Scheldt Capital

Thriving in the frontier regions

Fri, 01 Jun 2012 13:09:13 +0100

Ken Silverstein wrote a fascinating portrait of commodities trader Glencore for Foreign Policy. It sets the scene thus:

LEVERAGING TIES TO DICTATORS has always been at the heart of the business empire built by Rich, the Belgian-born U.S. citizen who founded what would become Glencore in Switzerland in 1974.

The explanation of why Glencore chose Switzerland as its base is another highlight.

"How Tim Cook is changing Apple"

Thu, 31 May 2012 11:32:51 +0100

"How Tim Cook is changing Apple":

Fortune’s Adam Lashinsky looks at Apple’s evolution since Tim Cook became CEO. Striking statistic:

2,153 Apple employees reference the term “MBA” in their LinkedIn profiles out of a nonretail workforce of nearly 28,000. More than half the employees who reference “MBA” have been at Apple less than two years.

Will be interesting to see if that announces the beginning of the end for Apple…

David v Goliath on the stock exchange

Thu, 17 May 2012 12:42:35 +0100

David v Goliath on the stock exchange:

The FT highlights some Norwegian day traders that succeeded in beating algorithmic traders. In one instance the traders got sued for market manipulation. But then:

The courts found them not guilty of market manipulation this month, concluding that they were making the market more efficient by exposing a flaw in the system.

Arguing the Efficient Markets Hypothesis in front of a judge, that’s brilliant.

The adventures of Cityman in China

Sun, 13 May 2012 11:46:13 +0100

This weekend’s FT has an exquisite piece on the travails of Anthony Bolton in China. After 30 years of managing Fidelity’s Special Situations fund in the UK and posting a 19.5% annual return (6% better than the FTSE All Share), Bolton set up a China Special Situations fund in 2010 which has lost 17% so far. The FT writer seems a bit embarrassed at having to expose this sorry track record and essentially ends up arguing that honest, hard-working Bolton was conned by the devious Chinese:

Fraud is a global phenomenon […]. In China, however, rampant corruption and a weak rule of law mean that when things go wrong there is little recourse.

…

“If people want to rip off people here, they’re very inventive,” says Bolton, with a hint of admiration.

The first line of the article gives a hint as to the real problem, however:

Anthony Bolton may be one of the world’s most accomplished investors, but using chopsticks is still a struggle.

The article sets up the strawman argument that Bolton’s failure to speak Mandarin was an insurmountable handicap, but then discredits it by quoting a native Chinese fund manager who insists that speaking the language is “not essential.” The larger issue, Bolton’s apparent lack of the cultural sensitivity necessary to do business in China, is thus deftly side-stepped.

From my understanding, what the article calls examples of fraud are not purely seen as such in China. Rather, one’s perceived stature is of paramount importance to successful business negotiations, and thus inflating one’s importance is fair game. It is up to the other party to cut through the smokescreen and see the reality. In short, nothing really is what it seems in Chinese negotiations, which is obviously a far cry from the direct nature of Anglo-Saxon ways.

As a result, successfully doing business in China as a Westerner requires a great deal of humility and accepting that deals in China are now done on Chinese, not Western, terms. Bolton, on the other hand, clearly arrived in Asia expecting something like Hong Kong in the 1950’s, where everything operated along the Anglo-Saxon patterns he knew. He got burnt as a result. Commenter “coolhead” captures the idea:

Oh, the hubris of it all! Acclaimed Occidental fund manager descends in Hong Kong to teach orientals how to invest

Some tidbits about Bolton’s lifestyle also betray his tragically outdated imperial perspective on life in Asia, despite the article’s assertion that “Bolton is remarkably ordinary”:

At weekends, Bolton and his wife skim across the South China Sea in his motorboat.

…

It’s a long way from the Hong Kong Club, the ultra-exclusive, 166-year-old private members’ venue where Bolton mingles with the city’s elite.

…

The Boltons’ 2,900 sq ft flat cost HK$72.8m (£5.8m) and is located in a tower called The Mayfair, overlooking Hong Kong’s Victoria harbour.

Unfortunately, it is now all too clear to the locals that the emperor has no clothes. What a brave new world it must be for Bolton and his cohort.

JPMorgan's new prop trading desk

Fri, 11 May 2012 09:03:28 +0100

This Bloomberg story from a month ago was still sitting in my Instapaper queue: “JPMorgan Said to Transform Treasury to Prop Trading”. To me back then it simply illustrated how banks’ organisations would change in response to the new rules brought in after the financial crisis. There was an undeniably ominous background to it as well though, along the lines of “let’s hope this ends well.”

Well, it didn’t:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks

Reports of the euro's death greatly exaggerated?

