Wednesday, 30 July 2014

Small things

At the request of some readers I've decided that instead of my usual once or twice a week mega posts I'm going to start to add some daily commentary on things that have caught my attention. I intend these pieces to be snippets that the blog may revisit in extended form later so as to provide a better track of the progression I go through in producing the big posts.

1. Yukos - 50bn not a game changer but interesting

Former leading shareholders of the Yukos oil company were awarded $50bn in damages against Russia. The Permanent Court of Arbitration in The Hague ruled that Russia had basically bankrupted the company for political reasons. The bulk of the assets now reside in state oil company Rosneft.

It's hard to have much sympathy for the beneficiary shareholders of the $50bn as they acquired Yukos on the cheap in 1995. Investors can just look at this as another reason to avoid Russia or they could look to the future when the rule of law may take hold. The beginning of the end of Putin's power? I think not. Certainly it's embarrassing, but nothing more at this stage. I tend to take the view that this plus Argentina plus a number of smaller events shows investors that countries and companies cannot hide behind international boundaries and effectively "shaft" people. Know your rights and be prepared to use any court you can.

2. Crazy end of the world theories

Paul Singer the founder of Elliot has of late been more in the headlines for doggedly pressing the Argentinians over their propensity to default on global obligations (as pointed out in yesterdays blog). Now in what for this blog is an important piece of insight into the world of risk management Mr. Singer has revealed his biggest fear is an electromagnetic pulse destroying the world. This blog will  actually acknowledge that this is possible, but modelling it may cause me to have to use many zeros after a decimal point before finally placing a one in the sequence. I put a nuclear war a couple of zeroes higher up the list when building my latest monte carlo of global risk factors. Perhaps James Bond movies should be banned anywhere near Elliot HQ?

3. How low will Eurozone yields go?

German 10 year bond yields dropped to 1.12% yesterday. That for all intents and purposes is an all time low. The ECB shows no sign of tightening rates at any time soon and therefore this blog will make the call that German Bunds can trade under 1% in yield. If that happens expect Germans to spend most of their time buying up property in the southern states of the EU and re-mortgaging properties and assets in Germany. There's a huge shift of money south and investors elsewhere in the world need to be aware that there's still money to be made in the eurozone. Just don't mention "bubbles ".

4. Bullish women's cycling

La Course, the women's race held on the Champs Elysées circuit on the same day as the last stage of the Tour de France this year was a great watch. The worlds best cyclist Marianne Vos won after some crashes in the peloton. Footage from on-bike cameras has started to come out. Check out the action:

Right now women's cycling is cheap. They're crying out for investors. If ASO, owner of the TdF introduces a 1 week stage race next year along side the men's tour the media exposure is going to grow fast.  Forget the mommy bloggers and embrace the marketing opportunities inherent in a sport that appeals to a huge constituency who have spending power. 


Tuesday, 29 July 2014

Flaws . . . more on Catapult Sports and a ride up a hill with a MAMIL

Would you lend the Republic of Senegal $500m at 6.25% for 10 years? Lead bankers actually had demand for up to $4bn of Senegalese debt last week when they priced this deal and while I don't begrudge Senegal the cash I do wonder where we're going in terms of risk pricing. For the record here's the current state of the worlds major bond markets in respect of 10 year yield:

Source: Bloomberg
The bond in question actually traded above issue price in the days after the deal was struck. The bankers interviewed since then have come out with some very interesting insights on whats going on in global capital markets which this blog feels is important for investors to understand. Essentially the pressure on yields in the broader USD denominated money markets have left investors with little room to move. The choices are limited. With 10 year UST's trading at under 2.5% it's hardly a strategy for wealth building. Russia a traditional outlet for emerging market yield investors is a "no-go" area. Africa as an outlet for EM monies didn't happen overnight, rather it's gained momentum in the face of ultra-low G7/20 rates. Nigeria, a country with a serious civil unrest problem highlighted by the kidnap of over 200 schoolgirls by fundamentalist rebels has been a consistent participant in the eurobond market. Look at the following tables and you'll see that Nigerian bonds trade only 200bp above their US counterparts.
Source: Federal Ministry of Finance Nigeria
You need more information? Take the results of the Ibrahim Index of African Governance. The index was established in 2007 and styles itself as the most comprehensive collection of quantitative data on governance in Africa. The IIAG provides an annual assessment of governance in every African country. Here's the 2013 results:

As an investor I have to ask myself whether the tenth ranked country on this list should have its international debt priced as this latest bond implies. It's not a question of can they pay it back, it's more a question of can they pay it back in a crisis given its institutions, economy, resources and their respect of the rule of law.

Just in case you think I'm down on Africa lets take Argentina. Currently the Argentinian government is toying with yet another international debt default because it feels that it's being held to ransom by a group of hedge funds who held out at a previous debt negotiation and now want to be paid before Argentina distributes coupon payments to those who took the restructured paper. This blog doesn't want to get into the politics of the situation, but think about this . . . Argentina has a strong agricultural sector, a burgeoning resource space and a highly educated population. What it doesn't have is a strong history of adherence to the rule of law or sound fiscal institutions willing to stand up to populist governments with balance sheet facts. It's a case of you reap what you sow as an investor and to be frank maybe African countries if given as many chances as Argentina deserve the current demand they have for their international bonds.

Back to the Senegal bonds. At 6.25% coupon for 10 years; you need to take into account your portfolio shape, both in terms of spread of geographical and credit risk, not to mention duration skew. So for every 100 dollars you want to invest in bonds perhaps 5% - 10% goes into emerging markets, then and only then do you decide you want to weigh up the merits of Senegal v Nigeria v Russia v Argentina  . . . etc. As usual diversification is your first risk management tool. Welcome to the world of bonds. In equities you spend hours fretting about PERs, CEO performance, product margins. In bonds you worry about the percentage of your portfolio that might default and whether the balance provides enough yield and potential re-rating to offset the risk. As the baby boomer generation ages, especially in the anglo saxon equity world they'll have to switch into bonds to preserve capital rather than increase it and with that as an investor you need to start looking at these instruments when you can, not when you have to.

