Monday, June 15, 2015

Alibaba.....a year in review.....

Well, while I was touring India Alibaba posted its' epic, year-end work of fiction and I must say that it was even more entertaining than the 12/31/14 figures.  I'm really glad I finally set aside some time to take a look at it.

Here are the Presentation, Filing & Recorded Webcast URL's.

Here are the bullet points:
  • The report was as close to a photo copy of the prior quarter as you can get.  Most of the verbiage was identical, with the numbers updated to reflect even more massive, unbelievable top line growth.  40% growth in GMV, 45% growth in Revenue.  Oddly the presenters never even mentioned GAAP (Generally Accepted Accounting Principles) Income in the conference call or the presentation materials.  For the non-accountants out there, GAAP income actually includes all of the costs and expenses that you don't want your shareholders to focus on.  Non-GAAP costs (Those costs excluded from the presentation) amounted to US$ 8.2 Billion (US$ 2.1 Billion of which was  SBC... or "Share-Based-Compensation").  Even with the enormous revenue and GMV increases, GAAP earnings per share (EPS) actually declined year over year, from US$ 1.61 per share in FY 2014 down to US$ 1.56 per share in FY 2015.  To me, this is shocking.
  • The earnings call was again, an incredible piece of obfuscation.  Again, no discussion whatsoever regarding the meteoric increase in Goodwill, Intangible Assets and Investments in "Non-Current Securities and Investees".  The value of these non-liquid "questionable" assets increased US$ 2.0 Billion from the prior quarter and US$ 10.1 Billion for the year totaling more than US$ 15.6 Billion or about 38% of total assets. Other than the "write up" due to the bolt on acquisitions of UCWeb & AutoNavi, none of the acquisitions described in the 424(b) filing were discussed.  As further described in my "Once Upon a Time" post from January, there was again no mention (either on the call or in the 6K) of the progress made integrating the US$ 15+ Billion acquisitions/folly perpetrated in the last year and described in the September quarter filing. UCWeb, OneTouch, ChinaVision, Weibo, TangoMe, AutoNavi, InTime, Youku Tudou, Wasu, Evergrande, ChinaSmart, Haier, Singapore Post, Alibaba Health, & Beijing Shiji did not merit even a footnote, yet these are significant investments where the only disclosures in previous filings indicate that they are currently not producing meaningful revenue and are eroding the groups profitability. 
  • The astounding disclosure that more than US $2 billion was distributed in share-based compensation.  That number alone should have made any investor cringe.  To put it in perspective, Alibaba's share-based compensation was a little less than the current annual Net Income of General Motors.
  • Cost of Revenue, Product Development & SG&A expenses are generally out of control when compared to revenue.  These expenses increased from 52% of revenue in 2014 to 67% of revenue in 2015.  Since a significant percentage of these costs should be "fixed" you'd expect these costs to be declining on a percentage basis given the massive increase in revenue.  Obviously, they are not.
  • They describe "pioneering cross-border e-commerce" strategic business alliances with US Brands (Heinz, Costco, GNC, Thermos, Nature's Bounty, etc.), yet I couldn't find any instances or press releases where the US Brand acknowledged the alliance/partnership, except for a joint Alibaba/Costco statement complaining about knock-offs.  There were of course lots of "Heinz-style" product listings with misspelled labels.  According to a December 2014 article in the Global Times :
"Alibaba said so far around 5,400 overseas brands from 25 countries and regions had opened stores on Tmall Global, and the sales revenue of more than 30 overseas retailers such as Costco, Nature's Bounty, Sugar & Spice and Kirindo had surpassed 10 million yuan ($1.6 million)."  Am I wrong or is US$ 1.6 million life-to-date for 30 retailers about as close to "flop" as you can get as far as "global e-commerce penetration" goes.  
  • At some point Price Waterhouse is going to issue an opinion on the Alibaba annual report.  I have to say that I'm really looking forward to what they have to say.  On the other hand, hypothetically, if the fee were large enough, and the issuer was out of reach of the SEC and the FBI, they might consider issuing an "opinion" that said just about anything. 
  • Finally, and probably most disturbing, the myriad deals/investments and joint ventures described by the financial press, quoting Alibaba sources, that are not even mentioned in the filing.  The articles below describe more than US$ 30 Billion in "investments" and commitments announced by Alibaba. This is particularly astounding given that the current/liquid assets on the Alibaba balance sheet total only US$ 22.9 Billion.   If anything, it would have been nice if the analysts on the call would have at least asked about some of these boondoggles and given Alibaba executives the opportunity to confirm or deny their veracity.  Here are a few of the more noteworthy news items:
China Business News - $193 million - 6/5/15
Taiwan Investment - No $$ disclosed - 6/5/15
Alibaba Pictures - $1.57 Billion - 6/3/15
Reorient Group - $150 Milllion - 6/1/15
Cainiao - $16 Billion over 5 years - 5/28/15
MyBank - No $$ disclosed - 5/27/15
Aliyun - 12 data centers this year - 5/12/15
Alibaba Health - $2.5 Billion -  4/15/15
SnapChat - $200 million - 3/11/15
SnapDeal - $1 Billion - 3/11/15
Tebon Fund Management - 30% Stake - 2/12/15
Meizu - $590 Million - 2/10/15
AdChina - Majority Stake - No $$ disclosed - 1/14/15
Baiyunshan - $1.6 Billion - 1/13/15
Momo - 20% Ownership - No $$ disclosed - 12/11/14
Ping An - $4.7 Billion total Joint Venture - 12/2/14
Youku Tudou - Joint Venture - No $$ disclosed - 10/29/14
Peel - $50 million - 10/9/14
Shiji Information Technology - $450 million - 9/29/14

