Thursday, 20 December 2012

Racing away . . .

In Italy Gran Fondos are big business, regions tend to group events together in a sort of mini season with points awarded for each event. Lots of wannabe pro's attend in the hope that a pro team will pick them up. I raced this year in the Coppa Piedmonte and was lucky enough to even ride on one occasion with the woman's points leader near my favourite bike shop in Italy. Why do I mention this? Well right about now I'm being bombarded with emails on various events and I liked the idea of the Tour dell’Umbria.

Because this is Italy and cycling is serious everyone gets a chance to race. In the regulations they list a number of categories: Cadets (1986-1994), Junior (1981-1985), Senior (1974-1980), Veterans (1966-1973), Gentleman (1958-1965), Supergentleman A (1951 -1957), Supergentleman B (1943-1950), Single Women (1943-1994). I love the fact there is a category for single women. Now it could be my translation skills or it might just be that this allows Italian men to get a list of all the available ladies for the after event party. Who knows? I know if I race I'm a veteran, now does that mean I have to restrict myself when dealing with the single women's category?

Anyhow, there are four stages, so you get to base yourself in one location. The first stage starts on Thursday, August 8 in Montone, which is a member of "the most beautiful villages in Italy", a classic medieval town, perfectly preserved. The second stage is divided into two sections (morning and afternoon individual time trial race circuit), near Umbertide. Stage 3 will be in Marsciano, the typical Umbrian landscape: green fields and rolling hills dotted with small villages. The final stage will be held on Sunday at Ponte Felcino, a small village near beautiful Perugia. They haven't up-loaded the maps etc. yet, but I bet it would be worth booking now.

If you decide to go to Italy for any races this summer I suggest you sign up for a timing "chip" with Sports Data Management.

Most events in Italy require you to have an SDMA chip and they come in a number of categories. I had the yellow one, which basically means you're racing for the season and they tally up your points etc. I believe the red one is more for the casual rider. Either way you can enter a lot of events via the SDAM website and you'll often get a discount. It's worth doing early as they can take a long time to process things. You have been warned.

Quote of the day from the FT: “I will f***ing do one humongous deal with you . . . I’ll pay you, you know, 50,000 dollars, 100,000 dollars . . . whatever you want.” This comes from a UBS trader involved in the Libor scandal. This was in an email. The first thing that I learnt from going to compliance classes was that the FSA (UK) requires that banks they regulate keep seven years of emails etc. You can delete what ever you want but it will still be on a server somewhere. A lawyer at UBS once said to me, "Just assume that what ever you put on an email is being read by a regulator, your boss and your family." That was wise advice.

Leaving aside the race to trap as many traders and bankers in the Libor saga the Greek finance minister is finally adopting that age old practice of CEO's everywhere: under promise and over deliver. Why else would Yannis Stournaras call next year a make or brake year for the Greeks in relation to their position in the Euro. I'll give him this much, if he wants to hit targets he needs to have the politicians and the people terrified of the consequences of an exit from the Euro. If he doesn't win that race then the Greeks will return to their old ways and default.

Another finance minister that has been running a race is Australia's own Wayne Swan. The Australian Treasurer and his cabinet colleagues decided a while ago to go with it all on red (politically) and they bet their reputations on returning the budget to a surplus this year. Now as we approach Xmas they've decided to come clean and say that's unlikely. The media has continually swallowed the line, but the revenue gap that opened up in the November figures looks to be just too big to bridge. I would suggest that today's statement is close to a suicide note that had to be written. The government spent too much too fast and when China slowed the resources boom started to fade so to went revenues. I now expect the Reserve Bank of Australia to cut rates again soon. The Australian Dollar will probably settled back at parity by March.


Wednesday, 19 December 2012

Grudges . . .

I do not begrudge Hector Sants the UK's chief regulator at the FSA the GBP3m package he is getting from Barclays to move over there to head up compliance. I would say though what sort of contract does the FSA and therefore the UK government have with him that allows him to take such a significant  role with barely a dash of gardening leave? Surely Mr Sants should have to sit out for a number of years before becoming a head of compliance at any institution he helped regulate over his time at the FSA. It's not his fault, it's governments fault.

Speaking of grudges I wonder if the EU will hold a grudge against S&P et al now that they've upgraded Greek debt? The Greek government swapped holdings of its own debt for notes issued by one of the eurozone’s rescue facilities at a value of 34 cents on the euro, it subsequently traded as low as 17 cents when a second restructuring looked likely. Luckily for the Greeks Mario Draghi committed to printing as much cash as he could get away with and not be sent to gaol by the Germans and therefore rescued Greece. None of this of course means the misery that is Greece, or for that matter Spain will not continue. I remain confident the main beneficiary of all this largesse will be German inflation and as I've said before the German real estate market is worth looking at. Maybe some of the French 1% now being asked for a top rate of 75% tax on their income might like to move there?

It's always been easy to take shots at the French. The anglo-saxon world has always been confused by the French psyche, especially when it comes to work/life considerations. Have you noticed that UK Gilts and French Government Bonds yields are starting to converge. The French now pay just 9bps over the Brits for cash. Consider this; the French deficit is smaller than the UK and they should get to 3% of GDP next year. They have about the same government debt and less private debt than the UK. The UK meanwhile is thinking about switching their monetary policy from targeting inflation to targeting GDP. That means inflation is coming to Britain and therefore I think UK real estate is likely to provide a hedge in the same vein as I mentioned in respect of the Germans. As far as France it may be best to stick with the yield trade at the moment and watch the FGB-Bund spread as well.

The FT's Alphaville column did a bit of cutting and pasting of DB's outlier events for 2013. They make some good reading because no matter how whacky you can just believe one or two might happen, well at least enough to continue buying those way out of the money puts that will pay-out like the lottery in a crash:

1. Fed finances the purchase of equities
2. Greece discovers gas reserves worth more than total debt
3. Sweden, Turkey and Brazil bring peace to the Middle East
4. UK coalition government breaks up – election called
5. A race to negative depo rates and every global stock market up
6. North Korea opening/detente
7. Iran turns less hawkish or more volatile
8. Breakdown of FX/equity correlation
9. South China Sea territorial tensions escalate
10. Sahara powers Europe
11. Climate change begins to be priced
12. EM bond bubble bursts
13. Malaysia government loses election

Worth a look don't you think?

For the second day in a row I've been off my bikes as my bad back hasn't improved much. It's a bit disconcerting as I usually get over things like this much more quickly. Given this I spent some time putting up a new ceiling hoist in my garage to get one of the bikes off the floor. I think considering my physical problems I did a pretty good job:

I've also decided to sell the BMC as I really don't get a chance to ride it much anymore. It's been  a great bike and really got me into the sport. The Shimano 105 triple is an ideal groupset for those looking to avoid some ealy pain associated with getting bike fit. If you're interested just drop me a line.


Tuesday, 18 December 2012

Targets . . .

As we continue the post Japanese election rally in celebration of the final debasing of the JPY I thought I'd start today on a somewhat lighter note. This is the toughest road cycling challenge I've ever seen and as such I think it's well worth your time to sit back and admire the route in all it's glory. I'd suggest a good glass of Rose de Provence.

The Haute Route de Alps takes in 600km of riding, 20,000m of climbing and takes 7 days. It's truly remarkable that people and do this and as one person said: "This is as close to what the pro's do that an amateur can ever attempt." The first leg for 2012 went from my last home town Geneva of Geneva to Megeve. I've driven this road many times and I can tell you a fully loaded car coming out of the valley up to Megeve can struggle getting up the Col. I can only imagine what it's like on a bike in the middle of summer. At the end I defy you not to want to do it . . . you first cycling target for 2013.

At this time of year you start to get so many new targets that it's hard to keep up. I believe that 2013 will be harder than 2012 in financial markets as I can see an inflexion point in the bond market. As I've discussed previously, if the US flips from full-on money printing to slow money supply contraction you'll not want to hold bonds. This brings me to Japan.

