Monday, December 31, 2007

SMOKE & MIRRORS 2008 ! !

2008 can be best described as the year of Smoke & Mirrors.
Reassuring comments and massive liquidity infusions from central bankers, never-ending losses at investment banks, rising inflation and slowing global growth: 2008 will keep you guessing. It will be an ongoing game of hide and seek, cover ups, assurances, lies and blame games, in the US election year

“Smoke and mirrors is a metaphor for a deceptive, fraudulent or insubstantial explanation or description. The source of the name is based on magicians' illusions, where magicians use smoke and mirrors to accomplish illusions such as making objects disappear, when they really don't disappear at all. The expression may have a connotation of virtuosity or cleverness in carrying out such a deception.” (Source: wikipedia)


A cautious approach to investing in 2008 is best advised. The world’s equity markets are near their recent highs, despite turmoil in the credit markets, record high oil prices and food prices, large write downs in the US financial sector, and a rapidly slowing US economy.

In a bid to build confidence in the system, Central Banks around the world have continued to pump liquidity into the markets, in an attempt to revive a frozen credit market and illiquid derivative market. Banks are refusing to lend against asset backed securities including mortgage backed securities as confidence is low, and no one is sure of the asset quality on the counterparty’s books; with banks still unwilling to disclose the full extent of their losses.

The credit crisis of July and August this year has still not abated and continues to haunt world markets. 2008 will see more write-offs, bailouts, fund infusions and maybe takeovers of large US and European financial companies, by investors from the Middle East and Asia.

Outrageous bonuses paid to investment bankers and CEOs at financial institutions are going to be questioned. Their short term oriented decisions and dangerous underestimation of risk have resulted in large losses that have eroded the capital of such banks.


  • Crisis in the housing market: An inventory glut, rising mortgage payments and increasing defaults
  • Cutbacks in US Consumer spending & Falling consumer confidence: Layoffs in the manufacturing sector as well as high profile jobs in the financial sector will affect both consumer consumption and the housing market.
    As a result of heavy discounting at US retailers November sales were better than expected. 2008 will be a difficult year for US retailers.
  • Credit crunch arising from the sub prime crisis & risks of increasing defaults in 2008.
    Wall Street is demanding FED rate cuts. The Fed is caught between a rock and a hard place, with rising inflation, slowing growth and a declining US Dollar.
  • Resetting of mortgages poses another risk to the default rate, even as the US government is coming up with all kinds of schemes to freeze mortgage resetting, ahead of an election year.
  • The ill-conceived SIV Bailout conduit appears to be a non starter, with many banks moving SIVs back onto their own balance sheets.
  • Write downs and write offs in the US financial sector, are spreading to financial Institutions around the world. European & Japanese banks and large Insurance companies may be holding a lot of junk paper.

  • Large Bond Insurers in the US, face losing their AAA ratings, due to potential subprime and CDO losses. Bond Insurers have ventured beyond the usual municipal securities into structured finance such as collateralized debt obligations, guaranteeing about $1.2 trillion of structured finance debt. Caught up in the subprime mess, they will need to raise additional capital to meet regulatory capital adequacy requirements.
    Bankruptcies and loss of AAA ratings at Large bond insurers will affect the credibility of the bond market as a whole, something the market is refusing to acknowledge at the moment.

Avoiding a global slowdown
Net US exports have grown due to a strong global economy. In the event of a US slowdown/ recession, the world market will struggle to decouple from the US.
Any slowdown / cutback in US consumer spending will hurt Asian economies that are large exporters to the US. As a result, Asian demand for exports from the US will fall sharply.
These Asian exporters in turn have been importers of industrial commodities and raw materials from South America, Australia and Africa, and Crude oil mainly from the Middle East.
The Decoupling theory will not work, if the US goes into recession.


The best strategy for 2008 is to maintain liquidity in ones portfolio. Fresh buying in equities may be delayed, but booking profit in overvalued sectors would be advisable.


I expect GOLD to outperform. Gold can be bought on declines, which will occur when Equity markets correct, as gold is liquidated to meet margin calls. Rising inflation and a falling USD are very gold positive. December 2007 marks the first time that gold has made a monthly and annual closing above $ 800.


The US Dollar will face strong headwinds, and this should be positive for Non- USD currencies. The USD may strengthen in the short term, when world equity markets correct, as investors exit foreign currencies and return to the USD. Longer term the USD will continue to decline.

I continue to be cautious on the Euro and the GBP. Though they will continue to strengthen, a strong Euro is hurting European exporters (e.g.: Airbus, B.M.W) while the recent slowdown in UK growth rates, high debt levels & a weakening housing market may force rate cuts in the UK. Political intervention cannot be ruled out.

Carry trade currencies such as the Swiss Franc and the Japanese Yen will strengthen if the markets crash/correct sharply.

‘Commodity’ currencies such as the Brazilian Real, South African Rand, Canadian Dollar and Australian Dollar, will react negatively to news of slowdown in consumption of Industrial Commodities and Oil.

The Oil producing nations of the Middle East may be forced to unpeg their currencies from the US Dollar if local inflation rates rise further, and the USD continues to decline.

Other currencies that should do well against the USD will be the Singapore Dollar and the Swedish Kroner.


Oil prices will be very volatile. A weakening USD is oil positive, but a slowing world economy will reduce oil consumption. The US is the world’s largest oil consumer. A US slowdown would be oil negative.


Markets around the world appear to be ignoring all of the above mentioned risks and concerns. I am bearish on the US Stock markets. Valuations are not cheap and expectations are far too optimistic given the problems the US is currently facing.
Tightening of global liquidity and lack of depth in Asian and emerging stock markets can result in sharp corrections in these markets, which have seen a phenomenal run up over the last five years.
While I am buying select Indian Equities, I continue to book profit in many long term holdings. If you are entering into a new position today, make sure that valuations are reasonable and that you are ready to adopt a long term buy on declines and hold strategy. Avoid buying into popular sectors that are overvalued and leave you with no margin of safety as an investor.