This all brings me to the third of the Investment Banker Cyclist rules for derivative investing. The first two were:
  1. A product class of derivatives will see returns decrease in proportion to the increase in barrier conditions available to investors
  2. The default probability of a counter-party to a derivative contract is inversely proportional to the size of that entity multiplied by the number of "deals" that they transact in a given period and the number of steps removed the issuing entity is from the seller of the product
The third rule is:

Always assume that most investors never read past page 5 of a 200 page offering document, term sheet or prospectus

Bankers, lawyers and regulators don't make offering documents the size of War and Peace for fun. It costs a lot to print all those "red herrings" and amendments. Investors need to read the documents. I know it's boring, but a lot of the smartest brains in finance spend countless hours formulating the pricing, trading and dispute rules in respect to a particular instrument. This is especially the case for derivatives. For those who've never bothered reading offering documents I challenge you to pick just one to go through and I defy you not to note at least a half a dozen things you've never thought or heard of before. Let's take something simple such as the Argentinian bonds mentioned above. There's a clause called Rights Upon Future Offers (RUFO). Not an unusual clause in a bond like this, but few will have bothered to read a RUFO before. Essentially this is a clause that says that if (in this case) Argentina renegotiates the terms of the bond then all bond holders get offered the same deal. On December 31st 2014 the RUFO expires. This means that those holders of bonds that didn't accept prior restructuring can be negotiated with as a separate class of investors. This is good news if you held out because there's a clear incentive for Argentina to wait and negotiate with you separately, safe in the knowledge that if they offered you par (100% of face value) for your bonds they wouldn't have to come up with about $15bn for those that chose not to hold out. Funds involved in this are smart and they had enough "prospectus geeks" to know this and to understand the cost benefit equation for the Argentinians. Here's a nice graphic explaining the scenarios:
Source: Australian Business Insider  / Abadi & Co. Global Markets
It's not important for the purposes of this blog to understand the potential outcomes of an Argentinian default, rather my broader point is that you need to understand the documentation to fully appreciate the possibilities. Investors need to understand the flaws in their own position as well as in the position of issuers.

Flaws exist in all types of credit and quantitive risks. Take the Australian bank hybrid co-contingency bonds I've spoken about previously. I had meeting with a senior figure in the finance industry here about 2 weeks ago and during the discussion I mentioned the way investors seemed to ignore the conversion risk in theses hybrids. I thought I was getting nowhere in terms of explaining the true rank of this paper within the capital structure of the issuing institutions and how they were promoted like bonds, yet under stress behaved like equity. I heard later that the message got through and although I'm not sure it got me any closer to getting a permanent or temporary position with the firm in question at least I hadn't completely wasted mine or there time. A classic case of read the prospectus.

I wrote recently about how impressed I was with Catapult Sports at a BBY lunch I attended. As a follow-up I've been keeping an ear out in the media for news as to how their business is progressing. I was listening to the Ross Tucker Football Podcast today when I heard Philadelphia Eagles coach "Chip" Kelly speaking to ex-NFL lineman and Princeton alumni Ross Tucker and ex-Indianapolos Colts GM Bill Polian from Eagles training camp. Kelly used Catapult in his previous job as head coach at Oregon University and clearly brought the technology into the Eagles. You need to know Kelly is famous for bringing a more up tempo approach to the gridiron. This of course means a greater number of plays per game than what the old guard are used to. Clearly to do this they need more data to monitor players and the exertion that these huge men are capable of during practice and in a game. This means Kelly and his team of coaches needs to know exactly what his players are physiologically capable of.  Listen in carefully (see the link below - fast forward to 7'30") and while Kelly doesn't name Catapult outright you can hear within his answers the allusion to the "data" that allowed them to keep a healthy roaster during last season, maximise their potential practice time and allow them to make the playoffs.

It's a great insight into the world of top-end pro-sports. Basically he's saying we have Catapult and it's good. Listen in when Tucker asks him about "pitch counts" for a particular player, essentially the number of plays he can put in before he loses effectiveness. Kelly's response is so revealing. With respect to Ross he basically says . . . (paraphrasing) . . . "pitch count?! Forget that, we have hard data and know exactly what players bodies are doing". Kelly is very smooth. Tucker and Polian do a good job, but Kelly or someone from Catapult needs to show them the tech in action.  Investors need to listen in to this one. And if you are at all interested in the NFL I suggest you follow Tucker's podcast.

Finally a word about the Tour de France 2014. I've had it described to me as a boring procession this year. Honestly I don't get that. Brilliant tour. Enjoyed it thoroughly. Unbelievable effort by Nibali, he attacked on numerous stages and won 4! That hasn't been done in quite a while. On top of that you had the Frenchmen fighting it out for a place on the podium with Valverde. And then there was Sagan's continual frustration with his inability to win a stage. What about Majka  . . .  the guy didn't even want to be on the Tour at the start and he won 2 stages and the King of the Mountains jersey? The crowds in England  . . .  the sprint on the Mall. What more do you want? Then there was some inspiration for we middle aged men in lycra in the form of double champion Greg LeMond's return to the Tour as a commentator for Eurosports. The LeMond segment that brought the biggest smile to my face was when he rode up the Col du Tourmalet for the first time since 1991. Greg's carrying a few more pounds now days, but forgive him as he was and is a great champion:


Thursday, 24 July 2014

Some disruptions going on (apologies to BBY) . . .

BBY are hosting another of their disruptive lunches in Melbourne today with my particular favourite Catapult Sports headlining. Funnily enough the more I think about these companies the more I asked myself what it takes to turn around an old school business and make it relevant again at the "pointy" end of growth both for shareholders and for customers. Take for example Microsoft. I find the changes at Redmond fascinating since new CEO Satya Nadella took over from Steve Ballmer. In the year before Ballmer gave up the "captains" role at Microsoft there was an almost hyperactive feel to the company as they surged into various platforms.

Microsoft - starting to catch-up
What Nadella has done is thrown all that in the air and challenge the exciting way of "things" even while his predecessor sits on the board clutching a huge chunk of shares. As with much of business since the global crisis there is a clear path being set out along the road of shrink to grow. First cab off the rank was 18,000 redundancies which while awful for those caught in the net is a clear sign of Nadella's commitment to the cause. That cause of course was encapsulated in a now famous/infamous 3,100 word memo to staff that called for an increase in productivity (thus the job cuts) and refocusing on core platforms. In the meantime the company has finally seen the beginning of the end of Window's XP as the PC cycle has shifted from interminable decline to at least a stable outlook. That means revenue for Microsoft is growing again. We're not going to see the end to this for years, but investors need to watch this closely whether they hold Microsoft shares or not because even if Nadella doesn't succeed he can do a great deal of damage to others caught in the path from the Pacific Northwest to Silicon Valley.

One of my favourite business books of the last few years is Pamela Williams' Killing Fairfax. For those not  au fait with the Australian media scene Fairfax was the dominant player in the quality broadsheet end of the newspaper market.

