Yearly Archives: 2009

Oil Prices on the Rise?

Prompted by an article entitled “Bust and Boom” in the current issue of The Economist, I have decided it is time to dust off a Stubborn Mule staple: the petrol price model. As The Economist notes, following last year’s precipitous fall, oil prices have been climing again over the last few months. The West Texas Intermediate oil price per barrel (bbl) has almost doubled in US dollar terms and, despite a stronger Australian dollar, the price in Austalian dollars is not far behind.

wti

West Texas Intermediate Oil Prices

Rising oil prices may seem odd in a world economy still under the influence of the Global Financial Crisis (aka the GFC), but The Economist points the finger at the collapse in investment in oil exploration and development of new fields. This raises the fear that, while oil inventories are currently in record excess, once these inventories are drained, digging up more oil is getting harder and, consequently more expensive.

So where does this leave Sydney motorists? The simple regression model I have used before is still showing a tight relationship between wholesale oil prices (in this case refined Singapore 97 oil prices) and prices at the bowser. If The Economist’s fears are justified, petrol prices will be reaching $1.30/L very soon and will be headed north from there. Updated Petrol Model

Data source: Bloomberg and the Australian Automobile Association.

Pinching Debt Data

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Regular readers of the Mule will know that I am a bit of a data-mining junkie. Whenever I come across an interesting chart I start Googling for the underlying data. But, even with well-honed Google skills, it’s not always possible to find the data. Sometimes it is simply not publically available. I ran into just this problem recently. The recent Australian Federal budget triggered countless alarmist opinion pieces despairing that Australia would be “mired in debt” and this prompted me to do some research of my own. In the process, I came across a handy primer on the subject entitled “A history of public debt in Australia”. Written by a number of Australian Treasury employees in the Budget Policy Division, it included the chart below which shows the history of net Government debt (combining Commonwealth and State debt) over almost 40 years. The chart also includes forecasts for the next few years.

Debt History - Original (v2)

Australian Government Net Debt to Gross Domestic Product

While the paper is clearly quite recent (it has no publication date), the forecasts pre-date those included in the May budget, so I was interested in updating the chart with the latest Treasury forecasts. The underlying data does not appear to be published online and, since I do not work with the authors in the Budget Policy Division, I had to resort to special measures. I turned to a handy (and free, open source) little piece of software I have used a number of times to pinch data from charts. The software is called Engauge Digitizer and it allows you to import an image of a chart and extract the underlying data.

Engauge Digitizer Screenshot

For charts with points or curve segments, Engauge generally does a great job of automatically finding the data. For a column chart like the one I had found, the process is a little bit more manual, but with a bit of clicking on the tips of each of the columns in the image, I had my data. The chart below shows the data I obtained. One indication of the accuracy of the results is that the authors of the history paper noted that net debt had averaged 5.7% of gross domestic product (GDP) since 1970. Satisfyingly, the average of my extracted data over this period was also 5.7%.

Australian Government Net Debt to GDP (imported data)

Having obtained the data, I was then able to replace the forecasts with the more recent Treasury figures included in Budget Paper No. 1.

Debt History - New Forecasts (v2)

Australian Government Net Debt to GDP (updated forecasts)

For the alarmists who are worried about this growing debt, it is useful to put these forecasts in a global perspective. The chart below puts these Treasury forecasts alongside IMF forecasts for a number of other developed countries.

World Debt Forecasts

Global Debt to GDP Forecasts

Compared to the rest of the developed world, the global financial crisis is still not looking quite so scary for Australia. When it comes to the United Kingdom, rating agency Standard and Poor’s is even more pessimistic than the IMF and is concerned that their net debt could reach 100% of GDP and have accordingly changed the credit rating outlook for the UK to negative.

UPDATE: For anyone interested in getting hold of the data without resorting to scraping it from the images, I have uploaded it to Swivel. This dataset includes the most recent Treasury forecasts.

Blip.fm Wobbling?

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Last year I wrote about the the music/social network combination blip.fm. That post was followed up with one on the demise of muxtape and mixwit in which I said “I hope that blip.fm does not become the next victim of the RIAA”. While blip.fm has survived to date, it may only last by significantly changing its laissez-faire approach to streaming music.

