Friday, January 22, 2010

2010: US Global Stock Portfolio for Newbie.

The year 2009, would be one of the best years to start investing in the financial history. But we cannot go back in time, so its better we start now.

With 2010 just started, I do not expect the same spectacular returns this year. But it’s certainly a good time for Newbie to get their feet wet in the world of stock maket.

Here is a good strategy for building up a long term portfolio in US Stocks.

I have come up with 5 classifications (I will refer to as “Sectors”):
  1. US Technology:  Google,   Apple.
  2. US Banks:          Bank Of America,   Citi Bank
  3. China:               Baidu,   iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI)
  4. India:                The India Fund Inc (NYSE:IFN)
  5. Commodities:    iShares Silver Trust ETF (NYSE:SLV)
Total investment to be made in 2010: $40,000

Average: $10,000 per Quarter. ($2000 per sector per quarter)

Equal amount of money should be invested in each sector. That’s $2000 per quarter for each sector.

Assuming you are paying around $10 as brokerage. Buy $1000 worth of stock at a time. Do not buy less that $1000 because at $10 brokerage you are already paying 1% in brokerage.

Wait for a correction in the stock market within a same quarter. If another correction happens in the same quarter, buy the remaining $1000 worth of stock for that quarter in each sector.

The buy decision for a particular stock (not the whole portfolio) can be made anytime if your stock goes below 8% of your average price for that stock only.

One needs to stick to $2000 per sector, per quarter rule (15-20% plus or minus deviation is fine, try to adjust it next quarter).

1. One needs to diversify in all the sectors. Do not exclude any sector mentioned above.

2. If one is short on cash then one can start with $20000 per year. But I would recommend $40000. If you think its not worth it then you can always stop it in the next quarter.

3. Some sector have two choices: one can choose to invest in both or just choose any one.

4. This is a long term portfolio and should easy give you atleast 15% CAGR returns per year for the next 3-4 years. 

2010: Global Outlook.

A YEAR ago almost every economy in the world was being walloped. The degree of pain varied. In rich countries output plunged; in China and some other emerging economies growth slowed sharply. But the slump was as striking for its synchronicity as its severity.

The opposite seems true of the recovery. China’s rebound began earliest and has been the most spectacular (see article). America’s economy began growing in the middle of 2009 and seems to have accelerated sharply in the final months of the year. Initial GDP estimates for the fourth quarter are due on January 29th, and many analysts expect annualised GDP growth to have shot up to 5.5% or more. News from the euro zone and Japan is rather gloomier. Germany emerged from recession before America, but its number-crunchers recently suggested that growth fell back to zero in the fourth quarter. The Japanese recovery also seems to be fading.

Shifting growth patterns could have big consequences for asset prices. Sustained strength in emerging economies, for instance, could push up commodity prices further, while a rapid rebound in America’s economy relative to Europe’s could strengthen the dollar more against the euro. So a lot rides on what is driving the divergence, and whether it lasts.

In America soaring GDP growth is likely to be a one-quarter wonder, driven by a rebuilding of firms’ shrivelled inventories. Output growth will slow in 2010—the question is by how much. Optimists argue that every deep post-war recession has been followed by a vigorous recovery and that growth will be well above its trend rate in 2010. But a gloomier outcome seems all too plausible. There are few signs of job growth. Much household-debt reduction still lies ahead. And there is the risk of a correction in stockmarkets.

But even a sluggish American recovery will outpace other big rich economies. The euro zone faces two different but equally painful problems. Former bubble economies such as Spain and Ireland are suffering a painful hangover. Germany, like Japan, is bedevilled by chronically weak domestic demand. Consumers are reluctant to spend and, so far, buoyant export growth has not incited firms to invest, despite hopes to the contrary.

The degree to which America outperforms the others will depend, in large part, on whether, and how, different countries tighten monetary and fiscal policy. There is a lot of talk about fiscal discipline within the euro zone, not least because financial markets are punishing Europe’s peripheral economies for their profligacy. Greece this month announced an unprecedented fiscal squeeze over the next three years. But Greece makes up only 3% of euro-area GDP, and rapid fiscal consolidation is much less likely in the big economies. The junior partner in Germany’s coalition government is pushing for tax cuts in 2011; France is railing loudly against the idea of cutting its deficit any time soon.

America’s budget outlook is rather more uncertain, especially in the light of the Republicans’ unexpected Senate victory in Massachusetts. The current stimulus package will stop boosting GDP growth by midyear. Thanks to the requirement that they balance their budgets, states are furiously cutting spending. Although the House of Representatives has passed an additional $150 billion-worth of job-boosting stimulus, the Senate has not yet done so. And if Congress does nothing, the Bush-era tax cuts expire at the end of the year. That seems unlikely, but political gridlock could cause America’s fiscal boost to fade unexpectedly sharply.

Policy decisions will also influence the relative strength of the recoveries in the emerging economies versus the rich world. Though China’s private demand strengthened a lot in the second half of 2009, growth is still largely driven by a government-directed lending boom. China’s short-term prospects thus depend on how quickly the government damps down the lending frenzy. Fears of tighter credit in China weighed on stockmarkets this week but the signs still point to very gradual tightening—and scant dampening of growth—in China and the rest of the emerging world.

Powerful structural factors will continue to reinforce the relative strength of the emerging world. Jonathan Anderson of UBS points out that even if you exclude China and India, emerging economies grew some four percentage points faster than rich economies during the recession, about the same growth gap that existed before the crisis. Some emerging economies, especially those that relied on foreign debt finance, will face prolonged problems. The World Bank argues in a new report that tighter financial conditions, thanks to tougher regulation and higher risk aversion, could reduce developing countries’ trend growth by 0.2-0.7 percentage points over the next five to seven years. Even so, the hit to potential growth in the rich world is likely to be bigger.

Persistent relative strength in emerging economies, especially China, suggests that commodity prices will stay stable or firm. It also means their currencies should rise against the dollar, though the pace will depend, more than anything, on China’s decisions about the yuan. Within the rich world, the growing transatlantic growth divide has helped buoy the dollar versus the euro: it is up by more than 5% from its lows in November. Will that rally continue? The answer depends as much on the likely policy mix as today’s growth differentials. Other things being equal, tighter fiscal policy suggests loose monetary policy for longer and a weaker currency. So relative fiscal discipline in America would push the dollar down, and vice versa.

A multi-speed recovery could also affect imbalances between countries’ current-account surpluses and deficits. America’s current-account deficit and China’s current-account surplus have both halved from their peaks as a result of the crisis, to around 3% and 6% of GDP respectively. Whether that reduction continues depends first on oil prices and second on the pattern of global demand. Imbalances will only stay low as the global economy recovers if surplus economies, especially China but also countries like Germany and Japan, rely on domestic demand while the big borrowers, especially America, cut their budget deficits and save more. Economies are now growing at different rates. They must also grow in different ways.


Thursday, January 14, 2010

Crude Heading Lower(For Short Term): Floating Storage Trade Starts Unwinding.

A 26-mile-long line of idled oil tankers, enough to blockade the English Channel, are firing up their engines and jockeying for position in a race to cash in on the bone-chilling deep-freeze plaguing the North America, Europe, and Asia.

The supertankers, each of which can hold over 2 million barrels of oil, are steaming "all ahead full" to deliver their stores of crude, heating oil and other distillates to the United States.

Their clients - which include several huge Wall Street investment firms - are eager to unwind what's become known as the oil storage trade.

Since late 2008, Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) and other investors have been accumulating oil and putting it in storage on huge tanker ships.

The tankers were then docked at locations around the world, mostly in the Gulf of Mexico and in Europe, according to a Bloomberg News report, and waited for demand, and oil prices, to go up.

Morgan Stanley, for example, has spent hundreds of millions of dollars to buy and lease offshore storage tanks in New Jersey near New York Harbor, along with oil and gas fields elsewhere.

The banks are maneuvering to take advantage of what oil traders call the "contango effect," which occurs when long-term prices are significantly higher than the current deliverable value.

Contango has been present in the heating oil market since late 2008, providing an incentive for companies to hold rather than sell their oil.

The storage trade is profitable as long as the spread between energy contracts exceeds ship rental, insurance and financing costs.

So what are big investment banks doing dabbling in the oil business?

"For some time now oil has been both a commodity and a financial asset," Dr. Kent Moors, the executive managing partner of Risk Management Associates International LLP and a regular contributor to Money Morning, said in an interview. "Banks can make profits on the spread between wet barrels and futures, futures and options, and new trading platforms will create more new ways to make money in oil."

In other words, the oil gambit is another potential profit center for investment banks struggling to recover from the biggest credit crisis in 70 years.

The laws of supply and demand are pretty clear - buy low when demand is low and sell high when demand is high. But, as usual, it's not quite that simple.

Record Cold Spurs Energy Prices

A relentless surge of cold weather that slammed nearly every country in the Northern Hemisphere, is disrupting travel, threatening crops and driving energy and commodity prices higher.

In the United States, snow flurries stretched as far south as Naples, Florida as below-zero temperatures spread over two-thirds of the country spurring demand for heating oil and natural gas.

Frigid temperatures in the United States are expected to boost the country's heating demand to 21% above normal, with demand in the Northeast - which consumes about four-fifths of U.S heating oil - 11% above average levels, Bloomberg reported.

The increase in demand has the energy complex on the rise across the board. Oil prices rose to a 14-month high of $83.52 in New York trading last week, and heating oil prices are hovering around $2.20 a gallon, their highest levels since mid-October.

And that's where contango comes into play: As the current price for heating oil rises, it becomes less profitable to store and more profitable to sell.

Now that the U.S. cold snap has spiked demand for heating oil and other distillates, raising prices along with it, the tankers are headed back to the Northeast, the trade Web site reports, carrying with them potential profits.

But it's not as simple as it looks, Dr. Moors said.

Oil traders are required to settle their accounts daily, answering margin calls on long and short positions if the market moves against them. Their survival is based largely on overnight credit from banks, where they take short-term loans until the market moves in their favor.

But when the recent credit crunch hit, the banks closed the capital spigot and a lot of traders went under, Moors explained. And just like a foreclosure on a house, the banks end up owning the rights to the contracts of oil.

In fact, many of the banks roll over the oil contracts on a monthly basis for liquidity reasons, meaning not all of the oil the banks have in storage was purchased as far back as 2008, when oil traded in the low $30's. In fact, some of it was obtained at much higher prices.

Profits Shrink With Spreads

There's another complication for oil owners that makes the floating storage trade risky.

The spread between the spot price of oil and future delivery has been shrinking as prices increase. A year ago, the spread between the first and sixth Brent crude-oil contracts traded on the London-based Intercontinental Exchange Futures Europe exchange was 23%. Now, it's 4%. The spread all the way out to January 2011 is only $7 and there is certainly no guarantee oil prices will be that high for sellers then.

The contango spread for heating oil shrank to a low of $2 this week from about $18 a ton in December as greater demand for heating oil has increased current prices.

Another factor is lease and crew costs. The cost of leasing a tanker runs $40,212 a day now, according to the median estimate in a Bloomberg survey of 15 analysts, traders and shipbrokers.

As frigid temperatures persist in the United States and Europe, more cargoes may move out of storage making it cheaper to store oil afloat, but with contango spreads tightening, it spells reduced demand for 26 miles of oil tankers.

Also, the profit dynamic in the oil business has changed, Moors said, to favor so-called downstream oil refiners over upstream (or integrated) oil companies like Exxon Mobile (NYSE: XOM) or Royal Dutch Shell (ADR NYSE: RDS.A, RDS.B), Moors explained.

In reaction to overseas competition and lower prices in 2008, U.S. refineries cut production by 8-14%. Now operating with limited capacity as demand increases, refineries can raise prices more than upstream producers.

As demand increases, the refineries will draw down existing stockpiles, while refining the new oil into heating oil, gasoline and other distillates at higher profit margins

It was one thing to store oil when crude was below $40 and future months were much higher. Risk factors are much higher now, and it looks like the oil storage trade will soon be unwound.

For investors looking to profit from the cold snap, as well as longer term, Moors favors Valero Energy Corp. (NYSE: VLO) as a likely candidate to benefit from spiraling demand. Moors points out that Valero has recently increased the efficiency of its distribution channels by opening new gas stations around the country to sell its gasoline, compressing the delivery network and increasing profit margins.


Thursday, January 7, 2010

Assam Company - Updates.

Q: How much of your business comes from tea, how much comes from oil and gas and I believe some of your facilities are shut because of some injecting issues and how much comes from road transportation? Could you just give us a percentage breakup of what is going on right now?

A: At this moment, last year, predominantly our overall percentage of profit came in from tea. Oil and gas was the smaller version. The reason was in oil and gas we had come out with big pool and in the pool we have found that the gas which is there is a retrogress gas. So we are putting up a gas compression unit where we will convert the gas back to the oil.

On the balance lean gas, we will then put up a power plant to get the value added. So at this moment, the revenue from oil is down because we have stepped it down. Otherwise we will be flaring in rich gas which we can use as oil and an oil condensate.

Q: If I can get some details on the FCCBs that you have bought. We understand that you have bought USD 2.2 million worth of FCCBs. How much is left outstanding, when does it mature, what is the conversion price?
A: Totally last year, we have bought nearer to 13 million of FCCBs. The company had issued 48 million of FCCBs. Out of which, 5 million got converted and 13 million was bought back, leaving nearer to 32 million which is outstanding in the market. The conversion price of these FCCBs is at Rs 28.75.
Q: The conversion date would be?
A: It is November 2011. We still have close to another two years.
Q: You also have on your website an SPV called Gujarat Hydrocarbon & Power SEZ Ltd. Could you tell us what is the status with that and have you bid for any oil and gas wells or have you gotten any concessions in any of the NELPs, or are you doing oil in a serious way at the moment?
A: The pre-NELP we have got two oil concessions, both were in Assam. 40% of the proven reserve for the government of India is in Assam Arakan basin. We have two blocks there, out of which in one block we have started the production. That is a block where we have further done some studies and we have found that the oil that we get is of richer quality. It is an oil condensate, and we get about USD 4-5 higher than the oil basket rate.
Hence what happens is when it is taken out at a high pressure, it converts into gas. Gas does not have the same market as oil. So we are putting up a gas compression unit which in another three-four months should be online. By doing that, we will be able to step up our oil production.
The gas that we will come out with, we will then set up a power plant. The company is in discussion at the moment to set up a 300 megawatt (MW) gas based power plant which would be done in phases. The first phase is about 80 MW which is on its way.
We have also got, in the NELP-VIII round, a block in Assam, where we are a partner with ONGC and Oil India. All the three have jointly bid together.
Regarding the Gujarat SEZ, we have taken this on the Vibrant Gujarat project, which would be the first logistic park which will be set up for hydrocarbon and its chemicals and petrochemicals. We have acquired the land, we have got the permission. We are now awaiting the notification before we start doing the land-breaking ceremony and going ahead with the project.