Category Archives: Markets

Credit Suisse business model flaws – high interest costs

Outstanding capital insturments of Credit Suisse according to this presentation.

According to my calculations (see table below) Credit Suisse pays over CHF 1 bn per year in interest rate costs alone. The coupon they need to pay is high. High risks demand high coupon.

So much profit has to be generated to just cover fixed costs. At the same time more and more peer-to-peer lending business models are springing up, robo-advisors, strong global competition. The Credit Suisse business model seems very challenging, that’s what the stock price and also credit rating tells you.

Do cantonal banks have these costs? Their share prices seem to be saying they have a lower cost and lower risk business model.  Makes you wonder why customers should even bother having assets with a riskier, negative news-flow company.

Table of AT (Additional Tier) 1 instruments:

Currency Nominal in m iCoupon Interest pa CHF interest
USD 2000 6.50% 130.0 128.05
EUR 1250 5.75% 71.9 77.98
CHF 290 6.00% 17.4 17.40
USD 2250 7.50% 168.8 166.22
USD 2500 6.25% 156.3 153.91
USD 2000 7.88% 157.5 155.14
CHF 750 7.13% 53.4 53.44
CHF 2500 9.00% 225.0 225.00
USD 1720 9.50% 163.4 160.95
USD 1725 9.50% 163.9 161.42
CHF 390 0.00% 0.0
as of Q1 2016 1307.49 1299.50
as of Q3 2016 1149.99 1144.36
USDCHF 0.9850
EURCHF 1.0850

FINMA could save Credit Suisse a billion by invoking their right:

Credit Suisse will be prohibited from making any AT1 interest payment if:

– Distributable profits are less than the aggregate amount of AT1 interest payments

– FINMA prohibited such interest payment

– Minimum regulatory requirements are not met

How safe is Credit Suisse?


According to the above presentation for fixed income investors of Credit Suisse the bank is less dependent on counterparty funding. Instead it has core customer deposits and long-term debt making up a larger proportion of balance sheet.

I don’t like this statement of the Credit Suisse CEO today (Interview with NZZ):

He’s asked are customer deposits (so crucial according to the above graph) leaving Credit Suisse in last days, weeks. He doesn’t say no, but says employees are doing a great job, that is diplomatic for yes, in my opinion.


Also this in another important sunday paper in Switzerland:

Basically saying: Swiss customers are transfering money to safer banks, like ZKB (with cantonal guarantee “Staatsgarantie”). It also notes, that UBS didn’t nearly fail in 2008 because of capital, but because customers and especially counterparties were pulling billions out daily.


In conclusion:

  • The CEO doesn’t deny they are seeing outflows
  • The banks capital is in better shape than in a long time
  • The CEO seems to think Q2 results shoud reassure investors
  • At the same time he states that we’ve only seen one quarter of twelve quarters of the transformation process
  • If Q2 doesn’t reassure investors I wouldn’t be surprised to see floodgates open
  • Time is a luxury Credit Suisse doesn’t have; so point 4 above could be rendered mute by reality.
  • In my view, and to reassure customers of the “crown juwel” (according to Tidjane Thiam), the Swiss Universal Bank should be granted temporary state guarantee. This would stop outflows. It would give the CEO the urgently needed breathing space. — Problem: At what price could this state guarantee be made?  Is it legally possible? Would CS shareholders have to take a large write-off?
  • It’s not the CEOs fault

Deja Vu with Brexit – Standard Life Fund Freeze – Pre Bear Stearns Moment – the Lehman Moment can still come

If you like working through the worst case scenario it would probably be sensible to consider the Brexit Vote the beginning of problems to come.   (Telegraph Group Business Editor James Quinn is doing a great job of reporting effects of Brexit!)

Trading in a £2.9bn commercial property portfolio managed by Standard Life Investments has been halted after a flood of withdrawals exhausted the fund’s cash reserves.

Standard Life said the move followed “an increase in redemption requests as a result of uncertainty following the EU referendum result”.

Details were not provided on the current liquidity position or on whether any buildings would now be sold.

The latest figures for the portfolio, from May 31, show the fund held 13pc in cash. Much of this may have been paid out to departing investors.

In the ten days since Brexit two other commercial property funds – run by rival managers Aberdeen and Henderson – have cut almost £300m from the value of their holdings. Freezing withdrawals is the “next step”, commentators say.

Time line – Bear Stearns Hedge Funds Collapse (we could be at the moment in time: June 2007 – meaning we won’t see the worst to come untill 2017 or early 2018. These things don’t unravel in a few days.)

