Tuesday, December 6, 2011

2012: The first ten years of the euro banknotes and coins

The euro will become ten years old in 1st of January 2012. It's ironic that one of the strengths of adopting the euro for a country is that the trustworthiness of the economy will rise significantly allowing to borrow money cheaper from international markets. Just to balance things out more important from this is the rise in foreign investments. But still the adoption of euro lead to marginal interest rates in many countries like Greece, Portugal, Ireland, Italy etc causing significant rise in borrowing leading to crisis that we are facing today.

Even though there is a lot of talk about the collapse of euro I'm fairly certain we will see the next big anniversary as well. The most important argument against euro is that it is not possible for countries to print more money (devaluation). Seriously?! That is a weakness?! First and foremost countries should learn how to spend according to tax revenues. Spending more than you earn is just not sustainable and every person knows that. Why should countries behave differently? Devaluation leads to short-term shock - exports rise, inflation rises, debt nominated in national currency is also being devalued reducing the debt burden, debt nominated in foreign currency is being revalued (it becomes more expensive to pay that back). This strategy is not sustainable. Country is much more open to shocks in foreign resources for example (rise in oil prices etc). This will eventually lead to strengthening of currency, making exports noncompetitive again. Long-term solution is internal devaluation. The same thing we are currently seeing in Greece and other PIIGS. Salaries will fall, regulations improve etc causing rise in productivity which is the essential key to long-term welfare. Devaluation is an easy way out but a bad trap to fall into.

With that I hope that the some kind of solution to eurozone crisis will be found already in EU summit held in two days time. We will probably see strict fiscal rules agreed and implemented in EU level making it impossible for countries to overblow their national budgets. We will probably also hear something from the ECB regarding short-term solution for high yields for national bonds. This could mean that the ECB is willing to cap interest rates for national bonds causing them to aggressively enter the market and buy the bonds themselves when critical levels are reached. The ECB needs EU politicians to act before they can bring out the big guns, or bazooka if you prefer.


Tuesday, November 22, 2011

Apple play into earnings


The markets have been very volatile recently. Apple reported lower than expected earnings last month even though they beat their own estimates. The problem with expectations is that when the market expects Apple to overshoot all estimates then the market just expects more. It was a matter of time until Apple reported lower than estimated.

The problem here is not Apple. Even though Apple reported lower earnings than expected (by the market), if you go behind the numbers you will see that the biggest failure for Apple was lower than expected iPhone sales. Since Apple introduced iPhone 4S in the beginning of November one major possibility could be that since this was expected, people were delaying their purchases. Supporting evidence can be found in pre-order data for the newest iPhone. Apple is unable to fulfill all the demand out there.

There have been rumors that Apple has cut iPhone production but my guess is that this is purely manipulation to get the price down even more. Before reporting Apple's shares made an intra-day high of $426 a share and the shares are currently trading at $374 a share which is a 13% drop from its highs.

Apple will be reporting their earnings in January 2012. I'm not a fan of estimates myself but if Apple can deliver their guidance for Q4 this year which is $9.30 per share then I think we will see at least $440 a share either before or after the earnings. I'm definitely going to play Apple into earnings and I'm looking for a price to enter. We might have already seen the bottom. As much as we dislike it, it depends a lot on dysfunctional politics of the US and Europe.

Why is banking more healthy than smoking?

Australia has introduced a law requiring all cigarette packages to look alike (see below). Main argument behind this is avoiding branding of cigarettes so smoking wouldn't look cool anymore for example. Theoretically this would mean that cigarettes as a product would be only consumed based upon its characteristics and the psychological value of consuming the product would not be defined to a customer. Will this reduce smoking? Only time will tell. What is interesting here is that this is one of the precedents of modern time where regulator has forbidden marketing in such a concrete way.


It is not possible to compare smoking with banking but no one would argue that both have had a major negative effect on modern society. While smoking is the direct cause of many deadly diseases, risk taking in banking sector (or in finance more generally) has caused millions of people to lower their living standards in recent years mainly starting with the crash of Lehman Brothers. The direct effect of both is difficult to assess although smoking has received much more attention in this area.

What is the point of all this? I would argue that banking similarly to production of cigarettes as a potentially well-being-threatening area of business is a commodity which should be handled like an utility rather than as profit seeking entity. If banks were to be stripped of their possibilities to (1) take massive risks in order to maximize profits, (2) make people believe that they too can enjoy the life of a millionaire once they fill their loan application and (3) regulate the way that bonuses are paid in finance sector then maybe we would have a system where banking is a utility. This would mean that banking would be a low-margin business with concrete rules for all participants - we would lose the value proposition similarly to what Australia is doing with smoking. This would mean that banks fulfill certain tasks given to them by governments. The interest paid on loans and deposits would be regulated by governments together with other aspects of banks activity.

Maybe then we would find solutions for avoiding the next Lehman Brothers crash, find some cure for inequality inspiring the Occupy Wall Street movement and solve the moral dilemma of the need of saving the banks. While this would definitely kill innovation in finance you could ask whether we need innovation in order to offer products for those that aren't able to get these themselves?

Wednesday, November 16, 2011

Crackdown on Occupy Wall Street (OWS)



Authorities of US (18 cities involved) and Switzerland have begun clearing the camps of OWS campers. There is a legal framework pending with the same aim in other cities like London. The main argument behind this action is to keep "occupied" places clean, safe and publicly accessible. According to officials it is not forbidden to hold an organized event or protest in a public area, it is a different thing though to start building a settlement in an area that might sometimes be privately held.

What ever the reasoning is the taste of this all is not good. While officials might be right in their reasoning it is clear that we will hear a lot of arguments regarding Wall Street's involvement in clearing the camps. First reaction however has been somewhat neutral and several leading groups of the movement have said they will take some time off and reorganize their movement.


The movement needs a common message now more than ever. While it has been a movement against capitalism and/or financial corporations and/or .... there hasn't been too many suggestions about concrete steps needed to be taken or concrete changes to be made. While it was the time spent together in the parks that kept a lot of people going a clear idea and some specific proposals could be a game changer here. Statements like "we are the 99%" are just not enough. Every person has the right to speak, right to vote and the right to participate in politics. If this is not good enough then what is?

Tuesday, November 15, 2011

Stock market manipulation by hedge funds

Even though I'm not at all a fan of Jim Cramer I liked this video where he explains some tools available for hedge funds to manipulate stock markets. Efficient market hypothesis anyone?


Monday, November 14, 2011

Week ahead

The markets will be mainly driven by economic data and eurozone crisis this week. We have preliminary numbers for German and French GDP (gross domestic product a ka economic growth) tomorrow morning (7 am and 6.30 am respectively (GMT)). I will not be holding any overnight trading positions since the data will hardly surprise positively but might just meet expectations. We have also numbers for UK CPI (consumer price index a.k.a consumer inflation) and EU GDP coming out later in the day. 

On Wednesday data for US CPI and industrial production will be published. I am expecting this to support the markets since US data has not been bad recently. 

Finally on Friday data about German PPI (producer price index a.k.a business inflation) will be published on Friday morning. 

Some interesting names reporting this week include Wal-Mart Stores, Dangdang (Chinese Amazon), Tyco International, Youku.com (Youtube of China), SABMiller and Salesforce.com. These are some of the names I will be watching for a possible trade. 