I will put up a detailed note on Indian Equities soon.

Invest wisely and safely in 2008. Heres wishing everyone a very Happy New Year!

Wednesday, December 19, 2007


I am positive on the long term outlook of the Indian economy. Investing in CONCOR allows you to participate in the core infrastructure development of the country and the subsequent benefits of expansion in trade once all the infrastructure is in place. The stock currently trades at Rs. 1790 (at a PE Ratio of 17 times its trailing 12 month earnings) and has sharply underperformed the BSE SENSEX Index over the last year. It has been rangebound between Rs.1800-2400. According to technical analysts, it has a long term support at Rs. 1550.

Reasons to Invest:

  • Established integrated rail logistics giant.

  • Long gestation period in the logistics business.

  • Improvement in Road and Port infrastructure.

  • Concor is DEBT FREE.

  • Unlocking of value through Privatization/Disinvestment: The Indian Railways currently holds 63.09 % in CONCOR. The Indian government has recently been divesting stakes in public sector enterprises in the power sector, so a further stake sale by the government in the future cannot be ruled out.


  • Increased competition from the private sector

  • Increased rail freight charges payable to Indian Railways.

  • Delays in development of Port and Rail Infrastructure.

  • Delays in implementation of the Dedicated Freight Corridor Project.

  • Slowdown in Export- Import (EXIM) business, if there is a global slowdown, (EXIM =80% of total business now)

  • Risk of a rising Rupee hurting Indian Exporters

  • Low Liquidity of CONCOR stock: The stock is thinly traded, with 27% being held by Foreign Institutional Investors, many of whom have been long term investors, and just 2% being held by individual investors.
    I have been holding shares of CONCOR over the last two years and have been buying the stock this week. I will continue to add it on declines.
    For a patient and risk averse long term investor, this integrated rail logistics player is an ideal bet.

Thursday, December 13, 2007


In January 2006, the Indian Government opened up the container haulage sector to the private sector. 14 companies have entered the field which until recently was the sole domain of CONCOR.

CONCOR has entered into a number of joint ventures with private sector players, who will use Concor’s pan India infrastructure setup, till they are able to set up their own.
Concor has also taken stakes in port terminals and container terminals, to enable it to become a fully integrated player.
CONCOR signed Memorandums of Understanding (MOUs) for co-operation and co-share/use of resources with eight out of fourteen new entrants (PIPAVAV Railway Corporation Ltd, Central Warehousing Corporation, Gateway Distriparks, Hind Terminals, Mundra International Container Terminals. India Infrastructure Leasing Company, Delhi Assam Roadways and J.M. Baxi Group).

CONCOR’s inland container depot (ICD) complex at Dadri is a mega terminal spread over 110 hectares, connected by six railway lines, designed to handle 5,00,000 twenty-foot equivalent units (TEUs) per annum when fully operational. While a portion of the ICD has been developed by CONCOR on its own, the rest is being developed by entering into partnerships with private shipping lines who will manage the Container Freight Stations (CFSs) within the ICD independently.

Star Track Terminals Pvt. Ltd.: A Joint venture with Maersk India Pvt. Ltd. for setting up and running a CFS at Dadri, U.P. India (CONCOR shareholding 49%)
Trident Terminals Pvt. Ltd.: A Joint venture with APL India Pvt. Ltd. for setting up CFS at Dadri, U.P. India (CONCOR shareholding 49%)
Albatross CFS Pvt. Ltd.: A Joint venture with Transworld group of Companies for CFS at Dadri, U.P. India (CONCOR shareholding 49%)
CMA-CGM Logistics Park (Dadri) Pvt. Ltd: A joint venture with CMA-CGM Global India Pvt. Ltd. (CCGIPL) for CFS at Dadri, UP. India (CONCOR shareholding 49%)

Gateway Terminals India Pvt. Ltd.:
A Joint Venture with Maersk A/S, Copenhagen for the third container berth at JN Port, Mumbai. India (CONCOR shareholding 26%)

CONTAINER GATEWAY: A joint venture between Container Corporation of India and Gateway Rail Freight (a subsidiary of Gateway Distriparks). (CONCOR shareholding 49%)
The existing rail linked terminal at Garhi Harsaru, Gurgaon just outside the capital New Delhi, will be expanded into a mega terminal with connectivity to the proposed Western Dedicated Freight Corridor. The JV will provide connectivity for cargo from the national capital region (NCR) to the gateway ports of JN Port, Mundra and Pipavav.

JWG-Air Cargo Complex: A business arrangement with Hindustan Aeronautics Ltd. and Mysore Sales International Ltd. for air cargo business at Bangalore, Karnataka, India (CONCOR shareholding 33.33%)

Himalayan Terminals Pvt. Ltd.: A joint venture with\Nepalese Enterprises (Interstate Multimodal Transport Pvt. Ltd. of Nepal & Nepal Transit & Warehouse Co. Ltd.) for management and operation of rail container terminal at Birgunj (Nepal). Nepal (CONCOR shareholding 40%)

HALCON: A business arrangement with Hindustan Aeronautics Ltd. for operating an air cargo complex & ICD at Ozar airport, Nasik, Maharashtra, India (CONCOR shareholding 50%)

India Gateway Terminal Pvt. Ltd.: A joint venture with Dubai Port International (DPI) for setting up and managing Container Terminals at Cochin, India. CONCOR holds a 15% stake.

