Wats Up India: The hara-kiri down here

The Sensex closed below 10K and has now broken the 9K barrier. 9771.7 yesterday’s close was the lowest close in 2 years. The NIFTY closed below 3k for the first time in 2 years. FIIs have been pulling out funds from the markets and Indian investors are too scared to invest. Mind you most of them had seen a 7 year long bull-run.



The FII’s pulling out money, have increased the demand for the dollar and the dollar is at an all-time high, a tad above Re 50 to a $ at the moment.

Meanwhile, Unitec defaulted on a payment to the government of INR 1500 MM for land dues for its ambitious Noida project. The company is amongst the largest realty players in India. Post this news when KPS Gill (of DLF) was contacted he said that it was difficult to draw on existing lines of credits in a liquidity crunch like this one.

Tata motors, Mahindra and Mahindra Maruti Suzuki and Ashok Leyland are taking huge hits on their ECB’s or forex loans. Tata Motors and Mahindra & Mahindra's forex exposure is seen at $4 billion and $700 Whereas Maruti Suzuki may have forex loans worth $500 million. Ashok Leyland has posted a forex loss of Rs 14 crore in the second quarter.

Tata Motors the commercial vehicle market leader, which commands more than 60% of the market has gone in for a production cut by as much as 40-50% over the last two months or so. Ashok Leyland has also announced similar cuts to the tune of 40 to 50% to reduce its inventory pile-up of 13000 vehicles.

Tata has also announced a cut of 400 non-permanent employees with immediate effect yesterday. The above indicates that the are far more job-cuts waiting in the wings. Furthermore, realty sector players have claimed that we should see job cuts to the tune of 20% in the sector as a whole. Additionally a large number of smaller players and fly-by-night operators who were in for the quick bucks may even be forced to shut shop considering significant correction in property prices. Of course, it was only recent news of the airlines cutting jobs with Jet leading the pack. We are also expecting significant job cuts across the banking and financial services sector and the IT sector.

Coming to property prices we have already seen a correction to the tune of 20% across all segments. Even at the renewed rates there is no activity. The prices are still expected to correct sharply. In my opinion we should see at least a further 25% to 35% correction.

Reliance Industries Ltd (RIL), the country’s largest company by market capitalization, has closed half its polypropylene plant at Jamnagar, Gujarat, because demand for the raw material used for packaging has slowed.

The Airline players have been awarded a bailout package due to the sudden downturn. Whilst Airport BOT players GVK, GMR have decided to approach the government for change in contracts (read: additional benefits) due to the lower traffic volumes at the airport. For the main-street what this means is that there could be significant job cuts waiting in the wings (pun-intended).

Vodofone has approached the government, asking them to post-pone the 3G-spectrum bid to the beginning of 2009. Stating that it would not be possible for players to raise money in times of such tight liquidity.

In spite of RBI’s recent moves to infuse liquidity into the system through CRR and rate cuts. ICICI has just yesterday increased home loan rates by 1%. I have said this before and I say it again, we need higher margins in this country. Tight margins just won’t help you sail through tough times.

It’s festive season here in India (Diwali), supposedly the best time for business in the year. But the regular hustle and bustle at malls and stores, jewelers, car dealerships and banks for loans is simply missing. The glitter seems to have been taking out of the season due to the negative sentiment and the worsening global environment.

The recession has dawned upon us. India is still better coped to deal with it and the long term growth story seems to be in tact owing to economic comparative advantages. There may be a little detour enroute to getting there and we will see tough times till 2010, and hopefully its just till then.

Linkedin Answer: Is New coffee start-up still a good business opportunity

The above question was an open question asked on Linkedin and what I post hereunder is my answer to it. I thought the answer was pretty interesting and it can be a yardstick to measure the strategic performance of almost any business. More so in economically tough times where businesses models are going to be stress tested.

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My personal opinion is that it’s going to be a real tough one. The competition in the sector is enormous, as a business you’ll compete with stores like Mocha, CCD, Barista (now Lavazza), Coffee Beans, Costa Coffee and the scores of other local operators. That is however just one aspect. Any place you go these days, be it a mall, an airport, or anywhere you’ll definitely find a coffee shop in some form or the other be it an actual store or a kiosk. The price of entry in most modern markets is to be fast, good and cheap…. Obviously cheap is a relative concept to the kind of perceived value your business provides. Not just that when entering a market where significant competition exists you need to be fast, good, cheap plus have an x-factor. Two questions you would need to ask yourself. Can I be fast, good and cheap, to make a dent in the market you would need to be industry standard at two and a market leader at one. Then you need to ask yourself what is the x-factor I can provide to my customers to induce a switch from their preferred brand. Further questions you may ask yourself: What will be the difference in experience I provide over competition? Do I have a price advantage I can leverage? Is there an un-satiated need of my target audience that I can satiate? Can I have number 1 market share/ Mind share? If you find answers to the above questions and you believe that you could be FGC + provide the x-factor then you have an up and running business model and all that then remains is the execution. I tried to think on the above lines and honestly could not come up with how this could be done in the coffee market in India. I thus believe that it’s going to be a tough ask, never the less it still is possible to make inroads into the market.

TED Spread- Don’t Say I didn’t tell you….

Update: Well here we go again we are well past the 3% mark, the TEDs currently at 3.13%, well I see it zooming past further too.
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Well just yesterday I mentioned that we could see the TED spread shoot past its peak of 1987.


http://ecobizindia.blogspot.com/2008/09/ted-spreaad-again.html


So here we are today the Ted spreads at a hefty 2.99%, the highest figure since we have data.

