Thursday, December 31, 2009
Thursday, December 24, 2009
Divestment may bring in Rs 32,500 cr in 3 months
NEW DELHI: The government could raise around Rs 32,500 crore in the next three months through its revived divestment programme, more than 55% of
what it has collected from sale of its shares in public sector undertakings since 1991.
The United Progressive Alliance (UPA) government, which is facing the largest fiscal deficit in the past 16 years, is keen to raise as much as it can this year to bridge the funding gap. The deficit soared to Rs 397,000 crore or about 6.8% of the national income this year, as a result of the government’s stimulus measures, announced to avert an economic downturn after some of the world’s largest economies fell into the grip of a recession.
The government has already kicked off big-ticket divestment programmes in NTPC and NMDC, from which it plans to mop-up around Rs 25,000 crore. In NTPC, the government is divesting a 5% stake to collect Rs 11,000 crore through the fast-track route, making this the fist follow-on public offer to use this facility.
It will divest a 8.38% stake in NMDC to take the total floating stock of the company to 10%. The government is set to appoint six investment bankers for this issue shortly. At the current market price of Rs 415 per share, the stake on the block would fetch the government around Rs 14,000 crore. However, bankers are sceptical about the pricing of the issue.
“The valuation seems to be stretched,” said a banker, who has bid for the mandate of NMDC issue. The current share price is based on a tiny floating stock and may not be reflective of the underlying value of the company, he said, requesting anonymity. The government has set the deadline of March-end to close the issue.
To facilitate the divestment drive, market regulator Sebi has relaxed the guidelines governing follow-on public offers. This will help government complete some of these issues by the year-end.
Under the fast-track route, a company does not have to wait for the approval of the market regulator, which normally takes more than a month. “Once the prospectus is ready and filed with the regulator, the issue can open for subscription,” said a banker. A senior government official in the department of disinvestment said the government is also planning to sell 5% in Steel Authority of India (SAIL).
“The process is likely to start in January after the Cabinet gives its approval. The follow-on public offer (FPO) of SAIL will be under the fast-track route, which will help the government to close the entire process within 45 days from the date of approval,” he said, requesting anonymity.
At the current price of Rs 235.60 per share, SAIL’s market value is Rs 97,300 crore, and a 5% divestment would fetch nearly Rs 5,000 crore. The issue will be priced at the premium to the current market price, said another banker.
The government has already raised Rs 4,260 crore this fiscal year through divestment of minority stakes in NHPC (Rs 2,013 crore) and Oil India (Rs 2,247 crore). The government has already mopped up far in excess of the target of Rs 1,120 crore set by the Union Budget 2009-10. Even in the case of NTPC and REC, the government has asked these bankers to price the issue at substantial premium over the current market price.
The UPA government has collected around Rs 57,683 crore so far from the divestment programme, started in 1991. In its previous term, it could not sell stakes in public sector firms due to pressure from its Left allies. The government led by Manmohan Singh looks more confident to carry forward reform agenda in its second term, as it no longer needs the Left’s support.
what it has collected from sale of its shares in public sector undertakings since 1991.
The United Progressive Alliance (UPA) government, which is facing the largest fiscal deficit in the past 16 years, is keen to raise as much as it can this year to bridge the funding gap. The deficit soared to Rs 397,000 crore or about 6.8% of the national income this year, as a result of the government’s stimulus measures, announced to avert an economic downturn after some of the world’s largest economies fell into the grip of a recession.
The government has already kicked off big-ticket divestment programmes in NTPC and NMDC, from which it plans to mop-up around Rs 25,000 crore. In NTPC, the government is divesting a 5% stake to collect Rs 11,000 crore through the fast-track route, making this the fist follow-on public offer to use this facility.
It will divest a 8.38% stake in NMDC to take the total floating stock of the company to 10%. The government is set to appoint six investment bankers for this issue shortly. At the current market price of Rs 415 per share, the stake on the block would fetch the government around Rs 14,000 crore. However, bankers are sceptical about the pricing of the issue.
“The valuation seems to be stretched,” said a banker, who has bid for the mandate of NMDC issue. The current share price is based on a tiny floating stock and may not be reflective of the underlying value of the company, he said, requesting anonymity. The government has set the deadline of March-end to close the issue.
To facilitate the divestment drive, market regulator Sebi has relaxed the guidelines governing follow-on public offers. This will help government complete some of these issues by the year-end.
Under the fast-track route, a company does not have to wait for the approval of the market regulator, which normally takes more than a month. “Once the prospectus is ready and filed with the regulator, the issue can open for subscription,” said a banker. A senior government official in the department of disinvestment said the government is also planning to sell 5% in Steel Authority of India (SAIL).
“The process is likely to start in January after the Cabinet gives its approval. The follow-on public offer (FPO) of SAIL will be under the fast-track route, which will help the government to close the entire process within 45 days from the date of approval,” he said, requesting anonymity.
At the current price of Rs 235.60 per share, SAIL’s market value is Rs 97,300 crore, and a 5% divestment would fetch nearly Rs 5,000 crore. The issue will be priced at the premium to the current market price, said another banker.
The government has already raised Rs 4,260 crore this fiscal year through divestment of minority stakes in NHPC (Rs 2,013 crore) and Oil India (Rs 2,247 crore). The government has already mopped up far in excess of the target of Rs 1,120 crore set by the Union Budget 2009-10. Even in the case of NTPC and REC, the government has asked these bankers to price the issue at substantial premium over the current market price.
The UPA government has collected around Rs 57,683 crore so far from the divestment programme, started in 1991. In its previous term, it could not sell stakes in public sector firms due to pressure from its Left allies. The government led by Manmohan Singh looks more confident to carry forward reform agenda in its second term, as it no longer needs the Left’s support.
Dubai Shares Fall Most in World as Investors Wait for Debt Plan
Dec. 23 (Bloomberg) -- Dubai stocks retreated the most in two weeks as investors wait for state-owned holding company Dubai World to present a debt restructuring plan.
Emirates NBD PJSC, a Dubai-government controlled lender, tumbled to the lowest close in seven months. Emaar Properties PJSC, the United Arab Emirates’ biggest construction company, fell for a second day. The DFM General Index dropped 3.8 percent, the biggest fluctuation among stock indexes tracked globally by Bloomberg News, to 1,735.7 in Dubai. Dubai’s benchmark index has gained 6.1 percent this year.
Dubai World may present a “standstill” offer to banks in early January as it aims to restructure $22 billion of debt, said three bankers who attended a presentation on the matter earlier this week. The company told lenders it needs time to allow its assets to recover from a drop in value following the credit crunch, said the bankers, who declined to be identified because the meeting was private.
“Investors are waiting” for Dubai World news, said Hesham Bakry, Dubai-based institutional sales manager at Al-Futtaim HC Securities Co. “The Dubai situation is very sensitive.”
Dubai’s benchmark index has retreated 17 percent since Dubai World on Nov. 25 said it would seek to freeze or delay repaying debt until at least May 30. The company said Dec. 1 it wants to alter terms on about $26 billion of debt, including that of Nakheel PJSC, which is building palm tree-shaped islands off the emirate’s coast. Dubai World repaid $4.1 billion on an Islamic bond from Nakheel last week after Dubai received a $10 billion loan from the Abu Dhabi government.
Emirates NBD, the U.A.E.’s biggest bank by assets, tumbled 4.9 percent to 2.89 dirhams, the lowest close since May 19. Emaar dropped 6 percent to 3.59 dirhams.
Abu Dhabi’s benchmark index lost 1.9 percent, Qatar’s DSM 20 Index declined 0.6 percent, the Kuwait Stock Exchange index retreated 0.2 percent, Oman’s MSM30 Index dropped 0.9 percent and Bahrain’s measure slid 1 percent. Saudi Arabia’s Tadawul All Share Index gained 0.2 percent.
Emirates NBD PJSC, a Dubai-government controlled lender, tumbled to the lowest close in seven months. Emaar Properties PJSC, the United Arab Emirates’ biggest construction company, fell for a second day. The DFM General Index dropped 3.8 percent, the biggest fluctuation among stock indexes tracked globally by Bloomberg News, to 1,735.7 in Dubai. Dubai’s benchmark index has gained 6.1 percent this year.
Dubai World may present a “standstill” offer to banks in early January as it aims to restructure $22 billion of debt, said three bankers who attended a presentation on the matter earlier this week. The company told lenders it needs time to allow its assets to recover from a drop in value following the credit crunch, said the bankers, who declined to be identified because the meeting was private.
“Investors are waiting” for Dubai World news, said Hesham Bakry, Dubai-based institutional sales manager at Al-Futtaim HC Securities Co. “The Dubai situation is very sensitive.”
Dubai’s benchmark index has retreated 17 percent since Dubai World on Nov. 25 said it would seek to freeze or delay repaying debt until at least May 30. The company said Dec. 1 it wants to alter terms on about $26 billion of debt, including that of Nakheel PJSC, which is building palm tree-shaped islands off the emirate’s coast. Dubai World repaid $4.1 billion on an Islamic bond from Nakheel last week after Dubai received a $10 billion loan from the Abu Dhabi government.
Emirates NBD, the U.A.E.’s biggest bank by assets, tumbled 4.9 percent to 2.89 dirhams, the lowest close since May 19. Emaar dropped 6 percent to 3.59 dirhams.
Abu Dhabi’s benchmark index lost 1.9 percent, Qatar’s DSM 20 Index declined 0.6 percent, the Kuwait Stock Exchange index retreated 0.2 percent, Oman’s MSM30 Index dropped 0.9 percent and Bahrain’s measure slid 1 percent. Saudi Arabia’s Tadawul All Share Index gained 0.2 percent.
Wednesday, December 23, 2009
Oil Is Near a Two-Week High on Signs of U.S. Economic Recovery
Dec. 23 (Bloomberg) -- Crude oil traded near a two-week high in New York as positive housing and fuel-inventory data signaled a recovery in the U.S., the world’s largest energy user.
Oil climbed above $74 a barrel yesterday after the National Association of Realtors reported November sales of existing homes increased at the highest annual rate since February 2007, indicating the industry at the center of the recession has stabilized. Separately, the American Petroleum Institute said the country’s crude oil and refined-product stockpiles declined.
“The psychology has changed significantly,” said Toby Hassall, a research analyst at CWA Global Markets Pty in Sydney. “There are increasing signs of recovery in the key market, the U.S.”
Crude oil for February delivery was at $74.42 a barrel, up 2 cents, in electronic trading on the New York Mercantile Exchange at 10:49 a.m. Singapore time. Futures closed yesterday at $74.40, the highest settlement since Dec. 4. There will be no trading Dec. 25 for Christmas and on Jan. 1 for New Year’s Day.
Oil, which lost 54 percent in 2008, has gained 67 percent this year on speculation global demand for fuels will increase with the economic rebound.
Yesterday’s existing-homes sales figure rate exceeded the highest estimate from economists surveyed by Bloomberg News. The Commerce Department is expected to report today November sales of new homes also increased.
Stockpiles Fall
Commercially held crude oil inventories in the U.S. fell 3.71 million barrels last week to 328.8 million, said the industry-funded American Petroleum Institute. Gasoline stockpiles declined 1.1 million barrels to 215.9 million, the biggest drop in 10 weeks. Distillate fuel supplies, which include heating oil and diesel, slipped 745,000 barrels to 165.1 million, the API said.
An Energy Department report today is expected to show crude oil stockpiles fell 1.6 million barrels in the week ended Dec. 18, according to the median of estimates from 16 analysts polled by Bloomberg News. Distillate inventories probably dropped 2 million barrels, the survey showed. The report will be released at 10:30 a.m. in Washington.
U.S. gasoline demand rose the most in three weeks as drivers in the northeast filled up before a snowstorm, according to MasterCard Inc., the second-biggest credit card company.
Motorists bought an average 9.57 million barrels a day of gasoline in the week to Dec. 18, MasterCard said yesterday in its SpendingPulse report. Consumption increased 2.9 percent from the previous week and 1.7 percent from a year earlier.
OPEC Quotas
The Organization of Petroleum Exporting Countries agreed at a meeting yesterday in Luanda, Angola, to hold production quotas at 24.845 million barrels a day. The 12-member group, which pumps about 40 percent of the world’s oil, has gathered four times this year without revising official output targets.
Rising oil prices have encouraged some OPEC members to renege on their pledge in 2008 to reduce supply by 4.2 million barrels a day. Secretary-General Abdalla el-Badri said he wants quota compliance to improve to between 75 percent and 80 percent from the current level of about 60 percent.
“No change in quotas was largely expected by the market,” said Kaha Kiknavelidze, a managing partner at London-based Rioni Capital Partners LLP, a hedge fund that specializes in emerging markets. “More important is compliance, which has deteriorated meaningfully. That puts pressure on prices.”
Brent crude oil for February settlement traded at $73.40 a barrel on the London-based ICE Futures Europe exchange, down 6 cents, at 10:48 a.m. Singapore time. Yesterday, the contract rose 47 cents, or 0.6 percent, to settle at $73.46 a barrel.
Oil climbed above $74 a barrel yesterday after the National Association of Realtors reported November sales of existing homes increased at the highest annual rate since February 2007, indicating the industry at the center of the recession has stabilized. Separately, the American Petroleum Institute said the country’s crude oil and refined-product stockpiles declined.
“The psychology has changed significantly,” said Toby Hassall, a research analyst at CWA Global Markets Pty in Sydney. “There are increasing signs of recovery in the key market, the U.S.”
Crude oil for February delivery was at $74.42 a barrel, up 2 cents, in electronic trading on the New York Mercantile Exchange at 10:49 a.m. Singapore time. Futures closed yesterday at $74.40, the highest settlement since Dec. 4. There will be no trading Dec. 25 for Christmas and on Jan. 1 for New Year’s Day.
Oil, which lost 54 percent in 2008, has gained 67 percent this year on speculation global demand for fuels will increase with the economic rebound.
Yesterday’s existing-homes sales figure rate exceeded the highest estimate from economists surveyed by Bloomberg News. The Commerce Department is expected to report today November sales of new homes also increased.
Stockpiles Fall
Commercially held crude oil inventories in the U.S. fell 3.71 million barrels last week to 328.8 million, said the industry-funded American Petroleum Institute. Gasoline stockpiles declined 1.1 million barrels to 215.9 million, the biggest drop in 10 weeks. Distillate fuel supplies, which include heating oil and diesel, slipped 745,000 barrels to 165.1 million, the API said.
An Energy Department report today is expected to show crude oil stockpiles fell 1.6 million barrels in the week ended Dec. 18, according to the median of estimates from 16 analysts polled by Bloomberg News. Distillate inventories probably dropped 2 million barrels, the survey showed. The report will be released at 10:30 a.m. in Washington.
U.S. gasoline demand rose the most in three weeks as drivers in the northeast filled up before a snowstorm, according to MasterCard Inc., the second-biggest credit card company.
Motorists bought an average 9.57 million barrels a day of gasoline in the week to Dec. 18, MasterCard said yesterday in its SpendingPulse report. Consumption increased 2.9 percent from the previous week and 1.7 percent from a year earlier.
OPEC Quotas
The Organization of Petroleum Exporting Countries agreed at a meeting yesterday in Luanda, Angola, to hold production quotas at 24.845 million barrels a day. The 12-member group, which pumps about 40 percent of the world’s oil, has gathered four times this year without revising official output targets.
Rising oil prices have encouraged some OPEC members to renege on their pledge in 2008 to reduce supply by 4.2 million barrels a day. Secretary-General Abdalla el-Badri said he wants quota compliance to improve to between 75 percent and 80 percent from the current level of about 60 percent.
“No change in quotas was largely expected by the market,” said Kaha Kiknavelidze, a managing partner at London-based Rioni Capital Partners LLP, a hedge fund that specializes in emerging markets. “More important is compliance, which has deteriorated meaningfully. That puts pressure on prices.”
Brent crude oil for February settlement traded at $73.40 a barrel on the London-based ICE Futures Europe exchange, down 6 cents, at 10:48 a.m. Singapore time. Yesterday, the contract rose 47 cents, or 0.6 percent, to settle at $73.46 a barrel.
Tuesday, December 22, 2009
India 'pleased' with climate summit
India says it is pleased at the outcome of the recently concluded climate change talks in Copenhagen.
Environment Minister Jairam Ramesh told MPs that India had been able to resist pressure from the developed world to sign up to binding emission targets.
The Copenhagen agreement has been criticised in India.
Critics say the country was forced to give up its sovereignty and agree to international checking of its efforts to lower its greenhouse gas emissions.
Facing parliament for the first time since he returned from the talks, Mr Ramesh was upbeat.
He said all of India's concerns had been safeguarded which included resisting signing up to legally binding emission targets and identifying a peak year for carbon emissions.
