Wednesday, 18 December 2013

Xmas review . . . . Shoes

As we head into the holiday break I thought I'd review my new cycling shoes, the 2014 Sidi Wire "Iride" edition. I bought mine from Italian online specialist All4Cycling in Italy. They cost €261.48 including postage and I paid no taxes in Italy or Australia due to the fact that the government here does not collect VAT/GST for items under AUD1,000 unless you're running a business.

First Impressions:

The shoes come with a storage bag and allen key for adjusting the toe and heel pieces. The shoes themselves are about 50g's lighter than the outgoing Ergo 3 model even though they seem to be almost entirely constructed of patent leather as opposed to the leather / nylon mesh mix of the ergo 3's.

Aside from the no nylon mesh the other noticeable feature is the way Sidi dispensed with the forefoot velcro strap and the ratchet type instep strap in favour of twin Tecno 3 twist type ratchet dials. The soles are the same and have the usual functionality in that the toe and heel bumpers are replaceable. Additionally the toe bumper has a mini vent that can be opened for extra ventilation where and when required, though be warned this requires a phillips head screw driver . . . not something you want to be doing on the side of the road with a multi-tool in my view.

Sidi has continued with their adjustable heel piece that allows you to tighten the shoes heel enclosure to help with lifting. I've played with this enclosure on both my previous pairs of Sidi shoes, but never really felt any great benefit or hinderance from the piece. Given everyone's feet are different I guess it's better to have the adjustability than not have it.

The shoe tongue has a wire mesh panel allowing greater ventilation to the upper foot. You can see it in the below photo criss-crossed  by the wire enclosure straps.

I have to wonder how this might go in the rain, so if you know it's going to be wet I suggest you might want to put some overshoes in your back pocket just in case.

The shoes come with the usual Sidi cleat adhesive which has one side that seems to be some type of very fine sand paper. These are supposed to be affixed to your cleat to prevent movement between the sole and the cleat. I never use them. I ride Look Keo cleats and have never had a problem with them while wearing Sidi shoes. I use a torque wrench and adjust the cleat screws to 4.5NM which is mid point in the recommended range detailed in the very comprehensive cleat guide booklet.

The Fit:

I got my shoes in a size 45.5 and if you already had the previous Ergo3's or even the 2's I saw and felt no noticeable change in the shape or length of the shoe. Buy with confidence in your current Sidi size. I have a wide foot, but I didn't buy the specifically wide version which is available in some geographies.

At first look I was somewhat intimidated by the all-leather look of the Wires. I just felt that they might not give easily to the shape of my foot as standard running shoe nylon mesh is want to do. I put some heavy cedar shoe trees in them overnight hoping they would stretch out a bit before riding in them.

I slipped into them at 5:30am the following morning looking to do a hilly ride along Sydney's eastern beaches. Normally when I wear new running or cycling shoes I pick a slightly thicker pair of socks, but given that the ambient temperature in the dawn light was already 21ºC I went with the very thin Rapha Pro Team Socks giving me little room for error.

I like the ratchet type instep strap on the Ergo 3's and 2's because you're able to tighten or loosen the enclosure while on the move without putting yourself at too much risk. As a skier I like to start with tight boots and slacken or tighten dependent on conditions or aggression I'm skiing with. I do the same with cycling shoes and often on a long ride I like to loosen things off a bit to allow some extra circulation. The micro adjustment available on the wires through the dial system's side triggers does not in my view allow precise and safe on the go adjustment. Having said that I slipped into the shoes without any great problems and immediately got to some comfortable settings without too much trouble.

Hopping on the bike I had no problems with engagement and felt no immediate rubbing as I headed up  my street to the first descend of the morning.


The course I chose maybe only 30km in length, but it encompasses about 500m of climbing on suburban streets:

There are lots of short sharp climbs requiring the rider to constantly change position and rhythm on the bike. The shoes felt cosseting without being tight and I was surprised I didn't have to get off the bike and adjust any of my settings during the ride. For most of the ride I even forgot that I was wearing new shoes and only gave them a second thought when I happened to look down at the the road during a flat sprint.

At the end of the course I usually get breakfast at my local cafe. Cooling down I didn't feel the need to open the enclosures for comfort, so all good.

After the ride I purposely examined my feet for any signs of specific chaffing or pinching and could detect none. The thin socks new shoe combo worked. Obviously the fact that I had no sizing issues helped a lot, but the multi-faceted adjustable nature of the shoes gives even the fussiest wearer the scope to get comfortable.


My previous leather and mesh combo Sidis always gave me cleaning problems. The mesh always picked up oil and road dust and no matter what I tried I couldn't get them completely clean. I should mention I throw my running shoes in the washing machine every now and then. This always works for me. I never tried it with cycling shoes, more out of fears for the health of my front loader washing machine, than for the shoes themselves.

As the shoes are a synthetic patent leather I like to use a latex and rubber cleaner that was recommended to me by a Swiss friend when I lived in Geneva. A quick wipe and then a spray and wipe with the cleaner keeps the upper moist and removes any remaining dirt.


With only 2 rides and 60km's under my feet it's hard to be too emphatic, but my feeling is that these are likely to be as good as anything on the market. There are 5 standard colours and Sidi issues various team or special editions periodically. The normal retail price for these in Australia is about $500, but I suggest if you are confident of sizing, shop around. Lastly a warning for those with 1/2 size sensitive feet. I know in Australia and the UK it can be difficult to find the half sizes above size 45; they're like gold . . . buy them if you can because they don't seem to last.

Highly recommended.


Monday, 16 December 2013

Looking back: 1

We all have goals when we start a new year. For this blog it was a goal to try and remain a consistent and relevant part of investment discussions focusing on the macro economic environment. The trouble with that is that the evidence as to the success or failure remains somewhat anecdotal. I'm always pleased to get feedback, but always confounded as to what people see as good and bad in the blog. Luckily I can always rely on the metrics of my cycling to be blunt and to the point.

This year I had started with a goal to try and ride 10,000km. I failed. That doesn't mean I'm disappointed after completing my first full year back in Sydney, as I really haven't ridden in such an aggressive urban environment seriously in my entire life. 

Just over 9,000kms so far is good result given I live in the most densely populated area of the biggest city in Australia. One of my colleagues in Geneva once said to me when I upgraded to the Pinarello that you shouldn't spend more in CHF's on a bike than kilometres you do a year. Well I think that rule of thumb just about works. It seems to me that once you ride around 5000kms you can put yourself in the upper enthusiast category and get something nice. People who see my bikes as a folly of sorts usually are the same people that can contemplate buying a car for $200k and drive it less than 10,000kms in a year, but see me as wasting money on $10k bike that I used to cover 9,000kms in that same period. The insanity of that proposition beggars belief. Don't even get me started on golf club memberships that get used a couple of times a year . . . but I digress. 

This year I've been hit twice on my bike and survived both times with a few bruises. I've been yelled at, abused, buzzed by angry tradesmen and taxi drivers. I've been spat at, ignored and chased. I've argued with drivers of both sexes. all ages and been lectured to by people who you would normally think are very sensible liberal types, but who just can't stand you being on the road. The worst of these was one person who put forwarded the following arguments as to why you shouldn't cycle in Sydney:
  1. Bicycles scare me because I could hit one
  2. It's too hilly
  3. You don't have registration to be on a road
  4. Bikes slow me down on the way to the shops / school drop off
That same person probably is long debt to the eyeballs sand sees that 2008 financial crisis as something that happened in Europe and the US. You see because Australia got through the crisis with unemployment barely above 6% those type of people haven't had to rethink their lives, never mind their attitude to the boom in cycling in this city. 