Tuesday, November 8, 2011

Call it "the political lag" if you wish

Greek prime minister George Papandreou has finally resigned after guiding Greece through multiple bail-out packages and adopting various reforms. When Mr. Papandreou started as prime minister in October 2009 the crisis in Greece was escalating. It was then announced that Greece had constantly underreported their finances and Greece's situation is far worse than bad. Greece's budget deficit was over 12% of GDP at that time.

After multiple confidence votes Mr. Papandreou has raised taxes, cut costs, let public workers go, introduced multiple reforms like the one aimed at reducing tax evasion - everything you would expect from a prime minister handling the biggest crisis in country's modern history. Yet his popularity has suffered greatly. According to recent polls over 70% of the people are not satisfied with Mr. Papandreou's handling of the crisis. Again, something you would expect after tough austerity measures that leaves no one untouched.

My sympathy lies with Mr. Papandreou. It's much easier to be a populist politician lowering taxes and raising salaries. The people love you.. After all that's what the Greeks and Romans did in ancient times when the emperor was becoming unpopular - held celebrations and gladiator fights. Mr. Papandreou is the victim of those earlier governments that were overspending and doing little to carry out reforms. From here the term "political lag" as well.

I have argued this before that current democratic system tends to reward those politicians that are not obeying the rules (being populist). The outcome of one's faults are handled by future governments. That's why I find it important to introduce so called governing in accordance with the rules. The principle is simple - the government is allowed to govern until it obeys the rules.

For example if Greece were to enter into its legislation that their budget deficit could not surpass 3% of GDP as eurozone rules require then the government that is unable to obey this limit would step down and new government would be elected or the power would automatically be handed over to opposition. After all the elected government is responsible for their promises during elections as much as they are responsible in obeying the rules agreed before them.

Friday, November 4, 2011

Groupon IPO


Today is the day when Groupon shares will start trading under the ticker GRPN. Demand for shares of new promising companies has been huge and almost all better-known IPOs have seen a significant price pop in the opening of trading. Yet the price pop has attracted lots of sellers and short sellers especially in the case of companies like GRPN or LinkedIn where expectations for profit are usually ahead of the curve causing volatile share price action.

Still I am hoping to get some trading action with Groupon shares. I am expecting the price of GRPN shares to pop in the open since very few GRPN shares are floated (only around 5% of total shares) and institutions are looking for exposure to hot fast growing IT firms like Facebook, Groupon or Zynga. My strategy is to buy into the opening strength and sell when buying pressure slows.

Tuesday, November 1, 2011

Greek referendum - necessary but risky

Greece announced yesterday that it will hold a referendum regarding the latest bail-out package among its citizens together with a vote of confidence in the parliament. The question asked from the Greeks is whether they want to adopt the latest aid package or not. It is a "yes" or "no" question which makes it a dangerous one. But first I will outline the core of latest bail-out package to Greece:

  • 50% write-down of Greek bonds (meaning that current holders of Greek debt will suffer a 50% loss)
  • 130 billion euros 
  • further austerity measures and reforms including selling of Greek assets, sacking of numerous public workers, raising taxes etc
All this should reduce Greece's debt burden to 120% by 2015. Greece should return to growth from 2013 (its economy will contract about 5,5% this year). 

The announcement was shocking because reforms carried out in Greece are not popular, yet they are important in order to get support from IMF and EU. The reasoning here is that solvent EU members want Greece and other historical big spenders to behave according to rules and promote economic growth. By supporting Greece and other PIIGS (Portugal, Ireland, Italy, Greece, Spain) the EU can push these countries to carry out painful reforms. 


Now Greece has put the latest package to referendum. While it is good for democracy it may not be good for Europe. Recent polls show that majority of Greeks think that bail-outs are bad or probably bad to Greece. This is because there are no people in Greece that aren't in some way affected by reforms and austerity measures. 

"No" in the referendum held would mean that the government would step down and new elections would be held. This would theoretically cause the IMF and EU withhold their support money causing Greece to be unable to pay out salaries for months possibly. Even though I am fairly positive that even then some agreement with EU and IMF would be reached, it will cause panic and market tumble wiping trillions off bank accounts. Would Greece leave the euro then? How would Greece deal with all this euro-nominated debt if their currency would depreciate 50% for example? What would be the effect on Greek economy? Just look at Icelandic example for that matter!

"Yes" in a referendum would be the best outcome of all since the people of Greece would show their support to change what current Greek austerity measures are all about. This would make it easier for the government to carry out reforms and would win the total support of the parliament as well. Let's hope that Greek prime minister Papandreou knows what he is doing. 

Tuesday, October 25, 2011

Chinese growth, the future of India et al.

China has shown some impressive growth numbers and has passed US this year as the biggest economy in the world. One key elements of China's impressive growth has been undervalued currency which has subsidized exports, investments and together with rising salaries consumption as well. Just look at the chart below (click to enlarge).


The growth components of the developed world is usually dominated by personal consumption which adds up to 80-90% of GDP growth. What happens if the salaries of Chinese workers have risen to a level that makes it financially reasonable to move your factories to India, Indonesia or Vietnam for example? What happens if there is no undervalued currency (due to pressure from inflation or other countries), no massive investments to export sector hence reducing pressure to raise wages as well (reducing consumption)?

One thing is for sure - this trend is good for India and other poor Asian and African countries. This might also be good for Western countries since more people in the world get richer creating jobs in Western countries as well. What kind of changes this means to China is uncertain.

Wednesday, October 19, 2011

Nassim Taleb (author of Black Swan) on Occupy Wall Street

I have thought about writing on Occupy Wall Street movement for a while but haven't found a good illustration for my point. Occupy Wall Street is a movement which I think has a good foundation of actually changing something and this is because it affects us all. As Nassim Taleb puts it - banking bonuses are like an additional tax for regular people which increases inequality. The main problem with Occupy Wall Street though is the lack of clear and common message. Here's one of my favorite authors Nassim Taleb on Occupy Wall Street (13 minutes but worth to watch).

Apple underreports, slowing growth?

Apple misses by $0.22, misses on revs; guides Q1 EPS, revs above consensus (422.24 +2.25)

AAPLReports Q4 (Sep) earnings of $7.05 per share, $0.22 worse than the Capital IQ Consensus Estimate of $7.27; revenues rose 39.0% year/year to $28.27 bln vs the $29.28 bln consensus, 63% of rev from outside U.S. Co issues upside guidance for Q1, sees EPS of $9.30 vs. $8.97 Capital IQ Consensus Estimate; sees Q1 revs of $37.0 bln vs. $36.64 bln Capital IQ Consensus Estimate. Q4 gross margins of 40.3% vs Street est of 39.9% and 38.0% guidance; 17.07 mln iPhones sold in Q4 vs Street est of ~21 mln; 11.12 mln iPhones sold in Q4 vs Street est of ~12 mln; reports 4.89 mln Macs sold in Q4 vs Street est of ~4.5 mln. "Customer response to iPhone 4S has been fantastic, we have strong momentum going into the holiday season, and we remain really enthusiastic about our product pipeline."

Here's an update of products sold


As can be seen the sale of iPhones has decreased significantly from over 20 million units to 17. Now thinking back this shouldn't be a surprise since Apple reported record sales of its newest model iPhone 4S - they sold 4 million iPhones within one weekend (in October). Customers were probably waiting for the newest model. Just see for yourself how sales of iPads and Macs have increased. Now I can only imagine what the fourth quarter will be for Apple since Christmas is coming. The company themselves gave a guidance of $9.3 EPS vs $8.97 consensus.

