Why Gold is a buy again!

Gold is down today to USD 1,587 due to new rules from China to control the gold speculation.

If we look at the attached chart, we see that Gold has been consistently rising since 2001, when it touched USD 280 levels.

We can also see a downward blip in Sept 2008 when the world's financial system was almost about to collapse and only Lehman Brothers went bankrupt but various other 'insolvent' banks of the USA were allowed to continue at the cost of the American taxpayer and the '99%' masses who continue to pay the price for the high handedness of the American banking system through more debt, more job losses, weak real estate pricing, no lending, weak stock and bond markets and insolvent businesses. We have entered a vicious cycle of DEBT - BANKRUPTCY - JOBLESSNESS -

Until Lehman collapsed in Sept 2008, we can see gold rising gradually, however, thereafter, as Governments around the world started printing more and more money, Gold started rising in a parabolic manner instead of a gradual arithmetic rise. Hence, we can actually time the rise of gold and show high degree of correlation to the 'bailing out' of privately owned banks and other large financial companies despite allegations of wrong doing and fraud.

Gold has always remained over its 50 day average and now is at that level again. This level indicates strong support and gold has remained above this level since 2002 except for the 5 month period Aug 2008-Dec 2008.

Of course, if gold drops below its 50 day average of USD 1,583, then it may go slightly more lower, but chances are quite low.

Next support of 100 day average is at USD 1,414 and 200 day average at USD 1,173.

Meanwhile, Historical price of Gold and US 10 year bond yield:

Dec 96 - USD 367      6.41%
Dec 97 - USD 289      5.74%
Dec 98 - USD 288      4.64%
Dec 99 - USD 288      6.44%
Dec 00 - USD 272      5.11%
Dec 01 - USD 278      5.05%
Dec 02 - USD 348      3.81%
Dec 03 - USD 415      4.24%
Dec 04 - USD 438      4.21%
Dec 05 - USD 517      4.39%
Dec 06 - USD 636      4.70%
Dec 07 - USD 833      4.02%
Dec 08 - USD 882      2.21%
Dec 09 - USD 1,096    3.83%
Dec 10 - USD 1,420    3.29%
Dec 11 - USD 1,587 - as on date...US 10 yr Yield 2.00%

There is a strong negative correlation between interest rates on USD bonds with Gold, when USD 10 year bond yields go down, gold rises.

Meanwhile, doubling of Gold price took over 8 years from 1997 to 2006.

From 2006, gold doubled only in less than 4 years from 2006 to early 2010.

While from Dec 2008, it took only two years to double up, from  USD 882 to USD 1,600 levels today.

Point here is that gold is doubling up due to:

1. More money in circulation and debasement of the 'value of money' in almost all currencies. More money in reality means higher national debt, which is the cause of problems in Ireland, Greece, Portugal etc and ultimately leads to higher prices in precious metals. US debt is over USD 15 trillion and rising while Eurozone debt is at USD 10-12 trillion and rising. Japanese debt is legendary and the highest.

2. Rising global population of upto 7 billion now, which was 6 billion only until 12 years ago, 1999, hence rising demand.

3. Declining mining and exploration of all major commodities such as oil, gold, silver etc.

4. 'Safe haven' status of gold since it not backed by any 'unstable' or 'risky' sovereign Govt.

5. Until the 'real' rate of return, i.e. actual/nominal yield on US bonds less inflation which is running high due to oil and other increases such as fertilisers, food, pharmaceuticals, car prices etc. This applies to all countries where inflation is higher than both GDP growth or respective yields.

In my view, today and this week is a great buy of physical gold and averaging it on purchases on a weekly or bi weekly basis, at every dip and holding it over the next few years until the global crisis can be controlled and some sort of stability and growth is seen.

I expect gold to rise to USD 2,000 levels shortly as most major banks such as UBS (USD 2,050), Barclays (USD 2,000), Goldman (USD 1,810), Citibank, JP Morgan, Morgan Stanley (USD 2,200) have already said in their research over the last few weeks! Some of these banks may be wrong or trying to once again 'frontrunning' their clients, but all cannot be wrong!

Lost Decade?.... but Axis Bank: BBB-/A-3 Ratings Affirmed

Following are various data points to conclude how the various companies and markets have evolved over the past decade.

Is it a lost decade, as far as the Western World is concerned? What will be the next mega trend over the next 5-10 years? India? China? Gold? Gold in EUR? Is indexing in India and China a great investment strategy? Finding the next Apple is impossible, so which will be the next best trend? Let's analyze....

Share Price of UBS, World's largest Private bank

On 8 Dec 2000 was CHF 38.61
Today 5 Dec 2011 is CHF 11.44
Decline of 70.3% over 10 years

Citibank, Another Largest Bank in the world

On 8 Dec 2000 was USD 479
Today 5 Dec 2011 is USD 28.17
Decline of 94.11% over 10 years

HSBC, Another World's Largest Bank

On 8 Dec 2000 was GBP 13.05
Today 5 Dec 2011 is GBP 5.12
Decline of 60.76% over 10 years

S&P 500 Index Largest 500 companies of USA
On 8 Dec 2000 was at 1,369
Today 5 Dec 2011 it is at 1,244
Decline of 9.13% over 10 years

UK FTSE 100 Index of Largest 100 companies of UK
On 8 Dec 2000 was 9,104
Today 5 Dec 2011 it is 5,558
Decline of 38.95%

Apple, the best performing US stock and the darling of everyone for last few years.
On 8 Dec 2000 was USD 7.53
On 5 Dec 2011 is USD 389.70
A Gain of 5,075% !!!!

However, most other US stocks are down, as indicated, by S&P 500 and Citibank etc above. Some conglomerates like 3M and Johnson and Johnson and IT companies like Microsoft and Oracle have not declined but neither have they risen. GE has declined despite being a conglomerate and stellar medical companies such as Merck and Pfizer have gone down because they operate in a competitive environment and also have high value of sales in Emerging Markets where the costs are high but FX reduces their margins as well so Merck is down from USD 80 to USD 35 over 10 years and Pfizer is down from USD 45 to USD 20 over the past 10 years.

Let's talk about our bank, Axis Bank, for a moment.

Axis Bank's stock price being the 9th largest Bank across India and second largest private sector bank in India.

On 8 Dec 2000 our stock price was INR 45.50
Today Axis Bank stock price is INR 1,019 on 5 Dec 2011
A Gain of 2,139% over 10 years.

We are listed in London exchange too, who wish to buy our stock being non Indian, which is currently down about 34% from peak of last year and is one of the most robust stocks in the current climate and could be accumulated on dips.

Indian Stock Exchange SENSEX
On 10 Dec 2000 was 4,156
On 5 Dec 2011 it is 16,819
Gain of 304% over 10 years

State Bank of India, India's largest bank
On 10 Dec 2000 was INR 185
On 5 Dec 2011 is INR 1,893 (despite being 50% down from its peak 6m ago)
Gain of 923% over 10 years

Our closest rival, ICICI Bank, which is the largest Private Sector bank and second largest bank in India

On 10 Dec 2000 was at INR 169
On 5 Dec 2011 is at INR 782
Gain of 362% over 10 years

ICICI was 8 times larger than Axis Bank in 2008 as per balance sheet size, however, since then until today, not only our stock performance is better from the same start date in 2000 or since our birth in 1995 or over the last one year and we are now about 60% the size of ICICI bank (from 12.5% in 2008).

In terms of safety and growth, Axis has been a steady and solid performer, whether by employee strength at 35k employees and rising at 6-7k per annum forlast few years, growth in India or abroad (70% growth in 2009, 40% in 2010 and 27% in 2011), number of branches (over 1,500 and 400 branches opened in 2010), profits or asset size or lowest non performing loans!

And recently, S&P has altered its rating methodology due to which most Western banks were downgraded last week and 2 Chinese banks were upgraded, while our Bank has been reaffirmed at same ratings.

S&P also indicated that Govt of India will provide support if required and they do not see any decline in profits or any risks in the near future.

