Eva'ngelists Incarnate

In the field of corporate finance, Economic Value Added (EVA) is one of the most sought after financial models of recent times to measure the financial performance of a company or its different activities. Formulated by Joel M. Stern, the current model computes cost of an activity by subtracting the cost of execution and the opportunity cost associated with it. This model is closely linked to the concept of economic profit. Today, many of the world's leading organizations follow the EVA model for computing their profitability. The EVA model is also used to decide employee compensation packages.

Hold your horses... We now have IDRs!

When the returns offered by Indian financial markets are amongst the best in the world - and with Indian stock markets at an all time high - IDRs (or Indian Depository Receipts) aren't a bad idea at all! Though the concept of IDRs was propounded way back in the Companies Act (Amendment) Bill 1997, the government is yet to arrive at a final conclusion. After opening Qualified Institutional Buyer (QIB) placement route for listed Indian firms to raise funds in the domestic market, SEBI now intends to introduce the Indian Depository Receipts channel for overseas firms to tap the Indian markets for funds in the 2006. With Asian economies, especially India and China, leading the world's growth in the near future, the Indian economy surely presents great opportunities for foreign companies to look for funds.

The Green Refers to Cash

A most criticized strategy, but used in a big way by corporate raiders. Greenmail - akin to blackmail - is the strategic practice where a significant investor threatens to takeover a corporation, unless the management of that corporation pays up money to buy back the investor's shares, obviously at a humongous premium. This old trick was exploited to its fullest extent during the mega mergers and acquisition wave of 1980s in the US. Many small and big corporations became victims of the trick during the same period - like Disney Corporation, which finally landed up paying a profit of $60 million to investor Saul P. Steinberg, who was holding only 6.3% shares of Disney.

What's Securitisation?

Securitisation is the process of creating a tradable financial instrument by pooling together other financial assets and marketing them to investors. Though it is one of the old financial concepts, its application is becoming more appropriate only now in the modern financial world. Though in reality securitisation does not hold much ground in India, under the current situation of high growth in credit demand, the Indian banks could vigorously follow this method to improve their liquidity position.

The New Fashion Term

The fall out of some major corporations like WorldCom, accounting frauds and governance failures in US and Europe ignited the debate on how to govern public listed companies, and encouraged the introduction of the most fashionable term used by regulators, namely, corporate governance. Corporate governance is basically the adoption of best possible management practices; as enumerated by acts like the SOX in US, and the Kumaramangalam Birla Committee closer home in India. Though SEBI's dictats have been regular, many companies still fail to follow governance norms judiciously.

$120 Billion! What more could you ask!

ETFs may be described as a basket of securities that are traded like individual stocks on an exchange. They are funds/schemes, which invest in the securities of only those sectors or industries as mentioned in the offer documents. ETFs are innovative products, which came into existence in the US in 1993. The success of ETFs can be gauged from the fact that almost $120 billion has been invested in about 280 ETFs in over 30 indices globally. The first Indian ETF was launched by Benchmark Mutual Fund in January 2002 based on S&P CNX Nifty. ETFs have many advantages over traditional mutual funds, the most important being that of liquidity, as they can be bought and sold like stocks.

Derivative Trading

Branded as "weapon of mass financial destruction" by Warren Buff et himself, derivatives have in reality changed the trading dynamics at bourses worldwide. Derivative trading started in India at NSE in the year 2000; BSE started trading it in the year 2001. The first derivative product to kick off in India was Stock Index Futures; later on, derivative contracts for individual securities were also introduced. At present, NSE offers derivative contract for 118 securities and 3 indices. Critically, derivative trading acts as the barometer of measuring the future activity in the stock market.

Imagine all the people, living life in peace...
Probably not, because the US now surely needs to wage war to avoid a recession

After a strong showing in the first quarter of 2006, the US economy is beginning to show strains that may lead to a significant downturn later this year, possibly bringing a recession after the weakest recovery seen in the last 50 years. Official figures from the Bureau of Economic Analysis show nothing to worry on the surface for now: US GDP growth rocketed from 1.7% to 4.8% in the first quarter, while unemployment continues to drift lower, holding at 4.7% in the month of April 2006.

But, the seemingly sunny outlook propagated by the White House gets heavily distorted by commodities' prices running wild. Whether it is zinc, oil, copper or uranium, all resources, except foodstuff s, are currently trading at historic highs, burdening producers worldwide with higher costs that are passed on to the customer, creating inflation.

