Is the notorious Inflation Curving??

The WPI index continued soaring upwards for 14 continuous weeks now.
But are the mixture of Monetary and fiscal policy, that hit the markets hard, are helping inflation curve ???After a drastic hike to 11.05 on 21st April Inflation was supposed to touch 13% by this week.
But known for its surprises inflation,which has undone all the maths of the speculators,has barely touched 12%.
Is this a sign of Optimism????Is it that Bulls are going to take the game away from the Bears now????
The moment we say yes, we might be hit hard by market downfall.
The moment we say no, there might be series of short covering in the market that can move the markets up.
Markets have over corrected, i.e we have returned to the point from where the BULL Run began last year.
None of us know, none of us can predict.
Already major of the speculations have been undone and proven wrong this year.
Lets look at the positive news of the markets-
1) Price of Wheat and similar commodities(food items) have actually reduced under the shadows of high inflation due to good yield this year.
Already the government is planning for increasing more subsidies in wheat as the government have more than required wheat in its reserves.
2)Arbitragers have made some money in this downfall.
3) Volumes have returned to the psychological Reliance group. With RNRL leading the race as far as volumes are concerned.
4)Markets have over corrected, i.e we have returned to the point from where the BULL Run began last year.
5)Bonds Yield hitting new seven years high. 10 year yield to cross 8.86 soon.
6)Despite all the bad news on the oil front, Indian consumers can hope to remain insulated from any price hike for the next couple of months. It is learnt that the government is planning to review oil prices only in October.
7)Rising price of steel once again spurred the government machinery into action with the steel ministry on Thursday getting all the major producers to agree for a set of stringent administrative action to check price rise and curb inflationary pressure. Steel companies have now agreed not only to check hoarding and price rise at retail level but have also decided to introduce a new system of MRP-based pricing for preventing consumers from getting cheated by retailers. Steel pipe and tube makers have also agreed to cap their product price after reducing market price by over 10 per cent.

Bad news!!We all know it well!!
But for the time being all we can do is sit back and watch market being butchered by Politics and not inflation and listen to our Finance minister commenting on how our Economy's fundamentals are strong and what GDP we will be pursuing for the coming year.

Enron, the company that grew from nowhere to become America's seventh largest company, employing 21,000 staff in more than 40 countries and a six time winner of the award ‘The Most Innovative Company’ From Fortune 500 and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of $111 billion in 2000. It took Enron only 15 years to achieve all this glory.

And ironically it took Enron only 24 hours to go bankrupt. The firm's success turned out to involve America’s biggest bankruptcy which had far-reaching political and financial implications.

It achieved infamy at the end of 2001, when it was revealed that it’s reported financial condition was sustained mostly by institutionalized, systematic, and creatively planned accounting fraud. Enron lied about its profits and was involved in a range of shady dealings, including concealing debts so they didn't show up in the company's balance sheet. As the depth of the deception unfolded, investors and creditors retreated, forcing the firm into Chapter 11 bankruptcy in December 2001.

Enron has since become a popular symbol of willful corporate fraud and corruption.

Brief Overview of Enron:

Enron began as the Northern Natural Gas Company, which was formed in 1931 in Omaha, Nebraska. InterNorth, a holding company, bought the company and reorganized it in 1979. They later purchased the smaller Houston Natural Gas in 1985 and changed its name to Enron in the process. After building a large, new corporate headquarters in Omaha, the new Enron named former Houston Natural Gas CEO Kenneth Lay as CEO of the newly merged company, and soon moved Enron's headquarters to Houston.

Enron's famous "tilted E" logo was designed by the late American graphic designer Paul Rand.

Enron was originally involved in the transmission and distribution of electricity and gas throughout the United States and the development, construction, and operation of power plants, pipelines, and other infrastructure worldwide

Enron grew wealthy, it claimed, through its pioneering, marketing and promotion of power and communications bandwidth commodities and related derivatives as tradable financial instruments, including exotic items such as weather derivatives. And may be for these creative ideas Enron was named "America's Most Innovative Company" by Fortune magazine for six consecutive years, from 1996 to 2001. It was on the Fortune's "100 Best Companies to Work for in America" list in 2000, and had offices that were, in hindsight, stunning in their opulence.

Enron was hailed by many, including labor and the workforce, as an overall great company, praised for its large long-term pensions, benefits for its workers and extremely effective management until its exposure in corporate fraud.

It’s most valuable asset and the largest source of honest income, the 1930s-era Northern Natural Gas, was eventually purchased back by a group of Omaha investors, who moved its headquarters back to Omaha, and is now a unit of Warren Buffett's Mid-American Energy Holdings Corp.

The Diverse Strategies:

As already told Enron was founded in 1985 a gas company. This was the time when the U.S. Government introduced the policy of Deregulation. Through a fusion of a vast network of natural gas pipelines Ken Lay thought that Enron was poised to take advantage of the prices which were floated with the currents of the market as a result of deregulation.

Oil Trading:

In 1987 two oil traders made bets for Enron whether the price of oil would rise or fall. This was a strategy that viewed the energy markets as capital markets. This was like gambling where a huge risk was involved and you win some and lose some. But Enron always seemed to win. This concept was evolved by Skilling who set up a gas bank called Enron Gas Services, and later, Enron Capital and Trade Resources (ECT). At a board meeting Lay was told by the auditors that Borget, the president of the company along with his traders were manipulating earnings, destroying daily trading records and gambling way beyond limit. Lay took no action on the situation saying it was the only part that was making huge profits. And at one time the traders drew $90 million in 5days and eventually all of Enron’s reserves. This led to the firing of the traders and Borget was convicted and sent to prison for 1year.

