It can sometimes appeear as if the universe of investment strategies is characterised by linear dimension and polar opposites. You’ either go long or you go short, you’re a day trade or a long term investor, you’re a risk taker or a risk avoider. Some would add to this collection your either a value investor or a growth investor. Even the professionals seem keen to pigeon-hole themselves as one or the other. Scratch the surface however and you’ll find very similar principles at the heart of both. (more…)
One of the underlying assumptions of technical analysis is that stock and index prices follow trends which are determined by the interplay between numerous forces which affect price. These can be broadly split into four categories; economic, monetary, technical and psychological. Depending on the direction of these forces, traders in a stock fall into one of two groups; bulls plan to buy now sell later and benefit from a price rise; bears plan to sell now buy back later and benefit from a price fall.
During a rising trend bulls dominate the market and during a downward trend the bears dominate. In a reversal period, where the trend is changing from an upward one to a downward one (or vice versa), there is a temporary balance between the two groups. These transitional periods are often characterized by price patterns which can be used to identify when a prevailing trend is reversing.
Efficient-market theory (or Efficient Market Hypothesis EMH) argues that in the long run it is impossible to “beat the market” because the current price of a stock always factors in all available information.
According to the theory, stocks always trade at fair value and it is impossible to buy undervalued stocks or sell stocks for inflated prices. Therefore it is impossible to outperform the market by stock picking or market timing; the only way to earn higher returns is to buy riskier investments.The theory gained prominence in the mid-1960s and in 1970 Eugene Fama refined it into three distinct forms: weak, semi-strong and strong. (more…)
The (MACD) Indicator is a technical analysis method first developed in the 1960s by Gerald Appel, a prominent author in investment and trading strategy. MACD stands for Moving Average Convergence-Divergence and is based on the comparison of fast and slow exponential moving average prices. Proponents of MACD Indicator methodology argue it can be used to identify trend changes in stocks and indices.
As with most sectors, Indian pharmaceutical companies have had a tough year. Rising raw material and energy costs squeezed margins for everyone but this was accentuated in the pharmaceutical sector as China halted production of intermediate drugs in the run up to the Olympics. The depreciation of the Rupee also hit many of the bigger players who booked large mark-to-market losses on FX hedges and saw their interest outgoings on foreign currency loans rocket.
The net outcome of these factors was an aggregate 7% reduction in PBT for domestic pharma companies, despite a respectable 24% increase in top line revenue, resulting unsurprisingly in significant market sell-offs. The BSE Healthcare Index is 29% down over the last 12 months with some of the larger pharma stocks such as Ranbaxy and Dr Reddy’s Laboratories being heavily sold (50% and 35% respective YTD fall in share price). However, despite this backdrop the future outlook gives some cause for optimism.
This pick was posted on: Friday by MoneyVidya.com member ‘Vicky’. The price of the scrip when this was posted was Rs. 44.5 and the latest price is 49.10 - indicating a gain of over 10%. The timeframe of this pick is 2 years. Vicky has indicated a target price of Rs. 80 and a stop loss of Rs. 20.
Analysis (Verbatim):
I think that as terrorism rises, people are going to become more insecure and paranoid. With the most recent (and ongoing) terror attacks in Mumbai - possibly the worst that India has ever seen - and the relatively poor handling of the same by government agencies / national security forces, people are going to increasingly take security and safety into their own hands.
The other thing that is quite different about these attacks is that they have struck the hearts and minds of the more affluent classes of Mumbai and indeed the rest of India. As a result, I think that Zicom’s ability to sell its security systems, not only to Corporate offices (more…)
Picking stocks in a Bear market can be both rewarding (as in the long term you see spectular returns) but also tricky (if you don’t invest near the bottom, then you’re in trouble if the market falls aggressively. Here are some general rules of thumb when it comes to picking stocks in a bear market:
Large Blue chips: Go for large, well established blue chips rather than mid-caps or small caps. While these are the first to be beaten in a bear market, they are also the very first to recover. Smaller shares are more likely to be dependent on one industry, and will have less access / negotiating power with banks for access credit - something that is absolutely critical in today’s environment of a severe credit squeeze.
