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.