from supermarkets to funeral directors, financial businesses and even one of the UK's largest department store chains, John Lewis, the mechanism has appeared to be a successful business structure.

However, this equitable model has found itself open to attack both directly and through market competition from its more aggressive capitalist cousin, the joint stock public company.

We will all recall the fashion fad of 'demutualisation' whereby apparently "inefficient" old building societies could be transformed into modern dynamic financial companies. Not only would they wake up a sleepy hollow but provide far more aggressive competition to the existing banks. Additionally the old members (many of whom never even realised they were part owners) would receive a windfall payment by way of cash or shares, and so would the staff, and so everyone would be happy. Oh and if that wasn't enough with some bright financial engineering, they would also be able to 'make their balance sheets much more efficient', which was a polite way of saying borrowing a lot more. And so a raft of flotations came through, with Northern Rock, Halifax, Bradford & Bingley and even Abbey National many years ago.

However, you can see the pattern here. None of those names exist any longer in their original form. Many others were scooped up by banks, like Cheltenham & Gloucester and Bristol & West, leaving a rump of building societies gamely fighting for a shrinking cause.

The demutualisations actually started off rather well. They brought in new products and aggressively took on the banks. Northern Rock, for example, was known for being a low cost mortgage operator and took positive pride in being the bank that liked to say "No". No, that was, to other products and services – just mortgages and deposits (not insurance and all the other banc assurance twaddle) and a bank that seemed quite fussy who they offered facilities to.

Sadly though all that changed, as we know – and the rest is painful and recent history as corporate greed overcame corporate common sense and worrying about risk was just for wimps.

The result was that many seemed to have abandoned the old disciplines of balance sheet management, funding themselves increasingly from the wholesale money markets and far less so from their original depositors. Add to that the lending practises to the unsuitable and unreliable, and the opportunity for disaster was clear – and well signposted some months before Northern Rock actually collapsed.

Since then the rump of building societies have been struggling. Dominated by the Nationwide, the band has now reduced to some 52 firms with some very well run and managed, such as the Coventry, but others suffering from lack of scale and a market squeeze.

The banking crisis is pressing in on them from various fronts. In terms of deposits they are suffering as they are unable to offer the attractive rates of before - and especially against government owned and guaranteed institutions. This means they have less deposit money to lend out. Meanwhile, the institutional money markets are still constricted with nowhere near as much available as before -thus other funding is necessary.

Some Societies have issued Permanent Interest Bearing Shares (PIBs) in the past, but these do not form part of any Tier 1 capital. Others have created more inventive structures including the Yorkshire and Chelsea who with their recent merger issued Contingent Convertibles (or CoCos) which convert into Profit Participating Deferred Shares (PPDS) in due course. However, these are less popular as it means that in the future part of the societies' profits will be streamed away to pay for them.

The latest idea (with of course the necessary acronym) are MODS or Mutual Ordinary Deferred Shares. These will have a capped coupon but will be loss bearing if the society goes bust and thus for regulatory purposes can be regarded as capital. If these are finally approved it would mean that at last this excellent financial sector can have more life breathed into it but without endangering their mutual status. This in turn will provide more competition for the banks, more liquidity and volume in the market – but it will take time.

Perhaps someone could now come up with a Rocker to go with the Mods?

***

Following on from my concern over the Chinese losing their interest in funding the US deficit by their falling value of purchases of Treasuries, I noted last week in the China Daily that far from buying, the Chinese have announced that they are selling $34bn of US bonds. This will mean that Japan will overtake China and become the US's largest foreign bond holder.

Seemingly Japan boosted its holdings in December by £11.5bn to $768.8bn, leaving China with a mere $755.4bn. I also note that apparently the UK increased its holdings to $303bn from $227bn – and there was I thinking we didn't have anything left!

China, it would appear, has taken advantage of the rising Dollar, but the key question for the US administration is whether this is the start of a new policy to put pressure on the White House or just a decision to take advantage of a change in the currency value. The larger question remains though - who is going to continue to buy their huge debt?

***

And finally ..............'Men run risk with anatomy-boosting pants.'

LONDON (Reuters) - Hundreds of British men are risking a Valentine's Day anti-climax for their partners by stocking up on anatomy-boosting underpants ahead of the most romantic weekend of the year.

British department store group Debenhams said it had seen a 76 percent surge in online sales of the £18 pounds-a-pair underwear in the past week.

The pants work by using a lift and hold feature at the front, like a male version of the cleavage-boosting Wonderbra. "The briefs mean that no man ever needs to feel inadequate again on the most passionate day of the social calendar," said Rob Faucherand, head of men's accessories buying at Debenhams. "However we can't be held responsible for what happens once the pants come off," he added.

That's why I prefer to wear a kilt.

