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?

Monday, October 8, 2007

U.S. Housing slump continues.

A combination of rising inventories of unsold homes, falling home prices, tightening lending standards, and inventory writedowns taken recently....have taken their toll on the U.S Homebuilding sector.

Tightness in the commercial paper market, and the upcoming resetting of Adjustable Rate Mortgages (ARMs) , appear to be compounding the housing slump.

Is the slowdown spreading to other sectors of the economy?

Sunday, October 7, 2007


An industry that Capital intensive with high asset replacement costs. Low/no customer loyalty
high fuel prices, competition from low cost carriers make it very competitive.
Bankruptcy protection and cyclical downturns where no one makes money are other negatives.

Buy stocks when occupancy is low & the business environment is weak

Steel/ Aluminium/Copper and other metals
Buy when industrywide financials are weak, and bankruptcy is high.Excess capacity exists and product prices are low. Metal ore producers, smelters,mill owners are worth a look at this stage.

Look at the new drug pipline, new drug research costs and possible failure risks.
For generic drugs ( copies of the original patented drugs ) look at patent expiry, legal costs,
and very competitive pricing of generic drugs on patent expiry.

Buy when mineral prices are weak.
Mining equipment stocks - trucks, dumpers, crushers, elevators, earth moving equipment, are the various ancillaries that are dependent on this sector.
Focus on hotels and real estate in mining areas during the downturn
And Roads, highways and bridges in mining areas during the upturn.

Oil and Gas
Rising oil prices benefit oil services industries such as drillers, rig operators,
Offshore supply vessels and tugs, marine engineers, welders, offshore helicopter
Companies, oil pipeline manufacturers and contractors.

Petrodollars from rising wealth in oil producing nations seek global investment avenues. The governments of Dubai and Qatar are a case in point. Oil producing nations see real estate booms, increased domestic consumption, and consequently inflation, as oil prices rise.

Rising Oil prices are positive for alternative energies, like wind energy, solar energy, hydro power etc, as their commercial viability vis a vis oil improves.

Oil dependent Businesses
A number of industries depend on raw materials/ inputs that are derived from crude oil.
These include
Paints (oil based paints, the raw material titanium dioxide)
Tyre industry (carbon black)
Fertilizers (fuels- naphtha and natural gas),
Airlines ( Aviation Turbine Fuel)
Truck/ Road freight ( Fuel costs)

Government Monopolies and Policies:
Relevant to sectors such as oil and gas, pipelines, freight transport, telecom, Railways, foreign direct investment.
Liberalisation policies in emerging economies

Investing in Agricultural Commodity related stocks
Beware the cyclical nature of commodities, and study the demand supply situation well.
Known also as soft commodities, these include cereals such as wheat, corn & soy; cotton, sugar, rubber.
Rising prices benefit producers of seeds, fertilizers, crop protection, and farm equipment like tractors, & harvesters.
Agricultural economies benefit greatly, as was the case with sugar in Brazil recently.

Industries that are negatively impacted
--By a cereal crop boom include the poultry and meat industry; milk and dairy industry,
--By a rise in rubber prices include the Tyre industry and the auto industry.
--By a rise in cotton prices include the textile industry.
--By a rise in sugar prices include confectionery, beverages etc

Investing in Infrastructure related stocks in Developing Economies
Looking to benefit from rising infrastructure investment in developing economies requires a long term investment horizon.
Projects can get delayed, clearances may take time, and the resulting cost overruns erode investment return

Industries that benefit from rising infrastructure investment include
Trucking, construction machinery and cranes, steel, cement, construction contractors & road development companies.
Power and electricity generating equipment, transmission and distribution equipment, transformers , high tension cables (applicable to upgrading of infrastructure in developed countries eg. power grids etc)
Airport/Seaport development, logistics, packaging and forwarding, cold storage.

Saturday, October 6, 2007

Foreign Fund Flows lift Indian Equity markets to new highs !

A surge in Foreign Institutional Investment lifted the BSE Sensex (Index) in Mumbai to new highs.
The last nine trading sessions of September saw a net investment of $ 2.77Bn.
The first four trading sessions of October saw a net investment of $ 2.33Bn.
As emerging market funds see positive inflows, the Indian markets have attracted significant investment, aided by a strengthening local currency ' Indian Rupee', which has been one of the best performing currencies in the Asia -Pacific region this year.
Sustainability of such fund inflow, or possibly fund outflow would dictate the direction of the indian markets which have already risen sharply this year.

DOW at 14,000 & the DOW/GOLD RATIO

The Dow/Gold Ratio is the ratio of the price of the Dow to the price of gold. More simply it is the number of ounces of gold required to buy one unit of the Dow. As the chart shows, though the value of the dow in US Dollar has risen post the dot com crash, it continues to decline in terms of gold.

The ratio is a extremely useful in determining major long term turnarounds or shifts in equity and gold markets. As the graph shows, declines in this ratio have been positive for gold, and negative for equity and vice-versa.

In 1999 it took over 40 ounces of gold to buy one unit of the Dow Jones Industrial Average, as against 18.68 ounces currently.

A time to sell?

(chart: )

Friday, October 5, 2007

What you win on the roundabout, you lose on the swing!!

The DOW at 14,000. 7 years on from the dotcom crash, long term eurozone investors in the USA, might well be disappointed. Since the Euro hit an all time low on 25/10/00, subsequent US Dollar weakness has really eroded the currency adjusted return of eurozone investors.
The Nasdaq has fared much worse, with a net return of -86.41% adjusted for the currency loss.