Research report

Commodities  – Earning ideas – 4th May 2009

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Secrets of the Nehru / Gandhi dynasty….

At the very beginning of his book, “The Nehru Dynasty”, astrologer K.N.Rao mentions the names of Jawahar Lal’s father and grandfather. Jawahar Lal’s father was believed to be Moti Lal and Moti Lal’s father was one Gangadhar Nehru. And we all know that Jawahar Lal’s only daughter was Indira Priyadarshini Nehru; Kamala Nehru was her mother, who died in Switzerland of tuberculosis. She was totally against Indira’s proposed marriage with Feroze.

Why? No one tells us that !

Now, who is this Feroze? We are told by many that he was the son of the family grocer. The grocer supplied wines, etc. to Anand Bhavan, previously known as Ishrat Manzil, which once belonged to a Muslim lawyer named Mobarak Ali. Moti Lal was earlier an employee of Mobarak Ali.

What was the family grocer’s name? One frequently hears that Rajiv Gandhi’s grandfather was Pandit Nehru. But then we all know that everyone has two grandfathers, the paternal and the maternal grandfathers. In fact, the paternal grandfather is deemed to be the more important grandfather in most societies.

Why is it then no where we find Rajiv Gandhi’s paternal grandfather’s name?

It appears that the reason is simply this. Rajiv Gandhi’s paternal grandfather was a Muslim gentleman from the Junagadh area of Gujarat.

This Muslim grocer by the name of Nawab Khan, had married a Parsi woman after converting her to Islam. This is the source where from the myth of Rajiv being a Parsi was derived. Rajiv’s father Feroze was Feroze Khan before he married Indira, against Kamala Nehru’s wishes. Feroze’s mother’s family name was Ghandy, often associated with Parsis and this was changed to Gandhi, sometime before his wedding with Indira, by an affidavit.

The fact of the matter is that (and this fact can be found in many writings)

Indira was very lonely. Chased out of the Shantiniketan University by Guru Dev Rabindranath himself for misdemeanour, the lonely girl was all by herself, while father Jawahar was busy with politics, pretty women and illicit sex; the mother was in hospital.

Feroze Khan, the grocer’s son was then in England and he was quite sympathetic to Indira and soon enough she changed her religion, became a Muslim woman and married Feroze Khan in a London mosque. Nehru was not happy; Kamala was already dead or dying.

The news of this marriage eventually reached Mohandas Karamchand Gandhi.

Gandhi urgently called Nehru and practically ordered him to ask the young man to change his name from Khan to Gandhi. It had nothing to do with change of religion, from Islam to Hinduism for instance. It was just a case of a change of name by an affidavit. And so Feroze Khan became Feroze Gandhi. The surprising thing is that the apostle of truth, the old man soon to be declared India’s Mahatma and the ‘Father of the Nation’ did not mention this game of his in the famous book, ‘My experiments with Truth’. Why?

When they returned to India, a mock ‘Vedic marriage’ was instituted for public consumption. On this subject, writes M.O. Mathai (a long-time private secretary of Nehru) in his renowned (but now suppressed by the GOI) ‘Reminiscences of the Nehru Age’ on page 94, second paragraph: “For some inexplicable reason, Nehru allowed the marriage to be performed according to Vedic rites in 1942. An inter-religious and inter-caste marriage under Vedic rites at that time was not valid in law. To be legal, it had to be a civil marriage.

It’s a known fact that after Rajiv’s birth Indira and Feroze lived separately, but they were not divorced. Feroze used to harass Nehru frequently for money and also interfere in Nehru’s political activities. Nehru got fed up and left instructions not to allow him into the Prime Minister’s residence Trimurthi Bhavan. Mathai writes that the death of Feroze came as a relief to Nehru and Indira. The death of Feroze in 1960 before he could consolidate his own political forces, is itself a mystery. Feroze had even planned to remarry.

Those who try to keep tabs on our leaders in spite of all the suppressions and deliberate misinformation, are aware of the fact that the second son of Indira (or Mrs. Feroze Khan) known as Sanjay Gandhi was not the son of Feroze.. He was the son of another Moslem gentleman, Mohammad Yunus. Here, in passing, we might mention that the second son was originally named Sanjiv. It rhymed with Rajiv, the elder brother’s name. It was changed to Sanjay when he was arrested by the British police in England and his passport impounded, for having stolen a car. Krishna Menon was then India’s High Commissioner in London. He offered to issue another passport to the felon, who changed his name to Sanjay.

Incidentally, Sanjay’s marriage with the Sikh girl Menaka (now they call her Maneka for Indira Gandhi found the name of Lord Indira’s court dancer rather offensive!) took place quite surprisingly in Mohammad Yunus’ house in New Delhi. And the marriage with Menaka who was a model (she had modeled for Bombay Dyeing wearing only a towel) was not so ordinary either.

Sanjay was notorious in getting unwed young women pregnant. Menaka too was rendered pregnant by Sanjay. It was then that her father, Colonel Anand, threatened Sanjay with dire consequences if he did not marry his (Col.

Anand’s) daughter. And that did the trick. Sanjay married Menaka.

It was widely reported in Delhi at the time that Mohammad Yunus was unhappy at the marriage of Sanjay with Menaka; apparently he had wanted to get him married with a Muslim girl of his choice. It was Mohammad Yunus who cried the most when Sanjay died in the plane accident. In Yunus’ book, “Persons, Passions & Politics” one discovers that baby Sanjay had been circumcised following Islamic custom, although the reason stated was phimosis.

It was always believed that Sanjay used to blackmail Indira Gandhi and due to this she used to turn a blind eye when Sanjay Gandhi started to run the country as though it were his personal fiefdom. Was he blackmailing her with the secret of who his real father was? When the news of Sanjay’s death reached Indira Gandhi, the first thing she wanted to know was about the bunch of keys which Sanjay had with him.

Nehru was no less a player in producing bastards. At least one case is very graphically described by M. O. Mathai in his “Reminiscences of the Nehru Age”, page 206. Mathai writes: “In the autumn of 1948 (India became free in

1947 and a great deal of work needed to be done) a young woman from Benares arrived in New Delhi as a sanyasin named Shraddha Mata (an assumed and not a real name). She was a Sanskrit scholar well versed in the ancient Indian scriptures and mythology. People, including MPs, thronged to her to hear her discourses.

One day S. D. Upadhyaya, Nehru’s old employee, brought a letter in Hindi from Shraddha Mata. Nehru gave her an interview in the PM’s house. As she departed, I noticed (Mathai is speaking here) that she was young, shapely and beautiful. Meetings with her became rather frequent, mostly after Nehru finished his work at night. During one of Nehru’s visits to Lucknow, Shraddha Mata turned up there, and Upadhyaya brought a letter from her as usual. Nehru sent her the reply; and she visited Nehru at midnight.

Suddenly Shraddha Mata disappeared. In November 1949 a convent in Bangalore sent a decent looking person to Delhi with a bundle of letters. He said that a young woman from northern India arrived at the convent a few months ago and gave birth to a baby boy. She refused to divulge her name or give any particulars about herself. She left the convent as soon as she was well enough to move out but left the child behind. She however forgot to take with her a small cloth bundle in which, among other things, several letters in Hindi were found. The Mother Superior, who was a foreigner, had the letters examined and was told they were from the Prime Minister. The person who brought the letters surrendered them…

“I (Mathai) made discreet inquiries repeatedly about the boy but failed to get a clue about his whereabouts. Convents in such matters are extremely tight-lipped and secretive. Had I succeeded in locating the boy, I would have adopted him. He must have grown up as a Catholic Christian blissfully ignorant of who his father was.”

