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SEPTEMBER 2 ,2012

Company In Focus

Cover Story : Debt to more debt

INSTITUTE OF MANAGEMENT TECHNOLOGY, GHAZIABAD


EDITORIAL Dear Readers, Greetings from FinNiche! There is a sense of relief amongst the first year students after completing the first end terms of their two year journey. As we all know that change is the only constant thing in this world, thus, there is a start of new semester from tomorrow, for those who want to make a fresh start, here is the opportunity. Team FinNiche thereby give its best wishes to all the students of IMT Ghaziabad for their second semester, especially for the OLT quizzes. In this edition of FinXpress, we have JP Morgan Chase in the “Company in Focus” section. In the “Term of the Week”, from concepts of Hedging we move on to Derivatives. We bring you “News of the Week” and “Markets this week” where the Sensex snapped its four-week gaining streak and tumbled to end at one month low due to fall in metal, realty, auto and banking counters on the back of weak global cues. In the “Cover Story” we have Debt to more Debt. We sincerely hope that the readers find our content engaging. We would appreciate feedback and suggestions for improvement. We hope to bring you more information in the future thus keeping you updated and adding to your knowledge base. Till then, “Enjoy Reading”! Yours Sincerely, The Editorial Board “FinXpress”

SEPTEMBER 2 ,2012

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COMPANY IN FOCUS JP Morgan Chase & Co.

About JP Morgan Chase JPMorgan Chase & Co. is an American multinational banking corporation of securities, investments and retail. It is the largest bank in the United States by assets. It is a major provider of financial services, with assets of $2 trillion and according to Forbes magazine is the world's second largest public company based on a composite ranking. The hedge fund unit of JPMorgan Chase is one of the largest hedge funds in the United States. It was formed in 2000, when Chase Manhattan Corporation merged with J.P. Morgan & Co. The J.P. Morgan brand is used by the investment banking as well as the asset management, private banking, private wealth management and treasury & securities services divisions. Fiduciary activity within private banking and private wealth management is done under the aegis of JPMorgan Chase Bank. The Chase brand is used for credit card services in the United States and Canada. JPMorgan Chase is one of the Big Four banks of the United States with Bank of America, Citigroup and Wells Fargo. According to Bloomberg, as of October 2011 JPMorgan Chase surpassed Bank of America as the largest U.S. bank by assets. Recent Acquisitions  In 2006, JPMorgan Chase purchased Collegiate Funding Services, a portfolio company of private equity firm Lightyear Capital, for $663 million. CFS was used as the foundation for the Chase Student Loans, previously known as Chase Education Finance.  In April 2006, JPMorgan Chase announced it would swap its corporate trust unit for The Bank of New York Co.'s retail and small business banking network. The swap valued The Bank of New York business at $3.1 billion and JPMorgan's trust unit at $2.8 billion and gave Chase access to 338 additional branches and 700,000 new customers in New York, New Jersey, and Connecticut.  In March 2008, JPMorgan acquired the UK-based carbon offsetting company ClimateCare. 

In November 2009, JPMorgan announced it would acquire the balance of JPMorgan Cazenove, an advisory and underwriting joint venture established in 2004 with the Cazenove Group, for GBP1 billion.

Structure OF JPMorgan Chase JPMorgan Chase & Co. owns five bank subsidiaries in the United States namely JPMorgan Chase Bank, National Association; Chase Bank USA, National Association; Custodial Trust Company; JPMorgan Chase Bank, Dearborn; and J.P. Morgan Bank and Trust Company, National Association. JPMorgan Chase's activities are organized, for management reporting purposes, into six business segments investment banking, card services and consumer lending, commercial banking; personal and business banking, home lending, treasury & securities services, asset management, corporate; including private equity and treasury and corporate functions. The investment banking division at J.P. Morgan is divided by teams: industry, M&A and capital markets. Industry teams include consumer health care and retail, diversified industries and transportation, natural resources, financial institutions, metals and mining, real estate and technology, media and telecommunications.

