Scoot capital

So much for fund regulation. Although a rounding error in these Madoff times, the recent fraud at Scoop Capital is yet another indictment of the current regulatory regime. As the fund manager does a disappearing act, the SEC has revealed that assets were overstated by $300m, and the fund in question has actual assets of less than $100k.

Astonishing - it shows how ineffective the reporting requirements actually are. Florida seems to be a hotbed of investment fraud. Madoff, Nagel, the land scams of the 1920s...at least it's consistent.

Sound as pound heading for the ground

In a piece in today's Financial Times, Jim Rogers makes the case that the United Kingdom is out of options. Its currency has no floor, London's status as a serious financial centre is a joke, and the public finances a disaster. Apart from the currency point, the same could be said of most developed nations, I have to say (the US being the exception, as it operates the world reserve currency).

I was surprised that Rogers didn't harp on about his usual hobby horse of investing in commodities. Talk about a broken record. If you'd taken his advice (unchanged since time immemorial) to buy commodities last year, you'd be nursing some nasty losses. Still, he has a point about the UK. Granted they don't have the same level of difficulties (yet) as the Citis and BoAs of this world, but the relative slackness of their government (compared to the momentum of the Obama administration) is a cause for real concern.

Citigroup shareholders never sleep

Lost amidst the jumble of commentary on the Citigroup situation, one point that seems to have escaped scrutiny is management. Specifically, why is all the talk about replacing the current chairman (Bischoff) with a fellow board member (Parsons).

Yes, that Dick Parsons - the former Time Warner executive (and we all know the many successes of that entreprise!). Isn't it about time that someone from the outside (with no vested interest in Citi's awful internal politics) to come in and cut this monster down to size?

Nationalisation is inching ever closer, and shuffling the deck chairs in the boardroom won't cut it. The company badly needs a group of new managers unbeholden to Citi's internal factions - it's the only way to turn this listing ship around.

Anglo Irish Jig

Just when people thought that the financial system was seeing some sort of stabilisation, along comes another full-scale nationalisation - this time at Anglo Irish Bank. Granted, it's not a huge dent in the system compared to Citigroup, but nevertheless an unwelcome development.

The Irish government was left with little choice. After guaranteeing all deposits (a somewhat rash and expensive move), the recapitalisation of AIB was always going to be problematic. In this case the market just wouldn't play ball, leading to a binary choice between a bank failure and full nationalisation. AIB did not help its case with a controversial loan transaction by its chairman.

The full scale of the folly of relying too much on wholesale funding is now plain to see. As an aside, Volcker's action group failed to quash a potential return of some sort of successor to the Glass-Steagall Act (unwisely dismantled in the 1990s). I think such a sequel would be no bad thing.

Emerging issues

One misdeed can undo years of hard work. Such is the case of the Satyam fraud, which has knocked the Indian business world sideways. Other firms in the outsourcing business (e.g. Wipro, Infosys) are now being tarred with the Satyam brush.

Corruption and fraud risk is everywhere, and as the Madoff case proves, it doesn't matter whether the country concerned is "developed" or "emerging". It is a great shame for India though, as it struggles to put some sort of order into its infrastructure.

Since English is one of its mainstay languages, India should have benefited far more in recent years from global trade. Unfortunately their Chinese neighbours simply pushed (sometimes brutally) ahead with big infrastructure investments that are now paying off.

Satyam is a corporate fraud, pure and simple. But in these stressed times it only takes one accident for capital to start flying back to government bonds (another bubble waiting to pop).

Arise Sir Anatole Kaletsky, Intellectual Bankrupt

Simply incredible. Economists are hardly the most credible or popular commentators at the moment, given the dire straits we're in. Their case isn't helped by the fact that their quaint theories are at least part of the reason markets have headed south.

Yet the sheer arrogance and lunacy of some of them is astounding. It's a crowded field, but the award for Intellectual Bankruptcy has to go to one of my favourite villains, Anatole Kaletsky. In his latest piece of sanctimonious claptrap, he puts out the idea of taxing savers in order to force them into spending mode. Truly a master of the facile school of economic thought.

Whilst Kaletsky belatedly admits that he has made many poor calls recently (try all of them, Anatole), this latest idea is simply crazy. Aside from punishing the people who kept their heads as others leveraged up, forced consumption would be a disastrous idea, funnelling precious capital into panic-driven investment decisions. Hardly a recipe for long-term value creation.

As government prepares to issue a huge amount of new debt to fund hastily-crafted vanity projects, Kaletsky's idiotic idea would, if implemented, destroy the deposit base of the banking system, forcing a further round of bailouts. Those bailouts would be funded by (you guessed it) even more government borrowing, with the taxpayer on the hook.

No amount of academic puff can disguise the stupidity of this move. It's morally reprehensible to be scaring savers and pensioners at such a time. This moronic action plan (if you can call it that) would cut down the last consumers standing. Ironic, isn't it?

At events where Kaletsky was a speaker (a generous description), myself and others were consistently underwhelmed. The man is a peddler of twaddle, and hawks his mediocre research services to the investment community like an estate agent - but with less class. Anyone following Kaletsky's arrant nonsense has at least one certainty - plenty of capital losses.

REIT for the skies?

I happened to bump into one of my acquaintances in the fund placement business - in essence estate agents to the investment world. The "hot story" of the day where "smart investors" are putting their money to work is in real estate investment trusts (REITs).

Naturally curious, I pressed him as to why that's the case. "Because of the tasty dividend yields, you moron!". "That's it?" I queried. All I got was a shrug, as if there's no point in further discussion if I don't get it.

Heaven help anyone taking action based on such threadbare reasoning. Sure, some REITs may look compelling on a dividend yield basis, but these are based on projected future dividends. Whilst a REIT is obliged by legislation to maintain very large payout ratios (typically 80+ %), there is nothing to stop them not paying a dividend (for example if interest payments rise).

This is a problem for several REITs at the moment trying to "rollover" their financing. Assuming a bank will lend in the first place, the terms will be much dearer, thus cutting funds available for dividends. I don't exclude some REITs being great buys, but a blanket purchase would be crazy without some careful analysis. It's safe to say some familiar REIT names will disappear by the time this recession is done.

New Year, same old Detroit

Proof that not all traditions are welcome, the gruesome threesome delivered some awful sales figures today. Having said that, they were joined by the Japanese carmakers this time round, as the downturn takes hold. Still, Chrysler can take cold comfort that it is the largest mover - sadly in the wrong direction at -52%.

Pundits praying for a quick recovery are forgetting a problem. Given that people were buying shiny new cars through to the start of this crisis, why would anyone in their right mind buy a new one in the current climate? Unless the thing falls apart, there's no need to. So the sight of those production lines still churning out volume is simply insane. The only people making money from this situation are the parking lot owners renting space to park the unsold inventory.