Oil speculators pushing prices to new levels - Part 2

Lehman Brothers, the investment bank, has estimated that fuel is 30 per cent overpriced because of an influx of money into the oil market from investment funds.

It believes that hot money accounts for between $20 to $30 of the recent increase in oil prices and that about $40 billion (£20 billion) has been invested in the sector so far this year — equal to all the money pumped into oil last year.

The price hit a record of nearly $120 a barrel on 28th April 2008, after North Sea production was shut down because of the Grangemouth refinery strike. In early trading, the price of US light crude rose $1 to $119.93. Prices later retreated to settle up 23 cents at $118.75 a barrel.

The situation may get even worse in the coming months. Chakib Khelil, the Algerian Energy Minister and president of Opec, said that crude could reach $200 a barrel.
The price rise comes despite a 400,000 barrel-a-day reduction in physical demand from the United States, which is consuming less because of its economic slowdown. This has been more than offset by funds seeking alternative investments to the falling US dollar.

Michael Waldron, energy analyst for Lehman Brothers, said: “There has been an increase in financial demand as many funds have poured into oil as a hedge against inflation and the weakening US dollar. This has been the main factor in driving the price in recent months. We do not think the fundamentals justify oil at $120 and, without financial demand, we think it would be trading at $20 to $30 below that level.”
Analysts fear that the price will rise even higher as supply shortages get worse in the coming months while both physical and financial demands increase.
On the supply side, shortages may occur if there is a bad hurricane season in the Gulf of Mexico and because the oil industry typically saves maintenance work at fields such as the North Sea for good weather.
Rapid economic growth in the Middle East has led to a large increase in energy consumption, which is diverting oil and gas away from export markets to feed domestic needs. This has exacerbated the effect of rising energy demand in the region.
Yesterday’s increases came as the workers at Grangemouth, which is operated by Ineos, a chemicals company, began the second day of a two-day strike over pension benefits.
This forced the closure of the 700,000 barrel-a-day Forties pipeline and sparked fears that Scotland and the North of England could face petrol shortages. Grangemouth supplies 10 per cent of the UK’s petrol but also produces power for BP’s Kinneil plant, which processes the oil from the Forties pipeline.

The impact:
The high price of oil is having an impact on the global economy, with airlines failing and drivers paying more to fill their cars. Eos, the business-class-only airline, went into Chapter 11 bankruptcy protection yesterday and joins at least six other carriers that have also been grounded in the past two weeks by high costs.

Conclusion:

Though the report is not all conclusive, and I would further investigate into the matter but seems as of now is:

• Lot of fund managers are putting money in Oil to hedge against weakening dollar and recession.
• Lack of sentiments in equity market world over is driving money towards Oil & Oil bonds.
• When the physical demand for oil would join the financial demand, the prices would accelerate northwards without any brakes...all leading to a bubble.

Mars and Buffett bid $23bn for Wrigley.

Mars, the world's largest chocolate maker, and the investor Warren Buffett confirmed on 28th April 2008 that they would pay $23 billion (£11.5 billion) cash for Wrigley in an agreed deal with America's largest chewing-gum maker. A combined Mars-Wrigley entity would overtake Cadbury Schweppes as the world's biggest confectionery company.
Shares in Wrigley rose 23.5 per cent to $77.13 after the $80-a-share cash deal was announced.
Mars is offering a substantial premium for Wm Wrigley Jr, which had a stock market value of about $17.3 billion at Friday's $62.45 closing price. The offer price represents a 28.1 per cent premium. Under the terms of the agreement, Wrigley will become a standalone subsidiary of Mars.
Berkshire Hathaway, Mr Buffett's investment vehicle, has agreed to provide financing to Mars for the deal alongside Goldman Sachs and JPMorgan, and will take a minority equity stake in the Wrigley subsidiary. Mr Buffett is well-known for his preference for strong consumer brands; however, he usually embarks on acquisitions without a partner.
Analysts said that if the deal went ahead, Mars would be the biggest player in the global confectionery industry with a market share of 14.4 per cent, overtaking Cadbury's 10.1 per cent.

