Schumi Is Back !!

Schumacher has been linked to Mercedes ever since the German manufacturer took over Brawn GP. The speculation reached a feverish pitch in the last few days. Now it is official. Michael Schumacher has confirmed on his official website that he will come out of retirement to make a sensational Formula 1 return with Mercedes GP next year.

Is it a wise move? Schumacher is statistically the most successful driver in F1 history. Apart from his seven world titles he has 91 wins, 154 podiums and 76 fastest laps. His record speaks for itself. However World Champion Jenson Button is of the opinion that "Michael Schumacher risks damaging his reputation if his comeback to Formula 1 if not as successful as the rest of his record-breaking career."

What about the competition? The Red Bull will certainly be among the front runners. Brawn GP was not the sharpest tool in the box by the close of the 2009 season, teams like McLaren had caught up with them and Red Bull had even surpassed them. The Red Bull was the best car on the grid by the end of the 2009 season. Ferrari stopped developing the 2009 car in August 2009 and started working on the 2010 car. So they have had plenty of time to develop it. McLaren will also be up there among the leaders.

The Brawn GP car had a clear edge at the start of the season. The car however struggled in cooler temperatures. The 2009 car was gentle on the tyres. This will be beneficial in 2010 since the pit-stops will be governed by tyre wear as refueling during the race is banned. The Mercedes engine is widely regarded as the best on the grid. The only potential problem is that the pressure to develop the 2009 car might have prevented the team from devoting resources to the development of the 2010 car.

What is going to be for Schumi in 2010 - Hero or Zero? Michael Schumacher at 90% of his best is still better than the vast majority of the F1 grid. Whatever happens in 2010, this comeback is unlikely to harm his reputation.

25 Facts About Infosys

It is an old article but still it is worth a read.

Link to the article:
http://teck.in/25-facts-about-infosys.html

What good is BOINC ??

BOINC stands for the Berkeley Open Infrastructure for Network Computing. The Wikipedia page for BOINC says: "It is a non-commercial middle-ware system for volunteer and grid computing. Originally developed to support the SETI@home project before it became useful as a platform for other distributed applications in areas as diverse as mathematics, medicine, molecular biology, climatology, and astrophysics. The intent of BOINC is to make it possible for researchers to tap into the enormous processing power of personal computers around the world."

Remember the SETI@Home project? The idea behind SETI@Home was to analyze radio signals from space for any form of intelligent communication from another world using ordinary home computers. BOINC is similar though on a much bigger scale. The BOINC network is very valuable and participation in it is worth your while and will benefit all of us in the long run.

Examples of BOINC projects

• Climate Change research
• Protein folding
• Build a 3D model of the Milky Way
• Malariacontrol.net

Many of the projects on the BOINC platform have published their results. The published results can be read online here.

You can participate by visiting this link

Roger Federer's Footwork: Artful and Efficient

The New York Times has created a video which scientifically describes Roger Federer's style of playing. It's a must read, rather a must watch !!

View the video here

Is The Market About To Top Out?

Never invest with the herd. More often than not, it is disastrous for your investments. No one can predict what the market will do; but one of the best indicators of a market top is when a so called perma-bear becomes a bull.

Is a tiger changing his stripes a sign of a market top?

It is certainly one of them. When a famously bearish analyst joins the chorus of bulls, it's time to be a little careful. One of the loudest contrarian voices, James Grant recently jumped ship.

James Grant is the editor of Grant's Interest Rate Observer. Among his books is "The Trouble with Prosperity." He is often referred to as a “perma-bear.” Reporters ring him up when there is a downturn in the markets. A glass half empty kind of guy. His recent article in The Wall Street Journal and newly bullish stance has caused a buzz in the US markets.

The Market Does What It Wants To Do

Sharp rallies are the rule in a bear market, not the exception. It is common for the market to rocket upward in an overall downtrend. Take a look at the following chart of the Dow Jones from 1929 – 1932.

During that time, there were seven major declines and six major rallies. The rallies ranged from 19% to as high as 101%. And in every case, investors probably thought the worst was over and a new bull market had dawned.

This rally has not been built on the foundation of improving fundamentals. There is still too much wrong with the economy to hope that a new bull market is beginning just yet.

What To Do?

Don't sell and exit the market. This rally could run much higher regardless of the fundamentals. Book 50% of your profits, set trailing stop losses and let the rest of your profits ride.

Is Irrational Exuberance Back In The Markets?

With market chaos abating the return of risk appetite in stock and lending markets is logical - up to a point. Markets probably overshot to the downside and some level of recovery is therefore only a return to a sensible middle ground.

But there are clear signs of an overshoot on the upside - an 'echo bubble'. Sensible analysis of stock prices for instance suggests that after the run-up of recent months, markets are clearly overvalued. A recent rash of IPO's (NHPC, Adani Power, Oil India), follow-on offers and QIP's (Axis Bank) and large bond issues can be seen as a return to business as usual.

