 Okay hello and welcome to episode 101 of the Market Maker podcast and given it is this episode I'm going to press the reset button Piz and I'm going to take us back to pretending this is our first episode and if you can remember all the way back then we used to have a pretty firm line that an episode should last only 20 minutes and I realized as we completed episode 100 we drifted north of 60 minutes so I just want to rain us in a little bit because I'm conscious of um you know okay even me trying to listen to you for an hour is a hard thing no one wants that literally no one right so you know I'm not I'm not gonna say we're gonna commit to 20 but I'm gonna commit to 30 and see how we go so let's um let's keep it concentrated on one key story and something that's definitely been um very present in global media and that is the Adani Group's 100 billion dollar loss you hear that and you kind of think wow that's a big loss but then I did see Google shares are down well over that in the last two days after their AI I think it's barred their version of their chat GPT demonstration when a little bit array and then or Orion and then their share price tanked pretty much which is quite phenomenal to think about it um the share price actually on that day dropped just shy of 8% and that was more than when they missed their earnings estimates the the week before that makes sense though you know earnings I mean earnings quarter by quarter right the AI race will define the next decade plus so yeah I got there's nothing worse than doing a demo like especially like a tech demo where you're like check this out and then oh hang on a minute but hang on well um yeah that's that's I mean that's bad I mean it shows you how well I guess how Microsoft of well would you say um open AI have kind of forced their hand um and really forced them to kind of reveal what they've got where are they in this race yeah yeah if I was alphabet and not just Microsoft with all the other tech companies I would definitely partake in corporate espionage and I would definitely have inside moles who are feeding back to me all the time like how can a company like alphabet get blindsided I know they've had the AI for a long time I know they've tried to coin this whole like yeah because we want to make sure it's it's for the right reasons and it does the right type of genuine result it's like no no they've caught you pretty blindsided on the timing of this evidently so how does that happen like well I think the employees involved in this stuff right well we touched on this the other day didn't we when all these job cuts and like stripping out of middle management and they've just become bloated and they've got so many projects right because they've got so much cash yeah let's just just have about a million different kind of tangential projects and then you lose I guess you just lose focus on the on prioritizing and then yeah happens yeah all right well look let's let's get on to Danny and what this story is and we're going to incorporate a few different things for a lot of people like who is this guy how important is he I mean very recognizable domestically but perhaps not so much on a global level yeah Hindenburg and we can talk a little bit there about who are they what do they do and what is activist short selling we've talked about activists before we've talked I think about short selling before but let's combine the two and and then we'll go through what's actually happened the allegations the fallout the stock price bond yield reactions and obviously intertwined into this in Indian politics as well so perhaps we could start with who is a Danny yeah and yeah I mean most people listening to this wouldn't have heard of him you know till the headlines over the last couple of weeks or whatever but if you're Indian then you'll definitely have heard of him this guy I mean Guatan Guatan Adani yeah he's kind of the self-proclaimed Rockefeller of India basically he's got a sprawling empire a sprawling kind of industrial conglomerate he's got he owns India's biggest ports he store his company store about a third of its grain he operates a fifth of its power transmission lines he makes a fifth of the whole country's cement he's among India's top 10 biggest non-financial firms by assets basically he touches hundreds of millions of Indians lives on a day-to-day basis yeah good extracts I saw from Bloomberg to put that into context they said that coal extracted from mines Adani owns is shipped via his ports and railroads then hold to the furnaces in his power plants electricity produced runs on his transmission lines into homes built with his cement company where people prepare dinner on stoves fueled by Adani gas yeah Adani cooking oil grains and apples and then later at their kitchen tables they might discuss impending vacations but of course they're going to use flights from his airports or they might even scroll through photos stored in his data centers so basically he's everywhere he is Mr. India and maybe we'll get into politics but Modi the Indian Prime Minister is very much in his pocket I mean well actually when Modi won the election at first I ran I think back at what was it 2015 I think he took a flight back to his sort of hometown to celebrate in Adani's private jet and anyway we'll get maybe get on to the politics but look yeah this guy you get you get the story right massive massive industrialist and was past tense the world's third richest man no longer I mean