Graduate Finance

Blog Closed

Mon, 20 May 2013 08:20:00 +0100

Due to new employment, I will unfortunately be unable to keep writing posts.

Thank you for the support and I hope you have enjoyed the blog.

Why You Should be Investing in Europe

Tue, 09 Apr 2013 18:25:28 +0100

With UK inflation at 2.8% for February and ever low interest rates, investors are struggling to find real returns for their investments. With 10 yr Gilts currently yielding 1.71% and inflation likely to increase over the coming years, the fixed income space is looking less and less appetising. Judging by the increase in alternative fixed income products such as infrastructure funds, investors are looking elsewhere in the search for yield. Whilst infrastructure funds, offering investment opportunities in dependable assets with visible revenues streams, may interest some investors, I think that the big opportunities lie in European equities

Europe has been riddled with financial insecurity recently but you only have to look to Cyprus to see the marked change in market confidence comparable to 2012. Cyprus’s bloated financial system, fat from the excess of Russian tax squeezes, almost toppled resulting in a serious haircut for the countries savers. Savers with uninsured cash reserves of over €100k could lose up to 60% according to the latest reports, surely causing chaos in the markets? Well not really. Markets were hit but by no means in the magnitude that they would have been should this have happened 9 months ago. Using my best market timing I invested in European Equity fund (ex UK) in the days before the Cyprus debacle started and remarkably I am only just in the red. Greece, Portugal, Italy and Ireland caused wild swings in the markets last year that had knock on effects across the global financial system. The market was sensitive and the recent events in Cyprus serve to illustrate the tidal change in investor confidence. The market believes that Mario Draghi will do ‘whatever it takes’ to save the Euro.

So why should you invest in Europe?

Amidst the tough economic backdrop, companies have had to prepare for the worse through stock piling cash in case of an extended, 1930s-eque depression. The financial stability of these companies is strong and, whilst Europe may continue to be a low growth area for the next 5+ years, many European companies operate on a global scale allowing them to generate earnings from areas where the consumer is stronger. As a result, many of the larger European income stocks have kept paying dividends and in some case offering income growth. Great Rotation or not, picking the right stocks in Europe could offer appealing returns and the scope for capital appreciation once things do pick up. There are a wealth of companies in Europe, allowing for investors to be picky and find the right companies for their investment objectives and economic outlook. For me the sort of stocks to focus on are those in the vein of Nestlé, Carlsberg and SAP AG. There are plenty of funds to choose from in the space. I picked the Allianz Continental Europe Fund which has Thorsten Winkelmann at the helm. He also the runs the (now closed for subscription) Allianz European Equity Growth Fund and has a history of generating returns for investors in this low growth environment.

Still not convinced? Well if its equities you aren’t comfortable with, I suggest you look to the latest memo from the Chairman of Oaktree Capital, Howard Marks (worth subscribing, if you don’t already). He has frank manner and his pieces often consolidate a number of topical, loosely correlated concerns that I have.

“And if I’m wrong – if there is no rotation from fixed income to stocks – I’m not that worried that I’ll end up with great regret over having failed to pile into T-bills yielding zero or the 10-year note guaranteeing 2.0%. When attitudes are moderate and allocations are low, like I feel is currently the case with equities, there’s little likelihood of investing being a great mistake. And when interest rates are among the lowest in history, it would take deflation depression or calamity to make failing to invest in Treasurys and high grade bonds a serious omission.”

What should economists and policymakers learn from the financial crisis?

Thu, 28 Mar 2013 12:32:00 +0000

As you may know from reading my previous articles, I am interested in how the financial system is regulated. Not necessarily from a compliance perspective but more through an interest of how regulation can drive the financial markets. So the recent talk at LSE on ‘What should economists and policymakers learn from the financial crisis?’ was an event I had been looking forward to for some time. It quickly became apparent though, that due to the “economic rock star” line-up, I wasn’t the only one waiting with bated breath (yes, at one point they were referred to as economic rock stars). Despite confidently applying for tickets under four different alias’s, I was rather put out not to have received one. I found solace, however, and attend the video link on campus.

