Headline of the Month: Why a Pigeon Is Under Armed Guard in India

Pigeon held in India on suspicion of spying for Pak :

NEW DELHI: Indian police are holding a pigeon under armed guard after it was caught on an alleged spying mission for arch rivals and neighbours Pakistan, media reported on Friday. . .

The pigeon had a ring around its foot and a Pakistani phone number and address stamped on its body in red ink. . .

Officials have directed that no-one should be allowed to visit the pigeon, which police say may have been on a “special mission of spying”.

The bird has been medically examined and was being kept in an air-conditioned room under police guard. . .

This is not a normal part of the world.

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Gold Fundamentals Weakening

The world's largest gold-importing country is India, which has been finding prices too high lately. Thus suggests that the recent new high in gold is best treated as a double top, with early December's price peak the first top. From Jewellers in India look to home as global markets struggle:

VICENZA, Italy (Reuters) - Jewellers in India are pinning hopes for demand in 2010 on the domestic market as international destinations struggle, but extraordinary price volatility is limiting sales, even in auspicious periods.

India, the world's biggest market for the precious metal, had made successful forays into target markets for mid-priced jewellery, but wholesalers exhibiting at Vicenza's international jewellery trade show said uncertainty across financial markets was also mirrored in export activity.

"For the moment, all the markets are slowing down, except for India. Europe is slowing down, the U.S. is not out of the woods yet," said Pradeep Kumar Godha, chairman and managing director of Shantivijay Jewels ltd, in Mumbai. . .

Hemant Shah, director of Hammer Group, a major jewellery wholesaler and core Council member of India's state-backed Gem and Jewellery Export Promotion Council, said that the uncertainty had turned attention back to Asia. . .

He said clients were reporting a disappointing outcome from Askhay Tritiya, a religious occasion where demand usually jumps because it is considered an auspicious time to buy jewellery and coins.

"Although it is deeply entrenched in religion, this year demand fell by about 60 percent, according to clients I speak with," he said.

Gold is suddenly looking challenged. Not many knowledgeable traders are going to want to fight India; and with China's stock market in a bear and property perhaps already moving down there, demand for jewelry will not soar there either. And if yesterday's post on ECRI's apparent change of view is correct and if ECRI is correct, there is lots of slowdown in growth or outright recession coming.

Sometimes cash has its uses.

Copyright (C) Long Lake LLC 2010

India Shooting Itself in Foot, Restricts Visas to High Tech Expatriate Talent

Worms are turning all over the world. Bloomberg.com is running a story that explains: India’s Visa Rules ‘Out of Line’ for Companies Seeking Expats:

T.V. Mohandas Pai says he wants to hire more expatriates for Infosys Technologies Ltd., India’s second-largest software exporter, as the global economic recovery boosts sales. Stricter visa rules prompted by unskilled Chinese workers are holding him back.

Infosys has about 20 foreign workers and needs “many more” to help it expand abroad, said Pai, who runs the Bangalore-based company’s human resources department. Companies in Asia’s third-biggest economy are using annual growth averaging 8.7 percent in fiscal years 2006-2009 to reverse a decades-long “brain drain” to the U.S. and Europe.

The government toughened regulations for foreign workers last year after discovering that about 40,000 Chinese building power plants used business visas instead of employment visas, skirting taxes and taking jobs from locals. The crackdown restricted employment visas to skilled people in senior jobs and limited foreigners to 1 percent of a project’s workforce.

“We need to get expats to help us understand the complexity of businesses,” Pai said. “But instead of helping, the government has tightened the visa rules. The problem in India is policymakers are totally out of line with reality.”

Just in case you thought that only the U. S. did things that seem dumb.

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SocGen: Out of India?

Societe Generale (SocGen) is in the news with an unflattering title that actually understates matters. Bloomberg.com is reporting that Societe Generale Ordered to Stop Derivatives Trading in India. Here is the lead:

Societe Generale SA’s Indian unit was ordered to stop selling or trading offshore derivatives by the nation’s capital markets regulator, which said the bank failed to provide fair and complete information about its trades. . .

The Paris-based company is the second overseas bank to be suspended from trading derivatives by the regulator in just over a month. Barclays Plc suspended sales of its exchange- traded notes linked to Indian stocks following a Dec. 9 order. Both banks gave incorrect details on the sale of so-called participatory notes, the regulator said.

“Societe Generale completely failed in obtaining correct and complete information from the counterparties it deals with,” the regulator’s statement said. “Societe Generale is required to show cause as to why appropriate proceedings including cancellation of its certificate of registration as a foreign institutional investor should not be initiated.”

Forget "Out of Africa". To be kicked out of India is a truly big deal.

Here is a link to the statement of the Indian regulator, SEBI, and one excerpt from page 6, point 13 and then point 17. It appears that SocGen (allegedly) lied to SEBI about the entity Hythe being the ultimate purchaser of the notes rather than what it often acted as, which was merely as a broker.

