Saturday, June 30, 2012

Current Rally will be short-lived!!


• We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate 
conditionality, including compliance with state aid rules, which should be institutionspecific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.  

• We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.  

• We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent 
to EFSF/ESM in conducting market operations in an effective and efficient manner.

• We task the Eurogroup to implement these decisions by 9 July 2012. 

The announcement said, "We task the eurogroup to implement these decisions by July 9, 2012." Does this include the sovereign bond buys? It is unclear. (There needs to be unanimous agreement of this deal.)

How long will the euphoria of the meeting's decision last?
How long will today's rip-your-face-apart rally last?
Hard to say.
But for a number of reasons, it is most likely that it will be short-lived.
The most significant reasons for this view include the recently weakening corporate profits picture in the U.S. -- see Nike (NKE_)Ford (F_) and the like -- and the likely expanding divide between the Republicans and Democrats following yesterday's Supreme Court decision on healthcare. On the latter point, there is a positive in that the Supreme Court's ruling could energize the Republican Party's base and lead to a stronger turnout, which would bolster Governor Romney's chance of election in November.
As well, another important reason why today's ramp might exhaust itself is that the initiatives fail to address the deep structural problems facing the EU.


Friday, June 15, 2012

Implications of India's Credit Rating Downgrade .

What is our current rating? 

Standard and Poor's rates India at BBB-. It had downgraded the rating outlook in April, citing poor public finances, rising fiscal burden and the government's failure to push through crucial reforms. 

What is an investment-grade credit rating? 

Investment-grade ratings range between AAA (superior) and BBB- in S&P's nomenclature. India's rating, BBB-, is considered the lowest investment grade by market participants. 

Any rating below BBB- is considered speculative grade. And CCC to C, the ratings below B, are considered vulnerable grade. The last category, D, is of bonds in default. Bonds that are not rated investment grade are known as highyield or junk bonds. Ratings from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. 

Why is an investment-grade rating necessary? 

Big financial institutions diversify their investment risks by not putting all their eggs in one basket. So they invest in equities and bonds throughout the world. 

Some of these institutions are pension funds, trusts and endowments, all of which follow very regimented investment styles and thus put their money only in investment-grade instruments. Hence, they will immediately exit bonds of any country that loses its investment-grade rating. 

FII Debt Inflow in Indian Bonds.

What are the implications? 

If a country loses its investment-grade rating, it would face much higher costs for its future borrowing as its credibility will not be considered high and fewer lenders would want to invest. This loss of confidence would result in an outflow of funds from the equity markets as well because then investors would begin to have doubts about the economy as a whole.


Wednesday, June 6, 2012

Why you need an exit plan for investments.

N Shrijith, a marketing professional with a multinational spirits company, had plans to buy a house in 2012. For this, he started investing in equity mutual funds in 2005. However, his hopes were dashed when he checked his investment last year. 

To his dismay he found that the value of his investment had eroded drastically with the fading fortunes of the stock market. Shrijith had no other option but to put his house purchase plans on the backburner. 

"Had he planned an exit strategy well, his dreams would have come true," says Abhishek Gupta, CEO,Moat Wealth Advisors. On many occasions, market volatility kills individual's plan. "Such instances are commonplace with people investing in risky assets, such as equities. In any investment, a planned exit is as important as a well thought out entry," he adds. 

Consider the perilous scenario of someone who has been saving for his retirement for the past 20 years, with a substantial allocation to equities. Without doubt, the person would have accumulated a substantial kitty by now, right? But he also would have lost a good amount of money in the current downtrend in the stock market. 

In hindsight, the best strategy would have been selling off the equity investments in January 2008 and moving all proceeds into debt. But that amounts to day dreaming. "Either you have to be god or you have to be plain lucky to sell all your equities at the top," says a wealth manager. 

There is no magic wand to tell you that you have reached the top or the market is going into a lean phase. Missing the top is something you can live with. But what about the other way round? Selling all your equity holdings at the bottom is worse. Again we cannot pinpoint the bottom so that we can avoid it. 

Consider the month of May 2012. The first quarter results could not attract much investor interest, rather many companies could not deliver what they promised. The macro economic scenario is not encouraging, too, with quarterly GDP growth falling to nine year low at 5.3% and inflation threatening to make a strong come back. 

The market benchmark S&P CNX Nifty lost 6% in the month of May. This is an extremely pessimistic environment for equities. Being forced to sell at this time would be the last thing that one wants. The worst is: no one knows when the sentiment would improve going forward. 

"The best option left with small investors is to gradually move their money from risky assets to safer assets as they move closer to their goals," says Mukund Seshadri, founder partner, MS Ventures Financial Planners. And he is not alone. 

"If you gradually move your money from equities to debt over a period of time, you reduce the timing risk of selling at the market trough," says Uday Dhoot, deputy chief executive officer, International Money Matters

Say, for instance, if you are retiring today, you should have ideally started moving your money from equities to debt from June 2010. Three years prior to your goal, you should move 33% of your equity allocation to debt, two year prior to your goal the next 33% and one year prior to your goal date the remaining equity investments should start moving into safer avenues. 

In other words, if you are retiring in three years from now, start today. If you are a mutual fund investor, you may choose to use a systematic transfer plan from your diversified equity fund to a short-term bond fund. You can also choose to gradually sell investments in gold, since gold too has seen much volatility. 

This strategy need not guarantee you an exit at the top, but will save you selling at the bottom. The idea is to reduce the exposure to volatile assets gradually and building a portfolio of safe assets, which you can hold comfortably. 

If you are of the opinion that interest rates may climb from here, do not invest your sell proceeds in long-term bond funds. Short-term bond funds, liquid funds and fixed deposits with nationalised banks are some conservative investments. 

"But keep an eye on the tax angle while moving from one asset class to another," says Uday Dhoot. This is especially true if you are an active investor and have some tactical allocations to volatile assets. In case of equities, gains on investments for more than one year are considered to be long-term capital gains and are not taxed. 
But short-term capital gains are taxed at 15.45%. The tax angle can materially impact your realised returns. In case of fixed income investments, short-term capital gains are taxed at the marginal rate, whereas long-term capital gains are taxed at lower of 20.6% with indexation or 10.3% without indexation. 

In both - equities and fixed income - the timing of selling can materially influence the returns. It pays to keep track of your portfolio performance and move money from risky assets to safer avenues over a period of time so that your dreams don't remain only on paper.


HDIL Interview after Q4 Results.

Q: What is looking like a doable sales target for FY13?
A: We have given guidance to rating agencies of approximately the same that we did last year. We did approximately Rs 2000 odd crore revenues. I think we maintain the target that we will be achieving anywhere between Rs 2000-2500 crore of revenues.
Our profit will remain in the same area, approximately Rs 900 crore. Given the market conditions today, I think that is a great achievement and even last year was a great achievement by a company like HDIL.
Q: What is your sense of how the Mumbai market is doing right now, both commercial and residential?
A: We did an offhand calculation and we figured out that with the new concept of fungible FSI and the increase in property taxes, the end consumer is going to end up paying approximately a Rs 1000 per sq ft more and that is in any given location. Now that is the base price.
You are going to see a minimum of 10-15% increase because of the fungible FSI concept that is going to go on the consumer's head. The entire concept of developers getting areas free of FSI has gone now. Margins are going to be contracted a little bit. I am sure they are going to start increasing prices to make sure that they achieve that margin.
Q: Any significant lumpsum payments or inflows that you are expecting from any land parcel sales. There has been talk about you selling a large parcel in Andheri to Adani Group etc; do you expect any of those to go towards repayment of that debt that you are speaking about?
A: Most of our internal accruals today are earmarked towards debt repayment. We are focused towards deleveraging the balance sheet through these FSI transactions. We are still negotiating with few buyers for the Andheri project. We are negotiating with Adani for the same project as such.
But, we do have other major land parcels like the Virar project, which is now coming up. It is approximately 40 million sq ft. It will probably be the largest township outside of Mumbai city. With prices in the range of anywhere between Rs 4000 and 4500 per sq ft, that is a huge project. I am sure that the internal accruals from there will help us deleverage the balance sheet over the next two years.

Monday, June 4, 2012

Eurozone Crisis Glossary.


A debt instrument issued by a government or company. Investors buy bonds (thereby lending the government or company money) in return for an annual interest rate, and receive the full amount they lent at the end of the bond's term, also known as the maturity. A bond's maturity can be as short as a year to as long as 100 years. Different countries refer to their government bonds by different names: Gilts (UK), Treasuries (US) and Bunds (Germany).
Bond yield
We often refer to this as the interest rate paid on the bond. In fact, it is a little more complicated. After they are sold, bonds are traded in a secondary market. If you buy a bond at its original price, the yield will be equal to the interest rate (or coupon) the company or government must pay on that bond until maturity. For example, if you buy $1,000 of a bond with a 10% coupon at its original price, your yield will be 10%. If you only pay $800 for that bond, the yield will be higher because you are getting the same guaranteed return on an asset that is worth less.
The bond yield shows how likely a company or government is to default; the higher the yield, the higher the perceived risk of default. That is because when Spain looks more likely to default, demand for Spanish debt falls; the price of Spanish bonds drops and the yield on Spanish debt rises. Yield is also a good proxy for how much interest a company or country would have to pay on their debt if they were selling new bonds.
Bond auction
Government bonds tend to be sold via an auction because the secondary market for government bonds is relatively active, so it is easy to find out the price of a bond equivalent to the new bond being issued.
Investors will put in bids for the new bond with the debt management office (DMO) of the country selling bonds. If an investor wants their full order they will usually put in at least the market price or higher. The DMO will fill up the orders at the highest prices first, gradually working down the list. Sometimes it may choose not to issue the full amount of bonds on offer, if it considers the prices offered too low.
Bid-to-cover ratio
The value of bids divided by the value of bids accepted in a bond auction. This gives a good idea of the demand for a particular bond. The higher the ratio, the higher the demand.
Long tail
In the debt markets, a long tail means a large difference between the average price and the lowest price paid for a bond in the same auction. This is not necessarily a sign of a weak auction, as the vast majority of bonds may have gone for a good price but a few small orders could have been filled at a much lower price.
Bond syndication
Corporate bonds tend to be sold via a syndicate of investment banks who market and place the bonds. They will go to investors and ask them to put in an order at a suggested price. The current trend is for investment banks to start with an extremely cheap price to reel investors in, but ratchet the price up when the bond is issued. The banks will also increase the size of the bond if they possibly can.
The difference between two figures. Often used when comparing bond prices. When considering the differing fortunes of Greece and Spain, traders might look at the spread between German and Italian bond yields. It tends to be measured in basis points, which are fractions of percentage points. 100bp = 1%.
Credit default swap (CDS)
Often referred to as an insurance policy against a company or country defaulting. In fact, CDSs are more frequently used to bet that a company or country will default, rather than to protect against any losses if it does. Investors pay a fee to hold a CDS and will receive a payout if the company or country defaults. Crucially, the investor does not need to hold the debt of the company or country in question.
Credit event
A credit event is the moment the ISDA (International Swaps and Derivatives Association) committee decides there has been a default, triggering the payout due to CDS investors.
Credit rating
A rating based on the likelihood a company or country will default. There are three main credit rating agencies – Standard & Poor's, Moody's and Fitch. Ratings go from AAA, which is considered very safe, to D, when a company or country is in default. Anything below BBB is considered junk, or speculative grade debt. The agencies often signal that they are likely to downgrade a particular country by putting its rating on "Outlook Negative" or "Creditwatch Negative".
The International Swaps and Derivatives Association (ISDA)
A trade association for derivatives that are traded directly between two parties – called over-the-counter trading – rather than via an exchange. It aims to make these opaque markets safe and efficient by helping resolve disputes.


Long-term refinancing operations (LTROs)
These involve the ECB lending money to banks in the eurozone at very low rates. This flood of cheap money is intended so that banks can lend more money to businesses and consumers, which would in turn help boost economic growth. The ECB has carried out two LTROs since December last year, lending a total of more than €1 trillion.
Quantitative easing (QE)
A policy used by the Bank of England in the hope of stimulating the UK economy. The Bank of England, with the permission of the Treasury, creates money by crediting its own account. It uses that money to buy government bonds from banks, pushing the price of the bonds up and the yields down (see bond yield), thus driving down the government's borrowing costs. The hope is that banks then have more money to lend to businesses and consumers. Theoretically, when the economy has recovered, the Bank of England sells the bonds it has bought and destroys the cash it receives, so there has been no extra cash created. So far, the Bank of England has injected £325bn into the economy in this way.
European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM)
Also known as the firewall. The ESM is a permanent rescue fund to replace the temporary EFSF. When the debt crisis erupted, the 27 member states of the EU agreed to create a fund, financed by the members of the eurozone, to provide financial help to eurozone states in economic difficulty. The EFSF is backed by commitments for a total of €780bn and has a lending capacity of €440bn. As Europe's largest economy, Germany provides the largest commitment to the fund and therefore wields the most influence in negotiations over bailouts and the size of the fund.
The EFSF is due to expire in 2013 due to the lack of a legal basis for the fund, although the programmes to deliver €300bn in loans to Ireland, Portugal and Greece will run their course until 2015. The ESM will be launched as soon as member states representing 90% of the capital commitments have ratified it, which is expected in July 2012, and it is able to run in tandem with the EFSF. Its lending capacity has been capped at €500bn.
Securities market programme (SMP)
The programme that allows the ECB to buys bonds from troubled eurozone countries, to help keep their borrowing costs down. The central bank has left the programme unused of late but executive board member Benoit Coeure reminded markets it was still an option in April this year. It is a tool favoured by the troubled nations as SMP bond purchases do not come with conditions.
Proposed debt instruments that would be issued by an individual country within the eurozone, but underwritten by all members of the eurozone. This would bring down borrowing costs for the most troubled countries in the eurozone. But critics say they open up a so-called "moral hazard": if profligate behaviour goes unpunished, what's to stop any country going on the national equivalent of a bender and expecting Germany to pick up the tab? French president François Hollande, Italy's prime minister Mario Monti and Spain's PM Mariano Rajoy all want to bring them in, but the Germans, Finns and Austrians are against them.
Financial transaction tax
Otherwise known as the Tobin tax, or (emotively) the Robin Hood tax. The FTT would apply to all 27 EU countries and the European Commission says it could raise €55bn a year, ensuring the sector made "a fair contribution" in an austere economic climate. But critics say it is distorting and the volume of transactions would fall so it would not raise that level of funds. Support from the tax comes from an unlikely alliance of actor Bill Nighy, the Archbishop of Canterbury, and president of the European Commission José Manuel Barroso, among others; David Cameron is against it.
Fiscal compact
A treaty signed by all members of the European Union, except the UK and the Czech Republic. The fiscal compact will force member states to hit tough budget targets, which would mean more short-term pain for a country that is already deep into its austerity programme. But the fiscal compact will also guarantee access to the European Stability Mechanism. Despite signing the compact in January, Ireland subsequently decided to hold a referendum on it on 30 May 2012.
The Greek memorandum
The treaty that obliges Greece to make swingeing cuts to public spending in return for its second eurozone bailout worth €130bn in addition to a €100bn writedown of debt by the bankrupt country's private creditors. The mainstream parties in Greece have committed to the memorandum, but Alexis Tsipras, who heads Syriza – a coalition of radical left groups that took 17% of the vote in the May 2012 elections –has called it "a path that will lead to hell". The second round of elections on June 17 – after the politicians failed to form a government the first time round – has therefore been portrayed as a choice between sticking to the memorandum to stay in the euro, or abandoning austerity and leaving the single currency.


International Monetary Fund (IMF)
The IMF lends to countries in difficulties on condition that they follow its guidelines for fixing their economy. It has 188 member countries who provide $364bn of resources to the fund. In April 2012, member countries announced additional pledges to increase the IMF's lending resources by over $430bn to go towards bailouts for countries hit by the global financial crisis.
The institution in charge of monetary policy for the 17 eurozone countries, headquartered in Frankfurt, Germany. The current president of the ECB is Mario Draghi, former governor of the Bank of Italy. As Europe's biggest economy, Germany's central bank (the Bundesbank) holds the largest portion of the bank's €10bn capital, almost 19%. The governing council of the ECB comprises an executive board and the governors of the national central banks of the eurozone.
An informal gathering of the finance ministers of the eurozone, currently headed by the prime minister of Luxembourg Jean-Claude Juncker. The Eurogroup usually meets the evening before the full meeting of the ECOFIN Council, which meets once a month. The ECOFIN Council is a group of the economics and finance ministers of the 27 European Unionmember states, as well as budget ministers when budgetary issues are discussed.
The trio of the IMF, the EU and the ECB managing the bailouts of European countries.
European Union (EU)
The economic and political partnership between 27 European countries that together cover much of the continent.
European Commission (EC)
The European Union's executive body. The EC proposes legislation to go through the European Parliament and Council. It manages and implements EU policies and the budget, and enforces European law (jointly with the European Court of Justice). The 27 commissioners (one for every member state of the EU) meet once a week in Brussels.
European Parliament
Members of the European Parliament (MEPs) are voted for directly by EU voters every five years. Together with the European Council, the European Parliament debates and passes European laws and the EU budget.
European Council
The heads of state or government of the 27 EU member states, along with the president of the European Commission, José Manuel Barroso, and the president of the European Council, currently Herman Van Rompuy.


Saturday, June 2, 2012

US Real Estate - Buy or Sell?

Mortgage rates are hitting new historic lows, but, contrary to conventional wisdom, pending home sales and mortgage applications have declined. At the same time, home prices are rising. And that's just this month. With so much fluctuating data, how can home buyers possibly figure out whether it's the right time to buy or sell?
Q: How should people read the numbers?
A: People need to focus on how a number is relative to last year rather than focus on monthly blips. Or, if you are going to look at a monthly number, look at it over a few months, rather than get freaked out by something like a (one-month) drop in pending home sales.
Q: Mostly, people are trying to figure out if the market has hit bottom and is now in recovery. How can they figure that out based on the numbers?
A: People get the impression that the bottom is a discrete period of time. But the bottom economists talk about is a process. Economically, you see a trough in home sales, and then they start to rise. After that, you see long-horizon buyers (investors, second-home buyers and retirees) re-enter the market. Then you see mainstream buyers get back in. Then you see pockets of metros recover, then the metros overall, then the national index.
Q: But for now, it's just chaos?
A: From month to month, these things are going to bounce around. A single month of bad numbers does not scuttle the housing recovery. Consumers feel a bit whipsawed, but the market is changing direction. At the fragile point where it is turning, indicators go in different directions.
Q: Is there any way to makes sense of the system as a whole?
A: The best advice is to use a set of numbers to triangulate a trend. If you look at a whole bunch of numbers, you find a pretty positive picture - such as rents are up 3.2 percent nationally while home values are down 1.8 percent. That is the makings of stabilizing prices.
But what tends to get emphasized instead is something like pending home sales are down from last month- but that's a little bit of noise factor. What you need to ask is: Are they up from last year? Of course, confidence will be higher once all those numbers move in lockstep.
Q: Which data should a potential buyer look at to figure out how to time the market?
A: The most important metrics to look at are home values and mortgage rates. I think a lot of buyers try to time the very bottom of the market, and try to avoid any loss at all, but I think that's penny wise and dollar foolish. They really need to focus on financing cost.
Q: What should sellers look at?
A: Sellers should look at inventory on the market and pace of home sales. In a lot of metros, you're seeing relatively tight inventory and values are up from last year, especially in certain zip codes. The shortage has a few different sources. One is that the pace of foreclosures hasn't picked up, and a lot of homes are still held by banks. The other is that 31.4 percent are in negative equity - being underwater on their homes - and they can't sell.