GalaTime

• FT: Are those who sweat the big stuff in meltdown?

Willem Buiter, a former member of the UK’s Monetary Policy Committee who blogs for the FT, complains that macroeconomists have simply discarded the difficult stuff to make their models more elegant: “They took these non-linear stochastic dynamic general equilibrium models into the basement and beat them with a rubber hose until they behaved.”

Economists now understand much more than Keynes ever could about networks and complex interactions (thanks to agent-based modelling), psychology (thanks to behavioural economics) and the real world (thanks to econometrics). In principle, these advances should inform our understanding of the crisis. An early attempt is Animal Spirits, a book by George Akerlof, a Nobel laureate, and Robert Shiller, who identified the housing bubble early.

• ROB: China’s runaway steel train

China simply makes too much steel. The government estimates that China’s annual production is about 100 million tonnes more than it should be, a figure equal to the whole annual output of the industry in the United States.

Worse, China has far too many steel companies, more than 700 at last count. Add in iron companies and companies that roll or otherwise shape steel, and the total comes to more than 7,000. Despite repeated government attempts to force them to consolidate into fewer, bigger companies, most of them are still small and inefficient.

Prices for Chinese hot-rolled steel fell to about $400 (U.S.) a tonne in March, less than half the peak of $980 a tonne hit last year.

China has 5,000 cement makers, 3,800 glass makers, 3,500 pulp and paper producers, and no less than 24,000 chemical companies.

As for steel, low prices coupled with China’s relatively high cost of production may have already tipped the trade balance in favour of imports. Russian steel producers “have been selling into the Chinese market at very competitive prices, and China might actually have become a net importer of steel in March,”

• Mint: IPO scam: Sebi board to take up order against NSDL today

The IPO scam, unearthed in April 2006, involved depositories, depository participants and market operators, who allegedly used or helped some entities use 59,000 fictitious demat accounts to corner shares meant for small investors.

In November 2006, Sebi passed another order against NSDL and a few others asking them to pay a sum of Rs115.82 crore for alleged carelessness in opening of demat accounts. Of this, NSDL’s share was Rs45 crore. This led to NSDL filing an appeal with SAT.

• Business Standard: TV news channels look for fresh capital

… broadcasters such as Times Global Broadcasting Co Ltd, Network 18 and UTV are looking to raise over Rs 600 crore to fund their growth plans.

Industry estimates show that the business news channels generate about Rs 300 crore a year in advertising. However, with the economic slowdown, ad revenue is expected to drop by about 15-20 per cent this year.

At UTVi, more money was needed to meet losses for the next two years, a source said. The channel, launched in April 2008, earns around Rs 2 crore a month and incurs an operating monthly expenditure of Rs 7.25 crore.

Stay short UTVi.

• Mint: Pre-IPO deals haunt companies

Companies owe their investors at least Rs4,000 crore for their inability to come out with IPOs within a specified time frame, a precondition for such investments.

This condition is built into share subscription agreements between promoters and shareholders, typically through put options, which give investors the right, but not the obligation, to sell back their shares in the company to its promoter if an IPO does not happen by a specified date.

“In some cases, the promoters are saying ‘take me to court, I’m not giving your money back’. But in most cases, the investor does not go for litigation because he does not want to be seen as hostile,”

“One form of ratchets allow for variable pricing determined by a multiple of net income from a few years ahead. If the income is lower than projected, the private equity investor could end up taking a much larger stake in the company than originally planned,”

Oh, those troublesome ratchets!

• DNA: Social networking sites find it tough to make money

… thanks to very low click rates, industry participants suspect the category accounted for just 5% or less of the total online ad spend in the country in the last 12 months.

Prasad Narasimhan, marketing head, Virgin Mobile, says, “We can talk about engagement and all that. But if I have to put in Rs 2 crore of my brand’s money, you need to find some mathematics to measure the impact.”

“The problem is that we are applying the metric of search advertising to social media,” says Mahesh Murthy, founder of the digital marketing agency Pinstorm. “How are you measuring the RoI when you advertise on TV? You are paying because people are spending time in front of your brand. They have to come back to the idea for social networks as well,”

Over hyped, over funded, no economic value added.

After the IPO boom of 2007 and early 2008, the pace & performance of IPOs has taken a cliff-dive. Here’s some statistics:

# IPOs at NSE in 2007: 95

# IPOs at NSE in 2008 (ytd): 35

But, # IPOs in past few months?