There is an idea going around that Japan should debase it's own currency by buying US treasury bonds.  It must seem attractive to those in Japan unwilling to live with the idea that living standards there will have to go into decline with the ageing population. In my world you tend to pay down your obligations rather than borrow more, especially when you're borrowing to buy bonds yields 0.25%. It's just crazy, but I don't rule it out. From the American point of view it at least holds out the possibility that they'll be a buyer in the bond market when everyone hits the sell button. In the meantime maybe the Chinese can get in front of the train and sell to the Japanese while they can and not when they have to? What a world.

If I was in rates at UBS I'd be targeting not to be arrested in the Libor investigation that the FT says may net three dozen of the troubled banks staff. I can't believe that it will be only UBS. Barclays were smart settling first. The question then moves on to who's next.

Another target I have for 2013 is a stronger copper market now that JPM has been given the OK to launch it's Copper ETF. This is not good if you're an end users. Any strategic resource like this that has funds scooping up the stuff is likely to lead to problems. Copper as a market already suffers some of the worse delivery problems amongst metals traded on exchanges. If you want copper you've always been better off buying directly from the physical market. I find it hard to believe that JPM will have the ability to ever deliver the metal itself and therefore I think you take risks buying the product as a long term investment. What you're really buying is JPM credit risk.


Monday, 17 December 2012

Jawboning ...

It's the holiday shopping season and it's sometimes interesting on the tech front to loo a little more closely at trends. E-readers have been the bridge for a lot of "tech-nervy"people. The experience of trying to read a book or magazine out in the open encouraged many aid readers to buy sn e-reader in order to allow them to mix tech with ink. The problem is that when people pick up a tech device they want to multi-task rather than uno-task, as such the sales of e-readers (in the US at least) is set to shrink. The market for these products peaked at 23million in 2011, but according to some we can expect that to shrink at least in half by the end of next year. It's worth thinking about when you head to the shops in the coming days.

Elsewhere in tech I've been trying to get a closer look at a note from investment bank ABGSC Sundal Collier, the analyst covering Apple put a $400 price target on the stock and a sell rating. Here's the basic math: Wall Street's consensus earnings is $49.39, so at 400 the P/E would be 8.09. If you use this  particular analyst's f/c then at 400 it would trade at 8.9. Here's the rub, consensus earnings grouwth next year is 11%'ish, while or man in his note grows earnings by closer to 2%. If you believe the must have cool factor has warn off Apple's products then he'll probably be right. If he's nt and you get your 11% growth then the stock will trade towards 600. For the super-bulls, with the 900+ price targets it's starting to remind me a lot of Nintendo after the Wii hit max growth and started to saturate the market. Therefore my 45 - 475'ish entry point on the balance of probabilities looks to be not a bad call for those anticipating slow to moderate earnings growth. There's also the likelihood of more dividends from the cash pile. Wait and see . . .

The FT is reporting on something that shouldn't come as a surprise to anyone in this ultra-low interest rate environment that we now live in. It seems that US banks are finally reversing the trend from over the last few years and starting to hold more mortgages on their own balance sheets. It's reasonably logical if you think about it. The inability of the banks to create "carry" has made it more attractive on a risk weighted basis to keep the quality loans in-house and capitalise on the duration of these earnings. As part of this they have stopped sending loans to the carcasses of Fannie Mae and Freddie Mac. This is a result that the government and the Fed has wanted to promote. Of course the danger here is that if rates lift then the trend will reverse and in addition more MBS will appear on the market just as the Fed starts to look to shrink its' own balance sheet. So in summary the trend is positive  for US housing and worth watching for anyone holding fixed income securities.

In Australia our friends at Fortescue is expected to announce the restart of its Kings iron ore project as early as this week. Part of me thinks this is a very good sign for the iron ore price, but I think that my be a little presumptuous. You see it looks like they'll finance it through a sell-off of some infrastructure assets. The equities market here should like that as it's always had a bias against anything too complex. Personally I'd like to see the prices they achieve before passing judgement. If nothing else some under-emplyed bankers will get a chance to do a deal and justify their existence. Good for them.

As an under-employed banker myself I managed to get out for a group ride yesterday with a mixed group from a club I belong to in town and a cycling group from the northside. Overall it was a pleasant enough morning even with my bad back and I look forward to doing it again over the holidays. I followed up today with another ride and enjoyed the fact that with the schools in Sydney starting their long summer vacation that there was less cars on the road.

I want to mention that my twitter account is up and running and I hope that I can put up some pithy insights that inform and entertain. Check it out at: @mikefagan_ibc.


Thursday, 13 December 2012

What would happen if things got better . . . riding on fluoro

No blog yesterday as my newly acquired bad back had me feeling none to happy with things. I did manage to get out on the bike in the afternoon for just long enough to loosen up. Thats the thing about cycling, the low impact nature can sometimes help you get through an injury rather than over it.

When I hit the news headlines this morning (in a better mood) the FT screamed at me:

My first thought was buy everything, but my second thought was to sell bonds. Now you have to give Bernanke credit for understanding the physiological side of his position. Big Ben has been very consistent in drawing lines in the stand and backing them up with action, whereas the Europeans until recently have demonstrated their paralysis by jaw boning without backing it up. OK, so lets think about it. Unemployment officially is now under 8%. That's good, but one of the reasons why it's there is the huge expansion of the Fed's balance sheet. Right, so until yesterday we were always thinks rates go nowhere until 2015 (Bernanke's last line in the sand), but now we have the spectre that at the current trajectory we might get unemployment towards 6.5% by the end of next year. So the question now is when does the sell bonds - buy growth equities - sell dividend equities switch start to happen. This is one hell of a big unwind and the traditional 6 month forward looking mechanism of the equity market has been severely corrupted by the current monetary policies. This leaves me thinking that the smart money are going to start selling bonds sometime in Q1 and have me actually contemplating reflation trades ahead of this. One last thought . . . there's also a 2.5% inflation trigger as well in the Feds thinking. The real question is: given the rate of increase of the Feds balance sheet is inflation controllable in the event of an unwind? Is this where gold returns as a bull market?

Here's an interesting graphic from Bloomberg. This shows what happens when capital gains tax rates increase. The two biggest increases (1972 and 88) saw investors take the money and run.

Obviously we're not in a normal market, so I'm not 100% convinced, I do take solace from the Bernanke statements yesterday that we may get back to a normal sooner rather than later and as such I think tax payers  in the US with very little good income news over the last few years take cash and pay the tax man. Consider this though. A lot of Cap gains people have are in the bond market, so does that leave us more vulnerable to volatility there?

Looking through to the switch from yield stocks to growth stocks I did the rounds yesterday trying to find out a little more about a troubled Aussie coal stock. I won't mention which one, but it seems to have several likely outcomes in the offing. Being a private investor of restricted capital means I won't be able to get in on the fun that will be the various debt pieces attached to it, but the equity could be interesting in the event of a sell-off as the company itself is interesting and the asset is worth looking at. As usual with these mining stocks there's an asset value and a developed asset value. The infrastructure required to take a small cap explorer to a mid-cap producer is often a bridge too far. Look at all the work companies have done on African assets and never taken them into production. Even in Australia capacity become a major constraint and the lead time between ground braking and first shipment can push companies over the edge. Thats why we're seeing so many projects mothballed. The big power point presentations don't always quantify the risks, thats why I like to be part of the debt syndicate. With bonds and financing you get a much better picture of whats going on. Debt is king at this stage of an assets development. Caveat emptor.

I've been looking at some of the rarer bike brands as I'm thinking about business opportunities here and with some friends in Asia. I know they've got distributors in most timezones but i was particularly struck by the De Rossa De Rosa Telaio Merak Evolution in the "verde" colour scheme:

Anyone with their eyes open can see the fluoro trend in all things fashion at the moment. This is De Rosa's 2nd level bike if I'm reading things correctly. The frame comes in at just over a kilo and the setup in the photo shows it with the electronic version of Shimano's Ultegra. To me it has a kind of aero  feel to the frame. It's hard to find any real reviews, so let's go with the fact that if you ride this people will see you coming.


Tuesday, 11 December 2012

Awake . . . but . . .

