Readings

Readings: DLF Overpriced, Greek Default, RE Losses

3 comments Written on March 4th, 2012 by
Categories: Readings

Subramoney on Losses in Real Estate Deals. (But success stories are equally incredulous. I have seen money doubled between a pre-construction purchase, waiting for three years until it’s evident builder isn’t anywhere close to finishing, and then selling off the flat; and the flat is still a LONGGGG way from completion)

Monika Halan on why banks should not be allowed to be insurance agents. (or must be liable for their mis-selling)

A Veritas Report (I don’t have a copy) says DLF is overpriced and it should be worth Rs. 100. They claim “aggressive accounting” overstated profits. They used to sell what they built to DAL at inflated prices to show profits, eventually having to buy the promoter owned DAL back at an extremely high valuation. They’ve given up on projects (Bidadi, Dankuni, NCR convention center etc). A stretched balance sheet, no free cash flow, and a slowing real estate market are quoted as reasons to downgrade. These are not unknown – both DLF and Unitech have been momentum stocks, and the DAL Dud Deal was known from the IPO. It was just assumed that the owners would carry DLF through; but the stock has fallen from the 1,200 levels in 2008, to 200.

The telegraph claims that Greece may actually default, by invoking Collective Action Clauses (CACs) if 90% of the lenders do not agree to the voluntary losses of 70% of the “face value” of privately owned Greek debt. The CACs allow Greece to force the haircut on to everyone, and that would make it involuntary which will definitely trigger bond insurance. This insurance has been sold by overleveraged banks who it is surmised will have another crisis if the insurance is “triggered”.

Back From Holiday, With Notes…

2 comments Written on January 16th, 2012 by
Categories: Readings

Bangalore was fantastically refreshing, with mentionably better weather. Much  has happened in the last few days, so I’ll use this post to link-comment.

Europe was downgraded (WSJ) by S&P – France is no longer AAA, and Italy is BBB-, just above junk. Portugal is junk. Step back and think about this a bit: The US is no longer AAA, and their stock market, their bonds and their currency have only gone up. Nobody cares about what rating agencies think. The point they should have been downgraded was two years ago. Right now, the rating fellows are just saying “oh, ok, we also agree that there is a problem”.

The rating change in itself is not such a big deal. It would be if – and I say if – funds and banks were forced to buy only the top AAA rated assets, or if the assets became AA then they were forced to put up more collateral. The ECB is happy to accept anything as collateral if it has ink on it, so Portugal being junk means nothing – the ECB will still lend against Portuguese bonds. Funds that are forced to buy only AAA (like pension funds) will simply modify their mandate if so required, like they did when the US lost AAA. For the markets, this should not be a trigger.

The issue with Greece is more worrying (WSJ). Greece has a lot of bonds out there, and much of them are owned by the “private sector”. They were talking to the pvt. sector bondholders to voluntarily take a hit on the bonds so that Greece can pay back less than the face value, or restructure the debt with a longer maturity and a lower coupon interest rate. (They have a 14.6 billion euro payment on March 20) While the initial hit was supposed to be 50% – a verbal yes had been given by everyone then – it’s turned out that Greece is substantially deeper doo-doo than anyone thought, so they are looking for a near-70% hit for the bondholders. This is not acceptable “voluntarily” to the private sector. Big deal, you think, so it will be involuntary – they have to take that much because that’s all Greece has.

Not so fast. If the hit is involuntary, it triggers credit default swaps, which have been sold as credit insurance (bond holders who buy CDS get paid out 100 cents on the euro, instead of a “voluntary” haircut). CDS sellers are institutions that will be hurt REALLY badly if the CDS is triggers, and are levered entities like banks. Interestingly, as hedge funds buy up the outstanding bonds and then CDS, they are lesser likely to agree to a voluntary hit; the negotiations get even more complicated. To sort this out by March 20, there will need to be significant arm twisting.