With the main money-maker gone Lay had to find someone who could make money for Enron. And he found Jeff Skilling, the man with the big idea. Skilling, an MBA graduate from Harvard, came up with the idea to transform energy into financial instruments that could be traded like stocks. Enron would become like a stock market for natural gas. Skilling followed a certain kind of accounting called Mark-to-Market (or Hypothetical Value at Future). HVF allowed Enron to book potential profits on the very day the transaction was made no matter how much money flowed in. This activity was hence open to a lot of manipulation.

“To the outside world Enron’s profits could be whatever Enron said they were”

Enron Energy Services (EES):

EES was a company EES was a company which sold energy services to industrial users and it was headed by Lou Pai. Once its profits got higher Pai lost interest on running EES.

He sold out his entire stock worth no less than $250 million and quit the job.

The splits that left behind lost a total of $1billion but Enron managed to disguise those.

Enron used to beat street expectations when it came to earnings and hence its stock prices skyrocketed but in reality profits weren’t going up. It was the opposite.

The Malpractices:

Dabhol Project:

Enron had vast natural gas operations all over the world. It cost them billions os dollars to build them. They built a power plant in Dabhol, India when no one was even daring to invest in India. What they didn’t realize was that India couldn’t afford to pay for the power Enron’s plant produced. Dabhol project was a ruin. Though they lost a $1billion on the project, Enron paid multimillion dollar bonuses to executives based on imaginary profits that never arrived. The real money and the next big idea had to come quickly.

Enron announced a buyout of Portland General Electric(PGE) which put it in the electricity business and gave access to the newly deregulated market in California.

Enron’s Stock:

Almost all the Wall Street analysts who covered Enron had a buy rating on the stock. Any analyst who didn’t buy the idea was an enemy. Merrill Lynch (investment bank) was even gifted money to put a strong buy recommendation on the stock. Enron’s stock was hence zooming ahead whereas its business was on a downturn.

Broadband Business:

Enron entered the broadband business and tied up with Blockbuster to deliver movies on demand. Its stock jumped 34% in two days but its idea to trade bandwidth failed and the deal collapsed. But, with the magic of mark-to-market Enron used future projections to book $53million in profits on a deal that failed miserably.

By the end of 2000, Enron was running short of ideas and its executives started selling their stock. Ken Lay sold $300million, Skilling $200million worth of stock.

Fakes Companies:

Enron was losing money year by year but was amazingly reporting profits. The mastermind behind this was its CFO Andy Fastow. Fastow created hundreds of special companies which worked with Enron to cover up Enron’s debt which was then a huge $30billion. To outside investors it looked like cask was flowing in but what actually was happening was that they were hiding Enron’s debt within them and investors didn’t have access to it. Many of the companies had exotic names like Chewco, Raptors, and Jedi. LJM was Fastow’s most ambitious creation which worked wonders for Enron and also made Fastow $45million.These SPEs will essentially hold shares of Enron and would cash in the increase in stock prices. The gains of which are again directed towards Enron. So the first SPE, LJM was started by Fastow himself and 15 other investors. This again was highly contradictory as the CFO of a company is chairing another company.Inspite of the loop holes the decision was passed amongst the board and they approved Enron’s deals with LJM.

Other Frauds:

Enron took advantage of the deregulation in power in California. Enron’s traders headed by Time Beldon found loop holes in the policy which helped cover the debts in Enron’s pockets. Enron was manipulating the power supply into California. They used to export power out of the state during crisis and when the prices soared they brought it back, hence earning millions arbitrage profit.

The Downturn:

Enron’s stock price gradually began to fall and on August 14 2001, in a shocking announcement its CEO Skilling quit his job and stating personal reasons as the excuse. And Ken Lay took over as the CEO of the company. The accounting frauds came out immediately after Skillings’ resignation. Fastow was identified as the crook behind the scam. Sharon Watkins was the person who discovered the accounting irregularities. It was a jolt as the accounting firm which took care of Enron was Arthur Andersen. Arthur Andersen destroyed nearly a ton of its Enron files. On December 2^nd 2001 less than four months after Skillings resignation Enron declared bankruptcy.

The Consequences:

February 11, 2004 Jeffrey Skilling was arrested by the Federal Bureau of Investigation, and charged a few days later with 35 counts of fraud, insider trading, and conspiracy to defraud investors.

April 7, 2004 Andy Fastow pled guilty and was sentenced to 10 years imprisonment.

May 25, 2006 Kenneth Lay found guilty by a jury on six counts and by a judge on four other counts in a separate bench trial.

Conclusion:

Enron’s accounting firm Arthur Andersen was convicted of obstructing justice. With its reputation for honesty destroyed America’s oldest accounting firm fell down along with Enron.

29000 people lost their jobs and medical insurance. Employees $1.2billion in retirement funds was lost. Retirees lost $2billion in pension funds.

Enron’s top executives cashed in on $116million in stock

Criminal charges: Guilty Pleas: 15, Convictions: 6, Acquittals: 1

Three California traders pled guilty to wire fraud.

A Major lesson in corporate ethics is to be learnt from the Enron scandal which might happen again anywhere in future.