Bulls
Get Ready...for a Bull Ride !!!
Friday, March 28, 2008
Asset Bubble
Here's a very interesting anecdote that describes how an "asset bubble"
builds up and what are its consequences.
Read it even if it confuses you a bit...things will be clear as you reach the end....
ANCEDOTE -
Once there was a little island country. The land of this country was the
tiny island itself. The total money in circulation was 2 dollar as there
were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B
and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, A and C now each
own 1 dollar while B owned a piece of land that is worth 1 dollar.
The net asset of the country = 3 dollar.
3) C thought that since there is only one piece of land in the country and
land is non produceable asset, its value must definitely go up. So, he
borrowed 1 dollar from A and together with his own 1 dollar, he bought the
land from B for 2 dollar.
A has a loan to C of 1 dollar, so his net asset is 1 dollar.
B sold his land and got 2 dollar, so his net asset is 2 dollar.
C owned the piece of land worth 2 dollar but with his 1 dollar debt to A,
his net asset is 1 dollar.
The net asset of the country = 4 dollar.
4) A saw that the land he once owned has risen in value. He regretted
selling it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollar
from B and and acquired the land back from C for 3 dollar. The payment is by
2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to
C.
As a result, A now owned a piece of land that is worth 3 dollar. But since
he owed B 2 dollar, his net asset is 1 dollar.
B loaned 2 dollar to A. So his net asset is 2 dollar.
C now has the 2 coins. His net asset is also 2 dollar.
The net asset of the country = 5 dollar. A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own the
land. So he bought the land from A for 4 dollar. The payment is by borrowing
2 dollar from C and cancellation of his 2 dollar loan to A.
As a result, A has got his debt cleared and he got the 2 coins. His net
asset is 2 dollar.
B owned a piece of land that is worth 4 dollar but since he has a debt of 2
dollar with C, his net Asset is 2 dollar.
C loaned 2 dollar to B, so his net asset is 2 dollar.
The net asset of the country = 6 dollar. Even though, the country has only
one piece of land and 2 Dollar in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blowed. An evil thought came to C's mind. "Hey,
what if the land price stop going up, how could B repay my loan. There is
only 2 dollar in circulation, I think after all the land that B owns is
worth at most 1 dollar only."
A also thought the same.
(8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollar
coins, his net asset is 2 dollar. B owed C 2 dollar and the land he owned
which he thought worth 4 dollar is now 1 dollar. His net asset become -1
dollar.
C has a loan of 2 dollar to B. But it is a bad debt. Although his net asset
is still 2 dollar, his Heart is palpitating.
The net asset of the country = 3 dollar again.
Who has stolen the 3 dollar from the country ?
Of course, before the bubble burst B thought his land worth 4 dollar.
Actually, right before the collapse, the net asset of the country was 6
dollar in paper. his net asset is still 2 dollar, his heart is palpitating.
The net asset of the country = 3 dollar again.
(9) B had no choice but to declare bankruptcy. C as to relinquish his 2
dollar bad debt to B but in return he acquired the land which is worth 1
dollar now.
A owns the 2 coins, his net asset is 2 dollar. B is bankrupt, his net asset
is 0 dollar. ( B lost everything ) C got no choice but end up with a land
worth only 1 dollar (C lost one dollar) The net asset of the country = 3
dollar.
************ ****End of the story******* ********* ********* **
There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -
(1) When a bubble is building up, the debt of individual in a country to one
another is also building up.
(2) This story of the island is a close system whereby there is no other
country and hence no foreign debt. The worth of the asset can only be
calculated using the island's own currency. Hence, there is no net loss.
(3) An overdamped system is assumed when the bubble burst, meaning the
land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows
having the land or extending loan to others are the loser. The asset could
shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece
of land but refrain to take part in the game. At the end of the day, he will
neither win nor lose. But he will see the value of his money or land go up
and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is
worthwhile to borrow money (like A ) and take part in the game. But you must
know when you should change everything back to cash.
(8) Instead of land, the above applies to stocks as well.
(9) The actual worth of land or stocks depend largely on psychology.
Source: Internet
That Lehman Thing Again!
Shares of Lehman Brothers (LEH.N: Quote, Profile, Research) fell by nearly 10 percent in early New York trading on Thursday on rumors that the fourth largest U.S. investment bank could see a run on the bank similar to what happened to Bear Stearns (BSC.N: Quote, Profile, Research), traders said.
Declines in Lehman's shares on Thursday are "all being tied to fears of Bear Stearns," said Robert Bolton, head trader for Mendon Capital Advisors in Rochester, New York. "Does another broker dealer go the route of Bear Stearns with regard to their solvency and the like."
A Lehman spokeswoman called the rumors "totally unfounded," which contributed to the stock taking back much of its losses.
Kerrie Cohen, a spokeswoman for Lehman Brothers, said, "There are a lot of rumors in the marketplace that are totally unfounded. We are suspicious that the rumors are being promulgated by short sellers of our stock that have an economic self interest."
At midday, Lehman shares were down 4.28 percent at $40.67 on the New York Stock Exchange, after falling as low as $38.36.
The U.K.'s Times reported on March 19 that the U.S. Securities and Exchange Commission (SEC) was probing whether hedge funds and other market players deliberately circulated false rumors about Lehman Brothers to push the company's shares lower.
Investors have been skittish about investment banking shares since the middle of the month when Bear Stearns Cos Inc experienced a run on the bank amid fears that its mortgage exposure could leave it insolvent.
Other traders, who declined to be identified, echoed Bolton's assessment for the reason behind the drop in Lehman's shares. In addition, large bearish bets on Lehman in options markets contributed to selling pressure, some traders said.
Lou Brien, a strategist with DRW Trading Group in Chicago, said there had been a rumor on Thursday that Lehman was close to making an announcement, which contributed to the shares selling off, but the announcement proved to be about the bank hiring a new co-head of global institutional distribution, after which shares recovered.
Lehman Brothers a decade ago derived an outsized proportion of its earnings from the U.S. bond market and has long been an active player in mortgages, leading some investors to argue the company could be devastated by the credit crisis. But Lehman's business is much more diversified than it was in the 1990s, and the company has not posted any net losses during the credit crunch.
Since Bear was forced to announce plans to sell itself to JPMorgan Chase & Co on March 16, the Federal Reserve has allowed investment banks to borrow directly from the central bank, in a move designed to shore up the financial system.
In an e-mailed statement on March 17, Lehman Chief Executive Dick Fuld said the Fed's creation of a liquidity facility for primary dealers "from my perspective, takes the liquidity issue for the entire industry off the table."
Lehman said on March 18 that its holding company has $34 billion of assets it could easily sell, and another $64 billion of assets it could borrow against. Regulated subsidiaries have another $99 billion of assets it could borrow against.
Declines in Lehman's shares on Thursday are "all being tied to fears of Bear Stearns," said Robert Bolton, head trader for Mendon Capital Advisors in Rochester, New York. "Does another broker dealer go the route of Bear Stearns with regard to their solvency and the like."
A Lehman spokeswoman called the rumors "totally unfounded," which contributed to the stock taking back much of its losses.
Kerrie Cohen, a spokeswoman for Lehman Brothers, said, "There are a lot of rumors in the marketplace that are totally unfounded. We are suspicious that the rumors are being promulgated by short sellers of our stock that have an economic self interest."
At midday, Lehman shares were down 4.28 percent at $40.67 on the New York Stock Exchange, after falling as low as $38.36.
The U.K.'s Times reported on March 19 that the U.S. Securities and Exchange Commission (SEC) was probing whether hedge funds and other market players deliberately circulated false rumors about Lehman Brothers to push the company's shares lower.
Investors have been skittish about investment banking shares since the middle of the month when Bear Stearns Cos Inc experienced a run on the bank amid fears that its mortgage exposure could leave it insolvent.
Other traders, who declined to be identified, echoed Bolton's assessment for the reason behind the drop in Lehman's shares. In addition, large bearish bets on Lehman in options markets contributed to selling pressure, some traders said.
Lou Brien, a strategist with DRW Trading Group in Chicago, said there had been a rumor on Thursday that Lehman was close to making an announcement, which contributed to the shares selling off, but the announcement proved to be about the bank hiring a new co-head of global institutional distribution, after which shares recovered.
Lehman Brothers a decade ago derived an outsized proportion of its earnings from the U.S. bond market and has long been an active player in mortgages, leading some investors to argue the company could be devastated by the credit crisis. But Lehman's business is much more diversified than it was in the 1990s, and the company has not posted any net losses during the credit crunch.
Since Bear was forced to announce plans to sell itself to JPMorgan Chase & Co on March 16, the Federal Reserve has allowed investment banks to borrow directly from the central bank, in a move designed to shore up the financial system.
In an e-mailed statement on March 17, Lehman Chief Executive Dick Fuld said the Fed's creation of a liquidity facility for primary dealers "from my perspective, takes the liquidity issue for the entire industry off the table."
Lehman said on March 18 that its holding company has $34 billion of assets it could easily sell, and another $64 billion of assets it could borrow against. Regulated subsidiaries have another $99 billion of assets it could borrow against.
A bearish view
NEW YORK (Fortune) -- Meredith Whitney, the CIBC analyst who has become the Jeremiah of the financial crisis, says there is a way out of the wilderness for banks like Citigroup. But like many of her pronouncements over the last five months, it's grim.
"The best-case scenario is that financial firms take the pain quickly and purge assets from their balance sheets. That could bring stock valuations down by as much as 50%, which would be enough so that you could legitimately buy long-term positions," says Whitney.
Given the fact that many large investment banks have lost a third of their value since the credit crisis began last summer (with Citi down by more than half), it's unlikely they'll take the pain. So Whitney fires off a worse case scenario.
"They don't purge and there is a slow bleed of capital and pressure on share prices for an extended period of time," she says. "We'll mostly likely see a combination of the two, with more of the latter scenario. It won't be pretty."
Whitney may be singing from the same hymnbook as most Wall Street pundits these days, but she has the distinction of being one of the first and harshest critics of the financial services sector. Throughout the credit crisis she has been willing to throw stones at banks, monoline insurers like MBIA and Ambac, and the alphabet soup of bonds (CDOs, SIVs, RMBS) that have taken down stocks and the economy, cementing her place as this era's star prognosticator.
The axe
As anyone who has ever spoken with her knows, Whitney always has one more thing to say to sharpen her last statement or find another way to make her argument airtight. She's witty and thoughtful and very thorough, but her considerable charm only goes so far if she thinks you're wrong. Then it's time to be blunt and unyielding.
She famously met her husband, former professional wrestler and stock guru John Layfield, by shredding his bullish Citi call while on live TV. (He's 6'6" and 290 pounds. She took him to the mat.) This quality of fearlessness is in part why her bearish calls have walloped financial stocks and earned her a reputation as the sector's axe.
Most recently, she issued a report Thursday that said first quarter earnings from Citi (C, Fortune 500), Merrill (MER, Fortune 500), and UBS (UBS) will be a "rude awakening" for those who thought Q4 was the darkest hour before the dawn. "Another rude awakening will likely be the need to refocus on capital ratios of the financials as net losses wipe out a material portion of new equity raised in the past three months."
On Tuesday, she said Citigroup could post a first-quarter loss four times greater than previously anticipated if it is forced to write down a predicted $13 billion; and she cut her estimates on JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500), and Wachovia (WB, Fortune 500). Citing the now familiar cocktail of collateralized debt obligations and other mortgage-related bonds, she added, "we are confident this will not be our last reduction in 2008." After the report was released, all four stocks fell.
Such has been the pattern since last October when she told investors to sell Citi in the wake of terrible quarterly earnings. Other analysts, including Deutsche Bank's Mike Mayo, also took the bank's management team to task during the earnings conference call; and the stock had been falling all month. But Whitney was the first to say the bank was wildly undercapitalized and that "in six to 18 months, Citi will look nothing like it does now."
She also predicted Citi would have to cut its dividend or sell its best assets to raise at least $30 billion. For her efforts, the stock plunged 7%, then-CEO Chuck Prince was ousted, investing legends including Jeremy Siegel said she was wrong, and death threats rolled in.
The bank not only cut its dividend by 41%, it also decided it needed a $7.5 billion cash injection from the Abu Dhabi Investment Authority in November. Whitney told Bloomberg TV that the deal wasn't enough to shore up the balance sheet and sure enough the bank was back on the streets in January, hat in hand. It got another $12.5 billion from a group of investors including the Government of Singapore Investment Corp., Prince Alwaleed of Saudi Arabia, and the Kuwait Investment Authority.
"I think her call on Citi was dead on. She stripped the company naked," Steve Eisman, who runs the hedge fund FrontPoint Partners and was Whitney's former boss at Oppenheimer, told the Washington Post last November. And as detractors and admirers alike will say, she is not afraid to say exactly what she thinks.
Blond Ambition
Before the 38-year-old was the analyst to watch, Whitney was just another hard-charging Wall Street type, albeit it with a twist. Back in the May, when she was as sanguine as most of her peers about her sector, she launched her very own "Blond Ambition" tour.
"In the summer of 1990, Madonna embarked on a ground-breaking world tour called 'Blond Ambition' which some say changed the look and feel of world tours," Whitney wrote in the PowerPoint presentation for those summer client meetings. "While I have very little in common with Madonna other than a shared affection for hair color augmentation, I have chosen to embark upon my own 'Blond Ambition' Summer Tour of 2007."
While in 1990 Madonna sang hits including "Cherish" and "Like A Prayer," Whitney performed her own list of "hits" including "Ken Lewis Always Gets the Girl: Third Highly Coveted Deal in 3 Years" and "Capital One Financial: It Ain't As Good As it Once Was: Limited Capital Caps stock Thru Mid-2008."
But as trouble brewed over the summer, Whitney became more skeptical. She was bullish on large-cap brokers like Bear and Lehman during that tour, but she adjusted her outlook as structured bonds looked increasingly like troubled creations.
"My job is not about quantum physics. This is really basic math, making sure the numbers add up," says Whitney. "Accounting rules change fast. New information is presented. If you can't pick things up quickly, it doesn't matter what acronym you have after your name. You just won't get it."
Some may be surprised to find that the only acronym Whitney has after her name is B.A., and that it's in history, not economics, from Brown University.
"When I was in college in the early 90s, I didn't even know what research analysts were," she says. "But an MBA isn't necessarily an advantage in my job. Curiosity is an advantage. Being able to find a story is an advantage. It's what historians do. Everything happening now we've seen before, just with different characters.
"This is the human story of power and hubris. If you know Shakespearean tragedy, you understand what's going on [in the market]."
After graduating in 1992, it was straight to work at Oppenheimer as a junior analyst covering specialty finance, where she worked for Eisman, who was her mentor. From there she went to First Union, a bank later acquired by Wachovia. There she says she was the youngest analyst to build and run a financial institution's platform. She was only 28.
Because of the non-compete agreement she signed with Wachovia, Whitney couldn't return to the sell side for three years after she left the bank, so she spent 2002-2005 working as a commentator for Fox news. She met Layfield after he was known as the World Wrestling Entertainment personality JBL, a character based on oilman JR Ewing from the 1980s show Dallas. He was the author of financial planning book "Have More Money Now." They appeared on Fox's "Bulls & Bears" in 2003 and were married by 2005. Whitney, the bear, has inadvertently locked her husband into his Citi position. "He and my mom both own the stock and can't sell it because I cover it," she says. "Let's just say there was coal in my stocking this Christmas."
