Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.
Joined Jun 23, 2015
86 Blog Posts


[Merrill Lynch: Thematic Investing – Global Future Mobility 17-Feb-2017:

Sustainable mobility: $7tn transport market facing disruption With over 1.2bn cars on the roads today, transport is a behemoth sector generating c.US$7tn in vehicle sales, supplies, and services. We believe that the sector is highly inefficient with 95% of cars parked at any one point, cars costing up to US$8.5k/year to own and operate, vehicles accounting for 1.2mn deaths p.a. and generating 23% of C02 emissions. Demographics (population to reach 9.7bn by 2050E) and urbanisation (70% living in cities by 2050E) will further strain existing infrastructure. The rising financial, social and environmental costs of transportation are unsustainable and demand a fundamental rethink of mobility. We see change catalysed by disruptive technologies and business models, rapidly evolving consumer preferences, and regulatory pressures. 4 game-changers: electric, autonomous, connected, and shared. In a world of exponential change as per Moore’s law, transport is a problem being solved at a tech pace. We believe that the convergent and mutually reinforcing trends of electrification, autonomous driving, the Internet of Cars (IoC) and the sharing economy will drive a fundamental shift from today’s car-centric travel to a platform-centric model whereby transport becomes a utility. Future Mobility – including an integrated, on demand electric fleet of autonomous taxis – can generate US$3.8tn of total positive impact in the next 10Y and lead to a “world of zeros”, including a 59% decline in vehicle demand, 87% fewer accidents, 54% fewer parking spots, and 85% lower emissions.]

Tesla Motors: One would think that Tesla could crack $300 a share on such ebullient projections (Tesla/Uber M&A perhaps). A lot of market cap has been added in a very short period of time, that is for certain. The last $100 move has been a blur with the stock up a full 24% year-to-date in 2017.  To grow in to the resultant current market cap Tesla has to be selling 1.7mm vehicles, at a profit, within 5 years (versus the 2.2mm currently produced and sold by mainline competitors such as BMW and Mercedes Benz).

As with all things “on the come”, much depends on the trajectory of China where 350,000 NEV’s (New Energy Vehicles) were delivered in 2016, 1.45% of the 24.3mm total vehicles delivered (up 15% yoy and accounting for 1 in 4 cars sold globally). EV’s account for 0.9% of sales in the USA and 1.3% in Europe in comparison. Chinese car producers accounted for 43% of global EV production (dominated by leading models from BAIC, Geely and BYD) and 46% of all plug-in sales globally. Tesla’s market share is 2% of NEVs in China (Japan is lower at est. 1.5%).  source: EV Volumes

Taking 59% of passenger vehicle demand out (ML 10yr #) should reduce emissions by at least that amount as some of the remaining internal combustion engine powered passenger vehicles are replaced with electric ones, but 85% seems like a high estimate to me. In China 31% of air pollution is attributed to vehicles, but heavy trucks as a sub category account for a full 90% of current total vehicle emissions. Despite Elon’s claims, electric transport trucks are not ready for prime time yet on the scale required to markedly change the emission numbers, the batteries required would be just too heavy (even before factoring the weight of the cargo) to stay within max payload limits (80,000 lbs.).

Estimated life to date Tesla sales in China are pegged at approx. 9,000 units (3000 were sold in 2015 versus an initial target of 10,000) and Japan at a very weak 2,000 (Japan’s EV subsidy is ¥950,000, or US$8,400), roughly equivalent to the US EV credit of US$7,500. As of mid 2016, Japan has more EV charging stations than gas stations. Tesla opened their 14th Supercharging station near Fukuoka in Kyushu earlier this month.

The fact that any credence is given to announcements like “opening” the Tesla market in India is laughable. Tata sells complete cars for less than the 55kWh battery cost projection on the new Model 3 Tesla. Ditto for Dubai on a relevance metric, Dubai will likely never hit 1mm in total car sales and 70% of current car sales are Japanese models.

I have previously written on the fact that EV subsidies are being curtailed in key global markets. The story does not end with EV subsidies either as Tesla has provided very generous residual buyback programs in key global markets like Hong Kong, which has very generous government incentives at the front end (fully detailed in the  legacy post below) putting a Tesla Model S pricing nearly on top of a gas powered Honda Civic and well below a Mercedes entry model. The 75% of purchase price buyback program after 24 months (low km) has been curtailed, but I fully expect lucky HK Tesla owners that have the “golden ticket” to exercise their put to Elon Musk. Factoring buybacks there is the potential to post net negative sales into China for Tesla in late 2017 to early 2018. Losing money on both the way out and on the way back into inventory as an exhibition (aka used) model will test the resolve of the hardiest Tesla bulls.


In the case of China, Federal NEV subsidies are expected to roll off by 20% in 2017 and regional subsidies by a more substantial 50-60%.

There has been a great deal of speculation about Elon Musk’s relationship with President Trump. Most recently, it seems like Elon is being relegated to dealing with VP Pense. Trump is very concerned with his image, it appears from afar, and it likely makes him uncomfortable that Tesla stock trajectory has left Elon with a paper fortune approaching treble his. Despite the fact that both Trump and Ryan have expressed a dislike for the current EV credit, Tesla stock has autonomously avoided the potholes and turned skyward like a SpaceEx rocket, seemingly never to re-enter Earth’s atmosphere. The EV credit may not be fully extinguished in the next budget, but it will likely be reduced from $7,500 which along with cheap $3/gallon gas might dissuade some of those Model 3 deposits from actually closing.

Tesla Energy: Even though the battery storage system revenue thus far in 2017 is estimated at a trickle like $15mm, Gigafactory 1 in California has launched and Musk is already projecting heady battery cost reduction of as much as 35% to under $125/kWh. With material costs estimated at $80/kWh this cost reduction is impressive. This result could allow the promised $35,000 Model 3 to be closer to a break even proposition for Tesla Inc. As for the sale of batteries to residential, business and utilities, all indications are that the business case is plausible, if not sound, and it is not unfathomable that revenues for 2018 approach $1bln, with the heavy lifting to come from the commercial and utility customers. Tesla’s PowerPack is scaleable to 1GW and will be an economically viable means to store relatively cheap mid-day produced power to be used when peak pricing is in effect later in the day (typically 5-9pm).

