Telecom scandal

There is something wrong with saving of blogs. Everytime I cover the whole material and try to align, the damn thing gets deleted

Not able to undo the damage.

Let me start again

Financial express seems to have done a detailed analysis and have ferretted out very relevant pieces of information and have analysed quite well.

Now comes the news that the Cabinet Secretary to the Minister, Mr Mathur was dead against the process. He had serious reservations about going ahead with the auction without setting in place an equitable and transparent policy. He was for evaluation of the potentiel bidders to ensure that only competent people participate in the bid and not Companies with just Real estate etc background as was the case with Unitech and a few others.

He had made it clear, one understands ,that the advancement of closure date to Sept 25 2007 from the earlier announced date Oct 1 2007 was not legally tenable.

He was so much against the process that he refused to sign the documents till his retirement till the year end. The Minister went ahead soon after the gentleman's retirement and concluded in Jan 08.

The Secretary DOT, Mr Mathru, had also recommended need for formulation of a mechanism of spectrum allocation after the grant of License . The Minsiter instead bundled both and sold part of the nation along with the license.

One understands that the Finance member of the Telecom commission advised auctioning of the license to fetch a much better price as against the proposal of going by the auctioned and established price of 2001 by TRAI.

This scam is of much larger scale and grandeur than anything elase before. This makes Bofors, Submarine, Fairfax ,look like small change.

Only problem in India is , public memory is short and newspapers will keep at it till such time they latch on to the next sensational thing. Things do not get carried to their logical conclusion.

Logical conclusion in India could mean just a few lacs penalty as was the case with Sukh Ram

Tighetening and fetching better pricing for Govt resouces would be a lot better than levying taxes which affects the entire population.Leaks in the system are far larger than the deficit that Indian Government budgets have. Nation can be run with Nil deficit if only 50% of the leaks are plugged.

Ponni Sugars and Seshasayee Paper & Boards Ltd- Good results, worth buying in even now

Sometime back, I had recommended SPB as well as Ponni sugars. SPB has been progressively driving itself to better performance and better financial results thorugh operational efficeincy rather than just expansion

They went in for captive generation of power to bring down the cost of power , next they went in for installation/expansion of pulp facility as against importation of the same in the past.

These are significant in house value addition activities and at significant lower cost. EPS for half year is Rs 19 and full year is likely to be Rs 40.Pulp capacity and new Mill ( Modernisation ) have added to the Interest and Deprecation but they have led to much better gross margins. Worth investing at Rs 140. If one is lucky, in the medium term say 1 year , it could touch Rs 350-450. I am atleast hoping for it .

Ponni is a pure commodity play on Sugar. EPS of around Rs 17 , in the first half. EPS likely to be around Rs 30 plus ofr the whole year. Sugar prices have shot up and sugar is likely to be shortage commodity for another year per reports. Government is trying to import and isntitute some controls. There has been diversion of sugar cane for ethanol production. Globally also, Sugar is likely to be a shortage commodity for a year atleast.

The share which is priced at Rs 100 can go up by another 50%. Regret is, I have only 500 shares. I had intended to buy more , but as usual in stocks these ifs and buts do not add to the kitty.

Telecom scam "King"

Typed once , messed up and deleted somehow.
Let me try again

This was on the Telecom swindle by our Honourable minister of telecome, Raja.

The Minister conveniently hides behind TRAI directives, he has cherry picked their directions to his convenience.

TRAI had insisted on Multi stage bidding by multiple operators for each circle and " No auction " for Licence. This was specifically for the exercise carried out in 2008. TRAI would have anyway had in mind operators who had experience and capability and not rank newcomers to the field. I don't think they had brokers in mind when they invited bids.

This is precisely what happened. People like SWAN and Unitech who had absolutely no track record bid for the license. The bid which were to be open till Oct 1 2007 was closed by Sept 25 2007, thus depriving some of the bidders

TRAI had recommended some price way back in 2003. The Minister took this since it suited him. DOT had authority to overrule TRAI and apply principles of prudence where it thought the same were required.

Two of the operators took in fresh Capital . SWAN diluted 45 % at $ 900 Mio, a license the full price of which was $ 400 Mio and Unitech diluted 67.5 % to proven operators at around the same kind of pricing , making huge kilings in the bargain .( It was dilutiuon through fersh capital infusion and not sale of stake is all just a cover up )

Subsequent to this the Minister put a stop on resale or dilution for a period of three years after a lot of clamour from the media and opposition.

Now he is trying to defend the earlier decision and process. If the earlier one was right, where was the need to put a moratorium on sale of licenses.

On top of this, DOT had also bundled some spectrum along with the license. Spectrum is considered a resource in short supply . Would have fetched considerable money if proper process had been followed.

Some Telecom experts estimate the loss to be around Rs 60,000 Crs, money large enough to bring down Country's Budegtary Deficit.

This man. Raja was considered tainted and given a second chance. DMK had Cong by its ....

Sad state of affairs.

