Getting lulled into debt

I never had any big problems with debt and I pay off my credit card in full every month. I have only faced credit card troubles once in my life for a brief period.

About three years ago, I ran a high balance for about 8 months.

The way the balance crept up on me was totally unexpected and caught me by surprise. I bought my first laptop and partially paid it with my credit card. There was a monthly payment scheme that allowed you to pay about half the sum up front, and the remaining in equal installments over the next 9 months.

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NHPC IPO: Price Band, Grade and Date

The price band of NHPC IPO is between Rs. 30 and Rs. 36.

ICRA has rated the NHPC IPO 3 out 5.

NHPC IPO opens at August 7th 2009 and will close on August 12th 2009.

NHPC: Business Overview

NHPC is a hydroelectric power company which has got 13 power stations, and an installed capacity of 5,175 MW. NHPC is predominantly present in the North and North Eastern part of India, and has power stations in the following states:

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ProShares Credit Suisse 130 30 ETF

Proshares is the master of creating exotic ETFs and was the first one to come out with a leveraged, and an inverse ETF. This time it has come out with another interesting ETF – the Proshares 130 30 ETF (CSM).

The Proshares 130 30 Credit Suisse ETF (CSM) takes the 500 largest US stocks by market capitalization, ranks them in the order of best to worst, takes long positions in the top ranking ones, short sells the lower ranking ones, and then uses the money from the shorts to take further long positions in the better ranking stocks.

The net effect of this will be that the Proshares 130/30 ETF is long 130% and short 30% of the index. So, if the assets of the ETF are worth 100 dollars, they should normally be long 130 dollars worth of stock and short 30 dollars worth of stock.


This is a simplified example to illustrate the basic principle of the 130/30 mechanism. The Proshares 130/30 ETF itself will invest in Equity Securities, short Securities, Futures and Options, Swaps and Forward Agreements to achieve its strategy.

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Unemployment Number Nuances

Unemployment numbers reported in the US can get a little confusing because they can be sliced and diced in different ways and news reports hardly ever go beyond the headlines to explain which numbers they are talking about. Here we take a look at two numbers that are used most often when reporting unemployment.

Official Unemployment Rate

The Bureau of Labor Statistics calculates six types of unemployment numbers and the official unemployment number is called – U-3, which is the total unemployed, as a percentage of the civilian labor force.

This number is seasonally adjusted and stands at 9.5% for June 2009. The first thing to note here is that the percentage of unemployed is a percentage of the total work force and not total population.

So, a 9.5% unemployment rate means that 9.5% of the eligible work force is unemployed and not 9.5% of the total population.

This number is released monthly and most of the time the breaking news you watch on TV quotes this number.

In May, the unemployment number (U-3) rose to 9.4%, and for the first time the unemployment rate had risen beyond the 8.9% rate the government had estimated as its adverse scenario for the stress tests.

The key however was that the May numbers were just numbers for one month while the adverse scenario in the stress tests was the average for the whole year.

The way the numbers look currently, we may very well hit the adverse numbers projected by the government, but it’s important to note that you can’t compare a monthly number with a yearly one. Just for reference, the unemployment rate for the whole year 2008 was 5.8%.

The Other Unemployment Numbers

The official unemployment number is U – 3, but this doesn’t include all type of unemployed people. U – 3 only considers those people who have actively searched for a job, but are still unemployed.

But as you can imagine, there are people who have stopped looking for a job, but are available for work and then there are people who wanted a full time job, but could only manage a part time job. These people are also unemployed or partially unemployed but are not part of the official unemployment number. There are separate numbers for these – U4, U5 and U6, but somehow these are not reported very often in the media. The U6 number is the most inclusive of them all, and stands at 16.5% for June 2009.

Continuing Claims

Apart from the official unemployment rate the other number that is reported quite frequently is the number of workers who get unemployment benefits. This is called “continuing claims”.

Obviously a declining continuing claims number is a good sign, but there is one caveat there. Continuing claims can go down because people who were getting these benefits have been jobless for more than 26 months at which point they start receiving the Federal Unemployment Benefits, and they are out of the continuing claims count. So, while the labor market didn’t improve, the reported numbers improved slightly.

The other thing to keep in mind is that unemployment rate and continuing claims are two separate things. Very often, people tend to think that the unemployment rate is based on just the number of people who claimed unemployment benefits.

However, to calculate the unemployment rate, data is collected from the Current Population Survey (CPS), a monthly survey of over 60,000 households, and so it takes a more holistic view than simply the continuing claims number.


