Tuesday, 7 December 2010



In yesterday's FT there was an article by JC Junker and G Tremonti outlining a proposal for the EDA (to be created European Debt Agency) to issue "E-bonds" up to 40% of eurozone GDP.

They also suggest that there be a switch option for holders of eurozone member sovereign debt.
The conversion rate would be at par but the switch would be made through a discount option, where the discount is likely to be higher the more a bond is undergoing market stress. Knowing in advance the evolution of such spreads, member states would have a strong incentive to reduce their deficits. E-bonds would halt the disruption of sovereign bond markets and stop negative spillovers across national markets.

For some reason they believe that Eurozone countries would treat the EDA in a superior way to the private market creditor, even though the EDA wouldn't have the bark of refusing to buy more debt, or politically the teeth of being a local voter when it came to a default.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design" Hayek, could not seem more appropriate.
The "cure" to reckless sovereign borrowing, buyers ignoring risks and moral hazard is obviously to create another EU body, with a more complex system, with even less market discipline?

Tuesday, 30 November 2010

"Seagate Technology Terminates Private Equity Discussions And Announces Share Repurchase Authorization"


Interesting the company instantly announced a share buyback, however the Raven is skeptical as to much many share will actually get bought back and when given that they intend to do it out of future cashflow. $2bn would be ~154mm shares, approx a third of the company!

Just for giggles where would that take the leverage of the firm? The Raven thinks its quite possible for their margins to fall to 15% then using 4yr average revenue and SGA, we're talking EBITDA of $1.3bn. Current assets cover long term debt and current liabilities currently, so leverage would be 1.5x still investment grade. but 10% margin and its 2.7 and we're getting to the covenant zone. Its not clear that its a lock either, there are strategic hurdles and a cash rich competitor, maybe levering up isn't the smartest trade.

So what are historical returns for announced huge buybacks?
Ok there aren't many companies that announce they're going to buy back a third of the company. Interpolating the stats isn't too easy, as two factors tend to drive returns, size of announcement and completion rates, which in this case are contradictory, top decile announcement size and probably lower quartile completion rate. Looks like about a 3% pop on the announcement, and another 5% over the year.

How much fat was on this puppy?
Punters are going to compare it to where WDC has traded, however its very clear that WDC priced in its own possible LBO on the back of the STX news, because taking a historical ratio of where they traded would indicate that STX was already at fair value to WDC before last nights announcement. Perhaps the trade on th open for the Raven will be to cover his very small STX short and sell some WDC, we shall as always check the price action at the time.

Thursday, 21 October 2010

$STX call

Company said they couldn't give future guidance or comment on PE approach given legality, which made for a short (if late and bland) call.

Interestingly they didn't participate in the "13th week", which $WDC had said was at twice the average rate of the prceding 12weeks. They think that the 13th week was busier because of pulled forward demand because of China's golden week, and quarter end dates.

$0.31 EPS and missed revenue.
49.2mm units (backs out ASP of $55) they said approx 8% q/q price decline. gross margin of 20.4%
'competitors more tenacious than years past'

long discussion on SSD's and hybrids in relation to notebooks, netbooks and MacBook Air.

general thoughts;
STX had popped up on the Raven's LBO candidates screen just based on historical numbers, however he'd excluded it because of the margin pressure and "third competitor" issue. To him it doesn't make sense for a PE firm to take such a big punt on storage when there are so many issues which management of the firm really don't have so much control over. Its also not apparent that higher financial leverage is either appropriate or adds value to equity holders. As the stories appeared in the WSJ its not to be written off lightly, there's a pretty good chance that a bid does materialize, and the rumoured price range is anything from $15 to $25. Anything above the 52w should be heavily mentally discounted.

FT article on Hitatchi Global Storage

Hitatchi is looking to sell its storage business, interestinly its lower margins and agressive attempts to take market share aren't helping the supply-demand imbalance. Strategically wouldn't it make more sense to buy the lowest margin competitor, accept market share and work on the cost base? the $1bn price tag for ~ $2.5bn of sales would value $STX and $WDC at $4.32bn and $3.84bn, or $9.15 and $16.76+$8.7=$25.5

Wednesday, 20 October 2010

$WDC earnings call

As the Raven has noted on the blog a few times, the sector will face margin pressure going forward. That's clear that this is happening from their current results. Yes sales hit estimates, net income was there, however that doesn't disguise what's happening with the MARGIN.
  • average selling price $46, -$3 lower than last year, -$1 q/q.
  • historical seasonality suggests this should be the best quarter for demand
  • gross margin adjusted for SGA was 15.8% last year 20.8%, unajusted 18.2% v 23.2%
  • margin decline driven by lower average selling prices, which is being driven by an excess of ~10mm units (Raven estimate), "6-8mm units need to get burnt off" ~ 5% capacity
  • management correctly say that Seagate's ownership structure won't matter to industry pricing
  • margin errosion is WITH them giving up market share to our ominous 3rd party
next quarter's guidance appeared to be 50-60c although the line was terrible and the accent heavy, so when the replays up it needs to be checked. Seasonally the coming quarters will be weak historically and there doesn't look like too much to get excited about buying this stock. Two interesting side points from the call; 1) company see increased demand for sea shipped product rather than by air, which can pull demand from back to school next year into the preceding quarter and 2) China's demand may change seasonality going forward, although hard to tell given economic volatility.

very roughly its got about $12 of cash, so its run rate p/e on next quarter is ~ 7.5, however;

The Raven wasn't so clear as to what effect the ipad is having for solid state devices, or just how much the company held back from shifting product to protect prices. The company is going to look at strategy and investment decisions and implied that some products didn't make sense at these prices...

Anyway its interesting and is definitely a better looking from the perch than Seagate, but if anything it and $STX are a short tomorrow and perhaps for the next few months depending on price action. Longer term though, enterprise does look a good bet, and of course it could be LBO'd. So its definitely a high risk position either way.

Friday, 8 October 2010

UK income distribution, FAIRNESS

We've heard much in the UK over the last few years about the inequality and unfairness in soceity. The Raven decided to look at some numbers because the political rhetoric as is often the case didn't match reality. Just looking at back of the envelope calculations some things didn't make sense. There has been much "taxpayer" outrage over bank bailouts (the fact that UKFI is actually breaking even on the bailouts is material for another post).

Wages; this is all earnt or income for a household, whether its derived from savings, self employment, salary, etc
Cash benefits; all cash payments directly from the government to the household
BIK; Benefits in kind; NHS, housing subsidy and travel subsidy
Other services; are the cost of the police force, army, government etc. The Raven's decided to allocate that evenly by household as its not obvious to him that any segment of soceity benefits more from it that one another, its clearly a cost so we must all be "enjoying" the benefit, even if it appears the ONS value this as zero.
Direct Taxes; VAT, fuel, etc
Vice Taxes; Tobacco, Alcohol and Gambling
Capital Taxes; Inheritence tax, Capital gains tax, dividend taxes, etc.

There are a few broad points to be made;
1) INEQUALITY, is nowhere near the levels thrown around by left wing commentators. They deliberatley exclude the value of services that soceity consumes and assume that these costs are magically absorbed by the tooth fairy. It seems contrived to be measuring income or household consumption to be only disposable income, when if one is even slightly unblinkered, it is very obious that households all enjoy police protection, the fire service the security of the army, etc. The Raven finds it outrageous that the ONS deliberately excludes these, but does include the NHS and housing benefits? by the ONS measure the lowest income household would have £18k and the highest income household £106k, whereas taking into account ALL services its £39k and £127k respectively. This is only half the story as obviously the government takes payments for these services so we should look at net income; in this case the numbers are £35k and £53k. How there is any uproar over inequality is amazing really. Especially when one cosiders the earned incomes were £5k and £101k.

2) As described before the majority of the population believes they are tax payers, and by this they believe net contributors, however looking at our numbers its pretty clear that only 25% of the population actually are net payers into the pot. The most disturbing indicator of the unsustainability of the system is looking at the middle of the distribution. A middle income house actually takes £15k more than it pays in tax, or to put that into budgetary numbers; £29bn. In fact subsidies of the middle half of the distribution total £117bn. A number not a million miles away from the current deficit of £150bn. To actually be a taxpaying household then one needs a household income of £48k.

It is very interesting that if one calculate the GINI index on earnings its 0.35, on ONS incomes 0.24, whereas taking into account services and actual tax paid its 0.05.

Friday, 1 October 2010

$EURUSD loss this month.

Its always cathartic to analyse a trading loss, and hopefully consign it to the box of expensive lessons rather than repeating it. With this being a rookie mistake and knowing what he did wrong before the event its not going to add much to knowledge box, but certainley requires some public self flagellation because he has clearly forgotten some basics.

The Raven shorted $EURUSD quite agressively on the 21st Sep, then got stopped out pretty quickly, then bought some downside puts, lost that premium and repeated it again. All in a loss of 10% of trading capital, even for a high return and volatility account definitely needs some serious thought.

The first short was at 1.3128 stopped out at 1.3160 on the same day, 21st Sep.

