India's five-year property boom is coming to an end as the supply of housing increases, borrowing costs rise and a stock market rout erodes buying power, according to executives at two mortgage lenders.
Prices across India may drop as much as 15 percent in the coming months, said Keki Mistry, vice chairman of Housing Development Finance Corp., India's largest mortgage lender.
Gagan Banga, chief executive of rival Indiabulls Financial Services Ltd., said prices in some cities may fall as much as 20 percent.
India's central bank signaled it will increase borrowing costs further after raising rates this week to the highest in more than six years, curtailing demand for loans. The nation'sproperty market may avoid the meltdown seen in the U.S., U.K. and Spain because of lower indebtedness and a housing shortage estimated by the government at 24.7 millionunits, the executives said.
``Due to the state of the equity markets, many investors who would have bought a second or a third house are abstaining from doing so,'' Mistry said in a June 24 interview in Mumbai.``Genuine home buyers who are looking to buy a house for self occupation will continue to buy.'' Mistry was speaking hours before the central bank raised its repurchase rate by 0.5percentage point to 8.5 percent.
Real estate stocks have led Indian equities to the worst six-month performance in at least three decades, with the Bombay Stock Exchange Realty Index slumping 59 percentthis year. The benchmark Sensitive Index has shed 30 percent in the same period.
``The real estate sector as a whole is under pressure because of rising input costs, and the increase in interest rates,'' said R.K. Gupta, managing director of Taurus Asset management Co. in New Delhi. Gupta manages 3.5 billion rupees and owns shares of developers DLF Ltd. and Parsvnath Developers Ltd.
Higher borrowing costs ``will push the developers to cut prices in the near future,'' he said. Big Developers Safe Still, the nation's biggest developers, most of whom raised capital from share sales in the last two years, aren't at risk of delinquency because they haven't borrowed from banks to purchase real estate, Banga said in Mumbai yesterday.
His company's sister firm, Indiabulls Real Estate Ltd., is the nation's fourth-biggest developer. The company, backed by billionaire Lakshmi Mittal, sold shares in aproperty trust in Singapore to raise $258 million earlier this month.
``If you don't have an interest meter running, and you just raised capital, where is the question of going belly up?'' Banga said in an interview. ``I don't see any systemicdamage, or a large name disappearing into thin air, or going bankrupt. The momentum has slowed down.''
Bulls
Get Ready...for a Bull Ride !!!
Thursday, June 26, 2008
Friday, June 20, 2008
Indian Real Estate-Under Debt Stress (Sell) Macquarie
Sector news flow remains weak
Inflation has surpassed all expectations and reached a seven-year high of 8.75% last week. The recent hike in fuel prices (10% for petrol and 8% for diesel) may further fuel inflation given the direct impact on the cost of transportation. Our regional economist, Bill Belchere, expects no monetary easing until later this year at the earliest.
This view is supported by the low base effect, which is likely to remain in place until October 2008. Note that we are also now in the run-up to central government elections in May 2009. We suspect that last week’s 25bp rate hike by the Reserve Bank of India (RBI) may not be the last.
Is there a ‘Centro’ lurking out there?
In December 2007, Centro Properties (CNP AU, A$0.28, Underperform, TP: A$0.50) announced a reduction in earnings projections as a result of its inability to refinance short-term debt obligations on a long-term basis.
We believe the situation is ripe for a similar scenario to emerge in India. The domestic markets and the Singapore REIT markets remain soft. Debt capital was already in short supply given targeted tightening by the RBI over the last two years.
Our channel checks suggest that certain developers have raised bridge finance (at 18–25% interest rates) until October. They expect the lull in activity due to the monsoon to end with the festive buying season in October.
Given the interest rate scenario, we believe there is a higher than 50% probability that the recovery in sales volumes will be weaker than expected. This would lead to under-cutting on product prices and asset sales/equity injections at distressed valuations.
Focus on the two C’s: ‘cash’ and ‘commercial’
‘Cash is king’ are the three sweetest words in the current scenario. This ensures timely project launches and delivery. Importantly, it also opens the door for opportunistic asset acquisitions over next 6–12 months.
‘Commercial’ sub-segment is the most attractive given stable (locked-in) cashflows in a volatile pricing environment. It derives benefits from limited upcoming grade ‘A’ supply, continuing economic growth and moderate prices.
The hard part! Identifying winners
We ‘shock’ our financial models and perform an analysis using scenarios – from the realistic to the grim (liquidation). Mid-sized players are trading at deep discounts to NAV. Meanwhile, individual companies (such as Ansal) are trading near their liquidation value (Figure 1). However, investors are unlikely to get excited as realisation of the value is unlikely given the lack of triggers.
Within our coverage universe, we expect the outperformers to have the two important characteristics: access to capital and exposure to commercial real estate. Indiabulls Real Estate and DLF Ltd stand out. Unitech is a player which we believe should survive the liquidity crunch by raising fresh venture and private equity funds.
What should one keep an eye on? We believe the possibility of positive 12-month returns in the sector is higher than 50%. The next data points we would watch out for are signs of any pickup in sales during the festive season in October. Purchases of distressed assets by capital-rich developers could prove to be NAV accretive
Inflation has surpassed all expectations and reached a seven-year high of 8.75% last week. The recent hike in fuel prices (10% for petrol and 8% for diesel) may further fuel inflation given the direct impact on the cost of transportation. Our regional economist, Bill Belchere, expects no monetary easing until later this year at the earliest.
This view is supported by the low base effect, which is likely to remain in place until October 2008. Note that we are also now in the run-up to central government elections in May 2009. We suspect that last week’s 25bp rate hike by the Reserve Bank of India (RBI) may not be the last.
Is there a ‘Centro’ lurking out there?
In December 2007, Centro Properties (CNP AU, A$0.28, Underperform, TP: A$0.50) announced a reduction in earnings projections as a result of its inability to refinance short-term debt obligations on a long-term basis.
We believe the situation is ripe for a similar scenario to emerge in India. The domestic markets and the Singapore REIT markets remain soft. Debt capital was already in short supply given targeted tightening by the RBI over the last two years.
Our channel checks suggest that certain developers have raised bridge finance (at 18–25% interest rates) until October. They expect the lull in activity due to the monsoon to end with the festive buying season in October.
Given the interest rate scenario, we believe there is a higher than 50% probability that the recovery in sales volumes will be weaker than expected. This would lead to under-cutting on product prices and asset sales/equity injections at distressed valuations.
Focus on the two C’s: ‘cash’ and ‘commercial’
‘Cash is king’ are the three sweetest words in the current scenario. This ensures timely project launches and delivery. Importantly, it also opens the door for opportunistic asset acquisitions over next 6–12 months.
‘Commercial’ sub-segment is the most attractive given stable (locked-in) cashflows in a volatile pricing environment. It derives benefits from limited upcoming grade ‘A’ supply, continuing economic growth and moderate prices.
The hard part! Identifying winners
We ‘shock’ our financial models and perform an analysis using scenarios – from the realistic to the grim (liquidation). Mid-sized players are trading at deep discounts to NAV. Meanwhile, individual companies (such as Ansal) are trading near their liquidation value (Figure 1). However, investors are unlikely to get excited as realisation of the value is unlikely given the lack of triggers.
Within our coverage universe, we expect the outperformers to have the two important characteristics: access to capital and exposure to commercial real estate. Indiabulls Real Estate and DLF Ltd stand out. Unitech is a player which we believe should survive the liquidity crunch by raising fresh venture and private equity funds.
What should one keep an eye on? We believe the possibility of positive 12-month returns in the sector is higher than 50%. The next data points we would watch out for are signs of any pickup in sales during the festive season in October. Purchases of distressed assets by capital-rich developers could prove to be NAV accretive
The World According To The "Bear"
As Robert Arnott steps out of a taxi en route to a CNBC interview at the New York Stock Exchange, two young Italian tourists stop him on the street. "Do you know where The Bull is?" asks one of the young men clutching a map. The bull in question is Charging Bull, a 7,000-pound, 16-foot-long bronze sculpture by Italian artist Arturo Di Modica that stands in Bowling Green Park.
Arnott, an investment guru who lives in California, isn't familiar with the twisty streets of Lower Manhattan, but one of his colleagues points the tourists in the right direction. I Little do the Italians know that they've just met The Bear, a.k.a. Rob Arnott, chairman of investment advisory firm Research Affiliates.
Big and burly, with a gray-flecked beard and a bit of a belly after loading up on pastries during a trip to Europe, Arnott certainly looks the part. His bearish outlook informs the way he manages $35 billion for clients such as pension giant CalPERS. Included in that $35 billion is $15.2 billion he runs in the Pimco All Asset Fund (PKO) for Pacific Investment Management (Pimco).
Index strategies he has created are used in products offered by a variety of investment companies, including some Charles Schwab (SCHW) mutual funds. The strategies are also the basis for a slew of exchange-traded funds (ETFs) listed in the U.S., France, Sweden, and elsewhere.
Stocks are likely to move lower in the next six months and will be in hibernation for years, predicts Arnott. "For the long-term investor, stocks will offer single-digit returns over the next 10 to 20 years, though individual years could be far better or worse," he says.
Among Arnott's worries: Congress getting too protectionist or doing a massive bailout of the housing market. Even after such musings, though, Arnott says: "I don't perceive myself as wildly bearish, but compared to rest of world I am." He does see some bright spots. "There are always places to invest," he says. He likes U.S. Treasury Inflation-Protected Securities (TIPS) and local currency emerging markets debt.
Arnott, 53, made his name as a pioneer in the wonky-sounding field of tactical asset allocation. He advocates actively shifting assets among categories—stocks, bonds, real estate, commodities—to take advantage of pricing anomalies or strong market sectors. He's also known for his bold, big-think forecasts.
"His talent is his insight," says Nobel prize-winning economist Harry Markowitz, who is an adviser to Research Affiliates. Arnott's views are closely followed by leading financial advisers such as Louis Stanasolovich, a Pittsburgh wealth manager. "A lot of people are focused on what is happening this minute. Rob steps back and says: 'Here's the big picture,'" says Stanasolovich, CEO of Legend Financial Advisors.
Stanasolovich has invested more than $20 million of his clients' money in the Pimco All Asset Fund. In that fund, Arnott mixes quantitative screens with his own insights to rebalance the portfolio among investments such as stocks, bonds, TIPS, commodities, emerging-market debt, and real estate.
The fund, which invests only in other Pimco portfolios, is up 6.01% for the past year, 4.8 percentage points ahead of the Dow Jones Moderate Portfolio Index, according to fund tracker Morningstar. The fund's five-year annualized return, however, is 6.77% through June 9, below the 10.69% return for its benchmark.
All Assets's top bets include inflation-related strategies (30%), alternative bond strategies (26%), short-term strategies (14%), and equities and convertible bonds (10%).
MATH GEEK AT THE BEACH
At the beginning of May, Arnott and about 15 colleagues moved some 50 miles from Pasadena, Calif., up to Newport Beach to be closer to Pimco, Arnott's biggest client. But the unofficial reason for the change of location is that Arnott fell in love with the beach when he was studying economics, applied mathematics, and computer science as a student at University of California at Santa Barbara in the 1970s.
Now he and his wife, Marina, are living in a beachfront property—but he rents it. His skepticism about equities, it turns out, is paired with a weak forecast for real estate. His says it makes more sense to rent a $5 million house for $8,000 a month than to be saddled with a huge mortgage and high property taxes: "That's the situation in coastal [Orange County]."
His big-picture view on real estate is that plunging home prices will continue to fuel a consumer-spending slump. That's because the cash consumers tapped from home-equity loans amounted to 5% of gross domestic product, he says. Arnott figures that roughly half of the $600 billion in home-equity withdrawals was used to buy consumer goods in 2005.
From his new stomping grounds, Arnott continues to beat the drum for a subject he's passionate about: fundamental indexing. It's a way of weighting indexes on metrics such as sales, cash flow, and dividends rather than by market capitalization.
Although several people claim to be pioneers in this area, Arnott puts his stamp on the theory in a new book, The Fundamental Index: A Better Way to Invest (Wiley; $29.95), which he co-authored with colleagues. "If I didn't write it," he says, "someone else would."
Arnott says there is a basic problem with traditional indexing: Companies are weighted by market capitalization, which leads to an overweighting of overvalued companies and an underweighting of undervalued ones.
Fundamental indexers say focusing on metrics such as sales makes it easier to identify the most undervalued companies. "The idea behind the traditional index fund is a very powerful one," says investor and author Peter Bernstein, an adviser to Arnott. "To take issue with it in this way takes Rob Arnott's tenacity and thinking."
Indeed, Arnott's tweaking of the tenets of passive investing raises the ire of indexing stalwarts such as Vanguard Group founder Jack Bogle, whom Arnott considers an investment hero. "My problem is that the basic thesis of fundamental indexing is definitely not proven," says Bogle, who's skeptical of backtesting data that show such indexes outperforming the Standard & Poor's 500-stock index by two percentage points annually for the past 46 years.
Bogle also notes that the PowerShares FTSE RAFI U.S. 1000 ETF, which uses Arnott's strategy and tracks the performance of the largest U.S. equities based on book value, cash flow, sales, and dividends, is down 13.4% for the past 12 months, while the Vanguard 500 Index Fund is down 7.93%.
"He's gone down almost twice as much as the market in the last 12 months. That's pretty remarkable," says Bogle. "It's especially remarkable since he assured the world that his theory also gave better downside protection."
"Of course it has underperformed," Arnott counters. The cap-weighted index tilts toward growth companies, while fundamental indexes favor value companies, he explains.
The controversy doesn't end there. Among fundamental indexers, there's squabbling over who gets credit for the idea as well as the optimal way to construct a fundamental index. Arnott says he stays out of the fray to focus on getting more institutions to buy his index products. Just $30 billion of $5 trillion in indexed assets is in fundamental indexing strategies.
Arnott takes a measured approach to his hobbies, too. In January he set a goal of riding at least two of his 20 vintage motorcycles every month. (He's a little behind on his goal.) Some of his prized bikes include a Morbidelli built by Enzo Ferrari's engineering team and a 1949 Vincent Black Lightning that set an Australian Land Speed Record of 154 mph in 1949. His worst fear: that fellow cycle enthusiast and talk show host Jay Leno will find out about a bike he's interested in and outbid him.
Arnott also travels the globe chasing solar eclipses. "A total solar eclipse is the most remarkable—and beautiful—spectacle that the skies can offer us," he says. His goal is to spend an hour of his life under eclipses—no easy feat considering some last for 30 seconds. So far he has viewed nine, including one from Eastern Antarctica. He expects to cross the half-hour mark on Aug. 1, in Central China.
Bear markets, like eclipses, can be fleeting, but Arnott foresees a down market with staying power. "We've only seen the first leg," he says.
Arnott, an investment guru who lives in California, isn't familiar with the twisty streets of Lower Manhattan, but one of his colleagues points the tourists in the right direction. I Little do the Italians know that they've just met The Bear, a.k.a. Rob Arnott, chairman of investment advisory firm Research Affiliates.
