Thursday, January 22, 2009

TAPI Petroleum Gas Pipeline

The Turkmenistan Afghanistan Pakistan India Petroleum Gas pipeline is scheduled for the start of construction in 2010 and the projections are that it will provide its first supply to India by 2015. The pipeline will run 1040 mi (1,680 km) pipeline will run from the Dauletabad Gas field in Turkmenistan to the Indian town of Fazilka, running through southern Afghanistan (Herat-Kandahar);and Quetta and Multan in Pakistan. As of 2006, Dauletabad had around 1.4 trillion cubic meters of gas reserves left. The pipeline has ane stimated cost of $ 7.6 million and the Asian Development Bank is co-ordinating efforts of the steering committee of the four nations' petroleum ministers. ADB is providing technical assistance in the form of feasibility studies, etc and it's agreed to provide financing for the project subject to the condition that it wouldn't crowd out private investors.
The project according to ADB studies is economically and financially feasible. The pipeline has a designed capacity of 3.2 billion cubic feet per day (around 30 billion cubic meters per year)

Saturday, January 17, 2009

"Failure to Deliver" in the US Treasury market

At this post on credulous_prole's utterly correlated blog page Dr. Susanne Trimbath's work on the mechanics of the "failure to deliver" in the US Treasury debt market is explained.
Dr. Brad Setser's analysis of the latest Treasury International Capital (TIC) data for November 2008 shows a marked shift from long term to short term Treasury debt purchases by foreign central banks. His previous analysis shows a large volume of private purchase of US Treasuries in 2008.

Here's an extract from Dr. Susanne Trimbath's article:
"Because the financial regulators do not require that the actual bonds be delivered to the buyer, your broker credits you with an electronic IOU for them, and, eventually, with the interest payments as well. But the so-called “bonds” that you receive as an electronic IOU, called an “entitlement”, are phantoms: there aren’t any bonds delivered by your broker to you, or by the government to your broker, or by anyone. "

I strongly advise the reader to go through her entire analysis.

I think Dr. Trimbath's analysis might have a connection with the reduction in long term Treasury purchases by foreign central banks. I could be wrong here.

Friday, January 16, 2009

Theme: The Geoeconomic World War

The purpose of this essay is to elaborate on the theme of this blog. Private investors in India are concerned with the performance of stock market indices and the profitability of investments in particular sectors of the Indian economy. These barometers are affected significantly by geo economic and geo political developments which exercise what is largely an influence that is in my opinion under-appreciated by domestic investors.
A full fledged geoeconomic war is raging, a war in which few sovereigns and regions have the choice of an insulated neutrality, in my opinion. My view is that the decisions and actions of most policy making organizations constitute an effort to strike a balance amongst various interests, rather than a tendency to focus on a more general nationalism that is symbolized by these entities.
The oil and gas industry is one of the focus areas of this blog. The process of exploration, extraction and distribution of petroleum and petroleum gas products involves several significant policy interactions. Given the scale and economic importance of these activities, these interactions constitute what should be understood essentially as being amongst large rival commercial organizations operating in this sector. Oil companies however, can exercise a competitive influence on policies of a particular sovereign versus those of another; and influence that also acts in different directions on the policies of a particular sovereign.
Competition in this sector appears to have recently intensified to the respective financial sector backers. Those institutions exercise influence on the availability of credit; and therefore on the monetary policies of independent central banks; and the fiscal policies of sovereigns. Study of the ownership (and significant rapid changes in ownership); of financial institutions in different geographies is therefore reflective of geopolitical influences at cross purposes.
The competitive dynamics in the oil and gas industry has also broken out in more visible political events: such as regime changes, and, more recently, medium intensity military conflicts involving sovereigns and militant groups.
The overarching objective of analyzing information along these dimensions is to predict the likelihood of resolution of these conflicts. While there is a natural tendency to favor the limitation of collateral damage; for instance, in the form of widespread unemployment, or vicitimization of unarmed civilians in armed violence; that predisposition does not entail any political, nationalist, religious or other ideological affiliation for this author.
It follows that the resolution of these conflicts augurs very well for the performance of the stock market barometers, though limiting the collateral damage has much more humanitarian significance than the improvement of the stock market barometers.
It is also true that we should expect the markets to look ahead towards a particular resolution rather than wait on it to actually occur, and I hope this blog will contribute to the market participants' efforts to look ahead.

Another Volte Face on Extradition of Mumbai Terrorists

Pranab Mukherjee: " We have never given up the demand that the perpetrators of terror acts should be extradited to India. There is no question of that or climb down."
The deal is more obvious now, according to me. If Pakistan wants to be friends with Iran, it can't be friends with India at the same time. Because Indians are great pals of the US Department of State. And the Department of State is friends with Israel. Israel doesn't like the Hezbollah and the Hamas. Iran happens to be supporting the Hamas quite openly.
This is like a geo-political roulette wheel :-)

Nuclear Power: Westinghouse Electric Company

Westinghouse Electric Company, a US-based nuclear power firm, signed a memorandum of understanding with India's largest engineering company, Larsen and Toubro Ltd. to manufacture modular nuclear power reactors yesterday (Friday).
WEC is also exploring the possiblilty of a partnership with the state owned Nuclear Power Corporation of India, Meena Mutyala, WEC's vice-president for global growth and innovation, said. (Source: Print editition of The Economic Times today)
Other corporate nuclear power companies with plans to set up in India include General Electric and Areva, a France-based company with a listed unit in India.
The Russian government representatives also visited New delhi and signed a vague MoU related to nuclear power. I don't rate the chances of a Russian firm manufacturing nuclear power reactors in India as very high, for obvious geo-political reasons.

Geopolitical Insights from "The Economic Times" (today's print edition)!

The following analysis is from the January 16, 2009 print edition of The Economic Times (Bennett,Coleman & Co Ltd.).

