Wednesday, June 29, 2005

Markets on June 29, 2005

Morning - 9:20 am

Looks like we would have a second day of +100 points gain for DOW. Oracle beat espectations and raised guidance. Revised GDP numbers for 1Q:05 put growth at 3.8% vs consensus at 3.7% (and earlier reported 3.5%), indicating economy was on solid footing then. More importantly, GDP deflator came in at 2.9%, vs consensus 3.2% (and earlier reported 3.2%). If the oil report out at 10:30 is bearish for oil (i.e. it reports higher inventories of crude and distillates than consensus), then that would be really bullish for equities.

One should remember that the GDP data is retrospective data, i.e. data of the Jan-March quarter. Now we are nearing end of second quarter. So it is a lagging indicator, not a leading indicator. Still, the GDP report indicates inflation was low in 1Q, even though oil prices were in their 50s. If inflation remains low currently, with oil hovering close to $60, the Fed can definitely start loosening interest rates if growth slows. But if growth was and is robust, then Fed might continue to increase rates, just to contain any incipient inflation.

Why are inflation indicators so low when house prices have been jumping up all over. Does this inflation metric exclude housing?
Evening - 4:20 pm

Guess I was wrong in the morning. Even though oil inventory report was bearish for oil, market has drifted down slightly. Primary reason: Investors are awaiting for the FOMC meeting tomorrow, and what comes out of it on interest rates. FOMC is Fed Open Markets Committee chaired by Alan Greenspan which decides on Fed funds rate.

Alan Greenspan's comments on housing market in June 9 testimony before Congress

The housing market in the United States is quite heterogeneous, and it does not have the capacity to move excesses easily from one area to another. Instead, we have a collection of only loosely connected local markets. Thus, while investors can arbitrage the price of a commodity such as aluminum between Portland, Maine, and Portland, Oregon, they cannot do that with home prices because they cannot move the houses. As a consequence, unlike the behavior of commodity prices, which varies little from place to place, the behavior of home prices varies widely across the nation.

Speculation in homes is largely local, especially for owner-occupied residences. For homeowners to realize accumulated capital gains on a residence--a precondition of a speculative market--they must move. Another formidable barrier to the emergence of speculative activity in housing markets is that home sales involve significant commissions and closing costs, which average in the neighborhood of 10 percent of the sales price. Where homeowner sales predominate, speculative turnover of homes is difficult.

But in recent years, the pace of turnover of existing homes has quickened. It appears that a substantial part of the acceleration in turnover reflects the purchase of second homes--either for investment or vacation purposes. Transactions in second homes, of course, are not restrained by the same forces that restrict the purchases or sales of primary residences--an individual can sell without having to move. This suggests that speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past.

The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace.

The U.S. economy has weathered such episodes before without experiencing significant declines in the national average level of home prices. In part, this is explained by an underlying uptrend in home prices. Because of the degree of customization of homes, it is difficult to achieve significant productivity gains in residential building despite the ongoing technological advances in other areas of our economy. As a result, productivity gains in residential construction have lagged behind the average productivity increases in the United States for many decades. This shortfall has been one of the reasons that house prices have consistently outpaced the general price level for many decades.

Tuesday, June 28, 2005

Time to move to high-yield bond funds from S&P?

Could high-yield bond funds the place to be now? There seems to be growing concern that growth is slowing worldwide, with Europe sluggish and high oil prices curbing growth everywhere. This would lead to worldwide lower interest rates, which should make high yield bond funds attractive. How does this impact the US, my primary economy of interest?

If US growth slows (and inflation remains low), Fed might have to pause the interest rate hikes soon (currently fed funds rate is at 3%, and futures indicate a 2005 year end rate of 3.5%-3.75%), and maybe start cutting interest rates again. This should be very positive for the bond funds. However, Fed might not pause the hikes, if inflation creeps up, which it might as oil is now at $60 (vs around $52 when the last inflation numbers came out).

