I voted for Obama

Yup, I mailed in my ballot and it should be over the Atlantic Ocean on it’s way to Montgomery County, Maryland for processing. Do I believe Barack can fix everything of course not.  Do I think he is better then the alternative, of course. McCain scares me and Palin reminds me of a pushy PTA board member. McCain had a shot, but to think that Palin could become president if McCain chokes on a steak should scare any die-hard GOP card carrying member. Yeah, Barack is black – get over it. Barack brings about a new way of looking at things and it might work or not.  I rather try than stick with what has NOT been working for the past 8 years.

(hat tip to Jeff N. for the image, not sure where he stole it from)

Dear Indian Investor

Tis the season for the Q3 quarter ending investor newsletters from hedge funds and man some of these newsletters read like a confessional. You can check several of the hedge fund newsletters that I have collected from the internets…TPG-Axon, BAM, Cerberus, Greenlight CapitalTosca and Perry.  The newsletters follow the same basic construct by being broken down into 3 parts: 1. Holy crap this has never happened before 2. Highlight specific stock or sector plays 3. The path forward (usually a plea to the client to not bail out of the fund).  In the same spirit, I bring you:

Dear Indian Investor,

Wow…what a ride the “India Shining” story has been.  The peak of the Sensex was around 21,000 at the beginning of 2008 and here we are at 8,500 a drop in the neighborhood of 59%. So what happened, I know most people didn’t expect it…bullsh%^. I believe people were not incented to look at the downside, we all became cheerleaders for the Indian growth story. I’ve been here for the past 3 years and kept on scratching my head every time the Minister of Commerce & Industry (Kamal Nath), Finance Minister (P. Chidambaram)  or Prime Minister (Manmohan Singh) would talk about 10% GDP growth.  Most people you talked to couldn’t really tell you how the 10% GDP growth was being achieved, they looked the other way because in the other direction was their portfolio sky rocketing. They sadly correlated stock growth with country growth, I kept on telling people that the governement had a window of 12-24 months to get it’s act together and I firmly believe they have missed it.  During the World Economic Forum in 2007, India was the toast of the town…the girl everyone wanted to talk to.  How things have changed, back then India laid down the guidelines for Foreign Direct Investments (FDI), telling who and what they could invest in.  Now, the government is pleaing for anyone to invest.  I can tell you companies like Starbucks are probably not looking to enter India anytime soon, they have their own issues to deal with and getting “back to basics” – entering a foreign country is not part of anyone’s back to basics restructuring plan.

Some of the sectors that are going to get hammered: real estate, infrastructure and aviation.  If you have been following what I write then you know my feeling about real estate, it’s very bad. The dynamics maybe different this time, but the outcome will be the same – over capacity and over leveraged.  I just hope we don’t come to the same scenario we had in early 90’s in Bombay, where developers got shot because they couldn’t pay up. The Indian government in early 2008 threw around numbers as big as USD 500 billion being spent on infrastructure, that is clearly not going to happen. Banks such as Macquarie and Depfa that were known for large scale public-private partnerships are no longer lending money. Depfa, which has an office at Ceejay house, was the main culprit in creating a massive hole in the balance sheet of commercial property lender Hypo Real Estate.  Aviation was another great growth story, many new carriers and low priced fares fueled the spike in traffic.  A year ago Air Deccan, Sahara Air, Kingfisher and Jet Airways were all competitors and fighting each other for business.  Just a couple weeks ago Kingfisher and Jet Airways announced a partnership to work together (read – control prices), the other two airlines were acquired by Kingfisher and Jet, in affect these 4 airlines now control 60% of all flights in India.

