It is said that we human beings are endowed with certain quaint characteristics that force us to make a mess of simple and easy to understand things and turn them complex. And nowhere do these habits hurt us the most than in the field of stock investments. We liken it to some IQ testing event like the Math or the Science Olympiad. Tempted by stories that they could be potential multi baggers, we tend to invest in companies with the most obscure names having the most complex business models.
But unfortunately, our rewards, which in this case are the returns, are not linked to the degree of success we have had in unraveling complex business models but the extent to which we have correctly identified its intrinsic value and obstacles that have the potential to erode the same. Not surprisingly then, these pre-requisites call for businesses, which are simple and easy to evaluate. Thus, as in life so also in investing, easy does it. This is precisely what the master has to say in his 1994 letter to shareholders. Laid out below are his comments on the issue.
"Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables."
Another habit that we often fall prey to is conforming to the herd mentality and this habit too deprives us of attractive money making opportunities. One look at the attitude of people towards investing before and after the recent correction in the Indian stock markets and you would know what we are talking about?
Before the recent correction, when the market was trading at its peak and most of the business way above their intrinsic values, investors were queuing up to buy stocks in the hope that since the times are good, there will always be buyers ready to buy from them what they themselves have bought at exorbitant prices. But alas, that was not to be the case and they had to pay dearly for their mistakes.
On the other hand, when quite a few businesses have now come down to a fraction of their intrinsic value after the correction, investors seem to be running away under the pretext that the time is not good to buy equities. These people could take a lesson or two from the master who has the following to say on this tendency among investors.
"We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?"
Bulls
Get Ready...for a Bull Ride !!!
Thursday, July 17, 2008
Thursday, July 10, 2008
The Real Story of the Real Estate Debacle
The consensus story—visible in the general as well as news media—is that real estate is in trouble because of the rise in interest rates. Real estate prices as well as the stocks of real estate companies are down in the dumps because the rise in interest rates is keeping people from buying houses and apartments and so on. The idea being that since property loans have become expensive, fewer apartments will be sold. It's a convenient piece of reasoning, but it also happens to be only vaguely related to the truth.
High interest rate may be the last straw that broke the camel's back, but the business was already in deep trouble. This real estate story started out quite nicely about six to seven years ago. With rising salaries and low interest rates, the early part of this decade saw a large proportion of Indians suddenly becoming capable of buying a house quite early in their lives. Given the tax breaks on housing loans, people realised that they could easily buy an apartment with a few lakhs down payment and an EMI of roughly whatever they would have paid as rent anyway. Such a situation had never really occurred in India. A house was something that Indians bought after a lifetime of hard work and miserly savings. As a result, there was a huge overhang of unmet demand.
Typically, someone earning Rs 40,000 a month could buy an apartment worth costing Rs 20 lakh taking a loan of perhaps Rs 15 lakh. Back when interest rates were around eight per cent, such a loan would mean a monthly repayment of around Rs 13,000. Add the tax breaks and it was a great deal. However, those days didn't last all that long. Powered by the cheap and easy money that banks were pouring into real estate financing, a huge swathe of investors rushed in and pushed up prices beyond the reach of all but a handful of real users. The 20 lakh rupee apartment was now a hole-in-the-wall fifty kilometres outside the city that would not interest anyone who could pay for it. Anything that would interest a middle class buyer was now above a crore of rupees. The basic price-salary-EMI equation now implied that if a real salaried user bought an apartment that he or she actually wanted, then they would have to mortgage the rest of their lives to someone. Genuine business-owners who wanted a shop in a mall were also in the same situation.