A post on their blog last week opens

In the past few weeks we’ve had to make a few difficult decisions that will change the way some things work on Blip.fm. For the majority of you the changes will be for the better, for others they might be less than ideal for the time being.

It goes on to note that music will “primarily” be sourced from the music service imeem rather than broad-based searches of the internet. Users will no longer be able to submit urls pointing to mp3s. Instead, a set of “approved” urls will be used.

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Shoots Are Greener in Australia?

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The phrase de jour (or du mois in fact) in financial markets is “green shoots”. Optimists, world equity markets included, are seeing tentative signs of improvement in the world economy. Google trends saw a blip in searches for the phrase green shoots back in January when UK Government minister Baroness Vadera used the phrase and was lampooned for what was perceived as premature optimism. Moving forward a few months and searches have surged again, but this time consensus seems to be far more supportive of a positive outlook.

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Dubai Perspectives

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dubai-small I’m hoping to try something a little bit different here on the Stubborn Mule: a guest post.

But first some background. Recently I came across this article in the Independent exploring the “dark side” of Dubai. It paints a very grim picture of massive crumbling developments, environmental degredation, Western ex-pats who either revel in luxury or are thrown into debtors prison and a society built on the backs of an immigrant sub-class of near slaves. I know very little about Dubai, or the rest of the United Arab Emirates (UAE) for that matter, but found the article a compelling read. So, as usual, I shared the link with my social networks on twitter* and Facebook. This drew an immediate response from a friend who has lived in the UAE who thought it painted a very distorted picture of Dubai. So, I have offered her a guest spot here on the Mule to present an alternative perspective.

So, with any luck you’ll be reading the first guest post here very soon.

UPDATE: the article is written, but waiting on clearance. Fingers crossed!

FURTHER UPDATE: sad to say it looks as though the piece is not going to see the light of day. My guest poster’s employer has ruled out any scope for publishing the piece, even if it is done anonymously. It was to have given a more positive picture of Dubai, but the experience suggests to me that on the score of openness at least, Dubai does not do well!

* In fact, I suspect that I came across the article on twitter in the first place.

Who is to Blame for BrisConnections?

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Bolton as The Dude In the latest instalment of the ongoing debacle that is BrisConnections, Nicholas Bolton shrugged off the mantle of hero to mum and dad shareholders in exchange for a secretly arranged $4.5 million dollars. I have to admit I would have enjoyed the Schadenfreude of seeing Bolton continue to stick it to Macquarie Bank, but whatever his shortcomings (which include a striking resemblance to the One.Tel dude—thanks to the friend who pointed this out to me and to Crikey!), and however tempting it is to blame him for not finishing the job, it was never his job to protect shareholders.

When it comes to assigning blame, it should fall fair and square on the ASX. If they were doing their job properly, they should never have allowed BrisConnections to be listed in the first place.

To explain why requires a (relatively) brief explanation of instalment receipts. Also known as partly paid shares, they are a means a of issuing shares in a company in stages. If a company was estimated to be worth around $200 million, rather than issuing 100 million shares at $2 each, this approach involves selling 100 million “instalment receipts” (rather than fully paid shares) at $1 each. At some point in the future, holders of these receipts would pay a further $1 and their receipts convert into ordinary shares. This means of raising capital is very well suited to construction projects where the company does not require all of the capital upfront and was, for example, used to finance the construction of the Sydney Olypmic Stadium prior to the 2000 Olympics.

So, using instalment receipts was a natural approach to raising capital for the construction of Brisbane’s Airport Link. However, there is a crucial difference between the approach Macquarie Bank used with BrisConnections and most previous projects such as the Olympic Stadium and the Telstra privatisation. In the earlier examples, payment of later instalments was optional. Holders of instalment receipts had the choice of paying the next instalment and converting their holdings to fully paid shares or simply walking away with nothing. However, in the case of BrisConnections, paying the instalment is not optional and this makes a big difference.

To see why, I’ll go back to the hypothetical example of the $200 million company. Imagine that, for some reason (project problems, global financial crisis, or whatever), the value of the company fell to $150 million and then to $100 million and finally to $60 million. If they had originally raised capital by issuing 100 million $2 shares, then the share price would fall to $1.50, then to $1 and finally to $0.60. Obviously investors would be disappointed to see their investment fall in value, but these things happen on the share market.

