Category Archives: Economics

Giovanni de Francisci Gets It – Wisdom coupled with good grasp of History and Psychology

That is what I thought when I watched the youtube clip ( of Giovanni de Francisci talking about hedge fund managers.

What he said is also just as correct for simple independent asset managers. I have just come through an education programme to become a Certified International Investment Analyst (CIIA) and the amount of modern portfolio theory (MPT) and diversification talk can make people blind to the most interesting investments. Or as Giovanni de Francisi put it in the clip linked above: A hedge fund manager he speaks to has to diversify to satisfy the clients rules so much, that he gives up close to 1/3 of the performance he achives when focussing on his favorite ideas for himself (he can bear the risk). So the hedge fund manager had to hold more positions, just to please many clients who have been indoctrinated by MPT and would not be allowed to invest.

Giovanni de Francisi also tells a great example about a hedge fund manger and his tactic regarding condos in Florida in the aftermath of the subprime crisis (towards the end of the video). Limited downside and over 100% profit opportunity.

Now of course he was talking about his favorite stories. It is therefor more anectodal than scientific. It would be interesting to see how many times he really does get better performance from his selection of fund mangers.

But in my experience the best investments have always been ones that knowledgable private investors would react to the most negative. Talk to someone about russian bonds during the most active part of the Ukraine war. Talk to someone about a condo in Florida in 2009. Psychology of the masses makes the best investments the hardest to stomach. Here’s a great graph Jack Schwager talks about in his book “Market Sense & Nonsense”.


Price Level Divergence Examples Switzerland vs Germany

Today I was once again hit by how much different the swiss price level is compared to Germany. Take the example of the company Gross Baumaterial AG which trades in building materials. Then compare it with the germany company Toom Baumarkt in Konstanz (swiss-german border). Notice any differences? It seems crossing the german border makes a product +100% more expensive.

Graph 1: Gross Baumaterial AG – Werbefax 044 500 92 02  17.1.2015SNB_Swiss_Price_Level_3_Baumaterial

Graph 2: Toom Baumarkt (Konstanz) Deutschland EUR Prices valid from 03.01.2015-10.01.2015SNB_Swiss_Price_Level_1_Baumaterial

Could SNB neutralise ECBs QE programme? (at least partially)

Considering that the SNB has such vast amounts of bonds from EU members and obviously isn’t comfortable with the rumoured details of the ECB QE programme (just like the German Bundesbank coincidentaly), one could argue that they will be selling bonds, reducing risk as soon as the ECB QE programme is announced (or even before).

Now the interesting question is, considering the size of the SNB balance sheet, and their large holdings: To what extent will they neutralise the ECB QE programme. How many german bonds will they sell. How much of their substantial other EUR denominated bond portfolio. As their P&L bleeds, will they also be able to take profits on their US Equity – and equity holdings worldwide – and what impact will that have.

If the ECB is that last central bank buying, implementing QE, there must be some chance that they will be left standing when the central bank QE music ends. From a Swiss perspective, it may be a godsend that the SNB is among the first to reverse QE (indirectly).

Should HSBC strategists be correct with their target of EURCHF 0.92 in 12 months, the SMI could see another 5-10% drop, even after the 9% and 5% on January 15th and 16th respectively.

Below the most active and biggest losers in the swiss market yesterday (Jan 16th 2015, day 2 after the SNB shocker)

Table 1: Most Volume


Table 2: Biggest losers


Interesting; Nestlé is buying back shares on the so-called 2nd line for pension funds. The financial wizards in their treasury seem to believe that overshooting is occuring.


Efficient Market Hypothesis – Counter Arguments – Series

This headline on just now reminded me of the theory you learn in Finance; Efficient Market Hypothesis.

Additional pent up supply not on the radar of all investors suddenly coming to the market, or just the possibility of it coming to market can lead to big moves; see below



“Our large early investors, as well as of some of our key insiders … don’t intend to sell immediately upon lockup expiration,” Chief Financial Officer Mike Gupta had told analysts during Twitter’s earnings call last month.

But, he added that “a meaningful portion of the supply … could in theory come to market after lockup expiration.”

The company had earlier announced that Twitter Inc. co-founders Jack Dorsey and Evan Williams, as well as Chief Executive Richard Costolo, have no plans to sell any of their shares.

Twitter also said Benchmark venture capital funds, which are affiliated with a Twitter director, also told the company that they have “no present intention to sell or distribute stock to their limited partners before or immediately after the expiration of our lockup.”

The wave of unlocked shares hit at a time when Twitter, despite recording surging revenue, has struggled with worries about slower user growth.

”It’s typical and many times almost a self fulfilling prophecy,” Wedbush analyst Shyam Patil told MarketWatch, as he reacted to the stock drop.


