GalaTime

• Brad Setser: This really doesn’t look good

• World Beta: An update to the Gold Miners / Bullion Ratio Analysis

. . . either gold has to come down, or gold stocks need to come up. . .a lot. Here is a recent article on the newsletters being bullish on bullion. Hussman uses the gold/XAU ratio which currently is above 7. (Hussman talks about a similar method here and here.)

The ratio is around .86 - near the lowest reading ever. Absolute returns for this decile have been strongly positive at 14%, 20%, and 43% for the following 3,6,12 months, and up 90% of the time a year later.

• Bloomberg: Satyam to Restate Earnings, May Be Broken Up

Satyam Computer Services Ltd. will have to restate earnings and may be broken up after the company’s founder was arrested in India’s biggest corporate fraud investigation, executives said.

Satyam shareholder Lazard Asset Management LLC said it asked for information from the government about developments in the investigation. Lazard Asset increased its stake in Satyam on Jan. 7 to 5.3 percent from 4.79 percen.

The company is now worth $332 million after the Bombay Stock Exchange removed Satyam from its Sensitive Index and the National Stock Exchange dropped the stock from the Nifty.

• Telegraph: Merrill Lynch says rich turning to gold bars for safety

Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or “paper” proxies.

If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. “It’s win-win either way,”

• Big Picture: Picture du Jour: Gold or platinum?

• Business Standard: Gold pushes up India’s forex reserves

• Emanuel Derman: The Financial Modelers’ Manifesto

The Modelers’ Hippocratic Oath

~ I will remember that I didn’t make the world, and it doesn’t satisfy my equations.

~ Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.

~ I will never sacrifice reality for elegance without explaining why I have done so.

~ Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.

~ I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

• Barrons: A Bearish Call on Bullion

Unfortunately for gold, the editors of gold timing newsletters are even more bullish now than they were this summer. In fact, they currently are more bullish than they have been in three and one-half years. Contrarians do not consider this to be a good sign at all.

As of Tuesday night of this week, the HGNSI stood at 75.2%. To put this into perspective, consider that the HGNSI this summer never got higher than 64.3%, even though bullion in July was a lot higher — within shouting distance of the $1,000 level, in fact.

The inverse correlation between HGNSI levels and the gold market’s direction over the subsequent several months is statistically significant at the 95% confidence level.

• Wall Street Journal: One Fund in 1,700 Made Money in ‘08

The BSE Realty Index is was having a bad day today:

The all-time low is 1403 (seen on Dec 2, 08), not that far from today’s low (1498). And who can we thank for that? DLF - the biggest index constituent - was down almost 35% earlier today!

On a somewhat related note, Arjun forwarded me this link: 15 Indian Stocks that may shock you

2. DLF:

DLFs non-DAL revenues declined 44% QoQ to Rs22.5bn and around 40% of sales have been to DAL, a group entity. 44% of debtors are DAL and of total debtors, the share of DAL has increased during the quarter with DAL receivables increasing by Rs14.5bn QoQ.

During 1QFY09, sales to DAL were Rs15.6bn, which is marginally higher than the increase in receivables from DAL. We would like to add that DLFs high level of transactions with group company DAL and high level of receivables has been a point of debate since it went public.

The other index biggies - India Bulls RE & Unitech were also down double digits. As I said earlier - those with BS on their Balance Sheet will get taken out by the market.

PS: DLF, like Satyam, is a past winner of the Golden Peacock Corporate Governance Award.

PPS: Based on a similar level of in-depth due diligence that was conducted earlier,

the UK-based World Council for Corporate Goverance has decided to take back its highest honour– Golden Peacock Global Award for excellence in corporate governance in 2008 — it had bestowed on Satyam Computer Services four months ago.

Most global equity markets are in a correction phase after the mid-Dec to early-Jan rally. They are likely to continue rolling down over the next few days - there’s no shortage of bad economic, financial & Ponzi news anywhere in the world.

However, I remain in a bullish camp as far as Indian indices are concerned, and think that the Nifty-50 index has a good shot at ~ 3500 over the next few months.

Note that the EPS for the index as a whole has dropped from a peak of almost 240 to 228. The upcoming earnings season is bound to do serious damage to this figure, and I would not be surprised to see a Nifty EPS of ~ 180 by late 2009 / early 2010.

Inspite of deteriorating economic fundamentals, I think the Nifty-50 could head higher until mid-year, driven by optimism on all sorts of bailout packages, interest rate cuts, FII/FDI flows, regulatory changes, etc. Of course, that optimism is unlikely to survive until December 09 - reality will intrude and we’ll have to accept sub-par GDP growth for longer than we like.

I have added a position in my 5 lakh Virtual Portfolio to reflect my short-term bearishness and intermediate term bullishness. I picked a Nifty Calendar Spread, thus:

• Sell Nifty January 3000 call @ 85
• Buy Nifty February 3000 call @ 155

The maximum risk (loss) on this trade is 155 - 85 = 70 points; for a lot size of 50, that works out to Rs 3500 per contract. I have assigned a position size of 5 contracts of each call option, for a total risk of Rs 17,500.

Given that the NSE SPAN margin system allows us to offset the short call vs. the long call, and given that the portfolio is short the January call (no risk of a naked option position), the margin requirement should be ~ Rs 30000 per spread. For 5 contracts, that works out to Rs 1.5 lakh (150K).

This is likely to be a rolling position in some form until my hypothesis is invaldiated or the Nifty continues to rise but hasn’t hit 3500 yet.

• Hindu Business Line: Noble turns spotlight on promoters

With most stocks on the NSE seeing daily turnover of the order of a few lakhs, imagine how easy it is to manipulate the stock price itself, let alone the financial statements.

• Bloomberg: Metals Prices to Be Lower in 2009 on Weak Demand, Goldman Says

Metal and coal prices are expected to average “considerably lower” in 2009 as demand plunges in a global recession and producers can’t cut supply fast enough, Goldman Sachs JBWere Pty said.

Price forecasts

                  2007     08    09    10     11    12
Aluminium USc/lb   120    116    84    100   112   120
Copper     USc/lb  323    315   189    263   300   330
Nickel     USc/lb 1689    955   567    725   825   850
Zinc     USc/lb    147     85    60     73    83    93
Gold oz            697    872   815    848   883   919
Platinum US$/oz   1306   1580   835    869   905   941
Palladium US$/oz   357    354   200    200   200   200
Thermal coal $/t   55.65  125    70     75    70    70
Coking Coal $/t    98     300   120    120   110   110
Iron ore c/dmtu    80     145   101    101    91    82

• Bloomberg: Standard Chartered Cuts Gulf Arab Economic Growth Forecasts on Global Woes

Standard Chartered Plc cut its economic growth forecasts for five Persian Gulf states this year, citing the deterioration in the global economy.

The United Arab Emirates will expand 0.5 percent, compared with a previous estimate of 2.7 percent, economists Mary Nicola and Marios Maratheftis said in an e-mailed report today. The growth forecast for Saudi Arabia, the largest Arab economy, was cut to 1 percent from 2 percent.

Conde Nast Portfolio:John Paulson Profits in Downturn

Paulson & Co.’s funds (with an estimated $36 billion under management and growing by the day) were up a staggering $15 billion as the markets teetered in 2007; one fund gained 590 percent, another 353 percent. All this reportedly garnered him a personal payday of $3.7 billion, among the biggest in history. In 2008, his funds didn’t climb nearly as much but were still successful enough to put him at the very top of his profession.

“Everybody’s too busy looking out for themselves to come to the defense of people who are perceived as profiting from the misery of others,” Chanos says.

“Alan Schwartz takes the position ‘Short-sellers were our problem,’ and who did he try to get to vouch for him on the morning of the collapse? The largest short-seller in the world. You want to talk about ethics and who’s telling the truth on these things? It’s unbelievable.”

“How do we benefit near-term?” - Paulson’s answer came in four bullet points: Cut leverage and build cash, eliminate exposure to the equity markets, maintain only short-term securities, and prepare for bargains in debt securities of distressed companies—a “$10 trillion opportunity,” another chart pointed out.