Warren Buffett tells investors ' The party is over'.

Warren Buffett, the world’s third-richest man, declared that the insurance “party is over”, as his Berkshire Hathaway investment vehicle reported that fourth-quarter insurance underwriting profit fell 46 per cent to $465 million (£235 million), while insurance investment income rose 12 per cent to $978 million.
Mr Buffett, who typically makes about half his profits from insurance companies such as Geico and National Indemnity, said that Berkshire Hathaway had been reducing new underwriting as rising competition in the absence of any disaster since Hurricane Katrina in 2005 pushed rates down, especially on coastal properties.
He also gave warning that, after two years with no significant disasters, it was only a matter of time before one happened, affecting claims.
“That party is over,” Mr Buffett said in his annual letter to Berkshire Hathaway shareholders. “It’s a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise . . . So be prepared for lower insurance earnings during the next few years.”
The decline in underwriting revenues dragged down the group’s fourth-quarter net income from $3.58 billion to $2.95 billion. However, for all of 2007, Berkshire’s profits rose by 20 per cent to $13.21 billion.
Mr Buffett, 77, whose Berkshire Hathaway owns 2.9 per cent of Tesco, 4.8 per cent of Coca-Cola and 2.2 per cent of Johnson & Johnson, said that he had drawn up a shortlist of four candidates to succeed him when he finally retires. He would not name names.

Brand TATA, biggest Indian brand in the world!

Tata, one of India’s biggest group of companies on an acquisition spree, has emerged as one of the largest global brands, according to a UK-based independent consultancy firm. Valued at $11.4 billion, Tata is ranked 57th among top 100 brands listed by Brand Finance, an independent company focused on the management and valuation of brands. Coca-Cola heads the list followed by fellow American companies Microsoft, Google, Wal-Mart, IBM and GE while UK’s HSBC is placed 7th.

Expressing his happiness, Tata Sons executive director R Gopalakrishnan said it was a first for an Indian brand to be listed among the world’s largest. “For the first time, an Indian brand has got into the list of the largest global brands, although it is number 57 and they have valued it at $11.4 billion,” said Mr Gopalakrishnan who is also a member of the Tata group corporate centre.

Tata has three biggest acquisitions in value, the Anglo-Dutch steel company Corus is the biggest. When completed and approved, Ford’s Jaguar and Land Rover will be second and the third will be Tata chemicals’ purchase of General Chemicals. The total amount of acquisitions done by Tata is probably around $25 billion in the last 4-5 years.

Hats off to you guys!

Sources: ET

Oil Rally - a bubble in the making! Part 1

It started with financial asset bubble burst in Japan with the Collapse of banking system, followed by Technology bubble burst then with recent and most devastating real estate bubble burst. I believe oil rally is yet another bubble in the making, which would burst and would impact several economies severely.

Oil's meteoric rise to near $120 a barrel looks like more than just another economic bubble - growing demand and tighter supplies are likely to keep prices high. Some analysts say even $200 a barrel would not be out of the question.

The latest price surge - pushing crude to record heights in recent weeks, and to nearly double its level a year ago - has some key components of a classic bubble, when market prices climb far above their intrinsic value. The burst comes when investors realise the assets are overvalued. But growing worldwide thirst for crude, in large part from the rapidly developing economies of China and India, means frustrated consumers probably won't get any relief.

"We can do our homework, but prices are going to go where they want to go at this point," said Jeff Spittel, an analyst at investment bank Natixis Bleichroeder.

Oil came close to $120 a barrel on 25th April 2008, on news that a ship under contract to the US Defence Department fired warning shots at two boats in the Gulf that may have been Iranian. The markets were also weighing the effects of a pipeline attack in Nigeria and a looming refinery strike in Scotland. Retail gas prices, which at times rise in tandem with crude oil, moved further into record territory near $3.60 a gallon.
 

