There have been a few unexpected referrals to this site but none more so than the google search for “chopstick market in Turkey” which returned CC in top spot.

Initially, this was nearly reason enough to short Google. Then, downtime and curiosity begged the question, just what could possibly be so interesting about chopsticks as to merit a google? The Top Five CC answers reveal an unsuspected richness to the utensil's character belied by the words "chop" and "stick":

  1. Chopstick etiquette in China demands that the palm face down or else the diner will be considered vulgar (source, Wikipedia).
  2. Japan consumes 200 pairs of chopsticks per capita per year (source, Washington Post).
  3. Singapore Medical Association members Leung, Poon and Lo considered death by chopstick from both “a clinical and cultural perspective” in their published paper Chopsticks and Suicide (source, Singapore Medical Journal 1995 vol. 36, no. 1, pp 90-91).
  4. In a gesture to environmentalists, China imposed a 5% export tax on chopstick producers in May this year. Exporters responded by raising prices 30%
  5. Reacting to these developments, a spokesman for the Japan Chopstick Import Association (yes, really) said, “We are not in an emergency situation yet” (source AP).
To the recent emailers with the kind words about the site, apologies. This is the last time chopsticks will be studied (even if the Mercantile Exchange establishes a contract for them).

Enjoy the weekend.

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"What we care about is GDP and earnings growth of emerging market companies. Who cares if they are small now, the real question is can we make money off of emerging market growth? Are emerging market stocks cheap right now? How about addressing these much harder questions?"

This is a new comment on an old post. The post in question argued that emerging - and emerged - markets are worth considering from a human development perspective and not merely on the basis of GDP and (by implication) earnings data. Market size did not necessarily matter: economic, political and social development did.

Exhibit 1: Updated chart of selected country data (right click, new tab for large image)

Implicit was the idea that country stability is worth a great deal when investing in emerging economies.

Take the example of Thailand. Until the military intervention this month it had been democratic for 15 years. The journalists say this was a coup based on disagreement over the policy employed against Muslim insurgents in the south of the nation. On the one hand sat the traditional power of the army arguing jaw-jaw. On the other sat the Prime Minister arguing war-war.

Investors may be happy the army lost patience with democratic processes (jaw-jaw being the vastly superior option) but in other circumstances the absence of the rule of law might have been catastrophic for portfolios – and more importantly – for the well being of Thais.

Taking account of the principles represented by events such as the Thai coup is - or should be - an integral part of the answer to the questions posed in the comment. In this case the principle is that the Thai military will intervene in politics when it decides it needs to.

GDP and growth rates can never be the whole answer. Systems - political, legal, social and economic – have greater impact for a populace. And for banal investors seeking returns also. If they can simply be spat out of the pram at will we should all be wary.

NB: As for specific answers to the questions (which are not the hard ones in my view): emerging markets are not in a vacuum and (generally) are highly vulnerable to the US slowing down. But if you think that’s just not going to happen, the Thai shipper (to stick with the Thai example above), Precious, has a nice little niche market, appears historically cheap and, when not having its ageing freighters impounded as unseaworthy, generates good cash from the shipping trade between China and the Mid East. May the force be with you.

Looking beyond imminent US or Chinese cyclical downturns, and if the commenter wants less risk, South Korea is promising, particularly financial services to an ever more prosperous population.

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Site additions: Recent Comments

Wednesday, September 27, 2006 | 1 comments »

Since the site moved to the new beta blogger platform many of its older posts have been inexplicably re-indexed by a number of economics/finance aggregators and readers. These posts now appear "new" despite carrying dates (sometimes) over a year old. In some cases they have attracted comments.

The long and short of the matter is that so future comments do not remained buried, a "Recent Comments" box (courtesy of has been added in the right column. A few comments have been copied and pasted into this new system so it initially does not look lonely but it is otherwise automatic.

There are a couple of bugs, but with some luck these will be ironed out soon (ie I have asked someone for help).

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The German ZEW economic sentiment indicator posted a much worse than expected decline this morning (it is at -22 versus an expected reading of –9) to sit at its lowest level since January 1999.

The survey behind this indicator is answered by a sample of German financiers. Its predictive value of German GDP and service activity is not helpful; but it is a solid, if volatile, indicator of German manufacturing activity 2 quarters out.

If predictions of recession have not been posted here this year it is because there is so much of it about in the press generally and history shows it to be a guessing game. But for the record (and doubtless this is going to come back to bite) the model used here covering the United States flashed red on all fronts for the second quarter '07 on the basis of various August monthly data releases.

The financial sector of Europe’s main economic engine also is now anticipating a US downturn from Q2 2007 and expects German export manufacturing to suffer as a consequence.

How much this is a reflection of US expectations leading - falsely or otherwise - international expectations remains to be seen.

Exhibit 1: ZEW Indicator of Economic Sentiment

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Still worth looking at - but with a proviso since 2006.