Neccessity rather than luxury: Focus on buying stocks of companies that sell a product or service that is a neccessity rather than a luxury. The reason is simple: when people’s confidence in the economy, the stability of their job / business and therefore their future income is threatened (as it is in a bear market) they’re going to cut back on all their luxuries including designer clothes, watches, luxury cars etc. They cannot cut back (much) on medicines, food, water, electricity, petrol. Business will also cut back on what they may believe are luxuries - advertising, and expensive offices and furniture. Not only will companies cut back spending on real estate, but individuals and households will also avoid ‘large spends’ on new houses, cars etc.Sectors which have shown to have done well in past bear markets include major pharmaceutical, food producers, tobacco, telephone (now more likely cellular phone), basic household products, oil and energy and utilities companies. This is pretty much in line with what we’ve seen thus far - companies like Hindustan Lever, which is actually up since January, or GSK pharma, which has only lost about Rs. 20 since its January highs.Sectors which have shown to do poorly in bear markets are house / real estate builders, motor vehicle related businesses, industrial materials or machinery / capital goods, advertising or advertising dependent companies, and financials. With real estate, most motor vehicle, and every financial stock suffering (financials are down between 70-90% from their January highs) this general rule of thumb seems to be highly applicable.
Domestic focus: Choose stocks that have a focus on the domestic economy and are not reliance on exports / foreign operations, especially outside of emerging markets and in the US / UK / Europe.
Low ‘beta’ - less than 1: Beta is a measure of how much the stock tends to move with a market move, or crudely, its relative volatility. For example, a stock has a beta of 2 then a 10% fall in the Sensex would typically lead to a 20% fall in the stock. Picking stocks with a low beta means that when the market recovers, your stocks may not ’soar’ but this certainly protects you if the market continues to fall. If you pick a stock with a beta, of say 0.5, then a 10% market fall is likely to only lead to a 5% price fall for that stock.
High dividend yield shares: Dividend yield is how much the annual dividend the company pays out divided by the current market price. So if the stock price is Rs. 100, and the last dividend that the company paid was Rs. 20, the Dividend yield is 20%. Buying stocks that have a high dividend yield is a useful way of protecting yourself against further falls in stock prices. If for example, the stock price falls by 10% and the dividend yield is 20% (provided you hold the stock long enough / at the right time to be eligible for that dividend) then the overall return is +10%.Of course, make sure that the dividend yield is over the prevailing (risk free) fixed bank deposit rate - you need to be compensated for the fact that while the fixed deposit rate will give you guaranteed returns, a company could cut its dividend as and when it feels like it. Be careful however - high dividend yielding stocks can also spell trouble: very high dividends means that the company may be spending too high a proportion of its profits on dividends. If profits fall, the dividend will get suddenly cut, and the stock price will plummet because nobody likes a stock that cuts its dividends. In order to guard against such instances, trying buying a stock with a dividend cover of 1.8 or more. ‘Dividend Cover’ is Earnings per share divided by dividends per share. If the company’s profits are stable, and it has a dividend cover of 1.8 or more, you can be assured that the company is unlikely to cut dividends suddenly.When looking for dividend yielding stocks, also try to focus on well established, well known blue chip companies, because they’ll avoid cutting dividends in order to protect their name and reputation.
Stocks to avoid: Stocks with high PE ratios and low dividend yields are likely to see a price correction, and dividend payments aren’t going to be sufficient to protect you. Stocks with few or no tangible assets are also vulnerable. The lower the tangible assets, the lower the company’s ability to get access to cheap credit, especially in an environment such as this, where liquidity has dried up. At the same time, avoid companies that have a lot of debt (a debt to equity ratio of higher than 25%) - in a high interest rate environment such as this (even to interest rates are being cut), those companies saddled with a lot of debt are likely to default, and unlikely to be able to raise further credit.
Timing - carefully examine support / resistance levels: While a stock might be fundamentally a good buy, it makes sense to try and purchase it near its support (the price level that the stock falls but bounces back from) rather than resistance (the price level that the stock keeps rising to but falls back from). Determining support / resistance levels is not very difficult if you look at a company’s stock chart.
