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.

Technorati Tags: ICICI

Is your Bank safe ??

With three banks going down and are taken over by the FDIC (Federal Deposit Insurance Corporation) in the last month, check whether investments in your bank are safe.

What is the FDIC

FDIC or the Federal Deposit Insurance Corporation is a US government entity that insures deposits in saving, checking and retirement accounts in member banks. Individual accounts are insured up to an amount of $100,000. There are different rules for different kinds of accounts. Some Retiree accounts may be insured up to $250,000 under the Federal Deposit Insurance Reform act of 2005. More information can be found at the official FDIC site.

Find out whether your savings are safe

Find the list of Banks insured by the FDIC at the following location.

http://www4.fdic.gov/IDASP/main_bankfind.asp

Also, if you are one of those whose Bank is already failed, you can check if you deposits are safe or not at the following location.

http://www4.fdic.gov/dip/index.asp

Precautionary steps to take

1. Do not have all your money in one Bank account, if you have say $100,000 in one account and another $100,000 in another account of another Bank, and both Banks are insured by FDIC, then you don't lose any money.

2.

Technorati Tags: US,FDIC,Failed Banks

Look at the quarterly report published by FDIC on Banks. Member Banks insured by FDIC have to adhere to regulations set by the FDIC, still they can fail. FDIC publishes a quarterly report of member banks depending on various parameters to look at Banks and rates them accordingly.

Circuit Breakers

Circuit breakers on the stock market work in a similar way to how an electrical fuse halts the working of the devices once there is too much load. It helps in stopping the system for a small period of time rather than breaking the system.

Technorati Tags: Indian Stock Markets,BSE NSE Circuits

Index Circuits

In case the index(BSE or NSE) rises or falls by more than ten percent, the circuit breaker kicks in and halts trading. Depending on the change in indexes, different period of break times are put in. Complete information related to the how much time the trading is halted can be found here. In case of a 10% movement of either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½ hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market shall continue trading. In case if the market hits 10% before 1 p.m. then as explained there would be a one hour halt in trading and after resumption of trade in case if the market hits 15% in either index, then there shall be a two-hour halt. If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for the remaining part of the day. If the market fails to resume at 10% then the next limit is placed at 15% and finally at 20%. In case if market fails to resume from 15% and if it hits 20% irrespective of the time, the trading shall be halt for remaining part of the day.

Circuits on Individual stocks

Circuits are also present on individual stocks. The stocks present in the BSE 30 and the Nifty 50 do not have any circuits built on them. These are known as the Non Index scripts. Incase there is huge percentage swings in these stocks, the whole market circuits can be triggered. For the other stocks on the nifty, circuits are built at 2,5 or 10 percent. This limit is determined by the impact cost and other things related to the script. These values are calculated monthly and for  a new stock ,it is placed in a group which has most companies in the same market cap.

How ya doin’

To start with, apologies for my prolonged absence here. I have had the opportunity in the last couple of months to see the financial and energy crisis unfold from the Big Apple. Here in the US, people are very polite and friendly to each other – asking How ya doin? To anyone who catches your eye. Usually the answer happens to be - I am fine.

There have been 2 long weekends in the US past me now, Memorial Day and the other American Independence Day. The gas prices here have risen by more than 30% since I landed. So there were fewer cars planning long trips on these weekends. Oil prices have already started their round of Beijing Olympics, smashing one record after the other. The prices at the supermarket too have been rising, with a woman balking at how much a bunch of asparagus costs. Since start of this year, around 500,000 people have lost their jobs in the US. Some of the companies are rethinking their strategies of manufacturing in China, as the cost of shipping goods to US offsets the cost advantage. It’s pretty much the downward slide which has been ongoing.

So what’s the real deal? People here are taking a more pragmatic approach towards things instead of believing in blind pessimism. They are just avoiding what hurts the most. Like the gas prices. Instead they just choose to stay back and go for dinners with their families at closer locations. It helps to look around for pockets of opportunity, like today Warren Buffet is financing a deal for Dow Chemicals, even though he has long concluded that US is in recession. Job data today, shows there has been a biggest drop in claims in over 3 years. The economic stimulus package seems to have worked for the retailers. So there are indeed reasons for hope. The Presidential elections are around the corner and people are hoping that things will turn around for the good.

So where are we headed. As for the oil scenario, which is the cause for bad sentiment all around, will only get worse with speculation with winter approaching in the US. The financial crisis seems to worsen day by day – the latest being government bailouts feared for Fannie Mae and Freddie Mac. It’s a period of incertitude and hoping for the best.

So the real answer to the question above is – Not so good.

PS: Recession or otherwise some people can still afford to pay $2.1 million for a lunch with Warren Buffet at Smith & Wollensky.

Ten things India needs to do...

Following are the ten things listed in a Goldman Sachs economics paper that India needs to do to achieve its potential. The complete paper can be found here.

www.livemint.com/2008/06/16235741/CB9BCB3C-5825-4AD6-9604-042202BBC985ArtVPF.pdf

1. Improve Governance
2. Raise Educational Achievement
3. Increase quality and quantity of universities
4. Control Inflation
5. Introduce a credible fiscal policy
6. Liberalise financial markets
7. Increase Trade with neighbours
8. Increase Agricultural Productivity
9. Improve Infrastructure
10. Improve Environmental Quality

Goldman Sachs book on the emerging economies of BRIC (Brazil, Russia, India and China) " BRICs and Beyond" can be found here.

Commodities

Who invest in Commodities and why?

There are two kinds of investors who invest in commodities. One who use it as a hedging tool to lock future prices and the second who use it to make profits by speculating on the future price movements. The first set of investors are usually investors who want to buy these commodities at a future price but are unsure of the future prices. e.g. Farmers would want to sell their grains at a particular future date. However, they are not sure what the future prices would be. Hence they would go Short in a particular futures contract in order to lock future prices. The same is applicable to any dealer who would be buying Gold on a future date and would want to lock the buying price today.The later set of investors trade on commodity futures and gain/lose depending on the future prices. They trade on these futures not with an intent of getting the actual commodity.

Why do Portfolio Managers like Commodities? 

Commodity futures are the only investment tools providing a negative correlation to all other investment asset classes (stock, bonds, etc). This is because commodities tend to gain (during depressions) when all other asset classes loose value. Due to this -ve correlation commodities help reduce the overall risk of the portfolio hence making it much more attractive to investors.

When to invest in Commodities?

People usually tend to invest in commodities when there are economic downturns. In times of economic depressions, the stock market usually tends to go down. Due to the -ve correlation that commodities have with the stock markets people invest in commodities as a hedging tool.

Technorati Tags: Commodities

Crude oil prices to fall ....