I woke up feeling a lot better ready to do some work on some housing numbers from Florida. Unfortunately I made the mistake of unstacking the dishwasher and pulled something in my back. A couple of voltarins later and at least I'm sitting up straight. Unfortunately this means two bad things down and obviously a third to come. Who knows what that might be, but I suggest you stay away from me for now.

Moving on to something more pertinent. The UCI has released it's license holders list for 2013. The list  is notable because it drops Katusha and a lot of Russian money out and includes Argos Shimano and further Dutch cash. Katusha will now have to rely on invitations to get into the major events. This shouldn't be too much of a problem, but no doubt makes it hard to budget for the year ahead. The luckiest team in the world must be Saxo-Tinkoff Bank given all the question marks surrounding management and riders at the Danish team. For the record then:

WorldTour licence holders:
Astana (2011-2013)
BMC Racing (2011-2014)
Cannondale (2011-2014)
FDJ (2012-2014)
Lampre-Merida (2010-2013)
Lotto Belisol Team (2012-2015)
Movistar (2011-2013)
Omega Pharma-Quick Step (2012-2014)
Orica-GreenEDGE (2012-2013)
RadioShack-Nissan (2011-2014)
Sky (2010-2013)
Vacansoleil-DCM (2011-2013)

WorldTour license renewals:
AG2R La Mondiale (2013-2016)
Euskaltel (2013-2016)
Garmin-Sharp (2013-2014)
Rabobank white label (2013-2014)
Saxo-Tinkoff (2013-2014)

New additions:
Argos-Shimano (2013-2016)

I'm trawling the bike market to find a bike for my sister-in-law and was checking out the latest in specials from my man in Italy when I came across what must be the loudest machine ever to see the tarmac:

I'm a fan of bike bling, but these wheels don't just yell, they positively scream at you. Not for me personally, but if you're up for it you get the full package for Euro 4300 and in my view a bargain. I haven't ridden a Fuji, but have heard some good things about them. Check the reviews in the better magazines. Be warned though, you will be the centre of attention and some jokes depending on your skill level.

The market got going last night with a rumour that Jamie Dimon was going to be the next Treasury Secretary. This of course seems highly unlikely given the Obama Administration's current stance on banking. Notice I didn't say it was because Mr. Dimon would not be interested. You see it's my understanding that there are some very important personal tax savings one can make when jumping from the private sector to the US Cabinet. Far be it from me to suggest that serving one's country wouldn't be enough of a reward in it's self for Mr. Dimon, but there's always the fringe benefits to consider.

Elsewhere in tax I saw a great story about French film star and wine maker Gerard Depardieu. The big man is taking his act to Belgium proving once again even those on the political left know when something stinks.

In this case the promise of a huge trickle down effect from President Hollande's much trumpeted wealth tax looks likely to be a mere drop and in fact may cost France plenty in the long run. The problem is that this 1930's thinking has no place in a world where home is usually no more than 24hours away and the internet etc. enables even the most ardent francophile to remain culturally loyal while safely ensconced in their modest villas in any tax jurisdiction offering appropriate terms.

Perhaps all this talk of tax avoidance needs to be tempered by what happens when you get it wrong. In this case money laundering by HSBC and Standard Chartered is set to cost those two institutions around $2.5bn in fines. It's costly lesson for shareholders and even when reading the cases it seems like institutional slackness rather than outright criminal intent. This of course is the problem with mega financial institutions . . .  it takes only a very small amount of rot to erode the greater part of the company. No one is in the mood to sanction apologies alone.

Just to prove that even the best run companies make mistakes ThyssenKrupp booked a €5bn full-year net loss after taking a €3.6bn writedown on steel plants in Brazil and the US. There could be some interesting assets in this lot if you think normal growth comes back anytime soon. I'd suggest for anyone interested you run a table on current steel company valuations and look into cashflow specifically and see if there's some cheap bonds trading around the traps. At least having something higher up the capital structure will give you protection and exposure to a bounce back. The equity of course may be the first call for companies seeking to de-lever.

Finally I return to our old favourite . . . there's not much rot in Apple (AAPL), but it's now sitting on some major support lines around $520 and looks to me like investors have now punished it for not announcing a special dividend before the year end. It seems credible that this "non-news" plus recent flattening of growth expectations has caused the rotation into other S&P stocks, specifically those giving cash back to investors before any tax rises in the new year. Apple reports next on January 24, though we are likely to get some sales numbers before then. As I've said before I'm not a shorter of the stock and am now waiting for an entry point. Watch for the 450 - 480 range as a place to initiate a position.


Monday, 10 December 2012

Sick . . .

I've fallen victim to the bug thats been going around Sydney at the moment and have been unable to do much other than sleep. The last time I was on one any of the bikes was Saturday. Normally with this much time on my hands I would have got out the cleaning rags and oil to give all the bikes a good tune-up, but with little energy even that has proved impossible. In the meantime I'm trying to get to grips with news hitting the tapes in respect to initiatives by authorities in the UK and US regarding the concept of too big too fail.

The trouble with too big too fail has always been that it took the risk away from the equity, bond and deposit holders and transferred it to central government. Now the proposal seems to be to move to a core system of banks that are in some way insured, be it by increased equity requirement, modified deposit insurance or something else regulators are yet to think of. Essentially if you're a member of the public interested in depositing your savings you'll probably be presented with some form of modified health warning . . . much like buying a packet of cigarettes.

As an investor the quid pro quo is going to be lower return on equity. Banks in the core group will have an implicit put option for depositors by virtue of their expanded capital base, but the price for investors will be whatever the market charges for funding al of this. At the moment the hurdle rate is very low because interest rates are low. As an investor if you can finance at sub-3%, then a return of 7 - 9% might seem OK. What if said costs rise, as it might if the current bond bubble bursts? What if the RoE at banks was less than WACC? Clearly no one would want to own the equity and even the bonds might have questionable value. Those banks would then have to shrink their balance sheets in order to attract capital. This is why I believe that as the new regulatory environment takes hold the winners will be the strongest of the non-systemic investment banks (such as GS) who will have the flexibility to compete for deals with the highest returns. 

All of this is academic to the man on the street, who if in Japan sees only that the country continues to shrink with its' ageing population. Japan is now in a technical recession and even if some of that has been brought about via the posturing with their Chinese neighbours then most of the blame still goes towards the inability of successive governments to adequately respond to the post real estate bubble economy of the last 20 years. Japanese GDP showed that output slipped by 0.9% the September quarter, but the government revised down the previous quarter’s estimate to an annualised 0.1% contraction, thus triggering the technical recession. Perhaps the weakening yen will help generate some internal optimism?

China is sill suffering from a lack of international demand. In November they recorded a USD19.6bn trade surplus, that's the lowest for the last five months and must be of concern to the local leadership who for all the posturing about rebalancing their economy still rely on exports  to finance an increase in the standard of living for the masses. All this of course goes against the grain of what we've been seeing on the industrial production side of the economy, which was pointing up. That was one of my primary reasons for looking more closely at Chinese equities recently. China IP increased 10.1% cent from a year earlier in November (up from 9.6 per cent in October). Retail sales rose 14.9 per cent year on year, up from 14.5 per cent. All of this leaves me in a quandary. Is the Chinese IP data a leading indicator of something not yet obvious . . . I hope so.

Maybe the European economy is about to come back with a vengeance? I got sent a series of charts showing that the various European indicies were being edged into tighter and tighter trading ranges. The small optimist in me suggests that this may signal a breakout higher because seasonally you rarely get a bad Q1. Who knows? I'm not in Europe any more and it's harder getting day to day information on this possibility. 


Thursday, 6 December 2012

Two funky news days . . . keep on riding . . .

