Tuesday, 26 June 2012

Mission Impossible . . . Converging views on the future of Europe

Greetings from the war zone which was once my well ordered apartment in Geneva. Packing day has arrived and I'm sitting in the midst of a forest of cardboard boxes. Bloomberg TV is keeping me company as I pack and I await the latest breathless news on this weekends summit to end all summits.

Is everyone reaching the same conclusion at the same time? Is reality converging? Many of my friends are starting to think so. Of course most of the investment banking world has been in denial, you see too many people in powerful positions rely on bull markets. The shock of Lehman Brothers was that there were no buyers. That never happened before. Bear Stearns went to JPM and even when Barings went under there was a single buyer ready to step in and take the whole thing on to their books and barely touch a single headcount.

The Fed has done 3 rounds of "creative easing": QE1, QE2 and Operation Twist. Each time the bounce has been less pronounced, less effective. I just can't see Bernanke using his balance sheet again unless things are terrible, because right now a QE3 will do nothing but rally risk assets for 4 months and lead to nothing but more policy acquiescence.

Meanwhile in Greece, to paraphrase the philosopher; to lose one finance minister is unlucky, to lose multiple finance ministers seems somewhat careless.

Who takes a job and resigns within a week when that job is saving your country from disaster? Is this the shock that the euro-cracy needed? Maybe they all just want to head to the South of France or Positano Italy?

The latest Spanish auction just happened and I've been distracted from my third box of rubbish. BTW - moving is a chance to throw stuff out. I've instigated a rule here, if you have to think whether you want to keep something for more than 10seconds then you don't need it so throw it away. Spain sold €3.08bn of short-term debt, but paid the highest interest rates since last year. They sold three-month bills at an average rate of 2.362%, compared with 0.846% v. last month, and also  6month bills at an average 3.237%, up from 1.737%. That's what I call unsuccessful. Of course the market seems to think that will make the euro-cracy act . . . . yeah . . . good luck with that.

In company news I thought it was interesting that Murdoch is fast seeing the end of newspapers. If he agrees to split them out of Newscorp it will replicate the strategic decision he took back in the 90's in Australia to get out of high cost low margin glossy magazines. He loves newspapers, but he knows the situation.

Back to packing.


Monday, 25 June 2012

On the road to Sydney . . .

Hell week. Not just for European leaders but also for me. This is the week for packing and moving. It's not going to be fun. It takes roughly eight weeks for my household goods to arrive at my house in Sydney. In that time I'll be living out of a suitcase and in a house with minimal rented furnishings.

Is George Soros long the Euro? I don't believe the king of macro currency trading ever does something for completely altruistic motives.

Interviews like this are adding to the international pressure on Merkel to let the children have their Xmas toys early (i.e. "euro" bonds). We know that Soros sold most of his gold holdings back in May when it was reported that he was of the view the commodity was forming a classic bubble. His holds seemed to be centered on various ETF's (see below).  Of course there is a school of thought that says part of his rationale may have been that he was starting to see the breakdown of the shadow banking system and the with that the derivatives of first order commodities.

It's difficult to know, but clearly a long Euro play would suit an investor known for liking the counter intuitive and for squeezing markets. Time and his next quarterly reports should tell us more.

The other big things this week are the Spanish deficit numbers and the US housing numbers (Case-Schiller). I don't know what to expect from the Spanish, but maybe the worse it is, the more pressure Merkel will be under. I hate this double-dutch logic, but that's how the market has been functioning for the last 3 years. Obviously the market will be looking for some deflationary numbers from the rest of the eurozone concluding with the total inflation numbers for the zone on Friday.

Those saviors of the west, the Chinese have some deflationary problems themselves in housing. Numbers continue to show non-tier 1zone prices falling (i.e outside of Shanghai, Beijing, etc.). 15% or so of the entire economy is focused in this space and therefore should put pressure on the overly optimistic GDP 7.5 - 8% f/c range of the market. The world should watch this carefully. Stay short AUD.

Finally I can report that my faithful stead, my Pinarello Dogma is now at my local bike shop being taken apart and packed for shipping. So that means no riding until my Cannondale hits Sydney around July 15.


Saturday, 23 June 2012

Brake-downs, meltdowns and brake-ups . . .

This is my Friday blog a day late. Sorry, but the packing and saying good bye to people is cutting my reading time down. It's also cutting my riding time down. I managed to get the Pinarello out today (Saturday) with my bullet proof Campagnolo Bora wheels. I think I'm going to give up on the Eastons as I'm not going to risk getting stuck in France again without support. I just couldn't face the indignity of another long cab ride home in lycra. Maybe the Eastons will come in handy around Sydney where my rescue options will be more plentiful.

When Moodys downgraded banks on Thursday there was a lot of cynicism regarding some of the conclusions. Much of the financial gossip has focused on Morgan Stanley, but in my mind their problems are no different than many of their peer group. Also if I hear one more CNBC "money honey" interview telling me this is all priced in I'll scream!

I mentioned recently the SNB's targeting of the capital adequecy of the CS balance sheet. CEO Brady Dougan is in the hot seat and because he's continually insisted they had enough capital and he's American. I believe the Swiss are intent on replacing him with one of their own. It's typical of this country that when things get bad they pull up the drawbridge expel potential infiltrators. Right now the Swiss nation feels under siege by a faltering Europe that is causing the SNB to debase their cherished CHF in order to save uncompetitive Swiss jobs. Basel III says that CS needs core tier one capital of 7%, but it probably has under 6%. Add to that that the Swiss have imposed a 10% hurdle because of the systemic importance to the country of CS (and for that matter UBS) and you can see the problem. They probably need to raise about CHF7bn to get over the 10% hurdle. He should have cut the dividend a while back, but clearly he felt he had a duty to shareholders who have seen their banks stock fall 80% since he took over. There may be another angle here as well . . . perhaps the Swiss are actually saying to Mr Dougan that he needs to shrink the bank, rather than continuing to raise more tier one. The choice is not an enviable one and if I was a Swiss banker looking for a top job I'd start to dust off my CV and call a couple of SNB board members with the news that I was available.