WARREN SHUTE CFP
Chartered Financial Planner
Lexington Wealth Management

Tel:01793 771093
enquiries@Lexingtonuk.com
www.Lexingtonuk.com

What next?

2010-02-17T23:17:00.008Z

I think we learned our lesson with the Titanic. It is always worth having enough lifeboats - or in this case even one. Seemingly the Euro was designed without one. So when an iceberg is hit, the horns go off and the result is that all the officers of the leading nations rush around wondering what to do. Seemingly there was no ´plan B´. Because there has been no bailout plan, it has been inevitable that there has been a fear of systemic risk as the contagion spreads to other nations. The latest acronym after the PIGS has been the STUPID nations - to list those with potential the most serious sovereign risks. The STUPID list thus includes Spain, Turkey, UK, Portugal, Ireland and Dubai.

In fact we may get some more cogent guidance as to where we need to see restorative action by governments, from the IMF´s own list of nations that need to make significant fiscal adjustments. At the top of the list are the UK and Japan where some 13% tightening of GDP would be required for the public sector to balance its books, then Greece, Spain and Ireland at 9% and then close behind is the USA at 8.8.

Looking at the US predictions for managing this, the figures don´t look encouraging. Although savings in US households have started again, it is unlikely to be enough to absorb the amount of debt issuance currently being planned. The old reliable buyer of days gone by was of course China; however, their purchases are seemingly declining at a rapid rate. In 2006 they bought some 47% of all new issuance. In 2008 this fell to 20% and last year apparently it had reduced to a mere 5%. So who´s going to buy the rest?

So from Greece, it looks as though we can see a funding fault line from the Eastern Mediterranean to Spain, from there to the UK and then running across the Atlantic to the USA. This ruction is not over yet.

I am sure I can hear a fizzing noise somewhere. It´s a sound that always makes me slightly nervous as it reminds me of a fuse burning. The sound seems to be coming from the Far East where we are seeing some sharply rising producer prices, house prices and money supply figures. This is all data coming out of China and seems to me to be creating a sensitive economic blister which at least is going to be painful and at worst, could burst causing some most unpleasant side effects and collateral economic damage.

One other China issue that has come to the fore has been the rising attitude of domestic protectionism and anti-foreigner bias. This of course has not been a new phenomenon but has been less prevalent over the past few years. However, the economic slowdown of last year created significant pressures with growing unemployment, and seems to have fostered an attitude of greater preference towards domestic Chinese businesses and against foreign participants. Some have even described it as a ´witch hunt against guilao´ (or gweilo – ´foreign devils´) resulting in blocked access to markets, theft of intellectual property and rigged tendering processes.

Such domestic trade protectionism hasn´t really been focussed on before but could now add to the concerns of rising protectionism I have mentioned in previous weeks.

Interest rates have started to rise. Whilst the Western nations may well be seeing floored and flattened rates for some time to come, other more vibrant parts of the world have already been forced to take action on their rates against the threat of inflation. Australian rates have already gone up as the ´lucky country´ has had a rather good recession thanks to its preponderance of commodities and enthusiastic Chinese demand for them (and come to that Australia itself if it ever came up for sale).

However, other countries have also started to raise rates. Vietnam has raised rates although Indonesia is, at least for the moment, are on hold at 6.5% despite inflation rising to 3.72% in January. This country now finds itself in a very different position from nearly two decades ago when the Asian crisis trashed so much regional value. Now with the Rupiah being a much stronger currency and with growing reserves, the nation has changed in both its attitude and pride. Last year it became a member of the G20 leading nations, this country (which by the way is as wide as the USA albeit mostly sea and islands) is beginning to show signs of greater stabilisation after the chaotic post dictatorship days and even starting to address some of its old problems of endemic corruption.

This focus on growth rather than inflation has further strengthened the currency however even here you can feel the concerns over the impact of the weakening value of the Chinese Renminbi. It´s not just the Americans that are complaining.

A priceless piece of Prime Ministerial rhetoric:

"What you as the City of London have done for financial services, we as a government intend to do for the economy as a whole"- Gordon Brown speech to bankers, Mansion House June 2002.

Yes, you certainly have Gordon.

And finally.....................just how much do you need a drink?

I don´t know if you know the story about Antarctic explorer Sir Ernest Shackleton´s "whisky on ice", but it got even better when recent explorers found more of the century-old whisky than they were looking for.
Explorers struggled to find a way to get to the whisky without upsetting Shackleton´s historic hut which still survives above the ice. They said however that the experience was less than enjoyable.

"We were lying on our stomachs on the permafrost completely under the hut removing the ice enclosing the boxes; to say it was a pleasant job would be untrue," said Al Fastier, of the New Zealand Antarctic Heritage Trust. (I just love the idea of raiding whisky as being part of a heritage trust…..)

