China's Urbanization

Source: Mckinsey

Where investment banking headed?

What a terrible week it was!! Panic all around. Hard to say what will be the future of investment banking.

A couple of good articles to read

On Wall Street as on Main Street, a Problem of Denial

Old-School Banks Emerge Atop New World of Finance

Another article from Economist talks about impact from the fallout of Lehman Brothers

The fallout from the bankruptcy of Lehman Brothers

Fannie Mae

A lot is going with Fannie Mae/Freddie Mac this year. I think the year has been FNM/FRE year.

Treasury secretary's plan for Fannie Mae/Freddie Mac couldn't subside the fear in the market. LEH is following the Bear's path and few other firms showing signs of same trouble. The following article in WSJ provide good insight on soundness of Treasury Secretary's plan.
How Paulson Would Save Fannie Mae

Hope some rescue plan can be derived today for LEH. Waiting to see what happens before asian markets open.

Oil prices really dropping?

How real is the recent drop in oil prices? According to an article “Nothing to smile about” in the Economist, there is nothing to cheer about the recent drop in the oil prices. The real rate of interest is negative due to lower nominal rate and higher inflation. There is no incentive for oil producers to pump more oil in this negative interest rate scenario. The money produced by pumping more oil is not going provide positive return. The oil producers are better off by letting the oil in the reserve and pumping it when prices are high enough. During the time when inflation is so high, the lower oil prices remain distant dream.

End of road for car leasing?

The trouble for Detroit's Big Three continues, the car makers are now trying to minimize losses by ending loss making lease business.

http://online.wsj.com/article/SB121737722208895269.html?mod=hpp_us_whats_news
WSJ article (Refer link above) mention reasons behind this step.

1. Banks are turning their backs on leasing as falling used-car prices make the business less profitable.
2. Declining resale values of trucks and SUVs that were leased two to three years ago, before gasoline prices shot to $4 a gallon. When leases expire, the auto makers' finance units must sell the vehicles and recoup some of their costs. But with today's fuel prices, used trucks and SUVs are selling for far less than the Big Three had anticipated. So they're losing money when they sell those vehicles.

Ford last week wrote down $2.1 billion in pretax profits as a result of unprofitable leases (a key factor in the company's $8.7 billion loss for the period). GM reported $2 billion loss (out of total of $15.5 billion for the latest quarter) due to declining residual value.

Auto Alternative
http://online.wsj.com/article/SB121737803358095319.html?mod=article-outset-box
The article above mention some good alternative to the lease option.

• Buy the car, Look for deals on domestic models, priced to move inventory.
• Lease from a foreign auto maker, such as Toyota or Honda.
• For those with spotless credit, get an independent bank to finance the lease.

Auto makers are looking to make alternatives as attractive as possible or in some cases they are planning to make buying more attractive than leasing (Ford aims to make vehicles like the F-Series trucks and Explorer SUVs "lease proof" by making terms on leases so tight that the monthly payments are too high to justify.).

KKR to go public

KKR's announcement of going public came at a time when market is hitting bottom everyday. KKR’s rival Blackstone went public at the peak of the market last year (June, 2007). Blackstone milked money through its public offer but it is very unlikely that KKR will be able to cash on IPO offering. Blackstone got listed at $31 and reached to $37-$38 very first day. Since then it never came back to same price. Today it is being traded at around $17. A sad story for a company, which made lot of news and front page stories on all the business magazines till last year.

Unlike Blackstone’s founders, KKR’s executive won’t take out cash from public listing. KKR’s share expected to be valued at 10 to 12 times of 2009 earnings, giving KKR a total valuation between $12b and $15b. Blackstone’s shares are traded at 13 times the company’s expected 2009 earnings.

Blackstone’s executives are happy that they won’t be alone in Private Equity segments to report company’s result to public every quarter. I am happy that I now have choice to buy shares in Private Equity segment.

http://online.wsj.com/article/SB121717198753387877.html?mod=hps_us_whats_news

http://www.reuters.com/article/businessNews/idUSN2741395420080727?feedType=RSS&feedName=businessNews&pageNumber=1&virtualBrandChannel=0

Morningstar’s Rating

Came across following article in today’s WSJ.
http://online.wsj.com/article/SB121702192232585849.html?mod=hps_us_whats_news


I always use to think that highly reputed independent research firms like Morningstar's research is always data-driven and there is hardly any chance of internal influence or pressure to tweak these reports. The article seems to be telling some other story. In future, I will have to be more careful reading analyst’s report on a company. The idea behind reading analyst’s report is to collect data and information from their reports and make your own judgement. What if data and information provided by analysts are misleading (or influenced)? What is the point in paying Morningstar for analyst’s report if these reports are not providing the right information?

