Pay up for deposits and receive interest for loans

Yeh you read the above correct. Negative interest rates play the tricks mentioned above. Normally, one would expect to RECEIVE interest on deposits (or a bond investment) and PAY interest on a loan balance (bond outstanding).

But the mandarins of high finance (read the central bankers) have devised this “innovative” solution to induce the world economy out of coma. Heres a piece by WSJ.

How is it expected to work? Simply put, these negative rates are supposed to put out a red carpet for all the borrowers out there to borrow to their hearts content and somehow kickstart the economy with private capital spending. The savers can go take a hike. This is what the central bankers are implying. Its as convoluted as it sounds and implications beyond the grasp of even savvy bond investors. This implies that there would no longer be a coupon payment (as yields are negative arent they?). So bond investors would be forced to think like equity investors and seek capital gains.

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Equity Markets to remain open on Budget Day

The stock market regulator SEBI too seems to have fallen for the hype of an event known simply as, Budget. Worse still, the market regulator chief himself seems to have backtracked from his earlier held view of ‘no correlation between markets and budget stand’ Not surprising then that exchanges seem to have received just a one liner from the market regulator asking them to keep exchanges open next Saturday on which Budget falls.

What should have been a drab affair whereby the government projects its annual revenue and expenditure heads has now become an annual media circus. Speculation wrt budget contents start doing the rounds a good 1 month before the actual event. Newspapers, business news channels are full of budget related crap. With such massive expectations its not surprising market volatility is high on Budget days as typically speculators amass positions in the derivatives markets only to unwind it post the event. This unwanted volatility could have been curbed by keeping the market shut on Saturday as speculators would shied away from excessive risk taking as they would have to react only on Monday. But by keeping markets open on that day these speculators need not fear. And anyway, the fine print analysis of the budget takes time. Market reaction on Monday would have been balanced as one event doesn’t change the future of the company underlying a stock.

Brokers argued that since Singapore opens earlier than Mumbai for trading, FII business would migrate to Singapore and they would lose out. Exchanges concurred since the war between NSE and SGX for market share is quite well known. Brokers (more brokerage), exchanges (more revenues as it is linked to turnover and turnover is typically high on such days), news channels (more eyeballs) and stock market speculators (rampant speculation) would be thrilled by this move. Retail investors should keep out and chill as the chance of losing money would go up manifold. Genuine long term institutional investors wouldn’t bother anyway since they don’t change their view on the basis of a singular event.

Lobby groups seem to have prevailed. The argument extended by brokers could very well be extended to market timings too as a whole host of events keep on happening the world over while the markets are closed. Thus, the next demand of these elements would be to extend market timings. All this talk of long term investing seems a joke when so much emphasis is given to the short term and when the regulator itself doesn’t understand what long term investing is.

‘Bond King’ abdicates his throne at PIMCO

Bill Gross aka ‘Bond King’ (name given by financial press) stunned the investment world on Friday when he left the firm he co-founded (was taken over by Allianz) and joined rival Janus on Friday. At PIMCO, Gross managed $ 2 trillion + fund and he is set to join a rival to manage a fund with ‘mere’ millions in corpus. Reuters columnist gives a great analogy here Its like resigning from the US Presidency to become a city manager of a small town.

The question remains Why would a 70+ year old multi – billionaire (drew a salary of $ 200 million pa.) bail out of the company he found to join a rival ? El Erian the chief econ at PIMCO had quit some time back and there were murmurs back then that he had a fall out with Gross. There were talks of Grosss’ short temper and his shouting at his subordinates. There were also talks of how it was ‘my way or the highway’ kind of approach that Gross was known for. There is this anecdote that i read somewhere whereby one of Grosss’ traders saying that one of their investment holding being expensive and Gross asking him to buy more of it for him. More about his behaviour (in lighter vein) by Deal Breaker here

There was the SEC investigation going on, news of which broke only recently. The investigation related to whether PIMCO returns were inflated in any way.

More importantly his funds had displayed poor performance and had witnessed outflows to the tune of $ 70 billion since May 2013 (16 straight months of outflows).

