Chelsea Football Club Innovates Financially

August 4, 2017 By in Analysis, Credit

I just found out that Chelsea Football Club is applying ideas from financial leasing to their football player lending programme.

I was shocked. The analysis is quite interesting. To me at least.

The movie Moneyball, based on the book by the same name, showcased the use of financial ideas in sports, in this particular case baseball. There are two parts to it. The first was picking the right performance indicators and, just as importantly, ignoring well established but ultimately useless indicators. A similar challenge happened with the infamous Black-Scholes equation, which ignored the probability of the price of a financial security rising or falling when computing the price of a derivative on that security.

The second part of Moneyball is to look at the price per unit for the new performance indicators when looking at buying or selling a player. This showed that the market in baseball was inefficient and the first teams to adopt this new pricing mechanism reaped great rewards. In effect what was happening was a weak form of arbitrage. Again, this is similar to traders in the nascent derivatives markets who adopted the Black-Scholes pricing model. Continue reading →

Your stop loss orders aren't guaranteed to protect you

August 4, 2017 By in Trading, Analysis Tags: ,

Speaking of trading, I want to talk about certain trading misconceptions. I recently talked about the liquidity trap that some investors were getting themselves into when investing in illiquid stocks. The issue is not an investment issue but a trading issue that can greatly affect the overall IRR. In discussions about this trading trap some other misconceptions came up and I’d like to address one of them: the stop loss order (SLO). In their most basic form these are orders that you give to your broker to sell a security if it drops below a certain price.

The main misconception with SLOs is that when the price of a security drops it will touch every price on the way down. For example, if you bought shares which are now at Dh20 and you put in a stop loss at 19.8 this will not necessarily trigger a sale at 19.8. One reason is that if the last trade is 20 and the next trade is 19.6 then you’ve passed by 19.8. If your broker actually manages to sell at 19.6 you’ve still lost an extra 1 per cent of your position. But there is no guarantee that your broker can sell at the lower price. I recall in mid-1998 that the UAE markets, then trading over the counter (OTC), had been enjoying a great rally when they suddenly collapsed. I saw an order for the most liquid shares at the time, Emaar Properties, executed at Dh160 a share. The crash started the next day and the buyer immediately tried to sell the position. It took several days before a new buyer was found, at a price of Dh40 a share. That is a 75 per cent loss. Remember, this was not about Emaar, the whole market had crashed. Continue reading →

Buying bitcoins is going long bitcoin deflation

August 3, 2017 By in Trading Tags:

Buying bitcoins as an investment means going long bitcoin deflation. That’s it. Let me explain.

Bitcoin is a cryptocurrency, a digital currency made hard to forge using cryptography, and also a payment platform such as those used by Visa, ATMs and if you’ve done wire transfers, the Swift system.

The bitcoin technology platform is not new, it was first released in 2009. The cryptography is older, having first been developed in the early 1990’s. The payment systems are decades old.

So what do I know about this? As a former Head of Treasury at Union National Bank I of course needed to understand currencies and currency market. Also the Swift system is managed out of the treasury’s back office. Furthermore I was a director of the board of VISA International CEMEA Region. For the technology, in the mid-1990’s Moti Yung, a former student of my graduate adviser, tried to lure me away from computational finance research back into mainstream theoretical computer science by explaining to me the uses of distributed databases and how they can be used for secure payment systems. Although I didn’t switch it was interesting enough that we would chat about it once in a while. Today, distributed databases have acquired a sexier name: blockchains.

I tell you all this so that you understand the following – there is no innovation here, not in the theory nor in the application. Even if there was, actually buying a bitcoin does not give one economic exposure to any technology, simply to the supply and demand forces acting on the bitcoin currency. So we can narrow our discussion simply to analysing the currency markets. Continue reading →

The UAE's banking paradox

August 1, 2017 By in Analysis Tags:

In this section I look at the UAE banking system and come to some startling conclusions. It seems that banks are grabbing market share in a market with deteriorating margins and increased risks.

Last week I took a look at Union National Bank’s Q2 financial results. The focus was to look beyond the headline numbers and try to understand the underlying fundamentals and what the core trend might be. This led to the idea of core revenue and expenses, ie interest income from direct lending and debt securities and interest expense of deposits and debt securities. UNB also provides Islamic financing so I added those in as well. This tells us what is happening at the basic banking level and then I look at any out-of-the-ordinary movements in other parts of the business.

