GalaTime

• Financial Express: Inflation up to 5 times more for corporates

Corporate India could be a much bigger victim to rising prices than the common man with cost of doing business soaring up to 35 per cent or about five times the wholesale price index levels.

It is the inflation faced by businesses in setting up and expanding manufacturing capacities, distribution and franchises, or simply investing in India and the concept becomes meaningful given the country is primarily investment led.

Not good for profit margins.

• Business Standard: Q4 FY08: Margins crimped

A Business Standard study of 1292 companies (ex financials) shows that the opm has stayed flat at 18.33 per cent for the March 2008 quarter compared with 18.72 per cent in the March 2007 quarter, while net sales have risen 25 per cent.

60 per cent of stocks have reported earnings below the brokerage’s expectations and margins have come off by about 150 basis points( ex-energy). The falls have been sharper in the energy and materials sectors.

The risk to margins, the study notes, is fairly evident given that they are at high levels and combined with slowing growth, could mean weaker earnings in the months ahead.

• Mint: Private equity firms see more value in US realty

India’s real estate party may be cooling down rapidly. Global private equity firms say that they would rather invest in the US realty market than in the Indian one because US property prices have fallen so sharply that yields on investments there will be more attractive—without the hassle.

“Last year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?”

There are around 125 private equity funds for real estate in the country, out of which 60% are global funds.

This has been widely noted over the past few months, but it’s fascinating to see the data nevertheless: NSE Derivatives Update April 2008

Almost 66% drop in single stock futures, the largest F&O segment!

Between this, unpaid margins & the new PMS rules from SEBI, brokers ought to be hurting real bad.

• Investors Insight: Food for thought

. . . it takes 232 kg of corn to fill an average 50 litre car tank with ethanol - enough corn to feed a child for an entire year. It is estimated that almost 20% of total US corn production will go towards ethanol this year and the number is set to rise to 45% by 2015.

. . . the cost of ethanol from corn is now over $80 per barrel, it is about $145 from wheat and over $230 from soybeans. Other countries recognised this problem a long time ago and use crops with higher carbon hydrate content. In the Philippines they use coconut oil and the Brazilians use sugar cane. Goldman reckons that the cost of one barrel of ethanol based on sugar cane is about $35.

It is estimated that the aggregate value of commodity-linked index funds now exceeds $200 billion, a very significant number in a not very large market.

The total amount of arable land in the world is diminishing, primarily as a result of urbanisation. China alone has lost 3 million hectares of rice land to concrete in the past 10 years. In order to compensate for the reduced acreage, higher productivity levels are required. But higher yields require increased use of fertilisers which is not an option available to everyone given the price of oil.

• CBS Marketwatch: The looming commodity crisis

Historically, rising commodity prices have always attracted investor attention. This is the first commodity bull market, however, where individuals and institutions have participated, not as “speculators” but as “investors,” treating commodities as an asset class.

Unlike traditional speculators, this new participation is marked by little or no leverage, a distinctly “long-only” bias, and long holding periods. Barron’s recently cited estimates of $200 billion in participation through the swap markets, and there is probably at least another $50 billion in ETFs, mutual funds and other securities.

The inordinate and one-sided volume is breaking down the traditional relationships between the futures markets and the cash markets. Without a close correlation between the two, commodity producers and users cannot rely on the futures exchanges for price discovery and risk management. Moreover, it can become downright dangerous for them to do so; when hedgers do not see corresponding moves in the cash markets and their futures positions, they are at substantial financial risk.

• Bloomberg: India’s Futures Ban Is No Answer to Inflation

India’s decision last week to suspend futures trading in potatoes, chickpeas, rubber and soybean oil didn’t come as a huge surprise; it was, nonetheless, a big disappointment.

There doesn’t seem to be a compelling reason for the government to take such a heavy-handed step for products that together account for less than 1% of the inflation index.

And even if one accepts at face value the government’s claim that it’s trying to cool speculative fever in essential items, one can’t fathom why its wrath had to fall on the humble spud: The spot price of potatoes has declined 27% this year, according to Multi Commodity Exchange of India Ltd., one of the bourses where contracts on the produce were traded.

