Reuters has it, and an analysis from Zero Hedge:

on Friday, one Sergey Aleynikov was arrested at Newark airport by FBI agents, as he was coming back from a trip to Chicago (maybe visiting his new employer), on what are basically industrial espionage charges. Sergey, or Serge as his Linked-In account identifies him, was VP of equity strategy over at 85 Broad (or maybe 1 New York Plaza, his detailed Bloomberg Bio page has disappeared) had the following responsibilities at Goldman Sachs according to Linked-In:

• Lead development of a distributed real-time co-located high-frequency trading (HFT) platform ..

In the 5 days immediately preceeding his departure from "Financial Institution" (potentially GS), Sergey allegedly downloaded 32 megs of ultra top-secret quant trading proprietary code, that, according to Special Agent McSwain's affidavit, he then proceeded to encrypt and upload to a website in Germany, with a UK owner. One can only imagine the value of this "code" not only to Goldman but to the highest bidder. After all, from the affidavit: "certain features of the [code], such as speed and efficiency by which it obtains and processes market data, gives the Financial Institution a competitive advantage among other firms that also engage in high-volume automated trading.The Financial Institution further believes that, if competing firms were to obtain the [code] and use its features, the Financial Institution's ability to profit from the [code]'s speed and efficiency would be significantly diminished." Needless to say, many others are now also likely hot on the trail of the code.

To those that don't think ZH is a worthy source, the NY Times has it as well. (HT: Anil Shenoy)

A quick recap: Programmer at Goldman's High Frequency Quant trading division decides to quit for 3x his salary, and transfers source code out of the US. 32 megs of it. They figure it out but take a month to do so, and have him arrested. Now, the code's been out there for a month, presumably looking for a buyer. It's likely someone already knows about it - and despite Goldman's "security" claims, it could have been a potential [failed] buyer that raised the alarm.

If it's true, it might be a volatile time for the high freq trading programs in the US. (In India, the high freq traders are all human. You should see the speed they can type orders.)

Labels: Goldman

Going through the Nifty stocks as results poured in, and some startling facts:

• Of the 50, 24 have contracted EPS. Meaning earning per share is less than the year earlier.
• Current Nifty P/E is 20. Of the 50 stocks, a total of 39 stocks have grown EPS < 20% y-o-y.
• With the new calculations of Nifty weights (based on free float) the EPS drops nearly Rs. 4 for Nifty as a whole. So Nifty EPS today is 215 versus around 220 as calculated before the nifty weight.
• Last year at this time the Nifty EPS was 234. So as an index the Nifty has dropped 8% on EPS in a year.
• There are some more stock issuances, QIPs, dilution like CCPS in Tata Steel, and so on. This is going to hurt EPS even more.
• Bank EPS still seems to be strong in terms of growth.

Bank EPS will only move down if banks will recognise losses as they happen - some of the default story is yet to come.

I've used consolidated EPS where I could get info, and standalone where I couldn't. In that, this calcuation differs from NSE (which takes only standalone into consideration for Nifty P/E and EPS calculations)

Will be an interesting budget tomorrow. Let's see how that goes.

Labels: Nifty

Michael Lewis on how A.I.G. and the insider view, beats up Joe Cossano. Also talks about how Goldman got away with their 100 cents on the dollar, which employees were asked to return their bonuses. (Employees: some 200 million. Goldman: $12 billion. Slightly different scale)

This is HT Zero Hedge.

Labels: AIG, Goldman

A horrifying set of videos (warning: very disturbing) show the obvious hand of Pakistan based "controllers" in the 26/11 attack on Mumbai. These videos make me very angry.

One might think the Mumbai police reaction was tardy or that India reacted slow. But remember that such people going amok in crowded places will definitely kill a few hundred people before any reaction can happen. Still, a certain set of thoughts:

1. It looks like the terrorists were continuously motivated by Cell Phone calls from controllers in Pakistan. We knew, as we were listening in to all these calls.
2. If we were listening in, why didn't we cut off those Cell phones? Granted, we had that IMEI problem of non-recognition of a phone (which is gone now, since IMEI is compulsory) but we could still find and disconnect those numbers? Heck, my cell phone provider will cut off my outgoing, incoming and what not if I was late by a few days in paying a bill - I can't believe the Indian government couldn't immediately ban all these phones from the GSM networks.
3. You might say "They could use a guest cellphone". But you will notice most of the calls are initiated from the Pakistani side, the terrorists were just pawns in their hands. Sometimes when the terrorists would balk at their own disgusting actions, the controller side would goad them on, keeping them focussed on their murdering actions. We should have cut off cell phones one by one, as they happened to be tracked. Not difficult.
4. And of course, we could easily cut off all calls to Pakistan during this time. While the average Pakistani is not a threat to India, it must be recognised that their country sponsors terror and therefore all calls to that country must be banned during such periods. They will have to use satellite phones or a conduit in another country - which raises the bar, and can be trapped as well.
5. Communication was the key element. The terrorists were brainwashed kids, it seems. (Note: That doesn't make them less sinful, or lesser a terrorist) If we had cut off their access to direct conversation, it's likely they wouldn't have done as much damage as they did.
6. An interesting option would have been to zero in on the location of the Pakistani side and bomb it. I don't know if we have the ability to do the zero-ing in, though.
7. I mentioned banning all cellphones from the towers then. I doubt we'll ever see this in a policy document but I hope someone considers the idea. The downside is of course that people trapped inside have no way to communicate; but if we let emergency numbers (100, 101 etc) continue - a sort of SoS mode - that problem will be solved.

Have a look see. (Hat Tip: Brijesh Nair)

Warning: Very gruesome and disturbing videos. There is blood and gore. It will shake you. You will feel like attacking Pakistan right now. You have been warned.

Suresh Tendulkar questions Indian dollar reserves:

Suresh Tendulkar, economic adviser to Indian’s Prime Minister Manmohan Singh, is urging the government to diversify its foreign exchange reserves and hold fewer dollars, he said today.

“The major part of Indian reserves are in dollars -- that is something that’s a problem for us,” Tendulkar said in an interview in Aix-en-Provence, France today.

He also said that world currencies need to adjust to reflect trade imbalances.

India imports 2 million barrels of oil a day. That's about $52 billion at todays rates, and $73 billion at $100 per barrel. We currently have $254B in reserves. Even if we had to pay two years of oil in USD, we could do it with $150B.

Diversifying away from the dollar can only mean buying a currency that is likely to be stronger - which one? Euro? Not a chance. Yen? Uh, no. Chinese Yuan? Maybe but they have to accept it back as trade currency.

I say keep a year of oil, and find a way to convert those dollars to rupees instead. I don't know how - but it should be possible to give those dollars out and use it to generate rupees; buying infrastructure technology, thorium reactors (hint, hint) or such foreign goods and use them up. Or, let Indians invest much more abroad, and they'll figure out a way to diversify. Of funding countries such as Iceland, and demanding back rupee based interest and principal at then applicable conversion prices. It could be done by letting Indians invest on margin (currently disallowed) in markets abroad, which will additionally bring stability to Indian commodity prices from the cross-hedging.

It's time to make the rupee convertible, too.

Now if Indians can be allowed to borrow in dollars, and get those fantastic interest rates, life might be a lot easier; heck, we could even apply for the PPIP in the US, we're very happy to get non-recourse loans at 16x leverage, thank you. If they'll let us, that is.

The Quiet Coup by Simon Johnson (HT: Reader "KVV")

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

... for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

It's a smooth and great read.

(One thing that I've always felt uncomfortable about is the concentration of wealth in retirement funds where you can't draw your money out, and are at the mercy of fund managers and indeed, your own risk taking in the case of 401-Ks. Such money leads to risk taking in retirement accounts and liberal spending or debt in regular accounts; not desirable. In good times, you'd risk the retirement for yield, and in bad times, when that money isn't there to save you - when else do you need it - you have to save from what you make otherwise. Need withdrawable retirement accounts, after say five years.)

But I digress. The point Simon makes is that the financial oligarchy is holding the U.S. to ransom, using the potentially devastating impact of their own demise. A financial suicide bomber, so to speak, who ask for government help - and use it to build more explosives. And the government is yielding - because the administration is now run by the very guys who built some of those explosives.

Why else were AIG's debts to Goldman (among others) made whole, but the government refused to respect the seniority of debts in the case of Chrysler? (They even gave an equal or more say to the unions, which are unsecured creditors - they should rank below secured debt holders!) And nothing can explain the PPIP - a plan that'll make these oligarchs substantially richer, if it takes off.