Thu, 10 May 2012 23:09:46 +0100

Reports of the euro's death greatly exaggerated?:

The FT:

Investors and dealers have shied away from foreign exchange trading this year amid frustration at the strength of the euro.

This statement is much more in line with what I hear from trader friends, despite the resurgence of sensationalist headlines announcing the euro’s demise after this weekend’s election results.

So the actual data seems to get in the way of the desired narrative again, but one can always hope:

Some believe it will take a more drastic event for the euro to finally break out of its range. All eyes are on Greece.

How does venture capital fare as an asset class?

Tue, 08 May 2012 13:14:31 +0100

How does venture capital fare as an asset class? :

Not well, says Felix Salmon after reading a report from an institutional investor:

the average VC fund returns less money to investors than they invested in the first place.

From the gullible journalists dept.

Tue, 08 May 2012 13:02:20 +0100

From the gullible journalists dept.:

The Atlantic interprets a sell-side research chart from JPMorgan thusly:

And here is your tweetable fact: A monetary union might make more sense for every nation starting with the letter “M” than it does for the euro zone.

Fortunately the Internet does a good job debunking that in the comments section, worth a quick read.

Japanese engineers help China move up the manufacturing value chain

Wed, 25 Apr 2012 07:18:18 +0100

Japanese engineers help China move up the manufacturing value chain:

Reuters has a report on older Japanese engineers being hired by Chinese manufacturing firms, mainly for their skills and experience.

Many of the Japanese engineers finding a second life in China do not have the cutting-edge technology that would deal another crushing blow to Japan Inc yet, analysts say, but the long-term impact could be severe because they will give Chinese manufacturers the skills to make high-quality goods efficiently.

Flashes of the historic rivalry between China and Japan also seep through, which makes for an interesting subtext (“traitors”…)

Lost Conversations From Steve Jobs' Best Years

Tue, 24 Apr 2012 07:21:53 +0100

Lost Conversations From Steve Jobs' Best Years:

Journalist Brent Schlender argues that Jobs’ time in between his two Apple periods was instrumental to his later success:

He became a corporate architect, coming to appreciate the scaffolding of a business just as much as the skeletons of real buildings, which always fascinated him.

Insightful piece overall.

Big changes afoot for Swiss hedge funds

Fri, 20 Apr 2012 15:03:09 +0100

Big changes afoot for Swiss hedge funds:

The FT:

By 2013, the country’s hedge fund managers will move from being completely unregulated to operating under one of the most stringent regimes in the world.

Essentially Switzerland wants to rehabilitate its reputation in wealth management by exercising tougher oversight over the many hedge funds established there, but unsurprisingly the fund managers are not necessarily in favour.

However, the good news is that the UK government now repealed the 50p tax rate, so many of the funds that relocated to Geneva in 2010 can just come back to London…

Week in review: The cavalry has arrived

Sat, 18 Feb 2012 12:36:34 +0000

Like in a classic Western, the cavalry was late but arrived eventually. There is a pervading sense that banks’ funding problems are all but gone thanks to the recent interventions of the ECB. The pattern is copied exactly from the Fed and Bank of England, the cheap funding allowing banks to generate extra profits that reinforce their capital position. The effect on the credit markets was almost immediately visible with CDS spreads dropping sharply. Investors are also less risk-averse, re-entering markets that previously shut down, for example junk bonds. Still, a lot of caution remains and banks have been given a reprieve rather than having all their problems solved.

It was a busy week for market infrastructure, where consolidation (or lack thereof) is still the order of the day. EuroCCP provided a nice illustration of the pressure central counterparties face, as it announced significant market share growth by clearing trades at cost. As a result, the race for size is still very much on, with both NYSE Euronext and CME throwing their hat in the ring for the London Metals Exchange. On the other hand, in what is becoming a familiar pattern, question marks are being raised over the tie-up of the Tokyo and Osaka stock exchanges, with squabbles over valuation.

Lastly, the weekend provides a perfect opportunity to delve into some longer and broader pieces. Two weeks ago, New York Magazine looked into the structural changes hitting the financial industry after the crisis and the impact on bankers. The overall mood it paints is that of a reluctant acceptance that the crisis was not a blip. Some hard, painful changes will have to happen that are likely to have a permanent impact on the economics of the industry and even its attractiveness to potential employees.

Even broader, Fast Company has two related articles on the changing nature of business and work in general. Uncertainty in business is at its highest level in many years, giving rise to “Generation Flux”, whose members are aware of the chaos and look to capitalise on it. This is having a direct impact on work, the era of the 30-year career at one firm is gone and replaced by much shorter stints in different industries, leading to employees with a very diverse set of skills and original insights. It is interesting to contemplate how these changes affect your personal and corporate “business model.”

