Thursday, February 28, 2013

Yen Down As Abe Nominates Kuroda As BOJ Governor

The nomination of Asian Development Bank President Haruhiko Kuroda as the next Bank of Japan (BOJ) governor has raised the prospects for more stimulus.
 
Kuroda is expected to follow Abe's insistence and push for easing to support growth. What we are seeing play out now is the cause behind the Yen weakness recently, as all the expectations are now being projected in the Yen's performance.

The Yen dropped by 0.2% to 92.41 per Dollar and dropped 0.3% to 121.57 per Euro.

The Yen has fallen 4.8% this year, amongst the worst performers after the Pound among most developed nation currencies.
 
Earlier today the Euro was little changed at $1.3154.

The Dollar is expected to extend monthly gains today Ahead of the release of a Commerce Department report which is estimated to show that gross domestic product Has risen by an annualized 0.5% in the fourth quarter of 2012. This would be a pleasant finding, as preliminary estimates had predicted a 0.1% contraction.
Meanwhile, Indian equity markets fell sharply into the negative territory after the announcement of the Union Budget 2013-14. The BSE Sensex was trading lower by 322 points at the time of writing. Most sectoral indices were in the red with IT and consumer durables being the rare exceptions. Asian stock markets traded in the green while Europe too opened on a positive note.
One of the major reasons India is facing a current account deficit is because exports have slowed and imports have increased. Most of the Finance Minister's budget proposals on indirect taxes were to address these concerns. Plus there were a few proposals to protect domestic industries. The duty on machinery to manufacture leather was reduced to 5% from 7.5%. The duty on precious and semi-precious stones was reduced to 2% from 10% earlier. On the other hand duties on imported luxury motor cycles, vehicles and yachts were increased. Domestic production of set-top boxes was encouraged. Protection was also given to the domestic sericulture industry by increasing duties on raw silk. The manufacture of environment-friendly vehicles and the aircraft manufacture, repair and overhaul (MRO) industry was encouraged. No changes were made in the rates of basic customs duty, normal excise duty and service tax. This was as per expectations. All in all there weren't any fireworks on the indirect tax front. We just hope that the economy revives next year, so that taxes don't pinch as much as they do now.
Another sector that receives a lot of attention is agriculture. And why not? After all it is the key livelihood in India's rural areas that are home to over 70% of the population. With Food Security Bill in the offing, the Ministry of Agriculture got a rise of 22% over the revised estimates for FY13. A further provision of Rs 100 bn was made towards food subsidy that remains a key overhang on country's fiscal health. While the fresh Green Revolution in eastern India has further been given a push, the crop diversification program will likely improve farm yields in areas that bore fruits of green revolution much earlier. The proposal to increase farm credit and extension of 4% interest subvention for short term crop loans to private and scheduled commercial banks is likely to give farmers further relief. Moreover, it is likely to improve loan repayment culture. Despite sufficient farm production, the country faces food inflation. At the root of this problem is huge food wastage and farmers' lack of access to the markets. The budget is likely to address this problem to some extent by extending support to Farmer Producer Organizations and companies that link farmers to markets. All in all, the FM ensured that agriculture continues to receive full Government support.
For the taxpayers, the Union Budget provided little relief. Given the need to bring down the fiscal deficit, the Finance Minister (FM) threw his hands up saying that there was very little room to provide tax benefits. As such he decided to leave the income tax slabs and rates unchanged. This would give a sigh of relief to those who were expecting an increase. Given the fiscal deficit problem, that is what everyone expected. There was some relief to the first time home buyers in the form of additional deduction.

But the part of the community that will not be rejoicing this year's budget would be the 'super rich' community. People with taxable incomes of over Rs 10 m would have to pay an additional surcharge of 10%. This is akin to what has been done in US as well. Though the idea behind the tax on super rich is good we believe this is not something that can help our fiscal deficit problem. All it does is give more money to the government who till now has not proved to be a very prudential spender. And we are afraid that the government will just find new ways and means to squander away the extra money. Hopefully the government will prove us wrong. But given the increased expenditure proposed in the Budget, we don't think we will be.

Eurozone inflation falls towards ECB target.

 Eurozone CPI dropped to an expected 2% on year in January from 2.2% in December, with inflation now close to the ECB's target. The decline adds weight to a forecast from Mario Draghi yesterday that CPI will fall to significantly below 2%. He also said the ECB is "far" away from tightening its monetary policy, although a couple of other policy makers were rather more hawkish in remarks they made.

RBS 2012 net loss almost triples to £5.97B; to float Citizens.

RBS's (RBS) 2012 net loss widened £5.97B from £2B in 2011, while revenue slipped 6.3% to £25.79B. The loss was due to a £4.6B accounting charge for changes in the value of RBS's own credit, a $1.1B charge for the mis-selling of products, and £381M for the bank's Libor fine. As expected, RBS unveiled plans to partially float its Citizens U.S. unit in two years and to scale down its investment bank. Shares were -3.85% premarket.

Wednesday, February 27, 2013

The Euro Strengthens Ahead Of Italian Auctions

Earlier today the Euro gained ground against the Dollar before Italy sells bonds. This gain has come after a parliamentary weekend election failed to produce a clear victor.
 
Italy will now look to auction as much as 4 billion Euros ($5.23 billion) of 10-year bonds and 2.5 billion Euros of five-year notes.

I predict that any relief rally on the basis of the Italian auctions could be worth selling into should the auctions go well.

For the Euro though, there is still a great deal of uncertainty to work through in the months to come, with the market's stance being that the Euro zone's crisis is far from over.

The Euro rose 0.2% to $1.3091 and remained little changed at 120.05 Yen. The Yen climbed 0.3% to 91.72 per Dollar.
 
Sterling was at $1.5106, within 0.3% of its lowest level against the Dollar in more than 36 months, and depreciated 0.3% to 86.59 pence per Euro.

The Pound had depreciated ahead of a report, by the Office for National Statistics, that analysts predicted would show that the U.K. economy had contracted by 0.3% in the last quarter of 2012.

In all, the pound has depreciated 5.6% in 2013 making it amongst the worst performers among developed-market currencies. By comparison, the Dollar has gained 2.5% and the Euro 1.5%.

Japan's optimism continues.

Japan's government has upgraded its economic assessment for the second month in a row, saying that industrial production has bottomed out and that the business mood is improving because of the declining yen and increasing share prices. However, the government warned that "some weak areas remain."

Demand remains resilient in Italian debt auction.

Yields rose but not as much as feared in the second Italian bond auction since the country's inconclusive election, with the government achieving the top end of its sales-target range. The Treasury sold €4B of 10-year bonds at 4.83% vs 4.17% last month, and €2.5B of five-year notes at 3.59% vs 2.94%. In the secondary market, the 10-year yield was -1 bps at 4.90% at midday in Europe
The Fed's policy of keeping interest rates ultra low could be an attempt to encourage investments and spending in the US. But the strategy is having an unintended side effect. Or should we say the policy is revealing its dark side. This unwanted effect is nothing but the soaring pension gap across the US corporate landscape. You see, there are promises made by US companies that they will pay their workers a certain amount of pension after they retire. And these promises when taken cumulatively reflect on the liabilities side of a company's financial statement. Now the problem is with interest rates at all time lows, there has been a huge increase in these liabilities. The reason being that the discount rate that is calculated to arrive the present value of pension liabilities has gone down, resulting into a corresponding rise in pension liability. So, how do the companies deal with this problem? Well, they simply take a one-time charge on their P&Ls (profit and loss statement s) which then affects their bottom line. Of course, the charges could also be reversed if interest rates start to climb. But this is yet another instance of how artificially manufactured interest rates lead to wrong valuations of assets and liabilities and cause anxiety to firms.

US is becoming more and more reliant on oil imports from Gulf region.

Oil is a critical commodity, not just as an energy resource but because of its wide geopolitical repercussions. For economies like Middle East, huge oil exports to other nations are the backbone. So one when comes across reports of shale gas revolution in US - the highest consumer of oil, one wonders about broader implications. These include not just demand supply trends, but also issues like US's commitment to security in the Gulf region.

One may expect that a shale gas glut might make US indifferent to oil security in the Middle East. Or that China with its growing need for oil imports may replace US in this regard. However, the actual trend suggests something different. Despite the shale gas boom, the US is becoming more and more reliant on oil imports from Gulf region. In fact, the share of Gulf oil supplies in US imports recently touched nine year high level. This is because US refineries are still tuned to process heavier Gulf oil. Hence, even though overall crude demand is down in US since 2004, the crude oil imports from Gulf are rising. Also, keeping in mind the high sensitivity of global oil prices to instability, we believe US will remain involved in Middle Eastern oil security.

Yields spike in Italian debt auction.

