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Kamis, 29 Desember 2011

Notes from the USA (Dec 2011) - a guest post

Of late, the US economy has been showing small but positive signs of stability. A double-dip recession seems to be off the table. Doom-sayers have been less prolific in their doom-sayings. No one is talking about a collapse of the dollar and revival of the gold standard any more. Gold bulls have stopped predicting levels of $6000 and $10000.

Even the noise about impending calamity emanating from Europe have been on very muted volumes. Every one seems reasonably satisfied that Europe may be heading into another recession, but the Eurozone is not going to disintegrate and the euro won’t collapse. This is what we are getting to read and hear from CNBC and Bloomberg.

But what is the reality? In this month’s guest post, KKP provides his measured opinion from Ground Zero, and advises investors to be cautious.

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All Green Light with the EU Crisis Over?

With all the moves being made in the last few weeks, and the latest punch by the ECB, is the crisis in Europe done with? The bailout of various governments by the ECB allowing them to borrow money super cheap might make it seem like that. These economies need the money to buy their sovereign debt at much higher yields and save a bundle. Sure, it is a big breakthrough in policy and a correct step towards savings these economies, but in my opinion it is far from convincing that this is a one step cure. Markets seem to believe some of it caused the yields to plunge.

The US dollar has reacted accordingly by going into a slight corrective mode, with gold, A$, C$ and Euro bouncing up a bit. Again, in my opinion, this is just a resting place for these currencies before they continue down against US$, since there is too much faith in the ‘least ugly’ (of the moment) i.e. US$.

The US economy seems to be showing typical seasonal strength. People are getting temporary jobs (seasonal jobs in retail, logistics and transportation industry) and hence the unemployment claims are lower. But, this is not going to last because come January, we will have many of those people back on the streets looking for jobs.

Again, 2012 is an election year, and hence we will see artificial moves made by the politicians to show improvement in the US economy so that they can ensure a win. It will again be temporary and not last long. The economy does seem to show some stabilization, but revenue and profits are ratcheting down for corporations, although the quarter to quarter comparison (from previous year) is looking positive, and hence giving a false sense of relief to investors. Net effect is that companies are cutting employees, cutting costs, and delaying investments to show those profits. Ultimately, the reduction in employment affects the supply chain of business that is inter-related, and inter-dependent on ‘jobs and employed folks’.

Housing is showing some stability although there is enough inventory out there (hidden) that keeps coming out slowly but surely. Banks are more lenient and allowing non-mortgage payers to stay in their homes for free based on government regulations. Until prices climb up, most of the purchases made between 2004-05 and 2008-09 are homes that potentially will come back out on the market as a foreclosure sale.

So, no, I do not believe EU is out of the red-light-zone, and neither is the US. Hence, times are still turbulent (with signs of positive turn in mobile computing marketplace) and keeping money safely on the sidelines or trading quickly (in and out) is the only thing we should be doing. This applies to India as well as US.

What are you doing with your money in India or in US?

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Rabu, 28 September 2011

Notes from the USA (Sep 2011) - a guest post

Every one was expecting - or may be hoping - that Ben Bernanke would do something different to jump-start the US economy, after the failure of two rounds of Quantitative Easing. In typical Bernanke style, he had already taken much of the surprise element off the table by hinting at an Operation Twist. But when the actual announcement was made, global markets reacted negatively.

What exactly is this Operation Twist? Here is KKP's spin on it.

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Is the Fed Twisting the Future?

The US Fed announced Operation Twist. What is the Fed ‘twisting’? Most people that I have talked to (average Americans), do not even know this stuff was announced and going on (poll based on discussions with my neighbors at a party on Sat. Sep 24 ‘11)!

Basically, the Fed never does anything that affects the long term bonds or bond rates. Rates are already so low that for those who wanted to refinance, they have already done so. Fed always assumes that when it lowers the short term rates (which is the only thing in its control), the banks will react to the message that goes along with the rate change (at the FOMC meeting), and adjust the mortgage rates which are linked to the Prime Rate (usually).