Please read the report for your information.

Axis Bank Ltd: 'BBB-/A-3' Ratings Affirmed ; Outlook Is Stable

S&P has affirmed 'BBB-/A-3' rating on Axis. The outlook is stable.

The rating on Axis reflects the bank's 'bbb-' anchor, "strong" business
position, "moderate" capital and earnings, "adequate" risk position,
"above-average" funding, and "adequate" liquidity. The rating also factors
in potential extraordinary government support in the event of financial
distress as Axis has "moderate systemic importance.".

Axis' "strong" business position represents the bank's strong retail
franchise, stemming from its brand equity, good geographic and income
diversity, and adequate management strategy.

The bank's funding profile is "above-average" and its liquidity position
"adequate."

Axis is the ninth-largest bank in India, in terms of deposits, and
accounts for about 3.2% of system deposits.

The stable outlook reflects the expectation that Axis will maintain its
strong business position and adequate asset quality.

Gold Vs AUD Vs S&P 500...Investment Ideas

Gold has been a tremendous investment opportunity since 2001 and has lasted a decade. My view is that this opportunity will continue and will last for at least a few more years and perhaps another decade due to the decline of all major currencies.

Facts are:

Had you invested USD 1m in Gold in 2001
Price in 2001 was USD 278
Price today is USD 1,697
Gain of 510% in 10 years
Total value of USD 1m would have been USD 6,104,316

Current outlook as on date: Gold shall continue to rise and shall touch USD 2,500 levels within the next 12 months

Had you invested USD 1m in AUD in 2001
Price in 2001 was 0.5144
Price today is 0.9881
Gain of 92% in 10 years
Total value of USD 1m would have been USD 1,920,878

Current outlook as on date: AUD shall continue to rise due to commodity price growth as well as China's growth and should be bought at prices below 1.00 on a weekly average basis and on any sudden dips. Another strong factor is that AUD has the highest base interest rate in the world of 4.50% while USA/Japan/Switzerland are at zero and England is at 0.50% and Europe is at 1.25% and Canada at 1%.

Had you invested USD 1m in S&P 500, in 500 the world's top most companies listed in America in 2001
Price in 2001 was 1,123
Price today 1,192
A miserable gain of 6% which is close to zero!
So USD 1m in equities in some of the best companies in the world would have got you zero return in 10 years.

Current outlook as on date: Expect S&P500 to go down to 800-900 levels within one year from 1,192 levels today. And do not be surprised if it goes to below 700 levels.

Gold would not have earned any excess returns but the AUD investment would have earned anywhere from 3-6% p.a. as interest besides capital gains in addition to the 92% return mentioned above taking the return to almost 150-200% or higher.

Point I am trying to make here is that AUD and Gold are still amazing opportunities to invest into, in the coming days, in fact this week, on an average basis due to some correction in the AUD as well as gold prices, in the short run.

In the long run, both will continue to run up.

Meanwhile, we have all seen and heard that Govts are going bust, real estate values are declining worldwide, global banks are in big trouble etc etc.

Please view the attached chart and observe that US equities gave close to zero return over a 10 year period and are expected to decline in the coming one year while AUD and Gold have continued to rise for almost a decade and have multi year highs, partly because both have high demand and both are anti-USD investments and China has a important role in both. In Australia, China is the largest importer while for gold, China has large reserves but has become a large buyer and is beating India in tons of gold purchased.

All in all, AUD and Gold are safe investments when entered at the right time to invest, in the short term, given current uncertain market climate but in the long term, it could be anytime.

Bonuses for Investment Bankers : Regulate It, Tightly!

A wonderful article, published in the NY Times, by the Prof of NYU and Author of  the book 'The Black Swan', espousing the negative impact of bonuses to investment bankers. It is the one percent of investment bankers out of the entire world of banking who failed the capitalist model across North America and Europe instead of bankers involved in the 'good aspects' of banking within corporate banking and trade finance or in credit cards and branch banking or in various support functions. The title of the article in NY Times should not have been just bankers but should have been titled 'End Bonuses for Investment Bankers'.

Although, I agree with the thrust of the article, however, bonuses and regulations should be regulated for the CEO's and investment bankers and some parts of the mutual fund and hedge fund areas of the banking system and not for the rest of the 'boring' banking community who work hard around the world from small villages to large cities while supporting millions of small to medium size businesses and facilitate trade from China to Colombia besides providing home and car finance or deposit taking and basic money transfer facilities which we take for granted today. These investment bankers create derivatives and structured products which have destroyed wealth instead of creating wealth and caused lack of trust in all bankers by the general public.

Once this trust is restored based on the essence of this article and changing of laws governing derivatives and investment banking with a major regulation of bonuses in the investment banking and derivative areas of 'banking', only then a meaningful change can be effected while restoring trust in bankers again by the general public.

Please do read this article which must find its way to the mind and hearts of our regulators and lawmakers who can drive the change and make banking a social cause (which it has been for centuries) and not just a profitable cause or an avenue for higher tax revenues, at the cost of the masses. 

The investors and public would be better off, if they do not support or invest in derivatives and structured products (hence reducing demand for mostly useless products) and suggest to their lawmakers or discuss with fellow businessmen to engage their banking community contacts to drive this change.

End Bonuses for Bankers

BY NASSIM NICHOLAS TALEB

Published, November 7, 2011

The Fall of the Mighty Swiss Banks...or is it Swiss Banking Model is in trouble?

Many Swiss Banks have announced major cost cutting measures, right from job cuts to closing departments to closing international offices.

Some main factors are:

Rise of CHF
Even if the Swiss banks did same amount of business in this difficult climate, they would be VERY worse off just due to their rising currency. They have costs in CHF, balance sheet in CHF but almost 90% of business in USD or other foreign currencies.

CHF vs USD
In 2005...1.28
In 2006...1.24
In 2007...1.15
In 2008...1.15
In 2009 ..1.02
In 2010...0.98
In 2011...0.90

Just on currency/FX alone, as per above FX rates of CHF/USD, the balance sheets have reduced by 30% from 2005 to 2011 (1.28 to 0.90 today).

If we added a loss of just 20%, which is quite conservative, in assets managed and total balance sheet size, that would be a total of 50% reduction in size from 2005 until 2011 of the balance sheets of all Swiss banks and the two largest Global Top 10 banks, viz UBS and Credit Suisse.

In addition, we have the negative imnpact of inflation due to rising salaries, rents and other fixed costs and expansion of all Swiss Banks in the same period. We all know inflation is an average of 5% or more each year, so for 6 years should be 30% or more, but let's say the impact was only 10%.

This now adds up to almost 60% decline in balance sheet size and profits and assets when converted into CHF over a 6 year period.

I don't think many businesses can survive if they have a 60% decline, on a conservative basis over a long term of 6 years and going into 7th year, especially if they are publicly listed which is why all Swiss Banks have seen the departure of their CEO's in the last few years besides employee shrinkage and now the real closure of offices in any country around the world which has been unprofitable over the worst global crisis we have seen, in 2009 and 2010.

We are not even including the reputational and goodwill damage that the US prosecution has caused to the Swiss Banks by forcing them to pay billions of dollars collectively in fines for helping US citizens evade taxes and now to their privacy model where the Swiss Banks have signed agreements with Germany, France, India, USA, UK etc to give confidential client names under tax rules of each country.

We also did not consider here the lack of new business activity such as slow IPO's, slow trading and slow M&A fees.

In reality, the Swiss Banking model is weak, crumbling and in trouble. Stock prices of all Swiss Banks indicates the same as well, where most have declined over 70% and some as high as 85% over the past 4 year period.

Without tacit and literal Govt support, these banks would have closed by now due to their intolerant investment banking activities to make trading profits for themselves instead of their fiduciary duty to their customers and their illicit private banking activities in tax evasion and hiding of assets under the guise of privacy.

