Monday 1 August
Global Business Surveys
China PMI: We expect the official PMI to test the 50 threshold, while consensus expects 50.2 after 50.9 in June.
US ISM (Jun): We expect 54 after 55.3 in June, while consensus expects 55.
Also interesting: Thailand, Indonesia June CPI, Korea July CPI
Tuesday 2 August
RBA Meeting: We expect the cash target to remain at 4.75%, in line with consensus.
US "Deadline" for Debt Ceiling Increase
US Personal Income (Jun): We expect 0.4% mom, above consensus of 0.2% after 0.3% in May.
Also interesting: Swiss PMI, Brazil IP
Wednesday 3 August
US Factory Orders (Jun): Consensus expects a decline of 0.6% mom after 0.8% in May.
Turkey CPI (Jul): Consensus expects a decline of 0.1% mom after -1.4% in June.
Thursday 4 August
ECB Meeting: We expect no change from 1.5%, in line with consensus.
Germany Manufacturing Orders (Jun): Consensus expects -0.2% mom after 1.8% in May.
BOE Meeting: We expect no change from 0.5%, in line with consensus.
US Initial Jobless Claims
Czech Republic Central Bank meeting: We expect no change from 0.75%, in line with consensus.
Also Interesting: Russia July CPI, Spanish debt auction
Friday 5 August
Germany IP (Jun): Consensus expects 0.1% mom after 1.2% in May.
US Nonfarm Payrolls (Jul): We expect +50k vs. consensus of 95k after 18k in June.
Also Interesting: Italy Q2 GDP, BOJ Meeting, Philippines CPI Taiwan/ Brazil July CPI, Hungary June IP, Indonesia Q2 GDP.
With the debt ceiling "compromise" deal still in flux, although at least according to the FX market expected to be approved shortly, despite the protestations of liberal democrats (one wonders if Obama will accuse said group of hostage tactics much as he accused conservative republicans of the same last week), below is what the current shape of the proposed deal looks like courtesy of the WSJ's Washington Wire blog.
Here's the outline of the debt ceiling deal as of now, according to officials on both sides:
$900 billion in the first stage of deficit reduction.
$1.5 trillion in second stage of deficit reduction to be defined by a bipartisan special committee of lawmakers appointed by leaders of the House and Senate.
If the special committee fails to deliver a deficit-cutting package that would trigger $1.2 trillion in cuts, half would be Defense cuts and the other half would be non-Defense cuts, exempting low-income programs Social Security and Medicaid, and only impacting providers in Medicare.
The debt ceiling increase would be done in three phases: $400 billion initially; another $500 billion later this year would be subject to a vote of disapproval; a third increase of $1.5 to get the rest through 2012 and would also be subject to vote of disapproval.
There is also a provision to have Congress vote on balanced budget amendment.
The special committee would not necessarily tackle tax reform. But Mr. Obama is threatening to veto any extension of the Bush-era tax cuts for those making $250,000 a year or more unless Congress acts on an overhaul of the tax code.
One can easily see why more radical elements on either side are not be too happy with the proposed bill layout. To be sure the futures market will immediately price in a deal with a triple digit move in the DJIA expected. The only question is at what point will the fade commence, since it is now obvious that absent more monetary stimulus, GDP will go negative first slowly, then very fast as backended cuts start materializing.
WASHINGTON –
President Obama announced Sunday night that a deal between the House and Senate has been reached to raise the debt ceiling. Obama says the deal will end the crisis and remove the cloud over the economy.
The president's announcement came in just as the Asian markets opened, helping to not only boost stocks, but also to raise the US Dollar.
White House, Lawmakers Bang out Deal
Details on the deal as still coming out. Various media outlets have reported that officials on both sides of the debate say the deal will include the following:
The debt ceiling would be raised in three phases, starting at over $900 billion
$900 billion in spending cuts over 10 years so they don't create a drag on the economy
A bipartisan committee would then find more cuts
A vote on a balanced budget amendment, but no guarantee that it will pass
Even though a deal has been reached, it doesn't mean this is over. A vote is still needed in both chambers. However, leadership on both sides of the aisle in the Senate say they support the deal.