Investors are also tired of talking about the macro issues. That's understandable given the return of a modicum of stability to markets. Yet the things that keep people awake at night are still the big macro concerns:

• Is the US consumer going to pull back further?
• Is a continuing downturn in commercial property going to undermine the credit recovery?
• Are bad things still lurking in the banking system?

The fact is that the foundations of a recovery are scarcely in place, yet the optimists are already looking for the lift to the new skyscraper's observation deck.

Is Reliance Bidding For LyondellBasell ?

Is Reliance Industries Ltd (RIL) in talks to buy bankrupt LyondellBasell, one of the world's largest polymers, petrochemicals and fuels companies? The buzz on Dalal Street is that RIL is looking to is looking at acquiring some or all of the assets of the company.

On December 20, 2007, Basell, owned by New York-based investor Len Blavatnik's Access Industries, acquired Lyondell Chemical Company through an all-cash leveraged buyout at $48 per share. This deal left the combined entity, LyondellBasell saddled with a heavy debt load.

LyondellBasell filed for Chapter 11 Bankruptcy under the US Bankruptcy Code on January 6 this year because of a short-term liquidity crisis. The company had USD 27 billion in assets and USD 19 billion in debt when it filed for bankruptcy. The company also had annual revenues of USD 50.7 billion in 2008.

Adding further fuel to the fire, on Tursday 17th September, RIL sold 1.5 crore treasury shares at an average price of Rs 2,125/share and raised Rs3,188 crore (USD 655 million). The treasury shares were created in May 2002 after the merger of Reliance Industries with the Reliance Petroleum (the old entity). The Petroleum Trust which was created to house the treasury shares still owns 9 crore worth 18000 crore (assuming RIL trades at Rs 2000/share). This money could be used to fund the LyondellBasell deal.

As per news reports RIL declined to comment on the rumored deal, but said "the company is committed to growth and creating value for long-term investors. Its sale of treasury shares on Thursday indicates the management intends to make large investments".

LyondellBasell’s reorganization plan will be provided to the US bankruptcy court on October 14, so that is when the details will be made public. So if the buzz on the street is right, the information should be in public domain before October 14.

Read about LyondellBasell’s bankruptcy here

1 Year After The Demise Of Lehman

One year ago on the 15th of September 2008 Brothers filed for bankruptcy. Reuters has created a great multimedia recap of the financial crisis 1 year after the collapse of Lehman Brothers.

Read more here

Same Old Hope: This Bubble Is Different

This time is different.

That’s what people argue every time a bubble inflates, and what they think every time they lose money when it pops. But year after year, decade after decade, century after century the process repeats all over again.

Not long ago, the housing bubble burst and brought the global economy to a standstill. Now investors, recognizing that bubbles tend to come in bunches, are on the lookout for the next market to fizzle. Possible candidates are the capital markets in China, commodities like gold and oil, and government bonds in heavily indebted countries like the United States.

Bubbles are episodes of collective human madness — euphoria over investments whose skyrocketing values are unsustainable. They tend to arise from perceptions of pending shortages (as happened last year, with the oil bubble); from glamorized new technologies or investment frontiers (like the dot-com bubble of the 1990s, the multiple railroad bubbles of the 19th century); or from faddish cultural obsessions (like the Dutch tulip bubble of the 17th century).

Often they are based on legitimate expectations of high growth that are “extrapolated into the stratosphere”. Such is the fear over investment in emerging markets like China. “I am a long-term bull on Asia, but right now it’s premature to be celebrating the ‘Asian Century,’ like some investors seem to be doing,” said Stephen Roach, chairman of Morgan Stanley Asia.

But a sovereign debt bubble — which many argue is driving the acceleration in gold prices — could prove far more dangerous. So many countries, like the United States, are running up such large national debts as a percentage of their overall economies that they could risk eventual default. Even without outright default on their obligations, the value of government bonds sold to finance these deficits could plunge, costing investors a lot. Debt crises are usually associated with developing countries, like Brazil, Argentina or Zimbabwe. But they can affect big, rich economies too, where the scale of global damage can be much greater.

The depth and breadth of the pain unleashed by the recent housing bust have led political leaders and central bankers to reconsider their duties to preempt, rather than just respond to, potential bubbles, and the same is true with the potential bubbles that economists foresee today. China has started to tighten monetary policy to rein in the hype surrounding its equities. Politicians in the United States, while torn over the means, are discussing ways to bring the deficit until control. The G20, at its coming meeting in Pittsburgh, is expected to address ways to calm financial frenzies. The solution may involve additional regulation, guidelines for financial compensation and possibly requirements for more market transparency so that, at least in theory, investors can better judge what they are taking on.

But however stringent such new regulations may be, economists say, they cannot completely defeat human nature. Investors will continue to be hypnotized by get-rich-quick deals, seeking investments that magically double, triple even quadruple without toil or trouble.

Ultimately, bubbles are a human phenomenon. Sometimes, people just get a little crazy.