The stock price should see some support on 398-400 area since psychologically it is an important level and it is also the area of Fibonacci 61,8 level (if you're fan of TA). Stronger support level should be in the 380-s so if we fall through 400 don't expect any serious resistance until that level.

Monday, October 17, 2011

US debt by presidents

While the chart below presents the share of US debt accumulated by different presidents during their time of governance it is a well-known fact that debt is much more difficult to not accumulate during a recession.

Obama has been in the White House during a recovery from a deep recession while George W. Bush has lead a recession free country most of his time in the White House (recession began in 2007). Maybe it runs in the family since George H.W. Bush didn't encounter a major recession as well?

Then again the debt of US might have more to do with major wars that the US has held. War on terrorism began in 2001 after 9/11 and has cost more than 3 trillion to date (as is been estimated by various sources). At the same time there were no major extremely expensive wars  held during the eighties or the nineties. At least their costs don't reach to anywhere near of the Vietnamese war or the invasion of Iraq and Afghanistan during the previous decade.

All in all the presidents that the US citizens can be "grateful" for their massive debt load involve most importantly the Bush family and Ronald Reagan. What do you think?


Source: Spiegel via a blog

Friday, October 14, 2011

Apple play into earnings?

Apple reports their earnings after the market closes on Tuesday. Current share price is at $419. Let's take a quick look into their performance during the last year. EPS in last four quarters have been growing steadily:Q3/11: 7,79 (consensus 5,84)
Q2/11: 6,4
Q1/11: 6,43
Q4/10: 4,64

Consensus estimate for current earnings is $7,21 a share which is a 55% improvement compared with EPS a year ago. With this consensus estimate Apple has a one quarter forward looking P/E of 15 and a trailing P/E of 16. Apple themselves estimate a $25 billion revenue for previous quarter with $5.50 EPS but don't be misled by that. They have done that for the past year and it's dangerous to take this guidance seriously (if you're planning to short).

I am fairly positive that Apple is going to deliver results that are above estimates. iPhone and iPad sales have not slowed down (see graph below).


iPhone is the product with the biggest profit margin as well as far as can be understood from their previous Q-10 filing. During the previous quarter Apple launched their new OS - Lion as well as some improvements on Macs. Looking at the news flow in the previous quarter I'm fairly certain that we will see Apple topping the estimates. By how much and how the markets will react this is the question.

From a technical point of view I would be surprised if Apple didn't reach a new high in at least somewhere around the 430 area before the earnings.

All in all I will probably take a position and hold at least until the earnings.

Thursday, October 13, 2011

Google beats by $0.95, beats on revs

From Briefing.com
 
Reports Q3 (Sep) earnings of $9.72 per share, excluding non-recurring items, $0.95 better than the Capital IQ Consensus Estimate of $8.77; net rev (subtracting traffic acquisition costs -- TAC) rose 37% YoY to $7.51 bln vs. the $7.21 bln consensus; gross revs rose 33.4% year/year to $9.72 bln vs the $9.45 bln consensus. Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased ~28% over the third quarter of 2010 and increased ~13% over the second quarter of 2011. Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our AdSense partners, increased ~5% over the third quarter of 2010 and decreased ~5% over the second quarter of 2011. Operating expenses, other than cost of revenues, were $3.28 billion in 3Q11, or 34% of revenues, compared to $2.19 billion in the third quarter of 2010, or 30% of revenues. As of Sept 30, 2011, cash, cash equivalents, and short-term marketable securities were $42.6 bln. On a worldwide basis, Google employed 31,353 full-time employees as of September 30, 2011, up from 28,768 full-time employees as of June 30, 2011. Google+ is now open to everyone and we just passed the 40 mln user mark.
 
Sold my position afterhours, nice 10% profit overall.
 

Update on Google

Google is about to report earnings today as I wrote couple of posts earlier. Google has had a nice run into the earnings. In October 4th the stock price made an intra day low of 483. Yesterday it made an intra day high of about 553. That's a 14% return within 6 trading days. At the same time Nasdaq index has ran from 2302 to 2585 if you consider intra-day highs and lows. That's an impressive 12% return. So Google has outperformed the market, but just slightly. The reason for rising is not optimism for Google but optimism in general. This market is definitely becoming overextended and we will see a correction which might just be beginning today. It might have already begun yesterday, we will see. How it influences Google's shares after the earnings will be released is hard to tell. What we can tell however is that during the last year every time that market was overpriced (beginning of year) expectations were very high and shares were down after earnings. Same goes for opposite. After the correction in late spring expectations were lower and better than expected results sparked a rally.

Anyway short interest in GOOG has gone down all this time which mean that betting on stock price decline has decreased. That's good news. (Source. Dataexplorers)


Option data shows that put to call ratio has been constantly between 0,5-0,8 in recent weeks. This means that investors are betting on rising share price. There might be some heavy option action today as well so this needs to be looked at.

And in the end something for technical analysis fans. Google's share price has stayed in a range of 480-550 for quite a while now. If we were in a down trend then subsequent falls would make significantly lower lows after the initial fall. Staying in a quite narrow range might indicate that we are actually in an uptrend and we might be in the end of the correction. This kind of correction would usually end with a nice spike upwards.


Once again, I'm staying long into earnings. Now all Google has to do is deliver. 

Wednesday, October 12, 2011

Slovakia votes against EFSF

Slovakian government has fallen after unsuccessful vote for EFSF. Temporary government will take place and EFSF will be approved probably during the week. This won't probably spare stock markets from falling. But still, not the first time that domestic politics is more important than international politics. Unfortunately.

Tuesday, October 11, 2011

Trading idea #1 - Google earnings


Google will release their Q3 earnings this Thursday after the market closes. Even though the market may be due for a correction this week I expect Google to carry some strength all the way to the earnings. While the last two months has been largely dominated by macro data, we are heading into the earnings season and we will definitely see some companies that are performing well even at these times, Google amongst them.

First some insight into how Google has performed during earlier earnings releases. Before the last earnings announcement on July 14th the stock was standing still before the announcement and closed up only $2 at about $529 after a two-day standstill. After beating the estimates the stock opened at $597.5 the next day. In April's earnings announcement the stock was down 8% after ER and in the beginning of the year it also went into earnings with a steady 2% rise the earlier week and was up about 3% after earnings report.

It is expected that Google will report an EPS of $8.76 compared with $7.64 a year ago. This means a 14% growth YoY. Revenue is expected to be at 9.4 billion USD. (Briefing.com consensus). Google reported an EPS of $8.74 in the previous quarter, $7.83 was expected. So it shouldn't be a surprise if Google beats estimates, especially considering that there hasn't been any major signs that Google or online advertising revenues are slowing down. In Google's case it should actually be vice versa - Google+ was introduced recently and so far it has gained a lot of users. The share of smartphones using Android platform is growing, the same goes for tablets.

I will hold some shares into earnings since I haven't seen any too negative signs that might indicate that Google is slowing down. Something that Gartner has said, I guess. In the end it all comes down to the question whether the recent economic slowdown has slowed down Google or not. If Google can surprise positively we can expect a nice rally and some support for technology companies as well. Negative surprise might lead to a quick correction. Interesting week.

Monday, October 10, 2011

Domestic battles of Slovakia threatening euro

Slovakia is the last member of the eurozone to agree to expanding the powers of EFSF (European Financial Stability Facility). Slovakia's prime minister Iveta Radicova (left on the picture) is finding it hard to reach an agreement with her coalition partners who oppose EFSF. Richard Sulik (right on the picture), leader of Slovakia’s libertarian Freedom and Solidarity (SaS) party last week agreed to supporting the EFSF only if Slovakia would not participate in ESM (future substitute of EFSF) and only if Slovakia would have a veto of how the funds would be used in EFSF. The prime minister refused the offer.


