Ten Surprises for 2009

In a collaborative effort between Global Equity Strategy and Global Asset Allocation, and in keeping with their year-end tradition, UBS presented in their final publication of 2008 a list of ten possible ‘surprises’ for the coming year. Its aim is to identify plausible scenarios, representing risks—up or down—to investor consensus thinking, and in some cases, to its own views.

UBS' list of ‘surprises’ include:

1) Corporate default rates don’t rise significantly;

2) Oil prices fall below $20 per barrel;

3) The dollar falls to new lifetime lows;

4) Breakeven inflation rates remain near zero;

5) Global growth is negative for 2009;

6) The Fed purchases corporate credit;

7) Emerging markets regain parity valuations;

8) Equity ‘fallen angels’ soar;

9) Obama pushes for a ‘tax holiday’; and,

10) Gold goes to $300.

Perhaps next year the surprises will be somewhat more positive? Who knows! Now let us take a look at their last years' surprises (predictions) and compare their conjectures to actual outcomes.

1) Global growth surprises on the upside: Did it happen? No.

2) Oil prices: Is 50 the new 20? Did it happen? Yes.

3) The dollar appreciates: Did it happen? Yes.

4) World trade clouds: Did it happen? Sort of.

5) Developed deflation, developing inflation: Did it happen? No.

6) Financials outperform: Did it happen? No.

7) Emerging equity markets under-perform: Did it happen? Yes.

8) Japanese equities outperform: Did it happen? It depends.

9) Equity volatility settles at lower levels: Did it happen? No.

10) Chinese inflation falls sharply: Did it happen? Yes.

With a success ratio of 40% in their last year's predictions it attests that this exercise has merit. At least it can provide an avenue for 'out of the box' thinking which can aid risk management. Whether their predictions hold good or live upto its own benchmark is a question that only time can answer. Let's wait and watch!!

Market Failure and the Big Three

It was much debated on whether the Federal Reserve should bailout the U.S auto industry or not. Many were of the opinion (with a conservative view) that the Big Three could probably survive and be competitive if the U.S government would let them go into Chapter 11 bankruptcy instead of bailing them out with taxpayers’ money.

In a capitalist economy, government intervention is less likely and less welcome unless there is a market failure which has far reaching effects. The fall of the Big Three would have been an imminent danger to the U.S.A's national economy. President Bush's order for an emergency bailout of the U.S auto industry offering $17.4 billion have risen mixed feelings. The autoworkers union complained the deal was too harsh on its members, while Bush's fellow Republicans in Congress said it was simply bad business to bail out yet another big industry.

To my opinion the Fed's decision is perfect as it could not afford to allow the massive auto industry to collapse when the economy is already in the middle of an economic downturn. The Big Three's fall could send the U.S economy into a deeper and longer recession. But, it is also high time for the U.S auto companies to reform bad management practices and begin the long-term restructuring to safeguard the millions of jobs it provides.

Chiquita, Not Just Bananas!

The name Chiquita in the western world is synonymous to a banana. But there's a lot more to Chiquita than just bananas!

The company's website parade about its ethical business practices without shame or modesty which they hardly practise in reality:

"Chiquita is committed to conducting business ethically and in compliance with the letter and spirit of the law. This commitment is reflected in our Company’s Core Values – Integrity, Respect, Opportunity and Responsibility. These values embody who we are and what we do."

In March 2007, Chiquita was convicted of federal criminal charges for making more than 100 payments, totaling more than $1.7 million, to the United Self-Defense Committees of Colombia (Autodefensorias Unidas de Colombia or AUC), which has been designated as a Foreign Terrorist Organization by the U.S. government. Chiquita paid a $25 million fine.

In July, 2007 Colombian families represented by EarthRights International (ERI), together with the Colombian Institute of International Law (CIIL), Judith Brown Chomsky, and Schonbrun DeSimone Seplow Harris & Hoffman LLP (SDSHH), filed a federal class-action lawsuit charging Chiquita Brands International, Inc., the multi-national produce company, with funding and arming known terrorist organizations in Colombia in order to maintain its profitable control of Colombia’s banana growing regions starting in the mid-1990s.

Chiquita’s payments to these paramilitary groups, including the AUC and its predecessors, were reviewed and approved by senior executives of the corporation, and resulted in the targeted killings of hundreds or thousands of individuals, including trade unionists, banana workers, and political organizers. It is also said that the company have been engaging women and child labourer in their plantations in El-Salvador, Colombia and other Central American nations, who were made to work under inhumanic working conditions.

It flaunts its 'Code of Conduct' (CoC) and holds it up as the representative of its ethics and compliance program. Apparently, going by the CoC of the company, it looks like the company is deep-rooted in strong fundamentals. But, the dark-side of the company's economic activities is scary.

DEEPENING WOES FOR JAPAN

In the face of the global financial meltdown it is now predicted that the recessionary situation in Japan may deepen further. The previous record was three quarters in a row, as in the last contraction seven years ago in the wake of the dot.com bust.

