To follow up my post this morning, I did not make clear my implacable opposition to any element of payment for genuine education (and I will follow the herd and single out media studies as the one that irritates me most). I think the coalition are just plain wrong on even having tuition fees, let alone increasing them.
There are beacons of sanity it seems
http://www.telegraph.co.uk/education/universityeducation/8157187/Student-tuition-fees-protest-hero-female-peacemaker-hailed-after-confronting-violent-anarchists.html
Well done - reason rarely triumphs, but in this case Zoe is more likely to be interviewed by the media and able to make the case (she was on the demo after all) than rent-a-thug anarchists.
Dum Spiro Spero
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Wednesday, 24 November 2010
The Meek will inherit the Earth??
I think the phrase really goes something like "The meek shall inherit the earth until they are conned into selling it for nothing to Goldman Sachs who then repackage it and sell it back to them as "Terra Bonds" at twice its real worth".
The meek inheriting the earth is a fascinating concept - and one that presumably stood in the early days of the spread of Christianity as a call that aggression and self-assertion to the exclusion of others were not the way to live in harmony with our fellow-man. An alternative view has also been expressed that it is a way of keeping the masses downtrodden while others really do the inheriting.
Which ever meaning you take from the aphorism, one thing is patently NOT true in the modern world is that being too meek gets you very far. It is only too easy to fade into the background of modern society and contribute or receive little or nothing. The less meek can try to contribute - even if by a simple act of self-assertion such as voting (which around half of the UK population tend not to do!) or writing to the newspapers, There are even those with little of value to say that write blogs to get their views heard. Er... wait a minute, perhaps I should delete that bit? It seems that to shout loudest is to be valued most.
Where public opinion is concerned, the measure is so often quantity not quality.
As a demonstrator against what I saw as excesses and unwanted policies in the very late 60s and early 70's, I saw a point to getting heard and seen. The cosier nature in those distant days of the establishment's relationship with the Fourth Estate meant that a few hundred chanting students were at least reported. Towards the end of that period one did see a few of the same faces under Socialist Workers Party pre-printed placards and it was always these same few that were the ones wanting to turn an expression of disapproval into something more confrontational. They were a major source of the reasons that many of us left this method of self-expression to the loudest - perhaps a major mistake.
As an avowed fan of the coalition government - perhaps even of the idea of coalition itself rather than specifically this one - I like the idea of the debate and tensions within government. There was something frighteningly Nurenberg-ish about Labour under Mandelson. I was expecting them to promote synchronised believing as an Olympic Event had they clung to power. Clegg and the Lib-Dems provide a leavening of common-sense in a time where the hard decisions are being made and prevent any chance of doctrinaire politics swapping from one extreme to the other. What is his reward for this? - A warning not to cycle as he is being targetted by "student extremists". There is also talk that Lib-Dem headquarters are the next target after Millbank.
Lets not be meek here. The agenda is an old one - Trotsky, Goebbels, even Animal Farm if you want it spoon-fed to you. Using democratic rights to destabilise democratic processes is an old trick for which we fall time after time it seems. The "fascist pigs" do have a wonderful weapon in CCTV - an awful lot of silly gullible kids who were carried away and wrecked Millbank will have had shocks when they were tracked down and arrested. What struck me however, in watching the footage, was the way in which the agents provocateurs were always able to blend into the background before the violence started. They are, of course, neither students nor protesters - just wrong-minded but often cunning troublemakers.
If students (or anyone else for that matter) wish to demonstrate against the Lib-Dems then so be it, but I do hope the CCTV is fired up. One of my bitterest regrets is that I did not take to the streets against the Iraq war - but I feared (wrongly as it happened) that the agenda would be hijacked by the extremes of the left and right.
So - will the Meek inherit the Earth? No chance! The Earth will continue to be inherited by the intelligent and the dishonest. Our task as temporary custodians of the social order should be twofold - firstly to ensure that the balance is tilted massively in favour of the intelligent or at least sincere and secondly that the inheritors realise their advantage and support and share with those without the advantages.
By the way, there is no need to panic - I have not suddenly "got religion" - I will not be analysing the Sermon on the Mount line by line. Anyone turning up on the doorstep with loaves and fishes will have the dog set on them.
Dum Spiro Spero
The meek inheriting the earth is a fascinating concept - and one that presumably stood in the early days of the spread of Christianity as a call that aggression and self-assertion to the exclusion of others were not the way to live in harmony with our fellow-man. An alternative view has also been expressed that it is a way of keeping the masses downtrodden while others really do the inheriting.
Which ever meaning you take from the aphorism, one thing is patently NOT true in the modern world is that being too meek gets you very far. It is only too easy to fade into the background of modern society and contribute or receive little or nothing. The less meek can try to contribute - even if by a simple act of self-assertion such as voting (which around half of the UK population tend not to do!) or writing to the newspapers, There are even those with little of value to say that write blogs to get their views heard. Er... wait a minute, perhaps I should delete that bit? It seems that to shout loudest is to be valued most.
Where public opinion is concerned, the measure is so often quantity not quality.
