Hi Guys!
Have not been able to come up with new posts this month though am working on one! In the meantime, I've located a pretty write-up on the history and anlaysis of crude oil right from the time it was discovered in Texas, ( that's why it is called 'West Texas Intermediate') to the gulf wars and till recent times. This exhaustive write-up has details and numerous charts on crude supply, rig counts and price & production movements due to geo-political happenings. It's a good read for those interested in Crude.
http://www.wtrg.com/prices.htm
Happy Reading!!!
Friday, November 14, 2008
Thursday, October 16, 2008
Laissez faire ou pas? – The lessons of Laissez Faire
While I had strongly criticized the previous package of purchasing bonds directly from financial institutions as this would effectively tantamount to bailing out the shareholders i.e. saving them first and then, the economy from the mistakes that the shareholders themselves were responsible for, the new package of investing through equity / preferential instruments in the banking companies is a far sensible and effective mechanism, and is being increasingly accepted world over.
It may prima-facie appear appalling to allow, to the champions of free markets to whom Nobel prizes awarded, but we must understand that this appears essential if any effort by the government is to bear meaningful success. With control on the banks and in turn on the Banks’ lending functions, the government will be in a better position to direct liquidity to the real economy - to the masses / affected sectors as against the current hoarding being done by banks. In effect this forced lending would restart the now collapsed lending activity. Also, by owning the banks the government would be in a better position to control the tax payer monies utilized for these banks than it would have been in case it bought the securities. More than over $ 10 trillion have been injected in the world debt markets and these figures show no signs of abating. Furthermore, this model has worked previously in a European country where the government recapitalized the banks. But, that model had an extra offshoot that led to its success. Banks were forced to come out with all losses in their books, subsequent to which a triage of the banks which could survive was done and only those recapitalized. A similar triage must be done in the current scenario. This triage fulfills the intention of the TARP as the weaker banks / institutions that cannot function despite a capital infusion due to their weak structure and heavy investment in complex failing securities should be allowed to close down as irrespective of there being or not being a recapitalization these banks would have failed. So, only those that stand a chance to survive this crisis should be bailed out through recapitalization.
Also, the financial institutions prior to recapitalization should be subject to a quick but thorough due-diligence of their books and their rusted portfolios be written off. Only when the government knows the extent of the rotten parts can it sufficiently take a call on recapitalization. If the elephants were to be brought in the boardroom at every quarter end then the government would have to resort to recapitalizing banks on a regular basis and thus leading to more confusions world over let alone the increased cost that the government will have to bear! So, post the due-diligence those banks that can function with additional support should be bailed out and the ones that cannot should be left to go under.
The current predicament is best understood by studying Hyman Minsky’s theory on financial market fragility and on speculative investment bubbles endogenous to financial markets. Minsky claimed that in prosperous times, when corporate cash flow rise beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts. Minsky identifies hedge, speculative, and Ponzi finance as distinct income-debt relations for economic units. He asserts that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system: conversely, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a "deviation-amplifying" system. Thus, he suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by hedge finance (stable) to a structure that increasingly emphasizes speculative and Ponzi finance (unstable).
So Mr. Bernanke & Co. does the current scenario sound familiar? Are we at the Ponzi stage now? Unfortunately, it seems so!
Of Red Socks!
This cataclysm and financial ignominy is despite the presence of supposedly austere and punishing regulations a la SOX, Basel, SEC rules coupled with the “Free Capital Market” theories propounded by armies and armies of men. These so called benchmark regulations have failed miserably to serve their intended purposes! Free markets sans effective capital and trade regulations is but a whitewash as when things are doing well they appear to be going fantabulously well but when things go bad it feels as though suddenly there are no rails amidst the descent of the rollercoaster journey! While “free markets” is almost always the destination of all economic philosophy and we all wish that there exist free markets so that the best man wins, but is this beneficial to the end user? Is this beneficial to the economies world over?
While I am not presenting a case for socialism, I am pressing for increased regulation wherever capital related aspects are invovled as money is highly fungible and whose speed of movement of which is second only to light!
SOX, Basel and other policies have not worked because of the “laissez faire” of capital involved. So, despite coming out with more regulations, the problems will not stop unless we stem the issue at its root. When ‘SOX’ was introduced we thought that it would save the investors at large and was the guardian of the Investing public as the senior management was to certify the risk framework of their company in their personal capacity. While regulatory laws might have allowed Banks / Investments Banks to borrow and leverage at levels as high as 35:1 (Lehman) but then shouldn’t the senior management had reassessed whether they had the wherewithal to address such a huge leverage while signing the SOX compliance? It is akin to building a ship, certifying it to be sea-worthy and then gracefully releasing the ship to the open seas as though it were a citadel of sorts, only to let the passengers drown in mid sea!
European Banks use the risk weightage of the Basel norms, and justify their high leverage by pointing to the high quality of their assets (including quite a lot of sovereign debt) When the major European banks were rescued by the governments, the creditworthiness of the governments themselves may be tainted. So the 0 risk weightage assigned by banks to government debt may be a potential time bomb as was evidenced last week when even government debt could get tainted in a crisis aka Iceland.
Of Libor the great!
The Libor which is set each day in London covers financial contracts valued at $360 trillion -- or $53,500 for each person worldwide. Now, you expect a rate that covers such an enormous figure to be trustworthy right? Wrong! The Libor was an overstated mechanism that was controlled by 16 major banks that used to mutually decide on the Libor rates daily for different periods and varying currencies. In April this year there Libor took the worst blow there was to and along with it so did the leading banks world over. While the Libor was set at a particular rate by the consenting banks, this rate was actually lower than the rate the rate that these banks themselves used to borrow for the respective tenures! So in effect these banks were showing an incorrect picture to the world financial markets and furthermore by showing lower rates they themselves could eventually try to borrow at rates set by themselves!!! What an orchestra! That is why major commercial banks now are lending at their own risk adjusted rates and not the Libor.
We must remember that the effectiveness of any policy or regulation is to be judged not by the successes it delivers but more so by the failures that they have prevented, full stop!
Despite what people say about the future of the economy and markets, when in crisis people vote with their money and if we see the markets world over be it BRICs or the developed markets (I wonder if we should still use the term developed?)
