I’m outrageously late for making seasonal new year predictions, and sorry for a title that sounds like Business Insider, but I want to keep a record to see if I have some predictive power. So, I would like to introduce my 5 best London-listed stocks to short, not for 2014 but for (end) 2016 — three years is a good time frame for short theses to develop, one year may not be enough for failure and they could easily keep being supported by momentum.

Ninenteenth century train crash with steam locomotive going through the wall of an end station.

The track was a bit too short. (source: Wikimedia)

I’m not short any of these stocks (or any individual stock at all) as in real life shorting is a major pain and I would only do it when a limited risk instrument (e.g. options) is available at an affordable price, which is not the case for this set.

That said I’m also not long these stocks, which is really half the value of the Obliquity strategy: there’s probably more insight in what I don’t buy than what I do (I’m short relative to an all inclusive market index). These are just some of the more egregious examples — there’s also stuff I don’t like for more mundane reasons.

For accounting the success or failure of these choices, I plan — if I remember by 2016! — to check the total return of an equal weighted short position in all 5, including dividends and capital actions. Should a stock be delisted, the exit value should be the closing price on the market day following the day the delisting was announced. Suspended stocks should (probably) be considered to have exited at zero.The drawdown allowance is hard to decide in advance, minimum would be 2x I’d say (so allow £2000 running loss for £1000 notional short position for the full portfolio).


Lots of accounting trickery with the headline product a me-too product nobody uses. Matthew Earl has written more than I could dream to about it.

Quindell Portfolio

The business model seem mostly about enabling insurance fraud, layered behind piles of creative accounting, all run by characters that do not inspire great confidence. If the business doesn’t fail, the likeliness of their leaving anything on the table for outside shareholders seems low.


Don’t you love the name? Spinning open source software they do not own or author, and selling add-ons of limited value seems both gross and ingenious. There’s probably enough mugs who don’t understand open source to have them run for a while and have the principals exit at a judicious time…

Naibu Global International

A Chinese shoe manufacturer, which despite the name doesn’t export outside China (why not? not starting well, are we?) and is a field of red flags hinting at possible accounting or corporate structure misrepresentation. It’s already heavily discounted relative to published accounts, so failure is largely already priced in, but I think the end game is delisting or the price languishing further down.

Judges Scientific

This is actually a much more legitimate business than any of the others here, but I’m not a fan of private equity masquerading as an operating business. Brilliant financial engineering, but I fear that the acquired businesses, left to their own devices, with founders pacified with a cash windfall, or retiring, may not prosper. Also the window it exploited where it was possible to buy private companies in this sector at a massive discount to a public market valuation could close as both sellers and competing buyers wise up to it. Combine that with it being a fashion stock on the back of past successes, and it seems more likely to go down than up in my view.

We’re really in the self-evident department here, but many arguments still float around which seem to forget the basics, so a little refresher may help.

Let’s start with the definition: what is inflation?

Inflation is too much money chasing too few goods.

From there it follows simply that to get inflation these two conditions must be fulfilled at the same time:

  1. Too much money
  2. Too few goods

People tend to watch reason #1 too closely, and often even get that wrong. For instance Quantitative Easing (QE) is an operation which is mainly about swapping different kind of money with each other to twist the yield curve at the margin which has a much smaller impact than really “printing money” and throwing it away through the central bank’s window would have. Most countries’ central banks are either not actually allowed, or do not actually practice, direct money printing. So it is in reality quite hard for a central banker, should they wish to, really to “print money”.

Now let’s just  assume that excess money is successfully injected in an economy. We still need condition #2, too few goods. If people find themselves with bundles of cash, and spend them — they must “chase goods”, if they save, no inflation — we’ve got suppliers of stuff and services facing facing an influx of customers. What do you do if you’re in business and see customers coming your way? You push your production/servicing capacities to the max, get more staff, etc. Under competition, you can’t really put your prices up by much in the medium or long term, otherwise someone will turn up and undercut you, opening a new café next to yours when they see yours is full.

