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IFM Independent Financial Magazine Issue 04 / 31 MARCH 2014

Janet’s first stress test 5 Internship 6

Malaysia Airline What Technology 7 Sector Bubble? 8

Private Equity 9

Die hard followers of the Random Walk Theory 12

The Future of the Big Tax Case13

Contents IFM 31 March 2014

Janet’s first stress test Internship Malaysia Airline What Technology Sector Bubble? Special : Private Equity

Private Equity Part 1 Die hard followers of the Random Walk Theory The Future of the Big Tax Case Exchanges of the week


Independent Financial Magazine vol.4 31.03.2014

Editors View The case of missing flight 370 continues and what comes with it is the truth about our technology limitations. On one hand we are struggling to find a plane that went missing over 3 weeks ago while on the other hand constant revelations of NSA’s technology and ability to ‘listen and read’ to private correspondence make us feel unsure about the direction the world is taking. In addition to that we might be experiencing another tech bubble that expresses itself through rapid growth of tech IPO’s and high valuations. Is it really a bubble thou? I am not sure myself. What I am sure however is the growing importance of private equity firms within the industry. Will private equity firms replace the Wall Street? Well, to some extend it happened already. Enjoy the arrticles and make sure to check out our “bible” of technical analysis reviewed in this issue. Happy investing!!

IMPORTANT IFM magazine publishes information and ideas which are of interest to investors and students. It does not provide advice in relation to investments or any other financial matters. Comments published in IFM magazine must not be relied upon by readers when they make their investment decisions. Investors/Students who require advice should consult a properly qualified independent adviser. IFM magazine, its members do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions. Members of staff of IFM magazine may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it will be disclosed. In keeping with the existing practice, reporters who intend to write about any securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the reporter can write about the interest, it should be disclosed to readers at the end of the story. Holdings by third parties including families, trusts, self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests.

Editor Pete McCarthy

Editor Alan Konopka

Designer Sarah Aoki


Special Report

Creative Director

Jeremy Kempke

Lloyd Josiah

Kristopher Connelly


Global Economy

Finance in Sport

Jeremy Cottingham

Mohieddine Kaddouri

Malysia Airlines

Book Review

Independent Financial Magazine

Issue 04 Published 31 March 2014 Front Cover #04

Lomdom 30 St Mary Axe “the Gherkin“

Independent Financial Magazine vol.4 31.03.2014





Level: 6,615.58 1,866.52 3,172.43 14,804.28 14.41 Price:

Weekly Change: 0.89% -0.48% 5.61% 2.21% -3.93% Weekly Change:

Gold 100 oz. Copper Brent Crude

$1,297.70 $3.06 $106.77

-2.65% 2.34% 1.18%


Weekly Change:

1.6639 1.3753 102.8300 0.8266

-0.96% 0.28% -1.02% 1.23%

Yield (17/03/2014) 2.67% 2.66% 0.63%

Yield 24/03/2014 2.74% 2.76% 0.60%

FTSE 100 S&P 500 EURO STOXX 50 Nikkei 225 VIX


Bonds 10Y UK Gov 10Y US Gov 10Y Japan

Source : Bloomberg


Independent Financial Magazine vol.4 31.03.2014

Volatility (Std Dev): 15.9778 1.5392 12.5841 192.447

Yield 31/03/2014 2.73% 2.72% 0.63%


Janet’s first stress tests Jeremy Kempke


he Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act (DFA) stress tests are regulatory tools the Federal Reserve uses to ensure that financial institutions have robust capital planning processes and adequate capital. CCAR & DFA are annual exercises to ensure that the largest bank holding companies have sufficient capital to continue operations and absorb losses throughout times of economic and financial stress. Such tests are measures for the Fed to intervene in banks’ plans to make capital distributions, such as dividend payments or stock repurchase programs Just last week Fed Chair Janet Yellen announced the most recent results of above mentioned stress tests. This year the Fed widened its scope for the study to 30 banks of which it rejected the capital plans of 5 banks’ US units; HSBC, RBS, Santander, Zions Bancorp and most surprisingly Citigroup. What most people tend to forget with these results is the fact that despite only 5 banks having failed the test, many others were restricted in their capital plans (i.e. Bank of America or Goldman Sachs) or weren’t tested at all (i.e. Barclays or Deutsche Bank). In particular Barclays which, after partially acquiring Lehman Brothers, Investment Banking business has great exposure to the US and over recent years has certainly navigated itself into

a tricky position. The Fed’s willingness to veto foreign bank subsidiaries’ capital plans may ring alarm bells in London and Frankfurt.

done much better” than Mr Pandit, who “wouldn’t have known how to underwrite a loan if his life depended on it”.

