Wednesday Oct 15, 2008

Have you ever heard of Credit Default Swaps?

Have you had enough yet of all the discussions, opinions, suggestions, agendas and lunacy regarding the stock market?  I've been watching for a while what is the ultimate effect of credit default swaps (CDS).  It is rumored that there are approximately trillions (U.S. dollars) worth of these puppies lurking out there.  That is no typo, yes trillions not billions worth of these unregulated contracts between a buyer and seller.  Some estimates put CDS liability up to $60 trillion U.S. dollars.  Basically CDS are insurance contracts if a credit instrument (e.g. bonds) defaults.  They cannot technically be called insurance because they are unregulated.  Since they are unregulated there is no requirement to report or track these instruments.  That's sounds a little broken you would think.

A good example is Lehman Brothers.  Lehman's bonds recently have traded for less than $.20 (U.S. dollars).  That means the seller of CDS on these bonds are liable to payoff the other $.80 (U.S. dollars).  These payoffs are going to absolutely impact negatively the institutions that issued the CDS. Instruments such as the CDS have complex probability mathematics behind them.  Created by intellects who went to work on Wall Street. Definitely something I'd personally stay away.  The derivative market is clearly not for the faint of heart. Trouble has been brewing for a while as reporting has disclosed.  The cascading effect across the world was obvious.  I don't know how some could say that this was a U.S. economy only problem.  Markets and investors worldwide are ultimately linked as a result of technology.  Investment options are available to almost anyone, anywhere via the access of a computer.  In my opinion the complex automated trading algorithms of buy .vs sell in the market do not take into account the variable of human fear.  How does a computer program stop a run on the bank without human intervention? That is intervention coordinated with complaint on a global level.   Would love to know where money is flowing to and where it is flowing from...  I'd guess it is flowing to banks where governments are insuring deposits and from banks where there is none.    Have we thought through the long term effects yet?  Truly fascinating.


Monday Jul 14, 2008

The simplified Coca Cola business model

I like Coke as my favorite soft drink. If you see me drinking a soft drink it's usually that red can... (not the diet stuff).  Let's take a hugely successful business that serves both tasteful and tasteless liquid for human consumption.  The Coca Cola Company.  Established in 1886, it provides 1.5 billion servings of its products per day with over 2800 different products.  In a very competitive landscape it has managed to maintain demand of its most mature product "Coke" while constantly bringing newer beverages to market such as "Full Throttle."  It is remarkable the beverage industry has convinced consumers to spend money buying bottled water which has become a huge industry. 

The beverage "Coke" has been around for a long time yet consumers have not grown tired with its taste.  In fact The Coca Cola Company in 1985 tried to change the taste and got a negative reaction from consumers.  All companies want to retain their customers as well as acquire new customers.  In other words grow.  While "Coke" is a cash cow throughout the world (it does taste different in China), the Coca Cola Company has done a remarkable job of introducing newer products for growth.  Just about every company with any longevity operates to sustain their core products while introducing new products to maintain and grow their revenue. 

Just as investment banks make varying bets on different types of businesses.   A venture capital investment carries a much higher risk and return than an investment bank who's advisory services guide an established business to divest, acquire, merge, etc..  A key part of strategy for any company is to be able to adapt the mix of established products with new products.  You cannot starve off one for the other or your competition will take advantage.  A plan that can absorb unanticipated changes, conditions and is willing to stay the course only draws investors appeal. 


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The blog of Bob Porras - Vice President, Data, Availability, Scalability & HPC for Sun Microsystems, Inc.

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