Tuesday, 30 April 2013

Dig a little but don't mess with small things too much . . .

The stream of news on my iPhone home screen is my first connection with the world most mornings. This morning's top story was Deutsche Bank looking to sell 90m new shares and raise €2.8bn.

I'm still amazed that it's taken so long for DB to do this, but so be it. The co-CEO's Jürgen Fitschen and Anshu Jain have been under a lot of pressure to get the balance sheet cleaned up ahead of the Basel III changes due in 2018. Germany of course is desperate to show leadership on the issue of solvency and even if the DB chiefs had wanted to chance their hand and waited for the European autumn I'm guessing they had little choice. So where does that leave DB? Well given they have some €2trn in assets a capital raising of this size does very little if they don't have the assets marked correctly. If they have everything lined up right then their Tier 1 capital goes to 9.5% which to me still seems low for a systemically important institution such as this one. I'll guess that this won't be the last capital raising we'll see, but it's positive for the moment even if the bears will cry about the pop in the share price today. 

Meanwhile in Australia one of the four pillars of the banking system reported. I have never really followed the action at the ANZ, but the reason I picked up on the news today was the headline talking about a drop in expenses. The local operations saw a 9% increase in earnings, while the overseas ops managed only 3%. The key was the productivity gain from cutting 2000 heads going to 47,419 from 49,509 over the last 12 months. The bank also commented that mortgage demand in their core franchise remained near all time lows. As I've said before, head cutting tends to be a one trick pony unless you believe that technology is making rapid strides in it's ability to scale operations. We know from the US experience that technological advancements can often prove overly seductive as is exemplified by the case of the "robo-signing" at BoA/ML amongst others. There was also a slight increase in bad debts bad debts to A$599 million from A$570 million a year ago due to ongoing stress in some parts of the economy. ANZ still has to raise capital to meet the local Basel III requirements as they currently have a tier 1 ratio of only 8.2%. The good news is that with RoE at a healthy 15.5% they unlike DB have the luxury of time to get things in line. I won't be buying ANZ shares where they currently are, but I fully appreciate those that might keep these rather than jump on the DB offering. 

For the record the other Aussie banks report: Westpac Banking Corp. May 3, followed by National Australia Bank Ltd. (NAB) on May 9 and finally Commonwealth Bank of Australia, the largest lender, on May 15.

Still on an Aussie theme, though it's really only an historical touch point I noticed that BHP Billiton is selling their Pinto Valley mine and a railroad in the U.S. for $650 million in cash. Pinto Valley is projected to produce 130 million pounds to 150 million pounds of copper in concentrate and about 10 million pounds of copper cathode a year, as well as molybdenum and silver. The buyer is Capstone (CS) and they'll pull copper out of the ground at a cost of about $1.80 v. current spot of $3.20. There's one point I'd make here that like nearly every global business in the last 10years they let things get out of hand when the going was good and the Chinese were happy to buy everything on offer. In adopting such swashbuckling ways they took their eyes off the ball and let things get away from them. They've now sold $5bn of assets in smaller operations in the last 12 months. Someone at BHP has said enough is enough: "let's get the big things right". The legacy of Marius Kloppers is that you can only do so many things and get them right. I now own some BHP and hope that the current management trend continues. 

I've often been criticised for tinkering with my portfolio too much over the years and I think that's fair. I do the same thing with my bikes because I think I get obsessed with having things running perfectly. Yesterday I dropped off my Campagnolo Bora's to have the tubulars replaced and in doing so I switched the Fulcrum Racing Zeroes to the Pinarello and brought out the Mavic Cosmic Carbone SLR's for the Evo. It's not as easy as you might think because there's a lot of brake pad swapping that needs to take place. With the Mavic you need the special Exalith pads for the coated braking surface. The good news is that I love the exalith surface for pure stopping power; in fact I think it's better than Aluminium. The bad news of course was that in making the pad switch I managed to strip out one of the brake bolts that hold my shoes to the Campy SR skeleton brakes. 

It's easy to do this if you are me because you start to get overly picky on positioning which made me make several attempts with the torque wrench when I should have just left well enough alone. Live and learn. I ordered replacement bolts from an overseas supplier as trying to get this stuff in Australia is near on impossible. I get 4 bolts with washers etc. for about $45 from Slanes in Ireland and they should arrive in about 5 working days.

The Mavic wheels rode really well, and while I'm not sure the bearings are quite as good as those on the Fulcrums or the Campy's it's hard to complain too much. 


Monday, 29 April 2013

Taxing as a time trial . . .

Last year some $3.5tn of foriegn funds were invested in the Dutch economy and $2.28tn in Luxembourg. Massive numbers in both cases that would normally have you thinking that inflation in such small companies would be rampant. Of course the real story here is that only $573bn ended up in the “real” Dutch economy and $122bn in the Luxembourg neighbour, the rest is part of various SPV's  meant to shield companies from the usual national taxes payable on profits. I've said before on this blog that these type of jurisdictional anomalies exist for a reason, mainly to enhance (in these cases) the economies of the Netherlands and Luxembourg. The trouble of course is that both of these countries belong in the EU and therefore is seen by many to undermine the tax base of various member states. My former home of Switzerland seemed to spend most of existance thumbing its' nose at various jurisdictions before finally realising that the model was breaking down. The post 2008 world seems to me to be in no mood to accept this evasiveness anymore and via a combination of carrots and sticks will eventually unwind the anomalies.

