Tuesday, November 08, 2011

Honesty. Cut to the bone.

TMM were surprised, nay shocked, last week when they went to buy some cat food. Not that they were having to do such (TMM do indeed have a cat and TMM do indeed go to the shops) but by the latest "hide the inflation, disguise the cuts" marketing ploy. Whilst TMM have gently been watching the weight of M+S prepacked  "steak for £5" fall steadily for the past 6 months and been in awe at how UK fuel price volatility has remained at zero throughout the collapse in oil prices, we sort of let them get away with it as, well, it is luxury steak and it is dirty carbon stuff. But here in front of us was our large carton of regular cat food emblazoned with "Super Saver! 44 sachets!",  with one of those ends designed to say "look we've coloured the last 4 inches of the box yellow to make it look extra long".

You may think that TMM has better things to think about than cat food, but we know damned well that box, for the past 5 years, always held 48 packets. 

"Sorry Macrocats, you feel hungry? Take it up with Purina and their marketing men because they have convinced us that you are actually getting MORE so you'll be just fine"? Of course we are meant to respond as usual to the demand side opening more cartons blaming the macrocat's sudden increase in gluttony for the 9% increase in costs. Who would do that to a cat?

Now why do TMM bore you with such a small frustration? Well, dear reader, because we suspect this cat food scenario is being played out  near you in many guises. Be it at a peripheral European Sovereign, a Japanese company or even in the IT expenditure at a place of work all too close to you. Sovereigns and Corporations trying to improve their ratios, whether it be debt to GDP or earnings per share, generally first try and reduce costs, many of which, as a Sovereign too often finds out, are sticky, fixed-ish and generally involve a lot of heartache (read riots).

For most flow oriented businesses life is cyclical and so the volatility should be felt at the front office if say a bank, or front line if a sov/corp. In a bank, if flows drop 50% you can live with half as many salespeople/traders. But if you cut 50% of IT in the bank, or 50% of the bridge maintenance staff in a country, things stop working. Badly. Sadly, as TMM note, this is seldom how things work. Instead the thinking goes more like this

1) We need to cut costs
2) How much money does IT dept generate?
3) I know, cut tech!
4) Success! Costs are lower!
5) Oh nothing works. Collapse.

It is a very fine line to walk between a steady state "business as usual" and phase change collapse of a supercritical structure just waiting to be triggered by that butterfly's wings in a server under someone's desk. Which is interesting as we see the same thought process in action in the revenue side of financial firms end with similar consequences.

1) We need to increase revenues.
2) How much risk are we taking.
3) I know! Increase risk!
4) Success! revenues are up!
5) Oh, those correlations don't work. Collapse.

Both of which scenarios end up with

6) Fire the management.
7) Retrench back to core activities.
8) Shut up overseas branches and go home to milk a low risk low volume franchise.

OR .. Go bust.

Unfortunately TMM lay much of the blame for this culture on the need for growth. Growth for the sovereign is needed to pay for their Ponzi schemes of debt and growth in the corporate is driven by the shareholders demand for returns (normally pension fund managers, those guardians of YOUR future). TMM have long believed that the model for business sustainability is more that of the privately owned German Mittlestand, driven by long term objectives not short term gains at the cost of future stability. But whilst we are seeing the short-termism the incentive towards deceit is still too strong,

So whether you are a peripheral sovereign talking about your debt load, or a Japanese company that has found a way of hiding cameras in your advisor's briefs (or its bank going through its normal 10 year cycle), or a financial company that has decided to "help" bail out Europe, or bosses telling your staff that the IT is just fine, or just a cat food company trying to survive in the heady world of boiled animal parts, paring things to the bone (or cow lip in the case of the cat food), TMM ask you to please show some honesty in conducting your business as that is what we are really lacking in the world. We have always enforced a simple rule with our kids - "Tell us the truth and there is very good a chance we will support you. If you don't? God help you when we find out".

Late PS posted at 21.15 ldn

Following this post about honesty and integrity, TMM could not believe their ears when they heard the rumour that the London Clearing House had held a call with primary dealers that reportedly went something along the lines of "Hello chaps, you OK if we raise the haircut on BTPs?", with all but one dealer replying "OK". And apparently everyone went away with the firm belief that a margin hike was a done deal... shortly followed by a 20bps widening in BTPs, spooz selling off 15-handles and TMM cursing. TMM were cursing, not so much as a result of the actual inevitable margin hike (though, the P&L damage certainly didn't help their mood), but at the fact that such if this rumour were to be true, a price sensitive move might be "sounded out" on the phone to dealers first, allowing them to sell ahead of everyone else ensure their books were in order. TMM shouldn't be surprised, really, but they do still hold this ideal that perhaps people might like to follow the rules of not trading on non-public information. *Sigh*...


Mental Crumble said...

outstanding post; been meaning to write something similar for a while - may I repost, with attribution?

VandalsStoleMyHandle said...

Society has turned against fat cats; hence the Cat Value Adjustment.

Skippy said...

Excellent post Pol,

There have been lots of theories on why corporations have under-invested in this cycle. In my view, one of the more interesting ones is the increased focus on quarterly results.

In the short term, capital expenditure and more headcount will reduce profit margins, ROE and CEO compensation.

Of course, in the medium-term it may be detrimental to sustainable returns. However, for now CEOs are being rewarded for (short term) gains in productivity and margins?

Polemic said...

Mental.. yes. A link to original would be great thanks.


Mental Crumble said...


