Save to Win

The WSJ had an interesting story about a financial innovation known as “Save to Win“, last week. This is a program created by finance professor Peter Tufano of Harvard Business School, who has developed a cross between a savings program and a lottery.

Under the – Save to Win, program, participants can enter a lottery just by depositing money in their savings account.

This program is designed to attract people towards thrift and saving, and has already attracted $3.1 million in the 25 weeks that it has been running.

How does Save to Win work?

Save to Win is a special savings account offered at eight credit unions to Michigan residents. It is a conventional one year certificate of deposit, and on top of that, also gives you the chance of winning a monthly prize and an annual $100,000 jackpot.

It gives you interest also, but the interest rate ranges from 1 to 1.5%, which is slightly lower than what others offer.

Each month every credit union will give 8 small prizes to its eligible Save to Win members, and at the end of the year, there will be one lucky draw for a $100,000 prize. The credit unions will also give two extra prizes in the months of March, June, September and December.

To win the monthly prize, you need to make a deposit of at least $25 in a month. So, you are eligible to win the prize if your account balance at the end of the month is at least 25 dollars more than what it was at the beginning of the month.

One member can have up to 10 entries per month, with every $25 increase corresponding to one entry. That’s the cap on the number of entries per month that a single member can have.

Here are the monthly prizes in the Save to Win program:

  • 2 winning entries to get $100 cash prize
  • 3 winning entries to get $50 cash prize
  • 2 winning entries to get $25 cash prize
  • 1 winning entry to get $15 cash prize

For the months of March, June, September and December, there are two extra prizes:

  • 1 winning entry to get $400 cash prize
  • 1 winning entry to get $15 cash prize

Here is a link to all other rules of the Save to Win program.

Participating Credit Unions in the Save to Win program

Central Macomb Community Credit Union

Christian Financial Credit Union

Communicating Arts Credit Union

E&A Credit Union

ELGA Credit Union

Frankenmuth Credit Union

NU Union Credit Union

Option 1 Credit Union

Save to Win sounds like a very interesting and novel way of enticing people into saving. It looks like the goal of the program is to get people from stop wasting money on lottery and get them into saving for retirement or other such things.

If anyone has any experience with this program or any such similar program, please share, as it would make an interesting story.

Raj Oil Mills IPO

Raj IPO: Price Band

Raj Oil IPO has declared that it has a price band between Rs. 100 and Rs.120.

Raj Oil IPO Date

Raj Oil IPO will open on Monday July 20, 2009 and close on Thursday July 23, 2009.

Business of Raj Oil Mills

Raj Oil is in the edible oil business and is engaged in crushing and oil filtration with a capacity of 5,000 TPA and 30,000 TPA. The company was incorporated in 2002, but the business itself has been running since 1959, when it was a partnership. The private company simply bought out the private firm and got access to all its assets and operations.

These are some brands that the company markets its products under:

  • Cocoraj (Coconut Oil)
  • Cocoraj Cool (Ayurvedic Oil)
  • Guinea Groundnut Oil (Double Filtered Oil)
  • Guinea Lite Groundnut Oil (Refined Oil)
  • Guinea Lite Sunflower Oil (Refined Oil)
  • Guinea Lite Cottonseed Oil (Refined Oil)
  • Guinea Lite Soyabean Oil (Refined Oil)
  • Tilraj Til Oil
  • Mustraj Mustard Oil
  • Cocoraj Jasmine

The brands are present in Western India, which is where the company has its major presence. The company plans to raise funds from this IPO to considerably expand its capacity. It currently has a crushing / filtering / refining capacity of 35,000 tons per annum (tpa) and it plans to increase it to 226,500 TPA.

This enhanced capacity will enable Raj Oils to enter the North Indian market by setting up plant in Jaipur, Rajasthan. It will also help it in backward integration, as it plans to enter into crushing of groundnut, mustard, and sesame seeds. It is currently dependent on suppliers for this function.

Raj IPO Grading

ICRA has graded Raj IPO 2 out 5, which means that the IPO has below average fundamentals. The things that weighed down the ratings were small scale of operation and the history of civil and criminal cases against the company. The other factors that weigh down against the rating is that the company is concentrated in the western region of the country and the market in which Raj Oil operates is highly competitive and scaling up involves several challenges.