SolarCity clouds the analyst’s lens as to magnitude of the negative cash flow generation, but clearly not the sign (unprofitable; check, negative cash flow; check). The now combined Tesla entity carries a substantial $6bln in debt. Tesla has a market cap of $43.9bln, now greater than Nissan and honing in on fellow American Ford. Tesla has issued secondary equity on several occasions, the last being for $1.7bln in proceeds ($1.4bln + Greenshoe exercise) at $215 in May 2016. The stock rallied over 6.5% the week following the announcement, with the proceeds earmarked for Model 3 production with deliveries by the end of 2017 and bringing forward Tesla’s 500,000 vehicle unit build plan 2 years from 2020 to 2018 (as in next year, 2018). Patient investors should ready themselves for another secondary in 2017 (more debt on the heels of the SolarCity combination is not likely in my view), as fundraising has been an annual affair since 2012 and profitability can still not be seen with a Hubble telescope. Tesla’s market cap is so enormous at this juncture $3bln + might be in order to keep the transaction costs down. Tesla has 161mm shares outstanding and a float of 129mm shares. 26.6% of the float is held short, part of the reason for the recent pin action. Elon Musk owns over 20% of Tesla stock personally (all other insiders own 1.3% in aggregate, this is the Elon Musk show, have no doubt). The largest institutional investor is FMR LLC, better known as Fidelity Investments who own 13% of Tesla’s equity.

The Gini Coefficient at Tesla is off the charts, making it ripe for the UAW to eventually turn California plants. What potential gains Tesla might realize on battery cost via a well executed Tesla Energy launch can more than be given back through higher labor cost. Starting wages are $17/hr. in the Tesla plants (Toyota Motors Manufacturing average is US$39.50) on 12 hour shifts. Elon has been quoted as saying “changing the world is not a 9-5 job”. There is a reason that North American auto jobs have migrated from Canada to non-union southern USA and on to Mexico. If Tesla wants to retain its silicon valley nucleus it will have to eventually pay left coast wages, unionized or not.

Tesla’s book value per share is $17.03, hence it is trading nearly 16X book and 5x sales. Tesla does not own much in the way of proprietary technology. The Gigafactory is plug and play Panasonic technology. Elon once characterized patents as “a lottery ticket to a lawsuit”. The Japanese, by way of contrast, own 1/3 of the world’s o/s patents and it is the Japanese firms that dominate is areas such as ADAS (Advanced Driver Assistance Programs), electrification and emission control systems. Musk arguably has a narrow moat, with venerable global competitors breathing down Tesla’s neck across the broadening business lines of Tesla Inc. Rather than focussing on the pedestrian, largely outsourced means of propulsion (i.e. the battery) shareholders may have been better served in the long run (in the short run they have done just fine!) by focussing on the semiconductors and other high end technology components that are crammed into high-end, modern, connected EV’s (5x the amount of a “low end” vehicle, contributing over a 1/3 of the vehicles all-in cost).

Tesla Inc. has proven to be a difficult short, even for tenacious hedge funds, let alone lowly individual investors like moi. My TSLA T-acccount is close to flat on my 3rd short attempt (short @ $260 into “revenues”) with the 1st try profitable, 2nd a loser (1/3 of 1st trade profit) and the 3rd, so far, offside. Q4 2016 numbers are out after the close this Wednesday the 22nd with analysts expecting and adjusted loss of $0.51/share which would be a marked improvement on the loss of $0.87/share booked in Q3 2016. SolarCity is enough of a wild card to lead one to suspend opinion, but it is certainly not outside of the realm of possibility that the Q3 loss is further eclipsed.

Hopefully 3rd times a charm, but I have no plans to overstay with my short position and a stop loss at $300 is in place. JCG

Follow me on Twitter @firehorsecaper

Tesla short is the fellow on the right, to be clear.

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Symbol U, atomic #92, Uranium is Earth’s heaviest natural occurring element in the periodic table.


Earth is dominated by the following 4 elements; Oxygen #8, Magnesium #12, Silicon #14 and Iron #26. For reference Silver is #47 and Gold #79.

Uranium has garnered a lot of attention this far in 2017. Little wonder, as the uranium plays are up nearly 60% since the deemed pro-nuclear Trump was elected in November 16′. Using the largest uranium ETF, ticker URA – Globe X Uranium ETF as a proxy for the space, https://www.globalxfunds.com/content/files/Global-X-Uranium-ETF-1.pdf ,one can clearly see the pain inflicted over the last 5+ years;

2017 +27%, 2016 -1%, 2015 -37%, 2014 -23%, 2013 -21%, 2012 -19%, 2011 -60.%. From inception (11/4/2010), URA is down 79.5% cumulative.

U3O8 uranium currently trades as $25.31.lb. down 81.4% from the 2007 high of $136/lb.


The merit of nuclear power on metrics of both energy security and a low-carbon future are beyond refute. Real facts;


1 kg. of uranium, post enrichment and used for power generation in light water reactors produces 45,000 kWh of electricity. From an output perspective 1 kg. of uranium is equivalent to almost 10,000 kg. of mineral oil and 14,000 kg. of coal.

The comparisons on emissions are as striking as on energy output;


Approximately 10% of current world energy supply comes from nuclear power. There are 447 operable nuclear reactors in the world at present, requiring 140 million lbs. of uranium per annum. Utility stocks are estimated at 478 million lbs., 3.4 year of demand. The largest 3 markets for nuclear power are France (58 reactors, 75% of overall power coming from nuclear), Japan (42 operable reactors, 40% of power pre-Fukushima disaster, only 3 have been brought online since all closed in 2011) and USA (99 reactors, 20% of overall power). A total of 60 reactors are under construction at present in China, India, South Korea, UAE and Russia . Twenty two of the nuclear plants under construction are in pollution ridden China, where 40% of growing electricity demand is still coal-powered, and the liveability of 25 of its largest cities hinge on nuclear power’s hockey stick growth projection. China is expected to have 40 nuclear reactors online by 2020 and to add 10 per annum thereafter. CNECC (China Nuclear Engineering and Construction Corporation) is the exclusive nuclear plant builder in China.

The USA only produces 4.3mm lbs. of uranium at present (2% of global output) versus an annual need of 56mm lbs., hence 93% of the uranium the US needs annually to operate existing nuclear plants is imported from places like Kazakhstan (39% of world uranium supply). Canada accounts for 22% of world supply and Australia 9%.

The World Nuclear Association (WNA) appear to have the best stats on the space. The top producer is Kazakhstan’s KazAtomProm at a 22% share. They recently announced a 10% production cut for 2017 (3% of world supply).

Canada’s Cameco is world #2 producer, not far behind KazAtomProm, at 18% of global production. The stock ticker is CCJ on the NYSE in US dollars and CCO on the TSX in dollarette’s (CAD). Despite all the seemingly good fundamental news on uranium, the price action has been nauseating. Cameco has some issues. Customer concentration is one, whereby almost 1/2 their long term sales contracts are with 5 key customers. Cameco received a termination notice last week from Japan’s TEPCO (Tokyo Electric Power, operator/clean upper of the crippled Fukushima plant) on a contract running through 2028 worth approx. $1bln. To give you an idea how offside TEPCO was on this long term uranium contract, 9.3mm lbs. spot is worth approx. $233,000,000 versus the $1bln contracted value, that is a $767mm potential hickey for Tepco. They have claimed “force majeure” in cancelling the Cameco contract, which might have had a shot of success if they had not accepted deliveries and paid for uranium 2014-2016. Sounds more like force manure to me, most expect Tepco will have to honor the contract via legal settlement. The news sent CCJ shares down 12.5% last week, although it remains above the 200-day moving average at $10.67.