With elections due to be held in the next 12 months, it’s very important for Indian politicians to be seen to be doing something. It doesn’t matter how ineffective or counterproductive that “something” happens to be.

All show, no substance.

• BCA Research: Natural Gas: Stay Bullish

• DNA: Sebi slaps curbs on PMS practitioners

Sebi asked PMS houses not to pool assets of investors the way mutual funds do and also increased the minimum networth requirement for floating a PMS house.

The networth required to float a PMS scheme has been increased to Rs 2 crore from Rs 50 lakh earlier, purportedly to weed out the smaller players.

The number of PMS players has shot up to 205 as on March 31, 2008, from just 18 in 1999. These include several small and mid-size brokerage firms. This is unlike in the markets abroad, where PMS is run primarily by asset management companies.

• Bloomberg: Libor Set for Overhaul as Credibility Is Doubted

The benchmark interest rate for at least $347 trillion of derivatives and 6 million U.S. mortgages is set for its biggest shakeup in a decade on concern that banks misquoted their true borrowing costs.

. . . complaints by investors that financial institutions weren’t telling the truth about their funding costs after rising mortgage defaults contaminated credit markets and drove up borrowing costs.

Libor rates jumped after the association said April 16 that any member banks found to be misquoting rates will be banned.

. . . some lenders were manipulating the rates to prevent their borrowing costs from escalating.

Oops!

• Morgan Stanley: Revisiting India’s Fiscal Stress

The combined central and state government deficit is estimated to have declined to 5.3% as of F2008 from 9.6% five years back. The headline fiscal deficit for the central government is expected to improve to 2.5% in F2009 (budget estimates) from a 6.2% deficit in F2002.

Including the off-budget expenditure items, the underlying F2009 deficit for the central government will be about 6.2% of GDP in F2009, instead of the headline estimate of 2.5%. The combined centre plus state deficit including off-budget liabilities will be about 9.4% of GDP in F2009 as per estimates.

About 85% of the total US$183 billion capital flows that India has received over the past four years have been in the form of non-FDI flows.

. . . the ratio of external public debt to India’s total public debt was only 6.8% as of March 2007.

. . . the total market value of government-owned listed companies is about US$280 billion (24.1% of GDP) currently, compared with US$20 billion (4.1% of GDP) in F2002.

• Bloomberg: India Cheapest BRIC Market, May Get Cheaper on Costs

Investors are showing less faith in India — even after the benchmark Sensitive Index jumped 14 percent from its March low — because companies produce fewer commodities than Russia and Brazil, the nation’s gross domestic product is growing slower than China’s and a scarcity of coal, oil and iron ore drove inflation to a three-year high.

India is also the only BRIC nation where economic growth is forecast to slow for a second consecutive year in 2008.

Overseas fund managers pulled a net $3.03 billion out of Indian equities in the first three months of the year, . . . the first time foreigners have been net sellers on a quarterly basis since the data were first compiled in 2000.

Indian shares are valued at 10.9 times analysts’ estimated 2008 earnings, based on the median of 573 companies analyzed by Bloomberg. That’s the lowest among the four BRIC markets.

About that last bit (P/E of 10.9) - note that the mid cap P/Es are almost 30% less than large cap P/Es.

• Economic Times: Funds now betting on natural resources

The seemingly unstoppable rally in commodities across the planet is driving many leading fund houses to launch schemes that invest in natural resources. Since Indian regulations do not permit mutual funds to invest directly in commodities, fund houses go for schemes that invest in stocks of mining companies.

And since there are not many mining companies on our local bourses, most of these funds propose to invest in companies abroad.

At least five funds, keen on investing in natural resources, are set to hit the market in the coming weeks, as per documents filed with the stock market regulator Sebi. There are two funds from ING and one each from Mirae Asset Management, Tata AMC and HSBC MF.

Getting closer to the commodity peak!

