Thursday, October 30, 2008

Inflation comes down to 10.68% Vs 11.07%

As per the data released, inflation came down to 10.68% as compared to last week's 11.07%. Primary articles down by 0.3%, fuel, power, light down by 0.4% & WPI for all commodities down 0.2%.

Now RBI seriously needs to think about increasing liquidity in the economy by decreasing key interest rates. Yesterday US FED cut its key interest rate to 1% and China also reduced its rate. Taiwan and Hong Kong followed up with rate cuts on Thursday and there was speculation that Japan could follow soon.

Eight out of 10 economists polled by Reuters after the policy review expect the RBI to cut its key lending rate by 50 to 200 basis points by the end of the fiscal year and lower banks' reserve requirements to support growth.

"The inflation rate has come down much faster than anticipated. I think this will provide a strong case for the RBI to ease lending rates further and support the markets," Anubhuti Sahay, economist at Standard Chartered Bank in Mumbai said.

Indian financial markets were shut on Thursday for a holiday. On Wednesday, overnight lending rates jumped in a cash squeeze and bond yields fell on hopes of more steps to ease liquidity.

Sources...
Moneycontrol
Economic Times

Wednesday, October 29, 2008

Great Debate between Jhunjhunwala, Sharma, Arora & Udayan Mukherjee (CNBC) on market direction.

Samir Arora of Helios Capital; Rakesh Jhunjhunwala, Investor and Trader; and Shankar Sharma of First Global Services; three of the market’s well-known names, come together to answer.

Q: Have you seen anything like this in your life?

Sharma: No, never. And I hope I don’t see too much of this anymore. But that said, beginning of the year it did look like the bull market was drawing to a close. One had reasonably optimistic price targets in hindsight. My sense is that one is not done with this thing either here or globally. We will have rallies of the kind that we have seen intermediately over the last three or four months’ time although even a brief rally these days is very illusive.

The reason why I say that the pain is still not over and there is still downside is because I don’t see a revival of any of the factors that drove the last bull market any time in the next 12 months. It could be even longer — of course during the programme, I am sure each one of us will elaborate on those — and the chief problem that exists this time is the rise of the US dollar. That, at the very heart of it, is the reason why emerging markets will probably not come back as an asset class for quite a while to come. The reason why emerging markets did well was because the weak US dollar drove up commodity prices. That drove earnings in emerging markets in general, made a flight away from US dollars into non-US dollar assets. That tide has changed. The US dollar is back to being the safe haven, the reserve currency. That change is not going to reverse anytime soon. So one will see the euro weaken against the dollar. All emerging market currencies are very weak against the dollar. That’s the central problem. It’s not just about India or the BRIC countries. The larger problem for emerging markets is the strength of the US dollar.

Q: What do you think? How close are we to a bottom and even if you cannot answer that, do you think most of the pain in terms of price is done?

Jhunjhunwala: There was a Kaka (uncle) in the stock market in 1992. I told him: I am worried [at the way] the stocks are priced. They are not justified by the fundamentals. So he said: abhi sab funda ka mental hai. So let us not talk fundamentals. All values are an expression of opinion and all opinions are influenced by emotion and news, both on the downside and the upside. Just like at 21,000-22,000 levels, we felt it will never end. You had an occasion where Mr. (Mukesh) Ambani sold 5% of Reliance Petroleum shares. The Economic Times reported it, and even at that price, people were buying Reliance Petroleum at higher prices.

What's going to happen in the markets here is that we are going to go through three phases.

First is going to be a phase of stabilisation and it will be linked in a large part not to local but international factors. Then we will go through a phase of consolidation. Then, we will go through a new market. Also, I don’t understand how the dollar is defying gravity. The only way for housing to ease in America is to consumption to ease up. The only way the American economy can stabilise is by growing exports and with this value of the dollar, what will happen to American exports?

Therefore, these are phases in markets when you cannot talk sense. You just have to look at prices and the technical factors. You’ve got to look where world markets will stabilise.

Q: What is your take? I am sure events of the last couple of months would have come as a bit unexpected at least in terms of the price erosion. Do you think most of it is done?

Arora: Yes. [It is] totally surprising, [whatever happened in] the last few months. But my theory has been what Rakesh just said: this market will rise when it stops falling. I disagree a little bit with what Shankar’s point when he said it is an all-or-none situation. Even I agree that there is no logic for the US dollar to keep strengthening over time. But even if it did, the world does not come to an end.

If you see how the markets have been behaving in the last few months — it is as if they are supposed to go to zero, because there is a recession next month, next year or this year. Ultimately, things don’t go to zero. As of now, the markets would celebrate. As I said last time, just the reduction in volatility and just the fact that the markets don’t fall would be enough. So, right now when we look for optimism, we are just saying that if markets were to stabilise, we would get an environment where the world evaluates what India and other relative strengths of the world are. India is very well poised for it.

So, as of now we don’t have to revisit what the reasons for the previous bull run were, because it was something which made stocks go up five times. If, today, you tell an investor that you would just go back to September 30 market, which is effectively a 65% rally because the market has fallen about 40% this month — even if you say it could happen in three years — you could get all the money in the world.

So the point is: it just has to stop falling. Then I think there will be one sharp reversal and things would stabilise, but it may take long. But as fund managers, as current investors, nobody would mind that and that would be the seeds for a new run. You may not call it a bull run. But even if today, as Shankar said, you cannot read the last Bull Run for five years, it would be humongous returns from today.

So, the point is that we have fallen so sharply that even getting back a month ago would be a very significant appreciation in the market. That will start very soon one day because it cannot fall at the pace at which it has been falling.

Q: Before that process starts, do you expect more price erosion, even from 8,000 on the Sensex?

Sharma: Frankly speaking, that is no call to make because from 8,000 we could rally 10,000 conceivably and those could be very quick, very sharp, could be over in 10 days’ time. Those kinds of things will happen. If you are smart enough to play that, you will play that.

My sense is, looking at individual stocks, looking at the baskets of various stocks; I don’t see how telecom will ever come back to even 30% close to its highs. I don’t see how real estate will ever even double from these levels. I don’t see how infrastructure stocks like Jaiprakash Industries are even going to make their way back to Rs 150. I don’t see how Reliance Industries is going to go to Rs 3,200. I don’t see so many stocks based on a variety of factors, ever trading anywhere close to their highs.

So, therefore the probability of them even rallying 30% and sustaining is very slim because I am sure that view is generally just not my view. I don’t think a lot of people will disagree when I say that a Jaiprakash Industries, or a DLF, may or may not ever get back to even 100% higher prices. It means that the wave of selling might abate for a day or two, but will come back in all fury the moment you see some kind of uptick on prices. That will keep capping your gains. Whether we like it or not, that is really the way this market is. A lot of leverage money came into a lot of asset classes. That leverage is gone. It is going, it is being pulled out.

As it always happens, the asset class that did the best will be the one that gets hurt the most. So, in India, capital goods and banks did the best — you have seen how they have done lately in the last eight-nine months. Overall on a global basis, the BRIC countries did the best. You see exactly what has happened. US was the laggard market for the five years of the Bull Run, it has actually been a terrific outperformer, down only 33%. India is down about 65%, and most other BRIC countries are down about the same.

So, you can imagine that just being long US and short EMs (emerging markets), you made a 30% relative return. So, the whole legs from this bull market have been cut. Let’s make no mistake about it. We are not going to see the highs to this market for many years. The whole construct, the underpinnings of the market have to change. Newer players have to emerge; new sectors have to come up for that new next bull run to happen.

So, right now I’d be very happy with a 10% rally in the markets. Beyond that, I don’t think anything sustains.

Q: How long will it take in your eyes? You spoke about stabilisation and then consolidation – what are you resign to?

Jhunjhunwala: I want to make two observations. Markets in the world are facing an uncertainty they have not faced in the last couple of years. Markets don’t like uncertainty. We cannot keep, however, keep on extrapolating what's happened in the last 12 months into the next three years.

There is uncertainty worldwide about de-leverages but what gives me hope is that at these levels, we are pricing in at the worst. It all started from the housing market in America. The fact remains that August sales of existing homes have gone up 7%. September has gone up by 5%. New home stats in America have come down to 4.5 lakh. So I don’t see a total economic collapse in the world — a possibility to which I give a chance but a very slim one. We are pricing in some kind of global economic collapse and even if the growth worldwide next year is 2-2.5%, there is no degrowth. Markets will go up next year. Now I don’t know how the US dollar is strong in momentum and on the charts the US dollar. If it continues to remain strong, then God help us.

Q: How long will all this take? You have seen previous bear markets. Do you think this one will test us for a year or two even from here?

Arora: What I have always said is: it depends on how you define a bear market. Coming out of this, a 10% move in the next one year would not be a bear market in anybody’s mind because [there would only be] relief of tension from what is happening these days. Before that, the point is then you are buying stocks in the market; somebody is always selling them and you do not know why they are selling. Mostly they sell for information or because they have a view and sometimes they sell because they need liquidity. There is no other reason why somebody sells a stock.

Q: What is your observation on how long this 8,000-10,000 kind of range can last?