The results of the Italian election has immediately hit the government where it hurts, with yields jumping to 1.24% in an auction of €8.75B in 6-month Italian bonds from 0.73% in a sale in January. The bid-to-cover ratio fell to 1.44 from 1.65.

U.S. stock futures ignore European turmoil following Italian election.

The inconclusive Italian election, in which an anti-austerity comedian won the most votes, has sent Asian and European markets into turmoil. At midday in Europe, the main indices were uniformly lower, while yields on 10-year Italian bonds were +28 bps at 4.75%. However, U.S. stock futures were up premarket ahead of a two-day appearance by Ben Bernanke in Congress. Are investors banking on some soothing words about money printing?
New banking licenses contenders have a tall task ahead of them. The banking industry is anyway facing a human resource challenge as a number of employees are retiring every year. New banking license holders will have to compulsorily have 25% of their branches in unbanked rural areas. These new banks will have their task cut out in finding skilled employees to work in such branches. PSU banks, especially State Bank of India, Bank of Baroda and Punjab National Bank will be a major hunting ground for talent. These banks will consequently face attrition issues. Better compensation and more recognition will drive mid-level associates to these new banks. For lower level employees, hiring can happen from Tier 2 and 3 cities. We believe that setting up new branches and paying exorbitant salaries to employees will raise the cost to income ratio of these new banks significantly. It will also take a lot longer for these new branches to break even. Speculators have been piling on the stocks of the banking license hopefuls. But, long-term investors should consider the various operational issues and competition that these new banks will face.

Monday, February 25, 2013

Yen slips further on BOJ nomination

Earlier today the Yen dropped close to a three-year low to the Dollar. Japan's government has now narrowed down its list of candidates that could run the central bank and take on Prime Minister Abe's plan to expand monetary stimulus.
 
The Yen was down versus all its major counterparts as an official disclosed that it was likely that Abe would nominate Asian Development Bank President Haruhiko Kuroda for BOJ Governor.

So what we see today, is the market factoring in speculation that Kuroda will be the new BOJ governor, and that he favours an aggressive easing policy.

The BOJ's current Governor Masaaki Shirakawa, and his two deputies, are set to step down on the 19th of March. As things stand, I think that the BOJ has significant room to further loosen and add to measures this year.

Earlier today the Yen weakened by 0.7% to 94.09 per Dollar and depreciated 0.7% to 124.13 per Euro.

The Pound though dropped for a second day, following Moody's Investors Service having, for the first time, stripped the U.K. of its top rating. It cited weakness in the nation's growth outlook and also challenges to the U.K government's fiscal consolidation program when it lowered the rating on the U.K. by one level to Aa1 from Aaa.

This being the case, I fully expect that other major rating agencies will follow soon.

The Pound fell 0.2% to $1.5128 and by 0.2$ to 87.19 pence per Euro.
 
  The Euro remained little changed at $1.3193 as investor focus now turned to the results of Italian elections.

Voting stations close at 3pm in Rome today and then the initial estimates will be released.

Many economists predict that a coalition government is the likely upshot and that this could take a week or two to form. Any uncertainty is bound to weight on market sentiment.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against currencies of six U.S. trading partners, rose to an almost six month high, by 0.1% to 81.591.

Ben Bernanke, the Federal Reserve Chairman, is set to deliver his semi-annual testimony on monetary policy to the Senate Banking Committee on Tuesday.

On Wednesday, he is set to speak before the House Financial Services Committee. Bernanke recently said that the U.S. economy is "far from the fully healthy and vibrant conditions that we would like to see."

China invests reserves in U.K. property.

China's State Administration of Foreign Exchange (SAFE) - charged with managing most of the country's $3.31T in foreign-exchange reserves - has been actively but discreetly picking up real estate in the U.K, with $1.6B in recent deals. It's a significant shift for the secretive manager and shows it branching out beyond its typical holdings of "low-risk" government paper.

China manufacturing slows.

HSBC's preliminary read on February manufacturing fell to 50.4 against expectations for 52.2 and January's 52.3. "Chinese fundamentals may prove weaker than previously expected,"
There is no denial of the fact that the Indian economy is in bad shape. Industrial production has come down. GDP growth has come down to its lowest level in a decade. Foreign direct investment (FDI) has slowed down. And now fresh order flows of domestic companies has pointed to a deepening slowdown in the Indian economy. Indian companies' new order inflows in the quarter ended 31st December, 2012 stood at the lowest level in nearly four years. The slowdown is worse in investment-related sectors like construction, infrastructure and power. The dire need of the industry is the availability of cheap capital by way of cut in the interest rates by the Reserve Bank of India (RBI). The government should also provide policy measures to boost growth.

Britain lost its AAA rating.

The United States suffered a setback when credit rating agency S&P boldly downgraded the country's sovereign ratings from its pristine triple-A rating in August, 2011. Less than two years later, Great Britain is in the same boat. The country suffered its first ever sovereign ratings downgrade from a major rating agency. And, this time it was Moody's who delivered the blow. Weak prospects for British economic growth have derailed the economy's deficit reduction plans. This downgrade comes as a major blow to Finance Minister, George Osborne who vowed to defend Britain's AAA rating when he came to power in 2010. But, maybe this humiliating blow will spur the Bank of England to resort to bond purchases in order to jumpstart the economy. Britain now joins the lowly ranks of United States and France in having lost its AAA rating from at least one major agency. The big question is whether Australia, Germany, Switzerland and Canada are next? Well, we sure hope not.
An interesting barometer for an economy is to see what the lower and middle income class people are buying. If their purchases fall, it clearly indicates that the larger part of the population is seeing tough times. This indicator is showing troubled times for the world's largest economy US. Wal-Mart, the largest retailer in US has given a subdued forecast for its sales. Given that Wal-Mart is the place where the lower and middle income groups shop, it indicates tough times in the US. The country has been gripped by the slowdown since the outbreak of the crisis. This has led pay levels to either remain flat or grow at a very slow rate. At the same time inflation and tax rates have been going up. Adjusted for inflation, household income has actually declined by 1.5% YoY in 2011. And the picture does not look too bright for 2012 either. As a result households have been cutting down on their consumption, which is clearly reflected in the lower sales forecast of Wal-Mart.

The US Fed and policymakers have been printing money through their numerous QE programs. The reason given by them has always been the same that this money will stimulate the economy. But all it has done is to stoke inflation and asset prices. And that is killing consumption, the essential requirement for a growing economy. There appears to be a disconnect between the policymakers and what is actually happening in the economy. If the US wants the economy to grow, then it needs to stop the sound of its printing presses and listen to its people. Unless it does that, things are not going to get better.

S. 54/54F: Several independent units can constitute “a residential house”

CIT vs. Gita Duggal (Delhi High Court)

 
The assessee entered into a development agreement pursuant to which the developer demolished the property and constructed a new building comprising of three floors. In consideration of granting the development rights, the assessee received Rs. 4 crores and two floors of the new building. The AO held that in computing capital gains, the cost of construction of Rs. 3.43 crores incurred by the developer on the development of the property had to be added to the sum of Rs. 4 crores received by the assessee. The assessee claimed that as the said capital gains was invested in the said two floors, she was eligible for exemption u/s 54. The AO rejected the claim on the basis that the units on the said floors were independent & self-contained and not “a residential house” and granted exemption for only one unit. The CIT(A) and Tribunal upheld the assessee’s claim by relying on B. Ananda Basappa 309 ITR 329 (Kar) and K.G. Rukminiamma 331 ITR 211 (Kar). On appeal by the department to the High Court HELD dismissing the appeal:
 
As held in B. Ananda Bassappa (SLP dismissed) & K G Rukminiamma, the Revenue’s contention that the phrase “a” residential house would mean “one” residential house is not correct. The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. Also, s. 54/54F uses the expression “a residential house” and not “a residential unit”. S. 54/54F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans, requirements and compulsions. A person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. The physical structuring of the new residential house, whether it is lateral or vertical, cannot come in the way of considering the building as a residential house. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction u/s 54/54F. It is neither expressly nor by necessary implication prohibited.

Italian markets calm ahead of election.

Italy is due to hold an election on Sunday and Monday, with the center-left Democratic Party leading in the polls with a projected 34-35% share of the vote, although that's below the 42.5% needed to form a government. Silvio Berlusconi's Freedom Party has recovered to second with 30%, roiling bond and stock markets over the past few weeks. However, today all seems calm, with the FTSE MIB +1.1% at midday in Europe and 10-year bond yields -4 bps to 4.46%.

Chinese new-house prices continue to rise.

Chinese new-home prices climbed in 53 out of 70 cities in January on a monthly basis, increasing expectations that the government will continue the tightening policies that have caused Chinese stocks to fall sharply this week. Prices in Shenzen led the way with an increase of 2.2%, while those in Beijing and Shanghai rose as well.