One more factor to consider is that the income and revenues of all these banks are in USD but their costs of HR, Finance, reporting, regulations, pensions, employees etc are mostly in CHF, which also is having a huge impact on them due to the rise of CHF, which is why the Swiss Central Bank announced that they will have a target CHF price against USD, possibly under pressure from the larger business community that includes luxury watches, export industry, and banks etc.

Meanwhile.....

UBS has cut thousands of jobs, given away client names to IRS and last week also agreed and signed another agreement in which 11 Swiss Banks will provide all information to US Govt, now besides the large USD 2.3bn trading loss in London office, and now they will slow down further and cut another '1,700' jobs, I suspect there will be more job cuts announced all around the world in the coming months besides office/country closures.

EFG International Private Bank has announced that they will close offices in Dubai and Abu Dhabi where they have at least 20-30 employees. EFG came to DIFC in 2005/6 and in 2011 they finally depart, being one of the more successful Swiss banks who were quite client focused, besides closing their offices in Sweden and some in Canada.

EFG International to Post Loss on Job Cuts, Office Closures

By Giles Broom
    Oct. 18 (Bloomberg) -- EFG International AG, the Swiss bank controlled by Greek billionaire Spiro Latsis and his family,
will report a second straight loss this year on costs related to cutting as many as 375 jobs and closing offices. EFG will book one-time reorganization costs and provisions of about 50 million Swiss francs ($55.8 million), a charge related to investments in Greek sovereign debt, and will enter a
lower goodwill figure in its 2011 accounts as it slims businesses to improve profitability, the Zurich-based company said today in a statement.

The bank, which lost 75 relationship managers this year, is cutting 10 percent to 15 percent of its 2,500 staff over the next 18 months and closing offices in Sweden, Finland, Dubai and Abu Dhabi, the company said.

Credit Suisse has also declared that they will announce further cuts when they announce their results next month, early Nov. Clariden Leu is part of the Credit Suisse Group and I do not believe that they are doing any better, as far as their balance sheet is concerned, because they are overleveraged in client accounts due to pressures to grow over the past 5 years when all Swiss Banks were growing fast unlike them and now Clariden is doing quite fine except that most of their clients are into leveraged Emerging Market investments on which Swiss Banks do not have much knowledge of, which could potentially devastate their balance sheet )due to relatively small size despite Credit Suisse parent support) and cause their risk department to curb on emerging market lending leading to mass exodus of high risk clients....

Most Swiss Banks in Middle East and outside of Switzerland will have issues related to their Head Offices where the cost cutting pressure and pressure to  withdraw from international business seems to be beginning to grow acutely, in the last month or two, prior to the Dec 2011 balance sheet. Its always about the Balance sheet!..:)..Thats my view that we might see exit of some more Swiss banks from various cities around the world!

Credit Suisse eyes investment banking cuts

By Haig Simonian in Zurich
    Oct. 14 (Financial Times) -- Credit Suisse will announce
significant adjustments to its investment banking activities
with its third-quarter results early next month.

Julius Baer has its own issues with USA, Rothschild, of all the banks, sold their Private Equity group in Geneva last week.......

The list goes on...I dont think I need to provide any more examples...:)

If you or any one you know has any bank accounts with any Swiss Bank, I would really strongly suggest to review your relationship and investments more actively.

I am not suggesting that any of the Swiss banks will close but the facts indicate that they will get worse in their quality of service, will probably close more offices around the world and who knows some of them might shut down or disappear like Bear Stearns, Lehman and Merrill Lynch disappeared in the USA in 2008. But only this time in 2011 this is a European crisis, so don't hold your breath that some banks actually shut down or disappear....so stay tuned

If you would like to transfer some assets to us for safekeeping in an Indian bank in Singapore, I would certainly like to hear from you.

UBS May Cut 1,700 More Jobs at Investment Bank, JPMorgan Says
2011-10-20 08:55:01.816 GMT

By Elena Logutenkova
    Oct. 20 (Bloomberg) -- UBS AG, Switzerland's largest bank,
may cut about 1,700 more jobs at the investment bank as it
shrinks the fixed-income business, JPMorgan Chase & Co. analysts
led by Kian Abouhossein said.
    "Investors would welcome a strategy aimed at shrinking
UBS's investment bank division and aligning it to mainly support
the private banking franchise," the analysts said in a note
today. "We would expect the restructured investment bank to
consume materially less capital with improved returns for the
investment bank and the group."
    The bank could reduce risk-weighted assets in the fixed-
income business by 70 billion Swiss francs ($77.4 billion),
freeing up about 7 billion francs of capital, the analysts
estimated. The job cuts, representing about 11 percent of total
headcount at the investment bank, would be on top of the
announced reductions of about 1,575 positions, they said.
    Zurich-based UBS plans to reorganize the investment bank to
focus on "advisory, capital markets and client flow and
solutions businesses," making the unit "less complex," Chief
Financial Officer Tom Naratil said at an investor presentation
in London on Oct. 4. The unit will aim to boost return on equity
as UBS reallocates more shareholders' funds toward wealth and
asset management, Naratil said. The bank plans to explain its
strategy to investors on Nov. 17.
    The Swiss bank may shrink its rates and structured credit
businesses to one third of their current size, exit the
commodities business and slim the credit trading unit by about
20 percent, the JPMorgan analysts, who have an "overweight"
rating on the bank, estimated. UBS is unlikely to seek
reorganization of its equities business, they said.

                        Trading Loss
     
    The bank's interim chief executive officer, Sergio
Ermotti, has decided to reduce the size of the investment bank
and to bolster UBS's focus on wealth management, the Wall
Street Journal reported today, citing unidentified people
familiar with his thinking.
    UBS said last month it suffered a $2.3 billion loss from
unauthorized trading in stock index futures at its investment
bank. The trading losses have led to the departures of Chief
Executive Officer Oswald Gruebel and the co-heads of global
equities, Francois Gouws and Yassine Bouhara, as well as the
suspension of a number of front office staff.
    Kweku Adoboli, the trader accused of causing the loss, goes
before a London judge today and may enter a plea before his case
is transferred to a higher criminal court.

For Related News and Information:
For top finance news: FTOP <GO>
More news on Goldman Sachs: GS US <Equity> CN <GO>

--Editors: Frank Connelly, Edward Evans

To contact the reporter on this story:
Elena Logutenkova in Zurich at +41-44-224-4101 or
elogutenkova@bloomberg.net

To contact the editor responsible for this story:
Frank Connelly at +33-1-5365-5063 or fconnelly@bloomberg.net

Belgian Banks...Dexia, KBC falling apart?

One Belgian bank after another gets in trouble .....

1.
Dexia is the largest financial group, ranked 49th largest company in the world by Fortune 500 Global companies in 2010. It has over 35,000 employees and shareholders equity of almost EUR 20bn. Its origins go back to 1860 but rapid international expansion started in 1990.

In Sep 2008, the same bank was bailed out with a capital injection of EUR 6.4bn and with a state guarantee for a maximum of EUR 150bn. Chairman and CEO were sacked and ex Belgian PM was appointed and have been selling healthy parts of the bank ever since.

From Aa1 in 2008, the Groups ratings have been reduced to A1 (equiv from AA+ to A+ by S&P) and expect further downgrades despite the nationalisation.

Dexia also borrowed from US Federal Reserve an amount of USD 30bn in 2008.

Currently, Belgium's ratings itself are under review for a downgrade.

Dexia's share price continues to fall and now is at EUR 0.84, from EUR 3.07 in Oct 2010 and EUR 5.60 in Oct 2009 and EUR 5.43 in Oct 2008 and EUR 20.5 in Oct 2007.

Belgium to Buy Dexia's Local Consumer Bank for $5.4 Billion

By Rebecca Christie
    Oct. 10 (Bloomberg) -- Belgium agreed to buy the local consumer-lending unit of Dexia SA, ending a 15-year cross-border experiment with France after the European debt crisis deepened. The Belgian federal government will pay 4 billion euros ($5.4 billion) for the division and guarantee 60 percent of a
so-called bad bank to be set up for Dexia's troubled assets, Finance Minister Didier Reynders said at a press conference today in Brussels. The sale will cut Dexia's short-term funding requirement by more than 14 billion euros, the French-Belgian bank said in an e-mailed statement.