High oil prices were the primary cause for economic slowdown in Japan until the third quarter. But, what is currently being observed that Japanese companies are curtailing production at an unprecedented pace as demand plunges not just in the United States and Europe but also in emerging nations that had until recently weathered the global financial storm. The situation is aggravated further by the sharp appreciation in yen.

Economists have been expecting a 0.4 percent contraction in fiscal 2008/09 but that now needs to be revised down. It's hard to see at this point how the economy will return to a recovery. The sharp fall in oil price and other commodity prices should positively impact Japanese consumption but there is still time when the positive effects are felt.

Commodity, Debt and Currency

This is the most comprehensive comparison that can be drawn between the current trend in the prices of major commodities (like gold, crude, copper and aluminium), yield on 10 year Government Securities and, Indian rupee - US $ exchange rate.

The exchange rate just cleared the highest mark in the last eight months and is probably on a slight downward swing. Prices of gold, copper and aluminium has slashed down considerably; the volatality being the highest in gold price. The yield on 10-year government bond is also at the lowest point in the last eight months.

If we look at the gold price fluctuations then we see that in every four months during the last eight months it has progressively increased, peaked and then went down again; this was almost cyclical. If the same trend (or cyclicity) continues then it is the right time to invest in gold as it is expected to go up and peak in another four months' time. As the world demand for gold has absorbed quite large quantities of Central banks gold stocks over the past decade, with only a fairly small downward effect on prices, we believe that gold prices are more likely to increase over the next few years than to decrease. Certainly the upside potential must now be considerably stronger than the downside potential.

The decline in copper and aluminum price is expected to be reflected in lowering of prices of finished goods using these metals as inputs (such as auto-ancilliaries). The fall in crude oil prices would definitely be a sigh of relief for the oil refining and retailing companies like IOCL, HPCL, etc. The depreciation of Indian rupee against US$ would definitely benefit the exporters on one hand, but would have adverse effect on the importers.

A basic property of a bond is that its price varies inversely with yield. The reason is simple. As the required yield increases, the present value of the cash flow decreases; hence the price decreases. Conversely, when the required yield decreases, the present value of the cash flow increases; hence the price increases. In the current scenario a declining bond yield would result in rise in its price.

The Indian Satellite And Cable Space

Indian cable & satellite (C&S) space is valued at Rs. 167 bn, growing at a brisk pace of ~22% p.a. Despite being the largest segment in the Indian Media & Entertainment industry, almost all players within the space have been suffering losses due to lack of addressability in the analogue transmission mode and high level of fragmentation as a result of low entry barriers. However, the space is all set for a phase of sustained digitization and consolidation led by consumer demand for quality and technology making it affordable. It is believed that half of India's C&S homes will be converted to digital by 2015, creating one of the world's largest digital subscriber base.

The Indian cable and satellite space (C&S space) comprises of delivery of TV signals to consumers through cable, satellite or broadband. The industry is a decade and a half old, third largest in the world in terms of cable network reach, and highly fragmented and unorganized because of low entry barriers in the analogue mode. The C&S distribution segment is the last leg in the television industry's value chain which comprises of content producers, broadcasters, Multi System Operators (MSOs), Local Cable Operators (LCOs) and satellite players. Even though the sector comprises 28% of the total entertainment and media industry and is growing at 22% per annum, most of the value creation is being cornered by the LCOs due to lack of addressability in the value chain. However, we believe that the sector is all set to witness disruptive change brought through technology, which will shift the balance of power towards MSOs and DTH players, unlocking huge value for operators in this space.

How Exposed Are Our Auto Ancilliaries?

In India the demand for passenger vehicles (PVs) and commercial vehicles (CVs) have declined by 2.2% and 14.5% respectively during August - October 2008. This has resulted in a slowdown in India's auto ancilliaries. From the above table it is observed that currently exports account for 20% of sales for Indian auto ancilliaries. The lion share of their sales goes to domestic market. As the market demand in most global auto markets have been pressurized, the auto ancilliaries having high exposure to domestic and global OEs are likely most susceptible to a decline in sales and profitability.

The data shown above reveals that the companies (like Exide, SKF India, Apollo Tyres, MRF) that have strong exposure to the domestic replacement market are relatively better-off to counter the market slowdown. However Chinese imports could be a threat for tyre companies. The vendors will reap benefits of the lower commodity prices and rupee depreciation in the near term but, it will be slightly offset by drop in realisations as the market demand is cooling down. Nevertheless domestic OEs (especially two-wheeler manufacturers) will likely benefit from lower component prices.

Pink Slips

I was reading an article by Saritha Rai on Indian Express website titled 'I signed the letter, took the cheque and walked out... it was over in five minutes'. The protagonist of the story is a 27-year old professional in India's outsourcing industry who had only seen the good times ... and was sacked unceremoniously from his company, the obvious reason being the "bad market conditions".

What I want to say is, what we always heard of happening in the West has arrived in our Bangalore as well. I think the situation is similar, if not more morbid, in Gurgaon, Noida, Pune or Hyderabad where the outsourcing industry is the mainstay of their economies. During my years of working (2005 - 2007) at Convergys in Gurgaon, I have seen how the young professionals took the advantage of the explosion in the outsourcing industry by hopping companies, demanding and getting handsome pay hikes.