Sharma: This range has been the moving target. I think it was 3,800 to 4,200 on the Nifty then 3,600 to 3,800 and now it is like 2,500 to 2,800 and I am no big lover of trading ranges. The fact is that the whole construct of this bull market is gone. My sense is that the S&P 500 will reach 600, which I think is a 20-25% away or thereabouts. The Dow will easily breach where it was in October 2002. Within that context, India still does very well because India still is up about 2.5 times or 3 times on the index from where it started the bull run and average stock is still up substantially. I look at a stock like Unitech adjust over where everything was 0.60 paisa and now it is Rs 30-40. That is not bad returns in many standards.

There is still a lot of money on the table to be taken off — for investors on a number of stocks and that’s a real problem. The outperformer gives you so much returns that people can still sell in reasonable size and still lock in gains which relative to let us say US equities market still look very good. The average stock is up at least four-fove-six times on the good quality end in India. I mean a Bharti used to be a Rs-45 stock, it is now at Rs 550. That’s still serious gains for anybody.

So what I am saying is till that whole original bull market construct is completely taken out of the equation, I don’t think the new bull market starts. But within that, Samir is right — we could get a 10-20% rally. I don’t think that amounts to anything at in context of how much price damage and psychological damage this market has suffered. I don’t think we are out of the tunnel yet. We are barely, I reckon, 40-50% into the turn.

Jhunjhunwala: I cannot agree on that.

Q: Do you have the conviction to go out and buy today at 8,000?

Jhunjhunwala: I have bought today.

Q: What kind of sectors were you buying?

Jhunjhunwala: I can’t say what I bought. But I can tell you one thing. One cannot look at the S&P and Sensex in isolation. That from 2002, even in the base estimate that you gave me, the Sensex earnings are up 3.35 times. I don’t think the S&P earnings are up 3.25 from 2002.

They won’t even have doubled. So one cannot compare the S&P to the Sensex. You are comparing apple with peaches. Here the earnings have gone up 3.25 times, there the earnings have doubled.

Sharma: That is completely incorrect. It is the same global bull market pond that every market drinks from. Nobody stands out. The only way you can say it is an Indian bull market is when every market is down and India goes up 50%. Then I will agree with you. Otherwise it is a big global macro move.


Jhunjhunwala: Ultimately, whatever I have learnt in the markets is that markets are slaver for earnings. One is going to find stocks at one time earnings and one is not going to have consolidation, one is not going to have people who take takeovers. Because when I buy stocks, I am buying value, I am buying assets. So if you tell me one thing, if that history is going to change for prolonged periods of 10-15-years, stocks are not going to be slaver for earnings but are just going to be valued just on any basis because somebody has the need to sell and somebody is leveraged. History tells us, at some value, if somebody is leveraged, there emerges a buyer. So I cannot agree with you that one is going to have values just because Bharti has gone from Rs 50 to 550, which means that Bharti must come down. I don’t agree with that.

Sharma: That’s not my point. I am saying that for an investor who bought, he has still got enough gains.

Jhunjhunwala: So it must come down?

Sharma: Exactly because those are the places where you made the money. That’s the place where you are going to take the money off the table. That’s the way people react. They say okay this is still money in it.

Jhunjhunwala: I can get you the tape I heard you say — and I quoted you — that assets by equity by an asset class is one which trend upwards.

Sharma: Absolutely. But it doesn’t trend upwards every single day. US equities underperformed for 14 years, they didn’t go anywhere. India didn’t go anywhere for 10 years. We had a good run along with the rest of the world.

Jhunjhunwala: Indian economy is not in mid-ages, the Indian economy is just in its puberty. We are just into our teens.

Sharma: It doesn’t matter. What matters is that whether the environment is conducive to a global bull market or not. It is currently not. It was great during the last five years.

Jhunjhunwala: Let’s agree to disagree. Time will bear it out.

Q: Let me get a third party in then, since the two of you disagree. You were talking about de-leveraging etc, what's your sense…

Arora: I was saying that Shankar is criticising you much more than I did because he is basically saying that you are not needed. We should only watch CNBC-US because everything depends on the S&P. Everything is a global bull run and we should just be a multiple of S&P.

Sharma: That is the fact. You show me the data that disproves that, instead of giving opinions. Give me the data that tells me my bull market stands away from the global bull market.

Jhunjhunwala: I will give the data. There is a big parallel. In 1965, the Dow was 1,000 and the Nikkei was 4,000 in the same year. In 1989, the Dow was 2,000 and Nikkei reached 40,000. There are so many parallels.

Sharma: Let us talk about an economy like India which has just converged with the global economy. During the last 10 years, I don’t know of any six-month period in which India performed very differently from how the world was performing. That’s the reality, we have to admit it.

Q: What’s going on with the FII selling? When do you think that nears some kind of completion? What sense do you have sitting out there?

Arora: As of now we hear a lot about hedge funds selling which may be true but the only thing — which I said last time too — is that hedge funds normally get a much longer period. At least a two- or three-month period before everybody would get to sell. Therefore this kind of selling, I think, has to do with India-oriented country funds where the redemption periods are: you have one-day notice and need to pay within three days. Hedge fund may also sell because those guys are selling but I don’t think the driver of this kind of a fall would be hedge funds because normally it’s not that they have to sell within three-six days. Even we were much liquid in terms of our hedge funds; liquidity terms are redemption terms. We will have at least 45 days to sell at any point of time before an old redemption has to be paid out.

But in general I cannot say that this is FII selling independent of the fact that the world is selling. Therefore this argument that strategists are making about Indian rupee depreciating and India having some problem on the fiscal account — I do not think that is a real reason.

Right now, it is a dollar-driven reason because even against gold which would have the best fundamental in some sense the dollar has appreciated a lot. So we should not take everything on ourselves. Our problem is: as Indians, we tend to get a bit holier-than-thou. We have strategies to come on your channel and say, how India is overvalued against the world by 40% without differentiating that we did not close our market on any random day or just did not choose to bring some government in and say buy stocks or randomly lockup some CEOs of companies or fund managers and give them visas. If the world is not going to appreciate these differences, maybe we should also all do these things and close our markets for five days when the world doesn’t want to penalise such action.

My point is: the world is not an all-or-none. If you bought today and market fell 20% tomorrow, if you are buying only 1/10th of 1/5th of what you are supposes to buy in this period, it does not matter.

The point is that even everybody is a hedge fund manager. Nobody should think that he is an all-or-none guy. The point I a, saying before is it is in our collective benefit to give some benefit to what is happening around us and not to think that we will all wait but somebody else will buy and then we will buy. Everybody is a participant, every consumer is a participant, every channel viewer and newsreader is a participant. Because in the end, everybody will be influenced and affected by it.

Jhunjhunwala: I would like to add one point to what Samir said. From 14,000 to 21,000, I do not think there was a single day when the FII buying was negative. I think from 4,150-4,200 to 5,700 — to the day they banned the P-Notes, up till that day — everyday continuously bought and the story was you cannot leave India, every FII has to be in India.

So, with due respects to them, I don’t know what to make of their wisdom. What was the reason for them to buy at 21,000? What was the reason for them to sell at these levels? What are the factors that drive them? What I do know is that the factors that drive them ultimately reverse them. It had happened earlier; it happened at 21,000, it happened last year, it will happen this year. The value of (their) holdings is now estimated at about USD 60 billion. So if you see the total world market, where their assets are between USD 5 and 15 trillion, India is a small part of it.


Arora: We cannot talk about Shankar because he has been right most of this year and I totally appreciate that. But look at other people who come on your channel and look at what they have been saying about oil, (they said) oil was in shortage and it was going out of supply that there was one last Saudi Arabian field [remaining] in the world. With great conviction, everybody would come in and say the same things. Three months later, they come now and say [prices of] commodities are going down. Point is: you cannot be carried away totally by the moment and therefore obviously everybody has become cautious. We have not net 30 instead of 50-60 but the point is that you cannot walk away from this game. If you are in this — and that includes everybody who is watching your channel — they may portion 1/20th or 1/10th but to think that we will wait and everybody else will support us and buy us out is not going to happen.

Jhunjhunwala: Can I look at earnings in isolation of ROC (Return on Capital) and ROEs (Return on Equity); earnings are not a mathematical figure.

Q: You are going on a different tangent.

Jhunjhunwala: No. India is cheap and when I compare India and Korea. If the return on capital in Japan is 3%, return on capital in India is 20% I can’t equalise PEs there from here. Today, if our long bond is 8% and we had 10 times the current year’s earning; the index is getting better yield in the long run.

Q: What if earnings fall 25% next year?

Jhunjhunwala: That’s the uncertainty. Who knows whether they will. Nobody can say that with certainty. That’s why I am saying you are pricing out. If the global economies collapse, they could.

Q: Do you think they will?

Jhunjhunwala: I am positively optimistic, they will not.

Q: In no de-growth at all next year?

Jhunjhunwala: Not 25%

Arora: We say that stocks represent present value of future dividends and future earnings and then we look at one-year earnings in a very distressed environment. Even if it is down 10% and therefore price everything of that that what happens when earnings are down. Beyond a point, people say that earnings have not yet been reduced but the market has fallen 65%. So you mean to say all this happened without the market taking a view on earnings? It is all simultaneously happening.