World stock markets are back at all time highs thanks to ultra-cheap money supply. It's hard to value risk when the hurdle rate for capital is so low. Take for example an insurance business sold by Australian conglomerate Westfarmers yesterday to fellow Aussie IAG. The business had an internal rate of return of 6.6% on average over the last five years. When I was reading the details at my local cafe this morning after riding the beaches of eastern Sydney my first thought honestly was; that's not too bad. My second thought was: "What am I thinking." This is an insurance underwriting business . . . shit happens! We just saw the biggest insurance business in Australia QBE have to writedown  businesses because of a $US300m increase in prior accident year claims provisions, centred on long tail classes of business such as workers' compensation, general liability and construction defects risks." That saw them revise expectations from a profit of $700m+ to a loss for the year of $250m. On the day the stock was down 20%. My cappuccino was barely finished before I contemplated writing a well done letter to Westfarmers CEO Richard Goyder for getting $1.85bn for this 6.6% IRR business. The best part of the story though was Goyder saying the transaction represented a "win-win" for both his company and IAG . . . . LOL! I never want to play poker with Richard Goyder . . . LOL!

Following on from yesterdays blog and my rosy view of the US "real economy" we had confirmation of industrial activity. November US industrial production rose 1.1% beating expectations for 0.6%. That readers is the highest pace for the year and a repeat in December January confirms a tapering by the end of Q1 in this blogs opinion.


It's getting a bit more interesting . . .

China seems to bump along at just a strong enough pace to keep the world's economies ticking over. The problem remains that much of the activity generated in China is being fuelled by local government debt, shadow banking and trade finance. If President Xi Jinping and his government want to tackle this unofficial bubble they'll risk GDP growth slipping below 7%. Currently the official forecast is for 7.5%, but that looks already to have gone by the wayside judging from the softening up of media sources.

As usual the canary in the coal mine for China is iron ore. Below is iron ore inventory at port. Now partly there is be a bit of end of year restocking, but there's also some one offs including the shutdown for pollution related problems of some big steel producers.

And then here's whats happening in the six month forward market for rebar . . .  the construction end of the iron ore chain. 

Finally here's iron ore itself. Again you can see the forward v. the spot price opening up. 

Investors need to watch this . . . This blog has been bearish on Chinese GDP for 2 years and admittedly has been surprised by commodity prices during that period. With the big five miners backing off new projects and tightening their belts it seems that the fall in spot iron ore might be more of a slow grind than a crash, especially if you think the US is picking up some slack. Which brings me to . . .

This week we get two important meetings in the world of central banking. The first and most important is the Fed's, which should not see an immediate policy shift, but might lay the verbal ground for a January move to taper. This blog continues to believe tapering comes in March and should see a modest roll-back of the $85bn a month in asset purchases to (say $60bn). Therefore I remain a Dollar bull and am becoming bearish US financials due to valuation. The real economy needs to take over if the US wants to get into a sustainable job building GDP cycle of around 3%.

The other central bank meeting this week is Japan. The thing that interests me here are the possibilities for policy failure. Readers of this blog know that I am a long time Japan sceptic and continue to believe in the maxim that if anything can go wrong for Japan it will. Therefore I was interested to hear other people picking up on this line this morning while tracking back through various podcasts I missed on Bloomberg from last week. Vincent Chaigneau is the head of fixed-income and foreign-exchange strategy at Societe Generale SA in Paris and he reminded me of the recent weakness in the Japanese current account over the past two months.

Japan Current Account
M. Chaigneau sees these two months as somewhat of a blip, but rightly points out that any longer term trend could severely hamper Abe-nomics given that its strength lies in its ability to fund from internal savings. The alternative for Japan would be to become an international debtor reliant on foreign funding, a position that would be perilous. I suggest investors watch the Japanese current account both in relation to their short JPY positions and long equity positions, because if history has taught us nothing else since the collapse of the Japanese real estate bull market it is that Japan has a propensity to snatch defeat from the jaws of victory on a regular basis. The latest numbers will be out this week.

Meanwhile in Australia RBA Governor Glenn Stevens continued to jawbone the AUD down towards 85cents. This blog has been somewhat volatile when it comes to Stevens, but last week when General Motors decided to cease manufacturing cars in Australia and Qantas went cap in hand to the Government in Canberra asking for help it become apparent that the long time RBA insistence on frightening the housing market first and a helping the receding manufacturing sector second seemed to come home to roost. The budget deficit looks likely to blow-out further since the last set of national accounts and therefore in all likelihood the economy will need stimulation from a more creative RBA. It's hard to believe that the RBA, as I've alluded to previously hasn't used the dollar more aggressively. Too little too late looks likely to become the title for Glenn Stevens biography in this blog's point of view.

There's been a lot to ponder on my bike in the last two weeks. Having said that readers should know that since my last published blog I've become a bit gun shy in Sydney traffic. Lately I've had a number of close calls, the most recent being a tangle with the L94 Bus from the city to La Perouse:

I'd like to report an unsafe bus driver. Today at 1240hrs I was proceeding along Anzac Parade near Gubbuteh Rd on my way towards La Perouse on my bicycle when I was approached by the L94  bus (Plate 1381). The bus stopped at the nearby stop and I went around it. The bus, after obviously dropping off passengers then proceeded in the right hand lane to approach along side me and tooted his horn. I was in the left hand lane. For what reason I have no idea. As we approached the roundabout at Pine Avenue I held my line and in fact increased my pace as I saw a bus stop 10m ahead on my left so as to clear the stop for the bus. The bus decided to approach closely to me again as we passed the bus stop while I was in the now clearly marked bike lane. He pulled alongside me revved his engine and cut in front of me stopping at Jennifer St and Anzac Parade. I'm not even sure that there was a bus stop there. I rode ahead again and maintained my pace (approximately 35kph) 
and line on the left hand side of the single lane only to have the bus again come from behind me and this time he approached within a meter of my righthand side at approximately 60kph and purposely revved his engine. As we approached the junction of Bunnerong Rd and Anzac Parade for a left turn towards the LaPerouse bus interchange the driver purposely drove into the cycle lane on the left side of the lane in a threatening manner. I approached the driver at the interchange to ask what his problem was but was immediately yelled at. I obviously let the driver know (loudly matching his colourful language) that his actions were at the very least threatening and at worst dangerous. I am at a complete loss as to what this drivers problem was given it was a clear day with no traffic on the road except for himself and a few bike riders. This man is a menace to his passengers and other road users.

I actually got a reply to this from the government owned bus company promising to review the in-bus tape of the incident. Now I don't actually expect anything to come from it mainly because the transport workers union is just too powerful to let any form of disciplinary action be directed at one of its members. I mean in their mind it would be the thin end of the wedge.

Finally I might mention that I managed to change the bar tape on my bike by myself. That doesn't sound like much until you mention it to other cyclists who seemed to be amazed by the feat - at least my friends. The job I did isn't perfect, but it's passable.