Many of my peers lived a lavish lifestyle on their plastic money; a few of them had bought a house or owned a car by taking loans. I can imagine if some of them lose their jobs in a jiffy may land up in a jobless state with a market debt of Rs. 30 - 40 lacs (60 - 80 thousand US$). Most of these young professionals were spendthrift and had the least propensity towards savings. In the past years the same people who were besieged with jobs are now having the nightmare of "pink slip".

But the recent, serial bust-ups in Wall Street and a recessionary US economy has badly hit Indian outsourcing firms. With American companies — their biggest customers — facing an economic dip, outsourcing companies are cutting back and, in turn, choking the job market. As a ripple effect it is showing up in unexpected ways in Bangalore; restaurants and drinking lounges reporting 30% - 50% dip in revenues, real-estate companies slashing prices of apartments and introducing low-end options, and outsourcing workers switching over to two-wheelers and company cabs rather than driving their cars.

A Jeffersonian Statement

Thomas Jefferson wished to be remembered for three achievements in his public life. On his tombstone, it reads that Thomas Jefferson was "author of the Declaration of American Independence, of the Statute of Virginia for religious freedom, and Father of the University of Virginia" and, as he requested, "not a word more." Historians might want to add other accomplishments--for example, his distinction as an architect, naturalist, and linguist--but in the main they would concur with his own assessment.

In 1802, during the years of his presidency, he made the following statement which shows his ability to envision future.

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."

This is more or less the exact situation that America is subjected to now.

Real Estate Developers Are Faced With Severe Liquidity Crunch

As a result of rising interest rates on home loans and reluctance on the part of developers to reduce prices on their projects, demand for real estate in India has slowed significantly, leading to significantly lower cash generation for real estate companies. Developers are now faced with a severe liquidity crunch, as the worsening macro environment coupled with the increased risk perception of the sector has made fundraising extremely challenging.

Real estate developers have relied on short-term debt (40-50% of total debt) for financing land purchases and funding construction of leased assets. Many companies have reported that borrowing costs have increased by 250-300 bp over the past few months, the bigger issue has been availability of financing – news articles and market stories suggest that a number of banks and mutual funds have stopped lending to real estate developers fearing defaults. Given slowing sales and weak cash-generation, it is estimated that some developers will be hard pressed to meet their repayment commitments.

Another issue is monies raised by some of the promoters of these real estate companies by pledging their shareholding – the impact of which is extremely difficult to assess given the lack of transparency in such transactions, which increases the perceived risk of companies.

Asia Is More Attractive

The Morgan Stanley Capital International (MSCI) emerging markets stock index is down 55 percent year-to-date. Investors caught up in the credit crisis sold their profitable emerging market positions in order to raise cash to protect their core positions. This deleveraging process has been indiscriminate across regions, countries and asset classes and continues even as central banks and governments shove cash into the markets in order to keep up the flow of money in the credit markets.

But, emerging market equity prices are expected to bounce back from the indiscriminate dumping of the sector faster than developed stock markets. In particular, Asian emerging market stocks are now expected to outperform their peers because the sharp decline in commodity prices will bring down their manufacturing costs and make them more competitive in exports as well as feed resilient domestic demand.

China's benchmark Shanghai Composite Index is down nearly 65 % year-to-date while India's 30-share BSE Index is down 51.50 % over the same period. India is a lot less expensive than they were but nevertheless, relative to other emerging markets, it remains one of the more expensive stock markets. Russia at 3.5 times perspective earnings versus 7.5 times for emerging generally makes Russia cheapest market in the world. As for Egypt, it tends to have a relatively low correlation with both developed and emerging markets because it is under-owned and has more investment coming from the region or from domestic sources.

Global Needs Assessment: People Are Still Less Welcome

International migration is part of today’s often discussed globalization. International movement of capital, goods, and labor have accelerated the pace of industrialization yet, today capital and goods move freely across borders, but people are less welcome. All developed countries have received significant numbers of migrants irrespective of the continent they are situated in.

In 2009, UNHCR is launching an annual Global Needs Assessment (GNA) in its operations worldwide to comprehensively map the real state of the world's refugees and people of concern under its mandate.

The aim is to outline the total needs, the costs of meeting them and the consequences of any gaps. The GNA will be a blueprint for planning, decision-making and action with governments, partners, refugees and people of concern.

In early 2008, a pilot GNA using a rigorous methodology drawn from UNHCR's Strengthening Protection Capacity Project, was carried out in eight countries – Cameroon, Ecuador, Georgia, Rwanda, Thailand, Tanzania, Yemen and Zambia. It focused on the unmet needs of refugees, internally displaced people, returnees, asylum seekers and stateless people.

The results published in the report 'Refugee Realities' revealed a sobering reality of substantial and disturbing gaps in protection, including basic needs such as shelter, health, education, food security, sanitation and measures to prevent sexual violence. It showed that a startling 30 percent of needs were unmet in the pilot countries – a third of them in basic and essential services. UNHCR is already actively involved in these sectors, but not to the levels required.

