Being that the vast majority of my family and friends happen to be in the diamond/jewelery industry, a newly launched electronic diamond exchange platform certainly caught my eye. Currently, many dealers use Rapaport to price diamonds along with its Rapnet Diamond Trading Network. However, what is different about DODAQ, which calls itself the first online certified diamond exchange, is that it enables professional traders to buy, sell and hold certified polished diamonds like stocks! Furthermore, it offers a two-way auction for traders and facilitates transactions with real-time “spot” pricing.

Right now, there aren’t any fixed prices for polished goods, although Rapaport gives a ballpark number, it can often be far off mark. Generally, it’s used much like the debt market where LIBOR is used as a base and instruments are sold X points plus LIBOR. The lists are weekly thus there is no dynamic transaction data. DODAQ creates a centralized virtual location alongside a physical vault location for secure storage of the graded and guaranteed diamonds with their documentation. Thus DODAQ is basically a custodian for which it charges a commission fee on the transaction. Read the rest of this entry »

One of the most elegant applications of mathematics to finance has been in the field of portfolio theory. Active portfolio management requires investors to not only select risky securities, but also decide the appropriate weightage to ascribe to each security in the portfolio.

Developed by Markowitz and Sharpe in the early 1960’s, modern portfolio theory defines portfolio risk and return in precise terms: portfolio return is the weighted average of the expected return of individual securities while portfolio risk, is the weighted sum of individual asset covariances. This simple insight allows us to determine the condition for the efficient frontier – a set of portfolios that combine various risky assets in proportions that yield maximum return for a given level of risk.

Applying the fundamental intuition behind the Markowitz / Sharpe framework, PortfolioEdge has been built keeping in mind the practical investment behaviour of traders, investors and portfolio managers. It is a rebalancing tool for equity portfolios, but can be used for any risky asset-class, provided that it is possible to specify the returns on an NAV basis. By risky, it is meant that the asset class should have a positive standard deviation and it should thus be possible to estimate a distinct higher and lower value for its Upside potential and Downside risk, respectively.

The PortfolioEdge algorithm uses an innovative methodology to estimate the model weightage of stocks in your portfolio. The fundamental intuition behind the allocation mechanism is the Reward-to-Risk ratio (R2R), which is analogous to the Sharpe Ratio under modern portfolio theory. However, unlike the Sharpe Ratio, the measure of risk is not volatility (standard deviation), but expected capital loss.

Salient Features:

• Uses an intuitive and practical approach to portfolio rebalancing, based on parameters than can be easily understood and estimated.
• Improves your Portfolio’s reward-to-risk profile by allocating more money to “superior” stocks.
• Dramatically simplifies the investor’s task: focus on ‘what’ to buy, rather than ‘how much’ to buy.
• Retains the flexibility to select between Actual and Model portfolio or to specify your own weightages
• Allows you to perform various kinds of portfolio analytics and generate customized report

Screenshots

You can download a free trial version of PortfolioEdge from www.portfolioedge.net

For further details about the product contact k.v.mehta@gmail.com

The events over the past few days suggests good and bad news for investors. I’ll start with the good: the shit has settled for now. The bad news: nobody knows how long it may take for before the bear phase ends.

Let us examine each of these claims. First, I believe that the two catalysts of the feverish decline in stocks, interest rates and inflation, are finally showing improvement. After nearly two years, RBI has stopped selling dollars and buying rupees from the market, besides infusing nearly 80,000 crores into the banking system. Secondly, inflation, which has been the bane of the bond markets, will ease, as the commodities super cycle has come to an end. While there may still be some pain left for the real economy, brought on my cancellations in private investments and general decline in asset values, we can be sure that the first hint of smart money, has already started to flow in.

As an examination of the Nifty long term chart will reveal, we are currently at 2006 levels. Notwithstanding any further bad news from the West, the trading range for the next year should lie between 2650-3650. I believe that equity markets are oversold in the short-term: a look at the MSCI Emerging Markets Index further suggests support at this level. In fact, it is possible that November and December may be a net positive months for the markets.

The long-term is anybody’s guess. According to me a period of downward consolidation, with intermediate spurts and rallies may last for the next 3-5 years, at a minimum. That is how long I believe it will take for volatility to return to ‘natural’ levels and the investment and earnings cycle will begin to recuperate. If history is any guide, we can take instruction from the financial crisis in 1998. Although, it was relatively mild in comparison, it still took over 5 years for emerging market bond yields to return to their bull market levels.

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.

Here’s what the FT interactive looks like:

MoneyVidya.com - A Facebook for Indian Stock Market Enthusiasts

MoneyVidya.com is launching a serious stock picking community for Indian Investors, Traders and Stock Market enthusiasts.

Think of it like a Facebook/LinkedIn + Moneycontrol.com.

We’re a keeping the site private, and invitation only. Register your interest if you want to join.

In order to control the quality of members and content on our site, we’re going to keep the site ‘invitation only’ for a (long) while. If you’d like to join simply register your interest on MoneyVidya.com by leaving your email address, and we’ll get in touch.

What’s different about MoneyVidya.com - A Stock Picking Community with a ground breaking member rating system

The core of our site is the ability for members to create and share stock picks. Our ground breaking Member Rating System analyses the performance of members’ stock picks so you can instantly identify the high performing investors and traders when deciding whose advice to follow.

