Saturday, 29 September 2012

Time to ride away from some dodgy Spanish thinking . . .

The one climb I'm sorry I missed in Northern Italy is the Ghisallo. I've been to the bottom in Bellagio on Lake Como on the day before I drove down to Treviso to pick up my Pinarello Dogma, so I couldn't do the climb. It's a spirtual jouney of 10.6km to the top where you stop at the chapel of the Madonna del Ghisallo and beside it the small cycling memorial to Coppi and Bartali.

In 2006 they opened a museum to cycling, but I think the museum is the hill itself and the names printed in clear white on the road showing championship years, times and elevation.

On Sunday we begin the latest running of the Giro di Lombardia - or simply, Il Lombardia. It will also be the first time in 50 years that riders have been asked to climb another famous hill,  Muro di Sormano.

The Muro di Sormano lies about two thirds along on the the 251km route from Lecco to Bergamo. The climb itself has been restored after many years of neglect. The tarmac is freshly marked.

Below is a film by Cycling photographer Jered Gruber of the route and even though the climb has an average gradient of 17% and ramps up to 27% I defy you not to want to jump on your favorite bike and try it.

I'll be west of Sydney tomorrow and I'm taking my bike. This will be my first ride in the Blue Mountains and I've planned an 80km ride between Mt Wilson and Blackheath. There's only a 5k section of road on the Great Western Highway that I'm not looking forward to, but as it's a long weekend here I'm going to hope that the big rig trucks that usually make the run from the agricultural heartland from the west into Sydney might be at home relaxing for once.

I bought a special rear light for the ride from Attelier de Velo. It's a Moon Shield (USB chargeable) with up to 60 lumens of brightness. There are five settings, three steady and two flashing, one of which is a psychedelic strobe. I can tell you from testing it that this sucker is bright.

Maybe regulators and supervisors could use some brighter lights when looking at Spanish banks. The FT tells us that "seven out of the 14 Spanish banks under review failed according to the results of the three month so-called “bottom up” review, which involved the individual assessment of 115,000 loans making up 11 per cent of the value of the sector’s total credit assets." This all sounds like good news until you realise that the modelling for total losses was 17% v. 24% they used for Ireland. I don't have the models, but I wonder what happens if you look at the greater number? I'm guessing 100bn isn't enough.

Of course who cares about Spain, right? I mean it's too big to fail? What about if we look at it like an another example where monies are injected at one end of the banking pipe and it fails to show any effect at the other end, the liquidity end of the pipe? That's because we have a solvency problem with banks in Europe, not a liquidity problem. There's plenty of liquidity thanks to Draghi. Some of these banks need to fail and get out of the way because only then will the cash get through into the economy.


Thursday, 27 September 2012

Diminishing effects and some cycling thoughts . . .

“It looks to me as though each round of central bank stimulus is having a diminishing effect,”  . . . Central bank (and government) actions may have stabilised markets and economies, but they have also ‘kicked the can down the road’. They have not resolved the fundamental underlying issues that need to be tackled for a broad-based and sustainable macroeconomic recovery.”
Michael Hintze (Founder of CQS, Europe’s biggest credit hedge fund manager)

I heard an interesting interview today with Steve Hanke Professor of Applied Economics at John Hopkins University on Bloombergs On the Economy radio program. Professor Hanke recently published a paper chronicling cases of hyperinflation around the globe starting with the first case during the French Revolution.

I thought the Professor was going to say that the QE we're seeing in Europe and the US would eventually lead to hyperinflation. Instead he said that he didn't see that because, if I understand him correctly the amount of money that is disappearing or being locked up in the banking system is offsetting the Central Banks printing of cash. Of course the trouble comes with an exit strategy as we go into QE-ternity. He suggested that governments would be better off shutting down QE and increasing credit supply via the softening of some of the regulatory goals of legislation such as the Dodd-Frank Act and Basel III.  This makes more sense to me as a long time observer of Japan because at no stage during their many long years of ultra low rates has that country looked likely to succumb to hyperinflation. Rather the problem has always been the continuing blockage of normal credit supply due to continual recapitalisation and a Zombification of certain assets never removed from relevant balance sheets.

The problem of course is that the legislative arm of many QE orientated countries lack outright support for a change in how they deal with their banks. If we return to Spain it seems foolhardy to expect voters to support a lossening of conditions of private banks. Instead I believe that the only solution is nationalisation so that public support coalesses around the view that as the banks are state owned then the "evilness" can be squeezed out without shrinking the credit supply. This of course will be difficult because Spain doesn't have a balance sheet in the way the US does and therefore has to rely on Northern European largesse. Perhaps we need to go down the route that the Finns are suggesting and pledge some banking assets to Europe in return for support? Either way the clean exit and return to normality is hard to see right now. I highly recommend reading Professor Hanke's paper.


I got a note from a mate who's recently taken up road cycling. He asked a couple of questions and was wondering how my own cycling was going, so I thought it might be interesting to share my thoughts and answers on this blog as part of my on going efforts to convert the many cycling skeptics to true believers . . .

Bike fitting:

I think it's absolutely compulsory to get a proper bike fit.  My preferred local bike shop (Attelier de Velo in Sydney currently) put me up on both my Pinarello and my new Cannondale recently. It was a fairly straightforward process, but during the fitting I learned about the importance of fit in respect of relaxation of the upper body on longer rides.