Results showed a clear need to improve and ensure access to asylum systems with better reception facilities and procedures, registration, documentation and border monitoring. Training and technical support are also needed to increase the capacity of governments to adequately respond to people of concern. Women and children require better protection with improved prevention and response measures for sexual abuse and violence, as well as strengthened child protection programmes.

To address the needs gap in the eight pilot countries, UNHCR has included requirements totalling $63.5 million in its 2009 budget.

In a parallel effort to the GNA pilot, all UNHCR field offices provided their rough estimates of the financial requirements to meet the total needs of each population of concern. The global total reached USD3.8 billion, highlighting the stark reality that UNHCR has only a portion of the funding required for its responsibilities towards 31.7 million people of concern at the current annual funded budget of USD1.8 billion.

With a current operating budget that cannot support all needed interventions, UNHCR must make tough decisions on prioritizing, to the detriment of those it is mandated to protect.

Barack Obama: From Frying Pan To Fire

Obama’s domestic agenda is clearly ambitious and will undoubtedly be an aggressive repudiation of the policies of the past eight years. It is an agenda heavily dependent on tax increases from higher-income earners, which should be supported by a like-minded. However, Obama’s aspirations may be constrained by external factors beyond his control. Even with expanded Democratic majorities in Congress, the political reality is that the financial crisis will likely dominate his playing field, hampering to some degree his ability to tackle the other pillars of his domestic agenda.

As the federal government responds to the credit crunch and growing recessionary pressure, Obama will need to dedicate significant federal funding to expedite recovery, thereby siphoning money from other priorities and increasing pressure on the national deficit and debt. The final 100 days of the Bush administration have been a churning cauldron for the President and the markets, and Obama will quickly learn what it is like to go from the frying pan into the fire.

Indian Commercial Banks: Even More Privileged Now

Over the last 45 days, RBI has lowered high Reserve requirements by up to 7% of deposits (20%+ of SLR/CRR), narrowed the repo/reverse-repo corridor by 150bps, and been proactively accommodative (rather than preachy) of banks’ liquidity and other needs. These actions are precipitated by extraneous events, possibly temporary in nature, and (in part) mirror global actions. But they could represent the beginning of a structural thaw in the overtly cautious and economically burdensome policy environment for India’s banks.

India’s banks have always dominated the domestic financial landscape – garnering 50%+ of household savings and 90%+ of system deposits. They were, however, being increasingly challenged (on the savings and lending sides) by rapidly growing MFs, life insurers, and in-flowing foreign capital. This has probably changed with capital savers and users flocking to banks (with fairly implicit backing of the government/RBI), commercial banks now appear even more privileged.

RBI's Mid-Term Review of the Annual Policy Statement for 2008-09

The Reserve Bank of India has reviewed the current and evolving macroeconomic situation and liquidity conditions in the global and domestic financial markets. In its Mid-Term Review of the Annual Policy Statement for 2008-09, the Reserve Bank of India indicated that in the context of the uncertain and unsettled global situation and its indirect impact on our domestic economy and our financial markets, it would closely and continuously monitor the situation and respond swiftly and effectively to developments. In doing so, the Reserve Bank will employ both conventional and unconventional measures. Global financial conditions continue to remain uncertain and unsettled, and early signs of a global recession are becoming evident. These developments are being reflected in sharp declines in stock markets across the world and heightened volatility in currency movements. International money markets are yet to regain calm and confidence and return to normal functioning.

It was also indicated in the Mid-Term Review that the current challenge for the conduct of monetary policy is to strike an optimal balance between preserving financial stability, maintaining price stability and sustaining the growth momentum. Inflation, in terms of the wholesale price index (WPI), has been softening steadily since August 9, 2008 and has declined to 10.68 per cent for the week ended October 18, 2008. Globally, pressures from commodity prices, including crude, appear to be abating. The moderation in key global commodity prices, if sustained, would further reduce inflationary pressures. On the growth front, it is important to ensure that credit requirements for productive purposes are adequately met so as to support the growth momentum of the economy. Domestic financial markets have been functioning normally. Prudent regulatory surveillance and effective supervision have ensured that our financial sector has been and continues to be robust. However, the global financial turmoil has had knock-on effects on our financial markets; this has reinforced the importance of focusing on preserving financial stability.

Not Far Away From 10,000

India’s bellwether stock index, the Bombay Stock Exchange’s (BSE) Sensex, soared towards the psychologically important 10,000 mark on Friday, powered by pent-up energy from traders who missed Thursday’s strong rally in Asian markets because Indian markets were closed on account of Bhai Dooj, a Hindu festival.

The Sensex closed at 9,788, adding 8.22% or 743 points, but analysts said the rally will last if only the central bank steps in with aggressive support by cutting rates and releasing money into the system.

After the recent spate of rate cuts by central banks across the globe, led by the US Federal Reserve, many more central banks are expected to announce rate cuts next week. This could see at least some of the funds parked in safe and liquid US treasury bonds coming back to Asian equity markets, according to global analysts. The allocation of such capital will favour those Asian markets where central banks are more focused on growth, these analysts add.

