Monday, 10 February 2014

Just minding my own business . . .

I finally made it back to Australia on Friday after a brief stop in Zurich. Things seemed to be going pretty well for the inhabitants of private banking central. The recent up-surge in market volatility outwardly was having little impact on my favourite small city of Europe. I wonder what it might take to change the mood?

Before I got to Zurich I had been thinking about commodities and and more specifically Oil. One of the bankers I met handed me a 2014 outlook booklet and I coincidentally flicked it open to the commodities page and found that I was not the only one thinking about oil. I'm a great believer in the petro-dollar, but I also understand that there's a reasonable amount of hot air in the price because of Iran, Syria and Egypt . . not to mention the lesser instability in places such as Iraq. The flip side has been the shale gas boom in the US and the subsequent change from energy importer to newly minted exporter. My ex-partner was a firm believer in the metrics that Oil would remain fundementally in a tight market as the BRICs economies continued to take up slack that the US economy was now generating in the energy markets. While in the long term I think he is right, I'm a short term (12 months or so) bear. This blog's position is that the US dollar will strengthen further in 2014 and therefore concludes that there will be some downward pressure on the oil price in USD's. This one is not for the faint hearted and therefore it would be best to develop a cautious short overall, best manifested from cheap out-of-the-money type options of various strikes and maturities.

Given the above I suggest equity investors remain underweight various contractors in the sector as any downward price spiral will inevitably lead to the closure or delay in slated projects, as has been the case in other commodities such as coal and various metals.

I was asked about the final stop of my skiing expedition in Cervinia . . . Not sure what I think of this resort. The snow never stopped falling during my 6 days there and as such getting a clear view of the terrain was somewhat difficult. By the time we left the slopes were recording about 4 metres of powder, mostly dry and very skiable. As is my usual practice when arriving at new ski resorts I always hire a guide/instructor for day one so as to limit the amount of time you would normally spend squinting at one of those huge piste maps located on the sides of most lift stations. Anyway with the snow falling I spent 3 hrs or so being shuffled around he Italian side of the mountain. The idea of being in Cervinia is that you get to ski over to Zermatt, thus creating a huge high altitude mega resort. Cervinia itself is already at 2000m and the top stations are closer to 3600, so when the weather is bad the mountain closes off access to Switzerland to avoid people being stuck. You can't just grab a taxi back from Zermatt as you have to go the long way around, about CHF500.

Cervinia doesn't advertise itself as a restaurant paradise, so our expectations were quite low. In reality there's a number of good restaurants both on and off the mountain, but few make it into the conventional guidebooks. We managed to spark up a conversation with an English girl working the lunchtime shift in a hidden gem of a bar. She gave us a list of suggestions which proved to be all good. Readers can contact me directly for the list.

During one lunch there I met a young Canadian guy and his wife. He was working for a multi-family wealth management office that had 1.5bn to play with. The usual complaints flowed pretty quickly regarding the ability to execute deals with any urgency. This is familiar territory to me. If you're fresh out of university or a graduate position at an investment bank it no doubt seems very attractive to be given the keys to the "financial Ferrari" and told to go out and look for opportunities. Unfortunately unlike in a large institution the ability to act is much more limited as these offices firstly seek to protect family wealth and secondly enhance it. It's therefore very unlikely that (say) a family who built their wealth in packaging is going to let a 28 year old lead them down the path into coal mining assets in Mongolia. Having said that, so long as you're willing to play the long game and build up a portfolio of actionable ideas you just may after a lot of due diligence get the chance to get out on the "deal highways" and see what that V12 can do. Patience is your friend.

My Canadian friend and I didn't get to talking ideas, which was a pity because I'd like to have heard what he thought about the current situation. A lot of the Gen Y's I meet were still at business school during the crisis and have come to see the current central bank activism as being quite the normal thing within the financial system. That may or may not be a good thing and I somehow think that the Fed taper may leave more than a few MBAs splattered like financial road kill by the side of the road. The problem is the only example of this type of thing we have is the Japanese and their flirting with ultra-lose monetary policy ever since the collapse of the real estate boom in the late 80's through early 90's. I know a couple of readers of this blog would tell me that the US version has had far more conviction behind it and therefore will ultimately prove successful. I'm not as a confident if stage one of the taper and the markets reaction to it is anything to go by. The overall correlation between markets has been so high for so long that it's hard to believe that the carry trade gang can extricate themselves from the developing world without some unforeseen systemic risk. Investors will just have to put up with the volatility. 

Finally I managed to get back on my bike yesterday and thanks to jet lag made it out early on to Sydney's roads. I can report that all systems were in working order. My legs were a bit heavy and I've definitely put on a pound or two thanks to a constant diet of rich european food. As is my custom I try not to ride on Mondays because of the early week "aggro" most drivers in Sydney show, therefore today I'm restricting myself to clothes washing, blog writing and bill paying.


1 comment:

  1. Fed tapering is, so far, coïnciding with reduction in the Federal deficit. The problem isn't the tapering, it's the very tight fiscal policy. No doubt the Fed will take the heat in the WSJ, though.