Tuesday, October 11, 2011

Going one up on Jeff Matthews with Chaoda Modern Agriculture

Jeff Matthews (he of the fabulous blog and excellent book on Warren Buffett) tweets every day his least helpful broker call. His twitter stream is here.

His latest tweet:

 Jeffrey Matthews Least Helpful Call, So Far: JPM cuts price target for TRMB (gps for construction) from $51.50 to...wait for it...$47.50. Last trade, $37.49.

Jeff however does not follow Hong Kong listed frauds.

Today I received a copy of Felix Fok's latest piece on Chaoda Modern Agriculture. This is from JiAsia - in other words from Societe Generale. To quote:

Ji Asia is terminating coverage of Chaoda Modern Agriculture (Holdings) (682 HK, HK$1.10, Ji BUY, Target HK$10.50).

The price on my screen is 55c but it is not trading any more.

The reason stated by Felix Fok is "following a realignment of resources within the team".

Chaoda is suspended for a reason: it is almost certainly a grotesque fraud.

The buy was a bad call. The dropping coverage: that was clearly the most useless call of the day.


Disclosure: Proudly short Chaoda Modern Agriculture.

Monday, October 10, 2011

Anarchists for good government

Today was my one afternoon of being a tourist in New York. After the return trip to the Natural History Museum I went downtown to see the "Occupy Wall Street" protest in Liberty Square. I had no clue about their agenda and the general description was that they did not stand for anything. If they stood for something like bringing back Glass Steagell maybe we would understand it and maybe they would achieve something - but it seemed far more unfocused than that.

My goal was to work out what they wanted and for that I was going to use a simple research tool. I was going to ask them.

On the periphery I found gold-bugs and anti-fed activists - not really part of the main group. They were a lonely looking lot. This photo of one, standing alone, describes them accurately:

Somewhere between the lone-ranger gold-bugs and the protest were the police. They were numerous and one of their horses startled and scared me. One protester was walking by with a placard protesting the extent of police presence and the seeming cost of that.

I thought he had a point. To an Australian the police seemed far more scary than the protesters though when I asked a protester about them he thought the police were "well behaved".

The first detailed conversation I had was with a middle-aged guy who was there "largely to exercise his first amendment rights" and the "rights embedded in the constitution". He did not really know what he was saying except that he had the right to say it and that it somehow involved good government. He did not like the libertarians (who he thought were rather silly) but he kind of liked the anarchy of the whole scene. And he gave me the quote of the day. The protesters were "anarchists for good government".

Anarchists for good government sounded silly but it was accurate. Whilst there were people carrying placards that said "fight for socialism" that was not why any of the people I asked said they were there. They were there because the system was broken. They thought that income distribution was screwy in America and whilst they thought the Wall Street bailouts might have been necessary they found big bonuses in bailed out banks deeply offensive. And I can't say I blame them.

They almost universally thought that government was owned by "corporations" and uber-rich individuals who have purchased the politicians. A middle aged woman was carrying a placard wanting "no more congressional whores". Almost universally they thought the system did not work for them but it did work for some shadowy elite.

But if you asked them what to do about it they did not know. Some had specific ideas (one argued that the Citizens United Judgement should be overturned). Most however had no specific agenda at all - just a general feeling of malaise about the economy.

A pretty young black woman I spoke to was about the most lucid person I found. She thought the American dream had been narrowed to a very small elite and that class distinction was rampant. She was at the protest because she thought that Wall Street was the most obvious bastion of elitism in America.

I asked her what she wanted to do in life and she said she wanted to work in the fashion industry in New York. I looked at her puzzled and she sheepishly admitted that was another bastion of elitism. Then she told me she wanted to start her own company. I wished her luck. She was charming in her hypocrisy.

This placard best summarized the crowd:

Our economy could be "more fair" is a reasonable statement of desire or even fact - but it contains no prescription at all. The United States has had times of high income inequality (the Guilded Age, now) and times of lower income inequality. And I do not want to say it was the New Deal or anything else that caused changing income distribution. Income distribution in Australia was flattest at the end of a very extended period (23 years) of Conservative government. The economy could be more fair. Then again it could be less fair.