The ‘Bond King’ sure was fighting a tough battle for the past many months. Regarding the possibility of being fired? Grosss’ rival Jeffery Gundlach however says he couldnt have been fired by Allianz and the move was just that Gross wanted to move on on his own terms.

Another Gorilla – This time a Chinese one – growls

Alibaba comes out with its public issue at $ 60 – 63 / share. At the upper end of the price band, Alibaba would have a market cap of $ 160 bln +. With the promoter, Jack Ma holding ~ 10% stake, his networth would equal ~ $ 16 bln. This is simply wow, considering that co. was established in only 1999.

Some Alibaba stats;

– GMV – $ 300 bln (50% share in the Chinese market)

– Revenues – $ 9 bln

– Profits – $ 5 bln

– PAT % – 55%

– ROIC – 20%

Seems like a highly profitable enterprise, may be this has much to do with the business model that it follows, i.e. the market place model. It essentially acts as a platform to bring together buyers/sells. Much like the equity / commodity exchanges and other platforms. Now, this is different from the other ecommerce model, i.e. the merchant model whereby the company takes care of the logistics and warehousing too. But this comes at a cost, as it is a low margin business due to the increased costs. Desi Flipkart, follows this model. Amazon.com of US follows this particular whereas EBay follows the marketplace model. So no one model seems to be superior, one is a high volume low value whereas the other is a low volume high value.

Valuation: At the upper end of the price band, Alibaba would be trading at 33x FY14 EPS. Now, 33x in for a fast growing internet co. is not much, infact its cheap. So, whats it that we might be missing. FT has this . Essentially, the ADS holders would get shares in a holding co. which in turn has holdings in subsidiaries which in turn has holdings in various operating cos. who have cross holdings in certain “variable interest entities” who crucially control the government liscenses and payment platform, Alipay. These are ultimately controlled by Ma and Xie. This explains the discount.

Second Bi – Monthly Review of Monetary Policy – Our take

RBI left the policy repo rate unchanged (leading to unchanged reverse repo and MSF). CRR was untouched. However it;

1. Cut SLR by 50 bps to 22.5 %.

2. Cut Liquidity under ECR to 32% of eligible export credit outstanding from the earlier 50%. However, introduced a special term repo facility of 0.25 % of NDTL.

RBI says, ” .. CPI headline inflation has risen on the back of a sharp increase in food prices. Some of this price pressure will continue into May, but it is  largely seasonal…. The risks to the central forecast of 8 per cent CPI inflation by January 2015  remain broadly balanced. Upside risks in the form of a sub-normal/delayed monsoon  on account of possible El Nino effects, geo-political tensions and their impact on fuel prices…”

Thus, the pause has been supported by reasons such as caution with respect to the rising CPI and uncertain monsoon and the need to let the disinflationary forces play out.

SLR cut has been effected so as to allow banks more headroom to extend credit owing to rising investment demand as the economy recovers. Since the system is currently excess SLR. Meaning, banks have hoarded more government / state paper than needed owing to lack of credit demand. Deposit growth still outpaces credit growth as there isnt enough demand from private corporates for credit. 

RBI provides an export credit refinance (ECR) facility to banks on the basis of banks’ eligible outstanding rupee export credit. ECR facility is available at the repo rate under the LAF. This is to enhance credit flows to the export sector. RBI says, “In pursuance of the Dr. Urjit R. Patel Committee’s recommendation to move away from sector-specific refinance towards a more generalised provision of system liquidity without preferential access to any particular sector or entity the Reserve Bank has decided to limit access to export credit refinance while compensating fully  with a commensurate expansion of the market’s access to liquidity through a special term repo facility from the Reserve Bank (equivalent to 0.25 per cent of NDTL)..”

With the bi – monthly review being on August 5, 2014, the trajectory of CPI and the development of monsoon would provide a clue in the future course of monetary policy. 

Second Bi-Monthly review of Monetary Policy (SBMR)

After hikes in January, Guv Rajan maintained status quo in April (first under the new bi – monthly format). His ‘data dependent’ style of conducting monetary policy would mean a close watch on the CPI (“Glide path” guidance based on Urjit Patel committee reccomendations, i.e. 8% CPI by January next year and then 6% later with +/- 2%) and its trajectory. Last two readings of the CPI point to a re-surgence the food price pressures in the fruits & veggie segment

El Nino is a threat looming large. And it could accentuate the pressure on Indian agriculture leading to food price shocks. Remember 50% of CPI is food.