The Organisation of Petroleum Exporting Countries - which supplies about 40 per cent of the world's crude - insists it's supplying more than enough oil. Instead, many observers blame speculative traders for bidding up the price as a hedge against inflation and as protection from the sinking dollar. Some see that as evidence of a bubble.
 

It's also becoming harder and more expensive for oil companies to find and tap new petroleum reserves - a troublesome scenario given forecasts that the world's energy needs will escalate by more than 50 per cent in the next two decades. Toss in the weak dollar and political instability in some oil-producing countries, and it seems unlikely that oil will fall below $100 a barrel anytime soon, if ever.
 

Widely watched oil price prognosticator Goldman Sachs has said oil could average $110 a barrel by 2010, up from a previous forecast of $80, and that a spike as high as $200 a barrel is possible in case of a major supply disruption.

Cell phones still fiercely opposed on plane!

The very idea of airlines allowing passengers to talk on cell phones during flights reminds frequent flier Alvin Kolchins of the movie Snakes on a Plane.
"I'm not sure which would be worse, but my vote goes to . . . cell phones," said Kolchins, a Penn Valley resident who sells life insurance and annuities. "At least with the snakes, they are quiet and can only bite and kill you."

Kolchins is one of millions of airline customers and employees who were horrified at a recent report that the European Union had cleared the way for carriers to allow the use of cell phones while planes are in the air.
"What a horrible thought," said Priscilla Sharpless, a travel agent who lives in Phoenixville. "Flying is miserable enough these days without having to listen to people yakking on their cell phones at close quarters."
The FCC ban - originally adopted in 1961 and later updated - was meant to prevent any interference with a plane's navigational instruments or disruption of phone service on the ground.
U.S. airlines aren't clamoring to change the rule. Flight attendants in particular are adamantly opposed to ending the ban, fearful that without it, confrontations between passengers would become common. And just in case an airline were to consider it, members of Congress are introducing legislation to enshrine the FCC ban in federal law.
The broad opposition may be a telling sign of the times. A dozen years ago when private cell-phone use was exploding and talking anywhere was considered a convenience more than nuisance, trade groups for the airline and electronics industries were expressing hope for easing of the rules due to traveler demand. But recently conducted survey showed that more than three dozen others who responded said they were opposed. None was in favor of lifting the ban.
"Cell phones on planes. . . . Four words that strike fear in my heart," wrote Wendy Earle, a marketing specialist from Kulpsville. "Who hasn't experienced the blowhard whose loud end of the conversation can be heard from 100 feet away? Wouldn't you just love to be sitting near him [or her] on a plane?"
Although cell phones increasingly are used for silent text-messaging and e-mailing, it was the prospect of gabby, one-sided conversations popping up throughout a confined aircraft cabin that elicited dread.

Don Goldkamp, a frequent business traveler who lives in Cedars, Montgomery County, called cell phones on planes "invasive to other passengers. I can't imagine why the airlines would want to make flying less pleasant than it already is," he added.
Objections to changing the rule started soon after the E.U. said on April 9 that midair cell-phone usage could start as soon as airlines could install onboard base stations in their planes. Passengers could turn on phones once a flight has reached 10,000 feet, when other electronic devices such as laptops are allowed.

After the E.U.'s decision, a bipartisan group of members of the U.S. House Transportation Committee quickly decided not to take a chance that the airlines would seek to change the regulation. They introduced the HANG UP Act - for Halting Airplane Noise to Give Us Peace - that would ban the practice.

"In far too many easily foreseeable operational scenarios, cell-phone use could be worse than a mere nuisance," Friend said. "It could have catastrophic effects on aviation safety and security."
The Air Transport Association, which represents the major carriers, hasn't taken a stand on the European Union decision. Were the restriction to be lifted in this country, "the airlines would have to weigh the benefits," spokesman David Castelveter said. "But you don't want to benefit a few and annoy the many."
Among the reasons airlines should not want to change the rule would be a loss of business from some customers, one of them added.
"The thought of allowing cell-phone use on planes terrifies me," said Earle, the traveler from Kulpsville. "If it happens in the U.S., that will be the final straw. If I can't get there by car or train, I ain't going!"