US Senate approves a bill to stop stockpiling the Oil

The US Senate voted to stop stockpiling of oil, US buys 70,000 barrels of oil everyday to create a strategic reserve that can be used in case of emergencies. Even though 70000 is a small number compared to the 21 million barrels of oil that US consumes everyday, it will still be step forward in reducing the Oil Futures.The House also passed a bill to stop stockpiling while the price of oil is more than $75 which probably isn't going to be sometime soon.

Dollar starts to hit back

The US dollar after hitting a low against all currencies has started to fight back(1 dollar = 41.85 Rupees, let it hit 45 and I am going to transfer all my money back home :) ). Part of this is because there seems to be increasing stability in the Financial market. Federal Reserve also seems to be done with the rate cuts and that should help the dollar.

International Energy Agency reports drop in Consumption

Higher gas prices have led to a drop in consumption of gas in developed countries. The CPI (Consumer Price Index) suggested that gas prices rose only 1.2 percent after adjusting for seasonal changes in gas prices (Gas prices increase as summer marks the driving season in US).

All these factors should lead to a drop in the Crude oil futures from its daily record breaking prices.

Technorati Tags: Oil,Futures

Google wins in the Yahoo - Microsoft battle ...

Microsoft over the weekend withdrew its offer to buy Yahoo. Yahoo reportedly wanted $37 per share and Microsoft was ready to offer $33 per share. In the end both sides did not budge and the deal fell apart.

Microsoft was given credit by analysts for not paying too much for Yahoo. Yahoo board on the other hand is sure to face shareholder lawsuits for not accepting Microsoft's offer. Yahoo stocks have not fallen to the pre deal price because a lot of analysts feel that Microsoft will come back and make another offer for the Internet giant.

Microsoft needs Yahoo to make its Internet division profitable. Windows live search was supposed to do that, but Microsoft's share in the search market increased for a while Microsoft offered goodies to use its search, but has since been losing ground to Google.

With both Yahoo and Microsoft distracted for this long, this just plays into the hands of Google, which has steadily gained in the Internet Search market and holds a strong position in the $25 billion online advertising market. After the Yahoo-Microsoft deal fell apart, Yahoo shares stumbled more than 15 percent, Microsoft and Google both surged around 5 percent. With Yahoo agreeing to allow Google to display Ads on its search results, the going simply gets better for Google.

How is an 'Asset Bubble' created?

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was $2 as there were only two pieces of $1 coins circulating round. There were 3 citizens living on this island country. A owned the land. B and C each owned $1. Now the following series of events happen: -

1. B decided to purchase the land from A for $1 . A and C now each own $1 while B owned a piece of land that is worth $1. The net asset of the country = $3 
2. C thought that since there is only one piece of land in the country and land is produce-able asset, its value must definitely go up. So, he borrowed $1 from A and together with his own $1, he bought the land from B for $2.  
       A has a loan to C of $1, so his net asset is $1.
       B sold his land and got $2, so his net asset is $2.
       C owned the piece of land worth $2 but with his $1 debt to A, his net asset is $1.
       The net asset of the country = $4.
3. A saw that the land he once owned has risen in value. He regretted selling it. Luckily, he has a $1 loan to C. He then borrowed $2 from B and acquired the land back from C for $3. The payment is by $2 cash (which he borrowed) and cancellation of the $1 loan to C.
   As a result,
       A now owned a piece of land that is worth $3. But since he owed B $2, his net asset is $1.
       B loaned $2 to A. So his net asset is $2.
       C now has the 2 coins. His net asset is also $2.
       The net asset of the country = $5. A bubble is building up.
4. B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for $4. The payment is by borrowing $2 from C and cancellation of his $2 loan to A.
   As a result,
       A has got his debt cleared and he got the 2 coins. His net asset is $2.
       B owned a piece of land that is worth $4 but since he has a debt of $2 with C, his net Asset is $2. 
       C loaned $2 to B, so his net asset is $2.
       The net asset of the country = $6; even though the country has only one piece of land and $2 in circulation.
5. Everybody has made money and everybody felt happy and prosperous.
6. One day an a thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan? There is only $2 in circulation, I think after all the land that B owns is worth at most $1 only." A also thought the same.
7. Suddenly, nobody wanted to buy land anymore.
   In the end,
     - A owns the $2 coins, his net asset is $2. 
     - B owed C $2 and the land he owned which he thought worth $4 is now $1. His net asset became -ve $1. 
     - C has a loan of $2 to B. But it is a bad debt. Although his net asset is still $2. 
     - The net asset of the country = $3 again.
8. Who has stolen the $3 from the country? Of course, before the bubble burst B thought his land worth $4 and the net asset of the country was $6 in paper. However, now his net asset is $2.  
   The net asset of the country = $3 again.
9. B had no choice but to declare bankruptcy. C has to relinquish his $2 bad debt to B but in return he acquired the land which is worth $1 now. 

At the end of all  this: -

• A owns the 2 coins, his net asset is $2.
• B is bankrupt; his net asset is 0 dollar. (B lost everything )
• C got no choice but end up with a land worth only $1 (C lost one dollar)
• The net asset of the country = $3.
  

*****************End of the Story***************** 
The net outcome of the above bubble is a redistribution of wealth. A is the winner, B is the loser, C is lucky that he was spared.

Few points worth noting from the above story: - 

1. When a bubble is building up, the debt of individual in a country to one another is also building up.  
2. This story of the island is a close system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
3. An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below $1.
4. When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the loser. The asset could shrink or in worst case, they go bankrupt.
5. If there is another citizen D either holding a dollar or another piece of land but refrain to take part in the game, at the end of the day, he will neither win nor lose. But he will see the value of his money or land go up and down like a see saw.
6. When the bubble was in the growing phase, everybody made money.
7. If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A) and take part in the game. But you must know when you should change everything back to cash.
8. Instead of land, the above applies to stocks as well.
9. The actual worth of land or stocks depends on psychology to a great extent. 

 

The above narration is an excerpt from a public web site. I don't recollect the web site name and hence cannot cite the source for reference. The excerpt has been reproduced here with slight modifications for better clarity.

Prisoner's Dilemma

 

Consider this scenario: -

Two Prisoners, A and B, are suspects for a crime and are put behind bars. The cops have no evidences against either of them. So the cops offer the following to each of the prisoners. "If you deny your crime and the other accepts, you get a term of 10 years and the other goes free. If you both accept, each one gets 5 years and if you both deny you both get 6 months each." The offer is summarized below

	Prisoner B Rejects his crime	Prisoner B Accepts his crime
Prisoner A Rejects his crime	A gets 6 months B gets 6 months	A gets 10 years B goes free
Prisoner A Accepts his crime	A goes free B gets 10 years	A gets 5 years B gets 5 years

Given the above scenario, how do you expect each of the Prisoner's to react considering the fact that neither of the prisoners knows what the other is going to do.

Consider Prisoner A. What would be the best course of action for Prisoner A given the actions of Prisoner B.

