Lloyds must make a decision

The former's share price has taken a pasting since the proposal was announced — much to the discontent of its hard-core loyalist shareholders — and the HBOS share price is back in the depths at barely half what Lloyds TSB agreed to pay for it.

What we cannot tell from this is whether the Lloyds shareholders would prefer the deal did not happen at all or whether they simply want the price for HBOS to be renegotiated down to zero.

The root of the problem is that the market mood has changed; a much darker view is being taken of bank valuations. As a result, last week's price is not this week's price.

Lloyds TSB may not like to be reminded of it, but the bank has form in this area. Back in 1987, TSB, awash with cash following its successful share flotation, launched a bid for a merchant bank called Hill Samuel.

The proposed bid was around 800p a share. Then came the 1987 crash which in effect cut all share prices in half and reduced Hill Samuel's price to around 400p. Everyone assumed TSB would either pull out or renegotiate a lower offer. Instead its then boss, Sir John Read, decided he would not only see the bid through but would do so at the old and now impossibly high price.

Naturally, Hill Samuel shareholders rushed to accept . But TSB's credibility in the City was shattered and faith in its management was permanently impaired. One would not want something similar happen to the current Lloyds TSB management. But it needs to come off the fence.

The bank must either seek to lower the price at which it will buy HBOS or it must work much harder to persuade people to accept that the initial proposal represents good value. Its continued silence suggests it is really not sure which way to jump.

Trust Alliance for the long term

It has always seemed to me that investment trusts are the perfect vehicle for private investors who feel they should be invested in stock markets but don't want to try to do it themselves.

Buying a trust gives them professional fund management but at a low cost so that if they do make a profit it does not all go in charges.

It is also a flexible investment model, one which can build up cash in difficult markets and borrow additional funds to invest when times look good.
The disadvantage is that such trusts normally trade at a discount to their asset value.

This is not a problem in itself provided the holder is able to ride out the cycle and wait for market sentiment to improve. But a widening of the discount can temporarily undo a lot of good work by the fund managers. The fund can have done well but the performance not be reflected in the share price.

This indeed is what has happened at Alliance Trust, one of the biggest and oldest in the business, which yesterday announced results for the six months to the end of July.

Its asset value has fallen, of course, but the decline is only 4.8% against an 8.4% fall in the FTSE 100, a much better performance than one generally gets from fund managers running pension schemes.

Alliance's own shares have fallen in line with the market so the discount to asset value has widened.

It is hard to tell anyone that now is a good time to buy; they tend to look at you quizzically, then send for the men in white coats.

But those who believe, like me, that we will get through this period and that the world will not come to an end, could do worse than think about Alliance.

It may take a year or two, but this business has been around for well over 100 years.

It has already survived two world wars and the great depressions of the 1890s and the 1930s. You have to believe it will get through this one too.