Its not really news when I say that we’re in a bear market (the widely accepted definition for western equity markets is a sustained 20% drop is much smaller than the 50% drop of the Nifty from our January high of 6357). But the question on everybody’s mind is - where are we in this bear market? The beginning, the middle, or at the end (the bottom)? Let’s have a look at the past three Indian bear markets and see if we can get some clues (data below sourced from Morgan Stanley Report, “India Strategy: How to Cope with a Bear Market”, published on 13 March 2008):
First: 2 April 1992 (top) - 26 April 1993 (bottom)
12 months trailing PE at the Bull market peak: 33.9
At the Bear market bottom: 13.6
Decline of 60%
Time taken in days to cross the previous high: 1425 (4 years)
6 months return from the bottom: 34%
From the above data we can see that:
A bear market leads to an average decline of 51% of the index, and upto 60% decline in PE ratios
If you managed to invest at the bottom, 6 months down the line you’d have made an average of 35% return (although spotting the bottom is near impossible - so this is rather misleading)
It lasts anywhere between 1-2 years
It takes anywhere between 2.5 to 5 years for the market to ‘recover fully’ to its previous peak - therefore the bear market is accompanied by a considerable ‘horizontal’ market
The bull market peak is over 32x earnings (PE ratio), and tends to more than halve at the bottom.
Now lets compare the above learnings from above to the ‘Bear Market’ of 2008:
Tipping point: Subprime leading to FII exit
If October 27 low, was the bottom then it has only lasted about 9 months
Sensex peak at 21,207
Sensex October 27 low at 7697
Decline of 64%
Nifty peak at 6357
Nifty October 27 low at 2253
Decline of 65%
12 months trailing Nifty PE at the Bull market peak: 28.3
At October 27 low: 10.7
Decline of 62%
Clearly we have overshot the average index decline of 51% that we have seen in previous bear markets, by a significant 13 percentage points. We have also seen large declines in index PE ratios - 4 percentage points more than the last bear market. Moreover, the PE on October 27 was an astoundingly low 10.7 - the lowest ever for the data since January 99, as I talk about in my post here.
This begs the questions - how much longer do we have to suffer such a market?
History tells us that there seems to be 3 ‘phases’ of a bear market:
First phase: A sharp initial fall - ‘capitulation’
Middle phase: A bear market rally on low volumes, where some investors a lulled into the false sense that the bear market is over
Final phase: Long slow downward grind in price where market valuations hit rock bottom
Clues that the bear market is coming to an end:
Indiscriminate selling leading to sharp falls
A major potential corporate or political crisis
Highly negative but irrational rumours about financially sound companies
Very low PE ratios for blue chip companies - often in single digits.
Based on history and what we’ve seen above, I’d wager that we’re at the beginning of the final phases of the bear market. We have seen a lot of volatility, and quite a significant rally over the last week, from 7967 to over 10,000 - a rally which seems to be coming to an end as I write this.
Globally, we have already seen unprecendented collapses in the banking and insurance sector - AIG, Lehman, Bear Stearns, HBOS etc. just to name a few. We haven’t seen an bankruptcies / defaults in India at such a significant scale, although rumours of ICICI bank collapsing, and then Unitech defaulting were rife. As far as PE ratios are concerned the Nifty’s trailing PE was at its lowest in a decade last week. All these point to us having crossed the bottom.
Do note however, that the 7697 low was not lower than the previous bull market’s peak, something that seems to be a pattern. Moroever, as I reported here, FIIs have only pulled out 20% of their investment in India, and I expect that this is not the end. Whether they like it or not, they may be forced to pull more out of our market even at these attractive valuations, in order to meet liabilities or liquidity pressures due to redemptions.
Well, the interest rate cycle has already turned, indeed quite aggressively with the Congress government trying do do everything it can before the elections in March next year, including leaning on banks to cut rates (which has worked). Inflation is on its way down, so that’s also pretty good news. Corporate earnings results have been really bad this quarter and we might see another couple of quarters of bad results before they start to improve. Therefore I think there is a lower bottom down the line. When will we see it? After another round of FII money getting pulled out, optimistically, I think we’ll probably see it over the next 6 months, pessimistically - given the grave global scenario - 12 months. That would make the bear market period 15-21 months.
