Wednesday, 31 October 2012

Flashback . . .

I had a terrible morning. I managed to drop my Cannondale right on it's rear derailleur which resulted in a bent hanger. I tell everyone that you need to have a great relationship with you favorite bike shop because at times like these you're going to want to deal someone who is motivated and skillful. I'm lucky as the guys at Atelier De Velo looked after me again. Damn they're good. I was lucky as the hanger was only slightly bent and the guys managed to get it back into shape without hurting the frame. Look don't try this at home or with a tech that you've only just met because this could cost you thousands in a replacement frame. Thanks guys.

I ordered a back-up rear derailleur hanger (AUD 45) in case this ever happens again. I advise that you accumulate useful spares like these when you see them, rather than when you need them. I like to keep in stock spare chains, brake pads, cabling, tires, tubes and even bar tape. I even like to keep spare cleats, heel pads and other clothing and foot ware replacement parts around just in case. I hate having to forgo a ride because of a 10 dollar part. So, unless you live near a European style mega shop like Cicli Mattio near Alba in Italy it's unlikely that even the most organised well stocked LBS will have everything you need in stock. Plan for problems and know how to fix them unless you have some reliable back-up.

Now that's what I call a proper back-up car!
I don't want to re-hash the UBS piece I wrote the other day but I'm starting to feel very uneasy about the depth of these cuts and so too are the Swiss themselves. I follow a twitter account called It seems that the locals are not happy about being included in the shake-up. The unions are now playing the quality card as they realise that it's not just London or New York that's going to be hit by a wave of redundancies:

“If UBS reduces IT services in Switzerland too much, or moves them abroad, then risk to the bank would increase and specific, vital know-how would be lost,” the association’s secretary-general Denise Chervet told

“[We] call for a more sustainable and long-term human resources policy, not just from UBS, but all banks,” the statement read, adding that UBS owed a debt to the Swiss nation after it was bailed out during the financial crisis.

There it is folks . . reality bites. CEO Sergio Ermotti management bloodlines come from Citigroup, ML and finally UniCredit of Italy. I'm happy to bet that this man cuts too fast and too deep because that's the M.O. of those institutions. I mean ML is or was famous for cutting heads only to rehire at a later date. They're also famous for being absolutely appalling institutions when it comes to the method of making people redundant. I distinctly recall my former boss at UBS in London telling me:  

"We don't do things like the Americans, they'll be no black garbage bags waiting in foyers for people who get axed. I don't want people escorted out by security guards in front of their friends and colleagues . . . lets have some dignity out there." 

With that I did my first ever round of redundancies shortly after Y2K. That thinking is long gone as Ermotti arranged something a little less dignified for his London staff this week:

"Some 100 of the Swiss lender’s fixed income traders in London discovered at the turnstiles that their passes were no longer working when they tried to get to work on Tuesday morning. Other bankers had been contacted by phone or discovered that they might lose their jobs when their email repeatedly bounced back."

Nice guys. You know what goes around comes around, if you humiliate people they'll bite back. Awful!

China, the land of the cash and carry economy is not so anymore. Q3 accounts receivable have been rising at an alarming rate. The FT says that accounts receivable at Sany Heavy, the Caterpillar (CAT) of China were up 83 per cent year to date at the end of the third quarter, hitting Rmb21bn. At Baosteel and Jiangxi Copper, the biggest listed producers of steel and copper, unpaid bills rose 52 per cent and 66 per cent, respectively, since the beginning of the year. HSBC economist Fred Neumann, who I've had a number of meetings with over the years reckons this is a lagging indicator. Perhaps he's right, but this blogger remains skeptical of the China bottoms argument. We shall see.


Tuesday, 30 October 2012

Spinning . . . waiting . . .

Sydney cycling culture is completely different from what I was used to in Geneva. Here there's a hard core of fitness fanatics who took up cycling as part of the triathlon boom in the late 80's. It's noticeable because of the number of time trial type bikes I see on the road. Your triathlon types are ultra competitive to the degree that they're almost upset if you pass them on a climb and heaven forbid if you say "good morning" or "lovely day", they take that as an insult to their personal fitness level that you're able to talk. It's not that people are unfriendly, but in Sydney exercise tends to be a serious business for many and if you're talking you're not pedaling, whereas in Italy if you're NOT talking then you're not enjoying.

The cultural differences are many and in Sydney a lot of riders seem to take pride in dressing in outfits that seemingly don't match or are old and worn. There's clearly a street cred thing going on here that speaks volumes of the Australian psyche regarding people who are seen to try too hard. There's no Italian sense of the ride being an occasion. The difference is what it is, as they say.

I managed to get 30k's under the belt this morning even though I didn't start until 0615.

By 0715 Sydney is buzzing and public transport buses are into their peak hour time table. The bus drivers were pretty good this morning and gave me a wide birth as I rode up Clovelly Road towards Centennial Park. The biggest hazard is the various mum buses (4WD's packed full of kids off to school) that seemed to be highly single minded in their task. The State of New South Wales is introducing a new law that says if you're talking on the speaker on your phone and it's not in one of those suction craddles etc. then it's considered an offense and you get to pay a 300 dollar fine. I really wonder how many people will actually get a ticket for this? Hopefully it acts as some kind of deterrent.

Just for fun check out these bike wheels with special LED lights. I'm not sure I'd put them on my road bike in Sydney, but if I was in Tokyo riding a "fixie" traveling up from Maranouchi via the Ginza to Roppongi I might give it a shot:


The big storm has seen everything battened down along the coast of the US north east. From what I understand the hurricane has been downgraded to a tropical storm.The S&P is trading just below 1400 and the market seems pretty calm. News is light on the ground. As usual in misery there will be money made. This type of events are always a help to Warren Buffet as his insurance arm inevitably raises rates on the back of others misery. The smiling grand father from Omaha Nebraska will as usual side step any controversy and lift a few dollars extra from everyone's pockets after taking some upfront hits on payouts.

The FT carried an interesting piece today on a luxury second hand good stores boom in China. This is a phenomenen that sprung up years ago in Paris and New York as ladies tired of certain articles of clothing and accessories they found willing buyers to relieve them of their seldom used goods. Even in Geneva, a bling-infested city when it came to leather goods there were a number of places in the old town where you could buy or sell your no longer wanted Birkin Bag etc. It's probably more a sign of maturity in the Chinese luxury goods market than one of economic weakness. The traveling Chinese public sees these shops in the west and realises that there is no stigma attached to buying or selling in this manner. I think luxury goods companies should be warned that in my view this signals a clear slowing in the exponential growth we've seen out of the Chinese and attached eastern economies in recent years.

Have fun with exponential growth rates . . .
It doesn't mean any one is going broke, but it does mean a dollar invested in the space might not be worth 4, 6, 8 dollars etc. by the end of the year. Be warned.


Monday, 29 October 2012

I'd rather be on my bike . . .

The New York Stock Exchange said it would close its trading floor on Monday for the first time since hurricane Gloria in 1985. Nasdaq planned to open on Monday and the Chicago Mercantile Exchange said it would suspend floor trading on the Nymex oil market, but electronic trading would go on as usual. Welcome to the disaster zone.

Tax is a very sensitive subject to most people. Letting government(s), colleagues, friends and family know how much you make or don't make is a minefield. I always appreciated the brevity of the Singapore tax system. In Singapore my taxes took about 15minutes to do on line and didn't require me to keep endless receipts for things hanging around the house for years on end. You felt un-violated by the process and personally free from worrying about random audits. The tax rate was low enough that you didn't feel the need to try and avoid it. Everyone felt they were getting a fair shot.

