Thursday, 28 March 2013

You ain't going anywhere mister . . .

It's hard to say something's draconian when there's very little other options available. As I suggested recently Cyprus has pre-emptively imposed capital restricts ahead of re-opening its' banks:

  1. Depositors will be able to withdraw no more than €300 in cash each day
  2. Transfers over €5,000 would require permission of the central bank
  3. Overseas credit card transactions would be limited to €5,000 per month (but would be unrestricted in Cyprus
  4. There is to be a ban on people taking more than €3,000 of bank notes out of the country per trip
  5. Cyprus will not allow any cheques to be cashed 
  6. Cypriot importers will be allowed to pay for goods only after showing supporting documents
  7. Cypriot students studying abroad will be able to receive only up to €10,000 a term, and only if the money is transferred by their immediate family

In doing the  above Cyprus has become the first eurozone country ever to apply capital controls. The banks open on Thursday local time. Good luck Cyprus.

The stats office in the UK confirmed that current account deficit rose to £57.7bn in 2012 (3.7% of GDP).That is the biggest percentage of GDP sine 1989. There were some upward revisions to the GDP, but of concern is the fall in the household savings ratio to 6.7% in the fourth quarter of last year from 7.9% over the previous three months. I guess at least if the BoE ever introduces a depositors bail-in they'd have less cash to grab.

In Australia we are in an awful period in or election cycle with a government with very few options but to go further into debt promising anything in order to remain in power.

From the Daily Telegraph (Sydney) 
It's a horrible record of spending what you don't have. Now there's a move to change superannuation laws to effectively claw back savings. Of course the government says it's only for millionaires, but isn't that always the case in the socialist grabs? This is Australia's little version of the Cyprus bail-in and the locals are going to get angry. The Australian Labor Party (socialist) is likely to lose half of it's seats in parliament and be wiped out in the most populous state (NSW). You can fool some of the people, etc . . .

At least someone is trying to lead the way down here, even if it's a very minor thing for the general population. The LIBOR manipulation scandals that we saw in London, Tokyo, etc have had a positive result in my homeland. Australia will use prices displayed electronically by brokers and trading venues to set the price of the country’s benchmark interbank borrowing rate. That means they'll be no panel system that allows for manipulation. That's a good thing.

Readers of this blog know that I believe that M&A is starting to become one of the crucial "planks" of current equity markets. Stats though are starting to show that I may have got this wrong and I'm happy to admit to it. There have been four megadeals in the first two months of the year but according to Dealogic that plus some IPO activity has failed to get things going sufficiently to agree with my earlier thoughts.

It seems that the continued eurozone problems helped suppress the value of global M&A in the quarter to $374.1bn. That's down 10% from the 2000 number, so we're in no M&A bull market. I would say though that there's enough activity even if it moderates slightly for the investment banks to scale down further headcount reductions. The value of global M&A reached $492.7bn by the end of February, up 24 per cent on the first two months of 2012. The same thing happened in 2011, but things slowed . . . we shall see.

Coffe is not a subject this blog tends to deal with regularly. I went for an early-ish ride this morning and was left pondering a few things as I waited for a cappuccino along my favoured cafe strip in Sydney. Firstly why did one place have a line 10 people long, while my favoured place only had two people waiting? I've had coffee from both and they're OK, but are people choosy or is it about the store front. Sydney siders think they know good coffee but the only difference between the shops was one has an Italian theme (run by Asian people), while the other has a Thai theme (naturally run by Thai ladies). Could it be that people just associate good coffee with Italy without really tasting what they're getting?

Like most people I have an Italian espresso machine at home. It's a proper machine, i.e. it doesn't use the Nespresso capsules which everyone seemed to have in Switzerland. Geneva was a terrible city for coffee. It's better in Zurich, but compared to the first espresso of the day in Courmayeur as you prepared yourself to do the backside ski run through the trees it pretty much sucked. I want you to know that I have never been able to make an Italian cafe style coffee from my home machine and probably should dump it, but something keeps challenging me to try again. Recently I realised that I had been breaking a few rules in coffee making:
  1. Don't scorch the grounds. If your machine gets too hot the coffee will be bitter
  2. Use full fat milk and don't kid youself that skim or soy produce a decent drink
  3. Don't overheat the milk as it will flatten the creme and be unsatisfactory
  4. 4. Clean and descale your machine regularly 
Why did I get on to this? Well lateral thinking award for the day goes to Cannondale Pro Cycling. Wega Coffee Machines has announced announced a new partnership deal with Team. Here's a picture from the Italian Cycling Journal of wonder boy Peter Sagan at work with a Wega machine on the team bus:

“The collaboration we've started with Cannondale is a strategic opportunity in terms of brand recognition," comments Paolo Nadalet, CEO for Wega Coffee Machines. “The agreement will allow Wega to increase their exposure in strategic markets, thanks to the international dimension of the team which, like us, operates on all five continents. This opportunity is doubly interesting in light of the company's hospitality activities during the Giro d’Italia which will allow company guests to experience a unique perspective at this important world class event.”

I love this press statement. What it should say is: We think Peter Sagan is cool and want to hang out with the guys at the Giro so we gave them a machine each and now we all have lime green lycra to cycle in. I may just have to take the bait and get rid of my old machine . . . of course I'll need a lime green "team edition" version because . . .  well, just because.


Tuesday, 26 March 2013

Don't back down . . . listen to your shoes

The question sometimes is not whether or not a deal gets done, but rather what is the deal. Cyprus was a classic example of this over the weekend where in a typical post-crisis EU move things got done on a Sunday night. Cyprus is getting €10bn of aid, equivalent to 60% of GDP and in return gets deposit insurance for small account holders (<€100k) and becomes the first place in the EU to have a "bail-in" for holders of large deposits. Shareholders and bondholders have lost the lot. They'll probably have to introduce capital controls to stem the inevitable flow of funds out of the country. It's a horrible, badly executed plan and once again leaves this blogger wondering at the wisdom of Cyprus staying in the Eurozone. In whose interests is it that this country has basically sold itself to Brussels for very little but the right for its' citizens to get on a plane and move to the mainland and look for work?

Where are we now? The first thing you need to know as an investor is that your money is not 100% safe in an EU bank. This is probably the moment when people need to start to understand that even the big systemically important banks of Europe (DB, BNP, etc.) will as an entity become state property in a crisis, not to protect depositors, but rather to protect economies. In that case depositors must see themselves as part of the capital structure that starts first with equity holders and progresses up through various bond holders to themselves. It's a horrible situation and reminds me of the hedge fund world in 2008 when COO's at some major funds were seen opening accounts at the government owned Post Bank in the UK because it was 100% guaranteed. At the time countries such as Singapore gave carte-blanche guarantees on deposits in their own banks system and this provided a less embarrassing, but ultimately similar function to lining up at the post office branch in Mayfair.