Consider the UK, where the combined assets of the big five banks is four times GDP. A recapitalisation equal to 1% of their assets would cost the government an increase in debt equal to 4% of GDP and a 5% recapitalisation would cost 20%of GDP. You can’t expect economies with major issues in their borrowings being over 3-4 times of GDP to just “switch” back on track!
There is both blood and bodies on the floor now. A 2.8% fall in US Industrial Production in September as against 1% in August, the largest since December 1974. Singapore’s economy sank 6.3 % in the quarter ended September 30th after a 5.7% contraction in the previous quarter. Malaysian government report released on October 11th showed industrial output grew in August at the slowest pace in 16 months. Brazil’s slowing down, India’s IIP at 1%.
Pain is rampant through systems from the poles to the eqautor but the world has to bear for all the success that the world has gloated in. Every transaction has a winner and a loser for status quo to exist, but last year when the markets world over went up there appeared only winners – commodities, equity markets, debt name it! But where were the losers? Alas, we have been finding them these days after their long hibernation. The fact is that people now want ‘Return of their Money rather than Return on Money”.
Yes, our own country is no exception. Even the bank credit week on week is declining and so is the manufacturing inflation which unlike the food inflation is not that erratic. Once a reduction in manufacturing inflation sets in as it has today, it continues to fall! That’s at a macro level but even at a micro level leading Indian companies are conveniently flouting laid accounting norms that even are even mandatory by law! The impacts of this àThe biggest company in the refining sector’s first quarter net would have been lower by close to a fourth. Kar Lo duniya muthi mai’s net profit would have been lower by two thirds; and India’s finest international Airline’s net profit in comparable terms would have reduced from a Rs.100 to a – Rs.600!
But the fact remains that we are resilient economy and so these anomalies do not warrant much attention from the Indian regulatory authorities! Yes, this seems to be the answer as there is hardly anything being done on this blatant fact that almost everyone in the accounting community is aware of! The SAT and the SEBI seem to have divergent views on almost every matter that confronts them. Is it a show of strength of who’s stronger between the two? Beats me!
Of Money and its policies!
Now it is all too clear that Monetary policy effectiveness is best judged in hindsight. While we all raised eyebrows on the hawkish stance taken by the RBI (including myself too!), it is only now that we are learning to appreciate the RBI’s moves. The Fed’s record is something we all know now.
And there are those that rose to the occasion and embraced capital convertibility. But they were in for a total shocker! The Latin American and the South East Asian crisis are the best examples that demonstrate the malice of complete capital account convertibility without any control and the wide spread domino effect it causes on countries. In times of crisis money will flow the fingers of the economy the harder you hold it! So, instead of these adventures though this may sound boring but isn’t prevention better than cure? All say Aye!!!
Of too much dark gold and glitter!
One classic example that I love to loathe about is of the failure of self regulation resulting in falling prices is that of the crude gang lords and their hubris. Be it the Gulf, Russia, Latin American Countries – all of them acquired a sense of jubilation following crude reaching $148 with a short in the arm from I Bankers predicting $ 175 and $ 200 targets (Oil was leveraged 13 times i.e only one barrel delivered for every 13 barrels traded). Where these countries went wrong is that they allowed crude prices to go to a level where the whole world started asking “should we trust these guys’ who simply want to gloat in other’s money and for oil prices to hit circuits?” While the crude boys made merry in their newly designed 7 star hotels and palaces the world economy bore the cost of their lavishness and hence this hurt everyone’s margins including you and me. Now this decline in operating profits and the credit squeeze has exacerbated the once rosy scenario of the crude boys because once the world slows down so will demand for the dark matter! More so, with slowdown sentiments even production cuts have not caused crude to rise as it used to only a couple of months back. The game theory has been lost by the Crude boys as they have now all to much breached that limit in price terms that people world over are seriously beginning to look at alternative energy, while de leveraging from crude may certainly take some time to come the fact is that crude may now play lesser weight age than it once did. Strategically, if the price was kept at such a stage where the world could grow and not really look back at the price of crude then we would have seen a far better picture over the long term than we will see now and so the oil producers would have shared their wealth with the world. But Hubris is the name of the game; the colour of money is green and its greed never ending! I recently saw on TV that a certain country spent $ 7 million (35 crores) only in designing the layout for a property exhibition, further on display were buildings and figures that posed challenges to even geometry itself! I just wonder considering the current crisis world over there might not be too many a people to invest in trapezium and constellation shaped buildings. So, while they have enjoyed short term benefits of over a $ 1 trillion dollar reserves, over the longer terms I am not too sure of their predicament. So, an ineffective self regulatory policy by the OPEC is now turning into a vicious circle for them and it is only a matter of time that Oil reaches $50 1/3rd of its all time highs.
So Mesdames et Messieurs we all can and will surely hope that the world economy is back and kicking and we wake another day to switch on the tube and hope to see a smiling Ben Bernake and the governors of the Central Banks world over having a vacation in the Bahamas. We can hope or can we? I end by quoting from the Matrix…
COUNCILLOR HAMANN: Commander, just one more question. Has there been word from the Nebuchadnezzar?
LOCK: None, and at this point there's no reason to expect that there ever will be.
COUNCILLOR HAMANN: Perhaps. But we can hope.
LOCK: I'm afraid hope is an indulgence I don't have time for.
Saturday, September 27, 2008
God’s New Address – The US treasury department!
If Shakespeare were alive and had recently met Henry Paulson, the question that he might have posed would have been – To $700 Billion or not to $ 700 Billion ?
On September 26th, 166 American economists including 3 Nobel Prize winners asked Bush not to go ahead with his “Golden Men” team’s brilliant $ 700 Billion package calling his plan a “subsidy” for business. Robert Lucas, a 1995 Nobel Prize winner and a University of Chicago economist says ``It doesn't seem to me that a lot decisions that we're going to have to live with for a long time have to be made by Friday.'' So is this $ 700 Billion something good?
