Friday, 30 November 2012

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

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

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

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

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

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

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

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

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

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


Wednesday, 28 November 2012

Are Chinese bears shi**ing in the woods?

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

I year chart

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

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

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

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


Tuesday, 27 November 2012

Shopping . . . .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Perfecto! Ciao!

Thursday, 22 November 2012

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

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

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

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

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

Happy thanksgiving to my American friends.


Wednesday, 21 November 2012

When is enough a enough . . . ?

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

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

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

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

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

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

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


Tuesday, 20 November 2012

I prefer not to ride in snow . . .

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

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

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

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

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

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

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

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

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

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


Monday, 19 November 2012

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

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

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

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

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

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

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


Thursday, 15 November 2012

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

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

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

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

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

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


Wednesday, 14 November 2012

Party in HK, but ride in Sydney . . .

Hong Kong is market I've never traded on the company level. Sure I've traded HK CB's, stock indicies and options, but I've never really sat down and tried to analyze stocks as fundamental investments. Today I was reading Nial Gooding's China Invest blog and he wrote up some views on HK residential property prices.

A good read . . .
 It's a good read and made a lot of sense even if I have very little interest in investing there. Included with today's blog was a nice little property price calculator spreadsheet that reveals a lot about the current state of Asia as much as the price of a particular investment. What do I mean by that? Well part of the assumption in the region is that rates will stay low for an extended period and I guess if you're sitting there pegged to the USD and watching Bernanke print away then you're probably comfortable. Nial rightly says that this is the potential flaw in the argument. Now play with the mortgage rate and take it back to a normalized level and you can see how things can become stressed. I'm sure Nial and my other HK friends would remind me that HK is a little different because there's probably an expectation that if rates go up the economy is doing better and therefore rents go up and neutralizes some of the mortgage stress. Which leaves me thinking about the history of yield spread in HK (mortgage - rent).

I'm starting to play with the same model for Australia, because unlike HK Australian residential property yields trade very differently due to the mix of negative gearing and pension fund investing that goes on in the market. Also Australia, like HK and unlike the US is based on a floating rate mortgage, which means that rates movements have a very big effect on the market. The RBA currently is in loosening mode because the government here is tightening because of a target to get the budget back to surplus. It's a fine balancing act and my money is on it not working. The Australian government could afford to get it slightly wrong when commodity prices were rising sharply because the money was coming in so fast, but now commodities are falling the buffer is just not there.

Tomorrow I'm going to walk down to Moore Park in Sydney where companies such as Mirvac have built thousands of apartments which seem to have been popular amongst Asian investors.

HK, Singapore or Sydney?
 The area reminds me of HK or Singapore, so I figure if I go down there and check out per square foot prices I might have some real fundamental information for modeling. You see in Sydney you don't see properties quoted in psf or psm, so it's hard to get really clean data to use. I'll report back when I have more.

I managed to get out on the bike this morning. A cloudy and dull day meant I had to load up the Cannondale with my high lumen Moon Shield lights.

I know Sydney is not London, but I'm not prepared to give drivers the excuse of "I didn't see him; he didn't have any lights." The lights work great and are USB rechargeable which helps cut out the battery bills . . . just don't forget to charge up.

The latest UK and US cycling magazines are hitting the shelves right now and I have to admit that I'm starting to smile about all the winter clothes I won't be buying or wearing this year. I especially won't miss wearing my neoprene gloves, which although absolutely necessary mean you're always in danger of slipping off the brakes or shifters. Choose your gloves wisely and pay up in winter.


Monday, 12 November 2012

The land of the setting sun . . .

The Japanese economy shrank by an annualised 3.5%during the July/ September quarter. That's nearly the economic equivalent of another tsunami hitting the country. Exporters suffered big falls in shipments to both China and Europe. It now seems likely that October’s trade deficit could top Y1tn. It's speaks volumes for the JPY and given Japanese QE 8&9 are still with use I expect worse to follow.

