Archive for August, 2009

Borrowing to buy IPOs – Another Bubble in the making

No Comments » Written on August 13th, 2009 by
Categories: IPO
LIvemint/Reuters: Brokers making costly loans to IPO speculators
Mumbai: Indian brokerages are borrowing ultra short-term money at almost twice the market rate, often from mutual funds, to lend to clients seeking shares in IPOs, fund managers said, in a sign of froth building in the market.

...

Brokerages have between them borrowed up to Rs100 billion ($2.1 billion) for IPO financing in the last few weeks, the fund managers said. None of the brokers would comment.

“They are lending the 15 days paper at 7-8% levels for IPO funding,” said K. Ramkumar, head of fixed income at fund manager Sundaram BNP Paribas. He declined to name the issuers.

Three-month commercial paper pays a coupon of about 4.5%.

The brokerages are issuing secured non-convertible debentures with a 15-day call option to fund houses and are lending the money to their rich clients at a minimum 11.5% and as much as 20%, the fund managers said.

Markets went up 3% today. They have been falling for a while - though the NHPC IPO got oversubscribed 23 times, that means nearly 120,000 cr. got applied; some of that money must have come from the secondary markets, which explains it dipping, and it looks like the borrowing at high rates to get even higher returns has started.

I'd written a post about it in Feb 2008 (Borrowing for IPOs are loser loans) which, come to think of it, was just about when the markets had tanked; IPO loans were very popular then. If history is a guide, this is a sign of bad things to come.

Posted in IPO

Paulson, ethics waivers, Goldman and the AIG bailout

3 comments Written on August 9th, 2009 by
Categories: Uncategorized
From the New York Times:
“I operated very consistently within the ethic guidelines I had as secretary of the Treasury,” Mr. Paulson responded, adding that he asked for an ethics waiver for his interactions with his old firm “when it became clear that we had some very significant issues with Goldman Sachs.”

Mr. Paulson did not say when he received a waiver, but copies of two waivers he received — from the White House counsel’s office and the Treasury Department — show they were issued on the afternoon of Sept. 17, 2008.

That date was in the middle of the most perilous week of the financial crisis and a day after the government agreed to lend $85 billion to the American International Group, which used the money to pay off Goldman and other big banks that were financially threatened by A.I.G.’s potential collapse.

In India I think this would be par for the course. Our government routinely decides to rescue companies in which they have an interest, using taxpayer money. And Murli Deora is on the side of a certain M. Ambani, surprising nobody.

But I digress. This is big for the U.S. though it probably only surprises because it's so blatant. And I like the quantum of research the author does. Further down, is this:

Mr. Paulson’s schedules from 2007 and 2008 show that he spoke with Mr. Blankfein, who was his successor as Goldman’s chief, 26 times before receiving a waiver.

On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day. The first call was placed at 9:10 a.m.; the second at 12:15 p.m.; and there were two more calls later that day. That evening, after taking a call from President Bush, Mr. Paulson called Mr. Blankfein again.

When the Treasury secretary reached his office the next day, on Sept. 18, his first call, at 6:55 a.m., went to Mr. Blankfein. That was followed by a call from Mr. Blankfein. All told, from Sept. 16 to Sept. 21, 2008, Mr. Paulson and Mr. Blankfein spoke 24 times.

At the height of the financial crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any other executive, according to entries in his calendars.

...

By contrast, Mr. Paulson spoke six times that August with Richard S. Fuld Jr. of Lehman, four times with Jamie Dimon of JPMorgan Chase and only twice with John Thain of Merrill Lynch.

Posted in Uncategorized

Bank Credit Growth lowest since March 2004

No Comments » Written on August 9th, 2009 by
Categories: Credit
RBI releases the total bank credit every fortnight. The latest total bank credit value (Food + non-food credit) adds up to 27.77 lakh crore. But you gotta look at that figure in context. Bank credit has been growing at a healthy clip over the last three years.

(Click on the image for a larger view)

From 14.66 lakh crore in March 2006, this means a 19.3% Compounded Annual Growth Rate.

One would expect that an economy growing at 6-8% will have a credit growth of that much - multipliers are around the 3x region.

But the picture changes as you start looking at this financial year - 2009-10. Let's look at credit growth on a year-on-year basis, that is, today minus the number one year earlier.

