US should recognize the dangers of Dollar being global currency. Their current and trade account deficits have declined sharply over the last three years. If not regulated correctly this record deficit may increase 10 folds in upcoming decade or so. Taking the role of dollar as the global currency, US has benefitted from it with much easier financing. Its because of this that  large trade and current account deficits with the rest of the world over 30 years. Also the subsequent inflow of capital turned out to be an important cause of the current economic crisis. This may be due to loosened monetary policies, reduced to near nil Interest Rates, excessive liquidity and many more.

In investing terms, the large external deficits pose a big threat to US Economy. This is because the investors might at some point refuse to finance these deficits. Any such happening would drive down the Dollar Value leading to Devaluation, Inflation and poorer image of US to world Economy.  

Due to higher budget deficits, domestic demands of foreign goods increases leading to larger current account deficits. Also if the rest of the world again finances US the conditions of the Financial Crisis may get replicated. Even if all these are properly checked the investment for foreign debt may erode the Standard of Living of US Citizens.

There is a need for the Fed Bank to recognize the large external deficits, the dominance of dollar, and the large capital inflows are in no interest of US. So as to add to this point China stressed on the development of a new reserve non-national currency to facilitate equal proportionate development in every nation.

Balancing the budget is the only reliable policy instrument  for preventing the buildup of foreign deficits and debt for US Also there is a need to restore a budget that is balanced neatly over Economic Cycle. The policy should be developed in a manner to aid the nation with surplus in phases of requirement and to add to the nation’s deposits in the time of boom.

Also with the weakening stance of US Government and its inability to restore economic balance will degrade its position in world economy. Dollar being the national currency, US is majorly dependent on foreign creditors like China, Japan, France etc.

The fear of India crumbling to the Economic Tsunami that emerged in North America is over. Our conservative regulatory approach saved us. Also, what United States did after crisis to control the situation, we already had it – I am talking about Govt. stake in Banking businesses and other important businesses like steal, insurance, power, etc. More sustainable growth models exist in Indian economy all thanks to domestic consumption strength and rising middle class, Govt. of India intervention capabilities and regulations framed keeping a conservative approach.
So the time is back to project 8 % plus figures of GDP, rising corporate salaries, Double digit growth of  companies on quarterly basis, booming real estate – Shinning India, Next Big thing India, etc etc.
Question is – Is the growth benefit reaching to all?? Is it a lopsided growth story??
What is the real economic challenge in next few decades to come.
The real enemy is POVERTY. The gap between rich and poor. We may not realize its severity now as this phase is wealth addition phase of rich and middle class. As time will pass, more and more wealth will get accumulated with the rich and middle class population creating greater gap in the society. Have you ever imagined or analysed the reason behind kidnapping cases of Bihar? Wealth is accumulated with few (Doctors, Zamindars, Industrialists, Businessmen) and large population faces acute poverty. Result is they resort to kidnapping, illegal trade, etc. So the rich and rising middle class can’t ignore the growing rich poor divide as if they do so, they will face the music later when frustrated poor mases will resort to forcefully & illegal means of wealth accumulation. When poverty organizes them and unites them, a revolution is born that can change the course of nation and society. Most Moists in India hail from very poor family background and are forced to join it as a result of illiteracy and hunger.
What we can do now? Shall we continue to pursue rapid growth without giving much importance to these issues. Capitalism believes that deserving ones will get wealth. Most will agree. But then if we don’t wake up and leave them to suffer, we are sowing seeds of  revolution which will finish us in days to come. Thus we must empower them too, the growth benefits should be passed to the most poorest person also. Both urban and rural infrastructure building should be given priorities, job opportunities should be created even in rural areas and backward ares. Cottage and Small scale Industries should be protected against forces of Industrialization & Globalization. Slum redevelopment should be given justice pushing aside politics.  
The real challenge in coming years is eliminating poverty and providing quality education and healthcare facilities to country men!!!!!

Market Risks are broadly classified as:

1. Crrency Risk
2. Interest Rate Risk
3. Liquidity Risk

Currency Risk:

Banks deal in different currencies both on behalf of their customers as well as themselves to earn trading gains. Currency Risk is the probability of potential loss caused due to changes in market exchange rate of currencies. US Dollar/Euro is the most traded currency pair. Increasing Forex Turnover in the world shows the integrated world feature the flipside of which is increasing the volatility of exchange rate of currencies. Volatile Exchange rates can have a significant impact in the earnings, cash flow and profitability of companies. Effective management of foreign currency risk can help stabilize a company’s performance relative to currency market and is a source of competitive advantage. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Interest Rate Risk:

It is the exposure of a bank’s Financial System to adverse movements in Interest Rates. Banks typically borrow for short-term and lend it for long-term and this process attracts repricing risk as interest rates might increase over the period whereas the asset would have been financed at fixed interest rate. The major portions of bank deposits are demand deposits in which depositor has an option to withdraw at any point of time leading to borrowings by banks at higher cost.

