Olam: Snake bites itself

Opps looks like Olam tried to be too clever by half. By calling a rights type issue but not answering two of Muddy Point’s questions (that it is spending lots of $ on lousy investments and the restatements), investors have decided to sell given that there will a lot more debt, at expensive prices, a possible dilution, and that Muddy Waters might just be right.

Then there is the cred of management: saying it had lots of cash but then calling yet another bond issue. And having to retract a statement on the approach to Temasek.

In such a confused situation, investors might as well sell esp with the year end in sight.

And on a technical issue: leaving the warrants to be priced tomorrow was asking for trouble.

All in all, management and its investment banks have not covered themselves in competency.

Update:  “The latest Temasek-backed transaction raises significant issues, as it is extremely expensive debt and equity capital, capital that Olam spent a week telling the market it didn’t need,” said Dee. “Muddy Waters is not the issue here, it is Olam’s strategic and financial decisions that have brought this situation to a head.”

Jap stocks cont’d trading below book value

On Wednesday last week ”the broad Topix index closed at 0.89 times book value, a whisker away from its widest discount to the MSCI World for five years, and near its lowest level relative to the S&P 500 for almost eight years,” reported the FT.

 

What is cheap can stay cheap. But do remember that in the 1950s and 1960s, a few ang mohs bot Jap stocks because they were very cheap by Western standards. They became investment legends.

CHC: Charity, Denial & Persecution

(Or “Answering some issues raised by the CHC case”, or “Can’t blame CHC members from being defensive” or “Netizens rushing to crucify before hearing the evidence”)

One question that has been asked on the internet, “What happens if all the members of City Harvest Church sign a resolution giving retrospective approval to what the pastor and the others charged are alleged to have done? Can they escape the consequences of the charges and the Charity Commissioner’s findings?”

The answer is: Even if all the church members agree to give their retrospective approval, nothing changes. By becoming a charity, CHC becomes subject to the Commissioner of Charities, and all that entails. It is no longer a private organisation, and the laws and regulations relating to charities applies. After all by becoming a charity, CHC deprives tax benefits: in return it has to play by the law and the Coc’s regulations. These include not misusing the chariy’s funds. Cannot suka suka choose what to obey. Not their grandfather’s money: it’s the money of Harry’s Law. Harry’s Law is more like obeying God: cannot pick and choose what to obey. It’s either God’s way or the highway to Hell. Same for Harry’s Law.

Another question raisen on the internet is, “Has the CoC defamed a CHC executive committee member?

The man is in denial. CoC is justified in giving details of its findings. Only if he can prove that at least one of the CoC’s findings is wrong, can he win a defamation suit.

Are the church members supporting Kong and the others in denial, and too defensive in defending Kong, wife and friends?

Those netizens who are anti-CHC, Kong, the others charged, Auntie Sun and the “prosperity” gospel can reasonably argue that the members should accept the CoC’s findings.

But as the appeal process has not even begun, church members can reasonably point out that their support does not mean they are in denial.

They are waiting to see the evidence. After all, netizens are always telling S’poreans that, “The PAP government is always wrong, never ever right”. So why should it be any different in this case? Because netizens don’t like pastor Kong, Auntie Sun, the CHC, and the “prosperity” gospel, so everyone got to trust the PAP govt that it does no wrong

And anyway, only charges have been filed against the pastor and friends. They have yet to be found guilty, and the law says that a person is innocent until proven guilty. And the bar is very high: beyond reasonable doubt, not on the balance of probabilities. The latter is the standard the CoC uses in his investigations.

So those who want to scourge, give gall wine, crown with thorns, crucify and spear CHC, Kong, the others charged, Raunchy Auntie and the “prosperity” gospel, hold your instruments of torture and death. Bit too early to drag them to slow and lingering deaths by dragging them behind Satan’s chariots.

Let Harry’s Law pass judgement first.

Seriously, it’s sad to see so many netizens waste and squander the after-effects of the unmasking of STOMP’s (and SPH’s) fabrications. Juz because they don’t like Kong, wifey, friends and the “prosperity” gospel doesn’t mean they should behave like the journalists and editors of the constructive, nation-building media at their howling, baying, snarling best. 

