Wednesday, 29 June 2011


When this came for IPO I remember being very interested. It is a fantastic product, and I can't see why most punters wouldn't use Betfair rather than their bookies once they have opened an account. It also has the critical mass and liquidity, given the fact that its pretty much the preferred exchange for spread betting firms to lay off their exposures, to give it a bit of a moat.

It does suffer from some serious negatives;

  • gambling as an industry should always trade at a bit of a discount because of the legislative and political risk that it faces.
  • lack of growth in its core market, it can really only grow its market share, as moving into different sectors it loses its edge, ie. its not going to grow a poker business or online bingo business, as they are competitive and will suffer serious and terminal margin decline
  • its going to struggle to break into different geographic segments because of regulation, and would need to get to critical mass
As such its valuation when it IPO'd was a bit of a mystery, we're now getting to the price levels where it gets interesting though;

What are fair numbers? and what is a fair multiple?

Firstly the firm has no real debt and has net current assets of ~ £46mm
A 'fair' EBITDA of ~£50mm, which you're fairly comfortable with given the business model.
what's a fair EV/EBITDA then? 10x seems like a fair stock exchange multiple => 510p

that's still a long way south of here, but one for the watch list if we do have a real sell off.

French Letter

here is the French proposal; ftalphaville link to french proposal

I think the mechanics in the flow chart are not too clear, here's my take on what happens;

Investor redeeming €100 of Greek bonds;
1) gets €30 cash
2) gets 30yrs on €5.5*0.7 + 0-2.5*0.7 risky coupon from Greece
3) gets a zero coupon bond, ZCB, worth ~ €30*0.7 today that will pay €70 in 30yrs time, that is guaranteed by the EU

Greece has to;
1) pay €30 to the investor
2) issue a ZCB to the EU for €70
3) pay coupons for the next 30yrs of €3.85 plus max(min(2.5,gdpRate), 0)*0.7

the EU
1) gets a zcb from greece
2) issues a zcb which gets held by the ecb

The euro value for the investor redeeming their bonds is thus approximately €78.

This is CLEARLY a restructuring. One can understand why a bank might accept it though, in part because of the dishonesty in the proposal.

  • Listed on an EU regulated market, but with restricted trading in the New GGBpg until 1st January 2022[1].

[1]    Trading and transferability restrictions do not apply to ECB financing transactions
This is trying to create a false market in these securities. By not allowing them to be traded they hope to make sure that banks will be able to carry on pretending that these bonds are worth this fictional amount. If I did that as a private investor, I would be sued for fraud, and rightly so.

I can accept that banks would accept this restructuring, because a 78% recovery rate on Greece is very high in my humble opinion. What nobody should accept is the idea that we can pay out such a high recovery rate from taxpayer funds, increase the taxpayer credit exposure, and be complicit in trying to create a false price for Greek debt.

When is the German public going to realize how much money they are giving to Greece?

Thursday, 23 June 2011


I get the feeling the market is already thinking about QE3 in a big way, and for some is acting as an insurance policy on their long equities/commodities/risky asset positions. Clearly this must be building valuations.

The more interesting point however are the second order effects of any potential QE3, and a question of its scale. IF it happens, and that is a very big if, it will be under some serious political flak, and as such its only worth then bothering doing if its a meaningful size, but clearly not going to be truly shocking and awe size.

QE2 had very wide reaching side effects; stock prices rallied hard, but more importantly, do did commodity prices, and food in particular. Another round of QE will put huge pressure on China, exporting inflation from the US to China in a big way. China will have to tighten, but even then, the political pressure from higher commod prices and higher food prices will have to lead to one of three outcomes;
1) substantial revaluation of the RMB
2) excessive monetary and fiscal tightening within China
3) revolution

(2) seems the most likely, but that is like somebody pulling very hard on the handbrake for the resource economies like Australia.

I am short $audusd, and doing a lot of work on Australian banks, and highly leveraged companies looking very actively for good short opportunities.

Tuesday, 21 June 2011

Labour overspending in a chart

Ed Balls still wants to pretend that it was just the recession that destroyed the UK's finances, well here are the figures from Eurostat. The chart is of the cumulative net spending as a % of GDP, so ignore where the finances are coming from, and focus on what government spent excluding interest payments versus their tax income, it is very clear that from 2001/2002 the Labour government significantly overspent, to the tune of  ~20% of GDP. The entire terms of the debate on the austerity measures would be so different if the UK's net debt was going to top out at ~60% of GDP, additionally we'd probably not be running such a large deficit.

So when Mr Balls calls for emergency VAT cuts, he really should answer the question as to why he fired that fiscal ammunition in 2003?

