Morgan Stanley expects bull market to pick up

The investment bank feels that India is on the verge of a massive bull market, the fuel to which will come from RBI cutting interest rates and a pick up in investments by corporate India

The Indian research arm of Morgan Stanley (MS) is expecting the bull market to pick up in the upcoming months and investors could expect as much as 14% returns over the next 12 to 18 months. However, this is subject to Reserve Bank of India (RBI) cutting rates by half a percentage point, or 50 basis points, in their next monetary review meet which is on 17 September 2012. The investment bank, in its latest report titled “When Will the Next Raging Bull Market Start? Here Is Our Framework”, has identified various factors and signals that point to a possible broad-based market recovery and a bull market ahead. It has said, “In summary, we believe that the market is preparing itself for the next big bull market, though we are not quite there yet. Meanwhile, investors can continue to make outsized returns because individual stocks, both large and small, are already in bull market.”

The first indicator is the Nifty range. While MS doesn’t quite admit that the Indian market is in a bull market phase, it feels that it is valued at levels that will leave ample space for an upside. The report said, “The Nifty seems to be a in a big trading range of circa 4,500 to 6,000. The market is in the lower half of this range, leaving us with decent upside—which we think can materialise in the coming months—but the market, is seemingly not breaking new levels.” So, it must first break new to make stage for the next bull cycle.

However, the investment bank feels that the yield curve will provide further clues to this. It has pointed out that the inversion of the yield curve has ceased which could mean that short rates (i.e. 91-day yield) could fall faster than long term yields (i.e. 10-year yields), which in turn could set the stage for expansion of the economy vis-a-vis access to long-term credit, as borrowing costs of long-term debt instruments will start to become attractive. This is, of course, subject to inflation expectations and how the RBI tackles it. If inflation does indeed fall, then there is a possibility of this happening. The investment bank said, in its report, “Core inflation is declining quite sharply, and this could form the basis for lower short rates in the coming months.”

Apart from interest rates, investors are concerned about lack of investment from corporate India, as profitability depends on investments, which in turn would lead to bull markets. In other words, according to the report, “profit margins are the interplay of the investment and consumption rates in the economy. The investment rate reflects revenue potential. The bottomline is that the investment rate is a critical driver of a major margin expansion cycle.” Despite slow down of government & consumer consumption and low asset turn, the investment bank believes that asset turnover and excess returns will pick up and trigger a new investment cycle which will pave the way for the next bull market. It said, “We see a recovery in asset turns and excess returns over the next 12 months to form the basis for a new investment cycle.”

One of the most discerning pieces of investment information is valuation. However, the bank has cited that there is value to be sought in companies having attractive price-to-book value levels, and there’s money to be made only with those companies having such depressed valuations. The report said, “Currently, valuations either are in the bottom deciles or close to them. This augurs well for forward equity returns.” However, it must be pointed out that each company should be looked at separately to assess book values. It is not known whether they have updated all of its numbers to reflect 2011-12 fiscal. Some companies would have come out with annual reports, while some are still pending.

Finally, it concludes by quantitatively evaluating what investors can expect, and hope to, make if their assessment turns out to be correct. MS came up with their own proprietary model using the gap between earnings yield and 91-day treasury yield to assess forward earnings. It said, “We find a very strong relationship between this gap and three-year forward equity returns. Rates need to fall further (i.e. liquidity has to improve) in order to make equity attractive.” Thus, for this to happen, RBI would need to cut rates by as much as 50 basis points, which would mean returns of as much as 14% could be a possibility. The report concluded, “We peg fair equity returns at 14% and the model currently implies a three-year compounded annual growth rate (CAGR) in returns of 12%. Rates need to fall by around 50bps to make projected equity returns to the ‘fair’ threshold.”


Case registered against Alagiri's son Durai

Police registered a case against Durai and his partner Nagaraj on a complaint from a Village Administrative Officer of Melur taluk that a company named Olympus, in which Durai is a partner, had illegally quarried stones worth Rs5 crore

Madurai: A case has been registered against Union Minister MK Alagiri's son Durai Dayanidhi and his partner for allegedly causing Rs5 crore revenue loss to the government by illegally quarrying granite from government land, reports PTI.
Police said the case has been registered against Durai and his partner Nagaraj on a complaint from a Village Administrative Officer of Melur taluk that a company named Olympus, in which Durai is a partner, had illegally quarried stones worth Rs5 crore.
On Saturday, police had registered cases against two granite firms for alleged illegal quarrying and charged them with destroying evidence, encroachment and damaging public property and is in the process of filing cases.
Another alleged illegal operation of sand quarrying in the district was stopped by Madurai High Court Bench on 3rd August, which banned it from 15 sites that were under operation for than five years.


Emails give glimpse into deals that fueled financial meltdown

Hedge fund Magnetar and Wall Street banks created $40 billion of CDO deals. The emails show how they did it

As ProPublica has been detailing for two years, Wall Street banks and the hedge fund Magnetar worked together to build mortgage-backed deals that the hedge fund also bet against. The more than $40 billion of deals helped fuel the crash of 2008.


Now, recently collected emails from bankers and a Magnetar executive involved in some of the deals appear to shed new light on how they did it.

Fiduciaries threatened with a loss of business if they didn't cooperate. Prime movers behind a billion-dollar deal suggesting they need to keep their actions hidden. It's all portrayed in the emails, which were included as part of a civil lawsuit against Magnetar filed in New York's Southern District Court in late June. (Our reporting is also cited in the complaint.)


The suit was brought by Italian bank Intesa San Paolo, which lost $180 million on an investment linked to a mortgage bond deal put together by Magnetar and French bank Calyon. The deal was "built to fail," in the words of the complaint.