Only the PAPpies will be happy: netizens are vigilante comboys and cowgals that S’poreans have to be protected against.

HSBC: Which number to focus on?

 (Or “HSBC: Glass half empty or half full?” or “The difficulty of analysing a company esp a bank”)

HSBC Holdings, one of Europe’s biggest banks, said on Monday that its profit rose 27 percent last year in part because of greater demand for loans in the developing world.

(“Profit” here means profit attributable to shareholders)

http://dealbook.nytimes.com/2012/02/27/hsbc-profit-rises-on-demand-from-emerging-markets/?src=dlbksb

But FT preferred to focus on the 6% fall in pre-tax underlying profits to US$17.7 bn.

But pre-tax profits actually rose 15% to US$21.9bn. But FT, rightly in my view, took out the US$13.9bn gain in the value of the bank’s own credit. This is Alice-in-wonderland accounting that banks have to use (some happily, some reluctantly). The weaker banks love it.

HSBC is currently the most profitable Western bank, with its nearest rival, JP Morgan having profits 15% lower.

HSBC Asia Pacific posted profits before tax of US$13.3 billion – 15% more year on year. The region accounted for 61% of the group’s total pre-tax profit.

As regards HSBC S’pore, it posted a pre-tax profit of US$595 million for FY2011, up 14% from a year ago.  A lot better than OCBC’s and UOB’s S’pore operations. I plan to blog on how well Citi’s, HSBC’sand StanChart’s S’pore operations compare to our three local banks, one of these days. BTW StanChart juz reported that its pre-tax profit from it’s S’pore operations has hit US$1bn, up 40%.

Why PM had three accountants on his pay review committee?

There were three trained and highly experienced accountants (the chairman included) on the eight person ministerial salary review committee, the most from any single profession.

Maybe the reason is that accountants can do magic with numbers? At least that is how it appears to us “lesser mortals”?

Example: The accounting profession can make a sum of money appear as US$4bn for the co that is paying out the sum and as US$6bn for the company receiving it.

http://dealbook.nytimes.com/2011/12/20/att-and-t-mobile-whats-2-billion-among-friends/?nl=business&emc=dlbkpma22

And there is the old joke that the best accountant is one that will ask you, “What answer do you want?” when you ask him, “What is 2+2″?

Accounting tricks that are still around

MF Global may have engaged in “window dressing,” reducing its level of debt before reporting its finances each quarter so as to appear less risky to investors, according to an analysis by the Wall Street Journal.

Despite all the laws enacted since Enron and Lehman Brothers, this trick is still being used. Other tricks still in use:

– accelerating revenues;

– delaying expenses;

– accelerating expenses preceding an acquisition;

–  “Non-Recurring Expenses”;

– “Other” income or expense;

– off-balance-sheet items; and

– synthetic leases.

More details on above

What Is A Cash Flow Statement?‏

http://www.investopedia.com/articles/04/033104.asp?partner=basics102811#axzz1cbAaBrGa

Banks’ Alice-in-Wonderland Accounting

The problem with a bank’s balance sheet is that on the left side nothing’s right and on the right side nothing’s left.

Think Lehman’s and Dexia’s balance sheets. One day AAA, six months’s later rubbish. That fast leh?

Profit and loss accounts are just as rubbishy. Recently UBS’s third quater profit fell to 1.02 billion Swiss francs (US$1.2 billion) in the three months ended Sept. 30 from 1.66 billion francs in the period a year earlier. The trading loss of  1.85bn Swiss francs (alleged caused by a rogue trader) and charges linked to a cost-cutting plan were partly offset by an accounting gain on the bank’s own credit of 1.8 billion francs and the sale of some investments.

Now this accounting treatment was not not only used by UBS. According to the FT’s Lex, four-fifths of the US$16bn net profits  in the latest announced results of (BoA, Citi, JPMorgan, Morgan Stanley and Goldman Sachs came from using used the same accounting treatment of the banks’ own debts.