SEPTEMBER 2 ,2012

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JP Morgan Chase in India India is an important focus for J.P. Morgan’s expansion in the Asia Pacific region. The lines of business include the Investment Bank, the Global Corporate Bank, Private Equity, Asset Management and Treasury and Securities Services. J.P. Morgan offers clients an integrated range of services that combine specialist local knowledge with leadership positions across these lines of business. Additionally, J.P. Morgan has a large Global Service Center in India that is rapidly expanding in scope and size. The service center has delivered process innovations that benefit our lines of business and support operations across the world. The firm's roots in India date back to 1922, when J.P. Morgan & Co. in New York and Morgan Grenfell, its affiliated partnership in London, took an ownership interest in the Calcutta merchant banking firm of Andrew Yule & Co. Ltd.

Financial analysis of JP Morgan Chase 

Revenue has increased in last ended quarter of the year. Revenue in last quarter was $7.01 billion which is 0.08 percent greater as compared to quarter ended as on September 30, 2010. According to the data shown, it appears that JPMorgan illustrated mix performance and its greatest revenue was in the second quarter of the year which stands at $7.10 billion. The revenue in the first and third quarters was $4.53 billion and $6.20 billion respectively.

The JPMorgan engendered net income of $4.83 billion in last quarter which is better than previous quarter’s net income of $4.41 billion. Moreover, net income has increased which led to increase EPS for the current quarter.

SEPTEMBER 2,2012

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TERM OF THE WEEK : Derivatives The primary objectives of any investor are to maximize returns and minimize risks. Derivatives are contracts that originated from the need to minimize risk. The word 'derivative' originates from mathematics and refers to a variable, which has been derived from another variable. Derivatives are so called because they have no value of their own. They derive their value from the value of some other asset, which is known as the underlying. For example, a derivative of the shares of Infosys (underlying), will derive its value from the share price (value) of Infosys. Similarly, a derivative contract on soybean depends on the price of soybean. Derivatives are specialized contracts which signify an agreement or an option to buy or sell the underlying asset of the derivate up to a certain time in the future at a prearranged price, the exercise price. The contract also has a fixed expiry period mostly in the range of 3 to 12 months from the date of commencement of the contract. The value of the contract depends on the expiry period and also on the price of the underlying asset. For example, a farmer fears that the price of soybean (underlying), when his crop is ready for delivery will be lower than his cost of production. Let's say the cost of production is Rs 8,000 per ton. In order to overcome this uncertainty in the selling price of his crop, he enters into a contract (derivative) with a merchant, who agrees to buy the crop at a certain price (exercise price), when the crop is ready in three months time (expiry period). In this case, say the merchant agrees to buy the crop at Rs 9,000 per ton. Now, the value of this derivative contract will increase as the price of soybean decreases and vice-a-versa. If the selling price of soybean goes down to Rs 7,000 per ton, the derivative contract will be more valuable for the farmer, and if the price of soybean goes down to Rs 6,000, the contract becomes even more valuable. This is because the farmer can sell the soybean he has produced at Rs .9000 per ton even though the market price is much less. Thus, the value of the derivative is dependent on the value of the underlying. If the underlying asset of the derivative contract is coffee, wheat, pepper, cotton, gold, silver, precious stone or for that matter even weather, then the derivative is known as a commodity derivative. If the underlying is a financial asset like debt instruments, currency, share price index, equity shares, etc, the derivative is known as a financial derivative. Derivative contracts can be standardized and traded on the stock exchange. Such derivatives are called exchangetraded derivatives. Or they can be customized as per the needs of the user by negotiating with the other party involved. Such derivatives are called over-the-counter (OTC) derivatives. However, exchange traded derivatives have some advantages like low transaction costs and no risk of default by the other party, which may exceed the cost associated with leaving a part of the production uncovered.