The Fed also said that when mortgage-backed securities (MBS) that it owns right now is paid off, it will roll the money back into new securities that are linked to mortgages. This means, it is also now trying to affect the mortgage rates, which would also go down with this move so that people can lower their mortgage payment (EMI) and spend the extra cash flow that they have received (and people here in the US sure do so).

The idea being that with lower interest rates on housing (long term rates of 10, 20, 25, and 30 year mortgage terms), people who are thinking about upgrading their homes would start going after a bigger loan and buy new homes. Once the housing boom starts, there are tons of businesses that get the support needed and, hence revive the economy.   Homeowners who have a lot of home equity and are current on their mortgages may also be given an opportunity to refinance, freeing up cash flow that could be spent on buying a car, upgrading the home, and/or paying off other high interest loans.

The issue is that lower interest rates, or lower price of homes has not really triggered a buying frenzy. That is because of two reasons. First, banks are scrutinizing loan applications with a super-high-standard. Everything has to be too perfect on the loan application, and any small element that points to risk, means that the loan officer rejects the loan. Second, people who need new houses, and have one (or more than one) family member that may not have a job, or might have a weak job-income, or might not have the feeling of being secure in their current job, do not go out and make a big house commitment.

A case in point is a single woman with a good job who wanted to buy a $325,000 home with $50,000 down payment, and $275,000 in loan was denied. This is according to one of our neighbors who is livid about how the banks have tightened their purses for some unknown reasons. Corporations, Banks and People (who have cash), are all ‘holding back’ due to the unknown future. This is actually creating a ‘bigger’ issue than what it would really be.   So many of us are living normal lives in this recessionary environment, but we all have a fear of the future, which is what makes all of us spend less, conserve more, and wait for a brighter day (my personal situation is different, since I am capitalizing by buying real estate, which is exactly what the government is trying to do by keeping short term interest rates near zero).

Fed wants banks to loan money, which is why they had provided the TARP funding. A lot of the TARP funding is being returned by the banks. There are announcements that show this return of funds that is on-going, and even a couple of bank VPs told me this in confidence. They are afraid to tap into it, loan the money, and lose profits (and capital) by loaning it to someone, specially if the economy gets worse. In reality, the central bank requires banks to keep a certain level of reserves on deposit at the Fed. Legislation passed in 2006 permitted the Fed to start paying interest on those reserves starting in 2011. This requirement of reserves and ratios by the Fed makes the loan officers reluctant to give out loans to people with the smallest risk.

Group of 20 finance chiefs are pledging to address rising risks to the global economy and are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” confirmed in a statement in Washington. These officials cited “financial system fragility” and “heightened downside risks from sovereign stresses” among the threats to growth. They said they will ensure banks are adequately capitalized and have access to liquidity, while reiterating an aversion to volatility in the currency markets. This support model is what we need to keep our world spinning and continue e-commerce for the world to survive. It is amazing that we are fearing a collapse when there is everything in abundance!

So, all in all, what is the ‘twist’ in the Operation Twist? The twist really is that the Fed is trying to affect long term rates or mortgage rates without really dipping in any huge way into a QE3, which would have affected how investors around the world view the US.

Daniel Gross’s Upshot View: This move by the Fed is better than doing nothing. But there's no reason to think it will make the difference between unsatisfying and satisfying growth.
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Selasa, 30 Agustus 2011

Notes from the USA (Aug 2011) – a guest post

Going through last month’s introduction to KKP’s guest post gave me a sense of deja vu. More fear-mongering from the TV channels – this time about hurricane Irene. Flashlights, batteries, drills were flying off the shelves at Sears. Home Depot had set up a ‘command center’ with a large number of computer terminals and phones (reminded me of the NASA command center!) to ensure customer requests from the entire east coast could be attended to, and supplies provided immediately through a fleet of trucks on standby.

Doomsday stories about the economy got relegated to the back pages after the damp squib from Bernanke. But KKP thinks that the economic situation is of genuine concern, with a possible relapse into a recession. At best, it might turn into stagflation – where inflation remains low, but low interest rates do not attract enough spending.

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Why is US Economic Data CRITICAL to our Financial Health?

I’m sharing a lot of information from multiple angles here…..Pay close attention since the picture is saying a 1000 words below.

A lot of readers of Subhankar’s blog might not realize it but the big-dog still is the $15Trillion engine in the US that continues to spend beyond their means every year. This is ‘huge’, and ‘unparalleled’ to any other economy. Until there are other economies that ‘spend’ as much as a percentage of GDP, AND, import it from other nations, it is going to be really hard to avoid the cold, sneeze and flu linkages (‘when US gets a cold, rest of the world gets a flu’ syndrome).

Just look at the statistics of how many people earned more than $200K per year in income! Four million tax returns showed income more than $200K per year. 26% of the big-tax-paying-people of the full US population earned $2Trillion in sum-total. This is a wealthy nation currently, and hence very spoiled with the spending patterns, debt levels, and problems arising are also of significant proportion/magnitude. Expenses are relatively low for the basic needs; in my area, milk is still $2.25 per gallon, gasoline is $3.50 per gallon, 2 piece sofa is $599, 42” LCD TV costs $399, mid-size car costs $16,000, good pant/shirt combo is $25, vegetables are $0.39-$1.50 per pound, and finally, cost of school is approx. $300 per year (housing taxes pay for school).

In researching the cause and effects, and the current state of the economy, I came across a unique chart that sums up the PFI (Philly Fed Index) and UoM (University of Michigan) Index. This chart is very interesting and thought provoking on what is coming down in the near future - especially if you map it to the previous recessions/slow-downs.

The Bureau of Economic Analysis's (BEA) second estimate of second quarter 2011 U.S. Gross Domestic Product (GDP) was reported to be 0.98%, continuing their recent trend of revising previously reported economic growth rates down. As a quick reminder, the classic definition of the GDP can be summarized with the following equation:

GDP = Private Consumption + Gross Private Investment + Government Spending + (Exports − Imports)

So, we are entering the phase of a recessionary time and we need to brace ourselves. I have been talking about this slow down since I just do NOT see:

Job market improving
Salaries improving
Corporate spending improving
Attitude of corporate buyers still very conservative
Housing market pretty much in doldrums / recession
Investors talking about ‘what to buy’
Investment choices in the market improving
Commodities still grabbing market share of available funds
IPO market improving
Consumers opening their purses to spend ‘openly’

Housing is still terrible. Existing-home sales were bad recently. The inventory of homes-for-sale grew, even as mortgage rates are at all-time lows. A 30-year mortgage is at 4.15%. It is possible we could see a 30-year mortgage with a “3” handle if we slip into recession. That is going to really help since it will reduce the mortgage payments for a lot of people. It is too common to hold mortgages on houses even if you are 60 years old!

If you follow the curve above, you will clearly see the Activity index going down into the deep end, and therefore, we will see the effect of this in a lower to negative GDP very soon in 2011.

The above chart is a good predictor of the recessions, along with the Laxman Achutan ECRI report that I have posted previously. Even the ECRI noted that it was because two of the financial components added to the positive numbers there seemed to be a temporary positive effect. One was the sharp rise in M2 money supply. But a lot of that is because people are going to cash (I am present in this list as a micro-drop), which is not all that positive from a macro viewpoint. The other is the steepness of the yield curve, which is being manipulated at the short end. But, the key is yield curve is inverted, and inverted yield curves are a perfect venue to predicting a recession. Without these temporary positive contributions, the index would be down and, down three of the last four months, and in a pattern that led to a recession in late 2007.

