Top 5 “We didn’t expect this to happen” quotes, reverse order:

5. General Henri Navarre on Viet Minh General Giap’s deployment of 300 105mm artillery pieces overlooking the French position at Dien Bien Phu (1953)

4. Everyone, the twist at the end of The Crying Game (1992)

3. Everyone, Julia Roberts marries Lyle Lovett (1993)

2. Everyone, Alexandre Vinokourov wins the Albi time trial on this year’s Tour de France days after crashing and taking 30 stitches in his knee (2007)

1. Macquarie spokesman Peter Lucas on subprime fallout being less contained than advertised, losing two of the group's funds A$300m or 25%. But no worries, mate - the funds' underlying assets are "fundamentally healthy" (31 july 2007).

Strange - that's also what Dil said to Fergus.

NB: It's all happening. Add Oddo & Cie ("we took this decision in the interests of our clients") to fellow liquidators Commerzbank, IKB, Basis, Absloute and Macquarie in the 'it was unforseeable' crowd [cf the 'never one cockroach rule' of the last post]. Of the visible in France, AXA and BNP Paribas may also be in discomfort.

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RIP American Home Mortgage, you stood by your approach
Even as your methods invited reproach
Except from peers the subject they would not broach
For which of them wants to be the next scurrying cockroach

NB: OK, that's probably it for the poor verse.

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Shall I compare thee to a margin call?
Thou art more subtle though less temperate.
Rough iTraxx does shake the darling hedges of summer,
And Bear Stearns’ lease hath all too short a date.

Sometime too hot the eye of credit derivative shines,
And often is his subprime complexion dimm'd;
And every REIT from REIT some time declines,
By fright, or forced-selling’s changing course, tanked-out;

But thy eternal cycle shall not fade
Nor lose possession of that danger thou ow’st;
Nor shall Death brag thou couldn’st trim his credit lines
When in eternal lines to time thou has always’st:

So long as men can over-leverage in hand with prime brokers,
So long lives this, and this gives life to thee.

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I’m telling you - this thing can’t be demasted
The soft landing’s been too beautifully crafted

(One trader said to the other)
And, like before, my brother

Buy the dip and it’s not us that’ll be shafted.

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Get the feeling that markets are confronting their own doping scandal today?


FTSE100 (3.15)%
DAX (2.39)%
CAC40 (2.78)%

In progress:

SPX (2.13)%
DJ30 (1.62)%
Nasdaq (2.18)%

10 Year Treasury yield: 4.79%

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Is it naïve to desire a government that does not promote corrupt practice; and which tries, mostly with sincerity, to represent its citizens honourably?

In DESO’s own words they offered “defence exporters an unparalleled network of contacts throughout Whitehall.” In the morally vague arms industry this afforded the illusion of legitimacy to otherwise suspect deals. What looked like a bribe was, in DESO-speak, a ‘special commission’; and accusations of promiscuous propagation of weapons were, in DESO-land, mere ‘security building measures‘.

No wonder British arms exports flourished: years of lavish UK Foreign Office ‘entertainment’ spending in its key embassies; and DESO with its veneer of quasi-legality over the kick-back culture of arms selling.

The scribe passes over the economic justifications for DESO - the academic research is inconclusive. But the scribe’s experience as a Treasury civil servant is not: UK overseas aid decisions have been distorted by arms deals in the past - and the Malaysian Pergau dam aid conditionally linked to the sale of BAe Hawk fighters springs to mind on this count.

It was said at the time that the Thatcher/Major governments were permissive of such arms deals – it was a Tory vice. Yet 15 odd years later a Labour Prime Minister arbitrarily prevents the Serious Fraud Office investigating an alleged massive breach of the rule of law in the BAe Typhoon aircraft sale to the Saudis on the grounds of national security. The deal, named by one of its key piss-taking originators 'Al Yamamah' or 'Dove', reveals a judicial process that has also been distorted.

Plus ça change? Maybe. But the original reason the state created DESO was in order to ’assist’ the UK’s arms industry. This it clearly helped do (insofar as it may reasonably be argued it merited assistance) but at some cost to self-respect. And impartiality: in the Al-Yamamah episode ring echoes of President Eisenhower valedictory warning of the military-industrial complex spreading its tentacles into the furthest reaches of government policy.

But for those without qualms DESO’s demise has little impact on the investment attractions of the large UK defence companies.

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There must be a London Stock Exchange regulation against parting company with your CEO on his nation's Independence Day.

However, Dicom's 4 July speaking in tongues episode over (background post here) the groundwork it laid seems to have heralded today's refreshingly straightforward announcement.