As China moves in 2006 to being a consistent net exporter of steel its influence over an important driver of the Baltic Dry Index (BDI) – iron ore for steel production - grows. But China’s massive growth in steel output has come in large part though government intervention. This, to some degree, is distorting the underlying freight rate picture.

To what degree is key. The level and volatility of the BDI is influenced not only by total commodity demand but also by fuel costs, seasonality, fleet numbers, route bottlenecks and sentiment. These additional factors should temper conclusions about the relevance of China’s steel activities on the level of the BDI.

The BDI has in the past been helpful to assessing global economic activity. It is, after all, a reflection of real prices paid to ship production inputs across the globe. Since March this year the index has been on a tear, rising 70%, or 1,750 points.

Exhibit 1: BDI vs 10 Year US treasuries, 2002-2006 ytd

Hang on – aren’t we supposedly on the cusp of an economic slowdown? If 10-year treasuries still lead the BDI (as in Exhibit 1) a dip in the BDI is around the corner. Some other indicators also suggest this may be the case - drops in crude prices, widening US credit spreads, inversion of the 10 year vs 3 month US yield curve, a flat S&P500 versus the prior six months and the Chicago Fed’s National Activity Index all signal below trend growth in the US, the main driver of the global economy.

Meanwhile, though, the BDI marches up.

Some explanation for its rise lies in the summer heatwave in Europe. Several nuclear reactors - in Spain, France and Germany - were shut down or operated at reduced output because the waters cooling their cores were too warm. Increased thermal coke was shipped to fire the power stations plugging the energy gap. However, thermal coke is only 18% of the total dry bulk trade; and these incremental shipments, a fraction within that, cannot account for most of the BDI’s increase.

But huge steel production by usual suspect China, demanding impressive quantities of iron ore imports, might. China’s imports of iron ore represented 13% of total dry bulk trade in 2005. Given that in the half year 2006 Chinese iron ore imports jumped 23% that share has at least held steady and probably risen.

Chinese steel production has correspondingly accelerated. To June 2006 it churned out 35% of global output and has become a consistent net exporter of steel since the start of the year. Which is essentially the same time period over which the BDI has counterintuitively taken flight.

Exhibit 2: Chinese imports & exports of steel, 2000-2006

Image courtesy of the Iron and Steel Statistics Bureau

Unfortunately, China’s steel output is not entirely demand led. A recent study by the American Iron and Steel Institute and the Steel Manufacturers Association argued that China’s production has been driven by WTO violating trade protections and subsidies. While both organisations might want to consider the relative shades of kettles and pots much of what is alleged rings true.

If so, China is in effect artificially boosting freight rates on an unprecedented scale (by having become the largest iron ore consumer and steel producer). Having saved non-sino steel producers from their own chronic overcapacity through large imports over the period 2000 to mid 2004 China is in danger of joining the bane of the industry. And possibly just in time for a trough in the global economic cycle.

Exhibit 3. Global steel production – demand led? Incremental growth is practically all Chinese
Image courtesy of the Iron and Steel Statistics Bureau

Clearly, China is but one factor at work on BDI freight rates alongside fuel costs, ship numbers, seasonality, sentiment, port and route traffic, and global commodity demand / GDP changes. But it is there and is becoming more politically thorny now the country is a net exporter of steel: how does a nation employing over 2 million in steel production* realign its output with demand without social turmoil - and without provoking WTO trading partners?

In the meantime BDI readings should probably be interpreted with a bit of care.

* A 2001 statistic, the most recent found. Since then China's steel production has tripled. Employment numbers have doubtless balloned too.

Sources: Goldman Sachs Global Investment report, March 22 2006; Iron & Steel Statistics Bureau; ABN Ambro Thailand Transportation coverage, August 2006; Qingfeng Zhang, A Comparison of the United States and Chinese Steel Industries; Review of Maritime Transport 2005, UNCTAD

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Note to subscribers

Thursday, September 14, 2006 | 3 comments »

In order to add improved functionality (notably, "Categories") to the site Capital Chronicle is being migrated to the new blogger beta platform. A secondary effect of this is the entirely new look (because re-coding the old look under the new system is making voluntary euthanasia look attractive).

The whole transition ought to take a couple of days only.

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RJH writes...

Codascisys (CSY) demerges at the end of the month. Looking over the financials, sector and management commentary one wonders why.

Demergers in the UK were rare before the 1980s at which point they were encouraged via tax incentives in order to break up inefficient (allegedly) conglomerates.

Market capped at £128m CSY is hardly worth the bother on that rationale although management claim Coda and Scisys are very different animals. The broader argument they offer is that value gains will come through better organisational and incentivisation focus. And of course two boards eliminates difficult discussion over which business is more deserving of funds.

Still, this looks fairly thin logic for a business selling at 20 times earnings. Science Systems removed Coda from the-road-to-nowhere when they bought them from Baan 6 years ago. Growth since has been steady; financially, the company has net cash [for those who still look at balance sheets, the £19m long-term liability is deferred income]; and key ratios have moved up over the last 3 years from an already decent base in 2003. Together things have not been too bad and, despite management claims that operating costs will remain as is, it is hard to believe there won't be increased margin pressure from the split.