The 10-yr bond is yielding 3.94% today. Is this the time to jump in, or should I wait it to rise to maybe 4.3% before I jump in? If the Fed actually hints at pausing in its rate tightening cycle in the next FOMC meeting in the next 2 days, that would be a boost to the high-yield bonds. On the other hand, that would lead to another boom in the housing market. If there is any blow up there, it might cause the risk-appetite to go down, leading to widening of spreads for everything, including high-yield bonds. So even if Fed funds rate gets cut, high yield bond yields might go up, simply because the spreads (between high yield and treasuries) are so narrow today. Then also, if economic growth slows and corporate cash flows dry up, companies might have a difficult time servicing the high interest coupons on their junk bonds. So this is a very tricky question, to which I have no answer.

There were some equity bulls out there who were happy with the prospect that interest rates hikes would pause. What I don’t understand is that why would equity markets go up if the pause is happening because growth is slowing? What I think should happen is that stock market would drift down as interest rates are cut because of slowing growth, and shoot up only when there is evidence that these interest rate cuts have started invigorating the economy. In the current bull market, the stock market took off only when the Fed funds rate was pushed down to historic lows of 1%. So maybe, it would make sense to wait outside the lines during the first few cuts, and jump in when it seems that the money-easing cycle is nearing its end.

Of course I am assuming here that growth is slowing in the US. It might not, and the second half might be much stronger than expectations, in which equity markets would rally. But I think it is safe to remain on the sidelines in the equity markets right now. This bull market has already outlasted most others in terms of duration.

Thursday, June 23, 2005

Best speeches..

So here is a compilation of the best speeches I have found on the web.

Steve Jobs on Life: Given at graduation ceremony at Stanford in 2005. Dots connect - in retrospect. Stay Hungry, Stay Foolish.

Jinnah on Partition: From Published after the uproar in BJP over Advani's comment that Jinnah was secular. Why should some Indians be so keen to unite and manage another 100 mn odd Pakistan citizens, when the Indian government cannot and has never been able to manage the 1.1 billion already under its control is a deep mystery to me..

Steve Jobs speech

This is the text of the Commencement address by Steve Jobs, CEO of Apple Computer and of Pixar Animation Studios, delivered on June 12, 2005.

I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.

The first story is about connecting the dots.

I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why
did I drop out?

It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers.
She only relented a few months later when my parents promised that I would someday go to college.

And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.

It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example:

Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.

None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, its likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college.
But it was very, very clear looking backwards ten years later.

Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.

My second story is about love and loss. I was lucky - I found what I loved to do early in life. Woz and I started. Apple in my parents garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation - the Macintosh - a year earlier, and I had just turned 30. And then I got
fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.

I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being assed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me - I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.

I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.

During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I retuned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.

I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it
just gets better and better as the years roll on. So keep looking until you
find it. Don't settle.

My third story is about death.

When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.

Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything - all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.

I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.

This was the closest I've been to facing death, and I hope its the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:

No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.

Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.

Stay Hungry. Stay Foolish.

Thank you all very much.

Friday, June 17, 2005

Interest rates, inflation and oil

In April, stocks went down because of concerns of a soft-patch. Since then, as inflation indicators have come below consensus, market has started thinking that Fed interest rate tightening cycle will end soon, sending stocks higher. There seems to be a growing consensus that the Fed is going to stop raising rates sometime this year, to end the year at 3.5% to 3.75%.

Oil prices continue to rise, today it is above $56. Oil prices have spiked up again recently, which can lead to inflation concerns again being ignited in the second half of the year.. This would imply that Fed continues increasing rates. This would continue to make US treasuries attractive for foreign banks and investors, keeping the 10-yr bond yields at low levels. The result - a flattening yield curve, which has histroically been a harbinger of recession. Maybe, as Greenspan thinks, it is not the case this time. But then, banks get killed in a flattening yield curve environment, as they stop making money in the carry trade business (borrowing on the short end of the curve and lending on the long-end). And so they curtail lending, which impacts the economy as a whole. Lets see if it is different this time.

On a separate note, on the question I raised the other day (Do monsoons really impact Indian auto companies bottomline) Smith Barney wrote a report recently. It suggested that while monsoons have had an actual less impact on performance of the Indian auto companies, they did have an impact on the stock performance. The key drivers seem to be consumer finance and level of competitive intensity.

