By Winton Bates, on May 13th, 2009
In attempting to understand the current financial crisis I don’t have the benefit of a great deal of knowledge of macroeconomics. Nevertheless, I can understand only too well what many macroeconomists are saying about fiscal stimulus and multipliers because they are using Keynesian language that I learned in my first year at university 45 years ago.
During the 1970s nearly all macroeconomists seemed to abandon the crude Keynesianism that I learned about at university. Why have so many reverted to it at this time? The answer might have more to do with the desire for a comfort blanket in times of uncertainty than with the merits of Keynes’ approach. The Keynesian remedy does not seem to me to be much more relevant to the current situation than it was to the stagflation of the 1970s. It suggests that when you wake up with a debt-induced hangover, then you will soon feel better if you get the government to take on some more debt on your behalf. That doesn’t sound to me like a recipe for a more healthy world economy.
So I have been looking for articles which will help me to understand why the world is in recession and what can be done about it. The best aid to understanding that I have found so far is John Cochrane’s refinery analogy:
“Imagine by analogy that several major refineries had blown up. There would be tankers full of oil sitting in the harbor, and oil prices would be low, yet little gasoline would be available and gas prices would be high. Stimulating people to drive around would not revive gas sales. Borrowing gasoline and using it on infrastructure projects would be worse. The right policy action would obviously be to run whatever government or military refineries could be cobbled together on short notice at full speed, and focus on rebuilding the private ones.” John H Cochrane, ‘Fiscal Stimulus, Fiscal Inflation or Fiscal Fallacies’.
The “major refineries” correspond to the banks that have loaded themselves with toxic assets. The oil tankers sitting in the harbour correspond to the savings that are going to government securities paying low interest rates and the high gas prices correspond to the high price of credit to businesses and consumers (in many countries). The running of government and military refineries at full speed corresponds to the government raising funds by issuing debt and lending it to businesses and consumers.
Cochrane recognizes that this analogy does not give a complete picture of the current situation. He explains that if we just had a shock to the supply of credit (blown up refineries) we would expect to see stagflation – lower quantities of goods and services sold, but upward pressure on prices. Instead we are seeing lower quantities sold and lower inflation. So, we are also seeing a demand shock as a result of people becoming much more averse to holding risks. (The refinery analogy could possibly be stretched to accommodate this. If several major refineries were blown up then investors could be expected to seek to reduce the exposure of their portfolios to other firms that might also be at risk of “blowing up”.)
Would the situation be resolved if the central banks were to target a specific rate of growth in nominal GDP (as I discussed in an earlier post)? The answer might depend on what assets the central banks purchase from the public in pursuit of this objective. If they buy government bonds this will help satisfy the increased demand for money, but not address the supply shock in the credit market. It is possible that the market could take care of this problem e.g. major firms may be able to by-pass the damaged banks by raising funds directly from the public. However, when central banks buy newly-issued commercial paper and securitized debt they are acting directly in place of the injured banks.
As a stop-gap measure this kind of by-pass intervention has the important merit of being a lot easier to unwind than alternative approaches. If central banks confine their purchases to quality assets they will not have any difficulty selling them when inflation begins to rise and people get tired of holding so much money. The effects of fiscal stimulus involving cash splashes by governments are likely to be much more difficult to unwind without a decade or more of high-tax and low-growth stagflation.
It seems to me that current debates about the effectiveness of stimulus packages in lifting aggregate demand tend to miss a more important point about consequences beyond the immediate short term (i.e. long before Keynes’ long run when we will all be dead). John Cochrane makes the point as follows in relation to the U.S. economy:
“If the resources are not there to unwind our current operations, to quickly retire … newly created debt, a large inflation will result as people dump government debt. If history is any guide, this outcome will unleash economic dislocations on a scale to make our current troubles look like a pleasant memory.”
By Ajay Shah, on May 12th, 2009
I happened to glance at the top 10 underlyings in derivatives trading at NSE and saw this:
I remember not so long ago, when the only thing that traders in India could think about was individual stocks. At the time, it was extremely difficult to get them interested in macro underlyings.
I find it quite striking that now, the top underlyings are Nifty (i.e. Indian macro), the INR/USD (i.e. Indian macro), mini Nifty (also Indian macro) and Bank Nifty (an industry and not an individual security). I find the sophistication of industry analysis that’s now found in India to be a big step away from the way things were a few years ago, when there was only security analysis and no industry analysis.
The biggest things in modern finance are macro underlyings and not individual companies or commodities. I feel that while this transformation has taken place in trading, there is still some distance to cover in terms of bringing macroeconomic thinking into the hands of the people trading Nifty. People who trade currencies and interest rates explicitly think macro, but most of the people who trade Nifty don’t seem to do this explicitly.
I remember a long time ago, when equity derivatives were still something to argue about in Indian public policy debates, I used to have a vivid sense that individual stock futures would readily tap into the capability for leveraged trading on individual stocks that existed because of `badla‘. But shifting from that to index derivatives was going to require new ways of thinking. You might find this article of mine, from 1997, to be mildly amusing. Today it’s all obvious, but back then it was not.
