Market Commentary

Tuesday 7th September 2010

The headline grabber this morning is the unexpected appointment of Bob Diamond to succeed John Varley as CEO of Barclays in March 2011.  Mr Diamond will assume the role of Deputy CEO in October. He will be replaced by Jerry Del Messier, formerly of Bankers Trust and Rich Ricci, as joint Presidents of Barclays Capital.  This is very good news for the UK banking sector.  It sends out a strong message to government and to Sir John Vickers’s independent banking commission that the banking sector in the UK is strong and robust.  Though Bob Diamond comes from an investment banking background, above all else he is brilliant delegator and the art of good management is delegation.  He is also a bold motivator and decisive manager. If those in key positions at Barclays or Barclaycard are not delivering to the standard required, they will be quickly replaced.

Barclays Capital has contributed a minimum of 40% to Barclay’s total profits in recent years.  Barclays have had a tremendous Chairman in Marcus Agius, a thoroughly respected CEO in John Varley and a major innovator in Bob Diamond.  This now appears to be a strong bank which will hopefully take a lead in the recovery of the UK’s economy.  Three years ago the market felt that Barclays had been economical with the truth over the state of its balance sheets and its impairment charges. They were steadfast in their defence of their position and refused to enter the government ‘lifeboat’.  Although they had to raise expensive capital from the Middle East, Barclays pulled off a real coup in buying the remnants of Lehman Brothers’ New York operation for a bargain price.  Provided there is not too much of a hefty bill to pay over claims on Barclays for Lehman this could prove to be the deal of the decade.

So Labour Day is over and though it may take a few days for the markets to get fully back into action there is plenty to talk and think about. In Asia today the Nikkei eased by 0.9% at their close and the Hang Seng in Hong Kong was flat at lunch time.  So there was no follow through from yesterdays euphoria triggered by improved employment data in the US on Friday.  President Obama was in Milwaukee for a Labour Day rally. He invited Congress to give him $50 billion to build 150,000 miles of roads, 4,000 miles of rail track and a few runways. Many thought that these plans were set down eighteen months ago at his inaugural speech. Having allocated $50 billion to GM against many people’s wishes and there being no guarantee that the forthcoming IPO will be a huge success, Congress could prove reluctant to respond to this request.  Also, the lead article in the New York Times on the US housing market was desperate stuff and will have done little for the Obama cause at the midterm elections.

The following companies post results in the US today: CASEY’S GENERAL, PEP BOYS and PHILLIPS VAN HEUSEN.

HSBC was clearly not going to be muscled out of the headlines by Barclays. It was announced this morning that the Chairman Stephen Green, would be taking up an appointment in the government as Trade Minister.  It is generally agreed that HSBC is the best-run bank in the world and the UK government should beware the possibility that HSBC may relocate head office to HK or Sydney if business conditions become too draconian.  There will be any number of candidates delighted to fill Stephen Green’s boots incoluding Lord Mervyn Davies.  He ticks every box having been CEO and Chairman of Standard Chartered Bank.

We should hear further recommendations from the Ecofin and also the IMF’s views on bank taxation. There seems to be a huge variation in thought processes with France and the UK supposedly favouring some sort of tax on assets and the rest of Europe keen on a banking tax on profits to go into a “sinking fund”.  It looks as though the German banks may have to raise as much as €105 billion fresh capital if they are to comply with the Basel III rules.

Yesterday was a non-event in London with New York shut and the FTSE closing up 11 points, with negligible volumes. The British retail consortium seemed happy that back to school summer discounts sales saw activity rise by 2.8% in August, but the numbers aren’t that wonderful when one considers the fact inflation stands at about 3.8%.  We should hear from the EU shortly about the plight of Anglo Irish Banks. Will the funds be found to permanently bail it out or will it have to be sold off piecemeal?

Ocado slammed its critics with an excellent trading statement with sales up by 29.5% for the last 12 weeks, but the stock fell by 4% at the open having rallied in recent weeks. Whitbread also posted stellar numbers with overall sales for the last quarter up by 14% and like for like sales up by 7.9%.

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