Banks got money at far better terms from the government - a private player like Buffett extracted far more for his piece than the government could, from a company like Goldman Sachs. And they get government guarantees on their debt, but can still play around in derivative markets without regulation.

If these banks aren't allowed to go bust, then there's not much of a banking system. A far better deal would be to just own these banks outright - like India does. Then, when life is better, break it up, sell or dispose of the pieces, and nothing will be that gargantuan in failure. Pre-privatisation or temporary nationalisation, it needs doing.

Simon says it best: "Anything that is too big to fail is too big to exist."

Labels: Goldman

RBI's statement on India's external debt provides interesting statistics.

At $229.9 Billion, the total external debt remains flat from $224.6B last year. Of this, NRI deposits are $42B, ECBs are $62B, long term govt borrowing is $54B and other short term debt is $49B.

ECB has been flat from last year - it has been a tough year to borrow abroad, I assume.

Sovereign Debt has come down - from $57B down to $54.6B this year. This is interesting - the amount makes for about 250K cr., which is about 6% of GDP. Most of this is loans - less than $1B in bonds really - which must be a pain. Why don't we let foreigners buy our bonds instead (there's a cap right now)? It might be our mentality of wanting to control the dollar-rupee equation - since secondary market transactions in the bond market can cause flows in or out, thus affecting the exchange rate. To me though, it seems very short-term thinking; a vibrant market in forex and bonds will ensure such flows will even themselves out, and reduce long term borrowing cost for the government, allowing repurchases in good times. (Loan pre-payments on the other hand cost a great deal in terms of penalties)

A comparison of the world external debt shows India is relatively an infant; Denmark's external debt at 583B, for instance, is twice that of India. Convertibility must be the factor here - most developed countries have higher external debt. Within the BRIC countries (Brazil, Russia, India, China), India's external debt is the lowest.

And the rupee's fall in the last year means the total external debt has gone to 22% of GDP (from 19%) despite staying relatively flat in absolute terms. Nowhere close to a big deal really - most developed countries seem to have it closer to 100% of their GDP.

(Why do I care? This is boring number stuff, I know. It's just forming a base for a larger understanding of the economic universe - I'm horribly new at it and am trying to get a handle from various news points. )

Goldman Sachs, in my opinion, has started its descent. For years, it has been out there, surviving crisis after crisis, managing to make tons of money and pay handsome bonuses even in tough years. It's built a solid house - nearly everyone in a top-level economic position in the US seems to be from Goldman. But that foundation seems to be rotting now, and the cracks in the wall are getting more and more evident.

Matt Taibbi has a great piece on Goldman (scanned in by Zero Hedge) Taibbi-Goldman-Sachs (Btw, Goldman countered, and Taibbi replied with another scathing column)

Tyler at Zero Hedge has done a great job exposing chinks in the Goldman armor, and so has Mike Morgan at http://www.goldmansachs666.com. Goldman seems to feel it - the oldies are closing ranks and keeping lids on data, and pursuing random legal options to keep such sites at bay. But there's too much out there known already.

Read the article - from market manipulation to blatant disregard for the rules and ethics in the game, there's stories of them all. (Oil will be at $100! Oil at $200! oh wait. Oil is now at $30? Frik, Oil at $75! ) Matt doesn't spare the ex-Goldman ex-Treasury Secretary Paulson either, and has scant respect for the insiders of all the big banks.

It seems to me that Goldman could be the next Enron. There's a lot of financial shit waiting to hit the fan - probably the worst kind since the Great Depression - and Goldman may just end up being a high-profile casualty. Or will they make it through this time too?

Labels: Goldman

After weeks of full subscription to the 15,000 crore weekly bond issuances, last Friday's bond sale was not fully subscribed. Around 900 cr. could not be sold, and devolved on the primary dealers. (That means, the primary dealers had to pay up because not enough valid bids were received below the cut-off yield)

The devolvement was only in the 18 and 26 year issue with a yield cut-off above 7.8% - the shorter term paper, 5 and 12 year bonds, were more than 2x oversubscribed. It may not be a very big deal, but it may give the government the feeler that large ticket bond sales can't sustain subscription too long.