So, in peacetime in a functioning economy, the supply side is very responsive: you can always get more staff or more equipment, for this to become strained you need to run out of staff so that staff become scarce and can name their price when negotiating wages. That is full employment, which brings us to the simple truism:

Inflation = Full employment

Exceptions to this require either inflation so frantic that it’s faster than people can advertise for jobs, or political disruptions that prevent normal operations of the jobs and equipment market. As far as I know all the historical episodes of major inflation occurred in time of full employment or major political disruption (war, civil or otherwise, etc).

Further it’s worth noting that full employment requires not only employing the people looking for a job, but people who are not currently looking but would if they saw opportunities, which in current circumstances are probably quite numerous in most mature economies (less people who are chronically unemployable due to personal or systemic circumstances, probably a percent or two of the workforce).

It also requires, in technological societies, running out of jobs that can be relatively easily automated but have not yet because staff was cheap and plentiful.

Conclusion: if you want to predict inflation, don’t ask an economist but a geopolitics expert re their views on major upcoming wars. If there is a green light here, and there are still plenty of people wishing to work, inflation risk is very low. Moreover, there’s a natural hedge for people of working age: if there’s inflation, it will be easy to get a job.

I have been a bit late in documenting my portfolio updates, though I try to keep the static pages (in the portfolio tab above) up to date. The core portfolio page is a bit off, as I’m due to write a bit of code for better reporting than the horrible copy-pasting from the FT site I’ve been doing up to now.

With no further ado, let’s review the updates to the Stamp Collection since my last post on it.

API Group: an erroneous wander

I’ve sold API Group, which hasn’t moved much since I bought it. While it’s the sort of business I like for the core portfolio, it was a bit duplicate at an aggregate level, and I was convinced partly by a “catalyst” story about some land they own. I now think this was an error: I don’t really want to chase relatively small side gigs  that way, as they may take years to realise and are hard work to follow. It’s nice to have on the side of a business I’d like without it, but I will try to avoid pure catalyst situations in the future. Also they tried to sell themselves last year, under instruction from a major shareholder, and failed, which doesn’t inspire confidence, if nobody in the business sees much value over the current share price.

GW Pharmaceuticals trimmed on doubling

I bought this amusing cannabinoids pharmaceutical company partly for the entertainment value, and because it looked relatively cheap in 2012. It’s got an extra listing on NASDAQ with an associated fundraising last year, which combined with moderate fundamental news flow (new countries for their existing approved meds, new clinical trials for others) and a bubbly environment in US biotechnology has lead to the price multiplying. I cut down when the weight doubled away from my target (which is more than notional doubling as the target weight increases with the market, and UK small caps have been doing very well lately).

It’s progressed further since, with a secondary US fundraising a few days ago, which makes it look pretty expensive in enterprise value terms (as the enlarged cash pile is effectively at a premium) so I may exit when the momentum looks like it’s stopped, or at least trim down if it doubles again.

Avanti Communications: too fashionable and indebted

Another stock that was probably an error, sold at a partial loss. It’s a satellite operator — a notoriously accident prone sector — which is a darling of spread betters and blue sky story chasers. The balance sheet weakened with a large debt rescheduling at a high rate. It’s just now too expensive, too leveraged and too fashionable for me to keep it.

Sweett: back to basics

A construction consultancy, surveying and property management business that seems to keep customers pleased on a modest valuation, is more fitting in the portfolio. It should be a good long term holding.

Wolfson Semi: the sound of music

Audio chip manufacturer Wolfson Semiconductors has great products and an accident prone past (managing to lose Apple as a client through poor execution) but seems fair value at the moment and aware of its past failings. This provide a bit of technology diversification from the dull Industrials I tend to buy.

Anite: network testing and travel software

Another technology company and an apparent leader in their field, a somewhat curious mix of mobile phone network testing and travel software, having experienced difficulty in a time of low capital expenditure from their large telco customers, seems likely to benefit from economic recovery and seems a reasonably steady business merely priced to plod along.