I spent this morning looking into the share price of Shimano. Given the gloom and doom I was clearly looking for a cycling led silver lining. Unfortunately I'm not sure whether I wasted my time or not. In Q3 Shimano made Y58 per share for a YTD total of 224. A lot of analyts will adjust for the tradiotnal end of year seasonal effect of the holidays so I'm guessing a lot will have Q4 estimates of around Y90 per share. Ok, so lets say that they only make Y80 to be conservative, with a share price of 5030 that put's this one on about 17x this year. Let's then say that next year they see a recovery of 10% in net EPS, then that still means the stock is trading on 15x. If you ask me that's expensive even with a div yield of 1% in a a market starved of income. You have to rely on a lot of people buying fishing gear and cycling goods to make this one a part of your portfolio. Oh, the stock is up 40% this year . . .

Shimano - fun with numbers

Analysts covering the stock according to the FT are clustered around a 5850 price target, which I think implies a Q4 forecast of closer to Y100 per share. With all the stimulus out there in the world right now and looming problems in Europe and tax rises likely in the US what are the odds these guys surprise on the upside? You be the judge:

Clearly the strong Yen makes a big difference to this company, as it does to all of Japan Inc.'s exporters. That of course is why the balance of trade (ok - a long with factors such as China tensions) makes Japan an investment nightmare. Remember too that about 25% of Japanese are over 65 and the birth rate will mean a decline in the population for the foreseeable future and I think you'll start to understand why Japan's debt might never get repaid.

The demographics for cycling are of course positive. Cycling is the new golf for men of my age. The conclusion that an expanding waist line and a time poor society means that 4 hours at a club once a week makes no sense for your wallet or your health. Mind you my golfing friends will point to the traffic on our roads and say "you don't get that on a golf course". Fair enough!

So what next?

I stayed off the bike today to get some things done around the house. The weather is amazing here and the summer is still ahead. I found myself reaching for my lightest weight jerseys today in preparation for the eventual run of high 30's temperatures we're bound to see. I have a team Liquigas shirt that worked a treat yesterday. Modern fabrics are amazing when it comes to drawing the sweat away from your body. This jersey as well as my Giro d'Italia leader's pink jersey have several perferated panels for extra airflow. I like the Giro jersey's fabric so much I've ordered a blue KoM version to supplement my collection. I know everyone likes black, but I prefer something that makes me a little less stealthy around town:


Sunday, 11 November 2012

A little bit about a Sydney Sunday . . .

It was supposed to rain in Sydney this morning so I got out early thinking that was the best way to get some k's under the belt before the weather turned. Of course the rain never came and I feel a bit cheated that I cut my ride short in anticipation. Anyway today's ride was the reverse of my weekday special, which means the highlight is the segment between Bondi Beach and the Gap. It's definitely easier than the standard direction and given that I was a little disappointed in my segment times. Sometimes it's easy to let your mind wonder and you kind of just get in an easy rhythm instead of mashing out at a higher cadence.

 I guess the main thing is that I enjoyed myself and feel great and ready for the day.

Sydney Fish Markets have grown a lot from the time my dad first took me there at some ungodly early hour on the way back from watching horses do track work at Rosehill Racecourse. In Switzerland I could always get good seafood, but the prices were outrageous. I miss some of the European varieties, but John Dory / St Pierre  is what t is where ever you go and even though you can't get Seabass here you can get the local speed predator king fish, so you adapt a little and all's good.

Living in Sydney means you'll probably be able to finish the northern hemisphere's finest newspapers long before you're friends in Geneva, London and New York see them. I'm not sure it's an advantage but it does mean you get time to digest the news before any catch-up calls with friends.

Trending news this morning is either about the economic compromises needed in the US, the Petraeus saga or the fallout from the child sex scandal at the BBC. It's all fairly muddy. In no particular order:

  1. Petraeus: You always get found out. A man in a lesser position could soldier on (no pun intended). As the Director of the CIA how can you run an illicit affair and not be open to some form of blackmail? People having affairs always think they can get away with it and I guess people in power who have affairs are the most arrogant of the lot. Sadly chalk this one up to self-delusion.
  2. BBC / Jimmy Saville: The first lesson of risk management is get it all out in the open and neutralize it. You can try like Jamie Dimond at JPM to deny it, cover it up and then blame someone else. Sadly the BBC's top management lack JD's skills or clear scapegoats, therefore go you must. Chalk this up to a lack of moral conviction.
  3. US economy: Stay short the stock market for now. The compromises that the POTUS is looking for will drain money, confidence and stability from the system. We won't fall off the fiscal cliff as much as run smack into it.
So that's Sunday. Enjoy it where ever you are. Remember to get out and ride.