Breaking-up is hard to do, or so the song says. Frau Merkel is fast losing her famed patience with the verbal diarrhea of France's  President Hollande. You can see it getting worse everyday. The Germans are not willing to allow the growth cartel to go out and start writing cheques on Germany's accounts. This continuing demand for the euro-cracy to issue bonds is crazy. And to call the paper that may come about "European" is a joke. It's actually Germany that will be doing the guaranteeing. Whats the point of getting a promise to repay a debt from Europe when 12% of that promise is from a near insolvent Spain? the next "summit" is June 28 & 29. You know what? Why don't they just use Skype like any other business that wants to save money?

A while back I was playing the AUDCAD cross pair in the belief that the Canadian exposure to inflation linked oil should be favored over the Australian exposure to China. Now what I hadn't considered was just how leveraged that average Canadian household has become. The WSJ reports today that Household debt in Canada hit a record in the first quarter of this year, at 152% of disposable income. The boom in Vancouver and Toronto looks to be slowing, but that hasn't stopped the government brining in new rules regarding mortgages:

1. The maximum mortgage amortization period was cut to 25 years from 30
2. The amount of home equity Canadians are eligible to borrow against was cut to 80% from 85%
 3. Taxpayer-backed mortgage insurance was limited to homes valued at less than one million Canadian dollars.

Canada and Australia are similar in the requirements for mortgage insurance, but here's the news on this .... in Australia most of that insurance is done through the private sector and backs out to? You guessed it - America. I need to do some more reading on the Canadian governments insurance scheme and decide if thats actually leading to a dangerous position for the land of the maple leaf. Oh, Canada .... !

I'll try and write another blog tomorrow to make up for the lateness of this one.

Bon Weekend . . . Ciao!

Thursday, 21 June 2012

Broken spokes in France, Australia and HK . . . and something for charity

What a day! I'm just back from a little town in France by the name of Machilly. Why was I there? Good question. A broken front spoke on my Easton EA90SLX's left my wheel completely out of true . . . . meaning that it was so off center that it kept hitting the bike fork prohibiting me from riding. My support crew is without a car at the moment, but thankfully Mrs IB Cyclist was able to use her French and call me a taxi. I'm very lucky to have her as my French wouldn't have been able to describe my location, let alone the fact I needed a car that could handle my bike.

Earlier in the day I had been bidding (via EBAY) on items donated by the Giro d'Italia to UNICEF. While bidding a good friend of mine called to chew the fat over a couple of things he'd seen during trading hours in Asia Pac.  After my blog yesterday where I mentioned the slowing of sales figures at Proctor & Gamble it was not surprising when he mentioned the disaster befalling former retail darling Billabong. Back in February Blackstone, KKR and TPG had been making overtures to buy the company out. The talk at the time was of a t/o price close to $6, but the board seemed to think it was worth multiples of that and therefore broke-off negotiations. Lately the number floated was $3.30, but whatever it was it was too much.

Well now comes the news that the company will issue new shares to existing shareholders at a 44 per cent discount to current prices. Talk about a joke. A board passes on 6, then passes on 3.3, then goes crawling to the shareholders offering stock at a buck! Goodnight and goodluck to those men and women.

Maybe north Asia felt neglected because of the goings on at Billabong, so HK came up with its own version of wealth destruction in the form of Evergrande (3333.HK). Check out this chart:

Notice the volumes? This is another one of those possible fraud situations we've been seeing over the last couple of years. An LA based stock blogger said: . . . Evergrande is . . . 

“essentially an insolvent company that has consistently presented fraudulent information to the investing public.”

Nice one. Obviously the company denied it, thus the afternoon rally, but shareholders and traders alike must have been looking forward to a cold San Miguel at the Captain's Bar at the Mandarin after the market closed. Recently he company made headlines by setting a land-price record in Guangzhou at a government auction, paying 80% more than a rival developer had paid for a parcel of land in the same area in 2011 according to Marketwatch. Talk about things that make you go Hmmmmm. There's a disconnect here and I for one will be watching what happens. 

Oh, I just remembered I didn't tell you what happened at the charity auction. Well I'm happy to report that I'm the proud owner of Maglia tecnica del leader della classifica a punti firmata dai corridori che l'hanno indossata durante il Giro d'Italia (G. Thomas, M. Cavendish, M. Goss and J. Rodriguez Oliver) or in English . . . Technical Giro d'Italia Red Jersey worn by point classification leaders (G. Thomas, M. Cavendish, M. Goss and J. Rodriguez Oliver).

Mrs IB Cyclist is a Cav fan, so having the world Champions signature on it made the internal transaction at chez IB Cyclist very smooth indeed. I'm looking forward to framing it and putting it on my workshop wall in Sydney. Obviously I won't be wearing it . . . I doubt it would fit over my head.


Wednesday, 20 June 2012

Stable staples or panic buttons . . . ?

I'm in two minds about what to write today. At 12:30 the Fed will make an announcement. The market, or at least equities has factored in some further stimulus. Goldman Sachs have pushed the QE3 bandwagon out, with an extension of Operation Twist at the very least. Pimco says it’s all too close to call, and they expect the Fed to hold off. I don't know . . . .

Meanwhile this morning Proctor and Gamble have guided earnings down again based on a lower growth number (2 instead of 4%). This is scary for the long only fund managers as they've hidden in consumer staples for months now. Look at the performance of McDonalds in the last 18months. If these start to turn south it could be ugly.

