Steel Bubble

We are reaching the end of 2012. A few days left in Dec 2012, before the new year sets in. The good news is that most of the stock markets will record a year of gain and hopefully many investors will walk into the New Year with a smile.

Many steel traders may also look forward with hope as major steel companies such as Arcelor Mittal (MT), etc. have witnessed some revival in its share prices recently. MT which touched USD 100/- per share in mid-2008 had crashed to sub-USD 14/- levels along with the collapse in steel prices.

It is an interesting story. Not only had the shareholders of MT faced a bumpy ride, the volatility in steel prices during 2007/08 period made many a steel trader bankrupt in 2008/09/10.

Steel Bubble

Steel prices which stood at $500 level in Dec 2006 touched $700/- record high in Dec 2007. Thereafter it zoomed to $1540 by July 2008, at the peak of commodity bubble, as evident from the chart below.

Source: mesteel.com

The problem was that many a normal ‘steel businessmen’ caught up in this whirlwind of speculation and when the bubble deflated by late 2008 to $480 levels, found themselves bankrupt!

Reasons for Steel Bubble

There were stories of steel becoming scarce due to several reasons – booming construction all over the world (GCC, China, US, Spain, etc.) which itself was credit fuelled.  Many businessmen switched to steel trading enticed by the profits and stories, which included that the entire years production of steel mills being pre-booked, etc.  Moreover those were crazy times of credit fuelled inflation!!

Real life example

There is a reason why I write this now. After a gap of about three years, I met an ex- CFO of a steel trading company, who reminisced about the crazy days off 2007 and first half of 2008. In fact from 2005 onwards, the steel prices were on the uptrend and it is like the gold prices of today. Just one way direction!

Attracted by the uptrend since 2006 many business men diverted their capital (exiting perfume manufacturing, textile retailing, etc.) to the lucrative steel business. Together with the credit facilities, they bought and stocked more steel which became almost like a precious metal.

Regular steel traders panicked and also began to stock more. And a borrowing customer (during my banking days) decided to do exactly that – hold more stock in view of the booming prices, which was supported by the research conducted by experienced purchase managers and industry experts. However, when the market crashed, the CEO, CFO and the Head of Purchase and Sales found it difficult to offload as the demand suddenly vanished. The aftermath of holding substantial inventory with borrowed funds in a crashing market is quite predictable! The proud CEO of this company, who was once chased by Private Equity (PE) firms with attractive offers, was humbled as he agreed to rather humiliating terms set forth by creditors (including banks) to restructure the credit facilities he took to finance his overpriced stock.

It took several years for the company to stand on its feet. He was lucky to survive as many of his competitors had either fled the UAE or faced jail terms for not settling business dues.

Strategic Plan

One of the large companies in the UAE recently faced a problem – whether to expand or not. We got in and conducted strategic study. I had the privilege to take an hour’s presentation to the ultimate decision takers- Board of Directors, who quizzed me with sizzling questions as Board was not so keen with the expansions while the top management was full of enthusiasm as they were more confident due to market awareness and day to day operational challenges.  Our solution which was best suited for the company was accepted by both Board and the top management wholeheartedly.

Is, strategic plan an isolated event which companies undertake once in a while?

Strategic management process is an ongoing process that evaluates and controls the business and the industries in which the company is involved. It includes assessment of its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment. The Strategic Plan will enable understanding of the key drivers of the market, its growth, market size, demand/supply balance, etc. Ideally, the Plan must have steps to identify areas linked to economic growth - to ensure that the performance of the company is in line with the economy.

Usually, it includes the following steps:

·         Evaluate current performance results

·         Review corporate governance

·         Scan the external environment

·         Analyse strategic factors (SWOT)

·         Generate, evaluate and select the best alternative strategy

·         Implement selected strategies

·         Evaluate implemented strategies

Strategy management may consider several options, depending upon the circumstance. It may include one of the following:

ü  Corporate Strategy-decisions regarding the flow of financial and other resources to and from a company’s product lines and business units.

ü  Directional Strategy-A corporation’s directional strategy is composed of general orientations towards growth

ü  Functional business strategy supports overall business strategy in much the same way that operational managers support upper top management. Marketing, human resources, logistics and production are all examples of functional areas.

Many organisations overlook functional strategy, which is very vital for efficient functioning of the business. It answers questions that impact a company’s competitiveness and efficiency. i.e:

§  Are you consistent with materials cost, labor and delivery?

