Investment for the future

My friend Sam and I were talking yesterday about the prognosis for the stock markets and economies in general. Both Sam and I have been investing in the Indian market for quite a few years now, and I have also been into the rest of the world markets over the last 6 to 7 years.
I had quit the European REIT maket in 2007 , the very same day the first hedge fund of Bear Stearns collapsed, because I thought trouble was brewing. It runed out to be a very timely call, in hindsight. Over the next 2 to 3 months, I had virtually withdrawn from the rest of the markets, including India. By end of 2007 , I was completely in cash, save for some token investments in Reliance and L&T in India. Again, in hindsight, this has turned out to be a fortuitous move.

We know the mess we are in right now. I am reminded of an episode in the Mahabharatha, where Yudhistira, after a hard day's fight in Kuruskshetra , is brooding over the thousands who had been left dead. In walks sage Vyasa, and Yudhistira, the righteous one that he is, tells him that he just feels like running away from the battlefiled, jsut does not want to fight anymore and wants to take Sanyasa.

Vyasa replies " no way, my son! In fact, this battle will not move on without you, and will be fought with you right in the centre, and you, like any of us, is unfotrunately destined to oversee this bloodbath haplessly, that is is your fate".

Fast forward to 2008 - I put myself ( and the rest of us poor denizens of the world) in the place of Yudhistira, and US Treasury Secy Hank Paulson in the place of sage Vyasa!!! I am awed at the uncanny similarities!!!!

Perhaps we too can do nothing but to see the financial world around us collapse.
Into the future now. I have observed that historically, the India index in a bear market has fallen to about 2/3rds of it's peak value before fighting back over 2/3 years. Going by this precendent, given that the Sensex had hit 21000+ not so long ago, my logic above would lead us to a 7000+ figure for the sensex as a worst case scenario. Of course no one seems to know what had happened to the Bombay market during the 1929 days.

People say that this round of recession is going to be long and deep. I think so too, but do not know, frankly speaking. Given that the Sensex had dropped close to 50% already and given that no one really knows how far it could, I am mulling the RSP or SIP strategy, to invest in, say Rs10,000 every week for the next 1 year in just Reliance and L&T shares, possibly in equal measure.

L&T has closed around Rs.1000 last weekend. Assuming 1.5% drop in the share value, on an average , over the next 52 weeks, the average of cost of possession would be Rs. 687, with a low value of Rs.456 ... to me, this could possibly be the worst case scenario ( another drop in the index by about 50% from where it is today)... which then means my avg cost would be at a 50% premium... but then, I would have had a big chunk of investment over this period on one of the best possible stocks in India... and given that indices tned to rise over 300% in a 5 to 7 year period in India, my invests could still yield me more than 200% in that period... in a fool-proof way....

Any thoughts on this? - and any loopholes in this logic.. over and above uncertainty that exists today, and the vagaries of the stock market.

My personal pick in terms of sector right now is the Sugar sector - completely contrarian... but I believe that over the next 3 to 5 years, this sector could get excellent returns... my pick would be Shree Renuka Sugars and Bajaj Hindustan. I plan to take positions in this sector gradually over time.

Fast Money

"Fast Money" is the name of a popular program in CNBC channel, where they discuss what stock to trade ( buy or sell) to make quick money.

However, what most people do not realize is that Fast Money policyis followed by many FIIs in many developing countries... need proof? Look at the Russian Stock Index, which has fallen 20% yet agian today... the graph actually is not updated... the sigure should show 886.

Point is, when things get difficult in emerging economies, hot money that came in and whipped up the markets, as the int eh case of Russia, when the going was good, can flow out even faster!!! Poor investors locally are left in the lurch... what we are witnessing in Russsia is PANIC... nothing more.
China and India are not too far behind, in this phenomenon.

Stephen Hawking and the Brihadaranyaka Upanishad

Right now I am reading some snippts of the Brihadaranyaka Upanishad, one of the 10 most popular ones. I was immediately reminded of the book The Theory of Everything by Stephen Hawking. I am sure many of you would have read the latter.
http://www.rlslog.net/stephen-hawking-and-the-theory-of-everything-s01e01-02-dvdrip-xvid-nosegment/
In the first chapter there, Hawking acknolwledges that God MAY have created the Universe in the first instance, after which the big bang happened. He clearly has no scientific explanations to a period before the Big Bang.. I rememebr many other top scientists admitting the same. To be, this is postulation that God MAY have createdthe Universe... the Believers believe that it was God's handiwork, and the scientists seem to agree " we do not have any other science to either prove or disprove this- yet; and so it may well be the case" . Maybe they really dont care.. so it be.
When I read the section in the Brihadaryanaka Upanishad where there is a conversation between Sage Yagnavalkya and Gargi, and I reproduce it below. It is astounding to find that Yagnavalkya comes to the same conclusion as Stephen Hawkins ( or rather the other way around!!) . Yagnavalkya is clearly unable to explain what the Origin of Everything is or was- in fact in chapter IV, where he as a conversation with Maitryi, she admits, at the end of the conversation, and I quote " Then Maitreyi said: "Just here you have bewildered me, venerable Sir, by saying that after attaining oneness the self has no more consciousness." Yajnavalkya replied: "Certainly I am not saying anything bewildering, my dear. This Reality is enough for knowledge, O Maitreyi." "
Nett of it, the philosophical angle to explain the Origin of Everything is to ascribe it to Brahmam, or Holy Spirit or Allah, or whatever it is, depending on the individual's faith ( of course, explainations to substantiate this would differ from religion to religion, but that is understandable). And as for Scientists, they merely seem to shrug their shoulders and say " sorry we can't explain this anymore bassed on evidence available, may it is created by God, or may not, we dont really know" ....
I found this fascinating - how could an ascetic, sitting on the Himalayas with no Hubble Telescope or nothing, have seemingly come to the same conclusion as modern scientists, thousands of years back?


.... Read on


Chapter VI—Yajnavalkya and Gargi (I) 1. Then Gargi, the daughter of Vachaknu, questioned him. "Yajnavalkya ," said she, "if all this is pervaded by water, by what, pray, is water pervaded?" "By air, O Gargi." "By what, pray, is air pervaded?" "By the sky, O Gargi." "By what is the sky pervaded?" "By the world of the gandharvas, O Gargi." "By what is the world of the gandharvas pervaded?" "By the world of the sun, O Gargi. "By what is the world of the sun pervaded?" "By the world of the moon, O Gargi." "By what is the world of the moon pervaded?" "By the world of the stars, O Gargi." "By what is the world of the stars pervaded?" "By the world of the gods, O Gargi." "By what is the world of the gods pervaded?" "By the world of Indra, O Gargi. "By what is the world of Indra pervaded?" "By the World of Virij, O Gargi. "By what is the World of Virij pervaded?" "By the World of Hiranyagarbha, O Gargi." "By what, pray, is the World of Hiranyagarbha pervaded?" "Do not, O Gargi," said he, "question too much, lest your head should fall off. You are questioning too much about a deity about whom we should not ask too much. Do not ask too much, O Gargi." Thereupon Gargi, the daughter of Vachaknu, held her peace.

Warren Hastings and the Gita

I stumbled upon this article. I do not believe that the Bhagwat Gita needs recognition and acknowledgement of anyone in particular- it has survived at least a few thousand years, inspite of numerous cultural and military invasions- but it was interessting to note that the first Governor General of India was deeply interested in this Oriental Holy Book and the philosophies that it offered, so much so that he commissioned a translatory exercise.
http://www.sscnet.ucla.edu/southasia/History/British/Hastings.html

On a more philosophical note, all the major religions of the world preach the same Utlimate Reality - the Brahmam, the Holy Spirit or Allah. None of these have a form or shape, per the individual definitions in the religous texts. And all of them have representatives to take humanity closer to this Ultimate Reality. I wonder why then we are perpetually fighting with each other, saying " my religion is better than yours" ... I think our energies are better spent going after this Ultimately Reality, or taking care of worldly matters in a peacful and happy life, as long as each one of us is alive for the 80 or 90 years ( on an average).
I would go one step further - it is even OK to be an Atheist or an Agnostic, as long as one feels peacful and happy while on this earth. Because, according to me, all religons are dessigned only with this end purpose in mind- stay peacful and happy as long as you are alive.
Cheers... Dilip

Fiasco at SEC

An interesting article that appeared in NY Times on 3rd of Cot, reproduced in CNBC, that I wish to reproduce here.