In the last two days which of the following headlines actually surprised you the most:

  • Berkshire Hathaway claiming $1bn from Swiss Re because mortality rates were higher than expected
  • Citigroup axes 11,000 and takes a $1bn provision
  • Deutsche books hid $12bn losses
  • Apple falling 6.5% in a day

I think the BH news was the most unpredictable in substance, yet predictable in terms of the way the oracle of Omaha works his magic.  Look I may have misread this in some way because the insurance industry to me is somewhat of a black box. A friend of mine was an actuary at various Lloyds syndicates when he first left university. He said at the time that the risk models that he and the other quants built were treated with a lot of scepticism by the "old boys" of the market. I wonder who at BH decided what the hurdle rate was going to be for this particular investment. Mr Buffett seldom talks of the mistakes he's made in the insurance arm of BH. It's so strange and in a lot of ways I really don't care who was right and who was wrong, it just speaks volumes to the dangers of selling puts . . . the leverage effect always works against you when you least expect it.

Selling puts on known parameters is fine by me. If you understand the risks and you're happy to own the the asset, i.e. take physical delivery, then so be it. And that's the key, for the private individual you don't want to have the cash settlement type put because you lack the ability to play the bounce automatically. Deutsche Bank looks prima facie to have effectively taken delivery a lot of European debt exposure and have happily been waiting on the bail-out to work it's balance sheet magic for them. The unfortunate thing here is that DB is a public company and it has a duty to the market and the regulators to provide full and frank disclosure. Having key risk officers reporting the bank in this way should have never happened because it never should have got that far. It's ugly for everyone, not just DB. A lot of the assets referred to are probably held by other major institutions and as such we now have some serious systemic problems to deal with. This could get ugly for a lot of auditors and lawyers as well as bankers and it remains to be seen whether the regulators were in any way complicit in the valuations in question. Wasn't it only Monday that the BoE was warning that assets being carried by the major UK banks looked to be incorrectly marked?

Citigroup announced reductions in the bank’s emerging markets consumer business, global retail operations, investment bank and support functions. The thing that gets me here is the cuts in the emerging markets division. I'm sure I saw where this was to be a major focus in the bank's future. Clearly new CEO Michael Corbat has other ideas. It's going to be a long cold winter in the banking world.

I guess if you want to avoid the misadventures of banking you could always just sit in Apple shares and rake in the benefits from all those i-Things they sell.

Well if it was a good idea yesterday then today you'll be even happier because the shares are worth 6.5% less. I've warned before about the crowded nature of the AAPL trade in hedge fund land. I have said all along that a company with this much free cash flow is not worth shorting and I stick by that. If you paid $700 per share when iPhone5 was launched you're now underwater and wondering what went wrong. It's a simple story of growth rates really. Fundamentally the company is sound, but people forget PER is about how much you're willing to pay today to own the stock at a given time in the future. Sitting on cash is fine if you can make a return on it commensurate with the risks in your business. Lots of commentators today said there was no news to cause the fall in Apple. I king of disagree . . . firstly there was the window dressing that went on for the end of November and it's correlation with year end books close for some investment banks. I also not that Netflix's new streaming deal with Disney looks like something Steve Jobs would have never allowed to get this far. Jobs remember held much of his fortune in Disney and through board memberships etc. worked to leverage that in Apple's favour. I don't know whether Netflix will be in business before this deal starts, but it shows that the Apple Fortress has some weak points in content.

I didn't ride yesterday as my legs were absolutely shot from the mega effort that took me to the northside of Sydney. I'm going to get out a but later for a stretch ride up to Centennial Park just to get the blood flowing again. What I did manage to do yesterday was a quick check on the Cannondale and I discovered some significant gouges in the rear tyre. I normally don't get too worried about this type of thing, but you could see the white casing underneath the rubber so I decided it was best to change it. No problems with the tube so that remained in place. I like the feel of Mavic's rubber, but am starting to think they may be a little too soft for Australian conditions. I know the hard shoulders here aren't so hard and you seem to spend a lot of time riding over tiny sharp pieces of gravel. I f I get more nicks and gouges I think I'll change to some Conti GP4000's as they are pretty much bullet proof. I have these on the Pinarello both in tubular and clincher form (Campy Bora and Easton wheel sets) and they rarely let me down.


Tuesday, 4 December 2012

The road ahead . . . .

Glorious weather here today and just the right conditions for my first serious ride on the northside of Sydney. So 81km later and I'm back home trying to digest the comments from the RBA. Before looking at the RBA's reasoning I prefer to look back on a great ride.
A lot of firsts for me on this one:
  1. First time riding over The Spit Bridge. A little scary in the late rush hour traffic, but way less agro than I get from drivers on my side of the bridge.
  2. First time on the Akuna Bay Loop. A pretty part of Sydney for sure and a Cat 3 climb that given the heat of the day had me reaching for one more gear.
  3. First time on the long flat run along Sydney's Northern Beaches. The bus lane and a tail wind made it an extremely fast outward trip.
Not Peter Sagan . . . 
It's nice riding with another investment banker on sabbatical, especially someone who was gently trying to push me to a better higher level. The Cannondale was really humming until I ran out of legs on the homeward stretch from Dee Why to The Spit and up the Parriwi Road climb. Strava tells me that I'm a pathetic 1706th of 1875 recorded attempts. At least I have something to aim for in the future.

When we got back we found that the RBA had predictably cut Aussie rates by 25bps. They'll be lots of talk by commentators that this was about helping middle Australia either directly by mortgage relief or indirectly via relief for SME's who employ them. For mine this all about the RBA waking up to unsustainable level of the AUD, because it's not just about SME's it's also about the number of massive mining projects that have been put on hold because of cost concerns. Just look at Rio Tinto's recent shift to the Mongolian mega pit over several Aussie projects.

I checked the usual social media when I finally got home. Bill Gross of Pimco Tweeted out today something we all know but dare not talk about: "Stock prices are dependent on Treasury real yields. 5-year TIP yield at negative 1.5% must go even lower for stocks to rise." It's true right? As long as rates remain where they are it's hard to see a crash . . . maybe a correction . . . but nothing extreme. So what would make US rates go up? A change at the Fed is the only action that seems likely to change this and I don't believe Obama is going to do anything less than beg big Ben to hang around so he can complete what he started.

Finally looking forward to the northern spring, when the one day classics dominate I want to leave you with something that I thought was truly exceptional. This is a piece on the famous Paris - Roubaix classic that runs in spring across the northern planes of France. Enjoy:

A Throw of the Dice from RAPHA on Vimeo.


Monday, 3 December 2012

Monday's . . .

Why would the Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi warn against holding Japanese Government Bonds? Slightly suicidal in a financial sense wouldn't you say? The FT is reporting that according to data produced by the Bank for International Settlements (BIS), the holdings of JGBs by Japan’s banks equate to 900 per cent of their tier one capital, compared with about 25 per cent for UK banks’ exposure to gilts and 100 per cent for US banks’ exposure to US Treasuries. It seems ludicrous I know, but this is Japan and the long story of economic decline goes on. This is what happens after over a decade of ultra-low interest rates, the hurdle on investments becomes so low that even low yielding paper is hoarded like it was the formula to turn lead into gold. It also tells me that Japanese banks have run out of ideas. They've tried buying foreign banks and that usually fails. They've tried investment banking and even the experts in Japan such as Nomura find it nigh on impossible not to buy a dud like the Lehman's rump. What else can they do? They hold a ridiculous chunk of their capital in Japanese equities, usually taken on board to signify their commitment to a a particular company. They may as well just load up on Apple and Google. Is it any wonder hedge funds are lining up to short Japan?

I've seen many crowded trades in my investing life, short JGB's has been a particularly unrewarding one. I remember that every now and then we used to leg into a put back-spread for zero cost in the hope that Japan would suddenly abandon it's current fiscal policy and revert to something more normal. It was a dream about as likely to come true as winning the lottery. Some of these trades become so seductive because of their low cost. The other one that springs to mind has been betting on the China / USD or HK / USD peg to break. Everyone in hedge fund land has one of these and it's usually advertised to show a mythical pot of gold at one or both ends of your pay-off plots. Investors love them, but they rarely understand the costs both in theta bleed or in time and opportunity. It's worth asking about next time you're in an investor meeting.