The one thing I haven't decided on is whether I was right to wrap the tape clockwise on the right and anti-clockwise on the left or the reverse. If you google the subject and look up some of the guides on Youtube it seems like opinion is mixed. Also I decided that the thick 2.5mm Lizard Skin tape is probably not ideal for a beginner. I suggest that if you're attempting this bit of maintenance for the first time that you try a stretchy style tape from 3T as per this video:

I'd swap, but the Cannondale needs green tape and 3T don't make it . . . such are the perils of cycling fashion.

Tuesday, 3 December 2013

Thank God (if there is one) for Margret Thatcher . . . What we can learn from the UK . . . and I need a job . . .

Since Friday we've had the usual data dump of PMI levels for the market to consider. The one that really stood out for me was the UK. Manufacturing growth there hit its highest point in almost three years, in part helped by a high pace of job growth. The UK PMI beat expectations by coming in at 58.4 in November up from 56 in October.

The all suggests to this blogger that my previous view to invest in the UK was sound advice and remains so, I only wish that the people I spoke to about the Commerzbank UK property portfolio that went under the hammer a few months ago actually bought in at that stage.

A real live "no-brainer"
Such is the life of those of us acting as consultants. That's why I'm looking more seriously at getting a "real" job. You see without the institutional card I'm reliant on people trusting me more than I can expect given the years I've lived outside of Australia.

The reasons the UK has rebounded so strongly are:

  1. Flexible labour market
  2. Government commitment to disciplined action on public sector finances
  3. BoE QE 
  4. BoE/Treasury Funding for Lending Scheme

This last facility is very interesting in that it offers banks cheap financing partly linked to lending to the real economy. Since it started in summer 2012, 33 banking groups have secured £23.1bn in cheap funding and seen a rise in net lending of £3.6bn. It's a fascinating facility because as recently as last week when the BoE/Treasury got worried that too much of the facility was being drawn on to finance property they chose to take action to cease its availability to mortgage linked transactions. Once again this shows the key advantage of the UK: flexibility. The rest of Europe struggles with this and therefore the UK is first out of the economic hole. The ability to react to changing market conditions without tightening the money supply into the economy is something other economies could adopt as they grapple with exit from stimulatory policies.

Meanwhile for those of us currently living in the Asia Pacific region China also managed to struggle into positive territory in its PMI. There are two indices for Chinese PMI, firstly the HSBC/Markit that came in at 50.8 for November, overshooting economists’ forecasts of 50.4. Secondly the official government survey showing a higher-than-forecast reading of 51.4 for November. This kind of good news would usually help Australia as we continue to ride on China's coat tails. I wonder what RBA Governor Stevens would think of adding the type of facility the UK has to its' arsenal of tools so as to enable the RBA to pump money where it's most needed. This blog has for over a year called for a lower Australian dollar to be at the heart of the RBA's policy, but I'm starting to see the limits of the current structures to deliver this without causing a housing bubble. Therefore if I was parachuted into the halls of power I'd suggest the following:

a) The RBA should adopt the NZ type restrictions on banks mortgage books:

God defend New Zealand . . . 

b) The Government, together with the RBA should copy the UK's Funding for Lending Scheme

What the government should not do is start trying to pick winners. Currently the Australian Treasurer is being asked to save GM's (Holden) Australian operations via a direct AUD600m injection and incredibly, to this blog at least provide Qantas with a government guarantee so they can raise debt at or near the same levels as the country itself. This blog says that the available money should go through institutions who are better placed to take the risk and assess the chances of success. Qantas can have some cheap funding . . . but it's going to come through one or more of the banks and they better be prepared to justify what they do with it.

Investors need to watch closely the continued "work-out" of debts by various entities, institutions and companies. UBS is to buy back around SFr2.15bn ($2.4bn) of its own debt in an effort to cut its borrowing costs and shrink its balance sheet. They will go to the SNB and make a cash offer for five subordinated bonds, denominated in Swiss francs, euros and pounds, and six senior unsecured bonds, denominated in Swiss francs, euros, pounds and Italian lira. My point here is not that UBS is looking better placed in terms of balance sheet, but rather the people of Switzerland via the SNB have kept control of their own balance sheet by not allowing UBS to dictate terms to them. 

This blog believes for example that the Spanish are about to start making headway against their own problems, as the Irish have also done. The "bad" proper bank "Sareb" said in March that it was aiming to sell almost 42,500 housing units, about half of its current portfolio, within the next five years.  They started the process in August when they sold 51 per cent of a portfolio including 939 homes to HIG, in a deal valuing the assets at €100m. Investors need to focus on these tranches as they come to the market.

I'm starting to get excited about getting off the bike and getting on the snow. I didn't ski last year, but thanks to a large bank of air miles I'll be jetting off to Europe to have a few meetings with old friends and business acquaintances in Switzerland on my way to my favourite ski resorts. I had wanted to hold off to May so I could pack up the Cannondale and ride some races in northern Italy. 

One particular ride caught my eye this week: Colnago Cycling Festival, Lago di Garda, 2-4 May, 2014. It looks like a great event. Here's some highlights from the last event this team put together . . . 

Maybe someone will ask me to go and have a look at some Italian property . . . I promise to get a good look at the countryside.


Wednesday, 27 November 2013

When someone robs you it can take a while to get back into things . . . .

It's taken me a week to get things back into shape since my home was burgled. During that time we've had the usual avalanche of verbal prognostications from Washington. Ben Bernanke once again managed to have the economic cognoscenti tripping over themselves trying to pick the next move of the Fed. Of course what we all know now is the Fed is quite simply on hold until early 2014. That leaves markets with little to do but to continue an upward move until told otherwise. We are now entering a very dangerous phase in the current bubble and it's worth looking at a few things.

This week's housing numbers from the US should help the Fed move on at the appropriate time from QE-infinity.  The S&P/Case-Shiller Home Price index showed a move up by 13.3% from a year earlier. Building permits in U.S. were up  6.2% in October to five-year high.

Housing, along with employment is central to the Fed starting to taper. Investors need to keep an eye on Case Schiller as it's my belief any weakness will be jumped on by the uber-doves at the Fed to backslide. 

On another matter investors need to note that volatility is extremely low. This blog remains of the view that we are currently seeing a a good short term buying opportunity in volatility indices. Take for example the Eurostoxx VIX and the S&P500 VIX:

Both of these indices remain at multi year lows due to the fact that the Fed and ECB basically limit their ability to move higher for extended periods by effectively selling a free put to the market via QE. Thus every time the markets try to move down a wall of money dampens the effect. If you believe that QE in the US gets scaled or tapered in (say) March one could expect the breadth of the markets moves to increase and with it volatility.

This blog likes to go back to basics when inflexion points, such as a Fed taper seem to be getting closer. Below is a chart of the S&P500 v. the Put/Call ratio on the CBOE. The thing to note is that although there was a blip up last week in the ratio indicating that there were investors in the market looking to buy protection for their portfolios. The converse is that said ratio remains reasonably low and indicates to me investors are almost "sleep-walking" their way to record highs. This of course spells danger; if not for the implicit "Bernanke Put" an move downward would be magnified. Investors should keep a close watch on this ratio, noting that the lower the ratio moves indicates the greater the complacency in the market in respect to the current market levels.