A LSE professor opened with quite a good quote from Peter Diamond, an American economist. He said “When analysing a topic, only three papers normally have a real contribution. The trick is to know which three”.

The talk consisted a short speech from each of the delegates, Mervyn King, Ben Bernanke, Olivier Blanchard, Lawrence Summers and Axel Weber. Below are my highlights.

Ben Bernanke said that our recent crisis was akin to many other financial crises with the “classic prescriptions of liquidity provision, liability guarantees, asset evaluation and disposition, and recapitalization where necessary.” The difference to previous financial crises was that down to the global nature of the financial system, and the scale and complexity of the global financial institutions.

Bernanke went into detail about the uncoordinated abandonment of the gold standard in the 1930s and the ensuing competitive depreciation of rates. Countries used what he called ‘beggar thy neighbour’ policies, which intended to boost domestic economies through stronger exports achieved by the depreciation of exchange rates. The problem with this type of response was that the gains that this country felt were offset by the losses their trading partners felt. This then depreciated the currencies of their trading partners and due to the relative nature of currencies, removed any gain felt by country who had depreciated first. Everyone was worse off. Currency depreciation has been in the news a lot this year and was a major worry until the G20 nations agreed to not target exchange rates competitively. Bernanke continued his talk along the same vein, making note of the collaboration between central banks across the world and celebrating this coordination as the reason the global economy is showing signs of recovery. The financial industry is riddled with global complexity and the coordination of regulators and central banks will be integral to its future. Later in the talk Axel Weber argued the need for a global regulator, referencing the trouble he has as Chairman of UBS to coordinate operating globally but adhering to differing national laws. He emphasised that, when the Basel III initiative was formulated, harmonised implementation was key. This has not been seen and the focus on national implementation hurts large multinationals.

A particularly enjoyable element to the talk was reflecting on the recent crisis without politics being involved. A point that was reinforced by almost every speaker was that the independence of central banks is important. The pioneering move by Mervyn King to make the Bank of England responsible for setting interest rates was lauded and it was implied that economics works better without politics.

The ‘rockstars’ in concert (by videolink)

The talk gave me a fresh look at economic figures. The speakers had all devoted their lives to understanding the economic history from the past so they could better control our economic futures. It felt very much as though I was in front of a group people who has pressed the buttons and pulled the levers to guide us through such a drastic economic depression in the best possible way.

The talk was not without warning though. Axel Weber said that we need to be mindful of implementing regulation during a period of recovery. The quick speed of implementing regulation can hurt growth at a particularly sensitive time. Axel also took the opportunity to have a dig at the press, stating that when regulators change the time frames it should not be construed as a result of bank lobbying – the banks were asked for their opinions.

The current situation in Cyprus was flagged as a stark reminder of the risks still out there. Whilst indicators are positive, the recent rally could be a misleading signal and the underlying progress of the economy still lacks a necessary forward leap. A fundamental rebound is not yet clearly in sight and when is does occur it will be against a debt ridden backdrop.

A video podcast of the talk can be found here

Cyprus Votes Down the Levy

Wed, 20 Mar 2013 09:17:19 +0000

As I am sure you have seen, the Cypriot parliament have voted down the levy on savings deposits perhaps marking the start of more volatility within the Eurozone. Whilst stocks have seemly shrugged it off so far, Greek bonds have taken a hammering with yields rising 60bps to 11.55% yesterday. The Euro has also struggled, falling to $1.2843 on the news.

As Cyprus has voted against the levy, all that is left is uncertainty. A German official warned that Cyprus’s banking system faced insolvency if the bailout programme fell through and that the islands two largest banks were “effectively illiquid” (FT). Only time will tell how the crisis talks with Cyprus’s finance minister and Putin will pan out.

If all else fails however, they have €1m sitting in an MoD airplane to tick them over.

Budget Day

Tue, 19 Mar 2013 18:40:10 +0000

Tomorrow is budget day and George Osborne is expected to stick to his guns, continuing austerity for into the next tax year. Savers will undoubtedly find little reassurance in minutes released for a Bank of England policy meeting that suggest they will use ‘monetary balm’ to counteract the fiscal pain (FT).

