Is India Vulnerable to the U.S. Subprime Crisis Global Slowdown

• ICICI and three other Indian banks with exposure of $3 bn to credit derivatives are writing down losses due to rising spreads, making provisioning; but they have no direct/indirect exposure to subprime derivatives
• Uncertainty in global financial markets, fears of U.S. slowdown have led to volatile stock market, sell-off by FIIs
  
• Morgan Stanley: Recent capital inflows have lead to BOP surplus, credit and demand growth in spite of fiscal/current a/c deficit; global credit crisis will impact capital inflows (portfolio equity, private equity, real estate), raise cost of external funding for capex, impact demand and growth
  
• Via Bloomberg: Credit risk limited to a few banks; no large-scale credit losses
• Shah: Poor monetary mechanism will limit the use of interest rate during economic slowdown, will impact recent boom in investment and growth
• Service exports may be hit as U.S. firms(a/c for 60% of India's service exports) cut down IT spending, but outsourcing may get a boost as companies try to cut costs; Citi (via PTI): Low export intensity and exposure to U.S. slowdown but some IT and non-IT exporters (leather, textile, jewelry) have high revenue exposure
• RBI and Govt: Sub-prime risk contained by monetary/liquidity management, banks have enough liquidity/low exposure to subprime; supervision of banks' exposure to foreign currency, corporate lending, credit/market risk and off balance sheet exposures; strong economy and corporate sector will reduce impact from global cues
• EIU: Stock market vulnerable to panic among international investors due to the large foreign portfolio investment; market fall in short-term to be led by U.S. markets and not country fundamentals
• Bowring: Risks from fiscal/current a/c deficit, low FDI, productive capacity; stock market boom and private credit led by global liquidity and capital inflows; may impact domestic money supply, asset prices, financial sector's vulnerability to bad debt
• Goldman Sachs (Finance Asia): U.S. recession will reduce export and economic growth but domestic demand and booming stock market will lend support to investment and growth
• Lex: Low subprime exposure of banks, debt-equity ratio of firms but sudden capital exit/stops can raise interest rates

india's GDP Growth : On A Slowing path ?

• Govt lowers growth forecast for 2007 to 8.7%; Oct-Dec-07 growth slows to 8.4% (2006: 9.6%) amid high interest rates, slowing exports, industrial production; growth forecast by IMF - 8.75%; ADB - 8.5%; WB - 8.4%
• Economist: Limits on growth sustainability (owing to poor infrastructure, govt debt) and trickle down effect
• World Bank: Strong investment but risks include global risk aversion impacting capital inflows, high oil prices
• Shah: Poor monetary policy mechanism will limit the use of interest rate during economic slowdown, will impact recent boom in investment and growth
  
• S&P (not online): Growth to moderate; stable outlook on improving govt finances, domestic demand led growth, limited impact of global financial turmoil, corporate earnings supporting equity markets
• Fitch: Capital inflows will finance current a/c deficit; current investment boom may not be sustained in medium-term
• Morgan Stanley: Soft landing in 2008 as monetary tightening reduced consumption and supply constraints ease; risks include U.S. slowdown and global risk aversion

IMF Is Urging Members to Set stimulus plan

WASHINGTON -- The International Monetary Fund urged members to make plans to increase spending to stimulate economic growth and to rescue troubled financial institutions if the global housing-and-credit crunch worsens further.

Policy makers world-wide need to "think the unthinkable," said the IMF's deputy managing director, John Lipsky, because of the possibility of what he called a "global financial decelerator." Under that scenario, "a downward credit spiral, driven by rising defaults or margin calls" might prompt banks to stop making loans and sell the existing loans and securities on their books at distressed prices. That, in turn, could reduce lending further and strangle the economy.

Mr. Lipsky said he wasn't predicting such an outcome. He said the IMF still thinks the global economy will muddle through with slower growth but no outright global recession. He said governments need to prepare to deal with the "low probability" of a financial meltdown.