Before pondering on this you must remember, its not only the 300 million US citizens only that will be impacted but rather the ripples will be felt by 6 Billion people across the globe not by this act but rather the outcomes from his actions
The US gave almost $ 150 billion of refunds to tax payers in February this year hoping to revive the economy and for all that what Bush Junior got were a couple of months where sales of Wal-Mart picked up. After that? You guessed it right! More freebies! The $ 200 Billion of Fannie and Freddie Mac guarantees, the $ 75 Billion AIG loan and still no change! The recent $280 Billion that was just given a few weeks back, where has that gone? The big banks have swallowed all of it in their coffers to prop up balance sheets but this has not reached the real economy, so why would $700 Billion dollars which is just the total of the all the above figures stand to be any different? You don’t give checks to people who are going to use this money to stock it up in their lockers to feel good about themselves and especially not to those who articulated the entire epic so far which is turning out to be more dramatic than even the Mahabharata!
Bankruptcies are something that we need to learn to live with. It isn’t like this hasn’t happened before. In 1907 US I banks went bankrupt, Wall Street was cleaned up and subsequently the US became the 20th Century King of the Jungle. In 1966 almost all the financial companies went bankrupt in Japan, the Japanese then cleaned up the system and Japan became the world’s best growth economy for the next 20 years! In 1990s the Japanese propped up banks and, they did not let their banks fail, this led to the creation of zombie banks and major problems for Japan which still haunts it. The same happened in the 1970’s in the US and this was a lost decade for the US with high inflation rates and troubles galore. Even, the dot com burst, all this happened but the world did not end! When capitalism goes awry you can’t bring in socialism all of a sudden, bankruptcies teach the capitalists to respect the markets and accept their failures with humility. So, this current performance is just desperation as the US doesn’t have any bullets left after shooting in the dark.
Till some time before the current banking fanfare Ben Bernake himself like Greenspan was a proponent of ‘the markets will set everything right themselves’ and that “interference is to be avoided”. But what can one say about their credibility after a U-Turn like this? If you or I had done that in a company after signing term sheets for investing Billions of dollars in a project, then making happy faces and drinking wine over it and tomorrow, you or I came and said hmm lets forget the Billions hmm lets look at this. Maybe even God would not have mercy on us then! But we are not Ben Bernake or Greenspan who can afford to sleep over and forget what they said because hey it’s your and my money that they are talking about, so a million a billion or something more what’s the difference?
These guys who are passing the resolution have got everything wrong! And we keep trusting them even more! The language in the proposed new law says that it would exempt the secretary’s decisions from review by any court or administrative agency, Blasphemy; finally we get God’s address – the US Treasury Department!
Yes, you may say and rightly argue what Keynes says here “When the facts change, I change my mind. What do you do, sir?" But the facts had changed ergo 2000 when money was being served as a 7 course buffet to people who didn’t even have jobs. Moreover, Greenspan didn’t prick the dot com bubble in the making even when he knew that there was something grossly incorrect in the US and famously talked about “irrational exuberance”. He plucked the interest rates when things got totally out of hand, while he could have raised interest rates or raised margin requirements to try to reduce the amount of stocks being bought on loan and allow the dot com to fizzle out slowly he did not. On a second thought, maybe the Fed did not interfere with the stock markets then because we all save the best for the last and that piece de resistance is now finally showing itself. A change when the exuberance was mounting might have saved the colossal damage but we honor these men by giving them Knight hoods. That’s how we work! When running for president in 1999, Senator John McCain said he would keep Greenspan at the Fed — no matter what: "If Mr. Greenspan should happen to die, God forbid, I would do like they did in the movie Weekend at Bernie's. I would prop him up and put a pair of dark glasses on him and keep him as long as we could." Would we think the same today? There is no taking away from the fact that he was darn intelligent but maybe we praise others at times because we know only so much as meets the eye.
The former Fed Governor is praised for reducing inflation. But hey! Inflation was not low because of great productivity gains or similar happy feeling matters, it was because China, India and other developing economies exported deflation to the developed economies keeping prices close to a MacDonald Chicken-Burger!
You have had the Fed saying time and again that they want a stronger dollar since over a year. Gibberish!! Yes they want it and what do they get by that? Yes it helps Americans to beautifully consume more oil but what about their production? If the dollar strengthens then God Bless America’s Production.
Washington Mutual is now under Chapter 11 bankruptcy with JP Morgan buying its assets. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were sub-prime mortgages. Washington Mutual, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest sub-prime lender in 2006, according to Inside Mortgage Finance. So the Bottom-line is, there are still 10 more!
Yes there might be hundreds of firms that would go bankrupt but isn’t this what capitalism is all about? People who have done the right things survive and the flamboyant losers eat humble pie. Even if you had invested in the financial stocks and their bonds you ought to have thought of the risks before investing. The current $ 700 Billion supposed to be bail-out is simply like putting band aid on a terminally ill patient.
While the dollar should have in all logic massively depreciated following what happened in the US (just think what would have happened if this had happened in India), it appreciated till about some time back. Strange? Well that’s the world we live in! despite all the technical charts and theories of Japanese Candlesticks and other exotic names, eventually it’s a human that trades world over and not machines
In most probability the $700 Billion band aid will get through, but who will finance it? The Sheikhs and men behind the opaque Chinese Walls, they have to, they don’t have any other option! Why? Read on...
Despite the brouhaha by the Arabs about debasing from the dollar to other currencies, the fact of the matter is even if they receive in Euros or in Gold or in Yuan(some day) they would still have to pay in dollars for what they purchase globally so like it or not as much as they move away the globally depreciating dollar, will only haunt them more in the future. Also moving away from the dollar to the Euro will depreciate the dollar more and make their imports even more expensive (we all know the 20% + inflation rates prevailing in the Gulf). So, the Arabs have will have to be party to the $ 700 Billion credit line to the US. Ditto for China. With the post Olympic slowdown effect being felt in the Chinese economy coupled with the fact that Chinese stocks have been the worst performers globally, imagine the effect on that economy which depends on US purchases from nuts and bolts all the way to complex gadgets and to being lenders of last resort for saving banks in the US. If the dollar was to depreciate and the Yuan appreciate then the Great Walls may not be all that strong after all. The Chinese are more interested in their economy growing at 9% plus rates and so have to keep the Yuan at a competitive level against the USD. But the big question is for how long will these two handhold the dollar?