As far as recovery is concerned, ’strong economic fundamentals’ can be cited in favour of the arguement for a shorter horizontal period. Fundamentals, however, doesn’t really seem to help when the global economy is in the toilet, and there’s no foreign money to push the market back up to the levels that it saw in this bull run.
The crash of the Indian Stock Market since January 2008 has been widely attributed to FIIs pulling their money out to meet liabilities and redemptions. According to this article, however, FIIs have only pulled out $12.7bn and still have another $53.7bn, or almost Rs. 270,000 Cr. left in the market.
A lot of market experts are talking about the market being near the bottom (”Valuations just cannot get any cheaper! The Indian growth story is sound, even at 7%!”) Let’s be clear on this: these falling prices are not about fundamentals - its simply about lack of liquidity. FIIs are not exiting the market because they want to, but because they are being forced to - nobody wants to book such massive losses, and nobody would argue against the fact that as an emerging market India is looking pretty cheap.
The fact that there’s so much FII money still in the market - 80% - is quite scary (more…)
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There’s been so much change in the global banking landscape, with banks going bankrupt, being nationalised, and being bought over by others that its become quite difficult to keep track.
Check out this excellent interactive by FT that takes you though a 10,000 feet chronological walk though a Global ‘Bank Street’, telling you which banks have been nationalized, bought over, expanding, or have a new business model. Sigh I still cannot get over the fact that we’ll soon be able to get a Goldman Sachs Debit Card.
There has been a lot of discussion / panic in the markets with regards to ICICI bank.
Nobody really knows what’s going on, but everybody is worried (see this article, which was a result of the response I got from ICICI bank for this article). What we do know is that there were intial reports in January, and then in March we were told that ICICI bank had declared over $260mn in credit derivative losses, on a total exposure of $2.2bn. In mid September there were rumours floating around about ICICI bank going under. These were put to rest by assurance by Kamath, SEBI and the RBI. Then there were more rumours a couple of days ago, and it almost seemed like there was a bit of a run on the bank, with people in Hyderabad, amongst other places, lining up at ATMs to pull out their cash.
While my view is that there isn’t smoke without a fire, and even Bear Stearns denied initially that there wasn’t anything wrong. While I think that ICICI bank shareholders might see a further deterioration in share price, I don’t think that people holding accounts at the retail bank really have much to worry about.
ICICI bank’s business, like any conglomorate bank, can be broadly categorized into - the wholesale/ investment banking arm, which would bear the exposure to the credit derivative instruments, and the retail banking side, which takes deposits from individuals and small businesses. I couldn’t manage to get a hold of the corporate structure or of ICICI Bank, but these businesses should be structurally separate even if they are owned by the same holding company, ICICI Bank.
If this is the case, it would mean that while the shareholders are exposed to both businesses, the customers of the retail bank are relatively safer from the effects of the losses of the wholesale banking / investment banking arm.
Also, as ICICI sets out above, it is mandatory for all Indian Scheduled Commercial Banks to retain 34% of the deposit base in the form of Government Securities (SLR) and cash with RBI (CRR).
Retail depositors are also protected to a limited extent (Rs. 100,000) by depositor insurance (check an article about depositor insurance here: www.rbi.org.in/Scripts/FAQView.aspx?Id=64).
I also believe that like the Fed could not let AIG, an institution that is far to large and far too embedded in the livelihoods of the American population, fail, similarly, the RBI would never let India’s largest private bank fail.
So if I was an ICICI bank retail depositor. I wouldn’t go running to ATMs to pull my cash out, just yet.
Disclaimer: This blog or any other content on this blog should not be construed as financial or investment advice. All views presented here are solely the opinion of the author’s.
Disclosure: I don’t hold any positions in ICICI Bank.
Although I mentioned in my last post that the world was coming to an end, I strongly believe that there is plenty of opportunity in the Indian markets. That being said, the US markets will be and have been a drag for India. However, I don’t believe the effects of the US and UK downturn will be recession inducing. In fact, I think India will actually come out stronger.
Of course, I would still err to the side of caution, especially because the markets have just been acting wild. Thus it makes sense to look at a large, steadily growing, but misvalued company such as Mahanagar Telephone Nigam Limited.