Week in review: everybody's in Davos

Sun, 29 Jan 2012 17:24:17 +0000

Somehow the news seemed slow this week, perhaps owing to the fact all the world’s good and great are hobnobbing in Davos. Nonetheless, some newly installed bank CEO’s decided the potential negative impact on their image was too big and decided not to attend. One not-so-new CEO who is prominently present is Vikram Pandit, who is co-chairing this year’s edition. He ensured he would have a talking point by writing an op-ed for the FT the week before calling for more transparency in bank’s risk management, which was well received overall.

In other words, a good week to catch up on some background topics. The Banker has a great overview of the impact new regulations will have on the banking industry. It looks at the changes required in capital and liquidity, and more importantly how the business model of the banks will be affected, hitting upon the major emerging theme for 2012.

From a pure finance point of view, more and more people are starting to call into question the “efficient markets” hypothesis. What seems to be gaining credence on the other hand is trying to predict sentiment by analysing social media. This seems to have predictive power for stock movements. It will be interesting to see whether these trends combine and lead to new valuation models used in banks. And lastly, more evidence of another major theme of the moment, the rise of China: at the Big 4 accounting firms, headcount in China is about to overtake headcount in the UK.

Scrutinising Europeank bank funding

Mon, 23 Jan 2012 10:19:46 +0000

Conflicting messages this morning on Europeank bank funding. From Bloomberg:

European banks, shunned by investors and each other, may borrow as much next month from the European Central Bank as they did in a record offering in December as they seek refuge from frozen funding markets.

There are two arguments supporting this statement. The first one is technical and refers to the fact that the ECB is again (carefully) widening its list of acceptable collateral and the banks will (rationally) take advantage of that. The second is obviously macro-economic sentiment (“shunned by investors”), but it’s not at all that clear that it holds anymore. In fact, it seems that the signaling function—the ECB will act as the lender of last resort—associated with the refinancing operations is working. Says FT Alphaville:

US money market funds have begun moving back into European bank paper, a sign that central bank efforts to backstop key institutions are improving risk appetite

There other other indicators that the ECB operations are working, most notably falling yields on sovereign debt, and they should, since it is in effect the same recipe as the one used by the Fed and BoE, just implemented a little later.

Week in review: shifting business models

Sat, 21 Jan 2012 10:04:01 +0000

Banking business models

The week saw more signs of a shift in banking models, with all banks still under pressure from the fallout of the financial crisis. Goldman Sachs’ results were telling; although their profits exceeded expectations, this was despite revenue falling even more than expected. The most worrying sign is the return on equity (RoE), which came in at 3.7%. With all the regulation constraining capital and leverage, it is becoming increasingly clear that RoE targets of 15% are unattainable. The effects of the crisis (financial and sovereign debt) are widespread: even custodian banks are feeling the effect of a decline in trading and a shift to cash.

On a positive note, it seems banks are waking up to the transformative potential of technology. In the UK, the Payments Council is looking to set up a database linking customers’ mobile phone numbers to their bank account, to enable money transfers using mobiles. In Spain, BBVA has again teamed up with Google, but this time to market economic indicators that are based on search statistics. Faced with the slowdown in their traditional business models, I would expect many more such initiatives in the coming months.

The regulatory debate continues

Meanwhile, regulators everywhere are still working to shape the industry’s regulatory framework. The European Commission launched a review of its policy on bank structure, prompted by the proposed ringfencing of retail banks in the UK. China nicely illustrated the macro-economic impact of these regulations by explicitly relaxing its regulatory constraints to give its economy a shot in the arm. At any rate, if this piece by The Reformed Broker on BofA’s appointment of a “Chief Image Officer” is any guide, the political pressure for more regulation is unlikely to abate soon.

Week in review

Sat, 14 Jan 2012 12:25:21 +0000

Economic uncertainty continues

Mario Draghi earlier this week stated that the ECB strategy for battling the eurozone sovereign crisis was starting to work, only to suffer a setback yesterday with S&P’s ratings action, stripping France and Austria of their AAA rating and downgrading Italy to BBB+ from A. Beyond the obvious impact on investors, there will also be a technical impact for banks, especially in Italy, that may now be unable to enter into critical swap agreements, for example.

Banks still affected by economic situation

The effects of the economic turmoil in 2011 on banks’ results are plain to see. Expectations are that banks’ profits for Q4 2011 will be lower across the board. JP Morgan announced a 23% drop in profits yesterday, ahead of announcements from most major banks next week. The lack of confidence engendered by the eurozone crisis is most often cited as the reason for the lacklustre performance.

