Rakesh Saxena

Emerging Markets: Millions Returning to the Natural Economy

Nothing wrong with returning to our rural roots, omooc. At least we would not have to worry about stimulus packages and TARP funds. Many thanks - Rakesh


On Feb 13 10:24 PM omooc wrote:

> What's wrong with returing to your rural roots? In China, a few years
> in the city allowed one to save some money, thereby allowing one
> to build a house in the rural area, and to return there from time
> to time. In the Chinese-language paper I read, I saw a photo, a couple
> of days ago, on the front page, showing the backside of a bicyclist,
> returning home, with a big washing machine (by Haier) at the back.
> The general attitude seems to be positive -- a few years in the city
> is nice, but returning to the rural home with your spouse and family
> is nicer. With simple tastes and no debt, plowing the field is gainful
> employment.

Emerging Markets: Millions Returning to the Natural Economy

Dear Proximo: FYI, my main business in a bull market has been merger-arbitrage type transactions, which provide the window to go long one one stock and short another. I am not a value investor (long term) because, since the early 1908s I have not trusted the accounting and disclosure in the marketplace. So I have focused on trading "misalignments", a bit akin to spread (pair) trading. Many thanks - Rakesh


On Feb 13 10:10 PM PROXIMO wrote:

> Rakesh---You have indicated that your preferred investment style
> is short sales. Just curious, if conditions improved, say, several
> years out and a bull market in stocks likely, would you still be
> most comfortable focusing on opportunities in the short sector? Or
> would you look to go long? Just curious---if you happen to read this
> comment. Thanks, PROX.

Emerging Markets: Millions Returning to the Natural Economy

Dear Kay: You are correct insofar as certain rural areas in these markets are dominated by foreign remittances, criminal gangs and aid packages. In that sense, the term "natural economy" needs to be contextualized in today's reality. Many thanks for your comment. - Rakesh


On Feb 12 02:02 PM Kay Moseley wrote:

> "Regeneration of the natural economy"? Would that it were true!
>
>
> Unfortunately, more and more of the countryside in the "emerging
> markets" now resemble rural slums -- dependent on purchased food
> and other inputs and thus on either some sort of rural wage work
> (including massive narcotics markets, here and there), remittances
> from relatives with urban or overseas jobs, or on "humanitarian assistance"
> (surplus food + foreign NGOs). This is why food prices, poverty and
> protests figure (as in the last paragraph of this interesting article).

There Are Many More Satyams Out There

Dear gig49: You obviously have a very limited understanding of the terms "leverage" and "cash in hand and banks"---in any event, the last thing one needs is an accounting course at this point. In my view, it is the accountants who failed the public, in India and in the West, by sticking to concepts which are totally irrelevant and unduly restrictive (the "snapshot" trap). But I will address your concerns in more detail when another similar issue comes up. Many thanks - Rakesh


On Jan 29 10:08 PM gjg49 wrote:

> two things:
> first, leverage has absolutely NOTHING to do with the Satyam fraud.
> Balance sheet leverage derives only from debt (or perhaps off balance
> sheet debt) or contingent liabilities (contract leverage). Satyam
> had neither. (BTW AIG's leverage was contract leverage--large batches
> of CDSs that represented very low $ liabilities until suddenly one
> day they all kicked in and represented very high $ liabilities--kind
> of like an insurer who has no claims to pay until the day after a
> hurricane when they suddenly incur massive claims.) Again, from everything
> I have heard, Satyam had neither debt nor any contingent liabilities
> that suddenly exploded on them.
> Second, Indian authorities arrested two of PWC's auditors on the
> Satyam account a couple of days ago.
> Rakesh, with all due respect, you should consider taking an accounting
> course to insure that you better understand financial statements.
> The cash issue that I raised has nothing to do with leverage and
> it has nothing to do with some of the cash flow and operating margin
> items you suggest. Cash itself and the entire balance sheet represent
> snapshots of the financial condition at a given moment in time--say
> 11:59 PM on December 31. At that moment, Satyam either had $x of
> cash in such-and-such a bank or it did not. Similarly, either they
> owed someone or they did not. Valuing inventories and receivables
> and most other items can be open to negotiations (how much is last
> year's undeployed personal computer actually worth in inventory.)
> But cash should not be open to any interpretation. The value of a
> contingent liability may be--such as the AIG CDSs. Someone either
> never checked to see whether cash assets were real or someone actually
> helped management perpetrate this--the arrests seem to suggest the
> latter. "Cash flows" and operating margins both represent "flows"
> or movement of funds over periods of time--quarters or years, not
> balance sheet snapshots.

