There has been three instances now which leads me to think that the Fed is going against market fundamentals and not letting the market efficiencies to shape out the final outcome.
1) US government backing of Feddie and Fannie - Both sister mortgage companies were in deep trouble last week with talks of something similar to Bear Stearns to happen. Both companies had seen their share prices tumbling by more then 50% in one week. Together they account for $5.2 trillion in home mortgages. Their failure could have given a big blow to the US economy. And so the government came to their rescue as expected.
Investors invest in these companies with the assumption that they have the government backing and the government would bail them out if they are in trouble. So in effect, the government is reducing the risk involved in these companies. Should government influence the market risk of a firm?
2) Hold on naked short selling on financial firms - The fed has put a limit on naked short selling of some 18 or 19 financial firms including fannie and freddie mae. By doing this it has forced people to take stake of shares before they sell it. But again, the financial firms are in trouble because their fundamentals are not correct.
By interfering with the market, is the fed preventing the market to reach the correct share price. I wonder why did the fed just limit it on 18 companies whose share price have been beaten by the market.
3) I am waiting when the SEC would step its neck up to prevent commodities trading on oil to prevent its price to rise . That is again another instance where the market is correcting the price of gasoline based on the future supply and demand. That is creating an incentive for others to come up with alternatives. If the SEC puts some regulation on oil, that would only have long term negative effects on the world economy.
What are your opinion on these three controversial topics?
Tuesday, July 15, 2008
Effects of weak currency.
The dollar has been on a downward spiral for some time now against currencies like euro.It touched an all time high of $1.6 for one Euro recently. So what are some of the effects of this dollar movement and in general what is the effect of a weak currency.
Effect on Imports: Imports become more costly and so the consumer has to pay more for commodities like oil. But goods imported from China don't have much effect because the yuan is pegged to the dollar.
Effect on Exports: Exports become cheaper and so the American companies can sell more goods outside. This helps decrease the trade deficit.
Effect on company valuation: American companies become cheaper for foreign companies and this increases the chance of takeover. InBev had the timing right for the acquisition of AB as a weak dollar made AB more attractive for InBev.
Effect on foreign investments: A weakening dollar relative to where your investment increases the returns you get from foreign investments. Vice versa a strong dollar decreases the rate of return. So should you invest now? Dollar is already at an all time low against euro and so may see an upside.Therefore investing in European investments might not fetch good returns.
What are the other effects of weakening dollar?
Effect on Imports: Imports become more costly and so the consumer has to pay more for commodities like oil. But goods imported from China don't have much effect because the yuan is pegged to the dollar.
Effect on Exports: Exports become cheaper and so the American companies can sell more goods outside. This helps decrease the trade deficit.
Effect on company valuation: American companies become cheaper for foreign companies and this increases the chance of takeover. InBev had the timing right for the acquisition of AB as a weak dollar made AB more attractive for InBev.
Effect on foreign investments: A weakening dollar relative to where your investment increases the returns you get from foreign investments. Vice versa a strong dollar decreases the rate of return. So should you invest now? Dollar is already at an all time low against euro and so may see an upside.Therefore investing in European investments might not fetch good returns.
What are the other effects of weakening dollar?
Sunday, July 13, 2008
A-B InBev Deal
The deal is through without the much anticipated drama and M&A takeover battles. InBev really showed determination and intent in making this happen.
Its good for both companies that they did not take the hostile route. It could have meant just waste of time and money for both.
I am really amazed by InBev's ability to think about a $50 billion deal at a time when the US and world economy are under tremendous pressure.
Challenges for A-B Inbev:
a) Huge cultural differences - InBev was pretty successful in merging the Belgium brand with Brazillian brand. The experience of doing such big mergers will be of help.
b) No common operations for cutting costs. They would not get much synergies from cost savings.
c) AB's primary market is in US and AB's brands are on a declining trend in US.
d) Extract synergies to justify $70 per share.
Advantages:
a) Huge global portfolio
b) Weak Dollar
c) Should not face antitrust problems
d) AB has a line of new products in the pipeline which would be beneficial for InBev.
What are your thoughts on the advantages,challenges and synergies for InBev.
Its good for both companies that they did not take the hostile route. It could have meant just waste of time and money for both.
I am really amazed by InBev's ability to think about a $50 billion deal at a time when the US and world economy are under tremendous pressure.
Challenges for A-B Inbev:
a) Huge cultural differences - InBev was pretty successful in merging the Belgium brand with Brazillian brand. The experience of doing such big mergers will be of help.
b) No common operations for cutting costs. They would not get much synergies from cost savings.
c) AB's primary market is in US and AB's brands are on a declining trend in US.
d) Extract synergies to justify $70 per share.
Advantages:
a) Huge global portfolio
b) Weak Dollar
c) Should not face antitrust problems
d) AB has a line of new products in the pipeline which would be beneficial for InBev.
What are your thoughts on the advantages,challenges and synergies for InBev.
Saturday, July 12, 2008
Topics to address
-Weakening Dollar
-InBev and AB
-US Markets
-Indian Markets
Any other topics we can discuss?