Somehow we have developed a winner-takes-a-great-deal economy. I regret not asking these people if they begrudged Steve Jobs dying with 7 billion dollars personal wealth. I somehow doubt it. iPhones were ubiquitous and they clearly believe that Jobs created something that they wanted.

But they would have universally thought it unreasonable that Wall Street CEOs were so rich when their banks were bailed out.

In other words they had a view that the economy could be more fair and that their definition of fairness actually accords with a lot of other Americans. Plenty of people would agree with them.

The Tea Party protesters in America are also animated by a feeling that the system could be more fair - as are the people who protested the Federal Reserve bank. For that matter the (very small) minority at this protest wanting "socialism" probably feel that way too. The feeling is unifying. The prescriptions as to what to do about it are not.

And the puzzling part of this protest was that there was no consistent prescription and nobody arguing for one - so they were unified by their common feeling and not divided by their hostility to each other's prescriptions.

In other words like most Americans they do not have a practical clue on how to get the sort of economy they want and the sort of politics they want. And so they had no agenda at all.

But most Americans don't go to protests. These people go to this strangely unfocused protest. This man - clearly middle-class and better dressed said it quite well. He was at this protest and he just wanted to tell you that. He had no agenda.

I found the lack of an agenda puzzling as did one life-time protester I talked to (someone who thought that growth-led capitalism would eventually fail because of environmental problems). He thought it was the most anarchic protest he had ever been to (no leader, no agenda). But then he thought the food was better than at any protest he had been to. I repeated the anarchists for good government line to him and he agreed. Then he said, pointing at dinner just being wheeled out, that the food was great. It was also he said anarchists with good government.


Saturday, October 8, 2011

Happenings in Little Italy: nurses and litigation risk

This evening I was in a restaurant in Little Italy New York. Fine place too.

The maĆ®tre d’ asks loudly if there is a doctor in the restaurant. Nobody responds. He asks again. Nobody responds.

I have a surf-lifesaving first aid certificate and volunteer at Bronte Beach. (I have previously blogged about that.) In the absence of anyone else I volunteer.

The victim has fallen over (his wife later tells me he was drunk) and he has hit his head - but for all I can tell he had a seizure. Whatever: he was barely conscious and was not answering his name or details.

Still he has landed in a recovery type position or moved to a recovery type position. His mouth is pointing down. 

I checked that he was breathing - and he was - his chest was moving up and down.

I checked what was coming out of his airway - and it was weak - and there was some blood coming out of his mouth - maybe consistent with biting his tongue really hard or maybe consistent with something really nasty. There was quite a lot of blood coming from his head but there was nothing I could do about that without moving him (and I was not prepared to move him). I checked his pulse and it was weak. (I did not expect otherwise - he was breathing...)

I asked him a few questions and I got no answer but he said he hated this and then said nothing sensible again. I did not get a name.

I did not see any upside in moving or treating him so I just chatted to him (without response), monitored his breathing and waited for the ambulance.

In the midst of this I worked out that two women sitting at a nearby table were nurses. I can't tell you how inappropriate it was that I was doing this and the nurses were sitting there. They are well trained - I did a 40 hours course 5 years ago. If it were me lying there unconscious and bleeding I would want the nurses looking after me... 

But they would not - even with pleading - take over. They were scared of litigation risk and they said they could not touch him. I did not move him and ultimately he was neither better nor worse off for the fact I was there. (Moving him when he was still breathing is beyond my pay grade. But I would still have preferred not be involved...)

I am an Australian who loves America. Many things are better than Australia. Many things however are worse.

Litigation risk that means a nurse would rather sit there watching an unconscious person bleeding rather than help them - that is something that is worse about America.


Post Script:

I do not doubt there are Good Samaritan laws that apply. There are specific ones in NSW for volunteer surf lifesavers. However it was commented later that if the request had been for a lawyer in the restaurant the hands would have all gone up. And the nurses were genuinely scared of litigation...


Thursday, October 6, 2011

Elegant ladies in high heels, water at $1000 per liter and Huabao, an interesting stock on the Hong Kong Stock Exchange

A couple of years ago my wife and my business partner's wife turned up at our office in Bondi Junction and then went shopping in the mega-mall below.

This is the sort of thing that gives a tight-wad like me nightmares.

A couple of hours later they returned with their bags. My wife was wearing a new perfume which I kind of liked.