Market microstructure theory has some important messages about why macro underlyings become more liquid than securities issued by firms. With firms, there is always more asymmetric information, which leads to bigger spreads (or bigger impact cost). With macro underlyings, informational asymmetries are smaller, which gives better liquidity.
By Winton Bates, on May 12th, 2009
It was a few weeks since I had seen Jim, so I made the mistake of asking him what he had been doing. He replied that he had been thinking about bankruptcy.
I said that I didn’t know his financial situation was that bad. Jim replied that he wasn’t having too much trouble paying his own bills at this stage, but he had been thinking about bankruptcy as an institution and about the role of government in bankruptcy. While he was saying that I was thinking that Jim was not the kind of person who would ever have too much trouble paying his bills. I heard him ask: “What do you think about bankruptcy?”
I said that I thought modern bankruptcy laws that wiped the slate clean when debtors had no hope of meeting their obligations were a huge advance on traditional practices such as virtual enslavement or imprisonment of people who could not pay their debts. I added that in my view there had to be a role for government in this process because you can’t allow people to hire muscle to pressure people to pay their debts. Since we have to rely ultimately on the coercive power of government to enforce contracts then we have to rely on government to devise rules about the conditions under which contracts cannot be enforced.
Jim nodded. He then asked: “What do you think about limited liability?” I said that I thought the contribution of limited liability to economic growth was often overstated because liability insurance could have arisen to serve a similar purpose in enabling individual investors to limit their liability when in investing in companies. I added, however, that I couldn’t see a problem in the owners of a firm declaring that their liability was limited to the amounts they had invested. In my view transparency is the important issue: people who lend money to the firm or provide good on credit should be aware that if the firm goes bust the liability of the owners is limited.
Jim said: “Hmm, so you are saying that if I form a company to engage in speculation there should be no limit on the amount of debt that the company can incur? Are you saying that I should be allowed to gamble with other people’s money secure in the knowledge that if the gamble doesn’t pay off then my own liability is limited to the extent of my own investment in the company?” I insisted that transparency was the important issue. If people are prepared to take the risks involved in lending money to speculators, good luck to them.
Jim said: “People who take those risks need all the luck they can get. What about systemic risks? It is one thing to accept that a few people will lose their life savings whenever some highly leveraged property speculator goes bust, but isn’t it something quite different when confidence in the whole financial system is threatened because of excessive leverage in major financial institutions?” I did my best to put the argument that the current financial crisis arose at the end of last year because central banks in major economies hadn’t established a credible commitment to maintaining a stable rate of nominal GDP growth. I suggested that the best way to deal with the deleveraging and associated decline in the velocity of circulation would have been by maintaining a monetary policy that would promote expectations of a stable rate of growth in nominal GDP.
I could see Jim’s eyes glaze over as I spoke. He said: “If you were making government policy decisions in the aftermath of the current financial crisis wouldn’t you be looking to see what could be done to avoid re-emergence of systemic risk in major financial institutions? I had to admit that if I was making government policy decisions I would probably be looking for policy levers relating to capital adequacy and things like that.
Jim said: “Ah, you sound just like one of those neo-socialists who advocates more financial regulation in order to save the capitalist system. Rather than interfering in the financial management of healthy companies, wouldn’t it be better for governments to focus on improving laws to minimize the adverse effects on the wider economy that can occur when some companies become insolvent. For example, why can’t the ownership of insolvent companies be quickly transferred to creditors?”
Jim seems to like asking me questions that I can’t answer.
By Ajay Shah, on May 11th, 2009
As we come to the beginning of the end of the financial crisis, the calls for the blood of bankers have abated. There is universal agreement that the system overall was flawed, and it is unfair to burden a particular group with the full responsibility of our current sorry state.
The time has come to dispassionately step back and ask the tough question. It may or not be unfair, but is it incorrect?
Consider first the arguments for those who claim that the Bankers have suffered enough.
There was a sense of outrage that that the Bankers had not paid for their sins. This is simply not true. As a percentage of their wealth, Bankers have lost more than everyone else combined. Fully 40% of Lehman stock was held by its employees. When that stock was worth $85, the company was worth around the same, in billions of dollars. Every person in Wall Street has the right to claim that they could not foresee the collapse. The original argument was that it took mala fide intent, or stupidity to not have seen the risk. It turns out that stupidity was the right answer, since every idiot on Wall Street was in fact heavily invested in – you guessed it, Wall Street.
Which brings us nicely to point 2. The idiots could not be held responsible, since there was not deliberate fraud. There is today only a perplexing cloud of sub moronic decisions. How, is everyone asking, could we not have foreseen this ? Naturally, we forgive ourselves, and having done that, find it easy to extend the forgiveness to Wall Street. They could hardly be held responsible for the wrong decisions. After all, we made them too!
Finally, we all would like to look at who else we could hold responsible. There is a popular cry that Rating agencies should have done more, or that the entire process of Ratings is intrinsically flawed. Regulatory agencies are also very popular invitees to the whip-them-all parties. Finally, what about the consumer, the buyer of gas guzzling Hummers, the takers of sub-prime loans to purchase houses three sizes too big? Surely, some of the pie, humble or otherwise, belongs to him as well.
