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Chinese cyber agents rigging polls on RMB?

Here is an interesting case from FinanceAsia:

"Last week, we asked our readers what they thought about China's new currency flexibility and whether it would be sufficient to keep American politicians at bay. The early voting was close. Some readers thought it would not be sufficient, while others thought it was a bit more complicated -- it might keep Timothy Geithner at arm's length, but not necessarily for long.

Nobody voted Yes. At least, not until last Wednesday, when almost all of the Yes votes we received all week arrived in the space of a few minutes from a range of IP addresses that suggests a location somewhere in Mongolia. Or Costa Rica, we're not exactly sure.

For the record, the final voting ended up with a storming majority of 64% in the Yes camp, with the remainder split 20% for No and 16% saying it's complicated. A surprising result, to be sure.

If we can take anything from this vote (and we almost certainly cannot), it might be that the Chinese government is using FinanceAsia to subtly tip a nod to the market."

Gas, Government and Institutional Investors

The ruling by India's Supreme Court on Friday, ended the five-year long dispute between two rival firms owned by the Ambani brothers. The verdict may have caused far greater pain for the loser than gain for the winner.

The loser: Reliance Natural Resources (RNRL), a shell company that would have made big profits in the future, only if the SC had ruled in its favor. RNRL's stock crashed 23% on Friday and dropped another 9.5% on Monday morning.

The winner: RIL, India's largest company by Mcap.

 

Now, this is not our story. We will look at the bets placed by the so-called smart investors, or the institutional funds, on the climax of this high-profile case. India's domestic institutional investors - including the state-owned insurance behemoth Life Insurance Corp, the largest equity investor in Mumbai's markets - was steadily trimming exposure to RNRL since June 2009. As you can see in the chart below, some gullible foreign funds were gobbling the stock during the same period. 

RNRL stock ownership - last four quarters: DII - Domestic Institutional Investors, FII: Foreign Institutional Investors. source: Bombay Stock Exchange

This is where the DIIs re-allocated the capital. Gail is India's state-run monopoly in natural gas distribution.

Here is the past 1-year performance of Gail. Smart play!

And this is another stock that the DIIs accumulated in the past year, while FIIs continued to dump.

 

RNRL had locked horns with two Goliaths: India's government and its largest private corporation. In the second-half of 2009, Reliance ADAG, RNRL's parent, launched an aggressive campaign against India's Union Ministry of Petroleum and Natural Gas for allegedly joining hands with Reliance Industries for the benefit of state-run National Thermal Power Corp (NTPC). The campaign, advertised on all "mainstream" national newspapers, was the first of its kind in the country. It became an instant controversy and prompted both RIL and the government to react. 

The intensely dramatic, five-year long dispute finally ended without any surprise. But yes, some cowboy fund managers still lost money.

Galleon and Goldman: SEC's path to Resurrection

 

Everybody loves to hate Goldman Sachs. The newly released emails may further strengthen the Wall Street titan's vampire squid image. The charges on Goldman has weakened Wall Street and will clearly help the Obama administration push the financial regulations. A big gainer here, however, is the markets regulator, which had earlier failed its job.

The Securities and Exchange Commission, during 2007 and 2008, was largely seen as an incompetent government agency, which could not "regulate" the exotic derivatives and their risk levels that led to the economic crisis. Its failure in unraveling ponzi-king Bernie Madoff, despite repeated red flags, was a huge disgrace. Then there were other scams that broke later, including Allen Stanford's.

In the second half of 2009, the agency was back on its feet by grilling Galleon -- a fairly large hedge fund, which routinely traded on insider tips like most other influential hedge funds -- leading to a series of arrests. By investigating a Goldman director for insider trading and then charging a civil fraud case against the firm, the regulator has restored its own credibility.

After the dust settles on Goldman, an issue that needs to be addressed is the role of this agency, whose top executives, as we now learn, were watching porn as markets and the economy roiled. Instead of being a postmortems expert, the SEC should aim to efficiently regulate the markets real time. It should simply strive to be the "markets regulator."

 
Also read: Goldman Sachs: A GSE Hedge Fund At Its Best

INR: Outlook Bright

India's currency and stocks rose as it kick-started the long awaited spectrum auction for 3G and Broadband Wireless Access (BWA) on Friday. Winners can roll-out next-generation mobile services -- in the world's fastest growing telecommunications market with around 600 million existing customers -- starting September 2010.

Three key points for investors -

1. INR appreciation may continue in the medium term as companies tap foreign lenders to fund/refinance their bids.

2. Portfolio funds likely to shift weights positively to play the currency rise and improved sovereign outlook, boosting equity valuations.

3. Competitive bids may further stretch the balance sheets of India's telcos. Strained debt levels could cap irrational bids.

India's largest player Bharti's debt-to-EBITDA level is greater than 2.5 times after its acquisition of Zain assets. Two other big players Vodafone and Reliance Communications already have $4bn of debt each.