Democratic Majority Leader Harry Reid said that both his party and opposition Republicans gave more ground than they wanted to. He said it'll take members of both political parties to pass the measure.
Minority Leader Mitch McConnell said that the pact "will ensure significant cuts in Washington spending" and he assured the markets that a first-ever default on U.S. obligations won't occur. Both the leaders said they will brief their colleagues tomorrow on the details of the agreement.
House Speaker John Boehner announced the deal to lawmakers during a conference call Sunday night. House Minority Leader Nancy Pelosi said she would take the plan to her fellow representatives Monday.
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Senate blocks Reid plan
Senate Republicans have blocked action on a Democratic approach to resolving the debt-ceiling crisis. It was a test vote largely unrelated to the talks between the White House and congressional leaders on a compromise that can clear both the House and Senate.
The Senate voted 50-49 to clear a procedural hurdle toward consideration of a bill put forth by Majority Leader Harry Reid. Sixty votes were needed to advance the measure. Reid himself was one of the people to vote against the deal, though no one has said why.
The outcome of the vote on Sunday did not affect the effort to come up with a compromise to stop the debt crisis, in which the government would be unable to meet all its debt obligations.
Tuesday, August 2 is the deadline the US Treasury Department says the debt ceiling must be raised by, otherwise the country will not be able to pay all of its bills. Several Wall Street analysis groups say the deadline is probably closer August 8-15.
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Frequently Asked Questions
Q: What is the debt ceiling?
A: It's a legal limit on how much debt the government can accumulate. The government takes on debt two ways: It borrows money from investors by issuing Treasury bonds, and it borrows from itself, mostly from the Social Security trust fund, which comes from payroll taxes. Congress created the debt limit in 1917. It's unique to the United States. Most countries let their debts rise automatically when government spending outpaces tax revenue. Congress has increased the debt limit 10 times since 2001.
Q: What is the federal deficit, and how does it differ from the debt?
A: The deficit is how much government spending exceeds tax revenue during a year. Last year, the deficit was $1.29 trillion. The debt is the sum of deficits past and present. Right now, the national debt totals $14.3 trillion _ a ceiling set in 2010.
Q: Why is the prospect of not raising the debt ceiling so worrisome?
A: The government now borrows more than 40 cents of each dollar it spends. If the debt ceiling does not rise, the government would need to choose what to pay and what not, including benefits like Social Security, wages for the military or other bills. It also might delay interest payments on Treasury bonds. Any default could lead to financial panic weakening the country's credit rating, the dollar and the already hobbled economy. Interest rates would likely rise, increasing the cost of borrowing for the government and ordinary Americans.
Q: Who holds the $14.3 trillion in outstanding U.S. debt?
A: The U.S. government owes itself $4.6 trillion, mostly borrowed from Social Security revenues. The remaining $9.7 trillion is owed to investors in Treasury securities _ banks, pension funds, individual investors, state and local governments and foreign investors and governments. Nearly half of that _ $4.5 trillion _ is held by foreigners including China with $1.15 trillion and Japan with $907 billion.
Q: How did the debt grow from $5.8 trillion in 2001 to its current $14.3 trillion?
A: The biggest contributors to the nearly $9 trillion increase over a decade were:
2001 and 2003 tax cuts under President George W. Bush: $1.6 trillion.
Additional interest costs: $1.4 trillion.
Wars in Iraq and Afghanistan: $1.3 trillion.
Economic stimulus package under Obama: $800 billion.
2010 tax cuts, a compromise by Obama and Republicans that extended jobless benefits and cut payroll taxes: $400 billion.
2003 creation of Medicare's prescription drug benefit: $300 billion.
2008 financial industry bailout: $200 billion.
Hundreds of billions less in revenue than expected since the Great Recession began in December 2007.