SEPTEMBER 2 ,2012

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MARKET THIS WEEK Sensex fell 1.99% from last week and ended the week at 17,429.56. Simple Moving Averages

30 Days

50 Days

150 Days

200 Days

17405.01

17340.36

17197.51

16923.56

Returns – BSE Sensex YTD

12.78 %

1 Week

-2.30%

1 Month

0.80%

3 Months

7.20 %

6 Months

-2.10 %

1 year

3.30 %

2 Year

-3.30 %

3 Year

10.90%

Nifty gained 2.7% from last week and ended the week at 5258.50 Simple Moving Averages

30 Days

50 Days

150 Days

200 Days

5,276.65

5,258.50

5,218.36

5,121.48

Returns – Nifty YTD

13.71 %

1 Week

-2.40 %

1 Month

0.60%

3 Months

6.80%

6 Months

-2.40 %

1 year

4.30 %

2 Year

-2.70 %

3 Year

12.80 %

SEPTEMBER 2 ,2012

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Overview Indian stock indices fell after rising for three successive weeks, fueled by steady FII inflows and amid expectations of some reforms going through. A surprise drop in inflation for July also raised hopes of a possible rate cut at next month’s RBI policy meeting. Data on indirect tax receipts and SEBI’s measures to boost the capital markets also had a positive rub-off on the markets. However, data on exports and imports continues to be grim, serving as a cruel reminder of challenges emanating from the overseas markets. The release of the controversial CAG reports in the Parliament also re-ignited fears of a wider political backlash. Much will hinge on the way global markets unfold. With the US economy showing resilience, the focus will be on the Eurozone and China. The current global risk-on trade has been fueled by hopes of fresh policy stimulus from both these regions. Any disappointment on that front could lead to a reversal.

Policy Rates

Reserve Ratios

Bank Rate

9%

CRR

4.75%

Repo Rate Reverse Repo Rate

8%

SLR

23%

Margin Standing

9%

Lending Deposit Rate 10%Base Rate 10.5% Savings Deposit Rate 4% Term Deposit Rate 8%-9.25%

7%

Exchange Rate v/s INR

Commodities

unit

Rs./unit

% change

Currency US Dollar

Symbol $

Rate 55.72

% change 0.57%

Gold Silver

10 gms. 1 Kg.

31220 59000

0.90% 9.1%

Euro

69.65

1.30%

Crude Oil

1 BBL

5361.01

0.14%

Dirham

AED

15.11

0.59%

Japanese Yen Chinese Yuan

¥ CNY

0.708 8.74

0.10% 0.45%

SEPTEMBER 2 ,2012

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NEWS OF THE WEEK Delay GAAR by 3 Years; Retain Mauritius Benefits, Recommends Shome Panel In what could be a huge relief to both corporates and financial markets, the Review Committee on General Anti Avoidance Rules (GAAR) headed by Parthasarathi Shome has recommended a delay in implementation by three years. The panel wants GAAR to kick in from 2015-16. Another major recommendation of the panel is with respect to continuation of Mauritius benefits. The original draft of GAAR denied corporates the tax benefits, but the Shome panel is believed to have suggested that the benefits still be given. The third recommendation which may greatly dilute the original GAAR is that all pre-GAAR investments will not come under the ambit of the rule. The recommendations if implemented will provide corporates time to prepare for the introduction of GAAR. The markets are likely to view this development as another positive signal from the Finance Ministry. The committee had been set up by the government to examine all issues related to the controversial GAAR. Introduction of GAAR, proposed in the 2012-13 Budget to check tax evasion, had triggered strong opposition by foreign investors following which its implementation was postponed till April next year.