At this point, which I believe we reached during 2005 and 2006, the real real estate market had essentially disappeared. There was breed of investors ranging from rich individuals buying two or three apartments all the way up to big syndicates with hundreds of (leveraged) crores at their disposal. These people were now buying up property either from each other, or in competition to each other. In the process, they were bidding up prices to bizarre levels. Into this morass stepped in the investor in real estate stocks, who eagerly believed in these fairy tales of fabulously valuable 'land banks'. Today, we are in a stage when the truth is sinking in. Real estate companies were being valued on the basis of fantasy land prices. In real (inflation-adjusted) terms, those land prices will not be paid by actual users for years, perhaps decades.
The party is over, and it's the investor who bought these stocks who has paid the bill.
(Please refer http://www.valueresearchonline.com/story/h2_storyview.asp?str=11593 for the original transcript of this article. Copyrights if any, are owned by the appropriate owners.)
Citigroup-India Redemptions Reach $ 7 bn, expect another $ 7 bn Outflow in H2 CY08
Three points from our latest note:
1. Six weeks of redemptions totaled $6.6b while regional markets fell 16% — With Asia ex Japan being the worst performing region globally last month and also YTD, outflows from Asian funds persist without surprise. According to EPFR Global, weekly redemptions from offshore Asian funds were in the US$1.4b-1.6b range most of the time in June and total outflows of US$4.8b were the second-biggest monthly outflow in history.
2. US$6b redemptions in 2H to replay the last episode — YTD net outflows total US$11.4b or 5.5% of Asian funds’ AUM. Comparing this with 8.4% being redeemed in the 2001 global growth slowdown, we would need US$6b outflows in 2H to replay the last episode.
Asian valuations remain above average, but earnings growth is below average. Together with shrinking domestic liquidity and deteriorating investment sentiment, we reiterate 15% downside on MXASJ.
3. Cash levels at Asian funds are nowhere to suggest a bottoming of Asian markets — Current cash weights of 2.2% are 120bps below historical averages. Contrasting this with 6% and 16% for 2001 and 1998 market troughs, respectively, Asian funds are fully invested and will have to sell what they are overweight, i.e. ASEAN markets, to meet further investor redemptions. We advocate avoiding the crowd and prefer North Asia (ex China ) to ASEAN.
1. Six weeks of redemptions totaled $6.6b while regional markets fell 16% — With Asia ex Japan being the worst performing region globally last month and also YTD, outflows from Asian funds persist without surprise. According to EPFR Global, weekly redemptions from offshore Asian funds were in the US$1.4b-1.6b range most of the time in June and total outflows of US$4.8b were the second-biggest monthly outflow in history.
2. US$6b redemptions in 2H to replay the last episode — YTD net outflows total US$11.4b or 5.5% of Asian funds’ AUM. Comparing this with 8.4% being redeemed in the 2001 global growth slowdown, we would need US$6b outflows in 2H to replay the last episode.
Asian valuations remain above average, but earnings growth is below average. Together with shrinking domestic liquidity and deteriorating investment sentiment, we reiterate 15% downside on MXASJ.
3. Cash levels at Asian funds are nowhere to suggest a bottoming of Asian markets — Current cash weights of 2.2% are 120bps below historical averages. Contrasting this with 6% and 16% for 2001 and 1998 market troughs, respectively, Asian funds are fully invested and will have to sell what they are overweight, i.e. ASEAN markets, to meet further investor redemptions. We advocate avoiding the crowd and prefer North Asia (ex China ) to ASEAN.
India's Economy Hits the Wall
Growth is slipping, stocks are down 40%, and foreign stock market investors are fleeing. Business blames the ruling coalition for failing to make reforms
by Manjeet Kripalani
Just six months ago, India was looking good. Annual growth was 9%, corporate profits were surging 20%, the stock market had risen 50% in 2007, consumer demand was huge, local companies were making ambitious international acquisitions, and foreign investment was growing. Nothing, it seemed, could stop the forward march of this Asian nation.
