The Financial Tsunami heading for the City of London -Letter to the Prime Minister

Prime Minister (via email to 10 Downing Street)

I realise that you and your Chancellor are struggling with a few home problems but I am alerting you now to the Financial Tsunami that is currently brewing in the Thames Estuary and heading straight for the City of London that could well lose you the next General Election and provide fodder to the pro-EU brigade who think that jobs can be created through ruthless regulation that satisfies no-one except swathes of legal buffs working for the super regulator and overseas banks that to date have a very poor record of job creation in the UK.

The crux of the problem goes back to your predecessor and the mid-80s when a certain Mr Parkinson did the rounds in the City and decided with the support of your party's Cabinet at the time to strip away the franchises of the many British partnerships and allow banks to compete head to head in securities operations presumably in the name of job creation and better marketibility. I don't intend dwelling on the marketibility issue only to say that recent financial press comments concerning High Frequency Trading and a re-examination of Glass Steagall Act in US leads me to the conclusion that the creation here of multi-faceted financial institutions has been a big mistake and should be reversed asap. Furthermore the untold damage that excessive regulation has done to the City and the UK's prospects viz-a-viz to act as the protector to British business and job creation has been lamentable. Your late father, a respected stockbroker, may well have mentioned to you that 100s of British stockbroking agency partnerships have been shut down due to the FSA and its predecessors but how many people in the City care about the effect that this has had on brokers and their clients or indeed the market as a whole and british business interests? Far too much focus is made on the City success stories but I'd like you to consider briefly the damage that investment banking and derivatives trading in particular has done to British business. I can assure you that one day economic historians will consider the last decade and what we are about to witness as the final nail in the coffin of London acting as a financial trading centre for the UK economy and its outposts in providing a fair and efficient market place for the raising and managing of capital.

I am of course referring to the FSA doctrine known as the Retail Distribution Review which will undoubtedly put between 3,000 and 30,000 advisers out of business and damage for ever true independent advice. But let me enlighten you further. As you know one of your party's main areas of focus is in small business finance (AIM, Plus Markets and Private Equity, etc) but by stripping out independent brokers and IFA's from the equation I think that AIM and small company investing could well get extinguished as FSA is intent on reworking the definition of 'Risk'. The Treasury Select Committee has called for the delay of the RDR but in my view it should be halted now before untold damage is done. Of course, I have an interest in this viewpoint as I am one of the 3,000 or so experienced stockbrokers who are being forced to go back to school which I find a total liberty. The way that many of us are being treated here is all good news for the banks and new age 'wealth managers' who are more intent on collecting their fees than giving a bespoke investment service.

I realise there are perhaps bigger problems to consider for your Government at this time but consider the implications here. The credibility of your party as well as the future of the London Stock Exchange is at stake too. Independent advisers have already taken alot of punishment from 'Big Bang' and regulation. Please use your common sense to put a stop to this nonsense that is the RDR before more untold damage is done because the consequencies for Britain are severe if this doctrine is allowed to be passed through without any proper analysis. I regret that the FSA,LSE, CISI & APCIMS have failed on all counts so far.

Yours

Richard Hoblyn FCSI

The SPUTNIK MOMENT is nearly upon U.S.

To coin the phrase used recently by the reputable US bond expert at PIMCO their CEO Mohamed El-Erian (whose colleague Bill Gross is perhaps more familiar to most of us)when he described the US AAA downgrade (to AA+ by S&P in case anyone has forgotten as S&P have received unprecedented stick for their rating change sometimes from their peers such as Moodys and Fitch, unbelievably) as the 'Sputnik Moment' for markets and the US dollar I was reminded of the fact that it was Obama himself who coined the phrase originally during his 2010 State of the Union address whilst describing how China had possibly overtaken the good ol' USA in many departments. Nevertheless the knee jerk bounce from the lows earlier this August suggest that even PIMCO got the timing of the Sputnik Moment wrong as the thrusters possibly got closed down before launch. THE SPUTNIK MOMENT IS NEARLY UPON U.S. though!