So how does that actually affect the It is the first time the Fed has put banks? Well, apart from bad publicity foreign-owned banks through future governance of the likes of Citi the process, so the rejection of or RBS will, with no doubt, become Santander, RBS & HSBC has been a lot more regulated and overseen. an embarrassing blow for the first In the case of Citigroup, the bank’s foreign banks represented within capital return programmes have been the tests and will most likely lead to rejected by the Fed. Citi was originally further complications, i.e. the delay of planning on repurchasing $6.4bn stock RBS’ planned IPO for Citizens, its US in combination with increasing its retail network. The banks that failed quarterly dividend from 1 to 5 cents per must resubmit their plans “following share by 2015. I find it quite surprising substantial remediation of the issues that a troubling bank, loss making that led to the objections”, the Fed said. within some of its major business Yet, it is near to impossible to find out lines, is being rejected in its plans to what exactly these issues were; great increase its dividend by 400%. Citi has transparency guys. had frequent run-ins with regulators for several years, including a period of open hostility Citigroup. Inc. Common Stok b e t w e e n previous CEO Vikram Pandit and Sheila Bair, former chairman of the Federal Deposit Insurance Corporation. In her memoir, Ms Bair wrote that Citi “could have Independent Financial Magazine vol.4 31.03.2014



- Asian adventure Pete McCarthy


here I was, standing at terminal 3’s departure lounge and about to experience the biggest baptism of fire to date. Butterflies set free in my stomach. For 3 months I had run through this exact moment in my head, but now, it was reality. Time to board. Destination: Hong Kong, on route via Dubai. It was officially ‘go time’. 14 hours later, flight landed. All the pictures, all the videos, all the experiences, but quite frankly, are all irrelevant until one is actually faced with the skyline of central HK. Light beams touch the night sky, waves lapping against the avenue of the stars and the sound of camera shutters amongst the hustle and bustle. Had to pinch myself. 6am, I wake to the sound of my alarm. Windsor tie, suit on and shoelaces tied. Day 1, training. Students from LSE, Oxford, Cambridge and HKUST were all present. Was I intimidated? Yes. But I quickly realised, the level of knowledge was lacking. It turns out academic grades are not the decider to


Independent Financial Magazine vol.4 31.03.2014

success. Sure, they had good memories, but real work requires a whole tree of skills, not just a single branch. 6am, I wake to the sound of my alarm. 30 degrees, suit on and sweltering as I wait for the 962B to central. Nervous? Hell yeah! This was it. Time to make a memorable first impression. Up the elevator, the glass door opens. I see the desks, the conversations, and the people. It was like watching a film and I was on set. My secretary showed me to my desk. Meeting the directors, the partners, and the senior managers was an unreal experience. They had experience in abundance and me with exactly zero. The most surprising thing about it was the approachability of the people. Getting a taste of client meetings, proposals and team discussions was priceless. There’s a lot of literature about how to land internships but very little about how to succeed when in the office. So here are a few things I learnt during my time. First off, working hard doesn’t cut it. Exceeding expectations is normal. If

you cruise around university happy with a certain grade, take it up by 30% and that is equivalent to the city mindset. Second, networking, networking and more networking. The word is slightly cliché but getting to know people outside of your division is crucial. The optimum situation is when you leave, people notice your gone. Third, talk the talk. If you talk like others, you’re quickly adopted in the team. Of course, you are not expected to know everything, but using industry terms is imperative. Over lunch just slip in the latest Chinese PMI number or the latest spread over Spanish to German CDSs and your good to go. Finally, the most important aspect is to control your mindset. BELIEVE you belong. The word ‘intern’ implies rookie, immediately a cap on your mentality. To succeed in the city, you have to believe you’re the best. Work doesn’t faze you because you’re the real deal. Control the mind, control your actions and control the situation. If you want it, it’s in your hands.

