Grab Bag

CFA Level 2 Free Sample Test Links

2010-05-30T05:46:00.000-07:00

Few free sample questions :
http://www.finquiz.com

Accounting Red Flags - Anomalies to watch out

2009-05-15T20:09:00.000-07:00

Few points:

1) Periodic Earnings rate increase should be commensurate with cash flow increase - If earnings increase but not cash flow, there is a possibility that company may be selling assets/investments to cover losses.

2) Analyst can read the audit report to see if the auditor has a qualified, adverse of disclaimer of opinion.

3) Inventory turnover ratio keeps decreasing though sales is consistent. - Management could be piling up inventories on credit to boost the cash flow ( tax advantage)

4) Frequent changes in accounting policies.( like change from FIFO to LIFO without concrete reasoning). This should be viewed in terms of timing.

Good link:
http://accounting-financial-tax.com/2009/04/using-operating-cash-flow-to-detect-earnings-problems/

Derivatives Unleashed by Professor Michael Greenberg

2009-05-15T06:01:00.000-07:00

On 05/15/2009, Michael Greenberg, Professor gave a good explanation of the derivatives.
My understanding: Derivatives are the value derived from the value of the underlying asset. If the underlying asset's value goes down, depending on the stand that the derivative took, the derivative value goes up or down.
Eg: If I own a house and run the risk of fire on the house, I get a fire insurance. When my house goes on fire, I can claim the loss through my insurance which is straight forward. If three other people buy the same insurance on my house, they are really indirectly betting that my house will go on fire and they make money if it does.While me taking the insurance makes economic sense from a risk perspective, the other bets turn the derivative market into a frankenstein monster cassino.

Currently Congress is contemplating on regulation similar to the Pecora investigation in the link below
http://en.wikipedia.org/wiki/Pecora_Commission

From an accounting point of view, there is no contingent obligation through any unrealized loss booked as well which hides these exposures until they realize.

CSPAN also shared the illustration of Derivatives published in The Washington Post -
http://www.washingtonpost.com/wp-dyn/content/graphic/2009/05/15/GR2009051500187.html

A Modern Approach to Graham and Dodd Investing - By Thomas P. Au

2008-12-27T20:15:00.000-08:00

As I am put on hold for the Security Analysis book by Benjamin Graham and Dodd, I thought of going through the following

A Modern Approach to Graham and Dodd Investing - By Thomas P. Au
This book can be previewed at google books .link below.
http://books.google.com/books?id=O4xKiTAOxT4C

Per my current reading, the first 2 chapters are basic concepts around financial analysis on value, growth oriented investment analysis factors and how Benjamin and Dodd viewed it and how Warren Buffet has extended those ideas.

Quick takeaway, stock can be viewed very similar to bonds. Just like discount, premiums on bonds ( against par value) determine the yield against current market interest rate, the premium/discount on stocks ( against book value) determines the dividend yield against the dividend distribution rate.

To illustrate, assume book value of stock is $10 per share, $1 is earning for an year and 60 cents paid as dividend. For this scenario
Dividend distribution rate = D/B = $0.6/$10 = 6%
Naturally, the remaining 40 cents or 4% makes the Earnings reinvestment rate.

With the above said, let us assume the price of the stock trades at a discount, say $6, then the dividend yield 10% ($ 0.6/$6) is greater than the Dividend reinvestment yield, thereby forming an analogous comparison to the bond behavior.

How good is the Bail Out ?

2008-10-04T16:20:00.000-07:00

On 10/03/2008, the $700 Billion bail out/rescue plan passed US Congress ( After the first attempt that failed a week earlier). The bail out probably passed since the issue at hand posed a double edged sword. The still open edge which is 'What has changed in average person's life?. Treasury buying the bad assets through tagging a price will help companies. While getting their books to some decent shape could have helped corporates goto 2001 level, the consumers are still stuck. With this, how can one expect a consumer based economy to change things unless some design has changed radically ?

From a global perspective, this is artificial inflation of the assets through additional pumping of fresh US dollars ( Thanks to non-public disclosure to M3 supply). This just means that dollar will go down in the long term and China and other Gulf nations get more opportunity to stack $700 billion more to their reserves. It will be interesting to see how the emerging markets behave for the next 4-5 months and their GDP levels with a distressed US. This will validate how the US's cold makes the the rest of the world to sneeze.

Wall Street Turmoil and US Congress response

2008-09-23T16:15:00.000-07:00

I planned to take a minute to recap on some of the recent happenings on the current Financial crisis hitting Wallstreet that is ubiquitous on internet, radio, TV and street talks.