There are many times in the world when bad news takes a stock up because that it the way it works. Now what Shankar was saying that the dollar because it will strengthen therefore the rest of the world will be bad, well then you could kiss goodbye to (Pepsi CEO) Indra Nooyi being the most powerful woman. She became powerful because she was running a multinational where she made all the money from a weak dollar. In the end, these are all self-correcting mechanisms. You will never have all or none.

All over, the world will not choose to have it like that. In the end, the world will not be confident enough to bet on only one factor even if it is the factor that happens but right now because there is a process of redemptions or whatever is that new word — de-leveraging — so it may take its course. Therefore you wait 20-30 days independent of what the price is and then by that time either it is the end of the world or this process would have taken us to zero or the de-leveraging would be over.

There may still be an overhang because in future people may not take the same amount of leverage but that is as if we want last year’s returns. You have to have returns in the environment in which you operate. Right now, for the next three months, if somebody told me the market will not fall and will not go up and will be effectively closed down, I will be the happiest guy in the world.

Sharma: My point is straightforward. In a lot of cases, what was the market cap of companies six-seven years back is equal to their interest outflows now. A lot of these companies are based on commodities and cyclicals. I consider infrastructure to also be a cyclical because it thrives in eras of cheap capital and cheap money which is what we saw in the last five-years. Jaiprakash Industries’ market cap was lower than the interest it pays now.

Q: Why do you single that stock out for punishment like it won’t go up?

Sharma: You should be asking Samir that.

Q: Samir sold out of it long back I am sure. Samir, didn’t you?

Arora: Yes, long back.

Sharma: He is the original finder of the downswing. But my point is that a lot of companies have built up huge balance sheet risks in India. We did exactly the same thing in the ’90s by putting up capex. This time we have done capex or acquisition which is the same thing as capex.

That is my real fear that you have so many good blue-chip names who have gone out, bid for companies at crazy prices. That is all setting on the balance sheets. So I do not really pay too much attention to these earnings estimates of the Sensex. That is an absurdity, which should be banned outright.

You are drawing an Rs-850 EPS across the bank, auto company, infrastructure company, steel company, two-wheeler company saying 850 times ten should be 8,500, ten times P/E across all industry including Hindustan Unilever, Infosys Technologies, Ranbaxy — that is complete absurdity.

Jhunjhunwala: So finally earnings will matter.

Sharma: Of course they matter. But they matter on a disaggregated and sectoral basis not drawing a line through all kinds of businesses and putting a common P/E to everything.

Coming back to the point, it is that companies have built a very significant risk on their balance sheet and no matter how emotional Rakesh Jhunjhunwala and Samir Arora get about the bull market — and Samir is so right that we are not neutral observers, I am not a neutral observer, I am a participant and I benefit from bull market as much as Samir or Rakesh do, let’s make that caveat clear.

But that said, you cannot ignore the hard facts that our companies today have greater balance sheet risks and in a lot of cases they have built these risks at pretty high levels of financing. Done at a time with a dollar-rupee was…

Jhunjhunwala: (Interrupts) From the 30 companies on the Sensex, I do not think more than five companies carry disproportionate debt-equity ratio.

Sharma: Correct. And they have been the companies that have actually done very well in terms of earnings. The companies that did not do well in terms of earnings have not done anything at all.

Jhunjhunwala: Infosys has done well in full cash.

Q: What names do you have in mind when you say disproportionately large?

Sharma: Some of the steel and auto companies and they have gone and done transactions which did seem very risky.

Q: Tata Steel, Suzlon?

Jhunjhunwala: That is what I am saying. Tata Steel, Tata Motors, some of the real estate companies, Hindalco, maybe even Suzlon. I do not remember more than five companies out of the 30-share Sensex and I cannot say that all the technology companies are in cash.

I do not think Reliance Industries has got any problem with liquidity, I do not think infrastructure has got any problem, any of Reliance Group companies.

Sharma: Infrastructure companies have got a lot of liquidity problems.

Jhunjhunwala: There will be certain companies but I cannot generalise that the debt-equity ratio within companies may be at all-time lows.

Sharma: Therefore the fact of the matter is that when you have gone and built up capacities, [increased] infrastructure spending, you have done without caring too much about what price and return that you are going to make on them. That in the downswing will get you hurt.

You do need to spend time marking time in this market. You cannot build a case for the resumption even if the earnings are not falling 25% in FY10, although to be honest, I do not believe that they will rise 10% in FY10. Looking at the history, last many years have had negative earnings growth. My sense is that you are still a long way away from calling the bottom to this market at least in terms of earnings momentum. Till that comes back, I agree with Rakesh Jhunjhunwala that you need earnings momentum to come back for the market to revive but I do not think that comes back that easily and that soon.

Jhunjhunwala: Warren Buffet wrote in his letter — I do not know he is right in saying it — that whether we should buy stocks or not but markets bottom far before the economy bottoms. That has been the history. I do not if everything in history is going to be turned around this time.

Q: But have they bottomed even before economies have started falling which is the case perhaps now? Only single market in the West has gone into recession, the others are still not entered into this?

Jhunjhunwala: Today, you are pricing in the recession. There could be a period of three to six months where the economies may not bottom out or maybe nine to 18 months. But whatever valuations you have today is because you are pricing in the future.

Nobody knows to what extent you will go around. But to say that Bharti is at Rs 550 so there is a long way to go down or because the stocks are not going to respond to earnings — I can say that in the index of 4,200 in 1992 — I think Hindustan Unilever was Rs 200. When the markets made a bottom, Hindustan Unlever was Rs 3,290.

So it is not that stocks will not gain. I think that corporate India is highly over-debted. There are certain companies but they do not represent the general companies. They have been punished and punished severely.

Hindalco today has a market cap which is less than what it raised in the right issue.

Arora: If the market is not pricing in the fall in economy and growth rates and explain independent of this leveraging world only, why have our markets fallen 45% this month? It is obvious that there are things being discounted. They may get over-discounted or not enough but to say now I will see some GDP number and therefore that will be another round of 30-40% because that is what happens when recession turns up in UK or somewhere else, I think we are doing it simultaneously.

At the end of the day, the alternatives have also to be seen: what else is the world — not in India but in the world — going into. Everybody is not going to keep their money in their bank because which bank they will put it in? If they actually put money in their bank in dollars, that means the banking problem is over.

So at the end of the day, it is all a choice between various markets.

Sharma: Which is why HSBC ran out of account opening forms in London.

Arora: State Bank of India also ran out of forms, these will happen for a few days or weeks. Whatever you may say, if there is a 20-year pension issue, that fellow will not — to save his job — say I am putting money in the bank and on a day one therefore, immediately take a hit in what he will accrue. They will still take all those bets. That is how life works.

So after it settles, the point is which market, which country has better opportunities or has fallen the same as other markets without having exactly the same problems. If India had in this fall fallen less then you could have said that India is already getting rewarded for it. Now a market that closes down, and a market which is open and a market which has restrictions — L&T (Larsen & Toubro) disappointed the market and disappointed us too but had a 32% earnings growth. Show me another stock in Russia or Asia where somebody went up 32% and then you say whether it is discounted or not.

The fact that that we have 40-50-20% earnings growth, half the world does not have. People talk about price-to-book, please show the book in the US banks.

Q: Fair point but it is still sad that L&T is at Rs 700 and languishing.

Arora: I agree. I am saying therefore when everything stabilises, the world will choose those markets, those countries, those companies where independent of the problem — there was this extra thing that the companies are performing well but they got hit as much as everybody else. Therefore after a month or two, when the whole world is fallen the same percent — nowadays everyone falls the same, plus or minus here and there but does everybody — everybody will put it together and choose what they like and in that case India has a very good chance.

Jhunjhunwala: Gold has fallen 35%. USD 1,035 per ounce was the top. Yesterday, I saw gold has gone to USD USD 680 per ounce.

Arora: Whether it is Russia, Korea, Taiwan, it cannot be that the world will suddenly say: no, I am going to keep my money in HSBC because that cannot be the trade of the whole world.

Q: Let us talk about the guy in India. He might not have such an international perspective. Has it come to the point where people can say at 8,000 Sensex if I put in money, I will get reasonably high chances of getting more than FD returns over a one-year period? Can you take that call today?

Sharma: The market has gone from being a buy-and-hold market to being a trading market. That’s the characteristic of bear markets that you do get very sharp — in fact one can probably and I still do believe that there is one big rally in this market that will going surprise us — which will make it look almost as if we are back into the bull market territory.

Q: 15,000-16,000 kind of rally?

Sharma: To be honest, my initial target was that from 10,000, it would rally to 15,000. In hindsight, it was too optimistic. Now it could well do down to 6,000 or 7,000 and rally from there to 12,500 which is where we were last month or may be the beginning of this month. So there is one big rally in there. This is not going to be a buy-and-hold market. This is going to change its colours, its strips and become a trading market. Timed right, he (the buyer) is definitely going to beat the returns of 10.5% or 11% of the FDs. Timed wrong, he is going to lose everything. My sense is that FDs and FMPs are in problems of their own. But good solid FD at 10.5% looks really attractive and if you lock it in right now because obviously the cycle is turning, I think one is good shape. I am just talking from a pure retail investor’s perspective, not a professional investor who can be a fleeter foot.