China’s manufacturing PMIs are steadying above 50, meaning we have some expansion. Of course the expansion seems to be coming in the state sector and the SME's are actually retrenching staff. I'm not so concerned given that after all China is a communist state and it seems pretty natural to me that the state enterprises would be the first to grow. Having said that, you have to admit that as an investor state enterprises are likely to crush competition and margins, so I wouldn't be too flirty to economic growth numbers there just yet. Time will tell and maybe the leadership of China figures that if they hold on longer enough Europe will get its' act together and the US will not fall off the fiscal cliff. It's the only bet that makes sense at the moment.

Christmas is coming and China will be hoping that the seasonal goodwill can help their balance of trade numbers. Obviously the Japanese are even more exposed to any weakness. What I really want for Xmas is tickets for the Giro d'Italia (which at least would help the Europeans) as all the big guns are lining up for the start: Wiggins, Hesjedal, Nibali, Contador . . . It's going to be massive and will probably prove that the Giro is fast becoming the rider's classic. TdF is massive and the one to wine for the fame  and money, but for difficulty and the sheer guts required the Giro is rightly on an upturn.

The TdF seemed somewhat slimed down last year. Maybe that's a misconception based on the ease of Wiggins' victory and the dominance of team Sky? The Giro was harder in 2012 and thats' why in 2013 the TdF is playing catch-up with Alpe-d’Huez being climbed twice on the 18th stage. That's pretty awesome, but will it be better than the Giro where we always have the chance of seeing the riders cutting through the early season snow on the Stelvio:

This will be my first Xmas in Australia for quite a few years. I have no sense of the season at the moment. I'm going to miss Europe this year as it truly is wonderful to have those winter feasts of seasonal specialities. I'm sure I'll find an alternative, but for me Xmas really shouldn't be about seafood and riesling, as nice as that is . . . it should be about game birds and cabernet. I guess that as long as you get to spend some time with family and friends the consumption side won't matter in the end.


Friday, 30 November 2012

Time for some heat . . . and some silliness for the weekend . . .

Heat . . . it's been a while, but summer has hit Australia with a vengeance. I pulled out the special Cannondale-Liquigas summer-pro jersey that I thought I would never wear and headed to Sydney's beaches for a ride.

I'm not going to say I look good in it, in fact far from it. These pro jerseys are tad tight and translucent for the taste of all but my closest family. If you're really fit then you're not too worried, but if you're not you tend to hope you don't run into anyone you know who doesn't ride a bike.

It was 33 degrees celsius when I got on the bike, but thankfully a cooling breeze hit me as I hit the flat of Rose Bay and the harbour before climbing up heartbreak hill towards the seaward coast. 

Late morning traffic in Sydney is usually pretty good as most of the tradesmen and builders have settled into their jobs for the day and the mums in 4wd's have finished the school runs and have taken seats at the usual cafes. The Cannondale was humming after it's regular maintenance and the big ring had me driving along at a nice cadence. 

The news continues on the positive side in the US. The fiscal cliff though remains for all to see. I was watching the West Wing on cable the other day and started to think what might happen if Obama adopted the same tactics as fictional liberal President Josiah Bartlet (Martin Sheen). I think it's a fair enough question. The Republicans although still well represented in the Congress are in a political no mans land. Obama has a chance to further rattle them by pushing them to the brink . . . you know in fact there's an argument that says he should just push the whole thing off the cliff and call their bluff. Personally I don't think he'll do it, but it's more possible than some commentators might care to believe. The Republicans are calling the current proposals “completely unbalanced and unreasonable” . . . too bad.

I was reading the Lex column in the FT today regarding the Aussie banks. It was the usual hedge fund inspired piece about Australia teetering on the edge and that the banks were over dependent on non-AUD funding etc. Look I know this and continually seeding it in the press won't make short bets pay off any time soon. An RoE of 15% v. international peers returning way less than 10% means that a 1.7x PBR is probably not unreasonable, especially when you also pay good dividends in an expensive currency. I'm not going to fall for being a massive bear on these in an environment where the BoE has just come out and said it's worried about proper book valuations in the British banking sector. That to me says that until we get the new Governor in place and see some real revisions of the rules we really don't know what the PBR is for many of the systemically most important banks in the world. Perhaps better to short some of these and watch them try and raise new equity capital to justify coming write-downs. If the BoE gets it's way and the banks have to raise GBP 20 - 50bn then stay long the hybrids and short  the equity. The credit situation will improve, but shareholder dilution is assured. 

The press are talking more and more about the China A v. H share trade. The FT today has a really good graphic showing what's happening:

Non-Asia based investors might not understand that the Chinese government is keen to stimulate buying of local shares to the point where Beijing relaxed rules for foreign investors wishing to apply for a licence to trade shares on the mainland, while officials from the Shanghai and Shenzhen exchanges travelled to Japan, Europe and the US in September in a bid to attract new investment. The bankers in HK tell me that QFII capacity remains tight (that's the gateway for capital between the world and China) and I wonder if an increase in the facility might be just around the corner? If that happens I think it would cause the switch from H to A . . . especially if brokers were a little more reasonable with the fees they charged.

The heat's getting to me so I'm off for a swim in my pool. I may not have the mountains of Switzerland anymore but I do have my own pool and it looks very inviting right now. So as a treat thanks to a friend in NYC I leave you with the following "Pythonesque" accessory that riders everywhere would do well to consider:


Wednesday, 28 November 2012

Are Chinese bears shi**ing in the woods?

The weather here is less than sparkling at the moment. No great joy being on the bike when a light rain is falling and the roads are slippery. Still, I got out and had some time to think about a call I had from a mate in HK yesterday. Why does the Shanghai A-Share Index trade at a discount to the H-Share discount at the moment? Where have all the onshore China bulls gone? Here's the charts:

I year chart

6 month chart
Clearly this happens from time to time and I have always been of the school that considers it a phenomenon of the capital controls between the two jurisdictions, but is it true this time? I don't have a particular answer to this one, but I'm looking for research that tells me I shouldn't be putting the trade on right now. Perhaps a little technical for some, but well worth considering a spot of bottom fishing.

Not all is right with China and the effects can be seen in the Iron Ore price which is back to where it was a month ago. Of course the 119 print v. the September low of 89 was a pretty reasonable rally and very supportive of the AUD. Keep an eye on the rally never made a lot of sense to me and I'm guessing a period back in the 90's is likely in the next few months. Rio Tinto, the world’s second largest iron ore miner is hosting a seminar in Sydney about the commodity. If any readers of the blog can get me in to hear their views I'd appreciate it and can offer a test ride on the Pinarello as a reward.

I'm making this short today as I've been dealing with Swiss bureaucracy for part of the day. When you leave Switzerland you naturally go to Swisscom and tell them you're going and you want to cut off their services and pay them. Well the catch is that they won't accept payment there and then, in fact they won't even collate everything on one bill, instead the gnomes of Berne send you separate accounts for pay TV, mobiles and fixed lines. If you're like me this can be confusing and failure to pay has them magically charging you a penalty fee of a couple of hundred francs. It's absolutely ridiculous. Then there's Zurich Insurance who automatically renew any policies you have at the end of each year. This of course happens no matter what you said to them before you left, so yesterday I got a mail forwarded to me saying they had sent the police around to collect the premium for the home insurance policy (which renewed on 1 September in my case), but I wasn't at home. Jeezus - really? It's just nuts as I have a string of emails between myself and my Zurich Insurance agent telling him I'd left and providing him with the "holy of holies" the official "Attestation"from the Canton of Geneva stating that I had paid all my taxes and was free to go. Oh my . . . .

No wonder I look for solace from my bikes. Riding makes a lot of this junk go away. So I got out the freshly cleaned Pinarello and hit the streets. I'm going to resolve to use the BMC around town for a shopping bike when I'm not taking friends out. As such I'm going to change the Shimano 105 triple to a compact double and add some FSA handle bars and stem to trim some weight off her. And I'm going to attempt the change myself, including cabling and handlebar wrapping. You've got to learn sometime - right?


Tuesday, 27 November 2012

Shopping . . . .