Of key interest could be the following points:

1.Lobbying at unimaginably high levels by the "investments Banks" to remove regulations, one among them being Henry Paulsson, who had gone on to become the treasury secy.
2.Looser rules leading to obscene levels of leveraging - - 33:1 in teh case of Bear.
3.Bringing in a regime of Voluntary controls, in the name of Deregulation - something that was doomed to fail from the word go.

Read on ...
==================================================


The SEC Rule that Let Banks Pile on Debt
BUSINESS BIZ COMPANIES MARKETS
The New York Times
03 Oct 2008 06:18 AM ET
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“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.
As rumors swirled that Bear Stearns faced imminent collapse in early March, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets — more than enough to weather the storm.
Drained of most of its cash three days later, Bear Stearns was forced into a hastily arranged marriage with JPMorgan Chase — backed by a $29 billion taxpayer dowry.
Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom — Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted to commercial banks.
How could Mr. Cox have been so wrong?
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.
A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.
One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.
“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”
Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.
Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.
“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”
The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.
After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.
With that, the five big independent investment firms were unleashed.
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.
Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.
The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.
But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.
The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.
The few problems the examiners preliminarily uncovered about the riskiness of the firms’ investments and their increased reliance on debt — clear signs of trouble — were all but ignored.
The commission’s division of trading and markets “became aware of numerous potential red flags prior to Bear Stearns’s collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain” capital standards, said an inspector general’s report issued last Friday. But the division “did not take actions to limit these risk factors.”
Drive to Deregulate
The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President Bush.
A similar closeness to industry and laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies.
“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”
As was the case with other agencies, the commission’s decision was motivated by industry complaints of excessive regulation at a time of growing competition from overseas. The 2004 decision was aimed at easing regulatory burdens that the European Union was about to impose on the foreign operations of United States investment banks.
The Europeans said they would agree not to regulate the foreign subsidiaries of the investment banks on one condition — that the commission regulate the parent companies, along with the brokerage units that the S.E.C. already oversaw.
A 1999 law, however, had left a gap that did not give the commission explicit oversight of the parent companies. To get around that problem, and in exchange for the relaxed capital rules, the banks volunteered to let the commission examine the books of their parent companies and subsidiaries.
The 2004 decision also reflected a faith that Wall Street’s financial interests coincided with Washington’s regulatory interests.
“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).
“Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.
In letters to the commissioners, senior executives at the five investment banks complained about what they called unnecessary regulation and oversight by both American and European authorities. A lone voice of dissent in the 2004 proceeding came from a software consultant from Valparaiso, Ind., who said the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.
“With the stroke of a pen, capital requirements are removed!” the consultant, Leonard D. Bole, wrote to the commission on Jan. 22, 2004. “Has the trading environment changed sufficiently since 1997, when the current requirements were enacted, that the commission is confident that current requirements in examples such as these can be disregarded?”
He said that similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.
Mr. Bole, who earned a master’s degree in business administration at the University of Chicago, helps write computer programs that financial institutions use to meet capital requirements.
He said in a recent interview that he was never called by anyone from the commission.
“I’m a little guy in the land of giants,” he said. “I thought that the reduction in capital was rather dramatic.”
Policing Wall Street
A once-proud agency with a rich history at the intersection of Washington and Wall Street, the Securities and Exchange Commission was created during the Great Depression as part of the broader effort to restore confidence to battered investors. It was led in its formative years by heavyweight New Dealers, including James Landis and William O. Douglas. When President Franklin D. Roosevelt was asked in 1934 why he appointed Joseph P. Kennedy, a spectacularly successful stock speculator, as the agency’s first chairman, Roosevelt replied: “Set a thief to catch a thief.”
The commission’s most public role in policing Wall Street is its enforcement efforts. But critics say that in recent years it has failed to deter market problems. “It seems to me the enforcement effort in recent years has fallen short of what one Supreme Court justice once called the fear of the shotgun behind the door,” said Arthur Levitt Jr., who was S.E.C. chairman in the Clinton administration. “With this commission, the shotgun too rarely came out from behind the door.”
Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.
Under Mr. Cox, the commission responded to complaints by some businesses by making it more difficult for the enforcement staff to investigate and bring cases against companies. The commission has repeatedly reversed or reduced proposed settlements that companies had tentatively agreed upon. While the number of enforcement cases has risen, the number of cases involving significant players or large amounts of money has declined.
Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency.
In the process, Mr. Cox has surrounded himself with conservative lawyers, economists and accountants who, before the market turmoil of recent months, had embraced a far more limited vision for the commission than many of his predecessors.
‘Stakes in the Ground’
Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.
“The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said.
The decision to shutter the program came after Mr. Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. Mr. McCain has demanded Mr. Cox’s resignation.
Mr. Cox has said that the 2004 program was flawed from its inception. But former officials as well as the inspector general’s report have suggested that a major reason for its failure was Mr. Cox’s use of it.
“In retrospect, the tragedy is that the 2004 rule making gave us the ability to get information that would have been critical to sensible monitoring, and yet the S.E.C. didn’t oversee well enough,” Mr. Goldschmid said in an interview. He and Mr. Donaldson left the commission in 2005.
Mr. Cox declined requests for an interview. In response to written questions, including whether he or the commission had made any mistakes over the last three years that contributed to the current crisis, he said, “There will be no shortage of retrospective analyses about what happened and what should have happened.” He said that by last March he had concluded that the monitoring program’s “metrics were inadequate.”
He said that because the commission did not have the authority to curtail the heavy borrowing at Bear Stearns and the other firms, he and the commission were powerless to stop it.
“Implementing a purely voluntary program was very difficult because the commission’s regulations shouldn’t be suggestions,” he said. “The fact these companies could withdraw from voluntary supervision at their discretion diminished the mandate of the program and weakened its effectiveness. Experience has shown that the S.E.C. could not bootstrap itself into authority it didn’t have.”
But critics say that the commission could have done more, and that the agency’s effectiveness comes from the tone set at the top by the chairman, or what Mr. Levitt, the longest-serving S.E.C. chairman in history, calls “stakes in the ground.”
“If you go back to the chairmen in recent years, you will see that each spoke about a variety of issues that were important to them,” Mr. Levitt said. “This commission placed very few stakes in the ground.”
Copyright © 2008 The New York Times
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Singur

For quite some time, I was watching with interest, the developments in Singur on the Tata Nano project. Of particular interest to me was, will Ratan Tata the patriot win over Ratan Tata the businessman.
Today's news that the Tatas have finally pulled the plug off Singur has convinced me that that the Patriot has won. And in the more-long term sense of it, the Businessman, and by deduction, Indian businesss, has won, too.
Let me explain why I think so. Let us assume, for a moment, that that Tatas had relented to the "comrpomise formula" and decided to hand out a host of freebies to all and sundry. This, after the Govt had given all necessary permissions to acquire land legally, and after the Tatas had paid market rate for the land, and , on top of it, offered jobs to at least one member of each affected family of farmers, in the same plant, irrespective of their skills levels. After doing all this, if reckless politicians start hijacking the project in the name of " fighting for farmers", I would expect a ressponsible businessman and a true Indian like Ratan, to call the bluff, and walk out. If he had not done that, he would have ended up ssending a few wrong messages to many sets of people:
To politicians - any project that generates thousands of jobs to the localss can eb hijacked at will, in the name of fighting for the poor.
To the poor and afflicted - one can perinnially depend on politicians to scuttle any project that usurps their precious land- this after full market compensation, and more.
To Other Business houses - that no State Govt's word can be taken for granted any more when it comes to land acquisition, and therefore, other than the vast wastelands of Rajasthan or the high peaks of the Himalayas. where no human will be willing to relocate and work, it is impossible to put up a viable big project.
To the international community - India is NOT dependable when it comes to the Govt's backing to make sure that all investments are taken to fruition.