Oddly enough, there's not much coal from Wall Street CEOs. She says executives from the financial services sector are some of her biggest supporters. "My work has been diligent and accurate. I've been fair. I can't say Chuck Prince is a huge fan, but every report and acknowledgment has helped open a door," says Whitney. "But I have to work harder now because you're only as good as your next story."
Whitney's streak of prescient calls may not last forever, but she'll fight hard to keep it going. "All I ever wanted was to earn the right to be at the table with the smartest people, and that's a privilege you work for every day."
http://money.cnn.com/2008/03/27/news/newsmakers/benner_whitney.fortune/index.htm?postversion=2008032713
"The best-case scenario is that financial firms take the pain quickly and purge assets from their balance sheets. That could bring stock valuations down by as much as 50%, which would be enough so that you could legitimately buy long-term positions," says Whitney.
Given the fact that many large investment banks have lost a third of their value since the credit crisis began last summer (with Citi down by more than half), it's unlikely they'll take the pain. So Whitney fires off a worse case scenario.
"They don't purge and there is a slow bleed of capital and pressure on share prices for an extended period of time," she says. "We'll mostly likely see a combination of the two, with more of the latter scenario. It won't be pretty."
Whitney may be singing from the same hymnbook as most Wall Street pundits these days, but she has the distinction of being one of the first and harshest critics of the financial services sector. Throughout the credit crisis she has been willing to throw stones at banks, monoline insurers like MBIA and Ambac, and the alphabet soup of bonds (CDOs, SIVs, RMBS) that have taken down stocks and the economy, cementing her place as this era's star prognosticator.
The axe
As anyone who has ever spoken with her knows, Whitney always has one more thing to say to sharpen her last statement or find another way to make her argument airtight. She's witty and thoughtful and very thorough, but her considerable charm only goes so far if she thinks you're wrong. Then it's time to be blunt and unyielding.
She famously met her husband, former professional wrestler and stock guru John Layfield, by shredding his bullish Citi call while on live TV. (He's 6'6" and 290 pounds. She took him to the mat.) This quality of fearlessness is in part why her bearish calls have walloped financial stocks and earned her a reputation as the sector's axe.
Most recently, she issued a report Thursday that said first quarter earnings from Citi (C, Fortune 500), Merrill (MER, Fortune 500), and UBS (UBS) will be a "rude awakening" for those who thought Q4 was the darkest hour before the dawn. "Another rude awakening will likely be the need to refocus on capital ratios of the financials as net losses wipe out a material portion of new equity raised in the past three months."
On Tuesday, she said Citigroup could post a first-quarter loss four times greater than previously anticipated if it is forced to write down a predicted $13 billion; and she cut her estimates on JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500), and Wachovia (WB, Fortune 500). Citing the now familiar cocktail of collateralized debt obligations and other mortgage-related bonds, she added, "we are confident this will not be our last reduction in 2008." After the report was released, all four stocks fell.
Such has been the pattern since last October when she told investors to sell Citi in the wake of terrible quarterly earnings. Other analysts, including Deutsche Bank's Mike Mayo, also took the bank's management team to task during the earnings conference call; and the stock had been falling all month. But Whitney was the first to say the bank was wildly undercapitalized and that "in six to 18 months, Citi will look nothing like it does now."
She also predicted Citi would have to cut its dividend or sell its best assets to raise at least $30 billion. For her efforts, the stock plunged 7%, then-CEO Chuck Prince was ousted, investing legends including Jeremy Siegel said she was wrong, and death threats rolled in.
The bank not only cut its dividend by 41%, it also decided it needed a $7.5 billion cash injection from the Abu Dhabi Investment Authority in November. Whitney told Bloomberg TV that the deal wasn't enough to shore up the balance sheet and sure enough the bank was back on the streets in January, hat in hand. It got another $12.5 billion from a group of investors including the Government of Singapore Investment Corp., Prince Alwaleed of Saudi Arabia, and the Kuwait Investment Authority.
"I think her call on Citi was dead on. She stripped the company naked," Steve Eisman, who runs the hedge fund FrontPoint Partners and was Whitney's former boss at Oppenheimer, told the Washington Post last November. And as detractors and admirers alike will say, she is not afraid to say exactly what she thinks.
Blond Ambition
Before the 38-year-old was the analyst to watch, Whitney was just another hard-charging Wall Street type, albeit it with a twist. Back in the May, when she was as sanguine as most of her peers about her sector, she launched her very own "Blond Ambition" tour.
"In the summer of 1990, Madonna embarked on a ground-breaking world tour called 'Blond Ambition' which some say changed the look and feel of world tours," Whitney wrote in the PowerPoint presentation for those summer client meetings. "While I have very little in common with Madonna other than a shared affection for hair color augmentation, I have chosen to embark upon my own 'Blond Ambition' Summer Tour of 2007."
While in 1990 Madonna sang hits including "Cherish" and "Like A Prayer," Whitney performed her own list of "hits" including "Ken Lewis Always Gets the Girl: Third Highly Coveted Deal in 3 Years" and "Capital One Financial: It Ain't As Good As it Once Was: Limited Capital Caps stock Thru Mid-2008."
But as trouble brewed over the summer, Whitney became more skeptical. She was bullish on large-cap brokers like Bear and Lehman during that tour, but she adjusted her outlook as structured bonds looked increasingly like troubled creations.
"My job is not about quantum physics. This is really basic math, making sure the numbers add up," says Whitney. "Accounting rules change fast. New information is presented. If you can't pick things up quickly, it doesn't matter what acronym you have after your name. You just won't get it."
Some may be surprised to find that the only acronym Whitney has after her name is B.A., and that it's in history, not economics, from Brown University.
"When I was in college in the early 90s, I didn't even know what research analysts were," she says. "But an MBA isn't necessarily an advantage in my job. Curiosity is an advantage. Being able to find a story is an advantage. It's what historians do. Everything happening now we've seen before, just with different characters.
"This is the human story of power and hubris. If you know Shakespearean tragedy, you understand what's going on [in the market]."
After graduating in 1992, it was straight to work at Oppenheimer as a junior analyst covering specialty finance, where she worked for Eisman, who was her mentor. From there she went to First Union, a bank later acquired by Wachovia. There she says she was the youngest analyst to build and run a financial institution's platform. She was only 28.
Because of the non-compete agreement she signed with Wachovia, Whitney couldn't return to the sell side for three years after she left the bank, so she spent 2002-2005 working as a commentator for Fox news. She met Layfield after he was known as the World Wrestling Entertainment personality JBL, a character based on oilman JR Ewing from the 1980s show Dallas. He was the author of financial planning book "Have More Money Now." They appeared on Fox's "Bulls & Bears" in 2003 and were married by 2005. Whitney, the bear, has inadvertently locked her husband into his Citi position. "He and my mom both own the stock and can't sell it because I cover it," she says. "Let's just say there was coal in my stocking this Christmas."
Oddly enough, there's not much coal from Wall Street CEOs. She says executives from the financial services sector are some of her biggest supporters. "My work has been diligent and accurate. I've been fair. I can't say Chuck Prince is a huge fan, but every report and acknowledgment has helped open a door," says Whitney. "But I have to work harder now because you're only as good as your next story."
Whitney's streak of prescient calls may not last forever, but she'll fight hard to keep it going. "All I ever wanted was to earn the right to be at the table with the smartest people, and that's a privilege you work for every day."
http://money.cnn.com/2008/03/27/news/newsmakers/benner_whitney.fortune/index.htm?postversion=2008032713
Wednesday, March 26, 2008
Also in exit mode?
Kumar Shankar Roy
With the Bear Stearns issue having churned up the markets, bulk and block deals data from the two exchanges will continue to hold cues to further distress sales by troubled foreign investors. But with most of the big global names in i-banking circles under a financial cloud, it may be difficult to sift routine “sells” undertaken by FIIs, from the ones which signal big-ticket liquidation of “India” positions.
Having said that, here’s an interesting flag for investors from the bulk deals data. LB India Holdings Cayman II — a Mauritius-based subsidiary of the fourth largest US investment bank Lehman Brothers, has also been a prominent seller in recent trading sessions. On March 17, it sold stocks such as Asian Electronics, Logix Microsystems and S. Kumar’s Nationwide.
This resulted in the firm liquidating its full holdings in Asian Electronics and Logix Micro, and 80 per cent of its holdings in S. Kumar’s Nationwide.
Earlier, on March 10, LB India Holdings had pruned 15 per cent of its holding in Voltamp Transformers and one-third of its holdings in Lakshmi Energy (also part of the Bear Stearns portfolio); and Karuturi Networks faced a similar fate in January. The firm appears to have been in exit mode for some time now. At the end of December, Lehman Brothers had significant (1 per cent or more) equity exposure in 20 Indian companies worth over Rs 1,100 crore.
The top five investments were Triveni Engineering, Lakshmi Energy, Voltamp, Mastek and PSL.
Interestingly, at the beginning of March, Lehman’s portfolio was worth around Rs 700 crore, probably as investments suffered losses due to the correction in the markets. Lehman Brothers had more than 1 per cent stake in over 30 companies at the end of September 2007, indicating an overall reduction in exposure to Indian equities.
The overall value of stocks sold by the bank is not too significant in the context of the overall market, at about Rs 100 crore.
Lehman Brothers still has a cumulative exposure to Indian shares of Rs 600 crore through Lehman Brothers Asia, Lehman Brothers International Europe and LB India Holdings Cayman II.
But, going by the impact that even small sales by Bear Sterns had on individual mid- and small-cap stocks, caution may be the watchword for investors in such stocks.
http://www.blonnet.com/iw/2008/03/23/stories/2008032350590700.htm
With the Bear Stearns issue having churned up the markets, bulk and block deals data from the two exchanges will continue to hold cues to further distress sales by troubled foreign investors. But with most of the big global names in i-banking circles under a financial cloud, it may be difficult to sift routine “sells” undertaken by FIIs, from the ones which signal big-ticket liquidation of “India” positions.
Having said that, here’s an interesting flag for investors from the bulk deals data. LB India Holdings Cayman II — a Mauritius-based subsidiary of the fourth largest US investment bank Lehman Brothers, has also been a prominent seller in recent trading sessions. On March 17, it sold stocks such as Asian Electronics, Logix Microsystems and S. Kumar’s Nationwide.
This resulted in the firm liquidating its full holdings in Asian Electronics and Logix Micro, and 80 per cent of its holdings in S. Kumar’s Nationwide.
Earlier, on March 10, LB India Holdings had pruned 15 per cent of its holding in Voltamp Transformers and one-third of its holdings in Lakshmi Energy (also part of the Bear Stearns portfolio); and Karuturi Networks faced a similar fate in January. The firm appears to have been in exit mode for some time now. At the end of December, Lehman Brothers had significant (1 per cent or more) equity exposure in 20 Indian companies worth over Rs 1,100 crore.
The top five investments were Triveni Engineering, Lakshmi Energy, Voltamp, Mastek and PSL.
Interestingly, at the beginning of March, Lehman’s portfolio was worth around Rs 700 crore, probably as investments suffered losses due to the correction in the markets. Lehman Brothers had more than 1 per cent stake in over 30 companies at the end of September 2007, indicating an overall reduction in exposure to Indian equities.
The overall value of stocks sold by the bank is not too significant in the context of the overall market, at about Rs 100 crore.
Lehman Brothers still has a cumulative exposure to Indian shares of Rs 600 crore through Lehman Brothers Asia, Lehman Brothers International Europe and LB India Holdings Cayman II.
But, going by the impact that even small sales by Bear Sterns had on individual mid- and small-cap stocks, caution may be the watchword for investors in such stocks.
http://www.blonnet.com/iw/2008/03/23/stories/2008032350590700.htm
How Deep Is The Economic Abyss?
Economic Abyss
Scene I: India-After four years of near 8.5 per cent GDP growth, the economy seems to be faltering. As a grudging acceptance Citibank downgraded India's FY08 GDP growth forecast to 7.7 per cent. Worse, stocks have plummetted 30 per cent in the three months to March 2008, Headline inflation is at 6 per cent-the highest in four years contributed by food prices, and a country that boasts of only 300,000 millionaires as per tax records is building million dollar homes by well, millions.
Is this a parallel to the state of the US economy today? Yes, most definitely and perhaps it will end in a similar fashion. The boom of the past 4 years was funded by liquidity pushed in by FIIs, NRIs, HNIs and Banks into Real Estate. From these two sectors people derived huge demand estimates for Steel, Cement and other basic industries.
Knock off Real Estate and everything falls flat. Look at the scenario in Noida, a Delhi suburb where Service Apartments are being put up by the thousands to meet the tourist rush of the Commonwealth Games in 2010. Estimated to be Rented out at Rs 10,000 a night plus taxes these blocks will be sold off to Singapore based REITS thereby securitising dead Real Estate Assets.
What happens to these properties after the 10 day Commonwealth Games and what will the Reits do with properties that do not sell and do not offer yield more than 1 per cent per annum?
Dont you think, the fate of these property developers and these Reits will be similar to what is happening in the US?
Scene II: For months, Americans have been subjected to a sort of economic water torture - a maddening drip of bad news about jobs, gas prices, sagging home values, creeping inflation, the slouching dollar and a stock market in bumpy descent.
Then came Bear Stearns. One of the five largest U.S. investment banks nearly collapsed in a single day before the government propped it up by backing emergency loans and a rival stepped in to buy it for a paltry $2 per share.
To the drumbeat of signs that seemed to foretell a traditional recession, this added a nightmarish specter - an old-style run on the bank, customers clamoring to pull their cash, a stately Wall Street firm brought to its knees.
The combination has forced the economy to the forefront of the national conversation in a way it has not been since the go-go 1990s, and for entirely opposite reasons.
As economists and Wall Street types grope for historical perspective - which is another way of saying a road map out of this mess - Americans are nervously wondering about retirement savings, interest rates, jobs that had seemed safe.
They are surveying the economic landscape and asking: Just how bad is it?
They are peering over the edge and asking: How far down?
And the scariest part of all? No one can say for sure.
Even before the crippling of Bear Stearns, the U.S. economy was acting as a slowly tightening vise - an interconnected web of factors combining to squeeze Americans from all sides.
Take Jaci Rae of Salinas, Calif. She runs a company, Luco Sport, that sells golf bags and accessories. The merchandise is made with foam, which is based on petroleum, so record oil prices have taken a heavy toll.
On the other end, her clients are feeling the pinch, too, and cutting back. Sales to retail clients are an eighth of what they were a year ago. So Rae had to cut five of her 20 employees loose.
Now the company isn't buying products as far in advance. With gas prices running high, she waits for shipping companies to pick up products from her headquarters instead of having an employee drop them off.
She is nickel-and-diming expenses at home, too. She eats in every night, has stopped going on road trips to visit her family, dropped her satellite dish and canceled her monthly Blockbuster movie rental.
"I want to make sure I have enough money to feed my family," Rae says.
Signs of the pinch are showing up everywhere:
-By the end of 2007, 36 percent of consumers' disposable income went to food, energy and medical care, a bigger chunk of income than at any time since records were first kept in 1960, according to Merrill Lynch.
-People are treating themselves less often. The National Restaurant Association says 54 percent of restaurants reported declining traffic in January, and the government says eating at home increased last year for the first time since 2001.
