Category — Europe
“For the first time since Word War II, owning U.S. Treasuries is a riskier bet than owning German bonds.”
From The Daily Reckoning. This headline was the most important thing I read today. The follow with:
On the basis of credit default swaps, which are used to speculate on a government’s ability to repay debt, the 10-year note reached a record high of 16 basis points on March 12. German bonds traded at 15 basis points, also a record. A decline in these spreads shows improving confidence in the government’s ability to pay…an increase shows the opposite.
“That’s certainly eye-opening,” writes our esteemed colleague Chris Mayer. “The market consensus is that you stand a greater chance of default investing in U.S. Treasuries than in German bonds.”
Officials in Beijing must keep shaking their heads. China holds more than $387 billion in Treasury securities.
May 14, 2008 No Comments
Betting on Bordeaux wine futures
Like every other investment, this one is probably over prices and won’t beat the index in the long run. But so what? Even if it’s value goes to zero, you can still drink it:
Most wines around the world go on sale only after they are bottled. But in Bordeaux the process starts far earlier. International demand for the biggest and best-known names is huge, and growing. That’s especially true for the five so-called first-growth Bordeaux wines – chateaus Lafite, Mouton Rothschild, Latour, Margaux, and Haut-Brion – but several dozen other labels also are increasingly sought after.
“Everyone wants to be on the market,” says Patrick Maroteaux, the owner of Château Branaire-Ducru, who also heads the industry association that organizes tasting week.
Since the quantities of wine made are limited, prices can and do shoot up. After setting a price per bottle, the chateaus sell as much as 90% of that year’s product to the market makers in Bordeaux, starting in mid-May.
May 6, 2008 No Comments
Mark to Model is Back
Remember all the criticism Enron took over doing just this (after getting permission from the SEC by the way)? Now the Bank of England is encouraging it:
While market-based estimates and the write-downs announced by firms may be unduly pessimistic, if such concerns persist there is a risk they could become self-fulfilling.
[...]
In that environment, firms may find that previous mark-to-market loss estimates have been overstated and some writebacks of reported losses may occur.
So instead of marking-to-market, you can just mark to anything you feel like…
May 1, 2008 No Comments
Super Senior CDO Debt and the Banks That Loved It
This clearly written FT article discusses why banks loved this tranche of CDO debt and why it is now such an issue:
Sometimes they did this simply to keep the CDO machine running. But there was another, far more important, incentive: regulatory arbitrage.
Most notably, because super-senior debt carried the AAA tag, banks were only required to post a wafer-thin sliver of capital against these assets – even though this debt has typically offered a spread of about 10 basis points over risk-free funds. Thus, banks such as UBS and Merrill have been cramming their books with tens of billions of super-senior debt – and then booking the spread as a seemingly never-ending source of easy profit. And it is not just the CDO desks that have been playing this game; treasury departments have been playing along. So have many hedge funds, including those financed by . . . er . . . the major investment banks.
But, last August it became clear why this 10bp spread existed: namely, because these assets are not as liquid as government bonds in a crisis. Indeed, the prices of some tranches of debt have fallen by 30 per cent in recent months, to the shock of senior managers. Hence these sudden, gobsmacking writedowns at places such as UBS, where the CDO desk alone produced over $15bn of losses, mostly super-senior linked.
April 21, 2008 No Comments
The Swiss Connection
Parallels between the current US situation and the Swedish bank crisis of the 1990′s:
“…the Swedish episode seems eerily familiar. … The first signs of trouble appeared among the finance companies that were responsible for the bulk of such investment. In September 1990, a company called Nyckeln — known as ‘The Key’ — folded when it was unable to renew its financing. … By late 1991 there were indications that two of Sweden’s major banks had exhausted their capital reserves and were barreling toward bankruptcy. Property prices, which once seemed capable only of rising, plunged by 50% in 18 months. … Unemployment took a sudden leap from 1.6% in 1990 to as high as 12% in 1993. … Fearing that a collapse of the banking sector would capsize the economy, the Swedish government in September 1992 issued a blanket guarantee of all of the banks’ obligations. … That led authorities, amid a general European currency crisis in late 1992, to briefly increase overnight interest rates to a commerce-killing 500%.”
April 16, 2008 No Comments
The Laffer Curve in Action in Switzerland
From Gartman:
We argue that there are plenty of countries around the world that prove the superiority of flax taxes, citing the huge revenue growth in eastern Europe where it is a race amongst the countries there to flatten and lower tax rates with abandon. But now we learn that the smaller, less populated, and poorer cantons of Switzerland are about to begin an experiment in lower, flatter taxes. Cantons such as Obwalden, bordering on the larger, but lower tax cantons such as Nedwalden, Zug and Schwyz, have been losing citizens and businesses to these other cantons for years. As they lost those taxpayers, the city fathers increased tax rates to make up for lost taxes. They failed, for as taxes were raised, the exodus increased. It became a virtual downwards spiral as revenues fell, tax rates rose, revenues fell again, and tax rates were boosted again… always t the same result.