From the Standard Chartered India team: "The rating agencies are closely monitoring the government’s efforts towards delivering on its fiscal consolidation promise, and therefore a successful execution of the 3G auction would bode well for the Indian rupee (INR) over the medium term. We expect this should lead to increased investor optimism about India’s sovereign outlook and give a fillip to portfolio inflows. The market also expects a pick-up in debt inflows, following the Reserve Bank of India’s decision in late 2009 to allow companies to raise external commercial borrowings (ECB) in order to bid for spectrum allocation. In fact, with the date of the auction nearing, the FX market has reportedly begun to position itself for a pick-up in ECB inflows."

Analysts at institutional brokerage India Infoline believes that imminent policy changes by the Telecom Regulatory Authority of India (TRAI), will cap aggressive bids. "We strongly believe that operators lining up to bid for 3G spectrum will consider that: 1) BWA offers a second chance. 2) the immediate requirement is additional spectrum for voice, for which 2G spectrum may soon also be available through trading or M&A (if the policy changes in the direction recommended by the May 2009 Spectrum report; this, we believe, will soon be announced, at least by TRAI. 3) intra-circle roaming. These factors should prevent bid values from rising to irrational levels, except perhaps in Delhi and Mumbai."

ADIA Chief Missing

The managing director of the Abu Dhabi Investment Authority, the world's largest sovereign wealth fund by assets, has gone missing.

From Bloomberg: The search for Abu Dhabi Investment Authority Managing Director was continuing after a glider he was in crashed into a lake in Morocco, the official Emirates News Agency said. “The nature of the terrain is making the survey and tracking effort especially challenging,” the state-run news service said yesterday. The pilot of the sailplane was rescued and is in stable condition, the news service said. The glider went down near Morocco’s capital Rabat March 26, according to the official Moroccan MAP news agency.

Over to Voltaire.net -- Sheikh Ahmed bin Zayed Al Nahyane, the younger brother of the president of the United Arab Emirates. He was in a glider which came down in a lake near Rabat (Morocco). Only the pilot was recovered alive.

BusinessWeek had interviewed the Sheikh for an earlier feature on ADIA, after its multi-billion dollar investment in Citigroup.

Photo: Business Week

74 Firms Miss TARP Dividends in Feb

The number of US financial institutions that missed the quarterly TARP dividends rose steeply to 74 last quarter, compared to 34 in August and 55 in November. The dividends were due on February 16.

These numbers, from the US Treasury Department -- analyzed by Virginia-based data provider SNL Financial LC -- indicates increasing risk on US tax payers' funds, used to purchase $204.9 billion worth preferred stocks of around 600 firms. 

Among the firms that missed the dividends, some 25 were first time deferrals. These 25 companies had received about $1 billion, while the 74 firms had cumulatively accessed $3.4 billion under the Capital Purchase Program, which was part of the Treasury's Troubled Asset Relief Program to boost the sector.

These 74 names excludes CIT Group, which filed for bankruptcy in November 2009, resulting $2.3 billion losses for the Treasury. It also excludes two banks that were placed into receivership by the FDIC in November, including UCBH Holdings, in which the Treasury had invested $300 million.

More than two dozen of the 74 companies have missed three or more payments. According to the rule of the game, if a firm fails to pay dividends for six quarters, the Treasury can send two directors to its board. The next dividend payment is scheduled for May 17.

SWF Trend Monitor

Global SWF assets grew 9% in 2009 to $3.51 trillion, according to a study published last week by Preqin. Sovereign funds from high-growth Asia and the resource-rich MENA region accounted for 75% of aggregate assets managed by SWFs. European funds managed 20%.

Norway’s Government Pension Fund which now manages about $445 billion recorded 25% returns, while Russia's fund wilted the most. The Russian Reserve Fund halved to around $60 billion.

Some 80% of all SWFs have exposure to equities, while about 55% have invested in alternatives. The source of wealth for 60% of SWFs is hydrocarbon revenues, while about 8% traces roots to other commodities.

On Thursday, the FT reported that India's oil companies are urging New Delhi to join the SWF bandwagon, though the country's dynamics are far from a Abu Dhabi or a Norway. Setting up one would help India secure off-shore energy resources and compete with China, whose state-backed commodities firms and SWFs often act in concert.

 

 

source: Preqin

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SWFs by assets

ADIA, which parted veil this week, is the world's biggest SWF, followed by the Norwegian fund, Saudi's SAMA and China's two big arms - SAFE and CIC.

source: SWF Institute

ADIA Parts Burqa

Abu Dhabi Investment Authority, the bloated petrodollar SWF, has followed its peers to incorporate transparency, complying with the IMF guidelines or GAPP, popularly known as Santiago Principles. According to the disclosures, about 10% of its estimated $425 billion assets are parked in alternatives including hedge funds and other managed funds. Some 45% of its assets are invested in developed markets. 