The good news is that if you own assets in Germany then you're safer than most. The Germans are not going to throw cash independently at trouble spots in the EU. The German people have hugely benefitted from the crisis in that the weakness in the Euro has allowed them to leverage their position as "exporters-in-chief". So long as the Germans keep a low-ish profile they should come out of this as the economic masters of Europe if they aren't that already. The UK is a huge loser in the process as politically they are isolated and the rest of Europe no longer wants the London Bridge to US capital. If banking rules continue to harmonised across the continent then London risks being marginalised further. Remember that the UK's banks system is about 6x the size of it's economy. Cyprus was about 8x . . .  one false move and they're in trouble. The chilling thought for people living in Luxembourg is that the banking sector their is 22x the size of the economy.

M&A has been quiet recently but today announcement that Schroders will pay £395m plus £29m in future costs from deferred pay for Cazenove Capital (aka asset management) got me thinking. Optically I don't know why I thought that £424m wasn't a lot for a business with £17bn in assets under management. Cazenove Capital made pre-tax profits of £22.4m on revenues of £111.3m in 2012. So here's a company with a cost income ratio of 80% that is getting bought out for about 19x earnings. OK, so the name is probably worth something, but as the £29m in deferred pay suggests the people are what matters. I have no idea what these business should go for, but I'll start to watch from now on. Apparently the price was at the low end of analysts’ expectations and is equivalent to 2.3% of assets compared with 3% for Rathbones, a quoted peer. Some are suggesting that makes it a bargain; mmmmm.....

A lot of people complain about noises from their bottom bracket while riding. Usually this has a lot to do with maintenance or incorrect assembly. I've been hearing the often mentioned creaking sound for a couple of days now and just couldn't isolate it fully until last night. Conventionally you'll take your bike to the local bike store and they'll put it in the work station and rotate the cranks. My Cannondale has the BB30 bottom bracket and I reckon it's a lot more complicated to deal with than say the convention cup system on my other bikes. Check out this video from Spanish bike maker Orbea to see what I mean:

Notice there's a specialist tool you'll need to put this assembly together. Specialist tools always ring an alarm bell with me because how can you be sure that your LBS has one. It's OK if you take a Orbea to a Cannondale specialist because you know both brands use BB30, but that might not help at Pinarello who don't use BB30.

Of course once you have the sound you'll want to try and isolate it. If you're anything like me then you know that the chances of replicating the sound in front of a mechanic will be zero and you'll look like an idiot. Well I have my own bike stand and I tried it for myself before sitting down to give it some thought. I got a list from the net to check off:

  1. Chainring bolts. Kill the creak: Tighten with 5-mm hex wrench and chainring nut wrench.
  2. Pedals. Kill the creak: Lube all points where the cleats make contact; remove from crankarm with pedal wrench, then grease the threads and reinstall.
  3. Crank bolts. Kill the creak: If your cranks move side to side more than 1/16 of an inch, you've found the likely creak source. Remove each bolt with an 8-mm hex wrench or 14-mm socket wrench, grease and retighten.
  4. Seatpost. Kill the creak: Remove and grease. Corrosion can form between the seatpost and frame, making a clicking sound. If an ungreased seatpost stays in the frame too long, it'll become stuck.
  5. Seat. Kill the creak: Tighten the seat binder bolt and grease the seat rails and clamp bolts. The seat is far away from the bottom bracket, but the noise can transfer through the bike.
  6. Shoes. Kill the creak: Clean your cleats and replace if necessary. 
I got down to number 6 pretty quickly and changed the cleats I'd been riding on. During the process I started to hear the noise. And there it was . . . I wear Sidi Ergo 3's and they have patent leather fronts. Where the tongue of the shoe meets the main body the two patent leather pieces rub together creating the noise. I put some baby oil / patent leather cleaner on them and hey presto - no sound. Well that worked for 18k's this morning until they dried out. Now I'm looking for another solution. Vaseline or new shoes? Maybe tomorrow?


Thursday, 21 March 2013

This could be serious . . .

The US Federal Reserve via the FOMC said they'd keep pumping the money into the system last night, but as I've been saying made a slight change to its language putting greater weight on the costs and risks. There was one dissenting vote only, but it's clear that the discussions are getting more robust. Watch this space because I think they start to withdraw QE by December. 

The Cyprus situation now lurches towards the weekend and time to breathe. I heard a senior opposition figure predict the banks will be open again on Tuesday. It's hard to believe that people will do anything but try and take their money out next week. I thought it was the ultimate humiliation for the EU that Russian prime minister Dmitry Medvedev said that their handling of the Cyprus debt crisis was something straight out of the Soviet Union. Take that then! I think the Russians may be willing to lend money on the basis of some kind of equity participation in the Cyprian oil and gas reserves that have yet to be tapped. Maybe some form of exchangeable bond would seem reasonable, or at the very least a bond backed directly by revenues coming from either privatisation or exploitation thereof. Look for announcements before the banks "reopen" next week.

Funny business story of the day comes via Lululemon Athletica. I've seen these shops around the place and I had to laugh when they announced that its latest batch of signature black yoga pants – available on March 1 – is, too “sheer.” They also had to remove 17% of similar articles from the stores. Now as a man of advancing years yet to enjoy the delights of mixed yoga classes I can only regret the company's decision. Of course as an investor this is a huge problem because they apparently didn't have the quality controls in for this or a previous problem with running dyes. It makes me appreciate the creators of Zara even more, they have an emphasis on stock and quality management which although some people complain about individual items they rarely stop shopping their as the clothes deliver what is promised and the shops remain fresh with new items. Beware over-promising and under-delivering. Lululemon Athletica trade at 299 times earnings on the back of a 37% expected jump in revenue this year. That sounds to me like the shares have little by way of buffer built in for such "snafu's" and probably should be lightened or sold completely into any bounce.

As the Volta de Catalunya enters the mountains I thought readers might appreciate what it takes to survive with the peloton in the mountains.

 Laurens ten Dam rides for the Blanco team and is fairly consistent in uploading rides to Strava. He finished 47th in stage 3. I haven't seen the highlights yet but will endeavour to catch up with them later today. Enjoy the stats.


Wednesday, 20 March 2013

Bubble, bubble . . .