The surge in commodities results from strong demand in Asia. Both China and India see their economies powering ahead at growth rates in excess of 8% and 7%, respectively in 2006, leaving the USA and Europe far behind. Relief for the old world is not on the horizon. With more than three billion potential consumers in Asia striving for goods, from cell phones to cars, the base demand for raw materials has been exploding, and all forecasts point to still more growth.

A shift in the productive base in the USA alerts to new dangers for the erstwhile biggest economy in the world that is only driven by debts anymore. The USA has outsourced a good part of their civilian production abroad while domestic production focuses increasingly on defense goods that are killing devices. Your IBM PC is now made by Chinese Lenovo, and trying to find a jacket not made in China has become a virtual impossibility in Europe. The US industry can still help you out if you need a missile-firing cannon or a fighter jet, though.

This helps mask structural deficits, aided by the international saver who finances the spending spree of Americans and their government. In the first quarter of 2006, the USA consumed $225 billion more goods and services than it produced. This is a rise of more than 20% quarter-on-quarter in the trade deficit, an unprecedented event. Never before in history, has the nation run a trade deficit equivalent to 7% of its GDP. The only area where the USA still runs a trade surplus is the group of Advanced Technological Products (ATP), an euphemistic term for a bizarre concoction of computers and war gear in the trade balance.

International policymakers do not tire to warn about the global imbalances created by the economic downshift of the USA that is a result of the declining education sector, which is unable to uphold its standards from earlier times, thanks to heavy budget cuts. But neither of the G-7, the International Monetary Fund (IMF), the World Bank, the European Central Bank (ECB) and several governments have come up with a solution on how to unwind the American debt mountain, now standing at $8.36 trillion, that threatens the well-being of the global economy. These institutions, fighting for a role in the economy of tomorrow, only unite in the analysis of the situation that calls for a U-turn in US policymaking, ending the profligate debt policies engineered by Bush & Co.

Such wishes are likely to fall on deaf ears in the White House that is eagerly preparing for the next oil war with Iran as oil prices above $70 a barrel threaten to become a choker for the global economy. As this strategy has visibly not worked in Iraq, it can be anticipated that the biggest army in the world will collect another black eye in Iran while civilians worldwide will be held accountable for the US' military success or failure at the gas pump - looking back into history, offers an uncomfortable perspective. Since the 1930s, war has always helped to pull the USA out of recessions.

• The Great Depression ended with World War II.
• The slump in the 1950s ended with the Korea war.
• In the 1960s, Vietnam helped grease the military industrial complex.
• The recession in the early 1980s preceded the Nicaragua conflict.
• Interference in the Kosovo in the 1990s, stood at the beginning of irrational exuberance in the 1990s.
• In the new millennium, the biggest defense (aggression?) budgets & the Iraq invasion helped pull US out of the rubble after the dot.com bubble until now.

Taking into account increasing pressure on the American property market from higher interest rates, worsening demographics with their associated higher medical costs and the biggest debt bubble, both private and public, the fact is that all signs are pointing towards a recession. To lift the economy out of the doldrums by way of war, the USA would only follow a concept that has worked well in the past.

Although, I hate to be caught using the phrase "this time it is different", it may well apply in the case of an Iran war, which the United States of America will have to fight with an outworn army that has not exactly "won" the "liberation" of Iraq. While the material drain can effectively turn into a blessing for companies in the defense sector and help drag along the nominal picture of the American economy, it will be harder to replenish the ranks of those willing to fight a war with doubtful purposes. People are surely not lining up for redeployment in another oil-rich country.

Trying to defeat Iran in a remote high tech war and exercising the nuclear option would lead the world into a dark chapter of history. For the first time a nation would use nuclear bombs in a war of aggression. Decades of trying to make the world a more peaceful place after the horrible experiences in Hiroshima and Nagasaki showed that the nuclear option has an inhumane strike price, and is therefore, rightfully outlawed by those nations calling themselves civilized.

A country willingly weighing the devastating forces of atomic bombs in order to secure its oil supplies will lose all its moral authority which was once a role model for the democratically minded majority in the world. Investment wise there is nothing to add to the old advice: Buy gold, buy silver, buy platinum and buy energy. These barometers of uncertainty are destined to reflect the clouded outlook with higher prices.