Monetary Policy as it states is all about Money. Money plays an important role in the economic system we see the use of money at every step of life indeed it would be hard to imagine life without money! The main function of money in an economic system is to facilitate the exchange of goods and services.
The actions of a central bank, currency board or other regulatory committee, that determine the size and rate of growth of the money supply, which in turn affects interest rates.
In banking and economic terms money supply is referred to as M3 - which indicates the level (stock) of legal currency in the economy.
In India context central bank is referred to as RBI (Reserve bank of India)
A central bank can be said to have two main kinds of functions:
(1) macroeconomic when regulating inflation and price stability and
(2) microeconomic when functioning as a lender of last resort.
Macroeconomic Influences
As it is responsible for price stability, the central bank must regulate the level of inflation by controlling money supplies by means of monetary policy. The central bank performs open market transactions that either inject the market with liquidity or absorb extra funds, directly affecting the level of inflation. To increase the amount of money in circulation and decrease the interest rate (cost) for borrowing, the central bank can buy government bonds, bills, or other government-issued notes. This buying can, however, also lead to higher inflation. When it needs to absorb money to reduce inflation, the central bank will sell government bonds on the open market, which increases the interest rate and discourages borrowing. Open market operations are the key means by which a central bank controls inflation, money supply, and price stability.
Microeconomic Influences
The establishment of central banks as lender of last resort has pushed the need for their freedom from commercial banking. A commercial bank offers funds to clients on a first come, first serve basis. If the commercial bank does not have enough liquidity to meet its clients' demands (commercial banks typically do not hold reserves equal to the needs of the entire market), the commercial bank can turn to the central bank to borrow additional funds. This provides the system with stability in an objective way; central banks cannot favor any particular commercial bank. As such, many central banks will hold commercial-bank reserves that are based on a ratio of each commercial bank's deposits. Thus, a central bank may require all commercial banks to keep, for example, a 1:10 reserve/deposit ratio. Enforcing a policy of commercial bank reserves functions as another means to control money supply in the market.
The rate at which commercial banks and other lending facilities can borrow short-term funds from the central bank is called the discount rate (which is set by the central bank and provides a base rate for interest rates). It has been argued that, for open market transactions to become more efficient, the discount rate should keep the banks from perpetual borrowing, which would disrupt the market's money supply and the central bank's monetary policy. By borrowing too much, the commercial bank will be circulating more money in the system. Use of the discount rate can be restricted by making it unattractive when used repeatedly.
What are elements of Monetary Policy?
As said earlier, The Central Bank controls the money supply and credit in the best interests of the economy. The bank does this by taking recourse to various instruments.
1) Bank Rate Policy
The bank rate is the rate at which the central bank lends funds to banks, against approved securities or eligible bills of exchange. The effect of a change in the bank rate is to change the cost of securing funds from the central bank. An increase in the bank rate increases the costs of securing funds and of borrowing reserves from the central bank. This will reduce the ability of banks to create credit and thus to increase the money supply. A rise in the bank rate will then cause the banks to increase the rates at which they lend. This will then discourage businessmen and others from taking loans, thus reducing the volume of credit. A decrease in the bank rate will have the opposite effect.
2) Open Market Operations
OMO is the buying and selling of government securities by the Central Bank from/to the public and banks on its own account. It does not matter whether the securities are bought from or sold to the public or banks because ultimately the amounts will be deposited in or transferred from some bank. The sale of government securities to banks will have the effect of reducing their reserves. This directly reduces the bank’s ability to give credit and therefore decrease the money supply in the economy. When the Central Bank buys securities from the banks it gives the banks a cheque drawn on itself in payment for the securities. When the cheque clears, the Central Bank increases the reserves of the bankby the particular amount. This directly increases the bank’s ability to give credit and thus increase the money supply.
3) Varying Reserve Requirements
Banks are obliged to maintain reserves with the Central Bank on two accounts. One is the Cash Reserve Ratio (CRR) and the other is the Statutory Liquidity Ratio (SLR). Under CRR the banks are required to deposit with the Central Bank a percentage of their net demand and time liabilities. Varying the CRR is a tool of monetary and credit control. An increase in the CRR has the effect of reducing the banks excess reserves and thus curtails their ability to give credit. Reducing the CRR has the effect of increasing the bank’s excess reserves, which increases its power to give credit.
The SLR requires the banks to maintain a specified percentage of their net total demand and time liabilities in the form of designated liquid assets which may be (a) excess reserves (b) unencumbered (are not acting as security for loans from the Central Bank) government and other approved securities (securities whose repayment is guaranteed by the government) and (c) current account balances with other banks. Varying the SLR affects the freedom of banks to sell government securities or borrow against them from the Central Bank. This affects their freedom to increase the quantum of credit and therefore the money supply. Increasing the SLR reduces the ability of banks to give credit and vice versa.
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Wednesday, October 31, 2007
What is Monetary Policy? - India Story
Dollar Falls to Record Low Versus Euro on Quarter-Point Fed Cut
The dollar fell to a record low against the euro after the Federal Reserve cut its benchmark interest rate for the second straight month.
Central bank policy makers lowered their target rate for overnight loans between banks by a quarter-percentage point to 4.5 percent to keep the worst housing slump in 16 years from threatening growth. Rate cuts can dim demand for deposits in the currency.
The weak dollar trend remains, said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston. If growth slows further, the Fed may still need to act to cut rates.
The dollar declined to $1.4489 per euro at 2:46 p.m. in New York from $1.44432 late yesterday, and touched $1.4495, the weakest since the European currency's debut in January 1999. The U.S. currency traded at 115.33 yen from 114.63.
The U.S. Dollar Index traded on ICE Futures U.S. in New York touched 76.498 today, the lowest since the index began in 1973. The index is headed for its fifth drop in six years.
Fed Lowers Benchmark Rate by a Quarter Point to 4.5 Percent
The Federal Reserve cut its benchmark interest rate by a quarter point to 4.5 percent to cushion the U.S. economy from the housing recession that officials predict will extend into next year.
Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets, the Federal Open Market Committee said in a statement after the meeting today in Washington. The committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.
Policy makers lowered borrowing costs for a second month even after reports today showed the economy expanded more than forecast last quarter and companies stepped up hiring. Chairman Ben S. Bernanke emphasized this month that the outlook is uncertain and housing will constrain growth into 2008.
Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance, the Fed said. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.
Discount Rate
The Fed also lowered the discount rate, the cost of direct loans to banks, by 25 basis points to 5 percent, from 5.25 percent. A basis point is 0.01 percentage point.
Policy makers said in the statement that inflation risks remain and the committee will continue to monitor inflation developments carefully.
Economists anticipated the decision, according to the median of 108 forecasts in a Bloomberg News survey. Futures contracts on the Chicago Board of Trade showed traders also expected a quarter-point move.
Economists and former officials said before the meeting that the central bank would want to preserve leeway to take back the rate cuts should the economy weather the risks from credit and housing markets. Vice Chairman Donald Kohn said Oct. 5 the Fed must be nimble in adjusting policy to promote both growth and price stability.
Bernanke, 53, and other officials in speeches this month have described the importance of taking out insurance to protect the economy from risks when the outlook is difficult to judge.
Consumer-price increases have slowed, while a falling dollar and rising oil costs threaten a renewed acceleration. The Fed's preferred gauge, the personal consumption expenditures price index excluding food and energy, probably rose 1.8 percent in September from a year ago, according to the median forecast. The Commerce Department reports the figures tomorrow.
The index remained below 2 percent from June to August. Bernanke, before taking the Fed's helm, said his comfort range for the measure was 1 percent to 2 percent.
The Commerce Department said today that the expansion picked up in the third quarter, though economists surveyed by Bloomberg predict a slowing this quarter. A private report showed companies hired 106,000 this month after creating 61,000 jobs in September.
The economy grew at a 3.9 percent annual rate in July to September, up from 3.8 percent in the previous three months, Commerce figures showed. It will slow to a 1.8 percent pace in the current period, according to the median estimate in a survey published Oct. 10.
Housing figures this month showed the industry has yet to find a bottom. A private survey yesterday showed home values in 20 metropolitan areas slid the most in at least six years. Sales of previously owned homes fell to the lowest level since National Association of Realtors began keeping records in 1999, and government figures recorded a 14-year low for housing starts.
Continued stress in credit markets may lengthen the housing recession and temper business investment plans. The world's largest banks and securities firms announced more than $30 billion of third-quarter charges.
Citigroup Inc. the biggest U.S. bank, said Oct. 15 that earnings fell 57 percent as loan losses increased. Merrill Lynch & Co. last week wrote down the value of subprime mortgages, asset-backed debt and leveraged loans by $8.4 billion.
The benchmark rate is now at the lowest level since January 2006. Bernanke took office the following month, and continued a series of rate increases that lifted the federal funds rate to 5.25 percent by June last year.
