Demand Supply and Markets v0.02

7/28/2019 Demand Supply and Markets v0.02

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Vishal Bhatia

security analyst.. hisviewpoints


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stories..

wealth creation

wealth destruction

hubris

magicians

vandals


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.. because of demand

and supply


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wealth

economics

money

finance


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what keeps a security

analyst awake..

trade should be profitable

trade profitable if company profitableat least demand should exist

duhh! Vish..

Off course!

have capacity to supply atprofit


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selling price no max the more the merrier

minimum selling price = Any greater thanmarginal cost

What is marginal cost? the cost of produzzzing oneezzzztra unit..zzzzz.zzzzz!!

Sponge Iron 2200 / Ton

Ore 1500 / Ton

Coal 850 / Ton

Electricity 200 / Ton

Operators 100 / Ton

Total Op Cost 2550 / Ton

Dem Supp

MP


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Not Necessarily a company

Takes positions on produce directly in the market

Industrial

Grade

Food Grade


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demand rises supply constant => prices rise

demand constant supply rises => prices fall

demand rises supply rises => prices steady

demand falls supply constant => prices fall

demand constant supply falls => prices rise

demand falls supply falls => prices steady

demand rises supply falls => hyper price rise

demand falls supply rises => prices fall


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supply

India + PakistanIndia global

monopoly (80%)

total prod = 1.5 mt

demand

wealthy American

oil cos

weak rupee

$2,000 Mar 11 -

$28,000 Mar 12

1400%

commodity

traders +

bankers/brokers

90% cornered

rs. 1000 cr

loans

42984439 4365 4576

3987 42774376

4263

5000 5745

1000011750

14800

30125

27458

0

5000

10000

15000

20000

25000

30000

35000

gaur gum seed

price/quintal

Perfect no consumer price resistance

Long run supply / short run supply

vultures

588%


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hubrisPride, self confidence, arrogance


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financial crisis or global financial crisis

what happened?


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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

year qtr shiller

1995 Q1 77.74

1996 Q1 79.61

1997 Q1 81.82

1998 Q1 85.71

1999 Q1 98.08

2000 Q1 1002001 Q1 109.27

2002 Q1 116

2003 Q1 130.48

2004 Q1 146.26

2005 Q1 169.19

2006 Q1 186.66

2007 Q1 185.45

2007 Q3 180.452007 Q4 170.64

2004 46%

2006 86% almost doubled

since great depression housing

prices in US have risen @ 1% a year


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for prices to increase what has to happen?

demand has to rise faster than the supply

Possible theories?

what are demand drivers?

population

incomes

+

what are supply drivers?

new homes

built

>


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populati

on

incomes

2000 2004

Population = ~1.5%

Incomes = 3%

____________________________________

Money Pool = ~ 1.4%


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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 yearSo 1.8 x 4 = 7.2 m new homes

So 7.2 / 115 = 0.06xxx = ~ 6%

new homes

builtHousing stock = ~6%


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Bizarre !!!!

demand falls supply rises => prices fall

basic

eco


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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 -

Discipline - X

Steady job ?

Good Credit score700+

Rent - X

Biggest Barrier down payment


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Cut to - 2000s

2000s

Down payment 10%

Down payment - $6000

Job is fine (ok if

unsteady)

Credit score = 600

Suddenly a lot of people

Became eligible to buy a

house

2002s

Down payment0%

Down payment - $0

Job you can lie

Credit score = 500

Still More people eligible

2005s

Down payment 0%

Down payment - $0

Job not required. We

have your house

Credit score = no credit

check

.. And more.. Lot more!

Absurd standards!!


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

Demand came from lowering of standards.

Poor migrant laborers earning $40,000 a year were able to buy $1,000,000 houses

Sub primes


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bonus

growthHouse loan

interest


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House loan

Fee

SECURITIZED

LOANS

MBS

CDO

+

Fee

+

interest

investors

+Fee


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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

Rating agencies

Have to rely on someone.. Who?


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MBS

CDO

Historically there have been low default rates

We know why ?