These arguments are not unjust, but unfortunately they miss the point. This is not a bad thing – it shows our intrinsic humanity. It takes a special kind of cruelty to turn away from justice for the past and coldly consider what is best for our future. But it must be done. “The greatest good of the largest number” is a disgusting motto, but we it does help in analysing the issues.
I will get to the inconvenient truths, but first let me speculate about why the Bankers lost so much money.
<nasty on>The reason that the Bankers lost so much of their personal money was that they were all overpaid, and behaved exactly like people do when they come into money that they know they haven’t earned. They throw it into the riskiest earnings streams that they can find. That comforts them, because if they lose the money, well then, they did not do such a bad thing after all, since they didn’t take the money home with them. And if they win, well then, this time the money was made by them, so that feels good as well! <nasty off>
Well, that was nasty, but my personal belief in this comes from the incidence of Wall Street Bankers in Las Vegas during the boom years. It really doesn’t take too much intelligence to know that you are playing against the house, so why do such highly educated and well paid people – which probably means that they are intelligent – keep playing these games?
To come to somewhat more factual matters, the arguments for letting Ken Lewis and all the other CEOs “pursue other interests” are as follows.
The current incumbents cannot effect the change we need. It is sad but true that it is only after Obama won the presidency has it become acceptable to admit that it was a mistake to give Bush carte-blanche in Iraq. Only Senator Edwards had the courage to admit that he made a mistake, and in retrospect, it may be because it was one of his smaller ones  The current lot will go right back to making original sin #1, forcing really intelligent people to think like idiots because of misguided compensation structures.
Which bring us to point #2. While it is probably correct to absolve the CEOs of fraud, it would be incorrect to absolve them of stupidity. One has to assume that they have blundered, and it would not be right to not hold them accountable for their blunders. In this case, by kicking them out.
The last and final point is simply a rebuttal of the desire to make major changes to the infrastructure, or to the nature of human beings at large. It may or not be feasible to make major changes to the infrastructure and social polity within which Wall Street operates. It is simply not the better answer. We don’t need change around Wall Street, we need it in Wall Street. The best way to effect that change is change the players, not the environment within which Wall Street operates.
The last point is the coldest of them all, because it makes no bones about asking Ken Lewis to lose his job so that we can get on with our lives without having to wait 10 years for a new world order to come into place. But it is also the most important. It is simply the most practical decision to get a new broom to sweep clean.
By Bron Suchecki, on May 11th, 2009
Had a call today from a lady advising me that I would be getting a call in a couple a days from a “Commodity Advisor” with information about the gold market. She stressed that she wasn’t selling anything. When I asked where she was from and she replied Hong Kong I knew it was a boiler room operation and she was pre-screening.
As one would expect, I had no luck trying to get her to understand that as I worked at a Mint, I didn’t need anyone telling me about the gold market, I worked it in. I ended up saying don’t get the Commodity Advisor to call me and hung up. In retrospect I regret that, as I now want to know what the scam was so I can share it with you. Hopefully they’ll ignore my request and call back.
First time I’ve ever received or heard about this sort of thing for gold. A sign of the times that gold is going mainstream, now that the cold calling scammers are on to it?
By Ajay Shah, on May 11th, 2009
Some examples
- Siemens Ltd. (14 Jan 2009) sold its IT division to its parent co. and came out with a matter of fact press release to the shareholders and the rest of the world saying it’s divesting a low-margin business. The consideration: Rs.449 crore, for a business that earned Rs.994 crore in revenues and Rs.73 crore in net profit, in effect valuing it at a modest P/E of 6 times. The very same business in 2007 had earned a net profit of Rs.160 crore. Why should Siemens sell this company for such a low consideration? Shouldn’t they be sharing the valuation report submitted by Grant Thorton with shareholders (so that everyone knows the basis for such a low valuation), just like they send their Annual Report? [link]
- Lok Housing & Constructions Ltd. (30 Jan 2009) made an announcement saying all the profits it earned in the last three years will have to be written back. Reason: Customers canceled contracts. Action taken by the Company: It mutually agrees to let legally-bound customers cancel all the contracts, thereby saying that all the profits it reported in the last three years were non-existent! [link]
- Sterlite Industries (India) Ltd. (9 Sep 2008) Board cleared a proposal to restructure its business by transferring the Aluminum business (including stakes in BALCO & Vedanta Aluminum) and the power business (i.e. 100% stake in Sterlite Energy) to Madras Aluminum (a much smaller company with a mcap of less than 1/15th of Sterlite’s). Further, the proposal also included a tranfer of Vedanta’s (Sterlite promoters) 79.4% stake in Konkola Copper Mines in favour of Sterlite Industries for a 1:1 ratio. The transfer of this business would have resulted in a significant jump in Promoter’s holding in Sterlite Industries. Reasons for this restructuring as given by the Management: Increase in efficiency, simplification of corporate structure, and elimination of conflict of interest [link]. The point is not whether the such proposals are fair, but whether companies share sufficient information with shareholders so that they could make an informed decision on their investments. In the case of Sterlite Industries, given the scale of restructuring it was only fair on the part of the Company to disclose basic details like impact on the Profit & Loss Account, the Balance Sheet of each of the three companies, impact of increase in efficiency on profits and profitability, basis for valuing Konkola Copper Mines (one share of which was valued on par with one share of Sterlite Industries), etc. Media reports suggest that protests from certain large foreign funds and a big thumbs down to the share price pushed the management to cancel the restructuring proposal for the time being. [link]
- S R F Ltd. (16 Dec 2008) announced its decision to purchase two businesses of SRF Polymers (the main promoter company for SRF) for a consideration of Rs.151.8 crore [link]. Consider this: when the announcement was made, SRF Polymers had a market cap of Rs.64 crore. Further, SRF Polymers on a cumulative basis has not made any net profit in the last five years. So why should SRF pay Rs.152 crore for a company that is a). loss making, b). has a debt of Rs.130 crore (as of FY08) and is trading at less than half that value on the bourses any which ways? Important data point: SRF’s promoter SRF Polymer and SRF Polymer Investments own 45% in SRF), whereas the group’s real promoters (Mr. Bharat Ram and group) own 74% in SRF Polymers.
- Satyam Computer Services Ltd. (16 Dec 2008) tried acquiring two of its sister concerns Matyas Infra and Maytas Properties, offering handsome valuations for both companies with `un-related’ businesses, but with high promoters (read: the Raju family’s) holding [link, link]. The rest is history, but it was yet another attempt to short-circuit minority shareholders.
- D L F Ltd. (23 Mar 2009) may try to do something like SRF, according to the pink papers, which suggest that the Company is planning to take a controlling stake in DLF Assets, a company owned by DLF Promoters (the KP Singh family). However, there is no official announcement or proposal that the DLF Board had cleared to this effect. But, neither have they denied the news. In a response to a related article carried in the Business Standard [link], DLF said “The Company has been looking at various options from time to time; however, no definite option has been presented to the Board so far for its Consideration“. [link]. In another article dated 1 May 2009, it was reported that DLF has formed a committee of Independent Directors to look at options for DLF with regard to its relationship with DLF Assets Ltd. The Committee will look at various options, which includes a possible acquisition of stake by DLF. [link]
The big question is: Why should DLF buy a company for Rs.6-7,000 crore (as mentioned in the Business Standard report) that owes it more than Rs.5000 crore in dues? The same Business Standard report also makes a mention that the merger of DLF Assets is primarily being done to provide an exit to some of the funds who are invested in DLF Assets. Rumour or reality, we do not know. What we do know is that DLF is under significant financial stress right now. Consider this: For the quarter ended 31 Mar 2009, DLF reported a 74 per cent drop in revenues and a net loss (after adjusting for other income) of Rs.70 crore as compared to an adjusted net profit of Rs.2,141 crore in the year ago quarter.
- Ray Ban Sun Optics India Ltd. (30 Apr 2008) transferred its business of distribution and sale of various luxury frames and sunglasses (that includes Dolce & Gabbana, DKNY, Ralph Lauren, Oakley, etc.), other than RayBan to Luxottica India Eyewear Pvt. Ltd. (a wholly owned subsidiary of the Luxottica group, also the promoters of RayBan Sunoptics, upon the former’s instructions). Effect: Around 40% of Rayban Sunoptics’ revenues came from the distribution business. And even though it was low-margin affair, it did not require any capex from Rayban Sunoptics’ end, so in effect it had a fairly decent ROCE. But, yet it was transferred. After a couple of months, Luxottica de-listed Rayban by making a public offer at Rs.140 per share. Had this business included the trading business, would the minority shareholders not have received more consideration? [link, link]
- Zee Entertainment Enterprises Ltd. (22 April 2009), in its quarterly results press release, announced that it has increased its holding in one of its subsidiaries, Asia Business Broadcasting (Mauritius) Limited, from 60 per cent to 100 per cent. The deal involved a cash payment of USD 56 million (approx – Rs.280 crore) to some Resource Software Ltd., valuing the overall company at USD 140 million (10 times FY09 sales and 20 times FY09 net profit). What made Zee take this step when it any which ways controlled the Company given its 60 per cent holding? Why did it not choose to repay some of its debt on which it paid an interest of over Rs.130 crore in FY09? How justified is it to pay 10 times sales or 20 times profit, given the kind of turmoil we’ve seen on stock markets in the last one year? What does this company called Resource Software Ltd do, who owns it, and where is it located?
Last but not the least, the mysterious case of Orissa Sponge Iron:
Here’s a Company that is currently in the midst of a three-way takeover bid (bid details 1, 2 & 3), with each of the bidding companies willing to value the Company in the north of Rs.600 crore. That for a Company which in the last five years made a cumulative loss of Rs.5 crore. What’s more as of 31st March 2008, it had a debt of Rs.229 crore (which I think has now increased to close to Rs.300 crore, but that’s just a rough estimate based on the interest payments made by the Company in recent quarters).
So where is the profit potential? What are these companies paying for here?
