Archive for the ‘Risk’ Category

The Negative Correlation of BATS

April 10, 2009

Since the FTSE-100’s closing low of March 5th 2009 British American Tobacco has been negatively correlated to the index.

The beta of BAT over this time has been -0.2617 [1]. Undoubtedly a short-term phenom but rather startling nevertheless.

batsftse1

What can we take from this snippet of info? Perhaps more evidence of “sector rotation” and a rebuke to the idea that “money on the side” is re-entering the market.

Other big cap “defensives” are showing little correlation to the index. Imperial Tobacco is also showing a negative correlation but far slighter than BATS (a beta of -0.074) while Glaxo is showing a very slight positive correlation of +0.069.

mm

[1] For some reason Google’s dataset is missing 27th March for both the FTSE 100 and All-Share, I’ve simply taken that day out of the calculation for all the above.

How Safe is your Bank (pre-Bear Stearns implosion)

March 14, 2008

The ever brilliant FT Alphaville Markets Live posted a Credit Suisse note earlier with credit default swap numbers for the UK banks:

UK bank CDS are fairly flat with A&L at 375bps, Barclays 163bps, B&B 425bps, HBOS 245bps, HSBC 145bps, Lloyds TSB 133bps, RBS 205bps, and Standard Chartered 143bps. It is interesting to note that HBOS CDS is now similar to levels where A&L and B&B were trading just a few weeks ago. Credit market commentators continues to cite confusion around the decision to issue non-equity tier 1 (particularly given they are already close to maximum headroom on the innovative).

For those who think the above is gobbledegook: A “CDS” Is a Credit Default Swap – a complex mechanism that insurances against a company defaulting. The “bps” is simply basis points (1/100th of 1%) – the cost of insuring the debt of that institution. The higher the bps the more risk the financial markets think there is in holding that banks’ paper.

Here’s my own chart of the above data (click for full size picture):

CDS for major UK banks

Note: many foreign banks operating in the UK are considered a far higher risk than Bradford & Bingley, including the Icelandic and Indian options.

Egg on Citi’s face

February 3, 2008

Citigroup’s withdrawal of 161,000 Egg branded credit cards has enraged much of middle England. The anger isn’t so much over the taking away of credit but rather calling the customers ‘risky’. Many of these customers don’t see themselves as a risk and have taken Egg’s pronouncement personally. Egg’s wording makes sense from their commercial viewpoint. Egg are considering the risk and reward balancing act they face not the absolute risk of default. An example:

1. Ms Perfect pays off her credit card bill in full every month. She believes there is no risk of her defaulting and is aware the creditor is making no money from their business together. Ms Perfect is retired on a comfortable but below average income.

2. Mr Lax doesn’t pay off his bill in full. Indeed, he has a patchy payment history but pays back reasonable sums at a high interest rate and his public sector job provides a steady, high, earned income.

It is Ms Perfect who is the riskier customer.

Mr Lax provides a highly profitable and ongoing income stream. Even if Mr Lax did eventually default on the capital it may be far enough in the future that the risk was worth taking and he has been a profitable client. Ms Perfect has far less chance of defaulting but there is no upside for the credit card company. Breaking even when extending a credit line of £1000s is very little reward for a little too much risk in the current climate [1].

Of course, this is an overly simplistic example, Citi will have used numerous parameters to decide the ‘risk’ of a customer. The decision will be dependent on a strict and highly complex risk/reward calculation. This doesn’t mean Citi will get it right 161,000 times but the large majority of those who feel besmirched by the too ‘risky’ tag will indeed be a bad bet on a risk/reward basis. It isn’t a simple matter of whether the customer will pay off their credit card bill or not.

Perusing financial messageboards this weekend it is no exaggeration to say many Ms Perfects consider the allegation of being ‘risky’ as tantamount to libel. The ‘risk’ label has been taken as a personal affront. For this layman of law it brings up a potentially interesting scenario. If some sharpshooter solicitor opens a class action suit what will Citi do?

Citi could simply admit ‘risk’ to them is the “responsible” lending to Ms Perfect rather than the “irresponsible” lending to Mr Lax. On the flip-side Citi could decide it’s better to offer a settlement without publicly stating they’re happier going after Mr Lax than Ms Perfect which could be a public relations nightmare.

Rock and hard place, its not where I’d want my eggs.

[1] The current climate of an economic slowdown and potential recession, of course. Idle musings could suggest a rather convenient coincidental event at Citi last week. On Wednesday Citi published an investment report pointing out the risk to the balance sheets of two UK banks (RBS and Barclays) in the event of a UK recession. Both banks were downgraded by Citi with the presumption in the report being there’d be a fullscale UK recession. The following day Citi’s most visible UK subsidiary is sending out letters to 7% of customers cutting off credit.