Coming back to Rajiv Gandhi, we all know now that he changed his so called Parsi religion to become a Catholic to marry Sonia Maino of Turin, Italy. Rajiv became Roberto. His daughter’s name is Bianca and son’s name is Raul.

Quite cleverly the same names are presented to the people of India as Priyanka and Rahul. What is amazing is the extent of our people’s ignorance in such matters.

The press conference that Rajiv Gandhi gave in London after taking over as prime minister of India was very informative. In this press conference, Rajiv boasted that he was NOT a Hindu but a Parsi. Mind you, speaking of the Parsi religion, he had no Parsi ancestor at all. His grandmother (father’s mother) had turned Muslim after having abandoned the Parsi religion to marry Nawab Khan.

It is the western press that waged a blitz of misinformation on behalf of Rajiv. From the New York Times to the Los Angeles Times and the Washington Post, the big guns raised Rajiv to heaven. The children’s encyclopaedias recorded that Rajiv was a qualified Mechanical Engineer from the revered University of Cambridge. No doubt US kids are among the most misinformed in the world today! The reality is that in all three years of his tenure at that University Rajiv had not passed a single examination. He had therefore to leave Cambridge without a certificate. Sonia too had the same benevolent treatment. She was stated to be a student in Cambridge. Such a description is calculated to mislead Indians. She was a student in Cambridge all right but not of the University of Cambridge but of one of those fly by night language schools where foreign students come to learn English. Sonia was working as an ‘au pair’ girl in Cambridge and trying to learn English at the same time. And surprise of surprises, Rajiv was even cremated as per vedic rites in full view of India’s public.

This is the Nehru dynasty that India worships and now an Italian leads a prestigious national party because of just one qualification – being married into the Nehru family. Maneka Gandhi itself is being accepted by the non-Congress parties not because she was a former model or an animal lover, but for her links to the Nehru family. Saying that an Italian should not lead India will amount to narrow mindedness, but if Sania Maino (Sonia) had served India like say Mother Teresa or Annie Besant, i.e. in any way on her own rights, then all Indians should be proud of her just as how proud we are of Mother Teresa.

Banks will lose half of their marketcap by Dec 09

Inflation is being used as a ruse to cut interest rates by the joker at RBI. Common sense tells that low commodity prices which underline a recession are responsible for a lower inflation and not a supply side response. The very factors that built up a strong case for banks a mere six months ago could as easily reverse if the Global Economies begin growing. However, 30 years of zero interest rates have achieved nothing for Japan, and so far similar efforts in the US and Europe have failed.

“Money has a cost” is the idiom the guy at RBI needs to understand, throwing money at dead businesses will mean sizeable business losses in six months from now. It is already an open secret that all Bank NPA figures are fudged in India, but with sub 10 per cent PLRs this will become difficult to hide. Starting from SBI, PNB, BOB, BOI, HDFC, HDFC Bank and Kotak Bank could halve even from here. This is going to become the last sector to be crushed in the fall of CY2009.

Top 10 American Financial meltdowns of the century

Banks failed, stock prices collapsed, and panic descended on Wall Street. Americans were holding their collective breath as a rescue plan was hastily drafted. The 2008 financial crisis? Nope – it was the Panic of 1907, and again in 1929, 1987, and so on. Since its independence more than 230 years ago, the United States has grown to have the largest economy in the world (GDP of $13.8 trillion as of 2007, by the way. That’s $13,800,000,000,000). But we didn’t get there without quite a few bumps on the road. To put today’s economic trouble into perspective, let’s take a look at the 10 financial disasters in the United States in the past century:

1. The Panic of 1907

Background: At the time, the young US stock market was in a decline – it was off 25% since the beginning of the year and Wall Street was jittery over the tight money supply.

Trigger: Then along came Otto Heinze with his get-(even)-rich(er)-quick scheme. In October of 1907, Otto, along with his brother, a copper magnate named Augustus Heinze, and the ice king (yup, he sold ice – remember, this was before the age of household refrigerators) Charles W. Morse, aggressively bought shares of United Copper, thinking that they could corner the market on the stock. Their plan failed spectacularly, and immediately bankrupted the trust companies and banks that provided the financing. Runs on banks immediately ensued as depositors pulled their money from banks that had dealings (or rumored to have dealings) with the trio. In a little less than two weeks in the Panic of 1907, a chain reaction had left 9 trust companies and banks bankrupt.

The Solution: At the time, the United States had no central bank (President Andrew Jackson had abolished the Second Bank of the United States some 6 decades earlier), but we had J.P. Morgan.

The 70-year-old financier stepped in to bail out, er … save trust companies worth saving and let those who were too far gone to fail. The infusion of cash helped stop the domino effect of failing trust companies, but more money was needed.

So here’s what he did:

Morgan gathered 50 trust company presidents at his library, told them to come up with $25 million on their own and left them in a large room. He withdrew to his librarian’s office. At 3 a.m., he called in one of his sleep-deprived lieutenants, Ben Strong, for a review of a trust company’s books. Strong gave his report, then headed to the library’s front doors and found them locked. Morgan had the key in his pocket. No one would leave until the trusts ponied up. The presidents continued to talk. At 4:15, Morgan walked in with a statement requiring each trust company to share in a new $25 million loan. One of his lawyers read it aloud, then set it on a table. “There you are, gentlemen,” said Morgan.

No one moved.

Morgan drew Edward King, head of the Union Trust, to the table. “There’s the place, King,” he said, “and here’s the pen.” King signed. The other presidents signed. They set up a committee to handle the loan and supervise the final-stage bailouts of endangered trusts. At 4:45, the library’s heavy brass doors swung open and let the bankers out. (Source)

Aftermath: The government realized that only having people like J.P. Morgan in charge of saving the entire country’s economy was kind of a bad idea, so it created the Federal Reserve System.

2. Wall Street Crash of 1929

Background: In the Roaring Twenties, optimism was everywhere: the Great War, as World War I was called back then, was over and advances in technology seemed limitless. Along with that optimism was an incredibly speculative bull market: stocks went up four fold in value in that decade.

Hundreds of thousands of Americans borrowed money to play the stock market. They bought stocks with just a fraction of the value in cash and financed the rest by borrowing from the broker (“buying on margin,” if you’ve never heard it before). Needless to say, stocks became overvalued fast.

The Crash: What goes up, must come down – but it doesn’t have to come down all in one day. The Wall Street Crash of 1929 came in forms of three “black” days.

In the morning of October 24, 1929 – later nicknamed “Black Thursday“- a massive sell-off happened. More than 3 times the normal amount of shares were traded and stock prices tumbled. Richard Whitney of J.P. Morgan and Company came to the trading floor … and instead of halting trading like everyone expected, he started buying confidently and the market recovered. The market actually went up the subsequent Friday and a little down on Saturday (back then, they traded on Saturdays). And then … the bottom fell off.

On Monday, October 28, 1929, nicknamed Black Monday, the market fell 13% and the next day, nicknamed Black Tuesday, the market fell another 12%. Financiers like General Motor’s William C. Durant and the Rockefeller family stepped in and bought stocks to show confidence, but their efforts failed to stop the slide. (Source)

That week (with heaviest losses over the first two days) the market lost $30 billion, ten times more than the annual budget of the government and more than what the US had spent in all of World War I.

Over the next few weeks, the stock market suffered sharp declines though the true bottom wasn’t reached until July 1932. Over three years, the stock market dropped a staggering 89%. It would take about 25 years for the stock market to recover and re-attain the 1929 level. (Source)

Aftermath: The Wall Street Crash of 1929 led directly to …

3. The Great Depression

Background: Stung by heavy losses on Wall Street, consumers began cutting expenditures. With lowered demand, businesses started laying off people (US unemployment rate rose to 25% by 1933) – which fed an ever-worsening cycle and plunged the US economy into a depression.

