Monday, 12 January 2015

New beginnings and old stories . . . .

During 2010, I was trying hard to get a new hedge fund off the ground which was set up to invest in commodities linked listed instruments. It wasn't a radical idea, but we felt that a lot of investment vehicles were either too single commodity orientated or too much like existing CTA's. While we were bullish, especially on oil markets, we used always to have a slide in our presentation about possible threats to our view. One of those threats was USD strength. You see we saw oil like Paulson sees gold, as a hedge against currency debasement. The lower the USD went, the more pronounced the spike in oil. Mind you, we always noted that the Keystone pipeline, natural gas, and fracking in making predictions on price targets within the petroleum complex.

The USD is the key. Consider that countries like Saudi Arabia are almost exclusively reliant on USD's to support their economy. Their local currency is almost an economic mirage. All the Saudi's, Iranians, Nigerians, et al. care about is how many dollars they receive for a barrel of black sludge. They may as well carry around little vials of oil to exchange for their groceries. If the USD goes down it usually means fewer oil barrels per dollar. If it goes up it means the opposite. In an economic sense, you may even be better off looking at the "Big Mac Index" to get a true sense of  what that means.

Right now oil is dropping faster than the dollar is rising. That differential is because the capacity takes time to slow down or shut off completely. Something has to give. This blog has long held the view that USD was the way to play the recovery in the world's economy, and this will continue. As such oil will bottom when capacity cuts start to come into force. The Saudi Ambassador to the USA said only last week that they had no plans to implement such cuts.

Why does that matter when the Russians and the Americans produce similar amounts of petroleum? Well, mainly because the Saudis have the advantage in the lowest cost and lightest crude. That means they have the flexibility to control the supply. It comes down to them looking at how many USD's of income against a "trade-weighted index". Obviously if oil falls too quickly the Saudis will have a deficit until USD buying power catches up. That's why we're still some ways off from an equilibrium being reached. In the meantime, look for further USD strength and slowing of the rate at which oil is falling. You'll know we're at the bottom when you start to see the Saudis cutting production.

I get perverse pleasure in watching the failures of newspaper stock pickers. One of the few reasons I buy the Sunday newspaper published by underperforming media group Fairfax is to watch the performance of their stock-pickers. Last year the dart board and astrologer seemed to be forever in their top ten, which gives you idea of what type of market we were seeing. This year I'm following a "dirty dozen" assembled by News Corps flagship paper The Australian (The Weekend Australian January 3-4, 2015, page 25). The twelve "pickers" have come up with 100 stocks, so there's some overlap. As usual I get a chuckle at those participants throwing in the odd "penny dreadful" in the hope of a big percentage return. Then there's the "dogs of the Dow" type picks, where they pick "bluish chips" that are bombed out in the hope of a bounce back. Don't get me wrong, there's a place for everything, but without weights and cap parameters the average punter would be best to treat this as entertainment.

Sample from the excel I'm building to track the stock pickers in The Australian. If you want a copy contact me at IBCyclist Consulting.
So far the combined portfolios are predictably flat for the year, perhaps slightly positive. There's a few end of 2014 marks I need to investigate before publishing. The best performer looks to be Angus Geddes (Fat Prophets, +3%). Geddes looks to have picked the bounce in gold via his Newcrest (NCM.AX) pick. In addition, it gets the secondary benefit of receiving USD's against an Aussie Dollar share listing, so the more the US dollar and gold goes up, the more AUD earnings the company has.

At first I thought the worst performer was Peter Wright (Bizzell Capital Markets), but because he's chosen some speculative plays my data looks corrupt and needs modification. Thus my earlier comment about 2014 marks. One of the stocks Mr. Wright has chosen is Laneway Resources (LNY.AX), a gold play whose market cap is less than AUD 10m. In his synopsis, he said the company "boats a gold resource of more than 400k ounces". That sounds attractive, but as I have no idea of the cost to produce those ounces it's hard to make a judgement. If you're like me, you'll go straight to the company website and the associated announcements made to the ASX. As I always say: Investors need to stop research and think before buying or selling. I'll be following this "competition" all year and providing some analysis of the mathematics of the performance we see at various intervals.

Finally on to cycling. In 2014, I didn't quite reach the same mileage as I had in 2013. Strava, the sports tracking website, produces a nifty video summary of all your activities for 2014. It's very cool and another reason I prefer using Strava over other similar websites.


Funnily enough I think Strava failed to upload one ride. Garmin has me at 8817km for the year. For the record, here's my Garmin numbers:

For the record, I cycled nearly twice as many kilometres that I drove my car. Which I think is a good thing, right?


Thursday, 18 December 2014

Disruptive Lunch Series 2014 ends. Happy holidays to one and all.

Last Thursday was the final BBY Disruptive Lunch for the year. Three entrepreneurs were presenting their ideas to the usual crowd of curious investors. Expert360, ChimpChange and Zeetings represent many of the existing themes we've seen developing over the last year in the tech sector. Just as preliminary disclaimer I should say that the IBCyclist Consultancy is already contactable through Expert360. Therefore unlike others in the room I probably bring certain prejudices to my analysis of the business model presented by co-founder Bridget Louden.

