Eye On The Crisis in Credibility: The Indian "Chairman" Who Cooked His Books

B. Ramalinga Raju, Chairman of the Indian outsourcing specialist Satyam Computer Services, has resigned, confessing that he cooked the firm’s books for several years.

Was this CRISIS IN CREDIBILITY a factor in global equity market weakness today? You bet your Madoff it was!

Raju admitted to grossly inflating Satyam’s cash and bank balances by $1 billion and fudging the firm’s revenues and operating margin in the quarter that ended in September 2008. The actual operating margin was 3% ($12.5 million), on revenues of $434 million. He reported an operating margin of 24% ($133 million), on $554 million in revenues. Debts were overstated by $100 million, and liabilities understated by $253 million.

The confession sent the stock of Satyam Computer Services (NYSE: SAY) plunging by 138.70 rupees ($2.84), or 77.5%, to 40.25 rupees (82 cents), and pulled down the BSE Sensex 30 index by 749.05 points, or 7.25%, today.

In the wake of Madoff, Raju’s actions further erode the credibility of executive leaders and put a black mark on India’s software sector. Raju’s statement that he cooked the books to prevent a take-over of Satyam is not a process, it’s an excuse. Ironically Satyam means “truth” in Sanskrit. This news further adds to our bearish view on India.

Deflating The Eurozone's PPI

This chart is more of the same on the global inflation report front for the month of December. As commodities were getting crushed, and the Euro’s currency “re-flated”, producer prices tanked. This European report (see chart) was the largest month over month decline in 27 years! Don’t expect to see the same in January.

This, of course, paves the way for the Europeans to continue to cut interest rates. Sans le inflation, Monsieur Sarkozy will be pounding the political free drums. That’s a bet you can lever up long on!

Keith R. McCullough
CEO & Chief Investment Officer

Got Yen?

We hope you have less of this compromised socialist currency, if any of it whatsoever. While we covered our short position in the Yen (via the FXY etf) yesterday, that certainly doesn’t mean we like it here. I will be looking for an entry point to re-short it on strength.

The October-December squeeze in the Yen was an output of one of the great levered long investor unwinds – the Yen carry trade. This also occurred in the time period of global asset class rotation where the safety of cash became king. Now that both the US and Japanese governments are cutting interest rates to zero, it inspires the capitalist in me to hold less and less of a currency that earns no rate of return on my hard earned savings.

As the “liquidity crisis” continues to burn itself away from consensus, look for both the US Dollar and the Yen to underperform as they have been doing for the last month.

We remain short the US$ via the UUP etf.

Keith R. McCullough
CEO & Chief Investment Officer

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Eye on Taiwan: Another Rate Cut Today

This morning’s rate cut was Taiwan’s 6th since September!

See the chart below. While growth falling off a cliff from September to November is now a fact for the revisionist historians to chew on, the reality is that both the Chinese and Taiwanese stock markets proactively predicted the growth slowdown for the 6-9 months prior to the news hitting the tape.

Now what? Well, that answer is fairly straightforward for Asian governments – jus copy Greenspan – cut rates to zero, cut taxes, and create stimulus.

We remain long Taiwan via the EWT etf.

Keith R. McCullough
CEO & Chief Investment Officer

Quote Of The Day: Byron Wien

You have to love this man - he is one of the all time great Gentlemen in this business.

Right now I am watching him do a Bloomberg interview, and when asked about Madoff, this was the straight shooter response (paraphrased):

"It was peer pressure... as we get older, we do less due diligence..."

Unfortunately, in this business at least, that is the process of some. Thankfully not all.

Obama Having A Rougher Day...

Undoubtedly, expectations mount on his shoulders alongside the US market's latest "re-flation"... which ultimately means that Obama can underperform more readily vs. those expectations given a higher level of prices.

Today's Obama press conference (that just ended) was the first in weeks where I noticed a more difficult dialogue between him and his adoring media.

From Israel to the economy, this just is what it is... not easy. I have an important support line developing for the SP500 at 901.

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