As debtors defaulted on their loans, banks began to fail, which led to bank runs as depositors attempted to withdraw their money en masse, triggering even more bank failures. Today, your deposit is insured in the event of a bank failure, but in 1930s, there was no such thing: when a bank failed, its depositors lost all of their money. In the first 10 months of 1930, 744 US banks failed and their depositors lost more than $140 billion. Before the decade was over, about 9,000 banks failed. (Source)

Hooverville: Many people thought that President Herbert Hoover did nothing to save them from the Great Depression. That’s just not true: Hoover did a few things, including deporting about 500,000 Mexicans to Mexico (half of which were actually born in the US and thus were legal citizens) and increasing tariffs on imports – which caused other countries to retaliate and US exports to plunge by more than half, but nothing worked.

Many of the people made homeless by the Great Depression lived in makeshift shantytowns called Hoovervilles. They used “Hoover blanket” (old newspaper) to keep warm, wave “Hoover flag” (an empty pocket turned inside out) and drink “Hoover soup” at restaurants (poor people would pour ketchup, salt and pepper into their drinking water at restaurants, then tell the waitress that they didn’t see anything they wanted on the menu). Those who were relatively better off drove “Hoover wagon” (a car pulled by a horse because the owner couldn’t afford gas). (Source)

Solution: In 1933, the newly elected President Franklin D. Roosevelt initiated the New Deal, which included work relief program for the jobless, financial aid to farmers and business reform, including setting minimum wages and maximum weekly hours. Roosevelt encouraged trade unions and forced businesses to work with the government to set prices (later found to be unconstitutional).

In Roosevelt’s first term, unemployment fell by two third and the economy stabilized; full recovery, however, didn’t occur until the start of World War II.

Aftermath: The Great Depression had a far reaching effect, even until today. Social Security, the Tennessee Valley Authority, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation (FDIC), and the Federal Housing Authorities are direct products of the New Deal that are still active today.

4. 1973 Oil Crisis

Background: In October 1973, Syria and Egypt launched a surprise attack on Israel on the Jewish day of atonement or Yom Kippur. This set off a twenty day war known as the Yom Kippur War (or Ramadan War), in which the Arab forces were defeated.

The embargo: Angry over Western nations’ support of Israel, members of the Organization of Petroleum Exporting Countries (OPEC) as well as Egypt and Syria shut off oil export to the United States, Western Europe, and Japan.

The crude oil price immediately quadrupled to $12 per barrel (I know. Twelve bucks. How quaint when compared to today’s prices!) which led gasoline price at the pump to jump 40% from 38.5 cent to 55 cent per gallon in 1974 (again, I know). The oil shock led to a huge drop in the stock market. The New York Stock Exchange lost $97 billion in value in just six weeks.

US Government responded by rationing gasoline. Long gas lines formed at the pump. In many places, motorists with even-numbered license plates were allowed to buy gas only on even-numbered dates and those with odd-numbered plates could buy only on odd-numbered dates. (Source)

Aftermath: To help reduce consumption, the federal government imposed a national maximum speed limit of 55 mph and mandated fuel efficiency standards for car manufacturers. The government also created the Strategic Petroleum Reserve and the Department of Energy.

5. Black Monday (1987)

The Crash: On Monday, October 19, 1987, the US stock market crashed. The Dow Jones Industrial Average dropped 508 points or 22.6%, the largest one-day percentage decline in the stock market history. At one point during the day, so many shares were being sold that “the New York State Stock Exchange ticker fell behind and TV newscasters couldn’t tell how much the market had fallen.” (Source)

The Culprits: The most popular culprits for the 1987 Black Monday were program trading and a new financial hedging method called portfolio insurance. These two things caused massive stock sell offs and drove down the stock price (note that other factors such as the weak dollar, large US trade deficit, and overvaluations of stock values might have played a role as well) (Source)

Program trading is easy to explain: in the early 1980s, the use of computers became increasingly popular in Wall Street. Traders began to use computers to execute rapid trades based on a pre-determined condition (say, sell when a stock price dropped to a certain point). Dropping stock prices trigger these automated trades, which flood the market with stock shares and caused an even steeper decline in stock prices.

Portfolio insurance is a little bit (okay, a lot) more complex. In 1976, two young Berkeley finance professors named Hayne Leland Mark Rubinstein thought of a way to “insure” a portfolio investments of stocks similar to the way insurance protects an asset. For a price (a kin to an insurance premium), their trading system can guarantee that an investment never loses more than a pre-set (and relatively small) amount.

To do this, portfolio insurance uses financial instruments called derivatives. Most people understand buying and selling stocks – if you buy a share of stock for $1 and sell it for $3, then you’ve made a profit of $2. Derivatives, on the other hand, let you speculate on the future price of a stock (or a commodity, or really anything at all) without ever owning a single share. For example, you can buy a futures contract, essentially an agreement to purchase a stock say a week from now for $1. If the price of the stock is greater than $1, then you’ve made money. If the price of the stock is less than $1, then you’ve lost money. At no point in time do you actually buy the stock!

In the case of portfolio insurance, say you have $1000 in stocks that you want to safeguard from falling in value by next week. Then you sell a futures contract for the stocks. If the value of your stocks dropped, you’ve lost value in your stocks but gained money from the the futures contract. (Yes this is simplistic, but that’s the basic idea).

Without getting into mind boggling technical details, suffice it to say that the portfolio insurance method linked stock prices to the futures index. The whole thing would work but for one teensy flaw: during a panic sell off, there is little market liquidity – you can try to sell stocks, but without any buyer, you effectively can’t sell it at any price.

Aftermath: In response to Black Monday, the New York Stock Exchange instituted trading rules (the so-called “circuit breakers”) to pause trading if the market fell precipitously. The Federal Reserve also get to play a really big role in ensuring liquidity by pumping billions of dollars into the banking system.

Remember the term derivatives. We’ll see that again, soon enough!

6. Savings & Loan Crisis (1989)

Background: A Savings and Loan institution is kind of like a bank: people deposit their money in it in the forms of savings, and the S&L gives out mortgages (or loans) to the local community. S&Ls have existed since the 1800s and they were tightly regulated until the late 1970s.

In the late ’70s, the newly available money market funds offered much higher interest rates than the S&L, so people started pulling their money out of S&Ls. As a response, S&Ls asked for government deregulation (which they got*) – effectively, S&Ls could then raise interest rates on deposits and make way more loans than before with little oversight. There was a regulatory body, the Federal Home Loan Bank Board (FHLBB), but it was understaffed and its officers were accused of being chummy with the industry.

The S&L Crisis: In the real estate boom of the early ’80s, many S&L grew extremely large, extremely fast. Between 1982 and 1985, S&L assets (many of which were speculative real estate holdings and commercial loans) grew 56%. In Texas, 40 S&Ls tripled in size, with some doubling each year. (Source) Needless to say, many were overextended (some were technically bankrupt, but according to the new deregulation rules, they could remain open and thus continued to make bad loans).

By 1987, 505 S&L institutions failed. Some, like those in Texas, failed spectacularly – losses in just that one state comprised more than half of all S&L losses nationwide. The deposits were guaranteed by the Federal Savings and Loan Insurance Corporation (FSLIC, just like the FDIC guaranteed bank deposits) – but because of the amount, it turned out that the FSLIC itself was bankrupt!

All in all, by 1995, 747 S&Ls or half of all the S&L institutions in the United States went bankrupt.

The Keating Five: You may have heard of the term “Keating Five,” here’s the story in a nutshell. In 1984, construction magnate Charles Keating bought Lincoln Savings and Loan of Irvine, California. Before then, Lincoln S&L was a profitable yet conservatively run Savings and Loan institution. Keating fired the existing management and loaded up Lincoln’s investment portfolio from $1.1 billion to $5.5 billion by buying land and junk bonds.

