Sunday, March 31, 2013

Cyprus reopens banks under tight restrictions.

 Stiff capital controls announced Wednesday designed to cut off the flow of money were in place as Cypriot banks reopened on thursday28th . Banks have been shut for nearly two weeks as the government negotiated a bailout package with the EU and became the first eurozone country to impose losses on bank depositors. Cash withdrawals are limited to €300 per day, time deposits cannot be withdrawn until maturity, and check-cashing is banned. Additionally, anyone leaving the country may take only €1K euros with them, down from €3K in an early draft of the restrictions.
The geographically and culturally diverse BRICS nations have finally decided to unite. These nations would establish a new development bank to finance infrastructure. This proposal was ratified at a summit yesterday. A US$ 100 bn Contingency Reserve will also be created. This will help tackle any financial crisis in emerging economies. A Business Council was also arranged in order to encourage investment, expand business cooperation and trade among member countries.

Developing nations, India being a prime example, are facing challenges in terms of infra development. There are insufficient avenues for long term financing and foreign direct investment. Creating long term capital stock is difficult. Such patient investment is hard to come by. BRICS nations require over US$ 4.5 trillion over the next 5 years for infra needs. If these nations work together, they can surely become a huge force to reckon with in the years to come. Well, we really hope that this arrangement goes as per plan. And not the way of the European Union.
There are only a few big picture guys we admire and love listening to. And Marc Faber aka Dr Doom is certainly one of them. Thus, every time he discusses something significant, we like to be all ears. So, what's going through the mind of Dr Doom these days? Well, true to his moniker, he is certainly not upbeat about the goings on in the global economy. In fact, in a recent interview he seems to have outdone even himself in terms of bearishness.

Mr Faber is of the view all that we are doing is creating bubbles, bubbles and more bubbles. And when this will come to an end, we will have a systemic crisis so big that it will be difficult to hide even in gold. Sounds pretty scary, isn't it? If you listen to the man's logic, you walk away convinced that things are certainly as scary as he is making it out to be.

He opines that printing money is nothing but an act of creating bogus money. Thus, as with bogus money, the money printed by US Fed and other central bankers does not spread evenly in the economy. It first reaches those officials and executives that are closest to this newly created money. And in this case it would be finance sector guys like brokers, insurance companies, fund managers etc.

Flush with funds, these people then go about scooping up assets like stocks and other commodities on the cheap. This is perhaps the reason why stocks are touching record highs and inflation is getting out of hand even without the economy improving. And what happens to the remaining majority of the population i.e. the people that are not first in line to receive the funds from central banks? Well, by the time the money reaches them, prices of assets and other goods and services are already up, forcing them to dip into their savings or take up more debt.

The rich on the other hand, the ones that get their hands on the money the earliest, keep playing the game of passing the parcel. They keep moving in and out of assets and in the process, creating bubbles that don't really rest on strong fundamentals.

It's obvious, isn't it? If one is earning a pretty handsome return on one's capital by selling it to the greater fool, why would someone bother setting up a plant and employ people. Besides, with interest rates at record lows, it makes more sense to invest in capital than hire labour. All of this further exacerbates problems in the economy, culminating into a systemic crisis Mr Faber is so worried about.

Thus, if there are bubbles in every asset class imaginable, how can even gold escape the painful result of these bubbles getting burst. Our only hope then are those assets and currencies that are the safest and are capable of getting away with minimum damage. 

Thursday, March 28, 2013

the Bank of Japan (BOJ) Governor, reiterated policy easing options.

Firstly, let me start off by wishing those that celebrate Easter this weekend, a very peaceful weekend and take another opportunity to thank you for following our daily market analyses.

Friday is a holiday in most of Europe, the U.S. and much of Asia.

In line with the short holidays, we won't be publishing on Friday and Monday but will resume again as usual on Tuesday.
BoJ Governor Kuroda earlier today addressed Japan's upper house lawmakers, having recently told the lower house that his goal is to achieve 2% annual inflation in two years.

His testimony basically entailed his view that that policy makers will need to "lower the longer end of the so-called yield curve" and also that they could need to purchase risk assets.

The central bank is due to meet to discuss policy on the 3rd and 4th of April and while Kuroda does what is now generally expected, I think that we will likely see limited reaction in the currency.

For the past six months expectations of additional BOJ stimulus have driven the Yen down by 17%. In comparison, over the same period, the Dollar has risen by 2.8% and the Euro by 2.1%.

Earlier today, the Yen rose by 0.4% to 94.06 to the Dollar and by 0.4% to 120.27 against the Euro.

The Euro rose by 0.1% to $1.2786, still close to a four-month low versus the Dollar. Traders are still speculating on whether future European bailouts might be similar to the kind of bank deposit levies imposed on Cyprus.

Today Cypriot banks opened their doors to customers for the first time since the 16th of March, following the European Union having presented a plan which was to force losses on all depositors in exchange for a bailout. New rules are to be implemented that will curb access to cash.

Borrowing costs rose yesterday in Portugal, Spain and Italy. The Italian 10-year yield is at its highest relative to German bunds so far this year.

For many, the expectations are that these are the countries with the highest risk of deposit flight after the Cypriot crisis unfolded and speculation is already taking flight as to who is the next candidate to follow the Cypriot lead.

Italy particularly is under the microscope, as the nation is still without a government following recent inconclusive elections.
 
From the U.S., growth revised figures are due out today from the U.S. Commerce Department. These are expected to show that the U.S. economy has expanded at a 0.5% annual pace in the fourth quarter. This would be faster than the government's previous estimate of 0.1% growth.

Recently, there have been signs emerging that strong U.S. economic figures are resulting in gains in the currency. Should data continue to improve, further Dollar gains should result.

 

Wednesday, March 27, 2013

Euro feels the heat versus Dollar on persistent Cyprus Concerns

The Euro today dropped as against most of its major counterparts, following a statement by a Swiss bank, Pictet & Cie, that said that the Cyprus crisis has "tarnished" the attractiveness of the Euro region.
 
The risk that there will be a bail -in by depositors in any future banking crises in the region has been brought to the foreground after the precedent set by Cyprus and the markets are bound to reflect that.

Cyprus could announce the types of capital controls it plans to implement today. Leaders are attempting to prevent cash outflows once the nation's banks reopen.

The banks have been closed since the announcement of a plan by the European Union (EU) that would force losses on some bondholders and depositors. The losses would be incurred in exchange for a 10 billion-Euro bailout.

Today Italy plans to hold an auction to sell as much as 7 billion Euros of Debt.

Taking into account the Cyprus uncertainty and also the current political uncertainty in Italy, the Euro is set to remain under pressure in the near term.

The Euro earlier dropped 0.2% to $1.2831 and was 0.2% lower at 121.26 Yen.
 
The Yen has fallen 0.1% to 94.51 per Dollar ahead of Bank of Japan (BoJ) Governor Haruhiko Kuroda appearing in parliament on Thursday. Kuroda had told lawmakers on Tuesday, that he is targeting for 2% annual inflation in 2 years.

Government funded until September.

President Barack Obama yesterday signed the FY 2013 funding bill into law, one day before the previous financing measure was due to expire. The package includes the $85B of sequestration and ensures that the government will be financed until the end of the fiscal year in September, with spending projected at $984B.

America is a magnet for the world's money.

America's "international investment position," or how much the value of foreign investments in the U.S. surpass American investments abroad, rose to $4.4T in 2012 from $4T in 2011. During Q2 and Q3, the gap reached $4.7T, the highest since records began in 1976. While the trend suggests the U.S. is still an attractive place to put money despite the country's weak growth, it also makes the economy more vulnerable to external shocks.

Ericsson axes almost 1,400 jobs.

 Ericsson (ERIC) has cut 1,399 positions in Sweden as part of its restructuring, fewer than the 1,550 jobs that the network-equipment vendor originally planned to axe. Ericsson will take a charge of 1.5B kroner ($230M) on its Q1 results because of the losses. Meanwhile, the company is reportedly in talks to acquire Microsoft's (MSFT) MediaRoom IPTV business, which allows telecom companies to provide television via the Internet.

Wal-Mart sees losses from Mexico bribery allegations.

Wal-Mart (WMT) expects to incur losses from the Mexico bribery scandal, which already cost the retailer $157M in the last fiscal year. Wal-Mart didn't provide a specific forecast for the losses, due to the complexity of the affair, but it did say that the amount probably won't have a material effect on its business.

S&P near record close.

 The S&P 500 could close at a record high today if negative pre-market sentiment turns positive, with the index having finished just two points shy of its peak yesterday. The Dow hit a fresh high as investors shrugged off eurozone concerns, and focused on what seemed to be decent U.S. house-price and manufacturing data. While the numbers were nuanced and consumer confidence plunged, the buy-the-dip mentality continued to prevail.

Cyprus works to avert run on banks.

 Cyprus has been preparing capital controls to prevent a run on the banks when they reopen for business tomorrow after being closed for almost a fortnight. Russia has warned Cyprus not to make the controls too onerous. Uninsured depositors at Laiki bank, which is being shut down, will probably lose 80% of their cash, the rest of which could take years to return, while those at Bank of Cyprus could take a haircut of up to 40%.

BOE: British banks must raise extra £25B by year-end.

 U.K. banks must raise another £25B by the year-end to protect themselves from potential losses, the Bank of England has said, with the sector facing a total capital shortfall of £50B. The news sent the FTSE, U.S. stock futures and the pound-dollar lower, although Barclays (BCS) and Lloyds (LYG) were higher at midday in London. HSBC (HBC) and RBS (RBS) were down.

South Korea cuts estimates for Q4 GDP.

The Bank of Korea says GDP in South Korea grew 0.3% in Q4, a slight reduction from its initial estimate of 0.4%, as the impact of a weak yen continues to take its toll on exports. The central bank forecasts economic growth of 2.8% for 2013 after pegging GDP at 3.2% just a few months ago.

S&P trims GDP forecast for euro-zone.

S&P reduced its estimate for 2013 euro-zone GDP to -0.5% from a prior estimate of -0.1% with financial conditions in the region becoming weaker. A report from the agency finds exports in Spain and Portugal holding up but lagging in France and Italy

Ford opposes free trade talk for Japan.

Ford (F) CEO Alan Mulally said the company will continue to oppose Japan's entry into free trade talks with the United States until the nation opens its markets for more U.S. cars and works on measures to strengthen the yen. The exec called the automobile market in Japan the most closed in the world.

BRIC nations plan new bank.

Leaders in Brazil, China, Russia, and India are exploring establishing a new development bank that could take on some of the roles of the IMF and World Bank. The goal is to create a bank with a sharper focus on emerging markets. Plans on funding the new bank have already created differing opinions with Russia favouring to cap each nation's initial contribution at $10B.

Cyprus bank closures enter second week.

 Cyprus will keep its banks closed until Thursday following the bailout deal reached yesterday. The government fears a massive bank run by depositors with businesses crippled and more ATMs running out of money. Cyprus Finance Minister Michael Sarris says large depositors in Cypriot banks could lose about 40% of their deposits.

S. 32: Special Bench verdicts on Sale & Lease Back & lease finance are not good law

Development Credit Bank Ltd vs. DCIT (ITAT Mumbai)

 The assessee, a Bank, bought assets from its customers and leased it back to them (“sale and lease back”). It also purchased assets identified by its customers and leased it to them (“finance lease”). The assessee claimed depreciation on the assets on the ground that it was the owner and had used the assets for business purposes. The AO, relying on MidEast Portfolio Management 87 ITD 537 (Mum) (SB) and IndusInd Bank 135 ITD 165 (Mum) (SB), disallowed depreciation on the ground that the transactions were an “eyewash” and “colourable device”. The CIT(A) partly confirmed the disallowance. On appeal by the assessee to the Tribunal, HELD allowing the claim:
 
The issue of whether the lessor is entitled to claim depreciation in the case of a “sale and lease back” transaction as well as in a “finance lease” have been laid to rest by the judgements in ICDS 350 ITR 527 (SC), Kotak Mahindra Finance 317 ITR 236 (Bom) and Cosmo Films 338 ITR 266 (Del) where it was held that the lessor is eligible to claim depreciation. The judgements of the Special Bench in MidEast Portfolio Management 87 ITD 537 (Mum) (SB) and IndusInd Bank 135 ITD 165 (Mum) (SB) are impliedly overruled

Monday, March 25, 2013

Pound Bounces back against Euro.

A report had shown that U.K. retail sales had risen by more than most economists predicted for February and this weakened the case for monetary easing through asset purchases.
 
Minutes of the BoE's March policy meeting had shown that some officials were of the opinion that more bond purchases could cause an "unwarranted depreciation of Sterling."
U.K. government bonds returned 1.1% to 21st March while, for example, German bunds gained 0.6%, and Treasuries dropped by 0.1%.
 
It appears then that we are seeing more traction in the U.K.'s economy as the Pound prices out aggressive monetary easing that was previously completely priced in.

Sterling had also extended its gains to the Euro and government bonds had risen for a second week, as Cyprus's lawmakers had been struggling to strike a deal on unlocking rescue funds to avert a financial collapse.

A government report, which is due out on Wednesday, is though expected to confirm that the British economy has contracted 0.3% in the fourth quarter and on Thursday, the GfK NOP Ltd. is expected to announce that March consumer confidence has fallen.

Households help keep government borrowing rates low.

An emphasis by consumers on boosting savings and limiting debt is continuing to help ensure that the government can borrow at rock-bottom rates even though the economy remains sluggish and its debt mounts. As of March 6, deposits at U.S. financial institutions surpassed loans by $2.03T; a month before Lehman collapsed, loans exceeded deposits by $205B. In 2012, households put $1.04T in Treasuries, up from $648B in 2011.

EU should be wary of Russian retaliation over Cyprus.

 With Russian citizens holding an estimated €30B in Cyprus, EU businesses might have to brace themselves for reprisals over the bailout deal for the island. "There are a number of large German companies operating in Russia," says former Kremlin adviser Alexander Nekrassov. "You could possibly look at freezing assets or taxing assets." However, Nekrassov doesn't think Russia will cut off gas supplies, as it did with Ukraine in 2009.

Cyprus bailout sends global shares higher.

 They say in Britain that a week's a long time in politics. Well it's also a long time in the financial markets. Last Monday, a plan to hit depositors in Cyprus sent global shares and the euro tumbling. Today, a plan to hit depositors in Cyprus has sent most global equities and the euro higher. Moody's, though, remains unimpressed, saying that Cyprus remains at risk of default.

Creditors, large depositors to take haircut in Cyprus rescue.

Hours before a possible financial meltdown in Cyprus, the eurozone has agreed to a €10B bailout in which the country's second-largest bank, Laiki, will be closed and its operations folded into Bank of Cyprus. Deposits of over €100,000 will be hit with a large tax, perhaps 30% or more, while those below that level will be left untouched. Laiki's senior bondholders will be wiped out, while Bank of Cyprus's creditors will also be affected.
The recent crisis of Cyprus has brought to light two things. One is the obvious part that the crisis in Europe has not yet eased off. Second is using the deposit money to bail out the banks. Cyprus has decided to charge a levy on deposits which would help it raise funds required to meet the bailout conditions. This has been a worrisome factor. Till now the bailouts were funded by richer and more stable countries. But with Cyprus there is a new trend that has started. The biggest worry is that deposits are of banks which are in trouble. So if the levy is charged, the country would be saved. But the bank would still go on to become bankrupt. Such things have happened in the past. That banks that have been bailed out have still gone bankr upt. In such an event the depositors would become bankrupt too. First they lose money to bail out the bankrupt bank. And second they would lose whatever deposit they have with the bank.

Unfortunately this is a crisis that seems to be spreading. As per Azizonomics, banks that are capable of charging such levies and which are in terrible financial condition can be found in many other areas of the world as well. Spain is one of the most noteworthy names that the blog has mentioned. Other countries like New Zealand, UK and US are not far behind either. If such a trend of charging a levy on deposits were to take grip of the world, the financial system would come crashing down like a stack of dominoes. And this time around, the smaller depositors would go down along with the big banks.

Sunday, March 24, 2013

How about a European Union for BRIC nations? Can these diverse economies work together? Well, leaders from the major emerging economies may be planning to create a joint forex reserves pool and an infrastructure bank. Brazil is leading the effort on the proposed reserve pool. India and South Africa are working on the creation of the development bank which would finance mainly infrastructure projects. Emerging market nations are frustrated at having to rely on the World Bank and IMF for their needs. These organizations still reflect the interests of the US and other industrialized countries which have a bigger representation. The reserve pool would be available to emerging economies facing balance of payments difficulties. Or it could be used to stabilize economies during periods of global financial crises. The infra bank would support the developing nations' need for new roads, modern ports, reliable power and rail services. Well, we really hope these proposals take of f the ground. China has moved light-years ahead in terms of infrastructure. The other nations, especially India have a lot to catch up on.
Cyprus is on the verge of bankruptcy and is fast running out of options. So will the discovery of this natural resource turn the tide in favour of the country? Indeed, at the end of 2011, American firm Noble Energy discovered a natural gas field off Cyprus' southern coast. Estimates are that the field could yield between 5 trillion and 8 trillion cubic feet of gas. By international standards this is a small field. But given that the size of the country itself is small, this field should be able to yield sufficient gas for the country. But it is too soon to say that this development will rescue the country from its financial woes. Simply because developing gas fields is an expensive and time consuming process. Wells will have to be drilled; pipelines laid to transport gas from the field to Cyprus and liquefaction plants will have to be put up. All of this will cost billions. In the longer term certainly this gas field is likely to benefit Cyprus immensely. But the country at present is plagued with cash problems and it simply cannot rely on the development of this gas field to bail it out of trouble.

Household net worth drops 36% in six years.

The median net worth of American households dropped to $69,000 in 2011 from $82,000 in 2000 and $107,000 in 2005, a census report shows. Meanwhile, debt in households headed by older people more than doubled during the decade to a median $26,000 from $12,000, largely because of mortgage loans. The trend increases worries about the financial well-being of older Americans, whose retirement funds have been hit by the recession and rock-bottom interest rates.

ING faces $1.16B in Cyprus exposure.

 ING (ING) shares have fallen more than 2% in Amsterdam after the bank disclosed about $1.16B of exposure to companies registered in Cyprus. ING said its credit risk, however, is limited, given that most of the firms are domiciled out of the country and the exposure is limited to letters of credit and very short-term maturity items.

German business confidence unexpectedly falls.

Germany's closely watched Ifo Index of business confidence has unexpectedly dropped in March for the first time in five months, falling to 106.7 from 107.4 in February. The decline was due to the uncertain outcome of the Italian elections and partly because of the Cyprus crisis.

Cypriot crisis heading for endgame.

Cypriot Finance Minister Michael Sarris has left talks with Russia about a possible rescue empty handed, with the latter saying they're not interested in Cyprus's offshore gas reserves. However, Prime Minister Dmitry Medvedev has apparently said the door to a deal is not closed. Meanwhile, the EU has objected to a proposal to take over pension funds as part of a Troika bailout. The situation is fast-changing, but the ECB's Monday deadline remained the same at the time of writing.
The world economic outlook is grim and India is no exception. In order to avoid large job losses and stimulate economic growth, the government had cleared the national manufacturing policy in October 2011. At the core of the policy is the creation of National Investment and Manufacturing Zones (NIMZ). NIMZs are proposed to be developed as green-field industrial townships and benchmarked against the best manufacturing hubs in the world. But 17 months after the policy was cleared, NIMZ are yet to see the light of the day. Contentious issues on labour and environment don't seem to have been resolved yet. But now it seems that the government is keen to clear the roadblocks. The environment ministry has come on board and is ready to rationalize the clearances. This is a significant step. The government should resolve the contentious issues very soon. This is because the NIMZ has potential to create 100 m jobs by 2020. It will also increase the share of manufacturing in GDP to 25% from the current 16%.

Fed keeps foot on the pedal.

As expected, the FOMC has left its $85B-a-month QE program in place, saying that the economy has returned to moderate growth even while fiscal policy has become more restrictive. Notable among the revised economic projections was an expected improvement in the unemployment rate. The Fed's announcement helped give shares a lift and boost the Dow to a new intra-day high.

Chinese HSBC PMI rises.

 In contrast to the eurozone, Chinese factories have continued their recovery this month, with flash HSBC PMI rising to 51.7 from 50.4 in February, which was distorted by the week-long New Year holiday. Consensus was for 50.8. "The Chinese economy is still on track" for a "gradual growth recovery," says HSBC's Qu Hongbin. "Inflation remains well behaved, leaving room for Beijing to keep policy relatively accommodative."

Deterioration at eurozone factories hits EU shares and the euro.

 The contraction in eurozone manufacturing has unexpectedly deepened this month, with PMI falling to 46.6 from 47.9 in February. Even German manufacturing shrank after growing in February. "The concern is that the (economic) downturn has gathered pace again," says Markit. Instead of stabilization as many have been hoping for, the slump could "intensify in the coming months." The data dragged down European shares and the euro, which was -0.25% vs the dollar at midday in Europe.

ECB gives Cyprus until Monday to reach bailout deal.

 The ECB has upped the stakes over Cyprus, threatening to cut off emergency funding on Monday to the country's banks if it hasn't agreed to a bailout deal by then. Cypriot President Nicos Anastasiades is in talks with party leaders to find a solution, while Finance Minister Michael Sarris is still in Moscow as he seeks a rescue from Russia
Data source: Business Standard
*Aggregate market capitalisation of all listed group companies;
**Consolidated borrowings of all group companies for the year ended March 2012

As per statistics, two-thirds of the total corporate borrowings are by firms whose stock prices are hovering around multi-year lows. As a result, the gap between the outstanding liabilities of these companies and their market capitalisation has been widening. This is indeed a worrying sign for banks. Even if they were to resort to wholesale selling of pledged promoters' shares, they would be able to recover just a small portion of the dues. This is a major risk to the banking sector we believe.

The chart of the day shows the five most indebted corporate houses in India. As is evident, the total market capitalisation of all the listed entities of each group is significantly lower than their total borrowings.

Wednesday, March 20, 2013

Euro falls against Yen and to 4-month low to Dollar

European policy makers in Cyprus have earlier discussed more capital controls and the possibility of an extension of a bank holiday through to the end of the week.
 
The Cypriot parliament has rejected proposals from the Euro group, and now will have to engage in further negotiations which is set to add to pressure to the Euro.

The rejection of an unprecedented levy on bank deposits has dealt a severe blow to plans to force depositors to take on the burden and shoulder part of the country's rescue.

Now, it's expected that officials from the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission (EC), could have to wait until the outcome of an ECB Governing Council meeting today before they make any decisions.
 
The Dollar and Yen though have held gains from Tuesday against most counterparts after investors sought havens as they became concerned that Europe's fiscal crisis could slide out of control.

The Euro earlier fell 0.2% to $1.2861 and declined by 0.3% to 122.23 Yen. The Euro also traded 0.1% lower at 1.2191 Swiss francs. The Dollar dropped 0.1% to 95.06 Yen.

Fannie, Freddie could repay bailout earlier than expected.

 Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) could repay the Treasury for their 2008 bailout sooner than initially planned, due to a change in the terms of the rescue, the FHFA has said. Previously, the firms had to pay a 10% quarterly dividend even if they lost money, and would even borrow money from the Treasury to do so; now they pay a dividend only if they make a profit.

BOE voted 6-3 to reject more QE.

 The Bank of England's monetary policy committee voted unanimously to keep interest rates on hold at a meeting earlier this month and 6-3 against more quantitative easing. As in February, Governor Mervyn King was among those wanting the bank to increase the program by another £25B to £400B. The pound jumped vs the dollar following the news and was +0.3% premarket. Next up very soon is the U.K.'s budget announcement.

Freddie Mac sues 15 banks over Libor.

 Freddie Mac (FMCC.OB) has sued Bank of America (BAC), JPMorgan (JPM), Citigroup (C) and 12 other banks for losses caused by the manipulation of the Libor rate. Freddie, which invested in mortgage bonds and swaps tied to U.S. dollar Libor, is seeking a whole gamut of damages. The FHFA has already calculated that Freddie and Fannie Mae (FNMA.OB) lost a combined $3B because of the Libor manipulation.

Stocks brush off Cyprus worries.

 European shares and U.S. stock futures were solidly higher at the time of writing despite the continued chaos surrounding Cyprus. Traders reckon that because the sums involved are relatively small, a solution will be found. Expectations that the FOMC will keep the money printing machines going at full pelt when it meets for a second and final day today could also be supporting sentiment.

Fears arise that farming is heading for a bust.

 Rising crop prices, particularly corn, have sent the cost of farmland soaring, with prices in Iowa, for example, doubling to an average of $8,296 an acre since 2009. The trend has attracted farmers and investment companies, but with data about rural debt incomplete, economists fear that the boom will at some point turn into a bust, leaving a trail of bankruptcies and out-of-pocket creditors.

Fannie working to repay large chunk of rescue.

 Fannie Mae (FNMA.OB) is working on an accounting change that could allow it to repay up to $61.5B of the $88B that it owes to the Treasury. Under the change, Fannie would reclaim tax benefits that were written down after the government took it over in 2008. The return of billions of dollars to the government "could have important repercussions for reform and other housing-finance discussions,"

Boeing wins massive Ryanair order for 175 737 jets.

 Boeing (BA) has obtained an order for 175 737-800 jets from Dublin-based Ryanair (RYAAY) in a deal worth $15.6B at list prices. The booking should make up for some of Boeing's hurt at losing out on a $24B order from Indonesia's Lion Air.

Cyprus scraps proposed tax on small deposits.

The crisis in Cyprus has again hit global markets - although not by as much as yesterday - ahead of a scheduled vote in Cyprus's parliament at 6 pm local time (12 pm ET) about whether to approve a raid on bank deposits. The latest draft bill scraps the proposed levy on deposits of under €20,000 but doesn't make up for the "lost" revenue by increasing the tax on larger accounts

The Reserve Bank of India (RBI) made a repo rate cut by 0.25%

The Reserve Bank of India (RBI) made another rate cut this year, in its mid-quarter policy review. This move was in line with general market expectation. The Cash Reserve Ratio (% of deposits banks have to park with the RBI) was however kept unchanged. The central bank has become increasingly dovish come 2013, as we predicted at the start of the year. Despite inflation levels not really being benign, the central bank made a rate cut of 0.25%.This was in order to stimulate growth in the flagging Indian economy. The repo rate now stands at 7.5% from 7.75% earlier. The Indian economy expanded at a 25-quarter low of 4.5% in Oct-Dec 2012 quarter, which is worrying. Although industrial production in January picked up to 2.4% growth after two months of contraction, the recovery is still weak. D Subbarao, the RBI governor acknowledged that there is limited headroom to ease monetary policy going forward. The government now has to play a key role in pushing growth. But with the deficit number hitting a record high, this is going to be a tough rope to walk. 

Monday, March 18, 2013

New Round Of Crises Hits As Cyprus Takes Drastic Action

Investors today have been seeking haven assets after Cypriot President Nicos Anastasiades succumbed to demands from Euro region finance ministers, to raise 5.8 billion Euros ($7.5 billion) which he plans to do by taking a piece of every bank account in Cyprus.
 
In effect, bank deposit holders are to be taxed and are to provide involuntary support for the bailout. The further concern is whether any larger nations will at some point have to follow suite.

This has seen the Euro drop to its lowest level to the Dollar since the 10th December 2012 at $1.2882 and by the most in three weeks against the Yen to 121.15. The Euro also slid by 0.65% to 1.2196 Francs and 1.3% to 85.39 U.K. pence.

In September of 2012, the European Central Bank had pledged to backstop troubled nations' debt however this was soon forgotten as Cypriots lined up at the banks.
 
Moody's Investors Service had said that the terms of Cyprus's bailout are negative for depositors across Europe.

Some analysts expect that the Euro could go through the $1.2872 area depending on how the situation pans out, but one thing seems definite, the Euro will face downward pressure in the near term.

As the level of uncertainty in markets rises and investors become unsure of where they're going to move to next, their focus becomes more intense on every new data release.

On Tuesday, Greece will sell 1 billion Euros of 3 month Treasury bills and Spain will auction 3 and 9 month bills. Portugal will sell 3 and 18 month paper on March 20th and Italy will offer bonds on March 25th.

The Federal Reserve is set to start a 2 day policy meet tomorrow, and we will also see a leadership change starting at the Bank of Japan (BOJ) the same day.

The Yen has risen against all 16 of its major counterparts and this saw the Dollar loose 0.9% to 94.47 Yen.

The Australian and New Zealand Dollars both dropped following a slide in Asian stocks.

The MSCI Asia Pacific Index dropped 1.8%, it's sharpest decline since July 2012, and the Aussie was down by 0.4% to $1.0367 with the Kiwi down by 0.4% to 82.41 U.S. cents.

Australia warns on government revenues.

Australia faces a "massive hit to government revenues" that "will inevitably continue to impact beyond the current year," Treasurer Wayne Swan said yesterday. The deficit increased a further A$4.6B ($4.8B) in the first four weeks of 2013 - above Swan's February estimate of A$2B - taking the total shortfall for the first seven months of the fiscal year to A$26.8B.

China risks financial crisis - Nomura.

China's economy is showing the same symptoms that sparked the financial crisis in 2008, Nomura warns, citing a spike in leverage to a record 155% of GDP in 2012, a fall in potential growth, and soaring property prices. Should the government maintain loose monetary policy this year, the risk of a crisis in 2014 would increase. "The true extent of the financial risks in China is not fully appreciated by investors," Nomura says.

Cyprus' plan to raid bank deposits sends markets scuttling.

Global equities, the euro and oil have slumped after the eurozone demanded that Cyprus tax bank savings in return for a €10B bailout. Cyprus' government is reportedly considering a tax-free threshold for smaller deposits as it attempts to win over legislators for the levy ahead of a parliamentary debate later today. The publicized plan is to tax accounts of under €100,000 at 6.7% and those above that level at 9.9%.

Cyprus is on the verge of an impolsion.

No sooner do the authorities in the Euro zone try to quell one problem, another one comes to the surface. Well, the tiny nation of Cyprus seems to be the point of origin of the latest problem to hit the Euro zone. Apparently, due to the bad loans made by its banks, Cyprus is on the verge of an implosion. And it desperately needs money to keep its banking system functional. And while the funding may not be difficult to find, it comes with a strict rider. Cyprus itself will have to pitch in with around 40% of the money if it is to get the remaining 60% in the form of bailout funds.

And it is here that everything can come crashing down. Since its coffers are empty, Cyprus has hit upon this unique idea of taking a bite out of each and every deposit account in the country and thus raise the bailout money. However, it didn't take long for the stupidity of this idea to become evident. Citizens of the country lined up at cash machines as their faith in the banking system took a huge beating. And there are howls of protests even outside the country's shores. Many experts are already terming the move as a dangerous precursor to how bailouts are likely to be handled in the future. Thus, those who were thinking that we are well past a full blown crisis, a serious re-thinking certainly is in order.
The entire market is keenly looking forward to March 19, 2013. After all, it is the due date for the Reserve Bank of India (RBI) policy review - the first one post Union budget. So RBI's review this time will be a good pointer where our economy might be headed. Further, it will indicate if Finance Minister and RBI see eye to eye on matters of growth and inflation. While the broad consensus or rather hope is on a rate cut, the economic signals look conflicting. A bounce back in manufacturing output suggests odds in favour of a rate cut. However, if latest data on inflation is anything to go by, the outcome might be different. Both WPI and CPI have inched up thus making task tougher for central bank. While FM's commitment to bring down the fiscal deficit may make RBI cut rates, we believe it will take more to sustain growth. The latter will need reform initiatives and effective implementation to boost economy in the long run.
Souce: Financial Express

 
Foreign exchange reserves are important for any country. But unfortunately for India, it does not fare too well when it comes to forex reserves. As shown in the chart, India has the lowest level of forex reserves in the BRIC peer set. Given that forex reserves are an important resource for the central bank, it does not portray a good picture for India. The reserves are available to the central bank to manage the currency in the foreign markets. The bank can use these reserves to intervene in the currency markets to insulate the currency against any untoward shock. This means that the Indian central bank has lower resources available to support the Indian Rupee in the global currency markets as compared to its BRIC peers.

Friday, March 15, 2013

What will the Fed do about Monetary Easing?

A Labour Department report due out today is forecast to show that price rises in the U.S. won't be sufficient to ensure that the Federal Reserve will halt monetary easing.

It's expected that a core measure of U.S. consumer prices, excluding volatile food and energy costs, has likely risen by 2% from a month earlier to February 2013

The stance of the Fed though it seems, is that even if economic indicators improve, there isn't inflation concern as yet in the U.S.

Fed policy makers had said in December that an "exceptionally low" target rate will be appropriate as long as inflation won't be forecast to rise to more than 2.5% and unemployment stays above 6.5%.

The expectation currently then is that the Fed will continue monetary easing persistently, which is weighing on the Dollar.

The Yen lost 0.2% to 125.23 per Euro today and fell 0.1% to 96.18 per Dollar. The Euro for its part rose by 0.1% to $1.3021.



 

China eases yuan limits for multinationals.

China has further continued the internationalization of the yuan by setting up three pilot schemes that ease strict cross-border currency regulations for 13 multi-national corporations, including Caterpillar (CAT), Shell (RDS.A), Intel (INTC) and Samsung (SSNLF.PK), which estimates the scheme will save it $10M a year.

Eurozone inflation drops to below ECB target.

Eurozone CPI fell to an expected +1.8% on year in February from +2% in January, putting inflation below the ECB's target of just under 2%. That could give the bank more scope to further ease monetary policy. The data comes as EU leaders meet on day two of a summit in Brussels, where they might come to some formulation on a rescue for Cyprus. The participants have already indicated that some countries could get more time to fulfill their deficit targets and leeway for government stimulus to boost the bloc's wretched economy.

Inflation seen edging up.

U.S. inflation figures for February are due out this morning, with economists expecting that CPI rose 0.5% on month after being flat in January. On year, inflation is seen increasing to 1.9% from 1.6%.

Samsung shares fall after launch of Galaxy S IV.

Samsung's shares dropped 2.6% in South Korean trading after the company yesterday launched its new Galaxy S IV flagship smartphone, which looks a lot like its predecessor. Among a host of features, the device has a 5" 1080p display, a 13MP camera, and a text/speech translator for nine languages, as well as eye-tracking and touch-free gesture technology. Three of the first reviews ranged from the mixed to the effusive

Fed OKs 16 bank capital-return programs but rejects two.

The Federal Reserve has approved the capital return plans of 14 banks and rejected two - those of Ally and BB&T (BBT). Goldman Sachs (GS) and JPMorgan (JPM) received conditional approval and were asked to resubmit their programs by the end of Q3 to "address weaknesses in their capital planning processes." JPM wants to raise its dividend to $0.38 from $0.30 and repurchase $6B in shares. Goldman's intentions weren't disclosed.

Thursday, March 14, 2013

Explanation to S. 37(1): No disallowance for compensatory payments

CIT vs. Regalia Apparels Pvt. Ltd (Bombay High Court)

 The assessee, a manufacturer of garments, was granted an entitlement by the Apparel Export Promotion Council (APEC) for export of garments and knit wares. In consideration for the export entitlement the assessee furnished a bank guarantee in support of its commitment that it shall abide by the terms and conditions and produce proof of shipment. It was also provided that failure to fulfill the export obligation would render the bank guarantee to being forfeited/encashed. The assessee did not utilize the export entitlement which led APEC to encash the bank guarantee. The assessee recorded the said payment as penalty in its books of account and claimed deduction u/s 37(1). The AO rejected the claim on the ground that as the payment was by way of “penalty” it could not be allowed under the Explanation to s. 37(1). However, the CIT(A) and ITAT allowed the claim. On appeal by the department to the High Court, HELD dismissing the appeal:
 
The assessee took a business decision not to honour its commitment of fulfilling the export entitlement in view of loss being suffered by it. The genuineness of the claim of expenditure being for business purpose is not disputed. The assessee has not contravened any provision of law and the forfeiture of the bank guarantee is compensatory in nature and does not attract the Explanation to s. 37(1).
 

CFTC looks at possible gold and silver manipulation.

Moving on from Libor, the Commodity Futures Trading Commission is reportedly having an informal look at whether gold and silver prices in London are open to manipulation. Gold is set twice daily by five banks via teleconference and silver by three institutions, with the fixings then used worldwide as benchmarks for any number of transactions. The banks involved include Barclays (BCS), Deutsche Bank (DB) and HSBC (HBC).

Germany sends message to EU with €5B cuts.

Germany intends to cut 2014 spending by €5B to €300B and balance its budget by 2015, a year ahead of schedule. Germany brought forward publication of its plans to before an EU summit today, when France and Italy may lead the charge for a relaxation of austerity. Germany wants to make the point that "consistent sustainable budgeting and growth are not mutually exclusive."

S&P eyes record high.

U.S. stock futures were higher premarket, setting the S&P 500 up to make a fresh challenge on its all-time high today after it closed just 11 points shy of the mark yesterday, and for the Dow Jones to continue its record run. Asian stocks rose and Europe was in the green at midday on the continent, helped by better-than-expected retail sales in the U.S.

S. 14A: Rule 8D(2)(ii) & (iii) do not apply to shares held as stock-in-trade

DCIT vs. Gulshan Investment Co Ltd (ITAT Kolkata) 

For AY 2008-09, the assessee, a dealer in shares, received dividend of Rs. 18.91 lakhs but did not offer any disallowance u/s 14A and Rule 8D on the ground that they were not applicable to shares held as stock-in-trade. The AO rejected the claim and computed the disallowance under Rule 8D at Rs. 21.45 lakhs. On appeal, the CIT(A) held that even if Rule 8D was not applicable to shares held as stock-in-trade, a disallowance had still to be made u/s 14A and this was estimated at Rs. 1.89 lakhs. On appeal by the department to the Tribunal HELD dismissing the appeal:
 
Though s. 14A applies to shares held as stock-in-trade, Rule 8D (2)(ii) & (iii) cannot apply if the shares are held as stock-in-trade because one of the variables on the basis of which disallowance under rules 8D(2)(ii) & (iii) is to be computed is the value of “investments, income from which does not or shall not form part of total income”. If there are no such “investments”, the rule cannot have any application. When no amount can be computed under the formula given in rule 8 D(ii) and (iii), no disallowance can be made under rule 8D (2)(ii) & (iii) either. As held in B. C. Srinivas Shetty 128 ITR 294 (SC), when the computation provisions fail, the charging provisions cannot be applied, and by the same logic, when the computation provisions under rule 8 D (2) (ii) and (iii) fail, disallowance there under cannot be made either as the said provision is rendered unworkable. However, this does not exclude the application of rule 8 D(2)(i) which refers to the “amount of expenditure directly relating to income which does not form part of total income”. Accordingly, in a case where shares are held as stock-in-trade and not as investments, the disallowance even under rule 8 D is restricted to the expenditure directly relatable to earning of exempt income. The result is that the scope of disallowance under Rule 8D is narrower than that of s. 14A.
 
The Reserve Bank of India (RBI), it seems, is rethinking about its stance on various aspects. Yesterday we told you about how the central bank has changed its view on gold. The RBI is no longer as worried about the impact of gold buying on current account deficit (CAD). But there is more to it. Another problem that the RBI had flagged earlier was the impact of lower interest rates on CAD. However, as reported in DNA, it no longer holds on to that view. That is the CAD problem is no longer an impediment to interest rate cuts. RBI has also offered several reasons for its view. One is that during a slow growth period, as is the case now, a rate cut is unlikely to translate into import demand.

Secondly, lower interest rates will also improve India's export competitiveness. Thirdly, lower commodity prices, especially crude oil, have eased the pressure on CAD to some extent. Lastly, in emerging economies like India, import demand is less a function of lower interest rate than of increased income. Thus, the RBI is no longer as rigid as earlier on its rate cut stance. But we would not want to hazard a guess on whether and by how much will the RBI ease interest rates. All we could conclude is that the RBI is taking the government's fiscal commitments seriously enough.

Wednesday, March 13, 2013

Government refinancing program starts to make an impact.

The Federal Housing Finance Agency will show in a report today how more borrowers, particularly those who are in negative equity, are taking advantage of the government's Home Affordable Refinance Program, which has become easier to access after the government changed the rules in January.
Given the ever increasing appetite for oil and gas, efforts to find new sources of energy have picked up considerable pace in recent times. The developed countries especially have been looking to become independent on the energy front. While the Middle East remains dominant in oil and gas production, mounting geopolitical risks in those regions means that many countries are looking for alternate sources of energy. The shale gas revolution in the US is one such example. And now Japan has moved closer to unlocking a potential new energy source. This is the extraction of gas from the deposits of methane hydrate. The latter is a mixture of frozen water and methane and is sometimes called 'fire ice'. However, whether this prospect is commercially viable is the key question for Japan. One estimates production costs for methane hydrate-derived gas at about nine times the US benchmark for LNG. Japan, however, can take hope from the fact that the same doubts had earlier lingered over shale gas extraction and which is now being commercialized. Either way, Japan does not consider itself having too much choice. The country has no conventional fossil fuels of its own. Plus its nuclear industry has been in shambles on account of the earthquake and tsunami.  
When the Dow Jones Industrial Average (DJIA) hit 14,300 mark recently the US stock markets completed a four year bull cycle. Over the last four years the markets have returned approximately 129%. This makes the current period rally as the sixth best ever bull run in the US stock market history. Sustenance of the rally for such a long period of time and scaling new highs in between suggests that the US market is in a structural bull run.

But doesn't the current investing environment seem paradoxical to this fact? Despite such strong returns, equity as an asset class is still viewed with suspicion. Most investors are circumspect about investing in equities at the moment. And that's because they know that the current rally is fuelled by artificially loose monetary policy followed by Federal Reserve. It is true that corporate profits have increased and unemployment rate has declined over the four year period. But it is the federal intervention which is a key trigger driving the markets right now. And once the intervention ends markets would lose steam. Thus, the current bull run is situation specific. So, while it may find a place to be sixth largest one in terms of returns score card it lacks broad investor participation. As such, it may well rank right at the bottom, if assessed on a sentimental score card.   
Do you know exactly how bad things are inside the Eurozone? If not, here is something very shocking. At US$ 2 trillion, Italy is one of Europe's largest economies with about 6 million companies. And it is also one of the worst affected by the crisis. The country saw nearly 365,000 businesses shutting down last year. That is like a 1,000 businesses going belly up every single day. It must be noted that the economy contracted by 2.4% during this period. The small and medium-sized businesses are the worst hit. In fact, 50% of the small firms are being unable to pay their employees on time.

Italy's economic worries are not new. Its economic growth during a major part of the last decade was just half that of the European Union. Who is to be blamed for this? Some major factors include a clumsy bureaucracy, rigid labour laws and declining competitiveness in the global markets. The Italian government took up austerity measures last year to deal with the crisis. Tax increases and spending cuts have pushed Italy into one of the worst recessions of any Eurozone economy.

Italy's crisis, in a way, represents the overall gloom in the Eurozone. It poses serious long term risks to growth and stability in the zone. In an increasingly interconnected global economy, the adverse impact of this is going to be felt everywhere. India is certainly not immune.    
Data source: Economic Survey 2012-13
 
India has seen a 'new normal' at least as far as inflation is concerned, over the past 3 years. The average wholesale price inflation (WPI) during this time frame has been around 8.7%. This against an average WPI of 5.2% between 2001 and 2008. Even in 2009 inflation was benign at 3.8%. However, the inflation levels have stuck well above RBI's comfort zone since then. This has also caused many to argue that probably the RBI should revise its inflation target upwards. This approach will also help the central bank be a little more lenient on monetary policy. However, the RBI has refused to go by this logic. While we understand the RBI's reluctance to accept higher levels of inflation as 'new normal', it cannot turn a blind eye to divergence between WPI and CPI (consumer price inflation). Even as WPI has cooled off in recent months (6.6% in January 2013), India has been amongst countries showing the highest rise in consumer inflation over the past year. Thus the RBI should shed its inflation target in terms of WPI and adopt one in CPI terms instead. 

SEC accuses Illinois of securities fraud.

Illinois has become only the second state to be accused of securities fraud, with the SEC saying that it misled bond investors from 2005-2009 about the ever-worsening condition of its public workers' retirement plans by claiming that it was properly funding the scheme when it wasn't. However, while Illinois has agreed to a cease-and-desist order, it has escaped any fines and it hasn't had to admit any wrongdoing.

U.K. production slump sends pound tumbling.

U.K. manufacturing and industrial production unexpectedly fell in January, renewing fears that Britain will enter a triple-dip recession. Manufacturing output dropped 1.5% on month and industrial production 1.2%, with the latter hurt by the suspension of a North Sea oil platform. The pound sank to $1.4832, its lowest since June 2010, after the data was released, and was -0.4% at $1.4855 at midday in Europe.
Well, the year so far has been gold's worst start to a year in 25 years. In fact, investors sold off 106.2 metric tonnes of gold from exchange-traded products (ETP) in the month of February alone. This has been the biggest sell off since the creation of ETP in 2003. Many are already ringing the alarm that the 12-year gold bull rally is nearing its end. Renowned investor George Soros has slashed his stake in the biggest ETP by a whopping 55%.

Why is the gold correcting now? There seems to be a change of sentiment globally. Many are beginning to believe that the world economy is on the path of recovery. Improving economic activity tends to push capital out of gold and towards equities and other assets.

We do not share the same enthusiasm for the world economy yet. In the aftermath of the 2008 financial crisis, policymakers pumped in excessive liquidity into the financial system. They tried to solve a debt problem by injecting more debt. So the real problem has not been solved at all. And this, in our view, still poses a serious risk to the developed world. So, there are good chances that gold prices will continue to correct for a while. But this must be treated an opportunity to buy the yellow metal.
The newly heralded Japanese premier is clearly a man on a mission. Seems he will settle for nothing less than watching the demon of deflation in Japan being run into the ground. And there are signs that he could well be on his way to success. The Economist reports that the largest retailer in Japan recently announced a pay-hike for around 54,000 of its employees. For some of them, this will be their first basic-salary hike in four years.

Clearly, this is big news for a country that hasn't seen the mercury on the price-meter rise for about 15 years now. However, the big question is whether the other firms will follow suit? And this is where the good news ends we believe. Most other firms are unlikely to take a leaf out of the retailers' book. At least until they see clear signs of growth returning and the economy improving.

But will a sustainable growth return to the land of rising sun? We are not that positive. The simple reason being that Japan is trying to achieve this by printing money. And if printing money leads to prosperity then Zimbabwe could have been the richest nation in the world. So Japan could well move from deflation to hyperinflation. But increase in real wealth looks a very difficult proposition to achieve.

Monday, March 11, 2013

Dollar Reaches High As U.S. Growth Picks Up

Prospects that data, to be released in the next couple of days, will show a gain in retail sales, and on the back recent reports that showed that the U.S jobless rate has dropped and payrolls have risen, has seen the greenback rise by 0.1% to 96.12 Yen, close to its highest level since August 2009. The Dollar hit $1.2998 per Euro from $1.3005 on Friday.
 
Labor Department data released on Friday showed that employers in the U.S. had added 236,000 jobs in February, for the third monthly rise above 200,000 in four months. This pushed down the jobless rate to a 4 Year low of 7.7%.

The Commerce Department is due to release figures on Wednesday that are expected to show, that sales at U.S. retailers have likely risen by 0.5% in February having gained by 0.1% in January.

The Yen lost 0.1% to 124.94 per Euro from Friday, close to its lowest level in 3 weeks, after Japan's machine orders dropped more than expected and after the nominee for central bank governor, Haruhiko Kuroda, had said in a report today that current monetary easing efforts are not enough to fend off deflation.

As the stock markets also continue to show resilience, many traders are gaining a higher risk appetite and we are seeing a weaker Yen as a result.

From Europe, the focus is also on the Italian gross domestic product (GDP) which is expected to have declined 0.9% in the fourth quarter. The final reading is to be released today.

Political risks in Italy, after recent deadlocked elections, also show no signs of receding and the growth outlook for the Euro region has been deteriorating further, which is set to weigh on the Euro in the near term.
 
The Pound has also been under pressure having declined to a 2 1/2-year low to the Dollar and having dropped against the Euro, as investors remain concerned that U.K. policy makers are still struggling to avoid an unprecedented triple-dip recession.

Prime Minister David Cameron has rejected suggestions that cutting taxes or raising spending would help the economy. He has called on the Bank of England to assist with growth.

I expect sterling to remain under pressure in the next few days and for it to even possibly weaken toward $1.46 in the next few weeks.
 

Legislators look to apply scalpel to sequestration.

Now that Washington looks to have accepted the $85B sequestration, GOP legislators are looking to see where they can apply the scalpel rather than the machete. Programs at risk include one for robotic squirrels that helps researchers understand how squirrels interact with rattlesnakes, and NASA's research on feeding astronauts on Mars

Japanese machinery orders slump.

Japanese machinery orders, a leading indicator of capex, dropped for the first time in four months in January, plunging 13.1% vs +2.8% in December and consensus of -2%. The government blamed the sharp drop on big-ticket items such as turbines and boilers, and forecast a rise in orders of 0.8% in Q1. Economist Takeshi Minami says that while the fall was greater than expected, "this is a temporary fall."

German exports edge up.

Germany's trade surplus slipped to a seasonably adjusted €15.7B in January from €16.9B in December and vs consensus of €15.8B. Exports rose 1.4% on month and imports 3.3%. "Very hesitantly, hard data is reflecting the strong rebound in sentiment surveys," says Berenberg Bank economist Christian Schulz. "The economy is rebounding from the sharp contraction, but the extent of the rebound remains subject to some uncertainty."

China unveils government restructure.

 China plans to break up its powerful Railways Ministry as part of a major overhaul of government designed to cut corruption and bureaucracy. "The new leadership is sending a clear message that they are...serious about building a cleaner and more efficient government,"

Ethanol law could lead to rise in gasoline prices.

The cost of complying with a federal law to use corn ethanol in fuel has sky rocketed. The problem is that refiners are hitting the "blend wall," whereby, according to recommendations from car makers, ethanol shouldn't comprise more than 10% of gasoline. That could conflict with proposed increased EPA quotas for ethanol next year, which has caused the price of ethanol credits to jump to over $1 from just a few cents last year. Eventually, refiners will pass the costs onto consumers, says Valero Energy (VLO).

U.K. parliamentary panel advocates collective punishment for banks.

 Britain's Parliamentary Commission on Banking Standards has said that the government should consider breaking up all banks into retail and investment-bank activities if just one of them breaches new ring-fencing rules designed to avoid another bailout. The Commission made its call ahead of a parliamentary debate today on the government's Banking Reform Bill, which is weaker than the panel would like it to be.

AT&T eyes $3.5B stake in Indian telco venture.

AT&T (T) is reportedly looking at acquiring a 25% stake in Indian telecom venture Reliance Jio Infocomm for $3.5B in a deal that would represent the largest foreign direct investment in India. Reliance Jio Infocomm, which is controlled by the country's richest man, Mukesh Ambani, hasn't yet begun operating; it aims to break even within three years of starting services.

Chinese inflation spikes to 3.2%.

Chinese inflation jumped to 3.2% on year in February from 2% previously, with the spike the result of the Lunar New Year. The data comes as other indicators slow down, including industrial production, retail sales and electricity output, which is often looked at because of the "quality concerns" of other metrics. The figures have helped send U.S. stock futures lower, as well as bourses in Europe and Asia.
India's slowing growth and rising fiscal deficit has been a matter of great worry. It has been a big headache for the Finance Minister. Rating agencies have been threatening of downgrading India's rating to junk status if the financial condition deteriorated further. If this happens, attracting foreign capital would become even more difficult and expensive. Keeping these risks in mind, the FM has launched an austerity drive. But this is taking a toll on highly indebted corporates. Tight liquidity has resulted in a torrent of corporate rating downgrades. During the first half of FY13, rating agency CRISIL downgraded 484 companies. This went up to 530 downgrades during the October-February period. This means over 1,000 downgrades this fiscal. It must be noted that there were just 492 downgrades during the whole of FY12. Banks have been facing the risk of rising bad loans. As such, they have shut the doors on small and medium enterprises. This has been the worst affected segment. It will take a while before these companies escape from the debt trap.

S. 9(1)(vii): Services rendered by machines is not “fees for technical services”

Siemens Limited vs. CIT (ITAT Mumbai)


The assessee made payment to a laboratory in Germany for carrying out certain tests on circuit breakers manufactured by the assessee and to certify that the said circuit breakers met with international standards. The assessee claimed that as the said tests were carried out by sophisticated machines without human intervention, the services did not constitute “fees for technical services” as defined in s. 9(1)(vii) of the Act. The AO & CIT(A) rejected the claim on the ground that the services were “technical” in nature and that even assuming human intervention was necessary, the same was present in the form of humans observing the process, preparing the report, issuance of certificate and monitoring the machines. On appeal by the assessee to the Tribunal, HELD allowing the appeal:
 
(i) Explanation 2 to s. 9(1)(vii) defines the expression “fees for technical services” to mean “any consideration for the rendering of any managerial, technical or consultancy services”. The word “technical” is preceded by the word “managerial” and succeeded by the word “consultancy”. Applying the principle of noscitur a sociis, as the words “managerial and consultancy” have a definite involvement of a human element, the word “technical” has to be construed in the same sense involving direct human involvement. If services are provided using an equipment or sophisticated machine or standard facility, it cannot be characterized as “technical services” so as to fall within s. 9(1)(vii) (Bharati Cellular Ltd 319 ITR 258 (Del) & Skycell Communications 251 ITR 53 (Mad) followed; fact that Bharati Cellular has been set aside by the SC in Bharat Cellular Ltd 330 ITR 239 (SC) does not affect this principle);
 
(ii) On facts, the services provided by the German laboratory for testing the circuit breakers was a standard service done automatically by machines and not requiring human intervention. The fact that humans are required for observing the process, preparing the report, issuance of certificate and for monitoring of machines is not a relevant criterion. The test is whether the services are rendered by a human or by a machine. If a human renders the technical services with the aid of a machine, the services are “technical services”. But if the services are rendered by a machine without human interface or intervention, then it is not “technical services” as defined. The mere fact that certificates have been provided by humans after the test is carried out by the machines does not mean that services have been provided by human skills.
 
Contrast with Kotak Securities 340 ITR 333 (Bom) where a similar argument that transaction charges paid to the stock exchange for the automated BOLT system is not for “managerial services” was not accepted

Sunday, March 10, 2013

There was a time when US$ 90 - US$ 100 per barrel used to be a psychological barrier for crude. However, if five year forwards for crude are anything to go by, the range is a new normal for crude. Oil prices play a critical role in shaping macroeconomic policies. No wonder that we have a deluge of views and forecasts on the same. But what if two prestigious agencies come up with totally divergent forecasts for a commodity as critical as crude?

Well, this is exactly what has happened. The official forecaster International Energy Agency suggests a level of US$ 120 per barrel for crude by 2020. That implies a decline in real terms for crude. However, OECD has a different take on oil prices. It believes oil prices will see levels of US$ 190 per barrel. And as if that is not bothering enough, OECD suggests a possible level of US$ 270 per barrel.

At the base of OECD forecasts lies the historical movement in oil demand in response to GDP growth and oil prices. As per OECD studies, oil demand has grown almost one on one with income in the past 20 years in emerging economies. Unlike developed economies, the emerging ones like India and China have shown high intensity of oil usage. Since these are going to lead the global growth in the future, oil demand is likely to go up and so are the prices. However, we believe that such a scenario is unlikely. As emerging economies grow further, they are likely to improve energy efficiencies which will moderate the demand momentum. Also, with huge shale gas findings and investment, oil may not remain that critical in serving energy needs. 
Ask any economist and he would say that the words 'unlimited' and 'currency' should never be used together. This means that the money printing presses should not be left to operate indefinitely. If they are then eventually disaster would follow. The current round of money printing has been triggered by the developed economies. Through their quantitative easing programs they are flooding the market with their currencies. In effect they are deliberately depreciating the value of their currencies. And naturally this has huge global implications. Particularly for economies like China which rely heavily on exports as well as imports. Since it relies on exports, devaluation of the developed economy currency makes China's exports un attractive. This hurts them on the export front. But even on the import front they take a hit. How? Well the flood of money leads to higher asset prices. This includes prices of natural resources like oil. And China is a huge importer of oil. Therefore it gets hit on both ends.

This is why the Chinese Premier has issued a warning against the devaluation of currencies by the rich countries. This is not to say that China has not played any role in the currency wars. The country has artificially kept the value of its currency down and has prevented it from appreciating. Therefore for China to cry foul is a little hard to digest. Nevertheless the global implications of the QE programs are huge. Sadly even the people of these rich countries are suffering the after effects of their loose monetary policies. But their governments have turned a deaf ear and a blind eye to these problems.

In such a situation, gold is the only real currency or preserve of value that is safe from the hands of central bankers. You cannot mint excessive gold the way you can print paper money.

China posts unexpected trade surplus.

China's trade surplus fell to $15.25B in February from $29.15B in January but beat expectations for a deficit of $7.75B. Exports jumped 25% and imports dropped 8.8%. As the data is distorted by the Chinese New Year, analysts look at January and February combined, when exports rose 23.6% and imports 5%. However, while exports have been improving, says Goldman Sachs' Song Yu, "it is not strong enough to sustain the robust growth we saw in February."

Job markets seen continuing slow improvement.

Unemployment data for February is due out this morning, with economists estimating that nonfarm payrolls grew by 160,000 vs 157,000 in January. That would leave the jobless rate unchanged at 7.9%. The number of vacancies has grown to heights not seen for a number of years, but employers are taking much longer to fill those openings.

Fed Stress Tests: All but Ally Financial pass.

Eighteen major banks have passed the Fed's stress tests, showing they'd have a Tier 1 Common Ratio of over 5% in the central bank's "severely adverse" economic scenario. That includes GDP slumping 5%, unemployment of 12%, a 50% fall in stocks and recessions overseas. Only Ally Financial failed, while Citigroup (C) came out as the most overcapitalized of the largest banks with an 8.3% common ratio. The bank has requested permission for a $1.2B share buyback and the maintenance of its $0.01 dividend.

Japan revises Q4 GDP up to show growth.

Japan appears to have recovered from its recession after revised Q4 GDP numbers showed annualized growth of 0.2% vs a preliminary reading of -0.4%. Private consumption and public investment boosted the economy, while a smaller-than-initially estimated drop in capital spending indicates that the falling yen may be easing corporate pessimism. The new data has helped boost global shares, with the Nikkei rising 2.6% to 12,283.62, its highest close since September 2008.

Thursday, March 7, 2013

French jobless rate hits 13-year high.

French unemployment rose to a 13-year record of 10.6% in Q4 from 10.2% in Q3, due to companies laying off workers amidst an economy that appears to be sinking into recession. Excluding France's overseas territories, the jobless rate was 10.2% vs consensus of 10.1%.

House passes bill to fund government.

Absent the usual last-minute drama and factional disputes, the House yesterday approved a bill to finance federal programs until the end of the fiscal year in September. The vote came well ahead of the deadline of March 27 and averts a government shutdown. The measure, which includes the $85B of sequestration, is due to be voted on in the Senate next week, when it is expected to pass.

BOE follows BOJ in leaving policy unchanged.

The Bank of England has kept its benchmark lending rate at 0.5% and its QE program dormant. The decision was expected by most, although the minutes of the bank's previous meeting had prompted speculation that it is beginning to lean towards additional asset purchases. The pound shot higher after the BOE decision and was +0.4% at the time of writing.

BOJ leaves monetary policy unchanged ahead of new governor.

As widely anticipated, the Bank of Japan has left its key interest rate at 0-0.1% and its asset-purchase program at ¥101T. The decision was made at Masaaki Shirakawa's last policy meeting as governor; the real action is expected to come at the bank's next meeting in early April, which is set to be led by Shirakawa's prospective replacement - and uber dove - Haruhiko Kuroda.
Look at the Dow Jones Industrial Average. The benchmark stock index has already hit an all-time high. Does this not indicate that a recovery is underway? Can so many people be wrong? Well, we fear that this bull rally in the US stock markets is dangerous. The economy still fares poor on several vital indicators. Household income and confidence has been dipping to an all-time low. The case with employment, wages and salaries and housing is not encouraging either. At the same time, energy continues to remain expensive.

In essence, the US is in a deleveraging cycle after a 40-year boom fuelled by excessive debt. Its economy is going through a correction. As such, the stock rally is not supported by organic economic growth. The US Fed Chairman has been injecting huge doses of money recklessly into the financial system. This has caused stock prices to go up. Mr Bernanke has been hoping that the 'wealth effect' caused by the rise in stock prices would trigger consumer spending. And this in turn would prop up the economy.

That's nothing but wishful thinking. By artificially inflating asset prices, the US central bank has created an illusion of stability. We believe this is extremely dangerous. Any major external shock outside the control of the central bank could bring the markets crashing.
Fed chief Ben Bernanke retires in January 2014. Many hope that this will put an end to the era of cheap money. However, that may not be the case. The US Fed itself may not want to take Bernanke's legacy forward. As it is, his colleagues at the Fed have not always nodded in agreement with his cheap money policies. The Vice Chairman of the Fed, who may succeed Bernanke, is known to be dovish central banker.

However, it seems that there are many more central bankers around the world waiting to fill in Bernanke's shoes. Bank of England and the ECB have already committed to keep cheap credit flowing. But the Governor of Bank of Japan takes the cake. Plagued by over a decade of economic stagnation, the newly elected Japanese PM has virtually promised the most expansionist monetary policy. It is therefore only a matter of time before other central bankers take the mandate of printing money from Bernanke. For those of us worried about inflation and devaluation of currencies, parking small amounts of money in gold is the only redressal.
FY13 has not been a particularly good year for the auto industry. Indeed, slowdown in the economy, high fuel prices, firm interest rates and higher consumer inflation have all taken toll in some form or the other on the demand for vehicles. Given that the fiscal is almost over, focus has now shifted to how the scenario will pan out for the sector in FY14.

The industry is closely linked to GDP growth. Thus, unless GDP growth picks up, the outlook for the auto sector will continue to stay subdued. And things are not looking too good for FY14 either. For the first six months at least, the demand is likely to remain subdued. Even dealers across the country have pointed out that the demand environment has been poor and deteriorating. Further, footfalls and enquiries have also reduced. In a tough economic environment, consumers are wary of loosening their purse strings for big purchases. Thus, if the Indian economy begins to display signs of recovering in the latter half of the coming fiscal, then that positive impact will be rubbed off on the auto sector as well.

Wednesday, March 6, 2013

Dollar Down Versus Majors Ahead Of Jobs Data

The Dollar has fallen for two days running against most of its 16 major peers, ahead of a private U.S. jobs report which is expected to show that U.S. companies have added positions.
 
The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the Dollar against currencies of six U.S. trading partners, had fallen 0.1% to 81.971

What we are seeing is that the Dollar is being sold in risk-on trade as earlier the Dow Average rose to a record high, aided by speculation that central banks will continue stimulus, and after Treasuries were sold.

The market is now keenly awaiting the next jobs report.

The U.S. Labor Department is set to release its payrolls data on Friday and a report due out today from the ADP Research Institute, will likely show that U.S. companies have taken on more workers, in the region of 170,000 positions, in February after adding the most jobs in almost a year in January.

The Dollar lost 0.1% to $1.3062 per Euro and weakened 0.1% to 93.18 Yen from Tuesday.

The Euro was little changed against the Yen at 121.70 for a third session, ahead of ECB President Mario Draghi and his board meeting tomorrow.
 
I expect that the ECB will keep its benchmark rate at 0.75% this week, though a few factors come into play.

The European Commission sees inflation at 1.8% for 2013 and at 1.5% in 2014 also, the Euro region's gross domestic product has likely fallen 0.6% in the fourth quarter of 2012 from the previous quarter.

Furthermore, the Euro has appreciated since the ECB's last economic forecast in December, which in turn could weigh on the ECB's outlook for inflation.

This could result in the market looking to price in more ECB policy easing and that, I expect, will put pressure on the Euro in the days ahead as anticipation builds for the ECB to update its December economic forecasts.

Australia enjoys strong GDP growth in 2012.

Australian GDP climbed 3.6% in 2012, representing the strongest growth since 2007 and one of the best performances in the developed world as rising exports and resources investment offset a slump in manufacturing and construction. In Q4, GDP slipped to an expected +0.6% on quarter from +0.7% in Q3. Australian shares hit fresh multi-year highs and the S&P/ASX 200 closed +0.8%.

Vodafone jumps on speculation about Verizon merger talks.

Vodafone (VOD) shares surged 6.6% in London following a report yesterday that it has been in talks about merging with Verizon (VZ), whose real goal is to take full control of Verizon Wireless. However, discussions have stalled over "disagreements on leadership and headquarters location." That apparently makes a buyout or partial sale of Vodafone's 45% stake in Verizon Wireless - estimated to be worth $115B - more likely.

DJIA set to add to record highs.

The Dow Jones looks poised to build on its gains from yesterday, when it closed +0.83% at a record high of 14246, with DJIA futures rising 0.3% premarket. The Dow's rise has helped boost Asian and European shares, and Japanese and Australian stocks hit fresh multi-year peaks. However, not everyone's convinced. "With the recent gains put largely down to central-bank stimulus and the fundamentals around the global economy remaining uncertain, heavy scepticism persists,"
India is witnessing acute coal shortage. This has impacted the power generation plans of India. And understandably so. Right now, approximately 57% of India's power generation capacity is based on coal. Thus, shortage of coal is bound to impact the power generation. Lengthy process in getting clearances for new mines has impacted coal production. Also, transportation bottlenecks have impacted the availability of coal. Shortage of railway wagons is the primary reason behind it. As a result, India has decided to move towards clean energy mechanism. There are ambitious plans to tap other energy resources like wind, water, solar etc. However, the share of coal is likely to remain unaffected. And this can be said from the fact that even in 2030 approximately 52% of India's power capacity will still come from coal. This is just marginally lower than 57% figure persisting currently. Thus, it can be said that India's power generation aspirations are heavily dependent on coal. As such, government must take steps to increase the production. If not, India will continue to remain a power deficit country.          
Most Indian taxpayers feel that the Union Budget is not for them. Whether you are salaried, self employed, home maker or retired, few Budget provisions impact you directly. Rarely do any impact you positively. But if you are a farmer or farm owner, budgetary provisions have something for you year after year. Ever since India was an agrarian economy in the 1950s our politicians decided to favour agriculturists. Seven decades later, when we are service driven economy, the country's tax policies have remained unchanged. No politician has dared to breach the topic of tax on agri income. In fact newer sops are awarded each year in the name of Green Revolution. That makes one wonder as to why do scores of farmers commit suicide each year. Where does all the money go? Most of us already have the answers. But Comptroller and Auditor General's latest report bares the facts like no one ever has. The CAG report calls the UPA government's popular 2009 farm loan waiver scheme a Rs 520 bn scam

No, it is not that the CAG is the first one to smell the rat in this case. In fact, this scam should have been one of the first to be unveiled by CAG. Chiefs of PSU banks have been crying hoarse about the piling up of bad loans due to loan waiver scheme for three years. Ever since the scheme was rolled out, PSU banks that were in perfectly good health saw their asset quality worsen. Even the subprime crisis of 2008 did not do to banks in India what the 2009 loan waiver scheme did! Now the government wants to compensate by recapitalizing the banks. Once again throwing away taxpayer money at them!

As for the small farmers who were supposed to benefit from the scheme, very little has changed. As per the CAG report, 37.3 million farmers were given debt relief worth Rs 522.6 bn under the scheme. But in 22.32% of the 90,576 cases checked by the Auditor, ineligible farmers were given benefit. The deserving ones kept reeling under the burden of debt, in the event of a poor harvest.

Unlike the telecom, coal and Commonwealth Games scams, this one has had a scathing impact on not just economic but also India's social well being. It cements the fact that the government's populist schemes benefit no one but itself. Worse, since the Union Budgets are backed by very little mathematical and logical explanations, promises are made out of thin air. It is time the Finance Ministry puts up the math for financing subsidies before asking taxpayers to shell out more! It is time the FM gets more accountable!