Liquidity Risk:

Banks face liquidity risks due to mismatch in asset and liability. Liquidity risk also arises when banks do not have enough funds to provide loans. Also the risk that arises from the difficulty of selling an asset is called as liquidity risk. A security has a good liquidity if it is easy to trade and has low bid-ask spread (difference in bidding price of buyers and ask quotes of sellers). In recent times due to shortage of capital, banks are still facing extreme funding liquidity risk as they cannot fund their loans. In order to induce faith in customers mind Banks had to maintain enough Liquidity by devaluating some of the assets and practicing tighter risk management. This has also been caused due to wide gap between bids and ask price.

Banks like Lehmann Brothers and Bear Stearns have been a true consequence of Liquidity crisis.

After Recession shocks, stimulus provided has included recapitalization of banks. The stress has been on raising new capital for banks to tackle liquidity problems.

Measurement of value:

If profit maximization is given the topmost priority, the quality of the products may be hampered due to propensity to reduce cost of production to earn higher rate of profit. This may go against the goodwill of the company, contradicting the Code of Conduct or Ethics. If a company launches an expansion campaign, it has to invest heavily in Marketing its product and also in some cases would require capital to increase its production capacity to meet needs after expansion. So if the cost of incremental capital is more than incremental profit arising out of the increased turnover, again the overall profit of the company will be affected negatively. So along with profit what is more important is the generation of sufficient cash inflows much more than cash outflows. Only then the value of shareholders’ holdings will enhance.

Hence it can be easily predict that the cash flow is being considered as the most important measure of shareholders value enhancement. Also generation of incremental cash flow is very vital to sustain the solvency and liquidity of a company.

But receipt of cash today is more valuable than receiving the same amount of cash one year later and so some sort of adjustment in values for future cash receipts is required so that present and future cash generation can be made equivalent. This technique is often called as Discounted Cash Flow (DCF) and is being considered as the most preferred approach for measuring shareholders’ value enhancement. With the help of DCF the amount of discretionary cash flow an enterprise is expected to generate within with in a given period is estimated and is taken as a measure of shareholders’ value enhancement.

To elaborate, discretionary cash flow is that cash flow that is available after the funding of all positive Net Present Value (NPV), capital investment projects, retiring debt and so on. It I s discounted to arrive at the present value by using the discount rate. More the discount rate the present value will be less and vice-versa. The discount rate depends upon the cost of capital. This cost of capital is closely related to the risk level because the rate of return required by the investors depends on the risk inherent in an organization. The more the extent of risk, the risk premium, a component of expected return, would be more thereby increasing the cost of capital. So by reducing the risk an enterprise can enhance shareholders’ value by reducing discount rate through reduction in cost of capital. So discount rate and capitalization rate, the two important derivatives of cost of capital can be manipulated effectively through better risk management.

But an organization can drive the best result when a holistic view is taken for overall management of the value drivers in the same direction an integrated and balanced approach so that each driver acts as complementary to its counterparts and not at cross purpose.

Hence whenever management takes a decision, the decision has to be circled around the value creation including enhancements and other criteria. There should be proper harmony and balancing among EBIT, investment policy and programs, targeted growth rate, risk and return and emerging cost of capital and the overall determining factor should be shareholders’ value enhancement.

A company may do so by-

• Extinguishing of reducing the liability in respect of share capital not paid up

             A company may have come out with an issue of capital, wherein shareholders will be required to pay the issue price in stages, as and when called. Before all the calls are made, the project may be over and the further funds may not be immediately required. In such a case, the company can reduce capital by extinguishing or reducing the liability in respect of share capital not paid up.

• Writing off or cancelling the capital which is lost

             If the company has been incurring losses for a long period of time and the accumulated loss has gone beyond the reserves which it had built in the past, it would have actually lost a part of its paid up capital. This means art of paid up capital is no more represented by any real asset. here, the company may have been showing the accumulated loss as a fictitious asset in the asset side of the Balance Sheet and in parallel would have been showing its paid up capital at a historical figure, figure more than what actually exists. For Example: if a company has a total Capital of 1 Crore and accumulated paid up capital of 50 Lakhs. It will be added in Debit side of the Balance Sheet and the net will be deducted from the Capital to show an aggregate of the total as 50 lace in Capital part.

• Buy-back of Securities

              This is an important tool of capital restructuring. When a company holds excess cash, which it does not require in medium term; it is prudent for the company to return this excess cash to its shareholders. Such situation arises at the beginning of recessionary phase. In such situations even Interest Rates come down and Stock Markets show Bearish Nature.