The Irish for all their failures to secure a sound basis for their rapid growth in the 10years prior to the crisis have stuck to their guns and kept corporate tax rates much lower than the EU average. The socialists who have dominated the EU for many of these years have always considered the Irish an exception to be wooed back into line, but now we're seeing places such as Portugal try the same trick by lowering their own corporate tax rate to 24%. I actually don't think that will be low enough in the arms race to attract investment, the UK is likely to cut into the low 20%'s itself, which with its' various advantages (legal system, workforce, language, etc.) should trump most players. If it wasn't for the troika and the strings tied to various bailout packages I'd be telling the PIIGS to cut personal taxes as well in a fashion similar to what happened in Russia in the 90's.

Russia replaced income tax rates of up to 60% with a 13% flat tax and in so doing saw personal income tax revenue rise by 25.2% in the first year, 24.6% in the second year and 15.2% in the third year. I know the Laffer curve has been given a bad name by the renaissance of the Keynesian economists, but the results of the Russia experiment is just too obvious for the incompetent and corrupt systems of some of the victim countries of the 2008 crisis to ignore, even if their masters in Brussels would prefer to brush it aside as not applicable. My point of course is that the Netherlands and Luxembourg situation would not exist if a more rational rate of corporate tax was available and the biggest winner might just be the United States. Would Apple be borrowing to pay out a dividend, rather than using its' overseas cash reserves if the US tax rate was closer to 20%? Would that help growth and spur job creation in various jurisdictions. Whenever I rode my bike out of Geneva to the foothills of the Alps I would pass the offices of Caterpillar Europe; it wasn't in Switzerland because of the demand for hydraulic shovels. 

As an investor what does this tell us. The opportunities for macro investment will be best in systems that drive growth via competitive reform of tax and other revenue sources. The UK should be in a better position in the next 2 years leading into the election because for all its' problems it remains sceptical of Europe and importantly retains the flexibility of the pound along with the most transparent and business friendly legal systems available to commerce world wide. As an aside, if you want to get some insight into the UK economy I suggest you read the paper published on April 23rd by the UK Treasury that deals with the prospects for an independent Scotland.

Geneva hosted the final stage of the Tour de Romandie on Sunday. The stage was a time trial that went up both sides of the lake with two 180º turns at points I am very familiar with.

I must admit that the grey skies and the beautiful lake front brought back good memories for me as a rider. I always knew after a long ride into the Alps that as soon as I could see the Jet d'eau that I was almost home:

It took just over 21mins for the riders to cover the 19km course. Here's how I can compare to that. During last years Tour Du Leman I completed the 2.2km section known as Le Sprint du Quai de Cologny in 3'45" and this formed part of yesterdays time trial course:

The pro's yesterday would have completed that section in around 2 minutes and averaged closer to 60kph. I'm not sure Tony Martin, who won the stage would have noticed the "Jet", but I'm sure he would have been celebrating in some pretty familiar clubs and bars along the lake front later.


Wednesday, 24 April 2013

The best way to celebrate a visit to your cardiologist is to go out and ride your bike . . .

Well I did the heart stress test with ultra sound and echo at St Vincent's hospital in Sydney this morning. I know thanks to my weight loss in Singapore and becoming a "person of the bike" that I'm now in the low risk category for heart problems. Having said that, I defy anyone to go through that test and not have at least a couple of "darkish" thoughts about obscure findings that in no way reflect your own general sense of well being. Anyhow, in celebration of a preliminary "clearance" I hit the road this afternoon in a new pair of Rapha Pro-team bib shorts. They're tighter than the classic style I've been riding of late and I possibly could have gone a size up, but that would defeat the purpose as these are supposed to fit like "body paint' and they certainly do that. I liken them to some of my Castelli shorts that I swore by until recently giving them an honourable send off. Neither brand is cheap so the deffinition of bargain depends on how well you judge them to do their job. Either way I'm happy with these. Oh, . . . and I'm happy to have today's stress test behind me.

I think most of the stress around me right now is with the gold bugs. The recent route has been extremely painful to holders of Australian and Canadian junior producers. I can hear the brokers now . . . "mate, this thing is trading at a discount to proven reserves!" Somehow they're missing the discounting mechanism of the stock market. The old adage goes that the market trades 6 months ahead of reality. If they proves to be the case I'd suggest people are now expecting physical gold to go lower.

Listening to Christine Lagarde recently being interviewed on the BBC has me wanting to watch gold carefully. Madam Lagarde always leaves me confused, you know she's a Keynesian first and a socialist second, she embodies the French attitude to everything in finance and economics. She mutely praises austerity while pushing central bankers to print more money. Does Mdm Lagarde own gold? Certainly you would think she should. The more she argues for growth, the more you know that we haven't seen the last of inflation. This blog has never been a gold bull, but neither has it been a bear; rather I've always said that the real-store of inflationary effect will be felt through petro-dollars at some time in the future.

Here in Australia a consensus seems to have been reached that the budget is unlikely to get back into balance anytime soon. That old champion of left wing economics Ross Gittins of the Sydney Morning Herald was the latest senior commentator to suggest that the Keynesian war was won:

It's amazing that he can rationalise the state of the budget and suggest that the spending of the politicians has so little to do with any surplus or deficit. To suggest that during the Howard years or even the Hawke/Keating years the surplus was, oh, an accident defies credibility. Governments make clear decisions about what to spend and those that ignore a boom by spending carelessly will repent in a recession when the cupboard is empty. Today Australia recorded its slowest core consumer price growth in 14 years, the betting now is that the RBA will have to cut rates and that of course will start to weaken the dollar. It's a pity Mr Gittin's didn't allude to the dollar in his piece because if the RBA can get that down through parity this hapless government might be thrown a lifeline before the September election.

