2006 Valedictory

Thursday, December 21, 2006 | | 0 comments »

a small venture beyond markets...

Over a decade ago this scribe was the sorry civil servant handling hundreds of replies to lobbyists peppering Her Majesty's Treasury with demands that the UK's overseas aid budget be increased. He saw all manner of arguments, laid out in exhaustive and voluminous detail - including a particularly sincere one from a prisoner in Long Lartin advocating human culling. Some circumstances are indeed self-explanatory.

But the best and most effective letter by far ran two lines:
"Dear Chancellor,

You know the arguments in favour of increased aid and greater debt relief - do the right thing.

In a year like 2006 which witnessed
cash-for-honours allegations; abandonment of bribery investigations because selling fighter jets to the Saudis is for our own good and more important than the rule of law; blank refusal to negotiate; sponsorship of holocaust denial circuses; religious and cultural demonization; dogma; inflexibility; non-respect of sub-judice; speeches of authority made by the knowingly ignorant; assignment of skill rather than luck to most outcomes; arguments that the Royal Family is worth it to UK plc economically; wilful omission of facts; the hard sell; double-standards; skin-saving (or other) white collar fraud/theft; getting away with it because it is possible; and not-my-problem syndrome
it would have been an equally striking request as well as an admirably distilled philosophy. A small, naive wish of this writer is that its spirit is applied more often in 2007.

Season's Greetings, Best Wishes and see you in 2007 (end-year celebrations permitting).

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The next president of France (maybe) Nicolas Sarkozy is also joining in the fun and doing a Baht. Some quotes from his latest speech:

  • the euro's level is "a serious economic error"
  • it's "making European labor expensive and the labor of the rest of the world cheap."
  • "the dollar will have become so cheap that we will have to go and make Airbus in the U.S."
  • it's "pulling wages down"
  • "I won't be the President who allows the Americans a monopoly with an all-conquering dollar."
  • "I want a strong currency supporting a strong economic policy"
  • "We cannot continue to preoccupy ourselves with an inflation which competition has eliminated without concerning ourselves with unemployment, purchasing power and growth."

Of course, canvassing is one thing, governing another: France is still - this has been fact checked - a democracy. That Mr Sarkozy's socialist rival, Mme Royale has a similar position makes it that much more euro-bashingly interesting.

It's all coming to the boil just nicely.

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Thai Capital Controls

Tuesday, December 19, 2006 | | 1 comments »

In September Capital Chronicle posted about the Thai coup arguing that blind pursuit of returns by investors ignoring context would, sooner or later, prove dangerous.
So it has. Buoyed by an arbitrary military intervention last September, foreign direct investment (FDI) poured into Thailand in the hope that "stability" would boost economic prospects. The baht rose to its highest level since, ah, the 1997 Asian Crisis.
Key exporters lobbied for intervention. Arguably in the absence of those inconvenient fetters of balancing democratic interests they have swiftly got their wish. In one fell swoop Tarisa Watanagase, governor of the Thai central bank and a military appointee, has punished FDI with a severe wedgie and hit upon a potentially inflammatory beggar-thy-neighbour depreciation wheeze.
Competing Asian exporters will not be impressed; and if this subsequently proves the thin edge of the wedge of a round of regional tit-for-tat currency manipulation the previous YouTubed post on the vagaries of form may not look so flippant.

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Monday, December 18, 2006 | | 0 comments »

Baseball fans, look away now.

Form has a funny way of abruptly turning 180 degrees; and when I get around to writing about equities going into 2007 it will be tempting to apply that principle.

In the meantime, it was nice to see it alive and well today as India beat South Africa for the first time in South Africa in a Test match. India had lost – miserably and embarrassingly - all the preliminary one-day games and looked to have no chance. Yet they crushed the hosts comprehensively.

A microcosm of that about turn in form came with two balls from trash talking South African quick bowler Andre Nel to man of the match "Gopu" Sreesanth. Naturally, Indian fans have had a field day with this on YouTube.

Laugh? I nearly cried.

NB: Where on earth were the SA supporters? The stands are practically empty...

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Since iSoft announced on 17 October that it was in talks that might lead to a takeover, dealings in more than 1% of the company’s share capital have had to be declared under rule 8.3 of the City Code for Takeovers and Mergers. These make interesting reading insofar as the information allows some limited conclusions.

