Friday, 22 February 2013

Petulant children . . . minor adjustments

The Federal Open Market Committee’s Jan. 29-30 meeting said the central bank " . . . should be ready to vary the pace . . . " of its $85 billion in monthly bond purchases. The market hated this and I didn't blog yesterday because I wanted to see today's reaction. The equities world wants to see this as profit taking day with no particular significance. That of course ignores the trend in the bond markets where big picture economic soothsaying is somewhat more prized.

High Yield Bond ETF v. SP500
The divergence of the high yield bonds and equities probably indicated that we were due some rethinking. The assumption has been that people would sell their bonds to buy equities when the risk reward equation in bonds no longer made sense. To degree that looks right and probably caused the divergence. But what happens when the Fed takes away the very factor that was decreasing the equity risk (i.e. cheap money) and instead tells you the investor that you're on you're own. This is what we had two days ago. The first time the Fed cuts the monthly repurchases we're not going to be in Kansas anymore.

Of course I remain somewhat sceptical that a real bear market is around the corner because of the M&A factor. More evidence came from that space comes in the form of the $1.2-billion all-stock deal for OfficeMax, where shareholders will receive 2.69 Office Depot shares for each OfficeMax share, valued at $13.50 each. This is a deal that has been 10 years in the making and only in a time of super liquidity do the two CEO's see the need to get together. The numbers are not compelling and much of Wall St had given up on this. It's a deal all about synergy and lacks the transformational dimension . . . but it got done and will be unlikely to suffer any competition regulation disruption.  M&A does rely on financing, both by banks and by companies. If you want to leverage an asset you have to be able to borrow against it. If the banks have the money, which is what Bernanke has been pumping in a very low rates of interest, then they can do the deals. If not . . . 
Any notion that the US regulators would step in and require more restraints on the off-balance sheet side of the US majors would have me worried. The Bloomberg piece that came out yesterday mentioned that: "U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need." No great surprise here, unless of course you're a legislator who doesn't understand risk. The bottom-line for me is that you need to watch the regulators. 
I got my new Fulcrum Racing Zero wheels yesterday and managed to get them out to test things. A couple of interesting things occurred in the process: The hubs on my Mavic Cosmic Carbone SLRs are spaced slightly differently than that on the Fulcums and for that matter my Campy Boras and Easton's. This means that you have to recalibrate you're front and rear derailleurs.
For me that's a problem as I'm yet to master the dark art of bike tuning. I have small problem from yesterday in that my chain is touching the front derailleur on the lowest gear (small ring on crankset / big sprocket on rear cassette). To change this it should require a very minor adjustment using the limiter screws. Having said that, it's not always that simple. If I get this wrong I'll be off to the local bike shop to see if they can fix it . . . if I get it right I've just saved myself some cash. The main thing to do is be very deliberate when you tune your bike. The manual talks about doing things in 1/8 turns of a tiny screw, but the margins we're talking about are so fine. In the case of the adjustment I'm trying to make I need to aim for 0.5mm between the chain and the inside of the front derailleur cage. I reckon that's closer to a 1/16 of a turn of a screw, but if you go too far you'll get your high gears out of sync. Honestly I wish I had electronic, because from what I understand the yaw control makes this process much less testing.

The price difference between Campagnolo Super Record  Mech and the same in electronic is approximately $1800, which is a lot trips to the LBS. 

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