US is all about driving around for everything since it is so large and geographically dispersed without the appropriate rail/bus system (outside of the top 100 cities). It is not unusual to drive 50 to 75 miles per day to get to job and back, with the average of 12,000 to 16,000 miles per year per person (not family). Therefore, above curve down in the chart shows the true effects of the loss of jobs, which reduces the number of cars on the road and shows the reduction in activity, consumption and therefore, justifiably a lower GDP on the cards in 2011-12.

For investors around the world, this is a sign of worry that needs to be treated seriously. I have been talking about it and reflecting in my portfolio holdings (mostly in non-US currencies, fixed income investments, and a handful of small dividend paying instruments in the US). For the Indian portfolio, it is pretty much 30%-40% in cash holding, with the rest of them being part of a long term (hold) portfolio.

What do you think about your own financial health situation in 2011 and 2012?

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Kamis, 28 Juli 2011

Notes from the USA (Jul 2011) – a guest post

Michael Moore’s hard-hitting documentary, ‘Bowling for Columbine’, made an interesting point. The government and the TV channels do their best to keep Americans in a state of fear – so that they consume more! Remember the Y2K scare? Shelves of department stores were empty of water, canned food, torches, batteries, guns and a myriad other goods required for survival. People bought truck loads of the stuff. On Jan 1 2000 – nothing happened. No crash, no collapse. But a lot of goods consumed.

Following the economic downturn in 2008, a similar fear scenario played out across the USA. It was going to be worse than the 1929 depression. There would be riots on the streets. The US dollar was not going to be worth the paper it was printed on. Stock markets would crash and retirement benefits will vanish into thin air (a la Enron). Yes, unemployment is still high and the housing market is in doldrums. The doomsday theories have only led to a phenomenal rush to buy gold – but Americans are not getting fooled this time. They are tightening their belts – well some are – and digging in for the long haul.

In this month’s guest post, Kiran provides a ‘ground-zero’ report of the US economy.

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Global Growth Slow, But Continues…

The global recovery from 2009-10 has broadened to encompass more enterprises, more countries and more elements that show aggregate demand. Improving labour market conditions in high-income countries and strongly expanding domestic demand in developing countries augurs well for a continued maturity of the recovery that is more than two years old.

The recovery here in the USA has gained strength over the past 8 to 12 months and shows signs of becoming more self-sustaining, although all of it has happened in an atmosphere of disbelief that it is real. Of course, Aug 2^nd 2011 deadline for raising the debt limit being around the corner, makes this recovery a huge suspect in the minds of many without a Quantitative Easing – Part 3 (QE3). At this point, QE3 is not being discussed although Bernanke has hinted that he would be ready to pull it off if the situation warrants it. In the US, significant gains in levels of manufacturing and services activity, business re-investment and technology upgrades have helped improve conditions in U.S. labour and professional services markets. Most of the technology upgrades that we see are destined to either reduce labour costs, or reduce the current monthly expenditure (lower powered servers, more automation, VoIP, Telepresence, Call Center automation etc).

The recovery in Europe continues to face substantial uncertainty surrounding sovereign debt in several Eurozone members (code named PIIGS for each of the individual countries in huge debts). Germany and France have shown increasing strength; with unemployment in Germany now well below pre-crisis levels. In many other countries, growth is becoming constrained by fiscal consolidation programs, ongoing banking-sector restructuring and a skepticism regarding the financial sector. Perception is more important than reality, which is why gold is still trending upwards.

The horrible natural disaster and ensuing nuclear challenge in Japan will shape economic and human developments in that country for years to come. More importantly, all of the nuclear power plants in the US that are built similar to the one in Japan are under re-engineering to avoid a similar disaster. Despite the very real human and wealth losses associated with the crisis, its negative impact on GDP growth is expected to be temporary.

