Nitpicks

Crude Shocks keep India in Smiles

2015-01-08T11:30:00.000+05:30

“The economics of oil have changed. Some businesses will go bust, but the market will be healthier,” says the Economist (December 6, ’14). Is this the beginning of cheap oil regime or just an interlude between two big bumps?

2013, in retrospect, had turned out to be the strongest year of recovery, with growing US Economy and stabilizing Chinese economy. Commodity prices were projected to remain flat with an up-side risk due to unexpected supply-side shocks.

Enter December 2014 and all the projections seem little more than wishful thinking. IMF went on record recently: “the global economic growth may never return to pre-crisis levels” ! All the Quantitative Easing (QE) from the US (3 till now – totalling over $ 4 trillion or, twice that of the entire Indian economy) which was supposed to push cash to banks ended up just in increased valuations and stock indices accompanied by higher prices of gold and other commodities. Emerging economies like India had to contend with high inflation. Some even said: it is ‘US Fed exported inflation’!

Now we’re in a scenario where the interest rates of most major markets globally are still at rock-bottom levels (which was the reason to adopt QE in the first place), and despite additional liquidity with banks and their “better health” the economy still isn't improving. Initial fears of QE stoking global inflation have reversed now since the desired impact is clearly missing, and instead we’re facing fresh fears of deflation.

Today, 2 of the world’s 3 biggest economies – US and Japan are reeling with increasing debt-to-GDP ratio, with US hovering over 100% and Japan, at a massive 225%. This means that if US and Japan were to devote even a massive 10% of their GDP for debt repayment, it would take them 10 and 22 years respectively to clear their debts. Another major economy, China is witnessing falling growth, higher inventories and housing bubbles, along with many other large economies like Australia and Euro Zone. Several companies in the Euro-zone have taken a substantial hit on their revenues due to sanctions imposed on Russia, adversely affecting economies of the few relatively better-off countries in Euro-zone like Germany.

India on the other hand, looks relatively promising despite its close to 66% debt-to-GDP ratio. The new government has been successful in changing perception of “doing business in India” in a relatively short time. India, a net importer of commodities, has also benefited significantly by falling commodity prices – most major one being Crude Oil, since it is the biggest by import value. Crude oil has fallen below $60 per barrel, nearly 45% since its peak in the middle of 2014, and with OPEC openly stating against cutting production, it might even fall to $45 per barrel. While OPEC’s decision not to reduce output despite such a fall in prices is being attributed to stifling recent massive US investments in Shale Oil and to corner Russia, the fact is, it is a silver-lining in a dark cloud for India.

However, there are significant head-winds ahead for India and rest of the world. With Euro-zone unable to move away from the edge of crisis, and growth in most major economies faltering, India cannot easily export its way to growth. Most countries are struggling with low domestic demand due to poor demographics leading them into a currency race to the bottom, since depreciated currency will give them better export value. India, with its demographic dividend (65% of the population under 35 years of age), must look inwards for growth. No wonder Raghuram Rajan called for a manufacturing growth led by domestic markets.

Are the shocks of declining crude prices going to hit the rest of the commodity markets - Copper, Wheat, Soybeans and Rice? The cost of production of these commodities could be well on the rise but will be staring the prices in the eye. When that level comes, many producers of such commodities might temporarily halt production that could impact GDP growth adversely and stoke inflation.

Global economy could be in a mess. Indian economy would for sometime be in smiles as it triggers a lower inflexion point in inflation and the consequent abatement in interest rates. Year 2015 would begin on a happy note.

About Authors:

Dr Yerram Raju, Risk Management Consultant and Nitin Gupta, Managing Director, Risk Edge Solutions (P) Ltd. (www.riskedgesolutions.com)

This article was originally published in Business Advisor Magazine's 25th Dec 2014 Edition.

Skill and Non- Skill, Real Money Games

2014-01-01T19:28:00.000+05:30

New Venture Research - Skill and Non- Skill, Real Money Games

The problem I am trying to address is two faceted, with a solution that eliminates boredom through thrill and entertainment and create money making avenue to skilled game developers and card game lovers. The opportunity identified from the problem would benefit game developers who lack capital and resources to market their games. Bringing these developers closer to those set of people who would pay for their gaming activity is the course of this solution.

The solution is a simple card based online platform where game developers across the world can build mobile card based games. Online gambling on skill based games is legal in 36 states in the United States of America. Any game which has an element of chance or luck is excluded from the scope of skill based games. For instance, the popular card based games like Poker has an element of chance involved. Using Artificial Intelligence (AI) bots/ machines, the element of chance is removed in the card based games. Hence technology is expanding the scope of skill based games.

In a real game while two players are playing a card based game, the distribution of cards can have an impact and the player who receives winning set of cards will have an advantage over his opponent. This gaming solution would remove the element of luck by introducing each player to an opponent which is a Bot or machine. The bots will assure high satisfaction to the players because the bots are built using AI system, which use soar cognitive architecture that plays against the user and learns from the experience. The card game’s logic is designed to distribute same set of cards to both the players. The player who wins against the bot tends to be the real winner. Each card game on this platform has its own engine assisted with an exclusive Application Programming Interface (API). Game developers have to build mobile games using the platform’s API.

Once the game has been launched on the platform, users can download these games onto their mobile phones. The fee generated out of distributing games will be shared equally between the platform and game developers. The fee would be 10% on the frozen bet amount. Through this gaming solution, I aim to target those gaming enthusiasts who amount to 176 million people who play social card games online. This online version is inspired out of a ground reality that reflects that millions of people go to Las Vegas to gamble on card based games.

Betting has emerged from ancient times of basic human civilization. Over the years of societal evolution, there have been legal obligations and societal obligations that have barred gambling as legal activity within a society. However, among some modern economies gambling as an activity is received as a full-fledged business activity. Research in this industry states that 30% of people who visit Vegas have graduate degrees which implies that a large mass of gamblers are well educated and aware of this industry and consequences. This number is growing year on year as it is turning into an accepted form of professional indulgence. Now, mobile platforms are key to Social card based games. My target audience being accumulated and aggregated in the United States of America has an advantage of easy market penetration.

With data that is already available in the market we can draw estimates about the no. of download, users and revenue per user. With an assumption that we would attempt to make different kinds of poker games during the first year, we could populate the rest of the estimations. Social Games like Zynga Poker attracts about 10 million monthly active users.

The distinction between Skill based and Non-¬Skill based games. Card based games are usually not considered skilled games because card based games have an element of luck on account of the way cards are distributed. My gaming platform change the style of playing to remove the luck factor; The bot is between players, same set of cards are distributed to players, player capabilities are judged against the bot. This model has a few dependencies which may mature as impediments in commercializing this technology.

According to Super Research Data, around 173 million people play Social Casino Games and close to 50 million gamble online worldwide. During the first week of Skillz.com’s launch, a skill based mobile gaming platform had million users in the first month. Another spend parameter from Netfix.com will help prepare the estimates. Netfix.com which provides Entertainment to users via Movies on average charges around $8 per month. It has around 29 million users from the United States. My idea is very different from Netflix, but our core purpose is the same, to provide Entertainment to end users. With this data, we can estimate $10 spent on betting per month as the average amount spent by each user. This provides 10% fee per user which is $1, to my platform and the developer. With an equal revenue sharing ratio, it would leave each of the parties with 0.5 cents per month. With 300,000 users as an initial target for the first year (multiplying 0.5 cents by 12 months and 300,000 users), the revenue would be $1,800,000. If the average spent by each user is reduced to $5 per month, upon applying the same calculation the platform would earn about $450,000. To conclude, with 6 mobile games attracting 300,000 downloads, the platform would oscillate revenues within the range between $450,000 and $1,800,000.

Like Zim Ride in the States, Zinghopper in India ?

2013-01-31T19:10:00.000+05:30

Latest on easing transport issues is a website that offers online coordination of carpools. Zimride, the latest fad in cost-effective commuting, beautifully blends the best of facebook and google maps to help coordinate carpools. Tactfully eliminating the anxiety of not knowing the driver, the single greatest concern while carpooling, Zimride has received mammoth funding. The success of Zimride is doubted by many industry veterans. Though massively funded, they need colossal user base to emerge triumphant.

India too, is serving as a fertile base for many such tech start-ups. I have traveled to places like Gurgoan, Bangalore, and Hyderabad to meet the budding entrepreneurs. But to my disdain, most of them started looking for emergency exits when I started pointing at their loopholes. Most of these brilliant entrepreneurs copy existing models that are a success in the States. That’s perfectly fine as I belong to the pirates club myself. But their brilliance becomes a little gloomy when they fail to make a clone of the original. I wish they COPIED with passion. Instead, they use their undeniable intelligence which results in churning up of insipid products which are bound to fail. No one can save them and no angel investor will touch them and I will never write a word about them.

One such nifty product is Zinghopper.com – the Indian version of Zimride.com. They have done a fantastic job of copying zimride.com’s functionality; I wish they had done the same with design too. The design is quite similar but with a little too many things glued all over the place. ‘Hideous’ would be the apt description. If they are to take a wise man’s advice, they should consider cleaning up the design before heading for the big release.

The most sensible thing to do would be to just exactly stick to zimride’s design. Now let’s move to their biggest flaw - charging customers for using the website. They may still stand a slim chance of success with the appalling design, but with charging customers for using their website they are bound to doom.

Zinghopper is a great idea, and I sincerely wish the product does well. They have done a great job adapting the product to Indian transport pooling requirements. If successful it would be a very useful tool for college goers and the working middle-class, not to mention the good it would do by reducing the CO2 levels. Victorious, they are bound to change the way India commutes.

Understanding the basics of National Debt

2012-06-01T07:30:00.000+05:30

A recent article in economic times caught my eye...it was about increasing levels of India's public debt. Considering that this, along with inflation, is quoted to be the primary reason of money flowing out of the country, I thought let me put a few points together to put this in a little more perspective for those who don't understand these terms well.

Consider this:

India's GDP is approximately USD 1.5 Trillion (that's USD 1,500,000,000,000)...almost equivalent to the monetary base of the US Federal Reserve (i.e. amount of money floating with the public in US + commercial bank reserves with the central bank). This amount is what all the products and services produced in India within 1 year are worth.

India's Public Debt, or total government debt, is approx. USD 636 bn, which comes to roughly 40% of the GDP. This is the amount the Indian government has raised to finance its projects, and the difference between its revenues (through taxes) and expenditure (salaries, infrastructure, etc.), also known as the fiscal deficit. Every year, some of this debt will come due (mature) and government will decide whether to take on more debt or not depending on its requirements from deficit. Also, every year, Indian government will need to pay interest on servicing this loan, pretty much similar to our EMIs. Any economy that's not growing at all, will have to service this interest burden by either printing more money, or by taking on more debt equivalent to the interest amount. In such a scenario, it becomes almost imperative for the countries to grow just to avoid the debt trap.

Just to put this in perspective, here is a list of some other countries where the public debt is at fairly high levels:

Japan - 200%
Greece - 144%
Iceland - 123%
Italy - 118%
Belgium - 102%
Singapore - 102%
Ireland - 98%
France - 83.5%
Portugal - 83.2%
UK - 76.5%
Germany - 75%
Brazil - 60%
US - 64%

US GDP is approx. USD 14.7 trillion, which puts their public debt at over USD 9 trillion....or nearly 6 times of India's GDP! The total amount that US would have to pay as interest just in 2011 is over approx. USD 3.5 trillion...and some people even say that by 2020, whatever US earns as revenue, the entire amount will go into paying interest on the debt ! An interesting website to look at for knowing and understanding these figures is the usdebtclock.org.