Thus, for these PNs (Participatory Notes), reporting Hythe as the end beneficiary is not true. Further, Regulation 15A of the FII (Foreign Institutional Investor) Regulations lays emphasis on the fact that an FII or sub account can issue ODIs (Offshore Derivative Instruments)/PNs to regulated entities only after compliance with ‘know your client’ norms. As described above, SG has failed to adhere to this norm as it has little or no relevant knowledge of the ultimate beneficiary of the ODIs issued by it. . .

From the above response, it is evident that SG has failed to satisfy the basic tenet of “know your client” compliance when it issued ODIs.

Taking a walk down Memory Lane, we come to the following article from last March, SocGen defends payments from AIG, which begins:

France's third biggest (bank) by market value said on Monday it had acted within its rights to call on AIG for cash. "Societe Generale acted in this matter in full conformity with our counterparty agreements with AIG," it said in a statement.

"Societe Generale issued collateral calls to AIG in accordance with the terms of those agreements as a result of specified credit events at AIG," it said.

"The collateral posted by AIG, and the amounts paid, were fully consistent with the terms of those agreements."

Among European banks, SocGen was the biggest recipient at $11.9 billion, Deutsche Bank AG received $11.8 billion and the UK's Barclays Plc was paid $8.5 billion.

This is an old issue, not a new regulation that has blindsided Big Finance. From IFRAsia last month in SEBI cracks down on Barclays over derivative trades:

This is not the first time that Sebi has issued a derivatives ban against an FII, citing disclosure issues. In May 2005 Sebi suspended UBS for a year from issuing participatory notes following a stock market crash in May 2004. As part of the investigations into the crash, Sebi required UBS to disclose end-beneficiaries on certain transactions. . .

Reporting requirements governing the distribution of Indian equity-linked products by FIIs are strict and extensive. The regulator does not want Indian investors or institutions parking money offshore and reinvesting in India via FIIs and thus bypassing reporting regulations.

And as a coda, for what it may or may not be worth, UBS was involved as a counterparty in the allegedly misrepresented Barclays/SEBI action.

Now SocGen and Barclays which together received $20.4 billion from the people of the United States, are alleged to have committed fraud in the Raj. As the old TV show went, who(m) do you trust? SEBI or Barclays?

Perhaps out there in some parts of BRIC-land, there are some regulatory authorities who just won't stand being played for fools. We shall see.

Copyright (C) Long Lake LLC 2010

India and the Gold Market

Here's a pictorial factoid from a Mineweb article/link.

Gold bulls will say that the "big dogs" have moved into the gold market. These dogs are central banks and the truly big money in America, Europe and elsewhere in the world.

While India as a whole could afford to import constant quantities of gold, one could argue that gold was relatively cheap. Such is not the case now. But "not cheap" does not mean "too expensive".

Gold is in the nether region of investing: a bit on the glamor side of things but with strong chart patterns and a strong story given the debt-upon-debt nature of many Western, Japanese and now Chinese economies.

If India starts buying at the current gold price, watch out above!

Copyright (C) Long Lake LLC 2010

What's Going Down

There's something happening here
What it is ain't exactly clear. . .

Paranoia strikes deep
Into your life it will creep. .

Stop, hey, what's that sound
Everybody look what's going down.

-Buffalo Springfield, "For What It's Worth", 1967


What's been going down is the stock market, even more than the economy. Why? Among the greatest investors of all time was Warren Buffett's mentor at Columbia, Benjamin Graham, who observed about the stock market that:

"In the short run it’s a voting machine, but in the long run it’s a weighing machine."

So here's the analysis of the only three asset classes of interest to Econblog Review (EBR) in this time of crisis: the general stock market, Treasury securities, and gold. As gold is a proxy for the anti-dollar, foreign currencies may be discussed in this context.

The general belief at EBR is that many chickens have come home to roost, but that financial asset prices are "sticky" and do not yet reflect the equilibrium scenario, which smells like a lot of chicken poop.


STOCKS


Here is a long-term chart of the stock market as judged by its most familiar measuring-stick, the Dow Jones Industrial Average. (Click on it to enlarge.)


Even unadjusted for inflation, it is clear that the 2002 low has been broken. Worse, the velocity of the descent exceeds that of the 2000-2002/3 bear market and equals that of the Great Crash of 1929-32 in velocity. Indeed, 17 months from the stock peak, this downturn at least equals that of the Great Depression. Adjusted for significant deflation then and some inflation in our time, there is no doubt that the current crash is worse than then, again at the 17-month mark.


The only other parts of the chart that look similar are the 1970 and 1974 lows. Adjusted for inflation, each of those market bottoms was followed by lower lows, especially after the 1980 and then the 1981-2 recession.


So whether this is more like 1931 or 1973/4, even if we are at or near an intermediate-term stock market bottom, history suggests the strong possibility of a better buying opportunity later.

Now, let us examine the stock market as a long-term store of value. From http://www.dshort.com/:




The horrifying point here is that the inflation-adjusted Dow has only just now reverted to the previous all-time highs, in 1929 (!) and1966.

