my wife wants a cooker

January 26, 2009

My wife wants a new gas cooker, and as a decent husband I took her down the shops to choose. We went around the usual stores, including Currys and Comet, the largest white goods retailers in the country.

After doing the rounds, a very interesting pattern started to emerge: pretty much all cookers that we asked for were out of stock. This was true even for items that were on discount, which we found a bit bizarre. The sales guys seemed to have no clue as to when they would come back on, with most of them guessing a four to six week wait. They were all keen to point out that we should nevertheless put our order forward, in order to secure our enamel dream.

Now as an expert in all things financial, I thought it would be interesting to check the stock and CDS prices for DSG International (owner of Currys) and Kesa (owner of Comet).

The CDS price is the insurance premium one would pay to protect themselves against a company defaulted. Typically it is used by bondholders as insurance (but, as you might have noticed, all sorts of unscrupulous financiers have been speculating with that stuff recently). Nevertheless, for DSGI the CDS quote was a whopping 18%. This means that if I want to buy insurance for DSGI bonds that promise to pay me EUR100, the premium would be EUR18 per year. Now that’s quite a lot of money, which means that someone believes that these guys might actually default. In fact, the implied probability of default would be at least 18% per year, depending on what proportion of the EUR100 I will be able to recover if DSGI default. With the standard 40% recovery assumed in the market, the default probability is an amazing 30%. This is roughly 2.5% per month.

To recap, some guy wants to sell me a cooker he doesn’t actually have yet. Actually, as far as I could tell, he doesn’t seem to have many cookers at all. But he nevertheless wants me to pay more than 500 quid in advance for it, in full. He promises that he will go and get it for me in the next couple of months, but there is a decent chance that he will make a runner.

Is this how we are going to get ourselves out of this mess? No way mate.

(Unfortunately –or fortunately– Kesa don’t have CDS contracts, and for that reason I could not replicate the analysis. The same is true for Home Retail Group that own Argos.)



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