Of course if you are a wealthy Greek you deeply resent your government and the associated tax system, in fact not to do so probably would make you some type of pariah amongst your friends. Over the weekend Greek weekly magazine "Hot Doc" published a list of 2,00 Greeks who held accounts at HSBC Private Bank in Switzerland. These names come from the disks stolen by a whistle blowing employee a couple of years ago that led to some pretty embarrassing revelations around Europe.

The Greeks list from HSBC is interesting as it includes a number of politicians and members of the ruling elite. If you're not part of the elite you just got another excuse to be angry. Worse still this information has been available to authorities for quite a while. I guess with all the changes ministers have been able to say absurd things such as "we lost the disk" and be semi-believable in doing so. That was fine when everyone (everyone that matters at least) was assumed to be cheating so the common interest was in keeping this brushed under the carpet. The problem is that the Germans and for that matter Europe in general needs to get Greece working a little more like Singapore and so they're not going to let claims of "corrupted USB sticks" stop them from getting their money back. An investigation of 54,000 Greeks who transferred a total of about €22bn to accounts abroad between 2009 and 2011 is also hanging around like a bad smell. When a system is this corrupt it's hard to blame people for storming the Bastille etc.

Just so you don't think tax dodging etc. is restricted to failing economies you need to check out the NY Times' piece on Chinese Premier Wen Jiabao’s family. I know 2.7bn doesn't really put him or his family in the same weight class as some of Russia's politicians, but it's a good start for a man who claims to be "of the people". I guess he's lucky that China doesn't owe the Germans any money? The FT has a piece today about Chinese banks leaving London because of the new regulatory regime. My old friend the FSA is holding out on giving the Chinese branch licenses because they really don't recognize China as having a suitable regulatory system when it comes to transparency or capital levels. Luxembourg, home of Trek Nissan and the Schleck brothers is happy to take their word for it and grab the business. What a mess!

All of this is just another reason why I'm surprised that so many banks are willing to bet the house on the wealth management of the international mega wealthy. I'm pretty sure that UBS for example in axing another 10,000 jobs is getting rid of a lot of dead wood, but it's probably also leaving itself open to a new concentration risk, albeit one less likely to blow-up Switzerland itself, but one likely to leave it open to avenging tax inspectors of many bankrupt countries. Perhaps more thought needs to be put into these strategic moves? You know, just because it's fashionable doesn't mean it will look good a year or two from now. Think before you jump.

I had a nice weekend on the bike, especially on Saturday when I managed to complete the full Sydney beaches run between Sydney Harbour and Botany Bay. Maybe I should call this one the Cpt Cook special?

Sunday was a bit different as it was day 2 for my sister in law in cleats. She managed really well with only one fall to report. It's hard when you first start riding a proper road bike to get the timing right for un-clipping and braking when you want to stop, so I completely sympathize with the fear factor of falling. Mind you she picked up the use of the SRAM Force gears quicker than I expected. I think too many new riders fear the gears when they first get on. They either are reluctant to change so as to maintain a high cadence or they think they're going to break something. Well anything can happen, but as I try to explain to people unless they do something stupid it's pretty hard to break a bike, even a carbon fiber one. Just relax and enjoy.

It's getting colder in Europe now and I have to admit that I kind of miss layering up before hitting the road. I was cleaning up my riding gear the other day and I had to laugh at the various outfits I'd acquired in order to keep the cold, rain and snow out when riding in the alps in autumn. My favorite piece remains my Assos Airjack 851 which kept me warm as the temperature dipped below zero. I believe there's a new name and model this year, but if you need to get out on the bike it's worth checking out what they have to offer.

You don't have to wear the cap in this video . . .


Thursday, 25 October 2012

Restoration experts . . .

I'm going to take a break from the markets today and instead focus on the following from the Pinarello twitter feed yesterday . . . check out the work this guy does, proving once again the Germans are great with machinery:

In Europe there's a large section of men now happy to restore old bikes in order to ride in vintage events. It's similar to the vintage car rally races that have people paying large amounts for old leaky English sports cars such as triumph frog eyed Sprites. In Italy the most famous vintage cycling race is the L'Eroica . . . enjoy on your pre-1987 bike:

L'EROICA (english version) from Edouard Sepulchre on Vimeo.

Meanwhile my own cycling efforts today were somewhat hindered by a faulty Garmin speed and cadence sensor which has me going down hills at 7kph and up hills at 36kph! I've had this before and it's usually either a slipped sensor magnet or, as it was today, a battery with very little left to give. I changed it when I got home and gave it a quick test before going out tomorrow.

Biggest laugh of the day comes from the FT regarding Mario Draghi's briefing to German MP's  – one of whom dubbed him “a Prussian from southern Europe” – but was dismissed by others as “a dove under a hawk’s feathers”. So funny.

Thanks for all those who sent me product information regarding inflation linked bonds. No I'm not interested in a Japanese version . . . I kind of like my inflation bets to be countries likely to expand in the years ahead.


Wednesday, 24 October 2012

So long farewell, . . . it's my way or the highway . . .

After I sent out yesterday's blog I was listening to the Bloomberg headlines when I heard a piece on Credt Suisse looking to announce along with their results next week a further cut of 4,000 jobs. Tacked on the end was a further rumor that UBS would do likewise and would look to concentrate on the core . . . i.e. Zurich. For those of us who've worked for the Swiss banks it was always implicit that where possible you didn't mess with the Swiss offices, they were sacrosanct. In fact where possible managers were always encouraged to look internally for young Swiss talent. So be it. I made a mistake once of going internally to look good in front of the Swiss and I swore afterwards I'd never play politics like that again. The fact that UBS will start cutting at the core tells me a number of things:
  1. The Swiss Government are willing to forgo Swiss jobs in order to shrink the bank from a position of too big to fail
  2. Returns in Investment Banking are currently not big enough to justify the systemic risks also encompassed by the business
  3. Sergio Ermotti the CEO is clearly in control now
  4. The Andrea Orcel hire was a waste of time and dare I say it . . . money
In relation to all this comes my favorite quote of the day via the FT:

“Investors are keen for UBS to shrink capital from the low returning investment bank to reveal the value of wealth management franchise,” Huw van Steenis, analyst at Morgan Stanley, said.

I wonder what Mr van Steenis thinks of the shares he owns in Morgan Stanley . . . perhaps I'm a little unfair because James Gorman, MS CEO is definitely skewing towards wealth management.

If that was the most interesting thing from investment banking in the last 24 hours, then the most interesting financial product I've seen in the same period was the announcement that the New Zealand Government may issue at least NZ$1 billion ($817 million) in inflation-linked debt by syndication.

Coincidentally the lead manager will be UBS and they mailed out a press release saying the bonds would carry 2% coupon and  be linked to an inflation indexand mature in September 2025. I'm getting this from various news sources and would of course be interested in the termsheet if anyone has it. I kind of like this product at the moment as I believe that the inflation geenie is hovering close to the opening of the bottle. If I believed in the NZ dollar, or lived in the land of the long white cloud I would definitely be buying these for my pension fund.

I know I'd be a buyer of Australian inflation linked paper at the moment. Aussie Inflation jumped during in the September to 2.1% v. an expected 1.6%.

