Back to Value in 2012

2011 was one of the most difficult investment years that we have encountered but for me highlighted the fact that we need to go back to basics of investment and to stop following economists, news feeds and other fads..

Investment is a business activity and we need to get back to the basic principles of how to look at a business opportunity;

I am convinced that their will be Major opportunities in 2012 and will be looking for them following the principles as first outlined by Benjamin Graham, all those years ago in his classic: The Intelligent Investor

We will be following our guiding principles:

1. Margin of Safety
2. Buying a good business at a reasonable price
3. Owner operators
4. Strong balance sheet

etc.


I think that 2012 will bring buying opportunities that we might not see again for a generation..


Good Luck

And may all your trades and investments be prosperous in 2012..

The Future Of Outsourcing

Globalization has been brutal to midwestern manufacturers like the Paper Converting Machine Co. For decades, PCMC's Green Bay (Wis.) factory, its oiled wooden factory floors worn smooth by work boots, thrived by making ever-more-complex equipment to weave, fold, and print packaging for everything from potato chips to baby wipes.

But PCMC has fallen on hard times. First came the 2001 recession. Then, two years ago, one of the company's biggest customers told it to slash its machinery prices by 40% and urged it to move production to China. Last year, a St. Louis holding company, Barry-Wehmiller Cos., acquired the manufacturer and promptly cut workers and nonunion pay. In five years sales have plunged by 40%, to $170 million, and the workforce has shrunk from 2,000 to 1,100. Employees have been traumatized, says operations manager Craig Compton, a muscular former hockey player. "All you hear about is China and all these companies closing or taking their operations overseas."

But now, Compton says, he is "probably the most optimistic I've been in five years." Hope is coming from an unusual source. As part of its turnaround strategy, Barry-Wehmiller plans to shift some design work to its 160-engineer center in Chennai, India. By having U.S. and Indian designers collaborate 24/7, explains Vasant Bennett, president of Barry-Wehmiller's engineering services unit, PCMC hopes to slash development costs and time, win orders it often missed due to engineering constraints -- and keep production in Green Bay. Barry-Wehmiller says the strategy already has boosted profits at some of the 32 other midsize U.S. machinery makers it has bought. "We can compete and create great American jobs," vows CEO Robert Chapman. "But not without offshoring."

Come again? Ever since the offshore shift of skilled work sparked widespread debate and a political firestorm three years ago, it has been portrayed as the killer of good-paying American jobs. "Benedict Arnold CEOs" hire software engineers, computer help staff, and credit-card bill collectors to exploit the low wages of poor nations. U.S. workers suddenly face a grave new threat, with even highly educated tech and service professionals having to compete against legions of hungry college grads in India, China, and the Philippines willing to work twice as hard for one-fifth the pay.

Workers' fears have some grounding in fact. The prime motive of most corporate bean counters jumping on the offshoring bandwagon has been to take advantage of such "labor arbitrage" -- the huge wage gap between industrialized and developing nations. And without doubt, big layoffs often accompany big outsourcing deals.

The changes can be harsh and deep. But a more enlightened, strategic view of global sourcing is starting to emerge as managers get a better fix on its potential. The new buzzword is "transformational outsourcing." Many executives are discovering offshoring is really about corporate growth, making better use of skilled U.S. staff, and even job creation in the U.S., not just cheap wages abroad. True, the labor savings from global sourcing can still be substantial. But it's peanuts compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.

Thus entrepreneurs such as Chapman see a chance to turn around dying businesses, speed up their pace of innovation, or fund development projects that otherwise would have been unaffordable. More aggressive outsourcers are aiming to create radical business models that can give them an edge and change the game in their industries. Old-line multinationals see offshoring as a catalyst for a broader plan to overhaul outdated office operations and prepare for new competitive battles. And while some want to downsize, others are keen to liberate expensive analysts, engineers, and salesmen from routine tasks so they can spend more time innovating and dealing with customers. "This isn't about labor cost," says Daniel Marovitz, technology managing director for Deutsche Bank's global businesses (DB ). "The issue is that if you don't do it, you won't survive."

The new attitude is emerging in corporations across the U.S. and Europe in virtually every industry. Ask executives at Penske Truck Leasing why the company outsources dozens of business processes to Mexico and India, and they cite greater efficiency and customer service. Ask managers at U.S.-Dutch professional publishing giant Wolters Kluwer (WTKWY ) why they're racing to shift software development and editorial work to India and the Philippines, and they will say it's about being able to pump out a greater variety of books, journals, and Web-based content more rapidly. Ask Wachovia Corp. (WB ), the Charlotte (N.C.)-based bank, why it just inked a $1.1 billion deal with India's Genpact to outsource finance and accounting jobs and why it handed over administration of its human-resources programs to Lincolnshire (Ill.)-based Hewitt Associates (HEW ). It's "what we need to do to become a great customer-relationship company," says Director of Corporate Development Peter J. Sidebottom. Wachovia aims to reinvest up to 40% of the $600 million to $1 billion it hopes to take out in costs over three years into branches, ATMs, and personnel to boost its core business.

Here's what such transformations typically entail: Genpact, Accenture (ACN ), IBM Services, or another big outsourcing specialist dispatches teams to meticulously dissect the workflow of an entire human resources, finance, or info tech department. The team then helps build a new IT platform, redesigns all processes, and administers programs, acting as a virtual subsidiary. The contractor then disperses work among global networks of staff ranging from the U.S. to Asia to Eastern Europe.

In recent years, Procter & Gamble (PG ), DuPont (DD ), Cisco Systems (CSCO ), ABN Amro (ABN ), Unilever, Rockwell Collins (COL ), and Marriott (MAR ) were among those that signed such megadeals, worth billions.

In 2004, for example, drugmaker Wyeth Pharmaceuticals transferred its entire clinical-testing operation to Accenture Ltd. "Boards of directors of virtually every big company now are insisting on very articulated outsourcing strategies," says Peter Allen, global services managing director of TPI, a consulting firm that advised on 15 major outsourcing contracts last year worth $14 billion. "Many CEOs are saying, 'Don't tell me how much I can save. Show me how we can grow by 40% without increasing our capacity in the U.S.,"' says Atul Vashistha, CEO of outsourcing consultant neoIT and co-author of the book The Offshore Nation.

Some observers even believe Big Business is on the cusp of a new burst of productivity growth, ignited in part by offshore outsourcing as a catalyst. "Once this transformation is done," predicts Arthur H. Harper, former CEO of General Electric Co.'s equipment management businesses, "I think we will end up with companies that deliver products faster at lower costs, and are better able to compete against anyone in the world." As executives shed more operations, they also are spurring new debate about how the future corporation will look. Some management pundits theorize about the "totally disaggregated corporation," wherein every function not regarded as crucial is stripped away.

PROCESSES, NOW ON SALE 
In theory, it is becoming possible to buy, off the shelf, practically any function you need to run a company. Want to start a budget airline but don't want to invest in a huge back office? Accenture's Navitaire unit can manage reservations, plan routes, assign crew, and calculate optimal prices for each seat.

Have a cool new telecom or medical device but lack market researchers? For about $5,000, analytics outfits such as New Delhi-based Evalueserve Inc. will, within a day, assemble a team of Indian patent attorneys, engineers, and business analysts, start mining global databases, and call dozens of U.S. experts and wholesalers to provide an independent appraisal.

Want to market quickly a new mutual fund or insurance policy? IT services providers such as India's Tata Consultancy Services Ltd. are building software platforms that furnish every business process needed and secure all regulatory approvals. A sister company, Tata Technologies, boasts 2,000 Indian engineers and recently bought 700-employee Novi (Mich.) auto- and aerospace-engineering firm Incat International PLC. Tata Technologies can now handle everything from turning a conceptual design into detailed specs for interiors, chassis, and electrical systems to designing the tooling and factory-floor layout. "If you map out the entire vehicle-development process, we have the capability to supply every piece of it," says Chief Operating Officer Jeffrey D. Sage, an IBM and General Motors Corp. (GM ) veteran. Tata is designing all doors for a future truck, for example, and the power train for a U.S. sedan. The company is hiring 100 experienced U.S. engineers at salaries of $100,000 and up.

Few big companies have tried all these options yet. But some, like Procter & Gamble, are showing that the ideas are not far-fetched. Over the past three years the $57 billion consumer-products company has outsourced everything from IT infrastructure and human resources to management of its offices from Cincinnati to Moscow. CEO Alan G. Lafley also has announced he wants half of all new P&G products to come from outside by 2010, vs. 20% now. In the near future, some analysts predict, Detroit and European carmakers will go the way of the PC industry, relying on outsiders to develop new models bearing their brand names. BMW has done just that with a sport-utility vehicle. And Big Pharma will bring blockbuster drugs to market at a fraction of the current $1 billion average cost by allying with partners in India, China, and Russia in molecular research and clinical testing.