Lex describes the accounting treament thus: ” Try this on your credit card company: your creditworthiness has weakened, so you write down the value of what you owe them to reflect the greater riskthat you will not pay it back and credit the difference to your personal account. That is what exactly accounting allows”.

UBS: What else can go wrong?

Readers will know by now that UBS, where GIC is a major long-term (and suffering)  investor, is planning to reduce the scale of its investment banking operations, the source of its on-going problems since 2007.

But they may not know “What they are trying to do has never been done before,” Christopher Wheeler, an analyst at Mediobanca, said. “They want to shrink the investment bank by choice, which means unwinding positions without loss and running down their books while keeping the morale among staff, and it’s unclear who’s running the shop.”

And don’t be fooled by its latest results. Despite being hit by a 1.85bn-franc loss from deals made by an alleged rogue trader, it just made  a better-than-expected third-quarter net profit of 1bn Swiss francs (US$1.1bn).

The loss was almost entirely offset by a 1.77bn-franc accounting gain that came from changes to the value of the bank’s own debt. One of these days, I’ll blog on the Alice-in-Wonderland accounting that allows this type of gain to materialise. According to the FT’s Lex, four-fifths of the US$16bn net profits  in the latest announced results of (BoA, Citi, JPMorgan, Morgan Stanley and Goldman Sachs came from using used the same accounting treatment of the banks’ own debts.

GIC: Smoke & mirrors

No, this is not a rant abt GIC’s performance or how it misleads the public abt its performance. It’s about how its inability or unwillingness to communicate with us, the public, can be self-defeating, leading to more questions being asked, especially on why it keeps relying on spin rather than facts, as illustrated by this media statement from GIC.

In a statement to the media last week, the Ministry of Finance said, How well GIC performs is not a secret. Its mandate is to preserve and enhance the international purchasing power of the reserves over the long term. Hence, it publishes its 20-year annualised real rate of return.

GIC also reports its returns over five- and 10-year periods as intermediate measures of its performance.

 GIC’s Performance as per annual report

Period	Government’s nominal rates of return in US$ for period ended 31 March 2011 (%)
5-Year	6.3
10-Year	7.4
20-Year	7.2

Well its performance might be as well be secret.

The problem is that these performance numbers raise questions on their methodolgy, to which answers are not available. I will only raise one issue, but this one issue will take acres of space. TOC has raised other less technical issues.

My grumble is that there is no disclosure on whether the functional currency is US$ or S$. By “functional currency”, an accountant means the currency in which the accouts are prepared. We only know that the returns are presented in US$, the presentational currency. This does not imply that the functional currency is US$.

If the accounting of the funds under mgt are done in S$, the performance results would have included the exchange loss arising from the US$ depreciation against the S$. So if its functional currency is S$, but its presentation currency is US$, then all exchange losses arising from US$ depreciation against the S$ will have been taken into account.

If however if the  functional currency is US$, then its US$ denominated assets and US$ investment income will not be impacted by US$/S$ movements. And any analysis would have to take US$ depreciation into account.

The differences can be great. (Please click ”Read more” to read the article in full, if you are reading from the Home page. There is a necessarily long-winded example to illustrate what I’m trying to say.)   

The trouble with auditors

Today’s financial industry may be too complex and too subject to opinions for the accountants to get right, even if they want to. Witness PricewaterhouseCoopers, which audited both Goldman Sachs and AIG. At the height of the financial crisis, the exact same securities on each firms’ books were valued at radically different prices. In other words, there was no way to compare the two firms’ results.

The complexity makes the accountants even more susceptible to pressure from management. That pressure is all too real. And the problem in Enron’s case was never the consulting business. It’s that the accountants forgot who they were working for. They’re supposed to work for investors, not management. Their job is to make sure investors have a fair chance at assessing a company’s financial condition.

————————————

Put simply, the unfortunate truth is that corporate bad behavior often pays. Thus, if accountants always behave like homo economicus — the hyper-rational, purely opportunistic hero of economic theory — rampant frauds are only to be expected.

—————————–

NYT article

Sino-E: Where’s the $14m?

