Tag Archives: emerging markets

Samsung and Elliott Associates

July 20, 2015 By in Asian economic development, Current Market Thoughts, family owned companies, Korea Tags: , , , , , , 1 Comment

I’m not an expert on Korea.  In fact, I think of Korea in much the way I think of India or Indonesia–or Japan or Italy, for that matter.  They’re all places where very powerful family controlled industrial groups have enormous economic and political power.  As a result, the rules of the stock market game are very different from those that prevail, say, in the United States.  Piecing them together can take an enormous amount of time and effort.  I’ve believe that, except in the case of Japan in the 1980s, the reward for mastering these markets would never be large enough to justify the effort involved.

In the case of Korea, government policy, both formally and informally, is heavily tilted in favor of a set of family controlled industrial conglomerates called chaebols (much like the zaibatsu/keiretsu of Japan).  In my view, these are not American-style corporations.  They care little for profit growth/maximization or for the welfare of ordinary shareholders–Korean or foreign.  I’ve found the laws and regulations that govern them to be bewilderingly complex and their financial statements (admittedly I haven’t read one carefully in well over a decade) unreliable.

Recently, Samsung, a major chaebol, decided that one affiliate, Cheil, would buy another, Samsung C&T, at what appears to be a bargain basement price. US activist investor, Elliott Associates, then bought a bunch of Samsung C&T stock and challenged the takeover.  Its objective was presumably either to have its stake bought out at a higher price by some other Samsung company or to compel Cheil to raise the acquisition price for everyone.

My initial reaction on reading this was that Elliott was fooled by superficial similarities with the US and didn’t understand the deeper political and cultural barriers it would face in Korea.  That has, so far, proved to be the case.  Shareholders have voted in favor of the acquisition as originally proposed.  Elliott is apparently continuing to sue to try to prevent/reverse this outcome.

The situation is a little more interesting than I’d thought, though, and bears watching:

–the Elliott effort to have Samsung C&T shareholders reject the takeover failed by only 3% of the shares voted.  This is a surprisingly small amount, in my opinion.  On the other hand,

–the deciding vote in favor was cast by the government-connected National Pension Fund, which ironically has previously been a critic of chaebol behavior.

My guess is that it’s ultimately Elliott’s foreignness that swayed the voting, particularly at the NPS.  Were a Korean equivalent to attempt the same thing, the outcome might have been different.  If so, there may be hope for investors in Korea after all.  I’ll continue to be on the sidelines until there’s more tangible evidence of change, however.

 

 

 

 

put it in the books–agreement on a third Greek bailout

July 13, 2015 By in EU financial crisis, Greece Tags: , , , , Leave a comment

Kirk Nieuwenhuis, a fine defensive outfielder who had been batting .097, hit home runs in each of his first three at-bats at Citi Field yesterday.  He became the first Met ever to hit three HRs in a single home game.

Shortly thereafter, Greece accomplished a similar reversal of form.  It agreed to a (third) sovereign debt bailout from the EU/IMF–under terms that were far more rigorous than those it had rejected in a voter referendum a week ago.

That referendum appears to have convinced the EU that Greece would never abide by the bailout terms it had previously proposed.  So, despite pleas for a softer line from France and Italy (both presumably thinking of their own structural problems), the EU opted for tougher terms and a stark choice:  either immediately pass laws breaking down anti-competitive barriers and nullifying ones enshrining vested interests; or leave the EU for five years, with reconsideration of membership at the end of that time.  The unwritten subtext–left to its own devices Greece would go from bad to worse and never qualify for reentry.

The ruling left-far left coalition in Greece has dissolved and been replaced by a left-center one whose primary goal is to retain EU membership.  The legislative changes demanded by the EU are apparently going to be passed this week.  The domestic political strategy will likely be to blame the “evil” EU for changes in the status quo.  Whether Prime Minister Tsipras, who will be the public face of capitulation, survives in office is an open question.  Nevertheless, the outcome is much more favorable for the EU, and  ultimately for Greece, than anyone would have imagined when negotiations started.

negotiating: Casio, China and Greece

July 9, 2015 By in economic problems in emerging countries, economics, EU financial crisis, Greece Tags: , , , , 1 Comment

requesting an investment banking client meeting

Years ago, so long ago in fact that Tokyo was by a wide measure the largest stock market in the world, I received a call from a broker asking whether I wanted to meet with the top management of electronics maker Casio in my office in Manhattan the next day.

I knew the company a bit.  I’d visited it in Japan.  It wasn’t a particularly well-run firm.  And it was an exporter, a weak yen beneficiary, at a time when the yen was soaring and only domestic-oriented companies went up.  So I had little interest.

But I said yes anyway.

The broker was in a bind.  He was supposed to be showing Casio the power of his firm’s client list in New York and some manager had cancelled at the last minute, creating a potential loss of face for both the broker and Casio.  I had only a small pool of money under management and my acceptance would obligate the broker to provide me a return service that my commission volume alone couldn’t buy.