I would have told her I liked it even if I was completely indifferent (she is my beloved wife) but I could say it honestly. It was Chanel Gardenia.

This was about a month before our tenth wedding anniversary so I had solved the gift problem – or so I thought. Later I popped down to DJs (think Nordstrom for Australia) and Myer (the also-ran department store) looking for Gardenia. No chance. Eventually a customer took pity on me and told me you could only find this at the Chanel shop.

I could see the bill going up.

I found the Chanel shop in a part of the mall I never visit and the shopkeeper (an elegant woman in high-heels who looked straight through me) eventually showed me the perfume which came only in sizable and expensive bottles. Three minutes later and $230 lighter I had my gift.

Mission accomplished.

Australian labeling laws require that Chanel specify some of the ingredients. Here is the label (now somewhat decayed):

It is a pretentious label. They call water “Aqua”. Guess they can't bring themselves to admit they sell water at almost $1000 per litre. Alcohol is the main ingredient – probably a good proportion of the total. Most the rest I had never heard of.

Being an inquisitive type I looked them up – I even looked on Alibaba for the cost (per tonne) of these chemicals so I could get some idea of how much I was being ripped off by the fancy box and the elegant lady in high-heels. It spoiled the romance but was educational. According to Wikipedia, Citral is a 3,7-dimethyl-2,6-octadienal or lemonal, is either of, or a mixture of, a pair of terpenoids. The E-isomer is known as geraniol (also an ingredient of the perfume). It is pheremonal in insects (and in the hope – probably vain - of the perfume manufacturer pheremonal in humans too). There are lots of suppliers on Alibaba – mostly by the barrel. Most of these are distributors for Givaudan – a Swiss flavors and fragrances business.

Linalool is a major fragrance chemical used – according to Wikipedia – in 60-80 percent of “perfumed hygene products” and also by pest-professionals as an insecticide. (Note what this perfume does – drives insects wild with pheremones and kills them. Think what it can do for you!) Again most the distributors on Alibaba are distributors for Givaudan. You can buy it here for $5 a kilogram and they will sell you 1000 tonnes per month. It is kosher (and Halal) too!

From there I went looking at Givaudan – the company that probably manufactured this fragrant “Aqua”. It is an interesting company with an enormous website containing technical specifications (instructions, FDA approvals etc) for the thousands of flavors and fragrances it manufactures. When you see apple-pie and cheesecake flavored yogurt what you are seeing is their fine Swiss technology. There are - if you do a Google count - about 11 thousand pages on this website. This is a sophisticated and wide-reaching business.

Givaudan is an interesting stock (we think about it as a long) and it is currently trading fairly low relative to sales vis its history. It is the technological leader in flavors and fragrances.

Here is its P&L in Swiss Francs for the past two years...

This company does CHF336 million (almost 400 million dollars) a year in research and development. That is what your cheesecake flavored yogurt and Britany perfume cost to develop. This R&D is a pretty solid barrier to entry. After quite considerable distribution costs (you have to interest the food manufacturer in the bizarre terpanoid you have developed) and considerable R&D Givaudan winds up with operating income of 13.1 percent of sales.

There is another flavors and fragrances company – International Flavors and Fragrances – that used to be the leader and is still the leader in tobacco flavoring (a declining business I would guess). IFF is well known to people who have read the investment classic “Common Stocks and Uncommon Profits”. IFF had a tech leadership for generations and was a fantastic stock - it is still not a bad one. Somehow (I don't know how as I do not have the history) it ceded much of that leadership to Givaudan.

All very interesting and grist for the memory bank.

Recently I came by Huabao – a Chinese flavors and fragrances company listed on the Hong Kong stock exchange. Market cap is about 20 billion Hong Kong dollars - about 2.5 billion USD.

The web site clearly is not as sophisticated as Givaudan. Counted pages on the site in Google total 49.

Huabao has a market cap of a bit over a third of Givaudan, and is a strange beast. Like IFF it claims to be primarily a tobacco flavorant. Here is the P&L.

Huabao it seems is a truly miraculous business. Gross profit is over 70 percent. Marketing and distribution expense is 80 million Hong Kong dollars – roughly a twentieth of Givaudan. Research and development expenses are 73 million HKD – a little over 10 million or about a fortieth of Givaudan's expense.

