Saturday, 17 December 2011

How the US avoided a total government shutdown

There is nothing like leaving things until the last minute for action to be taken as can be seen in this article on the Washington Post.

Congressional leaders headed off a weekend shutdown of the federal government with a $1 trillion spending deal. The agreement will fully fund most of the government, including the Defense Department, Education Department and Environmental Protection Agency, for the rest of the 2012 fiscal year.  

Congress had a whole 27 hours to spare when the deal was struck.  Boredom,tiredness and the fact that everyone wanted to leave for their Xmas breaks probably assisted in making the deal happen.

Wednesday, 2 November 2011

Regulators Investigating MF Global for Missing Money

Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.
Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.

The discovery that money could not be located might simply reflect sloppy internal controls at MF Global. It is still unclear where the money went. At first, as much as $950 million was believed to be missing, but as the firm sorted through its bankruptcy, that figure fell to less than $700 million by late Monday, the people briefed on the matter said. Additional funds are expected to trickle in over the coming days.
But the investigation, which is in its earliest stages, may uncover something more intentional and troubling.

In any case, what led to the unaccounted-for cash could violate a tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.
Neither MF Global nor Mr. Corzine has been accused of any wrongdoing. Lawyers for MF Global did not respond to requests for comment.

Now, the inquiry threatens to tarnish further the reputation of Mr. Corzine, the former Goldman Sachs executive who had sought to revive his Wall Street career last year just a few months after being defeated for re-election as New Jersey’s governor.

When he arrived at MF Global — after more than a decade in politics, including serving as a Democratic United States senator from New Jersey — Mr. Corzine sought to bolster profits by increasing the number of bets the firm made using its own capital. It was a strategy born of his own experience at Goldman, where he rose through the ranks by building out the investment bank’s formidable United States government bond trading arm.

One of his hallmark traits, according to the 1999 book “Goldman Sachs: The Culture of Success,” by Lisa Endlich, was his willingness to tolerate losses if the theory behind the trades was well thought out.

He made a similar wager at MF Global in buying up big holdings of debt from Spain, Italy, Portugal, Belgium and Ireland at a discount. Once Europe had solved its fiscal problems, those bonds would be very profitable.

But when that bet came to light in a regulatory filing, it set off alarms on Wall Street. While the bonds themselves have lost little value and mature in less than a year, MF Global was seen as having taken on an enormous amount of risk with little room for error given its size. By Friday evening, MF Global was under pressure to put up more money to support its trading positions, threatening to drain the firm’s remaining cash.

The collapse of MF Global underscores the extent of investor anxiety over Europe’s debt crisis. Other financial institutions have been buffeted in recent months because of their holdings of debt issued by weak European countries. The concerns about MF Global’s exposure to Europe prompted two ratings agencies to cut their ratings on the firm to junk last week.

The firm played down the effect of the ratings, saying, “We believe that it bears no implications for our clients or the strategic direction of MF Global.”

Even by Sunday evening, MF Global thought it had averted its demise after a disastrous week. Over five days, the firm lost more than 67 percent of its market value and was downgraded to junk status, which prompted investor desertions and raised borrowing costs.

Mr. Corzine and his advisers frantically called nearly every major Wall Street player, hoping to sell at least some of the firm in a bid for survival.

On Friday, the asset manager BlackRock was hired to help MF Global wind down its balance sheet, which included efforts to sell its holdings of European debt. BlackRock was able to value the portfolio, but did not have time to find a buyer for it given the other obstacles MF Global faced, according to people close to the talks.

By Saturday, Jefferies & Company became the lead bidder to buy large portions of MF Global, before backing out late in the day.

On Sunday, a rival firm, Interactive Brokers, emerged as the new favorite. But the Connecticut-based firm coveted only MF Global’s futures and securities customers.
While MF Global was resigned to putting its parent company into bankruptcy, Interactive Brokers was also willing to help prop up other MF Global units, including a British affiliate.
By late Sunday evening, an embattled MF Global had all but signed a deal with Interactive Brokers. The acquisition would have mirrored what Lehman Brothers did in 2008, when its parent filed for bankruptcy but Barclays of Britain bought some of its assets.

