Tuesday, 16 April 2013

Risk-off . . .

Gold was down another 9% yesterday and there feels to be a kind of mini panic in the air. Obviously the news of a bomb at the Boston Marathon didn't help things, but it feels like gold would have fell no matter what other news was coming out. The question now is how long will it take for the dumb money to get out of the shiny yellow metal? Copper was also down a couple of percent and iron ore remains somewhat resilient so far. There's been a big move in the AUD which some are saying should follow gold. That seems a bit of a stretch to me as I would think that volatility returning to the market is the biggest reason for a sell off in the Aussie. The AUD has been the favoured "risk-on" instrument for the market and so logically should suffer when hit by various negative factors.

The Chinese GDP which I mentioned yesterday disappointed many who had expected a print of 8%+. The 7.7% they got didn't seem unreasonable given the reports we've been hearing on the ground. The latest example of worsening conditions in China comes via a reported glut in cement capacity. It's been known for an while that things had been running too hot, but the market seemed a bit surprised when China's Ministry of Industry and Information Technology informed the provinces that 73.5Mt of obsolete cement production capacity will be eliminated in 2013. That spells trouble for the China bulls and probably for inflation as well . . . for the moment.

The commodities boom has been good to the largely privately held trading houses. The latest house to report good times was Trafigura, my old Geneva neighbours. When I say neighbours I mean it literally as my apartment in Geneva was literally up stairs from their then HQ. It's an interesting thing that they've been doing in buying back shares of employees ostensibly so as to stop ownership being too concentrated in the hands of a small number of senior staff who's eventually retirement might stress the company's balance sheet by paying out in one large chunk. Of course the other reason that they do it this way is because most of the employees reside in capital gains tax free jurisdictions. If you happened to be London based and you needed to get paid I'm sure a transfer to the shores of Lake Leman could be arranged. It's smart really and something that publicly listed companies rarely have the luxury of doing. Dividends are also tax effective in Switzerland and Singapore, so you could pay bonuses via that  structure as well, but getting the numbers right can prove fiddly, so better just to buy back shares and reissue new ones where necessary. Good for them.

Of the $3.8bn in profits reported by Citigroup yesterday $625m came via a release of reserves. The street had expected closer to $3.5bn so will probably be happy with the numbers. Citi’s return on average common equity was 8.2% in the quarter, up from 6.5% a year ago. If you ask me that leaves only a reduction in costs (i.e. shedding staff) and the reserves left in the easier part of the ledger for increasing RoE. On the hard part is the net interest margin; competition should remain tough and I don't expect that to improve much in the current rates environment. So what then are we expected to think? Well Citi now becomes more a GDP tracker and less a bounce-back story. It also tells us that getting RoE above 10% is almost impossible for these mega banks now and to be fair it probably doesn't have to try too hard given that the risk free rate of money is less than 1%. Citi for me becomes a slow burner with the occasional spurts of growth via share buybacks and the odd right move in what's left of the rump of it's investment banking division. Not a bad place for your investment dollars, but not for the aggressive short term player.

I dropped my Pinarello Dogma 60.1 off at Atelier de Velo yesterday for it's first full service. Readers will know that I'm just a bit obsessed about the maintenance on my bikes and even though the Dogma had been purring lately I decided that for its' second birthday it needed something special. 

With my dog and my bike in Italy
It won't be a complete rebuild, but it should encompass a bottom bracket and headset service and a bearing check on the back wheel as it has a bit of movement. I forgot to tell Blake that if they have to replace the bearing they should go with the ceramic version that upgrades the Bora One's to Bora Two's. Other than that I had been thinking that I should probably get some new tubular tires glued on and unfortunately a new saddle as I somehow managed to crack the shell on the existing one.

Julian just sent me mail that the bike is ready so I'll pick it up tomorrow and report on the results.


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