-InBev and AB
-US Markets
-Indian Markets
Any other topics we can discuss?
Soaring oil prices!
Oil prices are touching the roof. Some pundits are predicting it to soon touch $200 this year. It is already touching about $150.
Some of the questions that come to my mind when I see such high prices are - what is causing such high prices? Why are we seeing such high prices? Who is responsible for such high prices? What would be the effect of such high prices? Are such high prices sustainable?
We have been reading about this for quite some time. So let me try and answer some of these questions here.
There are number of factors that cause such high prices. In the short term the supply and demand are very much at play. While the estimated demand is on the rise because of the high growth and requirements of BRICS nations, the supply is almost constant. Secondly, there is very little investment on oil and so the estimated increase in supply to meet demand is not possible. It is estimated that supply would stay constant as OPEC is almost producing at peak level now.
Then political and economic uncertainty in oil producing countries plays a big role. Political developments like Iran doing a missile test or some terrorist scare in Nigeria results in fears of reduced supply and results in a spike in oil prices.
To add to all this , Oil prices are set through futures trading of commodities. These are not regulated yet in US and it seems that there is lot of speculation built into the oil prices now. Oil trading is primarily done by couple of banks now like Goldman Sachs. The other aspect that adds to the speculation is that the margin requirement for trading oil as a commodity is very less as compared to other commodities. This also adds to speculation and causes the high prices.
If you have answers to any of the above questions then please comment.
Some of the questions that come to my mind when I see such high prices are - what is causing such high prices? Why are we seeing such high prices? Who is responsible for such high prices? What would be the effect of such high prices? Are such high prices sustainable?
We have been reading about this for quite some time. So let me try and answer some of these questions here.
There are number of factors that cause such high prices. In the short term the supply and demand are very much at play. While the estimated demand is on the rise because of the high growth and requirements of BRICS nations, the supply is almost constant. Secondly, there is very little investment on oil and so the estimated increase in supply to meet demand is not possible. It is estimated that supply would stay constant as OPEC is almost producing at peak level now.
Then political and economic uncertainty in oil producing countries plays a big role. Political developments like Iran doing a missile test or some terrorist scare in Nigeria results in fears of reduced supply and results in a spike in oil prices.
To add to all this , Oil prices are set through futures trading of commodities. These are not regulated yet in US and it seems that there is lot of speculation built into the oil prices now. Oil trading is primarily done by couple of banks now like Goldman Sachs. The other aspect that adds to the speculation is that the margin requirement for trading oil as a commodity is very less as compared to other commodities. This also adds to speculation and causes the high prices.
If you have answers to any of the above questions then please comment.
Wednesday, March 19, 2008
Effect and significance of interest rate cuts by Fed.
When I think of this topic, some of the questions that pop into my mind are:
What interest rates are we talking about? Which rates are the fed cutting? Why is it cutting the rates and what is the significance of such rate cuts? How does it help the economy? Does it have any bad effect? To what extent can the fed cut such rates? What can we predict looking at the past interest rate cuts and is there any information we can extract based on the trends we see? How does the various factors in the market react to this rate cuts or increases? How does it effect globally?
The advantage of being an MBA is that you may not know the answers to many of these questions but you can start asking questions. Let me try and address these one at a time.
Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions. Here's why.
A decrease in interest rates means that those people who want to borrow money enjoy an interest rate cut. But this also means that those who are lending money, or buying securities such as bonds, have a decreased opportunity to make income from interest. If we assume investors are rational, a decrease in interest rates will prompt investors to move money away from the bond market to the equity market. At the same time, businesses will enjoy the ability to finance expansion at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices. Investors and economists alike view lower interest rates as catalysts for expansion.
Overall, the unifying effect of an interest rate cut is the psychological effect it has on investors and consumers; they see it as a benefit to personal and corporate borrowing, which in turn leads to greater profits and an expanding economy.
If you have answers to any of the questions above then please comment.
What interest rates are we talking about? Which rates are the fed cutting? Why is it cutting the rates and what is the significance of such rate cuts? How does it help the economy? Does it have any bad effect? To what extent can the fed cut such rates? What can we predict looking at the past interest rate cuts and is there any information we can extract based on the trends we see? How does the various factors in the market react to this rate cuts or increases? How does it effect globally?
The advantage of being an MBA is that you may not know the answers to many of these questions but you can start asking questions. Let me try and address these one at a time.
Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions. Here's why.
A decrease in interest rates means that those people who want to borrow money enjoy an interest rate cut. But this also means that those who are lending money, or buying securities such as bonds, have a decreased opportunity to make income from interest. If we assume investors are rational, a decrease in interest rates will prompt investors to move money away from the bond market to the equity market. At the same time, businesses will enjoy the ability to finance expansion at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices. Investors and economists alike view lower interest rates as catalysts for expansion.
Overall, the unifying effect of an interest rate cut is the psychological effect it has on investors and consumers; they see it as a benefit to personal and corporate borrowing, which in turn leads to greater profits and an expanding economy.
If you have answers to any of the questions above then please comment.
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