The 2nd blemish to be addressed by potential longs is Cameco’s ongoing tax battle with the Canadian tax authorities, the venerable Canadian Revenue Agency (CRA). CRA are asking for C$2.2bln (US$1.7bln) in back taxes related to a purported tax dodge run by Cameco 2005-2015 where C$7.4bln of earnings were allegedly run through a low-tax Switzerland subsidiary. Most expect this case to be settled out of court in either 2017 or 2018, but the magnitude is unsettling to say the least. Plenty of press on the matter for those that would like to weight the merit of the case. The market cap of CCJ, as noted, the 2nd largest global uranium producer, is $4.15bln or 10% of TSLA ($40.4bln), as a point of reference.

There is a high degree of idiosyncratic risk in buying the listed equity of  individual uranium companies. The largest ETF highlighted above, URA has enough daily turnover to be considered liquid, but it small at $250mm in AUM (MER 0.70%). The weighting of the ETF in Canadian uranium names is high at 60% (23% in Cameco alone). The Kazakhstan names do not have listed equity.

For those seeking modest allocations to the uranium space, I would recommend looking at URA for the diversification, but shorting CCJ to reduce the single name exposure. With the proceeds of the CCJ short I would buy smaller US producers (some better described as micro-caps) as they will likely have few headwinds under the current administration (i.e. permitting, production, and expansion). The smaller players are largely unhedged without long term supply contract hence they provide more leverage to the underlying uranium price.

A sustained recovery in uranium equities depends on uranium prices staging a recovery from the depressed levels we have seen over the last several years. We have smoke, we need fire. JCG

Note: Long CCJ (1% weighting), but looking to diversify near term to a broader grouping of uranium names.

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There are few things held in more deplore than retail at the moment. The list of retail equities that have blown up year to date is long, with Ralph Loren being only the latest to banzai skydive, and miss the chute. Luxury retail has not been immune, despite overall robust consumer spending.

While ibankcoin’s readership is largely focused on equity investment/speculation, hopefully my blogs posts have opened a few eyes to the bond opportunities that occasionally arise and merit both your attention and deep due diligence.

Enter the venerable luxury department franchise, privately held, Neiman Marcus (NMG), rated B3/B-. The speculative grade (Caa2/CCC) cash pay (I’ll explain shortly) NMG 8% 10/15/2021 (cusip 570254AA0) got rocked to trade < $60.00 last week for the first time. The bonds are currently wrapped around $61.00 for a yield to maturity (a quarter shy of 5 years) of > 21%.


The capital structure is complex and the 8’s 21′ are as you might expect, rank near the bottom with a couple of classes of debt ranking ahead on them in terms of priority of payments. In the event of a tap out, the recovery rate would be expected to be low.

New York based independent credit research firm CreditSights moved to a buy from hold rating on the unsecured debt of NMG on 1-Feb-2017 on some “early signs of stabilization in the luxury good market, the benefit of a runway clear of maturities until 2020, and a decent prospect for neutral free cash flow generation over the next  year. While we view the prospects for recovery in the bonds as limited – given the significant contractual subordination to the ABL (Asset-based Loan) and large term loan – yield opportunities of approx. 20% offer an enticing return while the company attempts to get the story moving back in the right direction during 2017.”

The October 2020 term loan maturity is a big one at $2.9bln. There is $1.56bln of unsecured debt maturing 10/15/2021, including $960,000,000 of the cash pay 8’s 21′ and $600,000,000 of 8.75% 21′ PIK (Payment in Kind) notes.

Beyond poor operating results in terms of comps, margins and outlook, the market is reacting to the fact that NMG pulled plans for an IPO (filed August 2015, delayed and most recently pulled). The history of NMG is long, complex and storied. Founded in 1907 with a head office in Dallas, Texas, NMG has has varied ownership over the years. The first store outside of the Dallas/Fort Worth area was opened in 1957. NMG was publicly traded from June 1987 until May of 2005 when it was taken private via leveraged buy out (LBO) by Texas Pacific Group (TPG) and Warburg Pincus for $5bln. The exit was prolonged, but in October 2013 NMG was sold for $6bln to Canada Pension Plan Investment Board (CPPIB) and Ares Management, netting TPG and Warburg Pincus a $1bln gain versus purchase price. CPPIB & Ares went 50/50 on the venture contributing $1.6bln in equity ($2bln was “expected”) with the rest of the deal financed via the debt markets.


Note: Trump’s signature. He is signing these executive orders Neiman Marcus? More recent renditions are even more similar.


Fast forward to today and approx. $900,000,000 of shareholders equity remains. The degree of leverage imparted in NMG on acquisition would make even Trump blush, and it has only intensified over the last 18 months. On the positive side, NMG is closely held by very savvy institutional investors that are used to taking the long view (CPPIB much longer in terms of liability matching). The next NMG IPO filing must be a successful one and beyond a century + long track record as a competent luxury retail operator, the elephant in the room is the immense debt burden approaching $5bln. NMG is well within their rights to suspend interest payments on the $600mm 8.75% 21′ PIK notes, a move that would save $52,500,000 per annum going forward. The signaling effect of such an election on the PIK notes would likely not be viewed as favorable though, and would likely take a potential IPO take-out off the table for the foreseeable future.

Owners with deep pockets is certainly a positive attribute. CPP and Ares have been equal partners to date, but there is nothing to dictate this has to be the case going forward. Ares would likely be somewhat reticent to add to a trade that has moved so far offside since late 2013. CPPIB, for their part, might look to creative ways to decrease leverage while operational efficiencies are given time to work through (cost cutting, reduced capex, further build-out of successful online offering “mytheresa”, etc.).

The current yield on the NMG 8% 10/15/2021 is 13.1%, if the bonds can be purchased for indicated $61.00 (+ accrued interest). The yield to maturity, as noted, is in excess of 20%. A plausible outcome would be for the current owners CPPIB/Ares to tender for the cash pay bonds, leaving the PIK bonds outstanding for debt servicing flexibility. Pure conjecture to estimate what percentage of the $960,000,000 of cash pay note holders might respond to a $70.00 tender offer, but given the prospects for a near term recovery from the dregs, I would expect at least a 50% take up rate would result. Deploying another $336,000,000 of equity under such a scenario would have the effect of extinguishing $480,000,000 par value of public debt, greatly improve the gearing numbers at NMG.

While not a pure “Red, White & Blue” lux retail play, given the Canadian connection, it merits further study for certain. Not for the widows and orphans due to outsized potential for losses , but in a measured dose Neiman Marcus debt may be worth a look.

