CBLOG

2. New book puts McKinsey in negative light

Correlation for the longest time has been the bane of hedge fund managers. The conventional wisdom was that, given the high correlations among asset classes and among in-class securities, there was no way to really differentiate your fund. You were bound by the mean, so to speak.

But has all that changed?

"There has been a barrage of recent evidence that markets may be entering a new and more complicated era, where large asset classes no longer move predictably in lock-step depending on the prevailing mood of optimism or pessimism over the global economy," notes the Financial Times.

"In other words, they may be entering a period where evaluating the fundamentals of particular commodities or countries or individual stocks might be more effective.

That has certainly been the case within the US equity market over the past month, where the correlations between stocks have collapsed…. Instead of being negatively correlated, bonds and equities suddenly seem to be positively correlated. And none of the linkages are not quite as tight as they have been for the past five years."

One expert was quoted: "In fact, the whole correlation spectrum has been going mad. Everything seems to be correlated with 'risk on'. Almost nothing is negatively correlated with equities now, and there are no safe havens any more."

The issue here is whether this is good news or bad news for fund. Back when correlations were strong, the industry often used that as one reason why their returns weren't so hot. Now that correlations have broken down, it just might be used as an excuse for middling returns. In the end, the best funds will find this an opportunity. The proof will be in the end-if-year performance statistics.

For more:
- here's the article

Read more about: Correlation
back to top

By Jim Kim

Comment |

3. Moynihan upbeat on West Coast swing

"No one ever got fired for buying IBM." Back in the 1980s, that rang true in the IT world. Some think it is among the most powerful marketing phrases ever created.

In the executive suites, a similar cliché holds that "you can't get fired for hiring McKinsey," as noted by a DealBook review of a new book about the consulting juggernaut. The book, The Firm, will likely generated massive amounts of publicity as it takes on a subject that would've daunted many journalists: The real track record of McKinsey & Co.

The aura of the highly secretive firm has been dented just recently by the stunning guilty verdict in the trial of Rajat Gupta, who once led the might firm, on insider trading charges. But there has never been a book to tackle full on the many failures of the firm.

"It often goes unmentioned, but McKinsey has indeed offered some of the worst advice in the annals of business. Enron? Check. Time Warner's merger with AOL? Check. General Motors's poor strategy against the Japanese automakers? Check. It told AT&T in 1980 that it expected the market for cellphones in the United States in 2000 would amount to only 900,000 subscribers. It turned out to be 109 million. The list goes on," according to the review.

To the long list of dubious outcomes, we can add a failed engagement that "some experts say led to the first too-big-to-fail bank failure in the 1980s, that of Continental Illinois Bank."

Duff McDonald goes so far as to suggest that McKinsey executives are "de facto industrial spies." He writes: "The firm would surely take umbrage at the suggestion, but the whole notion of 'competitive benchmarking' is just a fancy way of telling one client what the other clients are up to, with the implicit — and somewhat dubious — promise that their most sensitive secrets will not be revealed."

We would love to review the book, which will likely be a hot commodity once it is formally released this week. The world would love to hear McKinsey's side of the story. A point by point rebuttal may be in order.

One has to wonder if McKinsey has been advising any banks as of late.

For more:
- here's the article

Read more about: Mckinsey, Consulting
back to top

By Jim Kim

Comment |

4. Bank of America exits big China bank

Bank of America CEO Brian Moynihan recently took a trip to the West Coast to talk to key constituents, including the LA Times, which has been rather hard on the bank at times. He apparently had a new mantra on the trip: "We don't have to be the biggest."

The words certainly reflect reality. According to the articled, the number of branches has declined 7 percent. And "once the biggest U.S. bank, BofA now has about 5,300 retail offices, fewer than Wells Fargo & Co. or JPMorgan Chase & Co. Staff head count is down 11%, the equivalent of 33,000 full-time jobs, since he announced his downsizing plan in September 2011."

The near-term future looks bright. "With savings on payroll and legal bills dropping straight to the bottom line — and business lending and investment banking picking up — the Charlotte, N.C., bank earned $6.6 billion in the first half of 2013. It is poised for its most profitable year since 2007."

The paper gives the bank high marks for getting expenses under control and at the same time whittle away at crucial balance sheet issues. But it dings the bank on customer service. "In an American Banker-Reputation Institute survey, customers ranked BofA last among 30 big financial firms, with 53 points on a scale of 100 — a 'weak or vulnerable' score shared by just two other banks. Non-customers scored it 35, making BofA the only bank in the 'poor' category. To be sure, the bank's poor reputation has roots in missteps made before Moynihan took the helm."

My sense is that Moynihan has set the stage for good things to come. But he has yet to answer that critical question: can he get revenue moving north again? That will be hardest nut to crack. If he can figure out a way to get revenue back to what it was, he will have secured a prominent spot in the annals of finance.

For more:
- here's the article

Read more about: Bank of America, Brian Moynihan
back to top

By Jim Kim

Comment |

5. Massive fees at stake in Verizon deal

Banks poured billions into China banks, eyeing a foothold in a potentially lucrative company. But the promise began to fade over the past year or so, just as the need for more capital stepped up. Just like that, banks started to exit their large positions. In some cases, they were able to book some nice principal gains. Earlier this year, for example, Goldman Sachs sold off its investment in the Industrial and Commercial Bank of China in a deal worth $1.1 billion.

Bank of America has just followed suit, launching an offering for its shares in China Construction Bank Corp. The big charlotte bank has held the shares for 8 years. Some think the offering will raise up to $1.5 billion, according to media reports.

Bank of America paid $3 billion for a 9.9 percent stake in the Chinese bank before its initial public offering back in 2005. The bank sold much of its stake in late 2011. After it completes the offerings, it will no longer have a stake in the bank.

While CCB has fared well in its most recent quarter, there are plenty of concerns about China's biggest banks. Some think they have fueled a massive bubble that will have to deflate at some point. Transparency has also been an issue. All in all, the safe bet is probably to watch all this unfold from the sidelines.

For more:
- here's a Reuters article

Read more about: Bank of America, China Banks
back to top

By Jim Kim

Comment |