Indian Govt. Survives

Much debated India-US nuclear deal passed an important hurdle yesterday. Prime Minister Mr. Manmohan Singh put coalition government on stake for this deal. Political party “Left” had been threatening to withdraw the support from the government and finally withdrew the support. This forced government to face confidence vote in the Lok Sabha. During whole this confidence vote drama, some political party and politicians have come out as winners, while others failed miserably. Left comes out to be biggest loser and Samajwadi party (and arguably Ms. Mayawati) comes out to be biggest winner in this political game.

Though it is big win for Mr. Manmohan Singh, there are others who got a chance to enhance their political career. FM got a chance to speak strictly in terms of economies and comparing growth of India and China. It’s another thing that nobody listened to his speech in the Lok Sabha. Congress party’s prospective PM candidate for next general election Mr. Rahul Gandhi got a chance to make his first major speech in the Lok Sabha. Mr. Lalu got a chance to enlighten the atomsphere with his humor one more time. It was a nothing to lose kind of scenario for BJP. If government lose in confidence vote, it’s good to go for election and raise inflation point against government. If government wins, BJP is right there where it was before. No gain for Mr. Advani. The biggest winner of political drama is Samajwadi party. Mr. Mulayam Singh got government hands on his head and Mr. Amar Singh got recognition as architect of the whole process of collecting MPs for the support. By not supporting government, BSP should be at worse position but Ms. Mayawati turns out to be a winner. She managed to make a strategic alliance, Third Front, for next general election and became leader of that alliance. Looks like a good move towards next PM position.

The nuclear deal now should move at full pace. The India-US nuclear deal should provide a boost to already booming Indian economy and a good strategic partner to the USA both in terms of business prospects and competing against China. This deal still has a long journey to cover. The US congress and UN’s IAEA and NSG group has to approve the pact.

Indian markets welcome the news. BSE sensex was up 838.08 points (almost 6%).

Some good article to read on this news.
http://online.wsj.com/article/SB121672514943973317.html?mod=hps_us_pageone
http://online.wsj.com/article/SB121675052745674159.html?mod=PageOne_1

Apple's third-quarter result

Apple announced its third-quarter result on Monday. Profit rose 31% from the year-ago quarter and revenue surged 38%. The surge in demand for Mac and iPod boosted profit for third-quarter, but future outlook end up disappointment investors. This is the second time in a row company’s stock took a hit after declaration of its result. Apple also had good result for the last quarter but stock took a hit due to lower then EPS guidance for future quarter. Yesterday stock fell almost 11% in after-hour trading. The analysts are worried whether the Mac momentum will continue and whether the new fast selling iPhone will be sufficient to counter a slow down. After google, apple end up disappointing wall street and me too. My portfolio once again took hit on tech sector company's quarterly result announcement :-(

Starbucks to close more stores - Right or Wrong?

Starbucks is moving towards its announcement of closing 600 stores. The company disclosed the list of stores to be closed by early next year. The brand is so powerful that the commercial real-estate developers relied on the Starbucks to attract other tenants. Starbucks not only built the loyalist customers but established itself as a brand that businesses and people in stores’ proximity are proud of. Recent protest against closure of stores is a proof of such pride.

The company is right there at the productivity frontier with no other competitor nearby. Though McDonald's announcement of aggressive investment in cafes may have some impact on the Starbucks strategic approach, still company is too far ahead in this game. I feel the problem started from company’s last fiscal year rapid expansion. Company opened about 2,500 cafes, almost seven outlets per day, across the globe during last fiscal year. There were lot of reasons for such rapid expansion and I almost agreed with all of them except one. Apparently company research showed that the people sometimes weren’t willing to cross the street to buy a cup of coffee. Though research is correct from a normal café’s standpoint, but applying this research to Starbucks is an incorrect generalization of the research findings. I believe that Starbucks is vertically differentiated from its competitors and the company has achieved vertical differentiation by establishing a strong brand and loyalist customers. By applying research findings, Starbucks started thinking more of horizontal differentiation than vertical differentiation. By mixing two different strategies, the company not only impacted its financials but also end up disturbing its strategic fit. Being a loyalist Starbucks customer myself, it is hard to believe that a customer won’t even cross the street to buy a cup of coffee from Starbucks. I used to have Starbucks café almost 3 miles from my home. Now I have 3 Starbucks cafes within 2 miles radius. Some research must have indicated to open new stores and attract more customers but I don’t see increase in number of customers by having more density of stores.