As a demonstrator against what I saw as excesses and unwanted policies in the very late 60s and early 70's, I saw a point to getting heard and seen. The cosier nature in those distant days of the establishment's relationship with the Fourth Estate meant that a few hundred chanting students were at least reported. Towards the end of that period one did see a few of the same faces under Socialist Workers Party pre-printed placards and it was always these same few that were the ones wanting to turn an expression of disapproval into something more confrontational. They were a major source of the reasons that many of us left this method of self-expression to the loudest - perhaps a major mistake.
As an avowed fan of the coalition government - perhaps even of the idea of coalition itself rather than specifically this one - I like the idea of the debate and tensions within government. There was something frighteningly Nurenberg-ish about Labour under Mandelson. I was expecting them to promote synchronised believing as an Olympic Event had they clung to power. Clegg and the Lib-Dems provide a leavening of common-sense in a time where the hard decisions are being made and prevent any chance of doctrinaire politics swapping from one extreme to the other. What is his reward for this? - A warning not to cycle as he is being targetted by "student extremists". There is also talk that Lib-Dem headquarters are the next target after Millbank.
Lets not be meek here. The agenda is an old one - Trotsky, Goebbels, even Animal Farm if you want it spoon-fed to you. Using democratic rights to destabilise democratic processes is an old trick for which we fall time after time it seems. The "fascist pigs" do have a wonderful weapon in CCTV - an awful lot of silly gullible kids who were carried away and wrecked Millbank will have had shocks when they were tracked down and arrested. What struck me however, in watching the footage, was the way in which the agents provocateurs were always able to blend into the background before the violence started. They are, of course, neither students nor protesters - just wrong-minded but often cunning troublemakers.
If students (or anyone else for that matter) wish to demonstrate against the Lib-Dems then so be it, but I do hope the CCTV is fired up. One of my bitterest regrets is that I did not take to the streets against the Iraq war - but I feared (wrongly as it happened) that the agenda would be hijacked by the extremes of the left and right.
So - will the Meek inherit the Earth? No chance! The Earth will continue to be inherited by the intelligent and the dishonest. Our task as temporary custodians of the social order should be twofold - firstly to ensure that the balance is tilted massively in favour of the intelligent or at least sincere and secondly that the inheritors realise their advantage and support and share with those without the advantages.
By the way, there is no need to panic - I have not suddenly "got religion" - I will not be analysing the Sermon on the Mount line by line. Anyone turning up on the doorstep with loaves and fishes will have the dog set on them.
Dum Spiro Spero
Tuesday, 23 November 2010
Crevasse Investing and Derivatives - Two followups.
My recent blogs about a nice little derivative transaction and, more recently, my piece about Crevasse Investing have seen the chickens come home to roost (or perhaps even the Black Swans) in a most apposite way.
The last few days have seen the Euro-crisis dominate the news despite the fact that the underlying numbers have been in the public domain for months. Once again the shoal of fish have turned simultaneously. In addition the twin "saviours" of the US economy - Quantitative Easing and currency depreciation have turned from being the darlings of Wall Street to the very Devil incarnate in little over a week.
This morning we hear of the two Koreas at it once again and whoops the crevasse has been struck. Despite the idiotic ramblings of our Dear Leader (Kim rather than Milliband, although they have the same credibility in my mind) it is rather a case of nobody really knowing or possibly caring what goes on over there - possibly one of the few theatres of action where that is true in the modern world. The US will not and dare not take on China, unlike the 1950s, and similarly China has too much of a good (economic) thing going on to do more than help discomfort the US.
So we have our market crevasse and the gloom may well continue while in the real world things are looking rather brighter. The recent Hewlett Packard results bear closer scrutiny as the PC and related technology market have become a good leading indicator for economies over the last few years and while I would not want to be as crass as Lord Young, there is some truth in the benefit low interest rates are currently having at the consumer level. The glacier grinds on - the crevasse will soon present a good investment entry point.
With regard to the derivative investment idea I wrote about a few weeks ago - to update the figures the situation is currently as follows -
Short FTSE @ 5675
Sell 1month (October)5675 Put Option @108
End of month price 5808
Open Loss on FTSE (5808-5675) = 134
Less Premium Received (-134+108) Net Open Loss -26 points (Equating to £260 in real money)
After first option expires
Still Short FTSE @ 5675
Sell another 1month (November) 5675 Put Option @ 64
End of month price 5730
Open loss on FTSE (5730-5675) = 55
Less first Premium Received and second Premium Received (-55+108+64) = Net Open Profit 117 points (£1170).
After second option expires
Still Short FTSE @ 5675
Sell another 1month (December) 5675 Put Option @ 109
Current price 5645
Open profit on FTSE (5645-5675) = 30
Add to first Premium Received and second Premium Received and third Premium Received (+30+108+64+109) = Net Open Profit 281 points (after deducting the open FTSE profit as the option is an equal amount under water) (£2810).
Of course the third option is still in play and to that extent I have simplified the calculations - but potentially a marvellous return on an investment of approximately £5000 over less than three months.
Again I must stress how important it is to understand the risks - but equally do not forget the potential rewards.