My favourite tweet today comes from the back of a cab in Cyprus. Faisal Islam is an economics reporter from Channel 4 TV in the UK and he's very smart and perhaps wittier than I thought:

Our Taxi driver: "Every single person I've picked up at Larnaca airport has been a Russian flying into get their money out of banks" #cyprus (@faisalislam )

I'm waiting for his new book: "Tiptoeing along The Default Line" to be published this year because I'm sure it will have some great insights into the last 5 years of Euro-mess. Cyprus is the other side of what I used to see in Geneva, endless lines of well off Greeks heading to the major private banks to open new accounts. I didn't realise just how much foreign money has been hiding in Cyprus.

The rejection of the bailout plan is surely understandable. As I said yesterday, people are being dragged into a non-existant capital structure. This in a way is very similar to a bank collapse and just because Cyprus sits on the European periphery is no excuse. What next? Is there a plan B? My own thinking is that this will require the usual weekend negotiations and associated leaks. 

The Ft is now reporting that the Cypriots are going to ask Russia for help. Perhaps the idea is to protect some of the shadier Russian money from coming to light? One thing I learnt from commodity trading friends in Geneva was not to mess with the Russians. Taking Russian money into your fund was a risky business even for the best compliance teams in the hedge fund world. Get it wrong and you were likely to get an early morning visit from your investors associates. I guess this is similar. 

Meanwhile back in the UK where Russian money has kept the top end of the London property somewhat buoyant the Chancellors team has started to leak the details of the forthcoming budget. There's an extra £2.5bn in cuts this year, which means that all those areas that are dominated by civil service employment are about to have the life sucked out of them. For years now the Scottish and Welsh economies have relied on more than 50% of their jobs to come from government. The insane thing is that the biggest employer in the UK the NHS is likely to escape the carnage. It seems somewhat criminal looking back on history the way the Blair-Brown government pumped civil servants into the economy with barely a thought for balancing the structure of the regions. Good luck to the Scots if they vote to leave the UK because there are a lot of civil service jobs based on servicing theSouth Eat of England that will likely go.

More reports are now surfacing of shorting of bonds in the US. As I said yesterday the FOMC's meeting this week is crucial. It would seem that quite a few investors are betting against Bernanke to hold the team together as he did last month. The theory now is that we can expect rate rises before the end of the year. This is a huge bubble and some commentators and investors are already trying to calm the markets by saying that a 2% long bond rate is not the end of the world. Well I guess it's not if you're long cash, but over 50% of US homes have less than $25,000 in savings and they aren't likely to get much benefit.

The action in cycling has now moved to the Volta a Catalunya where there is only one rider everyone is watching. Brad Wiggins has been training on Tenerife away from the other Giro favourites with a select group of team mates. I tuned in yesterday to watch the action on a fairly flat stage. Clearly it's hard to tell much on days like that and so we're really waiting for the peloton to climb into the mountains to see how Sky's Giro squad are performing.

I managed another couple of hours testing the Cannondale after yesterday's adjustments. My confidence in the running gear is coming back fast. I went past my usual stopping point today in favour of a lunchtime bite at one of the cyclist friendly cafes in Sydney's Kings Cross. I was the only man in lycra there, but I was comfortable in the autumn sun and the very reasonable 25ºC temperature. My next bike purchase is now going to be a new helmet as the liner of my trusted Rudy Project is about to fall apart. I'll do some research and report on my decision.


Tuesday, 19 March 2013

Loss of confidence . . .

The Cyprus situation as I said yesterday is not good for bank customers in the EU as it sets a dreadful precedent and proves that the expansion of Europe went too far too fast. 

It would now seem likely that we could test the 1.27 area again in the Euro. This is quite a big shock to the system and I was surprised to learn that deposit holders were being tapped for cash while certain small group of bond holders were going to get their cash back. This is nuts as it overturns capital structure hierarchy, it's as though a department store goes bust and the customers are asked to contribute in order to bail out the store. I am extremely surprised that the population of Cyprus hasn't lost confidence in their leaders and started a Greek-style period of civil unrest. If they lose confidence that the system is working for them there will be a run on the banks.

The bond market is based on confidence; the confidence that at maturity one will be able to get one's capital back. This week the Fed meets and the minutes will mate fascinating reading because last time Bernanke was forced to go out and downplay the minuted concerns about exiting QE and play up the need to do more. He can only do this so often. If he overplays the hand he'll start to lose the market and with it the ability to borrow against the massive US deficit. Let's not forget that right now the Fed is spending $85bn a month buying various asset backed securities in order to pump money in at the long end of the yield curve. These minutes are very important and investors will need to watch the balance on the board of the FOMC.

Copper's weakness in the last couple of weeks has taken me by surprise. Ever since the Chinese leadership started talking down the housing market the metal has been on the slide. 

As of yesterday there had been 23 straight sessions where copper stocks at the LME had reported an increase. Without Chinese buying or renewed confidence in economic growth copper looks likely to find it hard to rally. I suggest that investors watch the LME stocks at the Chinese copper markets for any sign of a flip in sentiment. News of yet another sharp rise in daily LME copper stocks of 18,100 tons continues a pattern of recent builds, as it was the 23rd straight session with a build in LME copper stocks. 

Did you notice on Sunday how a lot of riders at the Milano - San Remo were wearing a particular non-branded jersey to ride in. I noticed it when I looked at the pictures of Mark Cavandish at the starting line.

It's a Gabba jersey by Castelli and they are not the clothing sponsors of the Omega Pharma Quickstep. A lot of teams had the same idea and wore the water resistant aero shirt at the start in Milan.

This is not the only time during the season you'll notice teams using unbranded or re-branded items of kit at races. Most famously the pros turn to Ambrosio wheels during the northern classics period where strength not weight is required. I think last year Sky used them at Paris Roubaix, but they weren't the only ones. Look also at the bottle cages . . . out goes the high tech carbon, in comes the aluminium and steel. Riders clearly are not stupid and if they don't believe something will work then they dump it and move on even if that means mechanics have to spend long nights removing decals and branding marks in the process. You see it's all about confidence.

I lost confidence in my headset yesterday, I couldn't shake the feeling that the last shop to touch it had overtightened the damn thing. Headsets are not my area of expertise, but I know that if I have a choise as to what piece of equipment I'd least like to fail it would be the headset. I just had visions of the bearings somehow braking and the fork failing while coming down a hill at 50kph. I took the whole thing apart and very carefully started to rebuild it. 

