On This Day - 25 MARCH 2009
This Fund Manager earns Rs 34 crores per day!
In this issue:
» Tata Motors financial ingenuity
» HDFC bites the bullet
» Japan in deep mess
» US Treasury seeks more control
» ...and more!
At a time when executives are being hauled over the coals for accepting million dollar bonuses, a guy who answers to the name of James Simons has walked away with a huge US$ 2.5 billion payout
without as much as being an eyebrow being raised. For dollarphobes, this translates into a daily wage of Rs 342 m! Of course, the only difference being the fact that while the former have nothing to show for their bonuses, Mr. Simons runs a hedge fund that has believed to have returned 160% before fees in 2008. And Simons is not alone. A leading financial magazine has published a 25-member list of top earning hedge fund managers, who took home an average US$ 464 m in 2008. Well, did someone say recession? Operating in various markets at a time, a typical hedge fund manager has an extremely short time horizon and is known to take massively leveraged bets. Little wonder, many of them rise like a star on the firmament in one year and quickly disappear into depths of obscurity another year. However, there are some like the legendary George Soros who are a regular feature on the list.
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Are you subscribing to Tata Motors' 8.75% fixed deposits? How, you may wonder? And how on earth can the company pay a paltry 8.75% when ratings agencies have downgraded the company and have forced it to raise debt at the rate of 11%-12%. Well, if all goes as per plan, the mad rush to buy Nano could easily hand Tata Motors a cool US$ 800 m to fund its working capital needs. And if more people decide to wait out the long waiting period, the company could well get a very attractively priced medium term loan.
||2008 Earnings (US$ m)
||Renaissance Technologies Corp.
||Paulson & Co.
||Soros Fund Management
||D.E. Shaw & Co.
||Duquesne Capital Management
||Winton Capital Management
||Brevan Howard Asset Management
This is how it works. In order to become an owner of the celebrated car, the company is asking for a huge upfront payment and hence, if one takes into account all the three versions, a prospective owner will have to shell as much as Rs 1 lakh for his name to appear on the bookings list. The company intends to sell 1 lakh cars initially and even if we assume a ratio of 4:1 between the potential buyers and eventual owners, the total amount works out to a cool US$ 800 m. This is the amount that will remain with the company until the dispatches start in the month of July, after which it may have to return the money to unsuccessful applicants. Furthermore, if these people wish to wait and take delivery at a later date, the company will keep the deposits and pay the applicants close to 9% per annum on their down payment. In hard times such as these, even the blue chips could well give their arms and legs to raise money at such attractive rates. Small the Nano may be, but Tata Motors has indeed pulled out a very big rabbit out of the hat.
Whether RBI does it or not, HDFC has indeed taken the bait. Of lowering interest rates that is. India's largest housing finance company has lowered its retail prime lending rate by 50 basis points (0.5%) as it decides to pass on the benefits of lower cost of funds to home loan borrowers. As per a daily, the current reduction will shave off Rs 34 if equated monthly instalment (EMI) for every Rs 1 lakh borrowed for a 20-year period. It should be noted that this is the second rate cut announced by the housing finance company in the past three months and it is hoping that the rate cut along with fall in property prices might once again revive demand. However, borrowers looking for property rates to fall further might be in for some nasty surprise as the company's MD has stated in no uncertain terms that property prices have fallen enough and any further reduction will be difficult to come by.
The US consumer, they say, is broke. And we got another evidence of the same, albeit not in the US but in Japan, its trans-pacific neighbor. As per Bloomberg, the world's second largest economy saw its exports plunge by a whopping 49% in the month of February on a YoY basis, its worst showing in almost 30 years. What more, exports to the US fell even more, a shade under 60% as consumers in the world's largest economy scaled back their purchases of autos and electronics big time. Courtesy the miserable showing, Japan's economic contraction in the current quarter could well match the 12% decline it experienced in the previous quarter, forcing the government to resort to yet another round of fiscal stimulus. However, this is easier said than done as the country already is knee deep in public debt. Its public debt to GDP ratio currently stands at a whopping 170% and any further stimulus will only exacerbate matters. Furthermore, its rapidly ageing population means that every year, the universe of people who will help repay the debt is shrinking at a worrying pace. The land of rising sun it may be, but as far as its financial health is concerned, Japan is really staring down the barrel.
