I am laying out the articles that we published with the dates, so that you may be able to see how our forecasts have beaten the rest of the world. While forecasting the market dynamics is a formidable task, we are focussing on an even greater problem. In the April 28th Article we discussed the inefficiency of the financial markets using the Japanese Crises as a case study. This is the proof that back testing and pre-programmed trading is ridiculous.
In a free market economy where price discovery is determined by supply and demand, the market should react to negative macro news to an extreme point. The Japanese Crises should have brought all the related equity prices down dramatically, until the individual companies proved that they could mitigate the risks. What happened is literally market manipulation in terms of the Japanese Yen, Japanese equities, and US equities that rely on either sales to Japan or consumption from Japan. It seems that they are controlling the tempo of the trades for some kind of controlled soft landing. In our view that is absolutely corrupting the free market.
"The fact of the matter is that high frequency traders (HFT) are pre-programmed machines that rely on both historical data and they monitor specific variables (for example: economic indicators) when they buy and sell. Think of them like watching the news on TV for an extended period of time. After a while the reporters are saying the same thing over and over again, its called a "News Cycle" in the media industry. The only thing that breaks the monotony and repetition is a "Breaking News" story, which suddenly introduces new reporters and graphics. The problem with pre-programmed high frequency traders is that its difficult to stop them from going through their usual routine. The catastrophe in Japan and the subsequent impact on the various industries and economies need to be programmed into the computers. This is too much centralized power to be referred to as capitalism or free markets. The sheer volume of leveraged computers can manipulate the markets, without any regard for fundamentals or real time events."
"The fact of the matter is that high frequency traders (HFT) are pre-programmed machines that rely on both historical data and they monitor specific variables (for example: economic indicators) when they buy and sell. Think of them like watching the news on TV for an extended period of time. After a while the reporters are saying the same thing over and over again, its called a "News Cycle" in the media industry. The only thing that breaks the monotony and repetition is a "Breaking News" story, which suddenly introduces new reporters and graphics. The problem with pre-programmed high frequency traders is that its difficult to stop them from going through their usual routine. The catastrophe in Japan and the subsequent impact on the various industries and economies need to be programmed into the computers. This is too much centralized power to be referred to as capitalism or free markets. The sheer volume of leveraged computers can manipulate the markets, without any regard for fundamentals or real time events."
Khalid I Natto
Chairman & CEO
The KIN Consortium
Email: khalid@kinconsortium.com
Mobile: +9665 686 10043
"May 19th, 2011 Arab News Article: Choices and strategies for economic growth"
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News & Events
"FEBRUARY 26th, 2015 Saudi Gazette ~ Changing landscape"
Last updated: Thursday, February 26, 2015 11:52 PM
Khalid I. Natto
JEDDAH — Some countries whose currencies are pegged to the dollar benefit from deflation brought about by the stronger green buck in the same way as American manufacturers do. For instance, Saudi manufacturers can now import raw materials cheaply, so that they can compete with international manufacturers of finished products.
Their profit margins are inversely correlated to the cost of their respective raw materials. For example, the construction industry is a direct beneficiary of the deflation of commodity prices like steel. As a result they will be able to produce their construction projects much cheaper than they had previously forecasted.
The strength of the US dollar can be seen as a stimulus of sorts to those respective industries. The underlying assumption is that the strong dollar is not simply an oil price story, it's a generic commodity deflation story. The fact of the matter is that the Bretton Woods agreement of 1944, has put all commodities and currencies on a US dollar denominated formula.
When this denominator rises, the numerator must decline in direct proportion causing deflation. It is this deflation story that has opened a window of opportunity for the international investors to diversify their stake in the Kingdom of Saudi Arabia.
The Tadawul stock market is full of contractors and manufacturers that are primed to benefit from the current global economy. The question that haunts the minds of most economists and investors is "How did we arrive into this strong dollar economy?"
My response is that it was largely a political decision as opposed to an economic decision.The Obama Era is enjoying the strong dollar due to the recent stoppage of QE or quantitative easing.
Basically the Federal Reserve and American economist Janet Yellen stopped the government from buying toxic assets, which were weakening the US dollar.
Suddenly the dollar rose and deflated all commodity prices and currencies.
A large number of Multinational Corporations (MNC) like Procter & Gamble have recently released their earnings and they are complaining about the impact of the strong dollar.
The fact of the matter is that there is no need for the Federal Reserve to raise interest rates even further in an endeavor to raise the US dollar.
It came down to an issue of balancing the needs of the "Old Democrat" constituencies, and the needs of the "New Democrat" constituencies. From a historical perspective the economic landscape has made some fundamental changes between the Old Democrats of the "Clinton Era" and the New Democrats of the "Obama Era"
It has been described as an economy that had little–to–no stake in shale oil; therefore, it was not viewed as a commodity driven economy. In fact the economy of the 90's was largely lauded for its growth and innovation in the birth of the Internet.
The Clinton era was also recognized for its high interest rates, strong dollar, and strong growth formula. All commodity prices were deflated as a result of the strong dollar; consequently, the local American manufacturers enjoyed the luxury of high profits due to cheap prices of raw materials.
This economy is fundamentally different in 2015, because it can now be viewed as a commodity driven economy. This is due largely in part to the Bush Era, which laid the groundwork for shale oil drilling in both of his consecutive presidential terms.
The economic impact of the new oil industry can be measured in terms of at least three metrics GDP, jobs growth, and tax revenues.
They have continued to flourish during the Obama administration, to the degree that some Industry analysts were forecasting total independence from foreign oil in the near future.
Then they hit a bump in the road when the financiers of shale oil, and new oil discovery projects began to cry foul. They had to recalculate the viability of the projects with the new discounted cash flow projections showing imminent losses.
The recent fall in oil prices has a number of hedge funds revisiting their bond portfolios as they have declined substantially. The ramifications of these pending defaults has yet to be discussed in the mainstream media.
As a result, the energy sector would like to see a weak dollar and low interest rates, so that their respective commodity prices would rise.
At this juncture we can anticipate a great deal of political lobbying from this industry to salvage their respective businesses.
Of course the economic picture would be incomplete if we didn't mention other segments of the economy, such as the real estate sector.
This is yet another sector that tends to be hyper sensitive to the direction of forecasted interest rates.
The real estate sector is also desperately lobbying to keep interest rates low, so that the demand for both the existing homes and new homes on the market can continue to flourish.
— Khalid I. Natto is the Chairman and CEO of KIN Consortum
"July 14th, 2011 Arab News Article: The auto industry and technology"
By KHALID I NATTO
Published: Jul 13, 2011 22:48 Updated: Jul 14, 2011 00:03
We at The KIN Consortium believe that the Kingdom’s economy will continue to flourish as we adopt state-of-the-art technology into our respective businesses.
At this moment in time, we would like to publicly state our commitment to continue building and developing both the image and infrastructure of the Kingdom.
We are taking this hands-on approach to developing these applications because a number of our readers have verbalized their disappointment in the growth rate of the economy. In fact they have gone so far as to say that our articles are full of enthusiasm, as opposed to action.
In an attempt to appease the disappointed critics we would like to say, “As you can see we at The KIN Consortium have developed applications for both the restaurant industry and now the auto industry. The aforementioned state of the art applications have literally put the economy of the KSA on the cutting edge of technology.”
The idea is to use all the tools at our disposal to facilitate transactions for both consumers and businesses; thus, vitalizing the local economy.
In an attempt to stimulate the economy in the Kingdom of Saudi Arabia, we at The KIN Consortium are now focusing this week on the sales of cars, SUVs, and vans.
We have launched a new state-of-the-art Android application for the Abdul Latif Jameel (ALJ) Toyota Fleet.
Take a moment to imagine a scene where a Toyota salesman has the freedom to sell cars while sitting in a cafe after work.
The gentleman is merely having coffee with a client and they look out the window at the passing traffic on Tahlia street.
The client sees the new Sequoia and starts to comment on the size and power of the SUV, yet sadly traffic is moving so fast that he couldn’t get an eyeful of the vehicle.
The ALJ salesman looks to his friend and says take a look at it again, as he hands him his phone with the ALJ Android Application.
The client taps on the icon and the application opens immediately.
Suddenly, his eyes are glued to the screen as he is tapping on every make and model of the Toyota fleet.
The pictures are so rich with color and vivid detail that he asks the Toyota salesman for an appointment to test-drive the car.
Then he starts asking about the financing options and the colors that are available.
The salesman turns to his Android phone as he checks his calendar for a vacancy, so that he may meet with this client in the office.
In the above scenario, the application literally served as a portable showroom that is available 24 hours a day seven days a week.
It has a number of interactive features that are designed to be used as a tool for the sales force, an advertisement, a Toyota Center locator, a direct line to the 800 number, and a quick link to schedule maintenance.
The application is also full of interactive graphics that show every car, SUV, van, and commercial vehicle in the Toyota fleet.
It is designed to be as user friendly as possible.
When you tap the buttons on the screen they immediately expand and show you images of the interior and exterior of the latest models.
If you tap on the phone icon, then you can call the 800 number to ask questions.
If you tap on the maintenance button, then you will go directly to the website to schedule an appointment.
If you click on the Google Maps button then you will immediately be able to see where you are with your GPS and where the nearest Toyota center is along with their phone number.
This user-friendly state-of-the-art application will be run on HTC, LG, Motorola, Samsung, Asus, Toshiba, Sony, and all the Android phones, tablets, pads, and computers.
The fact of the matter is that the majority of phones in the near future will be able to use this ALJ portal to access the 2011 database of products and maintenance services.
We would like to offer them our heart felt congratulations on this new Application, and we pray that their sales will rise exponentially as their sales force uses it as a portable showroom 24 hours a day seven days a week.
They can begin to e-mail and sms clients immediately with a designated web page URL kinconsortium.com/ALJ.apk, so that they may install the application and begin reviewing ALJ’s Toyota Fleet on their own respective android phones.
The aforementioned state-of-the-art applications have literally put the economy of Saudi Arabia on the cutting edge of technology.
It is just a matter of time before we build and customize the android applications for every industry in the region. The only question is who is next?
— Khalid I. Natto, khalid@kinconsortium.com, is Chairman & CEO of The KIN Consortium
"July 7th, 2011 Arab News Article: Restaurant industry — a fruitful business"
By KHALID I. NATTO
Published: Jul 7, 2011 00:12 Updated: Jul 7, 2011 00:28
This week we have decided to discuss the restaurant industry, simply because it’s one of the most consistently profitable sectors of the economy.
We at The KIN Consortium have researched a variety of sources and we found a report that was recently published in 2011 that was entitled, “NCB Saudi Economic Perspectives.”
The restaurant industry took a dramatic hit in 2009, and recovered somewhat in 2010.
According to the SAMA (Saudi Arabian Monetary Agency) and NCB forecasts, the restaurant industry should have fully recovered by the end of 2011.
Keep in mind that restaurants are one of the key sources of entertainment in the Kingdom.
We are blessed in the Kingdom because the markets are full of fruits, vegetables, and spices from all over the world.
It’s an absolute delight for both restaurant chefs and restaurant patrons.
If you select the right restaurants, you can literally experience the cuisine and ambiance of almost every culture on the planet.
There are literally elegant restaurants and fast food chains from almost every part of the world.
The only question is the long-term survival of each restaurant in a market that has a customer base with whimsical taste buds — also in a market that is saturated with a variety of competing theme restaurants.
Our base assumption is that the restaurant is a theater of sorts.
Just as in the theater, there is a transition of an idea from the mind of the author of the book, to the screenwriter, to the director, to the actors, to the audience, and finally to the word-of-mouth advertising that occurs when the audience describes the show to family and friends.
It is that transition of thought from one person to another that is the most amazing dynamic in the theater business, because it is the process of relaying the story that brings people back to the theater.
Now imagine the restaurant industry is identical to the theater business.
The restaurant owner is literally juggling a number of variables much like a film producer as he is constantly looking for investors and watching the consistency of the restaurant image at the same time.
Then there is the screenwriter, which would be played by the author of the menu or the restaurant chef.
The transition of an idea or a thought from the mind of the chef to the taste of a particular dish in the mouth’s and minds of the patrons is the epitome of art.
The combination of spices and recipes is a painstaking process that demands accuracy of measurement and timing.
Furthermore, one of the most important aspects of the cooking process is the consistency of quality, quantity and the presentation of each dish — which is how one builds a brand name or signature dish.
A film director or a restaurant general manager is burdened with the responsibility of the overall show.
That includes the other aspects of the presentation; for example, everything from the logo, the menu, the decorations, the costume and presentation of the staff, the actual food presentation, the website, the smartphone application, attention to detail in terms of cleanliness and lighting, and of course the availability of Wifi.
The various restaurant proprietors must consider that the patrons are paying for the overall restaurant experience.
The patrons dining experience is literally chasing the perfect ambiance, and its not strictly measuring the success of an event by the authenticity of the cuisine.
Finally, the actors in the theater would be comparable to the staff at the restaurant.
Training the staff in terms of how they greet the guests to how they prepare and serve the food is one of the most important phases of the show.
The staff must have delegated responsibilities that they perform with impeccable accuracy.
It’s absolutely crucial that they do not step out of character in the presence of the patrons.
That means they cannot eat, smoke, or joke in a casual manner in front of the guests.
Simply imagine you were at the theater watching Shakespeare and one of the actors on the stage decides to take a personal call on his smartphone.
The crowd would be both confused and perplexed at the inconsistency of the scene.
The restaurant is merely a stage and the patrons are there to eat and enjoy the ambiance.
Keep in mind that the restaurant experience is a fleeting moment in time, and rarely do the guests get to take something from the restaurant to remember the experience.
In the old days, people used to collect souvenirs like matchbooks with the logo on the packet, but in July of 2011 you find people taking pictures with their smart phones and uploading it to a variety of social networking sites.
It’s instantaneous advertising on social networking sites.
Some of the more astute restaurant owners are trying to use this state-of-the-art technology through the use of Android applications on smartphones.
They are offering the VIP customers a discount if they have the application on their phones.
These more elite restaurants design their Android buttons to include a menu, Google maps, the phone number of the restaurant, and even theme music.