Slovaks have publicly opposed helping heavy borrowers and those who don't follow eurozone rules. Let's see how Slovaks themselves manage in that area.

Slovakia has been running a huge budget deficit for the last two years (-8% in 2009 and -7,9% in 2010 - Eurostat). Maastricht criteria require it to be under 3% of GDP. In former years Slovakia has done well in that area. Slovakia plans to run a 4,9% deficit this year and has a budget drafted for 2012 which foresees a 3,8% deficit.

Slovakia doesn't have as much debt as the problematic countries in the eurozone do. It had a debt burden of 41% of GDP in 2010 which is bound to increase in current and next year.

Slovakia isn't the best performing country in the euro area. Yet it is possible that it will be the only one not supporting the EFSF legislation. And it is not because Slovakia has a lesson to teach to rest of the Europe about how to balance the budget but it's because Slovakia has power-hungry politicians not willing to do the right thing.

Pursuit Dynamics - company ready to take off

Pursuit Dynamics (PDX) is a British company developing innovative atomisation and reactor technologies. The technology is in the early stages of commercialization and the company expects to be cash-flow neutral by the end of the current year. Before I share some thoughts on the share price and its movement I will post a good overview of the technology the company is developing. The original text was posted on HERE.

WHAT IS PDX ?

Imagine its 1920 and you have just invented and patented the electric motor.

All around you are industries and devices run by steam engines and internal combustion engines water power and so on - you know and they know that electric motors will do the job so much better. So off you go on the monumental task of getting them to change - you know they will but it wont be overnight - and where do you start.

Of course PDX do not make electric motors but

Now imagine its 2005 and you have discovered a new way of heating liquids. And at the same time and in the same way a new way of mixing liquids. Both are several factors more efficient than the methods currently used by numerous industries. And you also discover that using the same system you can cover surfaces with a liquid much more efficiently and with far less liquid than any other method.

Now imagine that amazingly the system that does all this has no moving parts.

So off you go on the monumental task of getting them to change - you know they will but it wont be overnight - and where do you start.

That is the task facing PDX.

WHAT EXACTLY DOES THE PDX SYSTEM DO ?

The tech itself is simple and easy to understand

Using a gas and a liquid sent simultaneously through a patented "reactor" the pdx system divides liquids into smaller particles or drops than any other known method - up to 100 times smaller.

1. HEATING: The more you divide a given volume of liquid into separate drops the more surface area you expose. The more surface area you expose the more efficiently you can heat the liquid. Remember we have 100 times more surface area exposed than the nearest competitor. So to heat a liquid you pass it through the pdx reactor together with superheated steam as the gas. Much more of the heat is transferred from the steam to the liquid than by any other method. Including the effort of heating the steam it is about twice as efficient as any other method of heating liquids - so you save half the cost.

The reverse is true too. In the case of fire fighting the heat is transferred into the finely divided liquid to cool the fire. Again it is much more efficient than any other method.

2. MIXING: To use the PDX to mix liquids [or sludges or creams] you pass the different liquids through single or multiple pdx reactors into the same vessel. The pdx causes the liquids to move at supersonic speeds and the tiny drops swirl about inside the vessel and mix and settle as the mixed item. Using superheated steam as the gas element the liquids can be heated at the same time as they are mixed. Compare that to heating a vessel externally while mixing paddles turn the brew round to mix it. That is why people pay £400,000 for a pdx food mixer.

Food is not the only industry where efficient mixing and heating is important. Processes such as ethanol production and extracting gas from waste products, brewing and making household creams such as toothpaste and hand creams rely heavily on mixing and heating processes. PDX can do them more efficiently and so at less cost. Where heating and mixing processes are used to extract products PDX is able to extract more from a given quantity than any other method. Such as extracting sugar from corn to make ethanol.

3. COVERING SURFACES: Because the drops produced are so fine, the mixture coming out of the PDX reactor acts like a gas. But it is really a liquid in tiny drops. Because it comes out of the reactor so fast and so turbulently it covers every surface in an enclosed space, such as a hospital ward, no matter how small the surface and whatever its orientation. Under chairs and shelves, into crevices and inaccessible places the droplets go and cover the surface. Hence PDX can be used in decontamination, both medical and nuclear. It is more efficient and effective than any other method , evenly covering surfaces while using far far less chemicals than other systems. The surface covering can be made to be so fine that the surface does not appear to be wet and needs no after cleaning
Eventually painting and coating applications will also use this feature.

4. SPECIAL APPLICATIONS: Because the droplets are so small [almost down to one hundredth of the width of a human hair] they do other interesting things as well but these are more technical and specific [starch swelling, pharma applications, easier desalination of water etc]

All this is achieved at relatively low pressures of less than 3 bar. There is no need for expensive high pressure pipes, lines, containment vessels etc. The gas element of the system can be steam, air, nitrogen whatever depending on the application. The "mist" coming from the reactor reaches supersonic speed and is propelled a long distance in fire fighting, decontamination and similar applications.

And the system has no moving parts.

--------------------------------------------------------------------------------------

SO HOW DO THEY MAKE THE DROPLETS SO SMALL ?

What is the "reactor"

Imagine two oval pipes one inside the other with a fine gap between them - the shape of the end of the pipes is such that the fine opening is angled towards the centre

The liquid is sent through the fine gap between the pipes and the gas comes down the middle pipe - the very thin sheet of liquid is directed into the gas flow by the shape of the opening - the thin of sheet of liquid is hit by the gas and it fragments into the tiny droplets

The exact angles, speed, size of the openings, pressures and so on are critical

That essentially is it - simple - cheap and easy to make - patented - and incredibly effective.

____________________________________________________________________

All of this is comprehensively protected by more than 60 different patents.

Check the company's website to see how how these features are being applied

The PDX system is not as some have claimed just too good to be true.
Too many large and famous companies and organisations are using it , trying it, forming joint ventures with PDX and so on. They include P and G, Pepsi, SAB Miller, Premier Foods, Kaercher, National Nuclear Laboratories, Heineken , Marquis Ethanol and many others.

And too many very serious people, scientists and executives who are leaders in their fields, have joined the company.

SHARE PRICE ACTION

Pursuit Dynamics is listed in London Stock Exchange under a ticker PDX. Bloomberg. Its share price has gone all the way up to 700 pence in the end of last year and has come down all the way to 180 pence where it is today. The move in the share price in the end of the last year was initiated by company's statement that they have begun testing PDX's technology together with Procter & Gamble. These tests are still ongoing today and should reach some sort of commercial agreement in near future. The share price has come down significantly since its highs last year. The reason for falling has been Simon Cawkwell's (stock market commentator and investor known as Evil Knievil) statement that he will start shorting PDX's shares since the company is massively overvalued. He initially set a target price of near 1 pound compared to 7 that the price was back then. As can be seen the price came quickly down to 4 pounds a share and it stayed in that region for a while. The next major cause for the fall was Evil Knievil's comment again regarding one of the first commercial customers of PDX, Pacific Ethanol. EK said that Pacific Ethanol will go bankrupt and so will PDX. This was obviously an overstatement but since EK is given credit for his thoughts the share price went down over 20% that day. Pacific Ethanol is about to report profit in November, at least corn and ethanol prices point that way.