Follow me on twitter; Caleb Gibbons @firehorsecaper

Disclosure; Not yet long, but vetting a 2.5-3.0% allocation to NMG 8’s 21′ in clips of 100k par value.


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Corporate tax policy is very important for global investors, for obvious reasons. Trump’s first full week in the big chair is a good time to remind people of what the potential drivers are for relative valuation going forward. The topic of tax has come up already today, “We will cut taxes massively”, “We are going to impose a very large border tax”.

As a non-American, I can analyze such matters with a degree of detachment. It appears difficult for Americans to move on and accept that the card have been dealt, played, and that the spoils will be split with a different calculus than we observed under previous administrations.

A great deal of Trump’s campaign dealt with “Making America Great Again” and clearly on tax policy there is some wood to chop. To a man with a hammer, everything is a nail, and with the mandate Trump has been given, change is coming, hard and fast. Much of the focus to date has been on the timing, rate and window to be provided for US corporations to repatriate the offshore profits they have been hoarding outside of the grasp of the US Treasury. The headline bounty is large, estimated at between $1.7-2.3 trillion (dwarfing even China’s UST holdings to scale it!). The effect on the US dollar will overall be muted though, as the bulk of the offshore cash is already denominated in US dollars (brought back to the USA, less the TBD tithe of the US Treasury). Much of this liquidity has been invested conservatively as it was in many cases earmarked as dry powder for acquisitions, stock buybacks, etc. The ebullient debt markets have allowed this to be effected with ease by many corporate treasurers (onshore debt, offshore cash). Some form of tax “holiday” / amnesty program will see a goodly portion of the excess cash brought back onshore, given the new found flexibility afforded and concerns over such a pass ever being granted again (at least in the near future).

The big thing to watch with be the form of a “Border Adjustment Tax” (BAT), aka “Destination Based Cash Flow Tax” (DBCFT) that comes out of the other end of the corporate tax code transformation. This is much more complex than the disclosed plans on the individual taxation side (i.e. less complexity, less brackets, fewer loopholes, lower net taxes). Many of the USA’s trading partners have much lower corporate tax rates with many having fallen upwards of 10% over the last decade. Canada’s Federal corporate tax rare is 26.5%, down from 36.1% in 2006. Mnuchin (I’d like to buy an “i” for $500 Alex), Secretary of Treasury nominee, has already stated that a corporate tax cut is the biggest/best fix for corporate tax inversions, a topical M&A driver in recent years.

Robert Lighthizer, Trump’s pick for U.S. Trade Representative, has been critical of the abuses seen under varied free trade agreements. The US has pulled the plug on TPP, as expected. Trade partners due South and North have been put on notice that NAFTA is to be heavily reworked (Canada first up it appears as we have no wall issue o/s). Trump has already announced a “Border Tax” which would be troublesome to effect, given the presence of the WTO and others. Odds of Trump’s chest pumping border tax being a modified version of the EU’s 15-27% border adjusted VAT is high. The optics of such a plan are without precedent in the US, but  fit well with Trump’s stated objectives. It would the first time the US has imposed an internal tax on imported goods with an explicit rebate/exemption for exports. Such an innovative tax regime would also have merit from a budgetary perspective as addition taxes would be raised for the US Treasury, given the long standing net trade deficit the US typically runs.

USD strength would result under such a DBCFT plan. Tax policy watching could be more fruitful than Fed watching near term. The Fed die appears to be cast, at least over a 12-18 month time frame. The flames Trump provides oxygen to will likely quicken the pace of Fed Funds hikes upward march in the near term (an extra 25bp in 2017 over expectations and perhaps 50bp in 2018). King USD. Future posts will address the likely stress on EM bonds markets where US$3tln of incremental bonds have been issued since 2008. Higher absolute rate markets, steeper rate curves and challenged EM currencies will make for spirited trade indeed.

Follow me on twitter @firehorsecaper

Effected a family move to Tokyo, Japan over the holidays, but expect to more active going forward. JCG

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The U.K. Financial Conduct Authority (FCA) sent shivers down the spines of CFD (aka spread-betting) providers yesterday with the release of their consultation paper, outlining plans to crack down on the sale of certain derivative products, including CFD’s and binary options to retail clients.


IG Group Holdings, formerly a £3bln + market cap player in the space was the biggest “mover” on the news, and as one might expect, the move way not up. IGG.L fell 38% to 485.1p, shaving £1.4bln off their market cap. Their market cap stands at £1.7bln.


Another notable decliner was CMC Markets (CMCX.L) which also fell 38% on the day, closing with a market cap of £330mm. Plus 500, another provider noted a “significant financial impact” on their UK business after the FCA proposals, estimating a 20% reduction in revenues on stricter rules.


From the Australian Securities and Investments Commission (ASIC): thinking-of-trading-in-contracts-for-difference-cfds

CFDs were born in the U.K. in the 1990’s, the brainchild of UBS Warburg staffers. Retail began to get involved in the late 1990’s via a firm that was eventually bought by MF Global. IG Markets and CMC Markets are credited with expanding the popularity of the product from 2000 onwards.

CFDs are currently available in Australia, Austria, Canada, Cyprus, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, The Netherlands, Luxembourg, Norway, Poland, Portugal, Romania, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and New Zealand.

The most popular head office domicile for providers include the US, Cypress (regulated by CySEC, the Cypress Securities and Exchange Commission), and the U.K. The only actual US based, CFTC regulated provider in the US that I am aware of is Nadex  (North American Derivatives Exchange) https://www.nadex.com/ , former known as HedgeStreet, which was formed in 2004 and bought by IG Group in 2008.

IG has a long history. It was formed by Stuart Wheeler in 1974, Investors Gold Index as a way for retail to trade gold prices as an index instead of trading the underlying commodity. The IG group is now one of the UK’s top 200 firms (up until yesterday at least) and is listed on the London Stock Exchange and the FTSE 250. IG posted net income of £131.9mm on revenues of £427mm in 2015. For 2016 through May they have a £207.9mm profit before tax on revenues of £456.3mm.


In the United States, under the Dodd-Frank Act, CFDs are considered to be “swaps” or “security-based swaps,” depending on the nature of the underlying on which they are based, and are subject to the regulatory framework for those products established by Title VII of the Dodd-Frank Act. For example, a CFD on Apple common stock would be a security-based swap (SBS) subject to the regulatory framework for SBS established by the Dodd-Frank Act. Under the Dodd-Frank Act, among other things, transactions in SBS with or for retail investors must be done on a registered national securities exchange and offers and sales of SBS to retail investors must be registered under the Securities Act of 1933. The CFTC has taken swift action when players misstep and market to US-based investors. http://www.cftc.gov/PressRoom/PressReleases/pr7341-16

Many jurisdiction, including the U.K., regulate CFDs and binary options under their respective online gambling rules (fixed odds gambling). The U.K.’s FCA has signaled via their consultation paper that the rules for binary options will be moving from being regulated by the Gambling Commission to the FCA under their interpretation  of the scope of the Regulated Activities Order of MiFID ii (The Markets in Financial Instruments Directive). The U.K. remain uncertain of what investor need is addressed by these products (30 seconds to 1 week time frames typical) and noted that 82% of clients lost money.