§  What is the most cost-effective way to transport your materials?

§  Are you using social networking to target new customers?

§  Do you keep inventory flowing or work just-in-time?

§  What are your sources and scope of your competitive advantages?

§  Do you know your market position?

§  Is your brand easily identifiable from the competition?

(i) A courageous girl , (ii) US elections

Malala Yousufzai is just a teenager.... however she showed more courage than men in the northern region of Pakistan. Many parents wants good education for their children in the north Pakistan. Hope Malala's efforts brings a new light to the region, which a few centuries ago were beacon of knowledge and technology.
 
The place in Afganistan now notorious for Taliban - Khandahar - was known as Ghandara around BC2000-1000 and is mentioned in Mahabharata. The Ghandara kingdom played a crucial role in the power politics of Indraprasta (now known as Delhi). The battle of Kurukshetra (now in Indian Punjab) was due to the political moves of a gentle (or evil?) man by name Shakuni from Ghandara kingdom.
 
Then around BC 300-200, Buddism became prevelant and slowly the Hinduism gave away to the teachings of Buddism. The people of north Pakistan region and south Afganisatan became a mix of Hindusism and Buddhists and disseminated teachings and boasted about colleges that were the Cambridge of the world of those days (e.g. Thakshasila ). It seems that the world has forgotten the huge Bamiyan Buddists statues destroyed by Taliban a decade ago. Seleucus and Greeks who came with Alexander loved the beauty of the place and settled down. Remnants of Indo-Greco culture is still evident; although it is fading away.
 
Then around 1200, Islam arrived and the conversion followed; some accuse it was done by sword. Yet Islam was absorbed and of that born Sufism, which embodied the principles of life of the region. But Taliban is against Sufism.

Let us hope people of the region will show at least the courage of Malala and hope nowledge and prosperity return to that region.

.......................

US presidential elections are reaching the final lap. Debates are interesting. Somewhere I have read a comparison between George W Bush and Romney. That both are from rich families, got admission to the prestigious colleges because of connections, etc. Well any comparison with George W Bush, who presided over some of the disastrous period in US history starting with Sep 11 2001 and ending with Sep 15 2008 (Financial Crisis), any remote possibility of Romney repeating the same feat is unthinkable.


On the other hand, self-made Barack Obama, who got one of the worst jobs in 2009 has done reasonably well over the last four years and got Osama. In the month of March/April 2012, Times Magazine carried an article on how Obama decided to send commandos to pick up Osama - it was against all the advice by his generals and staff who preferred less effective course of actions. It was Obama's own decision and he oversaw it implementation. Times Magazine had praised the decision making approach and skill of Obama and the way the secret was kept as a secret. Most of his cabinet never knew about his multiple meetings and trainings by commandos.

 

 

Population Growth Dynamics

Recently, my daughter, studying in Class VI asked me a question- is India overpopulated? She learns that India’s population is around 124 crores or 1240 million. Suddenly, I recollected when I was studying in Class VI about 30 years back in early 1980s, India’s population was just above 60 crores or 600 million.

Doubling of population in 30 years! Wow – what will be India’s population 30 years from now– will it be 240 crores or 2400 million! Whatever the India’s population growth supporters say, that is huge number and the challenges will be enormous. The population dividend come with a huge bill to the government in terms of infrastructure, improving standards of living, education, utilities, etc. Even now about 30% of the population of the country is living without electricity and it is almost impossible to believe that will soon change. (Positive thinking persuades me to state that it means 70% of the population have electricity - which is twice the population of USA). A huge percentage of the population will be destined to be poor with low standards of living. Many may have to survive with just one meal per day. Criminal activity will increase, terrorist organisations will get more recruits and social problems will escalate.

Mumbai may be the best sample of India’s population. The City boasts several billionaires of the world, who find place among the top 50 richest persons in the world. There are millions of upper middle class in the City who swallows up luxury products and criss-cross the world. At the same time there are teeming millions of poor who eke out a day’s life. Criminal activity and underworld is active in the city. This social inequality is hard to change if the population continues to zoom. Often the middle/upper class don’t have more children; it seems that the lower middle/poor class tend to have larger families. A few miles outside the city, you get the best of the nature with lush greenery and scenic beauty. Similarly, India is blessed with natural wonders and thousands of years of history and monuments. But increasing population is a challenge –recently the reports of encounters with men and wildlife (e.g. leopards) are on the increase.Well, only the poor class suffer in this manner– the better off segment of the population is in safer places.

