Royal Mail update

An interesting follow up to the recent Royal Mail article suggesting a significant undervaluation of the distinctly British institution. It is important to note that simply because the company’s market value has increased on its first day of public trading, that does not mean that it was inherently undervalued. An example of this would be Facebook, which after a sharp initial increase in value, suffered a major plunge and has only recently recovered to reach its IPO (initial public offering ) value.

“Private investors who bought their shares directly from the government will have to wait until at least Tuesday if they want to sell. About 690,000 people were granted 227 Royal Mail shares worth £749.10 (at the 330p float price) following overwhelming public demand for the shares. The public applied for more than seven times the number of shares available to them, which meant nearly everyone did not get as many shares as they had asked for.

More than 36,000 people who applied for more than £10,000 worth of shares were prevented from buying any at all. About 40 people applied for shares worth £1m or more.

Cable said the government told the "very big wealthy investors … you wanted a big chuck, we can't give it to you".

City investors, hedge funds and pension funds applied for more than 20 times the number of shares available to them. More than 800 City investors applied for shares, with 500 being left empty-handed.

Sources said 90% of the shares reserved for the City went to "responsible institutional investors" such as pension funds. Investors include Threadneedle, Fidelity, Blackrock and Standard Life.

However, the remaining 10% of shares have been granted to "other investors", including hedge funds. Cable had said the government would prevent the shares from going to "spivs and speculators".

It is understood that about 20% of the shares available have gone to sovereign wealth funds – including those of Kuwait, Norway and Singapore – and other foreign funds. Royal Mail's 150,000 employees collected 10% of the shares free of charge, worth about £2,200 each at the flotation price and now worth £2,900. Employees were also allowed to buy a further £10,000 worth, but are not allowed to sell for three years.

Hayes said the share price rise would not make "one scintilla of difference" to employees' widely expected intention to vote for strike action on Wednesday. Days of nationwide industrial action could start as soon as 23 October.”

Royal Mail Privatisation

In the 1980s, the cost of keeping a miner in work for one year would have been enough to pay off his mortgage in its entirety and buy him a new Rolls Royce; Privatisation was the answer to Britains economic woes then, but it is not now.

The Royal Mail privatisation is, In my opinion , fraught with inherent flaws. For starters, it is undervalued hugely. Experts have placed the market capitalisation of Royal Mail at around £4.5 billion, yet the value estimate given by the government is £2.6 billion, a decrease of around 40%. The £2.6 billion valuation is of course hugely flawed, as it appears not to accommodate or account for the $1 billion in property assets and $2.8 billion in tax credits , meaning that it won’t have to pay tax for the foreseeable future. Furthermore, the government has retained the huge liability of its pensions, giving an even sweeter deal to investors.

It is, however in these investors that we see the biggest flaw of it’s privatisation : The government anticipates 70 % of the shares to be purchased by “large institutions “, or in other words, large banks and investment firms. The shares are forecasted to rise, leaving big banks in the red and many individual investors in the black. If the sale is to benefit the public, why is it the big banks that have helped no end in creating the financial crisis and subsequent recession which apparently necessitates its sale ?

Proponents of the Royal Mail privatisation cite it as being a convenient and effective way to reduce the budget deficit, which I find ridiculous.$2.6 billion is a drop in the ocean that is British national debt, which is forecasted to hit £1.5 trillion in 2015. Furthermore, the company recorded a £400 million profit last year, and , in the words of the government, is “on the road to sustained profitability”, and by extension, is on the road to contributing nicely to corporate tax receipts.

Now, however, it is on the road to large investors who will profit from the government’s incompetent valuation skills, and private investors who will end up buying into something which they already own, and end up not really owning it.

Retail sales falling

An interesting article from the Guardian which aptly illustrates the huge number of factors which influence consumer expenditure, an important component of Aggregate Demand.

“Retail sales growth eased back last month as clothes stores suffered amid volatile weather, according to new figures.

BDO's monthly high street tracker showed like-for-like sales across the retail sector, excluding grocery and online sales, increased by 0.6% last month - down sharply on the 3.5% surge recorded in August. Fashionsales fell 2.1% in September in a "challenging" month for clothing retailers as they were buffeted by changeable weather conditions, according to the accountancy and business advisory firm BDO.

It added that sales progress was held back as many firms chose not to launch heavy discounts in favour of protecting their profits. Retailers were also up against strong comparatives from a year earlier, when widespread discounting saw sales leap 3.5% higher.

Don Williams, national head of retail and wholesale at BDO, said: "September saw a game of nerve being played, with bolder retailers driving footfall and conversion imaginatively rather than resorting solely to price led promotion."

BDO added that retail sales were moving back into a "more regular pattern of growth". Homewares retailers continued to enjoy double digit sales growth, up 12.8%, thanks to Britain's housing market revival, helping non-fashion sales overall rise 3.7%. Online sales growth slipped to 23.7% from 26.7% in August, the report found.

BDO tracked sales at around 85 non-grocery retailers with annual sales of between £5m and £500m.