July 5th update: “Three property trusts, including Standard Life, M&G Investments and Aviva Investors, have suspended trading. The suspensions now account for more than a quarter of the £35bn-sized sector.” “Andrew Bailey, the new head of the Financial Conduct Authority, also attempted to ease concerns around the property sector, saying the actions taken by the property funds was not a “panic measure.” Mr Bailey, until last week the head of the Bank’s Prudential Regulation Authority, said the purpose of suspending redemptions is to allow a funds’ underlying assets to be revalued.” <– not a panic measure. No, just an indication that a haircut of unknown proportion is likely to follow. That is not something that is a calming thought to the owners of properties or property fund holders. — The big question: Will a self-fullfilling prophecy ensue. Worried people, pessimistic people selling because they are told they can’t sell. If a large proportion of your net wealth is in property, wouldn’t it be prudent to now take money of the table with property prices still high? I think so. — Mostly, if a ball gets rolling, it’s velocity doesn’t slow down. — Except the CHF vs EUR, that ball is being held by the SNB. The problem is: That ball is getting larger. — It reminds me of my attemps as a child to dam a little stream in the Swiss Alps. Just a question of time before pressure builds up and flushes away the dam. — But maybe the dam is so strong the SNB is building, that the safety seeking liquidity will go to Gold and other markets…


Marketwatch has it summed up nicely:

“What’s happening?”

“Standard Life Investments on Monday was the first to halt trading in its open-ended property fund. Aviva moved to suspend trading in its fund Tuesday, followed minutes later by M&G. Observers expect other U.K. real-estate funds to follow suit.”  (My view: aka Domino-effect, trickle-down-effect, contagion, you name it, it’s happening. It’s also going to be enough that buyers pause, to leave the sellers quickly swelling in number…)

“Redemptions can put a strain on such open-ended real-estate funds. Unlike stock funds, they can’t move to quickly liquidate holdings to meet redemptions. Most carry significant cash cushions, but those appear to have been sharply eroded. Complicating matters, unlike stocks, properties can be hard to value and liquidate during times of stress.”


Why Value Investing is a Good Choice for Your Nerves


The chart above illustrates very well, why value investing is a superior way of investing long term. For example the Global Value Fund (Tweedy, Browne) has been able to outperform in down and normal markets (left, center) and only underperformed in strong markets (right). When M&A gets heated you’ll be feeling pain, potentially, with a value investing portfolio or fund. But when the rainy days do come, you’ll have the best umbrella!


Practical step:

Looking at Tweedy, Browne Swiss Equity portion portfolio:

Name Investment %
ABB Ltd 40’043’593 3.39%
CIE Financiere Richemont AG 30’059’973 2.55%
Coltene Holding AG(d) 12’659’866 1.07%
Daetwyler Holding AG, Bearer 18’116’447 1.54%
Loeb Holding AG 428’308 0.04%
Nestle SA, Registered 208’491’495 17.68%
Neue Zuercher Zeitung(a)(f) 415’515 0.04%
Novartis AG, Registered 279’700’952 23.71%
Phoenix Mecano AG(d) 31’805’097 2.70%
Roche Holding AG 285’117’184 24.17%
Siegfried Holding AG(d) 44’311’142 3.76%
Tamedia AG 70’841’142 6.01%
Zurich Insurance Group AG 157’581’660 13.36%
Total 1’179’572’374 100.00%

Publica (CHF37bn Pension Fund) vs SMI Total Return, vs SMI Price Return, vs my clients, my mandates

Yesterday I was talking to a prospective client, who during the discussion become my customer. We were talking about investing, why it doesn’t make sense to hold cash if the money held is suppose to be for retirement.

To better explain to him what he should do with his money, we needed to look at how pension funds (money destined for members retirement), especially really well managed pension funds like the Swiss Publica pension fund, which manages over CHF 37 billion (!), invest (see graph 2).  Most of my clients have even larger risk tolerance towards volatility than a pension fund, so they invest over 90% in equities. The graph 1 shows that this has meant underperformance vs Publica in certain years, but that longer term (2005-2014 ; 9 years) the equity strategy (>90% equities) has performed better. This holds true for most periods you would compare, long term.

But as a starting point, as a discussion point, it’s great to look at how Publica invests. It’s also very easy to choose ETFs based on Publicas investment style. I’ll happily also discuss this with you, dear reader. Very important and impressive to see below: How much difference it makes if you have a Total Return index (orange), which is including dividends or just the Price Return (PR) without dividends (red).