Of course, the suitability of the technology will depends on the aura or ambiance of the particular restaurant.
Now that we have painted some broad brushstrokes regarding various facets of a successful restaurant, let’s take a moment to discuss the value of a good location.
The key is to position a restaurant in a setting that is suitable to its overall image.
Some may argue that the fundamentals of convenience of location and parking are crucial to the success of a restaurant, we would beg to differ on that point.
The convenience of a location in terms of proximity to an office complex or a shopping mall is important if the restaurant is designed for mass-scale food production.
However, if it’s a theme restaurant, then its exotic by definition and it should be separated from the crowd.
Consider the difference between elegant dining at a five-star hotel and casual dining at fast food chains at the eatery in the shopping mall.
The hotel restaurant has its own controlled theater, while the shopping mall eatery is more generic.
Try to compare your own stories about dining at the two different locations and you will find yourself describing the restaurant in vivid detail, while the eatery was a fleeting memory.
The importance of the issue of location should be considered as a relative factor since it depends on the overall show.
— Khalid I. Natto, khalid@kinconsortium.com, is Chairman & CEO of The KIN Consortium
"June 30th, 2011 Arab News Article: Evolution of the economy"
By KHALID I. NATTO
Published: Jun 29, 2011 23:05 Updated: Jun 29, 2011 23:05
In the media, they have been referring to Greece as if it were the Achilles’ heel of the European economy. If we analyze the growth of the Euro from a historical standpoint, it would be plain to see that they gained ground against the US dollar by using a strategy that involved adopting new countries into the European Union.
The fact of the matter is that the global financial crises have put a strain on the euphoric growth prospects of Europe.
When you take a closer look at the various Greek bankers, you will notice that they have invested and loaned money to the old Soviet Union. Apparently they were anticipating that the various eastern bloc economies would be adopted into the EU.
Greek foreign claims on CEE
Let’s take a closer look at Greece and Greek bankers for example. This recent Deutsche Bank report, produced by Marion Mühlberger on June 24, 2011, says:
“In recent weeks, contagion fears from Greece to Eastern Europe have resurfaced. There are three main contagion channels which could be looked at: First, contagion via reduced bank lending from Greek parent banks, second, contagion via reduced exports to Greece and third, contagion via foreign investors selling their portfolio equity and debt holdings given a general increase in risk aversion. The chart visualizes the first contagion channel, which is very relevant for Eastern Europe given the strong presence of Greek banks in South-Eastern Europe. The chart shows that after Cyprus, Bulgaria and Macedonia would suffer most from the potential withdrawal of Greek parent banks, as foreign claims by Greek (parent) banks account for 28 percent of GDP, in the case of Bulgaria. These foreign claims of Greek banks not only consist of cross-border lending of Greek banks to their subsidiaries but also domestic lending of those subsidiaries in the respective country.”
From that report it seems that Greek banks are lending to countries and industries that are not well renowned for their industrial strength.
It seems that they are exposed because they were under the impression that the expansion of the Euro into the eastern block, would be the catalyst that boosted the value of the investments.
The problem in June of 2011 is that the various candidate countries that are yet to be adopted by the EU are probably going to hurt the overall economy of the ECB as opposed to build the economy.
It’s high time for the European Union to consider a renaissance of industrialization with in its own borders.
They need to avoid making the same mistakes that were made in the US, simply because those who do not learn from the mistakes of history are doomed to repeat it.
Let’s stop and consider that economies have evolved from a hunter gatherer — to a farmer — to an industrialist — to a white collar service-oriented economy.
Then the service industry was literally supplanted by the Internet as we have all witnessed the cannibalization of newspapers, financial advisers, doctors, lawyers, advertisers, and the list goes on.
The fact is that economies around the globe have pushed industrialization East to Asia in a hope of capturing some cost cutting strategy.
The fact is that both America and Europe have been blindsided by the Internet economy, which has seriously diluted the service industry.
We have all heard the recent rhetoric of President Obama as he seems to be on the right track with regard to advocating industrialization.
The focus on Industry in his recent speeches seems to have struck a chord that resonates with the entire global community.
The simple truth is America and Europe cannot survive as a consumer oriented economy that is hooked on revolving credit.
They are never going to settle their debt issues based on sales taxes in their shopping malls and distribution outlets.
Therefore the re-industrialization of the evolved economies of Europe and America is the ideal self-sustaining strategy for those regions, specifically because of the potential for creating jobs.
As many of you know, we here at The KIN Consortium have been advocating boosting the manufacturing sector in Saudi Arabia in a number of articles.
The fact of the matter is that we were merely reinforcing the will of the Custodian of the Two Holy Mosques King Abdullah, who in his infinite wisdom, has systematically been building the infrastructure for both economic cities and industrial zones.
In our humble opinion, we believe that the development of the Kingdom into an industrialized nation is part of the future global trend.
The political rhetoric in the media seems to be about reducing imports and increasing exports, which will in turn make every nation endeavor to become a self-sustaining economy.
At the very least each nation will produce the staple goods and services that it needs for its economy.
This will serve as the ideal buffer zone in the event of chaos in neighboring countries.
Khalid I. Natto, khalid@kinconsortium.com, is Chairman & CEO of The KIN Consortium
"June 23rd, 2011 Arab News Article: Smartphones enhance efficiency"
Instead of discussing the financial markets, and the usual banter about corruption and manipulation. This week we have chosen to discuss how we at The KIN Consortium can do something proactive to vitalize the Saudi Economy. As many of you know our expertise is not limited to risk analysis and risk management in the financial markets. We also stand amongst the leading computer science engineers in terms of developing websites and developing applications on the new Google Android platforms. This week we actually launched two applications, and the downloads are literally in the thousands already. The technology is amazing and incredibly empowering to both consumers and retailers.
Freedom, mobility, and Internet connectivity are here at last on a bigger touch screen than the tiny iPhones. Stay tuned for the roll out of the 7 inch tablet smart phones from every major competitor in the business on an Android platform. We at The KIN Consortium plan to review each of these products as they become available in the marketplace, and we pledge to keep you informed about the strengths and weaknesses of each respective product and application. Each new application can be designed to enhance the efficiency of a variety of different business models. Imagine applications that are specifically designed for different industries like the hotel and tourism, the brokerage, and the medical industry just to name a few.
The first idea that came to mind was the Hotel and Tourism Industry. Imagine a tourist based in London can now attain a vivid picture of his tourism destination on google maps. They can read reviews and testimonials that are complete with videos, audio, PDF's , and constant communication. All this before they leave their homes in London. The days of multitasking with luggage, the family, asking directions, and falling into tourist traps are gone. In fact we have taken up the initiative in terms of developing a Google Android application this week for all the Hilton Hotel located in the Kingdom of Saudi Arabia and we called it the "Hilton Hotel Android Platform". Take a moment to imagine the icon on every smart phone. With a tap of the touch screen tourists can access all the information regarding hotel rates, directions, amenities, and they can call for reservations at the same time. The fact is that integrating the applications with specially designed links on Google maps has been an incredibly empowering tool. For instance, the tourist will never be lost in a strange land, as long as they are using the GPS function on the smart phone to know exactly where the hotel is located. Our minds are literally swimming with joy as we consider the seemingly endless opportunities.
The second idea that came to mind was the brokerage industry try to imagine using the new tablets to trade stocks, read research reports, newspapers, while calling your brokers at the same time. Multitasking at this level is currently available on the Samsung Galaxy Tab in the Kingdom of Saudi Arabia. The clients have the freedom of trading on the Tadawul from anywhere at anytime. They can program their stock alerts to notify them of specific news events or stock prices, and they can respond immediately. The panic of having to find a computer or an Internet connection is a thing of the past thanks to 3g.
The third idea we are looking at is the medical industry in terms of how a centrally controlled cloud computing solution can store all the files and radiology reports in one location. For instance the radiology department conducts the X ray, and immediately uploads it to the central computer, which then sends an alert to the Doctor. He can in turn look at the X ray and then forward it to his colleagues for a second opinion with a graceful stroke of his finger. He can get immediate feedback in a matter of seconds to assist in his diagnoses of the patients; thus, saving lives by accessing specialists from around the globe.
The future is going to be about enhancing efficiency through the transparency, open communication, and file sharing capabilities of the Internet and these multi-functional Android tablets. We envision a future where people are going to be documenting in video and audio with their new smart phones, as oppose to endless paper trails of documentation. The days of bureaucracies and corruption stifling the growth of businesses and economies are a thing of the past. The future is all about accurate metrics that allow upper management to set policies that can increase the profit margins, while maintaining a high level of quality control. These tablets are invaluable tools whether we are better informed tourists, trading stocks on a bigger screen, or saving lives at the hospital.
Khalid I Natto
Chairman & CEO
The KIN Consortium
Email: khalid@kinconsortium.com
"June 16th, 2011 Arab News Article: Inflation and market manipulation"
This week we witnessed a scene that accurately depicted market sentiment. All newspapers and media outlets had images of perfectly good-looking fruits and vegetables being cast into piles of garbage.
We are talking about the E-Coli scare that lead to hundreds of millions of losses in terms of European Agriculture products.
It seems that when the underlying asset is a commodity like a farm product, then the market is quick to devalue it.
Totally absent from the usual chorus of the media were the voices of controlling the market or soft landings.
The prices went directly to zero and the farm products were piled in heaps of garbage.
We at The KIN Consortium found this too be a refreshing change of pace.
While we of course offer our sympathy to the farmers who endured losses in Europe, we must confess that this was the first time that the dynamics of the market offered an air of Fair Market Value (FMV). For those of you loyal readers who have been following our discussion on Artificial Demand, we believe this is an ideal case study for natural versus artificial demand.
The High Frequency Traders (HFT) and their leverage are not real customers to commodity, currencies, or equities they are merely speculators.
However, if the European cucumber is traded on an exchange, then HFT could keep the prices up even as the actual products were rotting in a garbage heap.
Please don’t assume that commodities are not traded on exchanges.
We literally trade oranges, rough rice, corn, wheat, cattle, and a whole host of others.
Kindly refer to our recently published articles on the manipulation of wheat prices.
The question is why do currency and equity markets need a controlled soft landing, when cucumber prices are trading like a free market? For instance, let’s take the Japanese Yen and the Japanese crises as a case study.
The Yen has literally risen to an all time high despite a series of events that has ground their industries to a halt.
It should have tumbled to an all-time low in the midst of the chaos, much like the farm products did in the recent European E-coli scare.
As our frustration with the inequities of the markets begins to climb, we search for regulators or international organizations for some kind of cure.
We are sorry to report that the IMF is very busy with hackers, rape cases and hiring a new CEO.
The World Trade Organization has not been featured in the media for a very long time.
The various regulators are trying to enforce Basel III, Dodd Frank Bill, and the new higher margin requirement for commodities.
In this air of uncertainty, we anticipate a great deal of volatility.
We are using tempered enthusiasm when we recommend gold to our clients, because of the recent rise in the margin requirement.
However, it does seem to be the best likely candidate to win in this environment of uncertainty.
The second asset that I would recommend is oil, simply because unless the doors of revolving credit close to industry around the world, then we are certain they are all going to need energy.
In fact, we stated that the inflationary pressure of oil on the cost of transportation would likely lead to new manufacturing facilities closer to the point of sale, which means local jobs closer to the final consumers.
Both consumers and manufacturers demand that the doors of revolving credit must stay open.
That is the silent code of all the charlatans, businessmen, bankers, and politicians.
Keep the liquidity flowing in an environment of fear, perpetual defaults, and systemic failure. Everybody gets paid and we will call it “Kicking the can down the road.”
However, if its food like cucumbers then they devalue the product and realize the losses.
Actually, if we think about it they are probably going to subsidize the agriculture industry even further.
Austerity measures are probably going to be either ignored or delayed.
Let’s take this moment in time and simply examine the initial reaction of the markets in terms of European Agriculture.
This is the first honest market reaction that we have witnessed in a very long time.
We at the KIN Consortium anticipate that government farm subsidies are going to increase in Europe and the US, along with the rest of the world such as the growing farm subsidy program in the Kingdom converting deserts into farms.
The trend is literally government subsidization on all fronts as each respective country attempts to build self sustaining economies in a world that is complaining about inflation and market manipulation.
Let’s cite a few examples like the Japanese government owns Japanese bonds and I assume it rallies its own currency, despite the G7 efforts at bringing down the Yen.
Keep in mind that Greece just got its rating reduced again to CCC by Standard & Poors.
Individual states in America have risked municipal defaults and a loss of international credibility, while praying for the federal government to bail out the states.
The federal government will hit the limit to their own respective credit ceilings and risk further degradation by Moody’s, S&P, and Fitch.
Finally, the US federal reserve seems to be standing on principle as they have refused to prop up federal bonds with artificial demand with the ever illusive Quantitaive Easing 3.
All I can see in this market environment is oil and gold at this moment, along with of course the use of risk management and option strategies.
It is absolutely imperative that all investors utilize appropriate hedging strategies in all of their investments.
Kindly speak to your investment advisers prior to making any investment decisions, so that they might determine your level of suitability for the investments.
— — Khalid I. Natto, khalid@kinconsortium.com, is Chairman & CEO of The KIN Consortium
"June 9th, 2011 Arab News Article: Research reports and credibility"
This week we would like to discuss the degradation of the quality of research reports over the last 16 years. It seems the markets have changed to the degree that investors and financial market commentators scoff with disgust at analysts and their estimates.
Furthermore, the presence of High Frequency Traders (HFT) makes the market react in an even more irrational manner, which dilutes the credibility of the markets even further.
We have devised a solution that we believe addresses the concerns of investors, and allows for the analysts to do a more comprehensive job.
Simply do away with the buy, sell or hold recommendation and allow investors to make their own decision.
The new standard of research reports should include both the positive and negative scenarios of any given company.
The details would describe both the near term and long term milestones of the company, and the statistical probability of successfully completing each milestone.
In essence, the reports will include all the different risks from the macro-economic, micro-economic, industry, and company specific perspectives.
All the usual details will be discussed on each company including cashflow, research and development, cost of goods sold, administration expenses, etc.
The idea is to curb the propaganda and agenda oriented research with statistical analysis of different scenarios of risk, and then let the readers and investors decide whether to invest.