Profit before tax is 1871 million Hong Kong dollars on total sales of 2852 million HK dollars. That is 65 percent of sales and it compares (very) favorably with 13 percent at Givaudan of sales.

Huabao gets superior margins – nay vastly superior margins – whilst doing much less R&D and having much less selling expense. Truly miraculous. Givaudan – the putative technical leader – should watch out.

I wanted to work out what Huabao actually sold – what R&D they had – what technology they had that justified their superior returns. Alas this was difficult. You see HBGlobal.com is not a very informative website.

Here – in pictures – is the page (yes one page) that describes their product set.

Compare this page to the very detailed  specification at Givaudan. HBGlobal does not even allow its product specifications to be indexed on Google. (Go on – look at the page – it is pictures of text, not text, and hence not indexed.)

I went looking for all the chemicals in my wife's perfume on Alibaba. I could not find Huabao as a supplier. Nor could I find HBGlobal.

I googled “+Huabao. +citral” and the core reference I found was to Jishui Huabao Natural Medicated Oil Factory being a buyer of citral. Similar results were obtained for other chemicals.

I did this with lots of combinations of chemicals and the brand names they operated under (at least the brand names they operated under according to the HBGlobal website).

The website states that Kongque is a long established food additives brand in China. Kongque turns up in one index as one of literally 40 pages of suppliers for food flavor additives. Here is their entry which tells you nothing about them but gives a limited range of products (Lecithin, Foodstuff Essence, Flavor, Collagen Protein, Stuff Additives, Trichloromethyl Sucrose, Crystalline Fruit Sugar, Phosphate, Water-retaining). I have no idea what "stuff additives" are - and Trichloromethyl Sucrose is also a strange product - according to some links a sweetener 8000 times as sweet as sugar - but I can't find any non-Chinese references to it. Moreover this claim is likely false: saccharine is usually thought to 300-500 times as sweet as sugar and that is sweeter than most of the other standard sugar substitutes.

This tiny list of lightly specified products does not compare favorably to the sophisticated list at Givaudan.

For the life of me I can't work out what Huabao does that makes it so profitable – I can't work out what chemicals it makes, what  products it sells and why it manages to do so with much less research and development than Givaudan (or International Flavors and Fragrances).

Still Huabao must be real. You see it is audited by Price Waterhouse Coopers, it is not a reverse merger and it is listed on the Hong Kong Stock exchange – and we know that the HKSE is far more honest than the reverse mergers in the US. Mr Charles Li, the CEO of the HKSE told us.

So – if any of my readers know more about the flavors and fragrances business than you can get from reading Wikipedia and a perfume label and looking at Alibaba will you let me know.


Meanwhile – on the basis I can't understand any of this I am short on behalf of my clients. Super-fat margins in a chemical company almost devoid of research and development does not sound very sustainable to me.

My readers are a clever lot – so if you can help me, or talk me out of this position I would be thrilled.

Thanks in advance.


Post scripts: Some commentators have suggested that this company is a reverse merger - going public via the back door in 2006. I have not checked.

Also some commentators have suggested that Trichloromethyl Sucrose is the sweetener known in the US under the brand name "splenda". The 8000 times as sweet as sugar statistic sort of matches - and splenda has three chlorine atoms in the structure so cold be "trichloro" as per the name. But I am not sure where the methyls (ie CH3s) come in. There is a structure illustrated here.

Wednesday, October 5, 2011

Missing Bronte

Travelling, away from my family. And away from Bronte. And missing home.

This cheered me up - a winter swell coming in.


PURE BRONTE from Marcus O'Brien on Vimeo.

For the avoidance of doubt these waves are much bigger than anything I would dare surf in.


Saturday, October 1, 2011

Time for Discover

Financial stocks in the US have been very weak.

The consensus is that the situation is bad on credit. I suspect the situation is more likely to be bad on revenue - but either way the consensus is bad for financials.

I am going to give you an anti-consensus set of charts. This is credit data on Discover Financial Services (NYSE:DFS) from their master-trust for their credit card products. The information is from indispensable Portales Partners. They do not like people redistributing their stuff - but I hope they are happy with an advert: if you run a serious amount of money in North American Financials you should subscribe to them. They are likely to make you think.*

Here is the last ten years of DFS delinquency data:

Note that delinquency is near a ten year low.