There was a big jump in electricity prices and the new carbon tax had moved inflation up faster than than economists had forecast. As usual the market focused on the fact that it was still comfortably within the RBA’s target range of 2 - 3% . . . therefore prepare for another rate cut. Maybe, but I'll be watching inflation and hoping we can get some AUD inflation linked paper soon.

We've had best quote of the day, so what about best headline:

The China HSBC Flash Manufacturing Purchasing Managers Index (PMI) rose to a three-month high of 49.1. I believe I'm correct in saying that reading of 49.1 is still implying a contraction in conditions. I know all the usual CNBC arguments will be about flattening or stabilizing trends etc, but big improvement? Really?

A concerned reader sent me the a picture of US road racing champion Tim Duggan's special edition Cannondale Evo. The saga of the slipping handlebars clearly influenced a few of you to check out your own setup.

In the above you'll notice that Duggan is using the FSA OS99 CSI stem and SL-K handlebars. I have adopted the stem and managed to get the same SL-K aluminum handlebars on sale for only 53 bucks! I had some doubts about the stem because I hadn't seen another rider with one of these installed. I'm leaving m y current K-Force Nano bars on for the moment, but will change next time I decide to freshen up my white handlebar tape. The main benefit would be a greater stiffness . . . and maybe even a safer ride.

Lance-gate continues with more ex-team mates outing themselves and Lance. It's looking more and more like an exercise in arse covering to me. A friend in NY sent me a piece in today's Cycling News detailing David Millar's response to Rabobank's decision to leave cycling. It's a very thoughtful piece by a man who's recent book Racing through the Dark details his own spiral down into cycling's drug culture. The response is an open letter that criticizes Rabobank for abandoning young riders trying to compete without drugs for the sake of their own corporate image. I like the idea of sponsors responsibility, after all Rabobank benefited from many years of winning through drug boosted riders who knew that if they didn't dope they'd be on the street. I encourage all readers of the blog to take a look at it and think about what Millar is saying. Maybe Nike, who benefited most from Lance's single minded pursuit of victory might be better off taking over a team and setting an example of how to give something back.

Dear Rabobank,

Before I explain my initial reaction to your announcement of pulling out of sponsoring professional cycling (@millarmind: Dear Rabobank, you were part of the problem. How dare you walk away from the young clean guys who are part of the solution. Sickening.) I’d like to tell you what Rabobank represents to me as a cyclist, and a British cyclist at that.

It represents the Netherlands, from the orange kit to the comprehensive national support across the board, from grassroots level to men’s and women’s professional cycling. The Netherlands is the cycling nation, that’s how we see you, the fact you had a national bank who was willing to nurture and carry your nation's cycling hopes seemed so wonderfully appropriate.

There was a certain jealousy for me that I wasn’t Dutch, that I didn’t have that sporting ladder to climb up, from racing as a school boy to one day doing the Tour de France all within a national team. Of course, now it does exist, with Sky whose sponsorship starts at grassroots participation right up to their British Tour de France team. A sponsor that is inspiring a country to become cyclists on a very similar model to what Rabobank have done. Contrary to Rabobank and the Netherlands this is only a recent development for the UK.

I have raced against Rabobank riders since I turned professional in 1997, and it’s always been a powerful team, a team other professionals have been envious of with its big budget and massive support and strong national affiliation. Like me, and many others, it lost its way. To the point where it was accepted by Theo de Rooij that doping was tolerated within the team. The truth, which the world is now accepting, is that at the time doping was tolerated within the sport to some degree.

The downfall of Lance Armstrong has opened the world’s eyes up to what most of us within the sport knew, if not in the detail that the USADA file has revealed, that to win the Tour de France and many other big races was impossible without doping for a certain period of time. Of course races were won by clean riders, and many clean riders achieved remarkable careers, especially in hindsight, without doping, but the bottom line is that doping was rife and necessary to be the best.

Who is responsible for this? Most of us involved in professional cycling were in some way or another, it became a way of life. I’d hoped the Festina Affair would force change but the problem was too deeply embedded to be changed by one event.

It took several changes to take place. First came the anti-doping controls, they became more advanced, the drugs that had been previously undetectable became detectable.

Doping became a criminal offence in many European countries allowing for criminal investigations to delve deeper than any anti-doping agency or cycling governing body ever could; it was a criminal investigation that discovered my history of doping.

A whereabouts system was put in place, giving anti-doping agencies the ability to do doping controls out-of-competition effectively for the first time; out of competition being the time when most doping took place.

As the anti-doping measures became more effective more riders and teams found themselves being faced with doping scandals. This had the effect of sponsors asking questions, or simply withdrawing their sponsorship, thus making team managers more responsible for the actions of their doctors and riders. Some teams reacted more strongly than others, Marc Madiot and FDJ are a prime example of a manager and sponsor who made the decision in the late 1990’s to eradicate doping from within their team. They didn’t rely on anybody else, they did it themselves.

This is where my critique of your withdrawing stems from. The sport in the past five years has cleaned up massively, my team and our sponsors came into professional cycling with the intention of having a 100% clean team, we knew what the sport was about, Jonathan Vaughters our team manager is an ex-doper, I was the lead rider and I am an ex-doper. Our sponsors understand what professional cycling is about because we have explained it to them, they share responsibility with us, we have explained cycling’s history and how it is our intention to change the future through our actions every day.

Rabobank the cycling team is an institution, the amount of dreams that have been shattered by your pulling out are uncountable. You have some of the most amazing athletes, I’ll mention Marianne Vos and Robert Gesink because they are the most famous, but there are many more who do not deserve to pay for the mistakes of the past.

Those of us who make up the past have to take responsibility for the future.

You have stood by your team through scandals, I credit you this, but did you really try hard enough to prevent those scandals before or after they happened? I don’t think you did. Is your team clean now? I believe it is. Should you be proud of your cycling team and what it represents today? Yes, you most definitely can.

Yet you choose to pull the team, and within your statement make this remark, “We are no longer convinced that the international professional world of cycling can make this a clean and fair sport. We are not confident that this will change for the better in the foreseeable future.”

You are wrong.

We have made a huge difference these past few years. I KNOW it is now possible to win the biggest races in the world clean, that is a fact. I can empathise with your disillusionment with the sport, but please do not belittle all the work we’ve done and difference we have made. You are throwing away the chance to be part of the future of what is, in your own words, “…a beautiful sport.”

I admire your decision to not discard the teams immediately but to have them race in unbranded jerseys next year, many other sponsors would have seen this as an opportunity to jump ship. This says something about you. Maybe take some time to understand the sport, find a way to be part of the continued change. I believe all of us who were part of the recent history of cycling have a responsibility to accept we made mistakes (deliberate or not) and a duty to fix what went wrong.

That is the ethical thing to do, and more importantly, it is our duty.

Well said . . .


Tuesday, 23 October 2012

Like pulling teeth . . . ride your problems away . . .

Revenue growth slowed at my dentist this morning. I considered it somewhat of a bargain to have an old amalgam filling replaced for a mere AUD 198 bucks. The market of course has had the same shock via some of the results we've seen coming out at the moment.