CFD providers expanded into binary options as the competitive landscape changed. Some are also offering a suite of leveraged ETFs for less aggressive traders.

It remains to be seen if the move in IG Group stock has been a overreaction.

It is said that there are 3 ways to lose money. Farming is the most certain, but gambling is the quickest. JCG

Follow me on Twitter; Caleb Gibbons @firehorsecaper

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Narendra Modi was even accused of trying the steal the thunder from the US Presidential election with the timing of his demonetization campaign. Trump was having none of it, but it is still the biggest news you have largely ignored over the last week. India has effectively invalidated 80%+ of the legal tender in circulation into coupons that can only be exchanged in specific places and quantities (INR 4,000 initially), with the requisite identity proofs. With the unbanked estimated at 50% of the population and the unpapered estimated at >1/3rd, one can just imagine the mahem that has ensued. USD/INR = 68.56, hence the 500 rupee note is worth US$7.40. Apparently honest people have no need to worry, but in concert with daily limits on ATM withdrawals the public are forming orderly queues, at their gold dealers. The basis between financial gold and physical gold is reportedly skyrocketing in India, a trend that could have legs as other jurisdictions phase out their high denomination legal tender.

Singapore announced the phase out of their S$10,000 (US$7,067) banknote in early 2014. The ECB has plans to stop printing the €500 note (1/3 of € in circulation by value) by the end of 2018. All of these moves are defended as another quiver in the fight against tax evaders, organized crime and terrorists. In India, Naxalite, a Communist guerrilla group, mostly associated with the Communist Party of India, are target #1 of Modi’s demonetization plan.

Many fear the war on global cash could have unintended consequences. Some currencies are more fiat, by nature, than others. The USA holds 8,134 tonnes of gold, representing 76% of forex reserves. There has been talk of the US abolishing the $100 note which represents a full 75% of the value of banknotes in circulation, $969bln of $1.3tln. The majority of US$100 bills are held outside of the contiguous US States. I can see Trump eliminating the penny and nickel on economic utility grounds before the $100 is touched, but clearly anything can happen in the Upside Down. India holds 558 tonnes of gold, representing 6% of foreign exchange reserves. The ECB in comparison holds 505 tonnes of gold (28% of forex reserves). The largest gold ETF GLD is backed by 935 tonnes of gold, but the actual gold is unallocated (i.e. financial gold).

Tax collection rates in India are abysmally low, due in large part to agriculture at 60% of GDP being a tax exempt sector. As one would expect with a billion + populace, VAT (Value Added Tax) receipts dominate. Demonetization has come on the heels of a disappointing tax amnesty program that was touted as having the potential of outing 30 tln rupees worth of “black money” (625.5bln was recovered onshore, > $100mm USD).

Allocated gold is likely to catch a bid in the current environment, regardless of the trajectory of financial gold. JCG

Follow me on twitter; Caleb Gibbons @firehorsecaper

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The $5 trillion gold market has, yet again, become a head scratcher for market participants.

Bears, esp. on technicals grounds, call for further downside. There are two distinct scenarios which have yet to play out fully. The move in gold over the 9/11 – 12/15 could be a correction in a dominant bull market (my current positioning/thinking). Alternatively, the 12/15 – 9/16 gold rally could be a correction in a dominant bear market.

Bulls point to supply/demand fundamentals and likely ongoing support from global central bank shenanigans. The current geopolitical environment is what one would call supportive of higher prices. Think USA/Russia Cold War 2.0., N. Korea (nukes), the South China Sea (China, or “Jhina” as Trump appears to pronounce it) and Mosul, Iraq (ISIS).





Bitcoin has been quietly rallying and currently trades above $635. The best explanation I have heard thus far for the phenomenon of bitcoin is that it is a solution looking for a problem. Gold has been singled out as nature’s bitcoin. The forthcoming bitcoin ETF (Q1 2017 approval?) from the twins; Winklevoss Bitcoin Trust, ticker COIN has been touted as a reason for a skyward trajectory in the leading cryposcrip going forward. Truth really is stranger than fiction. I would fade that move, although the underlying blockchain technology clearly has merit. The recently approved IEX exchange (The Investors’ Exchange) will be utilizing blockchain technology with partner/spin-out TradeWind to roll out a safer, more transparent gold trading alternative. I for one would prefer to trade gold on Katsuyama-san’s portal and give fictional Satoshi Nakamoto-san’s fraud fraught bitcoin rabbit hole a wide berth.

The LBMA gold conference here in Singapore kicked off Monday. It appears ICE got the jump on LBMA for a gold future to help clear the London daily auction (central clearing via ICE). If the fixed income derivative market is any guide, 1st mover advantage is important and to the victor go the spoils. Watch this space.




I have written a couple of posts on the gold market in 2016 and way to play it. January 10th would certainly have had you in early on the 2016 move, but as if often the case, gold equities are not for the faint of heart. Most names are 20% off their 2016 high print.




This follow up post will be on Pretium Resources, PVG on the NYSE the TSX in Canadian Dollars. PVG closed up 6.21% on 10/18/16 to close at C$12.83 in CAD. PVG in the US closed up 6.41% to US$9.80. Market cap US$1.8bln.

2016 YTD performance; PVG +94% (21% off YTD high of $12.41), GDX +76%, GDXJ 111%.

Latest Pretium investor presentation (required reading):


Pretium is a Canada-based (British Columbia) development stage gold mining company, slated to move to production by mid-2017 of their 100% owned Brucejack project in Northern B.C.. Brucejack’s Valley of the Kings (VOK 6.6mm) and the nearby West Zone (0.6mm) have proven and probable reserves of 7.5mm /oz. of gold. An 18 year mine life is assumed. All-in sustained cost (AISC) per ounce of gold is US$446 (several majors are > $1,200 as a comp). Target production is just over 500,000 oz. per annum. The project IRR with gold at $1,250 exceeds 35%. The project also contains a lot of silver, the bulk, 26mm oz. P&P, at the West Zone with an additional 4.6mm oz. of silver from VOK.

What makes the Brucejack site and hence Pretium so compelling?

