Wednesday, February 18, 2015

Wealth Management & 2014 performance

Several of my friends (all ex-bankers) have been recruited to run family offices -- or at least the investment arm of family offices.  Overall the experience has been good, aside from the last minute: "fly down to Miami to brief me on what's going on" the work is interesting and moving from the sell side to the buy side can also be great.

The overall view of 2014 was that it was a spectacular year.  All three (ok not that many) hinted that performance had been spectacular:  " its a lot easier to make money went you start with a lot".  The figures were simply mind blowing:  21%, 27% and 31%.  So what the encore for 2015?

They are all taking their cash off the table.

Bottom line, although they don't think the market is going to crash, but the odds of a market crash are higher now than they've been in some time; Oil price collapse -- still around $50/bbl is a problem for the debt capital market and housing market (here in Canada), but overall in the US too with about 1/3 of junk bonds being issued by mineral ressources or energy extraction companies -- who are not having a good time. They've all noted a real slow down in China, things in Europe are OK but not great and Greece could prove to be a real problem (it could also fade away-- as some form of agreement is reached with the EU).

But, bottom line they've got an amazing 2014 and there's no pressure to generate big numbers in 2015.  All three have taken the view that after an excellent year, they can afford to hold and wait.  Take it easy (not easy for my friends that are ALL deal junkies!)  Still, I have no idea if this trend is pervasive or its just a coincidence, but it remains amazing that three out of three are taking the cash and going home.

Food for thought

Post Script:  It was pointed out to me over the weekend that as a Canadian wealth manager, a good percentage of these investors' cash would have been invested in USD denominated assets -- and since the CAD as dropped by nearly 15% over the past 12 months, a 21% performance is not that great...


Tuesday, February 17, 2015

Greece: Tic Toc Tic Toc...China: it sure is getting interesting!

Well its not like its a big surprise; on the right side you've got Greece's new government (now nearing its 30 days in power) and on the other side you've got ECB, Germany and well anyone that wants the fiction of a united Europe to continue.  What is amazing is that some believed that a deal was possible!  The signs have been there for months (years really), the ECB and the EU in general -- those committed to the ideal of Europe only want to "extend and pretend" a little longer.

Now, the new "radical" Greek government's first test is not one they can afford to fail, otherwise their entire term will be wasted.  Germany's media and the German government are adamant that every single Euro will have to be repaid -- damn the consequences!  Moreover, the ECB's pre-emptive strike of reducing the ability of Greek banks to obtain additional liquidity gave the chance of successful negotiations very low (lets say around 50%), now things are worse.

Everyone is seriously talking of a Greek exit, capital control etc etc.  Not exactly a surprise and for many Greeks not much of a change from their current desperate situation (not to say that it was not self inflicted -- but the tragedies remain).  An exit from a currency union will be painful, when Singapore was kicked-out of Malaya (predecessor to Malaysia) it was very hard on a very poor nation (seriously Singaporean were the cheap labor of the Philippines and Vietnam in the early 60s).  But with a collapsing GDP, unmanageable foreign debts equal to nearly 150% of GDP Greece has few viable options that would have it remain in the EU.

On the other side of the planet things are also getting interesting.  I already discussed the impact of the Chinese government's crack down on corruption and its impact on Macau's gambling revenues (in free fall in January -35% YoY).  It now appears that cracks are appearing the housing sector.  After almost 35 years of relentless price rise, it would appear like America in 2008, that house prices are dropping.  The issue is far more serious than in the US where housing only every represented 25% of American's net worth.  In China the figure is around 75% of their net worth is tied to housing stock. Chinese are not big stock investors.

The issue is social unrest, but its unclear how the government can respond.  Already the economy (lending) has been growing exponentially to allow housing to continue.  The prices were clearly unsustainable for the vast majority of Chinese.  A few years ago, it was calculated that there were 75 million "empty" apartments in China (America's entire housing stock is 125 million homes).  They were kept empty for one reason -- value.  In China an already occupied apartment is worth less than an apartment that has never been used -- a bit like a car.  This was done because these empty apartments were purchased as investments -- the sole source of wealth growth was property appreciation (and not rental income).  There were well documented stories of individual owning several hundred empty apartments as investments!  However, investors will be less interested in owning these apartments (or buying more) if prices go down (as they appear to have been doing for several months now).  In some districts price have fallen by nearly 10% with minimal "dead cat bounces" to resume their downward spiral.

Chinese government have in the past fallen because wealth was being destroyed (ok it was excessive inflation then), still this is serious stuff.