It is sad that BJP is devoid of decent leaders suddenly and losing its position all over. There is hardly any opposition worth the name for Cong. I am not a great fan of BJP but Cong which was running the Country for over 50 years , most of which with very little opposition has not taken bold measures to improve the economic condition of the Indian lot. If at all some good work was started it was when a Non Gandhi/Nehru was at the helm. You can say that the situation called for desperate meausres ( 1991) when Narasimha Rao formed the Government. That is just an excuse and a cover up for Gandhi/Nehru sycophants.

We are now getting enamoured with the New Gandhi . They come out as decent people with good potentiel, but are we as a nation so intelluctually handicapped that we think that there can not be any alternative. Gandhi/Nehru is a long term compromise (negative) choice and our usual tendency not to let any competent equal to come to power. We are okay with the Dynasty just to prevent others coming through to power.

One can talk of need for Inclusive measures and liberalisation with a heart. All that is fine , but do it. Don't walk around thumping chest on one NREGA ( National Rural Employment Guarantee ) Experts like P. Sainath have established that only a miniscule portion of such welfare schemes reash the intended people. Our delivery systems and mechanisms are poor. Do something about that.

Let us hope that things improve, let us hope that Cong starts delivering more than it talks, let us hope that BJP beefs ( Pun intended ) up its organisation and not just Hindutva and becomes a meaningful opposition.

A better book review of the book "When genuis failed "

I have copied the following piece , picked up through a Google search. The gentleman ( Ian Kaplan )has done an excellent job of summarising the whole thing.