U.S. Economy Grew More Than Forecast in Third Quarter
Economic growth in the U.S. unexpectedly accelerated in the third quarter as increases in exports, consumer spending and business investment made up for another plunge in home construction.
Gross domestic product grew at an annual rate of 3.9 percent in the quarter, the most since the first three months of 2006, compared with a 3.8 percent pace in the prior quarter, the Commerce Department said today in Washington. The Federal Reserve's preferred price gauge rose more than forecast.
The report comes as Federal Reserve policy makers meet to set interest rates, with most economists predicting officials will lower their benchmark rate for a second month. The figures may give the central bank reason to signal it isn't inclined to make further reductions, analysts said.
Looking forward, the Fed is probably still going to argue that the economy is softening, said Peter Kretzmer, a senior economist at Bank of America Corp. in New York. The language in today's statement could become a little more indicative of a Fed that will be reluctant to move again.
The median forecast of 82 economists surveyed by Bloomberg News projected the growth rate at 3.1 percent. Estimates ranged from 2.0 percent to 4.0 percent.
The dollar strengthened against the euro and yen in the minutes after the GDP report was released, before later paring its gain. Treasury notes declined. A report from the National Association of Purchasing Management-Chicago today showed business activity unexpectedly shrank this month.
Advance Report
Companies in the U.S. added 106,000 jobs in October, more than economists had forecast, according to a report today from ADP Employer Services. A report from the Labor Department also showed employment costs rose in the third quarter at a slower pace than in the previous three months, suggesting increases in wages and benefits aren't heating up inflation.
The GDP report is the first for the quarter and will be revised in November and December as more information becomes available.
The Fed's preferred inflation gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 1.8 percent annual pace following a 1.4 percent increase the prior quarter, according to the report.
The gain leaves prices within the 1 percent to 2 percent range policy makers, including Ben S. Bernanke before becoming Fed chairman, have said is their preferred zone.
Certain Rate Cut
Federal funds futures indicate a near certainty that the Fed will cut its benchmark rate by 25 basis points today to 4.5 percent, following its half percentage point cut on Sept. 18. The Fed will announce its decisions today at around 2:15 p.m.
Consumer spending grew at a 3 percent pace following a 1.4 percent increase in the prior quarter, contributing the most to the gain in growth. Still, many economists project spending will slow as declining property values turn Americans pessimistic.
The dreaded collateral damage from the housing market hasn't showed up yet in consumer spending, though it's just a matter of time, said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. The economy will probably expand at a 1.8 percent pace in the current quarter, according to the median forecast of economists surveyed earlier this month.
Consumers weren't the only ones buying last quarter. Gains in both commercial construction projects and purchases of equipment and software contributed to a 7.9 percent increase in business investment. The 5.9 percent rise in spending on new equipment was the biggest since the first quarter of 2006.
An increase in inventories contributed another 0.4 percentage point to growth.
Rise in Exports
The economy was also buttressed by a narrowing of the trade deficit that added 0.9 percentage point to the rate of expansion. The gap shrank to $546.2 billion at an annual pace, the smallest since the last three months of 2003.
General Electric Co.'s third-quarter profit rose as large- equipment orders climbed 39 percent amid a surge in demand from countries that are building airports and power grids, the Fairfield, Connecticut-based company said Oct. 12.
We see orders everywhere around the world, GE's Chief Executive Officer Jeffrey Immelt said on a conference call earlier this month. That seems to be accelerating, not diminishing.
Home construction remained the biggest drag on GDP, the report showed. A 20.1 percent plunge in homebuilding, the seventh consecutive decline, subtracted a percentage point from growth.
Credit restrictions since the August collapse in subprime lending intensified the blow to housing at the end of the quarter. Existing home sales in September fell 8 percent from the prior month, while housing starts declined 10 percent to the lowest since March 1993, reports earlier this month showed.
Tuesday, October 30, 2007
Recession risk rises with record oil
Economists say economic expansion that shrugged off $70 or $80 oil could finally be tripped up by oil above $90 a barrel.
There was a time when economists predicted that $60-a-barrel oil would cause a recession. Then they said $70 oil would. Then $80.
So it might be tough to take the recession threat of $90 a barrel oil very seriously. But some economists say that would be a mistake. They note that the current record-high oil prices are hitting when the economy is at its most vulnerable point in years - with the housing downturn, credit crunch and sliding value of the dollar posing threats that weren't present when oil passed its previous benchmarks.
The whole game has changed, said John Silvia chief economist of Wachovia. If they're sustained here, going into the holiday season, you're going to have a pretty horrendous fourth quarter.
Silvia said the downturn in housing and the problems in credit markets that hit in August have left the employment picture significantly weaker than it was six or nine months ago, when oil prices took gasoline prices into record territory.
The background is totally different now than it was in the spring, he said. The ability of the system to respond just isn't as great as it was then.
Still, Silvia says there slightly less than a 50-50 chance of a recession in the coming months, even if oil prices don't ease up. He said he expects that the Federal Reserve will step up its rate-cutting efforts and go beyond the quarter-point cut he is expecting from the central bank on Wednesday.
David Wyss, chief economist with Standard & Poor's, puts the chance of a recession at less than 50 percent. But he agrees with Silvia that the risks are greater with the combination of increased oil prices and the current weakness in other parts of the economy.
The more things that go wrong, the less room there is for anything else to go wrong, he said. With housing diving, the problems in the credit market and rising oil prices, eventually one of these things is going to break the camel's back.
Wyss still thinks that the current record highs are just short of the breaking point needed to tip the economy into recession.
My feeling is $90 doesn't get us there, he said. My guess is we have to go over $100 to get to a recession. How much over $100, I'm not sure.
Wyss said that the economy is less susceptible to oil shocks than in 1980 and 1981, when oil hit what was widely seen as record highs. Adjusted for inflation, the price then was between $93 and $101 a barrel, depending upon how those historical prices are calculated.
The growth of the service sector and the shift away from manufacturing means oil prices are less important to corporate profits and overall economic activity today than they were then. But the current economy is hardly immune to such problems.
Procter & Gamble, the nation's leading maker of consumer products, warned Tuesday that profit margins and earnings in the current quarter would likely be less than forecasts, citing increased energy prices as part of the reason. Auto sales, particularly among U.S. automakers, have taken a hit from high gasoline prices this year, Wyss points out.
And some service sector companies can also be squeezed by higher oil.
Retailers could be hurt if consumers cut back purchases due to higher gasoline prices, while higher fuel would jump could hurt some transport firms, particularly airlines.
Oil's impact is smaller than it used to be, but that sure doesn't mean it's trivial, Wyss said.
But Lakshman Achuthan, managing director of the Economic Cycle Research Institute, believes that the economy has shown enough underlying strength, especially in the labor market, to take even this latest oil shock.
There's obviously not a magic number [on oil prices] that defines if economy will tip into recession, he said. It might be easier if prices were lower. It doesn't feel good to dig into your pocket for extra gas or mortgage money. But it makes a big difference whether or not you're getting a paycheck.
Achuthan points out that despite all the focus on the credit crunch and housing downturn this year, the economy grew at a 3.8 percent annual rate in the second quarter. Furthermore, the third quarter is only forecast to slow to a 3.1 percent pace of growth when the government gives its first reading on the quarter's gross domestic product on Wednesday.
Certainly we're slowing, but you have some room to slow without going in recession, he said. You can never say never, but it [a recession] should not be the predominant concern. There's more resilience in this economy than people think, because you have not had a recessionary downturn in this employment market yet.
Merrill Ousts O'Neal, Names Cribiore Interim Chairman
Merrill Lynch & Co. ousted Stan O'Neal as chairman and chief executive officer and said it will begin a search for his successor, leaving the world's biggest brokerage without a leader.
Co-Presidents Gregory Fleming and Ahmass Fakahany will run the firm, reporting to board member Alberto Cribiore, who will be a non-executive chairman until O'Neal's successor is found, New York-based Merrill said in a statement today.
Merrill fell as much as 4.6 percent in New York trading after the firm said no successor is imminent. O'Neal lost the confidence of investors and directors after delivering a $2.24 billion third-quarter loss, six times what the firm forecast just three weeks earlier. Merrill has declined about 30 percent in New York trading this year, the second-worst performance after Bear Stearns Cos. among the five largest U.S. securities firms.
They have to move fast, said Mark Batty, who helps manage about $77 billion including Merrill shares as an analyst at PNC Wealth Management in Philadelphia. They have risk management issues that need to be tackled quickly.
O'Neal, 56, and the board of directors agreed that a change in leadership would best enable Merrill Lynch to move forward, the company said in the statement announcing O'Neal's retirement after 21 years at the firm. The board will consider internal and external candidates, the company said.
List of Candidates
Possible replacements include Laurence Fink, 54, who sold almost 50 percent of the BlackRock Inc. money management firm to Merrill last year, and Fleming, 44, who has spent most of his career as an investment banker at the firm. Another candidate is Robert McCann, 49, who heads Merrill's wealth-management division, including the firm's network of 16,600 brokers.