2.
Another large Belgian bank - KBC - just announced that they will sell their department of Private Banking to a Qatari investor under the name Precision Capital from Luxembourg. Qatar has been buying selective assets internationally quietly. Qatar is also rumuored to buy the Luxembourg branch of Dexia Bank, once details are finalised over the next few days.

KBC's stock price has declined from EUR 99 in Oct 2007 and EUR 50 in Oct 2008 to EUR 17 today Oct 10,  2011. Its share like most other European banks are banned from short selling at the moment.

Stay tuned....

BN 10/10 05:49 KBC Agrees to Sell KBL Private Bank Unit for 1.05 Billion Euros
BN 10/10 05:47 *KBC TO SELL PRIVATE BANKING UNIT TO PRECISION FOR EU1.05 BLN
BN 10/10 05:45 *KBC: PRECISION CAPITAL BUYS KBL EPB, KBC'S PRIVATE BANKING UNIT

India Slowing? : Govt owned Largest Bank from India downgraded

As expected, Govt owned banks continue to suffer in India due to:

1. Corruption coming out
2. Value of Indian Rupee falling making future payments in USD bonds or loans more expensive for large business houses as well as all banks
3. Interest rates rising to 15-20% for borrowings and 10-11% on deposits
4. Stock prices falling. SBI share price has declined 50% since Nov 2010. Not the best sign if the bank is the largest from India and Top 50-60 globally.
5. Lending to real estate and stock brokerages stalling and slow to all other sectors while loan losses rise, making interest revenues to decline substantially. DLF stock price down 50% in 1 year and 83% from peak of INR 1,200 in Jan 08.
6. Outsourcing slowing down from US and Europe indicated by Wipro and Infosys stock prices, down 30% approx in just one year and hindering growth of employment
7. Export companies from India in trouble due to lack of orders from US and Europe and rising tarrifs in most countries such as Gokuldas Exports, which are down only 37% thus far in 1 year but 77% from peak in Mar 2006.
8. To make it all worse, political instability and suspended Govt with no laws having been passed in almost all year.

9. Worse effects of global crisis impacting liquidity and raising borrowing costs for all banks
10. The sole reason interest rates have been hiked by Reserve Bank of India over the last 2 years is to fight high inflation whose negative impact is on slowing growth. High interest rates mean slow rise of banks, bad loans and poor performance of stocks besides much lower revenues than anticipated for all banks due to lower borrowing by both consumers and businesses.

Meanwhile, private sector banks are poor performers but not as bad as Govt sector banks since their loan losses are not as high, they are just in better shape if looking one year hence.

Stock price of SBI attached below. It has declined from INR 3,489 in Nov 10 to INR 1,770 today, Oct 4, 11, a decline of 50% in 11 months!

Stay tuned...

BN 10/04 08:42 State Bank of India Falls to Lowest in Two Years on Downgrade
BFW 10/04 07:19 State Bank of India Stand-Alone Rating Downgraded by Moody's
BN 10/04 07:16 *MOODY'S DOWNGRADES STAND-ALONE RATING OF STATE BANK OF INDIA

Moody's Downgrades Standalone Rating of State Bank of India
2011-10-04 07:25:17.949 GMT

By Pradeep Kurup
    Oct. 4 (Bloomberg) -- Moody's Investors Service downgraded
State Bank of India's bank financial strength rating, or
standalone rating, to 'D+' from 'C-', according to a statement
from the rating agency today. The revised rating maps to a
baseline credit assessment of 'Baa3', it said.
    The hybrid debt rating of the Indian state-run lender was
cut to 'Ba3(hyb)' from 'Ba2(hyb)', the statement said. The
revised bank rating carries a stable outlook and the hybrid
rating a negative outlook.

What will US do tonight? Will they or wont they?

It is very difficult to predict what the US Federal Reserve Committee will do today at 2.15pm EST/10.15pm Dubai time, Wed Sept 21, 2011.

Let me explain....The Fed will meet tonight and depending on what they SAY, either the market will sink down or rise up with a strong rally. However, no one knows. If they throw more money at the banks to help them, the mass market will be very unhappy for spending taxpayers money to help the investment bankers while politicians will lose their seats and the US debt situation will get more worse.

On the other hand, if the Govt does not throw more money, the joblessness will continue to increase, banks will continue to close and the global economic crisis (read depression) will get even more worse despite zero interest rates, because banks will be unable to lend to businesses causing manufacturing and trade to decline.

The US economy is hence stuck between a rock and hard place!

1. However, some interesting news today,just out from Bank of England that they are throwing more money. This makes me believe that USA might throw more money as well. This will make the situation less worse and give stocks a boost for a few days or weeks. However, I am not too sure if they will throw money in US or not but if England has done it, then it is more likely after hearing this news that US might. I have been uncertain and am 50:50 but this news makes me tilt more towards the reality that in politics, politicians will do what gets them the votes not what is best for the country!

Bank of England Hints Move to More Stimulus

By ROBERT BARR

London (AP) -- The Bank of England appears to be gearing up
to pump billions more into the British economy to stimulate a
faltering recovery, minutes to its last rate-setting meeting
suggested Wednesday.
Though American economist Adam Posen was alone among the
nine members to vote in favor of resuming asset purchases,
"most members" agreed that the case for more stimulus had
strengthened in the past month, according to the minutes of the
September meeting of the Monetary Policy Committee.
"For some members, a continuation of the conditions seen
over the past month would probably be sufficient to justify an
expansion of the asset purchase program at a subsequent
meeting," the minutes said.
All nine rate-setters also voted to keep the main interest
rate unchanged at the record low of 0.5 percent.


2. Some major corporations have lost faith in the European banking system.

Since yesterday, two mega corporations have moved billions of dollars from the French banks and deposited it straight with the European Central Bank thus bypassing the risk of closure or bankruptcy of French banks, since the Govt will be unable to help the banks, which are in reality, a business with a social cause.

What this means is that even European companies are not willing to keep deposits with their own European banks which indicates that the bad situation is about to get much much worse.

Lloyd's of London Pulls Deposits From Euro Banks on Debt Crisis

By Kevin Crowley
Sept. 21 (Bloomberg) -- Lloyd's of London, the world's
oldest insurance market, has pulled deposits from European bank
on concerns governments may be unable to support lenders in a
worsening debt crisis, Finance Director Luke Savage said.
"There are a lot of banks who, because of the uncertainty
around Europe, the market has stopped using to place deposits
with," Savage said today in a telephone interview. "If you're
worried the government itself might be at risk, then you're
certainly worried the banks could be taken down with them."
European banks are trying to reassure investors and
customers they have enough capital to withstand a default by
Greece and slowing economic growth caused by governments'
austerity measures. Siemens AG, European's biggest engineering
company, withdrew short-term deposits from Societe Generale SA,
France's second-largest bank, in July, a person with knowledge
of the matter said yesterday.
Lloyd's, which holds about a third of its 2.5 billion
pounds of central assets in cash, has stopped depositing money
with some banks in Europe's peripheral economies, Savage said.

Siemens Deposits More Than 500 Million Euros With ECB, FT Says

By Robert Fenner
Sept. 20 (Bloomberg) -- Siemens AG deposited more than 500
million euros ($681 million) with the European Central Bank
after withdrawing the funds from a French lender two weeks ago,
the Financial Times reported.
The money was moved amid concern with the financial health
of the unidentified French lender and higher interest rates paid
by the European Central Bank, the Financial Times said, citing
an unidentified person with direct knowledge of the matter. The
Munich-based engineering company has between 4 billion euros and
6 billion euros on one-week deposit at the ECB, the FT said.

3. What to do in such a scenario? Where to invest and stay safe?

Safety is not as safe as it used to be!