Orissa Sponge has applied for iron ore mines and coal mines in Orissa and is awaiting some final leg clearances from the State Government. But, in the Annual Report for FY2008, the Company makes no mention about the size or the quality of ore in the mines (in a way that would help shareholders appraise the Company’s value and compare the same with its market capitalization). There are news/brokerage reports that suggest that the DCF value of these mines could be in the range of Rs.2000-4000 crore. But, they are all based on unconfirmed reports & estimates. But, if that is indeed the case, shouldn’t the Company be sharing information with minority shareholders to enable them to appraise whether to tender their shares in the ongoing bidding war for control?
Well, it seems that the takeover bid is not the only war the Company is involved in. There have been scores of reports in the media (link1, link2) about the promoters of Orissa Sponge Iron allegedly flouting SEBI’s takeover code and increasing their stake in the Company at various instances in the past. Let me try to simplify things here:
- Orissa Sponge Iron’s total promoter holding in June 2005 was 62.7%.
- This was increased to 69.3% by December 2006 (by way of conversion of warrants).
- The SEBI takeover code (that was prevalent before the changes made in 2008) mentioned the following about trigger points for making an open offer:
- Regulation 11(1): Between 15% to 55%, an acquirer may consolidate to the extent of 5% in any financial year without an open offer. Any acquisition beyond 5% in a financial year would entail an open offer of 20%.
- Regulation 11(2): Any acquirer who is at or above 55% but below 75% cannot purchase any additional share or voting right without making a public offer for 20%.
- Regulation 11(2A): Any acquirer holding above 55% but below 75% who desires to consolidate his holding may do so by means of an open offer to the extent of the applicable limit for continuous listing.
From the above it is quite clear that the Takeover code requires an open offer to be made in case there is an increase (even if by a single share) in the share holding of an acquirer who is at or above 55% but below 75%. While calculating shareholding, the rule allows the shareholding of persons acting in concert to be added up. In Orissa Sponge’s case, the matter is still open for debate, but there is a possibility that the acquisition violates the Takeover Code assuming that it is proved that all the various entities which were classified as promoters were acting in concert. Further, Orissa Sponge Iron included Unitech Holdings (that held around 7-8% stake in Orissa Sponge during the aforesaid period) as a part of Promoters & Persons Acting in Concert group, despite Unitech group’s claim (as stated in a clarification provided by Mr. Sanjay Chandra to DNA) that it was merely an investment in their personal capacity and that they were never involved in the management of the Company [link]. Funny, Orissa Sponge Iron includes an investor as a promoter, wonder why?
The table below indicates changes in the holding pattern for Orissa Sponge Iron and it makes for quite an interesting read.
|
Promoters Hldg as reported |
Promoter’s holdings |
Addnl share / |
Avg price |
|
(%) |
(shares) |
(net of Unitech investment) |
sale of shares (-) |
(of H, L & Cl.) |
| Jun’05 |
62.70 |
7452849 |
6529949 |
|
59 |
| Sep’05 |
62.70 |
7452849 |
6529949 |
0 |
53 |
| Dec’05 |
62.75 |
7467949 |
6545049 |
15100 |
42 |
| Mar’06 |
59.10 |
7736465 |
6813565 |
268516 |
28 |
| Jun’06 |
-NA- |
-NA- |
|
|
|
| Sep’06 |
66.00 |
8639485 |
7716585 |
903020 |
24 |
| Dec’06 |
69.31 |
10049485 |
9126585 |
1410000 |
28 |
| Mar’07 |
-NA- |
-NA- |
|
|
|
| Jun’07 |
62.81 |
9106865 |
9106865 |
-19720 |
34 |
| Sep’07 |
62.71 |
9093385 |
9093385 |
-13480 |
72 |
| Dec’07 |
45.07 |
9013628 |
9013628 |
-79757 |
500 |
| Mar’08 |
43.80 |
8759459 |
8759459 |
-254169 |
444 |
| Jun’08 |
43.80 |
8759459 |
8759459 |
0 |
239 |
| Sep’08 |
43.80 |
8759459 |
8759459 |
0 |
229 |
| Dec’08 |
41.51 |
8301249 |
8301249 |
-458210 |
105 |
| Mar’09 |
48.98 |
15301249 |
15301249 |
7000000 |
143 |
So where do all the aforesaid instances leave the minority shareholders?
Quite predictably, they remain at a serious disadvantage vis-a-vis the promoters. Promoters may claim that since they own a majority stake in the Company their interest is equally (or more) affected than those of the minority shareholders. Maybe, the argument has some merit. But, are the minority shareholders so unimportant that Company’s do not even share details & justifications for large and important transactions like hiving-off of business units (as was in the case of Siemens, Rayban, et al) or restructuring of businesses (Sterlite) or ownership of strategic assets whose value is significantly greater than what reflects on the Company’s books (Orissa Sponge Iron’s mines)?
What can we do?