Just a day after presenting the US government's plan to rid the banks of their toxic assets and inject liquidity into the financial system, US President Obama has now urged leaders of other nations to follow suit and stimulate their respective economies so as to put an end to the global economic downturn. As reported in a leading business daily, Obama said, "The leaders of the Group of 20 have a responsibility to take bold, comprehensive and coordinated action that not only jump-starts recovery, but also launches a new era of economic engagement to prevent a crisis like this from ever happening again."
As if the perilous state of the global economy itself is not enough, Obama, since taking over as the President, has had tremendous pressure on him to restore the battered US economy. The US Treasury Secretary Timothy Geithner coming under fire and the outrage over the bonuses paid to AIG employees had only worsened matters. Of course, all these bailout packages will certainly mount the deficits of the country. But if they do help in restoring the economy, Obama can then lay the groundwork for future growth by making major investments in renewable energy, education and healthcare reform in the US. And however much everybody loves to hate the US, its recovery is certainly central in pulling out other nations from the economic slump.
The Indian government yesterday imposed a 21% duty on imports of aluminium flat-rolled products and a 35% duty on aluminium foils from China. While the duty has been imposed only till the 8th of October 2009, Indian aluminium makers like Hindalco and Nalco stand to gain from this move as it will protect them from dumping of Chinese aluminium in India. Imports from the country have in recent times threatened to cause damage to domestic aluminium industry and such a measure will go a long way in ensuring that bad shape in which the industry finds itself currently is to some extent alleviated.
In a move to increasing transparency for mutual fund investors, SEBI is thinking about introducing a variable load structure for mutual funds in India. The load chargeable will have to be mentioned in the application form. That means the investor will have to specifically agree to the charges. In fact, he can choose to compensate the distributor and the mutual fund with separate cheques. Distributors will now have to provide better customer care and value added services like research and advisory in order to earn a higher load. Since adding infrastructure will be costly, many distributors are turning to internet portals for help. The move towards internet portals is likely to level the playing field for small distributors and eventually help the investors.
After the cat and dog fight between the US Treasury and insurance giant American International Group (AIG) with regard to the latter's bonus payments, the US Treasury is seeking more controls to ensure better governance of the non-banking entities in future. As per the Washington Post, the Treasury has sought powers to take over insurers, hedge funds, and investment firms. This is despite the fact that it has stopped short of nationalising troubled banks like Citibank and Bank of America. The proposal highlights the urgency with which the Treasury seeks to put in place the needed supervisory apparatus over insurers and hedge funds after the messy state of affairs the latter have got themselves into. The newspaper report states that the Obama administration is considering asking Congress to give the Treasury unprecedented powers to initiate the seizure of such non-bank financial companies. This is because it believes that collapse of such large insurers, investment firms and hedge funds would damage the broader economy. Further, such authority also would allow the government to break contracts, such as the agreements to pay US$ 165 m in bonuses to employees of AIG.
In the meanwhile, stocks in India ended on a firm note today as the benchmark BSE-Sensex ended with gains of nearly 200 points. However, other Asian markets such as China (down 2%) and Japan (down 0.1%) ended on a weak note. Stocks in Europe are currently trading mixed as well. In addition, US futures fluctuated between gains and losses today, before climbing 0.7%. In India, buying activity was witnessed in stocks across sectors, with realty and energy leading the pack of gainers. However, stocks from the healthcare and auto space remained the lowest gainers.
"We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side" - Charlie Munger
|| Today's investing mantra
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