On the other hand, the demerger looks likely to increase the odds of a re-merger or bid with/from third parties. A Scisys potentially market capped at circa £35m looks especially vulnerable: in 2003 Vega plc sought to buy them but decided not after completing due diligence. They may regret that seeing Scisys turnaround since.

If so, this scribe advises them to consider early action. Academic research* reveals that the smaller bits of small company demergers outperform the broader market by 27% over the following 780 trading days (the other bit outperforms by 9% but after a very poor first year).

Which, assuming the end-September interims are sound, points investors towards accumulating Scisys equity post-demerger.

*Thomas Kirchmaier, The Performance Effects of European Demergers, May 2003 (Centre for Economic Performance, London School of Economics and Political Science)

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RJH writes...

PartyGaming (PRTY) released strong interim results this morning which have been overshadowed by the arrest of a second gaming executive, Sportingbet's Non Executive Chairman Peter Dicks, in the early hours. An initial hearing will be held for him at 09h00 US eastern and 14h00 UK time.

PRTY is exposed, theoretically, to the United States 1961 Wire Act under which Mr Dicks, like Mr Carruthers of Betonsports before him, has been detained. 'Theoretically' only because the US 5th Court of Appeal ruling in 2002 that the 1961 Act does not apply to online bets on games of chance like PRTY's online poker rooms (as opposed to sporting events) has not been tested in the US Supreme Court.

Rather, the threat of new anti-gaming legislation is what looms over PRTY. Although this scribe sees that outcome as improbable (hard to table an anti-gambling law ahead of other Senate priorities, strong pro-gambling lobby, chances of passing legislation governing moral conduct doubtful) it is possible and would crush PRTY given that 75% its revenues come from United States. Political moods do change, hence the group's furious non-US acquisition activity.

Whatever its chances of making the books, the legislative threat from the US is not going to diminish: there has only been one year since 1999 when proposed anti-gambling legislation has not been framed (last year). And as inviting to investors is the potential opportunity to buy PRTY on these threats (or maybe even shortly after Mr Dick's hearing) owning the equity would not be stress free.

But with great growth, ferocious cash cow characteristics (negative working capital), a market leading position and cheap equity yielding 5% many will take the gamble and, like a brave (or is it caught-in-the-headlights?) quarterback, stay in the pocket.

Unlike the scrambling and heavy selling in June and July by the founders, Chairman, Chief Executive, Finance Director (entire stake), and General Counsel / Company Secretary.

Postscript: There is more nuance to the legislative threat from the US than this post sets out. Several US states have laws specifically aimed at casino games run via the net. How these can be used by prosecutors to charge individuals beyond state lines is entirely unclear. The NY Times has this article covering some of the ground.

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RJH writes...

Abbot Group is a company this scribe wants to like. Self described in its own interims today this way:

The Abbot Group is the largest offshore drilling contractor in the North Sea, one of the largest international land drilling contractors outside the Americas, operator of mobile offshore drilling units and a world leader in drilling rig design, construction and operation.
Executive Chairman Alasdair Locke has transformed and focussed the company to this end since 2001. The happy result is that the group has hit a sweet spot and operates in an environment of high demand for its services. Its sector, notwithstanding the crude-price weakness of the last week, is likely to benefit from that demand for at least the medium term (say 5 years).

Even the political outlook is favourable given the probability of Labour losing the next election: a Tory government may lead to an end of the opaque and arbitrary 'super' taxes on North Sea energy operations which Messers Blair and Brown have imposed when the spirit moved them. That would increase exploration and production activity - and demand for Abbot's expertise - further.

Further, with M&A mania well underway generally, interest from larger suitors (Halliburton, for example) is not unimaginable.

Yet Abbot's transformation is having a cost. Key ratios have declined year-over-year since 2003 and look set to again for the full year 2006.

Exhibit 1: Selected liquidity, profitability, productivity and solvency ratios

The assumptions used for 2006 are that the balance sheet remains as per the interims; full year sales match the 2005 interim vs 12 month split; and that full year EBIT matches the 2005 run rate, plus 10%.

Combining the first four of these ratios via the Z-score formula of Edward Altman, usually a bankruptcy predictor but used here as a proxy of management's performance, produces the following picture:

Exhibit 2: Abbot Group's operational / managerial performance as per its Z-score

Any result over 2.9 is safe; results between 1.23 and 2.9 suggest caution.

The conclusion is that Abbot is a leveraged bet with a vastly expanded asset base (particularly over the last two years) but thus far the productive sales and profitability generation of that asset base is unproven.

Abbot's expansion logic is impeccable and aggressive buyers of the shares will be counting on Mr Locke and team sweating the acquisitions more than has been the case. More finicky onlookers, despite fantastic macro conditions and 2007 forecasts, may want to see actual parallel gains in internal excellence before committing.

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