So, in the short term I believe it is among a host of factors the above that have strongly contributed to the strengthening of the dollar, but long term the dollar would go down and more. Also, add the fact that you never know what the great US does, as it did in August 1971 when it abandoned the convertibility of the dollar. This unilateral action ended the exchange rates regime that had been negotiated by states at Bretton Woods and shocked the world from the equator to the poles and back! So, I suspect depreciation either willfully or due to market forces would be one of the solutions in the long run to help the 300 million self proclaimed ‘masters of the Universe’ get their house in Order.
I end by quoting what Marc Faber said in June 2008 and is now a big hit in the forwarding community ''The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on *********** and beer, since these are the only products still produced in US. I've been doing my part."
If you haven’t yet found out what the asterisks are google it! ;-)
My next write up would be where to invest in these turbulent markets…Keep watching this space! Do post your suggestions / comments on the write-ups!
On September 26th, 166 American economists including 3 Nobel Prize winners asked Bush not to go ahead with his “Golden Men” team’s brilliant $ 700 Billion package calling his plan a “subsidy” for business. Robert Lucas, a 1995 Nobel Prize winner and a University of Chicago economist says ``It doesn't seem to me that a lot decisions that we're going to have to live with for a long time have to be made by Friday.'' So is this $ 700 Billion something good?
Before pondering on this you must remember, its not only the 300 million US citizens only that will be impacted but rather the ripples will be felt by 6 Billion people across the globe not by this act but rather the outcomes from his actions
The US gave almost $ 150 billion of refunds to tax payers in February this year hoping to revive the economy and for all that what Bush Junior got were a couple of months where sales of Wal-Mart picked up. After that? You guessed it right! More freebies! The $ 200 Billion of Fannie and Freddie Mac guarantees, the $ 75 Billion AIG loan and still no change! The recent $280 Billion that was just given a few weeks back, where has that gone? The big banks have swallowed all of it in their coffers to prop up balance sheets but this has not reached the real economy, so why would $700 Billion dollars which is just the total of the all the above figures stand to be any different? You don’t give checks to people who are going to use this money to stock it up in their lockers to feel good about themselves and especially not to those who articulated the entire epic so far which is turning out to be more dramatic than even the Mahabharata!
Bankruptcies are something that we need to learn to live with. It isn’t like this hasn’t happened before. In 1907 US I banks went bankrupt, Wall Street was cleaned up and subsequently the US became the 20th Century King of the Jungle. In 1966 almost all the financial companies went bankrupt in Japan, the Japanese then cleaned up the system and Japan became the world’s best growth economy for the next 20 years! In 1990s the Japanese propped up banks and, they did not let their banks fail, this led to the creation of zombie banks and major problems for Japan which still haunts it. The same happened in the 1970’s in the US and this was a lost decade for the US with high inflation rates and troubles galore. Even, the dot com burst, all this happened but the world did not end! When capitalism goes awry you can’t bring in socialism all of a sudden, bankruptcies teach the capitalists to respect the markets and accept their failures with humility. So, this current performance is just desperation as the US doesn’t have any bullets left after shooting in the dark.
Till some time before the current banking fanfare Ben Bernake himself like Greenspan was a proponent of ‘the markets will set everything right themselves’ and that “interference is to be avoided”. But what can one say about their credibility after a U-Turn like this? If you or I had done that in a company after signing term sheets for investing Billions of dollars in a project, then making happy faces and drinking wine over it and tomorrow, you or I came and said hmm lets forget the Billions hmm lets look at this. Maybe even God would not have mercy on us then! But we are not Ben Bernake or Greenspan who can afford to sleep over and forget what they said because hey it’s your and my money that they are talking about, so a million a billion or something more what’s the difference?
These guys who are passing the resolution have got everything wrong! And we keep trusting them even more! The language in the proposed new law says that it would exempt the secretary’s decisions from review by any court or administrative agency, Blasphemy; finally we get God’s address – the US Treasury Department!
Yes, you may say and rightly argue what Keynes says here “When the facts change, I change my mind. What do you do, sir?" But the facts had changed ergo 2000 when money was being served as a 7 course buffet to people who didn’t even have jobs. Moreover, Greenspan didn’t prick the dot com bubble in the making even when he knew that there was something grossly incorrect in the US and famously talked about “irrational exuberance”. He plucked the interest rates when things got totally out of hand, while he could have raised interest rates or raised margin requirements to try to reduce the amount of stocks being bought on loan and allow the dot com to fizzle out slowly he did not. On a second thought, maybe the Fed did not interfere with the stock markets then because we all save the best for the last and that piece de resistance is now finally showing itself. A change when the exuberance was mounting might have saved the colossal damage but we honor these men by giving them Knight hoods. That’s how we work! When running for president in 1999, Senator John McCain said he would keep Greenspan at the Fed — no matter what: "If Mr. Greenspan should happen to die, God forbid, I would do like they did in the movie Weekend at Bernie's. I would prop him up and put a pair of dark glasses on him and keep him as long as we could." Would we think the same today? There is no taking away from the fact that he was darn intelligent but maybe we praise others at times because we know only so much as meets the eye.
The former Fed Governor is praised for reducing inflation. But hey! Inflation was not low because of great productivity gains or similar happy feeling matters, it was because China, India and other developing economies exported deflation to the developed economies keeping prices close to a MacDonald Chicken-Burger!
You have had the Fed saying time and again that they want a stronger dollar since over a year. Gibberish!! Yes they want it and what do they get by that? Yes it helps Americans to beautifully consume more oil but what about their production? If the dollar strengthens then God Bless America’s Production.
Washington Mutual is now under Chapter 11 bankruptcy with JP Morgan buying its assets. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were sub-prime mortgages. Washington Mutual, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest sub-prime lender in 2006, according to Inside Mortgage Finance. So the Bottom-line is, there are still 10 more!
Yes there might be hundreds of firms that would go bankrupt but isn’t this what capitalism is all about? People who have done the right things survive and the flamboyant losers eat humble pie. Even if you had invested in the financial stocks and their bonds you ought to have thought of the risks before investing. The current $ 700 Billion supposed to be bail-out is simply like putting band aid on a terminally ill patient.
