Back when $100bn bought very little Wednesday, December 24, 2008
I saw this recently on The Big Picture blog and thought it worthy of reproduction
Consider that one year ago Royal Bank of Scotland paid US$100 billion for ABN Amro. That seemingly impossible amount would now buy:
Citibank $22,5 billion (74% down)
Morgan Stanley $10,5 billion (-72%)
Goldman Sachs $21 billion (-67%)
Merrill Lynch $12,3 billion (-77%)
Deutsche Bank $13 billion (-71%)
Barclays $12,7 billion (-71%)
And still leave $8 billion change - with which you would be able to pick up General Motors, Ford, Chrysler and the Honda F1 team.
Odd thing is, it would be hard/impossible to borrow the $100bn now to buy them.
Could USD and GBP become carry trade currencies Thursday, December 18, 2008
With US interest rates around/at zero and sterling interest rates poised to fall further, could these two currencies become the funding source of carry trades?
A carry trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate [Investopedia].
For years, investors have been borrowing japanese yen and investing in currencies paying higher interest rates. Provided interest rates remain stable, these can be profitable trades which can be amplified by leverage. Of course, they can go horribly wrong and investors have to remain alert in case they need to quickly unwind their positions as fx rates move against them.
Whilst many of the world's interest rates have fallen sharply, there are still some currencies that may offer some potential for investors, provided the fx rate volatility don't terrify you. Current interest rates around the world can be found here.
Of course, it does rely on being able to easily borrow funds in USD and GBP which isn't the experience for many at present. But don't worry, the central banks in both countries appear to be priming the currency printing presses to head off deflationary worries, so borrowing may become easier.
I've been fortunate to develop an ability to speed read over the years, albeit I confess I've no idea exactly how fast.
It's an important skill, especially if you are time pressured, and improvements in your speed will genuinely free up more time.
Hence I was impressed by the free online application, Spreeder, that aims to help you do just that and which is a breeze to operate. Using text you provide, it renders the text on screen in a configuration and speed you specify e.g. 200 words per minute and three words at a time. By gradually ratcheting up the speed, you should be able to increase your reading efficiency. Of course, the important thing is not to sacrifice your comprehension of the content for speed!
Thanks to Andrew Dubber of New Music Strategies fame for pointing this one out.
Image via WikipediaI'm intrigued by the motives behind the decision by MF Global, announced today, to abandon its' interest in the US Futures Exchange in which it directly held at 48% stake.
The business was originally set up by Eurex to provide a competing offering to the dominant Chicago Mercantile Exchange. in the US. In 2006, when it was struggling to attract liquidity away from CME, MF Global took a sizeable strategic stake in the venture, with a view to ratching-up the competition in the market via an injection of its' own sizeable order flow and ultimately generating significant capital value for MF, given the heafty multiples that Exchanges commanded at that time.
The $7m annual cost of being involved in the venture is a relatively trivial sum for MF Global, which prompts me to wonder whether the current CEO's past positions, resultant beliefs and relationships have influenced this decision far more than the financials. Prior to joining MF Global in the Summer of 2008, Bernard Dan headed the Chicago Board of Trade (CBOT) where he served as president and chief executive officer from November 2002 until July 2007 when the company was acquired by the CME.
A dream that was realised Monday, December 15, 2008
LSE foyer, Image via WikipediaBack in 2003 when I joined Man Financial [MF Global], the firm was one of the most active equity CFD [contract for difference] providers in the UK by volume. These derivative instruments are almost perfect economic substitutes for equities, albeit without voting rights.
As a firm, we typically hedged every CFD order received from customers by executing an order on the London Stock Exchange [LSE]. More significantly, we were almost indifferent between whether customers sent underlying equity orders to us or CFD orders. . This prompted me to question why CFD orders couldn't simply be traded on Exchange like an underlying equity. Indeed, why shouldn't the order book treat equities and CFDs fungibly, and leave the mechanics of how the trade is settled to downstream processes.