On Page 02 you see the report titled "Pranab will settle for Pak trial now". Foreign Minister Pranab Mukherjee is now willing to accept a transparent trial in Pakistan for those who have committed crimes against India, viz. the perpetrators of the Mumbai terror attacks. What Pranab Mukherjee actually said, and he is quoted in the paper is: "Indian fugitives should face Indian justice. Others who have committed crimes against India should also be extradited. But if for some reason that is not possible, then there should be a transparent trial in Pakistan." The author correctly sees this as very different from the earlier Government of India demand that the terrorists should be "handed over to us to face trial".

On Page 19, there is a small block titled "Pakistan might opt out of IPI gas pipeline project". 'An unnamed Petroleum Ministry official' (in Islamabad) has told the Economic Times journalist that with Iran seeking an exorbitant $10 to $11 per mmBtu of gas from Pakistan, Pakistani authorities might recommend to their Parliament to abandon the proposed $7.4 billion tripartite Iran-Pakistan-India gas pipeline project.

India has been uninterested in having any agreement with Iran over this proposed project for quite some time now. Remember that the earlier Petroleum Minister of India, Mani Shankar Aiyar stepped down from his portfolio and Murli Deora became the new Petroleum Minister precisely because the Government of India was not interested in having either a petroleum pipeline, or a petroleum gas pipeline built from Iran through Pakistan to India. Mr. Mani Shankar Aiyar was a career diplomat in the Indian Foreign Service who was posted in the Middle East for a long time.He later won election to the Parliament and was an aggressive proponent of the Iran-Pakistan-India oil pipeline project. The United States plan is to have a new pipeline built southwards from the Caspian Sea through Afghanistan to an Arabian Sea port in Pakistan.

The report today that Pakistan hasn't yet finalized their decision on the project, but that they now might not go for it, is therefore representative of some kind of a shift on this issue.

The two reports are obviously linked. The United States Department of State, behind the scenes, is brokering a deal here. The deal is simple. Pakistan shouldn't co-operate with Iran. They should go for the US-backed pipeline project instead. Then the Department of State friends in India won't go after the Zardari regime to extradite their henchmen, who conducted the Mumbai terror attacks.

This post should also indicate to you good methods to use while reading the financial press. It's important to separate facts from interpretations made by the authors. It's even more important to acquire a contextual awareness, either by reading over time, or by reading related materials when you come across something new. You're advised to cultivate the ability to link various reported developments (that you consider as facts) and understand the evolution of the unfolding themes. It's a very good habit to check data from different sources to be sure that what you think are facts are supported by various commentators.

Infosys "Constant Currency" Q3 results!

I don't have anything against Infosys. This is an objective assessment of what was stated by the Infosys Board members on CNBC TV18 telecasted discussion of the Q3 results.

Along with millions of investors, IT employees, etc I watched the Infosys Q3 results discussion with the highly regarded Infosys Board; with presenters Udayan and Mitali a few days back. My view is that Infosys revenues fell during Q3. Infosys fired a large number of people and asked a large number of people on site to go on loss of pay leave. This reduced their outflow on salaries. The USD/INR exchange rate improved the company's margins. Overall, revenues fell in all geographies when measured in the same currency against previous quarter numbers. Margins improved because of a stronger dollar, and because of the culling of the bench. Infosys didn't do anything miraculous in terms of their business process to improve their margins dramatically.

The outlook for CY 2009 is truly dire. A lot of clients are on the verge of bankruptcy filing. There's little chance of any new projects coming Infosys's way. It's a volatile currency world. Infosys just has an unsophisticated foreign currency receivable hedging process, in which they mainly use non deliverable currency forward contracts, like a commodity export/import business. There was really nothing objective to cheer about in the Q3 results. Yet the stock price rose after the Board's TV discussion of the Q3 results.

At the Q3 results discussion the "constant currency" reasoning was presented by the Board.

While discussing revenues, the Board asked investors to take the view that there wasn't much decline in "underlying business volume" because you have to allow for the currency fluctuation. For instance revenues from the UK and Europe showed up lower when measured in USD because the US dollar strengthened against the GBP and EUR.

While discussing margins and net profits, one Board member stated that Infosys has a model which helps them to retain high margins even when the utilization is lower. The current crisis is a test of the model, he indicated.

I don't think there is any such model which can defy basic arithmetic. The viewer was supposed to accept the revenue as ok, as not having declined much, in "constant currency" terms. While looking at margins and net profit, the Infosys Board didn't apply their constant currency argument.

The good margins weren't because of a strengthening dollar, according to the Infosys Board. Infosys has a secret model that nobody has heard of. The model helps them to make high margins even when they have fewer people working on projects.:-)

Sold Satyam @ Rs. 36.45 on Jan 12

I didn't make any posts since Jan 12. On Jan 12, in the afternoon after lunch I noticed that Satyam had gone up to around Rs. 36.50. I sold it on instinct. I had previously exited my Nifty shorts as I mentioned somehwere else. Since the 12th I haven't done any trades.
I was bearish on the Nifty for the January series. I exited all my shorts the day of the Satyam Panic and after that I went long in Satyam delivery, stayed on for one trading day with a weekend in between and sold off the Satyam shares.
I've had a lot of difficulty taking a view on the Nifty since the day of the Satyam Panic.

Sunday, January 11, 2009

No view on Nifty this morning

I closed out my Nifty shorts in the wake of the Satyam panic and bought Satyam at Rs. 21.05. Today I have no view to offer on the Nifty.
It's the third anniversary of my late father's passing away today.

Saturday, January 10, 2009

January 08 2009 - EGoM decision on RIL Gas supplies to Reliance Power

Anil Ambani's entity plans a Gas based power plant at Dadri in uttar Pradesh and the EGoM has decided to direct RIL to supply gas to the 7,480 mw plant if it's available from the Kaveri-Godavari basin. The EGoM meeting was attended by Petroleum Minister Murli Deora, Law Minister HR Bharadwaj and Power Minister Sushilkumar Shinde, according to a front page ET exclusive report in the financial daily, The Economic Times dated January 08, 2009. The article is titled 'End in sight to Ambani Gas Row'.