I also now have witnessed a friend being fitted and it's fascinating to see a bike fitter try and get the most of a mismatch between rider and frame. Mike, Chris and the guys at AdV don't like putting people on unsuitable frames, but as the idea was to just give my friend a chance to get to know the way a road bike (my BMC) works they did their best.

I know many riders find the height of the position on a road bike disconcerting at first. My NY based friend said he felt like he wanted to get lower. That's OK you can get lower by riding in the drops or out on the hoods of your shifters. You should be doing this anyway because it allows you to slice through the air. Keep your elbows in, kind of like when you ski. If you look calm and elegant on a bike you probably are in more control and your muscles can relax into the the rhythm.

Cycling and coffee:

There is one thing that Geneva lacked . . . good coffee. In Italy and here in Sydney thanks to the vast number of Italians who immigrated here after the war the coffee is very good. After a long ride a good coffee serves as a pick-me-up. I usually head for my favorite spot in Elizabeth Bay after a ride around the cliffs that run from Vaucluse, Watsons Bay, Bondi and Clovelly.

Hill climbing:

I'm a pretty big unit, even if I've lost a great chunk of weight since living in Singapore. The basics are if you lose weight you will climb hills faster and faster. The other thing I'm appreciating is the importance of your core muscles when riding on hills. If you strengthen your core you are able to relax your upper body and in turn you'll find yourself not so much as gripping the handlebars, but rather guiding them. The result is you tend to open up your chest and take in more oxygen.

My gym trainer is trying to help me build strength and flexibility in the upper body. He's also making a point of trying to get me to stretch my abductor muscles so I feel better after training on the bike. The thing is if you become obsessed with cycling you spend a lot of time hunched over and you need to stretch properly after a ride to get back into a correct posture. When I did my first 100k ride I literally couldn't sit down, my body just wanted to unwind. 

Strava, alone and with others:

I use Strava as a record of my rides. It's my version of taking photos of all the places I go. The ability to see the segments (climbs, descents, sprints, etc . . .) is fantastic. Lately I'm also trying to make notes as well, kind of like the labels you used to put in photo albums. I wish I could add photos to individual rides as you'd have a perfect scrap book.

Upgrading your bike:

My NY mate is always very cautious with new devices etc. and being able to justify things. In cycling I say upgrade if it makes you ride more. If your goal is to lose some pounds and you're primarily going to do that on the bike then you need to feel good being on the bike. If you think new red pedals will put a smile on your face and make you want to ride then I say go for it.

If I'm happy I ride. At the moment I'm happy so I'm on the bikes 4 to 5 times a week. My new Cannondale Evo makes me smile.

I love the feel of speed it has. I like the paint job and the clicking of the Mavic Cosmic Carbone SLR's. I went for a ride this morning. Nothing special I just couldn't pass up the chance of a sunny day climbing the hills around Sydney's beaches.

It wasn't a long ride, nor was it particularly hard, but it felt good. And you know all the money I spent on my bikes has helped me stay sane during the crazy time of had leaving Switzerland. I'd gladly get back on the bike right now if a friend stopped by for a ride.


Wednesday, 26 September 2012

Farewell and adieu you fair Spanish ladies . . .

Spain . . . what is reality? The reality is that people are revolting . . . so to speak. Last night Catalonia announced a snap election with overtones of rebellion and an implied threat to leave Madrid. I can't say I'm surprised. This is what happens when a country gives up it's sovereignty, which Spain did when it adopted the Euro. At the time it looked all roses, but history has a way of catching up on people and now at this time of desperation the Spanish people lack the one mechanism that could let them determine their own future . . .  the Peso.

I don't think Catalonia will leave Spain. I also don't believe that Brussels will let the German, Dutch and Finnish block the Spanish bank bailout over their insistence on a timetable that calls for supervisors to be in place prior to recapitalization via the ESM. But, what we will see is something important tomorrow when Spain announces its budget.

Spanish jitters are one thing, but when one of my favorite companies CAT announces a minor downgrade and gets absolutely slayed for it you can see the perilous state of the markets. CAT finished down 4.25% after Doug Oberhelman (CEO) said “I don’t think the situation is as grave as it was in 2008, but the uncertainty, the storm clouds are around things that none of us know about – like what will happen with the political situation in Europe.” He went on to say he believed China and Brazil had bottomed and the US looked good. Mmmm . . . calling the bottom is interesting especially when we have Toyota slashing production destined for the Chinese market. Of course some will argue that this is Toyota and Japan Motor Inc. failing v. the competition, but I think its more a strategic move by Toyota in the face of a Chinese slowdown that is still to see rock bottom. Whatever the truth we'll have more clarity by year end.

Unlike Brussels and their new world champion Philippe Gilbert, the Spanish had little to cheer about at the cycling world's on Sunday. Alejandro Valverde won the bronze, but the stink it created when team captain elect Oscar Freire said that Valverde should have stayed with him for the Cauberg rather than immediately setting sail after Gilbert was palpable. Freire finished 5 seconds behind the leaders so maybe he had a point?

I wanted to show you the stats from the race. Here's the Strava details from Dutch squad member Laurens ten Dam:

Do you see the Calorific expenditure. That's 10,000 . . . count'em 10,000 calories drained over 6hrs 25 mins. I don't know about you, but Mrs. Ibcyclist and myself didn't average anything like 41kph on our ride to today in the safety of Sydney's Centennial Park.


Tuesday, 25 September 2012

The cockroach theory and watching your back . . .