PS: This is a summary of an article from the New York Times. View the original here (Registration required)

Secrets Of Formula 1 Helmets

Felipe Massa’s dramatic accident during qualifying for the Hungarian Grand Prix brought driver safety - and in particular the great strides made in helmet design over the past few years - into much sharper focus.

Read more here

Sensible Capital Gains Taxation

A capital gain is income derived from the sale of an investment. A capital investment can be stocks, a home, a farm even a work of art. Capital Gain is the difference between the money received from selling the asset and the price paid for it.

"Capital gains" tax is really a misnomer. It would be more appropriate to call it the "capital formation" tax. It is a tax penalty imposed on productivity, investment, and capital accumulation. Since the tax is paid only when an asset is sold, taxpayers can legally avoid payment by holding on to their assets - a phenomenon known as the "lock-in effect".

There is one other large inequity of the capital gains tax. It represents a form of double taxation on capital formation. This is how economists Victor Canto and Harvey Hirschorn explain the situation:

A government can choose to tax either the value of an asset or its yield, but it should not tax both. Capital gains are literally the appreciation in the value of an existing asset. Any appreciation reflects merely an increase in the after-tax rate of return on the asset. The taxes implicit in the asset's after-tax earnings are already fully reflected in the asset's price or change in price. Any additional tax is strictly double taxation.

The Direct Tax Code. introduced by the Government will replace India’s antiquated Income Tax Act of 1961.The draft is likely to become law only in 2011 and is currently open to public scrutiny and comment. It hopes to create a modern progressive regime of taxation in India. However the proposed treatment of Capital Gains is very regressive.

Swaminathan S Anklesaria Aiyar has written an excellent article about Taxation of Capital Gains in the Economic Times. Read more here

Why Text Messages Are Limited To 160 Characters

Did you ever wonder why text messages(SMS) are limited to 160 characters? No?

SMS messages simply fill the remaining bytes in the packets that GSM phones use to coordinate with the network. After the coordination protocol and some SMS headers are counted, there are 140 bytes remaining in the packet. With some simple packing techniques, those 140 bytes can be used to encode 160 7-bit characters, and THIS is why SMS messages are limited to 160 characters.

Interesting, isn't it? Read more here

Financial Crisis? No, Capitalism As Usual

The August 5 edition of the Economic Times had an excellent article by Swaminathan S Anklesaria Aiyar titled "Financial Crisis? No, Capitalism As Usual"

In this article he makes the case that proclaiming the death of capitalism is premature and booms and busts are integral to Capitalism's 'Creative Destruction' process.

Read more here

It's The Revenue Deficit, Stupid!

Budget 2009-10 has projected the Fiscal Deficit at 6.8% of GDP. This is certainly a cause for concern, but even more alarming is the four-fold increase in the Revenue Deficit.

I will articulate my worry about the Revenue Deficit, but first some basics because these two terms are easy to mix-up.

What exactly is the Fiscal Deficit(FD) and the Revenue Deficit(RD)?

The fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing).

The revenue deficit is the difference between the government’s current (or revenue) expenditure and total current receipts.

Basically,

RD = Current Revenue(from taxes) - Current Expenditure(salaries, repayment of past borrowings etc)

FD = RD + Capital Expenditure

What's the current status?

The RD for 2009-10 is budgeted to go up an astonishing 412% from that estimated for 2008-09. In 2008-09 the RD will account for 70% of the FD. This is the highest RD since the reform process began in 1991.

Problem with a large RD

Revenue deficit does not result in the creation of any assets. It merely adds to the interest and repayment burden without creating the capacity to repay the debt. If the reason for a large FD is Capital Expenditure(building roads, ports, power plants etc) it will prove to be useful for the economy in the long run. The increased expenditure has further multiplier effects because of the subsequent spending of those whose incomes go up because of the initial expenditure. The overall rise in economic activity in turn means that the government’s tax revenues also increase.

To give a simple analogy, if the FD is like a household borrowing to build a house, the RD is akin to borrowing to eat and drink and be merry.

The Road Ahead

Logically, there are two ways in which the deficit can be reduced — by raising revenues or by reducing expenditure. Reducing expenditure is always difficult in India. Raising revenues is easy only when the economy is booming. During a downturn, tax revenues fall. Levying more taxes will worsen the slowdown by dampening consumption.

Remember, it took us three years to get the RD down from 4.39% of GDP in 2001-02 to 2.59% of GDP in 2005-06. During these years taxes grew at a CAGR of almost 30%. This performance is not going to be repeated in the next few years.

The targets indicated in the government’s medium-term fiscal policy statement — RD (3%) and FD (5.5%) by 2010-11 and RD (1.5%) and FD (4.0%) — lack credibility. It is highly unlikely that the government will achieve the ambitious targets set out in its medium-term plan.