So there's your answer. The fed is not changing and therefore extends "Operation Twist" until the end of the year.

In fact the Richmond Fed Governor voted not to extend. Clearly the Fed is in this position where they want to keep something up their sleeve. Now everyone will wait until 2pm when big Ben speaks to the press.

Just when you though that was it for the day along comes the unelected fool from Brussels Rompuy talking about issuing short dated bills to help the situation. 

I hate this guy.  He represents no version of democracy that I know of. On top of that what do you think is going to happen to funding rates in Spain if they do issue these? Say after me . . . .


The game continues . . . .

The game also continues in the lead up to the Tour de France. I find it slightly Disengenuous this talk that Sky (Wiggins and Co.) are doping. Some people are calling them UK-Postal in reference to Armstrong's former team. I don't believe it. The extra scrutiny that we're getting these days on top of the fact that the Olympics are around the corner mean the chances of getting caught are just too high. Wiggins didn't do himself any favors by suggesting a new training regime was really giving them the edge. Shut up Brad.

You're the favorite, don't put extra pressure on yourself by getting crowds against you.

I think Wiggins and Evans are the obvious favorites. I like the Liquigas guys, though Nibali has probably got the experience over Sagan.

Tuesday, 19 June 2012

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

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

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

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

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

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

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

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


Monday, 18 June 2012

Swiss-ocracy . . . .

Today's blog will reflect exactly what I did today, i.e. spend most of it in various government offices officially "leaving" Switzerland. You can't just leave this country, you have to give notice and present yourself accordingly. For those of you thinking of leaving, or for that matter coming here let me give you a taste of the day.

1. Office of Population Control for the Canton of Geneva.

This Stalinist sounding place is the key to your success if you wish to extracate yourself from the idyllic Swiss lifestyle. You need to present yourself and officially declare via "Form D" that you are leaving the country permanently. You then have to provide your Swiss ID, in my case it was my B Pass and my Passport. Additionally your spouse and children, if you have one or both, have to be there as well. You then sign on the dotted line and in return you can purchase an "attestation" for CHF 25 which is evidence that you are leaving. You will need this no matter what you are told. Pay up and be happy as your multi-hour wait at the OPC allows you to move on to step 2.

2. Office of Tax (whatever the the French is . . . ?)

When you arrive here bring your newly acquired attestation, your passport and Swiss ID. You have to come here to fill out a form that says you owe the government nothing. The document you sign requires all sorts information about where you've been living and what you may have bought in terms of property while here. Essentially they're trying to ascertain whether they need to charge you capital gains or other associated taxes. Be very carefull about this part. If you're leaving a property behind they'll be applying taxes galore, so you may want to get the advice of an accountant. In my case we have a letter releasing us from our apartment lease. We found a replacement tenant and have an official letter from our managing agent, they didn't ask to see it, but there was a question about this on the form, so if you're skipping the country be careful. At the end they'll stamp your last tax return if they're happy and let you go. Proceed to step 3.

3. Pension

Take everything you have and if you're married bring your marriage certificate and head over to your pension fund to collect your pension. You are entitled to all those contributions your employer made to the government pension scheme. If you're Australian, or Canadian or American you get the cash. If you are EU then you get to transfer it to your home pension fund. Just do it. I've read the horror stories of people trying to claim it years after the fact . . . the Swiss don't want to give you a cent back, so get it while you can.

We estimate the day was about 4-6hrs of waiting around and travel. Obviously we stopped for lunch because that's what the Swiss do. A complete joke, but just pack your iPhone with music and books and you'll survive.

And finally on the markets . . . . I'll leave you with the the quote of the day from Bill Gross of Pimco:

"Germany, to me, is a credit risk"

Goodnight, good luck  . . . . and Ciao!

Sunday, 17 June 2012

Something not to look forward to and something to look forward to ...

CNN is wall to wall Greek elections. Richard Quest is anchoring the coverage with all his usual toothy enthusiasm. The problem of course is exit polls are showing this as too close to give the country direction. I suspect that the final formulation of a government could take weeks. No one should be looking forward to this.

I managed to get in another 60k's on the bike today. I went up the Col De Saxel. Not my fastest time, but enjoyable nonetheless.

It's a great ride and the area was crawling with riders. At the top there's a little pub with a large garden serving a BBQ. When I got back home I was doing some post ride maintenence and found this:

Guess you could say I was pretty lucky to be back in Geneva in one piece.

Maybe as it's a Sunday we should take some time off and look forward to something more exciting . . . July 2nd, it starts:


Saturday, 16 June 2012

By request ... Podcasts I listen to on the weekends


Riding back to reality . . .

66km's under my belt on a gorgeous day in Geneva. Absolutely pristine blue alpine sky. I got out just before 8am and hit the roads along the lake out into France. I wasn't the only one with the inclination to get out of bed this morning, literally dozens of my lycra clad brothers and sisters were grinding up the hills in the Haut-Savoie.

3 hours later I was back in the city listening to my usual list of Saturday podcasts and reading the various news papers. I was getting bored of the whole sky is falling / Greece is a disaster zone tone of the serious press until I came upon an Op-Ed piece in the NY Times by Nikos Konstandaras, managing editor and a columnist at the Greek daily newspaper Kathimerini. It's a great essay because it encapsulates the human side of this tragedy.