The IMF's warning contrasts sharply with its usual advice of balancing budgets, restraining government spending and counting on markets to lift growth. Since the credit crunch worsened last year, the IMF has generally stayed on the sidelines, applauding individual country actions to increase economic growth, such as the U.S. stimulus package. The IMF rarely steps far ahead of its largest members as Mr. Lipsky did yesterday.

The IMF staff has calculated that "major" advanced and developing nations accounting for half the world's economic output "have fiscal room to implement a discretionary stimulus, if needed," Mr. Lipsky said in a speech at the Peterson Institute for International Economics in Washington, D.C. In other words, the budget situations in those countries would let them increase spending without fear of igniting steep inflation.

A larger number of nations, accounting for two-thirds of global gross domestic product, are in adequately sound fiscal condition to let automatic stabilizers kick in if the economy turns down, he said. In many nations, welfare and social-security payments routinely increase when the economy worsens and people lose their jobs. During past economic crises, the IMF has sometimes urged countries against using the full panoply of automatic stabilizers, for fear of deepening inflation or creating a run on the local currency.

Mr. Lipsky specifically named China as a country that could raise government spending to spur growth, while tightening monetary policy to keep inflation under control. Oil exporters in the Middle East also are increasing spending, he said, but added those countries must make sure the spending doesn't worsen inflation. He didn't mention other countries.

Additionally, Mr. Lipsky said that nations should consider using government funds to "safeguard the financial system," although he said he wasn't advocating using taxpayer funds "for individual banks." He didn't lay any specific plan, but in the past the IMF has urged governments to rescue banks that are critical to the economy, while insisting that a bank's shareholders take a hit, too. By the IMF line of reasoning, such a plan wouldn't amount to a bailout, a term Mr. Lipsky called politically loaded.

Retail Sales Fall in February Amplifying Recession Concerns

• Retail sales dropped 0.6% in February, led by declines at auto dealers and restaurants
• Goldman Sachs (not available online): Consumption growth in the first quarter will likely be very weak. So far, indicators related to consumption have been coming in below expectations—and expectations were generally low to begin with. Taken together, the data point toward either an outright drop in consumption or, at the very least, barely positive growth.
  
• January: Personal income increased by 0.3%; Bonus payments in January boosted
  wages and salary growth to 0.5%,; Personal spending rose by 0.4%; Real spending was unchanged; Disposable personal income rose 0.4% and after adjusting for inflation its rise was just 0.1%
• January: consumers again spent more than they earned driving the saving rate down to -0.1%.
• January U.S. Retail Sales (headline nominal): up 0.3%; up 0.3% excluding autos. Still very weak in real terms. Decreases in furniture, electronics, building materials and department stores.
  Strong gain in autos (+0.6% m/m) which is a surprise after the Commerce Dept. reported vehicles sales falling sharply in January (from 16.2 in Dec to 15.2 in Jan).
  Ex-Auto sales likely pushed up by gasoline that rose 2% in Jan – due to movement in prices.
  Core retail sales (ex autos, gasoline and food): essentially flat m/m in Jan
• Iley: the six-month annualised rate for these ‘core’ sales has dipped into negative territory at -0.3%. Some economic factoids aremore meaningful than others. Given that this did not happen in the 2001-2002 recession or indeed at anytime in the datasets 15-year history makesthis a startling development.
• The Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly increased to 80.5, from December's 75.5 reading that was the lowest since 2005
• For all of 2007, retailers posted a 4.2% sales increase, the smallest in five years
• Ritholtz: Total sales gains from Thanksgiving to Christmas Eve were a nominal gain of 3.6% (and probably negative in real terms), according to data gathered by MasterCard’s SpendingPulse; Real sales showed an actual 0.0% gain -- or worse -- over 2006 levels

How to create a fast-growing company - "Seed capitalism"

TO UNDERSTAND why America remains the world’s most successful entrepreneurial economy, look no further than AeroGrow International. Housed in a nondescript office building on the edge of Boulder, Colorado, this young company is thinking big: it claims to have created a new product category—kitchen crop appliances, which allow people to grow plants quickly without soil—with potential global sales of (it hopes) billions of dollars.

