If you’re going to buy shares in Skype then watch out as the Sky could be the limit.

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The internet telephone company Skype is planning on raising $100 million via an IPO (Initial Public Offering) on New York’s NASDAQ later this year.

Skype is probably the best known “internet telephone company” and users can make free Skype-to-Skype calls. Paid for calls to mobiles or landlines can also be made.

$100 million however is a significant figure and the filing documents submitted on Monday show that in 4 of the last 5 years the company lost money. In addition, the proportion of Skype’s customers that use the paid for services is also relatively small (8 million out of total registered Skype accounts of 560 million) so arguably there’s a real risk that it may be a significant time before the company is well into profit making territory.

The IPO submission documents must also show any identified risks and there is an interesting one present with Skype.

If you look at page 30 of the IPO submission document it was revealed that BSkyB, the owner of Sky TV in the UK, is in a long running dispute with Skype over the use of various trademarks. There is a view that Sky and Skype could be confusing for certain individuals especially given that BSkyB are promoting their telephone services alongside their Sky TV services.

It’s a case of watch this space to see what happens next.

Of course, free phone calls are one thing but if Skype ever started showing free television programmes then that’s when things would get really exciting.

Forget the sunshine, the beaches and the fantastic food – if you live in Australia sell your house and move to America…

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Asset valuation is a tricky business.  It is, however, a skill that accountants are often commissioned to use.  It’s also a useful one to have when making personal decisions, such as whether to buy a home or not.

Some people would argue that a major driver of the current economic slump in many countries is the collapse of house prices.

In a number of countries, house price bubbles were enormous.  There are lots of motivations for buying a home; principally as a place to live, a store of value for the future; certainty come retirement (when the mortgage is paid off so housing costs drop only to be maintenance).

Another motive has been speculation.  In my opinion, speculation in house prices is a bad thing, since it drives up house prices.  This means that new houses are not affordable for the young.  The more that house prices go up, the greater the transfer of wealth from the economically active young to the less economically active old.

Unsustainably high house prices cause uncertainty in an economy and when a crash eventually happens, it can cause people to be locked into homes with loans greater than the value of the asset (negative equity).  As well as a source of human misery, negative equity reduces labour mobility, which is bad for the economy as whole.

The Economist newspaper tracks house prices in different countries, using a method based on rental yields.  The assumption here is that rental markets react more readily to underlying supply and demand conditions.  If one had $500,000 to invest, would one use it to buy a house which could then be rented out, or buy other investments such as bonds?  If the rental yield (rent / initial value x 100) is less than the yield on bonds, then the house price is overvalued.  It’s a simple enough methodology that can give some revealing results.

A couple of years ago, this analysis suggested that UK property prices were 35% overvalued.  A crash followed.  There have been property crashes and recession in many countries where speculation is a big motive to buy property.  The alarming thing is that a recent analysis (Economist 10 July, page 75) revealed that properties are under and overvalued in certain countries:

UK: 33.8% overvalued (following a hard-to-explain recovery in house prices)
USA: 6.5% undervalued
Spain: 50.4% overvalued
Australia: 61.1% overvalued
Germany: 14.5% undervalued
Ireland: 15.7% overvalued.

This may be poor news indeed for the economy of countries with very overvalued property.  With these sorts of valuations, mortgages may become unaffordable the moment that interest rates rise to above the rock bottom levels we have at the moment.  This could release very big downward forces in the economy and dampen out any economic recovery.

On the plus side, the USA looks to have reacted quickly, albeit brutally, to the changed economic circumstances and it might be a good time to sell your home in Australia (cash out your investment while it’s arguably overvalued) and buy somewhere in America.  If you can get a visa.  Oh, and a mortgage!

Is this the real Willy Wonka? After all he bought enough chocolate on Friday to make over 5 billion bars of chocolate.

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Anthony Ward, a British financier who set up hedge fund Armajaro Holdings, bought a huge chunk of chocolate on Friday.

To be precise, he spent over £650 million buying 241,000 tonnes of cocoa beans.

This was the highest single purchase of cocoa for nearly 15 years and happened as cocoa bean prices rose to their highest level for 23 years. On news of the purchase cocoa futures for July delivery jumped by 1.5%.

The trade took place on Liffe (the London International Financial Futures and Options Exchange), a market which trades contracts in commodities such as sugar, coffee and cocoa.

As well as the sheer size of the transaction the strange thing about it was that Mr. Ward’s company has actually taken delivery of the cocoa. This is very unusual as the vast majority of cocoa transactions normally involve traders exchanging option or futures contracts without actually taking possession of the beans.

So why has he purchased so much chocolate?

He’s a very astute and wealthy businessman who reportedly lives in a £10 million house in Mayfair, London.

The speculation is that he is stockpiling huge volumes of cocoa in order to be in a strong negotiating position. Harvests in the cocoa heartlands of Ghana and Ivory Coast have recently been weak and there is an increase in demand for chocolate in the Chinese and Indian markets.

