Thursday, 24 April 2014

Investors Relations in Germany: Buyer Beware

In 2008, there was a very controversial case involving Porsche and Volkswagen:

Porsche's controversial attempted takeover of Volkswagen (VW) has sparked a feeding frenzy for lawyers on both sides of the Atlantic. The claims and costs are now so onerous they have helped derail Porsche's attempt to take over its larger rival.

While the stakes could barely be any higher, the issue at the centre of the dispute could hardly be simpler – summed up by a press release from March 2008.

Investors claiming these large sums from Porsche say they were misled about its intentions regarding its investment in VW. One of the key elements to the case is a press release put out by Porsche in 2008, in which it dismissed as "speculation" it was mounting a takeover of VW.

By the end of that year the sports car manufacturer shocked the markets by revealing it controlled 42.6pc of VW and had options for another 31.5pc, giving it de facto control.

The revelation caused near panic in the market with VW shares surging to over €1,000 as shortsellers raced to cover their positions by buying back stock – what's known in the market as a "short squeeze".

More information in "Porsche crashes into controversy in the ultimate 'short squeeze'"

Shortly after 3pm on Sunday afternoon, Porsche, the German maker of the iconic 911 sports car, revealed it had secretly bought 31.5pc of VW through a series of cash-settled options with a range of investment banks.

Added to its known holding of 42.6pc, the options handed Porsche control of nearly 75pc of its bigger rival.

The news shot through the global hedge fund industry. With shares in VW trading far above the company's fair value and a recession hitting every other car manufacturer, traders had bet millions of euros that the stock would fall.

But the statement screamed the opposite. With nearly 20pc of the share register held by the state of Lower Saxony and another estimated 6pc held by index trackers, traders calculated a cornered market.

As one said: "With over 100pc of the stock tied up and nearly 13pc shorted, the correct price of any available stock was infinity. It was the ultimate squeeze."

The stock lurched violently, punishing the rest of the DAX index of Germany's leading companies. Hedge funds were estimated to have taken a €30bn hit, with the investment banks sustaining heavy losses, too.

The German regulator belatedly agreed in the face of the turmoil that there could be a case of market manipulation to answer.

Even so, this weekend the reputations not just of Porsche and its advisers, but of regulators and corporate Germany as a whole, are badly damaged.

Sources close to Porsche insist that the company never intended to cause the rumpus and has acted entirely within the rules.

Other observers disagreed. "This is the culmination of long-held plans to take over VW. Porsche engineered the squeeze as one of the most brilliantly conceived wealth transfers ever: they've got the hedge funds positioned to pay for Porsche's acquisition of VW. The only thing they underestimated was the scale of the fallout," said an insider.

The spike in VW's shares made it the most valuable company in the world.

Greenlight Capital is a hedge fund founded by David Einhorn, they were one of the parties involved in shorting Volkswagen.

From their latest quarterly letter more news about the court case:


I find this pretty shocking from a CG point of view, to be honest.

Monday, 21 April 2014

Mark Cuban on High Frequency Trading

To the person who approached me about High Frequency Trading: I am not exactly an expert on this subject, although I have read a quite a bit about it.

One article I just read made a lot of sense to me, it is written by Mark Cuban, one of the "sharks" of the Shark Tank.

"The Idiots Guide to High Frequency Trading"

"1.  Electronic trading is part of HFT, but not all electronic trading is high frequency trading.
Trading equities and other financial instruments has been around for a long time.  it is Electronic Trading that has lead to far smaller spreads and lower actual trading costs from your broker.  Very often HFT companies take credit for reducing spreads. They did not. Electronic trading did.
We all trade electronically now. It’s no big deal.

2. Speed is not a problem
People like to look at the speed of trading as the problem. It is not. We have had a need for speed since the first stock quotes were communicated cross country via telegraph. The search for speed has been never ending. While I don't think co location and sub second trading adds value to the market, it does NOT create problems for the market.

3. There has always been a delta in speed of trading.
From the days of the aforementioned telegraph to sub millisecond trading not everyone has traded at the same speed.  You may trade stocks on a 100mbs broadband connection that is faster than your neighbours dial up connection. That delta in speed gives you faster information to news, information, research, getting quotes and getting your trades to your broker faster.
The same applies to brokers, banks and HFT. They compete to get the fastest possible speed. Again the speed is not a problem.

4. So what has changed ? What is the problem
What has changed is this. In the past people used their speed advantages to trade their own portfolios. They knew they had an advantage with faster information or placing of trades and they used it to buy and own stocks. If only for hours. That is acceptable. The market is very Darwinian. If you were able to figure out how to leverage the speed to buy and sell stocks that you took ownership of , more power to you. If you day traded  in 1999 because you could see movement in stocks faster than the guy on dial up, and you made money. More power to you.