To provide some background on why we are where we are :

The creative financial instruments invented by the Wall Street heads in terms of derivatives like MBS, ABS, CDO, CDS etc have started to expose their real face as the interest bearing debts collateralized by these assets don't meet the investment expectations. In simple words, as people holding mortgages can't make their payments on time or get into foreclosures, these derivatives which expect their returns through their payments take a direct hit. This leads to banks not able to pass through their payments to the investors who had bought those derivatives from the bank. In addition, those investors who have insured these risks through insurance companies have passed on these effects to those Insurance companies as well. The creative financial instruments masked the mortgages with low ratings through packaging in different facets thereby giving them an artificial uplift.

Where are we now:
As investors sense a risk to their expected returns due to missing mortgage payments, the confidence level in the underlying assets ( All the securitized derivatives mentioned above) goes down, thereby shorting them. With no cushion build up to resist this fall, this gets into a spiral downward movement. Aaha, the credit ratings , who is supposed to be leading the curve, now wake up and short their ratings on these companies as well paving way for the perfect storm. The companies who didnot see this coming but are burdened with these poor assets are at the brink of filing bankruptcy or closing their business. The trillions of dollars and the big institutions involved in this has the potential to crack the US Financial system which is the rockbed for the jaggernaut capitalistic system. Hence the government intervention to ponder a $700 billion bailout.

Root cause of these issues from my point of view:
1) The rate of these instruments/derivatives coming up were too fast for the credit rating agencies to keep up that ended up endorsing these.
2) The SEC and Govt regulations were not keeping up with these as well.
3) The institutions impacted by this turmoil were too busy finding new customers than take a second look at their risk management models. In addition, their models relied on the credit agencies' ratings.
4) People were either greedy or scared of the skyrocketing home appreciation that everyone wanted to be part of the crowd than taking time to calculate if they can meet their financial obligations.

Good Youtube links

2008-08-10T07:05:00.000-07:00

Over the years, I have learned that learning through Videos and Podcasts can be efficient and effective. The following is a good place to learn more on financial concepts and in depth security related subject. I plan to add more such Video links both for my reference as well as to save time for people like me. If you have more such links, please share them through comments.

http://www.youtube.com/user/bionicturtledotcom

Goto google and do a search for the following
Structured Finance, Lecture 1 - The Alphabet Soup of the Credit Crisis - 62 min - Jan 30, 2008
Above is from Krassimir Petrov, AUBG - http://home.aubg.bg/faculty/kpetrov/

GDP translated to private spending and govt spending

2008-07-28T05:21:00.000-07:00

Rearranging components of GDP, ignoring net exports, one can write the formula as
Investment = GDP - Consumption - Govt spending
In addition,
Savings = GDP - Consumption - Govt spending
= (GDP - T - Consumption) + (T - Govt Spending)
= Private saving + Govt surplus.

Std deviation vs Beta

2008-07-27T10:51:00.000-07:00

The difference between Standard deviation vs Beta of a stock can be understood by starting asking few basic questions.

Let us say you have 2 choices, one to pick investment A and other B.
A is positioned such a way that the expected return, which is the probability of different expected returns due to various factors, is calculated as

E(A) = p(x) * E(x) + p(y) * E(y) + p(z) * E(z)
Note that sum of the above probabilities is 1.
A similar calculation can be done for E(B).

Any average person would pick either A or B, whichever is higher. An educated investor would like to find the risk he/she is taking.

Risk can be measured by calculating standard deviation. Mathematically, std dev is the square root of variance. If an investment's return varies like a roller-coster to provide the return calculated above, it more sounds like a gamble. On the other hand, if the investment has a smaller variance, it is a relatively stable investment where one can lay back and not worry too much on the odds.

How to calculate Std Dev/Risk?
Std dev = sqrt(Variance)
where
Variance = (p(x) * (E(x) - E(A))^2) + (p(y) * (E(y) - E(A))^2) + ( p(z) * (E(z) - E(A))^2

Okay, now that we have a better sense of what the risk is and what the corresponding return is, it makes life easy since the investment with higher return and lower risk wins. No Brainer !!

Let us assume that the return and risk for Investment A than those of B. Now it is logical that A being risky will yield higher return, but is that the best that one can choose. Since we have been comparing oranges and apples, its time to calculate risk for an unit of return. This is called Coefficient of variance.
Calculation is simple .. Just divide Std Dev (A) / E(A). Lets call it C(A).
The investor would pick C(A) or C(B), whichever is lower since the risk to earn an unit of return needs to be lower.

With the above detailed explanation of the basics, one should recall the standard deviation as the risk of a particular investment.

Shifting gears to Beta.

Beta of a stock/investment is the risk of the stock relative to its market risk. While standard deviation measures the standalone risk, Beta measures the relative risk to the market. Eg: Std dev of investment A could be lower than std Dev of B, however B's Beta could be better. To understand this better, let us explore the Beta concept further.

