Market Sense

The UK pound has hit an all time high against the US dollar at $2.067 per pound last Tuesday. Such high level of appreciation of the UK pound against US dollar occurred last twenty-six years back, on 5 November 1980 when the dollar touched a low of $2.446 per pound.

The devaluation of the US dollar compared with the pound is attributed to strong speculations of an impending cut in the Fed Rate by a quarter of a percentage point on Wednesday, in an attempt to limit the impact of a US housing market slowdown. For similar reasons, the Fed had last month gone for half a percentage cut in its main interest rate to 4.75% from 5.25%.

A faltering US dollar, that had touched its all time low compared with Euro last Friday, has favorably affected US exports by reducing its trade deficit but a strong Euro is not good news for European exporters with exports to the countries trading in dollar terms becoming costlier in terms of the depreciating US dollar. While the fear of decline in the value of exports is looming but for the European traders, it is not the appreciating Euro but it is global inflation that they fear might seize the competitiveness of their products.

After two days of bear run in the stock markets worldwide, Wednesday saw stock markets in Asia recoup a part of their losses. The positive investor response was a direct result of the cut in Fed rate by three and a quarter basis points and the better than expected earnings from major US investment banks Goldman Sachs and Lehman Brothers.

The International Monetary Fund and the Paris-based Organization for Economic Cooperation have scaled down the growth potential of the USA, the Euro zone and Japan. The international organizations have come short of declaring that a recession had almost hit USA. Despite of better economic fundamentals in the European and the emerging Asian economies, the aphorism, ‘when America sneezes, the rest of the world catches a cold’, remains nonetheless true. A credit crunch in the USA will have an adverse affect on the global economy via its strong global linkage effect.

The Fed has become rather agile reacting quickly to any signs of further downturn in the US economy. In keeping with the current trend of monetary activism, the Federal Reserve has further reduced the Fed rate by half basis point to 3%. This rate cut is fifth in four months. The latest cut in the Fed rate was in response to the news that the US GDP growth rate has slacked to a mere 0.6%.

As an immediate response to the Fed rate cut, banks announced lowering their prime lending rate to 6% from the current 6.5%. The cheap lending rate is believed to make credit cheaper and coupled with the stimuli expected to be garnered by increased fiscal spending as was announced by the US congress, the downturn of the economy is expected to be reversed.

Although, Nasdaq has extended deadline for its 31% stake sale in the London Stock Exchange, market rumors are asserting that LSE is supporting the Qatari Investment Authority’s bid to end the unwanted ruckus, likely in the coming time.

Earlier Nasdaq made clear that stake would not sell to single buyer but would be parceled out among a number of investors - preferably long-term investors. Single supremacy over the 31% stake can again put LSE on sell out radar. LSE is not confident on the American counterpart, and feeling that if it’s going to single chunk than QIA is a best option and firmly supporting its bid.

On the other side QIA also proved LSE’s decision right by asserting that it’s looking potential buyout as a long term investment rather than a springboard for a bid and interested in exchange’s long term business.

For an easy accessibility in one of the world’s largest stock exchange, few more names are surfacing in the regular interval, such as the Singaporean investment group Temasek, the Australian Stock Exchange and also a number of Italian investment funds are seeking part of the stake in LSE.

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The purpose of high leveraged buyouts is to allow companies to make large buyouts without having to invest a large amount of capital. However, the recent credit crunch has created an unusual problem for the companies in UK that had resorted to high-leveraged buyouts to acquire companies in the retail and housing sector by driving down the market value of their debts. Among the companies who have lost investor’s confidence are the specialist retailer, Fat Face, the house builder, Crest Nicholson, the estate agencies, Foxtons and Countrywide. Their equity value has touched insignificant levels.

During the bull market run the private equity firms acquired businesses using huge amount of debt and investing in lower level of equity, pushing up valuation of debts. However, with the expected slowdown in consumer spending following the recent credit crunch the retail and the housing sector is expected to see their revenue plummeting. Under such circumstances, the senior debt of firms like Crest Nicholson, for instance, that was acquired by HBOS and West Coast Capital for ₤715 million in 2007 is trading for 50p, and its junior debt is trading between 40p to 50p in the pound.

We have seen in the past that indulgence in excessive debt financing in high leveraged buyouts has resulted in corporate bankruptcy. In 1988 Robert Campeau’s buyout of the Federated Department Stores and the 1986 buyout of the Revco drug stores had created similar problems. The craze of the high leveraged buyouts had dwindled since the early 1990s but it had once again attained popularity since 2006 when the global equity markets were witnessing a bull run. The increase in debt frequently pushes the ratings of the acquired companies’ debt lower and they often end in speculative junk status. This badly affects the investors who earlier bought the high-grade bonds to avoid speculative risk.

