Wednesday, 29 May 2013

Look out here comes normality . . . smile

When people say that the US housing market is coming off a low base I honestly get that; the point is that the momentum is there for all to see and even the Fed now must admit that they just might have done what they wanted and achieved enough velocity for this bird to fly without an up-draft. 

Of course this brings us to the method by which the Fed withdraws. The fear is as soon as they say they are going to buy $84bn of securities in a month, rather than $85bn that the market immediately collapses. That might happen, but I'm betting it won't. The Fed will in the next three months withdraw some elements of QE3 and with that will come the beginning of the end of the biggest bull market we've seen for bonds since WW2.

The scariest part of a bond market re-tracement is that four US banks: Bank of America Corp. (BAC), Citi (C), J.P. Morgan (JPM) and Wells Fargo & Co. (WFC) now control two-thirds of the banking assets in the United States. That spells danger in a falling market. The problem with "too big to fail" is that the Fed decided to take away all the mid-cap banks so as to replace them with a small number of institutions it feels they can successfully monitor and pre-empt for balance sheet problems. I hope they're right.

The IMF makes me laugh. They always seem to be slightly behind the curve on things. If the Fed is acting a "tad" too arrogantly in believing it can control institutions as they get bigger, then the IMF matches them on occasion for hubris. Today's example is the IMF's decision to downgrade their forecast of Chinese GDP from 8% to 7.75%. I'm not sure if 8% ever looked achievable except in a case where the government just pumped cash into the housing market with no heed paid to the damaging speculation and credit bubble in the sector. Look China is still an exporter and it needs the US to start growing in order to balance the internal economy. The best result for China is that US demand picks up and allows them to put the brakes on internal credit growth.

I'm sure there's been bankruptcies in Singapore, but none that I can remember involved a public landmark. The Singapore Flyer, the world's tallest observation wheel, has had some of its assets put in receivership. Ferrier Hodgson will be managing the process. The wheel overlooks the bay where they have the F1 Grand Prix. I have no doubt the wheel will survive as Singapore Inc. doesn't like to air dirty laundry in public. I'll put money on sovereign investor Temasek to step in and buy up some equity . . . "nothing to see here folks . . . just happy smiling people . . . "

Sydney has had a series of foggy mornings, but today once the mist cleared it was glorious. As I didn't ride yesterday I got out the Evo and enjoyed the autumn sun (19ºC).

I really could have ridden all afternoon if it wasn't for the fact that I had to get home . . . well that and I don't like to be on the road when the afternoon school run begins. Anyhow for part of the ride I tracked a couple on Cannondales (B&W Evo and Synapse). It's funny how people don't smile here in Sydney when they're on a bike given what a friendly place it is. I said hello and honestly you'd think I'd broken an unwritten law or something. Hey people it's OK to just enjoy yourself. I remember once in Switzerland riding up a a hill for the best part of 20mins with a group of Spanish cyclists who just joked and smiled all the way up the Col ... and they included me on every joke, dutifully translating to English after every belly laugh. That's riding. Be happy.


Tuesday, 28 May 2013

You might not be interested at first, but . . .

M&A is not dead as Valeant's, agreed takeover $8.7bn purchase of Bausch & Lomb shows. The contact lens group has built a solid income stream from the disposable lens business. The reason why this attracted me attention is that Valeant had previously made a bid for Actavis who just last week made a bid for Warner Chilcott. That makes the pharmaceutical space clearly in play for bankers and with Pfizer looking to divest itself of Zoetis (which is veterinary orientated) makes it interesting to all investors. The next step for me is to look at the financing of these deals as I suspect at some stage the bond market will make terms more difficult. That of course has all sorts of ramifications for the broader market.

Along the same lines has been recent activity by the Crown Estate (UK). For those who don't know the Crown Estate represents the properties held by the UK formerly owned by the royal family. The Queen (i.e. the Crown) is the nominal owner, but swaps the outright ownership for a 15% cut of revenues in a deal that was revamp from the original George III era Act in 2011. The CE is taking a leaf out of the playbook of that other venerable UK institution the Duke of Westminster's Grosvenor Estate which has spent the last 10 years broadening and revamping it's portfolio of properties both in London and globally. The CE has struck a £320m deal with Ontario Municipal Employees Retirement System on a 270,000 sq ft development of shops, restaurants and offices in St James’s. One thing I didn't know was that the CE is not allowed to go into debt, therefore has to adopt a partnership system to finance redevelopment. My own interest in this deal goes back to the divestment of UK £5bn property portfolio held by Commerzbank that I have been watching closely. The costs and structure of the CE deal will hold a lot of information regarding valutaion of the Commerzbank portfolio and needs to be watched closely by investors. My own view remains that Sterling is underpriced and therefore UK cashflows could be somewhat of a bargain still. This is an interesting space for those wishing to diversify.

Sometimes property comes from unusual places. Singapore Press Holdings (SPH) is planning to raise about S$540 million ($427 million) from the initial share sale of a real estate investment trust that will include Paragon and the Clementi Mall in the island state’s western suburb.

As a former resident of Singapore I know these properties. I'm not as bullish about buying REITs from the Singaporeans as they usually are quite canny about the pricing of home assets. Having said that it, like the London deals will be heavily monitored to assess valuations for a number of properties likely to also come to the market. Investors may be best advised to look on rather than participate.

