Zozan Yilmaz's Blog

Spring Is Coming

2012-01-31T09:41:00.000Z

One more month and the spring is back. The season of optimism, the nature's refreshing of itself.

Confidence Interval In Statistics

2012-01-30T06:33:00.003Z

A recent statistical study shows that whole of the population won't addd up to half of one selected from the sample with 95% confidence.

Capitalism' s New Age

2012-01-30T05:30:00.000Z

Is it a new era in capitalism since it started with Mercantilism five centuries ago?

This blogger believes capitalism to be the best economic thought invented ever and is following the discussions with great interest.

Philosophy: What A Beautiful Thing You Are

2012-01-28T13:49:00.001Z

Definitely A Standard: Silver - Copper - Iron Maybe?

2012-01-26T01:32:00.000Z

When Front, Behind, Left, Right are all the same

2012-01-21T20:18:00.000Z

And success.

When "Store of Value" function is served by Goodwill

2012-01-19T19:41:00.002Z

Then purchasing power parity changes amazingly for better quality life.

School Education Not Good Enough To Keep The Best Leader

2012-01-10T09:32:00.000Z

Something about the school education is making them not good enough to keep the best leader.

This is to do with the leader's ability to think much ahead of current education himself and making it true.

Two Professors - Two Bright Minds

2012-01-07T19:26:00.001Z

As someone who has done a masters degree in one of the top economics departments of England, I have ben privileged to have had some very good professors in their fields. One was my maths professor Melvyn Coles and the other was Econometrics professor Jim Richmond. Both were exceptionally bright people who have left nothing but admiration. Econometrics turned into a subject of highest enjoyment despite heavy maths - geometry content like matrixes and a subject like differential equations turned into fun to study with Professor Coles.

Happy Birthday Elvis Presley

2012-01-07T18:52:00.004Z

Tomorrow is Elvis Presley's birthday. As one of the few people who will always live in hearts and will always be remembered, happy birthday to you.

The Best Answer to Strikes Given By a Pedestrian

2011-11-30T12:49:00.000Z

"I have got a work to do for Gods sake"

APT

2011-11-20T18:48:00.002Z

APT was my MSs dissertation topic. There is a wide literature on it. Most methods used
are advanced level of statistics.

The stocks used for empirical data did not have the Beta coefficients, which is the correlation between the movement in share price and market. Normally in UK, those would be calculated by professors in universities like LBS.

The idea was that; find the beta coefficient of each stock, by using cross sectional regressions and then insert these into time series regressions as another independent variable (one of the risk factors affecting the return on the share price). Then try to understand the affect of each risk factor on the return.

It is a topic, which I believe is going to be a dominant theory in the next decade considering the fact that there is no "risk - free" concept.

Parabol

2011-09-27T12:04:00.001+01:00

A parabol is very useful for analyzing minimization subject; apply it to anything from micro to milimicro; it can help you to find the minimum point after which the curve moves upwards.

On a curve it is not possible to find one point only so you need to have the tangent line through derivatives, which will give you the minimum. Think about y= xsquare + 2x + 1; the derivative will be 2x + 2 = 0 and the curve will be minimized at the point where it meets the tangent, which will be for x = -1.

Between Recession and Depression

2011-09-25T16:58:00.002+01:00

In "Between Recession and Depression" it was discussed that this crisis can not be described as either. In time terms three years threshold is over; a double dip by definition means another three years at least. This takes us above depression rather than between recession.

How to define this is something, which needs to be thought, this blogger believes.

Maybe a new concept like stagflation needs to be defined. Inflation is part of the crisis in certain markets like commodities, however not in manufacturing as there are still idle resources.

Interest rates are still near zero levels. Monetary policy can not still be explained fully. Fiscally governnmets are at very high debt levels.

Macro and Micro

2011-09-24T20:16:00.000+01:00

Macro economics is more art based to the contrary of micro economics.In micro you look at consumer's, and firm's maximization and minimization problems. Macro is the art. There is no rule, but the insight of politicians. Micro is the technical part.

How Far Is Economics From Being Universal?

2011-09-15T17:48:00.000+01:00

Like music, maths, philosophy, science, economics has a universal character. Demand and supply are the same no matter where you go, which market or country or concept you apply it to. The rules are not as rigid as in maths, science but equally not as flexible as in music, philosophy. There is a certain level of objectivity but discretion as well, as in macroeconomics.

The Best Part of Economics

2011-09-14T00:39:00.000+01:00

Micro side always functions, as it mainly focuses on firms and consumers. Fluctuating part of investment as a micro component is stable.

It is the macro level of investment and aggregation, which cause turbulence. As a solution, I believe there is a need for a mid level between micro and macro. Currently industial concept of looking at firms is helping that.

Components of Economics

2011-09-03T10:24:00.000+01:00

What is economics made of?

To measure this we have the GDP made of consumption, investment and government spending on the left side of the equation equalling to consumption, saving and taxation. When the economy becomes open, then you get import and export added to that.

As a pre globalization concept, is there a need for a new measure called globalization GDP maybe?

Rise in Unemployment

2011-08-18T13:12:00.000+01:00

I believe two factors are contributing to rise in unemployment

1) More capital intensive goods needing less labor,

2) Cost leadership rather than differentiation strategies of companies making domestic services more expensive and therefore causing business closures.

Different Types of Financial Crises

2011-08-17T09:58:00.000+01:00

There are four types:

1) Sovereign debt / defaults: When a government fails to meet payments on its external or domestic debt, obligations or both

2) Banking: After heavy investment losses, banking panics or both

3) Exchange rate: Over valuation etc.

4) Inflation: High or negative as with Japan

Only one of these is enough to bring crisis and there are all of it in current one.

A POET

2011-08-13T10:06:00.001+01:00

Risk Factors in APT

2011-08-11T06:56:00.001+01:00

The good side of APT is that risk factors to be included are not limited to a certain number unlike CAPM.

You can include macro variables such as exchange rate, interest rate, industrial production, inflation or micro ones such as "equity risk premia" as named by The Economist.

If We Define Efficiency as Economic Units of GDP Funded by Lower Debt...

2011-08-03T16:44:00.003+01:00

The Economist's breakdown of GDP/Debt percentage for countries between household and government units provides some brainstorming.