AeroGrow was started in 2002 by Michael Bissonette, who is a serial entrepreneur—an increasingly important role in America’s system for creating new firms. Mr Bissonette was driven by nothing more than a desire to start another successful company. By taking a technology that had largely been left to scientists and criminals and making it accessible to ordinary consumers, AeroGrow may have found growth where nobody thought it was possible.

Mr Bissonette previously sold a voice-recognition based remote-control company and a wireless home-security company. Looking for his next big idea, reading journals and chatting with contacts, he became excited about the potential of a technology called aeroponics. Originally developed by NASA, aeroponics accelerates the speed at which plants grow by drizzling nutrients onto their roots, which dangle in the air instead of being planted in soil.

Commercial aeroponics systems have long been available, but they were big, clunky and expensive (at around $900 each)—not consumer friendly. That was because they were bought mostly by the geeky criminals of the crop-production world: people who grow marijuana at home.

They cared neither about the look of the product nor about its effectiveness at growing anything other than cannabis. But with the demand for fresh, organic produce booming, Mr Bissonette saw a potentially huge market for an aeroponics system that looked good, was easy to use, and worked with the kind of crops (tomatoes, strawberries, legal herbs) that home kitchens need.

This proved easier said than done, which highlights two other key characteristics of the successful entrepreneur: persistence and perfectionism. Mr Bissonette had expected to have the new product on the market within a year to 18 months. In the end, it took four years.

Experience had taught Mr Bissonette that “when you launch a new category, you make one mistake and it could be your last chance.” So each new version of AeroGrow's kitchen garden was tested to destruction with people whose fingers were anything but green. “We kept building the best system we could, watched how people would kill their plants, and changed it so they couldn’t kill their plants that way any more,” says John Thompson, AeroGrow's marketing director.

The firm boasts that each seed planted in its gardens has a 99.9% probability of growing successfully. But Mr Thompson says the company is “still trying to figure out what to do about people who put it on their radiator and bake their plants.”

Among the other challenges were finding the most effective way to deliver the nutrient to the roots, identifying plants that would grow in a small enough space to make the garden kitchen-friendly, developing low-energy lighting and automatically adjusting the nutrient for chemical differences in tap water. After solving these problems, the firm spent another six months perfecting the machine’s look.

In 2006 the product was launched. It was marketed using another technique that America’s entrepreneurs have mastered better than anyone else: the television infomercial. AeroGrow's included convincing displays of greens growing twice as quickly in an aeroponics machine as they did in soil.

One obvious problem facing a start-up that launches a consumer product is that there are plenty of big kitchenware firms that can crush an innovator with a branded imitation of the new idea. Mr Bissonette has followed several strategies in the hope of warding off the big boys, at least for a while.

One is to use the “razor and blade” approach that has worked so well for giants like Gillette. AeroGrow’s appliances (the razors) are relatively cheap—now around $150—but the firm makes its real money from selling seeds (the blades) in specially designed capsules that only work with their gardens.

Also, AeroGrow had to get many fiddly things right before it could sell its gardens, which may make it harder for established firms to rush out a copy-cat product. “There are so many processes that the quick knock-off guys aren’t going to touch it,” Mr Thompson explained, “while the people with brands will take two or three years at least to get it right.”

To keep it that way, AeroGrow is continuing to innovate—another lesson that American entrepreneurs learned long ago. Rather than resting on its laurels, it is now working on versions of its product that meet every taste and price range, from a small $29 plastic garden to a $350 cool, metallic version.