• October - 2 (Alkali Metals, in progress & 20 Microns, down 45% from Issue price)
• September - 2 (Resurgere, Austral; the former is down 65% from Issue price)
• August - 2 (Nu Tek, Vishal IT;  the former is down 73%  from Issue price)
• July - 6 (all of which are cut in half since Issue)
• June - 1
• May - 0

Ouch. I-Bankers musn’t be happy. Watch out for this quarter’s results.

• DNA: ACC, Ambuja to hike prices by 5%

Holcim, the Swiss cement major, would increase cement prices through its subsidiaries Ambuja Cements Ltd and ACC by 4.8% in the first half of this fiscal, a spokesperson from Holcim’s headquarters in Switzerland said.

Analysts feel the company will see further squeeze on its margins. A research analyst from an international brokerage said the coming quarter would bring greater erosion in its operating margin as the company won’t be able to pass on the rise in input costs.

I wasn’t expecting cement companies to increase prices, given weakening demand and new supply. It will be very interesting to see how the market absorbs this price hike. Note that cement stocks remain in a firm down-trend.

• Business Standard: 22 firms miss date with public offers

. . . only 25 small IPOs hit the market in the first seven months raising Rs 4,345 crore, while the same period last year saw 65 IPOs raising Rs 32,993 crore.

In recent months, as many as 22 companies planning to collectively raise Rs 16,539 crore have allowed their IPO approvals to lapse.

According to Prime Database, nearly 500 companies are planning to go for an IPO. This includes companies like Avesthagen, Bhilwara Energy, BPTP, Essar Power, GMR Energy, ICICI Securities, Indian Railway Catering, Lodha Builders among others.

500! Really?

• Bloomberg: Zell Opts for Debt Investing, Awaits Housing Rebound

Billionaire Sam Zell, founder of the largest publicly traded apartment landlord in the U.S., is investing in distressed debt instead of real estate stocks or property and expects a housing recovery next year.

“I think there is no question that the government’s responsibility must include protecting Fannie and Freddie debt,” Zell said. “It is extraordinarily important. They today represent 70 percent of the mortgage market in this country, and I think that percentage is growing as other lenders are moving away.”

Real estate timer extraordinaire.

• Bloomberg: Vietnam Dong Investors Use Black Market; Traders See 18% Drop

Vietnam’s currency controls are forcing foreign investors into the black market to obtain dollars, aggravating declines in the world’s worst-performing stock market and pushing benchmark bond yields above 20 percent. The dong dropped 5 percent to 16,846 per dollar, its biggest decline since 1998. Traders are pricing in an 18 percent drop in the coming year to 20,600, according to offshore 12- month non-deliverable forwards.

Vietnam may suffer a “currency crisis” similar to the slump in the Thai baht that triggered the regional collapse in 1997, Morgan Stanley analysts said in a report last month. “The central bank is not providing dollars, except to some importers and some working capital for exporters”. The risk is Vietnam exhausts its currency reserves of $22 billion supplying dollars or that “overkill” in cooling growth causes losses at state banks.

With Vietnam & India being thought of in similar (economic) terms, it’s worthwhile to pay attention to what the consequences can be.

• DNA: Sebi nod for big-ticket IPOs lapses

The proposed Rs 1,000 crore-plus initial public offerings by Acme Tele Power, Jaiprakash Hydro Venture and UTI Asset Management Company are shelved for now as these companies have allowed the regulatory approval to lapse. The big three are among the 20 IPOs that have been put on hold owing to the negative sentiment in the stock market.

. . . the lengthened stock market volatility has forced 83 global companies to withdraw their listing plans in the first quarter of 2008. In addition, 24 companies postponed their listings. But some smaller domestic issues of Rs 30-40 crore are still hitting the market.

Note also that most of the IPOs issued in the last 12 months are underwater.

• Mint: Sensex can go below 10,000: Sharma

It was an easy call. In this bull run, India was termed an asset class. We were starting to think of ourselves as very special. I started getting worried when such rubbish started going around. India is not any asset class; it is only one of the markets. This kind of euphoric situation can last only for a while. In 2007, every Tom, Dick and Harry could think of making a billion-dollar personal fortune. Employees across industries were getting salaries which were not justified even at the peak of any cycle in the US. It was getting ridiculous—wage inflation, asset inflation. If one had stepped back and viewed it dispassionately, it was quiet easy to figure out.