"One cockroach fact that you may not like is that if you see one cockroach in your home, there are likely many more."

 “RBS traders and their managers routinely sought to influence the firm’s Libor submissions between 2007 and 2010 to profit from derivatives bets, according to employees, regulators and lawyers interviewed by Bloomberg News.”

It didn't take a genius to track down potential Libor manipulators. I honestly feel sorry for employees at banks such as RBS who no doubt thought they were doing the right thing when they sought to influence daily Libor sets so as to improve either a) the way the markets viewed the credit worthiness of their employers or b) claw back some funding for their overly geared balance sheets.

The effective freeze in interbank funding in from 2007 to the present has forced many banks into a game of chicken with short sellers and regulators. If they flinched and ran up their Libor bids it was a sure sign that they were the next target for a run on their shares, bonds or most disastrously deposits. That is why today we have situation where the banking system is being kept on life support by central banks; anything else would be too politically unpalatable.

Given this background yesterday's Op-Ed in the FT by Philipp Hildebrand (former SNB chief and architect of the CHF/EUR peg) and Lee Sachs (CEO of Alliance Partners) made shall we say . . . interesting reading?

"We propose that the biggest eurozone banks should be required to meet Basel III capital standards by the end of 2013, following a rigorous and credible validation of their balance sheets. To ensure credibility, the ECB should lead this validation. Banks should be required to increase their capital ratios primarily by increasing equity – not by reducing credit and so deepening the crisis."

The problem seems to be that banks are unwilling to go to the equity market in the required size because they may be signaling their own weakness. So the authors are suggesting banks maybe left with governments effectively offering to sell puts to potential investors so as to avoid having to purchase the shares themselves at this stage. Clearly the reason why this "put" mechanism needs to be in place is that governments such as Spain are least able to find the capital to support an outright share purchase scheme, their only recourse is to go cap in hand to the ECB, which in turn causes the very financial markets they would be supporting to weaken badly (if not panic outright). The one thing that really needs to be said is that while equity holders will be diluted severely under the plan, then bond holders need to also take a haircut because without this it is unlikely that the free flow of capital envisioned by the authors as being the desired outcome will not take place. I think the idea is interesting, but the complexity could have been dreamed up in the structured finance department of many of the banks they are looking to support and I thought that we didn't necessarily believe in that type of "stuff" anymore?

Maybe that's why the Singapore Government's main investment arm Temasek Holdings is looking to offload their 18% of Standard Chartered Bank.

Sometimes you need to keep an eye on the road behind you as well as the one ahead. Things have a tendency to catch up with you. Thus I was interested to see the Cerevellum Hindsight cycling computer with built in rearview camera.

It records continuous five minute loops, so in case of an accident you'll have some evidence. The one thing it doesn't have is GPS, so even though you'll have the usual stats (speed, distance, cadence, etc.) you won't have positioning which we all like for our Strava accounts. My other worry is the distraction value. I am very anti road riders wearing headphones, so I'm not sure continually checking your rear like this doesn't add danger rather than mitigate it. It's an interesting start and for $299 it will tempt a few people. Not just me yet. Then there's that other question . . . How long before Apple brings out an app that does the same thing with your iPhone5, 6, 7  . . . .


Monday, 24 September 2012

The moral hazard and we have a new world champion . . .

A good friend of mine sent the above chart of the DJI just before I left for a bike ride. It's a perfect chart for explaining the growth of the moral hazard that has developed since the  birth of QE. Is the world a better place because Ben Bernanke let the presses roll? Probably it's a happier place, but better? Well we'll know in another five years whether we can call it better. Here's the best example we have of the effect of an extended Zero Interest Rate Policy (ZIRP):

This is the N225. Japan has has ZIRP since 2001 and ultra low rates for an extended period before that. The reason Japan was forced into this position was a deleveraging post a real estate bubble. Sound familiar? For years Japan kept zombie banks alive. In return those banks continually refused to pass on the benefits of ZIRP to the larger economy because they had to recapitalize themselves and they remained unable or unwilling to write-down many of their low yielding assets.

When Deutsche Bank (for example) cut its' targeted RoE to sub 10% from 20%+ they were following what the Japanese had done a decade earlier.

At least the Belgians can smile about something today. Philippe Gilbert is the new Elite Mens Road Racing Champion.

I stayed up as long as I could last night to watch all the action. I nodded off with about 80k's to go so missed Gilbert's attack on the Cauberg:

I guess the most relieved people, aside from Gilbert himself, were the BMC team who until the Vuelta had got absolutely nothing in return for their massive investment in Gilbert. The super team were totally obliterated by Sky at the TdF and had little to smile about in the spring classics. Maybe their fortunes have turned and we'll see more from the boys in black and red next year. And we'll be seeing lots more of Gilbert in the rainbow jersey:


Saturday, 22 September 2012

Something for the weekend . . .

Sometimes you need to step back from the noise. I've been thinking about riding challenges for the coming year. One race I'd like to participate in is La Marmotte. Along with a handful of other events (such as Novi Colli in Italy) it's considered one of the hardest cyclosportives on the calander. The race covers about 174 km, but more importantly you have to climb more than 5180 metres over many of the famous TdF peaks . . . the Col du Glandon, Col du Telegraphe, Col du Galibier and the finally Alpe d'Huez. Check out the official film from 2011:


Thursday, 20 September 2012

Danger, danger . . . prepare to dive . . .