Source: world news network

Las Vegas experiencing the economic downturn.

MGM Mirage Inc., the largest casino operator on the Las Vegas Strip, told that more than 400 middle management employees would be terminated immediately in a cost-saving move. The decision will save $75 million annually and came after the company saw weakness since August at its properties, which include Bellagio, MGM Grand, Mirage and Mandalay Bay, spokesman Alan Feldman told The Associated Press recently.

The move is the largest and swiftest by a casino operator in the current economic downturn, although the use of so-called "extra board" employees such as dealers and busboys who take fill-in shifts as needed has been down citywide.Budget-tight guests have shown a tendency to spend less in all major segments of the business, Feldman said."Instead of four days, people stay for three. Instead of a five-star experience, they are going for four stars. Instead of two shows, they're going to one," he said. "There certainly is the possibility that there are people who are also making a decision to gamble less."

My take:

This was bound to happen. The sub prime has badly hit the investing upper class. Huge capital is eroded. So, the expenses on luxury will come down drastically. Las Vegas Mirage loss is just one of the many companies and sector that would soon follow the trend.

Sources: Detroit News.

My views on Various setors.

With increasing national and international issues affecting the Indian capital markets and the sentiments, here's a look and my views on various sectors. Updated 11/04/2008.

Could an economic lesson from Sweden work in the U.S.?

As U.S. officials hunt for solutions to what many economists are calling the most serious financial crisis since the Depression, they might draw lessons from another painful and costly banking emergency.
In the early 1990s, a massive Swedish real estate bubble burst, littering the Nordic economy with broken finance companies, failing businesses and jobless workers. It was the first systemic banking crisis in an industrialized country since the 1930s and it saw the Swedish economy actually shrink for three straight years — something that hasn't happened in the United States since the rapid demobilization after World War II.
The Swedish and American crises share many traits: Both followed periods of financial deregulation, and both featured newly daring banks relying upon bookkeeping maneuvers to take on unsustainable amounts of debt. Happily, despite economic conditions that were far worse than in the USA today — and unlike a similar episode in Japan — Sweden quickly recovered.
Yet, it did so in a manner that would be highly controversial in the United States. Sweden used taxpayer money — and lots of it — to rebuild its wounded banks. "In Sweden's case, the solution ultimately ended up on the government's balance sheet. … The government ended up recapitalizing the system," says economist David Rosenberg of Merrill Lynch. "There's a lesson here."
Sweden's successful crisis management may offer a road map for U.S. officials. But the Swedish cleanup wasn't cheap. It cost the public an estimated 6% of annual economic output; an equivalent bill for the U.S. today would be nearly $850 billion. And Sweden was able to implement a free-spending government rescue only because of a broad political consensus that is difficult to imagine amid the hyper-partisan atmosphere of a U.S. presidential election year.

Sources: usatoday

Helping Farmers or Hurting them?

Swaminathan Iyer took the words out of this bloggers mouth. The UPA government, he write “has suddenly shifted from protecting Indian farmers against cheap imports to protecting the consumer by cheapening imports”. He is referring to the ban on rice exports (which follow the export of wheat late last year, followed by the ban on export of maize and pulses).

The April 2008 issue of Pragati called for the government to free the farmers. The UPA government did just the opposite—far from allowing Indian farmers to benefit from selling their produce at record prices, the government is forcing them to sell at artificially low prices. So who is hurting the farmer? And next year, when farmers find themselves unable to repay their loans, the UPA government—if it is in power at that time—will simply increase payouts and write-offs.
In the end the consumers pay the farmers: only the government gets itself into the equation causing unnecessary leakage and wastage.