Tuesday, February 10, 2015

Is the market crazy?

In the right hand corner I give you the Grill Cheese Truck Inc (OTCMKTS:GRLD)  they listed about a week ago, raising some dough (US$ 10 million) to buy some stuff (mostly trucks I guess).  This company is a common type of product: they sell lunches to office workers in a few cities (off the back of a truck). There have been a number of comments from people I respect here and here and people I respect less here.  

So far so good.  The company operates 9 to 11 trucks -- its not entirely clear from the 10Q that were recently issued -- its seems that they've franchised the concept with two trucks (yes a truck that sells home made grill cheese sandwich).  So these guys have total revenues of $1,000,000 and operating losses of $2 million.  They've never made money (well at least not since 2013).  They've got a total of $12 million in retained losses.  

However, they recently sold some shares on the OTC market (about $10 million), and the reward has been to give then a market capitalisation of $100,000,000.  Yep, I am not joking.

This company has never made any money.  Its COGS + SG&A are equal to about 200% of its total revenues.  How you do reconcile the "no profit in sight" with a $100 million valuation.  Well, one way is to look at total market size ("Merica 300 million population!") for grill cheese sandwich.  You say to yourself, with their brand they will franchise their trucks all over the place and within 12-24 months they will have 300 truck selling their sandwich.  Plus, aside from the truck the operator pays no rent (they park on the street and pay modest municipal licenses). So they are worth a bundle.

On the other side, lets look at operations:  Generating an 8% gross return is not huge, that doesn't include depreciation, and overheads -- once a truck is working you can assume that those trucks are generating as much cash as is reasonable from the very start.  So we have to assume that even in a franchise environment, there is limited cash flow potential (the franchise user will need revenues too!).  finally, and this is the killer, although I like grill cheese sandwich, I don't like them all the time.  In fact, its a bit of a fade.  Once it passes -- then what?  

There are additional issues; first off its hard to trademark a grill cheese.  Its is after-all bread and cheese -- there's nothing special in the ingredients, Second there are no barriers to entry.  You can go out in any chosen city and buy a truck, paint it kind of orange, call it the "Grill cheese Wagon" or the "Grill Cheese Chef"and voila, your in business, and you got the benefit of GRLD's free advertising. You see with a market cap of $100 million everybody had heard of these guys, since imitation may be the most sincere form of flattery, but it remains that orange trucks selling grill cheese is not exactly an earth-shattering concept!  It's hard to justify that $100 million valuation.  

I'm not saying the Grill Cheese Truck is a bad business (actually it doesn't sound that great), but there are no (literally NO) barriers to entry into this business.  We had the same thing in 2000 with the doctcom bubble where guys would market "un-pattenable" or "un-trademarkable" business that had great value added but no way of protecting their efforts.

Now Barry Ritholtz is a very interesting guy so is Kid Dynamite (they guys I respect at the top of the page), yet the come to this problem from very different perspectives; BR is a private equity guy and KD is "mostly" an ex-trader (very successful at that).  Now BR was a little sloppy in his analysis of GRLD but his overall point is correct (which is also my point), but KD is also not wrong on a macro level, where he goes off the rail is to talk about total market for grill cheese sandwich -- which is irrelevant when you have 9 to 11 truck in two or three towns.  Sure you can expand, but the truth is despite all the publicity GRLD got from this $100 million valuation, anyone can paint a truck orange and sell Grill Cheese -- the average punter will not know the difference.  Plus, and this is important, there's not much magic in making a grill cheese (we're back talking about barriers to entry).  

I agree with Ritholtz that this valuation (on a company) that's generating operating losses on such a simple product is not the best investment ever.  In fact, looking at the 10Q the've never made money. Their SG&A expenses are nearly equal to total revenues (these figures don't include COGS expenses).  At a gross level the business generates an 8% return, and SG&A are equal to 900% of Gross revenues.  That's not a winning formula in my book.

The market is irrational, the value of GRLD is based on the same metrics as a Picasso -- its what the other guy is ready to pay, and has little relations to the fundamental value of the painting (yeah yeah I know this is a stupid analogy).  Bottom line the market has gone crazy -- its not clear whether is across the bord.  

Take oil companies -- if oil price are going down to $20 /bbl (that's Morgan Stanley's prediction) then Exon, Shell and the other big players are not worth a lot right now (don't get me started about the oil sands companies).  There is something wrong in the markets;  If 35% of Canada TSX is driven by raw material and energy -- these have got kicked in the face over the past 12 months -- their valuations don't seem to reflect this massive commodities price collapse.