1. If B rejects his crime, the best course of action for A would be to accept his crime.
2. If B accepts his crime, the best course of action for A would be to accept his crime.

Consider Prisoner B. What would be the best course of action for Prisoner B given the actions of Prisoner A.

1. If A rejects his crime, the best course of action for B would be to accept his crime.
2. If A accepts his crime, the best course of action for B would be to accept his crime.

Since neither A nor B are aware of the actions of the other, they both end up accepting their Crimes thereby getting terms of 5 years each.

 

The above scenario is what is referred to as the Prisoner's Dilemma and is a classic example of Game Theory. It explains why, even though by co-operating each player can benefit more, each player tries to maximize his/her payoff at the cost of the other player's payoff.

One application of the above theory is to explain how firms in an Oligopoly work together. Oligopoly refers to a market where there are a few firms competing with each other. If all firms in an oligopoly collude together, they can artificially jack up the prices and earn extra ordinary profits. However, each firm has an incentive to reduce prices in order to increase sales so that they can increase their profits even more as compared to their competitors. Because of this suspicion that the other firms might reduce prices, every firm reduces it prices and the collusion fails. Because of this none of the firms in an Oligopoly earn extraordinary profits.

However, there are Oligopolies that collude and work successfully by raising prices artificially. One example which I can cite is 'OPEC'.

 

LiveJournal Tags: Prisoner's Dilemma,Game Theory,Oligopoly

Ever heard the terminology top line and bottom line?

Ever heard of the term top line and bottom line being used by financial analysts? So what do these terms refer to and why are they called so.

Starting with top line; it refers to the total sales or revenue generated by a firm.

For e.g. if a firm sells 100 cars/fiscal @ Rs.1,00,000 (oh yes, its the nano!!) then the top line would be Rs.1,00,00,000. (The Math here has been simplified to drive home the point!! ).

Now, say the Net Income (profit) earned on every car is Rs.20,000, then the bottom line would be Rs.20,00,000. (Again, we exclude the effects of Depreciation, Taxes, SG&A and other accounting stuff to keep the math simple).

So why are these terms referred to as they are?

Try reading an income statement of any firm. If you see at the top you would find the Sales/Revenues being shown. Hence, in general usage, Sales/Revenues are referred to as top line because of their close proximity to the top part of an income sheet. If you keep coming down the income statement you will see that there are deductions( depreciation, taxes, interest expenses, etc ) and additions (gain from sale of securities, etc) being made to the top line. After all adjustments are made to the top line, the firm would report its Net Income ( or Profit ) at the bottom of the income statement and hence the term bottom line because of it's close proximity to the bottom of the income statement.

 

Also commonly referred as

Top line : - Revenue, Sales

Bottom line: - after tax profit, bottom line, net, net profit, profit

LiveJournal Tags: Income Statements,Top Line,Bottom Line

TCS disappoints ....

TCS dropped nearly eleven percent on Tuesday, the highest loss in terms of percentage since it began trading. Disappointing fourth quarter results lead to this.

Financial results can be found here. The profits dropped six percent on a quarter on quarter basis. Profits showed a small increase of four percent on a yearly basis.

TCS earns more than fifty percent of its revenue from North American clients, difficult conditions and an appreciating rupee puts a strain on the margins. TCS still earns more than 44 percent of its revenue from services provided to the Banking and the Financial Industry.

TCS lead a crash of the technology stocks on the BSE sensex with the BSE IT index losing 4 percent; the broader markets posted a gain of a mere 44 points. Infy dropped more than 2.5 percent, HCL systems lost 4.5 percent, Wipro lost more than 4 percent, Tech Mahindra lost more than 4 percent. I own at least a few stocks of each of these companies. After the Infy results, my portfolio suddenly started to look a lot better after the IT stocks started to pick up. Now they have again gone southwards.

MasterCard inControl and Healthcare Industry

Technorati Tags: Healthcare,US

Mastercard is planning to introduce a corporate card through which employers can set a limit on expenditures as well set up locations where the card can be used (Check the Businessweek story here ).

This incontrol Card represents a great opportunity for Healthcare Insurance companies that provide it's members with Cards to be used at Pharmacies(Humana provides a card for its Spending Account Members). In the current scenario, if the member misuses the card and uses to refuel his car or something other than what he qualifies. The Insurance company needs to reject this swipe or adjust in future claims for the member.

With the Mastercard inControl, the Insurance provider can program where the card can be used and for what it can used for. This can result in significant savings by saving all the effort that is required once a bad purchase has been made.

Spotting the next Orchid chemicals ...

Orchid chemicals is stock that had fallen from its peak of 300 to a low of 110 about a fortnight ago. But the stock has seen amazing recovery and gained something like 23 percent  on Monday and has reached a price of 223. If you had invested in this stock 15 days earlier you could have made a profit of hundred percent.

Orchid chemicals lost a whopping 44 percent of its value on the day of when Bear Sterns was sold to JP Morgan for $2 a share. Bear Sterns sold nearly all its assets in the Indian market and sold its stake in Orchid chemicals completely and this lead to margins calls for two firms Indiabulls and Religare securities. A nice article here on what happened during that day.

The company is still based on solid fundamentals and had reported  91%increase in the net profit in Q3 December 2007 over Q3 December 2006. It reported a sales growth of nearly 40% in the same period. Stakes sold in the market by Bear Sterns have been picked up by other Investment banks like Credit Suisse and with Ranbaxy picking up a 9.4 percent stake in the company, Its price has sky rocketed with a 23 percent increase yesterday. And as I am writing this down,  its already up another ten percent in today's trading.

Its much easier to write about such recoveries once they have happened, the trick lies in spotting such stocks that can have a V shaped recovery. So what do you think would be the next Orchid chemicals ???

Technorati Tags: Orchid Chemicals,India,Stocks

What if the Government doesn't intervene now...

There seems to be a debate whether the government should intervene and rescue the homeowners and lenders alike. What happens incase the government or the Federal Reserve doesn't intervene. Many think that if the Government doesn't do anything now, home prices will find a equilibrium based on fundamentals rather than what has pushed up prices over the last few years. Home prices might very well fall below the whatever the fundamental price needs to be, same way the prices did over shoot on their way up. When no one knows what the bottom is going to be, lenders wont be ready to lend at what they think are over priced houses. Buyers even if they want to will not be able to buy if there is no money to borrow. This in turn will push the prices down. Falling prices will deter new home buyers from buying since they would be waiting for the prices to fall still further.

Even if there are moral issues in helping the homeowners and the lenders who got us into this mess, Government and the Federal Reserve need to act to stop the financial industry from collapsing.

US Home Loans vs. Indian Home Loans

Swaminathan S Anklesaria Aiyar in The Sunday Times has written a great article by reasoning why a Subprime mess is not likely to take place in India. Is this definitely an eye opener.

Read the article here.

