Citigroup - the spiral of lost confidence

Citigroup's shares suffered during the week, as investors showed increased nervousness about the banking group's ability to weather a downturn. Vikram Pandit, Citi's chief executive, may have a point in blaming Citi's recent share price falls on false rumours and scaremongering. However, at the moment, rumours and fear can change a company's financial position overnight. If enough people think you are in danger, then you are in danger.

One day, a famous man was walking in Wall Street when a rumour spread that he had fallen over and knocked himself unconscious. Everyone rushed into the street to see what had happened. The man was knocked unconscious in the scramble to see what had happened to him. Whose fault was that?

Why is spending the answer?

At the moment, the answer to the current financial crisis proposed most frequently is to stimulate spending with financial incentives to the public.

Just yesterday the Chief Executive of JC Penney in the States called for the new U.S. administration to step in and help boost the amount consumers spend. He said that people are not spending because they are 'concerned about the lack of visibility to '09 and beyond'.

He has identified an important problem - lack of certainty, lack of visibility of the future. But the solution should match the problem. Short term financial incentives may simply add to the uncertainty by destabilising the economy once more. Perhaps we should stop trying to give short-term stimulation, and think more over a ten- or twenty-year time frame.

In a crisis, it is the constant change, constant attempts to revive in the short term, that are exhausting, and stop the wider world from functioning. To enter a period of good, extended recovery, we first need to accept that some parts of our infrastructure may not recover in the short term. Then we need to identify a long term plan to make the most of what will be left. We are spending a lot of time hanging on to what is gone, what is spent. Let's start from where we are. The beauty of crisis is its ability to create something new.

Let's stop trying to reverse autumn by sticking leaves back on the trees. Spring comes without our desperate help.

Why has Vodafone changed its strategy?

Vittorio Colao, who has been Vodafone's CEO since July, has announced a change in strategy to focus more on two key goals: cash flow generation, and operational execution. The opposite of these two is: using up cash, and failure to deliver on operational promise. In the last decade, Vodafone has been on a sometimes cash-hungry acquisition and expansion path, whilst sometimes failing to deliver on the original promise of those acquisitions, particularly in saturated parts of the European market.

The old strategy seemed appropriate in an expanding global market where market share and global presence matters. However, it always needs to be balanced against the availability of cash in the financial markets to fund that expansion. And it is here that Colao's change in strategy has its root. Global investors have stopped buying the future, and want to see performance and cash results now.

Indian suicides

Recent reports have suggested an increase in financially-related suicides in India. For example, a Mumbai couple last month killed themselves by poison after their son and daughter had hanged themselves. The family had at least 73 credit cards, and the children had a bank loan to start a new business.

Unpleasant stories, but with a very real human point. One of the worst aspects of being in financial trouble is the inability to see a way out. Those who are proud may see bankruptcy as humiliation. But equally, they may see it as impossible to earn their way out of a crisis. In the coming year, we would do well to adapt our global culture to allow a responsible, socially-acceptable path to rehabilitation for those caught in impossible situations.

I suggest that when a person or business defaults, a bank threatening action should be legally required to offer a referral of the defaulter to an independent agency which can represent them and offer them alternative courses of action. This would remove the aggressive one-sidedness of the default process, and perhaps lead to fewer emotional casualties.

Will the U.S. soon have an interest rate of zero?

In the U.S., the interest rates set by the Federal Reserve get lower and lower. They may even hit zero at some point (probably only for very short periods of lending). This means that they would be allowing banks to borrow over time, at no cost.

Apparently, the U.S. government would be willing to take the risk of lending out, without hope of any return to compensate for the risk. The theory is that the stimulation to the economy - in the medium term - outweighs the risk to the government in the short term.

Rates to businesses would remain above zero, because banks need to operate at a margin to make a profit.

The more risk the U.S. government takes on, the more it intertwines its fate with that of the economy it oversees. And the more vulnerable it becomes to anyone who wants to disempower it by financial means.

Why was VW the world's second most valuable company yesterday?

On Tuesday, VW briefly became the world's second most valuable company in terms of market capitalisation (share price x number of shares).

A number of hedge funds (risky funds) had bet on a fall in the share price. These bets took the form of an agreement to borrow VW shares, sell them immediately at the current price, and then buy them back again at a (hopefully) lower price before giving them back to the lender. This is a process known as 'short selling'.

However, when Porsche revealed it had a larger stake in VW than expected, the price of VW shares rose. The hedge funds all became desperate to buy back the shares they had borrowed before the price rose too high. The demand for the shares meant the price rose by 82% in a day.

This leaves some hedge funds having sold their borrowed VW shares low, and then having been forced to repurchase the same shares at a value up to 82% higher in order to 'close their position' (escape from the deal).

For many, it's hard to have sympathy for the loss-makers. Yet short-term investing is akin to betting: perhaps the kind thing would be to offer the fund managers (or their computers) a spell with Gamblers Anonymous to treat their addiction.

Why are the markets so volatile?

Think of how you behave when you are uncertain or under threat. It's very hard to retain a sense of perspective. If you are a family or a football team under pressure, you may well become a little paranoid about your team members, and super-touchy about each event in the outside world. Think how your heart jumps when you are anxious and your mobile phone rings. Irrational, but understandable.

There is a strong urge at the moment to do what the group is doing, to hide behind everyone else's combined opinion. But investors, as a group, are not necessarily being particularly rational. A number of companies, which provide essentials such as food, are reasonably financially healthy, and may survive quite well. Yet their shares are still lower than reason would expect, because we cannot get rid of an overall sense of fear.

Some investors may soon choose to step across the line and decide which companies have a good future after all. They may make some money by getting in early. But this is not investment advice. Make your own decision!