Thank God - nothing of this has happened -yet.
Now, I am not pro-business or anti-farmer or any such rubbish. My sole point is - once committed, stick to it, and let not dirty politicians scuttle it. Ratan Tata has made it clear, that there are at least 4 other states vying with each other to offer land for the project and that they are considering that. The message to politicians is - dont try to hijack things; those days clearly are gone. I hope the Mamtas of the world realize this new reality.

My personal opinion is - it is wrong to snatch cultivable land from farmers, for industrial production, in the first place. But once an agreement has been reached, it should be adhered to, and people should not be made to dance to the lewd tunes of Netas.
However, one also has to look at it practically. Assume that the set of farmers that managed not to sell out to factories, and continue farming. How long do you think they can realistically continue that, what with the neighbourhood air and water getting polluted like never before? Is it not then wiser to accept the package of compensation at market rates, plus jobs to ensure continuation fo livelihood? Why do they resist this change? I simply dont understand. Maybe I would never, perhaps I have never been a farmer myself.
The fundamental question is - why should industrialization be portrayed as BAD per se? Is it really THAT bad? Will the economic lot of the Indians be any better off if we continue as farmers rather than industrial workers? Are we, as a nation, seeking to refute the historical imprints of Europe, which gained all the economic clout in the world through the Industrial Revolution. Or more recently, the case of China? Are we trying to bring in a new paradigm that it is still possible to continue farming, and still become an economic Superpower of the future?

Baltic Dry Index

The look of the Baltic Dry Index, a key economic indicator, tells the story on the Global Economy - it clearly seems to be on a downward spiral at the moment.

Graph courtesy investmenttools.com

Financial ratios de-mystified

With all that is happening in Wall Street and Main Street, all of us must be wondering about the various Financial terminologies floating in the air, like pollen. I realized that this is causing Financial Asthma in many of us, and decided to do something about it.

Here is an imaginary list of Financial terminologies that any future author of books on Finance for future Investment banks ( if at all they continue to exist) will most likely come up with. I am sure this will be the badly needed Broncho-dialator we all need, to get over this bout of Financial asphyxation.



ROCE : Return OF capital employed in an investment bank ( previously understood as Return on Capital employed, erroneously. Such mistakes do occur of(f) and on…). Quite often this never occurs.

Leverage ratio: The number of times the assets in your balance sheet can be leveraged for borrowing, using “structured products”, mortgage- backed secutiries” etc… the commonly found ratio in Wall Street is 30 or above.

DCF – Diminished cash flows. (Earlier call Dsicounted Cash flow) . The more this is in the negative , the better prospects are, for Govt takeover.

IRR – Internal rate of Ruing ( Earlier called Internal rate of return). A strong indicator of how much the hapless investor and the depositor fumes inside. Higher the IRR, the better for the CEOs.

Payback – the earliest time it takes for the first $100M in Exec compensation, for the CEO to realize. Please note that this indicator remains strong, even if the company goes belly up.


Profit and Loss: Refers to the position of the CEO and the equity investor, respectively. For some time, it used to provide operational indicators for the company.

Balance Sheet – Means a Blank sheet (plain sheet of paper) . Earlier, used to provide a list of assets and liabilities of the company.


Quick Ratio – a measure of how quickly the investors lose their capital after investing in the company.

Cash Flow - Refers to the amount of cash that will flow from the Fed’s discount window, followed by the Fed’s Bailout plan, and topped up by the taxpayer, with the objective of protecting executive compensation.

Working Capital Advances : The extent to which the Capital ( read: the Fed) advances in working out a bail-out package.


Provision for taxation : The provisional increase the Federal Govt is planning to tax the hapless taxpayer in the ensuing years, to cover for the bail-out package.

Payout Ratio : The ratio of payout to the Execs to the amount of write offs in a quarter. Earlier definition was Dividend per share upon Earnings per Share.

Asset turnover : Refers to the number of times the same mortgage asset can be used as collateral, to create multiple “mortgage backed securities”. Earlier it used to be Total Asets upon Total Sales.

Debt Ratio: The ratio of the average debt every American will be in after he foots the huge bail-out package, upon his average monthly income.

Profit margin : Refers to the margin of profits that people like Warren Buffet, the Sheikh of Arabia, China’c CITIC etc will make, when they eat up beaten down investment banks.

P/E ratio : Also called Pride to Envy ratio . This is a measure of the tussle that goes on in the minds of the average Wall Streeter , a fight between the Pride in his country’s Assets ( as in “ Merill Lynch is a National Asset” kind of observations) and the Envy over the Chinese ability to draw up huge cash surpluses.

EPS : Refers to Emergency Pro-Note Service. Also called as Discount Window. This is a facility the Govt has created for the benefit of over-leveraged investment banks who have no further recourse, when creditors knock at their doors.

Risk-adjusted Return On Capital (RAROC) : Also called Zero. Invented by the Indians thousands of years ago. Refers to the real return to investors in investment banks, after adjusting for all the risks

EVA ( Economic Value Added) : The extra profits that Sovereign Investment funds and “predatory investors” add to their portfolios after they take over the investment banks on the mat.

How to value Toxic Assets?

During the late 80s there was folklore that pop singer Madonna had insured her breasts for an undisclosed sum. If I remember coorectly, Samantha Fox followed suit, and so did Pamella Anderson Lee… perhaps age is catching up, so I have lost track of this Hall of fame ( sic).

I was on the flight back home from Shanghai today, and could not help peep over the neighbour’s copy of newspaper which screamed “How to value to Toxic Assets” – somehow this peeping habit seldom seems to go away, be it the neighbour’s newspaper or in the men’s room, phew! Curiosity quite often seems to override common knowledge.

Back to the toxic assets discussion, for a moment I was left wondering what was being referred to. Surely Madonna may well have become grandma by now, and therefore her “toxic assets” may now have softened to the status of liabilities ( ahem!). Or did they refer to the twin towers in NY ( I mean the real ones?) … most unlikely, I mused… they have already been brought down by 9/11 of the real variety ( not the Financial one). Surely, I thought, they may be referring to the Presidential candidates in the US… but I was quickly back in my senses… after all, the headlines referred to assets, and I am not sure that average American considers either of them in this same category. Or are they referring to the new glamour girl in the Presidential run-up, Sarah Palin, I wondered for a moment. But then, I reasoned to myself, she does not seem to possess any toxic assets- I mean, as far I know , she used to only do community service in her native Alaska, and never did possess any oil wells, for them create any oil spills, leading to toxicity …. (Oh, come on, guys, give me a break!)

Then, immediately my recent jaunt in China reminded me – has the newspaper referred to the melamine-mixed milk from China as the toxic asset? That milk is toxic, for sure, as the thousands in China would bear, but , I wondered, when did the Americans start considering Chinese imports as assets? Surely not, I thought…

By this time, my neighbour had quietly folded that crimpled newspaper, tucked it under his legs, and gone to slumber after his round of Bloody Mary. And for the rest of the flight, I was left twiddling my thumbs on what those toxic assets could be - of course, I had washed my hands before my meal, so my thumb was free of any toxicity!

Any clues on what toxic assets were being alluded to?


Cheers... Dilip

Rewind to 1991

In 1991, India was on the brink of defaulting on external paymentss, forcing the then PM and the then FM to pawn Gold with Switzeland to raise cash. The IMF, driven by the likes of the US, was quick to jump in , to prescribe the panacea for the ills faced, and say " stop privatizing profits and nationalizing lossses, and open up the Public Sector Undertakings to the Pvt. Sector". Sure enough India trudged along that path, and many other countries followed suit.


Fast forward to 2008. Today's news is that the U.S Treasury Secretary Henry Paulson is considering setting up a government facility to take on bad debts from financial institutions and prevent the global credit crisis from worsening. In other words, the mesage for the big guns in the Corporae Sector is - go and commit hara-kiri, come out with "innovative" Financial instruments like "structured products" and , if things go awry, dont worry, I , like God, will take all the crap created". The Wall Street shenanigans are on the rampage, the Govt is soaking up all the foul bets, and we all watch in amusement and awe.