-Financial planners say that more than ever, parents are calling for advice on how to deal with grown children who have moved back in with Mom and Dad after losing a job or just to save money.
-Less trash is being set on the curbs of Mesa, Ariz., where surging home foreclosures are leaving more houses empty. That means fewer homeowners paying the city $22.60 a month for pickup. And William Black, the city's solid-waste management director, says people aren't throwing out as many appliances and bulk items, like furniture. They're sticking with what they have.
On top of an economy that was already groaning under the weight of a downturn, Bear Stearns came down like an anvil.
It tied together so much of what's wrong with today's economy - the housing crash, the credit crunch and a loss of confidence among investors and consumers alike.
Understanding how things got so bad means rewinding to the start of the housing boom. Wall Street and the banks made it far easier for people with shaky credit to get a mortgage - known as a subprime loan.
Investors wanted a piece of the fast-growing mortgage pie, so there was plenty of money sloshing around the market to pay for the loans.
Financial firms sliced up the mortgages and sold them as complex investments, finding eager buyers among pension funds, hedge funds and more who were chasing higher returns and willing to overlook risks.
As long as housing prices went up, the strategy worked. When they began to crumble, so did financial stability.
The same people who made a financial stretch to buy their homes are now defaulting on the loans at alarming rates. Many are "upside down" on their loans, meaning they owe more on their mortgages than their homes are worth.
Nearly 9 million households now have upside-down mortgages, and for the first time ever, aggregate mortgage debt is bigger than the total value of homeowner equity - bigger by $836 billion, according to research by Merrill Lynch.
The housing problem set off the dominoes: Surging defaults meant the mortgage-backed securities plunged in value. That dried up the money to fund new home loans, and lenders everywhere became tighter with credit.
Bear Stearns found itself in the cross hairs. Market rumors began to swirl about the size of its exposure to mortgage securities, whether it had ample reserves to cover potential losses. Clients and investors began to demand their money back.
"This problem begins with the fact that we underwrote mortgages sloppily, which means no one really knows what those assets are worth," said Lyle Gramley, a former Federal Reserve governor and now an analyst with Stanford Financial Group. "That makes bankers very leery, and has resulted in a significant contraction in the availability of credit."
The credit crunch means corporations can't borrow as easily, so they are delaying big projects, which cuts into the job market. And many of the same companies were already smarting from the downturn in housing, which has made many Americans uneasy about their household wealth and caused them to scrimp on spending.
The last time the U.S. economy tilted into recession was 2001. And it was an entirely different animal.
Investors bore the brunt of that downturn as the stock market shook off the excesses of the late-'90s technology boom. Encouraged by their government - and fortified with tax rebates in their pockets - Americans kept spending.
Perhaps most importantly, there was no reason for anyone to doubt the stability of the financial system. There was no credit crisis to speak of, and the housing boom had yet to begin.
This time around, no one has declared a recession just yet: By the generally accepted rule, that takes two consecutive quarters of shrinking economic activity. The economy came close to stalling late last year but eked out small growth.
But the lack of an official declaration makes the pain no less real.
"I think the current financial crisis looks to me like the worst one since we got into the Depression," says Richard Sylla, who teaches the history of financial institutions at New York University's Stern School of Business.
Which is not to say this time will be anywhere near as bad - partly because, economists note, Federal Reserve Chairman Ben Bernanke is a student of the Depression and appears to be steering the Fed toward avoiding the mistakes of back then.
That may be why the Fed moved quickly to back up JPMorgan Chase & Co.'s lifeline loan to Bear Stearns when it neared collapse.
The Fed dusted off other Depression-era tools, too. It allowed securities dealers to borrow directly from the Fed, a privilege once restricted to commercial banks. And it announced it would lend up to $200 billion to investment banks in exchange for the banks' beaten-up mortgage-backed securities.
The idea is to maintain confidence in the American banking system. If that fails - if more Bear Stearns episodes emerge - it could gum up the entire economy, historians note.
"No one would trust anybody else, no one would be willing to do business," said Charles Jones, a finance professor at Columbia Business School. "And if that happens, the economy would feel that right away. So the Fed is doing what it can."
Another key difference: Today, the United States is just one piece of a complex global economy. A century ago, an American financial crisis was America's problem. Today, emerging economies provide an extra layer of insulation.
"People are still going to eat in China and India. They're going to be buying clothes and cars and airplanes," says Robert A. Howell, a distinguished visiting professor of business administration at Dartmouth. "So I think it's a whole different ballgame."
A better comparison might be the economic downturn that gripped the United States in the early 1970s, a time now widely remembered for long lines at the pump. Today gas is plentiful, but summer drivers face the scary prospect of paying $4 a gallon.
And as David Rosenberg, chief North American economist for Merrill Lynch, pointed out in an analysis this week, the parallels to the 1970s go much deeper than just the shock of record oil prices, which tripled during the 1973-1975 recession and have seen a similar rise in recent years.
Then as now, food prices rose along with energy. Then as now, declining home prices gave homeowners ulcers over equity. And the dollar, which held up fine in the 2001 recession, is falling now even more than it did in the early '70s - 9 percent then on a trade-weighted basis, 14 percent in the last year, according to the Federal Reserve.
One other interesting difference: In the downturns between the '70s and today, the baby boomers used their massive buying power to help spend the nation out of the slump. In the 1970s, they were too young. Today, they are focusing on retirement.
"The mid-1970s is the best template," Rosenberg wrote, "if there is any."
If the 1970s truly are a guide, there's a lot farther to fall.
Back then, the Standard & Poor's 500 index fell 36 percent from its peak to its trough. Right now, the S&P 500 has only lost 15 percent from its record highs of October 2007.
Finding shelter from this downturn isn't as easy as you might think. So-called private label products - no-name cereal or crackers usually far cheaper than brand names - are less of a deal because of soaring commodity prices.
Nearly 90 percent of chief financial officers of global public companies don't see an economic recovery coming until 2009, according to a new survey by Duke University/CFO Magazine.
And that's more than just crystal-ball gazing: If companies see a sluggish recovery, they won't be taking any steps to build their payrolls soon and will remain cautious in how they allocate capital.
So what's the way out?
Former Fed chair Alan Greenspan wrote in the Financial Times last week that the financial crisis - which he said would likely be the "most wrenching" in the United States since World War II - would end only when housing prices stabilize.
Already, the Fed has slashed interest rates. It has cut the closely watched federal funds rate, the overnight lending rate for banks, six times since September, from 5.25 percent to 2.25 percent - two-thirds of the cut coming in the last two months alone.
But the Fed can't work alone. Upcoming tax rebates for millions of people and tax breaks for businesses may give a little relief, but economists think that something will have to be done soon to slow down the number of foreclosures, a cornerstone of the economy's woes.
"We can't have financial institutions not providing credit to the economy," said Eugene White, a professor of economics at Rutgers University. "We have to stop that if we want to avoid a deep recession."
Economists and market historians seem to agree that this is more than a typical, cyclical slump. And the X-factor that sets it apart - determining how deep the wounds from the mortgage mess really are - also makes it impossible to map the path of the downturn.
"Financial crises happen, but they always do blow over," Sylla says. "It's a question of how long."
So in the meantime, Americans like Monica Nakamine are planning for a long road ahead.
The 37-year-old took a higher-paying job at a Los Angeles architectural firm, but has been putting the difference in her earnings right into savings. These days she's dyeing her own hair, picking through sales racks when she shops and washing her dog herself, rather than getting him groomed.
And she's considering some drastic actions in case things get worse - like moving to a cheaper city such as Austin, Texas, and getting rid of her gas-guzzling SUV for a hybrid sedan.
"Certainly I don't want it to get any worse," Nakamine said, "but I know it can".
Scene I: India-After four years of near 8.5 per cent GDP growth, the economy seems to be faltering. As a grudging acceptance Citibank downgraded India's FY08 GDP growth forecast to 7.7 per cent. Worse, stocks have plummetted 30 per cent in the three months to March 2008, Headline inflation is at 6 per cent-the highest in four years contributed by food prices, and a country that boasts of only 300,000 millionaires as per tax records is building million dollar homes by well, millions.
Is this a parallel to the state of the US economy today? Yes, most definitely and perhaps it will end in a similar fashion. The boom of the past 4 years was funded by liquidity pushed in by FIIs, NRIs, HNIs and Banks into Real Estate. From these two sectors people derived huge demand estimates for Steel, Cement and other basic industries.
Knock off Real Estate and everything falls flat. Look at the scenario in Noida, a Delhi suburb where Service Apartments are being put up by the thousands to meet the tourist rush of the Commonwealth Games in 2010. Estimated to be Rented out at Rs 10,000 a night plus taxes these blocks will be sold off to Singapore based REITS thereby securitising dead Real Estate Assets.
What happens to these properties after the 10 day Commonwealth Games and what will the Reits do with properties that do not sell and do not offer yield more than 1 per cent per annum?
Dont you think, the fate of these property developers and these Reits will be similar to what is happening in the US?
Scene II: For months, Americans have been subjected to a sort of economic water torture - a maddening drip of bad news about jobs, gas prices, sagging home values, creeping inflation, the slouching dollar and a stock market in bumpy descent.
Then came Bear Stearns. One of the five largest U.S. investment banks nearly collapsed in a single day before the government propped it up by backing emergency loans and a rival stepped in to buy it for a paltry $2 per share.
To the drumbeat of signs that seemed to foretell a traditional recession, this added a nightmarish specter - an old-style run on the bank, customers clamoring to pull their cash, a stately Wall Street firm brought to its knees.
The combination has forced the economy to the forefront of the national conversation in a way it has not been since the go-go 1990s, and for entirely opposite reasons.
As economists and Wall Street types grope for historical perspective - which is another way of saying a road map out of this mess - Americans are nervously wondering about retirement savings, interest rates, jobs that had seemed safe.
They are surveying the economic landscape and asking: Just how bad is it?
They are peering over the edge and asking: How far down?
And the scariest part of all? No one can say for sure.
Even before the crippling of Bear Stearns, the U.S. economy was acting as a slowly tightening vise - an interconnected web of factors combining to squeeze Americans from all sides.
Take Jaci Rae of Salinas, Calif. She runs a company, Luco Sport, that sells golf bags and accessories. The merchandise is made with foam, which is based on petroleum, so record oil prices have taken a heavy toll.
On the other end, her clients are feeling the pinch, too, and cutting back. Sales to retail clients are an eighth of what they were a year ago. So Rae had to cut five of her 20 employees loose.
Now the company isn't buying products as far in advance. With gas prices running high, she waits for shipping companies to pick up products from her headquarters instead of having an employee drop them off.
She is nickel-and-diming expenses at home, too. She eats in every night, has stopped going on road trips to visit her family, dropped her satellite dish and canceled her monthly Blockbuster movie rental.
"I want to make sure I have enough money to feed my family," Rae says.
Signs of the pinch are showing up everywhere:
-By the end of 2007, 36 percent of consumers' disposable income went to food, energy and medical care, a bigger chunk of income than at any time since records were first kept in 1960, according to Merrill Lynch.
-People are treating themselves less often. The National Restaurant Association says 54 percent of restaurants reported declining traffic in January, and the government says eating at home increased last year for the first time since 2001.
-Financial planners say that more than ever, parents are calling for advice on how to deal with grown children who have moved back in with Mom and Dad after losing a job or just to save money.
-Less trash is being set on the curbs of Mesa, Ariz., where surging home foreclosures are leaving more houses empty. That means fewer homeowners paying the city $22.60 a month for pickup. And William Black, the city's solid-waste management director, says people aren't throwing out as many appliances and bulk items, like furniture. They're sticking with what they have.
On top of an economy that was already groaning under the weight of a downturn, Bear Stearns came down like an anvil.
It tied together so much of what's wrong with today's economy - the housing crash, the credit crunch and a loss of confidence among investors and consumers alike.
Understanding how things got so bad means rewinding to the start of the housing boom. Wall Street and the banks made it far easier for people with shaky credit to get a mortgage - known as a subprime loan.
Investors wanted a piece of the fast-growing mortgage pie, so there was plenty of money sloshing around the market to pay for the loans.
Financial firms sliced up the mortgages and sold them as complex investments, finding eager buyers among pension funds, hedge funds and more who were chasing higher returns and willing to overlook risks.
As long as housing prices went up, the strategy worked. When they began to crumble, so did financial stability.
The same people who made a financial stretch to buy their homes are now defaulting on the loans at alarming rates. Many are "upside down" on their loans, meaning they owe more on their mortgages than their homes are worth.
Nearly 9 million households now have upside-down mortgages, and for the first time ever, aggregate mortgage debt is bigger than the total value of homeowner equity - bigger by $836 billion, according to research by Merrill Lynch.
The housing problem set off the dominoes: Surging defaults meant the mortgage-backed securities plunged in value. That dried up the money to fund new home loans, and lenders everywhere became tighter with credit.
Bear Stearns found itself in the cross hairs. Market rumors began to swirl about the size of its exposure to mortgage securities, whether it had ample reserves to cover potential losses. Clients and investors began to demand their money back.
"This problem begins with the fact that we underwrote mortgages sloppily, which means no one really knows what those assets are worth," said Lyle Gramley, a former Federal Reserve governor and now an analyst with Stanford Financial Group. "That makes bankers very leery, and has resulted in a significant contraction in the availability of credit."
The credit crunch means corporations can't borrow as easily, so they are delaying big projects, which cuts into the job market. And many of the same companies were already smarting from the downturn in housing, which has made many Americans uneasy about their household wealth and caused them to scrimp on spending.
The last time the U.S. economy tilted into recession was 2001. And it was an entirely different animal.
Investors bore the brunt of that downturn as the stock market shook off the excesses of the late-'90s technology boom. Encouraged by their government - and fortified with tax rebates in their pockets - Americans kept spending.
Perhaps most importantly, there was no reason for anyone to doubt the stability of the financial system. There was no credit crisis to speak of, and the housing boom had yet to begin.
This time around, no one has declared a recession just yet: By the generally accepted rule, that takes two consecutive quarters of shrinking economic activity. The economy came close to stalling late last year but eked out small growth.
But the lack of an official declaration makes the pain no less real.
"I think the current financial crisis looks to me like the worst one since we got into the Depression," says Richard Sylla, who teaches the history of financial institutions at New York University's Stern School of Business.
Which is not to say this time will be anywhere near as bad - partly because, economists note, Federal Reserve Chairman Ben Bernanke is a student of the Depression and appears to be steering the Fed toward avoiding the mistakes of back then.
That may be why the Fed moved quickly to back up JPMorgan Chase & Co.'s lifeline loan to Bear Stearns when it neared collapse.
The Fed dusted off other Depression-era tools, too. It allowed securities dealers to borrow directly from the Fed, a privilege once restricted to commercial banks. And it announced it would lend up to $200 billion to investment banks in exchange for the banks' beaten-up mortgage-backed securities.
The idea is to maintain confidence in the American banking system. If that fails - if more Bear Stearns episodes emerge - it could gum up the entire economy, historians note.
"No one would trust anybody else, no one would be willing to do business," said Charles Jones, a finance professor at Columbia Business School. "And if that happens, the economy would feel that right away. So the Fed is doing what it can."
Another key difference: Today, the United States is just one piece of a complex global economy. A century ago, an American financial crisis was America's problem. Today, emerging economies provide an extra layer of insulation.