Threadless headsets are a fine balance between various pieces working in unison. The key is to understand the function of each piece. For example the bearings are not double sided and when they're covered in grease it's hard to tell which way they should go in.  Then there's the expansion bolt and top cap. You have to have these tightened and aligned correctly with the bolts on your stem because together they work as a unit to pull up the fork and lock it tightly in place so as it doesn't shift around and break. Watch the video and you'll understand why you need to do this a lot and have someone show you how it works so as to avoid catastrophic failure.


Monday, 18 March 2013

Baby it's cold outside . . .

It's been a while since I personally had to bring out the winter clothing for cycling, but on Sunday morning in Orange NSW I was wishing I had my Assos winter jacket and neoprene cycling gloves. 

I made the classic error of mistaking sun for warmth and spent a couple of hours with numb fingers and cold arms. The worst part of it was that I had sufficient gear with me back in the hotel room and therefore only had myself to blame on the first decent of the morning near The Pinnacle about 12k's out of town. 

Weather at the top of the main climb was clear, cloudy and about 8ºC. It was a good ride, but boy was I happy to get back into town where the temperature was closer to 12 and we were riding in the sun. In Sydney it's very easy to forget how cold effects you on a long decent as the temperature variation from 200m's to sea level at 50kph never really bothers you.

On Saturday we had ridden about 100k's. As usual I did my classic trick of forgetting to restart my Garmin after the coffee stop about 70k's into the ride, so I missed about 6k's of tracking. 

Really great countryside, a couple of good challenging climbs and a wicked 12º decent through the Australian bush. The Cannondale was purring most of the way, though I have managed to convince myself that the shop over-tightened the headset. No problems with my Fulcrum racing Zeroes though and I was glad that I hadn't chosen the Cosmic Carbones as there was some cross wind on both days of riding. I was very happy that even though I wasn't the strongest rider in the group by a long way, thankfully the ceramic bearings in the Fulcrum's had me making up time that rightfully I didn't deserve. A great weekend of riding, wine tasting and dining; the equal of anything I could have had in Europe without the famous name climbs of course. 

In terms of cold weather riding my own complaints need to be put into perspective by what happened at the Milano - San Remo.

I've driven the valley road from Milan to the south many times in all seasons, but I never had to face the snow perched on the back of a carbon racing bike at 50kph in the snow while wearing lycra. The race was actually stopped around the half way mark due to treacherous conditions in one of the tunnels. Riders were put on team buses and moved south to about a 130k's from San Remo.

The peloton was separated according to their arrivals times at the race break point. At that stage it became a 130km sprint that was clearly going to favour sprinters who now had the benefit of avoiding some of the climbs that had caused Cavendish to basically drop out in 2012. I won't call it an all time classic but it was interesting to watch.

It was cold for cyclists on the weekend and cold for bank depositors as well. Cyprus and cold weather rarely get mentioned in the same sentence, but I'm going to do it here. The Cypriot banks remain deeply underwater and in need of a fresh cash injection. The good news is that for a banker such as Mario Draghi and his unlimited printing press his €10bn share of the bailout the Cypriot President is trying to get through parliament should be no problem. Of course it did make the markets a bit nervous because some people can see the potential for the bigger problems elsewhere in Ireland and Portugal resurface looking for their own renegotiated bailouts.

The Cypriot bailout plan was going to establish a levy on all deposit holders as a part payment solution to the problem and in return be offered bank shares covering the full amount of their losses, while those who left their savings in banks for another two years would be rewarded with bonds backed by future income from exploiting Cyprus’s natural gas deposits. This was reshaped over the weekend with a 6.75% levy would being imposed on all deposits under €100,000 while accounts over that would be hit with a 9.9% levy. The German-led group of creditor countries demanded this levy as part of last years agreement intended to bring down the bailout’s price tag to European taxpayer from €17bn to under €10bn. It's clearly all a mess, though I like the idea of owning the bonds linked to energy reserves so long as they carry some kind of coupon at an appropriate spread above the benchmark euro rate (which to Draghi means the German 10yr bond).

Of course getting bonds and shares in exchange for a levy may be better than nothing, but given the warnings why didn't people withdraw their savings and move them to offshore banks? Were people just tired of the whole thing? Surely other European depositors will now be rethinking the depositor guarantees that they believe they were given at the eight of the financial problems in 2008. Those guarantees were meant to clam depositors and stall a run on banks. If you were in a country looking for another bailout wouldn't you be opening an account with a foreign bank?

Japan's efforts to talk up inflation have convinced investors they need to be onboard with the inflation led plans of PM Abe. The market shows some interesting characteristics now with four of the nine companies and Reits to be IPO'd in Tokyo this year at least tripling on their first day of trading. That's some very interesting valuation work by various corporate finance groups. Part of the reason will have to do with the fairly limited percentage of shares that get offered in Japanese IPO's as companies look to remain in control of their operations while benefitting from a market starved of new ideas. The other part of the reason is a combination of fear of missing out and irrational exuberance. Japan is looking dangerous again and even in a society that tends to trust first and ask questions later this is looking like a turning point to me unless we see some real signs the economy is growing. Investors need to remember that a quarter of a years profit growth based purely on an FX move does not mean the battle, or for that matter the war is over.


Friday, 15 March 2013

30º climbs . . . the weekend

A little something for the weekend. Here's the now famous last stage from the tirreno-Adriatico on Tuesday. If you want to skip the preliminaries and just see the pain on the 30º climb fast forward to about 1:22.

Anyone who doesn't think cycling is hard needs to watch this. When you have pro's snaking back and forth across the road to mitigate the steepness you know that it must hurt. What about the number of guys who just get off and try and walk up? Amazing.

To go up these hills you need to lose weight. Most of us know this is hard. If you're like me when you hit your dieting limit you shed some weight by spending more on a bike. So as you know my Cannondale Evo is about the lightest frame you can buy. And it seems a relative bargain for around $4000 (frame only), but if money is no object you can buy a bike with a touch more of an aero frame . . . . $10,000 for the latest Cervelo frame from their California skunk works.

Apparently it has all sorts of nano technology integrated into it. I guess once you fit it out with Campy Super Record EPS and (say) some Lightweight™ wheels etc. you won't wave much change (if any) from 25 grand! Check out the full details here: Cervelo

I'll leave the financial thinking for Monday in the great tradition of Australian productivity.

Remember if you're near Orange . . . the cyclist you give a an extra metre to while passing in your car could be me. Thanks.


Thursday, 14 March 2013

Participation . . .