If We Define Efficiency as Economic Units of GDP Funded by Lower Debt...
Then households are very efficient in Japan lowering the whereas in Switzerland government is slightly more effient.

CAPM

2011-07-22T14:58:00.001+01:00

A good point was made in FT's Short View today about risk free rate in CAPM.

When there is no risk free rate, APT is an alternative model to assess the return on risky assets.

Book of the Month in July: "Between Recession and Depression"

2011-07-05T17:30:00.000+01:00

Better Business Focus magazine featured "Between Recesssion and Depression" as 'Book of the Month' for July 2011.

Thank you very much.

Can An Economy Succeed Without A Big Manufacturing Base?

2011-06-29T09:51:00.001+01:00

The Economist's new survey thinks the answer is "no"

I think the closer an economy with protectionist measures such as tariffs, quotas the more likely it is the case

"50 big ideas": Capitalism

2011-06-24T12:16:00.000+01:00

Capitalism is the 38th of ideas.

Evolving around three main thoughts of Classical Economists (mainly Adam Smith, David Ricardo, John Stuart Mill); Keynesians and monetarists during the last few centuries.

"50 big ideas": Existentalism

2011-06-23T12:52:00.000+01:00

Existentalism is the 13th of ideas in the book. I am reading the top paragraph, which makes me think whether this is be the case or the opposite. It says:

If anyone had asked me what existence was, I would have answered, in good faith, that it was nothing, simply an empty form which was added to external things without changing anything in their nature.

Jane Austen

2011-06-18T20:37:00.000+01:00

The best author I have read sofar is Jane Austen. Some of her books are so fluid that few hundred pages could be read in one day and the whole book finished in few days.

Global Growth - New Debate of The Economist

2011-06-17T17:22:00.001+01:00

"Will global growth pick up in the second half of 2011?" is the new debate of The Economist.

This blogger doesn't see any such sign now and doesn't expect until 2012.

Bubble mania

2011-06-15T21:47:00.001+01:00

The nature of the second decade of the 21st century seems to be able to create bubble mania. What I mean by this term is bubbles of all sorts from tech (which The Economist thinks there is a new one) to property; equity, bond, hedge funds, commodities.

I am wondering if normal distribution is applicable? Perhaps something adapted to it can be called bubble distribution with the mean and the variance not being zero and one.

To Write

2011-06-15T18:05:00.001+01:00

Writing is an art, which gets its nutrition from itself only. The more you write the better it gets vice versa.

It is "fill in the blanks" time.

IS – LM MODEL

2011-06-12T11:55:00.001+01:00

How would IS – LM model work in the current economy? On LM side, there is a huge injection into the economy through quantitaitve easing but interest rates are kept at record low levels with central bank decision. Theoretically injection should bring the interest rates down but it is staying at its current levels. Where in the economy is this absorbed is a question coming to the mind of this blogger.

As far as follwed, IS schedule is only affected by a contraction in aggregate demand and supply components.

How those two schedules will interact to determine the equilibrium income and interest rate is something this blogger will be watching in the second half of the year.

BRICs

2011-06-08T19:48:00.002+01:00

While reading 'The World in 2011', it was noticed that BRIC's I and R approximately have the same GDP but I has 10fold more population than R.
I & C leading with their over one billion population whereas B & R are 195million , 141 million respectively.

How would it look like to have them as 1) BR & IC or 2) RI & BC and add other emerging nations to each in accordance to population in 1) GDP in 2)?

OR just focus on growth rates?

Banking

2011-06-05T17:20:00.000+01:00

Brilliant publication, The Economist's current debate on banking is quite interesting on whether more competition makes banking more dangerous or not.

I believe the core of the problem is the expertise. Expertise in understanding the financial products, which is a scarce resource. And expertise is linked to competition.

1) Competition with more / new banks; then banking is more dangerous (lack of scarce resource)
2) With existing banks getting more competitive; then again more dangerous considering the nature of the industry.

Never Stop Believing

2011-05-09T08:40:00.009+01:00

Tripled Magic Words

2011-05-07T14:26:00.022+01:00

Happiest moment in my life.

MORE BACKGROUND

2011-05-07T08:43:00.004+01:00

Having grown up in a business orientated and intellectual family environment made the biggest impact on the way of life. On paternal side, dad a self made tradesman, cousins manufacturers with two factories and few stores in various countries. On maternal side more professions orientated from CFO to accountant, nurse, teacher, engineer. My views have always been taken very seriously by my businessmen paternal sides and I was always asked what I thought on specific cases.

Not only in the family but also in all jobs I have worked in by my seniors. Developing an economic model to decide whether to buy a large portfolio of houses was one of those.

Book of the month

2011-03-24T13:13:00.006Z

It is very exciting days.

"Between Recession and Depression" will be featured as the book of the month in May.

Further details will be coming at the end of April.

Published Businessweek Background of Author in November 2008
BACKGROUND

Ms. Zozan Yilmaz is the Financial Controller at GP Bullhound Limited. Prior to joining GP Bullhound, she was working at Big Lottery Fund as Grant Accountant. During this time she has managed budgets, cash flow forecasts and management accounts reports for various programmes in England, Northern Ireland, Scotland and Wales. She also did management accounts in Housing Association where she assisted the Finance Director in building an economic model in deciding to buy a ... large portfolio of houses. She completed her Masters Degree in Financial and Business Economics at University of Essex. She is currently at strategic level of CIMA.

Bayes's Theorem

2011-01-06T15:33:00.002Z

The theorem is used in many different areas such as modelling climate change, predicting the behaviour of stock markets, a different approach than Blaise Pascal's.

Merry Christmas and Happy New Year

2010-12-22T17:29:00.007Z

It is that time of the year again. Counting backwards started both for Christmas and New Year.

Merry Christmas and a happy - peaceful new year.

GOLD STANDARD SYSTEM

2010-11-09T08:06:00.000Z

As a current debate topic, few notes from ‘Between Recession and Depression’ are as below;

The main advantages are:

• Limiting the governments’ power in creating inflation through issuing excess paper currency,
• Creating certainty in international trade through fixed pattern of exchange rates

The main disadvantage is:

• Being a barrier in the flexibility of the supply of money as the supply of gold is not close the growing needs of world economy’s supply needs.

"Between Recession and Depression" on Amazon Kindle

2010-09-13T21:33:00.004+01:00

"Between Recession and Depression" is available to purchase on Amazon Kindle for technology fans.