In fact, he added, the BASIC group of countries which includes Brazil, South Africa, India and China had emerged as a powerful force in climate change negotiations, especially in the face of relentless pressure from richer countries.
But, he said, India's approach had been recognised as constructive.
The Copenhagen agreement has been strongly criticised by environmentalists and opposition parties in India.
Environment Minister Jairam Ramesh told MPs that India had been able to resist pressure from the developed world to sign up to binding emission targets.
The Copenhagen agreement has been criticised in India.
Critics say the country was forced to give up its sovereignty and agree to international checking of its efforts to lower its greenhouse gas emissions.
Facing parliament for the first time since he returned from the talks, Mr Ramesh was upbeat.
He said all of India's concerns had been safeguarded which included resisting signing up to legally binding emission targets and identifying a peak year for carbon emissions.
In fact, he added, the BASIC group of countries which includes Brazil, South Africa, India and China had emerged as a powerful force in climate change negotiations, especially in the face of relentless pressure from richer countries.
But, he said, India's approach had been recognised as constructive.
The Copenhagen agreement has been strongly criticised by environmentalists and opposition parties in India.
Monday, December 14, 2009
November inflation at 4.78% YoY on high food prices
The annual rate of inflation based on monthly wholesale price index (WPI) for the month of November is up 4.78% (provisional) as against 1.34% in October 2009 and 8.48% in November 2008. In the fiscal year, inflation build up so far was 7.54% compared to 3.86% in the corresponding period of last year.
Inflation internals (MoM)
- Primary articles up 2.6% at 280.6
- Food items up 3.2% at 287.1
- Non-food items up 1.6% at 240.1
- Fuel group at 344.9
- Manufactured products up 1.2% at 211.1
Manufacturing inflation has come in as a surprise leading experts to believe that RBI action is almost imminent now.
Saugato Bhattacharya of Axis Bank believes this is a matter of concern, and quite disturbing, "We didn't expect manufacturing inflation to go up this quickly in November," he said in an interview on CNBC-TV18.
"The RBI would be forced to take this number seriously," he said adding that a degree of tightening is almost imminent now.
According to him, the priority would be to tighten liquidity. He expects the RBI to start doing this through a cash reserve ratio (CRR) hike first. Thereafter, he expects that interest rates would be hiked.
He expects the year end inflation to be around 7.5-8% (around March-April). That maybe the peak and inflation may not rise after that, he said.
Inflation internals (MoM)
- Primary articles up 2.6% at 280.6
- Food items up 3.2% at 287.1
- Non-food items up 1.6% at 240.1
- Fuel group at 344.9
- Manufactured products up 1.2% at 211.1
Manufacturing inflation has come in as a surprise leading experts to believe that RBI action is almost imminent now.
Saugato Bhattacharya of Axis Bank believes this is a matter of concern, and quite disturbing, "We didn't expect manufacturing inflation to go up this quickly in November," he said in an interview on CNBC-TV18.
"The RBI would be forced to take this number seriously," he said adding that a degree of tightening is almost imminent now.
According to him, the priority would be to tighten liquidity. He expects the RBI to start doing this through a cash reserve ratio (CRR) hike first. Thereafter, he expects that interest rates would be hiked.
He expects the year end inflation to be around 7.5-8% (around March-April). That maybe the peak and inflation may not rise after that, he said.
Tuesday, December 08, 2009
Repower Expects Wind Turbine Orders to Rise in 2010, CEO Says
Dec. 8 (Bloomberg) -- Repower Systems AG, the German unit of India’s Suzlon Energy Ltd., expects wind-turbine orders to rise next year as climate-change talks in Copenhagen may increase demand for renewable energy.
“The industry was pretty low on order inflow in 2009 and we are seeing the first signs of that easing up a bit,” Repower Chief Executive Officer Per Hornung Pedersen said yesterday, declining to give a numerical forecast. “The signals from Copenhagen are very important.”
Negotiators from 192 nations at the Copenhagen talks that started yesterday may agree on a framework to curb emissions from power plants and factories blamed for global warming. An accord with strong global endorsement to fight climate change could potentially accelerate the wind-power industry, Denmark- based MAKE Consulting said in a Nov. 24 report.
Repower yesterday announced an order from the U.S. to supply 70 turbines capable of generating 143.5 megawatts of power, the second deal in less than two weeks for the Hamburg- based company.
Suzlon rose 4.7 percent to 83.05 rupees in Mumbai trading yesterday, the most since Nov. 30. Repower gained 0.3 percent to 115.05 euros in Frankfurt.
“The industry was pretty low on order inflow in 2009 and we are seeing the first signs of that easing up a bit,” Repower Chief Executive Officer Per Hornung Pedersen said yesterday, declining to give a numerical forecast. “The signals from Copenhagen are very important.”
Negotiators from 192 nations at the Copenhagen talks that started yesterday may agree on a framework to curb emissions from power plants and factories blamed for global warming. An accord with strong global endorsement to fight climate change could potentially accelerate the wind-power industry, Denmark- based MAKE Consulting said in a Nov. 24 report.
Repower yesterday announced an order from the U.S. to supply 70 turbines capable of generating 143.5 megawatts of power, the second deal in less than two weeks for the Hamburg- based company.
Suzlon rose 4.7 percent to 83.05 rupees in Mumbai trading yesterday, the most since Nov. 30. Repower gained 0.3 percent to 115.05 euros in Frankfurt.
India Car Sales Rise Most in 5 Years as Economy Grows
Dec. 8 (Bloomberg) -- India’s passenger car sales rose the most in more than five years in November as cheaper loan rates and economic expansion lifted demand for Maruti Suzuki India Ltd. hatchbacks and Tata Motors Ltd.’s Nano.
Sales totaled 133,687 units in November, 61 percent more than the 83,121 sold a year earlier, the Society of Indian Automobile Manufacturers said in a statement in New Delhi today. That was the biggest surge since February 2004, according to data compiled by Bloomberg.
General Motors Co., Hyundai Motor Co. and Volkswagen AG have boosted investment in China and India as the world’s two most populous nations withstand a slump in global auto sales on government support and economic growth. China, due to report its November auto sales data today, is poised to surpass the U.S. as the world’s largest auto market this year.
“India and China are the two hottest auto markets in the world and no one can afford to ignore them,” said Deepesh Rathore, a New Delhi-based analyst at industry consultant IHS Global Insight Inc. “Anyone who isn’t strong in India will try to emerge a key player as the growth here is sustainable in the long term.”
China Demand
India’s economy expanded at the fastest pace in 1 1/2 years in the quarter ended September, helped by record-low interest rates and an economic stimulus. GM and Toyota Motor Corp. are among carmakers increasing bets on India, China and other emerging markets as sales in the U.S., Japan and Europe tumble.
Sales of trucks and buses jumped 98 percent in November from a year earlier to 40,847 while motorcycle and scooter sales gained 39 percent to 790,613, according to today’s statement.
Gross domestic product grew 7.9 percent in India in the last quarter, helped by the central bank holding its key reverse repurchase rate at a record-low 3.25 percent since April. Government spending and tax cuts took the value of stimulus measures to 12 percent of GDP.
China, Japan, and the U.S. are among countries that offered a mix of credits, tax breaks and subsidies to boost auto sales by getting consumers to trade-in old cars for newer, more fuel efficient models.
SAIC Motor Corp., China’s biggest automaker, said earlier today its November sales rose 91 percent to 252,190 units, according to a filing to Shanghai’s stock exchange. Sales for the first 11 months of the year rose 54 percent to 2.44 million units, according to the statement.
Middle Class
The automaker last week formed a venture with GM, with an investment of $650 million, to enter India.
India’s car sales are forecast to grow at least 10 percent in the year to March, the group of all vehicle makers in the country predicted in August. The 13 carmakers in India sold 1.22 million cars in the fiscal year ended March.
Sales may reach 3 million units annually by 2015, helped by new models such as the Nano, the world’s cheapest car, and higher incomes among a middle class of about 50 million people, according to a 2006 government forecast. The demand has prompted carmakers including Ford Motor Co. and Volkswagen AG to build factories and introduce new models in India, Asia’s fourth- biggest automotive market.
Sales totaled 133,687 units in November, 61 percent more than the 83,121 sold a year earlier, the Society of Indian Automobile Manufacturers said in a statement in New Delhi today. That was the biggest surge since February 2004, according to data compiled by Bloomberg.
General Motors Co., Hyundai Motor Co. and Volkswagen AG have boosted investment in China and India as the world’s two most populous nations withstand a slump in global auto sales on government support and economic growth. China, due to report its November auto sales data today, is poised to surpass the U.S. as the world’s largest auto market this year.
“India and China are the two hottest auto markets in the world and no one can afford to ignore them,” said Deepesh Rathore, a New Delhi-based analyst at industry consultant IHS Global Insight Inc. “Anyone who isn’t strong in India will try to emerge a key player as the growth here is sustainable in the long term.”
China Demand
India’s economy expanded at the fastest pace in 1 1/2 years in the quarter ended September, helped by record-low interest rates and an economic stimulus. GM and Toyota Motor Corp. are among carmakers increasing bets on India, China and other emerging markets as sales in the U.S., Japan and Europe tumble.
Sales of trucks and buses jumped 98 percent in November from a year earlier to 40,847 while motorcycle and scooter sales gained 39 percent to 790,613, according to today’s statement.
Gross domestic product grew 7.9 percent in India in the last quarter, helped by the central bank holding its key reverse repurchase rate at a record-low 3.25 percent since April. Government spending and tax cuts took the value of stimulus measures to 12 percent of GDP.
China, Japan, and the U.S. are among countries that offered a mix of credits, tax breaks and subsidies to boost auto sales by getting consumers to trade-in old cars for newer, more fuel efficient models.
SAIC Motor Corp., China’s biggest automaker, said earlier today its November sales rose 91 percent to 252,190 units, according to a filing to Shanghai’s stock exchange. Sales for the first 11 months of the year rose 54 percent to 2.44 million units, according to the statement.
Middle Class
The automaker last week formed a venture with GM, with an investment of $650 million, to enter India.
India’s car sales are forecast to grow at least 10 percent in the year to March, the group of all vehicle makers in the country predicted in August. The 13 carmakers in India sold 1.22 million cars in the fiscal year ended March.
Sales may reach 3 million units annually by 2015, helped by new models such as the Nano, the world’s cheapest car, and higher incomes among a middle class of about 50 million people, according to a 2006 government forecast. The demand has prompted carmakers including Ford Motor Co. and Volkswagen AG to build factories and introduce new models in India, Asia’s fourth- biggest automotive market.
Japan Releases Stimulus Package as Recovery Weakens
Dec. 8 (Bloomberg) -- The Japanese government unveiled a 7.2 trillion yen ($81 billion) economic stimulus package amid signs the recovery and Prime Minister Yukio Hatoyama’s popularity are waning.
Hatoyama’s first stimulus plan includes 3.5 trillion yen to help regions, 600 billion yen for employment and 800 billion yen on environmental initiatives, the Cabinet said today in a statement in Tokyo. The measures had been delayed because of haggling within the coalition government.
The Democratic Party of Japan, which took office in September pledging to support households battered by two decades of economic stagnation, is grappling with a slide in prices and a surging yen. The government will say third-quarter economic growth was slower than initially reported in revised figures tomorrow, according to economists surveyed by Bloomberg News.
“It’s a necessary step,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “Without another stimulus package, it’s very likely that the economy will fall back into recession. The government simply can’t risk this right now.”
The yen has weakened since climbing to a 14-year high of 84.83 against the dollar on Nov. 27. The Japanese currency traded at 89.07 at 11:41 a.m. in Tokyo from 88.99 before the announcement. The Nikkei 225 Stock Average fell 0.5 percent.
Deflation Risk
“Risk factors include a deterioration in employment conditions, sluggish demand because of deflationary pressure, a rise in long-term interest rates and movements in the currency markets,” the statement said.
“Excessive and disorderly movements in foreign-exchange rates can inflict considerable adverse impact on the economic recovery and the government will watch movements sternly.”
Japanese policy makers are adding stimulus measures just their counterparts around the world consider how to withdraw them as the global economy recovers.
The Bank of Japan released a 10 trillion yen credit program last week, satisfying government calls for it to do more to fight declining prices. Under the program, the central bank will offer three-month loans to commercial banks at 0.1 percent interest. In a meeting with central bank Governor Masaaki Shirakawa last week, Hatoyama applauded the move and refrained from pushing for further monetary easing.
Kamei’s Call
The People’s New Party, a junior coalition member headed by Financial Services Minister Shizuka Kamei, blocked the stimulus plan last week, calling for a larger package to defeat deflation.
Coalition parties agreed to boost the size of the measures by 100 billion yen to accommodate those requests. That increase will need to be funded with so-called construction bonds, Motohisa Furukawa, a vice minister at the Cabinet Office, told reporters late yesterday.
The government said some of the package will be paid for with funds frozen from the previous administration’s extra budget. It wants to avoid selling new bonds “as much as possible,” the statement said.
Japan has the world’s largest public debt, with liabilities that are approaching twice the size of the economy.
Bond Sales
Finance Minister Hirohisa Fujii said bond sales for the current fiscal year will exceed tax revenue for the first time in the postwar period. The government will sell 53.5 trillion yen in bonds, more than the 44 trillion yen budgeted in April, he said. Tax revenue will slump to 36.9 trillion yen, less than the 46 trillion yen projected.
Today’s package includes 3 trillion yen in tax grants to local governments to make up for a revenue shortfall.
Heizo Takenaka, who was economy minister under former Prime Minister Junichiro Koizumi, yesterday attacked the government for lacking policy direction. “There’s no control tower in the policy-making system,” he said in an interview in Seoul.
The premier’s sliding popularity may hurt his party’s momentum ahead of upper house elections in July 2010. His approval rating fell below 60 percent for the first time, declining to 59 percent from last month’s 63 percent, the Yomiuri newspaper reported yesterday.
Exports Improve
Japan’s exports fell at the slowest pace in a year in October as worldwide government spending spurred demand for the nation’s products, a Finance Ministry report showed today. That helped the trade surplus expand 42.7 percent from a year earlier to 1.4 trillion yen.
Other reports show the expansion may be weakening. Industrial production advanced at the slowest pace in eight months in October, wages slid for a 17th month, and consumer prices fell a near-record 2.2 percent.
Gross domestic product rose at an annual 2.8 percent rate in the three months ended Sept. 30, according to the median estimate of 17 economists surveyed by Bloomberg News ahead of tomorrow’s revised figures. That would be slower than the 4.8 percent the Cabinet Office initially reported, reflecting figures last week that showed companies cut capital spending at a record pace in the period.
The world’s second-largest economy will probably shrink 5.4 percent this year, more than a 4.2 percent contraction in the euro area and a 2.7 percent drop in the U.S., the International Monetary Fund forecast in October.
Hatoyama’s first stimulus plan includes 3.5 trillion yen to help regions, 600 billion yen for employment and 800 billion yen on environmental initiatives, the Cabinet said today in a statement in Tokyo. The measures had been delayed because of haggling within the coalition government.
The Democratic Party of Japan, which took office in September pledging to support households battered by two decades of economic stagnation, is grappling with a slide in prices and a surging yen. The government will say third-quarter economic growth was slower than initially reported in revised figures tomorrow, according to economists surveyed by Bloomberg News.
“It’s a necessary step,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “Without another stimulus package, it’s very likely that the economy will fall back into recession. The government simply can’t risk this right now.”
The yen has weakened since climbing to a 14-year high of 84.83 against the dollar on Nov. 27. The Japanese currency traded at 89.07 at 11:41 a.m. in Tokyo from 88.99 before the announcement. The Nikkei 225 Stock Average fell 0.5 percent.
Deflation Risk
“Risk factors include a deterioration in employment conditions, sluggish demand because of deflationary pressure, a rise in long-term interest rates and movements in the currency markets,” the statement said.
“Excessive and disorderly movements in foreign-exchange rates can inflict considerable adverse impact on the economic recovery and the government will watch movements sternly.”
Japanese policy makers are adding stimulus measures just their counterparts around the world consider how to withdraw them as the global economy recovers.
The Bank of Japan released a 10 trillion yen credit program last week, satisfying government calls for it to do more to fight declining prices. Under the program, the central bank will offer three-month loans to commercial banks at 0.1 percent interest. In a meeting with central bank Governor Masaaki Shirakawa last week, Hatoyama applauded the move and refrained from pushing for further monetary easing.
Kamei’s Call
The People’s New Party, a junior coalition member headed by Financial Services Minister Shizuka Kamei, blocked the stimulus plan last week, calling for a larger package to defeat deflation.
Coalition parties agreed to boost the size of the measures by 100 billion yen to accommodate those requests. That increase will need to be funded with so-called construction bonds, Motohisa Furukawa, a vice minister at the Cabinet Office, told reporters late yesterday.