When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger LowensteinRandom House, September 2000, 264 pages Review score: *** out of ***** The classic image of a Wall Street market trader is someone, usually a man, on the trading floor, shouting buy and sell orders, clutching a sheaf of trading tickets. Floor traders must have an instinctive feel for trading and get by on their quick wits. They are now a vanishing species and will soon join Mark Twain's riverboat captains in extinction and myth. Modern trading is now almost entirely paperless and takes place in the cyberspace of computers and computer networks. The instincts of market traders are being augmented and in some cases replaced by mathematical pricing models. Traders are being drawn from schools like MIT, rather than the City College of New York. A feeling for market dynamics and trends will always be important, but along side these skills modern traders have a command of statistics and probability theory. John Meriwether gained a measure of fame in Michael Lewis' book Liar's Poker, where he is described by Lewis as a Salomon Brothers Uber-trader and master of Liar's Poker. Meriwether was one of the top bond traders at Salomon Brothers and later became head of the fixed income securities department (which was responsible for mortgage security and bond trading). Meriwether was one of the first people on Wall Street to recruit mathematicians and physicists from schools like MIT and Cal. Tech and turn them into bond traders. Meriwether was a harbinger of the conjunction between Wall Street and the Ivory Tower. Perhaps to the horror of the old Wall Street operators, academic financial theory provided a framework that allowed markets to function more effectively. One example of this is the Black-Scholes model for pricing stock options. Acceptance of the Black-Scholes model has become so wide spread that Web sites like Yahoo and E*trade that quote stock option prices also list the associated Black-Scholes values. When Genius Failed, by Roger Lowenstein, is the true story of Wall Street traders, academics and hubris. It is the story of the failure of Long-Term Capital Management, a hedge fund founded by John Meriwether. In 1991, when John Meriwether was the head of the Salomon Brothers fixed income security desk, a US Treasury bond trader in Meriwether's department at Salomon falsified a US Treasury bill bid. The scandal that ensued when this came to light put Salomon in danger of losing their status as a Treasury bill broker. The head of Salomon, John Gutfreund was forced out and Meriwether went along with him. This left John Meriwether unemployed and very wealty. But Meriwether, to use Michael Lewis' term, was a Big Swinging Dick, a Master of the Universe, an Uber-Trader. Consignment to the golf course, even a very exclusive golf course, is not as gratifying as being a player in the market. In 1993 Meriwether took the first steps toward founding the Long-Term Capital Management (LTCM) hedge fund. As befits a Big Swinging Dick market trader, LTCM was to be a Big Swinging Dick of a Hedge fund, capitalized with two and a half billion dollars. For the privilege of having their money managed by Masters of the Universe, LTCM would also charge investors over double the usual management fees. A hedge fund is an investment fund for wealthy individuals and institutions like banks and pension funds. The number of investors in a hedge fund is limited and they are restricted, in theory, to only those who can afford the risks which may be associated with the hedge fund. Unlike mutual funds, hedge funds are unregulated. Although the story of the failure of LCTM and its subsequent bail-out, organized by the US Federal Reserve is inherently interesting, it is the stories of the people involved that make When Genius Failed difficult to put down. Lowenstein wrote a best selling biography of Warren Buffet and he excels at telling the stories of the people behind the events. The Genius mentioned in the title refers to Robert Merton and Myron Scholes. Nine months before LTCM failed 1997, Merton and Scholes shared the Nobel prize in economics. Merton, Scholes and Stanford's William Sharp (famous for developing the sharp ratio to measure risk) are some of the founders of modern finance, which attempts to apply quantitative techniques to market analysis. Merton and Scholes jumped at the chance to join LTCM where they could not only apply their theoretical work but make a great deal of money. The trading cachet of the LTCM trading group, headed by Meriwether and the stellar academic reputations of Merton and Scholes was joined by the final pillar of LTCM's power base: David W. Mullins who was vice chairman of the US Federal Reserve before joining LCTM. As a Big Swinging Dick hedge fund with the most stellar partners and a huge capital base, LTCM was able to convince banks to lend them money at rates that were not available to lesser mortals (including investment banks like Salomon Brothers). LTCM used this credit to leverage their capital base by a factor of twenty to thirty times. In the first few years this allowed LCTM to make spectacular profits for themselves and their investors. One of the flaws of When Genius Failed is that Lowenstein sacrifices the details of the investment strategies used by LTCM to tell the story (Nicholas Dunbar's book Inventing Money does a better job explaining the details of the LTCM's financial strategies). Many of the strategies that LTCM used involved derivatives. The term "derivative" has taken on an ominous cast because of the failure of hedge funds like LTCM. Derivatives are more innocent than their sinister reputation. A derivative is a security that derives its value from an underlying asset. A futures contract for corn, for example, derives its value from the underlying market price for corn. A stock option derives its value from the underlying price of a stock or stock index. Derivatives and the strategies traders use to make money on them can be complex and Lowenstein may have felt that these details would make the eyes of many readers glaze over. For example, Lowenstein never fully explains what exactly a "swap" is and incompletely explains LTCM's "volatility" bets. As we will see below, LTCM lost most its money on swaps and volatility bets, so these derivatives play an important part in the story. I've included a footnote here on interest rate swaps and volatility bets. In the epilogue Lowenstein summarizes LTCM's losses: Investment Loss Russia and other emerging markets $430 million Directional trades in developed countries (such as shorting Japanese bonds) $371 million Equity pairs trading $286 million Yield-curve arbitrage $215 million Standard & Poor's 500 stocks $203 million High-yield (junk bond) arbitrage $100 million Interest swaps $1.6 billion Equity volatility bets $1.3 billion This table makes it clear that the last two items, interest swaps and equity volatility bets, account for the majority of the losses. For the first four years, LTCM's trading strategies made huge profits. But no matter how good the trader is and no matter how good the models are, no one wins all the time. There will always be bad market bets. It is impossible to perfectly predict the future. LTCM's losses where large for two reasons: · LTCM used large amounts of leverage. For every dollar of assets in the fund they borrowed twenty to thirty dollars to place their trading bets. In many cases the loans made to LTCM where the equivalent of signature loans. There were not backed by securities and there were no margin calls when the value of LTCM's assets dropped. Leverage greatly magnified LTCM's profits when they bet correctly. It also greatly magnified their losses when the market turned against them. Although LTCM's returns were impressive when they did well, their risk adjusted returns were not nearly as good. · Low liquidity. Or to put it simply, there were few buyers when the market turned against LTCM. Interest rate swaps are contracts between two parties. They do not trade on an open market the way stocks, bonds or exchange traded options do. The options contracts that LTCM traded in their volatility bets were huge customized option contracts: Since long-dated options [LTCM was entering into 5 year options contracts] don't trade on exchanges, Long-Term had to tailor private options contracts, which it sold to big banks such as J.P. Morgan, Salomon Brothers, Morgan Stanley, and Bankers Trust. The market for such arcane contracts was thin, with only a handful of players who traded on a "by appointment" basis. When LTCM wanted to sell these contracts when they started taking losses, they could not get out of their positions at a reasonable price since there were few buyers. And the buyers knew they