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;
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!