Also, I feel he’s a great writer and some of his earlier articles are also gems. So please find the list of other articles here.

Here’s a small excerpt.

A housing boom-and-bust has engulfed the US financial sector in crisis. India, too, has experienced a runaway real estate boom, which in a few areas is going bust. The share prices of real estate companies have crashed. Yet, India has no mortgage crisis or financial sector crisis.

Why not? Mainly because of the huge amount of black money in Indian real estate. This has saved the Indian financial sector in unexpected ways. Traditionally, US mortgage lenders checked the creditworthiness of borrowers, and then made the borrower pay at least 20% of the house value, loaning the remaining 80%. So, even if the price of the house dipped, it would still be higher than the bank's loan, and the borrower had an incentive to repay it.

Also if I may add, buying a house in India involves a lot of sentimental factors associated with it. The strong family ties, concept of a joint family or living with your parents also serve as a deterrent to just switching houses or walking away from one. While the amount of black (illegal) money in circulation in India is certainly not advocated it’s an interesting outlook into how the home loan market in India works.

Is Google recession proof ?

The question is what effect recession is going to have on earnings of Google. Recently in a interview Eric Schmidt (CEO Google) tried to convince that Recession is not going to have an negative effect on Google. Lets take a look at the various arguments in favor and against Google.

Google earns most of its revenue from text based Ads displayed on various web pages. Advertisers pay Google depending on the number of clicks they had on their advertisements. In event of an recession the first thing that businesses cut down is the advertising budget.With Consumer spending weakening and showing the weakest numbers since September 2006, if the number of clicks goes down, Google revenue will go down along with it.

OR

In case of an recession and increasing inflation, people will tend to look for cheaper goods on the Internet.This might very well cause the number of clicks to increase and an increase in the Google revenue.

If you are someone who in these days of soaring gas prices are looking for deals on the Internet, also look for buying the Google stock as an investment. With the stock down to $430 from its peak of $750 this might a be good time to buy.

On Financial Independence

Laura Rowley in Yahoo Finance has written an excellent piece on financial freedom and how to use it responsibly. I think it’s a must read. Here’s the link.

One of the interesting excerpts from the passage:

A study by Thornburg Investment Management in Santa Fe, found that from 1976 to 2006, $100 invested in the S&P 500 in a taxable account would have grown to $3,225 -- a 12.26 percent nominal rate of return.

Factor in fees, taxes, and inflation? The real rate of return is a meager $456, or 5.19 percent.

Something on the same lines I had written some time back can be found here.

Is JP Morgan in a Quagmire?

Mr. Jamie Dimon, Chairman and Chief executive of JP Morgan recently raised the bid price for Bear Stearns to $10 a share which takes the bid to $2.1 billion. This is supposed to be a fair deal, or at least fairer than the last offering, much to please the investors and the employees. But still 1/3^rd less than the valuation on March 14, 2008. Valuations and the actual crisis at Bear Stearns aside the earlier valuation of $240 million or so was really a joke for a firm like Bear Stearns. The bailout by the Fed will be in end be financed by American tax payers money. One can argue that the actual fall would have been even more damaging to the American financial system.

Bear Stearns currently owns $30 billion of least liquid assets out of which $29 billion will be financed by the Fed and JP Morgan will bear losses of $1 billion. JP Morgan already has set aside $6 billion for lawsuits and merger costs. This is three times more than the cost of acquisition itself . Besides being big in home equity loans (read subprime mess), it is number one in the US in Credit Default Swaps. This really should be worrying.

What is a Credit Default Swap (CDS) anyway?

It’s an agreement between two parties to take responsibility for the credit risk for a third party entity can offer.

Alright, so what does it mean?

For a buyer:

A buyer will pay a periodic fee to a seller of a CDS to offer him protection in case a third party is to default on a payment. This offers him guarantee that his liability over this credit risk is limited.

For Seller:

In case a third part defaults on credit taken the seller of a CDS has to pay the buyer of a CDS with whatever sum agreed. The seller here can either take over the defaulted credit position or pay upfront to the buyer of a CDS whatever is the difference.

Mr. Dimon has sure has a tough task at hand at merging Bear Stearns and keeping his own firm in sound financial health.

Time magazine here has an excellent write up regarding a potential CDS crisis.

Timing the Stock Market

The money blog fivecentnickel which offers smart ways to invest and make money has pointed out a great excerpt from the book The Bogleheads' Guide to Investing which offers practical advice to investing where some real luminaries share their thoughts about timing the stock markets and by the look of things it’s definitely not a good idea.

“I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.”

Warren Buffett, CEO of Berkshire Hathaway

“Market timing is a poor substitute for a long-term investment plan.”

Jonathan Clements, Wall Street Journal Columnist

“Market-timing is bunk.”

Pat Dorsey, Director of Morningstar Fund Analysis

“I’ve learned that market timing can ruin you.”

Elaine Garzarelli, Stock Investing Analyst

“If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen in the stock market.”

Benjamin Graham, Investor and Author of The Intelligent Investor

“The market timer’s Hall of Fame is an empty room.”

Jane Bryant Quinn, Columnist and Author of Smart and Simple Financial Strategies

So still think you can get away with timing the markets?

STOP THIS ..... Please

Take a look at the ad presented by Countrywide, it advertises about home loans without a credit report. Is this not what has brought the financial industry to its knees. Lenders ready to lend money to earn the commission and then sell the loan to a bigger Investment bank so that the risk is distributed. Borrowers borrowing more money than what they can afford. This has lead to the sub prime mortgages to turn sour and billions of dollars of securities to be worthless. A simple example of what's happening in the sub prime market here. I feel the Federal Reserve needs to come up with a better regulations to stop this.

Technorati Tags: Economy,Fed,SubPrime

Is Merrill Lynch safe ??

The fall of Bear Sterns, the fifth largest Investment bank on Wall street, raises a few doubts in my mind about the safety of others in the same Business. Bear Sterns was bought by JP Morgan for $2  a share i.e something like $236 million for the bank. The Bear Sterns building is estimated to be worth a billion dollars, still it was sold for $236 million that puts into perspective the liabilities the bank currently had. It was sitting on a lot a mortgage backed securities which was turned useless in the current market situation. The leverage obtained from such securities allowed Bear Sterns to post profitable quarter after quarter.

Merrill Lynch is currently sitting on an Investment of $1 trillion dollars with a base equity of $30 billion dollars. Leverage is a great thing to make profits, but when the markets take a turn for the worse, a small in the asset values can wipe the shareholders value. I do not believe in the statements made by the Bank about the liquidity they have currently, after all the Bear Sterns CEO on tuesday made a statement that they had enough liquidity to see this bad phase through and on Friday the Bank was sold to JP Morgan.