were in distress. The huge size of LTCM's leveraged capital base forced them into markets with less liquidity. Investment funds must worry about their trades having a market impact, narrowing or obliterating their expected profit margin. The larger the investment fund, the more this becomes a problem. They could trade in only the most liquid markets (e.g., stocks) or via customized contracts for swaps and options. When LTCM crashed they had positions in securities with over a trillion dollars of face value. At the time many investment banks were losing hundreds of millions of dollars on similar market bets. There was concern at the US Federal Reserve that if LTCM defaulted on their contracts it would cause chaos and a market crash. This in turn could place the US economy in danger. So the Fed organized a bail-out. A consortium of banks and trading houses put four billion dollars into LTCM. In return the consortium took possession of LTCM's market positions. The investors that had money in LTCM got ten cents on their invested dollar. The partners were largely wiped out. Once LTCM's market positions were unwound the rescue consortium made money on their investment. LTCM's mistakes were made fatal by massive leverage and lack of liquidity. If not for their huge leverage, LTCM could have survived these mistakes, or at least survived without such breathtaking losses. So while the mistakes themselves did not have to be catastrophic, it is interesting to consider how LTCM's "world view" contributed to their losses. At the heart of LTCM's trading strategies were two core beliefs: 1. The academic view is that the fluctuations (volatility) of a given stock and, in fact, the entire stock market follows a random course. The most articulate expression of this arguments can be found in Professor Burton Malkiel's book A Random Walk Down Wall Street. According to this view, volatility is distributed in a bell curve (a so called "log normal" distribution), just as people's height and weight are distributed in a bell curve. The larger the movement away from the mean (the center of the bell curve), the larger the movement in the stock price and the greater the potential risk. If volatility falls in a bell curve, risk can be estimated. The calculation of volatility assumes that the way a given security or set of securities has acted in the past will reflect the way they will act in the future. Since the past is known, the future can be modeled. 2. Markets are perfectly efficient. The actions of market traders will price securities correctly. A "mispriced" security will be returned to its proper price by the market. This is sometimes referred to as "perfect market theory". Markets may be out of balance at some point in time, but they will always move back toward balance. When markets are stable and no events like the "Asian melt-down" or the Russian bond default perturb them, the assumptions above tend to be true. In fact, during the first three years of LTCM's history, markets were very placid. Efficient markets show linear behavior that can be described with calculus and statistics. Academics like this because it leads to elegant results which make good journal articles, with nice equations. There is, in fact, some reason to believe that markets are efficient. But there should always be a caveat: markets are efficient, on average, over a long period of time. Unfortunately for those who actually trade in the market, short term effects can be anything but "efficient" and perfect. Unlike physics, where theory is eventually tested against experimental results, much of economics seems almost willfully ignorant of the way the market behaves. Those who are active in the market, like George Soros, tend to discount academic theory. Anyone who hears news reports about the stock market will realize that rather than being perfectly efficient, markets are not always placid, but sometimes act like a manic depressive, gripped by wild euphoria one moment and crashes the next. A whole language has grown up to describe market "mood", complete with mascots: the bull and the bear. Markets exhibit avalanche events: a seemingly small trigger can produce a massive wave of change in the market. In the case of LTCM, the avalanche was triggered by the Russian bond default. LTCM was not the only trading firm to lose large amounts of money. Virtually every investment bank lost money when interest rate spreads widened unexpectedly. This was largely because they were using the same kind of trading models. The black-scholes option model and its more sophisticated offspring (binomial trees) are popular with trading firms because they usually provide a good model for pricing stock and bond options. These models work well when the market is "efficient" and orderly. But markets regularly make a transition between order and chaos. The movement from an efficient market to one that is sometimes wildly inefficient, where, in the case of LTCM, there are persistent mispricings of bonds, is not described by statistics or calculus. These events are best described as dynamical (or chaotic) systems. Dynamical systems are systems where action in the system feeds back into the system, producing a complex result. In markets these actions are produced by traders in the grips of panic selling (or in the case of the Internet bubble, euphoric buying). By believing in perfect markets, LTCM left themselves exposed to huge risk when the market changed and became chaotic. One question buried in the saga of LTCM is: would it be possible to recognize the switch in regime, from a market that is relatively efficient, where mispricings are corrected in the short term, to a market which is chaotic, where mispricings can be unexpected and long lived. A number of computer based market models have been proposed that act like real markets. Some of these rely on market models based on a set of dynamical equations. Others rely on a market composed of rule based market actors, which simulate trading in the market. These model produce volatility curves that have "fat tails". That is, bell curves that show extreme events on either side of the center. Although these models act like a real market, they do not necessarily mirror the market. In theory a model could be built that would predict market regime shift. If we had unlimited amounts of computing power and the ability to simulate humans, with their judgment, fear and greed, we could build a simulation that would perfectly model market behavior. When such a synthetic market got certain inputs, like the Russian bond default, the market will become chaotic. The market could then be run forward in time, telling us what the likely result would be. There are obvious problems with this thought experiment. Humans and the interactions between them are vastly too complex to simulate. Market information, like the trading volume or close price of a stock is internal market information. Humans act on information (news) that is external to the market. The interpretation of news depends on past news (the Russian bond default might not have produced such an extreme result if it had not been preceded by the Asian melt-down). Finally, even if such a predictive market simulation could be built, it might not be able to recognize a regime shift in time for the information to do any good. The 1987 stock market crash happened in a very short period of time, for example. Building a market simulation that could predict a regime shift is a daunting task. But it might not be an impossible one. It may be that traders generally act on a limited set of rules, which could be modeled. Instead of trying to interpret news, it might be possible to use the internal characteristic of the market (increased volatility and internal trends) as triggers for the market actors. Black-Scholes and related option pricing models made a great contribution in the past. Dynamical market models may be the next regime. Web based references: · LTCM Speaks, by Joe Kolman, DerivativesStrategy.com · Salon's review of When Genius Failed, by Alan Deutschman Disclaimer I work on software for quantitative finance. This does not make me an authority in this area. Although I would like to think that I am a master software engineer, what I don't know about quantitative finance literally fills bookshelves. Nothing that is written here should be interpreted as reflecting the views of my employer. Nor should it be read as an indication of the kind of work that may be going on at my employer. The speculation about actor based modeling has been influenced by work at the Santa Fe Institute more than any other source. Finally, www.bearcave.com is my domain and these opinions mine alone. Ian Kaplan - October, 2000Revised: Book review table of contents back to home page

When Genius failed- Book by Roger Lowenstein

Read this book " Rise and fall of Long term Capital management ","when genius failed " by Roger Lowenstein. Had read this once earlier , about a year and half back. Had done a fast read that time. Reread now . Lowenstein deals with the human element more than the technical elements of the story, which is good since he is probably trying to get a larger reader in to the fold. He does deal with some basic explanations on swaps, bond trading, volatility, risk aspects as well as the key aspects of Efficient market hypothesis and random course of securities and equities.

The basic storyline is that John Meriwether, an ex Salomon Bond and arbitrage wing leader , puts together a team of brilliant mathematicians and traders including two future nobel laureates Myron Scholes and Merton Miller to take derivatives tradings to a highly mathematical level through complex models. The major characters involved other than the above are Larry Hilibrand , Haghani and Rosenfield, all math geeks with doctorates from MIT etc to boot.
Their models are built with the following assumptions
1. Markets are efficient and prices respond to information and correctly take in to consideration all knwon factors.

2. Fluctuations ( volatility )in market prices or spreads follow a random course ,and such volatility follows a certain pattern ( bell curve)

3. Deviations from this in pricing , if any is a temporary state and the prices have to return to a state of equilibrium , or in other words follow the past pattern of a ell curve.

The Options pricing model of Scholes, Merton and Fischer in fact rely on a basic premise of Efficient markets and the pricing to follow a certain pattern.

It worked well for a the first three years.The major theme was to locate spreads and mispricing which were not quite in line with their theoretical esimation , book trades in such a way that once the pricing return to normalcy or equilibrium, LTCM can come out with profits.They banked on the fact that inequilibrium ( per their models) can only be temporary and at some point it has to be return to normal. Non adherence for a long time (to their models) was an event which could happen once in say 100 years.

They depended a lot on the convergence in cases of wild deviations and bet on such convergence.
Some of the convergence plays are as

1. Discount differentiel between Bonds based on their interest rate and maturity period .

2.Differentiel pricing between Futures and current price of a security. Make use of differentiel by may be buying futures and selling the current stock ( going short or in other words borrowing ). The expectation is that the Futures prices will go up and hence buying now cheaper makes sense and expectation that the price of securities would get lower

They located mispricings in relation to , one country bond to another country bond with reference to their coupon rates , discount at which they were being sold, one country currency to another country currency etc

Major weakness was that they had tried to model human behaviour .The fund was very higly leveraged. In times of stress or periods which in their terminology , the markets staying in a state of disequilibrium for long periods, there is requirement for additional capital to repay lenders.

To quote Keynes " Markets can stay irrational longer than one can remain solvent"

The had huge investments in Russian bonds , various other slightly risky bonds in which they had invested on the premise that the spread between Treasury bonds and other bonds were far greater than the theoretically right one. Apart from this they had made departures from their own credo of dependence on convergence to certain directional trades in the equity markets. This was very risky and to quote the author, this is like picking nickels in front of a bull dozer.

Russia went back on repayment of debt by devalueing its currency , putting a moratorium on total debt etc. Once markets started seeing red, there was propensity to invest only in safe bonds and the spreads widened. Losses arising this had to be made good by additional infusion of Capital. All the banks get together ( Fed's effort ) and inject capital to bail out LTCM. This was done not only to ensure limiting their losses but also to address the larger issue of protecting investor confidence in the system. The consortium put in $ 3.65 Bio and restricted theor losses. In the final analysis . a dollar put in initially was worth 33 cents. Of course at varying points of time, the invetors got out with profits, huge losses.

The partners who had blind faith in their models were left with very little. Of course as the author says, high finace in the late 90 s, had a knack of rewarding high peformance but not punishing losers. While the partners came donw from the lofty heights , they still retained enough money to come relatively unscathed in terms of retaining a dceent life.

To Scholes and Merton Miller, ,it was a huge blow . It was a case of shaking the very foundation of modern finance theories on options and pricing etc that they had come out with .

These people being the smart cats that they are, still defended and continued to belive that with more time, they would have come out winners.They also partially blamed it a strange set of unusual circumstances which conspired to bring their downfall.

There was also the murky aspect of Goldman , picking up information of LTCM trades while doing due diligence, making use of the information and selling out and making LTCM position get worse.

The Partnership made repeated profits in the first three years, banks in the intial period were servile and obsequious and were too willing to do any trade with them on terms dictated by LTCM. Banks considered it as some kind of honour and prestige to deal with the exalted lot of LTCM. Long term Capital management got away with " no margins on trades", not disclosing the full details of the trades, , keeping each of the two legs of the swap trade with tow different banks to ensure secrecy.

After 3 years of profit, it just took less than a year for the firm to run in to heavy weather and lose the everything.

Funny part is , the losses mentioned are nowhere near the ones sufferred by the players in sub prime crisis of 2008. LTCM collapse almost appears like a honeymoon compared to Sub prime. Same Alan Greenspan was at the helm then and later when the sub prime crisis was gathering momentum.