One of the reasons for the growth in population is also traceable to religious factors. Pakistan also faces a more severe problem. The fanatic religious leaders encourage more population for strange reasons (Jihad?) and the country is already suffering. Although there is illegal migration from Bangladesh to India, which adds to the growth in population, India continues to manage and accommodate. Pakistan also has got legal immigrants from Afghanistan and Taliban - who deny music, films and education to girls. India’s Mumbai equivalent city in Pakistan is Karachi which is a den of different relegious/political/underworld factions who kills almost one another every day. Recently, I had interviewed a bright candidate from Karachi who advised the sole reason for coming to UAE is the security reasons. He said his family is financially very rich and well off- but security is lacking in the City.

Coming back to India, the population growth in the country has huge disparities. Whilst the experts warn that Kerala state will face a situation akin to Japan within next 15-20 years with huge proportion of elderly population, most of the northern states continue to have large families contributing to the population explosion. This has led to a flow of migrant labourers into the Kerala state from distant regions such as Bengal, Bihar, Orissa, etc.

Overall, whilst the population growth may have its dividends, it comes with huge social costs as well. All responsible governments must be aware of the population growth has a diminishing marginal utility but increasing social costs. And the governments must take appropriate steps when the diminishing marginal utility (of population growth) curve meets the increasing social cost line.

Anti-India move by Trinamool

Financial thoughts had applauded Manmohan Singh when FDI was announced one year back. http://www.financialviewsonline.com/2011/11/indias-next-it-boom-fdi-in-retail.html . But got disappointed when Trinamool congress & other political quarters pressurized him to pull it back.

Last year when FDI was announced, it was the right time. Rupee was around USD=Rs 47/- Indian GDP around 7%. Drop to 6% was unthinkable. If anyone said then Indian GDP will drop to 5.3%, he would have been laughed at. Oil price in Indian rupee terms was much favourable and petrol, diesel and gas cylinders costed much less – thanks to Indian Rupee at Rs.45-47 range in first three quarters of 2011.

After one year, Indian Rupee touched USD =Rs.57/- Oil companies suffering losses, indian subsidies rising fast, fiscal imbalances increasing, cost of oil imports in rupee terms shooting up hurting the increasing consumers of petrol, diesel and gas cylinders in India. Above all, India's growth rate dropped to 5%, falling behind Saudi Arabia (6.2%), Turkey (8%), Indonesia and Philippines. No wonder FIIs and FDI have touched recent historical lows during the last one year.

Trinamool supremo just needs limelight and goes to any extent even thrwating India’s growth and common man's future. If FDI is rolled back again now, 2013 Oct will witness USD = Rs 70/- india’s growth rate below 4%, imported cost of oil shooting up, petrol, diesel and gas cylinders costing much more than what Govt. of India is offering now   and mark the words by Financial Thoughts – MARKET WILL MAKE INDIAN CONSUMERS PAY MORE WITHIN ONE YEAR. All FDI and FII will have migrated to Indonesia and Turkey which is growing by more than 8%. India is no longer attractive compared to Philippines etc.

FII knows how to make money from India whether it goes up or goes down. If India goes down, they will short Indian Rupee and equities and make money. Entire Indian retail investors are long on equity, who will be losers. Common man will suffer heavily in all fronts.

Hope the efforts of Manmohan Singh and Chidambaram will get the support from Indian politicans who have capacity to think in broader terms. A little suffering now will bring in lot of future benefits. Any attempts for little benefit now, will bring in lot more future worries.

Had FDI decision in Nov 2011 not rolled back at the behest of Trinamool, Indian situation now would have been much better – there would have been no increase in gas cylinder and diesel prices now.

PS: an article on poor distribution in India, which highlights need for modern technology and techniques thru retail FDI
 http://www.ndtv.com/article/india/foodgrain-worth-rs-250-crore-rots-in-maharashtra-godown-state-government-blames-the-centre-253898?fb_action_ids=10152024799815584&fb_action_types=og.recommends&fb_source=aggregation&fb_aggregation_id=246965925417366

THE SECRET FORMULA

Edward Thorp is a successful investor, a contemporary of Warren Buffet. He is of almost the same age of Warren Buffet and has been beating the Dow and S&P over several decades since 1960s through his own hedge fund. The brilliance of Warren Buffet is evident as he scaled up his activities from a hedge fund into a listed company and relied on insurance premiums instead of hedge fund limited partners.