Dum Spiro Spero
The last few days have seen the Euro-crisis dominate the news despite the fact that the underlying numbers have been in the public domain for months. Once again the shoal of fish have turned simultaneously. In addition the twin "saviours" of the US economy - Quantitative Easing and currency depreciation have turned from being the darlings of Wall Street to the very Devil incarnate in little over a week.
This morning we hear of the two Koreas at it once again and whoops the crevasse has been struck. Despite the idiotic ramblings of our Dear Leader (Kim rather than Milliband, although they have the same credibility in my mind) it is rather a case of nobody really knowing or possibly caring what goes on over there - possibly one of the few theatres of action where that is true in the modern world. The US will not and dare not take on China, unlike the 1950s, and similarly China has too much of a good (economic) thing going on to do more than help discomfort the US.
So we have our market crevasse and the gloom may well continue while in the real world things are looking rather brighter. The recent Hewlett Packard results bear closer scrutiny as the PC and related technology market have become a good leading indicator for economies over the last few years and while I would not want to be as crass as Lord Young, there is some truth in the benefit low interest rates are currently having at the consumer level. The glacier grinds on - the crevasse will soon present a good investment entry point.
With regard to the derivative investment idea I wrote about a few weeks ago - to update the figures the situation is currently as follows -
Short FTSE @ 5675
Sell 1month (October)5675 Put Option @108
End of month price 5808
Open Loss on FTSE (5808-5675) = 134
Less Premium Received (-134+108) Net Open Loss -26 points (Equating to £260 in real money)
After first option expires
Still Short FTSE @ 5675
Sell another 1month (November) 5675 Put Option @ 64
End of month price 5730
Open loss on FTSE (5730-5675) = 55
Less first Premium Received and second Premium Received (-55+108+64) = Net Open Profit 117 points (£1170).
After second option expires
Still Short FTSE @ 5675
Sell another 1month (December) 5675 Put Option @ 109
Current price 5645
Open profit on FTSE (5645-5675) = 30
Add to first Premium Received and second Premium Received and third Premium Received (+30+108+64+109) = Net Open Profit 281 points (after deducting the open FTSE profit as the option is an equal amount under water) (£2810).
Of course the third option is still in play and to that extent I have simplified the calculations - but potentially a marvellous return on an investment of approximately £5000 over less than three months.
Again I must stress how important it is to understand the risks - but equally do not forget the potential rewards.
Dum Spiro Spero
Monday, 22 November 2010
Oh God!! Am I having a mid-life crisis?
Those of you who know me well (and my commiserations to you for bearing that onerous burden!) know that the whole Investment Banker thing is a facade. My love is, was and always will be sung music. From being an angelic (Yeah Right!) choirboy, to the chapel choir during my Oxford days, countless church and secular choirs (none of which I have ever enjoyed as much as CTK in Frankfurt - thank you Kathy for that) - my "real" self has been in search of becoming a halfway-decent Tenor.
Despite the eye-rolling of those who hate "my sort of music" - Tallis, Byrd, Gibbons et al., right the way back to Monteverdi or even Palestrina, I never lost my ability to pick out the gems from my era. Among the three-chord wonders there were often some accomplished musicians hiding among the pop. Sometimes you could just feel the sheer musicality of the less-accomplished trying to burst through. I even spent a few dirty nights on dirty floors being a roadie for my then girlfriend. To this day it is the terror of family and friends when I sing along in the car with the top down. I have oft remarked that the only reason I do not have underwear thrown at me in the manner of Tom Jones is that I am moving too quickly. I am even more often told that I am a sad deluded man going through a mid-life crisis. Ho Hum - perhaps they are right?
Given the widely (or is that wildly) eclectic musical tastes I have developed, I rarely get the "tingle factor" at hearing something new or so well done that it reduces me to tears (Usually Simon Cowell is the only person to do that without fail!), so when I was invited to a gig on Saturday I was prepared to enjoy it, but I was totally unprepared for what I saw and heard.
The band was Gabby Young & other animals - http://gabbyyoungandotheranimals.com I can honestly say that I do not ever remember being so impressed with a band, a singer or an overall presentation.
Gabby herself is a quirky, eccentrically-dressed woman that seems to be totally original in her style and thinking (as her lyrics testify). Her vocal technique is utterly flawless and reminds me so much of a young Annie Lennox, but her style is very much her own. Saturday's gig was to launch their first album. Just go and buy it - do it!! It would be wrong to think of her just having a band behind her - the performance was integrated tightly and the seemingly anarchic onstage antics (sometimes reminding me of Madness) belie a tight musicianship and skill. The brass section in particular are essential to so many of the tracks they performed. In gentle Folk Rock mode I loved the way she fitted with Stephen Ellis ( I think I have that name right) - no mean musician himself.
OK - end of middle-aged-man discovers new band mode for now. I promise to go back to the arcana of investing or ranting about politics again ver y soon.
Buy the album though - utterly briliant - or even better catch a live performance.