A friend called me earlier today to say he was looking at a retailing opportunity in the bicycle space. He's a pretty dry character when it comes to due diligence and therefore is far better qualified to look at the sector then someone like me who's passionate about the sport. I gave him my general views about shops and retailers I've dealt with. Both of us agreed that in terms of time v. cost there's something missing in the bike servicing area. As I said recently I've never felt like I've been over-charged by a bike shop for a service. It seems ludicrous to me that somewhere between $80 - 100 gets you a good service that usually gets you on the road without any problems, which I consider to be a bargain now days. Add to this the fact there's a shortage of bike mechanics and you wonder why the price point isn't under more upward pressure. It all reminds me of the growth in high end watches and the restricting factor that is the lack of watch makers. As an example Rolex actually started an academy system in the US where they helped graduates setup shops. They literally trained you and wrote you a cheque knowing that if they couldn't meet the servicing demand consumers would drift away to cheaper more easily maintained time pieces. Perhaps we'll see the major manufacturers of bikes do the same thing? Think about it this way; you hand over your $3000  for a mid-range carbon frames bike. The experience is great until you hear a click in the bottom bracket or have a derailleur that gets out tune. If the mechanic you take it to doesn't fix it you start to think this bicycling thing is nuts . . . the result is one expensive dust catcher in the garage.

My Cannondale has been making some odd noises. The most obvious adjustment has been the headset. Readers will know that I've always had the odd issue with headsets and find the lack of science involved with adjusting them to be somewhat puzzling, especially because carbon framed bikes are quite precise in terms of the distribution of forces within the components and frame. In my case I've tightened the headset cap in the usual manner; try an eighth of a turn, ride, test and adjust again. Here's video from GCN showing how to adjust the cockpit on a carbon framed bike:

The thing to note here is the way he tightens the various bolts a little at a time so as to not focus all the forces on one small area. You see most of these type of components work to spread the load across the frame etc. Also note the use of a proper torque wrench. I've said it before, but it's worth repeating . . . buy a torque wrench and don't try and skimp on the cost. A$200 wrench will save a $4000 frame etc. You have been warned.


Friday, 15 November 2013

It's only deflation if you don't have money to spend . . . fancy 138km's on a bike?

James Hardie is an Australian building materials company that got into a lot of trouble locally due to asbestos content in some of their products. Now after many years of litigation and struggling against the tide of a slowing housing market globally the company yesterday surprised the ASX when it announced an operating profit of $US108.3 million ($115.9 million) for the six months to September 30, up from $US56.3 million a year earlier. This excludes asbestos, regulatory and liability adjustments, which would put its profit higher at $US194.1 million. It has upgraded its full-year earnings target to between $US180 million and $US195 million. Why do I mention this? Well, Hardie's is predominantly a US housing play now days and for a management team so bearish on the world in general it must be a huge signal that for the first time in many years they are investing in new capacity in the US. Investors know that this blog has for sometime been positive on America, but a data point such as this is good news all around.

Investors should now revisit stocks such as Toll Brothers the upmarket home builder if they wish to leverage this recovery to it's maximum:

"Six years of pent-up demand is just beginning to return to the market," Chief Executive Douglas Yearley said on a call with analysts to discuss the preliminary results.

Toll has underperformed the S&P500 year to date, but is starting to gain momentum. The company is expecting a 65 percent jump in revenue in its just-ended fourth quarter (taking it across the $1 billon threshold for the first time since 2007) and also reported a preliminary 6 percent rise in orders. David Crowe, chief economist at the National Association of Homebuilders, said 12 percent of houses sold in the United States this year to date cost $750,000 or more. Last year, the number was 9 percent. Toll Brothers said it expected its average selling price to have risen 21 percent to $703,000 in the three months to Oct. 31 meaning they are now in the sweet spot. 

If Toll brothers and Hardie is telling you demand exists in the worlds biggest economy, what then does the fact that Global gold demand fell to a four-year low in the third quarter tell us? Certainly it implies that inflationary expectations are low at the moment.

Gold demand was 869 tonnes between July and September, according to data published by the World Gold Council. There was a collapse in demand from India, traditionally the world’s largest consumer of gold (likely to now be overtaken by China) due to a series of government restrictions on gold imports. Said imports fell 32 per cent over the quarter to just 148 tonnes, the lowest since early 2009. Indians hold over 1trn in gold currently and it basically sits in banks and temples gathering dust. The problem is that the Indian currency has been under pressure, which forces up the prices of imports (especially energy), draining the governments reserves due to their subsidising of key fuels. The more gold they import, the more INR has to be sold to pay for it and the greater the pressure on the central government.

This is a problem for investors in all emerging markets. The gold restrictions demonstrate the ability of governments to legislate you out of returns. For example, being short INR is no longer an easy position to hold when the government takes this sort of action. Of course for India it may end up being a good thing. India is not in the same league in terms of exports as China, rather it's about demand and a low INR and middling growth is not going to help the world economy. If India could unleash a third of it's gold reserves this blog is of the view that Asia as a whole would benefit considerably. Investors should watch this situation closely.

As it's Friday and this is a short end of week blog I want to mention that a friend of mine has reminded me about the Orica-Greenedge Winery Ride on December 1st at Mitchelton Vineyard in norther Victoria. I looked up last years event on Strava and looks to be around 1500m of climbing in one big block. Other than that it's flat and should be fun.

I'd like to do it, but it's one long drive to get there and at this late stage it's a bit hard to get a partner. One thing I learnt about riding sportives in Australia when I went to the Wiggle Classic in the Hunter that the riders don't seem patient or organised enough to form mini pelotons and help each other as they do in Italy and Switzerland. People are friendly, but the mass ride thing is still reasonably new to the great majority of riders here, so I guess that will change over time.


Tuesday, 12 November 2013

Surprised and robbed . . .

Surprised . . . Last Friday the US non-farm payrolls surprised observers by coming in at at positive 204,000. Surprisingly, given recent history, markets rallied by 1% giving this blogger pause for thought. When did good news become good news again? It seems that for the past few years good news was bad, because any good news was treated as a possible trigger for the Fed to ease their $85bn a month in asset purchases. The conviction of this blog remains that tapering is unlikely to happen before December 17, which readers will know was a crucial date to get the US budget crisis back on track. If the Fed sees another stalemate in these talks they are unlikely to withdraw stimulus. Having said that, the market is now leaping forward and suggesting that the political polls are now so skewed against the recent political wars that the various arms of the US government have little or no room to restart the shenanigans of the past and therefore will rollover on much that was disputed.

Where are we now then? Well there has to be a suggestion that markets are anticipating the coming normalcy in monetary policy and are reverting to a time when good news was indeed good news. The dollar should be investors flashlight in a dark tunnel. The recent rate cut by the ECB (also a surprise) will weaken the EURUSD and add to a strengthening trend. For stocks, we may have to rethink allocation in that if good news becomes "good news" again it is likely that the cyclicals will start to revalue in investors portfolios which are currently dominated by the financials and defensive dividend yield stocks.

Robbed . . .

On Saturday I took off for my usual early morning ride aboard the Evo and returned to a house that had been broken into. My car was missing and so were the keys. The thieves had gotten into the house and stolen my wife's bag. We found the car dumped not far away with the sunroof open and the glove box contents tipped out in the front seat. It would seem that the thieves had second thoughts about the car and instead were happy with 300 bucks in cash and some smaller items. Oh, they scratched the drivers side doors and kept the keys meaning we have to have the car locks all changed etc. The police were good about the whole thing and even dusted the house and car for finger prints. Thankfully my wife who was in the house at the time was untouched . . . and that's the most important thing. They could have taken a stack of other stuff for all I could care so long as they didn't hurt her. 