Of course, corporations have been outsourcing management of IT systems to the likes of Electronic Data Systems (EDS ), IBM (IBM ), and Accenture for more than a decade, while Detroit has long given engineering jobs to outside design firms. Futurists have envisioned "hollow" and "virtual" corporations since the 1980s.

It hasn't happened yet. Reengineering a company may make sense on paper, but it's extremely expensive and entails big risks if executed poorly. Corporations can't simply be snapped apart and reconfigured like LEGO sets, after all. They are complex, living organisms that can be thrown into convulsions if a transplant operation is botched. Valued employees send out their résumés, customers are outraged at deteriorating service, a brand name can be damaged. In consultant surveys, what's more, many U.S. managers complain about the quality of offshored work and unexpected costs.

But as companies work out such kinks, the rise of the offshore option is dramatically changing the economics of reengineering. With millions of low-cost engineers, financial analysts, consumer marketers, and architects now readily available via the Web, CEOs can see a quicker payoff. "It used to be that companies struggled for a few years to show a 5% or 10% increase in productivity from outsourcing," says Pramod Bhasin, CEO of Genpact, the 19,000-employee back-office-processing unit spun off by GE last year. "But by offshoring work, they can see savings of 30% to 40% in the first year" in labor costs. Then the efficiency gains kick in. A $10 billion company might initially only shave a few million dollars in wages after transferring back-office procurement or bill collection overseas. But better management of these processes could free up hundreds of millions in cash flow annually.

Those savings, in turn, help underwrite far broader corporate restructuring that can be truly transformational. DuPont has long wanted to fix its unwieldy system for administering records, payroll, and benefits for its 60,000 employees in 70 nations, with data scattered among different software platforms and global business units. By awarding a long-term contract to Cincinnati-based Convergys Corp., the world's biggest call-center operator, to redesign and administer its human resources programs, it expects to cut costs 20% in the first year and 30% a year afterward. To get corporate backing for the move, "it certainly helps a lot to have savings from the outset," says DuPont Senior Human Resources Vice-President James C. Borel.

Creative new companies can exploit the possibilities of offshoring even faster than established players. Crimson Consulting Group is a good example. The Los Altos (Calif.) firm, which performs global market research on everything from routers to software for clients including Cisco, HP, and Microsoft (MSFT ), has only 14 full-time employees. But it farms out research to India's Evalueserve and some 5,000 other independent experts from Silicon Valley to China, the Czech Republic, and South Africa. "This allows a small firm like us to compete with McKinsey and Bain on a very global basis with very low costs," says CEO Glenn Gow. Former GE exec Harper is on the same wavelength. Like Barry-Wehmiller, his new five-partner private-equity firm plans to buy struggling midsize manufacturers and use offshore outsourcing to help revitalize them. Harper's NexGen Capital Partners also plans to farm out most of its own office work. "The people who understand this will start from Day One and never build a back room," Harper says. "They will outsource everything they can."

Some aggressive outsourcers are using their low-cost, superefficient business models to challenge incumbents. Pasadena, (Calif.)-based IndyMac Bancorp Inc. (NDE ), founded in 1985, illustrates the new breed of financial services company. In three years, IndyMac has risen from 22nd-largest U.S. mortgage issuer to No. 9, while its 18% return on equity in 2004 outpaced most rivals. The thrift's initial edge was its technology to process, price, and approve loan applications in less than a minute.

But IndyMac also credits its aggressive offshore outsourcing strategy, which Consumer Banking CEO Ashwin Adarkar says has helped make it "more productive, cost-efficient, and flexible than our competitors, with better customer service." IndyMac is using 250 mostly Indian staff from New York-based Cognizant Technology Solutions Corp. (CTSH ) to help build a next-generation software platform and applications that, it expects, will boost efficiency at least 20% by 2008. IndyMac has also begun shifting tasks, ranging from bill collection to "welcome calls" that help U.S. borrowers make their first mortgage payments on time, to India's Exlservice Holdings Inc. and its 5,000-strong staff. In all, Exlservice and other Indian providers handle 33 back-office processes offshore. Yet rather than losing any American jobs, IndyMac has doubled its U.S. workforce to nearly 6,000 in four years -- and is still hiring.

SUPERIOR SERVICE 
Smart use of offshoring can juice the performance of established players, too. Five years ago, Penske Truck Leasing, a joint venture between GE and Penske Corp., paid $768 million for trucker Rollins Truck Leasing Corp. -- just in time for the recession. Customer service, spread among four U.S. call centers, was inconsistent. "I realized our business needed a transformation," says CFO Frank Cocuzza. He began by shifting a few dozen data-processing jobs to GE's huge Mexican and Indian call centers, now called Genpact. He then hired Genpact to help restructure most of his back office. That relationship now spans 30 processes involved in leasing 216,000 trucks and providing logistical services for customers.

Now, if a Penske truck is held up at a weigh station because it lacks a certain permit, for example, the driver calls an 800 number. Genpact staff in India obtains the document over the Web. The weigh station is notified electronically, and the truck is back on the road within 30 minutes. Before, Penske thought it did well if it accomplished that in two hours. And when a driver finishes his job, his entire log, including records of mileage, tolls, and fuel purchases, is shipped to Mexico, punched into computers, and processed in Hyderabad. In all, 60% of the 1,000 workers handling Penske back-office process are in India or Mexico, and Penske is still ramping up. Under a new program, when a manufacturer asks Penske to arrange for a delivery to a buyer, Indian staff helps with the scheduling, billing, and invoices. The $15 million in direct labor-cost savings are small compared with the gains in efficiency and customer service, Cocuzza says.

Big Pharma is pursuing huge boosts in efficiency as well. Eli Lilly & Co.'s (LLY ) labs are more productive than most, having released eight major drugs in the past five years. But for each new drug, Lilly estimates it invests a hefty $1.1 billion. That could reach $1.5 billion in four years. "Those kinds of costs are fundamentally unsustainable," says Steven M. Paul, Lilly's science and tech executive vice-president. Outsourcing figures heavily in Lilly's strategy to lower that cost to $800 million. The drugmaker now does 20% of its chemistry work in China for one-quarter the U.S. cost and helped fund a startup lab, Shanghai's Chem-Explorer Co., with 230 chemists. Lilly now is trying to slash the costs of clinical trials on human patients, which range from $50 million to $300 million per drug, and is expanding such efforts in Brazil, Russia, China, and India.

Other manufacturers and tech companies are learning to capitalize on global talent pools to rush products to market sooner at lower costs. OnStor Inc., a Los Gatos (Calif.) developer of storage systems, says its tie-up with Bangalore engineering-services outfit HCL Technologies Ltd. enables it to get customized products to clients twice as fast as its major rivals. "If we want to recruit a great engineer in Silicon Valley, our lead time is three months," says CEO Bob Miller. "With HCL, we can pick up the phone and get somebody in two or three days."

Such strategies offer a glimpse into the productive uses of global outsourcing. But most experts remain cautious. The McKinsey Global Institute estimates $18.4 billion in global IT work and $11.4 billion in business-process services have been shifted abroad so far -- just one-tenth of the potential offshore market. One reason is that executives still have a lot to learn about using offshore talent to boost productivity. Professor Mohanbir Sawhney of Northwestern University's Kellogg School of Management, a self-proclaimed "big believer in total disaggregation," says: "One of our tasks in business schools is to train people to manage the virtual, globally distributed corporation. How do you manage employees you can't even see?"

The management challenges will grow more urgent as rising global salaries dissipate the easy cost gains from offshore outsourcing. The winning companies of the future will be those most adept at leveraging global talent to transform themselves and their industries, creating better jobs for everyone.

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How to Decant Wine with a Blender

Tom Schierlitz for Bloomberg Businessweek

By Nathan Myhrvold

Wine lovers have known for centuries that decanting wine before serving it often improves its flavor. Whatever the dominant process, the traditional decanter is a rather pathetic tool to accomplish it. A few years ago, I found I could get much better results by using an ordinary kitchen blender. I just pour the wine in, frappé away at the highest power setting for 30 to 60 seconds, and then allow the froth to subside (which happens quickly) before serving. I call it “hyperdecanting.”

Although torturing an expensive wine in this way may cause sensitive oenophiles to avert their eyes, it almost invariably improves red wines—particularly younger ones, but even a 1982 Château Margaux. Don’t just take my word for it, try it yourself.