Konstandaras summarizes the dilema facing the Greek electorate as a choice between the Nihilistic left and the discredited centre-right, with the middle now no longer a factor. The level of insecurity he writes of is palpable:

"When I go to the A.T.M., I hold my breath until I hear the reassuring whirring sound that says the machine will give me what I’ve asked for. I wonder whether I will be so lucky next time. "

The sad fact is this is a nation divided:

"None of these parties have advanced a serious agenda to avoid disaster. Those who are deeply in debt — or who aspire to gain at the expense of others — hope that the economy’s slate will simply be wiped clean. Those who have stashed their money abroad will be able to buy assets on the cheap if Greece leaves the euro zone. But the people who work hard and pay taxes, who have a stake in reform and progress, who carry the burden of every mistake, have no credible representative to vote for. Those who want a better Greece have to look for the least bad option."

It's a sad commentary on a nation who not long ago hosted the Olympics and had success on the soccer pitch. Both moments of great national pride. Having said that, Konstandaras doesn't shy away from the most damning conclusion:

"What I want to remember from Greece in 2012 is how laziness and years of intellectual sloppiness can waste the gift of freedom and leave open the gates of the city — how we allowed our leaders to pander to us until we had no one capable of leading us, no one next to us at the barricades."

This early 21st century culture of middle class welfare is more than a Greek phenomenon, it's something endemic throughout the G20. That's why the politicians keep bailing out failed institutions, because we the people demand it.  We no longer have the patience to save.

Bon Weekend!

Friday, 15 June 2012

Stop, search, exit and ride ....

Sorry about the lack of a blog yesterday but the internet conspired against me. The journey back from Italy was eventful as I got the complete stop and search going through the Swiss frontier. 45mins of questioning by the frontier police is less than fun. The support crew and I smiled and kept cool, though we did get into some trouble over the fact that the dog's papers were with the vet for export and not with us. Well, we got through in one piece and I'm thankful for that ... though the Swiss did seemed amazed by the fact that we were returning home to Sydney permanently. "Why?" I really didn't want to say it was because I was sick and tired of paying CHF25 for a pizza and a 50% mark up on wine. Better to just say nothing.

What does Carrefour know about the Greek elections this weekend that we and the equity market don't? Clearly the bond market is in agreement with the French supermarket group who sold out of their Greek franchise for €1, booking a €220mn loss in the process. Meanwhile Crédit Agricole also ran up the white flag (no jokes about cheese eating surrender monkey's please) and exited Greece. The FT was reporting that the euro-cracy was planing incentives to keep the Greeks in the EZ, but might I suggest that M. Hollande lacks conviction in such a commitment and probably indicated such to these two French institutions.

The Swiss may have reached the same conclusion yesterday when the SNB told Credit Suisse that they needed to raise more capital. I was telling a friend in Asia this morning that the SNB has been trying to get CS to man up for a while. The CEO has been adamant about the value to capital of the Co-contingency Bonds CS issued last year, but SNB has always thought this was a cop-out. Thus now they've had enough and are starting to push. For once UBS seems to be in the clear and they didn't do Co-Co's, so they got a pat on the head.

While in Italy I managed three nice rides on the Pinarello. Day 1 I did the full circle through the hills to Alba and home

I stopped at lunch to introduce the support crew to a little bar I found in Barbaresco. A couple of glasses of Chardonnay with some carpaccio and I was ready to ride again.

It was a great ride with over 1000m of climbing, so I deserved my swim back at the hotel later in the day.  I did two other rides, with one a half circle to Alba for lunch and the other a pre breakfast 35km sprint before driving home yesterday.

I like Alba, the people like food, wine and bikes. There's a hire a bike scheme in the town and every bar seems to have a good selection of of fine Barolo's and Barbaresco's by the glass. If you're coming to Italy it's worth bringing your bike and heading to Piemonte. True, it lacks some of the art of Tuscany, but the people have time to smile and that's a good thing after living in Switzerland.

Bon Weekend!

Wednesday, 13 June 2012

Quick thoughts from Benevello . . .

I rode 55km and stopped for lunch today. I was going to do another 20k's, but you know what . . . Why spoil perfection? Of course the fact that I made the decision just in front of my favorite wine bar made it an easy choice.

On the last 8 km's into Alba I was thinking about how the markets might take the Greek elections. I'm guessing that the market is betting that a pro-Euro party will get in. Probably because the leverage is in the shorts. I know others will say it's the other way around, but it's just my reading of the tea leafs. I heard an interview with the extreme left leader on BBC and all I can say is he sounded confident that they will exit in order to spare the Greek people the pain that the rest of Europe is inflicting on them. Clearly people such as George Osborne believe Greece should exit so the core can get on with saving themselves. It's hard to argue with that, right? The more important fight will take place over Italy. It would be hard for Germany/France to let the Italians go, in fact they probably for choice should exit Spain stage right and put all their cash on Italy. Afterall the Italians make the best bikes.

Who do you think is more dillusional Jamie Dimon or Francois Hollande? It's close because one guy convinced himself he was a great risk manager and the other guy thinks that you can print money and suffer no consequences. For mine, it's Hollande first, Dimon second. Hollande is amazing me with his calls for for a 500bn fund for bailing out banks ... I presume that in his mind the money is basically for the French banks. Exit France now.

So tomorrow I'm riding before breakfast. A quick 30k's should have me in a good mood for the 4 hrs driving back to Geneva. I'll be back here in a week to pick up the new bike and revisit the hill near Piasco . . . This time no stopping.


Tuesday, 12 June 2012

A perfect day ... Goodnight Spanish bonds, airlines and eating in Alba

All days should be like today. A 60k ride through the vineyards around Alba, lunch in Barbaresco and a swim in a pool surrounded by a herb garden. Perfecto.