But in the middle of the night, as Interactive Brokers investigated MF Global’s customer accounts, the potential buyer discovered a serious obstacle: Some of the customer money was missing, according to people close to the discussions. The realization alarmed Interactive Brokers, which then abandoned the deal.

Later on Monday, when explaining to regulators why the deal had fallen apart, MF Global disclosed the concerns over the missing money, according to a joint statement issued by the Commodity Futures Trading Commission and the Securities and Exchange Commission. Regulators, however, first suspected a potential shortfall days ago as they gathered at MF Global’s Midtown Manhattan headquarters, the people briefed on the matter said. It is not uncommon for some funds to be unaccounted for when a financial firm fails, but the magnitude in the case of MF Global was unnerving.

For now, there is confusion surrounding the missing MF Global funds. It is likely, one person briefed on the matter said, that some of the money may be “stuck in the system” as banks holding the customer funds hesitated last week to send MF Global the money.

But the firm has yet to produce evidence that all of the $600 million or $700 million outstanding is deposited with the banks, according to the people briefed on the matter. Regulators are looking into whether the customer funds were misallocated.

With the deal with Interactive Brokers dashed, MF Global was hanging in limbo for several hours before it filed for bankruptcy. The Federal Reserve Bank of New York and a number of exchanges said they had suspended MF Global from doing new business with them.
It was not the first time regulators expressed concerns about MF Global.
MF Global confirmed on Monday that the Commodity Futures Trading Commission and the S.E.C. — had “expressed their grave concerns” about the firm’s viability.
By midmorning on Monday, the firm filed for bankruptcy.

Friday, 7 October 2011

Statistics can tell what ever story you want them to

I have always been a fan of statistics.  You can manipulate statistics to tell what ever story you want.  As a director of a funds management business I have spent many hours sitting back and reflecting on the carnage that happened over the last quarter, trying to work out why stocks were so heavily discounted and for no apparent reason as well as trying to rub my crystal ball to predict what will happen this month (October 2011). 
To look into the future you must first look back into history to see what lessons can be learned and distinguish if any trends are emerging and why.  Markets are supposed to be efficient and random, trends are not supposed to occur and history should never repeat - well that is at least what the finance text books tell us. 
From my experience history has a habit of repeating and markets are not entirely efficient or random.  I choose to use statistics to tell a positive story rather than be all doom and gloom.  Looking back at previous October months the statistics are mixed.  We have had major stock market corrections (crashes) occur in October.  Take for example the events of 1929, 1987 and 2008 – co-incidence maybe?.  The month of October has also proven to signal the end of bear market periods as was shown in 1998, 2001 and 2002. 
The following are some key statistics about the month of October as they pertain to equity markets as found on the Pragmatic Capitalism website (  This website is one of the best I have found and is certainly full of information and different points of view.  If you have not visited this website I suggest you do.  The data was taken from an article first released on 3 October by Cullen Roche.   
  • Known as the jinx month because of crashes in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989, and the meltdown in 2008
  • October is a “bear killer” and turned the tide in 11 post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, and 2002
  • First October Dow top in 2007, 20-year 1987 crash anniversary –2.6%
  • Worst six months of the year ends with October
  • Best Dow, S&P, and NASDAQ month from 1993 to 2007
  • Pre-presidential election year Octobers since 1951, rank last across the board; excluding 1987 still   near the bottom
  • Big October gains five years 1999-2003 after atrocious Septembers

Thus far, many of the seasonal trends have held true in 2011. The traditional “sell in May and go away” strategy adopted by some investors will have paid dividends with the markets off heavily from their May closing. Roche notes that if the seasonal trends continue to hold, October could be the beginning of a change in the bear trend.  He also states that ccording to the Stock Traders Almanac (, October is a great time to buy stocks as it marks the beginning of the stock market’s strong seasonal period.
We have had an atrocious September so the outlook for October is rosy, well that is at least what I believe the statistics tell us.