My charts of the day:

As readers know I like to follow Apple (AAPL) because in many ways it is the bellwether for American investors. The upper chart shows the segment sales for the company's products. The worry here is not the fall in iPhone sales, we've had that before, but rather the rise of smart phone sales by its' competitors. Coming back against no competition was as easy as a new thiner case and some snappy apps, but now against Samsung and the cheaper android driven phones it's not so easy. The bottom chart shows Apple operating income v. taxes. Admittedly I could have produced the same type of chart for a number of US majors, but this one is the most egregious. At time when the company is borrowing US dollars onshore to increase the dividend rather than paying out from their offshore cash pile and paying the associated taxes Apple is thumbing its' nose at the legislature and daring it to act. Mr. Cook the Apple CEO may have taken the smart option in the short term, but has he taken the right option? The stock price popped and then fell back . . . they'll be more to come on this one.

Today's ride was once again on my trusty Pinarello Dogma 60.1. The more I ride it, the more I appreciate its' handling and comfort. It's still a racing thoroughbred, but not in the ultra stiff way the Cannondale is. I really love the Campagnolo Bora's with tubular tyres as they make you want to go harder than when I ride even quality clinchers like my Fulcrum Racing Zero's or the more aero Mavic Cosmic Carbones. If you've never ridden properly lightweight tubular wheels before I suggest you save your pennies and get some for Christmas because you'll never turn back.


Monday, 22 April 2013

How to run a deficit and lose 10,000 calories without even trying . . .

Readers will know that this blog believes the US is the best bet in terms of global growth for a number of reasons. One reason I didn't factor on was a change in the statistical analysis of GDP. The US economy will officially become 3% bigger in July as part of a change that will see government statistics take into account 21st century components such as film royalties and spending on research and development. That of course doesn't mean an instant employment boom, what it does do though is explain the two speed economy that we've all encountered but have had trouble explaining. The whole way we consume has changed in the last ten years. So much went online and in fact the sales of things such as movies and music has been growing even though we've all seen our local record stores closing. Stats can help explain, but they don't change things alone. Some economists will argue that the negative perception of growth in economies acts like a brake on spending. I think that this is correct to a minor degree and probably effects the bottom end of the economy more than the top end. Look at the boom in luxury goods as an example of this phenomenon. The upper reaches of the economy are hardly effected by slowing growth and are in fact the biggest beneficiaries of cheap credit generated by QE as practiced by institutions such as the Fed. If you want to read more about the changes to the statistical analysis of the world's economy go to: UN Stats

In days gone by the Aussie dollar would take a hit whenever the terms of trade started to go against the country. That's why so many hedge funds have been bearish on the currency for the last two years. Most expected a cooling China to be the catalyst for a move down towards 85c, but that didn't happen. Why? The main reason has been the endless increase in the money supply be the G7. Latterly of course Japan has embarked on the total debasement of the Yen, which of course has pushed the carry traders into higher yielding AAA currencies such as the AUD. The consequences of this is starting to become apparent. According to the Grattan Institute the Australian budget has taken a $7.5 billion hit since the midyear update last October because of the dollar strength impacting on previous forecasts. That means that the combined state and federal budget deficits should reach 4% of GDP by 2023, or about $60 billion in today's dollars and would be about $100 billion in 10 years' time.

Australia can hope the Chinese return to a 10% growth rate or start to budget accordingly now. There's only one thing for certain and that is that Glenn Stevens the Governor of the RBA seems pretty deaf to the AUD and other central banks and unfortunately he's been reappointed by a government 99% likely to get kicked out of office in September. What a mess!

A couple of blogs ago I was suggesting that if you're a European investor then you should have some cash in German real estate as a hedge against eurozone inflation and as a defensive measure in the case of more peripheral shocks. 

An interesting problem has developed for investors looking for a broader, more diverse version of this strategy. The German regulator that deals with investment products "BaFin" has proposed that German Reits should be regulated as investment funds under the EU’s Alternative Investment Fund Managers Directive, due to come into effect in July. That basically in my mind treats Reits like a hedge fund and requires a whole new layer of regulation. It probably doesn't matter a lot to people already invested in the very small Reits market in Germany, but it will inhibit the growth of the sector and make it harder to launch new products. If the German real estate market remains a vehicle only for large insurance companies then price discovery and therefore return remain somewhat opaque. More importantl is where the Germans go so to does the rest of Europe. Consider what might happen to Reits in France that make up a much larger investible asset class? The costs are going to get passed on through the dividend pay-out and to what end? I'll be looking out for the final paper from BaFin and posting it when I have it. 

