Gold will touch US$ 2,000 per ounce
(Dec 3, 2008)
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Citigroup, in a recent report has said that gold will touch US$ 2,000 per ounce. That's 2.5 times the current price of the yellow metal at US$ 800. The firm believes the measures taken to tackle the financial crisis will not stabilise the global economy. Instead they will either cause spiraling inflation or lead to a painful depression. As per the bank, the amount of money injected into the financial system might cause inflation. On the other hand, the system might have already tripped beyond recovery, towards depression. In both these scenarios, there will be a flight towards gold. In fact, according some reports, China plans to add nearly 6 times its current gold reserves of 600 tonnes in a move away from foreign paper currencies.
In our view, the 'either or' argument does not capture the wide variety of possibilities in-between runaway inflation and grinding depression (deflation). Completely dismissing a wide range of scenarios to arrive at a bullish conclusion on gold reminds us of what transpired with another commodity - crude oil. It was being predicted that crude would march on from US$ 147 per barrel to US$ 200 per barrel. Instead, it has collapsed by more than 60% since then.
» Motown's woes
» Recession's big bite
» PSU employees' date with ESOPs
» The reality of a fictional character
» ...and more!
Talking of crude oil, at last count, the world's most extensively tracked commodity was trading at well below US$ 50 per barrel. A massive decline from the all time highs of US$ 147 per barrel reached barely five months back. At its peak, it enabled Exxon Mobil, the world's largest private sector oil producer to report a record US$ 15 bn in quarterly profits. And the company was not alone. In fact, the enormity of the cash stockpile that players in unregulated markets generated also led to a huge outcry among oil users. But not anymore!
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Crude oil is off a mind boggling US$ 100 per barrel and the debate whether it will retrace peak levels is getting stronger by the day. Opponents of the peak price theory point to the weird inverted supply curve that the oil cartel OPEC is confronted with. They argue that no matter how much OPEC forces its members to cut back production, their budgets have been tied to a much higher price of oil and hence, they would be forced to sell more in order to make up for the decline in price. Hence, this would ensure that supply increases or at best remains constant in a world of slumping demand.
On the other hand, supporters of a structural upswing in crude oil prices point towards the rapid decline in the oil fields of the world. And hence, with economies around the globe likely to come out of slowdown in a few quarters, oil could be back in the vicinity of US$ 150 per barrel or may be even more. An interesting debate indeed! However, if there is agreement on one thing, it is on the fact that record profitability levels could be a thing of the past on account of the significantly higher extraction costs going forward.
If the world is going through a very difficult period of economic slowdown, it is definitely not showing in the results of Tata Steel. One of the world's largest producers of steel announced its consolidated results for the September quarter late yesterday evening. It has reported a more than threefold growth in net profits on the back of a relatively much lower topline growth of 36% YoY during the quarter. The biggest boost to the profits has come from a sizeable expansion in operating margins, indicating little or no pressure on realisation.
In fact, the company has admitted to an increase in the same. The management has also admitted to not curtailing production for the rest of the year at its India operations as it believes demand to remain strong. Comforting words indeed! Performance at its UK subsidiary, Corus will however take a hit on account of a severe recession that has engulfed most of the developed world. Overall profitability though is not likely to come under significant threat on account of lower profit contribution from Corus.
One place the slowdown is showing up big time is the auto industry. Here, sales have fallen like nine pins in the month of November 2008, both in the domestic as well as the international markets. In India, biggies like Maruti and Tata Motors reported fall in the region of 25% to 30% as high interest rates and non-availability of credit continued to act spoilsport. Furthermore, sales also came in sharply lower than last November as this time around the festive season fell in the month of October. Nevertheless, it still is a sorry state of affairs, forcing companies to shut down plants and lay off workers. In the most recent example, Tata Motors has decided to shut its commercial vehicle (CV) plant in Pune for another six days, taking the total number of 'shutdown days' to 12 this year, highest in the last 10 year history of the plant.
Developed economies have been worse off, especially the US. Here, sales have skid to a 26 year low, coming off 37% from a year ago. Ironically, the dismal figures have come out the same day the US carmakers submitted a plan in order to win financial aid for the beleaguered industry. The plan highlights some very drastic steps the carmakers are planning to take, particularly GM. Amongst these include sale of brands like 'Pontiac' and 'Saturn' and also sale of corporate jets. But the plan has also asked for a higher package, totaling US$ 34 bn, nearly 40% higher than the earlier envisaged US$ 25 bn, made necessary due to record drop in sales.
Bill Bonner, in his latest issue of Daily Reckoning, says that recession is "...not just in the United States. Shipping has sunk. Manufacturing in Britain has had it biggest drop since the early '90s. And house prices in the United Kingdom are back to where they were three years ago. India reports the first decline it in its exports in seven years. And in Iceland, people are holding rallies to 'protest the economic meltdown'."
Mr. Bonner has bashed the US government and investment bankers for first creating the problem and then trying to solve it using taxpayers' money. He believes, "Meltdowns are inevitable. They're just part of the process of capitalism - wiping out mistakes so it can get on with things."