It suffered a near catastrophic death in the late eighties due to a failed LBO by one of the family members who wanted to take it private. Since then it has wandered somewhat aimlessly turning over CEO's and Chairman on a regular basis while all the time lurching from crisis to crisis. In the 2000's it ceded it's natural home of electronic classifieds to several new players financed in part by long time competitors including Rupert Murdoch's son. Now with Australia's richest woman owning 14.99% and a core franchise that has been constantly eaten away from just the type of disruptive businesses that BBY has been presenting the company sees itself once again on the precipice of sale and dismemberment. Gina Rinehart sits brooding atop of her shareholding openly courting advice as to the correct strategy to transform the company. None openly are willing to step into the breech. Rinehart is unlikely to be a benign overlord in the way that many assume Amazon's Jeff Bezos will be at the Washington Post. Ms. Reinhart I think will be rather more hard headed and with that I might venture a guess as to strategy:
  1. Identify the value of the mastheads and the likelihood of sustainability
  2. Put a price on everything, nothing is sacred
  3. Sell assets that vanity buyers may overvalue (such as The Age in Melbourne)
  4. Keep the Australian Financial Review and try and transform it to the paper of choice for the desired upper end demographics (think Financial Times)
  5. Ditch the rust belt of Adelaide and Tasmania
  6. Get rid of the editorial fiefdoms - "Independent Always"  is not about the editorial direction as much as about a statement by the journalists that they don't care about the shareholder

  7. Get rid of non-core media . . . if you want to keep radio it has to pay for itself and has to standout from the rest of the dial. If it doesn't axe it or sell it within the first 18months of taking ownership
  8. Stop the cut and paste of certain competitor franchises - The Guardian Australia is a nest of white ants eating away at Fairfax's editorial with a lower cost base
That should be a start. Most of all the board, management and staff need to know what is left after all of this is going to be leaner and hungrier. It will take an inspirational appointment to the role of CEO by any buyer, with luck as Yahoo found Marissa Mayer, so Fairfax might find someone of equal talent and motivation. Of course as an investor my guess is that if you own the shares at the moment you'll be happy if a buyer comes along so you can exit with a premium and re-invest into something more disruptive with help from BBY.

If you want to see the latest in immersive fan experience check out Essentially you up load the video from your ride, run, swim or ski run and the stats from a personal fitness website such as Strava and it merges them into one "narrative". Here's stage 16 from The Tour De France.

Hit the play button in the lower left corner and then play with the other buttons. I like to overlay the power numbers (in this case from eventual stage winner Mick Rogers), but you can also look at the elevation profile while watching the speed, remand time. The only thing that could make it better is if you could have the information from several riders on the screen at the same time. I believe Catapult Sports has the same thing available, but with a lot more metrics for the pros, but if you're an amateur or just interested in your own performance just match your stats with video from your GoPro (or similar) divide and you're up and "riding"


Friday, 18 July 2014

Disruptive day dreaming: Why Don Draper should embrace the Sterling Cooper IBM 360

During yesterdays "Disruptive Lunch" at Sydney finance house BBY I found my mind straying to the HBO series Mad Men. In Series 7 advertising house Sterling, Cooper acquires an IBM 360 through which fictional Managing Partner Jim Cutler hopes to transform the firm of creatives into a firm of marketing consultants.

While my mind wandered in the direction of Don Draper and his heavy drinking crew of mad men (and women) Emma Lo Russo, the CEO of Digivizer was presenting to the room and doing a damn good job of making us feel like digital neanderthals in the nicest possible way. You see Digivizer in a way is what "Jim Cutler" had envisaged back in 1969 when he leased the ultimate corporate status symbol of the day.

Digivizer is about extracting actionable marketing data from social media. According to Emma (and I agree with this) social media is the number two most trusted resources for "advice" that consumers go to on a periodic basis. The theory is that if people are bothering to write it down for their network then they like to get it right, meaning it's likely that they stand by what they write. Now obviously this doesn't mean that they don't exaggerate or embellish. It's Digivizer that extracts our interactions with social applications and attempts to transform them into actionable leads for sales and marketing. Chances are they if you're on any of the big platforms (twitter, Facebook, Instagram . . .) then Digivizer has at some time "mined" your public tweets, musings and pictures for discernible trends, then cross matched them with whatever else you have out there that tells them if you're part of a potentially targetable demographic. It's all there waiting for the right mix of algorithms and correlated matchings to say that you're the next buyer of a car, appliance, vacation or service that a Digivizer client has to sell.

When I worked in London I sat all of 5 metres from my bank's first high frequency trading team. The two leaders of that team were a predictably "geeky" pair of PhD's in astrophysics who'd spent much of their early academic careers more interested in the particles thrown off by stars than whether the next tick in British Petroleum shares was more likely to be up than down. In fact I can remember them showing me their news reader app version 1.0 that cross correlated news articles on Reuters with reactions in the stock market. The first example they ever gave me of how this worked was the following:

I hate Volvos
I hate red Volvos
I hate not owning a Volvo

The idea at this early stage was to formulate an algorithm that looked at this three statements and made sense of them via what action happened in conjunction with them. See imagine the same thing in a Reuters report and the results of (say) Barclays Bank. What did the stock do? At the time it was all very new and the guys were just happy to be left alone with their ever increasing number of PC's that they networked together to process about 40 years of stock tick data. I became good friends with them and can still remember the first time they made GBP100,000 in a day. That doesn't seem like much until you realise that they told me that they could keep that up everyday +/-2% for as long as the bank liked . . . and they were only just beginning. They were mad men of a fashion.

So Digivizer to me is the logical outcome in marketing that high frequency trading was in financial markets. Open API and for that matter the huge array of public data we all give away for nothing allows Emma and her team to target consumers far more effectively than sales people could have ever imagined. Better than:

The progress from Neanderthal marketing to digital targeting has been like evolution on steroids, think about it . . .
  1. Here's a phone book. Start dialling.
  2. Here's a list of members of my golf club. Start dialling.
  3. Here's a list of people who flew business class on Qantas last month. Start dialling
  4. Here's a list of members of a golf club who flew business class to attend the US Open and then tweeted about the hotel they slept in, the meal they ate, the most impressive people they liked, the credit card they used and the pictures they took, etc. Oh, Start dialling the following 4 people . . . we think they'll buy what we're offering.
I hope that does justice to what Emma was offering . . . I'm sure its way too basic of a synopsis, but I'm confident in my own clumsy way that I'm at least facing in the right direction. And I promise that next time I won't let my mind wander to the IBM 360 in the old creative meeting room in Mad Men.

I'm not sure about the barriers to entry for potential competitors to Digivizer because part of my view as an investor since I got back to Australia is the way the markets geography has always insulated it from quick counter-punches. Think about the way the UK always seems to be the second place North American business rolls out it's plans for sector domination. We've seen it over and over again. Australia on the other hand is well down the list as the market, while affluent is at 25million quite small. Also it's a long way to come if you have to get on a plane . . . Oh, and besides that the "Aussies" can find us themselves without investing extra start-up capital.