don't get me wrong he's still disgustingly rich but just not quite as disgustingly yeah he's lost about half of his wealth in a couple of weeks painful so what's going on here well there's this guy well not guy there's a there's a firm called Hindenburg Research so they're a New York based activist short seller okay so maybe let's just stop and describe what that is first before we talk about exactly what they've done here and how this little tiny little sort of hedge fund firm in New York has somehow triggered a 114 billion dollar sell-off in Adani corporate value just by issuing one report so what this company does they've they've actually only been around since 2017 and over the past two years they've published 19 investigations and they what they do is they they they investigate companies to try and unearth wrong doings dodgy shenanigans you know governance issues um accounting fraud stock manipulation inside a dealing right they're trying to you know deep dive and investigate and unroot it's a bit like investigative journalism I guess in a way right and but but what they do is then they if they find examples of where they think dodgy stuff is happening they then issue a report on their website prior to issuing the report which is then the report is a damning report with all the evidence that they've uncovered before they make this report public on their website they seek to profit from issuing their own report by short selling the stock or whatever financial assets like bonds for example that are related to this business so they're very much in the business of profiting from share prices bond prices dropping um and they try to force these asset prices to drop by releasing this damning report on their website how does that fit regulatory requirements I do want to get onto this because you know ultimately obviously well obviously Adani has come out fighting big time here to say all of this is nonsense I mean so Hindenburg's report was 100 pages long yeah right that they issued on their website there were 88 uh am I right in saying I think there were 88 um points 88 pieces of evidence to show that this company is being run fraudulently um Adani his rebuttal was a 413 page um report that they issued explaining why every single one of these 88 allegations are false and then going way over the top by saying who the hell is this Hindenburg lock they're the dodgy ones they're the ones that you know aren't um were like actually let me let me quote in the summary of this what 413 page report and and no I did not read all of it but it kicks off by by describing Hindenburg as the made off of Manhattan and then he's talking about the truth of the matter is Hindenburg is an unethical short seller he talks about the irony of basically um you know the fact that Hindenburg are blaming Adani of covering things up and lack of transparency but Adani's rebuke is well nothing is known about Hindenburg either about their employees it's very secretive there's no info on their website no one knows who their investors are um and he's basically saying they've actively concealed the details of its short positions they've actively concealed the details of the source of its own funding and you know it's it's quite a I mean this is this is you know Hollywood stuff um which is why it's over the front pages of all the kind of financial media um around the world but um yeah I mean maybe we should talk about short selling first and yeah and just just with that point about these um type of research companies there was one I remember when I used to cover US equities on a desk and Citroen research was like the short selling research firm they are the ones who've been around for like 20 odd years or so they're like the original short sellers you know come out with these damning reports and they'd hit a lot of US kind of small caps and you'd see them move violently on the back of these and I remember the first few days of my job monitoring these stocks they were like if you see a lemon on the screen which was like the little icon that went with their posts if that drops down in one of these chat rooms like you need to cover it you need to be all over it that microsecond right the stock would just go boom and just hit it like it didn't matter what they said actually wow it was just a track record of the fact that they would move the stock price and importantly whether their facts were right or wrong the stock price moved so there was profit to be made on the short in the very um intraday kind of environment that was at least right so I mean obviously track record is key right yeah so with this with this hindenburg research it's got a pretty rough so of these 19 investigations they've reported over the last couple of years most of them are quite small they're going after companies that are tiny mostly companies that have gone public via a SPAC so they're kind of a special purpose acquisition company this is where you kind of go public but circumnavigate all the usual kind of regulatory factors and I won't go into SPAC now but so most of them would be quite small fry what is their famous one was um nicola um which was um the electric truck or no sorry battery powered lorries yeah so electric trucks right and they listed via a SPAC and um basically hindenburg uncovered the fact so nicola did this promo video of one of their trucks you know driving along okay and uh hindenburg basically uncovered that they managed to get the truck to move and appear like