But set up a proper blind taste test to avoid subconscious bias among the tasters. That’s a bigger problem than you might imagine. Researchers who examined the voting records of wine judges found that 90 percent of the time they give inconsistent ratings to a particular wine when they judge it on multiple occasions.

To avoid bias, use a “triangle test,” which is a scientifically rigorous way to test for a perceptible difference between wine prepared two different ways. Get as many judges as you can—10 is the minimum to get good statistics. Give each judge three identical glasses, and label the glasses X, Y, and Z.

Hyperdecant half a bottle of wine, and save the other half of the bottle to use for comparison. Out of view of the judges, pour an ounce or so of wine into each glass. The undecanted wine should go into two of the glasses, the hyperdecanted wine into the third, or vice versa. Vary the order of presentation among the judges so that not all are tasting the hyperdecanted wine first or last. Record which wine goes into which glass, and have the judges guess which two of their wines are the same.

You’ll probably find that hyperdecanting does clearly change the flavor of the wine. To determine with scientific rigor whether your tasters prefer the hyperdecanted wine requires a more complex trial called a “paired preference” test, or “square” test. But a blind side-by-side comparison works passably well, too, and requires no math.

Myhrvold is the ex-chief technology officer of Microsoft, co-founder of Intellectual Ventures, and author of Modernist Cuisine.

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How to Remember Names and Faces

Alamy (2)

By Hannan Khan

One of the hardest things about remembering people is that you only get to meet them once before you’re expected to recall their names. You can solve this problem with repetition. Focus on one or two obvious features—details about their personality or appearance or the way they talk—and say them to yourself as a sentence. For example, “Tyler has a goatee and firm handshake.” A moment or two after you’ve met, recall Tyler’s face and imagine him saying, “Hi, I’m Tyler.” The more you repeat it in your mind, the longer it will stay there. And just recalling the fact that you’ve chosen to remember one or two features from each person you meet will help bring those features to mind.

A lot of people swear by mnemonic systems, where you use the first letter of someone’s name—Slothful Stephanie, Happy Harry. My feeling is that systems like these take too much time, unless you’re dealing with a small group and you really need to get their names down cold. At a trade show or conference, where you’re meeting dozens of people over the course of a day, mnemonics make your mind into a jumble. It’s too hard to keep making up adjectives for people you don’t really know.

There are times when you’ll want to use your imagination to help remember someone’s name, especially when you can tap into the associations your mind makes when you see that person. Say you meet someone named Katherine, who looks a bit like Britney Spears. Next, try visualizing Katherine singing and dancing. When you meet Katherine again, travel back to this memory you’ve created. All the colorful details that you’ve imagined around her will help you fill in the empty spot—her name.

Khan came in first in the Names and Faces event of the 2011 USA Memory Championship.

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Transocean: No Apologies Over Gulf Oil Spill

A Transocean drilling vessel and platform used in the Gulf spill containment effort Jim Wilson/The New York Times/Redux

By Paul M. Barrett

Fourteen months after the Deepwater Horizon drilling rig exploded 50 miles southeast of Venice, La., killing 11 men and setting off the largest offshore oil spill in U.S. history, Transocean, the company that owned and ran the ill-fated 32,600-ton vessel, finally issued its official account of what happened and why. It produced a report on June 22 of no fewer than 854 pages, divided into two volumes, and spared no detail. The bottom line, though, isn’t complicated:It was BP’s fault.

That Transocean would try to deflect blame isn’t surprising. The Swiss-incorporated, Houston-based drilling contractor is caught in a litigation frenzy involving British Petroleum; Halliburton, which did cement work; and several other companies, including Anadarko Petroleum, one of the minority stakeholders in the well, and Cameron International, manufacturer of a critical piece of safety equipment known as the blowout preventer. They are wrestling over who will get stuck with tens of billions of dollars in environmental and economic damage claims related to the blowout of BP’s Macondo well on Apr. 20, 2010.

Since then, Transocean has refused to acknowledge committing any mistakes that may have contributed to the disaster. It has declined to help pay for the cleanup. It has made no apologies. And what is remarkable is that this blame-the-client, admit-no-wrong, take-no-prisoners approach appears to be working.

Of 126 people aboard the Deepwater Horizon when it exploded, 79 worked for Transocean (versus only six for BP). Nine of the 11 fatalities were Transocean men. Transocean has settled with several families of those lost in the disaster, for undisclosed amounts, and has said in Securities and Exchange Commission filings that its costs related to the blowout totaled $160 million through Mar. 31, 2011. Yet it hasn’t put a single dime into the $20 billion victims-compensation fund BP established, a fund that is close to finalizing settlements with 17 former Transocean employees, according to Anthony G. Buzbee, a Houston plaintiffs’ attorney representing the workers. Overall, BP has spent $17.7 billion related to the spill as of the end of 2010—more than 100 times as much as Transocean, which last year, according to the U.S. Justice Dept., “actually booked a $270 million ‘accounting gain’ on the difference between the real value of the Deepwater Horizon and the amount it received in hull insurance following the vessel’s sinking.”

Transocean’s shrewd, defiant response strategy began almost from the moment the crew lost control of the well. Within 12 hours of receiving medical attention after the calamity, surviving Transocean employees were transported to a hotel in New Orleans, where they were questioned by company lawyers seeking to exonerate the drilling contractor, according to Buzbee and other plaintiffs’ attorneys. In subsequent months, even as BP pledged to “make it right” and raise billions for its relief fund, Transocean worked behind the scenes to minimize liability and convince investors everything was just fine.

In May 2010 it filed papers in federal court in Houston seeking to use a 169-year-old maritime statute to cap the company’s liability for deaths and injuries at less than $27 million. (The owners of the Titanic invoked the same law to notable success.) Then, shortly after trying to minimize its payments to widows and survivors, Transocean announced plans to issue $1 billion in dividends to its shareholders. It further declared in its annual report that despite the death and destruction in the Gulf, 2010 had been “the best year in safety performance in our company’s history.” It even handed out safety bonuses to top executives.“You almost have to admire their chutzpah—almost,” Steven Gordon, a plaintiffs’ lawyer in Houston, says of Transocean. Gordon represents eight former Transocean employees who survived the disaster and are suing the company and BP.

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A Tiny Alaska Village Stares Down Big Oil

Alaska Stock/Alamy

By Katarzyna Klimasinska

This summer, four-year-old Micah Kinneeveauk helped catch and kill his first seal. His proud grandmother plans to reward him with a special dessert at Thanksgiving: A big bowl of ice cream flavored with caribou meat and fat. Hunting seals and whales in the Chukchi Sea and caribou and polar bears on the tundra has provided food, clothing, and rites of passage for centuries in tiny Point Hope, Alaska, a barren gravel village of 800 Inupiat natives located 125 miles north of the Arctic Circle. Many of the people live largely on what they catch.

That’s why Micah’s grandmother, Caroline Cannon, sees trouble in Royal Dutch Shell’s plans to drill for oil in the Chukchi and Beaufort seas. In the long shadow of the Exxon Valdez and BP disasters, she’s unconvinced by Shell’s assurances that it has helicopters, robots, divers, and skimmers available to respond if it loses control of a well, along with a cap-and-containment system similar to the one that ultimately plugged the BP gusher. “There is no technology to clean up an oil spill, and it’s devastating if it happens,” says Cannon, who serves as the village president. “I have 25 grandchildren. That’s why I oppose offshore drilling 2,500 percent—I want them to have a chance to have the same kind of subsistence life I have.”

Many of Cannon’s fellow villagers feel the same way, and the town has been remarkably effective at delaying the company’s plans to begin work in the region. Point Hope successfully challenged government-issued permits for emissions from the rigs, preventing Shell from drilling this summer. It also sued to challenge the government’s lease sale, convincing a court that more public comment and environmental studies were needed. Although Shell won its first lease to extract oil from beneath U.S. Arctic waters in 2005, it has yet to drill a single well, despite spending what it says is almost $4 billion on leases, research, engineering, lawsuits, and government-ordered studies.

Part of Shell’s problem is that it doesn’t have much to offer the villagers to help win them over. The company predicts that development of the offshore fields would create 35,000 jobs a year in the state and bring $4 billion to local governments by 2057. Shell says Point Hope would get its share of the wealth. “We are committed to providing the village … with the same opportunities for jobs and shared services as other villages,” says spokesman Curtis Smith.