In the past, there were two kinds of research reports, and they were commonly referred to as buy side and sell side research. This meant one set of reports was for the bank and the other was for the public.
In essence, the bank or brokerage firms held assets until they believed they were no longer going to ascend in value, then they would build a secondary market for the assets by continuing to sell their old euphoric research to the public.
The pipeline of timely research started with venture capitalists (VC), investment bankers (IB), and brokerage analysts.
The timely information was always in the hands of the first investors, which were usually the original risk takers.
The birth of the Internet information age changed the dynamics of the flow of information.
At first they promised the democratization of the markets with the Freedom of Information Act.
On one side the media and retail investors devoured the new data on platforms like Edgars Online and Yahoo finance.
The hope was that the availability of these portals of data would lead to a more educated type of investor, who could somehow determine their own level of risk.
The model does not work, which is evidenced by the low volume or trades on the various exchanges.
Both the investors and the analysts seem to have settled for a flood of data points.
Entirely too much information is available on the web in the form of blogs, articles, research reports, and social networking sites.
We have gone from Chartered Financial Analysts, MBA Graduates, & Series 7 licenses all the way over to anybody with an opinion can publish their view on the web.
The truly scary part is that HFT traders have programmed their computers to scan the web for tweets on Twitter, and searches on Google.
It’s no longer an issue of quality or accuracy of information because now it’s simply down to quantifying the sheer volume of the new data points.
Another sobering fact is that analysts might not be able to publish detailed reports, because of the fear of losing investment banking commissions from the companies in their universe of coverage.
So the pressure to produce euphoric research reports can come from internal management at the expense of the overall credibility of the analyst.
The investment banking commissions were the priority in the late 1990s leading to the repeal of the Glass Steagall Act. However, even these fees were not safe from the trend of open access on the Internet.
From the perspective of the various companies they found that they could suddenly find pools of investors with a great deal more ease.
In fact the process of listing on the exchanges became commonly available on the web.
Keep in mind that most of the exchanges that were stout pseudo-regulators in the past became publicly traded companies in their own right, which means they are driven by the same maddening hunger for earnings as every other company.
They are literally competing with each other for the listings of IPOs, and it seems that they are not scrutinizing the accounting.
The ensuing problem was the deterioration of the credibility of the information.
The truly sad issue is that the current standard of “buyer beware” has been adopted as an industry standard around the world. The research reports are truly lacking the credibility of the past.
The caveats at the end of the research report literally disavow the brokerage house of any responsibilities.
The Senate in the US has literally designed new laws called the Volcker Rule that forbids the banks from proprietary trading. This was done in an attempt at trying to surgically remove the profit incentive for publishing bad research reports.
Time will tell if this latest legislated solution will derive greater transparency and credibility from the various analysts and investment bankers.
Meanwhile, we would like to reiterate our proposal of removing all recommendations from research reports.
Merely state the facts, possible risks, and the forecasted milestones along with a statistical estimate of probability of the success of each milestone.
— Khalid I. Natto, khalid@kinconsortium.com, is chairman & CEO of The KIN Consortium
"June 2nd, 2011 Arab News Article: Golden opportunities"
Obviously, the recent announcements in the Saudi Arabian Monetary Agency (SAMA) Development report are important steps to revitalize the economy of the Kingdom.
They seem to have touched on a number of key issues like minimum wage, the health care industry, transparency, anti-corruption campaigns, and the list goes on as you can see below.
According to the SAMA Development Report, here are some of the Economic Resolutions that were passed by the Council of Ministers during the first quarter of the year ending with May of 2011.
“— Approval of the Saudi Institute of Internal Auditors’ charter (28/2/2011).
— Approval of the regulation of Real-Estate ownership by GCC citizens in GCC states for residential and investment purpose (7/3/2011).
— Approval of the regulatory arrangement of bottled water and ice factories, provided that Saudi Food and Drug Authority shall undertake all regulatory, executive and supervisor tasks, issue technical licenses for these factories, set up and monitor standard specifications of drinking water, set up sound bases for food and drug manufacturing as well as health requirements that must be met in water utilities (14/3/2011).
A Royal order, issued on 18/3/2011, includes the following points:
— Disbursement of a two-month salary to all government civil and military personnel.
— Disbursement of SR2,000 per month to job-seekers at the public and private sectors.
— Setting the minimum limit of salaries of all categories of Saudi workers at SR3,000 per month.
— Approval of building 500,000 residential units in all regions of the Kingdom and appropriating a total amount of SR250 billion for this project which will be implemented under the supervision of the General Housing Authority.
— Raising the amount of the maximum limit of the loan granted by Real Estate Development Fund from SR300,000 to SR500,000.
— Establishing the National Anti-Corruption Authority.
— Supporting the Ministry of Health with SR16 billion for the expansion of several hospitals and health centers.
— Raising the maximum limit of the private hospitals financing program run by the Ministry of Finance from SR50 million to SR200 million.
— Creating 60,000 military jobs for the Ministry of Interior.
— Establishing a branch for the General Presidency of Scholarly Research and Ifta in all regions of the Kingdom, creating 300 job opportunities for this purpose and allocating SR200 million to cover the branches’ needs.
— Establishing a complex called Saudi Fiqh (jurisprudence) Complex that will be a scholarly forum where jurisprudence issues can be discussed under the supervision of the Council of Senior Scholars.
— Allocating SR500 million for renovating mosques throughout the Kingdom.
— Allocating SR200 million for supporting the Holy Qur’an Memorization Associations in the Kingdom, under the supervision of the Ministry of Islamic Affairs.
— Allocating SR300 million for supporting the offices of Call and Guidance of the Ministry of Islamic Affairs, Endowments, Dawa and Guidance.
— Supporting the General Presidency for the Promotion of Virtue and Prevention of Vice with SR200 million to complete the construction of its premises in different regions of the Kingdom.
— Creating 500 jobs for the Ministry of Commerce and Industry to support its control efforts, and hasten application of deterrent penalties on price manipulators and slander them, whoever the offender.
— Raising the proportion of Saudization in the private sector to create job opportunities for Saudi citizens. The Minister of Commerce and Industry and the Minister of Labor are to meet with businessmen to emphasize the determination of the State to effectively accelerate the Saudization of jobs. The Labor Ministry is to report quarterly on rates of Saudization achieved and the action taken by the Ministry in creating job opportunities for nationals in the private sector.”
While these are all prudent and important strategic investments, we simply believe that we are missing a golden opportunity.
The combination of the Japan crises, European sovereign debt crises and the municipal debt crises in America have created an environment that makes the Kingdom the most attractive location for manufacturing and development.
We at The KIN Consortium were hoping for a more concerted effort to provide financing for the industrialization efforts.
From our perspective, the chaos in the financial markets has opened the doors of opportunity by highlighting the weaknesses of a number of international manufacturers.
If we could seize the opportunity by creating a fund that is oriented toward the acquisition of the foreign manufacturers and the relocating of the facilities here in the region, then we believe we could ramp up the growth of the industrialization process.
Whether its foreign investors, government investors, local investors, or international financiers we need to continue with the positive energy.
We have recently read about the IFC International Finance Corporation announcing its entrance into the Kingdom, along with a number of other banks that are currently hiring and training Saudi employees.
It seems the international financiers are trying to diversify their businesses by growing their Islamic Banking portfolios.
While the momentum of the growth story is building, we are literally publishing a series of articles trying to show the investment community that it’s our time to shine.
We need to seize the day.
— Khalid I. Natto, khalid@kinconsortium.com, is chairman & CEO of The KIN Consortium
"May 26th, 2011 Arab News Article: Back to the basics of business"
We spent the week in vibrant debates with a series of financial market experts in London. We talked about a number of issues including the status quo of the financial industry in the GCC region.
The executive search team asked open-ended questions in an attempt to pre-qualify the various candidates for senior level positions at brand name international banks in the region.
I patiently answered their questions for two and a half hours before it dawned on me that these guys are totally unaware of the reality on the ground.
Then I started to correct them by highlighting the different aspects of the economy along with the strengths and weaknesses of the various international banks in the region.
Let’s start with the reality of the situation in Saudi Arabia, which is that it is literally going through its industrial age.
That means the government is stimulating the local economy by building infrastructure projects like transportation, water, utilities and the like.
These investments can be compared to the stimulus plans in the US, Japan or China.
The fact of the matter is that the liquidity drain of the international banks, individual states in America and countries in Europe are caused by claims of a perpetual imminent default as they beg for an unlimited amount of revolving credit.
On the other hand, the GCC and Asia are focused on asset-backed loans, Islamic financing and government spending.
The situation is that the West is at a liberal extreme banking standard while the East is at a conservative extreme banking standard.
Now that we have defined the trends in the global markets, let’s revisit the position of the international banks in the GCC region.
Oligopoly of banks
The dynamics of pricing corporate clients at local banks involves evaluating the overall revenue that the bank generates from the clients.
That means each bank adds up revenue from loans, checking accounts, fees from letters of credit, fees from letters of guarantee, brokerage and investment banking businesses also.
Now as a new asset manager in the Kingdom, you have to stop and consider that while you may have access to portfolio managers, initial public offerings, Swiss secrecy, and all the other allures.
Any market share that you might win from the local commercial banks and their affiliates will end up costing your client higher fees.
The competition will raise prices if they notice that their asset management or brokerage business is migrating away from them.
As a result, the new foreign banks and brokerage firms need to offer all the products and services that the commercial banks offer. That way they can break the oligopoly by supporting the other business needs of the client.
Private wealth management
The wild fluctuations in the value of the monthly account statements have brought Saudi investors to the point of asking detailed questions about their international investment portfolios.
Their discomfort has spurred the growth for the demand of educational curriculum that involves knowing and understanding the risks of the growing Islamic banking products and conventional financial products.
In our humble opinion, we need to go back to the basics of banking and brokerage by building the educational platforms within the investment community.
We need to properly fund the research and sales departments, so that they might raise the suitability levels of the investors with educational programs.
In our interpretation of the “Know your customer law,” only accredited investors should have access to the financial markets.
At this point, we would like to applaud the efforts of NCB Capital and Jawdat Al Halabi for their efforts to build an educational platform with Injaz called ‘NCBC Financial Literacy Program’.
This is the kind of leadership that the local market needs in order to build the foundation of an investment community that shares the responsibility of their own investments.
Investment banking
At this point, we are pleased to see the recent hiring spree at Deutsche Bank.
It is surprising to me and my readers that in the midst of an ambiance of billion dollar contracts being doled out by various ministries, that somehow the rest of the various brand name international investment bankers are not ready to underwrite the various opportunities.
They seem to be understaffed at the moment; however, we believe that they will follow the initiatives of both NCB Capital and Deutsche Bank as they endeavor to develop the educational platforms, the research reports, and the products and services to the highest possible standards of excellence.
HSBC is yet another bank that has been an active participant in the underwriting of both conventional and Islamic debts on the London Stock Exchange.
From an economic standpoint, the cash flow that HSBC brings into the economy is rewarded with more asset management business from its respective client bases.
We at The KIN Consortium believe that as they continue to uncover the needs of the local market, they will continue to design products and services, which will in turn vitalize the local economy.
That means we are going to see capital inflows to under writings here in the GCC region, as all the international competitors attempt to win a market share.
I am laying out the articles that we published with the dates, so that you may be able to see how our forecasts have beaten the rest of the world. While forecasting the market dynamics is a formidable task, we are focussing on an even greater problem. In the April 28th Article we discussed the inefficiency of the financial markets using the Japanese Crises as a case study. This is the proof that back testing and pre-programmed trading is ridiculous.
In a free market economy where price discovery is determined by supply and demand, the market should react to negative macro news to an extreme point. The Japanese Crises should have brought all the related equity prices down dramatically, until the individual companies proved that they could mitigate the risks. What happened is literally market manipulation in terms of the Japanese Yen, Japanese equities, and US equities that rely on either sales to Japan or consumption from Japan. It seems that they are controlling the tempo of the trades for some kind of controlled soft landing. In our view that is absolutely corrupting the free market.
"The fact of the matter is that high frequency traders (HFT) are pre-programmed machines that rely on both historical data and they monitor specific variables (for example: economic indicators) when they buy and sell. Think of them like watching the news on TV for an extended period of time. After a while the reporters are saying the same thing over and over again, its called a "News Cycle" in the media industry. The only thing that breaks the monotony and repetition is a "Breaking News" story, which suddenly introduces new reporters and graphics. The problem with pre-programmed high frequency traders is that its difficult to stop them from going through their usual routine. The catastrophe in Japan and the subsequent impact on the various industries and economies need to be programmed into the computers. This is too much centralized power to be referred to as capitalism or free markets. The sheer volume of leveraged computers can manipulate the markets, without any regard for fundamentals or real time events."
At any given moment, countries have three choices of growth, bankruptcy, or refinancing debt.
The alternatives are simply that things can go up, they can go down, or they can stay the same.
In the Kingdom of Saudi Arabia, we have witnessed a growing trend that seems to follow the same game plan of a number of countries and states.
The game plan is to build commercial and residential locations that will consume utilities.
The idea is then to market the locations in a way where a huge number of people would come to rent and pay the utility bills.
It’s an excellent plan at first glance because it is ideal for all sorts of investors ranging from both Islamic to conventional forms of finance.
Let’s take a moment to define and analyze the strategy in a variety of locations around the globe.
In Saudi Arabia, they are building infrastructure for new and existing cities.
Custodian of the Two Holy Mosques King Abdullah stood tall and wrote royal decrees to ministries that subsequently began to dole out cash for infrastructure projects around the Kingdom.
Let’s go over a few of the recent contracts that were awarded by Saudi Aramco, Saudi Rail, Saudi Maaden, Al-Mabani, and the list goes on.
The money has begun to flow to the industrial sector, transportation sector, oil and gas sector, along with infrastructure projects that are crucial in terms of preventing floods in the metropolitan cities.
While this form of direct investment is growing in popularity in the form of stimulus plans around the world, it is a only a small part of the overall end to end solution.
The vision and brilliance of the custodian of the two holy mosques seems to have no bounds.