Surprised II . . . 

At the end of calendar year Q1 this blog posed the question: Is the Commonwealth Bank of Australia the best bank in the world? Last week CBA was the last of the Australian major banks to report and it once again surprised the market with its' result. The bank earned AUD2.1bn in the quarter,, which is up 14%. That's a massive number in such an economy as Australia's where there's very little to distinguish between the majors. The only thing that worries me is that loan loss charges for the quarter were significantly lower, down 22% to $228 million. Now the bulls suggest this is because much of the provisioning that went on in the 2008 - 10 period is now being written back via reclassification. That may or may not be valid. Rumours are flying that the banks of late have reduced their standards for new credit applicants. Given the heat in the Australian property market at the moment I hope that this remains just a rumour. I have no concrete numbers that backs this up except for the expansion in the banks loan books. 

The continuing reliance of the Australian economy on China is the biggest problem that the local banks face in ensuring their latest foray into the market for home loans doesn't go array. There must have been some nervousness in Aussie boardrooms when it started to leak that China will cut its growth target to 7% next year. The clearest sign that the government there means business came on Monday (as reported in the FT), when it was revealed that banks issued Rmb506bn ($83bn) in new loans in October, down from September’s Rmb787bn. New credit issuance, including China’s "shadow banks", was also much lower in October, falling to Rmb856bn from September’s Rmb1.4tn.
If this keeps up then China will indeed have to lower growth targets to 7% or even less. Then what will happen in Australia. Once again Investors need to watch the iron ore price.

Iron ore was trading at $136 a ton in China on Monday. Singapore based trading House Noble group expects that to fall to just under $100 a ton. If that happens the effect on the Aussie Dollar should be to push it down towards USD0.85, which has been my target since the start of the year. 

Putting all this together investors in Australian mining stocks as part of a broader cyclical switch will be hoping that US strength in the coming year will stabilise China and with it cushion any falls in commodities. Of course the one thing this blog knows for certain about commodities is that they over-shoot on both the upside and the downside, so expecting a non-non-volitile goldilocks scenario might be a little too much.


Monday, 4 November 2013

Conferencing . . .

Firstly apologies for not blogging last week. I was lucky enough to attend a conference dealing with the family office (FO) sector here in Australia. Normally I find conferences a bit dry as people tend to be pushing a very specific idea and often a very specific set of products off the back of it. In the case of last weeks gathering I was happily surprised by the fact that the conference stayed away from specific  investment structures and rather just took the view that financial, legal and accounting professionals needed a bit of education in respect of FO's and how they expect to be dealt with.

The one word I came away from with respect to these institutions (and the size and age of these offices really does mean that they are institutions) was patience. If you expect a family office to react to your first suggestion or idea you'll probably be disappointed. I was speaking to one senior advisor about my frustrations in respect of my push to get some investors together to do the due diligence on the Commerzbank London / SE UK property portfolio sale earlier this year. In my usual fashion I went through my investment case, not as a pitch, but rather in an effort to work out what I'd done wrong. The truth was I hadn't done anything wrong, I just didn't have a deep enough relationship to be given the benefit of the doubt. The idea was solid and the numbers made sense, but probably needed to be part of my own personal portfolio for a longer period. Perhaps I could track a couple of buildings within the group and show how things progressed? You see it's a long term thing and without a track record in this specific field my ability to action the advice would be limited. You live and learn.

I also realise now that many investment banks and even private banks have not really worked out how to best service family offices. The main problem with IB's and PB's is that they drive their efficiencies through an economy of scale. That's very good when dealing with institutions used to combing the markets for opportunities and disparities in valuations etc.. FO's don't have desks of traders or even teams of investment bankers with the time or the inclination to look at every prospectus that they get in their email daily. They rely on a true bespoke service, not a fake one. Some of the most up-market mens retailers offer a bespoke tailoring service, but it's not bespoke in the sense that you might get from establishment that measures you for a suit and has you back 4 or 5 times before finalising your suit. Most of the fashion houses now have their staff decide a base size and then provide the variation to the computer cutting pattern. It's like the banker who has one presentation and merely changes the name of the client on the title page; it's superficial and if it's not updated and recast enough the client starts to work out that they are at the other end of a long chain. Well thats what you can't do with FO's. The cost of dealing with FO's isn't the value of the due diligence put into valuing and packaging an asset, it's in the time taken to understand that things need to be built up over many months and years.

Talking with the various professionals at the conference also told me that hard assets were still the main focus of the very wealthy. It seems that the FO's suffered along with the rest of the financial sector during the economic crisis of 08-09. Securitized structures obviously had cost many time, money and stress. Real estate seems to remain in play with many I spoke to happy to put funds into direct ownership or even slightly subordinated mortgages. This later point surprised me, though 2nd mortgages are better in terms of recoverability than some MBS type paper by virtue of being more nimble to action. A yield pick-up of a couple of hundred basis points probably makes sense where the FO knows the market in question. And that's another good example for an advisor to consider. I now know that offering a Melbourne based FO the chance to invest in second mortgages in (say) Chicago probably won't win me any kudos, whereas a direct investment by way of a property easily valued and financeable is, while still not easy, at least palatable the basis for a broader conversation on asset purchases.

Since 2008 anyone seeking finance for their ideas has had a tough time sourcing funds through the old channels of banks and finance companies. Now without a risk taking mentality at the various traditional sources the valuation gap between buyers and sellers has grown ever wider. This enables the cash rich non-traditional financiers and investors to involve themselves where formerly they would have had to participate further down the capital structure. At the moment the mining and resource sector is out of favour because of the perceived risks in the economies of the main users (i.e China). According to E&Y Consultants a total of 165 deals worth only $8bn were completed in the three months to September, down from 236 deals worth $20bn in the same period a year ago. So where does that leave investors? The gap cannot continue to stay open and I suspect that the usual suspects of private equity and FO's will step in to take up the difference. That's especially truee given the hurdle rate for returns is low and likely to stay low for some time, in fact even if the hurdle rate (ie. government interest rates) starts to tick up investors in these economically sensitive industries are likely to generate considerable positive alpha.

This blog remains of the view that equities will continue to outperform cash for one very bad reason: money is cheaper than return on equity. In my last posting I pointed out that the corporate profit season in the US had seen profits in the S&P500 up only 4.9% year on year (ex-JPM litigation charge), but of course when compared to short-end cash returns this seems like a good risk. The most likely inflexion point now seems to be in March once we've negotiated yet another series of US debt ceiling and budgetary talks.

As many readers would appreciate I have little outright love for the valuations of Australian banks. The risk of buying something on around 1.8x tangible book v. an Australian Dollar dividend yield of 200or so bps over the applicable government debt is perhaps not enough at this stage in the cycle. I will be looking at a full review of the Australian banks at the end of this week. I am still suggesting to local investors to diversify into European banks to best leverage the recovery there.

As far as cycling goes I've pretty much been taking a low key approach since the Hunter Valley expedition a couple of weeks back. Since the Cannondale has been out of service I've been relying on my old friend the Pinarello Dogma 60.1. To spice things up I've been changing around wheels at fairly short intervals. It's interesting to do this as you definitely start to get a greater sense of the strengths and weaknesses of your frame. Trey getting some different wheels and see what I mean.