There Are Many More Satyams Out There

Dear Jerusel: When you talk of American companies being leveraged, you perhaps are unaware of the heavy over-valuation of assets and extremely low delinquency provisions in the emerging markets. In any event, if you are serious, please pick an example and let's get into the facts. Just making broad comments will not do your portfolio much good. To reiterate, let's deal in facts first, then make conclusions. Many thanks - Rakesh


On Jan 22 08:35 PM Jerusel wrote:

> This article is pure silliness. American companies, consumers and
> monetary system are leveraged many times more than emerging markets.
> Emerging markets have a much higher savings rate and finance much
> of there investments with capital and not debt. Emerging markets
> do not have massive and expanding current account deficits like the
> US and the dollar is in a very real danger of losing its world reserve
> currency status, which would be absolutely devastating to US business.
> Our national debt is huge, our foreign debt financed consumer consumption
> is going to end when emerging markets figure out their not get paid
> back because we are going broke.
>
> Short emerging markets if you want. Stay long on dollar dependent
> assets. Hope you have fun in the broke house.

IMF On Lending Spree - Needs $150B, At Least

Dear Debt Junkie: The UK economy is the most vulnerable economy at this point. Whether the UK government admits it or not, tourism (i.e. London) and "non-industrial" foreign investments (i.e. prizes like the soccer clubs) are both key for jobs. And the UK "buy-to-let" basement suite market is now in tatters. But re the IMF bailout, I'm not sure if the IMF will have the money for too many more bailouts--the numbers just don't add up. As a sign of the times, Instead of heeding Gordon Brown's call to contribute to the IMF kitty, one Gulf semi-sovereign investor is willing to pay $100 million for AC Milan's Kaka!! Many thanks - Rakesh


On Jan 13 10:26 AM Debt Junkie Scum wrote:

> Rakesh,
>
> A few smart cookies in the UK think that the UK will end needing
> an IMF bailout. What are your thoughts on this happening?

There Are Many More Satyams Out There

Dear Calling the Turns: In reponse to your "main question", the key area to focus on is the current asset-current liability section of the financial statements. This may not be the right place to go into details but, in brief, one target of an investigation should be the "sundry debtors" and "loans and advances" lines to determine the extent of "rollovers", i.e. the rollover of fundamentally the same receivables, from one accounting period to another, often under different names on record, when in fact a segment of those rollovers are doubtful, at best. Another are of potential misrepresentation is the curtailment of current liabilities by simply "organizing" dates on PNs, BEs or other paper evidencing debt obligations. As far as "cash on hand/banks" is concerned, auditors need to investigate the source-process for balances--is the cash being generated from genuine business receivable realizations or is the cash (or a portion of it) simply a result of maturity mismatches, i.e. borrowing long, and placing the money in current accounts--this explanation should appear in the notes. Already, we just heard that the SEBI (India's securities regulator) is checking Satyam accounts in Citibank etc to verify this cash-on-hand situation, and more details will inevitably follow over the next few weeks. There is also the issue of overstating operating margins, which should be checked (by market standards) to see if the free cash levels disclosed are justified in the first place. The quantification of capital and reserves is yet another area of concern. Many thanks - Rakesh


On Jan 10 04:13 PM Calling the Turns wrote:

> Rakesh,
> You still have not answered gjg49's main question which is what is
> bothering me (also, like gjg49, a securities analyst for long time)
> also. That is you can manipulate most everything on a financial statement
> - but how do you manipulate CASH?