Some things to look out for:

Further cuts in the public sector in a bid to increase infrastructure spending
Pensions under attack again, reducing the annual contribution limit to £40k (previously £50k) and the lifetime limit to £1.25m
Corporation tax for FY 2014 reduced by a further 1% to 21%
More stringent rules on tax avoidance

The Tax Affair

Fri, 01 Feb 2013 09:20:27 +0000

Tax avoidance is in the news a frustratingly large amount recently. Often due to comments from politicians seeking to rile up major corporations. Unfortunately for Mr Cameron, Starbucks is unlikely to wake up a smell the coffee until he does.

The FT today reports on how the big four accountancy firms were yesterday ‘grilled’ on the morality of tax avoidance and I can’t help thinking how theatrical it all is. Politicians have decided to cling onto this rhetoric of companies not acting ‘in the spirit of the law’. The spirit of laws that they could change. These ‘grillings’ are not much more than an attempt to gain votes through loosely backing fashionable topics. Perhaps this is democracy.

The accountants are being used as sacpegoats as they are being told one thing and shown another. Whilst they do not have a fiduciary duty to their clients, they are bound by the rules of capitalism and should they not serve their clients in this manner someone else will. Whether this is morally right or not is irrelevant. We live in a world where there are enough immoral citizens to ensure that if the service of tax avoidance remains possible,and as lucrative as the Ernst and Young head of taxes salary would suggest, someone will provide it.

Therefore, for the sake of not hearing this contradictory debate in a few years from now, politicians should decide their stance and stick to it.

Minding the Markets

Tue, 29 Jan 2013 13:39:00 +0000

‘Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlwind of speculation. When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill done’

This quote by John Maynard Keynes in 1936 formed the final words by David Tuckett in his pioneering emotional finance book Minding the Markets. In Minding the Markets, Tuckett explains how he believes that modern economic theory is unsuitable in light of the wild market fluctuations of today, and he, like Keynes did, believes that the markets are not as efficient as the economic theories on which they are built would suggest.

David Tuckett has a background in both economics and psychology putting him in a somewhat unique position of being able to comprehensively analyse the role that psychology plays within the financial markets. To do this he interviewed a sample of hedge funds managers various times over a number of years (before and during the sub-prime crisis), evaluating the affect that the competitive environment had on them, how they made investment decisions and how the associated gains and losses affected them.

Perhaps most interesting of Tuckett’s findings was the pressure on hedge fund managers to achieve exceptional returns in conjunction with lower-than-usual risks. This goes against the fundamental relationship between risk and reward; the higher the risk the higher the reward. The pressure on managers to find stocks that met such criteria resulted in them entering a ‘divided state’. A divided state is ‘an alternating incoherent state of mind marked by the possession of incompatible but strongly held beliefs and ideas’ which Tuckett says causes an influenced perception of reality. This is exacerbated by the need to constantly outperform benchmarks, meaning hedge fund managers are under pressure to be exceptional without being too different from the rest of the industry.

I am a firm believer that current market theories are flawed. Markets cannot be truly ‘efficient’ in the modern world due to the sheer amount of information and quantity of market players. Psychology and emotions play a part in every decision that we make, particularly those where the stakes are high. This is highlighted by Tuckett when he evaluates past investment decisions made by the hedge fund managers. Each of their investment stories had strikingly similar characteristics; mitigated risk through a unique position in the market, strong and reliable management, visibility of future revenues. Using interview scripts he shows how similar each of the buy stories were and illustrates how the hedge fund managers, whilst incorporating all of the vast analysis available to them, had to make their final decision through emotion or gut feeling rather than logic.

Whilst money managers may do everything possible to make decisions based on rational logic, the markets are not devoid of emotion. The sooner economic theorists acknowledge this the sooner we will be able to develop a better understanding of what makes the financial markets tick. For the next generation of prudent investors, it will be essential to have an understanding of the role that emotions play in the markets.

