GalaTime

• Hindu Business Line: Fall in coal prices may ease cement cos’ burden

Coal cost for the cement companies is likely to range between $190 and $200 a tonne (cost, insurance and freight) in the second quarter of the financial year 2008, against $170-240 a tonne in the first quarter.

On the domestic front, the electronic auction undertaken by Coal India has pushed up coal prices by 30-40 per cent to Rs 1,600 a tonne as the demand has gone up many folds, said another cement company official. Indian coal is of low calorific value compared with imported coal.

• DB: Indian Brokerage Sector

Despite a strong correction of 50-60% YTD, we believe it is still not too late to Sell as these brokerage stocks are currently trading at a premium to market multiples despite having higher betas.

In India the turnover has been steadily growing in the past few years as more FIIs have entered the market and more F&O contracts have been introduced in various securities. However, during the recession of 02 volumes declined 50% yoy.

The Indian broking industry is fairly large and fragmented with 9,000 odd brokers in the cash
segment and around 24,000 sub-brokers. The top five brokers in India command around 15-16% market share.

We expect volumes to decline 16% in FY09E followed by 20% growth in FY10E and FY11E.

Not too encouraging if you are a broker or shareholder.

• MarketWatch: Big jump in gold sale spurs manipulation talk

Recent heat from Congress and regulators, along with public speculation, over whether commodity prices are being manipulated has also reached gold pits, where the debate was stirred by a surge in bets last month that gold prices would fall.

Three unidentified U.S. banks held 86,398 short positions, or bets that gold prices will fall, in the COMEX gold market as of Aug. 5 — 10 times more short positions than a month earlier.

“What you have here is the footprints of hedge funds exiting the commodities markets en masse,” said Kitco’s Nadler.

Manipulation or exodus - does it matter? Price tells all.

• No Doodahs: Sharpe Thinking

It’s painfully obvious to all but the oblivious that many systems and styles of trading produce significantly skewed returns. Often these pay off like long options or long-term trend-following - positive skewness - or like scalping pennies (the “glorified market-making” world of high-frequency spurious correlation trades) or short options - negative skewness.

Using the Sharpe ratio on a positively skewed strategy may lead you to discard it unnecessarily, whereas using the Sharpe ratio on a negatively skewed strategy may lead you to discard your assets (and those of your investors) unnecessarily.

I use long backtests and start with two hurdles in the neighborhood of 20% each, one hurdle for maximum drawdown and one hurdle for minimum annual compounding rate. Then I try to maximize the ratio of annual compounding to maximum drawdown, which is kinda-sorta like Seykota’s Bliss ratio.

• DNA: Developers look to offload hotel land

. . . the hotel industry was expected to add 50,000 keys this year but has now dropped the figure to 30,000. “This figure will plunge further.”

. . . developers saw an occupancy level of nearly 90% when they announced the projects. But a correction followed, plunging occupancy levels to lower than 60%. Earlier, a mid-segment brand such as Lemontree was fetching a price of Rs 9,000 per night. But the charge has now fallen to Rs 3,000 a night.

. . . building one room for a premium hotel costs Rs 45-50 lakh. Such a hotel, with a minimum of 350 keys, will cost a whopping Rs 157 crore.

Yet another dent in the domestic demand for cement, steel, furnishings and what not.

• Financial Times: The global spending spree has hit a brick wall

. . . global private consumption expenditures – roughly $32,000bn in nominal dollars in 2007 – are expected to rise by 2-4 per cent this year. That compares with an 11 per cent jump in 2007.

Global consumption surged 63 per cent between 2001 and 2007, a bonanza fuelled by easy global credit conditions and soaring equity and housing prices.

. . . consumer spending in developing nations doubled between 2000 and 2007, from $4,500bn to $9,000bn last year. This splurge in spending drove developing nations’ share of global personal consumption to 28.1 per cent of the global total, up nearly 5 percentage points since the start of the decade. It also helped raise developing nations’ share of global imports to over 41 per cent last year.

No more personal loans => No more swanky vacations, gadgets, . . . ?

Looking at the recent collapse in trading volumes in the CM segment at the NSE, a few possible reasons come to mind:

• Seasonality - The dog days of August are well acknowledged in the US & European markets, with most people off on summer vacations; but in India, that’s not very relevant. Also, looking at past August volumes, there’s no indication of a seasonal lull.
• The exit of the retail investor speculator - This may be one explanation, given the 30% drop in Indian indices and lack of momentum trading opportunities. If true, we should expect things to get worse in terms of retail participation.
• Hedge fund (FII) deleveraging - As Satyajit Das notes:

The deleveraging cycle

Hedge funds have reduced leverage from an average five/six times to around three/four times as the supply of credit tightens. Each one-times reduction in hedge fund leverage represents in excess of $US2 trillion of assets. This accelerates the deleveraging process.

Most of this deleveraging is probably related to MBS & similar assets, but FIIs would have surely wanted to close their positions here in order to book their losses, repatriate their profits and shore up their capital, or meet redemptions. And there is some evidence of that:

• Capital inflows to Asian hedge funds decline

industry’s total assets under management grew by a mere 0.25% (about $200 million to $100.48 billion) because managers have lost $320 million in volatile markets.

And while the industry did enjoy net inflows from investors in the second quarter, the gain is nearly half the $1 billion gain from the first quarter, suggesting that investor interest is flagging.

• Asia Hedge Funds Face Drawdowns, Redemptions

Boston-based Venus Capital Management’s $100 million Special Situations Fund, an India-focused event-driven arbitrage and special-situation strategy, is down 22.25% in the first half, an about-face plunge from last year’s gain of 35.34%, according to public databases.

