Negative Equity is a term used to describe a state in which the outstanding balance on a loan is more than the actual value of the asset. For example, if you have a housing loan with outstanding balance of $500,000, but the price of the house has fallen say to about $400,000.

According to estimates in this article, as mentioned by CR, currently the negative equity is estimated to be around 12 million. !! The population of US is around 300 million. Lets say we have an average of 3 to 4 people per house. So we actually have about 80 million to 100 million families in the US. and 12 million homes, i.e. about 12% to 15% of the families are now facing the situation where the price of their house is less than their mortgage. This just gives us a glimpse of how deep and serious the housing problem in the US is, and although bailing out banks may have been the right move, how far it is from actually providing a healing touch to the US economy.

In UK, negative equity is expected to reach 2 million. The pouplation of UK is about 60 million, which means about 15 million to 20 million families. Thus housing in UK is also in a mess with around 10% to 15% families with more mortgage than their home values.

Would have loved to see numbers in India.

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Ultratech Cement Ltd has announced the following Unaudited results for the quarter ended September 30, 2008:

The results for the Quarter ended September 30, 2008

The Company has posted a profit after tax of Rs 1641.90 million for the quarter ended September 30, 2008 as compared to Rs 1858.60 million for the quarter ended September 30, 2007. Total Income has increased from Rs 11935.00 million for the quarter ended September 30, 2007 to Rs 14240.40 million for the quarter ended September 30, 2008.

With this, the current P/E ratio of Ultratech cement at its price of Rs. 375 is between 7 to 8.

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The Bank has posted a net profit of Rs 5279.80 million for the quarter ended September 30, 2008 where as the same was at Rs 3684.80 million for the quarter ended September 30, 2007. Total Income is Rs 46343.20 million for the quarter ended September 30, 2008 where as the same was at Rs 28451.40 million for the quarter ended September 30, 2007.

Interesting to note that inspite of hike in CRR and repo rate, the bank has still managed to post an increase in profit of over 40%. Latest P/E ratio of HDFC Bank (at price of Rs. 1077) is about 27.7

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The Group has posted a profit after taxation and minority interest of Rs 5808.50 million for the quarter ended September 30, 2008 as compared to Rs 4090.90 million for the quarter ended September 30, 2007. Total Income has increased from Rs 21422.60 million for the quarter ended September 30, 2007 to Rs 28988.70 million for the quarter ended September 30, 2008.

wow! unsustainable but remarkable growth of about 40% (YOY) !
Total shares of Satyam - 672.5 Million.
Thus Latest P/E ratio of Satyam = 10.3

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Banks, Corporates, Government often need to 'borrow money for their needs. The method of Long term borrowing by Corporates and Governments is usually by issuing bonds. Read the detailed wikipedia article on Bonds. However, bonds are usually for Debt Instruments for long term borrowing and the financial instruments used for short term borrowing are called money market instruments.

Forget about all the jargon of instruments and all that. The underlying idea is very simple. Suppose a Bank or a Company needs to borrow money for lets say 4 months. It will then go to the 'money market' and after some paper work (which are called money market instruments) they borrow it. Whom lends them money? For example funds like Liquid Funds which invest in Money Market Instruments. Thus in this sense, investing in Money Market Instruments can be compared to making a short term fixed deposit. After all short term fixed deposit can all be called debt instruments if you think of it as money you 'lend' to the bank, so that the bank can use it to give loans etc.

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Air India planning to give a rest for 3 years to 1500 Employees.

Facing the heat of the financial crisis that has hit the aviation sector, state-owned Air India on Wednesday said it is considering a plan to give 3-5 years leave without pay to about 15,000 of its staff. "We are planning to offer leave without pay for three to five years. We can consider it for about 15,000 employees," Air India CMD Raghu Menon told said.

3 years of temporary leave without pay? That is just a softer way of showing the door.

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Oil has cooled down, but it will take some time for the benefits to Aviation industry to be visible. Moreover, now the economic slowdown is going to hit the aviation industry, not the oil.
This is the start in India. Jet Airways lays off 1900 employees.

Battling a clawing downturn enveloping the aviation industry, Jet Airways on Wednesday announced sacking of 1,900 of its employees across all operations.

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"Reliance Retail Lays off 1200"

The Reliance Retail has declined to renew contracts of 1200 employees, which implies that few employees of the chain will be sacked. The company has, however, refused any jobcuts
As per sources, some of the Reliance Retail staffs being sacked are direct sales agents. The sources have also said that majority of Reliance Retail staffs are not on the payroll of the company.