Bike riding in Sydney has been a bit of a problem of late due to the changeable weather. I can't remember Geneva being like this even in the dead of winter. Sure it was cold, but you could prepare for that. The rain here falls heavily when we have it, not like Singapore mind you but hard enough to have you heading for the safety of your favourite cafe. I shouldn't complain as I'm well aware of the conditions that much of Europe has had this year. On Sunday the Liege-Bastogne-Liege, or La Doyenne was raced with in-form Irishman Dan Martin taking the last of the major spring classics. If you'd like to know what it takes to compete on a day like Sunday you can check out the Strava track for Blanco team rider Laurens ten Dam:

Liege Bastogne Liege with a pro
Amazing stuff and hard for we local road warriors to contemplate. I miss the fact that in Europe's smaller cities and towns you could be off in the countryside in a matter of 30minutes or so, but still have the infrastructure to support you in case of anything going wrong. I've been stranded up a mountain in France, but a steady set of hands on the brakes and a bit of patience from drivers and I always made it home.

I dropped off the Evo for a bottom bracket service today at my local Cannondale dealer. I really would have preferred to give the job to my regular guys, but the cranks on the ultra lightweight "Spider Rings" require a special tool that I'm fairly certain very few people in Australia currently have. I spoke to one of the mechanics on Friday and he concurred that it was a matter of a clean, lube and tighten to get the last of the ticking creaking sound out of the bike. Additionally I noted down a few things and told them to have a look at my headset and cabling. Obviously I'll report on the service and results as I get them in. 

As the Cannondale is out of action I'll be doing some more miles on the Pinarello. It's nearly time to change the tires on my Campy Boras as I've noticed some flat spots developing on the rear wheel. The last time this happened I left it a little too long and the result was that I was lucky to get home without having to resort to the support crew. 

I won't be letting that happen again.


Tuesday, 16 April 2013

Risk-off . . .

Gold was down another 9% yesterday and there feels to be a kind of mini panic in the air. Obviously the news of a bomb at the Boston Marathon didn't help things, but it feels like gold would have fell no matter what other news was coming out. The question now is how long will it take for the dumb money to get out of the shiny yellow metal? Copper was also down a couple of percent and iron ore remains somewhat resilient so far. There's been a big move in the AUD which some are saying should follow gold. That seems a bit of a stretch to me as I would think that volatility returning to the market is the biggest reason for a sell off in the Aussie. The AUD has been the favoured "risk-on" instrument for the market and so logically should suffer when hit by various negative factors.

The Chinese GDP which I mentioned yesterday disappointed many who had expected a print of 8%+. The 7.7% they got didn't seem unreasonable given the reports we've been hearing on the ground. The latest example of worsening conditions in China comes via a reported glut in cement capacity. It's been known for an while that things had been running too hot, but the market seemed a bit surprised when China's Ministry of Industry and Information Technology informed the provinces that 73.5Mt of obsolete cement production capacity will be eliminated in 2013. That spells trouble for the China bulls and probably for inflation as well . . . for the moment.

The commodities boom has been good to the largely privately held trading houses. The latest house to report good times was Trafigura, my old Geneva neighbours. When I say neighbours I mean it literally as my apartment in Geneva was literally up stairs from their then HQ. It's an interesting thing that they've been doing in buying back shares of employees ostensibly so as to stop ownership being too concentrated in the hands of a small number of senior staff who's eventually retirement might stress the company's balance sheet by paying out in one large chunk. Of course the other reason that they do it this way is because most of the employees reside in capital gains tax free jurisdictions. If you happened to be London based and you needed to get paid I'm sure a transfer to the shores of Lake Leman could be arranged. It's smart really and something that publicly listed companies rarely have the luxury of doing. Dividends are also tax effective in Switzerland and Singapore, so you could pay bonuses via that  structure as well, but getting the numbers right can prove fiddly, so better just to buy back shares and reissue new ones where necessary. Good for them.

Of the $3.8bn in profits reported by Citigroup yesterday $625m came via a release of reserves. The street had expected closer to $3.5bn so will probably be happy with the numbers. Citi’s return on average common equity was 8.2% in the quarter, up from 6.5% a year ago. If you ask me that leaves only a reduction in costs (i.e. shedding staff) and the reserves left in the easier part of the ledger for increasing RoE. On the hard part is the net interest margin; competition should remain tough and I don't expect that to improve much in the current rates environment. So what then are we expected to think? Well Citi now becomes more a GDP tracker and less a bounce-back story. It also tells us that getting RoE above 10% is almost impossible for these mega banks now and to be fair it probably doesn't have to try too hard given that the risk free rate of money is less than 1%. Citi for me becomes a slow burner with the occasional spurts of growth via share buybacks and the odd right move in what's left of the rump of it's investment banking division. Not a bad place for your investment dollars, but not for the aggressive short term player.

I dropped my Pinarello Dogma 60.1 off at Atelier de Velo yesterday for it's first full service. Readers will know that I'm just a bit obsessed about the maintenance on my bikes and even though the Dogma had been purring lately I decided that for its' second birthday it needed something special. 

With my dog and my bike in Italy
It won't be a complete rebuild, but it should encompass a bottom bracket and headset service and a bearing check on the back wheel as it has a bit of movement. I forgot to tell Blake that if they have to replace the bearing they should go with the ceramic version that upgrades the Bora One's to Bora Two's. Other than that I had been thinking that I should probably get some new tubular tires glued on and unfortunately a new saddle as I somehow managed to crack the shell on the existing one.

Julian just sent me mail that the bike is ready so I'll pick it up tomorrow and report on the results.


Monday, 15 April 2013

Re-capitalisation arbitrage . . . and some gold

Monday mornings always come with many questions. A weekend's worth of reading can often leave me puzzled about economies and markets. At least we get some solid data during the day including Chinese GDP, IP and retail sales just to provide something to go on with.