Emma Lo Russa was a hard act for Andrew Galack of start-up travel company Local Fixer to follow. Good confident speaker with a focused, if more embryonic offering than some of what we've seen at BBY lately. Basically Local Fixer is trying to be the next derivative of the movement to experience cities like a real local as first epitomised by the AirBnB phenomenon. So what exactly does that mean? Well it's kind of like sourcing your information by the most active social commentators in the city you're intending to visit. It's not supposed to be like a guide book or just a booking service, it's intended to link you with people who want to interact with you.

The revenue model for local fixer still is about taking a clip from these interactions, whether that be renting a room, a bike, a pair of skis or practically anything else you can think of. I'm not sure that Andrew and the team have it completely worked out yet as I'd like to have a close look at their apps to decide how they add value. I think perhaps its all a bit Gen Y for a middle aged man like me, though I think I get where they're coming from. Perhaps Local Fixer wants it to work like this . . .

Traveller is going to Geneva and as an "outdoorsy" type is looking to find people to show him (or her) around. Now it's not winter, but thats OK they heard there's a lake and you're in the Alps in 20mins on a bike. So where can I rent a bike and if I do where do I go on it? This is where I think I come in with my network. The traveller and I are on Strava, so we're pretty serious bike riders. My digital profile says not only that I lived in Geneva but I've got a network of friends still living their. Better still one of my friends own a bike shop and plays in a jazz band. He's a potential Local Fixer because he has a friend who rents a room and also rides a bike and is in another band. Even better they're all active on social media so we can get even more information about how they interact with visitors. This is where I kind of lost track of how it works . . . that final connection. How does Local Fixer make use of "Velo Shop Jean Brun" and jazz playing hip bike rider Jean-Philippe Brun and his group of born and raised Genevois mates?

Jean Philippe has been trying to get me to come over during the summer, but after seeing his latest petite sortie I think I'll need to lose 5kgs or so to make it back into town for his bands gig. Whatever the case I'll be keeping an eye on Local Fixer.


Monday, 14 July 2014

Credit where credit's due . . . Riding 13hrs a day in Russian wilderness

It's not a self-fulfilling prophecy if the facts came before the events. As an investor it's up to you to decide what events are likely to change your asset allocations, but never ignore the impact of an accumulation of small details. It's all about marginal gains whether you're riding the Tour de France or deciding the credit worthiness of an entity . . .

Last week was a great example of this. Firstly, as I wrote previously the repo market seemed somewhat disjointed. Secondly a report in the FT confirmed that a certain apathy was at work in the markets as shown by the fact that short selling was at its lowest level in the US, UK and the rest of Europe since the crisis. And then the penny dropped in the form of a situation that had been brewing in the background in the form of Portuguese bank  Espírito Santo or more precisely its Luxembourg parent holding company Espírito Santo International missing some payments on commercial paper.

So this paper was issued by the Espírito Santo International to retail investment funds elsewhere within the group, much in the same way that many big banks will issue derivatives out of a separately capitalised entity so as to provide a credit wrapper of sufficient worthiness to buyers. If that all sounds too complicated, you're right. All you have to know is that people got worried they weren't going to get paid what was due to them. When that happens investors go straight back to what they know best and in Europe that's German Bunds and internationally it's US Treasuries. All of a sudden the carry trades don't make as much sense if you think you're not going to actually receive the funds from the contracted parties.

Credit worthiness is not something the average investors considers often when executing a trade with a bank. Many times people just look at a letter head and equate that to an institution. This was one of the great fallacies of the 2007/8 crisis when financial institutions used increasingly more sophisticated structures to imply a certain credit rating to a derivative structure that in itself was not all that credit worthy. Readers of this blog will remember the first IB Cyclist law of extended derivatives markets:

A product class of derivatives will see returns decrease in proportion to the increase in barrier conditions available to investors

I now give you the second law to consider: 

The default probability of a counter-party to a derivative contract is inversely proportional to the size of that entity multiplied by the number of "deals" that they transact in a given period and the number of steps removed the issuing entity is from the seller of the product

Furthermore just double everything for a shady domicile and secretive majority shareholder(s) who spends very little time travelling on commercial flights with normal members of the public. Therefore if you buy a structured product from a small bank who issues paper out of an LLC that didn't exist a year ago and is based in a (say) Caribbean jurisdiction from which they are conducting a large volume of such trades then please raise an eyebrow of cynicism.

Always eschew the opaque in favour of the clear. Investors should want to see very clear systems in place for periodic payments, settlements, conflict resolution and where appropriate direct accountability back to the parent company. Everything needs to be aligned so that you'll always know what is supposed to happen next.

When I was a convertible bond trader I always liked to be the holder of record in respect of  a small tranche of bonds even if I was net short the instrument. Why? Well in most cases issuers in the bond market rarely have a duty to contact equity shareholders if a special purpose vehicle they setup to issue a debt instrument has failed to make a payment etc., but they will contact the bond holders and that information can be very valuable not only to you as an investor, but if you work for a large fund or financial institution it gives you a first mover opportunity in everything from cutting credit lines, increasing margining or collateral and of course hedging your positions. Remember that J P Morgan was well ahead of the game in the case of Lehmans because they as clearer could see the strains that Dick Fuld's team were under. Of course pay back is a bitch and when JPM themselves ran into their own problems in the guise of the "London Whale scandal" there were plenty who could see the irony of trading on the back of being a counter party with knowledge that these bets could not be sustained.

This week I'll be looking into a number of companies that deal in credit. I'm particularly concerned with loan administration at the moment. Say two parties agree to contract a loan agreement, then if it's of a commercial nature and simple they'll use a lawyer or notary to formalise the agreement and act as an agent to administer payments etc. If there's a lot of loans between multiple parties you need for issues of scalability a particular entity whose main focus is accumulating and disseminating details to all contracting parties. Finally you want that administrator to have very clear guidelines in the case of missed payments or default. This could be anything from serving various notices to a timetable detailing days in arrears before lodging a court debt claim. Finally of course I need to know what happens if I get a judgement in my favour, such as is there any collateral available to liquidate? It doesn't matter whether it's $1bn or $10k, an administrator needs to know what they're doing from the time the contract is formed until the time it either expires or is terminated.

I try to remain open minded on things even if the cynic in me makes it difficult. When things are too good to be true then they usually blow up in your face. In cycling or more specifically the world of Strava I keep an eye on things by monitoring their monthly ride or run challenges. There are some ridiculously fit people in the world and I'm constantly amazed at what people claim to be up to. Take for instance this month's challenge page for cycling.

