Tuesday, 22 October 2013

Brewing away . . . .

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

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

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

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

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

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

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

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

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


Friday, 18 October 2013

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

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

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

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

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

A fine line 

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

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

Vaya con Dios.

Thursday, 17 October 2013

My own cycling filibuster . . .

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

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

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

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

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

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

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

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

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


Tuesday, 8 October 2013

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

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

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

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

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

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

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

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

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

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

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

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

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