Merrill lost $2.41 to $65.01 in 1:03 p.m. New York Stock Exchange composite trading. The stock climbed 11 percent in the past two days on speculation O'Neal would go and the company might be a takeover target. Deutsche Bank AG analyst Mike Mayo estimates the firm may be worth $120 a share in an acquisition.
Some investors were probably too optimistic, expecting a quick resolution, said Benjamin Wallace, who helps manage $750 million, including Merrill shares, at Grimes & Co. in Westborough, Massachusetts.
The company said today that Fleming and Fakahany will stay in their jobs as co-presidents and chief operating officers. Cribiore, founder of New York-based private-equity firm Brera Capital, has been a Merrill board member since 2003.
Housing Slump
Merrill reported an $8.4 billion writedown for subprime mortgages, asset-backed bonds and loans gone bad last week, the biggest quarterly debacle in the history of the securities industry.
The loss followed O'Neal's $1.3 billion acquisition of mortgage lender First Franklin Financial Corp. in December. At the time, O'Neal said the purchase would add revenue velocity. Instead, the takeover contributed to losses as the U.S. housing market suffered its worst slump since the 1991 recession.
First Franklin was embarrassing for O'Neal since he had criticized acquisitions made by his predecessor, David Komansky, whose expansion culminated in a $1.7 billion charge in the fourth quarter of 2001. That's now dwarfed by O'Neal's third-quarter loss. Merrill may have to write down another $4 billion in the fourth quarter, said Meredith Whitney, a New York-based analyst at CIBC World Markets, in a note sent to clients last week.
The truth is there's probably an additional writedown coming in the fourth quarter, said Fitzpatrick. Until we get a little more color on that, it's probably a good time to be sitting on the sidelines.
Less Equity
Merrill's $8.4 billion writedown may have wiped out a fifth of shareholders equity, leaving the firm with $38.8 billion of assets minus liabilities. The probability of Merrill defaulting on debt within five years more than doubled since June 30, rising to 7 percent yesterday from 3 percent, according to credit- default swap traders.
Losing 20 percent of shareholders' equity in one fell swoop is a serious blow, said Robert Willens, the accounting analyst at Lehman Brothers Holdings Inc. in New York. It might take them two to three years to earn that capital back.
O'Neal angered the board by approaching Wachovia Corp. Chairman and CEO Kennedy Thompson earlier this month about a possible merger without consulting Merrill directors, the New York Times reported Oct. 26, citing people with knowledge of the matter. The board has discussed replacing O'Neal with candidates, including Fink and NYSE Euronext CEO John Thain, the Times said.
Discretion on Pay
O'Neal, who earned his way through college by working at a General Motors Corp. assembly plant in Georgia, may receive about $160 million to $200 million from Merrill, said James Reda, managing director of James F. Reda & Associates, a New York-based compensation consultant that has analyzed O'Neal's pay package.
Merrill has said in its annual proxy statement that the size of any payment would be at the discretion of the board. O'Neal has received stock bonuses of almost $80 million during the past three years.
O'Neal got a master's degree from Harvard Business School in 1978 and worked as a finance executive at General Motors before joining Merrill as an investment banker in 1986. He was promoted to president in July 2001.
Monday, October 29, 2007
Mukesh Ambani is world's richest man
Billionaire Mukesh Ambani today became the richest person in the world, surpassing American software czar Bill Gates, Mexican business tycoon Carlos Slim Helu and famous investment guru Warren Buffett, courtesy the bull run in the stock market.
Following a strong share price rally on in his three group companies, India's most valued firm Reliance Industries, Reliance Petroleum and Reliance Industrial Infrastructure, the net worth of Mukesh Ambani rose to $63.2 billion (Rs 2,49,108 crore).
In comparison, the net worth of both Gates and Slim is estimated to be slightly lower at around $62.29 billion each, with Slim leading among the two by a narrow margin.
The five richest people in the world with their net worth
1. Mukesh Ambani ($63.2 billion)
2. Carlos Slim Helu ($62.2993 billion)
3. William (Bill) Gates ($62.29 billion)
4. Warren Buffett ($55.9 billion)
5. Lakshmi Mittal ($50.9 billion)
Warren Buffett, earlier the third richest in the world, also dropped one position with a net worth of about $56 billion.
Ambani's wealth of about Rs 2,49,000 crore includes about Rs 2,10,000 crore from RIL (50.98% stake), Rs 37,500 crore from RPL (37.5%) and Rs 2,100 crore from RIIL (46.23%).
Slim's wealth has been calculated on the basis of his stake in companies like America Movil (30%), Carso Global (82%), Grupo Carso (75%), Inbursa (67%), IDEAL (30%) and Saks Inc (10%).
According to information available with the US and Mexican stock exchanges where these companies are listed, Slim currently holds shares worth a total of $62.2993 billion, with more than half coming from Latin American mobile major America Movil. Slim is closely followed by Gates with a net worth of $62.29 billion currently.
Earlier last month, US business magazine Forbes had named Gates as the richest American with a net worth of $59 billion, calculated as on August 30. The magazine had said that a movement of $2 in the share price for Microsoft, the world's biggest software maker, could "add or subtract $1 billion" from his wealth.
Since August-end, Microsoft's share price has risen by $6.58 (based on yesterday's closing on Nasdaq at $35.03), which results into a gain of $3.29 billion in Gates' wealth based on Forbes assumption.
Besides a stake in Microsoft, Gates' wealth also includes the commission and license fees earned by him and gains through his shares in an investment holding company that invests across the market.
Gates is followed by Buffett at the fourth place in the league of the world's richest with a net worth of $55.9 billion through his holding in his investment vehicle Berkshire Hathaway and in other companies. At the end of August, Buffett's wealth stood at $52 billion, as per the Forbes magazine. Berkshire Hathaway's share price has gained by about 7.5% since then.
Earlier on September 26, Ambani had overtaken steel czar Lakshmi Mittal to become the richest Indian in the world.
Mittal currently ranks as the fifth richest in the world with a net worth of $50.9 billion through his 44.79% stake in world's biggest steel maker ArcelorMittal.
While most of Mittal's wealth comes from his steel empire, though he has also spread his wings into businesses like oil and real estate, those of Ambani and Gates are mostly through petrochemicals and software respectively. However, Buffett and Slim are making money from investments across a host of sectors.
Saturday, October 27, 2007
Dollar Falls to Record Low Versus Euro Before Fed Rate Meeting
The dollar fell to a record low against the euro on signs a slump in housing is hurting the U.S. economy, bolstering the case for the Federal Reserve to lower interest rates next week.
The U.S. currency has weakened three straight weeks on speculation the housing recession will spread to consumers and erode corporate earnings. Sales of previously owned homes declined last month by almost twice the rate economists forecast, and consumer confidence dropped to the lowest since May 2006.
The dollar will continue to fall as long as the Fed is cutting interest rates, said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.
The dollar weakened 0.6 percent this week to $1.4393 per euro. It touched an all-time low of $1.4395 per euro yesterday and declined against 15 of the 16 major currencies this week. The U.S. currency dropped 0.3 percent this week to 114.19 yen.
The U.S. Dollar Index, measuring the dollar's performance against six major peers, has lost 8 percent in 2007 and set a record low of 76.977 on Oct. 26.
Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will lower its benchmark overnight rate a quarter-percentage point to 4.50 percent on Oct. 31, after reducing the rate a half-point on Sept. 18 in the first cut since 2003. Futures show an 8 percent chance of a half-point cut on Oct. 31.
Slowing Economy
A government report on Oct. 31 may show U.S. gross domestic product slowed to an annualized 3.1 percent growth rate last quarter, from a 3.8 percent clip in the prior quarter, according to the median estimate in a Bloomberg News survey.
Sales of previously owned homes fell 8 percent last month, while the median price dropped the most in almost a year, the National Association of Realtors said this week. Countrywide Financial Corp., the biggest U.S. mortgage lender, reported its first quarterly loss in 25 years yesterday as borrowers defaulted.
Oil rose above $92 a barrel for the first time in New York this week, pushing Canada's dollar to the highest since 1974 versus the U.S. dollar.
The yuan had its biggest weekly advance in six weeks, to 7.4877 per dollar, reaching the strongest since China ended a peg to the dollar in July 2005. Finance ministers and central bankers from the Group of Seven major industrialized nations last week called for a faster appreciation in the yuan, which they contend is artificially cheap.
A recovery in global stocks this week gave investors confidence to resume carry-trade bets, where they buy assets in countries with high yields, using loans in low-yielding currencies such as the yen. The Standard and Poor's 500 Index gained 2.3 percent this week, following a 3.9 percent tumble the week before.
The yen fell 0.3 percent this week to 164.34 per euro, and dropped 2.2 percent versus the New Zealand dollar.
Friday, October 26, 2007
Supply fears push oil above $92
Oil prices have risen to yet another record after an unexpected fall in US crude stockpiles added to fears over supplies for the winter months ahead.