The Great Depression II is truly here; trust is at all time lows, the market will punish even fair performers for all the trust is lost. Additionally there’s no easy way out of this, de-leveraging is going to be a long and painful process. We are sure to see the pain well into 2010 may be even more.

For all those looking for an investment opportunity, hit the Gold. It’s your best bet against a falling US currency and depletion of purchasing power. In fact it’s the only hedge. By the way gold’s rallied a 11% in the last trading session, I see more of it, much more.

The way I see it, Gold will shoot past the $1000 barrier soon enough and the next target thereon is $1200, which I see it shoot past in the next 3-4 weeks.

-Puneet Gulwani

Ecobiz on Reuters

Another one
http://www.reuters.com/article/blogBurst/investing?bbPostId=B922Cq4UnKrkCz9siTVg4bYgjCz8HBAkPcQx0pCzCV1XIMbTWjx

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http://www.reuters.com/article/blogBurst/investing?bbPostId=B922Cq4UnKrkCz9siTVg4bYgjBzAwV47RGKNoBCbPW2wnTtuf

Total Views: 429

The TED Spread Again

Update 17th Sept, 2008: TED Spread shoots further, zooms to 2.17%... this is the highest in the current crisis.... just a tad lower than Oct, 1987.... we could see it shoot past there in the next couple of days
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Update 16th Sept, 2008: TED Spread now shoots upto 1.82%
T-Bill 3 M: 1%
LIBOR US 3M: 2.82%

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Well here we go again. It's fairly evident now that the FED and the US government doesn’t have any further appetite for bailouts!!!.... With Lehman filing for bankruptcy and Merrill being sold clubbed with 'No More Bailouts' the TED spread today shot up to 136 basis points.... higher than the previous months figure.... need I say this is what was expected....

Well it looks like it's going to shoot up further additionally it’s is expected to stay above the 110 basis points mark till at least March'08...

(PS the previous post was drafted much before it was posted….. the post timing however was coincidental with the hara-kiri on Wall Street.)

Liquidity, inter-bank trust and the Ted Spread

The Ted spread is the difference between the 3 month T-Bill and the LIBOR rate. While the T-Billis a completely government backed bill, the LIBOR rate factors for the inter-bank risk. The Ted spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the rate associated with the LIBOR futures is thought to reflect the credit risk of banks. As the Ted spread increases, default risk is considered to be increasing, and banks will have a preference for safe investments. As the spread decreases, the default risk is considered to be decreasing.

Now lets just take a peak into what’s happened with respect to the Ted spread since January, 1987.

The highest spread was witnessed in Oct,1987. Surprisingly this was in the midst of another mortgage crisis. Mortgages on the wall street have been since the 1990’s the single highest traded securities. From 1990 the average Ted spread till march of 2007 was 0.50. It was only after analysts were hinting at the sub-prime and the crisis broke out did the Ted spread rise to over the 100 bps figure, it touched 1.98% in December, 2007. From 1997-1990 the spread was at an average figure of 129 bps, this when the crisis was a far cry from the sub-prime crisis of 2007. The gravity of this crisis has already been witnessed with Meryll writing down up to 88% of their CMOs and ADB writing of 90%. So, the question that arises here is are we assuming its over so soon? Or are we overly relying on the Fed? Or do we actually believe that banks have spun out of this crisis in a jiffy (6 months)?

Well honestly, I think not. The Ted spread still indicates that we are well in the midst of the crisis. In July,08 the spread shot 26 bps to touch 1.16%. Believe me it’s bankers who know best about the real situation that they are facing and thus will price the risk most accurately, and I believe that that is what they are doing. The Ted spread for the past one year since August,07 to July,08 has been at an average of 133 basis points. And, the spread is too high for us to believe that it’s all over.

The clear indicator that the crisis, in terms of write-offs, trust, and liquidity will be truly over only when the spread is less than 60 bps at least for an entire quarter. And obviously what we are seeing now is a clear indicator that a good proportions of the write-offs are still to come.

- Puneet Gulwani

Liar Liar - and this one ain't even funny

While every 3rd day some so called expert says the worst of the sub-prime crisis is done with, the market shows that well its all a plain and simple lie.

From a government perspective there’s a limit that the US and the Fed can take isn’t there.
Freedie Mac and Fannie Mae popped their ugly heads out after it was seemingly all over. And they said ‘it’s all over now’ after this one AGAIN!!!

HOWEVER:
Merrill has sold a chunk of toxic CDOs at 22 cents to a dollar and there’s no reason why we won’t see similar write-down’s from other Investment Banks. This again after the worst was done with.

Further the National Australian Bank on the 25th of July wrote of 90% of their US conduit loans.
Now don't investment banks need to rationalize their assets.

The only question here is, is it going to be slow and painful write-downs month after month or is it going to be one big write-off.

The great depression was a slow painful period lasting many years, and quarter after quarter experts then said it’s all over… did that make it any better…. The answer a resounding No. The post sub-prime is set to be no different. It's going to take a while before things normalize and the impact will be in years and years to come.

While this set the total write-offs are set to surpass $ 1 trillion, this from the $ 450 million written-off till date.

Besides this: The US economy grew at 1.9% in the 2nd quarter against an expectation of 2.4%. Further Labor Department data indicates that the number of people seeking jobless benefits jumped to the highest level in five years.

Well then folks times that we see ahead for the US are expected to be marred with further write-downs and further lies at every write-down trying to console the markets that it's all over. One day, in the distant future, they may be all over, but it still wont be all rainbows and butterflies.

-Puneet Gulwani