Budget 2009: Tax, Borrow, Spend

The Congress Party was re-elected in May on a promise of economic populism that the country can't afford. On 6th July the government delivered on that promise. This is bad news for India, and especially for its poorest citizens. The budget outlines three priorities: 9% economic growth, "inclusive development" and better public services. It would achieve these outcomes by boosting spending by 36% to 10.2 trillion rupees ($211 billion), mostly on handouts and infrastructure. No major public-sector rationalization or private-sector liberalization were announced.

This is in effect a revival of India's socialist past and a rejection of the 1990s reforms that gave India the best kind of "inclusiveness": economic growth. The Govt thinks that creating more 'yojanas'(schemes) and throwing money at them will eliminate poverty. Infact statistics show the exact opposite. More people were lifted out of poverty in the last 18 years(1991 to 2009) than in the previous 44 years(1947 to 1990).

Going back to 70's economic formula - government spending, large deficits and high interest rates will stifle economic growth and increase poverty. The 9% growth achieved in the last 4 years(2004-2008) was due to India's private sector. Mr. Mukherjee seems to understand some of these ideas, at least in principle. Yesterday he said private investment was "the principal growth driver" of India's boom years. Yet he did nothing to ease private industry's tax burden, cut regulatory red tape or liberalize the country's restrictive foreign direct investment regime. He also praised Indira Gandhi's 1969 bank nationalization as "wise and visionary" and "an inspiration".

The 9% growth achieved in the last 4 years was powered by foreign capital inflows(FDI, FII, Private equity, Venture Capital). These flows have slowed due the credit crisis. The main reason why Indian industry is dependent on foreign money is that the Government swallows a large portion of the domestic savings to finance its fiscal deficit. Things on this front do not look encouraging. In the financial year 2007-08 (i.e. between April 1, 2007 and March 31, 2008) the government spent Rs 1,26,912 crore more than what it earned. For the financial year 2009-10 (i.e. between April 1, 2009 and March 31, 2010), the government plans to spend a whopping Rs 4,00,996 crore more than what it earns.

When the government spends more than what it earns, it borrows by issuing financial securities known as treasury bills and bonds or government securities. So in the year 2007-08 the government borrowed Rs 1,26,912 crore to service its deficit. And in the year 2009-10, it will have to borrow Rs 4,00,996 crore to fund its deficit. Large Government borrowings are already leading to an increase in interest rates. The yield on the 10 year Gilt is already at 7% and could rise to 7.5%. The increase in the cost of borrowing could dampen investment and consumer demand.

Pranab Mukherjee's Budget wallows in the optimism that "something will turn up" and restore the Indian economy to high growth while miraculously restoring a sense of balance to the mounting fiscal deficit. Apart from making some ritual genuflections to fiscal responsibility -- he remarked that it was important to return to fiscal deficit targets "at the earliest possible opportunity" and that "reforms were required" to curb the fiscal shortfall -- he offered nothing concrete. The very real risk of a sub-par monsoon this year could upset all hopes of a sustained recovery.

If Pranabda is counting on a developmental Deus ex machina to save the day, I would bet against him.

The Bandra-Worli Sea-Link is now The Rajiv Gandhi Setu Bridge

The Bandra-Worli Sea Link opened for the public at midnight on 30th June 2009 (finally!!). The fact that the project is an engineering marvel is well known but what about the name of the project? As is always the case in India, when any sufficiently large infrastructure project (ports, airports, fly-overs, bridges etc.) is ready to be inaugurated there is a huge debate over the name of the project.

The Congress wants everything to named either Gandhi or Nehru. The BJP wants any of the other leaders involved in the freedom struggle. Local politicians demand that leaders from the region in which the project is located be chosen. The public is largely indifferent to the name; they are more interested in the benefit that will accrue to them from the project.

For example the Bandra-Worli Sea Link has been named "The Rajiv Gandhi Setu Bridge". This has (predictably) led to a huge controversy. This is something that has happened in the past and considering the political scenario will continue to happen in the future.

Why should projects be named after political leaders?. The right to name a project should be auctioned. It will be like an advertising contract just like the title sponsor for any major sporting event. (Barclays Premier League, DLF Indian Premier League etc). This will kill two birds with one stone. The political controversy over the name will be eliminated and money will be generated from the contract. The contract can be devised as a long term (say 5 years) advertising deal. The winner bidder will get prominent slots around the project area. The winning bidder will be able to use photographs of the project in other advertising campaigns(TV, Web, Print).

Infrastructure projects are expensive to build and maintain. The Maharashtra State Road Development Corporation (MSRDC) still has unpaid bills worth Rs 480 crore towards the construction of the Sea-Link. The money raised from such deals will definately prove useful.

This is not as radical as it sounds. BEST buses and Railway trains are already covered with advertisements. Companies can pay the Indian Railways to have an entire train covered with their advertising. In many places companies maintain public gardens and in return they get advertising rights. It really is a win-win situation.

Will The US Dollar Decline In Value?

