You've got to love this: in the Guardian, no less.

Vodafone's shares at 176.3p are relatively cheap and offer defensive qualities at a time when much of the developed world faces recession amid continuing turbulence in the eurozone. The company earns more than half its revenue in emerging markets and the US and less than half from Britain and Europe. The shares yield around 7% so if you can withstand some stock price volatility and hold on to your investment through 2012, and perhaps beyond, you could do well, providing dividends are reinvested. Vodafone has tidied up its sprawling global portfolio, while its Verizon joint venture in the US is poised to pay a dividend for the first time in seven years, with the promise of more to come. All in all, not a bad bet.

Given the appalling performance of the Guardian's 2011 picks, you could make an argument that it's an attempt to give the shares the kiss of death. But it's still a pretty bad slap in the face for UKuncut, don't you think?

Filed under: Capital markets with tags guardian, pwned, ukuncut, vodafone
5765No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F12%2Fthe-guardian-picks-vodafone-as-a-share-tip-for-2012%2FThe+Guardian+picks+Vodafone+as+a+share+tip+for+20122011-12-28+07%3A15%3A31Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D5765

Accountancy Age reports that, rather than issue its audit proposals next week as had been widely expected, the European Commission will now take a further week. Who knows, they may even decide to delay it further.

This is a mistake. The draft proposals were leaked months ago and that led to a rather childish and unhealthy debate in which everyone had seen the proposals but no-one would publicly admit that they had. Rather than treat the targets of their proposed regulations with respect, the EC seems determined to spring sweeping regulations on the market. And, if European process repeats itself, they will allow a pitifully inadequate period to respond to them, a period that also includes a two week Christmas holiday.

This is no way for a responsible regulator to behave. Barnier should meet his original deadline, even if he feels the papers are half baked. He should allow a proper period for discussion: say, six months. And he needs to listen to the evidence and feedback, and accommodate it. The listed company investment market is too valuable to the European economy to be treated in this lacksadaisical manner.

With markets showing falling confidence, Barnier must show how he intends to help restore it - and fast. A week could be a luxury he, and we, can't afford.

Filed under: Auditing, Capital markets with tags accountancy age, audit policy, big 4, confidence, michel barnier
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Alice has a cup. She loves it, and doesn't want to get rid of it. Belinda wants a cup just like it. She really wants one just like it, straight away, and she doesn't want to wait.

I ask Alice if I can borrow her cup for a month, on the understanding that she gets it back in identical condition. I'll pay her £1 for letting me do this.

I then sell the borrowed cup to Belinda for £10. That gives me a month to find a replacement cup for Alice. Luckily for me, Clare has one that she doesn't want, and she sells it to me for £7.

At the end of the month, I can give the used-to-belong-to-Clare cup to Alice. She's happy because, as promised, she's got a cup again. She's also got £1, for basically doing nothing.

Belinda is still happy; she's got the cup she wanted, for a fair price.

Clare is happy because she has got rid of the cup she didn't really want, for a fair price. She's now got £7 in her pocket, which she can spend on something else.

And of course I'm happy too. I've got £2 profit, which I can go spend on something else.

That's short-selling in a nutshell. Everyone ends up happy.

OK. The eagle-eyed among you are already crying foul. Alice didn't get "her" cup back; she got another one. When you're dealing in shares, not cups, this doesn't matter. Shares in public companies are all identical and can't be damaged. So this wheeze really does work.

But it only works for me if the price falls over the month. If the price rises, I may be forced to pay more to Clare to be able to fulfil my agreement with Alice. Ultimately, I could lose out. But the girls will still be happy. It's only me that loses out.

Another claim made by critics of short selling is that my intervention in the market forces the market price down. But they never explain how. And, having traded with Belinda, I'm a buyer in the market. Once my transaction with Clare is completed, I no longer have any exposure to cups at all. How does this manipulate the market any more than any other participant looking to buy or sell?

Oh. On no account try to repeat this analysis with one less girl and one less cup. That really is hazardous and, I'm told, not safe for work!

Filed under: Accounting 101, Capital markets, Economics with tags derivatives, market abuse, shares, short selling, stock lending
51001 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F09%2Fthree-girls-two-cups-how-short-selling-works%2FThree+girls%2C+two+cups%3A+how+short+selling+works2011-09-29+18%3A53%3A00Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D5100

Via Worstall, we learn of Ritchie's cunning plan to ban short selling.

We could require settlement of all trading every hour – instead of every fortnight or so – making short selling nigh on impossible. I especially like this idea which is why I expect lots of opposition to it.

Why stop at shares? Shouldn't we ban everyone from selling something they don't have in the hope that, by the time it comes to deliver the product, they've been able to fulfil it more cheaply? Well, that would basically screw up all bespoke sales, like Dell's computer business or most car sales. It would destroy the concept of "just in time" manufacturing, thereby requiring companies to hold more stock, pushing up obsolescence losses and thus prices.