Luckily the Federal Reserve has taken active measures to pump liquidity into the Financial System. The Fed chairman Ben Bernake (A scholar on the 1930 depression ) has taken some innovative steps to stop the Financial System from collapsing. Both Lehman Brothers and Goldman Sachs reported better than expected earnings for this quarter. The Bernake solution seems to be working, it should help the Investment banks to stay solvent and do what they are supposed to do help foster economic growth.

Time to Cheer and Buy?

The US stock markets are pleased with better than expected earnings from Lehman Brothers. This is despite the fact that it has taken a hit of $1.8 billion. It has also assured investors that its not facing a crisis like Bear Stearns and is not insolvent.

The crisis at Bear Stearns also didn’t seem huge when it reported a loss of $854 million on January 8. The Fed for sure is taking steps to ease liquidity with UBS advocating a 100bps rate cut for things to smoothen out. But it should really be also taking care to prevent such liquidity crisis from happening again.

Our Indian stock markets will surely rally tomorrow based on positive cues from the US. Even though this is a thin ray of hope. So do we go out and buy the fundamentally attractive looking stocks? Yes wise men have always said - Buy on dips. But I guess the trend is negative and there is more to come. The subprime mess in the US is going to take some untangling. So we better be vigilant with all the data coming out of the US and not get foolhardy.

What would you do ?

The current financial crisis resulting from the housing slump in the United Stated can be attributed to the irregular lending practices followed by the lenders and borrowers borrowing more than what they could repay. This has lead to an increasing number of defaults and foreclosures and a massive credit crunch in the global economy. Till now whatever steps have been taken by the Federal Reserve and the US government are aimed at increasing liquidity in the market. If the number of defaults and the foreclosures keep on increasing inducing liquidity in the markets is not going to help too much. Federal Reserve needs to address the root cause of the problem and stop the slump in the housing industry. In doing so, the steps will benefit only the lenders and the borrowers, who in the first place are responsible for this mess. What would you do in such a situation, If you were the Federal Reserve would you take steps to help someone who got you into a difficult situation and do things that are going benefit them .....

Slam Dunk on Wall Street: Coming Soon

Slam Dunk – It almost seems as Kobe Bryant did a slam dunk on the Indian indexes today. Only thing in basketball it’s supposed to be a good thing where you score points. Here we have lost and lost big time. Close to a 1000 points. Whoa! Somebody better catch this or as they say in basketball - DEFENSE. We seem to have none of it at the moment.

The shocking growth in Indian capital goods at 2.1% vs 16.3 in the previous year has really spooked investors and market watchers. This is really bad news as capital goods are the very basis on which the Indian economy has to move ahead. Some market commentators were even talking of 4 digit figures on the Sensex soon. What’s worse is an incident which is indicative of the bureaucratic nature of our economy and the Government failing to do enough to support the economy. L&T which was the contractor for the BIAL Airport finished the project well on time. But the government citing lack of infrastructure facilities around the airport has post phoned the opening to around May 11, 2008. I have personally visited the site at Devanahalli, Bangalore and it is anything but far away from the city. The airport provides nowhere the facilities like at Hong Kong and other major airports offer to reach Central Business districts from the airport in no time.

The past week has been terrible for the Indian economy and US alike. My Twitter (my2dimes) updates say that Goldman Sachs and Lehman Brothers are about to report real bad earnings. Blackstone has already reported shocking earnings. Bear Stearns is done with and right now it’s taking stocks down with it. The dollar has sunk to its lowest in 12 years and that can’t be music to exporters in Japan and India. Chinese commodities also are facing the onslaught of US recession. The subprime write offs have actually exposed the reckless functioning of money markets in a developed economy such as the US. The surrogate bailout of Bear Stearns by the JP Morgan and the Fed, has revealed huge cracks in functioning of the financial firms in US.

The big firms in US better subscribe to lesser aggressive ways of functioning. This means cutting exposure to bad loans, positions in currencies, mortgage backed securities (a prime reason in the Carlyle Capital fallout) etc. The Fed also has to be vigilant in monitoring bad practices and give a rap to the firms who don’t comply. There just cannot be an excuse or else the fallout will be huge and the meltdown will result a Slam Dunk for many of the stocks on Wall Street.

PS: Read interesting analysis for the Indian growth story by Swaminathan S Anklesaria Aiyar

BBC on US Fed's Injection

A day after Fed's injection of $200 billion dollars BBC's Business Editor Robert Peston here explains why even $200 billion won't make any sense and on Carlyle Capital which is on the brink of a collapse.

Robert Peston's Blog on BBC

Feds new tool TSLF

Traditionally the US Federal Reserve(Fed) had three ways to run the monetary policy namely cutting interest rates, cutting reserve requirements and cutting the discount rate. The Fed today came up with an innovative way of dealing with the credit crunch in the financial markets. The financial markets were expecting more than mere rate cuts from the Fed, some way the Fed could buy the mortgage linked securities and bring some confidence back into the Financial markets. The financial media Wall Street Journal, Bloomberg,  CNN Money had articles(linked here) with expectations and predictions about what the Fed might do.

Step in TSLF

TSLF is Term Security Lending facility, This is the Fed's new way of increasing liquidity into the System. What the Fed says is that the Banks can exchange the their mortgage backed securities for treasury bonds on a temporary basis. This should take off the pressure of the mortgage backed securities from the balance sheets of the banks and allow them to lend and borrow in a much more free way. Banks can exchange up to $200 billion dollars of mortgage securities at this moment. With this announcement, Fed probably closed the door on the 75 basis point cut in the increase rates. Stock markets have taken the Fed move in a very positive way with the Dow gaining more than 3.5 percent, even though there was a fall in the Healthcare stocks(More about that in my next post). Indian markets have also continued their recovery, the BSE sensex is 400 points up at this point. The only problem with the TSLF is incase the mortgage securities start defaulting in a big way, the Fed could be holding on to something worthless. Right now the Fed has said that they are going to buy only top rated securities. (BusinessWeek has a nice article on TSLF )

Subprime Equilibrium

Credit crunch, liquidity being sucked out of the system, FIIs not pumping the money, more bad news in the form of Blackstone profits (one of the major investors in India) and crude oil trading at $108 - 109 levels. Life on the stock markets is really tough these days.

Today though, the Indian stock markets showed some signs of recovery. There should be more on Wednesday based on US Federal Reserve decision to lend up to $200 billion to banks and lenders and ease liquidity. The Dow too as I write this is posting good gains based on the central bank’s decision. The US Fed Reserve is really taking some steps to thwart recession and hopefully it works for the US economy and of course that would mean good news to us too.

Point is when the Indian economy was in such good gear just 2 quarters back, has the tide turned really and all developmental activities leading to India’s growth halted. Or is it just a case of the confidence being low all over, more so because of global factors. Such that it has become a wait and watch game for Indian investors. However strong the domestic growth story may be, there is no denying the impact of the rupee on exporters even others than in the services sector. Their margins have got squeezed and which in turn has affected the local players supplying them.