So currently PDX's shares are about 180 pence. This gives PDX a market cap of 130 million GBP. They would have to make around 10 million GBP a year to justify this market cap if they were a company with stable cash flow and non-existant growth. The story is different here. The company is currently in trial or commercial phases in many global markets like water treatment, bioenergy, brewing and food production, fire suppression, nuclear contamination etc. Check their website for further information.

In addition to a good growth story the company already posesses a strong position in ethanol production market in the US. Their outlook for their technology usage is 2 billion gallons of ethanol next year. With 2-4 cents a gallon (their first level solution) for PDX this makes a hefty 40-80 million USD a year. Some of the companies using PDX's technology are already moving to different production modes earning PDX from 4 to 8 cents a gallon. Let it be clearly stated here once more. These are only revenues from their corn ethanol line of activity. With their yearly 10 million GBP cost package the company will probably make a nice profit next year and the valuation of the company should be not less than 500 million GBP. Once an ethanol company has purchased PDX's technology they will pay a license fee as long as they produce ethanol. The royalties from their business can only grow.

We will get a more clear outlook in November when the company announces their results for period April-September. It is expected that they will report revenues in the range of 1,5 million GBP. Major brokers and institutional investors have set target prices from 7 to 20 pounds.


Disclaimer: I am a shareholder of the company and will remain so until the potential of the company will be recognized by the market and its technology gets fully commercialized and appreciated.

Monday, October 3, 2011

Anecdotal composition of ECB's executive board

Mario Draghi, caricature
In case you haven't been extremely interested in the ECB (European Central Bank) you probably don't know too much about the members of the executive board. You might have heard that the current president of the ECB Jean-Claude Trichet, the Frenchman, will hand his duties over to Mario Draghi, the Italian, in November. You might have also heard of Jürgen Stark, the German, who's leaving the ECB for personal reasons even though it is thought (with a high level of probability) that he strongly opposes current market interventions by the ECB. Anyway, what you probably don't know or haven't looked at is the national composition of the ECB starting this November. Here are the 6 members of the executive board:
- Mario Draghi, Italian
- Vítor Constâncio, Portuguese
- Lorenzo Bini Smaghi, Italian
- José Manuel González-Páramo, Spaniard
- Jürgen Stark, German (has resigned and will leave by the end of 2011)
- Peter Praet, Belgium

Notice some familiar pattern here with some troublesome countries? I'm not suggesting that the ECB might be too South European here even though 5/6 of the ECB's executive board is from countries with laissez faire approach to public finances. All the members of the ECB's executive board have been approved by all eurozone members. It is a bit anecdotal though since you would be looking for countries like Germany, Finland and Netherlands to be the guardians of the euro.

Wednesday, September 28, 2011

Against EFSF? Really?

Estonia's parliament will vote on expanding the powers of EFSF tomorrow together with Germany. As always media and politics have managed to develop a circus out of the discussion preceeding the vote. Polls show that Estonian people are mostly against expanding EFSF (also those supporting our current right-liberal government). Some of the people shout out arguments like "Greece should go bankrupt" or "Why do we have to feed banks". This was followed by a statement from our centre (populist) opposition party that they also don't support joining the EFSF probably hoping to get some votes. Since people are getting very emotional on this subject I will lay out some most important facts about EFSF. (Check these out yourself HERE)

1) First and foremost - EFSF was created with an intention to preserve financial stability in the eurozone by providing temporary financial assistance to governments or banks in difficulty. In other words it is supposed to AVOID crises like we are in now.
2) EFSF finances itself by issuing bonds that are guaranteed by all 17 eurozone countries up to 440 billion euros. Countries participating in EFSF do not pay any additional funds to EFSF, it is backed by guarantees.
3) EFSF is only a temporary measure to handle the current crisis and its permanent follower will be ESM or European Stabilisation Mechanism.

Q: What happens if a country doesn't participate in the EFSF?
A: There's a risk that other countries don't want to particpate as well, who will finance the EFSF then?

Q: Why do we need EFSF at all?
A: To avoid uncontrolled bankruptcies of banks and countries

Q: Why do we need to avoid their bankruptcies if they have overspent?
A: Since if we don't borrowing costs for countries like Italy, Spain, France, Belgium etc will rise significantly leading to other bankruptcies. Banking system as we know it might fall because of the losses that these banks will have (the banks are holding the bonds that are worthless after a bankruptcy of a country). There will be no more euro.

Q: What happens if euro goes?
A: Countries like Germany, Estonia, Finland, Netherlands etc that are financially sound will get currencies that will rise significantly in value causing our exports to fall greatly (it is then more expensive for other countries to buy our products). This will bring massive unemployment and loss in economic welfare. It has been estimated that the effects of such an event would lead to 20-40% fall in GDP in first year. For countries like Spain, Italy and Greece this might even leed to civil war since their currency would devalue so greatly that the people of these countries are unable to pay off their loans. There would be massive unemployment since there is no funding for investments (who would borrow to a bankrupt country in civil war?). GDP of these countries could even fall 50% or more. (Analysis is done by UBS).

The total loss of these events will surpass trillions of euros (if you look at European GDP of about 12 trillion EUR). The countries going through tough austerity measures including budget cuts and reforms will hopefully turn to growth in a couple of years. It is not like regular people of these countries aren't suffering enough already. Hasn't Europe learned anything from its history just 70 years ago? It's not like we are not on the edge of a cliff..

Thursday, September 22, 2011

Operation Twist not impressive, fiscal stimulus needed

Fed announced yesterday that it would change the average maturity of its bond holdings towards longer term bonds. This is carried out by selling short term government bonds (2-3 years) and buying long term bonds (6-30 years). The idea of this operation is to lower long term yields thus making mortgages cheaper and stimulating economic growth through housing market. This isn't something that markets liked to hear, unfortunately. S&P500 was down more than 2% yesterday in addition to -3% already at pixel time. Not to mention DAX that is down more than 5% in trading today.


There has been a lot of talk of decreasing effect of more quantitative easing. Since yields are on record lows already the effect of manipulations performed by Fed have just marginal effect. The problem is not that long term yields are too high. Interest rates are near 0% already. The problem is economic outlook. Companies aren't investing as much as they used to hence not supporting employment, the future of individual persons is everything but certain. There's only so much that Fed can do about it. They have done everything they can.

Unfortunately Fed is one of few institutions that realizes the importance of financial markets in modern economy and their importance in supporting economic growth. Unfortunately Fed is also one of few institutions that is willing to act quick. What is needed today, is economic stimulus by fiscal expansion.

We need governments of the biggest countries to step in, initiate infrastructure projects thus directly subsidising employment. We need them to expand not contract. Even though we have a debt crisis in our hands we need to borrow (and grow) are way out of this mess. Governments tend to overspend during good times and underspend during bad times. This is not the fiscal policy we signed up for! That's the basic idea of fiscal policy - to level out economic cycles.

Debt crisis has to be handled by bold guarantees by central banks (for example unlimited purchase of government bonds) or by issuance of eurobonds for example (in the eurozone). Instead of this we are crossing our fingers and hoping that we will somehow get out of this mess, dealing with consequences.

Unfortunately things have to get really tough for this to happen. Stocks are cheap around the world. We need bold action by governments to get the stocks rising again. Watch out for these weekend meetings of countries. I wouldn't want to be short ahead of some bold plans when these would be announced at some point.