India Gateway Terminal (Cochin, India) of DP World, is the first terminal under DP World in India. It has taken over the operations of the Rajiv Gandhi Container Terminal from the Cochin Port Trust to further expand its global port operations. India Gateway Terminal Pvt Ltd are developers and operators of the major new deep water International Container Transshipment Terminal in Vallarpadam.
Vallarpadam’ is the largest single operator container terminal currently planned in India and the first in the country to operate in a special economic zone. The new terminal will make Cochin a key centre in the shipping world reducing India’s dependence on foreign ports to handle transhipment.

Integrated Infra Log Pvt. Ltd.: A joint Venture with IL&FS infrastructure Development Corporation Ltd. to carry on the business of establishing, acquiring, developing,
managing & maintaining logistic infrastructure, etc. India (CONCOR shareholding 50%)

Comprehensive Multi-modal logistics services
CONCOR has recently signed Memorandums of Understanding (MOUs) for alliances with strong road based majors like Transport Corporation of India and Reliance Logistics. Detailed commercial agreements will be signed in due course.
TCI and Reliance Logistics(a subsidiary of the Mukesh Ambani’s Reliance Industries) will now capitalise on the strength of container services provided by Concor's network spread across the country in rail transport and terminal handling, while Concor will use their road transport, shipping and warehousing network.

Saturday, December 8, 2007


Source: OPEC


Saudi Arabia, the world's largest oil producing nation and the key "swing" oil exporter, has always dominated OPEC decisions.

The GHAWAR oil field located in Saudi Arabia is the world's largest oil field. The field is entirely owned and operated by Saudi Aramco, the nationalized Saudi oil company. Discovered in 1948, it measures 280 km by 30 km and has more than 70 billion barrels of remaining reserves of Arabian Light crude (33 API). Ghawar’s producing capability of more than five million barrels per day is unmatched by any single entity in the world.

Other large oil fields include Cantarell in Mexico producing 2 million barrels per day, Burgan in Kuwait producing 1 million barrels per day and Da Qing in China producing 1 million barrels a day.

Points to note :
  • Oil prices are near their all time highs.
  • OPEC members are concerned about a falling US Dollar.
  • Middle Eastern countries are considering removing their US Dollar peg.
  • Pricing of Oil in a basket of currencies in the future as against USD denominated contracts currently.
  • The USA is the No. 1 Oil consumer.
  • Impact of a US slowdown/recession on Oil prices.
  • Impact of a US slowdown/recession on Asian economies (that export to the USA), that are currently large oil consumers.
  • Impact of declining production at large oil fields such as Ghawar and Cantarell, as well as oil fields in the North Sea.

Friday, November 30, 2007

The recent "bailout" of Citigroup by the Abu Dhabi Investment Authority (ADIA) has once again highlighted the crucial role that sovereign funds will play in financial markets in the future.

The Abu Dhabi Investment Authority is the world's largest sovereign wealth fund(as mentioned in 'The Economist' article). Since 1976, the fund has never publicly revealed its total assets or published any accounts & provides very little information about its investments: in fact its website provides just its contact details.

But if the $875 Billion figure is accurate, the Citigroup deal represents just 0.86% of its overall assets.

Citigroup, the world's largest bank is paying junk bond rates (11%), to secure a $7.5 billion capital injection to shore up its balance sheet. The investment is via convertible securities that will convert to Citigroup common stock at $31.83 to $37.24 a share over the next two to four years.

The questions one needs to ask are 'How bad is the situation at Citigroup?' and 'How large are the fourth quarter writedowns going to be?'
The Citigroup stock is down over 43 % from it 52 week high, and the mortgage and credit crisis shows no signs of abating.

Heres yesterdays US dollar update from Economist magazine.


Fundamental strengths of CONCOR.

A large integrated logistics player like Concor will clearly benefit from the expansion in domestic and international trade. Exim revenues (80% of total revenues).

Improvement in Railway & Port Infrastructure will be a key driver of growth in containerised traffic.

Slow growth in containerised traffic at ports, has resulted from lack of container handling infrastructure at ports, and poor yard and traffic management at Inland Container depots (ICDs), which also affects smooth transshipment of cargo to ports. Containerisation ensures safety of goods being transported, reduces packing costs and increases the speed of transportation. It facilitates inter-modal transport (entire movement from the point of origin to the destination, using different modes en route like road, rail, ship, airlines etc.
Development of ports such as Mundra, Kandla & Pipavav in Gujarat and Cochin(Kochi) in Kerala, will boost container volumes for CONCOR over the long term.

The company is debt free. This enables future expansion through debt in event of stiff competition from the private sector.

CONCOR’s entrenched market position and the long gestation period required in the rail container logistics business will be obstacles for potential entrants, who will take several years to build an integrated logistics chain.

Concor enjoys a distinct cost advantage by virtue of its Inland Container Depot (ICD) locations, which have rail-head connection and which therefore eliminates multiple handling and transportation.

Replicating such infrastructure would be an enormous challenge for the private sector, with spiraling real estate prices likely to impede land acquisitions for setting up depots.

The private sector is currently piggy-backing on CONCOR’s rail operations, through Joint Ventures, until they set up their own container infrastructure.

CONCOR enjoys positive Free Cash Flows vs. negative FCFs for competitors as capital expenditure on acquiring new rakes exceeds cash returns. Rail Logistics players currently face a shortage of rolling stock (wagons) and wagon wheels, due to order backlogs at wagon manufacturing workshops, resulting in a12-15 month time delay for wagon delivery.

Railways regaining market share from Roadways in the future – Once the Dedicated Freight Corridor (DFC) is built, the railways will be the most efficient and economical mode for long haul cargo transport. The DFC is a project of new railway lines exclusively for carrying freight, isolated from normal IR traffic and passenger trains.

CONCOR enjoys a superior Asset Turnover Ratio (= Revenue/Capital employed) given existing infrastructure and rolling stock set up at key locations over the years at low acquisition costs. Its Return on Equity is also well above the industry average.