One way a company returns excess crash to its shareholders is by paying a hefty special or onetime dividend. Another is to buy-back of equity shares hence indirectly increasing the promoters voting rights without making an open offer. This is also called Creeping Acquisition.

Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business.

Wikipedia

According to Analysts “Valuation is an objective search for true value” is a Misconception as all valuations are biased and payoff is greatest when valuation is least precise.

Valuation Models are sub-divided into 4 sub-models:

• Asset Based Valuation
• Discounted Cash Flow Model
• Relative Valuation
• Contingent Claim Models

Asset Based Valuation

The use of Valuation Models in investment decisions are based upon a perception that markets are inefficient and make mistakes in assessing value. This is because there is always uncertainty on the assets side being under valued or over valued. We living in a near to efficient market, the market price can be assumed to be the best estimate of value.

Discounted Cash Flow Model

Here the value of the asset is the present value of the expected cash flows on the asset. In order to successfully use this model a person needs to estimate the life of the asset. If the estimation is made then the total cash inflows and outflows relative to the asset can be obtained. This can help in gaining insights of the asset using methodologies like trend analysis by a seller.

Relative Valuation

Here the value of the asset is mapped in accordance to the values of the similar or comparable assets present in the market. Here there is a need of an identical asset or a set of comparable asset. This can also be achieved by bringing up highly correlated assets in relation to asset under valuation.

Contingent Claim Models

Contingent claims can be understood to be related to options mechanism. In many cases this model itself is an Option model. Options are instruments that derive their value form an underlying asset. This category of Models are practiced in cases when there is a variance in the values of the underlying asset so that a person can either go for a call when he thinks that the asset under inspection is under valued or go for a put option for reverse of the above criteria.

Acquisition in most cases refers to the purchase of a smaller firm by a larger one. Sometimes however a larger firm may be acquired by a smaller firm. This is known as Reverse Takeover.

Acquisition may be by purchasing of shares, and therefore control of the target company. Ownership control of the company in turn conveys effective control over the assets of the company. This form of transaction carries with it all the liabilities accrued by the business in the past.

Another form may be by buying the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. A disadvantage of this structure is the tax that many jurisdictions impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller’s shareholders.

These acquisitions may lead to changes in Earning per Share(EPS), changes can be positive or negative. In one case the EPS may increase this is a case when a company with higher P/E ratio acquires one with low P/E ratio. In other case EPS decreases, when a higher P/E ratio company is acquired by a lower P/E ratio marked company.

The Company traces its roots to the Northern Natural Gas Company formed in 1932. But the company got a stand-alone reputation in 1979, by buying a lower rated Houston Natural Gas Group, and establishing Enron Corporation.

The Company had a good hold on American Power Business and was presented the best Power firm for 6 consecutive years. With a capital of above 100bn$, the company was strongly steering to become the ultimate in Power Business.

Company having more than 50% hold on American Market, was seen to be the next big thing in Global Economy.

But the company was caught in a fierce scandal when many revelations about financing and accounting reports came up. The Company’s Auditor Firm, Arthur Anderson, was responsible for irregular accounting procedures conducted throughout the decade on 1990.

Company was on the verge of Bankruptcy within 6 months of the disclosure of the scandal.A White knight rescue attempt by a similar, smaller energy company, Dynegy, was not viable. Enron filed for bankruptcy on December 2, 2001.

The basis of scandal was the revelation that maximum part of profits and revenue of the company were due to the Special Purpose Entity.

Enron was using SPE’s appropriately by placing non energy related business into separate legal entities. What they did wrong was that they apparently tried to manufacture earnings by manipulating the capital structure of the SPEs; hide their losses; did not have independent outside partners that prevented full disclosure and did not disclose the risks in their financial statements.

So the financial debts and the losses that it reported were not reported in the financial statements. This scandal caused dissolution of one of the largest firm Arthur Anderson.

As the news of scandal was on air many of speculations were made for the dissolution of the company, this lead to decrease in the faith of investors in the company. This lead to the downfall of the shares of the company from somewhere about 100$ to about 50 cents. This was the basic reason that the company was on the verge of bankruptcy.

Financial Instruments of the Company dragged down to such an extent that the market capitalization decreased to about 1% of what it had before the scandal.

Enron planned to retain their three cross pipeline business and also some external invested assets. Post Bankruptcy the company had to sell-off all its pipelines business to make a new entity CrossCountry Energy, making the Company a small shell with limited scope of development.

So as to pay the debts to the investors and to pay all the outstanding in the market the company resolved into a Enron Creditors Group Corporation. Its goal is to pay off the old Enron’s remaining creditors and wind up Enron’s affairs…………………….

With the inflow of rapid investment and with the emergence of Real-Estate in Dubai many Banks including Swiss Bank, UBS and many other International Banks provided Financial Assistance to Dubai World for its developmental works.