Friday, January 9, 2009

December 24 2008 - Justice KK Tated Transferred to Aurangabad Bench from the Mumbai High Court

Justice KK Tated was transferred on December 24 2008 as part of a routine re shuffle. Ram Jethmalani and Mukul Rohtagi, both lawyers representing RNRL requested continuation of Justice KK Tated on the same Mumbai High Court Division Bench to facilitate early hearing of the case.

December 11 2008 - Govt Withdrew its affidavit filed in favor of Mr Mukesh Ambani

The Division Bench of the Mumbai High Court consisting of Justice KK Tated and Justice JN Patel suggested the Government withdraw its affidavit stating that "Sale of Gas at a price less than $4.20 per million British Thermal Units is not envisaged according to the decision taken by the Government of India's Empowered Group of Ministers with respect to the Production Sharing Contract between the Govt. and Reliance Industries Ltd.", according to the linked article.

The RIL-RNRL dispute

This article provides good numerical facts about the dispute but appears to me to be slightly biased.

The CPI Central Committee condemns the Essential Services Management Actions

Here today you see that The Central Committee of the Communist Party of India has condemned alleged arrest and detainment of the officers of the 14 Oil Public Sector Units under the Essential Services Management Act and the Government's threat to 'call in the Army' to deal with the strike.
"The major point of demand has been the demand of the officers for a "five year tenure" of their wage-revision instead of ten years." according to this article.

Executives of Indian Oil Corporation and Gas Authority of India Ltd. strike for 3 days and end it today

Another IBN Live report states the strike has ended with hard talk on wages from Petroleum Minister Murli Deora.

Russia's Gas Supplies to Europe through Ukraine

Daryna Krasnolutska in Kiev reported on Bloomberg that at 07:44 a.m. on January 07, 2009, OAO Gazprom, Russia's Gas export monopoly cut off ALL GAS SUPPLIES TO EUROPE THROUGH UKRAINE. This was confirmed both by NAK Naftogaz Ukrainy, the Ukranian utility and by Alexander Medvedev, the Deputy Chief Executive Officer of OAO Gazprom.
The article quotes the Naftogaz spokesperson, Valentin Zemlyanski as saying that Gas supplies to EUROPE through Ukraine were CUT to 74 million cubic meters a day from the normal levels of about 300 million cubic meters a day.
The reason for the capitals is to make sure the article is understood correctly. Russia significantly disrupted European Gas supplies on January 07. Read the post below to know what happened to Iran's Gas supplies in the following week.
I don't have sufficient insight right now on OAO Gazprom's Nord Stream and South Stream Links for Gas exports to Europe. I'd appreciate any further information/insights.

Reliance Industries Ltd., The US Exim Bank and Iran Gas supplies

On Dec 20, 2008, this report on India Business News Live stated that 8 United States Congressmen, 4 from the Republican Party and 4 from the Democratic Party wrote to James Lambright, President of the United States Export-Import Bank asking the bank to secure an understanding with Reliance Industries Ltd. that gasoline supplies to Iran will be suspended before the disbursement of two loan guarantee packages worth $ 900 million. Prior to the Exim bank transaction, RIL received a loan of $ 400 million from JP Morgan in August 2008.
The Reliance Industries Ltd. expansion program will significantly improve United States exports to India.
On January 08, 2009, energy business review reported that RIL has announced it is suspending gasoline supply to Iran after fulfillment of its existing contract.
Following an Iran News Blog with great cartoons on it has paid off in terms of financial insight today.

Buy Satyam at prices between Rs. 20 and Rs. 25 today for a long term profit

Starting with my disclosure, I just turned bullish on Satyam at Rs. 21.05. My volumes are insignificant and I want to hide my trade data to create a deliberate miscalculation in the reader's mind that I might secretly be a billionaire.
Today I'm betting that Satyam will continue as a going concern.I'm also assuming that Ram Mynampati and various other folks in the Satyam management will continue to be on the Company's rolls. I would put margins in the Indian IT services industry at close to around 28% operating margin when INR/USD is at around 42. Satyam's market cap today is close to Rs. 707 crore. Last year's annual revenue was well above Rs. 8000 crore. If the company continues, then my money will come back at most in a year's time, by the most conservative possible estimate.
Satyam has frequently delivered quarterly net profits worth hundreds of crores. It's stock price is down from around Rs. 170 levels during the recent controversy, and much higher levels before the Maytas campaign began in earnest. Satyam is a good buy.

Thursday, January 8, 2009

Gulf of Mannar Oil Exploration and The Fall of KiliNochchi

On closer scrutiny the theme of the conflict in Sri Lanka is the same as that on the Gaza strip. The Air Tiger attacks on oil storage facilities, especially in the Sinhala capital of Colombo have prejudiced powerful international interests to ensure the decimation of Tiger forces in Lanka.
The Gulf of Mannar is being explored by the Government of India owned Oil and Natural Gas Corporation Videsh Ltd., British owned Cairn Energy Plc. (through Cairn India and Cairn Lanka), and the China National Petroleum Corporation.
I'm posting several links on the Gulf of Mannar Oil exploration for reference.\papers22\paper2181.html

Wednesday, January 7, 2009

Update: Who owns Satyam Today?

CNBC TV18 reported at the end of trading yesterday that Aberdeen Asset Management, the largest shareholders of Satyam till yesterday, sold all of their 5.3% holdings in the company at close to Rs. 40 levels. Similarly the volume of trade in Satyam shares was nearly 50% of the total shares outstanding.
This should raise a significant question in the investor's mind as to who owns Satyam as of this morning?
I would like to reverse my recommendation to readers to go long on Maytas. Not just yet.
Today I'm going back to my analysis of the Natural Gas industry.