Dum Spiro Spero
Despite the eye-rolling of those who hate "my sort of music" - Tallis, Byrd, Gibbons et al., right the way back to Monteverdi or even Palestrina, I never lost my ability to pick out the gems from my era. Among the three-chord wonders there were often some accomplished musicians hiding among the pop. Sometimes you could just feel the sheer musicality of the less-accomplished trying to burst through. I even spent a few dirty nights on dirty floors being a roadie for my then girlfriend. To this day it is the terror of family and friends when I sing along in the car with the top down. I have oft remarked that the only reason I do not have underwear thrown at me in the manner of Tom Jones is that I am moving too quickly. I am even more often told that I am a sad deluded man going through a mid-life crisis. Ho Hum - perhaps they are right?
Given the widely (or is that wildly) eclectic musical tastes I have developed, I rarely get the "tingle factor" at hearing something new or so well done that it reduces me to tears (Usually Simon Cowell is the only person to do that without fail!), so when I was invited to a gig on Saturday I was prepared to enjoy it, but I was totally unprepared for what I saw and heard.
The band was Gabby Young & other animals - http://gabbyyoungandotheranimals.com I can honestly say that I do not ever remember being so impressed with a band, a singer or an overall presentation.
Gabby herself is a quirky, eccentrically-dressed woman that seems to be totally original in her style and thinking (as her lyrics testify). Her vocal technique is utterly flawless and reminds me so much of a young Annie Lennox, but her style is very much her own. Saturday's gig was to launch their first album. Just go and buy it - do it!! It would be wrong to think of her just having a band behind her - the performance was integrated tightly and the seemingly anarchic onstage antics (sometimes reminding me of Madness) belie a tight musicianship and skill. The brass section in particular are essential to so many of the tracks they performed. In gentle Folk Rock mode I loved the way she fitted with Stephen Ellis ( I think I have that name right) - no mean musician himself.
OK - end of middle-aged-man discovers new band mode for now. I promise to go back to the arcana of investing or ranting about politics again ver y soon.
Buy the album though - utterly briliant - or even better catch a live performance.
Dum Spiro Spero
Wednesday, 17 November 2010
Glacier Investing - Watch out for the crevasses!
I don't get Switzerland - I never have. My professional life has taken me there more times than I care to remember and I never fail but to be bemused. The languages are the main thing - officially four of them (OK - only 35,000 speak Romansch as their first language, but it does exist). Even that does not bear too much examination. There are pockets on the upper Rhine where villages on opposite sides of the river (and in different countries) speak detectably different dialects! As for the German dialects - Baseldytsch , Bärndütsch (the dialect of Bern) or Züridütsch are enormously different. Interestingly the French and Italian dialects have, while still retaining much variety, much more homogeneity with the "parent" tongue.
I suppose this is not too surprising in a country where communication (in the physical sense ) is often difficult. I feel deeply for the Swiss teenager feeling a natural urge one lonely night who knows that, having exhausted the genetic pool in his own small community, he is only 30 miles from "fresh meat" were it not for the interposed existence of a billion-ton granite condom in the form of an Alp!!
I am also amused at the way the various linguistic groupings often exhibit, in extreme forms, the characteristics stereotypical of their linguistic progenitors. How this country hangs together is beyond me - but it does and very successfully too.
What made me think of Switzerland this morning? I was pondering on one of my last trips there. Three memories stick in my mind - firstly of witnessing an almost ceremonial setting up of a Liechtenstein Anstalt in a dusty lawyers office in Zurich. Not even the discrete brass plate to be found at some private banks and an office straight out of Dickens. I swear the telephone (with a dial!!) looked a modern intrusion as a client happily signed away an enormous sum of money into a system where, in theory at least, he did not even own it. Secondly I am minded to think of the Bank in Lugano that has a vault (far too big and grand to be called a safe) in reception - necessary when the briefcases of clients shuttling backwards and forwards to Chiasso are often stuffed with banknotes (In passing, it is worth pointing out that some 75% of €500 notes are believed to reside in Luxembourg and Swiss Banks - and apparently many test positive for narcotics!). The third memory - and one that brings me in my normal rambling way to my point in this blog - is of sitting in a suburban bungalow near Zug, taking tea with two major investors in a Hedge Fund I was then running, and looking out of the window to an enormous glacier just one or two miles away. A surreal mix of Surbiton and Gstaad.
It was this that gave me my theory of Glacier Investing.
We are currently in an investment environment where the "safest" investments - cash in the bank and government bonds - are quite rightly being questioned in many quarters. Cash in the bank is only as safe as the bank itself and even if you take some comfort from various deposit insurance schemes, then you run into the conundrum facing investors in government bonds - are the abilities of all governments to repay or guarantee to be relied on? Irish or Greek debt anyone?
Given that returns on these "safe" investments run between 0.5% and 2%, it is no surprise that those able to stomach a little risk are happy to go to the stock market. The braver still might go to emerging markets, gold, commodities, rare stamps (my favourite at the moment) or any of a wide range of ever-riskier ventures. Yesterday we had one of those rare "What the ****???" moments when it all went horribly wrong for many people at the higher end of the risk spectrum. Even Gold was down nearly $100 in a few days. Investors in blue-chip indices would typically have lost 2-3% in 24 hours - very close to what they would have made in a year in a "safe" investment.