‘Buy Sell’ picture source: http://www.sharesinv.com/articles/2012/03/16/behavioural-finance-4/

Global Macro Outlook

Wed, 14 Nov 2012 23:04:00 +0000

The major issue for the global economy over the next few years is how the developed world will safely delever. On the most part this means keeping unemployment down, but when you look to Europe socialising the loss through default still can’t be ruled out. The most beneficial way for Europe to delever would be through actual economic growth and whilst recent moves by authorities point to stronger fiscal consolidation there are still many underlying issues that need to be addressed before growth can be reasonably expected. This absence of growth is likely to be exacerbated by the limited options available to policy makers in the developed world. Whilst their efforts to instil confidence through active monetary policy have been noble, a true lasting effect is yet to be seen. Markets remain volatile and fiscal intervention may be all they have left.

What this also indicates is a growing reliance on central banks. Australia is creeping into deficit territory and most economies continue to be affected by the ongoing problems in the developed world. Investors will have to be aware of the substantial impact that central bank intervention can have on the markets and act accordingly.

As I said in my previous post, investors expectations of returns are due an adjustment. The returns across asset classes over the previous couple of decades have been an anomaly. Growth will be low for the foreseeable future and without growth you can only sensibly expect low returns. The only investing style to really buck this trend is the ‘Risk On, Risk Off’ approach which takes advantage of volatility and heightened investor sensitivity.

What does the future hold?

Thu, 08 Nov 2012 18:05:00 +0000

Since the hype of American elections is likely to soon subside, I thought it may be a good time to take a look at the general outlook for the economy. Every day I seem to read articles that are either vehemently bearish or vehemently bullish and it is hard to find clarity amongst the chaos. As with all problems, it can be beneficial to strip away the noise and look at the fundamentals. In the case of the economy this means going right back and looking at the factors within an economy that are needed to promote economic growth.

Economic growth isn’t something that just occurs. It is a bi-product of a number of factors such as the consumer’s propensity to spend, employment levels, a strong infrastructure, technological advance, demographics, investment and various other elements. When you look over that list it becomes apparent that many of our 2012 economies are lacking, particularly in the Western world. Birth-rates are slowing on a global scale. Infrastructure is becoming dated and new investment is lacking (although intitiatives are being put in place to address this). High unemployment, low consumer sentiment and general uncertainty have served to decrease the consumer’s propensity to spend. Combine these factors with huge government deficits and a lack of available credit and it becomes clear that expecting economic growth may be somewhat naive.

This leads me to consider that maybe we are wrong to expect growth. The past 20, 30 or even 50 years have seen what you might consider abnormal conditions. The baby boomer period made huge population gains; stock markets saw some of the biggest bubbles on record, as well as some of the biggest busts. Rapid recoveries and the availability of credit have made us all live lives that we perhaps couldn’t afford. With reserves spent, resources reaped and prudence an old lesson that we are being forced to remember: maybe we are wrong to hope to return to pre-crisis levels.

In the FT yesterday, a representative from a London based property company said that he believed the housing market would not return to pre-2008 levels until 2015. This seemed a little off key to me as pre-2008 was a much swelled bubble and I don’t see returning there as a desirable outcome for anyone. This highlights a psychological problem which may affect the way we look at the economy. Humans tend to revert back to what is normal; but when normal is wrong (in the case of the economy, the last 20 years may have been an anomaly) reverting back can have disastrous consequences. The returns that have been experienced over the past 20 years are going to be hard to come by and to search for them will be risky. As investors make this search, proper risk management will be become more important than ever.

Mid-Crisis Regulation

Mon, 01 Oct 2012 15:59:00 +0100

Here is an assignment I did for the Contemporary Issues in Finance module whilst at university. The assignment was to write an Economist article that investigated whether the regulatory proposals being made during the crisis were indicative of a convergence of international financial systems.

Mid-Crisis Regulation

Flying Out The Door

Thu, 16 Aug 2012 21:39:00 +0100

I find a lot of the hype on Facebook boring. Its seems everyone is still interested after its monumental failure of a public offering. What I do find interesting though is that people didn’t see today coming.