Lets start with the negatives: This is the company that I get my broadband connection from and boy has it made a bad impression on me! The government tie to MTNL certainly does not help its case either. And as you would assume the land-line growth, more than 80% of the business, is decreasing.
On the other hand it has Rs. 53.63 in cash/cash equivalents (incl short term investments) per share, with no long term debt. That is more than half of its current stock price (Rs 83.80) in cash! Backing out the cash makes the PE look amusing! Then taking into account the unprecedented credit crisis, it places MTNL in an powerful position.
Meanwhile on a segment basis, the growth in both the cellular and broadband businesses should partially offset the decline in revenues from fixed-lines. Furthermore, the soon to be launched 3G network should accelerate growth in the cellular business, although margins will decrease with the license fees for the spectrum allocation.
First of all let me clarify that in my opinion, there is *absolutely no chance* that ICICI Bank can collapse. Its too well capitalized, its too big and its too important to the Indian financial system for that to happen.
I posted a small article this morning, which has been getting a lot of pageviews. I never expected, however that I’d get a response from ICICI themselves. This is what they left in the comments section of my post:
September 30, 2008
Dear Sir/ Madam,
We greatly value your relationship with us. In the context of the developments in the international financial markets, we thought it pertinent to bring to you our perspective of the prevailing situation.
We would like to bring to your attention that the Indian banking system is well regulated and significantly insulated from global developments. This is because it is mandatory for all Indian Scheduled Commercial Banks to retain 34% of the deposit base in the form of Government Securities (SLR) and cash with RBI (CRR). Besides, sound policies of RBI have ensured prudent credit practices in the Indian Banking system.
ICICI Bank is already compliant with the BASLE II requirement in respect of risk management practices and capital adequacy. At 13.4%, ICICI Bank has one of the highest capital adequacy ratios in the Indian banking industry. Last year, ICICI Bank raised Rs. 20,000 crores (US $ 5 billion) of equity capital, which almost doubled our equity capital base. We have a net worth of over Rs. 47,000 crores (US$ 10 billion), again one of the highest in the banking industry in India We have consolidated total assets of over Rs. 4,84,000 crores (over US $ 105 billion), which is diversified across a wide range of asset classes across retail, wholesale and rural banking.
ICICI Bank is amongst the most profitable banks in India. In FY 08, ICICI Bank made a profit of Rs. 4,158 crores (US$ 900 million).
ICICI Bank has the highest credit ratings in the Indian financial sector. We have AAA ratings for our instruments, such as senior bonds, subordinated bonds, and deposits. We have the highest foreign currency bond ratings assigned to any Indian bank from Moodys and S&P.
We continue to invest in growth, indicating our confidence in the opportunities in the Indian market. In 07-08, ICICI Bank added 650 new branches, taking the total strength to over 1400 branches.
We thank you for reposing trust in us over the years. We look forward to setting new benchmarks in service levels in India and to create a bank that you will continue to be proud of.
As a testimony to the above, please find below the clarification given by Reserve Bank of India.
Date : 30 Sep 2008
RBI Statement on ICICI Bank’s Financial Position
There are reports in some sections of the media that based on rumours regarding the financial strength of ICICI Bank, depositors are withdrawing cash at its ATMs and branches in some locations.
It is clarified that the ICICI Bank has sufficient liquidity, including in its current account with the Reserve Bank of India, to meet the requirements of its depositors. The Reserve Bank of India is monitoring the developments and has arranged to provide adequate cash to ICICI Bank to meet the demands of its customers at its branches/ ATMs.
The ICICI Bank and its subsidiary banks abroad are well capitalised.
Alpana Killawala
Chief General Manager
Press Release : 2008-2009/412
Sincerely,
Nazia Sayeed
Office of Head Service Quality
ICICI Bank Ltd.
It was nice of the folks at ICICI to respond to my humble blog, albeit with a standardized message. I’d like to clarify that I don’t think that ICICI is going to collapse, but at the same time I do feel that it is relatively more at risk in terms of Subprime exposure than other Indian banks. I certainly do not think that given the level of depostitory requirements that Indian banks must comply with - that there’s any reason reason to start pulling out your money from ATMs. Just as the US government protect retail deposits, so would the Indian government.