 

Edward Thorp is a mathematician by profession and hence relied on mathematical approach to risk and ran a well sought after hedge fund. When Warren Buffet liquidated his hedge fund in 1968/69, he had recommended Thorp to the limited partners who didn’t opt for the shares of Berkshire.  

Edward Thorp’s contribution to the investment area is great and we can learn a lot from his track record and insights.

 
He is an avid follower of Kelly formula for taking positions in the market. By the way, Charles Munger  (Warren Buffet investment partner) also expressed support to this formula.

What is Kelly formula?
 
Let us go back little bit in history.

John Kelly, who came out with the formula in 1956, was Bell Labs scientist. The formula is a corollary to a Bell Lab  application for information theory’s ideas which were developed to facilitate higher information rate for a given channel capacity (of Bell Lab projects). The genius of Kelly understood that the insight of the application is good to solve uncertainty element of gambling or risk taking.

If you have an edge in a probabilistic outcome, Kelly formula would show the exact amount to invest/ risk in order to maximize your capital over the long term.

When applied to stock market, it means the maximum rate of return comes when you know something the market doesn’t or ignores or you can structure a trade or investment where your gains will be more.

The formula is as follows:

Capital to be committed = Pw- (Pl / edge)

Where Pw     = probability of winning

           Pl          = probability of losing

           Edge  = the win ratio i.e. winning amount/ losing amount

For example, if the investment outcome shows a gain of 2000 vs. a loss of 1000, you have an edge in the ratio of 2:1. You assign a 60: 40 probability. The capital you have to invest is 100,000/- . How much you may invest in this deal? Is it full capital? Let us try Kelly’s formula.

= 0.60 – (0.40/2)

= 0.40 or 40% of the capital can be invested

Suppose, after observing some latest developments on the market, you are less confident and revise the probability to 35:65. How much you should invest?

= 0.35 – (0.65/2)

= 0.0250 or 2.5% of the capital can be invested.

Before trying in real life situation, you have to master the formula and understand its limitations as well. If interested, the original 1956 article, “A New Interpretation of Information Rate” by John Kelly is available. Although there are critics to the above formula-  Edward Thorp is a strong supporter. He has penned an article in support “The Kelly Criterion in Blackjack, Sports Betting, and the Stock market’. Edward Thorp is also the author of two successful books related to investment and risk taking.

If interested to know more on the topic/ articles mentioned above, you may please email me at ciby@financialviewsonline.com

CAG REPORT ON COAL ALLOCATION MAY BE IGNORED

Everyone tries to bring in sensationalism! Indian movies, TV serials, Politicians, Media entertain the public with sensationalism and breaking news!

CAG Reports (of India) seem to be no different. As they investigate each accounts, they bring out with more sensationalised scams. Telecom was the biggest scam so far.

Now the purported Coal scam is even higher! Rs. 1.86 lac crore (or USD 35 billion) That is lot of money!
Are you wondering where all this money has gone? Well this is a notional loss!
Are these numbers true and fair?
Are there willing buyers/ bidders at the price levels CAG Report is assuming?

Assumptions are dangerous stuff - as many financial analysts in banks and FIs can confirm. In my previous life, I was a financial analyst and had headed a team of financial analysts in a MNC bank.

During the boom time of 2008, the assumptions made presumed the continuation of the boom times of 2008 into the future. Then the great crash (global financial crisis) came which made many a fantastic projections, IRR, DSCR, PLCR, etc look like a mirage.

CAG assumes that had the coal blocks allocated between 2004 and 2009 were done at a particular price, then there would have been loss to Govt. 

What if there were no bidders at these levels? Even if there are bidders, what is the probability that they have the capability to execute?

As is well known in tender process, the contract is not awarded to the lowest/highest bidder, but to the one who has the capability to deliver on time.

India's future growth will be driven by private sector, which is incentivized by profit motive. Private sector (and even the public sector) is not motivated by charity.  Efficiency & productivity of resources (incl. capital) in private sector is much better than in public sector. Ignore the concerns of private sector of India at the peril of the economic growth, new job opportunities and prosperity.