Looking forward I see some great businesses created in this period, but on the whole it’s going to be a very difficult period.  I have recently rediscovered the tale of the “Tortoise and the Hare.”  Had you invested in the stock market 3 years ago in India and stuck with a Sensex Index fund you would be about even.  Had you put your money in a fixed deposit (similiar to CD’s in the US), you would have averaged 7% a year…slow and steady wins the race.  I believe the US is going through some large scale structural changes and things will not be the same as they were before and that will affect India.  The impossible is now happening: Goldman is now “just” a bank, Lehman is nothing more then a website, GM and Ford are on the brink of bankruptcy, the list goes on and on…what’s in store for India?  I believe we are going to see some major bankruptcies, a flood of people coming back to India due to H-1B visa’s being revoked and a general deceleration in the India growth story.  The Indian government is stuck because it cannot spend it’s way out of a recession/depression like the US. Cash is king.

Happy Diwali,

Manish R. Jain

Speechless

Wow, what a day on the Indian equity markets…Sensex down 1070 points and the Nifty down 360 points. Currently the Sensex is EXACTLY where it was when I landed 3 years ago at 8,700. And the fun is only beginning the Dow Industrial Futures are down 550 points – limit down. I can honestly say I have NEVER seen this happen before. But that is not the reason I’m speechless, I read this NY Times article this morning and having a very tough time trying to sympathize with this family:

…Last month, Mrs. DeCicco, 32, was laid off from her $35,000-a-year job managing a hotel business center in Orlando, and the family moved north where Mr. DeCicco, 28, a security guard supervisor for SecurAmerica, could earn $13 an hour instead of $10.

…these include a four-piece marble and mahogany bedroom set for which they paid $8,000 after they refinanced their house two years ago.

WTF, are you kidding me? Mrs. DeCicco spent nearly 25% of her yearly salary on a marble and mahogany bedroom set. Dude, I can’t even begin to comprehend how you could justify this purchase, based on this logic everyone should be living in McMansions, driving leased cars and living beyond their means…oh wait…

Portfolio Paranoia

Intel’s Andy Grove penned a great book back in 1996 about Intel, business and being paranoid about the competition. People have been asking me what’s happening worldwide, what’s up with India, etc…I see two stories being told depending on the audience.

The positive spin is “in the long term everything will be okay and you might actually want to invest now” and the other is “dude, watch the expenses, be liquid and don’t trust anyone.”   When it comes to my money, I’m absolutely paranoid and the competition is anyone out there trying to reduce my capital. In the last 6 weeks I have seen legitimate deals vanish, what was a viable business plan back in September is now apparently crap. The VC studs at Sequoia Capital had a meeting this week with a slide deck titled “RIP: The Good Time” and in short – get your house in order, things might get real crazy real fast. (Here is summary from Om Malik of the meeting).  

Someone asked me what is the silver lining to all this. I would take this time to vet out money managers, if they can survive this period they can rock in any market. If big companies can be paranoid about the future, I’m not sure why you shouldn’t be. It’s not me being a permabear, it’s just me protecting my capital at all costs.

Here are some great quotes from today’s newspaper:

The property rates in Mumbai will not see a correction above 10-15%, given the land rates are very high in Mumbai…

Gopal Sharma of Gundecha Builders 

Gopal has to be positive or his cashflow won’t be positive

Indians buy a home for long term use, unlike people in western countries

Pravin Doshi, Pres of Maharashtra Chamber of Housing

Seriously, Pravin have you even visited the West or just talking smack?  I know several of my cousins in India that have bought property for a quick flip. And several of my cousins in the US, that only have one house – the one they live in.

Be absolutely paranoid about your portfolio and don’t let anyone sway you.  People talk about risk metrics, the best risk metric is if you can sleep peacefully at night.

Paging Mark Haines

With the market rumors swirling about the imminent demise of ICICI Bank, Chanda Kochar the Joint Managing Director was all over TV spectrum clarifying that everything is okie dokie with the bank.  The stock was down 26% at one point but ended down “only” 19.86%. Watching the TV anchors question Chandra was almost like watching Oprah Winfrey interview Denzel Washington, the question were all softballs. If Mark Haines, of CNBC US, was asking the questions, I’m sure Chanda would have broke down and cried. She evaded every tough question in regards to the ICICI UK business, and made it very clear they are distinct entities.  Maybe, but at some point those books will be combined on the balance sheet and could adversely affect the Indian unit. She refused to give the mark to market positions of the ICICI UK book as of Sept 30 – are they using abacuses at the UK office?