Retail industry in India has already started taking a hit. Look at Pantaloon Retail or the well known Big Bazaar. These are the results announced by PantaloonR as on BSE

The consolidated results for the Year ended June 30, 2008
The Group has posted a net profit after minority interest of Rs 219.30 million for the year ended June 30, 2008 as compared to Rs 355.40 million for the year ended June 30, 2007. Total Income has increased from Rs 35654.80 million for the year ended June 30, 2007 to Rs 58665.00 million for the year ended June 30, 2008.

I would exit any PantaloonR shares and wait for the 'right entry point' before thinking about investments in Retail.

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Liquid Funds and Short term fixed deposits have two things in common.

1. They offer an almost risk free method of investing money. They are not as exposed to market risks as other investments like those in stock markets, mutual funds, etc.
2. The returns on both these investments are relatively low, i.e. just barely enough to beat inflation (most of the times).

Look at this graph which shows historical data of returns given by Liquid Funds and compares it with inflation.

Note: X-axis of the graph is slightly offset. The chart above is approximate but good enough for a qualitative understanding

Thus you may consider investing in Liquid Funds or (Short term) Fixed deposits if you find yourself in one or all of following situation

• You have 'free available cash' which you may need after a couple of months or a year. You cannot afford to invest the cash in 'risky investment options' because lets say you already know you need that cash after one year for your trip to europe for example.
  
• You want to do better than earning the regular savings account interest rate.
  
• If your taxable income is in the highest bracket (30%) you may consider investing in Liquid Funds. Read my detailed post Tax Advantages of Liquid Funds to understand the Tax benefits of Liquid Funds over Short term Fixed deposits.
• You anticipate that inflation / bank interest rates are going to increase. This is the scenario when Liquid Funds give good returns. Such a scenario is also not good enough to make an investment in stock market or mutual funds because higher inflation can hit company profits and in turn the returns on investments made in equities. It is much better to park your cash in Funds such as Liquid Funds and then make an investment in equities when the inflation fears recede and growth outlook improves.
  

Also remember that a drop in inflation or an anticpation of lowering of Interest rates by RBI usually hits the growth of Liquid Funds. Such a situation is a good point to exit these funds, partially or completely.

Related pots :

• Liquid Funds: What, Why, How, etc.
• Tax Advantages of Liquid Funds
  

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I was curious to see how much exactly does one gain by investing in Liquid Funds as compared to short term fixed deposits. I studied the past performance of about 7 to 8 Liquid Funds (all of them were at least 5 years old and none of them had given negative returns in any single quarters - so safe sound funds only !). Below is a rough graph of the average (annualised) gains given by Liquid funds over time. I have also plotted (red line) approximate values of past values of Inflation.

The X-axis as you can see is slightly off. where it says 2007, it should be between first and second quarter of 2008.

As you can see over the past five years, Liquid Funds have given annual returns somewhere between 4% to 8%. By looking at the above graph and by my vague memory, I think the annual returns given by Liquid Funds is more or less comparable to the returns given by short term fixed deposits. Nowadays short term fixed deposits give around 6% to 8% interest, the Liquid Funds are giving something in between 6% to 8%, back in 2004, both these figures were around 4-5% and so on. So what is exactly the advantage of investing in Liquid Funds? The key point is Tax Advantage. This is most useful if your taxable income is in the topmost or 30% bracket. On dividends you get from Liquid Funds, you do not have to pay any tax ! While on the interest earned on short term fixed deposits you will have to pay upto 33% of income tax ! Note however, the Liquid Funds themselves do pay Dividend Distribution Tax (currently around 25%) but the above returns I have plotted are your net non-taxable returns !.

Let us take an example. Suppose you invest Rs. 1,000,000 for 6 months in LIC MF Liquid Fund, which has no entry or exit load and when Liquid Funds are giving around 6% of annual returns. Your total dividend yield will be Rs.30,000. This will be non-taxable. While if you invest in a short term fixed deposit, let say which is also giving around 6% annual interest, you will also recieve Rs. 30,000 but by 33% rate you will have to pay Rs. 9,000/- income tax. So your actual gain will only be Rs.21,000.

Moreover there are other advantages of investing in Liquid Funds.

• You can withdraw your money more easily without penalty as compared to short term fixed deposits.
• Usually Liquid Funds (or rather good liquid funds) give more returns than interest on fixed deposits. (this is however not something you can bet your money on).
  

