Wednesday, 17 December 2008

Recession Causes - More of change in Perceptions

Economics is not a pure science... it is a social sicence.

So while studying any economic condition, we need to understand the social part of it to gain more understanding of it rather than looking at the abstract (relatively) terms as money supply, demand, supply, etc..

Even while studying demand and supply economics(which also has become obsolete after emergence of indifference curve analysis), the concept of demand has undergone lot of change...

While studying effect of demand on price, we should not loook at demand but "effective demand" So what is effective demand?

Effective demand is that demand that has three features
(a) Demand for the product;
(b) Ability to pay;
(c) Willingness to buy

So when demand is backed by ability and willingness, then it constitutes effective demand, which means demand which can make a difference....

The purpose of explaining all this is that the terms like willingness(which is more of cognitive term) have crept in the field of economics(so called science). This type of analysis has led to emergence of term called behavioral economics....

Now back to causes of recession and boom. The perception of the general public that there is more probability of gain in future as compared to now, leading that speculation and Vice Versa is the root causes of boom and recession...

The term more appropriate for this is "Irrational Exuberance". in fact this phrase was first used by former Fed chairman Alan Greespan to explain the irrational growth in stock markets during 1996-97...

Later Yale professor Robert Schiller came out with the book with same title in 2000 when market fell heavily....

This phrase became a catch phrase to explain the irrational boom. The important part is that this term takes into account the sentiment of public and tries to explain that boom and bust are more because of the sentiment of the public rather than the function of the forces of economics...

I hope I have a made point to you all......

Monday, 17 November 2008

Crisis or a Revolution?

Crisis or not, times are turbulent, for sure.

The turbulence –one would agree - is not just economic; it is more of socio-economic nature. Insolvencies, recession, cash crunch, interest rates... everything is contributing to the mess to the fullest extent possible. So much so that most of analysts are tempted to go back to 1930s to establish the comparable... well, do we really need to go that much back? (I do not think anyone who would read this blog would have had witnessed the 30s) Does anyone find any such example in recent history?

Perhaps, I do!

Just two odd decades ago, there was similar situation. Well, it was not of this magnitude; still it was of same importance (the world economy at that time was, definitely not as much interlinked then as it is now). It was... crash Communist economies.
Germany reunion, fall of USSR, China’s turnabout on economic policies, crisis of Cuba...

Was the rise and strengthening of capitalism as a socio-economic system at almost the same time a sheer coincidence? Or was it a corollary of fall of Communism? Or was it an inevitable alternative?

The voice of leftists is rising from hush-hush to growl saying, it is not a fall of one or more economies but of capitalism itself (Impliedly they mean the re-rise of communism - or at least, socialism - as a stronger system).

No, I am no left sympathizer in any way. Still, the point made by them can just not be dismissed since, as yet, there has not come up a single strong model which can analyze the past, explain the present and guide the future with confidence.

This is not an analysis. This is not an opinion. Perhaps just a mention of social vibrations I felt. Afterall, there is always a possibility of a “Third Alternative”!!

I invite your opinions, analyses, views and arguments on this.

Sunday, 28 September 2008

Warren Buffet - Goldman Sachs Deal....Resurgence of Debt

Warren Buffet one of the most Richest man on earth (precisely 2nd richest as in 2008) has struck a Gold mine in the deal with Goldman Sachs.

We all should also look for such deals, if we want to enter into one. Alas these options are rarely made available to common investor instead of persons like Warren Buffet. Only people like Warren Buffet can extract such a beautiful deal and it would have been surprising if somebody else would have been offered such terms and conditions. So Lets take a stock what the terms of the deal are:

Investment: $ 5 Billion;

Type of Investment: Perpetual Preferred Stock;

Guaranteed Rate of Return: 10% p.a.;

Early Redemption Premium : 10%;

Options: Warrants to purchase common stock worth $ 5 Billion @ $115 per Share;

Option Expiry: 5 years

Current Interest Rate: 2.0 Percent (September 26, 2008)

Goldman Sachs Group, Inc. (NYSE)
137.99 +2.49 (1.84%) 26 Sep 4:00pm ET
Open: 132.49
High: 137.99
Low: 129.51
Volume: 15,809,462
Avg Vol: 22,793,000
Mkt Cap: 54.34B
After Hours: 137.20 -0.79 (-0.57%) 26 Sep 7:59pm ET

Warren Buffet seems to have taken full advantage of the current situation and made a killing in this offering. Though Goldman Sachs gets very important commodity i.e. cash required to bolster their capital, Buffet has benefitted himself with the correct timing of the deal to drive the maximum benefit out of it.