The leader this month is a gentlemen(?) by the name of Vadim Vodolaga. In the thirteen days of July so far he's ridden 3316.5kms through some pretty remote parts of Russia. I have no idea how he's done it and frankly he must be a super man. The only thing he'll win if he finishes atop the leader board is an electronic badge to go on his Strava profile page, so it's not about money. I just can't shake the feeling that it's too good to be true. Here's Vadim's riding profile for the past year:

It looks to me that this guy rides like this once a year, which does in itself indicate that he's done it before. I just find it hard to believe that you can do so little time on the bike and suddenly just get on and ride 13hrs a day. I guess I should be in awe, but I'm wondering if it's a fake. It's kind of like watching tech companies go from zero to a $1bn capitalisation in the space of a few months, you need to get to see them face to face and test what they're up to before investing further. Therefore I'm treating Vadim like a credit officer treats a special purpose vehicle . . . show me the structure and prove to me what you're doing is verifiable and you'll have 100% of my admiration. Of course until then I'll be making an emotional provision against possible irregularities and limiting the size of our business while awaiting updates. Good luck Vadim, whatever you're trying to accomplish.


Tuesday, 8 July 2014

Early warning . . . riding into London and out on to the fields of the Great War

The US Treasuries are the instrument of choice for one of the deepest most liquid markets in the financial world. The trouble with this is that for many investors it simply represents the highest level of deposit protection available in governments financing. While many would say such assumptions are wrong, it's exactly how the "man in the street" investor operates. There's a another side to the market that many may either have never known or thought about.

As an ex-trader of various multi-asset books over the years treasuries represent an important hedging tool for the interest rate sensitivity of my positions when priced in US dollars. Let's take an example, say I'm long corporate bonds as portfolio and all I want to do is capture a carry pickup of the portfolio over the risk free interest rate available, I'd sell some treasuries against the portfolio after working out certain sensitivities from historical data. This requires me to borrow the treasuries and pay a fee to a holder of these instruments which is called the repo rate. If I can't "repo" the bonds I have more exposure than I want and I may decide that the risk of holding the portfolio of other instruments is not worth the risk. Sometimes when you can't borrow the bonds you still sell Treasuries short and "fail" on the trade and pay an extra fee because you like the risk metrics and carry on the portfolio you're trying to hedge so much that you're willing to pay the extra cash.

It's all very good to fail on trades for short periods, especially if you're one of the few and not one of many doing the same thing. You see if you find that lots of investors are failing in this the most liquid repo market in the world you get a liquidity problem building and banks start to distrust each other and their counter-parties ability to meet the terms of their sales contracts. When this happens as it did in 2007-8 you start to see credit lines being withdrawn and with them goes liquidity out of the system. Banks and institutions that require leverage (i.e. borrowings) to make returns suddenly have their businesses shut down and you get a Lehman Bros, Bear Stearns type situation. The Fed and most central banks monitor closely the health of their government bond repo markets knowing that if confidence starts to fail it usually shows up here first.

Why bring this up? Interestingly today I noticed on Bloomberg news a report that the Fed data was showing that failures to deliver Treasuries have averaged $65.6 billion a week this year and peaked in the week ending June 18 at $197.6 billion. By comparison uncompleted trades averaged $51.6 billion in 2013, and $28.8 billion in 2012, according to the Fed. In June repo costs got out to as much as 3%. This is in a market where the coupon for recent 10 year bonds was 2.5%. If you're a trader you really want to hope you're sitting on a lot of positive carry to put this hedge on or you're locking in a loss. As an investor when repos failures build up you need to ask about not only the liquidity in the bond markets but also equities and FX. Remember in equities you have rates sensitivities in any portfolio contains derivatives, hybrids or alike. More importantly it's not just contained in US markets, but also in multiple jurisdictions as foreign companies relying on the breadth and depth of US bond markets for financing. Take the Australian Banks as an example (following on from my blog yesterday). They have been big users of the US markets this year because they are happy to borrow in USD and lend into the Australian housing and credit markets in AUD making as I previously described a tidy pickup in carry. They hedge this through FX swaps and alike which in turn have a rates component. Now you see what can happen. Withdraw liquidity in the largest bond market in the world and it can ripple back to a credit card holder in Australia.

So what do we make of this latest data? Well it's not panic stations just yet. There's enough corporate profits being made for this to go on for quite a while. There's also another policy aspect to this in that the Feds QE which still stands at over $30bn a month is actually causing some of this by removing longer term bonds from the market by pumping cash into the system to force the banks into the carry trade by lending this cash out. The trick is for Yellen and Co. to get the balance right as we end QE. Withdraw purchases too quickly and liquidity in the real economy (like SME lending) will dry up. Take too long and you may have created a crisis in confidence that sees a new set of problems develop.  Investors need to monitor this data as an early warning sign that things are not well.

As a kind adjunct to the repo situation it seems that the Basel Committee on Banking Supervision is contemplating requiring banks to risk adjust their sovereign bond portfolios (via the Wall St Journal).

Here's the problem. When Greece defaulted on its' sovereign bonds it called into question the measurement of risk capital within banks throughout the Eurozone. Up until 2007 and since the introduction of the Euro the ECB and members preached convergence of money markets. In effect the ECB tried for years to make us believe that a Greek or Italian bond was the same as a German Bund. As part of this there was a concept that if you were an Italian bank holding Italian bonds these were considered the same risk as when they held German Bunds, which we now know is nonsense. So institutions ran a carry trade were they borrowed from the Germans and lent to the Italians (in this case) and all was good. So now the Basel Committee wants to revisit this, meaning you that say you were a Spanish bank your government's bonds might have a 10% risk discount for which you would have to allow in testing your own capitalisation and subsequently this would lead you to having to raise proportionally more tier 1 capital per capital Spanish bond v. German Bund as an example.

This all raises a number of problems in that if you were to suddenly require a new round of capital raising amongst countries where the bonds were likely to attract some sort of risk penalty you'd be hurting the banking systems most in need of relief. Here's a chart from the WSJ showing the size of the problem:

The problem is obvious and I can only suggest that any changes are made incrementally and carefully.  If you're an investor it also should add to your anxiety as it encapsulates the problem of building global portfolios of anything. Imagine you're running a global bond fund . . . you probably own the high yielding G20 Eurozone bonds and are short some Bunds and even some US Treasuries. Your repo rate has moved higher in the US and because of the "non-convergience" the Basel Group is implying you'll need to add to your short hedge. It  starts to get very complicated and should give you pause for consideration.

Perhaps then you may have been part of the millions who've lined the streets of the UK to catch a glimpse of the TdF 2014's sojourn onto those green and pleasant islands. If like me you were gobsmacked at the sheer size of the crowds lining the way from Cambride to the Royal Mall in London you probably forgot about the signals from the money markets to enjoy the spectacle of the big German sprinter crossing the line in front of Buckingham Palace.

I loved living in London and for years now the old lady has been tarting herself up with new infrastructure throughout the capital. The pictures were great and France herself has much to live up to. The Peloton has one more sprinters stage before reaching the first of the French highlights this year with Stage 5 where the TdF will remember the Great War by riding the fields of north west France were the great battles took place.