Boom to Bust

Over the past several years the great Indian real estate story has been front and center. From a Bombay point of view it’s been fun to hear about how prices will never come down and the time to buy is now.  Even in the last 3 months, people have been saying the real estate market will not crater like in the US.  I’m sorta leaning towards bulls@#$ when I hear that.  

I’m expecting every country that had a real estate bubble will have at least one bank and one developer go bust. Every time I rattle off a list of developers people have a reason why they will never implode:

Indiabulls – politically connected, it’s just a front for converting black to white money
DLF – lots of land, good rental income, political money
Unitech – backers with deep pockets
HDIL – politically connected, focused on slum rehab projects

On the bank front, the last 48 hours have generated more headlines and rumors about a bank going under. The one name that consistently seems to come up is ICICI, hence they have been appearing on TV the last 2 weeks telling everyone everything is okay. I’m sure the only reason it comes up because it was the most aggressive of the Indian banks. I have pulled all my money out of ICICI because if they fail, I’m not sure the Indian gov’t can create magic like Paulson and Company.

Credit Crisis 101

If you are watching your portfolio plummet and wondering what is happening, this post might help you understand with better clarity why it seems your money is being flushed down the toilet.  The 3 combined podcasts run about 100 minutes, I’ve summarized the key points and some choice quotes. However, I highly recommend you downloading them yourself to listen to. (If you have a Zune or don’t use iTunes, please close your browser and jump off a cliff)

60 Minutes (iTunes link, 42 minutes)
– What went wrong with the risk models

“You can’t model human behavior with math”

– What is a credit default swap (CDS) 

“It is an insurance contract, but they’ve been very careful not to call it that because if it were insurance, it would be regulated. So they use a magic substitute word called a ‘swap,’ which by virtue of federal law is deregulated,” 

– The CDS market is around USD 50-60 trillion dollars

Radioeconomics.com (iTunes link, 34 minutes) – The guest is Barry Ritholtz (from The Big Picture blog which is one of the best blogs covering the financial crisis)

– The Commodity Futures Trading Act of 2000 exempted any derivatives instrument (such as CDS) from being regulated
– The CDS market went from USD 2 trillion to USD 50-60 trillion in just several years
– Ratings agencies (Moody’s, S&P and Fitch) were rating most mortgage backed commerical paper as “triple A” investment grade
– Housing sales peaked in 2005 and housing prices peaked in 2006
– Why in 2004, were 5 investments banks exempted from the Net Capitalization rule?
– The ban on short sales in financial stocks is stupid

This American Life (iTunes link, 1 hour)

Part 1 – Commericial Paper Market
– The commerical paper market (one of the largest markets) locked up after “breaking the buck” occured with the Reserve Fund

Part 2 – CDS’s
– Satyajit Das talks about the market originally being used for insurance and soon turned into gambling. (He has a great book, that I reviewed a while back)
– Great analogy of using CDS’s for fire home protection
– CDS’s are traded via over-the-counter (OTC) between two private parties in an unregulated market
– USD 5 trillion in Bonds and USD 60 trillion in CDS  – a 12x leverage

Part 3 – CDS’s traded in an unregulated market

After listening to all 3 podcasts it’s clear, there is no quick fix to the problem.  The Fed stepped in on Tuesday and announced a Commercial Paper Funding Facility and the DJIA still got slammed over 500 points down. 

The two largest financial markets: commercial paper and CDS are unregulated and I’m sure the market participants like it that way. With regulation and transparency, you have to fight for business and lower your prices, look at the US brokerage model.  Once the US brokerage model was littered with companies offering rock bottom services, the industry looked towards new markets – CDS.

The size of the world stock market is estimated at about USD 60.9 trillion  at the end of 2007.  The size of the CDS market is between USD 50-60 trillion. Shouldn’t both be regulated the same way based on their size and importance?

The ONLY thing that is going to continue to rise is the US National Debt…USD 10 trillion and counting…