I trust CAT more than any other company in the world. It's not a cheap stock and while I believe Doug Oberhelman is a straight shooter I don't believe he has any more insight into the world right now than any other person. Caterpillar cut its full-year forecast to $9 to $9.25 a share, compared to previous estimates of $9.40 a share after reporting revenue of $16.45 billion (v. $15.72 billion during the same period last year) and earnings of $2.54 per share (up from $1.71 a share last year). Oberhelman told CNBC's Squawk Box:

"I don’t predict a recession anywhere in the world at all in 2013, but Europe is the one where there are so many political unknowns it's hard to see how that’s going to end up,  . . . We sure see China past the bottom. I’m optimistic about China in 2013."

I thought he said that about China earlier in the year, maybe I have that wrong? If you ask me I think there's too many balls being juggled right now to be so definitive. If you believe China has bottomed then invest in China do not invest in CAT because you're paying a very large premium over emerging market equivalents for that big yellow earth mover.

The late day rally on Wall St was clearly influenced by the tech sector. The fact that Yahoo beat the bearish forecasts of 25 cps by printing 35cps. I'm not a tech guru, but when I get a chance I want to do the numbers on the margins in order to compare it to the Google results. With the money that the new CEO is splashing around I can't see much reason to believe it gets too much better in the near term. One thing I think she has right is the emphasis on mobile. Why? Think about it yourself . . . when did you last buy a computer (even a laptop), compared to say a smart phone or tablet. More and more e-commerce is being conducted by mobile and as we ramp into 4G you'd be better placed investing in mobile than fixed.

I won't drone on about Morgan Stanley's result's today that seem strangely to encompass an increase in costs via the compensation pool after the CEO said only a month ago that things had to change. Instead lets consider the state of the world from the view point of the low interest rate enviroment. I liked the piece in the FT today that quoted Julian Adams, the Financial Services Authority executive in charge of supervising the insurance sector as saying that "the low interest rate environment threatens to undermine the value proposition of insurers”. Why is that important, well a lot of folks out there don't understand the way insurance companies work. Clearly they tend to gravitate to fixed income investing of your insurance premium. Of course when rates are this low they really have to venture into riskier assets and that implies an increase in offsetting premiums. So once again the cost of money may seem cheap at the headline, but actually is rising because of associated costs. It's a strange world.

Who do you think is in more trouble, Lance Armstrong or Pat McQuaid the President of the UCI? I think it's closer than people think because the UCI tested Armstrong 218 times and failed to record a positive leaving open to question about every TdF etc. ever staged. More importantly McQuaid doesn't have a plan; there's no truth and reconciliation committee being established, no discussion on how to ensure the coming season is clean. I mean I use to ride along Lake Leman in Switzerland past the various international sporting organisation HQ's: UEFA, FIFA, IOC and of course the UCI and I always wondered what suits who I saw lunching by the lake actually did to justify their huge slary packages?

I especially used to like UEFA's HQ in Nyon with it's beautiful low slung bauhaus style main building neatly separated from the admin centre across the road. I bet McQuaid will get out on that road between Lausanne and Geneva and try and pedal his problems away . . . I also bet it won't work.


Monday, 22 October 2012

Make mine a Big Mac meal . . . why I should have treated myself to McDonalds yesterday

I didn't have to look at the S&P500, Dow or Nasdaq on Friday to know the market was going to take a hit. If you're like me you get these dinky short messages from Bloomberg via your smart phone with a couple of lines of news. When I woke up on Saturday morning mine said McDonalds earnings $1.43 a share v. analyst estimate $1.47. You see McDonalds has been a clear outperformer for a number of years now and a lot of that has been because of their growth in Europe. I used to always joke with my French friends about how McDonalds was growing fastest in France. GE produced similar disappointing results and Google remained week after surprising the day before.

Don't get me wrong, it wasn't a terrible day, but it was a reminder of how high stocks have gone since 2008. The theory that cheap money alone can justify a portfolio is flawed in my view.

For those traders really in to fundamentals it is the debt markets rather than the stock market that offers real possibilities of good returns. The FT today had piece regarding the trade in MF Global creditor claims. In my career I've been involved in a number of these situations. In Korea I saw some truly awful bankruptcies because of the convoluted structures often associated with "chaebols". Often during 97 - 99 you wondered if the cash had ever been in the correct company's accounts in the first place. At other times governments and companies in South East Asia understood better the need to reach some form of financial conclusion, whether that be full, part or debt for equity swap and in some cases a combination of the two. MF Global looks likely to pack back 90 cents in the dollar to creditors, which in some ways makes you wonder why the company nearly went under in the first place. Having said that I don't know where the low was on the major tranches of debt, but I can guess if it was anything like Lehman's then it was likely to be far below 50cents in the dollar . . .  Some major tranches of Lehman's International traded into single figures and eventually paid out above 50.

In Australia there were leaks over the weekend about a large hole in the budget because of the fall in commodity prices. The local finance chief Wayne Swan released an update to the May 2012-13 budget today Swan saying that global conditions had cut almost $22 billion from tax receipts over the forward estimates and $4 billion alone in 2012-13. Therefore in order to meet various promises he was looking to find 16.4bn in new savings over four years to return the budget to surplus. I don't think the average man on the street believes him. For a start he said trend growth would be 3% in 2012-13 and 2013-14. He better hope the Chinese don't pull the plug on stimulus or he's toast on that one because he's also forecasting Australia’s terms of trade it worsen, declining by 8% this financial year compared to a previous forecast fall of 5.75%. The politics here is that an election is coming in the first quarter of next year and these revisions are meant to hide the reality from the electorate.

My Garmin 800 told me that I'd expended roughly 2300 calories during the Spring Cycle Classic here in Sydney yesterday. Look it was probably closer to 1700, but the good news is that it's enough to have considered a Big Mac meal somewhere during my ride back from the Olympic Stadium. I wonder if they would have let me use the drive through on my bike?

The blue line is the course. The red shows the ride home . . .
Someone was smart enough to section out the actual 50k ride on Strava so you didn't have to make estimates of time. I was really happy with my time given the stop start nature of the event.

40th of 283 Strava riders seems pretty respectable to me. More importantly the Cannondale got through it all with out any noticeable movement in the handlebars.

The event course itself was a bit tight as the idea was not to race, but rather to get to know the commuter cycling trail that the city and associated districts have put in place. I can tell you there are some pretty tight twists and turns that really call for an old fashioned commuter bike rather than a racing bike on carbon wheels. Obviously I road home on the standard roads.

I am now considering doing the 90km ride to Wollongong next month. I'd really prefer not to do it on my own, so if anyone out there feels up to it I can offer a lift back and a place on my bike racks for your trusted stead.


Friday, 19 October 2012

Googling margins, revenue and cycling . . .

Many thanks to Mike, Chris and the team at Atelier de Velo for finally fixing my stem. I took the FSA OS99 CSI to them this morning and had it fitted.

Stem partly obscured by Garmin 800 mount.
A quick and relatively easy ride up and around Centennial Park here in Sydney told me it was a job well done. During the setup there were a few dodgy moments with the fork and cap as for some reason there was some sticking of components. I know if I'd been trying to do it myself I'd probably sending an order right now to Cannondale for a new front end.

Google me this? What happens when a market darling falls on hard times? As we know Google is a crowded trade that even I haven't challenged up until now. Look at the volume on the lower chart because it tells you a lot about this market:

Google's net income fell to $3.01 billion, from $3.18 billion in the year-ago quarter, though revenue increased 51 percent to $11.33 billion from $7.51 billion a year ago. A lot of this has to do with the Motorola Mobility business that they paid 12bn for, but leaving that aside I think that the cost-per-click declining 15% is what is most significant. I can't tell whether this is a plan to dominate and crush the opposition or whether it's the opposition themselves that are putting the pressure on Google. Either way it shocked a tech long market that had coalesced around the Google/Apple pair for most of the year.