But stop it has. In the past month, India has joined the list of the wounded. The country is reeling from 11.4% inflation, large government deficits, and rising interest rates. Foreign investment is fleeing, the rupee is falling, and the stock market is down over 40% from the year's highs. Most economic forecasts expect growth to slow to 7%—a big drop for a country that needs to accelerate growth, not reduce it. "India has gone from hero to zero in six months," says Andrew Holland, head of proprietary trading at Merrill Lynch India (MER) in Mumbai. Many in India worry that the country's hard-earned investment-grade rating will soon be lost and that the gilded growth story has come to an end.
Global circumstances—soaring oil prices and the subprime crisis that dried up the flow of foreign funds—are certainly to blame. But so is New Delhi. Much of the crisis India faces today could have been avoided by skillful planning. India imports 75% of its oil to meet demand, which have grown exponentially as its economy expands. The government also subsidizes 60% of the price of such fuels as diesel. In 2007, when inflation was a low 3%, economists such as Standard & Poor's Subir Gokarn urged New Delhi to start cutting subsidies. Instead, the populist ruling Congress government spent $25 billion on waiving loans made to farmers and hiking bureaucrats' salaries.
Botched Opportunities
Now those expenditures, plus an additional $25 billion on upcoming fertilizer subsidies, is adding $100 billion a year—or 10% of India's gross domestic product, or equivalent to the country's entire collection of income taxes—to the national bill. This at a time when India needs urgently to spend $500 billion on new infrastructure and more on upgrading education and health-care facilities. The government's official debt, which dropped below 6% of gross domestic product last year, will now be closer to 10% this year. "Starting last year, the government missed key opportunities" to fix the economy, says Gokarn. In fact, he adds, "there has been no significant reform done at all in the past four years"—the time the Congress coalition has been in power.
Even the most bullish on India are hard-pressed to recall any significant economic reforms made in the recent past. A plan to build 30 Special Economic Zones is virtually suspended because New Delhi has not sorted out how to acquire the necessary land, a major issue in both urban and rural India, without a major social and political upheaval. Agriculture, distorted by fertilizer subsidies and technologically laggard, is woefully unproductive. Simple and nonpolitical reforms, like strengthening the legal system and adding more judges to the courtrooms, have been ignored.
A June 16 report by Goldman Sachs' (GS) Jim O'Neill and Tushar Poddar, Ten Things for India to Achieve Its 2050 Potential, is a grim reminder that India has fallen to the bottom of the four BRIC nations (Brazil, Russia, India, and China) in its growth scores, due largely to government inertia. The report states that India's rice yields are a third those of China and half of Vietnam's. While 60% of the country's labor force is employed in agriculture, farming contributes less than 1% to overall growth. The report urges India to improve governance, raise educational achievement, and control inflation. It also advises reining in profligate expenditures, liberalizing its financial markets, increasing agricultural productivity, and improving infrastructure, the environment, and energy use. "The will to implement all these needs leadership," points out Poddar. "We have a government in New Delhi with the best brains, the dream team," he says, referring to Oxford-educated Prime Minister Manmohan Singh and Harvard-educated Finance Minister P. Chidambaram. "If they don't deliver, then what?"
Disillusioned Business
More worried than most are India's businessmen, who have turned in stellar performances with their investment and entrepreneurial drive and begun to look like multinational players. For them, there's plenty at stake. But lack of infrastructure, from new ports to roads, along with an undeveloped corporate bond market and high prices for real estate, commodities, and talent, are causing them to hit "choke points and structural impediments all over. We will lose years," says Bombay investor Chetan Parikh of of Jeetay Investments.
Sanjay Kirloskar, chief executive of Kirloskar Brothers (KRBR.BO), a premier $470 million maker of water pumps, already has $100 million in overseas contracts. Yet few infrastructure contracts have come from New Delhi. Kirloskar had hoped to be part of a grand project linking India's rivers, but those plans have been on hold for four years. "The infrastructure growth we had hoped for has not come about," he says. "Instead, we will now expand overseas more than in India."