There Are Many More Satyams Out There

Dear gjg49: In brief, what happened at Satyam was that the financial statements were "guided" to keep the stock price in play over an extended period of time---I suspect that Mr. Raju and his associates made money selling and buying SAY shares; my very reliable sources in Bombay tell me that this fact will be revealed as the inquiry progresses. On the one hand, inadequate accounting and disclosure guidelines made it easier to manipulate the balance sheet; on the other hand, the same manipulation kept the company's shares at unrealistic levels. So, to finally know "what really happened?", one must follow the money, i.e. trading in blocks of SAY shares, in India and abroad. Perhaps those lawyers in NY who have filed class action suits should see if they can get access to the major trading accounts. >>>Many thanks- Rakesh


On Jan 09 03:35 PM gjg49 wrote:

> Rakesh,
> As a retired investment analyst with over 25 years of experience
> and as a retired manager of a tech fund, I think you understated
> the fraud involved at SAY.
> I have always used cash flow as the ultimate measure--it is far far
> more difficult to cheat on cash flow than on the income statement
> (virtually everybody embellishes the P+L). But SAY was EXTREME. How
> could they possibly have made the two largest single items on their
> balance sheet (from the 20-F filed 8/8/2008 at sec.gov--cash and
> investments in bank deposits) look so much larger than they actually
> were. Your assertion that they finagled with accounts payable (only
> $32 million compared to $290 million in cash) seems unlikely--this
> suggests that they had cash because they didn't pay vendors $300
> million but they somehow made the $300 million of payables disappear??
> Maybe they withheld pay to their employees (at least accrued expenses
> shows as $238 million) but this still seems unlikely. And how could
> they possibly show investments in bank deposits at $826 million??
> This dwarfs every other number on the balance sheet.
> I don't mean this to be critical of you (or your article), but I
> do mean this to seriously question whether you are anywhere near
> explaining what happened at SAY. (PS I do not and did not have any
> economic interest in SAY, but having looked at the company, I have
> an intense intellectual interest in how they perpetrated this.)<br/>I
> suspect that some parties at PWC probably were involved in a major
> way. I would be very interested in any info you have on that topic
> and how the big auditors interface with clients in developing countries.
>
> Thanks

There Are Many More Satyams Out There

Dear ap612: The Indian authorities, particulary securities regulators, are now going, starting Monday, to check the books of numerous companies who make up the market indices, as a first step---so let's wait for more news on this front in forthcoming days and weeks. My analysis is based on a thorough review of the balance sheets of about 2 dozen senior listed companies, including 3 banks. But I will let the results of the ongoing investigation play out, rather than naming names at this point. As far as your second question is concerned, this problem of inadequate accounting methodologies applies to all emerging markets, virtually without exception. The problem in the developed markets is somewhat different; in the US, for example, relatively superior accounting and reporting guidelines makes it more difficult (again, relatively) to defer a bad balance sheet process over an extended period of time--e.g. the problems at AIG and Lehmans were known to the regulators for quite some time, at least in the first quarter of 2008. Many thanks - Rakesh


On Jan 09 05:10 PM ap612 wrote:

> I would like to know what is making Author of this blog in being
> so sure in his comments like "..Secondly, besides Satyam, there are
> hundreds of listed Indian companies who are walking that fine line
> between fictitious cash and hard cash..."
> And is it true just for India and emerging markets?

There Are Many More Satyams Out There

Dear User 86999: The key indeed is real accounability--bit it a rating agency, a legal firm, an auditor or an asset valuation expert. Many thanks - Rakesh


On Jan 09 09:57 AM User 86999 wrote:

> "Because as long as auditors fail to conduct extensive and precise
> reconciliations between cash-flow items within financial statements
> on one hand and contractual obligations which generate those items
> on the other, innovative managements will always find ways to create
> an aura of viability."
>
> Yes, indeed. This is an equivalent of credit rating agencies, which
> have no fear of being accountable, because they grease the right
> wheels in the entire chain! Good luck with finding a respectable
> system. The common man/woman will be screwed until they bleed.