In 1986, the FHLBB initiated an investigation on how Lincoln was doing business. Keating, who was politically connected, asked 5 US senators, for whom he had made large contributions, to intervene (which they did). In 1989, Lincoln went bankrupt and more than 21,000 mostly elderly investors lost their life savings (Lincoln had misled them to switch their FDIC-insured holdings to bonds that weren’t guaranteed).

The five senators, namely Alan Cranston, Dennis DeConcini, Donald Riegle, John Glenn, and John McCain, were investigated by the the Senate Ethics Committee. Cranston was reprimanded, Riegle and DeConcini were criticized for acting improperly, whereas Glenn and McCain were cleared of impropriety but criticized for poor judgment.

The Solution: In 1989, newly elected President George H.W. Bush announced that he would rescue the troubled Savings and Loan industry. The bailout was priced at a shocking $60 billion, which actually turned out to be overly optimistic. The total cost of the S&L mess was closer to $153 billion, of which $124 was footed by the taxpayers. (Source)

Aftermath: A whole bunch of reform, including the dissolution of the FHLBB and the FSLIC, to be replaced by other regulatory bodies. Freddie Mac, which had been under control of FHLBB, was put under the US Department of Housing and Urban Development, which gave it one additional goal: to buy subprime mortgages to enable low-income families to afford buying houses (we’ll see this again).

*Note: The deregulation of the Savings and Loan industry happened with the Garn-St. Germain Depository Institutions Act of 1982. The bill was very popular – one of its provisions was allowing adjustable rate mortgages or ARMs. (Yup, you’ve guessed it – we’ll see ARMs again)

7. Long Term Capital Bailout (1998)

Background: In 1994, legendary bond trader John Meriwether left Salomon Brothers and founded his own hedge fund. He attracted the top financial minds at the time, including two Nobel Prize economists, Myron Scholes and Robert Merton. The hedge fund was named Long Term Capital Management. Meriwether raised $1.25 billion in capital from investors to start. It was the largest funding raised for a hedge fund in history.

LTCM, as the hedge fund was commonly known, wanted to make money the scientific way: in leveraged arbitrage.

At this point, it’s probably necessary to define the terms for some people. Hedge fund is a private investment fund that aims to make money using a variety of (often exotic) financial instruments. These funds typically don’t buy stocks or bonds, instead they trade derivatives (see “Black Monday” above). The “hedge” in hedge fund comes from their habit of “hedging” their portfolio – meaning that if they hold an asset, they will also place a bet that the value of the asset would go down. If their asset did go down in value, that “hedge” bet would pay off to offset the loss. In theory, this allows the fund’s investments to be risk-free. In practice, as we shall see, that’s obviously not the case.

Arbitrage is a fancy name for a simple concept: the way to make money by exploiting price differences in two different markets. For example, say that you spot a vase selling for $10 in one swap-meet and for $15 in another. If you buy that vase for $10, then go to the other swap-meet and sell it for $15, you’ve just made a profit of $5 (less cost of gas, of course).

Leverage is another fancy name for a simple concept, namely borrowing. For example, instead of paying $100 to buy $100 worth of stock or derivatives, you can pay $10 (i.e. 10%) and borrow the rest. So, if you have $100 in your pocket, you can “buy” $1,000 worth of stock or derivatives. Say that a week after you bought that stock, it rose to $130. If you bought 1 share at $100, then you’ve made $30. But if you leveraged your purchase, you would’ve “bought” $1,000 worth of stock and you would’ve made $200 (that’s $300 – $100 capital, and of course less borrowing cost). So leveraging lets you amplify your profits but if you lost, it also amplifies your losses.

The arbitrage that LTCM dealt with was in government bonds. Their strategy was complex, but suffice it to say that Myron Scholes famously summarized that LTCM would make money by being “a giant vacuum cleaner sucking up nickels that everyone else had overlooked.” (Source)

From 1994 to 1997, LTCM could do no wrong: it returned 40% in profit per year. In early 1998, LTCM’s managed portfolio grew to well over $100 billion, with net asset of $4 billion, and it was hard-pressed to find enough profitable deals in bond arbitrage. So, with over $1 trillion-worth of arbitrage, LTCM started to look at emerging markets, specifically in Russian bonds.

The Collapse of LTCM: In August of 1998, faced with their own financial crisis, the Russian government did something that no one thought they would: they defaulted on 281 billion rubles (US$13.5 billion) of its Treasury bonds. This resulted in a fiscal panic and a massive loss for LTCM. In two weeks, it lost $1.9 billion in equity. (Source) That’s a rate of about $95,000 a minute!

Then things started to go really bad for LTCM. It had thousands of derivative positions that it couldn’t sell without incurring massive losses. But LTCM wasn’t alone in this: for every deal it made, there was a counterparty that held the opposite position (for every buyer, there is a seller, and vice versa). If LTCM failed, then it would drag down everybody.

In September 1998, just weeks after the whole thing started to unravel, a consortium of banks and investment firms bailed out LTCM. Under guidance from the Federal Reserve Bank of New York, Goldman Sachs, Merrill Lynch, J.P. Morgan, Morgan Stanley, Salomon Smith Barney, UBS, Deutsche Bank, Lehman Brothers … virtually all who’s who in banking contributed to the $3.6 billion bailout (no government money was used).

Aftermath: LTCM wasn’t supposed to fail. It was managed by the rocket scientists of the financial world, and theoretically, in a rational market, it would always turn a profit. Indeed, after the bailout, the market calmed down and the positions formerly held by LTCM were eventually liquidated at a small profit. But, as economist John Maynard Keynes famously said, “the market can stay irrational longer than you can stay solvent.”

8. Dot-com Bubble (2000)

Background: In 1995, the Internet burst into the public’s consciousness. The Internet brought with it a new frontier to do business and everyone and their uncle wanted in on the new gold rush. Venture capitalists poured money into start up firms with poorly thought out business plan (other than “get big fast”), then took them public in an Initial Public Offering.

For a while, it worked: stocks in dot-coms went only one way from 1995 to 2000 and that is up. NASDAQ, the trading market that lists a lot of technology companies, went from 750 in January, 1995 to a peak of 5132 on March 10, 2000.

Despite the warning by the Fed chairman Alan Greenspan in 1996 about the market’s “irrational exuberance” and the then-dowdy-but-now-prophetic refusal of legendary investor Warren Buffet to invest in dot-com stocks, companies with no profit and even those without any viable plan to profitability were valued in the millions.

The Bubble Popped: Then, the party was over. Fueled with easy money from venture capitalists and IPOs, dot-com companies spent their way to bankruptcy: Boo.com spent $188 million in just 6 months in attempt to create a global fashion store. Pets.com raised $82.5 million in an IPO only to go bankrupt nine months later. Computer.com spent $3.5 million, or more than half of its budget, in 90 seconds ads during the Super Bowl. That’s a staggering $38,889 a second!

The biggest dot-com company that crashed and burned was, hands down, WebVan. The company aimed to deliver groceries to homes and businesses. It raised $375 million in an IPO, expanded to 8 cities (with plan to expand to 26 cities), built $1 billion-worth of infrastructure in forms of high-tech warehouses, and spent lavishly on pretty much everything (they bought 115 Herman Miller Aeron chairs at over $800 a piece!), all before turning a dime in profit. (Source)

WebVan forgot that it was actually in the grocery business, which has razor thin margins to begin with. In a mere 18 months the company had spent itself to bankruptcy.