US light, sweet crude rose $1.74 to $92.22 a barrel before falling back to $91.86 by close of trade in New York.
Meanwhile London Brent also reached a high of $89.27 before later settling at $88.69, up $1.21 cents on the day.
Analysts said threats of US sanctions against Iran and tension on the Iraqi border had also helped the rally.
According to some analysts, oil may well reach $100 a barrel.
US crude oil stocks unexpectedly fell by 5.3 million barrels last week.
Earlier in the week, prices had retreated from previous highs following concerns about the health of the US economy and expectations of more output from oil producers' cartel Opec.
Despite the latest price surge, Opec members said they would stick to their existing production targets.
The group has already pledged to increase production by 500,000 barrels a day starting from 1 November, but the US is calling for an additional rise.
Thursday, October 25, 2007
Rogers, Buffett see definite signs of recession in US
The United States economy has entered a recessionary phase, according to investor Jim Rogers, even as billionnire investor Warren Buffett said he expected the dollar to weaken further.
Rogers told UK's Daily Telegraph that he was switching out of the dollar and into yen, the yuan and the Swiss franc while Buffett said South Korean stocks offered better value than other world markets.
Buffett, worth $52 billion in March, according to the Forbes Rich List, said his Berkshire Hathaway company is still on the hunt for bargains as the US subprime mortgage crisis plays out.
Rogers, who co-founded the Quantum Fund with billionaire investor George Soros in the 1970s, said it made sense to desert the dollar. He had predicted the 1999 commodities rally, also said he was still bullish about surging Chinese stock markets despite worries over a bubble.
"The US economy is undoubtedly in recession," the Telegraph quoted Rogers in an article published on its website.
"Many parts of industry are actually in a state worse than recession. If it were not for Bernanke (Federal Reserve chairman) putting huge amounts of money into the market, the stock market would probably be down much more than it is," he said in an interview in Hong Kong.
The Fed slashed borrowing costs by 50 basis points to 4.75 per cent in a bid to shore up the world's biggest economy from the subprime mortgage market crisis and the global credit crunch it triggered. The Fed is widely expected to lower interest rates again next week.
Buffett's Berkshire Hathaway, which owns more than 70 businesses and has some $100 billion of stock and bond investments, has a stake in only one listed South Korean company, the world's fourth-biggest steelmaker POSCO.
Berkshire said in March it held a 4 per cent stake in POSCO as of the end of 2006. "We are gaining foreign currency exposure that we like," said Buffett.
"We are still negative on the dollar. We bought stocks in companies that are earning their money in other currencies," he told reporters during a visit to Berkshire's Korean cutting tool maker subsidiary, TaeguTec.
The US currency has lost 23 per cent against the South Korean won since the end of 2003, hit by accumulating current account surpluses in South Korea and a steady inflow of portfolio investment into the country's financial markets.
IMF managing director Rodrigo Rato, meanwhile, said the US currency was still overvalued and that there was room for further depreciation.
BEA set to negotiate sale price
Software maker says it would accept a bid of $8.2 billion, but not Oracle's current $6.7 billion offer.
BEA Systems said Thursday it is prepared to discuss a sale of the company to Oracle and other potential suitors at a price of $21 per share.
That is well above the $17 per share bid that larger rival Oracle made two weeks ago for the business software maker. BEA has twice rejected the offer as too low, according to Oracle.
BEA said it reached the $21 figure after consultation with adviser Goldman Sachs. BEA said it is "prepared to authorize negotiations with third parties including Oracle" at that price.
The $21 price values BEA at about $8.15 billion, based on its roughly 388.2 million outstanding shares as of April 2006, the last time BEA filed a quarterly report with regulators. Oracle's offer values BEA at about $6.7 billion.
On Tuesday, Oracle set a deadline for this Sunday evening for BEA to accept its original offer.
BEA's board said Thursday it will "continue to vigorously oppose a sale to Oracle at $17 per share" because it undervalues the company.
SEBI curbs P-notes to boost transparency
India's stock market regulator tightened investment rules for unregistered foreigners as expected on Thursday by clamping down on issuance of indirect investment notes to stem inflows of anonymous money.
The Securities and Exchange Board of India (SEBI) said the new regulations on so-called participatory notes (P-notes) would come into effect at the close of trade on Thursday.
The regulator says P-notes allow foreigners to make a backdoor entry into the market without registering with Indian authorities and it wants them to register to create greater transparency on inflows.
"We are saying we are registering more FIIs. We are saying that we are fast-tracking the system of registration," SEBI Chairman M. Damodaran told a news conference after its board approved the new regulations.
"What we are doing is to clean up the regulatory environment, that is our terrain, rather than seek to do something else."
P-notes are issued by foreign institutional investors (FIIs) registered in India to unregistered overseas investors. Registered FIIs buy Indian securities and issue the notes based on the underlying asset.
The new rules follow the lines of a draft issued by SEBI last week.
FIIs and their sub-accounts -- vehicles set up by registered FIIs to issue P-notes -- are no longer allowed to issue P-notes whose underlying asset is a derivative.
"The related decision that the current position would be wound up over 18 months has also been approved by the board," Damodaran said.
Fresh issuance of other P-notes by sub-accounts would stop immediately and they would be required to wind up their current position over 18 months. However sub-accounts applying for FII status could continue business with their application pending.
SEBI also imposed a P-note issuance limit of 40 percent of assets under custody. Entities below 40 percent would be allowed an annual 5 percent incremental increase capped at 40 percent.
"But those who are going above 40 percent now had to stay where they are, and clearly those who are below 40 percent cannot be allowed to run away indefinitely," Damodaran said.
Other steps included allowing P-notes to be issued only to regulated entities.
Indian shares, which have been volatile since SEBI first made its plans public last week, ended up 1.4 percent ahead of the announcement, with investors optimistic the rules would largely be as the regulator had already outlined.
India, the world's fastest-growing major economy after China, has battled a surge of foreign capital this year, which has pushed the rupee to its strongest against the dollar since 1998 and helped power the stock market to a series of record highs.
The finance minister has said India is also trying to moderate inflows to avoid a stock market bubble.
Net foreign portfolio investments so far this year are more than $17 billion, well above the full-year record inflow of $10.7 billion in 2005.
More than $8 billion of foreign funds flowed in the weeks after the United States cut interest rates in mid-September, prompting SEBI to announce its plans.
Wednesday, October 24, 2007
Merrill Lynch Reports Loss on $8.4 Billion Writedown
Merrill Lynch & Co. reported the biggest quarterly loss in its 93-year history after taking $8.4 billion of writedowns, almost double the firm's forecast three weeks ago.
The writedowns on subprime mortgages, asset-backed bonds and leveraged loans led to a third-quarter loss of $2.24 billion, or $2.82 a share, six times more than Merrill estimated on Oct. 5. Chief Executive Officer Stanley O'Neal said today that the New York-based firm may sell assets to shore up its balance sheet.
Merrill's stock fell the most in five years, its credit rating was cut and the perceived risk of default on the company's bonds rose after O'Neal said the firm misjudged the severity of the decline in debt markets since July. Investors who lauded the 56-year-old CEO for chasing higher returns as the biggest underwriter of securities backed by subprime loans now question his management. O'Neal said the firm increased the writedown after a more conservative analysis of its holdings.
We're very disappointed, said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston, including Merrill shares. I don't think Stan O'Neal will step down, but you do have to look at top management and wonder why they didn't know the extent of this loss.
Standard & Poor's, Fitch Ratings and Moody's Investors Service lowered their assessments of Merrill's credit. S&P cut its rating on Merrill's senior unsecured debt to A+ from AA-, describing the quarter's loss as startling and citing management's miscues that raised concern about the firm's risk controls and business strategy.
Financial stocks sank, led by Merrill, which dropped 5.8 percent to $63.22 in New York Stock Exchange trading. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage bonds, declined 1.5 percent to $57.42. Bear Stearns Cos., the second-biggest, fell 2.3 percent to $113.54.
Merrill's third-quarter revenue fell 94 percent to $577 million, as losses in the fixed-income division overshadowed gains from underwriting stocks and providing merger advice. At Merrill's retail brokerage, the nation's biggest with a network of 16,610 financial advisers who cater to individual investors, revenue climbed 23 percent to $3.27 billion.
O'Neal, on a conference call with analysts, said he was continuing to resize the firm's balance sheet. He also said he's weighing potential divestitures of non-core businesses.
Merrill's compensation costs fell by 49 percent from a year earlier to $1.99 billion, indicating that the quarter's losses may reduce year-end bonuses for some of Merrill's 64,200 employees. The firm said today that it remains focused on paying its best performing employees competitively.
`Remaining Impact'
We expect market conditions for subprime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions, he said in the company statement.
Merrill also wrote down the value of leveraged buyout loans the firm couldn't sell to investors by $463 million, after underwriting fees.
Merrill's writedown exceeded Citigroup Inc.'s $6.5 billion and increased to more than $30 billion the total third-quarter cost for bad loans and trading losses reported by the world's biggest securities firms and banks.