The government said some of the package will be paid for with funds frozen from the previous administration’s extra budget. It wants to avoid selling new bonds “as much as possible,” the statement said.
Japan has the world’s largest public debt, with liabilities that are approaching twice the size of the economy.
Bond Sales
Finance Minister Hirohisa Fujii said bond sales for the current fiscal year will exceed tax revenue for the first time in the postwar period. The government will sell 53.5 trillion yen in bonds, more than the 44 trillion yen budgeted in April, he said. Tax revenue will slump to 36.9 trillion yen, less than the 46 trillion yen projected.
Today’s package includes 3 trillion yen in tax grants to local governments to make up for a revenue shortfall.
Heizo Takenaka, who was economy minister under former Prime Minister Junichiro Koizumi, yesterday attacked the government for lacking policy direction. “There’s no control tower in the policy-making system,” he said in an interview in Seoul.
The premier’s sliding popularity may hurt his party’s momentum ahead of upper house elections in July 2010. His approval rating fell below 60 percent for the first time, declining to 59 percent from last month’s 63 percent, the Yomiuri newspaper reported yesterday.
Exports Improve
Japan’s exports fell at the slowest pace in a year in October as worldwide government spending spurred demand for the nation’s products, a Finance Ministry report showed today. That helped the trade surplus expand 42.7 percent from a year earlier to 1.4 trillion yen.
Other reports show the expansion may be weakening. Industrial production advanced at the slowest pace in eight months in October, wages slid for a 17th month, and consumer prices fell a near-record 2.2 percent.
Gross domestic product rose at an annual 2.8 percent rate in the three months ended Sept. 30, according to the median estimate of 17 economists surveyed by Bloomberg News ahead of tomorrow’s revised figures. That would be slower than the 4.8 percent the Cabinet Office initially reported, reflecting figures last week that showed companies cut capital spending at a record pace in the period.
The world’s second-largest economy will probably shrink 5.4 percent this year, more than a 4.2 percent contraction in the euro area and a 2.7 percent drop in the U.S., the International Monetary Fund forecast in October.
Thursday, December 03, 2009
Bank of America to Repay Bailout, Easing CEO Search
Dec. 3 (Bloomberg) -- Bank of America Corp., the nation’s biggest lender, will repay $45 billion of U.S. government bailout funds, helping free the bank from curbs on executive pay that have hampered its search for a new leader.
The bank will repay the Troubled Asset Relief Program using $26.2 billion of “excess liquidity” and $18.8 billion from the sale of securities, according to a statement. The firm plans to increase equity by $4 billion through asset sales, and will issue $1.7 billion of restricted stock instead of year-end bonuses to some employees.
Bank of America’s two rounds of U.S. funding included $20 billion to help cushion losses tied to the takeover of Merrill Lynch & Co. The planned repayment will ease the bank’s effort to replace Chief Executive Officer Kenneth D. Lewis, who announced his departure in September.
Dilution for shareholders will be “substantial,” said William Fitzpatrick, an analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1 billion, including Bank of America shares. “It looks like this was done for the incoming chief executive,” he said. “You take out the compensation restrictions and everything else that went along with the government ownership.”
Bank of America, based in Charlotte, North Carolina, rose to $16.23 in German trading today, up 3.7 percent from its $15.65 close in New York yesterday. The shares have gained 11 percent this year on the New York Stock Exchange after plummeting 66 percent in 2008.
Curl, Price
The repayment was negotiated by Chief Risk Officer Greg Curl and Chief Financial Officer Joe L. Price, a person familiar with the matter said. The two executives had approval from the board to close the deal once regulators including the Treasury, the Federal Reserve and the Office of the Comptroller of the Currency agreed to it, the person said, speaking anonymously because the details of the talks aren’t public.
Bank officials have cited Curl, 61, as one of two internal candidates most likely to succeed Lewis and his role in negotiating the exit from TARP makes him the favorite, said Anthony Polini, an analyst at Raymond James Financial Inc. While the board continues the search process, the agreement enhances Curl’s prospects, said a person familiar with the process.
No decision has been made with both internal and external candidates under consideration, spokesman Robert Stickler said in an interview. “It removes the stigma we’ve had as a company,” he said.
Limits on Pay
Repaying TARP funds removes Bank of America from limits on compensation required by Kenneth Feinberg, the U.S. special compensation master, Stickler said.
“This is huge for Bank of America’s ability to attract a new CEO,” said Jaime Peters, an analyst at Morningstar Inc. “No longer will they have to say we don’t know how much we can pay you unless some guy in Washington D.C. tells us.”
At least four external candidates, including Citigroup Inc. director Michael O’Neill and Bank of New York Mellon CEO Robert Kelly, rebuffed approaches.
Ending TARP saves $3.6 billion a year in dividend payments, which may help boost earnings next year, Raymond James’s Polini said in an interview. It also means CEO Lewis, 62, can fulfill his vow to arrange the return of all bailout funds before his tenure ends at the end of the year. Lewis endured criticism from lawmakers, regulators and shareholders about his handling of the Merrill Lynch purchase.
JPMorgan Competition “
We appreciate the critical role that the U.S. government played last fall in helping to stabilize financial markets, and we are pleased to be able to fully repay the investment, with interest,” Lewis said in the statement.
The move helps Bank of America compete with rivals including JPMorgan Chase & Co., which already repaid bailout funds, Stickler said.
Bank of America’s plan will reduce income available to common shareholders in the fourth quarter by $4.1 billion, the company said. Terms call for issuing “common equivalent securities,” and shareholders will be asked to approve an increase in authorized shares so they could be converted into common stock. The new securities have warrants to buy a total of 60 million shares of common stock at a penny a share if stockholders don’t vote to approve the increase.
‘Bitter Pill’
The asset sales, designed to boost equity, must be in contract and approved by the Federal Reserve by June 30, Bank of America said. If the sales aren’t completed by the end of 2010, the bank agreed to sell common equity.
The plan calls for the bank to buy back 1.8 million preferred shares sold to the Treasury Department. For now, the bank isn’t buying back warrants also awarded to the U.S., Bank of America said. The warrants are worth from $943 million to $2.5 billion, depending on the type of valuation used, said Linus Wilson, a finance professor at the University of Louisiana at Lafayette who has studied TARP.
Bank of America is offering the common equivalent securities because it doesn’t have stockholder authority to issue enough shares to raise the $18.8 billion of common equity, Stickler said. The sale is commencing immediately, he said.
“It’s a bitter pill, but longer term it outweighs the hit to the stock,” said Matthew McCormick, a banking analyst and portfolio manager at Bahl & Gaynor Inc. in Cincinnati, which oversees $2.5 billion. “I thought it would take longer than this for Bank of America to get out of it. It shows that the government couldn’t attract anyone of substantial talent unless they paid a fair wage.”
The bank will repay the Troubled Asset Relief Program using $26.2 billion of “excess liquidity” and $18.8 billion from the sale of securities, according to a statement. The firm plans to increase equity by $4 billion through asset sales, and will issue $1.7 billion of restricted stock instead of year-end bonuses to some employees.
Bank of America’s two rounds of U.S. funding included $20 billion to help cushion losses tied to the takeover of Merrill Lynch & Co. The planned repayment will ease the bank’s effort to replace Chief Executive Officer Kenneth D. Lewis, who announced his departure in September.
Dilution for shareholders will be “substantial,” said William Fitzpatrick, an analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1 billion, including Bank of America shares. “It looks like this was done for the incoming chief executive,” he said. “You take out the compensation restrictions and everything else that went along with the government ownership.”
Bank of America, based in Charlotte, North Carolina, rose to $16.23 in German trading today, up 3.7 percent from its $15.65 close in New York yesterday. The shares have gained 11 percent this year on the New York Stock Exchange after plummeting 66 percent in 2008.
Curl, Price
The repayment was negotiated by Chief Risk Officer Greg Curl and Chief Financial Officer Joe L. Price, a person familiar with the matter said. The two executives had approval from the board to close the deal once regulators including the Treasury, the Federal Reserve and the Office of the Comptroller of the Currency agreed to it, the person said, speaking anonymously because the details of the talks aren’t public.
Bank officials have cited Curl, 61, as one of two internal candidates most likely to succeed Lewis and his role in negotiating the exit from TARP makes him the favorite, said Anthony Polini, an analyst at Raymond James Financial Inc. While the board continues the search process, the agreement enhances Curl’s prospects, said a person familiar with the process.
No decision has been made with both internal and external candidates under consideration, spokesman Robert Stickler said in an interview. “It removes the stigma we’ve had as a company,” he said.
Limits on Pay
Repaying TARP funds removes Bank of America from limits on compensation required by Kenneth Feinberg, the U.S. special compensation master, Stickler said.
“This is huge for Bank of America’s ability to attract a new CEO,” said Jaime Peters, an analyst at Morningstar Inc. “No longer will they have to say we don’t know how much we can pay you unless some guy in Washington D.C. tells us.”
At least four external candidates, including Citigroup Inc. director Michael O’Neill and Bank of New York Mellon CEO Robert Kelly, rebuffed approaches.
Ending TARP saves $3.6 billion a year in dividend payments, which may help boost earnings next year, Raymond James’s Polini said in an interview. It also means CEO Lewis, 62, can fulfill his vow to arrange the return of all bailout funds before his tenure ends at the end of the year. Lewis endured criticism from lawmakers, regulators and shareholders about his handling of the Merrill Lynch purchase.
JPMorgan Competition “
We appreciate the critical role that the U.S. government played last fall in helping to stabilize financial markets, and we are pleased to be able to fully repay the investment, with interest,” Lewis said in the statement.
The move helps Bank of America compete with rivals including JPMorgan Chase & Co., which already repaid bailout funds, Stickler said.
Bank of America’s plan will reduce income available to common shareholders in the fourth quarter by $4.1 billion, the company said. Terms call for issuing “common equivalent securities,” and shareholders will be asked to approve an increase in authorized shares so they could be converted into common stock. The new securities have warrants to buy a total of 60 million shares of common stock at a penny a share if stockholders don’t vote to approve the increase.
‘Bitter Pill’
The asset sales, designed to boost equity, must be in contract and approved by the Federal Reserve by June 30, Bank of America said. If the sales aren’t completed by the end of 2010, the bank agreed to sell common equity.
The plan calls for the bank to buy back 1.8 million preferred shares sold to the Treasury Department. For now, the bank isn’t buying back warrants also awarded to the U.S., Bank of America said. The warrants are worth from $943 million to $2.5 billion, depending on the type of valuation used, said Linus Wilson, a finance professor at the University of Louisiana at Lafayette who has studied TARP.
Bank of America is offering the common equivalent securities because it doesn’t have stockholder authority to issue enough shares to raise the $18.8 billion of common equity, Stickler said. The sale is commencing immediately, he said.
“It’s a bitter pill, but longer term it outweighs the hit to the stock,” said Matthew McCormick, a banking analyst and portfolio manager at Bahl & Gaynor Inc. in Cincinnati, which oversees $2.5 billion. “I thought it would take longer than this for Bank of America to get out of it. It shows that the government couldn’t attract anyone of substantial talent unless they paid a fair wage.”
Wednesday, December 02, 2009
Microsoft Windows 7 problem 'could affect millions'
Microsoft has been investigating reports that some computers running Windows 7 crash as soon as the user logs on
Users have been complaining on internet forums about the "black screen of death", which causes the screen of their Windows 7 machine to turn black and the computer to crash when a user logs on.
Microsoft confirmed that it was investigating the possibility that a security update, released on Thursday, could be the root of the problem but later said that it was not the cause.
"Microsoft has investigated reports that its November security updates made changes to permissions in the registry that that are resulting in system issues for some customers," a statement read.
"The company has found those reports to be inaccurate and our comprehensive investigation has shown that none of the recently released updates are related to the behavior described in the reports."
It added: "Our support organization is also not seeing this as an issue."
The "black screen of death" also appears to affect other Windows operating systems, including Windows 7's predecessor, Windows Vista, as well as Windows XP. When users log on, they see a completely black screen instead of the usual start menu, desktop icons and system tray.
According to the software firm Prevx, which has issued a patch to resolve the problem, millions of computer users could be affected by the "debilitating" glitch.
"Users have resorted to reloading Windows as a last-ditch effort to fix the problem," said the company in a blog post.
"The cause appears to be a change in the Windows operating system lockdown of registry keys," said Dave Kennerley, a support engineer with Prevx. "This change has the effect of invalidating several key registry entries if they are updated without consideration of the new ACL (access control list) rules being applied."
Microsoft advised those affected by the problem to contact its customer service line. A spokesman said the problems didn't match any existing known issues. Microsoft is yet to release a patch to resolve the problem.
Tuesday, December 01, 2009
India GDP (Jul-Sept) & Dubai effects: Very strong growth, small Dubai impact
As upside surprises go, this was a big one. While we and the market
were looking for a 6.3% year-on-year rise, GDP jumped 7.9% (up from 6.1%
in April-June). This is the strongest figure since the January-March
quarter of 2008 and consistent, on our calculations, with a seasonally
adjusted quarter-on-quarter rise in GDP of 3.3% (13.9% annualised). We
believe this to be the biggest rise the Indian economy has seen since
the quarterly data began in 1996! An extraordinary result and one which
will no doubt make the RBI sit up and take notice. We can safely say
that the chances of a rate move before the end of December have risen
(although we are sticking with the January call for now).
The breakdown of the release showed agricultural GDP rising 0.9%
year-on-year, which in turn implies that ex-agricultural GDP was
up 9% from 6.9% in the previous quarter.
The improvement in ex-agricultural growth was driven both by
manufacturing, where growth leapt from 3.4% to 9.2%, as well as
services (9.3% from 7.8%). Given we already knew from the monthly
numbers that the industrial sector had picked up smartly the
bigger surprise was services. Here, however, one can question the
quality of the improvement as growth in "community, personal and
social services" all but doubled to 12.7% from 6.8%. This is
typically related to government spending.
Financial services actually saw growth slip to 7.7% from 8.1%,
while "trade, hotels, transport and communication" registered 8.5%
growth, up modestly from 8.1% previously.
Today's release will inevitably lead to a raft of upward revisions both
to this year's growth forecast and perhaps those for 2010/11 as well.
Our own 6.2% number for the current fiscal year is certainly looking on
the low side (we estimate quarter-on-quarter GDP would have to be flat
in both fiscal Q3 and Q4 to achieve it), but we will retain our top-end
number for the following fiscal year of 8.5%.
India impact of Dubai Debacle
There are a few observations to make in connection with the developments
in Dubai, which could impact both remittance and trade flows:
Indians living in the Gulf remitted USD27bn in 2007
Roughly 4.5 million Indians live and work in the Gulf of which 2
million are in the UAE
If we assume that 1.5 million of those are based in Dubai then in the
absolute worst case scenario, where all remittances stopped, about
USD 9bn of inflows would be lost (1.5/4.5*USD27bn). This is
equivalent to 0.7% of GDP
Remittances from the Middle East are estimated to account for about
25% of the Indian State of Kerala's economy
USD17.5bn of India's exports went to the UAE in 2008/09 (10% of the
country's total merchandise exports). This compares with USD19.5bn
which went to the US in the same year, making the UAE India's second
most important export destination.
Apart from food items, where demand is unlikely to be impacted that
much (although India's ability to exports such products will be
effected by the drought), the other major export to the UAE from
India is, slightly strangely, "mineral fuels and oils". These
amounted to USD4.7bn in 2007/08 (the latest data available).
Overall, there is likely to some direct impact of the Dubai debacle on
remittances into India as well on exports but, in our judgment, a fairly
small one - certainly within the margin of forecasting error.
were looking for a 6.3% year-on-year rise, GDP jumped 7.9% (up from 6.1%
in April-June). This is the strongest figure since the January-March
quarter of 2008 and consistent, on our calculations, with a seasonally
adjusted quarter-on-quarter rise in GDP of 3.3% (13.9% annualised). We
believe this to be the biggest rise the Indian economy has seen since
the quarterly data began in 1996! An extraordinary result and one which
will no doubt make the RBI sit up and take notice. We can safely say
that the chances of a rate move before the end of December have risen
(although we are sticking with the January call for now).
The breakdown of the release showed agricultural GDP rising 0.9%
year-on-year, which in turn implies that ex-agricultural GDP was
up 9% from 6.9% in the previous quarter.
The improvement in ex-agricultural growth was driven both by
manufacturing, where growth leapt from 3.4% to 9.2%, as well as
services (9.3% from 7.8%). Given we already knew from the monthly
numbers that the industrial sector had picked up smartly the
bigger surprise was services. Here, however, one can question the
quality of the improvement as growth in "community, personal and
social services" all but doubled to 12.7% from 6.8%. This is
typically related to government spending.