Now imagine that they had issued 100 million $1 instalment receipts with a compulsory instalment payment of $1 in the future. So, even though the original investors had only invested $1, they had effectively committed $2. Initially worth $1, these instalment receipts would fall in value to around $0.50 when the company fell to $150 million. This is because the overall value of a fully paid share is $1.50 and instalment receipt holders have committed to paying the final $1, so the balance is $0.50. It gets messier as the value of the company continues to fall. When the company is worth $100 million, the instalment receipts are essentially worth $0 and with the company worth $60 million they should be worth negative $0.40! What this means is that a holder of one of these receipts should be prepared to pay someone $0.40 per receipt to take them off their hands. Since a “buyer” of the receipts considers the company to be worth $0.60 per share but knows there is a commitment to pay $1, they would want to be compensated $0.40 per share to take on the commitment of paying the instalment.

This is where is gets problematic for the ASX. The way the stock exchange system is set up, it is impossible to trade on the exchange with negative prices. So, even though these hypothetical receipts have a negative value, they would have to trade at a positive price. And they are not worth that! This is exactly what happened with BrisConnections. It got to the point where it was trading at price of a fraction of a cent when the value of the instalments were in fact negative. As a result, investors unaware of the future instalment obligation thought they were snapping up large numbers of shares at a bargain price and instead are now faced with enormous liabilities that many will simply be unable to pay.

The ASX has responded by announcing new rules requiring better disclosure from brokers. This misses the point. No amount of disclosure will change the fact that BrisConnections instalments could not be traded at real, negative prices. Even if everyone had full disclosure and (assuming no-one was trying anything tricky like Bolton) so no-one bought any units at near zero prices, this would leave the problem that existing investors would be unable to sell their holdings at all.

When the BrisConnections receipts were first listed, everyone might have expected the value of the company to go up not down, but the possibility that it could have gone down was always there and this should have raised alarm bells with the ASX right from the start.

Put simply, if the ASX cannot cope with negative prices, they should never allow anything to be listed on the exchange that has the slightest chance of having a negative value.

Since instalment receipts are hardly new, why has this only come up now? The secret lies in the fact that the instalments for Telstra, the Olympic Stadium and so many others were optional. Since there would never be a committed liability for instalment holders, the prices of the receipts could certainly go down to very close to zero, but they could never be negative. Of course, if no-one paid the instalment this would create some difficulties for the company and they would have to raise fresh capital, but a debacle like BrisConnections could never happen. Why was BrisConnections structured with a committed instalment? I can only guess the certainty of future cashflows for BrisConnections made it much easier for Macquarie Bank to pull out fatter fees for structuring the deal in the first place, which is why I would not have been sorry to see it all collapse for them (and it still might). Even if I am right in my suspicions, this would hardly be surprising news about Macquarie. So, I don’t really blame them, I blame the ASX.

Burning Candles

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The third Earth Hour takes place tomorrow night and once again I have been asked about carbon emissions from candles. So, without wanting to be a party-pooper, I thought I would dig up some calculations from a year ago, courtesy of the friendly family power engineer (you know who you are!).

Tomorrow night, many people will turn off the lights for an hour and light up candles instead. Since the candles themselves emit carbon dioxide (CO2), the question is will we end up reducing emissions for the hour or not? Of course, it all depends on how many candles you light up and what sorts of lights you turn off.

Since candles don’t actually emit very much light, the temptation (particularly in bars and restaurants) is to light lots of candles. To make it concrete, think of a 40 Watt (W) traditional incandescent light-bulb. Although a 40W light bulb is not very bright, it actually emits the equivalent light of around 40 candles. The amount of CO2 emitted is equivalent to at most 5 or 6 candles. So if you turn off one light and replace it with enough candles to generate an equivalent amount of light, you’d be emitting at least 7 times as much CO2 as using the light-bulb. So, the moral of the story is not to light too many candles!