If the entire market in which you trade stock consist of only 1 stock. Then the Beta of the stock will be same as the market risk, meaning when the stock return is of the same proportion and direction as the market return. In contrast, let us assume you have 5 stocks forming a market. When the market return goes up, let us say one of the stock goes down, then the stock is negatively correlated with the market.
Ideally if you have an equal weightage of all stocks forming the market, the unsystematic or stock risk can be nullified. The systematic risk, which is the market risk due to economy and non-company related factors affecting returns cannot be controlled by diversification or effective asset allocation of investments within a portfolio.

CFA - Quantitative analysis.

2008-02-18T19:36:00.000-08:00

Let me start by saying time value of money. A $ today is not worth the same $ tomorrow. Hence someone not spending that $ today invests in something that can bring a reasonable additional return tomorrow. The more the risk in investing the more expected, though not guaranteed, return.
This forms the fundamentals of the Quant section leading to Present value (PV) and Future value FV) of money.

Present Value and Future value:
-------------------------------
Few formula to calculate future value

FV = PV (1+i)^n
where
FV = Future value
PV = PResent value
i = Expected interest rate or RAte of return
n = Time period

On a basic level, the principal or initial amount is compounded by the interest received at the end of every time period.
eg: $1000 today at 10% interest rate for 5 years compounded annually will be

FV = 1000 * (1+ 0.1)^5
However if the above was compounded semi annually, it would be

FV = 1000 * ( 1 + 0.05) ^ 10
As the frequency of compounding increases, the net FV increases. If the amount is compounded continuously, the equation would become

FV = PV * (e) ^ nr
= PV * (e) ^ (0.1 * 5)

Though knowing the above concepts is good, from a CFA point of view, it is more important that one knows how to use the financial calculator. The key is to identify and make sure that the n values and r values to be input are correct based on the frequency of compounding. A lot of practice is needed so as to not go wrong in this simple area.

Annuity:
--------
Annuity in simple terms mean a series of periodic payments. Unlike PV where the entire principal is a one time lump sum, Annuity is same amounts applied in equal time periods. Hence common sense is that, with all factors being equal, FV for sum of annuity amounts will be lower than the FV for the same amount when invested as a lump sum today.
Annuity normal or regular is when the payments are invested or applied at the end of every time period whereas Annuity due is when the payments are invested or applied at the begining of the time period. Use Begin mode to calculate PV or FV for Annuity due and End mode for ordinary annuity. A special case of Annuity is perpetuity where PV is CF/discount rate. Perpetuity in layman terms mean that the periodic payments run till end of one's life period.

Probability:
------------
Another area to focus is the chance of something happening. Typically in financial world, this is applied to the chance or probability that a particular asset/security/portfolio will result in a particular return for a given risk.
The Expected return for a security is given by the sum of (probability of something happening* expected return if that happens)
Eg:
If consumer sentiment optimistic, expected return for a particular stock is $1.25 per share
Let us say that the probability of that happening is 80%.
If consumer sentiment optimistic, expected return for a particular stock is $0.25 per share
Let us say that the probability of that happening is 20%.
From the above, if someone invests in the above stock, the expected return would be the weighted average, ie (0.8 * 1.25) + ( 0.2 * 0.25) = 1.05

Assuming there is another stock with the same return, but a different combination of probabilities and return attributes, then one needs to weigh in the risk of putting the money in one vs another. This is calculated through the Standard deviation, which is square root of variance.
In our example,
variance = (1.25-1.05)^2 * 0.8 + (0.25-1.05)^2 * 0.2
= .04*0.8 + (.64 * .2)
= .032 + .124
= .156
SD = sqrt(var) = .39

Hence the expected return can vary from .75 to 1.44 (Exp return +_ SD)
If we did a similar calculation for a different stock and end up with a range 1 to 1.1, then we know that the risk of the other stock is less since the expected returns oscillate in a narrow range.

The above analysis works fine if the expected returns are same but SD's are different. What if a stock with higher Expected return has more SD compared to another with lower return but a lower risk. To make apple to apple comparison, we calculate Coefficient of variation which is defined as risk per unit of return

Hence CV = Return/SD.

Hypothesis testing :
------------------
When someone tells you that they can earn you $5 dollars in 1 yr for every $ you invest, how can you weigh in on their claim. Well, hypothesis testing comes to the rescue. All you need is a sample of their performance that contains the number of sample, mean return of the sample and the SD of the sample. Using the above data, one can tell with a certain % of confidence that their claim is valid or not valid.
Formula:

CI = Mean(sample) +- t value * std error

If sample size small, t value need to be used. Note that degree of freedom should be used to look up t value. df = sample size - 1
std error = SD of sample/ sqrt(sample size)

This is a two tailed model since the Null hypothesis where claim = $5 needs to be rejected or not rejected and the alternative hypothesis is everything but that.
There may be cases when the claim could be >= $5 in which case, the analysis would be one-tailed analysis.

