Tuesday, 26 August 2014

BBY Disruptive Lunch . . . Get cash back, watch your business and hurt some people

Three companies presented at the latest of BBY's Disruptive Lunch series last Thursday. Aa a bonus we also got to hear from Jennifer McFarlane, a long time adviser to new technology start-ups (natural resources, pharma) who provided a nice narrative of her latest project.

Arriving early as usual I got to meet David Pysden the CEO of start-up Chiron, which is the holding company for the latest entry into the booming combat sports arena (think UFC, boxing, etc.) Unified Weapons Masters (UWM). It's kind of hard to describe, essentially it's a synthesis of some traditional weapons based martial arts, such as Japanese Kendo and medieval armour. The armour in this case is currently a 27kg suit studded with 59 sensors allowing the combatants to avoid significant injuries. The suit seems to be a cross between a Star Wars Imperial Storm Trooper and one of those weird cyborgs with the single LED scoping eye of Battle Star Gallatica. Here's a promotional video of what I'm talking about:

As male investor the first thing you have to do when presented with something like this is try and contain your testosterone. It's all too easy to get into the video game like nature of what you're seeing. That's a trap, so firstly let's look at the technology.

The suit's 59 sensors measure more than just body strikes, they also purport to measure the force of the blow and even though we didn't get into it there seems to be some algorithmic analysis of the likely injury caused by these blows. The suits currently are a polycarbonate type material and David tells me that the production version should shed about 9kgs bringing them down to 18kgs thanks to some help from carbon fibre boffins in the UK who specialise in Formula One car building. Overlaid on this will be various web and app based portals that allow a simulcast of data directly to your chosen device such that you're able to see the effect, status and likely location for the next "killing blow". Additionally you don't have to be Warren Buffett to see the possibilities for spin-off products such as video games . . .

If they could ever produce a suit for $300 that was safe you can imagine where this could go in the mass market, but at this stage the suits are not intended to be sold to the general public, rather UWM, like UFC, WWE and boxing before them is trying to create a closed system that allows them to match professionals against each other in sanctioned bouts. Right now the plan is to produce 24 such suits and rollout tournament style events in carefully chosen geographies. There seems to be a preference for version 1.0 to start in Asia where weapons based fighting has very deep roots in the sporting psyche.

As a business model you can track the growth in the sector by looking at WWE stock price and reports from UFC's privately held owner Zuffa LLC. Both leaders in the space, as well as boxing are very media-centric and have been keenly pursued by various content hungry media conglomerates. As I said to David before his presentation, if the L.A. Clippers are worth $2bn to Steve Ballmer without even owning their own stadium and then baseball teams are earning $200m plus a year from their own TV channels, then I can fully understand the market they're aiming for. News Corp. is reportedly already paying UFC at least $100 million per year for UFC programming.

Chiron / UWM will need to raise more money soon in order to build 24 production suits. I liked the fact that management had a very detailed plan helped by previous management and board experience.  The questions that I still have are:

  1. How viewer friendly is it? Are bouts like fencing at the Olympics short and sharp over multiple rounds?
  2. What liability does the company have for injuries? We know from the NFL that a helmet alone doesn't stop participants being concussed.
  3. In UFC fighters salaries are fast becoming an issue. What do you think you'll have to pay participants to attract the right types to the "sport"?
  4. How durable are the suits? 
The question for investors in this sector is are the viewers as likely to respond to a sport with limited visuals when it comes to the actual blows as they are in (say) UFC where literally real blood is flowing from the octagon? Then again would a Roman gladiator fan have liked watching medieval tournaments? I guess they probably would? And if enthusiasm is worth anything then following David Pysden and his team of happy martial arts enthusiasts is likely to be a rewarding trip. 

I guess for me it was much easier to understand and have some connection with the other two presentations of the day. Even though both Local Measure and Starthere go over some old ground both offer some new disruptive qualities that should appeal to investors are users alike. 