Such constraints on growth at home will have an impact. Corporate earnings growth is likely to dip, says Merrill Lynch's Holland, who now predicts just 10% growth, instead of the previous year's 20%. That slowdown makes it less attractive for foreigners to invest in India's stock market. Already this year, foreigners have taken $5.5 billion out of the market, compared with the $19 billion they invested last year. Gagan Banga, chief executive of India Bulls Financial Services, an emerging finance and real estate giant, points admiringly to China's ability to maintain its growth momentum for a decade, while India's has not been able to hold up for even three years. "Serious companies are going to grow at a much slower pace, and some may even de-grow this year," he says. Unless major policy decisions are made by New Delhi immediately to keep the economy on the growth path, he says, "India will slow down even further."
New Delhi defends its four year reign in India. "We've had 9% growth for four years in a row," says Sanjaya Baru, media adviser to Prime Minister Singh. "That is unprecedented." He attributes it to the increasing rate of investment, up from 28% of GDP to 35% currently, "close to most ASEAN economies," though he admits that a large part is from the private sector. "Yes, there is a fiscal problem, but there's a price to be paid for coalition politics," adds Baru. So having growth drop "from 9% to 7% is not grim."
Social Backlash?
Chetan Modi, head of Moody's India, says the increasingly high cost of doing business in India may force global investors who had set up base in India—especially financial-services players—to move to more affordable and efficient hubs, such as Singapore and Hong Kong. If the economy slows and inflation continues to accelerate, says Sherman Chan, economist at Moody's Economy.com, "social unrest is possible."
In fact, India is becoming a dangerous social cauldron. The wealth harvested by the reforms of previous governments has made itself evident in the luxury cars and apartments in India's big cities, leaving much of India full of aspirations but few means to achieve them. There is a severe shortage of colleges, yet a plan to build 1,500 universities gathers dust. The Communists in the ruling coalition are against both globalization and industrialization, so without new factories being built, employment growth has been almost stagnant, rising to just 2%—a disappointing rate in a country where an estimated 14 million youths enter the workforce every year, but just 1 million get jobs in the regulated, above-ground economy.
Meanwhile, few expect any bold moves New Delhi, especially with national elections due in 2009 and five important state elections scheduled before the end of this year. Thus far, the ruling Congress party's record has been poor; it has lost almost every state election this year and is likely to lose all five of the upcoming ones.
The big hope for a return to the course of reform in India, businessmen hope, will be a new government in New Delhi next year. The gravest danger is that India's messy coalition politics will bring into power another indecisive alliance that will keep the country in policy limbo for another five years. If so, says S&P's Gokarn, it's a meltdown scenario: growth slipping below 6.5%, accelerating the chances of India reverting to its 1991 status when it was plunged into a balance-of-payments crisis.
Kripalani is BusinessWeek's India bureau chief.
Merrill Lynch: Slowest Earnings Growth Expectation in 5 Years
* Earnings slow-down is finally here!- Expect earnings to slow to a 5-year low with net profit growth for Sensex cos at only10.8% (EPS growth forecast lower at ~7%) for Q ended June, 2008.
- While sales g is strong at near 25%, margins under pressure (100bps drop) - Slowingearnings and likely earnings downgrades is likely to continue to pressure the market.* Earnings partly clouded by forex losses, MTM hits ...- Earnings partly clouded by MTM losses on forex loans or MTM losses of State Bank on its investment books.
- These won't be repeated if currency/bond yield remain stable.* ...but earnings downgrades likely to our FY09 EPS estimates.
- While earnings may surprise on the upside again and even factoring an exaggerated slow-down in Q1 earnings, our full year FY09 EPS growth of 18% looks set to be downgraded (led by engineering & banks).* Energy, software, telecom drive growth; auto,cement lag.
- Autos and cement companies are likely to report drop in profits led by slowing salesand margin pressure.
- Energy (Reliance & ONGC) lead profit growth followed by software and telecom.* Key Result Out-performer: Bharti, Reliance Comm, United Spirits, Satyam.