The psychology of a market turn like this is fascinating to me. I always think of those underwater shots of shoals of anchovies turning exactly together. Rarely are there new facts involved - the so-called Euro crisis has been playing out for nearly two years - and equally rarely are there new interpretations of them. Last week we saw stock markets close to the levels we were at before Messrs. Lehmans and Bear Stearns went belly-up. The market as a whole looked through its rose-tinted specs even at the PIIGS and we were all pink and fluffy. From about 8 pm on Friday night the shoal of anchovies turned at once it seems. The same lego-bricks of facts on which market direction was predicated were dismantled and reassembled in a different order. This morning the combination of sovereign debt issues, China being realistic (and that is all!) about its domestic inflation, and the telegenic nature of the Irish Government acting like headless chickens - all of which were with us last week - are reasons for fear and caution.
Back to the glacier! Rather like the glacier, the world economy is propelled by a continuing deposition of industrial output, individual striving and an effort for betterment among several billion people. Adam Smith's dead hand takes the place of the snow driving the glacier as it slowly adds its weight. Again, like the glacier, the momentum of the world economy carves out new directions - often so slowly we do not see them - and nothing can either prevent it or predict its exact course.
Glaciers do, of course, have crevassses in them - and often they are potentially lethal. The local skating rink (for which read "safe" investments) may not have crevasses, but neither is it travelling anywhere.
Perhaps the analogy is getting stretched now - but my thesis is clear. Equity investment is ultimately ownership of a share of the world's economy and is subject to significant ups and downs. These may be cyclical and of several years duration (and Ars Longa Vita Brevis might be sensibly re-rendered to take this into account), there will also be crevasses - but the glacier will move on.
Was this helpful to those investing decisions? No I thought not. For what it is worth, I must have been admiring that glacier in Zug too much and not paying attention - we never did get the extra $50 Million those investors were thinking about!!
Dum Spiro Spero
I suppose this is not too surprising in a country where communication (in the physical sense ) is often difficult. I feel deeply for the Swiss teenager feeling a natural urge one lonely night who knows that, having exhausted the genetic pool in his own small community, he is only 30 miles from "fresh meat" were it not for the interposed existence of a billion-ton granite condom in the form of an Alp!!
I am also amused at the way the various linguistic groupings often exhibit, in extreme forms, the characteristics stereotypical of their linguistic progenitors. How this country hangs together is beyond me - but it does and very successfully too.
What made me think of Switzerland this morning? I was pondering on one of my last trips there. Three memories stick in my mind - firstly of witnessing an almost ceremonial setting up of a Liechtenstein Anstalt in a dusty lawyers office in Zurich. Not even the discrete brass plate to be found at some private banks and an office straight out of Dickens. I swear the telephone (with a dial!!) looked a modern intrusion as a client happily signed away an enormous sum of money into a system where, in theory at least, he did not even own it. Secondly I am minded to think of the Bank in Lugano that has a vault (far too big and grand to be called a safe) in reception - necessary when the briefcases of clients shuttling backwards and forwards to Chiasso are often stuffed with banknotes (In passing, it is worth pointing out that some 75% of €500 notes are believed to reside in Luxembourg and Swiss Banks - and apparently many test positive for narcotics!). The third memory - and one that brings me in my normal rambling way to my point in this blog - is of sitting in a suburban bungalow near Zug, taking tea with two major investors in a Hedge Fund I was then running, and looking out of the window to an enormous glacier just one or two miles away. A surreal mix of Surbiton and Gstaad.
It was this that gave me my theory of Glacier Investing.
We are currently in an investment environment where the "safest" investments - cash in the bank and government bonds - are quite rightly being questioned in many quarters. Cash in the bank is only as safe as the bank itself and even if you take some comfort from various deposit insurance schemes, then you run into the conundrum facing investors in government bonds - are the abilities of all governments to repay or guarantee to be relied on? Irish or Greek debt anyone?
Given that returns on these "safe" investments run between 0.5% and 2%, it is no surprise that those able to stomach a little risk are happy to go to the stock market. The braver still might go to emerging markets, gold, commodities, rare stamps (my favourite at the moment) or any of a wide range of ever-riskier ventures. Yesterday we had one of those rare "What the ****???" moments when it all went horribly wrong for many people at the higher end of the risk spectrum. Even Gold was down nearly $100 in a few days. Investors in blue-chip indices would typically have lost 2-3% in 24 hours - very close to what they would have made in a year in a "safe" investment.
The psychology of a market turn like this is fascinating to me. I always think of those underwater shots of shoals of anchovies turning exactly together. Rarely are there new facts involved - the so-called Euro crisis has been playing out for nearly two years - and equally rarely are there new interpretations of them. Last week we saw stock markets close to the levels we were at before Messrs. Lehmans and Bear Stearns went belly-up. The market as a whole looked through its rose-tinted specs even at the PIIGS and we were all pink and fluffy. From about 8 pm on Friday night the shoal of anchovies turned at once it seems. The same lego-bricks of facts on which market direction was predicated were dismantled and reassembled in a different order. This morning the combination of sovereign debt issues, China being realistic (and that is all!) about its domestic inflation, and the telegenic nature of the Irish Government acting like headless chickens - all of which were with us last week - are reasons for fear and caution.