Q: Same question to you Samir. You have always spoken about asset allocation. It has not worked this year for equities. Do you think from a one-year perspective you can take that call and be right from these beaten down levels?

Arora: If you put in the investment average over the next three months starting tomorrow than one month later, then yes, you will do better than fixed income.

Q: Why do you keep saying those 30-days, 60-days, 90-days? Is it because you believe there is more to come?

Arora: As I told you my view is that in terms of timing — because the pace of the momentum is strong — either it blows itself out and everything is over and India goes to 1,500 or 2,000 or this de-leveraging-led redemption of forced selling. The pace is such that it can go on for five days, who is to say? But it cannot go on for 90-days. That’s what I am trying to say. That it will either end because you fall so much or the pressures would be off because the end-investors would say there is no point in selling at this point and may give you not a one-year window but may give you a few months window saying: okay I will redeem after six to nine months. Then you have that.

The point is that right now the selling is not happening, normally most cases because the fund manager has a very negative view on Reliance knowing that one week ago, Mr. Ambani bought it at USD 3.6 billion or because Warren Buffet says — and I don’t agree but because that poor guy has a redemption. So once you let that go off for a minute either because the market has gone down a lot or his desire to raise money is over, you will have that rebound which Shankar talks, after which again there will be frustrated sellers, pent-up selling demand and that may make the market trade sideways or plus-minus a little bit. But that first round we are not sure when it ends.

Jhunjhunwala: What I personally feel is I cannot say whether he should put it now but two factors which should dramatically improve the atmosphere for Indian equity are: one is interest rates are headed nowhere but down. In my calculation — and I have studied the WPI index — one is going to have between 5.5-6% inflation by March and interest is one of the biggest factor in valuing assets.

So when interest is going to go down, that will give a kick to equities. Secondly, one year ago, nobody was bothered about India’s monetary and fiscal position and the only joker in the pack was oil. With oil being down and I am not seeing any recovery for oil, India’s monetary and fiscal position and foreign-exchange position next year will dramatically improve. These are two factors which could drive up valuations in India.

We are pricing in some of the corrections in earnings already into next year. I am personally bullish on the ability of the Indian economy to grow. Indian economy is in its teens. Having said that, I must warn I have been wrong about the last leg of the markets. So please take whatever I say with a pinch of salt. But I wouldn’t say that for the next one year, but if one has two- to three-year horizon, I am quite confident with interest rates coming down, India’s macro position improving equity is going to give a much higher return.

Tuesday, October 28, 2008

Sebi eases norms for promoters to raise stakes

Market regulator Securities and Exchange Board of India (Sebi) today relaxed the creeping acquisition norms and allowed promoters to annually raise their stake through the route to 75 per cent via open market purchases instead of 55 per cent earlier.

Creeping acquisition refers to the process through which promoters can increase stakes in their companies by buying up to five per cent of the equity in a year. Earlier, promoters were allowed to do so only till they reached 55 per cent of the compnay’s equity.

The late evening announcement, which came after the Bombay Stock Exchange’s benchmark Sensex fell below 8,000 Friday following an over 1,000-point intra-day fall and volatile trading, is aimed at boosting stock market sentiments.

Sebi, however, imposed conditions that such acquisitions could be done only though open market operations and not via bulk, block deal, or through preferential offer.

Sebi also said that promoters would not require permission if their holding in the firm were to increase 5 per cent in the event of a buyback of shares. Earlier they had to seek the approval of Sebi’s takeover panel.

“It has now been decided to automatically exempt increase/consolidation up to 5 per cent per annum as a result of buyback by a company,’’ the press statement said.

The relaxation comes at a time when overseas investors have sold close to $13 billion in Indian stocks this year with some companies losing as much as 70 per cent of their value.


Source... Business Standard...

Sebi looking into stock market crash

The Securities and Exchange Board of India (Sebi) is conducting an inquiry into the stock market crash on October 24 and today. The equity benchmarks BSE Sensex and NSE Nifty fell nearly 20 per cent during these two trading sessions.

According to sources in the regulatory agency, trading pattern last Friday aroused suspicion. “Short sellers on Friday took extra care of not letting the markets fall by 10 per cent before 1 pm, which would have triggered the circuit filter and resulted in closure for an hour. Today also there were similar trends. It could be a coincidence but it needs to be looked into,” said a source.

After 1 pm, the circuit filter is triggered only if the markets fall by 15 per cent. Sources said apart from a few participatory note (PN) issuing FIIs, activities of some stock brokers is also being looked into.

Market players said short sellers are exploiting the cash settled derivative segment of the markets and bear operators are taking advantage of the situation by forming a cartel.

Stock brokers have mainly blamed the overseas lending of stocks by FIIs as the real reason behind the fall. Even while the finance ministry has informed that FIIs have been asked to cover their short positions through borrowed stocks, FIIs have not entirely covered positions.


Source... Business Standard...

Monday, October 27, 2008

Another Psychological Breach by SENSEX.

Today SENSEX breached the psychological support level of 8000. At 12.52 PM it was trading around the 7990 level down by 710 points. Due to negative cue from its Asian Peers and Friday’s US closing. And now official words are coming about the world’s recession starting from UK and US.

In this kind of free fall, its very difficult predicts the support level since SENSEX is continuously breaking every support heavily with huge volumes. Even though my charts were showing 1000 and 8900 levels as support, SENSEX breached them successfully. Now when it breached the 8000 level means next probable support levels are 7600 and 6500. But I dont know? I think its time to act government and regulatory authority to interfere directly. How? I don’t know? May be use of Sovereign funds? Or I don’t know!!!

Responses from my readers...

Guys its good see the responses from you guys for ban on short selling. Good way of knowledge sharing...

Pradeep's Response

I don’t think short selling is playing a major role in fall of market…I don’t know the exact volume but some where I read that short selling is very small fraction of total traded volume

The major factor for current market fall is FII selling , last 4 month they have withdrawn more than $10Bn from the market due to obvious reason i.e. credit crisis and US Recession.

Even though RBI and Govt have taken various positive step like PN notes relaxation, increase ECB limit , increase Debt instrument investment limit by FII etc,

So the main reason for falling market is Global crisis in world market which have proven the theory of decoupling wrong.

Regards,

Pradeep C.


Purnendu's Response...

Hi,

Short selling can never be the cause of market falling to that much amount. An important point that you missed out in your explanation was that every brokerage firm charge the trader a heavy interest rate on its open position for short selling. This makes sure that traders can only short sell particular stock for an average of 4-5 days only. After that they have to cover their open positions by buying back the stock. An excellent tool for trading in short selling is “Short Interest Ratio”. This ratio is nothing but short interest paid for a particular stock in an exchange divided by the volume of stock traded for the stock for a particular day. If this ratio is high then there lies an opportunity for traders to buy shares of that particular stock since higher short interest ratio means that there are huge no of traders who have already short sell that stock and will cover their positions in a few days time. This will cause the demand for that particular stock to increase and subsequently the price of the stock will also increase. Now, the traders who have already bought shares for that particular stock can sell their shares at higher price and book profit for themselves.

Regards,

Purnendu Dey


Udit's Response...

I too don’t think that ban on short selling is the cause of the current meltdown in the Indian markets. It is just that the short selling is taken as a scapegoat for current turmoil. To take an example it may be 28th or 30th of this month that ban on short selling of the 19 stocks in US market would be lifted, however during this period those 19 stocks were the most beaten down stocks, as mentioned by Naveen that short selling provides a floor price to the stock.

Moreover, the problem in Indian market is that the short selling is not liberalized. What is the problem of lending and borrowing? However it effects because in India the period is just of 7 days, which should be of at least of a month or three.

I argue that if one is to disclose its short position before placing an order, what’s the point in short selling then anyone can run above him and make easy money. So a sane person will not short sell if the entire market knows his/her position.

Hence, I just want to drive in the point that short selling should not be banned it should be regulated and liberalized. Also there should be a delivery settlement in the F & O segment to augment it.

Thanks and Regards,

Udit Mehra


My reply:

I dont have to say anything as these are individual perceptions. But I have given enough data(from business standard) how FIIs are lending for short selling.

Thanks guys..

FIIs continue overseas lending despite warnings

Foreign institutional investors (FIIs) continue to lend stocks to overseas investors despite a warning issued by the Securities and Exchange Board of India (Sebi) and Finance Minister P Chidambaram against such transactions.

According to data released by Sebi late Friday evening, when the Bombay Stock Exchange’s benchmark index, the Sensex, fell over 1,000 points, FIIs lent over 300,000 shares of Reliance Petroleum and over 69,000 shares of Educomp Solutions. On that day, Reliance Petroleum fell 14.09 per cent to close at Rs 77.10 and Educomp Solutions dipped 6.67 per cent to close at Rs 1,778.

