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Surging Market: Reacting to what?

August 16, 2009 Leave a comment

March ’09, price-earnings (P/E) ratio for BSE SENSEX based scrips (30) was 12.68, and by July end it was 19.1. The higher the P/E ratio, the higher price per share than annual earnings per share. The statistics mentioned above clearly show that how the stock prices have shot up too fast. Considering failing monsoon and drought in India and current situation of global economy, Indian stock market looks overvalued.

I agree that top 6 out of 10 economies of the world have shown positive growth after 5 quarter consecutive negative growth. From January 1st, The DOW is up 6% and NASDAQ has returned 26%. In Europe, Spain’s and Sweden’s indices are up 18% and 30% respectively since January. The Hang Seng in Hong Kong has gained 45% plus in the same time. Brazil’s Bopseva is also up 50% since January. It is being said that pumping money into emerging markets would help world to come out of the financial crisis. Because of which many believe that Brazil, China and India share market are booming.

Now it”s time to analyze India’s market, from January it appreciated mind boggling 60%. If we look at the statistics from March to August ’09, BSE touched 8000 in March, and it almost gained 100% by coming close to 16000 in August. This figure is far ahead of Brazil or China. Everybody knows that demand is drooping in India. India’s imports have been contracting. The ability of India to absorb goods and services from all over the world is coming down. It is hard to predict when demand will bounce back. In light of India facing rapidly increasing commodity prices, pandemic eruption, slow sales growth, biggest drought of the century and sluggish job market, I don’t find any motive for market to surge. Disinvestment could be counted behind this race, but this is a long process. If I remember correct, after budget only 1 PSU IPO has been floated. Rest is lined up and still market is booming.

Is this again a bubble or a collection of many bubbles? Famous analyst Abheek Barman may not be wrong in saying that if earnings don’t grow as fast as share prices, the price to earnings (PE) multiple will bloat, setting us up for another crash.

Qualified Intermediary & W Series Forms

This post is an attempt to let the readers know what kind of form they should fill up if they are drawing any part of their income from US. Currently I am working on a US Qualified Intermediary Project, so I feel myself qualified enough to certain thoughts on the subject J But in case if I have written anything wrong, please drop in your comments which I could incorporate in my post. I had compiled this piece of information for an internal training, taking inputs from discussions with company’s QI business and IRS website.

What is QI Agreement?

A QI is a foreign financial institution that has agreed with the IRS to undertake certain U.S. tax withholding and reporting responsibilities and has agreed to audits by an external auditor.

Background:

 Purpose of IRS Regulations to:

  • Identify US persons investing into the US through Offshore Intermediaries.
  • Eliminate “treaty shopping” abuses occurring due to manipulation of the “address rule” for dividends.
  1. IRS QI regulations took effect in January 1, 2001
  2. By enforcing QI regulations, IRS meant to establish client entitlement to correct tax withholding by appropriate KYC or W series forms.
  3. Maintain valid customer documentation and supporting information to higher standards, including the completion of IRS forms (W series), to make judgments of the US tax status of bank’s clients.

W9 Forms

The W-9 is only required of independent contractors who are US citizens, US resident aliens, and some other less common categories (e.g., a domestic estate). Non-US independent contractors may be required to fill out a Form W-8 (like the Form W-8BEN) instead of a W-9. This is not always the case. Investors, or freelancers, living in other countries may simply file the W-9, which will provide the employers or financial institution with a way to keep record of their information.

Resident & Non Resident Aliens

  • You are considered a US nonresident alien for any period that you are neither a United States citizen nor a United States resident alien.
  • You are considered a US resident alien if you met one of two tests for the calendar year:
  1. Green Card Test: If at any time during the calendar year you were a lawful permanent resident of the United States according to the immigration laws, and this status has not been rescinded or administratively or judicially determined to have been abandoned, you are considered to have met the green card test.
  2. Substantial Presence Test: To meet the substantial presence test, you must have been physically present in the United States on at least 31 days during the current year, and 183 days during the 3 year period that includes the current year and the 2 years immediately before.

W-8BEN Form

Request Form W-8BEN from any foreign person or organization to which you are making a payment if it is the beneficial owner of the income, whether or not it is claiming a reduced rate of, or exemption from, withholding.

A beneficial owner is required to enter its U.S. taxpayer identification number (TIN) on line 6 of Form W-8BEN if it is a beneficial owner that is claiming benefits under an income tax treaty.

However, a U.S. TIN is not required to be shown in order to claim treaty benefits on the following items of income:

  • Dividends and interest from stocks and debt obligations that are actively traded;
  • Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund);
  • Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933; and
  • Income related to loans of any of the above securities.

Also request Form W-8BEN when a payee may claim an exception from domestic information reporting as a foreign person or to establish that certain income is not effectively connected with the conduct of a U.S. trade or business.

W-8IMY Form

Request Form W-8IMY from any person that is an intermediary (whether a qualified intermediary or a nonqualified intermediary), a withholding foreign partnership, a withholding foreign trust, or a flow-through entity. A flow-through entity includes a foreign partnership (other than a withholding foreign partnership), a foreign simple or grantor trust (other than a withholding foreign trust), and, for any payments for which a treaty benefit is claimed, any entity to the extent it is treated as fiscally transparent under section 894. Appropriate withholding certificates, documentary evidence, and withholding statements must be associated with Form W-8IMY or you must apply the presumption rules.

Note: A qualified intermediary, withholding foreign partnership or a withholding foreign trust must provide the EIN that was issued to the entity in such capacity (its “QI-EIN”). Otherwise, any Form W-8IMY it submits is not valid.)