All equity markets and most real estate markets including most bonds are severely down in the past couple of months.

We can blame it on high oil prices - which no one talks about - failing banks, declining real estate prices, joblessness, extremely weak equity markets or on Sun, Moon or God, but the fact is that most investment values are down, except for accounts managed by me!.

Major corporations such as Lehman, Bear Stearns, Merrill Lynch, 500 banks in USA, hundreds more in Europe have been shut down, hotels and airlines are in big trouble, Starbucks is closing stores, while Citbank and other major Top 10 banks have seen their stocks decline 80 to 90% or more and have been bailed out and are on life support. With no lending, the income of banks is under tremendous pressure., The fraud in trading departments at SocGen and UBS indicates that everything goes in this pressure environment while the US Govt chases investors and banks who assisted US citizens and residents to evade taxes. Thousands of Americans have come out to confess and the number is a staggerring 50,000 US citizens who have admitted to the US Govt voluntarily that they were helped by major banks in evasion of taxes under the amnesty scheme that ended in Aug 2011. HSBC, Credit Suisses and UBS have already settled with US Govt by paying hundreds of millions of dollars in fines and now 8 more banks are under grand jury investigation all from Europe, as announced yesterday.

Investors have lost money in all kind of assets and this makes them relucatnt to invest in anything else. Aside from banks in Brazil, China, India, Australia and Canada, all other countries due to their involvement with US or Europe business or trade are in serious trouble indicated by their stock values.

As on date, the asset allocation to follow should be:

1. Convert 10 to 20% of USD assets into AUD and keep in bonds or deposit at close to 6%. AUD has declined froom 1.10 to 1.02 level and will rise to 1.10 again in the coming months.
2. Invest in AAA rated bond from Singapore which has risen from USD 102 in Jan 2011 to USD 109 as on date named Temasek Financial.
3. Invest in selective Indian and Chinese companies whose bond values are attractive but should be cash rich
4. Stay short in any stock market worldwide or stay out. Can invest in dividend paying stocks selectively.
5. Invest in gold and silver in a selective manner on an average price basis weekly. If gold has risen for last ten years, then it will continue to rise in the future too.
6. Even CAD is great but lacks investment options. Canadian banks are good stocks to buy for the long term.
7. Stay away from INR and INR products as it will decline and remain volatile since Indian economy and real estate will go down in the next two years.
8. Stay away from anything related to European or American financial companies. Better still, short them.
9. Commodities will remain volatile but will continue to rise over next 1-2 years.
10. Keep lots of cash, because it cannot decline in value and provides opportunity to buy when a great opportunity presents in this crisis.

Some interesting bonds to consider as on date:
1. Evergrande Real Estate Jan 2015. Todays price of USD 88 yields 18% in USD from China.
2. ICICI Bank India Nov 20 is down to USD 97 from USD 104 and yields 6.10%
3. Bank of India Feb 21, is down from 109 to USD 101 and yields 5.95%
4. NTPC India July 21 is down from USD 106 to USD 101 and yields 5.50%
5. Indian Oil Aug 21 is down from USD 105 to USD 100.50 and yields 5.50%
6. Vedanta Resources Jul 2018 is down from USD 114 to USD 101.50 and yields 9.15%
7. Woori Bank from Korea Apr 21 is down from USD 107.25 to USD 101.75 and yields 5.60%
8. Rep of Sri Lanka Jul 21 is down from 105 to USD 102 and yields 5.95%
9. Rep. of Vietnam Jan 20 is down from USD 107 to USD 105 and yields 6%
10. Temasek Financial, from Govt of Singapore is AAA rated is down from USD 111 to USD 109 and will not decline further and yields 3%. I see this bond rising to USD 115 in the next 6 to 12 months.

There are not many other ideas at this time but Abu Dhabi bonds have indeed risen due to their safety status when compared to Europe and others.

4.
Do read the report below as to how 8 additional banks (aside from HSBC, Credit Suisse and UBS) have been under grand jury investigation who helped Americans to evade taxes and break US laws.

Eight Offshore Banks Under Grand Jury Investigation Over Taxes, U.S. Says

Visit to NYC and Toronto

I am visiting NYC week of Sep 5 and then in Toronto the week of Sep 12, 2011, in case you wish to meet.

The weather is excellent and the rain is not too heavy.

Few investment opportunities in Prague and Singapore in hand as well.

Major Shift in Textbook Economics : USA is neither Risk Free nor the Safest Haven

United States loses prized AAA credit rating from S&P

http://ca.reuters.com/article/businessNews/idCATRE7746VF20110806?sp=true

Yesterday, Friday, August 5 2011, will be remembered similar to September 11, 2001 attacks (on the New York World Trade Center) when the world changed and will become a turning point in world history.

I like the line from the movie Apocalypse Now, as stated by Robert Duvall, a war movie based in Vietnam - "I Love the smell of Napalm in the morning". This quote is what you think of this morning, as we all wake up, when we hear that USA has lost its vaunted and seemingly infallible AAA rating.

I have suggested to many to move assets from equity markets for past month or two and sell even bonds in the last 2 weeks mainly to crystallize gains, sit in cash on the sidelines until the haze clears and we know, exactly, what the hell is going on? Markets will not only be extremely volatile but slide downwards.

Losing the rating is not much, but what matters in this context is the changing fundamentals, where to invest and how to be safe?

It was a matter of time before USA would have lost its rating. This was clearly being indicated by the melodrama, Hollywood style, happening over the last two weeks in US Congress with respect to the increase in USA debt ceiling, rise of which in itself if a very bad thing for the US economy. Further, the bond yields of various US Govt bonds were declining at a very rapid pace and the 2 year yield was close to 0.30%, 5 years was approx 1.25% and 10 year was at 2.5%. Chinese had stopped buying US Treasuries for last few months, while equity markets worldwide were volatile and sliding and there was nervousness all around including the usually stable price of copper which started declining last week.

Just like in 2008, when Bear Stearns and Lehman Brothers went bankrupt causing thousands of job losses, severe loss of income for employees, investment values in those two stocks in particular down to zero, equity markets to collapse and Central Banks worldwide to coordinate reduction in interest rates and 'bail out' of large banks in almost all developed nations with the major exceptions of Canada, Japan and Australia (in developed markets) That was ugly.

In 2011, things will get much worse in my view, because banks are still unable to lend in most parts of the world. In countries like India and China, interest rates continue to rise making a new type of problem arise where the borrowers are unwilling to borrow at high rates (caused due to low borrowing rates in USD and influx of such money into these countries leading to high inflation). We have seen the problems in both China and India where bank stocks have taken a beating, some are down 20 to 30% and some bank shares just refuse to rise despite profitability while loan losses rise tremendously.

In my view, things will not only be very uncertain but will turn nasty and lead all global markets even more downwards in the coming month. However, do expect a sharp rally in stock markets as and when the Governments announce some major policy action such as buy back of Govt issued bonds from banks or reduction in interest rates as we saw in Switzerland and Japan last week or when stocks of some companies become undervalued from their intrinsic book values or oversold, then there will be sharp buying leading to rise in equity prices. However, be cautioned, that unless you are a day trader, this extreme volatility may wipe out your investments before it comes back up to the same levels.

It is also my opinion that most things taught to us in school and universities that were held as 'sacrosanct' are being tested and failing as we live through unprecedented times where USA loses its rating, banks do not do lending, interest rates in Japan, USA, Europe, UK, Canada, Singapore, Switzerland are close to zero. Whereas, borrowing rates in countries such as Brazil, India, Venezuela, most African countries, Argentina, China, Pakistan etc are at historic highs and continue to rise. This disparity between the developed and developing countries will cause greater financial pressures in the coming months where all nations will become more inward looking rather than 'globalizing' further causing further declines in equity markets and aggravating the lack of borrowing from banks. Meanwhile, the real estate crisis in countries like Spain, UAE and USA will remain prolonged due to global headwinds.