FIIs lend stocks to overseas investors, who invest through participatory notes (P-notes), which investors and hedge funds not registered with Sebi use to trade in Indian securities.

Sebi has said FIIs have been lending stocks to P-note holders to facilitate short sales, a factor that may have contributed to the collapsing market. Between October 10 and 17, Sebi said stocks worth over Rs 1,000 crore were short-sold, pulling down the benchmark share indices over 12 per cent in seven trading sessions.

Short sales refer to the sale of shares investors do not own. They are usually “borrowed” from other entities and bought back later. Investors selling short believe the stock price will fall. Market players expect short selling through overseas borrowed stocks to be nearly $5 billion.

On October 18, Sebi Chairman CB Bhave issued a statement warning FIIs to curb their overseas lending activities but stopped short of asking them to unwind their positions.

On October 23, Finance Minister P Chidambaram said FIIs should wind up their short positions through borrowed stocks within a few days, but did not provide specifics.


Sources..
Business Standard

Sunday, October 26, 2008

Ban Short Selling

As I mentioned several times in my previous posts, I still think that SEBI, should think of banning the short selling.

Before continuing my point of view of banning short selling, I would like make clear what is short selling for the benefit of my readers.

Most of the traders/investors like my dad, don’t know about short selling and they are not interested also. That is good thing since at least these kinds of people are not participating in short selling there by providing some kind relief to the market.

Short selling is process in which a person, who is not holding any stocks, sells the stocks for higher value (by borrowing from the lender through broker) and buys back them for lower value and return it back to the original lender. Confused? Okay let me explain with an example.

Consider me a short seller. When I think market may go bearish, I as a short seller see which stock may fall more. For our understanding we will take HDFC example. If I think today HDFC may fall from Rs. 1600 to Rs.1400. Then I would like to cash this situation.

Here originally I will not be holding any stocks. So I borrow HDFC stocks from the lender in the market and immediately I sell them in the open market for Rs. 1600. Then I wait for market to fall and when HDFC reaches Rs. 1400 at that time I buy back the HDFC and return those shares to the original lender. So in this process I made profit Rs. 200/share.

And who all can do this? Any person who is having a margin account with his broker can participate in this kind of transaction. This margin account is used as collateral for borrowing the shares from the lender.

And according to SEBI your portfolio should be at least 50% of the amount what you are short selling. Means if your portfolio is worth of Rs. 10 lakh then you can take Rs. 20 lakh worth of short position.

I think you guys got fair enough idea about short selling now. Now I will come back to original point of discussion of banning short selling.

As you all know market works on the Supply/Demand theory. So whenever there is more supply in the form of selling or short selling at that time market start crumbling down. First of all in this kind of market, sentiments and news flows are negative so long term investors like FIIs, institutional investors and individuals are squaring of their position by selling their holdings. And to cover back their losses/to gain profit from this kind of market, these guys are taking short position by short selling.

So due to heavy supply in terms of selling, market is coming back to its three years lows (8700 levels). Market almost 60% from its peak in January 2008. Highest number of 500 points loss in single trading days. Even small pull back rallies are also due to square of position in the short position by short covering. Once big fellows like FIIs start taking short position then retail investors like you and me can’t do anything but just watch the crumbling down of the market.

So why shouldn’t SEBI ban this short selling? According to some experts short selling should be there in the market to know the intrinsic value of the shares and market. They think that short selling provides floor value to the market, since short positions should be cleared within the stipulated time where as in long position person can hold his stocks for 500 years from the date of purchase. They think short selling is the instrument for the EFFICIENT MARKET HYPOTHESIS.

But I don’t know why they don’t understand the need of the hour??? Why they don’t think giving some temporary relief to the market and in turn to the sentiments of the investors? Why don’t they understand the FLOOR value come into picture in BULL market not in BEAR market? Why they don’t understand that in this time of CAPITULATION short selling leads SNOWBALLING EFFECT. Why don’t they consider market as efficient even after speculators almost tripled the price of the crude oil from $ 39 to $ 147 within 4 years? Why don’t they think about erosion of investor’s wealth? Why don’t they think of role of intervention of regulator/government in this of panic situation to console the crumbling market? Why don’t they think about the GREAT DEPRESSION which started from stock market fall which went on 90% fall from the peak? Why don’t they think stock market panic is spreading to FOREX market and in turn causing panic importers?

I am not saying short selling should be banned permanently. But what I am saying is ban the short selling temporarily for example till January/February or so. So by that time almost dust of this financial meltdown may start settling down. Domestically also inflation might have come into control and also liquidity might be available by that time by banks due to rate cuts. So investor start gaining their confidence in the market.

BOTTOM LINE…

SEBI should think about this!!!

Saturday, October 25, 2008

How much biggies lost in Market Mayhem

The Sensex recorded the second-biggest single-day fall in absolute terms on Friday when it crashed by 1,071 points, or 11%, to close at 8,701. With this, the index has crashed more than 12,000 points, or nearly 60%, since its peak of 20,873 achieved on January 8, 2008.

Market cap of all the companies traded on the Bombay Stock Exchange (BSE) has evaporated by a staggering Rs 46 lakh crore, or $940bn during the period. So, how poorer have top industrialists like the Ambanis, Tatas and Birlas become after the meltdown in the share prices of their companies?

Though still dominating the market cap ranking, RIL chairman Mukesh Ambani saw his personal wealth crash from $57.6bn as on January 8 to $14.4bn as on Friday, a fall of 75% since January 8.

A major part of the wealth erosion happened in the flagship company, RIL, whose market cap has declined by Rs 2.8 lakh crore, or $57bn. The market cap of two other group companies Reliance Petroleum and Reliance Industrial Infrastructure fell by $15.3bn and $0.7bn during the period.

Mukesh’s younger brother Anil Ambani of the ADAG group saw his wealth tumble from $48.4bn to $8.4bn, a loss of 83%. His five companies, Reliance Communication, Reliance Capital, RNRL, Reliance Infrastructure and Adlabs Films, recorded an aggregate market cap loss of $53.7bn.

Realty major DLF is the third-biggest loser where the promoter wealth has eroded from $44bn to as low as $6bn. DLF is followed by Tatas who saw their wealth in 27 listed companies plunge from $38.2bn to $12.8bn, a loss of 67%.



Source… TOI

Friday, October 24, 2008

Who murdered the financial system?

Guys, while doing Bubbles and crashes I did mention about the causes of the Subprime crisis and global financial melt down. Couple of days back I read this article of my favorite author Mr. Swaminathan Aiyar. He has explained the reasons very simplistically and effectively. So please go through this…

The Federal Reserve Board

Alan Greenspan, Fed Governor in 1987-2006, was once hailed as a genius for keeping the US booming, but is now called a serial bubble-maker. He presided over bubbles in housing, credit, and stock markets. He said it was difficult to identify asset bubbles in advance, so anti-bubble policies might be anti-growth. It was better to let bubbles build, and sweep up after they burst. Bernanke, like Greenspan, ignored the US housing bubble till it burst.

US politicians

Envisioning a home for every American, regardless of income, they provided excess implicit and explicit housing subsidies. One law forced banks to lend to subprime poor borrowers. Legislators created Fannie Mae and Freddie Mac, government-sponsored entities that bought or underwrote 80% of all US mortgages, and enjoyed exemption from normal regulations. Politicians ignored Greenspan’s warning that such a dominant role for two under-regulated giants posed a huge financial risk.

Fannie Mae and Freddie Mac

They resisted regulation, and spent over $2 million lobbying legislators against any tightening of rules. As mortgagers of last resort they should have been especially prudent. But they bought stacks of toxic mortgage paper — collateralised debt obligations (CDOs) — seeking short-term profits that ultimately led to bankruptcy.

Financial innovators

Their ideas provided cheap, easy credit, and helped stoke the global economic boom of 2003-08. Securitisation of mortgages provided an avalanche of capital for banks and mortgage companies to lend afresh. Unfortunately the new instruments were so complex that not even bankers realised their full risks.

CDOs smuggled BBB mortgages into AAA securities, leaving investors with huge quantities of down-rated paper when the housing bubble burst. Financial innovators created credit default swaps (CDSs), which insured bonds against default. CDS issues swelled to a mind-boggling $60 trillion. When markets fell and defaults widened, those holding CDSs faced disaster.

Regulators

All major countries had regulators for banking, insurance and financial/ stock markets. These were asleep at the wheel. No insurance regulator sought to check the runaway growth of the CDS market, or impose normal regulatory checks like capital adequacy. No financial regulator saw or checked the inherent risks in complex derivatives. Leftists today demand more regulations, but these will not thwart the next crisis if regulators stay asleep.

Banks and mortgage lenders

Instead of keeping mortgages on their own books, lenders packaged these into securities and sold them. So, they no longer had incentives to thoroughly check the creditworthiness of borrowers. Lending norms were constantly eased. Ultimately, banks were giving loans to people with no verification of income, jobs or assets. Some banks offered teaser loans — low starting interest rates, which reset at much higher levels in later years — to lure unsuspecting borrowers.