Financials of Raj Oil Mills

In FY 2008, Raj Oil had a revenue of Rs.32,123.12 lacs, up from Rs.23,992.11 lacs in the year before and Rs.12,021.36 lacs in FY 2006. The Profit after Tax for the last three years has been Rs. 2,961.88 lacs, 1,815.20 lacs and Rs.672.41 lacs.

The EPS for the financial year 2008 was Rs. 11.87 and it was Rs.10.47 the year before and Rs.7.86 the year before that. If you take the EPS for the last year, the P/E multiple ranges from 8.42 to 10.11 for the upper and lower range of the Raj IPO.

Raj Oil IPO: Risk Factors

Here are some key risks as mentioned in the prospectus:

The company faces three criminal cases and one civil case. The company is also involved in legal proceedings with respect to tax demands.

The company has defaulted in terms of loan granted by Barclays PLC. It had taken a loan from Barclays for Rs. 1000 lacs and had to create a charge on its immovable property within 180 days. It didn’t do it and Barclays has asked Raj Oil to repay the outstanding Rs. 4.5 crores in two installments.

The promoters formed the company Raj Oil Mills and then it acquired the partnership firm of the promoters for Rs. 75 lacs. There is no non compete agreement and the promoters may start a similar business and then compete with Raj Oil Mills.

Another venture by the promoters known as M/s. Raj Builders incurred a loss of Rs.459.41 lacs in FY 2009 and Rs. 442.21 lacs in FY 2008.

There has been a negative cash flow from operations for Raj Oil Mills for the year ended December 31st 2008 and as at January 31st 2009.

This is not a buy or sell recommendation on the Raj Oil Mills IPO. This is just a summary of information based on the prospectus it filed with SEBI.

Economy and your Finances Carnival – July 18 2009

Image by xAv

Welcome to this edition of the carnival, I hope you are having a good Sunday and enjoy the articles here. Thanks to all the bloggers who contributed.

Debt

Credit Shout presents Credit Card Hardship Programs posted at CreditShout.

Economics

Paul Kamp presents Jevon’s Paradox, and More Ado About Gas Taxes posted at Don’t Quit Your Day Job – Personal Finance, Economics and Investing, saying, “I wrote this economics article about Jevon’s paradox and its applications to current debate on limiting fossil fuel consumption. In a nutshell, increased fuel efficiency will also increase fuel usage, and only increased cost can limit utilization. ”

Toni Graybill presents tonig.net: Welcome to My World of Wealth posted at tonig.net Wealth, saying, “What is wealth? What is the key to happiness?”

Steven Chang presents Hyperinflation: Doomsday? – Money Blog – Money Making Tips & Money Management posted at Money Making Tips and Money Management.

Investments

Darwin presents High Yield Corporate Bond List – Yielding over 8% | Darwin’s Finance posted at Darwin’s Finance, saying, “This article highlights 15 high yield corporate bonds from quality companies paying over 8% for just staying in business.”

Silicon Valley Blogger presents Free Stock Charting Tool To Check Stocks, Chart Market Trends posted at The Digerati Life.

The Smarter Wallet presents Learn How To Invest: Develop An Investment Plan posted at The Smarter Wallet

ABC presents Different Types of Stock Market Indexes posted at ABCs of Investing, saying, “How different types of stock market indexes work.”

Personal Finance

Lazy Man and Money presents Wealth Creation: Is it a Myth? posted at Lazy Man and Money.

The Dough Roller presents freecreditreport.com versus annualcreditreport.com–Where to get your free credit report posted at The Dough Roller, saying, “Want your free credit report? Makes sure you go to the right website, or you could pay an arm and a leg.”

Patrick @ Cash Money Life presents Ally Bank Review posted at Cash Money Life, saying, “A comprehensive review of Ally Bank – formerly known as GMAC Financial. The high interest rates make Ally a great place to stash your cash while awaiting a better investment opportunity.”