Financial services actually saw growth slip to 7.7% from 8.1%,
while "trade, hotels, transport and communication" registered 8.5%
growth, up modestly from 8.1% previously.
Today's release will inevitably lead to a raft of upward revisions both
to this year's growth forecast and perhaps those for 2010/11 as well.
Our own 6.2% number for the current fiscal year is certainly looking on
the low side (we estimate quarter-on-quarter GDP would have to be flat
in both fiscal Q3 and Q4 to achieve it), but we will retain our top-end
number for the following fiscal year of 8.5%.
India impact of Dubai Debacle
There are a few observations to make in connection with the developments
in Dubai, which could impact both remittance and trade flows:
Indians living in the Gulf remitted USD27bn in 2007
Roughly 4.5 million Indians live and work in the Gulf of which 2
million are in the UAE
If we assume that 1.5 million of those are based in Dubai then in the
absolute worst case scenario, where all remittances stopped, about
USD 9bn of inflows would be lost (1.5/4.5*USD27bn). This is
equivalent to 0.7% of GDP
Remittances from the Middle East are estimated to account for about
25% of the Indian State of Kerala's economy
USD17.5bn of India's exports went to the UAE in 2008/09 (10% of the
country's total merchandise exports). This compares with USD19.5bn
which went to the US in the same year, making the UAE India's second
most important export destination.
Apart from food items, where demand is unlikely to be impacted that
much (although India's ability to exports such products will be
effected by the drought), the other major export to the UAE from
India is, slightly strangely, "mineral fuels and oils". These
amounted to USD4.7bn in 2007/08 (the latest data available).
Overall, there is likely to some direct impact of the Dubai debacle on
remittances into India as well on exports but, in our judgment, a fairly
small one - certainly within the margin of forecasting error.
My Seven Big Thoughts for the Rural Markets
1. Rural Boom: By 2012 it is expected that every village will be connected by an all weather road, every village will have internet connectivity, and almost every home will have electricity and possess a mobile phone. This significant improvement in rural infrastructure coupled with agriculture reforms already under way we can expect rural markets to reach inflexion point. This will lead to an explosion in demand the way it happened in the urban markets in the mid 90s as a result of easy consumer finance, a boom in the IT sector and steep increase in corporate salaries. Companies are not anticipating this boom and many will be taken by surprise when it happens.
2. Reverse Innovation: Ever since the BoP (Bottom of Pyramid) concept was introduced at the turn of the century many companies have tried to transform their business models through single serve sachets, low cost production, extended mom and pop distribution and NGO partnerships. But in the rush to capture the fortune at the base of the pyramid, something may have been lost-the perspective of the poor themselves. In my view most such initiatives have failed to hit the mark. Pushing the company’s reformulated or repackaged products into villages may indeed produce incremental sales in the short term. But in the long term, this strategy will almost certainly fail because the business remains alien to the communities it intends to serve.
For decades, MNCs have sold modified products in India, a process widely recognized as glocalization. This strategy worked reasonably well with the more affluent urban consumers whose behavior is somewhat similar to Western consumers. With growing rural purchasing power and the three times larger population than urban, companies will need to develop appropriate products for this market. The glocalization or minor modification will not work as rural consumers are very different. This will call for a reverse innovation approach, totally opposite to the glocalization approach. This will involve a bottom up, community embedded process of co-invention and business co-creation. Such an approach will bring the company into close, personal business partnership with BoP communities. While creating enduring value for the community, it will establish a foundation for long-term corporate growth and innovation.
3. New price-performance paradigm: What the rural market requires of products is delivery of decent performance at very low cost. My advise to companies is to aim for 75% performance at 25% cost. Nirma or Ghadi washing powders are excellent lower performance-low cost products compared to the global Surf and Ariel brands. Rural consumers are interested in deriving core benefit from the product and these low priced brands essentially clean clothes adequately. Users are not worried if these powders don’t have a softener or whitener. The sachet as a solution of making the offering more affordable will not work in the long term as the price still continues to remain high.
4. Innovative rural distribution: The biggest challenge in rural remains reaching your product to 600,000 villages compared to 5,000 odd towns in urban. A few new rural distribution and procurement models have been innovated by ITC e-choupal and HUL Project Shakti. But much more needs to be done in this area. One possibility is the use of the social infrastructure being created by government. For example there are over 5 million women’s micro-finance groups in existence and by 2011 the number of groups is expected to jump to 15 million. Thus 150 million rural women or 150 million of the 200 million total households in rural would be linked to self help groups. Can this channel be used innovatively to reach products and services to rural homes?
5. Dedicated Rural teams: Companies will need to shift power to where the growth is by dedicating empowered teams for the rural markets so that they can develop their own strategies and products. A separate sales force is also desirable as the regular force will avoid covering the more difficult and small off-take rural markets. MBAs from B grade small town institutes should be hired. Not only will they work at much lower salaries but will stick around as they belong to the local areas.
6. Inclusive marketing: This is a new concept I have created which goes much beyond BoP. Inclusive marketing looks at the poor not only as consumers but also as producers/suppliers of goods and services. This approach offers promise to add economic value to goods and services contributed by the poor. It can therefore impact poverty positively. ITC’s E-choupal is a perfect example of inclusive marketing. The business model ensures that farmers as producers get better value for their produce. Once their incomes are enhanced the model then uses the same channel that was created for procuring produce to push relevant goods and services needed by the farmers as consumers. Government and the private sector need to come together to promote inclusive marketing and grow the size of the rural pie through the development of reverse distribution channels rather than companies fighting with each other to grab share of the limited pie.
7. New Opportunities; Rural markets now offer a number of new opportunities.
Healthcare: Total rural spending on health care currently is Rs 700 billion and expected to reach Rs 3.5 trillion by 2025, an impressive fivefold increase. Despite the launch of the National Rural Health Mission 80% of health spending will be in the private sector.
Durables consumer financing: In the 90s consumer finance became available easily which led to high growth in sale of durables. Rural consumer finance has become a big opportunity only now with rapid electrification of rural households
Banking: According to a World Bank study bankable people in rural India is 185 million.
Construction and Housing: Currently there is shortage of 40 million houses in rural India.
In conclusion I would say the next growth will come from the rural market and companies that ignore this segment will do so at their own peril.
2. Reverse Innovation: Ever since the BoP (Bottom of Pyramid) concept was introduced at the turn of the century many companies have tried to transform their business models through single serve sachets, low cost production, extended mom and pop distribution and NGO partnerships. But in the rush to capture the fortune at the base of the pyramid, something may have been lost-the perspective of the poor themselves. In my view most such initiatives have failed to hit the mark. Pushing the company’s reformulated or repackaged products into villages may indeed produce incremental sales in the short term. But in the long term, this strategy will almost certainly fail because the business remains alien to the communities it intends to serve.
For decades, MNCs have sold modified products in India, a process widely recognized as glocalization. This strategy worked reasonably well with the more affluent urban consumers whose behavior is somewhat similar to Western consumers. With growing rural purchasing power and the three times larger population than urban, companies will need to develop appropriate products for this market. The glocalization or minor modification will not work as rural consumers are very different. This will call for a reverse innovation approach, totally opposite to the glocalization approach. This will involve a bottom up, community embedded process of co-invention and business co-creation. Such an approach will bring the company into close, personal business partnership with BoP communities. While creating enduring value for the community, it will establish a foundation for long-term corporate growth and innovation.
3. New price-performance paradigm: What the rural market requires of products is delivery of decent performance at very low cost. My advise to companies is to aim for 75% performance at 25% cost. Nirma or Ghadi washing powders are excellent lower performance-low cost products compared to the global Surf and Ariel brands. Rural consumers are interested in deriving core benefit from the product and these low priced brands essentially clean clothes adequately. Users are not worried if these powders don’t have a softener or whitener. The sachet as a solution of making the offering more affordable will not work in the long term as the price still continues to remain high.
4. Innovative rural distribution: The biggest challenge in rural remains reaching your product to 600,000 villages compared to 5,000 odd towns in urban. A few new rural distribution and procurement models have been innovated by ITC e-choupal and HUL Project Shakti. But much more needs to be done in this area. One possibility is the use of the social infrastructure being created by government. For example there are over 5 million women’s micro-finance groups in existence and by 2011 the number of groups is expected to jump to 15 million. Thus 150 million rural women or 150 million of the 200 million total households in rural would be linked to self help groups. Can this channel be used innovatively to reach products and services to rural homes?
5. Dedicated Rural teams: Companies will need to shift power to where the growth is by dedicating empowered teams for the rural markets so that they can develop their own strategies and products. A separate sales force is also desirable as the regular force will avoid covering the more difficult and small off-take rural markets. MBAs from B grade small town institutes should be hired. Not only will they work at much lower salaries but will stick around as they belong to the local areas.
6. Inclusive marketing: This is a new concept I have created which goes much beyond BoP. Inclusive marketing looks at the poor not only as consumers but also as producers/suppliers of goods and services. This approach offers promise to add economic value to goods and services contributed by the poor. It can therefore impact poverty positively. ITC’s E-choupal is a perfect example of inclusive marketing. The business model ensures that farmers as producers get better value for their produce. Once their incomes are enhanced the model then uses the same channel that was created for procuring produce to push relevant goods and services needed by the farmers as consumers. Government and the private sector need to come together to promote inclusive marketing and grow the size of the rural pie through the development of reverse distribution channels rather than companies fighting with each other to grab share of the limited pie.
7. New Opportunities; Rural markets now offer a number of new opportunities.
Healthcare: Total rural spending on health care currently is Rs 700 billion and expected to reach Rs 3.5 trillion by 2025, an impressive fivefold increase. Despite the launch of the National Rural Health Mission 80% of health spending will be in the private sector.
Durables consumer financing: In the 90s consumer finance became available easily which led to high growth in sale of durables. Rural consumer finance has become a big opportunity only now with rapid electrification of rural households
Banking: According to a World Bank study bankable people in rural India is 185 million.
Construction and Housing: Currently there is shortage of 40 million houses in rural India.
In conclusion I would say the next growth will come from the rural market and companies that ignore this segment will do so at their own peril.
India Stocks Advance to Highest in a Month; Reliance Climbs
Dec. 1 (Bloomberg) -- India’s benchmark stock index climbed to its highest in more than a month as Morgan Stanley and Kotak Mahindra Bank Ltd. raised their growth estimates after the country’s economy expanded at the fastest pace in 1 1/2 years.
Reliance Industries Ltd., the nation’s most valuable company, advanced 3.4 percent. Sterlite Industries (India) Ltd., India’s largest copper producer, gained 3 percent.
“India’s GDP growth was way above market expectations and will prompt an upward revision of full year fiscal 2010 growth closer to 7 percent,” said Ashutosh Datar, a Mumbai-based strategist at IIFL Ltd. “The underlying economic momentum has picked up strongly and it will get stronger over the next two to three quarters as global economic recovery builds and domestic demand gets stronger.”
The Bombay Stock Exchange’s Sensitive Index, or Sensex, gained 273.54, or 1.6 percent, to 17,199.76, its highest since Oct. 20. The S&P CNX Nifty Index on the National Stock Exchange rose 1.8 percent to 5,121.90. The BSE 200 Index added 1.8 percent to 2,143.95.
Morgan Stanley expects India’s gross domestic product to expand 6.7 percent in the year ending March 2010, more than its earlier estimate of 6.4 percent, while Kotak increased its forecast to 6.9 percent from 6 percent.
Reliance Industries Ltd., the nation’s most valuable company, advanced 3.4 percent. Sterlite Industries (India) Ltd., India’s largest copper producer, gained 3 percent.
“India’s GDP growth was way above market expectations and will prompt an upward revision of full year fiscal 2010 growth closer to 7 percent,” said Ashutosh Datar, a Mumbai-based strategist at IIFL Ltd. “The underlying economic momentum has picked up strongly and it will get stronger over the next two to three quarters as global economic recovery builds and domestic demand gets stronger.”
The Bombay Stock Exchange’s Sensitive Index, or Sensex, gained 273.54, or 1.6 percent, to 17,199.76, its highest since Oct. 20. The S&P CNX Nifty Index on the National Stock Exchange rose 1.8 percent to 5,121.90. The BSE 200 Index added 1.8 percent to 2,143.95.
Morgan Stanley expects India’s gross domestic product to expand 6.7 percent in the year ending March 2010, more than its earlier estimate of 6.4 percent, while Kotak increased its forecast to 6.9 percent from 6 percent.
Monday, November 30, 2009
Taglines and brands of major companies
ABN AMRO Bank – Making More Possible
Accenture – High Performance. Delivered
Adidas – Forever sports
Adobe – Simplicity at work. Better by adobe.
AIG or American International Group Insurance Company – We know Money
Air Canada – A breath of Fresh Air
Allianz Group – The Power on your side
AMAZON.COM – Earth’s Biggest BookStore
ANDHRA BANK – “Much more to do, with YOU in focus.”
Apple Macintosh – Think Different.
ARCELOR – Steel solutions for a better world
AT&T – The World’s Networking Company
AVIVA LIFE INSURANCE – ” Kal par Control”
Bank of America – Higher Standards
Bank of Baroda – India’s International Bank
BANK OF RAJASTHAN – Dare to Dream
Barclays – Fluent in Finance; Its our business to know your business
BIG BAZAAR – Is se sasta aur Achcha kahee nahee milenga
BIOCON – The difference lies in our DNA
Birla Mutual fund – The name inspire trust
BLOGGER.COM – Push Button Publishing
BLOOMINGDALES – Like no other store in the world
BMW – The Ultimate Driving Machine
BOEING – Forever new Frontiers
Bombay Stock Exchange (BSE) – The Edge is Efficiency
BPCL – Pure for Sure
Bridgestone – Passion for exellence
British airways – The Way to Fly.
British Petroleum – Beyond Petroleum
BUSINESS INDIA – The Magazine of the Corporate World
BUSINESS TODAY – For Managing Tomorrow
BUSINESS WORLD – Play the Game
CAST AWAY – “At the edge of the world, his journey begins “
CEAT – Born Tough
CENTRAL – Shop. Eat. Celebrate
CHEVROLET AVEO – When Good is not good enough.
Chevron Corporation – Human Energy
CHIP – Intelligent Computing
CIPLA – Caring for life
CITI – The citi never sleep
CITIGROUP or CITIBANK – The Citi Never Sleeps
CNBC or NBC – Profit from it or Must see TV
COMPTRON and GREAVES – Everyday Solutions
Computer Associates – The Software that empowers the E-Business
CSC – Experence. Results.
DAIMLER CHYSLER – A future of Automobile
Dell – Easy as DELL.
Deutsche Bank – A Passion to Perform
DIGIT – Your Technology Navigator
DLF – “Building INDIA”
DR. REDDY’S LABORATORIES – ÿLife. Research. Hope
DUNLOP – Accelerate your soul
DUPONT – The Miracles of Science
EBAY – The World’s Online Market Place
EMC – Where information lives
Ford ICON – “The Josh Machine”
EPSON – Exceed Your Vision
Ernst and Young – Quality in Everything we Do
Essar corp – A positive a++itude
Exxon Mobil – Taking on the World’s Toughest Energy Challenges
FIAT – Driven by Passion. FIAT
FORD – Built for the Road Ahead
Essar – Gas and Beyond
GM – Only GM.
HAIER – Inspired Living
HINDUSTAN TIMES – The Name India trusts for News
HINDUSTAN PETROLEUM – Future full of energy
HOME DEPOT – You can do it. We can Help.
HONDA – The Power of Dreams
HP Invent – Everything is Possible
HSBC – The World’s Local Bank
HYUNDAI – Drive Your Way
IBM – ON DEMAND
IBM – ” I think, therefore IBM.”
IBP – Pure bhi. Poora bhi
ICICI Bank – Hum hain na!!!
Infosys – ” Powered by Intellect, Driven by Values; Improve your odds with Infosys Predictability”
Intel – Intel inside.
IOCL – Bringing Energy to Life
Jaguar – Born to perform
Jet Airways – The Joy of Flying
JVC – The Perfect Experience
Kingfisher Airlines – Fly the good times
KMART – The stuff of life.
Kotak – Think Investments. Think Kotak.
KROGER – Costs less to get more
LARSEN and TOUBRO – We make things which make India proud
LEE – The jeans that built America
Lexus – The persuit of perfection
Lehman Brothers – Where Vision Gets Built
LENOVO – We are building a new technology company.
LG – Life’s Good
Lufthansa – There’s no better to fly
Macromedia – What the web can be.
Malaysian Airlines – Going Beyond Expectations
MARUTI SX4 – “Men are Back”
Master card – There are some things money can’t buy. For everything else there’sÿMASTERCARD.
Max NewYork Life Insurance – Your Partner for life
McDowells Signature – The New Sign of Success.
