GalaTime

• Business Standard: PSBs` net NPAs up 24% in 3 yrs

. . . the net NPAs of 25 public sector banks increased by 24 per cent in the last last three years, from Rs 13,794.60 crore in 2005-06 to Rs 17,015.04 crore in 2007-08. The last year itself saw the sticky assets rising by 17 per cent.

PSBs have been able to reduce their net NPAs by virtue of provisions and not by cautious lending and monitoring of loan accounts.

Wonder where the private banks stand - given the number of phone calls I used to get for personal loans back in 2006-07 makes me think that NPAs must be rising fast.

• TraderFeed: Four Lessons I’ve Learned From Coaching Hedge Fund Portfolio Managers

. . . lessons I’ve learned from coaching hedge fund traders/portfolio managers that differ from the common wisdom in the magazines, seminars, and books.

1) Success is Individualized - the notion that successful portfolio managers have a common set of personality features or trading approaches simply does not hold water in the real world.

2) The Game is Different - portfolio management in the hedge fund context is a different process from trading in the prop firm or retail context.

3) The Environment Matters - The research, platform, risk management, and managerial support of traders matter quite a bit–

4) Success Starts at the Beginning - Much of portfolio manager/trader success or failure simply comes from putting the wrong people into positions.

• IHT: Falling prices grip major stock markets around the world

In Europe’s largest economy, Germany, the benchmark DAX index is off slightly more than 20 percent this year, and the CAC-40 in France is down almost 22 percent. The Euro Stoxx 50, a gauge for the 15-nation euro zone, has declined by about 24 percent. The nearly 15 percent decline in the FTSE 100 in Britain looks tame by comparison.

“The longer inflation remains high, the more damaging it will be for longer-term economic growth prospects,” Morgan Stanley wrote in a report about inflation creeping upwards worldwide. “High inflation rates usually go hand-in-hand with a higher variability of inflation, which raises uncertainty and can thus reduce investment spending.”

Nowhere to hide, except commodities. Alo check out this Morgan Stanley piece on how to trade inflation.

• Economic Times: India, Japan to sign currency swap deal today

The swap arrangement will enable both the countries to swap yen and rupees against US dollar up to $3 billion. That means, Japan will accept rupees and give US dollars to India if the need arises and India too will accept yen against dollars. However, drawing beyond 20% of the stipulated amount ($3 billion) would require India to have an IMF (International Monetary Fund)-support programme.

. . . up to 20% of the maximum amount of drawing could be disbursed even without having an IMF-support programme.

• Hindu: What has changed with MF portfolios

That the funds continue to put these sectors on top of their radar suggests they remain convinced that the lower valuations more than factor in any earnings concerns surrounding these sectors. Sectors such as financials or infrastructure may recover quickly if concerns on credit growth and execution delays abate.

• Bloomberg: Harvard, Buffett Have Bad News for Asia Bulls

The knock-on effects are coming, just more stealthily than many expect. Asia is unlikely to get off easy even if the U.S. skirts a recession. The region hasn’t decoupled from America as much as some would say. The worst-case scenario — a prolonged U.S. decline — could be devastating, particularly at a time when record oil and food prices are hurting Asian households.

China is one of several Asian economies with negative real interest rates. With its annual inflation above the central bank’s benchmark lending rate, China would be hard-pressed to stimulate growth with lower borrowing costs or increased government spending.

• Economist: Capital inflows to China - Hot and bothered

China’s foreign-exchange reserves jumped by $115 billion during April and May, to $1.8 trillion. In the five months to May, reported reserves swelled by $269 billion, 20% more than in the same period of last year. But even this understates the true rate at which the People’s Bank of China (PBOC) has been piling up foreign exchange.

Mr Wright reckons that total foreign-exchange assets rose by an astonishing $393 billion in the first five months of 2008 (see chart), more than double the increase in the same period last year.

The stockmarket, which continues to plunge (see article), is no home for hot money. Some has gone into property. The lion’s share is in bog-standard bank deposits. An interest rate of just over 4% on yuan deposits compared with 2% on dollars, combined with an expected appreciation in the yuan, offers a seemingly risk-free profit for those who can get money into China.

Yuan carry trade?

• Zeal: Soft Commodities: Grains

• Morgan Stanley: Global Cross-Asset Strategy: The New Inflation Regime

India Equity Strategy: Downside Risk to Earnings Not Yet Priced In - The consensus has still not plugged in the risks. Narrow market earnings estimates are still rising, with strong expectations in financials, industrials and materials.

We see six reasons to be worried about earnings: 1) reflexivity between earnings and share prices; 2) high share of financial income in net earnings; 3) potential off-balance-sheet losses; 4) slowing macro-economy with negative implications for revenue growth; 5) dependence on margins that are close to record levels to sustain growth, and 6) a high base effect - earnings appear well above trend.

Bottom line: 4000 on the Nifty & 14000 on the Sensex start looking quite pricey!

• Bloomberg: Merrill Says India’s Swaps Signal More Rate Increases

Two-year swap rates in the past week climbed the most since the derivatives started trading in 1999, signaling that Reserve Bank of India Governor Yaga Venugopal Reddy may raise repurchase rates to the highest since 2001.

Two-year swap rates surged 1.3 percentage points in the week through yesterday to 9.86 percent, while contracts for five years climbed 1.2 percentage points to 9.9 percent.

The five-year swap rate is 1.45 percentage points above the central bank rate, compared with a median of 23 basis points over the past four years.

• Economic Times: Gold ends at $912.60/913.60 as funds buy, oil soars

Gold ended nearly 4 percent higher on Thursday with funds pouring into commodities as a tumbling stock market amid oil’s surge to a new record high boosted bullion’s appeal as an alternative investment.

. . . the dollar extended losses against major currencies as expectations for a U.S. rate hike receded after comments from the Federal Reserve on Wednesday.

Oil, the other main external driver of the gold price, surged 4 percent to a record $140.39 a barrel.

• Safe Haven: When Central Bankers Clash, Stock Markets can Crash

Central bankers of fast-growing emerging economies are navigating through the stormy seas of commodity inflation by tightening monetary policies. But the “Group of Seven” central bankers have acted in a different fashion. The British, Canadian, and US central banks are focused on the global banking crisis, and the slide in US home prices, and have lowered their interest rates, while the Bank of Japan has stood motionless. But the European Central Bank was moving in the opposite direction, and guided Euro-zone money market rates to their highest in 7-years.

The downward spiral in the German bund market widened the Euro’s interest rtate advantage over the US dollar, leaving the greenback on shaky ground and vulnerable to speculative attack. Bernanke would be under heavy pressure to match a second ECB rate hike to 4.50%, to defend the value of the dollar. In essence, the ECB could hijack US monetary policy, and force the Fed to guide the federal funds rate higher, in order to shake-out speculators in the crude oil and commodities markets.

Note that major US indices dropped over 3% yesterday, and Asian markets are following suit this morning. Do we see 4000 on the Nifty soon?

• Financial Times: GaveKal’s four ways to make money

. . . how money managers can make money in the current conditions -

1. Run some kind of momentum trade

2. Run some kind of return to the mean trade

3. Run some kind of carry trade

4. Run some kind of negative carry-trade

• Via Big Picture, Welling @ Weeden: Inflation Not The Problem

The Royal Bank of Scotland Group Plc (RBS LN) has the largest rights issue in European history, and everybody cheers it! It makes no sense. As I wrote, it’s the financial equivalent of being mugged and turning around and saying, “Thank you. But should we head off to the cash point so I can give you some more?”

Emerging markets are trading on a 40 times cyclically adjusted P/E. Back in 2003, they were at 10 times cyclically adjusted P/E.

If you’re investing in commodity futures, which most of theses funds tend to do, it used to be that the market was generally in backwardation, so you collected a positive roll on your contracts. But now, because these guys have driven up the spot prices so much, a lot of these markets tend to end up in contango, which means you get a negative roll. That means that you’ve got to make 15%-16% per annum in price move — just to cover the negative roll.

• Bloomberg: India’s Pro-Growth Lobby Squirms as Rates Rise

The Associated Chambers of Commerce and Industry of India, which in October conducted a survey of chief executive officers and said the “stage is set for the RBI to relax monetary policy,” is now singing a different tune. Higher interest rates would hurt, it said in a press release yesterday, “yet the pinch will be less painful than double-digit inflation.”

. . . high prices are being passed on to the consumer because of strong local demand, which must be cooled with monetary measures.

. . . businessmen in India can’t get over the ghosts of 1997. Then, too, interest rates were high, and a fast- growing manufacturing economy had first slowed and then descended into a multiyear funk.

Say 7% GDP growth. Assume a generous 15% EPS growth - that would take the Nifty EPS from 235 to ~ 270. At a P/E of 14, that works out to 3800 - one year from now. Ouch!

• Business Standard: RBI`s double whammy makes India Inc see red

RBI raised the repo rate, or the rate at which it lends to banks, by 50 basis points to 8.50 per cent. The cash reserve ratio, or the proportion of deposits kept with the central bank, will be increased by 50 basis points to 8.75 per cent.

While the repo rate has been increased to 8.50 per cent with immediate effect, the CRR hike will be implemented in two phases: To 8.50 per cent from the fortnight starting July 5, and to 8.75 per cent from July 19.

. . . aggregate deposits rose 23.2 per cent year-on-year on June 6 against the indicative projection of 17 per cent for 2008-09. Similarly, non-food credit grew 26.2 per cent during the period, which was higher than RBI’s projection of 20 per cent.

• Mint: The uncanny predictions of ‘Dr Doom’ Marc Faber

Unfortunately, Faber spoilt the effect by going on to predict an apocalypse for the world economy, with hyperinflation, war and religious strife. His final prediction: “A deflationary stabilization crisis will follow in phase four of our road to financial fiasco. Large segments of the population will be totally impoverished. Smart hedge fund managers will all have sold their businesses to banks and will have left the US to live in the Caribbean, Brazil, Singapore, or Thailand, while…Ben Bernanke will flee the US in a hurry.”

Faber on CNBC & Mint - time to go long the Indian indices. A short term trade, mind you!

• Bloomberg: Chicago Merc Customers Citadel, JPMorgan Rebel for Cheap Trades

Rubio’s Breakwater and funds like it rely on the Merc and CBOT for the rapid-fire, low-cost trades that are critical to their success.

Beneath the surface in the conflict between CME and ELX, a bigger battle is brewing. This one is for control of derivatives that aren’t traded on any exchange. The over-the-counter market, run by banks such as Goldman Sachs Group Inc. and JPMorgan, offers swaps and options based on interest rates, currencies and the creditworthiness of corporate borrowers.

The Chicago hedge funds backing ELX are closely associated with the city’s exchanges. The biggest by far is Citadel. Griffin has been featured this year in CME Group advertisements in financial magazines and newspapers, with a quote across the middle of the page that reads: “Risk is what you make of it.”

I imagine that for these huge hedge funds (or more appropriately - market makers), the brokerage costs make the difference between a profitable trading system and an unprofitable one.

• Business Standard: Rs 8,000 crore premium realty projects face delay

. . . the construction cost for large commercial projects was Rs 2,000 per square foot, on average . . . construction cost is growing 20 per cent every year and the developers are carrying a compounded interest burden of 30 to 40 per cent after three years.

By 2008-end, Mumbai and its suburbs will add 15.4 million square feet of office space.

“In Mumbai, developers need to obtain 56 approvals from environment and forest department, pollution control board and others. It takes over a year to get these approvals,”

• Hindu Business Line: Six sectoral indices hit year lows

. . . six key sectoral indices hit their 52-week lows on Monday as the Sensex fell another 2 per cent. The BSE PSU Index , Bankex, Realty, Auto, Power and Capital Goods were the indices that recorded their new 52-week lows on Monday.

. . . defensive sectors such as BSE Health Care and FMCG are trading close to their yearly highs. Market men say that these sectors are not affected much by an increase in interest rates or even the rising crude oil prices.

• DNA: FII unloading spree is worst to date

In May and June, institutions (FIIs +DIIs) have net sold equities worth Rs 11,472 crore. That tops the Rs 9,525 crore net sales by them in January. Despite high cash positions and new fund-offer collections, local institutions have not been shopping hard in the summer sale.

. . . even the long-term fund managers among the FIIs are pruning their India exposures faced with redemption pressures. India dedicated funds saw redemptions of $205 million during the week ending June 18, 2008.

The rupee has been consistently at just below 43, seems to be held back by RBI intervention.