The estimation as of yesterday is that the cost of bail-outs so far ( NOT including this new initiative" ) is about $900B ( Lehman Bros, Bear, Fannie, Freddie etc etc etc..) . And how will the Govt. fund this? Possibly a combination of the following:

1. Raise additional Govt. Bonds. I wonder who will buy them now.
2. Simply print more money - will be catastrophic as far as Inflation and US $ value is concerned, especially considering that the US wants to adopt a Strong Dollar policy.
3. Raise taxes - something Obama has said he would, and McCain has said No.
4. Cut down on infrastructure and public spending - will be disastrous for the long term future of the US.

Whichever way I look at it, the man on the streets is going to be impacted. The biggest story of the US ssuccess model is that it has made the average American more prosperous economically, than he was 50 years ago. True enough. But , to me, that very premise on which the US brand of Capitalism is under siege now, as these events will tell us.

I still do not believe that the US will go down the tube. It is a nation with fantastic human resources. But I strongly feel that the heydays of Yankee hegemony are well and truly over, and that we are undergoing a fundamental paradigm shift, where the world order is about to change permenantly. I am happy to be proven wrong here.

AIG (contd.)

AIG has dropped 60% in share value overnight. I, like a brave soldier, have bought AIG Oct CALL options, my guesss is tha the Fed, that super Investment Banker, will ultimately do something to bail out AIG.... they may not risk yet another failure on Wall Street.
This is no breast-beating exercise, but in my Aug 07 post, I had predicted the troubles that lay ahead for the Insurance sector. It is now turning out to be true indeed. God knows who else is on the run now... the gossip mills in Wall Street point to Morgan Stanley and Goldman being next in line, but I believe they are well hedged and sounder than the others who have failed.
The fundamental question though- all the Mandarins in Wall Street and Washington have so far maintained that the Economic Fundamentals arew Sound... on what basis, may I ask? Lehman, for example had $690B of debts ( and 680B in "assets" to back them up... assets that had been pawned multiple times over, in the name of "derviatives" and "structured products"). If Lehman can have this big a hole, what about the other biggies? And if we add up all of these biggies' holes, what Economic Fundamentalss are we talking about?

AIG

I hope AIG does not end up like Bear or Lehman, for the sake of millions of commoners who have insurances with it. If, God forbid and SEC/ Fed/ Treasury forbid, that indeed happens, and assuming it goes belly up, with no one else taking over, like Hehman, here are some of the possible ramifications:

1. People who have life insurance have to forgo any money that may be with the company, especially people with endowment policies.
2. People may be forced to go to another insurer and start afresh- most likely at a much higher cost of insurance, since they will be starting all over again, with no no-claims bonus etc to aid.
3. People with Helath Insurance with AIG will have it even tougher. They now have to prove that their health is as good as ever- which in many cases, may not be the cases, forcing their applications to be either rjected outright, or tobe accepted a much higher premium.
4. If a behemoth like AIG can be tourbled this easily, imagine the plight of the smaller fish! This could cause premiums in general to rise dramatically.

I only hope and pray nothing of this sort happens.

US Regulatory Agencies

The US Claims to be the best market regulated market. However, the past few months have busted that tall claim.

I wonder whatever happened to the SEC, even as people are busy blaming either the Fed or the Treasury for all ills in Wall Street.

Can anyone enlighten me on what actions had the SEC been taking regarding disclosures by Finance companies? How did it accept 10K filings from Lehman Bros or AIG without discolures? If, assuming, there was nothing to disclose, how come things unravelled so fast that SEC had no inkling of them? If the Management knew something but did not disclose at the earliest opportunity, is it not tantamount to Fraud according to the US laws? Or am I missing something here?

To me , the Financial companies seem to create a new paradigm in Financial management.

Balance Sheet is fast equalling to BLANK sheet!!! Making a mockery of the rules and regulations and regulators, and in the end, the hapless US taxpayers!!

Wall Street on Red Alert

guys, this is not MY caption, but what CNN Finance is saying!!!
http://money.cnn.com/
Even more terrifying are the accompanying Latest News headlines:
Sponsored By:More videoLatest News

Lehman's dying hours
The Lehman lesson: A warning to Wall Street
Wall Street's troubles are yours, too
Goldman and Morgan: The anti-Lehmans
More layoffs seen on Wall Street
Greenspan: Economy in 'once-in-a-century'

Sit back, and Watch the gloom as it unfolds.. brought to you by the media...

Cry of the Wolf

It is amusing to see more and more of the Capitalists in Wall Street crying wolf over companies which are dying. These are the same set of people who espouse the cause of Capitalism and actively encourage companies to die, so that it breeds competitiveness, the bedrock of capitalism. Looks like the bears in Wall Street doing the latest rounds now happen to be of the Siberian variety!!



A big game of chicken
Commentary: One firm was allowed to die because no one blinked
By MarketWatch
Last update: 4:40 p.m. EDT Sept. 14, 2008

It's one big game of chicken.
That's at the heart of the Treasury's decision not to assist in a Lehman buyout -- and the rest of Wall Street's decision not to step in, either.
The question is, how many firms can go under before the Treasury makes another bailout?
One, Lehman, is on the ropes. But what about two firms going under? Or three? At what point is it systemic failure that will force the government's hand?
Similarly, at what point does the healthier (a relative term) of the Street firms -- or aspirants, such as Barclays or HSBC Holdings -- step in and bail out rival(s), simply because it's in their own best interest due to the resulting market mayhem?
The answer, it appears, is not one. How much Street blood will be shed depends on who, if any, blink first.
-- Steve Goldstein

Ravi Batra

I am reading a book of Dr. Ravi Batra right now titled Greensspan's Fraud.


http://www.ravibatra.com/gsfrd.html


It indeed appears to be a very controversial book. Dr Batra seems to have made a life for himself by mouthing controversial forecasts.


http://www.ravibatra.com/Forecasting.html


In this book, he has made scathing analyses on how the US Govt has screwed up Finances by covering up Federal Budget deficit with the hard earned money of the common man through the Social Security Trust fund. The result - low income people who have saved throughout their working lives for retirement now find that lesser and lesser retirement benefits, and have to work longer than ever before in the guise of increased life expectancy, even as the coofers of the rich conitnue to get fatter. It is indeed interesting reading, this.

By the way, Dr. Batra finds mention in the NYT as far back as 1987, as a Depression Guru!!!

http://query.nytimes.com/gst/fullpage.html?sec=health&res=9B0DE4DC1639F933A0575BC0A961948260

Delhi Blasts

The terrorists have struck yet again. And the usual blaming game has started - soon to be followed by the ceremonial predictable " we will not keep quiet against terrorism" statement from the UPA Govt ( sic)... and life will move on- insterpersed with prompt " defence" of groups like SIMI by people like Lallo and Paswan - simply with the aim of cornering minority votes. Yet another shocking example of vote-bank politics steering the country fast towards the brink.

We can be sure that as long as politicians continue to condone con outfits like these, we can wintess more bloodshed of our bretheren. Whether it is the SIMI, the ULFA , the Raj Thackerays of the world , LTTE , Bajrang Dal, whoever it may be... the nation should unequivocally condemn people who espouse terrorism, and never ever make the blunder of supporting them even in idealogy - what happened in Delhi or Jaipur or Ahmedabad, or Hyderabad or Mumbai could well soon go out of hand and spread everywhere, unless drastic steps are taken right now.

For the moment, we can only pray for the departed souls.

Profitting versus Profiteering

I have been intrigued by the thin line of distinction between Profitting and Profiteering, especially in this era of Capitalism vs Communism.

Below id the definition of PROFITEERING per the Oxford Pcoket dictionary.


The Oxford Pocket Dictionary of Current English Date: 2008
prof·it·eer / ˌpräfəˈti(ə)r/ • v. [intr.] make or seek to make an excessive or unfair profit, esp. illegally or in a black market: [as n.] (profiteering) the profiteering of tabloid journalists. • n. a person who profiteers: a war profiteer.

We all know the meaning of profit, generally - Sale price less Costs; in other words, a small price for one's "value-add".

The phrases/ words int eh above defintion of Profiteering that really bother me are - Excessive or Unfair Profit. When and how does one really define what is excessive or unfair? And what is the yardstick for Fair Profit?

We also know that generally, in times of shortage or during emergencies, profiteering happens- sellers jack up the price beyond "reasonable" or "normal" limits, and still find buyers comfortably. In other words Profiteering happens when the "normal" demand-supply equillibrium is affected. And usually, Profiteering levels return to Profit levels, once the "demand supply" equation becomes functional again - either demand wanes, or suppply increases, or both.

