• NY Times: The End of the Financial World as We Know It

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him.

Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

• Kiplinger: A Bargain Hunter Stands Tall

We spend a lot of time thinking about what could go wrong with a company — whether it’s a recession, stagflation, zooming interest rates or a dirty bomb going off. We try every which way to kill our best ideas. If we can’t kill it, maybe we’re on to something. If you go with companies that are prepared for difficult times, especially if they’re linked to managers who are engineered for difficult times, then you almost want those times because they plant the seeds of greatness.

The free cash a company generates divided by its market capitalization. If we can get a double-digit free-cash-flow yield, I’m interested, especially if we can’t kill the company and especially in a world of 3% or 4% risk-free yields.

• Bloomberg: India’s Recovery Hinges on Stimulus, Rate Cuts, Ahluwalia Says

India’s next administration needs to cut interest rates and unveil more stimulus packages to revive an economy growing at its slowest pace in six years, the prime minister’s top economic adviser said.

Exporters in India have cut about 65,500 jobs as recessions in the U.S. and Europe, the nation’s biggest markets, damp overseas demand. Industrial production fell 0.4 percent in October, the first decline in 15 years, and exports plunged 9.9 percent in November after falling for the first time in seven years the previous month.

During 2008, I posted a bunch of articles on why I was bearish on real estate in India - especially residential 2/3 BHK apartments in Tier I and II cities in India. I also wrote about my bearish outlook for steel & cement prices. I haven’t changed my mind for 2009 (except that I am equally bearish on commercial real estate), and would like to add a relevant position to the Rs 500,000 (5 lakh) virtual portfolio.

Unfortunately, there are no cement futures traded on any commodity exchange in India. There are also no sector-specific indices that I can short. So I have had to pick a cement stock as the representative for my outlook on the sector.

The first trade in my 5L Virtual Portfolio is: Short India Cements January 2009 Future (1 contract) @ 105.

This is a single stock future, and unfortunately the NSE has quadrupled the lot size for the March 2009 contract from  725 to 2900. So the current contract value is ~ Rs 75,000 but will go up to Rs 300,000 in March. I doubt I will keep the position after February F&O expiry, but given that earnings season is coming up, I think the short trade is worth a try.

Take a look at the charts I posted here - Cement production, consumption & price trends. One word comes to mind: China! The astounding growth since 2004 in both production & consumption is directly related to Chinese economic growth - including their infrastructure investments and real estate boom. The spate of negative economic news of late does not bode well for the Chinese cement industry, and similarly for the Indian cement industry.

What is amazing to me is the fact that cement prices have barely dropped from their peaks in India, while most other commodities have tanked - locally & globally. Consider the chart below:

Cement cost ~ Rs 150 per 50-kg bag in late 2005. It almost doubled by mid-2008, and is now down to Rs 230-250 per 50-kg bag. Given the massive RE boom during this period, and the inevitable slowdown in 2009, cement prices have at least another 25% to go on the downside.

I find it hard to believe that any government bailout or interest rate reduction in India will support demand enough to offset the huge supply additions by cement companies in recent years. While several projects have been cancelled or delayed, there is still enough new capacity coming online in 2009 & 2010 to make cement companies think twice about resisting price cuts.

My hypothesis is that cement is one of the last commodities left to free-fall, especially in India. Moreover, prices have been the strongest in the South. One may attribute this to some infrastructure spending at the state-level or commercial/residential RE demand. But a combination of weak exports & slowdown in IT (Satyam, Microsoft, . . . ) can only mean one thing - rapid drop in cement demand in the South. Finally, companies that focus solely on OPC (ordinary portland cement) may get by due to infrastructure demand propped up by government spending. But those that derive a substantial chunk of their revenue from PPC (used for residential RE) have got to suffer.

Within the cement sector, India Cements looks like a good short candidate in the above context. The bear market rally since late October has seen some cement stocks rebound over 40%, but India Cements has shown poor relative strength. It’s focus on Southern India, combined with capacity expansion in 2009 make it vulnerable to large price cuts.

Even Friday’s interest rate cuts by the RBI and the second bailout package by the government are unlikely to revive the RE sector in any significant way. Low-income housing & road projects aren’t quite the pony that these stocks rode in the bull market.