Big and burly, with a gray-flecked beard and a bit of a belly after loading up on pastries during a trip to Europe, Arnott certainly looks the part. His bearish outlook informs the way he manages $35 billion for clients such as pension giant CalPERS. Included in that $35 billion is $15.2 billion he runs in the Pimco All Asset Fund (PKO) for Pacific Investment Management (Pimco).
Index strategies he has created are used in products offered by a variety of investment companies, including some Charles Schwab (SCHW) mutual funds. The strategies are also the basis for a slew of exchange-traded funds (ETFs) listed in the U.S., France, Sweden, and elsewhere.
Stocks are likely to move lower in the next six months and will be in hibernation for years, predicts Arnott. "For the long-term investor, stocks will offer single-digit returns over the next 10 to 20 years, though individual years could be far better or worse," he says.
Among Arnott's worries: Congress getting too protectionist or doing a massive bailout of the housing market. Even after such musings, though, Arnott says: "I don't perceive myself as wildly bearish, but compared to rest of world I am." He does see some bright spots. "There are always places to invest," he says. He likes U.S. Treasury Inflation-Protected Securities (TIPS) and local currency emerging markets debt.
Arnott, 53, made his name as a pioneer in the wonky-sounding field of tactical asset allocation. He advocates actively shifting assets among categories—stocks, bonds, real estate, commodities—to take advantage of pricing anomalies or strong market sectors. He's also known for his bold, big-think forecasts.
"His talent is his insight," says Nobel prize-winning economist Harry Markowitz, who is an adviser to Research Affiliates. Arnott's views are closely followed by leading financial advisers such as Louis Stanasolovich, a Pittsburgh wealth manager. "A lot of people are focused on what is happening this minute. Rob steps back and says: 'Here's the big picture,'" says Stanasolovich, CEO of Legend Financial Advisors.
Stanasolovich has invested more than $20 million of his clients' money in the Pimco All Asset Fund. In that fund, Arnott mixes quantitative screens with his own insights to rebalance the portfolio among investments such as stocks, bonds, TIPS, commodities, emerging-market debt, and real estate.
The fund, which invests only in other Pimco portfolios, is up 6.01% for the past year, 4.8 percentage points ahead of the Dow Jones Moderate Portfolio Index, according to fund tracker Morningstar. The fund's five-year annualized return, however, is 6.77% through June 9, below the 10.69% return for its benchmark.
All Assets's top bets include inflation-related strategies (30%), alternative bond strategies (26%), short-term strategies (14%), and equities and convertible bonds (10%).
MATH GEEK AT THE BEACH
At the beginning of May, Arnott and about 15 colleagues moved some 50 miles from Pasadena, Calif., up to Newport Beach to be closer to Pimco, Arnott's biggest client. But the unofficial reason for the change of location is that Arnott fell in love with the beach when he was studying economics, applied mathematics, and computer science as a student at University of California at Santa Barbara in the 1970s.
Now he and his wife, Marina, are living in a beachfront property—but he rents it. His skepticism about equities, it turns out, is paired with a weak forecast for real estate. His says it makes more sense to rent a $5 million house for $8,000 a month than to be saddled with a huge mortgage and high property taxes: "That's the situation in coastal [Orange County]."
His big-picture view on real estate is that plunging home prices will continue to fuel a consumer-spending slump. That's because the cash consumers tapped from home-equity loans amounted to 5% of gross domestic product, he says. Arnott figures that roughly half of the $600 billion in home-equity withdrawals was used to buy consumer goods in 2005.
From his new stomping grounds, Arnott continues to beat the drum for a subject he's passionate about: fundamental indexing. It's a way of weighting indexes on metrics such as sales, cash flow, and dividends rather than by market capitalization.
Although several people claim to be pioneers in this area, Arnott puts his stamp on the theory in a new book, The Fundamental Index: A Better Way to Invest (Wiley; $29.95), which he co-authored with colleagues. "If I didn't write it," he says, "someone else would."
Arnott says there is a basic problem with traditional indexing: Companies are weighted by market capitalization, which leads to an overweighting of overvalued companies and an underweighting of undervalued ones.
Fundamental indexers say focusing on metrics such as sales makes it easier to identify the most undervalued companies. "The idea behind the traditional index fund is a very powerful one," says investor and author Peter Bernstein, an adviser to Arnott. "To take issue with it in this way takes Rob Arnott's tenacity and thinking."
Indeed, Arnott's tweaking of the tenets of passive investing raises the ire of indexing stalwarts such as Vanguard Group founder Jack Bogle, whom Arnott considers an investment hero. "My problem is that the basic thesis of fundamental indexing is definitely not proven," says Bogle, who's skeptical of backtesting data that show such indexes outperforming the Standard & Poor's 500-stock index by two percentage points annually for the past 46 years.
Bogle also notes that the PowerShares FTSE RAFI U.S. 1000 ETF, which uses Arnott's strategy and tracks the performance of the largest U.S. equities based on book value, cash flow, sales, and dividends, is down 13.4% for the past 12 months, while the Vanguard 500 Index Fund is down 7.93%.
"He's gone down almost twice as much as the market in the last 12 months. That's pretty remarkable," says Bogle. "It's especially remarkable since he assured the world that his theory also gave better downside protection."
"Of course it has underperformed," Arnott counters. The cap-weighted index tilts toward growth companies, while fundamental indexes favor value companies, he explains.
The controversy doesn't end there. Among fundamental indexers, there's squabbling over who gets credit for the idea as well as the optimal way to construct a fundamental index. Arnott says he stays out of the fray to focus on getting more institutions to buy his index products. Just $30 billion of $5 trillion in indexed assets is in fundamental indexing strategies.
Arnott takes a measured approach to his hobbies, too. In January he set a goal of riding at least two of his 20 vintage motorcycles every month. (He's a little behind on his goal.) Some of his prized bikes include a Morbidelli built by Enzo Ferrari's engineering team and a 1949 Vincent Black Lightning that set an Australian Land Speed Record of 154 mph in 1949. His worst fear: that fellow cycle enthusiast and talk show host Jay Leno will find out about a bike he's interested in and outbid him.
Arnott also travels the globe chasing solar eclipses. "A total solar eclipse is the most remarkable—and beautiful—spectacle that the skies can offer us," he says. His goal is to spend an hour of his life under eclipses—no easy feat considering some last for 30 seconds. So far he has viewed nine, including one from Eastern Antarctica. He expects to cross the half-hour mark on Aug. 1, in Central China.
Bear markets, like eclipses, can be fleeting, but Arnott foresees a down market with staying power. "We've only seen the first leg," he says.
Ambani vs. Ambani – Mukesh Ambani wants to buy ADAG’s flagship company, Rcom
The MTN saga is getting longer and longer and the deal is just not getting through. Earlier, Bharti – MTN deal was ruled out due to deviation of MTN from ‘in – principle’ agreement which is highly unethical for a conglomerate of such magnitude. And now, all of a sudden, Mukesh Ambani has jumped into the fray claiming that RIL has got the first right of refusal if RCOM wants to sell its majority stake in the company.
The Rcom – MTN deal which was likely to sealed off soon has now taken a new turn as RIL sent a letter to MTN saying that RIL has the first right to buy shares of Rcom in case they are willing to sell stake. The letter was sent to MTN on last Thursday and simultaneously Rcom was intimated of the same on Friday. Mukesh Ambani claims that it is the duty of RIL to ensure that the price at which Rcom is selling off shares to MTN is appropriate. Furthermore, he is of the view that most of the Rcom’s shareholders are originally RIL’s shareholder and it is the duty of RIL to protect them. RIL also claims that as per the non - compete agreement which was unilaterally agreed upon by RIL in Jan 2006, RIL has the first right to refusal in case the group decides to sell off any business.
On the other hand, ADAG has reacted very aggressively on the claim of RIL calling it, “legally and factually untenable, baseless and misconceived.” ADAG is of the view that Bombay high court has ruled the agreement as invalid and also that it was not a bilateral agreement and was agreed upon only by RIL.
In a press statement, RCOM said: “RIL’s claim is born out of mounting despair and frustration at the Anil Ambani group’s continuing success and the support it enjoys from over 10 million investors. RIL is seeking to disrupt the creation of one of the world’s most valuable telecom combinations which will make over a billion Indians proud. RIL’s actions are clearly anticonsumer, anti-investor and anti-globalisation, and against the vision, beliefs and principles of the founder of the group, late Dhirubhai Ambani.”
As per the sources, MTN remains committed to their plans of value unlocking by entering into the deal with Rcom. But the recent twist to the story by Mukesh Ambani, can be a major setback in the way of Rcom’s growth plans which is looking forward to enter into a landmark deal not only for the company but also for India. If the deal goes through, Rcom will emerge as the single largest shareholder in MTN and simultaneously, it will become a subsidiary of MTN. This will create a telecom company with 115 million subscribers across 23 countries in Asia, South Africa and the Middle East.
The fight between Ambani brothers is not new for the spectators and both the brothers have agreed to disagree on expansion plans of each other. There had been instances in the past when both of them have filed cases against each other. It feels bad to see brothers fighting among themselves but when Pandavas and kauravas could not rule out such fight for power and fame, Ambanis’ can not be an exception. At the end of the day, it hardly matters to the stakeholders as Finance Minister, P Chidambaran once said –
“Who cares if the brothers are fighting, the markets are growing because the two are trying to outdo each other.”
(The views expressed are personal. For any queries, you may write to amitkhandelia@yahoo.co.in)
Source: aiii
The Rcom – MTN deal which was likely to sealed off soon has now taken a new turn as RIL sent a letter to MTN saying that RIL has the first right to buy shares of Rcom in case they are willing to sell stake. The letter was sent to MTN on last Thursday and simultaneously Rcom was intimated of the same on Friday. Mukesh Ambani claims that it is the duty of RIL to ensure that the price at which Rcom is selling off shares to MTN is appropriate. Furthermore, he is of the view that most of the Rcom’s shareholders are originally RIL’s shareholder and it is the duty of RIL to protect them. RIL also claims that as per the non - compete agreement which was unilaterally agreed upon by RIL in Jan 2006, RIL has the first right to refusal in case the group decides to sell off any business.
On the other hand, ADAG has reacted very aggressively on the claim of RIL calling it, “legally and factually untenable, baseless and misconceived.” ADAG is of the view that Bombay high court has ruled the agreement as invalid and also that it was not a bilateral agreement and was agreed upon only by RIL.
In a press statement, RCOM said: “RIL’s claim is born out of mounting despair and frustration at the Anil Ambani group’s continuing success and the support it enjoys from over 10 million investors. RIL is seeking to disrupt the creation of one of the world’s most valuable telecom combinations which will make over a billion Indians proud. RIL’s actions are clearly anticonsumer, anti-investor and anti-globalisation, and against the vision, beliefs and principles of the founder of the group, late Dhirubhai Ambani.”
As per the sources, MTN remains committed to their plans of value unlocking by entering into the deal with Rcom. But the recent twist to the story by Mukesh Ambani, can be a major setback in the way of Rcom’s growth plans which is looking forward to enter into a landmark deal not only for the company but also for India. If the deal goes through, Rcom will emerge as the single largest shareholder in MTN and simultaneously, it will become a subsidiary of MTN. This will create a telecom company with 115 million subscribers across 23 countries in Asia, South Africa and the Middle East.
The fight between Ambani brothers is not new for the spectators and both the brothers have agreed to disagree on expansion plans of each other. There had been instances in the past when both of them have filed cases against each other. It feels bad to see brothers fighting among themselves but when Pandavas and kauravas could not rule out such fight for power and fame, Ambanis’ can not be an exception. At the end of the day, it hardly matters to the stakeholders as Finance Minister, P Chidambaran once said –
“Who cares if the brothers are fighting, the markets are growing because the two are trying to outdo each other.”
(The views expressed are personal. For any queries, you may write to amitkhandelia@yahoo.co.in)
Source: aiii
10 great investing rules to become RICH
An old saying goes, "You can't build wealth by buying things you don't need, with money you don't have, to impress people you don't like." So how do you build wealth? Read on...
There are basically only four roads to wealth:
· You can marry it (don't laugh, some do);
· You can inherit it (others do that);
· You can get a windfall (from a lawsuit settlement, lottery, or some other unexpected good fortune); or
· You can accumulate it.
Most of us are stuck with option #4 - accumulate it. To do so, you need to understand how to manage cash flow. First, look at your annual earnings and multiply that figure by your working years. Not counting inflation (that is, pay raises along the way), the result may total several million dollars.
Whether you will have that several million dollars by retirement, though, depends on how you manage your cash flow - and how you answer the following questions: What do you need now, what do you want now, and what can you save and invest for the future?
Here are ten time-tested rules that can weather the stormiest market cycles.
Rules #1: Live within your means
This includes managing debt and learning to budget. Such boring topics may not be the most exciting things about becoming wealthy, but they may be the most critical.
Consumer-driven economies relentlessly hammer away at why we must buy this item or that gadget so we can have the appearance of being successful, happy, and altogether "with it." So it takes financial discipline and sensible behavior to successfully accumulate money and grow wealthy.
Possibly the biggest trap out there is easy credit, which lets us buy numerous things we might not need. Comedians have pointed out the foolishness: "You buy something that's 10 per cent off and charge it on a 20 per cent interest credit card!" And US newspaper columnist Earl Wilson opined, "Nowadays there are three classes of people - the Haves, the Have-Nots, and the Have-Not-Paid-For-What-They-Haves."
Learning to live within your means leads to a freer life - debt can be a mean master instead of a worthy servant. Save first, spend second. If you do so, building wealth will be a lot easier for you.
Rule #2: Save aggressively
This does not mean "invest aggressively." Rather, it means making it an absolute priority to set aside 10 per cent of your income right off the top, and even more if your goals tell you to do that. The longer you wait to start saving, the larger the percentage of your current pay you will have to save to reach your goal.
If you can save aggressively, you will be surprised how that "nest egg" will start to compound. Look at any chart of compounding. It has been said that it's the last compounding that makes you wealthy.
In other words, $20,000 becoming $40,000 doesn't seem like a lot of headway, but when the $40,000 compounds to $80,000, and the $80,000 to $160,000, and finally the $160,000 to $320,000, we're now talking about some serious money. Two more "doublings" and this account will be worth over $1.2 million. Those who spend first and save later inevitably end up working for those who have learned to save first, spend second.
Rule #3: Dollar-cost average
When buying shares, remove emotions from your investing by automatically buying more shares or equity mutual fund units when they are cheap. Emotional investing gets too many people in trouble. Statistics continue to show that we tend to buy when things are going up and sell when they are going down - in other words, we tend to buy high and sell low. Dollar-cost averaging not only removes emotions from investing, but it helps you buy low. Here's how:
By putting a constant amount into the market, as the price slips, you buy more and more number of cheaper shares or fund units and thereby reduce your average cost.