Thursday, June 16, 2005

Oil - What is happening?

BSE closed at 6906 today. As Edwin Lefevre wrote “More money has been lost during the last 10% and first 10% of a bull market than has been made in the middle”. And maybe that is the case now in the Indian markets.

Oil closed up again today at $55.60. The reason is that Department Of Energy (DOE) report in the morning showed a worse than consensus drawdown in inventories. OPEC raised its production ceiling by 500K, but they were already producing at this increased level of 28 million barrels/day, so effectively that means no new production is coming on-stream.

Why are oil prices going up? My guess is because of demand from US, China and India. US consumer demand remains strong amongst a sharp increase in wealth due to high real-estate prices and good returns from the stock market in the last two years. Americans continue to buy cars and gas-guzzling SUVs, and continue to drive across the nation on weekends. Why is that? Because of low-interest rates. If interest rates went up slightly to calm down the real estate market and also make car financing less attractive, consumers would start taking notice of the high gasoline prices and maybe cut down on oil consumption.

But why are interest rates in the US so low? Bulls say that even though they are low if seen historically, they are higher than the rest of the world currently, and so investors outside are investing in US to take advantage of the relatively high yields. Add to that the current uncertainity in the Euro area (France and Netherlands rejected EU constitution), where there might be interest rate cuts to stimulate economy, and that makes US Treasuries attractive.

However, we shouldn’t forget the huge US trade deficit, at around $55billion/month. Economic theory indicates that $ should weaken as a result. It hasn’t. And that is because foreigners (China) are lending back to the US (by buying treasuries) the surplus they get through trade. Why? Because, as I pointed out in the last paragraph, there is no other place to invest. If EU had been growing faster, then some investments might have gone in Euro. Unfortunately, that is not the case. It is sort of vendor financing that is going on here. Which brings us to China.

China has the biggest trade surplus with US. Till yuan is pegged to dollar, logic would dictate this trade surplus would exist and keep on growing. US wants the yuan to appreciate and dollar to depreciate. This would lower the overall economic growth in China (due to lower exports due to stronger Yuan), which would arguably curtail consumption of oil in China. At the same time, China would reduce its problem of investing all its trade surplus, which it currently does in US treasuries. This would inch US bond yields up. And as we discussed above, this would be a double whammy for oil.

Where does India fit in here? By keeping the lid on retail prices, Indian government has its own hand in keeping demand for oil artificially high in India (i.e. artificial to current oil prices). By bringing oil prices in line with global prices, Indian government would temper the demand of oil a little bit, and prevent unsubstainable economic forces from building up in the economy

Who benefits if oil prices increase? HPCL, BPCL. Who loses - maybe everything else. High energy prices are not good. Is it time to short Pantaloon?

A way to play coal shortage (see yesterday's post) might be to buy Cement companies -some people are arguing that coal shortage would imply that only small incremental capacity comes online, and with utilization rates tight and demand booming, this could lead to a jump up in cement prices. However, I haven't seen any numbers associated with the analysis, so I would just hold off.

Tuesday, June 14, 2005

Indian equity markets - Ideas

The BSE Sensex is at 6860 currently. Smith Barney issued a report today suggesting caution for H2. It is overweight Capital Goods, IT and banks. Automobiles has been cut to neutral. Underweight on Pharmaceuticals.

Auto stocks have gone down in the past few days, due to (a) Concerns over monsoons (b) high steel and oil prices, which depress margins (c) Maruti cut the price of Maruti 800 to compete with Hyundai, which had earlier lowered the prices on one of its models.

1) While Monsoons do have an impact on the automobile sector, it would be better if we could quantify the mix of cars sold between urban and rural centers.
2) Looking out 4 months ahead, when Diwali comes on, I guess there would be many financing schemes that should bode well for the automobile makers. So it might be a good time to position oneself in case stocks move down meaningfully on Monsoon concerns.