There is lot to learn from such deals entered. This deal also has returned the focus from common stock to debt which provides guaranteed returns (though somebody else then buffet getting such deal would be very rare apart from the promoters).

While looking at investments, only business ethics should drive it and not the emotion.

We also need to look whether common person has access to such deals in India. The deal is constructed very intellectually which has stock and debt option both meshed into each other and providing support in case of any situation.

The above deal gives guaranteed 10% returns at the same time allows to take benefit of the increasing share prices with a add-in warrants struck at specific price. (This warrant is nothing but call option purchased without paying any premium for the same) This is a master stroke by genius of Warren Buffet.

Friday, 19 September 2008

Biggest international heist in Financial History

Consider This

## Sometime back ##

(a) US denies Dubai Port company to takeover Us Ports company citing security reasons.

(b) Similar voices are heard against chinese companies too (though no official comment on the same)

# Still Sometime Back #

(a) sub prime crisis surfaces.

(b) Lot of financial institutions on shaky ground

(c) Spate of write off follow

(d) Bear stearn crisis, bail out done..

(e) US financial institutions need huge capital to bolster balance sheets.

(f) Fed action follows, credit & liquidity infused. lot of US financial institutions take capital infusion from chinese, Japanese & gulf (basically dubai based) companies.

(though could not verify which gulf company has invested in US Financial institution)

(g) Dollar depreciates, oil rises, world crisis looming.

*** Now ***

(a) US institutions crash

(b) Freddie & Fannie (biggest home mortgage companies) bailed out...

(c) Lehman follows same path.. US refuses bail out

(d) same fate announced for meryll & AIG but bail out package made.

(e) Oil prices decreasing despite hurricanes & Opec announcing reduction in production

(f) Dollar continues to strengthen against currencies

(g) One analyst finds out that biggest unsecured creditors of lehman brothers are Asian institutions!!!!!! (read this article in "from all street journal" in financial daily "mint")


What is the best way rob anybody?

Borrow---> Spend---> declare bankruptcy----> lender is finished.

Who is better off?

The person on whom the money is spent.

The person who borrows has nothing to lose as he is where he was earlier

Lender is punished...

Did same thing not happen with US markets? Did US government pull out biggest heist in financial history? Who lost most money in this turmoil? borrowers from those insitutions (i.e. US public who may not pay now to the lehman bros) or the ones who had faith in these institutions and lent them huge monies( Asian & other financial institutions)?

Why is dollar appreciating in such situation?

Saturday, 17 May 2008

Land Exchanges -- Efficient Way to Real Estate Trading

When we talk of investing, the foremost thought that comes to our mind is the shares and the Stock Markets associated with it. We in India have very less options for investing. however we choose the product, the money turns up in the stock market only. Even the funds like Pension funds, employees funds are finding their way in to stock markets. To find the alternative option of investing is a very daunting task. The assets classes other than stocks for investment include Real Estate, Government Securities, Gold Funds, Gold related products, Municipal Bonds (which are non-existent in India), Trading in Insurance policies, reverse mortgages.

With the REIT (Real Estate Investment Trusts) in vogue (after norms being set now), we have found a new of asset to invest into. But how they would be priced? what would be the mechanism of trading? how effectively would they be able to represent the asset class? These questions are yet to be answered.

As the shares of the company represent the holding of ownership in that comapny, in the same vein, the units of the REIT should reflect the ownership of the same asset class i.e. Real Estate. But how would that effected?

Consider this:

01) Every entity holding any real estate i.e. land (developed or undeveloped), buildings of any kind should get that listed at the Property Exchange.

