World Markets Simplified

 

 
The concept of gold as an occasional part of an investment portfolio has tremendous merits- not necessarily only as a hedge against inflation (or deflation), but more because of its role as an insurance policy against monetary debasement. However, with gold having just completed an unprecedented 11 year bull run, the natural question to ask if it's time to sell or too late to buy. Dylan Grice, global strategist at Soc Gen, wrote an interesting note outlining the reasons why gold should not be sold (yet)- to summaries:

-Gold's historical role as a medium of exchange, as well as its finite supply, makes it an invaluable hedge against monetary mischief on part of governments.

-However, (as Warren Buffet recently pointed out) it pays no dividend or interest and could therefore be seen as an insurance policy with the cost being the foregone cash-flow return, with a big payout under an extreme inflationary event.

-Unlike other inflation hedges, like inflation protected bonds issued by governments and subject to default or stocks which can underperform (at least during the initial period) as most bear market troughs during the 20th century have occurred during inflationary periods, gold cannot be defaulted on and will payout substantially when you need it to.

-However, gold is not a "buy-and-hold" investment and, like all commodities, is essentially a speculative play which is bought to be sold at a future date.

-The main reason why he holds gold is to cover against the long-term solvency of the developed world governments. Governments from ancient Rome, to Ming China, to revolutionary France and America, and to Weimar Germany have resorted to inflation in order to avoid an explicit default on their debt.

-During such inflationary episodes, contracting money supply have not been politically acceptable courses of actions as they would have ushered in depression like conditions.

-During the Weimar period, the Reichsbank president Rudolf von Havenstein did not pursue a policy of monetary contraction as he was terrified of the social consequences of high unemployment and falling output.

-During the 3rd century AD, the Roman empire halted all military expansion which created a budget deficit as the cost of defending the borders continued to increase without the increases in revenue from newly conquered territories.

-The Roman emperors, rather than cutting military and other sundry expenditures , chose to instead debase the currency. This resulted in the world's first fiscally created inflationary crisis.

-Governments over the years have usually resorted to "kicking-the-can" down the road rather than resort to short-term painful measures to cut spending. To reduce developed world government debt ratios to pre-crisis 2007 levels, fiscal spending cuts averaging 6% of GDP would need to be made over the next 5 to 10 years.

-However, there are fortunately examples of governments eventually being forced (in response to a series of crises) to adopt measures to induce short-term pain - i.e. Margaret Thatcher's being elected in the late 70s with a mandate for short-term pain (to reduce inflation) , which did no exist 5 years earlier.

-Another example is Ireland –which is currently subject to draconian fiscal policies (to prevent an economic collapse), with output contracting by 10% from its peak, unemployment at 15% and housing prices down 60-70% from their peak. These policies would not have been possible 5 years ago.

-Developed countries with central banks are a long way away from reaching the point of serious fiscal retrenchment – but the unsustainability of government finances and the increase in government debt points towards an eventual debt crisis forcing fiscal rectitude. That will be the time to sell gold.

An interesting perspective on why to continue holding gold. While I do not agree wholly with some of his points (i.e. this is not the time for austerity), he does make a convincing argument on why one must hold gold as part of a diversified portfolio in the current environment– primarily as an insurance policy against government profligacy, which history unfortunately informs us is a somewhat natural tendency! As I have noted in previous newsletters, the performance of gold is highly correlated to increases in the US monetary base and the time to sell all gold will come when QE policies in the developed world come to an end (late 2013?). This is likely to be before a significant increase in inflation (2014 onwards?).

There is also some serious academic work (Summers, Krugman and others) which demonstrates that the price of gold is linked to the level of real interest rates . This view has intuitive appeal– with real interest rates negative, it makes sense to hoard gold now and push its use into the future thereby raising prices now and in the near future. So the price of gold has risen because expected returns on other investments have fallen. This could explain the recent drop in gold prices, with the expected returns on other risk assets increasing (and the chances of QE receding). As the graph below (via Sy Harding) illustrates, the support level for gold prices are at around $1,500, at which point (or close to it) it should be an attractive buy as the currency debasement policy in the developed world is likely to continue for a while longer.




US Leading Indicators:

Given the current euphoria surrounding the better economic numbers in the US, it would be prudent to pay heed to the latest note from the well-respected economic consultancy ECRI, which argues that the leading indicators in US point towards a recession later in the year! Some excerpts:

- The ECRI's U.S. Coincident Index (USCI), is the gold standard for measuring current economic growth, as it summarizes the key coincident economic indicators used to determine the official start and end dates of U.S. recessions; namely, the broad measures of output, employment, income and sales. So when USCI growth is in a downturn (bottom line in chart), it's an authoritative indication that overall U.S. economic growth is actually worsening, not reviving.

- In contrast to the 3% GDP growth widely reported for the latest quarter, year-over-year growth in GDP, after peaking at 3½% in Q3/2010, has basically flatlined around 1½% for the last three quarters. Broad sales growth has followed a similar pattern, while the growth rates of personal income and industrial production have dropped to their lowest readings since the spring of 2010.

- The exception to this weakening pattern is year-over-year payroll job growth, which continued to improve through January, and was essentially flat in February. However, the empirical record shows that job growth typically turns down after downturns in consumer spending growth, not the other way around. Because consumer spending growth remains in a cyclical downturn, we expect job growth to start flagging in the coming months.

- The year-over-year growth in ECRI's Weekly Leading Index (WLI) remains in a cyclical downturn (top line in chart) and, as of early March, is near its worst reading since July 2009. Observers of this index might be understandably surprised by this persistent weakness, since the WLI's smoothed annualized growth rate, which is much better known, has turned decidedly less negative in recent months. The unusual divergence between these two measures of growth underscores a widespread seasonal adjustment problem that economists have known about for some time.

-Fortunately, year-over-year growth rates are naturally less susceptible to these seasonal issues because they involve comparisons to the same period a year earlier that is likely to be skewed the same way.

-In the chart, please note the one-to-one correspondence between the cyclical swings in the year-over-year growth rates of the WLI and USCI since the Great Recession. Both surged initially, only to roll over, pop up briefly, and then turn down once again. It is notable that the WLI, which is sensitive to the prices of risk assets that have been supported by massive worldwide liquidity injections, has hardly been swayed from its recessionary trajectory. In spite of the efforts of monetary policy makers, actual U.S. economic growth has slowed, while WLI growth has barely budged from a two-and-a-half-year low.

 
Pre-budget Analysis : Pre-budget February 2012

The Finance Minister will present the FY2012-13 budget in the backdrop of a sharp rise in the fiscal deficit for 2011-12. Interest rates have risen sharply in FY12 and budget provisions are expected to largely determine future monetary actions, we opine. Thus, the FM's priority in the 2012-13 budget will be fiscal rectitude, we believe.

Overall, we believe that, the budget will aim to provide an investment - led supply push to growth as against a consumption - led demand pull (higher subsidies, etc). Lower deficit and borrowings (and interest rates) post tax increases will also encourage investments. The resultant easing of supply constraints will also reduce the pressure on inflation.

We believe that, the budget may have: Positive implications for Banking, NBFCs, Capital Goods, Cement, Construction, Logistics, Media, Oil & Gas, Power, Shipping sectors; Negative implications for Automobile sector and Neutral for sectors like Aviation, FMCG, Hotels, Information Technology, Metals & Mining, Real Estate, Telecom.

 2 of 2 File(s)

Pre-Budget Analysis - Feb 2012.pdf

 Budget 2012 - White Paper_personal.pdf

 
Initiating Coverage: Engineers India Ltd (EIL)

Engineers India Ltd (EIL) is India's leading publicly held company engaged in the areas of Hydrocarbon, metal and infrastructure consultancy. The company has a healthy market share in the Hydrocarbon consultancy segment and enjoys entrenched relationship with few of the major oil & gas companies like HPCL, BPCL, ONGC and IOC. Driven by increased activity in global energy scenario and rapid development in Indian Hydrocarbon space, we believe that the company is well poised for 13% CAGR in net profits between FY11-13E.

In our estimates, we project a 21% CAGR in consolidated revenues between FY11-13E from Rs.28 bn in FY11 to Rs. 41.6 bn in FY13E. Within the revenue streams, we expect consultancy & engineering business to grow at 6% CAGR and Lumpsum turnkey project segment (LSTP) to grow at 30% CAGR between FY11-13E mainly driven by 1) current order book at Rs 57 bn 2) continued momentum in the domestic Hydrocarbon Industry mainly refining and petrochemicals 3) pick up in investments in projects in power and infrastructure space 4) company's new initiative adding to revenues and 5) meaningful contribution from overseas Hydrocarbon markets mainly Middle East.

At the current price, company's stock looks reasonably valued on a discounted cash flow basis. We therefore initiate coverage on EIL stock with a BUY rating and one year DCF based target price of Rs.320.

 Engineers

Amazon Launches CloudSearch. Amazon is taking baby steps into search. While it doesn't quite challenge search czar Google, Amazon is launching what seems to be a pretty useful cloud-based search service that companies with vast data troves can install on their websites. Amazon is offering something of a clip-on alternative to engineering a search system in-house that will let companies avoid "the additional cost and complexity of managing and scaling their own search engine."

Facebook Expands Downloadable Archive. Facebook is allowing users a closer look at their own data, per an announcment today on the Facebook Privacy blog. It's an extension of "Download Your Information"--a service that Facebook launched in 2010. Now, the archive will show you friend requests, IP addresses, previous names, and other information, all available for download.

Microsoft Cloud Tech Will Reach 7.5 Million Indians. Microsoft has signed a deal with the All India Council for Technical Education, to give 7 million students and 500,000 professors access to their cloud-based educational platform Live@edu. The service will give Indian students access to email, document sharing and storage, and other online collaboration tools. Sony To Spend $926 Million On "One Sony" Makeover. A billion dollars is all kinds of cool these days. After Facebook spent that tidy sum on Instagram, Sony's announcing an almost equal investment--$926 million--toward restructuring costs this year starting in March. It's part of what CEO Kazuo Hirai calls the "One Sony" strategy, under which Sony will ditch its small dispay and chemical manufacturing operations, and instead focus on gaming, mobile, and television. Sony will also be cutting 10,000 jobs.

Japan Bank To Use Card-Free ATMs. A Japanese bank has installed tech from electronics maker Fujitsu, which identifies people by their palm scans. Biometric readers for ATMs exist in Japan already, but Ogaki Kyoritsu will be the first bank to allow authentication solely on hand scans and a PIN.

3 Publishers Settle DOJ Antitrust Suit. Three of the five publishers challenged in the Department of Justice e-book suit yesterday have agreed to settlements. Meanwhile, a similar investigation is underway led by the EU, but Apple and publisher partners are trying to head that off early with a settlement. In Australia, the Australian Competition and Consumer Commission is watching the issue, and could propose a suit soon.

Daily Silicon Valley Reporter

U.S. Files Antitrust Suit Against Apple And Publishers. After months investigating the relationship, the U.S. Department of Justice has filed an antitrust suit against Apple and a posse of publishers for banding together and uncompetively keeping the price of e-books high. Apple's defense, Bloomberg surmises, will be that the Apple-publisher partnership actually increased competition in the larger e-book space--one that is ruled by Amazon. Amazon, however, has become recently unpopular among authors and publishers for independently setting the price of books too low, a position that's alienated their publisher partners, some of whom may not renew their annual Amazon contracts this year.

Google Announces Google+ Redesign. Google is rolling out a massive redesign on Google+, keeping room for bigger, better displayed photos, a new profile page, and a nicer interface overall. Their video chat service Hangouts also gets prominence in the new setup. Facebook-like, a chat list with online friends now appears to the right. On the left, Google is introducing a customizable navigation bar that you can fill with your favorite apps.

Nokia Debuts New NFC Windows Phone. Nokia has officially debuted the Lumia 610 NFC--its first NFC-capable Windows phone. Running on the Orange network, Nokia is ready to ride the NFC wave that we expect will break this year outside the U.S. The Nokia 610 NFC is compatible with Master Card's PayPass system and Visa's Paywave.

Wolfram Alpha Takes On Shakespeare. Finally, you can do your own analysis of Shakespeare's best and boldest. Wolfram Alpha has tackled the Bard's texts in their vast data system--which you can now use to do a word search by play, search for characters, or spot other themes hidden in the playwright's work.

Spotify Launches Web-wide Widget. Spotify has launched a new "Play" button--an embeddable widget that can stream music on any website, blog, or Tumblr page "totally free, and totally legal." Spotify is already quite popular, in part due to a Facebook partnership; with the new widget, it hopes to extend its reach even further.

Software Flaw Earns Lumia 900 Buyers $100. Nokia execs have acknowledged a bug in the new Lumia 900's ability to access data, and traced it back to a software flaw. A fix is in the works, to be available by mid-April. In the meantime, Nokia is offering $100 in credit (and a free phone swap) to all customers who have bought and will buy the phone, all the way until April 21.

Foxconn Reports Plump March Revenues. Having weathered a Fair Labor Association audit, the Mike Daisey affair, and an unprecedented visit by Apple CEO Tim Cook, Foxconn is reporting increased revenues for March. The numbers add up to an unconsolidated total of $9.43 billion--a 17.8% increase by month, and 29.7% increase year on year.

Daily Silicon Valley Reporter
Best Buy CEO Brian Dunn Resigns. Brian Dunn has resigned as CEO of Best Buy after more than 20 years working for the company. His interim replacement is director Mike Mikan. Dunn's resignation comes as the company fights competitors like Amazon, and is reworking its strategy to sell electronics in brick and mortar stores, shutting down its big warehouse style stores for better designed, smaller ones.

5 Million Android Downloads For Instagram. Following yesterday's $1 billion purchase by Facebook, Instagram is reporting that they've hit 5 million downloads of their Android app within 6 days of its launch. That comes after a not too shabby opening score of 1 million downloads on the first day.

Amazon Debuts In-App Purchases. Amazon has rolled out in-app purchasing system on Android and Kindle devices, letting developers sell subscriptions and products from within an app, with a click. The service matches Apple's and Google's similar systems which are already in existence. Sony Forecasts $6.4 Billion Loss. Sony has recalculated its losses this year, and is coming up with a figure twice as large as its original estimate. Tax charges in the U.S. running up to $3.6 billion now round off their total loss this year to $6.4 billion.

Anonymous Crashes USTelecom and TechAmerica Websites. As punishment for supporting the Cybersecurity Intelligence Sharing and Protection Act, Anonymous has claimed credit for crashing the websites of two IT trade groups, USTelecom and TechAmerica. CISPA, the Hill explains, has been ominously compared to the SOPA/PIPA legislation, but others argue the bill could better help companies shield themselves against hack attacks. CISPA is due for a vote on April 23.

Iran Plans August Internet Shutdown. With a second Internet in the works, and as Iran confronts oil blockades and embargos from international bodies, an Iran telecom minister has revealed plans to shut down parts of the Internet in the country, replacing popular services like Gmail and Yahoo with locally built alternatives like Iran Mail and Iran Search Engine. The "National Internet" should be out by August, the International Business Times reports, and the first few services will begin being blocked in May.

Update: Iran's government has said that reports of an Internet shutdown in the country are false, the AFP reports, via statements released by the IT ministry on a website that was inaccessible outside Iran. Iran's second Internet however, has been in the works for some time.

Utah Medicaid Hack Leaked 280,000 SSNs. 280,000 social security numbers may have been leaked in a hack on the Medicaid servers that took place on March 30, according to a revised count by Utah officials. 500,000 more people may have had other personal information stolen, such as names or addresses. Utah is compensating people affected with one year of free credit protection.

Daily Silicon Valley Reporter

Daily Silicon Valley Reporter