It looks like chocolate prices are on the rise so what better excuse for me to stock up on some chocolate before the price rises. Somehow though I don’t think my stockpile will be anywhere near Mr. Wards…

You know you’ve had too much to drink when your eyesight goes blurry, you slur your words and you spend half a billion dollars…

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Steven Perkins, a 34 year old commodity broker, attended a company golfing weekend, had a bit too much to drink over the weekend and then took the Monday off of work.

This in itself didn’t justify being fined £72,000 earlier this week by the Financial Services Authority (FSA) and being identified as “an extreme risk to the market when drunk”.

It was what he did on the Monday evening that caused all the excitement.

After the golfing weekend, Mr. Perkins felt the need to carry on drinking and started drinking again on the Monday lunchtime. Late that night in a drunken stupor he bought 7 million barrels of oil using $520 million dollars belonging to his then employers PVM Oil Futures.

Because the purchases took place in the middle of the night other traders around the world thought that there was something major happening in the oil market and as a result the price of oil shot up by $1.50 a barrel in less than 30 minutes. Through the alcoholic haze Mr. Perkins gradually increased his bidding price each time to push the price up until at one stage he was responsible for nearly 70% of the global market volume.

He tried to gradually sell down his position in the morning but no doubt with a very dry mouth eventually admitted everything to his employer.

His drunken night time purchases resulted in PVM losing £6million, him being fined £72,000 and banned from the industry for five years. Plus of course, an almighty hangover.

Should Michael Jackson have had more of a bond with David Bowie?

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It’s one year since Michael Jackson died.  In the year since his death, his estate has made earnings of £670 million.

Given that he was allegedly in serious financial trouble at the time of his death, this must be the source of a certain amount of posthumous frustration to Mr Jackson.  His ability to spend the money has been significantly impaired in the period since the money started to roll in, on the grounds of his no longer being alive.

This is a quandary well known to many pop stars.  The murder of John Lennon in 1980 sparked a sudden and deep revival of his career.

I can’t help but wonder why none of Michael Jackson’s advisors pointed him in the direction of the Bowie Bond.

David Bowie issued bonds in 1990 that were secured on the future income to be earned from songs that he had written up until that date.  This is a simplification of course, but that’s the big picture.  By doing this, David Bowie was able to get the benefit of some of his post death earnings while he was still alive.  He is a smart business operator as well as enormously popular song writer, it seems.

The Bowie bond has been influential in business since it was issued.  In practice, I personally used it as the backbone of market data to help in the divorce settlement of another well known musician.

Its influence amongst accountants is significant, though less so with the pubic at large. Rock stars probably don’t shout about it because valuation and securitisation of intellectual property isn’t really very rock and roll.

It’s a pretty good interest rate and it tastes a lot better than all the others…

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One of my weaknesses is that I just love chocolate.

Hotel Chocolat is a top end chocolate company with nearly 50 stores in the UK, the US and the Middle East. I must admit that I probably spend a bit too much time in their shops than I should but everyone has got their weakness.

As an accountant with a love of chocolate I was pleased to see Hotel Chocolat take a rather unusual approach to raising money to fund their expansion.  They are looking to raise cash to increase the number of Hotel Chocolat stores as well as invest in their plantation in St Lucia.

They are raising money by way of issuing bonds. This in itself doesn’t sound particularly unusual but what is different about this bond issue is that whilst they are genuine bonds with interest being paid on them, the actual interest paid is in the form of chocolate rather than money.

Two values of Chocolate Bonds will be issued. Holders of the £2,000 bonds will receive six chocolate tasting boxes with a value of £107 which represents a gross interest rate of 6.72% whilst holders of the £4,000 bonds will receive a higher interest rate of 7.29% via chocolates to the value of £233.

The bonds are fully redeemable after 3 years and on every anniversary after that so lovers of chocolate will be able to recover their full investment whilst at the same time enjoying some fantastic chocolates.

The interest rates on the chocolate bonds are pretty impressive when compared to what you would receive on a typical bank account so I’m sure that there will be many chocolate loving investors that will literally be licking their lips in anticipation of the interest that will be received (and eaten pretty soon afterwards….)

Allegations about two of the Big 4 and “espionage”? Make sure you don’t do this in your exam…

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So the June ACCA exams are finally starting today. After all the hard work students all over the world are facing that unique mixture of excitement, fear and anticipation as they turn over their actual exam papers for the first time.

One thing that really goes without saying though is that when you’re sat in the exam hall you shouldn’t be looking at the person next to you and trying to see what they are writing.

Although exams aren’t being sat in these two particular buildings occupied by PricewaterhouseCoopers and Ernst & Young in London, there have been various allegations recently that the buildings are a little too close for comfort.