With such a huge investment DW was able to bring out some rapid and phenomenal developments including Al Burj (Tallest Tower of World).Post Recession with minimal investment, demand for real estate profile decreased substantially leading to a large gap in between excessive supply and scare demand. This lead to a free fall in prices and valuation of Dubai World Products.  The cost impacted firm was its Real Estate firm Nakheel. Dubai’s credit risk fell the most in nine months after state-controlled Dubai World began talks on restructuring less than half its total liabilities and said the rest of its obligations are on “a stable financial footing.” The Dubai Government in order to save the Conglomerate announced that the companies which financed DW and Nahkeel should extend their maturities until at least 10 May 2010, extending the time by 6 months.

Markets around the world reacted very negatively to this news, with US markets the most hit as the debt in relation with Emirates was around $80 bn. Also due to market investors fears the credibility of Investors of DW decreased in S&P Indices.

Later World Bank in association with major Capital Markets published that the debt which is presently held on DW is not much to cause a trigger in financial crises. DW’s National Counterpart, National Bank of Sharjah and some other Funding agencies raising debts of $10 bn for the next 6 months have been seen as an assistance to the drowning Conglomerate.

In the meantime as the Dubai Government has asked Investors to extend the period of payments, the Conglomerate is itself thinking of Debt Restructuring of majority (approx. 60%) of its debt model.  Looking at the present scenario with incremental steps to bring back economy on track such decisions will be hard to put up, but ignorance of such financial crises may once again lead to situations which came up during Lehmann Brothers’ Fall.

Years later, Talibanese have again regained their power over Afghanistan (this time there is no US help who demonstrated destruction as a national cause to restore peace in Afghanistan).
Also Saddam Hussain being in no fault was hanged, although people remember him as an Autocrat who used to rule the people of Iraq and used to regulate his policies whether or not ir was in interest of common man.

Coming on to the main point of discussion-> What is PetroDollar??
People do not realize the real reason for Iraq war and the current war threat against Iran by USA. We cant call it against Terrorism nor illegal use of nuclear weapons or chemicals nor even the oil. USA has been doing the same from late 70′s and all other countries just be-fooled by this intelligence started supporting USA making it strongest economy for no real reason.

USA has been trying to protect and prop up the greatest con-job in recent history, its THE US PETRODOLLAR SCAM.

Back in 19771 when economies world wide were emerging and US was no doubt the fastest to grow, the USA printed and spent far more paper money then it cover to buy gold.
Few years later, French demanded redemption of its paper-dollar holdings in gold. But the USA rejected as it actually didn’t have enough gold for the dollars it had already printed and spent all over the world, thus committing an act of bankruptcy.
Seeing the future economy leading to starvation US started to make humble relations with Saudis for sole motive to promote its Dollar. Saudis and US cut a deal – OPEC denominate all sales of oil in US dollars.

From that point, every nation that needed to buy oil had to firstly hold US dollars, which meant that they exchanged their goods and services for dollars, which the Americans just printed. This lead to increase in demand of US$ in the global economy making US economy strong and stable.

The Americans brought their oil literally for free by printing those dollars. The ultimate free lunch for the Americans at the expense of the rest of the world.

Howerver many were against this scam but didn’t have enough power and resources to resist it until late 1990s.

Saddam Hussain understood the situation and started selling Iraq’s oil directly for Euro, abrogating the cozy arrangement the Americans had with OPEC. Thus Saddam had to be stopped. How? This has been clear to u by now!!

USA concocted up a pretext to wage war (drama of twin tower blast) and invade Iraq and the first thing the Americans did was to revert sales of oil back to dollars. The currency crisis was averted for the moment. After Saddam’s arrest price of Oil in locale increased by nearly 2000% and the market was full of American products, those sold at highest prices than in any other country. But Asian countries still were not getting the point and supported US blindly.

Hugo Chavez (Venezuela President) also started selling Venezuelan oil for currencies other than dollars, so there were a number of attempts on his life and “regime change”, traceable right back to the CIA. The petrodollar cat was out of the bag and busted.

Iran President (Ahmedinejad), watching all of this, decided to kick The Great Satan in the goalies and do the same thing – sell oil for every currency EXCEPT US dollars. This decreased the demand of dollar in global market leading to weakening of US$.

The shell game is coming to an end for the Americans. As the nations of the world find that they can buy oil for their own currencies instead of holding paper US dollars, more OPEC nations will abandon the dollar. The worst thing for the Americans is that eventually, they will also have to buy their oil with Euro or Rubles instead of just printing paper money to get it. That will be the end of the American Empire, the end of funding for the US military and the destruction of the US economy. The great scam is coming to an end and there’s not a lot that the USA can do about it, except start another world war!!!

Wait and Watch… Only few years/months ahead………………….