"People are still going to eat in China and India. They're going to be buying clothes and cars and airplanes," says Robert A. Howell, a distinguished visiting professor of business administration at Dartmouth. "So I think it's a whole different ballgame."
A better comparison might be the economic downturn that gripped the United States in the early 1970s, a time now widely remembered for long lines at the pump. Today gas is plentiful, but summer drivers face the scary prospect of paying $4 a gallon.
And as David Rosenberg, chief North American economist for Merrill Lynch, pointed out in an analysis this week, the parallels to the 1970s go much deeper than just the shock of record oil prices, which tripled during the 1973-1975 recession and have seen a similar rise in recent years.
Then as now, food prices rose along with energy. Then as now, declining home prices gave homeowners ulcers over equity. And the dollar, which held up fine in the 2001 recession, is falling now even more than it did in the early '70s - 9 percent then on a trade-weighted basis, 14 percent in the last year, according to the Federal Reserve.
One other interesting difference: In the downturns between the '70s and today, the baby boomers used their massive buying power to help spend the nation out of the slump. In the 1970s, they were too young. Today, they are focusing on retirement.
"The mid-1970s is the best template," Rosenberg wrote, "if there is any."
If the 1970s truly are a guide, there's a lot farther to fall.
Back then, the Standard & Poor's 500 index fell 36 percent from its peak to its trough. Right now, the S&P 500 has only lost 15 percent from its record highs of October 2007.
Finding shelter from this downturn isn't as easy as you might think. So-called private label products - no-name cereal or crackers usually far cheaper than brand names - are less of a deal because of soaring commodity prices.
Nearly 90 percent of chief financial officers of global public companies don't see an economic recovery coming until 2009, according to a new survey by Duke University/CFO Magazine.
And that's more than just crystal-ball gazing: If companies see a sluggish recovery, they won't be taking any steps to build their payrolls soon and will remain cautious in how they allocate capital.
So what's the way out?
Former Fed chair Alan Greenspan wrote in the Financial Times last week that the financial crisis - which he said would likely be the "most wrenching" in the United States since World War II - would end only when housing prices stabilize.
Already, the Fed has slashed interest rates. It has cut the closely watched federal funds rate, the overnight lending rate for banks, six times since September, from 5.25 percent to 2.25 percent - two-thirds of the cut coming in the last two months alone.
But the Fed can't work alone. Upcoming tax rebates for millions of people and tax breaks for businesses may give a little relief, but economists think that something will have to be done soon to slow down the number of foreclosures, a cornerstone of the economy's woes.
"We can't have financial institutions not providing credit to the economy," said Eugene White, a professor of economics at Rutgers University. "We have to stop that if we want to avoid a deep recession."
Economists and market historians seem to agree that this is more than a typical, cyclical slump. And the X-factor that sets it apart - determining how deep the wounds from the mortgage mess really are - also makes it impossible to map the path of the downturn.
"Financial crises happen, but they always do blow over," Sylla says. "It's a question of how long."
So in the meantime, Americans like Monica Nakamine are planning for a long road ahead.
The 37-year-old took a higher-paying job at a Los Angeles architectural firm, but has been putting the difference in her earnings right into savings. These days she's dyeing her own hair, picking through sales racks when she shops and washing her dog herself, rather than getting him groomed.
And she's considering some drastic actions in case things get worse - like moving to a cheaper city such as Austin, Texas, and getting rid of her gas-guzzling SUV for a hybrid sedan.
"Certainly I don't want it to get any worse," Nakamine said, "but I know it can".
Chinese Growth Cannot Save Asia-UBS
China's economic growth, expected to be about 10 percent a year through 2010, ``doesn't offer the rest of Asia guaranteed protection from a coming global slowdown,'' UBS AG said in a report.
Though imports should increase relative to exports, benefits to Asia-Pacific nations vary widely based on the types of products China is buying, Jonathan Anderson, UBS's chief Asia economist based in Hong Kong, wrote in the report.
The chart of the day shows the ratio of exports to China relative to total exports of Australia, Japan and South Korea. The starting date is in July 2005, when China ended the yuan's peg to the U.S. dollar. As a percentage of their total exports, Australia had the biggest increase, while Korea's relative reliance on China fell.
Among the countries plotted, Australia's exports -- mainly commodities -- would be most resistant to a global downturn, as the vast majority are used within China, the report said. Korea could suffer most, along with Taiwan and the Philippines, because about two-thirds of the goods they sell to China ``are quickly re-exported back to global markets.''
``Taiwan, the Philippines and Korea actually have the lowest `domestic' exposure to China, since these economies primarily ship electronics components and other inputs,'' Anderson wrote.
``Brazil, Australia, India, Indonesia and Russia all have exposure of 80 percent or higher to the domestic economy, since they sell minerals, fuels, metals and other materials that go into general construction and infrastructure,'' the report said.
That won't make exporters of commodities immune to a global slowdown, though, as they sell a smaller proportion of their goods to China than electronics manufacturers, the report said.
``There is no longer a clear-cut case for the mainland as a savior from global slowdown pressures, even in the nearest neighboring countries,'' the report said.
Though imports should increase relative to exports, benefits to Asia-Pacific nations vary widely based on the types of products China is buying, Jonathan Anderson, UBS's chief Asia economist based in Hong Kong, wrote in the report.
The chart of the day shows the ratio of exports to China relative to total exports of Australia, Japan and South Korea. The starting date is in July 2005, when China ended the yuan's peg to the U.S. dollar. As a percentage of their total exports, Australia had the biggest increase, while Korea's relative reliance on China fell.
Among the countries plotted, Australia's exports -- mainly commodities -- would be most resistant to a global downturn, as the vast majority are used within China, the report said. Korea could suffer most, along with Taiwan and the Philippines, because about two-thirds of the goods they sell to China ``are quickly re-exported back to global markets.''
``Taiwan, the Philippines and Korea actually have the lowest `domestic' exposure to China, since these economies primarily ship electronics components and other inputs,'' Anderson wrote.
``Brazil, Australia, India, Indonesia and Russia all have exposure of 80 percent or higher to the domestic economy, since they sell minerals, fuels, metals and other materials that go into general construction and infrastructure,'' the report said.
That won't make exporters of commodities immune to a global slowdown, though, as they sell a smaller proportion of their goods to China than electronics manufacturers, the report said.
``There is no longer a clear-cut case for the mainland as a savior from global slowdown pressures, even in the nearest neighboring countries,'' the report said.
WSJ: Rumours Engulf Foreign Banks
By CARRICK MOLLENKAMP, ALISTAIR MACDONALD and
AARON LUCCHETTI
In the world of financial stocks, fear and rumor have the upper hand.
Bank executives and regulators globally are facing a grueling test as the swift demise of Bear Stearns Cos. has left investors grasping at rumors, sending stocks gyrating at the slightest whiff of trouble. Yesterday, HBOS PLC, the United Kingdom's largest mortgage lender by gross lending, publicly denied that it had funding problems, as its stock took a wild ride.
Shares of securities firms Lehman Brothers Holdings Inc. and MF Global Ltd. also have been roller coasters in the past few days amid worries of a cash crunch.
At 8:30 a.m. in London yesterday, rumors spread that HBOS was short on cash. That prompted the Financial Services Authority, the U.K. markets regulator, to issue a highly unusual statement that it was investigating the possibility that traders were seeking to profit on investors' concerns, by spreading "false rumors" about troubles at U.K. Banks.
A Bank of England spokesman denounced as "utter rubbish" that the central bank had met with U.K. banks about providing emergency funding. After an 18% drop in the first 50 minutes of trading, HBOS shares recovered to end down 7.1% at 446.25 pence ($8.96) on the London Stock Exchange.
In the U.S., the downfall of Bear Stearns has prompted a Securities and Exchange Commission investigation of a spike in options contracts betting that the company's stock price would drop precipitously, according to a person familiar with the matter.
Bear tried feverishly -- but unsuccessfully -- last week to reassure investors and customers of its prime-brokerage business, which makes loans and executes trades for hedge funds, that its financial footing was sound.
Regulators face a delicate task when dealing with rumors. Issuing public statements denying there is trouble could set a precedent. Saying nothing could be interpreted as a signal that the speculation is true.
The fears spawned by baseless rumors can nevertheless create "a self-fulfilling prophecy,"
especially at companies that rely on customer confidence, says Michael Gooch, chief executive of GFI Group Inc., a New York brokerage firm that arranges trades between investment banks. GFI saw its shares tumble as much as 50% Monday amid rumors of
possible trading losses.
The company said the speculation was groundless because GFI just collects commissions and doesn't take any trading risks.
Also whipsawed by speculation has been MF Global, a brokerage firm catering to clients who use futures and options to take high-stakes bets on market moves. On Monday, the company denied that British billionaire Joseph Lewis, who stands to lose almost all of his investment of more than $1 billion in Bear Stearns, was either a big MF Global customer or a major shareholder. Another rumor: MF Global faced losses in repurchase securities,
where big investment dealers swap cash and securities for short periods. That sent the stock down 65%.
MF said it doesn't borrow using the repurchase market. A spokesman for Mr. Lewis said he has "absolutely nothing to do with MF Global." Despite issuing a letter to employees Tuesday and a news release yesterday, MF Global saw its shares slide 46% from their Friday closing price. Yesterday, the stock rose $1.19, or 15%, to $9.36 in 4 p.m. New York Stock Exchange composite trading.
"It is deeply disappointing and frustrating to have these types of rumors erode confidence in a company that is performing well," Jeremy Skule, MF Global's vice president of investor relations, said in an interview.
At HBOS, analysts following the bank had issued reports expressing increasing concern that HBOS and other U.K. banks faced funding questions. Yesterday, HBOS spokesman Shane O'Riordain said the bank has ready access to large retail deposits and continues to access other borrowings. "HBOS is one of the strongest financial institutions in the
world," Mr. O'Riordain said.
Within 20 minutes of the market's opening in London yesterday, HBOS fell 3.5%. A half-hour into trading, rumors began spreading among traders that HBOS was having cash problems, prompting media inquiries to HBOS, a person familiar with the matter said.
Mark Lovett, who manages funds at RCM Ltd.'s London office, said he heard the rumor from his trading desk. He says his reaction was: "It's extraordinary. We are in pretty jittery times." Mr. Lovett declined to discuss his holdings.
HBOS officials quickly began speaking with or phoning newswires and newspapers to say there were no liquidity problems. But the stock kept sliding.
By 9:30 a.m., bank trading desks at London's Canary Wharf financial district were sorting through other rumors, too. Other bank stocks, such as Barclays PLC and HSBC Holdings PLC, fell, though not as sharply.
At about 10 a.m., the Bank of England phoned the FSA, where officials already had noticed the sharp price moves, people familiar with the situation said. At the central bank's office in the City, London's other financial district, Bank of England officials were fending off as untrue a rumor that Governor Mervyn King had canceled a trip to Asia.
By 11 a.m., Bank of England officials decided to take the unusual step of making public statements saying they hadn't had emergency meetings with U.K. banks to discuss funding-and weren't planning to. The Bank's coming meeting with financial institutions was previously scheduled, the Bank said.
By this time, the FSA and Bank of England feared that investors who profit when shares fall -- by borrowing shares and selling them and then buying replacement shares later at a lower price -- were behind the rumors.
At about lunchtime, Sally Dewar, who oversees wholesale and institutional markets for the FSA, issued a statement denouncing "a series of completely unfounded rumors about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling. We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumors and dealing on the back
of them."
AARON LUCCHETTI
In the world of financial stocks, fear and rumor have the upper hand.
Bank executives and regulators globally are facing a grueling test as the swift demise of Bear Stearns Cos. has left investors grasping at rumors, sending stocks gyrating at the slightest whiff of trouble. Yesterday, HBOS PLC, the United Kingdom's largest mortgage lender by gross lending, publicly denied that it had funding problems, as its stock took a wild ride.
Shares of securities firms Lehman Brothers Holdings Inc. and MF Global Ltd. also have been roller coasters in the past few days amid worries of a cash crunch.
At 8:30 a.m. in London yesterday, rumors spread that HBOS was short on cash. That prompted the Financial Services Authority, the U.K. markets regulator, to issue a highly unusual statement that it was investigating the possibility that traders were seeking to profit on investors' concerns, by spreading "false rumors" about troubles at U.K. Banks.
A Bank of England spokesman denounced as "utter rubbish" that the central bank had met with U.K. banks about providing emergency funding. After an 18% drop in the first 50 minutes of trading, HBOS shares recovered to end down 7.1% at 446.25 pence ($8.96) on the London Stock Exchange.
In the U.S., the downfall of Bear Stearns has prompted a Securities and Exchange Commission investigation of a spike in options contracts betting that the company's stock price would drop precipitously, according to a person familiar with the matter.
Bear tried feverishly -- but unsuccessfully -- last week to reassure investors and customers of its prime-brokerage business, which makes loans and executes trades for hedge funds, that its financial footing was sound.
Regulators face a delicate task when dealing with rumors. Issuing public statements denying there is trouble could set a precedent. Saying nothing could be interpreted as a signal that the speculation is true.
The fears spawned by baseless rumors can nevertheless create "a self-fulfilling prophecy,"
especially at companies that rely on customer confidence, says Michael Gooch, chief executive of GFI Group Inc., a New York brokerage firm that arranges trades between investment banks. GFI saw its shares tumble as much as 50% Monday amid rumors of
possible trading losses.
The company said the speculation was groundless because GFI just collects commissions and doesn't take any trading risks.
Also whipsawed by speculation has been MF Global, a brokerage firm catering to clients who use futures and options to take high-stakes bets on market moves. On Monday, the company denied that British billionaire Joseph Lewis, who stands to lose almost all of his investment of more than $1 billion in Bear Stearns, was either a big MF Global customer or a major shareholder. Another rumor: MF Global faced losses in repurchase securities,
where big investment dealers swap cash and securities for short periods. That sent the stock down 65%.
MF said it doesn't borrow using the repurchase market. A spokesman for Mr. Lewis said he has "absolutely nothing to do with MF Global." Despite issuing a letter to employees Tuesday and a news release yesterday, MF Global saw its shares slide 46% from their Friday closing price. Yesterday, the stock rose $1.19, or 15%, to $9.36 in 4 p.m. New York Stock Exchange composite trading.
"It is deeply disappointing and frustrating to have these types of rumors erode confidence in a company that is performing well," Jeremy Skule, MF Global's vice president of investor relations, said in an interview.
At HBOS, analysts following the bank had issued reports expressing increasing concern that HBOS and other U.K. banks faced funding questions. Yesterday, HBOS spokesman Shane O'Riordain said the bank has ready access to large retail deposits and continues to access other borrowings. "HBOS is one of the strongest financial institutions in the
world," Mr. O'Riordain said.
Within 20 minutes of the market's opening in London yesterday, HBOS fell 3.5%. A half-hour into trading, rumors began spreading among traders that HBOS was having cash problems, prompting media inquiries to HBOS, a person familiar with the matter said.
Mark Lovett, who manages funds at RCM Ltd.'s London office, said he heard the rumor from his trading desk. He says his reaction was: "It's extraordinary. We are in pretty jittery times." Mr. Lovett declined to discuss his holdings.
HBOS officials quickly began speaking with or phoning newswires and newspapers to say there were no liquidity problems. But the stock kept sliding.
By 9:30 a.m., bank trading desks at London's Canary Wharf financial district were sorting through other rumors, too. Other bank stocks, such as Barclays PLC and HSBC Holdings PLC, fell, though not as sharply.