ECONOMICS BOOKS

2010-08-12T18:36:00.002+01:00

As empirical economics has the characteristics of being a social science, which gains more weight in “crises” there has been a huge interest in it over the last two - three years. The number of people who are interested in the subject increased although still the theories, diagrams; thick books make it quite uninteresting to read any article or book.

So, the option is to simplify it. As Leonardo Da Vinci’s famous quote of “Simplicity is the ultimate sophistication” says and put in the synopsis of my book. Then comes the feedback from the people who have never studied economics that they enjoyed it.

GOLD PRICES

2010-05-17T22:17:00.000+01:00

Gold is probably the oldest instrument of commodities market with a history going back to seven millenniums.

Can recent high price within the range of $1,250 per ounce - already 20% higher than February level – be an indication of conventional wisdom in finance theory?

CORPORATE OPTIMISM

2010-04-15T14:50:00.000+01:00

Corporate leg of optimism is showing up on two different sides:

1. Dividend payments,
2. Share buybacks.

Two added together are signalling good performance in the short term accompanied with “sustainability demand” for the long term to invest in projects, which will increase NPV and therefore shareholders’ wealth.

BETWEEN RECESSION AND DEPRESSION

2010-03-30T13:08:00.013+01:00

"Between Recession and Depression" is the title of my new book about the current economic crisis, which is now available to buy in the market.

If you wish to purchase a copy, you can do so from Amazon.com, Amazon.co.uk or Arima Publishing.

I am quite excited as this is my first publication. When you have had a chance to read the book I would welcome any feedback or comments via email. Alternatively you can review on the Amazon web site.

ONE YEAR ON

2010-03-18T21:57:00.000Z

It has been a year since I started to write in my blog.

If there is a need to find one single word to describe the last one year of the economics, that would be “speed”. It sometimes felt as if we were travelling at 300thousand kilometres per second.

Just remember the change in Davos World Economic Forum from 2009 to 2010. “We can not predict anything” was the theme brought by CEOs in 2009 whereas in 2010 a wide variety of social subjects were being discussed with a big relief that the worst for global economy is over.

The Economist had made a point about 2008, 2009, and 2010 by first one being financial meltdown, second being government intervention, and predicting third to be exit from expansionary policies. 2010 can also be evolutionary in a “kaizen” sense.

NO MAN IS AN ISLAND

2010-03-06T09:10:00.009Z

No man is an island,
Entire of itself.
Each is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less.
As well as if a promontory were.
As well as if a manner of thine own
Or of thine friend's were.
Each man's death diminishes me,
For I am involved in mankind.
Therefore, send not to know
For whom the bell tolls,
It tolls for thee. “

Note: Thee = you
Thine= your

US CREDIT RATING

2010-02-09T09:03:00.007Z

Moodys's warning last week over US's credit rating that triple A might be under pressure if growth was not robust is risking all relieves. Is the timing right when exit from expansionary policies and worries of what will happen with the bubble inside the bubble are the main concerns.

May be time to ask: "Do we need reverse-refunds of triple A until the economy is back to normal"?

SHAPE OF RECESSION

2010-02-04T15:50:00.001Z

There were many discussions on which letter of the alphabet the recession would end up with:

W: Double dip, two consecutive business cycles
V: Single dip
L: Economy going down and staying there for long.

I think, there is a need for a new letter to show that economy is balancing at lower level of income (macro wise). "F" may be. We can think it in terms of Cartesian coordinates: x the horizontal axis, y the vertical axis and the top horizontal line (x1) of letter F as the level of income before recession and the below horizontal line (x2) as the level after the recession.

DAVOS WORLD ECONOMIC FORUM

2010-01-29T14:00:00.007Z

The forum is taking place since 27th of January and will finish on the 31st.

It is a good mix of 900 CEOs, government representatives, media, academic professionals, NGOs.

This year there are many different topics on the agenda one of which is "Directing Avatar" -- Conversation with James Cameron.
Interesting to see it among the Economic Forum topics.

Many others with social focus are population growth, social networks, life on other planets, rethinking philanthropy, enrichment through music, economics of happiness.

JAPANESE MIRACLES

2010-01-29T07:55:00.002Z

Japan has been one of the miracle countries. On a land of nearly 80% of mountains unsuitable for agriculture they still managed to be the ninth largest producer of rice in the world, the main ingredient of their famous sushi. As an island being exposed to tsunamis, earthquakes they managed to build the houses, which can survive the earthquake at magnitude of 8.

Rank of number two in the league of global GDP, forth largest exporter and sixth largest importer plus enormous growth between 1960 and 1980 made the country a role model for the rest of the world in their management concepts such as kaizen (continuous improvement), just-in-time (production upon demand).

After their lost decade of 1990s, and a global world shaken by credit crunch, they are challenged again with an economy of deflation keeping the consumption low, weak earnings keeping investment low, government debt already with over 180% of GDP.
However, Japan managed to bring the exports, the only variable left to play with; in their favour in December 2009 at a level of ¥5.41trillion ($59billion). The country's exports are growing again after 15 months of consecutive fall. Yes, they are very below their peaks considering the fact that it was ¥12.7trillion ($113billion) in November 2007. What matters though is to gain the momentum of growth again.

Can Japan be heading to a new miracle of achieving good growth of GDP despite the challenges of depressed consumption, investment items and a government spending, which is restricted with a cumulatively high debt level and credit rating constraints?

The answer can be “yes”.

JAPANESE AIRLINES

2010-01-22T17:57:00.010Z

One thing, which can only be seen as “the whole glass is empty” is bankruptcy. It can be quite nostalgic depending on how old the company is. Last year in UK the list of the big names included 100 years old Woolworths, 250 years old Wedgewood. The former being the choice of tight budget customers whereas the latter serving luxury looking customers. Both existed over many generations.

As we are going through 2010’s first month, a new huge one came up from Japanese Airlines, which is Asia’s biggest airline. This is the first bankruptcy of the industry at this scale during this recession. Japanese government’s announcement of protection of creditors provided a relief. And it is a re-reminder of weak earnings considering the liquid nature of the business model.

The reason/s why this is so important will be the subject of my new blog post.