( All the above notes have been without looking at any notes. I will take additional time tomorrow to provide better examples and also revisit the sequence for better readability).

Done for the day :)

Sensex volatility

2008-01-23T18:09:00.000-08:00

The last 2 days of heavy selling seen globally, especially in India, has been portrayed as
"India’s investors lack sophistication"

My take on the above:

Indian fundamentals are strong in the long run, however, there is still a heavy biding to the US economy. With substantial percentage of Indian GDP still relying on Indian exports, with US dominating that pie, it ultimately means that the Sensex is subjected to volatility in the days ahead until we see US consumer confidence.

From a long term view, within a span of 2 years, the Indian economy will play a dominant role following the output of FDI investments currently at work.

CFA Links

2008-01-20T21:14:00.001-08:00

http://www.analystforum.com/phorums/list.php?11
http://unjobs.org/authors/ashwinpaul-c.-sondhi
http://www.dubravac.us/CFA.html

Learning Outcome Statements (LOS) for CFA Level 1
http://www.cfainstitute.org/cfaprog/resources/l1_outline.html

Standards of Practice Handbook
http://www.cfapubs.org/toc/ccb/2005/2005/3

A closer look at Sovereign funds

2008-01-20T19:42:00.000-08:00

I plan to do some analysis based on data from site below. More to come...
http://biz.yahoo.com/ap/080115/sovereign_wealth_funds_glance.html?.v=1

CFA Level 1 Exam Prep Self Notes.

2008-01-09T20:04:00.001-08:00

I finally made up my mind to take the CFA Level 1 Exam. Have been reading few materials and gathering info from various sites. I planned to take few minutes and consolidate my learnings till date. I expect this writing to be both useful for me to recap frequently as well as quick reads for other aspirants. I also admit that my writing skills might not be best presented, however, I have focussed more on the meat and tried to put it in a way easy to digest for me. For someone who is already preparing for the exam or someone with financial fundamentals, the reading should be reasonably okay.

I would love to take any of your questions and similarly participate in your forums . Just let me know your blog/website. Good luck folks and happy reading !! :)

Financial Statements:
--------------------
The 4 basic financial statements (BS, PL, RE, CF) is usually accompanied by the following.

Footnotes - Audited.
Management Discussion & Analysis - Not Audited.
Supplementary schedules - Not Audited.
Proxy statements - ?

Audit opinions can fit into any of the following categories.
1) Qualified - Something's fishy..pls take it with caution
2) Non-qualified - Looks good and clean, though maynot be error free.
3) Adverse - Sorry, statements don't meet standards.
4) - Didn't find anything wrong, however,I would like to do more before giving a thumbs up, but for some reason, I couldnot do it.

Operating lease vs capital lease effect on financial statements:
----------------------------------------------------------------

Leasing Inventories, equipments etc is common. However, how they are shown on balance sheets can differ.
If leased assets are planned to be used for greater than 75% of their normal life time, they ought to be considered as Capital lease.
If NPV of payments made for the leased asset > 90% of its normal value, they fit capital lease.
If ownership could either be transferred or a bargain can be made at the end of the lease, they fit capital lease.

Pros and Cons:
P&L impact:
Under capital lease, the depreciation can be expensed at the cost of Net income. ( Though subjected to the method of depriciation adopted)
Under capital lease, the interest paid to the fund borrowed for paying the lease can considered as expense and hence tax deducted.
Under operating lease, net income can increase during the earlier phase of leasing as opposed to capital since there is no depreciation expense in the equation.

Cash Flow impact:
Under capital lease, depreciation boosts the cash flow. ( after tax effect).
Under operating lease, the payment paid towards the lease is considered as operating expense thereby lowering the operating cash flow.

Interrelation between Balance sheet, P&L, Cash flow and RE statement :
--------------------------------------------------------------------
Change in Cash account on balance sheet same as change in operating cash flow ( cash reduction due to increase in assets/inventories, reduction in accounts payable, reduction in other current liabilities and cash increase due to sale of assets/inventories, decrease in AR etc)

Net income from P&L same as begining balance in Cash flow using indirect method.

Cost of capital and rationale behind equity vs debt financiing:
-------------------------------------------------------------

Company gets money to run business either through equities (Stocks,bonds) or debt( loans etc). Creditors expect return for lending this money to the firms.
Hence there is a cost to the capital. If company runs with 60% stock money and 40% debt money and lets say equity creditors expect 10% return and debt loaners expect 5% then ..assuming corporate tax is 30%.