Interbulk: dry bulk

A cheap-looking if somewhat indebted purveyor of containerised tanks and “dry bulk” containers. They provide a niche solution and focus on that, suffered from the euro and general repercussions of the financial crisis. Now with a new CEO they seem well placed to both regain their footing and benefit from a possible economic recovery.

They have relatively high debt but are conscious of it and doing something about it. It’s a relatively steady business which should be easy to (re)finance cheaply at the moment. Some of the balance sheet risk is mitigated by strategic holders (larger Chinese and French transportation groups) that will probably back the company should the lenders get cold feet. There’s a bit of “closely held” risk, but the plurality of strategic holders and their nature mitigates some of it. The price doesn’t really include much growth so it should do pretty well if both the operations and the economy improve. And on my boring metrics it’s hard to beat

Elektron top up

I’ve also topped up Elektron Technology, a previous acquisition whose price has more than halved. It’s basically a recovery situation for an established small electronic components group, which had been sleepy for many years, similar to Volex in the main portfolio. The valuation is very low, and sentiment on bulletin boards very negative. The whole equity costs the price of a posh house in London for a generally profitable business with 1000+ employees. I’m happy to wait for a recovery, several years if need be, these things take time.

This should be the one and only top up though, as I try to employ a “committed capital per idea” risk management metric: the money put into a single idea shouldn’t exceed (much) the target weight for similar ideas. This avoids throwing too much good money after bad just to maintain target weight. I had entered relatively modestly, which has allowed a sizeable top up.

Bodycote sold

This stock dates from the early days when I collected leftovers from the main strategy, so it’s a FTSE250 stock that I liked but didn’t pass the core portfolio criteria. It’s done well, possibly a bit expensive now, and in any case doesn’t fit in the current philosophy of the Stamps Collection, and my general possible overweight in that style of company, so was sold as a tidy up exercise.

Seeing machine: a retail placing

In sideways news, Seeing Machines, an existing portfolio holding, which is also becoming perhaps a bit too fashionable for my taste, is doing a complementary placing following an institutional fundraising a couple of months ago. Retail investors are offered to participate at the same price as the institutions, which now looks like free money because the price has gone up considerably since the original institutional placing. It’s a nice touch for long term small shareholders, so kudos to the management. I’ve applied for a fair chunk as a short term trade to exploit the difference between the offer price (5p) and the current price (9p+). I plan to sell whatever allocation I get — which i expect to be trimmed as the max fundraising is £1m and the conditions are so favourable — because keeping it would make it too large for my risk budget.


That’s it for now, a little more than I recalled! While it’s several months’ worth of catch up, maybe I’ve been trading this portfolio a bit too much (although some of the 2013 trading is explained by allocating more funds to the strategy, which is okay).

Estimates of the Bitcoin holdings of the network’s anonymous designer, Satoshi Nakamoto, seem to indicate he owns a minimum of 5-10% or the current issuance. He doesn’t seem to have “spent” them as the addresses known to belong to him have not seen activity — this can be checked in the blockchain, Bitcoin’s public transaction ledger.

If he’s not thrown away the keys in a spring clean, he effectively controls the currency. His holding is a multiple of daily volumes on all exchanges, so he could easily intervene on the markets to cap the price (like a regular central bank) and introduce a fixed or capped USD/BTC rate. He wouldn’t even need to spend much, just announcing “I’m Satoshi Nakamoto and I’ve decided to cap the rate at this value” would do it, as nobody has anywhere near comparable firing power so a successful challenge seems unlikely.

The market cap of Bitcoin-derivatives being even smaller, by extension he can also control the entire alttcoin movement.

If the protocol doesn’t fall apart, his capacity is still notionally limited as he can’t issue new Bitcoins — he’s surrended control of the algorithm long ago. But even then, he may have enough buying power to bribe enough nodes to be able to control the network if he so wished. He could similarly sell his stash at a discount to someone else who wants to control Bitcoin, easing the exit problem he has should he want to convert his holding to real world claims.