Now that the 2013 Giro is over we can look forward to the traditional lead-ups to the TdF. The primary focus will be on the  Critérium du Dauphiné. I know many of the towns and hills at the tail end of the CdD from my time in Geneva, many of which are truly beautiful. The route this year comprises:

Sunday 2nd June, stage 1: Champéry-Champéry, 121 km
Monday 3rd June, stage 2: Châtel - Oyonnax, 183 km
Tuesday 4th June, stage 3: Ambérieu-en-Bugey - Tarare, 164 km
Wednesday 5th June, stage 4: Villars-les-Dombes – Parc des Oiseaux, 32.5 km (individual time-trial).
Thursday 6thJune, stage 5: Grésy-sur-Aix - Valmorel, 139 km
Friday 7th June, stage 6: La Léchère - Grenoble, 141.5 km
Saturday 8th June, stage 7: Le Pont-de-Claix - Superdévoluy, 184 km
Sunday 9th June, stage 8: Sisteron -Risoul, 152 km

The Chatel to Oynnax leg interests me most as they are the roads I'm most familiar with. I'm hoping to get the strava tracks to see specifically what segments I might have actually ridden. It's always nice to think you've done something that the pros are going to ride. It should be a great week with the main question being what condition the Sky / Froome team is in ahead of the TdF. As an aside the course takes in some nice real estate, though I doubt we'll get much information regarding current valuations during the broadcasts.


Thursday, 23 May 2013

Sometimes it doesn't feel good being right . . .

Yesterday I pointed to concern with the dysfunctional way the bond market was behaving; today everyone got worried. Nikkei 225 closed 7.3% Lower; Topix Fell 6.9%, that's the most in a single day since March 2011. The first signs that things were not right was when the 10 year JGBs broke through the 1% yield mark.

“Rising interest rates is the story today,” said Tomomi Yamashita, a fund manager who helps oversee the equivalent of $5 billion at Shinkin Asset Management Co. in Tokyo. “There’s also a lot of profit-taking going on. When volatility is high, investors want to take off risk.”

Of course this was also componded by a Chinese PMI under 50 for thew first time in 7 months and some obtuse testimony from Ben Bernanke regarding the withdrawal of QE stimulus. The market surely must be aware that the QE had to come to an end at some stage. Japan most of realises that it can't go it alone and Abe's hoped for double hammer of his own Yen destroying stimulus and simultaneous US growth absent any monetary brakes is now under very close scrutiny.

Australia, the most cyclical of cyclical nations looks very vulnerable. Today Ford pulled out of Australian manufacturing (exit 2016) after years of government subsidies. The high Aussie Dollar, inflation of wages and a newly introduced carbon tax left Detroit to walk away leaving GM and Toyota free to produce piecemeal efforts against very little competition. And the AUD . . . well we're now at 96 cents and for mine they'll be a bounce of sorts, but until we get to 85 it's still overvalued by maybe a standard deviation.

The next target therefore becomes high yield bonds and after that corporate bonds of various grades. The ETF world is abuzz at the moment regarding various index re-weighting in the wake of the Apple mega bond ($17bn). Most of the concerns were about re-striking baskets while avoiding liquidity squeezes. If we get a bond sell of the liquidity problem will be for the sellers rather than the buyers. Investors should think carefully about their bond positions.

The weather remains damp in Sydney. I took the day off from riding to dry off the kit and prepare for a weekend in the Blue Mountains west of Sydney. I'll probably be riding alone as my usual partner can't make it. The biggest problem with riding in the countryside after heavy storms is the various road debris  to be found along the way. I had a choice today to change from the Mavic Cosmic Carbones on my Cannodale to the somewhat stronger Fulcrum Zero's and their Vittoria Open Pave tyres. The Exalith brake track on the Mavic's swayed my view and I'll stick with the better braking surface over the advantage of slightly stronger tyres. Ideally I'd like to take both, but without a workstand at the farm it can be somewhat problematic changing brake pads, wheels and getting things aligned.

Tonight is the last time trial of the Giro. It's a 20km up hill drag. I'm wondering how many riders will ditch the TT bikes in favor of the standard climbing bike plus triathlon extensions as demonstrated to great effect by Richie Porte at Paris - Nice earlier in the year. We shall see . . .


Wednesday, 22 May 2013

Don't rain on the parade . . .

The M&A market is not completely dead. I know Monday's blog looked like it was raining on the equity market rally; that wasn't my intention, so as if to prove me a bit too miserable along comes a new deal.

Yesterday Warner Chilcott agreed to be bought by Actavis for $8.5bn. Pharmaceuticals have never been in my core competency as they always seemed to be exercises in DCF calculations or highly dependent on very specific news flow that required a certain element of obsessive "nerdism". The very fact that Warner Chilcott is expected to see sales slide 15% lower by 2016 doesn't speak highly of this being a deal predicated on a growth strategy. Maybe the most interesting part of the deal will be the $400m in synergy saving expected to be generated by the new group primarily driven by Actavis moving its' HQ to Ireland. As I said on a blog in the last month the market for corporate earnings is starting to become very aggressive and will require major tax jurisdictions to rethink their response to the international economy. The legislature want to claw back lost tax dollars (see the latest from the hearings in Washington highlighting Apple), but at the same time there has to be recognition that companies have the ability to rebase themselves to best deliver returns to shareholders.

My favourite graphic of the last 2 days is that showing the continued strength in the Chinese property market. The market which in March saw China’s newly installed premier Li Keqiang call for a moderation in growth is thumbing its' nose at the leadership.

How can they slow the urbanisation?

The recent fall in the Aussie Dollar may be less dramatic than many, including myself may have thought as China without further intervention may yet provide a backstop to core commodity prices that some of the biggest investors in the world have not factored in. Therefore the next important move for the region will be the introduction of further measures to slow the Chinese property market. It would be interesting if the Chinese go for the brakes around the time of the Australian election. The twin outlook of further action by Beijing and an Australian budgetary clean-out by an incoming new government could be the perfect storm for the AUD.