The baltic dry index -- a real sign of what's going on in the commodity complex just hit its lowest level EVER. We are talking about 30 years of index here.  Something is afoot, but its not clear that the market is buying the new dynamic of lower energy and raw material prices.  This despite the market telling the market (ok ok I know) that demand for raw material (e.g. the Baltic Index) are in the sub-basement.  

So, if you are looking to invest money, maybe right now I would steer clear of the entire debt capital market (equities and bonds) and also away from Canadian(or Australian) real estate.  I would look at real assets (land etc).  I think that cash is a wonderful commodity, and think that gold is not too bad (not great -- I'm no gold bug) as a store of value.  In a nutshell, I think the markets are way too hot, that the current European/Greece games are not only interesting but may prove to be defining in terms of the whole Euro/ECB will be there for ever.  

I think that if oil price do go down any further, that the high yield market (junk bonds to everyone) is going to implode, because nearly 25% of all issuers were oil and natural ressource companies.  I think that the odds of a correction are greater than the odds of a boom.  

Anyway, just as a final note -- I have no position in GRLD, nor oil nor Morgan Stanley

I hope you enjoyed, BTW I tend to be a pessimist -- so grain of salt and all that...

Post-Script:  Well a week later the price of price of GRLD has moved from $6.00 all the way down to $3.00 and now back around  $4.00 -- looks rather volatile!



Monday, February 9, 2015

China Trade -- what's going on?

So yesterday (Sunday) China announced its January 2015 trade position; and the result was surprising:

Exports:  Down 3.2%  Expected:  +5.9%
Imports:  Down 19%   Expected:  -3.2%

Subsets:

Crude oil imports fell 41.8%
Iron ore imports fell 50.3%
Coal imports fell 61.8%
Exports to the European Union fell 4.4%
Exports to the Hong Kong fell 10.9%
Exports to the Japan fell 20.4%
Exports to the Russia fell 20.4%

None of this is good, in fact its terrible (sure China has a huge surplus...but) the implications for Canada and Australia are very serious in deed.  The Canadian correction will be massive (aside from Real Estate prices, we can expect job losses from a reduction in primary good exports) -- the same for Australia that is a major coal exporter.

The story is always the same, while economic growth numbers can be "massaged" imports of "energy" cannot.  Fundamentally for economic growth (in an economy that makes things) there is a requirement for energy -- one of the transformation components.

Now, some of the collapse can be set against China's massive anti-corruption drive,where Chinese company would import certain raw materials -- use them as collateral (many many times) and borrow extensively from China's massive near-bank financial institutions.  Last year one trader had borrowed more than 500 times against his holding of copper.  Needless to say that he's since disappeared (in prison or another country). Some of the collapse can be caused by Chinese New Year  -- when the country essentially shuts down for a week of celebration.

However, The numbers are huge, 40% collapse in oil imports, the same for Iron ore, and coal is down 60%  these are massive numbers.  It would seem that China's clients are having a hard time, when your clients are suffering things have to be hard for you too.




Sunday, February 8, 2015

Analogy: France/Germany 1871 and Germany/Greece 2015 -- Michael Pettis strikes again

European nationalists have successfully convinced us, against all logic, that the European crisis is a conflict among nations, and not among economic sectors. Today’s Financial Times has an articlediscussing the travails of Greece’s new Finance Minister, Yanis Varoufakis as he takes on Germany:
In a small but telling sign of the frosty relations between Berlin and the new Greek government, the German finance ministry last week criticised Mr Varoufakis for failing to follow through with a customary courtesy call following his appointment. Mr Schäuble, meanwhile, has warned Greece not to attempt to “blackmail” Berlin with demands for debt relief.
This is absurd.
Read Mr Pettis entire entry, facinating here

Thursday, February 5, 2015

Greece: The next hand is being played

So yesterday the ECB decided that Greece's debt (rated as junk by everybody) was no longer acceptable as collateral to allow the Greek banks to monetise their assets -- so that they can keep on paying out the Euros in drove to all Greeks who know the game is up.  In a nutshell the ECB decided that after a week in power the new socialist government needed a taste of "the baseball bat", mind you its just a taste (Greek banks can still get liquidity but via a less attractive and more costly route). The ECB and Bruxelles bureaucrats (and their elected officials) want one thing, and one thing only -- extend and pretend.  They want the troika back in town and they want the status quo re-instated.