German business confidence strengthens.

While the outlook for the eurozone is all doom and gloom, German businesses are becoming increasingly confident about their prospects, with the Ifo climate index climbing more than expected to 107.4 in February from 104.3 in January. The increase was the biggest monthly rise since July 2010 and the fourth in a row; it also matches improving PMI data.

H-P earnings beat forecasts despite 16% drop in profit.

H-P's (HPQ) shares jumped 4.9% premarket after the company's FQ1 earnings beat consensus and it provided guidance that was above expectations. However, net profit fell 16% to $1.23B as EPS came in at $0.82 and revenue slid 6% to $28.36B. Sales fell across H-P's operations, including PCs, printers, consumer and enterprise hardware, and high-end servers. On the earnings call, CEO Meg Whitman insisted that there are no plans to break the company up.

EU: Eurozone recession to continue into 2014.

The European Commission has cut its outlook, predicting the economy will contract by 0.3% this year after shrinking by 0.6% in 2012 and then return to growth of 1.4% in 2014. The EC had forecast the economy would expand 0.1% in 2013, but tight lending conditions and record unemployment - which is expected to peak at 12.2% - have dashed any hopes of a recovery this year. With inflation seen falling to 1.8%, pressure could rise on the ECB to lower rates.
The government it seems wants to make a genuine attempt to rein in fiscal deficit. But that is not to be without several hurdles. For cutting public spending tends to have strong multiplier effect on growth. The Reserve Bank of India so far bore the tag of 'growth spoiler'. Its resistance to cut interest rates was seen as the key reason for disappointing GDP numbers. But now tables have turned. The economy is drudging towards an abysmal growth rate of 5% for FY13. And the RBI's eyes are on the upcoming Union Budget for growth cues. It sees a reformist Budget as the sole hope of economic recovery. The RBI's key concern is too much cut in planned expenditure. Public spending on infrastructure is necessary to avoid a downward spiral in the economy. At the same time populist spending on subsidies etc could thwart its inflation control attempts. We would have to wait and watch whether the government delivers on RBI's demands this time.
Gold has had a stupendous run ever since the financial crisis broke out in 2007-09. As economies slumped into recession and unemployment rose, governments and central bankers resorted to reckless money printing. Their rationale was that more money in the hands of people will induce them to spend more and thereby bolster economic growth. They could not have been more wrong. Instead of fueling growth, these quantitative easing programs have only reduced the value of paper currencies. And this is where the precious metal gold stepped in. As a tangible hedge against falling currency values and inflation, gold has been the apple of the investors' eye. But the past few months tell a different story. India, which is the world's largest gold consumer, has seen the yellow metal's prices fall by nearly 10% from the record high in November 2012. This is line with the trend seen in the global markets as well. We believe that the gold story is not over. As long as governments cont inue to print money, gold will continue to cement its position as a store of value. Gold prices are bound to correct and such times should be looked upon as an opportunity to add a bit more of the metal to one's overall investment portfolio.

Thursday, February 21, 2013

Dollar Index Up On U.S. Economic Prospects

Clearer signs of an U.S. economic recovery are emerging and Dollar strength is gradually gaining momentum.

According to minutes of the most recent Federal Reserve meeting, several policy makers on the Federal Open Market Committee had advocated varying the pace of bond purchases.

The Fed has been implementing what is a third round of so-called quantitative easing (QE), which tends to debase the Dollar. the U.S. central bank has been purchasing around $85 billion of government and mortgage securities a month in order to support growth.
 
I expect that the Fed could reduce asset purchases in the second part of 2013 as the U.S. economy enters a gradual recovery path.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the Dollar against currencies of six U.S. trading partners, had earlier today gained 0.1% to 81.131 after touching 81.147, which was the highest level in three months.

Economists expect that the Conference Board's index of U.S. leading indicators has likely also risen by 0.2% in January for a second month. The gauge consists of data which includes work hours of manufacturers and initial jobless claims.

As for the Euro, the currency has remained lower versus the Dollar as economists predict that data will show that the manufacturing and services industries have shrunk in the Euro bloc during February.

The manufacturing purchasing manager's index is anticipated to be 48.5, as compared with 47.9 in January. Any reading below 50 shows contraction.

I expect that Euro weakness will be highlighted as the U.S. economy picks up and Dollar strength improves. It appears to me that although the debt crisis in the Euro block is waning, the Euro's recovery still lags as compared to other region's recoveries.

Earlier today the Euro dropped by 0.2% to $1.3259 and by 0.4% to 123.85 Yen. The Yen rose by 0.2% to 93.42 per Dollar.

The Yen has for some time been under pressure amid speculation that the next Bank of Japan (BOJ) governor will boost reserves in an effort to end deflation.

 It's apparent to me that the BOJ seems set to continue its policy to expand monetary easing whoever is appointed as the next governor, and with that being the case I foresee a weaker Yen over the next 12 months.

FOMC, PMIs send global markets spiraling.

Global markets were lower early morning U.S. time following the increasingly hawkish FOMC minutes yesterday and the depressing eurozone PMI data today. U.S. stock futures followed Asian and European shares into the red, while oil, gold, silver and copper also fell. Opponents of the Fed's QE program are increasingly outspoken, with "many" concerned about the costs/risks from further asset purchases.

Eurozone heading for further contraction as schism widens.

Eurozone flash manufacturing PMI slipped to 47.8 in February from 47.9 in January as the German reading hit a 12-month high of 50.1 while French factory activity continued to shrink. The data "suggests that the eurozone is on course to contract for a fourth consecutive quarter."

Wednesday, February 20, 2013

Euro Responds Positively To Data.

The Euro is responding to stabilization in the Euro Zone region as investor confidence about prospects in the region is clearly improving.

The European Commission is expected to announce today that its index of consumer confidence improved to minus 23.2 in February from minus 23.9 in January.
 
This follows data released on Tuesday that showed that investor confidence in the region's biggest economy, Germany, has jumped to a three-year high.

The Euro rose 0.2% to $1.3414.

The Yen in contrast dropped as much as 0.3% to 93.33 per Dollar and was little changed at 125.21 per Euro.

Japan's Prime Minister, Shinzo Abe, said earlier today that it has become less necessary for Japan to purchase foreign debt. In his election campaign in 2012, his party proposed a joint fund operated by the Bank of Japan (BOJ), the Ministry of Finance and private investors that would purchase foreign bonds as a means to end deflation and curb the Yen's strength.
 
In January Japan posted a trade deficit of 1.63 trillion Yen ($17.4 billion), the biggest shortfall on record dating back 63 years.

The Yen has weakened 15% in the past three months and looks set to continue a decline in the short term.

Japan's trade deficit hits fresh record.

Japan's trade deficit increased to a record ¥1.63T ($17.4B) in January from ¥641.5B in December, due to the sharply weaker yen and higher energy imports. However, exports climbed for the first time in eight months, growing 6.4% on year to ¥4.8T, with sales to China increasing for the first time since May. Exports to the U.S. were +10.9% but to the EU -4.5%. Imports rose 7.3% to ¥6.43T.

Michigan faces decision over Detroit takeover.

Michigan Governor  has to decide whether to appoint an emergency manager for Detroit after a review team concluded that the city suffers "operational dysfunction" and faces a fiscal emergency due to its "chronic deficits and its long-term liabilities." Ultimately, Detroit might have to one day carry out what would be the biggest municipal bankruptcy filing in U.S. history.
A few months back we had discussed the emergence of US as a major energy player. With its shale gas deposits it is slated to become the largest oil producing nation by 2020. But there is another country that is all set to become a major global force in terms of oil production. And that too much earlier than US. The country is none other than China. As per the Financial Times, China will produce enough oil outside of its borders to rival OPEC members like Kuwait. Through overseas oil investments the country is expected to produce nearly 3 m barrels of oil per day by 2015. This is double of what it produced in 2011.

The emergence of China as a major oil producing nation has two major implications. The first being the supply. There is a lot of dispute on this front. China is the world's second largest importer of oil. As a result it would be natural to assume that most of the oil that its companies discover would be shipped back to China. The Chinese oil companies have said that they sell the offshore oil in international markets. But given that China's own needs are quite high, they may send a large part back home. The second impact would be China's exposure to foreign politics. All oil producing nations are perpetually on the centre stage. And China is all set the join them. 
Data source: RBI

 
A recent paper published by the Reserve Bank of India (RBI) on the circulation of currency over the past 4 decades offers interesting insights. Particularly the data that compares currency in circulation with private final consumption expenditure. Now currency to GDP is a multiple of two ratios - currency to private consumption expenditure and private consumption expenditure to GDP. As seen in the chart, a sharp increase in former over the past two decades accompanied by only a marginal fall in the latter, has led to surplus currency in circulation. 