The bounce from FTSE100 which had declined from under 4,800 within the last few weeks to the current maddening 5,336 is clear proof that casino markets need curbing as prescribed by William 'Bill' Cohan at Bloomberg who this week appeared on his channel suggesting 3 areas of major concern, They were namely 1.taking the publicly quoted brokers back to partnerships allowing for proper capital investing 2. closing the casino by relooking at Glass Steagall Act and splitting the firms investment banking operations away from their principal trading operations (High Frequency Trading in essence needs to be curbed) & 3. cutting the reward culture (salaries & bonuses) by at least 50%. Unfortunately it's unlikely that any of these ideas will succeed as the power of the culture as imbibed by the likes of Morgan Stanley, Goldman Sachs, BofA Merrill Lynch, JPMorgan, Citibank & countless others is just too entrenched. But Cohan is 100% correct of course. In UK market the 1986 Financial Services Act is largely responsible for the dissection of the UK economy by investment banks working in cahoots with hedge funds & PE houses often financed from within the commercial areas of these banks. Regrettably profit is getting in the way of fair and just capitalism which is why I'm so concerned about crass M&A as has occurred by example in the takeover of Cadbury Schweppes and countless other business some of whom have got caught up in Private Equity deals that look almost too good to be true (EMI, Boots, etc, etc).

So with the Sarkozy Merkel meeting this week having gone down a treat with the neo-socialists who believe that the way to fix the EU is to subscribe a transaction tax on anything that moves it would appear that capital markets especially here in Europe are playing catch up with reality. I've seen just about every type of INVESTMENT EXPERT appear on B'berg, CNBC, BBC etc to suggest that "EQUITIES ARE CHEAP" that I'm half expecting Mr Blobby himself to leave the Oval Cricket Ground this Thursday to do a market commentary along the same lines. Custard on his face of course. Single digit p/e blue chips are just around the corner Gentlemen!

It seems to me that with chartists making stark warnings about the directions of bonds, currencies and equities I think the only way ahead is to purchase the odd krugerrand and buy the occasional gold share for the eventual gold share frenzy that will ultimately prevail here. Unlike dot.com which imploded spectacularly on promises of airhead valuations the gold boom around the corner could make the old Poseidion stories look rather unimpressive. Of course there will likely be the occasional Bre-X debacle along the way BUT I doubt our friends at North Collonade could even spot a pigeon across the River Thames at the moment as they focus on extinguishing independence.

Stand by Canaveral with your binoculars Ladies & Gentlemen please! Get your tickets for the Sputnik moment.....

What Level Are You At Mr Sants?

Open Invitation to Mr Sants To Respond To This Question-------------------------------------------------------

Although I don't expect a reply from Mr Sants personally at least I'm going to attempt to bring this QUESTION in to the open.