Investment banks

Once, these institutions provided financial services such as underwriting, wealth management, and assistance with IPOs and mergers and acquisition. But more recently they began using borrowed money — with leverage of up to 30 times — to trade on their own account. Deservedly, all five top investment banks have disappeared. Lehman Brothers is bust, Bear Stearns and Merrill Lynch have been acquired by banks, and Morgan Stanley and Goldman Sachs have been converted into regular banks.

Rating agencies

Moody’s and Standard and Poor’s were not tough or alert enough to spot the rise in risk as leverage skyrocketed. They allowed BBB mortgages to be laundered into AAA mortgages through CDOs.

The Basel rules for banks

These international negotiated norms provided harmonised regulatory checks on financial excesses across countries. The first set of norms, Basel-I, was widely criticised as too rigid and blunt. So countries agreed on Basel-II, which allowed banks to use credit ratings and models based on historical record to lower the risk-ratings of many securities. This dilution of norms led to excesses everywhere. Iceland’s banks went bust holding loans/securities totalling 10 times its GDP. The dilution of risk-rating in Basel-II helped inflate the financial bubble.

US consumers

Their savings used to be 6% of disposable income some time ago, but more recently has been zero or even negative. They have gone on a huge borrowing spree to spend far more than they earn. This excess is reflected in huge, unsustainable US trade deficits.

Asian and Opec countries

They undervalued their currencies to stimulate exports and create large trade surpluses with the US. They accumulated trillions in forex reserves, and put these mostly into dollar securities. This depressed US interest rates, and further fuelled borrowing there.

Everybody

Consumers, corporations, banks, politicians, the media — indeed everybody — was happy when housing prices boomed, stock markets boomed, and credit became cheap and easily available. Bubbles in all these areas grew in full public view. They were highlighted by analysts, but nobody wanted to stop the lovely party. Everybody liked easy money and rising asset prices. This trumped prudence across countries.

BLACK Friday for the market

Today was the worst day in the history of the capital market. Not only Indian stock markets fell, but all world markets fell nearly 8% - 10%.

Sensex (BSE India) –10.96%
Nifty (NSE India) –13%

Nikkei (Japan) –9.60%
Hang Sang (Hong Kong) -8.3%
Straits times (Singapore) -8.3%
UK -9%
Germany -11%
France -10%

And so on…

Today soon after the RBI announced its credit policy, markets witnessed one of the worst trading sessions following meltdown in global markets on concerns of slowing global economy and recession.

After infusing Rs 185000 crore liquidity into the banking system this month, the RBI on Friday surprised the market by keeping interest rates constant which was unexpected from the market.

In addition this, Credit Suisse said that the recession has already begun in the US, UK and Euro zone. The UK GDP has declined 0.5% on the quarter-on-quarter basis, which was the first contraction since 1992. Commodities are also feeling the heat of this free fall in the global markets. Gold fell below USD 700 per ounce to a new 13-month low.

Rupee falls to record low of 50.15 per dollar

The Indian rupee opened trade on Friday at a record low of 50.15 per dollar, weighed down by heavy losses in Asian stocks which raised worries of more outflows from the local share market.

At 9am (0330 GMT), the partially convertible rupee was at 50.00/15 per dollar, compared with 49.81/82 at close on Thursday.

Source... TOI..

It's worst ever October for markets in 29 years – Economic Times

Banks have gone bust, jobs have been cut and stock markets are taking a pounding the world over. And in India, this is the worst October in the 29 years that the 30-share benchmark Sensex has seen.

In sheer percentage terms, this is the worst fall the Sensex has seen in a less than 30-day period, from 13,006 to 10,170 points, a drop of 21%.

According to available data, this is the worst performance recorded by the bellwether index since it was started in 1979. A similar drop was witnessed in the Octobers of 1992 and 2000, when the Sensex fell by 10-1%.

In 1992, it was on account of the securities scam and in 2000, the collapse was triggered by the burst of the dotcom bubble. The other years when the market recorded a poor performance in the same month were 2005 (a fall of 9.3%) and 1990 (9.2%).

October 2008 was marked by seven 500+ point crashes. During the month, index heavyweight Reliance Industries saw a fall of 30% in its stock price, while other blue-chip constituents such as ICICI Bank (which fell 21%), Bharti (12%) and HDFC (10%) have also taken a hit. October has also seen the worst performance in terms of percentage losses for a month in the year 2008. Mind you, the month still isn’t over, five trading days remain.

Of course, foreign institutional investors (FIIs) have contributed their bit for this 'performance'. They have remained net sellers of stocks to the tune of Rs 11,463 crore, the maximum sold by them in any October, going by SEBI data. While domestic mutual funds have tried to put up a show by staying net buyers, this hasn't really helped the Sensex.

Even though the index is down by around 3,000 points this month, mutual funds have invested Rs 691 crore this month, their second-best effort since October 2005, when they had put up a whopping Rs 3,019 crore.

However, some have sensed an opportunity amidst this gloom and doom. Arun Mehra, manager of Fidelity India Focus Fund, says, "In fact, it is the perfect contra-play.

The issue of inflation that we have seen in India has been primarily driven by rising oil and commodity prices; India imports about 70% of the oil it consumes. As these prices begin to moderate, I would expect inflation to fall and the market to recover."

Thursday, October 23, 2008

Updates from the world of the business…

Inflation at 11.07% vs. 11.44%

Lower prices of food and non-food items pushed down inflation to 11.07 per cent for the week ended October 11, from 11.44 per cent a week ago.

Inflation measured by movement in the Wholesale Price Index was 3.07 per cent a year ago.

Among food articles, the prices of fruits and vegetables and eggs declined during the week. In the non-food category, sunflower and raw cotton became cheaper.

The index of fuel group too declined marginally by 0.1 per cent on account of lower prices of furnace oil.

Rupee slips to a new low!

The Indian rupee continued its slide and hit a new record low of 49.85 against the US dollar in morning trade on Thursday on sustained buying in the greenback amid renewed fears of a global recession.

The Indian currency fell by 55 paise from its overnight close partly because of absence of any intervention by the central bank.

Argentina stocks sink

Argentine stocks plunged more than 10 per cent as police raided the offices of the 10 private pension funds the government plans to nationalize.

The Buenos Aires bourse's main index closed down 10.1 per cent to 940.82 points on Wednesday, adding to 11 per cent losses on Tuesday. Stocks in Spain with close business ties to Argentina, also plummeted.

Wednesday, October 22, 2008

Bubbles & Crashes - 2

Sorry guys I didn't continue immediately after the 1st episode as I got much more important news(Repo rate cut and PM's Speech) than this. So here we go...

The Crash of 1987

When: October 19, 1987
Where: USA
Effect: 508.32 points, 22.6%, or $500 billion lost in one day, the largest one-day percentage drop in history. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover.
Main reasons for the crash are…

1. DERIVATIVE SECURITIES

Initial blame for the 1987 crash centered on the interplay between stock markets and index options and futures markets. The Brady Commission concluded that the failure of stock markets and derivatives markets to operate in sync was the major factor behind the crash.

2. COMPUTER TRADING

Many analysts blame the use of computer trading by large institutional investing companies. Computers were programmed to automatically order large stock trades when certain market trends prevailed.

3. ILLIQUIDITY

During the Crash, trading mechanisms in financial markets were not able to deal with such a large flow of sell orders. Many common stocks in the New York Stock Exchange were not traded until late in the morning of October 19 because the specialists could not find enough buyers to purchase the amount of stocks that sellers wanted to get rid of at certain prices.

4. U.S. TRADE AND BUDGET DEFICITS

Another important trigger in the market crash was the announcement of a large U.S. trade deficit on October 14, which led Treasury Secretary James Baker to suggest the need for a fall in the dollar on foreign exchange markets. Fears of a lower dollar led foreigners to pull out of dollar-denominated assets, causing a sharp rise in interest rates.

5. INVESTING IN BONDS AS AN ATTRACTIVE ALTERNATIVE
Long-term bond yields that had started 1987 at 7.6% climbed to approximately 10% [the summer before the crash]. This offered a lucrative alternative to stocks for investors looking for yield.

6. OVERVALUATION

Many analysts agree that stock prices were overvalued in September, 1987. Price/Earning ratio and Price/Dividend ratios were too high [Historically, the P/E ratio is about 15 to 1; in October 1987 the P/E for the S&P 500 had raised to about 20 to 1].


The Asian Crisis

When: 1989 - 2003
Where: Southeast Asia but primarily Japan
Effect: Percentage Lost From Peak to Bottom: 63.5% as of 2003
The Japanese economy gained extreme strength after its long recovery from the war and the atomic bombs. Japan became unstoppable economic force by coupling with the other emerging Southeast Asian economies.

Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks increased 100 times over. Trading became the national sport, and the Japanese jumped into the market with more blind confidence than that of the Americans of the 1920s. During the eighties, large Tokyo firms were worth more individually than all their American counterparts combined, and Japanese golf courses were worth more than the value of all the stocks on the Australian exchange.

An inverted growth cycle perpetuated itself when landowning firms started using the book value of their land to buy stocks that they in turn used to finance the purchase of American assets. Like the prosperity of the Roman Empire, the prosperity of Japan proved to be its undoing as corruption began to spread throughout the political and business realms.