At about 10 a.m., the Bank of England phoned the FSA, where officials already had noticed the sharp price moves, people familiar with the situation said. At the central bank's office in the City, London's other financial district, Bank of England officials were fending off as untrue a rumor that Governor Mervyn King had canceled a trip to Asia.
By 11 a.m., Bank of England officials decided to take the unusual step of making public statements saying they hadn't had emergency meetings with U.K. banks to discuss funding-and weren't planning to. The Bank's coming meeting with financial institutions was previously scheduled, the Bank said.
By this time, the FSA and Bank of England feared that investors who profit when shares fall -- by borrowing shares and selling them and then buying replacement shares later at a lower price -- were behind the rumors.
At about lunchtime, Sally Dewar, who oversees wholesale and institutional markets for the FSA, issued a statement denouncing "a series of completely unfounded rumors about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling. We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumors and dealing on the back
of them."
Pay Commission - India
The Sixth Pay Commission submitted its report to Finance Minister P Chidambaram on Monday. The commission is headed by Justice B N Srikrishna. The recommendations of the commission, when accepted, would provide a bonanza to over 4.5 million central government employees.
So what is a Pay Commission? And what are its implications? Read on. . .
What is a Pay Commission?
The Pay Commission is an administrative system/mechanism that the government of India set up in 1956 to determine the salaries of government employees.
The First Pay Commission was established in 1956, and since then, every decade has seen the birth of a commission that decides the wages of government employees for a particular time-frame.
The second Pay Commission was set up in August 1957 and gave its report in two years. The third Pay Commission, set up in April 1970, submitted its report in March 1973.
The recommendations of the Fourth Pay Commission covered the period between 1986 and 1996. The Fifth Pay Commission covered the period between 1996 and this year.
The Union Cabinet, under the stewardship of Prime Minister Manmohan Singh, approved the setting up of the 6th Pay Commission to revise the payscales of central government employees in July 2006.
The 6th Pay Commission is headed by its Chairman Justice B N Srikrishna, and has Ravindra Dholakia, J S Mathur and Sushama Nath as its other members.
The Pay Commission was supposed to submit its report in 18 months.
Why was there a hue and cry about the Fifth Pay Commission?
Because the implementation of the Commission's recommendations ravaged the finances of the central and state governments.
The central government declared salary and allowances hikes for its approximately 3.3 million employees, and insisted that the state governments too revise the pay of their employees as per the Commission's recommendations.
The result: Before the Fifth Pay Commission recommendations came into effect, the central government's wage bill (including pension dues of Rs 50.94 billion) stood at Rs 218.85 billion in 1996-1997.
It shot up by nearly 99 per cent to Rs 435.68 billion in 1999-2000.
What about the state governments?
The state governments' wage bill went up by 74 per cent to Rs 89,813 crore (Rs 898.13 billion) in 1999 from Rs 51,548 crore (Rs 515.48 billion) in 1997.
Economists say that almost 90 per cent of a state's revenues go into paying salaries.
The impact of the Fifth Pay Commission was so brutal that some 13 states did not have money to pay salaries in 2000.
So peeved were some state governments that last year states like West Bengal, Bihar, Orissa, Assam, Manipur, Meghalaya and Mizoram sought a mechanism under which the Centre could not announce a pay revision without consulting the states.
They also sought the Centre's help in offsetting the impact of the Fifth Pay Commission and a national wage policy to replace pay commissions.
So the Fifth Pay Commission just recommended hiking salaries of government employees?
No, and therein lies the problem. The government only implemented the monetary benefits part.
Some of the Fifth Pay Commission's other recommendations included slashing the government workforce by 30 per cent; abolishing 350,000 vacant posts and reducing the number of pay scales from 51 to 34, none of which were implemented.
The Commission also suggested that the grant of salary hikes to employees be linked to issues of downsizing government, efficiency and administrative reforms.
Did the Fifth Pay Commission affect the economic reform process?
The jury is out on that. But two years ago, the World Bank held the Fifth Pay Commission as the 'single largest adverse shock' to India's strained public finances.
The global body said India's civil service was 'not unduly' large, but there was a 'pronounced imbalance' in the skills.
In its review, the Bank added: 'There is a pronounced imbalance in the skills mix since 93 per cent of the civil service comprised class III and class IV employees for both the Centre and various states.'
So what led to the Sixth Pay Commission?
For the last four years, Communist leaders and trade unions have been demanding the setting up of such a commission.
In 2005, the government set up a committee to study the demand.
The committee, headed by Cabinet Secretary B K Chaturvedi, turned down the request for constituting the Sixth Pay Commission. The committee said the Centre might not be able to bear the additional burden and the states were just recovering from the impact of the Fifth Pay Commission, whose recommendations were implemented in 1997.
The Twelfth Finance Commission also urged the government to stop the practice of increasing salaries by appointing pay commissions every 10 years.
So, why the turnaround?
This is what Prime Minister Manmohan Singh had to say in early 2006: 'We have decided this. The last pay commission was set up in 1994. The time has now come for a new commission. We are preparing for it.'
Congress sources say the rising political pressure from the Communists -- key partners in the United Progressive Alliance coalition -- has prompted Prime Minister Singh to announce the new pay commission.
What about the drain on government finances?
New Delhi now argues the Sixth Pay Commission will not adversely affect the states as they are sitting on cash surpluses. Finance Minister P Chidambaram's Budget 2008-09 had hinted that the financial impact of the Sixth Pay Commission would be about 0.4 per cent of Gross Domestic Product, similar to the Fifth Pay Commission award of 1996. Given that the Budget 2008-09 has projected GDP at Rs 5,303,770 crore (Rs 53,037.70 billion) in 2008-09, the impact of the award may well be Rs 21,215 crore (Rs 212.15 billion).
http://inhome.rediff.com/money/2008/mar/24bspec.htm
So what is a Pay Commission? And what are its implications? Read on. . .
What is a Pay Commission?
The Pay Commission is an administrative system/mechanism that the government of India set up in 1956 to determine the salaries of government employees.
The First Pay Commission was established in 1956, and since then, every decade has seen the birth of a commission that decides the wages of government employees for a particular time-frame.
The second Pay Commission was set up in August 1957 and gave its report in two years. The third Pay Commission, set up in April 1970, submitted its report in March 1973.
The recommendations of the Fourth Pay Commission covered the period between 1986 and 1996. The Fifth Pay Commission covered the period between 1996 and this year.
The Union Cabinet, under the stewardship of Prime Minister Manmohan Singh, approved the setting up of the 6th Pay Commission to revise the payscales of central government employees in July 2006.
The 6th Pay Commission is headed by its Chairman Justice B N Srikrishna, and has Ravindra Dholakia, J S Mathur and Sushama Nath as its other members.
The Pay Commission was supposed to submit its report in 18 months.
Why was there a hue and cry about the Fifth Pay Commission?
Because the implementation of the Commission's recommendations ravaged the finances of the central and state governments.
The central government declared salary and allowances hikes for its approximately 3.3 million employees, and insisted that the state governments too revise the pay of their employees as per the Commission's recommendations.
The result: Before the Fifth Pay Commission recommendations came into effect, the central government's wage bill (including pension dues of Rs 50.94 billion) stood at Rs 218.85 billion in 1996-1997.
It shot up by nearly 99 per cent to Rs 435.68 billion in 1999-2000.
What about the state governments?
The state governments' wage bill went up by 74 per cent to Rs 89,813 crore (Rs 898.13 billion) in 1999 from Rs 51,548 crore (Rs 515.48 billion) in 1997.
Economists say that almost 90 per cent of a state's revenues go into paying salaries.
The impact of the Fifth Pay Commission was so brutal that some 13 states did not have money to pay salaries in 2000.
So peeved were some state governments that last year states like West Bengal, Bihar, Orissa, Assam, Manipur, Meghalaya and Mizoram sought a mechanism under which the Centre could not announce a pay revision without consulting the states.
They also sought the Centre's help in offsetting the impact of the Fifth Pay Commission and a national wage policy to replace pay commissions.
So the Fifth Pay Commission just recommended hiking salaries of government employees?
No, and therein lies the problem. The government only implemented the monetary benefits part.
Some of the Fifth Pay Commission's other recommendations included slashing the government workforce by 30 per cent; abolishing 350,000 vacant posts and reducing the number of pay scales from 51 to 34, none of which were implemented.
The Commission also suggested that the grant of salary hikes to employees be linked to issues of downsizing government, efficiency and administrative reforms.
Did the Fifth Pay Commission affect the economic reform process?
The jury is out on that. But two years ago, the World Bank held the Fifth Pay Commission as the 'single largest adverse shock' to India's strained public finances.
The global body said India's civil service was 'not unduly' large, but there was a 'pronounced imbalance' in the skills.
In its review, the Bank added: 'There is a pronounced imbalance in the skills mix since 93 per cent of the civil service comprised class III and class IV employees for both the Centre and various states.'
So what led to the Sixth Pay Commission?
For the last four years, Communist leaders and trade unions have been demanding the setting up of such a commission.
In 2005, the government set up a committee to study the demand.
The committee, headed by Cabinet Secretary B K Chaturvedi, turned down the request for constituting the Sixth Pay Commission. The committee said the Centre might not be able to bear the additional burden and the states were just recovering from the impact of the Fifth Pay Commission, whose recommendations were implemented in 1997.
The Twelfth Finance Commission also urged the government to stop the practice of increasing salaries by appointing pay commissions every 10 years.
So, why the turnaround?
This is what Prime Minister Manmohan Singh had to say in early 2006: 'We have decided this. The last pay commission was set up in 1994. The time has now come for a new commission. We are preparing for it.'
Congress sources say the rising political pressure from the Communists -- key partners in the United Progressive Alliance coalition -- has prompted Prime Minister Singh to announce the new pay commission.
What about the drain on government finances?
New Delhi now argues the Sixth Pay Commission will not adversely affect the states as they are sitting on cash surpluses. Finance Minister P Chidambaram's Budget 2008-09 had hinted that the financial impact of the Sixth Pay Commission would be about 0.4 per cent of Gross Domestic Product, similar to the Fifth Pay Commission award of 1996. Given that the Budget 2008-09 has projected GDP at Rs 5,303,770 crore (Rs 53,037.70 billion) in 2008-09, the impact of the award may well be Rs 21,215 crore (Rs 212.15 billion).
http://inhome.rediff.com/money/2008/mar/24bspec.htm
Stock markets: Has history taught you anything?
Equities/stocks/mutual funds are meant to be the highest return avenue. But then, how come it does not actually end up being so for most of us?
Many of us have seen good returns, but mostly on paper only (and not as money in our pockets!). During market volatility, there is always a lot of news flying around and a lot of views expressed.
Consider these, for instance.
The Sensex could touch 14,000 levels or even 12,000 levels
Well, probably the same people, when the index was at 20,000, were most likely suggesting levels of 25,000!
Similarly at negatives, there would be a lot of views that the market would go down lower. Many investors do not make money in stocks because of two key factors: fear and greed. Our view is that an investor who is able to overcome these critical factors and is able to take a rational decision will be able to generate good long term returns.
Empirically, for centuries, equities have generated the highest return among all asset classes across markets.
History teaches us a lot
This is what Wall Street's legendary investor Warren Buffett -- regarded as one of the world's greatest stock market investor, and CEO of Berkshire Hathaway -- has to say about the Internet bubble: "The world went mad. What we learn from history is that people don't learn from history." With an estimated net worth of US$62 billion, he was ranked by Forbes as the richest person in the world as of March 5, 2008.
Let us look at what has happened in the past. Let us look at one of the worst ever falls that has happened. That too of a sectoral fund through the great dot com bust. Industry majors like Wipro and saw substantial falls. You can only imagine what must have happened to the second rung stocks in the sector.
The SIP returns of a technology fund like Birla Sun Life went down from Rs 10 NAV all the way down to Rs 2.52 on October 10, 2001. This was reflected in the lows that all the technology funds saw.
On the other hand, for someone who invested at that point, the value went up four times when it hit the face value of Rs 10 from its low price.
Learnings:
~Even though one had started investing at the market peak, the SIP approach has given good returns
~ Someone who invested at the bottom has seen over 8-time appreciation from the low as per their NAV price on February 29
~ Avoid sectoral funds except in sectors like infrastructure where one may want to take a 5 year bet
~ Stay diversified
Trying to time the market -- a common mistake
How many of you have kept price targets for your stocks portfolio and seen it falling just before you wanted to sell? A mistake that can be easily avoided! In expectation of falls to 12,000 and 14,000 levels, you hold back switches to equity, and may end up missing an opportunity.
Learnings:
~ Phase your switches back to equity and continue to invest at every fall. While 12,000 could happen, you should not miss out an opportunity even if it does not. Hence you should switch and invest some money now and if the markets fall further, you could switch more. When markets have fallen, about 7000 points, it is definitely a great time to buy
~ 'Buy low, sell high' is easier said than done. Don't do the opposite as investors normally do as a result of their 'fear and greed'. Think about it logically and overcome the fear: the odds are very much in favour of an uptrend, after a fall. It may take a year or two but these are the investments that will do the best
Long term equity investing is the real wealth creator
As you would see from the SIP returns table, someone who invested on a monthly basis a sum of Rs 10,000 per month invested a value of Rs 12 lakhs; and at the end of Feb '08 has had a value of Rs 94 lakh to Rs 1.3 crores in good funds despite the market fall. (The Sensex was at 17,578 on February 29, 2008, the date of valuation of the mutual funds above).
Learnings:
~ Sleep over the bad times, continue to invest and invest long term (about 2 years) if you want to really build wealth. If this is what a person had done in the past 10 years, s/he would have become a crorepati in this period by investing only Rs 10,000 per month
~ While returns may not be sustained in the future, the market volatility would actually help enhance returns for the long term for an investor who is logical and disciplined on his investments
The bigger picture
After every large falls, the upside is higher than the downside from. While markets could fall further, in the long term it would even out. This is what you can do now:
~ Use diversified investments; preferably mutual funds that help you manage risk very well through systematic investments
~ If you have not already diversified do so at the earliest!
~ If you have a balance of debt and equity, you should be switching a part of the debt portfolio into equity. This is the time you should be taking a higher level of risk, even if it means that you temporarily have a higher equity composition versus what you desire. Spread it out over a period, and keep money for further falls
~ Invest more aggressively and on big falls you could even make lump sum investments in addition to the systematic investments
~ Invest more aggressively and on big falls you could even make lump sum investments in addition to the systematic investments
~ Don't miss your SIPs at this time. These are likely to give you the best returns. The returns may not look good now, but they are precisely done so that you get the advantage of the market falls
~ And if you are completely invested into equities and have not yet exited, sleep through the volatility. If you have used well diversified investments, you have nothing to worry in an economy like India
And above all it is important to consciously overcome fear and greed and take a rational decision.
Mid-cap stocks plummet on FII selling
Merrill Lynch, Citigroup, Morgan Stanley offload major holdings
Mid-cap companies saw heavy selling during the last fortnight with prominent foreign institutional investors being the major sellers. Bear Stearns arm BSMA Ltd itself offloaded securities worth more than Rs 2,000 crore from the mid-cap Indian companies last fortnight, most of which belong in the BSE-500 index.