There are other sources of government funding: PSU disinvestment and 3G auctions are likely in the next few months. Bond sales might end up slowing down, even if only to ease supply temporarily. With the budget coming up though, all bets are off - this government can throw us a socialist googly like it has so often in the past.

Labels: Bonds

A look at the reverse repo growth over the last few months is interesting:

The reverse repo level crossed 100K cr. every day in April - a typical spike time when new deposits are gathered. But it's been staying up and the one month average is at an all time high.

Reverse repo is the money parked by banks with RBI, and yields 3.25%, even lesser than the standard savings account interest (3.5%). That means banks are choosing to lend to RBI at lower than they have to pay savings bank holders for the money. Is this typical?

What is interesting is that the last two spikes have come in pretty tough times - July 07 (Subprime crisis) and May 06 (market crash). Typically this means banks are reluctant to lend outside and prefer to keep money with the RBI for the shortest term possible. Business Standard says that new deposits have added 133K cr. to the banking system, but credit has contracted by 38 K crore. Which obviously means banks are reluctant to lend.

But why? I thought our economy is recovering and going back to a 10% growth rate or whatever. Someone forgot to tell the banks?

After a long time, I've decided to analyse an IPO draft prospectus. Note that this is not advice, just my opinion.

Price: 275 to 325.
Size: 92.65 Lakh shares (255 to 301 cr.). Of which, 59 lakh are fresh issuances, and the remaining are for sale by existing investors.
Date: June 23 to 26, 2009

What do they do?

Club Mahindra, run by them, is a time-share and vacation holiday business. They own 23 resorts and are linked with RCI to about 4600 others. Effectively, to join their "network", you pay them a huge upfront fee - around Rs. 2.5 lakhs - and you get 25 years of membership, with 7 days a year available on any of their (or RCI's) resorts free of cost. Or, inflation free, as they put it.

Like most timeshares, the costs are hidden. Srinidhi Hande runs an excellent blog, and has written a review of the Club Mahindra membership. He mentions that the club membership costs between 2 and 7 lakhs including taxes. Additionally, one pays Rs. 7,500 to Rs. 14,000 on annual fees, regardless of whether they take holidays. Overall, this is not very exciting to someone who isn't bowled over by their presentation.

• At 2.5 lakhs, at a savings rate of 8% a year (using P.O. deposit rates) you're actually paying Rs. 20,000 a year. Plus, the 7,500 annual fees adds up to Rs. 27,500. For a week, that's about 4,000 per day. At the Rs. 2.5 lakh studio room membership, you are unlikely to get peak season bookings. For what it's worth, you will pay Rs. 3,000 to Rs. 4,500 per day for most of these resorts if you book externally - all of them are available for "non-members".
• (Don't consider that you lose the entire 2.5 lakhs at the end of 25 years- otherwise you'd have to do a complex reducing balance calculation)
• You hope that you will get the rooms when you want, in the place that you want, and in the hotel of your choice. If they have no rooms available during your kids vacations (surprise!), bad luck, try next year. Costs escalate when you consider this.
• Given that you're paying upfront, you are unlikely to get top service - after all service comes with the expectancy of repeat business, of a payout at the end. When you have committed to repeat business, and have already paid, what are the chances you'll be treated as well as, say, a walk-in visitor who's booked as a "non-member"? The incentives don't quite work in your favour.
• If you decide, at any time, to use your vacation at a non-Club-Mahindra place for a particular year, you are paying Rs. 4,000 more per day from the already sunk cost. They'll probably tell you that your days can be sold, but in practise this is extremely cumbersome.
• Holidaying has been inflation proof for the most part, in the last few years, all things considered. Goa still costs the same for 3 and 4 star resorts as it used to in 2005, in fact you could get hotels at lesser. I honeymooned in Goa, and even today would pay the same rate for the same hotel (Taj at Fort Aguada). Even if you consider that average rates were around Rs. 2000 per night in 1999 and are about Rs. 4000 now, that's a 7% CAGR - just about meeting inflation. At the increase of holiday opportunities - you could holiday cheaper in Bangkok, Malaysia or Dubai - and the increase in number of resorts, one can expect that the next ten years will not see huge price increases.