Mashreq recently reported Q2 results and announced an increase in profit of 3.4 per cent over Q2 2016. But looking at basic banking, core revenue rose 9.97 per cent whilst core expenses rose 19 per cent. This is not a good sign since if it continues, sooner or later, net core income will become negative. Operating expenses are flat at about 1 per cent so had little impact on changes to net profit. Continue reading →

Your guide to handling ethical management issues

July 31, 2017 By in Corporate Governance, Management Tags: , ,

You have spent a lot of time honing your business ethics, governance and compliance skills, but time and again you find yourself in difficult situations and realise nobody taught you what to do.

If I just described you, then this article is for you.

Most of what is taught is with regards to how to act if we initiate an action and, possibly, how to react when a client initiates an action. What I have not seen taught is how to react if your manager initiates an action. In this case there are broadly two scenarios: First, it is a legal and ethical instruction; or second, it is an illegal or unethical instruction. In the first case the employee’s proscribed reaction is straightforward – execute. In the second case it is to not execute the instruction. But is that as simple as saying “no”? Of course not.

Continue reading →

Jawbone lessons

July 19, 2017 By in Cash Flow Tags:

Jawbone, best known for fitness wearable technology, went into liquidation last month in part because of too much funding, according to CNBC. I believe that this is a good case study for some of the companies in the GCC that receive easy funding. Too often, certain investments are deemed strategic and then there is a blind mandate to fund them at any cost. One of the most frequent cases is the legacy business of a family conglomerate. Although other business lines might be doing fine and the commercially rational decision is to liquidate the legacy business, there is too much emotion tied to it. Often there is the belief that the loss of the legacy business would signal an unacceptable loss of face.

Of course if that funding is never-ending, you end up with zombie companies as the negative cash flows from operations and investing are offset by positive cash flows from funding, forever. This is why it is extremely important to look at the cash-flow statement. I have seen actual financial statements of large companies show that new debt funding is not only being used to pay for operations, an unsustainable situation, but to also pay off maturing debt. When you start using debt to pay for debt you’re in trouble.

The way this is explained to boards is that a certain debt is being matched to a certain activity. This is, of course, baloney – a proper analysis looks at the aggregate. If operating plus investment cash flows are negative and there is maturing debt it can only be paid off via more funding, be it equity or debt.

Sabah al-Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more on his Twitter feed or for deeper analysis on LinkedIn and al-binali.com.

UNB kicks off earnings season

July 18, 2017 By in Finance Tags: ,

Abu Dhabi lender Union National Bank announced its second-quarter financials. On the face of it things look positive with an increase in net profit of 7.2 per cent relative to the same period last year and that net income from interest and Islamic financing, the core business of a bank, rose 2.6 per cent. However, a quick peek at the underlying fundamentals shows that core revenue from interest and Islamic financing grew 6.4 per cent whilst expenses for interest and Islamic financing grew 13.4 per cent.  Core expenses growing faster than core revenue is unsustainable. When you factor in that operating expenses grew by a whopping 21.1 per cent the picture looks less than sterling. The main driver for the increase in net profit is retail fees and recoveries which grew 43.7 per cent, an unsustainable growth rate for this profit line item.

Stay tuned as I take a deep dive into reported second-quarter earnings next week and uncover whether the net profit reported is quality or whether the underlying fundamentals are deteriorating.

Sabah al-Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more on his Twitter feed or for deeper analysis on LinkedIn and al-binali.com.

Structuring formal boards and committees

July 17, 2017 By in Corporate Governance Tags: ,

A central pillar of corporate governance is to share authority. At the board level, directors have no individual authority unless the board assigns it to them. It is the board as a body that has authority. This authority is too often circumvented by the creation of an executive committee (exco) of the board. Although the existence of an exco does not mean that there will be corruption, when there is corruption it can usually be traced to the existence of an exco. The reason is that an exco effectively takes over the role of the board and the chairman of the exco becomes the de facto chairman of the board, replacing the elected chairman of the board. This is frightening.