W-8EXP Form

Request Form W-8EXP from any foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U.S. possession to which you are making a payment if such person is claiming an exemption from withholding under section 115(2), 501(c), 892, or 895, or claiming a reduced rate of withholding under section 1443(b). For all other purposes, request Form W-8BEN or W-8ECI.

A withholding agent may treat a payee as an international organization without requiring a Form W-8EXP if the name of the payee is one designated as an international organization by Executive Order (pursuant to 22 U.S.C. 288 through 288(f)) and other facts surrounding the payment reasonably indicate that the beneficial owner of the payment is an international organization. With regard to amounts derived from bankers’ acceptances, a withholding agent may treat a payee as a foreign central bank of issue without requiring a Form W-8EXP if the name of the payee and other facts surrounding the payment reasonably indicate that the beneficial owner of the payment is a foreign central bank of issue.

A U.S. TIN is required if the beneficial owner is claiming an exemption based solely on a claim of tax- exempt status as a foreign private foundation (or other foreign organization described under section 501(c)). However, a U.S. TIN is not required from a foreign private foundation that is subject to the 4% excise tax on gross investment income (under section 4948(a)) on income that would be exempt from withholding except for section 4948(a) (for example, portfolio income).

W-8ECI Form

Request Form W-8ECI from any foreign person or organization to which you are making a payment if it is the beneficial owner of the income and it claims that the income is effectively connected with the conduct of a trade or business within the United States.

Note: If you receive a Form W-8ECI without a U.S. TIN entered on line 6, you generally may not treat the income as effectively connected with a U.S. trade or business and you must apply the appropriate presumption rules.

Your receipt of Form W-8ECI serves as a representation by the payee or beneficial owner that all the income with which that form is associated is effectively connected with the conduct of a trade or business within the United States. Therefore, if a beneficial owner provides you with a Form W-8ECI, you may treat all of the U.S. source income identified on line 9 paid to that beneficial owner as effectively connected with the conduct of a trade or business within the United States.

In Negative Zone- Impact

July 12, 2009 1 comment

It’s Friday evening, had enough work to complete, but somehow could not concentrate as much as necessary. Probably I was done for the day, but had to follow the strict office timings, so could not leave for home either. As usual I started browsing economictimes.com. I was stuck on an article, In Negative Zone. It said Inflation dipped to minus 1.55 per cent for the week ended June 27, 2009 from -1.30 per cent in the previous week. I don’t know how CPI/WPI is measured when the fall in inflation has been reported despite increase in the prices of food items and other commodities.

Falling Inflation.. Rising Deflation

Falling Inflation.. Rising Deflation

Economists believe that deflation is even more worrying than inflation. Falling prices trigger a cycle of lower spending as lower demand sets in, thus hampering growth. Now as the consumer put back spending, manufacturers cut production and start cost cuttings. Companies are forced to sell products at cheaper prices causing decline sales and profit. Because of all these, jobs start vanishing from market and those working are in fear of job loss or have to bear pay cuts. Also fall in salary increase burden the one caries in the form of various loans. Investments in equities and share market also get affected because of deflation. As production declines, companies start losing their sheen which is reflected in share their prices.

Deflation Cycle Chart

Deflation Cycle Chart

Apart from the above, deflation also affects our Dearness Allowance (DA) component in pay which is employer’s effort to compensate against price rise and is normally a certain percentage of our basic pay. Because of inflation this component is revised annually, but on deflation setting-in, this component will be knocked off first.

I remember that last July-August (’08) consumers were horrified because of inflation as it was breaking all previous heights and this year we are still worried because of downslide.

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Worst.. Yet to come ?

June 23, 2009 1 comment

Today I was going through an article published in Economictimes.com that bigger crash is ahead for the global economy within the next two years. That’s the bold prediction from a famous economic forecaster Harry Dent who predicted Japan’s 1990s recession and the present economic crisis (I don’t know, just read in newspaper).

Of late I have been reading many write-ups on current economic recession and mostly contradicting each other’s theory. Hayekian and Keynesian theories are one of them. A Keynesian recession results because of a sudden fall in demand. Pumping enough purchasing power into the economy is a way to come out of this type of recession. A Hayekian recession, however, is caused by misallocation of resources over a long period, driven by unrealistic interest rates, ending in a bust that requires years of structural adjustment. Can’t say on Hayekian, but truly, this recession is not a Keynesian as I believe. Governments across the world have pumped in billions of dollars into their economy, but things have yet to improve.

Coming back to Harry Dent’s theory, it really makes you think a while and you will surely find a firm logic behind that. He said that baby-boomer generation was to cut back on spending, sending financial market and reality sector to a new low. Just to provide a brief on Baby Boom, it was a period (post world war 2) when birth rate increased many folds in Asia, Europe, North America and Australia. In USA alone approximately 76 million babies were born. For more than 25 years before baby boom, it was difficult for people to have children because of Great Depression and World War-2. After World War 2, when numerous economic reforms were introduced, couples who could not afford babies earlier, made up for the lost time. These children when grew, drove world economies differently in different decades. As per Dent, baby boomer’s spending pattern had been responsible for swing in world economy over the last few decades. It was observed that by year 2000, boomers had tended to avoid discussions on their retirement and long term investment and saving planning retirement. And they went on a spending spree. Precisely this was the period when world witnessed the start of great economic boom. Bent says that peak spending age is 46 and boomers have crossed this age and by end of 2010 they will start retiring leaving undue burden of their retirement on their children. Dent believes that this would be the period when world economy would start slipping to a new low, which somehow seems logical too.

I would say that boomers brought in a dramatic social change across the globe which started from west. They showed the world an era of Rock and Roll and a free society. Their style of living and affinity towards consumerism acted as a fuel to boost world economy then. If they could have impacted the world in that way when they were teenagers and young, then this theory of recession that might be aftereffect of their retirement must also stand correct.

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