UPDATE, 31 March (et merci aux Blériots):

Photo credit: BBC



Rejecting calls for his resignation Mr Walsh, ‘mastermind’ of the T5 disaster destined for the pantheon of Amazing Business Cock-ups, said to the BBC on 28 March:

‘We clearly disappointed a number of people and we sincerely apologise.'

Sincerely.



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Operation Finest Hour

Saturday, March 29, 2008 | | 0 comments »


Many a truth's spoken in jest...

___________________________________


Subject: Operation Finest Hour
From: m.oleary@ryanair.ie
Date: Sat, 29 Mar 2008 14:16 –0100
To: r.branson@virgin.co.uk

…and you said it would never happen! Thursday and none of the 16 lifts were working and only one escalator. A mate on the ground said he actually felt obliged to help one Nigerian lady carry her 3 mobile home sized suitcases up the stairs!

World’s favourite airline – hahahahahahaha!!!!!!!!

(btw – like how I put the boot in yesterday?)

These Irish eyes are smiling.

Cheers,

M


___________________________________


Subject: Re: Operation Finest Hour
From: r.branson@virgin.co.uk
Date: Sat, 29 Mar 2008 14:24 +0900
To: m.oleary@ryanair.ie

Bugger me - ‘exhaustive’ trials?!!

Baggage system chaos a particular masterstroke. I heard that one captain actually announced ‘Welcome aboard…but I’m not sure your luggage is with us’.

And I’m hardly believing Willie tried to fob customers off with £100 compensation towards overnight airport hotel accommodation - why doesn't he just slap each passenger directly upside the head? Can't think why I was ever against those open ended overnight compensation rules of the EU...

Blimey, it's like I died and was awarded all those Heathrow slots after all.

Best,

Richard

PS - Can you believe the sprog Sam actually begged me to come out with this story? Sometimes I wonder about him…he's got every episode of Neighbours (digitally remastered) she was ever in for Gawd's sake...


___________________________________


Subject: Re: Operation Finest Hour
From: m.oleary@ryanair.ie
Date: Sat, 29 Mar 2008 14:32 –0100
To: r.branson@virgin.co.uk

Mine’s a Guinness!

250 cancelled flights and counting, 15,000 pieces of orphaned baggage, a delayed victory ad campaign (stop it - you're killing me!) and I personally know one off-duty BA skipper who paid £69 to BMI in order to avoid T5 on his way to France. All they need now is a couple of nipple ringers.

When I think the Economist referred to him as a “house-trained” version of me after his Aer Lingus stint I just fall about.

Re: Sam – could have been worse.

Cheers,

M

PS/ We still on for that trans-Atlantic ticket pricing drink/chat next week?

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An investment overview and company tearsheet have been posted under the ‘Research List’ tab for Ascribe plc, the Alternative Investment Market quoted maker of healthcare software.

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Written 28 March 2008. Consult 'Investment Approach' tab for outline of what criteria gets a firm on the research list).

Writer holds Ascribe plc equity.

Quantitative rating of 60/100, as is, on recorded accounting data. Qualitatively, the company is considerably better than that and sits on a borderline ridiculous valuation in most of the 'in context' ways it can be cut.


Ascribe plc develops and markets health care software aimed at supporting patient, clinical and business processes to health care providers in the UK and internationally (notably Kenya, Australia and New Zealand). The company's year end is June and it next reports in September. Go here for the last set of full year results and here for the latest interims (12 March 2008).

Its admission to this research list is an example of 'criteria flexibility' given that Ascribe is marginally more expensive in price-to-sales terms than would usually get this far. However, this is a company with a free operating cash yield of over 11%; and on harsh forecasts likely to yield greater still come the next full year figures in 6 months time.

Somewhat paradoxically, a point of weakness is short-term liquidity. This is due to £5.6m of deferred income on Ascribe's balance sheet (the other side of customer prepayments), one of the nicer short-term liabilities to have within a total of £10.4m. Still, whilst prepayments are a source of cash funding they come with contractual obligations that can bite back in the event of poor cash management.

Earnings quality is exceptional, driven by the company’s recurring revenue maintenance contracts – 70% of turnover; and where Ascribe have used equity to acquire (but nothing in the last financial year) it has yet to show up detrimentally in its return on assets numbers. In fact, its past purchases appear prudent and revenue driving.

But all is not rosy. Gross margins were off 3 points without explanation last year end (although they recovered at the last interims). And the shares have been crucified in the market following a period of over valuation and recent (but now resolved) contract push backs.

Perhaps to mitigate this much management chatter has focused on order levels and larger order sizes in 2008; as well as upon an apparent health purchasing decentralisation initiative from the government which Ascribe calculate as beneficial to the company.

Yet it will take a lot to stop the shares digging the crater, especially in uncertain times. Moreover, management may talk its talk but order conversion and navigating the political vagaries of government policy are the perennial points of risk for this small health care company.

All to prove but with respectable investment merits to consider.

Exhibit: Ascribe plc tear sheet


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When the Federal Reserve agreed a non-recourse “loan” to JP Morgan of $30bn to do the supposedly otherwise undoable Bear Stearns deal many financial observers must have wondered why. Why, if JP Morgan was prepared to assume Bear’s balance sheet liabilities of 2 and a half times that amount. A normally calm and lucid John Hussman covered the ground earlier this week in a piece laced with indignation.

Now, a few minutes ago, this James Cayne stock sale breaks on the news wires. Do not blame the man for comporting himself rationally. But do wonder if central banks are buying a fabulously woven it's-the-end-of-the-world head-fake. As opposed to truly being privy to information indicating the sticky end of the financial system as we know it.

In the meantime, please consider the purchase of this soon to be released self-help video from Mr Cayne showing how to get out of a tight corner with a little friendly help. Name those other actors assisting at your leisure (and who is that cast in the role of the female lead?)





NB: For the avoidance of doubt (the resemblance is unCayney) the male lead is, of course, Harold Lloyd in the aptly named Safety Last (1923).

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The inaugural company kick-starting the research list is Educational Development International plc, quoted on the UK’s Alternative Investment market.

An overview and company tearsheet have been posted under the ‘Research List’ tab.


NB: Evolution to a cleaner tearsheet format hoped for with time...

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(Written 27 March 2008. Consult 'Investment Approach' tab for outline of what criteria gets a firm on the research list).


Tearsheet below this post.

Rated 65/100 quantitatively, as is, on recorded accounting data. Qualitatively, it has begun its ‘discovered’ phase although the only significant institutional holder is currently Marlborough UK Micro Cap Growth Fund (4.9%). A solid investment with some safe haven characteristics but unlikely to repeat is 2006/2007 price appreciation performance.

Education Development International (AIM:EDD) provides educational qualifications and assessment services for hopeful candidates pursuing vocational qualifications in such fields as finance and information technology (amongst others). Its year-end is 30 September; and the next interim results are released in May. The last set of annual accounts can be viewed here:

One of the first things that strikes when looking it over is the departure of the finance chief in December 2007. He left for a position in a smaller quoted company (Myhome International) whose shares are basically doing the inverse of the strongly performing EDD equity. However, closer inspection does not suggest anything sinister. Indeed, EDD is in what is probably one of the few markets that would conceivably benefit from an economic slowdown.

The price technicals reflect this; the shares were fundamentally good value by 2005; and extraordinary value at the financial end of 2006. The share price has moved to align with this during the last 15 months.

Yet it is still well positioned if not a screaming bargain. It is predominantly a UK company (70%) but with useful continental European exposure and important Hong Kong and Malaysian revenues. On an EPS broker forecast basis alone it is a comfortable ‘buy’.

Against that, the quality of EPS is worse than in previous reporting periods. The cause appears to be cash collection where debtor days have increased significantly. This in turn has had a knock on effect on the cash yield and liquidity ratios of the shares.

Moreover, a weak US dollar does not help; and where it has acquired using paper it has so far reduced its efficiency in sweating sales out of assets. Although management can always point to proportionally better (albeit modestly so) operating profit in 2007 given its asset base it is the same quality-diminished earnings which have made that possible.

These are hardly insurmountable obstacles and seem to be all linked to the 2007 acquisitions. Very importantly for a small cap, EDD has no long term debt. But some integration and execution risk is there and potential buyers ought to bear it in mind when coming to their own qualitative conclusions.

Exhibit: Education Development International tearsheet (IFRS from 2006):

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There is a section at many chemists/pharmacies/drug stores called ‘Embarrassing conditions’ (or words to that effect). Here one finds treatments for conditions such as bladder weakness, wind, piles, scabies, fungal infections, body odour – just name it. The afflicted don’t want to shout about it. Or have the cashier call to the back of the store for the price of the medicine.

So when Thursday comes and one of the calls from the check out counter of the Anglo-French summit is for “full and immediate disclosure” of the extent of the banking world’s mortgage backed securititis it is a fair guess that a queue won’t be formed.

Transparency is obviously key - but so is confidence. Which financial wants to have a Bear Stearns style whispering campaign on its hands that is actually backed by some truth? If governments are prepared to pressure for transparency it only makes any sense as part of a recapitalization deal. That is, in order to define the level of assistance required. An Oh-my-God-let’s-see-how-bad-you-got-it cry in isolation is not helpful.

At its worst stress points the crisis has become a do-we-have-to-bail-them-out discussion. Yet various central bank spokespersons over the weekend were denying or, in the case of the more sensible European Central Bank, maintaining radio silence on plans to buy distressed mortgage backed securities.

The Bank of England’s (BoE) spokesman even said

"The BoE is not, however, among those reported today to be proposing schemes that would require the taxpayer, rather than the banks, to assume the credit risk."
It is all very disingenuous.

A working hypothesis is that internal central banker doubts about the string pushing credit infusion strategy have boiled over with a hesitant consensus now formed that it was always a long shot: the fundamental issue of degraded, poor quality assets sitting on (or nearby) bank balance sheets remains. Now a plan is taking shape and it will involve public money and recapitalisations (this is, remember, a ‘working hypothesis’).

The BoE’s utterance on not risking taxpayer money looks a pointless political hostage to fortune in this context. Where sovereign wealth funds buy or plan to buy equity stakes in financials the polemic is not about public funds in quoted companies but, rather, the wider concerns of insidious, creeping foreign political leverage. Central bankers may want to take note of the distinction and weave the idea of including sovereign wealth fund characteristics into the rescue plan discussions they are currently claiming not to be having.

And you won’t want to be caught short when they make an announcement.


A footnote: an interesting read on a similar (in some regards) crisis is the account of the Deputy Governor of Sweden’s Riksbank of his country’s experience in the early 1990s. The Cleveland Fed also has a useful external review of that same crisis.

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Guest rant is back

Monday, March 24, 2008 | | 4 comments »


His previous outing having attracted fans, GR ushers in the site's new look...

Cadbury’s
Still no real comment from our eagle-eyed city scribblers about the continuing value destruction happening at Cadbury (nor the fact that their chair designate Roger Carr is heavily conflicted [Ed: hope you are prepared to expand]), though the Daily Telegraph did note rather lamely that they might be having trouble getting funding for the deal. I would have thought the demise of Bear Stearns has completely scuppered this, but no: the good ship Goldman’s, Stitzer & Hanna sail on oblivious to all.

To his credit the Daily Mail’s Alex Brummer (18/03) has suggested that it may not be a good deal. But has anyone noticed? The “share owner” meeting to approve the nonsensical demerger has been called for April 11th with the website confidently predicting investment grade capital structures for this. Yet who wants BBB / BBB- rated assets in today's world? I note that the press release makes no mention of interest cover (just the endlessly abused to meaninglessness EBITDA). The cost of this exercise in fees alone would have completely refurbished the Bourneville plant and, perhaps, stopped transfer of production of the eponymous chocolate to Poland.

Somerfield’s
As suggested in this blog recently it appears that the Somerfield's sale is in trouble with reports that it has been left on the shelf with only one buyer, the Co-Op, reportedly interested in the whole chain (& not at the prices suggested). And given that the business only returned to profit this year and made a meagre profit of £26.4m an asking price of something less than a £1bn might be more in order…


Checkout Time for Tchenguiz?
Co-incident with the bad news over at Somerfield Tchenguiz's Laurel pub group is close to administration and M&B shares in which he owns / speaks for 23% of took another pasting this week when downgraded by Lehman... [This scribe is a very minor holder of M&B.]


Smiths Group
Another great British engineering company about to be dismembered is Smiths. Rushed into a sale of its Aerospace business to GE in May 2007, as one analyst noted at the time, the best part of the business was being offered. That business should never have gone on the block.

However, what remains is not to be sniffed at and the previous management did manage to extricate themselves from a joint venture with GE (entered in to at the time of the aerospace sale) for their security scanning business, a growth business if ever there was one.

Still, Smiths' days as an independent company must be numbered since the board chose to appoint Philip Bowman as Chief Executive - an individual whose only motivation appears to be in a sale of the business. He announced decent half year results this week with sales and operating profits both up by 7% despite a flat performance from Medical. To prove his credentials a package with a one month notice period and no share options might be in order, chances of this happening? Zero!


GE
Amongst all the turmoil in the credit markets one major player has been conspicuously quiet. This despite some aggressive practices in the GE Money division which includes home loans there has been barely a peep, granted they sold a US sub-prime mortgage business last year but one does wonder that given their huge asset base and financing requirements that no mention has been made good or bad as to their funding position.

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Maintenance

Saturday, March 22, 2008 | | 4 comments »


You may have noticed; over in days. Hopefully.

In the meantime, while some parts and links may look live(ly) they may merely be resting pending completion and, in some cases, explanation.

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From Dow Jone newswires...

Financial Crisis Is Over, Buy Banks (Dick Bove, analyst at Punk Ziegel & Co)

"The actions taken by the Federal Reserve were innovative, dramatic, and, in my view, brilliant because they went right to the problem," Bove wrote in a note to clients. "The actions being taken by the Federal Reserve are being mirrored by the Treasury, which now has finally grasped the scope of the problem."

"The last time an opportunity of this nature existed to buy bank stocks this cheap was in 1990. The next time will be in 20 years. This is a once in a generation opportunity."
This observer does not share Mr Bove's enthuiasm but admires his chutzpa. Unlike Marketwatch.com community member Inthebusiness (site bio: Fat rich American living the California dream) who had this to say about Mr Bove:
"THIS GUY JUST GOT BACK FOR AMSTERDAM - HE HAS BEEN SMOKING THE GOOD STUFF. I REMBEMER LAST TIME I WENT TO HOLAND, I CAME HOME AND THOUGHT GEORGE BUSH HAD LEFT OFFICE. THEN I REALIZED THE WAS THE MAGIC OF MUSHROOMS. HEY DUDE JUST SLEEP IT OFF, IT WILL ALL BE WORSE IN THE MORNING. GOOD NIGHT AND GOOD LUCK."
Brilliant - Happy Hols!

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Once upon a time the initials 'BB' to this man meant Brigitte Bardot. Now they conjure up the image of a middle-aged, bearded academic civil servant and toupé candidate*. And, today, once that picture takes hold, it is not long before things economic take over - especially commodities, and especially gold. How sad that is.

Gold priced in terms of the S&P500 has steadily appreciated since the tech wreck - see Exhibit 1, below - and is lately accelerating. The economic narrative that might accompany such a graph is voluminous; and there are good reasons to expect the trend to continue: threats of economic malaise, prospects of a dollar collapse, the spectre of inflation, flat gold production with few signs of mine expansion, capped European central bank sales, store of value reputation etc etc.


Exhibit 1: SPX priced in Gold

Yet this is a very, very crowded trade and/or investment - and growing more so with every Fed Fund cut. Today's violent action which saw a price fall of almost 6% in gold reflects that reality.

That volatility by itself might prompt some questioning of the weight in gold's price movements of its fundamental attractions (as well as those of many other commodities). But considered alongside some of the opportunities emerging in other asset classes (c/f for example, the previous post) investors looking for the best possible risk/return profile might do more and seriously pause and wonder.

It is clear now that the ongoing turmoil in financials and resultant stampede into commodities has jointly caused collateral damage and a funds vacuum elsewhere. As with nature, that void will be filled at some point. Sceptics may say it is too early, the timing is wrong, go with the flow, momentum rules and so forth. But in this story events may end up rewarding most those who looked very carefully at what price they placed their cash - and not simply when.


NB: Cassandra is the man on commodities speculation, and the prompter of this scribble

*Fortunately images of the original BB can be found readily enough on the web thereby restoring the natural equilibrium of the universe.

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And now for some good news.

Babies are being thrown out with the bath water, particularly amongst small caps. On his research list of outfits far from operational doom this investor follows several with free cash flow yields in or - on some harsh forecasts - about to be in the range 12% to 20%. And some of these have no debt.

Without indicating these as the only important criteria please accept the general comment that it takes a very special talent to bollocks up a company yielding discretionary cash at 12% with no debt. It can be done, but it is a challenge. The alternative is growth, or (on those kinds of multiples) share re-purchases or some other form of added economic value. And, in due course, the attentions of institutional money.

Now, this observer believes, in a view supported by experience, that there is a 100% correlation between what happens to company fundamentals and what happens to the corresponding share prices. And it is small firms that consistently deliver the most dramatic results (in both directions).

Unfortunately, the timing of the relationship is imperfect for reasons which the prevailing economic context explains rather well. Nonetheless, in some corners of the investment world it is difficult to not conclude that rare, choice prices and chances are emerging.

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In the land of the blind, the one-eyed man is King. But the King still has to get the blind to follow.

Monocular Mr Bernanke appears to have such a problem. Inflation sits at 4.12%, Fed Funds are 2.25% - that’s free money - and yet credit markets will not budge. Still, not all is lost for it has set up a nice little sideline in public/private M&A partnership for the JP Morgans of the planet. With any luck this signals the return in full force of the generalised M&A and IPO boom thereby raising the value of all our under appreciated assets. Yippee - go Visa!

Scour the no-brainer encycolpedia and such symptoms might suggest that the wrong medicine is being over-prescribed. But not, it appears in the immediate aftermath of the cut, to the equity markets.

A Taylor Rule graph update:


The formula may not, like most of the public lately, be privy to the real-time information the Fed reacts to - but it still has its uses.

Stay sceptical.

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When canny market actors such as Joe Lewis end up on the financial crucifix the bystander must wonder. It is possible Mr Lewis, in his 70s, has had his antennae dulled by the comfort of the Bahamian lifestyle. But that would mean China’s Citic Securities has been equally dulled by life in the workers’ paradise.

And now the Fed has decided, post Bear Stearns collapse, that even more largesse is required for the troubles at hand - this time including non-banks and allied to terms of greater secrecy.

This latter feature is both a sop to financials wishing to preserve their reputations which, for some curious reason, they collectively appear to believe are currently held in high esteem; and to stave off depositor/client scrutiny and exit.

The secrecy is, viewed in these terms, a deception upon shareholders and a symptom of a weak banking supervision regime. Banks in difficulty are being allowed to hide and roll over their solvency issues (where they can) in the hope that their catastrophic losses on assets held proves transitory with the underlying security at some future point marketable.

So far the opposite is happening and yet this behaviour is likely to continue until the Fed eventually comes up with a package soft enough to persuade the banks (and other financials who, like Bear will find an indirect way to access Fed support) to take it up anonymously.

Maybe the Fed just did that; but the opacity of the deal destroys confidence more than the fig leaf excuse of protecting banks’ operations merits. Here is the point: it is currently impossible for investors to determine which banks/other financials are solvent. Allowing all and sundry to tap Fed offers can only turn out to be a drag on the broader economy and delay final settlement. The final, long threatened, collapse of Bear is surely an indication of this.

Lack of transparency and official misinformation that this is only a liquidity issue are proving massively misguided and expensive. The insolvency menace has clearly been underestimated and there is little question central bankers will be back to the drawing board. But next time they will more likely be looking at large recapitalization rescues rather than the smaller ones prompt action would have been limited to in a stronger regulatory regime.

It is stretching belief to imagine the Fed has seen a single significant bank balance sheet written down to reflect economic reality before its assorted and hitherto ineffective soft loan package announcements. A problem thus unquantified cannot be solved.

Banks need recapitalization. That requires transparency - and that someone takes losses. Just ask your average shareholders like Mr Lewis and Citic. Buying time and pretending otherwise is wishful thinking.

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Wonderful news! The Fed, according to today’s FT, will not allow the US economy to suffer a deep recession. This is so because officials have the will to make it so. And because the US system, say Fed officials, will not allow problems to fester like those misguided Japanese authorities did in the 1990s.

Anyone who thought accepting pennies-on-the-dollar AAA junk as collateral was, conceivably, a form of fester-promotion now stands disabused. Insolvencies?! Those assets are merely illiquid, whatever that Bloomberg report says about them not deserving their ratings. In Monty Python-speak, mere flesh wounds.

Moreover, there is also the Fed-supporting argument that it is right and proper that it acts as a market-maker of last resort to consider. And who would seriously question that. But one does wonder about those words ‘last resort’ and their definition, timing and application.

The survivors of the Andes flight disaster in 1972 faced a last resort decision not of their own making. In contrast, banks and shadow banks unwilling to take timely losses other than by slow nibble or to seek fresh capital are playing chicken with central bankers and ultimately, arguably, neglecting their fiduciary obligations to shareholders.

If they face a last resort it is a product of their own insensibility to prudence and resultant collective obfuscation intended to buy time. All in the knowledge that the occupant of the Fed Chair is no hard nosed a-hole; only a very clever, reasonable guy trying to do the right thing.

So some dreadful festering (sorry) has, in fact, occurred. And it is measurable on the Nipponic Moral Hazard scale. Perhaps it has even now become a last resort situation for the likes of Bear Stearns, if the rumours have credence. Possibly the financial system as we know it is in mortal danger. But above all a localised problem has over time taken on menacing political and economic overtones which could and should have been avoided; and the price of resolving it all now looks far greater than that originally demanded.

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Update, 14 Mar: For two days, nothing. Then this idle entry spreads like wild fire today thanks firstly to FTAlphaville and two Dutch sites (no names but it would make a great posting). Who would have thought little Bear would have become a star so soon?

Pre-order it now!


Plot: Asterix and Obelix (and their very stern small pet dog named, with typically Gaulish irony, 'Bear') head for the Federal Reserve leaving their village in turmoil – local banker Bonushistrionix and his three sons Caius Creditsclerosis, Odius Toxicvapours and Felonius Cleverdix have over-indebted themselves and the entire village! Local builder Pointlessedifis is in a particularly bad way but hardly anyone is content and tension is running high.

Asterix pleads with Fed Chieftain Benafixus Bankerspensionplanix who immediately confers upon him 200 million litres of Magic Potion against the deeds of a few empty and dilapidated stone outbuildings from the village.

Potion in hand, Asterix and Obelix (not forgetting Bear) speed back to Gaul to bail out the village, the Bonushistrionix clan and pay off stroppy Phoenician energy merchant Opekus Ekonomikrisis.

But will they make it before either the dreaded Caesar Deflaticious and his legions, or the equally feared renegade Roman general Magnus Inflationasaurus, arrive?

And still none of them know if the evil druid Dodgyresultus has spiked the potion…


NB: Profound boredom with the string pushing, as well as shopping for children, will eventually do this to you too.

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Message to Murphy- I can be bothered...today

Amazing scenes Down Under where financials are taking a hammering. Particular attention has fixed upon Allco Financial Group (AFG) whose shares have tanked amid allegations of impropriety. There is anger on the street/beach, people are losing money and it must be some one’s fault.

Funny thing is, when the tide was in, the beers cold and the shrimp sizzled on the barbie no one cared – or at least no one in authority.

Sudden action on the topical deserves a special kind of sceptical scrutiny. So when the Australian Securities and Investments Commission (ASIC) and the Australian Stock Exchange (ASX) decide to get jiggy on behalf of vocal holders of losing equity some guffawing from observers ought to be expected. On this occasion ASIC justifies its existence by choosing to investigate purveyors of rumours designed, it is alleged, to aid their short sale targets. Apparently the ASIC and the ASX are serious in this endeavour.

There is self-interest in this cynical commentary: prior experience has taught this scribe that where the ASX is concerned a complainant ought to expect zero transparency or explanation no matter what level of accounting logic or other proof is offered to them. But, of course, that may be only an isolated experience in a sea of otherwise conscientious regulatory oversight.

The simple fact of life is that a routine and invariably cost-effective regulatory audit and/or inquiry will ultimately benefit both shareholder and corporate governance; whereas expensive insider dealing and share manipulation prosecutions are difficult convictions to make wherever the jurisdiction.

A little early scrutiny of the incestuously cross-collateralised Allco empire, now said to be a victim of the naughty, wicked story-tellers who believe the group was/is recklessly operated, might well have underlined this notion.

Still, the market is doing the regulators' job (again) albeit belatedly. Even a relatively untouched-by-the-topical outpost of AFG (itself part of a yet another Allco entity whose organisational motto appears to be 'never knowingly simple') such as Allco Equity Partners (AEP) has seen its equity fall from A$ 6 at floatation in December 2004 to A$ 2 now. Compared to that 67% drop the ASX All Ordinaries have risen more than 25% over the same period.

As a footnote, AEP’s largest holding in its curiously diversified three-investment portfolio is IBA Health, buyer of the UK’s iSoft plc last year. Which begs the question why a ‘private equity’ fund would commit by far the bulk of its resources to a quoted outfit that individual investors could buy just as easily themselves.

Luckily in these troubled times IBA are doing so well, according to their Chairman last month, that they won’t be needing access to the A$ 58m working capital facility AEP had offered at acquisition. Which is a fine piece of pure fortune if soon to be demised AFG wants its 20% interest in AEP bought out.

Either way AEP will be into IBA for the long term. Obviously (see Exhibit 1).

Exhibit 1: The AEP long-term perspetive in action - IBA Health performance since iSoft acquisition


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How long, Doc?

Tuesday, March 11, 2008 | | 0 comments »


US payroll data from last week seems to have sealed the recession-is-here judgement amongst many popular-press quoted pundits.

Outside the White House and other optimists-by-interest bastions this is not news. Yet it has taken time for the dismal indicators (Exhibit 1) to erode the wall of confidence banks and their cheerleaders must, by definition, maintain: Mr Paulson, US Secretary of the Treasury, is now visibly shifting tone in his recent calls to finance houses to "pro-actively" raise capital in order to buttress balance sheets.

Exhibit 1: Dismal Matrix

And there sits the main problem. The yield curve looks great thanks to frenzied Fed action; but one has to go back to February1982 and the savings and loans crisis to find a wider Aaa vs US 10 year constant maturity spread than what was recorded last month. The next most recent 'wideness' episode was in November 1970 during the Penn Central Railroad failure (Daddy of Northern Rock, if you like, but dealt with far better).

Now there are shades of both eras - plus expensive energy. Same old stories, different twist.

How bad will the pain be? Cannot say but previous drops in the S&P500 (not all of them recession related) offer a very broad indication of what fright can do.

Exhibit 2: Prior SPX frights


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HAL: I know you and Frank were planning to disconnect me, and I'm afraid that's something I cannot allow to happen.

Dave Bowman: Where the hell'd you get that idea, HAL?

HAL: Dave, although you took thorough precautions in the pod against my hearing you, I could see your lips move.
2001 – A Space Odyssey


A philosophical restart to posts is in order.

Many find refuge in the belief that much of the practice of successful investment remains an art, or more of an art, rather than a science. Yet from the moment the ancient Greeks first began insisting on proofs and explanations mathematics has, albeit at tectonic pace, been eroding the romance of the hunch wherever it may be.

In 1997 Gary Kasparov lost to Deep Blue having previously declared a computer would never defeat him. Now he endorses chess playing software. Yet his strong pre-Kaparov Chessmate™ sentiment was based largely on the notion that a computer cannot filter out the noise from core strategic considerations, something the human mind excels at.

But even this gift of evolution can be brilliantly modelled – as, the quants have shown, can much of investing. So long as data relationships can be determined it is mainly a question of uncovering the variables and the rules governing their interaction.

Of course, readers may have noticed that shit happens to financial quants too. And the stink often is from non-linear relationships. But these too can eventually be successfully modelled: à la Deep Blue it is a question of time, resources and an enduring spirit of scepticism. Bottom line, there is art in math also.

Still, in order to frame the scale of the challenge of modelling chaotic systems, ask the meteorologists about the resources required to produce a weather prediction reliable over more than 3 days.

Thus, until Steve Jobs starts selling iPhone-sized non integrity-challenged HALs, investors face an infinite series of short run episodes joined up into a longer version. And it tends to be those moments between the episodes when the educated and informed hunch, allayed to the available data, saves or makes the serious bonus money.

In practical terms, copying the ancients and asking ‘why’ not ‘what’ serves well. As Socrates, Brazilian football great and a doctor of both medicine and philosophy, noted, the model might look true but that is not the same as its being true.

OK, it was the other Socrates. But try finding his backheels on Youtube.

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Sometimes a good guest vent goes a long way:

HSBC:
HSBC received a thumbs up from the city despite posting staggering write-downs in the US and in particular at it’s disastrous foray into the trailer trash credit card and loans business with Household. At the time of the deal it was obvious that this business was dog and that the deal was concoction of the ludicrously titled “investment” banks. Those of us with some sense and no corporate ego could see that the business was a disaster waiting to happen particularly when the business admitted obvious failings, viz:

  • Er we’ve just been fined $500m or thereabouts for misdemeanours but we’ve cleaned up our act;
  • We have a spanking credit model (see HSBC Annual Review 2003) that allows us to accept any kind of junk;
  • We don’t have enough credit collectors because we’re lean and mean;
  • Loans originated from “business partners” i.e. on commission;
  • Management will stay in place and they’ll continue to be paid millions per annum; and…
  • We’ve got a PowerPoint presentation that the investment bank and ourselves concocted over lunch that was staggering in its simplicity, absence of fact and ineptness.
Stung by this I wrote to the then Chairman of the bank and received an insulting and patronising letter from some lackey. Ho hum, meanwhile all went off in to the sunset richer except for the poor bloody shareholder.

Somerfield:
Hot on the heels of announcing the closure of it’s George High Street operation Asda (Wal-Mart’s UK operation) is apparently interested in yet more mostly grotty, High Street stores with a mooted purchase of Somerfield currently owned by a consortium of Barclays Capital, Apax Partners and the widely spread Robert Tchenguiz (see Daily Mail 24/01/08). Quite why any one would consider paying the alleged £2.0-2.5bn asking price for a business that makes £26.4m is beyond me. The much bigger, more profitable and better in every respect Sainsbury’s is worth a positively cheap by comparison with a current market cap of c: £6.1bn.

Mitchells & Butlers
Another blighted company (and a former part of the once great Bass empire before the City whiz kids and our pension funds decided to destroy it) is M&B, in which I have to declare a miniscule interest. It too (like its ex-sister company Intercontinental) has been asset stripped by a “progressive” (excessive) dividend policy and a management more interested in financial engineering than growing the business and in doing so lost the company £274m and most probably its independence. I was disappointed that the recent clear out stopped at the Finance Director Karim Naffah and didn’t include the Chief Exec rolly poly Tim Clarke who shares at least equal responsibility. Mind you, this is the company where Roger Carr is chairman and he’s somewhat thinly spread. He is also an advisor to Kohlberg, Kravis & Roberts. It is outrageous that any public company would have on its board someone who is an advisor to an “investment” bank or hedge fund. If that isn’t a clear conflict of interest then I’m a Chinaman. Incidentally, in case you didn’t know Tchenguiz is an investor here too.

Cadbury’s:
Another once great Midland’s company being slowly asset stripped and set up for a delisting (aka foreign takeover) is Cadbury’s. Here the CEO Todd Stizer (motto “to deliver superior shareowner performance”) aided and abetted by Goldman Sachs has been dismantling the business. Completion of their joint programme will be nicely timed to coincide with his retirement, no doubt. Plans have been knocked off course slightly by the recent market turmoil. Still not to be daunted and keen to keep fees hungry investment bankers happy they are pushing ahead with a de-merger, paring off a business with a reported underlying operating margin of 22.8% (pretty fantastic in this day and age) and creating two businesses BBB rated Cadbury and BBB- business in Dr Pepper. Cadbury (& Goldman’s) have previous form here, cutting off a high operating margin business with their sale of the equivalent European beverages business which had an operating margin of nearly 18%. Keen observers will note this stunning deal was for all of 2x sales.

This must be the most ludicrous time to undertake a de-merger, but not a peep from our on the ball financial press. Still rest assured the conflicted Roger Carr, currently a non-executive director and Deputy Chair and now Chairman designate will ensure fair play all round.

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