So when is all this going to balance out? How long is long term to stay put in the stock markets. The rupee is going to get stronger as soon as FII start pumping money again on account of Indian growth story which in turn would hurt exporters or till the FIIs don’t pump in money the stock markets will keep searching for directions and which will hurt investor sentiments. It’s time to get the fundamentals in shape such that the Indian growth story remains intact and still provides value. It’s a time reassess business strategies and growth drivers such that investors have confidence in India and come in droves.

Where does this end .....

We have all heard that the Banks are having problems with their exposure to the subprime mortgages and their financial troubles have caused a massive credit crunch in the financial markets all around the world. The absence of liquidity has caused a blood bath in the financial markets all around the world. All the big investment banks have declared multi billion dollar write off due to this. This has also led to the collapse of many of the hedge funds that were giving spectacular results till now. Read here about the anatomy of a hedge fund collapse. Where does all this stop, stocks around the world have lost more than thirty percent from their peaks or more, US might already be in a recession; According to me the next important thing is the results of the big investment banks. If they have accounted for all the sub prime write offs then we should be good, if there is more to be lost to that, the uncertainty will cause more harm. The US consumer will have the checks from the economics stimulus package (Details Here ) sometime in May, that should help the flagging economy. All in all another three four months before we see some kind of consistent recovery across the stock markets.

Dynamics of De-Merging

The Forbes list of the wealthiest people on the planet is out. Alright the whole world knows about this now. Warren Buffet, with a net worth of $62 billion dethrones Bill Gates as the richest man in the world. Bill Gates himself couldn’t care much or would he. May be not the rate at which he is donating money. It’s best answered by him.

The question is, can we have a new number one soon? Who can dethrone Mr. Buffet? We can certainly take pride on the fact that we have 4 Indians on the list, Lakshmi Mittal courtesy his Indian passport, the richest. The Ambani brothers are 4^th and 5^th with net worth’s of $50 and $48 billion. Put together $98 billion dollars and Mr. Buffet’s fortune seems a far cry from that of the two Ambani brothers. If these two brothers get together, which is highly hypothetical, Warren Buffet would get dethroned. It would take some while before someone over takes the Ambani brothers. Considering the fact that the Reliance demerger was announced not so long ago that’s a mind boggling amount of wealth created in about 2 years. January 17, 2006 was the last day when the Reliance stock traded on the bourses after which it was split into various businesses.

The two stocks which traded already, have got revalued - Reliance Capital and Reliance Energy. Save for the recent fall in the markets listed companies from both the camps have made investors and promoters alike, rich to a great extent. One could not think of this before demerger, may be only Mr. Mukesh Ambani would have been picture perfect on the Forbes list. While from a family perspective not the best of things to happen, kudos to both the brothers for master minding this.

While all things considered, it remains to be seen how much our Indians contribute to philanthropic deeds as compared to Bill Gates and Warren Buffet.

Read here: Appreciation for our Indian billionaires.

On why, if the US sneezes

… India can catch a cold. The phrase that if US sneezes India will catch a cold is very popular in the Indian media these days. It’s very true in the present global economy where businesses are no longer isolated from each other or from other parts of the world. This being evident by the hit taken by ICICI Bank. Especially true in the case of our services sector where now it has become one of the major contributors to India’s GDP.

The Oracle of Omaha, Mr. Warren Buffet has spoken. He says the US with a $9.5 trillion economy is in recession, even though technically it may not be, since it has not recorded two straight quarters of negative growth. This has to be taken seriously coming from a man whose organization’s per share book value has compounded 21% annually and who recently overtook Bill Gates to become the richest man in the World.

US GDP growth in the last quarter (Oct ’07 – Dec ‘07) has risen by just 0.6% and the IMF forecasts US GDP to grow by 1.9% in 2008. China on the other hand is looking at cosmetic ways of cooling down GDP growth. One of the biggest trading partners of the US is China and while in 2007 US exported goods worth $65.2 billion it imported goods worth a staggering $321.5 billion from China. That accounts for 40% of the exports from China. China has recorded double-digit growth in exports in almost every major sector to the US. If US growth is indeed slow; trade from both the countries India and China with the US will slow down. China would not get affected much as it’s anyway looking to cool down it’s booming economy but if it decides and grabs this opportunity to provide more value than India to the US it’s a cause for worry. China can very well force its muscle to get a bigger pie and India better watch its step.

One of the star performing sectors for India is the services sector, read IT and IteS, which is a big chunk. Already the local players in China are giving a tough competition for Indian players who want to establish a presence in China. Not that the Chinese aren’t experts at fields other than the core sectors. China’s search engine giant Baidu is giving tough competition to even the Internet behemoth Google.

While the Chinese growth has largely been government led, Indian organizations will have to find their own feet and keep going without the government’s help while they are busy playing their bureaucratic games.

As the Chinese say - “May you live in interesting times”.

FM delivers what was expected

Yes our FM has delivered what was expected and that is a populist budget. With the assembly elections looming ahead the timing couldn’t be more apt and he is right on cue to please the Indian populace by raising the income tax limits to Rs. 180, 000 and Rs. 150, 000 for women and men respectively. Or maybe, he could have raised the tax exemption limit from Rs. 100, 000 to Rs. 150, 000 to encourage savings. This is open for debate.

The one thing that definitely doesn’t make sense is the raising of Short Term gains tax from 10% to 15%. This can have two fallouts; either it doesn’t encourage day traders and a lot of people who are new to the stock markets to book profits early and periodically or a lot of people who book handsome gains but would shy away from actually disclosing their profits to avoid tax.

Yes one might argue this would do well to cultivate and inculcate values of long term investing which is free from any tax. The Great Indian middle class who is slowly waking up to virtues of investing in the stock markets would be wary of these kinds of taxes. It’s generally seen these tax structures are a big deterrent to a layman who has never invested in the markets and such news would certainly add to the confusion. The recently listed Reliance Power IPO has also dented many a first time investor’s confidence. Also it’s a little harsh on the day trader who handsomely contributes to the volumes in the stock markets and lends liquidity.

Meanwhile let’s celebrate, after all our wallets are going to a little heavier this year J

Tracking your portfolio too often ...

Are you one of those people who are waiting for the market to open everyday so that you can track the value of your portfolio. Or are you someone who is looking for a site like mantya.com so that you wont have to hit refresh on the ICICIDirect page. If yes then this is something that you must avoid since this is not very good for your health. The book Fooled by Randomness, which by the  way is a best seller suggests that the amount of pain inflicted when ones stock goes down is more than the amount of happiness one gains when ones stock goes up. Something directly from the book

You feel some pleasure when the performance is positive but not in the equivalent amount as the pain experienced when the performance is negative.