IT sector:
1) Strong dollar – augurs well for IT? Wipro says 1% appreciation in rupee hurts margins by 35-40 bps.
2)Infosys has appreciated YTD, but not TCS. Why? Residual reversion for TCS?

1) Pantaloon is overvalued, any other retail play in Indian retail market?

Coal shortage in India:
1) How to play it? Generator manufacturers, suppliers to infrastructure in Indian coal mines, shipping companies who ship coal to India? High oil prices might have a really big impact on India here. Who would be least impacted – services sector => IT? Maybe cost of power is going to go up, and if it can’t be passed on to consumers, Reliance Energy, NTPC might get hurt. If it can be, they are great stocks..

Wednesday, June 08, 2005

United India could never have worked - Jinnah's speech


L KAdvani described Mohammed Ali Jinnah as 'secular' while on a visit to Pakistan, and has had to step down as BJP president following the furore his remark has generated among his party's rank and file.

Advani had clarified that he based his comment on Jinnah's speech made to Pakistan's Constituent Assembly on August 11, 1947.

We reproduce the speech below, and leave it to you to decide if Jinnah was secular or not.
Mr President, ladies and gentlemen

I cordially thank you, with the utmost sincerity, for the honour you have conferred upon me -- the greatest honour that is possible to confer -- by electing me as your first President. I also thank those leaders who have spoken in appreciation of my services and their personal references to me. I sincerely hope that with your support and your co-operation we shall make this Constituent Assembly an example to the world.

The Constituent Assembly has got two main functions to perform. The first is the very onerous and responsible task of framing the future constitution of Pakistan and the second of functioning as a full and complete sovereign body as the Federal Legislature of Pakistan. We have to do the best we can in adopting a provisional constitution for the Federal Legislature of Pakistan. You know really that not only we ourselves are wondering but, I think, the whole world is wondering at this unprecedented cyclonic revolution which has brought about the clan of creating and establishing two independent sovereign Dominions in this subcontinent. As it is, it has been unprecedented; there is no parallel in the history of the world. This mighty subcontinent with all kinds of inhabitants has been brought under a plan which is titanic, unknown, unparalleled. And what is very important with regards to it is that we have achieved it peacefully and by means of an evolution of the greatest possible character.

Dealing with our first function in this Assembly, I cannot make any well-considered pronouncement at this moment, but I shall say a few things as they occur to me. The first and the foremost thing that I would like to emphasize is this: remember that you are now a sovereign legislative body and you have got all the powers. It, therefore, places on you the gravest responsibility as to how you should take your decisions. The first observation that I would like to make is this: You will no doubt agree with me that the first duty of a government is to maintain law and order, so that the life, property and religious beliefs of its subjects are fully protected by the State.

The second thing that occurs to me is this: One of the biggest curses from which India is suffering -- I do not say that other countries are free from it, but, I think our condition is much worse -- is bribery and corruption. That really is a poison. We must put that down with an iron hand and I hope that you will take adequate measures as soon as it is possible for this Assembly to do so.

Black-marketing is another curse. Well, I know that blackmarketeers are frequently caught and punished. Judicial sentences are passed or sometimes fines only are imposed. Now you have to tackle this monster, which today is a colossal crime against society, in our distressed conditions, when we constantly face shortage of food and other essential commodities of life. A citizen who does black-marketing commits, I think, a greater crime than the biggest and most grievous of crimes. These blackmarketeers are really knowing, intelligent and ordinarily responsible people, and when they indulge in black-marketing, I think they ought to be very severely punished, because the entire system of control and regulation of foodstuffs and essential commodities, and cause wholesale starvation and want and even death.

The next thing that strikes me is this: Here again it is a legacy which has been passed on to us. Along with many other things, good and bad, has arrived this great evil, the evil of nepotism and jobbery. I want to make it quite clear that I shall never tolerate any kind of jobbery, nepotism or any any influence directly of indirectly brought to bear upon me. Whenever I will find that such a practice is in vogue or is continuing anywhere, low or high, I shall certainly not countenance it.