Overall, global growth is projected to ease from 3.8 percent in 2010 to 3.2 percent in 2011, before picking up to 3.6 percent in each of 2012 and 2013. The slowdown for high-income countries mainly reflects very weak growth in Japan due to the after-effects of the earthquake and tsunami. Japanese companies doing business worldwide are just starting to turn around and getting the business environment back to normal. Growth in the remaining high-income countries is expected to remain broadly stable at around 2.5 percent through 2013, despite a gradual withdrawal of the substantial fiscal and monetary stimulus introduced following the financial crisis to prevent a more serious downturn.

Contrary to the above, much of the rest of the world, meanwhile, is brimming with energy and hope. Policymakers in China, Brazil, India, and Turkey worry about too much growth, rather than too little. Rate increases in India and China are perfect proofs of efforts to curb inflation. By some measures, China is already the world’s largest economy, and emerging-market and developing countries account for more than half of the world’s output. The consulting firm McKinsey has christened Africa (part of the BRICA with the A standing for Africa), long synonymous with economic failure, as the land of “lions on the move.” That is an amazing turn for an economy – recall the pictures circulating on the Internet of kids who do not have water to drink and food to eat, and are just sitting there on the roadside. Well, a lot of that might be just a memory in Africa in the next decade.

Overall, for the cluster of developing countries growth is projected to decline from 7.3% to 6.2% between 2010 and 2012 before firming somewhat in 2013, reflecting an end to bounce-back factors that served to boost growth in 2010. The BRIC nations might have its own growth factors that are uniquely defined based on the organic growth within. Hence, their economies are more in the 8% to 10% GDP growth range, although inflation is a cause for concern in these hot economies. So, monetary tightening will continue to happen to temper the inflation.

Bringing it to today, perhaps for the first time in modern history, the future of the global economy lies in the hands of developing countries. The United States and Europe struggle on as wounded giants, casualties of the financial excesses and for the next few days, political paralysis. Economies of USA and Europe are shackled by heavy debt burdens with years of stagnation or slow growth in the offing and definitely a widening inequality – although they are not going to crash, contrary to emotional and eye catching dire predictions by some people. Analyzing the profile of family groups, and looking into their financial profiles, clearly shows the excesses in US from an income and asset standpoint. In the next one to two decades we will create ‘the haves’ and ‘the have nots’ even in these developed countries since the poor are getting poorer (with less and less government programs) and the rich will get richer buying more assets at low prices, for an eventual recovery. See below for a couple of interesting graphics:

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Selasa, 28 Juni 2011

Notes from the USA (Jun 2011) – a guest post

One of the best ways to find out about the true state of financial health of a company is to scrutinise its cash flow statement. The Profit and Loss statement is based on the accrual system of accounting. The cash flow statement records the actual inflows and outflows of cash, which provides a better idea about the sustainability of a company’s business model.

What about an investor’s cash flow statement? Are you keeping track of exactly how much cash inflow is being generated by your cash outflows (i.e. investments)? Specially in a sideways or sliding stock market? In this month’s guest post, KKP shares some of his thoughts on the subject.

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Lets Get Down to Cash Flow Analysis

Q1 and Q2 2011 have shown that there might be a good size recovery, giving a feeling of hope to many people in the US, as well as corporations. The economy has slowly been recovering – no doubt. But the housing and construction market rebound has remained soft despite the big QE (quantitative easing) programs from the Fed and the low-low-mortgage rates (average 30-year fixed U.S. mortgage rate is around 4.82%). The reason is simple: Stubbornly high unemployment and underemployment, and also tight lending policies from the bankers/lenders. Bankers have swung the pendulum to the other end of the spectrum and have very stringent policies. In 2002-2008, lenders would lend money to people without any money down (by doing double mortgages), and today, even if someone is providing 25% down payment (upfront cash), they are scrutinized as if they are one of the worst borrowers.

Predictions show that home prices will fall around the 5% to 10% in 2011 compared to 2010, and they will remain flat in 2012. This median forecast was part of a poll by Reuters of 21 economists who provided price forecasts. In looking at really long term trends of US home prices, it clearly shows that home prices are close to the bottom and will hover around here for a bit, and with a ‘core-recovery’ we will see a bounce up in prices (albeit very slowly).