As the video shows it's a mini Paris Roubaix across the classic cobbles. The stage starts at Ypres in Belgium, the scene of so much carnage. I hope the fields are full of poppies and we get time to spare a thought for those that died. They'll be nine sectors of pave for the riders to negotiate.I can't imagine going 45kph on those cobblestone, let alone my more likely speed of 30kph., but I'd like to try.


Monday, 7 July 2014

Disruptive . . . another lunch at BBY . . . bienvenue le Tour de France

Australian investment is an equity culture, sometimes I wonder if there is such a thing as a local corporate bond market. Yes Australia has hybrids, but even these are little understood by many in the investment community, as for the more exotic structures often seen on offering letters in Europe and Asia these are basically relegated to a too hard basket. I think it has a lot to do with the highly concentrated banking industry and the affinity that we have as a commodities nation with the discovery of bright shinny things buried in the ground. It's no wonder then that when presented with the potential gold mine that is intellectual property that most run a mile and would prefer to trip over an iron ore deposit than deal with understanding some of the new business models that I've been lucky enough to see again last week.

More gold was left lying around level 17 of 60 Margaret St, Sydney Thursday in the main meeting room of local investment house BBY. As I said in the last blog another four companies were presenting their "disruptive" businesses for those lucky enough to get an invite:
  • GoFar - automotive and insurance sector
  • Open Learning - education sector (relevant to the announced 3P IPO)
  • SocietyOne - banks and financials
  • Zed Technologies - healthcare sector
Of these four I found Society One the easiest to understand. It helped that Matt Symons the CEO is an ex-Accenture partner via the acquisition of a company he helped found while living in the USA and was a polished and importantly focused speaker. Society One is a Peer to Peer lender, so in an international sense this isn't ground breaking, but for Australia it offers some real disruptive qualities in a personal loan market that is sorely in need of a good shake up. Readers of this blog know that the big 4 banks (CBA, WBC, NAB & ANZ) dominate the market for virtually all financial products in Australia. Competition where it exists is usually confined to first mortgages and little else.

There's a reason that the BIS recently ranked the Australian banks as the most profitable in the world with class leading net interest margins as a result of the super-charged profits they garner from personal loans and credit cards. Mr. Symons quickly summarised the situation when he put up a couple of simple slides showing the way how both credit card rates and personal loan rates had hardly moved in the face of rate cuts by the RBA and that's because there is no competition. If credit cards are charging around 18% and personal loans are around 14% versus a 2.75% official funds rate then you can see why the whole sector is crying out for someone to bypass these regular channels.

Peer to peer lending is nothing new, but it is in Australia. The main sticking points in Australia is probably just educating people in the use of a non-bank intermediaries. Society one is offering the conventional model of matching lenders to borrowers by offering them the ability to build a diverse portfolio of loans in definable categories. The system works on an auction type basis where borrowers offer business and lenders bid via rate and size. Society One acts to amalgamate the bids. I was bit slow in getting my hand up to ask some questions about the securitisation process which I think is the key to the business both in terms of loan administration and regulation. They use there own proprietary software "ClearMatch™" which they say offers:
  • Customer Service Tools 
  • Credit Decisioning and Score carding 
  • Debt Management Tools 
  • Bank Account, Control Account and Suspense Account Management
Having viewed this I'd still like to hear from the company themselves answers to the following questions:
  1. What is the entity for the administration of the loan?
  2. What is the procedure for actioning repayment for loans in arrears?
  3. Will their be any independent auditing in respect of statistics available to lenders?
There was a question asked about the regulatory framework under which Society One operates and while I felt assured by Mr Symon's answer that they had jumped through the various "hoops" I'd still like a one on one with him and a flow diagram given the forthcoming Murray Report on the Australian Financial sector. I've seen a lot of "blow-ups" over the years due to government regulation (anyone remember offshore online betting in the US?) and remain always aware of Warren Buffett's rule to avoid or limit investment in businesses that are easily "outlawed" by government regulation. I actually think that we're more likely to see an expansion in this sector rather than a crackdown, but remain vigilant that the first time a business like this "forecloses" on the proverbial widow with eight children that the press will plaster them on the front page of every news source in the country.

In summary Society One has credible management, an understandable and operating business plan, a confirmed niche offering acceptable returns and a regulatory environment on balance that is likely to favour rather more competitive force. Against this I don't see any barriers to entry, especially from the current group of mortgage brokers who already have brand awareness on there side. I think a successful peer to peer could easily be snapped up by said brokers and fit smoothly within their businesses as an alternative to them setting up their own versions. Society One remains one to watch.

An altogether different proposition was GoFar. Danny Adams and the team have a strong engineering background that should give comfort to investors. I think too often these small tech based start-ups lack a depth in this area and leave themselves somewhat vulnerable to the usual teething problems that business suffer in their roll-out.

GoFar is a device that you plug directly into your vehicle's engine diagnostics port. It then sends data via smartphone to the cloud from which it is analysed enabling the driver or importantly a fleet manager to adopt best practices in respect of energy management and data for insurance companies. There are a number of international companies already in the sector, especially in the UK and US where insurance has been the focus. GoFar owns a number of patents on the technology that is contained in the modules and I assume this is once again another system where the real value may end up being the accumulation of  data. They say they've already seen demand from fleet owners and if I was GoFar I'd concentrate on this area rather than in the broader retail sector as it's more likely that savings and therefore the value of the system will be recognisable and actionable in a business environment.

Danny and the team are spicing things up with some "gamification" of the results. You'll get a section of an app that will tell you how you rate versus other drivers in a kind of Strava-esque way. They'll also be a dashboard mounted device that glows green when you're being a efficient and red when you're not. I don't believe the average commuter will care about this, but I'm prepared to be proven wrong in knowledge that I'm not exactly the most "hip" driver on the road so as an investor I'd say to Danny "thats nice, but lets talk about the real guts of things". And that takes me to insurance.

As the proud owner of a vehicle tracking device as far back as 15 years ago the development in the user pays insurance system has always seemed logical to me. I think the first anti theft trackers I had were about a GBP1000, but when fitted to your wannabe master of the universe sports car of choice it brought down my insurance premiums by enough to make the trackers pay for themselves within 2 years. Of course now with GoFar adding driving style and in version one operating hours you can see the benefits for the actuarial classes. They're not doing GPS in 1.0, but I asked Danny about this and it looked very doable for 2.0 and thats where I think (excuse the pun) the rubber will hit the road. You see if I know as an insurer that a vehicle spends all it's time in a low theft area being driven at low correlated times for accidents (i.e. outside of rush hours) then I'm likely to cut a deal with the owner. On top of that you'll have proper data on what people do as opposed to what they say they do. If the only times they drive are between 9pm and 4am I'm wondering if the driver is worth having as a customer . . . but thats just me.