Hope these kind of allegations don't pull down India's growth.

Standard Chartered Woes

Standard Chartered was basking in glory these days when most of their counterparts were fighting a battle against economic slowdown and other issues in Europe and USA. It had good reserves, low exposure to euro zone and wasn’t guilty of LIBOR manipulations.

But - out of the blue-moon came the thunder that upset and injured Standard Chartered‘s stock price and its top management. Financial Thoughts believe that the style of New York State’s Department of Financial Services accusations of Standard Chartered is a surprise for everyone.

Standard Chartered has the right to defend and they are doing that by even spreading the news that they may ‘Fight the Fed’. Let us wait and see.

It is interesting to note that on 30 July 2012, UK's Financial Times (FT) carried an article (http://www.ft.com/cms/s/0/2ae72322-da45-11e1-b03b-00144feab49a.html#ixzz237nCKZSB) that mentioned about a company that attracted sanctions from US for Iran deals.

FT states that the US secretary of state had said that this company had …..

”….. provided more than $70m in refined petroleum to Iran in multiple shipments in late 2010. The company has tended to work with local banks, and with international banks including Standard Chartered.” 

Read the last sentence again! Other international banks are also involved with Iranian shipments mentioned above. So why singling out Standard Chartered alone? 

A few of my business clients are quick to point out that even US based companies (incl. oil field services co.) have business interests in Iran.

The media carries a lot of news / rumours on Standard Chartered’s possible defence against the allegations it broke US sanctions on Iran that could complicate things further – more counter lawsuits, fines and the loss of business, besides reputational damage . Some of the rating institutions are itching to downgrade Stan C's 'AA-' credit rating - this could impact its cost of refinancing.

For some investors, this may be a good news! After the dust settles, if Standard Chartered bank’s stock price goes down further, it may worth to have a look at it as an investment alternative.

Ludicrous Earnings of JPM

When JPM announced its first 1Q2012 results in April 2012, the investors were happy. It made good profits for the first quarter!  The CEO Jamie Dimon brushed off the questions about the potential CDS linked losses of its London office - he stated the trade is just a 'tempest in a teapot'!

However, during the conference call yesterday, JPM put the CDS trade losses at $5.8 billion, with the potential to grow another $1.6 billion (totaling $7.4 billion) in a worst-case scenario.

It definitely questions either the (i) integrity of top management at JPM or (ii) managerial capacity. In other words, when the CEO misled the investors in April 2012, either he knew it and had hidden the information from shareholders or he was kept in dark by his staff!

The beauty of the entire episode is that despite the loss, the second quarter results are better and profitable! Where have the losses gone? Well, the company simply restated its first-quarter results to reflect $1.4 billion in related CDS losses. What an accounting!! Let us see who signs the audited accounts of JPM!  

But for the state protection, both JPM and Goldman Sachs would have licked the dust in 2008 crisis. Well after all, there is not much difference in Communism and Capitalism at times. (Karl Marx had predicted in mid 1800s that the capitalist banks will have to be salvaged by the state after narrating incidents more or less in line with the 2008 crisis)

And the stock rallied because the 1Q2012 earnings were marked down to losses so that 2Q2012 can show some profits. If this continues, during the next conference call in Sept 2012, they may re-state 2Q2012 figures downwards to show profits in 3Q2012! and the stock may rally! Just wondering who is fooling who? Does it suggest a massive cover-up & isn’t it obvious that a critical examination required?

Across the Atlantic, another Anglo-Saxon banking model also shows loopholes. Barclays Chairman Marcus Agius and CEO Robert Diamond had resigned in the wake of that firm's LIBOR-rigging scandal. But is amazing that Dimon continues to be the CEO despite scandals after scandals – the power brokers are keeping him up there as he is an expert in mis-leading investors and public?  I like the British way of handling the situation - as they know how to treat erring CEOs or the CEOs that either lacks integrity or capability.

Driving the Indian entrepreneurs abroad!

Thank God, Finally Pranab Mukherjee left the Finance Ministry

When Pranab took the reins of financial affairs of India, the country was growing at about 8%, FIIs and FDIs always considered India as a desirable destination and Indian entrepreneurs were enthusiastic to start new ventures. After all, Chidambaram, who hailed from a reputed business family in South India, conducted the financial affairs in business-like fashion. Of course, India’s foreign currency rate hovered around healthy 1USD= Rs 45/- . Even when international oil prices peaked at US$148/- p/b in July 2008, petrol prices in India was around Rs 50-55/- per litre.

