Is Google recession proof ?

The question is what effect recession is going to have on earnings of Google. Recently in a interview Eric Schmidt (CEO Google) tried to convince that Recession is not going to have an negative effect on Google. Lets take a look at the various arguments in favor and against Google.

Google earns most of its revenue from text based Ads displayed on various web pages. Advertisers pay Google depending on the number of clicks they had on their advertisements. In event of an recession the first thing that businesses cut down is the advertising budget.With Consumer spending weakening and showing the weakest numbers since September 2006, if the number of clicks goes down, Google revenue will go down along with it.

OR

In case of an recession and increasing inflation, people will tend to look for cheaper goods on the Internet.This might very well cause the number of clicks to increase and an increase in the Google revenue.

If you are someone who in these days of soaring gas prices are looking for deals on the Internet, also look for buying the Google stock as an investment. With the stock down to $430 from its peak of $750 this might a be good time to buy.

On Financial Independence

Laura Rowley in Yahoo Finance has written an excellent piece on financial freedom and how to use it responsibly. I think it’s a must read. Here’s the link.

One of the interesting excerpts from the passage:

A study by Thornburg Investment Management in Santa Fe, found that from 1976 to 2006, $100 invested in the S&P 500 in a taxable account would have grown to $3,225 -- a 12.26 percent nominal rate of return.

Factor in fees, taxes, and inflation? The real rate of return is a meager $456, or 5.19 percent.

Something on the same lines I had written some time back can be found here.

Is JP Morgan in a Quagmire?

Mr. Jamie Dimon, Chairman and Chief executive of JP Morgan recently raised the bid price for Bear Stearns to $10 a share which takes the bid to $2.1 billion. This is supposed to be a fair deal, or at least fairer than the last offering, much to please the investors and the employees. But still 1/3^rd less than the valuation on March 14, 2008. Valuations and the actual crisis at Bear Stearns aside the earlier valuation of $240 million or so was really a joke for a firm like Bear Stearns. The bailout by the Fed will be in end be financed by American tax payers money. One can argue that the actual fall would have been even more damaging to the American financial system.

Bear Stearns currently owns $30 billion of least liquid assets out of which $29 billion will be financed by the Fed and JP Morgan will bear losses of $1 billion. JP Morgan already has set aside $6 billion for lawsuits and merger costs. This is three times more than the cost of acquisition itself . Besides being big in home equity loans (read subprime mess), it is number one in the US in Credit Default Swaps. This really should be worrying.

What is a Credit Default Swap (CDS) anyway?

It’s an agreement between two parties to take responsibility for the credit risk for a third party entity can offer.

Alright, so what does it mean?

For a buyer:

A buyer will pay a periodic fee to a seller of a CDS to offer him protection in case a third party is to default on a payment. This offers him guarantee that his liability over this credit risk is limited.

For Seller:

In case a third part defaults on credit taken the seller of a CDS has to pay the buyer of a CDS with whatever sum agreed. The seller here can either take over the defaulted credit position or pay upfront to the buyer of a CDS whatever is the difference.

Mr. Dimon has sure has a tough task at hand at merging Bear Stearns and keeping his own firm in sound financial health.

Time magazine here has an excellent write up regarding a potential CDS crisis.

Timing the Stock Market

The money blog fivecentnickel which offers smart ways to invest and make money has pointed out a great excerpt from the book The Bogleheads' Guide to Investing which offers practical advice to investing where some real luminaries share their thoughts about timing the stock markets and by the look of things it’s definitely not a good idea.

“I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.”

Warren Buffett, CEO of Berkshire Hathaway

“Market timing is a poor substitute for a long-term investment plan.”

Jonathan Clements, Wall Street Journal Columnist

“Market-timing is bunk.”

Pat Dorsey, Director of Morningstar Fund Analysis

“I’ve learned that market timing can ruin you.”

Elaine Garzarelli, Stock Investing Analyst

“If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen in the stock market.”

Benjamin Graham, Investor and Author of The Intelligent Investor

“The market timer’s Hall of Fame is an empty room.”

Jane Bryant Quinn, Columnist and Author of Smart and Simple Financial Strategies

So still think you can get away with timing the markets?