Like many operators in the securities industry I first learned of RDR from my firm in late 2009 when challenges and stipulations started being made about our abilities to give advice and trade in a business that as it turns out I feel that I have been part of since I was around 5 years old when I first bought shares through my grand-father (26 shares in Rio Tinto Zinc) in 1962 via Hoblyn & King, Stock & Share Brokers. Since 1980 when I joined the old firm of Beardsley Bishop I have done around 40,000 investment trades on behalf of individual investors and I'm pleased to say that so far not one single investor has made a complaint about my investment ethos, my attitude to risk pertaining to their affairs and throughout every trade has been settled satisfactorily. One of the interesting aspects to the debacle known as the Retail Distribution Review is the concept that all advisers sell "Product" or plurally "Products". This may be the case for many advisers (IFA's & bankers maybe) selling schemes, investment products (or packages) but I fail to see how stocks and shares can be classified as such. For clarity "s&s" are instruments NOT products Mr Sants! Like many instruments (think of fishing rods or horse reins) they do NOT necessarily require 'advice' to use or transact. By now Mr Sants you have probably switched off or passed this INVITATION to your laborious sidekick who whilst responding to a client (who in fact wrote to you personally) recently suggested that INTEGRITY can be obtained through EXAMINATION. This is another example of nonsense eminating from the corridors of North Collonade. Most private stockbrokers like myself like to think of ourselves as 'guides' in assisting investors (we call them 'clients' whilst many elsewhere have 'customers' and it's clear FSA only supports the notion of 'customers') in buying and selling securities ("s&s"). Essentially we are bookies suggesting to racegoers from time to time the timing of when to get on or off the proverbial 'horse'. We give opinions and rarely trade on firm 'advice' as 'suggestions and recommendations' are the market norm in what is a always a moving environment. Sadly we have no products to sell which is why I feel that the Retail Distribution Review is so sadly misaligned under a cloud of miscomprehension. The sheer title of this doctrine suggests that there is a wholesale attempt to pass off 'products' to unassuming 'customers' (RETAIL) across the entire market. As you can gather Mr Sants I'd like to challenge this assumption as well as FSA's incisive appetite along the lines that the PUBLIC that you profess to represent are demanding for a new world order in British financial 'advice'. I've been told by peripheral people (there are too many) in the industry that I am deemed to be at Level 3 for purposes of RDR but before responding to this claptrap I'd like to ask you again, WHAT LEVEL ARE YOU AT MR SANTS? You see I think this question is a worthy one. It seeks to get to the root of the problem. A problem as it turns out that might just be of FSA's own making. There is miniscule evidence to suggest that private investors dealing directly on the exchange or their brokers have been responsible for the credit crunch and yet those responsible for creating products and selling them on to investors (did I mention synthetic derivatives products being sold by the likes of JPMorgan & Goldman Sachs?) are conveniently being let off the hook by a regulatory process that has clearly got its knickers in a twist. Have you answered the question yet Mr Sants? Of course NOT! After all you are a regulator and answerable to no-one NOT EVEN the government that you pretend to represent. You do as you please and direct operations along with your many chums who have vested interests in the RDR doctrine. You pay yourselves large salaries, obtain large fees from the banks and participate in large bonus schemes. You see you are just like the investment bankers really that you pretend to admonish. Have you decided yet? WHAT LEVEL ARE YOU AT MR SANTS? You don't appear to understand the question do you Mr Sants? Well, let me rephrase it, WHAT IS THE LEVEL THAT YOU HAVE DEEMED TO HAVE ACHIEVED AS THE CHIEF REGULATOR IN UK? The answer is NOT CEO of FSA by the way. I'd like to hear WHAT LEVEL ARE YOU AT MR SANTS? Of course you can't tell me because there isn't a LEVEL is there Mr Sants? Just in the same way I can't explain why I can't remember ever achieving the RDR levels of 1, 2 or 3. What are they by the way? I can't help feeling that there's a rotten piece of a pigeon at all levels. Can you explain to me in your succinct language how I've achieved Level 3 please Mr Sants? You see I don't see that I can have achieved even a Level 3 without any form of submission, examination and/or invitation. LEVEL 3 is one of the great mysteries of my life in the City of London. I just can't get my head around a process that deems me worthy of proffering advice one minute and at the very next holds a loaded revolver to my head, presents me with a large bill and expects me to take an exam so that I can place myself on a pedestal only to see the legs sliced on a regular basis. Call me a cynic Mr Sants but I suggest that someone is after my business.

Oh by the way I did PASS the CISI Integrity test online and was pleased to see I obtained a B grade. I'll have another go very soon, pay the £20 application and let you know if I can press the wrong button to achieve the A grade pass. After all I wouldn't want to find that the pedestal legs have reached the ground just yet.

Think before you blink...is the market expensive or cheap?

I've been asked by several people since Thursday what is the best thing to do in these markets and in my experience the best thing to do is to stick to one's strategy and focus on one's own stock picking skills. This morning the FTSE100 touched 4,791 at the low and in my view this was precipitous territory. Ignoring the market for a second it's clear that the UK has entered a 'Dead Zone' with little prospect of real growth or significant shifts in employment.

Last night I watched a BBC documentary entitled "Great Thinkers" and I would recommend everyone to search and locate this superb analysis of economic doctrine on their i-Players or whatever system they have. In the left corner was the former Hoblyn & King client, the one and only John Maynard Keynes, generally regarded as the greatest economist of the 20th century and one who believed in applying more oil to the system. It seems that Ben Bernanke, the Federal Reserve Chairman, is a fan of Keynesian theory which admittedly may have worked for the good of all 'socially liberal' economies since WW2 but seems to be failing miserably at the moment. It seems that applying Keynes principles in the current dire economic scenario is sheer madness as unemployment is already high and increasing against a potentially disastrous tax hike across western democracies. The other corner had two men, both of whom seemed to be supporting the more sensible Austrian school as prescribed by my old friend Ludwig von Mises. They were Nobel Laureate Friedrich Hayek and the esteemed american economist Milton Friedman. Both seemed to be suggesting that the best fate for capitalism is to free up markets, cancel out as much bureaucracy as possible, and allow the markets to evolve spontaneously.Thatcher started in the Friedman camp but her lasting legacy could well be the introduction of REGULATION in 1986 and the abject failure of the privatisation schemes that have burdened tax payers with inefficient monstrosities. We all know where this has led us to. The UK is now on the proverbial garden path.