Now, as Pranab leaves the finance ministry, the country’s growth rate has fallen to 5% levels, FIIs and FDIs have dropped to a trickle, currency stability has become a joke, petrol prices increase to the north of Rs.70 p/l (although international crude oil price is around USD 90 p/b only). All of the above is nothing compared to the main achievement ‘driving the Indian entrepreneurs’ abroad!

Recently, I got a few Clients from India, who came to the UAE enquiring how to set up factory in this country. The reason is the changes in Indian income tax. They have informed that the export income which was hitherto tax free in India is now made taxable through MAT (Minimum Alternate Tax). So, the entrepreneurs are planning to shift the production base to business friendly UAE in such a manner that the production for exports will be done in the UAE. Whilst this is good for UAE Economy as the economic multiplier and accelerator works in its favour, Indian economy will suffer in terms of lost jobs, lost government revenue and negative multiplier effect.  Wealth creation in the country will be affected.

This is over and above other myopic policies pursued by the government in tax front that will scare away BPO outsourcing, FII and FDI. We have covered this in an earlier blog see http://www.financialviewsonline.com/2012/04/income-tax-department-is-taking-lessons.html

‘Penny wise and Pound foolish’ seem to the dictum of Indian tax bureaucracy now!

Indian Economy Under Attack & a sleepy leadership - Part II

India begs new leadership. Whilst Dr. Manmohan Singh has many strengths, managing a coalition and Sonia Gandhi does not seem to be one of them. His Finance Minister and RBI Governor are making a mess of things and PM cannot do much.

Ex-minister Raja took the corruption to new heights by looting billions of dollars of public money (of several tax payers) walks free and even visits the temple of democracy (Parliament) without any impunity. At least 2% drop in economic growth of India can be attributed to the corruption orchestrated by Raja. This dented confidence of several foreign and domestic investors and led to great disappointment to the multitude of Indian citizens, to see them walking free - this will induce the future ministers and bureaucrats to loot billions more.

 

With the general elections to elect a new Govt. a few months away, let us hope voters of India will give replace UPA. Let us give a chance to NDA, even if it means Narendra Modi in power. What we need is performance. Modi can perform as he has proven in Gujarat. Of course, his attitude towards minority is a worry; however the Indian constitution has been designed with enough checks and balances to rein in PMs and Presidents who keep dictator ambitions. Moreover, India is not Gujarat and if he follows anti-minority policies all over India, someone has stated that it may even sow the seeds of next partition of India.

Of course, Dr. Manmohan Singh is among the best of the best economists world has seen. His track record under Narasimgha Rao during 1990s opened up new possibilities in Indian Economy. It surprised the world, who has mostly written off India as a sluggish, slow growth country of snake charmers. Suddenly the world realised the immense potential since ancient times and flocked into the country in the form of FDIs and FIIs. Many Indians became multi-millionaires while many poverty stricken households catapulted to middle class buying up consumer durables such as TVs, DVDs, PCs, Laptops, Fridge, etc. and even small cars. BJP Govt continued the success story. India even survived 2008 global crisis.

Those days India also had dynamic RBI governors such as Bimal Jalan, Reddy, etc. Bimal Jalan was able to reduce  Indian interest rates to 6% during early 2000 when US reduced its rates to 1%.

However, now when the US has reduced its rates to 0.25% India's RBI had hiked the rates to 8.5%, making it almost impossible to do business in India. The cost of capital and cost of borrowing are so high that doing meaningful business is almost impossible. We had discussed this earlier (See http://www.financialviewsonline.com/2011/11/foolish-rate-hike-part-ii.html ) The current drop in India's growth rate to 5.3% could have been avoided had RBI been more smart.

Similarly, the current sharp fall in Indian Rupee and the consequent costly imports of oil is self-afflicted. (See http://www.financialviewsonline.com/2011/12/indian-economy-under-attack-sleepy.html). Whilst many try to blame the poor performance of the UPA government on Euro, the matter of the fact is that most of the blames lies with the Govt.

Let us hope, very soon Dr. Singh will cease to the Indian PM which will give him time to author a few books on Economics and Finance. Financial thoughts firmly believe those books will be treasures and will be cherished by the generations to come, not only in India, but all over the world.