Tradebot said...

hear hear. I don't want to sound like those fking losers camping outside St Pauls, but the executive comp ratio is all wrong - no rewards for failure, eh? For example, how much did Stan "The Man" O'neil and Freddie Goodwin trouser when they oversaw the total collapse of their respective firms? It is the poor Joe in back office who has to take a bullet for the top brass who jump off the plane with golden parachute.

Instead of pitching up my tent outside St Pauls and depositing human excrement to the near bushes as form of protest against capitalism, I will just choose never to hold any equity in ANY bank due to the utter lack of any competent corporate governence. Bank shareholders actually have a better case of protest than unemployed laybouts , but then again they should have seen the car crash in bank equity miles away.

Tradebot said...

in addition, I do wonder why the banks are still sticking to London (or NY). Market is extremely competitive for revenue, low margins and staff costs are horrible. Overheads suck. Regulators are generally hostile, telling you that what you do is socially useless and piling up stress test after another. Government is trying to kill off any business by charging you extra capital on everything while demanding you to expand your balance sheet. General public and politicians hate you. You already pay extra tax for your balance sheet. Soon there will be an additional bonus tax + tobin tax when sufficient mass of celebrity endorsement is reached. Basle 3 is coming, forcing your ability to get rid of lending risk more expensive as securitisation becomes expensive.

I would have thrown in the towel ages ago and moved into the Asia.

Anonymous said...

Ok. I enjoy this blog very much and I usually look past the slightly self-interested nature of the posts/comments. And I can only attribute this comment directly to Tradebot.

Are you kidding me? Why doesn't Citigroup, GS, RBS, BoS ( I mean Lloyds), SocGen, BNP, UBS, CS, Dexia, HypoReal, HSH, etc. Leave respectively NYC, London, Paris, Switzerland, Germany even though they have to put up all of these terrible, soul-destroying [insert your long list of Heritage or IFI - written criticisms of regulation here].

Don't know, just taking a stab here, maybe because try would not exist anymore of the state was not there to back them up, finance competitors to merge with them, underwite the money markets and repos that finance them. UBS and Sottish banks I'm looking at you.

Tradebot said...

Anon - boo fking hoo. Point is that bank equity is cheap and it is cheap for a reason : there is hardly an industry around with more headwinds. Despite moving domicile , the balance sheets are mostly static - but going back to to TMM posting today , why would you want to retrace from overseas and concentrate on your domestic markets? They are lousy already and offer little / no growth. That is management's strategical failure.

Nemo Incognito said...

Fact of the matter folks is that for those who don't have a term funded balance sheet (real money, HFs) and position limits many of us have moved to Singapore, Switzerland or similar.

As for the biz that's left - yeah its looking skinny - lots of *DELETE* on my SPDL these days though I think Jeffries is the future, we just need some kind of standardized generally accepted disclosure for positions.

Leftback said...

Is LB the only person in the universe looking for a bounce in the dollar as EURUSD suddenly experiences a Wile E Coyote moment?

It doesn't met whether the Letch is in office or in some stripper's pants, Italian yields are still giving investors vertigo and the ECB are going to have to print, or buy bonds, which is QE in ANY language.

Pol, when does a RORO market turn into a RUH-ROH market? How about tomorrow after the Ifo shows new evidence of a recession underway in GERMANY, never mind bloody Greece and Italy (which is sporting a YC inversion suddenly).

We are inclined to sit in the tank here for a wee bit and ignore the trench warfare....

Leftback said...

Greek economy is close to collapse now, once people stop using the currency unit and cease paying taxes, you may as well call time on the Euro experiment. These people are effectively using the drachma already:

Greek Barter Networks

ntwsc said...

Nail on the head there with 'the need for growth', Pol.

Sorry for the pickiness though, but I'm taking increasing exception to most things 'sustainable', not least because they've been swallowed by catchspeak. Me, I'm still rooting for durable.

I laughed when I read Hester's latest pronouncement which the Telegraph gave him space for entitled "RBS chief Stephen Hester: We're the circuit-breaker to jolt SME lending back to life," not only because he issued, as of last Thursday, "a three-month invitation for all small businesses with a plan for growth to come talk to us about their finance needs," but because he appears not to have an effin clue what purpose a circuit breaker actually serves.

Oh wait ...

Anonymous said...

fyi TMM supersmkts / food manufacturers been pulling the ol switcharoo downsize move for almost 2 years already...
You gotta love the cost cutting logic!
Keep it up guys.

ntwsc said...

I've had to resort (when I remember) to storing the baked beans upside down. There's so much gunky liquid floating round the top of the can these days it takes forever to unglue the beans from half way down otherwise.

Polemic said...

Ntwsc. Brilliant. U are a genius.. a solution to todays ringpull mkt.. but in the olden days we d just open the other end of the can. But those were the days of proper beans!

ntwsc said...

Just for you Pol ;)

Apologies in advance to any potential offendees that it's from the Groaniad, but I was actually trying to google the price of baked beans in 2000 - sad, I know. But I suddenly noticed today in our local Express place thingy what a single can costs (we usually get a shedload and I don't pay much attention).


For fartoo long I have succumbed to family groans when I dared to buy notHeinz in the past ... pRopeR beans days eh (and I hope you rolled your Rs when you wrote that, Pol, just like Hovis bRead bloke) long gone. I can feel an Aldi attack coming on.

And I like the way the Venezuelans are thinking too.

Thorium238 said...

Sorry polemic i have to object to your comment about the pension funds! A much bigger problem is the board management / private equity firms who set themselves such easy short term targets so they can walk off outrageous bonuses robbing the long term value for the sake of their short term greed. If the pension funds are at fault it is because they do not properly exercise their responsibility as Owners of companies to stop these practices either through engagement with the company executives or by not buying these "ponzi" companies!