I pitched this notion to the LSE and to LCH.Clearnet, with the intention being that Man Financial would act as a matching counterparty to all CFD orders for the purposes of managing the cash funding requirements or stock borrowing arising from such trades. This proposal was favourably received by the other parties and efforts began to implement the necessary consultations and infrastructure changes.
Sadly, I left MF before the vision became a reality and Man Financial subsequently withdrew from the consortium for reasons that never became clear. Thereafter the initiative was held back by issues at LSE and LCH but I was delighted to read today that the initiative is now close to going live.
Aside from the benefits cited in the news report, one important feature I saw early on was that making equity CFDs exchange-traded removed the regulatory restrictions on the use of CFDs by mutual funds which existed in their OTC form. I felt that this would widen and deepen the use of CFDs to the benefit of all.
By coincidence, I met with Roger Liddell, CEO of LCH.Clearnet the other week whom I'd also known at Goldman Sachs and was pleased to hear my involvement hadn't been forgotten.
Dilbert guide to Mortgage Backed Securities and CDOs Saturday, December 13, 2008
Poundland expands Tuesday, December 09, 2008
Image via WikipediaI heard a piece on the radio this morning featuring the CEO of Poundland, the retail chain that sells everything in the store for a pound. Thanks to the Government's reduction of VAT, his margins are up slightly as they retain the 2.5% drop in VAT. At the same time, their volumes are increasingly dramatically as the recession bites and customers look for cheaper alternates.
Most tellingly, they will have added 40 new stores this year and will look to do the same next year, on top of the 200 they already have.
A similarly sales boost is been experienced at other "value" retailers such as Aldi, Lidl, Asda and Morrisons.
Can we be certain our business will survive the next 12 months? Monday, December 08, 2008
Company Directors and Auditors are having to think long and hard about the "going concern" opinions they are required to express in the annual accounts. Most businesses are facing an uncertain time, especially around their banking facilities and funding, as well on-going profitability concerns.
Yet they are equally worried that any reservations or qualifications they may make to protect themselves regarding the future in the context of going concern matters may be self-fulfilling and panic investors. For instance, highlighting that the continuity of the business depends upon successfully renewing banking lines 6 months ahead may lead to jitters given that the rollover of such facilities is no longer as certain as it once was. Likewise, being dependent on the survival of both major customers and suppliers may have once been taken for granted - no longer.
Funnily enough, I once remember during my accountancy training being diverted for a week from my normal sector [capital markets, banks and building societies] to a building/construction materials business. I was astonished how no consolidated information existed within this large group about its' "counterparty" exposure to large building firms such as Wimpey or McAlpines. Management simply had no idea what the financial impact would be of a major building customer going out of business would be. Yet it was evident that my enquiries were received with bemusement, since this wasn't normal practice anywhere outside financial services.
Winning a large contract from a large customer is now a double edged sword - you are grateful for the business but concerned about the cashflow impact given that large customers typically demand generous payment terms, as well as worried about the financial viability of the same customer. Slow payment has always been a source of finance for companies, but the squeeze by banks makes it increasingly important. Sadly the companies under the "cosh" are those that can probably least weather it.
Likewise, the just in time supply chain upon which you rely now resembles a fragile chain with links buffeted by strong financial winds. Somewhere down that line a key component manufacturer could disappear or simply fail to secure the necessary letters of credit to oil the wheels of trade.
In the current climate, providing an opinion about your future business state is the question you will be increasingly asked - do you have an answer based on substance that you can confidently offer?
Labels: Going concern
Boxing Day Scrooge at Chelsea FC Friday, December 05, 2008
Image via WikipediaSo much for the spirit of giving! Chelsea FC have allocated West Brom fans just 1,400 seats in a stadium with a capacity over 40,000 for the Boxing Day game. Given that Chelsea regularly struggle to sell out matches, it is astonishing that they would be so restrictive given WBA regularly travel with upwards of 3,500 fans to games.