Official figures showed retail sales volumes fell 0.9% month-on-month in August as spend on food slumped after the barbecue boost from July's heatwave.”

Just read an interesting article which I found surprising, for one would of course expect markets to lose confidence and react negatively to such a piece of news :

"US stock markets recovered their losses Tuesday morning even as thebiggest government shutdown in close to 20 years began.

All the major US markets opened up after falling sharply Monday as it became clear Washington was at an impasse. Most of the major European and Asian markets were also rising.

The Dow Jones was up 48 points, or 0.3%, to 15,179 after the first hour of trading. The Standard & Poor's 500 rose nine points, or 0.6%, to 1,690. The Nasdaq composite rose 23 points, or 0.6%, to 3,795.

The dollar, however, took a hit — it fell 0.5% against the Japanese yen, to 97.78 yen, while the euro rose 0.1% to $1.3544.

The federal shutdown will send more than 800,000 federal workers home without pay, close national parks – and has been predicted to have a negative impact on the still insipid recovery in the housing market.

In a note to investors, Dan Greenhaus, the chief strategist at broker BTIG, said investors were more concerned over the looming row over raising the US debt ceiling than the shutdown. He said a common view "which has grown considerably in acceptance, is that the House is 'getting it out of their system' now so the eventual debt ceiling debate can be solved more easily."

Greenhaus said a short-term shutdown of one week would have little impact on growth, "but the longer this drags on, the more impactful it will be," he warned. And he added that he was "growing increasingly nervous" about the upcoming debt ceiling debate.

Bruce Bittles, the chief investment strategist at RW Baird & Co, said it was clear that investors were discounting the row and any potential clash over the debt ceiling. "We have been through this several times before. Markets reacted well yesterday, after the initial sell off there was virtually no selling in the US. The assumption is that it won't last that long and that it won't be that damaging to the markets," he said.

Bittles said the larger danger was "complacency".

"Investor complacency is widespread and deep-seated," he said.

He said the Federal Reserve's recent decision to keep up its $85bn a month quantitative easing programme may have underpinned investor confidence but that if the debt ceiling talks collapse, that confidence could be shaken and lead to a selloff."

Energy price caps

Labour leader Ed Miliband has recently announced that is Labour were to be elected, there would be a 14 month cap on energy prices. Anyone with a keen eye on business or an interest in economics will no doubt be intrigued as to the underlying business and economics behind this.

The first thing which strikes me about the price caps is that energy is a fairly competitive marketplace. There is no one company with a monopoly and a number of companies compete for customers’ revenues.  One must assume that the price caps would allow companies to operate and generate profit, and if this is the case, why does one company not simply drop its prices and take the business of competing firms?  Whilst one can assume that a start-up company cannot compete in the market due to the extortionate barriers of entry, namely capital investment and the infrastructure required, one could reason that a large company, such as Centrica could afford to be dominant in terms of price due to the economies of scale which they utilise to lower the cost of production.

The next pertinent question is whether the companies actually can afford to lower their prices. Centrica made £2.5 billion profit on a £23 billion turnover last year ; an 11.5 % net profit, meaning that if revenue were to decrease by about 10 % due to price caps, and costs of factors of production were to rise , Centrica would almost certainly be making a loss. It would then be likely that mass layoffs and downsizing would be necessary , to mitigate the diseconomies of scale which raise costs and alter the Marginal Cost curve for firms, which is again untenable as more companies would need to be created to fulfil consumer demand , which they cannot do due to the aforementioned barriers to entry.

Either way, the energy price cap gives us a fascinating insight into the economics and finances of large energy corporations.

Graduate employment in the city

Is the city the best place for our best and brightest mathematicians and economists ?

It is the year 2013 and bonuses are firmly back in the city. With them, incentives for bright and motivated individuals are back, with pay packets standing at multiples of the salaries offered in other industries such as engineering and medicine.

Concurrent to this, the city is beginning to become more and more quantitatively difficult market, replaced with a mathematically-able “quant “ who uses complicated algorithms to determine success. Maths plays a bigger role in the city than ever, with strong pHD level mathematical ability a pre-requisite for many jobs in the city.

As such, mathematics and economics graduates are being tempted into the city, lured by an image of glamour, prestige and high pay. Any student at a top UK university is almost guaranteed to have seen or have been inundated by offers for employment from top investment banks, many of whom going on to accept these same offers.

One has to question whether the abilities of these graduates could be employed better elsewhere. Does the city really contribute that much to us both as a society and as an economy? Whilst bankers are often in the highest tax band, banks and other large corporations have employed complex tax avoidance methods and, of course, have speculated wildly, precipitating the financial crisis, causing untold economic and social woe both nationally and globally.

Whilst speculation is a valid profit-generating activity for banks and other investors, we must be careful to regulate it so as to prevent another crisis. One has to question whether bright minds could be employed more creatively, and we must ensure that they are not employed destructively.