I haven't produced a blog for a few days as I've been waiting to get a feel of what US retail has been like over the mega-sales of "Black Friday and Cyber Monday". I wasn't surprised that Amazon came to the market during this period with it's first bond offering in about a decade. The company sold $750m of three-year notes at 0.65 per cent, $1bn of five-year debt at 1.2 per cent and $1.25bn of 10-year securities at 2.5 per cent. That's a cool $3bn worth  of debt. The world's largest online retailer still only manages to get a Baa1 rating (Moody's) for it's offerings due to it's low margins and therefore in my view "perilous" business model. Last quarter Amazon actually lost money and even with that trades at close to a 5 yr high! I know it's all about revenue, but compared to say Apple it all seems like a house of cards.

The retail sales season seems to have opened with a collective sigh of relief. The figures we have so far are positive in my view, but if I remember correctly this happened last year and things fell away sharply after that. I've said before that I won't bet against "America the nation", . . . though I'm tempted in the case of "America the markets".

The Europeans meanwhile are patting themselves on the back as for about 10th time (sic) they've reached another accord to make sure the Greek patient is kept on life support. This time the Greeks get about E44bn in exchange for saying that the can they kicked down the road has to target a deficit of 124% of GDP by 2020. It's just not sustainable and I suggest that either the Europeans accept a proper haircut or Greece leaves the Euro. I bet the retail sales numbers out of Amazon Greece are unlikely to impress any time soon. Good luck.

Italy is seen as a shoppers paradise for a lot of good reasons. If like me you spent a couple of years trying to figure out Swiss retail prices on goods then Italy also looked like a bargain. According to the WSJ Italian consumer confidence has dived to new lows. The collective angst in Italy regarding the position of middle class saviour Mario Monti leaves the future looking like a giant black hole.

Italy of course has lacked stability (well at least since Mussolini), but always found a way to muddle through. The number of engineering and associated industries in the north is amazing. Take a drive along the Po River valley and the number of household names you'll see is enough to make an worried Italian bond holder sigh with relief. The problem is that much of this industry is locked up in the non-listed world of the Italian family business culture who have quite rightly played their cards close to their chest for fear of opening themselves up to various punitive taxes. The German "mittelstadt" is similar, though somewhat less threatened. Wars and governments come and go, therefore you tend to hold on to things you know will be around in the future. Europe is a world of bond investors and the anglo saxon world prefers equities generally.

The Swiss island fortress remains under siege and latest news is that regulator "Finma" may ask UBS to allocate more of its existing capital to cover operational risk. This is in direct response to the recently concluded rogue trader case. My friends in Switzerland remain acutely aware that as a nation they no longer have the stomach for the big bets that investment banking requires. A quieter existence based on money management seems more to their liking. We used to say that Zurich was the city that looked restlessly for new worlds, while Geneva seemed content to take it's 2% and let someone else worry . . . but the GFC hit Zurich and Madoff hit Geneva.

My own shopping efforts have been rather modest and about 40% of the US average ($463) spend during this period. I bought a nice set of back-up Look Classic pedals in red in case I need to reconfigure any of the bikes.

I got them for AUD64 v. the local price of AUD104 so added some other smaller things to the package and paid the 20 bucks rapid delivery charge.

Over the weekend I managed to get out into the Aussie country side and rode the course from Mt Irvine to the Bells Line of Road and back. Previously I had taken the risk and hit the highway all the way through to Blackheath, but this time decided that Saturday morning truck drivers were to be respected and feared rather than ignored.

I had a great time and I hope to get a few riding friends up their as it's a good 90min ride with some lovely scenery and one of the few euro-style switchbacks I've seen since being home. I really do miss the dozen or so such turns up the forest road to Ballaison near Geneva. At this time of year it would of course be starting to get a little snow on the hill as you crest above the tree line.

The Cannondale probably will need a new chain soon as I'm up over 1500k's on her now. Myabe I should have bought one while the Cyber Monday sales were raging? No matter how well I maintain these bikes things like chains need to be replaced at regular 1500 - 2000k intervals.  If you don't do this you run the risk of breaking a chain in the middle of nowhere on a climb where the torque is greatest on the equipment. With this in mind I decided to take out the Pinarello on Monday here for a short run up to the park to do some intervals.

The Pinarello hasn't had the Easton EA 90 SLX's on it since I had them rebuilt at Brun's in Geneva. I'm a bit hesitant to rely on them given the problems I've had with broken spokes, but it seemed like a reasonable bet that going only 4 k's from home base would leave me with little more than sore feet if anything happened. As usual I had to replace the specialty carbon brake pads with my aluminium ones. If you've never done this before I advise you to take your time and follow these steps:

  • Buy yourself a second set of brake shoes and have the alternative pads already setup in these. I got some campy clones from BBB and added Swissstop pads.
  • Then line these up in your brake callipers with normal hand tension. Do not tighten at this stage as you'll need to "toe-in" the brakes in order to maximise stopping power . If you don't know what toeing-in means then what you have to do is align the pads so the front end is slightly closer to the wheel rim than the back. The brake shoes allow you to do this as they have a moving joint where the bolt meets the shoe. Like this:

  • Finally take a torque wrench and tighten the shoes in the callipers. Mine tighten to 8nm, but I suggest you tighten them in stages - 6, 7 and then 8nm . . . just in case your torque wrench is not calibrated correctly.

All went well and I was reasonable happy with the way the wheels rode. I was so happy in fact that I decided to strip off the old rubber when I got home and replace them with some new Conti GP 4000's I've had lying around the workshop. A good hour of cleaning and the old girl was looking a treat:

All done with new rubber and full clean and lube
Check out the running gear because this is how a bike of this calibre should be maintained:

Perfecto! Ciao!

Thursday, 22 November 2012

If it's too good to be true . . . you know the rest . . .

I found a really troubling website today. I followed a link to "eToro" that promised to let me buy Apple stock for as low as 50 dollars. Now this was interesting given Apple trades at around 560. So I followed it and discovered that eToro is basically selling you tracker shares. So say you want to buy Apple but only have 50 dollars, no problem, you get an eToro certificate saying you bought (say) 9% of one share. Clearly nothing wrong with the concept, unless of course you ask the question: "If you only have 50 dollars to invest, should you be buying Apple or any shares at all?" Of course what would happen to your 0.09 of an Apple share if eToro went out of business? Think Rehypothecation maybe?

On to more factual things that have come my way in the last day or two. Lot's of div yield stocks are trading like bonds now days. It reminds me slightly of the way Japanese utilities used to trade before the Tsunami changed everything. Basically as bonds rallied the pseudo bonds rallied and ground zero for that is HK where condo prices reached new psf highs. I remember the mania for REITs that started in the 90's. One particular example was the LINK REIT (HK:823). I went to an investor tour while working for the lead underwriter to kill time in HK while waiting to get back to London after one of those team bonding things you do at investment banks. LINK basically grouped a lot of mid to low level shopping assets together with the promise of improvement via steady renovation. The most obvious example in those days was just putting a second set of toilet facilities in an 8 floor high shopping mall. Simple idea, but it worked, as did changing car park configuration and cinema locations within complexes. This year the stock is up 45%, because it yields 3.3%. That's good and div has been growing at 10% . . .  can that be sustained? Consider this: An investment baker tells me that the average annual rent per square foot at Causeway Bay is USD 2,630, making it the most expensive retail area in the world, which means that a 2000sqft noodle shop has to (according to him) sell 1400 bowls at current prices to pay one days rent. You better be the best noodle man on the strip or you'll be in trouble . . .  and so to will be LINK.

Yield is always a two edged sword, often when times are bad and interest rates are going down people use yield to shield themselves from the volatility of the stock market. During the current run up in markets the fad has continued and is in fact backed strongly by the cost cutting efforts of major corporations who are no sitting on record amounts of cash. Companies such as Apple look great because of their cash stock piles and their new propensity to pay dividends. But an expensive stock is an expensive stock and dividend yield rarely compensates you 100% for the capital loss risk. Returning to retail stocks for a second; did you know that the S&P Retail index now trades on 21x earnings? Consumer sentiment is at a 5 year high, as measured by the Reuters/University of Michigan’s consumer sentiment index (84.9 in October, up from 82.6 in September). So the bet is that retail spending grows fast enough that 21x earnings today is a lot less in a years time. If you're bull on retail you're also betting that the US fiscal cliff is avoided sooner rather than later because if those tax incentives for the vast majority (as embodied by the 2% payroll tax cut that might disappear) expire, than the black friday sales might have to last until the end of January. Be warned there is a lot of things similar about selling noodles in HK and T-shirts in NYC . . . . if revenue hits a wall then watch out below.