I'm strictly a road cyclist these days, but occasionally I see something that amazes me from across the divide in the mountain biking world:

I'm not saying I want to start riding around Chile on a mountain bike, but after seeing this it certainly seems like a lot more fun than some of the streets around Sydney.


Tuesday, 22 October 2013

Brewing away . . . .

Last week this blog said that the political turmoil in the US over the debt ceiling was likely to delay tapering, but I honestly didn't think it would be confirmed in such stark terms by the Chicago Fed President. Mr Evans yesterday reaffirmed his belief in monetary stimulus indicating the recent fiscal turmoil will likely delay any Fed tapering. This of course is bullish for Equities and likely to delay  the unwinding of long bond positions. Of course investors may want to control their enthusiasm in some asset classes, namely housing as more central banks start to point out the possible problems in the housing market.

The Bundesbank for example warned that apartment prices in Germany's biggest cities are overvalued by as much as 20%. Don't ask me how they can come to that number and given that the ECB's main refinancing rate is at a record low of 0.5% I'm not sure that this is much of a problem compared to Asia, Australia, New Zealand, Canada etc. Within Europe Germany and parts of the UK (i.e. London) are somewhat of an island as housing prices in the rest of Europe remain less than buoyant. 

This blog previously stated that housing in Europe was starting to make a comeback and I stick by this and continue to expect that a backlog of supply is starting to clear even in the Mediterranean states. Take for example Spain, where I have previously mentioned that the Government's "bad housing bank" has started to move its' first offerings. Confirming this change in Spain was none other than a Bill Gates linked entity that yesterday was identified as having bought a 6% stake in in FCC (Fomentos de Construcciones & Contratas) the Barcelona based infrastructure company (7.64m shrs at EU14.865/shr), which is surely a leveraged play on a bounce-back. We also know that the Irish are turning things around and thus investors might wish to follow Mr. Gates and look into similar companies in the PIIGS (Portugal, Ireland, Italy, Greece and Spain). 

So where are we now? This risks that investors should be watching most closely are:

  1. US budget talks culminating in December 13 deadline before revisiting a January/February debt crisis.
  2. German Government renewed belligerence towards the EU Political. A policy of “no mutualisation of liabilities without sovereignty transfers” being the most likely problem now that Frau Merkel is back in charge
  3. Global GDP slowdown being lead by a deterioration of PMI
  4. Chinese bubble bursting. China September new home prices rose YoY in 69 major cities
  5. Iran and a failure of the new infant detente to yield acceptable outcomes
  6. The bond market and specifically in the first instance a failure coming from troubles in the high yield sector

Leaving aside the macro risks investors should note US 3Q earnings results . . . . If you exclude the financials (who have some one-off problems . . .JPM), companies have surprised on earnings estimates by 2.8% and 60% have beaten EPS. This has slowed when measured against the average (72%) since the start of the recovery in 09. In revenue terms 39% have exceeded forecasts which is also a slowdown from the previous pace. General Electric (GE) , for example continues to squeeze hard on it's businesses surprising on earnings by 2.0%, but missing on revenues by 0.6%.  Therefore investors need to pay heed to stocks trading on higher forward PE multiples as they are unlikely to be able to meet expectations easily on current trends. 

As part of the light relief this blog likes to offer, a friend of mine sent me an article from the Wall Street Journal  highlighting the trend of Australian baristas infiltrating the somewhat staid coffee culture of NYC. I don't think I appreciated the strength of the coffee culture in Australia until Starbucks had to shut about 95% of their outlets here due to poor demand . . . i.e. Starbucks coffee didn't cut it. The Aussie and Kiwi barista thing got to London first and there's a slew of them around north London helping the Brits get passed some pretty poor local offerings. I think I've mentioned before that the coffee in Geneva was also substandard. You the Genevois tended to burn the brew leaving it somewhat bitter. The ITalians of course are the kings and they have it almost cool in order to preserve the nuttiness. I hope NYC likes what's going on. I have nothing against those percolated brews standing in diners somewhere in the midwest, but good coffee it "ain't".

Some cycling notes. I did the Sydney spring cycle with my sister-in-law on Sunday. We totalled up just over 80k's in warm, but not oppressive weather. It's a great day out mainly because they shut off some lanes on the Sydney Harbour Bridge giving you one heck of a view in traffic free peace.

Finally a Cannondale update. All the parts have arrived except for the frame. It's clearly stuck somewhere in the ether that is DHL. Tracking cut out a while back, but as that happened with the other parts coming from Bike24 I'm not surprised. In the meantime the crew at cheeky Monkey returned the Evo Team frame and as soon as I get the packing from the new frame I'll be sending it of to the carbon repair specialist in Perth. 


Friday, 18 October 2013

A sad day for the blog . . . Vaya con Dios

It's with much sadness that this blog has to announce that the intense bush fires that raged around Sydney in the last 24hrs claimed the family retreat in Mt Irvine 3hrs from ibcyclist HQ. Luckily for all concerned no one was hurt. Mrs Ibcyclist, her mother and step father all got away late yesterday after trying their best to clear additional firebreaks. Places are full of memories and when we lose them there is a tendency to think that memories are lost with them. No one with a heart should believe this, you can take the good times with you . . . I know I will.

The first map shows my last Strava track in the Mt Irvine Mt Wilson area. As readers will know I've done the ride to the Bells Line of Road many times since returning home from Switzerland. It's a serene ride, devoid for the most part of aggressive traffic and includes a sublime section of the smoothest tarmac this side of a Swiss motorway. Bike riding, being what it is, has always offered your blogger the chance to escape trivial things and clear my mind of troubles and unrealities that haunt all of us as we progress through life. Many of my better thoughts have been created on these rides and therefore it will be a sad day to have to visit what remains of the Ibcyclist country HQ.

The below map shows the fire boundary. The area's mostly national park, though spurs of habitation are everywhere in the area.

Sadly here's where the HQ was hit. The fire leaped the boundary road between the national park and the house of many memories. It was a near thing of course. If the wind had changed direction an hour or two earlier the beautiful gardens and home would have been saved. Australia though is a harsh continent and luck is not always with the good or worthy.

A fine line 

The house . . . a fine line between standing or burning

So where to from here. It's really not for me to say, only I hope to ride the roads in the area again soon. The main thing as always is people are safe. Therefore rather than thinking about bonds, equities, FX and their various derivatives I'll sign off today with some of my own memories:

Vaya con Dios.

Thursday, 17 October 2013

My own cycling filibuster . . .

I waited until the US found away to get around the debt ceiling before updating this blog. My intention originally was to lead with a summary of my weekend in the Hunter Valley and the associated pain of spending 111km in the saddle on a 37ºC day that also managed to summon up a near gale force hot continental northerly wind, but the US government problems are perhaps more important.

It's very hard for we people of parliamentary style democracies to get our heads around the foibles of the republican systems with their separation of legislature from the executive. I know it's not hard to understand, but the press in the old Commonwealth world spends about as much time discussing the government structure as it does explaining the reasons for the shutdown; it's boring and tedious. All you have to know is that each branch of government serves as a check or balance to the others and in reality although the President seems to be all powerful he really isn't.

The deal struck last night will kick the can down the road by reopening the government until January 15 and will raise the debt ceiling until February 7. Those dates will not come into play if negotiations to reduce the budget deficit are completed by December 13. Everyone is claiming victory, though from afar everyone looks to have a touch of Pyrrhus around them.