THE FINANCIAL CRISIS INQUIRY COMMISSION

2010-01-09T21:46:00.003Z

We are seeing United States initiative for investigations regarding the causes of the recent crisis. We have been discussing, reading about these since 2007 but the commission has put them in a more organized structure under 22 headings ranged from credit rating agencies, global imbalances, corporate governance, derivatives to securitisation.

On the positive side:
1. US determination to lead the exit is persistent
2. A rich mix will be available in hearings from head of top investment banks to regulators and independent experts.

On the question mark side:
Will it cause high public expectations or indifference?

OIL PRICES – II

2009-12-13T16:51:00.003Z

1990s was a low price period.
But prices started to increase again in 21st century pushed by higher demand.

Goldman Sachs as the biggest trader of energy derivatives had made a forecast in March 2005 that prices could jump as high as $105 per barrel from then present levels of $50.

In July 2008 we saw the price over $147.

Now it is below $70 again.

Where will it go from here?

The answer lies in the competition between substitution effect of alternative energies versus demand effect of existing energies. As there is only one world, alternative energies is what logic dictates.

OIL PRICES - I

2009-12-13T16:49:00.002Z

The price of oil since it was first discovered in 1861 has always been one of the most volatile and carefully watched variables of the economy.

When OPEC raised the price by 70% in October 1973 and a further 130% in December 1973 and overall ten-fold between 1973 and 1980, it turned into a volatility creating source.

In 1980s, demand for oil and price declined due to efforts of oil importing countries to find alternative energies such as coal, natural gas and nuclear power and alternative sources such as Norway.

Then came production quotas of OPEC.

THREE MAJOR WESTERN CURRENCIES - II

2009-12-12T14:29:00.000Z

Sterling devalued both against the euro and the US dollars in 2008.

During the year, US inflation was 1% on average and UK inflation was 3.5% (Note). The inflation discrepancy is 3.4% whereas the change in exchange rate is 25%.

For the same period, average Euro zone inflation was 3.3% against the UK inflation of around 3.5%. The inflation discrepancy in this case is almost negligible at 0.2% whereas the change in the exchange rate is higher at 36%.

Although the theory is right in the sense that UK has higher inflation rate and therefore devaluation of its currency, it is not sufficient in explaining the significant differences in this case.

Note: Consumer price index is used for inflation.

THREE MAJOR WESTERN CURRENCIES - I

2009-12-12T14:27:00.001Z

Last year this time, sterling-euro exchange rate (€/£) was almost 1. 1£ was equivalent of 1€. This was from a level of 1.36 in January 2008, 1.44 in November 2007. (Now it is 1.11)

Similarly; dollar-sterling exchange rate ($/£) this time last year was 1.48, 1.98 in January 2008, 2.08 in November 2007. (Now it is 1.62)

One theory that would explain the movement is the inflation differences between the countries/regions. For $/£ between January 2008 and last time this year, there should be higher inflation in UK economy compared to the US economy according to the theory.

EURO MOVE

In a team work exercise I have been about seven years ago; two small groups were asked to build a tower from paper and staples.

Both groups were given “a” amount of papers, plenty of staples, “b” amount of capital. If ran out of paper you could buy more by “c” amount of money. For breakeven the tower should have been at least “d” foot tall and any foot above the breakeven would add to existing capital. The team, which would add more with consideration of scarce resource of papers would be the winner.

In my team (T1); we decided to make cylinder shaped blocks by rolling the papers - attached with staples- to make a cube of 3*3 (each cylinder making one of 9), and put some papers between each layer of 3*3. To make the foundation stronger; use three papers for each roll of the first two layers and roll them as landscape shaped. Then from third layer onwards use two papers for each roll and roll them as portrait shaped.

T1's building was getting higher and higher, as if competing to Eiffel Tower. When finished, I said, “Be careful with moving, the building may fall down” and two of the observers of the team as a joke acted like they were going to run. It didn’t fall and T1 had the highest capital.

The link to today: Just reading Financial Times of Saturday and once more seeing how suddenly global economy can shake with one walk, worse if run. Just look what happened to Euro. An economy making 3% of the zone’s GDP shook the whole Euro zone, and the value of the currency, causing 5% fall in the exchange rate against the US$ in 2010 so far. The market for Euro is moving strongly. And it may be the time to watch the Euro Zone Tower.

GROWTH MODELS: SUPPLY OR DEMAND DETERMINED

2009-12-11T22:58:00.000Z

Now that the global world is growing again; one question that is coming to mind is: “Is it supply or demand determined?”

The answer is demand determined for the moment, meaning supply adjusts to demand. Economist Tinbergen’s adjustment between demand and supply is in place, which is government regulating demand and supply to achieve the target/s of growth. All the recent government stimulus by developed economies are in mind.

Once the economy recovers and governments withdraw their support from the economy, the answer should change to supply determined, meaning price and market mechanism without state intervention.

GLOBALISED EXIT

2009-12-11T09:52:00.000Z

Following Jean-Claude Trichet’s - President of European Central Bank - underlying the importance of large insurance companies and pension funds as important ingredients of systemic risk last month, a second announcement came out yesterday, which sounds like an indirect declaration of exit from expansionary monetary policy.

Federal Reserve has been cautiously testing the right time of the exit from quantitative easing since mid-October through reverse repos, which is basically pulling out the liquidity from the system through selling assets such as treasury bills. $1trillion additional liquidity was injected into the economy since the beginning of the crisis in 2007

2010 seems to be the year.

JAPAN & DEFLATION

2009-12-09T20:34:00.001Z

Japan’s deflation problem since early 1990s have been ranked lower in priority during the recession following the globally imposed problems such as fall in exports, huge budget deficits caused by attempts to increase domestic demand through government spending, dealing with Debt to GDP ratio of over 180%.

Now deflation is back in an economy, which is trying to recover from recession. People don’t spend as they expect the prices to fall more. With consumption item of GDP low, the burden is on investment and government spending. And without consumption, investment will be low too. Government issued ¥10,800billion ($110billion) bonds last fiscal year and announced a stimulus spending announcement of ¥7,200billion recently.

NEW COMPETITION TREND: REPAY TARP FUND – II

2009-12-08T20:38:00.000Z

After Bank of America’s attempt last week, Citigroup is demanding to repay bail-out money received through TARP funds as well, which are $45billion and $20billion respectively.