In the opposite predicament to the Chinese are the Japanese, 20 years of negligible growth have left the  BoJ with few options because they've tried a little bit of everything already. The BoJ left the policy levers alone today and allowed the JGB some respite after the recent shift along the complete range of maturities greater than 2 years.

At present, the BoJ is buying long-term JGBs worth a ¥7 trillion from the market every month, But in the last week we've seen a sell-off in JGBs and a continuation in the N225 rally. What should we make of this? The N225 for all it's global reach is still more correlated to US growth more than its' own bond markets, this means you almost would be better of watching US rates than Japanese rates. The JGBs interestingly have fallen sharply even in the face of the BoJ buying. 

The concern now must be that the BoJ has damaged the pricing mechanisms of the bond market and may actually cause local holders of JGBs to adopt a new strategy that effectively undermines Japanese government debt causing a run on JGBs. The market is nervous and Japan's reflation efforts are somewhat reliant on other nations to continue to add money to the system. If the Fed pulls out of the  QE game it may not be good for Japan's current efforts.

The rain that has plagued the Giro d'Italia has found its' way to Sydney. My 40km lunchtime ride turned into a slog-fest against a driving rain storm that swept up from the south and drenched me for the next 25k's as I headed towards the safety of home. Luckily I was riding my Mavis Cosmic Carbones SLR's with the Exalith braking surface because there wasn't a whole lot of places to hide from the pooling water and cars that threw up spray along my route. 

The main thing you have to do when riding in the city in rain is slowdown, even a a steady 25kph the stopping distance is at least a third greater on days like today. If I was on a full carbon wheel you could double the distance for stopping. It's all quite tricky when you factor in cars who don't turn on their lights or moderate their own speed.

Luckily I had a rain jacket and front and rear lights with me today. I ride with the Altura Ergo Fit Race Cape Jacket. 

I like it because its translucent with a number of reflector points on the front and back. It's not 100% waterproof; it's better thought of as shower proof as it still lets some moisture in. Nothing is perfect and perhaps a Castelli Gabba Jersey might be worth investing in if you live in an area more prone to showers. For Sydney I think this is about right.

The result of my riding is thoroughly drenched shoes and helmet. The recommended course of action is to set all items out in a warm dry place away from direct heat. I like to stuff my shoes with newspaper and set them on a 45º angle so the moisture can run into the paper and not pool in the sole of the shoe. As for my helmet I find hanging it up is better than laying it on a surface as you want air flow to take away the moisture. Whatever you do, please don't put shoes and helmets in front of a heater as you'll find leather can crack when it drys out too fast losing it's suppleness. As for hard plastics and various modern enclosures heat can melt or warp these . . . especially if you chose to forget you left them out when you settled in for an evening of fine wine and the Giro. 


Monday, 20 May 2013

Live for today . . . cold hands

Everything looked so promising back in February when I first wrote about the coming M&A boom. The logic of insanely low interest rates along the whole spectrum of durations and types looked all so enticing. I wonder what Sandy Weil or Jack Welch would be doing right now if they were still running major US companies if they had this type of financing available in almost unlimited supply? Has the corporate world lost the swashbuckling boldness that characterised much of the late part of the 20th century? It would seem that with the percentage of corporate loans going to M&A falling from 60 per cent in 2006 to 25 per cent so far this year we have our answer. The corporate world seems happy to borrow money and pay out dividends on existing businesses, in effect gearing up to deliver cash, but not gearing up to increase returns. Is it me, or are we being told the RoE growth story is all too hard?

The US main regulator for loans and alike, the FDIC issued new "Interagency Guidance on Leveraged Lending" back on March 21st. "This guidance applies to all institutions that originate or participate in leveraged lending activities, including community banking organizations supervised by the Federal Reserve with total consolidated assets of $10 billion or less."

The fear at the time was that all the cheap cash might be misused. The Fed, or more specifically Ben Bernanke wanted the results of QE to be a general support for asset prices firstly by the Fed themselves via the purchase of various types of debt instruments including mortgage backed securities. Secondly the Fed expected US corporates to start buying assets as balance sheets cleared allowing appropriate transparency in the pricing of returns available. Clearly the second of these is not happening as the market has been unable or unwilling to do anything else but withdraw into their own core business competencies and where appropriate (or not) re-leverage that business. It maybe a little alarmist to start worrying too much just yet because clearly we are in the transition period between QE and normalcy and events such as the current rise of the US dollar allows corporate America to add to its' global portfolio in an appropriate fashion. The wise investor probably needs to understand that cheap money doesn't last forever.

At least Yahoo is attempting some M&A by buying Tumblr. It's being reported that the price will be $1.1bn and therefore should make 26 year old founder David Karp quite a wealthy man. The returns for recent investors are not so stellar. The FT is reporting that at the last round of fundraising the company was valued at $800m. That's not a bad return, but probably not what was hoped for. I'm not a user of Tumblr (or Instagram) so my impressions are not that valid. I guess Yahoo's CEO is just trying to build out her ecosystem. In "tech-land" valuations are rarely rational, in this case it's pretty widely known that Tumblr is yet to turn a profit, but no doubt Yahoo will suggest that Tumblr skews young and allows them to pick-up a chunk of the appropriately well-off demographic loved by advertisers. Melissa Mayer will be under a lot of pressure to make this work. I say good luck to her and her shareholders . . . they're not trying to re-invent the wheel, but they are trying to provide competition to Google.

The winter is starting to have an effect here in Sydney. Morning temperatures have dropped to below C10º and with that I've been getting lots of questions about cold weather kit. The one thing I've been asked most about is gloves.

