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!!