Saturday, 10 November 2012

The weekend . . . and the week ahead . . .

I received a mail from my favorite Italian bike shop "Cicli Mattio" this morning with a bit of a surprise. It looks like Cannondale have released two SuperSix Evo special edition frames:

For €2999.00 you can have either the USA themed frame first used to celebrate Liquigas rider Tim Duggan's national championship or alternatively the black, white and green model that looks suspiciously to me like the new Cannondale team bike now that they've split from Liquigas. Either way I think they're pretty nice bikes and well worth talking to your local Cannondale dealer about . . . or maybe just call Maurizio or Giovanni in Piasco and tell them you'll be over in May for the Giro when you'll pick one of them up. Perhaps the blue bar tape and red hoods might be taking it a little too far, but why not.

Sydney was all about wind today and a little rain. I got out while the going was good and enjoyed my usual 33k ride with only a few minor hiccups. Comming out of Bondi a guy decided it was OK to just pull his car out of its parking space without looking. I managed to get past, but the guy on the black and silver Colnago C59 just behind me let him know that he needed to watch out in future.

The Colnago looked brand new to me and was about the third one I'd seen that morning. My guess is the order for all these guys arrived in the same shipment from Italy and no doubt there was one very proud bike shop owner counting his cash as these left the shop. I didn't see many other high end bikes, a couple of Focus's in black, but no Pinarello's or Williers.

While cruising on Youtube I found this video of a Ferrari 458 Italia vs. Colnago C59 Italia:

The story behind the video can be found at the website for Creative Content Group . . . .

" . . . after AUTO 100 founder Sue Callaway returned from Art Basel Miami, where she had attended the celebration of Luca di Montezemolo's twentieth anniversary as Ferrari's Chairman, the idea to place these two purebreds against one another came to life.

Sue's strong, well-established relationships with leaders of the automotive industry—especially Ferrari—made obtaining the car a rather straight-forward task. However, procuring the Colnago took a little more work. "I remember calling up Colnago, and they were a little reticent about giving us a bike. When I mentioned we were also getting a Ferrari, they became more interested." However, that was before Sean mentioned the real plan. "I proceeded to tell Billy Kanzler at Colnago North America that I wanted to barrel down a 7-mile canyon in Malibu on one of their bikes to see if I could beat a Ferrari. Somehow I'd convinced myself it might be possible because of all the switchbacks." 

It sounds like a nice way to spend a day near LA. I used to be a car person, but kind of fell out of love with exotic vehicles in Asia where cheap finance meant every man and his dog in Singapore seemed to drive a supercar. I don't know why, but to me a C59 seems more exclusive than a Ferrari 458 right at this moment. What do you think:

Maybe if I could get the appropriate roof racks for the 458 I'd reconsider my love of cars. Love is expensive.

Equities on the other hand are getting cheaper and although I expect a minor relief rally next week it seems to me that reality of the Obama re-election is coming home to Wall Street. Most chilling was this piece from CNBC straw man Rick Santelli on the possibility of a wealth, rather than income tax. I don't know where this came from, but if it's being leaked to him from Congress it's pretty scary stuff.

OK, it's a bit of rant, but it shows where peoples heads are going when we're facing the fiscal cliff. Obama's staff are leaking stuff ahead of his meetings next week with Congressional leaders. The POTUS wants higher taxes on the rich as a condition of any budget agreement with Republicans according to the FT.

It's going to be a busy week, so hold on to your portfolio's as this could get rough.


Thursday, 8 November 2012

Things that go bump in the night . . .

