In Your Face

In Your Face
Thought provoking opinions on topical issues.

Wednesday, June 16, 2004

Confidence in the Financial System

Sir Richard Sykes, a "big player" in UK business circles and a leading government adviser, has published a report entitled "Restoring Trust; Investment in the 21st Century".

Sir Richard, worried about the small amount of money that people are putting away for their retirement, is trying to persuade investors to return to the UK stock market.

With the melt down in share prices in the first few years of the 21st century, the £40BN shortfall on endowment policies and the Enron and WorldCom scandals to name but a few; investor confidence has taken a battering over the past few years.

Sir Richard ought, in some respects, to be able to count on the help of the Financial Services Authority (FSA). Their primary function is to maintain confidence in the financial system in the UK.

One significant piece of the jigsaw that forms the financial system is the trading of shares on the stock market. Confidence in the working and price mechanisms of the market will minimise investors’ fears about investing in that market.

I have been watching the activities surrounding one particular share, with a degree of fascination over the past few months.

The share, which shall remain nameless, is highly volatile. Its trading range, in pence, has moved from below 10p to the high 70’s then back to the mid 30’s. All of this, in spite of the fact that the company has yet to earn single penny in revenue from its activities.

The main driving force behind the price swings have been:

  • Optimistic news releases via RNS and AFX notes.

  • Speculation by gullible fools.

  • Ramping and de-ramping (talking it up and talking it down), on the bulletin boards of financial websites.

  • Optimistic conversations, and emails, between the CEO and shareholders. The subjects of these "private exchanges" are then published, by the same shareholders, on the bulletin boards.

To some extent this will always happen in a free market. However, the degree to which this has happened with this share has given me much cause for concern.

Matters came to a head recently when a false AFX note, containing information that would have caused the share to leap, was posted on a bulletin board. On discovery that it was a fake, the poster claimed to have posted it as a joke.

Following on from that, the CEO in an email to a shareholder (the contents of which were naturally posted on a bulletin board), noted that he was fed up with the volatility of the share price; and that news flow would be staunched in order to stabilise the price, and remove the speculators from the share.

There are two possible scenarios, but only one conclusion, wrt this email.

  • The posting of this email, if false, means that the poster was trying to manipulate the market.

  • However, should the email be genuine; then it means that the CEO was trying to manipulate the market, via news management.

Either way, this is a very clear example of market manipulation; something which the FSA has an interest in stamping out, in order to maintain confidence in the financial system.

I applaud Sir Richard’s intentions. However, before trying to persuade investors to return to the market, he needs to ensure that shenanigans such as this are stamped out. In other words he needs to ensure that the FSA are proactively investigating occurrences such as the one I have just described, and taking action where deemed appropriate.

Tuesday, June 08, 2004

The Price of Petrol

The recent rise in the price of oil, to around $40 a barrel, has once again brought the price of petrol in the UK into focus.

There have been threats by various action groups to blockade the roads; in a repeat of the chaos that ensued a few years ago, when petrol prices hit new highs.

It seems that the hard pressed British driver, so we are told, will not tolerate petrol at 80p or more a litre. The argument is also made that, since over 50% of the price is tax, it is up to the government to keep the price down by reducing the tax.

Some politicians have jumped on the “petrol price bandwagon”, and expressed their support for the British motorist.

However, in my view, far too much time and effort is expended by politicians and the press in trying to placate the motorist.

Let us take a look at a few facts:

  • In real terms the price of petrol has remained, more or less, constant over the past 30 years. In other words, the motorist is no worse off now than 30 years ago.

  • Britain is a small overcrowded island of 58 million people. It seems that, despite the congestion of the roads and cities, everyone feels that it is their God given right to own and operate a car. Newsflash, it isn’t!

  • Oil is a dwindling resource, the more we use the less there is; by definition there will have to be some from of rationing. The most effective form of rationing is via the price.

  • Taxation on petrol is required to support the ever increasing demands of the electorate for better schools, hospitals and, dare I say it, more roads. It is time for the motorist to wake up, and realise that these thing have to be paid for. Therefore it is not unreasonable for the government to tax motorists, given the fact that they (the motorists) insist that every inch of the country be covered in motorways.

  • Cars are a blight on the environment, high petrol prices are a good way to make people think twice about using them.

  • The use of cars in the UK at the moment can be said, in many cases, to be unnecessary. The “school run”, in the mornings and afternoons, sees a multitude of unnecessary car journeys; as “little Johnny” is driven the few yards to school by his overprotective and doting mother. We are breeding a generation of fat, lazy and spoilt children. It seems to me that they, and the environment, would benefit immensely from them walking to school each day; rather than being chauffeured.

I am therefore very happy to see petrol prices rise in line with the price of oil.

Wednesday, June 02, 2004

The Current Situation in Saudi Arabia

The recent attack on the foreign workers in Saudi augurs ill for the future. Saudi Arabia, despite earning a good income from oil production, has a number of significant social/political problems that it needs to address.

These include the following:

  • Demographics, over 40% of the population are under 25 years old

  • Reliance on a single revenue source, oil is the sole revenue source for the Kingdom. Saudi has failed to develop any other form of revenue earning economic activity

  • High unemployment, Saudi relies on 6 million foreign workers to run its key industry. The result being that its own citizens are unemployed

  • Security, Saudi’s security services and armed forces are not “top rank”. This was very clearly demonstrated by the events over the weekend. Saudi relies on the USA to protect its borders

  • Democracy, this is in fact non-existent. Saudi has been ruled a by the House of Saud since the state was founded in the early 20th century

  • Human rights, Saudi has a very poor human rights record; eg women are not allowed to drive cars and people are still beheaded

  • Education, Saudi education is religious based and highly anti Western

The social and political problems within Saudi have provided a fertile recruiting ground for Bin Laden and his acolytes.

In my view, time is running out for Saudi Arabia. The Saudi government needs to address the above issues, with urgency, in order to avoid the significant and irreversible breakdown of law and order that is inevitable.

Failure to address these issues will ensure that the House of Saud is replaced by an extreme Islamic theocracy. This will not be good for either the Saudi people, or the oil-based economies.