While listening to Jonathan Barouch the CEO of Local Measure I couldn't help thinking of it as part Digivizer, part crowd control software being used by various police forces around the world. Essentially Local Measure is a venue management system come instant customer feedback system rolled into one. Here's how it works. A company asks local measure to monitor social media output associated with a particular venue. The first example given was an airline lounge. The management of the lounge wants feedback on everything from the overall experience to whether a customer thought the choice of cereals  or wines was up to the standard they expect. Algorithms filter some of the noise and focus on ranking the feedback and even associating it with particular high value customers. Think about it this way, if there's a very important frequent flyer in a lounge making a point positive or negative about the venue staff are able to respond to that promptly rather than waiting for the delayed feedback. 

Local Measure also has a policing function. It's amazing what people say and record on social media. Local Measure recently won a contract to monitor a particular casino, apparently during a presentation to the management board someone actually put up on social media that they'd stolen a security guard's walkie-talkie. Obviously the meeting was interrupted, but the bigger point was that the software effectively filtered the "noise" and prioritised the message, without this you'd be hoping for someone to hashtag their activity and for one of your staff to manually pick that up. And just laughs Jonathan showed us that stealing communications equipment is not the end of such stupidity . . . surface to say, don't take illegal drugs and post pictures of it from even the most expensive of hotel venues. 

As far as business model for Local Measure it's the usual subscription service based on size and number of potential sources. Jonathan didn't get into the numbers, but his clientele seems to be fairly tier 1 at the moment and I'm going to guess that if they're not already cash-flow positive they can't be too far away. I'd like to see them look into some more predictive algorithms as per the police work I mentioned earlier as I don't believe their first mover advantage is sufficient enough to be a wall around their revenue sources. 

Perhaps take Local Measure the next step?
I like Local Measure just a little bit less than Digivizer, though they're not exactly in the same place they certainly are closely related. And thats the problem, because if Emma Lo Russo and the team at Digivizer leveraged their customer base and offered something similar it may hurt Jonathan Barouch's progress to the next step. Investors need to start pocketing-up information on this sector and watch it closely. There will be a winner, but also a fair amount of carnage along the way, making this not as big a "gimme" as I'm sure many at the lunch thought at they mulled over who may be watching their own tweets, postings and feedback in the darker corners of the data mining cosmos.

I'm not sure any of the esteemed investors or bankers in the boardroom last Tuesday have ever given much thought to the various low-level rewards schemes offered by retailers aside from that most aspirational incentive of all, frequent flyer points.

It takes a second or two to adjust the radar and come down out of the clouds to where Chris Barton CEO of Starthere (under the guidance of Chairman Adir Shiffman - see my blog on Catapult Sports) is starting to get traction by offering shoppers cash back instead of nebulous points and alike. Yes thats CASH . . . in fact it's about $5 in every $100 for the shopper and $5 safely into the coffers of Starthere. There's a tool bar overlay for your chosen desk top browsers that automatically detects you shopping on an accredited site and quickly scoops up the rebate ready for your periodic payout. All very simple and even if Chris was a bit nervous during the presentation he still came across as positive and likeable.

Here's the value proposition for the shopper. Currently for every $100 you spend with your frequent flyer accredited card etc. you earn basically $1.80 worth of points. If you're getting back $5 from Starthere you're ahead of the game. And just to top it off you still get the frequent flyer points because you used the same card you always have. Thats the good news. The not so good news is it's not everywhere yet, but it's starting to be in places where at least this blogger is likely to make a purchase  a couple of times a year.

What I have trouble with in respect of businesses such as Starthere is where is the value for the actual retailer? Someone I asked said to me: "Mike, what do you think they're already doing in Australia with docket shopping? Whether they do it through a product discount, a coupon, frequent flyer miles or cash back they don't care." Thats a good point, in which case it just comes down to their ability to administer the scheme and drive new shoppers towards participating companies. Personally I think the barrier to entry is Starthere's ability to "land grab" enough that their critical mass makes it uneconomical for another player(s) to jump into the space.