CBDT Circular disallowing expenditure on freebies to medical practitioners is valid

Confederation of Indian Pharmaceutical Industry vs. CBDT (H. P. High Court) 

The CBDT issued Circular No. 5/2012 dated 1.8.2012 stating that as the Indian Medical Council had imposed a prohibition on medical practitioners taking any Gift, Travel facility, Hospitality, Cash or monetary grant from pharmaceutical and allied health sector Industries, the expenditure incurred by the assessee in providing such “freebies” had to be regarded as incurred “for a purpose which is either an offence or prohibited by law” and disallowed under the Explanation to s. 37(1) of the Act. The assessees challenged the validity of the Circular on the basis that it went beyond s. 37(1) and was invalid. HELD by the High Court rejecting the contention:
 
The regulation of the Medical Council prohibiting medical practitioners from availing of freebies is a very salutary regulation which is in the interest of the patients and the public. This Court is not oblivious to the increasing complaints that the medical practitioners do not prescribe generic medicines and prescribe branded medicines only in lieu of the gifts and other freebies granted to them by some particular pharmaceutical industries. Once this has been prohibited by the Medical Council under the powers vested in it, s. 37(1) comes into play. The Petitioner’s contention that the circular goes beyond the section is not acceptable. In case the assessing authorities are not properly understanding the circular then the remedy lies for each individual assessee to file an appeal but the circular which is totally in line with s. 37(1) cannot be said to be illegal. If the assessee satisfies the assessing authority that the expenditure is not in violation of the regulations framed by the medical council then it may legitimately claim a deduction, but it is for the assessee to satisfy the AO that the expense is not in violation of the Medical Council Regulations

China seen trying to curb property market further.

China is expected to introduce more measures to dampen rising property prices, while several cities have already reportedly tightened credits of housing provident fund loans. The speculation dragged down the main indexes on the mainland and in Hong Kong. It comes after home sales in China's 10 largest cities jumped almost four-fold to 8.5M square meters in the first five weeks of the year.

German investor sentiment improves again.

The ZEW index of German investor expectations has risen for the third month in a row in February, increasing to 48.2 from 31.5 in January and coming in well above consensus of 35. However, the current situation index unexpectedly fell to 5.2 from 7.1. Investors "have made their peace with the weak fourth quarter," says ZEW. "In their opinion the German economy faces fewer headwinds from the euro crisis than throughout the last months."
Take an economy that's growing at a very tepid rate. Add to this an unemployment rate of 7.9%. What do you think would be a great way to boost people's incomes? The President of the US has an idea. He has proposed increasing minimum wages from US$ 7.25 to US$ 9 an hour.

It doesn't require any expertise to figure that this is an extremely counterproductive idea. Already when employment levels are worrisome, increasing minimum wage rates would only make things worse. In order to get going into the workforce, unskilled workers need a first job. But a hike in minimum wages would make employers wary of hiring workers. Employment opportunities would further decline.

The sharpest criticism on this matter comes from Mr Peter Schiff, CEO of Euro Pacific Capital. As per him, what really needs to be done is actually the opposite. There is a need to lower the cost of hiring people. And that can be done by lowering taxes and regulations. In fact, he even suggests that the minimum wages should be abolished. We kind of think that this would be a good idea. For markets alone should determine the price of labour. All that the Government should do is ensure that system is fair and equitable.

Expenditure on corporate membership of club is revenue expenditure

CIT vs. Groz Beckert Asia Ltd (P&H High Court – Full Bench)

 The assessee obtained corporate membership of the Golf Club on payment of Rs.6 lakhs. The AO disallowed the expenditure on the ground that it was capital expenditure. This was reversed by the CIT(A) & Tribunal which held that the expenditure was revenue in nature. The department filed an appeal to the High Court and relied on Majestic Auto Ltd where the High Court had held that expenditure on corporate membership is in the nature of capital expenditure. As the Bench was of the view that Majestic Auto was not the correct law, the issue was referred to the Full Bench. HELD by the Full Bench:
 
In order to decide whether the expenditure is a revenue or a capital one has to look at the expenditure from a commercial point of view. Not every advantage of enduring nature constitutes capital expenditure. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. On facts, the corporate membership was for a limited period of 5 years. It was obtained for running the business with a view to produce profit. Such membership does not bring into existence an asset or an advantage for the enduring benefit of the business. It is an expenditure incurred for the period of membership and is not long lasting. By subscribing to the membership of a club, no capital asset is created or comes into existence. By such membership, a privilege to use facilities of a club alone, are conferred on the assessee and that too for a limited period. Such expenses are for running the business with a view to produce the benefits to the assessee. Consequently, it cannot be treated as capital asset (Otis Elevator 195 ITR 682 (Bom), Engineers India 239 ITR 237 (Del), Gujarat State Export Corp 209 ITR 649 (Guj) followed; Framatone Connector OEN 294 ITR 559 (Ker) dissented from; Majestic Auto overruled

Monday, February 18, 2013

Yen Weakens After G-20 Fails To Tackle Japan

A final G-20 communiqué, released after the conclusion of a summit on Saturday, has set the stage for recent trends in major currencies to resume.

While many analysts had expected the G-20 to have fired a warning shot at Japan, this didn't materialise and so we saw a rise today in the Dollar- Yen.
 
The G-20 statement pledged not to "target our exchange rates for competitive purposes," and avoided singling out Japan. Japanese officials have recently denied that they are driving down the Yen, instead saying that the Yen's decline has been a by-product of attempts at reviving the economy.

This seems to have created an opening, that I predict could see the Japanese continue to pursue aggressive fiscal and monetary easing.

The Yen has tumbled 0.7% to 94.13 per Dollar earlier today and over the past six months has declined by 16%.

Against the Euro the Yen dropped 0.4% to 125.50 per Euro.

The Yen's decline by 14% over the past three months is mainly as a result of Japan's Prime Minister, Shinzo Abe, having announced spending rises and having pressured Japan's central bank with the aim of boosting monetary easing.
 
For me, it seems that the main focus for the Yen now will centre around who will be appointed to replace Bank of Japan (BOJ) Governor Masaaki Shirakawa, once he steps down on the 19th of March.

Abe has said that he wants to show the government's intentions through his selection of nominees for BOJ governor and deputies soon.

The Pound dropped close to a seven-month low to the Dollar on prospects that the Bank of England (BOE) might tolerate higher inflation.

The BOE will release minutes of its February policy meeting on Wednesday. The central bank had left the target of its bond purchases unchanged and had declared that inflation is likely to accelerate further in the near term and could in fact stay above the BOE' 2% target until 2015.

It seems to me then that, the Pound is at risk of following the same path as the Yen and could be the next major currency that suffers a large scale devaluation.

Earlier today the Pound dropped by 0.3% to $1.5478.

The Euro fell by 0.2% to $1.3332, its fourth day of declines against the Dollar, ahead of Italy's looming parliamentary election, which is set for the 24th and 25th of this month.

So, the next main risk event for the Euro appears to be Italy's general election. If the outcome of that is an administration that reverses austerity, we could see risk-off moves in financial markets.

Consumer Price Index [CPI] makes more sense than the Wholesale Price Index[WPI]

It has often been reiterated that when measuring inflation in India, taking the consumer price index (CPI) makes more sense than the wholesale price index (WPI). This is because the latter does not take into account the prices of food. And higher food prices have been the main reason why consumer price inflation has not really come down even when the WPI has. Thus, does it make sense for the Reserve Bank of India (RBI) to lower interest rates when CPI is still firm? Lowering interest rates would mean that household savings would take a hit. Further, higher food prices eat into the incomes, as a result of which the propensity to spend on non-food items is low. Further, higher fuel prices also have an impact because it adds on to the transportation costs which ultimately reflect in food prices. One of the things that the government needs to do is reduce supply bottlenecks and provide adequate storage facilities. This is so that there is no wastage of foodgrains. This means that adequate supply will ensure that prices stay lower. The mechanism of minimum support prices also needs to be looked into especially when it is not aligned to the market but ends up impacting the market prices instead. Overall, the government cannot base its policies entirely on WPI but needs to attach more importance to the consumer price inflation numbers. 

