Friday, February 29, 2008

Indian Union Budget 2008 & beyond

The Indian equity markets ended in the red, in line with the weakness across global markets.
As far as the stock markets are concerned the Union Budget was neutral overall, and did nothing to further reforms in the run up to the upcoming elections.

Some Highlights
The Fiscal deficit = 3.1% in FY08, revenue deficit = 1.4%
Ahead of the upcoming elections, the finance minister reiterated the need for ‘inclusive’ growth, reduced excise duty on small cars and announced higher spending on education and a Rs. 60,000 Cr loan waiver/relief for farmers.
Short term capital gains tax has been raised from 10% to 15%, and the threshold limit for all IT assesses has been increased from Rs.110,000 to Rs.150,000.

2008 is going to be a difficult year for global stock markets. Here’s what we are up against:

Stagflation in the US : Slow growth, rising unemployment & inflation.
The rapidly declining USD, eroding the value of Forex Reserves of Central Banks.

An increased likelihood of a hard landing for the US economy.
The "Goldilocks economy theory" and the Decoupling theory are dead.
Weakening US Consumer consumption.
US Home prices continue to decline.
The global credit crunch continues.
Eventual downgrading of the US Bond Insurers. More trouble at Freddie Mac & Fannie Mae.
The Fed focusing on growth and Wall Street, and not inflation.
Food grain and oil prices at record highs.
Fears of writedowns in the Global Banking industry in the first quarter 2008.
Slowdown in foreign institutional fund flows to emerging markets.

Thursday, February 28, 2008


The market is expecting the FED to cut rates by 50 basis points when it next meets.
The USD is under real pressure now; and as it continues to fall, it erodes the value of Forex Reserves of Central banks around the world, as also the purchasing power of oil producing nations that receive US Dollars for their OIL.


STAGFLATION is back!!!!!!!!!
The recent consumer price index (CPI, an important inflation indicator) announcement, has renewed inflation concerns.
Stagflation is characterized by inflation, slow economic growth and relatively high unemployment ( expect more job cuts as the economy slows).
Stagflation dosent just go away, but is annoyingly persistant.
As Central banks around the world start to cut rates to boost slowing growth, they are unable to deal with rising prices. A combination of rising food grain prices and oil prices are the primary causes of inflation today.
Inflation + Falling USD +Central Banks cutting rates ==> High gold prices. Even the recent news of an upcoming sale of Gold by the IMF has had little effect on the enthusiasm of Gold Buyers.

Over the short term, although the news flow is positive for gold, a sharp sell off in world markets could lead to a sharp pullback in gold prices. For long term buyers, though caution is advised for now, adding to gold positions on declines in equity markets is advised.

As the arrow mark in the first graph shows, gold prices can crash sharply in an equity market sell off (May 2006), something that is increasingly likely as world markets factor in a US recession.

Saturday, February 16, 2008

MBIA & The State of the Bond Insurance Industry.

Here are some details of the recent testimonies before the House Committee on Financial Services, on The State of the Bond Insurance Industry. Thursday, February 14, 2008

Testimony of Mr Chaplin, CFO of MBIA.

Charles Chaplin, Chief Financial Officer, MBIA Inc., in his written testimony, hit out at William Ackman (of Pershing Square Capital Management), for his large short position in the MBIA stock. Ackman has claimed that the bond insurers are ‘functionally insolvent’, and has questioned the rating agencies about the AAA ratings assigned to the Bond Insurers. Ackman has voiced his concern about MBIA and other Bond Insurers in many TV interviews, presentations, letters to the Fed & the Treasury as well as his latest testimony.

  • Is it William Ackman’s fault that the bond insurers, chose to insure Structured Finance Products, CDOs and other now toxic derivatives, instead of relatively safe and low yielding (in terms of revenue for the bond insurers) municipal bonds?

  • As per page 106, of the MBIA testimony, Ackman on 23/5/07 claims that the insurance subsidiaries of the bond insurers are effectively insolvent, and then on 23/11/07 claims that the bond insurers are insolvent. If he was wrong, why are the bond insurers struggling to raise capital, even as they deny the need for ANY BAILOUT?

  • What was the methodology employed and analysis used by the Rating Agencies, which concluded that the capital adequacy of the bond insurers was sufficient; thus enabling them to retain their AAA rating?

  • Do Henry Paulson (U.S. Treasury Secretary), Charles Chaplin(MBIA) and Ben Bernanke honestly believe that the Bond Insurers will be able to pay up, in the event of a drastic escalation in defaults?

