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Posted on 14 Feb 2018 by Kevin Rose

Google’s Cash Road to Nowhere

Google’s Cash Road to Nowhere


Let me be the millionth investor to express frustration at Alphabet Inc’s approach to capital allocation. When the Google parent reported earnings recently, its cash balance totalled a whopping US$102bn. What in the world does the company need with all that cash? There are fewer than 100 companies in the world with a market cap greater than US$100bn, yet Alphabet has as much stuffed in a mattress somewhere.

This was all supposed to end with the recent change in US tax law involving the taxation of foreign profits. For many years, US-based multinationals avoided taxes on overseas earnings by keeping those cash balances offshore. Many companies including Alphabet took advantage of this quirk in the tax code.

Everyone understood the dynamic, but nobody liked it. Investors acquiesced fearing the tax burden that could be triggered if funds were repatriated, and the US government bemoaned the tax revenue leakage. Continue reading “Google’s Cash Road to Nowhere”

Posted on 13 Feb 2018 by Steve Johnson

Fragmenting Social Media and Facebook’s Withering Popularity

Fragmenting Social Media and Facebook’s Withering Popularity


Fair enough. I haven’t used it for years. And I don’t like it. Which means I’m predisposed to seeing signs of decline when they don’t exist.

But Facebook’s latest results at least give me some evidence to work with.

For the past few years I have been seeing lots of anecdotal evidence that less and less people are using Facebook, the world’s big daddy of social networks. Its results for the fourth quarter suggest that my anecdotal evidence is suggestive of a wider trend.

Daily active users in the USA and Canada, Facebook’s most mature market, declined for the first time in Facebook’s history. Time spent on the site was down by an average of 50 million minutes per day. That’s not much, given more than 1.4bn users a day, but it is a decline nonetheless.

Continue reading “Fragmenting Social Media and Facebook’s Withering Popularity”

Posted on 07 Feb 2018 by Gareth Brown

Why Even Small Panics Matter

Why Even Small Panics Matter


Sitting in a pub with property man Pete Wargent a few months ago, we were discussing the property market of Sydney in the 2008-10 ‘downturn’. I use inverted commas because barely a blip registered on any city-wide measurement of house prices.

But according to Pete, such indices didn’t register the depth of panic selling/forced liquidation going on in some pockets of the market. He and his clients were placing low-ball bids on properties for sale and were often successful. Things happen when you’re the only bidder and the seller is keen.

An amplified version of this happens in the stockmarket. Old salts will know this lesson but it never hurts to be reminded – stocks aren’t indices. And so while we’ve seen some light panic emerge in the indices in recent days, I don’t open my watch list each morning and see a consistent sea of red. A few stocks are up, a lot are down a little, some are down a lot. Continue reading “Why Even Small Panics Matter”

Posted on by Steve Johnson

A New Generation Learns About Nickles and Steamrollers

You are probably wondering what the hell happened yesterday. Friday’s relatively minor retreat in global stock markets – apparently due to increasing concerns about inflation and rising interest rates – suddenly became violent.

I’m in New York working with colleague Kevin Rose. At lunch time on Monday the Dow Jones index was down about 1%. Two hours later, he looked at me, eyebrows raised, and said “the Dow is off 1,500”. The 7% intra-day fall ended up becoming a 5% fall by the close of trade and the turmoil then spread around the world.

Absent any significant economic news, central bank announcements or a declaration of war, we were left scratching our heads.

Volatility trading – a formerly obscure corner of financial markets – has been identified as the culprit

You may not know much about vol trading. But you won’t be surprised to hear that, should you choose to pursue it, there is no way you are ever going to lose money. The strategies have all been back-tested.

That’s the way the marketing spiels run. In reality, these strategies pay investors regular small amounts of return for taking on risks thought implausible. Until one of those unprecedented 10-sigma events that couldn’t possibly happen comes along.

Credit Suisse sponsors a short volatility exchange-traded note (of course!) with the Nasdaq ticker XIV. It profits from benign markets and has returned 150% per annum for the past two years, with the down days few and far between.

LTCM, Bear Stearns and pennies in front of steamrollers

The volatility strategy might be new, but the concept is anything but. Long Term Capital Management was exploiting small bond yield differentials, with huge amounts of leverage, on the assumption that the gap had historically always closed. It worked for years, then the Russian government defaulted on its debt and LTCM went bust.

Through the mid 2000s, many supposedly risk-free money market funds started juicing their returns by investing in residential mortgage-backed securities. They had never lost money, and there would, of course, always be liquidity.

Until there wasn’t. The collapse of Bear Stearns began the whole financial crisis.

An unnamed source in Roger Lowenstein’s When Genius Failed – The Rise and Fall of Long-Term Capital Management likened these strategies to “picking up nickles in front of a steamroller”.

They often work for long periods of time. And the longer they work, the safer they seem and the more money floods into them. And then the steamroller obliterates everyone.

Up the stairs and down the elevator

Yesterday the net asset value of the XIV note fell by 76%, taking it all the way back to the starting point.

A New Generation Learns About Nickles and Steamrollers

The unravelling of XIV and many similar products and strategies apparently accelerated yesterday’s downturn. The maths wizards behind it will have learned a lesson, but rest assured there is another generation waiting in the wings.

This episode will likely be short-lived and contained. But it is a perfect example of the stupid things low interest rates have induced people to do in order to earn an extra percent of return. A larger steamroller could flatten many more penny gatherers.

Posted on 29 Jan 2018 by Alvise Peggion

Why Declining Businesses are Hard to Stomach

Why Declining Businesses are Hard to Stomach


Forget pizza, bruschetta, risotto and pasta. What I most miss about Italy is mortadella, a pork sausage flavoured with spices and pistachios. It may not be fancy but it is loaded with flavour, and great childhood memories.

What, then, to make of Felsineo, the leading mortadella manufacturer, offering a vegan option – of a pork sausage, no less – sold under its traditional label?

The decision could be seen as either bold or stupid but Felsineo had little choice. As Italy’s population ages, demand for meat is falling. Younger Italians, meanwhile, are increasingly choosing a meat-free life. Eurispes, estimates that 7.6% of the population is either vegetarian or vegan. And meat-eating Italians are buying higher quality cuts. Sales of cured meats like mortadella fell 5% in 2016.

Felsineo is desperately trying to fight a slump in sales, which is proving more structural than cyclical. It’s a challenging task, although successfully investing in a shrinking business like Felsineo may be even harder.

Continue reading “Why Declining Businesses are Hard to Stomach”