Saturday, August 24, 2013

Understanding BOE.

Integrated oil companies and independent exploration and production companies both essentially live and die by their reserve base. If reserves aren't replaced quickly enough, a company can't hope to maintain, let alone grow, production. That's why investors want to keep an eye on reserves for companies in this space.
The tricky thing is, reserves take many forms. There's crude oil, which is measured in barrels. Then you have natural gas, whose base unit is 1,000 cubic feet. Many companies have a mixed reserve base, and they need a way to represent to investors the total energy content of that base. They do that typically by converting all of the reserves to a barrel of oil equivalent, or BOE, basis.
The conversion is pretty straightforward, but the abbreviations can be confusing. A thousand cubic feet of natural gas -- notated as 1 mcf -- contains about one-sixth of the energy content of a barrel of oil. So 6 mcf of gas equals 1 BOE. You'll also see barrels of oil equivalent sometimes represented as "bboe," where the double-b represents the plural, "barrels."
Now, large companies don't have total gas reserves in the mere thousands of cubic feet -- that wouldn't be much of a reserve base. Rather, they tend to have reserves in the millions (mmcf), billions (bcf), and trillions (tcf).
Now that we have the abbreviations down, here's an example. For year-end 2006,ExxonMobil (NYSE: XOM  ) reported liquid reserves of 8.19 billion barrels, and gas reserves of 32.48 tcf. On an oil-equivalent basis, the gas reserves equal 5.41 billion barrels, yielding total reserves of 13.6 billion BOE. And that's how it works.

Sunday, August 18, 2013

Cramer Rules.

Timing is Everything.

"Investing is a lot like comedy. Timing is everything," Jim Cramer says. That's why he dedicated his entire show to going over the frequent errors that investors make when buying and selling stocks.

Cramer said that knowing when to buy and when to sell is one of the most important, and most frustrating, parts of managing your own money. That is likely the reason why there is an entire cottage industry of financial advisers telling investors that it simply cannot be done, that they should just put their money into index funds and leave it there forever. Cramer said that while index funds have their place, telling investors that they're the only way to make money is totally bogus.

Timing makes all the difference, Cramer explained. He said there's a big difference between buying stocks at the market peak in October 2007 and buying them at the generational bottom in March 2009. There's a difference between buying stocks before the European financial crisis began to rule the world's markets and after.

Cramer explained that one reason timing the markets is so hard is some of the best moments to buy are during the moments of greatest terror. He said that it's almost never the right time to sell when the markets are panicking. History has proven that whether it was the crash of 1987, the flash crash of 2010 or the attacks on Sept. 11, 2001, what worked best was to be prudent and not to panic.

Perhaps the only exception was the financial crisis of 2008. Cramer said he was widely criticized for telling investors to sell their stocks in October 2008 -- but with the entire financial world as we knew it on the brink of collapse, the call to sell proved to be the right one, and investors were able to side-step the additional 35% decline in the averages.

But other than that one special case, Cramer said dumping stocks into a selloff is always the wrong move. "Keep your head, because you will get a better moment to sell," he concluded.

Its Not the End of the World

Continuing with his tips for investors, Cramer said not every big decline in the markets signals the end of the world. That's why no matter what the crisis of the day, it's never a good idea to sell everything because not all stocks are equally good or equally bad.

When bad news hits, Cramer told investors to look at the stocks in their portfolios and rate them on a simple scale. 

Stocks you rate No. 1, for example, could be the ones you believe in and are worth buying more as they head lower. 

Stocks in the No. 2 camp could be those that could be sold if you needed to raise cash. 

Meanwhile, the No. 3s could be those that are expendable and should be sold now.

Cramer said that, as a general rule, if investors have big gains they should give them back. Ring the register, he said. If the fundamentals of a company have changed, sell. If you think a stock is headed lower, sell some and buy it back lower. But no matter what happens, never sell it all and hide in low-yielding bond or bank CDs.

Cramer recounted how he learned his lesson about not selling everything. He said in the 1990s he held shares of American Stores, the old Acme supermarket chain, hoping the company would be taken over. After years of losses, he finally gave up and sold all his shares, all at once. Just two weeks later, American Stores was taken over. Cramer said his mistake was selling it all.

Know What You Own

Cramer's next tip for investors is to know what you own. He said in today's media-driven world, investors simply should not own a stock unless they know why they own that stock. Why? Because the media has never met a negative story it didn't like.

Whether it's the tsunami in Japan or the European financial crisis, Cramer said investors should just assume that every story they see on TV or read in the papers has been exaggerated in some way. So unless investors know why they own a stock in the first place, it will be far too easy for them to bail out on their stocks at the first sign of trouble.

Cramer recounted what he used to call his "Bristol-Myers Theorem," derived from Bristol-Myers Squibb (BMY_), a drug company with the most consistent earnings imaginable. He explained that back at his hedge fund, anytime an associate would run in panicking about a negative story, he would always ask, "How does that affect the earnings of Bristol-Myers?" In just about every case, it didn't.

That's why Cramer often recommends reliable, consistent earning stocks with great dividends, stocks such as Kinder Morgan Energy Partners (KMP_), or Verizon (VZ_), or utilities such as Southern Company (SO_). Cramer said no matter what the negativity of the day, companies like these will allow investors to put those stories into perspective.

The Dangers of IPOs

Next up on Cramer's tips for investors: the dangers of initial public offerings. Cramer said he's often asked about the next hot IPO coming down the pike, but his answer is always the same: "What price are they offering and how many shares are there?"

When it comes to IPOs, Cramer said it's all about valuation, the number of shares offered and price. He said what starts out as a great offer at $20 a share can easily get hyped up to $25 a share right before it comes public. The IPO business also has a habit of limiting the number of shares offered to ensure a big first-day pop in the share price, a pop that will only hurt investors later on.

Cramer gave his usual advise: If you can get in on one of these "sliver" offerings (described above), do so, but never buy them in the aftermarket.

Case in point, the Groupon (GRPN_) IPO. Cramer said he never liked Groupon the company, but Groupon the IPO was a buy, buy, buy. Why? He explained that while Groupon had 640 million shares of stock outstanding, the IPO only offered a scant 40 million of them to the public.

The result was huge demand, which sent shares of the $20 IPO to $28 and then $30 a share on its first day. This was a great return for those in on the IPO at $20, but those who bought at $28 and $30 were crushed as shares slid to under $15 a share in the days that followed.

Few Are Forever

Cramer's final tip for investors was that only a few stocks should be held forever. He said it's not OK to own a stock unless investors know exactly what would make them sell it in the future.

Too often investors end up selling a stock at the wrong time because they never anticipated selling it in the first place, Cramer explained. Similar to the "Bristol-Myers theorem," if investors don't know what they own and why they own it, it's easy to panic at the first sign of trouble.

In particular, Cramer said high-flying tech stocks cannot be owned forever because technology changes too rapidly. What's red-hot this year likely won't be next year. Likewise with cyclical stocks, said Cramer. Just because the economy is great today doesn't mean the same will be true tomorrow.

"Tech stocks are not the same as staple stocks," Cramer explained. There are tech cycles and there are economic cycles, he said, but there aren't cycles for Cheerios or Hershey bars. Learn from the bust of 2001 -- investors need to be ready to sell when the time comes, Cramer reminded viewers.

When it comes to high-flying stocks, "take profits on the way up, get out on the way down and be ready to jump ship when the time comes," Cramer concluded.


Sunday, August 11, 2013

How to save income-tax after selling a house (Immovable Property).


It is really possible to save substantial amount of income-tax on your long-term capital gains arising out of selling your immovable property, if you take advantage of the cost inflation index concept. However, it is applicable only in long-term capital gains.

Only when you hold your property for more than 36 months and sell it, the profit is known as long-term capital gain. You can save by resorting to the theme of cost inflation index.

The long term capital gains for all types of assets including long-term property gains for all assesses would be computed in the following manner:

1. Cost of acquisition of the asset, whether movable or immovable, is to be multiplied by the cost inflation index of that year in which the asset is transferred. The resulting figure is to be divided by the cost inflation index for the year in which the asset was acquired.

If, the asset was purchased before April 1, 1981, the cost inflation index for the purpose of acquisition is to be taken as the one on April 1, 1981.

2. Any cost incurred on the improvement of an asset is to be similarly adjusted with the help of the cost inflation index, i.e. by multiplying the cost of improvement by the cost inflation index of the year in which the asset is transferred.

It has to be then divided by the cost inflation index for the year in which the asset is transferred, and be divided by the cost inflation index for the year in which the improvement to the asset was done.

The Government has notified the cost inflation index for various financial years from 1981-82 to 2013-2014, the table of cost inflation index for the different financial years is given on next page:

For the financial year, 2013-2014 relevant to AY 2014-2015 the net capital gain tax payable by an assessee in respect of long-term capital gains is calculated on the basis of the above cost inflation index.  It may also be remembered that the benefit of cost inflation index is not available for short-term capital gains or losses. 

Thus, selling property (land, house, flat, etc.) within a period of less than three years from the date of its purchases  is treated as a short-term capital gain or loss in respect of gain from property.  Thus, the above cost inflation index will be of no use to a person deriving  either a short-term  capital gain or loss.  
So, too, the benefit of the cost inflation index is not available to non-resident Indians.

Apart  from the adjustments arising from the cost inflation index the various expenses incurred on improvements to the asset, and on transfer of the asset for example  stamp duty, legal fees payment of brokerage, etc. are deductible from the full value of the sale consideration. 

It is the net resultant figure which will be treated as a long-term capital gain or loss chargeable to income-tax in terms of Section 112 of the Income-tax Act.

For the actual year 2014-2015 the tax on long-term capital gains payable is 20 percent.  Thus, tax payment in respect of long-term capital gains is much lower than what has been prescribed by the Income-tax Act, if we take into account the impact of the cost inflation index. 

This is explained by the following illustrations:

Illustration No.1

Shyam purchased property for Rs 10,00,000 in the year 1981. He sold this in the financial year 2013-2014 for Rs 38,00,000.  The long-term capital gain would be calculated as under :

Cost of acquisition for the purpose of capital gains
= {Cost of acquisition x Cost inflation index of the year of transfer}
÷ {Cost of inflation Index of the year in which purchased} 
= {10,00,000 X939/100 Rs.93,90,000}
In this case, the selling price is lower than the cost of acquisition as computed with reference to the cost inflation index [Rs 93, 90,000]

Hence, there will be no capital gains tax payable, rather, there will be a long-term capital loss to the tune Rs 55,90,000 which can be carried forward for adjustment against Shyam’s  total  long-term capital gains.

Illustration No.2

Anurag purchased flat for Rs 20 lakh during the financial year 1991-92 and sold it for Rs.96  Lakhs on 25-7-2013.

Normally, the capital gains should have been Rs.70 lakh  but in view  of the adjustments on account of the cost inflation index, the capital gains  would be calculated as under :

{ 20,00,000 x 939/199 = Rs.94,37,185}
[Cost  inflation index for 1991-92 = 199]

Thus, in this case, the long-term capital gains  would be calculated as under :
Sale Price                                                                         = Rs 96,00,000

Less: Adjusted cost price taking into                                    =  Rs 94,37,185
account the impact  of cost inflation index

Long-term capital gains.                                                      =  Rs 1,62,815

Illustration No.3

Neelam purchased a piece of land during the financial year 1989-90 for Rs. 6 lakh.  She sold  it for Rs.40 lakh in Financial Year 2013-2014  (A.Y : 2014-2015).  Normally, the capital gains would have been Rs.36 lakh but in view of cost inflation index, the capital  gains would be calculated in the following manner :

6,00,000 X 939 (cost inflation index for 2013-2014)

172 (Cost inflation index for 1989-90)                 =   Rs. 32,75,581

The long-term capital gains as a result of cost inflation index adjustment would be as under :

Sale Price                                              =  Rs. 40,00,000

Less: Adjusted cost price as per              =  Rs. 32,75,581

Cost Inflation Index    ______________
Long-term capital gain                             =  Rs.  7,24,419   

Illustration No. 4 :

Pranab Kumar purchased property on 1st February, 2013 and sold the same on 16-8-2013.  The cost price was Rs.22 lakh and the sale price Rs.26 lakh, thus  the profit  is Rs.4 lakh.

As this is  a short-term capital gain, the benefit of cost inflation index is not available and Mr. Kumar is liable  to pay tax at the normal rate.

As shown by the above calculations and illustrations, in most cases the assessee will benefit to a very large extent as a result of cost inflation index.

Financial YearCost inflation index