Facebook has has its worst day so far (and there have already been some pretty awful ones). Its has hit new lows as a result of some pre-IPO selling bans being lifted, but how did people not see it coming? This morning I read an article where Michael Pachter (managing director of equity research at Wedbush Securities) was quoted as saying, “I don’t think Thursday will be momentous at all” and related it to opening night of a new movie, “just because you can see it doesn’t mean you will”. It is difficult to see how he came to this conclusion considering Facebook has done little but spiral. It posted a loss in its first set of results, has had companies stop advertising (very publicly) and has shown absolutely no grasp of how it is going to capitalise on mobile. Had I been in possession of shares over the last few tumultuous months I would have been itching to shift them. The shares have miles more downside to break into and I have no doubt that they will. Couple this with the lifting of further selling bans due in November and the bottom looks nowhere in sight.

I actually have faith that they will pull off the mobile element which is so vital to the long term success of the firm. I also think that, once they are nearer to their bottom, they could represent good value for the long term investor. Until then though, a lot of the 1.9bn shares that will have selling bans lifted over the next 9 months will continue flying out the door.

Derivatives Reform

Wed, 15 Aug 2012 20:58:00 +0100

An article in today’s FT reveals that Nick Clegg and Vince Cable have decided to have another poke at the recently shaky coalition, this time focusing on the availability of derivative products (interest rate swaps in particular) to retail customers. As part of the Vickers report, a post crisis document aimed assessing potential regulations for the UK banks, Sir John Vickers suggested to keep the complex derivative products outside of a retail banking ring-fence. Ministers rightly decided against including this particular regulatory requirement in the June white paper released by George Osborne. I say rightly for two reasons; The first is based on the suspicion that their intentions are for the sake of making noise rather than for the public need, an increasingly common trait being shown by the Lib Dem benches. But the main reason I object is that, rather than being being restricted, derivatives need to be more widely available.

Derivative instruments get a lot of bad press due to their complex nature. Retail customers in particular have a hard time understanding the level of risk which is something I am sure lies in how they are marketed. This lack of clarity most certainly needs to be addressed but prohibition of these products to retail customers could be hugely detrimental to the future of finance. Robert Shiller, an economics professor at Yale argues that derivatives have the same uses as insurance, “you pay a premium and if an event happens you get a payment”. Shiller is of the opinion that in the future derivatives could be used by homeowners to insure themselves against falls in house prices. He believes that opening up derivatives could make the financial world a safer one for investors.

Public pressure on the financial sector is currently huge and bringing derivatives to the forefront in such an ugly light could result in their true potential being overlooked. Clegg and Cable run the risk of creating politically motivated regulations that could hamper the future of the UK’s retail banking sector. If you subscribe to Shiller’s view, as I do, derivatives could provide the innovation essential to creating a more accessible financial system and restoring the confidence vital to its long-term success.

"Whatever the future, economic growth will be hard to come by, both at a national level and at the..."

Sun, 15 Jul 2012 17:03:20 +0100

“Whatever the future, economic growth will be hard to come by, both at a national level and at the level of individual companies. And unless financial markets in Europe and beyond inexorably head towards a black hole scenario, which is not likely, the bold and astute investor with spare cash will seek out and find those rare growth stocks that are likely to look forward to a rerating of their valuations based on the superiority of their products or services coupled with true growth”

- Peter Seilern, Chairman of Seilern Investment Management in their latest newsletter

Whales, Risk and Ring-fences

Sat, 14 Jul 2012 12:28:00 +0100

London Whale - John Cole

JP Morgans ‘London Whale’ beached itself on the front pages again yesterday. This time revealing that the loss incurred by ‘it’ was not the $2.3bn as shown in the cartoon but indeed a mammoth $4.4bn that has caused them to restate first quarter earnings. This will no doubt add a petrol cans worth of fuel to the ongoing regulatory fire that has caused Ed Milliband to give his (rather nasal) two-pence worth. Maybe he should focus more on holding his tea.

But nonetheless the news today has reaffirmed the focus on what regulatory measures should and need to be introduced to the financial system. As a result I think it is worth having a look at ring-fencing and whether it is the answer to crisis prevention.

Ring-fencing is nothing new. It was part of the Glass-Steagall act introduced in the US in 1933 and the banks managed to operate fairly well under it. This may have been due to the fact that it was somewhat overlooked as regulation and it is argued that when the ring-fencing was repealed by the Gramm-Leach-Bliley Act in 1999 the banks were already operating as though the ring-fence had never been there. But if you look at JP Morgan as an example, their share price the year before this act was repealed was considerably more than it is today. Furthermore, in the time running up to that they prospered, giving out consistent dividends from March 1987 onwards. It is arguable that since the Glass-Steagall act was lifted they have prospered considerably more but I would attribute that more to the globalisation that rapid technological advance allowed rather than being able to mix retail and investment banking interests.