The put buys were on the 23rd Sep when spot was ~ 1.3333, where the Raven bought a lot of 1 week 1.32 puts, and the second lot 28th Sep spot ~ 1.3450 buying the 1.33 put, and on the 30th Sep spot ~ 1.36.

The first thing to do is rather similar to what one would imagine an AA meeting is like, admit your errors and sins, owned up to the actual errorS. Now time to understand the flaws personally.

There are several rods with which to beat his own back;
1) The cardinal sin; The first trade was very wrong on one level and right on another. Trading before the market has started moving in your direction is a mugs game, really that is unforgiveable, bad discipline and senseless. The small redeaming feature is that a moment of rationality dawned and the trade was cut because of sensible risk management.
2) The compounding error; Looking at the actual bond auction data and what was being reported was obviously too good a bait for the Raven's ego and it enticed him to make a classic error. He believed that the market was reacting to headlines, when he knew the headlines were wrong, which is the incorrect assumption to make. Similarly if you know an idiot is buying a stock and its going up, it doesn't mean that the stock should go down, however its very tempting to use this data point to falsely bolster one's confidence in the trade idea.
3) repeat step 1. correct to buy options to limit risk, bloody stupid to ignore your own first principles and trade against the market.
4) repeat step 2. further headlines, except now one has to be honest and admit that a degree of loss aversion and ego were kicking in, as well as a sense of frustration for making the error of step 1.

Its only now after getting a bloody nose and having portfolio level hard risk limits kick in that its really possible to step back properly and analyse the mistakes made. Additionally one can analyse the initial premise for the trade with less baggage.

Its not automatic that we should repeat the $EURUSD meltdown at the beggining of the year if we see a further melt up in European sovereign spreads. Perhaps we could see what we saw with the dollar in late 2008, a squeeze in the currency due to large losses being taken in that currency? similar to the squeeze in the Yen that Hugh Hendry thinks may happen.
On a similar thought to the Yen, HH points out that politicians and central banks need the political capital to act. Although he was talking about a different central bank and set of politicians one could apply the same logic to the EUR. Trichet is not going to trash the currency unless there is some real economic hardship, reaching as far as Germany, and for that to happen we'd have to actually see the $EURUSD a lot higher to slaughter their exports. Trichet is very arrogant (the irony isn't lost in this comment), so the pain level will have to be enormous.

The other side that really has to be mentioned is the sell dollar buy anything for the end of year trade, (which fits really well with long term trend following alpha patterns, ie. its about this time in 2004 they swung around after being down a similar amount).
Anyway just a thought, which is rather pleasant to have without the burden of the idiotic mistakes of September. At least trading stocks has been profitable.

1. I will not trade against the trend
2. I will not trade against the trend
3. I will not trade against the trend..........

Monday, 13 September 2010

with implied correlation

correlation chart

despite the recent commentary on how correlation is, and how this MUST be caused by high frequency trading its quite interesting to look at correlation on a longer term basis. The Raven created a pseudoDow (which is subject to survivor bias, but much quicker to do calculatons on) and calculated a rolling two year "correlation" on the monthly returns. Instead of taking an average of the correlation matrix coefficients he used an approximation from the calculation of the dispersion. The difference is a couple of point of correlation at most, so the general shape of the chart shouldn't be missing too much.

The key takeaway from this is though, that while correlation may be high, its certainley not freakish or out of historical norms, and the panic in the media with respect to HFT overdone and ill informed to say the least.

BskyB and NewsCorp

FT alphaville today highlights the 'competition commission concerns', which unsurprisingly a competitor supports. To take the liberty of summarizing the concerns; Sky + Times + The Sun = unstoppable control of the UK media, however the article says this is because of the ability to cross market titles and spend on marketing, neglecting more crucially the importance of how NewsCorp have really won the content war. The fact that the Times has a paywall when no other main stream newspaper does, or that Sky's pay TV model is dominant is the key issue, not spend on marketing or cross selling. These products are superior. Arguing against the deal because of competition concerns seems weak and definitely not as solid ground as the real reason that shareholders should be voting against the NewsCorp bid for BskyB, VALUATION. Taking 700p for an asset worth at least 1000p on a standalone basis would be absurd.

Wednesday, 8 September 2010

bits and Bob

"The UK Royal Mail's £26bn pension fund made a 29% return on its money last year, helped by a sophisticated derivatives strategy, reducing the company's £10.2bn deficit and potentially helping along its possible privatization"

well it turns out that the "strategy" was buying equity futures, aka taking a leveraged bet on the market, very uhmm sophisticated.

The story that has been hogging the headlines in the UK has been the appointment of Bob Diamond as the new CEO of Barclays. Today Vince Cable (who now apparently prefers to be called Dr. Cable) has been calling for the breaking up of the large 'universal banks'.

This as a measure to reduce risk makes absolutely zero sense. Utility banks will still have to invest their depositors cash, any belief that making loans on commercial property or residential mortgages is not risky really should have been destroyed in the credit crunch. The financial world would merely have more firms with more linkages, and as such there would be no amelioration of counterparty credit risk, nor the removal of the moral hazard of 'too big to fail'. It is the systemic nature of financial intermediation and the lack of penalties on bondholders and creditors of financial institutions that propogate poor investments. There is only one logical solution and that is a pigovian tax on all creditors.

Friday, 3 September 2010

Krugman and the Wolf.

Its interesting to see a high brow rehash of Krugman's appaulingly weak argument in the FT today by Martin Wolf.


Essentially the argument is that because long term bond yields are low, we should not worry about government debt. Economically and logically it makes no sense. A proponent of this view would logically conclude that only now should Greece begin fiscal consolidation, rather than years ago. The whole point that fiscal conservatives are trying to make is that trying to cut a deficit when long term yields have exploded is almost impossible, needless to say, cutting government spending when private firms are finding it difficult to borrow makes even less sense that the gloomy scenario Wolf and Krugman paint.

It is intellectual dishonesty in its most repulsive form, and unsurprisingly partisan support of Balls by Wolf. Even if one were to swallow Krugman's prescription that fiscal responsibility should only be practiced when one is forced to do so by the market, the notion that bond yields are signalling a lack of concern isn't clear cut at all, especially in the UK given the government's commitment to cut the budget deficit over the term of the parliament.

If as the Raven believes, bond markets are signalling a lower growth, lower inflation future, then it makes it even more imperitive that governments show fiscal responsibility as their ability to shrink debts in the future through a growth in their tax base is diminishing.

Tuesday, 10 August 2010

$BP, life after the spill?

Now there appears to be some relief in the stock the Raven thought it would be worth having a look at his revised estimates on $BP.

86 days of spill at 60k flow rate = 5.16mm barrels of oil
cost to $BP of clean up $30mm per day, and cleanup lasting another 172days = $8bn
litigation cost = $28bn from Exon Valdez figures inflation adjusted
aditional fines of $22bn from Water agencies etc.
so $58bn all in.
valuing the stock on its historic multiples that would make it worth 425p a share, $40.8 an adr. pretty much bang on where its trading now...

(the Raven does note, that he thinks those cost estimates are too low, especially the litigation cost, given that most estimates are based on the Exxon Valdez figures, which had less human impact than the BP spill, given that its not impossible that the litigation could be more like 3x that figure (but who knows??) in which case the Raven thinks its more like ~ 215p and $20.65, on the other hand there could be m&a as JPM have indicated that could get built into the stock? the one thing the Raven does know, is that there is more action in the name going forward)

Thursday, 5 August 2010

An interesting point from Zecco on $WDC and $STX

The Raven read this and thought it was interesting;


Basically it points out that data storage is cheap ie. $100 for a terabyte now. It doesn't explicitly say it, but the argument is then that 1Terabyte is enough space for you to store everything you could want and therefore that you'd just buy the cheaper version of the 1TB. Now it would be easy to dismiss this argument by regurgitating a quote about a desktop PC being everything you could need in the 90s. The Raven thinks it more interesting to wonder where the actual limit might be using a bit of imagination. As we're only really looking at personal data storage what items do people like to store? (and a point he's going to dig some more into offline)
photos, music, films, books? software? personal documents

photos, music and films all have the potential to upgrade again to higher resolution formats requiring more storage space, books less so, but software and the personal documents they produce if anything produce larger and larger files. Without even looking at the massive increase in commercial data that will be stored in the future its easy to make an argument that the size of files will expand to fill the space available to store them.

The other point that really should be thought about is what percentage of the population actually store this kind of data on their pc's, and if there is a potential generational effect, as stupid as this sounds the Raven would have a rather good punt that penetration of these sorts of products is much lower with consumers the older they are. ie. Your average 50yr old isn't going to have as many digital photos as your 30 something, or as many photos as that 30 something will have in 20yrs. Just to make the maths easier, lets say people only buy storage when they get to 20, and that penetration really only goes up to 40, thats 20yrs of the population that could be 40yrs in 20yrs time. Not a huge growth rate, but certainley not a stagnating industry at 3.5% p.a. growth for 20yrs.

It still looks like a situation to sit on one's hands. Especially given his other previous thoughts on WDC and STX...



Wednesday, 4 August 2010

share buybacks


Imagine there are two shares in a listed company, the intrinsic value of the company is $400 lets say made up of $250 of hard assets and $150 of cash, the company has no liabilities. So the intrinsic value of one share is $200.