Q1 GDP Grows At 5.5%, Languishes Around 3-Year Low The Gross Domestic Product (GDP) for the first quarter of the current financial year grew at a greater than expected level of 5.5 per cent as opposed to 5.3 per cent in the January-March quarter. The quarterly GDP at factor cost at constant (2004-2005) prices for Q1 of 2012-13 is estimated at Rs 13,06,276 crore, as against Rs 12,38,738 crore in Q1 of 2011-12. According to Central Statistical Organization (CSO), the economic activities which registered significant growth in Q1 of 2012-13 over Q1 of 2011-12 are 'construction' at 10.9 per cent, 'financing, insurance, real estate and business services' at 10.8 per cent and 'community, social and personal services' at 7.9 per cent. The services sector of the economy grew at 6.9 per cent and the industrial sector recorded a growth of 3.6 per cent in the first quarter of the current financial year. The agricultural sector expanded at a higher than anticipated level of 2.9%. The manufacturing sector of grew at 0.2 per cent as against a contraction of 0.3 per cent in the previous quarter. The gross fixed capital formation, a measure of investments, rose less than one per cent. At current prices GDP expanded at 13.5%, in line with the 14% assumed in the budget. This suggests that as far as tax collections are concerned GDP estimates are fine. The private consumption growth moderated further at 4%, suggesting a moderation in both demand and investments. The hit in consumer sentiment is also visible in the low 4% growth in trade, hotels and transport sector. The government's stimulus spending continues to provide support to the economy.

Ben Bernanke Lifts Wall Street, Keeps Stimulus in Play US stocks rose on Friday after Federal Reserve Chairman Ben Bernanke, expressing "grave concern" for the stagnating US job market, said the central bank was prepared to take further steps to strengthen the economy if necessary. Though Bernanke, speaking in Jackson Hole, Wyoming, dashed some hopes for a signal of quick action, his comments bolstered bets that the central bank was closer to providing more stimulus for an economy that is close to stalling. Stocks had been flat for much of the week ahead of Bernanke's speech, though expectations of additional stimulus from the Fed helped the market this month. All three indexes posted gains for August. Energy and materials shares were among the best performers, with the S&P energy index up 0.9 per cent and the S&P materials index up 1.1 per cent. The Fed's next policy meeting is in mid-September, and many analysts are looking to it for a decision on a third round of quantitative easing. The Dow Jones industrial average was up 90.13 points, or 0.69 per cent, at 13,090.84. The Standard & Poor's 500 Index was up 7.10 points, or 0.51 per cent, at 1,406.58. The Nasdaq Composite Index was up 18.25 points, or 0.60 per cent, at 3,066.96.

SEPTEMBER 2 ,2012

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Eurozone Jobless Numbers Hit Record 18 Million Jobless numbers across the eurozone hit a record 18 million in July, said new figures released on Friday by Eurostat. The headline jobless figure was the highest since records began in 1995, and left the European Commission fretting over potential unrest on the streets of Europe's capitals. Coupled with annualised inflation rising to 2.6 percent in August according to a separate Eurostat release, the figures had analysts warning of ever-tighter household spending acting as a drag on governments' hopes of recovery. The eurozone is faring far worse than its main international economic rivals. Japan's unemployment rate was flat at 4.3 percent in July even as the US rate rose to 8.3 percent. Ekkehard Ernst, a senior economist at the UN body, told a German daily that close to one in 10 would be without a job even in powerhouse Germany by 2014, nearly twice the current level. France has even higher numbers, upcoming August data seemingly sure to crash through the three-million mark. Annual unemployment increases in Spain and Greece were easily the highest, and both countries, labouring under sovereign and banking debt crises, logged jobless rates among the key under-25s age-group of more than 50 percent. According to research firm Markit, the eurozone is facing a fall of up to 0.6 percent in gross domestic product for the third quarter, which would meet the widely accepted definition of recession, two successive quarters of economic contraction.

Carrefour to cut 500-600 French jobs Carrefour, the world's second-largest retailer, plans to cut up to 600 jobs in France as part of plans by new boss Georges Plassat to cut costs and put the struggling company back on track. The cuts, aimed at "boosting efficiency and reducing overheads", will target jobs at the group's headquarters and support functions such as marketing and purchasing across France. Carrefour had 112,440 workers on its French payroll as of Dec. 31, 2011, making it one of the country's biggest private-sector employers. With the French jobless rate at a 13-year high, the new Socialist government said last week it would look closely at the French retailer's situation after unions warned of job cuts to come. Plassat, who has a reputation as a ruthless cost-cutter, took over in May with a brief to revive the company's performance in Europe and halt its domestic market share decline. Having pulled out of Greece in July and announced plans this week to close its two Singapore hypermarkets, Carrefour could exit more countries to reduce debt.