So back to present day markets. It's interesting that not one single analyst nor indeed securities firm other than Deutsche Bank really prepared investors for the global sell off over the last week. DB suggested that failure within EU could extinguish 35% from equity valuations and on this basis there's some way to go from here. Despite this mornings rally on FTSE100, it's now 5,081 I think that one can expect S&P to continue downgrades of US municipal debt (over $2 trillion of debt) and possibly France too from its AAA status. This event alone would set the cat amongst the pidgeons.

My strategy therefore remains. Stay LONG of oils (despite their short-term softness), stay LONG and increase exposure in global Precious Metals stocks (Randgold alone has remained resilient in London at over £60 now 6140), retain HIGH cash positions, avoid banks (there's likely to be a bank failure at any moment in Europe), hord Krugerrands and any gold/silver, pick up selective blue chips (Glaxo now 1213p, BAE 253p, SBRY 283p, RDSB 1889p) and especially some of the listed investment trusts which appear to be the best way to play UK equities. In essence GOLD is going much higher and if I had to give Mervyn King one piece of advice, I'd forget about the gilt market and focus QE3 on buying back some of Brown's $280pto gold positions before it's too late. The new world order (after Obama & Sarkozy that is) will demand some sort of pseudo Gold Standard and it's evident that many countries already recognise that their currencies need some backing from Gold. The pound certainly needs the same.

So the markets are cheap if you're in the Bernanke camp and arguably expensive if you're NOT.

The US AAA downgrade to AA+ and what it means for markets

T1Ps comment which mirrors my own review comment end June;- “Last week gold shares were sold lower as gold soared? Madness? Yes. But there are a lot of folks out there who were whacked by the general meltdown and just had to sell anything they could to cover losses and margin calls. So gold stocks fell with the market. But the speculators will be cleared out at some stage (soon we think) and with gold stocks trading on crazy multiples they must move ahead very sharply indeed as gold continues to climb.”

With GOLD trading sharply higher ($1,710pto + $40) on US debt downgrade (to AA+) it’s clear that investors are entering the ‘Dead Zone’. That is that the prospects of any real growth hereon for western developed economies just took a turn for the worse. Although the downgrade by Standard & Poors has been expected for quite some time the immediacy of the downgrade on the back of the Obama debt extension debacle has surprised a few. The leading Chinese credit agency Dagong has already last week lowered US debt to A from A+. Buffett’s view that US should be on quadruple A just shows how out of touch even some sophisticated investors are to the outlook for US and Europe. In my view we can expect other credit agencies such as Moodys & Fitch to downgrade US debt hereon but I think the real rumblings are in the EU with Spain, Italy and now France on the danger list. In essence the Euro is a ‘dead parrot’. It is deceased. It’s only a matter of time before the ECB finds itself diametrically misaligned with markets and I’m sure downgrades will follow. France could be the real surprise that shakes the tree and it’ll be interesting to see whether Europeans politicians can respond in a timely and efficient manner. I very much doubt it. The absurd stampede into US Treasuries and European bonds as well as the support for busted flushes in the Eurozone (just let these banks go to the wall, none are lending so just put them out of their misery) is absolute madness. The only sound investment here is Gold and it’ll be a while before general equities should be considered as p/e’s are still too high in my view. Others see things differently but the risk scenario to the downside has just taken a new turn with huge market unrest likely to erupt hereon.

ALL clients should reassess their attitudes to risk noting my continued recommendation to consider a 25% weighting in Gold shares. The risk and market landscape has literally changed this weekend. Gold will now likely reach $2,000pto ++ possibly by xmas (2011) and treasury and bond yields could well see some sharp rises once reality sets in.