The outstanding issue of tenants and customers are going to be an issue in the next phase of the plan, so we recently witnessed the GCC extend invitations to both Morocco and Jordan to join their ranks.
The King has literally turned the tide of depression and pessimism in the MENA region, and brought about an international celebration of Islamic ideals. It seems that hope and generosity have reclaimed their rightful place in the grand scheme of things in the Middle East.
The business model is diversified from oil revenue to Islamic tourism revenue to the ongoing industrialization programs.
The utility bills will be paid from the growth of all three of these revenue models.
Dubai went with the financial and tourism model as they built skyscrapers, indoor snow skiing, palm-shaped islands, giant aquariums, movie theaters, media cities, Internet cities and the list goes on.
They built world record holding architectural marvels to capture the imagination of tourists from all around the globe.
They are currently trying to adapt to the different tourist markets by providing menus at restaurants in English, Arabic, and Russian.
It is a totally dynamic metropolitan city that’s doing its level best to pay the bills.
In hindsight, it’s clear to see that they over anticipated the flow of tourists, as they obviously built too many buildings.
The fact is that as the flow of rental income declines, so does the flow of bond installment payments. At the height of the crises, investors experienced a series of defaults that lead to consolidation and a number of government acquisitions.
The fundamental problem with the Dubai Business model is that it needs to diversify its income stream away from tourism, because that tends to depend on a flourishing global economy full of disposable income.
Dubai needs to re-engineer its game plan to include industries that have a steady income stream.
The financial industry and its various tenants disappeared with the last global financial crises, and the tourism dollars are currently coming from Russians and the rest of the eastern block.
As a result the question remains, who is going to pay the bills in Dubai?
New York is a city that resides in a State that is suffering from overwhelming debt.
They have the same three choices of growth, bankruptcy, or refinancing. In terms of the growth prospects of New York, we believe they look dim at best.
On one side the combination of fear and hate-mongers have driven fortune 500 businesses in New York to set up redundancy computers and offices in places like Connecticut, which reduces the number of tenants that pay utility bills in the State.
The situation is even worse as the decade-old hate-mongering campaign has created a trend of insulting and abusing tourists, which will lead to yet another wave of bankruptcies on a corporate and municipal level.
In the news recently there were stories about intolerant behavior that drove away even more tourist income.
The question remains how is NY going to pay its huge municipal debts? Is the current hate mongering business model going to lead to a new series of downgrades from the rating agencies? Are they seriously going to sell the iconic NYSE New York Stock Exchange? Are they going to destroy the very fabric of the city to the degree that they are going to remove the Emma Lazarus’ Famous Poem on the statue of liberty, “Give me your tired, your poor, your huddled masses yearning to breathe free, the wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me, I lift my lamp beside the golden door!" Isn't that their very business model?
Each of the aforementioned locations has its own allure and its own identity.
While some of them are guarding their reputation and growing their business models, others seem to be stuck in a spiraling deflation hope.
The key is to stay consistent with their regional marketing campaign and their respective revenue generating game plan.
— Khalid I. Natto, khalid@kinconsortium.com, is Chairman & CEO of The KIN Consortium.
"May 12th, 2011 Arab News Article: Controlling market trends "
Assume that the burgeoning debt brought down the dollar, and it brought about the rise of commodities linked to the dollar.
The fact is the rise of commodities recently hit new highs in silver, gold, cotton, and a whole host of others.
In fact it impacted currencies dramatically, which is evidenced by the sky-rocketing Australian dollar.
Everybody is scrambling to control the markets including the rating agencies with their recent downgrades from S&P on the US Credit Rating.
This new trend brought about a series of changes in the position of the Federal Reserve.
They want to end Quantitative Easing 2, which in essence is an end to the US Government buying its own debt because nobody else wants it.
The Federal Reserve wants to stop acting like the Japan model because it is being ridiculed for self-financing the US Government.
Anyway all this growing debt brought down the dollar, which raised currencies and commodities.
Leveraged computerized trading compounded the volatility of currencies and commodities even further.
In response to the aforementioned rise in inflation, the regulators decided to raise the margin requirements in order to curb the volatility.
Suddenly commodity prices began to tumble as the traders could not use their usual margin loan facilities.
The fact is that the more the selling momentum picked up, the worse it became for the commodities.
At this point, we are literally staring right in the face of the solution to the problem of the inequity found in stock market valuations.
The way to cut the volatility of the US Equities market is to cut back on the leverage available for High Frequency Traders (HFT).
They are currently using a minimum of 40 times leverage, which means if you have $1 million then you play with $40 million all day.
We at The KIN Consortium believe that reducing the amount of leverage will initially bring about a correction in the market, much like the correction in the commodities space that we are witnessing today.
Suddenly the valuations of companies will be based on fundamentals, as opposed to rampant speculation for pennies.
This will then lead to companies and analysts lobbying investors for their belief in the story lines of their respective companies, which is better than the arrogance of merely programming numbers into a computerized leverage machine, and saying, “Who cares what real investors believe?”
Once we have eliminated the leverage that creates artificial demand, then we can assume that the prices of the commodities are real market demand.
At that point natural market forces will lead to an alternative way of dealing with rising commodity prices.
Simply by allowing the market to react to the rising prices by increasing the amount of supply of the various commodities or change the location of the manufacturing facilities.
For example, the impact of rising oil costs will naturally impact the cost of transportation of goods.
These rising costs will match or exceed the value proposition found in the cheap Asian labor costs argument.
If you assume importing from Japan will cost more due to the rising cost of transportation, then let’s produce the products closer to the point of sale.
The new local manufacturing plant will hire local employees, which will in turn vitalize the economy.
Suddenly we have resolved the outstanding issues of unemployment and income taxes.
Let’s reiterate the conclusion by saying that rising oil costs leads to a more competitive playing field for manufacturing goods closer to the point of sale.
A live example of this specific market dynamic can be seen today as companies are scrambling to find alternatives to Japanese imports due to the rising YEN and the ongoing Crises in Japan.
The costs of rising Japanese products has companies like Apple Computer (AAPL) looking for alternative suppliers of components in May of 2011.
In the case of commodities like corn and wheat prices escalating due to the weak dollar, we recommend increasing the supply of the affected commodities.
The logical course is to consider solutions like converting deserts into farms and greenhouses.
Increasing the supply of farm products will offset the cost of rising food prices.
The fact of the matter is that Saudi Arabia has been creating oxygen, along with fruits and vegetables out of farms that were converted from deserts.
Controlling market trends through margin requirements, and allowing market forces to create local sources for goods are only two solutions that we recommend here at The KIN Consortium.
The key is to allow for the principles of supply and demand economics to work in a free market environment.
The opportunities will present themselves in the market, without government meddling in the form of G7 summits or other centralized attempts of control.
— Khalid I. Natto, khalid@kinconsortium.com, is chairman & CEO of The KIN Consortium.
"May 5th, 2011 Arab News Article: Financial Solutions available in the KSA"
http://www.arabnews.com/node/376543
In the past we have written a number of articles about the growth of the KSA, and we have discussed certain hurdles that are hindering the growth of the economy. The topic for this week is about the tools available in the financial industry in the Kingdom. We have recently met with a CFO from Poland, who works for a prominent Saudi Family. He was new to the Kingdom, and he had very little knowledge about the financial tools that are available. In fact he was extremely frustrated with the fact that his balance sheet was literally leveraged 8 times. The company made sales to government ministries that are obviously slow to pay due to their own bureaucratic hurdles. The foreign CFO seemed to be brimming with sarcasm and frustration as he lashed out with disparaging remarks about being paid in, and I quote "Camels".
The primary problem that CFO's Chief Financial Officers are faced with is the management of their cash flows. The various importers are competing for bids at the various Ministries in an attempt to win multi billion dollar contracts. This situation applies to everything from the sales of school buses to the Ministry of Education or computer servers to the Ministry of Health. We at the KIN Consortium have been approached by Saudi Importer's that came to us requesting financial solutions, because the delays of the Ministries payments are about to bankrupt the local importers. So we went into our financial tool box, and called a number of Senior Bankers in the Kingdom. The solution is called, "Acknowledgement of Assignment of Contract Proceeds", and its available at almost all the local commercial banks.
The documentation consists of approximately three documents that need to be signed by the ministry, the Saudi importer, and the local bank. Once the products are delivered to the Ministry, the banks pay the Saudi Importer, and the bank subsequently waits on the Ministry to pay them. Of course the bank charges a fee for waiting on the bureaucratic ministry to make its final payment; however, this solution removes the problem of huge account receivables on the balance sheet of the Saudi Importer. In fact with this solution the Saudi Importers can continue to vitalize the economy by doing business as usual, while having the powerful local banks carry the risk of waiting for ministerial payouts. The next question was about the size of the risk to the banks. What if the amount exceeds the risk tolerance of any individual bank; for example, if the contract is worth hundreds of billions of dollars? The answer is merely a syndication of the outstanding amount amongst a number of different banks, in order to spread the risk accordingly.
So now the foreign CFO has the solution that is obvious to most Saudi CFO's. The only problem that I can see at this point is, why are we hiring foreigners? The Saudi solution is available in a cost effective manner at the local Saudi banks, and most Saudi CFO's are aware of the solution. I suppose the Polish CFO might be excused for his rude remarks about payment in camels, and the disgusting remarks about alcohol, since he is ignorant and new to the region. What I can't excuse is the sheer size of his paycheck. Why are they paying this inept, uneducated, and rude man millions of dollars? We at the KIN Consortium solved the problem with a few hours of research and phone calls. I must confess that the situation truly baffles the mind. To compound the issue even further, the Polish CFO denied that he requested the information, as he attempted to take the credit for our research. Naturally we at The KIN Consortium followed our company's standard operating procedure by emailing him a recording of our conversation, as evidence of the verbal contract. The fact of the matter is that foreigners should not assume that all Saudis' are uneducated businessman that can be dismissed with a disparaging remark about camels. Some of us Saudi businessmen have a better education, and international banking experience that can easily surpass that of the foreign employees. This story is factually true and it supports the case for the Saudiazation of the work force, as per the wishes of the Government of Saudi Arabia. The Sheikh of the local company has yet to respond to us for a comment on this outstanding issue.
We in the KSA have certain cultural sensitivities much like every other nation. When a foreigner comes to visit or work in a country they should attempt to immerse themselves in the traditional culture and values. The experience can only enrich them as they begin to understand the intricate aspects of the society. These fundamentals are the basis of the valuation models of the society. For instance, the Japanese have a word that they use for foreigners that generally lack the respect for their culture. The word "Gaijin" is a word meaning "non-Japanese", "barbarian", or "alien". They tend to use this term to refer to people who lack the cultural sensitivity or understanding of certain traditions like the tea ceremony, not wearing shoes in certain areas, etc. I can only implore certain foreigners to refrain from diluting or insulting our cultural values by showing an appropriate amount of respect and decorum, if they plan on staying or working in the region.
Khalid I Natto
Chairman & CEO
The KIN Consortium
Email: khalid@kinconsortium.com
"May 4th, 2011 CNN Article: New Flash Crash"
Apple crashed for a split second at 10:51 AM. We reached out to investors, students, SEC, and the media to get it corrected. Reuters published later that the incident was corrected at the BATS exchange.
By KHALID I. NATTO
Published: Apr 28, 2011 00:29 Updated: Apr 28, 2011 00:29
THE anniversary of the May 6th “Flash Crash” is coming up soon. We at The KIN Consortium are excited to hear about the changes in the markets and exchanges since that day of devastating losses. The free markets stood back in awe as companies suddenly traded at or near zero dollars per share.
It all happened in a matter of seconds, but the lasting ramifications is evidenced by the ruined confidence in the market place in terms of real human investors. The culprit was a high frequency trading tactic called, “Quote Stuffing,” which occurs when a trader places a bid of zero while placing an asking price of a 1,000,000. The idea behind this tactic was to slow down the extremely fast leveraged computers that were buying and selling faster than the human traders could place the order in the markets. On that horrible day the various traders overwhelmed the system with quote stuffing orders, until the stock prices fell too zero. The market reaction was full of shocked reporters, investors, and company owners. The exchanges and the various regulators went to work spinning up new rules that would surely prevent such a calamity from happening again. I think they missed the point entirely.
The fact of the matter is that high frequency traders (HFT) are pre-programmed machines that rely on both historical data and they monitor specific variables (for example: economic indicators) when they buy and sell. Think of them like watching the news on TV for an extended period of time. After a while the reporters are saying the same thing over and over again, its called a “News Cycle” in the media industry. The only thing that breaks the monotony and repetition is a “Breaking News” story, which suddenly introduces new reporters and graphics. The problem with pre-programmed high frequency traders is that its difficult to stop them from going through their usual routine. The catastrophe in Japan and the subsequent impact on the various industries and economies need to be programmed into the computers. This is too much centralized power to be referred to as capitalism or free markets. The sheer volume of leveraged computers can manipulate the markets, without any regard for fundamentals or real time events.
Lets take a close look at a few examples from last weeks news such as the two Standard & Poors downgrades, and the Apple Computer results.
1. Standard & Poors downgraded Fannie Mae and Freddie Mac on Friday April 22nd, 2011 which was a holiday.
2. Standard & Poors downgraded The US Treasury with a “Negative Outlook” April 18th, 2011
3. Apple computer announced earnings April 20th, 2011 saying they did not have enough components to meet market demand for the iPad2.
The Quants and the media need to stop downplaying or ignoring these specific metrics. The pricing of the US Dollar, AAPL Apple Computer, Fannie Mae, & Freddie Mac must be set by the free markets. The real demand and the real supply of the aforementioned items must be the driving forces that determine Fair Market Value (FMV).