While there is hell a lot of disclosure requirement and regulations on margins, investment etc on strightfroward loans, and anyway these can very much be gleaned form the balance sheets, derivatives are not disclosed and the risk exposure is much larger. If they had tightened in 1998, they would have possibly had a no or muted sub prime crisis and not the full blown one of 2008

Just to give a perspective, LTCM losses were may be around $ 4 Bio, sub prime was close to $ 1000 Billion.

Do we learn from past ? No, we read up history and the knowledge is history.

Equity research circus-Have a look at this sample reports on TN Newsprint by Karvy

This is not to cast aspersions on the equity research house since this kind of volte face ( not a complete volte face , this is partial retraction of their earlier stance ) is not the exclusive domain of Karvy alone. Almost the entire fraternity is guilty of this.

Just about 9 months back, Karvy had mentioned buy on TN Newsprint with a possible price of Rs 96 and just have a look their estimated sales and net profit figures in that report. Now they have substantially gone back on the recommendation.When they recommended earlier actual price was Rs 69.Now the price is Rs 81 . This rise has been quoted as one of the reasons. Does not cut much ice. They have scaled down the net sales figures between Dec 08 and now ,from Rs 1440 Crs in to Rs 1362 Crs and net profit from Rs 166 Crs to Rs 135 Crs and EPS impact of Rs 5.
I don;t thing an EPS of Rs 5 is the concern. I am sure there would be difficulties in exact estimation. Equity analysis and forecast should be more a function of the general direction of sales and net profit and performance of this Company vis a vis others .The forecast can only in a band/range and can not be exact. Trying to make it a highly mathematical and exact science , will only lead to the researchers falling flat on their faces.

I still maintain that this share is an extremely good value buy with a 18-24 months perspective.
Good assets, steady business, good capacity, nicely diversified in related fields and one of the largest paper manufacturers in India. You can expect 20-25% compounded . Of course I can be wrong, but chances are very low. I myself have 3500 shares and have been planning to add a little bit more.

I am just reproducing the pieces on 2 different dates, Dec 23 2008 and again Oct 16 2009 from Karvy for ready reference.

Published on Fri, Oct 16, 2009 at 12:38 , Updated at Fri, Oct 16, 2009 at 12:41 Source : Moneycontrol.com
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Karvy Stock Broking has recommended an underperformer rating on Tamil Nadu Newsprints & Paper with a price target of Rs 78, in its report dated October 15, 2009. At 12:39 pm, the share was quoting at Rs 82.95, up Rs 1.70, or 2.09%.
"We maintain our net sales and net profit estimates for FY10 & FY11 of Rs 11,131 million & Rs 13,612 million and Rs 1,078 million & Rs 1,353 million respectively. Tamil Nadu Newsprints & Paper is currently trading at P/E of 5.2x on FY10E EPS of Rs 15.6 and 4.1x on FY11E EPS of Rs 19.6. We maintain our target price of Rs 78 and downgrade our rating on the stock from 'Market Performer' to 'Underperformer' due to price appreciation," says Karvy Stock Broking's report.



Buy Tamil Newsprint, target of Rs 96: Karvy
Published on Tue, Dec 23, 2008 at 18:00 , Updated at Tue, Dec 23, 2008 at 18:14 Source : Moneycontrol.com
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"The stock is currently trading at P/E of 4x on FY09E EPS of Rs 17.2, 3.4x on FY10E EPS of Rs 20.4 and 3x on FY11E EPS of Rs 24. Hence, we believe TNPL deserves better valuation on account of attractive dividend yield and improving fundamentals going ahead. Hence, we recommend a BUY on the stock with a target price of Rs 96 based on 4x on FY11E earnings with one year investment perspective," says Karvy Stock Broking's research report.

Origin of Finance crisis by George Cooper

Origin of Financial crises by George Cooper.-Synposis

Well structured and well compiled . The book was in response to the credit crisis, to explain why the global economy and the US economy in particular finds itself caught in a seemingly endless procession of asset price bubbles , followed by devastating credit crunches. He describes the processes that generate these cycles and the reasons behind the policy mistakes that have of late tended to excerberate them

The author goes about explaining how the Financial markets are inherently structured in such a way that instability is built in. Credit creation, excesses (boom) and bust appear to be the norm and the author also explains the role and limitations of macroeconomic policy . He clarifies that politicans and voters must recognise the futility of use of fiscal and monetary policy to counteract any and all economic downturns.

The central theme of the book is that markets do not behave according to the laws of efficient market hypotheses. EMT describes our financial system as a docile animal which pushes all aspects , prices of products, factors of production including capital in to a state of equilibrium . It assumes that things will be fine at all stages without any external intervention.
The book argues against such an assumption and in fact the author goes on to prove with examples that not only is Financial instability , a fact of life . but is an inevitability .The fact that there have been several booms and busts prove this inevitability. Financial instability theory was strongly put forward by Minsky. In fact Keynes was the forerunner of the concept. Lord Maynard Keynes had suggested the need for Government’s intervention in the form of pumping money in to the economy to achieve greater economic activity. This by itself is a tacit acceptance of the fact that the financial markets and economy are not self correcting and need intervention from time to time.

