Where is the Oil top?

Though nothing to conclude, but an interesting pattern to see-

Look at the chart below, it simply shows the relationship of the current oil bubble to the last 2 big bubbles - tech stocks and then the housing market. Now the rise in oil eclipsed the mammoth rise in tech stocks in the late 90s. Interesting - where is the top?

Cheap Chines Goods - End of an Era?

Why American consumers are about to start paying more for clothes, electronics, toys, and just about everything else.

For years, China fed the consumption hunger of Americans through its cheap exoprts. But it seems that $2 t-shirts era will soon end as china is witnessing an increase in cost of production across industries. Deceds ago when large Chinese population wanted jobs desperately, bulk manufacturing for cheap wages looked viable. As a result, labor & environmental laws were violated, people worked for 7 days a week, working environments were just pathetic & there were no respect for intellectual property rights. But economic evolution cycle goes on, wages increased. Also the effect of 1970's one-child-law led to a dwindling demographics in China. Those born then, now-workforce, demand better labor laws, medical insurance & a good working environment. These rising middle class in India & China will ensure that the cost of raw materials continue to increase throughout the world. Inflation grows more rapidly & chinese remibi appreciates against US. All this indicates one thing - era of cheap Chinese goods is coming to an end!

Now US is looking for alternatives - Vietnam, India, Indonesia, Mexico, or Malaysia?

Vietnam - American importers are now looking at Vietnam, for its lower wages. But Vietnam, how hard it tries, has only 85 million people—the size of one Chinese province. Moreover, prices are rising faster in Vietnam than anywhere else in Asia. Also the rising incidence of strikes and labor disputes, and Vietnam looks increasingly like a short-term alternative.

India - India has not yet managed to get its act together to take advantage of China's rising export prices. Importers say India is good at certain things—embroidery, for instance—but not at the volume production. India's road and port infrastructure, while improving, is nowhere near as efficient as China's.

So US importers are looking back to countries they once rejected in favor of China— Indonesia, Mexico, and Malaysia. But none can offers the one-stop shop appeal as China can, where factories make everything under the sun. For the time being, US consumers will still be buying a lot of "Made in China" products—and paying ever more for them - until......!

Mezzanine Debt - Balancing your Capital Structure

Capital Structures - While there are no hard and fast rules for optimizing a company’s capital structure, companies that areahead of the curve use an efficient combination of senior debt, mezzanine debt, and equity capital to minimize their true cost of capital.

Mezzanine debt capital generally refers to that layer of financing between a company's senior debt and equity - filling the gap between the two. It is subordinate in priority of payment to seniordebt, but senior in rank to equity. Thus using mezz capital has positive side: the owners face little dilution and maintain their control of the business; the companies total cost of capital is reduced; and the mezzanine debt has a flexible payment term that is structured as “self liquidating” and is paid off over time. On the negative side, this is a debt structure that requires interest payments over time.

India vs. other Asian Economies

There are few significant differences between Indian Economy and other major Asian economies, lets analyze few:

a). Current account deficit - India has a current account deficit. As oil and fertilizer prices go up, the deficit increases further. Other Asian economies (like China, Japan, Korea, Taiwan, Singapore, Vietnam etc) have a massive current account surplus which they can use to finance growth, India relies on capital flows - FDI and FII. During 1990s, the East Asian crisis emerged as those countries financed their growth through capital flows, not from any forex reserves (as they did not have much in their kitty then), they were devastrated as world pulled back their money out of Asia. India survived then and is not that worse even today - forex reserves are high and FDI flow remains strong. But still, its a concern.

Benefit of having current account surplus is that forex can be used to contain domestic inflation. So China can led yuan appreciate to control inflation because there is a massive current account surplus, India can't.

b). Fiscal deficit - With increasing wages of govt employees (6th pay commission) and subsidies on oil and fertilizer, the fiscal position of India can become very bad soon. If this continues longer, govt will need to cut down on its spending. Whether that will be subsidies or investments is anybody's guess. Most likely, it will be a mix of both.