With about a third of the S&P 500has reported so far, 65% have beaten profit expectations but only 42% have have beaten revenue expectations. This is something I've been warning of for quite a while and in my view shows the active shrinkage of the consumers personal balance sheets as they look to deleverage.

I'm trying to get the term sheet for the mega Italian bond sale yesterday. Italy raised €18bn via 4year inflation-linked bonds that had fixed a minimum coupon of 2.55% for the bond, which will pay a return linked to the index measuring Italian consumer price inflation net of tobacco, with a premium for those who hold the bond to maturity. Now my first question is how much was the zero inflation yield; given these seem to be premium redemption bonds then I assume it's more than the coupon.  It's an interesting bet for the retail investors that bought the line that the ECB was there to backstop them. Anyone out there have a termsheet? . . . I'd take the Italian version.


Thursday, 18 October 2012

Give me something for a penny that's worth a buck and I'll give you thirty five cents and be a hero . . .

What are we to make of the news of Vikram Pandit's departure from Citigroup? His successor Mike Corbat seems like one of those faceless men that appear in the background of old photos of the Soviet leadership perched above Lenin's tomb watching tanks and missiles parade through Red Square. Ostensibly the story goes that Mr Corbat thinks he can wring more efficiencies from the operations than Pandit did. I can't believe a bank with so many asset problems is worried about certain operating efficiencies? If I were to speculate it seems to me more likely that the disagreements surround the "bad assets" space.

You see in a bank it's often politically a very good position to be in if you inherit assets that have been written down or forgotten because any value you are able to derive from them is seen as new profit rather than claw-back. It's a subtle difference and goes very much to the psyche of investment banks in general. The other major benefit you have in such a position is that you know where all the skeletons are buried. The leverage is unbelieveable, I've seen it in action . . . you sit in a high level meeting with people many times your senior and you're able to say . . . "well it's a bit like when you let [insert bankers name] buy those bonds ... and we know what happened there . . ." Usually the senior manager's face turns white because what you're actually saying is that you know how much money that guy lost and he better look after you or you'll go around him. The quid pro quo of course is that you get some of the value back so he's able to say in the next board meeting that the bank can report significant write-backs and asset sales above current book value. For this you'll get a bonus and be seen as some kind of wonder trader, when in fact you were just the lucky person who got in at the bottom.

I wonder what the truth is at Citigroup? One thing is for certain and that's Mr Corbat had the key's to the mausoleum and therefore was in a position to leverage. The only other person with an equivalent amount of knowledge would probably be the bank's Chief Risk Officer . . . Brian Leach. Mr Leach I bet gets a promotion and a big bonus for staying around . . . . as if he was ever really going to leave?

Citigroup is probably a buy right now because Mr Corbat wouldn't have pulled the challenge trigger unless he had more profits up his sleeve.

QE3 might not help everyone, but it is helping Bank of America. Though they reported a huge drop in revenues of $20.7bn compared with $28.7bn a year earlier they were able to report improvement from the increased valuation of mortgage-backed securities held by them thanks to the Fed’s buying MBS's as part of QE3. Look, as I've said before this is all about solvency, not liquidity with these assets, buying these ultimately does nothing but transfer the problem to the tax payer. What's more has anyone looked at whether they are paying a fair price? I suspect that the banks are dribbling this stuff out now and happily booking profits that seemed unlikely 3 years ago when the write-downs were happening.

I guess today's blog has a slight conspiratorial tone to it, given this lets go with the theme and consider the ability of China to magically construct a 7.4% growth number so as to keep on the full year revised target of 7.5%. Anyone who thought they wouldn't hit the target they set is crazy. This is a country with almost zero transparency, what Premier Wen Jiabao says goes. Wen Jiabao now says that the worst was probably over. Fair enough, but most economists and observers said the bottom would have been reached back in the 1H12, not 3Q12. I think I'm entitled to show apropriate skepticism now.

Anyhow I managed to go for a ride with a mate today and enjoy the Sydney spring weather. a quick 30k's on the Pinarello around the beaches and more salubrious suburbs of Sydney left a smile on my face.

And for those wondering about the stem issue on the Cannondale I can report that a new FSA OS99 CSI 110mm has arrived and if I get time I'll be having it put on later today.


Tuesday, 16 October 2012

Burning legs and burning batteries . . .

I  managed to get in a ride with a friend who's relocating to Singapore on Friday. A nice 65k's from the heart of ydney out to Little Bay in the south. He's lovely guy so I tried to add some value to his Singapore experience by offering some small pieces of advice. I hope he does well.

You know sometimes you don't need the latest kit to love riding a bike. My friend rides a beautiful hand painted Colnago Master XL. I know it's hard pushing the extra kg's of the steel frame, but it's the price you pay for beauty.

Colnago Master in Rabo Bank Colours
Anyhow for those wondering whats been going on regarding the stem on my Cannondale I received the following suggestion from FSA this morning:

Wow Mike, that seems really odd. Makes me wonder if the stem was oversized in production for some reason. Ideally, have your local shop contact our distributors down there and they should be able to warranty it sue to an oversize clamping area cause that definitely should not be happening! I haven’t heard of that happening before so makes me think there was a minor issue with the clamping surface… But, as I said have your shop contact our distributors down there about a possible warranty on that stem.

I'm not upset with that response, but I am concerned  about production glitches in general, especially when it comes from a Dutch company. My Dutch friends tended over the years to be super precise in things they do, so I wasn't expecting this. Anyhow I'm going to swap the Stem to another brand on Thursday so I can ride the bike in the Cycle Spring Classic Ride here in Sydney on Sunday. 50k's and I believe I get to ride across a car free lane on the Sydney Harbor Bridge!. The downside is you start at 7am . . . that kills Saturday night.

I'm slightly bemused by the mortgage markets in Australia and elsewhere around the world. In a speech Bill Dudley, president of the New York Fed, said “concentration of mortgage origination volumes at a few key financial institutions” meant that banks were not passing on low interest rates to borrowers. Really Bill? Well this is what happens when you designate a few banks as being to big to fail. Additionally if you drive rates to zero do you really think with Basel III looming that bankers want to take the risk for such small absolute returns especially as their cost of raising equity is still relatively higher?

In Australia we have 4 big banks and virtually no one else and I can tell you they do not pass along the full rate cuts offered by the RBA to mortgage holders because there is no competition for loans yielding these type of rates. And thats in a country with the best AAA yields available.

The world's economies are not normal and unless governments claw back some power from Central Banks via proper execution of their mandates then we will all continue to suffer.

Of course in the dreamworld that is silicon valley the fast failing Yahoo is now offering a package worth up to USD 60m to Henrique de Castro of Google. I have no idea who he is or what he does, but if this is Marissa Mayer's master plan to resurrect Yahoo then I'm pretty skeptical. I'm not so skeptical why Newscorp paid Rebekah Brooks GBP 7mil as she walked out the door . . . . moving right along. . .

Once upon a time in Japanese equities battery makers were very hot. Government subsidies for hybrid cars and alike meant that the sky was always blue. I never followed A123 Systems, but the US government gave them a direct injection of USD 249mil . . . and now they're filing for bankruptcy.