Monday, October 22, 2007
India's firms build global empires
Once sheltered from overseas competition, Indian companies are now building empires - ramping up exports, making acquisitions in the U.S. and Europe, and attracting billions in foreign capital.
Tulsi Tanti made his fortune building windmills, not tilting at them. But executives at French nuclear energy giant Areva might be forgiven for conjuring images of Don Quixote when the 49-year-old Indian entrepreneur squared off against them this year for control of Germany's leading wind-turbine manufacturer.
Areva - controlled by the French government and boasting annual revenue of $13.7 billion - is one of the world's most powerful power companies. Tanti's Suzlon Energy is a family-owned venture, barely a decade old.
Tulsi Tanti, Suzlon Energy: Bought 86% of German wind-turbine manufacture RE power earlier this year, making his company the fifth-largest supplier of wind power in the world.
Ratan Tata, Tata Group: purchased Britain's Tetley Tea for $430 million in 2000, followed by Daewoo's truck operations, the Ri tz-Carlton in Boston, and this year Corus steel for $13 billion.
But Tanti's bid for Hamburg-based REpower was anything but quixotic. Back home in India, Tanti had reinvented the model for selling wind power, forsaking the fragmentation typical of the global industry for an end-to-end approach consolidating the entire process - surveying and purchasing sites for wind farms, building and maintaining turbines, and even distributing the power - under a single corporate roof. Suzlon's sales were soaring, its stock hitting record highs on India's stock exchange, and foreign bankers were tripping over one another to lend Tanti money.
When Areva, which already owned 30% of REpower, offered $148 a share for the remaining stake, Tanti outbid the French Goliath, then outmaneuvered it at every turn. By May, Areva conceded defeat, clearing the way for Tanti to lock up 86% of REpower in a deal valued at $1.7 billion. To hear Tanti tell it, the contest's outcome was never in doubt.
"I can take a company with a 4% margin and turn it into a company with a 20% margin. They can't," he says with a shrug, sipping a glass of watermelon juice between meetings in Mumbai. "So I knew from the beginning: Whatever they offered, I could pay much more."
These days Tanti isn't the only Indian executive who feels the wind at his back. Buoyed by a robust economy, a booming stock market, and the sharp appreciation of the rupee, India's flagship firms are pushing beyond their home market into the wider world.
Once sheltered from overseas competition by a government fearful of foreign domination, Indian companies now are building global empires with impressive speed, ramping up exports, striking cross-border corporate alliances, snapping up firms in the U.S., Europe, and emerging markets, and attracting billions in foreign portfolio capital to India.
More on Indian companies
But Indian manufacturers are going global too. Consider Bharat Forge in Pune: After six foreign acquisitions in three years, Bharat has emerged as the world's second-largest manufacturer of axle beams, crankshafts, and other forged auto components. CEO Baba Kalyani says he's ready to spend another $250 million on foreign acquisitions and expects to overtake Germany's ThyssenKrupp as industry leader by the end of next year.
Ranbaxy Laboratories, India's largest pharmaceutical company, manufactures generic drugs in 11 countries, distributes and markets them directly in 49, and counts on foreign markets for 80% of its revenue. CEO Malvinder Singh touts Ranbaxy as India's first true multinational. "Our headquarters may be in India," he says, "but we have learned to operate locally and in a very decentralized manner."
India Inc. still wrestles with the old demons: bad roads, an inadequate education system, shortsighted politicians. In the most basic categories of development, India's economy lags behind China's. Morgan Stanley estimates that China outspends India on infrastructure by a ratio of seven to one. The result: India's manufacturers pay twice as much for electric power as do their Chinese counterparts and three times as much for railway transport.
It's estimated that 40% of India's perishable goods rot before reaching market. India's vaunted technology institutes graduate hundreds of thousands of engineers each year, but their skills are uneven, and India's broader educational institutions have neglected the rest of the nation, leaving 30% of the population unable to read and write.
India's dysfunctional political system - riven by caste, religion, party, and faction - bears much of the blame for these failures. Prime Minister Manmohan Singh and members of his economic team win high marks for policymaking savvy. But they answer to a fractious political coalition whose leaders seem indifferent to the realities of the global economy. Little wonder that while China attracted $70 billion last year in foreign investment, India took in less than $10 billion.
And yet, for all those handicaps, India is barreling forward. Indeed, for the past two years its economy has managed growth rates of 9%, only a percentage point or two shy of China's. In many ways Asia's two emerging giants have embraced development models that are polar opposites. China's strengths may be India's weaknesses - but the reverse is also true. Says CLSA equities strategist Christopher Wood: "China's economy grows because of its government, while India's economy grows in spite of it."
China's broad highways and bustling factories are the product of an authoritarian regime that puts a premium on control. Growth is stoked by government spending and exports, and the economy is dominated by state-owned companies. India's more chaotic business landscape is dominated by family-owned conglomerates, many founded generations ago during India's years as a British colony.
Lightly regulated sectors like software programming, telecommunications, and pharmaceuticals spawned new players such as Narayana Murthy, who launched Infosys (Charts) from his Pune apartment, and Sunil Mittal, who parlayed a bicycle-parts company in Ludhiana into Bharti Airtel, India's leading mobile-phone company.
The success of Indian ventures, whether old or new, owes much to the quality of their domestic capital markets. Deng Xiaoping launched mainland China's exchanges in the early 1990s as an experiment. More than a decade later they remain badly regulated, wildly speculative, and mostly off-limits to both foreign investors and private Chinese firms.
The Bombay Stock Exchange, by contrast, has been around twice as long as India has been independent. It is one piece of infrastructure India's regulators have gotten right: encouraging new ventures, punishing poor management, and accelerating growth of established players. India, CLSA's Wood argues, "has by far the best growth story of any of the emerging economies."
In April, Hindalco Industries, part of India's Aditya Birla group, paid $3.6 billion for Canadian aluminum company Novelis. In May, as Suzlon closed its deal on REpower, Vijay Mallya's United Breweries snapped up Whyte & McKay, the world's fourth-largest distiller of Scotch whisky. In August, Wipro (Charts) pocketed New Jersey software house Infocrossing for $600 million. In the first three quarters of this year, Indian companies announced 150 foreign acquisitions with a total value of $18.1 billion, according to Dealogic - a fourfold increase over all of 2005.
But none can match Tata Group for ambition. In April, Tata Steel paid $13 billion for Corus, an Anglo-Dutch steel company, securing mills in Ohio and Pennsylvania and quintupling its steelmaking capacity. That remains India's biggest foreign purchase to date. But between Tetley and Corus, Tata scooped up a slew of other overseas assets: an undersea-cable business, the truck-manufacturing operations of South Korea's Daewoo group, a stake in one of Indonesia's largest coal mines, and a raft of foreign hotels, including the Ritz-Carlton in Boston.
This year, for the first time, the group will take in more revenue overseas than it does at home. Tata is well on its way to becoming India's first truly global brand. And chairman Ratan Tata, who wouldn't talk to Fortune for this story, is still shopping. In August he declared his interest in buying Jaguar and Rover, now owned by Ford Motor.
Refer the link for full article (http://money.cnn.com/magazines/fortune/fortune_archive/
2007/10/29/100795475/index2.htm)
Sunday, October 21, 2007
Dollar hits record low vs euro, yen up on risk unwind
The dollar sank on Monday, hitting a record low versus the euro and other currencies after traders took a tumble in US stocks and the apparent indifference of Group of Seven finance officials to recent dollar weakness as a cue to dump the US currency.
Weakness in US stocks on Friday, when the Dow Jones industrial average and the Standard & Poor's 500 posted their worst daily percentage drops in two months, also pushed the dollar to a record low against a basket of currencies.
Tokyo traders on Monday picked up where dollar selling left off on Friday. At the same time, struggling equities discouraged demand for risky assets, boosting the yen as they triggered more unwinding in trades to sell the yen for high-yielding currencies.
The euro climbed to $1.4349 on electronic trading platform EBS after G7 officials ended a weekend meeting without offering verbal support for the beleaguered US currency, as expected, although they did urge China to speed up appreciation of the yuan.
The dollar fell more than 1 percent to 113.25 yen, hitting a six-week low, before pulling back to around 113.75 yen.
RISK AVERSION
The Japanese currency was bolstered by a 3.0 percent fall in the Nikkei stocks average, which along with other Asian equity markets followed US stocks lower.
"Stocks are down and volatility has shot up, so putting on yen carry trades is out of the question," said Seiichiro Muta, forex director at UBS Securities in Tokyo.
But the yen retreated from the day's highs, with some traders saying they had already factored in a sizable drop in the Nikkei, and that additional yen gains in Tokyo trade were unlikely barring a significant extension in Asian stock losses.
Market participants expect the dollar to stay weak on the growing view that the Federal Reserve may cut interest rates this month, as weak earnings among many US banks and corporations and a suffering housing market point to an economic slowdown.