It is also adding one- and three-plant gardens to its standard seven-plant version, and has designed a flower garden that allows a plant to be put in a vase for up to 48 hours before resuming its aeroponic growth. AeroGrow’s gardens were sold in around 4000 stores in America last Christmas (up from around 700 in late 2006) and are also available in Britain, Australia and, since last month, South Korea.

AeroGrow’s products consistently occupy a number of the top ten slots among Amazon.com’s bestselling indoor plants. In the final quarter of 2007, AeroGrow’s revenues topped $14m, three times its revenues from the last quarter of 2006. It is approaching profitability.

Mr Bissonette believes annual revenues for the aeroponics industry could eventually rise to $1.5 billion—the sort of vision that could only occur to someone in the grip of entrepreneurial animal spirits. But if he is even close to right, it would be remarkable if the big beasts of consumer electronics or kitchenware did not try to dominate the new product category—though that would probably let Mr Bissonette sell his firm at a juicy price.

Already his mind may be moving on to the next project. Last month, he appointed a new chief executive, a veteran of several leading consumer businesses, to help the firm grow even faster (he says he will remain at the firm in a less hands-on role).

Lest anybody doubt that the product works, look at the behaviour of cannabis growers. The AeroGrow garden is too small for their plants, and anyway the firm does not supply that sort of seed. Nevertheless, a crop of websites has sprouted explaining how to adapt the AeroGrow garden for growing marijuana. No wonder sales keep reaching new, er, highs.

REpower reaps tailwind for Suzlon

Boosts Indian firm’s efforts to expand in European markets

MUMBAI: Laid low by rising interest costs and a liability on account of the cracks discovered in some of its blades supplied to US customers, Suzlon Energy finally has something to cheer.

Its associate REpower outperformed Street expectations and may soon join the billion-dollar club. REpower reported a 48.2% jump in revenues to €680 million. Profit for the year also increased three-fold to €21.1 million.

As a result, the Suzlon-REpower combine has become the third-largest wind power turbine company in the world after Vestas (Denmark) and Gamesa (Spain).

In 2008, REpower hopes to join the billion-dollar club. By then Tulsi Tanti’s Suzlon would have tightened its grip on REpower.

“The acquisition of REpower is paying off. It has already moved the Suzlon-Repower combine into the top three among global wind turbine makers,” says Krishnakant Thakur an analyst who tracks Suzlon for Edelweiss Securities.

REpower is an assembly line operator and depends on vendors for the supply of critical components. With Suzlon embarking on a major vertical integration, the synergies of sourcing components from its Indian principal partner will benefit REpower immensely.

About 80-82% of Suzlon’s finished products are made in-house, whereas for REpower it is about 62% of sales, says Thakur. REpower’s wind turbines are in the range of 5 MW. There is thus no overlap in the product portfolio as Suzlon’s wind turbines are pegged up to 3 MW.

The Suzlon share ended on a strong note on Tuesday, closing up 8% at Rs 269.90.
Suzlon — by making an aggressive bid for REpower last year — was counting on the rising demand in Europe for renewable energy.

REpower is the beach-head that will help Suzlon gain a sizeable presence in the lucrative European market.

At present, Suzlon holds 33.6% in REpower, while Areva holds a little less than 30% and Portugal-based Martifer owns about 23%. Suzlon has the right to acquire the REpower stake from its partners in the next couple of years.

The performance of REpower will also help Suzlon iron out the creases that emerged from forex and the cracked blade episode.

Suzlon’s interest costs in fiscal year 2007 rose to Rs 276.3 crore from Rs 64.8 crore a year ago. Estimates reveal that the interest costs would almost double to 500 crore by next year.

The company had borrowed extensively to fund its ambitious acquisitions and organic growth plans.

There is a chance that the company may have to make more provisions for the cracked blades and the delay in order execution. But over a couple of years, Suzlon with its plans to vertically integrate will see a dramatic rise in capacities.

How Sound Is the AAA Mortgage Collateral the Fed Will Be Swapping Treasuries For?