• Economic Times: How derivatives were sold and bought

Banks made unsolicited offers to their clients and corporates eagerly bought these products with insufficient understanding. State-owned banks bought exotic products from foreign banks which were not appropriate for their customers. Some of the foreign banks are now moving away from selling these products to state-owned banks since the treasurers in these banks do not understand the complexity.

“In general I find clarity on the subject of risk reduction (i.e. hedging) and cost reduction lacking even in banks. The definition of speculation is deliberately taking risks to profit from price movements. How many CFOs understand the difference between hedging and speculation? There is no clarity in corporate and bank treasuries on strategies to reduce risk. With all due respects, CFOs of these companies did not understand what they were getting into,”

• Economic Times: NCDEX may see a 20% fall in turnover due to commodities ban

“The ban on four commodities announced by the Government is a big setback for us. It is a cause of concern as chana and soyoil contributes 20 per cent of our turnover. The volume of futures trading in rubber and potato is not very significant,” NCDEX’s Managing Director and CEO, R Ramaseshan, said in his first interaction with the media here.

The exchange daily volume is estimated at Rs 2,000 crore and chana and soyoil contributes around Rs 400-500 crore worth turnover.

• Bloomberg: Shipbuilding Torpedoed by Subprime Leads to Freight Cost Surge

The biggest shipbuilding boom in history collided with the largest credit-market losses ever, undermining forecasts for a plunge in freight rates. As much as $14 billion in ship orders is threatened by cancellations and delays, equal to 94 percent of annual revenue at Hyundai Heavy Industries Co., the largest shipbuilder.

The loss or delay in deliveries of about 250 cargo ships, or 10 percent of orders, will tighten the supply of vessels and support rates when demand from China and India for everything from soybeans to coal has never been greater. Based on the current orders for 2,561 new cargo ships, shipping rates are expected to decline 56% during the next three years, futures markets show.

The Baltic Dry Index, a measure of rates, has risen 58% in the last year as an index tracking the number of cargo ships under construction has fallen 21% in that time.

Note the recent relative strength of stocks in this sector: GT Offshore, Mundra Port, GE Shipping, Concor, etc.

• Hindu Business Line: Indian mutual funds shop globally to woo locally

• Business Standard: Brokers carry forward losses

A good number of non-banking financial companies (NBFCs) belonging to big brokerages are keeping themselves from announcing a one-time hit by losses arising out of margin funding following the market meltdown in the early part of this calendar. Instead, the broking houses are carrying forward these huge losses as loans under recovery, and announcing only minuscule bad debts.

Through this move, say experts, these broking firms can avoid making huge provisions for losses and, to a great extent, neutralise a possible negative impact on their share prices. Stock prices normally take a hit if a company’s provisioning or writedowns is huge, they say.

“However, when the market crashed, the entire system collapsed like a pack of cards, leaving the broking houses with piles of bad debts,” explains a dealer, while stressing that the margin-funding business is now down by over 60%.

Ah, the wonders of accounting!

• Sucheta Dalal: Anti-investor Moves

Corporate India has lobbied to scrap RBB ever since it was introduced. No company wants retail investors to have a say in its decisions. Investors, on the other hand, are dead against such a move. Corporate India alleges that a handful of investors can form a cartel and dictate the price because SEBI rules do not mandate minimum shareholder participation. This is debatable. There is nothing to stop companies from making an effort to ensure shareholder participation. In any case, companies make an RBB offer only when they have mopped up 90% of the floating stock.

• Bespoke: Baltic Dry Index Almost Back to Record Highs

  

• Big Picture / CNBC: Video: David Einhorn, Greenlight Capital, William Ackman, Pershing Square Capital

Bunch of excellent videos thanks to Barry; can’t embed them here unfortunately.

• John Mauldin: Why Investors Fail
  

Past performance is pretty much worthless when it comes to trying to figure out the future. The best use of past performance is to determine how a manager behaved in a particular set of prior circumstances.

Statistically and mathematically all these tools—stochastics, RSI, chart patterns, Elliot Wave, and so on—just don’t work. If you code any of these rigorously into a computer and test them they produce no statistical basis for making money; they’re just wishful thinking. But I did find one thing that worked. In fact almost all technical analysis can be reduced to this one thing, though most people don’t realize it: the distributions of returns are not normal; they are skewed and have “fat tails.” In other words, markets do produce profitable trends.”