As much as I worry about my old shop UBS they still can produce research. I won't reprint it here but I received a really great series of charts showing the participation rate for stocks in the current rally. It's a simple idea and all they did was look at the number of index constituents in various countries now above the 200 day moving average. They also sent me some views on iron ore and other commodities. It all makes some sense, but the problem is that the whole thing can be taken apart very easily by a switch in policy emphasis and that's why most people I meet are under invested in equities . . . no one trusts governments.

I never caught the gold bug. The market also looks to be tiring of the yellow stuff because some of its biggest investors have started cutting their holdings. Lots of stories yesterday that Soros was liquidating his holdings in various ETF's. Soros likes to portray himself more like Warren Buffett and less like the gambler he once was. I'd like to know his feelings about gold. He must  have concluded that so much more de-leveraging needs to be done that inflation id dead, or maybe he figures that there are better places for his money in the short term. Whatever the reasoning he's nearly out and investors might now re-examine their positions in the knowledge that the price hasn't completely collapsed. I still don't like gold stocks because so much of the margin seems to get frittered away, better to just buy gold if you like it.

During the last 3 years the Germans have benefited hugely from a weak Euro, so much so that their relatively austere stimulus as had their European partners particularly upset. One can only imagine what a Deutsche Mark might have traded at if it had been available during this period. Now leaks are coming thick and fast that Germany should join the Keynesian party. Wolfgang Schäuble the German finance minister, said on Wednesday that his budget for 2014, involving spending cuts of more than €5bn to trim the total below €300bn. He wanted to push back against such lose monetary forces. €5bn isn't really much of a cut so we can take this as being pure symbolism. Germany will now reach budget balance in 2015, a year earlier than required under the “debt brake” written into its constitution . . . the French of course are likely to miss all their targets as Hollande realises all his big taxing initiatives are going to add up to nothing.

Here is Sydney one of the major talkback AM stations has been running a competition for listeners to win premium economy tickets on various Cathay Pacific routes. I hadn't paid that much attention until yesterday when they reported full-year net profit of HK$916m (US$118m) versus a net loss in the first six months of financial year 2012 of HK$935m. That's a pretty good turn around and they seem to have a region leading cost income ratio of "only" 64%. That's why I hate airlines. . . .  64% seems absurd in an industry so leveraged to a commodity like oil. The buffer that Cathay has seems just ridiculous given the risks. Having said that airlines are cyclical for a reason and if you pick the cycle right and have the premium seat focus you will get rewarded . .  get it wrong and you'll be discounting those extra wide seats and eating into your margin.

I also noted this weak that Ryanair, the least premium airline in the world was making a $15bn order for new aircraft. On the short haul routes of Europe they have great flexibility and a mad man (with greatest respect) running the company. Of course they'll be leasing the aircraft in question what mad man would do otherwise?

This weekend I'll be riding near the country town of Orange in NSW. We're doing a 100k's on Saturday followed by a trip to the vineyards for some wine tasting. On Sunday we'll be taking it easy with an 80k morning jaunt.

I now have the Cannondale and the nightmare of the braze-on tab seems to be over. I took her out for a spin yesterday and discovered that the guy who did the work had left the old rivet pins in the down tube. That was was annoying, but easily solved by taking out the seat post and turing the bike upside down. I'm always a little hesitant with these carbon seat post and I like to tighten gradually taking the torque wrench up about a half a NM at a time. The seat clamp said 5NM, but I stopped at 4.75 and thought it looked good to me. Sure enough no slippage. f course I had wiped down the seat post and added a thin smear of carbon paste before re-inseting the piece.

When I did finally make it out I just couldn't believe how badly aligned the front derailleur was. I had to stop in and see ex-Cannondale dealer Andrew at Bike Lab in Bondi Junction to get him to adjust the gears. He did it as a favour and I promised to bring him over a bottle of wine next week. While Andrew was fixing the bike I helped a lady customer who had the guys pack here bike ready for transport. Until I picked up the box I thought it must have been a new racing bike . . . I mean why else would you take it on holiday with you? The box had to weigh 25kgs. I had a look inside and realised it was a 20 year old mountain bike. I asked her where she was going and she said Jakarta! I mean of all the places on earth to take a busted up old bike. I reckon a $100 would have bought her a better bike from one of the numerous street bike vendors. On top of that I really hope she's insured because traffic there is horrendous. I didn't say anything . . . I mean what could I say. She seemed nice enough and had to be in her mid-50's so she wouldn't have wanted a bloke like me telling her what to do.

When I go on vacation I prefer to get away from the cities if I'm riding. Check out this video . . . riding the Stelvio pass in early spring:

Makes me want to dig out my winter gear and call an airline. 

Tuesday, 12 March 2013

I'm at the end of a very shaky supply chain . . .

I have to pick-up the now repaired Cannondale Evo tomorrow at City Bike Depot thanks to Al and the team. After visiting the dentist I dropped in at the shop this morning only to find out that the part (braze-on tab) had yet to arrive. I came close to losing it, but I tried to keep my cool and wait for any news. I apologised to Al for my demeanour and I think judging from his expression that Cannondales local supplier (CSG) may have let him down in the past. Luckily for all concerned the part arrived with the morning post as was quickly fitted. Obviously Al was in a  no win situation. If he tried to harass the supplier he may have ended up at the back of the line for a whole host of products and parts. Once again this proves that supply chains are problematic for many businesses. I mentioned this recently in respect of Boeing's problems with the 787. The problems with my Cannondale are a great example. I guess the only thing you can do is threaten to switch brands and hope this enables you to get back some "hand" in the relationship.

One man with hand in the cycling world is Peter Sagan and his Cannondale Evo Super Six. Sagan did it again at Tirreno - Adriatico yesterday. Apparently (I haven't seen the highlights yet) there was a 365-meter, 27% ramp which featured three times on the circuit around Porto Sant’Elpidio and riders were forced to climb back-and-forth across the road. Alberto Contador was quoted as saying: “Sometimes you don’t believe it’s possible to go up on the bike.” I guess that says it all.

It kind of makes me want to go for a ride in the rain. Sagan is awesome isn't he . . . you gotta love that kissing of his own biceps as he crosses the line.

Back to finance and lots today regarding the financials and the way the Europeans are going to be paying their staff. I honestly don't care a lot about this. I reckon they could have kept the old low pay - high bonus system and tweaked it a little to allow for longer tails on compensation instruments and the bond type structures everyone seems to be issuing. I kind of think it's unseemly this rush to double or quadruple base pay ahead of an artificial cut-off date and it does no one any credit in the eyes of the public. Perhaps more important is the wrangling about various capital ratios.