Malaysia Airlines - Could this be the end? Jeremy Cottingham


o summarise the recent events, Malaysian Airline System Berhad flight MH370 – destined for Beijing – reported missing on March 8 carrying 239 passengers and crew. The disappearance of the Boeing 777 has amassed a multi-national search effort currently focused in the southern Indian Ocean. Relatives of the missing passengers have vented their fury after arriving in Kuala Lumpur. Since the incident, Malaysia Airlines’ stock has hit a low of 0.205 MRY on March 28, a decline of approximately 15-20% over the last 20days. Boeing also suffered from an initial hit to its share value. What have been the costs of the missing plane? So far it is believed that the search for the missing plane has already cost tens of millions of pounds. The help of several countries has been received – those being Australia, New Zealand, China, Japan, Republic of Korea and the USA. The nations are said to be taking part in a ‘search now, discuss money later’ basis.

But there are far greater economic costs that Malaysia could be faced with. Already relations have been damaged between Malaysia and China over the way the whole situation has been handled. The Chinese government have become increasingly restless with the lack of information being released to the officials. Frustrations with the way Malaysia has controlled the ordeal could have lasting effects on the relationship – these frictions do not bode well for relations within the ASEAN. If worse comes to worst, Malaysia could be left out in the cold. For Malaysia Airlines, the recent events are just more to add to their woes. The company has been on a downward trend for the past 10 years with a current yearly return of -43.08% and a corresponding $356 million loss in 2013. The financial turbulence is largely due to contending airlines operating in the same regions, such as AirAsia, who provide a low-cost service and have enjoyed juicy growth in recent years by successfully competing on prices. It is unsurprising then that several major restructurings have taken place. These however evidently failed to tackle mismanagement, the lack of

professionalism and the government interference within Malaysia Airlines. The recent events have significantly damaged the firm’s reputation and officials are also expecting lower ticket rates as travellers avoid buying tickets from Malaysian Airlines. Even though these incidents occur very rarely, the public still react through fear of being the ‘next victim of disappearing planes’. As well as this, large compensation pay-outs to the families of victims will inevitably be expected. Like every other major carrier though, Malaysia Airlines insure themselves against the risk of these rare situations and so will at least benefit from pay-outs by the insurance companies for the plane (valued around £150m) and the compensation. A claim however may be made to the airline to contribute to the increasing costs of the search. What’s next for Malaysia Airlines? In terms of surviving this economic blow, the company needs to respond to the disaster with a management ‘shakeup’ that can recoup its reputation, but also push for slimming costs and putting a business model in place that can compete with the rapidly expanding low cost airlines. Independent Financial Magazine vol.4 31.03.2014


Global Economy

What Technology Sector Bubble? Lloyd Josiah



ere’s the thing about markets, they’re not perfect. Eugene Fama would surely argue otherwise but we can all agree on this; asset prices go through periods where they exceed their ‘fundamental’ value which results in cycles of overvaluation of securities. In times like these, there are normally two schools of thought; those that scream the b-word and those that believe it is just periodic “frothiness” with a transient underlying cause. Unfortunately the difference between a bubble and periodic effervescence isn’t obvious, and may only be confirmed in retrospect if prices fall off a cliff.

is a typical thanks to loose monetary policy. In other words, blame the Fed. Rock-bottom interest rates and an abundance of cheap liquidity, due to the Fed’s asset-purchasing program, have resulted in a surge in equity markets as investors’ appetite for riskier assets has increased in their hunt for returns. This has resulted in a broadly based market rally with the S&P 500 trading at 20x earnings against a 100-year historical mean of 16x. As such, the entire market is currently trading at a premium but is nowhere near the lofty 44x earnings level that it soared to during the 1999 technology bubble.

The recent tech bubble rhetoric first surfaced in late 2009 when the tech-heavy Nasdaq-100 gained 54% that year. 2 years later in 2011 tech companies such as Zynga, Groupon, LinkedIn and Pandora went public and analysts screamed the b-word once again. This year we’ve witnessed the $19bn WhatsApp acquisition by Facebook followed shortly by the $2bn acquisition of Virtual Reality Headset maker Oculus by the social media giant. Candy Crush maker, King Digital’s IPO pricing translated into a whopping $7bn valuation and once again sparking the debate that the market was partying like it was 1999.