Lets say the company decides to buy back 1 share, ie. 50% of the shares issued. if they pay $x for that share to you as a shareholder. If they pay $100 for the share, you as a shareholder then have $100 of cash, and 1 share left in the company, which then has an intrinsic value of ... $50 of left over cash+$250 of hard assets = $300. So as a shareholder you're left with $400. If they pay $1 for the share, then you have $1 cash + 1 share worth $250+$149 = $400.

WOW its the same.

STX translation of WDC comments

Given the view the Raven has as to where $WDC should trade (in yesterdays post), then its relatively simple to make the same sort of read across in valuation terms to $STX given the belief that the "third party" drives margins down to 15% for these two players.

(the Raven is thinking that would be a great name for an activist hedge fund, you wouldn't need to be writing caustic letters with such an ominous name)

Reducing STX margins to 15%, then applying the same prop. adjusted EV/ebitda multiple then a stock price of $7.50 compares to $23. ($28.73 -> $10.67) a lot lower than its current price. Keeping its 3% margin premium that it had to $WDC then you have $9 and $13, so that tells you that the market is expecting them to be able to keep that premium, whether that's wise or not is a much more difficult call to make.

If the Raven is going to be buying anything in the near term future its going to be $WDC rather than $STX.

a bit of playful thinking;

ok just some left field thoughts from the Raven on things as crazy as the gold dow ratio...

just looking at spx vs $GLD back to 1975 some stats using the following ratios you get an SPX based on current gold prices;

min 154

25% 682

50% 1217

75% 2716

max 6505

average 1833

we currently stand at 45th percentile, so not extreme at all.

if we look at the price of gold, fixing the SPX and using the lowest SPX/GLD ratio from the last gold bubble, we see a SPX inflation adjusted price of $8,353. whooooah indeed.

Sunday, 1 August 2010


This is a stock that the Raven has been keeping quite a close eye on the last couple of weeks (he's traded around a small punter sized position). The company makes hard drives, the Raven actually uses one of their external hard drives to back up all his data.

This stock is cheap, by whatever metric you'd look at it classically, if you're using historic data it looks cheap. EV/ebitda(ttm) its 1.84x, p/e(ttm) 4.5, p/s 0.6, p/b 1.32, forward p/e 5.7.

This looks like a three legged dog with fleas. a blind three legged dog. Its fallen 41% since its high towards the end of April. Its done 40% more volume than one would have expected in that period as well. The 200dsma is 44% higher, basically its ugly, and looks oversold, but thats not a reason for it turn tomorrow.

Index funds, mutual funds and relatively passive money, so who's been selling??
4.3% of the float is short, 1.8 as a SR. (as of the middle of the month - so not very informative), not particularly high.

Going through some of the fears;
1) SSD tech becomes cheap enough to shut out HDD
2) inventory build up and volatile ASP (normal hardware producer risk really)
3) the "cloud"
4) areal growth rates too high or too slow (too high drives down the margin, too slow and SSD becomes cheaper relatively)

There is a lot of uniformed speculation as to what the fear is in the stock, the Raven doesn't claim to be any wiser than the street on this one, so its best to go through the obvious angles and see if it makes a bit more sense. SSD technically just isn't cheap enough to be competition just yet, the Raven also knows enough about the street to realize that this isn't a risk that has suddenly been priced in since April!! Neither is the cloud, or projected areal growth rates. So clearly by process of ellimination, investors are worried about inventory build up, pricing, etc. A "normal" fear in this sort of stock.

Listening to $STX and $WDC's earnings calls, its pretty clear that they both saw the same thing, the rather ominous sounding "third player" in their space producing an excess of 5mm units. They both speculate whether this is because the TP doesn't have as much control as they do, ie. aren't able to dial down their production as quickly, OR whether this is a deliberate shot at trying to gain market share with a limited number of OEM (original equipment manufacturers) that the TP is particularly close with. To the Raven the latter makes sense. In which case one should go and give the margins and balance sheet a good kicking to check how cheap the stock really is?

Ok, so looking at the suspected TP's driving down prices, the Raven thinks 'they' are running on a gross margin of ~15%, but also with higher r&d costs, and probably lower net margins than either STX or WDC. It does mean however that pricing could be quite weak, with bloody noses all round (although quite STX and WDC management seem quite aware of the danger of chasing market share thankfully). The Raven does think that the most conservative level is a 15% drop in ASP (average selling price). In which case WDC becomes break even, and worth ~ $11 of the cash its got on the balance sheet.

Realistically its easy to see WDC's margins get compressed down to 15% in the short term to match our TP's lower margins. That would mean EPS ttm of $1.95 ish. Putting that on a "value" p/e of 10x and you've got $19.50+$11cash = $30.50. So its only 16% higher than Friday's close. Certainley not bargain basement valuation in this scenario, putting a margin of saftey of 25% on that and you're at $23. (if you're a real punter though you could argue that you should use a market multiple of 14x and a 25% discount then you're looking at $28.73)

The other general trading point the Raven would make is that there seems little point being a hero, or draw a line in the sand, its much easier to trade the right hand side of a U than the left hand side, or "don't catch a falling knife", or "monkey's don't pick bottoms", etc, etc. Basically IF the Raven thought this was a screaming buy from a valuation standpoint, he's nimble and small enough to wait until the stock starts to move up before starting to buy. He's had a quick run of some quantitative screens and he'd only buy this stock when it broke throught its five day moving average on the shortest time frame.

So to sum up;
Looking in the rear view mirror, WDC is cheap. However the stock is telling traders and investors that there are worries about the future, by process of elimination it is 'clear' that market level inventory build up and weak margins going forward are a big risk given other market participants increasing supply and being less responsive to demand. The Raven believes that as a worst case scenario the stock trades at $11, at a realistic downside the stock is worth $30.50, so the Raven would look to buy a meaningful portfolio sized position if the stock went below $23 with the condition that the stock broke above its 5dma after that.

Thursday, 22 July 2010

The Raven saw this story and has to say that he wasn't that surprised, but he does wonder why the media isn't making a bigger deal of it, and why GM isn't being castigated. GM is going to pay $3.5bn for AmeriCredit, a subprime car loan business. You'd have thought it might have learnt its lesson with GMAC? or that it would be paying cash back to the government, but no, it appears it intends to use the taxpayer as a back stop and to agressively go after market share and unit volume, again you'd have thought it would have learnt its lesson, but apparently not. Heads the unions win, tails the taxpayer gets shafted, brilliant.

$CAT numbers were good, and the Raven feels that should and is driving a lot of the market action, however it does feel like there is speculation that China is going to be easing policy, just from the action of commodities, stocks and $AUDUSD (which has broken out from its recent range). The Raven sees absolutely no point in fighting this sort of a rally, he stopped out most of his shorts overnight and this morning. He'll probably put them on later in the day if we start to fade, but not before.

The Raven really would like to emphasize one point; you absolutely have to own your book everyday. A lot of investors fall into a very alluring trap, they care about the price they paid for a stock and not what the current price is. Focusing on your cost basis is suicide, it makes you sell winners too quickly and hold onto losers, as you're putting your pnl as an input into your trading decisions. It is much better to mentally at least start yourself off everyday at $0 pnl, and construct the book you'd want to own.


$WDC results were worse than "expected". One would imagine that the market's expectations were lower than the consensus analyst expectations (given the pounding its taken this quarter), he's picked up a little stock given the beating it took today and after hours once reported.

Just to highlight some of the widely quoted stats that the Raven looks at before running his own prop models;
from FINVIZ http://finviz.com/quote.ashx?t=wdc
5y sales growth; ~20%
5y EPS; ~17%
Forward p/e 5.1
Trailing p/e 5.3
p/sales ~0.8
EV/ebitda ~ 2.56
Short ratio 2.2
% of float short 5.8%
52w change -(0.2)%
52w residual -(19.2)%
current ratio>1
mkt cap $6.92bn
from market watch;
8 buys, 3 overweights, 6 holds, 1 underweight, 0 sell

or with a touch more brevity;
growth CHECK
balance sheet health CHECK
valuation CHECK
beaten up CHECK
reason for being cheap ?? The Raven would guess that the sector has always traded at a lower multiple, but that there is softer demand and some reports of much lower pricing in June.
The Raven doesn't like the insider selling over the last year.

There also isn't a catalyst, and in this sort of environment its not a smart idea to have "value" trades on, or trades that are based on the market coming to its senses and deciding to reprice an asset upwards in your favour. Especially when the chart looks so ugly.

HOWEVER, the Raven does think it is a touch oversold technically and just can't resist a tiny punt that it recovers some of the ground its lost. This is not a position that he's going to add to if it goes against him as his stop is going to be pretty far away.

Bernanke was a big yawn today.

More interesting to the Raven's eye was the $EURUSD continuing to move lower, that really is a bullish sign for Bunds. He heard a great comment today, "if Greek banks pass the stress test, then the test has failed" or something to that effect. Not a bad line.