Unsurprisingly, 2011 has been a bad year for employment in the banking sector, with the WSJ positing that the job losses reflect more than a cyclical dip. Last year also saw an unusually large number of partners departing from Goldman Sachs, mainly due to the shrinking business, although they may just have decided they were wealthy enough and called it a day.

Hedge funds arguably came out of 2011 looking even worse than banks however, with 60% posting a loss, even though they should nominally be able to make profits in down markets.

Regulatory pressures continuing

Meanwhile, the introduction of new regulations for the financial markets continues apace. The Basel Committee declined to extend the deadline for banks to meet imposed liquidity buffers, although they offered some concessions on the level of the buffers in times of crisis and the overall composition.

In addition, the Financial Stability Board extended the applicability of the “too big to fail” rules to include what it calls local “systemically important” institutions (i.e. within a country) and also clearing and settlement institutions. With regulators wanting to see more OTC derivatives trades cleared through CCP’s, this rule makes sense, but it will be interesting to see how the CCP’s and their clients respond.

Market infrastructure consolidation continues to rumble

In the market infrastructure landscape, the week was dominated by the news that the European Commission advised blocking the proposed merger between Deutsche Börse and NYSE. Apparently undeterred by the failure of $37bn in deals last year however, Nasdaq is reorganising its top management structure, perhaps to facilitate future takeovers. The last word on consolidation in the sector has not yet been spoken.

Technological evolutions

Finally, Spanish bank BBVA announced it is moving all its 110,000 employees to Google Apps, including using Gmail for email and Google Docs for office productivity. Bold move.

Targeting the ECB's "stealth bailout"

Mon, 02 Jan 2012 10:16:05 +0000

Slate’s Moneybox takes issue with the ECB’s “stealth bailout” of Italy:

Basically, as an alternative to directly guaranteeing the Italian government affordable loans the ECB is guaranteeing super-cheap loans to European banks. The banks are then able to plow that money into government debt at a profit and the strong demand for government debt assures that borrowing costs fall. [….] The whole thing is incredibly slimey and I have to suspect that it will end poorly, but for the time being at least it’s working.

Of course, not only are the Fed and BoE using exactly the same mechanism in the US and UK, by providing banks collateralised funding nearly for free (albeit at shorter tenors), they also add a big dollop of QE on top. Primary dealers in government debt are being encouraged to buy bonds from the Treasury, which the central banks then buy back at a higher price. Result, governments are funded, yields go down, banks make profits and are thus able to recapitalise.

In fact, the above was a stated objective of QE when it started in 2009. The ECB was never able to do this due to German opposition, at least until the agreement on deeper fiscal union in December last year. With that in place, this intervention by the ECB was to be expected and it is merely playing catch-up with the US and UK.

The Digest - Weekend edition

Sat, 10 Dec 2011 10:07:30 +0000

Business Week profiles Palantir, whose software is used by police and intelligence agencies to detect and disrupt terrorist plots. The data mining software is now also used by banks to detect fraud and even generate trade ideas. — Business Week

Moving OTC trading to a central counterparty (CCP) is often seen as a silver bullet to reduce systemic risk, but as it turns out it’s not that simple. — Deus Ex Macchiato

And with all the attention for sovereign ratings these days, this post from Nate Silver, written at the time of the US downgrade, puts their value (or lack thereof) in perspective. — FiveThirtyEight

The Digest is an overview of interesting stories in financial services technology and management.

The Digest

Sat, 03 Dec 2011 11:08:01 +0000

Another “Banks’ business models will have to change” story, this one looking at cost of funding and impact on lending. — FT

Hedge funds are delevering, due to banks having to reduce their lending and increasing margin calls on their positions. — Reuters

The European debt crisis in eight graphs: nice overview of the economic forces at work. — Wonkblog

The Digest is a daily(-ish) overview of interesting stories in financial services technology and management.

The Digest

Mon, 28 Nov 2011 23:50:48 +0000

ING chief says assets cannot be sold on fair terms in the current market and asks the EU to relax its demands for disposals following state aid — Bloomberg

“Tech is the new rock’n’roll.” The UK government pins its hopes for an economic revival on the startups of Silicon Roundabout. — The Guardian

An interesting idea for saving the Eurozone: conditional eurobonds. — vox.eu

Bloomberg is steadily turning itself into a full-fledged, vertically integrated media company, moving far beyond its roots as a financial data provider. — Daily Beast

Disintermediating the financial intermediary: peer-to-peer lending companies see business soar. — FT

A UK regulator calls for an end to free bank accounts and for more pricing transparency in retail banking. — FT

The Digest is a daily(-ish) overview of interesting stories in financial services technology and management.