In India, the Air India rescue effort required banks to convert 11,000 cr. of working cap to long term loans, and make 7,000 cr. into CRPS (Cumulative Redeemable Preference Shares), and provision around 10,000 cr. While RBI has blessed the SBI-Caps created restructuring proposal, this has scared off banks who feel that a) SBI (the bank) gets a better deal and b) The provisioning will kill their rating abroad. At nearly 2% of total bank capital, and the other big restructuring issues still to come – Kingfisher, GTL and so on – the AI deal will shine some light into how comfortable the banking system is with losses.

RBI has issued guidelines on compensation at banks; they’ve asked for “variable” pay limited to 70% fixed pay, clawback and malus in case bank performance deteriorates and so on.

Google, what were you thinking?  In a blog, Stefan Magdalinski, the CEO of Mocality, a business database in Kenya, unravels attempts by Google Kenya in association with Google India to steal business addresses off their database, including a sting operation that redirected requests from Google owned IPs to their own call center. (Google has apologized, but WTF)

I’m quoted in an article with Mahesh Murthy in a Business Standard piece on “Is Online Retail the next bubble waiting to pop?” This needs a detailed follow up, because it lost my entire chirpy twist that “bubbles are good, why are we complaining?”.

You want a long term gold chart? Zerohedge provides Goldman charts for gold from 1265 in Great Britain Pounds, properly adjusted.

Suze Orman recommends a “debit” card that charges $3 per month, and falsely claims it helps your credit score in the US. I don’t know enough of US products, but honestly, Indian cards are saintly in comparison!

John Mauldin: The End Of Europe?

Mark Cuban’s 12 Rules For Startups.

Schlep blindness by Paul Graham. This deserves a post with context. And I’m guilty.

What are you reading?

Readings: Bank Risk, Carbon Credits, Kingfisher

1 Comment » Written on December 19th, 2011 by
Categories: Readings

Nine Lakh Cr. stuck in risky sectors, says Firstpost. Even a 10% loss on that will hugely hurt bank capital, but the figure is exaggerated.

There is an enormous difference between a market opinion and a market position”, says Peter Brandt. A great post by an experienced trader. Lose your opinion before you lose your money; it’s silly to tell traders how they were wrong a month back, perhaps.

EU Carbon Credits have fallen off a cliff (From barchart.com)

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Stocks like SRF and Suzlon get income from selling CERs, and if the prices have more than halved, the stocks will see a decline in income. But the stocks have been beaten up so badly it might not even matter!

Kingfisher grounds 15 more aircraft. Can’t afford maintenance expenses now. That stock is at 21 rupees, which sounds like 21 rupees too many…

We Need More Equity Investors: McKinsey

3 comments Written on December 13th, 2011 by
Categories: Readings

The coming shortage of equity investors by the Economist, quoting a report by McKinsey. 80% of the world’s financial assets of $157 trillion are held in developed economies, where people are ageing. Pension funds are maturing and they withdraw from equities. Emerging market investors hold most of their assets in debt, very little in equity. The crash in recent years – 10 years of nothingness in the US, 4 years in Asia, 20 years in Japan etc. – have prompted an exodus from equity markets. Finally, financial investors like banks will have to sell equities to create capital for regulatory norms such as Basel III.

This means by 2020, there is an “equity funding gap” of $12.3 trillion, unless things change dramatically. (But things will change dramatically. IMHO: There is no equity funding gap – valuations will come down to levels where they attract investors. )

US households have 42% of non-retirement financial assets in shares. The number for Western Europe is 29%; and Japan is just 10%, down from the 30% number before the crash in 1990 (since which the index is down 75% today). Most emerging markets are at about 10%.