Apparently, the CEO of Casio felt under the same sort of obligation.  The meeting was interesting and informative, although it gave me no reason to want to buy the stock.

negotiations with China

The main topic was the company’s negotiations at that time to increase manufacturing capacity in China.

Casio met with Chinese government officials over several sessions and came to a preliminary agreement.  When the two sides met again, ostensibly to cross the ts and dot the is, the Chinese side reopened the negotiations, demanding substantial new concessions.   What Casio expected to be the end point turned out to be the new starting point for further haggling.  It went along because it figured the costs of starting again elsewhere from scratch were too high.

This happened several more times.

Then a contract signing was scheduled.  At that meeting, the Chinese side accused Casio of complicity in the rape of Nanking and demanded still more concessions as a form of reparation.  Casio did so, even though the last contract changes removed all chance of profit from the new plant.

With some distance, the CEO’s main conclusion from this experience was that the long-term relationship of mutual respect and trust that he hoped to find in China was simply not there.  He’d already decided to cut his losses and do no more expansion in China.

Greece today

I was already quite familiar with this negotiating style, which might be described as death (of the other guy) by a thousand cuts.  I’d seen a former boss to the same thing to Lehman.  In that case, however, Lehman eventually picked up and left in disgust.

In its negotiations with the rest of the EU, Greece has been following the same playbook Casio described to me decades ago, down to the accusation of wartime atrocities.  The main casualty in this approach is the loss of trust between the parties, once the Casio-side party realizes the other has no interest in a solution that brings mutual benefit.

It seems clear to me that we’ve passed that point in the Greece-EU discussions.  We’ll find out over the weekend whether this precludes any agreement from being reached.

 

 

 

the impact of daily price fluctuation limits on Chinese stock trading

July 8, 2015 By in China, emerging markets, Margin, margin trading Tags: , , , , , 3 Comments

As I’ve said in prior posts, I have no desire to buy shares on mainland China’s stock exchanges.  Hong Kong is fine enough for me.

This has led me to not pay enough attention to what may be a key feature of trading there–daily price fluctuation limits of +/ – 10% per day.  What this means in the current context is that a given stock can trade down until it has fallen by the maximum 10%.  Unless/until there are buyers at the -10% level or better, there is no more trade in the stock that day.

While this was common practice in stock markets around the world several decades ago, and is the norm in commodities trading, it is no longer the case in most stock markets.

The reason is that it prevents markets from clearing quickly in times of stress.  It tends instead to increase investor fears and to deepen stock market losses, as well as lengthen the selloff period.  I first saw this very clearly in the cases of Mexico, Spain and Thailand during the market downturn of October 1987.  All three countries had daily fluctuation limits.  After a number of days of limit-down-no-trade, Mexican authorities loosened the bands and the market began to clear.  Spain and Thailand didn’t.  Both markets suffered severe selloffs that lasted for months.

 

Press reports on China have alluded to the daily price fluctuation rule there.  But the authors haven’t a clue as to its significance; they provide no useful information about how it is impacting trading.  They do indicate that many small caps aren’t trading, but that would likely be the case whether price limits were in effect or not.  (Typically, one of the early signs of market recovery is that small caps go down.  The positive signal is that buyers–at any price–have reemerged.)

The 10% rule may be having negative effects on Chinese stock markets. The way to tell would be to examine the most liquid stocks and see if they are closing on the lows, with the last trades significantly before the market close.  Given the behavior of the overall indices and the overall trading volumes, I don’t think this is the case to a crucial degree.  But at this point I’m not curious enough to check.

Even so, it seems to me that Beijing could shorten the period of margin-selling downward pressure on the market if it were to modify or eliminate its old-fashioned daily limit rules.

(a little) more on the Chinese margin crisis

July 8, 2015 By in China, Hong Kong, Margin, margin trading, Stock Connect, stock market Tags: , , , , , , 1 Comment

Chinese stocks closed lower by about 5% overnight, as the margin selling spiral continues downward.

My thoughts:

–this very strongly suggests that some margin accounts that have enough equity in them a day ago are under water now.  So Shanghai and Shenzhen will likely open tonight to more selling.

–to be clear, I don’t know exactly how Chinese margin works.  And, because I have no intention of buying A shares, I have no desire to find out.  A logical step for authorities to stop forced selling would be to loosen margin collateral requirements.  It may be, however, that the government has decided that the best course is to wring speculation out of the market as quickly as possible.  In other words, despite its rhetoric, it’s content to see the selling play itself out fully.

–margin players tend to be their own worst enemies.  Taking both their margin and cash accounts into consideration, they tend to have a mishmash of high quality stocks and speculative junk.  Their margin accounts tend to be heavily weighted toward trash.  The junk is what’s most vulnerable to price declines, since it has little, if any, intrinsic merit.  The logical response to a margin call is to sell the trash and keep the quality names.  Margin players, in my experience, invariably do the opposite.  They sell their winners and keep their losers, exposing themselves to continuing margin calls and prolonging the overall market agony beyond what it should be.

–I’m still guessing that the current selling will exhaust itself within two weeks.