Bidders Hit The Rock

Being a shareholder in Northern Rock must be an insomnia-inducing activity these days. We did have a long and then a short but have now decided that the game is just a little too risky for our blood with bids coming in for the company well below what the market expected... well, the optomistic side of the market, should I say.

Shares in the troubled bank fell by more than 17% on Tuesday after it revealed there had been no interest in a bid for the whole firm. Northern Rock shares stood at over £12 each in February, but have now fallen to below 90 pence apiece.

The Bank of England has lent the bank more than £24bn in emergency funding, a move defended by Chancellor Alistair Darling in the Commons on Monday. Both the Conservatives and the Liberal Democrats have criticised the loans.

Mr Darling had told the Commons in a statement that the loan move was "right" to give the bank time to assess its "strategic options".

In addition, the government has pledged to guarantee the £16bn worth of savings deposits held by Northern Rock customers. Those who have so far expressed interest in Northern Rock include a consortium led by Sir Richard Branson's Virgin, and Olivant, an investment firm led by former Abbey chief executive Luqman Arnold. Private equity firms JC Flowers and Cerberus have also looked at the UK's fifth-biggest mortgage-lender.

Northern Rock, which has around 6,000 staff, has said it expects to receive further expressions of interest over the "next few days". But the company has said the proposals received so far from potential investors were "materially below" the stricken bank's share price.

Northern Rock was forced to seek emergency funding from the Bank of England in September after the jamming up of world credit markets wrecked its business model.

The government has a number of options when it comes to Northern Rock's future - it could let the bank go into receivership, seek a private buyer, or take it over itself.

Meanwhile, Northern Rock says it continues to be engaged in discussions with refinancing companies to explore refinancing "or reorganisation solutions for the company".

When the Rock bounced to 2.40 we believed that it was insane of anyone to think that a bid would be made at a higher level than that price and so shorted it, we proved to be correct. Our reasoning for this still stands and that is; although there is a business there, of that there is no doubt, the market out there is looking pretty rocky (no pun intended). Goldman Sachs has even warned of a deep recession saying that the slump in global credit markets may force banks, brokerages and hedge funds to cut lending by 2 trillion U.S. dollars and trigger a "substantial recession" in the United States, according to Jan Hatzius, chief U.S. economist at Goldman Sachs in New York.

According to Bloomberg News, he said losses related to record home foreclosures could be as high as 400 billion dollars. "The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized," Hatzius wrote. "It is easy to see how such a shock could produce a substantial recession" or "a long period of very sluggish growth."

Goldman's forecast reduction in lending is equivalent to seven percent of total U.S. household, corporate and government debt, hurting an economy already beset by the slowing housing market.

If this is the outlook for the US economy to suggest that the UK would be immune would be a little foolhardy. Anyone in the UK knows that a very large percentage of homeowners are leveraged to the hilt. In a micro hedge fund style investment strategy many have been able to purchase property with little cash down and have remortgaged gains to buy further properties.

With rents in the over inflated 'buy-to-let' market outstripping previous ratios by an unsustainable 60% the UK housing market is lined up like a pretty display of dominoes just waiting for someone to push the first one. We think there is a a very good chance that the US woes could be just such a push.

With all this in mind, would you want to be the owner of the fifth biggest mortage lender in the UK, without having a substantial discount from the potential problems that are lurking in the bank?

We thought not...

Hedge Fund Manager Toy of The Week.

Predictable I know. However, I am going on a trip to Canada this week and have found a Lamborghini garage where the owner is my new best friend. He is moving to Geneva soon and I aim to have him on my Christmas list as soon as possible. Not just because he is a nice chap, but also because he owns one of every model of Lamborghini ever made and that, my friend, is an awesome reason to visit his new house every weekend until I can do the same...

I give you, as the toy of the week... the Lamborghini Murcielago Roadster... you know you want one..