The truth behind yesterdays move by the Bank of Japan (BoJ) is out. Apparently exports cratered in August. Today's data showed that shipments down 6 per cent from a year earlier to Y5tn ($64bn), while imports were 5.4% lower at Y5.8tn. That's 3 months in a row now. Thus the panic button being pressed.

The thing that troubles me about this is the brinkmanship that the BoJ has played with the Japanese economy for 20 years now. Surely the BoJ knew about these export numbers weeks ago? Maybe they realise that they have shot all the bullets they have, so the only thing that moves markets now is the shock factor . . . .

Too bad the FX market didn't care as the JPY is now stronger than when the BoJ announced the fresh stimulus.

Meanwhile China also has it's own problems, so today's HSBC Flash China manufacturing PMI while nothing to cheer at a  terrible 47.8 is at least up from 47.6 in August. I really don't know what that means anymore because for so long I've believed the Chinese numbers to be less than rigorously collected.

Debt remains the biggest problem the world faces because the deleveraging we're going through is the ire of central bankers. The Economist recently updated their online interactive debt map.

I think it's a great graphic that shows total public and private sector debt in various countries. Notice Japan? 20 years of stimulus encapsulated in one nasty red bar. Meanwhile rumors of a Spanish downgrade to junk debt status (via Moodys) are swirling around the bond market. If this happens we're going to be bombarded by images of Mario Draghi and his printing presses. Last week BBVA sold three-year bonds last week at a 4.375% and earlier this month, Telefonica sold five-year bonds with a 5.8% interest rate. Given the positive effect of the ECB plan this was all taken as positive proof that things were bottoming in the bond market. So what now? If Spain is cut to junk how can BBVA and Telefonica raise cash at these levels. The inference must be that the Spanish government would need to claw back further corporate revenues via taxes or outright nationalisations. Far fetched? Maybe, but what else does junk status imply? Too me it says anything can happen. I think you get a chance to buy some good corporate bonds in Spain at a genuine discount to today's prices.

If it wasn't bad enough that markets were in a precarious position I too had to suffer from the dangerous driving of a particular Sydney lunatic today. I mean why a 65+ year old man in a black hatchback has to honk his horn for you to get your bike off the road when he was clearly in a hurry to go nowhere. I pulled up along side of him at the next set of lights and was met with a good spray of expletives. Clearly I'm no shrinking violet so I too summonsed a few choice words of my own. It was a great lesson for my new riding buddy who observed everything. I don't get Sydney drivers? It was a beautiful day around 11am, not a cloud in the sky and this guy wanted everyone to know how important he was. Jeez!

In the Netherlands they got through the time trial with blistering rides from the winner Tony Martin and runner-up Taylor Phinney. I follow Mr Phinney via Strava and it's great to watch his prep. Check it out here. Here's his recon ride from the day before the race:

He'll upload the race itself later, so look out for it. Strava is a great tool and worth getting a free account if you're into to cycling or running. If you want to see a real torture ride this is Phinney's day on the bike for the Milano-San Remo:

That was won buy Aussie Simon Gerrans . . . tough stuff?


Wednesday, 19 September 2012

Arrogance can get you killed . . . or get you noticed.

Arrogance is an interesting characteristic in man. It probably helped us in conquering flora and fauna as we began our move upwards from knuckle scraping tree dwellers to physics defying solar system explorers. Then again arrogance can get you in trouble.

In 1975 the US government set up the Strategic Petroleum Reserve (SPR). The idea was that the US needed a buffer between the suppliers and the consumers. The oil shock of the early 70's had taught them that being subject to unstable supply could bring whole economies to their knees. What the SPR was never intended to do was to act as a price manipulation mechanism. If governments wanted to vary prices they could do so via taxes and regulation of usage (such as smaller engine sizes in cars etc.).

Source FT / ICE
Last night in London the oil market (via ICE) went nuts for 45mins as the price fell about $4 bbl. Many assumed that the US and some smaller governments had decided to release some supplies from the SPR. Maybe it was the Saudis? I don't know what the truth about the drop is, but I do know that QE3 or Twist 2 speculation had been driving up oil prices for some time now. You see in my view oil is money. Think about it . . . unlike gold it actually produces something that people need. You can burn it and produce something. It's value is an expression of its energy output, whereas gold's value is a fear tool, an expression of value protection. Oil, especially on the long end of the curve represents an inflation / debasing hedge, maybe not in the sense of gold, but certainly in a world where the developing high growth world is not ready to abandon aspirations for car ownership. If the the US government wants the oil price to come down they just need to stop printing cash. There are approximately 695m bbl's in the SPR. At what stage does the US military say we actually need to retain "X" to defend ourselves. The difference between military and civil should be renamed the Strategic Pricing Reserve. Perhaps honesty would be a better policy?

Of course some governments have tried to get off the oil consumption track. According to the FT Japan’s feed-in-tariff rate, at JPY42 per kilowatt hour, is twice Germany’s and three times China’s. Remember that Spain and other European sick cases had similar schemes and are now reducing the subsidies because the cost differential to fossil fuels is too much for their economies to stomach now they have hit the point of functional bankruptcy. In Japan the high subsidy is driven by the fear of another nuclear disaster. Of course if the Japanese were rational they may well have responded to the disaster by relocating some nuclear facilities and adopted a policy of corporate honesty, something which the likes of Tepco (in power) and Olympus (in the industrial space) demonstrate has been severely lacking in Japan for sometime. The story for investors comes down to who benefits from selling people the panels and is the growth rate sustainable? The answer, as is always in Japan is less than clear. I visited Sharp in Japan once and their plans for solar production was impressive, the problem was they also had to shoulder the costs associated with consumer electronics amongst other things. I remember commenting to the investor relations rep at the time "hey . . . how come you don't float this off and get a big cash dividend for investors (because of the tech multiple and implied earnings growth) and then management might be able to focus on one product? Maybe I'm naive especially when looking at Japan because that's precisely what they never do. Too bad, as it may have been a better business left to fend for itself.

