Restarting useless stock knowledge

Hello everyone,

I have not posted anything on this for a long time. Since the last post, I have moved to US and will be posting related to stocks in the US.

Recently started investing in the US market and this year has been an exceptional year with stocks going up and down big time. I will start posting some things to this blog now. 

Manufacturer Rebates....

With so may manufacturers offering rebates for their products, I sometimes wonder about the logic behind these rebates. The reasons, manufacturers offer rebates in my opinion are

1. Cheap Credit -

Essentially, Rebates are a form to borrow from the Customer rather than the Financial Markets. A lot of times it is cheaper to borrow from the customer than the Financial markets. Consider the example below

When a Manufacturer offers say $100 mail in rebate over a $800 laptop, you still pay $800 and the associated tax to the seller. These mail in rebate checks can take up to three months for processing. The Seller in this case is borrowing $100 per laptop sold at nearly zero percent interest rate for 90 days. Nearly zero percent, because Rebates have their own management costs associated with them.

2. Tax Avoidance

I am not sure about this, but Manufacturers are not supposed to pay tax over the interest accrued over the Money that they need to send back by rebates. So, if it takes 90 days to process a rebate, Manufacturer can earn tax free interest on the rebate amount.

3. Attract more customers and get rid of Inventory

By offering rebates over products, Manufacturers are able to attract more customers couple with the fact that this gives them access to cheap credit as explained in the point above.

4. Not everyone redeems their Rebates

I was not able to get some statistics on what percentage of rebates are never redeemed. Some people forget to turn in their rebates, some rebates will get lost in the mail, all this is free money for the Seller.

Layoffs vs Pay Cuts

What things would you take into consideration, if you need to decide between having a pay cut across the board or laying off people. I came across this article which gives good explanation about both options and how his company was able to achieve its goals with pay cuts.

http://leaderchat.org/2009/01/30/layoffs-or-pay-cuts-how-would-you-decide/

In the above article, the author mentions that everyone took a pay cut except for people who made less than $50,000 and they were able to bounce back. But if you are asked to take a pay cut as an employee and if you have better paying jobs outside, are you going to take pay cut or move on. Whether you choose pay cuts or lay offs depend on how you are doing in the organization, suggests Manish Sabharwal,chairman of Bangalore-based staffing solutions firm TeamLease. If you are competent, you prefer lay offs, if you are not, you prefer pay cuts.He also cautions that it is dangerous to think that everyone thinks the same way.But, If this is true and the best decide to move on, its going to be a big loss to the organization.

You might argue that in this kind of economy, those better opportunities are not going to exist and pay cuts may be the way to go. But, what happens when the economy starts to bounce back, your best performers would the first ones to go.

Finally, I agree with the conclusion presented by the linked article above:

In the end it seems like the deciding factor may be the type of culture present in your organization. Some organizational cultures are more of the “we’re in this together” while others have developed more of a “Sorry, but business is business” type of attitude.

P.S: There is a poll in this blog about your preferences about layoffs or pay cuts. Do Vote.

Effects of the Financial Crisis on the IT industry

The credit crunch which has now turned in to a full blown recession in the United States is going to have a serious consequences on the Indian IT industry. You can already see some of the changes through the industry

1. Staggered joining dates for freshers. Freshers who normally join IT companies in the July - September period after graduation have had their joining dates pushed back to Feb and March, which might get pushed further back.

2. Reduction of the variable components in Salaries. Most companies have a variable component in the Employee salaries that is dependent on Company performance and on individual targets for higher level employees. With a reduction in growth of companies, few would be able to achieve growth targets hence Employees are going to take away a small pay check over the next two-three quarters.

3. Reduction in bench strength. With very few new projects in the offering, Companies have started to reduce the bench strength.

4. Reduction in Employee Perks like vacation air tickets being provided for onsite employees have been canceled now.

What effects have you seen in your company ??

Collateralized Debt Obligation (CDO)

Today I was watching the questioning of Credit rating agency chiefs by the Congress members. They had to justify on why the rating calls could not pick up bad instruments much before the system collapsed. All I heard was diplomatic answers to the questions from the members of the congress. None of the answers would conclusively result in solutions to avoid such events in future.