Note: Obviously, there are several risks to this trade. The standard disclaimer applies to this - and every - position in the Virtual Portfolio.

PS: Follow me on Twitter for updates on positions.

• Big Picture: Global Manufacturing Collapse

• Jayanth Varma: India in a ZIRP world

• NY Times: Risk Mismanagement

“Risk modeling didn’t help as much as it should have,” says Aaron Brown, a former risk manager at Morgan Stanley who now works at AQR, a big quant-oriented hedge fund. A risk consultant named Marc Groz says, “VaR is a very limited tool.” David Einhorn, who founded Greenlight Capital, a prominent hedge fund, wrote not long ago that VaR was “relatively useless as a risk-management tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. This is like an air bag that works all the time, except when you have a car accident.” Nassim Nicholas Taleb, the best-selling author of “The Black Swan,” has crusaded against VaR for more than a decade. He calls it, flatly, “afraud.”

Long, good read.

• PMO: Additional Government Measures for Stimulating the Economy

2 (c) NBFCs, dealing exclusively with infrastructure financing, would be permitted to access ECB from multilateral or bilateral financial institutions, under the approval route of RBI.

2 (d) In order to give a boost to the corporate bond market, FII investment limit in rupee denominated corporate bonds in India would be increased from US $ 6 bn to US $ 15 bn.

State Governments are facing constraints in financing expenditure because of slower revenue growth. To help maintain the momentum of expenditure at the state government level, states will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP), amounting to about Rs 30,000 crore, for capital expenditures.

And of course the RBI cut repo and reverse repo rate by 1% and CRR by 0.5%.

• Zeal: New Gold Stock Environment

The success of gold stocks indeed rides on the success of their underlying product, gold.  In fact the only environment to invest in a gold mining company, thus taking on the myriad of risks that come with it, is in a rising gold price environment.  But in order to take on these risks there must be incentive.  And the positive leverage mentioned earlier is the incentive gold stock investors long for.

Inherently gold mining profits should leverage gold’s gains.  And in a stable-cost environment margins should soar as the price of gold rises.  It is the realization and anticipation of stellar profits that attracts investors to gold stocks.  As a general rule of thumb I like to see at least 2x leverage, which is why the leverage seen in the last gold upleg was so disappointing.

• Bloomberg: SEC Said to Examine More Ponzi Schemes After Madoff

U.S. regulators working to untangle Bernard Madoff’s alleged $50 billion Ponzi scheme are probing other money managers suspected of using similar tactics, two people with knowledge of the inquiries said.

The U.S. Securities and Exchange Commission is pursuing at least one case in which investors may have been cheated out of as much as $1 billion, according to a person, who declined to name the manager and asked not to be identified because the probe isn’t public.

If you think that the commodities bust is restricted to base metals (Dr. Copper is sick) or sector-specific ones (Auto bust has destroyed palladium prices), think again. From the NY Times: As Recession Deepens, So Does Milk Surplus

. . . demand for dairy products is stalling amid a global economic slowdown and credit crisis, even as supplies have increased. The result is a glut of milk — and its assorted byproducts, like milk powder, butter and whey proteins — that has led to a precipitous drop in prices.

The price of powdered skim milk, used in infant formula, dairy products and processed foods, has fallen to roughly 80 cents a pound today from about $2.20 in mid-2007. Other dairy products have declined as well. Whole milk at grocers has not declined as rapidly as wholesale powdered milk, but it has dropped to $3.67 a gallon, down nearly 6 percent from the peak.

Hmm. As part of the $1.23 gazillion government bailout package for milk producers, the US government promises to make its staff drink at-least one glass of milk a day. And all bars in DC will only serve milk in 2009.

• BBC: Experienced eyes look back at 2008

Mr Kahn warns against drawing close parallels between what the US went through then (1930s) and the present financial problems. The nature of the trouble in the credit markets is, as he sees it, far more concentrated: “It’s a very narrow crisis because it involves people who borrowed too much money,” he says.