Sunday, February 17, 2013

Gains arising on sale of shares of foreign company by NR to NR not taxable in India under India-France DTAA even if the foreign co only held Indian assets


Sanofi Pasteur Holding SA vs. Dept of Revenue (Andhra Pradesh High Court)


Two French companies named “Murieux Alliance” (‘MA’) and “Groupe Industrial Marcel Dassault” (“GIMD”) held shares in another French company named “ShanH”. MA & GIMD acquired shares in an Indian company named “Shantha Biotechnics Ltd” (“Shantha”). The shares in Shantha were transferred to ShanH. MA and GIMD subsequently sold the shares in ShanH to another French company named “Sanofi Pasteur Holding”. The assessees filed an application for advance ruling claiming that as the two French companies had sold the shares of another French company to a third French company, the gains were not chargeable to tax in India. The department opposed the application on the ground that ShanH was formed with no purpose other than to hold the shares of the Indian company and that the transaction was taxable in India. The AAR upheld the department’s plea on the ground that the French company’s (ShanH) only asset were the shares in the Indian company & so when its shares were sold, what really passes were the underlying assets and the control of the Indian company and so the French company was a facade and a scheme for avoidance of tax. On appeal by the assessee to the High Court, HELD reversing the AAR:
 
(i) ShanH was incorporated as part of the policy that all off-shore investments must be made through a subsidiary incorporated in France. It is not the case of the Revenue that in 2006 itself ShanH was conceived as a preordained scheme to avoid tax in India. The Revenue’s case about when ShanH became a tax avoidance scheme is ambivalent and incoherent. ShanH is an entity of commercial substance and business purpose. Though a subsidiary of MA/GIMD, it is not a mere nominee or alter ego of MA/GIMD and there is nothing to show that they exercised overriding control over it. The creation of subsidiaries for investment is a legitimate practice. ShanH is accordingly the true and beneficial owner of the Indian company’s shares. When the shares of ShanH were sold, it was the sale of shares of a French company and it cannot be said that the control, management or underlying assets of the Indian company were sold so as to attract tax on capital gains in India (Azadi Bachao Andolan 263 ITR 706 (SC) & Vodafone International 341 ITR 1 (SC) followed);
 
(ii) Article 14(5) of the India-France DTAA which exempts capital gains from shares representing more than 10% holding from tax in India does not permit a see through on whether the alienation of shares by ShanH is an alienation of the control, management or assets of the Indian company. It cannot be said that an actual alienation of the ShanH shares amounts to a deemed alienation of the Indian company’s shares. The fact that the value of the shares of ShanH was because of the value of the Indian company’s assets is irrelevant;
 
(iii) The retrospective amendment to s. 9(1) so as to supersede the verdict in Vodafone International and to tax off-shore transfers does not impact the provisions of the India-France DTAA because the DTAA overrides the Act;
 
(iv) The Revenue’s argument that as the term “alienation” is not defined in the DTAA, it should have the meaning of the term “transfer” in s. 2(47) as retrospectively amended is not acceptable because as per Article 31 of the Vienna Convention, a treaty has to be interpreted as per good faith and in accordance with the ordinary meaning. Though Article 3(2) provides that a term not defined in the treaty may be given the meaning in the Act, this is not applicable because the term “alienation” is not defined in the Act. In some DTAA’s, the term “alienation” is defined to include the term “transfer” but not in the India-France DTAA;
 
(v) Even assuming that the controlling rights or assets in India held by the Indian company were transferred on the alienation of the French company’s shares, the cost of acquiring those rights and assets in the Indian company and their date of acquisition cannot be determined. It is also not possible to determine the exact or rationally approximate consideration (out of the total consideration for the transaction in issue), apportionable to these assets/rights. As the computation provisions fail, the charging provisions also fail (BC Srinivasa Shetty 128 ITR 294 (SC), PNB Finance 307 ITR 175 (SC) & Dana Corporation 32 DTR 1 (AAR) followed);
 
(v) The AAR has no power to review its own order. Having admitted the application, the AAR cannot at a later stage invoke clause (iii) of the Proviso to s. 245R(2)(iii) & decline to rule on the application;
 
Data source: The Economic Times

 
Over the last few years, inflation has been one of the biggest spokes in the wheel of India's growth story. As such, the recent inflation figures may provide some respite. As per data released, the wholesale price index-based inflation declined to 6.62% in January 2013. It must be noted that this is the lowest in the last 38 months. This may probably provide a cue to the Reserve Bank of India (RBI) to cut interest rates lower.

However, the dip in inflation rings an alarm on the growth front. The fall in inflation has been attributed to the decline in fuel prices and in the prices of manufactured products. A dip in product prices usually indicates dropping demand in the economy. This, in turn, would impact job creation and economic growth. The other worrying matter is that consumer price inflation still remains high, driven by food inflation. It stood at 10.8% in January 2013 against 10.56% in December 2012. This dichotomy of falling prices of industrial goods and rising prices of essential goods has put policymakers in a fix.             

Friday, February 15, 2013

G-20 to focus on currency in Russian parley.

G-20 Finance Ministers are due to meet in Moscow today and tomorrow, where discussions are set to include how to fund infrastructure building, changing a 2010 Toronto agreement about cutting deficits because many of the commitments haven't been met, and, of course, currency movements. Russia wants "specific" language opposing forex manipulation, although there seems to be little chance that Japan will get singled out.

Japanese shares drop ahead of G-20 meeting.

Japanese stocks fell sharply today as the yen travelled in the opposite direction ahead of today's meeting in Moscow of the G-20, whose utterances this week about forex matters have caused all sorts of muddle. Other Asian stocks were fairly flat, while those in Europe have broadly added to yesterday's losses; U.S. stock futures were lower premarket, while the yen was +0.2% vs the dollar

Yen climbs as market anticipates G-20 currency signals

The markets today are braced for yet more conflicting statements on currencies, as the Group of 20 (G-20) nation's finance chiefs start the Moscow summit today.

The G-20 claims to represent 90% of the global economy.

Russia holds the G-20 rotating presidency for 2013, and Russian Finance Minister declared on Thursday, that the G-20 should have more "specific" language opposing exchange-rate interference when it issues a statement after the two-day talks which end Saturday.

In his opinion, the G-20 countries have always held the stance that currency policy "should be based on market conditions."

The group meets amid a threat of a so called international currency war. This is deemed the case as countries are pushing for weaker exchange rates in order to make their exports more competitive, and as Japan throws it weight behind monetary stimulus.

I predict that the end result of the summit is likely to be disagreement, as it's doubtful that any unified view on foreign exchange will emerge. More likely, is that attention will focus on weak growth in some regions such as the Euro zone.

Earlier today, the Yen was firmer against the Euro and the Dollar.

The Yen has been supported by expectations that Japanese Prime Minister Shinzo Abe will, in the next few days, select Toshiro Muto as his nominee for BOJ governor.

Muto is viewed as less radical than most of the other possible nominees and has served as deputy BOJ governor from 2003 to 2008. He has downplayed what many lawmakers have advocated, that the central bank should purchase foreign bonds in order to keep the Yen in check.

All of the candidates are seen though as likely to continue easy monetary policy.

Japan's expansive policies have driven down the value of the Yen sharply and hence the expectation for sharp focus on this by the G-20 finance officials.

Thursday, February 14, 2013

BOJ Decision Ends 2-Day Yen Gain

Former BOJ Deputy Governor, Kazumasa Iwata, a potential candidate to become the next BOJ head, indicated earlier today that the Yen has scope to depreciate further. This set up a fall in the currency.
 
Iwata announced that the BOJ's price goal can't be reached, unless there is a correction in the strong Yen. He sees that the Yen at 90 to 100 per Dollar would be a point at which "equilibrium" is restored.
It's evident to me that the market's focus is shifting onto the BOJ and its policy under a new governor. Overall, I think that the market expects that the Yen will weaken further toward 100 Yen per Dollar, as hopes come to the fore that there will be further monetary stimulus.

The BOJ has rejected a proposal to keep interest rates almost at zero until a price target is decided on and has stopped short of adding to stimulus, at least until leadership changes are implemented in Mid-March.

The central bank is to kept its asset purchase fund unchanged, in line with majority analysts' expectations, at 76 trillion Yen ($813 billion).
 
In January, the BOJ doubled its inflation target to 2% and also pledged open ended bond purchases.

The Yen's losses remained limited though, ahead of a Group of 20 meeting that is set to start on Friday.

G20 member nations are expected to be especially critical of Japan for the recent declines in the Yen. Japan's currency has dropped 17% to the Dollar over the past three months.

Earlier today the Yen had lost 0.1% to 93.51 per Dollar and was little changed at 125.67 per Euro. The Euro bought $1.3439.

Foreclosure filings sink to six-year low.

Foreclosure filings fell to the lowest level in almost six years in January, dropping 28% on year and 7% on month to 150,864. The main reason for the decline was because of a new law in California that slowed repossessions - default notices in the state plunged 62% on year, and for the first time since January 2007, it didn't have the most properties with foreclosure filings.

Bank of Japan keeps policy unchanged as recession continues.

As expected, the Bank of Japan has maintained the size of its asset purchase program at ¥101T ($1T) and its benchmark interest rate at 0%-0.1%. The BOJ's decision followed news that Japan's economy had contracted for a third quarter in Q4 as GDP shrank 0.1% Q/Q vs consensus of +0.1%, with declining exports and a drop in business investment offsetting improved consumption.