$AMR (3.4)%, $NFLX (0.6)%, $WDC (5.2)% (and off another 3.5% in AH trading), $WFC +0.6% yesterdays view of the results would have produced about +1.5% delta neutral at the close.

tomorrow we should see $AXP, $CAT and $SNDK that the Raven cares about. The Raven is short some $AXP, but thats more of a hedge for some of his longs.

Wednesday, 21 July 2010

some commentary on numbers today and the Bund& EUR

$AAPL, what a surprise, it beat. stock up ~2-3% after.

$YHOO, one legged, blind dog with flees and partial sight. The Raven was itching to short this but took his eye off the ball, or lacked the stones to make another earnings call as his portfolio has been quite concentrated. (his toothless wonder was doing his best to reduce the range of his hearing) A lame excuse he knows, self flagellation in process...

$GS numbers a little disappointing to the Raven, he was actually expecting it to beat, and it didn't fit with what he thought the revenue would be (in terms of prop desk/fees split). The Raven covered his short just after the open as the tape and orderbook just didn't smell right.

$UAUA he cut his position in half, its had a great move from where he picked it up on Monday when it tracked $DAL falling out of bed.

tomorrow; $AMR, $NFLX, $WFC and $WDC of interest for the Raven.

He's not got trades on any of them, however for choice (gun to your head kind of choice) he'd be short, long, long, long those names.

He's traded around a lot over the last week, but has kept himself 100-200% short, if anything he'd want to increase that position right now, with a very tight stop, but that would just be too crowded and obvious.

The Raven has been scratching his head recently, trying to understand the underperformance of Germany 10yr government bonds, the Bund, which has lagged Gilts and US Treasuries. The only thing the Raven can think of is that the market is expecting more QE from the UK and US, whereas Germany won't participate, whereas looking at the chart above its perhaps more clear that the $EURUSD is the leading indicator for the Bund's relative performance, and that the $EURUSD's return has been linked more Greek headline risk. It would be interesting to see how things moved if there was a return to QE though!

Tuesday, 20 July 2010

where are the shareholders' yatchts??

Its another investment banks results tomorrow, perhaps the most notorious investment bank's results, aka the face sucking vampire squid, or Goldman Sachs. The Raven doesn't have too much commentary to give on this particular firm, he's got a very small short in the name, however he does want to make a wider point about investment banks.

It is a famous saying, particularly on the buyside, "where are the customers' yatchts?". The question comes from a buyside fund manager being shown a fancy new corporate toy by a Wall Street broker, and the question is to highlight that in general given the level of risk, "intermediation" is far more profitable than investing, or allocating capital correctly, its the brokers with the fancy yatchts and not the customers.

The Raven would like to refine and distill another gem of truth from this scene. In our story (pre 1999) the firm's yatcht, is ultimately owned by the partners, as it is their firm. Updating the story today, it wouldn't be the firm's yatcht on display it would be a senior MD's yatch or a pan-galactic-global-head-of european exotic volatility derivatives trading. Just to illustrate here are some numbers from Barclays;

2009: Staff costs £9.95bn, gross profit £4.56bn

2008: £7.2bn, £5.09bn

2007: £8.4bn, £7.1bn

2006: £8.2bn, £7.2bn

2005: £6.32bn, £5.3bn

So for 5yrs employees have received £40bn and shareholders £29bn, representing a split of 58%, 42%. This is not atypical.

The vast amount of the Raven's time in the markets has been in the buyside space, specifically HFs. There is next to no chance of an investor giving you 58% performance fee, especially for trades that have so much systematic risk and require so much leverage. The other key point is that no hedgefund could in any way have a balance sheet that looked anything like a bank's, its creditors just wouldn't allow that much leverage, 5% equity, borrowing 20x your equity?? The Raven can imagine his PB's face; "I'd like 20:1 leverage and I'll pay libor+50bps", "ha ha ha, you're 'aving a giraffe mate"...

This poses two important questions; How do banks borrow on such competitive terms, both in the absolute amount borrowed and the low interest rate? and why do shareholders reward staff with such a high split of the profit when they essentially wear all of the real risk?

This chart is a gross oversimplification of the situation, however it does illustrate the point which he feels lies at the heart of the answers to our questions.

The red curve is a modified distribution of returns. In simple terms, the IB (investment bank), chooses to win a slightly higher amount, 4.39% instead of 3%, but when they lose are prepared to lose 10% more. This is attractive to shareholders because they effectively have a call option on the return of the assets. They typically have put up $5 of capital, borrowed $95 and bought $100 of assets. If the value of those assets drops $50, $15, or any number greater than their initial stake $5 they still lose the same amount, $5, however if the assets rise in value they get all of the upside, so $4.39 rather than $3 in our example. How much is this option worth? in the normal case $7.9, in the modified case $11.8. That would imply a fair book value of 1.58 and 1.78 respectively.

It should be very clear even to the casual observer that as a shareholder you become far more sensitive to the distribution on the right. Shareholders are MADE to care about the left hand distribution by their CREDITORS. As a lender to the IB, the potential for the assets to fall 15% means having lent $95 you would be facing a loss of $10, whereas in the unmodified distribution you wouldn't expect to make a loss!

However creditors appear not to have been sensitive to the risk of these potentially large losses, and that is because they believed these institutions where TBTF (too big to fail), so they correctly believed that the $10 loss would be underwritten by the government. To the Raven this perfectly explains why investment banks were allowed to borrow so much by the market, and our example shows clearly why they would chose to do so maximize this.

As we said before shareholders only have sensitivity to the majority of the time when they are making money if creditors do not impose a cost for leverage. Thus shareholders are willing to give up 60% of the revenue to the most aggressive traders and prolific deal makers, because these employees maximize returns in the right hand side of the distribution, even if their risk adjusted performance is no better.

So where are the shareholders' yatchts?

Monday, 19 July 2010

earnings commentary

The Raven listened to the 57min or conf call replay for Delta ($DAL), interesting to see the market reaction given the numbers they posted with commentary, a couple of things did stand out to the Raven from his notes;

1) they lost quite a bit of money on "ineffective hedges", which they blamed on FASB rules, ahem excuse me chaps, but hedging jet fuel prices with crude oil is ineffective.

2) merger looks on track

3) they seem to have a lid on capacity

4) margins seem ok, even in Europe given the pricing pressures from FX

5) valuation isn't cracking right now, but, if they continue to pay down debt, it'll look substantially better, especially if they manage to keep a lid on labour costs and capacity issues.

$UAUA (United) numbers tomorrow, the Raven is more bullish this name as he's been trading its credit for years, the valuation looks a lot better and the tie up with $CAL should be "transformative". The way it traded today makes him slightly nervous tomorrow as it managed to close the gap it opened up today, so could easily have some room on the downside.

$GS numbers tomorrow, they will beat for sure, probably by something insane like a $1, however the Raven is still bearish on this stock, in fact on all investment banks as a proposition for shareholders. The Raven has a bone of contention that was raised today over at the motley fool. The Raven would like to expand a little bit on the idea that shareholders don't get enough of a share of the gross operating profits.

Friday, 16 July 2010

GS vs XLF residual chart update

just a quick chart for the $GS residual, updated to where its trading pre-market after the SEC news. Certainley is an interesting level given that its still got numbers to come next Tuesday?
The Raven is going to fade this pop, in VERY small size.
It seems like a lot of people are getting short at theses levels, the Raven got short very early this morning, he's watching it with a very tight rolling stop as this is getting crowded, he wants the cheap seats right next to the fire exit, the ones covered in chewing gum next to the teenagers throwing popcorn at eachother who can't understand a Nicolas Cage film's plot, with an obscured view of the actual screen, yes thats how close he wants to sit to the fire escape..

turning Japanese?

The Raven is really quite confused.

He's going to shoot out his thoughts as they pop up; maybe they'll make more sense tomorrow morning...

Just looking at the newsflow;
$AA beats, $INTC beats, $JPM beats, $CSX beats, and what does the market do to these stocks? FADES them.
$BP fits a cap, $GS get off with a $500mm fine, Fin Bill passes, etc.

You'd think we'd see the market a lot higher, or at least a bit more volume going through. The price action is terrible on the very short time horizon. Stepping back a little and it looks like we're right at the top of a decending channel, the Raven would have thought this newsflow would have squeezed out the shorts and we'd break hard out of the channel, but that doesn't appear to be the case, so he's a bit confused here.

$AMD up small in after market, another small hit for the Raven, however he got $GOOG wrong, but not all wrong as he'd not put capital on it.

WTI crude was all over the place today.

FX looks like the USD is still getting sold and EUR and GBP are still on fire.

VIX doesn't seem to care either way at 29

The one thing that does seem to care however is 10yr yields, which are <3%.

Interesting commentary from TeamMacroMan saying that it felt like summer last year and that we were starting a bear trap, the Raven was short then and he's short now and had been thinking the same thing for a couple of days.

$GS news probably not that good actually, given SEC had sod all $GS still had to pony up and the Raven guesses that it only covers this one series of trades, or apply to other banks. You'd have to think that they'll look at the other guys in the business, still its chump change. The Raven did laugh at a comment he heard that GS probably made more today trading their own stock, obvious joke.