The previous hikes would still be playing out in the economy. That being the case, it hardly leaves room for easing. It calls for a status quo. 

Enter the 400 pound gorilla!!

2 events of last week could potentially disrupt the way the respective industries function.

1. Merger of Myntra with Flipkart

2. Reliance Industries taking over Network 18 group

One is in response to the entry of a giant in online retailing segment and the other directly gives entry to another giant in the media sector. 

1. Myntra & Flipkart merger: No one would understand better the disruptive force of the entry of a giant like Amazon.com in India than former Amazon.com employees themselves. In December last year, Amazon introduced the ‘same day delivery service’ on the products covered under ‘Fulfilled by Amazon’ category in the metros. This was followed by an intense advertising campaign highlighting it. In the ‘me too’ Indian online retailing sector, this had the potential of taking market share away from the leader ‘Flipkart’ as consumers in their desire to get their hands on the products earliest might have just veered towards Amazon. Not surprisingly, Flipkart followed suit with its own version of same day delivery ‘In – a – day guarantee’ delivery for a nominal charge. This too was launched in metros and for a nominal charge.    

Flipkart with its ‘Cash on Delivery’ offering is the undisputed leader with GMV of $ 1 billion. The overall e-tail market is estimated at $ 2 billion. Thus, Flipkart has a 50% market share. Further, the organised retailing market in India is estimated at $ 40 billion. The e-tail space itself is expected to grow 10x to $ 20 billion in the next few years by some estimates. 

Last week, Flipkart announced the merger of Myntra with itself. Myntra is the leader in the online fashion and apparel segment. With Sales of ~ Rs 1000 Cr its one of the biggest fashion and lifestyle retailers alonside Jabong.  The deal prima facie seems a ‘win win’ for both with Flipkart getting access to the fashion prowess of Myntra and likewise for Myntra it gets the the logistical backup to scale up. Myntra being fashion focused has a lower base of customers whereas the universe of Flipkart consumers is pretty large. Myntra also has to focus on the customer experience while retailing which Flipkart doesnt and cant since it retails a wider category of products. 

Amazon is making its presence felt across product categories. 

As a result, its imperative to grow rapidly to capture market share.

2. In 2012, Reliance Industries extended promoter funding to the tune of Rs 2200 Cr in the form of debentures which were optionally fully convertible into equity and the option vested with Reliance Industries over 10 year period. This funding was extended to certain Raghav Behl owned companies to subscribe to the rights issue of Network 18 and TV18 which in turn were planning to use the rights issue proceeds to takover Ramoji Rao owned Eenadu TV.

Raghav Behl owned Network 18 is the holding company of assets such as web portals moneycontrol.com, homeshop18.com, firstpost.com as also channels such as CNBC TV18, CNBC Awaaz, CNN IBN, IBN Lokmat, History TV18 etc. On Thursday, RIL said it’s board approved funding of Rs 4,000 Cr (or roughly $730 million) to the company, IMT, through which the investment was made. Now, this is essentially because the 25% trigger, when breached, results in additional 25% open offer for minority shareholders. Now, RIL cumulative investment is to the tune of ~ Rs 35000 – 36000 Cr (translation of $ 5.7 bln) in the telecom business. RIL says,“The acquisition will differentiate Reliance’s 4G business by providing a unique amalgamation at the intersection of telecom, web and digital commerce via a suite of premier digital properties.

Forbes has this http://www.forbes.com/sites/meghabahree/2014/05/30/reliance-takes-over-network18-is-this-the-death-of-media-independence/ Mint has this http://www.livemint.com/Companies/Vpo4RrEprzzsFI7xGJw3OP/RIL-to-acquire-control-of-Network-18-spend-Rs4000-crore.html#nav=most_read

On the other hand corporate ownership of media is an extremely delicately issue. More often than not, it turns out into a propaganda machine.