Saturday, September 27, 2008
At the time of writing this, world markets were still unsure whether the US government's US$700bn bailout plan will get cleared by the Congress. President Bush, however appeared confident of seeing the rescue plan through despite growing apprehensions, which sent global markets into a tizzy on Friday. The unease over Bush government's bailout package may vanish if the US Congress approves the plan to cleanse the American financial system. Monday's movement in the market will hinge a great deal on what transpires on Capitol Hill. If the deal is passed in some form or the other, global markets are sure to rally. On the flip side, any further delay will dent investors' confidence further, leading to more selling.
Market players will also keep an eye on what happens to the Indo-US nuclear deal. Any bad news on this front could add to the weak undertone. On the whole, the outcome of these two events will drive the market on Monday. From thereon, the trend would depend on fresh newsflow from the US as well as local markets. The forthcoming quarterly results will be another key development. SEBI's Board is to meet on Oct. 6 to take a comprehensive review of the investment regime for FIIs. This will also have a bearing on the market. Given the uncertain environment, one should remain on the sidelines and let the dust settle before taking any call on the market. Aggressive investments should be avoided, as the market is highly volatile.
The Board of Approval (BoA) on Special Economic Zones (SEZs) approved 27 proposals, with 17 getting the formal clearance and 10 others receiving in-principle green signal. The formally approved 17 SEZs, included an SEZ by Bharat Forge near Pune which would spread across 1,271 hectares and see investments of over Rs50bn. Another significant SEZ that was formally approved was a 1,804 hectares SEZ by Jindal's JSW Bengal Steel in Midnapur in West Bengal. This SEZ would see an investment of Rs153.21bn. Other 10 SEZs also received in-principle approvals from the Board of Approval. These include a heavy engineering SEZ of 467 hectares to be built by L&T Ship Building in Tamil Nadu. The project would see an investment of Rs16.65bn. One of the largest projects among these plans would involve an investment of Rs113.4bn. The multi-product EMPI Vittal Centre has got in-principle nod and will come up on an area of 1,100 hectares in Gujarat. The SEZ is being promoted by former Central Vigilance Commissioner N Vittal.
Ok, first let's talk about what really went wrong in an easy to understand layman's language
Financial Markets is all about confidence in the System and an underlying assumption that system will not fail. But, after the bankruptcy of Lehman Brothers in USA and Northern Rock in UK and the bailout of Fannie, Freddie and AIG investors world over have lost confidence and faith in the system. Infact some people have even started doubting if any system exists at all.
Their doubts are not unfounded as the tricky web of Credit Default Swaps (CDS) and Collateralized Debt Obligations (CDO), which are traded privately and no one, yes no one including SEC, FED or US Treasury regulate them.
And this is where the problem lies. It is an unregulated trillion dollar market which has no system in place to track follow and regulate the flow of deals and transactions. It all started with the boom in USA real estate market a decade back. The cheap credit fueled the real estate rally for almost a decade. The innovative Investment Bankers at Wall Street wanted a pie of the action and devised some new innovative instruments like mortgage backed securities and insured them with Credit Default Swaps.
HCL Technologies announced on Friday that it was making a counter bid to acquire UK-based IT firm Axon Group. Under the terms of the offer, Axon shareholders would receive 650 pence in cash for each share, inclusive of the Interim Dividend. The offer price values the entire issued and to be issued share capital of Axon at approximately £441.1mn. The Infosys bid valued Axon at around £407mn. It may be recalled that earlier, HCL Tech had denied media reports of it making a counter offer for Axon.
The offer price represents a premium of 42.6% to the average closing price of 455.7 pence per Axon share for the three months ended August 22, being the last business day prior to the announcement of the offer by Infosys for Axon; 29.4% to the closing price of 502.5 pence per Axon share on August 22, being the last business day prior to the announcement of the offer by Infosys for Axon; and 8.3% to the Infosys offer of 600 pence per Axon share, inclusive of the Interim Dividend.
After last week's startling events on Wall Street that sent shockwaves across the global markets, many would have thought the problems facing the US financial sector were over. However, that was not to be, as more tremors struck the world's premier financial market this week that added to the global gloom. What's worse, at the end of another tough week, there was no clarity on whether the US government will be able to arrest the slide. An unprecedented bailout package proposed by White House to pull the rotten financial sector out of the abyss was stuck in the crosshair of political gamesmanship. The failure of the Bush regime to convince the lawmakers on both sides about the massive rescue plan sent global markets into a tailspin on the last day of the week. The fire sale of Washington Mutual to JP Morgan also had an adverse effect on market sentiment. Shares of North Carolina's Wachovia Corp. nearly 30% in early trading on Friday following the failure of Washington Mutual.
The Federal Reserve gave America’s last two big investment banks, Goldman Sachs and Morgan Stanley, permission to change their status to bank holding firms. They will be subject to stiffer regulation, but allowed to take deposits. Goldman Sachs raised US $5bn to shore up its capital by selling shares to Berkshire Hathaway, the firm run by Warren Buffett, a celebrated investor. The next day, it raised US $5bn more from a share offering. Mitsubishi-UFJ, Japan’s largest bank, agreed to buy up to 20% of Morgan Stanley for US $8.4bn. The Federal Bureau of Investigation said it was looking into 26 cases of potential fraud related to the collapse of America’s mortgage industry. The financial institutions under investigation are said to include the now-defunct Lehman Brothers, as well as AIG, Fannie Mae and Freddie Mac. In a bid to attract more investment to America’s struggling financial sector, the Fed relaxed rules on bank ownership. Private-equity firms will now be allowed to own bigger stakes.