Unnecessary? Why, isn’t it at least helping curb inflation? Not quite. As Mr Iyer explains:
The lesson is clear. Curbing exports is a form of national hoarding. If every country tries to hoard food, food prices will naturally rise. Governments would like to believe that hoarding by traders is terrible, whereas hoarding by governments promotes the public interest. But the impact on prices is exactly the same in both cases. Indeed, when governments start to hoard food out of panic, the panic itself stokes further inflationary fears.
That is why I am not optimistic about the Indian government’s anti-inflation package. The government thinks it is improving domestic supplies and hence bringing down prices. In fact the government is adding to the global hoarding problem, and stoking panic too. So, expect food inflation to keep rising in coming months.

It’s all very well, you say, but what should the government do when poor people can’t afford food? Well, it should buy food grain at market prices and distribute it to those who need it. That way it will least distort the price signals that farmers receive and allow them to benefit from the good times. And by spending taxpayers money in a targeted manner—only the poor will enjoy cheap food—it will spend less. That is, if the government actually wanted to address the policy challenge, and not flail about paranoid of losing votes.

But if we look another angle of the story, State Governments are trying to do exactly same as suggested above. They buy at little more higher price and try to give it to poor at lower price through ration shops. What really happening is no farmer is willing to give Rice to govt and they smuggle it to neighbouring states where they can fetch higher price. It is every day story in TN where Rice is smuggled to AP and kerala. Real problem lies in distribution systems and storage. Untill these problems get sorted out, export restrictions will not work.

Sources: TOI

Inflation, Climbing high and fast!!!

ASSOCHAM on Saturday, 5th April 2008, predicted that it would continue to soar for next three to four months, and may even touch the 7.5 per cent mark."The Wholesale Price Index (WPI) based inflation rate which is already at the highest in the last three years, could even surpass the 7.5 percent mark," predicts ASSOCHAM President Venugopal Dhoot.

In order to check inflation, the Cabinet Committee on Prices (CCP) chaired by Prime Minister Manmohan Singh on Monday, decided to abolish import duty on all crude edible oils, including palm and soya, and banned the export of non-basmati rice and pulses to contain inflation. The Central Government also decided to raise the Minimum Export Price of basmati rice to 1,200 dollars per ton from 1100 dollars, to balance the demand " supply in the domestic market and to cut import duty on butter and clarified butter (ghee) from 40 per cent to 30 per cent, besides, the 15 per cent import duty on maize was abolished, applicable on import of up to five lakh tons. The CCP also advised states to impose limits on stocks of commodities under the Essential Commodities Act, besides asking steel producers not to raise prices. The study done by the business conglomerate also reveals that the Central Government's efforts to contain inflation will come start-yielding results by August when inflation is likely to fall at of four per cent.

Experts believe that after all possible measures taken by the government, now, everyone is waiting for Reserve Bank of India's (RBI) annual credit policy that will be revealed on April 29 2008. The industry body has asked the RBI to increase the interest rates, specifically the Cash Reserve Ratio (CRR) to restrain liquidity. The problem of inflation doesn't seem to be India-centric with China too struggling with a rising inflation rate of over nine percent.

According to analysts, the announcement of Sixth Pay Commission recommendations, and provisions for enhanced expenditure on social sectors in the Budget 2008-09 coupled with rising crude oil prices have also raised expectations about high inflation.

Anmol Vachan - 1

"An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it" - "To give pleasure to a single heart by a single act is better than a thousand heads bowing in prayer" - Mohandas Karamchand Gandhi

Indian Economy Latest Updates :April 2008

• Infrastructure Sector Latest Updates:
  No takers for Rs 4,000-cr government aid
  Nagaland signs 2 pacts with Korean co
  Core sector grows by 8.7% in February
  Chopper Class: Govt plans airports for helicopters
  Green tilt in energy balance
  Nagarjuna, Maytas Infra to develop Karnataka airports
  IVRCL bags orders worth Rs 484 cr
  India set to sign transport project agreement with Myanmar
  