From March 2000 to October 2002, the dot-com bubble crash wiped out $5 trillion in market value of tech companies and more than half of all dot-com companies went out of business.

9. California Electricity Crisis (2001)

Background: In 1996, state lawmakers decided to deregulate California’s energy market. In the old system, prices were set so consumers faced stable prices but because of the price cap, energy companies didn’t find it profitable to invest in new power plants.

The deregulation was supposed to lower electricity price in the long term by attracting new competitions. Indeed, companies proposed new power plants that would’ve increased California’s capacity by almost 50%. But because of the cumbersome approval process, no new plants were actually built.

The deregulation plan, however, was flawed from the beginning: utilities were forced to sell power plants to the private sector (to companies like Enron and Reliant Energy) and then buy back electricity from them to distribute to homes and businesses. Worse, the utilities weren’t allowed to negotiate long-term contracts – rather, they had to buy on the “spot market” where the prices were very high. Furthermore, the utilities couldn’t pass on the cost to the consumers as retail prices of electricity were still regulated.

The Manufacturing of the Crisis: In June 2000, the market condition was ripe for manipulations. A drought reduced the amount of electricity supplied to California by dams in the Pacific Northwest. At the same time, the demand for electricity rose during the hot summer months.

Enter Enron. Traders at the Texas-based energy company manipulated the electricity market by persuading power plants to shut down for unnecessary “maintenance,” laundering electricity (basically, shipping electricity out of California and then charging a higher price by selling it back from out of state), and creating artificial congestions over power transmission lines. The traders called their manipulation strategies by colorful names like “Fat Boy,” “Richocet,” “Get Shorty,” and even “Death Star.” (Source) By these means, traders increased the wholesale price of electricity from $45 per megawatt to over $1,400!

The Crisis: Utilities like Pacific Gas & Electric and Southern California Edison were hit hard. On one hand, they had to pay Enron upwards of 50 cents per kilowatt hours wholesale but could only charge 6.7 cent to their retail customers (Source). PG&E and SoCal Edison racked up $20 billion in debt (PG&E later filed Chapter 11 protection under bankruptcy laws). As a result, rolling blackouts affected millions of households.

Political Fallout: The California Electricity Crisis ended Governor Gray Davis’ political career. Though he inherited the deregulation mess, people blamed him for being too slow to act during the energy crisis. In 2003, he was recalled and Arnold Schwarzenegger was elected Governor to replace him.

The Bankruptcy of Enron: In late 2001, a scandal involving Enron was brewing. Investigations into the company on its role in the crisis revealed that the company had created offshore entities to hide its debt and made it look much more profitable than it actually was. (Again, like the trading manipulations, Enron gave its offshore entities really colorful names like “Jedi” and “Chewco.”) (Source)

Enron’s stock imploded and the company brought down the accounting firm Arthur Andersen, who was found guilty for its role in auditing the company.

10. Subprime Mortgage and Credit Crisis (2007 – )

Background: To understand the ongoing subprime mortgage and credit crisis, let’s go back a few years. The end of the Dot-Com Bubble was the start of another, even larger bubble: the housing bubble.

From 2000 to 2005, the median sales price of existing homes increased year over year and speculative investment in properties skyrocketed. “Flipping” or buying a house, doing some quick renovation or repair, then selling it for a handsome profit, became sort of a national pastime, with cable TV shows dedicated to it. In 2005 we saw the launch of not one but two shows, one called Flip This House and another – completely unrelated – called Flip That House.

When property values kept on increasing, home loans became very easy to get (after all, if the borrower defaulted on the mortgage, then the bank got the house – which value kept on increasing anyway!). New mortgage products became popular: subprime loans for borrowers who otherwise wouldn’t qualify for loans because of their lack of creditworthiness (hence the term “subprime”) and adjustable-rate mortgage, which, as its name implies, have a variable interest rate. In addition to ARMs, there were also interest only loan – which let the borrower pay only the interest and not the principal on the loan for a period of time, and negative amortization loan (or NegAm) which let the borrower pay a portion of the monthly payment (the rest got added to the total amount borrowed – in this type of mortgage, the amount you owe gets larger year after year!).

How easy was it to get a mortgage? One mortgage provider, HCL Finance (motto: “Home of the ‘no doc’ loan” – no doc refers to no documentation of income required) had a product called the NINJA loan. It stood for No Income, No Job (and) no Assets! (Source)

In 2006, home prices started to go down and a year or so later, borrowers of subprime mortgages started to default on their loans. In 2007, almost 1.3 million properties were being foreclosed – a jump of 75% over the year before. (Source) As late as March 2008, it was estimated that 8.8 million homeowners (about 10.8% of total homeowners) have zero or negative equity in their homes, meaning they owe more than their houses are worth. (Source)

Had that been it, the crisis probably would’ve been isolated. Sure some banks would undoubtedly fail because they made bad loans, but the subprime crisis had since spread to the credit markets and created a massive credit crunch that is larger and far more dangerous than the subprime crisis.

Securitization: To understand the current credit crisis, it’s important to understand something called “securitization.” Securitization is an old process by which an asset that generates a cash flow can be converted into a security (like a bond), that can then be bought and sold in the market just like any other security.

A great example is the Bowie Bond. In 1997, musician David Bowie issued a bond (basically a loan note) secured by the current and future royalty revenues of his first 25 albums (a total of 287 songs … here it was the “asset”). The 10-year Bowie Bonds were bought for $55 million by Prudential Insurance Company, who then would collect on the royalties for ten years. So David Bowie got $55 million up front, and Prudential could either keep the bond (and get the song royalties) or sell the bond for profit. (Source)

Back to the topic at hand. Traditionally, banks hold mortgages until maturity, with profits being interest of the loan. But Wall Street had an idea: why not do to mortgages what David Bowie did to songs? So they (and by they, I mean Freddie Mac, Fannie Mae, and 12 Federal Home Loan Banks) pooled together mortgages and bundled them up into asset-backed securities (ABSs) and sold the package to get up front money (the investor would get the monthly mortgage payments from all of the homeowners whose mortgages got bundled).

But wait – these mortgages all had different risks. Some were safe, stodgy 30-year mortgages whereas others were subprime loans that though were more risky, also had higher interest rates and thus were more profitable. Not to worry: Wall Street split the ABSs into “tranches” (just a fancy word meaning sections or classes): the safest were rated AAA (by rating agencies whose sole job was to gauge how risky something was … and got paid by those whom it rated – talk about a conflict of interest!), the rest were medium and low-rated tranches.

The logic was this: one borrower might default on his loan, but if you bundled them together, there’s safety in number: it’s unlikely that ALL borrowers would default all at once.

But wait – there’s more. The medium and low-rated tranches were riskier investments, but it’s unlikely that all of them would default at the same time. So let’s take all those medium-to-low rated ABSs and pool them together to create something called collateralized debt obligations (CDOs). And through the magic of rating, we once again could turn some of these risky securities into – tada! – A-rated securities fit for pension funds. Repackage these CDOs a few more times and pretty soon you wouldn’t know how much subprime loans were actually in them. (Source)

The Credit Crisis: So how did the housing downturn infect the credit markets? Well, when the housing price dropped, a large number of borrowers began to default on their mortgages. Suddenly, ABSs and CDOs looked very suspicious as no one knew how much exposure to the subprime mortgage mess these securities actually had. The market for ABSs and CDOs dried up and holders of these securities couldn’t sell them. In many cases, these companies leveraged their purchase of these securities, which really amplified their losses.

Just as the market worsened and investment firms and companies found that their holdings of ABSs and CDOs were worth far less than they had paid for them (and thus had to write off that loss in their books – causing a number of hedge funds to collapse), another domino fell: Credit-default Swaps (which took down AIG).