• Fed announces on March 11 that it will auction $200bn Treasuries to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) against federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS on a weekly basis, starting March 27
• Pittman: About $650 billion of subprime bonds are still outstanding, 75% were rated AAA at issuance. None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February-->AAA debt fell as low as 61 cents on the dollar. Following through would downgrade at least $120bn in AAA bonds.
• Fitch: Latest revision to 2006/2007 vintage subprime RMBS rating methodology substantially raises loss expectations: Example: A new pool with the loan attributes of the ABX.HE 07-1 index would have AAA loss coverage required of 43%, versus 31% in the prior version.
  
• Bill Gross (PIMCO): What should an investor do desperately trying to avoid overlevered assets, yet trapped with good Treasuries at yields inappropriately low in a mildly inflationary future environment?--> If an investor requires 5%+ yields to compensate for future inflation they can increasingly be found in oversold authentic AAA assets such as conforming F&F mortgages at 5.75%.
• Shenn: Further losses/spread-widening at Fannie&Freddie expected due to lifting of investment caps and further foray into non-conforming mortgage underwriting business (jumbo loans, subprime, Alt-A).
• Barron's: FannieMae, created to bring liquidity to mortgage market in times of need, may itself be soon in need of bailout, could well be facing cumulative credit losses of over $50 billion--> F&F stocks plunge over 10% on March 10, agency debt spreads at record highs.

Economy weak but not enough for recession: report

By Jim Christie

SAN FRANCISCO (Reuters) - The U.S. economy will shrink in the second quarter, but avoid a recession this year as housing's drag will ease in the second half, helping normal growth return next year, according to a UCLA Anderson Forecast report released on Tuesday.

"The data don't yet add up to a recession and there is nothing here to challenge the basic story of sluggishness that we have had for two years," the forecasting unit's report said, adding: "Our no-recession forecast remains nervously intact."

Amid a cooling economy, the labor market is only slowing so it lacks enough drag to force a recession, according to the forecasting unit.

"The weakening job market is completely consistent with our longstanding forecast of a housing adjustment that is mostly confined to housing," the report said.

The UCLA unit added that its forecast also hinges on whether falling home prices depress consumer spending, and that it does not expect consumers to overreact.

"It has been our view that the reaction to the reality of lower home prices will be slow and smooth, which is a reason to forecast slower growth in the future, not a recession," the report said.

"In the last year or two, personal consumption expenditure has been weakening a bit, but it seems pretty clear that the news on the housing front hasn't forced a rapid consumer adjustment so far," the report said.

The forecasting unit noted the economy has withstood the housing slump -- especially eight consecutive quarters of declines in housing starts -- because the homes market and jobs market have become disconnected.

"Delinquencies and foreclosures went hand-in-hand with job losses" in the past, the unit's report said. "This time has been entirely different. People are walking away from their homes because home prices have declined, even though their jobs and incomes are secure."

Many who bought homes in recent years see defaulting on a mortgage as cutting losses on an investment, said Edward Leamer, director of the forecasting unit.

"The new ethic is that buying a home is a trial, and you see if it works for you financially ... It's an investor's ethic," Leamer said. "The old ethic was you would continue to service your debt barring a catastrophe like losing your job."

The UCLA Anderson Forecast unit expects anemic real gross domestic product growth of 0.4 percent this quarter, followed by a 0.4 percent contraction next quarter.

The economy will rebound in the third quarter with 3.0 percent growth, followed by 2.5 percent growth in the fourth quarter and full-year growth of 1.5 percent, the unit said.

It projects the unemployment rate will rise to 5.5 percent in the fourth quarter from 5.0 percent this quarter, and average 5.3 percent this year and 5.6 percent next year amid sluggish payroll expansion as the housing downturn bottoms.

"There's little hiring and little firing," Leamer said. "We're going to have the completion of a housing catastrophe without having the job losses that usually go hand in hand with that."