• Finance Updates April 2008 :
  Foreign fund restrictions to boomerang: Raghuram panel
  Grant Rs 5,000 cr for setting up SEZs in JK: Assocham
  CRR hike may leave banks with little to lend
  10 lakh backward class families benefit from NBCFDC loans
  JPMorgan's John Coyle joins Permira
  Indian investors get more room to diversify abroad
  WB, ADB may lend directly to urban bodies
  India raises overseas investment limit for funds
  'India needs $500 nn investment to sustain growth'
  Centre releases Rs 65 cr to revive lakes in J&K
  Refund claims may rise on derivatives losses
  'India important source of FDI in US'
  Microcredit raises hopes for farm widows
  Retail sector may get service tax relief
  BJP seeks Rs 1,000 cr relief package from Centre
  CST phaseout to miss deadline
  Repo rate, CRR hike on cards
  DA announced for Punjab employees

The US Sub prime - In graphics

The US sub-prime mortgage crisis has lead to plunging property prices, a slowdown in the US economy, and billions in losses by banks. It stems from a fundamental change in the way mortgages are funded.
THE NEW MODEL OF MORTGAGE LENDING

Traditionally, banks have financed their mortgage lending through the deposits they receive from their customers. This has limited the amount of mortgage lending they could do.
In recent years, banks have moved to a new model where they sell on the mortgages to the bond markets. This has made it much easier to fund additional borrowing. But it has also led to abuses as banks no longer have the incentive to check carefully the mortgages they issue.

Defence Pensions : Worrying Signs

The total strength of the defence employees has risen from nearly 362,000 in 1960 to 1.3 million today. The defence pensions bill, which is over 50 percent of the central government’s pensions bill, has also risen exponentially since the 1960s. It has grown nearly tenfold from Rs. 1670 Crore in 1990-91 to Rs. 15,244 Crore in 2007-08; and is currently over two-thirds of the military salary expenses. The subterfuge of removing defence pensions expenditure from the overall military expenditure, in vogue since 1985, has turned the spotlight away from this issue.

More than three percent of defence employees retire every year. The bulk of this group is of soldiers, who constitute 85 percent of the defence forces. There is an average in-service death rate of 1.2 percent for the defence employees, largely due to counterinsurgency operations. Early induction age and early retirement age implies a younger age cohort for 90 percent of the defence employees compared to their civilian counterparts.
Due to early retirement, the defence employees do not fulfill the government criteria of 33 years service to earn a full pension. This ought to reduce the defence pensions bill significantly. However, the high ratio of 1.68 defence pensioners per defence employee implies an extended period of pension payments, which offsets the lower rates of defence pensions. The other civil departments, incidentally, have a ratio of 0.55 pensioners per employee.
Moreover, Indian population above 60 years of age is growing at a rapid pace, at an annual growth rate of 3.8 percent per annum in the period 1991-2001, as against the annual growth rate of 1.8% for the general population. The improved health care and increased life expectancy will skew the pensioners to employees ratio even further.

The recommendations of the Sixth Pay Commission are likely to push the defence pensions bill further northwards, if the example of Fifth Pay Commission is anything to go by. The implementation of Fifth Pay Commission recommendations had led to an increase in the defence pensions bill from 4947 Crore in 1997-98 to 10770 Crore in 2000-01.

It is believed that the defence pension bill has the potential to reach an unsustainable level, and perhaps even exceed the wage bill. This is borne out by the recent trends and is indicated by realistic assessment of such liabilities in the future years. The government has decided against introducing pension reforms in the defence services.

There is an immediate need to reduce the defence pension bill, which will otherwise continue to be a big drain on the national exchequer. This can be achieved by reducing the minimum military service requirements, pushing for early retirements with lateral absorption schemes and identifying a new model for defence pension reforms. These are desirable not only on the grounds of fiscal prudence and equity, but also to keep the military lean and young.