But this still does not answer my question -what is normal and excesssive? Is it 5%, as in selling PCs? Or 10% , as in many "normal' businesses or 50% or more for "value added products and Sservices" like arms sale, Software sales or "massage Services" ? Mind you, many of these so-called value-added products and services are priced based on Value - more specifically, perceived value. As an extreme example, if tomorrow people decide not to buy diamonds any more, the same $10,000 diamond ring may end up not being worth even $10- " $10 for a peice of tetrahedral carbon?" could be the refrain...

Who then decides what is 'reasonable' profit, and who declares 'profiteering'?

Can someone enlighten me?

New Bangalore Airport

Today's news item on the new Bangalore Airport confirms my feelings on this new " state of the art" airport in Bangalore that was opened a couple of months ago.

To me, it is a classic case of how NOT to plan and construct a Brand new airport- especially in a place like "The Silicon Valley of India".

Chief Minister B S Yeddyurappa has said yesterday, "International airport at Bangalore which has been newly constructed is not up to the mark. That is why I have formed the legislature committee -- they will go through and take the necessary decision. After the report, after the inspection we are going to take decision. According to all our legislators and experts and industrialists, they want to have one more airport. We want to retain that and are in touch with Central government. HAL airport we want to retain."

The agreement signed with teh develoeprs of the new airport clearly says that the old HAL airport shall be closed to make way for this new one. Add to it that the DGCA ruling that no two airports shall be located within a 150 km radius of each other.

So much so for consistency on civil aviation policy! I wonder what message this will send out to the proespective investors in other airports? I am sure GMR, Reliance etc must be a worried lot by now.. The last thing you, as investor, would want is to pump in billions of dollars based on certain traffic projections being relocated to the new facility, at the contract award stage, only to see it being snatched by Netas based on their whims and fancies, after the airport becomes functional.

Russian Sstock Market

Not so long ago, Western investors were so pumped up about the Russian Oil story... the Russsian Stock Index (RTSI) spurted faster than the Sputnik.

Fast forward to 2008 - the same index is falling faster than the price of Oil. It ahs lost morethan 40% till date. (Phots and charts courtessy Wall Street Journal).

As they say, what goes up has to come down - maybe not this fast, though!!

Top innovations for the future

http://battelle.org

The above website had lsited the following as possible top 10 innovations for the future, in 2005. I would like to track them progressviely in anotehr 15-20 years.

1. Human genome mapping and genetic-based personal identification and diagnostics will lead to preventive treatment of diseases and cures for specific cancers.
2. Super materials. Computer-based design and manufacturing of new materials at the molecular level will mean new, high-performance materials for use in transportation, computers, energy, and communications.
3. Compact, long-lasting and highly portable energy sources, including fuel cells and batteries will power electronic devices of the future, such as portable personal computers.
4. Digital high definition television. This important breakthrough for American manufacturers — and major source of revenue — will lead to better advanced computer modeling and imaging.
5. Electronic miniaturization for personal use. Interactive, wireless data centers in a pocket calculator-size will provide users with a fax machine, telephone, and computer capable of storing all the volumes in their local library.
6. Cost-effective "smart systems" will integrate power, sensors, and controls. They eventually will control the manufacturing process from beginning to end.
7. Anti-aging products that rely on genetic information to slow the aging process will include aging creams that really work.
8. Medical treatments will use highly accurate sensors to locate problems, and drug delivery systems will precisely target parts of the body — such as chemotherapy targeted specifically to cancer cells to reduce the side effects of nausea and hair loss.
9. Hybrid fuel vehicles. Smart vehicles, equipped to operate on a variety of fuels, will select the appropriate fuel based on driving conditions.
10. Edutainment. Educational games and computerized simulations will meet the sophisticated tastes of computer-literate student

Gulf of Mexico

I am amazed at the number of oil rigs in the Gulf of Mexico. This picture was taken from one of the Forex blogs, and is as of Aug 2008.

I salute the resilience of the Oil Industry , given that the Gulf is "infested" with hurricanes of varying intensity, virtually every summer. To keep the thirsty gas guzzler SUVs and Hummers is no mean task, huh!!

Meritocrasy in Democracy?

All of us have been led into believing that the US stands, by and large, for meritocracy.

There used to be a joke about Giani Zail Singh. Before he became the President of India , he visited the US to meet Raegan, and they could not converse, since Zail Singh knew only Punjabi and Raegan, only English. The story goes that Raegan vowed to teach English to the genial Sardar, but ended up learning Punjabi!


The recent events in the US Presidential nominations and the street fights that preceeded it, made me wonder if the US is learning too fast from India. Look at the facts below and make your own conclusions:

1. There was initially so much hoopla in the media on whether to get a Blakc or a Woman as the Democratic party candidate... merit took the back seat, and all the public spats reminded me of Jayalalitha vs Karunandhi spats in the TamilNadu politics ( woman vs untouchable)...
2. Finally Obama elbowed his way, and the national press went ga-ga over a "hisotric" nomination of a Black Presidential candidate ( first in some 250 years after the Americas were founded) , again , talk was much less about his capability ( or lack of it) than the colour of his epiderm and mesoderm.
3. Obama was more criticized for his rather yougnage, and lack of Congressional experience... again no talk of merit or what his capabilties were. And how did he respond? By picking a 72 year Oldie (Biden), whom people hardly knew... for his age, his "experience" and for his oratorial skills... dont even bother asking about his credentials or capability... for a minute I thought Theepori Arumugam or Kaaduvetti Guru would have perfectly fitted the bill ( great orators, lot of experience and aged....)... Merit? What merit?
4. Just when the Democrats thought they got the trump card, McCain perhaps glanced through recent Indian politics, saw the Pratibha Patil episode, and decided to bowl a Googly ( or Doosra, should I say?). Not to be left far behind, he wanted to erase the accusation of old age being against him, he stuck two mangoes with one stone, by announcing Palin ass his running mate. One she is 44 years young only, and two, she is a woman? And how did she start off her Acceptance speech? By roaring that "women in the US are not finished yet!!" Clearly she was targetting the women voters ( 50% plus)... whether this gimmic will help erase the legacy(???) Georgie and help the Republicans back into the White house remains to be seen, but again, merit has clearly been buried under 10 feet of snow in Alaska!!
5. An even funnier observation - the media misses no chance to mention " Obama is a devout Christian... goes to xyz church regularly" "McCain is a devout Baptist" "Hiilary is a devout Methodist" ... all thesse are clear gimmics to corner the votes of the beleiver voters. Compare this what is happening in India - the BJP tries to woo Hindus, all the non -BJP parties go head over heels to establish their "secualar" credentials , a move amied clearly at cornering the Muslim and other minority votes... or Ramadoss and Co. clear take the names of Vanniyars. etc etc... clear market segmentation in the name of religion and caste in India, is matched one to one in the US by both the politicians and the media... and all along we thought the US democracy was a lot mature, and believed in meritocracy!!!!

All this goes to prove a few things:

1. Politicians are the same everywhere.
2. Formal Western Education ( or lack of it) is no guarantee for rational thinking and voting... people will still vote becuasde " she is a woman" or "he is a devout Christian" or " he is a white" or " or "he is from the Afro American community" or " he is from the xyz caste" or " she is from the abc town" etc etc... merit is only secondary or even tertiary.
3. Getting votes on factors other than merit has been the norm throughout the world, not just an expception in India. The next time you read a western magazine referring to the "abominable casteist politics" in India, dont shy to ask " what about the other countries?"