The rain continues here in Sydney and the low skies and wet conditions are keeping me off the bike and pushing me into the gym. I wanted to mention that I snapped a shifter cable on Saturday while on a rare ride and will have to rely on the Cheeky Monkey team to get it back on the road. It was strange, on Saturday I was riding along and it started to rain. One thing I've learnt is that a lot of things work differently when the wet stuff comes down, so the resistance I was getting from the rear derailleur didn't surprise me. It was especially difficult to get a positive click into my lowest gears and though maybe a bit of cable stretch and the water were the culprits? Luckily I made it home and as usually while wiping my bike down I cleaned off the chin with a cleanish rag and lubed it with my usual oil. When I tested the shifting the derailleur stopped moving. I lifted the shifter covers and noticed that the cable was connect with 2 or three strands only and a couple of more shifts broke it entirely. I pulled the cable through and contemplated fixing it myself but probably luckily for me didn't have the specific cabling kit I needed, which in my case Campagnolo specific.

One interesting question I have for the guys is whether I should just re-cable the whole bike? Given I'll have to pay for the cabling kit ($60), surely you just change everything? I'll find out on Thursday. Another thing . . . since coming back from Switzerland I've realised the number of what I'll call Campagnolo component selling shops is limited. You have to order most things Campagnolo, even brake pads are not always in stock when you want them. I think it comes down to the fact that Australia is at the end of a long supply chain and traditionally people here usually buy standard spec bikes, meaning that Shimanois their "go-to" component companies. It's a first world problem I guess, though I had to laugh recently when a better and more experienced rider than me was helping me change a flat on a steep hill didn't know that Campgnolo uses triggers to shift down the cassette or from the big ring to the small at the front. Not his fault, it's just that Campagnolo is rare here.


Wednesday, 20 August 2014

When the tide goes out make are you still have your swimwear on . . .

Sometimes being an investment banker cyclist there's a little moment of schadenfreude that gets me through the day. Today it was the results from US sporting goods retailer Dick's Sporting Goods (Ticker: DKS).

I never did get golf. I tried hard, but I  never did understand the culture. To be frank I was also hopeless and didn't have the patience to spend the hours necessary to progress my game. By the time I moved to Singapore in 2006 I also needed to get fit and so without even knowing it at the time I had played my last game of golf. I noticed a nice piece on Market Watch today looking at the results from Dicks Sporting Goods. Highlighted in the piece was the company’s Golf Galaxy stores which suffered a 9.3% decrease in same store sales. Now some call this the "Tiger effect", but retailers would do well to understand that the baby-boomer bubble is fast peaking and the tide has already gone out with generation X. Lets look at an example. Here's a chart of the Giant Manufacturing Company of Taiwan (9921.TW) v. Callaway Golf (ELY):

I took Callaway because it's a pure golf company, others like TaylorMade are owned by bigger companies (in that case Adidas). Giant is one of the biggest bicycle manufacturers in the world. The outperformance of cycling is obvious, it's clearly been a better investment choice. Now that doesn't mean that bicycle growth will continue because at some stage the market will become saturated. Think about it this way; the limits of golf participation started to become obvious as clubs jacked up membership fees to basically exclude people from participation. In other words it became an "exclusive" sport in a world that is embracing "inclusivity". Gen X onward no longer sees golf as an aspirational sport in the way that the baby boomers have. The world changed. We no longer see smoking as a relaxing indulgence, nor drinking alcohol at work (think Mad Men) as acceptable. There's a whole world now seeing health costs spiral and they want to mitigate that in a way that golf just can't. Golf is still going  to be a sport people play, it's just that it won't grow at the same rate and as an investment banker I call this a mature industry. Golf as a sport or investment now will pay dividends like a bond pays coupons, but it won't provide capital growth that it has in the past. As an investor you need to recognise these moments and embrace them for what they are, not what they were. 

This brings me to some disturbing news from the gambling industry. The trend of casino closures in Atlantic City New Jersey continues with doors shutting at the Show Boat. Atlantic City was once the venue of choice for the north east US gambler, the casinos have tried to transform to resorts, but the weather, the falling cost of air travel and a surge in competition especially at the lower end started to eat away at the business model. Four of Atlantic City's 12 casinos have closed, meanwhile the State of New Jersey looks likely to approve more competition in the form of a new venue at the Meadowlands, a complex which is a limo drive from Manhattan. 