* Key Result Under-performer: ITC, Tata Motors, Ambuja, Hindalco, Sterlite
Source; aiii
A Bankrupt Superpower
The Collapse of American Power
By PAUL CRAIG ROBERTS
In his famous book, The Collapse of British Power (1972), Correlli Barnett reports that in the opening days of World War II Great Britain only had enough gold and foreign exchange to finance war expenditures for a few months. The British turned to the Americans to finance their ability to wage war. Barnett writes that this dependency signaled the end of British power.
From their inception, America 's 21st century wars against Afghanistan and Iraq have been red ink wars financed by foreigners, principally the Chinese and Japanese, who purchase the US Treasury bonds that the US government issues to finance its red ink budgets. The Bush administration forecasts a $410 billion federal budget deficit for this year, an indication that, as the US saving rate is approximately zero, the US is not only dependent on foreigners to finance its wars but also dependent on foreigners to finance part of the US government's domestic expenditures. Foreign borrowing is paying US government salaries--perhaps that of the President himself--or funding the expenditures of the various cabinet departments. Financially, the US is not an independent country.
The Bush administration's $410 billion deficit forecast is based on the unrealistic assumption of 2.7% GDP growth in 2008, whereas in actual fact the US economy has fallen into a recession that could be severe. There will be no 2.7% growth, and the actual deficit will be substantially larger than $410 billion. Just as the government's budget is in disarray, so is the US dollar which continues to decline in value in relation to other currencies. The dollar is under pressure not only from budget deficits, but also from very large trade deficits and from inflation expectations resulting from the Federal Reserve's effort to stabilize the very troubled financial system with large injections of liquidity. A troubled currency and financial system and large budget and trade deficits do not present an attractive face to creditors. Yet Washington in its hubris seems to believe that the US can forever rely on the Chinese, Japanese and Saudis to finance America 's life beyond its means. Imagine the shock when the day arrives that a US Treasury auction of new debt instruments is not fully subscribed.
The US has squandered $500 billion dollars on a war that serves no American purpose. Moreover, the $500 billion is only the out-of-pocket costs. It does not include the replacement cost of the destroyed equipment, the future costs of care for veterans, the cost of the interests on the loans that have financed the war, or the lost US GDP from diverting scarce resources to war. Experts who are not part of the government's spin machine estimate the cost of the Iraq war to be as much as $3 trillion. The Republican candidate for President said he would be content to continue the war for 100 years. With what resources? When America 's creditors consider our behavior they see total fiscal irresponsibility. They see a deluded country that acts as if it is a privilege for foreigners to lend to it, and a deluded country that believes that foreigners will continue to accumulate US debt until the end of time.
The fact of the matter is that the US is bankrupt. David M. Walker, Comptroller General of the US and head of the Government Accountability Office, in his December 17, 2007, report to the US Congress on the financial statements of the US government noted that 'the federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2007.' In everyday language, the US government cannot pass an audit. Moreover, the GAO report pointed out that the accrued liabilities of the federal government 'totaled approximately $53 trillion as of September 30, 2007.' No funds have been set aside against this mind boggling liability. Just so the reader understands, $53 trillion is $53,000 billion. Frustrated by speaking to deaf ears, Walker recently resigned as head of the Government Accountability Office.
As of March 17, 2008, one Swiss franc is worth more than $1 dollar. In 1970, the exchange rate was 4.2 Swiss francs to the dollar. In 1970, $1 purchased 360 Japanese yen. Today $1 dollar purchases less than 100 yen. If you were a creditor, would you want to hold debt in a currency that has such a poor record against the currency of a small island country that was nuked and defeated in WW II, or against a small landlocked European country that clings to its independence and is not a member of the EU? Would you want to hold the debt of a country whose imports exceed its industrial production? According to the latest US statistics as reported in the February 28 issue of Manufacturing and Technology News, in 2007 imports were 14 percent of US GDP and US manufacturing comprised 12% of US GDP.