Take Laxey Partners, for example, self-described as
“a global active value investment management company that pursues one strategy: it actively seeks to close the valuation gap between the share price at which an asset trades and its intrinsic value.”
The regulatory announcements show Laxey holding 0.8% of iSoft, or 1.9m shares. They also show Laxey must have held almost 10 million shares at 17 October. In between they have sold the difference at prices between 32.3p and 47p. iSoft trades at 56p as this is written. In cash terms Laxey are around £1.5m lighter. Panic selling (perfectly understandable)? Or actively closing the valuation gap?

On the other hand, there is New Star Asset Management. They currently control a short interest of 7.1 million shares or over 3% of iSoft equity. They held about 9.3 million shares short on 17 October more than likely sold at much higher prices. However, on visible dealings they have lost almost £730,000 since; and for every penny rise (or fall) in iSoft their holdings move £71,000. Complacently sitting on an overall profit? Or quietly confident there is more downside to come?

On balance, what is visible shows institutions holding significant longs. Capital Group, a US mutual is especially notable for it has bought its 1.96% pretty near the trough (if that is what it was); Barclays is essentially a net 4.1 million shareholder trading a portion of its holdings on iSoft volatility; HBOS is an iSoft banker and holds over 10 million shares; HBK Master Fund, a hedge fund has 12.7 million shares; and Sisu Capital another 8.3 million (no further detail available, unfortunately, on these two).

Significant shorts like New Star and, to a lesser degree, TT International (2.1 million shares) as well as the chancers lurking just below the 1% threshold may want to reconsider their positions. iSoft cannot survive without a deal; but with a market dominant install base throwing off cash like an annuity, products of some promise, operational improvements and a sector growing at 11% CAGR a deal is likely. Sentiment is improving and closing over 4% of iSoft capital in an in-demand market will boost the equity significantly. All the institutional long holders know it.

NB: The writer holds a financial interest in iSoft plc

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Anyone reading and believing the AFX news wire interpretation (written by Simon Duke and the first off the press I have seen) of these results should be forgiven if they think the end is nigh. Mr Duke appears to have a short interest in the shares given his choice to rehash old shock and awe language regarding the dangers of bankruptcy; and to mention only the exceptional operating costs and not the related exceptional credits in his article. Ah, well.

Despite this scribe retaining a long interest, here is a more balanced appraisal for those who appreciate the iSoft context. These results are operationally impressive (break-even post-exceptionals) for a firm faced with overwhelming bad press and in the midst of wrestling with the previous regime's accounting cash hole. Cost cutting is ahead of schedule; and, for a firm who Mr Duke and many others doubt as viable, it has mitigated the top-line impact of its plight well.

The balance sheet is still very weak (expected) with the new financial borrowing facilities heavily drawn (ditto); and cash outflow is large but not as large as feared. It is even perversely encouraging.

Philips, or whoever is supposed to be studying a tie-up with iSoft but didn't want to talk about it today, certainly ought to be encouraged. iSoft will ultimately stand or fall on its products (notably Lorenzo) but a pre-condition is a sound financial structure. Going-concern fixations in the vein of Mr Duke's are lagging indicators and do not do justice to the operational progress made in part by Bill Henry's hiring (a step it appears many iSoft watchers may not have fully appreciated) or the financial rebuilding taking place under Mr Weston. They ignore, too, the importance of the large recurring revenue element of iSoft's substantial install base.

None of which is not to deny that the firm remains on a knife-edge in funding terms. But context should still count for something; and so far this morning the share price agrees with that approach.

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Is another iSoft plc chapter about to be written?

John Wayne starred in The Man from Utah (1934) playing John Weston, a young drifter who thwarts the robbery of a small town bank thus preserving its existence.

In a strange, time-shifted parallel world, iSoft plc’s non-fictional but identically named Chairman has been more or less living that same plot line with the company over the last year.

Although it is doubtful the bonus monies paid out to the previous Chief Executive, Mr Whiston, on revenue subsequently restated (very downward) will ever be returned there is a decent chance Mr Weston will rescue iSoft from the huge cash hole it was recklessly and silently plunged into. On the other hand, one analyst rates the probability of a bankruptcy at 25%.