At the same time, there is the possibility that ICICI will face larger than expected losses from its exposures. Make no mistake - ICICI has already earmaked $260mn+ (Rs. 1000 Cr.+) for losses due to exposure to Credit Derivatives. This was way back in January, and then was talked about again in March. A *lot* of time has passed since March, and alot of negative developments have also taken place.
My worry is that in light of the recent events (Lehman, HBOS, AIG collapse etc.) that there may be further losses. That’s the scary thing about the Subprime mess. When on entity falls over - other firms it owes fall over. Those other firms also owe somebody, who owe somebody else and so on. Suddenly, before you know it, you thought that a counterparty that was good for its promise to pay you what they owe you, no longer is in a position to do so.
According to this article in the Business Standard, its UK arm has 89% of its non indian investments book - estimated at $3.5bn - has an S&P rating of A- or above. ‘Only’ 18%, or $700mn has exposure to the US. I think that an ‘A-’ isn’t a fabulous rating, mind you. The highest rating given by S&P is AAA, after which we have AA, A, BBB, BB etc. to until D. Note that BB and below is rated as ‘Non investment grade’ or ‘junk’. And remember, these are the same ratings agencies that gave AAA ratings to those Subprime backed assets that are actually at the root of this entire mess.
The article goes on to say that ICICI bank asserts that the UK subsidiary has ‘no exposure’ to US subprime. Surely they do have some exposure, albeit indirectly, otherwise they wouldn’t have had that $264mn mark to market loss in the first place?
In fact, according to this article in the Financial Express, ICICI bank has a total of $2.2bn worth of expsosure to credit derivatives. What the underlying for these credit derivatives are, we don’t know. To an extent that is not even that important. I wonder, has ICICI booked all of those losses? Did it close out those derivative positions? Hopeful they did.
Thus, while a ‘collapse’ of ICICI bank, in my opinion, is highly unlikely, we may learn of larger than expected MTM losses on the back of credit derivatives. If this does happen, while the depositor doesn’t have anything to be worried about, it wouldn’t exactly be good news for the ICICI bank shareholder.
Disclaimer: This is not investment advice nor should be construed as such. Do *not* make any investment decisions based on what you read in this article, or anything else on this blog. All views presented here are solely the opinion of the author’s.
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I had a nice little pause in blogging last week, primarily because I was living (I write as if it has past) one of the biggest financial disasters of all time, first hand. It started late friday night as I was leaving from work, I read the Fed was holding a meeting with Lehman. Now mind you, many people knew Lehman was in trouble due to the lack of confidence and the rumors out on the street. So although important, I took off, it had no bearing on our investments.
Then Saturday afternoon I read a short story about the world’s banking heads convening at the Fed’s office downtown. This included the CEOs of Goldman, Morgan Stanley, JP Morgan, Lehman, Citigroup, Merrill, Bank of America, Barclays, etc. Simaltaneously, the rumor on Barclays buying Lehman started growing stronger and news on WaMu, AIG and Wachovia grew louder.
By Sunday it was intense. I walked into work and I was glued to the monitor as the movie-like drama unfolded. The posts below go through the history more or less.
Even those who were smart enough to recognize that the independent investment bank model was no longer viable thought that Goldman would get acquired.
There were whispers that the ~ GBP 103 Billion HSBC (the only mega cap bank stock to actually give investors a positive return year to date), would be the one to pick up the franchise. I for one, was one of the people who liked this story – it made sense right? There really didn’t seem to be anybody else who had the firepower at least liquidity-wise to pull off that kind of trade.
I was naive. I forgot about Goldman.
Firepower clearly has nothing to do with liquidity. The kind of lobby that Goldman commands is undeniable. How else do you explain the fact that Bear, Merrill, and Lehman were allowed to fail (more…)
Many are loudly criticizing Paulson’s mega bailout fund. $700bn is not a small amount considering the fact that the global GDP as of 2007 is estimated at around $55 trn (1% of global GDP), and the size of the US economy is around $14 trn (therefore around 5% of US GDP).