The BSE Mid-cap index has declined by around 14.7 per cent as on Monday, March 24, 2008 as compared with March 7, 2008; the Sensex has gone down by only 4.5 per cent during the same period.
(The BSE Small-Cap index too has fallen by a whopping 17.35 per cent during the above period.)
It is not only the FII arm of the fifth largest US Securities firm Bear Stearns that has been dumping the mid-cap companies but prominent FIIs such as Merrill Lynch, Citigroup, Credit Suisse, and Morgan Stanley have sold heavily in some of the mid-cap companies. BSMA, Bear Stearns' FII arm, sold shares in ABC Bearings, Exide Industries, ICSA Ltd, Jupiter Bios, Lakshmi Overseas, Man Industries, Spice Jet, Sujana Tower, Swan Mills, Kalyani Steerings, Stone India, and Silverline Technologies among others over the last two weeks. It sold shares worth more than Rs 2,000 crore.
Goldman Sachs, Lehman Brothers, Macquarie Bank and HSBC Financial Services Middle East too have offloaded shares in bulk deals in some mid-sized companies during the past two weeks.
Top US investment banking firm Merrill Lynch, which was among the first to announce write downs as sub-prime related losses, has pulled out from Indiabulls Real Estate (15.15 lakh shares at Rs 495.05), Jain Irrigation (22.86 lakh shares at Rs 634), Jai Corp Ltd (26.57 lakh shares at Rs 660), and Arshiya International through bulk deals that it reported between March 11 and March 18. Morgan Stanley also sold off IPCA Lab Ltd shares.
Citigroup
Citigroup has offloaded 25 lakh shares of Ruchi Soya, which was bought by Reliance Mutual Fund's new scheme Reliance Natural Resources Fund at Rs 87.50 per shares. Citi also sold off a large number of shares of Country Club at Rs 624.60, while Morgan Stanley offloaded 82,901 shares of Country Club at Rs 600. (Both these bulk deals were reported on March 10).
Credit Suisse sold shares in bulk deals in Gammon India, Simplex Infrastructure and GVK Power and Infrastructure.
Deutsche Securities has sold off in Bang Overseas shares in two big lots reported on March 10 and March 11.
Housing Development and Infrastructure Ltd shares numbering more than 38.85 lakhs were sold by Goldman Sachs at Rs 631.5 as reported on March 13. Lehman Brothers has sold Voltamp Transformers shares, while Macquarie Bank sold off shares of Orchid Chemicals following the company's reported exposure to foreign exchange derivatives in the overseas market.
HSBC Financial Services Middle East offloaded 2.92 lakh shares of Gruh Finance at Rs 137.50. FIIs have offloaded about $3.5 billion worth of shares from the Indian market since January 2008 so far. During March so far, they have offloaded $662 million, according to SEBI data.
Ravi Ranjan Prasad Mumbai, March 24
Mid-cap companies saw heavy selling during the last fortnight with prominent foreign institutional investors being the major sellers. Bear Stearns arm BSMA Ltd itself offloaded securities worth more than Rs 2,000 crore from the mid-cap Indian companies last fortnight, most of which belong in the BSE-500 index.
The BSE Mid-cap index has declined by around 14.7 per cent as on Monday, March 24, 2008 as compared with March 7, 2008; the Sensex has gone down by only 4.5 per cent during the same period.
(The BSE Small-Cap index too has fallen by a whopping 17.35 per cent during the above period.)
It is not only the FII arm of the fifth largest US Securities firm Bear Stearns that has been dumping the mid-cap companies but prominent FIIs such as Merrill Lynch, Citigroup, Credit Suisse, and Morgan Stanley have sold heavily in some of the mid-cap companies. BSMA, Bear Stearns' FII arm, sold shares in ABC Bearings, Exide Industries, ICSA Ltd, Jupiter Bios, Lakshmi Overseas, Man Industries, Spice Jet, Sujana Tower, Swan Mills, Kalyani Steerings, Stone India, and Silverline Technologies among others over the last two weeks. It sold shares worth more than Rs 2,000 crore.
Goldman Sachs, Lehman Brothers, Macquarie Bank and HSBC Financial Services Middle East too have offloaded shares in bulk deals in some mid-sized companies during the past two weeks.
Top US investment banking firm Merrill Lynch, which was among the first to announce write downs as sub-prime related losses, has pulled out from Indiabulls Real Estate (15.15 lakh shares at Rs 495.05), Jain Irrigation (22.86 lakh shares at Rs 634), Jai Corp Ltd (26.57 lakh shares at Rs 660), and Arshiya International through bulk deals that it reported between March 11 and March 18. Morgan Stanley also sold off IPCA Lab Ltd shares.
Citigroup
Citigroup has offloaded 25 lakh shares of Ruchi Soya, which was bought by Reliance Mutual Fund's new scheme Reliance Natural Resources Fund at Rs 87.50 per shares. Citi also sold off a large number of shares of Country Club at Rs 624.60, while Morgan Stanley offloaded 82,901 shares of Country Club at Rs 600. (Both these bulk deals were reported on March 10).
Credit Suisse sold shares in bulk deals in Gammon India, Simplex Infrastructure and GVK Power and Infrastructure.
Deutsche Securities has sold off in Bang Overseas shares in two big lots reported on March 10 and March 11.
Housing Development and Infrastructure Ltd shares numbering more than 38.85 lakhs were sold by Goldman Sachs at Rs 631.5 as reported on March 13. Lehman Brothers has sold Voltamp Transformers shares, while Macquarie Bank sold off shares of Orchid Chemicals following the company's reported exposure to foreign exchange derivatives in the overseas market.
HSBC Financial Services Middle East offloaded 2.92 lakh shares of Gruh Finance at Rs 137.50. FIIs have offloaded about $3.5 billion worth of shares from the Indian market since January 2008 so far. During March so far, they have offloaded $662 million, according to SEBI data.
Ravi Ranjan Prasad Mumbai, March 24
Friday, March 21, 2008
Real Estate: There's Asset Deflation Out There Inspite of Fed Rate Cuts
By cutting interest rates fiercely the Fed is trying to Buy time out of a Real Estate slump. More mortgages are being picked up by Fannie Mae and Freddie Mac, delaying that final wave of mass capitulation.
By Mike Larsen
I don't know about you, but I feel like I'm trapped in a real life version of the movie "Groundhog Day." That's the hilarious early-1990s comedy where Bill Murray's character travels to Punxsutawney, Pennsylvania to cover the February holiday. Unfortunately, he gets stuck there, and has to re-live that day -- over and over again. Just look at what happened this week: There was yet another move from the Federal Reserve to save the markets -- this time in the form of a 75-basis point cut in interest rates. That sparked more bottom-calling from many of the talking heads on TV. And it fueled another 400+ point rally in the Dow. I don't mean to sound cavalier, but has anything really changed? Isn't this the same movie we've seen four or five times since last summer? First, the credit markets seize up in some way, shape, or form. Second, stocks start falling. Third, the Fed, the Treasury Department, or Congress steps in and announces another plan to fix the housing and mortgage crisis, or to loosen up the credit markets. Those interventions keep preventing the stock market from experiencing a big "flush" -- a truly nasty decline that cleans out all the sellers and potentially sets us up for a larger, more lasting rally. Instead, each new plan helps spur some buying. We spend a few days or weeks working off "oversold" market conditions. Then we go right back to square one again. 
This one-step-forward and two-steps-back momentum looks exactly like what we saw during the 2000-2002 bear market. And so far, there doesn't seem to be much lasting evidence of a reversal. This trend is also playing out on Main Street with property values. Let me bring you up to date on ... The Latest on Residential and Commercial Real Estate Wall Street's largest banks weren't the only ones treated to a gift this week. The regulatory body that oversees Fannie Mae and Freddie Mac also loosened capital requirements for the two firms. The Office of Federal Housing Enterprise Oversight will now require they hold surplus capital of just 20%, down from 30%. It also suggested that threshold will fall with time. The goal is to free up money that Fannie and Freddie can use to buy or guarantee billions more dollars worth of home mortgages. That, in turn, is designed to lower the spread between rates on mortgage-backed bonds and U.S. Treasuries -- something that would lower the rates borrowers pay on home loans. It's not such a bad idea for the mortgage market, as ideas go. But home prices continue to fall, and housing inventories remain extremely high. Is there any evidence of a turn yet? Not as far as I can see. Just consider ...The National Association of Home Builders, which tracks how builders perceive sales activity and buyer traffic, said its benchmark index remains mired in the muck. The index held at 20 in March, just off its record low of 18 in December and far below the year-ago level of 36.
Meanwhile, single-family home starts dropped another 6.7% in February to 707,000 units at an annualized rate. That's the lowest since January 1991.
Building permit issuance for both single-family and multi-family property dropped to the lowest since 1991. That indicates future construction activity will be even weaker. And what about commercial real estate? There is troubling news trickling out of that side of the market as well. For example, a key architectural billings index plunged 8.9 points to 41.8 in February. That's the lowest level since October 2001 -- right after the 9/11 terrorist attacks.
The index is a major leading indicator of future construction activity since you need to hire someone to draw up plans before you start work on an office tower, warehouse or hotel. It also confirms an earlier report from Reed Construction Data, which showed the value of non-residential construction tanking 13.1% year-over-year in January. What's more, the Moody's/REAL Commercial Property Index dropped 0.6% in January. That was the third monthly decline in a row. Prices are still up from year-ago levels. But the rate of appreciation is slowing rapidly -- exactly what you saw in the residential market before values started falling. Because the Carnage Continues Unabated,I Suggest You Continue Avoiding Housing and Mortgage Stocks I would still avoid housing and mortgage stocks, even after this Fed intervention and Fannie/Freddie news. I also think the commercial REITs are vulnerable to even deeper declines, given what we're starting to see in that part of the business. If you're more aggressive, and you have some capital available to speculate, you can look into put options on stocks vulnerable to the weak economy and the real estate slump. Let me tell you, there are plenty of them out there these days, and any gains on those options can help offset losses elsewhere in your portfolio. The bottom line: I think you have to be defensive in this market. The pattern of large short-term, short-covering rallies -- followed by fresh moves to new lows -- is classic bear market action. Until we see some panic selling, this grinding process is likely to continue playing out. But always remember, eventually this interminable Groundhog Day of a market in housing and financials will end. That's when it'll be time to buy with both hands. I'll do my best to let you know when that time comes!
United States: Sinking Or Is It Just A Cacophony?
The people at the helm across the globe from US, to Japan, China, India and Europe are stoking a dangerous fire of inflation. They are letting lose liquidity in an effort to save Banking institutions which had acquired illiquid debt. The Real cause of inflation are Oil, Food and Energy and a double whammy called falling Real Estate and High Debt. None of these problems will get sorted with a interest rate cut. Inflation can come down if demand moves down or supply of Oil and food products increases. Since neither is going to happen in the short run, all of us will have to settle for a recession spanning a number of years. A rise in jobless claims and a drop in a key forecasting gauge provided the latest evidence that the U.S. economy is faltering and may be slipping into recession. The Conference Board, a business-backed research group, said Thursday that its index of leading economic indicators fell in February for the fifth consecutive month. The index, which is designed to forecast where the nation's economy is headed in the next three to six months, dipped 0.3 percent to 135.0 in February after slumping 0.4 percent the month before. In Washington, meanwhile, the Labor Department said that applications for unemployment benefits totaled 378,000 last week. That was an increase of 22,000 from the previous week and the highest level in nearly two months. The four-week average for new claims rose to 365,250, which was the highest level since a flood of claims caused by the 2005 Gulf Coast hurricanes. Ken Goldstein, labor economist at the Conference Board, said in a statement accompanying the leading indicators report that economic signals "are flashing yellow." He said the numbers indicate "the economy may be grinding to a halt" and that "a small contraction in economic activity cannot be ruled out." A Federal Reserve reading of business activity in the Philadelphia area showed contraction - but not as much as analysts expected. The news helped the stock market on Thursday recover from a drop the day before. In afternoon trading, the Dow Jones industrial average climbed 158.02, or 1.3 percent, to 12,257.68. Other indexes also were up. The economy has been hard hit by rising gas prices, falling home prices and tightening credit markets, which have forced consumers and businesses to cut spending. As a result, the U.S. economy may have stopped growing in the current quarter and could continue faltering in the second quarter. That would meet a technical definition of a recession - two consecutive quarters of economic contraction. Pessimism about short-term U.S. economic prospects was voiced by the Organization for Economic Cooperation and Development, which on Thursday downgraded its growth forecasts for the United States, the euro zone and Japan. The OECD, a Paris-based institution that supports global development, cut its forecast for first-quarter gross domestic product in the United States to 0.1 percent and predicted that GDP would be flat in the second quarter. Like the OECD, most experts expect any downturn to be relatively mild and probably short-lived. That's because the Federal Reserve in recent months has aggressively lowered interest rates and made more funds available to banks and brokerages. And the Bush administration has been moving on several fronts to boost the economy, including the promise of tax rebates starting in the summer. Scott Brown, chief economist with Raymond James & Associates in St. Petersburg, Fla., predicts that U.S. economic growth could be "close to zero, maybe negative" in the first half of the year but likely improve in the second half. "It will take some time before the Fed rate cuts since January have an effect on the economy," Brown said. And the rebates and other fiscal stimulus are likely to kick in to boost spending this summer, he added. The economic weakness already is showing up in higher layoffs and weaker hiring numbers.The Labor Department's report said the total number of payroll jobs fell by 63,000 in February, an even bigger decline that the drop of 22,000 jobs in January, which had been the first monthly decline since mid-2003. "We have no doubt that the trend in claims is upwards and is approaching the levels seen in the earlier stage of the recession in 2001," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. The reading for the Conference Board's index of leading indicators was in line with the 0.3 percent decline expected by analysts surveyed by Thomson Financial/IFR. The Conference Board said the leading index has declined 1.5 percent since August, with eight of its 10 components showing declines. In the latest month, the biggest negative influences were unemployment insurance claims, building permits, vendor performance and consumer expectations. The coincident index, which measures current activity, was unchanged for a third consecutive month at 124.9. The lagging index was up 0.2 percent in February after rising 0.1 percent in January.
Thursday, March 20, 2008
Why we should not UNDERESTIMATE US FED ???