But the problem is not just with the US, the entire continent of North America has an average of 62% public debt, and a close second is Europe with an average public debt of around 56%. Asia, Africa, South America and Oceania regions all have an average under 45%.

From the look of it, everyone is in a worse situation than the other one, and unlike in EU, most others still have the flexibility to print their way out of their mess. US being the world's largest economy, is also dealing with far larger figures on every front - so a mere 0.1% increase in unemployment makes huge waves in the financial circuit.

As for India, the debt and inflation are high, and so is fiscal deficit at over 5.2% of GDP, but three major points supporting India are growth, demographics, and ability to print money. Moreover, a majority of the debt is payable internally, and terms and conditions with internal parties can be negotiated without bringing in IMF into account in the worst case of sovereign default.

Given this, to me, the fall in the markets, the flight (outwards) of the money, looks like a temporary phenomenon, which is probably also a very good (even last!) chance of buying the lower levels in the market. And as for Gold, till US is printing money, I wouldn't care much about its fall, its primary trend will remain up.

Crude Awakening

2012-02-24T00:54:00.000+05:30

It's indeed a crude awakening for Qaddafi, Libya's leader for the last 42 years...and given that Libya supplies nearly 1.6 mbpd (mmn barrels per day), or nearly 2% of world's oil demand, it is literally so too for the rest of the world. Crude prices are on the boil again (touching $ 100 / barrel) after being under control since the 2008 crash. Take a look at the historical crude oil (WTI, NYMEX, in USD / barrel) prices:

(click for a larger image)

And considering the impact crude usually has on the rest of the asset classes, the whole world is sitting up and taking notice of events unfolding in the African country.

The global markets not impressed, with most markets going down by 2-2.5% in the last 2 days.

Take a look at the Dow Jones Industrial Average (DJIA) chart for the last 5 days for instance:

(click for a larger image)

Gold is moving up smartly again, touching $ 1415 / ounce, slightly below its recent multi-year high of $ 1431 / ounce. US treasury prices are moving up, implying that people still consider US T-bills safer during times of global crisis.

A whole host of other commodities will start moving up too, since this rise in crude oil is going to trigger a rise in demand for bio-diesel (an alternative to crude), which needs, among other things, ethanol...made from sugarcane...sending the prices of sugar higher. Elsewhere in the world, import duty paid to bring in bio-diesel in the country is by-passed by bringing in bio-diesel as blended oil...for which some portion of palm oil is mixed with bio-diesel to pass it off as "blended oil". Later, through some fractionation process, these two are separated, and pure bio-diesel obtained. [That's what I've heard from some of my sources in this industry, can't confirm it though]. So an increase in demand for Bio-diesel also increases the demand and prices of palm oil, and since soybean oil is a good substitute of palm oil (for cooking), that too moves up in tandem...and since soybean oil is derived from soybean seeds, the prices of those move up as well...and so it goes.

Given inflationary issues in almost all the countries world-wide, with an exception of the US among the bigger ones, this increase in crude prices is going to further aggravate the situation. Already high unemployment in US is going to go further up, as squeezed margins force companies to go even leaner. In India, already another price hike for diesel and petrol is being talked about...and it might come sooner rather than later.

However, at such times, solace comes from such pronouncements as given by an organization, that crude might hit $ 220 / barrel if Libya and Algeria stop oil production / exports. Usually, such "eye-catching" forecasts are given only at the end of a rally...so may be...just may be, the top is near. Let's wait and watch...and yes, in the meanwhile, stock up on cooking oil if you want to save a few bucks.

The silver lining in Chinese Inflation

2011-02-19T00:51:00.000+05:30

China has increased its Reserve Ratio Requirement (RRR, the amount required to be set aside by the banks, not to be used for lending) yet again...by 0.5% to mop up an additional USD 54 bn from the market with an intention to reduce liquidity and control inflation. Let's take a quick look at the different problems confronting China:

The Liquidity Problem:

Consider this, Chinese banks lent around USD 1.6 trillion (almost equal to India's GDP) in 2010, most of it for infrastructure, and lent almost around USD 160 bn in January alone (!), a figure that's almost twice that of December 2010.

The Inflation Problem:

Inflation in China is already quoting around 5%, according to official figures. I've covered Chinese Inflation issue in my earlier posts, consider reading Betting on China Crash and Understanding China and Japan. Also, while food prices are under control for now, the housing market continues to hog limelight. House prices rose in Jan 2011 in 68 out of 70 Chinese cities surveyed. This, despite the introduction of property tax (though a measly 0.6% to 0.8%) and frequent increases in RRR.

The Currency Problem:

China has been under pressure from various international organizations with sovereign members to let its currency appreciate. Currency appreciation will make its exports less competitive though it might play some part in checking inflation. Currency depreciation will boost its economy but increase the inflation problem. So China has constantly let its currency appreciate, and shows this as compliance to currency non-manipulation to better manage international relations. See the USD Yuan chart below which shows how yuan has appreciated against dollar:

Though the appreciation is there, but its too less, too slow...over the last 1 year, yuan has appreciated by about 4% against dollar.

Soft landing measures:

On the face of it, it looks like Chinese measures are failing to keep both inflation and real estate bubble in check. But just think about it, how difficult would it really be for the Chinese government to dictate terms and functioning to Chinese Banks if they really wanted to curb lending to infrastructure? And please bear in mind, Chinese Banking industry is considered by many investors as fairly opaque and government driven...(part of the reason why Chinese banks don't openly participate (except through proxies) during sale / purchases of various sovereign debt instruments).

China cannot afford to have a real estate bubble crash now...and they know it pretty well. The introduction of property tax also reeks of a gesture to please foreign investors more than anything else. They're completely abstaining from increasing interest rates to avoid a "Yuan Carry trade" situation (read more about this here) which will further worsen the inflation problem. In essence, all efforts are being made to not shake-up the real estate bubble, which has long assumed the position of "too big to fail".

So liquidity control without raising interest rates is probably the best way they've got. And this they're doing not just by increasing the RRR, but even, to a smaller extent, by acquiring Gold mines outside and simultaneously promoting consumption / investment in Gold / Silver in China. So people are just converting their yuan into Gold / Silver, which eventually will go to the owner of these mines from where the metals are being procured...the Chinese government held companies. [This, by the way, is also helping them control inflation through currency appreciation - as yuan supply reduces, it appreciates against its basket of currencies.]

In fact, so strong has the demand been off late, that even China's appetite for Gold and Silver is making frequent headlines. Here's an article from Zero Hedge giving various news items (most of them recent). The result...take a look at the silver prices:

Now, if this is indeed the case, and encouraging gold and silver consumption domestically is indeed a strategy adopted by the Chinese government, it's only a matter of time before both break their all time high and surge further ahead...Now, that's a silver lining in a dark inflationary cloud...

Random Walk - Econo blogging

2011-02-17T00:40:00.003+05:30

Apologies for not writing for such a long time...guess I've been hit by the Writer's Block. Nevertheless, this post is about econo-blogging...and about how some digging into it almost took the steam off my writing...

Came across this website econdirectory through Mish's site. The website gives a huge list of all the blogs which write on economy (and does not include those which restrict to just plain and simple stock tips). It covers some 165 websites, most of which have public page views, and some others which don't. Overall, the top 5 guys in the list take up the major portion of readership...here's a sample of what it looks like...

A massive 61% of all page views are with the top 5 blogs, and a good 54% with just top 4. The rest of the 160 blogs consist of the remaining 39% page views. The page view by the latter segment is small enough for each one to not sustain any meaningful ad revenues.

The NY Times even listed DIY (Do It Yourself) Macroeconomics as one of the top trends of 2010...in which, says NY Times "ordinary citizens pull apart the data and come to their own conclusions". So while more and more econo bloggers are joining the band-wagon, the pie is not undergoing any major expansions, resulting in traffic being held as captive audience by the top few websites.

Its tough getting into the top 20 list, and like even Mish pointed out, that would, under current circumstances, result in having just 5% of the traffic of the top blog...! But just like they say for Euro zone, there's hope...things could've been worse...

Golden movements

2011-02-04T07:30:00.005+05:30

Gold has been falling for quite some time now...giving rise to talks about whether it has seen its peak for some time to come...take a quick look at the 30-day Gold Price chart below:

This fall came in the backdrop of US showing signs of recovery, quoting better unemployment numbers and good consumption increases. This led to people moving out of emerging markets plagued with unsustainable inflation and prospects of lower growth and overall shrinking corporate margins; just as investors moved out of gold as well. People were again backing dollar denominated assets, US and European markets. Take a look at how US and European markets have performed over the last 1 month.

But still, its not that investors have started looking at dollar any more appreciatively...the US Dollar Index, which shows the strength of dollar against various currencies, continued its downward journey over the last 1 month.

All this points towards some sort of portfolio reallocation among some major funds of the world. As a part of their strategy, they are taking some profits off the table from Gold, liquidating their positions in emerging markets, and increasing the weight of US and European stocks in their overall portfolio.

However, to me, Gold still looks like a minor correction before the rally resumes...nothing more. Egypt is on the boil due to political unrest, creating tensions in almost whole of middle east...which is spooking the investors worldwide. Once that settles down, Europe will come right back on the radar. And then may be Japan, who knows; with 200% of GDP as debt, 1 in every 4 persons above the age of 65 and no longer contributing to the savings (which was being used by government to raise debt), Japanese government will sure have to look for other avenues to raise debt just to keep paying off its interest on the debt..leave alone retiring the debt. China's real estate bubble can now be seen from outer space (;)), and once that crashes, it'll take a whole lot of other asset classes with it, right from Copper and Soybeans to Equities and Bond prices. Asia, just because of these two big shaky giants...is a risky place to invest.

But fundamentals for Gold still look intact. Central banks are still buying Gold...and these are the biggest players in the market - please bear in mind, they don't get in into the market to make a quick buck and move out as soon as profit targets are achieved...they're in for long.

Take a look at this article here, that talks about how Russia added 135 tons of Gold in 2010...an increase of almost 21% from their 2009 end Gold holdings ! Saudi Arabia has disclosed a purchase of 180 tons which has come in due to "adjustment of gold accounts". Take a look at the latest Official Gold Holdings for countries:

World_Official_Gold_Holdings_January_2011

Getting back to brass tacks, it means that US has almost USD 350 bn of Gold with it. Germany has nearly USD 147 bn, Italy and France has USD 105 bn each, China has USD 45.5 bn worth of Gold, while Russia and Japan have 33 bn dollars worth of Gold each and India has around 24 bn dollars worth of Gold.

The Gold reserves of US, though the largest in the world, are still far away from its Debt levels of USD 9 trillion (not accounting for contingent liabilities - like medicaid and Social security). Germany, France and Italy will need these reserves to boost world confidence in their ability to come out of this crisis...any selling by these central bankers in time of crisis might trigger a sharp fall in Gold prices which will further depress the reserves status of almost all nations with substantial Gold holdings - and so is fairly unlikely to happen.