Load factor of the rail operator is a crucial determinant for profitability in this sector. With established ICD infrastructure in the western ports and the north western hinterland (Dadri,U.P and National capital region (NCR)) region, CONCOR is well placed to benefit from India’s highest traffic cargo route. The Mumbai to Delhi route accounts for 60% of India’s Container movement.

Risks to new players:
New players will thus find it difficult to generate cash in the first few years, and will face serious execution risks as they implement their organic/inorganic growth strategies.

Frequent changes in haulage charges by Indian railways (2-3 times per year) for container train operators and policy changes banning movement of certain categories of bulk cargo through containers, also disrupts long term planning for new entrants.

Also CONCOR, in order to capture higher volumes, deter competition and gain marketshare, has been increasing discounts on the high traffic routes of National Capital Region(NCR) to JNPT/Mundra Port/Pipavav Port.
Lastly heres a note on ICDs CFSs & Rail Freight expenses.
What are ICDs and CFS?CFS and ICDs are facilities set up for the purpose of in-transit container handling as well as the examination and assessment of cargo with respect to regulatory clearances.
An ICD is located in the interiors (outside the port towns) of the country, away from the gateway ports. A CFS, on the other hand, is an offdock facility located near the gateway ports and helps in decongesting the port by shifting cargo and customs related activities outside the port area.
What are Rail freight expenses? They are charges paid to the Indian railways for using its infrastructure facilities such as tracks, signaling systems and locomotives to haul the flat wagons and containers.

Thursday, November 29, 2007

CONCOR : PART 1 : The Indian Rail Logistics Giant !

My first post in over a week!!

This is the first of a four part write up of my analysis of CONCOR (The Container Corporation of India), a state owned rail logistics operator. This is a company with strong fundamentals and a solid growth story. Long term Investments can be considered, in the event of a market decline.

Container Corporation of India (CONCOR), a public sector enterprise and subsidiary of the Indian Railways is the well established incumbent in container train operations in India. Concor also provides a number of value added services like transit and bonded warehousing, consolidation, custom clearance, factory stuffing and destuffing, container maintenance and reefer services. Over the last few years, Concor has significantly scaled up its fleet of high-speed wagons. As of March 2007, its fleet of high speed wagons increased to 5927 & orders were placed for a further 2025 high speed wagons . The container fleet (owned and leased) as of March 2007 was 12,812 containers.

The real strength of this company lies in its strategic network of 58 rail-linked terminals, spread across the country.

In January 2006, the Indian Government opened up the container haulage sector to the private sector, thus ending CONCOR’s monopoly. Subsequently a number of private sector logistics players and port operators have applied for permits to move containers by rail. Under the new container policy, private players are expected to invest in rolling stock(wagons) and inland container depots. The railways will only invest in laying lines and improving and expanding the existing ones.

Increased competition and pressure on operating margins will have an impact on CONCOR’s financials over the long term. However given its headstart and pan Indian infrastructure setup, CONCOR still dominates Indian rail container logistics.

Thursday, November 22, 2007

FANNIE MAE, FREDDIE MAC & the US Mortgage Crisis

The US Housing market continues to deteriorate.

Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been hit by mounting losses as the mortgage crisis continues to intensify.
As mortgages reset & foreclosures continue to rise, the GSEs will see further write downs in the mortgages on their books, and will possibly require fresh capital infusions to meet government mandated Capital requirement levels.
The GSEs have been a key source of funding for banks & mortgage lenders by purchasing their mortgages and then packaging them for sale to investors.

Mortgage Lenders such as Countrywide Financial, will face a real crisis, if the GSEs slow down their mortgage purchases.

Heres a closer look at the two GSEs.

Fannie Mae (Federal National Mortgage Association (FNMA)
"A government-sponsored enterprise (GSE) that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. Fannie Mae is a publicly traded company which operates under a congressional charter that directs Fannie Mae to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans.

Fannie Mae purchases and guarantees mortgages that meet its funding criteria. Through this process it secures mortgages to form mortgage-backed securities (MBS). The market for Fannie Mae's MBS is extremely large and liquid. Pension funds, insurance companies and foreign governments are among the investors in Fannie Mae's MBS. In order to promote homeownership, Fannie Mae also holds a large portfolio of its own and other institution's MBSs, known as its retained portfolio. To fund this portfolio, Fannie Mae issues debt known in the market place as agency debt.

Fannie Mae's "little brother" is Freddie Mac. Together, Fannie Mae and Freddie Mac purchase or guarantee between 40% to 60% of all mortgages originated annually in the United States, depending upon market conditions and consumer trends. "

Freddie Mac (Federal Home Loan Mortgage Corp (FHLMC)
"A stockholder-owned government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The FHLMC purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries. Also known as "Freddie Mac".

Freddie Mac has come under criticism because its ties to the U.S. government allows it to borrow money at interest rates lower than those available to other financial institutions. With this funding advantage it issues large amounts of debt (known in the market place as agency debt or agencies), and in turn purchases and holds a huge portfolio of mortgages known as its retained portfolio. Many people believe that the size of the retained portfolio poses a great deal of systematic risk to the entire U.S. "

So what is a Government-Sponsored Enterprise (GSE) ?
"They are Privately held corporations with public purposes created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy. Members of these sectors include students, farmers and homeowners.

GSEs carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. For this reason, these securities will offer a yield premium over Treasuries. Some consider GSEs to be stealth recipients of corporate welfare. Examples of GSEs include: Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank and the Resolution Funding Corporation."


Wednesday, November 21, 2007


Increasing input costs (milk) and a slowing US economy, appear to have taken their toll on discretionary spending, as Starbucks recently reported a drop in traffic at its US stores.
The company cut its earnings estimates for the coming year and plans to slow down the pace of US store openings.

Milk prices in the US are up sharply this year, on the back of rising corn prices (Corn is used as feed grain for cattle).