The comparison gets worse if you use energy-saving compact fluorescent lamps (CFL) rather than incandescent bulbs. A 7W CFL bulb gives about the same amount of light as a 40W incandescent bulb or around 40 candles. However, the carbon emissions from this bulb is equivalent to one candle. Admittedly, this is a fairly dim bulb, so you’d be more likely to be using a brighter bulb. But even if we considered a 14W CFL bulb (equivalent to a traditional 75W bulb) this produces emissions equivalent to two candles but the light output of almost 80 candles.

So if it was just about reducing emissions, you would be far better off leaving on CFL bulbs (and switching as many of your old bulbs to CFL as possible) than lighting candles at home or in bars and restaurants. Of course, it’s more about the symolism than anything else. Furthermore, there is a real saving in commercial premises like office blocks where the lights are turned off and nothing is turned on in their place.

One final point people make is the source of the CO2. Coal-burning power stations release carbon that has been buried in the ground for a very long time, while beeswax candles release carbon that has only recently been captured (of course paraffin candles are just as bad as coal-fired power stations!). While this is true, the end result in terms of CO2 in the atmosphere is the same. Perhaps the best thing to do is to buy the candles and keep them in the bottom drawer for emergencies and keep the carbon captured, while lighting your house with CFL bulbs!

The (Optional) Details

For the brave of heart, here are some of the details used to calculate the figures discussed above.

The aim of these calculations is to compare the carbon emissions of candles, traditional incandescent light-bulbs and energy-saving compact fluorescent lamps (CFL). To make this comparison fair, we should take into account the fact that candles emit much less light than light bulbs. The traditional unit of brightness for candles is candlepower, so I will start with a hypothetical candle that emits one candlepower of light. In more moden units, this is a luminous intensity of 0.981 candela.

Now, to complicate matters, the light output of bulbs is typically quoted in terms of lumens, a measure of luminous flux. The relationship between flux and total intensity depends on the area over which the light is emitted (e.g. a pinhole light might have high flux, but not much total intensity). For our purposes, I will assume that we have an unshaded bulb which emits light in just about every direction.

According to wikipedia, a 40 Watt (W) bulb has an output of 500 lumens, which converts to an intensity of 39.8 candela or 40.6 candlepower. So, our relatively dim 40W bulb generates as much light as about 40 candles. While there is a fair amount of variation amongst CFL bulbs, a typical 14W CFL is equivalent to a 75W incandescent light bulb. To get to the equivalent of our 40W bulb, we would need a CFL of about 7W. To achieve the equivalent light intensity of a 40W incandescent bulb, it would therefore require 40 candles or one 7W CFL.

Each hour a small candle burns at least 2.5 grams of candlewax (most candles would be worse than this), which contains a little over 2 grams of carbon, producing 7 grams of CO2 emissions. So 40 candles would produce about 280 grams of CO2 each hour. These figures are based on the Hex Jar burn time in this table of candle burn times, which burns 1.5 oz of candlewax in 12 hours. Many others in the list burn at a faster rate.

Coal-burning power stations typically emit CO2 at the rate of 1kg/kWh or 1 g/Wh (need to dig up a reference on this one) (US National Renewable Energy Laboratory figures of 1.114kg/lWh are quoted here). This means that the 40W incandescent bulb produces around 40 grams of CO2 emissions each hour, while the equivalent CFL bulb is only 7W, and so it produces only 7 grams of CO2 emissions each hour. Of course, if your power comes from renewable sources, the emissions of these bulbs may be lower.

Photo credit: Rickydavid on flickr (Creative Commons).

AIG and DZ Bank: Dumb and Dumber

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To date, in their efforts to make the Global Financial Crisis (GFC) even more disastrous than it already is, the US Government has pumped an extraordinary $170 billion into the American International Group (AIG), the humbled and humiliated insurance giant. AIG’s biggest problems arose from entering into enormous credit default swap (CDS) transactions. The reason this creates systemic risk is that CDS are bilateral transactions between two counterparties and so if AIG is in trouble, so are the counterparties on the other side of the transaction. CDS are a little like insurance contracts (albeit with far less regulation), which is perhaps why AIG was attracted to the business, and with AIG selling protection, the buyers of protection are nervous.