Unfortunately the dot-com bubble comparison is widespread and cannot be escaped from. It seems those who mention 1999 don’t really remember what happened in 1999 so allow me to put things into perspective. Since March 2011, when the tech valuations started coming under fire, the Nasdaq-100 is only up 53% while in contrast it gained over 85% in 1999 alone. That’s not all; the Nasdaq 100 P/E is currently 21.15x which is not cheap but certainly nowhere near the 100+ levels that were seen in early 2000 when companies with no earnings or a defined path to profitability demanded irrationally high valuations.

The first thing one needs to keep in mind before they argue bubble is that the current macroeconomic climate

While it’s certainly undeniable that tech IPOs have been on the rise in the past few years it must be

Independent Financial Magazine vol.4 31.03.2014

noted that no definitive conclusions about market sentiment can be drawn from the number of IPO’s alone. What I’ve found to be more effective is the number of IPOs with 100%+ first day returns as it gives an indication of how much investors are willing to pay to get in early into a company. Unsurprisingly, according to Renaissance Capital the number was 202 for the years 1999 and 2000 c0mbined compared to only 13 since 2011. With all that’s been said, I will admit that there does seem to be some pockets of exuberance with valuations that seem significantly overvalued but this is not a widespread phenomenon across the tech sector. Some of the premium valuations, especially in fields such as social media and mobile services are due to increased market consolidation. With technology rapidly changing, larger corporations are increasingly resorting to acquiring start-ups that have the potential to be the technology of the future. This increased appetite in the M&A community will inadvertently push prices higher as founders have more cards to deal. Now the question is, are we currently in a technology sector bubble? The short answer is NO. What we’re experiencing is a slight policy-driven market distortion that will correct itself once the Fed closes the tap and interest rates go up.

Special Report: Private Equity

NY Š Daniel Vasconcellos

Independent Financial Magazine vol.4 31.03.2014


Special Report : Private Equity

Private Equity Part 1 Alan Konopka


he public usually likes to criticize Private Equity (PE) firms. Such criticism is often targeted to the strategies that private equity firms undertake in order to generate returns for investors and the firm. These include restructuring, layoffs and a short- term focus at the expense of the long-term prospects of the target company. This image is partly due to the nature of buyout investments, which aim to increase company value based on an accelerated transformation process. There is also very little media coverage of the buyout firms, which further adds to the murky perception the public has on the wider PE sector. Such lack of attention is due partly to the nature of the private equity industry itself. A private equity security is exempt from registration with the Securities and Exchange Commission due to it being classified as a transaction that does not involve any public offering. It is however one of the fastest growing (after Hedge Funds) sectors of Alternative Investment Vehicle and therefore I have decided to write a


Independent Financial Magazine vol.4 31.03.2014

series of articles with the aim to shed more light on the industry and help us understand this rapidly growing Wall Street contender. In this issue I will describe the PE sector in terms of its structure, the common business model and the fees that managers charge. I will also state the key differences between PE firms and Hedge Funds; two completely different vehicles that are misunderstood and misclassified by the majority of people. Private Equity is a name that refers to a specific form of investment in privately owned companies or in public companies with intention of taking them private. The main purpose of the buyout is to finance their transformation, restructuring or expansion. Although it seems quite straightforward and clear, PE firms create a number of funds and structures to target a greater number of investors by offering them a greater pallet of ‘risk & reward’ products. These might be a specific structure for a specific industry or a particular geographical region. Often PE firms create funds to focus on areas where they anticipate the highest returns from investments.

The most commonly known form of PE funds is venture capital (VC), which target ‘start- up’ companies. They finance growth and development. Second most common form of a PE fund is ‘leveraged buyout’ (LBO). This is where the PE firms acquire a majority or controlling stake in a mature business using a high proportion of debt financing. Besides those two most commonly referred there are number of other fund structures like ‘growth equity’, ‘mezzanine financing’, or distressed buyout’ funds. Venture capital (VC) funds target small, young innovative start-ups with risky but exceptional growth potential. Most deals are made within new and booming industries like information technology or biotech. Companies such as Microsoft, Dell Computer, and Genentech all received private equity backing in their early stages, with Dell Computers recently taken private for the second time in Q2 of 2013. There is usually a number of VC funds as shareholders who provide not only financing but also take part in the operational management of the firm.