Back to the glacier! Rather like the glacier, the world economy is propelled by a continuing deposition of industrial output, individual striving and an effort for betterment among several billion people. Adam Smith's dead hand takes the place of the snow driving the glacier as it slowly adds its weight. Again, like the glacier, the momentum of the world economy carves out new directions - often so slowly we do not see them - and nothing can either prevent it or predict its exact course.
Glaciers do, of course, have crevassses in them - and often they are potentially lethal. The local skating rink (for which read "safe" investments) may not have crevasses, but neither is it travelling anywhere.
Perhaps the analogy is getting stretched now - but my thesis is clear. Equity investment is ultimately ownership of a share of the world's economy and is subject to significant ups and downs. These may be cyclical and of several years duration (and Ars Longa Vita Brevis might be sensibly re-rendered to take this into account), there will also be crevasses - but the glacier will move on.
Was this helpful to those investing decisions? No I thought not. For what it is worth, I must have been admiring that glacier in Zug too much and not paying attention - we never did get the extra $50 Million those investors were thinking about!!
Dum Spiro Spero
Thursday, 11 November 2010
Derivatives - Not the spawn of Satan for Investors?? An example
Perhaps it will be necessary to choose my words here with an unaccustomed caution. Why? - Because I am going to think about derivatives and their place in the world of investment. Even more radically, I am going to suggest that they are not out of the reach or understanding of even a small investor.
At the height of the banking crisis it got a little interesting being an investment banker. I seemed to wear a permanent fixed and brittle smile as every cocktail-party pundit and bulletin-board guru delighted in comparing the banking world with the nether regions beyond the Styx. When I ran into the totally delightful rector of my local church here and saw him bearing down upon me, my immediate reaction was to duck into a doorway in case he was going to perform an impromptu exorcism to drive out the demons of derivatives from my soul.
For the sake of clarification, "Derivatives" is a slippery term. It encompasses a number of different worlds. Some of the very complex structures are the exclusive domain of the interbank (or at the very most inter-institutional) market. The highly-geared products based on Debt can range from the relatively secure such as government bonds to the truly terrifying such as US sub-prime mortgages. I don't want to re-open the whole can of worms, but the repackaging of the latter, often into structures so complex as to be not easily or fully understood by even the experts (and often with at least one more level of gearing) was the nightmare that led us to Lehmans & Bear Stearns. On the back of that (always there but the tide went out and the other mistakes were uncovered) we got the same sort of structures in Credit Default Swaps - derivatives on the credit-worthiness of corporates and even governments.
None of these risky derivatives were inherently evil - it is worth bearing in mind that all modern structures of this sort have their roots in an idea first put into action in Osaka in the 1630's - as a form of financial insurance against something going wrong (in that case a failure of the Rice harvest). These more recent structures were a way of lenders being able to protect themselves against their mortgages going wrong by buying insurance or hedging. Similarly Credit Derivatives enabled not just lenders, but even major corporate customers to gain some sort of cover (and incidentally led to a far more flexible view of credit rating than the major agencies were able to supply under pressure). The problem lay in the fact that these products were traded and re-packaged so many times that the underlying risks were multiplied as ever more layers of obfuscation and gearing were added, rather like a game of pass-the-parcel in reverse.
All that is background, however, to the truly vast daily activity that happens in derivatives daily. Rather like an iceberg, the vast majority of activity is submerged and not readily visible. This inter-dealer and inter-bank business is only partly visible on exchanges, as most of it is by private deals - usually described as Over-The-Counter or OTC transactions. Even so, a massive amount of derivative business is transacted every day on regulated exchanges all over the world - in Stocks, Bonds, Equity Indices, Currencies, Energy, Foodstuffs, Metals (both common and precious) and a wide range of seemingly esoteric other markets. Most of these are accessible to the private investor.
When I first came into the financial world the concept of Caveat Emptor was regarded as regulation enough, but with the onset of more formal regulations came the risk warnings that have stifled the growth of some areas. This is not to say that any geared investment should not be regarded as worthy of great caution, but my experience tells me that more so-called experienced investors under-estimate risks than many cautious "amateurs".
I want to illustrate an example of how this might work with a transaction that a close friend recently made. It is all the more interesting because, firstly it was based on a wrong premise - he thought Stock Markets would decline - and secondly because it shows how derivatives (in this case options on a stock index - the FTSE 100 index) can be used to control exposure rather than to increase it.
The FTSE 100 index can be accessed in a number of ways. Tracker Funds such as iShares can be bought for a few pounds. The FTSE futures contract is a bigger bet - at ten times the index, around £59,000 - but the private investor normally only puts up 5% to 10% of that total amount - this is usually called his "margin". The investor gets exposure to £59,000 of index for, say £5000. At an index of 6400 (up 8.4%) he doubles his money. At 5400 he has lost 100% (and is at risk for more if it continues to go down). Simply speculation if you would not normally have bought a £59,000 chunk of stocks - highly efficient investing if you would.