People are saying that the US taxpayer is getting squeezed from every which angle to make up for the irresponsibility of mega ‘sophisticated’ financial institutions. Not only is he having to deal with a fall in the prices of his real estate assets, costlier credit, job insecurity and business uncertainty, he’s now having to subsidize something that he doesn’t even understand. This is not entirely true however (more…)
A lot of people were criticizing BoA for overpaying for the third largest investment bank in the world at $50bn. Only time will tell, of course, but my feeling is that they did quite well to time the acquisition just days before the secretary of the US Treasury, ex-CEO of Goldman Sachs, Hank Paulson unveiled his plans to save the world through his $700bn US government fund.
After this announcement, most banking stocks that had been so badly beaten down over the last rallied 30% on Friday, and the UK FTSE closed a record 8% up. Such movements are unheard of in mature markets such as the US and the UK. If BoA had waited around, chances are that they would have had to pay more than the $50bn. (more…)
If you’ve been watching the market, even if not very closely, you’ll agree with me that it’s been – at the risk of sounding facetious – surreal.
Monday felt like a train wreck – Paulson’s refusal to bailout Lehman over the weekend and its subsequent bankruptcy announcement, and Merrill’s overnight sale to Bank of America (BoA) had my head spinning. If the Monday wasn’t black enough with news of Lehman and Merrill, we quickly learned that AIG was going around with a begging bowl trying to raise capital in the tens of billions to escape bankruptcy. Monday closed with the Dow 500 points down – that’s almost 5% - in contrast to the less that 1% movements that we’re used to seeing for that index.
In a discussion with a friend we realised that two global and highly esteemed (although Lehman had a more patchy 160 year history than Merrill Lynch) had within days just *poof!* ceased to exist. While BoA will probably retain the Merrill brand, its unlikely that my kids will ever hear the word ‘Lehman’. Indeed Lehman Brothers will probably be relegated to a notch in Barclay’s timeline on their website’s ‘About Us’ page.
Analysts blame the high interest rate environment on the poor results. Some 70% of car sales are financed, and high interest rates make it more expensive to take out loans to pay for their car purchases. The small car segment is thought to be more sensitive to interest rate fluctuations, as the middle class families that buy from this segment cannot afford to make outright purchases.
I largely agree with the rationale presented above. However, the high interest rate environment should have had an equally damaging effect on Hyundai’s sales as well. Even if you take into account that Hyundai’s August 2007 base of 16,000 cars was lower than Maruti’s base of 60,000 cars – you cannot explain away such a dramatic a dramatic difference in results.
The reason for Maruti’s poor performance goes beyond the interest rate environment. Since the Swift Maruti hasn’t had any new launches of note. Moreover, its marketing has been limited and unfocussed. Its strategy of driving sales through schemes in the rural and semi-urban segment – although intuitively appealing (tap into less served segments) – failed to provide results. The likely reason is that households in these regions, who have fewer financing options, are even more interest rate (more…)
Periods of high inflation often provide a much more difficult investment environment than periods of low inflation. Investors may therefore need to adopt a more active investment style if they are to maximise returns.
When inflation is high, as it is now, there are two basic principles which should be followed. Firstly, buy companies whose earnings growth will be able offset the inflationary effects on P/E ratios. Secondly, be prepared to rebalance your portfolio between inflationary and deflationary strategies, in response to changes in the economic environment.
The inflationary effect on P/E ratios is that they are generally downgraded in times of high inflation. As inflation rises, the inflationary component of earnings growth becomes a more significant proportion of the total. As the price of both inputs and sales increases, profits generally rise in nominal value without any improvement in productivity. So over time earnings growth, which is a key factor in determining stock price, becomes more and more a product of inflation rather than anything else.
Now you might think that all earnings growth would be a good thing. However, investors typically place less value on increased earnings (more…)
I visit the NSE’s site several times a day, everyday. For the first time today, however, as I scrolled down the homepage, I noticed a little image that advertised the ‘NSE theme song’. Apparently they’ve been playing it on Radio City 91.1 in Mumbai and Delhi (if you visit the site they’ve got a link to the PDF with the timings so that you can tune in and listen out for it!). He