Atlantic City isn't the only place where the Casino industry is showing signs of weakness. Macau’s casino revenue fell 3.6% in July, following a 3.7% decline in June. Interestingly VIP play was estimated down by about 20% as in June, while mass market play continued to expand around 30%, and July produced similar results. 

Macau gambling . . . the best behind us?
That to me is indicating that the high rollers go where they get the newest toys and the mass market goes where they can. That's dangerous for a location, because in terms of the lower end it means other localities can change the paradigm quickly because of nothing more than geography. I know my HK broker friends will tell me that China isn't about to open multiple resorts on the mainland anytime soon and that's true enough. Right now Macau has the location advantage, but as with what happened with Atlantic City, so to can the same thing happen to Macau. If cycling is the new golf, and Meadowlands is the new Atlantic City, then just fill in the blanks for the next Casino mecca in Asia. Investors in casinos should note that the sky is not falling, but the growth is slowing. 

I'll be at another BBY Disruptive Lunch tomorrow and I'm looking forward to it. I've really enjoyed looking at some of these new businesses over the last few months and am somewhat buoyed by the extent of the enterprise I'm seeing in Australia. There's still a solid core of "mining is the only game in town" investment banking here, but you get the sense that the tide has gone out on that sector for the moment. BHP's de-merger plan this week could be the last great party of the decade for the mining teams of the big banks. If you're at a bank that misses out on a mandate associated with this you better be looking for a new arrow in your quiver. 


Wednesday, 13 August 2014

InStitchu . . . BBY disruptive lunch follow-up . . . a new suit

Ever purchased an off the rack suit at a department store and got home to find there's something just not right? We've all done it, male, female, tall, short, fat, thin, athletic, etc. When I moved to London in 1997 I was 30kgs heavier and had some fairly cheap and nasty suits in my wardrobe. The first time I walked into to Selfridges department store in Oxford Street and tried to buy a suit it took so long in the alterations room that even the sales guy suggested I'd be better off going to Saville Row and having one (or preferably three) tailor made for me. After a reasonable bonus under the belt I never bought a suit at a department store again. The only downside was making the time for proper measurements, fittings and final adjustments.

InStitchu is a company that is trying to combine technology with old world tailoring. Bespoke without the price tag? For somewhere between $300 - 600 they'll deliver you a suit in 4 weeks that they say will fit you perfectly. I'd be lying if I said that I approached the business with 100% confidence as I'm quite skeptical in general of retail businesses and and the clothing space particularly. 

Over the years I can't remember ever getting a decent return from an investment in a stock who's business is based on selling clothes to the general public. I liked what I heard from Robin McGowan and James Wakefield at the most recent of the BBY Disruptive Lunches, so instead of trying to go into all sorts of detail about the metrics behind their business plan I decided to just test them out by buying a suit. I got the idea after remembering the way I missed an absolute "gimme" of a trade by failing to buy into Japanese retailer Fast Retailing (9983) (owner of UNIQLO). One broker practically begged me to go into one of their storers and just buy a white T-shirt and guaranteed me that afterwards I'd understand why this stock was going up.  Eventually I did buy a that T-shirt, but not before seeing the stock more than double in the meantime. 

Fast Retailing (9983) v. N225
InStitchu appealed to me because I had a chance to be a very low touch buyer. I wanted to try and never meet an employee face to face. Here's how it went:

1. Get an account(s)

I was going to get measured using the mPort body scanner that links to Institchu. That meant I needed two accounts, one for InStitchu and one for mPort. I suggest you get your mPort account before going to a body scanner as it will save time once you're in the booth . . . . Oh, and personally I prefer not to be typing personal information into a terminal in a booth in a public place. 

2. Get measured

I went to a body scanner in the centre of Sydney. You enter the booth and log in via a touch screen. The computer voice will guide you through what to do and point out where to hang you clothes and importantly where to stand.  

It takes a couple of minutes to do the scan and you'll be asked to wait (in your underwear) while the computer confirms that they have a stable scan. It's probably less that 5 minutes and there's a lock on the booth, so no need to worry about unwelcome guests. 