Special Report : Private Equity

Buyout funds on the other hand tend to intervene in larger, more mature businesses across all sectors. The word leverage implies that the deals are structured using vast amounts of debt. In most cases the debt proportion reaches up to 90% of the deal value. PE firms’ use their own assets as well as the target company’s assets as collateral for the new debt issue, which in most cases receives junk status. Post acquisition, the PE managers give support to the target firm’s management in order to increase the company’s value. This support aims to enhance operational efficiency, improve strategic distinctiveness and focus on optimizing cash flows. The public perceives private equity and hedge funds as being similar or just a mirror image of one and other. This is far from reality.

Although both vehicles belong to ‘alternative investments’, PE funds tend to make investments with a longer-term view, which is in distinct contrast to some of the best hedge fund managers. They can squeeze profits in seconds by employing a spectrum of strategies, ranging from arbitrage and short selling, to high frequency trading in foreign exchange. Both strive to provide saucy returns to their investors and tend to have a very similar fee structure, referred to as ‘2 and 20’. The initial 2% is charged as an annual management fee and goes directly to the general partners, while 20% applies in a form of carried interest on the profits of the fund. The remaining 80% of the profits is paid directly to limited partners. They do so with very different methods.

Despite having similar fee structures and similar objectives, the two investment vehicles are distinctly different and should be perceived so. In conclusion, there are number of different funds and strategies that PE firms deploy. They vary from targeting high risk and high abnormal returns, while others target mature growth with lower risk. Next weeks issue will cover other fund structures within the PE industry such as mezzanine financing or distressed buyout funds. Till then, keep an eye out for some of the PE exit transactions, as it’s a fast moving field of the financial arena.

Limited Partners  (Investors) Corporate  Pension  Funds

Investment Banks

Public Pension  Funds

Wealthy families  and   individuals


Bank holding  companies

Insurance Companies

Family Offices

Investent of     funds  and   experLse  


Company B

Private Equity   Investment  Fund General  Partners  (Managers) Private  Equity  Investment   Management  

Company A

Fund /  Investment     Management  

Company c

Company D

Private Equity  Business  Model  Structure

Independent Financial Magazine vol.4 31.03.2014


Book Review

Die hard followers of the Random Walk Theory Mohieddine Kaddouri


ie hard followers of the Random Walk Theory (the theory that states that traders that claim to predict market movements based on technical analysis should be locked up in a psychiatric asylum theory) look away. Rather than talking about an altogether boring forex market overview of the past week, I’ve decided to share one of the greatest resources a budding trader needs to have in their trading arsenal. I am of course talking about Technical Analysis. Forget the ‘100 ways to get rich from the stock market’; the reality is that there is no book out there that can tell you how to make money next week. Realising profits can only come from knowledge, historical chart experience, risk management and possessing a rockhard discipline. Murphy’s Technical Analysis of the Financial Markets has for years been the trading bible from beginners to up and coming big players in financial markets. When I first started trading, my system was based on events trading. I truly believed that the only certainty in the markets was the certainty of macroeconomic events. Whether it’s an earthquake or an unexpectedly shocking GDP report, a confident market it does not make. Meanwhile, a friend of mine was sending me


Independent Financial Magazine vol.4 31.03.2014

what seemed to be hieroglyphic code on Facebook chat telling me that EURUSD has violated Fib and RSI confirms downward trend. Looking at his trading history, I could see 8 trades in a single day where no data or earthquake had occurred! On average, 5 out of 8 of these trades came through, and boy did they come through big. I could no longer ignore Technical Analysis. Enter this delightful book. Throughout the past year I have sang its praises upon encountering it in the University library. When our guest speaker this week (Cameron Millar, Options Trader no less!) recommended it to our members, it struck me that I wasn’t the only one who found this book to be one of the most influential texts on Technical Analysis in the trading world. From start to finish , this book is designed to help the budding trader understand just what the heck online broker insight posts are talking about and help them create a definitive strategy not just for the coming day but for the coming days, weeks, months and possibly years! Whether you believe in it or not, the fact that fund managers use this method to accumulate or dump an asset is enough to warrant needing to know the timings of potential large moves