The government sought to excise the tumor and put a halt to the inflammatory growth of stocks and real estate by raising interest rates. Regrettably, this didn't have the slow soothing effect on the market that the government hoped. Instead, it plunged the Nikkei index down more than 30000 points.

East Asian Currency Crisis

When: 1997
Where: East Asian Countries like Thailand, Malaysia, Singapore and Philippines

In addition to above mentioned Japanese crisis, East Asian Currency started in that period only. And in September I have posted about this. For your reference I will provide the gist of that posting here.

The crisis first came out into the open in Thailand where doubts about sustainability of the exchange rate peg (to a basket dominated by the US dollar) prompted a run on the currency in mid-May 1997. There were significant spillover effects on other countries in the region, notably Indonesia, Malaysia, and the Philippines. The Thai baht and the Philippine peso came under renewed pressure in late June 1997 and early July 1997, leading authorities to abandon their respective pegs in early July. The baht had lost around 16 percent against the US dollar in a single day on July 2, 1997. This unleashed a flurry of speculative activity in other ASEAN currencies.

Between end June 1997 and end March 1998, depreciation of these currencies vis-à-vis US dollar ranged between 11% and 74%: Indonesian Rupiah (74%), Thailand baht (37%), Malaysian ringgit (31%), Philippine peso (33%), South Korean won (36%), and Singapore dollar (11%).

Investor confidence declined leading to sharp declines in equity prices in the stock markets of these countries. Compared with June 1997, the stock prices in January 1998 had declined in the range of 32 per cent (in Thailand) to 53 per cent (in Malaysia).
Causes are:

1. The prolonged maintenance of pegged exchange rates, in some cases at unsustainable levels, which complicated the response of monetary policies to overheating pressures and which came to be seen as implicit guarantees of exchange value, encouraging external borrowing and leading to excessive exposure to foreign exchange risk in both the financial and corporate sectors.

2. Debt overhangs. In Malaysia, loans are 140 percent of annual economic output -- the highest in Asia. Many loans are for real estate speculation or consumption; only 16 percent are for manufacturing. Thailand needs to shut, merge or fix 58 troubled financial institutions.

3. Inflated values. Japan's economy has been in recession since real estate and stocks collapsed in 1990. The Nikkei has never risen above 58 percent of its 1989 high.

4. Loose financial practices. In South Korea, foreign currency reserves have been pledged to guarantee foreign loans to corporate borrowers that push exports. In Thailand, Malaysia and Indonesia, off-the-book government guarantees cause bank loans to flow toward favored companies that create jobs and drive exports.

5. Imprudent lending by international lenders.

6. High and unsustainable level of current account deficit.

For further information you can check my September’s posts…


The Dotcom Crash

When: March 11, 2000 to October 9, 2002.
Where: Silicon Valley (for the most part)
Effect: NASDAQ Composite lost 78% of its value as it fell from 5046.86 to 1114.11.

The "dot-com bubble" was a speculative bubble during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields. The period was marked by the founding of a group of new Internet-based companies commonly referred to as dot-coms. A combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital created an exuberant environment in which many of these businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line.

The dot-com model was inherently flawed: a vast number of companies all had the same business plan of monopolizing their respective sectors through network effects, and it was clear that even if the plan was sound, there could only be at most one network-effects winner in each sector, and therefore that most companies with this business plan would fail. In fact, many sectors could not support even one company powered entirely by network effects.

In spite of this, however, a few company founders made vast fortunes when their companies were bought out at an early stage in the dot-com stock market bubble. These early successes made the bubble even more buoyant. An unprecedented amount of personal investing occurred during the boom.

One possible cause for the collapse of the NASDAQ (and all dotcoms) were massive, multi-billion dollar sell orders for major bellwether high tech stocks that happened by chance to be processed simultaneously on the Monday morning following the March 10 weekend. This selling resulted in the NASDAQ opening roughly four percentage points lower on Monday March 13 from 5,038 to 4,879—the greatest percentage 'pre-market' sell off for the entire year.

Another reason may have been accelerated business spending in preparation for the Y2K switchover. Once New Year had passed without incident, businesses found themselves with all the equipment they needed for some time, and business spending quickly declined.

The first shots through this bubble came from the companies themselves: many reported huge losses and some folded outright within months of their offering. Siliconaires were moving out of $4 million estates and back to the room above their parents' garage. In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.

Subprime+ Credit Crunch

When: We are going through that now.
Where: Base is in US and spreading to everywhere.
Effect: Yet to find out as still there is long way to go.

Guys you all know that what Subprime crisis is, where it is started and how it is affecting everybody. So I will directly mention the some of the causes for that briefly as I need to close this topic as this is becoming very lengthy to read. So here are the causes:

1. Boom and bust in the housing market

2. Speculation

3. High-risk mortgage loans and lending practices

4. Securitization practices

5. Inaccurate credit ratings

6. Government policies

7. Financial institution debt levels or leverage



Sources...

Investopedia
Wikipedia &
Google(last resort)...

Monday, October 20, 2008

PM’s Speech on Global Financial Crisis to Parliament

Honorable Members are aware that this crisis had its origins in the United States and spread quickly to Europe. While the crisis began in the housing mortgage market, it soon extended to the money market and the credit market.

As a result, several financial institutions were pushed to the brink of insolvency. The US and some other developed countries have bailed out a number of financial institutions and banks. They have also taken a number of unconventional steps to infuse liquidity, re-capitalize the banks and unfreeze the credit market.

The financial storm has shaken confidence in the system and precipitated a steep decline in stock markets. It has produced a sharp slowdown in economic activity, with the prospect of a prolonged recession in industrialized countries. Many observers have described this as the worst crisis since the Great Depression of 1930s.

India, like other developing countries, is experiencing the ripple effects of the financial crisis. However, we have taken a number of steps to minimise the impact.

Our first concern was to ensure the stability of our banking system. I am happy to inform the House that the Indian banking system is not directly exposed to the sub-prime mortgage assets. Their exposure to other problem assets is also minimal.

Our banks, both in the public sector and in the private sector, are financially sound, well capitalized and well regulated. There should be no fear of a failure of any bank. In particular, I wish to assure depositors in our banks that their deposits are entirely safe.

Although our banks are safe, and they are also providing credit in line with anticipated credit targets, the global turmoil has led to a contraction in other forms of commercial credit. External commercial borrowings, which are used by the corporate sector, have dried up, as have international suppliers’ credits.

This has led to a reduction in overall credit availability in the economy even though credit from commercial banks has expanded satisfactorily. This contraction produced a liquidity crisis in the system.

We have taken a number of steps to address this problem. From July 6, 2008 to October 15, 2008, the RBI cut the Cash Reserve Ratio by a total of 250 basis points. The SLR (statutory liquidity ratio) requirements were relaxed initially by one percentage point and subsequently an additional window of 0.5 percentage points was introduced specifically to enable banks to draw funds to provide liquidity to mutual funds.

As a result of these steps, the liquidity position in the financial system has improved considerably. The call money rate today is around 6.8 percent.

Government also arranged to provide, in advance, a sum of Rs.25, 000 crore (Rs.250 billion) to the banking system under the Debt Waiver and Debt Relief Scheme. The limit of investment by Foreign Institutional Investors in corporate bonds was increased from $3 billion to $6 billion.

Earlier today, the RBI announced a 100 basis points cut in the repo rate which is the rate at which banks can borrow against surplus SLR securities. Government welcomes this decision. It will have a beneficial effect on the interest rate structure and, in combination with the other steps to increase liquidity; will help to support economic activity and investment. It is broadly consistent with our objective to control inflation which has already begun to moderate.

I am happy to inform honorable members that the Wholesale Price Index (WPI) has declined in the last three weeks and, although the current rate is still high, the movement in the level of prices shows a clear deceleration in the current momentum of inflation. We expect a further reduction in the Wholesale Price Index in the next two months.

The government is conscious of the fact that it is not enough to infuse liquidity. The liquidity must translate into expanded flow of credit to industry, trade and business. Suitable advisories have been issued by the RBI and the ministry of finance to the banks to ensure that borrowers are provided adequate credit, including export credit and working capital.

Banks must also provide adequate funds in the form of investment or credit to mutual funds and NBFCs (non-banking finance companies) who, in turn, lend to industry, trade and business. These institutions are an important part of the larger financial system and banks are being encouraged to provide liquidity to ensure that there is no disruption in economic activity.

Both RBI and government are carefully monitoring the flow of credit and will ensure that the additional liquidity infused into the system translates into actual credit. We will not hesitate to do more if needed.

While the capital adequacy ratios of all our banks are well above the Basel norm and above the RBI stipulated norm, government has promised that it will help banks, which have lower ratios, to access funds to increase their capital risk weighted asset ratio to 12 percent.

Mr. Speaker Sir, the financial crisis and the economic slowdown in the developed countries is likely to have an indirect impact on the Indian economy. Fortunately, this effect will be on an underlying strong performance. GDP growth in the first quarter of 2008-09 was 7.9 percent. During April-August, 2008, exports increased, in dollar terms by 35.1 percent. Foreign direct investment, during this period was $14.8 billion. Gross tax revenues are on target.