it's driving along to show they're further down the road with regards to their you know r and d and getting towards a viable product let me get some guy with a rope pulling it along it was just going it was just rolling down a hill so it looks like it was a functioning vehicle just wasn't uh anyway uh that's their big famous one so that was in 2020 so nicola's stock is is down 90 percent um since then um anyway look there's let me just step back there's two types of activist investor you know one i would so one is an activist investor who's long for stock and then you know buys up a tries to buy a significant portion and get a seat on the board now if you listen to our episodes regularly you would have heard us talking about disney and how the activist investor um nelson pelts um was doing exactly this buying up disney shares right and then trying to get a seat on the board to then have a say on how the companies run and what the strategy is and to try and turn the company around this has been in the news this week because bob aigo who's stepped back into the ceo ceo role at disney has basically caved in and said okay yep nelson pelts you're right right we're going to lay off a few thousand people we're going to cut costs you know our streaming service it's going to be about profitability not about winning subscribers at all costs and you know we're going to set a set in place a restructuring plan great right and so helts the investor is trying to then profit from turning the company around and getting it onto a trajectory where it can grow profitably okay so you could could describe that as a well is it a healthy i don't know a healthy activist investor i mean maybe obviously the management team might disagree about what the best strategy is for growth right but the activist investor surely that at the end of the day their main incentive is to make money and a profit on their position so they strip it down make the money and get out isn't that yeah that's true um but you could say the short selling activist investors they're like you know they're the ones that are looking to profit from the stock dropping and you know in the case of hindenburg as i've described it's about trying to uncover dodgy dodgy stuff um and reveal it to the world you know like if i was the marketing team of hindenburg i'd be saying i'm doing a good thing for society to eradicate fictitious fraudulent companies yes indeed but this does have quite well when it gets to people like adani it has some pretty powerful you know ripple effects out across too big to fail well indeed um so look short selling so what what they do is prior to releasing their report they then go short um various financial assets linked to adani like so they might go short adani shares obviously adani has got lots of different companies in this conglomerate right which are listed so these are shares on the stock exchange there's derivatives links to this stuff there's corporate bonds linked to these companies and so going short so what does that mean well if you want to if you think the share price of something is going to drop then you can go short by borrowing those shares off a broker or an investment bank then you sell the shares that you've just borrowed okay let's say let's say the shares are trading at $100 right it's $100 a share let's say you think it's going to go to 50 right so i'm going to borrow these shares and i'm going to sell them at $100 okay if i'm right and the price starts to drop great i'm in the money right and let's say it hits my target and goes down to $50 right i then buy the stock back at 50 and i give that stock back to the broker that i borrowed it from so i sold at 50 i bought sorry i sold at 100 i bought back at 50 so i make a $50 profit and i give the shares back okay you do have to pay a fee to borrow the shares so brokers and investment banks you know a big revenue stream for them is providing stock for short sellers so the broker or the investment bank will charge a fee and that typically these fees range well sorry vary right and the range can typically it's like 0.3% up to 3% per year so if you borrowed you know if you borrowed whatever um 100 of these shares that are valued at $100 well that's $10,000 worth of shares right well i can just imagine if there's a big bank like JP Morgan and a company so large as a Danny group that we're probably lending to them and then we're then short selling them in the banking division but then in the commercial side it's like yeah i mean it's it's that's actually a really good point and the line up of banks that are lenders to these lot i mean it's basically all of them it's a bar to the city group Deutsche Bank JP Morgan the list goes on they're all lending but then you're right the other side of the Chinese wall one of these banks yeah they're lending at stock for short sellers to to kind of try and drive the price down so yeah it's it's an interesting one but um so yeah you might you might pay between 0.3% and 3% right so just think for this trade to work let's say you're paying 3% a year for the trade to work but stock has to drop by more than 3% and only then are you kind of in the money right um now to to do this you have to also know what you know it's not if it's not anyone at any average on the street that can go short a Danny stock right to do this you basically have to be a financial institution like a hedge fund and you have to post margin on account at the broker firm and if you and typically