WACC = (0.6 * 10) + (0.4 * (0.5 (1-0.3)))

Within equities, returns expected by stock holders are > bond holders since company has the flexibility of either paying or not paying stock dividends. In case of bonds, company is obligated to pay the promised coupon rate. If companies know for sure that they will definetly grow well and if their current market stock price is undervalued, then they are better off to go for loans/bonds. If company's stocks are overpriced, then the cost of capital, which has an inverse component on the stock price, becomes a cheap deal and hence can get more bang for the buck ( overall cost including floatation cost).
If a company is too small and has high aspirations, however, the banks/loaners maynot have the company's proven credit history, and hence the company might turn towards equity.Another situation for equity would be that the company's returns are sure but not immediate enough to generate cash flows for meeting the loan payment obligations.

Firm/Equity valuation:
-----------------------
If a company expects a constant growth and if the growth rate is lower than the expected rate of return, then the value of the stock can be determined through Gordon Growth Model (GGM).
V = D(1+g)
------
r - g
D - Current dividend
Eg: If a company pays a dollar per share and expects a constant growth of 5% ,and the expected investor return is 10%, then one should buy the stock today for
v = 1(1+0.05) 1.05/0.05 = 105/5 = $21
------- =
0.1 - 0.05

If at the end of next year, the company prospects turn really good and hence lets say that the company revises its growth rate to 9%, then the stock price will be
v = 1.05* ( 1+0.09)/0.01 = 1.1445/0.01 = $114.45
On the other hand, had the company revised the growth to 2%, then the stock value would have been
v = 1.05*(1.02)/0.08 = 1.071/0.08 = 107.1/8 = $13.38

If the company's growth rate is > expected return ( GooG can be a good example), then GGM cannot be applied. Rather the discounted cash flow method need to be used. Let us say investors expect growth rate 10%, but company expects 20%, then stock price would be

V = Dividend year1/(1+0.1) + Dividend year 2 /((1+0.1)*(1+0.1)) + .....

More to come on this at a later point...........

Marketing or Ignorance or Is Capitalism a paradox ?

2007-12-23T10:06:00.000-08:00

I am sure every one of us out there agree with Benjamin Barber's point that we are in a materialistic world that has dominated us from choosing our Needs and Wants.

It's not only the game gadgets that become a big hit among kids, but the gadgets like phones with added features have been overwhelming the consumers in the recent past.
The market is being flocked with so many promotions and the media has created enough buzz now than ever before.

I highly agree with Dr.Barber's point that the short term return has become the focus of current corporate world. It's not just the innovative features that strike the market, but the timings of introduction of these products have been strategically improving for the benefit of the companies.

I think this is the area where Monetarists and Keynesians should influence through their combined strengths to get the corporate world look into the real needs to improve the human life to make this place a better place. Corporations should nurture innovation for developing real products; not just innovate instruments that falsely inflates the books.

MBS, SIV, CDO explained

2007-12-22T21:37:00.000-08:00

The following article from Chicagofed.org defines how the Mortgage Backed Securities, Structured Investment Vehicle and Collateralized Debt Obligations are positioned in the grand schema and how they work.

http://www.chicagofed.org/publications/fedletter/cflnovember2007_244.pdf

With the Fed jumping in with additional liquidity, it is of some help to ease the hardlanding, however, as one of the author in either Time/BBC puts it, there is not much use in applying grease for a broken chain of the bicycle.

My analogy from a different view:

Assume you bought a big ship to catch huge amounts of fish from an ocean and a sudden oil spill has disrupted in the fish returns. Though the Fed here tries to nurture fishes through local ponds, rivers, and releases the reserved frozen fishes, the long term demand is unlikely to be quenched. A real fix of cleansing the spilled oil seems to be beyond Fed's cusp (at least based on actions till date) and left to voluntary action from banks/institutions. In addition, the increasing fund injection through reduced rates could potentially cause other side effects.

One medicine that I see of big helping hand is the Sovereign Wealth Funds (SWF), but the side effect of that in terms of political aspirations cannot be discounted, at least not yet.

Can I agree more with Greenspan ?

2007-12-17T20:16:00.001-08:00

Though the news from Greenspan about potential Stagflation (Title : Greenspan sees early signs of U.S. stagflation)reported by Reuters is not pleasant, it was a pleasant surprise to read this alert from Alan Greenspan. I am a novice when it comes to Economics and the indicator analysis, but it is quite encouraging to me that this news, for the lack of better term, coincides with my forecast.

The above statement will make sense if you skim my post on Stagflation ( Nov 7, 2007 and revisiting with more details on Dec 15,2007)

How RBI ( Indian Fed) deals with heavy Inflowing dollars ?

2007-12-16T09:47:00.000-08:00

I recently read this and planning to write more on the high dollar inflow to India and the dilemma faced by RBI.

Will Stagflation win ?