Thanking Dr. Brad Setser

Estimating the Currency Composition of India's Forex Reserves:
The composition of india’s reserves can be inferred, in very broad terms, from the scale of the valuation gains that india reports on a quarterly basis in a document put out by the RBI called something like sources of accretion to the foreign exchange reserves. the split between currencies in the SDR basket and other currencies is also disclosed as part of the data india discloses on its reserves through the imf (see the reserves data on india’s imf country page)

FIIs and the Satyam Board: Executive Summary

Satyam's plan to acquire Maytas, an Infrastrucuture firm run by the Satyam promoter family, created a widely reported controversy over Satyam's Corporate Governance. The promoter family owned very little stake in Satyam while FIIs were the largest shareholders. FIIs alleged overvaluation of Maytas equity in the deal, and pointed out the strategic irrelevance of the IT services firm's diversification into Infrastructure. Independent Directors on the Satyam Board were attacked by FIIs, the financial media and one Member of Parliament for their complicity in approving the controversial deal, and all except one of the independent Directors resigned.
FIIs demanded the resignation of Satyam's promoters and approached several strategic investors such as IBM,Oracle, HCL and Tech Mahindra to buy out the promoter stake in Satyam. Strategic investors demanded a lower valuation of Satyam's equity despite the stock having plummeted due to the Maytas deal controversy.
This morning Mr.Ramalinga Raju, Satyam's promoter, resigned from the Satyam Board. In his resignation letter Mr. Raju revealed a total overstatement of Rs. 7,000 crore (around $1.45 billion) on Satyam's books as of the September 30, 2008 Balance Sheet. Mr. Raju, the outgoing Chairman of the Board, claimed individual personal responsibility for manipulating the Company's accounts;overstating revenues and assets; and understating liabilities; over a period of several years without the knowledge of any other Board members or the Managing Director.
It appears that what has really happened is that Mr. Raju has diverted the money from the Company during the recent controversy. This action was probably motivated by the FIIs' unwillingness to allow him to continue to run a Company which he personally founded and built from a few people to a headcount of more than 50,000 over a period of 20 years.
It is unlikely that the money will be traced through investigations. This correct understanding of the Satyam issue indicates that a significant part of the Rs. 7,000 crores diverted from Satyam will find its way to the Maytas stock behind the scenes. I would therefore advise investors with a 2 year horizon to go long on Maytas.

Satyameva Jayatey Part II: The True Story about FIIs and the Satyam Board

This is a slightly long explanation of the Satyam controversy but interested private investors and policy makers will benefit a great deal from knowing the true Satyam story.
If you have been following the developments surrounding the 2008 credit crisis then you are probably aware that the current global macroeconomic environment is one of low levels of aggregate demand and deflationary pressures in the major world economies. Foreign Institutional Investors in the Indian stock market are free to invest in equities and other instruments across various geographies and sectors. If you had a choice of long term equity buys, which sector would you choose? According to me, the emerging markets infrastrcuture sector, specifically sectors such as the Electric Power Sector in India, offers an attractive opportunity to global investors due to the current macroeconomic environment.
While most sectors in various global economies are facing demand shortages, the Indian infrastrucuture sector continues to be in a situation of high levels of demand and low levels of supply. If you are an urban consumer of electricity, for instance, you would not appreciate disruption of power supply for an hour or two in a day. Urban consumers are perfectly willing to pay the additional electricity bill, and and saving from this amount makes little difference to the overall household budget.
When the announcement about the Satyam plan to acquire Maytas Infrastructure was announced, a controversy emerged on three basic counts:
a) There was a debate about the valuation of Maytas equity in the deal, and the fact that Maytas is managed by family members of Satyam's promoters seemed to indicate that the deal was a plan to siphon out Satyam's cash balances to a family run firm.
b) FIIs insisted that there was little value in the diversification of an IT firm into the infrastructure sector, and that investors could independently diversify.
c) FIIs debated that there is absolutely no synergy between the operations of an IT services firm and an infrastructure company.
Given the nature of this controversy there was a daily news flow in the Indian financial press and media, in which it was portrayed that the Maytas deal is a serious flaw in terms of the corporate governance structure of Satyam. the promoters, holding very little equity stake in the Company were planning to make an overvalued investment in a family run firm in another sector, to the detriment of the Foreign and Domestic Institutional Investors in the Company.
At that point in time I had no view on Satyam. The reason for my confusion about the Satyam story was my macroeconomic view that the Indian Infrastructure Sector is a good buy. I must admit that I did not go through the details and check whether the valuation of Maytas equity in the Satyam deal was fair or not.
What followed the Satyam-Maytas deal controversy was a veritable campaign against the Satyam Board of Directors by Institutional Investors, mainly the Foreign Institutional Investors . Independent Directors on the Satyam Board were blamed for their irresponsibility/complicity is passing the resolution to acquire Maytas.
The Board meeting to pass the resolution was chaired by Dr. M. Rammohan Rao, who has a position at the Indian School of Business in Hyderabad.
Dr. M Rammohan Rao is best known for his tenure as the former Director of the Indian Institute of Management, Bangalore. Dr. Rao is a scholar in discrete mathematics and he has won several international academic awards and prizes in that area. He teaches the application of mathematical methods to financial derivatives. Dr. Rao was a full professor at the New York University prior to his tenure at the IIM-B.
Dr. Rao also chairs various high level Government Committee. For instance, he used to be on a Selection Committee for the post of Deputy Governor of the Reserve Bank of India. In the wake of the Satyam-Maytas controversy a Member of Parliament wrote, questioning the appropriateness of having Dr. Rao on such Committees. The financial media reported with glee a couple of days back that according to them a meeting of this Committee was delayed and Dr. Rao was excluded from the meeting.
Other independent Directors included Vinod Dham, who is widely regarded as the father of Intel Corporation's Pentium Chip program, Dr. Krishna Palepu and one other Dr. Mangalam, both Professors at Harvard, I think. Mr. Prasad, another independent director, is a former Cabinet Secretary to the Government of India.
With the exception of Mr. Prasad, all the independent Directors resigned from the Satyam Board in the wake of the mass media and political campaign launched by the Foreign Institutional Investors.
As this controversy developed FIIs approached a wide range of "strategic investors" to buy out the promoter stake in Satyam; IBM,Oracle,HCL Infotech,Mahindra Consulting are some of the names here. The Satyam stock plummeted due to the controversy but the strategic investors were still demanding lower valuations if they were to think of a management buy-in. In the melee, the World Bank released information that they had earlier blacklisted Satyam due to Satyam having bribed Bank Staff members in return for favorable vendor contracts.
The bottomline of the whole Satyam-Maytas controversy was that the promoters, led by Mr. Ramalinga Raju, should sell their equity stake in the Company and resign from the Board. According to FIIs, this would solve Satyam's 'Corporate Governance' problem and help improve the stock's valuation.
While the independent Directors appeared to stand by the promoters initially, The Economic Times reported on the day following the controversial Board meeting that Satyam's COO and some other high level executives had put in their papers just prior to the Maytas buyout decision. This actually reveals that the FIIs had some Company executives on their side.
Overall, as events developed, there seemed to be little chance that the Satyam promoter will be able to sustain its position on the Satyam Board.
In the light of this background, Ramalinga Raju's resignation letter should be read accurately. What Ramalinga Raju has done, is that he has diverted a huge amount, in the range of around Rs. 7,000 crore from the Company and then resigned, with a letter claiming that the money was never there.
Now it will be virtually impossible to trace that money. Regulators are free to go and investigate Price Waterhouse Coopers, the auditors of Satyam. PWC auditors will say that the money was there when they did their audit. This won't be easily believed. Similarly everybody left in the Company, several senior Government officials, and some of the other businessmen in India Inc will all come on TV and express shock and surprise, etc at this development. Aspersions will be cast on several other IT firms.
All this jaw boning will presumably amount to nothing. Satyam now needs to be valued without that cash on its books.
I'm expecting that Ramalinga Raju will find ways to route the Satyam money to Maytas, just as he originally intended. I would therefore advise private investors to go long on Maytas with a 2 year investment horizon. There is no futures and options trading available on Maytas on the NSE. Buy Maytas in delivery and wait patiently till the Satyam storm blows over.
Maytas won a big contract from Southern Railways yesterday. It's trading at slightly above its 52-week low levels today.