Companies will have to fund themselves with equity but the lack of demand will propel them towards debt, says the report. About India:

Households are the largest investor class in India, holding 42 percent of financial assets—$835 billion out of $2 trillion. This money is invested almost exclusively in bank deposits, and equities accounted for only 8 percent of household financial assets in 2010. Overall, Indian household investors prefer gold and real estate to financial assets. The Indian government plays a large role in the financial system, holding more than a quarter of all financial assets. This $560 billion portfolio is largely invested in bonds and the listed equity of corporations. Banks are also investors, with $280 billion in securities. While the wealth of Indian households is expected to grow rapidly in the coming decade, the prospects for India to develop a significant equity investing culture are unclear. In 2009 the Securities and Exchange Board eliminated upfront sales charges, or “loads,” on mutual funds, which has caused distributors to pull back. Such regulations, perversely, may temper Indian investor demand for equities.

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Also, according to them, India has an equity gap of $1.8 trillion (that’s about the current GDP of India, and greater than the entire market cap of the NSE, to give you a size comparison)

The entire McKinsey report is worth a read.

Random Reads: The Big Fight, Social Media, UID Kaput?

2 comments Written on December 9th, 2011 by
Categories: Readings

The Big Fight between Ma-Mu and John K about the demise of Taggle, the kamikaze (or not) act of Air Deccan, and how we should not do things. I think it’s good that we do proper post-mortems of companies without looking at the ego lifting parts of the pieces involved (“I said Air Deccan wouldn’t work”, “Not till after it was dead”, etc.)

The story is of a much-chased space (“deals”) spoilt by the small fact that no one thinks getting a haircut for 80% discount at Rs. 200, implying a regular price of Rs. 1000, is a good deal. And then the “pivot” to sell electronics, of all things. And investor panic buttons were on, as they usually are. Of a smart team chasing a formula chased successfully before, and the local dynamics hurting before helping. The point to learn is: when you fail, fail big, boss.

John K and the Taggle team are not worse off; and regardless of what anyone says, they tried, they made a brand, and they individually come out winners even if the company lost. That is sadly the Indian story – of very few big exits – but at least it’s not a story that the founder was a Tata/Birla/BigName.

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A parliamentary committee has rejected the Nandan Nilekani run Unique ID (UID) Project, for four reasons: Inclusion of residents rather than citizens, private data collection could lead to misuse, duplication of work done by the National Population Register and the big costs of the project.

So much fun. First they reject FDI in multi-brand retail. Now UID. I don’t think this government is capable of any reform. I know that UID has flaws but it can’t be summarily rejected like this. If this is how large projects are run – sometimes yes, sometimes [NOO! ROLL BACK!] then this country is really not worth investing in.

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How social media is changing the stock market. Mentions Stocktwits, the US stock conversation site that builds on top of twitter. There is no such site for India, but the number of online conversations about Indian stocks on twitter is next to nothing; even then, I find that discovery of news, rumours and head fakes are better on twitter – the junta is definitely more informed than much of the media out there.

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A bank manager at HSBC tries to swindle customers out of 1.3 crore, by promising high returns on their unused savings account balances. The first rule of being a bank customer is: DO NOT TRUST YOUR BANK MANAGER.

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Greece likely to default in Jan? Interesting post, but I don’t think so.

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OT: Read Sidin Vadukut’s piece on Ashwin Ravichandran .

Readings: Farms, Prepayment Penalties, VC Movies

Comments Off Written on September 7th, 2011 by
Categories: Readings

Readings: Edible Oils, Real Indian Story, Italian Mints

1 Comment » Written on August 30th, 2011 by
Categories: Readings

A few interesting things to read over the 2-day trading holiday:

Italian town printing its own currency to escape austerity (Reuters)

Nidhi Nath Srinivas on the edible oil industry (ET).

Read @moneybloke about KS Oils, which has fallen a magnificent 80% in the last year, from highs of Rs. 80 down to Rs. 10 today. (Disclosure: I went long at 32. I ignored my stop losses on the way down and exited at an average price of 21 or so. But it  was a small position, so I console myself.)

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(Promoters pledged shares and financiers sold them as the stock collapsed). Directors have resigned. Rumours abound of the promoter losing his shirt on Palm oil futures. Risks to the Indonesian plantations persist, with some government bans that might happen. Tough stock to buy on fundamentals, except with a hope of a turnaround.