Dumb and Dumber Given the amount of money that the US Government has provided to AIG, it is reasonable for US taxpayers to expect some transparency from the recipient of their hard earned dollars. Today AIG has begun taking steps in that direction with the release of a number of documents under the heading “AIG Moving Forward”. Among these documents was a list of collateral postings made to AIG’s CDS counterparties. While this does not give the full picture of the vast CDS transactions volumes AIG built up over recent years, it gives an interesting glimpse of some of the larger participants in this dangerous game. The collateral postings are similar to margin payments made on margin loans when share prices fall: as AIG loses money on its CDS, it makes collateral payments to the counterparty to mitigate the risk that AIG may not be able to pay up in the future.

The counterparty list includes many of the usual suspects: Deutsche Bank, Goldman Sachs, UBS, etc. There are, however, a few interesting names. The one that struck me was DZ Bank,. Never having heard of DZ Bank, I had to look them up. It turns out, that Deutsche Zentral-Genossenschaftsbank is the fifth-largest bank in Germany and operates as a central bank for small German co-operative banks. It is not a listed company as it is collectively owned by the 1,000 or so cooperative banks it serves. It seems that providing services to these banks was not enough for DZ and so they branched out into the exotic world of CDS. Based on AIG’s disclosure, DZ have received a total of $1.7 billion in collateral (split between direct payments from AIG up to December 2008, and payments from the Maiden Lane III vehicle established as part of the Government bail-out) and so they ventured into CDS in scale. I can’t help thinking that in doing so, they didn’t know much more about what they were taking on than Waverly Council. It also helps to explain how they managed to lose €1 billion in 2008.

One last point on the subject of AIG. Despite managing to destroy such large amounts of value, it seems that they still want to pay bonuses of $165 million to senior executives. Timothy Geithner, Obama’s new Treasury Secretary, described this as “unacceptable”. I think he was politely trying to say “wake up and see what’s going on around you!”.

How Big Are Australian Banks?

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There is no doubt that the big four Australian banks have navigated the global financial crisis better than many banks around the world, particularly in the US and UK. However, there seems to be a pervasive tendency in Australia to overstate the success of the Australian banks.

A couple of weeks ago, Michael Duffy wrote in the Sydney Morning Herald that

There are only 15 banks in the world which now have a AAA credit rating. The four major Australian banks are among them.

It would be nice if it was true. However, no Australian bank has a AAA rating, they are all in the AA band. There are a few Government-owned or guaranteed banks around the world with a AAA and the only privately-owned bank with a AAA rating these days is the Dutch Rabobank.

More recently, Kerry O’Brien was interviewing the astute Morgan Stanley analyst Gerard Minack when he made the comment

Given that the big four banks in Australia are now in the top 12 around the world, what risk still applies to Australian banks as this scenario that you’ve described unfolds?

Gerard blinked for a moment before moving on, so I suspect he knew that Kerry did not have his facts straight here. By my reckoning (with a bit of assistance from Bloomberg),now that Westpac has taken over St George, it just scrapes in at number 12. ANZ, however, is all the way down at number 33 and the other two are somewhere in between. If I have missed any of the major world banks in my calculations, that would only push Australian banks further down.

The chart below shows data I have uploaded to Swivel giving the market capitalization for 40 of the biggest banks in the world in billions of US dollars. Figures are in thousands of millions (i.e. billions) of US dollars. While management of the big four Australian banks should be pleased with how they are faring, there is no need to blow their trumpets to the point of ignoring the facts.

One final point: it is interesting to note that the three biggest banks in the world today are Chinese banks.

For those who read my earlier Amazing Shrinking Banks post, you may notice that I have added a few more banks, including the large Chinese banks.

Time for States to Give Up Borrowing?

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It hasn’t been a very good few months for the Australian State Treasury Corporations. While the ongoing global financial crisis (GFC) has been challenging for everyone dealing in the financial markets, conditions really got difficult for the States when banks began issuing bonds with Commonwealth Government guarantees back in December 2008. Things got worse last week when Standard & Poor’s announced a downgrade of Queensland Treasury Corporation (QTC) from AAA to AA+. Many investors are concerned that New South Wales will be next. Perhaps the time has come for the States to give up their borrowing programs and move to a centralised Commonwealth borrowing model.

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