New U.S. Nuclear Trade With India: Liability Of The Provider

The U.S. had barred American companies from selling nuclear reactors, fuel, services and technology to India after India's atomic bomb test in 1974. Congress passed legislation lifting that ban earlier this month. Thereafter there has been a rally between U.S based General Electric Co. (GE), Paris based Areva SA, and Russia's Rosatom Corp. to clench the deal to sell nuclear-energy supplies to India.

The question is should the UPA government ratify that suppliers of nuclear plants and technology be granted a legal safeguard? India has a very bad experience already with a disaster caused by the Union Carbide factory in Bhopal in 1984, which had claimed 3,800 lives. Thus, it's essential that there be some kind of liability regime in place. It is agreed that this form of liability is extraordinary because there's no private market to purchase insurance against a nuclear incident. Yet, any agreement for the provision of nuclear reactors from any country, including the United States, has to carry with it the most important aspect -- the liability of the provider. 

The liability treaty is known as the Convention on Supplementary Compensation for Nuclear Damage. It makes plant operators, usually a utility, responsible for damages from any accident and shields suppliers from liability. Operators must set aside about $450 million for compensation in case of damage, and governments that sign the treaty would cover additional claims.

To my opinion there should be some sovreign immunity cover on the supplier through partial or full control by governments. In absence of it, we may probably have to recount the story of Bhopal disaster in the event of a nuclear accident.

FINANCIAL STRESS: A SYMPTOM OR A CAUSE

Greg Mandel, the chief economist for BusinessWeek has raised a question "Is the market and economic turmoil nothing more than a crisis of confidence?" His question is in response to what has been told by Ben Bernanke to the Economic Club of New York on Oct. 15:

"At the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets."

The Bernanke-Paulson paradigm is based on the rationale that the financial turbulence will cease as the confidence of the investors are restored, and they start putting money back into the stock markets and companies around the world. Here Mandel once again challenges the view. He asks "what if the Bernanke-Paulson view is wrong? What if financial stress is a symptom, not a cause?"

It is highly likely that over the years people have realized that the way cross-border technological transfer, foreign trade and financial integration have taken place cannot be maintained over a longer period of time. The U.S transferred technology and business know-how to other low-wage emerging economies like India and China. The goods and services produced on a massive scale in these emerging economies were moved to the U.S assuming that there will be perpetual consumption demand. And, the financial flow was from the rest of the world to the U.S to finance their trade deficit.

This is good till such time your consumption demand is backed by your earning potential. You cannot pay back your debt with falling income. By BusinessWeek's calculations, in the U.S, real weekly earnings for college grads without an advanced degree have dropped every year since 2002.

Thus the panacea to the current crisis is not just restoration of investors' confidence but, developing innovative new products and services that the U.S can produce and sell in the global markets. It's high time for the U.S policymakers to get back to action to reduce the external borrowings the country has to do, and help create a sustainable global economy.

U.S. Consumer Confidence Plunges To Record Low In October

Wounded by the financial crisis, U.S. consumer confidence plunged in October, reaching an all-time low, the Conference Board reported Tuesday. The October consumer confidence index fell to 38 from an upwardly revised September reading of 61.4. Economists had expected an October reading of 52. Expectations turned "significantly more pessimistic," with the percentage of consumers expecting business conditions to worsen over the next six months rising to 36.6% from 21%, and those expecting fewer jobs rising to 41.5% from 26.9%.

Refer: http://www.marketwatch.com

With The Fall In Oil Prices, The Gulf Economies Now Appear Vulnerable

According to few oil analysts the Gulf countries are not immune to the overall problems in financial system. If they get below $60 a barrel, some of these countries will suffer. This is evident to an extent when the benchmark indexes in Qatar and Oman fell more than 8 percent Sunday. Kuwait stocks fell 4.4 percent and Saudi Arabia's main index, which fell 8.7 percent Saturday, fell an additional 1.7 percent Sunday.

Stocks in the Gulf region are off about 40 percent so far this year, in line with the decline in the Standard & Poor's 500-stock index on Wall Street and the 45 percent decline in the Dow Jones Euro Stoxx 600 index.

On Saturday, finance ministers from the Gulf Cooperation Council and central bankers met in Riyadh, the Saudi capital, to discuss a more coordinated response to the crisis. In their communiqué, officials "underlined their confidence in the stability of the monetary system in their countries," and said their economies should continue to grow.

But they also expressed concern that the downturn in the world economy would hit home. "We should all work to avoid the negative effects and reduce their impact on our economies by coordinating policies and measures," the Saudi finance minister, Ibrahim al-Assaf, told the Saudi Press Agency. In addition to Saudi Arabia, the Gulf Cooperation Council includes Bahrain, Qatar, Kuwait, Oman and United Arab Emirates.

Globally, banks have posted losses and write-downs totaling $681 billion since the start of the credit crisis, according to Bloomberg News. But so far the damage has been limited in the Middle East. Any big ratcheting up of losses in the region could require governments to bail out their own lenders and dash hopes that sovereign wealth funds from the region would be able to help rescue troubled institutions in the West. Gulf Bank's chief executive, Louis Myers, said the loss would have "no major effects on the soundness of the bank's financial position, and will not affect its ability to continue business."