All may be revealed when the company announces interim results this Monday 11 December. The numbers will be interesting enough, particularly the top line and cash flow; but it is the unsubstantiated story, cited officially by Businessweek late today but broken unofficially (zero proof, see) by the FT’s Alphaville this morning, that Philips Medical Systems is in advanced talks with the firm that may add bite. It is conceivable that an announcement may come with the accounts.

In terms of potential fit, the idea of iSoft and Philips is a runner. Philips lost one channel for its relatively limited health care IT business when GE bought IDX in January 2006: GE promptly dropped the Stentor (a Philips company) imaging solution IDX had until then been offering.

Your scribe spent some time with GE Medical Systems finance and can attest that there is an incentive for Philips to join arch-rival GE in being capable of offering a comprehensive healthcare software solution (read: as in iSoft) alongside their formidable hardware line-up. Were you a potential client, which would you prefer - a bits and pieces or a single all-in-one solution vendor?

I leave you to your weekend with the trivia that, in The Man from Utah, viewers were treated to the unexpected spectacle of the Duke singing contentedly and strumming a ukulele. It would be sweet music for shareholders to see something similar from Mr Weston on Monday. Truth, after all, is stranger than fiction.

If this is a real deal, though, the Devil will be in the terms.

NB: The writer is financially interested in iSoft plc

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A post on India and globalisation is long overdue. This isn't (exactly) it. But Christmas is a time to share.

Courtesy of Australian-based Boymongoose & Nishan Selvadurai

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The Divergence Game

Friday, December 01, 2006 | | 0 comments »

You may be a bit busy today, what with the US dollar in free fall; a contracting US manufacturing sector (according to today's ISM index reading); the Fed's "preferred" inflation reading still stuck (as of yesterday) stubbornly above their 2% comfort zone; a US housing market showing signs of needing to go and have a lie down in a darkened room; and winter storms approaching the US with attendant crude prices above $62.

However, spare a thought for the US bond market as the 10 year yield dips to 4.41% whilst this is typed.

These charts have featured here before, and not that long ago. But when bonds threaten in this manner to diverge from equities and outperform the subject bears revisiting.

Exhibit 1: US 10 year Bond vs Equities (S&P 500), 1996 to 2001

Exhibit 2: US 10 year Bond vs Equities (S&P 500), 2001 to date

Have a thoughtful weekend and give Goldilocks my regards should you see her.

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Will China’s domestic demand play its proscribed role in the soft-landing “decoupling” scenario when/if American consumption demand falls along with GDP output in the next slowdown?

Much of the Chinese economic public relations image rests upon the urban areas of only seven of its provinces/municipalities whose combined population is 306 million souls*. Six of these are highly urbanised and have grown thanks in large part to massive infrastructure and/or capital intensive investments. With nearly 40% of industry state-run that is perhaps not unexpected; and at least in urban centres it can be said that a form of consumption demand exists.

Nonetheless, aggregate domestic distribution of goods has fallen since 1998; and the internal consumption market is, unsurprisingly, extremely fragmented. In rural China – 50% of the population - incomes are falling and are about 30% of the national average (which is $1,500 annually or $5,900 on a purchasing power parity basis). There are just too many farmers for what fertile land is available.

The famed export performance of China too has unexpected characteristics: 90% of it arises from the efforts of foreign owned firms. There is a striking lack of contribution from Chinese enterprises.

Exhibit 1: Foreign share of Chinese exports, 1998 - 2006

Image courtesy of La Caixa bank

In sum, it is difficult not to conclude that the Chinese economy is dominated by urban and state-led investment projects (itself a function of huge domestic savings) of which its 7 most urbanised provinces/municipalities have been principal beneficiaries. Preparations for the 2008 Olympics are a case in point; and the economic benefit from such investments has been ultimately mixed at best. Half the nation is rural and desperately poor; there is a distinct dearth of significant homegrown companies; and the export sector (with its own linkages back into China's savings rate) is in the hands of foreign companies sensitive to final demand above all.

Coupling? They must be considering proposing.

China may be a great new market (and so it's been said for over 400 years) but investment–led internal demand hand in hand with dependence on exports has limits. The balance of probability says these will be exposed in the event of a significant US downturn.

*Shanghai, Beijing, Tientsin, Guandong, Zhejiang, Jiangsu and Shangdong

Sources: World Bank; UN Development Programme; La Caixa bank monthly report for November 2006

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