AMR, US Airways confirm merger.

American Airlines (AAMRQ.PK) and US Airways (LCC) have confirmed that they are to merge and will provide details at a press conference this morning. According to reports, the all-stock deal will create the world's largest airline by passenger traffic with a market cap of $11B, and it will take AMR out of bankruptcy. The combined company will operate under the American Airlines brand.

Eurozone recession deepens, Germany contracts.

The eurozone recession deepened in Q4 as GDP shrank a greater-than-expected 0.6% on quarter vs -0.4% in Q3. The picture is ugly all across the bloc, with Germany slipping into a contraction of 0.6%. France also shrank after hanging on at or just above zero for a long while. EU shares had started fairly brightly, but were all sharply lower at midday in Europe, while the euro was -1% vs the dollar. U.S. stock futures weren't looking too clever either.
Sahara India is no stranger to controversies. The brand has been a key sponsor of the Indian cricket and hockey teams for years. It is a household corporate name across India, particularly in the smaller towns and cities. But, the promoters have very little reputation to uphold. The capital market regulator Securities and Exchange Board of India (SEBI) seized bank accounts and properties of two Sahara Group companies and its promoter Subrata Roy. These include various real estate special purpose vehicles (SPVs). Plus land development rights in Aamby Valley. The regulator has come down heavily on the group in an investor refund case of Rs 240 bn in convertible debentures floated by various group entities. The Sahara Group reiterated that it owed only Rs 51.2 bn to investors, a far cry from what it actually does. Banks holding accounts of the companies have now been told to move funds to a prescribed account opened to refund investors who had purchased the debentures. We ll, we sincerely hope these investors get their hard earned money back. We hope it doesn't become another Kingfisher Airlines saga.

Wednesday, February 13, 2013

Market Focus Remains On G20 Friday Meet.

The Yen rallied on Tuesday, after a Group of Seven official announced that Japan will be an item of discussion at the G-20 meeting in Moscow starting Friday. 
 
This follows recent market concerns that the Yen's moves have been excessive.

The G-7 finance ministers and central-bank governors appeared to have shown acceptance for a weaker Yen, with the proviso that Japanese Prime Minister Shinzo Abe's government won't actively pursue devaluation.

Uncertainly arose though, when one official stated that the group remained concerned about excessive moves in the Yen and also about Japan's stance on giving guidance on its value.
 
Finance ministers and central bankers from the G-20, are due to meet in Moscow on Friday and Saturday and I expect some criticisms about Japan's monetary policy, so it's no surprise then that the market remains cautious.
 
The Yen earlier today climbed 0.6% to 92.94 per Dollar, having tumbled 17% in the past three months, and rose by 0.6% to 124.98 per Euro. The Euro traded at $1.3449.

The Bank of Japan (BOJ) started a two day meeting today, and is expected to announce its monetary policy decision on Thursday.

The Euro meanwhile has held gains, as optimism rises that Europe will be able to cope with its debt crisis.

The Euro, to now, has rallied 2% as against the Dollar in 2013 as banks began to pay back the European Central Bank's *ECB) emergency three-year loans early. This was contrary to actions by the Federal Reserve and BOJ which had expanded their policies recently.

ECB President, Mario Draghi, declared on Tuesday that the Euro region is on the right track and has made "enormous progress."

The European Union's statistics office in Luxembourg is due to release data today, that is expected to show that Industrial production in the Euro area has likely risen by 0.2% in December from November.

Should the industrial production data be as strong as expected, the Euro will likely be bought.

Iranian oil exports, output fall as West tightens sanctions.

Iran's oil exports may have dropped to below 1M bpd in January after a mini-rebound to 1.56M bpd in December, the International Energy Agency estimates, with the latest fall coming due to reduced purchases from China and South Korea as the West tightens sanctions even further. Iran's output fell 50,000 bpd to under a three-decades low of 2.65M bpd, and the IEA forecasts even more declines.

Eurozone industrial output provides hope.

Eurozone industrial production rose for the first time in four months in December, increasing 0.7% on month vs -0.7% in November and consensus of +0.2%. The numbers provide hope that the eurozone could be climbing out of its recession, although it's worth pointing out that output dropped 2.4% on year.

Global cell phone sales drop for first time in three years.

Worldwide mobile phone sales slipped 1.7% to 1.75B units in 2012, the first decline since 2009, as demand for feature phones fell. "Tough economic conditions, shifting consumer preferences, and intense market competition weakened the worldwide mobile phone market," Gartner says. However, Q4 smartphone sales jumped 38.3% to 207.7M, with Samsung (SSNLF.PK) and Apple (AAPL) increasing their market share to 52% from 46.4% in Q3. Samsung was also the top overall vendor of handsets

Stock impact of State of Union seen muted.

Stocks aren't expected to react much to President Obama's State of the Union speech, as many of his proposals aren't seen getting through the House, while he did little to indicate that a deal is near to avert looming automatic spending cuts. Obama's initiatives include investing $50B on infrastructure and raising the minimum wage 24% to $9 an hour. He also wants to launch free-trade talks with the EU and he announced an executive order to protect infrastructure from cyber-attacks.

Dismal numbers of IIP{Index for Industrial Production} suggest that the economy is still not out of the woods.

Theoretically the stock markets are considered to be the barometer of an economy. Considered a lead indicator, they are supposed to reflect the direction the economy is going to take in the coming times. Therefore when our very own BSE-Sensex breached the 20,000 mark in January 2013, everyone thought the economy is taking a turn for the better. But the recently released economic data seems to point to the contrary. Dismal numbers for the IIP (Index for Industrial Production) suggest that the economy is still not out of the woods. So why have the stock markets been heading upwards? Simple, it is because of the flood of cheap money that has invaded our markets. With developed economies printing money like there is no tomorrow, a large part of it has found its way into India. This has led pr ices of asset classes, particularly stocks, to run up in recent times. As a result, stock markets do not seem to be reflecting the true state of the economy. However, it must be remembered that this can only continue for a short period of time. In the long term, the relationship between earnings and stock prices has to hold. So either the economy would take a turn for the better. Or the stock markets would come crashing down.
 
 

Tuesday, February 12, 2013

Yen Off 3 Year Low as Treasury Backs Japan Stimulus Plan

In the eyes of many traders today, the Dollar-Yen rate has unsurprisingly started to look overbought and the Yen rallied as investors bought back after a recent sharp selloff.
 
The Yen's 14 day relative strength index (RSI) per the Dollar was below the 30 level, a level that some traders regard as a signal that an asset has fallen too rapidly and could reverse course, and stood at 27 yesterday.

On Monday, the Japanese currency had dropped by the most in more than two weeks following a statement by Haruhiko Kuroda, a potential contender for Bank of Japan (BOJ) governor, that additional monetary stimulus might be justified for 2013.

Speculation is also rife that some statements will emanate from the upcoming G-20 meet in Moscow on Friday and Saturday, that will criticize the rapid pace of the Yen's depreciation.

In fact, a Group-of-Seven nations may release a statement on exchange rates this week in an effort to quell concerns that the world is on the brink of a currency war. They could release the statement before the G-20 meeting.

U.S. Treasury Undersecretary had announced yesterday that she supports Japan's efforts to end deflation and "reinvigorate growth." She added though, that it's vital that any structural reforms should accompany macro economic policies when striving to achieve these goals. G-20 nations should heed the call to "refrain from competitive devaluation."

Japan's Finance Minister,  said yesterday that Japan will tell G-20 officials that it intends to maintain efforts to beat deflation.

The Yen had risen 0.3% to 94.06 per Dollar and gained 0.4% to 125.92 per Euro. The Euro slipped 0.2% to $1.3387 ahead of the release of gross domestic product data for the currency bloc by the European Union's statistics office on Thursday.

Most analysts expect that Euro region GDP has fallen by around 0.4% in the fourth quarter and should there be any negative surprises, this could see the Euro weighed down in the short term at least.

G7 moves to play down fears of currency war.

G7 finance ministers and central bank governors have issued a joint statement reaffirming their "longstanding commitment to market-determined exchange rates and to consult closely in regard to actions in foreign-exchange markets." The statement is seen as an attempt to defuse growing fears about a global currency war, although Joe Wiesenthal reckons it's fairly weak and "has no big implications at all."

Markets to focus on automatic cuts in State of Union speech.

President Obama is expected to talk about jobs, defence, energy, immigration and the housing recovery in his State of the Union speech tonight, although market focus will be on the automatic spending cuts on March 1.

American Express launches first "pay-by-tweet."