Credit-default Swap: Credit-default Swap (or CDS) is basically insurance on debt. Say that a bank buys a large amount of bonds from a company. As with any debt, there is a risk of the debtor fail to pay the money back. To protect against the company defaulting on its bond payments, the bank would buy CDS. In case of a default, the bank go to the insurer and cash in its CDS.

American International Group or AIG was the creator and the largest seller of CDS. It thought that CDS was an insurance product just like a homeowner’s policy, but obviously it was wrong. “Any one house burning down doesn’t increase the likelihood that lots of other houses will burn down,” explained Adam Davidson of NPR, “That doesn’t apply to bond insurance.” (Source) In case of bonds, a default can create a domino effect: as investors lose confidence and sell, the price of bonds go down and the interest rates go up. Borrowers who can’t find capital to meet their obligations would start to default on their bonds and the cycle deepens.

To make sure that AIG would actually pony up and pay the CDS in case of a bond default, it had to post a collateral. This collateral depended on their credit ranking – as their credit was downgraded, it had to post more collateral. Because of its worthless mortgage-backed securities assets, AIG’s creditworthiness would be downgraded – which meant that it would need to post as much as $250 billion, which of course it didn’t have laying around, in collateral in a matter of weeks!

Why Bail Out AIG? Over the years, the CDS market has grown into a $70 trillion a year business. And since no one knew who has CDS from AIG, the failure of AIG would mean that a lot of companies are holding bonds that are significantly riskier than they first thought. Companies that had “hedged” their bets by buying CDS would find their books suddenly unbalanced, which means they have to sell off assets to cover their risks or they would become insolvent. This failure would propagate throughout the entire economy and create a “systemic failure.” That, by the way, was what the government was trying to avoid by bailing out AIG. (Source)

The Credit Crunch: The basic essence of the credit crunch is this: banks won’t lend because they can’t be sure that they’ll be paid back. Companies with excellent credit ratings found themselves unable to get a loan (after all, all those ABSs and CDOs had excellent ratings, so who’s to say that the ratings are worth anything?). Even some banks find themselves unable to borrow money from other banks!

The Solution? As you well know by now, the White House requested, and the Congress passed a $700 billion bailout program. The idea is to for the government to buy distressed asset, especially mortgage-backed securities, from the nation’s banks, which would inspire banks to lend again. The bailout remains unpopular with the general public, who perceive it as bailing out Wall Street, who caused this mess in the first place.

Whether the bailout will work or not remains to be seen.

Sex, reason for cocks’ dawn screeches

London: Sex is the guiding factor behind that familiar dawn cacophony by cocks, according to a new study.

Behavioural ecologists have established that sex apparently makes chickens noisier and more likely to raise the alarm, in an effort to ward off a potential threat.

The loud noise is perhaps the chicken’s way to safeguard its unborn offspring, reports New Scientist magazine.

Researchers behind the study said that they wanted to determine whether the males squawk mainly to impress hens by putting themselves in a situation where predators might notice them, or the noise was aimed at protecting any future offspring.

In the study, led by David Wilson from Macquarie University in Sydney, Australia, researchers kept 30 cocks and hens separate for five weeks.

They then observed the estranged cocks and hens after pairing them up in individual enclosures for two weeks.

The males’ screeches were recorded for two hours a day at sunrise – when predators are most active, a week before mating, during the time the pair were together and also for a week after.

It was found that the frequency of alarm calls skyrocketed by 30 per cent when the cocks were allowed to mate.

After a week of mating, the cocks still squawked 20 per cent more than before mating occurred.

The observations prove the fact that cocks are willing to put themselves in danger to protect their “investment” or future offspring.

According to Tommasso Pizzari at the University of Oxford, as the study was based on domesticated breed, it cannot reflect the results for other birds.

Value Investing – the 5 key principles

by Ye – Gurufocus.com

There are many who count themselves value investors. In fact, they are really what Seth Klarman calls “value pretenders”. It is easy to be a value pretender. I was one. Following Pabrai blindly into buying Delta Financial cost me a lot of play money. Importantly, I learned the differences between a value investor and a value pretender.

A value pretender may not realize he is a pretender. He understands the difference between price and value. He understands that Mr. Market is here to serve him. He knows he should demand a margin of safety. He admires the value investing gurus so to the point of thinking they are always right. But he does not grasp the principals of value investing.

To become a true value investor, we need to first understand the principals of value investing. Below are six principals I think are crucial for an investor to truly understand value investing:

Risk, not profit
Often, when you read a stock analyst’s report, you find the target price prominently displayed on the report. This gives investors the information he needs at a glance. The danger here is once the investor sees the target price higher than the current trade price, he skips the rest of the report and completely forgets about the risk. This is akin to lending your hammer to your neighbor because he promised to return two hammers when he still hasn’t returned the hammer you lent him two years ago.

Unlike a value pretender, a value investor does not target a specific return. Risk is what a value investor targets first. Understanding risk helps you avoid losses. Only after you understand the risks of an investment can you then calculate the rewards. An investment that promise a 50% return in one year is a lousy investment if there’s a 50% chance of the business going under in three months. But an investment promising a 20% return in one year with an 80% chance of surviving the downturn can be a wonderful investment. The rules of investing laid down by Buffett are simple — Rule No. 1: Don’t lose money. Rule No. 2: Don’t forget rule no. 1.

Do your homework, but not too much
Understanding the businesses behind your investments is what separates value investing from other investing approaches. To get to know your companies well, you need to do your homework and study the fundamentals of the businesses. Doing due diligence is a pain in the butt. In Investing Mistakes – 5 Deadly Sins, I talked about the hundreds of pages of annual and quarterly reports to read, not to mention the 8-Ks and proxy statements.

But investing is one activity where you don’t get paid by the hour. Here the general 80/20 rule applies; the first 80% of the most useful information is gathered within the first 20% of the time spent.[1] Don’t strive to find the perfect information about a company. Knowing the secret recipe of Coca Cola does not guarantee a profitable investment. At some point when gathering information, you will hit the point of diminishing returns. Embrace the uncertainty and imperfect knowledge about a company that make the company a bargain. Besides, if it’s too much work, you can always pass.

Maintain discipline and patience

A value investor knows to take advantage of Mr. Market when he is being irrational. Timing the market is futile. No one can reliably predict the direction of the market let alone when the direction will change. To overcome the uncertainties, a value investor must insist on a huge discount to allow himself a sufficient margin of safety.

A riskier investment warrants a bigger margin of safety and a higher discount rate to arrive at a more conservative value. A discount rate is the rate used to calculate the current value of future cash flows generated by a business. If the stock doesn’t trade at or below your margin of safety, just don’t buy. Yes, you may miss the opportunity of a ten-bagger, but don’t forget you may as well have saved yourself from a company headed for bankruptcy. If you are patient, eventually, the price will drop to your buy price. Then, you would have made a killing. Remember, the profit is determined the moment you buy the stock. If you buy at a bargain price, you are almost certain of success.

Bottom up, not top down
Many investors continue to worry about the state of the current economy as they read about the soaring bankruptcies, the rising oil prices, the growing unemployment and the worsening housing slump. In this environment, value pretenders will predict and identify sectors that will outperform the market and begin searching for bargains there. The problem with this top down approach is you are buying based on a trend, almost to the point of speculating. You’ve decided a sector will outperform before you can perform value analysis.

A value investor understands that a company that is fundamentally strong and run by competent management will ultimately survive the downturn. Searching for a bargain begins from the bottom; you find a company and learn about the company first, not the industry. Nevertheless, there are some industries like the airline industry that are just not worth investing in. Still, if you focus on the fundamentals of a company, you don’t need to worry about the economy and market direction. In the long run, the price always converges on the value.