Tuesday, September 20, 2011

Europe needs a vision, not just doing something

Imagine a football match without goals and goalkeepers, everybody are just trotting around anxiously. Imagine a ship on the sea without a compass or any other navigation system. Imagine a doctor treating you for symptoms even though you haven't agreed that you want to get better. This is what Europe is doing right now with the eurozone crisis.


In strategic management a vision is defined as the way an organization should look like in the future, what is the state of things. In the same manner we could (and most definitely should!) have a vision for Europe. What is the future of Europe? Do we want an economic union, a political union or even more integrated Europe? If we knew that it would be awfully easy to find a solution for the crisis.

If we wanted tight economic cooperation amongst countries we should let Greece suffer for their own overspending and throw them out of the euro. If we wanted United States of Europe we should introduce bazookas like eurobonds or unlimited supply of liquidity, bond buying and loans from ECB.

A clear vision of Europe is making it so difficult to find a solution to the crisis since everybody has their own vision for Europe. Again - imagine a football match where everybody would have their own rules for the game.. It is not too late yet. Even though the project of Europe should have began with a common understanding of the ultimate goal, it is not too late to agree upon one right now. The markets don't need a bazooka per se, they need a clear understanding of how Europe is going to tackle the crisis.

Thursday, September 15, 2011

Please welcome Google flights

Google has just launched their travel planning initiative (see website here HERE). Currently site unfortunately supports only US flights. All the major travel sites were down yesterday in the beginning of the trading day following the announcement.

I ran a quick test and compared the site with Expedia. I set up a travel route from LA to NY departing on 1st of Oct and returning on 8th of Oct. Expedia found me a flight that cost 258 USD (Continental), Google 289 USD (American). So I guess Google might not have so many deals with different airlines yet.

However the best feature that Google has is displaying the cost of flying from a selected destination to other cities. Just look at the following map (click to enlarge). So for example from LA to Denver it costs 159 USD to fly on these dates. Can't wait for this feature to be available in Europe since planning multiple destinations can be a real headache.

Tuesday, September 13, 2011

Windows 8 in action

MarketWatch has posted a video of Windows 8 in action on a tablet. Looks cool doesn't it?

Monday, September 12, 2011

Are German stocks getting cheap?

Frankfurt blue chip stock index DAX is one of the biggest fallers during the recent financial turmoil. Just look at the 5 year graph of the DAX index (click the chart to enlarge).

DAX has declined more than 25% already this year compared to S&P500 (9%) in the States or FTSE100 (13%) in UK. So the question is whether German stocks are getting cheap? On the following chart P/E ratios (stock price to earnings per share) of all the companies included in the DAX index are presented (click to enlarge).
While European banks are suffering a possible liquidity crisis (hence the low valuation) Commerzbank's stocks are good for gambling. The low valuation of most stocks seem to price in a double dip recession in Europe. We could see a nice rally with cheapest stocks from manufacturing industry once economic data gets more positive. Upside of 30% from current levels would not be anything extraordinary. One of my favourites from these stocks is BMW. Even though Europe and US might be slowing we have a major consumer boom in China and companies with big Chinese exposure might still do well this year and the following year. Hence my sympathy for BMW as well.

We'll see how much downside the DAX index still has and whether we're entering a double dip recession. Those who believe in a slow recovery rather than a recession might just start shopping, me included.

Sunday, September 11, 2011

In memoriam

Today is the anniversary of 9/11. The world changed that day, 10 years ago. War on terror officially began that day. But is the world safer today?

I think it is not. Terrorism comes in many forms, as we saw recently in Norway. The bombings in Russia or UK were also a proof of that. Al-Qaeda has lost their leader and their network is not the same it was 10 years ago which makes me to believe that operation similar to 9/11 would be hard to carry out. There just might not be organisations with such capabilities anymore.

Still, lack of such attacks is not a proof that such capabilities don't exist. As long as there are different ideologies there are those who are willing to fight. We just have to hope that initiations like the Arab spring will carry the power of words further than the power of weapons.

Saturday, September 10, 2011

What about Maastricht criteria?

Every country part of the eurozone has to fulfill certain economic conditions (referred to as Maastricht criteria). The country that is not obeying these criteria can be punished by the ECB. The criteria go as follows:
  1. Price stability. The inflation rate should be no more than 1.5 percentage points above the rate for the three EU countries with the lowest inflation over the previous year; 
  2. Budget deficit. This must generally be below 3% of gross domestic product (GDP);
  3. Government debt. The national debt should not exceed 60% of GDP, but a country with a higher level of debt can still adopt the euro provided its debt level are falling steadily;
  4. Exchange rate. The national currency's exchange rate should have stayed within certain pre-set margins of fluctuation for two years (no re- or devaluation of currency);
  5. Interest rates. The long-term rate should be no more than two percentage points above the rate in the three EU countries with the lowest inflation over the previous year;
Maastricht criteria were the reason why my home country Estonia didn't join the euro in 2007 as planned because of the inflation criteria was not fulfilled even though Estonia is fiscally the toughest and best performing country in Europe (Estonia is part of the eurozone from 2011). That's OK because rules are rules... or are they? Greece, Italy and Belgium (the heart of EU - really?) joined the euro even though their debt was exceeding 100% of GDP. Greece was running the biggest budget deficit with one of the highest inflation rates. Check the following graphs.




So far the criteria have been important for countries willing to adopt euro since it's a precondition for joining (this statement is conditional itself as seen from history). For joining countries it is a good motivational exercise to get their finances in order. Once already in the eurozone motivation quickly disappears.

So how should we deal with that? Shall we fine the countries that are not capable of cut their spending (read: living within their means)? That's like asking for money from a beggar so it probably wouldn't work. There are still couple of things that could be tried.

Make it political! The main reason for not cutting spending or increasing spending for politicians is the support of their voters. Political promises can often lead to overspending so there is motivation for politicians to spend more than possible. So why couldn't it be possible to force the government step down if two out of five criteria are broken for example?

Another idea is to keep away the cookies. Today a lot of countries are receiving structural funds and richer countries are participating in other mechanisms like Framework Programme. Would it make sense to cut funding for countries that aren't fulfilling their duties? Since all of the EU countries aren't in the eurozone it would be impossible, but approach as such would serve its course (as can be seen in Greece today).

I would prefer stabilizing the eurozone with political measures which reduces populism, the mother of all wrongdoings. We should remove the motivation to behave badly, fines and nagging doesn't work here!

Tuesday, September 6, 2011

What happens to a country after leaving the euro?

Who hasn't heard of a populist politician arguing that a country should leave the eurozone and be better off? I've had many discussions on this subject but as long as we don't have a precedent we really don't know what will happen. Anyway we have some calculations by UBS Securities (LINK) and I quote:

Ahead of the German constitutional court ruling on bail outs, we have assessed the cost of countries leaving the Euro. For a weak country the cost is 40%-50% of GDP in the first year. For a strong country like Germany the cost is around 20-25% of GDP.

Economic costs of break-up dramatically exceed the costs of bailing out weaker states. Political costs also need to be considered. Virtually no monetary union has broken up in modern times without some trend to authoritarian or military government, or civil war.

The cause for such a major crash is loss of credibility, default, collapse of banking system etc. I wonder whether the same people arguing against war in Iraq for example are arguing against bailing out countries like Greece which could turn into civil war? I wonder how the protesters below expect governments to fund basic needs of people with a scenario described above?


It is easy to be populist because it is good to be popular. Next time you hear somebody arguing their case about Greece, Italy or Iraq ask them about alternative theories - what should we do then (and don't settle with an answer "don't bail-out a country") - because that's what we usually see and hear - populist thoughts without a credible alternative.