STOP THIS ..... Please

Take a look at the ad presented by Countrywide, it advertises about home loans without a credit report. Is this not what has brought the financial industry to its knees. Lenders ready to lend money to earn the commission and then sell the loan to a bigger Investment bank so that the risk is distributed. Borrowers borrowing more money than what they can afford. This has lead to the sub prime mortgages to turn sour and billions of dollars of securities to be worthless. A simple example of what's happening in the sub prime market here. I feel the Federal Reserve needs to come up with a better regulations to stop this.

Technorati Tags: Economy,Fed,SubPrime

Is Merrill Lynch safe ??

The fall of Bear Sterns, the fifth largest Investment bank on Wall street, raises a few doubts in my mind about the safety of others in the same Business. Bear Sterns was bought by JP Morgan for $2  a share i.e something like $236 million for the bank. The Bear Sterns building is estimated to be worth a billion dollars, still it was sold for $236 million that puts into perspective the liabilities the bank currently had. It was sitting on a lot a mortgage backed securities which was turned useless in the current market situation. The leverage obtained from such securities allowed Bear Sterns to post profitable quarter after quarter.

Merrill Lynch is currently sitting on an Investment of $1 trillion dollars with a base equity of $30 billion dollars. Leverage is a great thing to make profits, but when the markets take a turn for the worse, a small in the asset values can wipe the shareholders value. I do not believe in the statements made by the Bank about the liquidity they have currently, after all the Bear Sterns CEO on tuesday made a statement that they had enough liquidity to see this bad phase through and on Friday the Bank was sold to JP Morgan.

Luckily the Federal Reserve has taken active measures to pump liquidity into the Financial System. The Fed chairman Ben Bernake (A scholar on the 1930 depression ) has taken some innovative steps to stop the Financial System from collapsing. Both Lehman Brothers and Goldman Sachs reported better than expected earnings for this quarter. The Bernake solution seems to be working, it should help the Investment banks to stay solvent and do what they are supposed to do help foster economic growth.

Time to Cheer and Buy?

The US stock markets are pleased with better than expected earnings from Lehman Brothers. This is despite the fact that it has taken a hit of $1.8 billion. It has also assured investors that its not facing a crisis like Bear Stearns and is not insolvent.

The crisis at Bear Stearns also didn’t seem huge when it reported a loss of $854 million on January 8. The Fed for sure is taking steps to ease liquidity with UBS advocating a 100bps rate cut for things to smoothen out. But it should really be also taking care to prevent such liquidity crisis from happening again.

Our Indian stock markets will surely rally tomorrow based on positive cues from the US. Even though this is a thin ray of hope. So do we go out and buy the fundamentally attractive looking stocks? Yes wise men have always said - Buy on dips. But I guess the trend is negative and there is more to come. The subprime mess in the US is going to take some untangling. So we better be vigilant with all the data coming out of the US and not get foolhardy.

What would you do ?

The current financial crisis resulting from the housing slump in the United Stated can be attributed to the irregular lending practices followed by the lenders and borrowers borrowing more than what they could repay. This has lead to an increasing number of defaults and foreclosures and a massive credit crunch in the global economy. Till now whatever steps have been taken by the Federal Reserve and the US government are aimed at increasing liquidity in the market. If the number of defaults and the foreclosures keep on increasing inducing liquidity in the markets is not going to help too much. Federal Reserve needs to address the root cause of the problem and stop the slump in the housing industry. In doing so, the steps will benefit only the lenders and the borrowers, who in the first place are responsible for this mess. What would you do in such a situation, If you were the Federal Reserve would you take steps to help someone who got you into a difficult situation and do things that are going benefit them .....

Slam Dunk on Wall Street: Coming Soon

Slam Dunk – It almost seems as Kobe Bryant did a slam dunk on the Indian indexes today. Only thing in basketball it’s supposed to be a good thing where you score points. Here we have lost and lost big time. Close to a 1000 points. Whoa! Somebody better catch this or as they say in basketball - DEFENSE. We seem to have none of it at the moment.

The shocking growth in Indian capital goods at 2.1% vs 16.3 in the previous year has really spooked investors and market watchers. This is really bad news as capital goods are the very basis on which the Indian economy has to move ahead. Some market commentators were even talking of 4 digit figures on the Sensex soon. What’s worse is an incident which is indicative of the bureaucratic nature of our economy and the Government failing to do enough to support the economy. L&T which was the contractor for the BIAL Airport finished the project well on time. But the government citing lack of infrastructure facilities around the airport has post phoned the opening to around May 11, 2008. I have personally visited the site at Devanahalli, Bangalore and it is anything but far away from the city. The airport provides nowhere the facilities like at Hong Kong and other major airports offer to reach Central Business districts from the airport in no time.