Tuesday, January 6, 2009

Satyameva Jayatey Part I: Fresh Unanticipated Panic Breaks out on the Nifty

A word on the title for international readers. The word 'Satyam' means 'Truth' in ancient Sanskrit and the phrase 'Satyameva Jayatey' means 'Let the Truth Triumph', approximately.
At this writing there are few round numbers to report. Nifty is trading at around 2950 levels, down around 162 points from its previous close. Satyam Computers Ltd. is trading at around Rs.50, which is around 76% down from its close yesterday.
Mr. Ramalinga Raju, the principal promoter and outgoing Chairman of the Satyam Board, this morning resigned from the Company's Board and wrote this:
a resignation letter for the history books.
Update: I was going to continue to write about the letter and so on but I have some useful information for investors on the Satyam so I'm moving on to Part II now instead. There's a lot of information available on the Satyam numbers elsewhere.

revealed with deep regret that The Company's Balance Sheet as of September 30, 2008 contains:
1) a) $ 1050 million of inflated (non-existent) cash and bank balance as against $ 1117 million reflected in the books.
b) An accrued interest of $ 78.33 million which is non existent
c) An understated liability of $ 256.25 million on account of 'funds arranged by Mr. Raju'
2) An overstated debtor position of $ 102.08 as against $ 533.54 million reflected in the books.
To be continued ...

US Treasury fights in Sri Lanka's Uncivil War

This post examines recent geopolitical developments in Sri Lanka to divine the financial dimensions of the ongoing war in that country. Sri Lanka is an island nation in the Indian Ocean, just south of India's southern coastline. Here's a link to The United States Ambassador to Sri Lanka, Mr. Blake's speech on the United States Department of State views on Sri Lanka at the University of Madras (Chennai) on October 24,2008.
According to Ambassador Blake's speech, sometime after November 2007, the United States Department of the Treasury designated the Tamils Rehabilitation Organization under Executive Order 13224, thereby freezing the TRO's assets in the US and prohibiting Americans from dealing with them. This was following an anti-terrorist investigation in which the Liberation Tigers of Tamil Eelam (LTTE) was linked with the TRO.
The official Department of State stand is to catalyze a political solution in Sri Lanka and establish a democratic government for all of Sri Lanka. It appears that the US has allowed the Sinhala Army to defeat the LTTE, mainly by choking off funding to the LTTE, in order to hasten the 'political solution'.
On January 01, 2009, offensive divisions of the Sinhala Army in the Wanni Theater of operations announced the imminent capture, within 48 hours, of the LTTE Capital of KilliNochi. Tiger propaganda would have it that KilliNochi was simply a 'ghost town', already evacuated by the Tigers before its capture. The Sinhala Army is now pursuing the capture of Velupillai Prabhakaran, the supreme leader of the Tigers.
Sri Lanka in 2007 was de facto an island with two nations on it. The North and North Eastern parts of Sri Lanka were controlled by the Tigers, while the rest of Sri Lanka was the actual Sinhala nation with its capital in Colombo. The Tigers had set up border control posts to delimit their territory. The Tigers had their own Army, Battle Tanks, a Sea Tiger navy fleet, and so on. Throughout the last few months of 2008, every week there were reports and announcements in the Indian media of miraculous successes of the Sinhala Army.
Some 200,000 Tamil civilians overall are reported to have been displaced, with massive uncounted civilian casualties of Tamils caught in the crossfire between the Sinhala forces and the Tiger strongholds. Both New Delhi and the international press have maintained a studied silence on the issue. There has been no Indian intervention, with the exception of one ship from India containing humanitarian relief supplies for the Tamils. There has been no discussion on this issue at the United Nations; no proposals for a ceasefire; and no talk of any outside military intervention to stop the violence.
My analysis is that the international silence on the ongoing war in Sri Lanka is closely connected with Sri Lanka's Natural Gas Reserves, The European concerns over Russian Natural Gas supplies and Gazprom's recent decision to cut off NG supplies to Ukraine.
Most importantly, all this probably has profound implications for what is really going on behind the scenes in the unfolding battle between the Reliance Group Ambani brothers over the new Natural Gas finds in the Krishna Godavari basin in India.