Overall that’s more power than any central banker — who have a monetary policy committee to contend with and can be removed by their parent government sponsor — has. If estimates of his holdings are correct, this “decentralised” currency is in effect an absolute monarchy, with an absentee, and so far benevolent, king.

A pugnaciously persistent meme, even among educated people and policymakers who should know better, is that governments at times “manipulate” the interest or exchange rates. By that it is meant that they move the rates away from some mythical “natural” value that they would be at in the absence of the alleged manipulation.

There is no natural rate. A governments is a monopoly supplier of its own government paper and while there are several suppliers of such paper, they’re not direct substitutes for each other. If you want USD cash or bonds, there’s only one shop in town, this is the US government’s (we here consider the central bank and the treasury as one entity given that they both manage the whole stock of government paper, central bank cash is just essentially a very short duration government bond).

Thus, the government is like any monopoly supplier of an exclusive product which has no directly fungible substitute, a price setter — unlike suppliers of fungible commodities who are individually price takers. So, like any monopoly supplier, while they cannot control external demand, they can choose the point on the demand curve, through setting either the quantity (how many bonds or cash they make available) or the price (the interest rate). They might practically set one or the other, but in all case they are choosing a point on the demand curve and which of the axes you use for that setting is a not very interesting technicality.

Not only they choose that, but they cannot opt not to choose. There is no “natural” point on the demand curve. The treasury cannot say they will issue “some” bonds at “some” price and not specify any price or quantity. Buyers of bonds cannot get not-a-number of bonds and receive not-a-number interest on it. Therefore the government is, like all monopoly suppliers of non fungible products, “manipulating” the interest rate at all times. It cannot not manipulate. And there’s nothing wrong with it for there exist no possible state of non-manipulation. Monopoly suppliers are price setters, this is just a fact of life. Buy the product if you like the offer, move on if you don’t.

The same apply to exchange rates, which is just the relative price and directly depends on supply which is just a consequence of setting a point on the demand curve, which in aggregate includes international demand. Exchange controls or the lack thereof doesn’t change that, they just make the currency more or less fungible which is just a quirky way to set quantity. Adding or removing price controls doesn’t change that governments are in full control of their position on the demand curve and have no way to relinquish that control.

I incidentally had a wander around the Bitcoin ecosystem in the past few days and there are a number of entertaining phenomenons to observe.

MtGox: a slow train crash

Looking at comparative exchange rates between Bitcoins and fiat currencies, one can’t help notice that BTC are 10% more expensive at MtGox, the highest volume Bitcoin exchange, than at every other exchange. The reason is not hard to find: MtGox has problems with their banking partners so that they have limited capacity to process withdrawals, and have thus set up a rate-limiting (both time and size) queue system. So basically it takes weeks to get money out of MtGox, making the obvious arbitrage opportunity of buying cheap bitcoin from any other exchange and getting back your original capital + 10% by selling it on MtGox and withdrawing it much harder (or for people who are BTC-based, the mirror strategy of buying fiat temporarily and converting it back into Bitcoin via cheaper exchanges). Of course the arbitrage is less interesting when (1) it takes weeks, (2) is limited in size, (3) MtGox might not be there by the time your withdrawal is due.

Interestingly MtGox remains the highest volume exchange despite being functionally insolvent — any old school bank sitting on funds for a month would be put in resolution by their regulator and counterparties would run away from it as fast as possible. It would be interesting to know how much of the remaining volume is the arbitrage trade and how much is people actually needing a transfer for non speculative reasons. Some inertia might be due to the difficulty of being validated on other exchanges.