With the industry restructuring he thinks there may be opportunities for boutique investment banks. Whatever happens next, in the form that it’s existed for decades, Wall Street is gone, and with taxpayers’ money now involved, the institutions that survive will do so, for now, under the supervision of the government.

103 years old! Does value investing lead to a longer lifespan?

• NY Times: As Trade Slows, China Rethinks Its Growth Strategy

China Export Plunge

• Seeking Alpha: India Unraveling: Stay Short Emerging Markets

. . . it is the 4,500 small-scale ancillary factories which are telling the story of the impact of the global recession on India. “If matters don’t improve quickly, the nexus of our industry will be destroyed,” a senior city official said Tuesday. “Any recovery then will be years away.” More than 35,000 people have lost their jobs in the second half of 2008; if the overwhelming numbers of small-scale outfits continue to operate well below maximum capacity, another 75,000-plus jobs will be at risk in the first half of 2009.

To make matters worse, 25% of unemployed workers have left Pimpri-Chinchwad. About 200 factories have closed altogether, thus far; the city official estimated that owners of more than 1,000 small-scale manufacturing units could declare bankruptcy in forthcoming months and move out of Pimpri-Chinchwad for good.

This is kinda grim given I’m in the midst of relocating to Pune.

Posted by guest blogger and virtual Portfolio Manager Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at arjun.ashar@gmail.com.

On this platform, I do not wish to burden the reader with information about the company like its financial statements, shareholding pattern, corporate announcements etc which should be easily available from the company’s or NSE/BSE website. I assume the reader has already read the annual report of the company along with the quarterly results and has preliminary information about the company that can be easily obtained from the company website/ annual reports.

I would only discuss my views on certain aspects, which I feel are important concerning the company, the industry it belongs to, and its stakeholders.

The best information about any listed company is all publicly available on its website, annual reports, stock exchange filings etc. That is all one needs to make a reasonably informed investment decision. I am amused by the so-called research reports, which merely reproduce publicly available financial statements of the company and bamboozle the reader with fancy charts, diagrams etc. Amidst this entire information overload, one hardly finds any non-obvious observations. Investment is as much about prose as math.

My outlook for Apollo Hospitals

Optimism

• Read my recent article on Indian Healthcare. I have covered therein, points like medical tourism, health insurance, PPP etc that affect the healthcare industry.
• The franchise model could be another interesting avenue that could be explored by hospital chains going forward. Your neighbourhood polyclinic or nursing home could soon be a franchise of a major hospital chain in India. It is not entirely outside the realm of possibility. A deeply personalized service like stock broking has adopted a franchisee model.
• From 1996 to 2006, Indian private sector banks and cellular telephony companies like ICICI bank, HDFC bank, Bharti Airtel, Reliance Communication benefited immensely by meeting the massive demand for cheap and good quality services in their respective fields. Similar situation can be witnessed currently in the hospital space in India. Existing government run hospitals are not known for high quality services and the privately run hospitals are few and expensive, just like poor quality of service at PSU banks and high cellular phone call rates prior to the year 2000. A healthcare player focused on filling this demand supply gap will take the cake in the next 5 to 10 years.
• It is a relatively recession proof industry. I am also fascinated by the wedding-related services business in a young country like India.
• The stock price of this company has been relatively less volatile amidst all the market mayhem in 2008.
• Updates for new initiatives by Apollo Hospitals with regard to medical tourism, health insurance etc shall be posted by me on Twitter.

Caution

• Outsourcing of healthcare to India might slow down in the unlikely scenario that US under Obama makes peace with Cuba and removes the sanctions. Cuban healthcare facilities are said to be very good (remember Diego Maradonna’s rehab / recuperating sting in Cuba in the recent past). Such reconciliation between USA and Cuba as a part of Obama’s New Deal initiatives is not outside the realm of possibility. Just because something has not happened till now doesn’t mean it cant happen in the future.
• This stock‘s price could be vulnerable to a large scale sell off in the markets as it has a relatively higher PE ratio. It has not fallen in proportion with the markets in 2008 but one never knows when the next bout of forced liquidation (marketwide) is triggered off in the current market conditions.
• The company will need to be in a constant expansion mode in the next few years in order to tap the existing opportunity. This throws up as many risks as opportunities for any business enterprise.
• Investors need to have a lot of patience. It is not a negative per se. The industry could have very bright prospects over the next 8 to 10 years. One needs to appreciate the steady manner in which value addition happens in any company/industry.