Must read for any investor / trader / speculator!

• DNA: Re’s 3-day plunge biggest in 12 yrs

The currency fell 2.8% from Monday’s closing of 40.61 per $1, ending Thursday at 41.74 per $1. The currency has suffered its biggest three-day loss since March 1996 this week, sliding a total of 5.4% this year.

The gap between India’s imports and exports also increased to $80.4 billion largely due to a 27% rise in imports to $236 billion in the year ended March 31, government figures said on May1.

The fact that the RBI hasn’t stepped in to defend the currency is goading the analysts to predict the short-term weakening. Rohan Lasrado, head of inter-bank foreign exchange at HDFC Bank, expects the RBI to protect the rupee only after it reaches 43:$1.

• CXOAG: Returns of High-Momentum Stocks Around Earnings Announcements

• Stocks in the top 1% of prior year returns generate an average market-adjusted return of +1.58% (-1.86%) during the five trading days before (after) earnings announcements, excluding trading frictions.
• within this set of high-fliers, stocks with earnings announcements unambiguously occurring outside of normal trading hours generate an average market-adjusted return of +3.09% (-3.05%) during the five trading days before (after) earnings announcements, including a significant close-to-open average return of +0.93% immediately after announcements as part of the pre-announcement return. In other words, going long these stocks five days before earnings announcements, closing the long positions at the first open after announcements and then shorting until the close five days later generates an average market-adjusted ten-day return of over 6%, excluding trading frictions.

• BeEarly/Barrons: A Rally With Serious Muscle

The 50% Principle, named by Schaefer, tells us that the primary trend of the market remains intact and bullish if the Dow doesn’t break below this midway point in the course of a pullback. Schaefer, who applied his studies to the Dow, emphasized that this tool should be used only in reference to major market movements, not short moves . . .

The findings of the 50% Principle are confirmed by other technical trends. The Dow made a closing low of 11,971.19 on Jan. 22, a session in which 1,114 stocks, or one out of three, hit new lows on the New York Stock Exchange. Since then, the new-lows list has contracted dramatically, which means stocks are pulling back on down days but not breaking support — an important difference.

Hmm.

• Paul Kedrosky: Oil Just Out-Bubbled the Tech Bubble

• Deutsche Bank: 2008 Alternative Investment Survey

Over 30% of investors are holding cash, and most commonly at levels somewhere between 5% and 10% of their own hedge fund portfolios. While we have seen investors take a “wait and see” approach to the hedge fund market over the last two quarters, 53% of investors holding cash now plan to eliminate their cash holdings by March 2009. This would suggest a renewed willingness to make allocations to hedge funds.

The Middle East/North Africa and Russia both appear as choices on the survey for the first time and investors expect them to perform well. Notably absent from the top are Asian regions, which were favored in our last two surveys.

For the first time on our survey we asked investors about their opinions on India-focused hedge funds. 25% of investors plan on increasing allocations to this space.

Economic Times

May 7: Gold sales may rise 40% this Akshaya Tritiya

This Akshaya Tritiya day, south India’s biggest gold buying festival, jewellers are expecting a whopping 35-40% growth in sales over last year’s all India sales of close to 780 tonnes. Industry experts attribute it to increasing popularity of the festival among the people and rising disposable incomes. Gold prices which have fallen after hitting an all time high in March is also expected to boost demand for the yellow metal.

May 8: There’s no big rush for gold on Akshaya Tritiya Day 1

The retail demand for gold on the auspicious event of Akshaya Tritiya in the Hindu calendar, that spans two days this year (May 7-8), is reportedly about 50% lower than the previous year, according to traders estimates.

Gold sales may cross around 5 tonne in the next two days, Mr Kothari said, though clear estimates would emerge once jewellers take stock of their inventories.

Predictions are tough, even one a 1-day time frame. Especially with ‘experts’ involved.