Stocks are not expensive on Raven p/e, or on an equity risk premium model, both of which are backwards looking and take account of low interest rates. The Raven is tempted to look at Japan again, but its just not comparable, the stock market certainley wasn't at bubble valuations like the Nikkei and the policy response has been quite different (although not as dynamic as governments would like to pretend).

The Raven really disagrees however with some commentary he's been hearing; "either a depression is coming or stocks are screamingly cheap". Perhaps the stopped clock that is Bill Gross is telling the right time? perhaps this is the "new normal" (he had to swallow a bit of sick in his mouth just thinking about repeating that phrase). If the Raven is rolling out cliches that are wrong, maybe this time is different; maybe we've moved into a new regime where earnings grow at ~ less than half the old rate, so something like 2% not 6.2%, which would give a ERP based valuation of 950. Not inconsistent with where we are now, or the very low interest rates. what if growth went to zero? then we're really ugly and at 700. So a big enough spread to take these sorts of numbers with a lot of salt!

He can't resist looking at what the numbers would be like if we went back to the old normal; 2400. In which case, stocks are screamingly cheap.

Wednesday, 14 July 2010

fade the numbers

some quick comments on numbers we have already seen and the market reaction;
$AA hit, positive outlook, however stock fell 50bps (on residual basis).
$CSX slight beat to the Raven's expectations, down 300bps (resid).
$INTC good beat, opened up so the Raven sold his long even though the stock might have broken out, if yesterdays action is anything to go by the stock will fade into the close regardless of its earnings news.

$AMD looks ok, however the Raven imagines that most of the good read across from other results is in the stock today, so he's going to leave it alone for the moment, especially as he thinks (still needs to do some more work on it) that $AMR, $GOOG and $JPM will be more interesting.

£ITV catching a beating today, interesting commentary in the FT that they'd perhaps try and change their strategy to a pay-TV model. The Raven's still long, although has traded around the position quite a bit.

In general he's been looking to increase shorts here and has been selling off longs.

Monday, 12 July 2010

the start to earnings season

first a quick comment on $BP, interesting to see where the stock has retraced to, its knifed through the first fib retracement, next target technically would be 435p. The rumour today is that $XOM is going to be interested after talk that Apache would buy some Alaskan assets over the weekend. Overall though it does appear that the market is focusing on the "value" of the underlying assets, rather than liabilities. The question is whether the market comes back and has another look at the liabilities?

The Raven has spent a little time looking at upcoming earnings announcements, after the close we have Alcoa and CSX, which should be interesting. In general the Raven believes that stocks that trade generally strongly into earnings tend to beat estimates, however there doesn't tend to be much follow through, whereas a stock that is weak into earnings, and misses tends to see some punishment after the event. Again one has to pay attention to the volume profile running into earnings.

$AA, the whisper is that they are going to miss, however retail punter sentiment seems bullish it doesn't appear that the stock has taken too much punishment before the earnings, its residual returns are negative, on a weekly, monthly and quarterly basis, usually a negative sign for earnings. The Raven doesn't have a strong view where the EPS will actually come in, however he is biased to think that the stock will trade lower over the next week. EV/ebitda is ~15x, fwd p/e its cheap, but its not a pretty balance sheet, especially as capex seems to have outstripped cashflow over this cycle.

The stock is clearly going to be trading on earnings 2yrs out to the Raven, and it'll be interesting to see how the market reacts to any commentary from the company and how it guides.

Option implied breakeven move is approx ~6%. He's going to look to get short at $11 or better today in small size, and hopefully will be covering his short tomorrow morning at $9 (more likely if he's in the black it'll be 10.40ish, however he'll be sized to cover at $12.25 and it not destroy his July.

$CSX on the other hand looks like it should beat earnings and that the market is expecting that. That doesn't mean that it can't trade up on it. implied breakeven move ~4%. He'll look to pick up stock at $51-$50, depending on the tape. Again small size.

Its not pleasing to note that £BT have caved into the unions and given them a 9% pay rise for 3yrs, it seems the public are determined to live in a parrallel universe. Even though the stock is cheap (if you close your eyes to the disasterous pension liabilities, in which case its more like fair value, you really do have to wonder what is going through management's head? Is the firm going to be run for the benefit of its staff or perhaps for shareholders? novel thought. What % of revenue ends up as profit and what % goes to staff directly as comp, and what as pension? or £20.7bn of revenue;
profit of 1.7bn (8.2%) and £5bn to staff (25.1%)

Wednesday, 7 July 2010

South Africa's trial by World Cup, by Gideon Rachman in the FT;
"While China has bent over backwards to attract foreign investors, South Africa has adopted investment laws that impose heavy costs on investors in the name of 'black economic empowerment'. That seems to have enriched a small group of well-connected black insiders, while discouraging job creation for the poor."

An interesting comparison made by Mr Rachman.

The Raven does wonder whether Australia's "Miners Tax" which cost Kevid Rudd his job could be translated to SA, if anything the case is easier to make politically. SA stocks are priced generally to include a big chunk of political risk offsetting the potential for growth, so its not clear even if such a measure was taken how much it would knock prices.

the end of the road for the 'cheap' FCUK ?

The Raven had a quick look at French Connection the UK retailer last night;
Well the conclusion is that its a very unappealing stock, even at its low valuation. (nb. low not cheap valuation!) on Revenue of 214mm, CoS 104mm, but other operating expenses of 117mm and the firm's running at an operating loss, which it has really since 2007. Its been restructuring and hence has some restructuring costs which kick the average loss for the last two years at 20mm p.a. Just to put that in context the firm has ~ 130mm in balance sheet assets and ~57mm of liabilities.

The Raven got excited when looking at the balance sheet that this could be a good liquidation story as its assets really are a healthy dollop of cash 36mm , some receivables and inventory which should cover the current liabilities and it appears to have no long term debt at first glance. However there is the relatively ugly uncapitalized leases, of which;
7.3mm <1yr
35.3mm 2-5yrs
222.9mm >5yrs.
Now the Raven isn't familiar with how these get treated in UK bankruptcy, in the US he believes they could be treated as unsercured creditors, with a cap on the liabilities of max of 1yr or 15%, globally capped at 3yrs of the lease. Using that it would be ~ 7.3+35.3+34 = 77mm. Which wipes out any upside for shareholders. The only hope there could be is that these leases are below market rents, in which case the landlords would be keen to terminate the deals if the company weren't able to assign the leases for a fee.
In that rosy best case scenario which the Raven doesn't believe in then he thinks there is approx of 42.4mm of shareholder value in a liquidation scenario, approx 44p as a share price (last nights close of 35.25p), indicating a 20% discount.

The other exit for shareholders would be a sale to a competitor, however the Raven doesn't have a good feeling as to which of their competitors would actually want to take on these stores, as it would appear to be a bit of duplication for major competitors. This is pie in the sky talk however given the large stake held by Stephen Marks the founder and 42% shareholder. The Raven doesn't know the chap, but given his reluctance to see the problems facing the brand as it started making losses in 2007 it would be a surprise to see him liquidate or sell the brand to a competitor.

Pass, there are easier trades and fatter pitches to look at...

Tuesday, 6 July 2010


the Raven thought its not a bad idea to show the $AXP vs the $XLF chart as he's looked at the $GS version, certainley some things to think about out there...

a couple of long weekend thoughts

Lubrizol popped up on a screen over the weekend, it looks ok from a valuation perspective, its been touted as a aquisition target. The Raven remains rather skeptical of that potential outcome, for sure speciality chems is a consolidating sector, however its not clear to the Raven whether Lubrizol really fits as 'bolt on aquisitiong' for the diversified big players. It does look relatively cheap given the recent operating improvements. Chart looks fine, but its more of a case of waiting for the right entry point rather than just buying a "cheap" lottery ticket at the moment. From a valuation perspective it appears to be >30% cheap, however as with all companies in this sector its very hard to strip out the cyclicality in the earnings and cashflow, so a lot more work to do on this puppy..


Interesting to watch it squeezing higher at the moment as the Raven thought it might, but before he crows, its interesting to look at the current newsflow and how that might change. Currently it appears that the market is reacting to small positive stories, such as the story yesterday that Libya basically thinks its an interesting investment, other stories have focused on SWF's buying more stock. At the same time there have been pieces highlighting that the actual costs have already hit $3bn, the stock is UP, so it does say which way the market is positioned perhaps? The Raven gets the feeling that the market would react far more positively to news that the well is capped than it would on news of additional liabilities.

As much as he would castigate himself for his dog leg forecast, but it does appear that the short term trend is up and that longer term it could be much lower.


The Raven is lagging behind in these longs to their hedges at the moment, he's not too concerned although he's keeping a close eye on things. It does appear that tech and financials are driving a lot of the index volatility at the moment, but that is the nature of the beast in a low volume summer period with lots of macro tid bits.


"Interesting" that Trichet was making comments on fiscal responsibility this weekend. The Raven has to admit that he has thought that budget cuts in the UK were positive, however the implicit support of these budget cuts from Merve the Swerve and Tichet have really made him question their wisdom, the case that belief in these measures restoring confidence was shown to be hollow in the Great Depression seems a lot more compelling now. It is however interesting to see the EUR's reaction over the last week to a good liquidity auction, a good Spanish bond auction, Trichets comment... but in reality is it anything more than a well flagged short squeeze? and more of a USD sell off, given the weak data coming out of the US and perhaps a realization that the US isn't that much ahead of the curve. Especially when one looks at the way some of the other crosses have traded.