In April, when Goldman Sachs and JP Morgan Chase had requested to repay $10billion and $25billion respectively, US government was much more cautious before deciding whether to accept it or not. But now the government officials are discussing one step ahead: “how shall we use these funds: more government spending and job creation or closing the budget deficit?”

This time markets are more cautious with initial response of a decline in Citigroup’s share price today.

OPTIMISM IS IN THE AIR

2009-12-06T20:22:00.000Z

According to Financial Times, increase in US unemployment is 11thousand in November. An incredible improvement from six digits to five digits in one single month.

When we look at the monthly trend during 2009 with the chart as below, November can be the end of the increase from 7.5million in December 2007 to 15million today.

US is leading the world out of this recession. 11thousand is almost 0 when considering the October figure of 195thousand. Numbers speak louder than words.

CREDIT RATING AGENCIES

2009-12-03T21:50:00.000Z

Should credit rating agencies function as informative organizations after things happen or as a forewarning mechanism?

When S&P downgraded five state-backed companies in Dubai after $59billion of delayed payments, presumably it is targeting to help for avoidance of future casualties.

They have been one of the most criticized bodies during this recession and any potential default risk just brings them back under the scrutiny of the public.

S&P’s, Moody’s, Fitch will be under more pressure to meet the dynamic nature of the current economy and update their ratings more often.

S&P’s responded to that pressure by downgrading 20 European companies yesterday, highlighting the default risk until 2011.

GROWTH ANNOUNCEMENT

2009-11-27T14:55:00.001Z

UK made a growth announcement for Q4 yesterday after giving the signals of exiting the expansionary monetary, fiscal policies and low interest rates on 10th November.

US had initiated the early growth announcement in Q3 and ended up with an annualised 2.8% actual expansion. The difference between the two announcements is the time where US’s was two weeks early but UK’s is five.

Just the day before, the holding company of Dubai World, which has broad real estate investments in US & UK, asked for a six month extension – until 10th May 2010 - from its creditors, on repaying its $59bn of debt. The announcement is timely to give the markets the confidence that the global world is strong enough to deal with this.

EXIT FROM QUANTITATIVE EASING

2009-11-10T21:44:00.001Z

UK contracted by 0.4% in Q3 and gave signals of gradually starting to exit quantitative easing by the relatively smaller £25bn further injection into economy, which is believed to be the last portion of a £200bn sum.
Lower interest rate is also expected to change the movement in upwards direction from mid 2010 onwards and a figure of 2% at the end of 2010 from the current level of 0.5%.

Is UK about to close a chapter of:

Expansionary monetary policy

+Expansionary fiscal policy

+Interest rates near zero?

2010 will be an interesting year to find out.

THE BIG ANNOUNCEMENT - II

2009-10-19T21:14:00.000+01:00

Figures are drawing the actual picture of the US economy. Increase in unemployment in September is 263k. This is reversing the downward momentum between April and August with a slight increase from August figure. US cumulative unemployment is standing at 9.8% after September. Investors who are ready to get a swine flu from a sneeze in those days reacted quickly by bringing down FTSE 100 index at the first days of last quarter of the year.

Housing market is ringing the bells too. Reuters informs repossession of a house for every 13 seconds, bringing worries that 6million houses are likely to be repossessed for the next three years. Inevitable and painful lagging effects of unemployment…

Despite these facts; change in the moods between early-April and now is incredibly huge! A change from depression expectations to growth cheers! It is understandable when considering the catastrophic nature of the first quarter of 2009 where we saw falls of 45.7% in Japan’s exports, 47% in German engineering companies’ export orders. And only in one single month! Nobody wants to even imagine what would happen if this percentage falls continued.

Bernanke is now “carefully optimistic” with slight emphasis of the previous announcement by saying “Recession is very likely over” this time he has a “but”, which is “It is still going to feel like a very weak economy for some time”.

The announcement is turning from big into realistic. This is parallel to the fact that no rational person will believe in pink clouds, not after US households saw their wealth shrinking by $14trillion!

THE BIG ANNOUNCEMENT - I

2009-09-22T16:01:00.004+01:00

FED’s Chairman Ben Bernanke made the long awaited announcement on the 16th of September that recession is over for USA.

I have been waiting to hear this for a long time, more impatiently after Germany, France and Japan declared growth for quarter two - 0.3%, 0.3%, and 0.6% respectively. - The fact that Bernanke made the announcement before quarter-three ended is signalling that I am not the only one. The main reasoning is the expectation that USA should lead the world out of this Great Recession earlier than anyone else as it led into it the first. Basically FIFO – First in First Out - principle of inventory management was my presumption but we had LIFO – Last in First Out – this time.

Quarter-three & four figures in growth are needed before making the judgement that it is really heading to be over. Forecasts have been quite movable with daily-weekly-monthly changing announcements during the first half of 2009.

On the positive side US monthly unemployment figures have fallen from an approximate average of 700k per month in first quarter to 539k in April, 345k in May, and finally 216k in August. Downward slope is a good sign. Also improving consumer confidence reflected through increased sales is supportive.

On the negative side though, there is still a nervously waiting banking sector, focused on saving its own life – through increasing high quality Tier-1 capital- and can barely help anyone else. The sector is still in intensive care except few big names on Investment Banking side such as Goldman Sachs and JP Morgan Chase. Those names were accepted as successful based on the basic fact that they could pay back the Troubled Asset Relief Funds borrowed from the US government.

Will see what comes up with the figures…

BOE AND FSA

2009-06-27T11:35:00.003+01:00

Recent discussions between Conservatives and the Chancellor of the Exchequer on moving powers between Financial Services Authority (FSA) & Bank of England (BOE) have been dominating the agenda.

Conservatives insist on moving regulatory power from FSA to Bank of England whereas the Chancellor is planning a new Banking Act to strengthen the role of FSA.

FSA and Bank of England - two very prestigious organizations - are blamed for the crisis in the banking sector. A few points should be born in mind before targeting those two institutions as scapegoats:

1) Banking crisis is GLOBAL,
2) Every country and industry was hit,
3) FSA has set up the rules very clearly for a well functioning banking system. The problem lies with its application, which is not easy to control,
4) Bank of England is the model on which most modern, large central banks have been based.

Main functions of Bank of England as for all other Central Banks in the world are to provide monetary and financial stability.

