RJH writes...

Until the second quarter last year US inflation expectations had been a very helpful leading indicator of equity prices. The second quarter 2005 was also when Mr Bernanke nosed in front of Glenn Hubbard and Martin Feldstein as favourite to succeed as Federal Reserve Chairman. He came as a man supporting implementation of an inflation target.

Coincidentally or not, inflation expectations fell as he became more likely to replace Mr Greenspan (Exhibit A). Yet the Chairman is not, he says, an "inflation nutter" (a Mervyn King phrase): he wants an inflation target harnessed to a policy of "constrained discretion". This would avoid, for example, killing growth as the cost of dogmatically taming prices.

Exhibit A: Bernanke Fear Factor?


Yet it is how unconstrained discretion would be in a targeted regime that intrigues. Belatedly, many equity investors have sold hard, erring on the side of caution by assuming at least some maniacal anti-inflation tendencies on the part of Chairman Bernanke.

Are they right? Rate rises impact two years hence. Given that US rates began increasing timidly in July 2004, continued rises in short-term core and non-core US inflation are probable in a persistently expensive energy context.

Exhibit B: 2% core target? Core & non-core inflation year-to-date = 4.2% and 2.4%


If Mr Bernanke's target is the often referred to core rate of 2% the hard landing scenario of overshooting rate rises is alive and well. Some economists are even increasing the volume on the stagflation thesis.

Inveitable, however, is neither.


Sources: Remarks by Governor Ben S. Bernanke, March 25, 2003; SanDiego.com business news; Briefing.com; FRED (Federal Reserve Economic Data)

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RJH writes...

Another triple witching falls tomorrow. Have things changed for cash index traders following the DAX since this post appeared here a year ago?

There are still no obvious differences in price variance at the aggregate level: the daily points range of all days versus triple witching days displays similar average, standard deviation, median, skew and kurtosis characteristics.

Since December 1990 the DAX continues to trade up on 51% of its trading days; and its triple witching day performances still outperform (click for a larger image):




The following two trading days post-triple witching may also interest (click for larger images):




Make of that what you will bearing in mind the context: a long multi-year bull run to where things stand now, uncertain. Within that, many markets have traded down circa 10% in a string of nearly consecutive declines; and it would be unsurprising to see a technical bounce from perceived oversold positions over the next trading week.

Pending, that is, more macro data.

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RJH writes…Mats, are you listening?

Having utterly ballsed-up an earlier World Cup arbitrage discussion, enjoying the football rather than trying to work it appealed greatly this weekend. This has paid dividends.

Long ago when the scribe was a sous-merde at Her Majesty's Treasury he once minuted a spending department colleague that he "was happy" with the line they had taken for a ministerial briefing. The scribe's chief sent his copy of said minute back to the author with the hand written comment "we are never happy, only content".

Yes, content. In the words of a popular calypso from boyhood, long time we don't fete like this.

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RJH writes...Update: these opinions ought to be read alongside this. This is the end of the line for the CEO, a positive for the shares. However, please read the first comment against this post below for a well-informed alternative ending.

As the dust settles from this morning's announcement iSoft plc stands market capped at £144m with revenues of £200m. Its shares change hands at 60p. The degree to which the iSoft brand has suffered is not obviously quantifiable making estimates of revenue growth even less fruitful than usual.

However, net asset value (NAV) per share at the last balance sheet photo was about 210p - but before assessment of the revolving debt facility, cash burn, backed out revenues and the mooted goodwill impairment. Unkind, back-of-an-envelope calculations suggest that NAV might more correctly be sitting somewhere between 75p and 100p per share. A software firm without important questions hanging over its management's ability and its finance structure would enjoy a premium of 2.5 to 4 times that.

The key to recovery is management's focus on fixing and retaining the Accenture-led NHS contract. In its favour, high profile utterances from the health department suggest they blame Accenture, not iSoft, for the delays.

That lessens the odds of iSoft being removed from the project - which bodes well for a healthier liabilities position and ratings recovery. Nonetheless, one must wonder about a company whose restated accounts show it profitless for at least the last three years.


NB: An aside - the restatement may allow recovery of or credit for prior year tax bills which since 2003 have totaled £5.5m, £6.8m and £19m. The group need to bring in capital - the main reason they sold the Swiss operations last month - and clawing back tax paid is the most lucrative of the obvious options available (the others being freehold property sale/leaseback and the redundancy programme).

The writer owns iSoft equity.

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RJH writes...

Today's change of accounting policy is welcome even if the "business has evolved" justification is implausible: never has necessity more been the mother of invented spin. At least the communiqué was less guarded and opaque than has been the norm.

The long anticipated restatement will likely show breakeven or losses at the operating level since 2003 with backed out revenues pushed forward up to 2010. The restated revenues all appear to carry product licence margins of circa 90%.

Which raises an interesting issue: it is clear the previous accounting regime did not, as last year's Annual Accounts asserted boldly, align performance bonuses and shareholders interests. These bonuses were paid based on earnings per share and normalised profit before tax: and both measures were in prior years grossly inflated by the incorrect recognition of tens of millions pounds worth of 90% margin product licence revenues.

The board has the chance to do the right thing and truly demonstrate alignment of their and shareholders'’ interests by renouncing these "performance" bonuses as wrong.

Repay the money.

The writer owns iSoft equity.

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