Three years ago PwC moved into an office next door to EY. At their closest point the buildings are approximately 10 metres apart. This has led to concerns that the rival companies could spy on each other.

PwC have apparently made the first move to reduce the threat of “espionage”. In order to prevent EY employees spying on them through the windows they have installed automatic blinds that close as soon as audio-visual equipment is turned on. The offices have also been designed so as to prevent any computer screens from being visible through the windows.

EY were reported to be evaluating their options in response.

Whatever the outcome of this is, all of us here at ExP would like to wish you the very best in your exams and sincerely hope that you don’t feel the need to try to spy on your neighbour in the exam! GOOD LUCK.

The “little black dress” is a fashion icon but when you’re sitting your exams don’t forget to…

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The “little black dress” is an evening dress that is simple, classic and fashionable. Its origins date back to the 1920s with fashion historians claiming that the first design of the little black dress was made by the designer Coco Chanel back in the 1920s.

The design has been worn by numerous women over the years. The most famous “little black dress” was arguably the one worn by Audrey Hepburn in the film Breakfast at Tiffany’s.

This is all very interesting but what has it got to do with a blog for finance students and in particular what has it got to do with the ACCA exams that are taking place next month?

Well, if I’m honest it actually has very little to do with the exams as I can’t imagine there will be a lot of people wearing little black dresses to the exams! What should be happening though is that everyone should be attending the exams with a “little black pen”.

The June 2010 ACCA exams will for the first time see all the papers marked using scanning technology. The scripts will be completed as normal by students but instead of the scripts then being physically sent to the markers they will instead be scanned and then marked by markers “on screen”.

It is important therefore that you use a black ballpoint pen in your exams. If you use other colour pens, pencils, fountain pens or highlighter pens then these are unlikely to be picked up by the scanning technology and as a result the marker may not be able to see your answer.

Put simply, it doesn’t matter how good your answer is but if it is not picked up by the scanning technology then you may well find that you miss out on passing the exam.

In summary, forget about wearing a “little black dress” to the exam but don’t forget your “little black pen”.

But surely getting a grade B+ is good. Isn’t it?

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The world uses Standard & Poor’s ratings fluently. But they’re not always as good as they sound.

In the days of getting grades for exam work, I was always happy with a B.  A grade C was generally considered to be a pass and passing with a bigger margin than necessary has always struck me as a bit of a waste of effort!

So I’m personally “hard wired” to think of a B as good news.  This means that when I hear that bonds issued by the Greek government have been graded to BBB-, my instinct is to think that this all sounds rather good, all things considered.

To quote from the Standard and Poor’s website, these are the definitions that they use:

‘AAA’  Extremely strong capacity to meet financial commitments. Highest Rating.

‘AA’  Very strong capacity to meet financial commitments.

‘A’  Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.

‘BBB’  Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.

‘BBB-‘  Considered lowest investment grade by market participants.

‘BB+’  Considered highest speculative grade by market participants.

‘BB’  Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.

‘B’  More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.

‘CCC’  Currently vulnerable and dependent on favourable business, financial and economic conditions to meet financial commitments.

‘CC’  Currently highly vulnerable.

‘C’  Currently highly vulnerable obligations and other defined circumstances.

‘D’  Payment default on financial commitments.

Of course, the higher the risk, the greater the return.  This means that investing in Greek bonds at the moment can bring considerable returns.  Of course, it does so at considerable risk also.  It may feel that governments will never default on their borrowings, but remember Iceland.

There’s no generally agreed definition of what constitutes investment grade, but it’s generally seen as BBB.  This means that when S&P graded Greek bonds to BBB-, it was a quasi-official statement that the Greek government was in serious trouble.  The result is that yields on these bonds jumped to 15%.  There’s money to be made from holding Greek government bonds, but only if you’re willing to take some risk of losing it.

Can a “fat finger” really cost USD 800 billion?

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It happened so fast, you may have missed it: On 6 May the Dow (stock exchange) index lost 999 points in 15 minutes, the largest intra-day drop in the market’s history. USD 800 billion in share value was wiped out before recovering (in the next 15 minutes) by USD 600 billion.

So what happened? One trader suggested that the decline may have been triggered by a so-called “fat finger” trade, meaning that a transaction may have been entered incorrectly by human input. It was suggested that a “billion” may have been keyed in instead of “million”, with the result that some “big-name” companies, such as Procter & Gamble and 3M, experienced big (but temporary) falls in their share prices.

Whatever started the selloff, it was intensified by automated computer trading, which led to a cascade of “sell” orders. The authorities are checking whether exchange “circuit-breakers” worked properly (these are procedures to halt trading temporarily if prices drop too sharply). System safeguards may have to be tightened in order to protect markets which are already very nervous because of the Greek debt crisis.

So was it simply “human” error? A case of “operational” risk? Whatever the conclusions, it is clear that this event will prompt a re-examination of the markets from financial, regulatory and technological points of view.