Now to get one level more complex. The trade my chum made (and he is an experienced investor) was just plain wrong. He thought the FTSE would drop in October (a seasonal trade I have never felt comfortable with even if some of the big moves down were made in that month). He sold FTSE futures at 5675 - almost 135 points to the wrong and thus sitting on a loss of £1350. Disaster? Nope - because he simultaneously sold a one month maturity Put Option for 108 points. This option gave the buyer the right (but not the obligation) to any profit from selling at 5675 in return for a one-off payment of the 108 point premium.
Good trade? Well no actually, because when the option expired, although my chum took the 108 point premium, the FTSE had gone up by 150 points. Disaster? Another no - because he sold another option for one month to someone wanting to get the profit if the market collapsed below 5675. This time he only got 64 points as the potential for the buyer was less. Let's do the sums.
Short FTSE @ 5675
Sell 1month 5675 Put Option @108
End of month price 5808
Open Loss on FTSE (5808-5675) = 134
Less Premium Received (-134+108) Net Open Loss -26 points (Equating to £260 in real money)
After first option expires
Still Short FTSE @ 5675
Sell another 1month 5675 Put Option @ 64
Current price 5806
Open loss on FTSE (5806-5675) = 131
Less first Premium Received and second Premium Received (-131+108+64) = Net Open Profit 41 points (£410).
I will not insult anyone's intelligence by iterating further - but I think it become obvious that a bad call initially seem to be turning into a good trade.
If the market is at or below 5675 at any option expiry then he gives away any profit on his FTSE short to the lucky buyer of the put option but gets to keep all Option premia obtained in the first two and any subsequent monthly cycle. In the case above he would have got 108+64 points in total, equating to £1720 - a return of 2.91% on the full index and 34.4% if a deposit of £5,000 was made. Not bad for two months. To look at the worst-case scenario, the FTSE could continue to rise and the the loss on the short position with it. Each month a further sale of a 5675 Put would mitigate that however and if, as my chum fervently believes (I really am not sure I agree with him) the market reaches 5675 again he will be sitting on a tidy profit.. The idea is that the option premia rack up each month until the 5675 level is hit again - if it ever is.
There are complexities such as rollover costs (the futures are on a 3-monthly cycle) and commissions - but these are not significant.
So - there is an example of a derivative trade that does not involve a little old lady being evicted from her home due to the failure of her sub-prime mortgage bank, does not involve Gordon Brown loading debt on our children and grandchildren. Instead it is a rather interesting way of taking a view on the market going down - which might be seen as insurance against the Pension Pot in some quarters?
I will update regularly on this one
Dum Spiro Spero
At the height of the banking crisis it got a little interesting being an investment banker. I seemed to wear a permanent fixed and brittle smile as every cocktail-party pundit and bulletin-board guru delighted in comparing the banking world with the nether regions beyond the Styx. When I ran into the totally delightful rector of my local church here and saw him bearing down upon me, my immediate reaction was to duck into a doorway in case he was going to perform an impromptu exorcism to drive out the demons of derivatives from my soul.
For the sake of clarification, "Derivatives" is a slippery term. It encompasses a number of different worlds. Some of the very complex structures are the exclusive domain of the interbank (or at the very most inter-institutional) market. The highly-geared products based on Debt can range from the relatively secure such as government bonds to the truly terrifying such as US sub-prime mortgages. I don't want to re-open the whole can of worms, but the repackaging of the latter, often into structures so complex as to be not easily or fully understood by even the experts (and often with at least one more level of gearing) was the nightmare that led us to Lehmans & Bear Stearns. On the back of that (always there but the tide went out and the other mistakes were uncovered) we got the same sort of structures in Credit Default Swaps - derivatives on the credit-worthiness of corporates and even governments.
None of these risky derivatives were inherently evil - it is worth bearing in mind that all modern structures of this sort have their roots in an idea first put into action in Osaka in the 1630's - as a form of financial insurance against something going wrong (in that case a failure of the Rice harvest). These more recent structures were a way of lenders being able to protect themselves against their mortgages going wrong by buying insurance or hedging. Similarly Credit Derivatives enabled not just lenders, but even major corporate customers to gain some sort of cover (and incidentally led to a far more flexible view of credit rating than the major agencies were able to supply under pressure). The problem lay in the fact that these products were traded and re-packaged so many times that the underlying risks were multiplied as ever more layers of obfuscation and gearing were added, rather like a game of pass-the-parcel in reverse.
All that is background, however, to the truly vast daily activity that happens in derivatives daily. Rather like an iceberg, the vast majority of activity is submerged and not readily visible. This inter-dealer and inter-bank business is only partly visible on exchanges, as most of it is by private deals - usually described as Over-The-Counter or OTC transactions. Even so, a massive amount of derivative business is transacted every day on regulated exchanges all over the world - in Stocks, Bonds, Equity Indices, Currencies, Energy, Foodstuffs, Metals (both common and precious) and a wide range of seemingly esoteric other markets. Most of these are accessible to the private investor.
When I first came into the financial world the concept of Caveat Emptor was regarded as regulation enough, but with the onset of more formal regulations came the risk warnings that have stifled the growth of some areas. This is not to say that any geared investment should not be regarded as worthy of great caution, but my experience tells me that more so-called experienced investors under-estimate risks than many cautious "amateurs".