I use three types of winter gloves. The first is a pair of Specialized mountain bike light weight gloves which are basically just fingerless gloves with fingers. They do the job for most of what Sydney throws at you, besides the gel padding is about perfect and you can use a touch screen phone or GPS device without taking them off.

Garmeau's Sotchi gloves are another step up and unless you are going to ride in the Alps these with maybe some thin inners are all you'll need. You'll have to take them of to use an iPhone, but you get good wrist coverage giving them more of a gauntlet feel. I've had to do a little mending on these as I found the seams around that most used index and middle fingers tended to burst after the first couple of hundred kilometres. I've had the same thing happen on $150 ski gloves, so the fact these cost me about CHF40 didn't really upset me too much. 

I picked up the below neoprene gloves from a local sports department store in Geneva. The brand is "Base", which I know nothing about. What I do know though is that these puppies are for sub zero riding. You pair them with silk/nylon inners from someone like Odlo and I guarantee that your fingers will survive even the coldest rides. The drawback is that the fingers do not have a very good non-slip surface, so be warned that if you're riding a groupset with slick carbon brake leavers you're going to want to hope the rain or snow stays away.

All these gloves are machine washable, though I advise not putting them in a tumble dryer. I'll put up some more winter clothing reviews tomorrow.


Thursday, 16 May 2013

Turning Japanese . . . because it's getting cold

At what stage do Japanese equities say enough? So far this year they're up 45% on the back of a Yen that has fallen from 78 to 100. My first thought of this was back on May 7 when Toyota revised up earnings on the back of the currency. At time I said to a friend that it seemed somewhat gratuitous as a CEO to be upgrading not because business is getting better, but because of the FX translation. That is a little unfair because my reading of the US economy says that Toyota's main market is going to help them out this year and if the FX translates to a pricing advantage then so much the better. The point is that it's hard to buy into a market that has performed so well when you have doubts about the underlying structures. The very fact the BoJ is back to a strategy that they have employed unsuccessfully before, though not quite in the same size or with the same vigour does make me raise an eyebrow.

Late today the market was hit by some Yen strength when we found out that Japanese GDP during the first quarter had expanded by 3.5%. And that is the danger to a fast rising market, the policies get in front of reality and the market starts to think the government will take their foot off the accelerator.

The three biggest Japanese lenders – Mitsubishi UFJ, Mizuho and Sumitomo Mitsui – might quite like the government to slowdown its' JGB purchases as they have been effectively sidelined from this market, which was a core money maker for them. Yesterday they forecast lower profits for the financial year to next March because of this very reason. Sometimes I wonder what else can go wrong in Japanese banking? The sector took years to clean up their balance sheets after the real estate bubble of the late 80's burst and many would argue they never recovered as they should have.

The Spanish are goinng through the exact same situation in the banking sector as the Japanese because of a "don't ask, don't tell" mentatlity at the ECB. The numbers coming through from Spain suggest more write-downs on Euro 200bn of business loans. What matters now is for the banking system to factor in such balance sheet moves and raise appropriate capital while rates are low and equity markets are relatively high; the environment has been setup perfectly by the ECB. Investors of course need to be cautious as experience tells me that you will be in the business of picking survivors and not of just being given money without strings attached.

As I'm on banking it is note worthy that HSBC is considering cutting a further 4 - 14,000 jobs. CEO Stuart Gulliver is desperate to get his cost income ratio down to a level that helps raise his overall RoE. Many thought Gulliver would target 48 - 52%, but instead went for 55% which seems reasonable. I don't have a table of peers to compare this to, but 48% would seem very low for a bricks and mortar high street bank.

Sydney is a funny place to ride a bike. It's kind of hilly in a San Francisco way. It seems improbable that you'd want to ride up and down hills all day . . . that means that people who don't ride think no one else should ride either. Obviously these people have no sense of modern bike mechanics; trying to explain the 11 speed cassette and compact front chain ring means nothing. Now we're in the autumn and even though the days still hit 20º Celsius the mornings are sub-10º, people start to wear overcoats and scarfs. It reminds me of Hong Kong, where the ladies wait for those 2 weeks a year that validate their ownership of a $100k sable coat and matching hat (say 8º). For myself I have been wearing arm warmers and a gillet for rides. My newly purchase white Rapha gillet is perfect for low-teens riding and I'd recommend that as a basic for most locals here.

As a back-up I recently took delivery of a Castelli Motorolo Due Jacket with the tasteful (?) digital camo pattern. I'll be riding this sub 15º jacket on the weekend and will attepmt to send out a review for readers. I don't have the matching tights. The jacket was 45% off at and even though I had it on my Christmas wish list I'm happier now at AUD 135 bucks delivered to my door!


Wednesday, 15 May 2013

It's happening . . .

The fall in the Australian Dollar reminds me that while as a trader being courageous will not always pay-off, being patient and smart does. The deterioration in the finances of the country, while not in any way catastrophic has instead underlined that the past few years have been abnormal for an economy that is very unlikely to ever brake away from the "cyclical" label many have pinned on it. Ideally the RBA would like the dollar in the mid-80's. That seems possible on a leg down, but unlikely given the free-wheeling money printing by the likes of the Bank of Japan.

Unlike Australia and crucially for the AUD/USD pair is the fact that the US budget deficit is declining faster than expected. The Congressional Budget Office figures showed the deficit falling to $642bn, or 4% of GDP. The moment in the US is hard to ignore and the Fed is stimulating internal discussion of how do exit the QE spiral.