Boston-based Putnam was the manager on the deal, called Pyxis 2006, which involved the creation of a $1 billion collateralized debt obligation. The managers in such deals were supposed to be independent and looking out for all investors' interests.

Intesa is suing all three players, Magnetar, Calyon and Putnam. Intesa, which is seeking unspecified damages, accuses Calyon and Putnam of misrepresenting the deal and Magnetar of acting in a conspiracy with Calyon and Putnam to aid and abet fraud. (Much of the information cited in the suit comes from an earlier case involving many of the same players that was settled.)


As with all partial document trails, the emails are open to a variety of interpretations. Magnetar says they have been selectively excerpted and that the more complete email chains don't show what the plaintiff alleges.

The firms involved in the deal — Magnetar, Putnam and Calyon —filed motions todismiss the suit last month.

A Putnam spokesman said, "The lawsuit is completely without merit and will be defended vigorously." A Calyon spokeswoman declined to comment.

Magnetar is reportedly under SEC investigation. The hedge fund says it has not received a formal notice of possible charges from the SEC and calls the lawsuit "meritless." The hedge fund reiterated that it "did not control" what went into the deals, known as collateralized debt obligations. (Read their full response.)

Here are some excerpts from the emails, with our captions: 

On June 14, 2006, an executive from Calyon wonders if Magnetar's participation should be hidden, that is, remain "behind the scenes and outside of the docs" in "exactly the same way we did" with another Magnetar CDO:

Banker asks if Magnetar wants to be "behind the scenes" (p. 12)



Magnetar's Jim Prusko responds: "No, not at all. What's your number?" Magnetar points to that response as exculpatory.

Yet a week later, Calyon, Magnetar and Deutsche Bank (which was also investing in the deal and playing a similar role as Magnetar), discussed creating a side agreement giving Deutsche Bank and Magnetar veto power over assets that were to go into the deal. Such side agreements were rare and would have left some investors unaware of important details of the deal.

The Side Letter, giving DB and Magnetar control (p. 7)


Ultimately, that side deal was never consummated, according to Magnetar. But Magnetar made sure it knew about the asset selection for the CDO, which Intesa charges is an example of its secret control. Neither Magnetar's influence in the deal nor the hedge fund's bet against it were clearly disclosed to investors:

Magnetar wants to know about all purchases (p. 23)


As the linchpin investor on the CDO, Magnetar needed to know what went into the investment, the hedge fund says. This does not indicate it ultimately controlled what went into the deal. Magnetar points out that Prusko, the Magnetar executive, wrote to the manager in an earlier email that the hedge fund will buy assets "of your choosing":

"We will buy... names of your choosing" (p. 24)


Though Calyon, which created and marketed the deal, told Intesa that it would select some better-quality, "prime" assets, none got in there, according to the complaint:

"Prime" assets didn't make it into the CDO (p. 39)


A key issue is who exactly knew whether Magnetar was betting against, or shorting, the deals in which it was investing. In one of the email exchanges, from September 2006, executives from Calyon and Putnam discuss who is shorting. The Putnam executive says: "It is definitely Magnetar." In other words, the manager who was supposedly looking out for investors' interests claimed to know that Magnetar was betting against the deal:

"definitely Magnetar" (p. 29)


Other emails refer to a CDO manager, the Dutch-owned NIBC, which was involved in another Magnetar deal. (As we reported in 2010, NIBC once pushed back against perceived pressure from Magnetar to make a deal riskier.)

Regarding another Magnetar deal, Calyon's Alex Rekeda writes in November 2006 that NIBC is concerned that it is ceding too much power to Magnetar and Deutsche, which was again partnering with Magnetar on the deal. He also relays another concern: "They feel very strongly that the older vintage bonds that they have in the portfolio have by far superior credit characteristics compared to the bonds they can pick up in the market now." Translated: NIBC was feeling pressure to buy riskier bonds and didn't think doing so would benefit investors.

(Last month, the Securities and Exchange Commission settled securities law charges against one of the players, the former Calyon banker Rekeda, accused of violating securities laws in conjunction with another Magnetar CDO. Rekeda did not admit or deny wrongdoing.)

"They feel very strongly" (p. 37)


Deutsche's Michael Henriques replies that the original investors — which include Magnetar and Deutsche Bank — are taking "execution, credit and manager risk." That suggests Magnetar and Deutsche viewed themselves as the real managers of the CDO, not the supposedly independent NIBC. Henriques, who later went to work for Magnetar, also complains that NIBC is treating Deutsche Bank and Magnetar poorly, lacking "a spirit of partnership."

"Manager risk" (p. 37)



That same day, Deutsche's Henriques threatens to withdraw a lucrative line of business from NIBC:

"Go back to the regular style" (p. 38)


In another deal from a few months earlier, Magnetar's Prusko had also threatened to withhold business from the manager, Putnam, if it did not "play ball":

"Take it or leave it." (p. 18)


Magnetar says Prusko's email solely refers to the fees on the deal, and not about controlling asset selection or any other issue.

In a statement, Magnetar said: "Intesa's decision to amend this complaint appears to be little more than a transparent effort to sensationalize a baseless case in which each defendant has already moved for dismissal.

"As the Plaintiff is well aware from the motion to dismiss we filed some time ago, no Magnetar entity was a party to the credit default swap at issue in the case, and we were not even aware of that transaction until this complaint was filed.

"We continue to believe that Intesa's accusations are meritless, and that the case should be dismissed.

"And, as we have stated numerous times in the past: Magnetar did not control the asset-selection process and our Mortgage CDO investment strategy was designed and implemented to maintain a market-neutral portfolio."



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