$GS vs $XLF

Without too much of a view this is a chart the Raven likes to look at, the residual performance of GS versus the financial sector ETF. Its interesting to see the GS seems to be losing its rerated premium that it earned during the financial crisis. Perhaps part of that is the unwelcome government attention (certainley not all of the derating as the process had already started before the SEC came out with anything), or perhaps the interpretation of the effects of the Volker Rule (which seems very unlikely given how watered down it has become). Just something to think about.

Thursday, 1 July 2010

euro pop

Yesterday had some interesting news that he feels slipped under his radar, that is perhaps playing out a little today. The ECB auction for funding went well and the commentary is that there still is some "excess liquidity" in the sytem. This positive sentiment and the fact the demand fell within the expected range is perhaps the reason that the bund has failed to rally on the equities sell off, which would also go some way to explaining the $EURUSD rally. Interesting to note however that initially this morning it wasn't a USD move, it was a EUR move, however with the employment numbers perhaps the read is going to be that the US really isn't that much ahead of the rest of the world on the road to recovery, and Europe's problems really are going to be the world's problems. It certainley feels like that in the UK, even though its not a member of the euro.

The other point to note is that the this month the euro area is going to be doing its stress tests. This will be run a very different manner to the successful US stress tests. The central authority will outline the broad details of the stress scenario, leaving the details and stress testing to local regulators. Obviously they will have zero meaningful data if they don't properly stress government bond markets in their scenarios, especially looking at the price of Greek bonds! but that isn't really the point of these stress tests, they're just an attempt to make the market feel like there is a finger on the pulse. They may well work, even if they have are meaningless, stranger things have happened.

The Raven particularly enjoyed listening to Greenspan's interview on CNBC, a rather balanced and an apolitical point of view regardless of whether you think he's right or wrong. Much better than listening to senators barking at eachother.

Deutsche Boerse looks like a very interesting stock to the Raven. Its cheap from a valuation perspective, and certainley trades at a large discount to its US peers. The Raven believes it should face less competition within this home market, it also has much more exposure to derivatives. Ordinarily this statement would be not be positive in this environment, however its not hard to believe that exchanges will benefit from proposals to have all OTC transactions cleared through independent clearing houses, it certainley isn't a wild idea to make CDS trade on exchanges.

He remembers in 2006 (maybe 2007), the launch of the European Xover Index trading on exchange, funnily enough the HF community and a lot of users of the CDS market thought this was a good idea, however the dealers for some mysterious reason thought it was a bad idea and conspired to kill this listed contract. It might have something to do with their large trading margin, superior capital margining requirements, and the massive benefit of asymettric transparency they had in this OTC market. It certainley will be interesting to see how this develops over the next couple of years.

The stock hasn't been doing that much recently and looks a bit like a value trap to the Raven, so he's not doing anything with it, but its definitely on the watch list!

Wednesday, 30 June 2010


The Raven had a very good day, and pretty much all of his net short on the close. He does have to however admonish himself for not sticking to some risk limits and targets, although his decision to overide them was profitable, it was perhaps not the wisest decision, hopefully he'll learn from it.

It is rather interesting to watch the way that $BP traded today, it looks to the Raven as if it traded with a negative beta today, however thats just his optics, rather than a proper analysis, but it would confirm his suspicion that the short interest is now rather significant and with weaker players who'll get squeezed sooner or later.

The Raven noted a comment yesterday from MarketFolly that $MDT had seen some insider buying, having a look at the stock its rather 'boring' but at a not too unreasonable valuation, on a BREVE valuation its got ~25% upside. It also passes his proprietary earnings manipulation test rather well. The residual charts look quite interesting to the Raven as well;

His current thinking is to divide his maximum position size into 5 clips, and add them progressively as we approach where the residual low is, putting one clip on tommorrow morning, another clip with the residual down a further 3.5%, then 3clips at the low, leaving a soft stop 5% below the residual level low. Getting to that point would be a loss of 7%+5% on the first clip, 3.5%+5% on the next clip and 5% on the remaining three, so a total loss of 35.5% on a risk unit, therefore for each 1% of total portfolio loss he is prepared to accept he should be willing to risk 2.8% of his portfolio as per unit position size, giving a maximum position size of 14%.

He'd also like to give a little explanantion of his thinking as to how many % of the total portfolio he would be prepared to lose; as a very rough and ready back of the envelope calculation to highlight the process. He expects to win with this strategy 80% of the time, winning 21% and losing 35%, giving him a net of ~10%. Now the Kelly Criterion would imply that one should bet the "expectation"/"odds" as a percentage of your bank roll; for $1 of risk, one would make a return of $1.86 (using american odds ie. including your stake in the return), your expectation would be $1.29 so that would imply betting ~ 70% of your capital, which is WAY too high. Suffice to say though that he is comfortable that risking 2% of his capital in this trade is below the KC limit, and within his other portfolio limits.

It could be quite quiet tomorrow so the Raven thinks it might be a good time for him to do some deep research on the name, perhaps it'll be an even bigger trade.

some initial thoughts on a busy day..

Its a relatively busy trading day today, given its the end to a rather eventful month and quarter, so BR only has a few comments to make and note, even if it may be slight repetition;

$BP - the Raven has been looking at where he'd want to short this stock again today as he's now flat. News flow on capping the spill and its potential cost seems to be a little quieter, and there is now more speculation on how much its assets are worth. With bullish case EV's of around $200bn you get to a price of 345p or $31.05 (for the US ADR = 6 UK shares *1.5055). He's not a chicken entrail reader, sorry, chartist, but he thinks a pull back up to 382p could happen in the short term, depending on what the short interest is in the stock. So from 365-385p range the Raven will be looking to scale into a short again.

The Raven read quite a good speculative piece today about China by TeamMacroMan; it highlights how hard it is to make any sense of the any of the official numbers, but that if you look at sentiment for financial conditions, its a pretty ugly picture, and that fits with the Hugh Hendry, Chanos type hypothesis that China is a rather large bubble on the cusp of bursting, or perhaps it has already and we're just waiting to hear the pop in the West.

just a quick look at the stocks residual chart pattern is interesting (ie. a chart of the stock performance adjusted for a beta hedge).

Its interesting to the Raven because it appears to have missed out on the rerating that $SNDK has been given over the last few months, conference call yesterday was apparently weak, and the seem pretty cautious about their outlook. It does have an absolutely cheap motivation, but doesn't appear to be going anywhere in a hurry.
The Raven will have a little review of the UK macro position tomorrow when things are quiet, however if one doesn't wish to boil one's blood then perhaps not reading the Guardian is a good idea. Given this "newspaper" supported the LibDems in the election and is "left-wing" it feels justified in running a headline claiming that the Budget is set to destroy over 1 MILLION JOBS! SECRET TREASURY INFORMATION... PANIC, PANIC, THATCHER DUN IT, CUTS, PAIN, HYSTERIA.

All that headline articles such as this show is a distinct amount of prejudice, poor journalism and a lack of understanding of the underlying economics. Several facts that are neglected;
1) nominal cash terms there will be an increase in government spending over the period of the parliament
2) the same report that said that 1.3mm jobs will be lost, also said that it will CREATE 2.5mm jobs, so if the Guardian had chosen it could have reported 1.2mm jobs CREATED BY NEW BUDGET.
Ironic that the last government justified wild economic forecasts with the response that they "didn't want to talk the country down", yet in opposition they use half the facts to create a deliberately misleading picture and use that to undermine consumer confidence.


Tuesday, 29 June 2010

a short update.

The Raven has had a pretty decent week back in the saddle, generally being bearish has paid off. He's also made some good single stock calls, his longs like £BSY, $DD have outperformed their hedges, shorts like $AXP look like they are starting to breakdown.

The Raven believes that there are a lot of endowment type investors ie. investors that are using a 10-12month moving average to time their investment in the SPX500 and other equity indices; those averages were at the 1085-1100 level and he's been expecting selling to accelerate as we came closer to month end if we were below these levels. Tomorrow being quarter end could be pretty ugly as there doesn't seem to be much buying interest in the market out there. He's going to stay short and look to cover at most half of his position tomorrow over the day - but that depends on the volume profile and what the price action is like. He'll be a liquidity provider at the right price and odds.

He also noted some interesting comments by Team Macro Man, noting that fixed income markets and gold appear to be giving very different signals. Fixed income markets have seen longer term interest rates falling, this being a response to "European headwinds" one would imagine, and the belief that austerity measures and weak growth will neccessitate lower interest rates for longer. On the other side of the sovereign (what a great pun), it appears that investors in gold believe that ulitmately the action of keeping interest rates lower for longer will be more loose money hence real assets should rally. The Raven has lost enough money shorting gold this year to just leave this one alone for the moment, he thinks its a bubble, and the best way to trade this is going to be after it pops. He's seen enough adverts advertising how retail investors can get 30x leverage on their gold investments to know that its frothy. He's not going to short it again unless it crosses the 100d ma, increasing at the 200d ma and the 250d ma.