A123 Systems . . . going, going . . .!
The lunacy of a system (no pun intended) was mad there for a number of years and now we have to pay for it. This blog has consistently pointed out the ridiculous levels of subsidies in the solar industry previously. I continue to warn investors in clean energy that the basis of their investment should be not predicated on a government subsidy model. If the company can achieve it's goals from it's own pool of investors and provide suitable reasonable returns then it's worth looking at.


Sunday, 14 October 2012

Time to rewrite history . . . politics, economics and cycling . . .

Apparently it was the European Union and not the USA and Soviet Union via mutually assured destruction (MAD) that stopped Europe from going to war in the last 50 years. Maybe it's just me but wasn't NATO the policeman of the peace? Wasn't the EU just an economic grouping that made sure that Italian, German and French farmers got to sell their costly goods at equal prices across a continent?

The Nobel Committee which was last seen disappearing up it's own proverbial when it awarded Barrack Obama the Peace Prize in 2009 has now officially donned the funny green wig, red nose and size 24 comedy shoes to prove what we all suspected that these people are a team of clowns by awarding the 2012 prize to the European Union.

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If that wasn't enough we had the spectacle of the IMF closing it's meeting in Tokyo with warnings that not enough was being done to stimulate economies. Lot's of debate surrounds the conclusions due to some fancy figure work at the IMF regarding the fiscal multiplier. Essentially this is the number used to show the net effect of each dollar spent by governments in relation to the output they provide in GDP. It would seem that the IMF has played with this to imply austerity is more harmfull than previously understood. I won't get into the argument other than to say that it shows how far to the Keynesian path the world has swung in recent years that this becomes such a core issue. As I've said many times the issue for most of the troubled economies dragging down growth is one of solvency, not of the liquidity being used to pump up economies.

None of this is helping the Spaniards who remain in denial regarding their problems. It now is becoming more likely that the budget there will suffer further blowouts even allowing for tax rises and cuts in the health services. The government debt will grow to 85% of GDP this year as Madrid absorbs some of the banking problems. Of course this figure becomes worse when you include the states now asking to be bailed-out. the Spanish 10year is back up to 5.85% and highly dependent on the ECB's continual monetization program.

Swedes Finance Minister is at least calling it like he see's it. He said this week Greece may quit the common currency within the next six months. Maybe they should take the Spaniards with them?

I said I'd keep readers up with the problems I've been having with the handlebars on my Cannondale. I managed to source a new stem which I had a Cannondale dealer here in Sydney put on the bike. All went well until they slipped violently coming down the hill towards Bondi Beach on Saturday morning. I was doing close to 50kph at the time and it shook me up. I stopped off at a bike shop near Centennial Park and had one of the young mechanics take a look at it pre-open. He tightened it the best as the shop hadn't opened we didn't want to risk going further without a torque wrench. So I decided to ride very carefully to the Cannondale dealer who had installed the stem, as he didn't open until 10am I opted for breakfast at Attelier De Velo where the guys are always available to check things out. They torqued it up to 6NM and still got slippage. They cleaned off the carbon compound paste and relied solely on the non-slip surface FSA uses and that also failed to work. So we put on some different compound and torqued up to 5.5NM for the ride home. I stopped by the dealer, but the head mechanic was off duty, so no luck. I'll probably take it back on Monday and see what he says. I reckon I'm destined to swap the handlebars and stem over to a Aluminum set. Saving component weight is not worth the potential ride home in an ambulance.

This is Peter Sagan's Cannondale he rode to celebrate winning the green jersey in this years TdF. If you look closely you'll notice that he uses an FSA SL-K stem forged from Aluminum. He pairs that with FSA Energy handlebars. The reason he's riding on a cockpit set I can buy for AUD 187 (84 + 103) instead of 550 (250 + 300) is that he knows that he won't get handlebar slippage, cracked stem or broken handlebars if he uses Aluminum. Why bother saving 100grams? I've learnt my lesson.


Thursday, 11 October 2012

Things to do on your Pinarello Dogma before you die . . .

If that doesn't put a smile on your face nothing can today. Rain here in Sydney is stopping me from trying some of these tricks. Given this I took the Cannondale up to local dealer Sable & Argent. It seemed like a nice shop and the Head Mechanic is going to do the warranty check on my stem tomorrow. That's cool with me as the rain looks to be with us for a few days. I want to mention that I got some really good advice from FSA on their stems. The problem with the K-Force model is the bulbous nature of the thing . . .  it was suggested to me that some bike shops actually ground down part of a wrench extender in order to get at the lower titanium bolts. I bet that most top mechanics just use their experience to guess at the 6NM tension required. Anyhow I'll soon also have an alternative stem, an OS99 3K wrap Carbon Stem in Cannondale green with conventional bolt placement.

In fact if the OS99 arrives tomorrow I'll ask the guys at the shop to give me a lesson in swapping out stems on the Cannondale.

I'm watching results from the US and will report more tomorrow.


Wednesday, 10 October 2012

Someone is starting to get it at the IMF meetings . . . Pinarello tune up ride . . .

IMF warns eurozone on capital flight. Well just maybe someone at the IMF is starting to get the fact that what we have here is a solvency problem. The IMF estimates that European banks will try and offload 2.3trn in assets by the end of 2013. Some private estimates say this number gets closer to 4trn by the end of 2014. In sum as this blog has said on many occasions the governments and central banks need to step in and remove this drag by asset purchases rather than by the indirect method of QE. In fact I would advocate abandoning Basel III in an effort to increase asset solvency. This in turn would allow a more normal central bank monetary policy in the meantime. Perhaps the trade off would be some hybrid return to Glass Steagall?

Meanwhile the IMF meetings were disrupted by the politics being played out by their Japanese hosts and the Chinese. Xie Xuren, China’s finance minister, and Zhou Xiaochuan, governor of the People’s Bank of China, decided not to attend because of the over a group of islands in the East China Sea. Yawn . . . .zzzzz.....

At least we have the start of the earnings season in the US to give us real numbers. As suspected things in corporate earnings land have slowed and the traditional leader of the season Alcoa reported a net loss of $143m which apparently was slightly better than expected. My favorite quote though comes from the CEO who said: ". . . he was “pretty confident” that the stimulus measures announced in China meant “demand will be picking up speed”. However, he said it was “probably going to take until the end of the fourth quarter” to show results." Doesn't sound too positive to me and I think the key here is that Alcoa’s revenue, at $5.83bn in the third quarter, was down 9%. Back in 2011 when I was more bullish we were getting flat to small positive revenue growth combined with massive attacks on business costs and this was justifying the rally in stocks. With said costs mostly squeezed out of businesses a fall at the revenue line cannot be sufficiently offset any longer therefore putting pressure on the bottom-line from which dividends are paid and debt is repaid. Watch the top line coming from these reports.

Just because some of my mates think I'm too bearish I want to mention the post Chinese Golden week bounce in Iron Ore prices. This is good news for Australia and its currency and clearly resulted in the bounce back over 1.02. The government here looks hard pressed to meet it's balanced budget target this year so an uptick in commodity prices will be greeted with a sigh of relief in Canberra.