Fed President Bernanke seems committed to unemployment being the chief trigger for the unwinding of QE. Although unemployment in the US is falling, the participation rate remains somewhat lower than ideal. Unemployment at 7.5% and likely to head towards Mr. Bernanke's magic 6.5% over the coming year makes it reasonable that the FOMC has at least started to discuss an exit from QE policies. The market as I have said many times on this blog tries to price things in around 6 months in advance, but I would argue that this will come sooner because of the bubble nature of the last 2 years. This primarily means the bond market. The danger now is that the biggest bull market we've ever seen in bonds unwinds in a less than savoury fashion.

The bond market currently, as evidenced by the recent Apple mega deal has been tapped well and truly.  If you haven't raised money yet then you may just miss out on one of the all time great debt issuing opportunities.

The latest piece of paper to cross my desk was Macquarie Banks new Capital Notes (CN). Mac Bank is moving to bolster its' Basel II credentials via these notes which have a non-viability trigger embeded in them. I haven't seen the prospectus, but leaving aside the spin these must act something like the co-contigency notes such as those first issued by Credit Suisse. As an investor I've said before there is nothing wrong with a small holding in such paper so long as you understand they'll act a bit like being short a put option in a crisis. For that option (in this case) you get a coupon of 180 day bank bill rate + about 4%. That's not too bad at the moment and you'll have some protection if rates rise. Worth a look, but keep your portfolio risk in mind etc.

While it has been good to see Cadel Evans getting back to form at the Giro, the leader Vincenzo Nibali (aka the shark of Messina) has been in great form all season. Nibali of course beat a similar field at Tirreno–Adriatico and now is in a similar position at the Giro. Astana has only one leader and a good team, on the other hand it is arguable that Sky through Wiggins misfortunes and form has now opened up questions for the team manager about whether it may be better to put their faith in Columbian climbing specialist Uran and allow Wiggins to become a loan wolf. At BMC I don't think Evans has had support of a similar quantity or quality to that of the other major GC contenders.  One thing is for sure and that is that the Giro is fantastic to watch and yesterday's stage 10 in Fruili was both pretty and mesmerising. I defy you not to enjoy the spectacle:


Friday, 10 May 2013

Damn lies and statistics . . . . honestly who knows?

As you get older you tend to listen to more talk back radio. A lot of what the various hosts say is obviously inflammatory rubbish, but occasionally they come up with an interesting guest. This morning I caught an interview on one of the commercial stations in Sydney of the lady that runs the Asutralian Bureau of Statistics stat unit that deals with this weeks job numbers. For some reason I always thought those numbers were based on registered job seekers and payroll and income tax records, but I was wrong as they are based on a survey of 32,000 households. The survey uses data from the census data which is collected every five years. They then work to spread the sample across geographies and income groups. If they are unable to get a suitable spread they add weighting factors in order to meet the requirements of the series in question. Therefore what are we to conclude about the 51,000 jobs created last month in an economy more than 10x smaller than the US which created less than 200,000 jobs in the same period. Statisticians will no doubt defend their work and probably point you to the mean growth rate as being positive, though the volatility is quite high. In other words we just don't know whether those 51,000 jobs are real or not. It's another case of having to take the trend and then patch in other pieces of information before making firm conclusions. Sorry.

Apparently hiring in Australia has been spurred by energy companies from Chevron Corp. to ConocoPhillips that are building seven liquefied natural gas projects in Australia at a cost of almost $200 billion and construction of Santos Ltd. (STO)’s $18.5 billion Gladstone liquefied natural gas project on Queensland state’s Curtis Island will peak this year - more than 7,000 people are working on the development. Next up will be the home loan data out next Monday which is forecast to show an eight per cent lift in new home loans being written during period. GDP for the March quarter is likely on the basis of these numbers to come in around 1.4%. So if this is all positive why did the RBA cut rates. Well the RBA has better data, especially in terms of housing debt repayment and obviously is betting that the economies in NSW are under pressure from the high AUD. They cut because they know what happens when things get out of line, anyone who saw the Spanish housing debacle, where construction peaked just below 60% of GDP can see what happens when boom turns to bust.

There are still housing booms in Europe, just look at places like Switzerland and Sweden. Housing is so tight in Sweden that an investigative report by the Svenska Dagbladet (SvD) newspaper showed that private landlords are selling rental contracts, at prices ranging from 40,000 kronor ($6,100) for the outer-lying suburbs to as much as 900,000 kronor for a two-bedroom flat in central Stockholm. This used to happen in Tokyo and was called "key money". It probably still does happen. Sweden was once the land of open-ended leases, but now landlords are trying to increase turn over so the can convert buildings to co-ops. Even social paradises of the Nordic type have problems.

Things can go perfectly as planned, just ask Mark Cavendish today. Omega Pharma finally got their lead-out train working allowing Cav to make the other sprinters in the Giro field look decidely average.

The real controversy of the day goes to the decision by Katusha to seemingly slow up on the pace when the peleton was split by a fall. Notably it was Sky team leader Bradley Wiggins who benefited most as he was able to get back on to the lead group and save himself a minute plus. Cycling is a bit like baseball, there's lots of unwritten rules. The usual rule about riding accidents is that if they are caused by external factors, such as tacks on the road or a team car hitting a rider the peloton slows the pace to enable those able to get back on to the group, but what happened today was a riding accident within the peloton itself and therefore you don't slow or change pace on purpose. Many will suggest that Katusha should have continued at a normal pace, leaving Wiggins and some other GC riders to their own devices. The point being that by not riding near the front and sharing the work gets you into trouble and you pay if something happens. Of course for Sky and some others it wasn't their fault and you have to say that "it is what it is". One wonders though what might have happened if the majority of Garmin had been on the front with Ryder Hesjedal whether they would have adopted the same policy given Wiggins is likely to put between 1 to 2minutes on their man during the 55km TT on Sunday. Remember in a TT no one stops or slows down if you fall or have a mechanical . . . it's just bad luck.


