Tuesday, September 21, 2010

Recap of a Bailout

A Bailout is act of providing capital to a entity that is in danger of failing or its act of saving it from failing and there by causing less damage to others with its contagion effect.

Now Question are:
Why will anyone be ready to bailout a entity if its failing ,How can it get back its capital back?.What if the entity needs more capital than the amount supplied to it?.What is the plan of entity to repay back the capital provided?.How much can be Trusted on this entity ?

Bailing out is easy but why should some one bailout after all the entity is mismanaged its money and came into this situation and many will argue that it should suffer for its misdeeds.Generally government bailouts happen with public money and most of the cases public will be angry with govt decision.

Bailouts generally encourage corporate irresponsibility and may be give a chance for them to act irrationally as they think that government is there in back of us and nothing is going to happen.
We can see that most of Big Banks in US got Bailed out for now..but if they repeat the same mistakes by there aggressive risk taking then govt will not be in a position to bailout.

Themes for Bailout: Wiki Link
# Central banks provide loans to help the system cope with liquidity concerns, where banks are unable or unwilling to provide loans to businesses or individuals.
# Let insolvent institutions (i.e., those with insufficient funds to pay their short-term obligations or those with more debt than assets) fail in an orderly way.
# Understand the true financial position of key financial institutions, through audits or other means.
# Banks that are deemed healthy enough (or important enough) to survive require recapitalization, which involves the government providing funds to the bank in exchange for preferred stock.                                                                                                                       
# Government should take an ownership (equity or stock) interest to the extent taxpayer assistance is provided, so that taxpayers can benefit later.
# Prohibit dividend payments, to ensure taxpayer money are used for loans and strengthening the bank, rather than payments to investors.
# Interest rate cuts, to lower lending rates and stimulate the economy
And why am talking about Bailout all of sudden when season flavor is Forex market and  Ongoing Bull Market
Coz...Coz.Today i was Bailed Out by my friend Bullzzzz :) Hope i will not make the mistake of mismanaging capital and avoid aggressive risk taking. Need more clarity or if u want to share your experience then contact me at 09884839655 or plekkala.ibm@gmail.com

Recession is over for now

At last The Business Cycle Dating Committee of the National Bureau of Economic Research determined the end of recession which created some amount of insecurity into my life. It excatly started when got into corporate from students life and  had to experience first hand effects of it like my company conducting a eliminating exam for graduates who joined in 2007, somehow i managed it but that's a different story.
Some observations from Committee report :

The committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.
 At that time my project was with American client so faced the music and now its European client and still they haven't come out of the woods and am still facing the music
In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.
Am not sure of any indicators turning pre-crisis levels
The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.
Meaning last recession is over and we are into expansion phase with a slow growth

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.
That means if any GDP drop occurs going forward implies that we might face another recession thats what people are calling it as double dip recession . For now we are safe cause of policies adopted by government is increasing consumption. But how far can government stretch to avoid double . Only time will tell it

Link of Committee report

Wednesday, September 15, 2010

19000 crossed...Whats next for Markets

All of Sudden Markets across the global went from Bear market to Bull market with a short span of 1 week started with ISM Index on September 1 in US , Economic Data coming from China and very good  IIP Data of  industrial growth at 13.8 per cent in July in India led to markets moving by over 5% to 7% within a short span.

Though they are some concernes with Data coming especially Dr.Doom commenting that ISM Data is flawed
and our own Provisional Data of IIP might not be very reliable   as commented by analysts.

So what exactly moved our markets in very short span..one reason is good IIP Data and domestic Demand coupled with Strong FII inflows Made our markets reaching 33 months High and now the same analysts are saying 20000 and 21000 for sensex is no BigDeal

And also there is talk of some Hedge funds pouring money into market when our own Domestic institutional investors are pulling out the money . To get a better understanding check the below chart
 Can see that DII were selling huges amount in last 3 days

Check this to get a look of FII flows ,whole of August and September except on last expiry day FII seems to be buying into equities

FII Net position (Total Buy -Total Sell) is very huge meaning FII are Buying more than Selling and thats what precisely is adding Fuel to the markets for now..

Looks like they might keep on doing that for some more time..untial the valuations of index becomes High and I guess we have RBI midterm policy review and Analysts are expecting a a hike of 25 to 50 bps in Repo Ratio. and do something to control inflation without effecting the growth.

I guess the current market run is due to FII and Liquidity driven rise and expect RBI to suck some amount of Liquid from market before inflation becomes too hot to handle. Lets see Tomorrow ..cya for now

Tuesday, September 14, 2010

Understanding Basel iii Accord

     Basel 3 Accord which was agreed by governors across the globe over this weekend to implement new set of rules to prevent another financial crisis,am not sure how its going to prevent another crisis..cause Basel 2 which was published on 2004 didnt prevent the crisis. Now its pointed by critics that basel 3 implementations got diluted for the sake of few selected countries. Will try to uncover whats this all about.
A. Tier 1 Capital

Tier 1 capital ratio = 4%
Core Tier 1 capital ratio = 2%
The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital
Tier 1 Capital Ratio = 6%
Core Tier 1 Capital Ratio (Common Equity after deductions) = 4.5%
Core Tier 1 Capital Ratio (Common Equity after deductions) before 2013 = 2%, 1st January 2013 = 3.5%, 1st January 2014 = 4%, 1st January 2015 = 4.5%
The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital.
Capital Requiement :
Tier 1 capital consists largely of shareholders' equity. This is the amount paid up to originally purchase the stock (or shares) of the Bank (not the amount those shares are currently trading for on the stock exchange), retained profits subtracting accumulated losses,

Tier 2 Capital 
A term used to describe the capital adequacy of a bank. Tier II capital is secondary bank capital that includes items such as undisclosed reserves, general loss reserves, subordinated term debt, and more

B. Capital Conservation Buffer

There is no capital conservation buffer.

Banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%.
Capital Conservation Buffer of 2.5 percent, on top of Tier 1 capital, will be met with common equity, after the application of deductions.
Capital Conservation Buffer before 2016 = 0%, 1st January 2016 = 0.625%, 1st January 2017 = 1.25%, 1st January 2018 = 1.875%, 1st January 2019 = 2.5%

The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions.If Banks are in buffer zone then they are restricted of paying out bonuses ,share buy back,dividends etc..

C. Countercyclical Capital Buffer
There is no Countercyclical Capital Buffer

A countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances.
Banks that have a capital ratio that is less than 2.5%, will face restrictions on payouts of dividends, share buybacks and bonuses.
The buffer will be phased in from January 2016 and will be fully effective in January 2019.
Countercyclical Capital Buffer before 2016 = 0%, 1st January 2016 = 0.625%, 1st January 2017 = 1.25%, 1st January 2018 = 1.875%, 1st January 2019 = 2.5%
 The purpose of the counter cyclical buffer is to achieve the broader macro prudential goal of protecting the banking sector from periods of excess aggregate credit growth With them, banks increase their capital in good times, not bad. And then, in bad times, they disappear: regulators can (and indeed are encouraged to) abolish the buffers immediately, if there’s some kind of credit crisis. When write-downs eat into bank capital, they eat only into the buffer, which is no longer required, rather than the underlying minimum capital requirement.

D. Capital for Systemically Important Banks only

There is no Capital for Systemically Important Banks
Systemically important banks should have loss absorbing capacity beyond the standards announced today and work continues on this issue in the Financial Stability Board and relevant Basel Committee work streams.

The Basel Committee and the FSB are developing a well integrated approach to systemically important financial institutions which could include combinations of capital surcharges, contingent capital and bail-in debt. 
Total Regulatory Capital Ratio = [Tier 1 Capital Ratio] + [Capital Conservation Buffer] + [Countercyclical Capital Buffer] + [Capital for Systemically Important Banks]
Will try to see how these rules going to effect indian banks..I have a feeling that indian banks need to maintain a higher ratio cause here in india as we have high inflation and  it will eat into banks capital...cya in next post

links which can be referenced :
Bank of international settlements paper

Friday, September 10, 2010

SANGUINE MEDIA: Warrants case Study

I dont know exactly what made me to look into this stock SANGUINE MEDIA way back in januray and after a simple analysis of the company's balance sheet and stock price moving in narrow range i made a decision to buy some stock in it.It never moved out from that range for long time until some events made the stock pricet zoom Its current Mcap is 7.2 Cr with a low holding of Promoters

Suddenly in july the board announced  Increase the Authorized Share Capital of the Company to Rs. 120,00,00,000/- (Rupees One Hundred and Twenty Crores Only). from 15 Crores. I dont have a clue for making such a change.May be they were in expansion mode and might need additional capital?but see 6 fold increase in capital..  looks like they might be having aggressive plans going ahead

Now in August comes the surprise

Sanguine Media Ltd has informed BSE that the Board of Directors of the Company at its meeting held on September 03, 2010, approved the allotment of 10,00,00,000 Convertible Equity Warrants at an offer price of Rs. 10/- per warrant to various Allottees from whom 25% of the upfront money has been received in pursuance to the resolution passed in the Annual General Meeting held on August 18, 2010. link

Here are my observations:
  • First why did they go for Warrants instead of selling the stock
    • Its like head I win, tails you lose
    • If they plan to sell the stock it has to be 10 or 15 % below CMP for it to be successful and there by the company will not get enough capital
    • If they go for warrants then its like selling the stock with a premium here it comes around 100% premium meaning when they convert the warrants its like selling the stock to public at double the price..here company benifits not the investor who might be buying at more than 10 Rs in future..(lets see this in future)
    • How ever if the warrants are never exercised then its clear profit to the company
  • Allottees paid 25% amount mean they paid  25 crores to the company to buy the options
    • Now they can improve the business with new capital which they got and hope they increase the EPS in coming quarters.
    • Another doubt i had is who al got allocated with these warrants..BSE website doesn't contain any such information ...hope it will be cleared in coming days..
  • My Feeling is that Stock Price will rise for some days till we get some clear status on exercise period and the allottes names.
  • My Target Price is around 15 to 18 ( Time Frame based on exercise Period )Rs ///lets see if it can reach that price (My feeling is that operators might pull the stock to that price before any conversion).