It howls past 60mph in less than 3.6s and goes on to a top speed of 200mph, slightly less than the coupe due to the messed-up aerodynamics of the chop top. It doesn’t need a detailed explanation of in-gear acceleration, other than to say it could scorch the skin off your face.

The Audi-sourced V12 generates 479lb/ft of torque, it’s got pace to burn and needs replacement tyres for the 18x13 inch rear wheels €1000 a pop every 7000km. If there was ever a time when this seemed like a reasonable bill, this might be it.

Driving it

Find a clear road and light the touch paper and the rear wheels spin momentarily before the car blasts down the road with all the aggression and purpose of a serial killer on the run.

The engine note hardens to one of the best sounds in motoring, the speedo races round to illegal speeds and the scenery races past the window at a bullet-train rate. Push hard on the throttle and prepare to hang on. It’s an emotional experience driving a Lamborghini in full flight and having driven one through the tunnel on Park Lane I can tell you that I didn't know whether to laugh or cry... I think I did both..

Hedge Funds.. Sick as a Parrot?

The Business Magazine had an article today that proposes that the hedge fund industry bubble is about to burst because the funds are now investing in football clubs.

"There comes a point in the development of many industries – as there does in the lives of many individuals – where fabulous wealth starts to crowd out common sense" the magazine said.

I can understand their logic, I am a Leeds United fan after all. For all you non football followers and those of you who call it 'soccer', Leeds United are a tragic story of financial investments gone bad.

The club spent millions and millions trying to win the premier league and to gain revenue from the European Champions league. They reached the semi finals 6 six years ago and then promptly started an almost straight line down the divisions. Today they are in 'league one' two divisions below the premiership and have survived administration and bankruptcy. Following £90 million of debt.

The club had all sort of financial instruments in play to buy players that would have looked more like a hedge fund hand book than a football club trying to buy players.

When all these financing instruments started to unravel it became a nightmare scenario where players were bought for £10mn sold for £5mn and the club still had the obligations of wages and the debt... for a Leeds supporter it was a nightmare.

Does this mean that hedge funds are complete fools for investing in clubs? Like any business, it depends which club and it depends on how much money you have.

Newcastle, Southampton and other hedgies choices are hardly the glamor clubs and for them to compete with the best of Europe (the Champions league is where the money is) then they will need to spend vast amounts of money. You only have to look at Mr Abramovich who a few years ago bought Chelsea, poured £250mn in and still hasn't won the champions league... If someone with a personal wealth of £15bn and money to burn without the requirement for a return can't do it, I would be a worried investor if my fund started investing in Football clubs.

"Investing in football clubs is usually what rich men do when they’ve made their fortune. It is how they spend their money, not how they make it. If the hedge funds cannot see that, they are running out of the most precious of all commodities – common sense" I have to agree with Business Magazine on this, I love football but buying a club could very much be paralleled with Branson's comments on how to become a millionaire, he said "First become a billionaire and then buy an airline"

Replace 'airline' with 'football club' and you have some very sage advice for hedgies dabbling in this marketplace... a sign that the hedge fund market 'bubble' is about to burst.... cobblers.... just a sign that some managers may be getting a little over confident, but when has been sensible ever been applied to the hedge fund industry?

New Managers Struggle For Funds

Crikey... one doesn't know who to believe these days. We have had reports over the last few weeks suggesting that the hedge fund industry is AOK even with the recent turmoil and that we will see the industry stomping forward despite all the troubles. Today, however, Bloomberg ask "where have the hedge funds gone?" in an article discussing the troubles in start up funds.

New hedge funds, according to data from Hedge Fund Research Inc, are opening at the slowest pace since 2003 with almost all of the $164bn of new investments going to managers with proven track records. Should this be a surprise? Not really.

``People are spooked,'' said Bill Grayson, president of 21- year-old hedge-fund company Falcon Point Capital LLC in San Francisco. ``There is no doubt that a few years ago, if you popped out of brand-name firm,'' everyone wanted to give you money. ``That game is now over.