Thursday, 9 May 2013

Pictures everywhere . . . . sometimes it takes 24hrs to get perspective

Being short the Aussie Dollar has been a past time for many on "planet hedge fund" ever since 2008. The almost unbelievable way the country sailed through the GFC seemed ludicrous if you were sitting at ground zero in London or New York. Now rumours that the big kahuna of macro economic trading, George Soros is playing once again in the Southern Hemisphere has traders looking again into the possibilities.Bloomberg contributor Michael McDonough (twitter: @M_McDonough) put together a few interesting charts this week that may help the likes of Mr Soros sleep soundly on his short. My favourite shows global manufacturing slowing down:

Stanley Druckenmiller managed $22 billion with and for Soros at the latter's Quantum Fund. Yesterday he joined those publicly calling the AUD one of the best shorts in the market. Readers of these blog know that I've long seen the AUD as being over priced, but have had to recognize that for all it's potential weakness an offsetting set of super lose monetary policies by the Fed, ECB and lately the BoJ has meant that it has been somewhat protected from the obvious frailties of being a commodity driven economy, spending too much in a less than bullish world which is as the chart illustrates slowing again. The AUD is up 45% since the crisis started, though that fails to acknowledge it fell about that much at one stage, so really the truth is that like the S&P it has retraced much of its' losses on the back of cheap USD, EUR and now JPY's. Mr. Druckenmiller may end up making a lot of money on his trade, but given a likely change in September to a more fiscally responsible government in Canberra it looks like he may have to rely on the Fed and the other central banks to really make it pay-off big. 

Yesterday the markets were cheered by the Chinese total Import numbers, which rose 16.8 per cent in April, up from a 14.1 per cent rise in March:

This is the flip side to what I've just written and another reason why the AUD hasn't fallen yet. As if to thumb it's nose at Druckenmiller the numbers show that imports of iron ore, a key Australian commodity, were up 16.4 per cent by volume in April compared with the same time last year, bringing import growth for the first four months of 2013 to 3.9 per cent compared with the previous year.

South Korea cut rates today. This 25bps has got nothing to do with the internal economy and everything to do with the recent 20% rise in value of the KRW v JPY:

The Koreans have had a distinct FX advantage over the Japanese for a number of years, so the inability of either of these export led economies to generate sufficient internal demand has left them in the similar positions. The result is a currency war. The South Korean currency at these levels will start to take its' toll on Seoul's budgets, just as the high AUD has basically been at the heart of the current problems in Canberra.

I didn't manage to write a blog yesterday as I was still think about my brush with death thanks to my lucky escape while on my Tuesday morning ride. I got out for some laps around Centennial Park late in the day to test how things had settled on the Cannondale. I always find that machinery (and for that matter people) may only show the true effects of an incident after "cooling" down. I saw no problems with the Evo after being hit, but noticed a looseness in the headset while in the park. Not a big problem, but clearly demonstrating that you sometimes need a little time to calm down and get perspective after going through a high stress situation.

The Giro has been great and yesterday's stage once again was absolutely fantastic. Watching Mark Cavendish "paper-boy" up one of the climbs made me even more appreciative of John Degenkolb's winning sprint in wet weather. 

Fantastico . . . it's well worth getting the extended highlights.


Tuesday, 7 May 2013

So what? . . . Complacency

The US debt ceiling was suspended on February 4, 2013 until May 19, 2013. A broker's note reminded  me of this fact this morning. Included with the note was the following graph showing news stories with the keywords debt ceiling in them:

Now I'm not going to superimpose the S&P over the top of this but when complacency rules investors need to expect trouble. As I said yesterday the market rallied on the US non-farm payrolls because it was positioning for weakness, the market now is positioned for complacency. 

Just a quick word on Australian banks after yesterday's blog. The banks trade on a PBR of 2, when most of their global peers trade at 1.5x or less. Additionally they yield 200+bps above the local risk free rate and their RoE is about 50% higher than the same peers.

The US job numbers acted like an electric shock to the copper market. Copper has been weak for most of the year strangely given its' correlation to bull markets. Chinese buyers were out in front with Jiangxi Copper up 5.2% in its best day in five months; Shanghai copper futures climbed by their 5% limit. Maybe this is a dead cat bounce, but the demise of copper has always been somewhat exagerated and predicated on an over supply v. weakening Chinese demand. Maybe some of the mine closures and project cancellations are going to start to bite?

My view on M&A has been sorely tested of late. BMC Software shares was sold to private-equity firms Bain Capital and Golden Gate Capital for $6.9 billion. Technology investors remain confident and willing to spend money for assets. Money is cheap and good businesses are rare. 

I just returned from a morning ride and for the second time in a month I was hit by a car. This time it was a lot worse for me and I was lucky to escape with a bruised hand and some scuffing of my handlebar tape. The car that hit me was driven by a 60+year old librarian on her way to work. She stopped and had to put up with a 30second rant from me. I appreciated the fact she gave me her name, number and place of employment. Her car bonnet though will probably need a bit of work. My bike was lucky because it was a small car. I'm guessing if I'd been hit by the likes of an Audi Q7 that my bike and I might not be still with you today.

The Giro is already getting very sexy. It's another good reason for staying alive, because this is going to be good. The stage today had two rated climbs and Ryan Hesjedal decided that Sky were not going to get an easy ride. I thought the reigning champ was fantastic as too were Evans and Nibali. Don't get me wrong, Wiggo looked great, but he wasn't given an armchair ride that he got at last year's TdF. Did you also notice the importance of the time bonuses? Hesjedal got 8 seconds back on  Wiggins even though they finished a wheel length apart at the finish. In the Giro riders are compelled to go for the win. Stayed tuned for what could be the best racing of 2013.