That's just what I think of the business model, of course. And I don't think it's sustainable. Once a friend or an acquaintance gets sucked in, a person usually "wises up"; it's very rare to see many related people buying the membership. Nowadays, it even seems to be a matter of shame, like "I got suckered". But that's my inference, please make your own.

How do people like their service?

First, a personal opinion. I have only heard of people being dissatisfied. From friends who couldn't get any rooms when they wanted, to others who couldn't get refunds, or even get anyone to answer their call, nearly all responses were negative. The only positives I got were for individual resorts, but like a friend said "You will get that even if you book as a non-member".

Let's also look at published (negative) opinions on the service or lack thereof:

• Mouthshut reviews are all negative, with literally no supporters for the service.
• Consumer complaints have a significant number of negative views on the service.
• A court recently asked it to refund the membership to a consumer.

Positive stuff: I could only find some positive reviews on the individual resorts.

If you're looking to buy or sell your membership check out Srinidhi's page with an excel sheet of sellers and prices listed - list your membership there for selling, and if you're looking to buy you can get much better deals here.

Club Mahindra is only one of their offerings. They also have Zest, the 10 year version of the above. And a corporate package deal called Fundays, a holiday travel website at clubmahindra.travel and Mahindra Homestays.

What does this have to do with the IPO?

Very little, really. Having crappy service or crappy products has never meant that the company won't grow in a stellar way going forward. But this has been a subject close to heart, so I wanted to write about. Let's get on with the financials and stuff.

What are the figures like?

They have 1261 apartments/cottages, and nearly 96,000 members. This might pose a small problem because each room can only be used 52 times a year (one week for a member). That's about 66,000 member nights available, meaning 30% of their members can't be currently accomodated, more if you consider "non-members". The official response is that many members don't get eligible, either by being early on EMIs or by default, but that isn't good enough as an explanation - simply put, they need a LOT more investment before they can scale revenues, or they will lose a substantial amount of goodwill and membership.

Earnings: FY 2009 revenue was 442 cr. up 17% YOY. Net income was down 6% at 79.8 cr.

They currently have 7.83 cr. shares in issue, so their EPS is 10. So at the price band (275 to 325) the P/E ratio is 27 to 32. This is ridiculously high for a company that has flattened profit growth and is saturated on capacity.

How will they use the money? They'll spend 211 cr. on five resorts (new and expansions) which will add 500 rooms to their kitty. Note that this will add 26,000 member nights over two years, still not quite enough to satisfy their current member count. And I believe they will need to grow their member count if they have to increase revenues.

Still, there's another problem. The IPO has only 59 lakh new shares - the rest are an offer for sale, in which the company gets nothing. At the upper price of the band, Rs. 325, they will collect 192 cr. They spend 210 cr. but only collect 192 cr. max, and have to pay around 6% management fees, listing fees etc. They do stagger spending over two years but the shortfall will have to be met elsewhere. Perhaps by some debt.

They've securitised receivables for 150 cr. and if a customer defaults, they have to make good the shortfall. This is not good, if you consider that there will be reasonable dissatisfaction among customers due to lack of room inventory. They also have about 100 cr. of debt on their books.

Conclusion: Given that:

• They have about 30% more members than room nights
• New capacity from this public issue will not even satisfy current membership, leave alone new members
• Ensuing loss of members or defaults can impact cash flow negatively, since they have securitized receivables.
• Customer dissatisfaction, from what I hear, is very high
• They're asking for a P/E of 27 to 32 on very small EPS growth in the past, and very little expected in the future

I will not subscribe for this IPO.

This is not advice so I would encourage readers to come to their own conclusions. I'd rather see this company scale up inventory and build a more satisfied set of customers, and see the tourism cycle go through its downturn before considering investing, at any price. Perhaps in three-four years. But given my horrendous record of looking at IPOs, it might just be that this share doubles on listing. That's another reason why you should come to your own conclusion!

Labels: IPO, MahindraHolidays

India's Wholesale Price Index has fallen compared to last year, giving us the first negative figure in 30 years, with a -1.61% printed. Of course this may be revised, etc.

The longer term trend seems to be intact, so no deflation per se. Food is an inordinately higher weighted component of WPI, and deflating factors like housing aren't quite well represented (though forming a significant percentage of expenses).

Still, a negative number is helpful in reducing inflationary fears. Now if the slope of the curve were to dip, that would be dangerous.

Labels: Inflation