The decision to close more than 5% of its store should be a step in right direction. I hope the right stores are being closed.

Rescue Plan for Fannie Mae

Is the proposed rescue plan for Fannie Mae and Freddie Mae going to work? The coming days will tell how good rescue plan was and if Mr. Paulson understood the whole problem.

Treasury, Government and Fed. continue to sweat on rescue plan for Fannie Mae and Freddie Mac. Treasury secretary Hank Paulson annouced three part plan - (http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&story_id=11735141)

1) Increase line of credit to the government-sponsored entities (GSEs), which currently
stands at a paltry $2.25 billion each.
2) Seeks authority to buy stakes in each company if necessary, and
3) Give the Federal Reserve a greater role in oversight of the GSEs.

Hank Paulson’s announcement of rescue plan, just before Asian financial markets opened, gave some support to the dollar. Japanese investors own $229b of debt issued by Fannie, Freddie and other U.S. – government related entities. China owns $376b of such debt. Total of $1.3 trillion is owned by different countries. Though it is not clear how much of this is from Fannie and Freddie, still this is a huge debt own by other countries. As Mr. Paulson made clear, part of the problem with the two institutions is that their debt is held by investors around the world. That includes many central banks. The fear is that a sudden collapse of either institution might pose a threat to the dollar and the global economy.

The downside risks to growth remain a big challenge to Bernanke. As he mentioned today, the economy is facing “numerous difficulties”. He outlined a long list of downside economy risks which includes ongoing financial stress, falling home prices, a weaker job market and rising food and energy prices. It is clear now, or atleast for now, that the interest rate is not going to change before the end of this year.

Looks like the whole recovery process is going to be very slow and it may take years before we are again in growth mode :-(

Fannie Mae

So who is right about Fannie Mae and Freddie Mac? Is it Investors who worry about debt of these companies, or its Regulators and companies who deny anything wrong with companies’ fundamentals? I think two recent WSJ articles provide good insight about the situation. The article “The price of Fannie Mae” puts some real number in perspective and shows political motivation behind Congress supporting these organizations.

“Fannie and Freddie are among the largest financial companies in the world. Their liabilities – mortgage-backed securities (MBSs) and other debt – add up to some $5 trillion. To put that in perspective, consider that total U.S. federal debt is about $9.5 trillion, compared to a total U.S. GDP of $14 trillion. About $5.3 trillion of that debt is held by the public (in the form of Treasury bonds and the like), while $4.2 trillion is intragovernment debt such as Social Security IOUs. This is the liability side of America's federal balance sheet, and its condition influences how much the government can borrow and at what rates.”

The number $5 trillion is too huge to put as liability on the federal balance sheet. It would certainly raise nation’s borrowing cost and jeopardise the Treasury’s AAA. Another article “Fannie Mae Ugly” talks about good and ugly part of this mess. By opening Fed’s discount window to these companies, the Congress would not only end up spreading poison to Fed’s balance sheet but also jeopardise the Fed’s independence. These companies are too big to fail and explicit taxpayer guarantee will put massive liability on the balance sheet (though implicit liability is already present). Will see how Congress/Treasury/Fed deal with this complicated situation/mess.

Good Morning

Its been long since i was thinking of writing my own blog. Finally, today morning i managed to do few clicks and started typing.
The topics everyone is talking these days are economy/recession/oil-prices/inflation. A known fact that maintaining growth (rather avoiding recession) and controlling inflation are going to be tough tasks for decision makers. Is Fed going to increase rate to control inflation or reduce rate to avoid recession in coming months? I don't think even Fed has a clue and it was apparent from recent statement from Fed. Lets hope the picture gets clear in coming month.
Today morning GE annouced its 2nd quarter (2008) results. GE reported net income of $5.07b (51 cents a share), a drop of 5.8% in second quarter income. I was expecting better result but end up disappointed. The stock price is already at $27.55, down almost 25% since the beggining of this year. The spin-off annoucement of industrial may provide some push to stock price.