It would have a profound impact on some niche businesses, such as publishing. Is it really sensible to require authors to complete their manuscript before seeking a publisher?

Short selling increases efficiency in a whole range of industries. Unless Ritchie has hastily finished his magnum opus, he's in no position to seek to outlaw its use in financial markets.

Filed under: Capital markets, Economics with tags dell, idiots, just in time manufacturing, richard murphy, short selling, tim worstall
50501 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F09%2Flets-ban-short-selling-of-everything%2FLet%27s+ban+short+selling+of+everything%212011-09-27+18%3A31%3A38Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D5050

Listening to Eric Daniels this morning discussing LBG's results with Robert Peston, there was one standout figure. LBG repaid £61bn of its government support during the year and, as per his chat with Peston, has repaid a further £13bn during this financial year.

So, the question is this: will UKuncut etc shut up about the bailout having cost us £1trn? Because, as their results make clear, we're getting vast globs of that money back again. It's a loan that's being repaid, not a revenue item.

OK, so I couldn't resist. I had to see what the perennially dreadful Jill Treanor had written. Not a dickie bird about the fact that LBG had even repaid so much as a penny!

Written on my Android mobile phone. Article may be edited later.

Filed under: Capital markets, Current issues with tags banks, guardian, idiots, jill treanor, lloyds banking group, ukuncut
46923 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F02%2Frhetorical-question-about-lloyds-banking-groups-results%2FRhetorical+question+about+Lloyds+Banking+Group%27s+results+2011-02-25+09%3A32%3A03Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F02%2Frhetorical-question-about-lloyds-banking-groups-results%2F

This country faces the most almighty pensions crisis. Maybe not today. Maybe not tomorrow. But someday and for the rest of our lives, we will suffer. Why? Because just about everything that can go wrong is going wrong.

People aren't saving enough.  People aren't saving for long enough.  People aren't saving in the right sorts of assets.  The right sorts of assets aren't even really available.  And the pensions companies simply don't care.  It's a grim picture.

We covered amount and length before, in our tale of Mr Grey, so we won't dwell on that now.  Instead, we'll grumble about the dearth of quality investment opportunities for ordinary people.  I am, in my own humble opinion, a fairly sophisticated investor.  I can read and understand accounts, and my audit experience helps a lot with grasping what companies do and how they make their money.  But investing takes time, so most people will turn to funds to help them diversify their portfolio quickly.

And funds are expensive.  Even though we've left most of the bad old days behind, where funds would charge upfront fees, or mask their charges by using incomprehensible bid/ask spreads, funds are still too expensive.  True, most funds can't get away with charging 5% per annum, as some - unbelievably - did.  But a 1% per annum charge is still extortionate in an era of low growth, low dividends and rising prices.  My defined benefit portfolio, which is in the mid 5 digits, has made about 10% in the last five years.  But the pension company has taken 1% in costs over that period - a full tenth of my gains.  And it gets its money whether or not the fund makes a positive return.

I had had enough, so I rang them to request a transfer into my SIPP, which has no annual charges.  They said they'd send out the forms and hung up.  Even this amazed me.  I was basically telling them that I would no longer be paying them a few hundred pounds a year, and they just let me go.  No sensible business  should do that.  They should have at least asked me why I wanted to transfer my money out.  Their complacency is alarming, but far from extraordinary in the tragedy that is the modern British pension.

Filed under: Capital markets, Economics with tags idiots, pensions, sipp
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The SEC's website lists, often in gory detail, the cases that it's handled in the courts.  This one is a real peach.

According to the SEC's complaint against Diebold, filed in U.S. District Court for the District of Columbia, the company manipulated its earnings from at least 2002 through 2007 to meet financial performance forecasts, and made material misstatements and omissions to investors in dozens of SEC filings and press releases. Diebold's improper accounting practices misstated the company's reported pre-tax earnings by at least $127 million. Among the fraudulent accounting practices used to inflate earnings and meet forecasts were:

• Improper use of "bill and hold" accounting.
• Recognition of revenue on a lease agreement subject to a side buy-back agreement.
• Manipulating reserves and accruals.
• Improperly delaying and capitalizing expenses.
• Writing up the value of used inventory.

Without admitting or denying the SEC's charges, Diebold consented to a final judgment ordering payment of the $25 million penalty and permanently enjoining the company from future violations of the antifraud, reporting, books and records, and internal control provisions of the federal securities laws.

Just check out that list of frauds!  They're like something you'd learn in Accounting 101.  These are hardly complex accounting gimmicks, a la Lehman, they're the most fundamental, obvious, blatant earnings management approaches you could possibly take.

Which, although their auditors, KPMG, appear to have been involved in the forensic work in cleaning up this mess, does rather make you wonder where they were at the time of the audit.  The SEC's complaint indicates that the auditors did identify some problems but inadequate action was taken as a result (para. 25).

Now, I'm all for the auditor getting it in the neck when they're really to blame.  But the happy ending for this story is that the SEC has really thrown the book at the directors.