China has a long way to go as far as diversification in gold is concerned since its gold reserves are just 1.8% of its nearly USD 2.5 trillion reserves. This thought has also been propounded recently by Xia Bin - adviser to China's central bank (see here).

The world is still quite close the uncertainty in several aspects...China's hunger for Gold will not go down, central banks will not sell their gold in a mad rush...these, and many such aspects are bullish signs for Gold...so for me, its still a good buy on all dips.

Addendum: See this article from Financial Times that talks about some gold traders estimating that China has probably bought around 200 tonnes of Gold in the last 1 month ! That's nearly 36% of India's Total Gold reserves ! Let's wait for China to release data on Gold reserves again...and we'll know how true these estimates were...

Betting on China Crash

2011-02-01T07:30:00.004+05:30

The rumblings of an imminent Chinese crash are getting louder by the day...giving an eerie feeling that something too big is so close that we're not able to see it!

Consider this article in Telegraph a couple of weeks back, which says how many hedge funds are now betting that China would crash sometime soon. It says:

"One academic said: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.” ...A recent study by Fitch concluded that if China’s growth falls to 5pc this year rather than the expected 10pc, global commodity prices would plunge by as much as 20pc."

This is understandably so, given the huge amount of fears from Inflation, asset bubbles (especially real estate) and uncontrolled lending spree by the banks. Its not as if China is not aware of these issues...or not working on them. It has been tightening its bank's reserve ratios to absorb excess liquidity available with the banks. It has been buying European Union's debt to prop up Euro against the dollar and also yuan (Chinese currency). Keeping yuan lower with respect to Euro will help China in boosting their exports to Europe and give them some breathing space in terms of trade deficit (Exports - Imports).

The article further says:

"According to Corriente (Advisors), China has consumed just 65pc of the cement it has produced in five years, after exports. The country is outputting more steel than the world’s next seven largest producers combined. It has 200m tons of excess capacity. In property, Corriente said it had found an excess of 3.3bn square meters of floor space in China – yet 200m square meters of new space is being constructed each year."

Besides, Chinese real estate bubble is fairly well documented...an average apartment in Shanghai costs more than 22 times of disposable income there...making it beyond reach for most people. HK was recently reported as the costliest city in the world for housing. Despite several efforts to curb speculations on housing, China has been able to achieve little by way of increases in reserve ratios. However, recently it has put up a property tax for the first time...(read here). But with the rate at about 0.6%, it looks like a case of too little too late.

Take a look at another recent article in Telegraph that talks about how the real estate bubble could be growing bigger in China. The article mentions:

"The property tax would have "a big psychological effect on potential home buyers," said Ge Haifeng, head of research at China Real Estate Index System in Beijing. "China's housing market may get really quiet in coming months," he said. "

Big Impact !! A 0.6% property tax rate? In India, retail investors pay that much as brokerage (each leg) for all equity transactions ! Does that kind of rate stop them from trading? I don't think so...In India, property tax rates are fairly high and vary from state to state...and to me, a 10% + service tax (of 2%) is a normal rate for property taxes....that's how much people pay in India as their property tax...8-15% of property value...and it still does not stop people from speculating. And many Chinese, who are traditionally gamble-happy people, are expected to stop speculating the housing market because of a 0.6% property tax ! Let's just say, this is being made up to send a message to the markets that a lot is being done to keep bubbles in control...but obviously, the markets are not impressed.

I think this is more likely a warning signal to speculators to move out of the market and not get caught with their open positions when the rates are increased. The idea in such a case would probably be to remove the panic from the market when property rates are raised further, and thus ensure that a crash in real estate prices would not happen. But how it actually unfolds, only time will tell.

Chinese Automakers are also facing tough times with restrictions on selling cars being put up in most populous Chinese cities to reduce traffic jams. It'll again have a cascading effect as the automobile ancillary units are also an industry in themselves and will suffer major losses due to loss of revenue.

Also, with China talking of "no need for yuan to appreciate" since exports will slow down in 2011, it looks like even the pretense of letting yuan come up over a period of time is over now. This is not going to help the geo-political equations, look forward to comments from the US.

Even the credit default swaps (CDS) rates - the instruments through which people bet for a sovereign nation defaulting on payment of its debt, have been increasing for China...it means that more and more people are buying these instruments at ever higher prices, in the belief that when Chinese economy really looks weak, or even tumbles, they'll make a handsome gain on these investments. I have a rather dated article mentioning this, take a look at that here.

Will China really go bust? Its difficult to predict, given the fact that we don't even know that the numbers that we're talking about are true or not (these are, and can be massaged by government agencies). China's public debt is reportedly just about 20% of its GDP compared with 40% for India, 60% of US and nearly 200% for Japan. It can no doubt continue to build bridges to nowhere for some more time, and hoard gold to protect itself from a dollar bust scenario, but eventually, all this lending spree and housing bubbles have gotta give...and they will. But when? Now, that's a trillion dollar question!

Guest Post - "The Business of Resolution" by Arun Varma

2011-01-24T23:54:00.003+05:30

I'm kicking off a brand new section on this blog - Guest Post. The intent here is to find emerging experts in various domains, not necessarily from Finance & Economy, and provide them a platform to express what they feel most passionately about...as long as it follows the basic tenets of being Simple and Applicable.

This Guest Post is from Arun, a good friend who has taken some time out of his busy schedule to give me an interesting piece to share with all of you. You'll find his details at the end of the article. So here goes our first Guest Post...Thanks Arun !

The Business Of Resolution

It was the 28th of December, an exceptionally cold evening in Boston going along the expected lines. David, Mark and I were frittering away time at Karen’s, following the latter’s invite to what she called an ‘exotic’ dinner. I was more hopeful than curious, as I badly wanted some fiery Paneer tikka masala and Tandoori Roti, but I was getting ready to delude the host with my ‘That was exquisite’ praise (It wasn’t my first time after all!). My hope was butchered when I found Quesadillas and Tacos. Mexican and exotic? I'm telling you, people have to use words more carefully, just so that you don’t raise hopes. So the acclaim went on, animatedly!

Post dinner the caboodles were kicking back by the fire place and the conversation was again along expected lines. (Something about this evening was so predictable!) Year-gone-by-problems, Anticipations…you know what I mean right? And then abruptly something unexpected happens.

David: Mark, so any New Year resolutions this time around?

Mark: Well not really.

David: What do you mean? How can you not have New Year’s resolution? (Flabbergasted!)

Mark: Well…You know, I really haven’t thought about it.. I guess…You know…Maybe…. (Almost apologetically with the look of a kid caught stealing candies)

The comments that followed almost crucified Mark instantly for the baleful sin of not having thought of a New Year’s resolution. As much as I was empathetic for Mark’s misery, I was glad that I got away without any damn resolutions.

Cut to the 31st of December. It was time for possibly the most hyped and over rated New Year eve party – the crystal ball drop at Times Square New York. Because my idea of a great new years eve is not blasting my urinary bladder (Folks who have been there will tell you why!) in acute East Coast winter (-8 C for the record) in the middle of a million inebriated demented lunatics, I was chilling at home and watching the ‘party’ live on TV.

The ad aficionado that I am, my focus was more on the ad intervals than the ‘party’. To my surprise, Chantix (A Nicotine patch brand from Pfizer) was running their ad slots back to back. Pharma ads apart from being incredibly expensive (due to their lengths related to legal compliance) are usually not placed midnight. For a while, I thought it was a misadventure of some godforsaken media planner. But then I was surprised even more, when ads related to legal agencies offering to help one get out of debt appeared, again back to back. And then it hit me, and almost immediately astounded me! Quitting smoking and getting out of debt are 2 top resolutions Americans make and marketers were trying to milk the opportunity right there! So this resolution thing is that behemoth of a business!

Picture this. GSK which spends a whopping $15 Million only on the promotion of their smoking cessation product, Nicoderm, generated a sales of more than 1 million boxes just in the month of January last year in the US. If online search traffic on Google is anything to go by, look at the worm below:

(click for a sharper image)

From a low of 20 index points on the 26th of December, the query volumes for the keyword ‘Chantix’ (Pfizer) touched a peak of 90 points on the 3rd of January. This despite all the news of Chantix incited violence doing rounds!

The next most popular resolution – getting fit, is another money spinner. Gyms see the greatest membership growth in the first three months of the year, with approximately 12.4% of new members signed in January, 9.5% in February and 8.7% in March. Overall, Gyms, Health & Fitness Clubs posted 3.2% growth in 2010, reaching revenue of $25.09 billion.

Additionally, Weight Loss Services are expected to grow 1.9% to reach $3.87 billion. ‘Planet Fitness’ the chain of basement gyms that I patronize, ran a $10 per month campaign until the 12th of January, that’s cheaper than a jug of beer at a decent bar. Oops we are talking fitness here! I almost suffocated in my gym the first 2 weeks, when the place was packed like sardines in a can!

It’s not the gym alone, people do anything to lose the flabs gained over the year. Even ‘demanding’ (strenuous?) tasks like popping pills, using ‘fat burning’ belts, lie down mats with poking pines (Search Acushakti on Google) and wacky ways like applying creams, tans and hypnosis! Look at the ‘how to lose weight’ graph for the last 30 days:

(click for a sharper image)

The traffic spiked up from a low of 40 points around Christmas to an incredible high of 90 around the 3rd January. Additionally, unlike quitting smoking, losing weight does not seem to lose steam that soon!

Managing one’s personal finance seems to be another problem people battle against. Household revolving credit debt declined for the first time in 20 years in 2009, and is expected to decline even further in 2010. Furthermore, the personal savings rate will hit a 16-year high in 2010, as consumers continue to focus their efforts on managing their balance sheets.

As a result of this, the Financial Planning & Advice industry is expected to expand 4.1 percent, increasing to $39 billion. Portfolio Management companies are also expected to experience strong growth, expanding 33.4% and a huge part of this growth is inclined towards the first quarter of the year.

New Year Resolution industry is wider and broader than we imagine. Think about a certain average Joe deciding to spend quality time with family starting January 2011. This can mean more holidays (Impacting the travel industry), more movies, more eat-outs and more anything as quality time just means better life.

Another angle is what I would call ‘Cumulative effects’. Joe who decides to join a gym opts for better diet which means demand for healthy food goes up. Joe needs sweat shirt for his gym leading to more cumulative effects. Joe needs an MP3 player / Ipod for a groovy work out. The domino effect is mind boggling!

No wonder then marketers agree to part with heaps of moolah to cash in on the resolution craze. Like people who wait until the next year to meet their goals, start a project or reform a habit, marketers keep their budget apart to influence these vulnerable minds precisely when and where its most delicate.

As for Mark, maybe he should resolve to think faster from next year!

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Arun Varma is a Boston-based digital media professional who previously worked with Google. He is a contributor columnist to Socialnomics.com, one of the top 10 social media blogs in the US as ranked by the PC Magazine. He enjoys conceptualizing and hosting business quizzes and is all set to complete his MBA from HULT International Business School.

Follow him on Twitter @varmaarun

Feedback: arunvarma100@gmail.com
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Follow-up - Nifty Trading Strategy - Short Strangle

2011-01-23T16:31:00.000+05:30

Thought I'd do a quick follow-up on the Nifty Trading Strategy given a few days back in my post. But before that, I got quite a few queries asking me to explain the strategy a little better, mostly by those who only part understood it and were fairly keen on executing it.