Many of the residents of Point Hope say they aren’t interested. The ramshackle village has a grocery store, a Chinese takeout, and not much else. They don’t want Shell coming in and building up the place. They aren’t expecting to be offered jobs on the rigs. They don’t want money. Mostly, the people say, they want to be left alone. “No matter how much money you’ve got, that money goes,” says Ronald Oviok, who says he has caught more than a dozen whales in his 69 years. “I’ve got no money. I don’t really care for money.”

Point Hope is exploring further legal challenges but likely can’t keep Shell from drilling forever. This week the EPA issued revised emissions permits, and in August Michael Bromwich, the chief U.S. offshore oil regulator, approved the company’s plans to explore in the Beaufort Sea provided it also wins permits from the U.S. Fish and Wildlife Service and the National Marine Fisheries Service, which are under review. A U.S. decision on the Chukchi Sea is still pending. “We are accustomed to making decisions that may not make everybody happy,” Bromwich said after meetings with native leaders and Shell executives in Alaska this month. “We have to make decisions based on the best information we have available and the appropriate balance.”

The eventual payoff for Shell will be worth the headaches. The Chukchi holds an estimated 15 billion barrels of oil—about as much as Alaska’s North Slope has produced since 1977. “Chukchi fields truly have the potential to be absolute world class,” says Pete Slaiby, Shell’s vice-president in charge of Alaska operations. That assumes the company can get to them. The Chukchi Sea is buried in ice for eight months every year, meaning Shell can only drill from July through October. That short window came and went this year, and the company must soon decide whether to begin planning to drill when the thaw comes next year—or to brace for yet another summer in court.

The bottom line: Shell, which spent nearly $4 billion for rights to drill in Arctic waters, has been stymied by villagers suing to stop the oil giant.

Klimasinska is a reporter for Bloomberg News.

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Copper market getting tighter and tighter: Commerzbank

Last Updated : 02 September 2011 at 21:05 IST

NEW YORK (Commodity Online): Copper supplies are getting tighter on higher Chinese imports and copper mine strikes around the world. Decreased availability of high quality ore is also expected to support copper prices.

"Copper is getting tighter and tighter due to supply problems. Not only strikes but also lower ore grades are cutting production, especially in Chile and Peru” said Commerzbank analyst Daniel Briesemann, Reuters reported.

-Data showed that China’s copper imports rose by 8.8% in July. And imports are expected to rise further after the inventories are tapped into and China starts restocking.

-The Copper mine strike at Escondida had caused a 14% in copper production. Possibilities of more strikes around the world especially in Chile (Collahuasi) and Indonesia remain very high.

-Peru’s government is considering increasing mining royalties. This would discourage new investments in this area.

"Recent economic data suggests that global growth could stabilize. Moreover China is starting to import more again. This should Lead to further price gains”, said a Credit Suisse note.

At the London Metal Exchange (LME), copper prices have traded in a range of around $10000 to $8500 for 2011.

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Buffett Tells CNBC 'This Isn't 2008' As Bank of America Gets $5B Loan at Just 6%

Warren Buffett tells CNBC's Becky Quick "this isn't 2008" and that's why Bank of America is getting better terms for its $5 billion loan today from Berkshire Hathaway, compared to what General Electric and Goldman Sachs paid for similar loans almost three years ago at the height of the credit crisis.

Bank of America shares [BAC  Loading...      ()   ] jumped more than 9 percent to close at $7.65 in trading on Thursday.

Buffett is also stressing the investment was his idea, perhaps to downplay any fears that Bank of America is desperate for a cash infusion.

This morning, Bank of America announced that Berkshire will use cash to buy 50,000 shares of preferred stock with a liquidation value of $100,000 per share in a private offering. 

That is, in effect, a loan to the bank, in which it will pay around $300 million in dividends each year to Berkshire.  BofA can pay back that loan at any time, but it will have to make an additional 5 percent dividend payment to do so.

The interest rate on the loan is 6 percent, well below the 10 percent that Buffett got from GE and Goldman almost three years ago, but not at all bad with 10-year Treasuries just above 2.2 percent.

Goldman paid back its $5 billion loan in April of this year, sending Berkshire roughly $1.6 billion in dividends over the 2-1/2 year life of the deal.  That's an annualized return on investment of 12.6 percent.  Warrants that came with that deal are out of the money, with Goldman trading a few dollars below the $115 strike price. Current price: [GS  Loading...      ()   ]  

Buffett had said he didn't want Goldman to buy back its preferred shares, because it cut off the stream of $500 million a year going from Goldman to Berkshire.  He's also indicated he doesn't plan to exercise the Goldman warrants until just before they expire in 2013.

General Electric has said it will pay off its $3 billion loan this October.  Berkshire will pocket a total of $1.2 billion in dividends over that deal's three years for an annual return on investment of 11.1 percent.  Like Goldman, warrants in that deal are also out of the money, with GE trading almost seven dollars below the $22.25 strike price.  Current price: [GE  Loading...      ()   ]

In today's deal, Berkshire gets warrants to buy up to $5 billion of BofA's common stock, 700 million shares at an exercise price of just over $7.14 a share.  It can make those purchases at its discretion anytime in the next 10 years.

That gives Berkshire the potential to become BofA's largest shareholder.  State Street is currently at the top of that list with 460.5 million shares, about 4.5 percent of the bank's outstanding shares.  (Berkshire sold a 5 million share stake in BofA during 2010's fourth quarter.  It had been purchased by the now-retired GEICO stock picker Lou Simpson.)

As was the case with GE and Goldman, Bank of America also gets a strong endorsement from Buffett.  He calls the investment a vote of confidence in both BofA and the United States.

In the release, Buffett says, "Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it.  I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy."

Buffett tells us he came up with the idea of an investment while taking a bath earlier this week, and he asked BofA CEO Brian Moynihan yesterday if Berkshire could do the deal.

Why now?  Buffett tells Becky that BofA's shares "have gone down a lot" and the bank is "certain to be around" for a long time.

He says Wells Fargo [WFC  Loading...      ()   ] , a large Berkshire holding, and BofA have the best deposit franchises in the country, and compares today's investment to Berkshire's past deals for GEICO and American Express [AXP  Loading...      ()   ] .

Current Berkshire stock prices:

Class B: [BRK.B  Loading...      ()   ]

Class A: [BRK.A  Loading...      ()   ]

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Aluminium to gain as China curtails production on power crisis

Last Updated : 02 September 2011 at 18:05 IST

BEIJING (Commodity Online): Power shortages have forced aluminum producers in the Guangxi district of China to start cutting production in September, causing a 120,000 tonnes production loss in the region.

-The action will cause a decline of 4% of China’s total production capacity and will trip the supply-demand equation from surplus to near equilibrium.

"The cut will also coincide with the start of the peak consumption season in China, thus lending support to prices then. We are also watching the situation to see if it widens to include other Aluminium producing provinces in the region. There are signs that Guizhou may be next”, said Zhang Xin, a metals analyst, Reuters reported.

"If aluminium prices rise high enough during the dry season to offset higher Electricity costs then, smelters may ramp up production before that. But we think that they are likelier to resume full production only next year" he added.

Smelters will possibly start full production only by May 2012 when the rainfall season will result in a higher hydro electricity generation and lower energy costs.

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Mexico closing in on Peru for top silver spot

Last Updated : 02 September 2011 at 19:20 IST

MEXICO CITY (Commodity Online) : Mexico could overtake Peru as world’s largest Silver producer as Fortuna Silver Mines announced starting commercial production from its San Jose silver-gold mine in Oaxaca.

The mine is expected to produce 520,000 ounces of silver and 4,600 ounces of Gold this year and 1.7 million ounces of silver and 15,000 ounces of gold in 2012 at an estimated cash cost of $5.04 per ounce, net of byproducts. Construction capex was $55 million.

Over the weekend, Camimex, the Mexican mining industry group, sent out a news release claiming Mexico has overtaken Peru, according to its own figures.

However Peru mining ministry said based on the latest figures from the U.S. Geological Survey, Peru is the world leader in 2010.

Peru and Mexico are jockeying for bragging rights as the world's top silver producer.

The battle lines are drawn as both nations point to a significant ramp-up in production that will keep them at the top of the Silver heap. Both countries are looking for foreign investment for projects that require big upfront expenses for long-term gains.

It was only in the last 10 years that the bustling mining industry in Peru allowed it to pull ahead of Mexico as the top producer. The two countries supplied about 30% of the world's silver.

Mexico’s Fresnillo is the biggest primary silver producer in the world. Two big Fresnillo mining projects coming online this year should add as much as 155.5 tons to silver production in 2011.

According to GFMS, a leading international precious metals consultancy, as of Nov. 1, global holdings in silver-backed ETFs, or exchange-traded funds, stood at more than 490 million ounces

Anlaysts said demand for one-ounce silver coins is reaching record levels in the U.S. and Canada.