I know there are people who do not quite agree with the division of India and the partition of the Punjab and Bengal. Much has been said against it, but now that it has been accepted, it is the duty of everyone of us to loyally abide by it and honourably act according to the agreement which is now final and binding on all. But you must remember, as I have said, that this mighty revolution that has taken place is unprecedented. One can quite understand the feeling that exists between the two communities wherever one community is in majority and the other is in minority. But the question is, whether it was possible or practicable to act otherwise than what has been done, A division had to take place. On both sides, in Hindustan and Pakistan, there are sections of people who may not agree with it, who may not like it, but in my judgement there was no other solution and I am sure future history will record is verdict in favour of it. And what is more, it will be proved by actual experience as we go on that was the only solution of India's constitutional problem. Any idea of a united India could never have worked and in my judgement it would have led us to terrific disaster. Maybe that view is correct; maybe it is not; that remains to be seen.

All the same, in this division it was impossible to avoid the question of minorities being in one Dominion or the other. Now that was unavoidable. There is no other solution. Now what shall we do? Now, if we want to make this great State of Pakistan happy and prosperous, we should wholly and solely concentrate on the wellbeing of the people, and especially of the masses and the poor. If you will work in co-operation, forgetting the past, burying the hatchet, you are bound to succeed. If you change your past and work together in a spirit that everyone of you, no matter to what community he belongs, no matter what relations he had with you in the past, no matter what is his colour, caste or creed, is first, second and last a citizen of this State with equal rights, privileges, and obligations, there will be on end to the progress you will make.

I cannot emphasize it too much. We should begin to work in that spirit and in course of time all these angularities of the majority and minority communities, the Hindu community and the Muslim community, because even as regards Muslims you have Pathans, Punjabis, Shias, Sunnis and so on, and among the Hindus you have Brahmins, Vaishnavas, Khatris, also Bengalis, Madrasis and so on, will vanish. Indeed if you ask me, this has been the biggest hindrance in the way of India to attain the freedom and independence and but for this we would have been free people long long ago. No power can hold another nation, and specially a nation of 400 million souls in subjection; nobody could have conquered you, and even if it had happened, nobody could have continued its hold on you for any length of time, but for this. Therefore, we must learn a lesson from this.

You are free; you are free to go to your temples, you are free to go to your mosques or to any other place or worship in this State of Pakistan. You may belong to any religion or caste or creed that has nothing to do with the business of the State. As you know, history shows that in England, conditions, some time ago, were much worse than those prevailing in India today. The Roman Catholics and the Protestants persecuted each other. Even now there are some States in existence where there are discriminations made and bars imposed against a particular class.

Thank God, we are not starting in those days. We are starting in the days where there is no discrimination, no distinction between one community and another, no discrimination between one caste or creed and another. We are starting with this fundamental principle that we are all citizens and equal citizens of one State. The people of England in course of time had to face the realities of the situation and had to discharge the responsibilities and burdens placed upon them by the government of their country and they went through that fire step by step. Today, you might say with justice that Roman Catholics and Protestants do not exist; what exists now is that every man is a citizen, an equal citizen of Great Britain and they are all members of the Nation.

Now I think we should keep that in front of us as our ideal and you will find that in course of time Hindus would cease to be Hindus and Muslims would cease to be Muslims, not in the religious sense, because that is the personal faith of each individual, but in the political sense as citizens of the State.

Well, gentlemen, I do not wish to take up any more of your time and thank you again for the honour you have done to me. I shall always be guided by the principles of justice and fairplay without any, as is put in the political language, prejudice or ill-will, in other words, partiality or favouritism. My guiding principle will be justice and complete impartiality, and I am sure that with your support and co-operation, I can look forward to Pakistan becoming one of the greatest nations of the world.

I have received a message from the United States of America addressed to me. It reads:

I have the honour to communicate to you, in Your Excellency's capacity as President of the Constituent Assembly of Pakistan, the following message which I have just received from the Secretary of State of the United States:

On the occasion of of the first meeting of the Constituent Assembly for Pakistan, I extend to you and to the members of the Assembly, the best wishes of the Government and the people of the United States for the successful conclusion of the great work you are about to undertake.