As readers know, I have always been an Xstrata bull and a Glencore admirer. So I was interested to read the comments by Tim Lane, deputy Governor of the Bank of Canada, who posed the question in a recent speech as to whether some commodity trading companies had become too big to fail? It's a great question and in theory they shouldn't be, but with the growth of leveraged structures based on their core sectors it is entirely possible. Personally I have never thought of Glencore or Vitol and alike in such a light, but it's certainly worth considering as an adjunct to the worries surrounding the securitization of certain important metals such as gold by the major ETF "structurers" in recent years. I suspect Mr Lane is laying the groundwork aimed at preventing further vertical integration in the commodities world and will for many of my friends in risk arbitrage hedge funds add yet another risk factor in their calculation of likely returns in the strategy.

One commodity that had me thinking today was rubber, or more specifically bike tires. As I wrote recently my Cannondale is out of action with a cracked stem.

Now Cannondale have been very proactive about the problem and I'll be taking the bike into one of their dealers tomorrow. In the meantime I took the Pinarello out today for a quick 30k's and I have to make a few observations:

  • Tubular tires have rolling feel that is completely different to clinchers. It's as though you just glide above the road
  • The Pinarello frame feels far less aggressive than the Cannondale, but really isn't much slower
  • Acceleration wise the Cannondale feels like it transfers the power more directly to the ground
  • Riding compact (50/34) rings after riding the big rings (53/39) is really strange . . . the power profile is obviously much steeper on the latter, but the slightly higher cadence you track at when riding on the former seems more relaxing
Anyhow it was good to have the Pinarello out and it was nice to have a couple of guys say what a beautiful bike it is. If only I was just as stylish . . . sigh.


Monday, 8 October 2012

Cracks are starting to show . . .

I was riding my Cannondale Evo here on Sunday and was jolted heavily when I failed to spot a pot hole. I guess it was just too beautiful of a morning to be paying extra close attention to the road. Anyhow the end result is that my FSA K-Force Stem in Cannondale green suffered a couple of micro cracks that widened throughout the ride. In one way I was lucky as the stem costs about 250 bucks, whereas a broken Mavic Cosmic Carbone SLR front wheel would have been closer to 1000. As such I've sent mails to Cannondale, FSA and my bike shop in Italy to see how I go about claiming for a part that has a very comprehensive warranty. I'm guessing as the stem was a special edition I'll get the usual excuses about it being irreplaceable and I'll have to settle for the standard red and white model. Who knows? While I was mailing Cannondale I also took the opportunity of reminding them that the compact rings for my Spider cranks hadn't arrived yet. Let's see what they make of that?

In the meantime the AUD has cracked down below crucial support at 1.02 and as I write this is trading at 1.0158 after the RBA said "the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected," . . .  and the board remains poised to push the cash rate lower because they suspect a harder landing in the Chinese economy. As such I remain surprised that stocks such as Rio Tinto remain about 10% above their mid-September lows when the Iron Ore price crashed through the 100 dollar mark. The local borse seems to be benefiting from yield and financial stock buying. In my mind the fact that more than 50% of the Australian market is held offshore could be the biggest headwind to the Index and I remain skeptical of the usual bulls.

So if my bike stem and the AUD are cracking what else is under pressure? This week’s annual meetings of the IMF and World Bank in Tokyo I suspect will show the economic debate starting to show equally fractious signs.

A number of interesting pieces regarding US government exit from QE-ternity are starting to appear in the press and if we are to believe that the US has turned the corner on the employment front as many were suggesting last week with the fall in the headline below 8% to 7.8%, then it's time to start looking ahead. You see as the Fed heads towards a 4 trillion dollar balance sheet we have to consider what happens as we return to "normal" conditions. The Fed has moved it's duration of debt out past 10 years by buying up vast quantities of mortgage backed bonds and alike. Of course to reverse this will require people and institutions with similar views on the long term viability of such debt. If the Fed manages to get things growing at 2-5% (and that's a big if) it would be dangerous for the market to have excess liquidity in the system. The Fed surely must understand that at the first sign that they are a seller a market (the MBS market wich they are currently destroying with their actions) will not be there to buy back the debt the Fed wants to sell. As Philly Fed Governor Charles Plosser said in September:

"While these risks are very hard to quantify, it is clear that the larger the Fed’s portfolio becomes, the higher the risk and the potential costs when it comes time to exit. And based on my economic outlook, that time may come well before mid-2015. In my view, to keep the funds rate at zero that long would risk destabilizing inflation expectations and lead to an unwanted increase in inflation."

The risk is that the bond market "cracks" long before the first Fed move and with it so does many of the huge bets currently in play in government corporate and junk debt. 

Now where is that bike of mine?


Friday, 5 October 2012

Debate this! . . .

I spent yesterday considering the fact that Romney had clearly defeated Obama in the first Presidential Debate. I watched a big chunk of it on the A-Pac channel on cable, which excluded all the fluff you get on the commercial channels.

Visit for breaking news, world news, and news about the economy

I was very surprised by the result as Obama deffinately let the proceedings slide a little out of control. The moderator basically interferred as little as possible, which was also a surprise and should have been picked up on by Obama, but wasn't. I still can't conceive a Romney victory, but it's at least going to be a fight now. If Romney was to win I'd predict a few things:
  1. A big uptick in equities
  2. A resurgent USD
  3. The end end of Bernanke or at least a Fed Board of Governors that are likely to see plenty of turnover
 There's probably a lot of bankers who would be happy to see the back of Obama, Bernanke, Geitner & Co. Clearly my fellow countryman James Gorman of Morgan Stanley would be one of those people. You have to hand it to Gorman who has had a "Pauline" conversion on the subject of bankers pay. As this blog has pointed out on many occassions the sorry returns now available to investment banks are changing the industry. The days of 20%+ RoE's have long gone and Mr Gorman only has to visit his Head of Research in Tokyo to get a picture of what he should expect in the years to come. I do have some sympathy for some of his observations (as quoted by the FT):  

“Comp [compensation] comes down because the amount of people in the business comes down,” said Mr Gorman. “What the Street has historically done is when revenues went up, they kept the comp-to-revenue ratio flat. They rank comp by ratio. When revenues went down, they increased the comp-to-revenue ratio because they said, ‘We might lose all our people. We have to increase it’. ”
    He's 100% right, but as shareholder can we trust a board still thick with people who built the model he now rejects. At least as a shareholder I can understand Goldman Sachs, but MS? Perhaps Gorman will turn out to be a great leader, but I believe an outsider is what's needed if his view is correct. Watch this space and be prepared to accept less than 10% RoE. I'm not going to debate the merits of various bank bail-out schemes in respect of the Spanish situation. There can be no debate. Spain needs to clean up zombie assets fast. The trouble is that many of these assets are held down at the state level where politics and prejudice plays a huge roll. Madrid has held Spain together since Franco by allowing the regions a lot of autonomy, reversing that trend in order to solve the solvency crisis will not be easy. They need to follow the Swedes before they get stuffed with everything at the wrong price.

     Finally earllier this year I was warning about the potential losses likely to come to light in the annual student loan default statistics, which are published as the new academic year begins (i.e. when cheques are due). The Department of Education published a very concerning note regarding the situation:  

    "The U.S. Department of Education today released official FY 2010 two-year and official FY 2009 three-year federal student loan cohort default rates. This is the first time the Department has issued an official three-year rate, which was 13.4 percent nationally for the FY 2009 cohort, a slight decrease from the trial three-year rate of 13.8 percent for the FY 2008 cohort. For-profit institutions had the highest average three-year default rates at 22.7 percent, with public institutions following at 11 percent and private non-profit institutions at 7.5 percent. The Department is in the process of switching from a two-year cohort default rate to a three-year measurement as required by the Higher Education Opportunity Act of 2008. The national two-year rate rose to 9.1 percent for the FY 2010 cohort, from 8.8 percent in FY 2009."