A country whose imports exceed its industrial production cannot close its trade deficit by exporting more. The dollar has even collapsed in value against the euro, the currency of a make-believe country that does not exist: the European Union. France , Germany , Italy , England and the other members of the EU still exist as sovereign nations. England even retains its own currency. Yet the euro hits new highs daily against the dollar. Noam Chomsky recently wrote that America thinks that it owns the world. That is definitely the view of the neoconized Bush administration. But the fact of the matter is that the US owes the world. The US 'superpower' cannot even finance its own domestic operations, much less its gratuitous wars except via the kindness of foreigners to lend it money that cannot be repaid. The US will never repay the loans. The American economy has been devastated by offshoring, by foreign competition, and by the importation of foreigners on work visas, while it holds to a free trade ideology that benefits corporate fat cats and shareholders at the expense of American labor. The dollar is failing in its role as reserve currency and will soon be abandoned.When the dollar ceases to be the reserve currency, the US will no longer be able to pay its bills by borrowing more from foreigners. I sometimes wonder if the bankrupt 'superpower' will be able to scrape together the resources to bring home the troops stationed in its hundreds of bases overseas, or whether they will just be abandoned.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com
CLSA: More Than Half Of The Malls Built In India Will Go Defunct in 3-5 Years.
“More than half of the 600 malls expected to open in the next 3-5 years will be defunct…” - a candid view from B. S. Nagesh, CEO, Shoppers’ Stop, one of India’s largest retailers.
This is a just a sample of what you can take away from CLSA's 10th Indian company Q&A, a 500 page tome that is set to hit your desks next week. While investors planning visits to companies will find it particularly useful, for any overseas investor daunted by rising air travel prices, $500/night hotel rooms, and the headache of traveling the length and breadth of India, the 10th CLSA Indian Company Q&A is all that you need.
The Q&A quizzes company managements on all issues relevant to making an investment decision on the stock, with CLSA’s sector analysts providing their own comments and financials to help put the responses in the ‘right’ context.
The 10th CLSA Indian Company Q&A titled “ A tightrope walk” is our largest ever, including 64 companies and an interview with Dr M. S. Swaminathan, father of the Green Revolution, and is also very well timed.
The BSE Sensex is off 34% YTD, reflecting the swing in investor confidence in the economy, corporate earnings and market valuations – as India grapples with the pressures of high inflation and the burden of oil at US$130/bbl. Some blue-chips are off 50-60% YTD and, in the view of CLSA analysts, are near stress value.
The Q&A should thus help you identify companies with strong medium-term prospects, where stocks may be trading not far from stress value. Our favoured picks, among the companies that participated in the Q&A, are Bharti, BHEL, ICICI Bank, HUL.
Highlights of the Q&A report;
Q&A with 64 of India’s leading companies (39 first timers), covering 13 sectors
A survey of India Inc.’s views on key economic variables, outlook for domestic demand and key challenges .
A survey with nearly 100 fund managers on their views on the outlook for the economy and the markets
Key message from the Q&A;
· Companies remain optimistic on their prospects, notwithstanding stockmarket’s concerns on Indian growth story. On average, corporations expect India to achieve a 7-8% annual GDP growth for the next two years.
· However, 72% of companies surveyed felt the deterioration of the overall business environment versus 2007. Top three concerns were rising raw-materials costs/commodities prices (69% of respondents), potential demand slowdown and ‘higher interest rate and credit availability’. We were surprised that ‘poor infrastructure’ was less of an issue.
· Metals companies see stronger growth in FY09, while most other sectors expect growth to be in-line with FY08; only airlines, software and retailers are cautious.
· While firms across sectors were concerned about rising input costs, consumers saw good pricing power, while capital goods saw volumes offsetting margin pressures. Banks saw 20% loan growth as achievable, but admitted to a rise in delinquencies.