2007-12-15T09:12:00.000-08:00

Alan Greenspan talks about increased odds of recession during his interview to NPR available at NPR site

According to Alan, it sounds like the housing market slump could have been inevitable due to the nature of recent global economic behavior catalyzed by long term interest rates that is out of Fed's control.

Knowing how the economic market works and the basic business cycles, I could only opine that the above is a weak defense. We will have to wait to see more analytical support from economists and media. I personally know few people who had bought hefty mortgage loans to join the bandwagon. In addition to new home supply, the volume of exchanges of used homes and leverage on home equities increased exponentially. In a booming market, one cannot agree more on the optimistic outlook and stretch goals to hit high returns. This has inarguably blinded the eyes of the public borrowing ARM's who are influenced by the positive marketing from the issuers and the media doing a great job on charting the facts around the increasing home return trends.

The reality that people not able to adjust when the Adjustable Rate Mortgages' rate stepped up from their comfort zone leading to increased rates. The inability of people not able to make their payments have resulted in the inability of the issuer's to meet their commitments to the whole another world of Mutual Funds and other Equity funds. While the homes are not selling anymore, the poor securities were being sold in all directions causing stress to Wall Street.

In short, while the global financial factors could have indirectly fueled the above, I think that the spark was the rock bottom Fed rate. Had we gone on a different tangent and asked, what if Fed didn't lower the rates in 2001. Would the US economy been in a better place today ? Maybe someone has already enjoyed analyzing this journey. Happy googling !!

Coming back to the topic, going by Alan's word that recession odds raise and with November CPI numbers hinting inflation, Details from Bloomberg

While this can be a good coincidence at a time in point, my forecast of stagflation on my post on Nov 7th encourages to follow up closely and look at future indicators and make adjustments. Considering the evils of stagflation, I wish I am wrong. I think this would be an interesting time to look back in history as to how these perils were defeated through financial and policy innovation or if US succumbed to it due to forces within and outside (oil price, pressure on dollar, cut-throat competition for resources from emerging economies) its control. I stress innovation because the market efficiencies have never been quick at work in the past. Thanks to the internet.

As always, I am not even going into war and other political aspects including the good Green forces at this juncture.

Sub-prime mortgage loss and SWF (Sovereign Wealth Funds)

2007-12-10T03:42:00.001-08:00

Who would have imagined that the sub-prime loss could have caused such a punitive damage in less than one year wiping off the previous year's profits. Some of the numbers as stated by BBC on the write offs by high profile financial institutions that bundled these complex loans are listed below.

UBS: $13.5bn
Citigroup: $11bn
Merrill Lynch: $8bn
Morgan Stanley $3.7bn
HSBC: $3.4bn
Bear Stearns: $3.2bn
Deutsche Bank: $3.2bn
Bank of America: $3bn
Barclays: $2.6bn
Royal Bank of Scotland: $2.6bn
BNP Paribas: $2.1bn
Freddie Mac: $2bn
Credit Suisse: $1bn
Wachovia: $1.1bn
IKB: $1bn

Source: http://news.bbc.co.uk/2/hi/business/7135872.stm

While few selected quarters discuss how the voluntary rate freeze would help, its really the monetarist theory at work where SWF's play the role of the FED, of course, for their own benefit. Though this is capitalism at work again, I wonder if these SWF's are not asking the same question and how far have they looked into their supposedly revenue generating machine, ie the companies, they just rescued. Since no medicine has been applied to the fundamental problem, within the realm of my knowledge, I am yet to understand how these investments would meet their expected returns. Only thing that stikes is CIC's rescue to Blackstone causing the former to lose 40% of its investment value due to continued poor performance of Blackstone. We will have to wait and see on case by case basis as US economy struggles to come out of this web.

As per estimates from Morgan Stanley, these SW funds have spent $35 billion since the start of last year on stakes in financial organizations, with $26 billion coming in roughly the last six months. Abu Dhabi's planned $7.5 billion investment in Citigroup is one big part of it.

Where is US Economy heading ?

2007-11-07T19:57:00.000-08:00

My opinion on the US macroeconomic outlook is based on the information from websites http://www.forecasts.org and http://www.gpoaccess.gov/indicators/07sepbro.html. The former website gives useful insight by forecasting the leading economic indicators whereas the latter tracks the trends and thus helps to get an historical view and current picture. Based on my analysis, the US economy is poised for a slow down due to various reasons like recent sub-prime mortgage issue, increasing trade deficit, fed’s recent move to lower discount rate to 4.75% and possible quarter point decrease pressuring the strength of the dollar, increasing oil price. The housing sector is poised for a high slowdown with thousand units annual rate reducing from 1281 to 1074. The growing cost of health sector also decreases the discretionary income.