Patrick @ Money Saving Deals presents Free Coldplay Live Album Download posted at Cash Money Life Deals, saying, “Get a free download of Coldplay’s new live album!”

Patrick @ Military Money presents Beware of Cash For Clunkers Scams posted at Military Finance Network, saying, “Tips on how to avoid Car Allowance Rebate System (CARS) or Cash for Clunkers Bill scams.”

Ryan Suenaga presents Who Benefits from Low Interest Rates? posted at Uncommon Cents.

Joshua presents Re-Using For The Family Budget posted at Family and Parenting, saying, “Recycling is not only good for the environment but also good for your family finances.”

ChristianPF presents The step-by-step process of building a house posted at Money in the Bible | Christian Personal Finance Blog, saying, “steps we have taken while building our house…”

Super Saver presents Has this Recession Changed our Children? posted at My Wealth Builder.

Matthew Paulson presents Consumers Confidence Shaken by Recalls posted at American Consumer News.

Savings Toolbox presents Handling Your Cash Without Technology posted at Savings Toolbox.

CreditCardAssist.com presents When Free Costs You Cash posted at Credit Card Assist.

Leave Debt Behind presents Is there Such a Thing as a Free Debt Consolidation Company posted at Leave Debt Behind.

Ben presents Credit Report Disputes posted at Money Smart Life.

Oliver Kennett presents Stocks and shares: What you need to get started posted at Star spray, saying, “In this economic climate people are looking for a good way to either protect their hard earned cash, or make that little pile of Benjamin’s blossom into a mountain range of equity.”

kathryn presents Banks Increase Overdraft Fees; How to Prevent Them posted at Out of Debt Christian, saying, “The New York Times is reporting that several banks have recently upped a host of fees. Everything from balance transfers to ATM withdrawals are costing customers more. Overdraft fees also continue to rise.”

Master Your Card presents My Top 8 Financial Resources Just Starting Out posted at Master Your Card, saying, “When I first sat down and realized that I needed to take my financial situation more seriously, I also realized I wasn’t going to be able to do it by myself. I really had no clue what I was doing or how to go about doing it. So, I looked into different resources as a guide to help me figure myself out. None of these are in any particular order, by the way.”

Chris McClelland presents Estate lessons we can all learn from Michael Jackson posted at Lucrative Investing.

Stocks

Puneet Kapoor presents THE BEST OF BOTH WORLDS : TATA INVESTMENT CORP posted at KuberKhana -Indian Stock Fundamental Analysis, saying, “A stock for the laidback, passive investor.”

Interesting Reads: July 18 2009

Here are some interesting articles I read this week:

Will CIT Go Bankrupt @ Baselinescenario

Stupid Answers for Stupid Questions @ Bad Money Advice

Alternative Investments @ The Dividend Guy

How to get a personal loan @ The Digerati Life

How to buy a used car @ Money Ning

Break bad habits when managing your finances @ The Smarter Wallet

Sejal Glass Limited – Fixed Deposit Scheme @ Think Plan Invest

Investment Advice: Ignore the noise @ Five Cent Nickel

College Student’s Guide to Credit Card @ Dough Roller

Carnivals

Money Hacks Carnival @ Money Beagle

Carnival of Twenty Something Finances @ Money Under 30

Guilty or not guilty?

You are a seasoned judge but have never seen such a case before. The cops found a beggar who was being mugged by other beggars because he had an extremely large amount of money with him.

They questioned him about it because they suspected that he had stolen it from someplace or has been selling drugs or doing something else like that.

He told them that he had been begging for 30 years and this is the money he has saved in that time. He said that he didn’t drink or smoke and has no family so there is nothing to spend on. He has been saving for the last 30 years and his income is especially good during holidays. He further informs them that he also has a bank account and has a lot of money in the bank too.

The police investigate and find that he has a lot of money in the bank and that he has been the customer of this bank for more than 30 years.

They see that the beggar makes regular deposits in his bank and has made small transactions for the last 30 years or so. The deposits have never been big enough to raise suspicion, but they do rise during holidays, when people are in a giving mood.