What the Q2 08 US GDP Numbers mean

The increase in second quarter GDP was widely expected, but not to the extent of 3.3% .... mainly due to the SOCIALISTIC DOLES ( aka, Stimulus cheques or "tax rebates").
But go beyond just the effect of the Stimulus cheques, and you will see the fluff in the numbers.
1. Major portion of the increased GDP is attributed to increased Exports.... more specifically, the drop of the value of the Greenback... which has dipped from 1.48 to 1.60 over the 2nd qtr... about 7% or so. Today's report in MarketWatch.com corroborates this... the Tech sector is in for a rough ride in earnings, due to the unexpected reversal in the Dolar's fortunes upwards now.. http://www.marketwatch.com/news/story/stronger-dollar-may-take-wind/story.aspx?guid=%7BBF5D0F4E%2D7F4D%2D4853%2D8EC9%2D8AEAFD54BFA0%7D
2. Exports picked up due to drop in Dollar ... a reasonable estimation, but now with the pull back in $$ parity, that edge is now gone...
3. Going forward, the consensus among Economists is that the GDP iss expected to come down , but not crash... the effect of stilumus cheque will wane, plus the appreciation on $$$ value. Add to it, the exacerbating Euro Zone economies, which are falling off the cliff now. In fact the recent sstrength in the Dollar is partially due to increased exportss , but majorly due to drop in Euro Zone prospects. This will continue.
4. A major worry is posssible recession in Japan in this quarter... this will mean slowing down of the Asian Economies... already China is "cooling off" to about 9% growth, and is expected to come down further. India reported 7.9% yesterday, as against an earleir estimate of 8.5%... what is will mean, are two things... short term rally of the Dollar ( wont help the US economy in any way), and slowing exports... this double whammy will result in the GDP slowing down more significantly in Q3 and Q4.
As for recession in the US, the official figures dont suggest a recession alright, but most economists agree wholeheartedly that it already feelss like recession... consumer spending is down over the last 8 quarters, housing is collapsing like a pack of cards, credit is tightening... all these dont bode well.
5. The average American is so stuck with plastic money ( credit Card). There was another report in CNBC last week of a crisis looming in the Credit Card ssegments. Read the articles below... http://www.researchrecap.com/index.php/2008/03/27/warning-signs-seen-in-rising-credit-card-delinquencies/
http://www.domain-b.com/finance/banks/20080813_unsecured_credit.html
To me, the Americans have exhausted all forms of SECURED CREDIT ( Housing, Stocks and Bonds etc.) and are now turning to Credit Cards as a last resort... if this sustains, then one can safely expect to see lesser number of cars zipping on the highways!!

Cheers... Dilip

Shanghai Maglev

The Maglev train in Shanghai, connects the City ( though not the centre) to the Airport iss an engineering marvel.



























It ocvers a distance of about 50 km in roughly 7 minutes ! Built by the Germans, it has not been very popular due to the cost and the lead into the city.


I travelled in it in 2004 . The Chinese Govt is trying to extend this route now, to increase the acceptance.

http://en.wikipedia.org/wiki/Shanghai_Maglev_Train

http://www.smtdc.com/en/

Murudeshwara

http://www.karnatakatourism.org/sites/des_west_murudeshwar.html

http://en.wikipedia.org/wiki/Murudeshwara

I had the fortune to vissit Murudeshwara Beach in Dec 2006.

This pristine beach-town on the Kanara Coast of Western India captivated me. The beach is one of the best, by far, that I have seen in any country so far. It was surprisingly clean and well kept. There are several lodges where one can stay for about Rs.500 a night and have a lovely sea-view room.

The Murudeshwara Templae is an ancient one, and was being renovated when I had visited.

Also, there is a huge statue of Krishna in the rath of Arjuna, as in the Bhagawath Gita, not to mention the mostrous form of Shiva.

To me, this beach is as good ass any other beach in Malaysia or Thailand.

I wonder how many Indians even know about it's existence. I think that with the new found riches, Indians right now seem to be more obssessed with visiting Phuket and Pattaya with their families ( sic) than go to "mundane" beaches like Murudeshwara. God bless us!

Modern Hindu Temples

For someone who has vissited quite a few Hindu temples outside of India, I find the architecture of most of them very fascination. Perhaps it is a reflection of the changing times. Perhaps we need to take change by our stride and get moving. Perhaps even welcome change with a PurnaKumbham ( or red carpet, should I say?).

However, I am trying to find some answers for things that I am unable to simply explain.

My rudimentary knowledge of the Agama Shastras, http://en.wikipedia.org/wiki/Agama_(text)) , that ancient Hindu set of codes, that included the science of buildings, especially temples, amongst many other things, stipulates that

1. there shall be a pond or lake close to the temple where people can bathe/ wash their feet before going in.
2. There shall NOT be any Shauchalayam ( Toilet) within the temple precincts.
3. The main Diety shall be surrounded by other dieties in a scientific manner, as shall befit the location and the Dieties.

Now let us look at the above, in today's context. Given the extreme space constraints, it is impractical to continue to have ponds and lakes, especially near the newer temples being built. Even if we do construct them, it is next to impossible to see water in those ponds 365 days in the year. And even if they do have water, it idiotic to try and stop people from abusing the temple pnod water ( for eg. one can see people washing trucks and cars in these ponds , in the smaller villages in Thanjavur District in India, known for this magnificent and ancient temples). As for the larger cities, the less said, the better.

Today, practically every "modern temple" ( built within the last 50 years or so), has a toilet within the temple precincts - for the "convenience" of the devotees. I personally wrench my face when I see a toilet therein. To me, it is plain disgusting. The arguement of some of my friends on this is - in today's world people live in far flung places, as opposed congregation around the temple in olden days, and therefore they need this convenience. Fine. But why dont temple managements build these toilets OUTSIDE the precincts, rather than building them inside, and spoiling the ambience, in the process?

As for the third, given the space constraints, the modern temples find all types of dieties being scatteered in whatever little space that is available- again a complusion of the times perhaps, but falling short clearly, on aesthetic and devotional appeal. One can even find "Shiva-Vishnu" temples within the same compound - something that was unthinkable a few centuries ago... I wonder what the Agama Shastras prescribe, when it comes to this!! So much so for Integration !!!!

Capitalism model

This week’s turmoil in the US Financial industry, Fannie Mae (FNM) and Freddie Mac (FRE) included, has thrown new light on the kind of capitalism that is being followed. It makes me wonder where the world, and Uncle Sam in particular, are headed towards, economically speaking. The collapse of Indy Mac, a US Bank, is symptomatic of the malaise that has been affecting the US Financial markets, and is an ideal fodder for the socialistic turkeys.

For those amongst us who do not know them, FNM stands for The Federal National Mortgage Association (FNMA) or Fannie Mae in short, and FRE stands for Federal Home Loan Mortgage Corporation ("FHLMC") or Freddie Mac in short.

Both of them are GSE or Govt. sponsored enterprises. Along with other GSEs, they buy mortgages on the secondary market (Banks and Housing companies like Countrywide Finance), pool them, and sell them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending, and increases the money available for new home purchases.

These companies were created in the 70s, and were meant to be stand-alone commercial. Over the years, these companies have become the backbone of the American housing dream, accumulating about $5.5 trillion worth of housing debt between them. That is, roughly about 40% of the $13.7 trillion GDP of the US in 2007 !!!

Due to the housing market meltdown, the mortgages they had bought, especially the subprime ones, have cllapsed in value. They now need to raise capital, to put themselves afloat, prompting the US govt to come out with “bold measures” to prop them up, over the weekend. Reason? Treasury Secretary Paulson very well knows that people’s hard earned 401K money is at stake, and any possible collapse of these “icons” could lead to a quick implosion and seizure of the great American engine – Financial markets. The results could well be cataclysmic, perhaps even worse than the Great Depression.

Fair enough, one would say? Come to think of it…two commercial orgs. were created back in the 70s with the intent of managing housing mortgages and providing guarantees on housing mortgages( much like Lloyds of London… a sort of reinsurance, to put it crudely) They were expressly meant to stand on their own feet. One of the hall-marks of capitalism is that companies are allowed to fail if the business model is not sustainable. Only in Socialist economies does one find government intervention… so then, in this case, whatever happened to “free market economy”? After all, everyone was lauding the great American innovations and the ever “novel and innovative” financial products that these companies churned out all these years. Something that kept the great American juggernaut moving all these years. When things were going up, the corporations were allowed to take the profits and distribute to “shareholders” and pay fancy CEO packages to run them.

Why then when things turn sour, the tax-payer is expected to pitch in and help out? Remember, there are only 3 ways that the likes of FNM or FRE can get out of the hole they are in:

Govt opens the “discount window” of credit … tax payers money being used up here.
Govt steps in with “equity participation” … again tax payer’s money
Govt buys out the private players by paying them cash, takes over the companies’ assets and liabilities and runs them on it’s own… this is either with tax payers money or simply by printing more $$$$$ !


