This will see small companies, whether on the main market or AIM, offered the chance to pay £10,000 for a year’s worth of independent research prepared by one of three firms, Argus Research from New York, Chicago’s Pipal Research and our very own International Investment Research Plc.

Naturally I am pleased to see the LSE at least acknowledge that the share prices of small companies often bear no relation to the performance of the business itself, and that this is a real concern not only for investors but also for the many small companies that want to be able to issue new shares at a fair price.

But will this new measure really offer ‘huge value’? After all independent research is not new.

Filling the gap

In the old days a company’s stockbroker was responsible for writing research notes, partly to inform the market and partly to drum up some business for itself. Finding that the illiquidity of small companies defeated this latter purpose, many stockbrokers have simply abrogated this responsibility to the disgust, I might add, of many of their clients.

Into this gap have stepped a number of independent research houses such as Edison and Hardman that will write research notes to order, for a fee of something in the region of the £10,000 that the LSE is charging for its new service.

Nobody, of course, really believes that this research is truly independent. The researcher will be briefed by the company, and the research note will be vetted before it is published. If an ‘independent’ research firm has ever thanked a client for the commission by publishing a sell recommendation, I haven’t seen it.

The new venture sounds slightly different. The research note will be written by one of the three appointed firms ‘on a pre-determined allocation basis’ which I assume means that the company itself does not get to choose which of these three it will be. And ‘the research will consist of comprehensive factual information and analysis’ and ‘will not be investment advice and will not make recommendations.’

This immediately raises one question. Will companies be prepared to pay £10,000 for a research note over which they apparently have no control, and which does not conclude with a recommendation for the shares? A second question concerns the contents of these notes.

Apart from ‘comprehensive factual information’ we are promised that ‘the research providers have agreed to share common methodologies and produce reports that follow a uniform presentation format, in order to facilitate cross-company and cross sector comparisons by investors.’

Some bright spots

I like the sound of a common methodology, although I wait to see how this will enable us to compare the merits of, for example, an oil explorer and a software provider. But how much new information will these notes bring to investors?

The basis of the LSE’s initiative is that there is a lack of information about small companies; that more information will mean that more opinions are formed; that more opinions will lead to more trading in the shares; and that the result will be a more accurate pricing of small company shares.

However, there has been a massive increase in the amount of information that is available to investors in the last few years – but it seems to have done very little for the pricing of small company shares.

Whereas two or three years ago it could be quite hard to get hold of information about small companies, today just about each one has a very comprehensive web-site, featuring a description of its activities, past copies of annual and interim reports, biographies of the directors, and sometimes broker research notes. Indeed, my very own articles from Red Hot Penny Shares have been known to appear on company websites.

So companies have made a big effort to inform the market and if it has had no effect it can only be for one of three reasons. Either very few people are actually reading it – as I am sure is the case. Or the huge increase in the number of small companies trading on the LSE has simply overwhelmed the market’s capacity to absorb all that it should know about them – which I also think is the case.

Or people have been reading this information, but simply don’t believe that it tells the full story.

It is of course inevitable that companies do not publish negative information about themselves, either via a corporate website or via a note written by an ‘independent research house.’

What intelligent investors really want to see is an informed assessment about a company’s product written perhaps by an industry specialist, and a suitably cautious and sober assessment of its position vis-a-vis competitors.

If these newly appointed research houses can provide these perspectives they could make a useful contribution. But the old problem remains – will small companies be prepared to pay £10,000 for a note that draws attention to their weaknesses? And if not, is it worth having these ‘independent’ notes written in the first place?
Regards,

Tom Bulford
for The Penny Sleuth

Source: The London Stock Exchange Listens to the Sleuth

Take this one…

According to “new analysis” from mform.co.uk, those still mad enough to want to get on the housing ladder but finding it hard to do so “can still beat the credit crunch by teaming up” with their friends, siblings or even (via websites such as sharedspaces.com) with complete strangers to get a mortgage.