Monday, 3 October 2011

Invest for equity income: boring strategy but pays dividends in the long run

The following article is intended to be informative and general in nature.  It is not to be interpreted as personalised advice and it is recommended anyone reading this article seek professional advice before making any investment.  The author does not hold shares in the securities mentioned in this article directly, but is a director and shareholder of a fund which may from time to time either hold or trade these companies.

A dividend focussed strategy may not appear to be the most glamorous way of investing but when you are in an environment where there is considerable volatility and little to no capital appreciation, deriving income off your share allocation can assist in insulating a portfolio’s return.
Investing for dividends has in the past, and will continue to be in the future, a viable strategy for investors seeking to supplement their income.  With yields on cash and traditional fixed income providing very little it is important to cast the investment net wider and look towards those companies that have strong cash flows and good annual dividends.

Yes, equities are generally more risky than bonds however one could reasonably argue that buying shares in companies like Johnson and Johnson (JNJ), Microsoft (MSFT) or Coca Cola (KO) is less risky than buying bonds in any of the PIIGS nations (PIIGS = Portugal, Italy, Ireland, Greece & Spain).  The dividend yields on these three companies used in this example are greater than what can be achieved from a US 10 year treasury security.  There are several examples of stocks in New Zealand and Australia where the dividend yield is higher than the long term fixed income or term deposit rate can easily be found.  Many brokers will publish this information and some you can access free of charge off the internet or out of the weekend newspaper.

Before everyone goes rushing off to scan the papers or internet for the highest yielding securities it is important to understand that the stocks paying the highest dividend yield may not be the best ones to invest into long term.  A high dividend yield could be as a result of a falling price.  The dividend yield calculation is the annual dividend in cents per share divided by the current price in cents per share.  A falling price could signal that the dividend is expected to be cut in the near future or worse stopped altogether. 

Factors to consider when adopting a dividend focussed strategy are:
  1.  The quality of the company(s) you are looking to buy – our preference is to stick to household names that are considered blue chip companies with solid balance sheets and good management.
  2.  The companies track record of paying dividends and increasing dividends over time.
  3.  The company’s dividend pay-out ratio, i.e. the portion of the company earnings that are allocated to paying dividends.
  4.  The dividend yield of the company compared to its industry peers
  5.  The dividend coverage ratio, i.e. the ratio between a company’s earnings and the net dividend paid to investors.
To implement a dividend focussed equity strategy investors have many options available to them including:
  • Purchase individual companies on their respective global stock exchanges through a broker;
  • Purchase exchange traded funds again through a broker;
  • Purchase units in a managed fund or investment trust via an authorised financial adviser. 
It is worth noting that in the managed fund space there are a number of funds available in the U.S. which are listed on U.S. exchanges.  Currently most of the offshore managers who provide dividend strategy funds do not have investment statements which are compliant with New Zealand legislation and therefore are not available to New Zealand resident investors.  Unfortunately from our experience there is very little by the way of globally diversified dividend focussed strategies available to New Zealand domiciled investors.

For New Zealanders, from the perspective of ease of execution, diversification and cost effectiveness, to gain an exposure to a dividend income strategy it may be preferable to use vehicles such as ETF’s or offshore domiciled managed fund or traded securities.  Most investors do not have sufficient investment capital or expertise to put together a globally diversified portfolio of high yielding securities.
Next time you are thinking about investing your capital into shares give some consideration to the dividend.

Tuesday, 27 September 2011

Can we fix it? Yes we can!