· Investors were far more bearish – seeing GDP-growth moderation to nearly 7%, earnings growth falling to 15-20%; 31% saw negative returns from the market, even from here. IT, consumer and pharma were seen as outperformers over a 12-month horizon; interest-rate sensitives such as property, auto and financials to be underperformers.
We sense some dissonance between these firms’ assessment of macro environment and their own growth outlook (only 26% expect their domestic business to slow) and see downside potential to their “guidance” on growth.
Overall market earnings growth could remain supported by commodity price boost for a few large companies, but variance in company performance across our universe will rise. The steep fall in stocks does provide opportunities, but for medium-term bets, we would focus on execution, risk-management skills and balance-sheet quality
This is a just a sample of what you can take away from CLSA's 10th Indian company Q&A, a 500 page tome that is set to hit your desks next week. While investors planning visits to companies will find it particularly useful, for any overseas investor daunted by rising air travel prices, $500/night hotel rooms, and the headache of traveling the length and breadth of India, the 10th CLSA Indian Company Q&A is all that you need.
The Q&A quizzes company managements on all issues relevant to making an investment decision on the stock, with CLSA’s sector analysts providing their own comments and financials to help put the responses in the ‘right’ context.
The 10th CLSA Indian Company Q&A titled “ A tightrope walk” is our largest ever, including 64 companies and an interview with Dr M. S. Swaminathan, father of the Green Revolution, and is also very well timed.
The BSE Sensex is off 34% YTD, reflecting the swing in investor confidence in the economy, corporate earnings and market valuations – as India grapples with the pressures of high inflation and the burden of oil at US$130/bbl. Some blue-chips are off 50-60% YTD and, in the view of CLSA analysts, are near stress value.
The Q&A should thus help you identify companies with strong medium-term prospects, where stocks may be trading not far from stress value. Our favoured picks, among the companies that participated in the Q&A, are Bharti, BHEL, ICICI Bank, HUL.
Highlights of the Q&A report;
Q&A with 64 of India’s leading companies (39 first timers), covering 13 sectors
A survey of India Inc.’s views on key economic variables, outlook for domestic demand and key challenges .
A survey with nearly 100 fund managers on their views on the outlook for the economy and the markets
Key message from the Q&A;
· Companies remain optimistic on their prospects, notwithstanding stockmarket’s concerns on Indian growth story. On average, corporations expect India to achieve a 7-8% annual GDP growth for the next two years.
· However, 72% of companies surveyed felt the deterioration of the overall business environment versus 2007. Top three concerns were rising raw-materials costs/commodities prices (69% of respondents), potential demand slowdown and ‘higher interest rate and credit availability’. We were surprised that ‘poor infrastructure’ was less of an issue.
· Metals companies see stronger growth in FY09, while most other sectors expect growth to be in-line with FY08; only airlines, software and retailers are cautious.
· While firms across sectors were concerned about rising input costs, consumers saw good pricing power, while capital goods saw volumes offsetting margin pressures. Banks saw 20% loan growth as achievable, but admitted to a rise in delinquencies.
· Investors were far more bearish – seeing GDP-growth moderation to nearly 7%, earnings growth falling to 15-20%; 31% saw negative returns from the market, even from here. IT, consumer and pharma were seen as outperformers over a 12-month horizon; interest-rate sensitives such as property, auto and financials to be underperformers.
We sense some dissonance between these firms’ assessment of macro environment and their own growth outlook (only 26% expect their domestic business to slow) and see downside potential to their “guidance” on growth.
Overall market earnings growth could remain supported by commodity price boost for a few large companies, but variance in company performance across our universe will rise. The steep fall in stocks does provide opportunities, but for medium-term bets, we would focus on execution, risk-management skills and balance-sheet quality
Thursday, June 26, 2008
Real Estate: That Sinking Feeling
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.''
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.''
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.''
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