While the dollar should have in all logic massively depreciated following what happened in the US (just think what would have happened if this had happened in India), it appreciated till about some time back. Strange? Well that’s the world we live in! despite all the technical charts and theories of Japanese Candlesticks and other exotic names, eventually it’s a human that trades world over and not machines
In most probability the $700 Billion band aid will get through, but who will finance it? The Sheikhs and men behind the opaque Chinese Walls, they have to, they don’t have any other option! Why? Read on...
Despite the brouhaha by the Arabs about debasing from the dollar to other currencies, the fact of the matter is even if they receive in Euros or in Gold or in Yuan(some day) they would still have to pay in dollars for what they purchase globally so like it or not as much as they move away the globally depreciating dollar, will only haunt them more in the future. Also moving away from the dollar to the Euro will depreciate the dollar more and make their imports even more expensive (we all know the 20% + inflation rates prevailing in the Gulf). So, the Arabs have will have to be party to the $ 700 Billion credit line to the US. Ditto for China. With the post Olympic slowdown effect being felt in the Chinese economy coupled with the fact that Chinese stocks have been the worst performers globally, imagine the effect on that economy which depends on US purchases from nuts and bolts all the way to complex gadgets and to being lenders of last resort for saving banks in the US. If the dollar was to depreciate and the Yuan appreciate then the Great Walls may not be all that strong after all. The Chinese are more interested in their economy growing at 9% plus rates and so have to keep the Yuan at a competitive level against the USD. But the big question is for how long will these two handhold the dollar?
So, in the short term I believe it is among a host of factors the above that have strongly contributed to the strengthening of the dollar, but long term the dollar would go down and more. Also, add the fact that you never know what the great US does, as it did in August 1971 when it abandoned the convertibility of the dollar. This unilateral action ended the exchange rates regime that had been negotiated by states at Bretton Woods and shocked the world from the equator to the poles and back! So, I suspect depreciation either willfully or due to market forces would be one of the solutions in the long run to help the 300 million self proclaimed ‘masters of the Universe’ get their house in Order.
I end by quoting what Marc Faber said in June 2008 and is now a big hit in the forwarding community ''The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on *********** and beer, since these are the only products still produced in US. I've been doing my part."
If you haven’t yet found out what the asterisks are google it! ;-)
My next write up would be where to invest in these turbulent markets…Keep watching this space! Do post your suggestions / comments on the write-ups!
Wednesday, September 24, 2008
Should you be scared if you have invested in Indian Banks?
There has been ample talk doing the rounds about Indian Banks’ holdings in foreign securities viz ICICI Bank’s holding of $80 million investment in Lehman, SBI’s holding of $170 million in Freddie Mac and Fannie Mae coupled with a $17 million exposure to Lehman Brothers and the Rs 400 crore worth loans to DSP Merrill Lynch Capital, but is there merit to these arguments? Many questions persist as to whether ICICI, SBI and other major Indian Banks may have other investment holdings overseas and if so then how much? Exhibit 1 is an extract from ICICI Bank’s 2007 – 2008 audited financials which will surely provide some clarity to this scenario.
After looking at the details in Exhibit 1 it is abundantly clear that ICICI certainly has significant investments and advances made overseas, apart from the Lehman amount of $80 Million which in INR stands at Rs.368 crores (1 USD = Rs.46). This represents a measly 1.68% of the total Investments of the overseas’ others’ portion, what the Bank must do at the earliest to alleviate investor fears is to elaborate where exactly does it hold its other Rs.22,372 crores investments classified as ‘others’.
An irony here is that the schedule VI provides for detailing the nature and name of companies and instruments in which the investments has been made for companies but this is no so for Banks. However, if this disclosure requirement was to be made to the investments made by banks then this entire fiasco prevailing could have been avoided and investor’s loss’s contained.
One should also take note that the advances made outside India by ICICI stand at a staggering Rs.67,500 crores. This stands at thrice the value of its overseas others’ investments! While it would certainly not be correct to deduce from the above that ICICI has investments in the bankrupt companies, however the investor must be informed in these uncertain times the details of where Rs.89,700 crores investments have been made! The credit crisis has not ended and it is now that the Fed has agreed to buyout the bad loans made by both international and US based banks that the skeletons from the closet are coming out at a much faster pace to access the Fed’s cash bonanza while exchanging their holdings of the CDOs and Sub-prime. The list of financial entities includes not only other US banks and offshore trusts but even Banks from nations as far and possibly remotely connected to all of this as Iceland (Kaupthing Bank) and Ireland (Allied Irish) let alone the Fortises and Santanders! The Fed which is already doing a great help to these financial institutions by lending almost a $1 trillion in short term loans to Banks and also will in most certainty not be as generous when it comes to buying these assets, it certainly would not buy at their book value as if it would do so it would only be another case of “Socialization of losses and privatization gains” as quoted by Alan Greenspan recently following the Fannie and Freddie debacle. Considering the cost to the tax payer and the government taking an enormous risk through this buyback expect a huge discount to the underlying value of the security. Now, what returns would ICICI bank’s Rs.89,700 crores stand to gain against this scenario? Anyone’s guess! Ditto for the other banks as shown in Exhibit 2 (Consolidated Figures)
An irony here is that the schedule VI provides for detailing the nature and name of companies and instruments in which the investments has been made for companies but this is no so for Banks. However, if this disclosure requirement was to be made to the investments made by banks then this entire fiasco prevailing could have been avoided and investor’s loss’s contained.