KPMG International, the accounting firm, warned last week that financial fraud in the region could run into the billions of dollars a year. Colin Lobo, a KPMG partner said the financial crisis was creating an environment "where the risk of fraud will increase as businesses come under pressure to show results. Likewise, individuals will also be tempted where costs are rising and income levels are flat."

Increasing Concern In Gibraltar About The Financial Crisis

An increasing number of people in Gibraltar are expressing concern about bank deposits in the wake of the unending world financial crisis. People are in fact worried about losing their money or having it slashed, and are resorting to withdrawing deposits and opening accounts elsewhere. This could lead to a financial crisis of Gibraltar's own making, and you cannot blame the public given the lack of information and guidance that reigns supreme.

All that people hear is what is being said elsewhere. They watch satellite television channels and hear that the crisis is not going away. They read UK papers and there in front of them are sad stories and how people are being affected. While elsewhere meetings are taking place and information is forthcoming, in Gibraltar nothing is being said.

The public, understandably, in increasingly more and more concerned - and prepared to take action on what they hear about in other places. They ask: Why are deposits in Gibraltar guaranteed up to £18,000, when it is 40,000 euros in the EU, and in the UK they have been increased to £50,000? There is a case for a major public relations exercise to explain the situation and how Gibraltar is affected. The sooner explanations are given the better for the state of the financial situation in Gibraltar itself.

India To Ride The Crisis ...

The World Bank report on "Global Financial Crisis: Implications for South Asia" released on Thursday shows that even as India is relatively more exposed to the contagion effects of global financial markets, risks associated with it are countered by a fundamentally strong macro economy including prudent foreign debt management, high savings rate, solid financial sector health, and a pro-active monetary policy management. These steps will allow India to ride the crisis without destabilizing the financial sector.

Further, the report indicated that the main effects of the global financial crisis will be to reduce the availability of funds leading to higher interest rates and lower public and private investment that will hurt growth.

As far as India is concerned, the report said the current account widened sharply from a surplus of more than 2% of GDP in 2004 to a deficit of over 3% in 2008. Moreover, the report indicates that India had made good progress in reducing fiscal deficit between 2003 and 2007.

Is It Time To Rejoice For Zimbabwe?

The hyperinflationary situation in the Zimbabwean economy is known to most of us. The "gross economic mismanagement" by the Zimbabwean government has led to the collapse of the economy. Inflation is officially running at an annual pace of 231 million percent, but some experts put it more at about 20 trillion percent.

Given this dilapidated situation and in the face of the world’s biggest capital markets going for a toss, the Zimbabwean stock market has been seeing record gains as citizens turn to equities in a desperate attempt to protect their money from the country's hyperinflation. The benchmark Industrial Index soared 257 percent on Tuesday up from a previous one day record of 241 percent on Monday with some companies seeing share prices increase by up to 3,500 percent.

Now the question is whether it is time to rejoice or not. To my opinion these figures do not substantiate any sustainable growth - they are just another representation of Zimbabwe's collapsing economy and are almost meaningless in real terms. The ZSE has managed to survive despite the tough environment probably because of Zimbabwe's isolation from the international world — and therefore protection from the financial turmoil – somewhat similar to what the Indian stock markets looked like.

The unofficial exchange rate of Zimbabwean dollars to U.S $ rose from 30 million/$ to 100 million/$. This is probably happening because of shortage of cash and people are resorting to equities trying to hedge against inflation. Market performance was also being driven by strong, cheap assets which are offering returns that were more than matching inflation. The market was largely overvalued in Zimbabwean dollar terms but undervalued in U.S. dollars. The market value of the ZSE being about $2.5 billion compared to South Africa's JSE, which is worth about $460 billion. That evidently tells us there is nothing to be too much optimistic, till such time there is political instability.

Macroprudential Analysis

A method of economic analysis that evaluates the health, soundness and vulnerabilities of a financial system. Macroprudential analysis looks at the health of the underlying financial institutions in the system and performs stress tests and scenario analysis to help determine the system's sensitivity to economic shocks. Macroeconomic and market data are also reviewed to determine the health of the current system. The analysis also focuses on qualitative data related to financial institutions' frameworks and the regulatory environment to get an additional sense of the strength and vulnerabilities in the system.

When looking at the health of the underlying financial institutions in the system, macroprudential analysis uses indicators that provide data on the health of these institutions as a whole including capital adequacy, asset quality, management performance, profitability, liquidity and sensitivity to systematic risks. Macroeconomic data used includes gross domestic product (GDP) growth rates, inflation, interest rates, balance of payments, exchange rates, asset prices and the correlation of markets within the system. Finally, macroprudential analysis looks at key components of the financial markets, including prevailing credit ratings and the yields and market prices of financial instruments. Scenario analysis and stress tests are major component of this analysis. For example, the analysis may look at how the system would cope with a steadily declining currency value and its impact on GDP, interest rates and underlying institution profitability.

FIIs Selling Heavily Amid The Index Rising

Foreign institutional investors sold off equities worth Rs 816.79 crore, amid the barometer index gaining over 200 points on Monday.