Today ring-fencing is included in the latest regulatory initiatives for both the US and UK. For the latter it forms part of the Vickers commission final report and the Dodd-Frank act for the former. But are these proposed reforms are enough to prevent future disaster? An article by Laurence Kotlikoff, author of ‘The Economic Consequences of the Vickers Commission’, highlights with great poignancy the shortcomings of the proposals. Breaking the ring-fences down into ‘Good’ and ‘Bad’ banks, he goes into the types of assets that good (ring-fenced) banks could hold as well as well as the degree of leverage they can use on these assets. Using his example, ‘good banks would be able to borrow £25 for every pound of equity and invest it all in gilts’. The result being that if gilt prices dropped 4 percent, the commissions good banks would fail. This is a very scary thought.

Kotlikoff actually argues, quite persuasively, that by pushing the bad banks outside the ring-fence and thus segregating them completely from any form of bailout assistance will increase the chances of financial collapse rather than eliminate it. Advocates of ring-fencing will argue that this is the intention and by ‘removing’ this moral hazard, bankers will act more conservatively. This couldn’t be more short sighted. Initially this might happen; banks will have to improve their balance sheets to ensure that investors don’t flee from the added risk. But realistically, as soon as the bull market takes hold again and the going gets good, these investment arms will leverage till the cows come home. And before you say that the shareholders will naturally regulate them just remember how many people were asking questions in the run up to the sub-prime crisis? Few. The majority were going home grinning at their capital gains as I am sure they will do again.

So how do you regulate the banks? Well I don’t envy anyone who is tasked with this and I suspect it will take a few more crises before we even get close to knowing. What I do believe though is that we are looking at regulation wrong. As Kotlikoff points out, ‘good assets go bad’ so how can we build regulation that specifies what is good and bad, risky and not risky. Surely it has to be built on different foundations. For this I think the English legal system has a lot to offer in terms of guidance (ignoring financial law for now). The English legal system is admired the world over for its ability to get justice. Many attribute this to how the various laws allow for enforcers to actually pass ‘judgement’ and use discretion to assess whether the accused acted improperly.

In its current and proposed state, financial law requires institutions to maintain certain levels of capital at a ratio to the amount of risky assets they hold (amongst other measures). This presents a grey area, how do we determine what is actually safe and what is risky? Ultimately this is down to opinion. Kotlikoff reinforces this by pointing out that Spanish, Lehman and AIG bonds used to be considered safe, good assets. So new regulation should focus not on risk, but on providing a set of laws that require the people working within these institutions to act in a prudent manner. The laws should provide scope for severe punishment and accountability against those who do not operate on sound judgement. To give example through the sub prime crisis, proper regulation would have allowed those who did not act with the utmost prudence to be prosecuted (and very few have). Automatically we think of the credit rating agencies who gave AAA ratings to securitised sub prime debt that either they didn’t fully understand or didn’t pay enough attention to. If the regulation allowed it, every person involved in giving these ratings should have faced charges for negligence. This should also extend beyond the rating agencies and apply to every single person who knowingly had contact with these products. Investors who didn’t fully understand what they were buying for their clients portfolios should be prosecuted. It is their duty to do this.

I am not saying that every time an investment doesn’t achieve its intended return, people should go to prison. Investments will always go bad. What I am saying is that new regulation should prosecute those who do not operate with the best intentions and the utmost prudence. Until we are able to predict risk with 100% certainty, risk based regulation will not work.

UPDATE - Loss now up to $5.8bn

Diamonds aren't always forever

Mon, 09 Jul 2012 23:11:00 +0100

I woke up this morning to a fascinating article by Martin Taylor, chief executive of Barclays at the time Bob Diamond was running Barclays Capital.

The article, as Rory Cellan-Jones put it (@ruskin147), shows that Bob Diamond ‘had previous’. Rory also rightly wandered why this story had not had more media focus.