If you are looking at the unemployment numbers to get a general feel of how the economy is doing then the nuances probably don’t matter that much. But, if you are using the unemployment number for investing cues, signs for the recession to end or whether it indicates a jobless recovery etc. then it’s important to understand what number you are using and how it was arrived at.

Photo Credit: Sonya

Indiabulls Power IPO

Business of Indiabulls Power

The Indiabulls Power IPO is another power IPO to hit the Indian market after the Adani Power IPO. Indiabulls Power IPO is from the promoters of the Indiabulls group, which have a large presence in the real estate sector.

Although Indiabulls Power was incorporated in 2007 and is relatively new, it has some 104 subsidiaries of its own through which it proposes to carry out its business (in addition to the parent). Most of these have the same registered office – E – 29, First Floor, Connaught Place, New Delhi and I wonder why Indiabulls Power needs so many subsidiaries.

Indiabulls Power is in the business of developing thermal and hydro power projects and it currently has the following projects under development. The Indiabulls IPO is planned to raise funds to partly finance these power projects.

Price Band and Open and Close Dates

The price band is set between 40 to 45 rupees. The IPO is scheduled to open on 12th Oct and close on 15th Oct.

IPO Grading

CRISIL has graded this IPO – 3 out of 5, which indicates average fundamentals relative to other stocks in India. The following factors influenced the IPO grading:

  • The company plans to operate in a sector that is expected to show good growth because of India’s growth rates and the resultant demand for power.
  • The strong track record of the promoters weighs the rating in their favor.
  • Negatives are that the promoters don’t have any experience in the power sector.
  • That they will have to depend on state electricity boards for offtake over the long term.
  • The returns on projects won through competitive bidding may not turn out be high due to the intense competition.

Indiabulls Power Thermal Projects

Name Capacity Commissioned by
Amravati Phase 1 Power Project 1,320 MW First unit of 660 MW to be commissioned by June 2012 and full unit by September 2012
Nashik Power Project 1,335 MW 5 units of 135 MW to be commissioned by Sep 2011, 2 units of 330 MW to be commissioned by Feb 2012
Bhaiyathan Power Project 1,320 MW 660 MW to be commissioned by December 2012, fully commissioned by March 2013.
Amravati Phase 2 Power Project 1,320 MW 1st unit of 660 MW to be commissioned by March 2013, fully commissioned by June 2013
Chhatisgarh Power Project 1,320 MW 660 MW by June 2013, fully commissioned by September 2013.

Indiabulls Power Hydro Projects: Indiabulls Power is planning to set up 4 medium sized hydro projects of 60 MW, 30 MW, 46 MW and 31 MW in Arunachal Pradesh.

Financials of Indiabulls Power

Since Indiabulls Power has still not commenced operations, I was surprised to see that it had any earnings at all. But it has earnings and here is the break-up of that income:

Particulars For the year ended March 31st 2009 (Rs. in millions)
Dividend Income 538.56
Interest on inter corporate deposits 627.11
Interest on fixed deposits 263.87
Interest on refund of bid deposits 40.61
Total 1,470.15

Looks like the subsidiaries are making money for the parent, but the earnings are not from the core business of the company, which is power generation and distribution, so there is not much to go by in terms of the earnings and financials of the company to evaluate the Indiabulls IPO.

Risks facing Indiabulls Power

Indiabulls Power doesn’t have any operating history and the company is new in this business.

The first power project of Indiabulls Power – Amaravati Phase 1 is scheduled to commence in September 2012. This is still some time away. Power projects have long gestation periods and it takes them a long time to get to the point where they generate positive cash flow. So the company is still a few years away from turning positive cash flows.

The other thing with power projects is that they are a capital intensive business. Indiabulls Power estimates that they need Rs. 310,524.00 million for the projects that they are developing. Delay in procuring financing or licensing will impact operations and ultimately profitability. Approximately 25% of the project is estimated to be financed from equity and the rest from debt. So, the company will be significantly debt – laden as well.

These projects require a large amount of coal and water. Indiabulls Power has gotten into agreements with various other entities for the allocation of these raw materials, but a change in the estimate v actuals, or unavailability of other raw material will significantly impact the company.

There is an income tax provision that allows companies which commence operations related to power generation 100% deduction in profits provided they commence before March 31, 2011. The current date of commencement for Indiabulls Power is after this date. If the government doesn’t extend the date, then Indiabulls Power stands at a significant disadvantage to other power players.