AAPL Apple computer, which seems to be ignoring real time events around the world, expounded upon their extraordinary performance in the past, while they sheepishly dodged questions about the impact of the Japanese crises on their future sales and production abilities. The world of reporters, analysts, and portfolio managers suddenly lost all their skepticism regarding the impact of Japan. They all started to act as if they were brain washed by the conference call, suddenly the stock took off as if the news cycle was suddenly synchronized with the leveraged program traders. They would literally state that there was not enough supply to create new iPad 2 tablets, and the stock took off anyway! It’s an insult to all rational investors to watch them manipulate the media and the markets with their hype. Please consider that if we had no leveraged computer programs, then the Apple’s investor relations department would have to produce a story line that would have to be logical and believable. They would have to answer the questions of real human investors in fear of being shorted out of business. Instead they act like the market is their own personal video game. They know that computer engineers are programming the markets in computer algorithms and code thats primarily found in computer languages like Matlab, Visual Basic, Java, and the like. They literally have no background in finance or economics, yet they refer to themselves with titles that allude to mathematical accuracy and precision like “Quants.” In fact a true skeptic might have to believe that the reason why all the high tech companies have all the cash on their balance sheets is because they are the ones manipulating the markets, while Goldman Sachs takes all the blame. I would like to see an investigation into the investment arm of the technology companies.
The truly frustrating part of this discussion is the expansion of the HFT programs into the commodities arena. They are literally playing with the prices of food as you can see from the charts. We should use this “Flash Crash” anniversary as an opportunity to analyze the merit of this artificial demand system. The key is to understand that the volatility in the cost of food and agriculture will impact people all around the world. While some governments like both the US and the Saudi Arabia have ongoing farm subsidy programs that buffer the normal seasonal fluctuations in commodity prices that would apply to both droughts and floods that occur in a natural way. The question at hand is how are the governments of the world going to cope with the volatility of commodity prices that is fueled with high frequency traders and market manipulators? In this author’s humble opinion we need to dismantle the current leveraged system and reinstate the rules and regulations that reinforce textbook definitions of supply and demand.
— Khalid I. Natto Chairman & CEO The KIN Consortium Email: khalid@kinconsortium.com
By KHALID I NATTO
Published: Apr 20, 2011 19:35 Updated: Apr 20, 2011 19:35
We apparently have our finger on the pulse of international financial markets. On December 16, 2010, we published an article discussing alternatives to debts and equities — like oil and gold.
The fact is that various financial market analysts are confirming that view in the midst of April 2011.
Our thesis for the commodities recommendation was based on the burgeoning debt and the rising risk of bankruptcy among the various debt insurers.
The forecast for sovereign and corporate debt doom and gloom was ratified by Standard & Poors issuing a negative outlook on the credit rating of the US.
The markets swooned from its recent highs with an intra-day retreat of over two percent.
The Efficient Market Hypothesis (EMH) is the principle that’s holding the feet of the traders to the fire of Fair Market Value (FMV), because the news is full of pending doom in the earnings reports and conference calls.
In an attempt to guard our perfect track record in terms of forecasting market trends, we at The KIN Consortium recently published an article discussing the impact of the post-quake crisis in Japan on various earnings reports.
We found that a number of earnings reports are referring to Japan as their Achilles’ heel.
One recent example was a Texas Instruments conference call, which brought out the uncertainty and fear about their manufacturing plants in Japan.
We are obviously tuning into each of these reports, listening to systemic problems in each of various business models.
We can see that there are two ways to look at the impact of Japan’s post-quake crisis.
The first way is from the production perspective, while the second is from a consumption perspective.
In terms of production, the Japanese are vulnerable to both the rising yen and the lack of fully functioning manufacturing facilities.
The scarcity of Japanese products will raise the prices of those goods that are produced in this type of market environment.
Subsequently, the rising cost of goods sold at the final assembly plants in the US will negatively impact financial markets.
The second way that international markets can be negatively impacted by the Japan crisis is the lack of consumption from the Japanese economy.
The stories that are unfolding in the news, reek of weakness and uncertainty in their company guidance due to the situation in Japan.
In fact, various media outlets began to discuss Chernobyl as an ongoing concern regarding radiation in Russia, while Japan’s nuclear scientists are trying to calm the world with solutions that may take six to nine months.
The question related to Japanese consumption of US goods and services will depend on how the story unfolds.
Everything from tourism to luxury goods to high-tech solutions are qualified as questionable sectors in the Japanese economy.
As a portfolio manager, we were trained to review the markets in two ways.
The first method is called bottom-up and the second method is called top-down.
Bottom-up is merely a fundamental study of an industry or economy that focuses on individual companies, while top-down is more of a macro view of individual sectors of the economy.
Let’s take this opportunity to build our thesis on the status quo of the financial markets using both methods.
From a top down perspective the sectors that will most dramatically suffer as a result of this crises are technology, auto manufacturing, and luxury good items.
On the other hand, bottom-up analysis will involve quantifying the impact on each individual company, which will involve gathering the data that is being announced as we write this very article.
We are still in the midst of the earnings reports season and the news seems dire at best.
Keep in mind that investors, manufacturers and retailers in Saudi Arabia can seize market opportunities by strategically planning end-to-end solutions.
We consistently advise our readers to adopt appropriate hedging strategies as well as consider buying and relocating various Japanese manufacturers to Saudi Arabia.
If you need any assistance with regard to either of these two strategies feel free to contact The KIN Consortium.
— Khalid I. Natto (khalid@kinconsortium.com) is chairman & CEO of The KIN Consortium.
By KHALID I. NATTO
Published: Apr 14, 2011 00:07 Updated: Apr 14, 2011 00:07
Shopping for bond investments in April of 2011 is similar to eating at a buffet. Every time they lift the cover off the food you see a variety of delicious choices.
Then you peer down on your plate that’s already full of delicious choices and you start to wonder how you can pile on more variety.
This week we would like to take the opportunity to discuss and explore the differences and similarities in international sovereign debt.
Apparently it’s a common misconception to believe that there is only one internationally accepted standard of either raising money or rating debt.
In fact this discussion might demystify the role of the rating agencies and their shady politicized image.
The rating agencies are not comparing apples to apples around the world.
When the likes of Moody’s, Standard & Poor’s, and Fitch rate a certain type or class of bond, the average investor might believe that they can compare bonds from different parts of the globe, based on that rating.
We at The KIN Consortium are about to clarify the details of that facade.
First let’s start with the features of the sovereign debt that are not exactly the same:
American bonds can be categorized as long term, medium term, and short-term sovereign debt.
They are commonly referred to as treasury bonds, treasury notes, and treasury bills at federal level. They are, however, referred to as municipal bonds at state level.
The key to these bonds is that they can be bought and traded by anyone around the planet, which creates an ongoing market for discussion about constant fluctuation of bond values.
There has been a great deal of discussion about an imminent default of all these types of bonds for both counties and the sovereign debts.
The good news is that the US federal government recently raised its own credit limit allowing the frivolous spending to continue a little while longer.
The current laws state that municipal bonds can default on a city and county level, yet general obligation state bonds and treasury bonds cannot declare bankruptcy.
The current federal budget fiasco is viewed as an event that has occurred in the past, yet it is usually rectified with a combination of revolving credit and certain austerity measures.
For example, in the Bill Clinton era, there were federal defaults that led to a focused drive to raise taxes and balance the federal budget.
The Japanese market is totally different to that of the US because there is no secondary market for federal Japanese bonds.
They tend to be financed by the Japanese for the Japanese.
The yields are kept low as the demand for government debt is constantly met by the government.
It is a totally different model than that of the US because there is no secondary market for bonds.
Euro Bonds are a hybrid of the US treasury bonds and municipal bonds.
In fact they are totally confusing to secondary markets of investors because each country is paying different yields for each respective country while denominated in the same currency.
For example, the 10-year Greek euro bond is currently yielding 12.65 percent, the Irish 10 percent Euro currency bond, the French 3.77 percent and the German 3.49 percent euro bond.
From a foreign investor perspective, if the client needs Euros in 10 years he is looking at several different prices for the same currency.
They are literally getting paid different prices for the same product.
This predicament has led to various financial market pundits calling for the break up of the Euro currency.
The individual countries, within the euro zone, are only concerned over their own debts, as if they were individual states managing municipal bonds. Where are the central bank bonds that would serve as treasury bonds in comparison to the US model?
The current ECB model is an unsustainable design and it should demand the immediate attention of the international investment community.
Islamic bonds are collateralized debts that are the ideal choice of investors seeking creditworthy investments.
The rationale is that the amount borrowed will not exceed the value of the collateral.
It seems that the Islamic model is the only fiscally responsible model out of the four that we have reviewed in this article.
From the perspective of credit agencies, it must seem clear that American, European, and Japanese models are all politicized markets with insatiable appetites for racking up debts.
Their debts are backed by nothing more than promises and an unrelenting demand for revolving credit.
Then they each brag and boast about having extraordinary economies that lead the world in terms of innovation and industrialization. We simply say that we too can burn a blazing blue flame of an economy too if we had an unlimited amount of money.
It’s this fundamental inequity in financial markets that has brought about the worst drought of liquidity in terms of volume of trade in US financial markets.
The media constantly describes the lack of participants in the Japanese model as a lack of confidence in that economy. Furthermore, in recent meetings at the Bretton Woods conference, they discussed the lack of participants in US markets and the reliance on leveraged computerized high frequency traders as a lack of confidence in that economy.
Let’s just say that if there is no real market demand for your products, then please do not try to supplant real investors with artificial simulations.
Educated people may see this artificial demand simulation as stealing investor dollars from creditworthy investments.
— Khalid I Natto (khalid@kinconsortium.com) is chairman & CEO at The KIN Consortium.
By KHALID I. NATTO
Published: Apr 7, 2011 00:26 Updated: Apr 7, 2011 00:26
Corporate earnings reports will be announced next week in the US financial markets, and we at The KIN Consortium are anticipating conference calls that are full of bad news, regarding industries that import from Japan.
We recommend that everybody stay tuned to the conference calls, and pay particular attention to how the various management teams plan to react to the recent Japanese Black Swan.
The publicly traded companies will probably suffer a dramatic pull back in market capitalization, as a result of their inability to meet market demand for their finished products.
We are recommending to all our readers that they hedge themselves immediately with the appropriate options strategies for a declining market.
We have recently spoken to a number of economists, analysts, and chief financial officers in the KSA regarding financing and vertically integrating the industrialization of the region.
We clearly and concisely built the case for seizing the opportunity that the markets have created. For example we mentioned Jarir Bookstore might suffer from a lack of inventory in the near future.
In terms of the immediate impact to the import oriented companies in the Kingdom of Saudi Arabia, they should prepare themselves for sluggish supply of products that come for Japan.
In fact the importers should check their suppliers if the product comes from anywhere including America because it may have components that are made in Japan. The lack of components will subsequently halt the production of the finished products.
A recent example was an announcement on April 4, 2011, by Toyota Manufacturing in the US halting production because they could not get the various parts from Japan.
Another example can be found in Apple Computer, which has a number of components of the iPad2 and iPhone 4 coming from Japan also.
Our point is that this trend will have global ramifications.
In the US conference calls they may discuss their strategic alternatives, which can range from changing the location of their parts suppliers, all the way over too a fundamental change in their management style.
For example, in the latter scenario, they might include abandoning the lean management style of Just In Time JIT delivery methods. Companies might find themselves tying up their cashflows by hoarding inventory of components. If the Japanese delays persist, then this would be a very sad turn of events because hoarding supply parts will lead to a slow down in innovation. If a company has a huge number of components, then they are less likely to introduce new and improved product models that do not use the old components.
Prioritizing between satisfying customer demand and stifling innovation is an interesting dilemma to be sure.
We have written a series of articles in the past on the efficiency of the popular lean management styles, and the subsequent benefits to the consumers. The system made companies more responsive to customer demand, and more efficient in terms of supply management. However history is teaching us that these points are not absolute truths. The fact is that the Japanese black swan may be a short term hiccup that can be mitigated by yet another round of Japanese innovation, or it might force the corporations of the world to adapt. We believe they have to be more versatile and diversified in terms of relocating their respective plants to more risk averse locations.
For those of you loyal readers I hope you feel the electricity in the air. The vision of Custodian of the Two Holy Mosques King Abdullah, regarding the industrialization of the Kingdom is beginning to materialize in front of us. The brilliant systematic planning of the architects of the economic cities, and industrial zones are primed and ready to seize the market opportunities. We recommend that we all watch the international markets for buying opportunities. The list of acquisition candidates should include the finished products manufacturers and all their subsequent component manufacturers. The key is to highlight the synergies of the region and the KSA by mentioning that we have no natural disasters, we are ideally located between Asia and Europe, no labor unions, access to Islamic pools of liquidity, and a friendly liaison office called SAGIA (Saudi Arabian General Investment Authority).
— Khalid I. Natto, khalid@kinconsortium.com, is chairman & CEO of The KIN Consortium.
The local Saudi Arabian stock market Tadawul is a long only market that has no derivatives or stock options, and it's impossible to short the stocks. The rise and fall of the individual stocks is fundamentally based on large investors buying or selling the individual stocks. There are no automated leveraged computerized traders on the Tadawul. The only leverage comes in the form of overdraft accounts or Murabaha loans. We conducted a series of interviews with regional managers of brokerage departments across the Kingdom, and the one complaint that they all shared was a lack of margin facilities for their trading clients. We quickly pointed out that it is our firm belief that margin does not have a place in the Tadawul stock market due to the very nature of momentum and volatility in a market that ignores the principles of fundamental analysis. The status quo is that the online traders are equivalent to gamblers on an online casino in March of 2011.
Imagine having an educated pool of investors attending sharer holder meetings and actively participating in the companies that they own. This can only lead to analysts publishing research reports that contain data points that satisfy the markets desire to calculate fair market value (FMV). Our topic for this week will be about both the education level of the local investor in the Kingdom, and the quality of the research from the various brokerage firms. The fact of the matter is that most online traders can not define or calculate any of the ratios that are commonly used in the fundamental valuation of the financial markets. This goes against the law in the Kingdom as per the Capital Markets Authority (CMA), which clearly and concisely states that the determination of suitability of investors is the responsibility of the brokerage houses.
This aforementioned law is the critical point that opens the gates to the masses of potential investors. The fact of the matter is that investing in the KSA should not be considered a right, because it is a privilege that is oriented toward those educated individuals who are suitable for these investments. The masses of would be investors need to be converted into a pool of qualified investors. We at The KIN Consortium recommend a general audit of every online trading account. We would recommend that each investor take the CME exam or some equivalent test, prior to opening an online account. Once the investors hold a license, then they can trade in the markets under their own responsibility. The license shall serve as a standard of excellence that will include valuation models for fundamental analysis, charts for technical analysis, along with fundamental economics and the rules and laws of CMA. By raising the level of suitability of the investor base, we would have created a market that demands accurate research reports with accurate metrics for measuring the fundamental valuations of companies.
