GalaTime

• Gary Dorsch, via Safe Haven: Is Crude Oil a “Bubble” Ready to Burst?

India is Asia’s third-biggest oil consumer, and imports 70% of its petroleum needs. India’s big-3 oil refiners Indian-Oil, Hindustan Petroleum and Bharat Petroleum, have borne the brunt of the crude oil spiral, are expected to report combined losses of 1.8 trillion rupees for the past year, from selling fuel below cost.

India’s Petroleum ministry is pitching for a reduction in the taxes and duties that account for about 55% the retail price of petrol. But the government earned a whopping 71,000 billion rupees in 2006-07 from taxes and duties on petroleum products last year.

The massive build-up of FX reserves can help India to cope with major external shocks, such as the surge in oil prices. In the past sixteen months, India’s imported 121 million tons of crude oil crude oil, up 9% from the same period a year earlier, and its oil import bill jumped 40% to $68 billion.

• Bloomberg: India’s RBI to Provide Foreign Currency to Refiners

The Reserve Bank of India will buy the securities, issued to oil companies by the government as compensation for selling fuel below cost, through designated commercial banks and provide equivalent amount of foreign exchange, it said in a faxed statement in Mumbai. Such purchases will be subject to a limit of 10 billion rupees ($235 million) a day.

The proposed market operations were aimed at minimizing the potential adverse consequences for the financial markets due to a rally in oil.

The increase in oil prices raised the value of India’s oil imports to a record $8.6 billion in March.

Finally putting those $300B+ forex reserves to good use?

• Hindu Business Line: SEBI amendments to FII norms to discourage sub-accounts

. . . a newly-established fund can now apply to be registered as an FII, provided the track record of the investment manager of the fund, who has promoted it, is taken into consideration.

The other relaxation is that university funds, endowment funds, charitable trusts and societies may be considered for registration as FIIs, even if they are not regulated by any foreign regulatory authority.

A sub account is now “any person resident outside India, on whose behalf investments are proposed to be made in India by a foreign institutional investor and who is registered as a sub account under these regulations.”

Asset management companies, investment manager/advisor, institutional portfolio manager set up or owned by NRIs shall be eligible to be registered as FII subject to the condition that they shall not invest their proprietary funds.

Full SEBI document.

If you were watching the market yesterday (especially after 2pm), you can’t have missed the vertical drop in the Nifty index (and Nifty May futures, but NOT Nifty June futures) at 3pm, followed by a super quick reversal. That’s what this article seeks to explain.

• Economic Times: FIIs let short positions expire in May

Being net short in Nifty May futures and 2 crore contracts still outstanding going into the settlement day, FIIs had a simple choice to make.

With no pressure of a short squeeze, they (FIIs) could either have rolled over these short positions into June or had let them expire in May itself. Since rolling over such huge short positions into June was a bit tricky, they decided to let them expire in May. But, how about making a bit of money before these shorts expire?

The Nifty fell like a stone in the consequential last half hour making an intra day swing of over 3%. No wonder, Thursday’s provisional figure revealed that FIIs were net sellers of Indian equities to the tune of a whopping Rs 1,277 crore. On the other hand, Nifty future contracts expiring in June added a 68 lakh shares in open interest to end the day at a huge premium of 23.35 points as compared to a mild discount on Wednesday.

• Mint: Costs, subsidy delays make going tough for fertilizer cos

Subsidy payments have skyrocketed in the past four years from Rs15,779 crore in 2004-05 to an estimated Rs95,000 crore in 2008-09, or 1.9% of the gross domestic product. Last year, the subsidy stood at Rs40,338 crore, which includes Rs7,500 crore paid through the first-ever issue of fertilizer bonds.

Fertilizer production requires natural gas, naphtha or furnace oil as feedstock, which account for 70% to 80% of the production cost. All feedstock variations are derivatives of crude petroleum and their prices vary with oil prices. In the past two years, the prices of liquefied natural gas, naphtha and furnace oil have increased by 198%, 50% and 71%, respectively. Out of the 28 functional urea plants in the country, 12 use naphtha or furnace oil as feedstock.

Similarly, the prices of crucial raw materials like phosphoric acid, sulphur and rock phosphate have gone up by 331%, 867% and 297%, respectively, in the past two years.

• Mauldin @ Investors Insight: The Geopolitics of $130 Oil

George and his team are calling the beginning of a new era of global competition. The weapons now won’t be the nukes of the Cold War or the suicide bombers of the post-9/11 world but rather exportable oil and food, and the huge piles of cash that come from exporting surpluses.

The real winners are countries that can export and generate cash in excess of what they need domestically. So countries such as Venezuela, Indonesia and Nigeria might benefit from higher prices, but they absorb all the wealth that is transferred to them. Countries such as Saudi Arabia do not need to use so much of their wealth for domestic needs.

The big losers are countries that not only have to import oil but also are heavily industrialized relative to their economy. Countries in which service makes up a larger sector than manufacturing obviously use less oil for critical economic functions than do countries that are heavily manufacturing-oriented.

The United States is an oil importer, but its relative vulnerability to high energy prices is nothing like it was in 1973, during the Arab oil embargo. De-industrialization has clearly had its upside. At the same time, the United States is a food exporter, along with Canada, Australia, Argentina and others.

Yet another unqiue perspective on oil.

• BCA Research: Is A Commodity Correction Approaching?

• Canadian Business: The next Buffetts

Dr. Michael Burry

Scion Capital, Cupertino, Calif.

Why he’s like Buffett: Burry works largely by himself and offers only limited disclosure about what he’s up to. He describes himself as a “contrary-minded individual” who profits by working far away from the “groupthink capital of the world” — New York. He made a killing in 2002 by buying up the distressed debt of WorldCom, the failing telecom firm. He cashed in again a year later by moving into South Korean stocks, which after a decade of inactivity had finally started to chug ahead.

Why he’s NOT like Buffett: Burry’s willing to run bigger risks than Buffett — at least the current Buffett, that is. He’s more comparable to the young Buffett of the 1950s and 1960s, who ran a free-wheeling investment partnership before settling down to manage Berkshire Hathaway.

What he’s doing now: Waiting. Burry believes U.S. home prices still have lots of room to fall. His flagship funds are about half in cash, waiting for opportunities to emerge from the chaos he sees ahead. “I see the virtuous circle of the past few years turning into a vicious spiral,” he says. “All the good things that came with rising home prices are now going to occur in reverse.”

• Barrons: The Best, From the Brightest

Icahn said the market has mispriced Motorola’s handset business, giving it a negative value. Price took a swipe at Icahn, saying Motorola and Time Warner (TWX) offer a “caveat” about activist investing, as neither situation involving Icahn has worked out for shareholders. Icahn dismissed one battered group: the airlines. His advice: “When they go up, short them.” There’s “no equity in an airline,” he added.

Einhorn took aim at $6.5 billion of collateralized-debt obligations (CDOs) backed by nonresidential mortgages on Lehman’s balance sheet, and said he has a hard time believing their value fell by only $200 million in the latest quarter, given the low credit rating on a chunk of them and dislocations in the credit markets.

Price said that “it makes no sense” that investors are willing to put capital into financial companies before the banks and brokers fully clean up their problems. He was critical of tens of billions of dollars of fixed-rate preferred-stock offerings that financial companies have sold to bolster their balance sheets.

• Morgan Stanley: Growth Cycle – At the Crossroads

Phase II – Acceleration to Overheating Zone (2004-07)

The timing of the acceleration in India’s GDP growth from 2004 coincided with a resurgence in the overall emerging markets growth trend. The positive trigger came in the form of an increase in global risk appetite from 2003 onward and an increase in capital inflows in emerging market economies. One of the key drivers of this phase was the prolonged low real interest rates in the US over mid-2001 through 2004 . . . total capital inflows into India increased to US$98 billion in 2007 from US$12 billion in 2002. We believe that these large capital inflows played a key role in boosting India’s growth cycle to above-sustainable levels.

Phase III – Reverting to Potential (1H08)

Policymakers allowed the phase of above-trend growth to last for a little longer despite early signs of overheating . . . The lagged impact of RBI’s monetary policy actions brought GDP growth down to an estimated 7.5% in 1Q08. Indeed, industrial production growth decelerated even more sharply to 5.8% during the quarter ended March 2008, from a peak of 13.6% during the quarter ended January 2007.

• Bloomberg: Time for Goldman to Add Indonesia to the BRICs

O’Neill says that if he were to sit down tomorrow and revise the BRICs, Indonesia would fare reasonably well. “Of them, we would rate Mexico as closer to a BRIC status than Indonesia, but it would not be far behind.”

. . . Indonesia isn’t an easy place in which to invest. It requires patience, disciplined research and a strong stomach given the lack of legal protection, the multitude of regional taxes and fickle politicians.

. . . it’s Indonesia’s potential and vast natural resources that are attracting interest from the likes of Reliance Power Ltd., the energy company controlled by billionaire Anil Ambani, and ArcelorMittal, the world’s largest steelmaker.

• Business Standard: FII stake in top companies back to June 2005 levels

FIIs trimmed their holding in the BSE 500 companies by nearly two percentage points to 17.8 per cent, bringing it back to June 2005 levels, according to a Citigroup report. FIIs pulled out shares worth $2.8 billion over the past quarter . . . The scenario is in quite in contrast to bull run of the last five years when FIIs pumped in more than $52 billion.

The drop in foreign ownership has been largely picked by promoters whose share of the market continues northward march. The uptrend continues even after accounting for public offerings where free-float is quite low.

Currently, they (FIIs) seem to be betting on industrials, telecom, consumer discretionary and materials.

Rupee at 43, FIIs back to ‘05 levels, EPS growth in single-digits . . . it’s as if everything is in reverse!

• Investors Insight: Joining The Dark Side: Pirates, Spies and Short Sellers

The parameters I used to define my shorts were a price-to-sales > 1, an F score of 3 or less, and total asset growth in double digits. This proved to be a powerful combination. Between 1985 and 2007 a portfolio of such stocks rebalanced annually would have declined over 6% p.a. compared to a market that was rising at the rate of 13% p.a. in Europe! Although I’ve not shown the result below, similar findings were uncovered for the US as well.

• Mint: Power target may slip by 20% on bad roads

India could miss by 20%, or 13,855MW, its target of adding almost 70,000MW of power over the next four years because of poor transport infrastructure. Currently, India has a power generation capacity of 143,000MW and it plans to add 78,577MW of generation capacity by 2012. With the country adding only 9,300MW of generation capacity in 2007-08 against a target of 12,000MW, a capacity addition target of 69,277MW is to be achieved in the next four years.

A case in point is NTPC Ltd’s Sipat power project turbine being stuck at Kasara Ghat on NH3 between Mumbai and Nashik for around six months because the road was not ready to take the load.

Long HCC?

• Financial Express: Inflation may be revised to 10%: Economist

India’s inflation rate may be revised to 10 per cent from the latest estimate of 7.82 per cent as data for prices of different commodities is updated, London-based publication The Economist has said.

It further said if measured correctly, five of the ten biggest emerging economies could have inflation rates of 10 per cent or more by mid-summer. “Two-thirds of the world’s population may then be struggling with double-digit inflation.”

Will the real inflation please stand up? And as for putting your money in fixed deposits - fuggedaboutit.

• IDD Magazine: Following The Money

As more revenue flows into the Middle East and North Africa (MENA) region, investment banks are moving greater numbers of professionals there to take advantage of the resulting opportunities.

Asset management, foreign exchange, Islamic finance and M&A advisory opportunities are some of the attractions for banks, and some of th wealthiest prospective clients in the region are sovereign wealth funds.

“Dubai started earlier than other regional centers, but there’s a tremendous amount of investment going into Doha, for instance. In the scheme of things, it’s quite a young region despite its tremendous history.” Besides Abu Dhabi (which, like Dubai, is part of the United Arab Emirates), Jenkins predicts Cairo could become an influential regional hub for international financial institutions, along with Manama, the capital of Bahrain, and Riyadh and Jeddah.

• Via Big Picture, Barrons: Barron’s Interview with Sy Jacobs

Looking ahead, what do you see for the financials?

We believe the recent rally in financial stocks — and for the whole market — is a bit of a head fake that will prove to be a bear-market rally.

What’s your premise?

After first ignoring subprime, people now are too focused on it and they’re missing the broader storm coming — that’s the head fake. While the bursting of the housing bubble produced all sorts of headline-making losses for some, it is just starting to drag down the rest of the economy. Separate from subprime, you are seeing diminished ability for consumers to spend their home equity. The securitization market, which banks and finance companies use to get funding, has slowed. So we see consumer and business spending slowing; the economy will falter.

• Business Standard: Melting under pressure

The difference of about $100 a tonne in the domestic and international steel prices is attributed to the Indian government’s recent cap on steel prices, which restricts the upside for steel players.

Additionally, the imposition of export duty on steel will only discourage exports leading to lower volumes. This cap on finished product prices comes at a time when companies are feeling the pain of unprecedented rise in input costs such as coking coke (up 200 per cent in the last year) and iron ore (up 65 per cent).

The domestic steel demand is growing at over 11-12 per cent, whereas the supply is lagging at about five per cent. As major expansion plans are expected to go on-stream from financial year 2009-10, except for the 1.8 million tonne expansion of Tata Steel (expected by June 2008) and 3 million tonne expansion of JSW Steel (expected by September 2008), the supply of steel is expected to remain tight.

• Economist: Inflation in emerging economies; An old enemy rears its head

• Business Standard: The whys and hows of farm loan waiver scheme

Initially, in the Budget, it was estimated that the cost of the scheme will be about Rs 60,000 crore to the central government. As it turns out, the cost of the scheme is likely to be in the order of about Rs 71,680 crore, again unaudited.

. . . if you are a small and marginal farmer, all the short term crop loans which are overdue and the instalments are overdue will be return off. Between 70 and 94 per cent is the range for all states.

Based on the audit, the claims of the bank of the Central Government would be reimbursed to the banks as I said they will be reimbursed over a period of three years. This year itself, we will provide Rs 40,000 crore, the next year and the next year, the balance will be provided.

• Safe Haven: What the Export Land Model Means for Energy Prices

Easier said than done!