Category: Your Money

Sunder’s List: No Control

Roundup: S&P -1.43%, Dow -0.94%, Nasdaq -1.84%, Gold $1,349.70, London -0.96%, Germany -2.34%, France -2.35%, Nikkei at pixel: -1.09%

Copper broke a key support level yesterday, signaling more selling ahead for the metal and possibly stocks and other risk assets. “When I look at copper, it reminds me a lot of gold before that big breakdown.” (CNBC)

Bundesbank President: Ask not what the central bank do for you country, but what the country can do for you?  Central banks in the U.S. and Japan are continuing aggressive stimulus. Whereas the ECB is an outlier, keeping interest rates steady the past nine months despite the euro zone’s economic weakness. Its balance sheet is shrinking while those of the Federal Reserve and Bank of Japan are rising. (WSJ)

The Saradha Group, one of eastern India’s biggest deposit-taking companies, is on the verge of collapse. More such companies are likely to collapse in the same way. (LiveMint)

There is a PIL in the Indian Supreme Court seeking a ban on Internet pornography and making the watching of it a non-bailable offence. To which MLAs sayGood luck with that! (LiveMint)

A brief history of price-controls in America. A must read wannabe socialists among us: Markets, prices and justice

Indian IT and Contingent Liabilities

Contingent liabilities are serious future obligations like lawsuits, warranties, etc. that may or may not be a problem. For example, if your parents guarantee your home loan, then if you make all your payments on time and do not default on your mortgage, there is no contingent liability on your parents. If you fail to make the payments, your parents will incur a liability.

Maybe its not a problem yet, but it appears the Indian IT companies are getting into riskier contracts in search of revenue. It used be that Indian IT companies were predominantly “body shops”, i.e., most of the contracts were labor based. An hourly or monthly labor rate was assigned to different skill levels and the contract outlined the total labor anticipated and quality of service goals. However, over the last 3-4 years, there has been a significant uptick in “gain sharing” contracts where the service provider obtains a share in the savings when outsourcing creates permanent cost savings. A gain-sharing contract better motivates the provider to innovate and to reduce operating costs.

The problem is that these contracts are not transparent to investors. How much of the anticipated revenue has been booked upfront? What if there are no “gains”? What if provider has a windfall year and the client decides to renegotiate the formula? Also, are investors aware of the risk-mismatch in contracts between what the provider has with its employees and its clients?

Investors should demand greater disclosure of these contingent liabilities before taking revenue numbers at face value.

Sunder’s List: Golden Whale

Roundup: S&P +1.43%, Dow +1.08%, Nasdaq +1.50%, Gold $1,606.50, London -0.62%, Germany -0.39%, France -0.67%

Did you lose more than $1.5 billion investing in gold? No? Then shut up! Hedge fund manager John Paulson has/had about 85% of his personal capital linked to the gold price. (FT)

Is HCL the new new Infosys? It beat analysts’ estimates with a 73% rise in quarterly profit, winning orders and hiring less. (LiveMint) [stockquote]HCLTECH[/stockquote]

Meet Reliance, India’s largest hedge-fund: RIL’s profits are heavily supported by its treasury income – returns it earns by investing the surplus cash on its books. This quarter, treasury income rose 29%, making up for a 4% decline in operating profit. (LiveMint) [stockquote]RELIANCE[/stockquote]

China’s sustained shift to a lower-growth gear would affect everything from iron-ore demand in Australia to the fortunes of companies who are counting on China to drive profits. Also, recent growth in GDP has been supported by a credit binge that has reached the point of inflection. A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash. As it transitions from to a more consumption-heavy, slower growth model, will China be able to avoid a cliff-dive? (FT, FT, FT)

Good luck!



Conglomerates: Heartbreak hotel?

Conglomerates are companies that either partially or fully own a number of other companies. Sprawling conglomerates litter the Indian landscape: from the Birlas to the Welspun Group, they have a finger in just about every pie.

The case for conglomerates can be summed up in one word: diversification. Because the business cycle affects industries in different ways, diversification results in a reduction of investment risk. A downturn suffered by one subsidiary can be counterbalanced by stability, or even expansion, in another venture.

The core of the idea came from a Harvard Business School proposition that management is management. If you could manage an oil business; you could also manage a movie studio, because the basic fundamental principles were the same. But anybody who has actually managed a business knows that success depends on understanding deeply the industry in which one operates. However, the megalomaniac allure of being everywhere and owning everything is hard to resist. After all, managers are also human, aren’t they?

The case against conglomerates can be summed up in two words: size and complexity. Bigger size slows down decision-making while complexity creates confusion. Diversified companies often allocate capital to keep poorly performing divisions alive. The market would have cut them off, but in a diversified firm, good money is thrown after bad. For investors, conglomerates can be difficult to understand – accounting can leave a lot to be desired and can obscure the performance of separate divisions. Behind every Tata company there is the unlisted and opaque Tata Sons lurking in the background.

So should we break up these behemoths and force them to be independent entities? It depends. Research shows that companies with one division operating in a high-growth industry and another in a low-growth industry will generally do a worse job of allocating capital than one with two divisions operating in industries with comparable growth prospects. It means that the Reliance of yore, the vertically integrated petrochemicals major, is an example of a “good” conglomerate. Whereas the new Reliance, the one that wants to be in every vertical possible, is an example of a “bad” conglomerate.

Forewarned is forearmed!



Sunder’s List: No More Fear!

Roundup: S&P -2.30%, Dow -1.79%, Nasdaq -2.38%, Gold $1,343.60, London -0.64%. Germany -0.41%. France -0.50%.

Gartman: “We’ve traded gold for nearly four decades and we’ve never… ever… ever… seen anything like what we’ve witnessed in the past two trading sessions.” (BI)

It looks like the end of the “fear trade” met the end of the commodity “super-cycle.” The recent slide in gold was preceded by investors pulling out of “black-swan” funds. And the disastrous Chinese GDP growth of 7.7% (vs. 8% expected) put commodities in a tail-spin. The Chinese numbers are bad not because of the headline number, but because of what it took to get to that growth rate. The Chinese credit:growth ratio has plummeted from about 1:1 to 3:1 – that is, about Rmb 3 of new credit for every Rmb 1 of new growth. (FT)

Chinese Credit

On why gold jewelers are not in as bad a shape as the market thinks: Gold vs. Jewelry. And here’s some confirmation for that theory: Thrilled shoppers make a beeline for jewellery outlets in Bangalore (Hindu)

Does the RBI believe in its own inflation numbers? Should it? (CapitalMind)

Nearly a fifth of Infosys’s market cap is now represented by cash and liquid assets on its books. Will the real PE firms please stand up! (ET) [stockquote]INFY[/stockquote]

Good luck!