Returns from trendfollowing alpha's have been a bit of mixed bag, partly because of the squeeze and reversals in some trends earlier in the month, however they appear to be back on track. The Raven has looked at adding some better filters and money management to the system to try and improve the risk reward, however he doesn't want to compromise on robustness.

He took a good chunk out of $MU on the short side today, it had been pumped into earnings and looked pretty frothy given the market and how aggressive the whispered numbers were. He covered at the 8.73 level. If it does a lot more volume and breaks its resistance it'll be interesting to see where it ends up, its got a relatively cheap valuation versus the sector and improving fundamentals, so it may well become a good buy.

He had a quick scan over his M&A universe, really nothing to be done in that space at the moment by the classical look of things. He does however remain relatively bullish on UAUA post merger, he's keeping an eye on it; its not quite there yet.

It was quite interesting today to see the reaction to BP rumours. The JPM analyst put out a bullish "note", well actually it was literally a fictional piece, based on the idea that XOM would look to aquire BP at some point next year. He does point out more seriously that XOM could buy BP and potentially detoxify the situation if they can get a handle on the liabilities, and that they'd be buying a much lower rated asset. He notes that the company could pay up to 700p without the aquisition being earnings dilutive.

It certainley is interesting to hear valuations on the stock that are not talking about $400bn of liabilities. The Raven has done his own work, he thinks the size of the liabilities are likely to be more like $75bn.

Now today the dicussion has switched as to how much BP's assets are really worth. The Raven would argue that its all very well for JPM to look at different measures, but it seems strange that the market wouldn't apply some sort of uncertainty discount. using BP's old BR's EV to cashflow multiple we get to a stock price of;

BP currently has debt a BR debt measure of $47bn. It has operating cashflow-capex ~$10.6bn, putting that on a very high mutliple of ~20.7 = EV of $219, take off $75bn for the spill, $47bn of debt and you'd be looking at a stock price of ~345p. About 15% above where we are trading, hardly a screaming buy, or a decend margin of safety. Even if you take the better spill estimates JPM were coming out with at the beginning of the spill and put it on the old multiple you're talking about 507p, you're looking at a 40% discount to perhaps the most bullish possible scenario. Alternatively if you look at the fact that the credit market is pricing a high likelihood of default then we're talking about -100%. The Raven has been short, which he covered most of this morning when it appeared that the XOM rumours were gaining traction. He'll probably look to put on more shorts if it squeezes up.

Where would he buy it for a long though? well actually he'd buy the credit instead at this sort of relative pricing. As stupid as this sounds, but he thinks it'd be a buy more at the 130p level, but if its trading there, then for sure the market and media are going to be coming out with a lot more aggressive estimates for the spill costs, so obviously that value would probably be lower. As arrogant as this sounds, it does appear to the Raven that T2 and Whitney Tilson have got in way too early, especially as he doesn't feel that many pension funds have dropped the stock, or those div yield players have kicked it out of their funds, that would be significant selling pressure of a size that wouldn't be able to be absorbed by traditional short term liquidity providers, or hedgefunds, so it should produce a relatively high risk adjusted return just because of the size.

Wednesday, 23 June 2010

a non-EUR rant

Well the Raven thought that he would feel the need to rant about the EUR, but that's not such a big urge today, Mrs. Raven has been bored by it several times already this month.

However, the Raven did read an 'interesting' interview with Vic Niederhoffer today (VN as he won't be able to spell it correctly twice) based on the premise of interviewing people that have been spectacularly wrong. Indeed VN has been wrong, in huge size twice, blowing up his fund in 1997 and 2007 after some huge gains. One might speculate that he'd have learnt or been in denial, however he instead had some strange analogies to make and basically wished he'd taken less risk.

Traditionally the Raven would mention the Kelly Criterion at this point and may well do as an appendix, but his main point is in conjunction with another lame article (whose title he has already forgotten) that was essentially a collection of 'good trader habits'.

This article certainly didn't deviate from the well trodden and essentially useless path of stock phrases and ideas. "let your winners run, cut your losers quicker, don't get emotional and bet the right size". These sorts of articles frustrate the Raven as they portray investing and speculating as a simple rule based skill that is applicable across lots of asset classes, time frames and regimes, which it just isn't, as anyone that is going to be successful for a long period of time should recognize. Now the Raven dislikes empty criticism that doesn't replace or better that being criticised, so in that vein;

1) Sound risk management is key

Now that doesn't mean having fancy systems or whizz bang models necessarily. That means the hard non-formulaic work of making sure you don't bet too much of your capital, that you realize what you're betting on and how much you can lose, how quickly and in what scenarios. Also kicking the portfolio with random ideas, historical ideas, likely scenarios, the kitchen sink, anything you can throw at it and making sure that you can live to fight another day. Now for the ironic glib formulaic statement; correlation is ephemeral, and if a hedge can hurt you when you need it help you, it probably will. As is a realization that other people are thinking exactly as you are, so don't rely on liquidity to get you out of your book, that my friends is a recipe for an offer only market, Oshkosh truck size spreads when you do find a bid and a PB that has a penchant for s&m.

2) Don't bleed to death

This second point is really point one again, however its for those investors who are "smart", i.e., skeptical of the market, who predict 9 out of 2 crashes. The Raven once heard a very glib quote, 'we don't believe in VaR or any of those statistical risk metrics, we realize how flawed they are, we understand what risk is, and the amount of money you can lose". You may think this is precisely right, especially in absolute space terms, however risk is more like not being able to play the game again, and in a roaring bull market as an absolute fund returning L+100bps will rapidly lose the firm capital and your ability to bet, heaven forbid you really loaded up on protection and lost money, well then you can guarantee that you'll have your capital pulled before your cheap options pay off to make you the next Paulson.

Its interesting that VN says in his interview that in general people are too skeptical or too gullible and that he believes he is the latter. One would have to agree given the fact that he's blown up spectacularly twice after huge performance. The Raven agrees, however both of these problem characteristics tend to cause blow ups and bleed outs because of not paying enough attention in just making sure that you're still around to trade tomorrow, and next week, and next year, etc, etc.

Monday, 21 June 2010

back in the saddle;

Today was the first day back on the perch for the Raven since the LO arrived 10 weeks ago; perhaps a chronic lack of sleep and circadian rythm will be positives for a skeptical trading style? or maybe not so much.

He would review his position notes if he was feeling ultra disciplined, he's not, that and the fact that the world has changed rather drastically in 10weeks mean that his portfolio has radically changed twice. Currently he's long a few UK stocks, a long and short a couple of US stocks, long some bund, short the CAC40 and Eurostoxx, with no volatility, fx or commodity positions.

in no particular order;

Bsky B; Newscorp has made a bid of 700p for the stock, its trading at 705p, management have said they'd look at offers above 800p, its 100d ma pre-bid was 563p and closed at 600p.

Now the Raven had a quick look at this, ok Newscorp have a big stake already so there aren't going to be any other buyers coming out of the woodwork, (however that didn't stop Pepsi recently having to bump its bid for its bottling groups), so its not going to get silly. BUT even at 800p the Raven thinks Murdoch is being a wiley old croc, the cashflow on this asset has been rock solid, its blown its competition out of the water so that it only has the government to fear rather than competitors. The Raven as a Virgin Media customer because he's not aloud a satellite at his flat really can say there is a massive difference and that he'd switch back in an instant based on service, content and value for money. In terms of valuation, well the Raven doesn't think 800p is out of the order (in fact he thinks 900p is more like it).

Dupont; now he doesn't feel as comfortable with this long as it doesn't have a near term catalyst, but it is relatively cheap and he thinks its turned the corner for earnings last quarter. He thinks that it should be well over $50 a share and closed at $38.41. Its next earnings are towards the end of July, so he's just put this on really small, looking to increase over the next couple of months. He does however want to avoid buying too much of this if it starts to tank into earnings, firepower for the day before and enough rope to hang himself will probably be essential in doing a SNDK.

Nedbank; the Raven has no position currently, because he sold it when it was bid up on rumours that Standard Chartered would buy it from Old Mutual. Its still an attractive business in a growing market, however it really doesn't fit with his skeptiscm for financial at the moment, or more precisely doesn't fit enough at this price.

Next; its just recently popped up on the Raven's radar (primarily because he was looking at ASOS). Now this has no catalysts at present BUT it does look pretty decent in terms of valuation, the Raven would like to kick the tyres and have a look at some of the stores as he hasn't really been clothes shopping for years. Its priced with almost no growth and the Raven really doesn't think the UK consumer is going to be that badly hurt. Once we get past the budget and the bluster, people will begin to realize that its not all doom and gloom, the government is taking the tough actions and there will be growth in the future. Ok some public sector jobs will be lost, and government spending will be lower, but for most households this IS positive. It will provide a large deflationary or disinflationary force in the UK, which will the Raven believes keep UK interest rates lower for longer, and stop the BoE from unwinding its QE. As such a large proportion of UK households are on floating rates, this really does make a difference to their disposable income, and he doesn't believe that the fundamental spending nature of the UK consumer has been bludgeoned to death just yet. Its trading at a BEVE (a Raven proxy for EV/ebitda) of 7, Marks and Sparks is trading at 8.5, Tesco at 8, Sainsbury at 8 and HnM at 19. The balance sheet looks pretty good, margins seem healthy, management seem fine. The Raven thinks there is at least 20% upside on discount valuation to start, and probably another 20% if his macro scenario plays out. So he's got a good clip on.

PUB; he's still got a position in this, although he's hesitant using the word still as he's sold 70s and bought 60s a few times in the last few weeks. Viz-a-viz is aforementioned UK consumer punt, PUB looks like pretty good value against book value. It appears Einhorn agrees, who's the Raven to argue (he hit his own hubris alarm bell there).

BP; well he's spent a lot of time looking at this and following the situation. In short, given the size of the liability, risks, etc, etc the Raven wouldn't pay more than 150p a share on a punt in small size. Its not at that level yet.

Firstly Obama has been a total tool for trying to turn a ecological disaster into positive PR. There was absolutely no need to compare it 9/11, that was both disrespectful and weak, as was his attempt to turn the issue into a childish and divisive international spat with one of the US's closest allies, only today the UK has seen its 300th casualty in Afghanistan.

Hayward has made the situation no better, his apparent lack of concern, lack of media savvy and insensitive comments are naive at best, reckless for a CEO earning a fortune from shareholders who've lost billions more than the estimated cost of the disaster thanks to piss poor managment. He doesn't appear to have had a clue as to what happened, hardly appropriate for someone supposedly tech savvy. Of course BP should pay for damage that it has caused, but the Raven is very skeptical of a firm putting money into an indepent escrow account for government to hand out as compensation, its hardly as if you're handing over the cheque book to an institution know for its fiscal responsibility.

But at least both guys got their lives back this weekend, time for baseball, golf and a spot of sailing, its not like they have well paid powerful jobs. Mere mortals work weekends, especially when they are under pressure.

the Raven will be moaning about the EUR tomorrow.. and probably the day after that..

and the day after that..

and the day after that..

Monday, 12 April 2010

EU bailout part deux

He's just noticed that the last post of his was actually about the EU bailout of 3 weeks ago, and the Raven has a few hypothesesesese;

1) Greece is budgeting using a 3% funding rate, hence the reason they are moaning so much about 6% interest rates. That would mean that with their ~130% net debt to GDP they are going to see an additional budget deficit of ~ (6%-3%)*130% = 4%. Which if the Raven were to be right would be larger than the gains they've made from their "austerity" package. Obviously he's being a bit cynical and speculative with that comment, but its entirely possible.

2) The announcement of a €30bn @ 5% loan today actually includes the IMF funds that have been anticipated (€10bn @ 2.7%), that would mean that ... the EU is actually giving €20bn @ 6.15% which would fit more into line as to what Germany has been asking for.

3) These loans do nothing to change the fact that Greece would appear to be insolvent and is just kicking the can down the road. The Raven can't really see a point where they will start to run a surplus, or that staying with the EUR they will suddenly become competitive enough to grow their way out of the hole they're in.

4) That this still appears to be a backstop facility and that the EU haven't actually fired the bazooka, they've just told you how big and how much it cost.

5) The Raven is rather suspicious of France being so insistant that a deal is done, might it have something to do with the fact that its banks have been the biggest lenders to Greece?? non non non of course its just being a good EU neighbour, Sarko would never be so blatantly ridiculously opportunistic.

position notes

As the Raven is about to take a non market related holiday due to the arrival of a LO, he thought he'd summarize his views so that he's got something akin to position notes when he's back in the land of the living.

$EURUSD; well the Raven spunked some cash on some 1week puts on the EUR and on some put spreads, all pretty low strike and took off his EUR short. The options were certainley cheap as a vol trade and he doesn't doubt that if he'd be delta hedging it he would have made money on today's gap alone. But as he was actively trading his delta and taking a view he's wasted 2% of the fund, ye pays ye money, ye takes ye chances.

$GBPUSD; he's put on a bit of short position this morning (pre-waterfall). The bookmakers now show a fall in the probability of a Conservative majority from ~61% to 58%. Whereas GBP has rallied with the rest of the market. Its also interesting that the polls over the weekend didn't show a marked difference. Longer term he's bullish GBP because of the large event risk priced in.

Nedbank; he's been long and trading this around, selling at 141 and buying in again ~ 136 over the last two days. This still looks like a good longer term thesis, which again has suffered from some country specific news.

$FRX he's been looking at this stock and bought some after its large sell off on Thursday when it didn't get approval for a new drug. He thinks the market is placing an unfair discount on the drugs that have yet to roll off, its a small position and a small trading long.

Gartmore Group, the stock has dropped because of the suspension of one of the directors, its been stated that this is due to him directing trades to certain brokers in conflict to the firms rules, however the Raven thinks the market has mentally linked this to the insider trading that the FSA have been investigating, which the company have denied. At this price relative to other asset managers it looks like a decent punt, especially given that its bite size and he's got about 5% of the portfolio in it currently.

$UAUA yes its an airline, yes its got a unionized workforce, but its also got a lot of potential in the m&a space, the numbers don't look too bad and its definitely had some momentum, as much as he hates to admit it the Raven is bullish on this space and UAUA and BA look the best ways to play it. BA is a different case, because he thinks if Willy Walsh get the best of the UNITE union and introduces the staff savings that could be expected, if they wrap up and integrate iberia well, then the stock could easily be worth 700-800p, so at 240p that looks like a good enough bet. The Raven has been pretty long on its recent small move, but took a few chips off the table last week, partially because he's a chicken and partially because there were other trades to put on.

Pendragon is about 10% of the book as well, it looks like a good story at a good boring price, he's made the thesis before and is bored of it himself.

He's got a small long in oil and gold, oil because if tensions rise with Iran then this will benefit, if the Chinese do a reval then commods will rise as well, and it doesn't look like he's risking too much for both of those plays.

He's short $AA and $AXP as a hedge.

Friday, 26 March 2010

is that a bail out?

It appears that the Greeks have been given a deal by the EU, where Germany have agreed to a package rumoured to be up to €25bn of support if the IMF comes in on the deal. Now it appears to the Raven from looking at the IMF website and doing his maths that the IMF will be able to lend €10bn at a blended rate of 2.7% (below where Germany could borrow). One would imagine that the Germans would be canny enough to argue that they (and France) should lend the remaining capital at a higher rate, say 4%? which would give Greece an average cost on €25bn of 3.48%.

The Raven thinks this is a ridiculous plan, which only serves to increase moral hazard and does nothing to either clear up the problem or to really stop the risk of contagion.

First lets but €25bn in context, thats pretty much the debt that Greece needs to roll over in the coming two months, and is ~8% of the total government debt.

Secondly it doesn't solve what really is becoming a solvency issue. Greece has moaned very loudly that is having to pay 6%, one has to wonder really whether they are good for the money they've borrowed already if they can't deal with a 6% interest rate. Its entirely irrelevant what what interest rate other EU governments have to pay on theirs.

The Economist had some numbers this morning that highlighted that the percent of GDP that would be taken up with interest payments will grow from 5% to 8.4% from 2009 tp 2014. They also highlight that government debt will be ~ 350bn which as a % of today's GDP is 147%. As a long term investor the Raven really doesn't think that the Greeks will ever be able to pay that back or grow their economy quickly enough to shrink that number relatively.


The structure of this "support" from the EU appears to be that they will step in when Greece can't borrow from the market. Surely Sarkozy can see that this encourages speculation? The real question is if this package is big enough and scary enough to make the market feel that Greek paper is safe and that you'll be bailed out if you buy it, in which case Sarko won't be firing his bazooka just yet.

Personally the Raven thinks this announcement will cause a small rally in Greek paper, but the market will come back and push the hand of the EU, either on Greece or another one of the UPIIGS.

Thursday, 18 March 2010

the FSA "business plan"

Hector Sants has come up with a new business plan for the FSA;


Basically Sants seems to believe that by adding 460 new "high quality staff" to the FSA and increasing their budget overall by 9.9% that they'll magically be able to spot asset bubbles. One would imagine that the "high quality staff" that they intend to hire will be among those made redundant in the credit crunch.

The FSA has only recently found the ability to find and bring mildly punitive action to 3 cases of insider trading. Odd that its been said that approximately 1 in 5 m&a deals are thought to have been traded on before being publicly announced. 3 cases in 9 years, good job guys?

Does £455mm represent good value annually? especially as that money is going to come from consumers of financial services, ultimately the UK public. The UK treasury estimates that the governments assistance in the financial crisis cost ~£10bn, given this crisis was about 1 in 20yrs event then actually the cost of having the FSA is going to be equal to the cost of the crisis, except the Raven would imagine that the chance of the FSA stopping a crisis accurately without predicting 5 out of the last 1 recessions before hand to be rather low.

The Raven thinks that Buffet's maxim that the firm should be simple enough for an idiot to run because one day an idiot will run it should be applicable to a regulator, because clearly and idiot does run it already. Rules should be simple and easy to enforce and should aim to do less harm than good.