This is just a summary of the Indiabulls Power IPO from its prospectus filed with SEBI and is only meant to give you some details about the business of the company. This is not a buy or sell recommendation on the Indiabulls power IPO.

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Interesting Reads July 25 2009

IPO’s are really hot in China right now and very soon they are going to come out with the biggest IPO in the world ever — Industrial and Commercial Bank of China (ICBC),  worth $19 billion dollars.

I was really keen on learning about these IPOs and was hunting for their prospectus. Finally I found this story in Bloomberg on China Shipbuilding IPO, which led me to its prospectus.

I downloaded the huge document and found that all 396 pages were blank. Adobe helpfully suggested that I download a 20 MB plugin to display the font on the prospectus. I downloaded and installed it, only to find out that the prospectus is written in some Chinese language! I don’t know why it didn’t strike me that it was not going to be English, but that’s how it is.

I just scrolled the pages out of curiosity and was a little surprised to see that the general layout of the prospectus seemed to be similar to a 10 – k filing or how a prospectus for an Indian company would look like. There seemed to be something like a glossary, they had figures for CAGR growth, Balance sheet for a few years and so on.

I wish I could read it, but I don’t think I will be able to learn that language any time soon. Here are some posts that I could read though, and I hope you like them.

Stock Trader Find Speed Pays, in Milliseconds @ NYT — By now, you may have probably read this article, but if you haven’t, I think you definitely should.

Building wealth: stay invested to catch the winning days @ Vilkri

What are the best credit card rewards programs? @ The Digerati Life

After Peak Finance: Larry Summers’ Bubble @ Baselinescenario

What risk models are useful @ Ajay Shah

New York Times suffering from Body Dysmorphia @ The Reformed Broker

Stop trying to impress other people @ The Simple Dollar

Using Credit Cards to rebuild your score @ Cash Money Life

Should you re-invest your dividends @ The Dividend Guy

Will the real FICO score please stand up? @ Dough Roller

Carnival of Twenty Something Finances @ Ginger Corsair

Difference between an expensive toothbrush and mutual fund

Image by The Fost

Last week I bought a battery operated toothbrush by mistake. It is not one of those fancy ones and it costs just a little more than the regular ones. I don’t have anything against battery operated toothbrushes, just that I didn’t want to keep something inside my mouth and then power it on.

When I discovered it was battery powered, I was not too dejected because I can always use it without powering it on. Regardless, I have used it with the power on, and like it quite a bit. A higher price meant slightly higher quality.

Sometime during the last week, my laptop charger gave way and I had to get a new one. I went to Best Buy with my existing charger and asked them if they have the same one or not. They told me they didn’t have the same thing, but they had one that will work with my laptop, but it cost a little more, as it was a universal charger. I asked them if I could return it if it didn’t work with my laptop, and they said I could. I went back home and it worked wonderfully well.

Most of the times when you are buying anything you have a fairly good idea of what to expect from it and the price is usually directly proportional to the quality.

Financial products of all shapes and sizes are different from everything else in this respect. But I find this true for mutual funds more than anything else.

There is no evidence that mutual funds with higher charges are any better than the lower ones. If anything, it is the other way round. There is no clear reason why one mutual fund charges a higher fee than another. The other thing about mutual funds is that if you are not buying a vanilla index fund, you can’t be sure what you will end up owning.

I was surprised to learn that an Infrastructure mutual fund that my uncle owned had a bank as its biggest holding. Over 10% of the mutual fund’s assets were invested in a single bank. According to them, banks provide finance to infrastructure companies, which is an important part of the whole infrastructure story so it is fine for them to own banks.

If I buy an infrastructure fund to own a bank stock, what should I do to own a steel company?

I bought USO – the oil ETF because oil had crashed and USO seemed to be a good proxy for oil, but I was totally wrong. USO has to roll over its contracts every month and they are being played by traders because of that. It turns out it is not a good proxy at all.

Then there are funds like the 3X housing ETFs and 3X daily leverage ETFs, both of which sound similar but act very differently.

Why does this difference exist between financial products and other stuff, and what do you think we can do to simplify financial products, so that they become easy to understand and own?

Apples Cash Cow

I bought an iPhone from eBay about three weeks ago and have been totally hooked to it. It is the most awesome thing I have had for a while, and I can’t say how happy I am to own it. I have now used a Samsung, Nokia, Blackberry and an Apple phone, and I truly never expected anything to outdo Nokia, but I must say – iPhone is smartest smart phone ever.

The battery life is good, apps are terrific, camera is good, blue tooth works quite smoothly, iPod doesn’t drain out any power, and you can use the Internet effortlessly.