I always Admired USA because of its intellect and great home to all the knowledgeable Institutions Like MIT, Harvard, Wharton, etc ( in fact out of top 100 education institutions more than 50 belong to USA) . I always believe their superior intellectual power due to the above-mentioned reason. So I wanted to take opportunity to discuss some notions about USA Recession floating around us. Some are comparing it to 1920s situation that I beg to differ. May be in short term yen may appreciate, Fed may cut interest rate and dollar depreciates, May gold and crude rise on Hedging. But in longer term Everything will get Reversed (may be 6 month from now) Now lets take case by case, If dollar depreciates than US exports will Benefit and it will rise as it will become more competitive. Companies Like Microsoft, GE, Boeing and other companies in Technology space, Heavy Engineering , Defense , agro processing will benefit . Thus more income from exports will stimulate the economy. Mind it USA economy stands on many pillar and one breaks (housing) other will hold. But as you know Imports will be expensive …like crude Now unlike India where higher energy cost are not passed to the consumers due to the political pressure, In US its gets adjusted every day… so if Fuel cost will rise than it will pinch people there more and they will become more efficient user . They might shift to efficient cars, (so new cars sales may actually rise) or they will take mass transit system (again it will be good as under capacity will be used optimally). Thus reducing the demand of over all crude. As prices goes up demand comes down simple. And if demand comes down than crude prices will come down or atleast they wont rise. (but I feel it will come down as USA consumes 50% of total crude supplies , so impact on prices will be visible) Now lets talk about non-crude imports. As we know USA major trade partner is China, and China has a fix dollar policy (currency is fixed /pegged) the impact in value of import will be Nil. Thus exports will rise and import value will be stagnant thus reducing the trade deficit. Once the trade deficit will start reducing dollar will stop depreciating and infact it may start appreciate. Thus people will again shift from gold (as gold bear no interest and have no economic value if its stagnant or declining ) to dollar . Now lets see what will happen to China China in last decade used appreciating dollar to its advantage . It pegged its currency with Dollar . So its export value was rising with the appreciation of dollar and at the same time Imports were getting cheaper (like crude and steel) thus it was able to amass 1 trillion dollar of reserves in last 10 years. Hence the growth rate and low inflation. But now when dollar depreciates its export value is coming down for the same volumes but import is getting more expensive hence high inflation and low growth …It will be just matter of time that China will be forced to break the peg with the dollar sooner than later. If it does so than its export will become expensive and countries like India and other ASEAN countries will become more competitive. Thus its will be good news for India. What will happen to Japan ?? As we know that's yen has rallied from 125 to sub 100 levels in matter of 4 months .And we also know that Japan have 1.5 trillion dollar worth of US treasuries.So if yen appreciates by 20% than US will make 20 % on 1.5 trillion dollar or 300 billion of notional profits ( which is almost the amount of US subprime losses) because Japan has invested into a depreciating asset (which get depreciated by 20%) Secondly Japan's economy is 4 trillion USD and major portion is export. Again USA and china are the major partners . So if its currency appreciates by 20 % than one can imagine what will happen to exporters . ( just imagine what will happen to Infosys if rupee appreciates from 40 to 32 levels) . So Japan cannot afford this double whammy both from investment loss and demise of exporters . So in all probability it will cut rates from .5% to 0% thus depreciation of yen and start of carry trade … thus inflating asset classes like equities Now again back to USA If Fed cuts rate than housing will again starts and will help economy .Secondly , even in 2003 companies like ENRON and Worldcom went bust but USA expansion did not stopped . In capitalist economy companies goes bust and new companies takes place . If u see the original companies in Dow jones index only 2-3 companies has survived . All are new entrants. It happens everywhere .. So trust Fed as Ben Barnake is very respected academician and is author of many vital economic theories paper even Nobel economists admires So we are lesser Mortals in passing outright judgments on him and US government
This article is written by my friend whom you can get in touch with following email smartreport3@gmail.com for further queries and clarification
Monday, March 17, 2008
Logics that drive Stock Price Patterns
Ask your kid to wake up in the morning or go to bed at night and you are likely to get a not so positive response. Ask an employee to perform certain difficult task and you need to ensure the employee is motivated. Incentives play a major role in motivating one to perform to achieve the desired goals. If the incentive is instant, the impact is likely to be better. That is human nature. Most organisations understand this well and devise reward programs for employees.
Often, in the world of investments, the results of the investments turn out to be very different from what logic can explain and there are situations when a wrong decision gets rewarded just because of the random nature of stock markets. Stock market is a very different place in that way. What we mean to say here is that even at times when one has invested for wrong reasons, or made wrong investment choices, the outcome turns out to be positive. Such an outcome leads one to believe that the decision and the logic behind the decision were right. On other occasions, when one has taken the right approach to assessing an investment, if the outcome is negative, one tends to question the investment process. In both the cases, the outcome may determine the future course of action. An investor making a mistake and getting the right outcome is likely to put more money using the same investment process. The moment the outcome changes, i.e., the negative outcome appears, the investor, in all likelihood loses more than he ever gained. On the other hand, if the outcome was negative in the first place, the correct methodology was either changed or the investor opts to stay away from stock markets. -->
This is no different from the famous experiment by the scientist Pavlov:
The original and most famous example of classical conditioning involved the salivary conditioning of Pavlov's dogs. During his research on the physiology of digestion in dogs, Pavlov noticed that, rather than simply salivating in the presence of meat powder (an innate response to food that he called the unconditioned response), the dogs began to salivate in the presence of the lab technician who normally fed them. Pavlov called these psychic secretions. From this observation he predicted that, if a particular stimulus in the dog’s surroundings were present when the dog was presented with meat powder, then this stimulus would become associated with food and cause salivation on its own. In his initial experiment, Pavlov used bells to call the dogs to their food and, after a few repetitions, the dogs started to salivate in response to the bell. (Source: www.wikipedia.org)
To put the above paragraph simply, while the dogs were expected to salivate on seeing meat, they started salivating even at the sight of the lab technician, who brought them meat. In the second experiment, when Pavlov started using bells to call dogs to their food, the dogs started to salivate at the sound of the bells even when there was no food. The brain learns and remembers using association. Sound of bells or sight of lab technician was followed by food – in the above discussion. This theory won the Nobel Prize for Ivan Pavlov and goes a long way in explaining how learning can take place.
It's human nature to find patterns where there are none and to find skill where luck is a more likely explanation – said William Bernstein
I would narrate an incident that happened long back with a college student. This student happened to be one of the toppers in his class but was always very nervous during the examinations. In his final year, he had prepared well for the exams like he always did. On the day of the first exam, he was sitting on a tea stall having his morning cup of tea. Whether it was nervousness or something else, he dropped the cup and it broke. That day, he did fantastically well in the exam. It became a routine for him from the next day onwards. Every morning, he would go to the same tea stall, have tea, pay the tea stall owner Rs. 5 and break a cup. This was exhibition of the same behavior that William Bernstein mentioned above – “find patterns where there are none” just because one was unsure of the outcome of the exams. We can look around ourselves and find many such examples in real life as well.
It is no wonder then that around the budget time, we hear talks about pre-budget rallies / crashes or post-budget rallies / crashes. The announcements in the budget still can make some difference to certain businesses and the economy at large, but then there is also the December effect or the May-June crash phenomena – just because someone happened to register similar movements of stock prices during those periods. However, there is a difference between the patterns that cause the prices to move and those that just randomly happen more often. The most important pattern and a proven one at that is the relationship between company profits and the stock price. The stock price moves in line with the growth in the profits of the company. As long as the company continues to grow profitability without diluting the equity base, the prices are likely to move up. However, this long-term up move is likely to be filled with many roller-coaster rides along the way. It is important to learn about the factors causing long term and short term movements in the stock prices and use this knowledge to our advantage. Most other relationships and associations are just coincidences. Such coincidences serve no other purpose than to distract an otherwise disciplined investor, leading to costly mistakes.
- Amit Trivedi
Source: Moneycontrol
Often, in the world of investments, the results of the investments turn out to be very different from what logic can explain and there are situations when a wrong decision gets rewarded just because of the random nature of stock markets. Stock market is a very different place in that way. What we mean to say here is that even at times when one has invested for wrong reasons, or made wrong investment choices, the outcome turns out to be positive. Such an outcome leads one to believe that the decision and the logic behind the decision were right. On other occasions, when one has taken the right approach to assessing an investment, if the outcome is negative, one tends to question the investment process. In both the cases, the outcome may determine the future course of action. An investor making a mistake and getting the right outcome is likely to put more money using the same investment process. The moment the outcome changes, i.e., the negative outcome appears, the investor, in all likelihood loses more than he ever gained. On the other hand, if the outcome was negative in the first place, the correct methodology was either changed or the investor opts to stay away from stock markets. -->
This is no different from the famous experiment by the scientist Pavlov:
The original and most famous example of classical conditioning involved the salivary conditioning of Pavlov's dogs. During his research on the physiology of digestion in dogs, Pavlov noticed that, rather than simply salivating in the presence of meat powder (an innate response to food that he called the unconditioned response), the dogs began to salivate in the presence of the lab technician who normally fed them. Pavlov called these psychic secretions. From this observation he predicted that, if a particular stimulus in the dog’s surroundings were present when the dog was presented with meat powder, then this stimulus would become associated with food and cause salivation on its own. In his initial experiment, Pavlov used bells to call the dogs to their food and, after a few repetitions, the dogs started to salivate in response to the bell. (Source: www.wikipedia.org)
To put the above paragraph simply, while the dogs were expected to salivate on seeing meat, they started salivating even at the sight of the lab technician, who brought them meat. In the second experiment, when Pavlov started using bells to call dogs to their food, the dogs started to salivate at the sound of the bells even when there was no food. The brain learns and remembers using association. Sound of bells or sight of lab technician was followed by food – in the above discussion. This theory won the Nobel Prize for Ivan Pavlov and goes a long way in explaining how learning can take place.
It's human nature to find patterns where there are none and to find skill where luck is a more likely explanation – said William Bernstein
I would narrate an incident that happened long back with a college student. This student happened to be one of the toppers in his class but was always very nervous during the examinations. In his final year, he had prepared well for the exams like he always did. On the day of the first exam, he was sitting on a tea stall having his morning cup of tea. Whether it was nervousness or something else, he dropped the cup and it broke. That day, he did fantastically well in the exam. It became a routine for him from the next day onwards. Every morning, he would go to the same tea stall, have tea, pay the tea stall owner Rs. 5 and break a cup. This was exhibition of the same behavior that William Bernstein mentioned above – “find patterns where there are none” just because one was unsure of the outcome of the exams. We can look around ourselves and find many such examples in real life as well.
It is no wonder then that around the budget time, we hear talks about pre-budget rallies / crashes or post-budget rallies / crashes. The announcements in the budget still can make some difference to certain businesses and the economy at large, but then there is also the December effect or the May-June crash phenomena – just because someone happened to register similar movements of stock prices during those periods. However, there is a difference between the patterns that cause the prices to move and those that just randomly happen more often. The most important pattern and a proven one at that is the relationship between company profits and the stock price. The stock price moves in line with the growth in the profits of the company. As long as the company continues to grow profitability without diluting the equity base, the prices are likely to move up. However, this long-term up move is likely to be filled with many roller-coaster rides along the way. It is important to learn about the factors causing long term and short term movements in the stock prices and use this knowledge to our advantage. Most other relationships and associations are just coincidences. Such coincidences serve no other purpose than to distract an otherwise disciplined investor, leading to costly mistakes.
- Amit Trivedi
Source: Moneycontrol
Friday, March 14, 2008
Capability or resources?
Someone asked me a pertinent question recently. Why should you be fixated on equity? Why not invest in real estate, commodities, currencies or even art? After all, we are trying to make money with money, so any asset class should do. I looked around. There's Jim Rogers, commodities guru, egging us on to accumulate everything from sugar and corn to lead and coal. The evidence is all around us. Oil has surged from $20 to over $100 a barrel.Metals have been on a gallop. Wheat acreage is continuously on the decline (atta is up to around Rs 20 a kg from under Rs 14 two years ago), while other grains and sugar are diverted to alcohol. Palm oil futures have doubled in less than a year, and a global fertiliser shortage looms.Art is no different. A Husain will some day be as coveted as a Gaugin or Picasso original. And Ravi Varma aspires to rub shoulders with Rembrandt. First-time investors are busy figuring out how to short the dollar and roll long positions on the renminbi, while moneybags from Boston, Hong Kong and Dubai are gobbling up millions of square feet of real estate in Vashi and Gurgaon.Where does all this leave the stock markets? Even here, many of the big opportunities being touted are in infrastructure and real estate, or iron ore, coal and other mining stories. But I think there is more to investing than just picking broad themes and riding waves. Sure, there might be money in doing this, but it does not hook me in the same way that a great management in charge of a good business does.
The principal reason is ironic, to say the least. A good management gives me protection against bad times. The biggest plus about capability is that it helps you survive bad weather. This cushion does not exist for resource stories, which bear the brunt of low prices at the trough of every cycle.Ask the Arabs who sold oil at $16 a barrel. Likewise, all the iron ore mines in Jharkhand and Orissa were useless when ore sold for Rs 700 at the pit head, and you spent more than that in raising cost. But Tata Steel lived through those times, living off its "lowest cost converter in the world" tag.Now compare the options that you have as an investor: buy gold (or copper, zinc, corn, crude, or sugar, using futures) to play on its price, or invest in an economic organism called a business that employs people, machines and time to work on your money. And deliver something useful to its customers, for a price that the competition does not like.Times change, the business reinvests its profits into new areas and capacity and moves on in its quest for earning a fair return to its shareholders, as also engaging and (mostly enriching) its other constituencies: employees, governments and society at large.Not all businesses do all of this, but the ones that donft do this soon get waylaid. This great cycle of business life repeats itself across companies, and serves to multiply investor wealth when listed companies do a good job of playing it out successfully. How exciting to own and daily track the fortunes of such an organism!Against this, you can choose to hold on to futures contracts or pieces of a precious metal that you can stash away in a corner of your home. Or, you can choose to invest in a Ganesh Pyne original or an acre on Sohna Road in Gurgaon. Youfd be very rich if you could stash away things like that or crude oil, zinc or iron ore. Or if you could short the dollar.In fact, I know of several people who have made pots of money sitting on bounties of resources that they inherited or bought at the "right" time. They include sheikhs in the oil rich countries of West Asia. Or legends like Jim Rogers, who punted on a wide range of commodities. And iron ore mine owners in Jharkhand, Orissa and Karnataka who have raked it in over the past five years after decades of pain. Not to forget mining companies like BHP Billiton or Rio Tinto, which own coal, iron ore and other mines in several countries.Plus the big oil firms like Chevron, BP and Shell. But not one of them has the sustainable profit and business franchise that a Warren Buffet inevitably looks for in every company he buys. Who do you want to follow?
The writer is head of research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws
The principal reason is ironic, to say the least. A good management gives me protection against bad times. The biggest plus about capability is that it helps you survive bad weather. This cushion does not exist for resource stories, which bear the brunt of low prices at the trough of every cycle.Ask the Arabs who sold oil at $16 a barrel. Likewise, all the iron ore mines in Jharkhand and Orissa were useless when ore sold for Rs 700 at the pit head, and you spent more than that in raising cost. But Tata Steel lived through those times, living off its "lowest cost converter in the world" tag.Now compare the options that you have as an investor: buy gold (or copper, zinc, corn, crude, or sugar, using futures) to play on its price, or invest in an economic organism called a business that employs people, machines and time to work on your money. And deliver something useful to its customers, for a price that the competition does not like.Times change, the business reinvests its profits into new areas and capacity and moves on in its quest for earning a fair return to its shareholders, as also engaging and (mostly enriching) its other constituencies: employees, governments and society at large.Not all businesses do all of this, but the ones that donft do this soon get waylaid. This great cycle of business life repeats itself across companies, and serves to multiply investor wealth when listed companies do a good job of playing it out successfully. How exciting to own and daily track the fortunes of such an organism!Against this, you can choose to hold on to futures contracts or pieces of a precious metal that you can stash away in a corner of your home. Or, you can choose to invest in a Ganesh Pyne original or an acre on Sohna Road in Gurgaon. Youfd be very rich if you could stash away things like that or crude oil, zinc or iron ore. Or if you could short the dollar.In fact, I know of several people who have made pots of money sitting on bounties of resources that they inherited or bought at the "right" time. They include sheikhs in the oil rich countries of West Asia. Or legends like Jim Rogers, who punted on a wide range of commodities. And iron ore mine owners in Jharkhand, Orissa and Karnataka who have raked it in over the past five years after decades of pain. Not to forget mining companies like BHP Billiton or Rio Tinto, which own coal, iron ore and other mines in several countries.Plus the big oil firms like Chevron, BP and Shell. But not one of them has the sustainable profit and business franchise that a Warren Buffet inevitably looks for in every company he buys. Who do you want to follow?