(Click for a larger image)

Since 2006, we've seen y-o-y credit growth stay above 20%. There was a surge in October-November 2008, a near 30% growth, and this could be attributed to the fall in the markets and Lehman; a lot of loans were provided, perhaps on a short term basis, to tide the crisis over, plus there was the whole issue of banks having to lend to Mutual Funds and NBFCs which didn't have access to the RBI. Since then RBI opened up its lending to let Mutual Funds and NBFCs borrow, which would have reduced the amount of credit provided by banks.

The worrying thing is the scene in 2009. There has been no crisis, and indeed our Q1 results seem to be great (more about that in another post, but let's take it at face value). Yet, bank credit has been slowing. It dipped below 20% growth in Jan 2009, and since April has been steadily falling - as of July 17, the last reported figure, yearly bank credit growth at 15.35%, the lowest since March 2004.

Plotting it month on month shows any seasonal impact, so let's see what it looks like.

(Click for a larger view)

March seems to see a rise in credit - this time there was a DIP in March (compared to Feb). There is some small seasonal element in credit, but a monthly comparison shows this year has seen a slowdown all the way.

(Click for a larger view)

Credit growth seems to increase in the monsoon months - yet, this time it's been steadily decreasing. This may be due to the bad monsoon this year - food credit tends to go up till August and reduce from there, though this time too, Food credit went up to 60,000 cr. in June, and has dropped to 48K cr. in July. (Note that this chart only sees absolute numbers, not growth rates)

Credit growth overall: End March 2009 saw a total credit figure of 27.70 lakh crore. July 17's figure was 27.77 lakh crore. That's a 0.65% growth in this financial year, not quite impressive. (Though it must be said that in FY 2007-08, we saw something similar, and there was a sudden upmove in the last four months of the fiscal year)

At this point, the y-o-y credit growth rate is at 15% and with a multiplier of 3x, this will only scale India's GDP by 5%, a figure that is currently unacceptable to anyone in power. Food credit will come down with the bad monsoon, and that will reduce credit from rural areas some more. Urban non food credit needs to make up for this - and in a large way, just to play catch up. Given there was a blip in October last year, we should see y-o-y credit growth continue to come down till November, but it as to show a significant rise after that, just to get to the 6% odd GDP growth expected this year.

Early days, so I shall keep tracking this data. No conclusions drawn, yet. It's too early to say anything.

(Btw, does anyone have any links to where we could divide credit into home loans, personal/credit card loans, working capital and corporate term loans? Anything by geography or urban/rural?)

Posted in Credit

NHPC IPO: P/E of 36

10 comments Written on August 8th, 2009 by
Categories: IPO
I've had some mail requesting for comments on the NHPC IPO. First note: the IPO is already 3x oversubscribed, with only one day of the IPO through. Only 9% of the retail bit is subscribed, and this has 49 cr. shares for retail (about 1500 cr.) which is fairly large. Still, that's only 1.5 lakh retail individuals (each is capped to a max of 1 lakh) and there are enough people who will apply using fictitious names, fake demat accounts etc. There is serious moral hazard here - In the Yes Bank IPO scam case, SEBI got active and banned Karvy, IndiaBulls and Anagram but each one of them got away on technicalities. The big person behind the scam, Roopalben Panchal, who applied for the Yes Bank IPO in 6,315 different names with the same address, has not been arrested, and is free today. An article says 90 cr. has been collected by selling shares - but 90cr. is nothing lost by the perpetrators, and nobody's gone to jail, so this is no deal.

But that's a different story, and the frauds will continue to milk the IPOs. Even if there was a jail sentence. Because the odds of getting caught are small - Ms. Panchal was an outlier; there are hundreds of others, unknown and known, that do this kind of fraud on nearly every IPO.

This also means you SHOULD apply to good IPOs. With ASBA, your money is not blocked for long and you continue to earn interest in your bank account. By applying you ensure that these fraudsters get even lesser allocation - the more legit people that participate, the less space there is for these scamsters. So they'll be forced to raise the scale of their operation and hopefully, if our regulators aren't sleeping or in a government-pressure-induced-coma they will get caught.

