Tuesday, 26 March 2013

Don't back down . . . listen to your shoes

The question sometimes is not whether or not a deal gets done, but rather what is the deal. Cyprus was a classic example of this over the weekend where in a typical post-crisis EU move things got done on a Sunday night. Cyprus is getting €10bn of aid, equivalent to 60% of GDP and in return gets deposit insurance for small account holders (<€100k) and becomes the first place in the EU to have a "bail-in" for holders of large deposits. Shareholders and bondholders have lost the lot. They'll probably have to introduce capital controls to stem the inevitable flow of funds out of the country. It's a horrible, badly executed plan and once again leaves this blogger wondering at the wisdom of Cyprus staying in the Eurozone. In whose interests is it that this country has basically sold itself to Brussels for very little but the right for its' citizens to get on a plane and move to the mainland and look for work?

Where are we now? The first thing you need to know as an investor is that your money is not 100% safe in an EU bank. This is probably the moment when people need to start to understand that even the big systemically important banks of Europe (DB, BNP, etc.) will as an entity become state property in a crisis, not to protect depositors, but rather to protect economies. In that case depositors must see themselves as part of the capital structure that starts first with equity holders and progresses up through various bond holders to themselves. It's a horrible situation and reminds me of the hedge fund world in 2008 when COO's at some major funds were seen opening accounts at the government owned Post Bank in the UK because it was 100% guaranteed. At the time countries such as Singapore gave carte-blanche guarantees on deposits in their own banks system and this provided a less embarrassing, but ultimately similar function to lining up at the post office branch in Mayfair.

The good news is that if you own assets in Germany then you're safer than most. The Germans are not going to throw cash independently at trouble spots in the EU. The German people have hugely benefitted from the crisis in that the weakness in the Euro has allowed them to leverage their position as "exporters-in-chief". So long as the Germans keep a low-ish profile they should come out of this as the economic masters of Europe if they aren't that already. The UK is a huge loser in the process as politically they are isolated and the rest of Europe no longer wants the London Bridge to US capital. If banking rules continue to harmonised across the continent then London risks being marginalised further. Remember that the UK's banks system is about 6x the size of it's economy. Cyprus was about 8x . . .  one false move and they're in trouble. The chilling thought for people living in Luxembourg is that the banking sector their is 22x the size of the economy.

M&A has been quiet recently but today announcement that Schroders will pay £395m plus £29m in future costs from deferred pay for Cazenove Capital (aka asset management) got me thinking. Optically I don't know why I thought that £424m wasn't a lot for a business with £17bn in assets under management. Cazenove Capital made pre-tax profits of £22.4m on revenues of £111.3m in 2012. So here's a company with a cost income ratio of 80% that is getting bought out for about 19x earnings. OK, so the name is probably worth something, but as the £29m in deferred pay suggests the people are what matters. I have no idea what these business should go for, but I'll start to watch from now on. Apparently the price was at the low end of analysts’ expectations and is equivalent to 2.3% of assets compared with 3% for Rathbones, a quoted peer. Some are suggesting that makes it a bargain; mmmmm.....

A lot of people complain about noises from their bottom bracket while riding. Usually this has a lot to do with maintenance or incorrect assembly. I've been hearing the often mentioned creaking sound for a couple of days now and just couldn't isolate it fully until last night. Conventionally you'll take your bike to the local bike store and they'll put it in the work station and rotate the cranks. My Cannondale has the BB30 bottom bracket and I reckon it's a lot more complicated to deal with than say the convention cup system on my other bikes. Check out this video from Spanish bike maker Orbea to see what I mean:

Notice there's a specialist tool you'll need to put this assembly together. Specialist tools always ring an alarm bell with me because how can you be sure that your LBS has one. It's OK if you take a Orbea to a Cannondale specialist because you know both brands use BB30, but that might not help at Pinarello who don't use BB30.

Of course once you have the sound you'll want to try and isolate it. If you're anything like me then you know that the chances of replicating the sound in front of a mechanic will be zero and you'll look like an idiot. Well I have my own bike stand and I tried it for myself before sitting down to give it some thought. I got a list from the net to check off:

  1. Chainring bolts. Kill the creak: Tighten with 5-mm hex wrench and chainring nut wrench.
  2. Pedals. Kill the creak: Lube all points where the cleats make contact; remove from crankarm with pedal wrench, then grease the threads and reinstall.
  3. Crank bolts. Kill the creak: If your cranks move side to side more than 1/16 of an inch, you've found the likely creak source. Remove each bolt with an 8-mm hex wrench or 14-mm socket wrench, grease and retighten.
  4. Seatpost. Kill the creak: Remove and grease. Corrosion can form between the seatpost and frame, making a clicking sound. If an ungreased seatpost stays in the frame too long, it'll become stuck.
  5. Seat. Kill the creak: Tighten the seat binder bolt and grease the seat rails and clamp bolts. The seat is far away from the bottom bracket, but the noise can transfer through the bike.
  6. Shoes. Kill the creak: Clean your cleats and replace if necessary. 
I got down to number 6 pretty quickly and changed the cleats I'd been riding on. During the process I started to hear the noise. And there it was . . . I wear Sidi Ergo 3's and they have patent leather fronts. Where the tongue of the shoe meets the main body the two patent leather pieces rub together creating the noise. I put some baby oil / patent leather cleaner on them and hey presto - no sound. Well that worked for 18k's this morning until they dried out. Now I'm looking for another solution. Vaseline or new shoes? Maybe tomorrow?


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