.

SEPTEMBER 2 ,2012

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COVER STORY Debt to more debt, but for how long ?? “If you suffer from small loans, you have a problem; but when you borrow alarmingly large sums, then it is the lender who will suffer a greater problem!”Simply put, this is the dangerous financial position of the US presently, undermining its continued ability to raise borrowings or to service them. If its debt bubble bursts, it is feared that the global economy will bear the brunt, reminiscent of the 1929 Great Depression. DEBT ADDICTION The national official debt of the US Treasury capped at $14 trillion has made Standard and Poor’s downgrade US credit rating for the first time ever. Add to this the “unofficial” part, which includes social security promises and the defense expenditures, after deducting all the expected tax collections of the Federal Government — and the fiscal gap could be to unimaginable levels.The last three decades saw a massive tenfold increase in the debt of the US, from $5 trillion in 1980 to about $54 trillion today. The gap between official debt and overall debt as shown by the chart is not known, but even the official debt of $14 trillion can, by no means, be a comforting figure to either the borrowers or lenders.During the same period, interest rates on savings were drastically cut to discourage savings, driving households to move their savings to the stock market.They not only spent at levels that exhausted their savings but also went beyond and borrowed heavily, the repayment of which was contingent on a stagnated market.Post 9/11, the stock market suffered as a sequel to the “dotcom bubble” and the economy took a beating.The Federal Reserve reduced interest rates to attractive lower levels, making it easier for financial institutions to borrow money and continue issuing debt liberally, and at very low interest rates.Such loans were made to ‘sub-prime’ customers who were unable to make mortgage payments when the economic situation took a turn for the worse. The interest rate on these mortgage loans started increasing in 2007, creating a housing crisis in 2008 which spun out of control.The economy took a further beating, the stock market plummeted, and there was further unemployment. A common factor in this escalating crisis is the constantly rising level of debt, both at the household and the Government levels. This trend persists, despite the continued recessionary trend in the economy.Debt has been tackled not by encouraging savings. Heightened consumerism has resulted in unsustainable levels of debt, and created an unabated appetite for US borrowings.The perceived strength of the US currency is under challenge.The US, in the last few decades, has been the beneficiary of large FDI flows into its economy, along with talent.Its continued ability to attract capital and talent is under threat. This is contracting the economy and increasing joblessness.The capacity to spend will also fall, further contracting the economy. LEARNING FROM ASIA The West will have to borrow the idea of savings from its Asian counter-parts, in the place of its debt-driven consumerism, to reverse its declining trend.Asian countries are no exceptions to this global problem of household debt, but they are expected to have relatively greater resilience.Their savings, and the family acting as an informal institution of insurance, will enable them to “de-couple” from external uncertainties for a longer period of time.This would also be an eye-opener that inter-dependence within family as an institution is a more sustainable approach than heightened individualism, with strong dependence on the state.This holds true, no matter how good the delivery systems of the state may be. Source: The Hindu Business Line

SEPTEMBER AUGUST 052, ,2012 2012

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CAN YOU SOLVE IT? LAST WEEK’S ANSWERS

Match the following:

SET A

Infosys TCS Mahindra Satyam Wipro CTS

JPMC Karen McLoughlin Ziraat Bank C.P. Gurnani Jack Palmer

1) JPMC

Jamie Dimon

2) Deloitte

Stephen Almond

3) Texas Instruments

Rich Templeton

4) Crisil

Douglas Peterson

5) SBI

Pratip Chaudhari

CARTOONS: Winner: Krishna Koundinya

**Rush in your entries to : finniche.imt@gmail.com The right entries will get their name featured in the next issue of FinXpress. So hit the quiz fast & get yourself visible among 1000 odd in the campus.

Feel free to write to us at : finniche.imt@gmail.com Drop in your suggestions to the editorial team : Magazine design/news : discover.ajay.kr@gmail.com Articles/quiz : jackruzario@gmail.com

SEPTEMBER 2 ,2012

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