Under the squeeze
JOHN BULL
Down go equities, now 30 per cent below the peak reached six months ago. Down also go some well known companies, first major casualties of the fiercest credit squeeze since the war. I refer to Klinger, which in the past few days has called in its bankers and its major shareholder and supplier (tct) to discuss ways of making good its shortage of cash and has mean- while had its share quotation suspended. I refer to Valor, which has similarly been consulting major shareholders and mer- chant bankers (the latter were called in, according to the chairman, 'to restore confidence').
I am surprised that there have not been bigger tumbles before this. Throgmorton Street, for instance, has been remarkably clear of failures over the past months. When the Australian mining market went sharply into reverse last year we crossed our fingers, knowing how many London brok- ing firms were deeply involved. But the crisis passed. We have our fingers crossed again as the London market falls faster— and further—than at any time for a genera- tion. I think the Stock Exchange Council can take considerable credit for this clean (so far) state of affairs.
From the Government's point of view, credit is still not scarce enough. Months later than expected, clearing banks' ad- vances remain above the target figure in- dicated by the Chancellor of the Exchequer. Indeed the July figure showed an increase of £40 million in loans to the restricted private sector, leaving them £65 million over the mark (11 per cent). The building industry (apart from newspapers surely Britain's least efficient industry?) is squealing. The National Federation of Building Trades Employers has warned Mr
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Iis for Increased productivity
Jenkins that the effects of the Govern- ment's credit policies are likely to be 'very severe indeed'. The builders have asked the Chancellor, if they can go into the priority list of borrowers. Well, 1 can think of some groups the banks would rather see among their priority borrowers.
For investors there is one pretty well essential routine to go through at the moment. See how much cash or cash flow, liquidity, borrowing facilities your favourite companies have got. Look suspiciously at those which appear to be short. Some weeks ago brokers were handing round lists of companies which were either illiquid or which seemed to have more money than they needed. The test used for those short of cash was the proportion of net overdrafts to net tangible assets on the balance sheet date. But you have got to use these lists carefully. For instance, among the apparently illiquid are Thomson Organisa- tion, a company with substantial secondary sources of funds; J. Lyons, which has a readily saleable portfolio of surplus property; General Electric and English Electric Companies which, according to Arnold Weinstock, can retrieve £100 million of wasted resources out of better stock control and attention to debtors and creditors; and Ross Group, which may be short of cash, but is one of the best take- over prospects in the market at the moment. Apart from the companies I have mentioned, other names which figure as `short' are Blackwood Hodge. J. B. East- wood, Racal, Dalgety, Amalgamated Metal Corporation, J. Bibby, Staveley and Bovis.
What about those companies which seem to be well off? I can best indicate the need to look at each case rather sceptically by saying that Klinger appears on this list. For what it is worth, I provide the names of the five companies at the top of the list for net cash as a percentage of net tangible assets — Charter Consolidated, Matthew Hall, Rugby Portland Cement, Slater Walker and Prestige.
It is not only government restriction of bank lending which is causing all the trouble, but also the institutions' reluctance to commit large funds to the debenture market now that gilt-edged securities are relatively more attractive (because of their special exemption from capital gains tax). In 1968 net acquisition of debentures by insurance companies at £218 million were almost double the extra funds directed into gilt-edged securities (£120 million). This year I would expect the proportions to be quite different with possibly the biggest invest- ment in gilt-edged securities for many years.
Certainly the gilt-edged market continues to show remarkable strength. In the last ten days it has shrugged off a new govern- ment loan (£400 million of Jenkins Nines) and a further increase in us Treasury bill rate (normally an indicator which London takes to heart). Fixed interest markets are partly but not wholly influenced by the slide rule men. They are also moved by senti- ment. And at the moment sentiment in London is running more strongly in favour of gilt-edged securities than it has for many months past. So the credit squeeze goes on, with no relief expected either from the in- stitutions or from the banks. Investors, watch out.
As for my portfolio, I shall now run it on a care and maintenance basis until the investment outlook brightens. Consequently, unless there are some major changes which need making quickly, I shall publish my share list once a month rather than weekly.
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