In theory, because of the huge amounts of dollars printed by the US Fed the US Dollar should weaken against all currencies. To some extent it has already happened. In the last 3-4 years as the US Trade and Fiscal deficits increased, the dollar did weaken.

From 2000 to 2007 the USD lost half its value with respect to the Euro. Refer the Euro-USD chart below:

This is exactly as per theory. But in the short run when investors seek to avoid risk they move into safe assets. So currencies like US Dollar, Swiss Franc appreciate in value. Similarly Gold gains when investors seek safety over returns. So in the last 6 months the dollar strengthened against other currencies.

In many respects India and US are remarkably similar. India has a huge fiscal deficit and is a net importer of goods. Last year India's Trade Deficit was over $100bn which as a percentage of GDP is worse than America !! This trade deficit was financed by foreign investors who bought Indian stocks and bond by the truckload. So, the rupee remained stable, when the stock market declined, the inflows dwindled and the rupee weakened.

India does not have Capital Account Convertibility. The Reserve Bank of India's official is to prevent sudden volatile movements in the currency markets. The RBI does not try to fight the trend; it tries to smooth out the volatility.

There was an article in the New York Times weekend edition about the US Dollar. Read the article here

Debt Monetization & Inflation

Mr Anonymous in response to my post "Asphyxiation By Forex" wished to know how Governments are going fund their fiscal deficits - Will they borrow the money or just print it?

The answer - bit of both actually. The technical term for Governments printing the money they need is 'Debt Monetization' or 'Quantitative Easing'. It works in the following manner: When the Government can’t find domestic or foreign buyers for its debt (usually because the interest rate is not high enough to attract lenders), the Central Bank buys this debt by printing new money. The government spends this money and in turn debases all the currency outstanding. Essentially the Central Bank "creates" money.

This is a sophistication of a process first used by the Roman empire. They would shave some gold off the edges of gold coins, remelt the shavings and mint them into more coins. The new coins would then be recirculated !!

Coming back to the present, the US Federal Reserve has "created" nearly $1.3 trillion dollars since October 2008. See the chart below:

Source: Wikimedia Commons

Is It Useful?

The size of a nation's economy is the total value of the spending on goods and services in the nation in a year.

The formula for GDP (Gross Domestic Product) is:

GDP = C + I + G + (Ex - Im)

where “C” equals spending by consumers,

“I” equals investment by businesses,

“G” equals government spending and

“(Ex - Im)” equals net exports, that is, the value of exports minus imports. Net exports may be negative.

The Global Economy is in the midst of a severe recession. Demand from consumers and businesses has dropped sharply. Economic theory suggests that the Government should increase spending to cushion the blow. By spending borrowed money Governments are trying to get the economy moving again.

Is there any risk?

The problem created by Quantitative Easing is that more the money in the economy less is its value. So it buys less over time. The prices of goods and services increase .leading to inflation. Inflation s a problem because it lowers the real value of wages and salaries and hurts people like retirees with a fixed source of income whose standard of life reduces due to inflation.

To sum up, Quantitative Easing is aimed at increasing the supply of money into the economy. Once the economy shows signs of recovery Central Banks will have to reduce the supply of money. If left unchecked the excess money can lead to high inflation, but managed well will soften the downturn.

Asphyxiation By Forex

India's phenomenal growth of the last five years was powered in large part by huge injections of cash and investment. Investment accounted for about 39% of the country's gross domestic product in the 2008 fiscal, up from 25% five years ago. At its peak, more than a third of investment came from abroad. At its peak, more than a third of investment came from abroad.

But in the last three months of last year, foreign loans and direct investment fell by nearly a third, to their lowest level in more than two years.

Source: Reserve Bank of India

The decline in foreign investment has taken a big toll on sectors like real estate, manufacturing and infrastructure. In the last quarter of 2008, the economy's growth rate plummeted to about 5.3%, the lowest in five years.

For 8-9% growth rate, private investment and low cost of capital is essential. The Government's Fiscal Deficit has ballooned to 10% of GDP. The Government is expected to borrow Rs 300000 crore this year compared to Rs 120000 few years ago. Such large borrowings will crowd-out the private sector and lead to an increase in interest rates.

Cutting subsidies, reducing the fiscal deficit and attracting foreign investment should be top of the 'To Do' list for the Government.

More Information About Swine Flu

Here are some informative links about Swine Flu:

Read about the Key Facts about Swine Influenza here
Questions & Answers about Swine Flu here
An updated case count of confirmed swine flu infections in the United States is available here
How does flu spread? Get the answer here
Why is flu a seasonal disease? Get the answer here
Read about the history of the 1918 pandemic from the CDC here and here

Is Swine Flu ‘The Big One’ Or A Flu That Fizzles?

New cases of swine flu continue to emerge around the globe, from Ohio to Nova Scotia to New Zealand. The declaration of a "public health emergency" in the United States has further stoked fears and confusion.