Here's a graphic from Barclays courtesy of the FT. What we can see is a general de-leveraging by financial institutions. Don't be mislead by the fact that the US banks seemed less leveraged than their Euro cousins because we know the US banks hold a lot of leverage off balance sheet in SPV's. On Monday UK banks started to try and push back against the legislature's attempt to require them to hold a higher amount of reserves than that set under Basel III. Maybe they'll get somewhere on this and maybe they won't. It seems to me that the capital reserves no matter how you frame them can never 100% guarantee that a bank doesn't fail. The problem will be how much is left when the regulators step in. I'm guessing no one in government or parliament for that matter in the UK wants a repeat of RBS. Whatever the result investors have to be aware that it's unlikely you'll ever be seeing 20% RoE's again without some extraordinary circumstances. That is why I have been staying away from financials . . . so far to my own cost.

The asset sales by zombie-ish institutions are picking up pace. Commerzbank who was at the centre of the bank-insurance merger craze is selling off their UK property interests. I for one didn't even know they had £5bn in property on their books! The assets in question come via the acquired Eurohypo business that the regulators have told them they need to sell by 2015. I wonder what the book value of these assets was at the height of the boom? I'd also like to know what the occupancy rates are and the duration of the tenancies. With Sterling at 1.50 the Euro denominated balance sheet of Commerzbank is about to take a hit . . . . luckily the bank is state bank. Danke people and tax payers of Germany.


Monday, 11 March 2013

The moral hazard revisited . . . never promise what you can't deliver

We've heard a lot over the last couple of years about the "moral hazard"connected with the world post the 2008 crisis, but even now we're seeing the ramifications of central bank activity in the financial markets. One of the central pillars of liquidity, the short term repo market has again been shrinking. The FT reports that the market dropped 11.9 per cent in the year to December 2012 according to the latest bi-annual survey by the European Repo Council of the International Capital Market Association. Why does this matter? Well the trouble now is that the banks are reliant on central bank facilities to cover short term liabilities. The result is that money supply and the correct assessment of risk in the system has been shifted to faceless men. If we consider the recent statements emanating from the Feds Open Market Committee (FOMC) we know the key central bankers are worried about the current course but seem somehow reticent to reveal their plans for weening institutions off central bank funding facilities for fear of impacting confidence (as evidenced by market reaction to the said recent minutes) and causing a run on weaker institutions. The moral hazard was not letting some institutions go bankrupt, the hazard to normalisation is keeping the same banks going concerns in the hope that they somehow de-leverage and can be cut adrift in a more regulated market. My own view is that markets are now reaching a point where either they are strong enough to stand on their own, in which case legislators need to step in and take back control of their economies or we continue to see general debasement of risk, in which case there are more new highs in equity markets to come.

The ECB has been somewhat quiet recently. If we look back at the frantic pace of announcements since Mario Draghi assumed the hot seat at the ECB what are we to conclude? Clearly the European economy is still under pressure. It could have course meant that the ECB is saving a rate cut for a time when we have another political crisis. I had suspected that the inconclusive Italian elections may have flushed the ECB out of it's bunker, but it didn't and I now can only think that the ECB will work behind the scenes to get Italy sorted out. The markets would fly if Mario Monti could head a coalition of any colour and it's likely that the ECB would not act. Of course in the case of another election with an inconclusive outcome the ECB would act to loosen monetary policy.

Sterling continues to look under pressure. It will be interesting to see what newly appointed Governor of the BoE (Canadian Mark Carney) decides to do. What if the government goes to a Plan B and starts spending again? Would the BoE go easier on QE? Carney didn't have the same pressures on him in Canada as he does now. He did lead G7 central banks in backing the calls for liquidity stimulus when markets looked likely to fail in 2008. The question is does he believe UK inflation is dead and therefore the economy could take a dose of QE + government spending. I've been tempted in the past to buy some sterling and that's one of the dangers of history. I lived in the UK when the GBPAUD was 3 to 1 - it's now 1.46, so to me it looks like a bargain. It may or may not be, but times have changed and when Gordon Brown broke his "golden rule" in 2005 (i.e. over the cycle the current budget must balance or be brought into surplus) it allowed £22bn of borrowings to go straight into the economy fuelling the final stage of the liquidity bubble that burst in 2007-08. For me now to expect the GBPAUD to get back to the old highs commodity prices would have to plummet and I don't believe that's likely without some major defaults in the global economy.

As I have said before I'm enjoying being back riding my Pinarello Dogma 60.1. Lately I've had a chain drop problem and I had to make some adjustments to the front derailleur this morning. The problem was that I was losing the chain in the shift from the big ring to the small ring when I had the back ring in the low third (easier) section of my rear cassette. The first thing I did was change the limiter so the gap between cage and chain was close to the recommended 0.5mm when on the lowest gear (small ring front, big cog back). Obviously this proves the old addage that you need to change gears before you get to a hill and go through the progression in a smoother fashion. While I was at it I also tightend the shifter cable for the front derailleur as the shift from small back to big ring was not as "snappy" as it once was. The result on today's ride was now dropped chains.

Lovely day here though I wish I'd been in Nice on Sunday to watch Richie Porte win the Paris Nice. Sky looked so well prepared compared to the other teams that the time trial to end proceedings hardly seemed worth the problem. I forget which commentator it was but there was a nice bit of insider knowledge about Sky's understanding of power meter readings. The riders just sit on a level shy of their max output and patiently keep the tempo there and peel off at pretty much at pre-dertermined points. This of course would have frustrated the hell out of Mark Cavendish last year as tempo is less important than positioning for the sprinter stages. That's why Cav went it alone so often at the TdF last year. All this makes me want to go out and get a power meter for my bike, not because I really need it, but rather because the science interests me.

 And finally an update on my damaged bike. After finding out that my new braze-on tab didn't get fitted to my Cannondale Evo SuperSix last week due to a ridiculous piece of bureaucratic logic by the local Australian supplier CSG I was pretty mad. Honestly it's amazing the thinking that says I might not want to repair a $4,000 bike frame because the supplier won't cover a $50 part under warranty. Here's the thing - don't think please, just send the part to the shop and call me and tell me it's a 50 buck fee on top of the labour costs. The angst this type of customer service causes is just another example of how companies get things wrong. I tried not to get upset with the local bike shop guy as it wasn't his fault. It all made me start looking at new bike frames onto which I'll attached the stripped components from the Cannondale. I'm thinking Colnago or Wilier . . .  a C59 or Zero7 . . .  Thoughts?
Wlier Zero7

Notice the pop rivets they use towards the end of the video to fit the braze-on tab . . . ?