02) Property Exchange would work in the same way as the Stock market works, the only difference will be instead to trading ownership of company, we would be trading ownership of real estate.

03) The unit that will be traded will be a standardised one like one sq ft or sq mt. All the stock will have the same units.

04) The companies listing their real estate will have to submit their ownership proofs of the real estate to the exchange to be listed.

05) The companies will submit reports like

(a) What kind of land do they own (agricultural or non-agricultural)?

(b) Whether that land is developed & to what extent?

(c) Where that land is located & what is the municipal valuation of that property as per ready reckoner.

(d) For what purpose that is used & what is the income earned from it?

06) The units so listed on the exchange should be converted into demat form.

07) The stamp duty on transfer of such units should be rationalised so that trading in the same is encouraged. The state governments would find their stamp duty revenues increasing manifold after that. Same had happened when stock exchanges were dematerialised.

08) Derivative products can later be launched for the same, once the certain level of trading is established to allow more depth to the market.

09) The purchase of single unit of the entity so listed will represent as holding of equivalent real estate by the concerned person.

10) Later on even the Co-operative Housing Societies should be allowed to list their flats. (better would be having a union of multiple societies being listed as single entity) though this can create problems while taking possession of the units.

11) The valuation of such entity would involve a complete diferent kind of dynamics like municipal valuation, location of the property, projected activity by the company owning that property, how much that property is developed and etc..

12) Later on Property Mutual Funds could be allowed who would still make more easy to hold the real estate across the country for small investor.

13) There would be completely new concepts like EPU (Earning Per Unit of Property held), VPU (Value of Per Unit of Property held), TPV (Total Property Value).

This kind of exchange will try to bring more transparency in the property related dealings. It will make real estate market more vibrant. It will also allow small investors to have holdings in the small part of the land.
The market will allow for price discovery mechanism and also create avenue for small investor in real estate.

This step could be a breakthrough in the type of investment avenue available to small investor, which hitherto was not available to him. Small investor can also reap the benefits growth of real estate market without investing huge funds. This would also enable more liquidity to the real estate. Locating of real estate would be more easier. The person holding certain property would find it easy to convert into cash, which now is very difficult. Even the Company's Stock has gone through similar transformation. We should try to extend the same to the real estate too. If we can have Exchange traded Gold Funds, then we can definitely have Property Exchange also.

Monday, 11 February 2008

Aternative to Common stocks as inflation Hedges---Benjamin Graham

Book: The Intelligent Investor
Author : Bejamin Graham
Edition: 1971-72

Chapter 2 The Investor and Inflation

"Alternatives to common stocks as inflation hedges

The standard policy of people all over the world who mistrust their currency has been to buy and hold gold. This has been against the law for American citizens since 1935---luckily for them. In the past 35 years the price of gold in the open market has advanced from $35 perounce to $ 48 in early 1972-- arise of only 35%. But during all this time the holder of gold has received no income return on his capital, and instead has incurred some annual expense for storage. Obviously, he would have done much better with his money in a savings bank, inspite of the rise in the general price level.

The near-complete failure of gold to protect against a loss in the purchaing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation by putting his money in "things". Quite a few categories of valuable objects have had striking advances in market value over the years-- such as diamonds,paintings by masters, first editions of books, rare stamps and coins, etc. But in many, perhaps most, of these cases there seems to be an element of the artificial or the precarious or even the unreal about the quoted prices. Somwhow it is hard to think of paying $67,500 for a U.S. silver dollar dated 1804 (but not even minted that year) as an "investment operation." We acknowledge we are out of our depth in this area. Very few of our readers will find the swimming safe and easy there.

The outright ownership of real estate has long been considered as a sound long term investment, carrying with it a goodly amount of protection against inflation. Unfortunately, real-estate values are also subject to wide fluctuations; serious errors can be made in location, price paid, etc.; there are pitfalls in salesmen's wiles. Finally, diversification is not practical for the investor of moderate means, except by various types of participations with others and with the special hazards that attach to new flotations--- not too different from common-stock ownership. This too is not our field. All we should say to the investor is, "Be sure it's yours before you go into it." "