Tuesday, March 29, 2011

Dollar Carry Trade.

What has happened is that the United States has become the world's financing machine, but in a dangerous way. What used to be known as the "yen carry trade" has now become the "dollar carry trade."

It works like this. Because rates are so low here in the U.S. market, investors and leveraged speculators borrow cheaply from U.S. banks and lenders. They take the borrowed dollars into the world currency markets, where they sell them and buy other currencies (these other currencies, of course, are from markets with higher interest rates).

Collecting the higher return from the interest-rate differential, or when investors bid up other asset prices with the cheap money they've borrowed, is known as a "carry trade," because the transaction is financed, or "carried," by borrowing cheaply.

And it's now technically the "dollar carry trade," since U.S. dollars are the currency being used to finance these often leveraged and sometimes speculative trades.

For years, because Japan's economy suffered from a stock market and real estate implosion, to keep the economy liquid the Bank of Japan (BOJ) kept interest rates lower than anywhere else in the world. That's how the Japanese yen carry trade came about in the first place.

Now the dollar-carry trade has replaced it.

One big problem with these trades is that they are leveraged trades. So if the U.S. dollar starts to appreciate - no matter what the reason - then the dollar carry trade can quickly become a loser if the amount of interest earned is eaten up by having to buy back "shorted" dollars that are rising in relative terms. The act of buying dollars back raises the price for other traders still in their trades. And if those traders have also "leveraged up" on positions in other asset classes, there could be a mad rush for the exit doors and a wholesale dumping of assets - a classic, and potentially ruinous, "short squeeze " - as the dollar rises.

What could cause the dollar to rise?

Though it might be surprising to some, there are plenty of credible candidates. There are also a gaggle of questions to be answered. For instance:

How about, for starters, what happens when "quantitative easing" is over? What happens when the central bank has to signal to the world that it is willing and able to do something about inflationary expectations?

What will happen if our rates start to rise because fewer and fewer investors will want to buy our government's debts, and won't accept the piddling returns they get on their U.S. Treasury holdings?

What will happen if strong growth returns to our shores? Will there be enough money to lend to meet demand? We'll find out then if our banks are really as flush with cash as they claim to be.

A rising dollar would make commodities cheaper, which is a good thing. Unless you are one of the millions of speculators who bid them up, or any of the emerging markets countries like China that's been stockpiling them.
A rising dollar would make oil cheaper, which is a good thing. Unless you are one of the many countries that sells it and needs increasing oil revenue to meet budget demands.
The whole problem with the Fed's policy of engineering artificially low interest rates is that it distorts the free markets. Naturally rising rates would have snuffed out the subprime spree, as well as the excessive speculation in leveraged assets that could be financed so cheaply back then (a capability that still exists today).

Courtesy: http://moneymorning.com/2011/03/29/the-death-dollar-carry-trade/

Sunday, March 6, 2011

Thought of the Month!!

Q: Do you think this is just a 6-9 month kind of tough phase after which we get back onto a bullish kind of trajectory for India?

Jhunjhunwala: I would like to make two observations, although I agree with Ruchir that financial speculation is playing a very large part in oil prices. But even if Libya is solved tomorrow, the problem is how do you know whether something is going to happen in Saudi Arabia or not. I have not read anywhere in any part of the international press, anything about any problem in Saudi Arabia or Kuwait.

But still they say there is this lurking fear and to my mind what troubles me is why the Saudi Arabian stock market is down 24%. So even if the financial speculation is going correct there is always going to be a risk premium for the next 3-9 months on oil prices. If nothing happens in 3-9 months then people will tend to forget. Second observation I would like to make is that the Indian public has never participated in this rise from 2800-2900 effectively.

Q: Is 5200 the bottom?

Kela: I am not evading the question. My mind is very clear. Whether 5,200, 5,000 or 5,600. We don't know where the index is. I am really focused this year to identify good companies, buy them from a 3-year, 5-year perspective. This is one of those 2004 to 2006 era where across the board you are getting companies really cheap.

Today we ran some sensitivity. There are 80% stocks trading below 2007 peak levels while in these 50% of these cases earnings have doubled from 2007 levels. So actually valuations have become 25% of what it used to be in 2007-2008 levels. So I am really focused this time around. We can get into a global debate where the markets are. But finally the money is being made when you invest in the right companies.

Courtesy: http://www.moneycontrol.com/news/market-outlook/market-upside-capped-till-oil-stays-above-3685-jhunjhunwala_527646.html

Friday, March 4, 2011

Orbit Corporation

Q: What is your initial take on the budget for the real-estate sector? What are the positive implications?

A: The budget was more or less neutral; we didn’t see much happening in the real-estate space. Maintaining a steady position is good and hence, we didn’t see too many negatives. At the same time, as far as the housing loans are concerned, the Rs 20 lakh limit got extended to Rs 25 lakh. Few of the aspects have been made clear in the budget. The budget has been neutral as far as housing is concerned.

Q: Do you think that raising the housing loan limit for priority loans to Rs 25 lakh has any impact on the Mumbai developers?

A: It does not have much impact. In a city like Mumbai, anything at Rs 25 lakhs is only available in the far flung suburbs and it is affordable housing.

Q: One understands that volume in the Mumbai metropolitan region is slowing down – in the last quarter, just a 6% quarter-on-quarter fall and a 34% year-on-year fall, as far as the fourth calendar quarter was concerned. Does that worry you that sales are falling? Do you see any improvement in this quarter?

A: On the back of good supply, we are seeing absorption in commercial real-estate in the metropolitan region, which is positive. However, a lot of this absorption is in terms of the leases. Therefore the collections as far as the sales would not be attractive because the duty you have to pay is incremental amount.

As far as residential real-estate is concerned, the projects that are under construction and in one year delivery ready projects – there is excitement about them. However, a project where there is a visibility beyond two years in residential segment is absolutely dry. Hence, you have been seeing a drop in that particular segment it is with projects that are under construction with visibility beyond two years and hence they are insignificant in movement.

Q: Does it worry you in terms of the prices specifically in the residential space? The near-term visibility looks quite muted, and you have a couple of projects coming up as well. What is the outlook looking like?

A: About two quarters back, the view was that the prices would correct. However, we are also seeing that in the residential side projects that were announced and were to have commenced construction after getting their permits were stalled for some reason or the other.

The positioning of these projects was that delivery would take place within three to four years; however, I don’t see a large amount of delivery coming over the next three to four years. The delivery that was expected to take place of about Rs 2 crore sq. feet to Rs 3 crore sq. feet over the next three years is extended for the next five to six years.

Hence, I don’t think that the price points would correct much. However, we would start seeing the movement because like stock market, even real estate is sentiment driven. The sentiment is low right now but once liquidity comes back into the market, one or two quarters’ post monsoon, we will start seeing the uptick in volumes again.

Q: Can you give us what have been the sales at your end? In terms of sq. feet, how much could you sell in Q3 and Q4?

A: I don’t have the exact numbers, but we are selling well. As far as Orbit is concerned, we kind of stayed ahead from the market, and we have positioned ourselves in pricing our projects attractively and in premium location. So, our clients are happy to pick up the project durations that we have drawn out – of about four to six years.

We have projects more closer to completion in two to three years maximum. The sales have been decent if not exciting. Therefore, in terms of pure numbers, we would have sales of about Rs 100-150 crore in Q3 and another Rs 150 crore to Rs 200 crore in Q4 is what we think we should be able to achieve.

Q: What about the average prices quarter-on-quarter? The prices are up about 25% odd or so and they are expected to go up further. What is your outlook for prices?

A: I think prices will stay more or less where they are, they won’t move up or down.
Courtesy: http://www.moneycontrol.com/news/business/budgetneutralforhousingsectororbitcorporation_527350.html

ACIL: Interview.

Assam Company has bought a 70% interest in an oil block in Colombia for an undisclosed amount. The company is expected to start drilling operations by July. It also expects to produce 4,000-6,000 barrels per day of oil over the next two years.

Q: Can you tell us about this acquisition in Colombia and what is the exploration schedule and by when do you expect to begin commercial production?

A: We did an acquisition in Colombia where we own 70% interest in a block called El Triunfo and we got a farming interest from a company called Sismopetrol and R3, they were the original owners of the block, and now they own 30% and this is in a basin called the Lianos basin. We expect to start drilling by July this year and we expect that over the next two years we should get nearer to 4,000-6,000 barrels a day.

Q: How much did you pay for it?

A: At this moment, I am not supposed to disclose that but the first drilling of the well will cost us nearly between USD 12 million and USD 15 million.

Q: Any early estimates of the resource potential in the block?

A: Yes, they have done some 2D and 3D seismic and in resource, we think recoverable resource is between 20 and 30 million barrels.

Q: Can you tell us what this will do to the Assam Company’s balance sheet, you said that 6,000-8,000 barrels a day will be probably drawn by FY12?

A: I think it would be by late FY12 or early FY13 depending on how because the basin is exactly the same as what we are doing in Assam- Arakan basin. There is no difference. So it depends on the weather and how we go about it.

Q: When does it become EBITDA positive as a project?

A: It becomes EBITDA positive by Q1 of January by between January and March this quarter.

Q: Of this quarter but you said that the oil will be drawn only by end FY12?

A: No, coming to that barrel what I am talking about 6,000-8,000, we would start because there would be the first well, which we will drill, we roughly expect to fetch about 2-2,500 barrel - between 1,800 to 2-2,500 barrel - which we will start drilling by this July-August.

Q: Perhaps an update on the tea business also, how is that fairing and how is the season progressed so far?

A: The season is looking good, as speaking to different members of other teams also, we expect buoyancy in the market for the next few years and there is about Rs 8-12 up over last year and the weather also is good for us. So we expect the production to also go by about 8-10% this year and we expect about Rs 15 increase over the last year.

Q: What is the relative share of revenues coming from the tea and the oil business?

A: Our balance sheet starts from January this year. The oil business, which is one of our partners in a block called Amguri, there has been a small problem with government and our partner. We hope that it gets sorted out. If that happens, there would be a different potential as we are looking at in the oil.

At this moment in tea, we are looking at nearer to about Rs 30-40 crore because it is just beginning of the season over the time as things progress, we would be able to talk more about it. We also have two other block under acquisitions, which is under consideration at this moment which we cannot disclose. One of the blocks is a producing block.

Q: Can you enlighten us a little more about this Canoro Resources which partners you at Amguri and what exactly is the problem?

A: It is a matter in the court so it is subjudice, apparently the interest of our partner called Canoro was cancelled by the government of India for certain noncompliance and that has been put into the court. Now once decision comes through the government has to then take it forward accordingly how will it go about. So at this moment, I am not competent to comment on it.

Q: Can you update us on the power business in Gujarat?

A: Yes, as you know power needs necessary certain clearances, we have got the land, we have also got recently the water connections, we have an approval on vibrant Gujarat by the state government, we have got the state government stamp on it that they would also give us the necessary permission, we have in principle some gas help from the state of Gujarat, we are following up the environment clearance and the final gas permission from the central government. As that is done, we will cut the ribbon.
Courtesy: http://www.moneycontrol.com/news/business/assam-company-buys-70colombian-oil-block_527622.html

ACIL: Colombia Oil Asset.

Kolkata, March 2, 2011:

Assam Company india Limited, a leading domestic conglomerate engaged in diverse sectors like tea plantation, oil and gas exploration and production and infrastruvutre, today annouced that the company has entered into a farm out aggrement with Sismopetrol and R3 in colombia, for exploration and production of the block for an undisclosed amount at ANH EI Triunfo('the Block') located in casanare, colombia.

Agreement Details:

As per the aggreement ACIL will acquire a 70% working interest in the block and sismopetrol and R3 will retain the balance 30% share.

The block size is 10,200 hectares and contains one discovery well (La Cabana).The work at the block is expected to begin early July this year and production of oil should commence from Novemeber, 2011 onwards. The farmout agreement provides for ACIL to be the operator of the block, wherein ACIL will pay 100% of the drilling and initial testing costs of the Phase 5 commitment well in the block.

The Block is located in the profilic Lianos basin, less than 20 kilometers from the Colombia's largest discovered field operated by British Petroleum.

The geological setup of the area is comparable to that prevailing in Assam shelf, in the northeast india. The company is expected to drill one well in phase five to 16,500 feet maximum depth, which is expected to cost between $10-$15 million per well. The company estimates the un-risked resource potential (recoverable) from the Block to be between 10 to 30 MM barrels.

Growth Plans:

With plans to increase its presence and portfolio on Colombia ACIL has already approached and initiated discussions wth a leading colombian player for assisting and partnering into future projects.

Management Comment:

On annoucing the aggrement, L.B. Kondratoff, Chief operating Officer, ACIL - Oil & Gas Project, commented that, "Growth in out oil and gas division is anticipated to be significant in 2011. This entry into the Colombian market is an exciting opportunity which fits well into our overall objective and strategy for the Future".

Courtesy: NSE, BSE