Industrial demand for silver, which is used as a conductor of heat and electricity, and as an antibacterial agent, is also boosting its price, analysrts added.

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TMZ Posts First Picture Of Steve Jobs After Resignation

Just released from TMZ. Our thoughts are with Steve.

And for anyone who is still unfamiliar with the man behind the legend, read the following Playboy interview with Jobs from 1985: the visionary brilliance oozes with every word he utters. Yet the one comment our government may want to heed very carefully is the following brilliant encapsulation of our economic quandary: "I'm convinced that to give away a dollar effectively is harder than to make a dollar." And therein lies the rub.

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9,173 Ounces Of Gold Transferred From HSBC To JP Morgan Gold Vaults Overnight

While we have no information as to who or why (we do know when and where) engaged in a transfer of 9,173 ounces of eligible gold (for a total of about $16.5 million) from HSBC's gold depository into that of JP Morgan, according to today's closing CME Group Metal Depository Statistics, we can merely point out that it happened. One back of the envelope hypothesis: we have counterparty risk at the bank level (which is currently manifesting itself at both the CDS, the stock price, and the Li(E)bor level; are we going to start seeing counterparty concerns at the gold depository level next? What next: a run on the [    ] gold depository in a self-fulfilling prophecy? The second hypothesis is by now well known- JPM needs all the gold it can get. But a paltry 9,173 ounces? Of course, the last hypothesis is that the two precisely 9,173 ounce transactions are in no way related.

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Bank Of America Capital Scramble Continues With Alleged Closure Of China Construction Bank Stake Sale

We are not sure how this is news, since it was announced weeks ago, but according to CNBC the bank that did not need capital, is following up yesterday's $5 billion capital raise with another $10 or so billion by selling "at least half of its 10% stake in CCB." That said, back on August 11, the FT came out with a report titled, "BofA faces struggle to sell CCB stake" in which we learn that "Bank of America is facing difficulties in selling its 10 per cent stake in China Construction Bank, partly because potential investors are expecting a deluge of rights issues, share sales and new listings from Chinese banks. But it might now raise less than than it had hoped. The BofA stake, once valued at $20bn, is now believed to be worth several billion dollars less, according to bankers. The US bank has approached sovereign wealth funds and other investors in the Middle East and in Asia, according to people familiar with the matter. The Kuwait Investment Authority was one potential buyer BofA approached, these people add, but the sovereign wealth fund already holds large stakes in ICBC and Agricultural Bank of China. “Right now, the KIA does not want to do anything more,” says one person with knowledge of the matter. “They think they have enough exposure to Chinese banks.” The KIA expects the two banks in which it already has shares to launch rights offers and the KIA intends to support those banks. "They will only look at CCB if the discount is high enough,” the person added...Potential buyers say the timing for BofA is particularly sensitive because, if CCB does launch a rights offer – as is widely expected – and BofA is still a main shareholder, it will be obliged to participate, using capital it can ill afford to part with." Stated otherwise, this must be one of those, "this time it's different" occasions. Next up: Bank of America does not, repeat NOT, need to sell its employee's blackberrys, but it will. Just because.

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The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets

 “Jeff’s analysis is unique, at least among academic derivatives textbooks. I would definitely use this material in my derivatives class, as I believe students would benefit from analyzing the many dimensions of Jeff’s trading strategies. I especially found the material on trading the earnings cycle and discussion of how to insure against price jumps at known events very worthwhile.”

—DR. ROBERT JENNINGS, Professor of Finance, Indiana University Kelley School of Business

 

“This is not just another book about options trading. The author shares a plethora of knowledge based on 20 years of trading experience and study of the financial markets. Jeff explains the myriad of complexities about options in a manner that is insightful and easy to understand. Given the growth in the options and derivatives markets over the past five years, this book is required reading for any serious investor or anyone in the financial service industries.”

—MICHAEL P. O’HARE, Head of Mergers & Acquisitions, Oppenheimer & Co. Inc.

 

“Those in the know will find this book to be an excellent resource and practical guide with exciting new insights into investing and hedging with options.”

—JIM MEYER, Managing Director, Sasqua Field Capital Partners LLC

 

“Jeff has focused everything I knew about options pricing and more through a hyper-insightful lens! This book provides a unique and practical perspective about options trading that should be required reading for professional and individual investors.”

—ARTHUR TISI, Founder and CEO, EXA Infosystems; private investor and options trader

 

In The Volatility Edge in Options Trading, leading options trader Jeff Augen introduces breakthrough strategies for identifying subtle price distortions that arise from changes in market volatility. Drawing on more than a decade of never-before-published research, Augen provides new analytical techniques that every experienced options trader can use to study historical price changes, mitigate risk, limit market exposure, and structure mathematically sound high-return options positions. Augen bridges the gap between pricing theory mathematics and market realities, covering topics addressed in no other options trading book. He introduces new ways to exploit the rising volatility that precedes earnings releases; trade the monthly options expiration cycle; leverage put:call price parity disruptions; understand weekend and month-end effects on bid-ask spreads; and use options on the CBOE Volatility Index (VIX) as a portfolio hedge. Unlike conventional guides, The Volatility Edge in Options Trading doesn’t rely on oversimplified positional analyses: it fully reflects ongoing changes in the prices of underlying securities, market volatility, and time decay. What’s more, Augen shows how to build your own customized analytical toolset using low-cost desktop software and data sources: tools that can transform his state-of-the-art strategies into practical buy/sell guidance.

 

An options investment strategy that reflects the markets’ fundamental mathematical properties

Presents strategies for achieving superior returns in widely diverse market conditions

Adaptive trading: how to dynamically manage option positions, and why you must

Includes precise, proven metrics and rules for adjusting complex positions

Effectively trading the earnings and expiration cycles

Leverage price distortions related to earnings and impending options expirations

Building a state-of-the-art analytical infrastructure

Use standard desktop software and data sources to build world-class decision-making tools

Price: $44.99

Click here to buy from Amazon

Selling Put Options My Way

I must start by telling you that I have no 1-800 number, I am not trying to sell you any products, and am not inviting you to come to my house to view a cleaning agent. I will not try to sell you plastic bowls or any other “can’t miss” ideas. I do not sell recordings that promise you unlimited wealth, inner peace, or a flat stomach.
I am going to tell you the true story of how I have made a fortune, lost a fortune, and came back from the edge of disaster to prosper in the option market. I started with a modest amount of cash; also, I was lucky as I stumbled into the Internet bubble through accident and ignorance. Other than the school of hard knocks, I have no special talent or training in the stock market. My good and bad trades have been learned the hard way.
I will also tell you how I now invest, and how it might work for you. If you find that it does, great. We both will be winners. Once you read the book and start your own financial journey, I have no control as to whether or not you will follow my ideas. Your results might be different from mine. I hope better but maybe not. You alone must make the decision whether this strategy will fit your investment goals.
My method is not the only way to trade options and these ideas are definitely not the only way to sell puts. My methods are a way for the average investor to sell puts with some rules and guidelines. Just a few simple things to check each month, then make the trade and pocket some “free money.”

Price: $9.95

Click here to buy from Amazon

Buffett's Renewed 'Tax the Super-Rich' Call Ignites Strong Debate

Warren Buffett has said, almost yelled, 'Tax the Super-Rich!' many times over the past few years.

But his latest New York Times op-ed headlined Stop Coddling the Super-Rich appears to have hit a "nerve," as Reuters puts it, with Washington gearing up for another debate on how to cut the nation's deficit.

On the campaign trial today, GOP presidential hopeful Michele Bachmann joined Buffett critics asking, in effect, 'If he wants a bigger tax bill, why doesn't he go ahead and make a voluntary contribution to the Treasury?'

Arguing that President Obama has "redefined millionaire and billionaire as any company that makes over $200,000 a year," Bachmann told a campaign audience in Spartanburg, South Carolina:

"Now the President's friend Warren Buffett just came out and said all the billionaires should be paying more money.  I have a suggestion, Mr. Buffett, write a big check today, there is nothing you have to wait for. (Cheers) ... Perhaps Mr. Buffett would like to give away his entire fortune above 200,000 dollars.  That's what you want to do, have at it, give it to the federal government.  But don't ask the rest of us have our taxes increased because you want to have a sound bite."

(In his op-ed, Buffett proposed higher tax rates for taxable income in excess of $1 million, and an additional rate increase for those making $10 million or more a year.)