Readers of this blog know that I have been watching very closely the action in the M&A space, with much of my focus being on translating cheap capital into returns via acquisitions. My theory has always been that if you can borrow at X% and return nX% then you're ahead in this ultra low financing environment. What I didn't consider was that Private Equity would take this opportunity to raise debt for the sole purpose of paying a dividend to investors (namely themselves). There's nothing wrong with this type of behaviour in general. The capital cost arbitrage between debt markets and real business often can push owners to add gearing over time. The trouble here is that the debt is raised not on under-geared businesses, but rather on businesses who's balance sheets are already at the upper end of their financing limits. The FT quotes the example of UK business Pets at Home. In February KKR which bought it in 2010 for £955m, added £135m in new debt, raising total debt to about five times the company’s EBITDA. I don't know whether the pet retail sector will hold up, but I do know that the buffer now available to that company is limited. It strikes me that an excuse such as the IPO markets are still not buoyant enough to correctly value a business is somewhat disingenuous. The total amount of such refinancing in Europe was €2.3bn in 1Q13 and $7.6bn in the US. When these companies finally come to market via IPO canny investors should look very carefully a the debt coverage and terms associated with outstanding bonds . . . being an equity investor may mean you're at the back of a longer line than you think in terms of getting access to returns on your capital.

My experience of Asian junk debt markets is limited to restructuring of various credit structures after the 1997 Asian debt crisis. As another facet to the refinancing dodecahedron it suddenly seems very strange to me that people would like to re-enter the world of mirky balance sheets in countries not always known for the rule of law when it comes to protecting investors. So far this year the Asian junk market has raised $18.1bn and is on course to smash all records. Chinese property developers who paid 13.5% for money in 2010 now can finance at 8.875%. The Bank of Ceylon, a Sri Lankan state-run lender, raised $500m last week. These are the consequences of insanely low government bond rate; the risk differential is fast evaporating. I could rattle off a raft of now defunct companies who did similar things in Asia in the mid 90's only to disappear by the end of 1998. Some will survive, but the bond buyer needs to understand that rarely will failed companies in Asia be wound up with an eye to returning capital in a correct sequence. In summary ask yourself if 8.875% seems like a reasonable return on a company that you hadn't even hear of 6 months ago and had in fact been paying nearly 5% more only 2.5 years previously . . . a split second in the world of bond investing.

Gold is now officially in a bear market as it slips below 20% from its' highs. To listen to various commodity analysts you'd think that inflation was dead and that they'd predicted the gold bubble all along. Of course the only thing that's moved down fasted than gold is gold equities who have long been  a refuge for those wanting to own the metal but either unwilling or unable to hold commodities directly. As I've said before gold equities spend most of their time disappointing investors whether it be through production reports, bad management or mines that suddenly become unprofitable. 

Maybe it was better that I stuck to watching another kind of gold over the weekend. The Amstel Gold race was as usual thrilling; perhaps not as great as Paris Roubaix for drama, but nonetheless exciting to the very end. 

When Roman Kreuziger kicked clear at the bottom of the Cauberg for the last time it was all over. Gilbert resplendent in the world champion's stripes just didn't have the legs to bridge the gap as his earlier problems had taken too much out of him. 

Thanks for the notes regarding my vertigo. The dizziness has not returned for 5 days now, so I remain hopeful that it was a virus. I should have blood test results this week and I've booked myself in for a full physical at the end of the month including the the treadmill heart lung show. Perhaps I can get a better idea about my oxygen capacity (VO2 max) and heart rate limits so I can input them into my Garmin 800 for a better picture of my cycling efforts. In the interests of science I'm going to take some photos and post some data which might shed some light on how the pro's assess themselves.


Thursday, 11 April 2013

Vertigo: me and markets . . .

Apologies for so long between blogs, but while riding last week I suffered a series of dizzy spells. The only way I can describe the feeling is it was like that hangover you had after first time as a teenager you got into your parents liquor cabinet and decided to try a little of everything. I stopped multiple times and was quite concerned that I might be suffering a stroke, brain tumour, inner ear infection or something in between.

The attacks went on for 48hrs and since then I've been OK. I am awaiting results from blood tests and will even see a cardiologist today as part of a complete assessment of what happened. My money is that this will turn out to be some kind of virus, so if you suffer the same symptoms I suggest you see a doctor ASAP.

I managed to get back to riding early in the week inspired somewhat by the action from Paris Roubaix. In case you missed it Fabian Cancellara's win was mesmerising. The final man on man battle on the velodrome in Roubaix was fantastic and well worth watching again:

It's a great race and even though it lacked the mud and rain of some of the most memorable days we got the second fastest time ever and clouds of dust off the cobble stones which must have caused some serious post race cleaning hours to be put in my mechanics at the team buses. One interesting tradition of the race that the TV cameras don't get to see is the old shower block where the stalls have the names of past winners. Cancellara has won the event three times and admitted on twitter that he still hasn't been in them:

I can't blame him especially on a cold day it must be terribly uncomfortable compared to what they have on the team buses now days.

