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Global - Economy and Market

Fed's Bullard: U.S. economic outlook is brighter

VANCOUVER - St. Louis Federal Reserve Bank President James Bullard said on Friday the U.S. economic outlook is righter and household confidence has improved, suggesting he sees no need for further steps to ease financial conditions.

Initial unemployment claims in U.S. hold near 4-year low, U.S. car sales reach highest level since February 2008

First-time jobless claims in the U.S. edged down after fluctuating near a four-year low for several weeks. The Labor Department said initial claims declined 2,000 last week, to a seasonally adjusted 351,000. The four-week rolling average dropped 5,500, to 354,000, the fewest since March 2008. Last month, Americans bought the most vehicles since February 2008, despite rising gas prices. Automakers weren't offering additional incentives. Analysts attributed the growth to pent-up demand by consumers who were delaying purchase as well as optimism about the economic recovery.

U.S. factory growth cools, spending stagnant, U.S. house prices reached 9-year low in December, index shows

WASHINGTON - U.S. manufacturing cooled in February and consumer spending was flat for a third straight month in January, suggesting the economy lost more steam early this year than expected. The Standard & Poor's/Case-Shiller Home Price index sank in December to its lowest since 2002, suggesting the housing market remains a threat to the U.S. economic recovery. The index dropped 4% compared with December 2010

Eurozone ministers withhold some funds for Greece, to decide on firewall in March

Eurozone finance ministers released €58 billion to Greece as part of its rescue program to smooth the country's bond restructuring, but they withheld €71.5 billion. They plan to hold a conference call on March 9 and make a decision on March 12. Athens faces a March 20 deadline to make a €14.5 billion bond payment. the European Central Bank said its extraordinary support measures would not be repeated, putting the onus squarely back on governments to act.

Troika reviews Portugal's economic reforms

The European Commission, the International Monetary Fund and the European Central Bank were expected to review Portugal's progress on fiscal reforms, paving the way for it to receive the next tranche of its rescue. Portugal continues to face significant challenges, and many economists expect that more emergency funding will be needed. European officials are striving to downplay Portugal's economic woes and differentiate its situation from that of Greece.

Risk of severe global downturn is fading, IMF says

The chances of Europe's financial problems triggering a sharp, worldwide downturn have fallen since the eurozone took several actions to deal with the sovereign-debt crisis, the International Monetary Fund said in a report. "The key risk remains that policies do not shift Europe toward a 'good equilibrium' and fail to break adverse feedback loops between real, fiscal, and financial sectors," the IMF said. The multinational development bank confirmed that the eurozone will soon enter a "mild recession."
Analysis: Stores fail to compete with online merchants

Conventional retailers are suffering because they aren't moving swiftly to compete with Internet merchants, according to The Economist. "To build a profitable online business retailers must integrate it seamlessly with their bricks-and-mortar operations," the magazine notes. "Many keep them separate, increasing the risk that they fail to communicate or work together properly." The Economist

Emerging nations want World Bank, IMF top jobs more contestable

Leaders of emerging economies called for an end to the longstanding practice of naming a U.S. citizen to head the World Bank and a European to helm the International Monetary Fund. The positions should be filled based on merit, rather than nationality, they said. Reuters

 

 

 
NMDC Price 179 Target 230

NMDC is India's largest iron-ore producer with ~30mn tonnes of annual extraction capacity and rich iron-ore reserves & resources of ~1.36 bn tonnes. It has 3 fully operating mines located in Chhattisgarh and Karnataka, having a total proved reserve of around 800mn tonnes. Debt free mining company sitting on huge cash Rupees 207.25 Billion will provide leverage to explore and develop new mines both India and globally.

Investment Arguments


~NMDC - One of the Best Players in Mining

~Quality resources in kitty

~High margin backed by low cost of production

~Diversifying Product Portfolio

~Huge Cash in Balance sheet will help company to grow inorganically

~Valuation

~Concerns


Company Description

NMDC Limited engages in the exploration and production of various minerals in India and internationally

It explores for iron ore, copper, rock phosphate, lime stone, dolomite, gypsum, bentonite, magnesite, diamond, tin, tungsten, graphite, and beach sands. The company also focuses on coal and gold properties, as well as platinum group of elements and bauxite.

It has interests in Bailadila iron ore deposits in Chhattisgarh, as well as Donimalai iron ore mines in Karnataka; diamond mine in Panna, Madhya Pradesh; magnesite mine in Jammu; and Arki lime stone project in Himachal Pradesh.

In addition, the company involves in developing a steel plant at Jagdalpur, as well as pellet plants in Donimalai and Bacheli; and invests in the development of renewable energy resources, which include a wind mill project of approximately 10.5MW capacity in Karnataka.

It was formerly known as National Mineral Development Corp.Ltd., and changed its name to NMDC Limited in January, 2008.

Valuations

With strong domestic demand, we expect NMDC's volumes to grow at 6-8% CAGR during F11-F14e. On EV/EBITDA, it trades at 5x F13e and 4.8x F14e and EV/Sales, it trades at 3.8x FY13e and 3.6x FY14e. We feel at the current valuation, the stock is undervalued with its peers and the company should command a premium, given its cost, high ROE, debt free, market leadership in the domestic iron-ore space, huge cash balance and high margins. We assign the price target of Rs. 230 based on relative valuation in next 12-15 months.

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Eurozone member countries have approved just half of the €130bn bailout for Greece saying that Athens has yet to prove that it will meet all the terms and conditions required for the second bailout.

The remaining €71.5bn will be paid once officials from the European Union and IMF are happy that Greece is committed to implementing key measures aimed at putting the country back on a sound economic footing.

Athens has passed laws on fiscal consolidation, pension reform, financial sector regulation and structural reforms. It still has to issue some decrees and other ministry decisions that will translate the laws into action.

However, eurozone finance ministers did sign off on funds to underpin the debt swap aimed at cutting the value of the Greek bonds held by private investors.

The money can be paid out only after the completion of a bond swap between Athens and private investors which is to be concluded by March 9 and which aims to halve Greece's privately-held debt, cutting it by €100bn.

Jean-Claude Juncker, the Luxembourg prime minister who chairs the eurogroup, said Greece's official creditors would "finalise in the next few days" an assessment of Greece's steps to enshrine the bailout conditions into law.

"All required legislation by the parliament and the ministerial cabinet has been adopted and a few pending implementing acts should be completed shortly," Mr Juncker said in a statement.

The second financing programme for Greece, which follows a €110bn bailout agreed in May 2010, will total €130bn, plus €34.4bn of the undisbursed remainder of the first programme.

Heading into the finance ministers meeting, Ireland's Finance Minister Michael Noonan said the meeting would largely focus on Greece. "There will be a review of the prior agreement and there will be a review of how far they have implemented the requirements.

The ministers also agreed on a backstop facility for the recapitalisation of Greek banks. No figures were given but two euro officials said €23bn out of the €130bn was earmarked for that purpose. Another official said it could be as much as €40bn.

 

 
A desperate seller unwilling to compromise on the product's price; a product that is plagued by a major shortcoming; buyers who are aware of both the seller's desperation and the expensive price of the product. What do you get when you combine all these? Answer: a debacle called ONGC disinvestment.

The details are murky but one fact is clear: the auction process for ONGC could have bombed on the government and but for LIC coming to its rescue, the Centre may have been left red-faced with the mortification of seeing its Maharatna's shares having no takers. The insurance major coughed up as much as Rs.12,000 crore of the Rs.12,767 crore raised from the auction, or 94 per cent.

It can never be proved conclusively whether LIC was ordered to bridge the large shortfall in demand. Circumstantial evidence, however, offers some pointers. Until 3.20 p.m. on the day of the auction, only 1.43 crore shares were bid for on the BSE and NSE. It is difficult to believe that bids for the balance 40.6 crore shares were made in the remaining 10 minutes before the offer closed at 3.30 p.m.

Second, the details of the bids were declared close to midnight on Thursday, eight hours after the auction closed. Why did it take so long for the bids to be tabulated? The auction was screen-based and the exchanges have efficient computer systems that have handled several big ticket initial public offerings (IPOs) in the past. So the explanation of glitches is not convincing and the exchanges have also clarified there were no technical problems.

Third, it is also difficult to believe that institutional investors putting in large bids will wait until the last 10 minutes of the auction. One explanation being given is that they were waiting for the indicative price to be declared by the exchanges. This did not happen because there were just 1.43 crore shares bid and the exchanges could not arrive at the indicative price from them. The fact is that all bidders, not just institutional, could see the trends live on the websites of the exchanges and were aware that the indicative price might not be announced. The question of indicative price arises only if there is excessive demand which was not the case with the ONGC auction.

The evidence, therefore, points in the direction of possible intervention by the government to save the auction. That institutions such as LIC and others have in the past been treated as handmaidens of the government only bolsters the case. It might well be that LIC will make handsome gains from the investment at some point in the future. Yet, that should not be confused with whether it is right for the government to lean on such institutions to bail it out of a tricky situation of its own making. The test question is: Would LIC have invested such a large sum in a single stock on its own volition?

 
Looks like the disinvestment ministry has taken the Life Insurance Corporation's tagline ('Why go anywhere else?') a bit too seriously.

Minutes before the government's first-ever disinvestment through the auction route was about to end in a fiasco, India's government-owned life insurer had to throw its owners a lifeline. It was roped in to bail out ONGC's floundering issue on Thursday.

The disinvestment ministry's additional secretary, Siddhartha Pradhan, of course, completely denied that there was any pressure on LIC to invest in ONGC.

Having the government of India as owner is the biggest risk to the future of the LIC.

As if one cue, the insurance company on Friday said that it "had found value" in the stock and that is why it had made a small purchase worth Rs 3,880 crore.

Nice Coincidence.

This amount, by some strange coincidence, was almost equal to the shortfall that the issue faced at the close of trading hours. To top it all, LIC's buying announcement came late in the night and the delay was conveniently attributed to technical and punching errors.

It is understandable if a small retail broker makes such an error, but the orders were directed through some of the biggest brokers in the country by a fund (LIC) which buys and sells crore worth of shares every month. And if an order worth Rs 3,880 crore was to be punched, the senior-most executive is generally present. In a normal day, given the brokerage given by LIC to its brokers, this would have resulted in a brokerage income of Rs 3.8 crore in one transaction only.

The other quaint fact is LIC's discovery of value in the ONGC stock a few minutes before the auction closed. The fact is the insurer has been holding nearly 3 percent of ONGC shares and has been regularly trading in and out of the company. LIC needs to re-evaluate its discovery process as the stock did not bleep on its radar when the price was 20 percent lower a month back.

The insurance company has also 'discovered value' in a series of banks, which needed equity infusion from the government. Given the series of disinvestments planned over the next few weeks, it would not be surprising if LIC's discoveries take it the UTI way.

For a company that has made money on the pretext of covering risk, it needs to follow its own advice.

Having the government of India as owner is the biggest risk to the future of the LIC.

 
Warren Buffett released his annual letter (PDF file, Adobe Acrobat required) to Berkshire Hathaway (NYSE: BRK-B ) on Saturday. If you have the time, it's worth reading the whole thing. If not, here are 25 important quotes.

On value: "The logic is simple: If you are going to be a netbuyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day's supply."

On market moves: "Here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham's The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life."

On foreclosures: "A largely unnoted fact: Large numbers of people who have 'lost' their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost. In these cases, the evicted homeowner was the winner, and the victim was the lender."

On share buybacks: "The first law of capital allocation – whether the money is slated for acquisitions or share repurchases — is that what is smart at one price is dumb at another."

On predicting turnarounds: "Last year, I told you that 'a housing recovery will probably begin within a year or so.' I was dead wrong."

On housing: "I believe [low housing construction] is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy."

On everything besides housing: "Though housing-related businesses remain in the emergency room, most other businesses have left the hospital with their health fully restored."

On recovery after the bubble: "[The] supply/demand equation is now reversed: Every day we are creating more households than housing units. I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America's best days lie ahead."

More on buybacks: "Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated. We have witnessed many bouts of repurchasing that failed our second test."

On conditions for share buybacks: "First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well. A corollary to this second point: 'Talking our book' about a stock we own — were that to be effective — would actually be harmful to Berkshire, not helpful as commentators customarily assume."

On risk management: "[I]f the insurance industry should experience a $250 billion loss from some megacatastrophe — a loss about triple anything it has ever faced — Berkshire as a whole would likely record a moderate profit for the year because of its many streams of earning."

On acquisitions: "We now have eight subsidiaries that would each be included in the Fortune 500 were they stand-alone companies. That leaves only 492 to go."

On Burlington Northern: "We must, without fail, maintain and improve our 23,000 miles of track along with 13,000 bridges, 80 tunnels, 6,900 locomotives and 78,600 freight cars. This job requires us to have ample financial resources under all economic scenarios and to have the human talent that can instantly and effectively deal with the vicissitudes of nature, such as the widespread flooding BNSF labored under last summer."

On Berkshire's subsidiaries: "Some of the businesses enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25% after-tax to more than 100%. Others produce good returns in the area of 12[%]-20%. A few, however, have very poor returns, a result of some serious mistakes I made in my job of capital allocation. These errors came about because I misjudged either the competitive strength of the business being purchased or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor. Charlie's has been better; he voted no more than 'present' on several of my errant purchases."

On committing to bad investments: "Any management consultant or Wall Street advisor would look at our laggards and say 'dump them.' That won't happen. For 29 years, we have regularly laid out Berkshire's economic principles … [describing] our general reluctance to sell poor performers (which, in most cases, lag because of industry factors rather than managerial shortcomings). Our approach is far from Darwinian, and many of you may disapprove of it. I can understand your position. However, we have made — and continue to make — a commitment to the sellers of businesses we buy that we will retain those businesses through thick and thin. So far, the dollar cost of that commitment has not been substantial and may well be offset by the goodwill it builds among prospective sellers looking for the right permanent home for their treasured business and loyal associates. These owners know that what they get with us can't be delivered by others and that our commitments will be good for many decades to come."

On banking: "The banking industry is back on its feet, and Wells Fargo [ (NYSE: WFC ) ] is prospering. Its earnings are strong, its assets solid and its capital at record levels. At Bank of America [ (NYSE: BAC ) ], some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today's problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire."

On derivatives: "Though our existing contracts have very minor collateral requirements, the rules have changed for new positions. Consequently, we will not be initiating any majorderivatives positions. We shun contracts of any type that could require the instant posting ofcollateral. The possibility of some sudden and huge posting requirement — arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist attack — is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength.

On bond yields: "Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: 'Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.'"

On fixed-income: "Most of these currency-based investments are thought of as 'safe.' In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge. Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments ofinterest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control. Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as 'income.'"

On liquidity: "Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be."

On gold: "Gold … has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end. What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As 'bandwagon' investors join any party, they create their own truth – for a while."

On stocks: "Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola [ (NYSE: KO ) ] or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce."

On why Berkshire chooses businesses over gold or fixed-income: "Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety — but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest."

On opportunity: "[T]wo categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard 'cash is king' in late 2008, just when cash should have been deployed rather than held. Similarly, we heard 'cash is trash' in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort."

On smart investing: "Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power — after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date."