The inevitable question arises: Is this the big one? Is this the next big global flu epidemic that public health experts have long anticipated and worried about? Is this the novel virus that will kill millions around the world like the infamous 'Spanish Flu' of 1918 (See Wikipedia article here)

The short answer is it's too soon to tell.

This is a new virus so there's no natural immunity. It has the potential to spread very widely. That's what raises worries about a possible pandemic. Every epidemic has its own behavior. There's really no way of predicting. This could really just fade out or it could become very serious. There have been false alarms before. In 1976 soldiers at Fort Dix, N.J., became sick with an unusual form of swine flu. Federal officials vaccinated 40 million Americans. But, the pandemic never materialized. To this day, health officials don't know why the 1976 virus petered out.

The people who died in Mexico are young, healthy people in their 20s, 30s and 40s. That's a big deal. More disturbing, this virus seems to spread among people fairly easily. The 1918 pandemic began with a wave of mild illness that hit in the spring of 1918, followed by a far deadlier wave in the fall which was most lethal to young, healthy adults. Scientists have speculated that something happened to the virus after the first wave — one theory held that it infected pigs or other animals and mutated there — before revisiting humans in a deadlier form.

This outbreak of Swine Flu is certainly cause for concern but not alarm. The warmer temperatures of summer should halt the spread of the virus. The virus might return in winter but scientists should have vaccines and medicines to combat the virus by then.

Visit the website of the Centers for Disease Control(CDC) here

Five Lessons From The Great Depression of 1930

The global economy is in a synchronized downturn. The economies of America, Europe and Japan are going to shrink by 2 to 5 percent in 2009. Emerging economies like China and India are going to suffer a sharp slowdown. Growth in China is going to fall from 11 percent to 7 percent while that in India is going to fall from 9 percent to under 6 percent. The current downturn is the biggest downturn in the last 70 years since the Great Depression of 1930.

What is being done by Central Bankers and Governments across the world to prevent a repeat of 1930? What are the lessons learnt? Read a nice article on this here

Don’t Count Your Recoveries Before They’re Hatched

Ben Bernanke, the Federal Reserve chairman, sees “green shoots.” President Obama sees “glimmers of hope.” And the stock market has been on a tear. Are we out of the woods? Is the recession about to end? The recent news is certainly better but there are many reasons to be cautious about the economic outlook.

The International Monetary Fund (IMF) has just issued its gloomiest forecast ever. It says world GDP, which has never shrunk since the Great Depression, will shrink 1.3% in 2009, and then inch up to 1.9% in 2010. Growth of less than 2% indicates a global recession. So, serious recovery will not come before 2011.

The IMF sees world growth being strangled by what it calls negative feedback loops. The financial crisis first reduces cash flow to producing sectors. This causes a recession, with producing sectors slashing production and employment. But the recession then makes the financial crisis worse — more corporations and individuals default on bank loans. The banks respond by cutting credit further, and this hits production and employment further. This is the negative feedback loop.

The current global recession is likely to be unusually long and severe and the recovery sluggish because it sprang from a financial crisis. New IMF analysis shows recessions tied to a financial crisis, like the current one that has its roots in reckless lending for the U.S. housing market, are more difficult to shake because they are often held back by weak demand. Worse still is that today's recession combines a financial crisis at the heart of the United States, the world's
largest economy, with a broader global downturn making it unique.

The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.

Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.

How Credit Default Swaps Became a Timebomb

A Credit Default Swap is a credit derivative or agreement between two counterparties, in which one makes periodic payments to the other and gets promise of a payoff if a third party defaults. The first party gets credit protection, a kind of insurance, and is called the "buyer." The second party gives credit protection and is called the "seller". The third party, the one that might go bankrupt or default, is known as the "reference entity."

Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge, or insure against a default on a debt. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used for speculative purposes.

Such exotic financial products are extremely profitable in times of easy credit, but when markets reverse, as has been the case since August 2007, they amplify risk considerably.

Read about the role Of Credit Default Swaps (CDS's) in the Financial Crisis in a great 3 part article
Link to Part 1

Link to Part 2
Link to Part 3

A.I.G: A Financial Blackhole

On Monday the American International Group(A.I.G) reported a loss of $61.7 billion, the largest quarterly loss in history. Most of it is due to write-downs on the value of the company’s assets. The American Government on Sunday agreed to provide an additional $30 billion in taxpayer money to A.I.G. This is the fourth time the American taxpayer has had to step in to stave off a collapse. So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat. A.I.G is becoming a financial black-hole swallowing billions upon billions of dollars.

Background Information
A.I.G. had to be propped up because its business and trading activities were intricately woven through the world’s banking system. After the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk?

The previous rescues were intended to stabilize A.I.G. and buy it time to restructure its business. The idea was that A.I.G Would gradually sell its various assets and repay the Government. Basically a controlled breakup of the company without leading to upheaveals in the financial markets.

Previous Bailouts For A.I.G.