This is something I can personally vouch to, I used to track my portfolio minute by minute on ICICIDirect to see the small changes in my stock value. After reading this I decided not to do that and check my stock value only once a day after the markets have closed and it helps. Clearly you cannot do this if you are involved in some sort of margin trading and plan to make money out of the Intra day fluctuations in the market.

Mutual Funds in Volatile Markets

The past 3 months at the stock market have been very volatile to say the least. At times like this can we trust the experts to conjure up a decent rate of return for us? Let say instead of investing in the equities directly and we hand over this task over to the experts i.e. invest in a Mutual Fund, to be specific an Equity Diversified Fund (EDF).

Analysis shows this may not be a good idea after all. Almost none of the EDF have given positive returns, at times when a common man would have found the going tough in the markets. Only one EDF, Reliance Regular Savings Fund has given a return of about 7.5%. The performance of some of the Gold Funds has been better, with some of them giving up to 18% returns. One may choose selectively going further then.

Meanwhile in a panel of speakers hosted by the The Economic Times, Tata Mutual MD Ved Prakash Chaturvedi is of the opinion that the market will be at 18000 levels on December 31, 2008. But still feels the mutual fund managers can beat that and deliver positive returns for the investors.

Here’s a light excerpt from one of the related articles.

After Albert Einstein died and reached the gates of heaven, St Peter asked him to temporarily share lodgings with three others till he was alloted space. St Peter introduced the room-mates by their IQ levels. As two of them had IQs of over 200, Einstein decided to discuss his theory of relativity and global warming. St Peter then pointed to the third person and apologetically said he had an IQ of just 60. “No problem,” said Einstein, “We can discuss where the stock market is headed.”

DISCLOSURE: All investments are subject to markets risks and should only be done after through consultation with a registered financial planner.

Sub-Prime market and Consequences

What are sub-prime mortgages

Simply put, Sub-prime mortgages is practice of lending money to people with lower credit ratings. Prime lending is the normal lending practice and the rates of interest in sub prime would normally be a couple of percent more than a similar prime lending loan.

What is Securitisation

Securitisation is the process of converting future cash flows into tradeable bond like packages. These future cash flows can be anything from future home loans, student loans, credit card payments and even music royalties. Securities can be very useful as you can use the money that you were going to get in the future.

What happened in the current scenario

A type of security backed asset called collateralized debt obligation(CDO) based its future cash flow on sub-prime mortgages. With the default rates in the sub-prime mortgages rising the value of these CDO started falling exponentially. These securities which had a value of billions of dollars suddenly became useless. This created a massive credit crunch with banks not able to finance things with these securities. A slump in housing market caused a world wide credit crunch because in this global economy these CDOs were brought and sold by banks all over the world. The extent of damage caused by these CDOs is still not clear even after Banks around the world have taken big hits on their balance sheets in the financial quarter. There is a school of thought that suggests that Securitisation encouraged lax lending practices. 

(The Consequences of Mortgage Credit Expansion - Study link here)

What is the future of structured Financing

Even the most ardent opponent of Structured Financing and Securitisation will agree to the fact that it has brought a lot of benefits to economies across the world. To throw Financial engineering out of the window because of the sub-prime problems would be wrong. This quote from the Economist.com article stuck "So it may just be a matter of hanging on. As any punter in Las Vegas will tell you, every losing streak ends eventually, if you can only stay solvent for long enough."

REC: Is the Retail Investor Missing Out

Before the Reliance Power IPO a lot of investors seemed to be sitting out of IPOs for some totally different reason; to avoid the anguish of not getting allotment. But post the Reliance Power IPO, the same investors are staying away from the fear of getting an allotment and a volatile market.

It seems like the retail investor is missing out on a decently priced issue. As of the 3^rd day it has been subscribed only 0.78 times in the retail section. Also the PE of the stock is quite lower than that of the currently listed Power Finance Corporation (PFC). The lending exposure of REC has also improved with a 27% share of power generation projects in its portfolio. With a strong thrust on Power related projects on which India’s future depends this seems like a decent stock if not one of those star performers.

Download the Prospectus.

DISCLOSURE: All investment decisions have to be taken only after sound advice from a registered financial consultant. This blog is in no way responsible for any investment decisions and exposure to the stock markets.

Plan Ahead. Get Organized.

Well with many of us running around to meet deadlines to avail various tax benefits, can we plan and have a better year the next time around. Here are some suggestions to get in shape financially.

1) Early bird gets the interest.

With our income levels rising and many of us having some surplus cash to invest, invest early. Many of us must be owning a PPF Account (Guys, if you don't have one yet get one fast.) instead waiting for the fiscal year to end, invest by 1st week of April. This amount with your earlier invested amount is going to earn you a whole year's interest.

2) Get a contingency fund.

Many of us living a fast life and several dependants to take care of you never know what is going to strike you. Plan and park a decent amount of money in a risk free account (ideally a FD) to take care of those unwanted surprises.

3) Get a Life Insurance Policy.

A lot of us already must be having Life Insurances Policies already but is it really enough for your family? Well check out Term life insurance policies where you can get insured yourself for a larger sum for a smaller premium. Generally you won't get your premiums paid at the end of the term but there are some policies which will. Ask your insurance agent for this.

4) Invest regularly. Understand compounding.

Discipline yourself to save a portion of your money monthly. To achieve this check out various SIP schemes of successful Mutual Fund houses. Look out for a good history and a good track record. You will find loads of information. One good place to start is here.

If you are risk averse get a monthly Recurring Deposit account in a bank.

And yes most importantly understand Compounding. That's why getting a PPF account makes sense.

5) Get a home.

Though not easy but this is a great option for anyone who can avail of a home loan or with some surplus amount of money. While on the home loan front you can avail of attractive tax benefits. On the other it can become one of your assets. It can be a great little getaway when you want to retire. Happy Investing.

DISCLOSURE: All decisions have to be taken only after through research and sound advice. This blog is in no way responsible for anyone's actions.

Fastest growing Indian Business

Read this article on time.com and you would be surprised to know what has become one of India's fastest growing business. This is not entirely surprising if you take into the consideration what India surfs for on the net. According to a India Online 2007 (A survey conducted by JuxtConsult, an online research solutions consultancy firm), 48 percent of urban net users in India use the Internet for online matrimonial search.The popularity of online matrimonial search has really surged in last one year. Last year the percentage of all net users undertaking matrimonial search was only 15 per cent. At 48 per cent usage level now, the category has seen an addition of a 33 per cent of all net users joining the category in this year. With so many Indians looking for a soul mate online, the number of users in this category has increased exponentially and along with that has increased the fraud that goes along with it. More and more people are looking at Dating detectives to find out that they are not being cheated.

BTW the most used activities on the net are email, job search and instant messaging.

Mint – Organize your finances

For readers in the US here's a useful site that will be able to help you out to manage finances smartly. This is a web application wherein you can find all your finances at one place. Also they provide tracking tools to see where your money is being spent through friendly charts, track your bills and plan your budgets.