LAMENTATIONS OF GREECE - Part II

Euro is proving to be Man Made Financial Disaster!

On 2nd Feb 2012, Financial Thoughts have suggested that exit of Euro by Greece is good for the country. It was plain logic. After the stringent austerity measures put forth at the recommendation of Germany (reminding the colonial rule of 19th century?), by 2020 Greece will still have 120% Debt/GDP ratio! (For details see http://www.financialviewsonline.com/2012/02/lamentations-of-greece.html)

This was level of Debt/GDP ratio when the Greece crisis began couple of years ago! If the policy of austerity still fails to reduce it after a decade, it is common sense that the austerity is not the right medicine.

However, the Greece departure is sure create a big mess. It could be as disastrous as Lehman or even worse - or there is a fair chance that since the event of Greece departure is not a 'black swan' most of the financial world would be prepared.

Financial Thoughts is worried about the consequences to its stock portfolio. We have been searching for the comments and thoughts by the veteran investor and Guru of Gurus, Warren Buffet. We haven't seen any other than that during the recently concluded annual shareholders meeting of Berkshire, he has predicted a good performance of his company. We hope he will come out with his views soon.

We believe there is time till end of June 2012 before Greece officially declares its exit.

Those who are courageous can play a George Soros of 1992 - akin to the manner he made tons of money betting against the weak GBP. The Euro, at least in the short term, is on the weak footing.

The question is how to protect the stock portfolios. As financial thoughts mentioned earlier http://www.financialviewsonline.com/2011/07/nasty-experiment-called-euro-part-ii.html as long as Euro is in existence, there will be troubles.

Euro is proving to be a man made financial disaster. Financial thoughts is now concerned with how to protect the portfolio - there are several options, take short positions, buy puts, create straddles, create synthetic positions, take DITM/DOTM option positions, etc. However, an idea about the extent of damage that can be caused is required

Ludicrous socialism policy of UPA

It is well known that Mrs Sonia Gandhi’s strategy is to pamper the poor for votes & don't care much about others - majority of India's 1.1 billion population is poor. Roughly 10% of India is super rich, 20-30%% middle class and they pay most of the taxes to keep up the Government. About 60%-70% are stated to belong to 'poor' section without much incentive to improve - as they are pampered in the wrong manner. Instead of giving hand-outs they must be given chances to work hard towards success.

As part of pampering the poor, free/ subsidised food, cloth, etc is flowing to the BPL (Below Poverty Line) class. For example, a southern state Kerala provides 1 Kg rice for Rs 1/- to the poor class. With average daily wage of around Rs 350 -500/- (monthly income of Rs 10k-15k) in the state, this lopsided socialism is creating undesirable behaviour among the population. It is easy for a labourer earning this level of wage to qualify themselves into BPL category and enjoy free/subsidies. No wonder even the middle class segments in the country is trying to get into BPL category to get benefits. As usual, the lopsided policies of Indian Govt. is not providing any incentives to work hard towards success. Instead, it encourages the population to be BPL.

But the middle class of India which exceeds 250 million exceeds the combined population of several leading European nations including Britain, Spain, France, Germany, etc. and adds a lot to the Indian economy is being ignored. Why? They are not the vote bank just as  National Democratic Alliance (NDA), led by the Bharatiya Janata Party, realised in 2003. After putting up a spectacular economic performance, they lost elections .

It is pertinent to note that during 2002-2003 period US kept its interest rate low at 1% and India was able to reduce its rates to record lows as well, thanks to then bold RBI Governer, Bimal Galan and NDA, led by Vajpayee who initiated the world class National Highway program. Compared to that currently, the interest rates in the US is all time low; however current RBI Governer did not reduce the rates to help the business in India. UPA led by Mrs. Sonia is a far cry from NDA led by Mr. Vajpayee. The result is the slowing economy. No wonder Indian Manufacturing data for March 2012 was in negative territory.

Recently Forbes magazine has put out a list of the world's billionaires, of which fifty-five of them are Indians. About half of them belong to Baniya caste (traditionally business class) who comprise less than 5% or 55 million of Indian population. The heartland of India , where most of the quantity (60%-70%) resides, is missing from this list. Bihar, Bengal , Jharkand, Utterkand, Chattisghad, Madhya Pradesh, Odisha, Uttar Pradesh have little or no representation. Remember these are some of the resource rich, mineral rich territories in India. The skillset of the successful indians and poor indians are different. Instead of pumping free / hugely subsidized goods to 60%-70% of the population - that results in huge deficits - Govt must embark upon schemes to improve the skillset.