In September 2008 after Lehman Brothers went bust, the Federal Reserve lent A.I.G. $85 billion when the company suddenly found itself unable to meet a round of margin calls. In return A.I.G. issued warrants for slightly less than 80 percent of the company’s shares.

But in just weeks it became clear that A.I.G.’s problems were so grave the $85 billion would not be enough. It was using up that money alarmingly fast. In October another $38 billion was lent to the company.

But that was not enough either. In mid-November A.I.G was back for more. The conditions of the previous loans were relaxed and $40 billion was injected into A.I.G. in exchange for preferred shares.

In all, A.I.G has received $160bn of government help: $85bn in exchange for an effective 79.9% equity stake, loans worth $38bn and around $40bn to capitalize two vehicles holding AIG’s dodgy assets. Add the latest $30 Billion and the bill reaches almost $200bn.

The Bottom Line
The American taxpayer is going to lose billions of dollars sorting out A.I.G's mess. At best $100-120bn will be realized by selling A.I.G's various pieces. Expected loss to the American taxpayer: $50 bn(minimum)

Ben Bernanke, the chairman of the Federal Reserve, is pretty peeved at the company as well. “This was a hedge fund, basically, that was attached to a large and stable insurance company,” Mr. Bernanke told lawmakers on Tuesday, later adding, “There was no regulatory oversight because there was a gap in the system.”

Read Mr. Bernanke’s Testimony here

The U.S. Automobile Industry's Biggest Mistakes

The U.S. Automobile Industry's difficulties stem from complacency, arrogance, endless executive upheavals, numerous reorganizations and unwise investments.

The Forbes website has a slide-show which succinctly explains the reasons for the downfall of Detroit.

Read more: The U.S. Automobile Industry's Biggest Mistakes

Mutual Fund Fundas

The Tata Mutual Fund website has a great article on Mutual Funds. The article is neatly written and the language is easy to understand. 

Read it here

Capital Flows And The Financial Crisis

The latest issue of the The Economist has a great article on how America's huge current-account deficit and China's huge Current account surplus together created enormous global imbalances. A growing number of policymakers and academics believe that these lay at the root of the financial crisis.

To read more click here

The Prime Minister Is Away, Who Is In Charge?

There has been a lot speculation in the wake of Prime Minister Manmohan Singh's bypass surgery about the protocol implications of the absence of the head of government. Who is in charge? This is not merely about who controls the nuclear button -- that makes for good headlines. This is about a whole range of governance issues.

Indian Scenario

The Indian practice is simple. When the prime minister is away, for example on foreign tours, then the most senior member presides over the cabinet meetings. This is fine, but what about serious emergencies? Someone has to run the country -- not merely on day to day matters but also in case of a situation where a quick decision has to be taken; including a war-like scenario. Are we to call a committee meeting if a missile is lobbed at us?

American Model

Everyone knows that in America the Vice President of the United States becomes the new President of the United States upon the death, resignation, or removal of the president. However the American model is much more comprehensive. The Presidential Succession Act of 1947 establishes the line of succession to the office of President of the United States in the event that neither a President or Vice President is able to "discharge the powers and duties of the office".

The act establishes the list of officers who automatically assume the office of the President in case of any eventuality. In all 13 persons are mentioned.

The act contains provisions to ensure the following:

1. Presidential Succession
   
2. Continuity of Congress
   
3. Continuity of the Supreme Court
   

What Needs To Be Done In India

India needs similar provisions to ensure the continuity of Government in case of any eventuality. The terrorist attack on the Parliament of India on December 13, 2001 underlines the need for such provisions.

It is time we relooked at the existing constitutional provisions and modified them. New protocols need to be put in place to deal with the complexities of running a country. The one person in charge must be know at all time with no scope for ambiguity. India needs a mechanism to ensure that there is a clear transfer of power to the appropriate successor in a time of crisis.

Lessons From Satyam: India Needs A Bankruptcy Act

The Satyam saga has proved that India needs a proper bankruptcy act modeled on the American Bankruptcy act; specifically the Chapter 11 provisions are worth emulating. "Bankruptcy" is a fact of life for all corporations big or small. It isn't a bad thing; it is basically survival of the fittest. When weak companies fail, the correct response isn't trying to save or trying to bail-out the company; the correct response is the allow the weak ones to fail, manage the fallout and allow the successful ones to flourish.

Corporate Bankruptcy
Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy") that is filed by the bankrupt individual or organization.

How Are Assets Divided in Bankruptcy?

1. Secured Creditors - usually banks - are paid first.
2. Unsecured Creditors - such as suppliers, and bondholders, have the next claim.
3. Shareholders - people who own common stock - have the last claim on assets and may not receive anything if the Secured and Unsecured Creditors' claims are not fully repaid.

What Is The Basis Of Division Of Assets?
The investors who take the least risk are paid first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as a mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy.

Bondholders have a greater potential for recovering their losses than stockholders, because bonds represent the debt of the company and the company has agreed to pay bondholders interest and to return their principal.