The author touches upon the history of trading, creation of gold as a standard exchange for trading,debasement of Gold by chipping sides of the Gold coins , melting and remaking few more coins ( effectively more Gold coins were created than the actual content of Gold and this possibly was the starting point of Inflation). At the next starge was creation of Central bank as the common repository of Gold reserves and issuance of Gold certficates by the Central Bank equivalent to the Gold reserves mentioned theirin. Once this was done, Central Bank almost became a kind of hub, issueing certficates against gold receipts and receiving certificates on redemption of gold.
In actual practice, seldom did the merchants come back for redemption of gold. They continued to keep either the certficates or traded with the certficates.
Next came creation of credit.
Since , it was unlikely that all the potentiel certificate claimants would ask for redemption in terms of gold, Central Bank had a chance of issueing more certifcates than the amount of Gold reserves they had. This possibly was another step in creating credit plus creation of additional money in the system.Central banks started issueing certficates as loan to the merchants and repayment at a later date post the conclusion of trade by the merchants for which they had borrowed the certificates.

Post the second world war, USD was pegged to Gold at around $ 35 to an ounce of gold. Gold and USD were interchangeable. People could exchange USD for Gold and vice versa and all other currencies were fixed with reference to USD based on their Gold reserve.in effect , the entire globe was placed on Gold standard.

Subsequently with increased industrialisation across the globe, and increased buying of goods by US, trade deficit of USA was up so much so that the Gold reserves they had was not enough for redemption of all claims on them. They had effectively bought on credit without backing of Gold. Nixon with one stroke got out of the Gold standard and USD automatically got devalued . Repayment in USD could be made with additional creation of USD treasury certficates etc or repayment by just printing of more USD.

The author with simple examples establishes how , higher savings means lower consumption . means lower production , means lower economic growth. Creation of additional money /credit means , additional growth and profits to the participants.

He talks how Central banks have become the main reason for destabilisation and not the stabilising role that they were supposed to . Central banks had just one goal , that is creation of easy money to spur growth in economy , wait till a credit bubble is created and react by tightening money supply.

The author mentions how, consumption market , that is production and consumption of products could be self correcting through price, supply/demand and allied factors . These are things where people do not maintain an inventory and the pricing and supply-demand mechanism ensures that a large and uncontrollable bubble is not created. In fact the author says, that on such consumer products and pricing , the Central Bank should not even make an attempt to intervene and let the system take care by itself.

This is not the case in Capital/ Financial and asset markets. The utility of assets is quite far in to the future and price is a factor of money availability and the perception of monetary value of the use of such asset in a future date.

Housing bubble was a clear case of hoarding assets at a high price in anticipation of great monetary utility from them at a future date. Anticipation of the price is a hazardous game and the author says that , neither is the Central banker competent to do that nor should he try doing that. He goes further to say , that while asset and credit bubbles are inevitable, there are some ways of ensuring that it is nipped at an early stage . Some factors worth watching are
Credit as a % age of the total GDP or the size of the economy
Extent of credit expansion in Assets

He advocates minor shocks to avoid a huge earthquake at a later date . Minor shock could be in the form of tightening money supply .

One more point was the point on self reinforcing factor. The author talks about how , growth in economy and in a particular sector could drive more money in to that .People do not perceive the tilting point, that is the point when it tilts over to the dangerous side. Conversely , how savings by one section of the population could lead to lower income levels to another section of the popuation which in turn could lead to reduction in savings in the that section of the population also. Overall decline in economic activity .

The author concludes reiteraing the fact that credit excess and bust are inevtibale and suggests minor shocks at regular intervals to avoid a major Tsunami.

House of cards- By William Cohen A brief recap

Read this book House of Cards by William Cohen , on the fall of Bear stearns. The author had taken this to illustrate what all went wrong in the wall street companies.Traces Bear Stearns business and CEO s right till the time it was forcibly taken over by JP Morgan Chase.

Starts with the kind of leadership that Bear Stearns had, very possessive, holding on to the positions much longer than the ideal period, poor succession planning so much so that in all the cases starting frm the first professional CEO, Cy Lewis to Alan Greenberg and then finally Jimmy Cayne who was there just before the crisis reached a climax and the company just got subsumed in to JP Morgan chase, all held on to their positions and had to be thrown out in silent corporate coups.

Of course they had enormous managerial strengths and high degree of street smartness which enabled the Companies to grow through good and bad times. They had the ability to recruit good people and hold on to them for long periods.

Each one of them had one area of strength, either good trading skills or extraordinary selling skills but all of them had great managerial and political skills to grow the company and at the same time hold on to their positions very cannily.

Amost all of them fail to realise that the Company had outgrown them and needed a change in leadership to be abreast of latest developments .


Surprising thing is that none of them was, what you would term as people who were specifcally trained in any of the core technical aspects like Investment banking, Securities trading etc. They were smart and picked up skills on the job.