But is NHPC a good IPO? I won't mull over much but the basics:

  • It's a hydel power company, with a current capacity of 5000 MW.
  • NHPC, in it's IPO, is selling 168 cr. shares between Rs. 30 to 36. The price has changed dramatically - an earlier prospectus talked about Rs. 20-24 per share, and even earlier, there were talks of 16 per share being the limit.
  • Out of this, 1/3rd of proceeds will go to the government, and the remaining to the company. At Rs. 36, this is about 2000 cr. to the govt, 4000 cr. to the company.
  • They have made 1244 cr. on a consolidates basis, on a current share capital of 1124 cr. shares. That's an EPS of about Rs. 1.1 per share.
  • At a price of 36, that's a P/E band of 27 to 32.
  • What are they using the money for? For 7 power plants, total capacity about 3300 MW, which will cost 14,000 cr. (equity+debt). The plants will all be ready only by 2011.
  • If their 5000 MW current capacity delivers Rs. 1124 cr - We can stretch and say the 8,300 MW will deliver about 2000 cr. of profit? Let's say 2500 crores. At the expanded equity of about 1300 cr. shares, that's about Rs. 2 EPS. If you expect that in 2012, it's a 22% EPS growth CAGR. That's still way below the current P/E.
  • In the last three years, EPS has grown at less than 10% a year compounded.
I wouldn't buy this IPO on fundamentals. It is way overpriced. At 20-24 there might have been something in there, though it would only be a "fair" price - remember, you gotta buy at dirt-cheap valuations so you get some appreciation.

And given the sentiment even this one will go overboard in terms of subscription, and then list even higher. Irrational exuberance perhaps, but who am I to stand in the way of this juggernaut? And this stock is ripe for trading - will at this price end up as a component of the Nifty, will get F&O approval, and has the grand ability to give huge visual gains on the minimum tick size of 5 paise. So yeah, it's worth trading.

Otherwise, it's a dim IPO. The price-to-quality gets worse and worse with every bull market, it seems.

Posted in IPO

Buffett: Winning With Government Support

12 comments Written on August 7th, 2009 by
Categories: Buffett
Rolfe Winkler on Buffett's Betrayal:
Today, Buffett remains famous for investing The Right Way. He even has a television cartoon in the works, which will groom the next generation of acolytes.

But it turns out much of the story is fiction. A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee.

Apart from that there are the hidden ways the Fed is providing liquidity to the banks, which they refused to reveal even after Bloomberg sued. The latest seems to be a way to make primary dealers (many banks are these) a conduit to pass treasury bond sales through. The Fed isn't allowed to buy bonds directly, and this article (Chris Martenson) says the treasury sells bonds to the PDs, and the Fed buys them back within a week. (Our RBI does buy back securities but they tend to buy different securities than the ones they recently sold)

But that's off the point. The "Betrayal", says Winkler, is that the bailout rescued Buffett; and now he complains, in his annual letter, that Berkshire is losing out to the cheap funding available to the banks now.

He may have a point. And the book he mentions - "Buffett" by Roger Lowenstein - is well worth the read. Lowenstein portrays Buffett in an unbiased way - which seems anathema to most Buffett fans, for whom he's either loved or loved some more. Buffett has his faults, he talks his book, he keeps silent when his money is involved (Moody's for one, one of the rating agencies that should be taken out and shot) and he does a lot different than he talks. I'm a fan of arguments, not of arguers - so while there's some sense in listening to some of what he says, Buffett is not quite the god he's made out to be. In my world, there are no heroes.

Posted in Buffett

RBI rejects all bids in bond auction

1 Comment » Written on August 7th, 2009 by
Categories: Uncategorized
The RBI was supposed to sell another 12,000 cr. worth of bonds today. In anticipation, the yields had moved to 7.09% yesterday. And today, this happened:
The Government of India had announced the sale (re-issue) of (i) “6.49 percent Government Stock 2015” for a notified amount of Rs.4,000 crore (nominal) (ii) “6.90 percent Government Stock 2019” for a notified amount of Rs.6,000 crore (nominal) and (iii) “7.40 percent Government Stock 2035” for a notified amount of Rs. 2,000 crore (nominal) through price based auctions on August 7, 2009 (Friday). The Government of India in consultation with the Reserve Bank of India have rejected all the bids submitted in the above auctions.
The yields moved back to 7.03%.

The last time this happened, (March) yields went from 7% down to 6.6% in the same day.

According to the release calendar, RBI has to sell about 86,000 cr. more this quarter. Yet, it's not been able to buy back much in the OMO repurchase auctions - even yesterday's OMO let RBI buy back only 3,000 cr. out of the 6,000 cr. it wanted to buy.