Continuing on the cycling theme with an eye to the Giro I noted the latest limited edition jersey offering  from Rapha in collaboration Paul Smith:


I like the details on this jersey including the reflective dotted back. The jersey has a story like most of these Rapha limited editions:

"The Tour de France has the Lanterne Rouge, an honour awarded for the last man across the line. The Giro d’Italia also has such a prize, called the Maglia Nera, the Black Jersey awarded to the rider who has suffered immensely just to finish. Organisers have recently started awarding the Maglia Nera again at the race; now presented as a unique dossard or race number with a white number on a black background. The number 81 on the jersey relates to Luigi Malabrocca, who won the maglia twice in 1946 and ’47. Naturally, Rapha and Sir Paul Smith’s love of the Giro d’Italia brought the idea for such a jersey about."

I've seen the black jersey won by Giovani "Nani" Pinarello in 1951 which marked the start of his company due to the fact that the team owner thought it was a better investment to loan him money to start his own bike building shop rather than keep him on as a rider.

My vertigo on the bike seems to mirror what the markets are feeling at the moment. The US reached yet another record high reminding all of us of the continuing liquidity bubble now upon us. Amazingly with money being printed with very little pause to contemplate the possible ramifications gold has continued to fall. I've never been a gold bug and pointed to the fact that the way the markets had accumulated gold via ETF's over the last few years was more of a concern to me than the fundamentals of the money supply itself. Since then some of the bigger gold bulls have liquidated positions. Now though it may be time to look again at the commodity. I'm prompted to look at taking a position by the super aggressive increase of the monetary base in Japan. Gold has had 650% rally from August 1999 to August 2011 and now many of the investment banks that had pushed forecasts ever higher have pulled back and now see it as having a sub-1400 price target. That may well be the case, but effectively also says that printing money and the gold price have nothing to do with each other. To me gold looks interesting at the current levels if you believe the US economy needs more QE. Watch this space.

The other commodity I've been keeping an eye on is iron ore. Some weakness lately was caused by perceived weakness in the Chinese numbers. This is looking to have played out after the Chinese trade data seems to be pointing to a recovery of sorts. 

I remain somewhat sceptical on most Chinese data especially where it implies internal consumption growing to offset any weakness in exports, but maybe in this case we need to pause for the big picture. Iron ore bears have been suggesting for a while that prices at the current levels is of itself a brake on growth. To me that argument would have more validity except for the remarkable stability we've seen for the the YTD. The weakness of the US dollar is in itself a floor under commodities and if you believe that QE is ending than maybe iron ore, like many commodities will pull back. I tend to think that QE very well might be coming to an end in the US as more members of the Fed board openly discuss the way out of monetary base expansion.

George Soros delivered a speech yesterday at the Center for Financial Studies, Goethe University in Frankfurt, Germany. It makes an interesting read in that it contemplates further troubles in Europe. His solution is financially simple, but (and he acknowledges this) politically difficult:

If my analysis is correct, a solution practically suggests itself. It can be summed up in one word: Eurobonds. If countries that abide by the Fiscal Compact were allowed but not required to convert their entire existing stock of government debt into Eurobonds, the positive impact would be little short of the miraculous. The danger of default would disappear and so would the risk premiums. The balance sheets of banks would receive an immediate boost and so would the budgets of the heavily indebted countries because it would cost them less to service their existing stock of government debt. Italy, for instance, would save up to four percent of its GDP. Its budget would move into surplus and instead of austerity, there would be room for some fiscal stimulus. The economy would grow and the debt ratio would fall. Most of the seemingly intractable problems would vanish into thin air. Only the divergences in competitiveness would remain unresolved. Individual countries would still need structural reforms, but the main structural defect of the euro would be cured. It would be truly like waking from a nightmare.

For Soros the Euro has to be saved, but I'm not so sure that the average northern European citizen feels the same way. The summer months may see the crisis rear its' ugly head again and it's only when the trouble penetrates into core Europe that we'll get answers to these questions. I highly recommend reading Mr. Soros' speech


Thursday, 4 April 2013

A bit of politics is OK

This blog was never supposed to be political as so long as the tax system is fair and governments stick to their promises I really don't have a lot to complain about. The trouble is that every so often you read things that make you want to shake some politicians. I liked the move by the UK last year to cut development aid to India. After all if you're able to send rockets into space, own an A-bomb etc., then development aid doesn't seem necessary to me. Pakistan is another case in point. The BBC is reporting that the UK government is threatening to scale back aid for development if the country can't get its' taxation system sorted out. Pakistan had a lower-than-average tax take, with only 0.57% of Pakistanis - 768,000 individuals - paying income tax last year. That seems ridiculous for a country that has the bomb. The UK and many other G20 nations have been afraid to withdraw aid from such countries because they feared others might step in and occupy markets that they once dominated, but clearly when Pakistan remains a reluctant partner in the war on terror one questions whether the people know or care where their new clinics or schools come from. It's sad, but inevitable that the first rule of global aid should be if you can produce a ballistic missile then you should be able to feed your people on your own.

Hong Kong doesn't get aid from anyone, instead it produces its' own from the HK Jockey Club. Right now though with the ultra lose monetary policies of the US inflicting ever increasing inflation upon the business capital of Sino-Asia people are not happy as evidenced by a strike by dock workers now into its' seventh day. I'm sure there are plenty of strikes in HK, it's just that I don't seem to hear about them. What I do see is a growing gap between the peak dwellers and those in social housing in the New Territories. HK is often cited as a special situation because of the limited land available to people, but that's a cop out; the dock workers earn about USD2,200 a month in the land of multi-million dollar condo's.