The maximum downside one had seen in India was about 35% in a year in 2000. We have breached that already by the middle of the year. Now we are entering a situation where long-held theories can be thrown out of the window. We could be down another 30-40% from here. I would not be surprised at all to find Sensex below 10,000. When we made an initial target (for the index) it was based on other factors and the run-away inflation was not in sight. If we factor it in that, the trouble gets compounded.

When the Sensex was at 21000, we saw people predicting 25000, 27000 and so on. Now, we are talking 10000 and below. Linear extrapolation can lead to sub-par results.

And saying that this big drop was obvious is a bit of 20/20 hindsight - coz the key is timing. Even at 5000, the Nifty could be considered over-valued by historical measures, but it went to 6300!

• Business Standard: FCCB shadow looms over corporate profits

Several companies that have issued foreign currency convertible bonds (FCCBs) face the prospect of not having these bonds converted into equity unless the stock markets stage a strong comeback. This implies that these corporations may have to pay back the amounts they borrowed together with the interest.

What could compound the problem is that many of these firms do not account for the debt. In other words, they are not providing for the borrowings on an annual basis over the life of the instrument. According to a study by a leading brokerage, accounting for the loan and the interest would, on an average, knock off at least 12% of the profits in FY09 and about 10% in FY10.

It was less than 6 months ago that FCCBs were helping these fine folks make a bunch of moolah. So, make profits on the way up, and dont account for it on the way down. Nice deal if you can get it!

• Mint: Companies shelve capital market plans

The meltdown in the equity markets has taken its toll on the capital raising plans of Indian firms. Investment bankers estimate that at least 13 Indian companies have stalled plans of raising nearly Rs25,000 crore from the equity markets and say this could just be the beginning of the trend.”

Most of the Indian firms that have scrapped their plans were planning qualified institutional placement (QIP)—a kind of private placement that listed companies can make to a set of institutional buyers such as banks, mutual funds, insurance companies, foreign investors and venture capital funds.

The cost of borrowing for Indian firms has gone up from 100 basis points over the six-month London inter-bank offered rate (Libor) to 400-500 basis points over Libor over the past six months.

• Economic Times: Nifty at 6950, Sensex 22880 by July 2008

There is a clear-cut demarcation in the earlier bull phases of 1992 and 2000 and the current bull phase. The earlier bull phases were more or less driven by a handful of market operators who eventually got crushed under their huge outstanding positions.

The age-old concepts of stock valuation have become more or less redundant in view of the structural changes in the market mechanism. As long as the flow of funds remains intact and the settlement in derivative segment continues to be “cash settled”, there is no threat whatsoever to the ongoing bull phase.

This time, its different. Cash flows don’t matter. Valuations dont matter. Common sense is useless!

This would be a good time to do a reality check on stock market predictions. As of market open, the Sensex is at 15200 and the Nifty is at 4550. What is the probability of them meeting these July ‘08 targets?

• Bloomberg: Reliance Power to Give Free Shares to Investors

Reliance Power Ltd., the company that raised $3 billion last month in India’s biggest initial public offering, will issue free shares to compensate investors for the slump in the stock price after listing. The Mumbai-based company will issue 3 shares for every 5 . . .

The bonus issue will reduce the cost of acquiring Reliance Power shares to 269 rupees for individual investors, 40% lower than the IPO price.

‘Seven Mauritius-based investors went on selling within four minutes of the listing even when the market was falling,’

• Economic Times: Value of investments takes a tumble in stock mkt reversals

Virtually every big PE from Citigroup, Temasek, 3i, UTI Venture Funds, CLSA and Warburg Pincus to JP Morgan have been left licking their wounds in the wake of the sudden market reversal. The situation is so bad that the value of investment in some deals of 2008 is down by 21%.

The average loss on investment for all private equity deals done in 2007 is 30%. And if you think that is bad, then private equity investors who did deals in 2006 stand to lose two-fifth of their investment at 43%.

All valuation tools have been savaged at the altar of market volatility.

Love that last line! But where were these valuation tools on the way up to 21k?

• Mint: Sugar back on a winning roll as surpluses shrink

Comparatively cheap sugar may have been a late-starter in the global commodities boom, which started at the beginning of 2007, but it has been among the strongest of commodities in 2008, outpaced only by soaring platinum.

May white sugar futures on the IntercontinentalExchange rose to an 18-month peak of 14 cents (about Rs5.60) a pound on Thursday, up 30% this year and more than 40% since December.

“A lot of the funds’ analysis suggests that this thing called ag-flation is here for a while.”