I know he's only a school teacher but the economics teacher at Eton College predicted in September I think it was that the Northern Rock share price would bottom out at £4 a share.

 

At the time of writing the price of a Northern Rock share has actually fallen from just under £12 in January 2007 to £1.10 today, 30th November 2007.

 

Not much of a prediction was it? At the time the prediction was made the price per share was around £7.50 or so.

Duncan Williamson

How about this very prudent use of hedging?

 

Porsche profits by CFO's hedges By Richard Milne

Reported by

Duncan Williamson

I haven't had a chance to study the report in detail still but I would watch out for Vodafone if I were you. There recent interim report showed that their EBITDA was just a bit worse than last time ... remember my warning that any company that generally reports EBITDA or an adjusted profit figure as their headline profit figure is suspect.

 

In yesterday's FT there was an article showing yet again how Vodafone is trying to use its cash base to buy profits that will then prop up the dreadful parts of its business. It is trying to buy into South Africa but one part of the deal collapsed and as I write this the deal is not going through.

 

In spite of all of my warnings I see that the Vodafone share price has risen over the last year from around 130 pence to 181 pence ... a 35.46% increase on the year. How these people are evaluating this company is a mystery to me. The message is clearm though: I should have bought loads of shares a year ago!!

 

Duncan Williamson

Imagine that you are working for a major UK company: well known by everyone in the UK and well known in many countries across the world. Your job is at a relatively low level but you not only love your job but you are keen to ensure that your company and its customers are always fully satisfied with your performance.

 

Sometimes an order is placed by a customer and you find that your branch is out of stock but there is one of the items in one of your branches around 20 miles away. Even though you don't drive, you make it your business to help the customer and decide to go to the other branch on your day off by bus to collect the item. You do this a lot ... and you have done for several years now.

 

As a result of the high quality of your service and dedication, you have won numerous customer care awards both local and national. You have even won this company's best customer carer of the year national award.

 

Then your health began to fail a little and you needed time off for treatment and after a while you started to go over the allowance for time off for illness.

 

Company policy is that if someone takes off more time than their allowance, they must be taken down a disciplinary track: verbal warning, written warning, investigation, possible dismissal.

 

The options open to the company at this stage are ... well, what are they? ... what would you do with this employee? ... now? ... in the medium term? ... in the long term?

 

Assume that the employee's health is going to recover.

Assume that the employee's health is going to recover but not to its fullest extent: she will still be a valuable member of staff but not necessarily as vigorous as she was.

 

 

This is a real case and if anyone would like to know the company, post your suggestions here as to what you would do and I will share it with you.

Duncan Williamson

A survey just published by The Economist shows that the companies that perform best, on average, are those where management has undergone some formal management training.

 

Whether you like it or not, then, you NEED to get that certificate, diploma and degree. Not only will it enhance your salary and prospects but it does your business good too.

 

They say in The Economist article:

 

 

 

So now you know!

 

Duncan Williamson

Here's the final ice breaker presentation I'm uploading from last week's batch of five. I thought it was an excellent topic to chat about and not so tongue in cheek, although I am sure a lot of economists and other ne'er do wells will disagree!

 

Consider the first topic though, sports hedging: a much bigger business than I'd thought.

Duncan Williamson

 

Even sports results can be hedged

Consider the perceptions of misplaced risk!

 

Opening Topic: Hedging Sport

 

·                     From a letter to the FT:

·                     Sir … Winterflood Securities has been writing financial contracts that provide … a [sports hedging] service for about 18 months.

·                     Most of our clients are sports equipment manufacturers and corporate sponsors with commitments to make incentive payments in sports such as football, golf, tennis and rugby.

·                     In the Rugby World Cup … we hedged squad bonuses for six rugby unions, totalling £9m, for various targets from reaching the quarter-final through to winning.

·                     … Perhaps the greatest current risk is faced by broadcast rights holders in England, France and Italy for Euro 2008, the European Football Championship … the value of the rights greatly diminished if their respective national sides fail to qualify for the finals.

 

Opening Topic: Misplaced Risk? 1

 

 

·                     A banker will only lend you an umbrella when it's not raining … read on to see if that sentiment might be more true than we think!

·                     Opening Topic: Misplaced Risk? 2

·                     All markets are risky. The emerging markets are those where this is priced in. Emerging markets offer value because people perceive them to be riskier than they are relative to investments closer to home … when something is perceived as safe (AA rated, perhaps, or located in a developed country) further inquiry often ceases.

·                     And here is another definition: developed countries are those that have learnt how to be fiscally irresponsible and get away with it.

·                     Opening Topic: Misplaced Risk? 3

·                     It is the emerging countries recently joining the European Union that have started to relax in the knowledge that capital will flood in less discriminately than before. In other words, to graduate from "emerging" to "developed" involves not an improvement in creditworthiness so much as being allowed to deteriorate one's creditworthiness.

 

Opening Topic: Misplaced Risk? 4

 

·                     Looking at debt/gross domestic product ratios, fiscal surpluses, current account surpluses, reserve levels, inflation and flexibility of macro economic policy to events, one could be forgiven for concluding that emerging markets are collectively much better credits than developed markets. And where have people lost most money recently?