Recent price hikes and increased competition from McDonalds and Dunkin’ Donuts are also possible reasons for the reported drop in traffic

Starbucks still remains largely dependent on its US business, even as it continues to expand overseas.
2006 Revenue Breakdown:
United States 79 %
International 17 %
Global Cons. Prod. group 4 %

Pressures on consumer spending are clearly evident, and as the US consumer cuts back on spending, a premium coffee retailer like Starbucks will continue to lose market share to aggressive competition.

Saturday, November 17, 2007


Gold is MONEY, and not just an investment or an asset. Invest in gold to preserve the purchasing power of your money. As I said in recent posts, Gold has been rising in all currencies.


Rising inflation: Inflation is always higher than government published estimates. Inflation can also be defined as "too much money chasing too few goods". Gold is a classic inflation hedge.

A Falling US DOLLAR: This is the most important factor responsible for the current rally in GOLD. A USDX index that is below the ‘80’ level is extremely positive for gold.

The first net capital outflow for 9 yrs, in the month of August 2007:
US Treasury data showed a net long-term capital outflow of US$69.3bn for August while there was a total outflow of US$163bn(now revised to $150bn). Central Banks selling US Treasury Bonds is extremely USD negative.

Financial Market turmoil or crises: Valuations across asset classes are no longer cheap, but remain fairly valued or expensive. While economic growth has been strong in developing and emerging economies, developed economies (especially the USA), have witnessed growing debt levels and slowing economic growth.
Given the dependence of the emerging Asian economies on the US, they stand to be major losers in the event of a US recession.

Global Imbalances: resulting from large trade deficits in the US and growing trade surpluses in emerging economies, threaten to derail the global growth story.

As foreign fund flows enter emerging economies, local Central Banks try to control sharp appreciation in their local currencies, and large forex reserves are created. Large Foreign inflows impact the monetary base and consequently the money supply.
The rate of Money supply growth around the world has been increasing. An increase in money relative to a fixed number of consumable goods and services, results in rising prices. This is inflationary and gold positive.

CENTRAL BANKS bailing out Wall Street
The current crisis was caused by speculative leverage & excessive greed on the part of investment banks that created this maze of financial products & investors in their funds looking for returns not commensurate to their risk taking ability (all high net worth hedge fund investors are not as misinformed as they now claim to be). Bailouts would only encourage a repetition of such speculation & greed.

No end to Credit crisis!
On the 15th of November, 2007 the US Federal Reserve pumped $47.25 billion in temporary reserves into the U.S. banking system, its biggest since just after the Sept. 11, 2001 attacks, to calm a rising Fed Funds Rate. The LIBOR in the UK, also continues to rise.
Meanwhile, the U.S. asset-backed commercial paper market continues to shrink.

Gold miners have accelerated their de-hedging programs:
Anticipating higher gold prices in the future, large gold miners have begun to dehedge. No large gold miner is looking to place price-protection hedges.

Middle East Oil producers revaluing their currencies/ dropping the USD peg:
In May 2007, Kuwait dropped its USD peg, in favour of a basket of currencies. Rising local inflation in the region has made it difficult for Middle eastern Central Banks to follow the interest rate policy of the US Fed. For exporters whose oil revenues are USD denominated, a falling USD will certainly be a matter of great concern.


So is this the right time to buy gold?

I am extremely positive on the prospects of Gold over the long term. However after the sharp surge in prices recently, a correction was bound to occur. The rise from the $ 740- $ 840 level has been steep, so a further retracement to the $ 740 level in the short term is possible if world markets and crude oil prices were to correct again.

Heres a few points worth considering before investing in gold.

Hot money and speculative leverage that exists in Crude Oil contracts, base metal contracts and in the Real estate market, also exists in the Gold Bullion market, and has contributed to the recent gold price surge.

When markets crash or correct sharply, gold is liquidated to meet margin calls. Speculators close positions as stop losses are triggered. As a result, gold prices fall along with the rest of the market. Such moments are opportunities to buy gold, which then recovers faster than the market, as investors soon flee for safety.
Market sell offs and Carry Trade unwinding result in a strengthening Japanese yen.
Those looking to buy Gold should look out for spikes in the Japanese Yen, to time their gold purchases.

Trading in gold (especially on margin) to generate short term returns is both risky and dangerous, given the volatility in Gold prices and markets in general. A long term buy and hold strategy is best advised.

Beware advice in the financial news media, reports from investment banks, and targets set by short term technical chartists/traders/speculators, instead invest in gold on declines with a view to hold it over the long term.

Stocks of gold mining companies offer greater leverage to the gold price. Investors need to take into account of factors such as current production, valuation of gold reserves, gold hedges and risks of small/junior mining companies with no track record, when considering investments in gold stocks.

Sunday, November 11, 2007


An accelerating slide in the U.S. Dollar against the Japanese Yen last week, could set the stage for another market sell off.

In the autumn of 1998 (at the time of the LTCM collapse), the Yen rose by more than 10 percent against the U.S. Dollar in two days; resulting in sizeable carry trade losses.

National Highways development : India

Heres an update on Indian Road Infrastructure.

The National Highways Authority of India, is the government body in charge of developing National roadways.

Here are some interesting stats from their site.

  • The Indian road network of 3.3 million Kms is second largest in the world.

  • About 65% of freight and 80% passenger traffic is carried by the roads.

  • National Highways constitute only about 2% of the road network but carry about 40% of the total road traffic .

  • Number of vehicles has been growing at an average pace of 10.16% per annum over the last five years.

---The Golden Quadrilateral connects Delhi, Mumbai, Chennai and Kolkata. It is now nearing completion.

---The North South East West Corridor connects Srinagar to Kanyakumari and Silchar to Porbander. Contracts are still being awarded, and work has only just begun.

Execution has been slow, but is steadily progressing.