With no signs of the financial turmoil abating, some of the big companies in the US, namely GE and Goldman Sachs, are in for a rough ride as they are expected to declare significantly lower profits during the fourth quarter (October-December) of this year. GE is bracing investors for a poor fourth quarter by warning that the profit is expected to be at the lower end of the previous guidance. More importantly, the company expects charges for restructuring to soar to US$ 1 bn after taxes. The financial unit of this behemoth GE Capital is what is causing it so much heartache and obviously access to a slew of federal aid programmes and Warren Buffett's US$ 3 bn investment have done nothing to pull this unit from a slump. GE Capital will be restructured into three units focused on commercial lending, consumer finance and potential asset sales. GE is also evaluating a capital infusion of US$ 5 bn into the unit.
Goldman Sachs has not been spared either. With investment banks in the line of fire amidst this turmoil, Goldman Sachs is expected to report a fourth quarter loss of up to US$ 2.2 bn, its first quarterly loss as a listed company. Readers would do well to recall the fact that this investment bank had developed an aura of invincibility around it as it emerged relatively unscathed as compared to its not so fortunate peers who either had to fold up or merge with banks.
But the tables have now turned. The silver lining is that though the company is expected to report a loss in the fourth quarter, the full year in all likelihood will see profits. Of course, given that investment banks as a whole are highly leveraged, even a company like Goldman was bound to get adversely impacted at some point if not sooner as asset prices continued to plunge.
It looks like the government is finally waking up from its deep slumber. Faced with an intense competition for talent, it has directed all listed public sector undertakings to devise plans for ESOPs (Employee Stock Option Plans) in order to prevent poaching by their private sector counterparts and also reward top performers.
Once considered to be the employers of choice by the country's best engineers and finance professionals, the PSUs have lost their sheen in recent times on account of the emergence of private sector companies. These companies managed to lure talented employees from the PSUs, doling out pay packages and incentives that were very difficult for their PSU counterparts to match.
Thus, if the ESOP plans are any indication, the reality of the changed dynamics seems to have finally dawned upon the Indian government. As per a leading business daily, the PSUs will have to give 10% to 25% of the performance related pay as ESOPs. While the proposed performance pay scheme could commence from the financial year FY08 itself, ESOPs are likely to take some more time till each PSU finalises its respective scheme. The wealth creation that has happened in the Indian equity markets over the last few years has also seen a significant jump in the value of listed PSUs that did not have significant government meddling. But what about the companies that were made to suffer on account of government's populist policies, the most blatant example being the oil PSUs? It is very difficult to imagine how the ESOPs will benefit the employees in these companies. More clarity would indeed be welcome.
It is believed that the developer of this immensely popular brand did not want it to be particularly likeable. And he even went to the extent of giving the brand what he thought was the "dullest, plainest-sounding name" he could find. These drawbacks however have not stopped the brand from gathering a cult following and raking up a cool US$ 13.8 bn from just 21 past appearances. If you have still not figured out, we are referring to the world's most famous spy, James Bond. Yes that's right! Those are the revenues that various products like movies, games and merchandise produced with the secret agent in mind have garnered over the years. Little wonder, Bond is one of the most lucrative fictional characters in the world currently.
Infrastructure funding in India that seemed to the apple of every investor's eye until a year back seems to have lost its glamour. Here we are not just talking about the infrastructure linked thematic mutual fund schemes but about one of the largest and most talked-about dedicated infrastructure fund in the country. The India Infrastructure Fund Initiative (IIFI) that was announced in February 2007 by Blackstone Group, IDFC, Citigroup Inc. and India Infrastructure Finance Company (IIFCL) to invest US$ 5 bn in the infrastructure sector through 2012 has lost one of its key investors. The Blackstone Group has withdrawn from the project citing reduced equity allocation.
As initially envisaged, IIFI was to raise US$ 5 bn, of which US$ 2 bn was to be equity and US$ 3 bn long-term debt, which would come from IIFCL. However, the equity component of the fund was reduced to US$ 1 bn last year. Of this, the Blackstone group was allocated US$ 35 m. An allocation of US$ 35 m would have been merely 0.03% of the global PE fund's US$ 116.3 bn in assets under management worldwide at the end of September 2008. Hence, not finding the business economics to be meaningful, Blackstone has withdrawn from the project. IDFC Project Equity and Citigroup have each put in US$ 100 million in the equity component, while US$ 680 m has been raised by the two entities from third-party investors. While the withdrawal of Blackstone does not signal any immediate impact on the fortune of the project, it may make incremental fund raising that much more difficult for IDFC.
Once bitten, twice shy goes the saying, and China is a case in point. The China Investment Corporation (CIC) , having burnt its fingers after losing US$ 6 bn due to the stakes it had in Morgan Stanley and Blackstone Group, has swore not to invest in foreign financial firms again until there is more clarity on them. CIC is China's sovereign wealth fund and has a corpus of US$ 200 bn. It invested US$ 5 bn last year for 9.9% of Morgan Stanley and US$ 3 bn in Blackstone, which is the world's largest private-equity firm. Both companies have lost more than 75% of their market values since these investments were made.
"If you can find a company that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you've got a terrific investment." - Peter Lynch
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