And here is the charge-off data:

The spike and the collapse in the numbers in the middle of the sequence is the change in personal bankruptcy laws which gave people an incentive to bring forward bankruptcy filings. This meant a spike and subsequent drop.

Net of the spike which was caused by a policy change the charge-offs are about the lowest in a decade.

Delinquency leads charge-offs so given the delinquency is low you would expect the charge-off to drop.

Some of the low charge-offs are caused by high recovery of past written-off debts (recoveries count as negative charge-offs).

Recoveries have come back to a high level.


DFS are reporting among their best credit numbers in a decade - and they are reporting it in a very sour economy. If the delinquencies really are a leading indicator these numbers will be the best in a decade shortly.

So what is happening?

I can see three broad possibilities:

(a) The numbers are not real - DFS is faking it.

(b). The numbers are real but they are DFS specific and they relate to changes in DFS policy such as a dramatic tightening of credit standards, or

(c) The numbers are real and middle American unsecured credit has improved dramatically despite the recession because consumers have retrenched and really are paying back their loans.

I will leave it to my commentators - you are a smart and well connected lot - to work out which.

But if it is (a) then DFS is a strong sell, and if it is (b) DFS is a strong buy. If it is (c) then there are a wide range of financial stocks you should buy.


*Seriously - this advert is warranted. Portales really are one of the better specialist firms out there.

Post Script

I know I am cheating with this list of choices - there are other possibilities like

(d) It is all going to get worse ... so don't buy financials when this data is at its peak (in other words do not buy).

(e) DFS earnings are artificially inflated with recoveries and hence earnings will fall when recoveries normalize (in other words do not buy).

(f) The revenue line for all American financials is toast as per the Japanese experience. So far one of the biggest problems for American financials has been falling revenue but that is not widely commented on outside specialist bank analysts. (In other words sell.)

I left it vague because I wanted to encourage comment. I learn a lot from the comment - but I got many emails that thought I was being unfair and simplistic. So I needed to clarify.

Let me tell a story though.

When I first went to visit BofA in Charlotte (and this dates me) I wanted to ask them about credit. They told me they had 36 billion in revenue and 18 billion in costs and 2 billion in credit costs and that I should watch where the revenue and cost lines were going because they drove it.

That turned out to be wrong of course.

But it may not be wrong in the future.

Post Script 2

I think I should say this is not Discover specific. Consumer credit looks about as good (ie safe) an asset as it has ever been. (It can get worse..) It can also be spurious (extend and pretend for instance).

The best comment yet received by email suggests that I should measure the delinquency against availability of cheap rollover credit cards. Why default - or so the argument goes - when someone will give you a balance transfer and extended credit at 2 percent?

Monday, September 26, 2011

Solar panel prices

Since I expressed interest in the price of solar panels form an Australian distributor I have been bombarded with sales pitch emails...

Last price - $1.30.


Dear customer

Just a quick note that the price of alex panel has been dropped to $1.20p/w (minimun purchase amount is 2 pallets).

I have no idea whether the Solyandra disaster involved anything untoward or not.

But it does not matter either way. Solyandra was doomed.


Friday, September 23, 2011

Models for a Greek Sovereign Default

I am on a plane - long-haul over the Pacific - and someone asked me to spell out what I thought would happen with a Greek sovereign default. As this is drafted on a plane it is designed to outline extreme views (you know the ones after two glasses of wine). If people want to explore more modest views that is for the comments. Still all options look bad.

I see two broad variants - both of course stick most of the losses on Germany and France. Some variants are totally disastrous.

Variant 1 - the Argentine option: Default and de-peg the currency. 

When Argentina defaulted not only did the government default but they forced a private default. If you had a debt in US Dollars in Argentina prior to the default you were forced to pay it back in Peso. Indeed it was illegal to make payment in US dollars.

Likewise if you had a US dollar asset you got back Peso. A dollar deposit in Citigroup in Buenos Aires  became a peso deposit. If you really wanted to keep your dollars you needed to make your Citigroup deposit in New York.