While hearing all of this, there is one more instrument, which is Collateralized debt obligation (CDO) which could result in the ripple effect from the failure of a Credit Default Swap (CDS). A CDO is an instrument where debt of firms is clubbed together. What makes this instrument sweeter is the was in which they are packaged; the debt of 100 or more companies is clubbed together such that the companies with a higher default risk are compensated by companies with lower ones. This results in higher credit rating eventually. Wachovia tells Bloomberg that $254 billion worth of CDOs have defaulted so far. Today in the questioning the President of the credit rating agency division in Standard & Poor’s, who joined the firm in September last year told the Congress people that on an average the model of rating of instruments was revised as many as 2.5 times in a year. One could very well infer here that the experts could have caught the bad debt and the resulting systemic collapse well before, as the model would have evolved with respect to changing (deteriorating) economic conditions. Even though these instruments can be very complex in nature, hence difficult to rate; definitely it should not be used as an excuse by people who make a living off rating these instruments. Now a buyer of these instruments has no direct exposure to the underlying debt / loan instruments but relies solely on the ratings assigned to the CDO as a whole and would fail to correctly access his risk exposure.

The banks in Iceland too have been reported to have heavy exposure to the CDOs and it’s sad to see reports such as an entire country going bankrupt. As reported in Bloomberg, Barclays Capital estimates that 70 percent of synthetic CDOs sold swaps on Lehman. So it is not hard to understand what kind of mess Lehman was in. As selling the CDO is relatively simpler due to nature in which they are packaged, the seller normally an investment bank would make a commission. On the other hand it allows firms to pool their debt and hide away their losses. What makes this instrument more prone to failure is the mark-to-market accounting basis. The domino effect would come now as the CDOs have part exposure to fixed income products in the form of a Credit Default Swap (CDS). The CDS mess has already become like a folklore and will be used as case studies in times to come.

The Nerd is Cool

I feel like I am sitting in the cockpit of a F-16, the jet engines roaring, the adrenaline gushing and the crazy G-Forces, only thing it seems like a tailspin. What a time to be in the US; you get a box seat view of the events, the feeling is of your team losing. Let’s be practical, everyone is in a fix so how do we rectify it?

For starters there has already been a lot of financial slicing and dicing the financial mess on the Wall St and the Main St and I am no expert on taking full stock of the situation. As I write this there is a $675 billion bailout happening in Germany. Repeatedly, Warren Buffet has reinstated his stock buying ideology – When there greed it’s time to panic and when there is panic it’s time to be greedy and buy stocks. But I am sure not many people are willing to tread the waters in times like this. But let’s not focus on that now.

Had you been conservative and thoughtful of the long term, would you have been in panic. It pays to follow investment strategies of successful investors in the long term and read great books. Like one of the most amusing story I read about – When Warren Buffet’s father took him to meet the CEO of Goldman Sachs when he was 10 years old and then the Sage of Omaha himself coming out for the rescue of Goldman Sachs with $5 billion. Fascinating. What should we all learn from this? Patience, that’s what matters. Your thoughts and actions on your investing habits will pay off rich dividends when you will make value buys with a really long term horizon. Buffet says – when we buy a stock, think of that as if you were buying a business. Such that your whole life depends upon it. Not only you will tend to make a better informed decision but thoroughly research it before buying it.

Here are My 2 dimes in these rough times.

1. Spend conservatively. Don’t spend on things that won’t put you in a more comfortable position than you are already in.
2. Analyze more. See how many assets you have. By assets I mean what is earning you money.
3. Prioritize what matters. Think of the final goal and not just the journey.
4. Learn about your risk appetite and strike a balance between that and being risk averse.

ICICI Money Multiplier

Create Auto Linked Fixed deposits
If you have more than  Rs 15,000  in your savings account in ICICI, you should better make use of the Money Multiplier facility in ICICI. ICICI allows you to invest the extra money in Fixed Deposits that can be closed prematurely. In a Resident Savings Account, ICICI pays you a interest rate of 3.5 percent, with a fixed deposit of one year you can make as much as 9- 10 percent. Interest rates for different durations can be found at the following link.

http://www.icicibank.com/pfsuser/interestrates/interestrates.htm

What happens if you break the Deposits prematurely
As soon as you balance goes below 10,000 , your Fixed deposits are broken in reverse order of their creation, the one that was created last is broken first. You can easily earn more than a couple of percent more in interest rates. ICICI official guidelines for the money multiplier features can be found at the following link.

http://www.icicibank.com/pfsuser/icicibank/depositproducts/quantumoptima/features.htm

One bad thing about this is it says you cannot avail this facility if your account is linked to a ICICIDirect demat account. I am trying to figure out a way to use this along with your ICICIDirect account. Will update the post once I find out.

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