For example, let's say you are investing $100 a month into a fund. In the first month, the price of the fund is $10 per share and you buy 10 shares. The next month, the price has dropped to $8 per share, so your $100 buys you 12.5 shares. The next month, the price has fallen again, to $5 a share, and you buy 20 shares. In the fourth month, the price ticks back up to $7 per share. Your total investment so far is $400.
If you're like most people, though, when you look at your statement and see that by the end of the third month the price has fallen to half, you would probably think you were losing money hand over fist. Especially after a fund continues to decline month after month, investors lose patience and start to bail. They're looking for "better returns," but they don't understand what's going on with the math.
At $5 a share, it feels as though you're down 50 per cent (because the price started at $10 per share). However, you own 42.5 shares, which, when multiplied by $5 a share, equals $212.50 - and you've invested $300. In the fourth month, the price gets back up to $7 per share. Although it might feel as though you're still down because the price started at $10 per share, you're actually within a couple of dollars of your break-even point. You own 56.79 shares, which when multiplied by $7 equals $397.53, on an investment of $400.
Of course, if the fund or market continues to go down and never comes back up, you can't be guaranteed a profit. But this would happen rarely, if ever. Dollar-cost averaging - by investing a fixed amount in regular intervals - is the best way to make money in a variable market over time.
The most difficult part is having the discipline to keep doing it. Investors should be willing to consider their ability to invest over an extended period of time. Remember, you need a longer time horizon when investing in the stock market.
Rule #4: Diversify
No investment is risk free; only a diversified portfolio can mitigate the risks of market cycles. We've all been warned against putting all our eggs in one basket; even Warren Buffett said, "It's better to be approximately right than definitely wrong." By "approximately right," he was referring to diversification.
If one piece of your portfolio is doing substantially better than other parts, the natural inclination is to load up on the part doing the best and forsake those not doing well. But the result will be an under-diversified portfolio that will probably be much more volatile - and the risks may be on the downward side.
Also, proper diversification does not mean any old bunch of mutual funds or stocks, but a proper allocation among stocks, bonds, real estate, fixed assets, and other investments. It also means diversifying within those investment categories.
For example, your stocks should include a mix of midcap, large-, and small-cap stocks as well as growth, blend, and value stocks. You should have bonds that are long, medium, and short term, as well as high grade, mid grade, and low grade.
A mutual fund may offer more diversification than you could afford by owning the same stocks individually. But owning a handful of mutual funds may not offer the diversification you seek unless you research the funds' holdings carefully. That's because many funds have substantial "overlap." In other words, fund A from mutual fund family X may have many of the same stocks as fund B from fund family Y.
Rule #5: Be patient
Warren Buffet says, "The market has a very efficient way of transferring wealth from the impatient to the patient."
But waiting is very hard to do. How long are you willing to hold an asset that is not performing well? One year? Two, three, or four? If you look at the history of asset classes over time, you will see that an asset can be "out of favor" for several years in a row.
You have to be prepared to wait. Don't think you can time when bonds will perform and stocks will get hot. If someone really could do that, he would own the world by now. So remember: Time in the market is more important than timing the market.
Rule #6: Understand volatility
Very few people truly understand the risk and volatility inevitably baked into every investment portfolio. Without getting into its complexity, every variable investment has produced a range of returns over its lifetime, and this range, or deviation, can be plotted on a chart.
So, it's important to understand what the investment category's "average" annual return means in order to prepare yourself for its volatility. For example, does a 10 per cent average mean the investment was up 73 per cent and down 30 per cent and happened to average 10 per cent? Or was it up 15 per cent, and then down 5 per cent to average 10 per cent?
Many investors are fooled by averages - they chase the 70 per cent return after it has happened, when the likelihood of a repeat performance is slim (which we'll discuss more in Rule #7). Yogi Berra is rumored to have said, "Averages don't mean nuthin". If they did, you could have one foot in the oven and the other in a bucket of ice and feel perfectly comfortable."
Over time, returns from investments regress to a mean. "Regression to the mean" simply means that highs and lows will average out so that your return regresses to a certain number or range. Understand an investment's range of returns so you know what to expect annually, and over time.
Markets move from fear to greed, and back to fear. So there are times when the market is "overvalued" and other times when it is "undervalued." Warren Buffett said of the stock buying and selling decisions made at his company, Berkshire Hathaway, "We strive to be fearful when others are greedy, and greedy only when others are fearful."
Rule #7: Don't chase returns
If we know from Rule #6 that a 10 per cent average annual return does not really mean a 10 per cent return each year, why do we still fall for an ad touting a fund that produces 20 per cent annually or some other phenomenal return?
Human nature. And maybe we even convince ourselves that for the chance to experience a year or two of 70 per cent gains, we're willing to stomach the years of 30 per cent losses that also fall within the fund's range of returns.
So, before chasing that incredible return, find out how the investment did during the last bad market for that asset class. Find out its risk, and ask yourself whether you can stomach a bumpy ride over the long term.
Another Buffettism: "The dumbest reason in the world to buy a stock is because it is going up." So before chasing a return, always consider how likely it is that the investment will continue to produce that return - and whether it's really worth the cost of cashing out of another, perhaps only temporarily depressed, investment to do so.
Rule #8: Periodically rebalance your portfolio
You may decide that your investment mix should be, for example, 50 per cent growth stocks, 20 per cent value stocks, and 30 per cent bonds. But asset classes vary in performance over time, so after a year or so, the portfolio balance will start to shift as one asset "overperforms" and another one "underperforms."
Emotions would tell you to sell the underperformers and buy the overachievers. If you want to remain adequately diversified, however, you would rebalance by selling some of the overperformers and buying some of the underachievers - probably just the opposite of what your emotions will tell you.
So, if you strive to put your portfolio back to its original allocations from time to time (annually, semi-annually, or possibly even quarterly), you will be taking gains from the best-performing assets (selling high) and buying those temporarily out of favor (buying low). But it takes discipline to keep your emotions in check.
Rule #9: Manage your taxes
Have you ever considered how taxes are your biggest expense in life - more than mortgage expense, education expense, or any other expense? So, you must take advantage of all tax breaks available - each and every single one of them.
Rule #10: Get advice
Never underestimate the value of good advice. Someone who manages investments full time certainly will find things you have overlooked or done wrong. A good financial adviser is like a personal trainer for your finances and can get you on track and keep you there until your goals are met.
And even more critical than getting the advice is being sure you consistently follow your game plan. The greatest problem for most people is procrastination and erratic investment behavior. So get started, get advice, and get going down the road to wealth - and steadfastly follow through.
(Excerpt from the book, Investing Under Fire)
There are basically only four roads to wealth:
· You can marry it (don't laugh, some do);
· You can inherit it (others do that);
· You can get a windfall (from a lawsuit settlement, lottery, or some other unexpected good fortune); or
· You can accumulate it.
Most of us are stuck with option #4 - accumulate it. To do so, you need to understand how to manage cash flow. First, look at your annual earnings and multiply that figure by your working years. Not counting inflation (that is, pay raises along the way), the result may total several million dollars.
Whether you will have that several million dollars by retirement, though, depends on how you manage your cash flow - and how you answer the following questions: What do you need now, what do you want now, and what can you save and invest for the future?
Here are ten time-tested rules that can weather the stormiest market cycles.
Rules #1: Live within your means
This includes managing debt and learning to budget. Such boring topics may not be the most exciting things about becoming wealthy, but they may be the most critical.
Consumer-driven economies relentlessly hammer away at why we must buy this item or that gadget so we can have the appearance of being successful, happy, and altogether "with it." So it takes financial discipline and sensible behavior to successfully accumulate money and grow wealthy.
Possibly the biggest trap out there is easy credit, which lets us buy numerous things we might not need. Comedians have pointed out the foolishness: "You buy something that's 10 per cent off and charge it on a 20 per cent interest credit card!" And US newspaper columnist Earl Wilson opined, "Nowadays there are three classes of people - the Haves, the Have-Nots, and the Have-Not-Paid-For-What-They-Haves."
Learning to live within your means leads to a freer life - debt can be a mean master instead of a worthy servant. Save first, spend second. If you do so, building wealth will be a lot easier for you.
Rule #2: Save aggressively
This does not mean "invest aggressively." Rather, it means making it an absolute priority to set aside 10 per cent of your income right off the top, and even more if your goals tell you to do that. The longer you wait to start saving, the larger the percentage of your current pay you will have to save to reach your goal.
If you can save aggressively, you will be surprised how that "nest egg" will start to compound. Look at any chart of compounding. It has been said that it's the last compounding that makes you wealthy.
In other words, $20,000 becoming $40,000 doesn't seem like a lot of headway, but when the $40,000 compounds to $80,000, and the $80,000 to $160,000, and finally the $160,000 to $320,000, we're now talking about some serious money. Two more "doublings" and this account will be worth over $1.2 million. Those who spend first and save later inevitably end up working for those who have learned to save first, spend second.
Rule #3: Dollar-cost average
When buying shares, remove emotions from your investing by automatically buying more shares or equity mutual fund units when they are cheap. Emotional investing gets too many people in trouble. Statistics continue to show that we tend to buy when things are going up and sell when they are going down - in other words, we tend to buy high and sell low. Dollar-cost averaging not only removes emotions from investing, but it helps you buy low. Here's how:
By putting a constant amount into the market, as the price slips, you buy more and more number of cheaper shares or fund units and thereby reduce your average cost.
For example, let's say you are investing $100 a month into a fund. In the first month, the price of the fund is $10 per share and you buy 10 shares. The next month, the price has dropped to $8 per share, so your $100 buys you 12.5 shares. The next month, the price has fallen again, to $5 a share, and you buy 20 shares. In the fourth month, the price ticks back up to $7 per share. Your total investment so far is $400.
If you're like most people, though, when you look at your statement and see that by the end of the third month the price has fallen to half, you would probably think you were losing money hand over fist. Especially after a fund continues to decline month after month, investors lose patience and start to bail. They're looking for "better returns," but they don't understand what's going on with the math.
At $5 a share, it feels as though you're down 50 per cent (because the price started at $10 per share). However, you own 42.5 shares, which, when multiplied by $5 a share, equals $212.50 - and you've invested $300. In the fourth month, the price gets back up to $7 per share. Although it might feel as though you're still down because the price started at $10 per share, you're actually within a couple of dollars of your break-even point. You own 56.79 shares, which when multiplied by $7 equals $397.53, on an investment of $400.
Of course, if the fund or market continues to go down and never comes back up, you can't be guaranteed a profit. But this would happen rarely, if ever. Dollar-cost averaging - by investing a fixed amount in regular intervals - is the best way to make money in a variable market over time.
The most difficult part is having the discipline to keep doing it. Investors should be willing to consider their ability to invest over an extended period of time. Remember, you need a longer time horizon when investing in the stock market.
Rule #4: Diversify
No investment is risk free; only a diversified portfolio can mitigate the risks of market cycles. We've all been warned against putting all our eggs in one basket; even Warren Buffett said, "It's better to be approximately right than definitely wrong." By "approximately right," he was referring to diversification.
If one piece of your portfolio is doing substantially better than other parts, the natural inclination is to load up on the part doing the best and forsake those not doing well. But the result will be an under-diversified portfolio that will probably be much more volatile - and the risks may be on the downward side.
Also, proper diversification does not mean any old bunch of mutual funds or stocks, but a proper allocation among stocks, bonds, real estate, fixed assets, and other investments. It also means diversifying within those investment categories.
For example, your stocks should include a mix of midcap, large-, and small-cap stocks as well as growth, blend, and value stocks. You should have bonds that are long, medium, and short term, as well as high grade, mid grade, and low grade.
A mutual fund may offer more diversification than you could afford by owning the same stocks individually. But owning a handful of mutual funds may not offer the diversification you seek unless you research the funds' holdings carefully. That's because many funds have substantial "overlap." In other words, fund A from mutual fund family X may have many of the same stocks as fund B from fund family Y.
Rule #5: Be patient
Warren Buffet says, "The market has a very efficient way of transferring wealth from the impatient to the patient."
But waiting is very hard to do. How long are you willing to hold an asset that is not performing well? One year? Two, three, or four? If you look at the history of asset classes over time, you will see that an asset can be "out of favor" for several years in a row.
You have to be prepared to wait. Don't think you can time when bonds will perform and stocks will get hot. If someone really could do that, he would own the world by now. So remember: Time in the market is more important than timing the market.
Rule #6: Understand volatility
Very few people truly understand the risk and volatility inevitably baked into every investment portfolio. Without getting into its complexity, every variable investment has produced a range of returns over its lifetime, and this range, or deviation, can be plotted on a chart.
So, it's important to understand what the investment category's "average" annual return means in order to prepare yourself for its volatility. For example, does a 10 per cent average mean the investment was up 73 per cent and down 30 per cent and happened to average 10 per cent? Or was it up 15 per cent, and then down 5 per cent to average 10 per cent?
Many investors are fooled by averages - they chase the 70 per cent return after it has happened, when the likelihood of a repeat performance is slim (which we'll discuss more in Rule #7). Yogi Berra is rumored to have said, "Averages don't mean nuthin". If they did, you could have one foot in the oven and the other in a bucket of ice and feel perfectly comfortable."
Over time, returns from investments regress to a mean. "Regression to the mean" simply means that highs and lows will average out so that your return regresses to a certain number or range. Understand an investment's range of returns so you know what to expect annually, and over time.
Markets move from fear to greed, and back to fear. So there are times when the market is "overvalued" and other times when it is "undervalued." Warren Buffett said of the stock buying and selling decisions made at his company, Berkshire Hathaway, "We strive to be fearful when others are greedy, and greedy only when others are fearful."
Rule #7: Don't chase returns
If we know from Rule #6 that a 10 per cent average annual return does not really mean a 10 per cent return each year, why do we still fall for an ad touting a fund that produces 20 per cent annually or some other phenomenal return?
Human nature. And maybe we even convince ourselves that for the chance to experience a year or two of 70 per cent gains, we're willing to stomach the years of 30 per cent losses that also fall within the fund's range of returns.
So, before chasing that incredible return, find out how the investment did during the last bad market for that asset class. Find out its risk, and ask yourself whether you can stomach a bumpy ride over the long term.
Another Buffettism: "The dumbest reason in the world to buy a stock is because it is going up." So before chasing a return, always consider how likely it is that the investment will continue to produce that return - and whether it's really worth the cost of cashing out of another, perhaps only temporarily depressed, investment to do so.
Rule #8: Periodically rebalance your portfolio
You may decide that your investment mix should be, for example, 50 per cent growth stocks, 20 per cent value stocks, and 30 per cent bonds. But asset classes vary in performance over time, so after a year or so, the portfolio balance will start to shift as one asset "overperforms" and another one "underperforms."
Emotions would tell you to sell the underperformers and buy the overachievers. If you want to remain adequately diversified, however, you would rebalance by selling some of the overperformers and buying some of the underachievers - probably just the opposite of what your emotions will tell you.
So, if you strive to put your portfolio back to its original allocations from time to time (annually, semi-annually, or possibly even quarterly), you will be taking gains from the best-performing assets (selling high) and buying those temporarily out of favor (buying low). But it takes discipline to keep your emotions in check.