What changed is that the exchanges both delivered information faster to those who paid for the right AND ALSO gave them the ability via order types where the faster traders were guaranteed the right to jump in front of all those who were slower (Traders feel free to challenge me on this) . Not only that, they were able to use algorithms to see activity and/or directly see quotes from all those who were even milliseconds slower.

With these changes the fastest players were now able to make money simply because they were the fastest traders.  They didn’t care what they traded. They realized they could make money on what is called Latency Arbitrage.  You make money by being the fastest and taking advantage of slower traders.

It didn’t matter what exchanges the trades were on, or if they were across exchanges. If they were faster and were able to see or anticipate the slower trades they could profit from it.
This is where the problems start.

If you have the fastest access to information and the exchanges have given you incentives to jump in front of those users and make trades by paying you for any volume you create (maker/taker), then you can use that combination to make trades that you are pretty much GUARANTEED TO MAKE A PROFIT on.

So basically, the fastest players, who have spent billions of dollars in aggregate to get the fastest possible access are using that speed to jump to the front of the trading line. They get to see , either directly or algorithmically the trades that are coming in to the market."

Please read the remaining article at the link above for more. Also the comments provide quite a few good pointers.

I would be very interested to know the exact situation both regarding Bursa and SGX. Are they allowing HFT? If so, what percentage of the trades are executed by them? To what extend can HFT players get an advantage?

Maybulk: IPO of POSH (6)

First of all a correction. On April 2, 2014 Maybulk issued its prospectus to acquire more shares in POSH. In it were the financial numbers of POSH for the year 2013.

On April 8, 2014 Maybulk announced a deviation in its audited accounts for 2013 due to a lower profit of POSH. I assumed therefore that the profit as given in the documents on April 2 had to be adjusted downwards, but it turned out that those were already adjusted. I have amended the relevant blog postings.

Remains the question why Maybulk waited until April 8 with announcing the profit deviation when they knew about the difference already at least on April 2.

The prospectus for POSH IPO has been issued and can be found here.

A (very) good review can be found here.

A few additional issues I like to mention:

[1] Maybulk was not the only company that subscribed to POSH shares in 2008, there was one other company named Singa Star Pte Ltd.

It turns out that the company did exercise the Put Option, contrary to Maybulk (USD 8.125 is exactly the original paid price of USD 6.50 + 25%):

Who will be right and who will be wrong? I guess we have to wait to see how things unfold.

[2] From the financial statements we can see the amount of Fixed Assets of POSH:

And the Depreciation:

The question is, why has the Fixed Assets in 2013 increased by 35% compared to 2012 while the depreciation has (slightly) decreased?

[3] POSH is aggressively increasing its fleet, but utilisation rates seem to be dropping since 2012, for every category:

[4] Another issue is the Joint Ventures:

The Joint Ventures have total assets of USD 720 million, but are still booking a loss for the year? Revenue as percentage of Total Assets looks rather low.

[5] The Related Party Transactions of POSH are huge (in USD '000):

[6] The Other Operating Income, detailed:

How recurring are these? Given the PAT for POSH over these years (respectively 26M, 54M and 73M), these amounts seem to be very meaningful.

Friday April 25, 2014 POSH will start trading.

Sunday, 20 April 2014

Anthony Bolton: I was wrong about China

"Anthony Bolton (born 7 March 1950) is one of the UK's best known investment fund managers and most successful investors, having managed the Fidelity Special Situations fund from December 1979 to December 2007. Over this 28-year period the fund achieved annualised growth of 19.5%, far in excess of the 13.5% growth of the wider stock exchange, turning a £1,000 investment into £147,000."

The above taken from Wikipedia. Pretty impressive, isn't it?

And then he did something he now definitely regrets:

"In 2009 he announced his return to fund management and in April 2010 moved to Hong Kong to begin managing the newly launched Fidelity China Special Situations PLC, an investment trust listed on the London Stock Exchange."

SCMP wrote recently an article with a rather harsh tone:

"Anthony Bolton retires with unfond memories of China"

"... despite his bullishness on China he was unable to repeat his successes with his China investments - to no great surprise from older hands here who felt he didn't have enough knowledge of the market to succeed in the short term.

He retired from Fidelity at the end of March. At a function to mark his retirement Bolton criticised standards of corporate governance on the mainland. Initially he thought corporate governance issues in China were about whether the chairman and the chief executive positions were held by the same person, or whether independent directors held a majority on the board.

"I found that corporate governance is a euphemism for 'are the figures real and is the management lying?', that is, fraud.

A longer and more detailed article in the Financial Times: "Anthony Bolton: ‘I was wrong about the market in China’"

“The most disappointing thing for me – and I am happy to admit it – is that I was wrong about the market in China,” the manager said during a press briefing on his last day in the office on March 31.

I thought it would go up for four years but it has gone down for more than four years.”

Eventually he did outperform the relevant index, but in absolute terms, the performance is nothing to shout about:

Someone who has performed (very) well by investing in China is Malaysian Cheah Cheng Hye (founder of Value Partners), about whom I wrote here.