I want to illustrate an example of how this might work with a transaction that a close friend recently made. It is all the more interesting because, firstly it was based on a wrong premise - he thought Stock Markets would decline - and secondly because it shows how derivatives (in this case options on a stock index - the FTSE 100 index) can be used to control exposure rather than to increase it.
The FTSE 100 index can be accessed in a number of ways. Tracker Funds such as iShares can be bought for a few pounds. The FTSE futures contract is a bigger bet - at ten times the index, around £59,000 - but the private investor normally only puts up 5% to 10% of that total amount - this is usually called his "margin". The investor gets exposure to £59,000 of index for, say £5000. At an index of 6400 (up 8.4%) he doubles his money. At 5400 he has lost 100% (and is at risk for more if it continues to go down). Simply speculation if you would not normally have bought a £59,000 chunk of stocks - highly efficient investing if you would.
Now to get one level more complex. The trade my chum made (and he is an experienced investor) was just plain wrong. He thought the FTSE would drop in October (a seasonal trade I have never felt comfortable with even if some of the big moves down were made in that month). He sold FTSE futures at 5675 - almost 135 points to the wrong and thus sitting on a loss of £1350. Disaster? Nope - because he simultaneously sold a one month maturity Put Option for 108 points. This option gave the buyer the right (but not the obligation) to any profit from selling at 5675 in return for a one-off payment of the 108 point premium.
Good trade? Well no actually, because when the option expired, although my chum took the 108 point premium, the FTSE had gone up by 150 points. Disaster? Another no - because he sold another option for one month to someone wanting to get the profit if the market collapsed below 5675. This time he only got 64 points as the potential for the buyer was less. Let's do the sums.
Short FTSE @ 5675
Sell 1month 5675 Put Option @108
End of month price 5808
Open Loss on FTSE (5808-5675) = 134
Less Premium Received (-134+108) Net Open Loss -26 points (Equating to £260 in real money)
After first option expires
Still Short FTSE @ 5675
Sell another 1month 5675 Put Option @ 64
Current price 5806
Open loss on FTSE (5806-5675) = 131
Less first Premium Received and second Premium Received (-131+108+64) = Net Open Profit 41 points (£410).
I will not insult anyone's intelligence by iterating further - but I think it become obvious that a bad call initially seem to be turning into a good trade.
If the market is at or below 5675 at any option expiry then he gives away any profit on his FTSE short to the lucky buyer of the put option but gets to keep all Option premia obtained in the first two and any subsequent monthly cycle. In the case above he would have got 108+64 points in total, equating to £1720 - a return of 2.91% on the full index and 34.4% if a deposit of £5,000 was made. Not bad for two months. To look at the worst-case scenario, the FTSE could continue to rise and the the loss on the short position with it. Each month a further sale of a 5675 Put would mitigate that however and if, as my chum fervently believes (I really am not sure I agree with him) the market reaches 5675 again he will be sitting on a tidy profit.. The idea is that the option premia rack up each month until the 5675 level is hit again - if it ever is.
There are complexities such as rollover costs (the futures are on a 3-monthly cycle) and commissions - but these are not significant.
So - there is an example of a derivative trade that does not involve a little old lady being evicted from her home due to the failure of her sub-prime mortgage bank, does not involve Gordon Brown loading debt on our children and grandchildren. Instead it is a rather interesting way of taking a view on the market going down - which might be seen as insurance against the Pension Pot in some quarters?
I will update regularly on this one
Dum Spiro Spero
Tuesday, 9 November 2010
George W Bush, The Law and basic morality
A short one today - if for no other reason than my conviction that some subjects are of such importance and yet simplicity that too much debate can dilute the starkness of the truth.
Today we hear in his new book "Decision Points" - that George W Bush authorised the torture known as waterboarding, as he was advised it was "legal".
"Legal" means within the laws defined by the state - so hanging drawing and quartering could be regarded as such if the law were to be changed. Bush could have made anything "legal" by suitable legislation.
No mention of morality whatever - possibly because he doesn't even know the meaning of the word (together with many other words I suspect he doesn't know the meaning of).
This sort of revelation can only drive the U.S. even further into the pariah state slot it seems to have chosen for itself. Perhaps Cameron will find it difficult to discuss Human Rights in Beijing without first apologising for the UK's slavish involvement in this evil.
Dum Spiro Spero
Today we hear in his new book "Decision Points" - that George W Bush authorised the torture known as waterboarding, as he was advised it was "legal".
"Legal" means within the laws defined by the state - so hanging drawing and quartering could be regarded as such if the law were to be changed. Bush could have made anything "legal" by suitable legislation.
No mention of morality whatever - possibly because he doesn't even know the meaning of the word (together with many other words I suspect he doesn't know the meaning of).
This sort of revelation can only drive the U.S. even further into the pariah state slot it seems to have chosen for itself. Perhaps Cameron will find it difficult to discuss Human Rights in Beijing without first apologising for the UK's slavish involvement in this evil.
Dum Spiro Spero
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