We were taught that US interest rate is the only 'risk free rate' to measure everything against. Question is: If USA is not 'risk free' then how will those formulas work? Are they not useless now? What shall we measure risk against?

It seems the economists, writers of textbooks, Nobel prize winners and all, never contemplated that WHAT IF scenario, that will happen if their basic assumption of risk free rate itself is challenged and becomes useless.

It also brings to my favourite suggestion for the past 2 years to keep assets in different currencies.

With USA sliding gradually, other currencies will get some benefit and continue a gradual rise. This can be a hedge or protect value of your assets especially in such uncertain times.

This news of US rating downgrade will continue to have ramifications beyond the financial sector. It will impact politics in USA and change of thinking in countries like China and Japan who buy US Treasuries and lack of respect from emerging markets who always look upto USA as a global leader. Not to forget that economic uncertainty leads to unemployment and therefore, rise in crime and taxation or both.

What happens in countries like UAE, HK, and other Middle eastern nations who keep their currencies pegged to the 'strong' dollar, is still an unknown. Although UAE announced last week that they will not change the status of pegging with USD and HK has also announced that they are watching carefully but have not made any decisions yet. What was surprising in UAE that UAE does not hold any US Treasury bonds since last year or so.

Stay tuned for the most volatile week of your investment life next week.....Your guess is as good as mine as to what will happen, but markets are expected to go further lower and be very volatile......If you can, go short the markets so at least you can benefit from the negative news until it all turns around. I hate to say this but I did advise to go short over the last two months.

The point is, this downgrade has never happened before, so we are in unchartered territory where mass inertia or herd mentality will not work and neither anything we were taught in schools and newspapers will work. In such times, it is best to stay in cash and keep out of the markets, as much as you can.

Bankers and banks finally pay the price of their past mistakes... in 2011...and beyond

The times have come when European and American banks are slashing jobs instead of expanding and growing. This will have impact in growth centres such as Singapore, Dubai etc where local banks will continue to flourish like in India, Brazil and China while 'international' banks will continue to decline both in scale and scope in the coming years......Lack of reserves in times of uncertainty can haunt all businesses including the banks themselves. Most of the Top 20 banks globally have been brought down in profits, assets and no. of employees, thanks to the unprecedented crisis. Most have been replaced by Chinese, Canadian and Australian banks in the Top 20.

1.

Credit Suisse announced 2,000 job cuts last week. But WSJ says to expect more job cuts in coming months.

http://blogs.wsj.com/source/2011/07/28/expect-more-job-cuts-at-credit-suisse/

The rise of Swiss Franc is hurting the Swiss banks since most of their business is from abroad and in USD. Plus, deals are slowing and Governments are putting pressure on taxation while the past mistakes of banks are catching up from Ireland, Iceland, Greece, Italy, Portugal etc.

2.

HSBC may cut over 10,000 jobs, according to news this week.

http://retailbanking.banking-business-review.com/news/hsbc-may-cut-10000-jobs-to-slash-costs-280711

This is in addition to sale of bulk of their business and thousands of lay offs that have happened in 2008 to 2010 period and 360 announced in Middle East in June 2011.

3.

UBS has announced 5,000 job cuts last week.

Interestingly, they have announced 3% lay offs in Asia Pacific as well.

http://uk.reuters.com/article/2009/04/14/uk-ubs-idUKTRE53D3YA20090414

4.

Lloyds Bank has announced 15,000 job cuts last month

http://www.ft.com/intl/cms/s/0/17166134-a2ea-11e0-a9a4-00144feabdc0.html#axzz1TTwSFrFg

There is news of sale of 660 branches of Lloyds to Mr Osmond a businessman from UK together with Virgin Group

5.

RBS from UK announced 200 cuts but laid off over 3,000 bankers last month

http://www.financialadvice.co.uk/news/12/ukeconomy/8565/employment-massacre-in-the-city-as-rbs-cuts-3000-adrift.html

6.

Goldman Sachs has announced 'official' job sits of 1,000 last week

http://www.bloomberg.com/news/2011-07-19/goldman-sachs-plans-job-cuts-as-debt-trading-misses-estimates.html

Plus....

7.

Cisco has announced 6,500 and upto 10,000 job cuts globally, last week.

http://www.bloomberg.com/news/2011-07-21/cisco-s-6-500-job-cuts-could-hurt-push-for-offshore-tax-holiday.html

 8.

RIM, from Canada whose stock is languishing in the 20's from upper USD 70's also announced cuts but they hired 1,500 since Feb 11 and are letting go, 2000 now.

http://www.bizjournals.com/dallas/blog/2011/07/rim-cuts-jobs-but-hired-1500-since.html

Impact on Emerging Markets

9.

The way the emerging markets like India will get slow down is due to lack of outsourcing from Europe and America, which can partly be blamed on inflation and rising salary costs besides patriotic sentiment to create local employment in Europe and USA.

For example, Santander bank has closed all contracts with India and brought most outsourcing jobs back to UK.

http://www.cio.in/news/santander-moves-call-center-jobs-india-uk-146152011

Meanwhile, after 2 years of work, Union Bank of California cancelled a USD 20m contract with Infosys from India, this week.

http://timesofindia.indiatimes.com/tech/news/software-services/US-bank-cancels-Infosys-deal/articleshow/9333220.cms?intenttarget=no

Bond Prices: Change in Influencing Factors and the Future

I have been suggesting to investors for quite a while now that a bond pricing/yield shall not work the same as in the past for various reasons.

Let me elaborate, the price of a bond depends on two primary variables and is calculated as below:

Bond Price/Yield is equal to 'Risk Free' Interest rate of underlying currency for same period PLUS Risk Premium of the issuer.

Until now, when the world was quite stable, in the past 20-25 years since 1971, most of us have not seen difference or volatility in Risk Premiums. As we all now know that Lehman Brothers (wonder if it was called Lehman Sisters, if it would have had the same downfall), Enron, Arthur Andersen, Emaar, Nakheel, Bear Stearns, Citi, Fortis, ABN AMRO, RBS, Bank of Ireland, Satyam, Madoff etc, have changed the perception of risk even if backed by 'solid' balance sheets or the assurance of Governments or guaranteed inflows as in the case of Madoff. Large banks such as Citi, RBC, Fortis, Spanish and Irish banks and over 500 US banks that have closed in the last 4 years, have all been brought to their knees despite backing from various Govts. Despite being a lender of last resort, Central Banks are unable to help the banks nor the borrowers and nor the clients.

Coming back to bond price/yield, we have all assumed that ALL THINGS BEING EQUAL, as taught in Economics 101, if interest rates rise, only then bond price declines. When another function such as underlying risk of the Company/Govt is introduced in this equation, then the ALL THINGS BEING EQUAL does not hold true since now two variables are at work, interest rate and credit risk (or Risk Premium) of the company/issuer.

In the past 4 years, all things have NOT been equal and various unprecedented events have occurred causing markets to seize and play havoc with lives of various common citizens such as unemployment, lack of new job prospects, closure of large companies such as Fannie and Freddie, closure of car factories, outsourcing companies, large and small banks, various businesses etc and decline in stock markets and real estate among other things.

When Risk Premium is added to the equation, and is quite volatile, then the impact of USD interest rates even if they go close to zero, stops having any impact on the bond price / yield. We have observed this, first hand, in the past 2 years when Fed rate and USD LIBOR has been stable at close to 0.25% levels but bond prices across various countries including USA have continued to move tremendously upwards and have been volatile for some which has been due to only ONE FACTOR: RISK PREMIUM.

My contention is that in the past two-three years, economic theory, as investors have been led to believe by teachers, media, advisors and bankers has altered permanently.

Interest rate movement no longer will have the same influence on the movement of bond prices/yields as it had over the past two/three decades, until stability returns. We must, therefore, change our way of thinking in terms of fixed deposits or fixed income bonds if we need to navigate these treacherous waters called investment markets, currently and in the coming years.