Change your mind
One of the most essential virtue a value investor needs is humility. Everyone makes mistakes. No one can make the right decisions all the time, not even Buffett when he sold Anheuser-Busch too early and left a big chunk of change on the table. Buffett willingly admitted he made this mistake and that is why people admire the man.

More importantly, once we learned that we have made a mistake, we must be willing to take action even if it results in a loss. The obvious case here is to sell when you realized you made a mistake in your analysis of a company. Too, when hunting for a bargain, a value investor must not get too attached to his first love. Unlike a marriage, infidelity isn’t a bad thing in investment. He may find a better bargain as he continues his search. And when he does and he has no cash available, he needs to trade his first love, even if it’s at a loss, for the better bargain. This is very, very tough to do. This is what baffles many people when gurus switch from one position to another, even though there is nothing wrong with the former position.

Absolute performance, not relative performance
Setting the right goal and focus could mean the difference between devastating losses and reasonable successes. The trouble with focusing on beating the index is we are too competitive. It is too easy to succumb to the temptation of trading just to beat the index every quarter. Ironically, this is the very reason many mutual funds underperform the index. The mutual fund managers are not entirely at fault here because if the fund underperforms the index in a quarter money starts flowing out to better performing mutual funds. The general public demand for short term performance will continue to ensure mutual fund underperformance.

On the contrary, a value investor focusing on absolute performance should do quite well in the long run. By setting aside the need to beat the index every quarter, you are forced to focus on minimizing risk while earning a decent return. If you do this well, you won’t be too far off from the index performance. Buffett uses an internal score card to gauge how he does in life. He posits, “Would you rather be the world’s greatest lover and let everyone think you are the world’s lousiest lover or be the world’s lousiest lover and let everyone think you are the world’s greatest lover?”

References

 
1. Seth A. Klarman, Margin of Safety, HarperBusiness, 1991, p. 102 – 115.

 

Best stock picks in the Services sector

Make no mistake: No investor can beat the business cycle. Thousands have discovered this fact the hard way. But the smarter ones have also spotted ways to soften the blow. Non-cyclical stocks can be less esoteric and academic than you think. Investors can, if they apply their minds, identify counters that will not give them sleepless nights. They just have to make sure that the stocks they pick up don’t miss out the bull run entirely, even as they cushion them from the batterings of a bear market.

Sectors whose fortunes are directly related to the performance of the broader economy — cyclical ones such as manufacturing — fall in the line of fire during an economic downturn. This limits the choice of investors to the fundamentally strong companies in the sectors, which are more or less non-cyclical in nature. The services segment in the economy, by and large, consists of such sectors that are not directly affected by a downturn.

Keeping this in mind, ET Intelligence Group this week brings you a first-cut analysis on the services space in the Indian economy, along with some investment ideas. Apart from its non-cyclical nature, another strong reason to evaluate the performance of the services sector is its prominent contribution to economic activity, represented by the gross domestic product (GDP).

Between Q1 ’04 and Q1 ’09, the share of services in the country’s GDP grew to 56% from 53%, while that of agriculture fell to 18% from 21%. The share of manufacturing, however, remained stagnant at 15% during the same period. The study selected only those aspects of the services space, which tend to show lesser coupling with the broader economy. These include healthcare, information technology (IT), telecom, logistics and recreation. Other sectors, including travel and tourism, retail, banking and financial services were not included due to their direct relationship with the changes in economic parameters. Further, the financial performance of this set of companies was compared with companies in the manufacturing sector. Here again, oil and gas was excluded on the ground that it is a tightly regulated sector.

The analysis reveals that the services sector has registered a stronger growth in sales and profit in each of the past four years until FY08 vis-à-vis the manufacturing sector (see table). While sales growth in manufacturing remained lower than 30% in each of the years during the said period, services almost always exceeded this mark. Further, even though sales growth in services tapered over time — 29% in FY08 compared with 79% in FY05 —it remained above the 18% recorded by manufacturing. A similar trend prevails in the case of net profit for both the sectors.

Another case in point is that higher growth in services has come on the back of higher profitability. This is in line with the common assumption that a component of services in a business offers greater profitability. During each of the past four years, the services sector has delivered better margins at operating and net levels.

While the services sector has outclassed manufacturing on various financial parameters, it lags behind the latter in terms of return on capital employed (RoCE). Manufacturing companies have delivered better RoCEs during the said period. A point to note is that in the case of services, RoCE has gradually increased over a period of time. During FY08, it was 22.7%, compared to 23.3% for manufacturing.

Given its stronger performance and noncyclical nature, investors can park their funds in select companies in this space (services) during an economic slowdown. ETIG has provided stock ideas on various service sector companies from time to time. It now presents a list of the best picks in this space along with the investment rationale.

The Chosen Ones

In logistics, the stocks of Container Corporation of India (Concor)and Gateway Distriparkslook promising. Concor is in the business of containerised movement of goods on rail. The stock trades at a priceto-earnings (P/E) multiple of 15.1 on a trailing 12-month (TTM) basis. It has historically traded at a P/E of less than 20. The company does not have any competitor in the strict sense. Concor appears to be trading at reasonable valuations, since the average P/E of stocks in the ET Logistics index is 18. The stock looks attractive at current levels, considering the growth potential in its domestic business, entry into cold chain logistics and reasonable valuations.

Gateway Distriparks trades at a TTM P/E of 13.4. This is lower than the average P/E of companies comprising the ET Logistics Index. As of now, only the container freight station (CFS) segment of the company is making profit as the remaining two businesses including cold chain logistics and container rail segments are yet to turn profitable. The stock looks attractive, given the future business potential of these segments.

The IT sector is battling with external economic pressures, including currency volatility and turmoil in the global credit business. So, investors can consider companies that provide niche solutions and have sizeable presence in the domestic market. One such company is Rolta India. The Rs 2,000-crore geo-spatial solutions provider is trading at a P/E of 20.4. It is the single biggest provider in its area of operations and has a significant presence in government and private sector projects. The company (through its international tie-us) is likely to benefit from the nuclear deal. In the IT services space, Infosys Technologiesand Tata Consultancy Services (TCS)look better placed to face macro-economic challenges. Both the companies are keen on inorganic growth to expand their service offerings.

In the healthcare space, Fortis Healthcare has shown a turnaround. With the company’s hospital network reaching a critical mass, its financials may improve in the coming quarters. (For a detailed analysis, refer to Fortis’ stock idea on page 2) .

The telecom space is another service sector, which continues to see buoyancy in subscriber addition despite slowing economic growth. Here, Bharti Airtel, Idea Cellular and Tulip Telecom are our top picks. Despite fierce competition, Bharti Airtel continues to hold the biggest market share in mobile telephony. The company has seen higher momentum in its net monthly subscriber additions. The company has chalked out plans to enter the direct to home (DTH) and internet protocol television (IPTV) services space.

Idea Cellular looks promising, given its recent acquisition of Spice Communications for Rs 2,720 crore. We expect the company’s operations to turn around in the next 2-3 quarters. This can improve Idea’s future performance.

Tulip Telecom provides solutions in the space of corporate data connectivity and network integration. The company has seen phenomenal growth in the past three years. It has undertaken capital expenditure (capex) to strengthen its presence in the virtual private network (VPN) space. Further, it has added two more services in its deliverables, including managed services and value-added services. These developments are expected to keep Tulip’s growth momentum intact.

There will be other such counters. You can spot them if the stock-picker in you plays a different role. Remember, it’s not a bull market; it’s life below 14K. Follow the news flow and policy drift, which can impact counters. There will be spin-offs. The only difference now is that identifying such stocks will require a little more hard work.