Here is a list of Liquid funds I considered to calculate the above average. The inflation data is highly approximate but good enough for qualitative analysis.
HDFC LIQUID FUND (G)
BOB LIQUID FUND (G)
CANARA ROBECO LIQUID FUND(G)
DBS CHOLA LIQUID FUND – REGULAR (G)
ING LIQUID FUND (G)
LIC MF LIQUID FUND (G)
TATA LIQUID FUND (G)

Related posts :

• Liquid Funds : What, Why, How, etc.
  

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The P/E ratio and the expected growth of the company are the two most popular numbers to quickly evaluate a company, and what should be its fair price and so on. To calculate the P/E ratio one divides price of the company by its EPS (Earning per share).

However while calculating P/E ratio, or evaluating a company, one must always look at consolidated results and not standalone results. These resulting two numbers, i.e. Consolidated EPS and Standalone EPS can be vastly different. Consolidated results or Consolidated EPS takes into account the share of earnings of all subsidiaries of the company. For example, if company A, has a 60% stake in company B, then it will also have a share in 60% of the profit and / or liabilities of company. The Standalone results or Standaldone EPS does not take into account this fact.

It is important to look at "Consolidate results after deduction of minority interests". Usually when companies (at least "good" companies) declare consolidated results it is after deduction of minority interest. What this means is the following. Take the above example where company A has 60% stake in company B. Suppose company A makes a net profit of Rs. 1000 and company B makes net profit of Rs. 100. Then net consolidated profit "before minority interest deduction" will be Rs.1100. Just the sum of the two net profits and is a pretty useless number, because the share of company A in company B's profit is only Rs.60. So the actual number to look at is Rs.1000+ Rs. 60 = Rs. 1060. This is the net consolidated profit after deduction of minority interest (which here is Rs.40). Throughout i have been assuming that Company A does not have a majority stake in any other company, otherwise even those will have to be taken into account. Naturally !

Related posts :

• Values of P/E ratio, EPS, Book value, Debt/Equity ratio, Market Capitalization, etc.
  

Related Posts on Financial concepts and Investment Basics Understanding the P/E Ratio Return on Equity (ROE), ROCE and Shareholder's Equity Consolidated results vs. Standalone Results. Topline Growth vs Bottomline Growth

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Excess cash or liquidity naturally tends to fuel inflation. This is one reason why RBI or FED increases interest rates in order to control (or try to control) inflation- Increasing rates tries to 'suck out' excess cash, tries to make availability of money more difficult.

Obviously, if excess cash is inflationary, lack of cash, or liquidity crisis or credit crunch, whatever name you give to describe the current situation will exert deflationary forces. Remember, there was a time, not long ago, maybe around May, when every other day there was a news in Business section of BBC mentioning inflation in some particular country had reached record levels in the past so many years, etc... Now you dont see that news anymore? The FED cutting interest rates to 1.5%, shows that it is not bothered much about inflation. The risk of facing a deflation is much more than the risk of stagflation. Not only FED, but RBI cut CRR by 50 basis points a couple of days ago and now we have a world wide coordinated rate cut exercise. Read this article from the BBC

Six central banks, including the Bank of England, have cut interest rates by half a percentage point in an effort to steady the faltering global economy.

We are having Job lay offs everywhere, salary hikes are now less popular and so now there is less easy cash available for households these days. Its getting worse, will keep getting worse at least for one or two quarters from the most optimistic angle. This would also make any possible deflation worse.

Be cautious about Real Estate, Gold , Steel, Retail. By now any random person on the street could also tell that real estate and retail are going to get hit very hard. i am surprised, Pantaloon Retail is still trading at a P/E of 25 (while its growth in the past one year has been negative).

Related posts :

• Preparing for the coming recession.
  

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Here is the action we had in the past 24hours.

Dow Jones down by 5.1%
Nasdaq down by 5.8 %
Japans Nikkei down by 10%
China's SSE Composite down by 3.7%
Nifty / Sensex down by nearly 7%


This is getting interesting guys. I would say fasten your seat belts, the more sharp falls we have, the closer we are to the next bull run (may be a couple of years away though). I am soon going to start analyzing and picking companies for building a long position within this coming year.

But dont catch a falling knife just yet ! Let us first see how far it falls. It may be too early to build a full fledged long position right now!.

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That is ridiculous ! US interest rates are already at 2%. Another cut would take it to near 1% !! doesn't 1% interest rate sound way too low? even 2% for that matter.