- What the regulators need to do is make it mandatory for listed companies to share key material information that relates to important transactions like Business/Capital Restructuring, Scheme of Amalgamations, Purchase/Sale of Assets/Investments to related companies, etc. Usually, in such cases various reports are prepared, viz. a detailed Scheme of Arrangement/Amalgamation (to be submitted to the High Court) or detailed valuation reports (prepared at the behest of the Company by external agencies). Companies should be required to share these with their shareholders just like it is mandatory to send Annual Reports.
- Make the transaction a transparent one, based on which a shareholder can appraise his/her investment. The way to do this was shown to us by Tata Motors, where most of the details of its takeover of JLR were made available to shareholders [link]. We may agree or disagree with Tata Motors on the merits of the acquisition or the price paid for it, but at the end of the day the investor had the option to appraise his or her investment and decide whether to stay with them or walk away.
- Detailed background information of all those involved in a purchase/sale transaction should be provided. For e.g. in case of Zee Entertainment, the Company paid about Rs.280 crore to a company called Resource Software for a 40% stake in Asia Business Broadcasting (in which it already had a 60% stake). Now, what is this Company? What does it do? Where is it located? and who are its promoters? These questions are not to doubt Zee’s intentions, but its a question of being transparent with your shareholders.
- Companies that hold Analyst Meets (one to one or in the form of a gathering) or conference calls usually share a lot more information than that available in the Annual Report or on the Company’s website. And, in most cases this information is not available to minority shareholders and is neither available in public domain. Regulators must make it mandatory for listed Companies to share the transcripts of such analyst meets and concalls in public domain and that too within a stipulated time frame. Again, just the way companies like Tata Motors do it [link].
By D H Smith, on May 8th, 2009
In better times, I was a money manager. My first job was analyzing Asia-Pacific stocks for one of the world’s largest pension funds, and my first boss was a very smart, savvy Hong Kong Chinese person. I had coffee with her recently and she says she is certain that this country is already experiencing capital flight. Capital flight is one critical step beyond “capital strike,” which is how Larry Kudlow on CNBC characterizes it. If true, this is a big problem for a country with a current account deficit such as ours.
By Cheryl Grey, on May 8th, 2009
Okay, so the U.S. is solidly in recessionary territory. The fundamental economic data are lousy, trends are down, consumers and businesses are retrenching, and nobody is happy. We know that, if current forecasts are accurate, the fourth quarter of 2008 will be the worst in terms of economic performance and at least the two following quarters aren’t going to be all that pretty, either.
What we now want to know is, how will we know when the worst is over? What signposts will show when the bottom has been reached and the light ahead isn’t the proverbial catastrophic train wreck heading right at us?
Watch the stock market indices such as the Dow Jones Industrial Average and the S&P 500. Market movements can influence the economy, but being forward-looking, stocks tend to move first and therefore can serve as a leading indicator (explained below) for what people call “the real economy.” An examination of market movements during previous recessions shows that stocks tend to start their rally about four to six months before a peak forms in continuing claims for unemployment benefits.
For example, in the recession of 1981–82, these claims peaked at 4.713 million in November 1982; however, the Dow Jones bottomed out in August and rose over 300 points in those interceding four months. This pattern repeated in 1990–91 and 2001, as well. So when the DJIA quits jittering between 8000 and 9000 and actually begins rising on a sustained uptrend, it will be a good indication a bottom is forming in the labor market and therefore the real economy, too.
Watch the leading indicators. Most economic announcements concern lagging indicators, which trail the data they illustrate by a matter of weeks or months. While the time is necessary to allow for tabulations and calculations, reading about last month’s industrial production figures (down 0.6% in November) is old news at best.
On the other hand, some economic indicators are designed to show, not where the economy has been, but where it seems to be going. These leading indicators are often surveys of consumers or business managers, most of whom know their budgets to a hair, and the readings published therefore reflect their financial expectations for the coming months. The best leading indicators are consumer confidence surveys, such as those published by the Conference Board and ABC News, and commercial indicators such as business confidence surveys, purchasing managers indices, and industrial new orders data.
The two very best are the U.S. Leading Economic Index (LEI) of the Conference Board, and the Purchasing Managers Index (PMI) of the Institute for Supply Management. The LEI pulls from forward-looking data such as building permits, interest rates, manufacturers’ new orders, stock prices, and initial claims for unemployment benefits, and calculates them into a single headline figure for easy comparisons. It’s currently at a level not seen since 1991 and has fallen 3.7% from this time last year.
The PMI unfortunately doesn’t make for more cheerful reading. This survey of manufacturing purchasing managers looks at inputs such as commodities prices, new orders, order backlogs, employment plans, and customer inventories, and calculates a headline figure as well. A reading of 50 indicates the U.S. economy is stable, while readings above that point to expansion and readings below point to contraction. The current November manufacturing PMI stands at 36.2, the worst it’s been since May 1982, with significant gains required to indicate an economic bottom is in place.
Finally, watch payroll data, not unemployment figures, which can be skewed by seasonal factors and the workforce participation rate. Employment figures, on the other hand, point to jobs created and people back at work, and a rise there is generally followed fairly quickly by a similar rise in retail sales.
Like all predictions, this one carries certain caveats, the biggest being that another shock to the global financial network would be much harder to absorb at this stage of the economic game. But indicators don’t lie, and sooner or later that light ahead really will be the end of the tunnel. Watch for it.