Monday, 6 May 2013

Ride the wave . . .

US Non-farm payrolls came out on Friday showing 165,000 increase in April compared with the 140,000 gain forecast by analysts. The unemployment rate fell to 7.5%, its lowest level since December 2008. As I had said last week there was a certain amount of gloom being built into the market, so the "pop" to new record highs didn't surprise me.

Having said that it must be noted that this type of job growth barely keeps pace with the population growth and therefore allows Ben Bernanke to continue pumping in $85bn per month and effectively provide the stock and bond markets with a put option against which to trade.

Over the weekend I listened to the usual podcasts from various commentators, one of my favourites over the years is political round table "Left, Right and Center" from National Public Radio in the US, Curmudgeonly "left" commentator Bob Scherr had a libertarian rant about the Fed's QE which had me thinking about the Japanese ZIRP. Japan had maintained a zero interest rate policy (ZIRP) between 2001 and 2006. That's a lot of years. 
The effects have been broadly negligible in that the mean growth rate and trend growth rate have remained barely above zero, but the variance in the GDP growth rates has increased as the economy bounces between despair and hope. You see central bankers are now keeping the economy in a perpetual state of expectation by saying: "just one more year . . . just one more administration . . . " The very fact that Japan has re-adopted the policy shows a certain amount of stupidity, but how then do we explain that the wholesale adoption of a failed strategy by the Fed. The challenge for investors remains to know when to jump onto "flow" and went to jump off. Which brings me to the point that I always return to: what distortions are we creating in the investing world when we price money at 0%?

Last week Westpac (Australia) reported a very fine set of figures to the Australian Stock Exchange and announced a special dividend. Interestingly the Australian banks remain in pure valuation terms some of the most expensive stocks in the global financial sector to hold. I was ruminating on this fact with a broker recently who clearly was advising people to reduce their holdings of these stocks. Broadly I think he's right, but to the great mass of investors it remains hard to sell something with a return on equity of 16.1% easily 50% higher than it's global peers which pays dividends at a rate above the risk free and obtains it's earnings by an economy for all its' faults clearly well within the AAA zone of the investment universe. The solution for investors is to remain vigilant for switching opportunities with the sector both locally and internationally. 

Yield remains illusive. Recently I wrote about the GBP5bn UK property portfolio being sold by Commerzbank. I have advised a number of high net worth acquaintances to try and access the sales process because:
  1. Sterling remains week
  2. UK government policy is largely likely to remain pro-business
  3. The South East of England will remain as the main connective hub between the US and Europe

While it was unlikely you could pick up bargains in core business London certain fringe areas may offer redevelopment opportunities when paired with the mega developments. One of the most successful national sovereign wealth funds, Norway's oil fund is targeting a 5% weighting in property after many years of being under weight. They're limiting themselves to a yearly 2% cap of assets under management so as to not overcook the market. The fund traditionally has remained fully invested in stocks and bonds. This diversification is significant as it underlines my thinking in respect to the value of yield and the value of hard assets in  a world determined to print money. The example is there for all to see . . . investors it's up to you. Paper asset prices may be out of line, but hard investments in commercial real estate centrally located in major business areas globally remain attractive.

In property terms the islands surrounding the Bay of Naples have been in demand since Roman emperors first decided to build villas on the Island of Capri. Yesterday the Giro stage 2 went to Capri's sister Island, Ischia:

Sky now holds the maglia rosa, they have a 9 second advantage over the Movistar riders and importantly a 14 second advantage over Nibali of Astana. People forget that unlike the Tour de France the Giro still has time bonuses for podium positions and therefore the gap might not be as significant as some members of the press think. Monday’s stage 3 is a 222km leg from Sorrento to Marina di Ascea, with the category-3 climb of Sella di Catona sitting 20km from the finish. It will be interesting to see if anyone decides to challenge Sky early in week one by forcing the pace. Remember that Wiggins doesn't have Chris Froome or Richie Porte to support him in senior leadership roles like he had at the TdF last year so the fight might be a little more even than expected. 

Thursday, 2 May 2013

Bless you and all your investment decisions . . . oh and please let an Italian win the Giro

Rather than starting with the investment side of things today I noted Pope Francis, in the picture with Vatican Secretary of State Cardinal Tarcisio Bertone, has blessed the Maglia Rosa of the 2013 Giro d'Italia which will start Saturday, May 4th, from Naples and ends on May 26 in Brescia.

The pope looks to me like at least a XXXXL. That's not a nasty thing because as we all know the Italian sizing tends to be very tight. Traditionally one or more of the Italian bike makers present the Pontiff with a new bike. I think the popes prefer Campagnolo to Shimano on their Colnago:

The Giro starts on the weekend. On Sunday the riders spurn the usual short time trial for what is a glorified criterium around the streets of Naples. 

It should be well worth watching as the teams try and upset what should be the Mark Cavendish show. I like Naples and I've been there a few times. The city has a certain grittiness that's hard to get your head around at first, but when you look past the chaos of the streets and out over the bay the old saying "see Naples and die" makes sense. A stunning place and the home of pizza.

My own cycling activity took me down to La Perouse here in Sydney today for my usual workout. Once through Randwick you get a pretty clear run for 20kms or so before the turn. The wind was southerly today, which hurt on the way down , but had me flying on the way back along Anzac Pde to Maroubra Beach. It's pleasure to get a tail wind, the miles melt under the bike and you hardly notice as the speed flicks up over 40kph. I'm sure in the right peloton I could have average high 40's most of the way back today.