It seems that up to 42 home loan providers, i.e. around 46% of lenders, ranging from regional building societies to major names such as Abbey, HSBC, Woolwich and Cheltenham & Gloucester, are still allowing multiple borrowers to apply jointly for a loan, with four people the typical maximum. And amazingly, some lenders set no limit on how many people can make the application, says the online adviser.

We hope that anyone tempted to join in such an arrangement exercises more common sense than this mixed bag of loan providers. When everything was going well, there might have been a tenuous case for jumping on the ‘property ladder’ using the multiple application route – even if based on the greater fool theory that there’s always someone more stupid who’ll pay a higher price. At least if it all went wrong the shared space in question could have been flogged to a greater fool fast.

But now, as house prices have started to tumble…forget it! The moment that negative equity raises its ugly head how likely is it that one-time friends, let alone strangers, are going to agree to remain trapped together in a starter home? Just watch those payment defaults rise and forced sales start to mount.

And who will be the winners in the battles about when to sell, how to sell and who owns what? The lawyers, of course. Though any applicants for this kind of mortgage won’t be the only idiots in the deal: the fact that such schemes are still being touted shows that too many of our big lenders still haven’t accepted the fact that house prices are heading south in a big way, for a long time.

How to chuck the UK’s financial credibility out of the window

That is, of course, assuming the economy isn’t bailed out with huge doses of extra liquidity. The next scary story comes from Peter Spencer, chief economist of Ernst & Young’s Item Club. He’s just warned that the Bank of England will “crucify” consumers unless the Treasury lets it abandon its current 2% target for the consumer price index (CPI).

If the 2% CPI target stays in place, interest rates won’t be able to fall, the Bank won’t be able to pump any more cash into the system to bail out the multiple application nitwits and Britain, says Spencer, will face an unnecessarily deep and painful economic slump.

According to the Telegraph, Professor Spencer feels that controlling the volatile elements of the CPI is too big a task for the Bank. So it should instead be left to focus only on “core inflation”, which excludes volatile (read rising) items such as food and energy prices.

This might sound compelling – and it would certainly make the Bank’s job easier – but it isn’t. This wouldn’t just move the goalposts but relocate the whole pitch somewhere else.

That doesn’t mean it hasn’t been done before, of course. It has. Only in 2003 did the Treasury alter the target from RPIX (the Retail Price Index excluding mortgage interest payments) to the European-harmonised CPI, which doesn’t reflect housing costs.

That caused trouble enough – it set the stage for the low interest rate environment, the personal debt crisis and the house price bubble of the last few years – but to change the target again would be to just chuck what little financial credibility the UK has left out of the window. As it is, long-term index-linked bonds now imply that CPI’s heading for 3.7% and staying there. We might as well give up any pretence of trying to maintain the value of pound sterling right now.

The answer to the dodgy debt problem: rig the prices

And talking of value, here’s today’s final shocking story. Remember all those bankers who blew more billions than most people can imagine on a load of bets on dodgy debt?

Well, their spokesmen have come up with another wizard wheeze. And this time it’s to do with something called ‘marking-to-market’, in other words, the system of valuing any assets they hold at prevailing market prices rather than at their cost price.

The Institute of International Finance (IIF), whose board comprises 20 Western institutions including most of the biggest losers in the crisis, says that while marking-to-market as a system has “generally proven highly valuable”, it isn’t any more. Instead it is responsible for creating a downward spiral in asset prices.

So the IIF wants to do some of its own goalpost shifting, proposing that, in “disrupted markets”, banks should be allowed to value instruments using their own models or at book value. The IIF wants “stable valuations” that “increase market confidence”. It also wants lenders to have the flexibility to move assets from trading books onto banking books, where mark-to-market rarely applies.

In short, the IIF thinks that market pricing is far too basic for the titans of high finance. So they want to ignore the market and its unstable prices, and to be able to value their mistakes at whatever figure looks best. Unbelievable! We’ll be keeping an eye on this one.

Source: Three Shocking Examples of the Financial Plight We’re In

Floating out Fresnillo, the world’s largest primary silver producer, Penoles is valuing the subsidiary at a whopping $4bn.