One should also take note that the advances made outside India by ICICI stand at a staggering Rs.67,500 crores. This stands at thrice the value of its overseas others’ investments! While it would certainly not be correct to deduce from the above that ICICI has investments in the bankrupt companies, however the investor must be informed in these uncertain times the details of where Rs.89,700 crores investments have been made! The credit crisis has not ended and it is now that the Fed has agreed to buyout the bad loans made by both international and US based banks that the skeletons from the closet are coming out at a much faster pace to access the Fed’s cash bonanza while exchanging their holdings of the CDOs and Sub-prime. The list of financial entities includes not only other US banks and offshore trusts but even Banks from nations as far and possibly remotely connected to all of this as Iceland (Kaupthing Bank) and Ireland (Allied Irish) let alone the Fortises and Santanders! The Fed which is already doing a great help to these financial institutions by lending almost a $1 trillion in short term loans to Banks and also will in most certainty not be as generous when it comes to buying these assets, it certainly would not buy at their book value as if it would do so it would only be another case of “Socialization of losses and privatization gains” as quoted by Alan Greenspan recently following the Fannie and Freddie debacle. Considering the cost to the tax payer and the government taking an enormous risk through this buyback expect a huge discount to the underlying value of the security. Now, what returns would ICICI bank’s Rs.89,700 crores stand to gain against this scenario? Anyone’s guess! Ditto for the other banks as shown in Exhibit 2 (Consolidated Figures)
For a better perspective on the percentage of losses possible it would be interesting to take note of eClerx Services Limited here. This company had Lehman as one of its major customers in the BFSI domain. On October 6th 2008, Eclerx lodged a disclosure with the NSE that “one of company's clients had filed a petition under Chapter 11 of the Bankruptcy Act in a New York court. The Company has now accepted a Cure amount of USD 561,340 proposed by the acquiring entity of the Company's previous client as full and final payment against the receivables of approximately a million dollars.”
Now all this is when we look at the asset side of the Balance Sheet but now looking to the liabilities portion ICICI Bank like other Indian Banks has borrowed massively from overseas markets so that they can play a well orchestrated game to borrow cheap and earn a tidy return by loaning the same in the Indian Domestic market at far higher rates. So far so good till around a few months back. But, things are ‘a changing’. In the past weeks central banks have released liquidity of almost a$1 trillion to assuage the liquidity crisis; moreover the LIBOR USD / EURO / GBP have reached record highs of over 6% compared to under 3% rates a month ago and still are showing no material signs of abating. So, what is the effect of this on Indian Banks? I am not an optimist here. Why? The $ 280 Billion central bank money giving spree and all the monies thereafter hasn’t really transcended in real effect to the economy but has been horded by the Banks to fund their requirements and replete their capital base. Also, the sacrosanct LIBOR is also taking a major blow of sorts as global banks are now negotiating to lend at their real risk adjusted cost of funds and not at LIBOR rates, simply put hence forth all contracts will bear a greater interest than before and following this the spreads of Indian Banks will come pressure, so game over? Well, maybe not yet but effectively we will be importing the sub-prime effects in our Banks and in our finances albeit the ripple effect will be felt in a few months and not immediately. If Indian Banks were to de-hedge from their foreign borrowings to India originated borrowings let alone the present liquidity crisis they would need to raise a colossal Rs.123,000 crores just for the 6 Banks as displayed in the table below that shows the foreign borrowings of leading Indian Banks per their 2007 – 2008 financials in Exhibit 3 (Consolidated Figures)
Now all this is when we look at the asset side of the Balance Sheet but now looking to the liabilities portion ICICI Bank like other Indian Banks has borrowed massively from overseas markets so that they can play a well orchestrated game to borrow cheap and earn a tidy return by loaning the same in the Indian Domestic market at far higher rates. So far so good till around a few months back. But, things are ‘a changing’. In the past weeks central banks have released liquidity of almost a$1 trillion to assuage the liquidity crisis; moreover the LIBOR USD / EURO / GBP have reached record highs of over 6% compared to under 3% rates a month ago and still are showing no material signs of abating. So, what is the effect of this on Indian Banks? I am not an optimist here. Why? The $ 280 Billion central bank money giving spree and all the monies thereafter hasn’t really transcended in real effect to the economy but has been horded by the Banks to fund their requirements and replete their capital base. Also, the sacrosanct LIBOR is also taking a major blow of sorts as global banks are now negotiating to lend at their real risk adjusted cost of funds and not at LIBOR rates, simply put hence forth all contracts will bear a greater interest than before and following this the spreads of Indian Banks will come pressure, so game over? Well, maybe not yet but effectively we will be importing the sub-prime effects in our Banks and in our finances albeit the ripple effect will be felt in a few months and not immediately. If Indian Banks were to de-hedge from their foreign borrowings to India originated borrowings let alone the present liquidity crisis they would need to raise a colossal Rs.123,000 crores just for the 6 Banks as displayed in the table below that shows the foreign borrowings of leading Indian Banks per their 2007 – 2008 financials in Exhibit 3 (Consolidated Figures)
So, should you be scared? I think I would! While I am not passing an opinion on the solvency of Indian Banks which I believe are adequately capitalised, I do have concerns on the aggresive stance of certain banks' assets and liability positions which could cause strains on their profit and loss account
* Disclamer - The views mentioned in this blog are my personal views. These views are neither endorsed by / supported by nor are they the views of anyone else / any other organisation. Kindly take your decisions on an informed basis, only after going through the financials of companies at your end and then consulting your financial advisor.
Tuesday, September 4, 2007
Dada's Quiz! Week 1
hOw mANy kNOW U?
Q 1 Recently a Mumbai based coaching classes received a FDI , a first of its kind in India? Which firm received the FDI, which firm invested (organisation and country) and what amount?
Q 2 Which firm owns the job portal Naukri.com? and it has recently launched two new portals, name them?
Q 3 In one of the largest acquisition by a Indian health care company, Apollo Health Street (AHS), recently bought which overseas firm and for what amount?
Q 4 The Montreal protocol and the Kyoto protocol are defined under different aegis of the United Nations. Name them?
Q 5 The Citigroup in India, has come out with a unique ATM facility for lower income class and rural customers in India, what is it?
Q 6 On passing of a new competition bill in 2007 what is set to replace the MRTPC (Monopolies and restrictive trade practices commission)
Q 7 The legend behind this toy originated when in 1902, an American president on a hunting trip refused to shoot an old – she bear, who had been cornered. This was made famous by a cartoon in Washington Post, which inspired a novelty store owner to come up with this toy. Which and why was it named so? (nice one)
Q 8 The name of this search engine was inspired by a poem written more than 800 years ago during the reign of the Song Dynasty, and which literally means hundreds of times. Which?
Q 9 Which was the first wholly Indian made commercial and who sang the Jingle for it? (nice one)
Q 10 Which Brand's logo, in the form that it appears on its products, always weighs 0.38 grams and it is the surest sign of the authenticity of the product? (Super one)
A new quiz would be put up every week and the answers of the old quiz will be posted as comments on the date of upload of the new quiz.
flurry awayw with answers by creating a comment to this...