Other spending increases in domestic, farm and defense programs, adding lesser amounts.
Munoth Communication (MUNOTHI) is engaged in the business of trading in mobile phones. It was incorporated in 1984 and got its present name on April 5, 2003
It is in communication with other mobile phone manufacturers and is contemplating diversification into other areas like pharmaceuticals and chemicals by-product manufacturing.
The mobile phone business is back in action and the sales growth is shown in March Quarter results.
Munoth Communications, the Chennai based Company has launched Mobile Phone for Senior Citizines. The features of this phone are designed for the safety & emergency requriments of the elderly. (emergency button, SOS text msg, Special GPS Facility etc ) price range of Rs 1400 to Rs 4000.
MCL has a robust pan India distribution network in place to roll out phones. MCL has extensive distribution experience since 2003 as it was the exclusive all India distributor for DBTEL mobile phones and south India distributor for Panasonic Mobile Phones.
Just to make sure that we all get the message that a consolidated sell off across all asset classes is what the cental planning doctor ordered, here comes Moody's to not only trim all the gains in the EURUSD since the Boehner debacle, but to remind us that the Fourth Reich is coming, even as the US of Aa- still struggles to pass its 2009 budget. Oh, and as a reminder Moody's put Italy's Aa2 rating on downgrade review on June 17, which means the formal downgrade is due right… about…. now.
Moody's places Spain's Aa2 ratings on review for possible downgrade
Spain's Prime-1 short-term ratings are unaffected by today's action
New York, July 29, 2011 — Moody's Investors Service has today placed Spain's Aa2 government bond ratings on review for possible downgrade.
Spain's Prime-1 short-term ratings are unaffected by today's action.
The initiation of the ratings review is driven by the following concerns:
1.) The continued funding pressures facing the Spanish government, which the precedent set for future euro area support arrangements by the official package for Greece is likely to exacerbate, and the resulting increase in risks to bondholders.
2.) The challenges posed to the government's fiscal consolidation efforts by the weak growth environment and the continued fiscal slippage among several regional governments.
Funding costs have been rising for some time for the Spanish government and for many closely related debt issuers, such as domestic banks and regional governments. Pressures are likely to increase still further following the announcement of the official package for Greece, which has signalled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits. The package has not relieved market concerns over the position of such sovereigns because (i) it sets a precedent for private sector participation in future sovereign debt restructurings in the euro area, and (ii) while an expansion of powers has been proposed for the EFSF, it is not clear when the powers will be implemented.
Moody's views positively that the central government has been successful in meeting its near-term fiscal consolidation targets, but the rating agency nonetheless notes that challenges to long-term budget balance remain due to Spain's subdued economic growth and fiscal slippage within parts of its regional and local government sector.
Moody's review will evaluate the weight of these risks, set against the Spanish government's high Aa2 rating and its credit strengths, which include (i) a low public debt ratio compared to other highly rated EU sovereigns; (ii) its success in achieving budget targets for 2010; and
(iii) its implementation of key structural reforms, including progress made in the recapitalization of the banking system. Moody's will also evaluate the outlook for economic growth against the high debt levels of the private sector and the need for an ongoing rebalancing of the economy.
Moody's has today also placed the Aa2 rating of Spain's Fondo de Reestructuración Ordenada Bancaria (FROB) on review for possible downgrade as the FROB's debt is fully and unconditionally guaranteed by the government of Spain.
In the absence of any unexpected development, Moody's expects that any change in the rating following the review is most likely to be limited to one notch.
The announcement of the rating review closely follows the publication of two Moody's Special Comments, which explain why the official support package for Greece has negative credit implications for non-Aaa-rated euro area sovereigns with high debt burdens or large budget deficits, and why the fiscal under-performance of several Spanish regional governments has adverse credit implications for Spain's sovereign rating.
RATIONALE FOR REVIEW
The main driver of Moody's decision to place Spain's sovereign rating on review for possible downgrade is the increased vulnerability of the Spanish government's finances to market stress and consequently to elevated funding costs and event risk. Funding costs have in fact been rising for some time for the Spanish government and for many closely related debt issuers, such as domestic banks and regional governments.
Moody's ratings are not affected by short-term market moves; however, the risk of a sustained rise in funding costs nevertheless has to be factored into the agency's analysis of a country's prospective debt affordability.
While the likelihood of a shift in sentiment that would prevent a country with Spain's fundamental strength from accessing private financing on affordable terms remains low, the risk of such a shock has risen in recent months.
Moreover, the official support package for Greece announced last week somewhat increases the potential for adverse market dynamics given (i) the precedent it sets for possible private sector participation in the future provision of support for euro area member states, and (ii) the uncertainties surrounding the content of the package, including whether the EFSF will be expanded and when the promised expansion in the scope of its powers will be implemented. As Moody's stated earlier this week, the official support package for Greece has negative credit implications for non-Aaa-rated euro area sovereigns with large debt burdens and/or high deficits, (See Moody's Special Comment entitled "EU Support Package Permits Orderly Default by Greece and Buys Time, But Credit Effects Are Mixed for Other Euro Area Sovereigns", published 25 July 2011). Moody's will factor this into its risk analysis for such euro area sovereigns.
The review of Spain's sovereign rating is consistent with this objective and follows Moody's rating action on Italy, whose Aa2 sovereign rating was placed on review for possible downgrade on 17 June 2011, in part to reflect similar concerns.
The second driver underlying Moody's review is its continued concern over the central government's ability to ensure compliance by regional governments with fiscal targets, especially given the limited effectiveness of the central government's debt authorization powers. (See Moody's Special Comment entitled "Spanish Regions: Continued Fiscal Slippage Would Have Negative Ratings Impact", published 28 June 2011.) Moody's expects the regional governments to miss their collective budget deficit target by up to 0.75% of GDP, which would make the achievement of the overall budget target for the general government sector (deficit of 6% of GDP in 2011) more difficult. The rating agency expressed concern that regional governments' finances may prove difficult to control due to structural spending pressures, particularly in the healthcare sector.
FACTORS TO BE CONSIDERED IN THE REVIEW
Moody's review of Spain's credit rating will focus on both external and domestic factors.
In terms of the external factors, Moody's review will largely focus on the broader question of how best to reflect the impact of last week's precedent-setting announcement of a Greek package on funding pressures facing non-Aaa-rated euro area sovereigns that are vulnerable to elevated market stress and loss of confidence, be it due to the need to finance large budget deficits or to roll over very high debt levels.
The impact of last week's euro area decisions on the depth, breadth and price of Spain's market access and the risks borne by its bondholders as a result will be an important factor in that assessment. The package announced remains subject to uncertainties and execution risks. Moody's review will therefore monitor progress in implementing the expanded EFSF powers to support sovereign debt prices. It will also assess the impact of the package's announcement on market dynamics and on Spain's access to and the cost of private funding in the medium term. Moody's notes that the Spanish Treasury has already issued an important portion of its funding requirement for the year at affordable interest rates, and should be able to accommodate temporarily higher interest rates within its current budget parameters. Spain's debt affordability ratio, defined as debt interest payments as a share of total government revenues, is roughly in line with that of Belgium and lower than that of Italy.
As for the domestic factors, Moody's will assess the likelihood that the central government will again be able to compensate for fiscal slippage at the regional government level. Any additional measures at the regional government level, both to correct the fiscal slippage currently evident and to address the structural spending pressures on the regional finances, will also be assessed during the review period.
In this context, Moody's notes that the government was able to achieve the target set for the general government budget deficit in 2010 (9.2% of GDP versus target of 9.3%), and reduced its own central government deficit by a full percentage point of GDP more than the target (5.7% of GDP versus target of 6.7%). At around 60% of GDP in 2010, Spain's public debt ratio is lower than that of several important European countries, including several Aaa rated sovereigns. Judging from the budget execution for the year to June, the Spanish government also seems to be on track to achieve its target for the current year (central government deficit of 4.8% of GDP), although Moody's believes that budget execution will probably deteriorate in the remainder of the year due to higher interest rates paid from May 2010 onwards.
Moody's also notes that the Spanish economy has so far grown broadly in line with the agency's baseline assumptions. The necessary rebalancing of the economy is progressing, with positive signs from the export sector.
Spain is — next to the Netherlands and Ireland — the only euro area country that has managed to surpass its previous peak level in exports, signaling stronger underlying export dynamism than most of its peers. The key downside risk continues to be the weakness of private consumption against the background of high household debt, rising interest cost and persistently high unemployment. The recently implemented changes to the collective bargaining system are widely considered to be inadequate to significantly increase urgently needed flexibility in the labour market.
GDP data for Q2, to be published at the end of August, should give further clarity on the outlook for the economy.
PREVIOUS RATING ACTION AND METHODOLOGY
Moody's last rating action affecting Spain was taken on 10 March 2011, when the rating agency downgraded Spain's government bond ratings to Aa2 and assigned a negative outlook. The rating action prior to that was taken on 15 December 2010, when the rating agency placed Spain's Aa1 ratings on review for possible downgrade.
Viom Networks offers to buy GTL Infrastructure for Rs 7,500 crore
Telecom tower company Viom Networks has made a 7,500-crore offer to buy out its competitor GTL Infrastructure, two executives directly aware of the development.
Talks are continuing, as there is a valuation mismatch -GTL promoters are learnt to be eyeing valuations of over 10,500 crore (excluding its debt), the executives quoted above said.
They also added that earlier rounds of talks held during first week of July had not make any headway as Viom was not keen on the merger option being proposed by bankers. Viom had made this offer to GTL last week.
SBI Capital Markets is advising Global Group, the parent company of GTL and GTL Infrastructure, on the possible sellout or stake dilution.
Viom's CEO Arun Kapoor declined to comment when asked specifically if the company had made a 7,500-crore offer to GTL. Viom is 53% controlled by the Tatas, while Kolkata-based Kanorias, founders of Srei, have 27% with foreign institutional investors holding the remaining 20%.
The founder and promoter of Global Group, Manoj Tirodkar, refused to comment, but the company in an e-mail reply to an ET query said: "There are many aspirants who want to acquire our assets or partner with us.
Viom has not entered into any formal discussion with us and hence the question of 7,500 crore or the 10,500 crore being value does not arise. The fact that players like Viom continues to approach and show their interest in GTL Infra is a tribute to the business we have built."
GTL's debt is estimated to be around 14,000 crore. The executives quoted above also clarified that Viom's offer to GTL was subject to two conditions. First, theGlobal Group must reduce its debt in its tower arms to about 7,500 crore post the restructuring. Viom is of the view that GTL cannot sustain a higher debt based on its current cash flows.
Next, Viom has also said that its offer is valid only for a limited period as it shares the view that its competitor's valuations will erode further if the company fails to meet its service level agreements with respect to its clients, they added.
In the past week, almost every single sellside bank and their mother has released a report on "what happens to the US if there is a [default|debt extension|compromise|zombie apocalypse (if one believes Tim Geithner)]. Sure enough, here is Credit Suisse with its three scenarios. This is notable as it presents the binary outcomes for the stock markets as a result of what develops in Congress. The scenarios are: i) debt ceiling extension (market up 3%); ii) debt ceiling not extended (market down 15%); iii) default (market plummets by at least 30%). Of course, if there is really is a default it is game over for equity markets but that is a moot point. Either way, any report that has zero mention of the word gold when contemplating the impact of a US default goes straight into the garbage. Such as this one.
Here is Credit Suisse's scenario summary :
And a brief and largely irrelevant summary of the key outcomes.
What happened during the previous debt ceiling crisis?
We have already had a debt ceiling crisis between November 15, 1995 and 29 March 1997 (with two short episodes of government shutdown, in November 1995 and December 1995 to January 1996), when the Republican party agreed on raising the ceiling to $5.5trn after Secretary Rubin informed Congress that he would stop mailing out Social Security cheques. During those periods bonds yields, the dollar and the S&P all rose a bit.
The difference this time around is that the US is running a budget deficit of 11% of GDP, not of 2% of GDP. Hence, the required fiscal tightening to balance the books if the debt ceiling is not raised is a lot higher. Moreover, this time there is also more fiscal tightening on at the state and local level. [as we presented yesterday]
On to the market impact of the various outcomes:
No debt ceiling agreement: equities markets down 15%
If there is no increase in the debt ceiling for a prolonged period (say 3 months) with no agreement in sight, we believe stock markets could easily fall 15%. As above, we believe we get very close to recession – and if say ISM fell to 40 and credit spreads rose to 4%, the warranted equity risk premium would rise to 5.8%. At the same time, EPS on our model could fall 15%, leading to equity risk premium to fall 5%. This would give equity markets some 12% downside.
We believe that the fall in markets would give politicians a strong incentive to compromise – and we would likely get an agreement (as it was the case with TARP, when the first rejection of the bill on 29th September 2008 triggered a 9% fall in markets and the bill was then passed in a second vote on October 3rd).
In Europe, this would happen at a time when the long-term bank funding market is still almost closed, recent PMIs have been particularly weak (suggesting GDP of just 0.2% quarter on quarter). We believe this makes Europe more vulnerable than normal, especially if the Euro, as seems likely, would strengthen a lot in this scenario. Clearly, weaker global growth and a generalized risk-off trade would make funding issues in peripheral Europe worse.
Overall, we would expect the sharp decline in growth expectations to lead to lower bond yields, as the impact of weaker growth more than offsets investors' concerns about the credit downgrade. On our fair value bond model, each 10 points decline in the ISM reduces the fair value of bonds by 75bps. In this case, investors should focus on secular growth (as it is long duration and benefits from the fall in the discount rate) and noncyclicality (healthcare, telecoms, food retailing, regulated utilities). In addition, we would greatly increase our underweight of cyclicals and with the exception of software (which should prove defensive as in 2007/8). In particular, we would go short of corporate spending related areas, given that corporate spending is typically the high-beta component of growth.
The sectors that have low cyclicality (negative correlation with the ISM) and low leverage (net debt to EBITDA) are pharma, health care equipment, food retailers and software.
In case of default, just be overweight defensives [ZH advice: in case of default, run]
If there was a default, we would simply focus on non-cyclical companies with high FCF yield and low leverage (as we assume that funding markets would dry up and the cost of debt would rise).
Focus on companies safer than governments
Regardless of the outcome of the negotiations over the debt ceiling, we think investors should focus on ultra-safe corporates (those that offer a CDS spread below that of the average G7 sovereign in combination with a dividend yield above the average G7 government bond yield). To the extent that the debt ceiling negotiation in the US and the worries about peripheral Europe drive home the uncertain outlook for government finances, the strong financial position of these corporates will appear increasingly attractive.
Interest rates are at a 12-year high. Just as a person with little or no debt is the most stress free today, companies which have little or no debt are probably the safest bets. It is not that every zero debt company is a good bet. There are companies with no debt but with suspicious management and even fishier fundamentals. It could also indicate very low risk ability which for long term growth is not prudent. But in today's time, where interest cost, combined with inflationary pressure is expected to eat away the margins, it is best to go for companies where one does not have to worry about the debt component. Inflationary pressure is something which even the RBI and the Govt seem to have no handle on. Thus best to bank on some zero/low debt companies.
Complied below is a list of companies who have very low debt, which is evident from their miniscule interest outgo. Take a look and make a well informed choice.
Companies which are zero debt are:
Infosys, Crisil, Gillette, P&G Hygiene, Pfizer, AstraZeneca, NMDC, Nalco, Concor, Engineers India, Bajaj Finserve, Lakshmi Machine Works, Honeywell Automation, Tata Sponge, Chemfab Alkalies, Praj Industries, Lakshmi Automatic Loom.
Companies which have very low debt, where interest outgo per quarter is less than even Rs.50 lakh:
Aventis, PTC India, Zydus Wellness (Rs.1 lakh in Q1FY12), TTK Prestige (Rs.49 lakh in Q1FY12), Shanthi Gears (Rs.16 lakh in Q1FY12), KSB Pumps, Foseco India, Castrol India, Kansai Nerolac, IFB Industries, Eicher Motors, Balmer Lawrie, HUL, CMC, MRO-TEK, Infotech Entp, Oberoi Realty, Wyeth, Thermax.
What came as a revelation was that apart from the cash rich MNCs, which we all knew were debt free and cash rich, were some of the PSU companies which figured in the zero debt companies. Realty companies probably figure highest in terms of high debt companies and in that scenario, to see Oberoi Realty as a low debt company came as a complete surprise. As at 31st March 2011, it had an interest outgo of just Rs.16 lakh. An unheard of phenomenon in realty companies!
Companies like PTC, Zydus, Kansai, Foseco, IFB industries, CMC, MRO-TEK, Infotech Entp, have debt which is extremely paltry with their interest outgo for entire year being not over even Rs.10-15 lakh.
All the above mentioned companies are doing well financially. And being zero/low debt is like the perfect icing on the cake. Infact, coming across cake itself has become a rarity and here, cakes with icing, holds promise!
Most of these companies are fundamentally sound and one can afford to stay put. But in companies where you are not sure about the fundamentals but are going purely based on low debt, then its best to constantly monitor the stock every quarter. Like Lakshmi Automatic Loom – it is a part of the Coimbatore based Lakshmi group but its financials are not steady, though it has been in the black in Q1FY12 and Q4FY11.
Many of the NBFCs have very low debt but in today's circumstances where brokerage houses are finding it difficult to keep things together, going for these stocks, despite being low debt makes no sense.
24% of the stocks listed on the BSE are zero or low debt. That's over 800 shares. Yet not all are great. Thus looking at all debt free stocks with the same outlook would be a folly.
At the same time, a quick look at companies which have huge debt and in the current scenario are sure to face more heat.
Realty companies like DLF, Unitech, Omaxe, HCC, HDIL, Ansal Properties. And after this comes big ticket infra companies like GTL Infra, Lanco Infra, GMR, IVRCL. Others with very high debt are – Kingfisher Airlines, Jet Airways, Rcom, RIL, Alok Industries, Bhushan Steel, Ispat Industries, JSW Steel, JSW Energy, Rajesh Exports, Jaiprakash Associates, SAIL, Adani Power, Suzlon, GE Shipping, Essar Oil, HPCL, BPCL, NTPC, Videocon Industries.
The same logic for low debt companies (but inversely) applies here – not all high debt companies are bad. Here, we have to view debt in terms of its revenue. Heavy debt companies, where continuity of revenue and profitability is visible, the return on equity capital invested is usually higher. And that's not bad!
But currently, its best to go for zero/low debt companies as that is what the high interest regime demands. Its best to have a portfolio based on current macro conditions. Gone are the days of buy it and forget it!
The epic revision in the just revised Boehner plan is to cut a grand total of … $91.7 billion per year for 10 years (back-end loaded of course: 2012 will see just $22 billion in cuts – can't have any real cuts too early or else). The spin is that this is sufficient because the $917 billion in cuts is more than the proposed $900 billion debt ceiling hike, so all shall be well. Of course that is only part one of the two-part debt ceiling hike process. The next step is a $1.8 trillion cut to "protect programs like Medicare and Social Security from bankruptcy." The problem is that Boehner continues along the path of a two-step debt hike, a formulation that Obama will never agree to, since it effectively guarantees him no-reelection chance, as the last thing the people will want is the same bickering as we are experiencing every day again some time in 2012, when the current $900 billion in incremental debt capacity runs out. And actually, with the US debt already $300 billion below trendline and with the government's two pension funds already plundered by a like amount (which means they have a net IOU position), it means that the Boehner plan really buys only $600 billion of dry powder. At a burn rate of $150 billion a month, this means the first step of the Boehner plan buys precisely 4 months before the debt ceiling has to be raised again! Oh yes, this plan also guarantees at least a one notch downgrade to the US debt, with more notches coming up before the end of the year when this whole farce is repeated.
Full release:
BREAKING: Independent CBO Confirms Spending Cuts Exceed Debt Limit Hike in Revised GOP Plan; Bill Now Includes $22 Billion in Deficit Reduction in First Year
Posted by Speaker Boehner's Press Office on July 27, 2011
The Congressional Budget Office (CBO) has released its analysis of the revised Budget Control Act of 2011 today, and CBO's analysis confirms that the spending cuts are greater than the debt hike – affirming that the House GOP bill meets the critical test House Republicans have said they will insist upon for any bill to raise the nation's debt ceiling. Specifically, the CBO analysis confirms the Republican plan will:
Cut and cap spending by $917 billion over 10 years – that's more than the $900 billion debt hike;
Cut $22 billion in spending for FY2012 and hold spending below FY2010 levels until FY2016;
Continue reducing discretionary spending each year compared to President Obama's budget (by $96 billion in 2012, $118 billion in 2013, $115 billion in 2014, $117 billion in 2015, and so on); and
Require Congress to draft proposals that produce reductions of at least $1.8 trillion that help protect programs like Medicare and Social Security from bankruptcy.
Republicans adjusted their spending cut bill after a lower-than-expected score from CBO. This updated analysis confirms what others are saying: the Republican plan "changes the trajectory of spending" and "would keep the debt cutting process going." Unlike Senator Reid's gimmick-filled plan, the Republican proposal includes real spending cuts and reforms that will restrain future spending – and the spending cuts are larger than the debt limit increase.
This bill is far from perfect, but it's a positive step forward that denies President the $2.4 trillion blank check that lets him continue his spending binge through the next election. Learn more about it here.
And here Paul Ryan explains how this grand plan will cut a whopping $22 billion in all of 2012.
The Budget Control Act has been updated to make certain that House Republicans fulfill their pledge to cut spending more than we increase the debt limit. Congressional Budget Office numbers confirm that the updated legislation adheres to this pledge: no new taxes; no blank check for the President; spending cuts greater than the size of the debt limit increase.
The bill has been revised to increase outlay savings, according to the Congressional Budget Office. The Budget Control Act caps budget authority each of the fiscal years from 2012 to 2021. Budget authority – the authority Congress provides to agencies to spend each year – is set at a fixed level for the next decade under the Budget Control Act. Budget authority eventually results in the actual spending of money, which are recorded as outlays. Outlays are recorded when agencies spend out the money they've been provided through budget authority.
The updated legislation makes no changes to the annual budget authority caps, but removes a limitation on outlay calculations that was included in the first version of the bill. This adjustment allows the Congressional Budget Office to provide a more accurate measure of the likely rate of spending. In their new analysis of the Budget Control Act, the CBO estimates that the bill will reduce the deficit by $22 billion in FY 2012, and by $917 billion between 2012 and 2021. Under the bill, the President is given authority to increase the debt, under certain conditions, by up to $900 billion. Based on CBO estimates, the spending savings exceed the amount of this debt increase.
The revised bill will also include a point of order against consideration of a measure that would violate the discretionary spending caps put in place by the bill, which in the Senate would require a three-fifths vote in the Senate to waive. In addition, three provisions from the original bill are modified to address technical timing issues with respect to resolutions of disapproval.
For a review of discretionary spending next year under the Budget Control Act, showing real cuts relative to FY2011, and spending cuts far closer to the House-passed budget as opposed to the President's request to increase government spending:
