<Demand Supply and Markets..

>
Vishal Bhatia security analyst.. his viewpoints

stories..
wealth creation
wealth destruction

magicians
hubris vandals

.. because of demand and supply

wealth

money

economics

finance

what keeps a security analyst awake..

duhh! Vish.. Off course!

trade should be profitable trade profitable if company profitable at least demand should exist have capacity to supply at profit

selling price no max the more the merrier

minimum selling price = Any greater than marginal cost What is marginal cost? the cost of produzzzing one ezzzztra unit..zzzzz.zzzzz!! Dem <-> Supp MP

Sponge Iron Ore Coal Electricity Operators

2200 / Ton 1500 / Ton 850 / Ton 200 / Ton 100 / Ton

Total Op Cost

2550 / Ton

Not Necessarily a company Takes positions on produce directly in the market

Industrial Grade

Food Grade

demand rises

supply constant

=>
=> => => =>

prices rise
prices fall prices steady prices fall prices fall

demand constant supply rises demand rises demand falls demand falls supply rises supply constant supply rises

demand constant supply falls

demand falls supply falls

=>
=>

prices rise
prices steady

demand rises

supply falls

=>

hyper price rise

Perfect no consumer price resistance gaur gum seed

35000
30000 25000 20000 15000 14800 10000 5745 4298 4439 4365 4576 3987 4277 4376 4263 5000 11750

vultures

30125 27458

price/quintal

10000
5000 0

588%

supply India + Pakistan India global monopoly (80%) total prod = 1.5 mt

commodity traders + bankers/brokers 90% cornered rs. 1000 cr loans

demand wealthy American oil cos weak rupee $2,000 Mar 11 $28,000 Mar 12 1400%

Long run supply / short run supply

hubris
Pride, self confidence, arrogance

financial crisis or global financial crisis

what happened?

fundamentally amazing or economically mind boggling

hubris challenged the simple laws of demand and supply

until 2006 any RE agent in USA would tell you that nationwide prices go up
since great depression housing prices in US have risen @ 1% a year
year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2007 2007 qtr Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q3 Q4 shiller 77.74 79.61 81.82 85.71 98.08 100 109.27 116 130.48 146.26 169.19 186.66 185.45 180.45 170.64

2004 46% 2006 86% almost doubled

for prices to increase what has to happen?

demand has to rise faster than the supply Possible theories?

what are demand drivers?

what are supply drivers?

population

+
incomes

>

new homes built

populati on

2000 2004 Population

~1.5%

incomes

Incomes = 3% ____________________________________
Money Pool = ~ 1.4%

Maybe new homes did not keep pace with population increase.. lets check!

2000

->

~ 115 million housing units

In 2000s US was building 1.5 m homes a year Then it started accelerating. By 2004 they were building roughly 2m homes a year
On average 1.8m homes a year So 1.8 x 4 = 7.2 m new homes So 7.2 / 115 = 0.06xxx = ~ 6% new homes built Housing stock = ~6%

Bizarre !!!! demand falls supply rises => prices fall

basic eco

Dig Deep

Mortgage / Lending markets

1970s House Price = $60,000 Down Payment = 25% Down Payment = $15,000 Loan = $45,000 Interest 9% = $4050 / yr or $340 /month Rent = $900

Important Cash flow - Steady job ? Discipline - X Rent - X Good Credit score 700+ Biggest Barrier down payment

Cut to - 2000s

2000s

2002s Down payment 0% Down payment - $0 Job you can lie Credit score = 500

2005s

Down payment 10% Down payment - $6000

Job is fine (ok if unsteady) Credit score = 600

Down payment 0% Down payment - $0

Job not required. We have your house Credit score = no credit check .. And more.. Lot more! Absurd standards!!

Still More people eligible Suddenly a lot of people Became eligible to buy a house

Demand came from lowering of standards. Sub primes Poor migrant laborers earning $40,000 a year were able to buy $1,000,000 houses

That is someone earning Rs. 20 lakhs a year could buy a Rs. 5 cr house

interest

bonus House loan growth

Fee

SECURITIZED LOANS

Fee

CDO House loan investors

+
interest MBS

+
Fee

Investor gives 1m for home purchase. In return has claim on interest Does not know me. Thousands or millions. Then how would investors put up the money Have to rely on someone.. Who? Rating agencies

CDO AAA MBS Historically there have been low default rates We know why ? So there is a high likelihood that you will be paid

7%

PBOC Hedge funds Pension funds

Still no defaults

Vicious cycle

Housing prices go up

Lower defaults Lower standards Easier financing Perceived lending risk low More people willing to lend

Phata poster nikla vulture 100m 1000 borrowers 1m each Total borrowing = 1b 1b

1b 100m 1.1b

100m Share entitlement $100 yearly $1000 repayment SPV 1m shares High IPO Demand Price rises to 1100

Ideal -None defaults - no prepayment Everyone knows -It will not going to be exactly 10% How much lower? -Some will default some will prepay Computer models Historical data

population

State history

Recovery patterns

Real return?

1000 borrowers @ 1m = 1b asset

Simplified model 20% or 200 default 10% overall losses Real return = 10 (10% of 10) = 9% VAR

50% recovery

1980s Down payment 25% Steady Job Credit score = 700+

wealth destruction

1995
E 20 2005

100k
L 80 1m

100k

100k
hettich Audi 1m

100k

100k

1m

E 0
300 k

L 1m
1m

Macau

500k

8%

1m

1m

Bubble peak

2008

580k

580k

580k

580k

600k??
2009
Bubble burst

250k

250k

250k

Honest effort Wealth wiped off: Short sale? Bank = 500k - 250k = 250k Borrower = 250k 80k = 170k 250 k Total = 420k boom!! Kaput!

Plagiarist! Salman Khan videos

Khanacademy.org

magician

Post mba 7 to 20 lakhs / year 10 years into management job 40-60lakhs / year

Ceos 4cr $70m $300m

How much did george soros earn in a day?

INDIA RBI $ Stock

gatekeepers

Currency Market

Peg to USD

Black Wednesday 16 sept 1992 EERM European Exchange rate mechanism Predecessor of euro Pegged to deutsche mark. Band 6% movement Commitment to ERM required that BOE doctor interest rates higher Economy demanded lower rates

Soros flooded markets with pound how?

Shorting the pound

Mind Numbing $ 1B Rs. 5,000 cr.

The Man Who Broke the Bank of England

Buys for Rs. 5 an apple

Sells for rs. 3 an apple

Millionaire?

33%
1500 x 1920 = 28.8 L

Operating costs pilots airhostesses

Ground staff Maintenance crew

1 plane = $200m Or Rs. 1000 cr.

100,000 days 4% of 28.8 L = 1.15 L

Kingfisher 66 planes

Cost per available seat mile

Marginal cost concept will not work. DGCA will ground the airlines if scheduled altered Or if the airline is kingfisher

.. Another magician

to his shareholders the worst sort of business is one that grows rapidly, requires significant capital to engender growth and then earns little or no money. think airlines

Evolution theory? Natural process

hardnosed Single minded focus cost cutting

1 configuration 1 type

38 years of profit

Vandal
.. Jala kar rakh kar doonga..! Saara paisa! How much money destroyed?

Kya kareen..?

Thyan thyan!!

"The Century's Greatest Sports Photos"

Phantom punch

Inflection point

Disruptive innovation

Mechanical engg from imperial college London Frustrating attempts at making metal furniture in Calcutta. 1980s

Sensed opportunity in storage media business

2000 - 2004

357 cr

Second largest in the world 3 billion discs a year 17% global share

Vishal the procastinator

Ran out of time.. Number digging stops Stories continue..

Tried increasing capacity Idea was to kill the competition from Taiwan

Prices fell from $1.2 to $0.2 per disc

US Europe Antidumping against India and china

Puri got india to apply anti dumping

Taiwan manufacturers moved to china

Dumping no dumping china kicks indias ass

cmu

Dresses impeccably
No hobbies workaholic Finishes project before time

Sensed inflection point

Started Moser Baer power pvt ltd

PE Funded

Raised debt

What happened?

Vandal?

Industry

Green power

Renewable

Clean air.. Leave better earth to our children

..on crutches!

Govt funded

How much we pay for 1 unit of electricity in india? Rs. 3.5 to 4.25 depending on state How much does solar electricity cost per unit rs. 7 Babaji kya aap hari bijli ke liye jyada paisa denge..?

Beta hari ko ni.., lal ya peeli.. Ek paisa bhi nahi doonga!! vote doonga..

If babaji will not pay.. Who will?

In form of? Subsidy / grants / carbon credit / tax offsets

Grants / subsidy

1. Security 2. Food 3. Fuel 4. Investments 5. NREGA 6. 7. 8. Renewable!

Will u do this business?

3 yrs for asset turnover

Demand erratic.. Must service any demand that arises.. However high it is..

If not you shall be penalized..

If you continue.. Govt will nationalize or sell you as going concern..

Govt will regulate you heavily..

Which business is it?

Power .. No storage.. Consume while generated..

Such poor economics

then why did people put $3b or $13000 cr.. In power - 2008

Monopoly

Assured take off

Supreme court ruling..

Per unit price should be regulated such that the return on asset should be equivalent to similar businesses in India having a similar risk profile and investment requirements

Hats off!

Thanks!

If you hv nothing better to do And there is some problem with 2+2..

Write to me vishalrpb@gmail.com