Important update based on Brad's comment

Brad Setser points out that India doesn't peg to the dollar as much as China; India's forex reserves are falling, (this is me: while China's forex reserves are probably rising).
So we need to understand that the only really significant support for the US dollar's status as a central bank reserve currency comes from China, among state actors.
I think there is some risk that the US dollar can in the medium term lose its status as a central bank forex reserve currency.

Reserve Currency Status of the US Dollar in 2009

In my humble opinion there is a significant risk that the US dollar will lose its reserve currency status. However my view is that at worst this can happen gradually over a period of time rather than in a sudden manner.
The recent debate around the reserve currency status of the US dollar must be examined in terms of different dimensions that impact this status and also from the perspective of various private and state actors who influence it.
George Soros in his March 2008 book "The Credit Crisis of 2008" predicted the end of an era and the collapse of the US dollar. He recounted that in January 2008 he went massively short on the US Dollar and long on the Indian stock market. Both the positions were losers and his firm,according to the book, "took it on the chin". Marc Faber, Jim Rogers, Peter Schiff and perhaps Stephen Schwarzman are other US dollar bears.
If any other country on earth had been in the same macro economic situation as the United States was in 2008, its currency would have been subjected to a massive speculative attack from private currency speculators. This would have begun with a tremendous build up of short positions on the currency in the forex derivatives market. The fact that the US dollar escaped a successful attack from currency speculators in 2008 does not neccessarily augur that it will indefinitely retain its unique role in international trade as well as its exorbitant previlege to run painless fiscal deficits.
In 2008 several state actors have openly indicated a policy shift in the composition of their central bank foreign exchange reserves. Iran's President Ahmedinijad made a self congratulatory speech in which he claimed that his decision to shift over from the USD to the EUR as the Iranian reserve currency was apt both from an investment perspective as well as from a political perspective. The German Foreign Minister Peer Steinbruck gave an interview in which he predicted that future forex reserves would move towards a combination of the US dollar, the Euro, the Japanese Yen and the Chinese Renminbi. Nicholas Sarkozy of France indicated that "the US Dollar is not the only currency in the world" in his statements prior to the G-20 summit. Though Japan continued to maintain strong support for USD denomination of international trade, Japan made a request to the US Treasury to issue Yen denominated debt securities to the Bank of Japan.
Given the political enmity with Venezuela's Chavez and Russia's Putin, those two countries will probably welcome any chance to ensure the demise of the US Dollar.
The only prominent supporters of the US dollar are emerging market economies like China and India. These countries are compelled to peg their currency to the US dollar since significant percentages of their population is directly dependent for their employment on a sustainable profitability of their export sectors.
Trade protectionism is another aspect which impacts the US dollar. Given Obama's recent focus on data from manufacturing and unemployment statistics in some of his comments, there is widespread speculation that the new administration is likely to pursue protectionist policies. If the level of export demand for emerging market output becomes unsustainably low due to protectionism the remaining state supporters of the US dollar reserve currency status will change their view.
If the Obama Administration does not resort to severe trade protectionism it is quite likely that 2009 will see the US dollar gradually weakening against major world currencies, rather than undergoing a sudden collapse.
However in this analysis we have to recognize that a lot depends on the relevant emerging market economies wishing to sustain employment levels in the medium term. In the longer term, it is difficult to see how or why a country like China, for instance, would want to continue the policy of accumulating US Treasury bonds in lieu of real goods.

What is Dr. Brad Setser missing? Part I: Seeds

That's the question at the end of Brad's post on issues to be watched in 2009.
Seeds, for one. Seeds?
Most of the economics discussions in 2008 seem to have paid little attention to the African continent. Food prices skyrocketed more than 95% during the credit crisis of 2008. Several countries, Ethiopia for instance, are facing a severe food crisis. There have been "food riots" during 2008 in places like Somalia and Zimbabwe.
The scientific/secular argument is that in the face of the food crisis, genetically modified seeds that provide a higher yield should be used to increase the productivity of agriculture; thereby reduce costs and prices of food; and thereby help alleviate the impact of the credit crisis on least developed countries. Many African country regimes, on the other hand, perceive genetically modified seeds as a United States foreign policy tool. Their apprehension is that the genetically modified seeds are configured to provide vastly decresing yields with every succeeding generation. What this means is that farmers always have to purchase new supplies of seeds from the foreign agri-biotech companies and effective sanctions can be implemented through restricting future sales of seeds from American firms to certain African countries.
This is the real theme of the Council on Foreign Relations 'Politics of Hunger' report, though it doesn't say so in so many words.
I'd like to report an unconfirmed speculative rumor that Merill Lynch has made a huge investment in a company called Biotor, or whatever its name is, bang in the middle or the tail end of the whole 2008 financial disaster, as it may turn out to be. Again I'm constrained to check the rest of the details of this story out and would appreciate any corrections/additional information/additions.

Fog around the Santa Claus Rally

Why is it hard to predict the Nifty level over a period of say one month or so?