So here's a quick primer on a "Short Strangle Strategy":

Its made by shorting a put option and a call option. The put option must be of a lower strike than the call option. The idea here is, if the underlying (here, Nifty) is likely to stay within a particular range before the next option expiry, you can make money by betting on it. If it does so, good...you get to keep all the premium received by selling a call and a put. If it does not, well, the losses, theoretically, are unlimited. Let's understand this a little better; here's the profit profile of a short call and a short put option.

(click for a sharper image)

So, like it was suggested in the strategy, shorting 1 Nifty (6100 strike) call option on that day would have paid you

Rs. 15.4 *50 (each lot of nifty has 50 units) = Rs. 770.

Thus, you'll retain this entire amount if Nifty stays below 6100, and you'd break-even at 6115.4 and for every point above 6115.4, you'd stand to lose 1*50 = Rs. 50

And shorting 1 Nifty (5700 strike) put option would have yielded

Rs. 87 *50 = Rs. 4350.

Thus, you'll retain this entire amount if Nifty stays above 5700, and you'd break-even at 5613 and for every point below 5613, you'd stand to lose 1*50 = Rs. 50

So the total money received by you at the start of strategy would have been

770+4350 = Rs. 5120.

You'll retain this entire amount if Nifty stays between 5700 and 6100, and you'd break-even at 5613 and 6115.4 for every point below 5613 or above 6115.4, you'd stand to lose 1*50 = Rs. 50

So this is how the profit profile of the suggested short strangle would look like:

(click for a sharper image)

And here's how the strategy has performed from the time it was given:

(click for a sharper image)

As of now, the strategy is making money to the tune of over Rs. 2800 / lot. There are 3 more trading days left - since 26th is a trading holiday. The options will start losing their time value fairly quickly now which will make this strategy more profitable. Any sharp downside movement (we're quite far away from hitting the upper limit of 6100) although, will result in losses.

Happy Trading !

Strong China Growth - Bullish / Bearish ?

2011-01-20T20:13:00.001+05:30

Like I said in the last post - these are interesting times indeed...Please consider the two news articles given below.

The first one is dated 14th of December 2010, and talks about the day when Asian stocks rose due to China reporting strong growth numbers. It says:

"Asian stocks advanced on Tuesday, supported by optimism that China would avoid aggressive moves to curb inflation that could inhibit its strong economic growth and blunt its voracious demand for raw materials."

Compare this to the second one which is dated today, 20th of Jan 2010, and talks about how Asian markets tumbled when China said it grew by a robust 10.3% in 2010. It further says:

"China said its economy grew 10.3pc in 2010, marking the fastest annual pace since the onset of the global crisis but concerns about persistent inflation sent Asian markets tumbling."

What a difference 28 - 29 trading days can make ! Inflation was high then, is high now. Interest rates haven't been raised during this period, although liquidity has been sucked in through increases in RRR - the reserve ratio requirement which mandates banks to keep a certain percentage with themselves as cash and not give it off as loans.

It doesn't end here though. The first article goes on to say:

"A Reuters poll released on Monday showed economists still see a rate rise in China in coming months, but expect policymakers to rely more on lending controls in 2011 as its weapon of choice in the fight against inflation."

...while the second goes:

"Analysts said the pick-up in growth in the fourth quarter - partly driven by stronger exports - and the still-high inflation in December supported the case for further interest rate hikes and bank lending curbs."

Apparently now the markets are really sceptical about interest rate hikes coming up...quite a bit of change of view from the previous one !

Like I said before...interesting !

Goldman Sachs on BRICs v/s US Markets

2011-01-19T01:01:00.000+05:30

An interesting article in the Telegraph on Goldman shunning BRIC (Brazil, Russia, India and China) nations for US markets for better returns this year. Just thought I'll evaluate this news literally...and here's what I've managed to come up with, please take a look at the following charts of global indices and how they've moved over the last 6 months:

(Click for a sharper image)

Notice among all the markets in the world, namely, US, France, Korea, Canada, UK, Australia, Brazil, India and China, only the latter 2 are actually in a downtrend right now, the rest are actually at or well above their support levels.

The reasons are fairly well publicized, Inflation and an economic hard landing for China and Inflation and fiscal deficit for India. Inflation is the common major worry in both the economies though. China is rumored (conservatively speaking) to suppress its actual inflation figures which some believe to be in early double digits...and for countering a growing distress among local lower-middle class population, it has raised salaries for government employees twice in the last 1 year...and that too by over 20% each time! This is in turn putting an upward pressure on the salaries of their peers in private organizations in China, thereby hurting their wafer thin margins.

India is a worse story in Inflation, recent ads in newspapers and TVs are from poultry chains showing the marginal price difference between vegetable and poultry products...and asking people to make a better choice ! Some people are reportedly even switching to fruit diet as they are almost as costly as vegetables here. Although unlike China, the liquidity is quite tight here, asset bubbles not as great and the banking industry much more robust, but with the government racing down to find the depth of moral bankruptcy through various scams over the last 1 year, its an overall fairly uncertain scenario, which is something no investor will like.

It'll be interesting to see how things unravel from here...will China really crash? Will India see a major correction from here? Will the US economy rebound? Will EU stabilize thus sending gold southwards?

But then again, always keep in mind the (potential) vested interests of such investors, and that there have been times when they have given an outlook for $200 / barrel of crude oil (when oil was $122). Crude eventually went to $147 and then turned back to touch $35 in less than a year. These are interesting times indeed.

Global Inflation, local solutions

2011-01-17T07:30:00.001+05:30

Inflation is making headlines globally again, and going by Google trends, is almost as worrying for most people globally as it was in 2008 !

Consider the following news pieces over the past few days:

South Korea raises rates to tackle Inflation (here): S. Korea increased rates to 2.75%, about 75 basis points more than its low during Feb 2009 period, when it had slashed rates to tackle recessionary effects. This is its 3rd attempt since, to bring inflation back to under 3% from about 3.5% currently and for Korean PM to bring the growth back on track to at least 5%.

Australia faces food-inflation risk with Tomato prices shooting up by 20% (here): Situation might get further aggravated due to floods in Australia, which reportedly could have caused as much loss as 1% of its GDP. Besides, with petrol prices inching up further in the coming weeks, the inflation is unlikely to come down anytime soon. Moreover, flood situation is likely to result in a delay in increase in rate hikes as well, to be able to offset the lack of growth in the flood affected region.

China increases its RRR again in a bid to control Inflation (here): China (as also Taiwan) has increased is reserve ratio requirement (RRR) by 0.5 % which mandates banks to hold more money with themselves instead of lending it, in a bid to reduce the money in circulation and tighten liquidity. China is clearly refraining from increasing the borrowing interest rates as it might not only hit the growth hard, but even fuel the Yuan carry trade (wherein, people from foreign countries with lower interest rates can take loans in their countries and invest in China at higher interest rates - something similar, but in reverse order has happened in Japan for a long time due to its long bout of near zero interest rates). If a Yuan carry trade does happen, it'll negate all measures being taken to contain inflation as a whole lot of foreign money will come in into China's financial system.

India's WPI inflation touched 8.43% in December (here): Indian markets are caving in due to better growth prospects from US and due to upward pressures on interest rates due to high inflation. Although onion prices in India have come down from its highs of over 2$ / kg to around 1$ /kg, its still high enough to be unaffordable to over 75% of India's population. Expect some interests rate hikes soon from India. Since moving money in and out of India is not easy due to various capital flow controls, unlike some other countries, India would not trigger a massive Rupee carry trade by increasing interest rates.

Its not just the emerging market economies / Asian economies which are facing teething troubles due to inflation, even UK and US are reporting increases in inflation. Besides, Compare the response to inflation in China now (@ 5.1%) as compared to in 2008, when it was over 8.3% and its RRR was about 16% as compared to 19.5% today ! Back then, it was a real problem with excess liquidity, now its not. Thus, at this stage one question that needs to be asked is not How to control inflation, but rather, What is causing inflation despite poor growth and high unemployment in most of the developed world?

Reasons for Global Inflation:

Inflation can be caused primarily due to 2 reasons - if liquidity / amount of money in the system is high (like in China), or if Supply and Demand dynamics of inflation causing elements change. For example, food - which contributes a decent chunk to inflation figure, and is fairly inelastic in nature (just because food prices have gone high, you'll not stop consuming food...may be make a temporary dietary shift, but still eat something). Or real estate, if everyone starts buying houses tomorrow, then considering the decent amount of weight it has in inflation figure, inflation will rise along with prices of other related commodities like steel, cement, etc.

Yet another way of looking at inflation is, like Mish says, to look at the supply and demand of money itself. But this time around, I think its primarily the supply and demand of commodities, which is causing inflation globally, and not the excess supply of money / poor demand for money (which might happen if interest rates are reduced to such low levels, that people do not have any incentive to save).

If we look at the real estate bubbles forming across different countries like India, China, Singapore, Australia, Thailand, etc., its not very difficult to see why costs of some of the basic commodities is going up, which is further stoking inflation. Food prices globally are also on the rise, from basic food items to raw materials like soybeans and palm fruits, which are used to produce soy and palm oil (to be used in cooking). High energy prices (crude oil nearing 100$ - though now it has come back to 91$ / barrel) aren't contributing to reducing inflation in any way either. Just like Australia, India too is looking at higher petrol prices due to high crude prices globally...India will rise today to an approx. 5% hike in petrol prices...and how this will affect inflation is anybody's guess.

Its a combination of liquidity control and food / commodity production investments which are a key to controlling inflation right now, rather than just using text-bookish ways of taming it through fiscal / monetary measures. The former is the playground of central bankers, while the latter, that of the governments. China has already started investing big time in food production to tackle this issue, Singapore has started implementing roof-top harvesting concepts to reduce dependency on imports of essential commodities in future as also to reduce the fluctuations in food prices, heck, even Greenland is using greenhouse effect to increase its produce of agriculture.

Though these are baby steps towards future sustainability, and is surely unlikely to yield either results or fruits (literally !) in near future, but it looks increasingly likely that another Green Revolution is required in sync with liquidity control measures to tackle inflation from here on...

How Fed pumps in money into the system

2011-01-12T07:30:00.002+05:30

An interesting article in the NY Times explains it all - how US Federal Reserve pumps money into the system...basically, the grail of how Quantitative Easing works.

Take a look at how QE works here, explained in a simple way:

(click for a sharper image)

Basically, Fed prints money and deposits it in its own account (I know what you're thinking of right now...I wished the same ;)). This money is then used to buy back bonds sold by US Treasury to banks. The bank use this money for lending, both commercial and retail, through lower interest rates, which motivates people to take loans and spend it on either revenue / capital expenditure. This creates demand for people, products, services and takes the economy on a higher growth path.

The article gives a glimpse of how it all is actually executed by a few traders sitting in the Fed's office...and buying bonds from the 18 PDs (Primary Dealers - who have the sole authority to buy bonds from treasury in the first place).

So, by issuing QE I, Fed bought back bonds worth over $ 1 tn from these large banks / PDs, and with QE II, Fed is again buying back another $ 600 bn from them. All this money is supposed to go into the system as loans to companies and people like you and me...to build better products, to buy houses, etc. but is it actually happening?