To encourage investment from the private sector, the existing toll-based Build Operate Transfer (BOT) model (which made such projects commercially unviable), has been changed to also include either construction only contracts or schemes with annuities over the concession periods. 100% FDI under the automatic route is permitted for all road development projects

For long term investors in India, National Highway development will be crucial to increase the efficiency of multimodal logistics and road freight operations, debottleneck ports, and in so doing increase trade volumes. Road development, will also provide a boost to the auto sector(passenger cars and commercial vehicles) over the long run.

Saturday, November 10, 2007

Subprime Mortgages & ABX Indices.

As the subprime mortgage writeoffs get larger everyday, heres a look at the pricing of credit derivatives in the sector.
" Markit was founded in 2001 as the first independent source of credit derivative pricing.
Working in conjunction with a consortium of key asset-backed security trading desks, Markit acts as administration, calculation, and marketing agent for ABX. Under this broad remit, Markit will provide a number of services and functions to facilitate the transparency, liquidity and standardisation of this new benchmark index.

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages.
ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected.

The ABX swaps offer protection if the securities are not repaid as expected, in return for regular insurance-like premiums.

A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments.

Likewise, an increase in the ABX Index signifies investor sentiment looking for subprime mortgage holdings to perform better as investments. "

8 NOVEMBER 2007:

Lastly, What are Credit Default Swaps?

According to Investopedia - They are swaps designed to transfer the credit exposure of fixed income products between parties.
The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product.

By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

For example, the buyer of a credit swap will be entitled to the par value of the bond by the seller of the swap, should the bond default in its coupon payments.
............trouble is, subprime has begun to default!!!!

Friday, November 9, 2007


The Indian Stock markets closed in the red, on the back of weak global cues during the Muhurat trading session( A special one hour trading session on Diwali evening) today.

Further writeoffs and write-downs from global financial majors, and fears of a US slowdown that could affect emerging markets, led to a weak close.

Valuations of Indian Equities remain high( given the strong long term growth prospects), and are hence susceptible to sharp corrections if negative newsflow from global markets continues.

Over the next few weeks i will put up some research on a few Indian stocks that i track. These are stocks with strong fundamentals and growth stories which can be bought for long term investment in the event of a sharp market decline.
Technorati Profile

Thursday, November 8, 2007


According to recent press reports,Gisele Bundchen,the world's highest paid super model is insisting that she be paid in Euros and not the U.S. dollar. Her manager subsequently denied these reports.

Nonetheless,concern over a fast depreciating US Dollar is spreading.

The Brazillian super model, whose annual earnings (according to Forbes ) totalled $33million, will continue to see her earnings in terms of the Brazillian Real and the EURO fall sharply in value; if the decline of the US Dollar continues.

The Brazillian economy has been performing well led by strong commodity prices and increased foreign investment.
The Brazillian Real has risen sharply against both the USD and the EURO.

The Brazillian Real appears to have held its value against gold, given its high interest rate(11.25%) and strong economic activity in Brazil .

In recent months Warren Buffet, Bill Gross, Marc Faber, Jim Rogers and other experts have all expressed concern over a falling USD.

Tuesday, November 6, 2007


As the losses emerge and the write downs continue, the US Financial sector faces a very tough last quarter for 2007.

Sunday, November 4, 2007


As Central Banks around the world pumped in large amounts of liquidity to avoid a credit crunch, and world stock markets recovered to new highs, everyone has ignored the fall in purchasing power of fiat/paper currencies around the world.

Saturday, November 3, 2007


Since 25/10/2000, the EURO is up 75.5% against the US Dollar.
Oil prices near the $ 100 mark, as gold prices cross $ 800.
Rising inflation in developing economies, Eurozone inflation at two year highs and possible threats to the carrytrade as the US Dollar interest rate differential falls............
A falling reserve/standard currency is going to do more harm than good.


Since my last post over a week ago, the bad news from the US Markets, has continued t o trouble world stock markets.

The US economy grew at a SURPRISING 3.9% in the last quarter, DESPITE a weakening housing market, auto sector, and severe writedowns in the US financial sector.
The US Dollar continued its slide, as gold and oil have rallied to new highs.

So is there more bad news to come?

Well, Stanley O'Neal ex CEO of Merrill Lynch , is to receive a severance package of $160 million after the bank was hit with writeoffs of about $8.4 billion last quarter.Merrill's stock is down another 10% today!!!

Citigroup and their CDO mess isnt doing much better either.
Look for possible downgrades, not from other investment banks, but credit rating agencies next week.

Th e past week can be best summarised in the last two paragraphs of a book i read a few months ago, ' The Great Crash 1929 ' by the late John Kenneth Galbraith.

" Wall Street, in recent times, has become, as a learned phrase has it, very 'public relations conscious'. Since a speculative collapse can only follow a speculative boom, one might expect that Wall Street would lay a heavy hand on any resurgence of speculation. The Federal Reserve would be asked by bankers and brokers to lift margins to the limit; it would be warned to enforce the requirement sternly against those who might try try to borrow on their own stocks and bonds in order to buy more of them. The public would be warned sharply and often of the risks inherent in buying stocks for the rise. Those who persisted, nonetheless, would have no one to blame but themselves. The position of the Stock Exchange, its members, the banks, and the financial community in general would be perfectly clear and as well protected in the event of a further collapse as sound public relations allow,

As noted, all this might logically be expected. It will not come to pass. This is not because the instinct for self-preservation in Wall Street is poorly developed. On the contrary, it is probably normal and may be above. But now, as throughout history, financial capacity and political perspicacity are inversely correlated. Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present. So inaction will be advocated in the present even though it means deep trouble in the future. Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound."

The book was first published in 1954, and provides a detailed account of the events leading upto the 1929 crash and the consequences thereafter.
The last paragraph, sums up the situation in which we find world markets today.