Here's one for you, have you ever heard an annoying noise coming from your bike which you were unable to identify? Seriously I hae noises that I've never heard before. It's the same for me in respect of all machinery I own or operate, I just can't keep going unless I know what it is and have an idea whether it can be fixed or not. Today every time I went over a bump I heard this noise, like when you drive over loose paving in your car. What's worse is that I had earlier set up my new Tacx indoor trainer and mouted the Cannondale Evo in it to make sure all was good. I obviously assumed that I'd done some daamage to the raear end of my bike on the trainer when I kept heaing this noise. I tried everything I could . . moved the water bottle between cages, loosened and then tightened the rear wheel, check the straps on my saddle bag . . . jeez I even checked the bottom bracket in case one of the cups hap come loose. And nothing. Finally after a couple of hill climbs I got off one last time and I tried to replicate the sound by gently bouncing the rear tire on the road. Bingo! It was coming from the saddle bag . . . . It was the two CO2 cartridges banging together and in turn banging the carbon rails on my seat that caused the noise. 45minitues of annoyance ended as soon as I redistributed the contents of the bag. I'd never had that sound before because in Sydney I usually ride with only a single spare tube and CO2 cartridge, but because of the double flat on Tuesday I had crammed in an extra tube and cartridge to my small bag. In Europe I always rode with 2 of everything, but the saddle bag a i had was bigger, so things were well spaced. Oh well, live and learn. Things that go bump in the night or the light . . . go figure!

Unfortunately something also went bump for Mr. Bradley Wiggins overnight. Wiggo was hit by a car while riding his bike near his family home in Lancashire. It seems that he's broken some ribs as a result of a car driving out of a service station. I know exactly what's happened, I've swerved so many times on narrow European roads in this very situation. I bet it's ugly when you do it going at TdF speed.

There was a big bump on the stock market as well. I said in this blog that an Obama victory was bad for equities and I also said a Romney victory was bad for bonds. Well what I didn't say was the real problem was the intersection of an Obama victory with a continued legislative block in Congress. It's all ugly and the big bump in my night was the realization that the fiscal cliff is looking a lot more dangerous.  The S&P dropped 2.4%.

Look out below . . .
Clearly some of the rally we'd seen post the first presidential brake was the Republican wing of Wall St and to a lesser extent Main St buying into their man.

It's interesting to watch Apple, which is now at a five month low as the market starts to get the post Steve Jobs jitters thanks to the mapping app on iPhone5. The problem is that Apple was, and probably still is the biggest best bet amongst Hedge Funds who trade in the US market. The stock has been the a bright beacon of hope on the stormy seas in the post GFC world. What I think we're seeing is a revaluation of the stock to a lower multiple as the Steve factor disappears in the rear view mirror.

Europe is the home of the "bump" and even though the Greeks passed the latest round of austerity legislation yesterday the Spanish looked more likely to need a bailout. The anti austerity groups grow ever louder in Europe. The lack of flexibility on the currency front leaves the masses very little room to move. If the FT is right and the Spanish completely blow-out the 4.5% deficit target and veer closer to 6% then Draghi will need to buy a hell of a lot of bonds in the coming months. Expect more revisions to European growth and bump the Euro from your investment portfolio.

A final bump was the sound of German Industrial Production hitting a wall. No doubt the engineering genius of the German's made the bump sound a lot better than it really was, but a 1.8% fall month on month was worse than expected and follows Tuesday's data that showed factory orders fell 3.3 per cent in September.

Maybe the Chinese can help?


Wednesday, 7 November 2012

Two flats and broken speed sensor . . . Kissinger to return

Can it be a great day on the bike when you flat twice within 200m and lose a stack of pertinent data because of a failing speed sensor? I think yes. A great ride yesterday and fun catchinng up with some ex-UBS Australia friends. The thing that got me most was how well we coped with the morning traffic here in Sydney. We did the complete loop from Watsons Bay to Little Bay and home, so just under 60k's. Riding in our mini-peloton certainly meant our average speeds went up and we did some nice hill climbs. As I've said before Sydeny hills tend to be short and very sharp, sometimes I wish they were longer so you could just settle into a rhythm and grind out the miles. I'm not going to complain too much because it's hard to swap the Sydney weather for the grey skies of November in Europe.