Some one defined Capitalism as 'wealth shared unequally' and Socialism as 'poverty shared equally'. It seems that current UPA believes in the latter!

Why can't Dr.Manmohan Singh be an effective PM?

Recently, Financial Times (of UK) dated 17 Apr 2012 carried an article on India. Some of the interesting points (embellished with Financial Thought views) are given below:

1. India is in fact turning back to its model of 1970s when Indira Gandhi stifled Indian businesses and focused on poverty (eradication). They nationalized banks such as Bank of Baroda who would have rivaled HSBC or Stan Chart today. BoB had operations in ME and Africa while a few south based banks were active in Far East.

2. Socialism is making an entry through back door. It believes in equal distribution. Since socialism hardly creates wealth, often it means "Poverty distributed equally' while the able escape to the west.

3. Narasimgha Rao gave his then FM free hand in the matters of Finance, unlike Indira Gandhi.

FT goes on to say that Sonia Gandhi tries to imitate her mother in law, Indira Gandhi. It is reported (not FT) that someone is going to make a movie on Indira Gandhi. However, Financial Thoughts is not a fan of Indira Gandhi, although some of her decisions such as 1971 War, 1983 Blue Star operation may get a few points. But Indian economy was a disaster during those days. An Indian economist familiar with the benefits of poverty alleviation of 'Reforms' pleaded to liberate the economy from license raj, however he just was ignored by Indira Gandhi, possibly because she thought of herself good in economics?

It took Narasimgha Rao to give economic freedom to India; however it seems to be taken away slowly.

India's own industrialists feel discouraged by the economic policies (read 1970 socialism) and they have billions to invest. They are looking outside to invest - say a place like UAE, which hosts several illustrious businessmen who conduct business hassle free with rest of the world. Or ask why Swaraj Paul or Mittal, why they left India in the 1960s and 1970s. Given the kind of policies adopted by Sonia Gandhi (re-appointment of 1980s FM Pranab Mukherjeee, selection of relatively unknown Mrs. Patil as President) brings dejavu experience of Indira Gandhi, back in action!

Modern days need modern leaders - turning to the failed model of 1970 defies logic.

Many have often wondered why an eminent person like Dr. Manmohan Singh (who did a lot for the country) seems uninitiated or lacks motivation he showed in the 1990s. FT article provides some good insight on the backseat driving . Moreover, Indian PM has friends like 'Mamatha Banerjee'. With such friends, who needs enemies!

Is Income Tax department a mother-in-law?

Recently, a moneycontrol article (dated 8^th April 2012) has stated that India is expected to grow at 6.1% in calendar year (CY) 2012, similar to the pace recorded in Q4 2011

The Government and RBI may not be able achieve reduction in inflation through their policies, but definitely they know how to achieve reduction in India's growth from 10% to 6% levels.

As Financial Thoughts mused earlier in this blog, with the kind of high interest rates in India, the cost of capital shoots up impacting business confidence

Not only RBI is trying to hamper the growth, but a recent report in Indian Express has shown that Income Tax department has also joined the wagon. Their duty is to scare the FDI away (imagine the impact on India's current account balance & employment of its educated youth).

In a thought-provoking article in the Indian Express, Jaithirth Rao tells about the harassment that the income-tax department has heaped on the BPO industries which have caused a shift of BPO businesses from India to the Philippines and other more ‘reasonable’ Countries.

The income-tax department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down.

The income-tax department is reportedly making frequent and arbitrary changes in rules and says that this has resulted in vicious harassment of Indian IT and BPO industries.

No wonder these things happen when we have a 1980 Finance Minster (Pranab Mukherjee) presenting 2012 budget. In 1980, income tax department was like a vicious mother-in-law for the business community. For a period, from 1991 there were progressive FMs. (i.e. Manmohan Singh, Yashwant Singha and Chidambaram), irrespective of whether it was BJP or Congress.

Hope they will make Pranab Mukherjee the next Indian President and bring back Chidambaram as FM so that Indian businesses can breathe and the confidence in Indian Economy is retained such that FIIs and FDIs continue to flow into the nation.