The markets in Asia are in the red today mainly because of another nut case calling the shots in a desperately poor country. North Korea has trouble feeding its' people, but also has the bomb and ballistic missiles and a perchance for bad haircuts and Mao-jackets. The (South) Korean Won is under pressure again as foreign investors weigh up the risks involved in keeping capital in a country within 40km's of 250,000 artillery pieces aimed at them by a guy who picks fights with the USA, yet loves the NBA . . . go figure? 

When you trade Asian equities you spend a lot of time looking at the cross rates to try and get a bead on  how competitive particular nation's exporters are. My old favourite was the JPY/KRW. As you can see by the below chart the Koreans were a huge beneficiary of the strength of the JPY over the past couple of years and that enabled them to snatch market share in crucial heavy goods such as Auto's:

The Japanese would like the FX rate to start to stabilise around the current levels as it gives them the ability to compete in heavy manufacturing again. It's a bit of a mess and the fact that they sit on a group of islands well within the range of the nutty North Koreans doesn't help a lot.

The Bundesbank is finally getting around to investigating DB in respect to some old allegations regarding the "mis-marking" of various credit derivative books during the crisis. I'm no great fan of any such shenanigans, but I wonder whether anyone in the German or European financial regulators really wants to open up this can of worms right now? The reason why this is coming back is because of the whistleblower legislation in the US that awards 15 - 25% of fines to those exposing wrongdoing such as is outlined in this case. I guess the two American based guys would get the cash if the US government can prove that the DB branch in NY is culpable in the marking of the books. This could get messy, but I'll have a small bet if DB is found to have a case to answer that they certainly won't be the only ones writing cheques to regulators . . . sorry.

There's a great article in the April 4th edition of UK Mag "Cycling Weekly" dealing with Team Sky's use of the Osymetric chainrings. 

It's a good piece in a good magazine. They delve into the benefits of the equipment and basically suggest that proof of the benefits is inconclusive. I haven't ridden them, though I'd like to. I bet it would be interesting to see the power data mapped by the new left/right dual channel system that Team Blanco are using courtesy of Panasonic, as I bet that the single channel SRM is somehow giving a misleading picture to Wiggins and Froome. One question I have for the physics graduates out there is if I ride (say) a 53 toothed big ring on normal chainrings and osymetric rings are they the same thing?


Wednesday, 3 April 2013

Opening day . . . anyone need car parking?

Yesterday was opening day for another US baseball season, it was also the day that Bronx Parking Development Corp, the operator of parking garages at New York’s Yankee Stadium missed a $6.9 million interest payment to bondholders. Bronx Parking had issued $237.6 million of municipal bonds in 2007 through New York City’s Industrial Development Agency to build three garages and renovate two others at Yankee Stadium to ensure the storied franchise remained in it's current home. It was the the first time Bronx Parking Development Corp. has skipped a payment to investors, and the next scheduled one is for $8.1 million on Oct. 1. It would seem that parking hasn't been the no-brainer one normally associates with NYC and the company has hired Willkie Farr & Gallagher to serve as bankruptcy counsel. What are we to make of this? Well clearly the company was over leveraged and secondly bond traders will now be trolling through various prospectuses issued through New York City’s Industrial Development Agency to ascertain any inter-conectivity of obligations (unlikely) or more importantly the degree to which the Agency is responsible for any misleading statements etc. I don't trade "Muni's" but this will send shock waves through the market not because of the size of the payment missed or because the underlying assets won't cover the capital involved, but rather because we're still in the midst of a bond bubble looking for an excuse to burst.

I said yesterday I had faith in the US housing market because of all the cash the Fed had pumped in via the various iterations of QE. The key to this has been the recent purchases of mortgage backed securities (MBS) which has allowed issuers to source funds by taking advantage of the "put option" that has resulted from QE. More evidence of this today when Fannie Mae reported that it earned a record net income of $17.2bn in 2012. Additionally fewer households fell behind on their mortgage payments during 2012 and the delinquency rate was down to 3.3% by the end of the year compared with 5.5% in March 2010. Thats a big turnaround suggesting to me that the Fed must be coming closer to at least slowing the rate of asset (e.g. MBS) purchases. The trick now is to balance the Muni sector with the MBS sector so as to create a path to normalcy. I remain somewhat sceptical as to a smooth exit and believe we have at least one more US shock in the offing.

My M&A belief waxes and wanes, but I like to see companies such as Dish Network Corp. (DISH), the third-largest U.S. pay-TV provider raising new funds for possible acquisitions. Yesterday they said they's raise $1 billion in debt "for purposes that may include wireless transactions or acquisitions of airwaves."Dish made an offer to buy all of Clearwire Corp. (CLWR)’s outstanding shares for $3.30 back in early January as part of its' wireless strategy. Sprint Nextel Corp. (S) also got involved offering $2.97 a share. It's unclear what will become of that battle but I'm betting that even if Dish fails to secure all of Clearwire they get some spectrum or take their business elsewhere and buy part or all of another wireless operator. Either way M&A is happening in Telco and that should help markets.

M&A cheer has yet to get to Europe, in fact today Verizon denied that it’s considering a bid for Vodafone, disputing a report that said it was discussing a plan with AT&T Inc. to make a joint offer for the U.K. carrier. Seeing Vodafone as a target would certainly bring a smile to my face as I can still remember the company's swashbuckling run of acquisitions in the 90's culminating in a number of high profile questionable moves such as buying Mannesman in Germany. Who knows what could happen in this space, but if I were an M&A banker I'd make sure I had regulators on side because as we've seen in recent history the EU is not very transaction friendly and will use any excuse to come down hard on exterior corporations looking for a foothold in the "zone".