As a starter you can see that Publica has close to 60% in bonds, virtually no cash, the rest being in equities (mainly global equities, only 3.25% Switzerland!), commodities and property. The Publica equity portfolio is worth over CHF 11 billion.publica-switzerland-assets-investments-2013-2014


Raw data:

Aktiven 31.12.13 31.12.14
Flüssige Mittel 95’496’710 88’199’403
Forderungen 112’957’535 111’665’871
Geldmarkt 921’274’624 902’208’419
Obligationen Eidgenossen 3’311’852’153 3’388’180’570
Obligationen CHF ex Eidgenossen 4’896’565’712 4’264’542’568
Staatsanleihen Industrieländer ex Schweiz 3’630’404’753 5’508’242’627
Unternehmensanleihen Fremdwährung 5’532’395’653 5’807’034’405
Inflationsgeschützte Staatsanleihen 0 1’279’854’337
Staatsanleihen Schwellenländer 1’469’941’708 1’795’717’194
Hypotheken Schweiz 177’593’503 174’157’435
Aktien Schweiz 1’228’404’017 1’222’926’830
Aktien Industrieländer ex Schweiz 7’238’977’923 6’382’965’626
Aktien Schwellenländer 3’134’254’827 3’032’771’754
Rohstoffe 1’788’097’956 1’188’474’928
Immobilienanlagen Schweiz 2’456’429’696 2’484’074’326
Vermögensanlagen 35’994’646’770 37’631’016’293

source raw data:




Central Banks In The Driver Seat

The Reserve Bank of Australia always has interesting comments ;

“Low interest rates are acting to support borrowing and spending, and credit is recording moderate growth overall, with stronger lending to businesses of late. Growth in lending to the housing market has been steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates.”

– Regulators and National Bank see the housing market as potentially overheating (why mention it otherwise? The SNB here in Switzerland has exactely the same problem; housing overheating). The low long-term interest rates putting in a good bid to the market as a whole.

What could be the key for next months and years? I believe the big question is how this develops/unfolds:

“The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are stepping up the pace of unconventional policy measures. Hence, financial conditions remain very accommodative globally, with long-term borrowing rates for sovereigns and creditworthy private borrowers remarkably low.”

Fed slowing the US housing market. ECB heating up the EU housing market. The BoE heating up the UK housing market. The SNB heating up the Swiss housing market. Makes you wonder if the proverbial frog in the pot will realise it’s in water getting close to the boiling point, or whether there may even by a lid stopping it jumping out in time.

My feeling; at the moment there’s still much too much caution, too much money on the sidelines so that equity markets will see a good deal of M&A before the top there is seen. But there’s also a lot of fast money in the housing markets worldwide. But normally a bubble bursts AFTER an acceleration of a strong trend. To get back to my proverbial point with the frog; there’s cold water being poured into the pot regularly, still.

Looking at the SMI index, I would argue at the moment, that it should be less likely to break the 200 day moving average, than to stop and rebound. My opinion is based on the growing liquidity in Europe (a very important market for Switzerland), the high dividend yields of blue chip companies, the high liquidity held by investors, the lacking alteratives.



PS: The quotes are from Glenn Stevens, Governer of the Reserve Bank of Australia. They were published today.

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”.


Hypocrisy of the CFTC – Unfair Treatment of Sarao Futures – Globex Rules at Fault

Please note: You will better understand this post if you read the CFTC press release first.(press release: Spoofing-Tactics)

I just read in the complaint regarding Sarao Futures (enfsaraocomplaint041715) published on that

Many market participants, relying on the information contained in the Order Book, consider the total relative number of bid and ask offers in the Order Book when making trading decisions. For instance, if the total number of sell orders significantly outweighs the total number of buy orders, market participants may believe a price drop is imminent and trade accordingly.

Now one futures trader, acting through Nav Sarao Futures Limited, called Navinder Singh Sarao realised that traders trying to front run the sellers visible in the order book can be spoofed. He’s basically bluffing using an algo. Like any good poker player he consideres what his opponents (other market participants) are doing and then came to a logical solution to outsmart them like any person relying on their wits would do, if they could bear the risk of being filled on tens of millions worth of S&P futures.

Why any judge or organisation would protect one trader from another trader is beyond logic comprehensible to me. Anyone using algos to sell when the order book on the sell side is heavy, with no economic or long term trading plan, has no reason to be protected. On the contrary.

As a former trader, I know that it is common to see order books with large orders several price levels above (on the offer) and below (on the bid) the prevailing traded price (for example in ETFs). Many market makers do this, so they catch any large market orders, that would other wise move a traded instrument by several percentage points, but at the same time giving them opportunity to hedge at no loss in the underlying instruments (in the example of Sarao it would be the S&P 500 stocks).

Now if Globex uses this defintion: Globex functions such that the best available bid or ask price must be taken (“hit” or “lifted”) by the market for a trade to occur, before the next available best bid or ask price can be taken.  — then it’s their own fault. In any normal order book you can hit whatever you see in the book, that being the point of the book. On SIX Swiss Exchange for example you can hit anything as long as you don’t move the particular instrument by more than x.x percentage points.