I'm going to be riding in the country west of Sydney this weekend. The weather looks a bit patchy, but I'll load up the bike gear in case I get a patch of blue. I won't try and ride on the main motorway arteries as I did last time because I doubt my nerves will take it. I'll also be charging up the front and rear lights so I can max them out at 70 lumens to give cars a chance to see me.

Happy thanksgiving to my American friends.


Wednesday, 21 November 2012

When is enough a enough . . . ?

I still take an interest in all things Singaporean, so when the short selling research house Muddy Waters targeted Singapore based trading house Olam I was interested in where this might go. Muddy Waters has been a fairly diligent critic of many of the asset holding plays in Asia over the last few years and in the case of Sino Forest a very successful one. I find their analysis a little thin at times, but the basis for their recommendations is usually sensible at it's core. With Olam the pattern is familiar; a low margin "clipper" of tickets decides that they can do things better so they start to accumulate assets in the hope of controlling the supply chain. Now there's nothing wrong with this so long as your free cash flow is strong enough to meet the debt servicing requirements of the gearing. The problem is that Olam seemingly is patching-up its bottom line by revaluing assets and calling this a gain. The trouble is not the revaluation in itself, but rather the fact that there is a temptation to revalue and then borrow more cash on the back of it, much like households in the US did during the housing bubble. Of course if your cash flow falls at any stage the banks are going to want to "close" on some of the assets in order to make good on the loans. The ponzi'ish nature of all this goes to Muddy Waters current case against holding Olam equity. I guarantee if you follow this one you will learn a lot about Asia and even more about how to do fundamental research on companies.

Given the current controversy surrounding Olam why not consider other areas where assets or inventory or being values incorrectly? Goldman Sachs estimates that non-performing loans at Chinese banks are approximately 9 times greater than the official estimate of 0.9%. A lot of people think that the GS number itself underestimates the real NPL's. Why does it matter? Well in reality the Chinese banks are propping-up unprofitable companies who are sitting on inventories that are being carried at "unreasonable" book values. According to a Reuters piece yesterday the motivation is political as governments, both central in Beijing and provincial are worried about the systemic risk of multiple bankruptcies in what is a country with falling revenues and increasing leverage. Reading the story it's stating to remind me of the early stages of the Japanese bear market when zombie companies were kept alive in order to allow lenders forgo the embarrassment of taking losses. That may sound unfair, but it's meant more as a warning, than a diagnosis of the situation.

The de-leveraging within the system still has a way to go. Some banks are rushing towards a restructuring, others are cautiously probing the way ahead like a soldier in a minefield armed only with a bayonet. The more I read about the CS restructuring the more I prefer it to the slash and burn at UBS. The cosmetic re-labelling of divisions is clearly meant to placate Swiss regulators while buying time to formulate a more measured response. I call it more a wait and see strategy. Here's a very good discussion piece from the FT today: The FT was lauding UBS yesterday and think CS will have to go further, with implication being that they are delaying the inevitable. Maybe they'll be proved right, but for the life of me I can't see the first mover advantage on this occasion unless you believe that rally in the UBS share price allows them a better chance to raise tier 1 capital than CS has.

It must be tough being a regulator in any industry. You're most likely to be fairly lowly paid compared to those you seek to control and if you're successfull your reward is to be hired by those that you were successful against. Of course if you're too successful no one will want you, so you're left in a half way house of report writing and backside covering. Take for example the latest re-hashing of allegations surrounding the dumping of Pierre Bordry, former head of the French national doping agency, who says that the President of France sacked him at the request of Lance Armstrong. OK, maybe it's true, but at what stage did Bordry ever cause a real stink about doping in cycling. Sure their were some minor successes, but when did he stand up in the media and say "I think we have a systemic problem here"? It looks like Bordry knew everything and sought to do a lot of clean-up work behind the scenes instead of going public. I know it's tough on Boudry, but sometimes the laundry has to be hung out in full view of the public in order to prove it's clean.

Cannondale has announced that they're changing wheel suppliers to their pro-cycling team from Mavic to Vision. I haven't ridden Vision wheels, but have seem them in the peloton. Vision is a division of FSA, so essentially this Cannondale going with a single accessories supplier aside from the group set which I assume will probably remain as SRAM . . . but even that's not clear yet.

And finally here's one for those dark days around Christmas in the northern hemisphere, Revolights:

Retail is $250. System weight is 12.3oz (348g). Battery packs are USB rechargeable and good for four hours of light per charge.


Tuesday, 20 November 2012

I prefer not to ride in snow . . .

Good call from one of my investment bank sources yesterday prior to the move on Wall St to sell the downside Apple 90% puts and buy multiple calls against them. I've seen this move work a bit over the years and requires very accurate execution and a bit of luck when you're in a bearish environment. The guy that sent me the idea said I could get 4.4%'ish for the put expiring in the middle of April. That's appealing to me if I'm sitting in zero yield bank deposits and desperate for some income. The risk that Apple falls another 14.4% (10% + 4.4%) by expiry is out there, but with Xmas coming and sales for products likely to be at least OK, then I think I can stomach it. And let's not forget that there's always another round of QE-ternity! I think I'd prefer to that than sell downside puts in Chinese dependent resource stocks.

It's hard to sit on cash with rates so low and some people will buy anything. At this time of year one of the purest wealth indicators is the auction held in France to support the Hospices de Beaune in Burgundy. The auction, which is the highlight of a three day festival (Les Trois Glorieuses) has been held since the 1850's. Unlike a normal wine auction where you bid on particular cases of various bottle size composition, the auction in Beaune requires that you bid on entire barrels. You then specify how you would like your wine bottles. It means that you better be a serious buyer because a barrique holds 225ltrs. FT wine critic Jancis Robinson put the results up on her website and it does make for some interesting reading for investors and drinkers. Highlights were:
  • 407 bbls of red and 111bbls of white were auctioned
  • 12% of bids by value came from Asia based buyers
  • The President's barrel fetched €270,000 and was acquired by a Ukrainian (Igor Iankovskyi) 
  • Some of the records included - Clos de la Roche, Cuvée Georges Kritter €55,667 (without premium +94.2%) and Mazis-Chambertin, Cuvée Madeleine Collignon at €38,318 (without premium +57.7%)
This all tells me money is too cheap in some parts of the world. So while I find it difficult in recommending a wine section in an investment portfolio (because it's an asset that usually doesn't last, I have to say that there's probably some good turns being made by merchants at the moment.

The Chinese hopefully didn't use todays CNY 45bn (about USD7.2bn) in reverse repos to finance any wine purchases. The people in the know in Asia keep a close eye on such money market operations as China looks to add money to the system. Todays operation wasn't particularly large for the Chinese, but it's always worth watching.

I had some interesting feedback from people looking at property opportunities in Europe. People are always fairly passionate about residential property and my point was never for you to buy it to live in, but if you did want to leave your current domicile for the high taxing environment of Europe then you'll like the fact that Reuters is reporting that the country's commerce secretary said on Monday that his government is thinking of offering foreigners a residency permit if they buy a property worth 160,000 euros or more. So does that mean I can get a passport and move to Germany etc. without having to worry about the niceties?

My friends have gotten sick of me telling them how much equity global banks have to raise to meet Basel III requirements. Sine June US banks have raised 10bn worth according to the FT. I've always liked pref shares as you get a kicker in dividend and end up slightly up the capital structure. I'm not a great buyer of the banks as a wealth creator at the moment, but if you have to be involved why not get a  better yield for your trouble? Here's a table of hybrids on Citigroup:

Citigroup Hybrids
Notice the 5.95%'s? These were issued in October and it says they are unlisted. Now I'm a little out of the loop, but I bet if you're an appropriate institution then you probably got to buy some and Citi themselves will make you a market if you want to get out. Look for these to adventually make their way into private banks etc. Well worth a look.