In the article Taylor explains how Diamond had proposed a fivefold increase in exposure to Russian counterparties at a time when Russia appeared to have an appealing domestic bond market. Taylor who chaired the credit committee disagreed and only authorised a ceiling of half that amount. Later in the year Russia defaulted and the ceiling put in place should have limited BarCap’s exposure. This wasn’t the case as Diamond had ignored the limit and significantly increased their exposure. Not only had he increased the exposure but he had tried to cover it up by marking the counterparties as Swiss or American. I think this shows a serious flaw in Diamond’s attitude to rules and highlights that there is likely to be far more revelations in the ongoing Libor scandal. Perhaps more importantly though, it highlights that the board, knowing of Diamonds previous misdemeanours still opted to put him at the top of the company later down the line. Maybe Barclays lack of alignment with public interest and goodwill spread further than just the heads that have rolled recently?

As one former bank executive was quoted as saying, ‘It would be a very good thing if an awful lot of people lost their jobs in a lot of banks’. ‘Not because I wish them ill, but because only by making many examples will you get through to people that this is a very important business’

If this is the tip of the iceberg for Barclays then it will be well worth avoiding in the near future. The Libor probe is being extended to many other banks (bottom of article), which when coupled with the ongoing banking crisis may show investors red flags for the sector as a whole.

Trading Global Consumer Sentiment

Mon, 09 Jul 2012 20:09:00 +0100

A University assignment in my final year required us to look at how news organisations could harness social media to better collate information. During the project I came across Derwent Capital which, at the time, was a hedge fund that made trades based on consumer sentiment data collected from Twitter. The company was set up by Paul Hawtin in 2008 and built upon research from Indiana University that analysed millions of tweets to gauge ‘sentiment’ or ‘mood’. The study showed a very close correlation between the ‘mood’ data collected and the Dow Jones.

The company has since taken a change of course and rather than actively trading on the sentiment information, it will soon provide a (CFD) trading platform that provide real-time sentiment analysis to its users. I am really interested to see how accurate the sentiment analysis is and how closely it correlates with the performance stocks. Gauging sentiment is no mean feat and as this Economist article points out tweets are often ironic or sarcastic adding to the difficulties.

I think DCM Capital is a hugely exciting new project and signifies how broad innovation within the financial industry can really be. The team look like a group of exciting young entrepreneurs, backed by an investor with a proven track record in the online retail environment. Their new website provides limited sentiment data on a few big stocks/markets and is well worth a look.

If you, like me, find this an exciting area of the financial industry then you may be interested to know that they are now recruiting! Take a look at their careers page for a number of positions available within the firm.

Open Innovation and the Pharmaceutical Industry

Tue, 03 Jul 2012 11:45:00 +0100

On the FT’s homepage today is news of a record $3bn fine that US regulators have dealt GSK (here). The fine is due to the companies ‘selective use of clinical data’ as well as the ‘aggressive marketing’ of drugs. Pharmaceuticals have often been accused of being less than honourable with the results of their clinical trials as well as using monetary reward to ‘encourage’ powerful medical advisors to use their sometimes dubious products. I have direct experience of the former. When quitting smoking I was prescribed Champix, a nicotine replacement therapy developed by Pfizer. I was told that I might experience some side effects such as nightmares and if I were ever feeling depressed that I should go an see the doctor immediately. I experienced the severe nightmares throughout the course of treatment but never thought anything of the depression comment. That was until I did a bit of research that suggested Pfizer, upon submitting the drug, had withheld some information from US Regulatory authority that authorises drugs for commercial sale. It turned out that there had been a number of suicides directly related to the drug that they had forgot to mention. Fortunately I never experienced anything like this but it shows why I was not at all surprised to see this article today.

The pharmaceutical industry is going through a somewhat transitional period. The era of the ‘blockbuster drug’ is over and big pharmaceuticals are unable to rely on the profits generated from these blockbusters to keep them afloat as they have done in the past. Is it then not a surprise that these companies are perhaps resorting to less than ethical methods to create profits? As many pharmaceuticals try to avoid falling off the ‘patent cliff’ they are desperate for new ideas in the development of drugs. After all, these companies have been a staple for many dividend investors in the last few decades (Pfizer 10yr). So what does the future hold for this very secretive and sometimes shadowy industry?

Whilst at uni I had to compile a presentation on the benefits of Open Innovation for an industry of my choice. I decided to look at big pharma as the methods of Open Innovation are in quite a contrast to the way the companies are currently run. Open Innovation is all about sharing information, both internally and externally to aid collective advancement. I won’t go into too much about how Open Innovation works, there is lots of information available on it (such as here), I will however highlight one success story given by Henry Chesbrough, the professor who first coined the term.

A biofuel firm called Amyris developed an advanced method of programming organisms to secrete chemical compounds whilst working on their core competence; creating bio fuels. In turned out that this process could be hugely useful to pharmaceutical firms particularly Sanofi-Aventis. Amyris licensed the method to Sanofi so they could use it to create artmesinan (a malarial treatment). By licensing this technique Amyris were able to lower the costs (through licensing revenue) of their core research and Sanofi were able to access an already developed and tested technique, cutting down on the development time they endured. The sharing of this knowledge gave benefits to both firms and it is this principle of sharing (whilst safeguarding intellectual property) that Open Innovation is built on.

For me I think the future of the suffering pharmaceutical industry relies on adopting such techniques. The article in the FT today only reinforces the difficulties that the industry is facing. I for one won’t be investing in any pharmaceuticals until it becomes apparent that the business model has changed and the lessons that Open Innovation teaches have been adopted.

My uni presentation on Open Innovation and the pharmaceutical industry can be found here.

A PowerPoint version of the presentation that includes presentation notes can be downloaded here - click the download link in the top right.

Disclaimer: I have been unable to find the article that cites that Pfizer had withheld information about Champix from the US regulator. This should therefore be taken as opinion and not as fact. This drug has been fully authorised for prescription use by NICE (National Institute for Health and Clinical Excellence) and is therefore considered safe to use

"Diversification is a protection against ignorance. It makes very little sense to those who know what..."

Fri, 29 Jun 2012 15:38:00 +0100

“Diversification is a protection against ignorance. It makes very little sense to those who know what they are doing”

- Warren Buffet

Fundamentalist vs Optimist

Fri, 29 Jun 2012 13:22:00 +0100

For the UK, GDP figures have confirmed that the UK is in a double-dip recession (link). This news may have had more of an affect on the markets if everyone wasn’t so excited by the Euro news which raises the question, ‘is this a fickle rally?’. If the UK is still in recession then surely when this good news wears off nothing will have changed?

Well, the answer depends on your point of view. Fundamentalists might say that until the underlying issues with the UK economy are fixed, any market rallies will be short-lived. Another way of looking at it requires a pinch more optimism and a belief in positive feedback loops. If I look at my portfolio before leaving work on Friday and it is up 1.44% (like the FTSE 100 at the time of writing - FTSE100 quote) I might be a bit happier this weekend. That might mean that I decide I will eat out tonight, book that holiday or buy that television, which, in turn, might mean that businesses make more money this weekend, which in turn will create growth.

Who knows what people will decide to do this weekend and who knows whether the Fundamentalist or the Optimist will prevail, one can only hope.

Spain's Painkiller

Fri, 29 Jun 2012 13:18:00 +0100

Last night was a late one for leaders of the various Eurozone countries as they fought to save the struggling Eurozone. Spain and Italy will awake this morning with significantly clearer heads than their German counterparts. Held at ransom by Mario Monti, Angela Merkel was forced into addressing the short-term needs of the Eurozone nations before any other items on the agenda were addressed. This was a shrewd move from Mario and one that markets have reacted well too (link). Angela has been against providing short-term rescue plans for the Eurozone nations until (rather fairly) the underlying issues have been address. The technocratic Mario forced her into patching the wounds and went home to Italy likely sporting a spring in his step.

The significance of this meeting is not only that an agreement was made to restructure Spain’s bank recapitalisation plan, but that plans for a ‘single supervisor’ have to be written up by the end of the year. This shows a forward step to addressing the underlying issues of the Eurozone and may help to heal Angela’s heavy head this morning

For more go here (FT)