Section 304 of the Sarbanes-Oxley Act deprives corporate executives of certain compensation received while their companies were misleading investors, even in cases where that executive is not alleged to have violated the securities laws personally. The SEC has not alleged that O'Dell engaged in the fraud. Under the settlement, O'Dell has agreed to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.

I approve heartily.

Filed under: Capital markets with tags diebold, fraud, kpmg, lehman, pwned, sarbanes oxley act, sec
3261No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F06%2Fnaughty-diebold-directors-get-pwned%2FNaughty+Diebold+directors+get+pwned2010-06-06+09%3A55%3A47Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D3261

While Obama fumes about the devastation caused by the oil leak and what he views as BP's inaction over cleaning up the slick, there's another danger lying in wait to threaten US citizens.

The US Securities & Exchange Commission is warning about a series of scams involving boiler room operations:

Some companies may issue press releases, or send unsolicited faxes or spam emails that might include:

• Claims to have products or technologies that are effective in remediating oil spills or restoring the eco-system
• Mention of contracts or expected contracts with BP, formerly British Petroleum, that will aid the cleanup effort
• Claims that the company is providing technical assistance or expertise to BP or to U.S. government agencies such as the Coast Guard or the Environmental Protection Agency
• Predictions of rapid, exponential sales growth
• Pressure to invest immediately

So it's good to see that US scammers aren't prepared to let a good disaster go to waste.  Compare their rancid activities to BP's honest (if so far futile) attempts to make good the damage caused.

Also, it's interesting to note the SEC referring to BP as 'formerly British Petroleum'.  The company renamed formally in 2001.  Had it adopted another name, say "Kevin PLC", would the SEC still feel obliged to remind us of its former name? I don't think so.  This is just another example of Brit-bashing.  The premium securities regulator in the world really should behave better than this... shame on them.

Filed under: Capital markets, Current issues with tags bp, fraud, sec
32551 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F06%2Foil-slickers%2FOil+slickers2010-06-05+19%3A36%3A14Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D3255

The ICAEW has published an update to its guide to private equity. Called, inspiringly, Private equity demystified – An explanatory guide, it aims to provide "an objective, up to date explanation of private equity, recognising that for public scrutiny to be effective it must be conducted on an informed basis."

The preface observes, rather forlornly, that

It remains the case that media coverage of private equity and some public commentary have frequently displayed a poor understanding of how private equity operates, yet these sources are frequently relied upon as fact. This guide provides an objective explanation of private equity, recognising that for public scrutiny to be effective it must be conducted on an informed basis.

I suspect that this won't do very much to improve the quality of media reporting on hedge funds and private equity. While the hedge fund industry now has a better profile, in the form of Hugh Hendry, media coverage seems compelled to descend into childish "they're rich so they must be bad" taunts. And although Poul Rasmussen was badly duffed up by Hendry on Newsnight and Boris Johnson has come out in support, the EU's temporary halt in increasing regulation on both sectors is likely to prove only temporary. This is ironic, seeing as neither hedge funds nor private equity had anything to do with the crisis. Such is politics.

Filed under: Capital markets, Institutes, Regulation with tags boris johnson, hedge funds, hugh hendry, icaew, newsnight, poul rasmussen, private equity
15871 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Feverything-you-always-wanted-to-know-about-private-equity-but-were-too-afraid-to-ask%2FEverything+you+always+wanted+to+know+about+private+equity+but+were+too+afraid+to+ask2010-03-31+12%3A29%3A33Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1587

Richard muses on limited liability.

Now they want the people of Iceland to repay them even though the banks in question had limited liability

Because Landsbanki operated in Iceland and as a branch in the UK, we want the people of Iceland to underwrite all bank accounts on the same basis. The government had proposed to underwrite only domestic accounts while ripping off accounts held by Brits. That's not fair.

In the comments, Demetrius writes:

What is happening is that the taxpayer now seems to have unlimited liability and those who run busted companies no liability at all.

This is typical bone-headed socialist thinking. Someone always has to have unlimited liability. If we want to allow entrepreneurs to enjoy limited liability then we must accept that that will sometimes mean that the parties with whom they contract will lose out. When it's the state, that means that the state must either accept unlimited liability, or that what it wants done won't get done.

So why, Richard asks, do we tolerate this?

This is easy. Because the alternatives are far worse. If we forced companies to honour onerous contracts, without being able to partition the risks into individual companies using limited liability, then they would enter into fewer contracts ('good', you might say. But this would mean less profitability, fewer jobs, lower employment...). Alternatively, they would seek to cover the additional risk by increasing prices. If the state did not allow investors to protect their personal assets from their investments, then they simply wouldn't invest. 'Carol Wilcox' might think that to be a good thing, but it would mean jobs never created, a smaller economy and lower growth.

Limited liability is a price worth paying for the huge multiplier effect it has on our economy. Without it, we'd all be much poorer.

Filed under: Capital markets, Economics, Other blogs with tags carol wilcox, demetrius, idiots, limited liability, richard murphy
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