MCX – Trade with trust
METRO – The spirit of Commerce
MERCK – Where patients come first
Metropolitan Life Insurance Company or Metlife. – Have You Met Life Today
Microsoft – Where Do You Want to Go Today ; Your Potential Our Passion
Michelin – A better way forward
MITTAL STEEL – Shaping the future of steel
Monster.com – Never Settle
MRF – Tyres with Muscle
NASDAQ – Stock market for the digital world
NDTV Profit – News you can Use.
NOKIA – “Connecting People”
NYSE (New York Stock Exchange) – The world puts its stock in us
ONGC – Making Tomorrow Brighter
Orange – The future is bright. The future is orange
Panasonic – “ideas for life”
PFIZER – Life is our life’s work
PHILLIPS – Sense and Simplicity
Prudential Insurance Company – Growing and Protecting your wealth
ARaymond – A Complete Man
Reliance industries Limited – Growth is Life
Rivolta – “Undress Code For Men”
Sahara – Emotionally yours.
SAMSUNG – Everyone’s Invited or Its hard to Imagine
SAMSUNG Mobile – Next is What?
SANSUI – Born in Japan Entertaining The World
SBI – SURPRISINGLY
SBI DEBIT CARD – Welcome to a Cashless World.
Servo – 100 % Performance. Everytime.
Singapore Stock Exchange (SGX) – Tomorrow Market’s Today.
SKODA – Obsessed with Quality since 1897.
SONY – Like. No. Other.
Speed – High Performance Petrol
Standard Chartered Bank – Your Right Partner
Standard Insurance Company Limited. – Positively Different.
Star Sports – We know your game
Sun Microsystems – The Network is the Computer
SUZLON ENERGY – Powering a Greener Tomorrow.
SYMANTEC – Be Fearless.
TATA MOTORS – Even More Car per Car
TCS – Beyond the Obvious
TESCO – Every Little Helps
Thai Airways – “Smooth as Silk”
THE DAILY TELEGRAPH – Read a Bestseller everyday
THE DAY AFTER TOMORROW – Where will you be
THE ECONOMIC TIMES – The Power of Knowledge
The Indian EXPRESS – Journalism of Courage
TIMESJOBS.COM – ” If you have a reason, we have the job “
TITANIC – Collide With Destiny.
TOSHIBA – Choose Freedom
TOYOTA – Touch The Perfection
Toyota Innova – All you Desire.
UBS – You and Us
Union Bank of India – Good People to Bank with
VIDEOCON – The Indian Multinational
VIZAG STEEL – Pride of Steel
VOLKSWAGEN – Drivers wanted
WILLS CLASSIC – “Discover a Passion”
Window XP – Do more with less
WALMART – Always low prices. Always.
Windows XP – Do More with Less
WIPRO – Applying Thought
ZEE NEWS – “Haqueqat Jaisi, Khabar Waisi”
Accenture – High Performance. Delivered
Adidas – Forever sports
Adobe – Simplicity at work. Better by adobe.
AIG or American International Group Insurance Company – We know Money
Air Canada – A breath of Fresh Air
Allianz Group – The Power on your side
AMAZON.COM – Earth’s Biggest BookStore
ANDHRA BANK – “Much more to do, with YOU in focus.”
Apple Macintosh – Think Different.
ARCELOR – Steel solutions for a better world
AT&T – The World’s Networking Company
AVIVA LIFE INSURANCE – ” Kal par Control”
Bank of America – Higher Standards
Bank of Baroda – India’s International Bank
BANK OF RAJASTHAN – Dare to Dream
Barclays – Fluent in Finance; Its our business to know your business
BIG BAZAAR – Is se sasta aur Achcha kahee nahee milenga
BIOCON – The difference lies in our DNA
Birla Mutual fund – The name inspire trust
BLOGGER.COM – Push Button Publishing
BLOOMINGDALES – Like no other store in the world
BMW – The Ultimate Driving Machine
BOEING – Forever new Frontiers
Bombay Stock Exchange (BSE) – The Edge is Efficiency
BPCL – Pure for Sure
Bridgestone – Passion for exellence
British airways – The Way to Fly.
British Petroleum – Beyond Petroleum
BUSINESS INDIA – The Magazine of the Corporate World
BUSINESS TODAY – For Managing Tomorrow
BUSINESS WORLD – Play the Game
CAST AWAY – “At the edge of the world, his journey begins “
CEAT – Born Tough
CENTRAL – Shop. Eat. Celebrate
CHEVROLET AVEO – When Good is not good enough.
Chevron Corporation – Human Energy
CHIP – Intelligent Computing
CIPLA – Caring for life
CITI – The citi never sleep
CITIGROUP or CITIBANK – The Citi Never Sleeps
CNBC or NBC – Profit from it or Must see TV
COMPTRON and GREAVES – Everyday Solutions
Computer Associates – The Software that empowers the E-Business
CSC – Experence. Results.
DAIMLER CHYSLER – A future of Automobile
Dell – Easy as DELL.
Deutsche Bank – A Passion to Perform
DIGIT – Your Technology Navigator
DLF – “Building INDIA”
DR. REDDY’S LABORATORIES – ÿLife. Research. Hope
DUNLOP – Accelerate your soul
DUPONT – The Miracles of Science
EBAY – The World’s Online Market Place
EMC – Where information lives
Ford ICON – “The Josh Machine”
EPSON – Exceed Your Vision
Ernst and Young – Quality in Everything we Do
Essar corp – A positive a++itude
Exxon Mobil – Taking on the World’s Toughest Energy Challenges
FIAT – Driven by Passion. FIAT
FORD – Built for the Road Ahead
Essar – Gas and Beyond
GM – Only GM.
HAIER – Inspired Living
HINDUSTAN TIMES – The Name India trusts for News
HINDUSTAN PETROLEUM – Future full of energy
HOME DEPOT – You can do it. We can Help.
HONDA – The Power of Dreams
HP Invent – Everything is Possible
HSBC – The World’s Local Bank
HYUNDAI – Drive Your Way
IBM – ON DEMAND
IBM – ” I think, therefore IBM.”
IBP – Pure bhi. Poora bhi
ICICI Bank – Hum hain na!!!
Infosys – ” Powered by Intellect, Driven by Values; Improve your odds with Infosys Predictability”
Intel – Intel inside.
IOCL – Bringing Energy to Life
Jaguar – Born to perform
Jet Airways – The Joy of Flying
JVC – The Perfect Experience
Kingfisher Airlines – Fly the good times
KMART – The stuff of life.
Kotak – Think Investments. Think Kotak.
KROGER – Costs less to get more
LARSEN and TOUBRO – We make things which make India proud
LEE – The jeans that built America
Lexus – The persuit of perfection
Lehman Brothers – Where Vision Gets Built
LENOVO – We are building a new technology company.
LG – Life’s Good
Lufthansa – There’s no better to fly
Macromedia – What the web can be.
Malaysian Airlines – Going Beyond Expectations
MARUTI SX4 – “Men are Back”
Master card – There are some things money can’t buy. For everything else there’sÿMASTERCARD.
Max NewYork Life Insurance – Your Partner for life
McDowells Signature – The New Sign of Success.
MCX – Trade with trust
METRO – The spirit of Commerce
MERCK – Where patients come first
Metropolitan Life Insurance Company or Metlife. – Have You Met Life Today
Microsoft – Where Do You Want to Go Today ; Your Potential Our Passion
Michelin – A better way forward
MITTAL STEEL – Shaping the future of steel
Monster.com – Never Settle
MRF – Tyres with Muscle
NASDAQ – Stock market for the digital world
NDTV Profit – News you can Use.
NOKIA – “Connecting People”
NYSE (New York Stock Exchange) – The world puts its stock in us
ONGC – Making Tomorrow Brighter
Orange – The future is bright. The future is orange
Panasonic – “ideas for life”
PFIZER – Life is our life’s work
PHILLIPS – Sense and Simplicity
Prudential Insurance Company – Growing and Protecting your wealth
ARaymond – A Complete Man
Reliance industries Limited – Growth is Life
Rivolta – “Undress Code For Men”
Sahara – Emotionally yours.
SAMSUNG – Everyone’s Invited or Its hard to Imagine
SAMSUNG Mobile – Next is What?
SANSUI – Born in Japan Entertaining The World
SBI – SURPRISINGLY
SBI DEBIT CARD – Welcome to a Cashless World.
Servo – 100 % Performance. Everytime.
Singapore Stock Exchange (SGX) – Tomorrow Market’s Today.
SKODA – Obsessed with Quality since 1897.
SONY – Like. No. Other.
Speed – High Performance Petrol
Standard Chartered Bank – Your Right Partner
Standard Insurance Company Limited. – Positively Different.
Star Sports – We know your game
Sun Microsystems – The Network is the Computer
SUZLON ENERGY – Powering a Greener Tomorrow.
SYMANTEC – Be Fearless.
TATA MOTORS – Even More Car per Car
TCS – Beyond the Obvious
TESCO – Every Little Helps
Thai Airways – “Smooth as Silk”
THE DAILY TELEGRAPH – Read a Bestseller everyday
THE DAY AFTER TOMORROW – Where will you be
THE ECONOMIC TIMES – The Power of Knowledge
The Indian EXPRESS – Journalism of Courage
TIMESJOBS.COM – ” If you have a reason, we have the job “
TITANIC – Collide With Destiny.
TOSHIBA – Choose Freedom
TOYOTA – Touch The Perfection
Toyota Innova – All you Desire.
UBS – You and Us
Union Bank of India – Good People to Bank with
VIDEOCON – The Indian Multinational
VIZAG STEEL – Pride of Steel
VOLKSWAGEN – Drivers wanted
WILLS CLASSIC – “Discover a Passion”
Window XP – Do more with less
WALMART – Always low prices. Always.
Windows XP – Do More with Less
WIPRO – Applying Thought
ZEE NEWS – “Haqueqat Jaisi, Khabar Waisi”
India Economy Expands at Fastest Pace in Six Quarters
Nov. 30 (Bloomberg) -- India’s economy expanded 7.9 percent last quarter, the fastest pace in 1 1/2 years, giving the central bank room to withdraw more stimulus to check inflation.
Gross domestic product expanded 7.9 percent in the three months to Sept. 30 from a year earlier as manufacturing jumped 9.2 percent, the statistics bureau said in New Delhi today. That was more than all estimates in a Bloomberg News survey of 22 economists, where the median forecast was a 6.3 percent gain.
Indian shares and the rupee extended gains while bond yields rose following the GDP report, which came after Reserve Bank of India Governor Duvvuri Subbarao last week said there was a need to remove some of the “unconventional” steps implemented to support growth. Economies across Asia including Taiwan, South Korea and Singapore are performing better than expected as the region leads the world out of recession.
“India’s GDP growth is positioning for an upswing,” said Rajeev Malik, a Singapore-based regional economist at Macquarie Group Ltd. “A handle-with-care exit is on the cards.”
To steer India’s $1.2 trillion economy through the worst global financial crisis since the 1930s, Governor Subbarao has kept the central bank’s key reverse repurchase rate at a record- low 3.25 percent since April. Government spending and tax cuts took the value of stimulus measures to 12 percent of GDP.
Stocks Gain
That’s helped the economy recover and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 72 percent this year. The Sensitive index increased 1.9 percent to 16,941.25 at 11:03 a.m. in Mumbai, while the yield on the benchmark 10-year government bond rose to 7.23 percent from 7.21 percent. The rupee gained to 46.45 per dollar from 46.51 before the report.
Inflation pressures are building as economic growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During 2008, the rate rose to almost 13 percent.
“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said Nov. 19.
Falling bond yields signal that investors don’t expect interest rates to rise this year.
‘Inflation Risks’
“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore.
In a debate in parliament on Nov. 26, Finance Minister Pranab Mukherjee said policy makers are balancing the need to create jobs against inflation concerns. The central bank started to withdraw monetary stimulus on Oct. 27 by ordering lenders to keep more money in government bonds.
Food inflation, which has climbed to 15.58 percent, is a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than $2 a day. Opposition lawmakers said last week that the government is obsessed with growth, allowing prices to spiral to the detriment of the poor.
By sustaining the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including South Korea’s Samsung Electronics Co. and French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu.
High Savings
Prime Minister Manmohan Singh said this month that returning to the 9 percent growth pace that India averaged between 2004 and 2008 is “eminently feasible” in the medium term because a high national savings rate will aid investment.
Car sales climbed at a 33.9 percent annual pace in October and cellular operators, led by Tata Teleservices Ltd., added 16.6 million new subscribers. Lodha Developers Ltd., an Indian property company planning an initial share sale, said its home sales may climb about threefold this fiscal year as low interest rates encourage spending.
Rolls-Royce Motor Cars Ltd., which introduced the super- luxury “Ghost” model in India this month, said it has already received 25 orders for the model from New Delhi alone, equal to expected sales in Australia in a year.
“We are seeing strong expression of spending power in India,” said Brenda Pak, general manager, South and East Asia Pacific at Rolls-Royce. “India will be a very strong market for us in the years to come.”
Gross domestic product expanded 7.9 percent in the three months to Sept. 30 from a year earlier as manufacturing jumped 9.2 percent, the statistics bureau said in New Delhi today. That was more than all estimates in a Bloomberg News survey of 22 economists, where the median forecast was a 6.3 percent gain.
Indian shares and the rupee extended gains while bond yields rose following the GDP report, which came after Reserve Bank of India Governor Duvvuri Subbarao last week said there was a need to remove some of the “unconventional” steps implemented to support growth. Economies across Asia including Taiwan, South Korea and Singapore are performing better than expected as the region leads the world out of recession.
“India’s GDP growth is positioning for an upswing,” said Rajeev Malik, a Singapore-based regional economist at Macquarie Group Ltd. “A handle-with-care exit is on the cards.”
To steer India’s $1.2 trillion economy through the worst global financial crisis since the 1930s, Governor Subbarao has kept the central bank’s key reverse repurchase rate at a record- low 3.25 percent since April. Government spending and tax cuts took the value of stimulus measures to 12 percent of GDP.
Stocks Gain
That’s helped the economy recover and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 72 percent this year. The Sensitive index increased 1.9 percent to 16,941.25 at 11:03 a.m. in Mumbai, while the yield on the benchmark 10-year government bond rose to 7.23 percent from 7.21 percent. The rupee gained to 46.45 per dollar from 46.51 before the report.
Inflation pressures are building as economic growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During 2008, the rate rose to almost 13 percent.
“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said Nov. 19.
Falling bond yields signal that investors don’t expect interest rates to rise this year.
‘Inflation Risks’
“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore.
In a debate in parliament on Nov. 26, Finance Minister Pranab Mukherjee said policy makers are balancing the need to create jobs against inflation concerns. The central bank started to withdraw monetary stimulus on Oct. 27 by ordering lenders to keep more money in government bonds.
Food inflation, which has climbed to 15.58 percent, is a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than $2 a day. Opposition lawmakers said last week that the government is obsessed with growth, allowing prices to spiral to the detriment of the poor.
By sustaining the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including South Korea’s Samsung Electronics Co. and French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu.
High Savings
Prime Minister Manmohan Singh said this month that returning to the 9 percent growth pace that India averaged between 2004 and 2008 is “eminently feasible” in the medium term because a high national savings rate will aid investment.
Car sales climbed at a 33.9 percent annual pace in October and cellular operators, led by Tata Teleservices Ltd., added 16.6 million new subscribers. Lodha Developers Ltd., an Indian property company planning an initial share sale, said its home sales may climb about threefold this fiscal year as low interest rates encourage spending.
Rolls-Royce Motor Cars Ltd., which introduced the super- luxury “Ghost” model in India this month, said it has already received 25 orders for the model from New Delhi alone, equal to expected sales in Australia in a year.
“We are seeing strong expression of spending power in India,” said Brenda Pak, general manager, South and East Asia Pacific at Rolls-Royce. “India will be a very strong market for us in the years to come.”
India’s Economy May Grow at Fastest Pace in Year, Survey Shows
Nov. 30 (Bloomberg) -- India’s economy, the third biggest in Asia, probably grew at the fastest pace in a year because of record-low interest rates and tax cuts.
Gross domestic product rose 6.3 percent in the three months ending Sept. 30 from a year earlier, according to the median forecast of 19 economists in a Bloomberg survey. That would compare with 6.1 percent in the previous quarter. The statistics office will announce the number at 11 a.m. local time in New Delhi today.
Officials are weighing the threat from inflation against the risk that raising interest rates too quickly will undermine the recovery of the $1.2 trillion economy. India must withdraw monetary stimulus “carefully and strategically” to sustain growth, central bank Deputy Governor Subir Gokarn said in Mumbai on Nov. 24.
