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Saturday, June 4, 2011

Everything that you should know about GDP

Every investor is bullish on two Asian countries China and India and the reason which  they cite is the GDP growth rate.
Let us know what GDP is and why GDP growth rate is so important.
GDP stands for Gross Domestic Product and is used as the macroeconomic indicator of country’s produced goods and services.
In simple words, GDP is the total value of all goods and services produced domestically in a country.
Formula for GDP is -
GDP= C+ I+ G+ Export-Import
Where C is Non-Government Consumption i.e. spending by consumers on goods and services also referred as Private Consumption or Private Expenditure.
‘I’ is the investment done by the industry which is generally capital expenditure like plants and machinery etc.
G stands for Government Spending or Public Sector Spending.
How GDP is measured?
(1)GDP considers Total Market Value- GDP adds up the dollar value (or local currency of a nation) of all goods and services produced in USA (or other concerned country), which gives the total market value of all the goods and services produced in terms of dollar.
(2) GDP considers only Final Goods and Services- In case of manufactured goods market value of final product is considered only and not of intermediary products used. So aluminium, rubber, plastic etc used in making a jet shall not be counted in GDP  as final price of the jet is inclusive of all these stuffs.
(3)GDP considers National Geographical Border-whether a medical check-up fee or final cost of a jet produced; everything is counted provided it takes place in the geographical boundaries of USA. Revenue earned by US subsidiary of an Indian IT company is also counted as it falls in USA territory despite parent company being Indian, but revenue earned by Microsoft in Germany shall not be counted.
Nominal GDP vs. Real GDP
Nominal GDP being Unadjusted for Inflation is also referred as Unadjusted GDP. In USA, it is also called Current Dollar GDP as it is calculated on current value of the dollar.
In simple word Nominal GDP uses current prices to value current production.
Change in nominal GDP can be due to either change in production of goods and services or change in the prices of those goods and services.
So nominal GDP shall increase even if there is no rise in the production of 'goods and services', but due to increased price of those ‘goods and services’.
And this is the biggest drawback of the nominal GDP, it often misleads.
To tackle this shortcoming of nominal GDP, Real GDP is used.
Real GDP (adjusted for inflation) takes the valuation of goods and services of some base year and thus keeping same price, real GDP shows how production of goods and services has changed over years.
Health of the economy is measured by the growth of real GDP.

Let us understand all these arcane stuff with the help of a lucid illustration-
If in the year 2010, a country produces goods and services worth $ 1000 billion domestically then on the basis of prices of year 2010, both Nominal GDP and Real GDP shall be $ 1000 billion.
In the year 2011, that country produces goods and services worth $ 1200 billion on the basis of 2011 prices; this means Nominal GDP shall be $ 1200 billion.
If this GDP is calculated on the basis of prices of 2010 and if it comes out to be $ 1000 billion, this is nothing but real GDP as it is inflation adjusted figure (as change in price is not considered).
And thus real GDP figure tells us the reality that there is no increase in the production of goods and services and increment in Nominal GDP is due to inflation only.

Limitations of GDP
(1)   GDP growth does not ensure well being of common man. Because of few very rich people a nation can have higher per capita GDP, but that’s not the real picture.
(2)   GDP does not consider the parallel economy (wealth accumulated but not reported to the government).In a country like India, it is said that illicit money deposited by unscrupulous citizens  in foreign banks is as high as the Indian GDP, which is around $1.38 trillion.
(3)   GDP considers only that income which is reported to the government and in countries like India lot of big transaction settled in cash, never gets reported.

Friday, June 3, 2011

Quantitative Easing and Implications

Quantitative Easing is the monetary policy tool exercised by central banks in which central banks increase the money supply in the economy with a vision of boosting up of the economy.
Central banks buy government securities to release the money in the system. Central banks first credits its own account with money created ‘ex nihilo’ (out of nothing) and the same is used for purchasing government securities, corporate bonds and other similar products from financial institutions under Open Market Operations and this results in more capital with financial institutions to lend. This process results in the increased money supply in the economy and thus provides the stimulus to the economy.

