China: The Earthquake impact.

Here's how the recent earthquakes will probably impact China.

Due to the earthquake, China has lost huge amount of human capital, fertile land, natural resources, etc. It will impact the agricultural production drastically. The production would be less and the ability to deliver products in the market will reduce. This will result in demand supply mismatch. The increased demand would put pressure on the existing prices.

The affected area will require rebuilding and redevelopment. For this huge capital and resources would be required. Demand for resources like Oil, petrol, energy which are already scarce will push the crude oil imports. With crude oil touching life time highs, this can further add woes for the government.

Also the material and different services required for the redevelopment of affected areas will have a negative impact on the prices.

And while all this happening, maintaing high growth would be difficult. Add to it difficult global markets scenario.

Controlling measure for the government could be to restrict price rise or artificially freeze prices of commodities, in order keep a check on inflation. But, this can not be the ultimate long term solution. The earthquake has caused a real increase in demand and a real decrease in supply. How can price freezes possibly eliminate the disequilibrium? It explores both the difficulty of keeping prices at current levels – shortages and an increasing fiscal subsidy – and the difficulty of letting prices rise – the inflationary impact.

Zimbabwe - The Unbeatables!

The Indian people and the government are both quaking with fear with inflation hovering at around 8%. The people can barely make two ends meet with prices soaring, and the government knows that if prices don't fall, the government will.

But India is not the only nation grappling with rising inflation. The entire world is. So which is the nations with highest inflation rates?

Zimbabwe: 355,000%!
The inflation in Zimbabwe for the month of March 2008 rose to 355,000%! Yes, 355,000 per cent! It more than doubled from the February figure of 165,000%.
Economists say that it is a miracle that the Zimbabwean economy is still surviving and prices have been rising to unprecedented proportions. Inflation surged between February and March following the sudden rise in money supply that flooded the economy to finance the 2008 elections. Apart from this food and non-alcoholic beverages continued to drive up inflation.

Almost 80% of the nation is unemployed. The Zimbabwean central bank has introduced $500 million bearer cheques (or currency notes) for the public, and $5 billion, $25 billion, $50 billion agro-cheques for farmers. Just last fortnight the nation had introduced $250 million bearer cheques.

A sausage sandwich sells for Zimbabwean $50 million. A 15-kg bag of potatoes cost Zimbabwean $260 million. But then, Zimbabwean $50 million is roughly equal to US$ 1!

An unusual China!

China is known for its censorship and how it keep media at bay. The way it polices the internet is all known. There has been instances where the government has detained reporters and correspondents for trying to report from the spot on an explosion that killed many children in a school in Jiangxi province, in 2001. The country is very particular about what gets printed in the media about the country.

Yet this time, there is something unusual that has happened, in terms of openness and press access. As the country got struck by earthquake, I could see pictures flooded all over the news channels from morning to evening, live right from area where the event took place.

May be this might be an historic turning point for China, on its journey towards modernity and openness. I have never seen so many pictures on the media ever before from the ground china.

Now, the openess to media may have raise doubts on the preparations for Olympics, why the government was not able to recognise the event early, corruption, why the structures that collapsed didnt meet the standards, etc. But in a way this will also help China by getting aid from other parts of world, like this time, if such event occurs. Also, openess to media would help to install transparency and reduce corruption in the country.

Financial "Weapon of mass destruction" by Buffett

It was not so long ago when the Oracle of Omaha, Warren Buffett described derivatives as ‘financial weapons of mass destruction’ and warned against the extraordinarily high risks hidden in those instruments. He rightly said that those who are holding derivatives hardly understood the risks, a fact that was very evident during the recent credit crisis. That was when financial derivatives were not even a fraction as popular as they are now.

Having said that, we would have expected Buffett to stay clear of derivatives. But, contrary to popular wisdom, Buffett is not all that risk-averse – the stock portfolio of his company Berkshire Hathaway is very concentrated, for example. Unlike others, he is quite clear about the risk he is taking and that is the major reason for his superior and consistent performance. In other words, better risk awareness helps him prevent the huge losses others suffer once in a while.

Given that, markets were quite surprised when Berkshire declared a huge $1.6 billion loss on derivative contracts for the first quarter of this year. Most of these losses were on account of put options on the S&P 500 index. It seems Buffett was a bit too bullish on the markets! Credit default swap, which protects bond investors against default by issuers, contracts accounted for the rest of the losses.