Traders are bracing for US data on new and existing homes to be released later in the week, and some said that weak readings may push the dollar lower this week.
But they added that yen gains may be limited, as Japanese investors, particularly institutional players, were expected to step in to sell the yen to buy foreign assets as part of their investment plans for the second half of the financial year.
Japanese importers were also seen keen to sell the yen as it appreciates.
The yen may become vulnerable to selling in the near term, as some traders said that a Fed rate cut this month would likely boost equities, just as its decision to slash its fed funds rate by 50 basis points last month triggered a surge in US stocks, which may reheat demand for yen carry trades.
Japenese Stocks hit 4 weeks low and Nikkei was trading down 540 points
Saturday, October 20, 2007
Dollar May Extend Drop After G-7 Fails to Address Record Slide
The dollar, trading at an all-time low against its major trading partners, may extend the decline after the Group of Seven failed to address the drop following a meeting of finance officials.
The policy makers, representing the U.S., U.K., Japan, Germany, Italy, France and Canada, stuck to language in prior statements by saying excess volatility' in currencies is undesirable and that currencies should trade in line with fundamentals. They also intensified calls for China to let its currency strengthen, during yesterday's gathering in Washington.
The dollar is going to be under pressure as the growth outlook weakens. Risk aversion is the focus now. The dollar dropped this week by the most in two months versus the yen, on concern the U.S. housing slump will rekindle a credit market sell-off.
The yen rose against the 16 most-actively traded currencies this week as a decline in global stocks prompted investors to sell assets funded by loans in Japan. A report next week is forecast to show existing home sales in the U.S. fell to the lowest since 2001 in September.
Sell the Dollar
The dollar fell 2.6 percent to 114.51 yen, from 117.61 on Oct. 12, the biggest weekly decline since the period ended Aug. 17. The U.S. currency weakened 0.9 percent to $1.4301 per euro. It touched an all-time low of $1.4319 yesterday.
The statement gives the market a green light to sell the dollar, said Brian Dolan, chief currency strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million of funds under management. With no comment from the G-7 about its weakness, the dollar could decline to $1.45 per euro in a month.
An Oct. 24 report from the National Association of Realtors may show sales of existing homes fell to an annualized 5.25 million last month, from 5.5 million in August, according to the median estimate of 64 economists surveyed by Bloomberg News.
The International Monetary Fund cut its forecast for 2008 U.S. economic growth to 1.9 percent from 2.8 percent on concern the sell-off in the credit markets will cut business and consumer spending.
Risk Aversion
Increased risk aversion caused investors to pare carry trades financed by yen. In such transactions, investors get funds in countries with lower borrowing costs and buy assets in nations with higher rates.
The trades have pushed the yen down 8.9 percent versus the euro and 12 percent against the Australian dollar in the last 12 months. The Japanese currency gained 1.8 percent to 163.79 versus the euro this week, the biggest increase since the period ended Aug. 17.
The Bank of Japan's benchmark borrowing cost is 0.5 percent, the lowest among major economies, and compares with the European Central Bank's 4 percent, the Federal Reserve's 4.75 percent and Australia's 6.5 percent.
Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will cut its benchmark interest rate a quarter percentage point to 4.5 percent on Oct. 31. The odds were 32 percent a week ago. The chance of another rate cut in December to 4.25 percent is 74 percent, up from 15 percent on Oct. 12.
Apple Market Value Soars Past Dell's on Mac, IPod
Ten years ago this month, Dell Inc. founder Michael Dell said Steve Jobs should shut down Apple Inc. and return the money to shareholders.
Dell then had a market value of $4 billion to Apple's $700 million. Apple's valuation has since soared to $150 billion, more than double that of its personal-computer rival. Last month, Apple passed PC leader Hewlett-Packard Co. in market capitalization for the first time.
Jobs changed Apple from a company dependent on the Macintosh computer to a consumer-electronics innovator. He introduced the iPod media player, and built sales to more than 110 million units by updating features. This year Apple entered the wireless-handset market, drawing more than 1 million customers to the iPhone at an initial price of as much as $599.
It's not a one-trick pony anymore, said Jeffrey Krumpelman, portfolio manager at Fifth Third Asset Management in Cincinnati. It really is a cash-flow machine. He helps oversee $21 billion in assets, including Apple shares.
Jobs, who returned for a second stint as chief executive officer in 1997 after being away for a dozen years, may say annual sales surpassed $20 billion for the first time in the company's 31-year history when he reports results for the year and fourth quarter on Oct. 22.
Record Share Price
The Cupertino, California-based company's profit for the year probably topped $3 billion, according to the average estimate of 11 analysts surveyed by Bloomberg.
Sales for the quarter ended Sept. 29 may have jumped 24 percent to $6.01 billion, fueled by back-to-school demand, the survey found. Profit may have climbed to 84 cents a share from 62 cents in the year-earlier quarter.
Apple's shares fell $3.08 to $170.42 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has more than doubled this year. Twenty-five analysts monitored by Bloomberg recommend buying the stock, and four say hold.
The company plans to give new sales figures for the iPhone, which features a built-in iPod and Web-surfing functions. As of Sept. 9, Apple and U.S. partner AT&T Inc. sold 1 million phones. The device, introduced June 29, was AT&T's best-selling handset in the third quarter, Boston-based researcher Strategy Analytics said yesterday.
Apple's Cut
Jobs reduced the iPhone's price last month by $200 to $399 to spur holiday sales and reach his goal of selling 10 million handsets in 2008.
The lower price probably worked, said Piper Jaffray & Co. analyst Gene Munster in Minneapolis. He estimates Apple sold 1.05 million iPhones last quarter, topping Jobs's July forecast of 730,000 units.
Apple also will disclose for the first time its share of the $60 to $220 monthly in fees AT&T receives for providing iPhone service. The San Antonio-based company has an exclusive agreement to sell a two-year contract to U.S. customers.
Analysts' estimates of Apple's commission range from $6 to $15 per subscriber a month. A 10 percent share of the 24-month contract would give Apple about $10.6 million in revenue since the device went on sale, Munster said.
Sales will get a boost in November, when carriers in the U.K., Germany and France start selling the phone.
This party is just getting started, said Stephen Coleman, chief investment officer at St. Louis-based Daedalus Capital, which began buying Apple shares in 2004 and owns about $4 million worth. My clients smile a lot. So do I.
IPod Success
Apple's iPod sales continue to grow six years after the player was introduced, helped by upgrades such as support for videos and photos. Jobs continued that strategy in September, when he revamped the line and added the iPod Touch video player, which uses the same 3.5-inch color touch screen as the iPhone.
The enhancements are enticing current iPod owners to buy new models, said Credit Suisse analyst Robert Semple in New York. The company sold 10.4 million to 13 million iPods in the fourth quarter, according to five analysts surveyed by Bloomberg.
The iPod accounts for 70 percent of media-player sales in the U.S., while its closest rival SanDisk Corp. has 10 percent, according to the research firm NPD Group Inc. in Port Washington, New York.
Microsoft Corp.'s Zune player, introduced last year and refashioned earlier this month, is unlikely to crack the iPod's dominance, said Michael Gartenberg, an analyst with JupiterResearch in New York. The iPod provides form and function that resonate with consumers, he said.
Winning Customers
Updated versions of the Mac, with faster chips from Intel Corp., also are winning customers. Mac shipments have topped 1 million units for 11 straight quarters. Analysts estimate a record 2 million machines were shipped last quarter.
Apple's PC market share in the U.S. widened to 8.1 percent from 6.2 percent in the third quarter, Gartner Inc. reported this week. Mac shipments rose 37 percent, with Apple posting the fastest growth among the top five PC makers, the Stamford, Connecticut-based researcher said.
At Round Rock, Texas-based Dell, which lost the PC market lead to Hewlett-Packard last year, shipments fell 5.5 percent.
Friday, October 19, 2007
Brutal selloff on Wall Street
Dow down almost 367 points, its third worst day of the year, on fears about credit and housing sector, earnings, record-high oil prices, slide in dollar, what the Fed will do next.
Stocks tumbled Friday as record-high oil prices, more problems in the bank sector and slower corporate earnings growth revived worries about an economic slowdown.
The Dow Jones industrial average lost around 367 points, seeing its third-biggest point loss of the year, its worst since the steep selloff in early August in the midst of the credit and mortgage market mess.
The decline Friday left the blue-chip indicator at its lowest point since Sept. 17, the day before the Federal Reserve cut interest rates for the first time in 4 years, triggering a rally that was cut short this week.
The S&P 500 index lost 2.6 percent and the Nasdaq composite gave up 2.7 percent.
Disappointing earnings from Caterpillar, Honeywell and others exacerbated concerns about weak third-quarter profits. Meanwhile, Wachovia became the latest financial services firm to reveal how the credit and mortgage market crisis had hit its profits.