American Express (AXP) yesterday launched the first "pay-by-tweet" service on Twitter, enabling cardholders to make purchases by sending a short message. The offering represents one of the most ambitious attempts so far to build e-commerce directly into Twitter, although strangely, the social media site won't be taking a cut of the transaction revenue. Instead, the hope is the service will boost its ad income.

Barclays to axe 3,700 jobs as it swings to £1B net loss.

Barclays' (BCS) swung to a far wider-than-expected 2012 net loss of £1.04B from a profit of £3B last year, hurt by charges for compensating customers for mis-sold products, and by the loss of the value of its own debt. However, adjusted pretax profit climbed 26% to £7.05B, in line with consensus. CEO Anthony Jenkins unveiled his "Project Transform" strategy, which includes cutting 3,700 jobs as part of a program to slash £1.7B from Barclays' annual costs by 2015. Shares were +3.8% premarket.

India needs more sustainable, long term investment into the country.

The Reserve Bank of India (RBI) provided some relief to India in January by cutting policy rates by 0.25%. But, is there scope for further rate cuts? Well, not unless the government repairs its finances. India's current account deficit (CAD) is likely to reach a record high in FY13. As of September, 2012 it was at a record 5.4% of GDP. And last year it was at 4.2%. This gap desperately needs to be filled for the RBI to reduce interest rates further. According to RBI governor, D Subbarao, the country needed more foreign investment in assets such as plants and equipment. Currently most overseas investments are in equity and debt markets, from which investors can quickly exit. Instead of volatile fund flows, India needs more sustainable, long term investment into the country.
Most countries recognize the fact that the US is abusing the monopoly of dollar. If not for its currency the US's economic position would have been in a free fall since the crisis of 2008. The only hedge against such a catastrophe is buying gold. Now the yellow metal has caught the fancy of investors world over due to its inflation hedging property. Indians in particular have displayed enough inclination towards buying the precious metal. So much so that the government had to impose taxes to reduce gold imports. This, the Indian government believes would help the problem of current account deficit. Probably it is time the Indian policymakers take some lessons from their Russian counterparts with regard to gold buying. Only then will they relieve themselves of their myopic views on gold buying.

As reported by Moneynews, Russia and not China has been the world's biggest gold buyer in the past decade. The Russian central bank has added 570 metric tons of gold in the past decade. This is nearly 25% more than runner-up China! The added gold is in fact almost triple the weight of the Statue of Liberty. Now, despite the purchase, Russia remains the eighth-largest holder of gold as per the World Gold Council. It is still way behind the US, Germany, Washington-based IMF, Italy, France, China and Switzerland. Also gold accounts for 9.5% of Russia's total reserves. As against this, it accounts for more than 70% of reserves in the US, Germany, Italy and France. However, the gold buying binge at least suggests that Russia is betting more on a safer asset than fiat currencies.

India's estimated private gold holding is the largest in the world. However it ranks 11th in the tally of publicly held gold. At just 9.6% of its reserves in gold, we do not think the RBI has enough reasons to shy away from having more exposure to gold.

Monday, February 11, 2013

Euro Hits New Low on Slowdown Signs while Yen Advances

The Euro dipped to a two week low versus the Dollar on political uncertainty and held a three day loss against the Yen ahead of data expected to show, that industrial production in France fell.

Spanish Prime Minister Mariano Rajoy is facing calls to resign following newspaper reports alleging his acceptance of illegal cash payments. In Italy, current opinion polls shown that Italy's former Premier, Silvio Berlusconi, who was convicted of tax fraud in 2012, is closing the gap on front runner Pier Luigi Bersani. Italian elections have been set down for the 24th and 25th of February.

France's statistics office is due to release data today that is expected to show, that Industrial production in France has likely dropped by 0.2% in December from November.

Finance chiefs from the Euro bloc are also set to meet in Brussels today in order to discuss aid to Greece and Cyprus. They hope to win back crisis-management momentum following recent signals that the three year old crisis is far from over.

For the moment, I expect the current negative momentum behind the Euro to stay in place, as it's apparent to most investors that there are more European risks showing than there were at the start of the year.

I do think that we might see a stronger Sterling against the Euro, as the British pound has risen of late against the Euro as bets remain on that the Bank of England (BOE) will refrain from extending its stimulus program, which is in contrast to the European Central Bank's stance that its own policy will "remain accommodative."

Earlier today, the Euro touched $1.3325 and slid 0.1% to 123.72 Yen. The Yen climbed 0.2% to 92.54 per Dollar.

The Yen's steep drop over the past three months, by 14% against the U.S. Dollar, has ignited criticism From South Korea to Russia to the effect that Japan is competitively devaluing the Yen.

Central bank governors and Finance ministers from the Group of 20 nations will meet in Moscow on Friday and Saturday. The G-20 will likely see heated debate of currencies.

Demand for the Yen was higher today on market corrections, though I expect the Yen to be volatile in the short term as mixed rhetoric from politicians is set to make headlines.

The Bank of Japan (BOJ) will start a two day policy meeting Thursday.

China passes U.S. as world's leading trading nation.

China surpassed the U.S. as the largest trading nation in the world last year, with the total value of Chinese imports and exports hitting $3.87T while those of the U.S. reached $3.82T. Still, the latter's economy remains more than double the size of China's

Obama to unveil another spending program.

President Obama will lay out yet another plan for trying to spark some life back into the economy when he gives his State of the Union address tomorrow. The program includes investments in infrastructure, manufacturing, clean energy and education. But as with countless proposals in the past, any new spending plans are likely to hit strong opposition from Republicans, who probably want to hear about deficit reduction.

Report slams "revolving door" at the SEC.

The "revolving door" between the SEC and the finance sector may have helped delay attempts last year to reform the $2.6T money market fund industry, a report from the Project on Government Oversight says. "The close linkage between the regulators and the regulated can influence the culture, the values, and the mindset of the agency - not to mention its regulatory and enforcement policies," the report says.

Barclays to cut annual costs by at least £2B a year in revamp.

Barclays (BCS) reportedly intends to slash at least £2B from its £20B annual cost base as part of an overhaul that CEO Anthony Jenkins is due to unveil tomorrow. Under "Project Transform," Barclays will cut 2,000 investment-banking jobs and scale back various operations in Europe and Asia. Barclays also plans to axe its tax-avoidance unit, which has generated huge profits but is seen as toxic to the bank's battered reputation. Shares were +0.8% at midday in London.
Japan's move of depreciating the Yen has already raised concerns of currency wars getting escalated. What is more, a substantial policy gap has emerged between the Euro and the Yen. As a result of which currency investors are looking to profit handsomely from it. The most popular trade in the currency markets has been buying the Euro and selling the Yen. That explains why the Euro has gained nearly 9% against the Yen this year. While against the dollar it has gained just over 1%. Indeed, it is not that the fundamentals of the Euro zone have significantly improved. It is just that Japan seems quite keen on keeping the value of its currency lower to prop up its economy. Investors in the meanwhile have been selling the Japanese currency on the assumption that the Bank of Japan will step up the central bank's efforts to boost the economy through more quantitative easing measures. This in turn would lead to a fall in the value of the Yen.

Sunday, February 10, 2013

Which school of thought should an investor subscribe to? Which parameter would be the most reliable indicator of how your stocks are likely to perform? We came across an interesting article in the Business Line that drew a link between the direction of the rupee and corporate profits. The financial daily carried out an analysis of quarterly profits of the 1,300 NSE-listed companies for the last five years. The analysis suggested a nearly one-to-one correlation between the direction of the Indian rupee and the trends in corporate profits. In other words, when the rupee falls, corporate profits tend to dip.

Of course, there are several other factors such as interest rates, commodity prices, demand-supply dynamics, etc that affect corporate profitability. But the fact remains that the rupee's movement has a substantial impact on the corporate sector as well as the Indian economy at large. The main reason for this is that India is still heavily dependent on imports compared to several other major economies.

A weak rupee increases the fiscal deficit because of higher subsidies. It widens the current account deficit by inflating the import bill. It leads to higher inflation and impacts savings and investments. This shows how vulnerable our economy is to the rupee-dollar exchange rate.
This correlation could prompt some investors to think that the best way to know where the markets are headed would be to get the direction of the rupee right. If the rupee is set for a sustained appreciation, then dive into stocks right now. Or else, exercise caution.

This theory seems appealing, isn't it? But is it practically possible to guess where the rupee is headed? The answer is no. The fate of our currency is intricately linked to hordes of domestic and global factors. Guessing the direction of the rupee would mean reading the minds of central bankers and policymakers across the world. Moreover, it is important to note that since December 1990, the dollar has appreciated by over 200% against the rupee. Despite this, the BSE-Sensex has managed to shoot up by about 1,850% during the same period.