I'm not sure you would call the Bank of Japan arrogant for thinking that they still mattered in the world, but they've done a Bernanke and cranked up the presses again. Clearly they wish that people would dump the JPY so their industries might be able to compete again, but alas . . .  So the plan is to expand its asset purchase and loan program by ¥10 trillion, or $127 billion, to ¥80 trillion. They also lengthened the duration to the end of 2013. Yawn. Stay long the JPY and learn to not hate it so much!

Olympic champion Alexandre Vinokourov sold his gold medal winning bike for charity and raised $243k. I hope someone told the buyer that the red-orange S-Works Tarmac SL4's Corima wheels are unlikely to carry a rider + bike above 85kgs. This is an extremely lightweight setup. Check out the spoke count on those wheels, because if you're like me and total loaded weight of bike, gear and rider is around 100kgs then you're going to last about 500m up a decent hill before hearing a "ping, ping" as spokes fail. Mind you so long as you have a nice matching outfit you'll look good?

The Italians have an expression that sums up their attitude to life . . . "bella figura". . . it can mean many things, but essentially it's about how one looks, how one comports oneself, how one makes a good impression in all things. So in cycling it's about keeping your bike sparkling cleaning and making sure the saddle and handlebar tape match the frame. It's about wearing a the appropriate outfit that enhances your style and presentation while riding. Of course it also refers to how you ride . . . are you relaxed? Is your cadence in an easy rhythm? When you attacked a hill did you do it with panache. Italians watch these things. That's why when you go and get a bike fitted in Italy they'll encourage you to buy matching shoes and jerseys. They'll even discuss your diet and what is best for a rider of a particular type of bike. I kid you not!

Bella Figura = Bike + Jersey + Style

I once rode up a hill near Barolo and a gentlemen came past me on a beatiful black and white Cannondale Evo Super Six, he was wearing a matching outfit and old, but spotless white sidi shoes. After checking me out he told me to relax and enjoy the climb. "Si tratta di una splendida collina - cadere la guarisce e relax il mio amico" (It's a beautiful hill - drop your heals and relax my friend). He rode off and met me at the top of the climb for coffee. He was about as far from arrogance as anyone so clearly in charge of what he was doing can be.


Tuesday, 18 September 2012

Luxury, style, functionality and reliability ....

“iPhone 5 pre-orders have shattered the previous record held by iPhone 4S and the customer response to iPhone 5 has been phenomenal,” said Philip Schiller, Apple’s senior vice-president of worldwide marketing.

It's very hard to bet against Apple (AAPL). We all know it's a crowded trade, but even in the case of a comparatively underwhelming product such as the latest iPhone (5) comes to the market it would seem that consumers think the team at 1 Infinity Loop can do no wrong. Brand value is all in the consumer world and if we're waiting for AAPL do a Sony and produce a mundane product with technical problems we may be waiting a long time. It seems to me now that APPL has a quasi-mystical reputation for style, functionality and reliability. 

In the same way as AAPL the likes of LVMH (via their Louis Vuitton brand) have strategically played desirability game to it's full potential, especially in Asia. The consumer in an age of reality TV has become fixated with the notion of fame and the trappings that go with it. Only as budgets are stretched have we seen a small fall of in top lines of the likes of company's such as Tiffany & Co. Reality as shown yesterday in the Empire manufacturing survey which fell to its lowest level since the GFC has yet to be seen as having a huge effect in luxury, . . . but it will. When will luxury become exclusive again? Is the iPhone an indispensable tool or a status symbol. Can something be both? Do not short AAPL yet.

Fortescue (FMG) managed to get a syndicate headed by CS and JPM to stump up $4.5bn out to November 2015.The stock reacted very positively. The conditions for the loan, which is secured at the group level remain a bit patchy, but time has been bought. Of course now we wait for the Chinese to start buying Iron Ore again . . . and therein lies the bet. If you are a China bull this stock is cheap. If you are somewhat skeptical stay away because there is $7bn of unsecured junk debt out there that will want to be paid back as well. Be very careful people.

I don't understand the reasoning behind the Team Time Trial at the World Championships. Omega Pharma winning the mens elite TTT proves what that various pro-races over the summer didn't prove?

Isn't the idea of the World Championships that riders race for their country? The Dutch will certainly be out for the Mens Road Race on Sunday. For mine it's looking more like a lottery. I know everyone thinks the course is built for Gilbert, especially after his stage wins in the Vuelta.

To me it's the winner is not nearly as obvious as the short but steep hills allow for an attack and brakeaway by any of the riders. Remember too that we're not going to see the big teams of the grand tours, so this makes the event more random and plays into the hands of the "loners". Boonen is a rider who might do well here . . . as is Thomas Vockler who I hope rides his red and white TdF KOM edition Colnago C59:

Very nice . . . . one might even say???? . . . . stylish, functional, reliable and ultimately quite luxurious?


Monday, 17 September 2012

Transferring momentum . . .