Once you have this you need to link it to your InStitchu account. As an aside your body scan can be used to calculate various health metrics, but you need to pay to unlock those functions. The first basic scan is free. 

3. Choose a suit, style and  . . .  you get the picture

It's very straight forward. Choose a suit style, colour, fabric and add details. You can have different coloured lining, workable cuffs as well as the usual array of lapel styles and venting. While you're going through the process an instant messenger appears and an InStitchu advisor can help you through the process. I like this both from a design point of view, but also from a business angle because it gives InStitchu the chance to avoid the "won or done" nature of internet selling . . . if it doesn't work first time people tend not to give you a second chance.

It should be said that InStitchu doesn't just make standard lounge suits, you're offered dinner suits, jackets, shirts and various accessories. They also have some advice regarding mix n' matching various pieces.

4. Problems?

I ran into a problem because for some reason my body scan wasn't downloading my measurements to InStitchu. I'll be honest and say without the instant messenger I would have given up and said no sale. But "Monica" offered me a free measurement service at their Sydney location and promised me that this could all be solved. I went to the office and got measured (normally $30). Even though this all went smoothly and I had the added bonus of getting to see and touch the fabrics I think InStitchu needs to solve whatever the problem there is with the link between mPort and themselves. I've asked the company to send me a comparison between the measurements taken by their "live" staff and mPort so I can see the tolerances involved and therefore the likelihood of post delivery adjustment being needed.

5. Payment and delivery

I paid $467 for my suit, but need to subtract from that $50 discount offered to investors who attended the BBY lunch. I also provided references for 3 friends that earned me a $35 credit for future purposes. My usual spend on a suit is closer to $2000 from a tailor here in Sydney. I'll be reporting back after I see the results. My expectations are fairly low as I always think the mantra "you get what you pay for" is both true and wise. If I get a suit that fits and lasts a once a week wear over a working year I'll be happy given the price. 

The suits are manufactured in China. I assume they're using computer cutting for the patterns. The team told the lunch that they've gone through a few suppliers to help cut down on the error rates and to increase the overall quality of the garment. Margins are roughly 50%, but as I'm not a retail analyst I couldn't tell you how that compares with boutique tailors or department stores. The business is growing, with a surprising up-take from wedding related shoppers which makes up about 20% of revenue. That makes sense to me, what with this trend toward bigger weddings where the bridal party size can be pretty ridiculous in my experience. This means that you need to get matching suits, shirts and ties for all those involved and getting that at a department store or hire place just doesn't always work. 

I'm not going to recommend you buy a suit or a shirt just yet from InStitchu, but if you're an investor I think it's worth checking out their business. In my mind I see this as just another reason to avoid owning shares in department stores. 


Monday, 4 August 2014

How to avoid being as frustrated as Warren Buffett . . . Qwilr . . another BBY lunch (Part1)

The third presentation of the day last Thursday at Sydney investment bank BBY had me on the back foot for a few seconds. Quiller, kwiller,  . . . QWILR . . . got it. Dylan and Mark . . . OK, who's who and what's their full names and who does what? Dylan Baskind & Mark Tanner . . . now which is which? So Dylan is the web designer and Mark is the ex-Google guy and there's three other staff members. You get the picture? The presentations at these things always start off the same. If you get invited it's typically sink or swim in those first minutes. If you're lucky the idea and the proposal get your endomorphins flowing as they did in my brain and as is so often the case with me I tried to get a fix on the business from a problem in the past.