Monetary stability's two main criteria are stable prices and confidence in the currency, which are controlled through inflation target and adjustments in base interest rate.

Financial stability is the crucial function, which these discussions are based on. It involves protecting against threats to the whole financial system and Bank's acting as "lender of last resort" in exceptional circumstances.

The Bank works with several organisations to serve these functions including HM Treasury, FSA, other central banks and international organisations.

Bank of England did a good job in managing the crisis so far. The base rate was lowered very successfully from 5% to 0.5% since March 2008; confidence was managed well by intervening the troubled banks such as Northern Rock and Royal Bank of Scotland on time.

FSA is an independent body that regulates the financial services industry. It is kind of a branch of Bank of England, which has already made significant changes in regulations, and managing risks.

In a nutshell, these discussions are not bringing any benefit. Focusing on finding constructive solutions would be ideal in these exceptional days, in which CONFIDENCE is the most important variable to manage.

BRITAIN’S CREDIBILITY

2009-04-26T20:40:00.002+01:00

Alistair Darling’s budget figures dominated the agenda of the week. There is pretty much agreement that he is too optimistic in growth forecasts of 2009, 2010 and 2011 with 3.5 per cent contraction, 1.25 per cent expansion, and 3.5 per cent expansion respectively. IMF forecasts contraction for both 2009 and 2010.

With current government spending plans, Britain needs £175bn in 2009 and another £173bn in 2010. Alistair Darling needs pretty much the same amount of government spending in 2010 unless the government spending causes an increase in household consumption and/or business investment. Considering the extent of unemployment, consumption is not the right candidate. Can the doubled capital allowance or £750m technology investment fund fill the gap through increased investment spending? We can’t tell under current uncertainty.

The challenge is the funding of the government spending. Gilts will be the major mechanism; there is a huge competition to sell government bonds from USA, European countries, Japan. US is planning to issue $2,000bn in the fiscal year from last October onwards, Euro zone governments $1,035bn for this financial year, Japan $449bn, and UK $262bn. Needless to mention the multinational companies selling corporate bonds to the same market segment.

Globally investors have a huge choice and little confidence! They are showing this through higher yields on gilts and higher basis point on credit default swaps. Former being the investors’ premium for higher risk and latter being cost of insuring against default on UK gilt.

If both yields and basis points keep on upward slope, the first risk is that; UK’s AAA credit rating may come under threat, secondly if unable to raise the target funds from gilt sales it may be likely to knock IMF’s door for bailout funds as in 1976. Ratings Agency Moody’s confirmed on Friday, the 24th April that it is not considering UK government’s credit rating for a possible downgrade. It looks like the next two years will be determinant.

NEW COMPETITION TREND: REPAY TARP FUND

2009-04-16T21:03:00.000+01:00

This week we saw an interesting request from Goldman Sachs to pay back the $10billion government bail out money received through Troubled Asset Relief Program (TARP). Follower JP Morgan Chase announced it has enough money to pay back $25billion bailout funds. Both announced good profit figures to strengthen their requests.

At a time when government is about to announce the results of stress tests for the top nineteen US banks and conclude whether there is need for further capital injections from $700bn TARP, it is a question mark whether Goldman Sachs & JP Morgan Chase’s timing are good. What might be the motivation behind the new competition trend?

Top Wall Street banks seem to be concerned about being rescued by government funds and restricted in all activities taken including executives’ bonuses, and preference shareholders’ dividends. The possible motivations can be summarized as:

1) Saving the reputation;
2) Getting back the independence of bonus, dividend paying;
3) Attracting clients through the message of “look, I am still the best, paying back the bailout funds first”
4) Diverting public anger.

The stakeholders’ reaction to the new trend is not clear yet:

Markets digested the news positively today as JP Morgan Chase’s share price increased by 3.65 per cent; Goldman Sachs’s followed it by 0.72 per cent increase.
Government is the most cautious side with focus on the stress test results and determined not to add further to damaged confidence.
Clients will be watching carefully after losing billions of dollars in investments.
Executives and preference shareholders will be the most eager side as pressures on bonuses and dividends will be released.
Ordinary shareholders might take it as an increase in risk and therefore increase cost of capital.

Will these efforts help lowering the new shock caused by Chapter 11 bankruptcy protection sought by General Growth today? The biggest real estate failure with $29.26billion of assets and $27.29billion of debt.

We will find out soon.

CORPORATE SOCIAL RESPONSIBILITY

2009-04-10T15:58:00.000+01:00

Milton Friedman’s 1970 article in New York Times said: “Social responsibility of a business is to increase its profits” He was mentioning the sole social responsibility of business being to increase its profits through using its resources and staying within the rules of the game. What are the rules of the game?

Firms supply goods and services with the objective of maximising shareholders’ wealth. And they will have the sort of risks associated to this objective, such as losing customer satisfaction and therefore revenue; threat of new entries, substitutes; cost structure etc. Planning is needed for short, medium and long term in order to control the risks.

It is very disappointing for most of us to see very big companies hitting the wall, giving the impression they have been doing business without understanding their business environment and without forecasting the next three to six months. Three names coming immediately to my mind are:

AIG - Eighteenth largest company in the world with 116,000 employees - swallowed $170bn of the US bailout funds so far, bringing the benefits of its survival under question.

General Motors – Second largest automaker in the world with 266,000 employees - New CEO is talking about Chapter 11 bankruptcy by 1 June 2009.

RBS –With 141,000 employees and 700 branches in UK - acquired ABN AMRO with a consortium on 9th October 2007 at record price of €70billion and spread contagious subprime mortgage assets. It still can not recover, announcing 9,000 more job cuts on Tuesday, the 7th April.

Current economic environment is witnessing new ones such as Lloyds TSB’s merger with HBOS. It doesn’t appear to be a digestible transaction as Lloyds TSB has fallen from top four ranks in terms of market capitalization in 1999 to disappearing from top fifty in 2009. Share price has fallen from 860p in 1999 to 79.50p in 2009.

I agree on the importance of regulation to avoid such big, macro failures happening again but also doubt if you can really control every firm. Firms should be able to appoint the right senior management, who can lead their companies. At least the big names like AIG, General Motors, and RBS!

MIRROR, MIRROR, TELL ME: WHO IS GOING TO SAVE THE WORLD?

2009-04-04T12:40:00.002+01:00

G20 meeting is over. If we leave aside the protests, and casualties; What was new to bring excitement for saving the world?