I got some feedback regarding my Apple comments yesterday, which was good on two points:

1. People are reading the blog
2. Not everyone felt the same way

It would seem that the yield starved investors have a point in that they now don't care about inovation as much as income. If Apple can hold it's own and cover a good stream of dividend payouts they're happy to hold the stock and treat it like a CB that might get an equity kicker in the future. Some likened it to my comments on ANZ bank saying that the RoE alone, even when discounted to allow for deterioration of market share and the effects of lower margined products (ie. iPad Mini) still afforded them some comfort. Look, I'm not sure I agree with own a tech stock for dividends etc., but I see the point and am happy to print other arguments, though I'm not going to get all gushy about an Apple watch or TV as I just don't see people buying into them as they did the iPod etc..

Also After my comments about DB I see that the  ING Groep NV's US unit IPO saw the parent sell 65.2 million shares for $19.50 each, raising about $1.3 billion. The per-share price is below an expected range of $21 to $24, but the offering's size is above the estimated 64.2 million shares. Expect more of this type of action over the summer. 

Finally I'm going to avoid too much comment on some week US data due to the fact that the first Friday of the month gives us US non-farm payrolls which will trump everything else. I think the market is bracing for some weak numbers already, so maybe a bad headline is already priced in. More on that tomorrow.


Wednesday, 1 May 2013

It had to happen . . . breaking the speed of sound

Things have changed a lot in the Apple bunker in Cupertino California. I can't imagine Steve Jobs getting cozy with Wall St the way Tim Cook is, but different times call for a different approach. Apple's biggest problem is that competition has ramped up in the crucial area of mobile devices, but Tim Cook is somehow being convinced that his biggest problem is the $145bn he has sitting offshore. Mr. Cook please do not let yourself be distracted by cash dispersal or spending it on needless acquisitions. Yesterday I wrote that I liked the fact BHP was starting to refocus on its' core operations, the beauty of Apple is that it has a clear a simple set of product lines . . . they don't have to refocus their business they just have to block out the noise. Bolt-on acquisitions of technology is acceptable where you can quickly integrate or successfully incubate at a low cost in money or time to management. If Apple were to make a significant (for them, greater than $5bn) I would quickly say the dream was over.

Today Tim Cook went to the dark side by selling $17 billion of bonds in the biggest corporate offering on record. The bonds went in several tranches with $3 billion in floating-rate notes and $14 billion of fixed-rate securities in six parts with maturities from three to 30 years. I don't have the termsheets yet, but will be getting them. The point now is that Wall St will have a guaranteed stream of fees for years to come as Apple rolls over and restructure bonds on an almost annual basis. The fees on these issues is low, but the cost in time and management manpower is high and I would expect that the number of staff working in the CFO's office will start to expand in short time. The noise will be deafening. I want to be clear in that the banks have only provided a solution that the CEO and board has asked for. No one has done anything wrong. Tim Cook can honestly say he's giving back cost effect (ie. tax effective) capital to investors. Sometimes though it's not about the black and white math of the situation when you're deciding to invest in stocks. Investors in Apple's intellectual property and creativity have to be concerned.

And so to slowing growth elsewhere . . . China’s official purchasing managers' index (PMI) fell to 50.6 in April from 50.9 in March. Back on the 15 April we had found out that Economic growth in China had unexpectedly slowed to 7.7% in the first quarter. Now the PMI is confirming the ongoing trend. China remains an economy in transition and without the demand from the G7 for its' manufacturing strength the era of double digit growth looks to be over. That in itself had to happen someday. The smaller Asian tigers, such as Korea and Taiwan have been through this, so the Chinese leadership should have lots of examples about what not to do. One thing they'll want to avoid is the '97 situation where a debt bubble burst sending the tigers into a frenzy of bailouts and restructuring. The government has been attempting to slow things for some time now and reports are that this has had mixed success.

The slowdown in Chinese real estate really hasn't materialized yet on the balance sheets of the developers because of the carrying cost of old land banks. For the last 18months the government has been putting up duties and telling banks to back off on the credit, but because the gross margins available to developers holding this old land was so clearly viable the banks have felt fairly justified in handing out cash. The trouble comes now as prices have stabilized and been driven up, but so to have costs. I expect some more slowing to happen and with it will go some of the consumer confidence amongst the Chinese. Buyers should be cautious.

I've been reading some reports that the US is reflating their property market too quickly. A nice piece yesterday on Zerohedge and today more news in the WSJ highlighting  the composite 20-city home price index, which was up 9.3% in February from a year earlier. All 20 cities posted year-over-year gains for January and February, the first time that has happened since 2006. Phoenix was up 23%!

Should I be worried that even ground zero of the housing bubble, Las Vegas, was also up strongly?  I tend to think that this is the result of the Feds actions and we are getting closer to a time when we see the Fed's open market operation changed to a more neutral phase. I know most economists believe that inflation is dead and it certainly in my view is quiet, but at some stage the bounces in the housing market demonstrated by the above survey will feed back into the economy and its' then that you won't want to own bonds . . . even bonds issued by Apple.

A friend of mine is following me down the path and buying a Cannondale Evo. I hope he doesn't hold me too responsible for seducing him into the dark side of high end carbon bikes. It tends to be easier to recommend these bikes to 70kg riders than 90 kg riders as they are really finally tuned machines. I liken it to buying a Ferrari, or perhaps getting a mistress. All require time, money and a lot of attention; if you don't look after any of them you are in trouble. Regular servicing is the key.

Today's ride has once again highlighted some faults with my Garmin. I guess I felt pretty good on the bike today and I managed a few PB's, but I didn't expect to break the speed of sound . . . check it out:

A mere 1800kph on a public road . . . Mark Cavendish I have your number. Give me the green jersey now!