Speaking in Minnesota yesterday, President Obama endorsed Buffett's call and argued the wealthiest Americans have an advantage when it comes to tax rates.  "You don't get those tax breaks. You're paying more than that.  Now I may be wrong, but I think you're a little less wealthy than Warren Buffett. Now that's just a guess."

In a Financial Times article on how Buffett's remarks are "energizing" the tax debate, a representative of the nonpartisan Tax Policy Center says the rich do pay higher taxes than the poor, "particularly if the impact of corporate taxes, estate taxes and investment taxes are counted in the mix."

In a New York Times article taking a Closer Look at Taxes on the Rich, a TPC economist says Buffett's proposal isn't "going to solve the long-term budget shortfall all by itself.  The only way to do that is to have broader tax increases or reduce entitlements.  But it could be an important part of the puzzle."

Tech Crunch's Michael Arrington writes in Screw the Rich (Here's How) that Buffett's op-ed is a "huge pile of manipulative garbage."  He says the super-rich don't mind higher tax rates, because there are no taxes on the wealth they've accumulated, only on the additional money they bring in each year:

"Buffett is just fine with big new taxes on the rich because those taxes never touch all the under-taxed wealth he’s accumulated over the decades. He talks about how he’s benefited for decades by being under taxed, but is only willing to pay more in the future. That’s like a steroids-ridden baseball player declaring that steroids are bad and from now on no one gets to take them. But paying for past sins? Shhh."

Arrington argues that Buffett wouldn't be as enthusiastic about a "wealth tax."

It's not all negative.  Writing on the Huffington Post, Chuck Collins says, "We need more wealthy folks like him to speak up for taxing the wealthy."  He links to Patriotic Millionaires for Fiscal Strength.

And in a light-hearted Washington Post blog post headlined Warren Buffett Strikes Gold, Alexandra Petri (who puts the 'pun' in punditry) writes, "If the overwhelming (positive) social response to Warren Buffett’s piece in the Times ... has showed us anything, it is that we agree with Warren Buffett that Warren Buffett has too much money, and that we don’t know how to spell his name." (Spelling link added)

Yesterday's post has generated 88 comments.  You can tell everyone what you think below.

Two effs and two tees.

Current Berkshire stock prices:

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Class A: [BRK.A  Loading...      ()   ]

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Copper prices set to rise on increased Chinese buying

Last Updated : 17 August 2011 at 10:45 IST

BEIJING/MUMBAI (Commodity Online): Copper prices are expected to go up as the arbitrage window between London Metal Exchange and Shanghai opened earlier in August and spurred increased Chinese buying.

At LME, copper has fallen from levels around $960o to $8900 as of this month primarily due to fears about global slowdown. However, the prices are believed to have found their current support due to increased Chinese buying.

“The reason why copper was able to find support at the current level during the market turmoil in the last two weeks is because of Chinese buying,” said Pang Ying, an analyst at Shenzhen Rongtuo Trading Co, as per a Bloomberg report.

LME copper inventories have fallen for 3 days since August 12 whereas inventories in Asia are the lowest since April.

"If buyers could obtain as many letters of credit as they want, there would have been massive buying orders", said Jing Chuan, chief researcher at Hua Tai Great Wall Futures, Reuters reported. The researches expects Copper imports to rise to 230,000-250,000 tonnes in Q4 compared to an average of 180,000 tonnes in the first half of this year.

At the Multi-Commodity Exchange of India (MCX), copper August contract is down by over 8.5% for the month as of Tuesday close.

The metal, however, is up by 0.50% as of Wednesday morning trade at 401.50.

GEOJIT Comtrade view:
MCX Copper August: Prices to trade in between 397 - 404 now, break of either level could decide the momentum. S1 397 S2 388 R1 404 R2 410.60

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Recession: Unusual unconventional actions the need of the hour

Last Updated : 04 August 2011 at 10:55 IST

By Rakesh Neelakandan
Everybody dreads the R-word! But why dread the thing that you are living?

You heard me right: recession is still there in our backyard (if not in the bedroom), which Paul Krugman dubbed as nasty recession. But certain media outlets, through their analysis, are creating the impression that recession is approaching anew, once again, out-of-the-blue!

By assuming that recession is here for a “second” time, media outlets give out the false impression that it has already been ended and has started off “once more”. By creating that impression, they simultaneously fan the fire of hope and cold-water the same in people’s mind in a stroke of matchless mastery (that recession had ended and we are facing a “new” crisis).

“Recession has been here and is expected to continue for the short-term...” said Dr.N. Ajith Kumar, an economist with Centre for Socio-economic and Environmental Studies, a Kochi based think-tank.

The fact is that the political drama staged as the debt-ceiling debate unveiled in the United States was too compelling for the media community to miss. As a result, many of the high-profile analysts who have had a lag in writing when it came to the topic of recession, in due course, forgot that there has been a recession, and when the drama ended, wrote about recession with some nostalgia. A pardonable offence!

So, if recession has been here for a while, then what can we be doing about it?

“See, the raising of debt-ceiling did little to add to the confidence of the industry participants.”, said Martin Patrick, an economist from Kochi.

One cannot pay off debt by contracting additional debt! Given this aspect, it may happen that the United States will, today or tomorrow, announce a slew of austerity measures.

“This may not bode well for the economy.” Martin Patrick added.

He points out that there is a fundamental flaw with the so-far-announced US’ monetary measures to tackle recession. A significant portion was utilised to bail out the heavily-struck institutions. The ordinary people who lost their wherewithal did not receive anything.

“Unless the Purchasing Power Parity or PPP of these people are restored, recession cannot be hoped to rein-in. This is just one of the measures.”

Pump priming, as the measure is termed, can be extended to include regions where unemployment is rampant.

“The governments should identify sectors where there is the need for additional capacity creation and pump money to them, creating employment opportunities. India is already having welfare measures like NREGA which helped it.” said Martin Patrick.

The political will of the governments are often tested in times of crises. Failure of governance and policy paralysis can add to the current woes.

“The US government can consider bringing in youngsters to jobs which are being carried out by old people nearing retirement. This can be a temporary arrangement, say for five years until the economy rebounds...but can sufficiently infuse some amount of money into the hands of those who are unemployed. The old people can, for the time being, live out of what they already have.” Martin suggested.

Of course, the myriad nuances of this scheme has to be worked out.

But measures like this would need some unusual and unconventional thinking from the part of the political class.

Is the world ready?

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Russia diamond output hits 34 9 million carat in 2010

Last Updated : 03 August 2011 at 20:50 IST

MOSCOW (Commodity Online) : World’s largest diamond producer Russia’s production hit 34.9 million carats last year.

According to a report by Rapaport, Russia mined 34.9 million carats of diamonds last year, which were worth $2.38 billion of the $12 billion worth of diamonds produced worldwide, and accounting for around a quarter of world production.

Russia, which in 2009 led the world in diamond mining by both volume and value, yielded first place to Botswana in terms of value last year, but held onto its position in terms of volume.

Botswana mined 22 million carats worth of diamonds valued at $2.59 billion last year. There were 133.1 million carats mined worldwide in 2010.

The group Alrosa, Russia's diamond monopoly, mined 5% more diamonds last year than the year before - 34.336 million carats in all.

In the first half, the group mined 19 carats worth of diamonds, 8% more than in the same period in 2009. Judging from a forecast of world diamond-market growth, the company plans sales in 2011 of up to $4.7 billion and reckons to extract 34.438 million carats worth

The annual output of Alrosa is expected to increase to 39.6 million carats in 2018. Alrosa accounts for 25% of the world’s and 99% of Russia’s uncut diamond output.

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ASSOCHAM: Rational GST regime can improve tax revenues by Rs 1 2 lakh crore

Last Updated : 04 August 2011 at 12:15 IST

NEW DELHI (Commodity Online): A rational Goods and Services Tax (GST) could increase GDP growth rate by 1.4 to 1.7 per cent with an annual revenue increase of Rs 1.2 lakh crore at current level, apex chamber ASSOCHAM said today.

According to a recent study by ASSOCHAM, The tax GDP ratio too may go up by 1.5 to 2 per cent with net revenue jumping by Rs 1.5 lakh crore a year.

While a constitutional amendment is being considered by a Parliamentary Standing Committee, next financial year (April 2012 to March 2013) is the time set for implementing GST which is a comprehensive value added tax on goods and services levied at each stage of supply chain.

“With a significant reduction in tax administration costs due to simple uniform structure, overall cost – and thus prices – of goods manufactured locally may reduce by 10 per cent,” said the chamber

Then chamber has already organised over 30 conferences on the subject in various states.