High grade deposit. Gold at 14.1 g/t. It is not an exaggeration to say that Brucejack is one of the highest grade gold discoveries of the last 1/2 century. This is both good and bad in that high grade deposits tend to be uneven. Grade varies considerable overly the broader deposit. The road to 7mm ounces P&P has at times been harrowing for investors. A relatively large scale 10,000 ton bulk sampling conducted by Snowden Mineral Services in 2013 netted 4,215 ounces of gold (versus 4,000 oz. expected). Strathcona at one juncture in October 2013 burst Pretium’s balloon, sending the stock down nearly 30% to sub C$3.00 by stating, “There are no valid gold mineral resources for the Valley of the Kings zone, and without mineral resources there can be no mineral reserves, and without mineral reserves there can be no basis for a Feasibility Study.” Snowden Mining Industry Consultants took over the study from Strathcona at the direction of Pretium management, employing Pretium’s preferred bulk sample method (i.e. run the full sample through the mill and see what comes out, hard to argue with as it is difficult to cherry pick a 10,000 tonne sample). Pretium have reported some intersections grading as high a 1,000 grams of gold per metric tonne. Impressive indeed.

As an aside, Strathcona have retained a very strong reputation in their field. Their report on the now famous Bre-X scam in May 1997 laid bare the record setting fraud that had been perpetrated on global investors. At its peak, Bre-X had a $6bln market cap.


A full quarter before the definitive Strathcona report the stock fell from C$20 to the mid $2’s when the proposed 15% partner Freeport McMoRan Inc. (FCX) found scant amounts of gold from their independent testing of samples drawn by drilling parallel to Bre-X’s. I was a buyer for size, not believing that a scam of this magnitude could be possible. The meticulous detail required to salt over 3km of core samples over an extended period and have them tell an intelligible story seemed to me a stretch. The report was to come out on a Friday and the stock had levitated modestly to a 3 handle. “Dr. No”, as Strathcona’s Farquarhson was known, put a scare into me given the highly spec nature of my stock wager with that days horoscope putting me over the edge. I sold 10,000 of my 12,000 shares and saw them open the following Monday (post report – no gold) at 8 cents. I had clearly dodged a bullet and did what any 30 yr old punter in the same situation would do. Hanging my hat in Japan at the time, I walked into a Harley Davidson dealership and pointed to the two-tone silver/black 1997 Softail Custom. ¥2.1mm changed hands and I kindly asked the proprietor to point me the direction of central Tokyo as the 2-wheeled beast sprung from the captivity of the showroom.

Managements’ vision/acumen. Robert Quartermain is Pretium’s Founder, CEO and also acts as Chairman. Quartermain’s history with the Brucejack site is very interesting in and of itself. While at Silver Standard, where he spent 25 years of is 40 year mining career, the Snowfield/Brucejack assets were purchased for $3mm (5 cents per ounce of silver in the ground). Pretium’s IPO at C$6 raising $283mm in 2010 provided the capital to allow the company to purchase the assets for $450mm and Pretium’s market cap now stands at $1.8bln. At 0.63% of NAV and commercial production less than a year away, I do not think the story has fully played out yet.

Operations; permits / funding / construction. Permitting is a huge issue in all jurisdictions. The delays can be staggering. A decade ago a time frame of 3-5 years would be typical for the requisite environmental assessments and permits. Today estimates would be 7-10 (The Canadian  government recently approved the BC domiciled Pacific Northwest LNG project with 190 conditions, mercy me).

The full project cost (through production in mid 2017) of US$686mm has now been fully funded, $540mm financing package (largely debt) and $146mm via equity. The amount of support infrastructure required for such a remote location is daunting and all observers have been impressed by the progress Pretium has made to date. To put this capital budget in context, Toronto is spending C$3bln ($2.3bln) for 1 (one) subway stop in Scarborough (Manhattan’s Second Ave. line will have a comparable cost at $2.23bln/mile, but at least it has 3 stops!).

Top Shareholders (%): Van Eck Associates 9.97 Silver Standard Resources 9.50, Zijin Mining 5.04, Black Rock Asset Management 4.97, Orion Mine Finance 2.57, Pretivm Management 2.00 (41% institutional ownership). Franco Nevada Corporation have purchased a modest royalty interest in the Brucejack project.

Given the site is open in all directions there certainly exists the possibility of an increase in the reserve numbers over time. Most see the likely catalyst as being M&A related as the majors are keen to fill gaps in their production profile and average down their ASIC in low risk jurisdictions. Post permitting, Canada certainly fits the bill.

Analysts are bullish on the Pretium story, with targets as high as C$20 one year out (vs. C$12.83 spot, +55%). I think it could eclipse the all time high of $18.24 and reach $20 which would be good for a double from spot $9.80. It certainly will not get there is a straight line, but hopefully it will be devoid of the high wire peril evident in 2013. The story has been effectively de-risked, as much as a small cap gold mining stock can be.

Hopefully the toys will be funded is a more traditional fashion this time around. Street bikes are now off limits (wifey), but maybe a Nissan GT-R?


Follow me on twitter @firehorsecaper

Disclosure: Long 1/4 portion PVG in Canadian dollars, usually hold in USD as well. High beta gold play.

Note: Gold – a good delivery bar (think central banks and bullion banks) contains 400 troy ounces (12.4kg. or 438.9oz). A kilobar (preferred in Asia and with individual investors) weighs 1000 grams and contains 32.15 troy ounces. An ounce of gold contains 31.1 grams.





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I had the pleasure of hearing Singapore based Mark Mobius, Ph. D. (Economics, MIT) Executive Chairman, Templeton Emerging Markets Group keynote speech at the Asia PE-VC Summit 2016 held 30 September 2016, run by Deal Street Asia / mint asia.


Dr. Mobius was born August 17, 1936 (six years younger than Warren Buffett, born August 30, 1930). Nobody can rock a baby blue two piece suit and white shoes better than Mobius. Style and substance are rarely brought together in such a seamless fashion. At 80 year young, he is beyond sharper than a tack and offered a great deal of insight to a crowd, on average 45 year his junior.

Templeton has $28bln invested in 70 global EM markets at present, sprouting from a kernel of $100 million circa 1987. In South East Asia, the focus has been on PIPE deals (Private Investment in Public Equity). EM is up 1848% over the 1987-2016 period.

What keeps Mark up at night, other than travails of being 80, can best be summarized as the three i’s;

1.) Interest rates – Global Central Banks are the classic non profit maximizing counterparty and Mobius thinks they are destined to “make a mess” of it. Negative interest rates are far from a rational state. In terms of rational equity valuation, almost any p/e multiple can be justified in an environment of negative rates, 100 OK, 200 sure. Mark questions the mentality of said central bankers, overly influenced by academia,  economist and other charlatans (my term). Specifically called out was Ken Rogoff’s “Curse of Cash” as poppycock.

2.) Isolationism – Both with respect to trade and investments. A damaging trend. Little comment required on this point. Mobius grew up in Boston, Mass. but long ago relinquished his US passport and holds a German passport (his father was German and his mother was Puerto Rican) and a Singapore tax domicile.