May this be the renaissance worthy of the strong financial and market position Dicom is still in.

NB: Author holds Dicom equity.

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NB: Originally published 23 July. Republished verbatim 22 Aug less balance sheet exhibit pending IBA's new cash offer.

Since CompuGroup tabled their cash bid for iSoft at 66p/share the market has assumed no further bids will be forthcoming. That is, iSoft equity is trading slightly below the 66p offer.

A comparison of the latest bid versus IBA's effort (in the shape of what the balance sheet of either combined group might look like) shows how different the approaches are: CompuGroup is leveraging hard, perhaps in part because of an unwillingness by the founder to reduce his two thirds controlling stake. IBA, on the other hand, has room to make a fight of the sale via additional leverage and could up its offer with a cash component.

As is, it appears that one of these bidders is either badly underestimating the earnings capacity of the enlarged company; or the other is doing just the opposite. If the correct assessment is in between observers ought to ask themselves what the downside is on a punt at circa 64p.

Usual disclaimers.

NB: Scribe holds iSoft plc equity

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UPDATE, 23/7/7: Rash IBA conclusion below. IBA/iSoft significantly under leveraged vs CompuGroup/iSoft. Higher cash & paper counter-offer not unrealistic.

It is fair to say that the scribe has been surprised that iSoft did not attract louder bidding interest from either private equity (PE) or trade competitors. But as this 11th hour bid from CompuGroup Holding AG shows, the large lady has been mezza voce rather than finished.

Look closely at CompuWho?, floated moments ago it seems in Frankfurt, and who's that peeking out from the shadows? Why, it's General Atlantic, big PE iSoft holder and hitherto curiously absent from the fray.

General sold down a circa 66% voting interest in CompuGroup at floatation prices to 16.5% (as of last week). Meanwhile, their iSoft holding, circa 5% and acquired at 214p/share, has long been unchanged. Neat work between holdings, eh? Some claw back is better than none at all.

Cannot say the same claw back fate struck Deutsche Bank, CompuGroup's financial advisers. Starting in January they built a stake over five purchases of 9.05% in iSoft - over 21 million shares. Yet today's offer document says:
"The interests of Deutsche Bank and its affiliates consist of, as at 19 July 2007, a long position of 82,359 iSOFT Shares." para 17.
Wonder where that 21 million went (and at what price) since there is no trace of a transaction by Deutsche on the iSoft RNS announcements between the 9.05% of 28 June and today. Surely all good clean innocent fun as usual though. At least that's what the FSA's market manipulation prosecution success rate suggests.

That aside, a marvel of immaculate timing, planning and (so far as this observer would guess) mostly leak free negotiations all round (despite at least two confidently large stakes built up in the last 3-6 months).

A final investor note - academia suggests (well, some of it) at this point in a cash bid selling your iSoft holdings and clambering aboard CompuGroup AG in Frankfurt. But have a look at the numbers first of which the 2006 accounts are entirely in German. Presumably that will change as the still timid numerical detail (listen to the conf call questions for entertainment on this count) of the purchase plan is fleshed out.

And spare a thought for IBA and Mr Cohen. In the face of cash their tank is surely empty.

NB: Author holds iSoft plc equity

CompuGroup's 'transaction overview' presentation

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A young bull and an old bull survey a large herd of heifers in the valley below. Says the young bull, "Hey, let’s run down there and have us one!” The old bull replies “Nah. Let’s walk and have them all.” *
Canadian Prime Minister Harper, Old Bull if you will, has taken the ambled route since his finance minister Jim Flaherty announced the decision last October to tax distributions of the country’s income trust sector under the wonderfully named “Tax Fairness Plan” (TFP).

Hopes had been high amongst the energy trust subset that concessions/exemptions would be made beyond the 4 year tax holiday. But no - Old Bull is going to have them all.

To put this in perspective, PM Harper broke an election promise pursuing the income trust tax element of the TFP. So when it became law on June 22 the energy trusts must have taken a long hard look at their lobbyists: the bill had survived three readings, a Committee stage and a Reporting stage in the Commons - and the same again in the Senate - all without concessions/exemptions.

Some now hope the legislation, enabled by a minority government, will not survive its creators by much. Canadian minority governments have an average life span of 18 months and so, the thinking goes, there is a potential re-rating catalyst in the offing if the Tories fall before 2011. Mr Harper’s conservative administration is now 19 months old and the latest polls are not good.

However, there is no obviously superior opposition alternative waiting in the wings. Certainly there is no opposition confident of outright victory were an election called next month. Moreover, times are economically sweet stupefying the average voter’s civic motivation; and, in any case, this scribe has yet to see a government, new or incumbent, significantly reduce its revenue by wiping taxes off the books merely out of the goodness of its heart.

If this legislation is ever rolled back it will most likely be on a commodities downturn in a time of political compulsion. It is one thing raising the cost of capital for energy trusts when times are good. But let sector job losses hit or ‘energy security’ become the focus of public attention and electable minds backtrack soon enough.

Through it all, the financially soundest energy trusts appear ‘holds’ at worst whatever form they might choose to take post-2011: until then they yield as much as 15% (think of the wonders of compound interest); sector consolidation seems inevitable as changes to the tax system impact marginal trusts; conversion to alternative trust-like tax structures is not out of the question though tricky (domicile changes); and the Magic of Chinese Demand continues.

* Obviously this is the polite version.

PS: That cowboy suit.

NB: Author holds Canadian energy trust units

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Banking in the UK, together with (ironically) pharma and tobacco, are consistently the top 3 most profitable sectors over most time horizons. But this year, despite earning forecasts generally holding steady, banks (on both sides of the Atlantic as it happens) have suffered a price derating in a rising interest rate environment.

This turn has brought a premier bank like RBS, for example, to the point where it forward yields 5.4% and sells on a earning multiple of less than 10 dropping to under 8 on forecasts. And yet it is still willing to be party to a deal paying 20 times forward earnings for the distinctly ordinary ABN Amro franchise. It is implicitly telling shareholders it can simultaneously grow and cut its bit of the purchase beyond the profitability point despite the impressively high price.

RBS performed this feat with its Nat West purchase in early 2000. But this time there is no obvious domestic overlap where nearly 20,000 jobs can be shed. Its targets look wishful; and without LaSalle as part of the deal the strategic benefits do not seem compelling.

Its consortium partners, largely out of focus in the UK press, appear better placed. Fortis, especially, is pursuing a company transforming deal and wants the core Dutch network where it might be able to do a Nat West. And Santander is after ABN Amro’s Brazilian ops where probably it would do better than Barclays given its existing franchise there. In fact, it is curious, given their relative strengths in Brazil, that Barclays has not tried a divide and rule tactic to beak the opposition by conceding a sale and dealing directly with the Spanish. Or maybe it has/is.

Meanwhile, a rival bid is supposedly in the offing from Citigroup, Banco Bilbao and ING* - a team bearing an uncanny resemblance to the RBS consortium. Oh, to be an ABN Amro equity holder.

In contrast, institutional cross holders in the various bidders must be somewhat concerned. Possibly all the more so with the potential for further rate rises sparked, perhaps, by inflation data appearing over the next couple of days with the US numbers. That would raise financing costs, unbalance the deal’s value assumptions and make banking operations less straightforward and profitable.

Doomsdayish? Maybe. But all in, it is not looking a bad toss to lose for RBS shareholders.

*source, with a pinch of the proverbial, is Dow Jones (13 July) citing German financial newsletter Der Platow Brief. Citi would not comment; and BBVA & ING "weren't immediately available to comment" either.

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So many M&A stories to consider. Yet the most intriguing, although it never left (or intended to leave, it seems) the stalls, is Vodafone / Verizon.

The details and numbers are stunning enough. But it is the ducking and diving of the breakers of the piece, FT Alphaville’s Hume and Murphy, that truly impresses. The ‘how’ they got it is something; but the implied politics of the ‘why’ the Vodafone source(s) sprung are likely even better - possibly the best (untold) chapter of the entire episode.

Back in the markets, speculators have curiously bid up Verizon without, it seems, taking in the full story. A key element of this is the possibility of Vodafone exercising their 'wireless' put: in such circumstances Verizon would be compelled to pay them between $10bn and $20bn (according to FT Alphaville's sources).

Sounds eminently shortable to this scribe.

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With yesterday’s stunning market performances the question on many minds is further crystallised: who is the daddy of this marvel? Is it the US Fed, led by Mr Bernanke, with its apparently successful campaign against inflation in an easy credit world? Optimistically interpreted US retail data? Simple liquidity volumes?

Man and nature may abhor the vacuum of non-explanation but it is the no-daddy thesis of Immaculate Conception that offers the likeliest cause.

That is not to dismiss the significance of the all time highs out of hand: yet a few indices such as the FTSE100 and (more marginally) the DAX and the SPX are not there or not quite over the hump.

Exhibit 1: 10 year SPX tests the high ground

The congestion near these tops may well clear on, perhaps, high volume and small spreads as pro optimists absorb nervous retail sellers. That would be a strong positive. Alternatively, agnostics may be significant enough to push things sideways until the 18 July US CPI data. It being Friday the 13th consult the entrails / runes / tea leaves for further detail.

What is certain is the force (and co-ordination even) with which central banks have spoken regarding the importance of ‘anchoring inflation expectations’; and markets have listened to this palaver attentively. Still, it is worth remembering that old talk tends to work adequately only alongside credible data results.

Exhibit 2: Great Expectations, SPX offset and no longer led

Exhibit 3: Counting on Estella not following or falling for Pip's passions

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“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing...The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be.”
Chuck Prince, Citigroup Chief Exec in interview with the Financial Times 10 July 2007

Let us, led by Mr Prince, chant a psalm in praise of liquidity (with apologies to Psalm 20).

This interview is perhaps the perfect tour d’horizon of the actual state of liquidity affairs from any big lender’s perspective: it may end badly but they are compelled to play.

If there is a debating point it is Mr Prince’s argument that disruptive events now have to be much larger than in previous, shallower, liquidity regimes to cause significant discomfort.

Maybe. An alternative version is that in an ever-wider global economy any given event simply lasts longer as the knock on from say, rising rates in the world’s largest consumer economies, works its way through to the bulk of producer economies. And abundant liquidity may initially mask rather than mitigate the discomfort of this process.

US subprime, Mr Prince’s disruptive example in the interview, is not a chaotic act but a symptom of the shifting US cycle. It is not discrete; and how hurtful it becomes is unlikely to be a straight function of liquidity levels.

Some contextual data:

Exhibit 1, Long term trends in global liquidity

Exhibit 2, Global liquidity and the S&PX500

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Rational man does not, in the aggregate, refrain from crime because he has been taught that it is Not a Very Nice Thing to do. He refrains because the chances of getting caught outweigh the risk.

Much confusion surrounds this simple hypothesis; and some of it seeped into the UK’s Financial Services Authority’s Thematic review of controls over inside information relating to public takeovers published last week.

A well intentioned work best described as 'educative' it is full of best practice and policy; but it hardly adds bite to the UK’s insider trading legislation nor is it likely to improve its record in reducing the sum value of illegal trades. A sample quote:
"Ensure that staff are aware that insider dealing is a criminal offence (this could act as a deterrent to trading)." (page 11, bullet 4)
That a significant cause of serious insider dealing might be staff ignorant to the point of not knowing that stealing is generally frowned upon is a diagnosis Bob Woolmer’s pathologist might readily concur with. But the idea that UK plc has not been healing itself of the worst examples of the insider habit because of poor practices or lack of knowledge bears little scrutiny.

In the man-eat-man arena of markets the FSA plays at the margins with a document of this ilk, cooing and stroking the heads of all, seminar-style. It is greater regulatory confrontation with shady dealings, M&A related or not, that would not go amiss. And in this vein there is something to be said for the Mr G Khan approach of slaughtering or blinding all but one in the village; and dispatching the mono-eyed survivor down the road to the next settlement with the news.

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Is it curious, in the absence of any regulatory or other announcement, that a share with an average trading volume of 250k per quarter experiences 4 times that in the last 2 hours of trade on a single day? Moreover, many of these late trades appear not to have even made the cut for recording before close.

Welcome to the wonderful world of Adventis plc, up 5.6% on a Friday where clairvoyant confidence in next week’s (probably) trading update (or other, perhaps) knows few bounds.

It so happens that the scribe also has great confidence in this business. Just not confidence of the Sure Thing variety.

Steward's inquiry?

NB: Author holds Adventis plc equity

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To gain entry to the Financial Spin Hall of Fame a PR person must be able to at least turn with ease CEO worries like this:
“Our competitors are STILL crapping all over the margins and revenues of our bread and butter business – soon there’ll be no hiding from the fact that we have to Do Something. Or at least show what we are doing is maybe working. Hell, I’m going to have to say something about the £3m already thrown at the problem. How can I put it without inviting irritating scrutiny and suggestions of fire-fighting panic management? Christ, where’s M&A to bail us when we need it?”
into this:
"I am pleased to announce that fourth quarter trading has been broadly in line with expectations. At the same time, the traditional batch capture market remains under pressure from the continuing trends of consolidation and commoditisation, thereby rendering it a segment with diminishing long-term opportunity. Our further shift towards transactional solutions positions DICOM Group well for future growth. We are confident that these changes will position us to grow our business over the next few years into one of the most successful providers of integrated content capture, transformation and exchange solutions globally."
The scribe lives in a perpetual fear and perverse admiration of what the spin meisters of his holdings will unleash in the place of straight talk. The entirely rational basis for this paranoia is that the PR artistes of this morning’s Dicom announcement above, Financial Dynamics, also advised a pre-Weston iSoft plc during its recent near-death trip on a series of pronouncements that collectively might be described kindly (but inaccurately) as disingenuous.

Nonetheless, Dicom is a different case. It is jammed in the spit-roast position between an investment public yet to be convinced of its current “new” strategy; and a management indecisive (or incomprehensive) as to how to invest a cash pile of £35m or 40p per share. For a firm worth £158m calls for special dividends are not far away - especially if the touted double-digit earnings fail to materialise. And 10.01% will probably not count.

Dicom has improved an array of liquidity, productivity and profitability ratios since 2005 and remains an impressive cash machine in spite of the operating discomfort its regulatory announcements and analyst presentations gloss over. A £3m investment (if that is indeed what it ought to be called) in “more attractive growth areas” (as the update terms it) thus looks eminently reasonable and sensible. If only the owners knew precisely what it was for they might react encouragingly instead of with puzzlement at an announcement of lamentably opaque quality.

Does the bulk of public company history not caution against communications strategies that issue the bare minimum information demanded by exchange disclosure requirements? Spirit, please, not just letter.

Addendum: a small idea of one source (Open Text Corporation) of likely M&A interest here in case readers thought the reference was a complete joke.

The scribe holds Dicom plc equity

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How far the success of South African champions Mamelodi Sundowns in attracting FC Barcelona for a friendly last month (which the fortunate scribe was invited to watch) can be regarded as a metaphor for the investment attractions of the country is probably a leisurely Castle Lager discussion. However, some resonance of the country’s actual economic situation could be found in Sundown player Esrom Nyandoro’s comment about what it is like to mark Ronaldhino: kicking (and the scribe paraphrases) the great Brazilian is straightforward. But, unsportingly, he kicks back just as hard.

It is difficult not to be impressed by the economic dynamism of Johannesburg and the appropriately named province it sits in, Gauteng (place of gold). Yet for the hyper worrier investor (guilty) there are usually things to worry about. An abundance, for example, of no-brand name ads carrying the message 'Need vehicle finance?' did not soothe. Nor for that matter, do the banners proclaiming 'Hummer is coming'.

Speculating from these and the tremendous traffic generated by the vast numbers of cars under three years old crawling between Pretoria and Jo’burg during rush-hour(s), many consumers appear to have used the prior relatively easy credit times to park a Mitsubishi Pajero in their new high security residential housing developments alongside the slightly older first-choice (pending Hummer) BMW.

Not that South Africans are alone amongst the world’s citizenry in exhibiting self-indebting luxury good expenditure behaviour when money falls from the sky; but it does look a trickier political balance to maintain in a place where 100 metres across the highway from spanking new industrial zones the sight of families living in the bush under tarps or in corrugated iron huts during winter can be contemplated. Indeed, the actual ANC leadership contest (result due in December) echos this very tension. As does, arguably, the level of violent crime.

For the industrialised part of this two-speed economy, the prime rate sits at 13% and appears, on the latest poor inflation data (6.4% ex-mortgage costs and above the 6% target ceiling of the central bank), set to go higher in August. Household debt to disposable income is circa 73%. And the latest economic indicators for Gauteng (place of gold, remember) indicate a generalised slowdown. Eish (as the locals say), liquidity may be about to kick back.

It is true that these South African mortgage and inflation rates are historically very reasonable. But the scribe suggests that a few things happened globally to debt markets and China in the last decade which might have been more determinant to this condition than the wonderful domestic changes since one-man-one-vote elections in 1994. Unfortunately, the combination of the two may yet turn out to be akin to a Girls Gone Wild Spring Break Special with the consequent post-party come downs.

Which brings the assessor of investability face to face with the obvious point that finances are amongst the least interesting things to consider in a country where politics, economics and society is still utterly dominated, one way or another, by the residue left by the appalling creature institutionalized in 1948 by Doctor of Divinity, Nazi supporter and all-round nice-guy DF Malan.

There are fine potential equity and property investments in South Africa, but they reside in an extraordinary context; and if you have ever wondered what the ‘emerging’ part of the ‘emerging economy’ label really refers to, visit Jozi and balance carefully the risk spoken by dry data alongside the broader qualitative one witnessed by the eyes.

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