Whilst I concede that Chelsea fans may wish to see their club enjoy a goal feast over Christmas, I'd be amazed if WBA ranked as a must-see game for most Chelsea fans used to dining out on Champions League football.
A horrible day for City job losses Thursday, December 04, 2008
Image via WikipediaToday sees Credit Suisse announce a cull of 11% of their investment banking workforce, which is 5,300 jobs. Nomura have also announced 1,000 job losses following the absorption of Lehman staff. More job losses were also announced by State Street and Jefferies in the US. This follows other layoffs by Goldman, Morgan Stanley and a raft of others.
Whilst unlikely to generate much sympathy amongst the wider public who blame the City for all of the current woes [Reminder - the wider public were the folks borrowing the money when they couldn't really afford it! Like a person getting drunk blaming the barman for their plight, whilst being instructed by the Government to serve drink in greater quantities i.e. do more lending to the less well off], this represent a huge downsizing in the indsutry, perhaps comparable to that which the mining industry went through in the 1980s.
Almost everybody in the City will know someone that has lost their job recently be it friends, colleagues or former colleagues. I sadly know many people in this situation, who are talented and capable people, but who have been hit by indiscriminate layoffs as a result of the scale and urgency surrounding the cuts. There are no obvious comparable roles in other sectors, assuming jobs existed, for many outside of IT whose skills may be more portable. Job insecurity is rife and there is considerable fear evident amongst those with jobs.
It's a frightening situation and may represent a permanent change to the landscape of the City and the wider economy which had come to depend upon the City for wealth creation and tax revenues.
Cross channel shopping gets a boost from Gordon Brown Wednesday, December 03, 2008
Image via WikipediaBased on today's announcement in the Queen's speech, booze cruises across the channel could see a resurgence of interest.
The proposed measures are intended to ban drink promotions in supermarkets, as part of measures to discourage alcohol abuse and drink related problems. As a consequence, retailers will not be able to offer discounts on bulk purchase of alcohol, regardless of how many a customer buys.
Hence, no more "two for ones" or "20% off if you buy six bottles" or "three bottles of wine for £10". Even multipacks of beer/lager cannot be sold for an average unit price which is less than the items are sold individually.
Most businesses are driven by volume and hence offering discounts for buying more is common-place. To remove this facility will be to the detriment of breweries, wineries and consumers alike.
The group who are expected to be hardest hit by this will be wine buyers, which was acknowledged in a Government sponsored study by the University of Sheffield.
Unless the supermarkets find a way to circumvent these measures e.g. they could drop individual prices, I suspect that the attraction of cross channel trips to France to stock up on cheap wine and beer will see renewed interest, as French retailers will not be constrained. The Euro is relatively expensive at the moment which will act as a discouragement, but it may not be a deterrent for long.
Image by via CrunchBaseMicrosoft continued their expansion of their online capabilities by increasing the free online storage limit for their Skydrive "storage in the cloud" to 25gb. This is a considerable uplift - even a year ago they were only offering 1gb.
Unfortunately, they haven't increased their individual file size limit which remains at 50mb, which is increasingly relevant eg home made video files. I realise that you can load these up to video sharing sites instead, but usually you only load finished/edited video to these sites.
Obviously this announcement has generated enormous interest in the website, with the consequence that I was only intermittently able to access the site during today, which is a little worrying - these people are supposed to also be running Azure based services for third parties [Microsoft's Cloud Computing offering], so you'd expect them to be able to handle surges on their own services! Hopefully they will address this pronto, otherwise they will not be a reliable storage choice and will undermine confidence in their abilities.
Meantime, if you're underwhelmed by 25gb for free, you can get 50gb free storage with Adrive here. Easy to use interface and I've experienced no reliability problems with them to date.
Whilst on the subject of online storage, you should also check out Gladinet, a free application which can mount your online storage locations as virtual drives on your PC and make them indistinguishable from your local folders, so long as you are connected to the internet. Whilst the new Skydrive service isn't supported [enhancement being made according to their blog], it does support many other services. However, this is not a synchronisation service - for this you need to look at services like Dropbox or Foldershare from Microsoft, albeit this is imminently due to be replaced by Microsoft Live Sync in December 2008.