“India’s growth is being heavily driven by government stimulus,” said Nikhilesh Bhattacharyya, a Sydney-based economist at Moody’s Economy.com. “It’s way too soon to turn away from accommodative monetary and fiscal policies.”
To steer the nation through the worst global financial crisis since the 1930s, the central bank has kept the key reverse repurchase rate at 3.25 percent since April and government spending and tax cuts have taken the value of stimulus measures to 12 percent of GDP. That’s helped growth recover from a four-year low in the final quarter of last year and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 70 percent this year.
Monsoon Rains
Inflation pressures are building as growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During 2008, the rate rose to as high as almost 13 percent.
“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said Nov. 19.
Falling bond yields signal that investors don’t expect interest rates to rise this year.
“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore.
Obsessed With Growth?
In a debate in parliament on Nov. 26, Finance Minister Pranab Mukherjee said policy makers are balancing the need to create jobs against inflation concerns. The central bank started tightening monetary policy on Oct. 27 by ordering lenders to keep more money in government bonds.
Food inflation has climbed to 15.58 percent, a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than $2 a day. Opposition lawmakers said last week that the government is obsessed with growth, allowing prices to spiral to the detriment of the poor.
By sustaining the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu, and South Korea’s Samsung Electronics Co.
Prime Minister Manmohan Singh said this month that returning to the 9 percent growth that India averaged between 2004 and 2008 is “eminently feasible” in the medium term because a high national savings rate will aid investment.
Car sales climbed at a 33.9 percent annual pace in October and cellular operators, led by Tata Teleservices Ltd., added 16.6 million new subscribers. Lodha Developers Ltd., an Indian property company planning an initial share sale, said its home sales may climb about threefold this fiscal year as low interest rates encourage spending.
Gross domestic product rose 6.3 percent in the three months ending Sept. 30 from a year earlier, according to the median forecast of 19 economists in a Bloomberg survey. That would compare with 6.1 percent in the previous quarter. The statistics office will announce the number at 11 a.m. local time in New Delhi today.
Officials are weighing the threat from inflation against the risk that raising interest rates too quickly will undermine the recovery of the $1.2 trillion economy. India must withdraw monetary stimulus “carefully and strategically” to sustain growth, central bank Deputy Governor Subir Gokarn said in Mumbai on Nov. 24.
“India’s growth is being heavily driven by government stimulus,” said Nikhilesh Bhattacharyya, a Sydney-based economist at Moody’s Economy.com. “It’s way too soon to turn away from accommodative monetary and fiscal policies.”
To steer the nation through the worst global financial crisis since the 1930s, the central bank has kept the key reverse repurchase rate at 3.25 percent since April and government spending and tax cuts have taken the value of stimulus measures to 12 percent of GDP. That’s helped growth recover from a four-year low in the final quarter of last year and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 70 percent this year.
Monsoon Rains
Inflation pressures are building as growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During 2008, the rate rose to as high as almost 13 percent.
“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said Nov. 19.
Falling bond yields signal that investors don’t expect interest rates to rise this year.
“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore.
Obsessed With Growth?
In a debate in parliament on Nov. 26, Finance Minister Pranab Mukherjee said policy makers are balancing the need to create jobs against inflation concerns. The central bank started tightening monetary policy on Oct. 27 by ordering lenders to keep more money in government bonds.
Food inflation has climbed to 15.58 percent, a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than $2 a day. Opposition lawmakers said last week that the government is obsessed with growth, allowing prices to spiral to the detriment of the poor.
By sustaining the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu, and South Korea’s Samsung Electronics Co.
Prime Minister Manmohan Singh said this month that returning to the 9 percent growth that India averaged between 2004 and 2008 is “eminently feasible” in the medium term because a high national savings rate will aid investment.
Car sales climbed at a 33.9 percent annual pace in October and cellular operators, led by Tata Teleservices Ltd., added 16.6 million new subscribers. Lodha Developers Ltd., an Indian property company planning an initial share sale, said its home sales may climb about threefold this fiscal year as low interest rates encourage spending.
Friday, November 27, 2009
6 Keys to Finding Momentum Growth Stocks
Momentum stock trading has been around for awhile and has been proven to a sound method for creating incredible wealth in the stock market. During the 1990s, for example, Clear Channel Communications went up 5,615%, Emulex rose 6,412%, Dell Computer went up 10,198%, Activision went up 13,819%, and Semtech rose 15,231%.
It is not uncommon to find stocks that accelerate in price that go on to make 100% to 300% returns in less than year or even in a few months. However, for beginning investors it can be a confusing and frustrating experience to find such stocks.
While many momentum stock traders all have different criteria when searching out tomorrow’s big winners there are typically six key steps when screening for a big winner.
They are:
Accelerating earnings or EPS (earnings per share).
Annual earnings up 25% or more in the last 3 years.
Minimum volume of 100,000 or at least increasing volume.
17% ROE (return on equity) or better.
Has leadership role in the market place.
Price at an all-time high.
Potential stocks for momentum trading should show strong fundamentals on there balance sheet and show that they are growing at an accelerated rate. By selecting stocks that are showing high EPS ratings and accelerating rates of growth over previous quarters you can be sure that you have a company that is growing out an above average rate. Wall Street loves earnings that are growing quickly and a company that does will be rewarded with institutional sponsorship by the big funds further causing share value to increase.
Momentum stocks also have shown that they are strong players in their market and prove there value by exhibiting strong annual earnings. Less than a 25% annual increase in annual earnings will not stimulate interest by the big mutual funds or investors resulting in a stock whose price will likely remain stagnant or increase in value at too slow a pace for momentum investing.
Stocks for consideration should have a daily average of 100,000 shares or at least see there average daily volume increase as the value of the stock rises. Any volume less than this shows little interest by the investment community and you could find yourself having trouble with liquidity in the stock if you need to sell and get out.
A potential stock should show a ROE of 17% or better. ROE is the net income divided by the number of shares held by investors. It shows the responsible return on capital by investors and the higher this ratio is the better for investors. In my opinion, this is one of the most important attributes for any stock investment.
Momentum stocks are also leaders in the market. When the major indices have declines true stock leaders exhibit strength by holding or even exceeding there highs or near there highs. When the major indices rally these leaders typically lead the rally and go on to make new highs and outpace the market.
Momentum stocks should also be traded at there all time highs. Buy trading at these levels at key technical entry points you are likely to ride the trend as the stock increases in share price. This type of characteristic increase your chances for profitability because a up trend in place is six times more likely to stay in place so you have the odds on your side.
You can stock for scans like these at Yahoo Financial or MSN Financial for free. Begin keeping a list of potential candidates and then track there performance. It may take a little practice but with time you will be able to spot the stocks that go on to make the big moves of 100% or more.
As with all types of investing keep in mind to cut your losers quickly and ride your winners with a good money management plan.
Good luck and good trading.
It is not uncommon to find stocks that accelerate in price that go on to make 100% to 300% returns in less than year or even in a few months. However, for beginning investors it can be a confusing and frustrating experience to find such stocks.
While many momentum stock traders all have different criteria when searching out tomorrow’s big winners there are typically six key steps when screening for a big winner.
They are:
Accelerating earnings or EPS (earnings per share).
Annual earnings up 25% or more in the last 3 years.
Minimum volume of 100,000 or at least increasing volume.
17% ROE (return on equity) or better.
Has leadership role in the market place.
Price at an all-time high.
Potential stocks for momentum trading should show strong fundamentals on there balance sheet and show that they are growing at an accelerated rate. By selecting stocks that are showing high EPS ratings and accelerating rates of growth over previous quarters you can be sure that you have a company that is growing out an above average rate. Wall Street loves earnings that are growing quickly and a company that does will be rewarded with institutional sponsorship by the big funds further causing share value to increase.
Momentum stocks also have shown that they are strong players in their market and prove there value by exhibiting strong annual earnings. Less than a 25% annual increase in annual earnings will not stimulate interest by the big mutual funds or investors resulting in a stock whose price will likely remain stagnant or increase in value at too slow a pace for momentum investing.
Stocks for consideration should have a daily average of 100,000 shares or at least see there average daily volume increase as the value of the stock rises. Any volume less than this shows little interest by the investment community and you could find yourself having trouble with liquidity in the stock if you need to sell and get out.
A potential stock should show a ROE of 17% or better. ROE is the net income divided by the number of shares held by investors. It shows the responsible return on capital by investors and the higher this ratio is the better for investors. In my opinion, this is one of the most important attributes for any stock investment.
Momentum stocks are also leaders in the market. When the major indices have declines true stock leaders exhibit strength by holding or even exceeding there highs or near there highs. When the major indices rally these leaders typically lead the rally and go on to make new highs and outpace the market.
Momentum stocks should also be traded at there all time highs. Buy trading at these levels at key technical entry points you are likely to ride the trend as the stock increases in share price. This type of characteristic increase your chances for profitability because a up trend in place is six times more likely to stay in place so you have the odds on your side.
You can stock for scans like these at Yahoo Financial or MSN Financial for free. Begin keeping a list of potential candidates and then track there performance. It may take a little practice but with time you will be able to spot the stocks that go on to make the big moves of 100% or more.
As with all types of investing keep in mind to cut your losers quickly and ride your winners with a good money management plan.
Good luck and good trading.
Thursday, November 26, 2009
Analysis of Company Profit Margin (Gross, Operating & Net Profit Margin)
Corporations and their shareholders are determined to make profits from their business operations and make a good return on their investment (ROI). In order to make good profits, a firm needs to be run efficiently and have sufficient cash flow to meet current liabilities and short term debt (liquidity). You as a small scale investor need to investigate the profitability of a company in order to determine if it is both liquid and it is being run efficiently. The way to do this is by calculating the various profit margin ratios available. We look at a few below:
i) Gross Profit Margin
The Gross Profit Margin illustrates the profit a company makes after paying off its Cost of Goods sold (cost of inventory). Gross Profit Margin illustrates to us how efficient the management is in using its labour and raw materials in the process of production. The formula for Gross Profit Margin is:
Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales
Firms that have a high gross profit margin are more liquid and thus have more cash flow to spend on research & development expenses, marketing or investing. Avoid investing in firms that have a declining Gross Profit Margin over a time period, example over 5 years. Once you calculate the gross profit margin of a firm, compare it with industry standards. For example, it does not make sense to compare the profit margin of a software company (typically 90%) with that of an airline company (5%).
ii) Operating Profit Margin
The Operating Profit Margin will illustrate to you how efficiently the managers of a firm are using business operations to generate profit. This ratio also shows the success rate of these managers. The formula for Operating Profit Margin is:
Operating Profit Margin = Earnings before Interest & Taxes / Sales
For example, consider a firm that has $2 million sales this year and an EBIT (Earnings before Interest & Taxes) of $450,000. What is the Operating Profit Margin?
Operating Profit Margin = 450,000 / 2,000,000
Operating Profit Margin = 22.5%
The higher the Operating Profit Margin, the better. This is because a higher Operating Profit Margin shows the company can keep its costs under control (successful cost accounting). A higher Operating Profit Margin can also mean sales are increasing faster than costs, and the firm is in a relatively liquid position.
The difference between Gross Profit Margin and Operating Profit Margin is that the gross profit margin accounts for only Cost of Goods sold, but the Operating Profit Margin accounts for both Cost of Goods sold and Administration/Selling expenses.
iii) Net Profit Margin
Net Profit Margin tells you exactly how the managers and operations of a business are performing. Net Profit Margin compares the net income of a firm with total sales achieved. The formula for Net Profit Margin is:
Net Profit Margin = Net Income / Sales
For example, consider a firm that has an annual net income of $500,000 while the total sales achieved during the year amount to $2,200,000. What's the Net Profit Margin?
Net Profit Margin = 500,000 / 2,200,000
Net Profit Margin = 22.7%
Once you calculate the net profit margin of a firm, compare it with industry standards. For example, typical software companies have a Gross Margin of 90% (as mentioned above). However, the NET profit margin is only 27%. That's a huge difference right there and it tells us that the marketing/administration costs of software companies is huge! However, this also tells us that operating costs and cost of goods sold of software companies is relatively low.
i) Gross Profit Margin
The Gross Profit Margin illustrates the profit a company makes after paying off its Cost of Goods sold (cost of inventory). Gross Profit Margin illustrates to us how efficient the management is in using its labour and raw materials in the process of production. The formula for Gross Profit Margin is:
Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales
Firms that have a high gross profit margin are more liquid and thus have more cash flow to spend on research & development expenses, marketing or investing. Avoid investing in firms that have a declining Gross Profit Margin over a time period, example over 5 years. Once you calculate the gross profit margin of a firm, compare it with industry standards. For example, it does not make sense to compare the profit margin of a software company (typically 90%) with that of an airline company (5%).
ii) Operating Profit Margin
The Operating Profit Margin will illustrate to you how efficiently the managers of a firm are using business operations to generate profit. This ratio also shows the success rate of these managers. The formula for Operating Profit Margin is:
Operating Profit Margin = Earnings before Interest & Taxes / Sales
For example, consider a firm that has $2 million sales this year and an EBIT (Earnings before Interest & Taxes) of $450,000. What is the Operating Profit Margin?
Operating Profit Margin = 450,000 / 2,000,000
Operating Profit Margin = 22.5%
The higher the Operating Profit Margin, the better. This is because a higher Operating Profit Margin shows the company can keep its costs under control (successful cost accounting). A higher Operating Profit Margin can also mean sales are increasing faster than costs, and the firm is in a relatively liquid position.
The difference between Gross Profit Margin and Operating Profit Margin is that the gross profit margin accounts for only Cost of Goods sold, but the Operating Profit Margin accounts for both Cost of Goods sold and Administration/Selling expenses.
iii) Net Profit Margin
Net Profit Margin tells you exactly how the managers and operations of a business are performing. Net Profit Margin compares the net income of a firm with total sales achieved. The formula for Net Profit Margin is:
Net Profit Margin = Net Income / Sales
For example, consider a firm that has an annual net income of $500,000 while the total sales achieved during the year amount to $2,200,000. What's the Net Profit Margin?
Net Profit Margin = 500,000 / 2,200,000
Net Profit Margin = 22.7%
Once you calculate the net profit margin of a firm, compare it with industry standards. For example, typical software companies have a Gross Margin of 90% (as mentioned above). However, the NET profit margin is only 27%. That's a huge difference right there and it tells us that the marketing/administration costs of software companies is huge! However, this also tells us that operating costs and cost of goods sold of software companies is relatively low.
India Mahindra Satyam hit by new charges; outlook uncertain
* Investigators say Satyam fraud may be bigger than revealed
* Analysts say Mahindra Satyam a risky bet until restatement
* Shares plunge as much as 18 pct in two days
BANGALORE, Nov 26 (Reuters) - Mahindra-Satyam (SATY.BO) shares fell to a 4-month low on Thursday, before recovering, on concerns over its outlook after Indian investigators filed new charges over accounting fraud that hit Satyam earlier this year.
"Investors are playing a blind game until the audited numbers are out. There could be more skeletons hidden in the closet," said HDFC Securities' head of private client group V.K. Sharma, who is advising clients to stay away from the stock until there is further clarity.
The stock topped the volume chart, with about 30 million shares traded, nearly three times its average daily volume over the past 90 days. It ended up 2.4 percent at 92.75 rupees.
Mahindra Satyam, earlier known as Satyam Computer Services, was acquired by Tech Mahindra (TEML.BO) in April after the company was hammered by India's biggest corporate fraud, which came to light in January. [ID:nBOM476146]
V. V. Lakshmi Narayana, deputy inspector general of India's Central Bureau of Investigation, told Reuters the extent of the fraud at Satyam could be much larger than the 71.36 billion rupees ($1.5 billion) that founder Ramalinga Raju had confessed to in a letter in January.
"All investigations into the accounting and auditing part of the business have been completed, and we are now going to look into the money diversion from the company," Narayana, who is part of the team probing the fraud, said from Hyderabad.
"Whatever Raju said is not the complete reality."
Narayana said the agency estimated losses suffered by investors in the wake of the fraud could be up to 140 billion rupees.
Mahindra Satyam, which has about 35,000 employees, hoped to restate its accounts by the middle of next year, Atul Kunwar, president of its global operations, said on Wednesday.
Vaibhav Sanghavi, director of Ambit Capital, said, "It's very difficult to assess the situation until the audited numbers are out."
Officials at Mahindra Satyam did not respond to requests by Reuters for comment. A Tech Mahindra spokesman declined comment.
Shares in Tech Mahindra (TEML.BO), a unit of tractor and utility vehicles maker Mahindra & Mahindra (MAHM.BO), ended down 1.2 percent, having earlier fallen as much as 6.5 percent to a 3-month low.