Consider this really interesting article from The Telegraph, which talks about trap that America's have-nots are in. It talks about how high-end luxury stores like Cartier and Louis Vuitton US are witnessing strong growth over 50%, but bargain shops like best buy and Walmart are seeing a drop in sales !

It summarized the context of this post beautifully:

"Such is the blighted fruit of Federal Reserve policy. The Fed no longer even denies that the purpose of its latest blast of bond purchases, or QE2, is to drive up Wall Street, perhaps because it has so signally failed to achieve its other purpose of driving down borrowing costs."

It further goes on to say:

"Corporate America is in a V-shaped recovery,” said Robert Reich, a former labour secretary. “That’s great news for investors whose savings are mainly in stocks and bonds, and for executives and Wall Street traders. But most American workers are trapped in an L-shaped recovery."

I like that phrase - "L-shaped recovery"...personifies the current pain of American Middle-class...with its growing mortgages as interest rates grow, inability to get out of their investments in housing, unemployment hitting every 5th employable person, and even pensions at risk because of states inability to keep up with the payments.

And all that Fed does is to pump in more money into the system - very much like digging deeper in order to get out of the trench...all the best making it work Sammy.

Indian Markets - down but not out, Trading Strategy

2011-01-11T07:30:00.001+05:30

Its amazing to see a strong unidirectional trend in the markets...this time its down ! Consider this, from the start of this year, Nifty has gone down by nearly 7% while some others like Bank Nifty and CNX Realty have shed over 10% and 12% respectively !

Here's the chart for Nifty:

(click for a sharper image)

And for Bank Nifty:

(click for a sharper image)

The reasons for such drastic fall are apparently the flight of hot-money from India in the backdrop of strong consumption / demand and reduced unemployment numbers being reported from US and rising default risks in EU region again reminding investors further about the relative sustainability of the US.

The flight of money from India is also reflected in the USD INR Chart of the last 5 days (see chart below). Notice how INR has moved from 44.4 to nearly 45.4 in just 5 days...in currency markets, that's a HUGE movement.

(click for a sharper image)

China's inflation worries and its continuing stress on further rate hikes is keeping the entire Asia Pacific region on tenterhooks for an impending crash. Besides, China has been coming under increasingly higher pressure to let its currency appreciate in order to help US and Europe cope with their crisis better, which if it happens, would be disastrous for most markets as it will lead to China crashing.

However, I think given the strong 200DMA supports coming up for both Nifty and Bank Nifty, the fall should take a breather here. Moreover, with China reporting a trade surplus (net of Exports - Imports) of nearly USD 13 bn for Dec 2010, (which happens to be much lower than what it was last year in the same quarter), it is in a better position to bargain for slower / no increases in yuan (CNY) during meeting with Barack Obama on Jan 19 this year. [Keeping its currency weak will help China in boosting its export value, and thereby increasing its trade surplus. Ditto for US, which is going to be one of the points of discussion during the meet] Such a bargain (though US is unlikely to give it) will help China immensely in keeping itself from a crash, which will be a good boost to Asian markets.

Besides, with US pumping in more money into the system through its currently on QE II, China is going to find it tough to increase interest rates. This is because if it does, it'll boost what is known as the "Yuan carry trade". The term Carry trade was earlier associated with Yen, wherein, given the near zero interest rates in Japan, investors used to borrow in Yen and invest in foreign markets where interest rates were higher, thereby making a neat sum in this simple arbitrage. For China however, increasing interest rates will bring in even more from the US where the rates are currently near zero. This will further pump up the money supply in China boosting inflation further - which is the last thing China wants at this stage. This will, among other factors, keep China from increasing the rates too much, too often...and it is more likely to contain inflation by sucking liquidity out of the financial system (by increasing reserve ratio for banks, making loans to real estate more difficult, etc.).

Given this scenario, I'd suggest another trading strategy for this month...to sell a Strangle. Sell Nifty Jan 5700 put for 87 and sell Nifty Jan 6100 call for 15.4. This will result in a net inflow of (87+15.4) = 102.4 * 50 units = 5120. If Nifty ends up between 6100 and 5700, before 27th of Jan (another 12 trading days) the entire money is yours. The break-even points would be 5598 and 6202. Beyond these points, you'll end up losing 50 bucks for every point. Keep your stop-losses in place and trade.

See my earlier trading strategy and its follow-up here.

Disclaimer: No positions as of now. But be aware of the risks...I'm not a trader by profession and don't claim to have any expertise in either trading or recommending trading strategies.

Global Oulook for 2011

2011-01-10T07:30:00.002+05:30

Here are a few questions that I posed in my post earlier. These are a part of the Global Outlook for 2011, some of the most important questions staring us in the face right now....from Euro to Gold, Currency wars to US recovery. Enjoy the ride...

Is Euro zone going to fall apart? Will Euro cease to exist as a currency?

Tough one to start with....the troubles in EU seem never-ending...its like the "Hydra of Lerna" (from Greek mythology)...a deadly serpent which had nine heads, and each time one head was cut-off, two more came up. Only this time, it all first started with Iceland instead of Greece. [Remember the good 'ol joke about Iceland's capital? It was arguably around 4 Euros !]

The troubles have since passed through Greece and Ireland, and looks set to suck-in Portugal, Italy and Spain sometime soon. And don't forget, its not that Iceland, Greece and Ireland are out of troubled waters just because they got handed over some nice bail-outs.

Unlike the US, since EU is woven with the same currency with different political leaderships, the more Euros that are printed and given out, the more the purchasing power of the other EU nations reduces (as it devalues their currency as well). People in countries that are better off, like Germany and France, don't like this Robin-hood story being played on them...(I think rightly so). But what choice do they have? If they don't bail-out these guys, their banks are going to take a big hit on the Iceland / Greek / Ireland bonds they hold...which is going to put them into trouble...creating a contagion effect.

Moreover, as per recent reports, German leadership, under pressure from the vote-bank, is getting tougher on such bail-outs. Reduced bail-outs with severe austerity-imposing conditions will not make things any better for the troubled countries.
So from the looks of it, EU has tough choices, and it'll have to do a tight-rope walk between keeping its vote-bank happy and letting the Euro go down. My guess is, it'll continue making and imposing tough choices on near-default nations, who'll have to abide by the rules, and manage their civil unrest internally. May be, just may be, to teach others a lesson, one of the countries just might be let out of the EU, possibly the worst & smallest one, which will also help shoring up Euro value and giving a moral boost to the general EU public.

Accordingly, Euro should continue to do badly, but abandoning Euro altogether is probably not an option. Euro should sustain for some more time.

Which countries in Euro-zone are getting into trouble next? Will anyone default?

Taking over from the previous question, Portugal, Italy and Spain should be next in line, possibly in that order. But to default either the country has to choose it or or they have to be made to default. My guess is, and its really just a guess, that probably Portugal should default, although i cant say due to which of the 2 reasons above...and probably Germany and France may even force Portugal out of the EU.

Again, like I said above, not doing it with Portugal will further emphasize the fact that individual country's leaderships are willing to sacrifice their people's financial health for the overall health of the EU...which not many people will like. Also, while Portugal is big, its not as big a problem as Italy / Spain...so letting it default will probably just cause tropical storms in the financial sectors and not a Default Tsunami. Such an action will also prove to people that their leadership cares first about them and then the general good of people who've spent & speculated mindlessly in the boom times.

How will the currency war be played out between US and China?

Include Euro here and what we get is a thriller of a race... to the bottom ! Let's try and understand what's happening here...as global demand for almost everything goes down, countries increasingly prefer a weaker domestic currency (e.g. 54 INR / USD is weaker than 45 INR / USD; 8 CNY / USD is weaker than 6.6 CNY / USD...and so on). This helps the countries compensate the lack of demand / growth with increased export value. Therefore, with say, 15% weaker currency, even a drop of 10% in exports will result in net realizations of +5% for the country.

So, to prop up their fledgling economies, all countries are trying hard to push their currencies down. China, under pressure from various groups and markets, has let their currency appreciate from nearly 8.3 CNY / USD to current levels of 6.62 CNY / USD...a strengthening of almost 25% ! And the US is still crying hoarse about Chinese currency's undervaluation...! Now, this is not to say whether Chinese currency is fairly valued or not, the point is, the amount of strength Chinese currency shows from here, that much growth is required in Chinese exports just to keep the value of exports same...and where is that growth going to come from? US, UK, EU, India, SE Asia, Australia? All have the same problem and are trying hard to keep their currencies weaker and fulfill all their domestic demand internally by putting more import restrictions in place.

My take on this is, its going to end up in favor of China ! Despite all its problems of unemployment, housing starts, foreclosures, states approaching bankruptcies and what have you, US is still the safest bet amongst the likes of Euro, Renminbi and Yen, can keep pumping in money to keep a semblance of sanity longer than most believe, and still amounts for a massive pie in the global consumption.Many states are nearing bankruptcies, but can pull along from an year's perspective.

China, on the other hand, is already struggling with inflation and poor domestic consumption growth at the same time...(consider reading my earlier post on Inflation in China and India). It has massive infrastructure just lying around waiting to be used, strengthening currency is further eroding wafer-thin margins from export oriented manufacturing units - further limiting the worker's pay rises. Although China is making amends to avoid a crash, in terms of diversifying into Gold, asking its trading partners to use CNY as base currency for trading, buying out debt from EU zone to help stabilize Euro, and investing big-time in agriculture to address the supply side issues in agriculture, my feeling is, its too small an effort too late in the day.

Also, given the expectations that demand from Japan is not going to be very encouraging, (consider my earlier post on Understanding China and Japan), commodities and manufacturing dependent China is far less likely to be able to avoid a crash...which might help it in at least one way - it'll weaken its currency quite a bit. Such currency crisis at global levels have occurred before but this time around the difference is restrained geo-political efforts in containing it. Almost everyone is so deep in crap, that fending for themselves is top priority now. There is no consensus on who to trust and which side to stand on. In times of global crisis, like these, USD will appear a fairly decent haven, especially when compared to CNY, Eur and Yen.

Will the US Economy recover?

Fairly unlikely but considering the uncertain scenarios elsewhere in Japan, China, EU, Australia and SE Asia, I think it should do just OK this year...or rather "muddle through". US states will continue to have problems clearing their pension bills, the unemployment is really difficult to come down, the foreclosures are likely to maintain pace, and Fed is likely to give-in to a QE III if need be, to keep the rotting machinery lubricated for some more time. So its not that the problems in US are going to get solved any time soon, but I look at this as a Titanic sinking, due to its massive size, it'll take time sinking.

Are Gold and Silver the new proxies for currencies? Will countries start dealing in Gold and shun dollar completely?

While gold is widely accepted as a good alternative to any currency, world is not likely to move freely (stealthily, maybe) to a gold standard. This is primarily because large economies like Japan, China, EU countries, hold humongous amounts of US bonds...so if they show clear interest towards dealing in Gold, US Bond prices are going to crash...and so will the M2M value of all central banks' holdings. So right now, countries are stealthily diversifying their holdings into gold and other currencies (e.g. China, instead of buying gold from markets, which will be widely known and reported, is quietly buying gold mines worldwide, and marking down their potential reserves).

However, this is a shift that will continue to take place, albeit slowly - like IMF has started accepting payments in Gold. So instead of seeing a massive move towards Gold as a reserve currency, we're fairly likely to see subtle shifts, which will also help in keeping the Gold prices up and rising for the year to come.