Ajay Shah: Only 20% of India has a household income of less than 60K per year. This is a result of a survey of 143,000 households, which I haven’t tested for integrity (i.e. is it diversified enough, how much urban/rural bias is there, is there cherry picking). But if true, this is revolutionary. That means the real story is that 80% of India is making more than Rs. 5,000 a month. This is going to rapidly increase consumer spends – FMCG, appliances, gas and all that. Oh, and stuff is cheaper now than Jan of this year.

Andrew Ross Sorkin on The Mystery of Steve Jobs’ Public Giving (NYT) There’s always a different standard for Jobs, versus any of the other really rich people, and Sorkin’s almost apologetic. Though it must be said that Jobs is suffering terribly these days and I hope he gets better and Sorkin, in that context, is all right to go easy on him. 

Readings: Warming, Bonds, Book Writing

8 comments Written on February 8th, 2011 by
Categories: Readings

Krugman blames global warming for "popular rage" from lack of food. Sadly, this is really shallow. We've had food crises for ages, and we only had a relatively nice period in the last 10 or so years. That we're warming is a fact, but it's not that humans are influencing it, regardless of the so-called consensus. Rage against food prices is usually the straw that breaks a camel's back - people are usually pissed off about other things, like corruption (and Egypt *is* a prime example).Blaming a "vast leftist conspiracy" is just a strawman.

12 steps to get things done. (The Kirk Report)

A great post on Bonds: Bond Trading 101 (Pragmatic Capitalism)

Food has 50% weight in the New CPI, and housing, 10%. Releasing 18th Feb (CPI)

James Altucher on writing books with details. (The Altucher Confidential) Incredible - just 14,000 of his "Trade like a hedge fund" sold. Books don't seem to make much money.

Readings: Guarantees, Neta-Babu, Term Plans

5 comments Written on December 30th, 2010 by
Categories: Readings

Readings after a hiatus:

Dhirendra Kumar takes a jab at the labour ministry for asking for a “guarantee” of equity returns. The labour min seemingly asks for a guarantee and a minimum return – yeah, what’s different between that and buying government bonds, one would think. The EPFO looks screwed, with the corpus of 5 trillion (lakh cr.) that needs to pay out either 8.5% or 9.5%; if they fall short, they will need the government to put in money.

About 100 years ago: The New York Stock Exchange decreed that commissions of 1/8% is sacred, it will be charged for all transactions, even outside the exchange. From then to now, what a difference. (That’s about 15 basis points, still lesser than what delivery transactions in India tend to cost)

The National Housing Bank (NHB) has increased the risk weights and provisioning for housing finance companies (HDFC, LIC Housing Finance etc.). Loan to value above 90% isn’t allowed, and for loans of 20 lakhs or more, the limit is 80%. Additionally, risk weights of loans above 75 lakhs are at 125% – that is just following what RBI did for banks in November. Provisioning for teaser loans goes to 2%. Obviously this is a non-issue – the stocks didn’t even flinch.

I didn’t know this – NHB has banned prepayment penalties for pre-closure of housing loans if the money is paid through the buyer’s own sources.

Manish Chauhan at Jago Investor has an excellent review of term insurance plans. The data’s outdated, a little bit – let me see if I can expand on this a bit.

Sucheta Dalal on the Mutant Superbug, the increasing neta-babu nexus that we will just not stop. While she makes many allegations without presenting any evidence*, the main point she makes is valid – we seem to have an even higher neta-babu control over our economy.

* Like “stock tips in lieu of cash”, etc. I believe that might be true, but in the absence of evidence, it’s just a random allegation. Did she hear someone say it? But like Niira Radia said Kalal Nath “can make his 15 percent”, that doesn’t make it true. It has to be not just believable but true; especially when there is more research possible. Note: even I make this mistake a lot.