Kunwar also told the Reuters India Investment Summit on Wednesday that customer attrition had stopped and the company did not need price cuts to win new deals. [ID:nBNG159632]
On Tuesday, the CBI said it had filed a supplementary charge sheet containing new allegations against Raju and nine others associated with the outsourcing firm. [ID:nBOM490232]
New charges included that revenues had been inflated by 4.3 billion rupees by creating fake invoices and customers, and that forged board resolutions were used to get loans worth 12.2 billion rupees.
On Thursday, Bharat Kumar, a lawyer for Raju, told Reuters he could not comment as he had not received a copy of the additional charge sheet the investigating agency had submitted to the court.
* Analysts say Mahindra Satyam a risky bet until restatement
* Shares plunge as much as 18 pct in two days
BANGALORE, Nov 26 (Reuters) - Mahindra-Satyam (SATY.BO) shares fell to a 4-month low on Thursday, before recovering, on concerns over its outlook after Indian investigators filed new charges over accounting fraud that hit Satyam earlier this year.
"Investors are playing a blind game until the audited numbers are out. There could be more skeletons hidden in the closet," said HDFC Securities' head of private client group V.K. Sharma, who is advising clients to stay away from the stock until there is further clarity.
The stock topped the volume chart, with about 30 million shares traded, nearly three times its average daily volume over the past 90 days. It ended up 2.4 percent at 92.75 rupees.
Mahindra Satyam, earlier known as Satyam Computer Services, was acquired by Tech Mahindra (TEML.BO) in April after the company was hammered by India's biggest corporate fraud, which came to light in January. [ID:nBOM476146]
V. V. Lakshmi Narayana, deputy inspector general of India's Central Bureau of Investigation, told Reuters the extent of the fraud at Satyam could be much larger than the 71.36 billion rupees ($1.5 billion) that founder Ramalinga Raju had confessed to in a letter in January.
"All investigations into the accounting and auditing part of the business have been completed, and we are now going to look into the money diversion from the company," Narayana, who is part of the team probing the fraud, said from Hyderabad.
"Whatever Raju said is not the complete reality."
Narayana said the agency estimated losses suffered by investors in the wake of the fraud could be up to 140 billion rupees.
Mahindra Satyam, which has about 35,000 employees, hoped to restate its accounts by the middle of next year, Atul Kunwar, president of its global operations, said on Wednesday.
Vaibhav Sanghavi, director of Ambit Capital, said, "It's very difficult to assess the situation until the audited numbers are out."
Officials at Mahindra Satyam did not respond to requests by Reuters for comment. A Tech Mahindra spokesman declined comment.
Shares in Tech Mahindra (TEML.BO), a unit of tractor and utility vehicles maker Mahindra & Mahindra (MAHM.BO), ended down 1.2 percent, having earlier fallen as much as 6.5 percent to a 3-month low.
Kunwar also told the Reuters India Investment Summit on Wednesday that customer attrition had stopped and the company did not need price cuts to win new deals. [ID:nBNG159632]
On Tuesday, the CBI said it had filed a supplementary charge sheet containing new allegations against Raju and nine others associated with the outsourcing firm. [ID:nBOM490232]
New charges included that revenues had been inflated by 4.3 billion rupees by creating fake invoices and customers, and that forged board resolutions were used to get loans worth 12.2 billion rupees.
On Thursday, Bharat Kumar, a lawyer for Raju, told Reuters he could not comment as he had not received a copy of the additional charge sheet the investigating agency had submitted to the court.
Thursday, November 19, 2009
Gold shines at Rs 17,400
NEW DELHI: Firming global trend and melting domestic equities helped gold prices reach a new high at Rs 17,400 per 10 gram in the bullion market
here today.
Marketmen said the bullion market drew support from reports that gold in international markets surged to an all-time high of 1,153.90 dollar an ounce.
Besides, some investors were seen shifting from melting equity market to rising bullion for quick gains, boosting the demand for the metal, they said.
"The precious metals are more fancy of investors in domestic as well as overseas markets these day as a better option for making fast profits," said Rakesh Anand of R K Jewellers.
Marketmen said increased buying by stockists and jewellery fabricators for the ongoing marriage season was another factor that lifted the gold prices.
Standard gold and ornaments added another Rs 30 each to Rs 17,400 and Rs 17,250 per 10 gram respectively, while sovereign was unchanged at Rs 13,500 per piece of eight gram.
Silver ready remained steady at Rs 28,600 per kg in restricted buying, while weekly-based delivery strengthened by Rs 105 to Rs 28,200 per kg on speculators buying.
Silver coins continued to be asked around previous level of Rs 34,000 for buying and Rs 34,100 for selling of 100 pieces.
here today.
Marketmen said the bullion market drew support from reports that gold in international markets surged to an all-time high of 1,153.90 dollar an ounce.
Besides, some investors were seen shifting from melting equity market to rising bullion for quick gains, boosting the demand for the metal, they said.
"The precious metals are more fancy of investors in domestic as well as overseas markets these day as a better option for making fast profits," said Rakesh Anand of R K Jewellers.
Marketmen said increased buying by stockists and jewellery fabricators for the ongoing marriage season was another factor that lifted the gold prices.
Standard gold and ornaments added another Rs 30 each to Rs 17,400 and Rs 17,250 per 10 gram respectively, while sovereign was unchanged at Rs 13,500 per piece of eight gram.
Silver ready remained steady at Rs 28,600 per kg in restricted buying, while weekly-based delivery strengthened by Rs 105 to Rs 28,200 per kg on speculators buying.
Silver coins continued to be asked around previous level of Rs 34,000 for buying and Rs 34,100 for selling of 100 pieces.
OECD raises India 2010 GDP growth forecast
PARIS (Reuters) - Following is a summary of what the Paris-based Organisation for Economic Co-operation and Development had to say about non-members Brazil, India, China and Russia in its semi-annual Economic Outlook released on Thursday.
CHINA
In its previous forecast on June 24, the OECD had projected GDP growth of 7.7 percent this year and 9.3 percent in 2010.
Upgrading its outlook, it said domestic demand was set to remain strong thanks to highly stimulative economic policies and buoyant consumption spurred by improving employment prospects.
Fiscal stimulus has not endangered the sustainability of China's public finances. Indeed, the OECD expects net government debt to be "very low" when stimulus is withdrawn in 2011.
Whereas the government can afford to keep spending at higher levels, credit growth will need to be reined in to avert a new crop of bad loans, the report said.
INDIA
The OECD had been forecasting GDP growth for India of 5.9 percent in 2009 and 7.2 percent in 2010.
With inflation re-emerging, due to various supply factors, policymakers will need to ensure a timely withdrawal of stimulus.
"Given the magnitude of the easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon," the report said.
Reining in the budget deficit will be tough because of its size and the permanent nature of recent increases in spending.
Higher financing costs, exacerbated by heavy government borrowing, will be a drag on investment and keep economic growth just below pre-crisis rates.
RUSSIA
The OECD had previously forecast a contraction of 6.8 percent for Russia in 2009 and growth of 3.7 percent in 2010.
"Although recovery is in prospect, the large output gap and subdued inflation suggest that policy stimulus should not be removed too hastily," the OECD said.
By contrast, discriminatory trade measures to protect domestic industries during the crisis are counter-productive and should be unwound as quickly as possible.
"Also, the high concentration of assets and deposits in a few state-owned banks was a natural consequence of the crisis, but is not healthy for the long-run development of the banking system."
The OECD said consumer and investor confidence is still fragile and closely tied to the oil price, which holds the key to the direction of capital flows, credit growth and asset prices.
BRAZIL
In its previous forecasts, the OECD projected that Brazil's GDP would shrink 0.8 percent this year and grow 4.0 percent in 2010.
"A judiciously planned withdrawal of policy stimulus would be advisable from early 2010, if the recovery is well in hand, as expected," the report said.
The inflation outlook is benign, but a gradual tightening of monetary policy might be in order from mid-2010 to prevent price pressures arising from rapidly diminishing slack in the economy.
Brazil's debt dynamics are sustainable, even though the ratio of public debt to GDP has been trending higher, the OECD added.
Wednesday, November 18, 2009
Baltic Dry Index - BDI (BALDRY)
The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.
The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.
Economic Implications
This index is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. This could also be gleaned from looking at commodity prices, but there are substitution effects and futures contracts that make it difficult to interpret the impact of commodity price fluctuations. Additionally, nearly all commodities are seeing severe increases in prices in 2008 regardless of supply situations as investors seek to hedge their inflation exposure with hard assets.
Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it. [5] The BDI will show how much a company or country is willing to pay to import raw materials immediately. For example, if a Chinese company has contracted out coal prices for the next year from Rio Tinto (RTP), then the spot price of coal increasing after a mine accident will not impact that established contract. However, when this company is willing to pay more per ton to ship the coal than to actually purchase it, an investor can see that price growth is accelerating.
Price Increases Passed To Businesses/Consumers
As the BDI increases, so effectively does the cost of raw materials. This cost associated with procuring the materials must be passed along the value chain by producers and refiners. In the end, consumers will see higher dry bulk rates in the higher prices they pay for goods derived from these raw materials. For example, when Folgers pays an extra $10/ton to import coffee beans, they will pass along this increased procurement cost to consumers to maintain margins.
Additionally, imported goods may often carry a BDI factor in the prices. An example of this would be the average Chinese imported good. As China transformed from coal exporter to importer, they began buying coal from nations such as Russia, Brazil, and Australia. The coal from the latter two must be shipped using dry bulk carriers. As the rates for the BDI went up in 07, so did the cost of coal to China. Since coal is used for 70-80% of China's energy generation, [6] overhead costs for factories increased with the price of coal. As the overhead costs increase, so must the price of the end good to maintain the margin of profit. As this end price increased, an American paid more for a t-shirt or toy at Wal-Mart.
Key Trends and Forces
* Commodity Demand - This is determined mainly by industrial production and energy demand. If commodity demand is strong, BDI rates will increase regardless of spot rates for those commodities. Companies that have contracted out spot rates will show increased demand through paying more for shipping of the materials. As more coal and steel are being demanded by China, so will the rates for dry bulk shipping increase.
* Fleet Supply - This is determined by the number of available ships, their capacity, and the utilization rates. Additionally, the average age of the fleets will determine where they are in the life cycle. The average ship lasts 25 years. If the average is closer to that number, supply will be decreasing in the short term. Also, supply is greatly determined by delivery of new vessels. Currently, there is significant back logged demand for new vessels. No new orders are being taken for delivery before late 2009. With this backed up supply, BDI prices soared in 2007. With rates for the largest dry bulkers fetching nearly 10x that of a comparable VLCC Oil Tanker, many companies converted tankers into dry bulk carriers.[7] As conversions and ships contracted to be built at the beginning of the price run up in 2006 come on line, the upward pricing pressure of a fleet in which 41% of its ships are over 20 years old will be held at bay.[8]
* Seasonal Pressures - Weather has a major impact on both demand and logistics. For demand, cold weather may increase the demand for coal and other energy creating raw materials. For logistics, cold weather may cause ice to block ports and low rivers to prevent travel. Both of these cause increases in the BDI. Conversely, a mild winter or early ice breakup in cold water parts will cause decreases in the BDI.
* Bunker Prices - Bunker fuel is a type of fuel oil a ship uses for propulsion. Bunker fuel accounts for between a quarter and a third of vessel operating costs. Higher crude oil prices also mean higher bunker fuel prices which will be reflected in higher BDI prices. So, just as higher oil prices will put a damper on Airline company margins, they will squeeze margins for dry bulk operators. High bunker fuel prices in 2008 caused many companies to instruct their crews to decrease ship speeds to conserve fuel, thereby increasing shipping times- which causes the BDI to rise. A new (2008) trend in the shipping industry is the recent development of a "skysail," a ship propulsion augmentation system consisting of a paraglider-type airfoil and an electronic deployment and control mechanism that uses wind to help propel ships and thereby save bunker fuel costs[9].
* Choke Points Nearly half of the world's oil passes through a few narrow shipping lanes. This includes the straights of Hormuz and Malacca, the Bosporus and the Suez and Panama canals. These geographic choke points cause natural caps in the number of ships that can pass through each day, month or year and therefore also limits the bulk tonnage capacity of certain shipping routes. If anything disrupts the flow of ships through the choke points, the BDI will increase. The narrow (52 mile wide) Bering Strait (also called the "Bering Gate" in the shipping industry) may soon become the world's newest strategic "choke point" for shipping [10].
* Market Sentiment - Because of the time lag in forecasting demand for raw materials, market opinion can greatly affect the freight exchange. [11] The recent halving of the index's value can be attributed to many companies forecasting lower global growth and cutting their production/demand targets.
* Port Congestion -This acts as another great buffer against supply increases lowering index prices. The actual infrastructure of these ports prevents more ships entering the market. The ports simply cannot handle more traffic. Until major changes occur at these vital terminals, there will be upward pressure on dry bulk prices. Shipping industry analysts [2] are actually developing an index to standardize and make available this incredibly vital data.
* Labor Relations - Nothing is loaded or unloaded from ships without labor. Labor relations at various ports around the world directly affects the BDI. For example, in the U.S. both the ILA (International Longshoreman's Association) and the ILWU (International Longshoreman's and Warehouse Union) exert enormous control over the labor at ports. Labor relations issues include: intentional work slowdowns, company lockouts, strikes and political boycotts. Labor unions have expressed their political power and influence in the past by boycotting products from apartheid South Africa, protesting the war in Iraq and even the Soviet Invasion of Afghanistan[13]. Labor relations impacts on the Baltic Dry Index should not be underestimated by the sophisticated investor.
* Piracy - Although piracy has been a constant factor affecting shipping for thousands of years, 2008 saw some significant piracy events including the capture and ransom of the MV Sirius Star, a Saudi owned oil supertanker seized by pirates off the coast of Somalia. Pirates are also holding crews hostage for significant ransoms as in the case of the MV Faina, a Ukrainian arms shipping vessel. Interpol and other global law enforcement agencies are investigating the connections of various organized crime groups that may be bankrolling and organizing pirate groups including those based in Somalia. Various nations including the U.S., Canada, France, U.K., Russia, Ukraine and China are now deploying warships to patrol the coast of Somalia. These factors put additional upward pressure on the BDI[14].
* New Arctic Shipping Routes - Shipping from Europe to China by means of the arctic offers a route distance savings of approximately 4000 miles, which is a large percentage of the non-arctic total route distance. Of course, the historical search for the Europe-China route was the reason for the discovery of the "New World" (America). With oil prices (Bunker Fuel) at 1st Q 2009 lows, arctic shipping may or may not be economical. But during mid-2008 oil prices, a 4000 mile route saving offered significant fuel and time savings. Discussion among scientists attending the March 2009 "Copenhagen Conference" suggests that the predictions by the 2007 UN- IPCC Report on Climate Change regarding the likely clearing of arctic sea ice has underestimated the rate of clearing and by 2013 arctic shipping may become feasible. Although the shipping industry remains highly secretive, the potentially significant economic advantages have caused many international shipping companies to begin analyzing and planning for potential new arctic routes. Shipping industry intelligence indicates that China is interested in potential deep-water ports in Iceland. Arctic routes do not currently affect the BDI but may in the near future[15].
The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.
Economic Implications
This index is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. This could also be gleaned from looking at commodity prices, but there are substitution effects and futures contracts that make it difficult to interpret the impact of commodity price fluctuations. Additionally, nearly all commodities are seeing severe increases in prices in 2008 regardless of supply situations as investors seek to hedge their inflation exposure with hard assets.
Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it. [5] The BDI will show how much a company or country is willing to pay to import raw materials immediately. For example, if a Chinese company has contracted out coal prices for the next year from Rio Tinto (RTP), then the spot price of coal increasing after a mine accident will not impact that established contract. However, when this company is willing to pay more per ton to ship the coal than to actually purchase it, an investor can see that price growth is accelerating.
Price Increases Passed To Businesses/Consumers
As the BDI increases, so effectively does the cost of raw materials. This cost associated with procuring the materials must be passed along the value chain by producers and refiners. In the end, consumers will see higher dry bulk rates in the higher prices they pay for goods derived from these raw materials. For example, when Folgers pays an extra $10/ton to import coffee beans, they will pass along this increased procurement cost to consumers to maintain margins.
Additionally, imported goods may often carry a BDI factor in the prices. An example of this would be the average Chinese imported good. As China transformed from coal exporter to importer, they began buying coal from nations such as Russia, Brazil, and Australia. The coal from the latter two must be shipped using dry bulk carriers. As the rates for the BDI went up in 07, so did the cost of coal to China. Since coal is used for 70-80% of China's energy generation, [6] overhead costs for factories increased with the price of coal. As the overhead costs increase, so must the price of the end good to maintain the margin of profit. As this end price increased, an American paid more for a t-shirt or toy at Wal-Mart.