In other words, the US Govt all along let these “financial wizards” come up with fancy products, to which credit rating agencies like S&P and Moody’s coolly looked the other way. Banking companies continued to provide loans based on inflated market values of properties, and FNM and FRE backed them up. Seemed fine, as things were Northbound. But when things turned sour, the Govt decides to use taxpayer money to bail out the wrongdoings of these corporates. So much so, that it is wiedly expected that shareholders will now demand that the Govt take over the Operations of FNM and FRE and run them…

The most amusing part is- taking over and running ( for a different reason, though) is what Hugo Chavez did exactly, last year to the big oil firms in Venezuela… so did the Russians… so did Indira Gandhi in the 70s in India, to the Banks… in “Socialist” parlance , this is called Nationalisation !!! Something that was frowned upon by Uncle Sam… “ goes against the very grain of free market economy”… “ companies should be allowed to fail”… etc etc…. the Fed and the Treasury are now made to eat humble dollars ( thanks to food prices, the humble pie remains humble no more!!)

To me, America is on the throes of Capitalist cross-roads. The signs on all four directions, unfortunately, are, rather ominously, pointing to anything but Financial Nirvana!!! Bertie would be tempted to quip, " Ah, Jeeves! Nowhere to hide would be right phrase".

Weak Rupee policy of the RBI

Back in Jan 08, India’s forex reserves were about $220B, the INR USD Exchange rate was Rs.39 to the greenabck and oil was trading at $100 a barrel. None of the countries were particularly perturbed over the high price of oil let alone India. The Reserve Bank of India(RBI) kept on propping up the Dollar by buying dollars in the open market even as the weakness of the dollar made it more attractive to buy. Exports were surging at around 22%, and no one other than the exporters including the IT exports lobby complained. Fiscal deficit was precariously high, though inflation was more under control at around the 4% mark.

Cut to June 08. Inflation has shot up to over 11% more due to global factors beyond the Govt’s control, and is expected to remain so for some time to come. This has forced the RBI to increase interest rates to beyond the tipping point where economic slowdown is imminent. An economic slowdown will lead to lower tax collections, widening the already dangerously high fiscal deficit. And profligate loan meals like the ones announced by Madame Sonia Antonio Maiyo, which will put a further strain of $ 15B on the already stretched Govt Rupee, don’t make matters easier. With global economic slowdown comingfast and furious, exports are bound to be affected, though some people still argue that such an slowdown is actually beneficial to the IT Outsourcing business, which I very much doubt.

However, the most interesting happening in all this melee is, the RBI continues to buy the Dollar even after the Rupee has fallen to more than Rs.43 to the Dollar!! Today, the forex reserves stand at about $305B … which means that while Rupee fell all the way from Rs 39 to Rs.43 ( about 10%) , the RBI has continued to mop up Dollars in the market, further helping the weak Rupee policy, a major beneficiary which is the exports lobby, including the IT captains.

But what perhaps no one realizes is the following. Even in Jan 08, and right through in the apst, India has always been a nett importer, meaning imports have been much higher than exports, unlike, say, China, where the exports have outstripped imports significantly, creating records rates of Trade surplus. Oil has been the single biggest item in India’s import list. With ONGC and the private sector boys failing to meet even 65% of India’s burgeoning oil requirements, we had no other choice. But in this 6 month period, a lot of oil has flown in various petro pipes. Oil has shot up to $145 now ( 45% increase). This, coupled with the 10% drop in the Rupee value , has bloated the oil import bill by at least 55% for us !!

Granted that we perhaps could have done nothing to control the $45 per barrel in crude prices, but all the RBI could have done is to liquidate a big portion of the $95B dollar holdings that they accumulated over the past months, to put a lid on the free fall of the rupee. That could have controlled our oil import bill by at least 10% … clearly the RBI seems to have switched over from a strong Rupee policy that it has has been holding over the past 3 years to a consistently weak Dollar policy. And I suspect the Exports lobby and perhaps the NRI lobby are behind this move, since they were the ones crying foul all these momths when the Rupee appreciated…

Maybe the RBI is hoping that those NRIs who were so eager to jump into the growth bandwagon of India will now find it more attractive with a weaker rupee, and use this opportunity to pour their hard earned monies back into mother India’s “growth engine”.
If that indeed is their thinking, then I am sorry to say that they are totally mistaken. NRI inflow is of 3 types – those whose families are dependent on their remittances for day to day sustenance ( mostly from the Gulf, and this continues to be the single biggest chunk), those who want to “give back something” to their motherland , for emotional reasons deciding to remit either for the purposes of charity or for business , which I suspect is only a minority, and the third, who typically invest in any place where it makes business sense ( and if they are NRIs, they may favour India, to the the comfort factor, as long as business prospects are conducive).

There may not be much change in categories 1 and 2, but no businessman is stupid enough to pump his money into something being touted as a great growth story, if it does not make business sense.

Interest rates shooting through the roof to around 13% now ( base rate, excluding the real cost of capital computation)
Fiscal deficit going out of control, with irresponsible loan melas and similar non plan expenditure increase, and high oil prices.
Economic slowdown being imminent, with all sectors likely to see a slowdown ( agriculture continues to be in the hands of God… He willing, we may see good monsoon yet again and Argi sector may well hold up).
Inflation over 10% consistently may mean the real worth of any earning will be significantly eroded quickly.
Continued fall in Rupee vis a via the Dollar, may make it less attractive currency to invest, in terms of dollar returns.

I don’t know of many businessmen who are brave or foolhardy to say” well, India is a long term growth story, let me continue to invest in it notwithstanding all the above short term effects”. Forget investment in business, even stock markets are witnessing flight of capital for the past 3 months consistently (to be fair, not just in India but across all developing countries), as part of the global stock market meltdown.

But then, who cares? With polls round the corner, the ruling parties may want the powerful exports lobby to fund election expenses, and therefore are perhaps trying to pander to them. It does not matter that the common man is paying a higher price for petrol by about Rs5 now…. The Govt and RBI could perhaps have averted this increase, but elections come right on top, above the common man or the country…

Long live our politicians!!!

"Art of Living" in today's fast world

On the topic of Sri Sri Ravishankar, yes, he is extremely popular everywhere, including here in Singapore. His teachings are nothing new, but a refreshing level of packaging and applied spiritualism does the trick… much like Osho, or Vivekananda. I had realized fairly long back ( but am doing nothing about it due to sheer complacency) that part of the Hindu prayer for padaiyal or Neivedhyam are a set of mantras which invoke the panchapranas (or five different breaths that every human body has).. infact most people think that the mantram is towards God… but it is not… it dedicates the food to the panchapranas and Brahman ( or the Utlimate truth, or God or Holy spirit… whatever one wants to call it as). It is a clear reminder that the right food is essential for getting the right breath, and thereby a long and calm life … in Hindusim there is nothing really called happy life… it is calm, contented and equanimous life that one aspires for. Controlling the breath, and by extension, the mind and intellect, have been proven scientific ways to achieve this. What Sri Sri and others do are to take this practical message to today’s fast world, and get some sanity back into people’s otherwise harried lives. By the way, this “meditation” is not unique to Hinduism. I have observed that muslims who do namaz devoutedly 5 times a day in the true muslim way, tend to get similar sadhvik qualities. One of my closest friend is a Christian, and I observe that their entire family is always calm and quiet, take happiness and sadness with equanimity, and dedicate everything to Jesus. Their secret? All of them pray for 10 minutes together, silently, every morning… and I have known this happen for at least 30 years in their families now.. Nett nett, it does not matter what religion one follows.. or for that matter, if one is an atheist or an agnostic ( Mammu, I do not know which category you fall into). If one can keep his mind calm and clear then a lot of things can be achieved in this material world… I am not surprised at 2.5 million people following him… guru Ramdev in India has similar number of followers for his yoga… the point is, people today want simple quick-fix solutions to their teething troubles… anyone who can make is simple for them becomes a hit. In fact, one of Business 101 in Harvard business school principles is, if you can take a complex idea or task, and make it simple through your product or service then that can become a great business proposition ( no disrespect to Sri Sri intended).