The forced private sector default was necessary for Argentina. The Argentine banks all had lots of US dollar funding. If you devalued without forcing their default then they would all have uncontrolled defaults (a true disaster) and the country would lose its institutions. Telefonica Argentina would have failed too - failing to replay USD debts.

The same applies in Greece. If the Greek Government were to devalue the new Drachma (to perhaps a third the value of the Euro) then the banks (which are loaded with Greek Sovereign paper) would default. Even Hellenic Telecom would default because they would be forced to repay their billions of Euro borrowings whilst collecting only Drachma phone bills.

The Argentine economy was doing quite nicely after the devaluation. The lesson was that devaluation worked - provided you simultaneously forced private sector default.

If you were Greece you would take this option without hesitation.

However this option has explosive implications for Europe. You see a bank deposit in Athens is going to turn your Euros into Drachma. Overnight it will lose 70 percent of its valuation.

So it has to be done quickly and with an element of surprise (as per Argentina when most people did not get their dollars over the border). Without surprise people will rush their money to Deutsche Bank in Munich.

One weekend we will just find that the Greeks have done it.

But now suppose Greece does pull this trick. The day after we have a Drachma - deposits are in Drachma. We might print a single 10 drachma note and allow it to settle against the Euro - then over time print more. This should work for Greece.

Now if you are Irish or Italian or Portuguese (or even Spanish) you know the rules. You get to get your Euro out of the PIGS and into the core (Germany) as fast as possible. So max all your credit cards (for cash), draw all your bank deposits and load them in the boot of your car and make the drive to Switzerland or Germany. Somewhere safe. Otherwise you are going to lose half the value the day that the rest of the PIGS do a Greece.

And this bank run – a run including tens of thousands of Italians driving their Fiats - will surely blow apart every Italian bank. And their Euro-skeloritic compatriots will sign the death knell for for all their banks too.

If you are going to go the devaluation route you are going to have to do it all at once. Like the big-bank weekend (maybe coinciding with a week long bank holiday) in which all core European countries get their own currency back.

There is a precedent. It is not a pretty one. When the Austro-Hungarian empire collapsed there was a single currency over a huge area covering much of what is now Euroland. In this case the rather Germanic Austrians were in charge (or rather were in charge until their empire collapsed).

What they did was put troops on all the borders and made it illegal to take cash (or wire cash!) across borders. Then all Austro-Marks in each country was stamped - converted to Drachma for Greece, Marks for Germany, Peseta for Spain or whatever the currencies of the day were [If someone remembers the 1918 border splits better than me they are welcome to say...]

In this conception all Spanish debts become Peseta debts. All German debts become Mark debts. All Greek debts become Drachma debts. Unstamped currency goes worthless.

If you are going to split the currency I see no alternative to a big bang - and if you do that I see no alternative to troops at the border stopping transfers (and wire transfers) because shifting cash North looks so profitable against a sudden devaluation. Suddenly – and against all historic hope – its time again to guard the French-German (and every other European border) with troops for a week whilst the money is stamped.

Note however almost every country borrowed in hard currency (Marks) and got to repay in soft currency (Drachma). This is a scheme which shifts the loss home to Germany and with little compensating benefit except that they get their beloved Mark back. Its a scheme that is way better for the periphery because they get to keep their institutions. In two years they should bounce back like Argentina bounced back after their default.

Unilateral Greek default and devaluation without planning for the periphery to do the same - well that is a true mess. Too ugly almost to think about - and it would be unilateral for less than a week. The rest of Europe falls into that abyss with maximum movement of deposits and cash in the meantime.

The second variant on Greek default. Greece defaults and stays in the Euro 

The second variant on Greek default is the one that Germany prefers – Greece defaults and stays on the Euro. (Credit Agricole also prefers this.*)

In the second variant Greece has a huge problem after the default - which is that its banks are insolvent. They own a whole lot of Greek Paper. Moreover Hellenic Telecom does not look that great either.

The recession goes from bad to worse and the government deficit goes from bad to worse. The Germans wind up owning the banks and the telephone company as partial offset to their losses lending to them. The Greek Institutions are captured by the Germans. (All your base are belong to us.)

They also wind up getting paid a little more as Greek austerity - as long as it lasts and that might be a long time - partially reduces German losses but at huge social costs.

