Thursday, 20 December 2012

Racing away . . .

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

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

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

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

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

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

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

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


Wednesday, 19 December 2012

Grudges . . .

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

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

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

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

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

Worth a look don't you think?

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

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


Tuesday, 18 December 2012

Targets . . .

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

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

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

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

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

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


Monday, 17 December 2012

Jawboning ...

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

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

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

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

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

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


Thursday, 13 December 2012

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

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

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

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

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

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

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

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

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


Tuesday, 11 December 2012

Awake . . . but . . .

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

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

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

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

New additions:
Argos-Shimano (2013-2016)

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

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

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

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

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

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

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

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


Monday, 10 December 2012

Sick . . .

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

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

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

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

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

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


Thursday, 6 December 2012

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

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

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

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

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

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

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

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

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


Tuesday, 4 December 2012

The road ahead . . . .

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

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

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

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

A Throw of the Dice from RAPHA on Vimeo.


Monday, 3 December 2012

Monday's . . .

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

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

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

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

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

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