3.) Internet – On-going game changer, especially in EM. Largely a mobile phenomenon.

China, still a monster growth story. It is all about the absolute numbers. Growth is slowing, but the absolute numbers are bigger every year (10% growth in 2010 is smaller than 7% in 2015 given the absolute size of the economy).

Biggest take away:

The people you are dealing with is the most important factor in investing, over the long haul. Having  a legal agreement is of course required, and governing law important, but typically if it gets to the stage of lawyers and the courts, the result is a big zero for all involved. Word to the wise, word to the wise indeed.

My current public market favorite instrument for EM exposure is WisdomTree’s Emerging Market High Dividend ETF, DEM, yielding 4.15%, ytd 2016 performnance +20%, AUM $1.6bln. No home country bias, as a global citizen. JCG

Follow me on twitter; Caleb Gibbons @firehorsecaper

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Even the Asian elephant in the room is endangered.

Over 80% of the market value in the S&P is attributable to intangible factors (environmental capital, sustainability governance and stakeholder relationships). Less than 20% is accounted for by physical and financial assets.

Global sustainable investing assets grew by 61% over the 2012-2104 period and now stand at $21.4 trillion. The domicile of these assets is telling; 99% are in the United States, Canada and Europe.

Environmental and social issues affect both valuation and financial performance. If your investment decisions focus only on financial disclosures, you will not be getting a complete picture of the drivers of value.

Global ethical principles have never been more important or, it appears, more wanting than in current times (i.e. VW, Phoney Express aka Well Fargo, global Trumpism, and global lawsuits imperiling not just returns but the very viability of global commerce beyond national borders).

Community manager education world tree concept with colorful abstract leaves and earth icon illustration. EPS10 vector file organized in layers for easy editing.

The UN supported Principles for Responsible Investment (PRI) ,a not-for-profit organization, held their 10th anniversary conference in Singapore last week (Sept. 6-8th) which I attended. No conference bag full of binders and junk mail at this conference, your 1 page agenda fold up into your name tag and all meals were vegetarian, a subtle but effective message. Forbes Magazine The conference domicile was not chosen by chance. Asia has been termed the cradle of disorder for a reason, it is home to 5 of the world’s 7 billion population and on metrics of social investing if the game has even started it is is the 1st inning. When a region has practices like dynamite fishing and farmers still clear land with a match much work lies ahead.

Chris Sanderson, Co-Founder of The Future Laboratory focussed largely on the sustainability of the capital markets. He characterized global citizens as being tired of austerity, wary of politicians and perhaps even more wary of brands. Backlash culture; http://shop.thefuturelaboratory.com/products/backlash-brands-report.

Elliott Harris, Head of the United Nations Environmental Program (UNEP) gave a rousing speech on environmental and social sustainability. The end game is that all investments will be social. Elliott introduced the concept of thick profit versus thin profit, a concept akin to quality, hard to define, but you know it when you see it.

Georg Kell of Arabesque Partners Arabesque spoke of  Generation S, a cross-section of all age groups working towards making the world a better place, one worthy of handing down to future generations. While ESG (environmental, social & governance) alpha may prove illusory, ESG smart beta appears to have legs.

Millennials were of course discussed with the most shocking realization being that the oldest ones (born 1990) are in their mid 30’s now! Generation D (Digital), whose only need or want in life is wifi and lithium, was out in full force, albeit well behaved and overall attentive. The 600 conference attendees were largely baby boomers, representing approx. 50% of global financial assets under management (AUM), signatories to the PRI whose mission states, “We believe that an economically efficient, sustainable global financial system is a necessity for long term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.” Clear, concise, devoid of the typically mumbo jumbo one gets when issues like climate change and the environment are normally tabled.

The session run by GS alum David Blood, Managing Partner at Generation Asset Management Generation Investment Management was excellent. Al Gore is the Chairman of Generation Investment Management. If Obama delays the election to allow Clinton to get her legs perhaps they could run as a Third Party choice? Could not lose with the ticket “Blood & Gore”. Both men can readily point out Aleppo on a map too. In any event, David’s sage words rang true to all in attendance. Finance and capitalism is not working for everybody was a key statement. The transition to a low carbon economy will clearly not be an easy one. A full 1/3 of aggregate world equity and fixed income market value lies in the cross hairs. We can do this the hard way or the easy way, but de-carbonization is a trend now moving under its own power. Mr. Blood noted that while the majority of global asset managers in attendance (120 signatories, 50% of global AUM) were managing to sustainability factors, those not present (i.e. non PRI Signatories) are largely American. The reasoning to date for USA firms reluctance is that becoming signatory could put them in breach of their fiduciary duty. We must collectively get the remaining 50% on board as priority #1.


Investing for the long term. Short termism. A great panel on investing for the long term had some serious panel power. The headliner was Hiro Mizuno, CIO of Government Pension Investment Fund, Japan (GPIF), the world’s largest funded pension plan. GPIF manage their liabilities to a 100 year time frame. Their most recent result showed a loss of ¥5.3tln (US$5.2bln) for the current fiscal year through March 2016. The fund’s quarterly loss through June 30, 2016 was > ¥5tln (-3.88%). They run ¥130 trillion (US$1.27 trillion) leading Mizuno-san to characterize the latest qtly loss as peanuts. The joke was not well received, perhaps because it was so unexpected, leading Hiro to quip that perhaps there were Japanese pensioners in the audience. The fund increased their allocation to equities in recent years. Global equity investment totals US$600bln, 80% of which is allocated in a passive fashion and 20% ($120bln) of which is actively managed. All investment are mandated to external manager, counter to the global trend in the pension arena of in-sourcing. Fellow panelist Paul Smith, President & CEO at the CFA Institute noted that one advantage of being old is that “you see everything twice” with such decisions as out-sourcing vs. in-sourcing set to very long term market cycles.

Several panels touch on infrastructure finance with GPIF mentioning their joint investment effort with Canada’s CPP on ESG brownfield infra projects. Mizuno-san noted the challenges of crafting/originating greenfield projects as funding challenges often drive the cheap option and the cheap option is usually dirty (materials, supply chain, etc.). GPIF will not finance dirty deals, full stop.

A deeper discussion ensued on better was to measure and compensate performance with a general aversion shown to managing to qtly earnings guidance. The average hold period for SPY, the > $100bln S&P 500 SPDR, the largest ETF tracking the benchmark for US stocks is 5 days. In the last 15 years 52% of the Fortune 500 companies as no longer in existence. In 1955 the average Fortune 500 company life expectancy was 55 years, in 2015 it is 15 years. Traditional valuation metrics clearly must evolve to address the realities.