Rain is falling here in Sydney, so my bikes are likely to get another day off the road. Yesterday I took the opportunity to head down to the LBS to grab some new lube and some cleaning liquid for the workshop. The shop was short on cleaners and offered me a cleaning pack containing frame cleaner and degreaser. The cost: AUD39! I use a degreaser I get from my local mega DIY store which is about 6 bucks for 4 litres when on special, so I had no interest in this arrangement and took the lube and some frame shine only. Australia is a bit like this, retail remains somewhat under pressure from the internet, but not so much that it passes on more competitive prices. I know the same cleaner pack is £14.99 on the net. I'm sure the shop would point to their rent, plant and equipment, but while I'm willing to pay for some of that I expect a certain value add and acknowledgement that I'm not a complete chump unable to use a computer. Leaving this aside I highly recommend Juice Lubes Frame Juice for after wash shinning. It leaves your frame with a non stick surface that dirt finds it a lot harder to stick to. Check it out:


Tuesday, 2 April 2013

Stats are more than numbers . . .

Bad data has started to hit the street and for investors the old adage of sell in May and go away could be the wise move. Last year that tactic didn't work and as people's memories are now building up an immunity to being out of the market it will be interesting to see what effect the recent stat releases will have on trading in the coming weeks.

The US ISM fell to 51.3 in March from 54.2 in February, the market had expected 54. The only redeeming news was from the housing market where construction grew 1.2% after a 2.1% decline in January. Housing is the main beneficiary of the Fed's largesse and I remain bullish on the space. Businesses in the North East are starting to report a tightening of available office space in cities such as Boston. I am waiting on some further numbers but would say that the market is well aware of this and conditions have been priced in to a degree. NY interests me as new floor area seems to be coming on to the market steadily and therefore might not have the same lift yet as other business areas who have been out of the construction cycle.

Japan for all the bravado of the recent moves remains less than bubbly. The Bank of Japan’s quarterly Tankan report showed a reading of minus 8 (up from from minus 12 in December) in the large manufacturing sector on the back on the weaker JPY.

The trend is fine but it didn't stop the rot yet as evidenced by the slump in Japanese vehicle sales which fell the most in six quarters after government subsidies ended. No doubt many say that these figures are already in the market and have been the basis for the recent moves by the BoJ to weaken the JPY. I wouldn't argue too much with this only to say that the market now has priced in a recovery from these horrible numbers and anything less than a complete bounce will lead to renewed negativity.

Meanwhile the Chinese PMI rose slightly from 50.1 in February to 50.9 in March. Many readers will know that I am not 100% convinced as to the accuracy of China's statistics and therefore would advise investors to look more closely at the trade numbers instead. China is not so domestically focused as some would have us believe.

At least in M&A China has been given some outlet for it's reserves beyond US T-Bonds. Taiwan will let Chinese banks own as much as 20% of some financial institutions, raising a limit on mainland ownership from 5%. Good news if you own Taiwanese financials. It's been talked about for some time, so some of it is in the price. If I were a HK investment banker I'd be sending a present to the Taiwanese government as they have effectively under-written my job for a further year.

Much the same goes in respect of Nasdaq OMX, who offered as much as $1.2bn in cash and deferred stock for a electronic bond trading platform from BGC Partners, an interdealer broker. I was beginning to get M&A jitters last week, but it's this type of activity that helps me sleep with markets at these levels. I'm not sure that BGC will put the money back into the market, but at least they have plenty now to fight another day.

Goldman Sachs clearly believe in leverage again. They've decided to create an entirely separate holding company to raise external equity capital. I'm sure they got tired of top Investment Bankers leaving the "family" and decided that given the current regulatory restriction and market opportunities that they needed to do something. They'll offer shares in a new unit, Goldman Sachs Liberty Harbor Capital LLC as soon as is practicable and effectively side-step Volcker Rule by calling it a BDC (Business Development Corporation). Other banks seem afraid to follow once again proving that you can't beat GS for "balls" in the face of regulatory pressure. Good for them and their investors.

For those who follow my Strava feed you will have noticed that I did a bit of riding over the Easter vacation here in Sydney. The most solid hit-out I had was the 800+m of climbing over only 41kms between Mt Irvine to Blackheath west of Sydney. Only another 35k's on Sunday before my riding partner had a mechanical, but enough was enough. The Cannondale need a solid 2hrs of cleaning here on Monday due to the fine red dust that was coating the drive train. I really can't emphasise enough how important it is to keep this powder out of your bike's workings. It's spotless now ready to be taken in for the yearly service which will cover headset, bottom bracket and cables.

On Monday I did another 65kms with some mates here in Sydney and decided that my legs needed a rest today. I rode the Pinarello and can only say that I advise people to slow down when it rains and your realise that your carbon wheels breaking surface takes 2 - 3x as much distance to bring you to a stop compared with Aluminium. I survived well enough, but lost the peloton for a stretch as a I battled to avoid the limited holiday traffic.

In racing "The hell of the North" . . . Paris Roubaix is here:

Sunday will be epic. I dare you not to watch. Maybe some late night research for me in front of the TV reading through office rental stats in the US while watching the hardest one day race on the calendar.