Expert360 is the ultimate trickle-down of the high-end consultancy world. I don't know whether it's Linkedin on steroids or clearing house of professionals wanting to cut out some of the social media aspects of other similar marketplaces. The company's goal is to offer SME's access to the same expert business advice normally reserved for established blue chip corporates. You may want Mckinsey's to sprinkle some of their magic on your business but without writing cheques for multiple millions it's back to the mid-sized accountancy firm  you've always engaged. With Expert360, you get access to individual and smaller firms with specific skills. These skills often were honed at those larger consultancies. Take, for instance, my profile page:

If you hire me or any other consultant through Expert360, you can manage contracts, invoices and payments through the platform. That's why it's a kind of clearing house. That means cutting down on admin. It's a good solution if time is of the essence. Expert360 adds a transaction fee to consultations. The fee will depend on Expert360′s contract with that particular Customer. A consultant such as myself doesn't pay to belong to Expert360.

The big question is: Does Expert360 work? My experience is minimal as I think the model favours refugees from existing consultancies. Certainly if my established client base were more extensive within Australia I could see the advantages more clearly. The portability of my name is important, and Expert360 offers me the chance to be mobile. Bridget and her team are betting on the trend for independence amongst advisors. In a way, they not only disrupt the normal advice lines, but they also disrupt the need for me to spend capital on little used infrastructure. It's an interesting way of enabling fragmentation of the business world.  I know many in the room were utterly convinced of this trend, but how many of those are living the model? I remain somewhat sceptical as I haven't had one referral through Expert360 since I joined. That probably says more about me than Expert360. The idea is good and prima facie the market is deep. My problem since being back in Australia is that SME's and high net worth individuals are very sticky to existing advisors, even if that advice is somewhat outdated.

Expert360 makes sense. Linkedin is unfiltered, but to get on Expert360 you have to apply. How rigorous that vetting is I cannot say. I know HR managers at large listed corporation can implement an algorithm search of Linkedin. SME's don't have that facility. Therefore, Expert360 is an easier to navigate alternative to than the admittedly larger database that is Linkedin.

Expert360 is an interesting opportunity for investors looking to play the post "great recession" employment market. The company is currently in another round of capital raising. I am able to facilitate the introduction of anyone interested to the bankers in question, and will not receive a commission. Readers will know that this blog doesn't post specifics in such cases, but if you feel like a chat, I will be happy to take calls.

I don't like the name ChimpChange, but then again I'm not the GenY demographic that Ash Shilkin and the team is chasing. ChimpChange is a low-cost, instant money transfer facilitator that uses a combination of smartphone app and Mastercard to get around existing banks. It's what I wished existed when robbed in Germany in 1987. One phone call  and within seconds I could have been on my way with cash in my pocket. Here's the video we got shown:

It's not difficult to understand. They have a clearing agreement with a US bank. ChimpChange makes money from the associated MasterCard fees and spread on any FX. The app is currently available to US customers only. They need about 25,000 users to breakeven. The marketing campaign focuses on US college campuses, which I think is smart. The US banking system is still cheque orientated, while GenY college students are tech-focused. The synergy is clear. The problem is how high the barriers to entry are? That's not a question I can answer.

ChimpChange could be a remittance monster. We know that huge swathes of diasporic third world populations currently have very few options to return wealth to their homelands. Given the growth of smartphones, it's logically for the Western Union's of this world to be ripe for competition.

Remittance flows 2012
Consider that Americans send $2 billion a year to Cuba, even though there are significant barriers to commerce between the  two countries. Add to that (say) the Philippines where remittances constituted about 8.6% of the total Philippino GDP in 2012, and you'll understand the global significance of cheap and fast money movement.

Originally I'd intend to invest in ChimpChange the moment I left the BBY offices as the team disclosed to me they were already in capital raising mode. Due to deadlines I was squeezed for time to do my due diligence. I strongly advise investors to forgo investments that might cause them to circumvent their normal procedures. If your DD involves contacting referees and doing company searches, then work to your timetable and be willing occasionally to forgo the odd opportunity. In ChimpChange's case I'm watching it very carefully and strongly advise readers to do the same. It just smells like a potential winner to me.

The presentation by Tony Surtees of Zeetings was more theatrical than I've become used to at these events. Mind you it was theatre with a purpose. Zeetings provides presentations enhancements that allow audiences to participate in various data surveys. That sounds dry, but after you log in and start checking boxes you do get a sense of engagement. The presentation itself was about big data; the Zeetings piece was just an add-on to demonstrate a new tool.

Zeetings in a way was a good full stop to the series for 2014. If any one theme resonated loudest, it was a progression of data mining amongst even the most passive tech offerings. First came the Monte Carlo simulation in an effort to win games of chance. The casino by nature of the repetitive execution of an action within tight parameters was easy to data mine. Man counted cards and loaded the dice long before they crossed to the New World. When Alan Turing produced the first electronic computer the ability to crunch numbers began an arms race that passed through the military, aerospace and on to finance.

When I sat at SBC Warburg in London in 1998 and met two Ph.D. astrophysicists tasked with building the first algorithmic trading model I had ever seen, things started to change. From the very moment, they described to me how they used predictive models to define atomic particles it was addictive. Next came Google with their uncanny (for the time) ability to target search results. It goes on and on, until today when two entrepreneurs with a spreadsheet and the money to buy a data series can predict by shopping habits if a woman is pregnant.

The ultimate question for an investor is can the entrepreneur make data actionable in some way? Secondly how high can they build patent walls to protect their discovery? Finally, what role do governments, and for that matter people play in the success or failure of these ventures? 2015 will surely bring more challenges.

Many thanks to all the companies I was privileged to see this year. Thanks also to the BBY corporate finance team for inviting me to these presentations.

Happy Holidays. Merry Christmas.