About 80% of ADIA’s assets are managed by external asset managers in active and passive mandates and as much as 60% of the portfolio is in indexed products, says RGE Monitor. Its strategic asset allocation --  remains heavily weighted to equities – and the fund is still largely invested in developed markets in North America, Europe and Asia, but as befits one of the earliest sovereign investors in emerging markets, its exposure to EMs is relatively high, ranging from 15-25%, most of that apparently in equities (the EM equity allocation ranges from 10-20%.)  Its neutral benchmark also includes 10-20% in government bonds, 5-10% in each of credit, alternatives and real estate, 2-8% in Private equity and 1-5% in infrastructure (its newest asset class). Cash has a strategic allocation of 0-10%.

Abu Dhabi along with the China and Norway, forms the respected and much feared holy trinity among sovereign funds. The SWFs of these nations manage combined assets worth some $1.5 trillion. Two funds from China, SAFE and CIC together manage some $650 billion. Norway's The Government Pension Fund manages $445 billion in assets. China's CIC had publicly disclosed its strategy and holdings early February, to comply with the SEC's mandatory disclosure norms for funds.

ADIA Vehicles

source: SWF Institute

Lalit Modi's League

Stephen Allen Schwarzman, the billionaire chairman and co-founder of private equity giant The Blackstone Group, was found snacking at the sidelines of the ongoing World Economic Forum in Davos. This video was posted on some financial blogs recently. It is fun to watch an imposing Wall Street billionaire enjoying a banana break at the high-profile summit. What is less apparent in this clip is the growing global clout of Lalit Kumar Modi, the man in gray.

Modi is one of India's most astute businessmen. He is the president of Modi Enterprises, an industrial conglomerate with interests in diverse industries from tobacco to entertainment. To the world, he is better known as the brain behind the Indian Premier League (IPL) and the Champions League  -- international cricket league matches played in the Twenty20 format in the lines of the English Premier League and the UEFA Champions League.

Modi is also the vice president of the Board of Control for Cricket in India (BCCI), a cashcow that oversees the game in India. He was anointed to Indian cricket's top ranks by the heavyweight politician Sharadchandra Govindrao Pawar, who is the vice-president of the International Cricket Council and chairman of its World Cup Organizing Committee. Pawar owns a large Agriculture-related business empire and ironically, is India's Agriculture Minister. Pawar and Modi are today the two most important people associated with cricket, globally. While Modi's success in remodeling the colonial game is widely praised, there has also been allegations of a bit of underhand bowling.

Family ties augments his business profile. Modi is the nephew of Bhupendra Kumar Modi the billionaire chairman of Singapore-based Spice Group. Recently, Lalit Modi's elder daughter married one of the scions of the Burman family, which owns India's fourth largest FMCG products maker Dabur, apart from several other businesses and co-owns the Kings XI Punjab, an IPL team. Large conglomerates in India, including Mukesh Ambani's Reliance Industries Ltd, owns the nascent IPL franchises as strategic trophy assets. PE firms are keeping a close watch.

DE Shaw Re-Initiates Dialogue on Leverage

Leverage, the mechanism to do more with less, has to factor quality, argues the eleven-page Market Insights this month from the $23 billion hedge funds firm DE Shaw & Co.

Investment managers, investors and regulators are often not on the same page in measuring leverage, according to the world's eighth biggest hedge funds manager. It highlights six factors to estimate the quality of a portfolio's leverage.

1. Term: Matching longer duration assets, especially illiquid ones, with longer-term liabilities.

2. Haircut: If lower, reduces counterparty risk and frees capital to be productively deployed elsewhere.

3. Haircut stability: Constant as against 'variables'. Provisions, such as VaR, are analogous to rating triggers. Example - AIG in 2008.

4. Counterparty's stability: A partner less likely to default, violate contract terms or act aggressively in times of stress. More willing to work with borrowers on new investment initiatives.

5. Valuation: A fair mechanism of pricing the financed asset, and including provisions for margin dispute resolution such as third-party arbitration.

6. Cost: Less than the expected return enhancement.

The principles of managing assets also apply to managing a portfolio of liabilities. Most notably -

a. Diversification: In terms of counterparties, assets and financing structure.

b. Term structuring: A longer or 'termed out' financing is costlier than the short-term option. This, however, could be viewed as an insurance premium against protection from cataclysmic losses if a crisis occurs.

c. Stress testing: By running various forms of liquidation scenarios.

The report suggests factoring the derivative exposure -- not accounted on the balance sheet as per US GAAP -- when calculating leverage. On the other side, derivative-adjusted leverage does not necessarily indicate the amount of financing. In the case of pair trade or interest-rate swaps, the notional value and nominal leverage are higher than the actual risk involved.

The conclusion: though it may increase the complexity of the discussions, both managers and investors stand to benefit from comprehensive dialogues on the quality of leverage.