Sunday, September 16, 2007

What is Leveraging?

Simply put, leveraging is borrowing to invest. The most familiar use of leverage is using a mortgage to buy a home. In return for a down payment you receive funds to purchase an asset that would otherwise be too expensive. The hope is that the home will appreciate in value, and when you sell you will be able to realize a profit over what you bought it for (including interest payments).

There are several ways in which markets can expand:

  • By selling to hitherto closed markets (India, China)
  • Through higher productivity- producing goods and services more cheaply
  • Globalization - shifting production to low-cost countries
  • Opening closed sectors for pvt companies - entering govt. domain of utilities, infrastructure, education and health
  • Increasing levels of consumer debt

It is the last one - increasing consumer debt – where leveraging plays a big role.

Leverage can be created through options, futures, margin and other financial instruments. For example, say you have $1,000 to invest. This amount could be invested in 10 shares, but to increase leverage, you could invest the $1,000 in five options contracts. You would then control 500 shares instead of just 10.

Most companies use debt to finance operations. By doing so, a company increases its leverage because it can invest in business operations without increasing its equity. For example, if a company formed with an investment of $5 million from investors, the equity in the company is $5 million - this is the money the company uses to operate. If the company uses debt financing by borrowing $20 million, the company now has $25 million to invest in business operations and more opportunity to increase value for shareholders.

Monday, September 10, 2007

Economics & Self-Interest

I have been ploughing (slowly, painfully) through Amartya Sen's "The Argumentative Indian". A related wiki search led me to an interesting clip:

The absurdity of public-choice theory is captured by Nobel Prize-winning economist Amartya Sen in the following little scenario: "Can you direct me to the railway station?" asks the stranger. "Certainly," says the local, pointing in the opposite direction, towards the post office, "and would you post this letter for me on your way?" "Certainly," says the stranger, resolving to open it to see if it contains anything worth stealing.
--Linda McQuaig, All You Can Eat

Clearly, he was making good use of pejorative rhetoric and sophistry (deceptive reasoning). But one question led to another and here is the days collection of interesting terms:

PUBLIC CHOICE THEORY studies the behavior of voters, politicians, and government officials as (mostly) self-interested agents and their interactions in the social system. It is the use of modern economic tools to study problems that are traditionally in the province of political science.

sometimes defined as the economics of "what is", whereas normative economics discusses "what ought to be". It focuses on facts and cause-and-effect relationships to identify a problem or suggest how a system could be improved by changes in rules .

RATIONAL IGNORANCE: Ignorance about an issue is said to be "rational" when the cost of educating oneself about the issue sufficiently to make an informed decision can outweigh any potential benefit one could reasonably expect to gain from that decision, and so it would be irrational to waste time doing so.

PUBLIC GOOD is a good that is non-rivalrous and non-excludable. Consumption of the good by one individual does not reduce the amount of the good available for consumption by others;

BUDGET-MAXIMIZING MODEL argues that rational bureaucrats will always and everywhere seek to increase their budgets in order to increase their own power, thereby contributing strongly to state growth and potentially reducing social efficiency. This is an influential new stream of public choice theory and rational choice analysis in public administration inaugurated by William Niskanen, in 1971.

RENT SEEKING occurs when an individual, organization, or firm seeks to make money by manipulating the economic and/or legal environment rather than by making a profit through trade and production of wealth. Eg,: A farm lobby that seeks tariff protection or an entertainment lobby that seeks expansion of the scope of copyright.

Sunday, September 02, 2007

Container Ships and Indian Ports

A fwd from DM on the Emma Maersk set me wondering – If ships carry 90% of India’s export-import volume, how much do the containers carry? How do our ports compare internationally?

According to IPA data (2005-6), Indian ports carried 4.7 million TEUs last year, of which nearly 60% went through JNPT-Mumbai (2.6 m TEU). This port has a draft of 12.5m and so the largest ships that can get here hold up to 5,000 TEUs (panamax).

To put things in perspective, here are the numbers for China – just the port of Hong Kong handles more than 22m TEUs annually. Four of the top ten container ports are Chinese.

Two critical factors affect the economies of ship operations – operation costs and time. On both counts Indian ports lag far behind the international benchmarks. In Hong Kong it takes eight hours to unload and load a ship; Indian ports take an average of 3.4 days (78 hours!).

Increasingly, global shipping lines are going for ships that can carry more than 7500 TEUs. A BRS-Alphaliner report says that 150 such ships have already been ordered, in addition to the 40 already in operation. By 2015 vessels with 12,000 TEUs (Suezmax) and 18,000 TEUs (Malaccamax) will become common. And India, with its strategic location and 7600km coastline will get only “feeder” ships and higher costs per container :(

And here are the vital stats of the lady from Denmark who is rewriting the rules:

  • Length - 1,302 ft (397m)
  • Width - 207 ft (56m)
  • Net cargo - 123,200 tons
  • Engine - 14 in-line cylinders diesel engine (110,000 BHP)
  • Cruise Speed - 31 mi/h (50kmph) – special silicon paint reduces drag and saves 317,000 gallons (1.4 million liters) of diesel per year!
  • Cargo capacity - 15,000 TEU (stated capacity is only 11,000 TEUs)
  • Crew - 13 people
  • First Trip - Sept. 08, 2006
  • Construction cost - US $145,000,000+

Ports capable of hosting Emma - Suez Canal (Egypt), Gothenburg, Aarhus, Bremerhaven, Rotterdam, Algeciras, Singapore, Kobe, Nagoya, Yokohama, Yantian, Hong Kong, Tanjung Pelepas and Felixstowe.



50 Largest Container Ports, 2004: Four ports handled more than 10m TEUs annually – all in the Far East