Oil prices ended lower Friday, but not before hitting an all-time high of $90.07 a barrel in electronic trading. The dollar fell to a new record low against the euro and also slipped versus the yen. Treasury prices surged, as investors sought safety in the comparably safe haven of bonds.
The declines reflect a certain shifting in perspective, said Ram Kolluri, president at Global Investment Management.
"We have fully come to the queasy realization that the U.S. economy may slow down considerably," Kolluri said.
He said that this realization has been driven by the ongoing problems in the real estate market, rise in gold and other commodity prices, and especially $90 a barrel oil - all of which is hitting Corporate America, and the consumer.
Consumer spending fuels roughly two-thirds of economic growth, and after a lot of predictions, actually does seem to be slowing substantially.
Stocks have had a tough week as investors digested a batch of lackluster earnings reports and tried to put into context what the run up in oil prices could mean for consumer spending and the economy.
"We're seeing this kind of selloff because of where oil is and because the banks are reminding people that we have a lot further to go before we get to the bottom of the real estate issue," said John Forelli, portfolio manager at Independence Investments.
Forelli said that this marks a change in thinking from earlier in the month, when a rash of billion-dollar writedowns from big banks seemed to give investors a "the worst is behind us" perception.
The run up in oil prices was also significant in that it revives fears about whether it will drive up inflationary pressures enough to limit the Federal Reserve's ability to cut interest rates further, even if the economic growth deteriorates enough to warrant more cuts.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than 5 to 1 on volume of 1.79 billion shares. On the Nasdaq, decliners topped advancers 5 to 1 on volume of 2.41 billion shares.
Stock declines were broad based, with all 30 Dow stocks slumping.
Thursday, October 18, 2007
The price of everything, in flux
These days, the value of housing, stocks, bonds and even a spouse seems to be up in the air.
"No one knows what anything is worth." Lately I've heard that from lots of people. We're in one of those odd periods when things feel unmoored.
Six months ago you knew, or at least you thought you knew, what your house would sell for. Now you probably don't. The bond market is quaking with fear about the credit crisis, while the stock market is saying rock on.
"Either U.S. economic conditions are really not that bad after all, or investors are suffering from a collective attack of wishful thinking," Martin Barnes, editor of the Bank Credit Analyst, wrote recently.
Valuation is supposed to be a science, sort of, but there are times when it feels more like a demented form of multivariable calculus. Bond guru Bill Gross of Pimco recently wrote that "the modern financial complex has morphed into something unrecognizable to many astute market veterans and academics."
But while you may not be able to analyze the price of a security right now, you can at least analyze the insecurity.
The first issue is that the nationwide decline in home prices that wasn't supposed to happen -- even Alan Greenspan said he didn't expect it -- and there's no historical precedent for it.
The inventory of unsold and new homes is still extremely high, which suggests that a "clearing price" -- a price that buyers and sellers agree upon -- has yet to be found. It's hard to feel secure when your feet can't touch the bottom.
But the scariest thing is that today the price of every asset -- houses, stocks, and bonds -- seems to rest on a foundation that looks increasingly shaky. David Wyss, the chief economist at S&P, puts the losses from the subprime meltdown at around $150 billion, a manageable figure in and of itself. But the subprime crisis was like a termite coming out of the wall. It made everyone start worrying that there were deeper problems.
In the past few years, there's been an explosion of what the Street calls "structured credit" -- everything from mortgages to loans used to finance LBOs was carved up into exotic new securities and sold to buyers who didn't understand what they were purchasing.
Now it turns out that Wall Street didn't understand its own mad, tangled creations either. A Bank of England official called the tests that financial firms used to measure the risk of these new products "completely hopeless." Firms from Citigroup to Merrill Lynch have declared multibillion-dollar write-downs due to losses on these products. And they're still guessing.
In August a Morgan Stanley equity analyst recommended that investors buy the stock of insurer Ambac, which guarantees the payment on billions of dollars of bonds backed by subprime mortgages. A Morgan Stanley fixed-income trader promptly fired off an e-mail calling the recommendation "absurd." "My analyst has no idea how to value" the securities Ambac guarantees, he wrote. "No one in the world can put a definitive view on recovery levels" for some of these bonds.
The subprime crisis was also the first visible sign of a weird inversion that took place during the past few years. Instead of the value of an asset dictating the amount of debt you could use to purchase it, the availability of the financing began to dictate the price of the asset.
In 2004 even the Federal Reserve Bank of New York argued that a chunk of the increase in house prices was justified by the easing of lending standards. "The price exists at the pleasure of the financing," is how one hedge fund manager put it to me recently. "That is true for stocks and houses and bonds and buyouts." But if the financing doesn't exist, or only maybe exists, then how do you determine price?
In early October a Craigslist posting, in which a self-described "spectacularly beautiful 25-year-old girl" asked for advice on meeting a man who made at least $500,000, sparked a raging debate on how you measure the value of a man or a woman.
How appropriate :-).
China's market capitalisation swells to $3.37 trillion, emerges world's fourth largest
China has emerged fourth in the world in equity market capitalisation with a volume of 25.32 trillion yuan ($3.37 trillion) as of September 30 this year, accounting for about 5.7 per cent of the world's total.
A total of 1,517 companies went public on the stock markets of the mainland by the end of September, official media said.
The overall volume at Shanghai and Shenzhen bourses was around 4 trillion yuan at the end of 2002, ranking China the fourth largest in Asia, data furnished by a delegation of the central financial authorities to the ongoing communist party congress showed.
China's equity markets raised a total of 425.04 billion yuan ($56.7 billion) through initial and secondary public offers in the first nine months of this year, surpassing the combined funds from 2002 to 2006, the China Securities Journal reported.
In September alone, money raised through 15 initial public offers (IPO) amounted to 149 billion yuan, or half of the money raised through IPOs so far this year. China Shenhua, the nation's biggest coal producer, raised 66.58 billion yuan from IPO, refreshing the 58.05 billion yuan record set by the China Construction Bank.
China securities regulatory commission chairman Shang Fulin cited shareholder reform initiated in 2005 to float non-tradeable state owned shares, tighter market supervision on insider trading and the clean-up of the securities sector as factors leading to the bull run on the stock market.
He said the stock market is playing a better part acting as a barometer of china's economy.
Institutional investors control 46 per cent of the market equity, reports quoted Shang as saying.
The market was also driven by sufficient liquidity, rapid economic growth and the return of heavyweight state-owned enterprises from overseas bourses to domestic share markets.
Wednesday, October 17, 2007
SEBI's mooted curbs on PN (P-Notes) flows causes BSE, Nifty to hit lower circuit
Curbing the flow of hot money into the country has side effects. Bulls discovered this to their cost, when market regulator SEBI placed limits on participatory notes.
What is participatory notes?
Participatory notes (PNs) are instruments used by investors or hedge funds that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian securities. Indian based brokerages buy Indian-based securities and then issue PNs to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.
Participatory notes are instruments used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in that country. That is why they are also called offshore derivative instruments.
Like any other derivative instruments, their value is determined on the basis of the underlying asset. In the case of participatory notes, the underlying assets are shares listed on the stock exchanges.
In the Indian context, foreign institutional investors (FIIs) and their sub-accounts mostly use these instruments for facilitating the participation of their overseas clients, who are not interested in participating directly in the Indian stock market. According to one estimate, participatory notes constitute more than 25% of the cumulative net investments in equities by FIIs.
Today's fall
India's stock market benchmark Sensex crashed by 1,743 points within the first few minutes of opening this morning (17 October 2007), prompting the suspension of trade for an hour.
This is fallout of market regulator Securities and Exchange Board of India (SEBI) clamping down on anonymous participatory notes (PNs) to arrest the flood of foreign inflows. The fall came just days after finance minister P Chidambaram expressed surprise at shooting stock prices - the Sensex had shot up by 5,000 points in less than two months - and hoped that things would cool down.
Soon after the stock markets closed on hitting the down-circuit, Chidambaram said in a live telecast that the government was neither against PNs, nor was it banning them. Proposals to moderate portfolio investment by foreign investors were part of a series of steps to moderate capital inflows, he emphasised.
Earlier, on Tuesday, SEBI proposed partial restrictions on investment through offshore derivative instruments, including participatory notes (PNs), equity linked notes and capped return notes.
SEBI issued a discussion paper suggesting that FIIs and their sub-accounts should not issue or renew offshore derivative instruments (ODIs) with underlying derivatives, with immediate effect. "They are required to wind up the current position over 18 months, during which period SEBI will review the position from time to time," the paper said, inviting comments from the public about the new proposals.
FIIs currently issuing ODIs the with notional value of PNs outstanding (excluding derivatives) as a percentage of their assets under custody (AUC) in India of less than 40 per cent should be allowed to issue further ODIs only at an incremental rate of 5 per cent of their AUC in India.
Those FIIs with a notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of more than 40 per cent should issue PNs only against cancellation or redemption or closing out of the existing PNs of at least equivalent amount.