If one needs instant gratification, there are many other scrips available in the market apart from Apollo.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.

Well, 2008 was certainly an eventful year - those of us involved in the markets got an experience of a life-time. On the personal front, this was the first full year of entrepreneurial & trading experience for me, and it was fantastic in terms of learning - though not as much on the moolah side.

At Moneyoga, we went from a round of VC visits and website updates early on in the year to a focus on system development starting April, and full-time trading all the way till October. Since then, we’ve decided to discontinue further efforts on the Moneyoga.com site itself, and instead figure out a way to better utilize our analytics & systems for wealth management.

Looking to the future, 2009 is going to be a year of many new beginnings from me, including:

• Relocation to Pune - yup, it’s bye bye to Navi Mumbai and back to the place where I grew up.
• An Adjunct Faculty position at SIBM - this is something completely new for me, and it’s going to be fun talking about capital markets with MBA students.
• 2 new intiatives at GalaTime: 5 Lakh Virtual Portfolios & the Gujarati site. (I intend to expand the latter into print media as well).

As for investing / trading / money management, the new direction for 2009 will certainly build upon my data/analytics driven approach to markets and the urgent need for better (cost effective, client friendly, systematic) investment management solutions for retail investors in India.

Back in August, I wrote this post: Inflation? No problem (by December 2008) to highlight the possibility of falling prices at a time when everyone was predicting 16% inflation in India. 

I predict that by December 31, 2008:

• WPI in India will be below 8% (yes, single digits!)
• Cement prices will drop below Rs 250 per 50-kg bag (currently 275+)
• (HRC) Steel prices will drop below Rs 35000 per tonne (currently 45000+)
• Nifty will be down 30% for the year - oh wait, it already is!

I got lucky with all these guesses - the Nifty one was a done deal even then.

Last month, I also started a “Daily Dose of Deflation” series to point out the breadth of price declines across markets & geographies. I will not continue that series anymore - I think the point is made that most asset classes have been under severe pressure and some of them (eg. Indian metro residential real estate) will continue to get hosed.

Once WPI in India hits the RBI’s target zone of 3-5% (something that has not happened for the past 8-9 months), the fun will be in figuring out how far the RBI will cut rates to stimulate growth? And what that implies for gilts, the rupee and EPS growth.

Posted by guest blogger Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at arjun.ashar@gmail.com.

The genesis of India’s successful IT story was laid in early 1990’s when its early stakeholders capitalized on the low cost arbitrage model by taking advantage of India’s multitude of software engineers and they framed an efficient offshore delivery platform. Another such opportunity for the coming decade lies in the Healthcare sector in India. Indian healthcare in the 1990s grew at a compound annual rate of 16 per cent. Currently, the total value of the sector is more than 34 billion dollars. As per government estimates, by 2012 India’s healthcare sector is projected to grow to nearly 40 billion dollars. The full potential of this sector would be realized by adopting Public Private Partnership (PPP) model. Unlike Indian IT/ITES, which succeeded inspite of the lack of government support, healthcare in India needs a government umbrella due to sheer size of the number of people it seeks to serve. Only then, can one tap the mega opportunity that lies at our doorstep.PPP would involve synchronizing efforts of the central/state governments with that of the private sector enterprises towards achieving the broad public healthcare goals, which successive governments have not achieved in terms of coverage and quality of healthcare in public hospitals/clinics across India.

As witnessed in case of Special Economic Zones in India, the PPP model does not come without its share of challenges. Some of the key issues in this context would be equitable distribution of the burden of service delivery and costs, in a manner where the parties’ best equipped to meet the same are empowered to meet their responsibilities. For example, a blanket policy measure like universal free basic healthcare may be suitably altered to include universal free health insurance, partly subsidized by the government but wherein the policy obligations are shared with the providers of healthcare services.

At large, a PPP model demands a large dose of maturity from the public, the governments they elect, along with the responsibility to be borne by the private sector. Only then, can a sustainable alternative emerge to the current healthcare model in India.