Rule #9: Manage your taxes
Have you ever considered how taxes are your biggest expense in life - more than mortgage expense, education expense, or any other expense? So, you must take advantage of all tax breaks available - each and every single one of them.
Rule #10: Get advice
Never underestimate the value of good advice. Someone who manages investments full time certainly will find things you have overlooked or done wrong. A good financial adviser is like a personal trainer for your finances and can get you on track and keep you there until your goals are met.
And even more critical than getting the advice is being sure you consistently follow your game plan. The greatest problem for most people is procrastination and erratic investment behavior. So get started, get advice, and get going down the road to wealth - and steadfastly follow through.
(Excerpt from the book, Investing Under Fire)
Tuesday, June 17, 2008
How high net-worth individuals diversify risk
Jaideep Hansraj
Managing money for high net-worth individuals is a complex task that needs access to various resources, asset classes and constant monitoring.
As wealth increases, the needs evolve; from plain vanilla reactive investment strategies to active oversight and scientific planning.
Historical data indicates clearly that no one asset class tends to perform consistently over a long period of time. Therefore, to curb volatility and achieve targeted returns, an individual must spread his wealth not just across asset classes, but also across management styles.
Unique Requirements
Today, sophisticated investors have access to various asset classes like equity, debt, private equity, real estate, structured products, insurance, commodities etc.
Investments can be done in a variety of styles such as discretionary and non-discretionary equity, concentrated portfolios, diversified portfolios, long only, conservative, hedged, arbitrage, growth, value, etc.
Every individual has unique requirements based on appetite for risk, ability to tolerate volatility and cash flows. Additional needs of asset preservation and handover to the following generations adds a layer of customisation and complexity to the process.
While attempts have been made to broadly classify investors according to their financial planning needs, the market has been evolving constantly.
The growing maturity of the players and evolving regulations are giving birth to newer opportunities. Let us look at some of the newer developments in the product space.
Today a substantial part of the investors' portfolio is on Indian shores. As regulations permit and structures develop, we will increasingly see investors demanding geographical diversification to minimise country risks. This will not only mean geographical access to global markets but also access to more cutting-edge structures that fulfill possible risk-reward gaps in the portfolio.
While a few years back Indians had restricted access to global markets, today regulations permit investors to route large amounts through global access mutual funds and limited amounts directly.
Investment strategy
These products offer investors geographical diversification, access to emerging markets across the world or could also offer asset class diversification for example; a global gold fund. These enable the investor either to reduce volatility or simply attempt to outperform.
Sometimes existing products may or may not be enough to meet every gap in the portfolio.
At such times, the smart manager needs to access sophisticated products that are structured specifically for the individual needs.
A structured product is generally a pre-packaged investment strategy, which is based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuances and foreign currencies.
A unique feature of some structured products is a 'principal guarantee' function, which offers protection of the principal, if held to maturity. Structured products can be used as an alternative to direct investments, as part of the asset allocation process is to reduce risk exposure of a portfolio or to capitalise on the current market trend.
For example, today's HNIs have access to structures that outperform the benchmark on the upside and protect capital on the downside.
Private Equity
The last but amongst the most interesting opportunities that HNIs can benefit from is the alternate space, this is predominantly in the form of private equity.
These opportunities may be in broad sector agnostic funds or in targeted verticals such as real estate and infrastructure.
While these alternates hold the promise of larger returns, they come along with their share of risk and long lock-ins ranging from 7 to 12 years.
At the same time, the funds try to achieve higher IRR through structured draw downs and profit bookings that are paid to investors on realisation before the final wrapping up of the fund.
These options are definitely for the larger investors and smaller investors may well be advised to exercise caution. Thus, we see that, as wealth increases, the complexity only increases. Managing money is a fulltime activity that requires trained professionals, who understand both: the high net-worth individual as well as his wealth management need, to achieve a fine balance.
After all…it takes all ingredients to make a perfect recipe.
The author is Executive Vice-President & Head of Wealth Management Services, Kotak Mahindra Bank
Source: Hindu buisness line
Managing money for high net-worth individuals is a complex task that needs access to various resources, asset classes and constant monitoring.
As wealth increases, the needs evolve; from plain vanilla reactive investment strategies to active oversight and scientific planning.
Historical data indicates clearly that no one asset class tends to perform consistently over a long period of time. Therefore, to curb volatility and achieve targeted returns, an individual must spread his wealth not just across asset classes, but also across management styles.
Unique Requirements
Today, sophisticated investors have access to various asset classes like equity, debt, private equity, real estate, structured products, insurance, commodities etc.
Investments can be done in a variety of styles such as discretionary and non-discretionary equity, concentrated portfolios, diversified portfolios, long only, conservative, hedged, arbitrage, growth, value, etc.
Every individual has unique requirements based on appetite for risk, ability to tolerate volatility and cash flows. Additional needs of asset preservation and handover to the following generations adds a layer of customisation and complexity to the process.
While attempts have been made to broadly classify investors according to their financial planning needs, the market has been evolving constantly.
The growing maturity of the players and evolving regulations are giving birth to newer opportunities. Let us look at some of the newer developments in the product space.
Today a substantial part of the investors' portfolio is on Indian shores. As regulations permit and structures develop, we will increasingly see investors demanding geographical diversification to minimise country risks. This will not only mean geographical access to global markets but also access to more cutting-edge structures that fulfill possible risk-reward gaps in the portfolio.
While a few years back Indians had restricted access to global markets, today regulations permit investors to route large amounts through global access mutual funds and limited amounts directly.
Investment strategy
These products offer investors geographical diversification, access to emerging markets across the world or could also offer asset class diversification for example; a global gold fund. These enable the investor either to reduce volatility or simply attempt to outperform.
Sometimes existing products may or may not be enough to meet every gap in the portfolio.
At such times, the smart manager needs to access sophisticated products that are structured specifically for the individual needs.
A structured product is generally a pre-packaged investment strategy, which is based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuances and foreign currencies.
A unique feature of some structured products is a 'principal guarantee' function, which offers protection of the principal, if held to maturity. Structured products can be used as an alternative to direct investments, as part of the asset allocation process is to reduce risk exposure of a portfolio or to capitalise on the current market trend.
For example, today's HNIs have access to structures that outperform the benchmark on the upside and protect capital on the downside.
Private Equity
The last but amongst the most interesting opportunities that HNIs can benefit from is the alternate space, this is predominantly in the form of private equity.
These opportunities may be in broad sector agnostic funds or in targeted verticals such as real estate and infrastructure.
While these alternates hold the promise of larger returns, they come along with their share of risk and long lock-ins ranging from 7 to 12 years.
At the same time, the funds try to achieve higher IRR through structured draw downs and profit bookings that are paid to investors on realisation before the final wrapping up of the fund.
These options are definitely for the larger investors and smaller investors may well be advised to exercise caution. Thus, we see that, as wealth increases, the complexity only increases. Managing money is a fulltime activity that requires trained professionals, who understand both: the high net-worth individual as well as his wealth management need, to achieve a fine balance.
After all…it takes all ingredients to make a perfect recipe.
The author is Executive Vice-President & Head of Wealth Management Services, Kotak Mahindra Bank
Source: Hindu buisness line
Thursday, June 12, 2008
Lehman Sinks In The Hudson River
Shares of Lehman Brothers (LEH.N) plunged 13.6 percent on Wednesday, bringing their total loss in the past four days to more than 25 percent, on concerns about the potential for further write-downs and investors' declining confidence in the investment bank's management.
The stock's latest drop followed a newspaper report that Lehman could seek more capital after raising $6 billion on Monday, and a downgrade by a prominent analyst. Shares of the fourth-largest investment bank fell to $23.75, their lowest close since October 2002.
The Financial Times said on Wednesday that Lehman had sought capital from Korean financial institutions, and may still enter a deal with them later this year. Lehman said on Monday it expected to post a roughly $2.8 billion quarterly loss next week.
"They diluted the shareholders that much, and now they may need more capital? There's a real crisis of confidence in management here," said Bill Smith, chief executive officer of Smith Asset Management, which sold its Lehman shares at the open Wednesday morning.
A spokesman for Lehman declined to comment.
Credit markets do not seem as concerned about Lehman, but some investors have been preparing for steep drops in the bank's shares. David Einhorn, whose Greenlight Capital hedge fund is shorting Lehman shares, has repeatedly accused the investment bank of understating the extent of its losses.
Merrill Lynch analyst Guy Moszkowski cut Lehman's ratings to "neutral" from "buy" on Wednesday afternoon, and said it believes Lehman is trying to value assets appropriately, but there still may be more write-downs coming for mortgage and real-estate assets.
"Real-estate assets and mortgage-payment delinquencies remain under intense pressure," Moszkowski wrote in his note, in which he cut Lehman's share price target to $28 from $36.
Lehman has an estimated $60 billion of real-estate-related assets on its balance sheet, the analyst said. The downgrade came just a week after Merrill had upgraded Lehman.
OTHERS LESS CONCERNED
In the credit derivatives market, the cost of protecting Lehman's debt against default is about two-thirds its level in mid-March, when Bear Stearns suffered a run on the bank.
The relatively low price of insuring Lehman's debt implies that demand from banks and clients to hedge their credit exposure to Lehman is hardly outsized.
Over the last week, more than a dozen clients, dealers and banks told Reuters they were trading normally with Lehman, but two funds said they had reduced their exposure.
Investment banks are much less likely to crash now that they can borrow funds from the U.S. Federal Reserve, an option unavailable to Bear Stearns, analysts said.
Larry Fink, chief executive of BlackRock Inc (BLK.N), the biggest publicly traded U.S. money management firm, told CNBC on Wednesday, "Lehman is not a Bear Stearns situation." BlackRock bought Lehman shares earlier this week.
"Lehman Brothers is adequately structured in terms of avoiding a liquidity crisis. That was what the Bear Stearns problem was," Fink said.
Lehman's shares dropped amid a broader decline in financial stocks, but Lehman's shares suffered the biggest decline among the top U.S. investment banks.
That's in part because of questions about the company's management, said Anton Schutz, a portfolio manager at Mendon Capital, which owns Lehman shares. "Investors were really disappointed on Monday," he said.
Goldman Sachs (GS.N) shares slipped 2.9 percent to $162.40, and Merrill Lynch & Co Inc (MER.N) fell 6.6 percent to $35.46.
Lehman is taking steps to scale down its risk. It decreased assets by about $130 billion in the second quarter, and has raised $10 billion of common equity and equity-linked capital in recent months. Lehman's holding company has about $100 billion of cash and assets it could easily sell or finance.
Brad Hintz, analyst at Sanford C. Bernstein, said in a note to investors on Tuesday that Lehman was taking the steps it needs to make its balance sheet "bulletproof," but Bernstein believes Lehman faces significant challenges in the future.
The cost of protecting Lehman's debt against default in the credit derivatives market rose about 30 basis points on Wednesday to 283 basis points, or $283,000 a year for five years for every $10 million of debt protected, according to Markit. That figure was about 465 basis points in mid-March.
Source: internet
Lehman Brothers-What's Next?
Lehman Brothers is done cutting down its balance sheet and says it's ready to take some of the $6 billion in capital it raised this week and make riskier trading bets based on "opportunities" it sees in the markets.
The question is whether people believe Lehman still has plenty of new opportunities to rebuild after the credit crisis decimated Wall Street's powerful fixed-income machine.
Though it has diversified into deal advisory and other activities, Lehman is still a big force in the fixed-income business, and that will likely mean its return to the profits it has enjoyed in recent years is still a way off. Its second quarter closed with an unexpectedly large $2.8 billion loss, thanks in large part to $4 billion in write-downs.
While Lehman was getting bigger in the structured products businesses that have been caught up in the credit crisis, the big commercial banks elbowed into more plain vanilla bond activities and now dominate the quarterly rankings of underwriters, says CreditSights analyst David Hendler.
"The competitive landscape has changed dramatically and makes it difficult for a fixed-income centric company like Lehman to thrive," Hendler says.
Lehman's second quarter, officially announced next week, was a period in which revenues were pressured almost across the board compared to the same quarter last year, before the credit crisis erupted.
Ratings agencies have taken a dimmer view on investment banking outlooks lately. Moody's (nyse: MCO - news - people ) put Lehman on negative outlook Monday, while Standard & Poor's went ahead and cut Lehman's credit ratings last week along with the ratings of Morgan Stanley (nyse: MS - news - people ) and Merrill Lynch (nyse: MER - news - people ).
And because of that downgrade, clients of the firm are limiting trading with Lehman's unregulated derivatives subsidiaries, says Brad Hintz, an analyst at Sanford Bernstein.
"We expect this pullback by counterparties will hurt the earnings of the firm's fixed income, equities and commodity derivative franchises," Hintz said in a research note last week.
Lehman disputes it is having trouble with counterparties.
But, perhaps acknowledging that it has been criticized for playing its cards too close to its vest in its disclosure of exposures, said it has taken a cumulative $17 billion in write-downs since last year, including $11 billion from residential mortgages, $3.5 billion from commercial mortgages and $2 billion from leveraged deal financings.
It offset them by $7.5 billion in gains from its hedging activities, which broke down in the second quarter and so couldn't help make up for losses as it had in prior quarters.
In addition, it sold $130 billion of assets during the quarter, the much discussed de-leveraging that all Wall Street banks are undergoing. But that doesn't mean it won't have more write-downs ahead.
The pre-announced quarter results Monday didn't quiet one critic, David Einhorn of Greenlight Capital. Einhorn, who is betting on a decline in Lehman shares, says Lehman has issues with its financial disclosures, hasn't taken write-downs that accurately reflect its exposure and needs to reduce leverage and raise capital.
Even though Lehman did take write-downs, reduce leverage and raise capital in the second quarter, he says it's not enough. "Lehman is raising $6 billion that they said they didn't need to replace losses that they said they didn't have," Einhorn said Monday.
"Since the credit markets actually improved this quarter, such losses primarily reflect losses that might have been taken in prior quarters. A preliminary analysis of the pre-release and conference call suggests that there are still unrecognized losses on the balance sheet."
The uncertainty around Lehman, despite the company's efforts to dispel it, makes it a takeover possibility, Hendler says, though it's difficult to say just which bank would make the first move.
Among the U.S. banks with big, diverse balance sheets, JPMorgan Chase (nyse: JPM - news - people ) is busy integrating Bear Stearns (nyse: BSC - news - people ) and wouldn't have the appetite for another deal, at least not for an investment bank. Citigroup (nyse: C - news - people ) has its own issues of reducing leverage. Bank of America (nyse: BAC - news - people ) is facing the closure of its deal for Countrywide Financial (nyse: CFC - news - people ). Wachovia (nyse: WB - news - people ) just fired its chief executive and seems ill-inclined for deal-making, unless it involves the sale of itself to some other company.
Foreign banks, particularly Barclays (nyse: BCS - news - people ), have been rumored to be interested in buying a chunk or all of Lehman. But they also have been dealing with the effects of the credit crisis.