Happy New Year !

2011-01-03T13:40:00.000+05:30

Wishing all my readers a very Happy and "investful" New Year 2011...!

I was surprised to see, for the first time since this blog was launched, this blog registered Zero hits on a day (i.e. the 1st of Jan 2011)...but I'm happy about this! I think all you guys must have had good fun celebrating the new year bashes ! I too had a good time...with barbeques, and vodka, fun and dance...and with family over here with me, it was extra fun !

Its always good to keep one eye on investments, markets and outlook, and another one on celebrations and family...there are always reasons to celebrate, no matter what !

Hope you guys have a great year ahead !

When Inflation plays Runaway Bride

2010-12-31T16:35:00.000+05:30

India's Inflation is a lot like Julia Robert's role in "Runaway Bride"(1999) ...and is catching global attention for refusing to be tied down despite several measures over the last 9 months or so. I happened to read Mike's latest post on Indian Inflation...it talks about how India's inflation has been driven up by food and fuel prices, how faster growth in Bank credit (the amount banks give away as loans to corporates and individuals) than in Bank deposits (the amount banks receive as deposits) has led to liquidity crunch, and how India (along with China) is going to "overheat and crash or their economic growth is going to slow dramatically, quite possibly both."

Before we move ahead on this, please note that Mike Shedlock (popularly known as Mish) is one of the world's best and arguably the most read blogger on global economy. So much so that he was even covered in NY Times recently as one of the ideas / trends for 2010. Check that link out, it talks about how post 2007 DIY (Do-It-Yourself) Macroeconomics - ordinary citizens as econo-bloggers have flourished on the internet, many with their own hypothesis and conclusions on how global data should be read and understood !

Having said that, I think while the analysis is correct, the conclusion being drawn here that India and China are overheating and will crash, is flawed...(and no, I'm not taking it personally !) Let's first start by understanding where we're coming from... Here's a chart of interest rates movements over the last couple of years...

(Click for a larger image)

Notice a clear trend...how post 2008 crisis, the rates were sharply pulled down in anticipation of a slow-down in economy, which did happen, along with a minor to sharp correction in real estate prices across the country. Also notice how the rates were kept low for an extended period of time till Mar 2010, before realizing that the economy was in the danger of overheating and the interest rates needed to be moved up...Despite almost 6 rate hikes since then, the inflation is still quite high...(Nov WPI inflation was reported at around 7.5% which is drastically lower than Oct's WPI figure of 8.58%).

There are several reasons for inflation not responding to the interest rate hikes the way it is supposed to:

Fuel Inflation: Fuel is a crucial component in the inflation, and Crude Oil has gone from near 70$ / barrel just 4 months back to over 91$ as of now, an increase of approx. 30%. From the time government has decontrolled the fuel prices (though diesel, kerosene and LPG is still not completely decontrolled), these prices are being effected almost instantly by the OMCs (Oil Marketing Companies).
Food Inflation: Food inflation has significantly impacted India with Onion prices shooting through the roof, along with the rest of the veggies. In India, its probably cheaper to snack on fruits than vegetables. Even non-vegetarian items are seeming relatively cheaper to consume, along with dry-fruits ! The government, as usual, has woken up late, but just in time to avoid getting toppled (survival is the objective, improvements are optional) and has cut import duties, banned exports, and prevented hoarding.
Lending borrowing Spreads: Interest rate hikes are not getting passed in full to consumers, thereby preventing the full impact of increased rates being passed on. So much so that RBI recently had to request banks to narrow their lending-borrowing spreads...some banks acted on it in good faith...all this has happened less than 30 days back.
Time: Interest rates take time in bringing the inflation down, typically a quarter or so...
Credit - deposit growth ratio has exceeded 1, which is also pumping in a lot of liquidity in the system, thereby fanning inflation (like Mish has also pointed in his post).
Real Estate Sector: The curbs on Real Estate sector, which has regained the peaks attained at the boom time in 2008, have been modest, to say the least. This sector is fairly likely to be the area where liquidity and credit is giving rise to huge speculation and further liquidity...to avoid a hard landing in housing prices and thereby a US-equivalent scenario, the regulators here are being overly cautious (I think all lobbyists from Realty sector must be having at least 1 slide in their pitch titled "Look what happened in US"). Probably (and its only my guess), this fear is keeping regulators away from taking the necessary steps to reign in the price rises...which, if true, is a fallacy on their part in my view.

Despite these issues, I believe there are good reasons why India and China can't be painted by the same brush, even though China is also facing almost exactly similar issues as listed above (in terms of containing inflation). And so even if China is at a danger of overheating and crashing, India has far lesser chances of that due to the following reasons:

Banking System: India has a far more robust and transparent banking system as compared to China. Indian banks do and are perfectly capable of raising money from abroad, though at fairly high rates (read my earlier post on Indian Companies raising International Debt).
Cushion in Housing: Besides, in India, a whole lot of black money goes in into the house for down-payments, so much so that a lot of buyers actually own 20% -50% of their houses by the time their mortgage payments start. So the banks have a good cushion even in the case of price drops. (Black money payment keeps the official registration value of the house down and helps in reducing the registration tax down which is a percentage of the house's value).
Infrastructure Requirements: While China has put in place a cap on domestic consumption through over capacity in almost every area possible, whether it is high steel or cement production capacities, or already well-built infrastructure including ghost cities (Kangbashi) and empty malls. Contrast this with India's dire requirements for all kinds of infrastructure...right from ports, roads, bridges, railroads, dams, power, military spend & upgrades and housing. India can comfortably raise debt and ride the growth path for the next decade, if not more...and note that this is Productive Growth, not equivalent to building Ghost Cities, which do not contribute anything to the exchequer, but over a couple of years will become huge liabilities which will need to be maintained at massive expenses. The difference is between building a bridge that can rake in toll-tax, saves hours of commute & wear & tear for people and trucks, thus contributing really well to GDP growth, and building a bridge that generates little or no revenues, doesn't save time and will need to be maintained irrespective.
Political Will: In India, all that's lacking is political will, which too is slowly turning a new chapter...its being made to - by the public that's voting in performance and growth and voting out caste based politics. Scams are toppling one after the other from inside corporate and political cupboards, but the response its getting this time around is that of serious concern and not that of indifference from the general public. Consider a scam in 2G spectrum auction which could have potentially wiped out nearly 50% of India's fiscal deficit ! These scams are a blot on India's image, but are being reported and followed by general public far more than ever before...Compare this with China, where corruption is probably as rampant if not more, but nothing ever comes out...and you'll never know how much garbage is behind an opaque curtain...
Transparency, Lack of Investment Avenues: This transparency in India is going to give investors that additional comfort in putting their investments as investment avenues keep reducing worldwide. If Europe is on the edge, and US is next, Japan is uncertain, and China can't contain inflation and most definitely can't keep growing at this rate much longer, how many other investment avenues are you left with? Currency, Gold, Platinum and such asset classes are increasing being interlinked to sovereign stability, and need to be invested in with proper hedges being in place...'coz for all the analysis in the world, you still don't know which variable is going to play-up first !
Demographics: Like its often said, India is a young country, demographics are skewed quite positively towards India. Millions of people are currently on the verge of making it to great Middle Class of India...and for us, that translates into all kinds of requirements, from housing, to cars, from luxury products (like conditioners, deos, perfumes, watches, shoes, etc. - for people below the Middle class level, even these are luxuries!) to clothes and general groceries. Just to give you an example of how young India spends, can you take a guess as to which FMCG product is registering the highest growth in India? Its deoderant !! Now, I dont' see too many old people using that...to me (stats apart) is a sign of young people getting more disposable income...the kind of people who think using a deo is more a necessity than eating breakfast...its just a sign, but it sure is that. Language comfort is another important plus for India over and above China.

To me, these factors seem quite supportive of the view that India may be down for some time (correction) but it sure won't be out (crash)...I'm not saying there are no risks or they are minor enough for us to ignore...India's poor education system, lack of identity, corruption, lack of planning and coordination among various government agencies, fiscal deficit (though not too bad), failing to cash-in on the opportunity of increasing domestic consumption, etc. are all risks...but I believe they can be and will be overcome in some time...its not going to happen overnight, but the framework of India is changing and that change will enable all these to happen.

The bride (inflation) is going to get reigned in in some time, provided proper steps are taken by the regulators...and I believe they will be...no one is giving kudos to Indian regulators for being pragmatic during the boom times and keeping the interest rates high, which prevented the bubble from becoming too big in India...they did that right then, they'll do right now.

Have a Happy New Year ! And make some resolutions, some will be broken, but then for some that aren't, its still worth the effort !

Follow up - Developments on earlier posts

2010-12-27T23:31:00.001+05:30

Thought I'd do a quick follow-up on the various posts posted earlier to gauge if the analysis and thought process was at least in the right direction...and also to make note of further developments on some of the topics covered. This post also introduces a video on this blog and a really interesting document, via embedded "Scribd". We'll also take a look at some other improvements that I've made to this blog. Hope you'll enjoy this read...

Ref: Post on Nano's Nano Sales (Random Walk Section, Dec 05, 2010)

Tatas seem to have taken the shock of just over 500 Nano sales in Nov well. They're pulling all stops to boost the sales figures...including (as I had mentioned in my post as well), innovative ways of financing and targeting internal employees as well (Tata motors has over 24,000 employees). The positioning is also being modified from stress on just "cheap" to "key to happiness". Check out this video of the latest ad in Nano.

With Ratan Tata himself posing with the car, even driving the car for the media, complimented with the kind of brand image that Tata group holds for most Indians, it looks like they are getting back on the right track, but like I've emphasized in this post, Quality has to be given top priority for this trend to sustain. Otherwise, all Nano will witness is macro sales for a couple of quarters before going back to its nano sales !

Ref: Post on Uncertainty (Dec 15, 2010)

Inflation is still a worry in both China and India...despite several measures being taken to contain it. After China tightened its real estate lending, as per the expectations in the post, India too took some steps to discourage banks from going all out on Realty loans, wherein, RBI has made it mandatory for customers to make a down payment of at least 20% on all properties above INR 75 lakhs (about USD 167k) and the rest can be taken as a loan. This will severely push up costs of speculators and will result in lesser number of deals as well.

RBI has also increased the risk weight on loans above INR 75 lakhs...which means that when calculating the risk on this loans, the risk, according to the new guidelines has to be multiplied with 1.25. Since there is anyways a cap on the risk being taken for each sector, this policy will further result in reducing more risky (> 75 lakhs) loans.

Despite these measures, inflation is still stubbornly up, partially due to increase in crude oil prices (hovering above $ 90 / barrel) and also due to food inflation (onion prices have shot up around 200% in the last 1 month, and the rest of the veggies are also shooting up). This, along with the advance tax payments by corporates to the government has kept the liquidity really tight. So much so that RBI has had to release almost about INR 48,000 crore (nearly USD 10 billion) by purchasing Government bonds from them. However, even this is not enough it seems...! The daily demand of overnight call money is apparently over INR 1,45,000 crore (nearly USD 30 bn)!

In all, RBI has tightened funds going to realty sector, increased interest rates, reduced SLR (Statutory Liquidity Ratio - 25% of capital all banks are supposed to hold in Government bonds)...by 1% to 24%, but the inflation is still not budging. I think some more rate hikes are in pipeline sometime in the first / second week of Jan.