The sad truth is that like Paris taxi drivers that protested the arrival of unknown Uber by going on strike, the ECB has shown themselves to be bullies.  The new Greek prime minister has made a number of speeches, and interviews, his ECB interlocutors have been caught a number of times with "errand microphones" saying exactly the wrong thing at the wrong time.  Bottom line, the Greek prime minister sounds reasonable -- he is winning the popularity contest (not to say that Greeks were not thieving bastards for years) still!

The sad truth is that Greece cannot repay its outstanding debts, the sooner this conversation occurs the faster the problems can be solved.  For Europe the problem is fundamental; the population (in Germany in particular) were sold a false bills of goods, they were told that integration would be cheap, they were told that this was going to be easy.  They were not told that fundamental flaws had been incorporated -- such as high inflation countries with low inflation countries, they were not told that the partially federated system -- with no real central power was poorly equipped to deal with errand "provinces" such as Greece -- that were borrowing like drunken sailors and had an incredibly high level of corruption, would easily solve all problems.

I'm not sur that Greece will be the winner here.  I'm not sure that the left can do this -- because if they fail, its the right that will take over, and Golden Dawn is far less fun then the socialists.  Lets not forget that America fought the Russians with the Taliban, the Americans armed the Taliban -- because the enemy of my enemy is my friend.  Look at what "friends" America has today... My guess is that Bruxelles and the ECB would rather have this fight another day, even if it means Golden Dawn -- which is not Neo-nazi, bur a full blown Nazi party.

So the ECB has decided to see what it can see, to test Athen's socialists.  Frankly, acting this way against a 10 day old government seems a bit...rash.  My guess is that they will do this for two weeks and back down, but the damage will have been done -- another Greek bank will go down the tube, and savers in Greece -- the very people who Bruxelles likes and wants to encourage will be made in the paupers, it may convince the rest of Greece that this Europe thing is really not worth the trouble.

Anyway, oil prices are back down to $48.99, the Euro is back at 1.14 to the USD.  All is well!




Wednesday, February 4, 2015

Oil prices up 20% -- why is the market not freeking out

From $44.70 all the way to $57.15 in the space of 36 hours!

Nothing in the world has changed


  • US economy still appears to be slowing down
  • China seems to be in a recession
  • Europe is "sclerotic"  
  • The S&P is up 2% on the day -- based on the good news.

The question is what good news, what is so great, what has changed to make oil prices jump by nearly 20% -- in short nothing.  It would appear that a substantial segment of the market has decided that it was time for oil prices to rise (we are talking technical points here), so the market started rising, and the momentum trade followed through.

Every few days a new conspiracy theory emerges; these days its Saudi Arabia screwing with Siria and Russia, some will say that the world economy is doing OK and that its a small oversupply that is driving everything, in fact OPEC is to blame, because this cartel controls nearly 35% of all global oil production, so they have huge control... I would not take this to the bank.

While it is true that demand/supply imbalance is not huge the reason is that there is very limited storage capacity -- already tankers are full anchored off shore from Singapore to Kuwait waiting for prices to rise, but also simply because there is insufficient demand.

The lack of cartel control is the reason there is such oversupply.  America still believes that it is generating oil surplus (just about if the take into consideration Canadian crude).  I never bought the long term Machiavellian plan of Saudi Arabia -- after-all GW Bush pleaded with SA to increase oil production when prices were around $120/bbl (remember that?).

As in aircraft accidents its never just one thing; it would be convenient if it were the fault of the Americans, or the Chinese or again the Saudis.  But in truth, the oil market is overstuffed with supply -- because certain producers need to maximize production at these low prices, but the demand side is not doing very well either.

Europe is not in an explosion of growth, nor is China or Japan.  America is doing OK (last two quarters of 2014) but the benefits of low oil prices has acted as a way for Americans to save a bit. Wages are simply not rising in the US, finally Americans (average joe) is getting a small break on the cost of filling his SUV, and he's decided to save the difference.  There is little sensation of economic exuberance in the US, for most Americans (who have seen zero wage growth over the past decade) the economy is in standstill, there is a fear of job losses (Sears should be about ready to keel over-- as did Target in Canada).

The TRUTH:

No one knows why oil prices collapse
It would be idiotic to believe that the Saudi had some kind of evil plot -- and that it works
if this is a teaching moment for OPEC, its an expensive one for most of the participants
BTW the day after oil prices rise back to $80 on their way to $120 will be the day that new drilling will occur in the US, that Canada's oil sands re-start their R&D activities.

There is no reason for the collapse -- there are events and circumstances that coincided -- like a Venn diagram that has let the world to oil at $45 no wait, $55 no wait $52.  Ok these numbers are good for the next twenty minutes