In the middle of March, BT reported that the CEO declined to comment on the S$14 million cash reserves the group’s former executive directors claimed to have kept in a Xiamen bank, saying: “We haven’t sent the auditors in yet, so I don’t want to make any comments on the cash as that could be quite misleading.”

Have the auditors gone in yet? And if not, when? Sin0-E shld be telling its shareholders.

[Update on 18 April 2010 -- Co says money is there and that it has been secured]

As a group of managers have asked for the opportunity to subscribe for 20% or more of the group’s issued paid-up capital in the form of new shares, shareholders could be reassured that there is value in Sin0-E, something that the CEO was quick to point out. But they should worry that this request was tied to a pledge of support to the new directors.

A polite threat?

Buybacks: problematic in bear markets

Based on filings with SGX in the last week of February, “the buybacks among listed firms surged last week, after very low activity for three straight weeks. A total of six companies posted 17 repurchases worth $2.1 million. The number of transactions was more than the seven repurchases from Feb 1 to 19. Among the stocks that recorded significant buybacks last week were KTL Global, HTL International, and InnoTek”, reports BT.

The theory is that a company buys back its shares when it thinks the market is undervaluing the shares.  But buying in a bear market can cause problems especially since bear markets can only be recognised in hindsight.

In a bear market, buybacks become a bad tool of creating shareholder value, and can cause management problems if they want to issue  new shares to fund an investment.

One Warren Buffett said a few months ago, “ What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive “currency” to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more.

‘Does the board now believe those purchases were a mistake and that Kraft’s true value is only the current price of $27 per share – and that it is therefore fine to structure a major acquisition based upon that price? Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated. We hope all shareholders will use this yardstick in deciding how to vote.”

S-Chips: putting their cash into S’pore banks

The ST suggested that S-Chips should deposit their cash in in DBS, OCBC or UOB and not Chinese banks.  This could reassure investors that the S-Chips’  cash were safe.  This would in turn help the shares to trade above their net cash per share.

Err might not be a gd idea. Forget about the practical reasons like

– the companies not having the cash they claim they have; or

– withdrawing the cash after depositing it for reporting purposes and deposting it again just before the next reporting date. To prevent this the banks would need clear mandates to report such actions, and manpower and systems to track such movements.

It could be that the investors are (or will be) concerned that the cash could be used up in unprofitable businesses. Chinese dot.com companies listed on Nasdaq were trading below their net cash positions after the dot.com bust. Investors rightly assumed that they would not see the cash.The cash would be used to fund internet ventures etc. Anything else except be returned to shareholders.

They were right.

Sino-E’s board are powerless/ SIAS needs to growl louder

I’ve always wondered why SIAS had been quiet on the lack of news from Sino-E’s board on what was being done to protect the assets and business of the company. I had tot that maybe company had quietly assured SIAS that things were in motion but that publicity could cause problems.

So I was surprised to read in Wednesday’s papers that SIAS had gone public on Tuesday, saying it had asked asked questions since December, but had been ignored. ST also reported that Sino-E had responded in a sense. No wonder it didn’t earlier reply or inform shareholders, the news is not reassuring. Bugger-all has been done other than reconstituting the board and appointing a CEO. Production has ceased, and the cash has not been secured.

Though to be fair, the board is S’pore-based, while business, assets are in a faraway district in a faraway province from Beijing or Shanghai in China.  And the board could could argue that since the shares are still suspended, there was no need to upset shareholders with the bad news.

Let’s hope that SIAS has learnt that a nicely, nicely approach could be taken as a sign of weakness and impotence.  More and louder growls, pls. If nec, howls pls. Wolves are feared: lap dogs and toothless mutts are not.  As MM has said, S’poreans needed to be spurred.

Base Metal into Gold: no not Alchemy. It’s all in the Accounting

Here’s an explanation of how accounting turned an investment banking loss of £160m into a profit of £3.65bn. And so made “hundreds, and possibly even thousands, of staff at the state supported Royal Bank of Scotland group (RBS)” eligible “for bonuses totalling about £1.5bn”.

Wow!

The moral of the story: be sceptical, very sceptical of the headline financial numbers. And read the footnotes cynically.