When the cops investigate and ask other beggars about the rich one, they tell them that the rich beggar drinks often and he is lying to them. In cross examination, he admits that he was lying about drinking, but hadn’t done anything illegal to get the money.

Will you charge him guilty or not guilty?

Your money

A few years ago, my mom’s friend — a middle aged widow came to us with a mutual fund certificate. She said that she had found it in her late husband’s papers and didn’t know what it was. I told her that the paper represented a decent amount of money and that this was a type of investment that fluctuates daily. There was no guarantee of returns or even that the capital is protected. In fact her mutual funds had already lost about 30%, but she could still sell them for a decent sum.

I told her that it is better for her not to be invested in something as volatile as this and she should instead cash it and put the money in a fixed deposit. That way at least her capital will be protected and the interest will be extra money that she can earn.

To me, stocks and mutual funds are risky assets and you should invest in them only if you understand that risk. You should also have a decent bit of money in secure assets before investing in stocks or mutual funds. That was my reasoning and I explained it to her.

Then it was her turn to talk.

This dear lady explained to me that she never dreamt that this little piece of paper was worth so much. She was pleasantly surprised to know that the money could even grow.

She said that for her the money never existed and if she let it be, it might grow into something more significant and then she could use it to pay off her son’s college fees or some other big expense like that.  The sum as it stood today was big, but not big enough to enable her to pay off any big ticket expenses. On the flip side, if the value were to decline, since the money never existed for her, she’d be happy with whatever she got.

That made perfect sense to me and I wished her luck. Her hopes of what she could do with the money if it grew far exceeded her desperation with what would happen if she lost it. So, the risk was well worth it for her.

I was tempted to talk her out of it but it’s her money and if she knows what the pros and cons are, it is her decision after that.

After that particular experience I have always been careful to stay away from specific advice about buying or selling something. If someone asks about something, I try to explain the features of a product or some key aspects of a company (to the best of my knowledge), but I rarely ever say anything about what you should do with your money. It is your money and I have no idea what you should do with it.

It’s your money, your dreams and your decision.

Loss Leader

A loss leader is a product that a company sells at a loss to stimulate or promote the sales of another product.

So, if you are a retailer, you may offer a shirt at an extremely low price (below cost) just to attract customers to your store, and then sell them other more profitable stuff like shoes and handbags. In this case your shirt is your loss leader.

A low price and a loss-making price are two different things. For example, selling your own store brands is a price strategy that makes you money on the product itself. But, a loss leader strategy is when you sell a product for a loss (not a low price alone).

I was reminded of this concept today when Felix Salmon wrote that Reuters can offer its “Commentaries” for free because it helps them boost the sales of their terminals, which is their bread and butter (this is his conjecture and not Reuter’s official strategy). I always thought that they must be covering their cost by advertising, and so it was quite interesting to note that there is another angle to it as well. So for Reuters, its Commentaries are a loss leader.

This strategy seems to be more prevalent in the online world because you see a lot of stuff that’s free. But, then again, not every company that provides free online content is following a loss leader strategy. Some of them make their living through advertising and hope that advertising covers all their costs.

For example, New York Times provides all its online content free, but it’s not promoting anything by way of free content. It is trying to make its earnings through advertising. Their online content is not a loss leader for them.

On the other hand the Indian newspaper Business Standard also provides free online news, but its atrocious online format doesn’t allow you to link to it or read it easily. Looking at it, I can’t imagine anyone wanting to advertise especially on the online version or pay more for the ads because of the online version. To me, this seems more a strategy of influencing online readers to subscribe to the offline version and resembles a loss leader strategy.

Then there is the case of blogs of companies and consultants who are promoting their services. I am regularly amazed by high quality blogs by graphic designers and other such consultants, in which they feature quite a few useful – do it yourself tutorials. I have even seen many useful videos by car mechanics that teach you to change your car oil, remove dents etc.

If a car mechanic makes a video teaching you how to change your car oil, isn’t he taking away his own business? If I see that video and decide that it is easy enough for me to change my car’s oil, then that is one less customer for the auto shop.