The writer is head of research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws
Tips for trading
Nothing fascinates people more than an opportunity to make a quick buck on the stock market. Enthusiastic risk-takers and the more sober risk-averse investors alike find it difficult to stay away from equities. That’s largely because investing in equities is one of the few investment avenues that eliminates purchasing power risk.That is the returns offered on investment in direct equities best beat the inflation in the long run. But volatility in the stock markets could put off many investors, although there are money making opportunities even in falling markets. However, such opportunities can be converted into fortunes only if one can correctly predict the market direction.That’s why it’s necessary to understand market basics and functioning, the factors influencing it, the ways to reduce risk, as well as trading strategies, before you enter this market. Whether you’re a new investor or if you want to study advanced market concepts, Michael Sincere’s book, Understanding Stocks, could prove the perfect guide.The book is divided into four sections, starting, appropriately enough, with the fundamentals. Sincere then moves on to discussing sophisticated concepts, trading strategies, stock picking methods, influence of macroeconomic factors and even some nuggets of financial advice. In the first section, the author explains the concept of equity shares.
According to him, the primary reason for investing in stocks is the capital appreciation or capital gains. Other investment alternatives like bonds, mutual funds, exchange traded funds, money market instruments and index funds are also explained. The section also explains the concepts of stock split, float, market capitalisation, stop loss and limit orders.Market capitalisation is the base for classifying stocks as large, mid and small cap. Generally, companies with low float are considered to be highly volatile due to demand-supply mismatch. A stop loss order enables an investor to sell the stock at a specified price. The author also advises investors to avoid margin or leverage trading, as any wrong judgements (in terms of market direction) can put them into severe losses. The concept of short selling is explained, and Sincere adds that short selling is often used to make money in falling markets.The second section covers some trading or money-making strategies. Some of the strategies explained are “buy and hold”, “buy on the dip”, “dollar cost averaging”, “value investing” and “growth investing”. The author mentions that an investor must do thorough research before trying these strategies, as not all strategies work during all market conditions.The third section covers fundamental and technical analysis. Fundamental analysis aims at calculating the intrinsic worth of a stock, whereas technical analysis looks at historical price charts to forecast future price movements. The author also explains how to analyse balance sheets, identify the best performing companies in the industry, use financial terms like P/E ratio, PEG ratio, RoE, etc.In technical analysis, it covers simple charts—line, bars and candle stick, various patterns like head and shoulders, double top and advanced tools like moving averages, relative strength index and on balance volume. Though technical analysis is not comprehensively covered, it still gives a basic idea of the tools and techniques used by professional traders.
The final section identifies some of the macroeconomic factors that influence global equity markets. US central bank policies, strength of dollar, inflation and unemployment are cited as some of the major factors. It explains why a reduction of interest rates by the US Federal Reserve leads to a bull run in emerging economies’ equity markets.The book also mentions some of the mistakes investors make while trading in equities. Lack of diversification, herd mentality, believing in stock tips and lack of liquidity are mentioned as some of the mistakes. The author has given some good stock market advice in the final chapter.According to him, investors should use both technical and fundamental analysis while investing in stocks, keep healthy cash reserves, question earning estimates given by analysts, listen to traders (as short-term traders have a good idea about the market direction), research companies before buying stocks and invest only a reasonable proportion of savings in the stock market.The book serves the purpose of both long-term and short-term investors, as it meticulously explains longand short-term trading strategies. It acts as a step-by-step guide for those who are new to equity markets and are not familiar with its functioning. All tools and concepts are well explained in simple and clear language. Even the technical (economics and finance) jargon is explained clearly. It could prove to be an asset for students, investors and traders alike.
Source: Money Today
According to him, the primary reason for investing in stocks is the capital appreciation or capital gains. Other investment alternatives like bonds, mutual funds, exchange traded funds, money market instruments and index funds are also explained. The section also explains the concepts of stock split, float, market capitalisation, stop loss and limit orders.Market capitalisation is the base for classifying stocks as large, mid and small cap. Generally, companies with low float are considered to be highly volatile due to demand-supply mismatch. A stop loss order enables an investor to sell the stock at a specified price. The author also advises investors to avoid margin or leverage trading, as any wrong judgements (in terms of market direction) can put them into severe losses. The concept of short selling is explained, and Sincere adds that short selling is often used to make money in falling markets.The second section covers some trading or money-making strategies. Some of the strategies explained are “buy and hold”, “buy on the dip”, “dollar cost averaging”, “value investing” and “growth investing”. The author mentions that an investor must do thorough research before trying these strategies, as not all strategies work during all market conditions.The third section covers fundamental and technical analysis. Fundamental analysis aims at calculating the intrinsic worth of a stock, whereas technical analysis looks at historical price charts to forecast future price movements. The author also explains how to analyse balance sheets, identify the best performing companies in the industry, use financial terms like P/E ratio, PEG ratio, RoE, etc.In technical analysis, it covers simple charts—line, bars and candle stick, various patterns like head and shoulders, double top and advanced tools like moving averages, relative strength index and on balance volume. Though technical analysis is not comprehensively covered, it still gives a basic idea of the tools and techniques used by professional traders.
The final section identifies some of the macroeconomic factors that influence global equity markets. US central bank policies, strength of dollar, inflation and unemployment are cited as some of the major factors. It explains why a reduction of interest rates by the US Federal Reserve leads to a bull run in emerging economies’ equity markets.The book also mentions some of the mistakes investors make while trading in equities. Lack of diversification, herd mentality, believing in stock tips and lack of liquidity are mentioned as some of the mistakes. The author has given some good stock market advice in the final chapter.According to him, investors should use both technical and fundamental analysis while investing in stocks, keep healthy cash reserves, question earning estimates given by analysts, listen to traders (as short-term traders have a good idea about the market direction), research companies before buying stocks and invest only a reasonable proportion of savings in the stock market.The book serves the purpose of both long-term and short-term investors, as it meticulously explains longand short-term trading strategies. It acts as a step-by-step guide for those who are new to equity markets and are not familiar with its functioning. All tools and concepts are well explained in simple and clear language. Even the technical (economics and finance) jargon is explained clearly. It could prove to be an asset for students, investors and traders alike.
Source: Money Today
Thursday, March 13, 2008
Commodities: A Twin Edged Sword
Mutual Funds and ULIPs will be Hit Hard
For more than four months, I've been telling you how rising oil, corn and commodities prices would split Dalal Street in two. The warning I issued in December has finally come true: "Consumer spending will decline, entire sectors will be abandoned and earnings will evaporate--and with it, the fortunes of millions of investors will vanish as well." Just look at the free fall the financial, construction and airline sectors have suffered on declining earnings and poor expectations. But as I also said, on the other side of this great divide, "Companies will be thriving, earnings will be accelerating, and investors will be enjoying their best returns in years, fully protected from the liquidity plague that will send millions of investors to the poorhouse." What most investors don't understand is that commodities (oil, food and natural resources) are the blood supply of global growth. What rising commodities prices have done, so tragically, is trigger one of the biggest stock declines in market history... increase borrowing costs...shrink profit margins...panic investors...and raise fear of global economic collapse. And while the Fed's move to flood the markets with more easy money continues to boost stocks temporarily, the worst is far from over... ...as the falling dollar continues to push prices higher, increase the price of oil and shrink profits--ultimately undermining consumer confidence and triggering inflation across the board. The bottom line is this: In a world where easy money and low interest rates have been the driving force behind the real estate boom of the past five years, the repercussions have resulted the in a falling dollar, rising oil and commodities prices, and collapsing real estate and stock market. Not just here in the U.S., but in all four corners of the Earth. Which is... Why You Must Reposition Your Assets Now But Let me sum up the dangers. The subprime credit squeeze has increased borrowing costs and put downward pressure on profit growth and consumer spending. The result has triggered a global sell-off, sending throngs of investors into commodities as a safe haven, trigging an epic rise in gold, oil and corn prices. The chain reaction has not only dried up merger and acquisition activity, and put the breaks on dozens of corporate buybacks, which not only supported stock prices but also helped drive the market higher... ...but also kindled inflation fears not only here in the U.S. but also around the globe. And this isn't even the worst of it. On top of that, hedge funds are bleeding bad debt, and many have already declared bankruptcy. As a result of the credit crunch, experts predict that nearly two-thirds of the hedge funds operation today will exist. When you add everything up, the subprime mess and following credit squeeze and commodities boom has not only crippled global markets, reduced investor confidence and stalled world growth... ... but also painted the Fed into a dangerous and frightening corner with only two options:Lower interest rates again on March 18th to reduce the chance of a slowdown, but fan the flames of commodity-induced inflation, or Leave interest rates unchanged to reduce the risk of a rampant commodities-inflation bubble, but likely allow the economy to slip into a recession in the process. Either move could blindside investors who have not adjusted their holdings accordingly.
Source: aiii
Credit: eagle eye
For more than four months, I've been telling you how rising oil, corn and commodities prices would split Dalal Street in two. The warning I issued in December has finally come true: "Consumer spending will decline, entire sectors will be abandoned and earnings will evaporate--and with it, the fortunes of millions of investors will vanish as well." Just look at the free fall the financial, construction and airline sectors have suffered on declining earnings and poor expectations. But as I also said, on the other side of this great divide, "Companies will be thriving, earnings will be accelerating, and investors will be enjoying their best returns in years, fully protected from the liquidity plague that will send millions of investors to the poorhouse." What most investors don't understand is that commodities (oil, food and natural resources) are the blood supply of global growth. What rising commodities prices have done, so tragically, is trigger one of the biggest stock declines in market history... increase borrowing costs...shrink profit margins...panic investors...and raise fear of global economic collapse. And while the Fed's move to flood the markets with more easy money continues to boost stocks temporarily, the worst is far from over... ...as the falling dollar continues to push prices higher, increase the price of oil and shrink profits--ultimately undermining consumer confidence and triggering inflation across the board. The bottom line is this: In a world where easy money and low interest rates have been the driving force behind the real estate boom of the past five years, the repercussions have resulted the in a falling dollar, rising oil and commodities prices, and collapsing real estate and stock market. Not just here in the U.S., but in all four corners of the Earth. Which is... Why You Must Reposition Your Assets Now But Let me sum up the dangers. The subprime credit squeeze has increased borrowing costs and put downward pressure on profit growth and consumer spending. The result has triggered a global sell-off, sending throngs of investors into commodities as a safe haven, trigging an epic rise in gold, oil and corn prices. The chain reaction has not only dried up merger and acquisition activity, and put the breaks on dozens of corporate buybacks, which not only supported stock prices but also helped drive the market higher... ...but also kindled inflation fears not only here in the U.S. but also around the globe. And this isn't even the worst of it. On top of that, hedge funds are bleeding bad debt, and many have already declared bankruptcy. As a result of the credit crunch, experts predict that nearly two-thirds of the hedge funds operation today will exist. When you add everything up, the subprime mess and following credit squeeze and commodities boom has not only crippled global markets, reduced investor confidence and stalled world growth... ... but also painted the Fed into a dangerous and frightening corner with only two options:Lower interest rates again on March 18th to reduce the chance of a slowdown, but fan the flames of commodity-induced inflation, or Leave interest rates unchanged to reduce the risk of a rampant commodities-inflation bubble, but likely allow the economy to slip into a recession in the process. Either move could blindside investors who have not adjusted their holdings accordingly.
Source: aiii
Credit: eagle eye
India: When Was The Last Time You Saw A Meltdown?
It's unfortunate but Sardar Manmohan Singh has to contend with a unique set of foursome. The Harvard Twins PC and Montek, and the twosome called Kamath and Parekh. Between, the four of them lie $ 15 bn in Bank write-offs, a $ 500 bn Capital Formation and 8 per cent GDP growth ennui, ad infinitum and possible truckload of wishful thinking. The 2 per cent growth in Capital Goods production seen in Jan 2008 and the IIP growth of 5.5 per cent year on year makes one feel, that either Kamath and Parekh are deluded or they have some other work of mathematics at play which will make India's GDP grow at 8 per cent per annum yoy for 2008, given a negative growth in agriculture. If with this methodology Mr. Kamath is willing to finance a $ 500 bn expansion of the Indian industry, then he may save a few Rupees here or there to BUY a lock for the Bank he runs, for the lock may be needed soon. On the other hand, if by some virtuous way the Banks do lend out this kind of money then just like the 1980s, huge NPAs in the form of Steel, Cement and Petrochem plants will arise, which will be no more than White Elephants for the Economy but clobber down the lending Banks. To this troika of industrial segment, one could add in hindsight, Real Estate, which no one afford now and will not be able to afford more so six months from now. For nearly a year the World has been searching for the next "Bubble" and they seem to have found it in Asia. Emerging market stocks provided super returns in the period 2002-07, averaging 39.5 per cent leaving them perilously over-valued. Yes..look closer at the numbers. The Price to Sales ratios in Emerging Market stocks is roughly 120 per cent higher than the same measure in developed economies. That means, if PEs are about the same, profit margins in Emerging Markets are twice as high as in the developed world. The obvious risk here is that profit margins in emerging markets will decline to global average levels as new competition surfaces, says Robert Arnott, Chairman of fund manager Research Affiliates. "These stocks have soared beyond reason," he says. So what could cause a collapse? A market bust and recession in the US., which together were enough to trip up emerging markets six years ago. Or Credit tightening in China, or inflation and political instability in the developing world. There's nothing like an overseas crisis to make a little turmoil in the US seem rather tame, compared to what can happen in far-off markets like India, Russia, Brazil and Turkey. Why then if the negatives were known all along then did the speculative excesses continue? Countries like BRICs nations had fancy GDP growth of 5 to 11 per cent per annum between themselves compared to a miserly 3 per cent in the US, over the past 4 years. The run-up was fuelled by speculative money that presages typically a savage collapse. FDI moved at the rate of $ 213 bn into Developing Nations as per the Institute of International Finance New York during 2007. Added spark came from Hedge Funds, Domestic Mutual Funds and Private Insurers like Reliance Capital, Bajaj Allianz, Birla SunLife, HDFC Standard, and Max New York. Total assets under management for Emerging nations hedge funds jumped 8 fold to $ 270 bn in the four years between 2002-07, estimates Lipper Tass Asset Flows. Even this figure lowballs the true figure by amounts funnelled in by Non Hedge Fund portfolio flows into nations like India, which use portfolio flows as a mechanism to balance its BOP. "Such a scale of inflows are reminiscent of the flows into technology in late 1999 and early 2000," worries Robert Adler, AMG's President. Of concern, too, is how much of the recent years' stellar returns have been the result of price multiple expansion rather than of earnings. Since bottoming out six years ago, the PE ratio of Morgan Stanley's emerging market stock index has climbed 70 per cent to 18.5, just ahead of the S&P 500's multiple. Worse, this cumulative sum of money after appreciating 6 to 7 times in 4 years is now worth over $ 1 trillion. A small withdrawal from this pool could ensure that such markets especially India and other BRIC nations lose as much as 50 per cent of their index in a very short time.
Source: aiii
Source: aiii
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