FIIs invested in shares worth Rs 1,934.53 crore and shed stocks valued Rs 2,751.32 crore, resulting in a net sale of Rs 816.79 crore as per provisional data available on the BSE.

According to information available on SEBI website, FIIs shed of equities worth Rs 215.10 crore on Friday. However, domestic institutional investors show confidence in the Indian market and offloaded stocks worth Rs 216.43 crore on the day's trade.

Among other categories, brokers invested in shares valued Rs 98.96 crore on behalf of their clients and retail investors. Proprietors and non-resident Indian entities purchased equities worth Rs 53.33 crore and 5.88 crore respectively. The Bombay Stock Exchange 30-share index settled at 10,223.09 points, up 247.74 points or 2.48 per cent.

Bubble Economy

Bubble Economy is an economy in which trade takes place in large volumes with a discrepancy between the price and the intrinsic value of the product. The intrinsic value reflects the fair value, which takes into account the hypothetical calculation of the risks and future returns. The prices in economic bubble waver easily and cannot be calculated only in terms of demand and supply. The economic bubble is normally followed by a period of deterioration of prices. This crashing phenomenon is known as bubble burst or crash. The boom and the burst period in bubble economy are considered to be a positive feedback mechanism.

Bubble economy can lead to disastrous consequence as it occurred in the 1930s in the form of Great Depression and during the 1990s in Japan. The condition misallocates resources. The period of crash following this condition adds to the devastation. It is seen that this economic condition has far fetched effects. This phenomenon also casts a negative impact on the buying capability of the richer class. They spend more for the products that might be a trifle. The housing market in US, UK, Spain and Australia is an example of this kind of market. The bursting of the bubble aggravates economic slowdown. The occurrence of this kind of phenomenon in the stock market is known as stock market bubble, which is usually difficult to differentiate from an ordinary bull market.

The reasons behind the occurrence of such a phenomenon can be various according to the experts. The first one is the ‘greater fool’s theory’. According to which a buyer buys a product at a higher rate than its actual worth and waits to sell it off to some other person at an even higher rate. Another school of experts believe that it occurs when the number of potential buyers increase. In an economic condition where people have lots of disposable money this type of situation can occur. However, other experts observe that this situation may arise due to the avarice and irrationality of bullish investors. Therefore it can be deduced that there is no unanimity in the observations of experts regarding the cause of bubble economy. But it is a common belief that all assets have a fundamental value and however bubble takes place the value of those assets again return to that value.

No Matter What They Tell Us ...

And here's what the world's top leaders and economic brains have to say about the global meltdown. Read on ...

We are right now teetering on the verge of panic: George Soros, billionaire investor, head of Soros Fund Management

The government's intervention is not intended to take over the free market, but to preserve it: George W Bush, president, US

It's wrong to ask teachers, farmers and small-business owners to fill the gas tanks of the helicopters of Wall Street tycoons: John McCain, Republican presidential hopeful

Washington has to recognise that economic recovery requires that we act not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America: Barack Obama, Democrat presidential hopeful

The Masters of the Universe have bitten the dust, the same dust that is now in the mouths of the rest of us. The impact on the developing world would be profound. Projects are already stopping because of the lack of liquidity and financing. The debt crisis would become worse. The decline in commodity prices and exports would hurt the developing world: Nirupam Sen, India's permanent representative at the UN

India; Rank: 120

India has the world's fourth largest gross domestic product at $4.726 trillion. India's per capita income is $977. Indian economy is among the fastest growing in the world and the country also has the world's second largest labour force. However, the ongoing financial sector crisis in the United States and its repercussions on developed markets worldwide result in lower capital inflows into India, it is feared. And this in turn is expected to slow down investment growth in the months ahead.

With the Indian economy exhibiting distinctive signs of slowdown, Indian economists predict a real growth rate of 7 per cent for the current financial year. The Doing Business Report said it takes 30 days to set up a business in India, 73 in Bangladesh and 38 in Sri Lanka. Interestingly, the report added that an entrepreneur can start a business in 9 days in Afghanistan and Maldives, and in 24 days in Pakistan.

Krugman: The New Nobel Laureate In Economics

Princeton University Professor Paul Krugman, known as much for his criticism of George W. Bush's policies as for his academic work, won the Nobel Prize in economics for his theories on world trade. The Princeton economist's academic work analyzed how world trade came to be dominated by countries that both import and export similar products -- automobiles, for example.

In 1991, Krugman was awarded the John Bates Clark Medal by the American Economic Association, which gives the prize to the best economist under the age of 40. Krugman was born in Long Island and studied economics at Yale University. He obtained a Ph.D. from the Massachusetts Institute of Technology in 1977 before joining Princeton University. From 1982 to 1983 he served on the White House Council of Economic Advisers, during the presidency of Ronald Reagan.

Alfred Nobel, the Swede who invented dynamite, in his will in 1896 established awards for achievements in physics, chemistry, medicine, peace and literature. The economics prize was set up by Sweden's central bank in 1968. The prize consists of 10 million Swedish kronor ($1.41 million), a gold medal and a diploma.