While unemployment rate has risen in the recent months to 4.7% based on the actual indicator from gpoaccess.gov, the forecasts.org suggests this to be rising in the future to 4.73%. The forecast for CPI is also high leading to 209.5 in March 2008 suggesting inflation. The PPI also leads to a constant lower 170’s with no significant decrease. Based on these, ie the increasing energy price and the decreased economic activity could be a double edged sword leading to stagflation. The slowdown in US economy along with an increased global inflation index will discourage US consumer spending and hence the imports. The $9 trillion US debt only sheds the investors away from dollar backed sectors.

While economic indicators can go so far as stated above, history shows that inventions and innovations have always come to the rescue. With US leading the green effort and being a house for R&D till date, a viable alternative to oil that address the scale can turn things around. Interestingly, this is clearly one of the pressing issues that humankind needs an answer. Even more to save the US Dollar.

Fortune Global Forum - 2007 at New Delhi, India

2007-11-04T09:07:00.000-08:00

At a time when globalization is the heart of talk at household level, the following link has few interesting video links that gives different perspectives from top echelons in today's corporate world, especially from US and India. Personally, the confident remarks made by Indian Business magnets and their recognition that India has a long way to go to join the Developed nation list, has never been better before. In my next post, I plan to write my forecast on how the US economy could head towards and its implications on other emerging countries or should I say growing countries would be ?

Ofcourse, the economical analysis can only go so far by making few political assumptions, in the absence of which writing this blog would have had a big opportunity cost of making that additional buck :)

Fortune Global forum 2007 videos at
http://money.cnn.com/video/globalforum/#/video/fortune/globalforum/

Invention Of the Year: The iPhone- Should it be Innovation ?

2007-11-02T10:05:00.000-07:00

Time Magazine had recognized The IPhone as the Invention of the Year. Based on my understanding on the definition of Invention and Innovation, I am not convinced that this can be branded as an invention. Calling it innovation would fit this product and its features. With tons and tons of articles out there on the web to differentiate innovation and invention, it is quite straight forward to go through the 'Time' link below and ponder oneself.

http://www.time.com/time/business/article/0,8599,1678581,00.html

Burgeoning US Trade deficit

2007-10-07T19:50:00.000-07:00

Few points that states the origin of US Trade deficit era, the causes for it and my 2 cents:

The 1990's had been primarily an era of internet revolution. Buzzing business activities with myriad of interesting products in the market have lured customer spending. Corporate increasing revenue and cheering Walstreet gave more confidence to the economy which further increased customer confidence supporting increased level of consumer spending. With China helping the manufacturing sector and countries like India on service sector, the product prices reduced which further increased the GDP. I think since the pie was growing larger, the unemployment level has not been alarmingly high, though underemployment is a different issue.

Basically with some of the above happenings, people have been encouraged to borrow more, be it credit card or loan or home equities eventually adding to the trade deficit. The major benefit of trade deficit has been the lower cost of products ( though quality is a different issue). The major cost is that the nation, which in turn points to the people are eventually obligated to pay off these debt. While Monetarists like Milton Friedman argue that the dollar going out comes back with other governments buying US Securities, it is not just the dollar in question. It is the real situation and question if majority of people holding these debts will be able to make their ends meet from a long term point of view.

Few economists argue that these trade deficits will weaken dollar thereby enhance exports or the weak dollar would be helpful to pay off the debts etc. However, being called as the world's superpower, US should be proactive through saving and funds at discretion to act on priorities like medicare, social security, medicaid, security measures etc. Currently the reserves held by US is much lower that even some of the developing countries.

Overall, I think that the trade deficit in a short term is okay. However, if it consistently grows in the negative direction for few years, then economy is going in the wrong direction. While the GDP can be quoted as a defense, there are questionable statistics there as well, as stated by the Phantom GDP link. Just like recession measured by GDP decline, we need to have some phase in economy to measure consequent trade deficits :)

IPod Index

2007-10-04T17:11:00.000-07:00

Australian Bank has replaced Big Mac Index with IPod Index to measure global currencies and purchasing power. With reduced freight charges these days, it is surprising to see how the prices differ across the globe. The price details of the IPod 4GB Nano in different countries opens the opportunity for hedging based on the fluctuating currency rates. High tariff and tax policies are stated as the reasons for high prices in Brazil, Argentina. Details as stated in link below.

Details here

Interesting Sites on Economy

2007-09-30T20:33:00.000-07:00

I stumble on so many websites on economics by googling. Planning to keep a list of those I would refer periodically. Something like a delicious link.

http://www.econbrowser.com/
http://www.forecasts.org/
http://www.bls.gov/opub/hom/homtoc.htm
http://www.businessweek.com/magazine/content/07_25/b4039010.htm
http://usinfo.state.gov/products/pubs/oecon/chap4.htm

Let me know if there are other handy ones that keep up with the current happenings with a perspective.