Have you ever built a spreadsheet for modeling discounted cash flows? There's usually a cell right up near A1 where you put the "risk-free" rate. As you gain sophistication and move the duration of the asset you're trying to value out you usually start adding in a whole curve of risk free rates.

What Bernanke did last week was to change those cells down and thereby raising the overall value of the asset in your model. Magic, right?

So you have your new cheap money to set up a business? You don't? So you go to the bank and ask for some and they say what? That's right . . . No. Here's the problem: the banks have to retain earnings so they can meet the additional capital requirements of new regulation, such as Basel III. Therefore Mr. Bernanke can buy as much MBS as he likes, it won't force the banks to transfer those lower rates on to businesses and homeowners. It's all stunningly Japan like in its' arrogance. The banks are covering over the transfer problem by saying they have huge backlogs of demand and that they cannot process the paper work:

“In the very near term [QE3] has virtually no transfer mechanism whatsoever to the customer,” said one executive at a leading lender, who requested anonymity. “Originators are massively backlogged in terms of origination volumes.” (FT)

What they should be saying is we don't want to increase the size of our loan books with rates being this low. In Europe where things are a little tougher at the moment they have a similar situation, but it manifests itself through a lack of investor cash for Asset Backed Securities (ABS). What's been happening is that because of the continual downgrades by credit agencies and a lack of faith in the liquidity of the system that ECB has been offering financing on these products at a better rate than the market, meaning that a lot of new paper that should be privately held is instead being used in repos by the banks. Why is that important? . . . Well primarily because people looking to refinance aren't able to access the cheap money, only banks can . . . thanks to ex-Goldman's apparatchiks Mario Draghi.

A mate of mine went on an investor tour of Fortescue Metals Group's operations back in 2007. At the time the company was trying to roll some debt facilities.

My friend wasn't an analyst with an an MBA or a CFA, but he did understand leverage and so he came back bullish the company on the strength of his own views on Asia and the possible returns to shareholders. Now we find that with iron ore below $90 that the reverse is the case. The plan announced last week for $300mil in savings looks suspiciously like the company is praying for a turnaround in China. They are doing as little as possible to calm investor nerves and to avoid a fire sale of assets. Australia as a nation has similar leverage to FMG, its not so much in the public sector, but its there in the banks and with the consumer. I'll be watching the spring real estate sales as a guide to where my home nation is going.

An article appeared in Velo News today that discussed the 2014 cycling World Championship which is currently scheduled for the small town of Ponferrada in north western Spain. These type of events are usually (in Spain) sponsored by the provincial governments, but as such governments are functionally bankrupt the president of the Spanish cycling federation is "encouraging" the organising committee to find dome private sponsors. I'm not sure if Spanish cities know what private sponsors are? I mean traditionally that would be a signal for a trip down to the local caja (regional bank) to collect some cash, but now with many of these government owned banks being under much tighter regulation that seems an unlikely target for largesse. Things are bleak when cycling starts to take it in the neck. Maybe Madrid can ask the ESM for some cash and save them the embarrassment of actually having to give up the event? In fact of course thats what will happen as the State of Leon will ask Madrid for funding and they will ask in turn for help from Brussels . . . So maybe the sposors of the event should be the German taxpayers?

I managed my first 50km ride since being in Australlia. I did the run along the coast from Watsons Bay and "The Gap" climb all the way down to Little Bay.

It was a great morning, though I lost my way several times as things have changed so much in the southern sector of my ride since I last ventured to these parts that few of the traditional landmarks were visible to help me. When I was growing up all you had at Malabar was public housing and Long Bay Gaol. I guess it speaks volumes for Sydney that 1 bedroom apartments near the gaol are for sale at a mere $495k!. Nice view of the ocean though . . .


Thursday, 13 September 2012

When investors and riders lose faith . . .

I had lunch today with a few smart players from about town. The conversation was positive, but the sense of opportunity in the secondary markets was negative. Australia, like the US and the UK is an equity culture for a particular reason and that is that the pool of wealth over the years has focused on building itself through taking risks. The old world (i.e. Europe) was a bond culture where wealth defended itself by achieving risk adjusted returns through a high dose of bonds and a small dash of primary investment. Thus in Germany we have the dominance of the non-public companies of the mittelstadt and the same is functionally true in Italy and France, though the latter two gravitate away from public listings on stock exchanges to protect themselves from tax systems unfavorable to "entrepreneurship". The anglo-world is fast regressing as the 2007-08 crisis undermined much of the trust investors had in the system to at least shield them from the most outrageous excesses of the global ponzi scheme. Now of course bonds are in vogue and I sense many of the stockbrokers have learned how to discount cash flows on a spreadsheet.

The FT reports that on Monday some $29bn of corporate bonds hit the market; most were snapped up immediately as investors searched for yield. Nestle issued seven year Euro paper yielding 1.5%. I mean you really have to believe in never ending QE to buy that. Mind you in the case of Nestle there is something of a Swiss "too big to fail" quality that surely has people treating these as the equivalent of Swiss government issued debt - the Swiss 10yr yield is negative. I wouldn't be surprised if the SNB used some of the Euro's they now owned to prop up the issue in their own bizarre version of "Operation Twist". Whatever the example (and there are plenty), it is obvious that company's are being attracted by low rates and investors with an insatiable appetite for paper promises over risky equities.

As I've been spending time in Australia I'm starting to see some of the confidence shaken locally in respect of the never ending Chinese growth story. Right now I believe we're starting to see the end of the infrastructure driven growth that peaked with the massive investment in the Three Gorges Damn and manifested itself in such projects as the MagLev trains and mega cities of the interior. Simply put the calculus of the situation should have told us that economies do not grow at 10%+ for ever and if you try to make this a national policy you will eventually create a situation of overheatinng that can end with only one result. I am constantly surprised by how many people in the Australia/China axis forget the '97 Asia crisis, much as I am surprised with the endless lines of economists from the US who think that LatAm is a car from Ford. No, China's new leaders will have to cool the presses very carefully and with that disappoint trading partners like Australia. Sorry.

I managed to get out this morning to help my ex-trader friend have his first ride on a racing bike. As I said to several people it's easy to coach someone to ski or cycle if they're fit, it's sometimes harder for them to understand that it will take time to perfect the art.  All was good, though getting out of cleats was somewhat more difficult than getting in. Having said that there were no falls, so the BMC and the rider were delivered safely home. I of course being less coordinated fell numerous times in my first week riding, so I hope some of my bad experiences helped with the technicalities.

The other notable thing about this morning was that it was my first time on the Evo Super Six. I don't want to get too effusive about the bike, but the power transfer is amazing. I was riding on big rings  (53/39) today as Cannondale have yet to send me the compacts (50/34). Holy cow! The big ring had me hitting 40kph on the flat without too much effort. Of course up the hills were a little more of a test, but as I was using a 12-27 cassette and I coped pretty well thanks to the bike being at least a kilo lighter than the Pinarello. I expected the stiffness of the frame to be more of a challenge, but it's not . . . in fact the bike is as smooth as anything I've sat on and my only regret is not taking my Campagnolo Bora tubulars with me to compare v. the Mavic Cosmic Carbone SLR clinchers that came with the Evo.  I bet the experience of losing 400gms from the wheels would be pretty sexy. It was a great morning and I hope to get out early tomorrow to trim off todays lunch.


Wednesday, 12 September 2012

It's alive . . . more Obiter Dicta . . .

I took a mate of mine who recently exited one of the larger European banks into Atelier de Velo to get measured up as a riding partner. He's never been on a real racing bike so I'm lending him my BMC to try it out. I've got to say Chris at AdV did his best to make the bike bearable for my friend and I reckon when he joins me tomorrow morning it will be a small shock to the system. He's a natural athlete so he's either going to get it straight away or get frustrated with the process.

It's my second time this week watching a rider being fitted to a bike. I'm starting to understand the geometry of the process much better now and I could immediately see today that the bike was about 2 inches too long in the top tube for my mate. A racing bike is so different to a commuter or even a mountain bike as the margin for error is much smaller. Make a mistake at this stage and your rookie rider is likely to have little control and a permanent loss of confidence.

My legal training did not extend to German constitutional law, but from what I from read of todays decision from the Bundesverfassungsgerichtsee (German Constitutional Court) there are enough "buts" to stop politicians from some of the more egregious attempts of power grabbing by Brussels. There is a suggestion that the court already considers certain acts of the central bodies to transfer the debts away from their source and to a central body (ESM, ECB, etc.) and therefore Germany herself prima facie invalid. This could get very interesting if Draghi wants to push things further.

The court also seems to be saying that nation states remain the ultimate bearers of sovereignty, any move to transfer further powers to the central European government would have to be ratified by a referendum. Thereby stopping the creeping power of the ECB?

Maybe the more significant political event is the Dutch election? As a creditor country and one renown for being quite "cheap" in all things fiscal, the Netherlands certainly has some influence over the larger rump of the European nation. Voters there look likely to spurn some of the anti-immigration parties and look to the mainstream to keep them safe from Euro-armageddon.

I'm going to sleep on this one. No sense in jumping to conclusions until the politicians move to test the limits encapsulated in the obiter dicta.


Tuesday, 11 September 2012

What is real Genius?

I'm going to start an Ivan Glasenberg fan club. I have no idea how he's been able to convince investors that 3.05 Glencore shares for each single Xstrata share is enough to buy full control of my favorite mining company.

Pure Genius
The fact that he has leaves me somewhat awestruck at the man's deal making ability. As I write this Glencore is trading at GBP3.70 v. Xstrata @ 10.26. That means the market is currently pricing in a takeover premium of only 9.9%. Given that XTA trades on around 6.5x earnings and this in turn is being paid for with shares that have a reasonably limited history I tend to think that this could be the deal of the decade (and we're still only two years in!). One wonders what would have happened to Glencore if Credit Suisse had been forced to pull the finance lines they had with the company at the time of the global meltdown in 2008? To the winners go the spoils.

Maybe people heap praise on others too easily? I'm sure that the "G-word" has been used too many times over the years. Consider how Alan Greenspan was anointed as some sort of latter day Moses every time he came to congress - we know how that ended. Mario Draghi is getting the same kind of treatment. All of a sudden his ability to push beyond the actual legislated mandate of the ECB is being praised by bankers everywhere.You know that Bernanke wants some of the action that Draghi is getting, but its really a lot more complex for the "Bernank" as his mandate is multi-faceted. If he keeps his ego in-check and states the obvious, i.e. Congress needs to step in and do something now because QE does nothing more than pour cash into a pipeline blocked up by the banks unwillingness to lend.