In an interview, Vic Mehrotra, founder of Venus Capital, said he is positioning the portfolio for more market declines this year in India, where investors are worried about higher oil prices, inflation and political turmoil. He also said the fund has faced some redemptions from leery investors.

The question is - what next? If FIIs continue their relentless selling, this will get worse in terms of liquidity. And since most of the retail crowd is loath to short, a trending market isn’t going to do much unless the trend is pointed from the bottom-left to the top-right.

Even if DIIs - especially insurance companies & pension funds - put in a bunch of money, most of it will have a ‘long-term’ perspective, not the trading mentality that is needed for heavier volumes.

The authorities better loosen up the norms around commodity trading, PMS leverage, domestic hedge funds & such!

• Housing Wire: PIMCO Looks Towards RMBS Rubble

The wreckage that is much of the private-party residential mortgage-backed securities market is bound at some point to become a “high yield” playground for distressed debt investors; and a published report on Wednesday suggests that PIMCO, the biggest manager of bond funds, is moving now to make sure it doesn’t miss out on the party.

HW has covered recent growth in the market for distressed whole loans (and, in fact, it’s the cover story for our inaugural print magazine). But news of positioning by PIMCO on securities — rather than whole loans — suggests that the market for junk mortgage bonds may be getting ready for some early movement.

Seems to me that the US residential market down-trend is slowly coming to an end, and 2009 will be a great entry point for bargain hunters.

• China Daily: Shenzhen home buyers bugged by mortgage dilemma

Shenzhen’s property prices dropped 36 percent in May from the peak last year.

. . . among mortgage lenders, investment-oriented buying jumped 5 percent compared with 2006, and the proportion of those buying a second or a third home also increased by 14 percent over the previous year, indicating rising risks.

• DNA: Rentals nip at Levi’s margins

India may be one the fastest growing markets for the American denim brand Levi’s, but exorbitant property rentals in the country have put its margins under pressure.

Though denim wear in India is 40% cheaper than the global markets, rentals of commercial properties here are almost on par with those in the developed economies.

Once mall & shopping space is in over-supply, rents will drop rather quickly. Just visit any mall in Navi Mumbai to see what I mean.

With talk of double-digit inflation in everything but Bandra Kurla commercial real estate, I figure this is a good time to come up with a few wild-ass guesses; I predict that by December 31, 2008:

• WPI in India will be below 8% (yes, single digits!)
• Cement prices will drop below Rs 250 per 50-kg bag (currently 275+)
• (HRC) Steel prices will drop below Rs 35000 per tonne (currently 45000+)
• Nifty will be down 30% for the year - oh wait, it already is!

Check back in 4 months.

• Bloomberg: Best Farm Economy Since 1970s Comes With Expense Risk

Fertilizer costs doubled from a year ago, while fuel increased 62 percent, USDA data show. Expenses probably will surpass the $279.2 billion that the USDA estimated in February, eroding net income the government pegged at a record $92.3 billion for 2008.

Deere said it will raise prices for large, wheeled tractors by as much as 7 percent and combines by as much as 10.5 percent next year to cover rising materials costs.

Falling crop prices coupled with higher costs would create a situation similar to 1980, when expenses fell 1 percent while income fell 9.2 percent

• RGE Monitor: Making sense of what comes after the Olympics

According to Ministry of Finance (MoF) statistics, China’s total revenue in July was RMB 532.325 billion, an increase of 13.8% over the same month last year. But this growth rate is 19.3 percentage points lower than in July, 2007, and 19.7 percentage points lower than the growth rate in the first half of the year.

. . . tax from land and real estate, a major source of the local governments’ incomes, has also declined drastically. In July, land-related tax increased by 79.4% over the same month last year, for a total of RMB 14.306 billion, but this was 25 percentage points lower than in July 2007.

A slowdown in China => further drop in commodities.

• International Herald Tribune: Europe sets date when deaths overtake births: 7 years

Europeans will begin their long foreseen demographic decline in just seven years’ time - the point at which deaths exceed births.

. . . not only would Germany lose its status as Europe’s most populous nation but several East European nations would experience a sharp drop in numbers - with populations shrinking by a quarter or more. By contrast Cyprus, Ireland and Luxembourg would all boost their numbers by at least half.

. . . in 2008, in the EU’s 27 nations, “there are four persons of working age (15-64 years old) for every person aged 65 years or over.” In 2060 “the ratio is expected to be two to one.”

Following up on my previous post: NSE CM Turnover - August sucks!, here is a look at liquidity in the NSE CM segment, since 1995 (click for larger image):

Some observations:

• Even after the March 2000 peak in the Nifty, CM turnover continued to go up; then it crashed 80% within a month during the KP scam
• Since then, there was a steady rise to ~ Rs 12,000 crore till mid-2007; then things got really wild and daily turnover shot up to over Rs 25,000 crore in October 2007
• Since then, turnover steadily declined along with the Nifty, and then completely tanked this month

If there’s a repeat of the 2001-2002 bear, we’ll see daily turnover remain in the Rs 7,000 - 10,000 crore range. Of course, the F&O segment has grown much faster since 2003, and as the NSE adds more stocks to the F&O list, perhaps we’ll see increasing liquidity. But for now, I’m worried! With a range-bound market (and perhaps even a further 15-20% drop in the Nifty per my expectations), it’s tough to be optimistic about liquidity.

And imagine how much pain the brokerages (and other financial intermediaries) are going to be in if this continues. Guess we’ll soon see consolidation in the industry.