There Are Many More Satyams Out There

Dear Aalan: You should review my older posts on the SA site. I share your view that the "phenomenon" is all-encompassing. Many thanks - Rakesh


On Jan 09 09:20 AM Aalan wrote:

> Yes, but why call this an Emerging Markets phenomenon? Have we learned
> nothing from Enron, Lehman, AIG?

There Are Many More Satyams Out There

Dear amruth1: Please review Proximo's post (above) which is self explanatory. The fact that my "name is Indian" does not mean that I have to advocate buying into India. My exclusive commitment is to trade markets for profit--and if my interpretation of the facts is wrong, I have to take losses. But I only deal with facts, and the related inferences one can draw from the facts. Many thanks - Rakesh


On Jan 09 10:22 AM amruth1 wrote:

> I run a 115 year old publicly traded Indian health care company and
> I am proud of the fact that we have been giving dividends since 1936(
> when we did our listing). This has to say something about corporate
> governance!
> We are one of numerous Indian companies that do a honest days work
> and take care of all our stakeholders. For this author to say most
> emerging market companies have transparancy issues reeks of prejudice(
> and going by his name which is Indian makes this more of a Uncle
> Tom syndrome) . Are we all forgetting the Enrons, World Coms and
> the Maddoffs of the world? Seriously, seekingalpha should be careful
> about who they allow to write.
> Lot of people unfortunately read this sort of garbage and believe
> it to be true.

There Are Many More Satyams Out There

Well KCP--it is this site's policy to disclose positions. You are, however, entitled to your opinions; I only wish they were supported by facts. Many thanks - Rakesh


On Jan 09 11:27 AM KCP wrote:

> Wow Mr. Saxena!!! You are a fraudster as well. You AH short emerging
> markets and then write about this!!! Of course, you are negative
> - manipulating idiots - there is no difference between you and Raju
> or Madoff - all are vultures. Publish this if you truly believe you
> are sincere.

There Are Many More Satyams Out There

Dear H.J. Huneycutt: it is more than obvious that financial fraud can occur in all markets, both developed and undeveloped. The real benchmark test (in terms of a distinction) is the quality of regulatory and accounting guidelines. In the briefest of terms, the requisite disclosure level is much less in the emerging markets, and therefore companies can get by for years with financial statements (particularly in delinquency ratios and asset values) which don't meet western standards. Of course, fraud can occur with both benchmark tests----but the life of a fraudulent balance sheet (rather a series of balance sheets) is much less in the West than in the developing world. I trust that answers your concern. Just post further if you want specific examples and I can guide you to the relevant websites. Many thanks - Rakesh


On Jan 09 09:48 AM H.J. Huneycutt wrote:

> I am in agreement with the author, but if the author is around, I
> was wondering if he could provide some insight as to why this is
> so much more of a concern in emerging markets than somewhere like
> the US or the UK (for instance)? Is there some reason that auditors
> do not pick up this type of thing over there? Is collusion more likely?
> Are auditors in emerging markets simply more likely to give the benefit
> of the doubt to the company?
>
> I agree, I'd definitely keep away from India right now, and I'd be
> very skeptical of other emerging markets (particularly Russia), but
> I wish I had more info as to why seems so much easier to do in emerging
> markets.

India Unraveling: Stay Short Emerging Markets

Thanks freefall51. As far as the market is concerned, it will be interesting to see how long this mini-bull run can go on in the face of clear and unequivocal facts to the contrary. Part of it, of course, is that most investors are fundamentally bulls, and issues like the Obama stimulus, auto bailouts etc are treated as positive signals--in my view, as you know, these rescue packages are actually bearish indicators. - Rakesh


On Jan 03 10:41 PM freefall51 wrote:

> Rakesh,
>
> keep going. I like your articles.
>
> BTW, I think the latest mini-bull is just based on a temporary lack
> of sellers after the recent tax loss sell-off and due to the fact
> that the indices hit a major uptrending support line. The market
> tries to sneak in an upswing on low volume. This is not logical to
> me given the overall conditions but the market proves me typically
> wrong.