Monday, May 28, 2012

Buying Bonds in India - Checklist.

Bonds are fixed income instruments in which payment is made by the issuer to the subscriber on a fixed schedule, even though the amount may vary. Depending on the terms of the bonds, the issuer pays a pre-defined amount after a specified period. 
In between the subscriber may also received periodic payments from the issuer which is called as,’ Coupon’. Bonds are issued by governments, financial institutions, banks etc. 
These institutions issue bonds because they need capital for certain reasons. Investors prefer to invest in bonds because these instruments generally offer secure and steady cash flows.

How should an investor decide to invest in a bond? 
What are the parameters on which bond can be evaluated?

Let us look at these parameters one by one:
1) Coupon: The first and the most important parameter to evaluate a bond is the rate of return being offered by the bond. The rate of interest offered by the issuer of the bond is called as,’Coupon’. An investor must first check the coupon being offered on a bond issued by a company. Higher the coupon higher is the return. However, there are some inherent risks in higher coupon bonds. A company offering higher coupon on bond may be credit hungry and hence the investor need to be careful with such bonds. It is pertinent to note that coupon and rate of interest are used as inter-changeable concepts in the financial market by investors.

2) Payment Frequency: Payment frequency shows how many times in a given year the coupon is being paid by the company. If a company pays Rs. 8 as coupon once a year and pays Rs. 4 as coupon semi-annually ,the second option becomes better for the investor as Rs. 4 received after six months can be reinvested and higher return can be generated on the same. If an investor receives Rs. 4 semi-annually, it becomes equivalent to Rs. 8.16 per annum which is higher than Rs. 8 received per annum. So higher the payment frequency for a given coupon better it is for the investor.

3) Credit Rating: Credit rating of a bond is a third party assessment of the quality of bond in terms of its credit performance. Some of the leading credit rating agencies in India are CRISIL, ICRA, and Fitch in India. Watch out for credit rating of bonds before you make investments. An investor who is risk averse should go for a high credit rated bonds. Risk savvy investors can select lower credit rating bonds. Generally bonds issued by government agencies command a higher credit rating because of low probability of default. Credit rating of bonds is also changed from time to time so the investor needs to be careful about it.

4) Tradability or Listing on stock exchange: A bond which is tradable on the stock exchange has higher liquidity and provides an exit route to investors. Any investor needing money can sell his investment on stock market and come out of his investment if the need arises. Other things remaining constant, an investor should go for a bond which is available for trading on stock exchange.

5) Bonds with call and put option: A call option in a bond gives the issuer right to recall bond before maturity, while put option gives an investor right to redeem bond before maturity. An investor should check if options are available with bonds or not. A high coupon bond having call option makes it easier for the issuer to call back bonds before maturity which may impact expected cash flow of the investor.

6) Tax Benefits: Some of the bonds offer tax benefit under certain sections of Income Tax act. Till last financial year, investment in infrastructure bonds upto Rs.20000 was eligible for tax benefit under section 80CCF. The tax benefit on bonds increases effective rate of return. Hence, an investors needs to check whether there are any tax benefits available for the bond selected by him.

7) Maturity: An investor needs to select a bond which matches his requirement of funds. So if an investor needs money after ten years, the investor can select bonds having maturity of ten years. The significance of maturity lies in the fact that investment in bonds must be aligned to the goals set by an investor in terms of time horizon.

Before buying any bond it is important to evaluate bonds on above mentioned parameters. The bonds cannot be bought only on the basis of return offered. Like other investment options, the bonds also must pass the test of return, risk, liquidity and tax benefits. Be a watchful investor and buy those bonds which pass the test of these parameters.

Saturday, May 26, 2012

What would Greek exit mean for the U.S. Economy?

If Greece were to leave the euro zone, it would raise questions about the survival of monetary union and trigger turmoil in markets. Business investment would stall, banks would pull back on credit, and lost wealth as equity prices fall would cause consumers to slow their spending. Commodity prices would plunge, helping importers but hurting growth in export economies.
The extent of the damage would depend upon how quickly global policymakers could stop the rout and stabilize markets.
Following is a look at three scenarios for the euro zone and the likely impact on the U.S. economy.
SCENARIO: Greece elects a government on June 17 that continues implementing the EU/IMF bailout program, possibly with some softened conditions. Greece stays in the monetary union for now. Spain recapitalizes its banks, possibly with some EU help. ECB liquidity injections and EU-wide guarantees help stabilize the big French and German banks to insulate them and the broader financial markets from further damage. Bouts of market uncertainty continue in the months and years ahead, but gradually EU integration advances.
IMPACT: Ongoing volatility in financial markets and slow-to-mildly negative euro zone growth would continue acting like a low-grade fever weakening U.S. growth. This already is the baseline scenario for most analysts' forecasts. TD Economics said it has marked down its 2012 outlook for 2.0 percent growth by about a quarter to half a percentage point because of Europe. IHS Global Insight has trimmed about one tenth of a point from its 2.2 percent forecast for this year.
SCENARIO: An anti-austerity government takes power in Greece and rejects the bailout terms. The EU and IMF stop lending Greece money. Athens runs out of cash, defaults on its debt and starts printing its own currency to pay bills. Its banking system collapses. The European Union has had time to draw up contingency plans and succeeds in preventing the currency exit and debt default by Greece from pulling down Spain, Italy and Portugal and manages to stabilize its banking sector quickly. The Federal Reserve may help provide market liquidity through new FX swaps with Europe and quantitative easing.
IMPACT: Greece accounts for only 2 percent of euro zone GDP and U.S. exports to Greece are negligible. So too is U.S. credit exposure. U.S. money market funds have largely moved away from investing in Europe. Greece owes the private sector $70 billion, but mostly that is to German and French banks, according to the Institute of International Finance. The bulk of its $460 billion in external debt is held by the European Central Bank, the European Union and the International Monetary Fund.
Hence the direct impact of a default and euro exit by Greece on the U.S. economy would be quite small, as long it were contained - but that is a big "if." Once one country leaves, market focus would switch to other deeply indebted countries - Spain, Portugal, Ireland and even Italy. European policymakers would need to sling a safety net under these countries and big EU banks to prevent the contagion from spreading and imperiling the euro zone.
The immediate shock of a Greek exit probably would shave half a percentage point from U.S. GDP in the quarter when it happened and soften growth in the subsequent quarter, said Craig Alexander, chief economist at TD Economics. But if managed smoothly, a Greek exit could cause a burst of optimism that the euro zone woes are over and strengthen U.S. output subsequently, he said.
Nariman Behravesh, chief economist at IHS Global Insight, said his firm is about to change its baseline forecast to a managed Greece exit, probably early next year. He expects to cut its U.S. GDP forecast for 2013 of 2.4 percent by two to three tenths of a percentage point.
SCENARIO: Greece crashes out of the euro. Yields skyrocket for Spanish and Italian bonds locking them out of the government debt markets. Spanish and Italian depositors withdraw cash in panic over the possibility of their countries leaving the euro zone, too. Global equity markets sink. Investors pile into U.S. markets as a safe haven. The U.S. dollar soars as the euro plunges. European banks face funding shortages as investors shun the euro zone and the banking system seizes up. Global markets become chaotic.
IMPACT: This is the nightmare scenario. The economic impact in the United States would be felt through trade, financial linkages and business and consumer confidence. The size depends upon how quickly policymakers could stabilize the situation and whether any big financial institution whipsawed by a rapid repricing of assets is in danger of collapsing.
At the very least, shockwaves through financial markets would cause a downward jolt to the U.S. economy, immediately erasing at least half a percentage point from growth in that quarter.
If Europe's banking system shuts down, violent shudders through global financial markets would equal or surpass those seen when Lehman Brothers collapsed in 2008. Banks are better capitalized today than four years ago and therefore better able to weather the storm. But with interest rates near zero and governments fiscally stretched, advanced economies this time around would have fewer tools to offset the hit to growth.
At the very least, the U.S. and global economy would fall back into recession, and some economists warn it would be far deeper and more dangerous than the one of 2007-2009. The U.S. Fed would be almost certain to embark on a fresh round of bond buying, known as quantitative easing, to keep financial markets highly liquid and hold interest rates low.

Thursday, May 24, 2012

An Open Letter to India’s Graduating Classes.

Dear Graduates and Post-Graduates,
This is your new employer. We are an Indian company, a bank, a consulting firm, a multinational corporation, a public sector utility and everything in between. We are the givers of your paycheck, of the brand name you covet, of the references you will rely on for years to come and of the training that will shape your professional path.
Millions of you have recently graduated or will graduate over the next few weeks. Many of you are probably feeling quite proud – you’ve landed your first job, discussions around salaries and job titles are over, and you’re ready to contribute.
Life is good – except that it’s not. Not for us, your employers, at least. Most of your contributions will be substandard and lack ambition, frustrating and of limited productivity. We are gearing ourselves up for broken promises and unmet expectations. Sorry to be the messenger of bad news.
Today, we regret to inform you that you are spoiled. You are spoiled by the “India growth story”; by an illusion that the Indian education system is capable of producing the talent that we, your companies, most crave; by the imbalance of demand and supply for real talent; by the deceleration of economic growth in the mature West; and by the law of large numbers in India, which creates pockets of highly skilled people who are justly feted but ultimately make up less than 10 percent of all of you.
So why this letter, and why should you read on? Well, because based on collective experience of hiring and developing young people like you over the years, some truths have become apparent. This is a guide for you and the 15- to 20-year-olds following in your footsteps – the next productive generation of our country. Read on to understand what your employers really want and how your ability to match these wants can enrich you professionally.
There are five key attributes employers typically seek and, in fact, will value more and more in the future. Unfortunately, these are often lacking in you and your colleagues.
1.You speak and write English fluently: We know this is rarely the case. Even graduates from better-known institutions can be hard to understand.
Exhibit No. 1: Below is an actual excerpt from a résumé we received from a “highly qualified and educated” person. This is the applicant’s “objective statement:”
“To be a part of an organization wherein I could cherish my erudite dexterity to learn the nitigrities of consulting”
Huh? Anyone know what that means? We certainly don’t.
And in spoken English, the outcomes are no better. Whether it is a strong mother tongue influence, or a belief (mistakenly) that the faster one speaks the more mastery one has, there is much room for improvement. Well over half of the pre-screened résumés lack the English ability to effectively communicate in business.
So the onus, dear reader, is on you – to develop comprehensive English skills, both written and oral.
2. You are good at problem solving, thinking outside the box, seeking new ways of doing things: Hard to find. Too often, there is a tendency to simply wait for detailed instructions and then execute the tasks – not come up with creative suggestions or alternatives.
Exhibit No. 2: I was speaking with a colleague of mine who is a chartered accountant from Britain and a senior professional. I asked him why the pass percentage in the Indian chartered accountant exam was so low and why it was perceived as such a difficult exam.
Interestingly (and he hires dozens of Indian chartered accountants each year), his take is as follows: the Indian exam is no harder than the British exam. Both focus on the application of concepts, but since the Indian education system is so rote-memorization oriented, Indian students have a much more difficult time passing it than their British counterparts.
Problem-solving abilities, which are rarely taught in our schooling system, are understandably weak among India’s graduates, even though India is the home of the famous “jugadu,” the inveterate problem solver who uses what’s on hand to find a solution. Let’s translate this intrinsic ability to the workforce.
3. You ask questions, engage deeply and question hierarchy: How we wish!
Exhibit No. 3: Consistently, managers say that newly graduated hires are too passive, that they are order-takers and that they are too hesitant to ask questions. “Why can’t they pick up the phone and call when they do not understand something?” is a commonly asked question.
You are also unduly impressed by titles and perceived hierarchy. While there is a strong cultural bias of deference and subservience to titles in India, it is as much your responsibility as it is ours to challenge this view.
4. You take responsibility for your career and for your learning and invest in new skills: Many of you feel that once you have got the requisite degree, you can go into cruise control. The desire to learn new tools and techniques and new sector knowledge disappears. And we are talking about you 25- to 30-year-olds – typically the age when inquisitiveness and hunger for knowledge in the workplace is at its peak.
Exhibit No. 4: Recently, our new hires were clamoring for training. Much effort went into creating a learning path, outlining specific courses (online, self-study) for each team. With much fanfare, an e-mail was sent to the entire team outlining the courses.
How many took the trainings? Less than 15 percent. How many actually read the e-mail? Less than 20 percent.
The desire to be spoon-fed, to be directed down a straight and narrow path with each career step neatly laid out, is leading you toward extinction, just like the dinosaurs. Your career starts and ends with you. Our role, as your employer, is to ensure you have the tools, resources and opportunities you need to be successful. The rest is up to you.
5. You are professional and ethical: Everyone loves to be considered a professional. But when you exhibit behavior like job hopping every year, demanding double-digit pay increases for no increase in ability, accepting job offers and not appearing on the first day, taking one company’s offer letter to shop around to another company for more money — well, don’t expect to be treated like a professional.
Similarly, stretching yourself to work longer hours when needed, feeling vested in the success of your employer, being ethical about expense claims and leaves and vacation time are all part of being a consummate professional. Such behavior is not ingrained in new graduates, we have found, and has to be developed.
So what can we conclude, young graduates?
My message is a call to action: Be aware of these five attributes, don’t expect the gravy train to run forever, and don’t assume your education will take care of you. Rather, invest in yourself – in language skills, in thirst for knowledge, in true professionalism and, finally, in thinking creatively and non-hierarchically. This will hold you in good stead in our knowledge economy and help lay a strong foundation for the next productive generation that follows you.
Together, I hope we, your employer, and you, the employee, can forge an enduring partnership.

Friday, May 11, 2012

Gold vs Platinum.

Says Priyada, “which actress have you recently spotted wearing gold jewellery? They either stick to diamonds or platinum.”Platinum jewellery has an aura of uniqueness around it and women especially love to own it. Vijay Jain, CEO, Orra says, “The younger generation is definitely more open to buying platinum.
Today for engagements many young couples are opting for platinum rings in India. But this does not mean there are no customers in the 40+ segment.On Akshaya Tritiya, many older customers are asking for spiritual pendants crafted in platinum which were earlier the mainstay of gold. These however form only 25% of our consumers. The majority are youth.”
However, platinum will have to fight a long battle before it can replace gold as the metal of preference, because Indians look upon jewellery as something which will bail them out during tough times. And platinum does not fulfil this need. Platinum is sold on a piece rate basis and it includes making charges, which can be quite high. If you were to ever resell your platinum jewellery, you would get back about 90 % of your investment.
Gold or platinum, the choice is easier when you know which function you want your jewellery to fulfil – investment or adornment.

Thursday, May 10, 2012

Gold Outlook in India.

The price of gold has been rising and might touch Rs 30,000 per 10 gm (it is currently around Rs 29,300). If you had invested Rs 1 lakh in gold  five years back, it would currently be worth around Rs 3.1lakh. In comparison Rs 1 lakh invested in the stocks that constitute the BSE Sensex would now be worth Rs 1.22 lakh (without adjusting for dividends, etc).
So clearly gold has done much better than Indian stocks have. But will it continue to give the kind of returns that it has in the past? Before I try and answer that question, let’s get into a little bit of history and try and understand why people buy gold.
Queen Elizabeth I, who ruled England in the 16th century, used to have a financial advisor by the name of Sir Thomas Gresham. Gresham had been appointed to clear up the financial mess created by the Queen’s father Henry VIII and her brother Edward VI, who had ruled before her.
Between them they had completely destroyed the pound by debasing it and ensuring that there was very little silver left in it. Kings and governments throughout history have had a habit of debasing coins and other forms of money to generate more revenues. Nero, King of Rome, and who fiddled while it burned, was one of the first kings to debase coin. 
Debasement was a practice where the ruler or the government of the day decided to lower the metal content of the coin while keeping its face value unchanged. Let us try and understand this through the example of a coin which has a face value of 100 cents (or any other unit for that matter). The face value of a coin is referred to as its tale. This coin is made up of a metal (gold or silver) and the metal content of the coin is worth 100 cents as well. The metal content in a coin is referred to as specie. 
So in this example the tale of the coin is equal to its specie, which is the ideal situation. Now the ruler decides to debase the coin by 20 percent. So he reduces the metal content or the specie value of the coin by 20 percent to 80 cents. But at the same time he maintains the face value of the coin at 100 cents. And thus debases the coin. 
In most situations the rulers used to pocket the metal (gold or silver) they had saved by debasing the coin. The situation in Britain at the start of Elizabeth’s rule was similar and the market that was full of debased coins. 
She wanted to correct the situation and decided to launch new silver coins where the tale of the coin was equal to its specie – i.e. the face value of the coin was equal to the amount of metal in it. 
But her financial advisor Gresham thought that there would be a major problem in doing that. He felt that the bad money would drive out the good. This essentially meant that the citizens of the country would hold on to the full metal new coins and try and carry out their transactions through the existing debased coins. They would melt the newer coins for the greater amount of silver in them and sell them for their precious metal content. Hence bad money would drive out the good. This phenomenon came to be known as the Gresham’s law. Gresham decided to solve the problem by exchanging all the old coins for new coins. This would ensure that there would be no old coins in the market and people would move onto using the new coins as money. 
Even though Gresham’s name came to be attached to this phenomenon, this had been happening for thousands of years. “Under the Greeks and Romans, when gold coins were debased, few people were dumb enough to want to exchange their old coins that had high gold content for newer ones that had low gold content, so older good coins disappeared as people hid them,” writes hedge fund manager John Mauldin.
In fact it is even being observed today, though in a different form. Central banks and governments around the world have been printing money in the hope of tiding over the financial crisis and reviving economic growth in their respective countries.
When governments print money there is much more money in the financial system than before, and hence the money gets debased. To protect themselves against this debasement people buy gold, something that cannot be created out of thin air and thus is expected to hold value. 
So as governments have been printing money, people have been buying gold and the price of gold has been going up. Till the early 1930s, paper money around the world used to be backed by gold or silver. This meant that citizens at any point of time could go to the central bank of the governments and its various mints and exchange their paper money for gold or silver. 
Hence whenever people saw that the government was resorting to money printing, they could get their money converted into gold or silver, and thus ensure it did not lose its value. Now the paper money is not backed by anything except a fiat from the government which deems it to be money. 
Given this fact, whenever people now see more and more of paper money, the smarter ones simply go out there and buy that gold. Hence, as was the case earlier, bad money (that is, paper money) is driving out good money (that is, gold) away from the market. 
But that’s just one part of the story. The governments around the world are likely to continue printing more money, in the hope that people spend this money and this revives economic growth. This in turn would mean that the price of gold is likely to go up in dollar terms. It is important to remember that gold is bought and sold worldwide in dollar terms and not in terms of Indian rupees. Hence whether Indians will continue to benefit from the price of gold continuing to go up will depend on a few other factors. 
Let us examine four possible scenarios:
1) The price of gold goes up in dollar terms and the rupee continues to depreciate against the dollar: This is what has happened over the last one year. In dollar terms gold has given a return of 6.1 percent over the last one year. But in rupee terms the return is almost four-and-a-half times more at 27.3 percent. Why is this the case? A year back one dollar was worth Rs 44. Now it’s worth almost Rs 54. So the gold price has increased in dollar terms but because of the depreciation of the rupee, the returns of gold in rupee terms are a lot higher.
If gold quotes at $1,600 per ounce (around 31.1 gm), and one dollar is worth Rs 44, then the price of gold per ounce in rupee terms is Rs 70,400 (1600 x 44) per ounce. If one dollar is worth Rs 54, the price of gold increases to Rs 86,400 per ounce. So the depreciation of the rupee against the dollar can spruce up returns for the Indian gold investor. Even if gold prices remain flat, and the Indian rupee keeps depreciating against the dollar, there is money to be made in gold. But the ideal situation for an Indian gold investor is that the price of gold goes up in dollars and at the same time the rupee depreciates against the dollar. 
2) The price of gold in dollar terms falls and the rupee depreciates against the dollar, so as to knock off the fall in price in dollar terms: This is a phenomenon that has been observed over the last six months. The price of gold in dollar terms had gone down by around 7.4 percent, whereas in rupee terms the return on gold has been around 1 percent. This is because six months back one dollar was worth around Rs 51, now it’s worth Rs 54. So even though the price of gold has fallen in dollar terms, a depreciating rupee has more than made up for it. 
3) The price of gold in dollar terms falls and the rupee appreciates against the dollar: This is a scenario that the Indian gold investor does not want. An appreciating rupee will  further accentuate the negative returns of gold. This is a scenario that is highly unlikely. The chances of gold price falling remain low as there is no end in sight to the financial crisis. Also, with the government of India being in the mess it is, the chances of rupee appreciating also remain very low. 
So the moral of the story is that even if the price of gold goes up in dollar terms, for Indian gold investors to continue to make money, the rupee has to either depreciate against the dollar or to at least remain flat. The rupee is likely to continue to lose value against the dollar and thus there are still more gains to be made on gold. But these gains will be rather limited till gold does not rally majorly against the dollar, which it hasn’t for the last one year. 
The moral of the story is that stay invested in gold. But don’t bet your life on it. 

Wednesday, May 9, 2012

Austerity in Europe: what does it mean for ordinary people?

Austerity has been the main prescription across Europe for dealing with the continent's nearly three-year-old debt crisis, brought on by too much government spending. But what does it mean for the average European?

Greece, one of three eurozone nations to need an international bailout, has cut spending on just about everything it can – public sector salaries, pensions, education, health care and defence. As a result, unemployment has soared to over 21%, fuelling social unrest that has sometimes turned deadly. In the last two years, riots have erupted frequently and the country's near-daily strikes and demonstrations have shut down schools, airports, train stations, ferries and harmed medical services.

Portugal is paying its bills only because of an international rescue loan. But the effect of lower government spending has been brutal: the economy is expected to contract 3.4% this year after a double-diprecession last year. Unemployment has climbed to a record 15%. New labour laws have made it easier for employers to hire and fire workers and change their working hours. Rent controls have been scrapped and state energy companies have been sold off.

Ireland, the third European nation on rescue loans, has already seen five austerity budgets since 2008. It has been forced to raise taxes and slash spending for years – and that won't stop until at least 2015. The sales tax is now up to a whopping 23% and middle-class wages have been cut around 15%. Residents face higher taxes on incomes, cars, homes and fuel, while the nearly 15% who are unemployed have seen lower welfare and other benefit payments. Ireland has also cut the number of civil servants.

The government has raised income and property taxes, cut spending on healthcare and education and made it easier for companies to fire workers. Coming on the heels of a real estate market implosion, the austerity measures have hit Spaniards hard. Unemployment is around 25%, a record in the 17-nation eurozone, while about half of its young people have no jobs. The country's sales tax has already been increased to 18% and experts don't rule out another rise.

Over fierce protests, the government has increased the retirement age from 60 to 62, raised the sales tax from 5.5 to 7% on non-essential products, cut tax breaks to the wealthy and corporations, and reduced regional and local government budgets. For the next two years, two state workers have to retire before one is replaced.

Austerity measures have sent Italian unemployment up to 9.8% and put the country in a recession that is expected to shrink its economy 1.2% this year. In addition, the prime minister, Mario Monti, is trying to change laws to make it easier to fire workers. Amid the budget cuts, Rome dropped its bid for the 2020 Olympics after the government said it could not back the estimated €9.58bn cost, and an art museum near Naples burned paintings to protest against the lack of culture funding.

Britain's coalition government is making spending cuts of £103bn through 2017, cuts that have sent the country into a double-dip recession. University tuition costs have soared, provoking violent protests. Harsh spending cuts have slashed government jobs by the thousands and cut funding to police. Unions have threatened to strike and disrupt the London Olympics to oppose the cuts.


Tuesday, May 8, 2012

US Market will bounce back in 2012.

Let's, again, go through the 15 reasons why the U.S. economy and stock market are better positioned today than 12 months ago.

  1. Economic growth: Most observers are more cautious regarding domestic growth today, even though the recovery's breadth is better -- employment has improved, and there is a nascent recovery in the residential real estate markets. Consensus (worldwide) GDP forecasts (here and abroad) are far more reasonable today. I do not view the April payroll report as the start of a weakening trend but rather a consolidation after warm weather lifted payrolls well above trend line growth in the December-February interim interval. Moreover, the combined manufacturing and non-manufacturing ISM in April remains slightly above its long-term average and is consistent with real GDP growth in excess of 2.5% in second quarter 2012.
  2. Profits: Corporate profit momentum has turned positive -- the first-quarter profit beat was by over 500 basis points. Historically, this magnitude of upward earnings revisions has been associated with a near-8% rise in the U.S. stock market over the next six months.
  3. Housing: The outlook for housing is markedly improved. Household formations are recovering, and the NAHB Index and buyer traffic are at five-year highs while inventories are at five-year low. The role of residential real estate markets cannot be overstated. Representing about one-third of household wealth and nearly half of bank assets, housing could add almost 1% to GDP in 2013.
  4. Durable spending: Other types of durable spending are returning -- for instance, autos industry sales have risen sharply to a four-year high.
  5. Household health: Household leverage has moved lower -- household debt/GDP has returned back to the long-term average.
  6. Employment: Employment indicators have improved relative to a year ago. Claims data are lower, and ISM employment components are consistent with monthly private payroll gains in excess of 200,000. (For net monthly growth, subtract 15,000 to 17,000 for the likely contraction in government workers.) Hours worked are expanding at a 4% annualized rate.
  7. U.S. monetary policy: 2012 is highlighted by massive global easing of monetary policy and excessive liquidity. Central banks were generally tightening 12 months ago.
  8. European monetary policy: Europe's central bank has lost its obsession with inflation and austerity and has begun to pay more attention to the capital markets and economic growth. (This weekend's elections in Greece and France almost insure more easing of policy and could result in aggressive pro-growth initiatives, as austerity is put on the back burner.)
  9. Commodities: Commodity prices are falling year over year. By contrast, a year ago commodity prices were rising. The recent $10-$12 drop in the price of oil (and $0.20-$0.30 drop in the price of gasoline) should serve as a tax cut for the consumer and will likely buoy corporate profit margins.
  10. Banks: Banks have materially recapitalized and have passed very stringent stress tests. Pretax, pre- provision income is at near-record highs.
  11. Balance sheets: Corporate balance sheets continue to improve and remain rock solid. Debt is low vs. the same time a year ago and liquidity is higher.
  12. Investor sentiment: Investors remain risk-averse, and expectations are low. Unlike last year, investors are no longer aggressively positioned toward economic growth or markets. Inflows into domestic equity funds are lower through the first four months in 2012 compared to the beginning of 2011, and hedge funds' net long exposure is lower this year than a year ago. Volumes are low, indicative of nonparticipation of the retail investor, and I still see the big reallocation trade occurring in the fullness of time. (Steve Leuthold made an interesting observation on Monday that the Yale Crash Confidence Index, which measures how fearful large investors are of a crash in the next six months, is sitting on exactly the same reading which has marked four important market lows in the last 20 years.)
  13. Valuations: Valuations remain subdued, and the earnings risk premium is still elevated. In Monday's presentation to the Value Investing Congress, I observed that when the S&P 500 stood at 900 in November 2008 and S&P earnings approximated $65 a share, stocks traded at under 14x when the high-yield index yielded 25%. Today, with earnings of $100-$102 per share, the S&P 500 trades at 1375, basically the same P/E multiple that existed in November 2008, even though the high-yield bond index had dropped by over 70% in yield (from 25% to under 8%). Taken another way, over the past five decades, stocks have averaged a P/E of 15.2x. During that period, the yield on the 10-year U.S. note averaged 6.67%. Today the 10-year yield is 1.87%, and stocks trade at under 14x. (In previous periods of low inflation and interest rates, the S&P 50 routinely traded at 18x-19x.)
  14. Europe: European stress indicators are lower, reflecting a ring-fencing of the debt problems and facilities that have been put in place to insure funding needs for the next few years as well as improving current account balances in Italy, Spain, Greece and Portugal. The cost of interbank lending risk is low and falling -- it was rising last year -- and short-term note yields in Italy and Spain are well off their highs. I have long contended that the EU debt crisis has morphed from a near-fatal affliction to a manageable condition that must be monitored. The results of the French election were in line with expectations. (Betting parlor Ladbrokes had Hollande's odds of winning at 1:9 for the past two weeks.) I do expect some friction between Hollande and Merkel over the next few weeks regarding solutions on how to best address the debt contagion's impact on the peripheral nations. As to Greece, I believe the initial negative response on Sunday evening (that led to the dive in stock futures) was incorrect. To a large degree, Greece's problems are mostly their own, as Greek bondholders have already taken their hit. Though there will remain uncertainty regarding short-term funding, in all likelihood, there will be new elections in June. This election should have a more favorable outcome -- elderly voters stayed home in protest this weekend; they should return in greater numbers (helping the troika).
  15. Black swans: In 2011 exogenous events negatively impacted worldwide growth. Thai floods and the Tohoku earthquake disrupted supply chains and hurt sales and resulted in nearly $100 billion of insurance losses.
In summary, the outlook for worldwide economic growth and corporate profits is nowhere near as bad as many fear.

Perdaman, Lanco want speedy trial.

PERDAMAN Chemicals and Fertilisers is hoping the trial of its claims against Lanco Infratech will begin in September or October, the company’s corporate director Andreas Walewski said on Monday.

It was in everyone’s interests that the dispute was dealt with quickly.

 “Hopefully it will be before the end of the year,” he said.

Lanco Queen’s counsel, John Karkar, has pushed for a trial in September to resolve the dispute. “We are anxious to have the trial date fixed so things can happen expeditiously,” he said.

The $3.5 billion legal case returned to the Supreme Court last Thursday after Perdaman was instructed early in the week to amend its claim.

On Monday last week, Chief Justice Wayne Martin told Perdaman to amend its claim against Lanco, to make clear it was claiming damages directly due to Lanco’s actions.

The previous statement of claim had not made that seemingly vital link, according to Chief Justice Martin.

“You don’t actually say, ‘but for the conduct of the defendants of which we complain, the project would have gone ahead’,” the judge had said in an earlier hearing.

Queen’s counsel for Perdaman, Allen Myers, told the court the statement of claim was clear and was not for the defendant to dictate.
“They know what our case is,” he said. “They say, ‘No, that’s not the way you run a case of loss of opportunity’ but that’s for the judge to decide.”
“We have amended the statement of claim and are waiting for the amended defence,” Mr Walewski said.
“The discovery process is continuing.”

Perdaman took Lanco to court over a 25-year coal supply contract signed before Lanco bought Griffin Coal. It says Lanco’s failure to uphold the contract undermined financing of its planned $2.5 billion Collie urea project.

Lanco has said it was willing to satisfy the contract but Perdaman wanted “onerous” guarantees.
Lanco was claiming a victory last week after being awarded costs for the change.

The State Government is known to want the matter resolved swiftly but Perdaman has argued there are procedural issues to sort out before a trial date is set, and Chief Justice Martin agreed.

The trial is likely to be split into two sections, one examining the issues of liability and causation and the other attempting to quantify Perdaman’s losses.

Lanco has disputed Perdaman’s claims it had already spent $169 million on engineering studies before financing was secured.

Late last year The Australian Financial Review reported that Perdaman was at risk of losing its rights to valuable space at the port of Bunbury if its timetable for a 2014 start-up slipped.

Mr Walewski said this week that there would come a time when the space would be needed by others if the urea plant did not go ahead as scheduled.
He added that the port authority “is still behind us and I don’t think it will be an issue”.