By David Barr, on May 7th, 2009
I have been thinking a lot about the meaning of saving money. Which brings me to what I call the fundamental question of finance: How does forgoing consumption today translate to increased consumption in the future?
In thinking about this question I have identified six distinct answers to this question:
The dog: Place a bowl of food in front of a hungry dog and it will devour it without hesitation, lick the bowl clean and then look around for more. The dog’s world represents the very simplest economic system. What you have now is what you consume now. If there is plenty today the dog will eat itself sick. If there is no food tomorrow he will go hungry.
The squirrel: Before the first human walked the earth, animals such as squirrels discovered the first financial innovation. Just as the squirrel gathers nuts to get through the long winter, there are some goods that we can simply store and use in their current form. This is the simple and most obvious answer to the question listed above. For many people this is as far as they get when thinking about savings. However, money is not a can of beans. Simply storing money today does not automatically translate to purchasing power in the future.
The farmer: Around 10000 years ago humans discovered that seeds left in the ground would grow into new plants. Thus the birth of agriculture also represented the first investments. By not consuming some grain today, early farmers could ensure a reliable supply in the future. Many natural and living things allow this sort of simple investment. We now know that by not clear cutting a forest or fishing a species to extinction we can ensure an adequate supply for the future.
The builder: Some projects take a lot of time and effort before they yield any value. 10 people might have to work for half a year to build a house. Bigger projects like highways and dams can occupy hundreds or thousands of people for years. Of course all of those people need food, shelter and all the other necessities of life. Which brings us to the fourth answer to our big question. When I consume less then I produce, my surplus can sustain those who are working on larger projects. In exchange, I expect to receive some of the benefit of the completed project.
The parent: Over the course of ones life ones needs and abilities change. A new born infant is completely helpless to meet its basic needs. By providing for young children during their peak production years, the parent can count on their children to sustain them as they age. This familial relationship has been a cornerstone of nearly every society in human history. In modern societies this function is often aggregated, in that governments invests in education for children and pensions and medical care for the elderly. The logic is basically the same, individuals in their prime working years consume less then they produce, while the surplus goes to supporting children and the elderly.
The creator: The greatest achievements often require years of effort with only a small possibility of creating anything of value. Great works of literature, billion dollar corporations and medical breakthroughs all follow this pattern. An individual researcher may toil for 20 years with no tangible results before a discovery that creates millions of dollars of value. The artists, entrepreneurs, scientists and writers depend on the savings of the general population to support them in their efforts.
The financial sector is responsible for taking the excess production of today and using it to meet the needs of the future. Some goods can be stored for the future, but the vast majority of the production is services or perishable goods that cannot be stored. Forsaking consumption today does not guarantee that there will be plenty tomorrow.
By Trace Mayer, on May 7th, 2009
Serious investors should watch specific key ratios; which I provide freely to any RunToGold reader. The major asset classes include gold, silver, oil and stocks. At all times and in all circumstances gold and silver remain money. Oil is the worlds primary energy source. Among other purposes, stocks should represent the wealth generating capability of the economy.
There appears to be (1) a strong uptrend for gold, (2) a fairly decent bear market rally for equities that is running out of upward pressure, (3) a resurgent oil, (4) insane accounting sorcery that is rending any remaining confidence from the financial statements of corporations, (5) insolvent banks being sustained only through government bailout, (6) massive job losses with (6) continued bankruptcies which (7) detonate financial weapons of mass destruction.
DOW PRICED IN GOLD
10 Februrary 2009 I wrote about how the DOW had predictably crashed, again with a price of 8.67. It later bottomed slightly under 7 or about a 20% decline. The DOW has since recovered to 9.32.
Because of the 200dma and 50dma there appears to be plenty of downward pressure available for the DOW.
 GOLD TO SILVER
Gold is the world’s monetary commodity. By analogy, gold is like an oil supertanker while silver is like a speedboat. Silver usually always chases gold both up and down in terms of fiat currency. This is largely due to the much smaller hoards of silver and its industrial demand characteristics. Silver is the speculator’s territory and smaller pools of capital can significantly impact its price. Consequently, the recent breakout of silver portends a fairly strong bull market for the monetary metals.
BACKWARDATION
Earlier I explained the process and importance of both gold backwardation and silver backwardation because of their role as monetary commodities. Since that time there was an unprecedented black swan where silver was backwardated for nine weeks! While the ’sweat of the sun’ and ‘tears of the moon’ are no longer in backwardation on the LBMA forwards fixing; there continues to be some slightly unusual activity with particular interest in the 3 and 6 month silver contract and the 3 and 12 month gold contracts.
OIL IS GETTING MORE EXPENSIVE
As I explained in December, oil is the world’s primary energy source and therefore the gold to oil ratio does matter. ”Oil is either going to go up, gold is going to go down or to move into some sneaky calculus the rate of oil’s rise will be faster than gold’s.” Since that time oil has increased from 1.28 goldgrams per barrel to 1.92 or about 50%. While gold has gone from the $770s to the $900s.
