Where to next?

Haven't posted for a while as I'm considering where next to take the blog. Since starting it has become a bit of a mishmash of ideas and quite general, while trying to avoid getting into tips, if only because I'm not qualified nor want to be a tipster. So, I'm considering where to take things next. One of the problems with a blog is not always knowing how big the readership is. Stats may be improving, but some of them are always likely to be spam, no one might be reading.

So, if anyone has any ideas of what they would like to read about please post a reply below.

Royal Mail, dividend not so attractive now

One of the major attractions of buying Royal Mail shares was the prospect of a 6-7% dividend yield thanks to the Government pricing the company to sell. This would have been nice for the private investor if you could have got more than the 227 share limit, £750 worth at IPO, but once the issue was scaled back it became less attractive as a hold. I made the point in a post a few days ago that because of the small 227 share limit it might not be worth holding on to them given the 30-40% rise in price since then. If you want more, at a less attractive dividend yield, you now have to pay for it. Some in the city seem to feel the same way.

Investors who bought Royal Mail shares for the income should sell their stakes, experts say. Before trading began on Friday, the appeal of the shares had largely been in the likely dividend stream, which seemed attractive at the price. But with the shares having soared in value, the income now looks less appealing by comparison with the instant capital gain available if you sell.

With the shares priced at 475p at the end of trading yesterday the yield works out at about 4.3pc, net of basic-rate tax, which is deducted at source. Before trading began on Friday the yield stood at 6.1pc, representing 20p a share. The yield is now on a par with income stalwarts such as Tesco or Vodafone – which, unlike Royal Mail, do not face a union battle and massive restructuring.  

http://www.telegraph.co.uk/finance/personalfinance/investing/10378410/Royal-Mail-sell-now-investors-urged-as-yield-falls-from-6.1pc-to-4.3pc.html

So, the euphoria around the Royal Mail IPO is beginning to wear off and as the price rises it is becoming less attractive as the market will inevitably focus on the issues facing the company going forward. There is also the question of whether a 4% dividend yield is attractive now when compared with other dividend payers, chances are that the risks are much higher going forward with Royal Mail. For the institutions however, a 3-4% dividend yield will still be attractive so I would expect them to continue to hoover up Royal Mail shares as the small investor sells off  their 227 shares. As an exercise in widening share ownership, if this was the Government's intention, it has largely failed. Most of the shares will end up, eventually, with institutions.

Thursday the 17th, US debt limit day approaches

Last week was a strange one for the markets. At the slightest hint of a possible compromise over the US budget and debt limit being raised the markets showed their euphoric side. However, the Republican proposition to extend the time until December so that further talks can take place was actually loaded with strings attached. These strings were again around ObamaCare, so it shouldn't come as a surprise that it was rejected. What was a surprise was that the market seemed to buy into the possibility that this might work.

If anything, what we saw towards the end of last week was a relief rally. Markets had been falling off for a while and they were prepared to grasp hold of anything that might suggest a deal was just around the corner. They are still living in hope that common sense will prevail and a deal will be done by Thursday, European markets are currently treading water in wait, while the US market is currently predicted to give back some of the gains made towards the end of last week. So far a big sell off has been avoided and the US bond market is closed today.

If you are an investor in shares these are troubling times. Perhaps not so much if you are a trader. Investors perhaps don't want to think too much about liquidating everything before Thursday, but also why would anyone open any new long positions before that date? Traders, especially those with short term time horizons will probably be out and waiting or looking to get out the closer the date approaches. They will also be looking at opportunities to short in the event of no agreement. Longer term investors may also look to hedge against the fall out of share price falls by taking out an index short, the more sophisticated may be using options. Many investors however, will probably just sit tight and hope the worst doesn't happen.

We should be under no illusion as to what a US default, even if it is only technical, actually means.

The stalemate is now damaging confidence and denting the recovery, bankers at a satellite Institute of International Finance meeting in Washington warned.

“It would be utterly catastrophic,” Deutsche Bank co-chairman Anshu Jain, said. “This would be a rapidly spreading fatal disease.”