Just Don't Borrow Money To Buy Your Piece

Warren Buffett's Reassuring Words On the Future

As the stock market's wild moves downward have average investor worried about their financial futures & looking for leadership, it's important to keep Warren Buffett's reassuring words about the long-run in mind. Here's what he said live on CNBC just a few weeks ago: "You know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary (stock market) buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well." Just don't borrow money to buy your piece.

Warren Buffett's Three Rules for Investing In a Crisis:

1. "Cash combined with courage in a crisis is priceless"

2. "Dont invest in things you don't understand"

3. "Don't try to catch a falling knife until you have a handle on the risk"

India: Its Growth Dynamics

Dismissing fears of global financial contagion impacting India, the International Monetary Fund has said that the country's economy will continue to perform well. According to Oliver Blanchard, Economic Counselor and Director of International Monetary Fund (IMF) Research Department it seems that overall, the Indian economy is going to continue to perform well.

According to the projections made by the World Economic Outlook (WEO) released recently by the IMF, India is likely to register a Gross Domestic Product (GDP) growth of 7.9 per cent in 2008-09, which may slip to 6.9 per cent in 2009-10. It is projected that the growth in India will come down from eight per cent in 2008 to seven per cent in 2009. But seven per cent is still a strong rate of growth as per IMF officials. A likely seven per cent growth rate at a time when the world economy is on a downhill path, would reflect India's internal growth dynamics.

Giving reasons for relatively mild impact on India of the ongoing financial turmoil, Blanchard said, "India is still largely a closed economy, has strong internal growth dynamics, from rapid productive growth, from its process of integration into the global economy that is still continuing".

India has registered a growth of nine per cent during 2007-08 and according to Prime Minister Manmohan Singh it is likely to register a growth of 7.5-8 per cent during the current financial year.

Do India Still Expect To Emerge Unscathed?

India's corporate optimism has sunk on worries about the global economy and weakening demand, according to a new survey on Monday, as the stock market and rupee fell to fresh lows. Some 57 percent of the 348 firms in the cross-sector survey reported Asia's third-largest economy had grown "moderately to substantially worse" in the first quarter of the financial year. In the same April-June period last year, just 12 percent believed the business climate had deteriorated, said the survey by the Federation of Indian Chambers of Commerce and Industry (FICCI). The findings came days ahead of the start of India's quarterly reporting season and as the stock market fell to a two-year-low amid concerns about the world credit crisis while the rupee hit a five-year low against the dollar.

The BSE benchmark 30-share Sensex index tumbled 469.65 points or 3.75 percent on Monday to hit an intraday low of 12,056.67 -- a level last seen in October 2006 -- as risk-adverse investors continued to pull out funds. The outward flow of investment pushed the rupee down to 47.35 to the dollar, its weakest level since April 2003. As of Friday, Indian shares had lost more than 38 percent so far this year on overseas fund outflows of 9.17 billion dollars. During the same period last year, overseas funds bought 13.62 billion dollars' worth of Indian stocks.

More than 50 percent of those companies surveyed forecast India's economy would remain the same or worsen over the next two quarters. The global financial crisis along with the high cost of credit, reduced availability of funds and weak demand have created added hardship for the Indian corporates in a globalised market.

Earlier, Indian policymakers insisted it would largely escape fallout from the US-led financial turmoil thanks to its still mainly insulated economy. But lately, policymakers have changed their tune, with the government's Economic Advisory Council warning no country can "expect to emerge unscathed." Interest rates at seven-year peaks aimed at wrestling down double-digit domestic inflation have hit borrowing costs, weakening demand and corporate expansion.

What The New Bailout Bill Won't Fix

If Monday’s rejection of the president’s bailout bill means one thing, this is it: You must take action to protect yourself from the next 777-point collapse because it’s abundantly clear that Congress won’t. Today’s 300-point decline that comes on the back of the Senate’s new bill proves what I mean.

Congress’s bungling of the bailout bill out has me shaking in my boots. But not because of another impending disaster. I’m shaking because the no vote and today’s sell-off isn’t the end of the line for America—it’s actually the beginning of a better deal for taxpayers and investors.

Hard to believe? You bet. But not when you see what will happen when a new and improved bailout bill passes. As you’ll see…

The market will reverse its 777-point decline as the U.S. financial markets—and the whole world—sighs a breath of relief. Just look at how the market jumped 450-points higher on Tuesday hopes a new improved plan is in the works!

Mark my words—the same thing will happen again Monday when Congress votes to approve compromise legislation on Friday! The chain reaction will result in more stable and responsible financial .

What’s more, the strong companies will get stronger. You needn’t take my word. Just look at Bank of America’s takeover of Merrill Lynch, JP Morgan’s takeover of Washington Mutual and Citibank’s take over of Wachovia, and you’ll see what’s headed your way.

MOST IMPORTANT: Cash will be king on Wall Street again as banks no longer pass out credit like pancakes at a fireman’s picnic. Despite what the Feds want you to believe, the NEW and IMPROVED bailout bill that’s ultimately passed will not only make credit tougher for individuals to get, but also tougher for businesses, as well.