Feelings of Regret over RBS?

I have to say I was wrong over Royal Bank of Scotland. I own some stock and supported them through the ABN.Amro acquisition. More recently I could see capital was very tight but I thought they would fight and manage to squeak through, making disposals where necessary, rather than do a u-turn on previous commitments and raise more capital, a huge embarrassment for CEO Sir Fred Goodwin. But with £5.9bn more write-offs the company probably had no choice and so launched a massive £12bn deeply discounted Rights Issue. As it turned out the capital raise was so well anticipated that the effect on the share price when it was announced was actually slightly positive. The company has now come clean and with a stronger capital base plus the option of disposals, will be better placed to move forward rather than the alternative of trying to fight with its back to the wall. Other banks may yet need to come to the market and RBS has the advantage of being first in the queue.

So I whilst was wrong about the capital situation, I was right in that the shares had recently fallen so low that almost every possible piece of bad news was already in the price. Ultimately I think the ABN acquisition will be good for RBS and create a stronger business. Whether or not it will create any shareholder value remains questionable.

Saudi Arabian Oil Capacity Reaches Limit

News today is that Saudi Arabia state they do not expect to increase oil production capacity as far and as fast as previously hoped. The Saudi Arabian Oil Minister said current production is around 9mbpd against a capacity of 12.5mbpd but he had no real intention to increase that capacity any further at least in the period upto 2020. Obviously this raises the possibility that Saudi Arabia is unable to increase production, even if it wanted to, because of the high decline rates of existing fields.

Something else: Late last week T Boone Pickens the respected Texan oilman also said he thought global oil supply has peaked and so prices are likely to go up rather than down: “There are only 85 million barrels of oil in the market every day,” Mr. Pickens added. “I don’t think you can get it above 85 million – lock that number in, and we’ll see if I’m right.”

Pabrai - A day at Work

For about a year now I've been following a sucessful US investor called Mohnish Pabrai whom has been operating since 1999 very much in the mould of Warren Buffett. I'm not going a write much about him here - you will need to read his book The Dhandho Investor or look at his website (only you will need a login from him). Pabrai recently published a transcript of his annual investor meeting which was held in September last year. There was obviously a lot of discussion at this meeting about his performance, past investments and philosophy but to me the most interesting point he made was to say a bit about how he works. You see it is easy to read up on the many investment principles but very difficult, without sharing an office with other investors, to find out how they actually work and find opportunities.

In the case of Pabrai he says he goes to work each day very much as a man of leisure and simply reads generally until he comes across something of interest. Then after only an hour or two on such specific idea he quickly decides whether or not to take it further. Somewhere else I read that he often only spends a couple of days of further research before investing.

That might not seem much to know about but is actually very useful information to me. As I sit down at my desk each day I don't really need to be there at all and unless a company I follow is reporting results there isn't anything I really need to do. Yet the possibilities are limitless - look at share prices, set up data base filters, read company accounts and brokers notes, try sector and company specific reasearch, read magazine and internet articles and so on. Once you start to look there is a huge amount of investment comment and "advice" available but the best opportunities come from digging much deeper. How to do that without being influenced by the market and journalistic chatter is key.

Incidentally the Pabrai Fund PIF3 (open to non US investors) returned -12.4% in the first quarter of 2008 after a loss of 7.8% in 2007. Naturally Pabrai focusses very much on his longer term record for this fund of an average of 15% pa since 2002. Not much different to me so I think I'll stick to managing my own money!

Quote from Pabrai I've taken from SmartMoney on how he can beat the market: "Lots of other investment managers have large teams; they have a lot more brainpower, they've got a lot more resources. The only advantage Pabrai funds have, which is why we have done better than the market, is attitude — my ability to be patient and not be swayed psychologically".

Oil Update

A couple of interesting pieces of news this week providing further evidence for a fragile global oil supply outlook. On Tuesday the FT reported the vice-president of Lukoil as saying that he believed that last year's Russian oil production of 10m barrels a day was effectively the most that would ever be produced and that Russia had therefore "peaked". Even the Russian Government admits that oil production has reached a plateau. As other oil producing regions reach maturity we can expect more stories like that from Russia, although this is highly significant because Russia had been seen as an important source of oil to supply the ever increasing demands from China.

Then today an internal report prepared for the Nigerian government highlights the risk that by 2015 Nigeria could lose a third of it's oil output unless it can find ways to further boost investment in the sector. The Nigerian situation is interesting because it shows how countries which try to take more control over their oil resources tend to under invest themselves and also have difficulty in attracting the foreign capital they need to reach full potential. Nigeria has in any case lost a lot of production because of the security situation in the Delta Region forcing Shell for example to shut down some facilities.

The importance of this factor is often not fully appreciated by those sceptical of "Peak Oil" theories such that, even if there is enough oil in the ground, the cost and difficulty of extracting it is increasing fast and whilst the high oil price should theoretically provide the rewards and incentives, in certain countries and indeed globally, there might not be enough investment and skilled resources available to make it happen.

Panic over?

I see it is now a month since my last post and a lot has been going on in the markets but I've found it hard to think clearly about where we are at. It seems the banks have now stopped panicing as if one bank had to fail on each side of the Atlantic before the bottom of the market was revealed, but now that is done (Northern Rock and Bear Stearns) the worst of the bad news from the financial sector is out.

Generally I'm going through a good spell with a recent MBO bid for Civica, bid interest in nCipher and a tug of war over British Energy which has been a long term favourite of mine. But I don't understand why confidence should start to return when bad news from the housing market and high street is still gathering momentum.

On Tuesday the headlines read "Largest house price drop in 15 years" but more significantly I read in the FT that a number of mainstream lenders have just stopped offering 100% mortgages. This surprised me for two reasons:
1. I didn't realise it had been so easy to get 100% loans! Probably on new build where developers offer incentives this means loans could easily have been 105% LTV or more.
2. It is only now some 9 months after the credit crisis hit that such lenders are withdrawing this product: still so keen to maintain market share at the expense of credit quality.
I expect there is a lot more to unwind: I am monitoring the house builders but a long way off looking to buy.