Tuesday, 19 June 2012

Small risks, more risks and miscalculations of risks . . .

I wonder why Walgreens decided to do the deal with Alliance Boots today? It's good news for KKR as they get some cash in for when it really starts to rain and at the same time exit some UK exposure.

I just don't see the hurry to do a deal where you also include a slightly funky 3 year take-out structure. Then again I never played risk arbitrage a lot. The positive is that it shows that there are buyers out there for retail operations in Europe and that corporates are willing to use some of their cash rather than stashing it away in T-Bonds at terrible rates of return.

Maybe Walgreens could help the Spanish out because their 10 year debt remains solidly above 7%. So given the pressure at the 10 year maturity they elected today to sell into the shorter end of the curve. €2.4bn of 12-month bills at an average interest rate of 5.074% (up from the 2.985% last month) and €639m of 18-month bills at an average of 5.107% (3.302% previously). Given the issue of subordination brought on by their failure to understand the terms surrounding the €100bn bail out of their banks by the euro-cracy I'm surprised there were any buyers at all. Surely the next bail-out when it comes will lead to deeper subordination of their debt and a ballooning interest rate bill. If Spain runs out of money in the next 4 weeks as some have conjectured the whole banking bail-out structure will have a lot to answer for.

I've given up on Greece. I don't think they can pay the money back and they need to do an Iceland and properly default. Mind you the short covering continued today here in Europe as traders cut their positions in the face of multiple international (G20, G8, Eurozone Finanace Ministers) meetings. I guess thats wise given the propensity of politicians to make grand promises in the heat of the moment.

Jamie Dimon has been great at blamming everyone else for the $2bn trading loss at JP Morgan. Well for a starters he's going to have to clarify things regarding the size of that loss soon and we know it will be a lot more of $2bn. What gets me is that he claims he ordered risk in the CIO's unit to be scaled down. If that's the case all he had to do was look at the gross exposure to know that he should have asked more questions. Here's how it works . . . say I'm long a portfolio of US equities worth say $1bn and my boss says half the exposure. Well I can sell $500m of the equities or I can sell $500m of say S&P 500 futures with a modifier or beta. Of course if I sell the futures my gross exposure has actually gone up because now I have 2 positions. That can be fine of course if all my assumptions regarding the portfolio's correlation to the futures is correct, but what if I'm wrong? This is what happened to JPM in the rates markets, but with many more moving parts. If someone came to me as a risk officer claiming he had halved risk, but had increased gross exposure I'd be asking a lot of questions, especially on a bet of this magnitude. Mr Dimon needs to stop blaming others and instead offer his resignation to the board.

People always want to blame someone else. It even happens in cycling.

I say this after seeing the above piece from San Francisco where a family of a cyclist is suing Strava because it publishes fastest times on various cycling segments around the world. It looks like this man (who was 41 years old and should have known better) wanted to get his name to the top of a list and ended up hitting a car and getting killed. Now readers will know that I use Strava everyday and that I check my times against others. What I don't do is use it as as some form of macho measurement system, it's merely there to guide me as to what is possible. I mean if I tried to beat some of the hill climb times I would litterally have a heart attack. No, I drill down and compare myself to slightly overweight 46 year old men, not 25 year old professional athletes. I take responsibility for that. I wear a heart rate monitor and I slow down or stop if I exceed my upper threshold . . . the hill will always be there tomorrow. I suggest the family back off and take a deep breath for the sake of us all.


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