The responsibility of education falls on the Saudi Arabian Monetary Agency (SAMA), Institute of Banking and Finance (IOBF), & the CMA. The brokerages houses and their CME brokers carry both the fiduciary responsibility and the responsibility of enforcement of the know your customer rule. The weakness of the aforementioned brokers and agencies in terms of meeting the educational demand of the investment community has created a number of independent training facilities that all claim to be accredited by the CMA. We also recommend the audit of each training facility to ensure that the data that they are teaching is consistent with the accredited syllabus and training manuals.
The pool of investors are all striving to find some type of rhyme or reason for the manic volatility of the Tadawul. The ideal solution is to have the research departments at the local banks set up their own respective educational platforms teaching the CMA curricula. The content should not only consist of the basic valuation formulas for calculating fair market values for stock prices, but should also include live research reports with analyst commentary. The brokerage houses will offer these workshops and seminars to allow the investment community to understand how the formulas are applied in the real time markets. The CME brokers will close the deal by tailoring the clients investment portfolio to the needs and risk tolerance of the client. These are the solutions that are currently being used at a number of international brokerage firms around the world, and we believe that they should apply to the investment community in the Kingdom as well.
- Khalid I. Natto, khalid@kinconsortium.com, chairman & CEO of The KIN Consortium.
By KHALID I. NATTO
Published: Mar 24, 2011 00:45 Updated: Mar 24, 2011 00:45
We are living in some exciting times with all that's going on in the news. I am talking specifically about Japan and the earthquakes, exploding nuclear reactors, electricity blackouts, volcanoes, tidal waves, mass evacuations of Tokyo, mass destruction, closing of manufacturing plants, and the chaos of the financial markets. We recently discussed the ramifications of the chaos on the insurability of Tokyo based businesses in a video on our website at http://www.kinconsortium.com. The fact is that Japanese businesses have been suffering from the rising Japanese yen (JPY). This problem has been compounded by rising insurance premiums, which is hindering the profitability of the various Japanese manufacturers. The visionary leader Toyoda is the CEO of Toyota Manufacturing Company actually mentioned in an interview recently that he was open to considering changing the location of his manufacturing facilities if the yen continued to rise. I am earnestly waiting for his next public statements regarding the impact of Insurance premiums on the bottom line of his income statements. There are obviously a number of locations across the globe that are going to be aggressively lobbying the various manufacturers for their investments, yet from our analysis we would like to highlight the advantages of the Kingdom of Saudi Arabia.
We at The KIN Consortium recently published articles discussing the advantages of manufacturing in the KSA. The fact is that we in the region are blessed with a lack of natural disasters, and a location that is midway between Asia & Europe. We believe that the Kingdom is the ideal place for the development of automated robotic manufacturing facilities, and we merely propose that the various Japanese manufacturers consider moving to our location. We have a liaison office set up just for such an occasion called Saudi Arabian General Investment Authority (SAGIA), we are sure they would be happy to assist you with any and all of your endeavors.
Now that we have discussed the macro solutions to the macro problems, let's take a moment to discuss various investment strategies to profit from the volatility in Japan. In the recent video that we mentioned earlier on our website, we discussed a product of Morgan Stanley that's called iShares. The specific one that pertains to our discussion of Japan is the EWJ iShare. Its top holdings include Toyota & Honda, amongst other Japanese brand names. On March 17, we bought a long straddle on the EWJ which is "at the money" purchase of both call & put option contracts. That basically allows the purchaser to profit from both volatile rises and falls in the Japanese financial markets. We actually bought the contracts that expire in September of 2011, which allows us to sell the contracts at any point of time between now and then. This type of investment strategy is an elegant way of profiting or hedging portfolio risk. Please keep in mind that one must always speak to their respective investment advisers prior to making any investments, so that they may determine their level of suitability for the investments. The aforementioned strategy profits from extreme volatility in the underlying assets, and it demands the undivided attention of the investor.
We recommend all our readers stay vigilant in all your investments whether you are investing in long-term manufacturing projects, or short-term hedging strategies.
— Khalid I. Natto (khalid@kinconsortium.com) is chairman & CEO of The KIN Consortium.
By KHALID I. NATTO
Published: Mar 10th, 2011
Ongoing projects in the Kingdom of Saudi Arabia include economic cities, industrial zones, universities, Islamic tourism, hospitals, railways, desalinization plants, refineries, new electricity companies, converting deserts into farms, and the list goes on.
I have recently interviewed a series of chief financial officers (CFO) of different multibillion dollar companies in the KSA. We discussed both their vision for the future in terms of the local economy, and the opportunities that are available in the international market as a result of the global financial crises. Of course I suggested the acquisition strategy, which assumes that the international manufacturers are liquidity starved, and that seizing the opportunity in this type of a market is mutually beneficial to both international manufacturers and Saudi companies.
The list of potential acquisition targets ranges from world-renowned brand names to generic manufacturers. The news is full of stories about companies that are struggling to maintain their normal working capital requirements, or they are announcing job cuts and production cuts. Whether its an issue of rising raw materials and commodity costs, or weak market demand for the goods that they produce in either case the manufacturers are looking for strategic partners. There have been a string of acquisitions announced recently like TATA buying Jaguar and a number of other auto manufacturers, the sheikh of Qatar buying Harrods, or Fiat buying pieces of both GM and Chrysler. Mergers and acquisition specialists have obviously been working around the clock on closing these types of deals.
The trend of acquiring the manufacturers fits ideally with the over all vision the Custodian of the Two Holy Mosques in terms of Industrializing the KSA. The timing is perfect for the acquisition strategy, so let’s discuss the various sources of finance. Either in the form of joint ventures or outright ownership, Saudi companies can attain the financing for these projects.
Sources of finance:
The fact of the matter is both Saudi banks and Saudi companies have issued and continue to issue bonds on the London Stock Exchange. They are issuing European Medium Term Notes (EMTN), which are 5 year bonds. From our research at The KIN Consortium the investment bankers of choice are both HSBC and Calyon, as they open the portal of liquidity to the KSA economy. Of course these facilities are only open to the most renowned and respectable companies in the region. The general obligation bonds can be used for a variety of purposes, including the acquisition strategy.
The acquiring Saudi conglomerates can then spin off their respective companies in the form of IPO’s on the Tadawul Stock Market. They also have access to both conventional and Islamic finance with every major bank and investment bankers based in Riyadh. There is also funds available from the government in the form of the Public Investment Fund (PIF). The various government agencies have been sponsoring huge refinery projects and they are rumored to be sponsoring some of the economic cities in exchange for an equity stake.
Yet another source of finance that we are discussing is all the Saudi funds outside of the Kingdom in London, Paris, New York, and Zurich to list a few. The fact is that a huge number of foreign investments have suffered dramatically in the recent global financial crises. The sophisticated Saudi investors have come to realize that investments abroad are a great deal more speculative than investments in the KSA. While I cannot reveal any names due to our confidentiality policies, we at The KIN Consortium have received an extra ordinary number of calls and emails regarding losses in Swiss Bank Accounts. The cases vary from unscrupulous Swiss bankers who do not actively monitor there clients portfolio all the way over to Swiss bankers that do not return the clients calls. The losses are so extreme in some cases to the degree, that even I can’t salvage the situation. Unsophisticated investors should not invest in products that they do not understand. The Capital Market Authority (CMA) has specific laws that discuss client suitability. It’s a shame that the Swiss banks do not fall under the jurisdiction of Saudi Law. It seems that the stereotypically elitist Swiss banks do not offer the type of security and safety that they did in the past. The ultra-rich Saudi investors should consider our acquisition strategy in terms of buying foreign manufacturers and bringing them here to the Kingdom. In fact they can loan the money to Saudi businesses through the aforementioned EMTN or sukuk on the London Stock Exchange.
Advantages of manufacturing in the KSA:
The advantages of manufacturing in the Kingdom have been discussed in depth by the media and SAGIA. Some of the issues that have been highlighted are about vitalizing the Saudi labor market with industrialization. They have also discussed the fact that the Kingdom is ideally located between Asia and Europe, which makes it cheaper than transporting the products from Asia. Finally the government of Saudi Arabia is literally building the infrastructure for the manufacturing plants with a number of industrial marine ports, the railway, new roads, and an energy rich environment. One might say that in light of the global financial crises, the KSA is truly the land of opportunity.
— Khalid I. Natto, khalid@kinconsortium.com, is chairman & CEO of The KIN Consortium.
"March 3rd, 2011 Arab News Article: "Secondary markets respond" - Pubished in Arab News" http://www.arabnews.com/node/369895
By KHALID I. NATTO
Published: Mar 3, 2011
Whether it is manufacturing software or hardware, everybody needs both a primary and a secondary market. Defining a brand image with features based on functionality and quality is key to capturing market share. In fact reinforcing the brand name with warranties and assurances of the highest quality standards is an investment in both customer satisfaction and futures sales. The customers will then provide word of mouth advertising for the brand name, with their personal testimonials to their friends and families. Each individual manufacturer of software or hardware must meticulously survey and manage the highest quality and efficiency standards not only for his production line, but also for the secondary market.
Some of the available tools for surveying and then responding to customer complaints are technical support desks that receive complaints on the phone, email and online chats. If the issues can be addressed immediately because they have been pre-qualified as “Known issues” then they are dealt with as Frequently Asked Questions (FAQ). On the other hand if the complaint is a new issue, then the data is gathered by the manufacturers and then they adapt the products in the research and development departments to address the concerns of the client. Then they roll out the new model of the product, as the new and improved version.
The feedback of the primary market is invaluable as the manufacturers tailor-make the product or service for that specific market. Let’s say the secondary market for the brand name would be in a foreign country. Let’s take an example of a brand name fast food chain like McDonald’s in a country like Saudi Arabia. The fact is that the restaurant chain does not serve bacon cheeseburgers. In this secondary market the customer feedback showed that bacon conflicts with social and religious principles. Therefore the brand name quickly responded to the market before it was tainted with a bad reputation in the local market.
Reputation risk is an intangible that is hard to quantify due to its subjective nature, however, studies do show that once your tainted with a bad image it can cost a company an unlimited amount of future sales.
Let’s take a moment to examine political ideology as a product, for example, socialism and collective bargaining. Is there a secondary market for this ideology in the Islamic world? Are the principles of monopolistic control of labor considered haram because it is ihtikar? The fact is that socialism carries the same anti free trade stigma that was inherent to communism, which puts it at odds with Islam. It is high time that various advocates of socialistic agendas adopt the same stance as McDonald’s and the bacon cheeseburger. The manufacturers of this particular political ideology have programmed the innocent minds of Muslims in North Africa, with 24-hour media coverage available on smartphones, the Internet and TV. People have died as a consequence of building a brand name of socialism and a socialist workers union in a market where the product does not fit with in the scope or expectations of the region or the consumers. The common pool of experience in the Middle East and North Africa MENA region is Islam and individuality. The reality is that we were born as individual humans that can and will make individual decisions. We shall not be categorized, labeled, measured or quantified into a corner of limited choices. We must allow for creativity and innovation. We must allow for free thought. The thing that distinguishes humans from animals is our ability to think.
The fact is that the socialist media programmers are not listening to the secondary markets around the globe regarding their socialist products, so let me try to paraphrase what the world is saying as follows:
1. Please do not copy & paste political ideology to the world.
2. Please try to balance your budgets, since the world is linked with the Dollar via the Bretton Woods Agreement.
Root of the problem:
A popular misconception is that socialism was defeated by capitalism and individualism over the last seven decades. The fact is that more European countries have adopted socialistic ideals than individualistic or capitalistic ideals. In fact we can categorize the groups into ethnically based or agenda based socialist groups. For example there are White Anglo Saxon Protestant (WASP) Socialism which stems from the old British Commonwealth, Aryan Socialism also known as the National Socialists (Nazi) Party, French Socialism, Latin American socialism / communism with leaders like Che Guevara and Castro and the list goes on. On the other hand there are Agenda Socialism and Collective Bargaining Unions; such as, Labor Unions, Women’s Movement, African Americans, Gay & Lesbian, Green Agenda, etc.
The fact is that the entire world is trying to position their respective assets in a better light. For example, the Japanese and Toyota, the Italians and FIAT, the French and AIRBUS, the Russians and the MIR Space station, and the list goes on. Each of these respective groups has tirelessly lobbied for their own brand name recognition. They have tried to enter the US Markets to capture market share by every means possible. In fact Fiat bought out Chrysler and a part of GM, while Toyota captured market share with low prices. They spent a lot of money on lobbyists, advertisers, investment bankers to get through the hurdles of the market place. In the past, these financial bureaucratic controls were reinforced by the monopoly of the media. The days of stereo types in the mainstream media controlling or creating a prejudice or stigma are a thing of the past. The bottle necks that hindered the growth or development of certain groups are all but gone in March of 2011. The Internet has provided a level playing field for marketing brand names across the planet. We now have interactive demonstrations, PDFs, video, text, graphics and audio. We at The KIN Consortium believe that the free markets for equities can be liberalized, as the various publicly traded companies utilize the Internet to reach their target market.
We are at an important point in the history of the markets, where any manufacturer can build and market high quality products with their own paint stroke. The World needs to take a step back and realize that Internet marketing is the path to self actualization. A company or a person can build their own brand name and earn market share without taking a look back at archaic stigmas, prejudice, or stereotypes. The days where people needed socialism and collective bargaining are literally numbered because anyone can speak and conduct e-commerce on the World Wide Web.
— Khalid I. Natto, khalid@kinconsortium.com, is chairman & CEO of The KIN Consortium.
