Trade

Kobe ‘Steal’ – will the market referee wave a red card at what looks a lot like insider trading?

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If the referee caught Kobe Steel’s (5406) rugby team up to such foul play it is likely that players would be red carded. While unconfirmed speculation at the moment, it would appear that since September 21st Kobe Steel shares came under heavy selling pressure in what a seasoned market punter might suspect looks like insider trading via aggressive short selling. 7 straight negative candle sticks. Kobe Steel spilled the ball on its data manipulation on October 8th.

This would not be the first time that a broker conspired with a fund to short sell a stock ahead of a negative release on insider information where several weeks later news broke and sent the shares collapsing. This is the current action of Kobe Steel shares.

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So excluding borrowing costs or any leverage, if one had managed to short sell Kobe Steel at 1350 (on Sep 21) and brought back at today’s prices a quick fire 53% return would be gained.

The important question is whether the regulator will investigate any potential foul play when looking at the video replay. I will be asking this question directly to the Financial Services Agency (FSA) as I have been invited the regulator to give a speech on ways to improve Japanese corporate governance in a few weeks time.

This won’t be just a beat up of Japan’s corporate governance as foreign corporates have made countless scandals post the introduction of Sarbanes Oxley in 2002.  However it will aim to be a realistic overview of tolerating what seems to be endless preventable insider trading scams with paltry penalties of $500 and a slap on the wrists with a feather duster.

Until serious punishments for flagrant market manipulation are thrust front and centre in front of bewildered and annoyed (foreign) investors, the cynicism will remain that Japan is not a safe place to invest. Remember insider trading is effectively fraud. Perhaps your pension fund owns Kobe Steel in a global portfolio meaning that some shady investor has stolen your retirement to feather his or her nest.

Perhaps I should thank Kobe Steel for getting dirty in the ruck area to help the final presentation draft.

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Norwegians want a referendum on leaving the EEA & warn Brits not to become like them

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It seems more in Norway are wanting to have a referendum on the European Economic Area Access (EEA). The claims is that their costs have risen 10-fold since signing the EEA 25-years ago. Norway, while not a member of the EU, still pays around £650 million to Brussels to fund the EEA administration and other EU research projects. Two recent opinion polls conducted by Sentio reveals there is a strong majority wanting to have a say on the EEA agreement: 47% are in favour of a referendum on Norway leaving the EEA, with only 20% rejecting such a referendum. 70% of Norwegians do not want to enter the EU and the Labour Party has recently removed it as a policy platform.

Norwegian businesses had duty free access on all exports to the EU before the EEA was signed and this FTA would still apply if the EEA agreement were terminated. Ironically Norway used to export more to the EU as a percentage of total before the EEA than after it meaning that the supposed benefits of the club have not led to bigger trading opportunities within the block.

So to Brexit – Norwegian Prime Minister, Erna Solberg of the Conservative Party, sounded a warning before the UK referendum about following a Norway style deal, stating that “you’ll hate it…that type of connection is going to be difficult for Britain, because then Brussels will decide without the Brits being able to participate in the decision-making.”

Brexit – why the EU shouldn’t treat the UK like a hostage with a ransom note

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Isn’t it ironic that the Bullies of Brussels are already throwing random numbers for Britain to pay to leave the EU. GBP 52bn billion based on thin air. Isn’t the UK a shareholder in all of the assets, buildings and infrastructure in the EU having invested over GBP 200bn net during its membership? Shouldn’t the EU have to buy out the UK’s stake in the project? The EU is now dictating the UK can’t discuss potential trade deals with other countries while the exit process is ongoing. Are they mad? They are now saying that Gibraltar gives Spain the right to veto any trade deal with the UK. The UK is being treated like a hostage with a ransom note being sent to the Queen.

Doesn’t the EU realise that Marine Le Pen is way above what the mainstream polls are predicting? 24% of French youth see her as a viable candidate who promises real change vs decades of failure with mainstream parties. Youth unemployment is over 25% in France and many view increased risks of more terrorism are other reasons to support her France First views.

Brussels still fails to get that IT is the problem. It should be showing humility and self reflection not ramping up the vitriol.

Flake News

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Fake news, very fake news or in many cases it is just flake news. Flake news? The lack of context and perspective and trying to draw parallels with irrelevance. Take this piece from Robert Reich taking a trademark swipe at Trump rationalizing it with a very poor understanding of the industry he seeks to convince his audience he is an expert in:

“I just watched Trump give a speech at South Carolina’s Boeing facility where the new 787 “Dreamliner” is being unveiled. Trump said it was “built right here” in South Carolina, and that “our goal as a nation must be to rely less on imports and more on products made here in the U.S.A.” He also called for “a very substantial penalty to be paid when they fire their people and move to another country, make the product, and think that they are going to sell it back.” And said he’ll lower taxes and get rid of regulations that send our jobs to those other countries. “We want products made by our workers in our factories stamped by those four magnificent words, ‘Made in the U.S.A.'”

