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Carillion - the lessons folks will just NOT learn from this debacle

By Tom Winnifrith | Monday 15 January 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

So Carillion (CLLN) has gone tits up. You do rather feel for its 19,500 employees but as folks work out what happens next there is an orgy of recriminations. What lessons do you learn?

1. When bears go heavily short of a stock and BBMs are keen buyers the bears are almost invariably right. The risk reward on share trading is massively in favour of the bulls ( upside unlimited, downside capped at 100%) not the bears (upside capped at 100%, downside unlimited) so bears tend to do their homework better than bulls, especially BBMs. Please take note if you own shares in Telit, IQE, UK Oil & Gas, etc.

2. Companies drowning in debt and with zero earnings visibility are always in trouble. This is compounded if there is a big pension fund deficit as was the case here. They should be avoided.

3. Capitalism is not bad but some capitalists give everyone a bad name. For instance it is surely wrong that ex CEO Keith Cochrane (no relation of mine) will be paid until October (£700,000 a year) despite having stepped down in Autumn 2017. What is worse is that under Cochrane, Carillion continued to increase the dividend while debt was increasing and there was a material pension fund deficit - and - in 2016 dividend cover was just 1.7 times.

This is reckless and rash. It is not, as Caroline Lucas the nutjob Green MP has suggested, a criticism of capitalism but of those who practice it in a reckless manner. I wonder if the law might be changed so that if companies pay dividends while running a pension fund deficit then if they go tits up, directors should be personally liable.

It is not companies that sin but individuals.

4. Folks like Lucas, the Trades Unions and the rest of the left argue that Carillion shows the dangers of allowing private firms to run State services. Yes private firms can go bust that is capitalism for you. We wicked capitalists are not allowed to rack up ever larger debts which we can never repay - that is the privilege of the state. Almost invariably the private sector is more efficient than the State at providing services so it should do so. Can you imagine any private sector firm allowing its staff to go on holiday and training jollies when it knows demand will be at its peak? Nope. But the NHS thinks that is fine.

5. The Government should not bail out Carillion as some on the left argued. It is bad enough that taxpayers will have to bail out its pension fund. But why should it save the firm too? Good contracts will be bought out by competitors ( so reducing the pension deficit), bad ones will have to be sweetened by the Government to be offloaded or taken in house. But that twin track process will see most employees keep their jobs - it is just that their employer will change. Why should we taxpayers bail out any private firm to spare the losses of mug shareholders or the banks?

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