This is no aberration.  Alibaba has been a "serial acquirer" of under-performing, money sucking businesses for years.  Here's a graphic that shows some history prior to the IPO.



Again, after researching the brands/businesses above I could find little/no detail information (Other than vague Alibaba promulgated press releases and articles) describing the business prospects, financial information or products/services of these acquired businesses.

Back to Reality

Now let's go back to the prior post of my recent India visit.  (Please take a look at the pictures again before continuing on)  If you've ever visited Asia, you'd conclude, as I have over the years, that much of this part of the world, at the risk of horribly offending about 4 billion people....is the same.  There is little difference, whether you are in India, China, Viet Nam, Thailand, etc.  There are miles and miles of shacks and huts filled with people who barely have enough to eat.  You would observe:
  1. Unimaginable traffic and congested, nearly impassable, unmarked gravel/dirt/potholed roads. 
  2. Low per-capita GDP in the US $2,000 to $10,000/yr. range.  Much of the population has virtually no disposable income.  They spend their money on food and daily necessities.
  3. Unreliable electric power, phones and networks. Interestingly, many/most people have some sort of cell service.  They are well connected, but they don't spend time "shopping on-line".  Picture the people in the photographs spending time on their smart phones buying plastic, knock-off junk, or pallets of Gucci bags to be delivered by bicycle or tuk tuk to their tarpaulin covered, dirt floor hut. See where I'm going with this?
  4. No central organized distribution system or the ability to efficiently move freight and packages across town, much less across the country.


Let's take a closer look at the GMV figures


In just a few short years, Alibaba's GMV (US$ 396 Billion) is almost as large as that of Walmart (US$ 485 Billion).  Before you e-commerce gurus jump all over me, I understand that the business models are completely different.  I get it.  I'm bringing up Walmart since it's an excellent illustration of the incredible amount of "work", effort and resource it takes to move US$ 400 + Billion in retail goods.  Walmart has 11,488 stores globally (5,187 in the US including Sam's Club) 1.3 Billion square feet of retail space, 2.2 million employees and 158 distribution centers with roughly 200 million sft. of warehouse space.  Interestingly, they only have 412 stores in China and my understanding is that they are beginning to close them because the Chinese people believe that the Walmart brand represents inferior quality products.  Am I the only one that sees the irony there?

During the BABA conference call, CFO Maggie Wu trumpeted that she believes the current 40%+ growth rate will continue and she sees a relatively near term growth target of US$ 1 Trillion as realistic.  (minute 57 of the recorded call)  Based on a 40% growth rate they will be at  US$ 1 Trillion about two years from now.  They will be twice the size of Walmart and they will apparently accomplish this with 30,000 employees unless they lift the current hiring freeze soon.