All fantasy. In fact, almost a third of Boeing’s Dreamliner comes from abroad — from countries with high taxes and high regulations, good wages, strong unions, excellent schools including technical education, and universally-available health care.

1.The Italian firm Alenia Aeronautica makes the center fuselage.

2. French firm Messier-Dowty makes the aircraft’s landing-gear system.

3. German firm Diehl Luftfahrt Elektronik supplies the main cabin lighting.

4. Swedish firm Saab Aerostructures manufactures the access doors.

5. Japanese company Jamco makes parts for the lavatories, flight deck interiors and galleys.

6. French firm Thales makes its electrical power conversion system.

7. Thales selected GS Yuasa, a Japanese firm, in 2005 to supply it with the system’s lithium-ion batteries.

Oh, and the first delivery of the Dreamliner is scheduled to take place next year – to Singapore Airlines. Currently there are 149 orders for it from worldwide customers including British Airways and Air France.

In other words, contrary to Trump, the Boeing Dreamliner is made all over the world and will be sold all over the world.

His “America First” economics is total demagoguery. We get a first-class workforce by investing in their education, training, infrastructure, and healthcare — not xenophobic grandstanding.

What do you think?

Well Mr Reich. Here is what I think.

The Boeing 787 Dreamliner has been one of the biggest program failures in the company’s history. While a technical marvel it was three years late, largely exposed by Boeing’s disintermediated supply chain, a break with decades of practice.

Aircraft production is a precise business. It requires that all parts arrive on time and to achieve that all suppliers must be on board. The 3-month delay of a $1 plastic fastener can mean a plane can’t be fully completed let alone delivered. So multi million dollar wing set production gets impacted. So do landing gears, engines and stabilizers. Everything is affected. Boeing’s delays sent many suppliers into financial distress. In some cases it was so bad Boeing had to step in to buy out suppliers (e.g. Spirit) to prevent further delays and cost overruns.

The second big flaw in Mr Reich’s article is that Boeing is a multi-nation aircraft for a reason. It is what is known as risk and revenue sharing partnerships (RRSPs). Companies bid to be on the project and pay a part share in it. It is an investment. They are shareholders to all intents and purposes. Companies like Mitsubishi Heavy and Kawasaki Heavy bought a stake in the project. Boeing was the project manager and designer. In short international companies bought themselves a ticket to be on the 787 with the hope if it was a success they’d be higher up the technology curve when 777 or 737-Max went to similar production materials and processes.

Boeing enthusiastically embraced this outsourcing, both locally and internationally, as a way of lowering costs and accelerating development. The approach was intended to cut the 787’s development time by 30% and with it, development cost from $10 to $6 billion. Estimates show that cost ended up being $20bn and 3 years late and is expected to break even in its 10th year. It is far from the success it was meant to be.

Another thing with aircraft suppliers is their scarcity. Aircraft manufacture comes at huge fixed costs and low lot volume. Around 120 Dreamliners are made a year and the reason the supply chain is like it is makes perfect sense. Suppliers need guarantees to ensure production levels meet their financial objectives. Parts certification is a tricky business.

Boeing needs to be sure suppliers meet certification requirements. If people think pharmaceutical companies going through the FDA process to sell a new drug is a nightmare, they should try to get a new aircraft past FAA regulations. While a drug might have minor side effects like drowsiness, a plane has to fly safely every time in almost any condition. Therefore the quality, durability and safety aspects for a plane that flies for up to 40 years is second to none. There are no short cuts.

The Boeing 787 was also made with all new production processes and materials not used before on this scale. The wings were carbon fibre composite. Mitsubishi Heavy not only agreed to be a RRSP but was willing to invest to meet Boeing’s production goals. Toray, the maker of the composite material was seen as the most reliable and stable supplier. These were cold hard facts and when building a new aircraft, airline customers want to minimize risk. Boeing needs to guarantee risk minimization and made rational decisions based on that. Had those suppliers been all in the USA you can be assured US suppliers would have been picked. Sadly many have lost competitiveness. An unknown fact is that Lockheed Martin called in Toyota to help it finesse its production processes for its disastrous F-35 programme.