Friday, 17 June 2011

inflation and stock returns

is a piece by Warren Buffet from 1977, in which he talks about the effect of inflation on stock returns.

some interesting points;

But the potential for real improvement in the welfare of workers at the expense of affluent stockholders is not significant. Employee compensation already totals 28 times the amount paid out in dividends, and a lot of those dividends now go to pension funds, nonprofit institutions such as universities, and individual stockholders who are not affluent. Under these circumstances, if we now shifted all dividends of wealthy stockholders into wages -- something we could do only once, like killing a cow (or, if you prefer, a pig) -- we would increase real wages by less than we used to obtain from one year's growth of the economy.
The Russians understand it too
Therefore, diminishment of the affluent, through the impact of inflation on their investments, will not even provide material short-term aid to those who are not affluent. Their economic well-being will rise or fall with the general effects of inflation on the economy. And those effects are not likely to be good.
Large gains in real capital, invested in modern production facilities, are required to produce large gains in economic well-being. Great labor availability, great consumer wants, and great government promises will lead to nothing but great frustration without continuous creation and employment of expensive new capital assets throughout industry. That's an equation understood by Russians as well as Rockefellers. And it's one that has been applied with stunning success in West Germany and Japan. High capital-accumulation rates have enabled those countries to achieve gains in living standards at rates far exceeding ours, even though we have enjoyed much the superior position in energy.
This parallels to some extend our current situation, and should frame thinking towards government debt. Even though Krugman et al would like us to believe there is no consequence to government spending in a deep recession as there is no inflationary risk, it is still consumption, and by definition building up debt is the opposite of saving. By CONSUMING today, we reduce our ability to generate wealth going forward. Almost all government spending is really consumption, paying high wages, increasing future pension liabilities, hiring more equality officers, is all consumption, and dramatically reduces the countries wealth generation capabilities.


captures a lot of what I have been thinking....

Thursday, 16 June 2011

shopping list;

characteristics of stocks I would currently like to own;

revenue dependent on American business spending and consumer spending
cost of revenues largely dependent on commodity prices
no unionised labour, and low dependence on low skill workers
fixed rate borrowing, but generally low leverage.
plus all the usual requirements...

stocks I would like to short;

highly leveraged, floating rate
large fixed investments in commodities and supplying China

Wednesday, 15 June 2011

under the hood of a sentiment change

there has been a dramatic change in sentiment over the last month and a half.

the spy is down  -7.41%, iwm -10.11%, qqq -8.51%.

tlt is up +3.50%.

gld is down -0.86%

there have been many blog lines spilt on this topic, suffice to say, this has absolutely nothing to do with the debt ceiling, nothing to do with Japan, or Libya, and probably not that much to do with Greece either.

What then is driving this repricing? digging deeper than just the headline numbers;
size +1.20%
value vs growth +8.33%
momentum +1.69%
liquidity provision strategies +0.81% (unlevered)

consistent with the market shifting to more defensive footing in anticipation of slowing growth and macro economic weakness. My narrative is this; the commodity spike over the last couple of months hurt consumers, a small disruption to supply chains from Japan have undone a lot of the monetary policy heavy lifting of the last year. Demand remains weak.

What is not being talked about enough, is the tightening of Chinese monetary policy, and the risk that we see a hard landing there, which could seriously impact the commodity economies such as Australia. 

Tuesday, 14 June 2011

$CSCO, the wrong song...

Dasan commented that Barton Biggs didn't understand CSCO's valuation of 12x p/e thinking it could grow at 12% a year.

This is interesting, because Dasan is a very good tech investor, and I am not, my knowledge of Biggs as a stock picker is minimal, meh.... he does write a good book though.

I think if you are used to looking at beaten up industrials and searching for "value" you could make justify buying a whole handful of names; $INTC, $HPQ, $DELL, $MSFT, $PHG, all of whom have forward p/e's of under 10x, all of which have had positive top line growth over the last year, and three years compounded, all have pretty decent looking balance sheets, and certainly let you feel safe and familiar.

What is an appropriate multiple for these sorts of companies, tired, almost utility like structures, with fewer growth opportunities I'm not so sure market like multiples make that much sense, neither do these companies have hard barriers to entry, or perpetual demand for their particular products like you do with a water company. For these names to be attractive, one might actually need to see deep value multiples.

Where does that leave CSCO? well firstly there are a few other stocks that look a lot better, but on a 5xadj ttm p/e and adding in the spare cash on the balance sheet $3.86 + 5x1.32 = $10.46

So we are a long way from where I care...

Saturday, 11 June 2011

em-dm... am?