Few investors where I now live can recall the September day in 1987 that Warren Buffett bought $700m of convertible preference shares in Salomon Brothers Inc. that helped then famed anglophile Chairman and CEO John Gutfreund to stave off the moves of one of those typical 80's buccaneers Ronald Perelman. Those prefs paid 9% and were convertible after three years at a 27% premium to the then current share price of $30. Get the math? 3 x 9 . .  etc? Famously Buffett cut a similar deal with Goldman Sachs during the GFC, but lets leave that to one side. Those prefs led Buffett on a decade long odyssey including ten painful months as acting Chairman that left the sage somewhat scarred and at times quite reflective on what he'd seen in investment banking. 
As I sat in that boardroom at BBY my mind turned from the Qwilr presentation to the classic 1991 Buffett letter to Salomon shareholders and to the paragraphs on the compensation culture at Salomons, specifically:
". . .  the compensation plan did not take this extreme unevenness into account. In effect, the fine performance of some People Subsidized truly out-sized rewards for others. It would be understandable if a private partnership opted for such an egalitarian, share-the-wealth system. But Salomon is a publicly owned company depending on vast amounts of shareholders' capital. In such an operation, it is appropriate that the excess earnings of' the exceptional performers-that is, what they generate beyond what they are justly paid-go to the stockholders.

Of course, it is difficult to quantify performance in many vital jobs, such as compliance, audit, funding, and research. For these activities, and for operational and support jobs as well, Salomon employees should normally be paid in line with industry standards, whether profits are high or low. Our compensation plans must also both reward cooperative, for-the-good-of-the-firm behavior and recognize that some business units earn relatively little in profits but deliver valuable, if hard to quantify, collateral benefits to the firm.

All that said, there remain many jobs for which performance can be concretely measured and ought to, be. In these, employees who produce exceptional results for the firm, while operating both honorably and without excessive risk, should expect to receive first-class compensation. On the other hand, employees producing mediocre returns for owners should expect their pay to reflect this shortfall. In the past that has neither been the expectation at Salomon nor the practice."

One of the most frustrated people in an investment bank, any investment bank is invariably the head of research. You see no matter what they tell you it's often difficult to tag an analyst, especially those not used to grabbing headlines with particular income streams. That means compensation can be somewhat haphazard. All too often the metrics asserted look like a cross between a beauty contest and a time and motion study. If a pension fund / client thinks a particular analyst is of value to their fund managers they'll vote for him or her in a particular survey. Sometimes, if they're really motivated they'll specifically tag a transaction with the analyst name. The bank will then add on such things as research produced (may as well just weigh the reports), presentations conducted and work conducted for the corporate finance department (producing models, helping at a deal pitches etc.). None of this easily incapsulates day to day influence or change in performance. Take the surveys for example, they're often self-fulling in the stickiness they have to a particular analyst. Fund managers are far too easily swayed by the reputation of an analyst and this can mean a number one ranking has an excessively long tail on it. Consider this; what if a head of research or CEO knew the daily influence a particular analyst had on the market not just from a quarterly survey ticked and dispatched in 5 minutes, or from emails or a brief comment caught in the lifts after a presentation ("Jane really knows her stuff . . . we better get a one on one before we get bigger in this position . . .")? What if the management had some real unbiased metrics to add to the piles of research reports? 

Well welcome to Qwilr.

Qwilr rethinks the delivery of all those kilograms of research reports and sales pitches. In fact it goes a lot further, but as I was sat in an investment bank boardroom the correlation was a little too good to miss. Who exactly is reading these documents? How much time do they spend on it and what exactly are they reading within the document? And importantly are they in a position to action positively a transaction as a result? Well from what I saw Qwilr is about to hand that to me on a silver platter and many businesses may be changed overnight.

The team at Qwilr present a very simple formula; change dumb documents (pdf's etc.) into smart web pages that track the reader experience and deliver the data back to the sender. Furthermore get control of your output with the ability to instantly dictate who gets to see or retain the information. How many times do staff send out mails with valuable and expensive work attached that gets farmed constantly by people? What if a target customer moves from a company? Wouldn't it be better to be able to turn-off all that data in an instance, ready for someone to say: " . . . anyone see that recent piece on shale oil production from XYZ bank? Didn't Charlie used to deal with a person there? We need to get them in and find out how we move on now he's left us?" Bingo, instance opportunity. Now that's very simplistic, but a reasonable example. 

I was lucky enough to be sitting next to Dylan after the presentation. As an aside here's another hint when you attend these presentations . . . try and sit next to a person not in a suit who looks a little out of place. They'll be the ones presenting. If you luck-out and their presentation gets you interested you'll have first chance to ask questions as the other suits leave at the end. I asked Dylan a couple of things and while it would be unfair to give you his answers I can give you a rough idea of what I asked . . .