Europe central bankers have stolen Bob the Builders catchphrase with their latest and greatest proposal to help the struggling european nations.   For those without children, grandchildren or young nieces and nephews - Bob the Builder is a children’s animated cartoon where the main characters catchphrase is “Can we fix it” to this the other characters shout  “yes we can”.  This is a bit like what is happening at the European Central Bank right about now.  
Defaulting on its debt is nothing new for Greece by the way.
According to academic research, Greece was awarded the dubious honour of recording the first ‘default’ back in around 377BC.  Greece has defaulted on its external sovereign debt obligations at least five previous times in the modern era (1826, 1843, 1860, 1894 and 1932). The first episode occurred in the early days of that country's war of independence, and the last default was during the Great Depression in the early 1930s. The combined length of period under which Greece was in default during the modern era totalled 90 years, or approximately 50% of the total period that the country has been independent.
Although many might consider this level of default to be excessive, Greece is nowhere even close to the top of the list. Venezuela and Ecuador, with 10 defaults each, share the (dis)honour of being the greatest serial defaulters of the modern era.
The latest rescue package announcement to hit the wires is for the use of the European Financial Stability Fund (EFSF) which was created by the euro area member states in May 2010 to assist with the debt crisis that was unfolding at that time. 
There are several moving parts in the proposal but essentially it goes like this -  banks would be allowed to exchange their sovereign debt for debt issued by a special purpose vehicle (SPV) created by the European Investment Bank and capitalised with funds from the EFSF.  The creation of the SPV is seen as important to protect the members and ensure that neither the ECB nor EIB are left carry the can should this all turn to custard.
It is important to also understand that prior to this latest announcement the EFSF has already provided emergency funding to Ireland, Portugal and Greece.  The expectation is that a further 100 billion euros in additional funding is needed just for Greece.
Some commentators are speculating that the proposed plan will effectively make the new vehicle a levered fund, which borrows far more than it has in equity capital provided by European governments. After reading this I am left wondering how leveraging the new fund is going to help and wasn’t this kind of how we got into this mess in the first place?  Maybe we never learn from our past mistakes?

Saturday, 24 September 2011

Project Armageddon - UK most indebted nation

Hard to believe the UK is seen as the most indebted nation according to a new study published on (full article below).  Prince William's recent wedding to Kate Middleton would not have helped reduce this debt pile either.

With so much having been written about Greece and the contagion effect their default would have on the global economy and global are investors ignoring the fact that the UK could default?  

The study released by brokers Tullett Prebon suggests the possibility of the UK defaulting is not being priced in to any of their assets. As investors are we becoming too relaxed around those economies that are perceived to be too big to fail?
UK most indebted nation in the world reveals new study
Posted on 28 August 2011
A new study from brokers Tullett Prebon called ‘Project Armageddon’ has established the true scale of borrowing in Britain which amounts to a truly staggering £5 trillion or $8.3 trillion.
You would hardly think that reading the Sunday papers today that are monumentally self-complacent and seemingly reckon the UK light years away from Europe in terms of financial problems. Yes, they are in a far worse position.
Once pension fund liabilities and PFI contracts are included the total public debt is £2.46 trillion or 167 per cent of GDP. To that you have to add the £1.34 trillion in financial sector bailouts. The total public debt is therefore £3.6 trillion or 244 per cent of GDP or £135,000 per UK household.
Add mortgage debt
Then there is £1.2 trillion in outstanding mortgage debt and £210 billion in unsecured mortgage credit. Together public and private sector debt amounts to £5 trillion, or 340 per cent of GDP.
‘The biggest single debt increment during the period between 2002 and 2009 was mortgage borrowing, which increased £590 billion between those years,’ explains the report. ‘Many borrowers saw this as an investment, a view which was profoundly mistaken even though many policymakers and even bankers managed to delude themselves otherwise.’
Average UK property prices rose by 70 per cent in this period, until the 19 per cent fall between 2007 and 2008. But most of this private borrowing went into consumption and the public sector did exactly the same thing with its borrowing.
‘Equally worryingly, UK external debt is 400 per cent of GDP,’ notes the study. ‘Far higher than countries such as Portugal, Spain or Greece and equates to $143,000 for each man, woman and child in Britain, again far higher than in most other developed countries.’
Bankruptcy possible
The study concludes that there is ‘a very real possibility of national bankruptcy’ but it notes that financial markets are not yet pricing this into UK debt. You have to wonder how long the very low interest rates available to British national debt can persist in view of the quite obvious massive credit risk exposed by this report.
‘Project Armageddon’ is actually pretty thin on predictions as to where this debt mountain will take the UK, apart from flagging up the inadequacies of current government policies, namely that they rely on the resumption of high rates of economic growth that are impossible with 70 per cent of the economy laden with debt.
You are left to draw your own conclusions about the merits of holding sterling-denominated assets with this sword of Damocles hanging over the economy. And the investment conclusion about the UK is surely don’t go there!