Jozi Finance

Monday, June 18, 2007 | , | 2 comments »

The scribe is in Johannesburg. Normal posting and email replies resume from end-June.

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“You’re doing great – aren’t you having a wonderful time?” One beach goer, seeing another encouraging a somewhat frail-looking older woman to keep swimming far offshore in some of the roughest, pounding surf he’s seen anywhere exclaims, “Hey,what are you doing? It’s dangerous to send her all the way out there!” he says. Comes the reply, “Buddy, you take care of your mother-in-law, I’ll take care of mine.”
Google-news “bond yields” and a media consensus appears to have formed that a new dawn has broken, the low rate era is over and the bond market is coming to terms with a global economy more resilient than thought.

Yet we have been here before as recently as June 2006 when yields on 10 year US bonds touched 5.24%. Exhibit 1 illustrates.

Exhibit 1: SPX vs TNX, 2001 to date

This reads simply like a new chapter in the same story begun in early 2003. The denouement may be underway (there are some inflationary signs in China, and US capacity utilization suggests the same is en route there) but slowly and paced in annual not weekly calibrations. At current levels US 10 year bond rates, real and nominal, are still astoundingly low.

There is no inflation in the US expectations data; globally, capital dictates terms to labour thus signalling more benign price data; money is (still) cheap and abundant; and it is asset owners rather than lenders that are making hay.

Short of a black swan or a shockingly fierce hurricane season the conclusion that bonds are heralding in a new higher rate era is not an inevitable one. But it is clear that bond prices are diverging from equities more profoundly than at any time in the last 27 years (which is merely as far back as the scribe went); and the only comparable period within that stretch is the span from September 1998 to September 2000 in which the current expansion, alarmingly perhaps, has its roots.

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Economics blog Stumbling and Mumbling recently suggested that the unusual first names of the West Indies (WI) cricketers were possible factors explaining the squad’s poor performances. Entertaining though far-fetched, it allows the scribe to vent on a topic not only economic and financial in nature but one close to his heart.

The key causes of the WI fall from sporting glory are, in fact, a catastrophic financial position, poor administration and a sporting structure at the international level that has a vested interest in fixing player remuneration below market value. That structure is to oligopoly what feudalism was to social organisation.

Professional cricket is conceived (mostly) such that financially weak domestic leagues are the serfs of national “boards” who control the real money (which arises from international matches) and dole out grants to the clubs thus enabling them to stay afloat. The incentive of clubs is therefore to service the requirements of the boards rather than those of spectators. This is why English counties and Australian state sides (for example) can continue to play an abundance of 4 and 3 day games during the working week to largely empty grounds. See, the beauty of centrally planned production exists not only in China.

Unsurprisingly, however, it is market forces that supply the money tap of international fixtures. Television rights, the main revenue stream, are a function of consumer demand. UK satellite group Sky paid the English Cricket Board £220m for its latest 4 year deal; and the India Cricket Board received £352m from Numis (also 4 years) for rights over the greatest viewer market on the planet outside China. The West Indies – population circa 2.5 million - has a somewhat more modest Sky deal. The rich get richer in this scheme with no analogous redistribution valve like the draft system of US professional sport.

Additionally, in this system players are unable to sell their services to the highest bidder as, say, soccer players can. There is only one true buyer for all but the star cricketer – his national board – and competing labour volume is vast. The relationship between board and players is consequentially measured in degrees of adversariality.

Players unions exist but end up distorting the market even more by (for example) going beyond prevailing labour legislation and employing moral suasion to keep markets local and impede the free movement of labour onto their patch (and there are no international club competitions). England’s Professional Cricketers’ Association, for example, is able to produce hymns to protectionism like this, decry European Union “Kolpak” labour market rulings as threats rather than opportunities and yet then turn around and proclaim without irony:
“that players want to see changes to the structure of the domestic game and they believe that it should mirror international competition more closely... players want competitive cricket, all season long. They desire competitions that have intensity, integrity and that incentivise high playing standards throughout their entirety.” (link)
Forced, then, to rely on amateur-based domestic structures an impoverished by contrast WI system is on the back foot from ball one. Attempts to change the systemic obstacles depend on other wealthier boards - and turkeys don’t often vote for Christmas.

It must be said that the West Indies Cricket Board (WICB) does not help itself when operating within the structural restrictions placed upon it. It is not, for example, a model of efficiency or transparency. Some other boards such as the English Cricket Board publish their financial accounts. The WICB do not and as a result doubts surround its financial management abilities (it is known to carry large debts), its sales & marketing savvy (the “West Indies” brand is not what it might have been following a generation of global dominance) and the paternalistic methods it uses in dealing with its players.

One route to financial reform and the rebuilding of trust of both players and public might be an offering on the regional exchanges. Regional pride is strong enough to carry this through but political and cultural sensitivities are such that regional governments would have to be shareholders; and a multi-class share structure including non-voting equity would be required to preclude foreign owner influence over management.

Not that a “new” WICB would be enough - but it would not have to pretend to be. There exists a new financial and commercially driven force in Caribbean cricket controlled by Allen Stanford, the Kerry Packer of the region. Relations between millionaire Texan (yes) Stanford and the WICB have to date not been smooth, largely the result of the latter attempting to mark turf and protect its fiefdom. Yet a revamped, refinanced, open and market-oriented WICB might be able to make something of this unique investment opportunity to create a domestic demand that pays to watch. The Stanford tournament experiment has already turned up notable talent in its first year in the form of Nevisian teenager Kieran Pollard.

There was a similar opportunity in the late 1970s when the original Kerry Packer injected professionalism into world cricket and saved great players like Michael Holding from a life of programming computers for Barclays Bank in Kingston, Jamaica. From there the WI ascended to dominance and lost to no one in the highest form of the game anywhere for 16 years.

Are you not tired, Dear non-Australian Reader, of the same team winning everything?

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Unexpected sibling harmony.

But you may need to wait for the release of Super Mario Galaxy and Super Smash Brothers
Brawl later this year to decide truly if the financials can be sustained.

Or so says the scribe's (infuriatingly usually right) daughter tells him.

NB: Latest Nintendo financials here

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Given the crash of bond prices despite a curious absence of concern about inflation the scribe wonders what effect tomorrow’s CPI data will have on both equities and sovereign debt. Clearly, previous posts indicate that he leans poor number.

Perhaps readers would take a nanosecond and click a choice on the poll below sometime before 08h30 US Eastern Standard Time tomorrow.

An alternative, and more interesting if numbers are sufficient, future version of this exercise could involve a bottle of 2002 Saint Chinian (think prop-forward / tight end but note that is a partial tasting note only) to the luckiest guesser / accurate forecaster. This idea is also code for it is possible to have too much of a good thing in the cellar.

Suggestions from the interested on equitable not-for-profit methods of defraying the postal costs (c. 30€ world-wide) welcome (nominal entry fee?).

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TD Ameritrade (TDA) should indeed merge with E*Trade if only to obtain some useful California mortgage exposure. Shoot, the bad taste of the $111m in bad loans E*Trade reported last time around can only fade with time - just lie back and think of the revenue diversification. Jana Partners and SAC Capital know a good thing when they see it; and what's good for them is surely good for shareholders.

However, as a mere holder of a United States TDA account the scribe has more prosaic concerns about its mastery of core operations than with whom it jumps into bed next. Premium discount brokers must be more than mere cheap fillers. Their service must be sound; and client accounting bullet proof.

Yet consider these gems in reply to why TDA chose to ignore a double taxation agreement contrary to its previous practice and to the detriment of the scribe:
"Our system shows that we do not have a W-8BEN on file for you, which is why you see the foreign tax withholding posted to your account. The W-8BEN is an IRS form that is required for Foreign Tax Status customers."
Ouch. The reflexive get-a-grip-of-your-paperwork-Sir approach. One email reply later:
“We apologize for the confusion. We do have a valid Form W-8BEN on file for your account.

The dividend payment you are inquiring about was paid from a foreign company located outside of the US. As such, any dividends it pays to shareholders outside of that country are subject to that countries' foreign tax rate. This rate of taxation is determined by that country and the withholding is done at the source of the dividend payment, not by TD AMERITRADE. We are simply reporting in your account the amount that you received and the amount that was withheld from the payment.”
Polite, simple, classic and disingenuous. The I-wasn’t-even-there-Guv defence with a touch of assertiveness tossed in for good measure. Pressed again this was dispatched by the broker:
“When reviewing your account I am showing that France has a reduced tax treaty with the United States. This reduced rate has been applied to your account, however the security in question is a Canadian security. The reduced tax treaty does not apply to two foreign countries. The withholding amount in your account was done correctly.”
Not bad. The misdirection-and-not-made-here gambit with a maintained level of assertion. But would they manage to go a logical step further and simply deny the appropriateness of the applicable treaty? Full of hope, the scribe pushed back and got this beauty:
“The treaty between Canada and France does not apply to your TD AMERITRADE account because the dividends in question were paid from a Canadian company to a US brokerage account. Therefore, it would be the US and Canada treaty that would be applicable. However, because you are not a US citizen, this treaty rate does not apply. The withholding in your account on the Canadian securities is correct.”
Brilliant, conceptually intriguing but perhaps betraying some irritation. It was at this point suggested to TDA that the day the location of the holdings rather than the residency of the beneficial holder was the basis for the taxation of dividends would be the day that tax shelter specialists around the globe became a redundant species. After a longer pause than usual came this:
“I have spoken with our dividend department about your May payment…and they found that the dividend was withheld on incorrectly for all payments. They will have it corrected and reduced to the 15% withholding rate. Thank you for bringing this matter to our attention and I apologize for any inconvenience this may have caused you.”
TDA are the third largest US broker with, presumably, the third highest number of foreigner-owned accounts. Think this client subset ought to be worried about TDA's tax knowledge?

Good luck to Jana and SAC: the scribe is already considering other brokers (suggestions welcome) as he expects the hedgies, whatever the outcome of their current campaign, are too.

Si, Barone.

UPDATE: TDA have written since this post asking what can be done to keep the scribe put.

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Update, June 2, para 3 & 4

Until now those important but little regarded management tips that not everyone who shits on you is your enemy and not everyone who gets you out of the shit is your friend have been useful guides in this ongoing soap.

But then CSC, invoking the noble cause of saving the NHS, held [Ed: allegedly] fascinating internal US-Euro pole discussions a scant month after agreeing in principle to the iSoft/IBA transaction and decided that a distinctly well-aimed bowel movement was actually preferable.

It now seems that CSC has itself been manoeuvring in the style of JR Ewing, late of Dallas fame, to take the cake for itself. CSC has, it looks like, been perverting the iSoft auction process from the very start. So much for bona fides: robber-baron capitalism is alive and well.

If Mr Weston is correct, CSC's behaviour, even allowing for the generous ethical margins of capitalism, is shameless; and their inadvertent argument to be considered alongside such luminaries as Ebbers, Scrushy, Nacchio, the Rigas', Skilling and Martha Stewart merits serious consideration.

At the very least CSC professions of having the best interests of the UK's National Health Service at heart appear even more hollow and self-serving now than they did initially.

Author holds iSoft equity

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It is bittersweet to be consistently and categorically stopped out of a short hedge on a portfolio to the point where re-hedging begins to become a debating point: but it seems that unusually wide margins are being used to interpret US macro data (including today’s) such that optimism and liquidity consistently carry the day.

With core inflation being the focus of Federal Reserve attention the proof of this economic & market miracle will be in the eating of the next quarter’s PCE, CPI and variants thereof numbers. Why next quarter?

Exhibit 1: US Core CPI vs Capacity utilization. Again.

By end September sentiment might well have changed along with investment returns expectations.

Or maybe this time it’s truly different and the fuddy-duddy cautious crowd just refuses to see the Good Thing before it.

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At last, a non-iSoft plc entry

Months ago the groundwork was laid for an equity investment in a Spanish IT group quoted stateside. Company finances were scrutinized; background information sought from a contact with pertinent Sevillian knowledge of the controlling family; and assessments formed of the small float, Fidelity’s large stake, the engineering/construction parent and its domestic Spanish market base. It was in the end a “Go”.

Enter Icelandic-controlled UK bank and straightforward instructions regarding a money transfer to a US broker. These were not followed, nor was the oversight picked up and sorted for 6 weeks. Meanwhile the target equity rose a quarter and the opportunity was mostly lost.

That firm was Telvent (TLVT, Nasdaq) - also notable for having royalty sit on its board. And since sucking it up over this opportunity cost (now >30%) the scribe has undertaken plenty of reconnaissance for a replacement. All of which is the lead in to a most interesting little Israeli firm, Ness Technologies (NSTC, Nasdaq).

It is true the scribe has recently acquired equity in NSTC but, please, this is not a recommendation – Ness has under performed since coming to the Nasdaq; and there are plenty of risks listed as per SEC regulations in the company’s last 10K. Along side these must also be considered the increasing commoditization of IT services as well as challenging remaining-year targets for Ness.

However, any CEO (Mr Sachi Gerlitz in this case) who when asked during a conference call to explain his firm's high attrition rates in India can answer “It was just bad management” and spend the next minute or so candidly criticizing his own outfit (before outlining the corrective action made) is a breath of fresh air.

Thus the space between conf-call sweetness & light and outright contrition is now occupied by at least Mr Gerlitz whose middle name, Issachar, means, “rewards will come”.

Fortuitous? Maybe.

*Appears Ness benefits also this US am from a JP Morgan recommendation.

Author holds Ness Technologies equity

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