Interestingly, the mid-year report mentioned that the RBI had already managed to sell bonds worth 201,000 cr. (gross.) of which 34K cr. was redeemed. Now they only wanted to sell 98,000 cr. more in the remaining two months, of which 12,000 cr. was sold on July 31. Total repurchases - for which RBI will pay out money - add up to about 37,000 cr. out of an 80,000 cr. kitty, leaving them with 45,000 cr.

What they wanted to sell after that Jul31 announcement was about 48,000 cr. They have borrowed 12,000 cr. already. They have 45,000 cr. in the OMO repurchase kitty that can be transferred (okay, this needs some parliamentary action, but still). They also have a 28,000 cr. desequestered MSS balance cash-hoard which can be added to make the grade. So they don't have to pay high yields - they could force the issue and wait a while.

Or, it may just be a move to bring yields back temporarily and stave off panic. Must check out news. (Seems there's also something wildly off at the 1 year T-Bill yield and the CBLO arbitrage desks, something to check out)

Posted in Uncategorized

Yet Another Inflation Update

3 comments Written on August 6th, 2009 by
Categories: Inflation
Time for an inflation revision. Latest is -1.58%, but the graph doesn't look like it's falling very much. (Click for a larger image)

What's interesting is the past revisions - for nearly three months ago - are higher than one thinks, making the graph a very spiky one. What might change things? A massive change in oil prices, for one, or the dollar dropping 10-15%. Plus, there's the bad monsoon - though I think there's been enough hoarding to last us a while.

The 10 year bond yield, meanwhile is at 7.09% - I don't know how I'm still positive on the gilt fund, but it's still on a plus for me, and I'll probably redeem it pretty soon if the prices go much lower. I'm still not convinced we'll inflate, or that the crisis is over.

People say inflation is a mislabelled thing, look at the price of sugar etc. But inflation considered is always urban, and urban people have far lower food based expenses than rent, travel, clothes, wages and clothing - none of which have increased much. Some of them have gone down. I used to think it was only gadgets - now it's in everything.

There's a call for a better inflation index than the WPI - and it's a work in progress, as the Urban CPI. Of course, I hope we don't do the U.S. makeover by introducing "substitution effect" (People will eat jaggery when sugar is expensive, so let's use the jaggery price instead), hedonics ("You get a better computer for the same price today, so let's put a lower price instead, to reflect the betterness") or Core CPI ("Oh, Food and Energy are impacted by factors other than the country's real economics, so let's ditch them and report CPI"). (Read this link) OH, and the gloriously insane "We'll take housing inflation as equal to the rent an owner may get, instead of the actual increase of price of the house". The US managed to get great GDP growth in "real" terms because of the low CPI numbers.

I don't even know how India calculates GDP growth - but if we're factoring WPI then this year will definitely yield 6.5%. We're not saints, I think it's more important for our folks to keep inflation high rather than to see it close to zero. However, the next few months will be critical even for WPI; at the rate we're going, we'll see headline inflation in two months.

Posted in Inflation

Another Great Trading Move

21 comments Written on August 4th, 2009 by
Categories: Uncategorized
Once in a while you see a signal. Of euphoria, or panic. This time I'm seeing it again - the euphoria. It's a great trading move - the Nifty and Sensex are at one year highs, the S&P 500 (US) has crossed 1000, and every market in the world is celebrating.

A lot of us have missed the bus. I have, willingly, as I cannot trade due to my job. And this is a trading market. What will follow, likely is a great trading move. In either, or more likely, both directions. So buckle up.

The fundamentals aren't there yet. The Q1 results are good, no doubt, but nearly all of them have that feeling of one-time income around them. From DLF's emergency sale proceeds, to ICICI's surge in trading income while dropping regular business. So we gotta wait till the economy surely shows signs - and it will be the shortest downturn I have ever seen, if it is truly a turnaround. I'm skeptical, and willing to wait out a few months before I truly declare I was an idiot for waiting a few months.

Prices, meanwhile, dictate trading. And prices are declaring a bullish sentiment. If I were trading, I'd go with the flow - run it up, ride it up, keep a strict stop loss and remember to short the son-of-a-bitch on the way down. Oh, it's going to be a fun ride; I participated the last time, I won't this time.

What I would do is to watch carefully why the top line stocks like RIL and ICICI aren't making new highs and slowing down on volume, while the mid-caps hit their peaks. Accumulation in the midcaps, distribution in the large caps? That is not a good sign, but surely a sign of a great trading move.

Happy Trading!

Posted in Uncategorized

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