Bitcoin exchanges: a flawed idea

MtGox problems are I think revealing a more fundamental problem. The entire modern banking system is oriented towards traceability and, to a degree, reversibility. Interestingly MtGox’s euro bank sits on incoming electronic transfers for 7-10 days, presumably to cope with reversals. Any transaction chain that gets out of regular banking and back in again via Bitcoin is in principle a loophole in the world banking system (let’s assume for a moment that Bitcoin is as anonymous as its proponents claim).

The way it seems to work is that while a new Bitcoin exchange is small enough to be under the radar it’s left alone until it becomes big enough to trigger compliance problems and then loses its interface with the regular regulated money world. I don’t think that’s going to get any better, limiting the potential for Bitcoin to gain wide acceptance. It can still work as an underground currency by using bridge goods for exchange, or peer-to-peer exchange, like LocalBitcoins, which basically works around the regulations by turning private individuals into unlicensed money changers, probably breaking some rule or other but possibly escaping it as long as individual members operate on an amateur scale.

ICBIT futures contango

Another arbitrageable anomaly is the contango curve for BTC/USD futures on the ICBIT futures exchange. Liquid things normally have a flat term structure, because you can construct a market neutral position with the underlying and the future and gain the difference in a risk free manner.

Some possible explanation for this contango:

  • innumeracy may dominate, if more people believe that the future prices for liquid assets are bets about prices at expiration than there are people prepared to arbitrage this basic error.
  • the icbit exchange is too small to be worth bothering (the open interest on the BTC/USD futures is less than $400k nominal).
  • an arbitrage position that is short is subject to infinite risk if the price on icbit spikes before converging at maturity.
  • an arbitrage position is exposed to counterparty risk: the exchange, like many bitcoin ventures, is probably a one-man shop who can at any time disappear with the margin account or get it hacked/stolen.

Fees: even more expensive than regular finance

One striking thing is that bitcoin exchanges, and other bitcoin-based financial websites, despite skipping the full regulation of the regulated world, charge fees that are can be higher than the regular regulated financial industry, for example an arbitrage transaction getting euros in via Bitstamp and out via MtGox would cost:

  • Bitstamp deposit: unspecified USD/EUR cost
  • Bitstamp exchange fee: 20-50 bps (volume dependent)
  • MtGox exchange fee: 25-60 bps (volume dependent)
  • MtGox withdrawal fee: 100 bps

A speculative forex round trip with a competitive regulated money solution is much cheaper than that.

These services are just a bit of software, with a supporting geek community, it’s surprising cooperative services that don’t charge fees haven’t appeared.

Another look at fees is the cost per transaction shown on blockchain.info which seems to oscillate around 2-3% which seems pretty steep to me for transactions within a purely electronic currency with no services attached. I understand this includes the block fee from BTC created and given to miners, which are not paid directly as part of the transactions, but are fair to include given that they increase market cap and thus, everything else being equal, devalue existing bitcoins.

The US government will probably partially shutdown tonight, which as such isn’t that bad for a short while, but Congress seems set for a conflict about the debt ceiling, which could be really bad if they really defaulted, however pointless a technicality it is.

Alley flanked by trees with low-level branches

Low ceiling (credit: Swiv on flickr)

The market is basically pricing in a deal and hasn’t panicked yet. There will probably be a deal in the end, but I feel it does require a market panic (at least a small short one) to progress. I see things (possibly) happening that way:

  1. Markets stay calm for a few more days, while the deadline approaches
  2. The calm markets reinforce radical Republicans’ intransigence
  3. The market panics more convincingly (via volatility and/or actual dollar/stock falls) when a significant deadline gets too dangerously close
  4. Radical Republicans see the market panic in their brokerage account and surrender in a disorderly manner
  5. Problem solved, markets come back to where they are now, after a few days or at most a couple of weeks

The logic of the institutions seems to imply this, along with Obama being a much better strategist than radical Republicans — I don’t see why he would surrender first. That way he gets his way on the healthcare reforms, and scores political points in the process.

This is eerily like the Eurozone, without the structural reasons. Not silly at all.

Disclosure: long VIX, VSTOXX via derivatives.


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