There are various factors why emerging market or developing market companies have done well:

1. More and more money is being deployed to invest in the developing markets from the western world, in the search for higher yield, greater than the one in USD or EUR at close to zero levels, thus increasing liquidity in developing markets. New mutual funds are being created all the time in developed markets to invest in emerging markets. More and more asset allocation is being done towards Asia and other developing countries. This has increased both demand and liquidity in the emerging markets and created depth.

2. Companies in developing country are growing despite global recession especially in BRIC and some other emerging countries. This has created huge cash reserves and surpluses in the balance sheets of some of these companies which make them more stable that companies in the developed world.

3. The thinking in the developed markets has been changing and the money from those countries does not put more emphasis on liquidity premiums i.e. liquidity risk in the developing markets. As mentioned in Point 1 above, liquidity is higher than ever before in the developing countries.

All these factors are making emerging markets develop their bond and currency markets more efficient and more liquid every single day and causing more and more new bond issues being launched which would not have been possible a counple of years back. These factors also cause RISK PREMIUM to decline in developing countries vis-a-vis developed countries.

I will show some examples where large companies from the developed world who 'were' highly respectable and used as a blue chip or a benchmark have come down to levels of companies in emerging markets. All these were issued in the last few weeks.

Goldman Sachs issued a 10 year bond which is an A rated company at 5.25%.

Morgan Stanley issued a 10 year bond which is an A rated company at 5.50%.

Meanwhile, Woori Bank from Korea also A rated issued a 10 year bond at 5.875%.

NTPC from India rated BBB- issued a 10 year bond at 5.625%.

POSCO from Korea which is A rated issued a 10 year bond at 5.25%.

Govt of Sri Lanka which is only B+ rated issued a 10 year bond last week oversubscribed to USD 7.5bn versus issue amount of USD 1bn, was at 6.25%.

What the above indicates is that A rated companies from AAA country such as USA are almost as close as BBB rated companies from the developing world.

Until a few years ago, Sri Lanka would have paid 10%, about 4-5% higher (called RISK PREMIUM) than high rated companies from America, while POSCO and Woori would have paid 3-4% higher and Indian companies would have paid the same 3-4% higher. This risk premium is declining and developed countries are coming closer to emerging markets all the time. With declining risk premiums in emerging markets, the bond prices are set to rise much higher, depending on when they were issued and at what rate. An Indian company issuing a bond at same rate as Goldman Sachs is a first timer!

This indeed was happening until last year or two when the markets and investors were demanding higher interest rates from emerging market issuers but now the investors are clearly indicating their preference towards companies which are solid, receive no direct financial Govt support, are cash rich regardless of which part of the world they are from.

The 'solid' or 'blue chip' companies from USA or other developed countries are being 'punished' and have to now issue bonds at rates previously unheard of. This is because the Govts themselves behind such companies in US or Ireland or Greece etc are extremely tight on their cash positions and are therefore unable to help these companies, should the need arise.

With such precarious situation arising where Govts and companies are in tight spots, it is expected that extreme volatility in the stock, bond and currency markets will continue.

It is interesting to note that no media or newspaper or any Bloomberg or Reuters or research reports is alerting investors to such dramatic changes where the RISK PREMIUMS between developed and developing countries have been shattered and have come down to an extent where they are almost the same and in some cases even better.

Question is: Will Developing market rate of returns continue to decline i.e. improve with lower risk premiums and the returns in developed markets continue to rise, i.e. higher risk premiums?

My answer is: Yes!

Meanwhile, bond prices will rise and decline not because of changes in USD interest rates, but because the underlying risk and future growth is what investors are worried about. This was the case in USA also when the markets were beginning to rise in 60's and 70's and interest rates continued to decline as long as prosperity continued, however, now that the prosperity in USA has come to end, interest rates for borrowers based in USA must rise, regardless of the fact whether Fed and LIBOR rise or not....

Korea/Philippines Investment Opportunity, Comparison of CDS with Europe/Middle East

If you look at the attached chart, you will observe the Credit Default Swap Rates (CDS) of various countries. The CDS prices indicate the chances of a default of a country or a company and are used as a tool to hedge against defaults by investors. Higher the price (or rise), higher the chances of default.

Greece has risen from below 200 levels in late 2009 to 1,297 today.

Germany has been stable but volatile at 44 today. It went over 60 few months ago and over 90 in 2009, but was below 20 until Sep 2008.

Dubai continues to be among the highest in the region. When compared to two benchmark large countries, Bahrain and Egypt on the chart we see that Bahrain despite its problems is at 269 and has come off from 350 levels, was stable all through 2010 though it touched a high of 700 in Nov 2008.

While Egypt rose to 800 levels in Sep 2008 but has come down and was stable at 250 levels until Jan 2011 and jumped to 345 and touched 400 levels 2 months ago at its peak recently.

Dubai is at 371, Bahrain at 269 and Egypt at 345 in Middle East.

Dubai was highest ever in late 2008, was volatile in 2009 and stable in 2010 and has been coming down every week in last few months, from over 400 levels it is now at 371 today.

When compared to all these countries, I find Korea to be very strong and an excellent investment opportunity.

Korea is at 99 level, despite many people considering it as risky or a 'developing' country. Korea was very stable until 2008, when it rose due to the onset of global crisis, went as high as 650 levels, then dropped all through 2009 to below 100 level and has remained stable through late 2009 until today in Apr 2011 and getting gradually lower.

Compared to Germany, Korea is currently risky but rising and Korea is not in a region where there is a financial crisis while Germany is. Additionally, Japan, Australia and China are all growing (or will grow/spend in the near future) very rapidly helping Korea among other adjoining countries in the region.

Compared to Middle East, Korea is at least 5 times or more safer.

Over the last one year, the highest growth of risk and hence rise in CDS prices has been in following nations:

1. Greece, increased by 817 points
2. Ireland by 473 points
3. Portugal by 406 points
4. Venezuela by 208 points
5. Egypt by 125 points
6. Bahrain by 112 points
7. Lebanon by 93 points
8. Spain by 83 points

The above increase since April 2010 clearly indicates that Portugal, Spain, Ireland, Greece etc are all in trouble and will eventually default or cause sufficient financial problems thatthey will be unable to rise.

There is a strong rumour that Greece may default this coming weekend. Let's see.

Yields on 10 year bonds of Portugal continues to rise and is at 10% levels, same like India, while Greece is at 15%!

Meanwhile, the decline in risk and decline in CDS prices has been most in the following countries from April 2010 to April 2011:

1. Argentina by 303 points
2. Iceland by 146 points
3. Ukraine by 112 points
4. Dubai by 46 points
5. Kazakhastan by 32 points
6. Colombia by 28 points
7. Chile by 26 points
8. Philippines by 22 points

Iceland and Dubai may not have improved considerably but risk has come down, according to market valuations.

While Philippines is another country which continues to grow quietly and its bonds also offers a great investment opportunity.

Korea Idea:

Govt of Korea USD bond maturing 2025, rated A, size USD 400m touched a high of USD 118.50 in Oct 2010 and has declined to USD 106 levels (10.5% down) today yielding a solid  5.10% in USD.

Chances of rise of this bond to USD 110 levels are quite high over the coming months which shall deliver a 4% gain plus interest earned. Or one can continue to remain invested until it goes back to USD 115 levels.

Korea will grow at an estimated 4.3% in GDP in 2011 and grew 6.2% in 2010. It is Asia's 4th largest economy. Unemployment is only at 3.8%. Korean Won has strengthened from 1220 levels to 1080 levels over last year, a 11% rise, in an uncertain period which is an indicator of better times to come in Korea. Foreign Investment in Korea was USD 825 billion in 2010 a jump of 13.6% from 2009.

Aside from Korea, Rep of Philippines offers two USD bonds, one maturing in 2034, coupon 6.375% which has declined from a high of USD 119 to USD 104 (down 12.6%) today yielding 6%. A bond maturing in 2020 yields 4.54% at coupon of 6.50% which has declined from USD 121 to USD 114 today (down 5.7%). As yields compress and come closer to the 2020 bond yield, price of 2034 bond will continue to rise with strengthening of the Philippines economy.