But, at the same time I also get a feeling that if this guy is telling me all this stuff for free, imagine how much more he knows. It creates a brand for that fellow and if I need something more complex done with my car, I am much more likely to go to that guy. This is a clear example of a loss leader strategy.

Then there is the weird case of Microsoft trying to make a Search Engine and Google trying to make an Operating System. Both are likely to lose money on stuff other than their core products for years and yet they make so much money from their core products that it doesn’t matter. To them, it’s more a question of keeping the other on its toes than make any real money out of these other products. They are losing money for sure, they may remotely be promoting their own products and services, but I am not so sure this is really a loss leader strategy.

Loss leaders are great for customers because they are getting something which is worth much more than what they pay for (in some cases even free). I will certainly never spend any money on a Reuters Terminal, and so I am certainly glad that I don’t have to pay anything to read Salmon’s blogs.

Can you think of any loss leaders that you use?

Photo Credit: Amber Rhea

MacroShares Major Metro Housing Up and Down Shares (UMM) and (DMM)

Macroshares has come up with a 3X leveraged ETP, for the housing market, which is similar to the one it had for Oil (UOY) (the one that terminated early).

It is meant to give you a way to invest in housing, but it will not go out and buy any real estate, nor will it buy stocks of companies that invest in or are related to real estate, and it won’t even get into any future contracts.

So how will Macroshares Metro ETP let you own housing?

Well, this is not the usual daily leveraged ETF or inverse ETF, and works differently from most ETFs, and is an ETP not an ETF either.

Here is how it works.

Macroshares has issued a pair of funds – one Up and one Down. Both will track an underlying reference index and if one is up, the other will be down and vice – versa.

At the end of a given period, if the reference index rose, then assets worth 3 times the movement will be transferred from the Down index (DMM) to the Up index (UMM). The ETP will only hold Treasuries and Repos on Treasuries as assets. To me this is like taking money from one pocket and putting it into another, while charging a fee for it.

Here is a graphical representation taken from the prospectus:

up-shares-umm-transaction

This is a complex financial product and I really can’t think of any use for this type of security for most investors. So, here are some aspects about Macroshares Metro, which will help you decide, if this is meant for you or not.

You can lose all your money

The good news is that you can’t lose more money than you have invested in this ETP; the bad news is that you can lose all of it.

If the S&P / Case Shiller Composite – 10 Home Price Index falls below 108.11, you will lose all your investment in the Macroshares Housing Up Shares. If the index rises above 216.23, you will lose all your money in the Macroshares Housing Down Shares.

Your upside is capped in UMM and DMM

Since, both the Up and Down shares are issued in pairs, one’s profit is another’s loss, this also means that your gains are capped.

So, keep in mind that when you are buying Macroshares Major Housing Up or Down Shares — you are buying something that can go down to zero, but has a cap on how much it can rise.

Reference Index of UMM and DMM

The reference Index of the MacroShares Major Metro Housing Up and Down ETPs is the S&P / Case Shiller Composite – 10 Home Price Index. The S&P/Case-Shiller Home Price Indices only measure changes in the market values of pre-existing single-family detached houses, though both homes that serve as primary residences and homes that are considered vacation or investment properties are included in the calculation of the indices.

Even though there is a reference index, the price of the Up and Down ETPs will be determined by the demand and supply in the market and there will be no arbitrage or other pressure

Macroshares Major Metro Housing does not move in pairs

Even though UMM and DMM are designed to be pairs and move in tandem with each other, in reality they don’t move exactly like that. Each trust will make quarterly payments to the other according to the way the Case Shiller index behaved.

As far as assets are concerned, the revenue generating assets are just the US Treasuries that will accrue interest to the Macroshares Housing ETP.

There are several other factors that affect the market prices other than the reference index and this same phenomenon was seen in the MacroShares Oil Down and Up Tradeable Shares also. Their value differed from the underlying value of the shares and those got terminated early.

The ETPs have a termination date of Nov 2014, and it is only then that the value of the funds will be reconciled with the value of the underlying asset. Before then the price will move like stock prices do on investor expectation.

UMM and DMM are not the same as buying or selling a house

This is not the same as buying a house or hedging against a house because of several reasons. One is that it has 3X leverage so the gains and losses are magnified.

Two, this really can go to zero, while your house will rarely ever go to zero. The upside is capped in DMM or UMM, while the upside is not capped in a house.

Factors other than the reference index will impact the price of your Macroshares Up or Down unit.

The annual fee and operating expense that Macroshares charge might eat up the assets of the fund itself.

Termination Date of UMM and DMM

MacroShares has set November, 25 2014 as the termination date for the UMM ETP. So, if the fund lasts that long, it will get terminated on that day and unit holders will be paid according to the index value. There are several reasons because of which UMM or DMM may terminate before 2014, and the most prominent among them is the underlying index going above or below a certain value.

For three (3) consecutive monthly index publication days, the S&P/Case-Shiller Composite-10 Home Price Index level is equal to or below 108.11 or equal to or above 216.23. At and above an index level of 216.23, the Up Trust would be entitled to 100.00% of the Down Trust’s assets under the settlement contracts and at and below an index level of 108.11, the Down Trust would be entitled to 100% of the Up Trust’s assets under the settlement contracts.

Expense Ratio of MacroShares Housing Up and Down Shares

The ETP charges a rather high expense ratio of 1.25% of assets. The fund will also need to pay an additional fixed amount that is estimated at $600,000 per year.

If the treasury income of UMM or DMM doesn’t cover the expenses, then they will be recovered from the assets of the fund.

Brief Summary

This post is much longer than my usual posts, so I’ll give you a brief summary here:

  1. The MacroShares Metro Housing ETP is issued in Up and Down pairs.
  2. It doesn’t move exactly in tandem with each other.
  3. This is not a hedge against home prices
  4. Your fund can go to zero
  5. Your upside is capped.

Excel Infoway IPO

Date and Price Band of Excel Infoway IPO

Excel Infoway IPO opens on 14th July 2009 and closes on 17th July, 2009. The price band for Excel IPO is between Rs. 80 and 85.

Excel Infoway IPO Grading

The Excel IPO has been graded 1 by CARE. This is a scale of 1 to 5, where 1 indicates that Excel Infoway has poor fundamentals.

Business of Excel Infoway

Excel Infoway is a BPO and Customer Contact Center, which has customers in the US and UK. The company’s customers are concentrated in the Telecom and Financial sectors. The company operates with a capacity of 150 seats, and the IPO is planned to set up 300 additional seats in the financial year 2010 – 2011.

Excel Infoway Risk Factors

Heavy Dependence of a Few Customers: The top 4 customers of Excel Infoway contributed 98.87% of the revenues of the company in fiscal 2009. This was up from 94.17% in fiscal 2008.

No Proven Track Record: Excel Customers was incorporated in 2003, and as such the company doesn’t have a long record of existence.

Negative Cash Flow: Excel Infoway had negative cash flow last year of Rs.344.5 lakhs.

Cost per seat higher than peers: Business of Excel Infoway: Interior & Furnishing Cost and Technology & Equipment Cost for setting up new facilities of 300 seats at two locations in Borivali and Kandivali in Mumbai will amount to Rs.2117.12 lakhs. Average Interior & Furnishing Cost and Technology & Equipment Cost per seat come to around Rs.7 lakhs. This is higher than the competitors of the company.

Financials of Excel Infoway

The company had revenues of Rs. 1860.73 lakhs in 2009, which declined from Rs. 2,310.89 lakhs in 2008 and 1979.0 lakhs in 2007.

The profit after tax for 2009, 2008 and 2007 has been Rs. 1485.07 lakhs, Rs. 1433.80 lakhs and Rs. 1537.98 lakhs.

The company saw a substantial increase in its debtors for the past few years. The company had debtors of 48.18% of sales for the last year and 38.06% for the year before that. This can be attributed to the recession because of which Excel Infoway had to extend credit facilities to its customers.

The company had a diluted EPS (weighted for last three years) of Rs. 9.56. Based on this the P/E Multiple at the higher end of the offering is 8.89 and at the lower end it is 8.36.  

This is just a summary of Excel Infoway’s business, and is not a buy or sell recommendation on the IPO.