Image via WikipediaIt wasn't a huge surprise to see that UBS was going to switch its' clearing for its' London Stock Exchange ["LSE"] traded equity business to the Swiss based X-Clear from LCH.Clearnet. After all,
- they are both Swiss and you should never under-estimate the power of relationships e.g. inevitably, UBS personnel will be on advisory boards at X-Clear and will be one of the largest X-Clear users in Switzerland
- they will probably enjoy margin netting benefits by combining their their Swiss and UK equity business at a single clearer, which will be financially beneficially
- they may enjoy cheaper tariffs or better margin rates
However, I chuckled when reading the comment made by Robert Barnes, managing director, equities at UBS who said "that by deciding to switch to X-Clear, UBS believed that it would help accelerate a “market-driven” solution to interoperability, rather than waiting for regulators to apply further pressure to get the process moving."
Firstly, it was the LSE's decision to enable competition that allowed this to happen, albeit evidence of client support for this must have existed. Secondly, UBS are doing this for financial reasons rather than on altruisic grounds for the "good of the market". Perhaps UBS should now be using its' market clout to insist that other markets, including Switzerland and Germany, follow suit.
Steve Eisman of Front Point Partners called "spoof" on CDOs Tuesday, December 02, 2008
Image by Getty Images via DaylifeMotleyFool has an interesting piece with Michael Lewis (Liars Poker fame), who talks about the huge sums Steve Eisman made for his funds by spotting the lunacy surrounding certain Collateralised Debt Obligations [CDOs] as well as Mortgage Backed Securities [MBS] and shorting them via credit default swaps. In essence, he paid a small annual premium to an investment bank as insurance against these instruments defaulting, in the expectation that they would collapse. Once these assets began to implode, the price of the CDS protection rocketed and he was able to profit, without evening having to wait for default to occur.
In the piece, Lewis recounts that
"Eisman called S&P, the ratings agency, and said, Look, I know you are rating these things AAA, and your model says they are AAA, but what happens if real estate prices go down? And the guys says, Actually there is no place in their model to put a negative number. I can't tell you what happens when real estate prices go down."
So much for stress testing.
London Scottish Bank closes Monday, December 01, 2008
Over the weekend, London Scottish Bank was forced to close as it no longer met the FSA's threshold conditions for authorisation.
The Government has announced that no depositors will lose any money regardless of the size of their deposits, including those over the deposit protection threshold.
Image by Getty Images via DaylifeI'm catching up on some of the "View from the Market" videos on FT.com and just watched one featuring Chris Flanagan, who is Head of Asset-Backed research at JP Morgan.
In his first video he affirms that virtually every mortage-backed security could be classified as toxic or distressed. Prices on the triple A part of the capital structures are down to 30, 40, 50 cents on the dollar. A huge proportion of the asset-backed investor base, anywhere from 65% to 75%, is gone from the market which combined with continuing losses on mortgages is placing major downward pressure on MBS prices.
In a second video, he is very negative on any asset backed security that is not government backed. In his view banks holding other than government backed securities are essentially stuck with them on their balance sheet.
It's rare to find so candid a set of responses in an interview of this sort and he makes no attempt to gloss over or play-down the situation faced.
Labels: jp morgan
Image by via CrunchBaseAlthough I've recently been using Nimbuzz on my Blackberry as my IM aggregator application because of its' inclusion of skype amongst the networks it covers, I have retained EQO as well. Whilst it performs a similar service to Nimbuzz, I much prefer the EQO interface and its superior usability.
Sadly it appears that EQO may be about to shutdown if reports on GigaOM and Techvibes are true. Having raised $13m in VC funding, it was apparently under pressure to find a buyer for the company but seemingly hasn't been successful.
I previously blogged about my use of EQO here.