    I wonder what 2011's default rate was? Leaving that aside, lets just say things haven't gotten any better, so now we have over 100bn of defaulting loans??? At what stage does this become a huge deal? Unless you have jobs for these graduates the US economy is just layering more zombie assets that will need to be reserved against by a banking system that just doesn't need its solvency tested further.

    There is a major debate within the cycling community in Sydney regarding helmets. There's a strong hardcore who want to fight the compulsory helmet laws. I was on a well known website recently and when I expressed the view that fighting helmet laws was a worthless battle in a bigger war I was absolutely slayed by strange angry faction of riders. I don't get it? I mean why can't they see that wearing a helmet is a small price to pay for the moral high ground over the driving community? None of these people has read Sun Tzu's Art of War:  

    "If your enemy is superior, evade him. If angry, irritate him. If equally matched, fight, and if not split and reevaluate. "

    Maybe if they did they could appreciate the following video . . .


    Wednesday, 3 October 2012

    Memo to self . . . if output is slowing . . . then get on your bike and ride . . .

    Here's a chart I got from Zerohedge. It's a nice follow-up to yesterdays's blog as it shows the disconnect between the Global Manufacturing PMI's and equity markets. If you remember I pointed out the contractionary numbers printed by Australia and China on Monday which were very much at the core of the RBA's thinking when they cut rates yesterday.

    I know very few people want to be reminded about this stuff, but what it speaks to is the gap between QE and the real world. Unless you are producing stuff that is consumed a monetary policy predicated on ink and paper only is doomed to fail. 

    I'm lunching with an old friend on Friday who know is going to ask for some investment advice. You know I want to just tell him to sit on cash at the moment, but that's probably not going to cut it. I know a good rule of thumb used to be that once you're over 40 you start buying bonds at percentage proportional to your age. How do I suggest that given where bonds currently trade?  The BIS released a report on Monday pointing out that sovereign bonds were being overvalued in terms of "riskiness". If banks are buying up questionable soveriegn debt and ranking them as "riskless" then I have a feeling that you don't want to be in them, because when the clean out comes you're going to be in trouble.

    Of course part of me is excited about the fact that report said the implementation of Basel III was behind schedule etc. As I've said on this blog before we are in the middle of a solvency crisis which Basel III is not helping to alleviate. So good news for banks, bad news for middle age investors?

    As a sometime professional expat I know the trouble you can get yourself in when the good times are flowing. Well it's often good to break away from your immediate peers and try and meet some "real" people. With this in mind I can certainly recommend the following which I received from a good friend in HK today:



    "Biking the World"

    Emily Chappell

    Thursday, 11 October 2012

    The British Consulate General
    1 Supreme Court Road, Pacific Place, Admiralty
    by kind permission of Her Majesty's Consul-General

    Drinks 6.30 pm; Lecture 7.30 pm

    Pre-booking; please reply to also

    I can only marvel at peoples durability in being able to accomplish feats such as this. I know from my own reading that anyone attempting such a challenge needs to plan the setup of their bike very carefully. I'd suggest going to the lecture and checking out a book entitled "It's All About the Bike" by Robert Penn. Mr Penn goes about building his perfect bike in the book and importantly shares some secrets for those going long distance touring including the fact that steel frames are better than carbon or aluminium because if you're in northern India it's likely you can find a welding shop, but unlikely that you'll find a specialist in carbon lay-up technology.


    Tuesday, 2 October 2012

    Rate cuts and French pigeons . . .

    Yesterday the RBA cut rates here by 25bps and even though 9 out of 25 economists polled by Bloomberg predicted it there was still a sense of mild surprise to the market. I'm sensing that RBA Governor Stevens is fast falling for the Bernanke / Draghi trick that announcing a change in policy via carefully considered action is not enough and that somehow like a petulant 2 year year old you need to be dramatic to get the attention you deserve. In the case of Stevens he needs the positive attention to offset the filth pile he has presided over as journalists delve deeper into the bribery allegations surrounding the RBA's sale of banknote printing technology to several Asian countries. Either way the Aussie dollar hit the wall and headed towards the 1.02 level which has been a point of support over the European summer. 

    My view is that after some horrible manufacturing numbers on Monday when the Australian manufacturing sector contracted for a sixth consecutive month as the AIG Manufacturing Index for September came in at 44.1 down from 45.3 in August that Stevens now did not have the excuse of an offsetting and inflationary Chinese demand bubble to excuse him from cutting rates and dealing with an over-valued dollar. Chinese manufacturing in September via the Chinese Manufacturing PMI data came in at 49.8 which athough higher from last month’s reading at 49.2 was still signaling contraction. I see anothe Australian rate cut before the end of the year. Stay short the AUD.

    Bernanke of course just can't help himself as exemplified by his speech in Indiana where he said the Fed would keep rates low even after the economy started to recover. I haven't read the full text of the speech. The speech can be found on the Fed's website here. Bertnanke asked himself 5 crucial questions:
    1. What are the Fed's objectives, and how is it trying to meet them?
    2. What's the relationship between the Fed's monetary policy and the fiscal decisions of the
    3. Administration and the Congress?What is the risk that the Fed's accommodative monetary policy will lead to inflation?
    4. How does the Fed's monetary policy affect savers and investors?
    5. How is the Federal Reserve held accountable in our democratic society?
    I'm guessing the 5th question is a direct response to Ron Paul's push to audit the Fed. Anyone who's ever seen Dr. Paul's questioning of Bernanke at hearings will know that Professor Bernanke does not enjoy the scrutiny that the Congressman from Texas puts him under:

    In this exchange from 19 July 2012 I believe Paul put his finger on the essential problem, that is that the problem with the economy is not about liquidity, rather it's about solvency. Of course ultimately auditing the Fed would show this, but just as obviously Bernanke should point this out and get the Congress to deal with this aspect of the problem. The so-called fiscal cliff that is fast approaching is the exemplar of the way the US legislature has abandoned its duty to deal with solvency. The recovery is there in the US, it just needs some rational policy help.

    Alternative thinking is always welcomed by this blog, but of course the alternatives need to be somewhat sane. Close to half a million French people live in and about London. You have very little chance of getting your teenage child into the French language Lycée Français Charles de Gaulle in South Kennsington. Why is this so . . .  well it's mainly about the lack of opportunity available in France to young aspiring entrepreneurs. Leaving aside the ridiculous 75% tax rate recently introduced on the mega wealthy, the French have attacked the main engine of job creation in the country by the government’s plan to tax capital gains at the same rates as earned income. The FT reports that Jean-David Chamboredon, chief executive of ISAI, a venture capital fund, and leader of an investors’ lobby group called France Digitale, as saying that the result in some cases would be a jump in the effective marginal tax rate to as high as 60 per cent from 32 per cent for investors and entrepreneurs selling out of a business. Who wants to live in France?

    I'd gladly cycle in France again as drivers there appreciate a fine bicycle. My trip to the hills (max elevation approx. 1050m) near Sydney on the weekend did remind me somewhat of my adventures deep into the Haut-Savoie just 45min from Geneva. If it wasn't for the wind my Cannondale would still be on the road now . . .

    Perhaps when the Bernanke stops printing I'll use my air miles to return to France . . . and so might the French citizens of London.