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.)