This holds true at the executive level. The board must ensure that long-term strategic decisions are made by competent committees, not solely by the chief executive. A simple example is that you don’t want the chief executive to have sole authority over investments. That’s a one-man hedge fund. There is a balance between efficiency and governance, but that balance clearly isn’t an all-powerful chief executive.

I have seen different attempts at managing these issues. One unfortunate one that I’ve seen in this region is rejecting executives who want to be paid at the higher end of the market. The idea is that this way the executives hired are not greedy and will not commit fraud. This idea has several flaws.

The simplest flaw is that a dishonest executive is not going to care about his formal compensation as he will supplement it via the fraud. A more subtle but far more dangerous flaw is the idea that the only alternative to someone who prioritises financial compensation is one whose incentive is to do a good job. In this region I have seen that the much greater percentage are those who prioritise power and those who prioritise publicity. Both of those incentives corrupt as much as, if not more than, financial incentives. I’m not sure people stuffing their friends into jobs or people using their positions to get on the front page are any better than people who think high performance should be rewarded with high pay.

Sabah al-Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more on his Twitter feed or for deeper analysis on LinkedIn and al-binali.com.

Your guide to handling ethical management issues

July 16, 2017 By in Corporate Governance Tags:

You have spent a lot of time honing your business ethics, governance and compliance skills but time and again you find yourself in difficult situations and realise nobody taught you what to do. If I just described you, then this article is for you.

Most of what is taught is with regards to how to act if we initiate an action and, possibly, how to react when a client initiates an action. What I have not seen taught is how to react if your manager initiates an action. In this case there are broadly two scenarios: 1. It is a legal and ethical instruction, or 2. It is an illegal or unethical instruction. In the first case the employee’s proscribed reaction is straightforward – execute. In the second case it is to not execute the instruction. But is that as simple as saying “no”? Of course not.

Even in relatively flat/informal organisational structures this is difficult. When the hierarchies are formal, prized and inflexible it is next to impossible to refuse an illegal instruction. Without clear wrongful termination and whistleblower laws it becomes extremely difficult for an employee to stick to their values, especially in the current climate, as the consequences can quite easily lead to personal insolvency. For foreigners the risk is greater still, if the employee is fired in retaliation they have three months to find another job or face uprooting their entire lives, family and all. A daunting risk to doing the right thing. Continue reading →

Lack of Transparency in Senior Dubai Executive Departures

July 12, 2017 By in Management, HR Tags: ,

Last week saw the unexplained resignation of two senior executives, the chief executive of Jumeirah Group and the chief investment officer of EmiratesNBD.

There are several pertinent facets to these announcements. First, both seemed to be abrupt as there was no permanent successor named in the reports. Second, both left after a relatively short tenure, with both executives having had taken on their roles in January 2016.

In the case of Jumeirah there are a number of relevant organisational changes: the chairman joined from the parent, Dubai Holding, in March and who in turn appointed Dubai Holding’s chief executive to “run the [Jumeirah Group] business together” with an interim chief executive from within the group. When a chief executive leaves three months after a new chairman is appointed to the parent, there may or may not be an issue. When the chief executive of a parent is sent in to co-run a subsidiary business the implications are not usually positive. Add everything together and one might consider the scenario that the board had lost confidence in the chief executive.

The matter with EmiratesNBD’s chief investment officer CIO has less going on around it but the short tenure with no prior succession planning does not augur well.

Here is my fear: are the decision-makers in these cases clear on whether the issue is with the executive or if it is simply an unavoidable consequence of our challenging economic times? If it is the latter then boards and CEOs could create unnecessary employee turnover and lose the very people who have information to help the company.

It is difficult to ascertain if this is going on as there is not enough information. This lack of transparency is unfortunate in the case of EmiratesNBD, a publicly listed company that is the second largest bank in the country and regulated by both the UAE Central Bank and the Dubai Financial Market. As Jumeirah is private there is a lower bar in terms of transparency, but if Dubai’s sovereign wealth fund the Investment Corporation of Dubai (ICD) can adopt global best practice for corporate governance and publish audited financials then I don’t see why other private entities could not adopt the same philosophy. As an aside, ICD is also the majority owner of Emirates NBD, the bank could learn from its largest investor.

This article was originally published in The National.