The CMIE (Centre for Monitoring Indian Economy) database shows that a huge amount of money towards capital expenditure is in the pipeline. Nevertheless, we must be prepared for a temporary slowdown in the Indian economy. The precise impact is difficult to estimate at this point since the depth and duration of the global slowdown remain uncertain.

Some estimates project GDP growth to decelerate to 7.5 per cent in the current year. The most pessimistic estimates place it at no less than 7 per cent. Our effort will be to minimise the negative effect of the financial crisis and, once the global situation stabilizes, to return to the growth trajectory of 9 per cent. I would urge Honorable Members and the people of India to continue to repose faith in the fundamentals of the Indian economy.

Honorable Members will recall that, in anticipation of a slowdown, we had stepped up public expenditure in the Budget presented on February 29, 2008. Our expenditure proposals were criticized at the time in some quarters, but I am happy to note that it is now widely acknowledged that increased public expenditure is an important part of the solution.

Our expenditure on education, health, NREGP, NRHM, AIBP, JNNURM and other programmes will, I believe, stand us in good stead in these difficult times. Besides, the debt waiver and debt relief amounting to Rs.65, 000 crore to 3, 60, 00,000 farmers will also greatly benefit our farmers and enthuse them to increase production.

Mr Speaker sir, India has faced challenges in the past and has overcome them. We have the strength to overcome the current challenges too. In fact, it is when India is challenged that the Indian people rise to the occasion and convert the challenge into an opportunity. There is no place for fear. This is the time for unity of purpose and resolute action.

I seek the support of all sections of this House to the measures taken by government and the authorities. Thank you.




Source… TOI…

RBI Cuts REPO rate from 8% to 9%

As I was insisting from last one month or so in my previous posts, RBI reduced the repo rate by 100 basis points that is from 9% to 8% with the immediate effect. This is the first repo cut since 2004.

In a statement issued on Monday, the Reserve Bank of India said that it 'has been continuously monitoring the monetary and liquidity conditions with a view to maintaining domestic macroeconomic and financial stability in the context of the global financial crisis.'

The global financial situation continues to be uncertain and unsettled. Even as countries directly affected by the turmoil have taken aggressive action to manage the crisis, confidence and calm is yet to be fully restored in the financial markets. Due to financial integration, this uncertainty is transmitting also to countries outside the epicenter of the crisis,' said the RBI statement.

'India too is experiencing the indirect impact of the global liquidity constraint as reflected by some signs of strain in our credit markets in recent weeks. The Reserve Bank has been and will continue to monitor the impact of global developments on our financial markets and on our liquidity conditions and will take action as appropriate,' the statement added.

The Finance Minister, P Chidambaram said that the repo rate cut will help in moderating inflation. This is a positive move which will enthuse both borrowers and investors, the FM added. The RBI’s move is consistent with the government's aim of maintaining high growth, he added.

My View:

I was expecting gradual decrease in the REPO rate in terms of 50 basis points as RBI need to take care of INFLATION also. Since inflation just now only started reducing mainly because crude oil price decrease, global fear of recession, cost cutting majors of majority of the companies and base effect.

This move was above expectation and mainly aimed for boosting the investor sentiments. So Central government need to take care supply side of the economy. Since once the liquidity starts the economy in that proportion demand increases for various goods and services.

And central bank needs take care of country’s fiscal deficit so that it can take care of currency depreciation. Since INR depreciated from almost 39/$ in last October to 49/$ this October many oil companies and country not able to get the benefit of Crude oil price reduction.

And as for as SEBI is concerned I already mentioned they need to ban short selling at least for temporary movement since dust is not yet settled down and as par the experts views normal bear phase in the history lasted for nearly 18 months. So to minimise the panic in the investors SEBI needs to think of this option.


Source...
Rediffmail.com
Moneycontrol.com

Sunday, October 19, 2008

Bubbles & Crashes - 1

Now each and every person is thinking global financial turmoil. Everybody is asking same questions!!! What is happening in United States of America, European Countries & their impact to Asian countries including India? Why it happened? When it is going to end? So guys today I am talking about what are these turmoils or bubbles or whatever you call them? And how these happened in the history at various point of time and in different places? So here I am providing some information on bubble, crashes and some of the major crashes in the history.

A bubble occurs when investors put so much demand on a stock/commodity that they drive the price beyond any accurate reflection of its actual worth, which should be determined by the performance of the underlying company.

Investing in bubbles often appears as though they will rise forever, but since they are not formed from anything substantial, they eventually pop. And when they do, the money that was invested into them dissipates into the wind.

A crash is a significant drop in the total value of a market, attributable to the popping of a bubble, creating a situation wherein the majority of investors are trying to flee the market at the same time and consequently incurring massive losses.

Attempting to avoid more losses, investors during a crash start panic selling, hoping to unload their declining stocks onto other investors. This panic selling contributes to the declining market, which eventually crashes and affects everyone. Typically crashes in the stock market have been followed by a depression. Thicker the bubble, harder will be crash.

It is important to note the distinction between a crash and a correction. A correction is supposedly the market's way of slapping some sense into overly enthusiastic investors. As a general rule, a correction should not exceed a 20% loss of value in the market. Surprisingly, some crashes have been erroneously labeled as corrections, but a "correction," however, should not be labeled as such until the steep drop has halted within a reasonable period.

The Tulip and Bulb Craze

When: 1634-1637
Where: Holland
Effect: At the peak of the market, a person could trade a single tulip for an entire estate, and, at the bottom, one tulip was the price of a common onion.

In this period contract prices for the newly-introduced tulip (due to virus attack, the color on the petals changed and because of this demand for the same drastically rallied) reached extraordinarily high levels and then suddenly collapsed. At the peak of tulip mania in February 1637 tulip contracts sold for more than 20 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble. The term "tulip mania" is often used metaphorically to refer to any large economic bubble.


The South Sea Bubble

When: 1711
Where: United Kingdom
Effect: Stocks in the South Sea Company were traded for 1,000 British pounds (unadjusted for inflation) and then were reduced to nothing by 1720. Massive amount of money was lost.

The mania started in 1711, after a war which left Britain in debt by 10 million pounds. Britain proposed a deal to the South Sea Company, where Britain’s debt would be financed in return for 6% interest. Britain added another benefit to sweeten the deal: exclusive trading rights in the South Seas. The South Sea Company issued stock to finance operations and gain investors. Shares were quickly snatched up from the start. The South Sea Company, seeing the success of the first issue of shares, quickly issued even more. This stock was rapidly consumed by the voracious appetite of the investors.

Eventually the management team took a step back and realized that the value of their personal shares in no way reflected the actual value of the company or its dismal earnings. So they sold their stocks in the summer of 1720 and hoped no one would leak the failure of the company to the other shareholders. Like all bad news, however, the knowledge of the actions of management spread, and the panic selling of worthless certificates ensued. The huge hole in the south sea bubble also punctured the unrealistic value and came crashing down.


The Florida Real Estate Craze

When: 1926
Where: Florida
Effect: Land that could be bought for $800,000 could, within a year, be resold for $4 million before crashing back down to pre-boom levels.

The 1920’s, in America, were a time of great prosperity. Florida became hotspot for tourism land prices started sky rocketing. Many astute investors took notice and started buying Florida real estate. The population in Florida was growing exponentially and housing couldn’t meet the demand. At this point, almost anybody could invest in Florida, even without much money. Credit was plentiful and soon everybody in Florida was either a real estate investor or a real estate agent.

Land prices quadrupled in less than a year and eventually, however, there were no "greater fools" to buy the disgustingly overpriced land, and prices began to adjust. Speculators realized there is a limit to the boom, and began to sell their properties to solidify their profits while they could and panic selling started. With thousands of sellers and very few buyers, prices came down with a sickening thud, twitched a bit, and then crawled down even lower.


The Great Depression (1929)
When: October 21, 24 and 29, 1929
Where: USA
Effect: More than 40% drop in the market from the beginning of September 1929 to the end of October 1929. In fact, the market continued to decline until July 1932 when it bottomed out, down nearly 90% from its 1929 highs.

So the reasons for the Great Depressions are…

1. Stock Market Crash of 1929

Many believe erroneously that the stock market crash that occurred on Black Tuesday, October 29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes that led to the Great Depression. Two months after the original crash in October, stockholders had lost more than $40 billion dollars.

2. Bank Failures

Throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival stopped giving new loans. This exasperated the situation leading to less and less expenditures.

3. Reduction in Purchasing Across the Board

With the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. This then led to a reduction in the number of items produced and thus a reduction in the workforce.

4. American Economic Policy with Europe

As businesses began failing, the government created the Hawley-Smoot Tariff in 1930 to help protect American companies. This charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation.

5. Drought Conditions

While not a direct cause of the Great Depression, the drought that occurred in the Mississippi Valley in 1930 was of such proportions that many could not even pay their taxes or other debts and had to sell their farms for no profit to themselves.


Will be continued...