Today I did some more training with my sister in law who is nearly at the stage where she'll be able to abandon the environs of Centennial park and head out into the traffic filled canyons of this fair city. Women seem to be taking to the new surge in cycling, perhaps part of it could be attributed to more female friendly equipment. Some of the retailers I know in Europe have told me that there's been a huge take-up by female cyclists of Shimano's newest electronic groupset Ultegra Di2. The theory goes that women unless specifically prepared have always found the mechanical gears on road bikes too hard to shift easily as they are created for bigger hands etc. Now with the more affordable electronic groupsets it means the gears change on the press of a button and leave women feeling more in control. I think the theory is correct. I know that changing from the small ring to the big ring with my weaker left hand requires quite a bit of force and clearly can result in a stutter in my rhythm. I'd like to go to electronic shifting, but it's hard to justify Campy's Super Record EPS at around 5 grand without factoring in that you'll probably need a new frame to mount the thing . . . .

I like it when people send me advice on business or cycling. I had to laugh when I received the following from a reader who obviously is concerned about the effects of having a cycling obsession:

That comes from the latest issue of Penthouse Magazine and once again should prove that men really do read the articles. In fact, thinking about it, just how popular is cycling becoming when Penthouse starts to put it in their pages. Cycling is sexy, never forget that when someone is less than enthusiastic for your new found love of Lycra.

I don't like Warren Buffet much, I think the 2008 to now period has shown him to be perhaps just too clever. The image Buffet cultivated as just a grandfather from Omaha Nebraska battling the sharpies in New York via hard work and folksy investing sound bites doesn't wash for me. If AIG had collapsed and taken Goldman Sachs with it I wonder what Buffet would have been forced to do? Anyhow I can agree with him on the US recovery. Buffett has been buying up real-estate brokerages around the US as he bets on a housing turnaround. He is partnering with Brookfield Asset Management, a Canadian real-estate investor, to more than double the size of his brokerage business. To me this makes sense as did he's takeover of railways assets . . . we can argue about the price he paid, but essentially it was a bet on America which I agree with at the moment.

I'm not sure who's President matters too much to Mr Buffet, he's voting for Bernanke and his printing presses to help America inflate out of it's problems. I do wonder if Bernanke might like to return to academia rather than to continue, especially if he knows Obama will replace him with a like minded individual.

In Greece of course we've been counting down to yet another iteration of the bailout since we found out that the books just don't add up.This time the crucial date is November 27 when €31.3bn in aid payments are due. The point is that unless the Greeks can showed some improvement before the deadline then perhaps even the most ardent of europhiles gives up on things in the "Big Olive". Look a deal will probably get done as Greece is big enough to save . . . . but Spain etc?

A quick note about BHP. I said in previous blogs that Marius Kloppers like Icarus had flown too close to the sun. His failures to get several M&A deals done showed that he was long on number smarts and short on political ability. You can run a division at a major miner and get all the numbers right, but to run a company that sovereign nations see as competition to their own goals then you have to be Henry Kissinger in a hard hat ....

Perhaps I can convince the Chinese to buy more iron ore?
... and I'm sorry, Mr Kloppers is not that. Now the FT is reporting that BHP has quietly started looking for a replacement for its' CEO. The most damning sign that this was all true probably surfaced with Jac Nasser praising Klopper's for his performance only a few weeks ago, saying:

“We are very fortunate to have Marius as the CEO of the company, and he has been there for five years, and they’ve been five very, very successful years for us.”

A kiss on each cheek and an exit to the street . . . .

"Et tu, Brute?"


Monday, 5 November 2012

Learning to pay . . .

Quick quizz . . . . according to Bloomberg Businessweek:

How many banks are there in Denmark?
How many Danish banks have failed since 2008?
What was the last Danish banks to fail and when was it?