Export costs will reduce due to zero rating of central GST and state GST with annual savings in the range of Rs 48,000 crore. While imports parity with domestic goods will change due to dual GST on imports, services will cost more because of dual tax incidence.

The GST will create a single Indian common market with supply chain efficiencies and scale up the economy, said the ASSOCHAM study. There will be no distinction between goods and services with seamless input tax credit allowed throughout the supply chain.

Thus GST will be a destination-based consumption tax borne by ultimate consumer. “It is crucial for international competitiveness, revenue buoyancy and economic growth. GST will be the biggest game changer for all stakeholders – industry, trade, investors, central and state governments, and consumers.”

However, major concerns remain due to recent trends in value added tax (VAT) structure in states and central value added tax (CENVAT). While the VAT has two rate structures of 4 per cent and 12.5 per cent, six states have introduced third slab of 15 to 20 per cent.

A total of 17 states have increased standard rate ranging from 13 to 14.5 per cent. And 19 states have increased lower rate to 4.5 or 5 per cent. Tamil Nadu has linked input tax credit to output tax.

State GST on electronically transmitted inter-state services will be a major challenge if states apply different rates, according to the study. Accounting and information technology systems will also need to be aligned so that required details can be accessed to avail full input tax credit and avoid tax losses.

Under the proposed GST rate structure, all services will attract a standard rate of 16 per cent with a negative list being considered for exemption of few. There could be a lower rate of 10 to 12 per cent for specified goods like precious metals and stones.

Other goods will be taxed at a standard rate declining from 20 to 18 per cent in second year and further to 16 per cent in third year.

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Crude Oil demand to rise in Q3 supplies uncertain: E and Y

Last Updated : 04 August 2011 at 12:45 IST

HOUSTON, USA (Commodity Online): Crude Oil demand is set to rise in the third quarter of 2011 but there is uncertainty with regards to supplies. Therefore prices should continue to rise in the third quarter of 2011 according to indicators, even with ongoing uncertainty with respect to the economic recovery, deficit reduction initiatives in the US and the debt crisis in Europe, Ernst & Young said.

In the first quarter of this year, with expectations for continued economic improvement and as a result of the supply disruptions from the Middle East, oil prices rose to over $100/barrel. But after peaking in the second quarter, crude prices fell back slightly, in spite of the announced stock release by the International Energy Agency (IEA), as the economic recovery lost some steam.

Oil
The bright spot in the oil outlook is the increasing activity in the Gulf of Mexico since the oil spill last year, with the first new production out of the Gulf coming in the second quarter. While overall production remains below pre-2010 levels, the application and permitting process is substantially improved, and increasing production will create jobs and increase domestic energy supplies at a time of expected strong demand growth. Oil production elsewhere in the Americas continued to increase as well, notably from the Bakken formation in the Upper Midwest, as well as from the Canadian oil sands and Brazil.

The big unknowns for oil producers are the short-term effects of the IEA's release of 60 million barrels from emergency supplies and OPEC members' disagreement over supply increases. The IEA's release announcement brought prices down temporarily and is expected to fill the void of Libyan supplies. However, as the market moves into the high-demand season, the IEA release will not meet that increased demand, and the market will need more supply from OPEC at a time when its spare capacity is at its lowest level in more than 20 years. Beyond the short-term, over the next three to five years, pressures on OPEC to increase capacity and production are expected to increase substantially.

"Oil prices are dictated by supply and demand, and all signs point to modest oil demand growth and uncertain supply," said Marcela Donadio, Americas Oil and Gas Leader, Ernst & Young LLP. "Barring a strong economic shock, continued strong oil prices seem to be in order over the next three to five years."

Gas
US Natural Gas production continues to grow, with the latest production figures reaching the highest point in almost 40 years. Shale gas is driving the growth and is now approaching about 30% of US total gas production, even as gas-directed drilling has slowed and issues surrounding the economic feasibility and potential environmental impacts of the resource are raised.

"We maintain that Natural Gas is a sound solution to the nation's need for domestic, cleaner-burning fuel," said Donadio. "We have the resource in abundance and we know how to produce it safely. We need to put any questions around that to rest and focus on creating more opportunities to increase natural gas demand."

Downstream
With softening crude prices during the second quarter, the US downstream sector had a relatively strong quarter, with average cracking margins moving close to $30/bbl. Refiners with access to the relatively "undervalued" crude oils, like WTI and Canadian crude, continued to see stronger margins than did coastal refiners, which are more exposed to global Crude Oil markets.

Investments in new refining capacity made in recent years are now coming to fruition, and are expected to overwhelm growth in oil demand in the short-to-medium term. This means weakening conditions for margins over the next few years.

Oilfield services
Oilfield service activity is dictated by upstream spending. Spending is expected to continue to grow by about 15 to 20% in 2011, returning close to the peak 2008 levels. Service capacity is being strained by the unconventionals boom. Cost increases and staffing shortages are appearing. This resurgence of the oilfield service segment is being driven by fit-for-purposes technology such as rotary steerable rigs and directional/horizontal drilling; strong oil prices; and the efficient application of shale gas technologies including multi-stage fracking and horizontal drilling.

Transactions
The second quarter was another fairly strong quarter for oil and gas transaction activity, marking seven consecutive quarters of deal growth. Deal activity in Americas continues to dominate the global transactions landscape.

Looking into the second half of year, transaction activity should stay fairly strong, boosted by the expected continued high oil prices and the ever-high geopolitical risk, tempered only by the still reasonably high levels of economic uncertainty, particularly in the US and Europe. (Courtesy: PRNewswire)

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Five factors behind Gold's Midas Touch

Last Updated : 04 August 2011 at 13:35 IST

By Renisha Chainani
Gold keeps finding new catalysts to rise and hit record highs every time. On 2nd August, despite news reports showing Republicans and Democrats are on the verge of resolving the debt-ceiling issue, it rose to view records of $1660.

Many of us anticipated a temporary correction lower in Gold when the deficit-ceiling impasse ended, because Gold had ran up roughly 10% from 1st July to entire month, a period when the debt-ceiling gridlock and potential for a default increasingly dominated headlines.

There was an expectation that some short-term speculators would sell after an agreement in order to liquidate positions or capture profits. Gold pulled back by around $20 when electronic screen trading opened Sunday night on reports that Republicans and Democrats were close to a compromise. But the market soon regained its footing and went on to new highs even as the two parties worked toward an agreement.

The following catalysts underpin the ongoing gold rally:

1) US debt crisis

President Barack Obama said congressional leaders agreed on a plan to prevent a default, curbing demand for the metal as a protection of wealth. Obama announced that leaders of both parties in the U.S. House and Senate had approved an agreement to raise the nation’s debt ceiling by $2.1 trillion and cut the federal deficit by as much as $2.5 trillion over a decade.

Despite the temporary pullback in Gold and Silver, the debt deal is actually bullish for precious metals. The debt deal allows the government to continue its massive spending and debt cycle, which will cause investors to seek out protection from the U.S. Dollar. Furthermore, someone has to purchase government bonds, and the Federal Reserve is the most likely candidate. The past two quantitative easing programs from the Fed paved the way for all time record gold prices, just imagine where QE 3 will put gold at in the near future.

2) European debt Issues

Meanwhile, investors remain wary of debt levels in periphery European nations, with 10-year yields on Spanish and Italian bonds rising again. Political leaders in both countries cancelled holidays and called emergency talks to address the crisis that reignited fears of new and bigger euro area bailouts for the first time since European leaders reached agreement to contain the crisis on July 21.

3) Continuation of Central Bank Buying

News that the Bank of Korea bought 25 metric tons over the past two months, its first purchases since the 1997-98 Asian financial crisis. South Korea is the world’s seventh-biggest foreign-exchange reserve holder.

Sixty-four percent of its reserves are in dollars. So in essence, they are diversifying their reserves.

Further, this only adds to expectations that China will keep adding gold to its massive foreign reserves. It has the second-biggest economy on the planet, and China is only the sixth-largest holder of reserves with 1,054.1 tons. That’s only 1.6% of their currency reserves. If they start loading the barrels…and start to diversify like South Korea has done, you could see Gold continue to spring forward.

3) Recent Weak US Economic Data

The latest weak data from the United States, following a batch of dour manufacturing surveys on Monday, added to fears over a deteriorating global economy. U.S. consumer spending dropped in June for the first time in nearly two years and incomes barely rose. Weak economic data means low interest rates are likely for a longer period of time. This supports gold several ways. It pressures the dollar, adds to worries about longer-term inflation and means a lower so-called “opportunity cost” of holding gold, or income that would be lost by holding gold if investors instead could get higher yields in fixed-income assets.

4) Possible Downgrades in US

A bill that has now passed both chambers of Congress has added to worries about a downgrade of U.S. debt, which is supportive for gold. Though the Senate has passed the bill to raise the US debt ceiling by $2.4 trillion, it might allow the Treasury to keep paying bills till 2012; it is projected to trim the budget deficits by only $2.1 trillion over the next decade. This is far below the roughly $4 trillion that Standard & Poor’s has said was necessary to avoid a downgrade.

Last month S&P warned that the US faced a 50-50 chance of having their credit rating cut within the next three months. Shortly after the agency put the US on a negative watch, the value of the dollar fell. Despite the debt deal made overnight which will include large spending cuts over the next ten years, the rating is still under review.

5) Investment and Speculative Demand

Assets in exchange traded funds that follow gold prices are at an all-time high as more investors tap the liquid vehicles to get exposure to the precious metal. Holdings in exchange traded products backed by gold climbed a record $113 billion on July 29, according to data from Bloomberg. The roughly $66 billion SPDR Gold Shares is the largest ETF in the category. Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, jumped six percent to 1280 tonnes in July highest since end of last year. Holdings are only 40 tonnes less than previous high of 1320 tonnes in June 2010.

Moreover, most recent data from the Commodity Futures Trading Commission shows that as of July 26, the large non-commercial accounts—essentially the funds— were net long by 269,489 lots for futures and options combined, the most since last October.

Technicals

There is a strong upward channel trend from last three years in gold. Even though critics of gold will quickly call an end to gold’s run on a decline, investors should keep the big picture in mind. Gold continues to receive buying support as it nears the bottom of this channel. Even if gold declines to $1550, the longer-term technical trend looks strong.

(The author is Manager - Research Edelweiss Comtrade Ltd.)

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S&P Downgrades Greece To CC From CCC, Expects Recovery Of 30-50% By Principal Bondholders

Long-Term Sovereign Rating On Greece Cut To 'CC' On Likely Default; Outlook Negative

Overview

Following review of the July 21 statement by the European Council (EC), Standard & Poor's has concluded that the proposed restructuring, in the form of an exchange into discount or par bonds or a rollover into 30-year par bonds, of Greek government debt would amount to a selective default under our rating criteria.

In anticipation of the debt exchange, we have lowered the long-term rating on Greece to 'CC' and we have affirmed the 'C' short-term rating.

The outlook on the ratings is negative.

We view the proposed restructuring as one that would amount to a "distressed exchange" under our criteria because, based on public statements by European policymakers, the debt exchange or rollover is likely to result in losses for commercial creditors, and the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default. Under our criteria, we characterize a distressed borrower as one that would--in the absence of debt relief--fail to pay its debt on time and in full.

While no exact date has been announced to initiate Greece's debt restructuring, we understand that it will commence in September 2011 at the earliest.

Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders.

Rating Action

On July 27, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the Hellenic Republic to 'CC' from 'CCC'. At the same time we affirmed the short-term rating at 'C'. The outlook is negative. Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders, including on those bonds subject to a 20% reduction in net present value (NPV) as estimated under the Institute for International Finance (IIF) proposal.

Rationale

Following review of the European Council's (EC's) July 21 statement, Standard & Poor's has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology. We view the proposed restructuring as a "distressed exchange" because, based on public statements by European policymakers, it is likely to result in losses for commercial creditors. Moreover, the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default and to give the Greek government more time to undertake fiscal consolidation and policy reforms.
Under our criteria, we characterize a distressed borrower as one that would--in the absence of debt relief--fail to pay its debt on time and in full.

The restructuring proposal put forward by the IIF gives investors the option of exchanging either into discount or par bonds, or rolling over into 30-year par bonds.

In the debt exchange option, we understand that new, discount bonds would be offered in exchange for existing bonds at 80% of  par and would pay investors effective interest rates of 7.17% and 7.69% on the 15-year and 30-year maturities, respectively.

Alternatively, investors could swap into 30-year bonds at par, which would pay an effective interest rate of 4.6%.

At the same time, the IIF is proposing a €40 billion debt buyback fund that would aim to repurchase Greek secondary market debt at an average discount of just under 40% of face value.

In our opinion, the terms of both the exchange and rollover options appear unfavorable to investors. The new debt instruments' maturity would extend well beyond the maturity of bonds tendered in the proposed exchange and rollover options, and beyond what Greece could currently issue in the market. We assess the interest rate levels paid on the new bonds as significantly below rates available to buyers in the secondary market. As a consequence, we assess the restructuring as distressed, and we view the terms of the restructuring as offering less value than the promise of the original securities. Under our criteria, this leads us to conclude that the restructuring amounts to a selective default.

The purchase of Greek sovereign bonds in the secondary market one at a time would not be viewed by Standard & Poor's as a selective default, as we would view these as transactions entered into voluntarily by both the buyer and the seller. Nevertheless, purchases of debt securities at large discounts to par are an indication of weakened issuer creditworthiness. Moreover, under Standard & Poor's methodology, coordinated bond buybacks at fixed prices could be considered selective defaults. For these reasons, we are downgrading Greece's long-term foreign currency rating to 'CC.'

Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders after taking into account the 20% reduction in NPV likely to occur under the first round of restructuring, as estimated under the IIF proposal. Our recovery rating base-case default scenario for Greece continues to incorporate a second debt restructuring, including considerably higher principal "haircuts" on top of those proposed under the IIF exchange. Under the IIF's accompanying exchange
proposal, some of the securities into which investors can swap will be collateralized with 'AAA' rated, zero-coupon bonds. In that case, we will assess if the recovery of principal on 'AAA' collateralized instruments could be significantly higher than that of senior unsecured Greek government bonds, which could then lead to higher issue ratings for the collateralized instruments. Nevertheless, our experience with similar arrangements, such as that for Brady bonds, suggests that the new securities may not be immune to
future restructuring and losses, and that recovery may not necessarily be higher than for that of unsecured securities.

Our country transfer and convertibility (T&C) assessment for Greece, as for all eurozone members, is 'AAA'. A T&C assessment reflects Standard & Poor's view of the likelihood of a sovereign restricting nonsovereign access to foreign exchange needed to satisfy the nonsovereign's debt service obligations. Our T&C assessment for Greece reflects our view that the likelihood of the ECB restricting nonsovereign access to foreign currency needed for debt servicing is extremely low. This reflects the full and open access to foreign currency that holders of euros enjoy, and which we expect to remain the case in the future.

Should Greece exit the eurozone (which is not our base-case assumption) and introduce a new local currency, the T&C assessment would be reset to reflect our view of the likelihood of the Greek sovereign and its central bank restricting nonsovereign access to foreign exchange needed for debt service.

Contrary to the current case, the euro would in this scenario be a foreign currency, and the Bank of Greece would no longer be part of the European System of Central Banks. Under our criteria, the T&C assessment can be at most three notches above the sovereign foreign currency rating. In most reasonable scenarios, Greek-domiciled holders of euros would likely continue to face no
restrictions in converting euros to dollars, Swiss francs, or other foreign currencies, the issue addressed by the current T&C assessment.

Outlook

The outlook is negative. While no exact date has been announced to initiate Greece's debt restructuring, we understand that it will commence in September 2011 at the earliest. Upon the announcement of the implementation of the restructuring, a downgrade to 'SD' (selective default) would likely occur. Should the exchange/rollover be initiated, Standard & Poor's would expect to revise the rating on the specific obligation to 'D' (default) even if only a portion of the rated bonds is subject to the exchange offer. We would also likely revise the sovereign credit rating (the issuer credit rating) to 'SD'.

On conclusion of the exchange and/or bond buybacks, we would likely raise the sovereign credit rating on Greece to a level commensurate with our forward-looking opinion on the likelihood of future defaults given Greece's adjusted debt profile. If the exchange involves multiple separate transactions over several weeks or months, we would assign our 'SD' sovereign credit rating
to Greece on completion of the first repurchase. Subsequently, all other things being equal, we would likely raise our sovereign credit rating as early as a few days after completion of the first repurchase.

In our opinion, the likelihood of a future default on the new securities is likely to remain high. We anticipate that we would assign a
low-speculative-grade rating to Greece, given our view that Greece will likely continue to be burdened by high debt to GDP of just under 130% of GDP at end-2011 and uncertain growth prospects even after the debt restructuring is concluded.

Conversely, if the terms of the transactions do not result in a default under our criteria, and the Greek government complies with the revised EU/IMF program, our ratings on Greece could stabilize at the current 'CC' levels, even taking into account the risk of a debt restructuring in the form of a principal haircut by 2013.

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