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.