Personally I think there is a little bit of showmanship going into this statement from Mr Grayson. If I was running a large hedge fund I would be happy to keep the 'spookiness' going and declare to whomever would listen that giving money to new managers 'is over' and very dangerous!

Of course confidence in the $1.8 trillion industry has been shaken by the worst decline in non-government debt markets since Russia defaulted in 1998 and, as an investor, you may want to be a little more careful about who you give your money to. Just like when the tech bubble burst, everyone virtually abandoned the small cap market for the relative safety of blue chips it is, in our opinion, the same here. It wasn't so long ago that the stories of vast profits and huge earnings were the best to sell newspapers and bring visitors to your web site, it is now the horror stories of failure and losses that make the headlines.

``We got really burned by a startup,'' said Louis Morrell, vice president of investments at Wake Forest University in Winston Salem, North Carolina, declining to identify the manager. Wake Forest has about 18 percent of its $1.3 billion endowment in hedge funds. Morrell said he now won't invest in a fund unless it's been open for five years.

About 1,200 funds will be introduced this year, down 20 percent from 2006, Hedge Fund Research estimates. There were about 9,900 funds worldwide at the end of September. The 20 biggest managers control one-third of the industry's assets, according to data compiled by London-based research firm Hedge Fund Intelligence Inc.

This reluctance on the part of investors to deposit funds with start ups will have an affect on the industry, obviously. If you are a young gun at Goldmans and you only have the prospect of getting $20mn to start your fund you are hardly likely to leave your million dollar bonuses to start your own fund that will not attract enough to pay you more.

The point, however, from our perspective, is that the industry itself is becoming more institutionalized and civilized. The big boys have to court pension funds and others and, perhaps, do not have the need for the risk aware high net worth clients of old.

This creates a two teir market...the sophisticated high end institutional funds and those who aren't. Having this distinction is not a bad thing for the smaller managers, they will be more nimble, more free to take more risks and, ultimately be more profitable. Then the cycle will start again, everyone looking for the new hot shot manager creating spectacular returns compared to the boring big boys, who in our opinion, will struggle to give the returns required with the institutions breathing down their necks...

Hedge Fund Manager - Toy of the Week

Come on! You know you don't spend all day analysing shares and derivatives... There has to be some playtime.. and here it is... a fully kitted out racing simulator. For the cost of a couple of Monaco GP tickets you can be racing in the office while battering the CEO of a non-performing portfolio company....

The simulator's system, steering wheel and pedals come configured for your choice of Xbox 360, PlayStation 2 or PC. The simulator is customizable for a monitor of up to 42" and includes a 10" subwoofer behind your seat, three front speakers and multiple rear speakers.

"You'll have to feel it to believe it!" $5000 at www.costco.com

Not So Easy - Jet

It's Friday and I reserve the right to have a moan. There is a tenuous finance link if you can wade through this post but the post is more of a cathartic exercise to expel the poison brewing in recent experiences.

Air travel is the theme for today's rant. No, I am not going to go on about the security issues at airports. Like many readers here, I suspect, I go into a 'travel trance' in order to block out the aggravation at airports these days, so much so I often cannot remember the journey at all.. No my rant today is not about increased security it is about decreased service and the subject is Easyjet in Gatwick.

Before Stelios and his band of merry men reach for the 'lawyer phone' I have this to say. I love Easyjet, the in-flight staff are great, it is easy cost affective and, being based in Geneva, I can get in and out of London in a day no problem.

First a positive. Last week I was booked on the early flight out of Geneva to London Gatwick. The plane was delayed for 3 hours, with only going for the day this could have been a disaster. The staff at Geneva, however, we fantastic, they had me back through security (i was at the gate) back into the airport, switched to a flight going to Luton and I arrived in the City only 2 hours late... 5 Gold stars for Easyjet Geneva.