Stockholders own the company, and take greater risk. They could make more money if the company does well, but they could lose money if the company does poorly. The owners are last in line to be repaid if the company fails.

Indian Scenario
India's current laws make bankruptcy an extremely poor option. India has liquidation and rehabilitation regimes, but they don't work. There are no dedicated courts or judges, no professional cadre of trustees or administrators, no mechanism for an expedited hearing on a bankrupt company. Under a 1985 law, it's possible to revive and rehabilitate what is termed a "sick company." But by the time a company in financial difficulties becomes a "sick company" as per the definition in the law it is already too late to do anything. Months and years are lost while the situation at the company continues to deteriorate. In the end everybody loses.

India also has something called a 'Corporate Debt Restructuring System'. It's under the aegis of the country's central bank, the Reserve Bank of India. This allows a creditor to propose an out-of-court restructuring, which would prevent other secured creditors from putting a company into liquidation. However the system isn't binding on unsecured creditors and foreign banks, Theoretically possible for an unsecured creditor to petition the court for liquidation. But usually judges discourage such a move or keep the matter pending.

How Bankruptcy Would Help Satyam
The real danger is that the loss of confidence can lead to a downward spiral in which clients move projects to other companies, employees leave in droves, projects are disrupted which forces Satyam to pay damages leading to a messy implosion of the company.

If India had some sort of Chapter 11 bankruptcy provisions Satyam could have filed for a 'packaged bankruptcy'. The new members of the board along with the lenders would then be the people in control. This will reassure clients who are worried about the projects that Satyam is executing for them. Satyam also faces a problem of liquidity. It has dwindling cash levels and has to pay employees salaries, lease rentals, daily expenses. Within a proper bankruptcy framework Satyam will be able to borrow money from banks - this is called "Debtor-In-Possession Financing" or DIP financing. With DIP financing in place Satyam would be able to make a fresh start albeit under strict conditions. After stabilizing the business, the new management can try and sell off Satyam in whole or in parts. This way job losses can be minimized and there will be no disruption to the client's projects.

Resources On The Web

1. Read about the basics of Chapter 11 bankruptcy here
2. Read about Debtor-In-Possession Financing here
   
3. Thomas Friedman, New York Times columnist has strong views on the importance of bankruptcy to a modern economy.
4. The Economist has an article on European Bankruptcy Laws
   

Satyam Computers: "Raju Ban Gaya Gentleman"

'Satyam' is a Sanskrit word which means 'truth'. This is ironic considering that the Chairman of Satyam Computer Services, B Ramalinga Raju issued a statement revealing that the company's sales, profits and balance sheet is fictitious. He added that the company's accounts are fictitious due to overstating of profits in the last few years. Raju said that the company's balance sheet which carries inflated cash and bank balances of Rs 5040 Crore (as against Rs 5361 crore reflected in the books) is non-existent. He added that an accrued interest of Rs 376 crore is also non-existent. The company has understated liability of Rs 1230 crore on account of funds arranged by Mr Raju. The overstated debtors position of Rs 490 crore (as against Rs 2651 reflected in the books).

View the company Media release here
View the submission made to the Bombay Stock Exchange here

In a nutshell, this is the biggest corporate fraud in Indian History.

The revenue and profits have been inflated and the stated cash on the books is non-existent. The company was declaring huge margins when in reality the margins were only about 1/8th of the declared margins. Such large-scale manipulation went on for so long and nobody smelt a rat.

Certain questions become relevant at this time.

Show Me The Money

The promoters of Satyam a few years ago owned almost 25% of the company. Over the years they sold their stake reducing their stake to just 3%. Where did the money go?

Future Of The Company

Will Satyam survive this ordeal? Will clients and/or employees desert the company? Is any white knight interested in taking over the company?

Future Of The Employees

What will happen to the 53000 employees of Satyam? There is a distinct possibility that thousands may lose their jobs. The fallout has to be managed properly. The IT Services Industry is in the midst of a slowdown so the probability that competitors will absorb laid-off workers(if any) is low.

The Role Of The Auditors

Price Waterhouse are the Chartered Accountants for Satyam. What was there role in this fraud. Were they deceived by the Satyam management or were they co-conspirators? Read the auditor's report of Satyam Computers in March, 2008.

The Role Of The Management

It seems highly implausible that a fraud of this magnitude could have been orchestrated by just one person. What about the CFO of the company? The Board Of Directors? The Senior Management like unit-heads and vice-president level guys? How deep does this go?

Impact on Indian Stock Market

The reaction by the stock markets was swift and brutal. Satyam's share price plummeted by 77% from Rs 178 to Rs 41. The broader markets also fell with the Sensex falling 750 points. What about the long-term impact? How will FII's perceive this event? Will it lead to a permanent derating of India?

More questions are certain to arise over the next few days and weeks. What is certain is that the issue has the potential to damage India's reputation as an investment destination so, the fallout from the mess has to managed properly.