Monday, September 5, 2011

Cat and mouse play by the ECB

I'm back from a nice holiday and sad to see that Greece is making the headlines again together with Italy. Two interesting things have happened that caught my attention.

First, Greece has caused representatives of the IMF (International Monetary Fund), EU (European Union) and the ECB (European Central Bank) to walk away from a progress monitoring event which was suspended for 10 days causing the bond yields of Greek 2-year bonds to rise to more than 50% today! The price of the bond has fallen lower than 50% of its initial value. This means that investors are getting more confident over a Greek default. Greek finance minister Evangelos Venizelos claims that Greece is not willing to make any more budget cuts this year.

The second interesting thing is that at the same time the ECB has not commented on whether they are continuing to buy Italian government bonds or not. This has caused yields of Italian 10-year bonds to rise above 5% again which is considered to be not-sustainable.

The ECB doesn't have too many instruments to put some pressure on Italy and Greece carrying out their austerity programmes. While couple of weeks ago we could see worrying statements by Papandreou, Berlusconi and Tremonti (Italian finance minister) then suddenly we're seeing both governments dropping some of their austerity plans. So right now we might just be seeing the ECB taking a more straightforward line with the two governments.

Even though both sides want to find a solution to the crisis it is not so easy to find it. The economies of both countries aren't doing so well and extra austerity measures might temporarily lower the growth even more. At the same time the ECB has to stand against Germany who opposes bond buying programme. Who will be the cat and who will be the mouse in the end?

Friday, August 26, 2011

Finland vs Greece vs Europe

No, it's not a football match I'm going to write about, even though Greece would have a much bigger chance succeeding there. Finland has gained much attention recently since their prime minister announced that Finland has gotten monetary collateral for supporting Greece. This means that Finland agreed to support the second bail-out package to Greece only if Greece would deposit equal amount of money as a collateral for Finland. If Greece would go bankrupt, Finland would keep the money.

For Finland this is mainly a domestic political campaign. Finnish voters are turning anti-euro and the government had to do something in order to win some votes back. For Greece, guaranteeing collateral was one way of securing the votes of all countries, including Finland.
Other countries in the eurozone though are (rightfully so) upset because if one country gets collateral, why shouldn't others? This would eventually lead to a situation where all the money borrowed to Greece would be deposited somewhere as collateral and there would be no money left for Greece to cover its costs. Is there any solution for this?

Seeking collateral for the money borrowed to Greece would be a good idea since this would discipline Greece as well. What could be used as a collateral though? One possibility could be natural resources. In 1992 my home country Estonia successfully carried out a monetary reform which substituted Russian ruble with Estonian krona. Estonia initially used our national forest and gold reserves as collateral for the krona. So let's look at Greece's natural resources and other reserves (from CIA World Fact Book):
  • 991 million cubic meters of natural gas with a market value of around 138 billion USD (Bloomberg)
  • 6,37 billion USD in gold reserves
  • 10  million barrels of oil with a market value of around with a market value of around 1,1 billion USD (Bloomberg)
In addition to that Greece has deposits of bauxite, asbestos, nickel, magnesite and marble. So Greece just might have enough natural resources to at least partially put out a collateral for money received from other eurozone countries and the IMF. As a matter of fact natural gas, gold and oil reserves add about up to the total amount of the most recent bail-out package of 110 billion euros.

Wednesday, August 24, 2011

Crisis escalated (and managed) by ECB

I came across a blog (link) where Rebecca Wilder pointed out that hiking of interest rates in Europe has worsen the crisis in Europe. Take a look at this graph.


ECB (European Central Bank) has risen interest rates twice this year. In both cases the yields of 10-year government bonds of the most problematic countries (Yes, Belgium is not one of the hawks) has risen considerably. This means that these countries have to pay much bigger interest costs on their debt thus worsening situation with their budgets.

Now ECB has started buying government bonds of Italy and Spain in additon to Greek, Portuguese and Irish bonds. ECB now holds more than 100 billion of debt of these countries. While the ECB is terrified of inflation (reason for hiking interest rates) their colleagues from USA have speculated that inflation might be temporary. Maybe that's what ECB should do now - lower the interest rates so the euro would weaken supporting export and possibly lowering yields of problematic countries as well. Of course, maybe the ECB knows something we don't. Or maybe Jean-Claude Trichet (president of ECB) is busy buying all the bonds. We will know more maybe even on Friday when the ECB publishes their opinion on monetary developments in Europe. If not then, we will here more on the 8th of September when the Governing Council will meet in Frankfurt to discuss economic environment in the eurozone.

Tuesday, August 23, 2011

Gold bubble?

Take a look at a 1 year gold price chart in USD.


As you can see the price of gold is going parabolical and this, in fact, is a proof of a bubble forming especially considering we don't have hyperinflation in US. If you don't believe me take a look at the following two charts - first is a yearly price of silver where you can see a decent correction after parabolical rise. The second chart displays Nasdaq index during the famous dot.com boom in the beginning of the current century.


And here's Nasdaq


The most difficult question with all bubbles is this - will we see even higher prices or are we heading for a top. Since this is impossible to answer, I would recommend the following. Set a target price for your investment which for you is fundamentally justified for some reason. When this price level is achieved, sell and be happy that you made profit. Even if the price does goes up after you sold this is all speculative and it might as well go down and eat your profits.

The price of gold will come down at some point. The question is how far can it fly. What is your target price for gold?

Monday, August 22, 2011

Panic or what?

In case you haven't seen the picture, here's an insight to stock market movements.


Now take a look at the S&P500 stock index for the last 5 years.


Are we still in denial? Have we gone through panic already? Are we ready to capitulate? The only way you would know is if you felt sick each morning and you are ready to sell with whatever losses. Stock markets usually rise much slower then they fall. If you are a long term investor (2 years or more) then you wouldn't need to worry too much since eventually the markets will bounce back and we can start waiting for euphoria.

The bottom of 2009 came after the financial world as we know it was about to end unless lots of tax payers money was used to bail out some of the biggest banks in the world. Our current fears are driven by uncertainty and possibility that we might be heading for a recession again. The fundamental situation is not as bad than it was two years ago which makes me think that we will see the hopeless despondency phase (the bottom) much higher than in 2009. We might already be in a depression phase.

It is dangerous to catch a falling knife though so I would wait until we have seen some stability and strength in the market before I would start shopping for bargains again. There is nothing rational about market bottoms. Volume levels are also important since that is an indicator of smart money entering (or leaving) the market.

On Friday Ben Bernanke from the Fed is about to deliver a speech on economic conditions. While we probably won't hear QE3 or something similar announced we will get a pretty good picture on how the Fed sees the situation in economy. I think we will see some speculation on the markets before that. If you see markets rising this week then make sure you won't fall to "sell-the-news" reaction. Whatever the news are, we will probably see some selling action assuming there will be a lot of green this week.

Keep your head cool, your emotions in tack and we will see some news pretty soon.

Friday, August 19, 2011

The Pope in Spain - can Spain handle the costs?

There are tens of thousands of people on the streets in Spain rioting over papal visit and its high cost in times when Spain should cut unnecessary costs and deal with unemployment problems. These are the main arguments. Let's do the math in order to decide.

It is thought that papal visit will cost around 50 to 100 million euros to Spain. Price tags offered also include costs like cleaning, security etc in addition to everything regarding Pope's well-being.

It is thought that one or even two million people will try to get a glimpse of the Pope, many of them arriving from other countries even from as far as Philippines or Brazil. It is estimated that about 500 000 foreign pilgrims visit Spain to see the Pope. Average tourist spends around 90 euros per day according to Spanish tourism statistics (link). So even assuming that a tourist spends only two days in Spain will cover the costs of the event. It is thought that actual number of foreign tourists can even exceed 1 million people.

Not to mention those extra 10 000 policemen or thousands of cleaners brought to the streets with Spanish government money (included already in the price tags brought out).

Poster saying "Not with my taxes"
Let it not be a monetary argument because it seems like a nice boost to Spanish economy at a difficult time. The protest should more focus on the views of young Spaniards towards abortions and same-sex marriages or 0,7% religious tax rate imposed to all people.

72 percent of all Spanish people describe themselves as catholics. Amonghst young people only 46% describe themselves as catholic.


Thursday, August 18, 2011

Another recession coming up in Europe?

There has been a lot of talk about another possible recession that the world could face. Focus on debt and spending isn't helping since government spending also contributes to economic growth. Following chart presents real economic growth (adjusted with inflation) on a quarterly basis (compared with previous quarter) in the biggest economies in Europe (also for comparison purposes EU27 and eurozone countries in average)


As can be seen from the chart the sudden slowdown occured in the second quarter of current year in all countries at the same time which is remarkable. It can also be seen that sudden slowdown occured again in the final quarter of 2010. The effects of the previous slowdown was thought to be related with extreme weather conditions in northern Europe. This shows that small things (or extraordinary) can have a big effect on economic growth - considering that it is already fragile due to the recent (and still ongoing) financial crisis.

The following chart presents real economic growth on an annual basis (GDP value of current quarter vs GDP value of the same quarter last year - this methodology is not used by major statistics departments which calculate annual growth by multiplying current quarter growth by 4).


From this chart it can be seen that growth indeed has slowed considerably but there is no reason for panic. Previous recession was followed by a quick recovery and the growth has slowed. Whether we will go into negative territory we will find out in October-November.

Couple of more things have to be taken into account. Second quarter numbers obviously include the effects of Japanese nuclear disaster in March and since the whole supply line of major industries was disrupted some of the growth might have just gone there. Also European Central Bank has risen interest rates already twice this year which definitely has a negative effect as well. Cutting of budget deficits isn't helping.

We might see a bounce in economic numbers if some of the weak growth was caused indeed by the Japanese disaster. We might also see ECB lowering rates if weak growth continues and in addition to that some additional measures by the Bank of England (monetary stimulus). All in all I am pretty confident that we will not see a bad recession coming just now.

Wednesday, August 17, 2011

Soviet Union vol 2

Call it whatever you want. Putin calls it the Eurasian economic union. The idea of Soviet Union has reinveted itself. Only this time the union is not forced by war and occupation but instead, economic cooperation.

It will be formed based upon the Eurasian Economic Community or EurAsEc which is active today.  The first agreements came into effect already a year ago when Russia, Kazakhstan and Belarus removed tariffs and custom controls along the countries. Current members also include Kyrgyzstan and Tajikistan (Uzbekistan currently suspended). The single market currently covers around 170 million people already and is bound to grow more.

Kyrgyzstan and Tajikistan have already expressed interest in joining the new union. There has been talk of a common currency from 2013 onwards. With that move Putin will try to get countries like pro-European Ukraine and Chinese influenced Kazakhstan to integrate more thoroughly with Russian market.

It's a world of unions, not a world of single countries anymore. The process is influenced by the coming of countries like China and India which are just too big to ignore.

Some more info HERE

Tuesday, August 16, 2011

Time to buy Nokia?


Shares of Nokia were up 17% yesterday after Google announced it will buy Motorola Mobility. Seems like investors were placing bets that Nokia could be the next takeover target. I'm not sure this would be the best investment thesis, here's why.

First of all Google's push to take over MM was not their strategic move to start producing their own mobile phones. Google is and will be an advertising company. It was the huge number of patents, especially in wireless solutions, that MM had that was of interest to Google (more specifically around 17 000 patents and 7 000 applications). For Google the ownership of the patents could mean that its partners will receive relevant licences in competitive terms which will secure Android's market position. It's a game of patents and since Microsoft already has a partnership with Nokia there's no point in buying them.

Nokia Windows 7 phone concept
circulating in the web
For me news about order of 2 million Windows 7 Nokia phones were much more important. There are rumors around that we might see a presentation of the phone already in September and they will hit the shelves for Christmas. Another interesting rumour going around is that Nokia is producing tablets secretly without involving Nokia brand. Techradar link

So for Nokia's case the question is not whether Nokia is a takeover target but whether they will succeed with their new phones (and tablets.. if the rumours are true..). For speculative purposes I would consider taking a small position in the coming months after there is more certainty about the economic recovery and hold the position until the results of Q4 2011 since there will probably be a lot of uncertainty regarding their sales. For long-term investor I would recommend waiting for the results of christmas sale and subsequent comments before taking a position.

Monday, August 15, 2011

Bye-bye eurobonds, enjoy the crisis

Germany and France have once again publicly opposed eurobonds as a measure of resolving the crisis. Eurobonds are like regular bonds, only they are guaranteed by all eurozone members jointly which means that they carry very low interests and are probably rated with a triple A rating (maybe not as low rates as in Germany but relatively low still). Eurobonds would replace national bonds so all countries issuing eurobonds can borrow money from the markets with a low price.

Eurobonds would cure one of the biggest problem currently spreading in the markets - possibility of attacking weaker countries. What happened in Greece, Ireland and Portugal was about to happen in Spain and Italy. Since these countries didn't come out of the recession as quick and their public finances were a mess, yields on their national bonds started to rise quickly. This means that bigger interest costs have to be paid for their national debt hence making their fiscal position even worse. Weaker fiscal position means bigger risks again and yields rise again - it's a self-fulfilling process. With commonly guaranteed eurobonds attacking countries' bond markets is not possible (in normal circumstance) and all member-states can borrow cheaply.

Thus with eurobonds we can also cure the biggest problem today. With cheap money eurozone countries could (instead of too much austerity right now) stimulate investments and introduce reforms like targeting tax evasion for example. This would lead problematic countries to growth and cure the budget deficit problem as well (together with moderate austerity of course).

So why Germany and France oppose eurobonds. Their main argument is that without common economic and budgetary policies there is no point in issuing jointly backed eurobonds because this would punish stronger countries (by raising their interest costs). This is of course true but countries like Germany and France could push through any reforms they wanted in EU. Especially at times when the whole Europe is looking for a way out of this mess. We have elections coming in Germany and Mrs Merkel has voters to worry for. Main opposition parties in Germany already support eurobonds and thus it is a matter of time when they are introduced.

Until then, bye-bye eurobonds and enjoy the crisis!

Friday, August 12, 2011

Why short selling ban should matter right now

There have been various references to the ban of short selling initiated by US in 2008 compared with EU's decision today. It didn't work then, markets did not stabilize and fell even more. I'd say that situation is very different right now. Back in 2008 the markets were driven downwards by bad fundamentals and outlook. Stocks didn't fall because of short selling (only). Right now there is much uncertainty in the markets. Whether we're going to see a double dip (another recession) or not remains unclear. Fundamentals are not terrible, the economies of the biggest are recovering, though slowly. Speculative greed and fear are driving the markets right now so ban of short selling will reduce the possibility of gaining from falling markets hence reducing the fear as well. Not to mention margin calls.