As an investor I need to know a little more about the nature of the patents in question and I reckon that they should try and get some insurance companies on board (if they haven't already) in  their next round of capital raising. Gamification alone probably doesn't do it for the average family unless they get a little prompting from their insurance company. Other than that I'd also need to do a bit more research on the competition.

Of the other two companies I thought Zed Technologies was the more easily understood as Open Learning looked to me a bit too easily replicated by the already established players in web based learning. I just have to believe that the big US players could make the jump very quickly to limit Open Learning whereas Zed might just be simple and nimble enough to gain a foothold before their competition wakes up to what is going on.

As is my usual practice I arrived early at BBY and was lucky enough to grab a couple of minutes with Co-Founder Ross Wright and one of the more senior BBY bankers. Ross is an ex-radiologist and works from the basis of empowering the patient. Essentially Zed offers portability of radiological film by the patient. Essentially you get your X-ray or similar digital scan and it's uploaded to the cloud and you get access through an account and I gather eventually even an app. Instead of carting analogue film from doctor to specialist etc. you simply generate a passcode for the medical practitioner in question and allow them for a given time to access your digital films. The benefits for radiologists and for that matter governments, patients and medical insurers is that you're not spending money generating film that if you're anything like my family gets damaged or lost pretty quickly. For patients it means you can get a second opinion quickly. At this stage the patient owns the data, but I see where Zed can leverage this in future, though I appreciate that at this stage lots of people are not too keen to let even anonymous versions of their films be on-sold. Keeping it nice and clean until people get used to the security of the system works best to me in version 1.0, but consider in the long run just the benefits of a vast database of these type of things for researchers I can see the potential.

Having been a long time citizen of the world I know the problems of transferring medical data between countries and doctors, so I'm an easy sell. I wonder what the more single jurisdiction citizens might think about the system? My guess is that if the price was low enough the under 35's would jump all over this. At this stage it's a film/scan-centric service and they already have a system operating in Australia for practitioners. The possibilities are good and I can imagine other biological information could easily be uploaded. I fear of course that the main pushback might come from the medical community who always surprise me with their desire to control the patient "experience". Doctors are a conservative lot given the technology they work with. I just wonder what might happen to Zed if (say) GE offered a similar system to hospitals or insurance companies. As I said Zed will have to rely on flexibility and first mover advantage to get a strong enough foothold. I'm a big fan of of the anything health related and therefore at the very least would recommend investors watch out for Ross and his partner when the time comes for a capital raising.

I wasn't always interested in health and those readers who know me probably can testify to my love of fine food and wine. That changed for me in Singapore in 2006 when I had a health scare and ever since I've been extremely aware of how you can let things go. Garmin has been the main beneficiary of my conversion to an exercise regime and the world's wine traders the biggest losers. I'm a concrete believer in measurable data in health matters. Luckily given my focus on cycling since 2011 this has become ever easier. The combination of various monitors, be they heart rate straps, cadence counters, wireless body mass scales or home blood pressure monitors are fast being condensed to fewer and smaller units. The ageing baby boomer generation and the spiralling cost of insurance makes the wholesale adoption of personal health monitoring a no-brainer. In fact I think much like the space race gave us a vast array of devices and materials so too has the world of high-end athletics. Take for example the trends in cycling towards monitoring personal power output. Watching Chris Froome and team Sky competing under the direction of a strongly analytical staff can be both fascinating and soul destroying. I know personally I hate to think that the team rides knowing a given rider can sit on 400w for 62.5 minutes and then he's burnt and you need to have the next guy in the procession step up.

I appreciate Sky, but prefer Contador because he rides more with guile and cunning and puts pressure on other teams to react because of his explosive power on the climbs. You need a team with a lot of depth to combat a Contador, because you've got to be patient and hope he burns himself out. If that doesn't happen you're going to be down 2 or 3 minutes on a an alpine clime and even if you're a phenomenal time trailer that might not be enough.

On Stage 2 of the tour yesterday there was another wildcard at play in the form of Vincenzo Nibali.

The course was setup like a slightly shorter version of Liege-Bastogne-Liege, meaning lots of short sharp climbs with chances for riders with real endurance to get away.

Readers will know I like they way Nibali won the 2013 Giro and have been somewhat disappointed with his form since. He took the Italian Road Championship recently and although I agree with a number of the more fashion conscious commentators that the Astana kit he's been weaing since is pretty poor there's no denying that it's given him a boost as evidenced by the way he point at the flag while winning this stage. I also like the new shark themed bike that Specialized have provided him with for the TdF.

I liked the old Tarmac SL4 "Shark Of Messina" frame with the blue highlights on the forks and stylised sharks on the top tube so much I tried to buy one.

The new Tarmac SL (they dropped the model number) is in my mind strangely cartoonish and perhaps less classy? As an investor with a few years under my belt I'm still more a buyer of the older graphics, but can appreciate the more menacing newer version. Whatever your preference watch out for Nibali.


Wednesday, 2 July 2014

Don't press that button without thinking . . . getting in early and not getting into the wrong investment for a dumb reason

Email is the most dangerous and effect weapon any executive has in their arsenal of management tools. It makes us lazy and isolated from the realities of the world around us, but simultaneously allows managers to feel directly in control. For years now I've been following the criminal case(s) against various News Corp executives in relation to tapping mobile phones in the UK and the thing that struck me most was the cavalier attitude to email for communicating crucial decisions. Leaving aside the legalities of the case(s) I wondered what course things may have taken without the ability to "point and click" approvals while running between meetings? Acting decicively is not always a function of time, it's a combination of being able to quickly summon the necessary facts within a clear framework of compliance to company goals, policies and legalities.

Email is therefore ripe for some kind of rethink. In the UK and for that matter many other jurisdictions banks are required to keep all electronic communications for 7 years. The decision you make as a mid-level executive can haunt you for quite a long time and as such maybe we need a new model to protect ourselves as much as to protect your company. The easiest thing you can do today is to set a "rule" in your email preferences to delay actually sending emails for (say) 2 minutes from the time you press send. That gives a crucial period in which to reassess what you've written and stop it from leaving your local device and hitting the servers wherever they may be. Just a thought.

This week I'll be attending yet another pre-IPO lunch at local investment bank BBY. The theme remains the same, so it will be another group of tech type business looking to disrupt the old world with some fresh thinking:
  • GoFar - automotive and insurance sector
  • Open Learning - education sector (relevant to the announced 3P IPO)
  • SocietyOne - banks and financials
  • Zed Technologies - healthcare sector
I honestly haven't looked much into these and of course will adopt my usual practice of being early to the meeting in the hope of getting a march on the crowd. One thing I've been noticing is the lack of interest some of the bigger pension funds have in these type of events. I guess it's hard for the big pension funds to run a start-ups sub-fund without incurring costs out of proportion to the size of the investments in stage one of any such business. Instead they probably remain content to go in via various venture capital funds. This seems to me to limit their potential. This sub-contracting of function is dangerous in the e-commerce world we currently live in. I bet the same fund managers whinged about the valuations of Linkedin, Facebook etc., because they had no "touch" with the incredible growth rates of these businesses until they were mustered into a meeting room to be one of the many, rather than one of the few and delivered an ultimatium of either invest or get risk missing out.