·                     As well as offering value, emerging debt is less volatile than US Treasuries. It also is highly diverse:

• emerging countries are pretty invulnerable to external shocks. They are net creditors;
• the investor base in emerging debt is dominated by pension funds and other long only unlevered institutional investors not prone to panic, but with the strategic view to increase exposure significantly to emerging markets.

 

Opening Topic: Misplaced Risk? 5

 

·                     Emerging markets represent 85% of the world's population and emerging market asset classes could account for about 50% of global market capitalisation in 15 years. It is possible to argue, with a straight face, that pension funds should put 35% of their assets in emerging markets now.

·                     The stock of emerging debt is about $5,500bn, but expanded at 29% in 2005 and 25% in 2006. Within this there is a new asset class, corporate high yield, offering exceptional value since the developed world credit crunch.

 

Opening Topic: Misplaced Risk? 6

 

·                     There is a lot of talk about the weak dollar and upward pressure on the euro. But both could see major declines against emerging currencies. We have seen a decade of building up huge reserves, through intervention by central banks buying dollars to keep currencies weak. This has resulted in invulnerability to external shocks and domestic macroeconomic stability: just the low inflation environment needed to kick start major domestic investment.

 

Opening Topic: Misplaced Risk? 7

 

·                     But the sterilisation costs are significant and the reserve build up has been at the cost of foregone domestic investment. Savings as a percentage of GDP are more than 30% in emerging markets and rising, as a result of the need to save for old age in the absence of welfare states. These savings have been channelled to finance the US consumer rather than domestic investment.

 

Opening Topic: Misplaced Risk? 8

 

·                     A major adjustment may be coming. Emerging currencies could gain 30% against developed world currencies over the next few years as intervention ends and reserve accumulation stops; as savings are channelled to domestic investment; but also as reserve pools are reallocated towards emerging markets and away from Treasuries and other US assets.

·                     Emerging debt denominated in dollars, but particularly denominated in local currencies, are set to rally further as this scenario unfolds.

— http://www.ft.com/cms/s/0/123a500a-868b-11dc-b00e-0000779fd2ac.html

Here's a second set of bullet points relating to another ice breaker presentation. The Airbus A380 has finally gone into commercial service with Singapore Airlines. the question is, is it a massive risk or a trail blazer?

Read on!

 

Duncan Williamson

 

Opening Topic: Airbus A380

Duncan Williamson

 

October 2007

 

 

Assess the most important risk factors of the long haul aircraft manufacturing industry from the extracts that follow …

 

Opening Topic: Airbus A380 1

 

·                     Singapore Airlines takes delivery of first A380

·                     Airbus hopes its troubles will finally take flight

·                     Double beds give new meaning to luxury airline travel

·                     http://www.ft.com/cms/s/0/114da1d8-7b1e-11dc-8c53-0000779fd2ac.html

·                     Airbus hopes its troubles finally take flight

·                     Slowly and shakily, Airbus is starting to rebuild a little confidence

·                     http://www.ft.com/cms/s/0/61878240-7a9c-11dc-9bee-0000779fd2ac.html

·                     Emirates seeks A380 and 747-8 weight control

·                     http://www.godubai.com/gulftoday/article.asp?AID=19&Section=Business

 

Opening Topic: Airbus A380 2

 

Airbus A380 customers	Orders
Emirates	55
Qantas	20
Singapore Airlines	19
Air France	12
British Airways	12
ILFC (International Lease Finance Corporation)	10
Lufthansa	15
Thai Airways Int	6
Virgin Atlantic	6
China Southern Airlines	5
Kingfisher	5
Korean Air	5
Malaysia	6
Qatar Airways	5
Etihad	4
Grupo Marsans	4
Total	189
Source: company

 

Opening Topic: Airbus A380 3

 

·                     Chew Choon Seng, chief executive of Singapore Airlines, took delivery on Monday of the first Airbus A380 superjumbo, the world's biggest commercial passenger jet and provocatively consigned the rival Boeing 747 to history.

·                     Two weeks ago, Boeing's 747-8 programme suffered a big setback when British Airways, which hitherto has operated an all Boeing long haul fleet, finally decided to select the A380 and placed an order for 12 super jumbos.

Opening Topic: Airbus A380 4

 

·                     Each aircraft has only 12 suites, each one a private compartment with sliding doors and fabric screens. Behind them are hundreds of economy seats, 10 abreast across the cabin. Above them, up the elegant front staircase, wide enough for two to climb together, are 60 business class seats and more economy seats.

·                     The suites provide the marketing magic, but Singapore Airlines has adopted a hard headed business approach generally to the use of space on the superjumbo. With a total of 471 seats, 12 first class, 60 business class and 399 economy, it has eschewed most other exotic features.

o        http://www.ft.com/cms/s/0/114da1d8-7b1e-11dc-8c53-0000779fd2ac.html

 

Opening Topic: Airbus A380 5

 

·                     Richard Carcaillet, A380 marketing director, says: "We are back on track."