The logic is that analysts prefer simple stories rather than trying to evaluate multiple-asset miners. Fresnillo contains just the group’s major precious metal operations. The Penoles structure, which survived 120 years of revolution and crises, is being dismantled to suit 21st century investors.

This IPO is deemed to be a success for London. Commentators are saying that Fresnillo’s launch in the City is part of a shift in corporate Latin America. Instead of using Madrid or New York for its capital raising, these guys are coming to London.

Of course, the London Stock Exchange (LSE) has worked hard to cultivate links with Central and South America. There’ve been loads of road shows extolling the virtues of a FTSE or Alternative Investment Market (AIM) listing. The LSE has met chief executives in Sao Paolo and Lima. Further road shows are planned in Chile and Argentina.

Hochschild, a Peruvian silver and gold miner, became the first Latin American company to float in London for a century when it listed in November 2006. Fortunately for the LSE’s marketing drive, its shares have since risen 20%. Andrew Wray, at bankers JP Morgan Cazenove, said: “New York used to be in the backyard for Latin American companies but they are increasingly turning to London, particularly resources companies, as so many others are listed here.”

The IPO is a success for its parent

The IPO seems to have been a success for Bailleres, too. Penoles’s shares jumped 8.14% on the Mexico City bourse to 346 pesos a share following news of the spin-off.

Fresnillo sold about 23% of its shares in London. It was hoping to raise around $1 bn in total. In the event, it brought in around
$900 m, but plans are to sell a further 2%.

Anyway, the company is large enough to move straight into the top London share index, the FTSE 100. The remaining shares will be held by Penoles.

Penoles’s precious metals division produced 34.4 m ounces of silver last year and a further 280,000 ounces of gold. It is Mexico’s second largest gold producer, with a turnover of $648 million.

The new company is named after its largest mine, in the Zacatecas region of central Mexico. Fresnillo also has a gold mine in the Sierra Madre mountain range of northern Mexico and another in central Mexico.

The money raised from the share placing will be used to pay off debt, finance the expansion of the Fresnillo mine and develop three other mines.

CEO Jaime Lomelin said at the IPO press conference that Fresnillo will ramp up annual production of gold to 400,000 ounces and silver output to 60 million ounces. “We have a lot of projects in the pipeline,” he told reporters.

Continues below

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Weaker metal markets took off some of the shine

Understandably, Fresnillo is forecasting that silver prices will stay high. Chief financial officer, Mario Arreguin does, however, expect “increasing volatility.”

His words might equally apply to the share price. The stock opened on the London Stock Exchange at 530p, touched an intraday high of 539.5p and hit an intraday low of 502p. The shares then closed at 520p, a decline of 6.3% from the IPO price.

Analysts said the fall reflected the recent retreat in precious metals prices. They also thought there was a lack of appetite for new issues after Czech coal miner New World Resourcesraised £1.1 billion pounds with an IPO in the same week.

But BlackRock fund manager Graham Birch, a big name in precious metal investing, hastened to defend Fresnillo’s virtue. He told journalists that he had bought shares in the IPO and was confident they would perform well over time.

“I think this is a really excellent company. We’re very pleased to have it in our precious metals portfolio,” he said.

Silver is certainly a way below its peak. It is around $17 an oz, having crossed the magical $20 line in March. Kitco, the precious metal commentators, share Fresnillo’s view that the price will remain volatile. They expect it to revisit $15.50 an ounce at some stage.

At the moment, however, chartists reckon the price movements are looking good. The 200 day moving average is on the up… an excellent sign!

The case for silver shouldn’t fade

Analysts GFMS believe that as long as gold prices remain strong, the case for silver investment will not fade.

They expect the rally to continue at least to the end of the year, and quite possibly into 2009. So, they see silver investment demand and price strength persisting.

More importantly perhaps, since investor sentiment can turn on a speck, industrial use of silver is still rising. Electrical and electronics fabrication accounted for the greatest increase.

So, keep mining.

Erin and Isabel

PS Make sure you don’t miss out on getting all the latest industry news in one daily hit with a brand new free eletter from Fleet Street Publications.

Source: The Case For Silver Investment Should Not Fade