in the markets. The book begins with the philosophy behind technical analysis and moves to the tenets of Dow Theory, Chart Construction and Trend Analysis. The language used by this book is simple and assumes little knowledge by the reader while still retaining a high level of information as it moves into the minute aspects of Technical Analysis; breaking down each technical study tool and providing valuable examples of application to historical chart patterns to show the confirmation of these methods. Whether you intend to become a follower of simple Japanese Candlestick techniques or an Elliot Wave Theory Aficionado, you can rest assured that this book will carry you on your path to trading glory. Consider it an all-in-one guide to knowing what on earth is going on. All in all, whether you’re forever a proponent of Random Walk theory and believe that this is all self-actualizing prophecy at work or a doe-eyed first year with desire to make millions in your first week from a firm belief in charting techniques, this book has enough to make both parties see their arguments in a different light. Pick it up, you might just learn a thing or two, or at least be able to pretend you have…

Finance In Sport

The Future of the Big Tax Case Kristopher Connelly


s stated in my first article, Rangers were sanctioned a bill from HMRC of £49 million over there inappropriate use of EBT’s between 2001 and 2010. To date this case has been through the first tier tax tribunal with the appeal already underway. The one question that remains is what does the future hold for this tax case? Let us begin by considering who will end up winning the current case. This case will with no doubt go through all of the courts in Britain and Europe before it is over. HMRC will not want to lose as by losing this would create a precedent and also damage the reputation of the organisation. The Rangers Football Club PLC (in liquidation) will not want to lose as no one wants to pay a £49 million pound bill. Here is what I think will happen. If HMRC was to lose this case, the misuse of this loss would be catastrophic. It would set a precedent

where organisations in the future could have an email and letters of conversations with employees that discuss the use of EBT’s and for it not to be considered contractual or illegal. HMRC are probably correct in saying that the loss was due to error in law from the people from the first tribunal. I believe HMRC will eventually win even if the court battle is taken all the way to Luxembourg. Now let’s consider who will foot the bill. Two obvious candidates will be either David Murray or Craig Whyte. But would they pay it? If HMRC were to try and hold them liable, both David Murray and Craig Whyte would claim that paying £49 million is against their human rights. They probably would be correct in saying this as £49 million is a substantial amount and would more than likely bankrupt them. This would probably also go through all of the courts to Luxembourg and I suspect Murray and/ or Whyte would win this case.

They could charge the old company to pay it, but since they are in liquidation they would not get much if anything. Therefore HMRCs only other possible route would be to charge Rangers FC with the bill. The current owners of Rangers would argue that the bill is not their responsibility and you could imagine that the verdict of each court no matter the outcome would be appealed. If it reaches Luxembourg, would Rangers FC win? I will leave that for you to decide. From a bill sanctioned to Rangers back in 2010 until now, there has been a lot of speculation about the future of this tax case. What I have described may happen but equally, it may not. All we know for sure is that this tax case will not conclude for years to come. For any Rangers fan thinking that what happened in the past is behind the club, think again.

Independent Financial Magazine vol.4 31.03.2014


Exchanges of the week London Stock Exchange (Left) Warsaw Stock Exchange (Below)


ondon Stock Exchange is a diversified international exchange with headquarter in London and significant operations in France, North America and Sri Lanka. The exchange is owned by the LSE Group that operates a broad range of international equity, bond and derivatives markets. Being London based makes the exchange become a connection between US and Europe’s capital markets. In addition to ownership of various exchanges around the world, LSE Group wholly owns FTSE.


Independent Financial Magazine vol.4 31.03.2014


arsaw Stock Exchange is the largest national stock exchange in the CEE. WSE is one of the most recognizable Polish institution as well as being one of the fastest-growing exchanges in Europe. It offers a wide range of products and services within its trading markets of equity, derivative, fixed income and structured products. It also major provider of market data.

Ifm volume 4 31 03 2014  
Ifm volume 4 31 03 2014  

HWUTIC's fourth publication in its magazine publishing series. Just what will they do next?!