Moreover, Alibaba's logistics company, China Smart Logistics/Cainiano that ostensibly handles all of BABA's global distribution is only two years old.  Here's an interview with the CEO Judy Tong.  Ms Tong is very enthusiastic about her business citing the ability to deliver 278 million Alibaba "Singles Day" packages, roughly the equivalent of delivering a package to every man woman and child (over the age of 5) in the United States.  Of course she did not disclose any metrics regarding the resource involved to get this done.  According to Alibaba's press releases, these 278 million packages yielded US$ 9.3 billion in GMV, or US$ 33.00 per package.  At a 3% Revenue to GMV ratio, Alibaba would have received revenue of less than $1.00 per package to handle/process all of these orders.  During the investor call, Maggie Wu stated that the company is not disclosing any further granularity about "monetization", transaction volume and Alipay transactions. (Minute 37)  I hate it when CFO's refuse to get "granular" especially when the numbers are so out of step with what I'd expect.  If we assume the same US$ 33.00 per package "Singles Day" package value and US$ 396 Billion in GMV, Alibaba handled 12 Billion packages (43 million packages a day for a five day work week) in the FYE 3/31/15.  Do these numbers really make any sense to anybody?

A year and a half ago the Fung Group Report  issued an excellent  report summarizing the state of Logistics in China with China Smart Logistics/Cianiao merely described in a footnote (pg 19-20) i.e.) not yet in existence. Generally, the report described the logistics hurdles in China and  specifically described the  efforts of e-commerce retailers (pg. 14-22). The systems are growing rapidly, fragmented, inefficient and high cost.  My sources in China tell me that Cianiao is still a pipe dream and, contrary to the statements of Ms. Tong not yet in operation.  So, I ask again, how is Alibaba actually delivering all of these packages?  The simple answer is: They don't.

Now, let's take a minute and look at a few the higher value items sold on the Alibaba platform(s)

Jet Packs - $5,000 each. - thousands available....no training necessary!
Helicopters - 26 available for $1 million ea. +/-.
100,000 Cars For Sale - every one a cream puff!
Slingshots - 4,500+ for sale...kid...you'll put your eye out with that....
Coal - 12,000 sellers (20-50 metric ton Min. Order)
Deisel Fuel - 100,000 metric ton min. order (4,300 listed sellers)
Steel Pipe - 4.2 million listings - This particular vendor has a capacity of 8,000 tons per month.
Pre-Fab Houses - Shipped in Containers (Assembly Required) There are 750,000 listings.
Reposessed Assets - Financial Institutions dumping repos - thousands of cars and properties
Bankruptcy/Estates - Mostly Real Estate - Hundreds of Listings
Equity - You can bid on "stock" in a bank!...80 million shares for sale at auction in blocks of 10 million shares each......this is particularly odd since their website (www.ZRCBank.com) is down at the moment....must be a glitch....not to worry other bank stock is also available if you can't get your hands on some of these shares.
Commercial Real Estate Bad Debt - 26 real estate projects gone bust.....place your bids now....get 'em while they're hot!
Forrest Land - Are you a developer looking for cheap rural land?  Alibaba is your first and last stop!  Hundreds of thousands of acres available.
Intellectual Property - You can buy formulas for "Streptomyces GSDX-1318 and fermentation production of oligo-saccharides antibiotic avilamycin" or "a high yield β- glucanase of Bacillus subtilis and Its Applications"
....I know if I were looking for something like this, Alaibaba's auction site would be the first place I'd go!

Let's be honest here, does listing, Coal, Diesel Fuel, Industrial Supplies, Steel and "bad assets" on Alibaba really add any economic value to these transactions?  Does anyone really buy 100 metric tons of coal, real estate or repossessed assets by putting them in an electronic shopping cart on their smart phone and typing in an Alipay card number?  There are contractual, legal and titling issues involved in every one of these transactions.  Yet, these high value items are presumably somehow included in GMV?

The SEC

The SEC correspondence, as always, is enlightening.  During the review of the IPO materials, the SEC had significant concerns regarding Alibaba's accounting and reporting of GMV.