Though only a proposal, the SEBI move effectively halted the FII-led rally. FIIs invested over $5.45 billion in October alone, taking their total investment for 2007 to $17.69 billion.
The huge inflows have pushed up the value of the rupee against the dollar. The year-on-year increase in ODIs, the anonymity that it provides to investors, and the copious inflows into the country from foreign investors have been areas of concern for the government and regulators like the Reserve Bank of India (RBI) and SEBI.
Earlier, the High Level Committee on Capital Markets (HLCC), as well as various committees set up by the government and regulators had made recommendations that included issuing of PNs only to regulated entities subject to know-your-customer (KYC) requirements.
Main causes for concern
The notional value of PNs outstanding, which was Rs31,875 crore (20 per cent of AUC) in March 2004 has grown over 10 times to Rs3,53,484 crore (51.6 per cent of AUC) by August 2007
The value of outstanding ODIs with underlying derivatives is Rs1,17,071 crore - about 30 per cent of total PNs outstanding
The notional value of outstanding PNs - excluding those with underlying derivatives - as a percentage of the AUC was 34.5 per cent in August 2007
At present, 34 FIIs and sub-accounts issue offshore derivative instruments (ODIs), against 14 in March 2004
Tuesday, October 16, 2007
MMTC ousts Infy from top 10 m-cap club
An unfavourable business environment owing to a buoyant rupee has taken the sheen off information technology stocks. Reflecting the underlying market sentiment, industry bellwether Infosys Technologies on Tuesday was ousted by the state-owned metal giant, MMTC, from the Top 10 market capitalisation list.
The m-cap list, which featured Infosys for nine years (since 1999), on Tuesday does not figure a single IT stock.
| DETHRONED | ||
| Name | M-cap in Rs crore | |
| Oct 15, 07 | Oct 16, 07 | |
| Reliance Ind | 3,71,252 | 3,69,043 |
| ONGC | 2,54,742 | 2,51,587 |
| Bharti Airtel | 2,13,824 | 2,10,608 |
| NTPC | 1,87,008 | 1,90,677 |
| DLF | 1,52,882 | 1,56,599 |
| Reliance Comm | 1,53,899 | 1,55,524 |
| ICICI Bank | 1,21,952 | 1,28,629 |
| NMDC | 1,13,017 | 1,18,667 |
| BHEL | 1,18,111 | 1,17,274 |
| MMTC | 1,07,286 | 1,12,650 |
| Infosys Tech | 1,10,325 | 1,06,864 |
Compare this with the technology boom in 2000, where six stocks figured in the list. In 2006, the number fell to three Infosys Technologies, Tata Consultancy Services and Wipro.
On Tuesday, MMTC replaced Infosys with a market capitalisation of Rs 112,650 crore, as the stock went up by 5 per cent. Infosys was the largest loser among Sensex stocks. It fell by 3.14 per cent to Rs 1,868.25. As a result, its market capitalisation plummeted by Rs 3,461 crore to Rs 106,714 crore on the BSE.
The decline in net profit growth rate owing to the rupee appreciation has been the culprit behind the re-rating of technology stocks.
The net profit growth rate of the sector almost halved from 90 per cent in FY2000 to 40 per in FY2007. The rupee has appreciated almost 20 per cent from Rs 49.05 in May 2002 to Rs 39.38 in October 2007.
Infosys Technologies, which recorded an over 100 per cent growth in net profit till FY2001, reported a 56 per cent growth in 2006-07.
The company posted a 26 per cent rise in the first half of FY08. And even though the Sensex is hitting new highs everyday, the BSE IT Index has discounted 47 per cent from its lifetime high of 8,678, seen in February 2000.
The IT index is the largest loser, falling 1.77 per cent (83.34 points) to close at 4,629.09 on Tuesday compared with the marginal 6.81 points drop in the Sensex.
The IT sector, which accounted for 24 per cent share of the total market capitalisation of the BSE, declined to 12 per cent in 2006 and, currently, stands below 10 per cent at 6.79 per cent.
Reliance Industries, Oil and Natural Gas Corporation, Bharti Airtel, DLF, ICICI Bank, and BHEL are the others in the Top 10 club.
Monday, October 15, 2007
Oil Trades Above $86 After Rising on Turkey-Iraq Border Tension
Crude oil traded above $86 a barrel after rising to a record yesterday on concern oil shipments may be disrupted if Turkish forces pursue Kurdish militants in Iraq.
Prices climbed as much as 3 percent yesterday after Turkish Prime Minister Recep Tayyip Erdogan formally asked lawmakers to sanction military action against rebels based in Iraq, holder of the world's third-largest oil reserves. Oil also gained as the dollar fell to a two-week low against the euro and U.S. equities declined the most in two months.
``This is something that Turkey has probably wanted to do for a long time,'' said Tom Hartmann, commodity broker at Altavest Worldwide Trading Inc. in Mission Viejo, California. ``You have the weak dollar, and concerns about the U.S. economy, and that is just spilling into the buying of commodities.''
Crude oil for November delivery was at $86.35 a barrel, up 22 cents, in after-hours electronic trading on the New York Mercantile Exchange at 9:30 a.m. in Sydney.
The contract settled $2.44, or 2.9 percent higher, at $86.13 yesterday. It reached $86.71, the highest since being introduced in 1983.
Today's intraday high passed the previous all-time inflation- adjusted record reached in 1981 when Iran cut oil exports. The cost of oil used by U.S. refiners averaged $37.48 a barrel in March 1981, according to the Energy Department, or $84.73 in today's dollars.
Crude-oil and other commodities also rose because the U.S. dollar declined against the euro, enhancing their appeal as an investment. The Standard & Poor's 500 Index fell 0.8 percent to 1,548.71 yesterday after Citigroup Inc., the largest U.S. bank, said loan defaults will plague the financial industry for the rest of the year.
Currency Impact
``You don't hear a lot of complaining about high prices except in the U.S.,'' Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington said yesterday. ``The rise in prices is a lot less impressive in other currencies.''
In U.S. dollars, West Texas Intermediate, the New York-traded crude-oil benchmark, is up 41 percent so far this year. Oil is up 31 percent in euros, 35 percent in British pounds and 39 percent in yen.
Oil ``is going to soon hit $90 and go north of $100 next year,'' said Peter Schiff, chief executive officer of Darien, Connecticut-based brokerage Euro Pacific Capital, with $700 million in customer accounts. ``We should see $150 to $200 oil in the next two to three years because of the drop in the dollar. Once Asian countries allow their currencies to appreciate, demand will explode there.''
Brent crude oil for November settlement rose $2.20, or 2.7 percent, to close at a record $82.75 a barrel on the London-based ICE Futures Europe exchange yesterday.
OPEC members have said a falling dollar justified higher prices because oil-producing countries sell oil in dollars and often buy goods in euros. OPEC will discuss the impact of the falling dollar when members meet on Dec. 5, Algerian Oil Minister Chakib Khelil said yesterday.
Yen May Rise Against Dollar on Credit Concerns, Risk Aversion
The yen may rise for a second straight day versus the dollar as comments from the biggest U.S. bank about deteriorating credit markets stoked risk aversion.
Citigroup Inc. yesterday said the financial industry is in for more losses from the housing market. A private report is forecast to show confidence among U.S. homebuilders fell to a record low. Federal Reserve Chairman Ben S. Bernanke speaks about the U.S. economy in New York.
``Risk aversion is going to be an ongoing theme,'' said Steven Butler, director of foreign exchange trading at Scotia Capital Inc. in Toronto. ``Even in pockets of calm, the market realizes things are going to get a whole lot worse in the U.S. before they get better.''
The yen traded at 117.39 per U.S. dollar and 166.75 versus the euro at 6 a.m. in Tokyo. The euro bought $1.4205. Japan's currency gained 0.2 percent versus the dollar yesterday.
The yen yesterday advanced 0.9 percent versus the Australian dollar and Brazilian real after Citigroup Inc. said third-quarter earnings fell 57 percent. Chief Financial Officer Gary Crittenden said late payments on home loans may worsen in the fourth quarter.
``An air of skepticism is re-emerging around the credit problems,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut.
U.S. Stock Indexes
The Standard & Poor's 500 Index and the Dow Jones Industrial Average fell 0.8 percent yesterday. The indexes lost more than 3 percent in June and July as credit markets were roiled by the worst recession in the U.S. housing market in 16 years.
The National Association of Home Builders/Wells Fargo index of builder confidence may drop to a record low of 19 this month, according to the median estimate of 36 economists surveyed by Bloomberg News. The data will be released at 1 p.m. Washington time.
Bernanke may speak about the resilience of the U.S. economy in the face of the housing slump at his address to the Economic Club of New York at 7 p.m. New York time on Oct. 15.
The Bank of Japan yesterday cut its economic assessment in three of the country's nine regions yesterday, making it more difficult to continue the policy of gradual interest-rate increases. Japan's 0.5 percent benchmark interest rate is the lowest among major economies and compares with 11.25 percent in Brazil and 6.5 percent in Australia.