This leads us to conclude that trying to outguess the rupee's movement would be an effort in the wrong direction. On the contrary, investors must look for great businesses with solid moats that have flourished despite all the problems and hurdles that India faces, including a weak currency.

S. 153A assessment is mandatory even if no incriminating material is found. Distinction between “developer” and “works contractor” in s. 80-IA(4) explained

ACIT vs. Pratibha Industries Ltd (ITAT Mumbai)

 
A search and seizure action u/s 132 was conducted on the premises of the assessee. No incriminating material or evidence was found to indicate that there was any undisclosed income. The AO passed an order u/s 153A for AY 2000-01 to 2005-06 in which he took the view that the assessee was not entitled to claim deduction u/s 80IA(4) on the ground that it was a contractor and not a developer of infrastructure projects. The Tribunal had to consider two issues: (a) whether if the assessments for the concerned years have attained finality and no incriminating is found in the course of the search, the AO has jurisdiction to proceed u/s 153A and (b) how to distinguish between a “developer” and a “works contractor” for purposes of s. 80-IA(4). HELD by the Tribunal:
 
(i) Three possible circumstances emerge on the date of initiation of search u/s 132(1): (a) proceedings are pending; (b) proceedings are not pending but some incriminating material is found in the course of search, indicating undisclosed income and/or assets and (c) proceedings are not pending and no incriminating material has been found. Circumstance (a) is answered by the Act itself, that is, since the proceedings are still pending, all those pending proceedings are abated and the AO gets a free hand to make the assessment. Circumstance (b) has been answered in Anil Bhatia to hold that while there is no question of any abatement since no proceedings are pending, the AO is entitled to reopen the assessment (without having to comply with the strict conditions of s. 147, 148 and 151) and bring the undisclosed income to tax. Also, in All Cargo Global Logistics Ltd 137 ITD 287 (Mum)(SB) it was held that in the case of a non-abated assessment, an assessment u/s 153A has to be made on the basis of incriminating material. Circumstance (c) has been kept open and left unanswered. Circumstance (c) has to be answered to say that even where there is/are no pending proceedings and no incriminating material has to be found, the AO is still required to pass an order u/s 153A though the assessed income will have to be the same as the originally assessed income as there was no incriminating material. Accordingly, the assessee’s argument that when there is no incriminating material or assets, then there is no jurisdiction to proceed u/s 153A is not acceptable. S. 153A contains a non-obstante clause and is triggered automatically whenever a search is undertaken. The fact that no incriminating material was found has no bearing on the applicability of s. 153A;
 
(ii) S. 80IA(4) allows deduction to “any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility“. The Explanation provides that it shall not apply to “business which is in the nature of a works contract”. Whether an assessee is a developer or works contractor depends on the nature of the work undertaken by the assessee. The word ‘contractor’ is used to denote a person entering into an agreement for undertaking the development of infrastructure facility. Every agreement entered into is a contract. Therefore, the contractor and the developer cannot be viewed differently. Every contractor may not be a developer but every developer is a contractor. Contracts involving design, development, operating and maintenance, financial involvement, and defect correction and liability period cannot be called as simple works contract. A case where in an undeveloped area, infrastructure is developed and handed over to the Government cannot be considered as a mere works contract but has to be considered as a development of infrastructure facility. If the contract is composite, it will have to be segregated so as to allow deduction on the parts that involve design, development, operating and maintenance, financial involvement etc and to deny on those which are pure works contracts. On facts, the assessee had made substantial investments in fixed assets and was exposed to various kinds of risks. It was not a mere contractor. It is enough if the assessee is a developer. It need not also maintain & operate the infrastructure facility (Patel Engineering Ltd 94 ITD 411 (Mum)& GVPR Engineers Ltd (included in file) followed)

German 2012 trade surplus highest in 5 years.

Germany's trade surplus rose to a five-year high in 2012, jumping more than three-fold to €188.1B, a figure that's also the second-highest since the stats began in 1950. Exports climbed 3.4% to €1.1T and imports 0.7% to €909.2B.

Chinese exports surge 25%, CPI slows to 2%.

China's exports jumped a greater-than-expected 25% on year in January, representing the fastest growth since April 2011. Imports rose 28.8%, while the trade surplus fell 7.6% on month to $29.2B. Meanwhile, CPI slowed to +2% on year from +2.5% in December and met consensus. The figures helped boost global equities, although it's worth noting that the data, particularly the trade numbers, were affected by the New Year falling in February rather than January.
There is no denying that the Indian Government is in a fiscal mess. Hence it wants to leave no stone unturned in its efforts to garner as much revenue as it can. What's helping the Government in this endeavour in a big way is a wing of the IT department, the Directorate of Transfer Pricing. Last year, it managed to rake in a cool Rs 660 bn and there's the target of collecting an additional Rs 440 bn this fiscal.

There is nothing wrong in the concept of transfer pricing we believe. After all, what is earned in India should certainly be subject to Indian taxes. Our worry though is the danger of this concept being taken too far.

Recently, there was a case where the transfer pricing authorities forced the Indian subsidiary of an MNC to pay taxes on its advertising and marketing spends. The transfer pricing department was of the view that beyond a certain amount, the advertising expenditure in fact ended up promoting the MNC brand. Thus, taxes need to be paid on this extra expenditure. Now, this is akin to entering a grey territory we believe. As it cannot be convincingly established what expense is towards enhancing local sales and which one's towards promoting the MNC brand? Thus, things like this should better be left alone. Otherwise they could end up hurting the investment climate in the country.
I recently came across an article in Firstpost that drew my interest. The article talked about an asset that is also responsible for inflation in our country. Interestingly the same asset is also responsible for the widening current account deficit problem. The asset is none other than land. As per the article, land is responsible for higher inflation to a significant extent. And the reason it does so is because of its limited supply.

It all starts with people investing in land in order to earn rates higher than the rate of inflation. But things go awry when speculation sets in. Since the supply of land is limited, speculators enter the market and pay higher prices to hold on to the land. Their idea being that if they hold the land long enough, they would be able to find another speculator or interested party willing to pay a higher price. As this cycle of speculation sets in, the same piece of land keeps getting priced higher and higher. Two things come off it. First the persons from whom the land is being bought get richer and have more money at their disposal. Second, the feeling that they have become wealthy leads them to splurge even more not just on essential goods and services but also discretionary ones.

As demand of these goods and services rise and supply shrinks, there is inflation which leads to higher prices of goods in the country. The increase in prices attracts foreign goods and services without commensurate rise in exports. When this cycle sets in, there is an adverse impact on the country's current account deficit. As the cycle of speculation deepens inflation rates and current account deficit increases.

When this cycle continues for a long time then asset bubbles start to build. This seems to be exactly what is happening in India. Land prices have been spiraling upwards thanks to speculators. Though this is not the only contributing factor for inflation, but still it has supported continued higher prices in the country. The government needs to reform the laws to prevent and control this kind of speculation. The consequences are severe. We can already feel its repercussions with slowing growth and dampened economic conditions simply because the high inflation is not letting Reserve Bank of India (RBI) cut rates and encourage investment towards production of more go ods and services. If the bubble continues to build then things are just going to get worse. And when it bursts, the shockwaves will hurt the economy even more.  

Thursday, February 7, 2013

Today Euro At One Week Low As ECB Meets


The Euro weakened versus the Dollar ahead of an ECB meet today, and dropped from its highest level since April 2010 against the Yen, as calls for Spanish Prime Minister Mariano Rajoy to resign become more vocal and as Spain prepares to auction bonds today.

Some analysts expect today, that even as the ECB may decide to keep rates unchanged, that ECB President Mario Draghi could express concern that the economy is weak and justify a more defensive Euro zone by signalling that easing options are still available should they be needed.

The ECB has held its main refinancing rate at 0.75% since July 2011.

Spain's Prime Minister, Mariano Rajoy, is facing heated calls for him to step down amid contested reports that emerged of corruption in his party. During his time in office, he has imposed the harshest austerity measures in Spain's democratic history in an effort to reign in the budget deficit and lower Spain's borrowing costs.

Spain is also due to auction securities, due in 2015, 2018 and 2029, today. Spain's benchmark 10-year bond yield rose 24 basis points, or 0.24% points, this week to 5.45% on Wednesday.

For the moment, I expect the Euro to fall at a modest pace in the medium term for the reasons above.

The Euro dropped to $1.3509 and fell 0.4% to 126.15 Yen The Yen climbed 0.3% to 93.38 per Dollar as declining Asian stocks spurred haven demand.

Some analysts predict that the recent declines in the Yen against the Dollar may be at an end, because Japanese officials likely will view this year's more than 7% drop to be sufficient.

Rhetoric from the Japanese government seems to have shifted, albeit subtly, to convince many that it thinks it has done enough to weaken the Yen for the moment.