Surviving a possible recission is important for an economy. But any recession requires multiple shocks. In 2001, there was tech meltdown, Corporate bankruptcies like Enron-Worldcom, junk bond blowup and Sept 11. This time, we had subprime blowup and the credit crunch. This time may be we are on the verge of an oil shock. Only time will tell how these mighty economies steer away from testing times.

China - High A-Share/H-Share Premiums

For those unfamiliar with China's markets, Chinese companies may have Shanghai listed trading as well as Hong Kong listed trading. A-shares are listed on Shanghai exchanges and are largely available only to domestic investors. H-shares are listed on the Hong Kong Stock Exchange; they are available mainly to non-chinese investors (like QDII, International investors). But in both case, the origion of business should be in mainland China.

There is a huge price difference at which a mainland company trade in both the exchanges, and intrestingly there is no channel to arbitrage. A-shares trade at a huge premium over H-share counterparts (or even what is being quoted in London exchanges). This is due to huge imbalance between supply and demand of high quality stocks in China. High ristrictions/regulations combined with high demand from newfound investible wealth, is pushing premiums up. More possible reason for the price difference is summarized in below graph:

To track this, there is an index called Hang Seng China AH Premium Index" which measures the the spread between the A-shares and H-shares of dual-listed companies domiciled in mainland China. This means that A-shares as a group are currently trading at a premium of about 80% over the H-shares and that at one point they were trading at a premium of more than 100% !!

The spread is going up constantly, some reasons could be that China is a closed market wheres Hong Kong is a fiercly open economy, thus it reacts more sharply to international economic developments. A recent credit crisis left many markets crashing, impacting HK markets as well. Also HK currency being pegged to US dollars, it took a greater hit from investors!

There is something about Germany !!

Germany just increased their labor wages, a weird decision at current economic situation! Once inflation works its way into wage growth, wages propel inflation further upward. So European Union is worried about Germany. And this is not not the only reason, as ECB battles against inflation that results in a strong Euro, this is actually threatning the long term viability of Euro. If any major EU country (such as France) plans to drop Euro (they can do it anytime under the initial Euro treaties), value of Euro will nose-dive in global financial markets. For that matter, Germany - the strongest EU economy, is equally unhappy about having to ‘carry' the Euro and the weaker economies!!

High Inflation - Don't blame U.S. alone!!

World is already bleeding under inflation, if Central banks cut interest rates more (to protect ecenomy drowing under recession), this will push inflation further up. That’s making the global response to inflation more complicated. European Central Banks are convinced of not decreasing rates further as they believe high inflation is a bigger threat than what credit crisis was!

World Bank estimated that global food prices have risen 83% over the past three years. The IMF forecast consumer prices in developing countries will rise 7.4% this year, and 2.6% in rich countries, the highest inflation rate since 1995. The 15 countries that share the euro currently see inflation of 3.5%, a decade high.

Some of the factors driving inflation vary from country to country: union-negotiated wage hikes in Germany, pork shortages in China, an electricity squeeze in South Africa, pay rises for civil servants in India. But the fact that inflation is rising almost everywhere suggests some of its causes are global. As crops are sold for alternative-energy production, food prices have soared: The price of rice is up 147% over the past year. Increasing demand for natural resources from India and China has pushed up prices for raw materials world-wide. Sky rocketing crude oil prices has increased fuel and transportation prices.

The weakening U.S. dollar is another source. Not only is it pushing up prices of American imports, it is transmitting inflation to economies that link their currencies to the U.S. dollar, from Saudi Arabia to Hong Kong. Because of their currency pegs, these economies are forced to track Fed rate cuts even if they aren’t facing recession. If they don’t, investors seeking higher returns would move money to these countries, placing upward pressure on their currencies. Hong Kong has mirrored the Fed’s recent rate cuts, igniting the local property market, that went up 31% from a year earlier in January, thus feeding inflation.

Economists believe that slowing growth in the U.S. and Europe will ease inflationary pressures globally. Also, current commodity prices are higher than what underlying demand can justify, and predict they could fall sharply. And, at some point, the Fed will stop cutting U.S. rates, helping arrest the decline in the dollar and the inflationary side-effects.