Also, in the same post,to the existing list of troubled / near bankruptcy states in the US, (like Detroit, Chicago, LA, Oakland California, Miami) a few more have joined...Alabama, (HT: Mish), for the first time ever, did not send pension checks to its retired citizens...it has basically defaulted on Pension payments ! Now, a state is not supposed to default...so this is a first of its kind in the US (I think). While markets may be moving up, both in US, and Europe, things are not getting any better at the ground for thousands of people....and how long can the markets operate in isolation from state issues, bankruptcy and unemployment risks is something that we need to keep a look-out for.

Ref: Nifty Trading Strategy (Nov 25, 2010)

A quick follow-up on the Nifty trading strategy that I'd suggested earlier, and then followed with another post as well. Its' gone as per the plan...resulting in a net profit of around 4365 / lot of nifty, which will go to 4500 in the next couple of days (as the option, which has a value of 2.7 will go to 0). Take a look at how the strategy's P&L has moved from the time it went live till date...

(Click for a larger image)

Notice how the opportunity presented itself once more in between, when the price of the put option (blue line) went up, sending the P&L line down sharply (long red line). But then Nifty found support and moved up again, bringing the put price down again.

Improvements in this Blog

To enable a quick feedback on all the posts, I've added something called "Reactions", which will be seen at the end of each and every post. There are three reactions in all:

More posts like this - If you liked a post and want more posts like that, either for its writing style and depth, or the specific topic.
Interesting - If you found a post interesting enough, and just that.
Ok - Something lesser than interesting.

Please provide your reactions as per these in as many posts as possible, it'll help me a great deal about knowing what to write more about and also what NOT to write a lot about ;). Of course, detailed comments are most welcome.

I've also introduced another section called "Most Popular Posts", wherein the top 5 most read posts are shown...

Hope you'll like these changes.

End Note

As an end note, here's another really interesting report from IceCap Asset Management, on their outlook for 2011 (HT: Zero hedge). Do read it, its not too large, insightful and really well written.

IceCap Asset Management Limited Global Markets December 2010

Banking on Global Scams

2010-12-24T00:45:00.006+05:30

There is this interesting piece of journalism from NY Times. It talks about how a handful of banks are keeping the multi-trillion dollar derivatives trading to themselves, especially in Commodities markets.This is really interesting, and it exposes us to a world which is widely spread, but little is spoken and written about it...(and even lesser blogged!)... the world of commodities trading and hedging. Let me first start by explaining how and why Commodity companies use derivatives for hedging.

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Hedging using Derivatives:

Recall the company whose wheat flour you use for bread. Imagine how that company procures this wheat...probably some is grown in fields owned and operated by the company, but most will come from farmers who sell their produce to this company at wholesale rates. Now, if the demand of wheat increases, the prices will go up...so the procurement / purchase costs of this company go up. It can't however, increase its flour prices so easily and quickly because pricing of such mass retail items is a well researched and planned strategy in itself. Besides, pricing will also determine the market share for this company. On the other hand, if it does not increase the prices, its margins are squeezed. For example, if the company bought wheat for 1$ / kg, processed into flour at 0.2$ / kg, and sold for 1.5$ / kg, it made 0.3$ / kg margins. But if wheat prices moved up to 1.2$ / kg, the margins get squeezed to 0.1$ / kg. If you look at it in percentage terms, its a 20% increase in input costs, but a 67% reduction in Net profits ! So what does the company do?

At the beginning of the financial year, the company goes and buys wheat futures in an exchange...which will expire around the time when it plans to purchase physical wheat. Now, since futures prices move along with the physical commodity's prices, when the company actually goes to buy wheat in the physical market, if the price of wheat has gone up, it'll make that profit on futures prices and set it off against the higher procurement / purchase prices. Alternatively, if the prices went down, the company make a loss on its futures trade, but it is able to procure wheat cheaper as well. In either case, the company is able to "lock-in" the price of wheat right at the beginning of the year for all its purchases throughout the year. This act of locking-in the price is known as Hedging, and derivative like Futures, options, swaps are useful instruments available in the market to hedge.

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The Derivatives Trading Scam:

Coming back to the topic, according to the article, in the wake of the 2008 crisis exchanges like ICE (Intercontinental Exchange) and CME (Chicago Mercantile Exchange), two leading exchanges for trading commodities, opened clearing houses (a clearing house takes on the role of a counter-party in a trade, so you are assured that for that 1 lot of wheat futures that you've bought / sold, ICE / CME is taking the responsibility of giving you the cash / futures allocation...so you don't have to worry about the counter-party risk). For this, they needed big banks to join this effort and use these clearing houses, as they had most of the volumes. Some 9 banks (including BofA, Citi, JP Morgan, Goldman Sachs, Barclays, Credit Suisse, Deutsche Bank, etc.) joined these clearing houses, and formed a cartel...they now decide who else joins and who doesn't, what rules are created, and of course, what brokerage to charge.

They have practically blocked anyone else from coming into this "Elite" group so that the broking fees doesn't come down, the rules of the game don't change. The fees charged for such derivatives transactions (especially the structured products) is the biggest fee earner for these banks...in billions of dollars !

What are Structured Products?

This is actually true...from my talks with various commodity trading and processing companies in countries in South-East Asian and European regions, I can say that it's nearly impossible to get a bank outside this group to offer a structured product for hedging. For example, if you take a simple structured product like an Asian Collar option or say, an Asian Swap...instruments which combine multiple call and put options or swaps, expiring at the end of each month for the next 2 / 3 years...priced on the basis of Asian pricing (average of last 1 or 2 month's prices). These instruments meet the requirements of commodity firms much better than just a simple futures / options contract., because they give a different profit profile to these firms. Its not important to understand these instruments, the point here is that these deals / contracts are, most of the times, custom-built for each customer and contract...which pushes their cost of transaction higher. Hmmmm...

....And hmmmm again 'coz banks are charging much higher for creating and offering these instruments than what it can possibly cost them...and making huge margins on these. The loser here is the commodity firm, which, due to higher transaction costs, was not able to cover itself completely from the rise / fall of the commodity price...and it'll eventually show in both, their margins (and therefore their share prices) and the prices of their products...in the wheat flour that you and I buy...! As if the governments weren't doing enough already to push the prices up...I guess everyone can use a li'l bloody bit of help once in a while.

And as an icing on the cake, here's another one...

Banks get Basel to dilute norms

According to a report by Bloomberg, Banks have gotten the Basel committee to bend rules to suit their requirements. For one, the increased amount of capital the Banks were supposed to hold (to reduce risk on defaults exceeding capital), has been pushed beyond eight years...(like they'll shore up money to set aside more capital in that much time...optimistic bankers are the most dangerous breed of humans around...!). The lobbying effort towards this effect was led by, well, Deutsche Bank (again)!

Another proposal which was rejected by the bankers was a "Leverage Ratio", a ratio of Equity / Liabilities, to prevent banks from becoming too indebted. Majority of the 27 EU nations opposed this. The bankers apparently said that this will "restrict their borrowing capacity" and "inhibit lending"...!!!! Wasn't that the point to start with?

Both the examples above show the ability of banks to "write their own pay-checks". (both literally and metaphorically)..something that is an absolute no-no in Risk Management parlance. They demonstrate how far away we are from having a stable banking system and honest bankers.

As an end note, I'd like to tell you that while giving a title to this post, I swayed a bit between "Banking on Global Scams" and "Scams on Global Banking"...and I deliberated....before realizing it doesn't matter...both mean almost exactly the same!

Happy banking...and yes, the next time you buy that pack of wheat flour (or your bottle of cooking oil), remember its not really the rising commodity prices which have pushed the prices of these products up...that could have been countered...what couldn't have been is a nexus between governments, regulators and bankers.

Have a Merry Christmas !

PS: By the way, Wikileaks founder Assange has revealed the name of the bank his company is going to expose in early January next year...its Bank of America. Check my earlier post in which I had mentioned this, though the name of the bank was not known then.

Dope 'em - Dec, Jan Effects of Markets

2010-12-22T01:19:00.002+05:30

Just some of the similar events that took place simultaneously across the world:

S&P 500 Index Climbs to Pre-Lehman Bankruptcy Level
Seoul shares hit 38-mth high as worry eases
European shares hit 27-month high
Nifty crosses 6k, Sensex crosses 20k after 5 weeks
Nikkei hits 7-mth closing high on bargain hunting
Copper and Cotton also moved up higher, Coffee jumped to a 13 year high (its definitely on caffeine !)

Apparently, the reasons for all these highs include:

China backing the efforts put by Euro zone to contain the crisis (like there was an easier choice to make; besides, is China signaling a similar action being taken under similar circumstances is justified for them as well?)
North Korea has backed away from threats to retaliate against the drill
Mining companies rising on higher metal prices, (helping European shares edge higher)

These are despite the fact that nothing has changed much fundamentally, and:

Spain is already going deeper into trouble (it just successfully sold its bonds at a much lower price to raise debt further)
Moody's has cut Ireland's rating by 5 notches to below investment grade and put Portugal on watch for a rating cut, along with Spain.
US has extended tax-cuts, further releasing (indirectly, by not taking that is) around USD 900 billion which will not help US in reducing their debt faster in any way. (While we're talking about US debt, check out this website...it gives a really amazing picture of how US debt levels are increasing by the second)
More and more states in US are approaching bankruptcy, and are taking drastic measures to cut expenditure, even at the cost of hygiene and security of the general public.

It looks pre-medicated to me...and there good reasons for that. December is usually when most big funds close / report their year-end M2M profit / loss. A lot of profit taking and loss-taking (minor losses - to set of the profits a little bit) takes place. For the trading and accounting books to look good, the markets are generally given a dressing...which could be possibly what is being done right now. This is typically known as the "December Effect". Since 1950, S&P 500 has risen in December 45 years out of 60...statistical coincidence anyone?

Overall, there is not much reason for markets to cheer, considering they've just come out of shocks of Euro zone and Chinese interest rates, both of which refuse to go down, but are staying put for now (I guess these days, that's a good enough news to buy). Looks like the December effect is taking place. After this...well, "January effect"...which says that if S&P 500 is net positive for the first 5 trading days in January, it'll sustain that trend through the rest of the year. However, the inverse of this is not true...if S&P 500 gives a net negative return for the first 5 trading days of January, then markets can actually go anywhere...there are no reliable statistics to prove up / down movement in this case. This apparently happens as the stocks which are sold off (for booking losses) in December get into the oversold territory and are picked up by the bargain hunters.

What's next? Well, if I had a 5 year old kid, (I have a 2 year old daughter), the kid would have replied "Daddy, tell me the February effect story..." ! Well, I don't have one...but I can figure out something...after all, Statistics is an interesting subject...

Random Walk - The Paradigm Shift in Enterprise Solutions Sales

2010-12-20T09:00:00.003+05:30

The Crisis that started with Lehman fall, really did change a lot of things on the ground...the way people looked at their businesses, the kinds of risks they were prepared to build in into their decisions, the casualness with which purchase decisions were made (all in the hope that this boom is going to go on forever), including even the sales presentations they gave and received! Yes, trust me, I have seen this difference although it took me some time figure out the shifts in patterns. However, whether this transition in sales presentations had started before the crisis and only got the final push post crisis, or it started only after the crisis and gained traction as time passed...is difficult to say, but a paradigm shift in the entire approach of Enterprise Solution Sales has been there for sure.