The question is whether people believe Lehman still has plenty of new opportunities to rebuild after the credit crisis decimated Wall Street's powerful fixed-income machine.
Though it has diversified into deal advisory and other activities, Lehman is still a big force in the fixed-income business, and that will likely mean its return to the profits it has enjoyed in recent years is still a way off. Its second quarter closed with an unexpectedly large $2.8 billion loss, thanks in large part to $4 billion in write-downs.
While Lehman was getting bigger in the structured products businesses that have been caught up in the credit crisis, the big commercial banks elbowed into more plain vanilla bond activities and now dominate the quarterly rankings of underwriters, says CreditSights analyst David Hendler.
"The competitive landscape has changed dramatically and makes it difficult for a fixed-income centric company like Lehman to thrive," Hendler says.
Lehman's second quarter, officially announced next week, was a period in which revenues were pressured almost across the board compared to the same quarter last year, before the credit crisis erupted.
Ratings agencies have taken a dimmer view on investment banking outlooks lately. Moody's (nyse: MCO - news - people ) put Lehman on negative outlook Monday, while Standard & Poor's went ahead and cut Lehman's credit ratings last week along with the ratings of Morgan Stanley (nyse: MS - news - people ) and Merrill Lynch (nyse: MER - news - people ).
And because of that downgrade, clients of the firm are limiting trading with Lehman's unregulated derivatives subsidiaries, says Brad Hintz, an analyst at Sanford Bernstein.
"We expect this pullback by counterparties will hurt the earnings of the firm's fixed income, equities and commodity derivative franchises," Hintz said in a research note last week.
Lehman disputes it is having trouble with counterparties.
But, perhaps acknowledging that it has been criticized for playing its cards too close to its vest in its disclosure of exposures, said it has taken a cumulative $17 billion in write-downs since last year, including $11 billion from residential mortgages, $3.5 billion from commercial mortgages and $2 billion from leveraged deal financings.
It offset them by $7.5 billion in gains from its hedging activities, which broke down in the second quarter and so couldn't help make up for losses as it had in prior quarters.
In addition, it sold $130 billion of assets during the quarter, the much discussed de-leveraging that all Wall Street banks are undergoing. But that doesn't mean it won't have more write-downs ahead.
The pre-announced quarter results Monday didn't quiet one critic, David Einhorn of Greenlight Capital. Einhorn, who is betting on a decline in Lehman shares, says Lehman has issues with its financial disclosures, hasn't taken write-downs that accurately reflect its exposure and needs to reduce leverage and raise capital.
Even though Lehman did take write-downs, reduce leverage and raise capital in the second quarter, he says it's not enough. "Lehman is raising $6 billion that they said they didn't need to replace losses that they said they didn't have," Einhorn said Monday.
"Since the credit markets actually improved this quarter, such losses primarily reflect losses that might have been taken in prior quarters. A preliminary analysis of the pre-release and conference call suggests that there are still unrecognized losses on the balance sheet."
The uncertainty around Lehman, despite the company's efforts to dispel it, makes it a takeover possibility, Hendler says, though it's difficult to say just which bank would make the first move.
Among the U.S. banks with big, diverse balance sheets, JPMorgan Chase (nyse: JPM - news - people ) is busy integrating Bear Stearns (nyse: BSC - news - people ) and wouldn't have the appetite for another deal, at least not for an investment bank. Citigroup (nyse: C - news - people ) has its own issues of reducing leverage. Bank of America (nyse: BAC - news - people ) is facing the closure of its deal for Countrywide Financial (nyse: CFC - news - people ). Wachovia (nyse: WB - news - people ) just fired its chief executive and seems ill-inclined for deal-making, unless it involves the sale of itself to some other company.
Foreign banks, particularly Barclays (nyse: BCS - news - people ), have been rumored to be interested in buying a chunk or all of Lehman. But they also have been dealing with the effects of the credit crisis.
Market crash: What to do?
An imperfect but psychologically important measure of the Indian stock market - the ubiquitous BSE-Sensex - fell by 4% today, the hardest hit amongst Asian markets. This mirrored a 3% decline recorded by the US stock indices last Friday following a sharp spike in crude prices following fears of geo-political tensions in the Middle East as also due to an increase in the US unemployment rate.
·
Things look bad out there...Things are not really fine with the global economy currently as rising oil and other commodity prices are sparking fears of a general economic slowdown across regions and countries. As for the Indian economy, before the recent oil price hike could be factored, the inflation level has already touched its high in four years.
As reported late on Friday last week, India's inflation (as measured by the wholesale price index) jumped to 8.24%, the fastest rise since August 2004. This adds further pressure on the central bank - the RBI - to hike interest rates, especially with economists expecting inflation to rise to a 13-year high of 9.5% over the next few months. That will be a severe blow for Indian banks' credit growth prospects with the same already slowing down on the back of high interest rates and a general slowdown in economic activity.
· Higher raw material prices (oil and metals) are also likely to have a medium term impact on corporate India's profitability, with direct effect expected to be seen in sectors like automobiles, capital goods, cement, power and consumer durables. That's all part of the broader slowdown that the economy might enter into.
...so what?
Warren Buffett, the legendary investor, in his company Berkshire Hathaway's recently held annual general meeting, asked investors to 'think small'. Buffett made a simple point to investors - "As an investor, you don't need to predict the economic cycle (or even pay much attention to it). Instead, you should focus on evaluating individual businesses if you pick your own stocks."
·When asked as to what were his views on the US economy, he indicated of having no clue and said that he did not care about it either. He said, "I haven't the faintest idea. We never talk about it. It never comes up in our board meetings or other discussions. We're not in that business [of economic forecasting]. We don't know how to be in that business. If we knew where the economy was going, we'd do nothing but play the S&P futures market." Such has been the humility of this man who has indeed been one of the greatest investors the world has ever seen.
Simply, do as the gurus do
So, Warren Buffett is not concerned about the macro-economy. Peter Lynch isn't as well (as the legendary fund manager spends very little time focusing on macro-economic issues). So why should you? Be like the gurus, and hold on to your horses (stocks for the long run). If you expect yourself to be a net buyer of stocks over the next 15-20 years, be happy on seeing falling prices.
· Rather than worry about today's crude price data and inflation or GDP growth estimates for the next quarter or year, you should be focused on owning companies that are best placed to create wealth for you over a period of several years, not days or months. However, the key is to stay strictly with those that are high-quality business models and have the capabilities to stand up straight through good times and bad.
Source:EquityMaster
·
Things look bad out there...Things are not really fine with the global economy currently as rising oil and other commodity prices are sparking fears of a general economic slowdown across regions and countries. As for the Indian economy, before the recent oil price hike could be factored, the inflation level has already touched its high in four years.
As reported late on Friday last week, India's inflation (as measured by the wholesale price index) jumped to 8.24%, the fastest rise since August 2004. This adds further pressure on the central bank - the RBI - to hike interest rates, especially with economists expecting inflation to rise to a 13-year high of 9.5% over the next few months. That will be a severe blow for Indian banks' credit growth prospects with the same already slowing down on the back of high interest rates and a general slowdown in economic activity.
· Higher raw material prices (oil and metals) are also likely to have a medium term impact on corporate India's profitability, with direct effect expected to be seen in sectors like automobiles, capital goods, cement, power and consumer durables. That's all part of the broader slowdown that the economy might enter into.
...so what?
Warren Buffett, the legendary investor, in his company Berkshire Hathaway's recently held annual general meeting, asked investors to 'think small'. Buffett made a simple point to investors - "As an investor, you don't need to predict the economic cycle (or even pay much attention to it). Instead, you should focus on evaluating individual businesses if you pick your own stocks."
·When asked as to what were his views on the US economy, he indicated of having no clue and said that he did not care about it either. He said, "I haven't the faintest idea. We never talk about it. It never comes up in our board meetings or other discussions. We're not in that business [of economic forecasting]. We don't know how to be in that business. If we knew where the economy was going, we'd do nothing but play the S&P futures market." Such has been the humility of this man who has indeed been one of the greatest investors the world has ever seen.
Simply, do as the gurus do
So, Warren Buffett is not concerned about the macro-economy. Peter Lynch isn't as well (as the legendary fund manager spends very little time focusing on macro-economic issues). So why should you? Be like the gurus, and hold on to your horses (stocks for the long run). If you expect yourself to be a net buyer of stocks over the next 15-20 years, be happy on seeing falling prices.
· Rather than worry about today's crude price data and inflation or GDP growth estimates for the next quarter or year, you should be focused on owning companies that are best placed to create wealth for you over a period of several years, not days or months. However, the key is to stay strictly with those that are high-quality business models and have the capabilities to stand up straight through good times and bad.
Source:EquityMaster
The Evaporation Of Wealth
The Evaporation Of Wealth (Bloomberg)
Automobiles, auto ancillaries, airlines, Banks and Real Estate stocks should not be a part of your portfolio.
Sky-high gasoline prices aren't just raising the cost of Eugene Marino's 120-mile round-trip to his job in the Washington area. They're reducing his wealth, too. House prices in his rural subdivision beyond the Blue Ridge Mountains in Charles Town, West Virginia, haveplunged as commuting expenses have soared. A four-bedroom home down the street from his is listed for $239,000, after selling new for $360,000 five years ago.
Homeowners in the exurbs aren't the only ones whose assets have taken a hit because of the surge in energy costs. Companies such as General Motors Corp. and UAL Corp. are writing off billions of dollars in plants and equipment that are no longer viable in an age of dearer oil. The destruction of wealth and capital will weigh on U.S. growth for years to come.
The loss of wealth could be a double whammy for the U.S. economy. In the short run, it depresses demand as homeowners save more and spend less, and companies fireworkers. Longer run, it curbs productivity growth, as firms shift their focus from increasing worker efficiency to reducing energy costs.
`Uneconomical' Activity`
`At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activitybecomes uneconomical,'' says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania. The lifestyle of the exurban commuter may be one casualty.
Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.
``It was drive until you qualify'' for a mortgage, says Robert Lang, director of the MetropolitanInstitute at Virginia Tech in Alexandria, Virginia. ``You can't do that anymore. Your cost of transportation will spike too much.'' The 38-year-old Marino, an archeologist for the U.S. Fish and Wildlife Service, is among those feeling the pinch. ``Eating out and discretionary income are a thing of the past for us,'' he says.
Declining Value
He reckons he once could have sold his 2,700 square-foot, four-bedroom house for around $450,000 based on the value of other homes in the neighborhood. Now he figures it's worth about $330,000. Gasoline prices have doubled his commuting costs since he bought his home in 2003, he says.
``Gas prices are really hurting demand here,'' says Celia Lainez, a broker at Keller Williams Rice Realty in Martinsburg, West Virginia. She says she has yet to receive a bid on thehouse down the street from Marino's, which has been on the market for five months.
Nationwide, home prices in neighborhoods with long commutes and no public transportation are falling faster than prices in communities closer to cities, according to a study byJoseph Cortright, an economist at Impresa Consulting. For example, his study found that prices in distant suburbs of Tampa fell 14 percent in the last 12 months, versus a 9percent drop in areas nearer the city.
Suburbs, Exurbs
``The decline in almost every case is worse in the suburbs and exurbs than it is in close-in neighborhoods because transportation costs are so much more of a factor,'' saysCortright, whose Portland, Oregon, firm studies regional economies. Americans are trying to cope by switching from gas-guzzling trucks and sport-utility vehicles to more energy-efficient cars.
Asian automakers outsold Detroit's Big Three in the U.S. for the first time last month as buyers left GM and Ford Motor Co. trucks on dealer lots in favor of Honda Civicsand Toyota Corollas. ``This is a fundamental change,'' Ford Chief Executive Officer Alan Mulally told reporters last month.
The Dearborn, Michigan-based company plans to temporarily idle its Wayne, Michigan, SUV plant and cut production at its Louisville, Kentucky, pickup-truck facility.
Drastic Steps
Detroit-based GM is taking more drastic steps. It plans to close four North American pickup and large-SUV factories, cutting capacity by 700,000 trucks a year, and may sell itsHummer SUV brand, which averages about 13 miles per gallon in city driving and 18 on the highway, according to government data.
The largest U.S. automaker is responding to ``a structural change, not just a cyclical change,'' Chief Executive Officer Rick Wagoner said before the company's annualmeeting June 3. Gasoline prices are up 31 percent this year and have doubledsince March 2005.
Dennis Virag, president of the Automotive Consulting Group in Ann Arbor, Michigan, says vehicle manufacturers will find it cheaper to shut factories than retool them. ``Domestic automakers, in their infinite wisdom back in the 1980s and 1990s, built factories and tooledfactories just to build trucks and SUVs'' like the Ford Explorer, the Chevrolet Suburban and the Ford F-150, Virag says. ``So it's very likely you're going to see more plant closings.''
Airlines Retrenching
Airlines are also retrenching. More than a dozen have collapsed in the last six months, including Columbus, Ohio-based Skybus Airlines Inc. and Frontier Airlines Holdings Inc. ofDenver. Chicago-based United Airlines, the world's second-largest carrier, will cut its fleet by 70 planes and shut its low-fare Ted unit to counter record fuel expenses. The airline willground about 64 Boeing Co. 737s and six Boeing 747s by the end of 2009.
Delta Air Lines Inc. in Atlanta is grounding 90 planes, and Fort Worth, Texas-based AMR Corp.'s American Airlines, the world's largest carrier, plans to reduce capacity on domesticroutes by 12 percent.
``Skyrocketing oil prices are changing everything,'' Giovanni Bisignani, chief executive officer of the International Air Transport Association, told the group's annual meeting June 2. ``The situation is desperate.''
The association, whose members account for 93 percent of international traffic, forecasts that airlines may report combined losses of $6.1 billion this year, the worst since 2003.
`Obsolete' Capital Stock`
`The change in energy prices makes a portion of the capital stock obsolete,'' says Richard Berner, co-head of global economics at Morgan Stanley in New York. ``That will depress demand.'' He sees the U.S. economy growing at a sub-par 1.4 percent next year after expanding just 1 percent in 2008, held back by a variety of forces that include the destruction of capital resulting from the rise in energy prices.
Zandi at Moody's Economy.com says permanently higher fuel costs will depress productivity growth during the next three to five years as companies retool to boost energyefficiency.
That's what happened in the 1970s, as successive oil shocks, coupled with increased environmental regulation and other factors, led to a sharp slowdown in productivity growth.
Federal Reserve Chairman Ben S. Bernanke said in a June 4 speech at Harvard University that he doesn't see a return of 1970s-style stagflation, in part because the economy is moreflexible and adaptable than it was back then.
That doesn't mean the future will be pain-free, others say. `We're going to see some companies go out of business,'' says economist Philip Verleger, president ofPKVerleger LLC in Aspen, Colorado. ``There is going to be a large amount of wealthdestroyed.''