The 216 page SEC correspondence Q&A filed June 16th 2014 is a wealth of information re:  the process surrounding the development of the BABA IPO disclosures.  There has been much press/speculation re: the validity of BABA's published GMV (Gross Merchandise Value) figures and the possibility that they are significantly inflated. The correspondence discusses BABA's GMV disclosure failing to reflect incomplete transactions, returns & allowances.
 
p5 - SEC - "You indicate that a limitation of calculating GMV is that it does not take into account how, or whether, the buyer and seller settle the transaction. Please tell us why your calculation of GMV does not include only settled transactions and tell us how GMV provides material information about changes in your results. For example, we note from your disclosures beginning on page 84 that commission revenue is earned from fees based on a percentage of settled GMV. "
BABA Response - "The Company respectfully advises the Staff that, among e-commerce companies, it is the industry standard to calculate GMV without taking into account the actual settlement of transactions."  They go on to cite eBay's 1/31/14-10k (pg. 65) further stating that "The Company also advises the Staff that buyers and sellers settle their transactions through the Company’s related company Alipay or through other means, including the use of cash payments. Accordingly, consistent with the practice followed by its peers in the e-commerce industry, the Company calculates GMV on the basis of transactions entered into on its marketplaces regardless of whether there is settlement between the buyer and seller.

BABA's representation re: GMV is only half correct.  eBay also discloses Returns and Allowances, "Take Rate" as well as "Net" Merchandise Sales in addition to GMV. ( Described on 10k - p63)  eBay's disclosures are completely transparent.  BABA does not disclose these statistics, nor do they disclose "settled" GMV . 

Additional evidence of Alibaba's GMV overstatement is that eBay's Revenue/GMV ratio has held constant at 18% +/- for years.  This ratio represents the reasonable cost to handle that level of "small transaction" GMV.  Conversely,  Alibaba's ratio of Revenue to GMV has remained constant at 3% for the same period, reflecting that the real economic value of Alibaba would be more in line with Yellow Pages or Craig's List Advertising rather than an e-commerce retailer.  Many or possibly most of Alibaba's transaction are either never settled, or in all probability would have taken place regardless of their irrelevant listing on Alibaba (i.e. Coal, Fuel, Industrial Equipment, Steel, Cement, Repo Assets, Patents, Houses, etc. etc.)  If we back into Alibaba's "closed" GMV using eBays 18% Revenue/GMV ratio, we get a GMV of US$ 68 Billion ($12.3 Billion/18%).  In reality, Alibaba may actually be about two thirds the size of eBay with a Market cap three times as large.

JD.com

In the same SEC correspondence, Alibaba also cites JD.com as precedent for also including "un-settled" transactions in GMV.  Let's take a closer look at JD.com, another large Chinese e-Commerce company.  For 2014, per the JD.com Annual Report, the ratio of Revenue to GMV was 44% on 41.9 Billion of GMV, yielding an average order value of US$ 61.00 per order, with revenue per order at US$ 26.85.  Again, compared to Alibaba's Revenue to GMV ratio of just 3%.

JD.com's footnote on pg. 15 of the Report also states that they exclude the value of large orders from GMV:

(3) GMV is defined as the total value of all orders for products and services placed in the Company’s online direct sales business and on the Company’s online marketplaces, regardless of whether the goods are sold or delivered or whether the goods are returned. GMV includes the value from orders placed on the Company’s website and mobile applications as well as orders placed on third-party mobile applications that are fulfilled by us or third-party merchants who are enabled by the Company’s marketplaces. The Company’s calculation of GMV includes shipping charges paid by buyers to sellers and excludes any transactions in the Company’s B2C business with order value exceeding RMB2,000 that are not ultimately sold or delivered and products or services on the Company’s C2C marketplace, Paipai.com, with list prices above RMB100,000 as well as transactions conducted by buyers on Paipai.com who make purchases exceeding RMB1,000,000 in the aggregate in a single day.

Note that JD.com primarily sells home electronics and small appliances.  It has no "industrial", "Bad Asset" categories or "big ticket" goods for sale.  The business model is much more like Amazon.com with a mix of direct sales and third party sellers.  Given the above, the order value and associated GMV and margins are probably much more representative of what we might expect out of a "real" e-commerce company in China.  As a point of reference, JD.com increased revenue by 66% to US$ 18.5 Billion from last year and still managed a GAAP Net Loss of US$ 805 million.  I guess meteoric growth and gigantic losses are the way business is done in China.


Summary/Conclusions

Unfortunately, investors are valuing BABA as a global e-commerce game changer with enormous retail growth potential when in reality the transactions reflect grossly overstated "non sales" and should be more properly viewed as a gigantic, but barely useable directory listing of all sorts of odd junk of questionable quality and seller veracity.  Despite widespread allegations of Vendor Fraud, Channel Stuffing, "Red Envelope" Giveaways, Shua dan, Wash Trades, etc.as well as the above described, "industrial" transactions and impossible ratios and business model, Investors still seem to value Alibaba as the greatest business opportunity since Al Gore invented the Internet.

Let's think this through.  Is it more likely that Alibaba handles/controls as much retail merchandise as Walmart, with a two year old logistics business, shipping 40 million + packages a day to tin-roof shacks located in every nook and cranny of China?  ....or is it more likely that the books are as cooked as a Christmas goose.   

Finally, I'm going to say something about the analysts and their Q&A at the recent earnings call.  

Dear analysts:  I understand that you are in China, and you have to do what you are told or you won't be allowed to participate in the call.  I get it.  However, if you are going to continue to ask all of the same irrelevant, meaningless, spoon-fed, congratulatory questions about "providing color" on MAU's, GMV growth and "visions for the e-commerce future" rather than anything of substance, it would be better if you asked no questions at all.  Your mere presence and participation in these investor calls lends an inappropriate level of  credibility to the charade and could give you significant "known or should have known" liability once this thing blows up.  Furthermore, the appropriate action on your part would be to either cease coverage or put a big fat "sell" rating on the stock until your questions are answered to your satisfaction.  Just a little friendly advice. 











Monday, June 1, 2015

India.....the next Global Economic Super-Power....

Well, my wife and I just got back from another wonderful, inspiring trip to India.  We spent time in Delhi and the Eastern Industrial belt, Ranchi, Asansol & Kumardubi located in the Jharkhand and West Bengal States.

Here's my thesis:

India will be the next Global Economic Super-Power

Why?  Here are my general observations.
  1. The Indian people are the hardest working people I've ever known or could imagine knowing.  They work long hours for low wages, are independent, self sufficient and intensely proud of their work and efforts.
  2. They are highly educated, usually multi-lingual, inquisitive, well read and interested in a wide range of subjects.  They value education above all else and understand that education is the only way that their children will move up the socio-economic ladder.
  3. They are fiscally responsible and honest. They don't borrow money unless they are absolutely sure they will be able to pay it back.
  4. The country is surprisingly secure.  There is relatively low crime and virtually no violent crime.  Firearms are strictly controlled.
  5. The county is "connected".  Smart phones are ubiquitous and inexpensive. 
  6. Political barriers to progress are eroding.
  7. The Indian people are kind, helpful, generous souls.  We were treated like royalty wherever we went.

Before I elaborate on the above and discuss the road blocks that must be overcome to make my thesis a reality, I've always felt that pictures usually tell a better story than words possibly can.  To that end, I've posted the following collage.  Captions reflect the US equivalent of the composition.




































The intent of the above is first, to convey the energy, work ethic, physical, financial and emotional effort expended during a day in the life of the people of India.  Second, to illustrate how much work still needs to be done to achieve, by Western standards, a truly efficient, functioning society.

The pictures selected are neither "better" nor "worse" than any of the other pictures I took.  What I'd like to stress is that these pictures paint a very accurate portrait of daily life in India.  We hired a car and a driver and traveled 140 miles in about seven (7) hours.  The top speed we reached was probably about 35 miles per hour. There were people, cars, animals, trucks, commerce, activity and commotion everywhere. At one point of the trip I challenged myself to snap a picture where there was no person in the frame. I failed miserably.  Our driver was expert at "nudging" pedestrians, livestock and bicyclists out of the way without incident, as well as somehow avoiding head on collisions.  There are 140,000 traffic fatalities per year in India.  It's hard to believe, since highway speeds rarely exceed 40 miles per hour.  Sadly, most of these deaths are preventable as helmets and seatbelts are generally not worn.  "Transportation chaos" best describes our little trip.

That said,  the overarching theme which permeates every crevice of day to day life in India, in my observation, is the lack of understanding of the aggregate consequences of individual actions.  The Indian people generally think nothing of:
  1. Allowing livestock (cows, chickens, goats, pigs, buffalo, and the occasional elephant, etc.) to roam freely with no constraint.
  2. Driving any vehicle (car, bicycle, tuk-tuk, rickshaw, truck, etc.) anywhere there is open pavement. (There are no street signs, signals or markers.)
  3. Urinating or defecating wherever they happen to be.
  4. Having children without any plan to feed, clothe or house them.
  5. Dropping a plastic bag or bottle, food waste, wrapper, can or other trash and walking away.
  6. Power outages or "load sharing" for hours or days at a time.
  7. Living in a tarpaulin covered hut.
Individually, none of the above would have any impact on the citizens or their quality of life.  However, in aggregate, multiplied by 1.3 billion people over dozens of years on a land mass one third of the size of the United States, the result is, to say the least, astonishing.

Oddly, the people seem to be, at least to a certain degree, "ok" with it. The Indian people seem to be happy with their lot in life. Local and municipal government efforts are inconsistent at best and often fail to provide what Westerners would consider "basic" services. (trash collection, water, enforced traffic laws, public transportation, an adequate electrical grid, etc.) In the US, my guess would be that these conditions would generate various levels response ranging from public outcry, up to ouster of political officials and potentially riots in the streets. Yet, in India, things somehow seem to get done.

Let's go full circle here....

Let's get back to my thesis that "India will become the next Global Economic Super Power".  After reviewing the above you are probably thinking that this thesis is most likely the byproduct of malaria or a bad plate of Tikka Masala.  On the contrary, there are grass roots efforts underway already. The economic and societal road blocks India faces are absolutely insignificant when compared to the competitive advantages described in the opening bullet points of this post.

According to the IMF, India is the third largest economy ranked by GDP on a Purchase Power Parity (PPP) basis, behind only the US & China and well ahead of Japan, Germany and the UK.  (Of course it's way down the list on a per capita basis)  India also has very little debt when compared to the rest of the world.  Total Debt (Public, Private and External) as of June of 2014 was at 120% of GDP with the ratio remaining constant (0% debt growth) since 2007.  By comparison the US is at 230% (Increasing 16% since 2007); China is at 217% (Increasing 83% since 2007) and Japan is at 400% (Increasing 64% since 2007)  (McKinsey)  Simply put, India doesn't owe its future to anyone.

Moreover, every business person I talked to gave the Modi Government a hearty "thumbs up" on its initiatives.  Whether it's the Swachh Bharat Abhiyan (Clean India Mission), Jan Dhan Yojana (National Mission for Financial Inclusion) or the Atal Bimi Yojana (National Pension Plan) there's movement taking place today that hasn't happened in the past.  The newspapers are filled with full page ads describing the industrial initiatives (Steel, Transportation, Roads, Rail, etc.) currently underway.  While I was touring the countryside, the media coverage of the Prime Minister's  (Narendra Modi) trip to China was constant.  Meetings, discussions and ceremonies with Xi Jinping were all anyone was talking about.  Northern border and security concerns, capital flows, FDI, joint venture opportunities, Modi's Bullet Raja higher speed ("Express" trains in India currently average 31 mph) rail plan, Pakistan relations as well as China's Naval operations/aspirations in the Indian Ocean were all on the table and open for dialogue.  The battle cry for the Modi Government seems to be "If China can do it, why can't we?". 

All of these initiatives are beginning to take root.  India's output growth accelerated to 7.5% last quarter (7.3% for the fiscal year ended in March), putting it ahead of China as the world's fastest-growing large economy.  Manufacturing activity progressed at a healthy 7.1%. Services such as finance, insurance and real estate continued to perform very well, growing by 11.5%. But with below-average rain hurting crops last year, agricultural growth was flat, at 0.2%.  "In this cloudy global horizon, India is a bright spot," Christine Lagarde, the International Monetary Fund's managing director, told college students in New Delhi in March, referring to a stagnant EU the slowing Chinese economy.