Quantitative Easing may not be effective if financial institutions just garner the capital but don’t lend it fearing defaults. Quantitative Easing is used during zero or close to zero interest rate (bank rates, inter-bank rates, and discount or repo rates) situations.
Quantitative Easing is also colloquially known as Printing Money but no physical currency is printed and money is printed by making an electronic entry in the account only.
Japan had used the Quantitative Easing during early 2000s followed by USA and UK during the recession of 2008-09.
With the done away of gold standard and gold exchange standard, governments can print as much money as they wish provided legislative approval.
Quantitative Easing often brings inflation in the economy due to increased money supply chasing almost same goods and services.
If not controlled properly, Quantitative Easing could drive the economy to the Hyper Inflation Zone by diluting the value of the local currency.

Quantitative Easing comes heavily on senior citizens, it not only erodes the value of their saving but lower interest rates diminishes the return on their savings which being the only source of income for most of them.
In international perspective, Quantitative Easing devalues the currency of the nation resulting in downgrading of its credit ratings followed by lowering of foreign investments
Zimbabwe is the extreme example where Quantitative Easing resulted in nearly worthless currency and citizens had to take piles of money to buy even grocery.

Thursday, June 2, 2011

VMS Industries Limited IPO Subscription as on 2/6/11

VMS Industries IPO Subscription

Overall issue subscribed 1.36 times

QIB (Qualified Institutional Investors): 0 Subscription
NII (Non Institutional Investors): Subscribed 1.11 times
RII (Retail Institutional Investors ): Subscribed 3.41 times

Timbor Home Limited IPO Subscription Deatails as on 2/611

Timbor Home Limited IPO Subscription

Overall Issue subscribed 5.78 times.

QIB (Qualified Institutional Investors ): 65%  Subscription
NII (Non Institutional Investors): Subscribed 3.22 times
RII (Retail Institutional Investors): Subscribed 14.22 times 

Wednesday, June 1, 2011

US Debt and Dollar Devaluation- a catch 22 situation

 On Tuesday, US house rejected a bill to increase the federal borrowing limit by $ 2.4 trillion.Republican made it clear they shall not allow increasing the debt limit without substantial government spending cuts and budgetary reforms.
Prima-facie republican stance seems justified.US debt is almost becoming equal to its GDP (almost 97% of GDP) and might even surpass it in time to come.
Government borrowing leads to higher demand for money which results in higher interest rates and reduced availability of loans to businesses better called clouding out.
So far USA has never failed to repay debt in the past. During the great depression president Roosevelt had devalued dollar by 41% against gold which helped out US banks from vicious cycle of failures.
Presently Japan is having debts more than 200% of its GDP but this debt is owned by mainly by Japanese and they are not willing to sell it. But this resulted in tattered credit rating of Japan.China and Japan being  major debt owners, US government is not that fortunate.
On the other hand China shall not easily let US devalue its dollar fearing erosion in chinese foreign reserves, and its catch 22 situation for USA.
Earlier World War II drove US debt to dreaded 109 % of the GDP which was brought down significantly by post war economic development.But it seems very difficult for USA to repeat the history amidst burgeoning clout of Asian countries like China and India.

Monday, May 30, 2011

VMS Industry Limited IPO- No Reason to Invest

VMS Industries Limited

Issue Highlights
Face Value: ì 10
Lot Size: 160 Shares
Issue Type: 100 % Book Building
Allocation Details
                QIB: 1,28,75,000 equity shares
                NII:  38,62,500 equity shares
                RII: 90,12,500 equity shares
Lower Price Band: ì  36
Upper Price Band:  ì 40
Issue Size:  ì  25.75 Crore
Issue Opens On: 30th May 2011
Issue Closes On: 2nd June 2011
Industry: Ship Breaking and Scrap Recycling
Maximum Retail Limit:  ì  1,98,400

NB: Debt-Equity ratio for FY11(till Q3) is around 2.5 and shows company has taken heavy debt in FY 11.
Download VMS Industry Limited IPO Analysis Report

Sunday, May 29, 2011

Timbor Home Limited IPO- High Risk N0 Gain

Timbor Home Limited (THL) IPO Analysis Report

Issue Highlights
Issue Opens On: 30th   May
Issue Closes On: 3rd June
Issue Size: 36, 90,000 equity shares
Issue Type: 100% book building

Allocation Details
     QIB: 18, 45,000 equity shares
     NII: 5, 53,500 equity shares
     Retail Bidders: 12, 91,500 equity shares

Upper Price Band: ì 63
Lower Price Band: ì 54
Face Value: ì 10
Lot Size: 100 Shares
Maximum Retail Limit: ì 1, 95,300
Industry: Modular Kitchen and Home Furniture

NB: ROCE in the report is 'Return on capital employed' and not 'Return on common equity'
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