JP Morgan chief executive Jamie Dimon added: "I think it would ripple across the global economy in ways you couldn’t possibly understand.” 

http://www.telegraph.co.uk/finance/economics/10376058/US-debt-ceiling-Markets-on-edge-as-talks-drag-on.html

The fact is that to a large degree it would be entering unknown territory, but markets do tend to react to such events in a way that is entirely predictable, they go crazy. There is a good chance of a market crash if Thursday comes and goes without a decision, because this is the way markets respond to such news. It's no good trying to be rational about it, it is unlikely the markets would simply respond by staying calm.

The reality is that many of us know that any deal before Thursday does not solve the problems the US face going forward in relation to its budget and debt, it is kicking the can down the road, but this is effectively what an inflationary money system does. The can kicking can go on for a long time, because for long periods it depends on whether you are good at controlling the can as it rolls on. Ultimately issues like debt and the budget have to be resolved, but within our current financial system it will always be relative to other things, like manageable debt. To stop the can kicking in total requires a different financial system, but whether it can ever be changed in a way that isn't destructive in a horrific way until something new replaces it is a much bigger debate.

One final point about the current Republican stance in relation to ObamaCare, is that the politics of this is saying they are doing this for their voters, or middle America, but how will this constituency respond to crashing markets if they push it to the wire? As they see their investments collapse, jobs and pensions in danger, recession or depression and the US name across the world being about as bad as it could get? If they default, who would lend to the US again at such generously low interest rates? Middle America has a lot to lose from a default, which is perhaps one of the main reasons why it is believed unthinkable that Republicans will go that far. They must know what the outcome would be from default?

The market still believes that a default is unthinkable, it is as Warren Buffett recently referred to as the financial market equivalent of using nuclear weapons. Are the US politicians really prepared to do that come Thursday?

Royal Mail, damp squib for private investors?

So, here we are on Day 1 of the grey market trading for Royal Mail shares and as widely predicted the share price is showing a healthy premium already at around 445p. However, as the IPO was so heavily oversubscribed the Government was forced into deciding how many shares the institutions and private investors would get. Both will no doubt be disappointed.

For the private retail investor, an allocation of just 227 shares will go to anyone who asked for £10,000 or less. Over £10,000 you get nothing. Institutions are getting 67% of the issue, with priority apparently being given to pension funds and those with a long term intent.

That's all very well, but for most small investors, especially those that wanted more than the minimum, an allocation of just 227 shares may seem hardly worth keeping. The potential dividend on this might be nice and beats cash on deposit, but it's hardly likely to be a holding factor especially as the shares are currently up around 33%. You might as well take that couple of hundred pounds worth of immediate profit as it represents 5-6 years of potential dividend payments. The point is, if every small investor who had asked for say £5000 or under had got the full allocation, chances are they might be inclined to keep them as that's a chunky dividend worth holding on to. Adding to your 227 shares now will be 30%+ more expensive, thus the dividend yield is lower. Of course, you could wait and hope the price sells off after the initial euphoria, which is a possibility.

All of this would have meant that the institutions got less, but there again if they are serious about wanting the shares they would then have to go into the market and buy them. Chances are that many of the smaller serious investors will simply offload their 227 shares as not really worth keeping and it will be the institutions that hoover these up over the weeks ahead.

Retail trading doesn't begin until next week. Holders in ISA's cannot buy until the official start date of the 15th, because until then they are not classed as an ISA investment. There might be quite a lot of volatility between now and then and it will be interesting to see if the current price holds especially if the small investor decides to get out quick and just bank any profit as quickly as possible once official trading starts.

Royal Mail IPO looks like it will be very popular

With the Royal Mail IPO less than a week away it looks like it will be well oversubscribed and purchases will be scaled back accordingly. Institutions have been looking to get in big time, they want £30 billion's worth.

Institutional investors have placed more than £30bn of orders for Royal Mail shares as the Government puts the finishing touches to the biggest UK privatisation for decades.

Sky News understands that firms from around the world have deluged the investment banks running the postal operator's sell-off on an unprecedented scale, with the initial public offering more than ten times oversubscribed.

Whitehall sources said that the £30bn figure excluded demand from members of the public, with a last-minute rush for shares expected throughout the course of Tuesday.

http://news.sky.com/story/1151723/royal-mail-city-demand-for-shares-tops-30bn

So, if you are small investor the chances are that if you want these long term for income then you may have to wait and hope for a pullback once trading starts as the chances are you won't get the full amount asked for. The Government have said that the retail investor will get their "fair share" when the allocations are finally announced. It's also possible that some institutional buyers will get none. Let's hope so. If the institutions are that desperate to buy they will start hoovering them up from day one.

What is interesting about the RM float is that in many respects it couldn't happen at a worse time for the markets with the US budget/debt talks ongoing. It might be one of the few big name shares still going up in price come next week if US politicians can't find common ground to do a deal. However, the fact that the institutions have asked for so much, even though they have done so with the full knowledge that it will be scaled back, suggests there is still an appetite for buying shares despite market fears of wider issues like a US default.

Decision time ahead.

Well, here we are again heading towards a potential crisis point which let's face it was so predictable. Politicians in the US continue to argue and stand their ground on the issue of the budget, the debt limit and of course what appears to be holding it all up, the politics behind "ObamaCare". In the meantime the markets have gone cold, some profits have been taken. They have been falling session after session but no strong message has yet been sent to Washington that if this goes to the wire and beyond, crisis awaits.

According to Obama the votes are there to pass a clean bill, which would mean that they could then argue and negotiate afterwards for as long as it takes. The impasse appears to be that the President won't negotiate under threat and he won't back down on his health initiative, while elements of the Republican opposition see this as their chance to put a line in the sand and get what they want. The end result appears to be stalemate in the face of disaster that awaits elsewhere if an agreement isn't reached in the next week or so.

Chances are it will be a disaster if there is no agreement as history shows that ultimately markets will throw a hissy fit to get what they want, but this goes slightly deeper than what has gone before. If the US were to default, even if it is only a technical default, then trust will go, the chances are the rating agencies will come out with US downgrades and the stock markets will crash. Maybe some on the Republican side can live with this out of principle, but will their voters and what about their financial backers? The Republican Party might be feeling some heat right now from those that back them to get a deal done, otherwise the money that finances them will drain up. Unless of course, you believe in conspiracy and that the financial elite want this crash and the crisis to come to further their ends.

There is a general view that while the markets have been falling recently an agreement is ultimately expected, because the alternative is pretty dire. Sooner or later the politicians, or enough of them, will cobble together some agreement that will stop the immediate crisis, but in reality simply pushes things further down the road. Nevertheless this should be enough to at least placate the markets for now.

In the meantime, hold on to your hats.

Poundland considers IPO in 2014

All the IPO talk at the moment may be about the Royal Mail's debut in the next week or so, but one small quite attractive company is looking at possibly doing the same next year. Poundland has been one of the High Street success stories of recent years and it may look to become a PLC next year.

Poundland, the biggest UK retailer of its kind, is reportedly weighing up whether or not to become a listed company before the mid-point of next year.

Sources "familiar with the situation" told Reuters that the group is considering an initial public offering (IPO) in the early part of 2014 following what it anticipates will be a strong Christmas trading period.

http://www.digitallook.com/news/21194788/Poundland_considering_IPO_next_year_sources_claim.html?&username=&ac=,

The growth of pound or 99p shops has been big business in the UK and has no doubt been helped by austerity, as people look for value for money. I've often wondered whether such a company would make a good investment though, especially if you are a long term investor? The key question here has to be one of inflation. Can pound shops survive long term the pressures that they would be under to consistently source decent products over the years in an inflationary money system?

Poundland as a private company appears to be well run and growing, making decent money, but had it come to market 50 years ago it would probably have had a different name because even back in the 60's a pound could go a long way. The further you go back the more you realise what inflation really means. A pound isn't what it used to be and while people do have a lot more of them these days as the average salary has gone up quite a lot over the years, so have prices. It does make you wonder whether the pound shops have a long term future or perhaps along the way they will have to change their name, Poundland may end up as FiverLand and then TennerLand? It would never have survived in Zimbabwe or Weimar Germany.