(Over the weekend, i will put up some updates on gold investing and the indian markets.)

Friday, October 26, 2007

Countrywide Financial Loses $1.2Billion, stock up 23%

Hit by loan-loss provisions and writedowns in the third quarter, Countrywide Financial lost $1.2Bn, its first quarterly loss in 25 years.

CEO Angelo Mozilo blamed the loss on unprecedented disruptions in the mortgage market and an ongoing national housing slump.

However shares soared on promises of a profitable fourth quarter and a positive 2008, due to ongoing business restructuring at the company.

Coming back to reality
  • Countrywide's market capitalisation at todays stock price is $9.20 billion.
  • The stock is well off its 52 week high of $ 45.26. (52-Week Low $12.07)
  • They just lost $1.2 billion.
  • No signs of a recovery in the housing market anytime soon
  • The USD is sliding to new lows on the USDX Index.

Thursday, October 25, 2007

The Merrill Lynch write-down

October 24, 2007 Press release:
" Merrill Lynch (NYSE: MER) today reported a net loss from continuing operations for the third quarter of $2.3 billion, or $2.85 per diluted share, significantly below net earnings of $2.22 per diluted share for the second quarter of 2007 and $3.14 for the third quarter of 2006. Third-quarter 2006 net earnings per diluted share, excluding the impact of the one-time, after-tax net benefit of $1.1 billion ($1.8 billion pretax) related to the merger of Merrill Lynch Investment Managers (MLIM) and BlackRock (NYSE: BLK), were $1.97. Third-quarter 2007 results reflect significant net write-downs and losses attributable to Merrill Lynch's Fixed Income, Currencies & Commodities (FICC) business, including write-downs of $7.9 billion across CDOs and U.S. subprime mortgages, which are significantly greater than the incremental $4.5 billion write-down Merrill Lynch disclosed at the time of its earnings pre-release. These write-downs and losses were partially offset by strong revenues in Global Wealth Management (GWM), Equity Markets and Investment Banking, particularly in regions outside of the U.S. The results described above and herein, exclude Merrill Lynch Insurance Group (MLIG), which is reported under discontinued operations."

October 5, 2007 earnings pre-release:
Merrill Lynch & Co., Inc. (NYSE: MER) today announced that challenging credit market conditions will have an adverse impact on its net earnings for the third quarter. The company expects to report a net loss per diluted share of up to 50 cents, resulting from significant negative mark-to-market adjustments to its positions in two specific asset classes: collateralized debt obligations (CDOs) and subprime mortgages; and leveraged finance commitments. These mark-to-market adjustments primarily affect Merrill Lynch's Fixed Income, Currencies & Commodities (FICC) business. The company expects to report revenue growth in excess of 20 percent over the 2006 third quarter in each of its other major business lines: Equity Markets (excluding the firm's private equity business), Investment Banking and Global Wealth Management. Merrill Lynch expects to report a solid revenue performance from the rest of its FICC business, considering market conditions, and expects strong performance from its operations outside the U.S., led by the Pacific Rim region.
"Despite solid underlying performances in most of our businesses in the third quarter, the impact of this difficult market was much more severe in certain of our FICC businesses than we expected earlier in the quarter," said Stan O'Neal, chairman and chief executive officer of Merrill Lynch. "While market conditions were extremely difficult and the degree of sustained dislocation unprecedented, we are disappointed in our performance in structured finance and mortgages. We can do a better job in managing this risk, as we have done with other asset classes, including leveraged finance, interest rate and foreign exchange trading, equity trading, principal investments and commodities."

To put things in perspective.
  1. At its current stock price of $60.18, Merrill Lynch has a market capitalisation of USD 51.7 billion.
  2. Its 2006 net revenues stood at $34.7 billion, and its net earnings at $7.5 billion.
  3. Chairman and Chief Executive Stan O'Neal received a $47.3 million bonus in 2006.His bonus consisted of a $18.5 million cash incentive and a restricted stock award of $28.8 million in addition to an annual salary of $700,000!!!
  4. Meanwhile, Goldman Sachs Chairman and CEO Lloyd Blankfein set the highwater mark for Wall Street bonuses, receiving $53.4 million for 2006.
  5. Over the last couple of years, Merrill Lynch's leadership role in underwriting risky CDOs brought in millions in fees!!!!
  6. October 24, 2007, hit with $7.9 Bn in record write downs....

Saturday, October 20, 2007

US Gasoline and Diesel Fuel Update

Oil prices touched 90 US dollars a barrel for the first time, amidst tensions in the middle east, and a weakening US dollar (which fell to new lows on the USDX index).

As the economy slows, rising fuel costs will continue to affect consumer consumption.

Thursday, October 18, 2007


What are P Notes?
Participatory Notes -- or P-Notes or PNs -- are instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India.

The BSE SENSEX Index opened over a 1000 points down, hitting a low of 17,308, down over 1740 points.

Fears of restrictions on P Notes, and curbing foreign institutional investment in Indian equities triggered circuit breakers and the markets were shut for 1 hour .

Clarifications from the Finance minister and the stock market regulator SEBI, confirming no ban on P –Notes and no ban on offshore derivative instruments contracts (expiring this month or in the following months being renewed, provided the renewal does not go beyond 18 months), helped markets recover.

"Let me assure all investors what has been done is to moderate capital flows, which have become very copious. It is a culmination of long discussions between SEBI, RBI and government," the Finance minister Mr P.Chidambaram said, adding that "SEBI's proposals are just a consultation paper, but would become regulations with or without some modifications. "

The market gradually recovered closing at 18,715.82, down only 336 points.

Valuations remain high and the markets volatile.


As central banks around the world struggle to control local currency appreciation against the US dollar, USD negative developments in recent days, is going to make their task all the more difficult.