CALL OPTIONS
On 29 April 2009 Adrian Douglas of Market Force Analysis wrote, “The bets by bulls outnumber those by the bears by a 2.3 to 1 ratio which is even more bullish than for JUN 2009. The Total Call option interest is 113,663 contracts which is very similar to JUN 09. Furthermore if gold is trading at around $1600 by DEC then 100,000 contracts will be in the money!”
DENIAL
I highly recommend reading Nation Ready To Be Lied To About Economy Again by The Onion: America’s Finest News Source. Among the notable quotes are, “According to a CBS News/New York Times poll, 98 percent of Americans no longer appreciate President Barack Obama’s attempts to break down the economic crisis into simple terms they can understand. Instead, many say the president should have the decency to insult their intelligence by using complex jargon to confuse and deceive them, perhaps even implying that the subprime mortgage fallout was just a big misunderstanding that resulted from a clerical error.
“I know when he’s telling the truth, and it bothers me,” recently laid-off schoolteacher Mary Hanover said of Obama. … Thus far, many policymakers in Washington have responded favorably to their constituents’ requests, saying they respect and understand the public’s need for dishonesty.”
With politicians encouraging fair-value lying in conjunction with rewarding financial terrorists for detonating financial weapons of mass destruction there is good reason shell-shocked Americans prefer to be repeatedly lied to about the state of the economy. Please, in the comments tell me what you think about whether the video The Goverment Should Stop Dumping Money Into A Giant Hole?
NEXT GLIMPSE OF REALITY
 Last June on stage at the Cambridge House conference after the Bear Stearns fiasco I was asked a question about whether the economy would get better. Unlike the other commentators I responded, “No, the light at the end of the tunnel is just the next train and there will be plenty more. Get out of the way!”
So likewise the light at the end of the tunnel is not safe but dangerous. The next round will consist of failed corporations starting with Chrysler, a credit crunch starting with the single digit midget Bank of America needing $34B and derivative settlements on credit default swaps like BTA or GM.
As much as individuals, corporations and governments would like to deny reality there is basic economic law at work. At the behest of their owner’s the Obama administration is intentionally exacerbating the Greater Depression because the financial terrorists who make so much money vaporizing companies are gleefully detonating financial weapons of mass destruction.
THE GREAT CREDIT CONTRACTION
Like a skydiver closing its eyes, the derivative illusion has allowed a brief reprieve from staring at the rapidly approaching reality. Like a skydiver who does not understand the basic laws of gravity and why they are falling and not floating; most Americans feel helpless in their current situation and have an intuitive sense that something really big and really bad is coming.
But there is a parachute, already properly packed, and a ripcord to pull. The immortal risk-free asset that can never become worthless idly sits ready to protect and preserve capital. Capital is rapidly moving down the liquidity pyramid into safer and more liquid assets while the fictitious capital evaporates away when liquidity dries up and no bids are offered.
The Great Credit Contraction has only begun. While gold is money it is nowhere close to being used as a currency in ordinary daily transactions. While the trust purports to hold over 1,000 tons of physical gold a simple reading of the prospectus reveals a tremendous amount of risk with GLD ETF in contrast to an option like GoldMoney that poses no counter-party risk and is not involved in OTC derivatives.
The amount of individuals who have allocated even a small portion of their net worth to the safest and most liquid asset is terribly small. That is one of the most bullish aspects of the immortal currency. After all, there is only about 4/5th of an ounce available per person.
 CONCLUSION
Because of incredible activity in gold call options, a fairly decent bear market rally for equities, oil having strengthened considerably, insane accounting gimmicks, insolvent banks, continued bankruptcies triggering financial weapons of mass destruction along with settlement the next few months will be particularly interesting.
While the DOW may continue its rally I highly doubt it will breach 11.5 gold ounces before it resumes its downward destiny and reaching 5-6 ounces sometime this year. Silver will likely continue its upward ascent and return to a more normal ratio with gold around 55. A little bit more difficult to prognosticate is oil but if I were to wager it would not descend too far below 15 on the chart but the probabilities are not particularly clear either way.
Like the basic laws of physics such as gravity; the basic laws of economics are not difficult to grasp. As “T. S.” recently remarked a couple days ago about my work The Great Credit Contraction, “Thanks, my whole perception has again shifted. Finished the book yesterday. I studied a little economics at school and Uni and hated it. Your work is brilliant and makes sense.”
Gold, silver, oil and stocks are sometimes expensive and sometimes cheap. The investor wants to buy cheap and sell expensive which reveals gold’s true role: Money. Gold is as effective at accurately relating value today as it was hundreds or thousands of years ago.
Disclosure: Long physical gold and silver.
Copyright © 2008. This article was published on http://www.RunToGold.com by Trace Mayer, J.D. on May 7, 2009. This feed is for personal and non-commercial use only. Applicable legal information and disclosures are available. The use of this feed on other websites may breach copyright. If this content is not in your news reader then it may make the page you are viewing an infringement of the copyright. Please inform us at legal@runtogold.com so we can determine what action, if any, to take. (Digital Fingerprint: 1122aabbLittleBrotherIsWatching3344ccdd)
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