SKS Microfinance IPO

The IPO of the company I admire most.

SKS Microfinance IPO Attracts Strong Demand

Why you should be interested in the SKS IPO

I wish capital keeps on flowing for SKS Microfinance and the company is able to maintain balance between its priorities i.e. providing loan first and thinking of profit later. It’s difficult for any public company to maintain such a balance. Hope SKS is able sustain it.

Eugene Fama on CNBC

Fair Tax Treatment

The following New York Times editorial reported Hedge Fund pay in 2009.
Hedge Funds Make Hay

Shouldn't this be a top priority for law makers? We have gone through the worst recession since great depression due to financial crisis, but an important issue has not been taken care by law makers yet.

"The tax disparity results from an outdated rule that lets a money manager in a private partnership treat a chunk of his fees as if they were long-term capital gains, taxed at a special low rate of 15 percent. Fees for managing someone else’s money should be taxed as ordinary income, like wages and salary, at rates as high as 35 percent."

"President Obama has included a provision to end that special treatment in his most recent budget. For three years running, the House has passed a bill to close the loophole. In the Senate both Democrats and Republicans have resisted, all for fear of losing lucrative campaign donations."

The Henry Ford of Heart Surgery

An excellent article on Heart Surgery.

The Henry Ford of Heart Surgery

Dr. Shetty at Narayana Hrudayalaya Hospital in India is able to drive the cost of heart surgery down to just $2,000 on average. In the US, the same procedure cost between $20,000 and $100,000 depending on complexity. By economies of scale, Dr. Shetty managed to drive cost down without compromising on the quality of procedure. He has 1,000 beds hospitals compared to 160-beds (on average) in the US. His Cardiac surgeons performed more than double cardiac surgeries than cardiac surgeons has performed in the US.

The more surgeries performed by doctors, the more experience they gain and better they are. Also with more number of patients, surgeons can specialize in a particular area. The mortality number also supports that quality has been better at Dr. Shetty's hospitals, and even better when adjusted for patient conditions.

Profit at Dr. Shetty's hospital was 7.7% after tax compared to on average profit after tax in the US, which has been 6.9%. As mentioned in the article, Dr' Shetty is planning to take number of total beds from 3,000 to 30,000 and will continue to reduce cost by bypassing medical equipment sellers and directly purchasing from suppliers.

Tariffs on Chinese tires

What a bad idea! Obama's decision of imposing tariffs on Chinese tires doesn't make any sense at all. Nice article on Economist on it.
Economic vandalism

"A protectionist move that is bad politics, bad economics, bad diplomacy and hurts America. Did we miss anything?"

Healthcare Reform Bill

Obama’s healthcare reform bill which doesn’t provide any clear picture continues to drag his approval rating down (only 49% - down from 60% in April). He was able to avoid mistake of Clinton administration by not imposing his predetermined plan and let Congress comeup with the plan, but that has resulted in five different healthcare bills. These different plans have created so much mess which no one understands.

Very good analysis in today’s FT “The prosaic professor” and an interesting opinion “Pull the Plug on ObamaCare” in WSJ.

Healthcare Reform

A very nice article in Financial Times on the recent healthcare reform.

Cost control not coverage is the key to health reform

I agree that the president’s objective is off the mark. Rather than focusing on cost cutting, the president’s focus is on making bill revenue neutral. This may provide increase healthcare coverage but definitely not going to reduce cost, which is the root cause of problem.

Microfinance Bubble

Here is the reply from Vikram Akula on WSJ article on Credit Bubble in Microfinance.
What Microfinance Crisis in India?

Microfinance in Rural India

A recent article in WSJ reports that credit bubble is being created in Microfinance.
A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum

Social benefits to rural population compare to greed of richer: Though there is a possibility of bubble it is still beneficial to rural population which has nothing to lose.

1) Surge in microfinancing will allow more rural population to start their own small entrepreneurial venture allowing them to have an opportunity to come out of poverty.
2) Easy access to credit may allow people to borrow more than what they can afford leading to higher default rate. It may be risky bet for financiers, but it is not bad for poors since if they default on their loans they are at the same position where they were before.
3) I believe microfinancing originated with the idea of helping poor people first then anything else (making profit). SKS Microfinance has been able to do both successfully. It seems that entrant in this industry seems to forget that this is not the same industry where normal business principal can be applied.

There are around 150 millions rural household in India. With average loan size of $300 per household, total microfinancing business size will be around 45 billions dollars. A 10% default rate will be $4.5 billions at risk which is a very tiny number compare to trillion dollars mortgage mess and other crisis.
A nice article on Economist
Microcredit may not work wonders but it does help the entrepreneurial poor

The Bush Economy

Nice article on WSJ

http://online.wsj.com/article/SB123215327787492291.html

The article talks about the mistakes made during Mr. Bush's presidency. Also talks about the Fed funds rate which was kept low for long and compare against what it should be per Taylor's rule.

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.