I will be really surprised if any school or public institution in India will ever introduce a course in such “exotic” disciplines such as Art of Living. Sadly, the media in India, and the political parties would want to make us believe that giving prominence to anything that is considered “Indian” is akin to blatant promotion of Hinduism, to the detriment of “minorities”. This, to me, is absolutely ridiculous, but then that is the way the media and polity in India act today.

I just now returned from a 10 day trip to Beijing/ Hongkong with my family. We had a rollicking time climbing the Great Wall, something that I will write about, separately. The new airport terminal 3 in Beijing is a masterpiece by itself… huge, dragonshaped, and perhaps about 20 times the size of the “state of the art” airport which we claim to have in Bangalore now. Even as one deplanes, the first things that strike are two mammoth paintings, each about 25 metres long and about 3 metres wide. On these paintings, are intricate depictions of the ancient Chinese way of life .. a village on a riverside, replete with a teacher ( like Confucius) teaching an attentive audience of students, attired in traditional Chinese dress… and then people working away in Smithy’s, weavers, farmers, fishermen etc etc… in India, if one were to try putting up a statue of Gomateshwara in the new Bangalore airport, it would provoke immediate rebuke from the likes of Karat& Co. Similar “religious” depictions/ statues can be seen at the airports in Bangkok and Jakarta… in fact, the most astonishing thing is, in Bangkok, one can actually see a huge statue of the Devas and Asuras using Vasuki the snake as rope and tying to whip up Paarkadal… a scene from the Dasavatharam… no kidding guys.. you can go to the new Suvarnabhumi airport to see this.. Can we imagine this in India? No way.. we would rather be “secular” and have Annadurai or Karl Marx… because they are the true representations of ancient India, you see!!!! God bless us!!!

Strange are the ways of the West

I was amused to read the CNBC article dt. 9th July 2008.

http://www.cnbc.com/id/25606039

Read this section in particular.


"But because their counterparts in developing countries across the globe continue to fill their tanks at will, often with gas priced artificially low because of government subsidies, there's likely to be little relief on the way".

The author ( whoever it is) has almost an accusing tone of the developing countries ( read: China and India) of "consuming all the hard-saved last drop of oil by the drivers in our country".

I do not see any rationale behind. When these same drivers were happily criss-crossing the country in their Hummers, Cherokees and other SUVs, falunting what they could then aford and were capable of, they expected nobody to complain... in fact their ostentatious ways of driving exacerbated after the 1973 oil crisis. It is still not uncommon to find a lonely lady driving a half lorry all for herself, even in these days of $150 oil.

This, to me, is like the devil quoting the scriptures.

Remember, the boom century in America was started off with the Automobile revolution, when people were able to spread themselves into the countryside for a living, and were still able to enjoy the fruits of big cities, courtesy Henry Ford and Co. That boon is now turning into a bane, since public transport is now virtually non-existent in the US.

Now, the US can use all the oil in the world for their development ( in the earlier part of the 20th Century).... but now when China and India are attempting to do the same, they are being scorned at.... what a hypocrisy!!

Playing with numbers

Playing with numbers


My career has seen some interesting twists and turns. I graduated as a Mechanical Engineer from one of the best and oldest Engineering colleges in India, went on to become a qualified Cost Accountant on my own, and have dabbled in jobs ranging from a Project Manager of a Heavy Engineering company to a Finance Executive, to a Management Consultant to a Sales Exec. All along, my interest in macro-economics and the way the economies and markets behave – Financial, stock, bond, money and commodities included- has increased by the day. I find it interesting when people analyze the state of the economy, and the performance of companies in light of business and economic climate. I find it equally amusing by some of the dissection of numbers by the so-called analysts – not just in India- but the whole world over.

Consider this sample report on Biocon, which appeared in the website of Capitalmarkets.com when they published the news of their proposed bonus issue.

Amongst other things, the report said, and I quote,

"Biocon's net profit rose 497.8% to Rs 284.03 crore on 9.3% fall in net sales to Rs 194.19 crore in Q3 December 2007 over Q3 December 2006."

Does this make sense to the prospective investor? Quite unlikely, unless the reader is an expert in business and numbers. The person who has written this report is most likely to be one who knows how business is reported in numbers – a CA, an MBA or an ICWA. It will do a world of good for the analyst profession as well as for the reader and prospective investor if the following are taken care of, before the report is published.


1. The reporter needs to step back for a while, and think about who this report is intended for, and how the reader can understand this statement without the any other help. The prospective investor is most likely to be confused about how a company can earn Rs.284 crores nett profit on sales of Rs. 194 crores… my guess in this case is, there must have been a massive "other income" and not necessarily income from operations.

2. That then begs a follow-on question – how has the company fared in continuing operations? Have their earnings grown or diminished? Unfortunately, the report, as most other typical Indian reports, is completely silent on this. Income from operations, especially in a mature company, is a key indicator of how well the company is faring.

3. The same report also talks about Biocon acquiring a German company for 30 million Euros in an all-cash transaction, but again, no mention is made on how this cash-outgo is accounted for. Most OECD country accounting norms (including GAAP) advocate setting off the cash outgo in the same quarter and not amortize it. I guess the Indian laws are similar – I am awfully out of whack with the Indian laws at the moment, and am happy to be corrected in this regard- given that we are in an increasingly Globalized world and listings in NASDAQ required such Accounting norms to be followed.

4. Read the same sentence above on Biocon's earnings. I wonder if the reporter or Capitalmarkets.com would be pulled up for material misrepresentation of information, if they reported a profit of just Rs.284 crores, instead of Rs.284.03 crores! Will a prospective investor change his investment decision on Biocon if the earnings were only Rs.284 crores instead of Rs.284.03 crores?? I can understand an accountant reporting the numbers, but then materiality is a key requirement of any business report. Reporting numbers to the last two decimal places may well be the norm for any legal financial statement, but it need not be the case in a performance report or analysis.

Our brethren who aspire to become analysts with stock brokers or fund houses, could do well to follow some of the world media… not for the content, but for the way they present and analyze quarterly or annual results. The analysts quickly slice and dice the results, and come up with their interpretation of numbers – what has been the income from continuing operations, why have profits fallen, what is the future earnings guidance – in fact, investments are made or taken away based more often than not, on future earnings guidance than on last quarter performance.

In short, when one analyzes or reports a company performance one will need to think like a businessman/ businesswoman or an investor, rather than like an accountant. One has to bear in mind what information is materially important for a businessman or an investor, and investigate, analyze and report along those lines.

India's stock market is one of the oldest in the world, and one of it's biggest in volume terms (the biggest in Asia after Japan). The investment community and business community alike, needs quality information to make sound business/ investment decisions. As accountants and future accounts, let us strive to enable that.

Talking about reporting on business, all along I given to understand that only Indian media and analysts either did not know how to report coherently, or plainly manipulated information to suit vested interested.

After having lived outside India for more than a decade, and having followed the world markets and media reasonably closely, I have come to the conclusion that the media and analyst community elsewhere is no different.

Sample this – the US stocks have witnessed a mild rally in the week of 14th April. On 15th April, CNBC reported that Dow Jones closed higher, due to higher oil price !! Their logic? They claimed that higher oil price would lead to higher profits for the oil biggies. Right?

Wrong!! Hogwash!! All one has to do is to back in time. 1973. The so called oil shock is period resulted in a prolonged recession in the US, and bear market for stocks for 12 whole years !!! World oil prices are like onion prices in India – they can bring down governments! The fact is, when oil prices go up, it is the governments of the producer countries that reap a rich harvest. Yes, the companies who produce and refine oil gain too, but that is far less compared to what the Government earns by increased oil. And in the case of the US, profits increases for Exxon Mobil and Conoco Phillips, their two major oil biggies, can perhaps give their shareholders short term profit growth, but the consumers are going to be hurt badly by increased oil prices, and that will be a huge drag on the economy. And I am yet to see any stock market and stock prices that sustain an upward movement when the economy goes South.

In reality, what had happened was that the US Fed's moves to increase liquidity during that week in question made the bond prices unattractive, resulting in fund houses pumping more money into stock market than bond market.

- Dilip Subramanian