Dwaitin Dave
Final Year PGDM, Global Business
NMIMS, Mumbai
Q 1 Recently a Mumbai based coaching classes received a FDI , a first of its kind in India? Which firm received the FDI, which firm invested (organisation and country) and what amount?
Q 2 Which firm owns the job portal Naukri.com? and it has recently launched two new portals, name them?
Q 3 In one of the largest acquisition by a Indian health care company, Apollo Health Street (AHS), recently bought which overseas firm and for what amount?
Q 4 The Montreal protocol and the Kyoto protocol are defined under different aegis of the United Nations. Name them?
Q 5 The Citigroup in India, has come out with a unique ATM facility for lower income class and rural customers in India, what is it?
Q 6 On passing of a new competition bill in 2007 what is set to replace the MRTPC (Monopolies and restrictive trade practices commission)
Q 7 The legend behind this toy originated when in 1902, an American president on a hunting trip refused to shoot an old – she bear, who had been cornered. This was made famous by a cartoon in Washington Post, which inspired a novelty store owner to come up with this toy. Which and why was it named so? (nice one)
Q 8 The name of this search engine was inspired by a poem written more than 800 years ago during the reign of the Song Dynasty, and which literally means hundreds of times. Which?
Q 9 Which was the first wholly Indian made commercial and who sang the Jingle for it? (nice one)
Q 10 Which Brand's logo, in the form that it appears on its products, always weighs 0.38 grams and it is the surest sign of the authenticity of the product? (Super one)
A new quiz would be put up every week and the answers of the old quiz will be posted as comments on the date of upload of the new quiz.
flurry awayw with answers by creating a comment to this...
Dwaitin Dave
Final Year PGDM, Global Business
NMIMS, Mumbai
Upload ur stuff!
Greetings!
Well I thought there could be quite a few of us who had loads of material to put up, but this data was in formats viz pdf, doc, xls and so on, but on blog u cannot keep downloadable stuff! So I have opened an account with a free online space provider. With this all you guys now need to do is just put a brief forward on ur write-up in the post and mail me the softcopies of the dtuff u want to post...following that I'll post the link to the shared space of ur research below ur post! Easie weezie for u! No formatting jhanghat while posting!
So this should be pretty convenient and fast for u guys to send all ur research and tht too in truck-loads!
Step 1: u get to make posts urself! just mail me ur info + writeup detail then ASAP I'll mail u an invite so that u too can create ur own posts on the blog. And then!!! ur as much a part of the blog creation as I am! Trashbrothers!
OR
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Ya I know the latter is more of snail mail..but Im working on how to make the process more smoother. Also, I advise that u put ur name and email id in the document u send for uploading, so that u get ur deserved credit!
For eg. my article can be accessed at http://www.4shared.com/dir/3778361/647fdd10/sharing.html
Here u will see a screen having files on the page, then u "click on the file u want to download" not below where upload option is given then u go to another page where ur downloading facilitation takes place..
Do let me know if there are any problems/ improvements possible in this method of sharing...
Staaart traaashing!
Well I thought there could be quite a few of us who had loads of material to put up, but this data was in formats viz pdf, doc, xls and so on, but on blog u cannot keep downloadable stuff! So I have opened an account with a free online space provider. With this all you guys now need to do is just put a brief forward on ur write-up in the post and mail me the softcopies of the dtuff u want to post...following that I'll post the link to the shared space of ur research below ur post! Easie weezie for u! No formatting jhanghat while posting!
So this should be pretty convenient and fast for u guys to send all ur research and tht too in truck-loads!
Step 1: u get to make posts urself! just mail me ur info + writeup detail then ASAP I'll mail u an invite so that u too can create ur own posts on the blog. And then!!! ur as much a part of the blog creation as I am! Trashbrothers!
OR
Step 1: U send me a comment to this post having ur write-up on it and mail me ur documents
Step 2: I convert the comment into a post and in the post give the link to the place where everyone can download ur files from (still working on how to make it a post automatically and not a comment)
Step 3: U happy me Happy!
Ya I know the latter is more of snail mail..but Im working on how to make the process more smoother. Also, I advise that u put ur name and email id in the document u send for uploading, so that u get ur deserved credit!
For eg. my article can be accessed at http://www.4shared.com/dir/3778361/647fdd10/sharing.html
Here u will see a screen having files on the page, then u "click on the file u want to download" not below where upload option is given then u go to another page where ur downloading facilitation takes place..
Do let me know if there are any problems/ improvements possible in this method of sharing...
Staaart traaashing!
Sunday, September 2, 2007
Arbitrage opportunities of a Fully Paid vs. Partly Paid Equity Share
Arbitrage opportunities of a Fully Paid vs. Partly Paid Equity Share
While a super majority of the shares listed in the Indian Markets are fully paid up, in the coming future there stands a good possibility of Indian Cos. raising share capital by means of issuing partly paid shares for eg. the DLF issue, ICICI Bank. The benefits in theory that is, we all know are that the companies are able to facilitate easier subscriptions, however for some reason Indian investors resist subscribing partly paid shares. Below is the explanation that holds partly paid shares in a better light as against what is generally conceived by general retail investors (RI) and why subscribing to partly paid shares (PPS) might in certain instances be a superior option to subscribing to the fully paid share (FPS).
To facilitate easy understanding we shall take ICICI Bank’s issue with its characteristics.
Now, ICICI under its partly paid scheme allowed an upfront payment of Rs.250 on application + Rs.250 at the time of allotment, further the partly paid shares would list in close proximity with the other FPO shares allotted. Below is illustrated the pricing of the PPS assuming that the PPS and the FPS list in close proximity.
As the issue was sold to retailers at Rs.890, the RIs would have to pay Rs.500 within a month’s time and the balance within 6 months time period. What happens is because of this the RI is left with a cash of Rs.390 lying with him for 6 months unlike the RI who applied for the FPS had put in Rs.890 all at once! So there is a case of interest earning for the PPS Retail investor. The PPS retail Investor would have to pay Rs.390 at the end of 6 months so, he would make availability of that much only at the end of 6 months, this is by depositing Rs.373 today that will become Rs.390 at the end of 6 months at 9% annualized or 4.5% half yearly. So what this means is that the PPS RI pays actually Rs.250 (at the time of application) + Rs.250 (the amount of allotment money can be discounted as there would be a time lag of 15 days though this makes sense only if the amount involved is meaty) + Rs.374 (Today’s Value of Rs.390 receivable at the end of 6 months) = Rs.873 to convert his PPS into a FPS. Hence while his counterpart has paid Rs.890, the PPS RI actually saves Rs.17 due to the option chosen by him and that to, to own practically the same share as the FPS Retail Investor!