Thursday, 7 March 2013

New tech and new highs . . .

This is great. Watch this video to see how bike wheel hubs really work and also watch some cool technology . . . 

The catch with this one is that these hubs are heavier than what you'd see normally on a top end road bike. The parent company of Gokiso is Kondo Machine Works Corp which I'm unable to decide if it's listed or not on any of the Japanese exchanges. The technology looks to be derived from their activities producing industrial grinding machinery, specifically high-end spindle wheels and associated bearings . . . which when you look at some of their machines makes a lot of sense as something that can be leveraged into wheel hub production. As much as I hate what the Japanese have done and are doing to their economy it's companies like this that always puts a smile on my face. I'd love to get more information as to who owns the company, but my guess is that the President Mr. Kenji Kondo is either the founder or the son of the founder as the company was established in the 50's. Investors should always look out for transformational tecnology such as this wheel hub because often it signals a change in direction or growth phase for a company. I'm not a big fan of micro caps (Kondo Machine works has 100 employees and ¥19.15m in capital) but often they can lead to an opportunity. Look out for Mr. Kondo's wheel hubs. 

The Japanese Yen is still trading at the weakest point in some years and part of me thinks that it's run very hard on the jawboning of the new government and the appointment of a new BoJ Governor. 

Committing the country to a debasement of the currency is like telling the world you'll never pay back your debt, but as most of your bonds are held by your own population that might not matter if your population shrinks enough. It's like a ponzi scheme . . . if you die before the country defaults you don't worry because you got your money out. I kind of want to play contrarian and buy the JPY here, but doing that in every other QE-addicted market has been such a loser that you know if you did that you'd want to be pretty light on your keyboard and take profits quickly. This one is for the pro's only.

Obviously you'd expect Shimano (7309) to track the JPY like most Japanese exporters. For the cycling investors here's the stock chart.

I'm not sure how many Japanese companies are trading at all time highs, but here's one with return on equity at over 10% v. a Japanese Government Bonds trading at closer to 0.5%. There's reasonable growth and if you trust the management to execute on their leisure focus based on the baby boomer retirement patterns it probably remains a stock to watch.

It's good to get away from looking at Australian markets. I think the problem for many Australian investors is that they allocate very little to international equities and to be fair that's been an OK strategy during the recent resources boom. Now though it seems to me that a look at Asia and beyond would be advisable. I know I've always said that ETF's are dangerous products because of the possible failure of an issuer. That of course misses the benefits of ETF's that have given many the opportunity to invest in a more diverse set of equities that normally either wouldn't be offered on an easily accessible exchange or would be prohibitively priced in terms of brokerage. 

It's always worth checking the various listings of any investments you are interested in. Australians for example all know about the BHP v. BLT dual listed arbitrage, yet few bother to try and invest in the London version of BHP because it remains in the "too hard" basket. The Australian line still trades at around a 20% premium to the UK line and if while I think it's a very long shot that the dual listed structured for BHP or Rio Tinto is ever collapsed it might make some sense if you thought that the new CEO's at either company were inclined to adopt a position of splitting out units into individual companies. Rio for example is dominated by iron ore and because of the failure of their move into Aluminium was reluctant to do anything at the corporate level until they stabilised the balance sheet. Much of the same story goes for BHP, who if anything have a better balance in their structure and have the experience of doing this before when selling off their steel division. The easiest way from a compliance point of view would be to collapse the dual listed structure and issue shares on new entities. I could be wrong, but even if it's a small possibility I bet the various investment bankers are spending lots of man hours trying to come up with something that allows directors to un-lock value etc. I wish I could see some of the presentations.

Tirreno-Adriatico is now with us and we probably shouldn't be surprised that Omega-Pharma Quickstep took out the team time trial as it was anchored by Tony Martin. That means that Mark Cavendish as team leader gets to wear the GC jersey for the first individual leg. I've only seen the short youtube highlights so far but the wet weather looks to have added some spice to the day.

I managed to see the extended highlights of stage 2 of Paris - Nice. A really exciting sprint finish to this one:

Kittel was good, but earlier around the 20km mark not covered on these highlights Tom Boonen goes very hard and toys with the peloton. Clearly this is a training exercise for the Belgium champion ahead of the northern classics. Boonen for mine is looking good. His compatriot and reigning world champion Philippe Gilbert doesn't seem quite as comfortable, though he's not that far off the pace. As I said previously Paris - Nice is not my favorite race to watch, but it does have it's moments.

Finally I managed to get out this morning for a ride on the Pinarello. No news on the Cannondale yet, but I'm keeping my fingers crossed. I was a bit late leaving home at 7am and at times I felt like every tradesmen's truck and 4WD in Sydney's eastern suburbs was trying to knock me off my bike. I tried to keep cool and by the time I hit the beach front at Bondi I had decided to head to the safety of one of my usual cafes. 

Not a great rides in terms of the numbers, but definitely a success in terms of surviving morning traffic. The lesson here is get out at 6am or wait until after the rush hour . . . 


Tuesday, 5 March 2013

Caught between seas . . .

I was in central Sydney this morning meeting a few people involved with a cycling trip I'm planning in a couple of weeks time. While sipping my expertly made coffee (really puts Geneva to shame) I started to consider the retail environment around me. Sydney was never a great shopping city, most of my mothers generation if able managed to con their partners into a couple of days in Melbourne where the variety was far better. Its' changed around a lot with the central precinct now boasting the usual high-end names backed up by Westfield's massive redevelopment of the formerly down market strip of arcades and cheap fashion outlets on the Pitt Street Mall. The Lowy family who control Westfield's various operations have come a long way from the days of Frank Lowy selling small goods from a shop in South West Sydney's original mega-mall Roselands. I went there when I was a kid with my grandmother and it was special for the times as it made shopping easier and more comfortable. I think the most important thing Frank Lowy learned was that cleanliness equals confidence and that's why most of his operations are full of the ubiquitous "mall cops", janitors and clean bathrooms. Give a mother a place to park safely and a clean toilet and I'll show you a loyal customer. McDonalds did the same thing in fast food and it works.

Why do I mention all this today? Well Aussie retail sales figures for January came out this morning and show sharp rise, up 0.9% which was better than expected. I'm guessing the rate cuts before Xmas had a very positive effect on consumers, but January is a sales month and there was clearly some pent-up demand. On top of that the RBA left rates unchanged stating:

"In Australia, most indicators available for this meeting suggest that growth was close to trend over 2012, led by very large increases in capital spending in the resources sector, while some other sectors experienced weaker conditions. Looking ahead, the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen."