Buy Punj Lloyd

We recommend a buy in Punj Lloyd from a short-term perspective. It is apparent from the charts of Punj Lloyd that the stock has been on a medium-term uptrend from its 52-week low of Rs 183, recorded in early July.

While trending up, the stock crossed over the 21- and 50-day moving averages in late July.

We notice high volume in advance days of the up move. After witnessing resistance at Rs 300 level recently, the stock is currently pausing in the band between Rs 280 and Rs 300.

The daily and weekly relative strength indices are rising in the neutral region towards the bullish zone. The stock’s medium-term up trendline is intact and it is trading well above its 21- and 50-day moving averages.

We are positive on the stock in the short-term horizon. We expect the stock to move up until it hits our price target of Rs 314 in the upcoming trading sessions. Traders with short-term perspective can buy the stock while maintaining a stop-loss at Rs 269.

SSPDL-Will This Concern Become A Multi-Bagger?

SSPDL-Could This Stock Become The Proverbial Real Estate Multi-Bagger?
BSE 530821; CMP Rs 65
 
SSPDL (formerly Srinivasa Shipping and Property Development) is a three city Real Estate play on Bangalore, Hyderabad and Chennai markets. For the FY08, SSPDL reported a near Rs 100 crore in Revenues and an EPS of Rs 16. The scrip effectively quotes at a historical PE of 4 while the Industry led by the Real Estate biggies fetch a PE of 11.
 
Considering that SSPDL will deliver about 7 mn sq feet of built up space in the form of built up malls, commercial real estate, residential houses, apartments and villas in cities with a reasonably affluent populace, the current valuations are simply not reflective of the potential. With completion of ongoing projects SSPDL could become a Rs 1000 crore corporation by FY2012.
 
A recent study released by Cushman and Wakefield proclaims that Rental values and Real Estate markets have stabilised in most parts of the country and with the onset of the festive season that lasts over the next half of the year, things could indeed begin to brighten up for the sector.
 
SSPDL is a property development company primarily developing commercial (IT parks, Shopping Malls, Hotel projects, service apartments etc) and residential properties (gated communities, villas, apartments and serviced plots) in Chennai, Bangalore, Hyderabad and Kerala.
 
The company has a strong foot hold in the Chennai market and is gaining momentum in Bangalore and Hyderabad. The OMR (Chennai’s High Tech Corridor) is the main stay for the Company with over 3 million sq. ft (constructed and in planning) in the form of IT Parks, Shopping Malls, Hotel and Apartments.
 
Projects under Execution with expected dates of completion:
 
-
Matrix Towers, Chennai – April 2008
-
SSPDL Avion, Hyderabad – May 2008
-Bangalore Retreat – December 2009
-
OMR Mixed Development Project, Chennai – September 2010
-OMR Residential Project, Chennai – December 2009
-
Hyderabad Retreat, Hyderabad – December 2012
-The Retreat, Kallar Valley, Kerala – Dec 2010
 
The value of projects under execution exceeds Rs 2000 crore with
over 7 Million Sq. ft of Built Up Space aggregating to a Sale Value of Rs.1800 Crores Plus in various stages of execution.
 
SSPDL has also announced plans to take up the following projects:
 
-
Gundla Pochampally/Kompally, Hyderabad – a 40+ acre residential gated community
-Bangalore-Mysore Highway Project – a 60+ acre residential community
-
Montieth Road Property Chennai – Office space.
 
The Retreat, Hyderabad has an SEZ as an integral part of the project. SSPDL has appointed Surbana, the Singapore based architects for this project and currently planning is underway. The earliest revenues will be recognized from 3rd quarter of 2008.
 
At Kallar Valley in Kerala SSPDL has acquired about 325 Acres of pristine Plantation Land with natural forest and waterfalls, springs etc. The site is located in the Hills and is a 2 hour drive from Kochi Airport.
 
SSPDL intends to put up a 20 acre world class resort with a Hospitality Partner. Besides that, it will promote Vacation Homes of super luxury quality by invitation only.
 
In addition, the Company has been awarded construction contracts aggregating to Rs 78.20 Crores for the following works from third parties.

(i) Construction contract with NBCC, Hyderabad for construction of 1.5 lakh sq feet office building.
(ii) Construction contract of warehouse for SAIL Ltd at Vizag.
(iii) Construction contract for TCG IT Park, Chennai.
(iv) Construction contract for 50 villas for Ferns-Regalia Realty Ltd, Chennai.

2. SSPDL Infrastructure Developers Pvt Ltd, a SPV held jointly by the Company together with Innovative Realty Opportunity Fund Ltd have entered into a sate agreement with Accor Group of Hotels for hotel space in “The Promenade” Project, at Egattur, OMR, Chennai.

3. SSPDL Ltd and Indiareit Fund Advisors Pvt Ltd through their SPVs have acquired 42 acres in Gundtapochampalty village, Hyderabad to develop a gated residential villa community “SSPDL Northwoods”. Total estimated project value is Rs 250 crores.

HDIL-Mired In Dharavi

BSE 532873; CMP Rs 338
 
Industrialists/Businessmen/Investors must realise that charity and politics do not go hand in hand in India. Look at HDIL which is undertaking a mammoth project for the reconstruction and rehabilitation of the slums adjoining the Bombay Airport, known as Dharavi.
 
What HDIL promoters and investors do not realise is that the project will see huge arm twisting and flow of grease money to successive political parties which are and would be governing Maharashtra, the labour unions and local legislators.
 
The Dharavai slum rehab will costs huge sums and will be spread over years if not decades, and ultimately meet the same fate as Enron’s 2000 MW LNG based $ 3 bn Thermal Power Plant at Dharwad, which inspite of its re-christening as Ratnagiri Power and owners like NTPC, remains non-operational long after Enron collapsed.
 
The HDIL stock is a Sell, even though the notes given below by the management will make us feel otherwise.
 
Airport project to generate revenues from 1QFY09
 
Management expects that the company will convey ~53 acres of land for the first phase of the project (involving resettlement of 18,000 – 22,000 families) in
1QFY09 . As per estimates this move will generate Land TDR of ~3m sf. Revenues on the same could also be recognised in 1QFY09 itself.
 
The first phase of rehabilitation families is expected to take 24 months.
Recent policy changes on SRA beneficial
 
Management has welcomed the increase in size of tenement given under the slum redevelopment scheme from 225sf to 269sf of carpet area (460 sf super built up) as they believe that while increased FSI will compensate the developers for constructing a larger house, a larger unit size will also make it easier to convince the slum dwellers to move from their existing dwelling.
 
Increase in housing size also adds to the TDR receivable from the airport project, which the management now expects to be 40m sf (construction TDR).
 
Land requirement for airport project
 
The increase in applicable FSI for high density slum rehab scheme from 3x to 4x brings down land requirement for resettlement of airport project to an estimated 150 acres of land. HDIL expects to tie-up the land at an average price of Rs200m/ acre. It has acquired and paid for about 1/3rd of land requirement, which will be utilized for the first phase of the project.
 
TDR realisations
 
In the first phase of the Mumbai airport resettlement project, families will likely move to Kurla, which will be considered as the source of TDRs. Hence, these TDRs could fetch premium valuation as the point of origination will mean that these TDRs could be utilised in high value zone adjacent to Bandra Kurla Complex (BKC).
 
Increase in FSI in suburban Mumbai to 1.33x
 
The move is likely to impact the demand for TDRs adversely as developers will likely buy 0.33x of FSI from the state government.
 
No immediate need to raise additional funds
 
The company’s outstanding debt has increased by Rs18bn so far in FY08 to Rs22bn to buy land for airport resettlement project and the Vasai SEZ project. The gross debt/equity ratio is still reasonable at 0.73. The current cash balance of Rs17bn includes the recent commercial asset sale.