Thinking Economically

2007-09-02T09:41:00.000-07:00

'Thinking Economically' by Maurice Levi is a light read if you are well versed with the basic economic concepts. I have completed 4/16 chapters currently. He has tried to introduce concepts that would reach a lay man and not jumping on the traditional supply, demand curve right away.

One interesting area that caught my attention is an illustration where a fast, roaring, expensive car is being perceived by different people differently. An environmentalist criticizing the pollution, a physicist thinking about the horsepower and the pickup, a social person pondering the status of the person driving the car and an economist calculating the cost benefit or the value of possessing the car. This makes an interesting relation between how market demand is driven by the consumer taste and how marketing, psychology and economics are interwoven.

I have temporarily stopped continuing with the remaining chapters and saving it for the train ride.

China Shakes the World - Part 2

2007-08-11T21:37:00.000-07:00

After finally completing this book, it is a good eye opener to realize how China is like Japan during its boom period and how China is different in avoiding the mistake Japan made. It is also interesting in how China capitalizes energy commitments from countries like Venezuela, Sudan, Iran that are already try to look for safe-havens other than US. It is also a dichotomy that China's bulk of the population is still to come out of the poverty zone while the country has close to 1 Trillian dollars in its reserve.

While hot discussions around global warming grow hot on one side, it is also scary that China and India are just on their initial stages of enjoying the economic fruits that is positioned on a different tangent to the environment needs. It's ironic that time, usually a medicine for most of the issues, could be a threat to today's unanswered complicated issues. The economic weapon controlling neo world is well buttressed by the internet that grows faster, wider and deeper demeaning the physical national boundaries.

As the book says, it takes countries like China and India to develop in half the time that it took for America. And it is natural that these changes reflect themselves on the business cycles that orient around them.

China Shakes the World

2007-07-29T20:19:00.000-07:00

Started reading this book "China Shakes the world" by James Kynge. As with other Chinese books, this book shares some of the common facts on the history and the evolution of China post 1978 and overviews the Mao and Deng times.

Though I have not completed it fully, this has triggered the buds by covering some of the recent strategic moves like China National Offshore Oil Corporation's (CNOOC) bid for Unocol and Dalian's almost done acquisition of Ingersoll Milling Machine, which was working on few of America's sensitive projects.

The book also goes in length about how China were able to leverage the lessons learned from the world and pick the best brains in an amazingly short time before pumping the gas on their juggernaut economy. That's the gist for now.

Note: The next book I plan to read is "The Elephant and the Dragon" by Robyn Meredith unless I hear if there is something else that is more interesting.

Nice read

2007-07-20T21:22:00.001-07:00

http://www.time.com/time/magazine/article/0,9171,1645150,00.html

The Rise of India

2007-07-12T22:35:00.000-07:00

Recently finished the book 'The Rise of India' by Niranjan Rajadhyaksha. Very interesting read that gave a vivid picture of the Indian economic history ( on a high level) and the realistic issues the country faces ranging from corruption to population to poor government reforms etc. It is a good read for young MBA students to get a fast track view on the past and current bottlenecks that the country faces.

The author also talks in detail on how India missed the Asian race post independence till early 90's and how the energetic Indian youth is catching up currently and also talks about future projections. It was definitely an enjoyable read.

It is certainly encouraging that prominent leaders like Nandan M. Nilekani (one of the 100 most influential people in the world by Time Magazine, 2006.) have read this book and acknowledged it.
As a part of continuous learning, corporates and political parties should enforce that leaders read these kind of books for the benefit of those that they serve.

From Wall Street to the Great Wall

2007-07-08T11:17:00.000-07:00

Marc Faber's 'From Wall Street to Great Wall' was the first of his books I had completed a few days back. Since I like the meat and not beating around the bush, the initial few pages repelled me from proceeding as the content was around his life-hood background etc etc. It was a light read until the contents started focusing on how different eras lead to the waves of developments that ultimately resulted in unbalanced growth on this planet.

For those interested in economic and history trends and how they are closely linked, this book is a good read offering a stratum of perspectives. For amateurs, this can help connect the social, political, economical dots from a history as well as contemporary standpoint.

In addition, it is imperative that while financial analysts' detail dashboard is the day to day numbers and the book driven financial stats, the macro-economic barometers are to be viewed with utmost diligence as well, as exemplified by Dr.Doom.

2007-07-07T13:21:00.000-07:00

In response to http://us.rediff.com/money/2007/jan/06bspec.htm

With all the mega trends that India is going through, it is easy to forget the forces that pull them back. The prime vanguard of those enemy forces being CORRUPTION. In the long run, though the wide income gap can be handled through education, awareness, communication and govt. policies, the main results being savings gap of the mass middle class and the growth catalyst for them is highly challenged by the grass-root corruption. There have been tons and tons of movies on this subject with futile reaction.