The past week has been terrible for the Indian economy and US alike. My Twitter (my2dimes) updates say that Goldman Sachs and Lehman Brothers are about to report real bad earnings. Blackstone has already reported shocking earnings. Bear Stearns is done with and right now it’s taking stocks down with it. The dollar has sunk to its lowest in 12 years and that can’t be music to exporters in Japan and India. Chinese commodities also are facing the onslaught of US recession. The subprime write offs have actually exposed the reckless functioning of money markets in a developed economy such as the US. The surrogate bailout of Bear Stearns by the JP Morgan and the Fed, has revealed huge cracks in functioning of the financial firms in US.

The big firms in US better subscribe to lesser aggressive ways of functioning. This means cutting exposure to bad loans, positions in currencies, mortgage backed securities (a prime reason in the Carlyle Capital fallout) etc. The Fed also has to be vigilant in monitoring bad practices and give a rap to the firms who don’t comply. There just cannot be an excuse or else the fallout will be huge and the meltdown will result a Slam Dunk for many of the stocks on Wall Street.

PS: Read interesting analysis for the Indian growth story by Swaminathan S Anklesaria Aiyar

BBC on US Fed's Injection

A day after Fed's injection of $200 billion dollars BBC's Business Editor Robert Peston here explains why even $200 billion won't make any sense and on Carlyle Capital which is on the brink of a collapse.

Robert Peston's Blog on BBC

Feds new tool TSLF

Traditionally the US Federal Reserve(Fed) had three ways to run the monetary policy namely cutting interest rates, cutting reserve requirements and cutting the discount rate. The Fed today came up with an innovative way of dealing with the credit crunch in the financial markets. The financial markets were expecting more than mere rate cuts from the Fed, some way the Fed could buy the mortgage linked securities and bring some confidence back into the Financial markets. The financial media Wall Street Journal, Bloomberg,  CNN Money had articles(linked here) with expectations and predictions about what the Fed might do.

Step in TSLF

TSLF is Term Security Lending facility, This is the Fed's new way of increasing liquidity into the System. What the Fed says is that the Banks can exchange the their mortgage backed securities for treasury bonds on a temporary basis. This should take off the pressure of the mortgage backed securities from the balance sheets of the banks and allow them to lend and borrow in a much more free way. Banks can exchange up to $200 billion dollars of mortgage securities at this moment. With this announcement, Fed probably closed the door on the 75 basis point cut in the increase rates. Stock markets have taken the Fed move in a very positive way with the Dow gaining more than 3.5 percent, even though there was a fall in the Healthcare stocks(More about that in my next post). Indian markets have also continued their recovery, the BSE sensex is 400 points up at this point. The only problem with the TSLF is incase the mortgage securities start defaulting in a big way, the Fed could be holding on to something worthless. Right now the Fed has said that they are going to buy only top rated securities. (BusinessWeek has a nice article on TSLF )

Subprime Equilibrium

Credit crunch, liquidity being sucked out of the system, FIIs not pumping the money, more bad news in the form of Blackstone profits (one of the major investors in India) and crude oil trading at $108 - 109 levels. Life on the stock markets is really tough these days.

Today though, the Indian stock markets showed some signs of recovery. There should be more on Wednesday based on US Federal Reserve decision to lend up to $200 billion to banks and lenders and ease liquidity. The Dow too as I write this is posting good gains based on the central bank’s decision. The US Fed Reserve is really taking some steps to thwart recession and hopefully it works for the US economy and of course that would mean good news to us too.

Point is when the Indian economy was in such good gear just 2 quarters back, has the tide turned really and all developmental activities leading to India’s growth halted. Or is it just a case of the confidence being low all over, more so because of global factors. Such that it has become a wait and watch game for Indian investors. However strong the domestic growth story may be, there is no denying the impact of the rupee on exporters even others than in the services sector. Their margins have got squeezed and which in turn has affected the local players supplying them.

So when is all this going to balance out? How long is long term to stay put in the stock markets. The rupee is going to get stronger as soon as FII start pumping money again on account of Indian growth story which in turn would hurt exporters or till the FIIs don’t pump in money the stock markets will keep searching for directions and which will hurt investor sentiments. It’s time to get the fundamentals in shape such that the Indian growth story remains intact and still provides value. It’s a time reassess business strategies and growth drivers such that investors have confidence in India and come in droves.