ESG toolkit for Fund Managers: http://toolkit.cdcgroup.com/

Q&A with Author of the PRI’s Practical Guide to ESG Integration for Equity Investing

The ESG investment construct must be turned on its head, to my mind. Social investing = investing and “dirty” or non-socially minded investment should be the type requiring explicit sponsor/board/member approval. JCG

Follow me on twitter @firehorsecaper


Shenzhen “beach” September 2016

Mark Carney, Chair, Financial Stability Board (FSB). Awesome 30 minutes of your life, watch it. Carnage, indeed.


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“Here be Dragons” means dangerous or unexplored territories, in imitation of the medieval practice of placing dragons in uncharted areas of maps. With respect to considering an investment in Deutsche Banks’s (DB) equity, I would argue we are instead dealing with “known unknowns”, as Rummy would put it.

Much of the risk and potential upside going forward hinge on non-financial risks, legal being #1. DB has now paid $9bln in fines, 1/2 their current market cap of $18.2bln, for various settlements post GFC. No opinion to provide on the validity of any given case from a merit or $ perspective, but clearly through a process of elimination, DB is closer to the end of the financial spartan race. The ability of John Cryan, chief executive of DB, to reduce the dominance of litigation charges from results going forward will dictate the very survival of the bank that led the financing of Germany’s economic miracle post WWII. Those drawing parallels to Lehman are data mining in my view, DB is too important to the German, European and Global banking/financial system to be euthanized.


€31bln of Level 3 assets remain on balance sheet, but this is down 65% from the peak of €88bln in 08′.


2015 was the kitchen sink year for Deutsche Bank. Litigation costs and re-structuring charges led to a €6.8bln reported loss. GM was once appropriately described as a health-care company that also made cars. DB is a law firm that dabbles in the capital markets and asset valuation. Modest earning are expected for full 2016 ($1.11 per share), but the first “clean” year expected by chief executive John Cryan is in 2018.


Fixed Income Currencies & Commodities (FICC) has become a dirty 4 letter acronym for many players in the capital markets in an environment of ZIRP, since trumped by NIRP. The transition from Anshu’s Army (once responsible for 85% of DB “earnings”) to Cryan’s Janitors has clearly hampered returns. DB was a top 3 players over the 2008-2014 period, earning approx. 20% “share of wallet” in FICC. This share has slipped to 17% and is not trending well, with share ceded to venerable competitors like JP Morgan (JPM is now trading at 1x book versus 0.25x for DB). Approximately 1/3 of the slippage has been expected as DB exited high risk weighted asset (RWA) businesses they no longer have an edge in. Risk reduction efforts include improving the leverage ratio (CET1/total adjusted assets) to 4.5% by the end of 2018 and 5% by 2020. DB has run with leverage as low as 2% previously and the leverage ratio currently stands at 3.4%. Daily VaR (99% confidence interval), has dropped 57% since 2007, from €86mm to €37mm. Liquidity reserves (HQLA- cash and highly liquid government, agency and government guaranteed bonds and other Central Bank clearable securities) as at Q2 2016 stand at €223bln, up 243% from 2007’s €65bln. As a result DB’s liquidity coverage ratio (LCR) stands at 124%, well ahead of the 100% required by Jan. 1, 2019 under B3.

Price to book and price to tangible book have become somewhat interchangeable terms in analyzing bank stocks post GFC. Few have sizeable goodwill yet to be written down. To temper expectations, DB would likely be over the moon if they could get back to 0.6x P/TNAV by the end of 2017 which would put the stock back in the high 20’s, roughly a double from the US$14 it stands at now (NYSE listing). This would put DB in line with where Citi trades, on a metric of price to tangible book. The list of  global banks that trade > 1.0x book is dominated by the Canadian and Australians (i.e. RY at 1.9x and WBK at 1.7). Wells Fargo & Company is the rare American that trades at a premium, 1.4x book at present.


The “to do” list for DB by the end of 2018  is long, but achievable; a 10% return on tangible equity, a leverage ratio of 4.5%, a 12.5% CET1/RWA (10.7% at present), efficiency ratio of 65% (perhaps the most challenging metric to achieve, low 70’s arguably more achievable interim step), and achieving €3.5bln per annum in cost savings by cutting 30,000 staff and the exiting 10 non-core markets. In their home market of Germany, plans include selling their remaining stake in Deutsche PostBank AG and closing >25% of their 700+ retail branches.

DB is currently rated Baa2 with Moody’s (Senior Unsecured Debt), BBB+ with S&P, and A- by Fitch. The most recent 5 year CDS level for DB was 216bp (JPM in comp. is 60bp).

The largest dragon investors worry about with respect to DB is their sizeable otc derivatives book. The focus on headline notional exposure of €46 trillion materially overstates the true economic risk. Looking at the €46 tln notional amount of contracts across fx (27% of net exposure), rates (54% of net exposure), and index/equity (12%) can be daunting, but as with other areas noted, steps are being taken to reduce the size and improve the liquidity of their derivative books. DB intends to exit the CDS business for one and has novated over 2/3rds of their book to other cptys since 2015 (JP Morgan the biggest CDS player by wide measure). The previously noted number for level 3 assets include level 3 derivative related assets (DRA). As with the rest of the market, the vast majority of DB’s derivative contracts are centrally cleared. Those contracts not centrally cleared (i.e. bi-lateral contracts) are typically collateralized above rating based mark-to-market threshold amounts. A Credit Support Annex (CSA) is the legal document which regulates credit support (collateral) for derivative transactions. A CSA is one of the four parts that make up an ISDA Master Agreement, but it is not mandatory. Some classes of cpty are legally restricted from posting collateral and even impose 1-way CSA against their Bank cptys, although such instances are much more rare than pre-GFC. Banks are keen to renegotiate such legacy ISDA/CSA’s given the spike in the cost of funding their DRAs. 85% of DB’s net derivatives exposure of €41bln (after consideration of master netting arrangements and the €72 bln in aggregate collateral pledged to them, split €58bln in cash and €14bln in liquid securities) is with investment grade counterparties. Further, DB have disclosed that they actively manage their net derivatives trading exposure to further reduce the economic risk. This practice is common across the street where the credit valuation adjustment (CVA) desks are often one of the most active credit customers, given the immense scale of their books and their diversity as to cpty.

It appears a floor is in on DB equity. Near term, a lessening of the legal risk is the biggest factor in building capital to 12.5% from 10.7%. While a return to former glory is not likely in the cards, the combined view of Deutsche Bank is too pessimistic at present, in my view. DB is down 42% year-to-date in 2016 and 91% below their all time high of $159.59. The short interest in the stock is 1.68% of the float.

Less risky bank plays certainly exist, ING at 0.7x book on a move to 1x (they even make money in Germany, think FinTech) being one. JCG

Disclosure: Studying investable European banks. Long RBS pref shares and Lloyd Bank common shares. No current position in Deutsche Bank.

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