on short selling the amount of margin you need to post is 150% of the value of the shares that you're borrowing at the point that you're borrowing them okay so if you want to borrow $10,000 worth of shares you got to post $15,000 cash into the margin account at the broker okay so look it's quite it's quite yeah you need a lot of capital you need to be a financial institution you need a margin account and you need one of these big brokers or investment banks to allow you to open a margin account and deal through you and there's this big risk of like what happened with Citroen research who understand doesn't exist anymore because guess what company forced them to close out a big short that ended them what do you I'm gonna go company just think company in the last couple of years that was fundamentally a disaster but shares went to the moon and back uh pro uh game stop game stop killed them right really wow yeah well there you go I mean the thing is about going short it's considered to be more risky right and the theory is because if you buy a stock worst case you lose 100% if the stock goes to zero right I've lost 100% of my money the thing about going short is the stock price can go up I mean there's no limit right in theory it's infinite of course obviously it's not going to go to infinity but the point is it can go up by more than 100% you can lose more than 100% of your money which is why the margin requirements 150% of of the value right but you could lose more than that and as the stock is moving as the stock price is moving unless it does start going up and so you're losing money now you're offside on your position the brokers more more than you know within their rights of issuing a margin call demanding that you now post more cash into your margin account to kind of rebalance it to make up for the loss that you're currently in so yeah it's a risky business for sure and Citroen obviously found that out but so this is the play right Hindenburg issued this report and basically they're they're they're they're saying in the report that there's dodgy stuff going on and that there's these dodgy accounts in Mauritius and basically they're yeah opaque entities to quote the report in Mauritius where apparently they're basically accusing the Adani family of manipulating the group's stock price they're saying that Adani have used the network of obscure offshore shell companies to buy and sell shares in the various Adani businesses and and in so doing pumping up their share prices or they're kind of injecting funds into these businesses temporarily to make them appear like they're more credit worthy and then on that positive credit worthyness footing they're then borrowing money from public markets and then you know oops that money then disappears out of the account and this is what Hindenburg is saying right it's all kind of a house of cards and you know it's not what it appears right so this report gets issued it's all over the press the share prices of the various companies have dropped super sharply I mean that we're talking about down 50% across on average across the group's listed firms they're down around 50% which is 114 billion dollars worth of market cap that's been wiped off here and also on their bond yields so if credit worthiness decreases then the risk of lending to this entity obviously increases right and this gets reflected in bond yields and so when bond yields go up that means it's basically more expensive for you to borrow because you're less credit worthy and at its extreme at the moment their Adani's renewables are their corporate bonds are now trading with a yield of 19% so yeah it's pretty it's pretty desperate times now what's happened talking about kind of margin calls because Adani had a margin call because they borrowed money you know using stock as collateral but if the stock prices are dropping and dropping and dropping and dropping well then they're less valuable that's less collateral and so it's dropped so much that they've been requested to post more collateral to cover that now they borrowed a load of money to actually start a share buyback program so they borrowed money to buy back shares which isn't in itself dodgy and in this environment of zero interest rates I mean Apple have been doing that for a decade borrowing money at super cheap kind of rates and then buying back their own stock I mean it's not it's not an unusual practice but yeah Barclays basically issued so they borrowed 1.1 billion for the share buyback loan and Barclays issued a margin call for $500 million last week okay well sorry this week because the share prices have dropped so but here's where Adani start fighting back so number one they issued this 413 page rebuttal against him Hinderberg second rather than paying this $500 million margin call they said you know what we're going to pay back the entire 1.1 billion dollar loan we're not in trouble here this is all false this is all fake we're going to prove it we're going to pay back that loan right now and they have now no one knows where this money's come from so that that action doesn't necessarily prove innocence yeah because there's a there's a precedent of this in recent times which was the Abraaj group well if if you are Indian you're aware of Adani you'll be aware of the Abraaj group which was Afrif I think his name was and he was doing this very it sounds very similar it was like you owe us back hundreds of millions and then he came up with the money