For three days, they chipped their way through the ice toward the crates. Their efforts were more than rewarded. "We got the two boxes out and were very excited and pleased with ourselves and then we looked through the layer of ice behind the second box and could see through the opaque ice the words ´whisky´ again," says Fastier.
Fastier said they found not only the extra crate of whisky, but also two crates of brandy.

The liquor cache is believed to be what´s left of 25 cases donated to Shackleton on his first expedition to the icy, unforgiving continent.

The biggest proponents of the expedition were from faraway Scotland. The makers of the original whisky said they want a sample so they can attempt to recreate the old recipe and no doubt with the world´s worst storage instructions – leave for 100 years!

Fat chance.

Many thanks

Warren Shute CFP
warren@Lexingtonuk.com
www.Lexingtonuk.com

TAXATION DEVELOPMENTS/DEVELOPMENTS IN TAXATION

2010-02-09T09:01:00.000Z

The next General Election is now no more than four months away at the most. Neither the Conservatives nor Labour seem especially anxious to spell out exactly how they would bring the £178bn Budget deficit under control, were they to win. Several commentators have remarked that the politicians have been happy to talk about the ends, eg a halved deficit in four years, while keeping relatively silent on the means.

The latest high profile speech to focus on the state of UK plc was given by the Conservative shadow chancellor, George Osborne. On 2 February he launched a document entitled ´A New Economic Model: Eight Benchmarks for Britain´. For the record, the Benchmarks octet was:

1 Ensure macroeconomic stability
2 Create a more balanced economy
3 Get Britain working
4 Make Britain open for business
5 Ensure the whole country shares in rising prosperity
6 Reform public services to deliver better value for money
7 Create a safer banking system that serves the needs of the economy
8 Build a greener economy

It is the sort of motherhood-and-apple pie list that Alistair Darling would not have much difficulty signing up to. However, buried in the document are some interesting insights into the Conservatives´ plans, some of which would definitely not be on Mr Darling´s agenda:

• The Conservatives would hold an emergency Budget within 50 days of ´taking office´. Mr Darling would probably also have two Budgets this year if Labour retains power: one would produce a non-contentious Finance Bill in March and the more uncomfortable follow up would arrive in much the same timeframe as Mr Osborne´s.

• The Conservatives would scrap tax credits for families with income over £50,000, which would largely mean stopping the family element of Child Tax Credit and, for larger families and those with high childcare costs, also the child element. In revenue-saving terms, this is pretty small beer: £45m on Treasury estimates.

Child Trust Funds would be scrapped for all but ´the poorest third´ of families, ie families with a 2009/10 income of not more than the Child Tax Credit threshold (£16,040 in 2009/10). This is not a large saving either: the Conservatives say £300m, Labour, £225m.

• ´Cut the headline rate of corporation tax to 25p or lower and the small companies´ rate to 20p, funded by reducing complex reliefs and allowances.´ This would probably mean new restrictions on interest relief and smaller capital allowances. The change would create corporate winners and losers, but probably alter the Exchequer´s receipts very little.

• ´Raise the Inheritance Tax threshold to £1m. No date is given for this measure, which would be expensive (£2bn) and controversial.

• Double the stamp duty threshold for first-time buyers to £250,000.

• Introduce ´a simple flat rate levy on all non-domiciled individuals in return for certainty over their future tax treatment´. This is meant to pay for the IHT and SDLT reforms, although there is much argument about whether the numbers stack up, particularly as there is scant non-dom data and already a limited non-dom tax in place.

• On the pensions front the Conservatives would:

- Bring forward the date at which the state pension age (SPA) starts to rise to 66 to ´no earlier than 2016 for men and 2020 for women´. Labour´s plans phase in a 66 SPA from 2024 to 2026. Longer term the Conservative proposal would create significant savings, but its immediate effect on the deficit would be nil.

- ´Restore (the) savings culture and encourage people to save more for retirement´. A Conservative government would also ´work with employers and industry to support auto-enrolment into pensions for those on middle and lower incomes´, a clear indication that NEST (aka Personal Accounts) is unlikely to disappear completely.

- ´Restore the link between the state pension and average earnings´, something which legislation already requires will happen by 2015 at the latest. However, like the Pensions Act 2007, the Conservatives do not specify a start date.

- ´End compulsory annuitisation at age 75´, something the Finance Act 2004 did by introducing ASP. There is no hint of what the revised treatment of post-75 death benefits would be.

- ´Reverse the effects on pension savers of the 1997 abolition of the dividend tax credit for pension funds´ over an unspecified ´longer term´.

COMMENT
The changes put forward put Mr Osborne would change the tax landscape, but the absence of dates for many of the plans suggests that, like Mr Darling, Mr Osborne can offer only short term pain.