"February 24th, 2011 Arab News Article: "Of commodities, currency and equity volatility" - Pubished in Arab News" http://www.arabnews.com/node/369193
By KHALID I. NATTO
Published: Feb 24, 2011 00:48
In an attempt to get our bearings on the status quo of the international markets, we found that it’s crucial to track a number of underlying assets at the same time. From the chart you can immediately get a feel for the money flow in the markets. At a quick glance you can determine the rises and falls of each facet of the market. If you need to track these particular commodities, currencies or equities on a daily basis you can refer to my website 24 hours a day 7 days a week http://www.kinconsortium.com
Soft Commodities:
In the last week we have seen the international media rage about skyrocketing prices of commodities and currencies. Most countries around the globe have old subsidy programs to cushion the volatility of commodities. As a result the prices at the supermarket don’t tend to reflect the extreme volatility on the various exchanges. Two examples are Coffee up 99.2% and Corn up 98.7% year over year from February 20th, 2010 to February 20th, 2011. The rationales for these dramatic rises in prices tend to vary from the weakness of the US Dollar, manipulation of High Frequency Traders HFT, and industry specific issues. It has grown more unpredictable over the recent past few years as the prevalence of politicized markets with Quantitative Easing and the speculation of computerized traders have become the de facto standard in the marketplace.
The actual consumers of the various underlying assets are finding it more economical to find alternative sources of commodities. In the Kingdom of Saudi Arabia the recent trend seems to be the acquisition of farm lands around the globe along with an ongoing effort to convert deserts into farm lands. The large importers such as Savola utilize sophisticated option strategies to hedge the costs of vegetable oil and sugar. It seems the whole world is trying their level best to stabilize prices of soft commodities.
Metals:
The hard commodities have witnessed a spike in metals like silver, which is up 99.7% year over year. This is interesting because the consumption of silver for industrial use has not increased, which leaves us with either silver jewelry or silver speculators. On the other hand we have witnessed a 36.3% rise in copper, which is predominately used for industrial purposes. The rise of copper is a signal of continued growth in that sector of the economy. The other popular metal is of course gold, which has risen 24.1% year over year. Gold tends to be the favorite safe haven from a historical standpoint, which is evidenced in the elevated market price.
Currency:
In terms of currencies we have seen a sudden spike in the Swiss Franc (CHF) recently. Despite recent articles about frozen Swiss banking accounts, it seems that everybody is running for the Alps. While we at The KIN Consortium view Switzerland as a facade, in terms of its neutrality or safety, it still seems that ultra rich investors have flocked to the Swiss bankers yet again. The recent spike in the CHF seems to be positively correlated with the recent uprisings in the North African Region.
The Australian Dollar (AUD) has also continued to rise to an all time high in the past five years. It has a strong yield and it tends to trade in a positively correlated manner with the Japanese Yen. It is actually quite interesting to see the Japanese Yen (JPY) has broken that correlation by trading down in the last few weeks against the AUD. The only rationalization that we could come up with is a combination of the attractive AUD interest rate, and the fact that Japanese manufacturers have been complaining about the strength of the JPY. According to our best forecasts, we at The KIN Consortium believe the demand for Japanese products will continue to rally the JPY currency unless we see a change in the locations of the various Japanese manufacturing plants, as alluded to in recent articles by Akio Toyoda of Toyota Manufacturing Company. Keep in mind Moody’s just down graded Japanese debt with concerns about the enormous debt burden. They are also anticipating a tax hike in Japan, which could potentially reduce the outstanding debt.
Equity Indices:
With a quick glance you can see the small cap Russell 2000 index is up 32.1%, followed by the NASDAQ 100 index up 31.3%. While the list of indices is not comprehensive by any means, it does allow us to see how the smaller capitalization (Higher risk) companies in America have benefited the most in our current economic climate. We tend to attribute this rally in this small caps to an over all technology rally, and the volatility of the Exchange Traded Funds (ETFs).
— Khalid I. Natto, khalid@kinconsortium.com, is chairman & CEO of The KIN Consortium.
"February 17th, 2011 Arab News Article: "Automated socialism" - Pubished in Arab News" http://www.arabnews.com/node/368501
By KHALID I. NATTO
Published: Feb 17, 2011
When the markets rise and fall based on computerized trades, where are the checks and balances for price discovery and fair market value? This current trend takes us away from free market principles and it leads us toward centralized or politicized markets. The politicians and their special interest constituency are funneling subsidies at projects (for example: The green agenda) with no natural market demand; thus, creating artificial demand in the market place. Then they attempt to resell the project to investment bankers in the financial markets, who are in turn relying on automated computer programs, as opposed to convincing real investors. The machines are trading with at least 40 times their principle investment, while retail investors trade on only 2 times margin. The sheer volume of the leveraged machine can literally wash out the human investor. This is automated socialism as opposed to free market capitalism.
The function of the High Frequency Trading HFT programs is to provide liquidity and artificial demand. This leads to severe market conditions of either artificial inflation or artificial deflation. The ramifications of the failure of the financial markets with all these socialized agendas, collective bargaining, and a herd mentality have literally been felt all over the globe. It can be seen in the World Economic Forums, the G20 Meetings, Davos, and now we have socialist workers causing uprisings in Muslim countries all over North Africa.
The fact of the matter is that Islam is closer to capitalism in its pursuit of free markets and its championing of individualism, than any of the western political ideologies. Socialism in particular is seen as a foreign and forbidden ideology in the Islamic world due to the fact that Islam is a religion that is rooted in free trade. There are rules that are intrinsic to the fundamentals of the religion that discuss monopolies (Ihtikar) and market manipulation.
Here is a dictionary definition of Socialism:
“So·cial·ism [soh-shuh-liz-uhm] -noun : A theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.”
Let’s try to examine how socialism has invaded the financial markets. I am not going to focus on obvious examples like Brazil, Russia, India & China (BRIC) Mutual Funds, and discuss the fact that 3 out of the 4 countries were or are communists. I simply would like to discuss how the markets have grown more corrupt without actual human investors. It seems that its is so much easier to have an investment banker plug in metrics into a computer, and then have the asset management departments computers finance the equity or debt offerings. No credit analysis or real banking were used in the process, just automation of the banking process and the financial markets. All the risks get mitigated by credit default swaps, and promises of diversification. As a result the markets are totally vulnerable to corruption and a socialistic type of control of capital. The liquidity is not going to the investments with the greatest merit or the greatest potential. Instead the flow of capital is either politicized, socialized, or skewed by the HFT.
The prices of currencies, commodities, and equities must be set by fundamental analysis as opposed to market manipulation into convenient correlation (Refer to the three charts). Criteria such as supply, demand, quality of the underlying asset must be the issues at the core of the price discovery process. The allures of “Computerized Trading” such as liquidity and volume are destroying the fabric of capitalism by creating a centrally controlled market place. Let’s look at the market manipulation through the analysis of the patterns of the three different indices in the charts. The Dow Jones is composed of 30 stocks, the S&P 500 is composed of five hundred stocks, and the Nasdaq is composed of literally thousands of stocks. Each of these different indices is composed of different equities, yet the prices are moving in the same pattern. Where is the Fair Market Value FMV of the underlying equities? Are consumers supposed to pay for their commodities, currencies, and equities based on these whimsical prices?
Computerized trading supplanted investors and they have been designed and categorized into trading platforms that function as liquidity rebate traders, predatory algorithmic traders, automated market makers, and program traders. They are exploiting the new market dynamics and negatively affecting real investors with their rampant speculation. We at The KIN Consortium have published a series of research reports detailing the manipulation of the prices due to these programmed computer trading platforms. In essence the machines are focused on short-term profits, while focusing in on high volume underlying assets that have a small difference between the bid and ask prices. This practice is not consistent with the principles of economics and the pursuit of fair market value. The world has grown wary of the financial markets and various countries are developing solutions to mitigate this volatility risk.
This can only be described as market manipulation by computers and programmers. The artificial inflation has ramifications around the globe. We have recently seen riots and revolutions based on inflated prices of commodities. People are screaming for fair market value of basic food. We need to dismantle the leveraged computerized trading platforms and return to a cash based supply and demand driven market place. We must literally take a stand against socialism in all its forms, be it in the financial markets, commodity prices, labor costs, land, manufacturing, etc. We must allow for the natural price discovery process of the capitalistic system to determine the true market prices.
— Khalid I. Natto, khalid@kinconsortium.com, is chairman & CEO of The KIN Consortium.
"February 10th, 2011 Arab News Article: "Follow The Money" - Pubished in Arab News" http://www.arabnews.com/node/367778
By KHALID I. NATTO
Published: Feb 10, 2011
We at The KIN Consortium would like to take this historical opportunity to discuss abolishing the credit default swap (CDS).
In the recent past, we have published a plethora of reasons why it is fundamentally unsound to ignore credit analysis in favor of loan guarantees like the CDS.
Let's take the opportunity to discuss the respective rates of the various countries involved in a crises in North Africa.
The loan insurance rates (CDS) for Egypt are literally flying as a result of the chaos.
One might infer that the financial markets see the current uprising as an event that can hinder the borrowers ability to repay a loan.
Keep in mind the CDS can either insure a loan or insure against the borrower's ability to repay the loan.
Now let's discuss the motivation of both sides.
The investors insuring the loan are merely trying to borrow money from the financial markets, while the hedge fund betting against the loan repayment are merely speculators.
Now imagine some unscrupulous group simply betting against the borrower repaying a loan with a naked CDS, and then starting a political fight.
Its similar to buying put options on a stock of a company, then sabotaging the company.
In the US, there are laws to monitor option contracts, but the CDS cannot be monitored.
While I could site dozens of likely suspects who could be betting against North Africa, I would prefer to focus on abolishing the credit default swap. Theoretically, it can be used to finance or encourage terrorism or government manipulation.
From the chart you can see that the buyers started raising the price in December.
Take a moment to imagine a labor union buying put options on the companies stock prior to announcing a general strike.
When the event hits the newspapers, the stock price would fall and the put option would rise.
It is illegal to profit off information that is not public; therefore, it is called insider trading.
If we were to return to the Egyptian analogy, we could see the transactions occurring December and January, which was prior to the regional problems. That too should be considered insider trading.
There are a number of other laws that were established after Sept. 11, 2001, that investigate the purchase of put options prior to a terrorist event. The same laws should apply to the credit default swap. We should be able to follow the money.
For Example, "Germany's Finance Minister Wolfgang Schaeuble told the Bundestag on March 16, 2010 that the country may have to consider ordering 'intelligence agencies to set up surveillance of who is getting together with whom for which kinds of speculative processes, and where' to protect the euro" - quoted from a Bloomberg article entitled, "Sinister' German spy plan aimed at hedge funds, analysts say".
The world has not evolved into a Utopian society of non-violence. We are not playing in a market that is free of manipulation, and bound by truth, honor, and the rule of law. Therefore it is our position that we should abolish the credit default swap, much like Angela Merkel did in Germany in the height of the European contagion of 2010.
Simply removing the source of finance will remove the motivation for war and chaos.
Please join us in abolishing the CDS.
— Khalid I. Natto, khalid@kinconsortium.com, is chairman & CEO of The KIN Consortium.
"February 3rd, 2011 Arab News Article: Saving real estate valuations - Pubished in Arab News" http://www.arabnews.com/node/367074
By KHALID I. NATTO
Published: Feb 3, 2011 00:26 Updated: Feb 3, 2011 00:26
The price of real estate has both historically and fundamentally been based on its rental income or earnings potential. Other factors that can influence real estate values can be certain intangibles like having famous neighbors, or having an extraordinary architectural design. We at The KIN Consortium have found that property values have fluctuated in an erratic manner around the world. The irrational valuations have literally ground the world financial system to a halt in the past few years. So here we are in February of 2011 trying to return to the fundamentals of real estate valuations.
Keep in mind that in the world of Islamic finance we have asset backed loans, which means the value of the loan will be directly correlated with the value of the real estate. In Dubai we have witnessed the phenomenal growth of commercial and residential real estate, which was financed based on projections of an unlimited number of visitors and businesses. The more people migrated to this fantastic location the higher the value of the residential property values. They also spent no expense when it came to designing and building world record standards in architectural designs. They were sadly mistaken as the global financial crises brought about a dramatic slow down in the flow of tourists and commerce, which subsequently lead to the decline in real estate values. That in turn lead to a series of margin calls at the banks, since the loan balances exceeded the declining market value of the property. To compound matters even further the cashflow of the developers was strained to the point where they did not have enough to cover the payments to the banks, which lead to their subsequent defaults. Then the rulers of the country stepped forward and rescued the situation by restructuring the outstanding balances. The lesson to be learned from this scenario is about the diversification of revenue streams. Such as creating industries that derive a steady income, as oppose to focusing on strictly seasonal tourism.
In an attempt to learn from our neighbors in the GCC, we in the Kingdom of Saudi Arabia have endeavored to build industrial zones and economic cities. The overall aim is to create consistent rental revenues along with vitalizing the consumption of electricity, water, and all the various facets of the economy. The projections for industrial growth fuels the rise of real estate valuations. The economy is growing more diversified away from its core strengths, referring specifically to the oil industry and the consistent flow of Islamic Tourists. The projects literally mesmerize investors, land owners, and real estate developers who are excited about the prospects for the future. The financiers of these infrastructure projects are working around the clock trying to supply the liquidity.
Recent events in the region have us financiers pondering the impact of certain catalysts that can potentially deflate real estate values. The first being severe floods, and the second being delays in construction projects. When the property is located in the midst of a flood zone, one can only assume that property values will decline rapidly. This is compounded by the lack of utilization of flood insurance. If the banks are using Last In First Out (LIFO) otherwise known as Mark to Market, then they will experience a dramatic decline in the valuations of the property. Normally flood insurance would cover the value of the property thus insuring the financier and the property owner. However, once the property is deemed in a flood zone its future rental revenue will be discounted dramatically. Unless they build a citywide drainage system, those specific locations will be uninsurable. Which will eventually lead to a lack of finance for that location. It is imperative that cities that recently suffered floods in Australia, Germany, and Saudi Arabia take immediate action to install state of the art drainage systems in order to save their respective economies. Its simply an issue of mitigating risk at the insurance company.