Putting more pedal to the metal , India's exports are relatively cheap and getting cheaper.  The Rupee is depreciating and worth about a third less in US$ than just a few years ago.  India's favorable Purchasing Power Parity (PPP) disparity will provide a tremendous advantage as markets open and investments flow.   The cost of goods, labor and services are declining on a relative basis and the labor force is poised and looking for global opportunity.  The Indian people are ready, willing and able to "go to work", yet nine out of ten Indians don't even have a "formal" job with a regular paycheck.  Most survive by doing handyman, or domestic work or making/growing/selling whatever they can to get by.  Wages for domestic work and these "odd jobs" generally pay about US$1.50 to US$2.00 per hour.  To illustrate the difference in labor philosophy from that of  the West, a few weeks ago the Union Cabinet authorized a law "limiting" child labor.  Children under age 14 can now only work in a family business or a few other non-hazardous industries with their parents permission.  Believe it or not, this is actually tightening the rules.  Prior to this new law, Children of any age were working in virtually any industry with no limitation as long as there was parental permission.  In the US of course, child labor is illegal per se.

India's FOREX Reserves are at record levels, $352B or 17% of nominal GDP (4.7% of PPP GDP) representing enough currency to pay 10 months of imports (compared to the financial crisis on 1991 when the reserves were the equivalent of 2 weeks of imports).  Unlike in the US, there's plenty of room for economic stimulus.  Bank Deposit Interest rates are at 8% and the Reserve Bank of India has just lowered its benchmark lending rate by 50 basis points to 7.5%.   Apparently India's finance minister saw no reason to follow the lead of "Helicopter Ben".  On the other hand, It would be difficult to imagine what the US economy would look like right now if the FED had kept interest rates at 7.5% since the financial crisis.

Today, India's Capital/Stock & Bond markets are developing, yet continue to take a backseat to China's markets.  An article in the Economic Times (May 9th) Opined "China's Tsunami Sinks D-Street".  The article's premise was that the eruption in China's equity markets was syphoning available global capital from Mumbai's Dalal Street (i.e. India's Wall Street).  Incredibly, "Between May 5th and May 12th - 25 Chinese companies would mobilize $377 billion, according to Bloomberg Data. This is eleven times the amount raised by Indian IPO's in the past decade and slightly greater than India's current Forex reserves."  The meteoric returns in the Chinese markets over the last year have stymied the ability of India's businesses to raise capital.  If this were to continue for an extended period of time it would be crippling for India's prospects.  Why invest in India when you can double your money in China?  Fortunately for the Indian economy, in the author's opinion, the tide will soon turn.

As discussed in great detail within this blog, once the Chinese economy implodes, and make no mistake about it, it will, India will be ideally positioned to fill the void.  In fact, China's economic day of reckoning will most likely come long before India has undertaken significant trade, capital and integration risk in China. As a result, Capital will begin to flow into India and in contrast with what's happened in China, it will not be wasted.  The Indian work ethic, resilience, honesty and creativity simply won't allow it.   In fact, India's economic ride with respect to China's impending hard landing should be much smoother in the near term than that of the US.  Again, as described in detail in prior posts, the US is more exposed to the Chinese Contagion than any other economy.  US financial markets and institutions are more immersed in this fraud and the related integration risk than any other economy.  US exposure to China's ADRs, A and H Shares, markets and US$ denominated bonds are well in excess of US$ 2 Trillion now and the values, as well as new money flow (China Stock-Connect et al) into these assets are increasing at an breakneck rate. 

China's Stock Markets, Shanghai (SSE), Shenzhen (SZSE) and Hong Kong (HK) have nearly doubled in six months and now have a market cap of about US$13 Trillion making these markets larger than the London, Euronext and Japan stock exchanges combined.  Amazingly, most of this value has been created in the last few months and has no relationship to the fundamentals of the underlying businesses.  The Shanghai stock market currently has a P/E of 68.  That's fine for a tech startup, but quite a frightening P/E for a mature index.  As a point of reference, the current P/E for the S&P 500 is 20.6

But as we have learned all too well, all good things must eventually come to an end and all bubbles will eventually pop.  Once the China/Global correction and the reallocation occurs, I will be very comfortable looking toward India for some very unique opportunities.

Namaste