So where to from here. Investors can expect a rally in the treasury markets and a delay in tapering. The Fed will not risk cutting the liquidity lifeline until a budget deal looks certain. This blog suggests watching the VIX index closely in the coming weeks and reserving funds for a portfolio protection play. The trouble with most investors is that right now they are sitting in bonds or cash to a great degree. Buying puts specifically on T-bonds might not work if the Fed supports the market. The VIX though might be broadly more effective depending on individual mix.

The VIX was down 21% yesterday and has now retraced to just above the 200day moving average. This blog is not about technical trading, but clearly if we believe that the events of the last 3 weeks are repeated in December and over the illiquid Christmas period, it will clearly be advantageous to revisit a long VIX strategy in late November.

The Hunter Valley lies about 3 hours northwest of Sydney and is known for vineyards, horse studs and coal mines. It's a strange combination of industry and agriculture. The towns of the lower Hunter once rusted, but lately a combination of high coal prices and strong demand for it's wines and the associated tourism have led to a mini-renaissance amongst these old towns. On Sunday I set out to ride the first "Wiggle" Hunter Classic over 122.5kms starting and for some finishing in Cessnock. I say for some because I was one of those who found the going too tough and dropped out at the 111km mark due to the high winds and temperatures.

As you can appreciate I was extremely frustrated to get so close to finishing. Temperatures during the ride topped out at 39ºC. There was a continental wind blowing from the north, meaning the peloton spent nearly 70km's riding into or across the weather front. I saw the first drop-out at the 56km mark and many riders were already short of water well before the 80km 2nd feeding zone. Organisers were smart enough to drive up and down the roads handing out bottled water and various high sugar snacks in the hope of preserving the field for as long as possible. As readers can see I spent over 5hours in the saddle and over 6 hours on the course in total. Normally I would have hoped to finish the ride in under 4hrs 30mins, but conditions were not so kind. Thankfully my support crew (Mrs IB Cyclist) scrapped me off the road and delivered me back to a cool air-conditioned hotel room.

In summary I thought the event was well organised and unlucky to have to endure the combination of wind and heat. Perhaps September might be a better time for this type of event as the propensity in the Hunter is always towards long hot days. I hope to be back next year and finish those last 11 km's.

A reader asked about the status of my replacement Cannondale. The new frame as I write this blog is now in Australia. Cheeky Monkey (Centennial Park Sydney) have stripped the damaged bike and have ordered any parts that I need to complete the build. The only things I'm now missing are the FSA K-Force handlebars and a saddle. I got the handlebars on eBay 2nd hand for AUD 137 from a reliable US dealer. Courier tracking tells me they have also arrived in Australia. I saved 200 bucks on the new shop price for those bars and really once I add the new tape they'll look as good as new. I got the saddle from the same place I got my frame, Bike24 in Germany. I think it matches things quite well:


Tuesday, 8 October 2013

Internet retail and "prepping" out-loud . . .

Firstly and maybe most importantly an update on the great Cannondale replacement frame situation . . . 

The Germans being the efficient people they are have been able to source me my frame of choice.

As if to underline the difference between web shopping in the country who gave us the motor car, precision optics, Goethe etc. and the usual "get the cash and send out whatever you click for" type operations . . .  I received a mail after placing my order with the team at Bike24 in Dresden, Germany saying they wouldn't be able to sell me the frame of choice without the following information:
As you have read we would like to advise you before buying that frame. To give you a professional
consultation for determining the correct frame size we need some details.
1. Usage of the bike
- all day, free time, training, competition?
- how many kilometres are you going by bike within one year?
2. Body details
- inner leg/inseam length
- body height
- body weight
- back length (measure if sitting on a chair: from seat to top of shoulder)
We will calculate the right frame size/seat position for you.
I had to laugh at the earnestness (if that's the right word) of this mail. Essentially they were not going to sell me anything that wasn't actually suited to me . . . and not just size, but style of riding. This is why these guys are not some phoney Nigerian sting siting behind a server somewhere being manned by 14 year olds in Russia. I answered the above mail with pictures of the remnants of my current Evo which resulted in a confirmation that the order would be processed without further questions pending payment. The frame will be dispatched in the next 24 hours and I should receive it next Monday in Sydney. 
Leaving aside my bicycle purchasing my mind turned to problems in America. Most readers will know that my global asset allocation has been something like:
USA: +65%
UK: +20%
Europe (ex-Germany): +10%
North Asia (ex-Japan): +5%
I've obviously preferred hard assets where possible, though I've mentioned my interest in French and some Northern European equities. Currency wise I've preferred the USD, but GBP has been my other favourite as growth returns to my former country of residence. There comes a time in every asset managers existence when he or she starts to doubt their positioning. 
Perhaps my optimism in respect of the US economy was shaken after watching a couple of episodes of "Doomsday Preppers" on the NatGeo channel last night. 

Usually I watch the show as a kind of light relief, making fun of the various nut jobs and weirdos predicting armageddon type scenarios.  For those readers who haven't watched this weird slice of American life the premise of the show is:

Doomsday Preppers explores the lives of otherwise ordinary Americans who are preparing for the end of the world as we know it. Unique in their beliefs, motivations, and strategies, preppers will go to whatever lengths they can to make sure they are prepared for any of life’s uncertainties. And with our expert’s assessment, they will find out their chances of survival if their worst fears become a reality. 

One particular episode that had my attention yesterday assessed the survival chances of a certain family in Ohio who was predicting economic disaster with the associated collapse in the US economy and the the US dollar. The father had spent every cent he'd earned over the prior 3 years buying guns, canned goods, bottled water, gold, silver and metal detectors. The mother of the family was practically in tears describing how their family's life had been taken over by the her husband's obsession with the collapse of the US dollar. What causes people to do this? 

You would expect that if the "preppers" were right that we would have seen a rally in the gold price to compensate for the collapse of paper money in the US, but the price has been somewhat benign of of late.

Gold is telling me that the consensus bet is not for collapse, but further stimulation of the economy by the Fed as the funds management "preppers" bet on some form of "kick the can down the road" scenario in which the Fed decides not to taper it's $85bn per month of asset purchases. 
Let's put gold aside and look at the world's usual safe haven . . . US T-bonds. Now, given the shenanigans in Washington you might expect yield to be rising. Well they were, but of late they've fallen confirming the belief that the Fed is going to continue to print money.

There is one problem of course and that is that the US T-bond is the cornerstone of the multi-trillion dollar repo system. In 2008-9 when Lehmans etc. collapsed the system went into freeze mode and the central banks had to step in to allow for free flows of funds between financial institutions. This worked because institutions like the Fed have the total confidence of all sane people. The market seems to be acting in the same way, but why?

Firstly and most importantly there is no alternative. The Chinese and all those that hold T-bonds have to make it work or lose their foreign reserves. Some, like the Russians, have hedged by buying gold, but essentially the worlds currency is the US dollar and therefore a Greece type default with Chinese officials visiting Washington and telling the US how to run its economy remains a scenario for only the most paranoid of investors.

Instead of the above October is now highly unlikely to see the Fed taper and this blog now believes it could be until February 2014 before we see the Fed withdraw from the system, though there is a small chance that December might also work in the event of an orderly end to the current impasse. 
Therefore this blog is maintaining its' current asset allocation and continuing to emphasise hard assets such as commercial real estate first and foremost in all its' various forms and where appropriate equity investment in crucial infrastructure (ports, toll roads, etc.) that are likely to remain less volatile than the broader market.