Dark Clouds Hover Above Union Bank Of Switzerland (UBS)
Swiss bank UBS has already had more than the typical share of write-down scares. Yet Monday's report that the bank could be hit by an additional 4 billion Swiss francs ($3.9 billion) of write-downs in the second quarter seemed a little unfounded. UBS (nyse: UBS - news - people ) fell 2.8%, or 0.70 Swiss francs (69 cents), tp at 23.92 Swiss francs ($23.47), on Monday morning in Zurich, after the Swiss newspaper Sonntag quoted anonymous sources within the bank as saying it could be hit by 4 billion Swiss francs in write-downs during the second quarter. But it is far too early to put a number on the size of its write-downs, say analysts, since UBS isn't due to report on its second quarter until August 12. "We simply don't know. Though there are likely to be further write-downs, we aren't even at the end of the first quarter," said Landsbanki-Kepler equities analyst Dirk Becker. So where are UBS' trouble spots? One area, according to Becker, will be the revaluation of its own debt, which led to a $2.0 billion profit in the first quarter. The spread of this has tightened, and depending on what it looks like by the end of the quarter, it could be reversed in its profit and loss statement. However, these losses won't necessarily count as write-downs. The steeply discounted sale of $22.0 billion of mortgage assets to BlackRock in May will help stem losses, though only partially, according to Dirk Hoffman-Becking of Sanford Bernstein. "In terms of write-downs it won't move the dial as much. It's likely that at least BlackRock believed the assets they bought were worth more than the value they paid." The bank is likely to sustain losses from its exposure to monoline insurers like MBIA and Ambac, which had their credit ratings cut last week, its commercial mortgage-backed securities book, and collateralized debt obligations as the valuation on triple-B rated securities has fallen. Its portfolio of student loans, which is hold in the form of auction rate securities, could also sustain losses. UBS, once reputed to be one of the best risk managers, has had subprime-related write-downs of $19.0 billion, surpassed only by Citigroup.
RPL WORTH INVESTING INTO? what do you all say?
Diesel Beats Gasoline as Traders Bet on Widest Spread
By Nesa Subrahmaniyan
June 9 (Bloomberg) -- Diesel, the world's most-used transport fuel, is so prized by traders they'll pay the biggest premiums in at least 15 years to buy it.
Because refiners can't make enough, diesel sells for $145 a ton, or 14 percent, more than gasoline as China halts exports, the Middle East boosts imports and power shortages force mines from Australia to Chile to run oil-fed generators. For the first time, refiners Valero Energy Corp. and ConocoPhillips this summer will make more money from diesel than gasoline in the Northern Hemisphere, said Andrew Reed, an analyst at Energy Security Analysis Inc. in Boston.
``Diesel is in the driver's seat now, and will be at least in the next few years,'' said Anthony Nunan, assistant general manager for risk management in Tokyo at Mitsubishi Corp., Japan's largest trading company. ``About 43 percent of the world's gasoline is consumed in the U.S., and with high prices and a soft economy, that market is stalling.''
Diesel use in developed economies is growing about 2 percent this year, or 200,000 barrels a day, while gasoline use in the U.S. falls for the first time since 1991, according to Merrill Lynch & Co. The trend will continue, boosting diesel's premium to gasoline by 31 percent, to more than $190 a ton in Europe by year-end, swap contracts from broker PVM Oil International show.
Refiners will profit by producing more diesel instead of gasoline, and the biggest winners will be those that process cheaper, heavy grades of crude. Reliance Industries Ltd. will start operating the world's largest refinery on India's west coast this year, with equipment designed to produce about 247,000 barrels a day of diesel from every 580,000 barrels a day of crude, 22 percent more than the world average.
Saras, ERG
Saras SpA, owner of the Mediterranean region's biggest refinery, Italy's ERG SpA and Greece's Motor Oil Hellas SA also have plants with units designed to maximize diesel supply.
``ERG, Saras and Motor Oil's bias toward diesel production versus gasoline positions them well to exploit the global shortages of diesel and upgrading capacity,'' Merrill Lynch analyst James Schofield said.
The world consumed 30.2 million barrels of diesel and related distillate fuels, 16 percent more than the 26.1 million barrels of gasoline in 2006, according to statistics compiled by BP Plc.
Most U.S. refiners can't maximize diesel production and cut back on gasoline because they lack the flexibility to switch from one product to another. That means when gasoline profits dropped and refiners cut output, they reduced diesel supplies too.
Focus on Gasoline
U.S. oil refiners for the past seven years focused on increasing gasoline production, adding the capacity to make another 1.2 million barrels a day, almost double the additional 700,000 barrels of diesel, according to the Organization of Petroleum Exporting Countries.
To be sure, some analysts say diesel's gains have peaked. Higher prices will curtail demand, and capacity ``should increase markedly'' as refineries come back online after maintenance and new plants are added in China and India, Credit Suisse said in a report last week.
``Diesel prices may decline over the second half of this year,'' said Jit Yang Lim, a Singapore-based senior consultant at FACTS Global Energy, who also said diesel's best is past. ``Part of the reason is that in the second half we have new refining capacity coming, particularly Reliance in India.''
Last week a fire shut down shipments from Apache Corp.'s Varanus Island natural gas plant off Australia, boosting demand for diesel from the region's mining companies. Apache said it may take two months to restore production.
Supply Crunch
Even before the fire, the diesel supply crunch prompted Goldman Sachs Group Inc. analysts led by London-based Henry Morris to increase estimates of refinery profits in Europe to $8.20 a barrel from $6.95 for 2008, and for 2009 to $8 from $7.50.
``In Western Europe, diesel is all the time gaining market share compared to gasoline,'' Jeroen van der Veer, chief executive of Royal Dutch Shell Plc, Europe's largest oil company, said in Kuala Lumpur. ``We expect those trends will continue.''
European demand for diesel is growing at an annual rate of 4.4 percent, Energy Security Analysis' Reed said. Carmakers Volkswagen AG and Bayerische Motoren Werke AG are making more diesel-engine cars, cutting demand for gasoline, while Shell, Total SA and BP Plc's plants can't make enough of the fuel.
Stricter emission standards for diesel in the U.S. and Europe are also helping to push up diesel, Reed said. The European Union starting in 2009 requires sulfur content in diesel to be lowered by 80 percent, to 10 parts per million, he said.
Trucks, Trains, Ships
Diesel for prompt delivery in New York gained 32 percent this year, the result of increasing demand from trucks, trains and shipping companies, outpacing gasoline's 20 percent advance. U.S. diesel consumption in March rose 3.3 percent from a year earlier to 3.5 million barrels a day, while gasoline use declined 1.5 percent to 9.1 million a day, according to the International Energy Agency in Paris.
Diesel has ``gained a new lease of life,'' said Tom O'Brien, a director of closely held Trafigura Pte in Singapore, the Asian unit of Trafigura Beheer BV, the world's third-largest independent oil trading company. ``Diesel has cleaned up its image as a dirty fuel by lowering its sulfur content in the developed world.''
Political hypocrisy on display
Straight from the Hip by Jawahir Mulraj
An ostrich can hide from reality for awhile, by digging its head in the sand, but ultimately, when he raises it to breathe, he must face it. The Government, cowing like a wimp to pressure from its Left coalition partner, had tried to bury its hydra head in the sand staving off hikes in petroleum products and trying to escape the facing of reality. That left oil marketing companies gasping for breath, with no money left to buy petrol and diesel, which were under threat of being rationed, including to the armed forces. Last week the Government faced (partly) the reality of the situation and raised petrol prices by Rs 5/litre, diesel by Rs 3 and LPG cylinders by Rs 50. Even with this, the hikes absorb only about 9% of the total under recoveries estimated at Rs 245,000 crores. Fifty five percent is borne by issuing oil bonds, which is simply passing on to a future generation the cost of profligacy of the current one. Reprehensible policy!
What followed was a sheer hypocrisy by other political parties. The CPM and Trinamool Congress called bandhs in Kolkata on two successive days, never mind the hardship imposed on people or the futility of such a bandh on the decision. Price increases are not going to be reduced because of the bandh; instead, West Bengal's GDP will suffer.
It was the Left parties, supporting Government from outside without taking the responsibility of joining it, that were, in fact, responsible for the apparent steepness of the hike. Had the Congress mustered up the spherical objects to raise petrol prices by, say Rs 1/litre five times instead of once, it would have been far more acceptable.
The fact that it did not indicates the invertebrate nature of Prime Minister Manmohan Singh's government. Being an economist he ought to have been able to convince others of the folly of defying economic reality; sadly politics and the lack of backbone prevented it.
The BJP's protests of economic terrorism also smacks of hypocrisy. During its incumbency, the BJP Government had raised prices of petrol and diesel to the same extent as the UPA Government, despite the fact that crude oil prices hadn't increased as dramatically as they have under this Government. So its claim that the UPA Government has unleashed economic terror is only posturing for the next election.
Finally the Prime Minister's appeal that ministers cut down on air travel and on unnecessary usage of cars is another display of crass hypocrisy. It does not take the public protest of a petro product price hike to make these sensible suggestions. Any good leader must prepare for bad times instead of making senseless gestures after they have arrived.
The consequences to the economy and to Government financing will be bad. For preparing the country for a future of high energy prices with shortage, even worse. By artificially curbing prices of petroleum products, the Government has not allowed demand to be curtailed, as it would be, if prices were raised. The export growth of 31.5% in April 08 (over April 07), to $ 14.4 b. seems impressive until juxtaposed with the 46.2% increase in oil imports to $8 b. and of 36.6% in total imports, to $ 24.3b.
This relates to pricing, but availability of fossil fuels is a bigger concern. An alternate energy basket has to be developed, with urgency. One of the options was to use nuclear energy, essential if India is to grow at 9% or more. However, once again politics takes precedence over sensible economics and long term planning.
The conclusion that all political parties care only about power and not about the country, thus becomes inescapable.
The upstream oil companies, ONGC and GAIL, have to bear Rs 45,000 crores, or 18% of the total underrecovery of Rs 245000 crores. This means that ONGC will not be able to make the investment in both developing and acquiring, energy assets to the extent of the subsidy burden it bears. Once more example of succumbing to political follies and jeapordising the future.
Auto companies will be hit. None of the auto companies have bothered to develop alternate fuel products, including CNG, electric hybrids or other hybrids. Years ago this columnist had written to the CEO of Maruti Udyog asking why Maruti did not provide factory fitted CNG car options and why was it necessary for a consumer to bear the risk of a CNG kit not working. It was, after all both a consumer need (to cut running cost) as well as a national priority. His reply was that there wasn't enough demand to justify the investment! How on earth would there be demand without a product on offer? Even foreign manufacturers like Toyota, with its popular Prius electric hybrid, have been slow in introducing it. Auto makers are also faced with the prospect of a 30-40% hike in contracted steel price for high grade steel.
Immediately following the price hikes, road transport freights have been hiked by 10-15%, which would add to inflation. Middlemen will take the opportunity to hike prices of e.g. vegetables, by more than the freight hike, taking advantage of the situation. It is hard to imagine inflation coming under control fast.
One hope for inflation to be reduced was in the delivery of PMT gas. This would substantially reduce the feritiliser subsidy as cost of producing fertiliser using gas instead of naphtha would be much lower. A fire at the PMT gas field has affected production of oil and gas, which may cut supply by 6 and 20 % respectively.
Lastly the effect on the fiscal deficit. To cushion the popular backlash of the petro price hike, the Government cut excise duty on petrol and diesel by Rs 1 and customs duty on crude oil by 5%, and on petrol/diesel by 2.5%. This will deprive it of revenue. Combined with a farmer debt waiver of Rs 71,000 crores, and the hike to Government servants by the sixth pay commission, the fiscal deficit will probably exceed the limit set by FRBM. It surely will, if the fudging of accounts through issuance of oil bonds, and fertiliser bonds, which do not go into the budget and hence don't reflect in the fiscal deficit, is counted.
Meanwhile the US Fed has signalled an end to interest rate cuts and may well raise them in order to defend the dollar which Bernanke has expressed a concern over. The RBI would also follow suit. That would act as a dampner to equity markets.
Last week the sensex fell 843 points to end at 15572 and the Nifty was down 242 points to end at 4627. Should 14,500 on the sensex crack, there could be a fall of another 2000 points. India's growth story remains intact, despite all political parties doing their hypocritic best to derail it. The strains and contradictions of coalition politics will be evidenced as elections approach; as the saying goes, it is only when the tide goes out you discover who is swimming naked!
Source:equitymaster.com
Jesse Livermore: Bear Markets Pepetuate On The River Of Hope
Hope Is Not What You Want Right Now-Take A Deep Hard Look At Your Finances This Monday Morning And Cut Down Your Risk To The Losses That You Can Live With... Sometimes It is Better To Be In Cash. Even Cash Is An Investment Position.
This past week was a roller coaster ride in the currency markets, and it sure ended with a bang. I'll get to the big news in a second. And I'll also tell you what to make of this market.
But first, I want to do a quick day-by-day rundown of what happened in the currency markets ...
Tuesday:
Ben Bernanke revealed new concern over inflation and spoke directly about the weaker dollar.
Knee-jerk reaction in the currency markets: The dollar jumped.
Thursday:
European Central Bank President Trichet signaled interest rate hikes may come as early as July.
Knee-jerk reaction in the currency markets: The euro soared.
Yesterday:
U.S. Non-farm Payrolls were reported down 49,000 (better-than-expected) for the month of May. But U.S. unemployment leapt by half a percentage point to 5.5% (worse-than-expected).
Knee-jerk reaction: The dollar tumbled. The Dow lost almost 400 points. And on the same day, crude oil skyrocketed by more than $10 a barrel!
Looks like it's time to queue up the recession talk again. And don't forget that inflation is a big concern — Big Ben even said so!
Did this tag-team of Fed inflation rhetoric and freshly disappointing economic data open up the flood gates? Sure might have.
Stocks don't like it when the Fed gets lovey-dovey with inflation. In an already tight lending environment, if the Fed leans toward drying up access to money (or away from doling it out freely), who's going to keep what little leftover cash they have invested in bogged-down companies that still may be many months away from honest-to-goodness recovery?
It's been surprising how well stocks have held up so far. It's likely the keep-hope-alive mentality was buoying the Dow and the S&P. But with every new fundamental defeat how long can investors' minds stay focused on the light at the end of the tunnel? It's dimming rather quickly and should be practically invisible if the Fed keeps its attention on rising prices.
And for the buck, it comes down to one thing: Sentiment. We can argue all day for a dollar rally, or a collapse to new lows. And we have. But what matters is how the dollar is perceived by those who are trading it.
If you're off trading solo it's not always easy to keep a firm grip on market sentiment.
But protecting against most of the bad and positioning for most of the good is a crucial step toward successful trading.
Here's a little guideline for today's markets ...
Hope Can Hurt; Fear Can Help
I read a book on trading many years ago that said before every trading day begins, you must ask yourself: How badly can I screw-up my account today?
It sounded a bit blunt, and an odd way to start the morning. But I've found this simple approach is a great way to focus on the key element that will determine long-term success in any asset market — stocks, bonds, commodities, currencies, and even real estate.
It's risk.
In terms of the risks today, you probably have your own personal checklist. You might be including:
Inflation fears brewing.