Where does this end .....

We have all heard that the Banks are having problems with their exposure to the subprime mortgages and their financial troubles have caused a massive credit crunch in the financial markets all around the world. The absence of liquidity has caused a blood bath in the financial markets all around the world. All the big investment banks have declared multi billion dollar write off due to this. This has also led to the collapse of many of the hedge funds that were giving spectacular results till now. Read here about the anatomy of a hedge fund collapse. Where does all this stop, stocks around the world have lost more than thirty percent from their peaks or more, US might already be in a recession; According to me the next important thing is the results of the big investment banks. If they have accounted for all the sub prime write offs then we should be good, if there is more to be lost to that, the uncertainty will cause more harm. The US consumer will have the checks from the economics stimulus package (Details Here ) sometime in May, that should help the flagging economy. All in all another three four months before we see some kind of consistent recovery across the stock markets.

Dynamics of De-Merging

The Forbes list of the wealthiest people on the planet is out. Alright the whole world knows about this now. Warren Buffet, with a net worth of $62 billion dethrones Bill Gates as the richest man in the world. Bill Gates himself couldn’t care much or would he. May be not the rate at which he is donating money. It’s best answered by him.

The question is, can we have a new number one soon? Who can dethrone Mr. Buffet? We can certainly take pride on the fact that we have 4 Indians on the list, Lakshmi Mittal courtesy his Indian passport, the richest. The Ambani brothers are 4^th and 5^th with net worth’s of $50 and $48 billion. Put together $98 billion dollars and Mr. Buffet’s fortune seems a far cry from that of the two Ambani brothers. If these two brothers get together, which is highly hypothetical, Warren Buffet would get dethroned. It would take some while before someone over takes the Ambani brothers. Considering the fact that the Reliance demerger was announced not so long ago that’s a mind boggling amount of wealth created in about 2 years. January 17, 2006 was the last day when the Reliance stock traded on the bourses after which it was split into various businesses.

The two stocks which traded already, have got revalued - Reliance Capital and Reliance Energy. Save for the recent fall in the markets listed companies from both the camps have made investors and promoters alike, rich to a great extent. One could not think of this before demerger, may be only Mr. Mukesh Ambani would have been picture perfect on the Forbes list. While from a family perspective not the best of things to happen, kudos to both the brothers for master minding this.

While all things considered, it remains to be seen how much our Indians contribute to philanthropic deeds as compared to Bill Gates and Warren Buffet.

Read here: Appreciation for our Indian billionaires.

On why, if the US sneezes

… India can catch a cold. The phrase that if US sneezes India will catch a cold is very popular in the Indian media these days. It’s very true in the present global economy where businesses are no longer isolated from each other or from other parts of the world. This being evident by the hit taken by ICICI Bank. Especially true in the case of our services sector where now it has become one of the major contributors to India’s GDP.

The Oracle of Omaha, Mr. Warren Buffet has spoken. He says the US with a $9.5 trillion economy is in recession, even though technically it may not be, since it has not recorded two straight quarters of negative growth. This has to be taken seriously coming from a man whose organization’s per share book value has compounded 21% annually and who recently overtook Bill Gates to become the richest man in the World.

US GDP growth in the last quarter (Oct ’07 – Dec ‘07) has risen by just 0.6% and the IMF forecasts US GDP to grow by 1.9% in 2008. China on the other hand is looking at cosmetic ways of cooling down GDP growth. One of the biggest trading partners of the US is China and while in 2007 US exported goods worth $65.2 billion it imported goods worth a staggering $321.5 billion from China. That accounts for 40% of the exports from China. China has recorded double-digit growth in exports in almost every major sector to the US. If US growth is indeed slow; trade from both the countries India and China with the US will slow down. China would not get affected much as it’s anyway looking to cool down it’s booming economy but if it decides and grabs this opportunity to provide more value than India to the US it’s a cause for worry. China can very well force its muscle to get a bigger pie and India better watch its step.

One of the star performing sectors for India is the services sector, read IT and IteS, which is a big chunk. Already the local players in China are giving a tough competition for Indian players who want to establish a presence in China. Not that the Chinese aren’t experts at fields other than the core sectors. China’s search engine giant Baidu is giving tough competition to even the Internet behemoth Google.

While the Chinese growth has largely been government led, Indian organizations will have to find their own feet and keep going without the government’s help while they are busy playing their bureaucratic games.

As the Chinese say - “May you live in interesting times”.