Given the disastrous performance of such metrics as corporate dividend cuts, consumer confidence, global economic performance, massively high debt levels in society as a whole, in other worlds a sea of troubles, that the Dow is only now at a record valuation except for the past 15 or so years is a warning sign. Dow 2000-4000 is a real possibility.

Note: The Short web site has several interesting charts.

Who could imagine
That they would freak out in the suburbs!
(No no no no no no no no no no
Man you guys are really safe
Everything's cool) . . .

And they thought it couldn't happen here
(duh duh duh)
They knew it couldn't happen here
They were so sure it couldn't happen here
But . . .

Frank Zappa, "It Can't Happen Here"

No, we guys were not really safe re the economy or stock prices, and yes, a long-term period of poor stock market returns can happen here, even starting from today's valuations. Japan's stock market halved from its market peak of 39,000 in 1989. It is way down from that half-the-peak, to little over 7000, twenty years after the peak. Look at the inflation-adjusted Dow in 1932-3. It was below the 1921 bottom, which itself was far below the 1900 level.

Looked at another way, if the Dow was at 900 in 1979, then in the subsequent 30 years it has return 6.8% yearly at its current price. Adding in dividends gives about a 10% yearly return.

What if the Dow were now at 3000? We would still be looking at a 7+% compounded annual return.

The S&P 500 yields about 3.2%. At major market bottoms, yields have been in 6-7+% range.
Given poor current prospects for dividends, and given a very high stock price:tangible book ratio, there is no fundamental reason to expect this to be a stock market bottom.

In other words, while the stock market will gyrate, given the obvious technical breakdown of the stock market, the poor current and short-term outlook for the economy, the weak state of the major financial institutions, the lack of fiscal discipline out of the Federal Government, etc., the stock market is riskier than it was a year ago. If the stock market were a stock, it would be a stock to avoid or to short-sell on moves upward.

GOLD

Gold remains in a structural bull market. Its nominal price remains above its 19790-80 bull market high, which is a positive sign. However, most commodities are in major bear markets. The Economic Cycle Research Institute's Future Inflation Gauge fell again in February to the lowest level since 1958.

Following the 1958 recession, the U.S. experience several years of stable prices until the Viet Nam War and Great Society programs led to a ramp-up of inflation and began the structural bear market that began in 1966 and bottomed in 1982. During that time gold rose about 20 times in price.

To this observer, the chart of gold is worrisome. It continues to give a negative year-on-year return, has become popular beyond sophisticated investors, and simply is not a currency. Thus, it is speculative in an ultimate disaster case, and perhaps is best considered as a necessity to have physically on hand or in a secure, accessible location in a foreign country in case of breakdown of the world's monetary system. However, so much deficit spending is proposed by the Obama administration, along with frank monetization of debt out of the U.K., that the case for potential significant inflation has strengthened. A much higher gold price to keep pace with inflation and perhaps to reflate global economies is very possible.

Hedges against the dollar can be considered by buying the depressed securities, BZF and ICN, which are interest-bearing investments in the currencies of Brazil and India relative to the U.S. dollar. Both countries avoided toxic derivatives, have large home markets, are not mature enough for their people to have fallen prey to the Merchants of Debt, are not involved in any wars, and have democratic governments that from this observer's perspective in Florida appear to be more prudent than our Federal Government. However, the charts on each of these securities is weak, with ICN's better and currently our favorite.

TREASURIES

Here is a real conundrum. A 5-year T-note at a 2% per annum yield gives a positive and significant return against current deflation, where almost everything for which prices vary is on sale; however, there is now a 1% per annum default risk premium on U.S. Government securities, so that the "real" nominal yield is only 1% per year.

A tentative suggestion is to buy no new Treasuries longer-term than 2 years other than for quick trades and to consider selling on strength. Given the real possibility of renewed panic a la last fall, a re-test of the December lows in yield (highs in price) of Treasuries of all durations is possible.

Treasury-equivalents such as Ginnie Mae securities, whether purchased individually or through the Vanguard or Fidelity mutual fund families, may well be superior to straight Treasuries at this time, though investors need to understand the general principles of mortgage-backed securities before investing in them.

CONCLUSION

The fundamentals of capitalist principles are strong, but the fundamentals of the economy are weak and weakening. The technical structure of the stock market is poor. There are numerous stock market metrics that are nowhere near trough historical valuations.

There really is nothing new under the sun.

If you began with the equivalent of one dollar the year Jesus was born in Nazareth and looked for 1.5% interest compounded annually, you would now own all the world's current financial worth, approaching 100 trillion dollars. Thus there is no reason to assume that any particular rate of return should occur, or should even be positive in nominal terms, much less in today's situation where debt defaults by previously apparently credit-worthy borrowers are happening and are likely to accelerate.

In plain language, the needs of the many to eat, be clothed and be housed will trump the desires of those owning that theoretical construct called capital are going to win out during hard times.

Common stocks are far riskier than are cash or bonds. Given how much our current situation resembles that of the early 1930s and Japan post-bubble, maximum caution is strongly advised.

Copyright (C) Long Lake LLC 2009