Finally a word on banks. Readers will have noted my recent blogs on risk allocation within the major global banks. Now is the time to dust off the VaR numbers and assess the value of the scenario analysis  contained therein. In the event of high volatility and associated tail risk events it will be interesting to see the relative performance of these institutions. I am tempted if owning said banks to compress my portfolio into the low VaR positions such as UBS and prepare for opportunities to rebalance before the years end.


Monday, 30 September 2013

Trading yields, bike parts and George Orwell's scarf(s). How much is one quadrillion Yen?

The rise in the US yield curve is starting to discourage home owners from refinancing their mortgages.

US 10 and 30yr yield
Last week this blog looked at the trading revenue at various banks in light of my recent research into the risk profiles of various investment banks across the globe. The assumption at the time of writing was that banks in general had cut back on risk profiles in order to:

  1. Stabilize income streams, making a less "lumpy" and more predicable earnings profile
  2. Cut-back on capital usage in order to satisfy Basel III's looming requirements

Now comes a third piece of the puzzle and that is the drop off in volumes/activity especially in the fixed income trading space. This is why data points such as Wells Fargo's laying-off 4,000 employees in mortgage banking (10% of that banks total revenues) matters. Citigroup is doing the same. Remember this all translates to less financial activity and banking is based on "clipping a ticket", thus revenues will be falling. So what can we conclude. The tipping point has already been reached in the cycle, whether the Fed starts tapering in October or January the easy money of refinancing the American housing market has been made.

Next week when the banks start to report I expect there to be some reasonable revenue gaps in their numbers. Analysts have been busy with downgrades ever since 2nd tier Jefferies reported an 85% drop in fixed income revenues in the three months to August compared to the three months to May. Bloomberg are now showing the net income expectations for the US majors to fall by $210m for Citigroup, $128m at Bank of America, $123m at Goldman Sachs and $97m at Morgan Stanley. It's not earth shattering, but it does show that a plateau of sorts has been reached and that when tapering starts the downward trend should continue.

In Australia readers will know that since April I have been suggesting that recent election would bring about increased activity in the infrastructure bond sector. Such predictions fell on deaf ears, but now comes news that the new Treasurer and his finance team are looking into this very notion and hope to bring forward proposals likely to boost demand for said bonds in the coming parliamentary session. I expect there to be various tax breaks to bond holders likely to be in the form of relief on coupons payable etc. If the Australian arms of various major investment banks want to know what they should be devoting resources to I strongly suggest switching some of the equity talent pool to fixed income and also preparing pitch books for Hybrid versions and start booking flights to Canberra. You have been warned. For investors this could be a bonanza of quality yield producing income that should not be avoided.

Japan has recently hit the milestone of one quadrillion Yen in government debt. Even cutting two zeros off that numbers and converting it into US dollars does little to cushion one from the impact of it on a per capita basis.

Japanese Per Capita debt in USD = 1,000,000,000,000,000 / 97.8 x 1/127,650,000 = ~ 80,101

One way to to fix this problem would be to allow future generations, by virtue of population increase share the burden and by "baby-booming" its way out of this trap. Unfortunately the Japanese nation has been reluctant to reproduce at a significant rate and the expectations are now for population decline, meaning that without intervention the debt burden grows on a per capita basis.

Given all this it is expected that the Japanese government will increase their sales tax in order to start repaying some of this money. The theory goes that by printing Yen they will be reflating their way out of some of the debt, but they need to be showing an increase in their revenue base so as to not undermine their efforts in the eyes of the financial markets. This blog's position remains that the Japanese experiment will partially fail as the number of moving parts is just to great to control from a central government. Japan's fate remains precarious at best as its technological lead over its Asian neighbours shrinks leading to a drop off in margins of goods produced. Investors should realise that betting on Toyota etc. is no more or less than a leveraged bet on the demise of the JPY and of growth in the US and Europe.

Hard assets have really performed well since the crisis of 2008. This week you can add to your collection of famous object d'art by buying scarfs warn by George Orwell during the Spanish civil war, including one he was wearing when shot by a fascist sniper.

Eric Blair and his anti-facist scarfs . . . 
This blog has always had a soft spot for all things Orwell, especially his social commentary books (Down and Out in Paris and London, Road to Wigan Pier, etc.), but I am drawing the line at bloody scarfs on the basis that Orwell himself might not have appreciated the Turin shroud quality of such an artefact. I think my own preference would be for a  signed first edition of 1984.

Last week I reported to readers that my beloved Cannondale SuperSix Evo had suffered a catastrophic gear failure. At the time I thought the frame itself, though scratched-up and a bit battered would live to fight another day. My optimism has been dashed when local dealer Cheeky Money (Centennial Park, Sydney) declaring it unsafe for riding. The biggest crack can be seen in these pictures.

Given this I asked Cheeky Monkey to investigate a replacement frame. Readers, will know that my experience of Australian Cannondale distributor "CSG" has been less than enchanting. As I said to the excellent team at Cheeky Monkey I wasn't looking to save money by going around them and sourcing the replacement at the lowest possible prices, rather I just wanted some reasonable alternatives and likely delivery times. CSG offered me a choice of two frames, the first was an older 2011-12 Team Liquidgas frame at RRP -20%. The second was black frame of similar vintage at the same price. By the way that discount is no great deal after I found out that Cannondale started a sale of 2013 frames on Friday September 27 across the globe as they look to get rid of old stock ahead of new team colours etc. being introduced for 2014. That probably means that what I was being offered should have been marked down even further. Having said that, price wasn't a deal breaker on its own. When the rep at Cheeky Monkey said . . . "Mike, you're probably not going to like this . . . ", I chose to not get too upset and instead asked the rep to go back to CSG and ask them to try again given that my connections in Europe would be able to supply me with two superior choices at a better price with a lead time of 48hrs! As I have heard nothing at this stage I have given up on CSG. I did commit to Cheeky Monkey as the builder  so long as they understood that I was being forced to go around them by circumstance rather than choice. They are a good team and I recommend them. Of course if they decided because of politics between themselves and CSG not to build the bike I would take the parts to Atelier De Velo and no doubt get equally as great service. I hate that I've been put in this position as I strongly want to support my LBS suppliers.

So what alternatives am I looking at? Locally I would have to change brands and I've been investigating what's out there. Bike Lab in Bondi Junction has a choice of alternatives and the boss there Liam walked me through various frames he could get. I liked the idea of this black, yellow and white Colnago C59 but would have to get new bars and cranks to fit the frame:

I also spoke to Liam about the Cipollini RB 800 which aesthetically appealed to me, but Liam suggested I wouldn't like the ride and it was perhaps not for the "larger" bodied rider. It's a pity because the finish on the frames is pretty spectacular:

I also spoke to a Specialized dealer about an S-Works Tarmac SL4. The attractiveness about this offer was that the local distributor had multiple colour choices available in my size and in stock. I've heard good things about Specialized warranty here in Australia and it's somewhat tempting. I like the idea of the special order Vincenzo Nibali Ltd. edition "shark of Messina" themed frame:

As for Cannondales it looks like my choices will be the either the new black, green white team frame or the USA themed frame:

I'm leaning towards the red, white and blue theme and setting it up like 2012 US road champion Tim Duggan:

What's not to like? C'mon, we all want a bike with blue bar tape and red hoods, right?