Another catalyst that can deflate real estate values is the delays in huge construction projects. We are referring so the growing pains of the city as it impacts the existing businesses and residents. Stop and consider the impact of having a construction site near your show room, restaurant, or hotel. The usual flow of customers can not or will not tolerate the traffic jam or the unsightly construction crew. As customer dissatisfaction grows, they tend to find alternative venues to spend their disposable income, which results in the bankruptcies of the respective businesses. Compound the situation even further with the delays in construction that leave cranes and piles of dirt to serve as landmarks when giving tourists directions. The entire community is holding on to the hope that the contractors will attain the finance to get the construction finished.
Those businesses that are adversely affected by the huge construction projects around their locations are not an isolated part of the economy. They are not an acceptable loss in the grand scheme of growth. The fact of the matter is that they each have existing bank relationships. They have outstanding debts in the form of overdrafts and loans. If they go out of business due to the infrastructural blockade of on going projects at their respective locations, then the bank loses money. The non performing loan NPL requirement is currently at 150% for KSA Banks. Delays in construction lead to customers avoiding certain retail outlets, which in turn leads to bankruptcies. Then the money supply suffers a spiraling deflation of liquidity. If we look into the reasons for the delays of the construction we find a barrage of excuses, such as a lack of finance for construction projects due to delays from bureaucratic ministries. Our problems can be resolved with a city wide drainage system, and more timely financing for the huge infrastructure projects. Both solutions can be resolved through Lean Management Tools. Enhancing efficiency and eliminating waste, while staying focused on customer satisfaction.
Stay tuned.
Khalid I. Natto (khalid@kinconsortium.com) is chairman & CEO of The KIN Consortium.
Spike in NPL at Banks
http://www.zawya.com/story.cfm/sidZAWYA20110129142605
By KHALID I. NATTO
Published: Jan 29, 2011
The Saudi Credit Bureau has been doing a fantastic job since its inception in 2004. It will be put to the test regarding the expected flood of credit defaults. A combination of severe rains and delays in construction are the most recent catalysts in the deflation of liquidity in the local economy. We at The KIN Consortium are expecting a spike in Non Performing Loans NPL at the local banks and creditors.
Insurance: The insurance companies can insure many items in a flood zone. Its simply an issue of probability and statistics. There are certain areas around the world that experience seasonal floods, and the local insurance companies cover all the risk. The key is to have a rain drainage system in place. Once that key fact is in place the flood risk is mitigated and insurable.
Real Estate Development: The flood damage to the construction equipment and the loss of raw materials like cement are only the tip of the ice berg. These losses are insurable, and should be considered a part of the expenses of the construction business. On the other hand. the delays in an on going construction project due to the bureaucratic processes at the various ministries, can simply exacerbate the situation. We must take a hard look at modern managerial practices that incorporate cost cutting, quality management, and customer satisfaction such as the popular "Lean Managerial Tools". These methods can ensure that the cash flow will go to the infrastructure projects in an extremely efficient manner, because they will be monitored with both qualitative and quantitative tools. Any delays in the development process will have seriously detrimental impacts on the local economy.
Residential & Commercial: The value of real estate will be based mainly upon their respective rental revenue forecasts. If the property is located in a recently labeled flood zone, then one can assume that it will not be able to sell or lease its locations. In fact tenants will probably migrate away from the disaster zones. This loss of revenue stream will impact the cashflow of the respective land owners, who will in turn default on their respective outstanding loans.
Leases:
Car Buyers: The number of defaults on Auto leases willn probably reach an all time high. They are either insured or uninsured. People will either collect insurance as they claim their flood damaged car as a "Total Loss". The money will then go to the respective lender, and the borrower will probably finance the purchase of a new automobile. In the other scenario we find that most borrowers did not insure their cars, and they no longer want the destroyed vehicle. In this scenario they are likely to default on their outstanding loans.
Auto Dealers: Most large auto dealers use securitization of receivables through banks as a means of finance. They simply bundle up a large number of auto loans and then sell them off to a variety of investors. The auto dealer raises cash immediately while the investors wait on the car buyers monthly installment payments. This concept is built on the principles of diversified risks, which obviously does not work in a mass flood.
The Auto Dealer must also contend with the issue of the ruined inventory of cars at the flooded show rooms and the marine port. We can only hope that inventory was insured, so that the auto dealer can order a fresh boat full of cars.
Distribution outlets: Shopping Malls and local supermarkets are struggling with inventory that is literally ruined. Unless they are insured, the entire inventory is worthless on their respective balance sheets. This includes both perishables and durables like laptop computers, smart phones, clothes, and the list goes on. Insurance is the solution that can cover the value of the merchandise on the balance sheet.
Industrial Zones: The machines, the laborers, the raw materials, and the inventory are all at risk from flood damage.
For more information, please contact
Stay Tuned,
Khalid I Natto
Chairman &CEO
The KIN Consortium
Email: khalid@kinconsortium.com
Manufacturing in Saudi Arabia
http://www.arabnews.com/node/366497
By KHALID I. NATTO
Published: Jan 26, 2011 23:48
THE global financial crises and the volatility of currencies around the world have opened a window of opportunity for the GCC region. We at The KIN Consortium recently read indications that Toyota will be moving its high end manufacturing facilities out of Japan due to the exorbitant pressures of the rising Japanese yen (JPY).
Stop and consider the possibilities for Japanese-based companies like Toyota, Mazda, Toshiba, and Sony if they were to build highly automated manufacturing plants in Saudi Arabia. The location provides proximity to Europe, Asia and North Africa. With the Kingdom directing large-scale investments into sea, air, rail, and road infrastructure, we can only anticipate improved links to the global economy. Multinational manufacturers can even receive direct government support during transition through a liaison office called the Saudi Arabian General Investment Authority (SAGIA). Furthermore, there is a long list of advantages to building in this economy aside from being pegged to the US dollar.
Is Toyota’s decision to move manufacturing out of Japan the beginning of a new trend? Toyota has long been the world leader in running a ‘Lean’ business model. This model contains an inherent sensitivity to both customer needs and supplier impacts that act as early indicators of extraordinary changes in the markets. With Toyota’s announcement, our readers may well be wondering, what other manufacturing plants are suffering losses from the rising JPY. Perhaps more importantly, what would it take for them to consider moving their automated manufacturing facilities to the Kingdom?
The answer is obviously a return to profitability with a systemic solution to the currency volatility issue. They need to seize the opportunity and the competitive advantages in both the currency peg to the dollar and the ideal location found in the Kingdom. Take a close look at the existing automotive business models and examine how they created their success. This inevitably leads us to a discussion of the lean model and customer satisfaction.
The lean business model is built on the idea of systematically eliminating anything that does not create value for the customer. A lean process is characterized by high levels of value added work, standardized work practices, and evenly distributed product movement from raw materials to the customer. An example of how two famous authors Womack and Jones would respond to a company asking for advice on efficiency would typically start with a tour. Usually starting at the point where the company and its customers meet; for example, a retail aisle, a car showroom, a shipping dock, or a computer company support hotline. Then with executives in tow, they stroll backward up the supply chain through storerooms and assembly lines, pass order-taking desks, until they reach the entry points for raw materials. Each step across the way, they point out blocks, glitches, and redundancies that inhibit the flow of work.
Every company will tell you they’ve got a lean initiative, but a true lean initiative integrates four different systems: Production, product development, supply chain management and customer management. These two famous authors have led the charge promoting efficient end-to-end business models. The more SAGIA and the various economic cities orient themselves with these principles, the easier it will be to transition these automated high tech manufacturers to the Kingdom.
The challenge for the Kingdom is to implement these efficient automated manufacturing facilities for high tech products and heavy industry. The Japanese robotic auto manufacturers seem to be shopping for suitable locations around the world. Let’s see what the future will bring. Imagine a future where the salesman and the customer have direct access to the manufacturers. Consumers will take the term warranty or guarantee of the quality of products seriously. People will regain the confidence in the marketplace, and the retail outlets will raise their heads with pride. They will finally have a manufacturer who can be held accountable for the goods and services that they produce. The days of the importer of substandard products are literally numbered.
From our rudimentary search of the Internet we have found that GE (General Electric) and IBM have literally dozens of programs designed for the automation of the manufacturing process. They have programs that are designed for the pharmaceutical manufacturing process, steel manufacturing process, auto manufacturing process, and the list goes on. They cover both qualitative and quantitative analysis of the process with end-to-end business solutions. It’s simply a matter of applying the seamless hardware and software configuration to this growing region.
Stay tuned for the evolution of the Saudi Arabian economy.
— Khalid I. Natto (khalid@kinconsortium.com) is chairman & CEO of The KIN Consortium.
FX risk on auto importers http://www.arabnews.com/node/365903
Published: Jan 19, 2011 23:23
Saudi importers have a number of market risks, one of which is foreign exchange. The volatility in the foreign exchange markets can easily wipe out the profit margins of a number of different sectors of the economy. The issues of foreign exchange risk can easily be addressed at the treasury department of every bank in the Kingdom. There are plenty of option strategies to hedge positions on commodities and currencies.
The CFO of the various companies must be aware of all of the intricacies of the financial markets from a macro, micro, and industry specific perspective. In fact the companies can’t rely on the research reports, the news, the economic figures, the IMF, or the politicized marketplace. The credibility of the aforementioned sources is tainted by their own desire to profit from the market movements.
So that leaves us with the question of every CFO in the GCC, “What can we do to control the risks of volatility in commodities and currencies?” As per the research at The KIN Consortium, we have designed option strategies for every type of market. (For further information please search Amazon for my book called “Risk Management and Option Strategies” http://www.kinconsortium.com).
If we take a moment to review the basic assumptions, then we can later discuss the various options that the CFOs will have at their disposal. Let’s assume that the underlying asset can only do one of three things at any given moment (Go up, go down, or stay the same). The financial markets offer us tools that are designed to profit from a movement in any of the three directions with insurance products called Options contracts. Using them in different combinations can limit the risk of loss and offer opportunities for profit. In our book we mention the various strategies and describe the markets that are best suited for each of them.
For the sake of illustration let’s discuss the Japanese yen (JPY) as the underlying asset. Assume the CFO has to have $500 Million worth of yen in 6 months because he is importing automobiles from Japan. The background story is that the JPY is up 14.2 percent in 2010, while the US dollar only climbed 1.4 percent respectively. My favorite strategy is a capital guaranteed product that involves a fixed deposit and option strategies.
The fixed deposit is going to guarantee the principal amount. The balance of the funds available after investing the Net Present Value (NPV) is what we use in the actively managed option strategies. Assume we do not know whether the yen is going to go up or down. We hear stories in the news that are both positive and negative. An example on the positive spin; they are the best alternative to the euro and dollar because there is consistent demand for their products and subsequently their currency. On the other hand, there is an example of the negative spin; they have a great deal of outstanding debt, decreasing tax-paying population, and the Chinese are manufacturing similar products.
However, when we take a look at the chart we see a climbing trend since 2006. In this type of manic market environment, we at The KIN Consortium recommend either a “Long Straddle Strategy” or “Long Strangle Strategy,” the latter being more aggressive than the earlier one, simply because it relies upon extreme volatility in the underlying asset. When the volatility rises in the JPY and the currency begins to rise the client will profit, if the prices should fall then the client shall profit. The only way the client loses is if the prices stay the same. That’s why it’s imperative that the CFOs delegate the task of monitoring the markets to specific departments that are oriented toward these types of markets.
In Saudi Arabia, most conservative minded CFOs tend to rely on the various Treasury Department products like forward rate contracts, interest rate swaps, and structured products. From our discussions with the various treasury officers at the banks of the Kingdom, the trend seems to be that the various CFOs are taking a position in the markets and then waiting until the expiration of the options or the maturity of the fixed deposits. The opportunity cost of this strategy involves dramatic moves of the prices during the tenure of the fixed deposit and the options contract. The CFO did not monitor the news or the trends in the market. We refer to this type of mentality as the “Ostrich Theory” because they bury themselves in day-to-day issues that deal with the management of the core business. The chaos of the financial markets will demand the respect and attention of the investor with monumental swings in price volatility. The key is to capture the profits by predetermining profit potential target or loss potential target. The tools for this solution are called “Limit orders” on the outstanding option contracts.
The other type of businessman in the Kingdom is not hedging his foreign exchange risk at all. Let’s also assume in this scenario that the yen went up and suddenly all of his existing inventory is under priced. He literally could sell all his inventory and he still will not be able to cover the cost of purchasing the new cars for the next year. He lost money due to the volatility of the foreign currencies. While he is juggling his costs trying to stay afloat, the bank asks for its over due loan. The client has every intention of repaying the bank in order to maintain his credit worthy reputation. At the same time, the banks are reducing their credit exposure to clients across the board due to the uncertainty of the global financial crises. This client starts streamlining costs by firing employees. The working capital of the company dries up and they declare bankruptcy. The ramifications extend to the entire economy, because the company and its ex-employees were all consumers. For example, they were paying rent, electricity, water, food, and the list goes on about how they were a vital source of income to other local businesses. An educated investor must use all the tools in the marketplace to ensure maximum efficiency for the sake of his business, his customers, his employees, and the economy.
Stay vigilant.
Khalid I. Natto (khalid@kinconsortium.com) is Chairman & CEO of The KIN Consortium.)
"January 13th, 2011 Arab News Article: Do not copy and paste automation"
http://www.arabnews.com/node/365257
"Chairman Natto believes the Internet World is adopting Broadband at a rapid rate. Technology like VSAT is going to make video easily available to and from consumers. The "Old Media" monopoly of News or Advertisments is fading, as the world seizes the opportunity for freedom of expression via VIDEO BROADCASTS on the web. Welcome to the Internet Revolution! Freedom of Speech & Self Expression!"
Signed,
/s/
Khalid I. Natto Chairman of The Board The KIN Consortium
The Company
The KIN Consortium is a conglomerate that is comprised of a consulting & research division, a promotional division, & a production division. The KIN Productions Company is leading the internet in the Video Formatting Sector of the Web, and in terms of animation in Website Design. Take a look at our animated graphics by clicking on the animation below:
"July 14th, 2011 Arab News Article: The auto industry and technology"
"May 21th, 2011 Zawya an affiliate of Dow Jones Newswire: Japanese Crises case study proves market inefficiency "
"May 4th, 2011 CNN Article: New Flash Crash"