So all good in the land down under?

If the retail environment is getting better and the RBA sees no need for another stimulus via monetary policy why is the Lowy family opting to sell out of one of the Westfield property trusts at a 10 per cent discount to net tangible asset (NTA) value? Apparently another of the Westfield property trusts will sell down its Australian and New Zealand property portfolio. Clearly the Lowy's don't believe their own NTA's and therefore neither should we. I think the Australian economy remains caught between the perils of a high dollar which is killing off manufacturing jobs and concentrating low skilled labour into a housing sector already too big for the size of the economy (remember Spain) versus a still somewhat booming resource sector all to reliant on Beijing's policies.

Yesterday of course Beijing decided to start putting an end to some of the free-wheeling speculation in their own property markets. A lot of the measures are actually just centred on the enforcement of capital gains taxes that are already on the statutory books. It was enough to have he Chinese market hit hard. On top of that I've been hearing a renewed round of forecasts saying Iron Ore is heading below $100 again.

That makes sense if you think China simulateously is able to stop property market expansion and deliver a GDP growth number of 7.5% as the government has now announced. Something has to give. Is that something Australia?

Elsewhere I was intrigued that Warren Buffett has weighed-in on the debate over the amount of cash Apple is holding on.

Warren talks to the ladies of CNBC
Buffett asserts that Apple needs to think about what to do with its 137bn and he clearly favours a stock buy back. He's right if Tim Cook believes he has a new revenue driver, but if not he may need to retain cash. Remember also that the hurdle for buying back stock is very low for CEO's at the moment. The cash risk free rate as provided by the Fed is less than 1% so a CEO who says "here's a bigger dividend" to his shareholders must not have much confidence in his or her business. That's probably a little too simple, but the fact is that this is what is happening. This is why equities are so risky right now and as an example have been a dog investment in Japan for 20 years. So next time you see a company who normally doesn't pay a dividend actually pay a dividend start asking some questions about your continued involvement in the stock.

I haven't ridden today as I managed to get to the gym for the first time in quite a while. No news on my Cannondale and I remain somewhat nervous regarding its' recovery. I would say that the Pinarello was fun yesterday and the sun is once again shinning in Sydney so I hope to have it out again tomorrow. The race to sun, Paris - Nice has started and I have to say the TV coverage is pretty good here via local public broadcaster SBS. I'm not a big fan of the race and will reserve my nights on the couch for the Tirreno - Adriatico which starts on Thursday. This one looks stacked and includes Foome (Sky), Contador (Saxo), Peter Sagan (Cannondale), Samuel Sanchez (Eskaltel Euskadi), Joaquim Rodriguez (Katusha), Mark Cavendish (OmegaPharma-Quickstep), Vincenzo Nibali (Astana), Andre Greipel (Lotto-Belisol) and the young Tour Down Under winner Tom Jelte Slagter (Blanco). On  top of that the scenery will be "fantasico"!


Monday, 4 March 2013

Not as bad as I thought . . . 6 sigma quality control

I've been pretty much in worry mode since Friday when I found out that the "braze" that holds the front derailleur on my Cannondale Evo Supersix had cracked. It's hard to work out how this could have happened, but I suspect that the cable was too tight and that under load last Wednesday the various forces came together to crack the metal open at the bottom of the slot. Luckily the frame itself is undamaged.

There is some good news because I called City Bike Depot here in Sydney and spoke to Brian about things before calling the Cannondale supplier (CSG) direct. It seems they've seen this before and he told me to bring it in and speak to the head mechanic. A relaxed Scotsman known as Al was a bit pessimistic at first and like all tradesmen in Australia wanted to talk down the chances of fixing it. The original diagnosis was "new frame" and warranty not covered internationally. I kept my cool and prepared for the worst as Al got on the phone to CSG to discuss the problem. I was surprised when I got the answer that CSG was sending over a new braze kit with the instructions and my costs would have to cover stripping out the bottom bracket etc. I asked Al how confident he was of fixing it and he didn't flinch and said it should be alright. So I promised the boys a good bottle of Italian wine if they fixed this as I'd really like my bike back and ready for my trip to Orange with my club on March 16th.

Just out of curiosity I stopped by to see Mike Shaw at Atelier de Velo to discuss the Cannondale with him. He said it happens now and then and that sometimes it's easy to fix and other times as with Giant frames it can be a long fiddly process because one of the important pieces of the puzzle is what backing there  is inside the down tube. I guess I should have some faith in the process given the number of high end bikes in Sydney now days. Mike even told me that some new bikes come with lose brazes that require a retro fitting before going to a customer. I'll keep my fingers crossed that all goes well.

Going through this carbon fibre nightmare I was starting to appreciate Boeing and other aircraft makers problems when engineering and constructing composite materials. There are only three rivets on my carbon frame and if failures are not uncommon what should we conclude about the process of building a 787 or A380? The fault checking must be a nightmare . . . imagine the consequences of failed riveting on an airliner.

In the late 90's a number of large corporations adopted six sigma method originally developed by Motorola in 1985 as part of their overall corporate structures. GE under Jack Welch were probably the most aggressive users of the science in which 99.99966% of the products manufactured are statistically expected to be free of defects. Generally it all makes good sense and I was once presented with a thesis at a UBS managers briefing that spoke about the elevation of our back office from three sigma to five sigma and the associated cost savings. In general terms we often found that hiring extra process staff equated to greater savings from "failure-less"document production. The problem of course was that once the process starts to be executed at a higher rate management are often lulled into a false sense of security in respect of what is achievable. Thus in the current environment with off-shoring of processing and pressure on human associated costs upper management often feels more can be done with less without sacrificing production.

The greatest example I can think of regarding a processing failure was the implementation of robot signing technology in the US mortgage market. It was a classic case of seeing a documentation process as a manufacturing process devoid of human input. The problem is, as many institutions found out to their cost, that the courts see each step along the way to a mortgage as a check and balance. In other words the idea that a bank representative is in a room when you sign is so he can ask you "do you understand what you're doing?" In fact there are a whole set of cooling-off provisions also within many contracts. I once had a manager say to me: ". . . look we're just trying to build a product factory here . . .  just get the thing done and make sure we can replicate it . . ." So much for that.

Finally in case you're wondering why I haven't said anything about the sequestration crisis I would say because no one would listen. The markets are assuming that this gets solved sooner rather than later and the most optimistic of commentators are suggesting that we get a simultaneous resolution to the soon to be faced debt ceiling talks. Of course maybe they're wrong . . . ?