So while Reich points to the ‘social’ qualities (education, healthcare, strong unions and good wages) of what goes to make an airliner they are generalizations to say the least. Japanese unions are far from strong and definitely not militant. Mitsubishi Heavy wing workers would be paid the same as their elevator assembly brothers across the hall. They wouldn’t necessarily be on high wages. I would imagine that many of Boeing’s designers have Ivy League or similar pedigrees. Assemblers would also possess serious qualifications.

In any event the point Trump was making was the same jawboning at election time. Make America First and keep jobs at home. Ideally he would be saying to Boeing that following Airbus’ example of assembling a portion of A320s in China is not his wish. In fact Boeing now has a joint venture with a Chinese entity that installs interiors and paint exteriors on 737 airliners. Is he a criminal for requesting companies stay at home?

Yes Mr Reich, President Trump is not perfect but he is doing his level best to turn around the fortunes of a country sold out by the establishment over many decades. Indeed if he cuts corporate taxes and incentivizes companies to stay at home because of a rational reason to do so that will be key. Instead of sticking it to him Mr Reich, try look beyond your prejudice to see why 64mn Americans put him in charge of their future. He may well fail but voters took that risk when they put him in office. They care not for the petty issues you raise in your articles.

This article seeks to take pot shots without assessing the full facts of an industry. What you wrote wasn’t fake news but flake news.

Trump sends message by Carrier pigeon

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Well, well, well. Isn’t interesting to see a President-elect make solid progress with US corporations before he has even got his feet under the desk. For all the negative press, Trump is at the very least sending strong messages to these corporations to look after the home team or face consequences. For major multinationals like Ford and Carrier (part of United Technologies) to quickly about face on their expansion plans shows he is no light weight unlike his soon to be predecessor.

As I have argued for a long time, the quality of jobs in the US has been declining dramatically over the last 8 years. The ratio of full time jobs has continued to slide. The number of people with two or more jobs has never been higher. The election result by and large wasn’t about racist #whitelash but people fearing for future job security. We can argue that Obama drove the unemployment rate down, but multiple jobs also skew the true figure. We should ask ourselves where President Obama was in tying to cut red tape for corporates? Listen to the National Federation of Independent Business (NFIB) and 80% of respondents to the largest body for small businesses (which are 50% of total employment) said Obamacare and unnecessary regulations were the biggest inhibitors of growth. As a small business myself, I can assure you small businesses are self-regulating. We can’t afford frivilous activity.

The haters can complain all they want about the repercussions of burning flags but when it comes down to encouraging corporates to tow the new ‘hard’ line they should be at the very least issuing congratulation not censure. One of the key reasons Trump won was down to promising to keep jobs at home.

To think that years of preparation and planning to move production to Mexico gets overturned in a flash sends a very powerful message that companies are not prepared to call his bluff. Of course one can argue saving 1,000 jobs is pretty tiny in the grand scheme of things, but it sends a large shot across the bows of other like minded corporates – “Don’t play with fire. You’ll get burnt.”

Of course the wider implications confirm the idea that globalization is firmly off the agenda. As an interesting aside, I attended a conference yesterday where a member of the BoJ presented the idea that the slowdown in global trade was also in part because of a large shift by Chinese companies producing more intermediate products at home, shown by the larger impact on SE Asian countries trade stats. So before many spit venom at Trump’s plans to twist the arms of corporates to prevent exporting jobs, note China is actively pursuing the same policy. Of course Japan repatriated a lot of production when the yen weakened. Of course US companies will have to look at ways to improve productivity.

Perhaps more than keeping jobs at home, I am most interested in seeing the rapid turnaround in ‘consumer confidence’ and other leading indicators which should give a better idea as to how sentiment is shifting on the back of a coming Trump Administration. More than Carrier, Ford, currency, I am guessing that these indicators will overshoot to the upside, surprising a market that is still giving Trump zero credit. As I have always said about Trump – the market offers little promise about him – which means that any positive surprised will have a much larger than  normal positive impact.

A record to be proud of?

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A lot of people may look at the unemployment statistics and marvel at the seemingly low rates. I noted Queensland’s Palaszczuk government now employs more than 250,000 staff with the bureaucracy ballooning by more than 2500 full-time-equivalent workers in three months supposedly in health and education. Don’t get me wrong – the public sector provides vital services – fire, police and ambulance, to name just three-which are served by top drawer people. However looking across the globe, we see since the turn of the decade the OECD reports that pretty much every country has grown its public sector payroll at the same time government debt climbs and the economy slows.

