Friday, 26 August 2011

management matters

Molins is nothing short of a basket case company.

Ms. Palmer-Baunack impresses me, Mrs T. would have been impressed with her handling of the unions in previous roles.

I like that.

If she can get a penny of value out of the company, then there are a couple of pounds of real value there according to the financial statements and a large dose of wet finger in the air.

dd in progress...

bank of america

its not a name i really care about. but i like to price things.

Buffett has stuck $5bn down, for that he gets pref shares that are worth $5.5bn, what is 10% between buddies..

the real KICKER is the warrants he gets, 700mm warrants that i think are worth $3.5, so $2.6bn.

in essence that means BAC is letting Buffett buy stock at a discount of 5/(5+2.6) it at 66c on the dollar.

BAC recently said that their tangible book value was $12.65

They just let Buffett buy the stock at effectively 36c on THEIR dollar if they think that $12.65 is fair value...

'yem kidding me.

Thursday, 25 August 2011

jackson hole

at the beginning of the week it was easy for some people to think that other people thought there would be one of these;

but anyone reading anything finance related will have realized that Bernanke is not going to play ball tomorrow, no dice.

there are not the same signs of deflation to justify the launch of QE3.

there is however the risk that Bernanke says the economy is weak and that they are keeping an eye on it. saying this would be a policy mistake in my view, even if that is what he thought. we have seen before the the market fears these sorts of comments because they think Bernanke can see lemons they don't have the data to see.

Bernanke is not a mug, i don't think he will make that mistake tomorrow, and therefore i think there is upside risk.

to balance that, today's price action was fugly.

Wednesday, 24 August 2011

Ian Dyson.

Another "Captain of Industry".

When in charge of Punch Tavers, had a basic salary of £675k.

Now that he has split the company in two and is managing just the profitable easy bit, has a salary of £675k.

If I did 30% less and got paid the same amount of money I would be pretty pleased. Especially if I got a pension contribution of 25% of that salary, a 150% bonus, £18k BIK. We're talking almost £2mm. The market cap of the company is £277mm, no thanks to management. That is a 73bps management fee!

I guess shareholders, not so much.

Tuesday, 23 August 2011

why didn't anyone look at the SMP balance yesterday?

well I didn't check how much the ECB bought of peripheral debt last week, and I didn't see any market chatter on the matter. The week before however there were millions of comments on that the ECB were out there buying €22bn.

Last week they clearly took it a little easier and only bought €14bn.

I think they only had/have the appetite to double the SMP, so they have €130bn of powder.

They don't expect to be buying once the EFSF is operational, although its not entirely clear to me when that will be, at first glance the earliest is in 4 weeks time, but it could be later.

That leaves them with €94bn. Which means they have the capacity to do €23.5bn a week.

OR they actually expect it to be longer, as the ECB clearly prefer the shock and awe approach. Their steady state approach will probably be more like the 14bn they did last week, which implies EFSF buying starting in 6weeks time.

Monday, 15 August 2011


No not something from a John Irving novel... but the Equity Risk Premium.

There have been several commentaries highlighting how "cheap" equities are versus bonds. In essence the ERP is the difference between the earnings yield, ie net profits / market cap for equities against 10yr government bond yields, ie the so called Fed Model.

Does one expect these yields to move in the same way though? in all economic environments? and does it provide a good signal?

Firstly one would expect these two yields to move in opposite directions, ie when the economy is improving, then bond yields should be rising as demand driven inflation rises and long term growth expectations rise, at the same time equity valuations are increasing so equity yields are falling. Whereas in a a recessionary environment the opposite will be true, bond yields fall and equity yields rise. Thus the ERP naturally is going to be counter cyclical, we expect it to be high during recessions, and low/negative in booms. However is it PREDICTIVE?

You tell me?

and would you bet on it?

any guesses for what those charts would look like in Japan??

Tuesday, 9 August 2011

quick notes again...

  1. August markets are thin. Any selling or buying can push markets to extremes far more easily.
  2. People have spent a lot of time talking about valuations, imho they really aren't that important, or supportive on the macro level.
  3. Profit margins are fat and inflated, probably meaning profits are 10-20% above their long term average.
  4. Reflexivity is going to bite, there is a big demand shock.
  5. Asia has a LOT of froth and bubble in it, there has been serious over investment.
  6. Government debt levels, demographics, etc are a long term headwind.

I'm not ready to run out and join the rioters and call for the end of civilized society, but it does look awfully gloomy, and that has been rapidly priced in. I've made some pretty decent money out of the move, calling how much further there is to go is a lot more difficult.

Monkey's pick bottoms. Its a lot easier to buy when its going back up than to catch a falling knife, etc, etc. cliches abound...

Wednesday, 3 August 2011

Arb trading...

A good proportion of the portfolio is dedicated to "arbitrage". Now, in the last few decades almost all relative value trading has been called arbitrage of some kind, ie. buying very 'cheap' value shares is now "time arbitrage". I use the term slightly more tightly than that, but more loosely than buying and selling exactly the same instrument, at exactly the same time for a penny difference in profit.

When I say arb, I mean things like merger arbitrage, credit basis trades, rights issues, convertible bond arb (with everything hedged!). These strategies are first order market neutral, ie. their pnl doesn't show any correlation to small moves in the overall market. They do tend to show correlation over big moves to the downside (which is what you really care about).

Some strategies have a fundamental reason for the weak downside beta. For example the probability that an acquirer walks away from a deal increases when the economy changes for the negative, the credit basis can often move in unexpected ways because of differing funding spreads and expectations of restructuring, etc.

In general there is also a second mechanism, liquidity and contagion. Holders of these arb, basis, RV trades tend to have similar positions and when the market takes a real beating there is often an increase in risk premiums and blow out in relative value spreads (whether fundamentally justified or not) as investors look to increase their liquidity. Additionally you can have real contagion as any stat arb fund that was around in 2007 can tell you, ie. a fund that runs several strategies blows up in one more directional one and then has to liquidate all their strategies, that can set off a cascade of liquidation.

The general point that came up in conversation however is that with all these type of arb spreads, one is short a put on liquidity. That diversification is an illusion, and if anything its better to panic first.