Post liberalization, the share of health sector in India’s GDP has been at a level of 4 to 6 %. The central and state governments in India currently spend a meager one percent of the GDP on health sector. The private sector accounts for rest of the outlay. By 2011-12, at the end of the 11th Five Year Plan, the government outlay is expected to rise to two percent with the overall share of the entire health sector rising to 8.5% of GDP. As per current estimates, the total expenditure on healthcare in most developed countries is 8 % and upwards, with US spending a whopping 16 % of its GDP in 2007 on healthcare. The prevailing health expenditure outlay in India could undergo a massive transformation if the government and private players form a mutually rewarding partnership in a manner where interests of all stakeholders are considered. This contention is largely based on the premise that healthcare in India is largely under serviced as compared to developed nations. In sectors like telecom, Indian entrepreneurs have displayed a flair for exponential growth through use of technology. They catered to a large chunk of the one billion customer opportunity which was largely under serviced till the late 1990’s. The lessons learnt from telecom can be suitably replicated in healthcare, in terms of meeting the massive demand for basic affordable services.

Another interesting facet of Indian healthcare is that medical tourism is taking off in a big way, again, borrowing from the low-cost business model pioneered by ITES sector in India. At the 4th India Health Summit organized by CII in November 2007, Minister of Commerce and Industry Kamal Nath stated that medical tourism in India that was estimated at US $350 million in 2006, has the potential to grow into a US $2 billion industry by 2012.At the summit, India’s Minister for Tourism Ambika Soni stated that a total investment of US $6.5 billion was in the pipeline for setting up affordable hospitals and budget hotels for medical tourism. One additional feature is that medical tourism in real sense combines medical treatment with tourism. After all, it makes a lot of sense for a foreigner in India to spend another 300 USD for a round trip to Taj Mahal, since she has already saved a couple of thousand dollars on that Lasik Operation in say, Chennai. An entire additional eco system of hotels, airlines, tour operators also benefit. Some existing hospital chains have already smartened up to this opportunity by tapping additional revenue streams via innovative tie-ups with the hospitality and aviation sector. Fly to India with the preferred airline partner and get an additional discount on hospital room charges! Makes a lot of sense..

One needs to balance the moral hazard of treating foreigners at the cost of ignoring Indian patients by investing greatly in hospital bed capacity, which again would be simpler by having a PPP model. In this aspect, the idea of free universal health insurance needs to be further explored. The insurance premiums could be paid directly by government to medical insurance firms for all Indian citizens. In return, the risk would be borne by reputed private insurance firms. This would mitigate the risk of leakages which arise from having the government responsible for insurance risk. Instead we should adopt a model where the government just pays the medical insurance premium for over a billion Indians to select reputed firms. In turn, those insurance firms would bear the obligations of meeting the healthcare bills of all Indian citizens in need of healthcare. The government would recover its premium costs by more than commensurate savings in running government aided hospitals, since the cost of treatment would now be borne by insurance companies, who themselves have received huge premiums from the government for a billion plus Indian citizens. This model is unlike the present American healthcare model of steep costs, the burden of which for a large part remains, on the US citizen.

At present, the hospital segment in India is primarily dominated by a few hospital chains like Apollo, Fortis, Wockhardt along with government aided hospitals. Additionally, there are various non profit trusts managing major hospitals in India. At the unorganized level, there are numerous nursing homes and polyclinics. This fragmented structure in a large country like India, offers a huge opportunity for a mega corporate to deploy its ample financial and managerial resources and offer a consistent and high standard healthcare delivery model to the Indian masses.

Apart from large business houses and existing players, this sector has also recently witnessed the interest of private equity firms. In their search for the next 100 bagger from India, these fund houses have supplanted their understanding of the global healthcare industry into the Indian context. It is painfully obvious that the developed world has its advanced healthcare facilities which come at a very high cost even by first world standards, whereas the under developed nations have deplorable healthcare infrastructure. India is a uniquely positioned between the two extremes. The millions of doctors and paramedics in India can be a plausible solution to the world’s healthcare challenges and this opportunity is not to be missed by any of the stakeholders.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.