Forbes wrote an interesting article pointing out an obvious longer term issue as follows:

“In many states, public service has little to do with serving the public and everything to do with using the public’s money to serve politicians. Whenever we open the books, California is consistently among the worst offenders. Recently, we found ‘animal collection curators’ making $110,290; city librarians earning $222,320; public utility commission bosses at $550,028; and county hospital doctors making $1.274 million.

This spring, at Forbes, we exposed 50,000 Illinois public employees earning six-figure salaries who cost taxpayers $8 billion. In California the numbers are exponentially larger: 218,667 employees making six-figures who cost $35 billion. For example, Illinois has 72 ‘city managers’ out-earning every governor of the 50 states. But, in California, the salaries of 171 assistant city managers average $201,550!

Using our interactive mapping tool, quickly review (by ZIP code) the 220,000 California public employees who earn more than $100,000. Just click on a pin and scroll down to search the results rendered in the chart beneath the map.”(You can see that via the previous link)…

In total, there’s roughly $35 billion in total benefit flowing to highly-compensated government workers when counting the 21,332 federal employees based in California with six figure salaries.”

A while back I wrote on the awful state of government pension funds in the US and the risk of insolvency given the unfunded portions were multiples of the state tax collections (for California it was 3x annual tax intake). I wrote:

“To put this in perspective the California Public Employee Retirement System (CalPERS) lost around 2% of its funds in 2015/16. The fund assumes an aggressive 7.5% return. Dr. Joe Nation of Stanford Institute for Economic Policy Research thinks unfunded liabilities have surged to $150bn from $93bn in the last two years. Furthermore suggesting the use of a more realistic 4% rate of return. CalPERS has an unfunded liability of $412bn (or the equivalent of 3 years’ worth of state revenue). California collects $138bn in taxes annually in a $2.3 trillion economy (around the size of Italy). With over-inflated asset markets and increasingly negative returns on highly rated paper, the growth in unfunded liabilities is even more concerning as any market correction (likely to be severe given such blatant manipulation to date). If the correction is huge it will push the unfunded portion to even more dizzying levels.”

Since the Global Financial Crisis (GFC) we’ve been living on borrowed time. It doesn’t take a genius to work out that this endless printing and hoovering up of toxic waste on the public purse then hiding it to mask reality can’t go on forever. It is a legalized Ponzi scheme at best. Even the legality can be questioned. Manipulation of financial markets is taking away the one way to reset and create price discovery.  Talking to some of my old pension fund manager clients, many lament that they are being buried by regulation on one side and government participation which is destroying fundamental performance based on individual company merits. Sure robotic (algorithmic trading) makes sense for a lot of capital allocation but not all.

I still hold that we are on the precipice of the largest economic shock since 1929. The worst part about it is that central banks have no ammunition left. Negative rates worked in Norway for a period but they aren’t working in Japan. Why? Well confidence remains the biggest neck. If you give money away and people stuff it between the mattresses then you aren’t instilling them with hope. Most Japanese know that the “national insurance” they put away is nothing but a massive black hole which will likely never return to them after retirement. So at negative rates, their investment opportunities are made riskier to get less return.

December 4th is a big day. Italian referendum which is likely to fail, throwing Italian politics back into its normal rhythm (volatility) and an Austrian presidential rerun which should favour the right wing FPO after the voter fraud discovered at the previous one held in May.

Throw on top of that Schulz taking an escape pod from the EU, Marine Le Pen edging closer to a presidency next year and we have the settings for overpriced asset markets, stretched government budgets, record levels of debt accumulation, insolvent pension funds, bloated public sectors and impotent central banks out of bullets to resurrect us. With thermonuclear fuel failing to reset us, the only way out of this is to massively cut taxes, deregulate and let the people’s confidence lead us out. In case you hadn’t noticed, more government doesn’t work.

Perhaps Reagan put it best about government – “if it moves tax it. If it keeps moving, regulate it. If it stops moving, subsidize it!”

Trump is actually just the type of politician to shake us from this drug induced slumber over the last few decades. Be thankful we didn’t get Clinton – it would have been more of the failed policies under Obama that crushed the middle class and small business, the incubator of innovation and jobs creation.

2016 vs 2008

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Sometimes pictures do really tell the tale. The above pic is UBS’s trading floor in Stamford in 2008.  Below is the same floor in 2016.

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I couldn’t help but think this should give people good context on how the industry has shrunk. Make no mistake, the number of experienced workers exiting the market is not a good sign.

More and more financial firms are chasing cheap and cheerful staff at the expense of experience. In a world where knowledge of previous cycles is so invaluable we have the intern pilot flying the plane through a hurricane. This won’t end well.