One consumer note . . . Late in the day Burberry that Lazarus-like luxury brand has warned on earnings.The FT quotes the CFO:

". . . the number of people entering its stores had dipped in recent weeks. It is the last couple of weeks we are particularly referring to – it is actually a very broad-based slowdown,  . . ."

Something had to give. And luxury goods seemed to sail through much of the havoc aused in 2007-8 unscathed. Not anymore.

I was lucky enough to finally receive my Evo Supersix today. There is real genius in the design of this bike. The pictures (see below) don't do it justice. For a start the top tupe is far thicker than it looks in the photos and the spider crankset is elegent in the extreme.
I took it in to Mike Shaw at Attellier de Velo ( in Sydney to have it fitted and I got plenty of comments. One chap wandered over during the fitting and asked how Mike (a non-Cannondale dealer) could have the 2013 model here fr people to try. I had to expalin how I'd ordered the bike many months ago as a 2012 request and because of a snafu had instead received the 2013 as compensation. I got the sense he wanted to buy it from me there and then. Given my unemployed stated I may have been tempted to pop it out, but I just have to ride it at least once.


Monday, 10 September 2012

Good cop, bad cop . . .

After a week of dealing with all sorts of personal matters (including some dental mishaps) I'm  intending to be back in full swing tomorrow, until then just a short word on something I read this morning.

I can remember when Sunday morning TV was just a series of religious based shows that really wanted to do nothing more than satisfy the guilt of those who decided that sitting at home was preferable to sitting in a place of worship and being lectured to. The phenomenon of the Sunday news show now means you get all the fun of that church lecture but with a modicum of personal relevance. Sundays are also primetime for talking heads, pollsters, experts and "Op-Ed-sters".

A good example is reformed currency demolition expert George Soros. Mr. Soros has re-branded himself into a macro-economic wise man by embracing philanthropy and writing books. He seems to want to be a grandfather for central bankers, someone they can go to when they need advice.  Once again on Sunday kind old granddad George was out there offering advice, mainly to the Germans, but available to all his worried grandchildren. I've always found it fairly pompous that political leaders release their speeches 24hrs in advance of actually delivering them to their chosen audience, but when Soros starts to do it I have to relax my gag reflex. On Monday night Soros will be telling the chosen few in Berlin that they need to either get behind the Euro and embrace inflation or leave it altogether.

Read the full speech here and decide for yourself.

My own view is that the essay/speech is mainly correct in its facts, as you would expect from someone who has specialised in benefiting from troubled economies. My main disagreement comes in the conclusion that Germany has some sort of duty to bail out its European partners:

"In short, the current situation is like a nightmare that can be escaped only by waking up Germany and making it aware of the misconceptions that are currently guiding its policies. We can hope Germany, when put to the choice, will choose to exercise benevolent leadership rather than to suffer the losses connected with leaving the euro."
I don't believe Germany wants to make the other economies go through austerity for its' own sake, rather, like the Germany after reunification I believe that Frau Merkel wants to see Europe embrace reforms that allow the debtors to fulfill their commitments in the long term. At the moment all we see are budget cuts, but no change to fundamental pillars of these economies, such as labor reform. Europe needs to commit to being a competitive block of highly skilled and productive workers and not some huge experiment aimed at doing the bare minimum. Germany will support this type of Europe with money . . . the alternative would be a splintering of core Europe.

And finally a quick mention on what I thought was the cycling event of the year, the Vuelta. The thing that makes this event in some ways more compelling than the TdF is the time bonus system for stage places. It means the GC riders can't relax and compete against a small clique. It helps too that this year in Spain we got more climbing than at the TdF, which really succumbed to the time trial monster and handed Sky a deserved but somewhat hollow victory. The crucial stage 17 . . . magic:


Tuesday, 4 September 2012


Apologies to all those readers who have been waiting for my recent thoughts. Unfortunately I am in the middle of moving house and have not had time to pen something worthwhile.


The Investment Banker Cyclist

Sunday, 2 September 2012

Will he or won't he?

So on Friday Ben spoke ... and spoke ... and spoke. Apparently what he said was not disappointing because he didn't say he "wouldn't", of course he didn't say he "would" either. The most notable point in favor of believing the Fed would do something was centred around the unemployment data which he said was 2 points higher than they (the Fed) would normally feel comfortable with. The problem for the Fed remains wat can they do that will change the situation without seeing inflation pop through the "acceptable" 2% level. Clearly QE type stimulus will see a upward move in oil. This will equate to a tax rise in oil-centric America. The limits of extraordinary policy just may have been reached.

While we wait for the next move the world continues. In the case of France they nationalized CIF the second biggest mortgage provider over the weekend.

Clearly for many this is bullish as it will increase desperation within the Elysee Palace to seek an ECB lead solution for the current crisis. Gold is back above 1700 and the market expects further printing of USD's via some form of QE. Flows into equity funds are picking up and many now have reached the point where they can no longer leave their wealth in cash or bonds. This week should be fun.

Stage 14 of the Vuelta was unbelievable, I mean I just can't imagine the pain of racing up that hill and hitting the final couple of km's at 12 or 13 degrees and knowing this could be the end.

Contador and Rodriegez dueled while Froome tried to stay in contact. It looks less and less likelyt that Froome can hang with the Spaniards. I thought the gearing used by the leaders told you a story as Froome used 38-32 while the others were at least 4 teeth lighter. Was this the result of the failures of Froome and Wiggins last year on Stage 15 climbing Alto de L'Angliru where Cobo spun freely on a 34-32 going up the 20 degree plus slopes?