Idea . . . this is yours 100% right?
Security . . . so how is an HTML more secure than a pdf?
What type of metrics can you deliver?
How exactly do you know what the person is reading?
Who in business are you talking to? Who's already committed?

Anyhow it went on and to be honest I could have spent a couple of hours on this one such is the opportunity. 

Qwilr is only seven months old and as such is a rare opportunity for someone like myself to see something in tech at a stage before the angels and boffins swarm the offices. I'm meeting with Qwilr on Tuesday for a coffee and in line with my usual practice at these follow-up meetings I don't publish their content on the blog. I'm lucky in that I can basically ride my bike to the meeting. As a NY hedge fund manager said to me once when I was pitching my commodities fund " . . . look Mike, Geneva? We used to go there, but since the crisis unless you're a cab ride from one of our offices we take the view that we don't trust you." I considered that harsh at the time when we were struggling to attract capital. I'm not so harsh with companies like Qwilr, though yes it's an advantage to be close to any potential investment, but it can also be hindrance. Investors like dieticians need to start from the point of all things in moderation.

And finally on Salomon Brothers . . . They ended up being taken over by Travellers / Citi bank / Citigroup. When Buffett took over Salomon's the leverage was 37:1. When Lehman Brothers went under during the 2007-8 crisis it had 30:1 leverage. Buffet's $700m was finally worth about double what he paid for it in 1987, which he considered somewhat of a failure. His later investment in Goldman Sachs paid off in a similar fashion, though he managed to avoid having to be directly involved with the management and he exited as quickly as he could. 


Friday, 1 August 2014

Small things 2

1. BBY Disruptive Lunch

Three companies presented yesterday. The enthusiasm these companies have is, as always reinvigorating to aged investment bankers like myself:

Airtasker - Employment facilitator for small jobs. I thought of this one like a concierge service.

InStitchu - Custom tailoring for men, but with some interesting technological twists.

Qwilr - A different approach to documentation. Active feedback with some remarkable capabilities. Be very afraid if you're a mail-shot freak.

I'll these up over the weekend in a more comprehensive form and give you my opinion on the chances of success.

2. Those crazy guys from Credit Suisse . . .

I like Credit Suisse as company, whether it's the old First Boston guys, the private bankers or the various local stockbroking groups that have over the years been melded into the larger entity, I like them all. Yesterday the CS troops left me smiling as they clearly haven't seen my blog or they'd know they just added a great example of the 1st of the Investment Banker Cyclist rules for derivatives trading:

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

Credit Suisse launched an investment product that they call oil express certificates. Essentially they're just another structured product that various qualified accounts will be offered that are linked to the performance of WTI front-month future over the next 8 months. Essentially you've sold a series of 1 month puts in exchange for a coupon dependent on WTI. The coupons are cumulative so that if the WTI never breached the downside barriers (which change periodically) you get 6.68% plus your face value back.  Without going into it too much the monthly puts step down 1% each period. There's a knock-out at 93% . . . essentially if thats breached and never recovers you start losing money one for one. 

I don't have the term sheet for this one or I'd happily simulate the payouts. I bet CS is short a lot of downside puts in the WTI market and this is the way of covering their risk. Good for them and somewhat good for you so long as WTI doesn't take a hit. Nothing is foolproof and nothing is for free. Investors be warned.

3. Argentina officially defaults

Well it happened. The hand wringing has commenced. For mine it comes down to nations understanding their obligations to behave responsibly. Argentina has for years thumbed it's nose at investors and allowed corruption whether it be a military junta, Peronists or now the Kirchners. It's messy, but as I said in this blog you'll now have to wait until 1 Jan 2015 when the RUFO expires for some serious negotiations.

4. Strava was down!

Help I'm a Strava junkie and for 24 terrifying hours this week your uploads weren't immediately available. I put every workout I do on Strava and back them up at Garmin. It was funny seeing the "Twitter-verse" light-up complaining about it.

Strava stats are now up-to-date