I you answered 105, more than a dozen and Toender Bank November 2nd then you're either a market tragic like me, or the Danish finance minister. Having said that, if you really are the Danish finance minister can you explain to me how a bank that as late as June had a claimed solvency ratio of 17.3% and at August 21 claimed a profit of Kroner 9.2m goes bust by November? What a joke . . . and this is Denmark folks . . . , not Greece, Spain or Portugal. Awful . . . stay clear of the Euro.

This blog has on many occasions pointed to the UXB (unexploded bomb) that is US student loans.

The Department of Education has finally released the revised status report of loans in the new 3 year cohort block and the picture is not pretty:

"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."

Now do the math (as my American friends say) and apply it to a trillion dollar market in  student loans. Now remember this is the US and a lot of these loans were bundled up and sold to private investors. Yep, welcome to subpime version 2.0.

Back in Subprime 1.0 we in Australia are currently leading the crusade against the ratings agencies. An absolutely enormous decision was handed down today in a case at the Federal Court of Australia. Twelve local government authorities invested around 16 million Australian dollars in mortgage related notes and received back less than 10% of their principal invested when they cashed out in October 2008. The ramifications are huge as the court agreed with the plaintiffs that the ratings firm (S&P) engaged in "misleading and deceptive" conduct by placing triple-A ratings on constant proportion debt obligations, or CPDOs, created in 2006 by investment bank ABN Amro Bank NV. This will be interesting as the Federal Court is not some minor institution . . . amongst the Commonwealth countries this will get raised over and over again in courts from London to Auckland. Good luck to S&P and thanks for playing. All the tiny disclaimers at the bottom of prospectus documents are worthless for the moment at least in Australia.

Today my sister in law completed 30k's and a lesson on hill climbing that basically means she's graduating to itermediate road bike rider earlier than I would have suspected. Good for her, next up she needs a bike, so anyone selling an XS frame in good condition please contact me. As for my own riding tomorrow should be interested. It's going to be a bit of an ex-UBS day. We'll be trying to complete the run around the beaches and Eastern suburbs of Sydney before the peak hour kicks in. Wish us luck and if you happen to be in Sydney and catching a cab in the east tomorrow, please tell the driver to be careful.


Friday, 2 November 2012

An honest day's work . . .

Time for some manual labor. I spent the day ripping out an old kitchen at my brother in laws house so won't get a chance to ride today. A perfect spring day here so I'm catching up on some reading.

The Greece situation seems to matter less everyday as I believe the market is starting to ignore European contagion and instead take the glass half full view of the world and concentrate on improving US and Chinese numbers. Now I'm prepared to believe the US numbers and I'll predict that the Mega-storm effect will provide a positive surge in US GDP in the coming two quarters.  US weekly initial jobless claims fell more than forecast. Maybe more importantly the ADP said companies added 158,000 positions in the private sector during October. If you're US believer as I tend to be, then this is what you want to see. Of course if you're long US bonds it might not be such welcome news.

I don't believe in China even though the official manufacturing PMI came in at 50.2 in October (49.8 in September ). I believe that the 1.7% rally in Shanghai had more to do with Asia's favorite gambling game real estate. Reports are that more cities will relax real estate restrictions, thus once again sucking in cash to the developers and speculators. I am positive that the Chinese government will not want this unless they see construction jobs slipping too fast driving workers on to the street. Be very careful.

In some ways I thought it was very sad that Sharp admitted there is “material doubt” about its ability to stay in business as it warned of a second year of record losses. Many years ago I spent time at Sharps HQ looking at both their TV and solar panel business. The technology in both units was amazing for the time, but it was technology where the barriers to entry were not high enough to prevent the Koreans in TV's and the Chinese in solar panels from playing havoc with Sharp's plans. We also know that Sony is in a similar position as it's technology and business models have been surpassed or improved on leaving the once cutting edge innovator slashing margins to keep revenue stable. Unfortunately all this relies on a constantly renewable line of products that are desirable and scalable. On top of that given the ever rising JPY an a bad record of off-shoring production has left techno Japan without anywhere to go but down. Look at Panasonic, it was down nearly 20% yesterday and I don't know what they do? I mean you can't produce losses of near USD10bn after saying you were going to breakeven without questioning whether you have any chance of saving the business.