On Nov 20 2008, Nifty was at a trough of around 2500. By Jan 05, it closed at 3100 plus. This post tries to explain the reasons for what’s commonly been called the December 2008 Santa Claus Nifty Rally. (During this time visibility was very low in Delhi and several flights were cancelled due to dense fog). FII and DII turnover was at very low levels. Overall market turnover dropped precipitously during the holiday season, though the market continued to rally. Several commentators have mentioned that the December 2008 rally was led by high net individuals (HNI s) and retail investors.
Let’s examine this in its wider context and try to understand what’s really happening. You will observe the following typical sequence in the stock market. The economy is booming. Unemployment is at historical lows. Consumption is strong. Credit is flowing freely. Productivity is increasing. There are no major wars or conflicts. The stock market suddenly undergoes a precipitous fall. Various sectors decline. You get bears coming on TV and giving meaningless reasons why the market is considered to be “overvalued” and predicting a dire correction. After some time the market goes up again, and reaches ever higher levels. This behavior is called as an “intermediate downtrend in a bull market”.
Similarly you’ve observed several rallies since January 2008. The economy is down. People are dependent on government stimulus spending to make profits. Credit is frozen. Unemployment is at historic highs. The market suddenly goes up 20% or more in a month. This completely funny behavior of the stock market is called as “an intermediate uptrend in a bear market” or simply as a “bear market rally”.
Technical analysis textbooks will tell you that these “intermediate trends” last anywhere from 3 weeks to 3 months. The corrections are usually shorter and sharper than the rallies. So far I’ve never actually come across a believable and consistent explanation as to what causes these intermediate trends.
Of course there are many theories about it, from the Elliott Wave theory to the Random Walk Hypothesis, to the Business Cycle theory, stretching across the various areas of technical analysis, capital market theory and macroeconomics. None of the theories have genuine predictive value and none of them suggest ways and means to remedy this problem.
The reason for these trends might very well be what is known as “operator play”. A stock market operator is a participant who has access to a large amount of capital, usually in the form of short term credit. This participant is able to manipulate and influence prices in a particular counter and segment. Typically the influence on prices is aided by misinformation campaigns which create increased speculative interest in the counter.
Observation of the December 2008 rally appears to indicate significantly high levels of operator play in various counters.
This is why trying to predict the Nifty levels in a particular series using the traditional methods of technical analysis, fundamental equity analysis and macroeconomic analysis can be ineffective.

Nifty and the Global Economy

The global deleveraging process is still on. According to posts on the Calculated Risk blog, commercial real estate firms, retail chains, etc are facing significant financial problems both in the US and in the UK. On December 17, 2008 the Fed made an announcement revising the target fed funds rate to zero and indicating a policy of further monetary expansion through quantitative easing. The recent uptrend in global markets appears to be on the back of that announcement. Globally, Q3 earnings are going to be released and economic data hasn’t been encouraging since that announcement. After Obama’s inauguration on January 20, 2009 announcements regarding the US government stimulus package are expected. Global economies are in a recession and economic expansion can definitely not be expected during Calendar Year 2009.
Around 32% of India’s GDP comes from exports. Around 15% of that is merchandise exports. Export markets are severely affected by low levels of aggregate demand worldwide, apart from operational issues such as the availability of credit. Given the Q3 earnings releases in India and similar data on financial performance worldwide, all the news and cues from today onwards till January 20 can be expected to be bearish for the Nifty.

Q3 Earnings and the Nifty

Q3 Earnings and the Nifty:
Earnings releases are expected to begin later this week and early next week. Several analysts have an opinion that the expectations from the Q3 earnings are already priced into the Nifty.
Advance tax numbers have been released. Commercial vehicle sales data has been released. November trade data shows merchandise exports declining at a decreasing rate and non-oil imports increasing at a decreasing rate. Given the information already available there are several expectations related to Q3 earnings.
The auto sector, auto ancillaries, real estate, metals, etc are expected to show very bad results for Q3. The IT services sector will show severe topline weakness, combined with higher margins from layoffs of workers on bench and a stronger dollar; it’s possible that dollar hedges resulted in Treasury losses for them.
My opinion is that the earnings are not fully priced into the Nifty. Once the results are actually out, there will be a bearish impact on Nifty levels. Consider the example of how bullish news flow impacts the market. Before the Friday evening announcement of a second government stimulus package there were already expectations around it. The RBI’s 100 basis point cut in reverse repo rate to 4%, and 50 basis point cut in the Cash Reserve Ratio did act as a positive surprise for the market. At the same time, the real estate, infrastructure, exports, sectors were disappointed with the stimulus package and more was expected on those fronts. So the actual news was different from what was expected both ways. The market rallied yesterday with higher volumes on news of the stimulus package. My view is that the simpler story applies. Though the market was expecting bullish news, when that news was actually out; it rallied.
Today the market is adjusting to Q3 earnings expectations. Once the data is actually out, there will be a Nifty fall.
Given the technical analysis of the Nifty, that fall might take us below 2500 to the next trough, possibly to around 2200 levels.

Technical Analysis of the Nifty

The Nifty peak was around 6300 levels, in January 2008. The troughs were hit in October and once again on Nov 20 2008, at around 2500 levels. Between the October and November troughs the peak was at around 3150 levels. There’s been a up trend from November 20 onwards. Technical analysts believe that a bear market rally is one in which the successive peak is lower than the previous peak. So the technical view expressed, for instance, by Rajat K Bose is that unless the Nifty closes above the 3150 level at high volumes the current up trend should be viewed as a bear market rally. The other characteristic of a bear market rally is that it is followed by a sharp downtrend, in which the next trough is lower than the previous trough. Since the previous trough was around 2500, if the current uptrend were to break then the next trough is likely to be below 2500.
Technical analysts also measure volumes and market breadth. The Nifty rally all the way till yesterday (Dec 05) was marked by low volumes. Yesterday volumes were higher and the Nifty was up further from the Friday close.
Today’s view from Rajat Bose is that traders need to watch out for the 3045 level. Nifty has resistance at 3045 and if that is breached it could signal the start of an intermediate downtrend, which might possibly take the Nifty below 2500. Similarly it stands to reason that if the Nifty crosses 3150 levels at high volumes that would signal a reversal of the downtrend all the way since January 2008.