Yesterday however, I got to London fine, no problems,.. coming back was a different story. I was booked on the late flight, finished business early and headed for the airport. Easyjet offer a free service to switch you to an early flight if they have room, which is a great touch. Previously I have just rocked up at check in, explained the situation and been switched no problem. No such luck yesterday.

I turned up at 2.15 qued for 30 minutes with only six people in front of me only to be told that check-in doesn't handle switches. I went to the ticket desk and joined another que. Short for time I asked an Easyjet 'helper' if he could, indeed, 'help' me. Having explained the situation he said he would be 'back in a minute', this at Easjet Gatwick is obviously code for 'I can't help out and you will not see me again' because he disappeared never to resurface.

By the time I got to the desk I had this bizarre conversation.

"Hi, I am booked on the late Geneva flight and would like to switch to the early one please" I said, optimistically.

"OK, but you don't have much time to check in" I was told. "and if you miss check -in you will have to pay £35 to be booked back on the 8 O'clock flight... if we have room" she added.

"Can't you just get one of your 'helpers' to walk me to the front of a que... I have no bags" I pleaded.

"That's not their job" came the reply.

"Oh.. what do they do then?" I asked

"Not that" was the informative answer.

"OK, I'll take my chances on the switch then" I said, thinking I would be able to quickly run the 50 yards to check in and politely que jump.

"Sorry you don't have enough time now, I can't help you, sorry... next please" She ended..

Just like that I was discarded like something on the bottom of her shoe. Of course facing hours walking around Gatwick, I was livid, but what could I do?

I was left contemplating the inefficiencies in the Gatwick system compared to Geneva, which runs like clockwork. Is it because I am used to everything working in Switzerland or is it the general laziness and poor service that is prevalent in the UK these days?

As I twiddled my thumbs and seethed, I counted 12 people with fluorescent yellow t-shirts with 'Here to Help' optimistically emblazoned on them. I counted 3 Easyjet helpers wandering around, 14 check in desks and two ticket desk staff, all incapable of switching a flight and booking me in when the two desks are only 50 yards apart. In Geneva, this would have been a routine request executed with courtesy and efficiency.

I can only conclude that the Easyjet management at Gatwick are, frankly, incompetent.

I make a point of writing to companies about good service, when it is received (and I have had many oppotunities to do so about Easyjet) I do this because I appreciate good service but I also believe it qualifies me to complain when the service is sub standard.

I have written to Easyjet explaining my frustrations and expect that I will get:

a) A standard... "Sorry for your troubles, we manage a zillion passengers... 000000.1% complaints.. we will try better... blah blah" standard computer answer, or

b) "How dare you criticize our staff... you are banned" letter, or

c) Nothing, or

d) "We have looked into it, sorry a cock up... fixed the problem... thanks for pointing it out... her e is a free sandwich voucher"...

All but the last would be a standard respnse from a company over extended and creaking under the weight of its success and time, perhaps, for a short trade. The last would be a refreshingly honest satisfactory, grown up response... we shall see.

All I know is that if I was a senior guy at Easyjet, Gatwick would be on my hit list for improvement. It was, quite simply, the laziest most inefficient service I have had at any airport, ever. And I used to live in the Caribbean where good airport service is about as prevalent as unicorn droppings.

Before Gatwick Easyjet people re-route my next trip to Baghdad, I am not having a go at you. In my time wandering around the airport I saw a lot of Easyjet staff working harder than I would ever care to do, taking on individual problems with the best smile they could muster but with a lack of confidence as to what exactly they should do. This kind of lack of systems which lead to my disastrous day can only be blamed on the management of Easyjet Gatwick.

My advice, for what it is worth, would be to send the managers of Gatwick to Geneva airport for a couple of weeks. The service there is seamless... electronic check-in, informed staff, systems for when things go wrong known, and practiced by the staff in a friendly, courteous professional manner, which can only come from good leadership.

I doubt, however, that anyone really gives a monkey's which is the sign, to me, that the rot will set in sooner or later in the rest of the company.