So there is a high likelihood that you will be paid

AAA

PBOC

Hedge funds

Pension funds

7%

Still no

defaults


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Vicious cycle

Housing prices go up

Lower defaults

Lower standardsEasier financing

Perceived lending risk low

More people willing to lend


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Phata poster nikla vulture

1000 borrowers

1m each

Total borrowing = 1b1b

100m

1b

SPV1m shares

100m

Share entitlement

$100 yearly$1000 repayment

High IPO Demand

Price rises to 1100

1.1b

100m


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Ideal

-None defaults

- no prepayment

Everyone knows-It will not going to be exactly

10%

-Some will default some will

prepay

How much lower?

Computer models

Historical data

populationState

history

Recovery

patterns

Real return?


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1000 borrowers @ 1m = 1b asset

Simplified model

20% or 200

default50% recovery

10% overall losses

Real return = 10 (10% of 10)

= 9%1980s

Down payment

25%

Steady Job

Credit score =

700+

VAR


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wealth destruction

1995

2005

2008

2009

100k 100k 100k 100k 100k

E 20 L 80

1m

Bubble peak

E 0 L 1m

1m300

k

Bubble

burst

1m

1m

1m 1m500k 8%

580k 580k 580k580k

600k??

Honest effort

Short sale?250

k

Audi

Macau

hettich

250k 250k 250k

Wealth wiped off:

Bank = 500k - 250k = 250k

Borrower = 250k 80k = 170k

Total = 420kboom!! Kaput!


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Plagiarist!

Salman Khan videos

Khanacademy.org


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magician


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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?


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INDIA

RBI

$

Stock

Currency

Market

$ga

tekeepers

Peg to USD


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Black Wednesday 16 sept 1992

EERM European Exchange rate mechanism

Predecessor of euro

Commitment to ERM required that BOE doctor interest

rates higher

Economy demanded lower rates

Soros flooded markets with pound how?

Shorting the pound

Pegged to deutsche mark. Band 6% movement


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Mind Numbing$ 1B

Rs. 5,000 cr.

The Man Who Broke the Bank of England


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Buys for Rs. 5 an apple

Sells for rs. 3 an apple

Millionaire?


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33%1500 x

1920

= 28.8 L

Operating costs

pilots

Ground staff Maintenance crew

airhostesses


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1 plane =

$200m

Or

Rs. 1000 cr.

4% of 28.8 L

= 1.15 L

100,000

days


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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


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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

.. Another magician


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Evolution theory?


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Evolution theory?

Natural process


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hardnosed

Single mindedfocus

cost cutting

1 configuration

1 type

38

years

of

profit


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Vandal

How much money destroyed?

.. Jala kar rakh kar doonga..! Saara paisa!


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Kya kareen..?

Thyan thyan!!


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"The Century's Greatest Sports Photos"

Phantom punch


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Inflection point


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Disruptive innovation


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Mechanical engg from imperial college London

Frustrating attempts at making metal furniture in Calcutta.

1980s

Sensed opportunity in storage media business


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Sensed opportunity in storage media business

2000 - 2004

Second largest in the world

357 cr

3 billion discs a year

17% global share


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Vishal the procastinator

Ran out of time..

Number digging stops

Stories continue..


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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


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cmu

Dresses impeccably

No hobbies

workaholic

Finishes project before time


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Sensed inflection point

Started Moser Baer power pvt ltd

PE Funded

Raised debt


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What happened?

Vandal?


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Industry

..on crutches!

Govt funded

Green power

Renewable

Clean air.. Leave better earth to our children

How much we pay for 1 unit of electricity in india?


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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..


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If babaji will not pay.. Who will?

In form of?

Subsidy / grants / carbon credit / tax offsets


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Grants / subsidy

1. Security2. Food

3. Fuel

4. Investments

5. NREGA

6.

7. 8. Renewable!


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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..


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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


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Monopoly

Assured take off

Supreme court ruling..

Per unit price should be regulated suchthat the return on asset should be

equivalent to similar businesses in India

having a similar risk profile and

investment requirements


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Hats off!

Thanks!

If you hv nothing better to do

And there is some problem with 2+2..

Write to me [email protected]

Demand Supply and Markets v0.02

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