Interesting article in the FT, basically suggesting that by many metrics, EM emerging markets, have progressed to be close to or at the level of the DM, developed markets. More interesting than the history is the prediction that high savings rates in EM's will moderate, creating new demand, and that capital flows of recent years will reverse, ie capital will flow from DM to EM's.

Perhaps though there is another category that one will need to classify economies, and that is AM, ageing markets, such as Japan and parts of Western Europe, that will probably have a very different dynamic to that of developed markets that don't have the same demographic challenges.

Saturday, 4 June 2011

update on trend following in a bubble

This is a chart of the a simple trend following strategy sharpe, on the x axis is the time window used for the entry and exit signal in trading days, the green line is the sharpe for commodities and the red line is the sharpe for equities bubbles. These sharpe's do NOT consider transaction costs. Including that would dramatically shift the optimal window to a the right, because you'll trade less often. So the pseudo optimal window for commodities is the 6yr average, and for equities its a lot shorter, at the 252d approximately.

That would have bought you gold at $300 in 2002....a 17.46% compounded annual return. It would also put your robust stop at $866 now, a pretty huge drawdown.

Friday, 3 June 2011

another potential chinese fraud;

without commenting on the company in particular, its another example of a potential fraud. It was striking reading an FT alphaville article quoting a Chinese 'expert' saying that he saw long term problems for China, medium term problems, but had faith in the government to engineer a soft landing. There has been an enormous shift in media and 'expert' thinking that has blind faith in the Chinese government and the Chinese development model.

US officials have decades of experience and collective wisdom managing a market economy, one which is smaller, has more transparent and reliable data, yet one would be called mad if one were to place that level of faith in the US government to guarantee a soft landing. Or even more absurdly, that the Fed could fine tune the economy by setting interest rates to the nearest 0.01% (Chinese base rate is the absurdly precise 6.31%), when the Fed has to move in 25bp increments at least.

Fraud typically really starts to accumulate in the late stages of a bubble....

Wednesday, 1 June 2011

why the eurocrats think that re-profiling Greek debt will work.

I started off yesterday, with another post about Greece, it was boring....

digging through the numbers it just becomes so clear that Greece fudged its way into the euro. Greece ran a primary budget surplus of 3.62% before joining the euro, and then really just let it all hang out and since has been running -2.47%, whereas over the same period Germany ran 0.27% and 0.34% respectively.

Greeks' not paying high real net tax rates is not a new thing, preEuro (pE) tax revenues as a % of GDP, 39.64% versus aE 39.21%. So it really is the spending side of the equation that has made all the difference; going from 36% to 42%. ie having a Northern European welfare state, but also low taxation, and plenty of EU funds.

It has been incredibly puzzling that European ministers believe that reprofiling will sort out what I believed, like other commentators, to be a solvency crisis.

After the 90% net debt to GDP, its a when not if case of default, and lets call it default not modification, restructuring, etc.

Banks might be willing to pretend that a reprofiling (ie saying you can have your money back in 20yrs rather than 10yrs) is not a default, but a zero coupon german government bond would go from 71 to 51, a 30% haircut. Banks that have this crap in their "banking book" should still be able to pretend that there isn't a loss.


can Greece reach a stable equilibrium without default?

In eurocrat world, the answer has been muddled.

Under what parameters does Greece avoid blowing up?

Its current interest payments/total debt outstanding gives us the average interest rate which stands at 3.83%. Germany at 2.87%, so the credit spread that Greece "feels" is only 130bps. Even at that low level it was forced to ask for aid.

Believe it or not, it managed to feel a credit spread of only 56bps on average since joining the euro, instead of the 329bps before.

IF Greece were to reprofile, in terms of modelling that is just a guaranteed rollover of a bond into a longer maturity with the same coupon. BUT given that Greece is having to borrow to meet its coupon payments at the moment then it will still see some uplift in its effective average interest rate, unless it is given even greater access to EU funds.

So lets assume we lose our minds, and give the Greek government a pass, and assume they can bring their primary budget balance to a pre euro surplus of 3.4%, and that they have strong nominal GDP, what is the interest rate that avoides them spiraling out of control and needing to default. Well it looks like at about 600bps credit spread is the cut off point, above that and Greece is bust, below that it *could* turn its self around, if the Government managed to turn a 4% primary budget deficit into a 3.5% surplus over a few years, with very high economic growth. THIS IS WITH REPROFILING...

without reprofiling....then that stable credit spread is only 450bps.

assuming the market lost its mind and allowed Greece to roll its credit at current spreads, in less than 5yrs half of Greece's increased tax revenue would be spent paying the interest alone.