When the then Union Bank of Switzerland took over merchant bank Phillips & Drew in 1986 they acquired a very successful funds management business. By the late 90's Chief Investment Officer Tony Dye was a well known figure within the business pages of various financial journals. Mr Dye was referred to as Doctor Doom (one of the many to hold that moniker over the years) because of his famous scepticism in respect of growth stocks and the sub-sector of tech stocks in particular. Essentially Dye believed tech stocks valuations defied logic. In doing so the P&D funds under his control seriously lagged their peer groups and as such shrank from £60bn to less than £35bn over the years before the tech bubble burst in 2000. Unfortunately for Dye he had been removed from his position before seeing himself justified in his stance. My point for investors and investment professionals is that things change very quickly and those organisations who dogmatically hide their heads in the sand and refuse to confront such changes will suffer the consequences. Dye was right in 2000, but a decade on was still wrong and although one can envy the schadenfreude of the moment the case points more to the flaws in P&D's management structure as much as to Dye's single mindedness.

This blog has pointed out more than once the prevailing scepticism that many international investors have in respect of Aussie banks. Maybe there's a moment of Tony Dye schadenfreude out there for the bears that have constantly tried to pick the turning point in the relentless rise of the four Aussie behemoths. Lately there's been a crack in the business model of at least one of the big four. The Commonwealth Bank of Australia (CBA) has lately come under the microscope by behaviour of some its financial advisors who directed certain client funds to higher commission paying CBA products rather than choosing a best in class type solution. The investigations are ongoing, but certainly some investors used to seeing little compliance problems at the Aussie four were quick to jump on the potential for new regulation to eat away at the seemingly endless stream of record profits by the banks. The Murray Review (to be released 15 July) will make recommendations that may weaken the position of the majors and this might cause a rerating in valuations. Investors should remain vigilant, but this blog continues to believe without interest rate rises and a complete change in government policy that the Aussie Banks are perhaps moderately over priced, but no free ride for short sellers. I wonder what Tony Dye thinks?

The Crown Estate (CE) is the GBP 8bn property fund held by the UK government on behalf of the royal family. The profits of the fund get returned to the exchequer and the Queen gets the civil list and fringe benefits for her family. The reason I mention this is is because last week the CE reported a fairly impressive set of figures and in doing so confirmed what this blog has been saying about the London property market for some time. In the UK tax year ending March 2014 the CE recorded a profit of £267m, which was up 5.7% year on year. The total value of its assets increased to £9.9bn. Rents are growing and vacancies are down. As a company and a quasi-sovereign wealth fund there's a lot to like about the way management has been handling things. In particular since 2011 there's been several deals with select outside investors including a sale of a minority stake in Regent Street to the Norwegians and the 2013 partnership with the Ontario Municipal Employees Retirement System on a 270,000 sq ft development in St James’s, worth around GBP320m. The CE isn't allowed to take on debt, so it's hard for them to get the leveraged returns you see elsewhere in the sector. Investors into the UK property market getting in now have missed the easy returns, especially if you are non-GBP based as not only have market cap rates rerated, but so to has Sterling. Watch Spain and southern Europe for better opportunities while they last.

Property can easily get overrated. A great example came to me this week via twitter. Apparently our good friends at KKR are eyeing the yields in the South Korean capital.

This is a great lesson for those investors who apply the simple logic of spread over government bonds. In the case of Seoul the uninitiated looks at this chart and thinks how can prime property trade at such a carry over government debt? The same person then starts doing a similar chart of various Asian and later world cities. Here's the problem . . . In Seoul you're sitting basically an artillery shell's  shot from one of the maddest men on earth. One bad day for the North Korean leader could easily wipe out your whole investment and make you understand why there's a yield pick-up. The same is the case in Japan. Tokyo sits on one of the most active fault lines in the world. One earthquake and those 50bps that you bet your career on are going to look pretty paltry in comparison to your lost capital. Additionally buildings in Tokyo are constantly upgraded or replaced to lessen the impact of "the big one". Thats why I used to get frustrated at conferences and company meetings when the real estate guys from NY, London or Sydney sent over a relative junior who spent most of their time ear-bashing you on the golden opportunities based on the spreads in Seoul or Tokyo narrowing to the same level as NYC. Some investors are best off sticking to what they know and can see from their own office.

We've finally reached that time of year when Europe goes on vacation. It's a time when France's RN7 autoroute will be bumper to bumper and earnings for the toll companies should see a nice bounce. It's also the time of year that we get to see the start of the Tour de France.

The great race begins this year in the UK and I'm tipping it to be the most wide open race in quite a few years. I wish that Wiggins was riding for Sky along with Froome so we could also get a La Monde - Hinault type situation developing, but it should still be pretty good watching Sky try and see off Contador and a raft of others.


I'm tipping Contador because it seems to me that Saxo-Tinkoff finally has a team to support the Spaniard.

As I'm in Australia I'm more concerned about winter riding than the latest in summer cycling clothing being pushed at me through the usual marketing devices. This week I made a effort to get out the winter training wheels as the costal winds have picket up here and I'm getting a bit concerned about the way I've been getting blown sideways as a result of my deeper rimmed Mavics and Campagnolo Boras. My trusty Pinarello Dogma 60.1 has also been dusted off in anticipation of the usual rain and slop that Sydney is likely to se between now and September. When you haven't ridden a bike for a while I highly recommend you give it a full check and even do a wash and re-lube. The Pinarello has been off the road for a few months and given I'd last been on it during the rains earlier in the year here I wasn't surprise to sense something amiss in the headset.

I had a go at taking it apart myself, which is a firs for me with this particular bike as it's always been rock solid and low maintenance. I removed the top cap, spacers etc., but had a lot of trouble getting the fork out. At one stage I used a rubber mallet to try and loosen it, but to no avail. Discretion being the better part of valour I retreated to the safety of the team at Cheeky Monkey and got Joe to do the job. Interestingly the setup on these bikes is very tight and the bearings are of a proprietary specification and can often mean its hard to get things out for a service. Joe tells me the top bearing was the culprit and he replaced it and cleaned things out appropriately. I'm confident of doing the job on the Cannondale and my BMC, but next time will try and do the Pinarello myself . . . mind you for AUD 60 it wasn't the most expensive trip I ever took to the bike shop.