The book brings out how , with the growth in size and complexity ,the leaders lost touch with even the key aspects of the business . Bear stearns starts off more as a securities trader, clearing house for shares etc and ends up with a much larger income from the Fixed Income Hedge fund activities.

The man who was there most of the last lap. Jimmy Cayne, had hardly any idea of the Fixed Interest , Assets backed mortgages and Hedge fund investment activities.

Poor risk management , lulled perhaps by the past success was another factor.

At a more macro level, Bear stearns failure was the first of several which followed. The author has gone in to great detail and has chronicled and narrated all the behind the scene activities and goings on behind the failure. Bear sterans failure was a combination of macro reasons , egoistic bosses, people who were drunk with past success and just could not see the disaster coming for several months notwithstanding clear signs for over 9 motths. Across the Industry, there was this obessession on Bonuses, remuneration, concern only about making money immediately ( you have to take with a pinch of salt , all their claims of running an organisation for the long term, they might have done it in the past but things changed in the last 20-25 years ).

Failure of Lehmann Bros , Merril Lynch could in all probability could have been due to some or all of these factors in varying degrees.
This business , that is investment banking, securities /derivatives trading , more specifically, had a lot of slack in controls for example, a normal bank could have a leverage of 10 times its capital wheareas a securities trading firm like this could have a leverage of 40. Of course they were not allowed to tap Fed's funds by offering collaterals the way banks are allowed to do.
Building of the bubble and the failure of the credit system on a macro level , apart from the people factors were the principle reasons. Macro and the broader economy related factors could be broadly summed up as follow
1. High leverage,
2. Some amount of encouragement from the Government on the housing front where the Govt encouraged more lending by Institutions like Fannie Mae and Freedi Mac to the underpriveleged ( read , sub prime or risky credit),lowering of due diligence standards in
extension of credit to high risk constituents,
3.Bundling of loans in to mortgage backed securities and trading of the same.
4. Creating a second level asset backed security in the form of CDO( Collaterilised Debt obligation) which was nothing but picking from several medium risk MBS and creating a new instrument apparently with better risk profile than the original ones

5.Continuous creation and proliferaion of such toxic assets and spread of the same across several instituitions

6. Enormous increase in House prices and low margins insisted up on by the lenders and so on and on

7. To top it all, we had CDS ( Credit default swaps ) which was nothing but an insurnace of the CDO s.

To sum it up, the assets backing the total paper created around such hard assets ( like housing etc ) was a fraction ( atleast less than one) of the value of paper ( MBS and CDO bonds) so much so that they became clean loans , that is from Asset backed instrument to a partial asset backed instrument.

The moment , general economy started taking a beating and defaults started happening , the investors ( investors in to the Financial instituitions -repo people/lenders to firms like Bear Stearns) wanted a relook at the true value of collaterals, some asked for higher margins as a result of revaluation, some just asked for their money back. The moment there was stress on cash, people start looking at possible sale of some of the securities and found that they were not as liquid as they thought.

Overnight , from a say 98 c to a USD, valuation of some of the securities was scaled down to 55 C . This kind of valuation affects all Companies. The author also brings out the fact that all these wall street companies have a blow hot blow cold relationship. They are so intricatley interlinked that valueing down of the securities of one company has a cascading impact of other Companies being required to write down the value of their securities and assets and their being this vested interest in not letting this happen. At other times, of course they are at each other's throat.

Author brings out the build up and the drama surrounding the way Fed gurantees a $ 29 Bio back to back loan and ensures that JP Morgan chase buys out Bear Stearns at $ 2 per share.

The share prices which were in the region of $ 100 plus a few months earlier slide down to a single digit figure. It is almost as if these Companies are walking on thin ice most of the time.

From a blue chip to being considered Insolvent was just a matter of few months.

Author also briefly captures how Merril Lunch escapes bankruptcy by being bought over by Bank Of America , how Lemann Bros was almost bought by Barclays . The deal fell through only because British Financial regulators rejected permission. Lehmann manages to pull off sale of their investment banking division and a few others , saving few thousand jobs , but were forced to file for Chapter 11 Bankruptcy. Fed , somehow decides in this case not to bail them out. Surpisingly after Bear sterans they (Fed) had come out with a temporary measure of allowing these wall street Companies to dip in to Fed loans on the back of collaterals. This was refused to Lehmann leading to sinking of the Lehmann ship.

Fed also allowed Morgan Stanley, Goldman Sachs and American Express to convert themselves in to Banking Holding Companies .

Several other Financial Instituitions failed.Some survived , thanks to disbursement from TARP(Troubled asset relief fund ) and Fed also pumping in additional capital in to Freddie Mac and Fannie Mae.

Overall an interesting book . The author has interviewed people extensively and has quoted several people who were privy to a whole lot of discussions which were run up to the crisis .Makes racy reading .

Have finished reading Origin of Financial crisis by Dr George Cooper. Small book , but excellently compiled , very well laid out book. Will have a brief recap of that book under a seperate caption.