Potential time-bomb of derivatives.
An overvalued stock market.
Falling real estate values.
On and on into infinitum ...
No doubt these are market risks. And they do inspire fear. But there's nothing we can do to fully eliminate risks. We can neither keep them from happening, nor forecast them with complete accuracy. But you can control the small stuff, like your individual account risk.
It's obvious some of us can handle more risk than others. The best single phrase about how much investment risk one should take comes from J.P. Morgan, who told a worried friend, "sell down to your sleeping point."
Translation: If you're lying awake at night, worrying about your investments, you are carrying too much risk.
I have found the simple "screw up your account" mantra very useful for risk control, so much so that I have it printed across the top of my "trade sheets" where I record each of my trades, risk levels, and reasons for the trade.
Why does it help me? Because it forces me to define the level of risk I will take BEFORE I enter an investment position. The reason I have capitalized "before" is because before you enter the investment you still have at least a degree of objectivity left in your brain.
AFTER you enter an investment position, your objectivity is flushed down the drain and replaced with something very dangerous — hope.
Here's an example of how I define my risk in a currency trade BEFORE putting on a trade ...
I look for a key technical level — some type of chart support area, or basic trend line that will tell me that the dynamics of supply and demand in the market have changed. Or put another way: if prices reach this level I am wrong because the market has proven me wrong.
At this point I'm out of the trade with a loss, period, end of story. I can always reenter the trade if it makes sense. But because I have exited, I somewhat regain that modicum of objectivity to better evaluate price action.
Always remember: Being in cash is an investment position; and it's sometimes the best position!
There is an old market adage: Bull markets climb a wall of worry, while bear markets flow down a river of hope. It's natural to hope our losses will subside and be afraid our profits will go away. And it's also why we are tricked by Mr. Market.
Legendary Wall Street trader Jesse Livermore summed it up best when he talked about reversing our natural impulses in the market:
"When the market goes against you, you hope that every day will be the last day — and you lose more than you should had you not listened to hope. And when the market goes your way, you become fearful that the next day will take away your profit and you get out — too soon. The successful trader has to fight these two deep-seated instincts."
We must turn hope and fear inside out. We must fear our losses will get bigger and cut them short.
And we must hope that our profits get bigger and let them run. In these choppy markets, defining risk beforehand is the best thing you can do.
This past week was a roller coaster ride in the currency markets, and it sure ended with a bang. I'll get to the big news in a second. And I'll also tell you what to make of this market.
But first, I want to do a quick day-by-day rundown of what happened in the currency markets ...
Tuesday:
Ben Bernanke revealed new concern over inflation and spoke directly about the weaker dollar.
Knee-jerk reaction in the currency markets: The dollar jumped.
Thursday:
European Central Bank President Trichet signaled interest rate hikes may come as early as July.
Knee-jerk reaction in the currency markets: The euro soared.
Yesterday:
U.S. Non-farm Payrolls were reported down 49,000 (better-than-expected) for the month of May. But U.S. unemployment leapt by half a percentage point to 5.5% (worse-than-expected).
Knee-jerk reaction: The dollar tumbled. The Dow lost almost 400 points. And on the same day, crude oil skyrocketed by more than $10 a barrel!
Looks like it's time to queue up the recession talk again. And don't forget that inflation is a big concern — Big Ben even said so!
Did this tag-team of Fed inflation rhetoric and freshly disappointing economic data open up the flood gates? Sure might have.
Stocks don't like it when the Fed gets lovey-dovey with inflation. In an already tight lending environment, if the Fed leans toward drying up access to money (or away from doling it out freely), who's going to keep what little leftover cash they have invested in bogged-down companies that still may be many months away from honest-to-goodness recovery?
It's been surprising how well stocks have held up so far. It's likely the keep-hope-alive mentality was buoying the Dow and the S&P. But with every new fundamental defeat how long can investors' minds stay focused on the light at the end of the tunnel? It's dimming rather quickly and should be practically invisible if the Fed keeps its attention on rising prices.
And for the buck, it comes down to one thing: Sentiment. We can argue all day for a dollar rally, or a collapse to new lows. And we have. But what matters is how the dollar is perceived by those who are trading it.
If you're off trading solo it's not always easy to keep a firm grip on market sentiment.
But protecting against most of the bad and positioning for most of the good is a crucial step toward successful trading.
Here's a little guideline for today's markets ...
Hope Can Hurt; Fear Can Help
I read a book on trading many years ago that said before every trading day begins, you must ask yourself: How badly can I screw-up my account today?
It sounded a bit blunt, and an odd way to start the morning. But I've found this simple approach is a great way to focus on the key element that will determine long-term success in any asset market — stocks, bonds, commodities, currencies, and even real estate.
It's risk.
In terms of the risks today, you probably have your own personal checklist. You might be including:
Inflation fears brewing.
Potential time-bomb of derivatives.
An overvalued stock market.
Falling real estate values.
On and on into infinitum ...
No doubt these are market risks. And they do inspire fear. But there's nothing we can do to fully eliminate risks. We can neither keep them from happening, nor forecast them with complete accuracy. But you can control the small stuff, like your individual account risk.
It's obvious some of us can handle more risk than others. The best single phrase about how much investment risk one should take comes from J.P. Morgan, who told a worried friend, "sell down to your sleeping point."
Translation: If you're lying awake at night, worrying about your investments, you are carrying too much risk.
I have found the simple "screw up your account" mantra very useful for risk control, so much so that I have it printed across the top of my "trade sheets" where I record each of my trades, risk levels, and reasons for the trade.
Why does it help me? Because it forces me to define the level of risk I will take BEFORE I enter an investment position. The reason I have capitalized "before" is because before you enter the investment you still have at least a degree of objectivity left in your brain.
AFTER you enter an investment position, your objectivity is flushed down the drain and replaced with something very dangerous — hope.
Here's an example of how I define my risk in a currency trade BEFORE putting on a trade ...
I look for a key technical level — some type of chart support area, or basic trend line that will tell me that the dynamics of supply and demand in the market have changed. Or put another way: if prices reach this level I am wrong because the market has proven me wrong.
At this point I'm out of the trade with a loss, period, end of story. I can always reenter the trade if it makes sense. But because I have exited, I somewhat regain that modicum of objectivity to better evaluate price action.
Always remember: Being in cash is an investment position; and it's sometimes the best position!
There is an old market adage: Bull markets climb a wall of worry, while bear markets flow down a river of hope. It's natural to hope our losses will subside and be afraid our profits will go away. And it's also why we are tricked by Mr. Market.
Legendary Wall Street trader Jesse Livermore summed it up best when he talked about reversing our natural impulses in the market:
"When the market goes against you, you hope that every day will be the last day — and you lose more than you should had you not listened to hope. And when the market goes your way, you become fearful that the next day will take away your profit and you get out — too soon. The successful trader has to fight these two deep-seated instincts."
We must turn hope and fear inside out. We must fear our losses will get bigger and cut them short.
And we must hope that our profits get bigger and let them run. In these choppy markets, defining risk beforehand is the best thing you can do.
G8 Forecasts Global Recession
Japan's energy chief launched a meeting of ministers from the world's top industrialized nations Sunday by warning that soaring oil prices could trigger a global recession if they're not checked.
The Group of Eight rich nations met in northern Japan with representatives from China, India and South Korea to discuss oil and gas markets, energy investment, energy security and climate change amid deepening concerns about the world economy.
Oil prices made their biggest single-day surge on Friday, soaring $11 to $138.54 on the New York Mercantile Exchange, an 8 percent increase. On the same day, the United States announced a rise in unemployment.
"The situation regarding energy prices is becoming extremely challenging," Akira Amari, Japan's trade and energy minister, warned his colleagues Sunday. "If left unaddressed, it may well cause a recession in the global economy."
Five top energy consumers -- the United States, China, Japan, South Korea and India -- urged oil producers on Saturday to boost output to meet growing demand, while pledging to develop clean energy alternatives and increase efficiency.
World oil production has stalled at about 85 million barrels a day since 2005, while global economic growth -- boosted by spectacular surges in China and India -- has pushed demand to unprecedented levels.
Amari called for a strong message ahead of the G-8 leaders summit in Toyako, Japan, in July. The 11 nations gathered in Aomori account for 65 percent of the world's energy consumption and emissions of greenhouse gases.
"What actions we take to address the challenges that we face will have an extremely important effect in solving the global energy issue," he said.
It was unclear, however, what impact consumers will have without action by producers. The current president of the Organization of Petroleum Exporting Countries, Chakib Khelil, has said that the cartel will make no new decision on production levels until its September 9 meeting in Vienna.
The five nations meeting in Japan on Saturday agreed that the sharp surge in oil prices was a menace to the world economy and more petroleum should be produced to meet rising demand. They argued that the unprecedented prices were against the interests of both producers and consumers, and imposed a "heavy burden" on developing countries.
The ministers also vowed to diversify their sources of energy, invest in alternative and renewable fuels, ramp up cooperation in strategic oil stocks in case of a supply shortage, and improve the quality of data on production and inventories available to markets.
The group, however, diverged over oil subsidies. The International Energy Agency has estimated that oil subsidies in China, India and the Middle East totaled about $55 billion in 2007.
The United States, which has its own energy subsidies, urged countries such as China to lower its oil supports, which enable domestic consumers to enjoy cheaper gasoline. Subsidies shield consumers from higher prices, meaning consumption does not decline despite rising expenses.
China and India, while signing on to a statement recognizing the need to eventually phase out such subsidies, argued that removing such supports quickly could trigger political and economic instability.
India is already facing such effects. The government on Wednesday hiked gasoline and diesel prices, triggering protests by angry consumers who blocked rail tracks and roads and shut down businesses.
The Group of Eight rich nations met in northern Japan with representatives from China, India and South Korea to discuss oil and gas markets, energy investment, energy security and climate change amid deepening concerns about the world economy.
Oil prices made their biggest single-day surge on Friday, soaring $11 to $138.54 on the New York Mercantile Exchange, an 8 percent increase. On the same day, the United States announced a rise in unemployment.
"The situation regarding energy prices is becoming extremely challenging," Akira Amari, Japan's trade and energy minister, warned his colleagues Sunday. "If left unaddressed, it may well cause a recession in the global economy."
Five top energy consumers -- the United States, China, Japan, South Korea and India -- urged oil producers on Saturday to boost output to meet growing demand, while pledging to develop clean energy alternatives and increase efficiency.
World oil production has stalled at about 85 million barrels a day since 2005, while global economic growth -- boosted by spectacular surges in China and India -- has pushed demand to unprecedented levels.
Amari called for a strong message ahead of the G-8 leaders summit in Toyako, Japan, in July. The 11 nations gathered in Aomori account for 65 percent of the world's energy consumption and emissions of greenhouse gases.
"What actions we take to address the challenges that we face will have an extremely important effect in solving the global energy issue," he said.
It was unclear, however, what impact consumers will have without action by producers. The current president of the Organization of Petroleum Exporting Countries, Chakib Khelil, has said that the cartel will make no new decision on production levels until its September 9 meeting in Vienna.
The five nations meeting in Japan on Saturday agreed that the sharp surge in oil prices was a menace to the world economy and more petroleum should be produced to meet rising demand. They argued that the unprecedented prices were against the interests of both producers and consumers, and imposed a "heavy burden" on developing countries.
The ministers also vowed to diversify their sources of energy, invest in alternative and renewable fuels, ramp up cooperation in strategic oil stocks in case of a supply shortage, and improve the quality of data on production and inventories available to markets.
The group, however, diverged over oil subsidies. The International Energy Agency has estimated that oil subsidies in China, India and the Middle East totaled about $55 billion in 2007.
The United States, which has its own energy subsidies, urged countries such as China to lower its oil supports, which enable domestic consumers to enjoy cheaper gasoline. Subsidies shield consumers from higher prices, meaning consumption does not decline despite rising expenses.
China and India, while signing on to a statement recognizing the need to eventually phase out such subsidies, argued that removing such supports quickly could trigger political and economic instability.
India is already facing such effects. The government on Wednesday hiked gasoline and diesel prices, triggering protests by angry consumers who blocked rail tracks and roads and shut down businesses.
Why Is The Sensex Earnings Forecast For FY09 Not Being Downgraded?
Why Is The Sensex Earnings Forecast For FY09 Not Being Lowered? This is surprising considering that all input costs ranging from iron ore, coal, alumnium, Zinc, Copper, Foodgrains, Steel, Cement and Oil prices are rising. Quite obviously the Analyst/Research world Is Living Under A Time Warp, and will be rudely jolted to reality when the second and third quarter numbers are released later this year. By then perhaps the BSE Sensex would have dropped closer to 10,000.
The bulls are faced with tough times, thanks to concerns pertaining to high inflation, rising input costs and earnings deceleration among other factors.
It all started with the US subprime problem and the global credit crunch, which led the BSE Sensex nosediving from its peak of 21,206 on January 10, 2008 to 14,677 on March 18. A part of the fall can also be attributed to the concerns pertaining to the increase in crude oil prices and its impact on India's economic growth. Some of the early signs were also visible from rising inflation and the slowdown in domestic industrial production numbers. This further led to concerns over high interest rates, slowdown in GDP and thus, corporate earnings as well. Sensing these developments, foreign institutional investors (FIIs) were the first ones to move out of the market, and they partly became the reason for the markets to fall.
End of the bloodbath?
If the global and domestic problems persist, experts predict the Sensex to fall to 12,000-14,500 levels. Though bold and unbelievable, there are few players who are predicting that the Sensex may touch the 9,000 levels.
While we are not predicting the Sensex levels, we jot down and bring certain factors that may determine the future course of the markets and what investors should do during these uncertain times.
Crude realities
No investor will be willing to invest in an asset headed for reporting lower profits and no asset can be profitable if costs are higher than realisations.
Crude oil is one such commodity, whether it is the economy (macro) or corporate profitability (micro), which is considered to be the source of most of the problems. While crude oil prices had corrected to $125 levels, after crossing $135 a barrel mark, it again scaled a new peak of $139.12 a barrel last week. There are reports predicting that it will go to $150 to $200 a barrel. There are several reasons attributed to the recent spike in the crude oil prices including increased financial investments and a marginal rise in costs of oil production. Whether the crude oil price rises to such high levels or not, experts suggest that the good old days of cheap oil may be gone for a long time to come.
Bloating deficit
According to studies, a $10 increase in the crude oil prices may reduce India's GDP growth by about 0.3 percentage points and an increase in the consumer price index by 1.2 percentage points.
India imports about 70 per cent of its oil requirements, suggesting that at current levels, it will have to pay a significantly higher amount to meet demand. It has already led to a large trade deficit (over 7 per cent of the GDP). Fiscal deficit, which is currently at about 3 per cent of the GDP, could reach to 10 per cent levels if the fertiliser, food, farm and oil subsidies are added. Hence, further rise in crude oil prices will only make things worse. Not only this, rising oil will have serious consequences on others things as well.
"If crude oil touches $150 levels and sustains there, it will be a crude awakening for the global as well as for India. India's annual import bill will touch to $140 billion against the $78 billion estimated for the FY08," says Devendra Nevgi, CEO and CIO, Quantum Mutual Fund.
High inflation
High crude oil prices would have a sweeping impact on the Indian economy.
To put forth some of them: Higher inflation rate, rupee depreciation, increasing trade account and fiscal deficit, and firm interest rates. The other side of an oil shock would probably the ensuing political instability and social unrest. The inflation rate, which is already high at over 8 per cent, could emerge as a key concern. Economists share different views with regards to inflation reaching the double digit figure in the short term, and if not, it could range at about 7-8 per cent, especially after the recent hike in the petrol and diesel prices. "We are yet to see the cascading effect of recent spike in oil prices, and the recent hike in fuel prices will further translate into higher inflation in the weeks to come. We think the inflation rate is heading towards 9 per cent levels, however it will ease out in the later part of the year," says, Anand Krishnamurthy, Co-Head Global Markets, HSBC. Experts observe that the high oil prices will further increase the cost of goods and not to mention, the logistic costs itself, which is expected to go up by another 10-15 per cent as most of the truck operators have increased rentals. And to join the league, we have already seen airlines companies increasing the fuel surcharge by 15-20 per cent on the ticket price. So, either the companies will have to increase the prices of goods sold or services rendered or they will have to take a hit on margins. This will certainly lead to overall cost push on other sectors and may discourage the consumer spending further. In both the cases, either the sales volumes will come down or margins thus, lower earnings for companies.
Interest rate worries
One of the objectives of the monetary policy in India has been achieving price stability, which the RBI may try to achieve even at the cost of giving up growth. If inflation spirals, the RBI may also raise either the CRR (cash reserve ratio) or the repo rate, depending on the prevailing situation.
The RBI's comfort level for inflation rate is 5.50 per cent, whereas the current level is 8.24 per cent. As there are worries over the rising interest rates, the economist also predict higher interest rates, which along with other factors would shave off around 50-75 basis point from the GDP growth rate. "It seems that the economy will slow down, closer to its long term average of around 6-7% for the next decade. Higher inflation and rising crude oil prices remain a risk to the Indian growth story," says Devendra Nevgi.
Earnings slowdown
The high interest rates along with the factors like inflation and higher commodity prices will hit India Inc negatively. The domestic cost of capital has already increased, with the prime lending rates having gone up by 175 basis points since the second half of 2006 to 12.5 per cent currently.
Also, the housing loans have become more expensive, while in many of the cases the banks are charging about 18-22 per cent for the two wheeler and personal loans. As a result of this, the bank credit growth has come down to about 24 per cent as against the recent high of over 30 per cent in January 2007. This will not only hit the banks' income growth, but also hit the companies immediately, due to higher interest outgo and slow down in the consumer demand. The early sign of this is seen in the slow down in industrial production to 5.8 per cent during the quarter ended March 2008 compared to over 10 per cent a few months ago. The lag effect is also felt by the companies. According to estimates, sales growth of a cluster of 1,524 companies, excluding oil and gas and finance companies, was 14 per cent year-on-year (YoY) during the quarter ended March 2008 as against the recent peak of 28.9 per cent YoY growth during the quarter ended September 2006. Analysts expect this trend to continue going forward if the various issues, as mentioned above, remain. "We think the Sensex earnings growth will slow down in FY09 mainly on account of margin pressure across the sectors led by input costs of power, coal and other raw materials. Also, higher interest rates and slower credit growth should pressure the banking sector," says Harendra Kumar, head research, Centrum Broking. "Yes, moderation in earnings is quite visible. With increase in input costs (of materials, human resources and capital) margins are also under pressure. We have seen decline in margins of companies from the IT, automobiles, engineering, capital goods and logistics sectors" Says Bhavesh Shah, VP Research, Asit C Mehta Investment Intermediates. Though not all sectors will witness a slowdown, certain sectors will be more vulnerable, such as financials and banking services, real estate, industrials, capital goods and auto, among a few others. Analysts are also predicting a slowdown in the BSE Sensex earnings in the FY09 in the range of about 5-10 per cent. "We expect Sensex EPS to be Rs 1,001 for FY09. We have revised this slightly lower (by one per cent) over the past couple of months from Rs 1,012, but do believe that the risk for further downward revisions does exist," says Ajay Loganadan, Head Investment Advisory Group, HSBC Private Banking.
Foreign capital
Considering these issues coupled with the slowdown in the earnings, market participants say that the Indian equity markets are relatively expensive as compared to other emerging markets. Also, this is cited as one of the reasons for the FIIs selling witnessed lately.
The depreciation of the rupee has lowered net returns (in dollar terms) for FIIs. While sharing his view on the FII investments, Ajay Loganadan say, "FIIs have been net sellers of Indian equities to the tune of about $4.2 billion with about $1.2 billion of this selling coming in May. Given the high levels of risk aversion and P/E contraction, we could expect flows to remain muted over the near term. Fund flow for the rest of the year will depend on global news flow and the perception of risk amongst foreign investors. Also, rising trade and fiscal deficits are not viewed very favourably by FIIs."
Global markets
Besides the FII flows the direction of the market will be determined by the global developments, which are not considered to be very favourable. "In our view, global markets are going to remain weak over the next 12 months.
US Housing data continues to get worse, record number of small businesses in the US are filing for bankruptcy (5,000 in April 2008 alone), debt of 174 large US companies is trading at distressed levels. In these circumstances, it is tough to make a case for stability in the US financial space," says Madhusudan Rajagopalan, Director, Aranca India Operations. Besides the instability and slow down in the US, analysts also see more risk due to the sub prime crisis. So far, major banks and other financial institutions across the world have reported losses of approximately $380 billion. In a recent development, Lehman Brothers Holding, a top investment bank in the US is expected to raise approximately $4 billion to shore up its balance sheet after incurring losses due to the subprime crisis (S&Powngraded its ratings). The rating agency also downgraded credit ratings of Merrill Lynch and Morgan Stanley, saying they may have to book more write-downs on devalued assets.
Outlook
For many, it is a bearish market due to the negative micro and macro factors that are affecting the markets, while for others it is the right time to invest and use the lower levels as an opportunity to invest for the long term. Considering that these issues remain, it also indicates that there are concerns for the market to rise from here in the near term. A good monsoon, lower inflation rate along with the better global cues could be the positive triggers, which though seem some time away.
The bulls are faced with tough times, thanks to concerns pertaining to high inflation, rising input costs and earnings deceleration among other factors.
It all started with the US subprime problem and the global credit crunch, which led the BSE Sensex nosediving from its peak of 21,206 on January 10, 2008 to 14,677 on March 18. A part of the fall can also be attributed to the concerns pertaining to the increase in crude oil prices and its impact on India's economic growth. Some of the early signs were also visible from rising inflation and the slowdown in domestic industrial production numbers. This further led to concerns over high interest rates, slowdown in GDP and thus, corporate earnings as well. Sensing these developments, foreign institutional investors (FIIs) were the first ones to move out of the market, and they partly became the reason for the markets to fall.
End of the bloodbath?
If the global and domestic problems persist, experts predict the Sensex to fall to 12,000-14,500 levels. Though bold and unbelievable, there are few players who are predicting that the Sensex may touch the 9,000 levels.
While we are not predicting the Sensex levels, we jot down and bring certain factors that may determine the future course of the markets and what investors should do during these uncertain times.
Crude realities
No investor will be willing to invest in an asset headed for reporting lower profits and no asset can be profitable if costs are higher than realisations.
Crude oil is one such commodity, whether it is the economy (macro) or corporate profitability (micro), which is considered to be the source of most of the problems. While crude oil prices had corrected to $125 levels, after crossing $135 a barrel mark, it again scaled a new peak of $139.12 a barrel last week. There are reports predicting that it will go to $150 to $200 a barrel. There are several reasons attributed to the recent spike in the crude oil prices including increased financial investments and a marginal rise in costs of oil production. Whether the crude oil price rises to such high levels or not, experts suggest that the good old days of cheap oil may be gone for a long time to come.
Bloating deficit
According to studies, a $10 increase in the crude oil prices may reduce India's GDP growth by about 0.3 percentage points and an increase in the consumer price index by 1.2 percentage points.
India imports about 70 per cent of its oil requirements, suggesting that at current levels, it will have to pay a significantly higher amount to meet demand. It has already led to a large trade deficit (over 7 per cent of the GDP). Fiscal deficit, which is currently at about 3 per cent of the GDP, could reach to 10 per cent levels if the fertiliser, food, farm and oil subsidies are added. Hence, further rise in crude oil prices will only make things worse. Not only this, rising oil will have serious consequences on others things as well.
"If crude oil touches $150 levels and sustains there, it will be a crude awakening for the global as well as for India. India's annual import bill will touch to $140 billion against the $78 billion estimated for the FY08," says Devendra Nevgi, CEO and CIO, Quantum Mutual Fund.
High inflation
High crude oil prices would have a sweeping impact on the Indian economy.
To put forth some of them: Higher inflation rate, rupee depreciation, increasing trade account and fiscal deficit, and firm interest rates. The other side of an oil shock would probably the ensuing political instability and social unrest. The inflation rate, which is already high at over 8 per cent, could emerge as a key concern. Economists share different views with regards to inflation reaching the double digit figure in the short term, and if not, it could range at about 7-8 per cent, especially after the recent hike in the petrol and diesel prices. "We are yet to see the cascading effect of recent spike in oil prices, and the recent hike in fuel prices will further translate into higher inflation in the weeks to come. We think the inflation rate is heading towards 9 per cent levels, however it will ease out in the later part of the year," says, Anand Krishnamurthy, Co-Head Global Markets, HSBC. Experts observe that the high oil prices will further increase the cost of goods and not to mention, the logistic costs itself, which is expected to go up by another 10-15 per cent as most of the truck operators have increased rentals. And to join the league, we have already seen airlines companies increasing the fuel surcharge by 15-20 per cent on the ticket price. So, either the companies will have to increase the prices of goods sold or services rendered or they will have to take a hit on margins. This will certainly lead to overall cost push on other sectors and may discourage the consumer spending further. In both the cases, either the sales volumes will come down or margins thus, lower earnings for companies.
Interest rate worries
One of the objectives of the monetary policy in India has been achieving price stability, which the RBI may try to achieve even at the cost of giving up growth. If inflation spirals, the RBI may also raise either the CRR (cash reserve ratio) or the repo rate, depending on the prevailing situation.
The RBI's comfort level for inflation rate is 5.50 per cent, whereas the current level is 8.24 per cent. As there are worries over the rising interest rates, the economist also predict higher interest rates, which along with other factors would shave off around 50-75 basis point from the GDP growth rate. "It seems that the economy will slow down, closer to its long term average of around 6-7% for the next decade. Higher inflation and rising crude oil prices remain a risk to the Indian growth story," says Devendra Nevgi.
Earnings slowdown
The high interest rates along with the factors like inflation and higher commodity prices will hit India Inc negatively. The domestic cost of capital has already increased, with the prime lending rates having gone up by 175 basis points since the second half of 2006 to 12.5 per cent currently.
Also, the housing loans have become more expensive, while in many of the cases the banks are charging about 18-22 per cent for the two wheeler and personal loans. As a result of this, the bank credit growth has come down to about 24 per cent as against the recent high of over 30 per cent in January 2007. This will not only hit the banks' income growth, but also hit the companies immediately, due to higher interest outgo and slow down in the consumer demand. The early sign of this is seen in the slow down in industrial production to 5.8 per cent during the quarter ended March 2008 compared to over 10 per cent a few months ago. The lag effect is also felt by the companies. According to estimates, sales growth of a cluster of 1,524 companies, excluding oil and gas and finance companies, was 14 per cent year-on-year (YoY) during the quarter ended March 2008 as against the recent peak of 28.9 per cent YoY growth during the quarter ended September 2006. Analysts expect this trend to continue going forward if the various issues, as mentioned above, remain. "We think the Sensex earnings growth will slow down in FY09 mainly on account of margin pressure across the sectors led by input costs of power, coal and other raw materials. Also, higher interest rates and slower credit growth should pressure the banking sector," says Harendra Kumar, head research, Centrum Broking. "Yes, moderation in earnings is quite visible. With increase in input costs (of materials, human resources and capital) margins are also under pressure. We have seen decline in margins of companies from the IT, automobiles, engineering, capital goods and logistics sectors" Says Bhavesh Shah, VP Research, Asit C Mehta Investment Intermediates. Though not all sectors will witness a slowdown, certain sectors will be more vulnerable, such as financials and banking services, real estate, industrials, capital goods and auto, among a few others. Analysts are also predicting a slowdown in the BSE Sensex earnings in the FY09 in the range of about 5-10 per cent. "We expect Sensex EPS to be Rs 1,001 for FY09. We have revised this slightly lower (by one per cent) over the past couple of months from Rs 1,012, but do believe that the risk for further downward revisions does exist," says Ajay Loganadan, Head Investment Advisory Group, HSBC Private Banking.
Foreign capital
Considering these issues coupled with the slowdown in the earnings, market participants say that the Indian equity markets are relatively expensive as compared to other emerging markets. Also, this is cited as one of the reasons for the FIIs selling witnessed lately.
The depreciation of the rupee has lowered net returns (in dollar terms) for FIIs. While sharing his view on the FII investments, Ajay Loganadan say, "FIIs have been net sellers of Indian equities to the tune of about $4.2 billion with about $1.2 billion of this selling coming in May. Given the high levels of risk aversion and P/E contraction, we could expect flows to remain muted over the near term. Fund flow for the rest of the year will depend on global news flow and the perception of risk amongst foreign investors. Also, rising trade and fiscal deficits are not viewed very favourably by FIIs."
Global markets
Besides the FII flows the direction of the market will be determined by the global developments, which are not considered to be very favourable. "In our view, global markets are going to remain weak over the next 12 months.
US Housing data continues to get worse, record number of small businesses in the US are filing for bankruptcy (5,000 in April 2008 alone), debt of 174 large US companies is trading at distressed levels. In these circumstances, it is tough to make a case for stability in the US financial space," says Madhusudan Rajagopalan, Director, Aranca India Operations. Besides the instability and slow down in the US, analysts also see more risk due to the sub prime crisis. So far, major banks and other financial institutions across the world have reported losses of approximately $380 billion. In a recent development, Lehman Brothers Holding, a top investment bank in the US is expected to raise approximately $4 billion to shore up its balance sheet after incurring losses due to the subprime crisis (S&Powngraded its ratings). The rating agency also downgraded credit ratings of Merrill Lynch and Morgan Stanley, saying they may have to book more write-downs on devalued assets.
Outlook
For many, it is a bearish market due to the negative micro and macro factors that are affecting the markets, while for others it is the right time to invest and use the lower levels as an opportunity to invest for the long term. Considering that these issues remain, it also indicates that there are concerns for the market to rise from here in the near term. A good monsoon, lower inflation rate along with the better global cues could be the positive triggers, which though seem some time away.
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