Then again, these are non-cash losses and Buffett is unruffled. In his letter to shareholders he says he is not ‘bothered by these swings even though they could easily amount to $1bn or more in a quarter’. Since the end of the quarter, Berkshire is said to have recovered close to $0.5 billion of the non-cash losses as stock markets have recovered since April.

Clearly, derivatives, F&O, are something which has a huge amount of risk. And it requires lot of experience to understand and structure your positions so that the risk exposure gets reduced. One must not just jump in the F&O segment just by looking at the potential gain it can give.

IPOs - Relief to investors.

Investors no longer have to wait for weeks for refund of their IPO application money.The application money earmarked for an IPO will now remain in the applicant’s bank account till the allotment is finalised, thus eliminating the refund process. This means that the money marked for the IPO will not be used for any other payment obligation during that period. At the same time, the applicant will enjoy the interest payable on the amount.This would also reduce the burden on registrars and merchant bankers. But bankers to the issue can no longer enjoy the floating interest. Most important of all, investors would not have to wait for their refund money. It also ensures that a liquidity crisis such as that of January 2008 does not occur again. At that time, many investors were unable to buy scrips which were at attractive lows, as their money was locked up in the Reliance Power and the Future Capital IPOs.

Still a lot of reform work is required in primary markets.

Naam mein kya rakha hai bhai!

A couple of days earlier Shiv Sena's student's wing, Bharatiya Vidyarthi Sena (BVS), targeted establishments that still have Bombay in their names, including the city's prestigious school, Bombay Scottish, a Bombay Dyeing showroom and offices of The Times of India, whose city supplement is called Bombay Times.

Now, the list also includes Shiv Sena's demand to remove Bombay from Bombay Stock Exchange.

Every party wants some fancy issues rather than solving some existing serious ones. I dont want to take a political stance here, my views are completely objective. On one side Mr. Raj Thackeray and his followers try to be in limelight by targeting Amitabh Bachchan. And now Shiv Sena is trying to cook some irrelevant issue of Bombay versus Mumbai. How are the farmers of Maharashtra going to be benefited out of this ? Or is it going to solve the power problem of the state?

Bombay Dyeing is a corporate entity, a company registered under Company Act 1956. Now, why should a company change its name, just because of change in the name of the city, whose name matches with part of its name? Two years hence, politicians in UP or Bihar may not allow the company to open its stores there, just because it doesnt say "Patna Dyening" or "Lucknow Dyeing". It really sounds funny. I wonder what the advisors to the politicians do?

BSE has created a brand for itself over a period of time. Now it is a globally recognised name. What's the point in changing the names?

My serious suggestion: Politicians should focus on issues like primary education, good health and medical facilities, sufficient power, infrastructure, farmers and farmer loans problem and also check the crime in the state.

Cashing the real estate!

Chennai-based Indian Overseas Bank is planning to sell its properties to self-promoted special purpose vehicle, thus realising the entire profit and then ploughing it back to its Tier-I capital. IOB will do a leaseback deal of properties that it had sold to the SPV.
According to the bank's estimates, the prices of its property has appreciated nearly 200 per cent over the last couple of years.

IOB has sought the approval of the finance ministry for implementing the idea, according to a top bank executive. If approved by the ministry, the government-owned bank's profit will soar by Rs 6 billion and the amount will be ploughed back to its Tier-I capital.

Banks are allowed to use 40 per cent of the rise in assets valuation to accrue to their Tier-II capital. In the current case, however, the bank will show the transaction as a sale and not revaluation. Hence the entire value of the property is accruable to its Tier-I capital.

The move followed a substantial depletion in the bank's capital adequacy ratio in the previous financial year as it had to comply with Basel-II norms. The capital adequacy ratio of the bank was 11.13 per cent as on March 31 compared with 13.27 per cent in the same period a year ago. The Tier-I capital stood at 7.31 per cent. The decrease in CAR of IOB has happened as Basel-II norms includes attaching higher weights to various risky assets.

So net net the bank would make profits virtually and make its balance sheet look healthier just by doing some paper work. Kudos, Ye hai India meri jaan.

Sources: Business Standard