Cash for Votes
It is becoming increasingly difficult to believe that Chancellor George Osborne has much idea how to get the economy back on track. Or should one say that he has not got the faintest idea?
No-one can seriously suggest that he caused the nation's economic difficulties—I think even Gordon Brown must have worked that one out by now—but it was a great pity that Alistair Darling got thrown out with the Brown bath water. Darling had some clues as to how to improve the situation without making it worse, a paradox that is baffling Osborne.
Osborne's problem is that government spending is still rising despite his protestations that reducing the deficit was the top priority. His idea of cuts is to reduce the rate at which government spending rises, not to make real cuts. Unfortunately the spending increases are not feeding through into stimulating the wider economy, so taxation is failing to keep pace and the deficit is rising.
My great fear is that Osborne will be panicked into more policy changes that will make matters worse and undermine confidence in his stewardship even further. Meanwhile the European Union is sliding backwards economically, thus exacerbating our balance of payments deficit.
There are two measures that will boost tax revenue and start to reduce the deficit. One is to force companies to pay tax on earnings in the UK by outlawing tax dodging devices. This can be done—the EU has already made clear that any artificial arrangements put in place simply to avoid tax can be banned under single market rules. At the same time, the head of HRMC, the UK tax authority, should be banned from accepting hospitality from anyone to show that we mean business.
Secondly, those wealthy people who claim to be domiciled abroad but who really live most of the time in the UK should be made to pay tax as the UK residents they are.
Both these measures would, unfortunately, alienate too many large donors to political parties. But who needs donations when such great vote-winning measures are so easily available?
Realistically it won't happen and we will struggle along in a continuing recession. The message for investors goes on ad infinitum: buy on the dips, don't chase shares higher and stick with solid, dividend paying companies.
Still Swanning Around
One of the great regrets of my financial career has been my failure to invest in WH Smith (SMWH) two or three years ago. I am a great admirer of Kate Swann, arguably the most successful female chief executive that this country has seen so far for the way she turned Smith round, but I have long been reluctant to buy High Street shares and I was worried about reports that she was preparing to step down and might be making way for a less talented successor.
In a trading update, WH Smith says both parts of its business have put in a good performance in the year that ends next Friday. The travel side, with outlets at airports and railway stations, has been growing consistently but it is particularly encouraging to see that the High Street branches have also done well.
Admittedly the publishing phenomenon Fifty Shades of Grey and the other two titles in the trilogy have provided a short term boost but Swann is still there, performing the admirable task of increasing profits on lower turnover. She clearly knows what she is doing.
Smith shares were already trading on a 12-month high before the trading update and took a further boost from the excellent news. If, unlike me, you took the chance to get in at lower levels you deserve your rewards. Stay in there and gloat.
Pass the Tarts
Compare WH Smith with Premier Foods (PFD), which made an announcement on the same day. Premier, with more than £1 billion of debts, is busy selling off anything it can offload and the latest disposal is the jam and jellies business that includes Hartley's jam, Robertson's marmalade and Gales honey.
These disposals - this is the third and largest in the series - will leave Premier all the poorer. Meanwhile the debt refinancing in March has imposed a greater burden on the remaining businesses.
The shares have lost about 60% of their value from a 12-month high of 180p but are amazingly trading at twice their low of 33p. This represents a great chance for any shareholders to cut their losses. Don't be tempted by Hovis bread or Kipling cakes. Pass the Bakewell tarts. The risks are far too great.
Market Performance (August 20-24)
FTSE 100: -1.68%
FTSE 250: -1.73%
FTSE All Share: -1.66%
FTSE Small-cap: -0.51%
FTSE AIM 100: -0.46%
FTSE Fledgling: -0.36%
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Rodney Hobson is a long-term investor writing about his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