Forces behind the Bid in the Equity Market

In addition to central banks who have been aggressively increasing their equity positions (see my post on the SNB equity position) there are now large pension fund systems that are moving toward more international equity proportions and decreasing their bond portfolio size.

The state pension fund of Japan manages EUR 908 billion (Milliarden). Of that 67% were in bonds, for example Treasuries. The plan now is to reduce that to 60%. In future 12% of the fund shall be invested in japanese equities and 12% in international (foreign) equities. That’s over EUR 100bn each.

The reason behind Japans’ move is one that works across the developed world. It’s not possible to generate the returns needed with bonds. However most pension fund systems have a large proportion in bonds, thus leading to a ticking time bomb of sorts.

Interesting in this contect: The holdings of US treasuries in Belgium (where they are held by Euroclear for large institutions/banks/central banks) has been exploding. This could mean large amounts of US treasuries are being placed so that they can be sold without alerting the US as to which country is actually selling.

The time has probably never been better to sell, considering the printing press is slowing and the price is still inflated…

Economy: Reasonable Prospects of a Pick-up this Year says RBA

Thought this statement from the Reserve Bank of Australia is a good gage of where we currently stand regarding the state of the world economy.

Growth in the global economy was a bit below trend in 2013, but there are reasonable prospects of a pick-up this year. The United States economy, while affected by adverse weather, continues its expansion and the euro area has begun a recovery from recession, albeit a fragile one. Japan has recorded a significant pick-up in growth. China’s growth remains generally in line with policymakers’ objectives, though it may have slowed a little in early 2014. Commodity prices have declined from their peaks but in historical terms remain high.

Financial conditions overall remain very accommodative. Long-term interest rates and most risk spreads remain low. Equity and credit markets are well placed to provide adequate funding, though for some emerging market countries conditions are considerably more challenging than they were a year ago.

source: Glenn Stevens, Governor, Reserve Bank of Australia

date: April 1st, 2014

Sanctions vs Russia – Impact on European Companies

The impact of political uncertainity can be clearly felt in the time of terroritorial conflict. Russia is working on a law that will permit the russian state to confiscate foreign companies’ properties, merchandise, machines.

In recent years many companies from Western Europe had invested heavily in Russia. As an emerging market or even frontier market in some regions it has a lot of potential which investors wanted to capitalise on.

An example: KWS Saat AG invested EUR 7m in factories in Russia, which produce for the local market but are German owned.

Another example: TKS Agro Invest Union AG is said to have invested over EUR 280m in huge production facilities.Tönnies, owned by the German Clemens Tönnies, owns 65% of the venture.

Further example: Land machines maker Grimme and  Claas have factories in Russia. For both those companies Russia is one of the most important markets they sell to.

An example from Switzerland: Bucher Municipal has a majority stake in a company that “expanded in 2013, with a new production plant in Kaluga, Russia, improving the operation’s market position as a local producer. As a result of these developments, Bucher Municipal will be able to offer its customers a much broader range of winter maintenance products.” Bucher also has plants in countries such as Latvia, close to Russia. (see PDF source of this information)

Russia is only really dependent on import of meat and milk produce. Strategic sectors like automobile and energy aswell as pharma should function independently and put Russia in a strong position like the US was before and during WWII.

Over 6300 companies from Germany are invested in Russia. EU sanctions could potentially backfire.

BlackRock’s Weekly Investment Commentary March 17th 2014: “In addition, depending on how the events in Ukraine unfold, there are some specific risks for Europe. Europe imports roughly 30% of its natural gas from Russia, and should any sort of economic sanctions come to fruition, Russia could decide to interrupt this supply. At this point, we are not expecting this to occur, but should significant sanctions be enacted, such actions would certainty hurt Europe’s already-fragile economic recovery and would act as a drag on European stocks.”


Russian Sanctions vs Ukraine

Here’s a outtake of a New York Times article

[…] Russia started last year to block the import of Ukrainian goods and threatened severe hardship if Kiev signed the trade and political pact with Brussels. But officials in the Brussels headquarters of the European Commission, the union’s executive arm, say it was difficult to raise the alarm over Russian pressure last year because Ukraine itself kept mostly quiet about it until Mr. Yanukovych suddenly told Mr. Fule in November that trade restrictions imposed by Moscow had slashed key industrial sectors in Ukraine by 40 percent.

I’ve translated this from a NZZ article (22nd March 2014)

The Crimea crisis has reminded the EU how dependent it is on energy imports. According to Eurostat 86% of oil demand and 66% of gas consumption are covered by net imports. Russia is the main supplier with around a third of the EU-imports for both energy sources. Some eastern european members are much more dependent and the Ukraine is the most important transit land for the deliveries.

According to the FAZ (Frankfurter Allgemeine Zeitung)

Germany imports 39% of its oil and 36% of its gas from Russia. For the EU as a whole it’s 35% and 30%.