The North/South divide and Economic Growth

Here is a  fascinating article from Larry Elliott, economics editor at the Guardian newspaper, which highlights the illusion that is  UK  economic  recovery  :

"Go to Preston and tell them that Britain is booming and the notion will be greeted with a hollow laugh. Tell the folks in Hull that the housing markethas caught fire and they will assume you have taken leave of your senses. Mention in Rochdale that a corner has been turned and you are likely to be run out of town.

Ed Miliband's big idea at last year's Labour conference was One Nation Britain. This is a nice as an aspiration but bears no relation to the country we actually inhabit.

The latest growth figures are a classic example of Disraeli's dictum that there are three sorts of falsehoods: lies, damned lies and statistics. Sure, if you take the UK as a whole it is true that growth has returned. National output is expanding by 3% a year, slightly above its long-term trend.

But the country-wide average disguises considerable regional disparities, which are reflected in Britain's political make-up. Areas where the Conservatives are strong tend to have above-average prosperity; areas where Labour is strong tend to be poorer than the average. Marginal seats are clustered in those areas where the two nations collide.

House prices are one example of how regional economic performance varies. The Office for National Statistics said last week that property was 3.3% dearer in July 2013 than it had been a year earlier. But strip out London, where the cost of a home increased by almost 10%, and the south-east, and in the rest of the country prices were up by just 0.8%. That's below inflation, meaning that property prices are falling in real terms. In Scotland and Northern Ireland they are falling in absolute terms.

Now look at the regional breakdown for workless households, where the five areas with the worst record are all former industrial powerhouses lying north of a line drawn from the Severn estuary to the Wash: Glasgow, Liverpool, Hull, Birmingham and Wolverhampton. For the UK as a whole, 18% of households do not have anyone in work; in the unemployment blackspots it ranges from 27% to 30%.

At the other end of the scale, the areas with the fewest workless households are all in the south of England. Hampshire has the lowest percentage, at 10.6%, followed by North Northamptonshire (11.2%), Buckinghamshire (11.3%), West Sussex (11.3%) and Surrey (11.4%).

The north-south divide is not new. Far from it. There has been a prosperity gap for at least a century, ever since the industries that were at the forefront of the first industrial revolution went into decline. But the disparity between a thriving London and the rest has never been greater.

On past form, there will be a ripple effect from the south-east and there are tentative signs that this may be happening. But it is early days and, understandably, there is concern in the rest of the UK when it is mooted that economic policy needs to be tightened to tackle a problem that is chronic and heavily localised.

This is well illustrated in an article by Paul Ormerod published in Applied Economics Letters. Ormerod drills down into the UK labour market to see what has been happening to unemployment at the local authority level.

He notes that most labour market economists have seen the cure for unemployment as a good dose of "flexibility".

According to this approach, joblessness will only persist over time due to "rigidities" in the labour market. Remove the rigidities – such as over-generous welfare systems, employment security provisions, working time regulations, national pay bargaining – and the price of employing workers will adjust (ie reduce) to a level that will ensure that everybody who wants to work can find a job.

Unemployment blackspots

That's the theory. Ormerod tests it by looking at what has happened to unemployment over time. If greater labour market flexibility is the answer, then local authority areas with high levels of unemployment 20 years ago should have witnessed an improvement. But Ormerod finds no such correlations.

Those parts of the country that had relatively high levels of unemployment in 1990 still had them in 2010, even though the rates of joblessness went up or down according to whether the national economy was booming or struggling. "The striking feature of the results is the strength of persistence over time in patterns of relative unemployment at local level," Ormerod said.

Those who say flexibility is the answer may counter that the problem with Britain is that the labour market is still not flexible enough, and that only by making the UK more like the US can the problem of persistent unemployment be tackled. The only difficulty with this argument is that high levels of unemployment persist in America as well, although the correlation is not quite so strong as it is in Britain. This, though, may have more to do with the willingness and the ability of Americans to move than it does with the flexibility of the labour market.

Ormerod concludes: "The labour market flexibility of the theorists, beloved by policymakers, appears to be at odds with reality. This is especially the case in the UK, where relative unemployment levels persist very strongly over long periods of time. The findings certainly call into question the efficacy of policies that were designed to increase flexibility and to improve the relative performance of regions."

The cross-party support for a new high-speed rail link to the Midlands and the north is one attempt to find new ways to tackle the two nations problem. Supporters of HS2 say the cost will be worth it because the new line will lead to higher investment, increased rates of business creation and enhanced spending power in the northern regions.

Another solution to the north-south divide would be for London, rather than Scotland, to get its independence. Although Britain is not part of the single currency, London is Europe's unrivalled financial capital. From the dealing floors of Canary Wharf in the east to the hedge-fund cluster in Mayfair to the west, London is where the action is. Upmarket estate agents can tell where the world's latest troublespot is by the source of the foreign cash buying up properties in Belgravia and south Kensington: currently, it is Syria.

Were the government to publish regional trade figures, they would show that London runs a current account surplus with the rest of the UK, offset by capital transfers from the rich south to the poorer north. As an independent city state, London would have a higher exchange rate and higher borrowing costs. The rest of the country would, by contrast, get a competitive boost.

The reality is that London is a separate country. Perhaps we should make it official."