But have you realised that inspite of US interest rates being at 2%, the US inflation is not spiralling out of control. Is this because of decreased demand for goods, rapidly falling consumer spending and hence demand that prices have remained in check?

The dow jones is already trading at 9667 !

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Here are details of the New IPO

IPO Name : ALKALI METALS LIMITED
IPO Opening Date : 7th October 2008
IPO Closing Date : 10th October 2008
Price Band : Rs. 95 - Rs. 105
Bid Lot : 65 Shares.
Face Value : Rs. 10/-

You can download the IPO details from SEBI webpage for Alkali Metals Limited.

Its Net Profit for the past year is as follows (in Rs. Million)

march 2004 - 63.4
march 2005 - 47.05
march 2006 - 133
march 2007 - 76.05
march 2008 - 79.32

This is a public issue for roughly 2.5 million shares which constitute rougly 25% of the total capital of Alkali metals limited. So the approximate EPS of Alkali metals limited is 7.9.which means P/E - Alkali metal limited is roughly 12. even at the lower end of the price band. I think this is an expensive price.

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This is a continuation of my earlier post on Liquid Funds. Ofcourse, Liquid Funds do provide a really cool alternative investment option to park your liquid cash. Especially they provide a Tax benefit. Read more about Tax for Liquid Funds.

I bought 2 liquidbees a few days ago, just for trial basis, to find out about how dividend for liquid bees is distributed etc. . I realised that in my Demat account, the number of liquid bees had increased from 2 to 2.002 ! I thought, just like mutual fund units, liquid bees (which after all is a mutual fund unit) can be traded in fractional units. Maybe this is how they distribute dividend, increase your units. Because the price of Liquid bees is always constant- Rs. 1000/-. But the system did not allow me to sell fractional units ! Ofcourse the number of liquid bees i had was negligible, but I think this is still a problem with them. It does not seem to be possible to liquidate the 'fractional part' of your liquid bees units. I wonder if i had waited for some more time, a n actual cash dividend would have been deposited in my bank account. In any case another and a bigger problem is the brokerage. You do have to pay brokerage (delivery) when you buy and sell Liquid bees. So with the Securities Transaction tax, service tax etc. You end up paying around 1.4% of brokerage on your invested amount, 0.7% when you buy, and 0.7% when you sell. This may be a significant amount compared to the amount of gain you are looking forward to extract from Liquid Funds. Nevertheless, this is only a problem for small investors, because if you are planning to buy liquid bees for amount greater than Rs. 25 lacs, then you can directly buy them from Benchmark Mutual Funds, hopefully without having to pay any brokerage.

Small investors may alternatively look for other liquid funds (not exchange traded funds) which have no or low entry load and exit load.

Hope this helps you in making a decision !
If you have any more information on this, i would be grateful if you post it in a comment.

Related posts :

• Liquid Funds : What, Why, How, etc.

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The following figures summarize FII on NSE and DII on NSE + BSE on the last friday.

FII net trading activity (in crores) : -1662.26
DII net trading activity (in crores) : 56.75

This is an indicator that FII's are pulling out money primarily to complete their financial commitments. Looks like the rupee will keep falling further !

I have an open question. Isn't US economy outlook much worse than India's? Isn't US economy going to be hit much harder, even though we are not insulated fromt he current global crisis? Doesn't that mean Rupee, fundamentally should grow stronger against the dollar?

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Oil prices have dropped further by around 2% and near $91. You can get latest-updates of oil prices on Oil prices In my earlier post, i had asked the following question :

Today's crude oil demand is comparable to the demand in June 2007... The around 5% drop in crude-oil demand in US seems to more than offset the demand increase in the rest of the world. Does that mean crude oil prices will fall to the level of those in June 2007 ? i.e. touch $80 a barrel ?

Now, ofcourse, the OPEC has rolled back its excess production. But still, i have started thinking it is more and more likely that oil will settle somewhere between 80-90. Near $80 would be great :) have to buy air tickets sometime in next month. Will the falling prices result in fall of air tickets? Eventually yes, but in the next month or two? I dont know. Must wait and see.

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Warren Buffett: Well, I don't think it's[US bailout plan] perfect, but I don't know that I could draw one that's perfect. But I'd rather by approximately right than precisely wrong, and it would be precisely wrong to turn it down. We need -- we have a terrific economy -- it's like a great athlete that's had a cardiac arrest.

I like the way Mr. Buffet juggles around words to make an impressive statement. But I think Mr. Buffet was precisely wrong about 5 months ago when he said in this article that the worst of credit crisis was over. That was just the beginning !

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