I'm going to be riding on the north side of Sydney next week and I'm looking forward to  seeing the difference. It's taken me a while to get comfortable with eastern Sydney and I hope the traffic is a little less aggressive in the leafy north. Tuesday I think we'll get to the northern beaches, while Thursday I'll be hill climbing in the lower north shore around the harbor.

I saw this video on and thought readers of my blog might be interested:

Long time readers of this blog know that I've mentioned how much I liked the aggressive look of the German made bikes out of Canyon. The technology they've employed in the video is a typical approach to the German school of quality assurance. I'd like to have a test ride on one . . . especially this special edition version see under the Giro leader this year:


Thursday, 1 November 2012

And you thought you had options!

I like to check various news sources when I stop for a coffee at the end of my morning ride.

I had a bit of chuckle when twitter presented me with a stream of commentary about Carl Ichan's position in Netflix. It looks like Ichan decided to be very comprehensive when he filed his 13D on October 24, so via some 36 buck calls he's claiming he owns 10% of the company. Now some commentators have dismissed this as trickery and to a degree they're right, but lets think about it a little more closely.

Ichan started accumulating the shares on 4 September when the stock was trading at approximately 54.75. He only bought about 550,000 common shares. After this he switched his strategy to buy call options (american style) in order to get the right to purchase the 10% that everyone is talking about. Now the strike of these options is 36.05 meaning that they were deep in the money and in my view quite rightly to be assumed as having a significant predatory effect on the stock. But let's think about how the position works:

Financing: Ichan gets a financing deal via whoever sold him the options as he gets the leverage to pull the trigger on the acquisition of the shares without having to finance them on day one. The leverage here is not huge by the standards of what we've seen in recent history, but it all helps.

Protection: Consider this . . . Ichan now has the ability to walk away from the company in the event of it suffering another earnings blow-up. It would be painful, but his 36.05 call might look more like a 36.05 put in a bankruptcy scenario.

Calls are puts - right: Thats right, Ichan could in fact at any time sell short shares against his long holding if he felt that the 36.05 strike was more important as a put that a call. In fact Ichan could if he desired sell 36.05 puts and lock in a more advantageous level of financing via the conversion strategy, i.e. long call, short put, short stock.

I think he has a fairly flexible position. No doubt he's enjoyed squeezing the shorts with the announcement that he owns 10% of the company . . . that in itself is perfectly acceptable to regulators in the current environment as we know they hate short sellers. Also the very fact the strike is so deep gives him a skin in the game argument that saves him from market manipulation charges.

Carl Ichan is not a person I'd want to mess with. Netflix is a company unlikely to prove cynics wrong. It will be fun watching this . . . not as much fun as watching Porsche v. VW, but fun enough.

I gave the derailleur hanger a good work out today. Not a spot of trouble during the ride. Everything felt good and I was extra careful with my bike. I did notice a little damage to my saddle that I had overlooked yesterday, so I ordered a new one as a back-up. I got a good deal via a local shop wh had one for sale at 40% off! Not bad and cheaper than anything I saw on ebay etc.

It's interesting on these team themed bikes, riders often like to replace some of the components to suit themselves and a lot of what I've seen on ebay specific to my Cannondale is people replacing the carbon stem and handlebars for something more solid in aluminum. Until I got the Evo I hadn't thought about it as the carbon Pinarello Most Talon bars on my Dogma always seemed pretty stiff.

The KSA K-Force Nano bars definately have more flex than the ones on the Pinarello. I'm coming around to the fact that the larger you are the more wise it is to swap over to metal and be damned with weight savings. Check out this setup on Cadel Evans' BMC Team Machine SLR01:

Easton EC90 TKO carbon drop bar.
Easton EA70 Aluminum stem
That handlebar set is no longer available and even though it's carbon it's said to be one of the stiffest around. Given that Evans probably weighs closer to 60 than 70kgs he probably doesn't have to worry about the flex like I would. The stem though says he doesn't want any slippage on those long descents in the alps. I guess after my recent problems with carbon stems that neither do I . . . .