Monday, January 5, 2009

The Oil Route and the Gaza Strip Conflict

There is a plan to transport oil from the Caspain Sea/South Caucasus region to the Mediterranean port of Ceyhan, and thence to the Red Sea port of Eilat, through to supply markets in East Asia. Hamas appears to have been targeting an oil pipeline inside Israel with rocket attacks to disrupt this plan, and this has led to the Israeli invasion and planned occupation of the Gaza strip.
This post has nothing to do with nationalism, religion, or any civil society movements, etc. All the analysis and information here is from public sources of information. This analysis is intended to highlight the connections between the geopolitical developments on the Gaza strip and the financial markets. Contrary to popular press coverage, this is an ongoing conflict which has fairly clear financial causes and consequences. Interested private investors are advised to draw appropriate inferences to their advantage.
Since 2005, 5000 rockets have been fired into Southern Israel, causing 11 casualties amongst Israeli citizens so far. This statistic is from a statement of an Isreali military spokesperson on CNN yesterday. The Israeli military bombed Gaza City over 8 days and yesterday launched a ground offensive into the Gaza strip. Hamas continues to fire more rockets into Israel. In Gaza city there are civilian casualties and there is reportedly destruction of schools, hospitals, mosques, and all kinds of other buildings etc. Supply of electricity and the working of mobile phones has been disrupted. Shops are closed. Landline phones and radios appear to be working.
Israel has stated that the civilian population of the Gaza strip is not its enemy. Israel has assured that humanitarian relief is being provided. There have been pamphlets from the Israeli High Command adivising civilians to evacuate the Gaza strip and allow operations against the Hamas dominated areas. Washington has maintained at the United Nations that "a meaningful ceasefire is impossible at this stage". The Arab League has called for a cessation of hostilities. There have been popular protests against the invasion of Gaza all across various Arab countries and a very large protest in London as well.
It appears that the target of the rocket attacks by the Hamas were not civilians in highly populated areas in Israel. Rather it appears that the target has been the Ashkelon-Eilat oil pipeline inside Israel. Similarly it appears that the target of the Israeli Military is the disruption and prevention of these rocket attacks and not the civilians inside Gaza.
The Baku-Tiblisi-Ceyhan oil pipeline pumps oil from Azerbaijan in the Caspian Sea region to the Mediterranean sea port of Ceyhan in Turkey. More than 30% of this pipeline is owned by British Petroleum. The Ashkelon Eilat pipeline is owned by the Eilat Ashkelon Pipeline Company which began as a joint venture of the Israeli Government and the Teheran government. Since the Islamic revolution Teheran seems to have dropped out of the pipeline ventures of EAPC.
The BTC pipeline transports oil from the Caspian Sea to the Mediterranean and opens the way to supply Europe with Central Asian oil. In 2003 a reverse flow of oil from Ashkelon to the Red Sea port of Eilat was completed successfully. By transporting oil from the Turkish port of Ceyhan to Ashkelon, oil can then be pumped to Eilat and then transported across the Red Sea to the Arabian Sea in order to supply the markets in East Asia.
China already has another new pipeline that runs from the Kashagan oil fields (in Kazakhstan, South Caucasus region) east into China. So India seems to be the primary target market for the oil from the Caspian Sea through this route.
I'm yet to work out the details of the rest of this story. Chevron recently renewed the plan to buy equity stake in Reliance Petroleum. Indian Oil Corporation was a close partner of Istanbul in the construction of the Baku-Tblisi-Ceyhan pipeline.
Additional information/comments/corrections are most welcome.

Friday, January 2, 2009

From Brad Setser's Analysis of China's Exports

My comment on Brad's post :
(I might be making some corrections/additions to this later)

I find Brad's analysis very interesting from an Indian market perspective. Thanks a lot Brad for your insightful post. The Nifty has rallied from its October low of around 2500 to around 3050 levels at this writing.Over the last 4 trading days volumes have been low (presumably affected by the holiday season) and the rally has proceeded in the range upwards from around 2810 to 3050 in these 4 days. The November trade data for the Indian economy is out. It shows a contraction of around 9% plus in merchandise exports in Nov 2009 and an increase of around 3%plus in non oil-imports. India's fiscal deficit and current account deficit are both widening and forex reserves are falling.Today the Govt. of India is expected to make an announcement regarding further stimulus programs after market hours. Speculation in the marketplace is around the following factors:1) The Govt. stimulus program is expected to be bullish.2) Earnings for the Sep-Dec Quarter will start to be announced around 10 days from now.This is expected to have a negative effect on market sentiment.3) Global cues are being closely watched. FII buying has begun in Dec 2008 after a selling trend throughout 2008. However, if you total up FII turnover from the previous trough onwards you get a negative total (i.e. more sales than purchases)Given your analysis that "the global environment is changing in ways that will make it harder for China to avoid a sharp downturn in its exports no matter what China does" I believe it applies to India's merchandise exports as well.Merchandise exports are around 15% of India's GDP and exports total up to around 32% of GDP overall. Your post reinforces my bearish outlook on the Nifty for the January series.At the same time you have to remember the recent rally on the Nifty has been led largely by HNIs and retail investors rather than institutional buying.The current bear market rally can either be artificially extended beyond the earnings season, or there could be a natural collapse to re - test the October lows of 2500.

Thursday, January 1, 2009

Whither Nifty in January 2009?

In January Nifty is likely to make a break either upwards or downwards. Nifty is likely to test the October lows of 2500 if the move is downwards. If the move is upwards you could expect a trading range above 3250.
Technical Analysis shows a consolidation during the last 2 trading days of 2008 and today. This consolidation is below the previous peak of 3150, in the 2990 range. At this writing Nifty has risen above the 3000 mark and is trading at around 3030 levels.
One of the limitations of Technical Analysis is that it tends to show a movement once it has started rather than predict a movement before it starts.
My bias is a bearish one on the Nifty but at the same time I don't rule out a bear market rally in January 2009.