Another 30 k's on the Cannondale today in what is a strangely cloudy and wet Sydney. I managed to get out the door at 0610hrs after catching up with the overnight news:

Lots of peloton's out there this morning. I'm a bit surprised at how some of these guys ride, some pretty aggressive stuff and not much talk, no jaunty "bon jours" to be had in Sydney amongst the more serious riders. It makes me miss Geneva. I've heard that some of the training peloton's in Centennial Park have recently been telling slow and younger  riders to get out of their way. A bit rude in a public park in my view . . . and let's face it, if you're capable of riding at a steady 30 - 35kph in a big group of 8 - 12 for more than an hour than perhaps, just maybe you really should be on a road? Food for thought?

A mate of mine is buying some new wheels for his bike. I sent him a quick note, but perhaps I needed to add something about riding in the northern hemisphere during winter? For a laugh I reckon you could do worse than watch the following video:

Just in case you're a warm climate guy like me let me suggest that you want to be very careful on a road bike in a northern winter.


Monday, 19 November 2012

Ask for everything, but settle for what's reasonable and safe . . .

Nearly 60k's on my bike yesterday left me with lots to think about. Let's start with a question . . . What would a Greek exit from the Euro do to Franklin Templeton who now own at least €8.4bn in Irish bonds? Think about it . . . this means that this one funds management company now controls almost a 10th of Ireland’s entire government bond market. The search for yield knows very few bounds at the moment. For the investor the fact that Irish Government debt now yields around 4.6% v. more than 8% at the start of the year will no doubt leave some running to catch up and that running may unwisely push many to the periphery of the Eurozone in the hope of similar gains. OK then, consider this: What other investments exist in Europe that offer an appropriate yield and safety? I would suggest that direct exposure to the AAA property markets, perhaps in Germany, but certainly within that group of northern countries most likely to continue with some form of Euro based currency continue to offer some attractions. Direct investment can be difficult and costly, but if correctly constructed a portfolio of worthwhile properties can be constructed. Then again do you really want exposure there just yet?

Of course I've been bearish on the AUD for a while now and continue to be worried about slowing tax receipts and a government unable to make cuts in social policy infrastructure, Having said that the comparative yield advantages and lack of debt stress make it hard to see a major fall in the currency before the new year. At least a high AUD makes it easier for the Australian public to turn to online shopping to escape the various duopolies that dominate the retail sectors:
Follow the leader? Maybe yes, maybe not so fast?
Local retail groups continue to make noises about growing their internet businesses, the problem is that mega-mall retail group Westfield has brought specialty shopping into the Australian cities allowing people to seek a wider selection of brands and better service than traditionally available. This combination means that smart shoppers are now seeking a better retail experience, that of course encompasses price and selection. The ruling that indicated that for the moment the Customs authorities will not seek to collect taxes on purchases of less than AUD 1000 virtually assured that the world had changed. In Switzerland the customs authorities collected even the most meager taxes on purchases made outside of the country. On more than one occasion DHL, Fedex etc. would collect from me amounts of less than CHF 10 on behalf of the federal authorities in order to assure Swiss jobs were saved. Of course it did mean that higher costs were built in making the country even more costly for people living there.

I noticed that shipping giant AP Moeller-Maersk CEO Nils Anderson told the FT that his group will not be investing significant amounts in the container shipping business during the next 5 years. They prefer to concerntrate on oil rigs and ports. Mr. Anderson told the FT that . . . "we have sufficient capacity to grow in line with the market." That to me sounds like someone is not willing to bet on a global pick-up. I obviously hope he's wrong.

I buy a lot of my bike equipment online. Even with priority shipping to Sydney I often find that I get what I want quicker and at a lower price. Where it makes sense I support my favorite local bike shop, but because of their size they can't carry everything in stock and often are forced to wait a considerable amount of time for something I can get easily from some of the European mega bike shops.

Their were some splendid bikes here on the road yesterday. I particularly liked the  Giant TCR Advance SLR that I saw when I stopped for a breather at Little Bay yesterday.

I'd never been taken with the Dutch flagged influenced colors or the geometry of the bike before, but it looked a lot better than I remembered when I saw it in the flesh.


Thursday, 15 November 2012

Beware of the prospectus and always know what you want from an investment . . .

It was a busy day yesterday and I didn't get time to add to the blog. One thing that mesmerised me yesterday was the JPY sell-off, it's been a long time coming and interestingly was precipitated by negotiations surrounding Japan's own fiscal cliff. The Japanese have to borrow $480bn to make the current budget work and the only way of doing that was by having the government promise to call an election after the bill gets passed. Failure of course would have effectively decapitated Japanese banks who hold huge portfolios of government bonds and are already struggling with the equities they hold and should have long ago divested. Combined losses from "mega-bank" (Mitsubishi UFJ, Sumitomo Mitsui and Mizuho) shareholdings have more than tripled in the six months ended Sept. 30 from Y170bn to Y540bn. So you can imagine the amount of equity that would have be raised to keep these banks as going concerns if they were forced to take a hit from a JGB collapse!

Japan is kind of like a huge ponzi scheme, with the banks owning everything. The idea you see of ultra low rates since the early 90's was that the ease of credit would allow the economy to grow and therefore make up the gap between real tangible assets and paper value allowing the ponzi to be traded out. Of course all that was a bit like the US government telling Bernie Madoff that they were going to inject funds into his firm so he could try and make enough to return money to investors . . . not likely to work. Of course as an investor you can still make money trading the market, you just have to look for the right instrument. For many in the late 90's and early 21st century this was the Japanees bank's convertible preference shares. These shares had diabolic terms attached to them both for the banks and the investor. The vast majority had were resettable, meaning that at various points in time the conversion price of the preference shares reset to the prevailing stock price and therefore also increasing the number of shares you received in order to preserve your face value. The problem of course was that there is a floor to the reset and when you hit the floor the investor in the prefs doesn't getting any more shares at a lowe price and therefore starts to suffer a real slide in value because up until that point in time investors might consider themselves somewhat hedged. What really happened was that foreign investment banks started to offer to buy prefs directly from the banks and they in turn would not notionally hedge, but in fact actually hedge, treating the resets as barrier options and pricing accordingly. I could go on, but suffice to say Goldman Sachs was the prime beneficiary of this type of play by dominating the trading, pricing and distribution (when they liked you) especially in the prefs issued by SMFG. Maybe that's enough of Japan for one day . . . all you need to know is that the Nikkei was up nearly 2% when the rest of the world was going down.

Australian banks have recently been issuing convertible preference shares. They're not in the same toxic category of some of the Japanese prefs in their construction. I think the main reason that the Aussie's issued these hybrids was because they needed to onshore funding as they were and are too exposed to offshore bond markets which in 2008 basically closed down and put the bank's mortgage books in real peril.

I was speaking to a firm this week about a possible position. They asked me about my short-lived hedge fund and what our investing strategy was. I always give the same example that we built the fund predicated on protected investments. The best example of this was during the BP oil spill in the Gulf of Mexico. At the time the BP share price collapsed and as a professional investor in commodities and related infrastructure you had to make a choice of whether you trusted the BP reserves and oil price enough to cover the costs of various legal actions and still make a good return. The alternative we looked at was a capital structure arbitrage scenario. Basically we built a table of scenarios and then considered what BP would have left in order to repay their various stakeholders. To cut a long story short we realised that with the most senior debt trading in the high 70's as opposed to pre-crisis high 90's and with the 90%+ likelihood that even in the most extreme cases that the bond holders would get their money back there was a quick low risk 20%+ to be made. Of course you then went further down the capital structure and via modification via a risk-weighted model built a position in BP that maximised returns while minimising potential capital losses. The argument that you had to go all-in on the equity alone didn't fit in with our philosophy. If we had been a high volatility type hedge fund whose investors understood boom or bust bets then yes you go for the shares, but that of course comes down to horses for courses.

With a light rain falling here in Sydney I'm probably going to get out my Tacx trainer and head up the virtual Pyrenees: