Greece can go - but avoid a bigger euro break-up

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. Again we face a sea of uncertainty from across the Channel. Is there any way we can avoid a nasty outcome for Britain? Sir Mervyn King...

Sell Facebook

Facebook is going public with a valuation of $104 billion, although they are only selling $16 billion worth of shares. Here's a tip. At that price avoid it like the plague. In fact, short the plague. Put all your assets into shorting the stock.  The price won't last, just like the radioactive decay that was Lastminute.com. And here's why:

Capped Revenues
Facebook makes its money from selling advertising space based on the information supplied by users. And it says it has a lot of users, about 845 million. So far, so smart. Facebook is currently valued ...

You couldn't make it up #94

It's been a pretty busy week here at the Financial Crimes with a lot of incoming readership from Zero Hedge, all because of a post I made a few years ago about Matt Zames, rising star at JPM.

Well it seems that not a lot of people spotted that Mr Zames was fingered in a court deposition as having suspicions about Bernie Madoff 18 months before the NY District Attorney got wind and closed him down.  Zames' suspicions were strong enough for him to mention them to a JPM risk officer, but obviously not strong enough to go to ...

Gender, science & stereotypes

Paradoxically, this post on gender stereotypes actually reinforced one perhaps unjust prejudiced stereotype I have - that female/feminist writers are apt to rely on unscientific anecdotes and focus upon trivial everyday irritations. This is unfortunate, because rigorous scientific thinking about stereotypes suggests that women have a genuine grievance.

This paper shows what I mean. Researchers got subjects to compete in a task in which it is thought that men do better - mentally rotating different shapes.

They found that women did indeed do worse than men in such tasks, but only when they knew their competitors' gender:

Information on rival’s ...

Austerity v Growth

I have appeared recently on Newsnight (23 minutes in), ITN News and BBC News talking about the debate over austerity v growth.

I also appeared on Robert Peston’s BBC2 programme about the Eurozone crisis - The Great Euro Crash.

These appearances were prompted by the Eurozone crisis coming back into focus, and in particular by a period of a week in which the Dutch government fell; elections in Greece failed to produce a government, and in particular failed to produce a consensus which supported the austerity measures which Greece had agreed to as part of its last bailout deal; and ...

Weekend reading: Good and bad news travels fast online

Some good reads from around the Web.

I have to use this week’s Saturday morning piece to point readers to an update to our post about Vanguard funds and Interactive Investor.

The plot thickened almost as soon as we posted that article. Initially prompted by Monevator readers’ comments, it was soon fueling even more confusion among others.

Vanguard funds that were seemingly available on Interactive Investor’s systems – and confirmed as such by staff – turned out to be part of a limited test program, not yet permanent additions to the iii stable. Please read the updated intro to the ...

Everyone in finance should read David Bermingham’s “A Price To Pay”

By Rowan Bosworth Davies White-collar crime, and particularly fraud and wrong-doing in the City of London, has been ignored by regulators and the judiciary for too long. The global financial crisis has highlighted how, if left unchecked it can cause almost incalculable damage to ordinary people’s lives and the wider economy. The biggest disincentive to [...]

A defence of austerity

Is there anything to be said in defence of the coalition's fiscal austerity? Martin Wolf and Jonathan Portes think not. And the Tories' usual defences of their policy seem inadequate. The idea of expansionary fiscal contraction has come as close to being refuted as any macroeconomic idea can be - at least in terms of its relevance here and now. The government's claim to be "fiscal conservatives and monetary activists" is undermined by Osborne's failure to change the inflation target. And the idea that austerity is necessary to retain the faith of bond markets is, at best, an ...

They just keep coming

It's pretty hard for a bank to lose a billion all of a sudden, but when, like JPM, it is hiding a hedge fund amongst its federally insured businesses, it happens very quickly as the $2 billion loss of less than a week ago seems to have doubled.  A billion here, a billion there and pretty soon you are talking serious money.  much more of this and JPM will be looking for a new CEO.

Things worth investing in: Art

Most people assume that in order to collect art you’ve got to have millions of pounds to squander away. This assumption is entirely wrong and in actual fact it’s better to collection art from new artists in order to maintain the industry and showcase new talent. If you have a passion for art collecting it could bring you great pleasure and could be an extremely beneficial investment.

There are a couple of things you should think about, however, before you decide to start collecting art.

How do you start?

First and foremost, if you are considering ...

Euro woes advance risk sell-off

Previous posts suggested switching from a neutral to defensive stance on equities in response to a fall in a global leading indicator derived from the OECD’s country leading indices. The thinking was that such a decline would confirm the monetary forecast of a slowdown in global growth from the spring, implying increased headwinds for risk assets.

The signal was duly delivered last week – see here – and has been followed by a 4.3% decline in global equities, as measured by the MSCI World index in US dollars. Stocks, however, had already fallen by 6.1% from a 19 March ...

What we’ve learned from Green Office Week

 

When it comes to making your office greener, it’s the little things that count. Small changes in work habits can make big changes for the world’s environment, and doing your bit may just contribute to a healthier planet for all of us.

Although many of us would love to make our offices more environmentally-friendly sometimes it’s hard to know where to start.

Taking part in Green Office Week 2012 has been a great way get started and it feels like we’ve learned many ways to make a difference. So ...

Volatility and Premiums

By Eugene F. Fama and Kenneth R. French

Understanding volatility is crucial for informed investment decisions. Our paper explores the volatility of the market, size, and value premiums of the Fama-French three-factor model for US equity returns.

Volatility and Premiums in US Equity Returns (PDF)

Markets react to Greece news

 

In the aftermath of elections, Greece’s future as a member of the Eurozone looks doomed.

Greece’s place as a member of the euro club hinged on the country sticking with stringent austerity measures. Although no overall victor emerged from the election, the mainstream parties that had supported austerity were punished.

It is possible that another election may have to be held in a few months time if a ruling coalition can not be formed.

This political instability has led to Greeks scrambling to withdraw their money from the banks, prompting fears that the ...

Sexism, deunionization & inequality

Is sexism partly to blame for the decline of trades unions? A new paper suggests so. It finds "a negative and statistically significant link between workplace union density and gender diversity" and says:

The increase in the labour market participation of women in the face of gender discrimination may increase friction between female and male employees within the workplace. This may, in turn, pose challenges in the way of coalition building, which unions need to achieve in order to succeed.

In other words, it might be no accident that the increase in female employment since the 70s has coincided with ...

Wine Investment: splashing money into commodities

 

In the world of investments, probably the most widespread piece of advice is to “diversify, diversify, diversify.”

And in your average investment strategy, this would be accomplished by creating a portfolio investing in a number of different industries. However, there is a lot more to the financial world than just playing the stock market.

Considering on the type of portfolio an investor is looking to build, it can also be a good idea to look into the possibility of alternative investments.

Commodities

SWAG investments, or silver, wine, art and gold, as well as coffee and oil have ...

Never mind, there's always another time

We note from the Court Pages of the national newspapers that Queen Sofia of Spain has been ordered to down turn an invitation from Queen Elizabeth to a Diamond Jubilee lunch for the world's sovereign monarchs because of Spain's persistent niggling over Gibraltar.

Queen Sofia had earlier accepted the invite to tomorrow's (Friday's) celebration at Windsor Castle, but in a last minute snub by Spain's government she has been told not to attend because it would be "inappropriate in the current circumstances".

Never mind, perhaps she would like to come back next April to celebrate ...

UPDATED: Vanguard funds are NOT on iii

Update 18 May 2012: Since this post was written, we have been informed by Interactive Investor that Vanguard funds are NO longer available on its platform. We are told that the company is piloting seven Vanguard funds to ensure its systems work, but will be removing them at the end of testing. We’re advised to inform you that “they will be not be available until further notice.”

We at Monevator are sorry for contributing to this confusion, which was prompted by the fact that readers kept telling us that the funds WERE available – reasonably enough, because they saw them ...

Yahoo! CEO! quits!

The Chief Executive of Yahoo! Scott Thompson has  resigned two weeks after it was revealed that he did not have a Computer Science degree as claimed, but an accounting degree. Which is a shame, because his CV is filed as part of the corporate filings with the SEC and that is a bit bad.

His real crime of course was to have such an appalling moustache. It takes a certain panache or dress sense to carry off the modern business-suit-with-no-tie look.  It rarely works, but your chances of success with a '70s style Mexican dollop of fluff on the top ...

Guest post: Why I’ll buy 40 random stocks when the FTSE hits 4000

Monkey strategy

Pete Comley’s new book explains why private investors do so badly in aggregate, and how understanding why can help your investment decisions. I asked him how his research influenced his own investing strategy.

There is an old joke about how to make a small fortune on the stock market (by giving a large one to a stock broker). Having spent the best part of the last year researching and writing a book called Monkey with Pin, I think I might be able to rewrite this joke as:

How to make a small fortune on the stock market ...

Good news on jobs, bad news for Mervyn

This was Sir Mervyn King today, presenting the Bank of England's latest inflation report: "Output in the United Kingdom has been broadly flat for a year and a half. It remains more than 4% below its level at the start...

Dovish UK IR suggests QE hold was tactical

The May Inflation Report suggests that more QE is in the offing but the Bank of England is reserving its ammunition until the fall-out from the Eurozone crisis becomes clearer. The Bank, however, continues to deny any responsibility for improving credit conditions, despite believing that credit constraints have contributed to supply-side weakness.

The Report downgraded the Bank’s growth forecast while maintaining a projection of below-target inflation in two years’ time. The mean two-year-ahead inflation expectation based on unchanged policy seems to be 1.8%, the same as in February, based on “eye-balling” the relevant fan chart. This raises the ...

Unemployment: a river not a pool

The ONS released some important data today that deserve more attention - the unemployment flows numbers. These show several points of interest:

1. In Q1, 530,000 people moved from unemployment into work. That's over one-in-five of all the unemployed. Even in a depressed economy, folk have a fair chance of finding work.

2. In the same quarter, 342,000 moved from economic inactivity to work. These represent 15.1% of the economically inactive people who'd like a job. The chances of moving from inactivity to work are not much lower than the chances of moving from unemployment to ...

FSA’s Verrier ban only scratches the surface at BGC Partners

May 16th, 2012 The Financial Services Authority today imposed a lifetime ban on Anthony Verrier, a senior executive at interdealer brokers BGC Partners, who two years ago was described by a judge as a liar with an extraordinary proclivity for “losing” Blackberries and mobile phones. On March 18th, 2010, Verrier (pictured right) was found guilty of orchestrating [...]

French Connection in 2 minutes 9 seconds

In for the long haul

Stephen Marks, French Connection’s chairman and chief executive, has just experienced the most difficult winter season in all his years in business. That’s saying something considering he founded the fashion company in 1972, and rescued it after the recession of 1989.

-

Its a cliché but French Connection, or at least FCUK was an iconic fashion brand. It’s sold wholesale internationally and through the company’s own stores and department store concessions in the UK, primarily, the US, and recession-bound Ireland, Span and Portugal. The company also has two stores operated as joint ...

Restoration man

Banking on experience

Stephen Marks founded French Connection in 1972, rescued it from the recession of 1989 and is currently turning the company around again. The bad news is it needs turning around…

The good news is he has the experience to do it and the value of his shareholding is 32.6 times his annual salary, giving him a very big incentive:

Redefining French Connection

Walks like a net-net, talks like a net-net, but it isn’t one

Leases are not only key to interpreting French Connection’s financial position, they affect valuation.

According to the definition French Connection is a net-net, the ultimate bargain, because the balance sheet value of its current assets, those most easily convertible into cash, minus all liabilities is a fraction of the share price. This was Benjamin Graham’s rough proxy for liquidation value. Quite possibly the company could stop trading, sell its assets, repay its liabilities, and still have more than enough money left over to justify investing ...

Leases key to retailer’s financial position

Flawed fortress

Leases are key to the interpretation of French Connection’s financial position. With no debt and no defined benefit pension scheme it has very few liabilities on its balance sheet. Bring off-balance sheet obligations into the analysis though, and ratios relating to borrowing change alarmingly.

The lease commitments should be discounted to account for the fact that some of them will be paid many years in the future, but its a vague calculation requiring estimation of how long the leases will be paid for (the notes to the accounts only disclose the commitments falling into three bands, less ...

Greek bank depositors, not voters, key to EMU future

Press reports of faster deposit outflows from Greek banks accord with developments on the ECB’s balance sheet last week.

“Other claims on euro area credit institutions denominated in euro” – a category that includes the Greek and Irish emergency liquidity assistance (ELA) operations – rose by €3.7 billion in the week to Friday. This may reflect Greek banks borrowing more to plug a funding gap created by deposit flight.

Greek banks are unable to increase borrowing under the ECB’s regular programmes (i.e. refinancing operations and the marginal lending facility) because of a lack of higher-quality collateral. Regular lending ...

Ambivalent about French correction

Little strength in numbers

French Connection‘s 2011 results seemed to herald a recovery, but the fashion retailer has suffered a French correction. The good news is it’s still profitable. The bad news is profitability has fallen to meagre levels when investors expected an improvement.

My spreadsheet shows an F_Score of four out of nine, five really because the share issue was minuscule and part of executive remuneration as opposed to say, a fund raising, so it’s is no reflection on the financial strength of the company.

An F_Score of five is the minimum I require to add ...

Meanwhile, in the real world

The argument that very low gilt yields mean the government should be borrowing a lot more to fund capital or other spending has been around for a while, though nobody knows how much more borrowing it would take to trigger...

The Case for a Financial WikiLeaks

By Brett Scott May 15th, 2012 (edited May 16th, 2012) The greatest barriers to financial whistleblowing are social and economic, not legal. Fear of being shunned by colleagues, passed over for promotion, bullied and harrassed, summarily dismissed and even shut out of Wall Street or the City for life plays a big part in dissuading [...]

Financial Times Interview

EFF: Last week I was interviewed by James Mackintosh from the Financial Times. We discussed the relevance of market efficiency for investors, the definition of market "bubbles," and measurements of active manager outcomes. Watch the seven-minute interview here: Defending efficient markets (Financial Times).

The coming crisis of Conservatism

Tory ministers have told British business to stop whinging and work harder. These remarks are more significant than generally thought.I suspect they are the bewildered howls of frustration of men who realize that their god has failed them.

What I mean is that, for at least 40 years the central tenet of Conservative economic thinking has been that if only government could "get out of the way", entrepreneurial spirits would be unleashed and the economy would grow.

This belief has not always been wrong. But it is now. Record-low interest rates, a quiescent labour force and the (prospect of ...

Sluggish UK trade performance cautionary for Greek devaluationists

Officialdom and the consensus cheered sterling’s 2007-08 collapse on the grounds that it would speed economic recovery. Posts at the time suggested that capacity and credit constraints would prevent a major expansion of tradeables output, implying a bigger boost to inflation and consequent squeeze on real incomes and spending – see, for example, here. The net impact on the economy, therefore, would be negative, at least in the short to medium run.

Three years on, there is little reason to revise this assessment. The trade volume response to the lower exchange rate has been muted – net exports strengthened by 0 ...

Sluggish UK trade cautionary for Greek devaluationists

Officialdom and the consensus cheered sterling’s 2007-08 collapse on the grounds that it would speed economic recovery. Posts at the time suggested that capacity and credit constraints would prevent a major expansion of tradeables output, implying a bigger boost to inflation and consequent squeeze on real incomes and spending – see, for example, here. The net impact on the economy, therefore, would be negative, at least in the short to medium run.

Three years on, there is little reason to revise this assessment. The trade volume response to the lower exchange rate has been muted – net exports strengthened by 0 ...

An equality multiplier?

EU rules could cost women drivers

 

There’s a change coming at the end of 2012, and it doesn’t bodes well for women drivers. From December 21 (uncannily coinciding with the supposed Mayan ‘end of the world’ prophecy).

The European Court of Justice (ECJ) has ruled that gender will no longer be allowed to be considered when car insurance companies work out how much premium people pay.

This has had very mixed reactions, as it represents a big leap for gender equality, but it also means that premiums are likely to increase for women, making people wonder if the ruling is fair ...

A quick guide to asset classes

One of the most fun things about managing your own investments is coming up with an asset allocation strategy to diversify your portfolio. It’s a chance to tinker like an alchemist to find that blend of asset classes that’s going to help you weather the storms ahead, and see you dancing upon the sunlit plains of financial independence some time yonder.

That’s the dream, and in the weeks ahead I’m going to write a simple guide to devising your own asset allocation.

But first we need a primer. What are the asset classes that make ...

French and German GDP - a welcome puzzle

There is some small eurozone relief in the fact that German gross domestic product rose by 0.5% in the first quarter, while French GDP was flat. Both countries have avoided the commonly-used definition of recession: two consecutive quarters of declining...

The Euro is doomed

I was surprised to see the headline in Friday’s Financial Times “Seven days which shook Europe” looking back over the fall of the Dutch government, the election of Francois Hollande in France and the Greek elections. As I have been predicting for more than a year that Greece will leave the Euro and that this will produce a domino effect which will probably see Portugal, Spain and Italy follow suit, I am surprised that anyone could be surprised by these events. But then I suppose I don’t spend my life swallowing a diet of PR spin from the ...

Three earnings yields

Three benchmarks for market value

Premier Foods’ earnings yield is 15% if you divide earnings by price conventionally,  6% if you divide earnings before interest and tax by enterprise value, a method popularised by Joel Greenblatt, or 7% if you multiply median return on capital by how much you’re paying for the capital, the method I chose when I evaluated the company.

Which is best?

An earnings yield of 15% suggests that investors buying at the current price might expect a return, paid or reinvested in the company of 15%, which makes the shares look cheap (it’s the ...

Friends and money

 

The age-old advice to never lend your friends money is sometimes ignored but always the best advice in the end. You could be the best and closest friends, but a simple money lend can always go wrong.

It’s along the same lines as: “Don’t move in with your best friend” and “Never go into business with family”. These gems of wisdom are often tried and tested and in some cases, proven wrong. But the average person with average friends should think twice before handing over any cash.

Friends and money come together in awkward situations in various forms ...

Wrong-way speculators buy Treasuries

Speculators in US Treasury futures have a poor timing record and last week went long, suggesting a rebound in yields.

The chart aggregates the positions of “non-commercial” investors in four Treasury futures contracts using duration-based weights. Examples of recent poor timing include: 1) a large long position in October 2010 – yields subsequently surged; 2) a large short position in early 2011 – yields subsequently collapsed; and 3) another large short position in March this year ahead of the recent yield decline.

The poor record reflects trend-following behaviour – more precisely, a tendency to invest in trends when they are at a late ...

Private schools' advantage

Michael Gove's speech decrying the domination of the privately-educated has reignited an old debate. But there are two important distinctions to be made here.

One is: does private schooling confer advantages merely through the quality of its education, or does it confer them even beyond this?

If private schools merely offer better education, you'd expect their pupils to get more A levels and places at Oxbridge, but you wouldn't expect them to go on to succeed more than state school pupils with the same qualifications.

However, two pieces of evidence suggest they do better than this. One ...

The Worst Bank in the World? HBOS’s Calamitous Seven Year Life

February 27th, 2010 (updated May 13th, 2012) HBOS’s entrance on The Mound; Image: The We Lessons must be learnt from the short and calamitous history of HBOS, the bank which effectively went bust in September 2008, writes Ian Fraser (Note: This article was first posted under the headline “HBOS: When did the rot set in? [...]

FSA warned that transparency proposals for bank property portfolios will require £35bn

By Ian Fraser Published: Sunday Herald Date: May 13th, 2012 HUNDREDS of property firms could be propelled into bankruptcy if the Financial Services Authority pushes ahead with new “slotting” regime that will force banks to be more transparent about the state of their commercial property loan books, according to property industry leaders. Banking and property sector [...]

Ordering effects, luck & rationality

I point out here that people's choices can be sensitive to arbitary differences in the order in which options appear. In the Eurovision song contest, for example, the first or later performers have more chance of winning than those appearing in the middle of the show. I omitted to add that this ordering effect also matters in politics. A new paper concludes:

Alphabetic ordering effects exist in the 1977 2011 Irish general elections. The effect is significant, in both a statistical and substantive sense. The estimated effect of being listed first on an alphabetical ballot paper in an Irish ...

Weekend reading: Spain, the market that thinks it’s 2009

Some good reads from around the Web.

I once asked readers to admit they were nostalgic for the turbulent days of 2008 and 2009, when banks were going bust and stock markets were a bargain.

The post was slightly tongue-in-cheek, with my idea being to remind readers that the bad days don’t last forever, even if the headlines take a while to change.

There is a reason to lament more stable times, though, and that’s that buying cheap is the best guide you’ll get to good future returns from equities.

And cheapness tends to come hand-in-hand with ...

Safe-haven pound need not kill off exports

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. The European Union is turning into a very dysfunctional family. Greece, now combining deep economic pain with political instability, is the troubled teenager threatening to leave...