Now skeptics may argue that dividend would possibly be paid on the Equity Share and the PPS RI would not get dividend, this though is true but the fact of the matter is that the ICICI Bank PPS option calls for Rs.9 of the F.V. of Rs.10 share in the first go and hence as dividend would be paid on F.V. of equity share the PPS RI just loses Rs.1 F.V. on which he would have got dividend, last year’s dividend was Rs.10 per share and this further assuming a Rs.12 on the Rs.10 F.V.(For the sake of argument Rs.12 has been taken, though it is a little on the higher side as the share capital now stands increased by 20%) the PPS RI stands to lose Rs.1.2 for the Rs.1 of value that is outstanding, moreover this dividend is for an entire year so theoretically he would miss out on Rs.0.6 dividend divided by two (As Rs.1.2 is for the full year and we assume that the company declares dividend in the middle of the year and hence Rs.0.6 for the half year), this Rs.0.6 actually would have to be brought to today’s terms by discounting it at 9% annualized that brings it to Rs.0.56. Hence, for the ICICI bank issue it can safely be argued that the dividend amount hypothetically forgone would be minimal and hence not material, provided the investment is not huge.
Having assumed the fact above that the RI would hold the PPS till call, we shall now proceed to value the share at the time of listing. As the PPS RI would be getting a benefit of Rs.16.50 (Interest earned – Dividend foregone) if this amount is paid to the RI on the day of listing he should therefore sell! Why? The chart below explains…
Chart I
| | Price of FPS at a point of time (Say) | 830 | | ||
| (A) | Theoretical Listing of PPS (less Rs.390) | 440 | | ||
| | | | | ||
| (a) | Balance to be paid Value of PPS | 390 | | ||
| | Invested amt at 0 date which becomes RS.390 after 6 months | 373 | | ||
| | | ||||
| (B) | Interest earned on 390 at PV terms | 17 | | ||
| | | | | ||
| | Assumed Dividend on FPS for Yr | 12.00 | | ||
| | Dividend Lost for Yr | 1.20 | | ||
| (C) | P.V. of Lost Dividend for 1/2 Yr | 0.57 | | ||
| | | | | ||
| (A)+(B)-(C) | Minimum Traded Value of PPS | 456 | | ||
| | | | |
| |
| | | | |
| |
| If at Rs. (C) | PV Payable (D) = (a) - (C) + (B) | Cost of Share (C + D) | Beneficial for |
| |
| 600 | 374 | 974 | Seller |
| |
| | | | |
| |
| 576 | 374 | 950 | Neutral |
| |
| | | | |
| |
| 435 | 374 | 809 | Buyer |
| |
The above aspect of discounting would also hold true during the listed period of the PPS as during this stretch of 6 months there would be in most probability arbitrage situations wherein the theoretical value as per discounting and the traded price of the PPS would be in disequilibrium due to demand and supply factors – for example FII’s interest, shortage of fully paid shares. Thus, one can make use of the above shown discounting to determine the fair value of the PPS vis-à-vis the FPS and make a shift into the undervalued option of the two types of Shares. However it is to be noted that the discounting difference would reduce as the time of the final call approaches and the difference in the price of the FPS and the PPS will at a point of time be only the balance payable call of Rs.390 and hence arbitrages possibilities may be very less and very low.
Now the other factors that would help the RI is that his % return on the amount invested would be higher than his counterpart who had been allotted the FPS {Chart II}. Moreover in case of a fall in prices in the 6 month period, the ratio of return of PPS/FPS which occurs if there a positive return is not the same in case of a downfall in prices i.e. the magnitude of the gain ratio is not the same as the magnitude of the loss, hence the loss ratio is comparatively lesser to the Gain ratio.
It is assumed that:
(I) For Income Tax purposes this income is assessed under the head Profit Gains from Business or Profession or both the buyer and the seller are either short term traders i.e. their holding the stock for a period less than a year and hence no Long term Capital Gains Vs. Short term Capital Gains situation arises, however if one investor is in it for the short term and the other for long term, comparison would have to be made against (a) the lowered gain % of the short term investor à the capital gain reduced by 10% (the short term Capital Gains tax is 10%) with (b) the full gain of the long term investor as there is no capital gains tax on securities held for more than a year.
(II) Selling Price = Traded Price (-) 0.5% for Brokerage Costs and STT
(III)The PPS have been assumed to list at the minimum traded value for a PPS i.e. traded price of FPS (-) Rs.373 (Present Value of Rs.390).
Chart II
| Optimistic I | Traded Price | Selling Price | Cost | Return | PPS/ FPS Return |
| FPS | 950 | 945 | 890 | 6.2% | 2.36 |
| Hence, PPS | 576 | 573 | 500 | 14.7% | |
| | | | | | |
| Optimistic II | Traded Price | Selling Price | Cost | Return | PPS/ FPS Return |
| FPS | 900 | 896 | 890 | 0.6% | 7.64 |
| Hence, PPS | 526 | 524 | 500 | 4.7% | |
| | | | | | |
| Pessimistic I | Traded Price | Selling Price | Cost | Return | PPS/ FPS Return |
| FPS | 835 | 831 | 890 | -6.6% | -1.24 |
| Hence, PPS | 461 | 459 | 500 | -8.2% | |
| | | | | | |
| Pessimistic II | Traded Price | Selling Price | Cost | Return | PPS/ FPS Return |
| FPS | 800 | 796 | 890 | -10.6% | -1.44 |
| Hence, PPS | 426 | 424 | 500 | -15.2% |
Hence, one can see that the PPS option is actually a better option to invest in an IPO/ FPO of a company, albeit the company issuing the share should be expected to list strongly/ above cut off else the loss ratio % under the PPS option would accentuate as compared to the gain.
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