As a part of the Random Walk series on this blog, I thought I'd cover this intriguing topic about how not just the presentations, but the entire approach towards Enterprise Solution Sales has undergone a sea change. But before that, just to bring everyone on the same page, let me define what I understand by Sales of Enterprise Solutions...

Enterprise Solution Sales

Enterprise Solutions are typically high value deals, (between USD 1 mn to 1 bn) with decision makers as the C-suite people of the organization. These are also far more complex than their smaller counterparts and each sales cycle can typically last anywhere between 6 months to 2-3 years before fructifying into a deal. There are deals above these levels of value and time as well, but then those are far more strategic in nature.

What went wrong?

In the pre-crisis days, focus used to be purely on selling, on "This is what I want to sell you..." approach rather than "Is this what you need...?". This approach also involved wining and dining, relationships beyond work, and an aggressive and crude action to quickly convert that relationship into hard cash...(or wire transfers ;)). Not only was the focus on features / benefits in the offering low, the focus on converting the leads quickly and moving on to the next one was inordinately high. And as the markets went up in a tizzy, this practice only gathered pace, faster, even more faster conversions became the new mantra. The high degree of focus on quick conversions naturally diluted the other most critical steps of the sales cycle - that of building long-lasting relationships with the customer, being a trusted adviser to clients, and focusing on what the requirement is and how much the current product / service being sold can actually accommodate.

The New Paradigm in Sales

Off late, this trend is taking a U turn in many ways. Focus is coming back on solving customer problems rather than selling solutions. And the people who are doing this just because they are unable to convert leads quickly anyways, are still lagging behind those who actually recognize the significance of getting in the door with a real solution rather than glib talk. "We've always maintained high standards in every area of customer service" OR "Our products and services have long maintained highest quality standards worldwide and we assure you of the same...." somehow don't mean anything in a sales pitch anymore.

What's far more important than wining and dining now, is the connect with the prospect...a connect that tells him / her that these guys listen, and understand, and are trustworthy enough to be sure that they'll do what it takes to solve our business problem. The ironical part, however, is that these words, if said, no longer mean much...these words have to be felt on the other side of the table.

The sales presentations are also changing accordingly, from jargon to real content, from flashy stuff to real ROI (return on investment), from empty talk to demonstrations of how exactly a relevant business problem is solved, from giving faff and getting away with it, to realizing the customer can actually make out when you're lying...and he doesn't need factual data to prove it. The point is about getting real, not just in terms of the best / lacuna that your offering has, but also with the trust that your prospect has on you, the effort that you're willing to put to solve their business problem, the responsibility of being a trusted adviser to the prospect ...

Ask yourself this - would you really give the name / USPs of your biggest competitor if your prospect asked you? Would you really tell your prospect that you don't offer X, Y, Z things as part of your product / service even if they did not mean much to your prospect? Would you ask your prospect to stop evaluating you any further if you realized that your offering is not going to be able to solve a good part of their business problem? ...there are numerous such questions, but you get the drift...

For all this to happen effectively, the sales team really has to upgrade themselves on operational capabilities of their offerings. Its imperative to know A-Z of your product / service, each and everything that it can or cannot do...even those which your offerings can be tweaked into doing...! Most of the times, the operations people, the delivery managers, the analysts, etc. are brought in into the picture to bridge the domain gap between prospects' questions and sales guy's knowledge about the offerings. While this is a stop-gap, it still doesn't allow the sales people to build that "connect" with the prospective clients which is perhaps one of the biggest necessities for closing a deal. With the marketing team already taking care of opening the leads, apart from branding, advertising, conferences, etc., the sales team has no other choice but to bring themselves up to speed on what's on offer.

An in-depth discussion on domain / offering allows the sales guy to build a rapport with the prospects...which allows entry into the deeper alleys of the complexities that are a part and parcel of the enterprise solution sales. If only these sales were as easy as "1. I like you product / service. 2. I like the price. 3. I'm ok with the Terms and Conditions. 4. Deal Done." There are usually multiple people involved in these sales discussions who have inclinations, motivations and aspirations which are complex for a sales guy to understand almost immediately. Each and every person involved in the decision making, is an institution within himself, which has to be connected with, assured and trusted. All these, along with varying price expectations within the group, make it all a fairly complex affair, which also has to be taken care of...once the connect is in place.

[I'm probably oversimplifying this at the risk of make an erroneous statement. But the fact of the matter is there are so many variables involved, that managing all of them simultaneously and successfully most of the times is almost an art + some gifted talent.]

Will it last?

Though at times it looks like this new evolved practice of enterprise solution sales will go back to the one during the pre-crisis days if we get in a boom again (though that's a BIG IF!), but somehow, to me, it looks like the shift is here to stay...'coz its a shift in philosophy of measuring people and their offerings, its a fundamental shift, a lot like evolution... just as we're unlikely to get back to being apes again anytime soon....

Also, it would be wrong to say that all corporates followed the pre-crisis practice (as described in this post) earlier, or that all corporates have changed tack now. But one thing is increasingly getting clear, that those who do not adopt the changed paradigm of enterprise solution sales, may have a good offering, but it will not reflect in their growth.

Understanding China and Japan

2010-12-17T15:30:00.002+05:30

I usually don't put a post that's just a review of a post on some other blog...but I'll make an exception for this one...Here's a conversation posted in John Mauldin's Outside the Box section, with Vitaliy Katsenelson (VK), the Chief Investment Officer of Investment Management Associates Inc., and the author of Active Value Investing.

Long but amazingly well-done interview...real perspectives on China and Japan, put in a simple way, with applicability to the rest of the world, more specifically, the US.

I'll summarize VK's point of view on China, but this summary will be as much a substitute to the interview as a trailer is for a classic movie...so do watch the trailer, but don't miss the movie...!

China is a bubble which will burst eventually, due to the following reasons:

High degree of State Control - on practically everything...which is ok sometimes (like bringing them out of recession much faster) but leads to more bureaucracy and corruption.
Instances of excesses are too many - from Real estate (building massive malls which are empty to building ghost towns altogether), to infrastructure, to lending and borrowing, to manufacturing, to keeping their currencies low (to facilitate exports). These excesses will be a drag (oversupply) once the music stops...once they have no more bridges to build, no more real estate buyers, etc. And that will happen at some point of time. So its like (VK says) the movie Speed, where the bomb in the bus is timed to blow up if the speed came down below 50 mph. The bus just can't slow down now...
Poor demand from US and Europe will have a huge impact on China. In China's $ 5 trillion economy, domestic consumption covers about $ 2 trillion. While in US + EU 's $ 30 trillion economy, almost $ 20 trillion is contributed by domestic consumers. [So a 10% decline in the latter, needs practically a duplicate set of the entire Chinese population !] It's really difficult for Chinese to completely replace lack of demand in US and EU with domestic consumption.
The real estate bubble in China is scaling new heights every year. There are some 64.5 million apartments which do not use electricity, as they are vacant ! Also, there, one needs to pay almost 30-40% as down-payment. So when the real estate bubble crashes, there's going to be real pain...as a lot of money from people is going to get sucked in into the crash...and crash it will, when there is no incremental buyer left in the market.

Japan's also going to get into some real trouble sometime in near future due to the following reasons:

Japan slowed down in the early 1990s. So the Japanese government lowered taxes and increased government spending, thereby increasing their deficit drastically. To fund this deficit, they sold bonds, initially at a high interest rate, then at lower rates. Most of these bonds were bought by Japanese people themselves as they thought of this as a good form of saving. So the government kept selling bonds, and kept lowering the interest rates (which helped them raise money cheaply).
Now, every 4th Japanese is over 65 yrs old. Not just are demographics bad, the savings rate is declining, which means the young Japanese is not saving as much as the earlier generation...(why should they, when interest rates are next to zero).
[I think Japan's deficit is now almost over 200% of their GDP...and still growing.] They need to sell more bonds, which if, the new-gen Japs don't buy, they have to sell outside Japan.
In this case, the bonds will compete with those from US and Germany, due to which Japan will have to raise interest rates on those bonds to make them more attractive to the markets....which increases their cost of debt...leads to even more deficit...And the only way out of this cycle is to print more money to repay debt / interest....which will lead to hyperinflation....which will just kill the currency.

Now, if China goes down, it takes with it its major commodity trading partners - Australia, Russia, Canada. Both Japan and China are amongst the largest holders of US Treasury bonds...which they may try to sell...which might make things difficult for US, ('coz it'll push the prices of bonds down, US will have to pay higher interest to sell further).

As of now, markets worldwide are hoping that demand from China will not subside, 'coz that's one of the major factors keeping the markets up...but once that's done...the markets will realize they were peering down a gun barrel...and the clock just stopped ticking !

US Housing - Interesting developments & Interlinkages with Australia

2010-12-16T20:20:00.002+05:30

US Housing starts have risen for the first time in the last 3 months...according to a report, housing starts rose to a 555k annual rate (annual rate implies that based on last month's increase, if the same increase is taken for the rest of the year, you'll close the year with 555k number. Its like saying if my revenues for Q1 of this year were 10$, my annual rate of revenue is 40$ ($10*4 quarters)). However, the building permits fell 4% to 530k annual rate.

Let's first start by understanding what "Housing Starts" means...

Housing starts means how many new houses were built, while building permits means how many permits for new houses were taken. If you have to make an estimate of how many new houses will come in near future, then you should look at the building permits data. Housing starts, on the other hand, is a backward looking / post-mortem measure of how much was done.

These data points are usually given high weightage for overall analysis of the economy and markets by analysts world-wide. This should be so, considering the large impact that housing industry has on the markets, and also considering that the entire crisis happened due to excess money being pumped in into the housing sector in US.

Now, I don't see this news as very significant, simply because till about Jun / Jul end, US had extended tax breaks & discounts on housing prices for all new buyers (in an effort to lift / stabilize the housing prices, which was falling from the sky without a parachute). So, a lot of people, to take additional price benefits, bought houses hoping for an arbitrage after the scheme expires. So soon after this period, there was a lull, as demand from future months got pulled into the scheme period itself. By now, some small but real demand is just coming up, and again, its just an "Annual Rate".

However, and I'm not sure if these two dots can be connected, but I recently read another article about how Australians are buying homes in US ! This has been made possible primarily due to parity between AUD and USD. Suddenly, people from Australia can afford a lot of things from US, which were simply out of reach just a few months back. Take a look at the AUD USD chart below:

The way it has moved in the last few months is a game changing event...and smart (and obviously rich) Australians are lapping up this opportunity...and given the high housing prices in Australia and poor rent / price ratio, this definitely is a good deal.

With some houses on sale / distress sale getting taken up, a jump in new starts is not very surprising. However, just as so many other things, this is also a self-correcting mechanism...if too many such transactions start taking place, USD will appreciate wrt AUD, making it unviable to do this any longer. Besides, USD appreciating against AUD, will also adversely affect US exports to Australia, so its also likely that US will try to put a stop to this by introducing some additional taxes on such transactions.

Its a classic "between a fire and the frying pan" choice - if US restricts these transactions, it keeps its exports up but its housing, which is a bigger problem, gets worse. If it doesn't, exports get hit and the demand doesn't pick-up...which one do you NOT want more is the question here. Take your pick, US !