The underlying member performance metrics also allow you to assess members’ stock picking abilities across the dimensions of timeframe, risk and return. This allows you to identify members and stock tips which match your personal style investment goals.

I read an article in the Mint this morning about the fact that an (unnamed) a major Indian commercial bank has borrowed a massive Rs. 1000 Cr. from another domestistic bank at 20% interest, a rate which reportedly the highest charged by any Indian bank in over a decade. The article goes on to say:

In this particular case, the borrower of the money was desperately looking for funds to tide over short-term asset-liability mismatches in its overseas operations.

There have been a bunch of rumours going about ICICI being badly hit, indeed threatening to collapse under the weight of losses from the subprime crisis. These rumours are of course very unlikely to be true - there’s no chance that ICICI bank could ever go under. At the same time, I wouldn’t blame people for thinking ‘ICICI’ the moment they read this article in the Mint. Bearing in mind this very issue, the author didn’t waste time in including a caveat:

Most of the large Indian banks, both state-run as well as private ones, have overseas presence. The aggressive ones have been building assets overseas by rolling over their liabilities, raised from the inter-bank market.

I had earlier written a brief article on the unilikely rumours that were floating around about ICICI Bank collapsing. I received a promt reply from ICICI bank to the post and I wrote a counter to it. I do wish, however, that rather than send generic responses they would just come clean and say - ‘Hey, look, guys honestly this is the exact extent of Mark to Market losses we’re expecting from our exposure to credit derivatives’. The only issue here may be, they themselves may not know know the true extent of their losses.

If you are a shareholder of ICICI Bank, and if there is more bad news regarding ICICI’s MTM losses, its obviously going to be bad for the stock. However, if you hold an account with ICICI bank, I think it would be a gross overreaction to start pulling out your money from your checking account.

Disclaimer: This, or anything else on the blog is not investment advice, and should not be treated as such. Do not make trades on the basis of what you read on this blog - I’m not liable for any gains / losses. All views presented here are solely the opinion of the author’s.

Disclosure: I don’t hold any positions in ICICI Bank.

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. 

The biggest carry trade currency is the Austrailan Dollay/ Yen… The trade which took 6 yrs to move up, took less than a one month to fall… Massive unwinding seen from 104 level to 65 currently…

AUD Vs Yen

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.

A more detailed analysis to follow…

Disclosure: I don’t hold any positions in MTNL.

~~~~~~~~~~~~~~~~~~~

Shalin

So this is what happened in the US. Banks started giving mortgages to people who had a poor credit record (sub-prime), and clearly couldn’t afford to pay back the loans. They knew this but thought that since house prices would always go up, borrowers could always refinance their loans against the additional equity due to appreciated house prices. Alternatively, banks thought that they could take over the defaulter’s home and sell it for higher than the original loan amount. Of course, what brought the house of cards down was the fact that of course house prices didn’t continue to go up: borrowers defaulted en masse so banks were stuck with a ton of houses (increase in supply of houses), and since they now stopped lending to people who couldn’t afford to pay, demand for houses fell. Falling house prices lead to more defaulting, which lead to a further fall in house prices and so on.

Why wouldn’ this happen in India? Two words: Black money. Property in India is purchased using both declared income, on which taxes have been paid (white money) and undeclared income, on which taxes haven’t been paid (black money). When a borrower takes out a mortgage in India, he’ll obviously only get the loan for the amount paid in ‘white’. However, if he defaults, the bank will take possession of the entire house, which is probably much higher in value because of the ‘black’ component. Only if there is an extremely aggressively fall in real estate prices - so much so that the black component is wiped out (which given our fairly strong domestic economy, is unlikely), do we have something to worry about. 

So black money serves as a protective cushion - who would have though it?

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.

Disclosure: I don’t own any shares of ICICI bank.

Somebody called me early this morning telling me that they had heard fresh rumours that ICICI bank was going to collapse in the wake of the credit crisis. Clearly, a number of people in Hyderabada also heard this rumour, and panicked. According to this TOI story, people were lining up at ATMs to pull their money out. 

On September 17, ICICI bank’s management strongly denied rumours that the management was offloading ICICI shares. Share prices dropped from Rs. 720 on September 8 to Rs. 560 on September 17. They rose again to Rs. 634 on September 22, and are currently trading at Rs. 493, marginally down from yesterday’s close. 

In my opinion, while ICICI may have not insignificant Mark to Market (MTM) losses from its exposure to credit derivatives, there is *no way* that ICICI bank would collapse. It’s India’s AIG, for all practical purposes. As the second largest bank in India, the regulator would never let such a thing happen. Moreover, even if it did face large MTM losses, given the fact that it recently raised $5bn in equity capital - I imagine that this is more than enough to tide it over in uncertain times. 

If you don’t believe these rumours, then ICICI is looking pretty attractive, trading at a PE of 15, and almost a third of its yearly high in January of Rs. 1440.

Disclaimer: This post or any other content advice is not investment advice and should not be construed as such. All views presented here are solely the opinion of the author’s.

Disclosure: I don’t hold any shares of ICICI Bank. 

What’s different: Our groundbreaking Member Rating System 

It zeroes in on the high performing Investors and Traders so you’ll know who to follow.

We believe that a member rating mechanism is the most important part of any investment community. We believe that our algorithms are superior to any others available in the Indian market. 

We are keeping the site invitation only, so please register your interest above

Read the rest of this entry »

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.

Monday was a complete war-zone Read the rest of this entry »