Now, the finance minister of Obwalden, Mr. Hans Wallimann, has chosen to follow a different path. He cut the corporate tax rate to 6.6% two years ago, compared to the 14-17% taxes that prevail in the cantons, and he cut them again to 6% as of the 1st of this year. In the process, the number of new businesses opening up in Obwalden has gone up by 500%. Admittedly this is from a low base, but until the tax cuts were instituted, Obwalden was losing businesses and tax revenues. Now it is not. Having enjoyed that success, Mr. Walliman is pushing for a flat individual tax of 12.4%. In most cantons, the personal income tax is progressive, moving from something close to 11% on the lowest wages to as high as 40%. Obwalden is “flattening” that to 12.4%. We shall watch, over the coming months, how Obwalden does, but ’tis our guess that the canton’s population shall rise from 34,000 to 100,000 sooner than the tax man in Sarnen can raise a glass to Mr. Walliman’s wisdom.
January 24, 2008 1 Comment
Nokia Makes Losers of TomTom, Garmin in Bidding
Bloomberg’s analysis is spot on. Over time neither will survive as standalone entities:
Consumers also will find navigation systems available in more new cars, giving them little reason to pay $250 or more for units from Garmin or TomTom, said consultant Blair Swedeen.
“They are getting squeezed from both sides,” said Swedeen, a principal at Partenza Consulting in San Francisco, which advises navigation companies. “Competition is inevitably going to drive down margins and commoditize standalone hardware.”
Just as cell phones crushed the electronic organizers made popular by Palm Inc., they’ll probably end the boom that has driven personal GPS sales to a 20 percent rise this year, said Canalys researcher Chris Jones in Reading, England.
November 15, 2007 No Comments
Porsche the Hedge Fund
FT reports that Porsche is acting more like a hedge fund than a luxury car manufacturer:
Porsche on Monday revealed it earned three times as much money from trading derivatives as it did from selling cars, prompting accusations it was acting more like a hedge fund. The German luxury sports carmaker said €3.6bn ($5.2bn) of its €5.86bn pre-tax profit in the year to July was from share options. Stripping out the €521m it made from revaluing its 31% controlling stake in Volkswagen and €702m from its share of VW’s profits, Porsche made at most just €1.05bn from its “core” carmaking business.
November 14, 2007 No Comments
Public Law Firms Don’t Make Sense
Soon private investors will be able to buy stakes in law firms in the UK. While not as broad as Australia’s rules, which allow for publicly traded law firms, it could be an initial step down in that direction. Besides cashing out their shares why would any law firm want to go public?
This Bloomberg article about Slater & Gordon, the first Australian firm to go public, bring up the main reason investment banks reluctance to go public was overcome:
`They were hesitant; it took awhile,” Geisst, a professor at Manhattan College in Riverdale, New York, said of the investment banks. “Law firms could go public for the same reason that the investment banks had to go public. The number of the transactions were increasing and it required them to have more capital and the partners couldn’t provide it.”
Fair enough for investment banks who participate in the underwriting process and invest their own capital, but why would law firms need to tap the capital markets? What they do isn’t capital intensive. The same article mentions only one reason:
“Anyone that’s been a leader of a law firm has thought about how we raise capital,” Orrick’s Baxter said. “It takes millions and millions of dollars.”
Law firms are not leveraged companies; no matter how smart they are or how hard they work, for the most part, billable hours rule. The only way to increase margins is to cut costs or increase billable hours. There isn’t much room for capital appreciation but they could be steady dividend payers.
This chart from Adam Smith Esq, an economic law blog, shows the tradeoffs between number of employees and profits per employee, essentially it’s brains vs brawn. Wal-Mart turns bodies into profit; Microsoft uses smarts. Where would law firms fall on this chart? For profit reasons, efficiency isn’t a priority at big law if you care about billable hours:
Most firms won’t have a reason to tap capital markets, but there are some exceptions that could use hedge fund or PE capital: the firms who do a lot of high-risk, high-payoff litigation where billables aren’t important and there is a big gap between wins.
October 30, 2007 No Comments
Nassim Taleb in FT
Great article about academia vs real world trading:
We learn from crisis to crisis that MPT has the empirical and scientific validity of astrology (without the aesthetics), yet the lessons are ignored in what is taught to 150,000 business school students worldwide.
Academic economists are no more self-serving than other professions. You should blame those in the real world who give them the means to be taken seriously: those awarding that “Nobel” prize.
…The environment in financial economics is reminiscent of medieval medicine, which refused to incorporate the observations and experiences of the plebeian barbers and surgeons. Medicine used to kill more patients than it saved – just as financial economics endangers the system by creating, not reducing, risk.
October 23, 2007 1 Comment
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