The Eurozone becomes really dysfunctional - with the whole periphery totally unable to work their way out and having lost all their key institutions to the Germans who neither know how to run them nor really want them.

Moreover Greece stays expensive and unproductive and becomes more socially fractious. The likelihood of them staying the the Eurozone would be pretty low. (After all what have the Germans ever done for me!)

Europe would be held together by a massive and compulsory German aid budget. If they can't get that agreed on on day dot (and Merkel and the German constitutional court are not of that mind) then my guess is that is is in Greece's interest to go the Argentine route and let the rest of Europe fend for themselves.

And for that Europe will need troops on borders. Armed and dangerous.

Bring out the guns.


*I have a known partiality to that stock but do not own it at the moment...

Monday, September 19, 2011

Some comments on the UBS Rogue Trader

There has been lots said about the rogue trader at UBS. The best gag was that the name for a trader who makes money breaching risk limits is "managing director". Matt Taibbi argued that rogue traders were what banks hired when they hired "risk takers".

All of that misses the point. A well organized financial institution - any financial institution - has a back-office and a front-office (and sometimes a "middle office"). The back office records and settles trades and sometimes measures risk. (The risk measurement function is sometimes at the "middle office".) If you have your systems right you can hire "risk takers" all you like. They won't kill you because the "back office" and "middle office" won't let them.

If anyone is able to break the risk limits, managing director, lowly trader, then that is a failure of the system and reflects directly on senior management who have a core function of making sure the systems work.

Oswald Gruebel (the CEO of UBS) took a different stance (hat-tip Kid Dynamite) and argued that management could not stop rogue trading. (Quoted Chicago Tribune.)

Speaking for the first time since UBS revealed the loss, Gruebel told the Swiss weekly Der Sonntag that the loss couldn’t have been prevented. 
“If someone acts with criminal energy, then you can’t do anything. That will always be the case in our business,” the former trader said in the interview published Sunday.
No Mr Gruebel: there will always be criminals, there will always be people who want to steal from your bank or go to the casino on your dime. You cannot monitor all those people but you can and should build systems that are as robust as possible to human nature and when you fail to do that you fail in your job.

But worse: your statement that "you can't do anything" is a statement that you are abdicating your duty. I hope that statement is misquoted because if I were on your board and you took that stance I would be seeking your resignation. To lose money to a determined rogue trader is an error - and all systems have holes. To deny you can do anything about it is to give up being a banker.

Still the best analysis of this trading loss comes from Macro-Man who makes a simple but clearly correct observation:
There is a really good reason why you don't promote people from back or middle office to front office: they know the systems well enough to cover their tracks. Better the norm where very few front office people have a clue what happens to a trade once they press "done". Leeson, Kerviel and Adoboli all had this in common. Note to management - if you want to hire a back or middle office guy to do a front office job, hire them from a different bank.
Alas every second back-office guy wants to be in the front office. After all front-office guys are paid more and have more decision making power. Back-office is administrative and procedural. Front-office are "risk takers" which is somewhat more glamorous. But there are good reasons for discriminating against back-office guys, especially when bank systems are not robust.

Whatever: A message to the UBS CEO. An internally discriminatory hiring policy is not as good as robust systems but it is surely better than what you are doing Mr Gruebel.


Wednesday, September 14, 2011

Welcome to day-traders anonymous (French Bank edition)

At Bronte we talk a lot about French banks. But we have not owned any of the majors since Greece started looking shaky. We used to own Credit Agricole SA - indeed when we started Bronte it was one of our largest positions. But their exposure to Emporiki (the number 5 bank in Greece) scared me. Indeed I blogged about it once.

We have an estimate of their largest possible loss at Emporiki - and it is probably a good estimate - but hey - this is a crisis and its pretty hard to trade that estimate. The main issues are found on page 70 of 236 of their results presentation (that is where customer assets, customer liabilities and other funding needs are presented). Whether the loss in Greece is 4 billion or 12 billion Euro hardly counts...

Anyway I just bit the bullet and purchased a position in Credit Agricole. My business partner didn't like it - indeed he argued strongly against it.

So we sold.

We made a profit - after commissions - of 412 Euro on the only day trade Bronte has ever done.

My name is John and I am a day trader.

Kind of makes you feel dirty...


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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.