We were already informed of several strict issues of bad hedge funds, credit rating agencies, tax havens; controlling banks and avoiding protectionism. The main new thing was he $1.1 trillion figure spelt to fund IMF and international trade. We are now kind of used to spell “trillion” from U.S. bailout programmes but the initial $250bn IMF funding budget was moved upwards to $1.1 trillion that will be another unforgettable number when history of credit crunch recession is written.

Stock markets welcomed the meeting though. The positive side is the determination of developed economies to fight the recession – a must to bring back the confidence -the negative side is the future burden the funding will bring on taxpayers. Now that the unemployment is on the rise, investment is scared, automatic stabilisers of lower tax and unemployment benefits should play their role until the economy comes back to life. Adding to this the stimulus spending and the result is a big future burden on taxpayers who do not have the option to invest their money in less/more risky ventures unlike shareholders.

Who is going to save the world? When comparing to team of policy makers of Great Depression, Churchill, Keynes and Hoover; Churchill voted at the top of the Great 100 Britons; Keynes, one of the best economists; Hoover failed in ending the downward spiral into Great Depression bringing the need of a big name like Roosevelt.

Roosevelt created the New Deal to provide relief for the unemployed and recovery of the economy. His success was widely appreciated as being ranked one of the greatest presidents of U.S. alongside Abraham Lincoln and George Washington.

Q1-09 & UNEMPLOYMENT

2009-04-02T20:54:00.002+01:00

First quarter’s draft figures started to be appearing. US March unemployment was announced to be 746,000 and February, January were updated upwards to 706,000, 655,000 respectively (Note1). This reminded me of Fibonacci numbers where the next number is bigger than the previous in a series of numbers such that :

0 - 1 - 1 - 2 - 3 - 5 - 8 - 13 - 21 - 34 - 55 - 89 - 144 - 233 - 377 - 610 - 987 - 1597 - 2584 - 4181

The only difference with monthly US unemployment figures is the lack of existence of a relationship between the numbers. With Fibonacci numbers any number starting from the third is the sum of the previous two as can be seen below:

0+1=1
1+1=2
2+3=5
3+5=8 etc

US unemployment figures has been on an upward slope, thankfully not as bad as Fibonacci numbers would state - it would have been 1,361,000 in March as total of January and February!- although it is not still going down!

If we make the picture even bigger; of the 112 million US employees in payroll – as of 2002 statistics - 56.4 million are in small businesses AND many small businesses are expected to close in the near future. Depressed demand and dried lending is making life difficult mostly for them. They are least likely to get government bailout.

On global scale; UK unemployment is expected to increase from two million cumulative number to three million by 2011, global unemployment to increase by fifty-one million in 2009 in the worst case scenario.

We were talking to an entrepreneur friend of mine the other day and one possibility we were both concerned was war. Unemployment is the strongest indicator of this probability. OECD is already talking about having double digit percentage of unemployment at the end of 2009.

Watching the protests against the G20 meeting held in London, one protester dying, many being injured, taken under custody remind the history of wars.

Is there a sun shining somewhere? May be the determination shown by G20 leaders to fight, lending $1.1trillion to IMF and opening the channels for IMF to lend from the markets if necessary. Markets welcomed this determination with Nasdaq, Dow Jones, Nikkei all up.

We hope to get there eventually without having a Third World War. Fingers crossed!

Note1: Figures were updated on Friday, the 3rd April as Jan: 741,000; Feb: 651,000; Mar: 663,000

NOTE: An article in www.cnbc.com on 5th August 2011:

Fibonacci Fate Date for a Bear Bond Market?
Published: Friday, 5 Aug 2011 | 3:24 PM ET

Text Size
By: Rick Santelli

When I was an institutional broker in a former life, I was a believer in the merits of using technical analysis. I found that it was a very useful tool that complemented the much more mainstream tools generically referred to as fundamental analysis.
Many don’t put much stock in technical analysis. I understand that. A former institutional client of mine once said: “At the bottom of the ocean are many sunken vessels, and in each one there is a chart room filled with charts.” But there is another perspective. The markets represent the aggregate interaction of many investors. Their attitudes, philosophies, and behavioral patterns on many levels are predictable….and repetitive.

One of the greatest technicians of all time was a man named W. D. Gann (1878-1955). He had tremendous success predicting market moves much in advance. Legend has it that he occasionally sent notes to The Wall Street Journal, which accurately predicted tops and bottoms in grain markets months ahead of time.
There are two Gann principles that I have always respected. They are that historical prices alone aren’t predictive unless paired with time; and that the “birth dates” of contracts are of major significance. The birth date is the first day a contract, stock, or grain begins trading. And birth dates that occur during "Fibonacci" years are even more significant. The larger the Fibonacci number, the more significant.
Leonardo Fibonacci, the great 13th century Italian mathematician (1175–1250) created the “Fibonacci sequence” to explain behavior in nature mathematically. History has it that the first question he posed was how many rabbits would be created in one year starting with one pair.

The sequence is actually quite simple. Start with "1" and add the previous number to create the next. So, 1 + 0= 1, 1 + 1 =2, 2 +1 =3, 3 + 2=5, 5 +3 =8….and so on…so the sequence is…0,1,1,2,3,5,8,13,21,34,55,89,144,233 and so on. Mathematicians have been enamored with the sequence ever since. It not only predicted rabbits' explosive reproduction numbers, but accurately measures a wide array of activity and behavior in nature.
Over time, this sequence was used by the master painters to define the dimensions of their paintings. There is something “pleasing” to humans about the proportions defined by the sequence. Think of 3x5 index cards, or how many times most people knock on a door, or ring the phone….3 is the most common, 5 is second. Humans have 5 senses, five fingers. The patterns of the spiral of sunflowers seeds also can be explained using the sequence.
The Fibonacci sequence also gives us the “golden mean” used in many mathematical calculations. The golden mean is 1.61—which is arrived at by dividing a Fibonacci number by the previous number. For example 89/55=1.61. Going the other direction 55/89=.61—which is how market technicians come up with Fibonacci retracements. Skip a number, 55/144=.38, the next retracement. I could go on with the many combinations used by market technicians. Suffice it to say the harmony of these numbers in nature was the cornerstone of much of W.D. Gann’s work to explain grain markets' pricing behaviors.
The other application of the sequence by Gann was with respect to time. Consider how 21- and 55-day moving averages are a favorite of purist technicians. It was this aspect of time when applied to the “birth dates” of markets that I wish to concentrate on—specifically for the Treasury market.
On August 22, l977, the Chicago Board of Trade started trading 30-year bond futures. This year, August 22 falls on a Monday. It will be the THIRTY-FOURTH ANNIVERSARY (34 is a Fibonacci number). My goal is not to make a market prediction as much as to share a fascinating possibility.