Of course it's now official .... I am the only man on a bike in Italy who does not shave his legs for bike riding. I concluded this when I hooked up to a group of 10 Italians horsing around on my first climb of the morning. No worries here about the bond market. Every one of them had smooth brown legs. No waiting around for me though. I took off past them up a 5% gradient at a steady 20kph. That's about my max speed on that gradient and I guess the boys decided it was a challenge they couldn't resist. Two of them speared after me and caught me quickly. We then spent the next 3k's grinding cranks up the hill before, satisfied I peeled off in the direction of Alba happy with my effort.

On the run into Alba on a vicious little climb (max 13% gradient) I let my mind wander to disperse the pain evenly through my body. The Spanish PM is a liar I started to repeat to myself over and over again. It's true, right? What else would you call it when in his presentation of the bailout he proclaimed the 100bn Euros he'd secured came without conditions. It reminded me of Chamberlain returning from Munich with his piece of paper .... Peace in our time. No Prime Minister, you gave the Euro-cracy seniority over your own debt issuance, thus guaranteeing escalating funding costs for years to come. The markets agree with me and have now pushed Spanish 10yr yields back to their recent highs .... mark my words this will go wider.

Readers will remember my recent rant about airlines, well a friend pointed out to me today that airline industry lead body IATA was holding it's AGM in Beijing. Looking through the number it looks like profitability is collapsing under the assault of euro instability, high oil prices and (get this) a slowing China. Brian Pearce, IATA's Chief Economist has an interesting presentation available on the IATA website. I'm no expert, but check out the aircraft orders. Is it just me or might this be a replay of the shipping industry's massive 05 -07 capacity expansion? Take a look:


It seems to me that you want to continue to avoid this space.

Tonight we're heading back into Alba for dinner with some friends at a really nice local wine bar and restaurante. It seems local porcini mushrooms are in season, so no doubt like last night we'll be presented with a specific menu of these delectable fungi. I have to say that these mushrooms go perfectly with the local Barolos and Barbarescos. All in all given my ride to today I'm quite looking forward to good conversation and replacing the 2500 calories I expended today. I ride to eat and drink, I eat and drink to ride.


Monday, 11 June 2012

Let the Ponzi scheme continue . . .

The ponzi scheme continues without me today. On a whim I booked a hotel near Alba for some time in the saddle and by the pool.

Frankly I made the decision to avoid the press this morning as I couldn't bare a repeat of the same analysis that we'd seen over the last 6 bailout type events. I almost vomited when I heard a call from some fringe long only fund manager to buy the financials. OK, you go ahead my friend because I know you're a Warren wannabe. Look, yes buy when there's fear by all means, but only do so when you have an advantage. At the moment you're so called Warren trigger is a ponzi scheme ... That's not an advantage. Here's why ... Spain is 12% of the Eurozone, so when the EZ promises 100bn for Spain, then 12bn has to come from Spain itself. What about Ireland, Greece and Portugal? Is this the definition of insanity or not?

What about the structure of this facility. It's for the banks, but goes through the sovereign, so doesn't that mean the Spainish debt just got bigger. I don't know, but I guess that's why markets in the US and Europe, not to mention the Euro itself are down or unchanged as I write this. I'll ignore Asia as they just don't know what to think unless their governments tell them.

I'm here until Thursday. I'll be doing some reading and lots of riding. The hills here look great at the moment. I plotted six rides last night varying between 40 and 80k's. The aim is to do three good rides, which I will upload to the blog on Friday ... So watch out.


Friday, 8 June 2012

Diminishing returns . . .

It's raining here this morning and I'm hesitating getting on my bike and heading for the today's stage of the Criterium du Dauphine. I don't want to be accused of being a wimp, but now that I sold my car I can't rely on the support crew to bail me out if I get into trouble.

The stage itself will be a cracker, 187km's through the alps just south west of here. I know the hills well and you should see some great racing. I've marked in purple where I'd like to ride to, but we'll have to see what happens in the next 2 hours with this weather.

First, some stimulation for the brain ....

Do you remember when you were first introduced to calculus in math class? I can remember the teacher posing the following question:

"If a frog has to cover 10m to reach a pond and jumps 5m on his first jump and on each subsequent jump covers half the distance of the previous jump, how many jumps must the frog make to reach the pond?"

The problem is one of diminishing returns for the frog and of estimation in mathematics. Either way when Ben Bernanke was finished his testimony before Congress yesterday we all started to understand that the Fed Frog was realising they alone could never reach the pond. The Fed and the ECB are hesitant to act because every additional round of QE is less effective than the previous round. We learned this in Germany in the 1920's and Zimbabwe lately.

All this is bad news for the 1%'ers because that reintroduces the concept of democracy into the equation and as we are seeing in Greece when you do that you might not get the answer you wanted. Asian stocks are down this morning. Welcome to reality.   

Asia was disappointed that Bernanke did not offer any policy easing measures and even former Goldman Sach's man Mario Draghi is pushing back by urging Europe’s politicians to do more to solve this crisis . . . . yesterday of course the markets had celebrated China’s unexpected rate cut. Today of course people started to rethink the Chinese rate cut . . . .

“This rate cut is a clear indication the government sees further weakness in the May economic data [due to be released on Saturday],” says Stephen Green, an economist with Standard Chartered in Hong Kong. “But there’s obviously a risk that the increased focus on the short term undermines the structural reform agenda.”

It's a good thought, because the Chinese are starting to understand that the real risk is that they are unable to create an internal consumption model that will allow them to create the un-creatable .... the perpetual motion economic machine. The leadership understands that the only thing they'll create is the greatest property bubble since that other savings juggernaut Japan started its long road to ruin in the late 80's. Sorry China.

I got a laugh at the expense of Louis Vuitton when I read a piece on CNBC regarding the possible fading of the mega brand in China:

"The truly wealthy, the real millionaires, they will not want to buy LV Louis Vuitton or Gucci because they are too commonplace," said Shaun Rein, managing director, China Market Research Group. "Rich people are getting richer and they want exclusiveness and more self-indulgence."

If this is China then the government is truly stuck in a hard place.

I'd rather be in Australia (obviously given my impending move) than Spain as Fitch downgraded their credit rating three notches to BBB, citing the cost of restructuring and recapitalising the country’s embattled banking sector. Having said that having the RBA's chief teller telling people to stop being gloomy about the economy strikes me as disingenuous from an institution that has lopped off 75bps from its benchmark rate in two months because it sees external shocks heading for its shores.

Yesterday the international press was trumpeting Australia's ability to sidestep the global economic problems when it created a slightly unbelievable 39,000 jobs last month in the face of an expected contraction of 5,000. Well today most people outside of my home town of Sydney will have missed
that 10,000 jobs will be cut from the public service. These aren't janitors and messenger boys, these are 10,000 properly paid full time pension backed jobs. I'd humbly suggest these outweigh the 39,000 barista positions created in the job report yesterday .... OK, maybe I'm over doing it, but them are the approximate facts. Oh, and in case you want to ignore that think about the fact that GST payments that are collected by the federal government and then allocated to the states has in the case of NSW collapsed by $5bn since September. Thats a lot of cash at the state level and speaks volumes as to the consumer downturn. Stay short the AUD.

Have a great weekend . . .


“At best, rapidly rising levels of debt will lead to reduced rates of capital formation, slower economic growth, and increased foreign indebtedness,” Bernanke said. “At worst, they will provoke a fiscal crisis that could have severe consequences for the economy.”

Thursday, 7 June 2012

Things That Make You Go Hmmmm....

Hmmmm .....

Rally or short squeeze? Hmmm ..... fade the squeeze.

1. China cuts rates to 6.31% in first reduction since 2008
2. Bernanke says Fed ready to act on Europe
3. The Swiss National Bank foreign exchange reserves rose to SFr304bn in May – a record high – up from SFr238bn the previous month - mostly defending the Euro cross rate
4. European officials are weighing up a bailout programme for Spain
5.Australian employment surged by 38,900 in May to beat all expectations

So there's the things that make me go Hmmm ....

So China cutting rates is good news because it helps locals buy more condos? Is that why they cut rates, or is it because the central committee can see the brick wall the economy is about to hit. I wrote about the record coal inventories at Chinese ports yesterday as evidence that things are getting worse fast.

Bernanke saying they can do QE3 is no surprise, weak employment will be his trigger, though really its all about mortgage relief.

The SNB trying to debase the CHF is troubling for the Swiss nation and the vast amount of international wealth that the Swiss act as guardians for. If they don't turn of the taps quickly enough the few thousand jobs that a weaker franc protects at Nestle etc. won't balance the enormous job losses in the financial industry.

As for the European's weighing up a Spanish bailout, I'd argue that all that does will then put tIaly and France in the gun sites.

Fiddling while Rome burns?

Finally if the Australian jobs situation so good why is the RBA cutting rates?

So this is a short squeeze and the beauty of being a independent trader is that I can sit back without listening to the flow guys and trade the facts and the facts are that the world is not in a good place.

In the Time Trial at the Criterium du Dauphine 2012 aka Stage 4 .... I thought Wiggins rode beautifully and deserved his lead. There was a strong cross wind which hit the riders around the 40k mark. How do they stay on their bikes when they get such winds and they're riding with the big solid disk out back?

Wiggins powering with the big disk out back
I saw Tony Martin's bike get shoved a meter sideways as he topped one rise. Aussie hero Cadel Evans lost a 1'43" and that's going to be tough to make up in the remaining stages.

Well if it's fine I'm going to try and catch some of tomorrow's action live. I changed the wheels on the Pinarello back to the Boras as I reckon I have some hills to climb and about 55k's to the point at which I can see the action. It could be a long day in the saddle.


Wednesday, 6 June 2012

Known's and unknow's . . . take your pick

Meanwhile amongst all the doom and gloom the Australian Gross domestic product (GDP) rose 1.3 percent in the first quarter, more than double the 0.5 percent increase forecast. We know that this is yesterdays news because only the day before, the Reserve Bank of Australia (RBA) had cut rates for a second month running, anticipating the coming Euro storm. Therefore I ask how important was this number?

It was good news if you're long Aussie dollars because it gave an excuse to squeeze the weak shorts out. That's about it, because we know that in the last month we've seen the Chinese, the Indians and of course the Aussie's themselves cut forward GDP estimates. Look at the FT Lex colomn today and you'll find an interesting piece on Chinese coal inventories. Stockpiles at Qinhuangdao, the world’s largest coal port by capacity have exceeded levels last seen in late 2008. The port has a capacity of 9mt, in the last 10 days they've been forced to stockpile a further 1.1mt meaning they now have 8.2mt on hand. If no one wants the stuff prepare for things to get pretty backed-up at Newcastle (New South Wales).

I might not be as gloomy as SocGen Strategist Albert Evans, who said in a report on May 8 that he expected Australia to have the "mother of all hard landings", he further stated:

“(In Australia) We see a credit bubble built on a commodity bull market based on a much bigger Chinese credit bubble; of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious.” 

I'm bearish enough to see further opportunities to add top shorts here on this misguided bounce. Sorry.

In the un-united states of Euroland the ECB has failed to cut rates. I can only guess that either they a) want to save a cut for when the final axe falls on Greece in the hope that a (say) 50bp cut acts to support markets under stress or b) they figure there's no point as no bank is in a position to lend anyhow given the precarious position of their balance sheets. The German banks, for example are being downgraded today because they have vaults full of dubious fringe European debt exposures. Of course the mother of them all  review of Deutsche Bank will get a review by Moodys when they report on the status of the largest global lenders.

Spain is living in a different dimension altogether. The finance minister said today:

"I have absolutely not discussed any intervention in Spain's banks today."

Well is that credible? So, while he's been too busy drinking beer and eating mussels he left those sort of details to junior officials from the ministery? He took the line that the next report on banks will be June 11 .... and then another one from independent auditors 10 - 15 days later. By my reckoning that kills June off and we know what happens in Europe in July and August . . .  nothing. Shut it down and lets go home ....

Stay out of the financials.

So Criterium du Dauphine continues today and according to my map they're getting closer to Geneva. As my car is now gone I don't know if I can get to any of the stages.

It might have to be the ferry across the lake to Evian and then bus to Chatel on Sunday. I could of course ride? We'll see.


Tuesday, 5 June 2012

The sky is not falling ..... it's only an airline's stock

Markets were up for most of the morning in Europe as the Portuguese magically found €6.6bn to recapitalise its banks. Of course reading beyond the first paragraph of any news source tells you that this was old money, mostly previously earmarked from the €78bn EU-International Monetary Fund rescue programme, which was agreed last year, allowing €12bn for aiding banks. Oh well it was a good headline.

The weather is great and I've done a stack of chores and it's still only lunchtime. I probably have the OK to hit the road on the Pinarello, but I want to do some reading on this G7 emergency conference call scheduled for tomorrow. Clearly this has the markets covering back shorts. Fair enough too, because if they turn on the taps the Euro will pop to 1.30. Having said that I believe any statement will be short on detail and long on intentions. Be prepared for lots of paragraphs beginning with: "... the leaders believe that it will be in the best interests of member states to work towards . . . " - you get the picture. Fade any rally.

Airlines are a terrible investment. Richard Branson has said this, but we all fall for the glamor of travel. I'm about to book flights to go home and I can tell you I'll be squeezing as hard as I can. Flying up the back for 24hrs is not on when I'm traveling with so much luggage, so I'm using the internet agents and frequent flyer staff to work it all out.

I won't be flying Qantas, not because I'm unpatriotic, but because I always get crap service on them ... and I'm talking business class, not the Sydney to Melbourne shuttle where who cares as you don't have to be trapped for very long. Anyhow Qantas warned profits could be down 90% this year. They obviously blamed jet fuel prices, though we know that the problems run deeper as evidenced by its intention to split its costly international arm from its profitable domestic business. Even Singapore Airlines is launching a low cost carrier for long haul . . . and it's first route? Singapore - Sydney, obviously. Not good . . . stay out of Qantas and airlines for the moment. Oil as I said yesterday would go down, but be careful trading the airline bounce.

Professor of Marketing at NYU Scott Gallow called the Facebook IPO a "text book version of an IPO" when he appeared on Bloomberg's Inside Track on the day of the float. He was back today, poor guy and was hit with his quote within the first 30 seconds. He's now calling it a flop. Well I guess at -20%+ he's got that right. Anyhow he says the thing that will drive the company stock price is whether they have any ancillary business up their sleeves that gives them the "promise" PE multiple (say 30+ times), if not the implication is we go back to 14x times earnings and call it a mature business? 10 bucks a share? Remember I said that Silicon Valley Pod-Father Adam Curry said it was worth about 14. Good for Mr. Curry. I wish I could say I thought the same thing at the time.

The big bike race at the moment is the Critérium du Dauphiné. It's always been an important race, but after the way Evans used it specifically to ride the time trial course that would also be the final stage of the 2011 TdF it seems to have enhanced its reputation. As usual the younger Schleck was nowhere in the time trial prologue and looks out of form. Cadel Evans won the first serious stage and really looked good. That stage was supposed to be a gift for the classics riders such as Phillipe Gilbert, but Evans stole it. Wiggins, who for my money looks like the missing third Schleck brother has the yellow by 1 second. Very interesting.

Schlecks and . . .

missing Scleck or Brad Wiggins?
I just got back from a ride. It was short and annoying. I broke a spoke nipple on my back wheel and had to nurse the Pinarello back to Brun's bike shop. Only 33k's and 18 of those were at low speed. Oh, well . . . it's still a nice day.


Monday, 4 June 2012

Goodbye to an old friend . . .

Another milestone for me today as I sold my much loved car today. This will be my sixth major move since 1997 and no matter how dispassionate you get about things there's always something that you have to sell or leave behind that leaves you feeling a little hollow inside. I don't think I've ever owned a better car than my Mercedes ML350 CDI 4matic. I've owned BMW's and Porsche's, but for all round livability they just didn't match it. That diesel engine is superb . . . moving 2+ tonnes of car so efficiently shouldn't be possible. Cruising at 130kmh on the motor ways of Europe barely pushes the economy gauge above 10 liters per 100 kilometers, in fact sit on 120 and you hit a sweet spot that will have you nodding with approval.

Goodbye and good luck . . .

I was surprised that it took only 12 hours to find a buyer for a car in this market. I don't know if anything has changed over the weekend and was surprised that the US markets tried to rally early as it seems to me that the situation was getting worse not better. I don't expect much to happen prior to the Greek election . . . why would it? If you were Madame Lagarde who would you talk to in Greece? They don't have a government, so you could fly as many kites as you like but no one will be there to snap the photos.

I was interested in reading about the selling of private equity stakes by financial companies as highlighted in the FT today. Remember a couple of weeks back when Barclays sold a stake in Blackrock because of the pressure Basel III requirements put on ownership of these type of holdings? Well it's not going to stop anytime soon. Apparently it's got a lot to do with something called the  European Union’s Solvency II directive. I've never looked into before, but from what I can tell it delves into the liquidity of an institution's shareholdings. It comes into being in 2014, which in private equity time is just around the corner. In my mind this makes the coming downturn more nasty than 2008 because at that time governments and financial institutions declared a truce on mark to market accounting in order to avoid exacerbating the run on banks balance sheets. We don't have that consensus this time. Stay short the financials, especially those with highly illiquid non-listed / pre-IPO holdings.

Oil is going down. It's going down a long way and it won't stop unless we get a political event or a weak US dollar. I like oil in the long term and would be long it again if the US moves into QE3. I think it's a cheeky hedge against inflation. I like it more than gold at this stage in the search for a hedge against inflation. I also like having something that can have a "black swan" upside as opposed to downside. Watch crude especially the long end of the curve.

I managed to get out on the bike for two hours earlier today and happily managed a new personal best on the climb I was attempting. Strava really is a fantastic app and I've mentioned it on this blog before. The Ballaison depuis Loisin is a short Cat 4 climb just over the border in France. Its a pleasant hill that slopes up at an average grade of 4.6%. It took me 3 minutes more than the fastest recorded time on the climb and so yes I have some room to improve. My aim is to do it in 7.5minutes. A modest goal, but one that would see my average speed on the hill go from under 15kmh to about 16.5kmh. I can assure you that for a man my size it would be a very satisfying milestone.


Saturday, 2 June 2012

Say it ain't so . . . God save the queen

I just got back from a fantastic pre-breakfast ride into France. 2 hours of pleasure in the alps, I know I'll miss this easy access to the countryside when I move back to Sydney. The Pinarello was humming, though my Easton wheels just don't have the zip of my Campagnolo Bora's. I'm looking forward to the Mavic Carbone SLR aero clinchers that I'm getting with the Cannondale. They're a bit heavier than my other wheels, but I'm told they're the business ... we'll see.

In finance the good news is it's the weekend, the bad news is the US non-farm payrolls . . . say it ain't so . . .

El-Erian tells it like it is. Notice how the money honey immediately goes for the QE button. She knows that moves markets, but what she doesn't get is that it won't move credit. No one trusts their neighbors and if you don't do that you won't see banks lending and you won't see businesses investing.

"This is a time to be concerned with the return of your capital, not with the returns on your capital."

I wonder hat the RBA will do with their rate decision on Tuesday? Are they bold enough to go 50bps? I think 25 minimum, they can't afford to get behind on this as the government is locked in to a budget surplus.

Meanwhile the Irish proved themselves too cowardly to leave Europe and have instead voted to pay off their debts. The Irish Prime Minister:

“The Irish people have sent a powerful signal round the world that this is a country that is serious about overcoming its economic challenges.” 

What he didn't say was that the poorest in society, those that have been hit the hardest voted no. Class warfare will be back on the agenda. Ireland has Euro 31bn in bank debts and a population of 4.5 million. What are they thinking? Iceland had the right idea, walk away and start again. The Greeks will walk and then .... Spain?

So that's it for the moment. For my monarchist friends I wish you all a happy Jubilant long weekend.

Friday, 1 June 2012

March of the lemmings ....

I heard Thomas Hearn from Credit Suisse's Global Economics Unit being interviewed on Bloomberg when I first got up this morning. I was pretty dopey as I tried to shave, but what I was hearing certainly got my eyes open. It seems like overnight the Chinese PMI came in at 50.4 in May, its lowest in five months, down from 53.3 in April. This showed what I'd long thought i.e. Chinese manufacturing was close to hitting a wall. Mr. Hearn seemed shaken, but not stirred sticking to his line of Chinese GDP growing at 8% this year. Really? Why do these people not see the trend?

Of course the Chinese stock market on the day started to rise into the close believing the government bailout was imminent. The problem remains that the Chinese are big savers, they aren't going to spend like teenage girls at a shopping mall in L.A. .... cut rates and people will buy real estate which will increase the credit problems in the long run because things don't go up for ever. The leadership knows all this, so any stimulus will focus on some infrastructure projects. Good news for Caterpillar (CAT) and fellow heavy machinery makers.

Anyway as I write this US overnight futures started to rally as nervous shorts started to cover ahead of the May jobs report from the US later today. Don't discount the fact that it's Friday .... the lab rats of global markets have been trained to cover on Fridays because policy response comes on weekends. Jeezus!

Late yesterday Q1 growth for the US was revised down from 2.2 to 1.9, then add to that the ADP employment report, which suggested that the private sector created only 133,000 jobs in May. I don't like the ADP report, so take it as a trend indicator only. And if all that wasn't enough the Chicago PMI came in at 52.7 v. the expectations for 56.5. Not good. QE3 more likely?


I know I've mentioned Morgan Stanley a few times recently, but here we go again. The foot in mouth award for the year has a new nominee .... it's fellow Aussie and MS CEO James Gorman. The Chief Facebook salesman dismissed outrage over Facebook’s IPO by calling investors who had expected immediate gains “naïve” ... they had “bought it under the wrong pretences”. Nice one JG, congratulations on playing into the public perception of banker stereotype. “Give this a little bit of time ... We’re only on day eight here.” Please spare us, you got greedy to print a bigger number and when institutions got some negative briefings the public got stuck with the deal. This will end badly and I'll predict Mr. Gorman will appear on Capitol Hill, botch his testimony and within 18months be joining me for a coffee at Coluzzi's in Sydneys Kings Cross after a morning bike ride.

"JG . . . I'll get the next coffee . . . "
No riding or gym for me today, my exercise will be detailing the car as I need to sell the beast in the next 4 weeks. I'll hear the Swiss will be pretty picky about cars and you rarely see a dirty car in the streets of Geneva, so this will be 2 hours of washing and waxing. At least the sun is out and thats got to make it easier to get a nice shine.