temporarily by moving a lot of things around so yeah to come up with a billion shop what do they call it window dressing yeah yeah yeah I don't think well I see what he's trying I see the hand he's trying to play there but as I say doesn't prove his innocence um look this does set in motion a series of events because what's happened as the share prices have dropped the MSCI indices have now reduced the weighting of Adani group stocks in their indexes which basically then forces ETF tracker funds to sell Adani stock because they no longer need as much because the weighting's been reduced so it triggers this snowball which drives the stock lower and lower and lower and hence then the margin call and fine they've gone right we're going to pay it we've issued a rebuttal they've just hired like news this morning they've just hired this new law New York law firm Watchtell Lipton Rosen and Katz which is a super expensive you know hardcore New York law firm who specialised in fighting against short sellers so Adani has just signed up this this this law firm and they are going they're not backing down um and I guess look you're supposed to be innocent until proven guilty right I know Hindenburg had thrown up all of these sort of accusations but um as Adani started to lean on the government yet because you said earlier that yeah he's in his pocket you know these free rides in my private jet don't come for free well Modi's been he basically hasn't said anything he's said not been been yeah eerily silent which I guess maybe speaks volumes but the thing about Modi and broadly the Indian economy it's got it's got such huge potential the demographics are awesome they're going to be a powerhouse economy what's held them back is their infrastructure the lack of infrastructure roads bridges railways power plants they it's just been the kind of thorn in their side in terms of advancing as an economy and they they've been through various kind of phases of trying to go through mega investment rounds in infrastructure and it's not been handled well the governance side of it hasn't been particularly strong and there's been a lot of unfinished product um projects and a lot of banks saddled with toxic debt as a result and they've had false starts and they're miles behind when if you compare it to China okay over the last couple of let's say three decades China have just nailed it in terms of infrastructure build out an India of just it's just been a bit of a disaster so the problem Modi has is he's so reliant on these guys like Adani to advance this infrastructure um project like Adani had committed to 50 billion dollars of spend and investment on Indian infrastructure so they need they need people like Modi needs the Adani's to fund India's future I mean it's literally it's literally like that so yeah on a government level then at what point does Modi get involved sees this as a US attack on Indian sovereignty issues because it's disrupting like you said not just a stock price potentially the citizens of India on a wide scale India we know has been maneuvering geopolitically to align and become quite friendly with the likes of China which adds another layer of complexity in the growing in some way friction with the Americans do you think it would ever get that far I think the fact that Modi's not come out defending him I think tells you everything that would be my hunch in my opinion I guess the tragedy that well let's just for one second assume he's guilty that the human tragedy of all of this is that this guy is like the worst criminal you could possibly imagine because what's going to happen now if he is guilty then international investment into Indian infrastructure that is going to be set back years and years and years which then has a very very direct negative impact on Indian people's lives I mean that's that's the real tragedy of these sort of episodes now he might not be guilty so I don't know and actually let's just go there for a second if he's not guilty then Hindenburg is the guilty party and I mean it's crazy like we talk about market manipulation and how that is illegal under SEC rules and this is exactly I mean this is I'm going to short sell then I'm going to post a report basically accusing this company of being fraudulent and then I'm going to profit as the stock collapses but if you've told a lie if your investigation and your reporting is false then surely you're the guilty party but there don't seem to be any SEC regulations that kind of police these short sellers and so we'll see the battle goes on the lawyers have been instructed and yeah the the the gloves are on I think ding ding round one here we go I think we've said this before in a previous episode there's always one winner here in these situations that's the lawyers yes it doesn't matter what side what happens yes they just print the money but perhaps you and I went into the wrong profession um all right well look hopefully that episode was useful uh covered a couple of different concepts there uh activist short selling being one of the main ones uh aside from the actual topic in itself so yeah we'll wrap it up there um don't forget to share the the pod with a friend if you think that they could benefit from it um we'd love to have new people into the community uh had some really great messages uh as well since we've come back on since the new year began so thanks everyone for listening and Pierce thank you again and then catch you next week yep have a good weekend