The dismal high leveraged buyout scenario has acquired a global dimension. In USA itself after pumping $650 billion in the US economy over the past two years, the number of deals is shrinking. Buyout executives are canceling deals already signed and renegotiating other at marked-down prices.

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Source:timesonline

Yesterday was a ‘Black Monday’ for investors throughout the globe, with stocks in American, European and the Asian markets witnessing unprecedented downslide amidst fears of the US economy moving towards recession. In London, FTSE crashed by 217.3 points to close at 5,414, its lowest since November 2005. Hang Seng lost 5.18% points to close just above 21,000. The BSE Sensex lost 951 points the second largest fall in equity prices in the history of the Bombay Stock Exchange. Dow Jones was perhaps the only major index to witness a slight 0.2% rise in response to the Fed’s intention of further cutting the interest rate.

With recession hitting nearly every country in the West, the small businesses are likely to bear the worst brunt of the credit crunch. Small businesses unlike their big brothers often risk everything on one endeavor and without any escape route suffer greater losses. However, experts feel that a fair amount of prudent business practices could enable small ventures to remain afloat even in the worst economic circumstances. The simple mantra for any company to tackle the plummeting demand would be efficient management of cash, building customer confidence and creating new opportunities.

Ben Bernanke the Federal Reserve Chairman said that most of economic problems in the U.S., including the severe housing slump, will cause business growth to slow noticeably in coming months.

Fed policymakers last week cut a key interest rate for the second time in two months, but disappointed Wall Street by discouraging expectations that it would follow with further rate-cuts.

Bernanke said he and his colleagues believe economic activity will “slow noticeably in the fourth quarter” compared to the 3.9 percent pace of the third quarter.

Price of gas in Europe is expected to rise by up to 17 percent, reaching new heights in next year because of rise in oil prices, according to a warning issued by Gazprom. The state-owned Russian company said on Tuesday that gas prices in Western Europe will rise to $300 -$350 per thousand cubic metres.

The steep rise in gas prices follows the government of Turkmenistan’s increase in price for its gas supply. The price of gas from Turkmenistan is linked by supply contracts to the cost of oil products such as heating oil.

Australian hedge-fund manager Basis Capital Funds Management Ltd. sought bankruptcy protection for its Yield Alpha Fund after it suffered big losses due to the U.S. subprime-mortgage crisis.

The growth rate of in-theater advertising is outpacing box office growth of Hollywood. Compared to $395 million 2005, in-cinema advertising grew by 15 percent and done $455.7 million business in 2006, a Cinema Advertising Council report says. A blockbuster year for cinema advertising, nevertheless.

It seems, advertisers are eager to reach to the audience who are stuck to their seats without having a remote in their hands, and thus making in-cinema advertising one of the fastest growing advertising categories in recent times.

The state-owned oil and natural gas behemoth PetroChina is expected to surpass US energy giant Exxon Mobil as the world’s most valued company. This comes at a time as PetroChina is making its debut on the Shanghai Stock Exchange. The Chinese company’s shares are already being traded in New York and Hong Kong and are expected to be seized on by a market awash with cash and investors eager for new opportunities. At the close of markets on November 2, PetroChina was valued at $460 billion, making it the world’s second-most-valuable company, just $26 billion short of Exxon Mobil’s market value.

It is the dream of every Indian family to buy gold jewellery and lots of it. This purchase of the precious metal gets into an overdrive during festivals, marriages and other family occasions. On the Akshaya Trithiya, a function in India, it is almost mandatory that every family at least buys one gram of gold. This leads to massive transactions and gold businessmen laugh all the way to the banks.

But this may not happen this season! With gold prices climbing new heights people are feeling jittery about venturing out to shop for jewellery during the oncoming festival season. As if the volatile ping-pong movements of the stock markets was not enough, gold prices is on an upward growth curve. Yesterday, gold prices in India touched a new high and reached Rs. 10,000 per 10 grams, though bullion trading closed at Rs. 9,915 per 10 grams at the end of the day, it offered no respite to the end user.

Top merchants and businessmen are expecting gold prices to rise, primarily because of a weakening dollar against most currencies including the Rupee. Those who had planned to purchase jewellery this festival, this price fluctuation is a clear disadvantage. Apart from paying a higher price they will have to pay a good percentage as making charges, wastage, etc. Jewellers are known to make margins even in these other tariffs.