1) The first net outflow for 9 yrs, in the month of August.
US Treasury data showed a net long-term capital outflow of US$69.3bn for August while there was a total outflow of US$163bn.
Central Banks selling US Treasury Bonds is extremely USD negative
Possible currency diversification away from the USD?

2) The Master-Liquidity Enhancement Conduit (M-LEC),
Citigroup, JP Morgan Chase and Bank of America will lead a consortium of banks to create a master conduit to revive the global commercial paper market,
where liquidity has all but dried up.

They plan to raise over $80Bn ( surely not enough), and purchase assets ( bank bonds/asset backed mortgages/ subprime debt/only highly rated paper ) from Structured Investment Vehicles ( SIVs), thereby enabling SIVs to avoid dumping their $320 billion in holdings and causing further turmoil in the already troubled credit markets.

Firstly who will they raise this money from? At a time when liquidity is so tight, and no one wants to have anything to do with US mortgage related debt.
Or is the M-LEC safe because it is backed by some of the Worlds largest investment banks, who themselves are at the centre of this SIV and derivative market maze?

The conflict of interest !!!!
Citi itself has a large exposure to the SIV market !
Will the lead bankers earn fees and commissions for managing the conduit.

3) The National Association of Home Builders' housing index falls to a record low of 18 in October from 20
The NAHB for sales of new, single-family homes decreased to 18 this month from 20 in September. Clearly no recovery in sight for the US homebuilders, not for a long while yet.

As emerging markets struggle with foreign fund inflows that are boosting their currencies and stock markets, the negative flow of US Treasury investment by central banks will add to the trade deficit problems of the US Economy.

So is a weak US dollar good or bad for the US Economy?

Tuesday, October 16, 2007


The net foreign investment in indian equities today, was $ 956.5 mn

On friday the 12th of October, the finance minister expressed concern over a rapidly rising stock market and local currency( Indian Rupee).

Possible curbs on foreign fund inflows into shares ?

Monday, October 15, 2007


Asian currencies have been rising against the US dollar over the past few years.

Faced with large sustained foreign fund inflows, a weakening US Dollar, and rising local inflation, Asian central banks have been allowing local currencies to appreciate against the USD.

Large foreign exchange reserves across the region, are a testament to the central bankers attempts to stall runaway rallies in their currencies.

China's foreign exchange reserves now at over $ 1.43 trillion, have resulted in repeated calls for appreciation in value of the Chinese Yuan.

Asian central bankers have been using strong local currecies to fight inflation, given their large oil and food imports. However rising currencies have now started to affect exports, worse still at a time when the US economy is slowing down.

Sunday, October 14, 2007


The net investment by Foreign Institutional Investors (FII) in Indian Equity Markets since the 1st of October 2007, is now $ 4 .30 Bn.

Given the strong long term outlook for the Indian economy, valuations have risen sharply, as FII investment pushed up prices of large capitalisation shares.

Below is a list of Top gainers among the Large cap 'A' group shares over the last month.


An increased demand for corn used in ethanol production in the US, has been blamed for rising corn prices. Ironically, as corn prices have come off their recent highs, and crude oil prices surge to new highs, ethanol prices have been down sharply.
A possible ethanol glut as new capacities come on stream, and high prices of corn relative to a few years ago, has taken its toll on the US Ethanol industry.

Arguments that ethanol is not as environmentally efficient as it claims to be, and rising food crop prices heading into an election year, have led to sharp corrections in the stock prices of ethanol producers.

Friday, October 12, 2007

Rising prices of CORN, WHEAT & SOYBEAN



Prices of food crops have seen a dramatic rise, over the last few years.
The diversion of corn to ethanol production in the U.S.A., crop disruptions due to droughts, and increased consumption in developing countries spurred on by a weakening US dollar , are among the many responsible factors.
Core producer prices, used in reports on the wholesale price index in the USA, do not include food and energy sectors.
Consumers are facing higher supermarket bills and higher fuel prices, though the core inflation figures may not reflect the same.

Moody's Investors Service cut its ratings on US.home builders.

" Moody's Investors Service on Thursday cut its ratings on home builders Centex Corp (CTX.N: Quote, Profile , Research) Lennar Corp (LEN.N: Quote, Profile , Research) and Pulte Homes (PHM.N: Quote, Profile , Research) to junk status, saying it expects bleak housing industry conditions to linger at least until 2009.
The downgrades affect about $9.4 billion of debt and $3.25 billion of commercial paper authorizations, Moody's said. "

Wednesday, October 10, 2007

Understanding the US Dollar Index (USDX) !

The USDX recently broke down below its critical long term support of 80.

What is the US. Dollar Index?

According to Investopedia it is 'A measure of the value of the U.S. dollar relative to majority of its most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.'

''The US Dollar Index (USDX®) is a geometrically-averaged calculation of six currencies weighted against the US dollar. The US Dollar Index has been in existence since 1973.The 1971 Smithsonian Agreement ended the fixed exchange rates that had been set at Bretton Woods in 1944, and the US Federal Reserve Bank began the calculation of the US Dollar Index to provide an external bilateral trade-weighted average of the US dollar as it freely floated against global currencies.''

What then are the implications of a sub 80 level on the USDX ?

Over the long term, a falling USDX is very negative for all investors in USD denominated assets.

In order to attract investors to a falling currency, interest rates would have to rise, causing USD Bonds to fall in value.

Rising interest rates would negatively impact the equity markets as also the mortgage and housing market. Given the current debt levels in the US economy, default rates would rise.

Historically the worlds central banks have always supported the US Dollar at the level of 80, to prevent shapr appreciation of local currencies the USD. Central banks also hold huge USD reserves( U.S government debt), so they would be worried by a falling USD.

The last time the USDX neared 80, in December of 2004; Gold was in the range of $ 450.

Gold is now $ 740.

Does this mark a permanent shift in the USDX index?