"It is hard to see the housing market doing better until the massive headwind of foreclosures is removed and that will likely take a couple of years," said Mark Vitner, senior economist at Well Fargo Securities in Charlotte, North Carolina. With home prices still falling, many potential buyers are sidelined and banks are more stringent with loan applications and credit scores, Wells Fargo's Vitner said. "It is not that I am pessimistic about the housing market, it is just that I am not optimistic and a gradual recovery probably will not happen until 2013 or 2014, with a full normalization not until 2015," he said.

I have noticed that there is a rise in the "distressed, foreclosed and short sale" homes due to the fact that the lower home prices have put mortgage balances (what you owe on the home) above the current price of the home. Therefore, the home either goes into a short sale (seller and lender put it on the market), or foreclosure (owner cannot or will not pay mortgage), or distress situation (seller does not pay mortgage, and lender cannot afford to keep the home on the books). The net result is that the price of the home has to be marked down significantly, for investors or home-upgraders or renters are willing to look at the properties.

I am currently sprucing up a home that I purchased as a ‘distressed home’, and will be renting it out before July 1^st, 2011. In addition, have offers out on Short Sales where the Seller and Lender are considering my offers for Downtown Condos (at 1/3^rd to 1/4^th the last sale price). Even with the above flat market situation predicted, I remind myself that I am buying real estate at the “equivalent of March 2009 Sensex prices”. Remember how undervalued we were in the stock market at that time, before we took off? Real estate will NOT take off in the same manner (of course), but my tarot-charts (figuratively speaking) is telling me that I am buying it close to the bottom and have no desire to price these out for sale since I will be renting them out in the near term (2 to 5 years).

In addition, I am buying these at really ‘distress’ prices, instead of chasing them, and have the ‘patience and privilege of dividends’ while I hold. Dividends are in the form of rent here so it is easy to convince myself to hold. So, equate it to holding a stock that may not move up immediately, but will pay you almost risk free 12% to 26% in return with minimum loss of capital (if so).

Bottom line is that a lot of books have been written about ‘cash flow’ production, and with this methodology, I have found how much of a parallel it holds to Selling Calls on individual stocks being held in a portfolio. Call Selling had been a very favourite methodology of mine when I was very active in the markets in the 1990’s, and most recently as a way of reducing my stock holdings. But, in both cases, it taught me how to ‘generate cash flow’ from the holdings, and ‘make a paycheck’ out of it.

Real estate has the power to make the same with almost the same amount of time involvement. Wow. Really? Yes, very true. In India, it is even better since you can literally buy a flat/condo and rent it out, making all responsibilities of maintaining the flat a responsibility of the tenant (minus big issues). I am able to replicate the same with a team of contractors to simplify my life and do virtual-maintenance (call someone to go and fix it at low cost).

For now, think cash flow, and figure out a way to generate a paycheck or cash flow from your investment holdings. If you hold RIL or HUL for a long time, the percentage yield to your purchase price could be significant enough to get a very net high yield, especially if the stock has provided splits/bonuses. With my net-buy-price of HUL under Re 1.00, the percentage yield on the annual dividend seems like a paycheck each time it comes. So, there are many ways to skin the cat, and as one gets more experienced, some of these techniques become part of the portfolio and life, and yet, it is each portion of the portfolio that needs to replicate the ‘cash flow’ generation methodology. Traders might be good at generating cash flow from ‘trading’, but very few can do it consistently, and hence doing it with many techniques/strategies will be good for your long term financial health.

Hope you can ‘draw’ some ideas from this to your thinking and add a twist to your investments that might change the overall short and long term return, such that it gives back some cash flow which can help with your own personal goals (buying gold or silver)…..Oh, that brings me to another favorite topic of mine (gold), but we will leave that for the future….

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