Both are interesting ideas to consider in your portfolio.

Stay tuned....

The Seven Immutable Laws of Investing

I have been meaning to write on this subject since I read this article a few weeks ago and today I finally got around to actually write about it.

This article summarises the seven laws of investing that every investor must follow and I personally believe in and advise investors accordingly.

Investors and financial advisors do get swayed by the fact that returns in USD terms are low so leverage could be a good idea or that unending search for higher return which makes investors believe that a poorly performing company when offering higher yield is a good idea.

We have seen recently that Greece, Portugal and Ireland who have received ‘bail outs’ not defaults, lol, have been giving enormously high yields of upto 10 to 12% on their USD bonds. Their bond curves have shot up just prior to the impending defaults, oops, bailouts. Good returns necessarily do not imply good investment ideas and can deplete your capital in a very short period of time.

These 7 laws of investing can actually guide to make safe investments and help understand that equity investing or bond investing or any investment for that matter can be made using these principles.

Please do take out time to read these important thoughts.

The headline ideas are:

1. Always insist on a margin of safety

2. This time is never different

3. Be patient and wait for the fat pitch

4. Be contrarian

5. Risk is the permanent loss of capital, never a number

6. Be leery of leverage

7. Never invest in something you don’t understand

This article is written by James Montier who was the co-head of Strategy with Societe Generale Bank before moving to GMO LLC, an investment advisory firm in USA, in 2010.

The Seven Immutable Laws of Investing

James Montier - Published 8/03/2011

Currency holdings, FX thoughts & Where to invest?

Since the start of the global financial crisis in June 2007 in the USA, the contagion has spread around the world.

However, my theory and assertion that countries and companies that are cash rich will remain on top and provide profits at all times, stands confirmed since June 2007.

A currency is a leading indicator of how a country or its economic system is doing or going to behave in the future.

Some of the best currencies to have been invested into, since June 07 are:

JPY, 49% gain since June 07
CHF, 33%
AUD, 21%
SGD, 20%
BRL, 14%
SEK, 9%
CAD, 9%
NOK, 8% gain since June 07
EUR and DKK provided insignificant upsides.

The only currency / country which has a significant amount of Govt debt besides USA is Japan but has risen. This exception is due to the fact that in the period since 2000 to 2007 Japanese Yen was very weak and hence it appears that Yen has provided a 50% gain.

Aside from JPY, all other countries whose currencies have gained, as per the attached chart, since June 07 are very strong countries with strong cash reserves, robust exports and positive cash inflows or current account balances and no banking problems (except for Switzerland).

However, countries such as India and UK, have declined over the same period.

This indicates that USD may be weak but it is not weak against all currencies. All currencies have their own counterweight as well depending on their internal economic situation.

I have been a strong supporter to invest in AUD since last year and this currency has provided over 10 to 12% gains plus interest on bonds of 7% over the past 1 year.

AUD is the only big currency which provides good investment options. All others including CAD do not have many investment options outside of their own countries.

BRL has been a star performer amongst BRIC countries and for solid reason, they have lack of corruption when compared to other nations, are a democracy, have a young and thriving population and their region has not been afflicted with the global financial crisis or bank failures due to strong regulations.

Brazil will still continue to provide solid investment returns along with Mexico in 2011. Venezuela will remain weak due to lack of cash reserves and with a looming default by the Govt in 2012.

Indian Rupee declined 10% over the same period from June 07 till date. Despite the high interest rates of upto 10% on domestic deposits in India, INR remains unfavourable to hold since it has weak fundamentals. This is clearly shown in the chart where all currencies have risen versus USD except for INR and GBP. The loss in FX valuation is far greater than the high interest rate earnings. With high interest rates, comes high inflation which further erodes the value of holdings in INR.

During the same period, GBP declined an astonishing 18%!

All in all, investing in strong countries with strong cash reserves does provide long term benefits with high profits and historical data on a chart cannot lie!

If you think about it, investing in a currencies at the right time in line with a long term trend, can be more beneficial than maintaining funds in a specific "known" or "home" currency.

It is certainly not easy to predict how currencies will perform over the short term but long term trends certainly favour countries with positive inward cash flows, strong cash reserves and strong regulatory framework.

The Chinese Yuan has not been evaluated here although it meets a lot of criteria except that the currency is pegged to an unknown basket of currencies. In addition, it has been controlled at a strong level by the Govt. of China at approx 6.6 to 6.7 Renmibi to the USD for the last year and has been allowed to appreciate at a measured pace, despite all the pressure from USA and allegations that Chinese currency is undervalued and it helps China to keep its exports at a very competitive price. But that has been the case for the past 10 or 20 years so it does not matter now and secondly, every country has a right to keep its currency at a level beneficial to itself (and the Chinese can certainly do so, since they have USD 3 trillion in reserves to back their intentions with).

Once the time comes to invest or hold in Chinese Yuan, you must be prepared to jump at it.

US Treasury style investment with better yield & Reliance

If you look at the attached chart, you will see that the AAA rated bond from Temasek Holdings (Sovereign Wealth Fund of Singapore) offers a better yield than the underlying 10 year US Treasury bond and moves exactly in line with the US Govt bond.

Today, US Treasury 10 year bond yields 3.41%. It had touched a peak of 3.73% on 8 Feb. and has been declining ever since due to strong demand for USD assets and hence this bond continues to rise and its yield decline.

10 year or similar bonds from US Govt are global benchmarks and any yield provided by any corporate or any Govt issued bond adds a risk premium on top, to provide a higher yield. US Treasury yield plus risk premium equals any bonds net return.

As on date, if you buy Temasek Bond maturing in 2019, approx 10 years, actually 8.5 years now remaining, at USD 102.30, it will give you a yield of 3.98% which is way higher than any AAA rated bond as on date.

In addition, as the maturity period comes closer, the yield will continue to approach the 5 year US Treasury yield of 2.16% and then to 2 year Treasury yield of 1.20%.

Once yield declines, price rises, therefore, this bond shall continue to provide higher and higher price or capital gain as time goes by.

Potentially, a AAA rated bond could give 3-5 dollar or percent gain and a yield of 4% which is total of 7-9% in a USD investment just this year.

Since our bank is very comfortable due to the AAA nature and despite the 8.5 year remainder term, this bond may be leveraged upto 3 times, however, I would only recommend one time leverage to extract that additional 2-2.5% yield and not take any additional risk.

PLEASE DO NOTE THAT YOU MAY HAVE SOME FUNDS WHICH ARE MEANT FOR FIXED DEPOSIT KIND OF INVESTMENT AND THIS BOND PROVIDES A VERY STRONG, ROBUST AND AN EXCELLENT ALTERNATIVE, AT THIS POINT IN TIME, FOR ALL SUCH DEPOSIT ORIENTED FUNDS AND TO HOLD THIS BOND FOR A YEAR OR TWO AND OBTAIN ALMOST 4% YIELD (WHICH IS TWICE OUR OWN BANK's DEPOSIT RATE ON USD FOR 1 YEAR of 2% AND ALMOST 4-6 AND UPTO 10 TIMES THAT OF MAJOR INTERNATIONAL BANKS).

On another note, which is related to India....

Most investors believe and say that if Reliance stock goes up, so does Indian stock market and vice versa.

I just wanted to share some facts on such theories which are mentioned in the media and taken as fact by investors.

If you look at the attached chart, you will observe that this was in fact true until early 2009 when markets fell down in 2007 and 2008, however, since that time, Reliance shares have either gone down or remained within a very tight range but the Indian stock market index has continued to rise.

Over the last 10 years, this chart shows that Reliance actually outperformed the Indian stock index, but since 2009 it has lagged the broader market.

This goes to show that the 'other 29' stocks in the Index do have a strong role to play in the Indian stock marrket or any market index for that matter, especially going forward henceforth.