At 3s and 6s with GS and JP

Goldman Sachs and JP Morgan both performed strongly in 2012 but how did the two businesses compare both at the macro level and at the individual business unit level?

GS: Net Income = $2.89bn (just under 3 bn)
JP: Net Income = $5.7bn (just under 6 bn)
GS: Net Revenues = $9.24bn
JP: Net Revenues = $24.4bn

GS seems to have been performing decently in rates and credit, but weaker in commodities and currencies in 2012.

Morgan Stanley did pretty badly in Q4. Net revenues were $7bn but income from continuing operations was only $573m. The Institutional Securities Division lost $1.7bn overall -through compensation expense of $6.7bn (lowered from last year) and non-compensation expenses of $5.6bn (up from last year, due to litigation expense, relating to some confusion over loans made to New Century Financial).

The Art of Naptha Trading

Naptha is a lightweight hydrocarbon.

Who trades it?

• Vitol (primarily a physicals trader) trades about 14m tonnes of naptha per year.
• Trafigura has naptha trading teams in Geneva, Houston and Singapore
• Glencore - has been reported to buy naptha every so often direct from refiners like Essar

What is it used for?

Primarily a feedstock for high-octane gasoline.

The Story behind the Traders

Trafigura is a Dutch company founded in 1993 established by Claude Dauphin and Eric de Turckheim. They have been involved in a number of scandals including waste dumping in Cote d'Ivoire.

Glencore was started by Marc Rich, credited for creating the spot market for crude oil in the 1970s. It was formerly known as Marc Rich & Co. AG.

Reflecting on FX Volatility Correlation in 2012

The May/June FX Vol Party of 2012

There was a strong degree of FX volatility correlation in 2012, reflected across the "majors" such as EURUSD and USDJPY and Cable, as well as "EM" pairs such as USDINR, and more esoteric pairs like "euro-zloty".

The bulk of this correlation can clearly be seen in the May/June period of 2012 when FX volatility peaked across the board, before subsiding in the latter part of June.

Europe Leading the Crazy Vol Market

The main driver for this craziness was Europe. The Bank of International Settlements covered this in their June 2012 Quarterly Review, whose executive summary was "Optimism Evaporates" (end of the second quarter 2012).

Sentiment around that time, reflected in the FX vol market, could have been due to:

• Concerns over the impact of fiscal consolidation on growth
• Financial health concerns for Euro-area sovereigns and banks

"Upside Bias" in EURUSD Short-Term Volatility- What it Means

Looking back from January 2013, we see the EURUSD one-month at-the-money vols over a one-year period, has been biased to the upside in volatility terms (by this I mean there are observations beyond two standard deviations from the mean on the over the past one year (during the "optimism evaporation" period for the Eurozone, rapidly followed by the "condensation" period)) but no such observations below two standard deviations from the mean on the downside).

"Crazy Horse" Levels versus Average Vol Levels on EURUSD

During this "crazy time", mid-June vols were around 13% versus the current one-year average implied of 9% (we are currently trading below that at 8.5%). This second-quarter vol-spike is not unprecedented, though. It is also worth noting that the 1 year average of 9% is also below the 3 year vol average of 12%.

Palladium - The Mystery Metal 20+ Times More Valuable Than Silver

Power of Palladium

Palladium is the mystery metal more valuable than silver.

It was discovered as recently as 1803 by chemist William Wollaston whilst analysing platinum ore samples from South America. It is known as a "rare element". It is often recovered as a byproduct of mining other metals like platinum, silver and gold.

Whereas silver is around $31 an ounce, palladium is  around $720 an ounce - about 23 times more valuable.

Palladium is also less than half the value of gold.

Palladium's Precision Applications

Palladium is used in making springs for watches, surgical instruments and dental fillings and crowns.

• Palladium dichloride is used in carbon monoxide detectors.
• Palladium is combined with gold to form white gold.

Platinum Price Rises above Gold

Spot platinum hit a high of $1,701 per ounce. Woosha!  The rise was partly due to supply concerns in South Africa.

Blockbuster Gets Busted

Another victim in the UK high street rampage (Blockbuster have around 1000 stores in the UK) and another round of new business for Deloitte! Deloitte have taken the honourable step of promising to honour all Blockbuster vouchers (e.g. vouchers to rent two movies a month for three months, and the like). Founded in Dallas in the era of the VHS, Blockbuster was already bankrupt in 2010, and rescued by US satellite TV operator Dish Network in 2011. Blockbuster has been overtaken to some degree by LoveFilm which has 40% of the rental market in the UK. Managing Director Martin Higgin's compensation in 2010 was £613,000, a ludicrous sum-of-money for a company that was basically being run "business-as-usual".

HMV Welcomes New Year in Administration

HMV, with 250 stores, failed to reach agreement on its debt situation and went into administration on Tuesday, 15 January. The administrators are Deloitte and Touche.

Trevor Moore is the Chief Executive, having been appointed fairly recently, having previously run Jessop Group Limited, another high-street name, which went into administration just a few days prior. Was it poor management, the impact of recession or the force of online shopping that brought these firms to their knees. What questions does this raise for other UK high street names?

According to analysts, HMV "did not react early enough to the digital trend" and have a business model that is "irrelevant and unsustainable". Both HMV and Jessops have online businesses but rather low profile ones.

HMV has had a great history, opening it's first store in 1921, expanding in the 1970s and going public on the LSE in 2002. Simon Fox became Chief Executive in 2006, and did a big transaction in 2009, buying MAMA Group for £46m (sold in December 2012 for £7.3m to Lloyds Development Capital). It started closing stores in 2011 to reduce its debt pile.

Retail consulting firm Conlumino said investing in HMV would be "betting against the future".