·                     Mario Heinen, the Luxembourger who was drafted in to lead the A380 recovery programme 13 months ago, says the plan is to deliver one A380 this year, 13 in 2008, 25 in 2009 and 45 in 2010 with the rate of four a month to be reached in assembly around mid 2009.

·                     The 13 aircraft that were already assembled when the magnitude of the wiring mismatches was finally understood are being completed through "artisan" work as hand built products. In parallel to this craft work, a new digital mock up tool has been developed for planning the wiring installation for future production and will be fully in use from the 26th aircraft in the series.

·                     Opening Topic: Airbus A380 6

·                     All the added costs of the delays and extra work have pushed the A380 development costs from the original $10.7bn to at least €16bn-€17bn ($23bn-$24bn).

·                     EADS said a year ago that the breakeven point for the programme had jumped from an estimated production of 250 in 2000 to 420.

o        http://www.ft.com/cms/s/0/61878240-7a9c-11dc-9bee-0000779fd2ac.html

 

Opening Topic: Airbus A380 7

·                     Emirates is due to take delivery of its first Airbus A380 next August. This will be followed by a further four in 2008 and within two years Emirates will operate 22 of the type.

·                     Speaking at the World Air Transport Forum in Cannes, Emirates President Tim Clark said: "It is six tonnes overweight, that's a fact about the A380, but the good thing about it is that Airbus has been working very hard to take weight out of the aircraft.

 

Opening Topic: Airbus A380 8

 

·                     "We are still interested in [the A380-900]. We could do with a few of those now. It is an easy one to do because the wing is there, the propulsion is there. All they need to do is stretch the fuselage and 'bingo'. I am sure it will come.

·                     "There won't be many of us who want it, but at that point it doesn't matter because the manufacturing economics become incremental. They'll have gone through the 200 or 300 they need to break even and beyond that, to stretch the aircraft, would be a $2 - 5 billion investment. We'd take it straight away."

·                     Emirates is also working with both Boeing and Airbus to find ways of cutting controllable weight across its in service fleet, evaluating options such as shifting some of its paper literature into its in flight entertainment system.

o        http://www.godubai.com/gulftoday/article.asp?AID=19&Section=Business

 

The following are the bullet points from an ice breaker presentation I put together for my seminar last week. Speaks for itself I think and I have put all references there if you want to follow up on the topic.

Duncan Williamson

 

Analyse the following story from the viewpoint of a risk averse shareholder of ebay

 

Opening Topic: 1

 

·                     Ebay bought Skype for $2.6 billion up front and agreed to pay yet more if Skype met certain targets.

·                     Early in October 2007 eBay said that it will write off $1.4 billion in relation to the purchase.

·                     www.economist.com

 

Opening Topic: 2

 

·                     AMONG the many lessons that Margaret ("Meg") Whitman has picked up during her three decades as a businesswoman, three stand out, she told an audience at Stanford's business school last year.

·                     And those three lessons, she implied, explain why she, as boss of eBay, the world's largest online auctioneer, was right to buy an internet telephone company called Skype for an astonishingly high price in 2005.

 

Opening Topic: 3

 

·                     The first lesson, which she learned in 1979, was that attention to detail is all important

·                     The second lesson occurred in 2002. As boss of eBay … she decided to buy PayPal. She negotiated for a year, during which the price kept rising. She concluded that in the internet industry one bids early, boldly and preemptively high.

·                     The third lesson was that in such a fast moving realm "the price of inaction is far greater than the cost of a mistake." In any case, mistakes can always be corrected.

 

Opening Topic: 4

 

·                     In terms of the first, eBay's "execution" in integrating Skype with its main business has been poor. Skype's service has deteriorated: it collapsed completely for two days in August.

·                     The second lesson, bid early and high, was observed to a fault.

·                     As for the third lesson, the mistake has now been admitted, but not fixed.

 

Opening Topic: 5

 

·                     Skype became and continues to be a revolutionary technology precisely because it does not extract much revenue from its customers.

·                     "We want to make as little money as possible per user," Niklas Zennstrom, Skype's co founder, has said.

·                     Skype's breakthrough, in his view, was to point the way towards a time when all voice communication would cost the consumer nothing at all.

 

Opening Topic: 6

 

·                     By buying Skype, the internet phenomenon of 2005, eBay started a bubble.

·                     Google, with its purchase of YouTube, the cyber-star of 2006, inflated it further.

·                     Microsoft and Google now appear tempted to add more froth by investing a silly sum in Facebook, the latest big thing.

·                     All three, the internet telephone firm, the video site and the social network, make almost no money.

 

Opening Topic: 7

 

·                     Shareholders at eBay, at any rate, will surely now start asking what on earth Ms Whitman, a seasoned executive, was thinking. …  she felt pressure from Wall Street to come up with a big idea to maintain the firm's breakneck growth.

·                     Its main business, brokering auctions, has been slowing. In the year to June, product listings on its site fell for the first time ever, by 6%.

 

Opening Topic: 8