Key Trends and Forces
* Commodity Demand - This is determined mainly by industrial production and energy demand. If commodity demand is strong, BDI rates will increase regardless of spot rates for those commodities. Companies that have contracted out spot rates will show increased demand through paying more for shipping of the materials. As more coal and steel are being demanded by China, so will the rates for dry bulk shipping increase.
* Fleet Supply - This is determined by the number of available ships, their capacity, and the utilization rates. Additionally, the average age of the fleets will determine where they are in the life cycle. The average ship lasts 25 years. If the average is closer to that number, supply will be decreasing in the short term. Also, supply is greatly determined by delivery of new vessels. Currently, there is significant back logged demand for new vessels. No new orders are being taken for delivery before late 2009. With this backed up supply, BDI prices soared in 2007. With rates for the largest dry bulkers fetching nearly 10x that of a comparable VLCC Oil Tanker, many companies converted tankers into dry bulk carriers.[7] As conversions and ships contracted to be built at the beginning of the price run up in 2006 come on line, the upward pricing pressure of a fleet in which 41% of its ships are over 20 years old will be held at bay.[8]
* Seasonal Pressures - Weather has a major impact on both demand and logistics. For demand, cold weather may increase the demand for coal and other energy creating raw materials. For logistics, cold weather may cause ice to block ports and low rivers to prevent travel. Both of these cause increases in the BDI. Conversely, a mild winter or early ice breakup in cold water parts will cause decreases in the BDI.
* Bunker Prices - Bunker fuel is a type of fuel oil a ship uses for propulsion. Bunker fuel accounts for between a quarter and a third of vessel operating costs. Higher crude oil prices also mean higher bunker fuel prices which will be reflected in higher BDI prices. So, just as higher oil prices will put a damper on Airline company margins, they will squeeze margins for dry bulk operators. High bunker fuel prices in 2008 caused many companies to instruct their crews to decrease ship speeds to conserve fuel, thereby increasing shipping times- which causes the BDI to rise. A new (2008) trend in the shipping industry is the recent development of a "skysail," a ship propulsion augmentation system consisting of a paraglider-type airfoil and an electronic deployment and control mechanism that uses wind to help propel ships and thereby save bunker fuel costs[9].
* Choke Points Nearly half of the world's oil passes through a few narrow shipping lanes. This includes the straights of Hormuz and Malacca, the Bosporus and the Suez and Panama canals. These geographic choke points cause natural caps in the number of ships that can pass through each day, month or year and therefore also limits the bulk tonnage capacity of certain shipping routes. If anything disrupts the flow of ships through the choke points, the BDI will increase. The narrow (52 mile wide) Bering Strait (also called the "Bering Gate" in the shipping industry) may soon become the world's newest strategic "choke point" for shipping [10].
* Market Sentiment - Because of the time lag in forecasting demand for raw materials, market opinion can greatly affect the freight exchange. [11] The recent halving of the index's value can be attributed to many companies forecasting lower global growth and cutting their production/demand targets.
* Port Congestion -This acts as another great buffer against supply increases lowering index prices. The actual infrastructure of these ports prevents more ships entering the market. The ports simply cannot handle more traffic. Until major changes occur at these vital terminals, there will be upward pressure on dry bulk prices. Shipping industry analysts [2] are actually developing an index to standardize and make available this incredibly vital data.
* Labor Relations - Nothing is loaded or unloaded from ships without labor. Labor relations at various ports around the world directly affects the BDI. For example, in the U.S. both the ILA (International Longshoreman's Association) and the ILWU (International Longshoreman's and Warehouse Union) exert enormous control over the labor at ports. Labor relations issues include: intentional work slowdowns, company lockouts, strikes and political boycotts. Labor unions have expressed their political power and influence in the past by boycotting products from apartheid South Africa, protesting the war in Iraq and even the Soviet Invasion of Afghanistan[13]. Labor relations impacts on the Baltic Dry Index should not be underestimated by the sophisticated investor.
* Piracy - Although piracy has been a constant factor affecting shipping for thousands of years, 2008 saw some significant piracy events including the capture and ransom of the MV Sirius Star, a Saudi owned oil supertanker seized by pirates off the coast of Somalia. Pirates are also holding crews hostage for significant ransoms as in the case of the MV Faina, a Ukrainian arms shipping vessel. Interpol and other global law enforcement agencies are investigating the connections of various organized crime groups that may be bankrolling and organizing pirate groups including those based in Somalia. Various nations including the U.S., Canada, France, U.K., Russia, Ukraine and China are now deploying warships to patrol the coast of Somalia. These factors put additional upward pressure on the BDI[14].
* New Arctic Shipping Routes - Shipping from Europe to China by means of the arctic offers a route distance savings of approximately 4000 miles, which is a large percentage of the non-arctic total route distance. Of course, the historical search for the Europe-China route was the reason for the discovery of the "New World" (America). With oil prices (Bunker Fuel) at 1st Q 2009 lows, arctic shipping may or may not be economical. But during mid-2008 oil prices, a 4000 mile route saving offered significant fuel and time savings. Discussion among scientists attending the March 2009 "Copenhagen Conference" suggests that the predictions by the 2007 UN- IPCC Report on Climate Change regarding the likely clearing of arctic sea ice has underestimated the rate of clearing and by 2013 arctic shipping may become feasible. Although the shipping industry remains highly secretive, the potentially significant economic advantages have caused many international shipping companies to begin analyzing and planning for potential new arctic routes. Shipping industry intelligence indicates that China is interested in potential deep-water ports in Iceland. Arctic routes do not currently affect the BDI but may in the near future[15].
Baltic Dry Index at 2009 high and what it means
LONDON (Commodity Online): The Baltic Dry Idex (BDI), the global benchmark for freight costs for dry bulk commodities has a hit a 2009 high of 4381 points as bids rose for the Capesize vessels that transport iron ore and coal to China. Analysts have described BDI as the purest leading indicators of economic activity as it measures the demand to move raw materials and precursurs to production, as well as the supply of ships available to move this cargo.
The Financial Times quoting Peter Norfolk of SSY Consultancy and Research said that at the start of 2009, 170 Capesize vessels were on order for delivery this year but new ship availability amounts to only 35 vessels at present due to congestion and scrappages and the fact that some greenfiled shipyards have either not been built or have not delivered on schedule.
The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.
BDI measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it. [1]
The index is maintained by the Baltic Exchange. The cargoes being moved are raw material commodities such as coal, steel, cement, and iron ore. The prices of underlying contracts are determined by the buyers and sellers, and then the exchange takes 20 different routes throughout the world for various materials and averages them into one index. The index does not concern itself with finished goods or container ships, only raw materials and dry bulk specific ships are factored into the calculation.[2] It also factors in all four sizes of oceangoing dry bulk transport vessels.
The Baltic Dry Index, had its ups and downs this year as in August first week it fell 17.2% from 3,350 to 2772 on falling coal and iron ore imports by China. At that time China's steel mills were locked in negotiations with foreign miners over import of iron ore and there fore, BDI fell to one of the lowest levels.
The Financial Times quoting Peter Norfolk of SSY Consultancy and Research said that at the start of 2009, 170 Capesize vessels were on order for delivery this year but new ship availability amounts to only 35 vessels at present due to congestion and scrappages and the fact that some greenfiled shipyards have either not been built or have not delivered on schedule.
The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.
BDI measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it. [1]
The index is maintained by the Baltic Exchange. The cargoes being moved are raw material commodities such as coal, steel, cement, and iron ore. The prices of underlying contracts are determined by the buyers and sellers, and then the exchange takes 20 different routes throughout the world for various materials and averages them into one index. The index does not concern itself with finished goods or container ships, only raw materials and dry bulk specific ships are factored into the calculation.[2] It also factors in all four sizes of oceangoing dry bulk transport vessels.
The Baltic Dry Index, had its ups and downs this year as in August first week it fell 17.2% from 3,350 to 2772 on falling coal and iron ore imports by China. At that time China's steel mills were locked in negotiations with foreign miners over import of iron ore and there fore, BDI fell to one of the lowest levels.
US urges China to strengthen renminbi
President Barack Obama on Tuesday urged China to strengthen its currency as tensions over exchange rates and trade broke through a carefully orchestrated show of co-operation between Washington and Beijing.
Mr Obama made his comments after a three-hour meeting on Tuesday in Beijing with President Hu Jintao, during which both leaders pledged to work together on a long list of pressing international issues.
However, the US president also joined in the growing chorus of international voices calling on China to allow the renminbi to appreciate.
“I was pleased to note the Chinese commitment made in past statements to move toward a more market-oriented exchange rate over time,” he said at a joint appearance with Mr Hu in the Great Hall of the People. Such a move would “make an essential contribution to the global rebalancing effort”.
The reference to “past” statements could imply that China did not make any new commitments on Tuesday. Mr Hu did not mention the currency issue in his own statement, although he did call on both governments to refrain from protectionism, a veiled criticism of recent US trade measures on Chinese steel pipes and tyres.
“I stressed to President Obama that under the current circumstances our two countries need to oppose all kinds of trade protectionism even more strongly,” he said.
Coming at a time when Chinese prestige is growing and the US is facing enormous difficulties, Mr Obama’s trip has symbolised the advent of a more multi-polar world where US leadership has to co-exist with several rising powers, most notably China.
Although the public appearance on Tuesday had been billed as a press conference, the two leaders did not take any questions from the media and made only prepared statements, adding to the impression that Mr Obama’s visit has been one of the most tightly scripted in recent years and frustrating his hopes to speak more directly to the Chinese people.
In their comments and in a nine-page joint statement, the two governments spelled out a programme for ever-growing co-operation including stronger ties between their militaries, joint research initiatives on climate change and clean energy and even “a dialogue on human space flight”.
On Iran, where the US has been pushing China to take a harder line against Tehran, Mr Obama spoke with stronger language.
“We agreed that the Islamic Republic of Iran must provide assurances to the international community that its nuclear programme is peaceful and transparent,” he said. “Iran has an opportunity to present and demonstrate its peaceful intentions but if it fails to take this opportunity, there will be consequences.” Mr Hu said it was important to try to resolve the issue through negotiations.
China’s currency has been effectively pegged to the US dollar since the middle of last year and in recent weeks a number of international officials and governments have complained at the advantage this gives Chinese exporters, given the current weakness of the dollar.
Dominique Strauss-Kahn, managing director of the International Monetary Fund, called again on Monday at a conference in Beijing for a stronger renminbi “the sooner the better”.
He Yafei, one of China’s vice foreign ministers, defended China’s exchange rate policy. “In the process of tackling the financial crisis, keeping the RMB stable not only was a contribution to fighting the crisis but also helped stabilise global financial markets,” he said.
In recent days, several senior Chinese officials have criticised the US Federal Reserve, arguing that loose monetary policy in the US was creating bubbles in asset prices and endangering the global recovery. Yu Yongding, a researcher at one of China’s leading government think-tanks and a former member of the central bank monetary committee, said on Tuesday that Europe and China “should play together and put pressure on the US to change its monetary policy”. China and much of the world was being held “hostage” by US monetary policy, he said.
Mr Obama made his comments after a three-hour meeting on Tuesday in Beijing with President Hu Jintao, during which both leaders pledged to work together on a long list of pressing international issues.
However, the US president also joined in the growing chorus of international voices calling on China to allow the renminbi to appreciate.
“I was pleased to note the Chinese commitment made in past statements to move toward a more market-oriented exchange rate over time,” he said at a joint appearance with Mr Hu in the Great Hall of the People. Such a move would “make an essential contribution to the global rebalancing effort”.
The reference to “past” statements could imply that China did not make any new commitments on Tuesday. Mr Hu did not mention the currency issue in his own statement, although he did call on both governments to refrain from protectionism, a veiled criticism of recent US trade measures on Chinese steel pipes and tyres.
“I stressed to President Obama that under the current circumstances our two countries need to oppose all kinds of trade protectionism even more strongly,” he said.
Coming at a time when Chinese prestige is growing and the US is facing enormous difficulties, Mr Obama’s trip has symbolised the advent of a more multi-polar world where US leadership has to co-exist with several rising powers, most notably China.
Although the public appearance on Tuesday had been billed as a press conference, the two leaders did not take any questions from the media and made only prepared statements, adding to the impression that Mr Obama’s visit has been one of the most tightly scripted in recent years and frustrating his hopes to speak more directly to the Chinese people.
In their comments and in a nine-page joint statement, the two governments spelled out a programme for ever-growing co-operation including stronger ties between their militaries, joint research initiatives on climate change and clean energy and even “a dialogue on human space flight”.
On Iran, where the US has been pushing China to take a harder line against Tehran, Mr Obama spoke with stronger language.
“We agreed that the Islamic Republic of Iran must provide assurances to the international community that its nuclear programme is peaceful and transparent,” he said. “Iran has an opportunity to present and demonstrate its peaceful intentions but if it fails to take this opportunity, there will be consequences.” Mr Hu said it was important to try to resolve the issue through negotiations.
China’s currency has been effectively pegged to the US dollar since the middle of last year and in recent weeks a number of international officials and governments have complained at the advantage this gives Chinese exporters, given the current weakness of the dollar.
Dominique Strauss-Kahn, managing director of the International Monetary Fund, called again on Monday at a conference in Beijing for a stronger renminbi “the sooner the better”.
He Yafei, one of China’s vice foreign ministers, defended China’s exchange rate policy. “In the process of tackling the financial crisis, keeping the RMB stable not only was a contribution to fighting the crisis but also helped stabilise global financial markets,” he said.
In recent days, several senior Chinese officials have criticised the US Federal Reserve, arguing that loose monetary policy in the US was creating bubbles in asset prices and endangering the global recovery. Yu Yongding, a researcher at one of China’s leading government think-tanks and a former member of the central bank monetary committee, said on Tuesday that Europe and China “should play together and put pressure on the US to change its monetary policy”. China and much of the world was being held “hostage” by US monetary policy, he said.
Short View: Dollar carry trade
Just hours before US president Barack Obama arrived in China, the country’s chief banking regulator said the US was fuelling “speculative investments” and endangering global recovery through loose monetary policy.
Hours after the president landed, Ben Bernanke, US Federal Reserve chairman, said he did not think new asset price bubbles were forming in the US. Who is right? Near-zero interest rates in dollars are one reason for the rush for higher-yielding assets, from US and European stocks to emerging market equities to corporate bonds and commodities. Indeed, creating demand for risky assets is part of the point.
What is not clear is how dangerous it is. A so-called “carry trade” of borrowing in dollars in low rates to invest in higher-yielding assets could be reversed as soon as US interest rates rise or the currency shifts. If there is a rush for the exits, some investors fear a knock-on collapse in prices of assets.
Though some investors are likely to be borrowing in dollars, it may not be that widespread. “Money and credit have been quite weak, suggesting that asset price movements have not been fuelled by increased leverage that would leave financial intermediaries vulnerable to a reversal of recent gains,” said Donald Kohn, Fed vice-chairman, this week. In the US, as well as in Europe, bank lending continues to fall. The amount lent against securities in the repurchase, or repo, markets is also well below the peaks of 2008.
The problem with measures of leverage in the financial system is they ignore market psychology. If nothing else was reinforced by last year’s market gyrations, it is panic travels fast. Aggregate positions also may not reveal build-ups in particular trades, which present particular exit dangers. Leverage is down, but a lack of leverage in markets does not mean there will be a lack of volatility.
Hours after the president landed, Ben Bernanke, US Federal Reserve chairman, said he did not think new asset price bubbles were forming in the US. Who is right? Near-zero interest rates in dollars are one reason for the rush for higher-yielding assets, from US and European stocks to emerging market equities to corporate bonds and commodities. Indeed, creating demand for risky assets is part of the point.
What is not clear is how dangerous it is. A so-called “carry trade” of borrowing in dollars in low rates to invest in higher-yielding assets could be reversed as soon as US interest rates rise or the currency shifts. If there is a rush for the exits, some investors fear a knock-on collapse in prices of assets.
Though some investors are likely to be borrowing in dollars, it may not be that widespread. “Money and credit have been quite weak, suggesting that asset price movements have not been fuelled by increased leverage that would leave financial intermediaries vulnerable to a reversal of recent gains,” said Donald Kohn, Fed vice-chairman, this week. In the US, as well as in Europe, bank lending continues to fall. The amount lent against securities in the repurchase, or repo, markets is also well below the peaks of 2008.
The problem with measures of leverage in the financial system is they ignore market psychology. If nothing else was reinforced by last year’s market gyrations, it is panic travels fast. Aggregate positions also may not reveal build-ups in particular trades, which present particular exit dangers. Leverage is down, but a lack of leverage in markets does not mean there will be a lack of volatility.
Mother of all carry trades faces an inevitable bust
Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.
Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.
People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.
Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.
So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.
While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.
The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.
But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.
Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.
This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.
Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.
People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.
Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.
So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.
While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.
The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.
But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.
Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.
This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
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