When I decided that I wanted to buy a smart phone, my first choice was a Nokia. I used to have a very simple Nokia phone and when I upgraded to an expensive Blackberry I really missed my old Nokia. Nothing can ever beat Nokia’s battery life and their phones are generally quite sturdy.

But, it was quite clear to me that a Nokia smart phone costs a lot more than an iPhone and this WSJ story explains why it is so cheap.

The reason you are able to buy iPhones for just $100 is that AT&T is willing to subsidize the remaining cost. They hope to sell you the phone cheap and then recover their money by a high monthly plan. In fact the article quotes a Deutsche bank study which estimates iPhone subsidies to be the highest of any smart phone and value them at $400 per phone!

Blackberry also gets a subsidy from phone companies and that is estimated at $200. Then there are the basic phone operators who also get a subsidy of about $100.

This is a really clever strategy that is win – win for the smart phone manufacturer and the wireless provider. The smart phone manufacturer can sell their phone at a high price to the wireless company without the customer ever feeling the pinch. The wireless company can then charge a monthly plan and recover their money.

I think this is a win strategy for customers also because a lot of them won’t be able to pay $500 for a phone, but don’t mind paying $100 for the phone and then $80 every month for the plan, which may just be 15 or 20 dollars higher than their existing plan. If they don’t want to get into a contract then they always have the option of getting one from eBay like I did, and I think even Best Buy is selling unlocked iPhones now.

The subsidy strategy sure works for Apple (even Blackberry), and it shows in their profits. The two companies only account for 3% of the world’s cell phones sold last year, but the 35% of operating margins!

The question is: would you rather pay a big amount upfront and have the freedom of choosing your plans or pay a small amount upfront and then pay a slightly higher monthly plan and locked into a particular network?

JP Morgan JF Greater China Equity Offshore Fund NFO

JP Morgan Greater China mutual fund is a fund of funds. This means that it will not directly invest in stocks but invest in a mutual fund, which in turn invests in stocks.

The difference between the JP Morgan Greater China fund and most other fund of funds is that this fund will primarily be invested in just one mutual fund — JF Greater China Equity Fund. Normally, the fund will invest at least 80% of its assets with the JF Greater China Equity Fund.

The first thing I think about when I hear – fund of funds – is double fees. A fund of funds normally has its own fees and then because it invests in some other fund – investors are indirectly charged the fee of that fund as well.

In this case, JP Morgan JF Greater China fund charges an expense of 0.75% of net assets and then you will have to incur the expenses of the underlying fund – JF Greater China Equity fund.

Obviously that is not a good thing but I think this is the only fund that allows Indian investors to invest in Chinese companies and I’d like to hear if you are familiar with other funds which do that.

Since this fund invests in equities, it is saddled with all the usual risks that are faced by mutual funds that invest in equities. In addition to that there is a currency risk also, which is not very common for mutual funds in India. Since the fund is based in one country and invests in another, there are at least two currencies involved here and exchange rate fluctuation between the two currencies will impact your return. I say at least two currencies because the Chinese Yuan and Indian Rupee are involved at the minimum. I am not sure whether some transactions are going to be made in US Dollars or not.

The other thing about the JP Morgan Greater China fund is that since it invests in foreign securities, a SEBI cap of $300 million is applicable on the scheme. The cap means that the entire investment of the fund is limited to $300 million and can’t go beyond that. This cap is applicable on the mutual funds of the sponsor and not this particular scheme alone. That means there is a chance that you could get only pro rata allotment on this NFO. This is very normal for IPOs, but doesn’t happen a lot on New Fund Offers.

JP Morgan Greater China NFO Dates

This is an open ended equity fund whose NFO opened on 9th July 2009 and will close on 31st July 2009. The mutual fund will then trade from 28th August 2009.

Minimum Application for JP Morgan Greater China NFO

The minimum application for this fund is Rs.10,000.

Benchmark for JP Morgan Greater China NFO

The benchmark for this scheme is the MSCI Golden Dragon Index.

Load Structure of JP Morgan Greater China NFO

There is an entry load of 2.25% when you invest less than 5 crores. There is an exit load of 1% if you are exiting the fund within two years of allotment and have bought it through a Systematic Investment Plan (SIP). The exit load is charged only if you exit within six months if you bought the fund in any way other than the SIP.

You can find the Key Information Memorandum and application form here.

This is just a summary of the JP Morgan Greater China NFO and is not a buy or sell recommendation on the mutual fund.