The next Fibonacci number is 55, it's a difference of 21, which could determine the length of the next cycle. If this Gann cycle is accurate, it may mean a cycle high in price, a cycle low in rates in the Treasury complex could occur possibly on August 22, or thereabouts. Another way to look at this would be, that it may be the BEGINNING OF A 21-YEAR CYCLE in lower prices, higher rates.
Simply stated, if this measure were truly predictive, it could mean the end of a bull cycle and the beginning of a bear cycle in Treasury prices. This may not mean that once the cycle's low yield is reached, the market will immediately reverse. Yet, if you were to look back , over time it could show up as an important turning point in the market.
There have been several large changes over the years in the bond contract, like a coupon change 11 years ago from an 8-percent coupon to the current 6-percent coupon. I can’t say if that would distort Gann’s theories. At the margins I hope readers find this interesting. Yet for those of you out there that believe in a higher order to human behavior, this could prove to be a prediction that W.D Gann might have mailed into CNBC if he was alive today.
© 2011 CNBC.com

RISK ATTITUDES

2009-03-27T14:57:00.001Z

Finance theory categorises investors’ attitudes to risk under three headings as risk averse, risk neutral and risk lover. The first is where investor prefers less risk to more, second where investor is indifferent to risk and finally the third where investors prefer more risk for less.

Conventional wisdom is that investors are risk averse. The higher the risk they associate with a particular investment, the higher the return they will demand. According to portfolio theory, the main risk investors will ask return for is the systematic/market risk, which is the part that can not be removed through diversification and measured by beta. – The correlation of any stock’s return with the market-

During the last three decades of boom period, we breached this wisdom by taking risks beyond the capacity funded by debt assuming the bull market will go on. The result is well known as a global financial system brought to the edge of collapse.

Now we are all risk averse. UK government’s failed bond auction on 25th March is the evidence of how dramatically risk averse we have been. Germany had the same painful experience earlier this year. We are used to experience this with emerging markets but when it is the world’s 5th and 4th largest economies respectively you are talking about, then you stop and think.

The investors’ concern is understandable when you look at the facts that planned UK government borrowing of £350 billion for financial years of 2009-10 & 2010-11 is GREATER than total borrowed by successive rulings and governments of Britain between 1691 and 1997. Mervyn King’s loud concern makes more sense after taking this fact into consideration.

The yield on the 10-year UK Gilt climbed 7bp to 3.02 per cent in the third week of March 2009. A sign that investors are nervous about buying UK government debt and asking for premium for the perceived risk

Is there another option? Domestic demand is contracting mainly by consumption and investment items of GDP. Government item needs to increase its share to fill the big hole left from the former two and borrowing is the only funding option.

Monetary policy is already in place with bank rates near zero. Four million tracker mortgages will enjoy reduction in the mortgages they pay, if not yet so and hopefully this will boost consumption. Low interest rates should theoretically cause investment to increase but the current climate is making this item most difficult to play its role given the reluctance of the banks to lend, uncertainty surrounding the global economy, spare capacity. Another barrier for private investment item is the crowding effect created by the government borrowing.

But there is no solution to keep all sides happy. One or more sides have to pay for the cost. In this instance it seems to be partly private investment in lack of fund, depressed demand and government in having to bailout the private sector.

Let’s hope these efforts give fruits soon.

WINNING STRATEGY: COST LEADERSHIP

2009-03-22T17:58:00.001Z

WINNING STRATEGY: COST LEADERSHIP

Anyone who has somehow touched business studies will recall Michael Porter’s name. Porter -Harvard professor specialising in Management and Economics - describes three generic strategies of firms to gain competitive advantage as: cost leadership, differentiation and market segmentation or focus.

Differentiation has been an innovative and respectable way of entering to and staying in any market of which doing the business in a different way, challenging the available methods, thinking outside the box have been the main characteristics. However credit crunch is making it hard for differentiation to breath and pushing firms in most industries to be cost leader to increase their market share or in most cases to survive.

Swiss chocolate maker Lindt & Sprungli’s closure of 62.5 per cent of its 80 retail boutiques in US is the most recent example of this. Lindt has a self defined philosophy of premium quality chocolate with products or services of superior quality and value and a history, which goes back to 1879. Being established and good quality can not prevent customers from moving to cheaper brands.

Asda and Lidl’s increase in UK market share by the end of 2008 due to cheap products are other examples of success of the strategy in retail sector.

The problem with cost leadership is the squeezing profit margins, thanks to price sensitive buyers, which is a barrier to new entrants. However it will work well when there are economies of scale, learning effect, low costs for factors of production, technological developments.

If you can achieve these conditions adding minimum or best no debt in balance sheet, then you are likely to be a winner.

RECESSION AND NUMBERS

2009-03-19T19:44:00.000Z

As the recession gets deeper and eyes are on the G20 meeting to be held in April 2009, numbers still manage to surprise with one record after another.

Let’s look at some recent unforgettable figures;

On micro basis;

Fedex reported 75 per cent fall in profits on19th March 2009 for its quarter ending on 28th February 2009 from $393 million to $97 million.
AIG reported $60 billion loss for Q4-08, the biggest in US corporate history.
HSBC had £12.5 billion rights issue

Macro basis;

Japan’s exports fell by 45.7%, German engineering companies’ export orders by 47 per cent in January 2009. 700,000 US job losses were recorded in February 2009.

The changes are very high in percentage and absolute figures when the shortness of the periods is taken into consideration.

The picture gets gloomier when adding the major stock markets’ significantly lost values such that;
Dow Jones industrial average fell to its lowest level since 1997 with 22 per cent loss since the start of 2009 -as of 2nd March 2009- accompanied by S & P 500’s 21 per cent fall.

Q1-09 figures will be very crucial in managing expectations. So far so bad!