Also, if it is so usual for traders like Singh Sarao to “manipulate” the order book, there would soon be an opportunity for other funds, active traders to take the other side and buy whatever is in the order book. Any market participant familiar with the Globex functions knows, that anything above the best bid and best offer is pure fiction. If they don’t, they didn’t do their homework.

Additionally, if the large offers are moving up, as with the algo Sarao programmed, it should become obvious for the market participants, the CFTC wants to protect, that someone is trying to bluff.

Anything executable in an order book is fair bid or offer. If everyone knows they can’t lift/hit more than the best bid or best offer then, as I said, it’s a mistake Globex is solely responsible for. Sarao just took the bluff to a next logical level. Why the CFTC have to find a scapegoat now is highly unfair and wrong. They are not protecting anyone worth protecting. If they changed their system to make everything in the book visible tradeable, they wouldn’t have a problem in the first place.

In my book, Sarao was risking his money with a fair tactic. Why anyone like the CFTC can come and decide whose tactics are fairer than others, is rather disturbing.

This was also interesting; the sheer volume this one guy trades: “For example, on May 4, 2010, Defendants had established a long position .of over 2,000 E-mini S&P contracts, and over a forty-minute period, then proceeded to repeatedly sell and buy E-mini S&P contracts such that, at the end the forty-minute period, Defendants had established a short position of over 1,500 contracts. This cycle was repeated several times during the day, and Defendants ultimately ended the day flat, profiting $876,823 from this trading. On that day, Defendants had the fifth highest trading volume in theE-mini S&P, trading 130,030 Emini S&P contracts.”

And also the ingenuity of Sarao: “Prior to June 2009, Defendants used an off-the-shelf trading platform commonly utilized by traders in the futures trading industry to place E-mini S&P orders. Beginning in June . 2009, Sarao sought technical assistance in modifying the trading platform to create an automated trading algorithm designed to rapidly place, modify, and cancel orders in theE-mini S&P market. Specifically, Sarao emailed a representative at FCM A and indicated that he needed technical assistance in programming a “cancel if close function, so that an order is canceled if the market gets close.”

Here’s the complaint the CFTC details the allegations in enfsaraocomplaint041715

In the post I wrote about Nav Sarao Futures Ltd.

My main points:

  • Globex should change their order book policy: Anything on the 10 best bid and best ask should be open to being lifted.
  • A trader who was active on 800 trading days, according to the CFTC itself, is highly unlikely to be the trigger or cause of any Flash Crash. Especially as no new tactics were used.
  • The only reason they even noticed him, is probably because on that day of the Flash Crash his orders were the sole ones remaining in the book. The main problem not being his offers, but the fact that everyone else pulled their offers, arbitrage guys not functioning as usual.

Iran: Joint Comprehensive Plan of Action (JCPOA) – Financial Institutions need to act fast to help Economy

The results of the most recent round of discussion regarding the iranian nuclear programme are positive. Provided, Iran and the five UN veto powers aswell as Germany (5+1-group) agree on the missing “techincal details”, the Joint Comprehensive Plan of Action (JCPOA) provides a reliable base for the future international relations to Iran, also in economic terms.

The embargo situation remains unchanged for exporters until the final agreement of the JCPOA and with that also the very restrictive business policy of many banks. On the other hand the demand from Iran for machines should now rise quickly, as such projects often have a long lead time. In addition the demand for urgently needed spare parts will rise quickly.

Many Iran-exports are already possible today legally. Also payment transactions for Iran-business is legally allowed – but despite these facts many financial institutions block such transactions until now.

China has been the big winner with regard to the Wests’ financial and political institutions policy and much effort will now be needed to win back business in Iran. The finance industry is now required to act quickly to level the playing field and open up possibilities for doing business.

The lost busines can be gaged by the following facts: In 2006 Germany exported machines worth EUR 1.57bn, in 2013 just EUR 455m. During the same time period Chinas’ market share rose from 7.6% to 36.1%. In 2014 exports were EUR 631m.

Short Interest in Transocean (Symbol/Ticker RIGN RIG)

One of the reasons Transocean is so volatile:

Short Interest; currently over 10 days would be needed to cover the short interest in Transocean. transocean-rign-rig-short-interest-2015-2014



Another reason Transocean shares are so volatile:

Oil Price


This makes Transocean an interesting candidate for an investor looking for exposure to the oil price and a change in sentiment (based for example on Transoceans financing becoming more solid, capital increases out the way etc).

6month Chart indicates a leveling off of selling pressure: