World Markets Simplified

Nowadays disruptive ideas and innovation are moving so fast that make markets less vulnerable to unexpected events and turn out to be a crisis. 

If we see,disruptive ideas and technologies, those are changing almost everyday, making people less confident to predict future and bet on it.The truth is that as we become adjusted to a rapidly changing world, we are less prone to adopt the false certitude that makes a black swan event so dangerous. Also, increased amount of uncertainty in the markets doesn't conclude less market stability. 

As a result, people should take precautions to protect themselves and their investments against the unexpected. We'll prudently hedge against uncertainty, instead of blithely assuming the future will look like the past.

The surprising result is continuous disruption may make us less vulnerable to disruption.

The phrase 'black swan' was introduced into our vocabulary by the author Nassim Nicholas Taleb. As he explained it, years of experience of only observing white swans led many to believe that all swans were white.

The discovery of a black swan in Australia proved that this conclusion was incorrect. This, he explains, is a metaphor for the power of the unexpected to prove that what we view as facts about the world are wrong.

How could this be? Shouldn't more uncertainty mean that markets will be less stable?

The experience of rapid and significant change should make us less confident that we can understand our world and predict the future.

S&P said it had lowered the long-term credit rating of Tokyo Electric, one of the most active bond issuers in Japan, to B+ from BBB, while cutting the rating on the utility's secured bonds to BB+ from BBB.

The ratings agency said it viewed a default on the utility's 5 trillion yen ($62 billion) in corporate bonds as less likely than a restructuring of its bank debt.

Japan's government earlier this month agreed to set up a fund with taxpayer money to help Tokyo Electric, known as Tepco, avoid insolvency and compensate victims of the radiation crisis at its Fukushima Daiichi nuclear plant.

Reactor cooling systems were knocked out by the March 11 earthquake and tsunami, causing a meltdown at three of the reactors and forcing the evacuation of about 80,000 residents near the plant.

But Chief Cabinet Secretary Yukio Edano has said the government scheme, which still needs parliamentary approval, would be unlikely to gain public support unless Tepco's banks agreed to waive some of the debt they are owed by the utility, a step they have resisted.

S&P said a restructuring of Tepco's bank debt would be a "selective default," and it now regarded the probability of "extraordinary" Japanese government support for Tepco as "high" rather than "very high," the phrase it had previously used.

"Standard & Poor's now believes that some politicians think banks should share the burden in some form, which may fall into our definition of default," S&P said in a statement. "We now think such a scenario is more likely than previously thought."

Tepco is Japan's largest corporate bond issuer, and its shares are widely held by financial institutions.

S&P said it was still unclear how much Tepco would have to pay in compensation for people who have suffered damages because of the Fukushima disaster. But the ratings agency said it believed that the Japanese government would intervene to prevent a disruptive default on Tepco's bonds.

"The Japanese bond market would suffer a negative impact if Tepco were to default on its bond payments," the ratings agency said. "We believe the Japanese government has an economic incentive to avoid such a scenario."

Moody's Investors Service said on May 19 it might review Tepco's credit ratings if Japan failed to pass laws to help the utility handle compensation payments related to the plant.

Estimates for the cost of the compensation to be paid to displaced residents and disrupted business ranged as high as $130 billion in an extended crisis, according to one calculation by Bank of America-Merrill Lynch.

By comparison, BP earmarked just $20 billion for its oil-spill clean-up fund run by an overseer appointed by the Obama administration.

Sumitomo Mitsui Financial Group is the main bank for Tepco, Japan's largest and most politically connected utility.

SMBC had an estimated $11 billion in exposure to Tepco after an April lending round, according to CreditSights. The analysis service put the total for Mizuho Corp. at the equivalent of $8.5 billion, and at $5.8 billion for Bank of Tokyo-Mitsubishi.

( Source: Reuters )

LinkedIn ( NYSE:LNKD ) the star of the week in stock market after its explosive listing on NYSE on Thursday. But most of the analysts' are talking about social networking bubble and company's valuations are not justifying after gaining more than 100 % on the first day of trading. If we look at the history of social networking companies, It might give us somewhat negative call on the future of the companies, but situation might have changed in terms of public awareness, internet users and advanced technology. 

As we have an example of the company Theglobe.com ( PINK:TGLO ), first social networking company listed on stock markets.

Theglobe.com. Company was founded in late 90's and had 20 million users at that time, and there were hardly couple of hundreds internet users. Even the analysts, those were recommending company stock to invest, might not even know TheGlobe or hardly used internet at that time.

Theglobe.com company was founded in 1994 and went public in 1998, stock of the company jumped 1000 % on the first day of listing. It was very exciting movement according to one of co founder of the company.

It was a social networking company that made more money on its first day of trading than most people see in a lifetime.Then the shares started falling, and as the price dropped, so did the fortunes of its investors and its co-founders.Now company is traded in a Pink Sheet.

Stephan Paternot, one of the co-founders, told CNBC the IPO's broker, Bear Stearns, underpriced the shares to enable its clients to flip the stock for a huge profit.

"Bear Stearns priced us at $8 a share and they had told us two days before the IPO that we had 45 million shares of demand for a three-million share offering. We couldn’t understand why they couldn’t move our price back up," he said.

"Bear Stearns really underpriced us 10 years ago, unfortunately. We did go public, we did raise $30 million but we felt we left $300 million on the table."

Bear Stearns failed in 2008 and was bought by JPMorgan Chase.

Things are different now, however. LinkedIn, whose shares although opened at $ 80 while the issue price was just $45. It is not that much overvalued as Theglobe.com 

Also, many of the other major dot-com companies "now have significant revenue, and many of them are profitable," Paternot said. "There are over a billion Internet users now. Most people who are investing in Internet companies are actually very familiar with the products that they’re using. You have a much better sense now of what the Internet is and what you’re buying."

Companies don't even need to raise capital through IPOs, thanks to alternate vehicles such as the online marketplace Second Market.

Despite his experiences, Paternot still believes in the power of social networking, and the next phase for these companies will be to leverage that power.

"I’d like to thank [Facebook CEO] Mark Zuckerberg for validating the entire social network model," he said.

( Source: CNBC )

Apple sued Samsung last month, claiming Samsung's Galaxy line of mobile phones and tablets "slavishly" copies the iPhone and iPad. Samsung followed with its own lawsuit, alleging that Apple was the company doing the copying.

Earlier this month, U.S. District Court Judge Lucy Koh ordered Samsung to give Apple copies of several models of its Galaxy mobile phones and tablets, as well as other products.

"It would put Samsung at a significant disadvantage in this litigation if the Court allowed Apple access to Samsung's future products ... but prevented Samsung from gaining access to Apple's future products so that it could prepare its defense," Samsung argued in a motion filed on Friday with the U.S. District Court for the Northern District of California.

Apple was Samsung's second-biggest customer last year, mostly for semiconductors. The iPhone maker's claims against Samsung focus on Galaxy's design features, such as the look of its screen icons.

Samsung declined to comment, and Apple could not be immediately reached for comment on Monday.

Apple and Samsung are part of a wider web of litigation among phone makers and software firms over who owns the patents used in smartphones and tablets as rivals aggressively rush into a market jump-started by Apple with its iPhone and iPad.

Samsung is one of the fastest-growing smartphone makers and has emerged as Apple's strongest competitor in the booming tablet market with models in three sizes. But it remains a distant second in the space.

Samsung's Galaxy products use Google's Android operating system, which directly competes with Apple's mobile software.

Mela Sciences Inc ( NASDAQ: MELA ), company is waiting for review of its Melanoma detection device called Melafind from FDA. Company's CEO Mr. Gulfo was talking in an exclusive interview and hoping that company will receive a review soon. Keep an eye on the stock as it might shoot up after the FDA review. Company has submitted amended PMA ( Pre marketing approval ) to FDA hoping to get a positive response from it.



Below is the exclusive interview.

Today, Investors are waiting for confirmation that India's gross domestic product (GDP) slowed in the financial year that just ended when the data is released at 1.30pm local time.

According to a Reuters poll of economists, full year 2010-2011 GDP will slow just a touch to 8.5 percent over the previous year, down from 8.6 percent in 2009-2010, while GDP in the January to March quarter is expected to grow 8.2 percent.

But at least one analyst is expecting the data to disappoint. Rahul Chadha, Head of India Equities at Mirae Asset Global Investments expects GDP to grow 8 percent over the previous year, with manufacturing and agriculture growing just 5 to 6 percent.

Chadha says markets have already priced in such a slowdown. But he says the real concern now is whether growth will continue to slow next quarter because of tight liquidity and worsening consumer sentiment.

India's benchmark Sensex Index has dropped from 20,500 in January this year to 18,200 currently, a decline of 11 percent.

Chadha expects growth to slow to between 7 and 7.5 percent this year as rate hikes by the Reseve Bank of India (RBI) begin to bite. In all, India's RBI has hiked interest rates nine times since March 2010 to fight persistent inflation.

Chadha is bullish though on India's information technology (IT), pharma and consumer staples sectors, which he believes will continue to do well.

"Financials would get impacted because we have seen some instances of high deliquencies for public sector banks and pension liabilities," Chadha told CNBC in an interview on Tuesday.

( Source: CNBC )

The well known bond manager PIMCO organises an annual forum (it is a 40 year tradition!) to discuss the key investment themes for the following 3 to 5 years. They typically invite a few outside speakers to contribute to the debate and this year's group included the former British prime minister Gordon Brown and the FT columnist Gillian Tett. I find it a useful framework to help develop a medium-term outlook on markets and have summarised below their outlook written by their Co-Ceo Mohamed El-Arian. 

Their outlook from the previous two forums – of a "bumpy journey to a new normal" has largely played out as they expected with a sluggish G-7 recovery, persistent levels of high unemployment in the developed world, worsening debt and deficit indicators in the developed world versus the emerging world with the average credit spread of the advanced economies now exceeding that of emerging economies.

The aggressive fiscal and monetary policies pursued by the advanced economies in the aftermath of the financial crisis have fallen short in terms of their impact on the economy, but have had a major impact on markets by suppressing real interest rates and thereby pushing global investors to take on more risk resulting in higher prices of global equities, emerging market bonds, credit assets and commodities.

The policy action has led to "good" asset inflation in terms of making people feel richer and therefore spend more- but also has resulted in "bad" asset inflation by pushing up commodity prices and imposing a tax on input prices for production and on the consumer. 

The last 12 months have also witnessed some serious and remarkable speed bumps - the possibility of default and restructuring in peripheral Europe, S&P putting the AAA rating of the US on a negative outlook, commodity prices urging despite a sluggish recovery in the developed world and a continued decline in the dollar despite a host of financial, political and environmental calamities.

Looking forward, there are signs to expect an accelerated healing of the global economy and therefore the ability to remove the exceptional level of stimulus in an orderly fashion. In addition, there are signs that emerging markets would be able to continue their strong growth trend and China should be able to navigate a complicated transition period.

The risk factors to the above benign scenario are the large debt overhangs in the developed world, the resolution of which would range from restructuring and socialization of losses (Greece) and a combination of inflation, austerity and negative real interest rates (US). Demographic transitions, commodity constraints and geo-political tensions are likely to complicate the picture further.

The critical issue remains that of the quality of balance sheets – of governments, companies and households. Balance sheets in some sectors (governments in advanced economies) remain out of equilibrium and would require a difficult process of resolution, while others (multinationals and consumers in emerging economies) remain healthy and robust.

A number of "long-term contracts" in the developed world are likely to be under pressure over the next few years – an undermining of the "real return" contract for savers due to negative real rates, a variety of social contracts like heath, pension and unemployment benefits and the role of the dollar as a reserve currency.

They therefore expect a baseline "hobble through scenario" for the foreseeable future where policy makers opt for gradualism and "mini bargains" to avoid bad economic outcomes, thereby leading to a slow and uneven healing process. 

The investment implications of the above scenario are as follows:

There is a limit to how much investment returns can be brought forward from the future in the advanced economies, particularly given that interest rates are negative – therefore equity and bond returns in the developed world are likely to be muted going forward.

Exposure to negative real interest rates in the developed world should be minimized (i.e. government bonds and cash), hedge against inflation and developed world currency depreciation, and favour risk assets in multinationals and emerging markets with robust balance sheets.

More specifically, stocks and bonds of corporations with healthy balance sheets, high dividend (versus growth) stocks in advanced economies, growth stocks in emerging economies, currencies in emerging economies with surpluses (and ineffective capital controls) and supply constrained/store of value commodities. 

Another important theme which is likely to play out over the next few years is a change in investment guidelines, asset allocation methodologies and construction of indices which have not kept up with the changes in the global economy – i.e. market cap approaches and well-entrenched home biases which are inconsistent with global re-alignments (the % allocation to EM equity in US investor portfolios is about 2.5% while EM share of global output is 33% and EM share of growth is 50%).

PIMCO provides a helpful framework to help navigate an investment portfolio over the next few years. Most of the themes presented above would be familiar to regular readers of this newsletter - gradually building a well diversified portfolio through funds/ETFs in EM currency bonds, US high quality credits and private mortgages, US high quality and global energy and natural resource equities, Greater China, India, and select EM equities, gold and cash should serve well over the medium-term. However, the road is likely to be somewhat rocky and it would require a good measure of discipline and patience to stay the course and not be swayed by market fluctuations. In addition, constant revaluation of the thesis to gauge secular changes in the fundamental trends would be important so as not to be blindsided by new developments. The last point made on the inevitable shift towards emerging markets in investor portfolios will be another powerful tailwind in favour of EM and commodity assets over time.

Japanese company Kokuyo is buying stake in Camlin at a valuation of Rs 110/share, sources with direct knowledge said. This is at a 30% premium to the current market price of the Camlin stock. Kokuyo has today announced on Nikkei Stock Exchange that it is buying stake in Camlin. 

Sources said Kokuyo will buy 51% stake in Camlin for which it will make an open offer to buy up to 20% stake in the company, which is expected at Rs 110/share. The entire deal size is at Rs 365 crores. The promoters of Camlin are selling 23% stake in Camlin for about Rs 150 crores. Camlin will also make a preferential allotment of 10% stake in company to Kokuyo, this will be done through fresh equity issuance. 

Even as the peanut gallery debates whether or not the dollar is the reserve currency of choice for the world, China continues to diversify away from the USD. After last week's news that Beijing had not had enough of Portuguese bonds, in a repeat of the same scenario from January 2011, and was preparing to bid up Eurozone bonds across the curve (aka double down) we now learn that China, or rather third-party London-domiciled banks doing its bidding, is now the actor behind "massive Japanese bond buying" seen over the past month. Per Reuters: "Foreign investors have flocked to Japanese government bonds in the past five weeks, finance ministry data shows and market sources say China was among the main buyers, although a large part of buying was made through banks in London." That said, even Reuters appears unable to get its story straight: "Foreigners bought a net 4.696 trillion yen ($57.7 billion) of Japanese bonds in the five weeks to May 20, a record amount of purchases for any five consecutive weeks since data began to be compiled in its current form in 2005. One source said China appears to be buying the four to five-year sector after having sold a large amount of short-term bills earlier in the month. But other sources said foreign investors, including China, were buying long-dated bonds with less than one year left to maturity, effectively the same as buying short-term bills." Wherever in the curve China is focusing, the fact that it continues to actively buy JGBs after 5 consecutive months of declines in its UST purchases is sending a very clear political message to the US. One that certainly got some airplay when the Treasury once again declined to brand China an FX manipulator, despite rhetoric out of very brave Geithner at the first possible opportunity this week, that China is precisely that.

One likely trigger for the shift to the short-term yen market is the fall in yields for dollar government bills since April.

The foreign binge on Japanese government bonds started in the week of April 18-22, shortly after a squeeze in U.S. bills pushed U.S. bill yields lower.

A new deposit insurance rule sparked a torrent of buying in government bills, pushing the U.S. three-month T-bill yield as low as 0.01 percent in early May and below Japanese government bill yields.

The yield spread between the two countries widened to around 0.09 percentage point in early May although it has since come back to around 0.05 percent.

Then came a sharp fall in the euro, which may have also prompted investors to move funds to the yen.

"As the euro started to suffer from debt problems again, some reserve managers could have shifted some of their euro-denominated to assets to the yen," said Makoto Noji, senior strategist at SMBC Nikko Securities.

This was similar to last year when China's foray in the short-term yen market coincided with worries about Greece's ability to pay back debt.

But China quickly moved out of that position, selling a large amount of yen bills in August to take profits after the yen rose. Market players said at that the time China was unlikely to keep a large amount of funds in the yen because yields were low.

Slowly China is realizing the joy of an interlinked fiat world: at best it can rotate out of one insolvent regime into another. The bottom line is that all regimes are insolvent. So the only question is whether or rather when, just like back in April 2009 China dropped the bomb that over the past 6 years it had accumulated secretly 454 tons of gold, will China announce that while it has been rotating in and out of paper, the ultimate source of its $3 trillion in USD reserves will be non-dilutable commodities which handily double up as currencies.