Friday, February 15, 2008

Asahi India Glass (AIS) : Part 1

This is a write up on my analysis of Asahi India Glass (AIS).
In the recent market meltdown, I have added to my existing investment in AIS. Asahi India Glass is a company with strong fundamentals and a solid growth story. It has recently undergone a massive expansion, which has resulted in subdued near term earnings (as a result of increased interest expenses and depreciation and amortization charges). The company has now completed its expansion, and its new plant has been recently commissioned.
I will continue to add to my existing position in AIS, in the event of a further market decline.

About AIS:
AIS is the largest integrated glass company in India.
AIS has the following three Strategic Business Units (SBUs) :
· Automotive Glass Unit – AIS Auto Glass
· Float Glass Unit – AIS Float Glass
· AIS Glass Solutions Ltd – AIS Glass Solutions
It has around 85% market share in the automotive glass industry and 25% market share in the float glass industry. It has entered into the architectural business in order to diversify its business model.
Promoters: The Labroo family, Asahi Glass (Japan) and Maruti Udyog

Financial Snapshot . source:

Friday, February 8, 2008


“Temasek Holdings is an Asia investment house headquartered in Singapore. With a multinational staff of more than 300 people, we manage a portfolio of over S$160 billion, or more than US$100 billion, focused primarily in Asia. We are committed to fostering a sustainable future for our shareholder, staff, portfolio companies and the community.”

Temasek and The Government of Singapore Investment Corp operate as Investment Management Companies / Private Equity Arms / Sovereign Wealth funds of the Singapore Government. GIC was set up to manage Singapore's foreign reserves.

Over the years Temasek has been a long term investor mainly in Asian markets, acquiring sizable stakes in large companies.

Here is a list of its major investments as on 31st March 2007.

Here is a wikipedia link with recent updates of investment stakes held by Temasek.

For an accurate list of investment holdings, please refer to the annual statement from Temasek as of 31 March 2008, which will be put up later this year.


Recent High Profile Investments

After its recent investment in Merrill Lynch, Temasek now owns approximately 9.4% of Merrill Lynch.

It recently announced that it owns 19% of Standard Chartered.(up from 13% on 31 mar 07)

Its sister concern, the Government of Singapore Investment Corp, invested almost $ 10 Billion in UBS AG recently.

The current activities of Sovereign funds such as Temasek mark an inflection point in the history of financial markets. With a shift of wealth and assets from west to east, investors from Asia are acquiring businesses in the west, during a crisis, at exceedingly low prices.
The new buyers will gain access to western markets, by acquiring well established businesses and brand names. They will also indirectly acquire a foothold in the subsidiaries of large multinational corporation businesses built up in Asia over the last few decades .
Over the long term, this will be the biggest loss for investors and business owners in the west, being forced to sell out when prices are down.

Monday, February 4, 2008


The US Dollar has continued to lose value against major currencies since the credit crunch began last year, and rate cuts by the US Fed continue to hurt the USD

Aug 20, 2007- Jan 14, 2008: The Euro is up 10.46 % against the USD. Economic growth in Europe is slowing even as inflation concerns continue to grow; the ECB may have to cut rates, as the strong Euro is hurting European exports.

CHF/USD: Sept 4, 2007 - Jan 31, 2007: The Swiss Franc is up 11.66% vs the USD. In times of crisis, it is viewed as a safe currency, and it will be a key beneficiary of any carry trade unwinding.

GBP/USD: Aug 2007- Jan 2007, and the GBP has been unable to hold onto its gains vs the USD. After hitting a high of 2.1104 , the GBP has weakened considerably, on concerns of upcoming rate cuts, a slowing economy, and a weakening housing market

Interesting trends:

Meanwhile, the Euro has gained 10.35% vs the GBP (Sept 5, 2007- Jan 31, 2007)

The Euro has been flat against the Swiss Franc(CHF). Since December 2007 the Euro has weakened against the Swiss Franc, only to regain part of its losses on concerns of a rate cut in the CHF

The Key questions now are :

  • Are we going to see rate cuts from Central Banks around the world, in an effort to reflate slowing growth in developed economies ?
  • How long can the BOE and the ECB hold their rates, if the Fed continues to cut interest rates ?
  • How are the USD pegged currencies of the Middle East going to continue to cut rates, when local inflation rates are rising ? eg: Saudi Arabia inflation = 6.5%
  • Will the US Bond market see slowing inflows, or even outflows, as the interest rate differential of a low yielding USD, and high yielding Asian Currencies continues to widen ?