Visit the website Mint.

Indian Economy Slowing . . .

With our markets turning the tide over the past few days not all confidence is back. With the Sensex putting a good show many wonder with glee of getting back into the market. Key economic data made available this week throws caution to the wind.

Industrial production for December '07 has fallen to 7.6% compared to 13.4% in December '06. Also the Core sector growth , comprising of crude oil, steel, cement, electricity, coal and refinery was 4% in Decemeber '07 as opposed to 9% in the corresponding month in the previous year. One might argue this is just a sign of the economy slowing in line with the global economy especially since our exports are hit hard due to a strong rupee. Our GDP too has been expected to grow at a rate of 8.7%

This does raise concerns over India's competitive relationship with China. Though China's GDP is slowing too; it is still growing at a rate faster than India's. To catch up or atleast maintain a healthy gap between India and China so as to not China get away with the cake we need to continuously clock growth rates higher than currently forecasted. As they say - We live in interesting times. Hope our FM comes up with his magic potion for the economy soon.

 

The optimist in me........

If you go through the various business sites related to the US, most of them would have articles about whether US is headed for a recession or not or is US already in a recession. Even though most of the articles point that the US is headed for a recession or is already there; I would always end up reading one that says positive things about the economy and the market. Like this one which speaks about the fourth quarter earnings of various companies, if you leave the financial sector out the others have been doing well. But as the article explains the losses of the Financial sector are too big to ignore, the hope is that we have seen the worst and things will improve in the coming quarters. Every time the Indian market loses a few hundred points(seems a daily phenomenon to lose a few hundred points), I hope that the market has found its bottom and will gain over the coming period. That has not been the case and at 16500 we have analysts saying that we may lose another twenty percent in sometime. But the optimist in me says Investing in companies having strong fundamentals will give great returns, how much time it will take for the markets to return to its bullish ways is  the million dollar question...

ADAG plans a new IPO... Will you get carried away this time?

There is news floating around that ADAG might file for DRHP with SEBI for Reliance entertainment IPO.

All about Reliance Entertainment.. (ADA Group)

Reliance Entertainment is spearheading the Group’s foray into the media and entertainment space. Reliance Entertainment’s core focus is to build significant presence for Reliance in the Entertainment eco-system: across content and distribution platforms.The key content initiative are across Movies, Music, Sports, Gaming, Internet & mobile portals, leading to direct opportunities in delivery across the emerging digital distribution platforms: digital cinema, IPTV, DTH and Mobile TV.Reliance ADA Group acquired Adlabs Films Limited in 2005, one of the largest entertainment companies in India, which has interests in film processing, production, exhibition & digital cinema.
Reliance Entertainment has made an entry into the FM Radio business through Adlabs Radio www.big927fm.com Having won 45 stations in the recent bidding, BIG 92.7 FM is already India’s largest private FM radio network with 12 radio stations across the country as on 28th February 2007, with many more to be launched in the coming months.

I'll surely think twice before applying for this one. How about you?

Regards
HM

Reliance Power and a frivolous excuse

Reliance Power today came out saying that global factors were to blame for it's IPO listing so terribly. Is it really so? It seems that the promoters have gone too far with their optimistic pricing and have been victims of their own game. Deep analysis shows that promoters after all have made money already and retail investors are left in the lurch.

By going through some reports about their current and projected capacities, NTPC seems to be available at a really cheap market price. How does one justify the excuse given as "global factors" when all of them or atleast most of the future projects are going to be based in India. So it seems not only they factored reasons core to their future plans but buoyancy in our capital markets rake in some moolah. Surely lot of the investors got allured by the Reliance brand name and especially a lot of them who got their demat accounts opened only for this IPO. This will not go well with the first time investors and create a general negative sentiment regarding the Reliance pack among these people.

Are the promoters only to blame for this? Reliance Power has for sure consulted the bankers before coming out with this issue. It depends upon the bankers to come up with a fair price for the Reliance Power IPO. Do they really feel that was a fair price band based on the company's growth prospectus keeping in mind the domestic focus, then why blame global factors.

Credit has to be given to the promoters about marketing the issue well for the retail investors. A discount on the upper limit and full payment not being required at the time of subscription. Oh yeah, that's sweet, it was for me too.

One hard truth is, a lot of investors have lost money and hopefully the ADAG group gives us some reasons to cheer in the future.

IPO party may be over !!

IPO (Initial Public offering) was the most happening thing or rather something which attracted almost everyone in last few months. Every Tom, Dawood or Hari with no knowledge of the actual business or the profit margins of the company was more than willing to apply the maximum number of shares offered to a retail investor.

Well, Markets did not play a spoilsport either. Most of the IPO's listed in last few months have made the retails investors happy by not only giving handsome gains on listing but also sustaining the levels. Few examples in last couple of months would be Burnpur cement(listing gains of 350%) (I still regret not applying for this one), Edelweiss Cap(100% premium), Allied Computers (current gains of 191%).

But, as they say Grass is not always green. The present day scenario is a complete different story. The events that took place in last few days are more than terrifying,,,

a) Wockhardt recalls the IPO after poor subscription.
b) Emaar MGF recalls as well.
c) Future Capital (IPO that was oversubscribed 130 times opens with a small premium of 40%)
d) Reliance power (ADAG company), most talked IPO of the year so far falls flat on its face. (closes below the issue price.)
e) J Kumar Infra (listed today and currently trading with a loss of 18%)

I personally applied for both Future Cap and Rel Power, not bothering much about the business model or current valuations or future growth plans. And here I am (always hoped for booking huge listing day profit), sitting with a mere 20% gain on Future Cap and still trying to cope up with the Rel Power disaster.

Lets hope to see those 500+ trading sessions in near future which may bring smiles back for many small investors.

Till then Happy Investing :)
Hanif Merchant

Maintain stock portfolio without login

This web site created by me allows you to maintain a list of stock portfolio without the "jhanjhat" of registration and login.It uses cookies for the same.
The symbol should be from ICICI Direct and only NSE stock prices can be seen.This is auto refreshed after 3 minutes.There may be some errors but please bear with me for the same
Donot press F5 it may show wierd results

http://www.mantya.com/stockwatch/quickstockwatch.aspx

Margin and Margin Plus trading in ICICI Direct

ICICI Directmargin trading you can square off the position between 9.55 am to 2.45pm,after 2.45pm system can any time square it off.
Every time you open an application there is a temporary image of the same application being stored in the computer. When these images get accumulated they affect the smooth functioning of your computer. Hence it is always advisable to clear your cache memory with below mentioned procedure:
1.a. Click on Toolsb. Go to Internet Optionsc. Click Temporary Internet Filesd. Click Delete Filese. Click ok
2. a. Go to Tools b. Internet Optionsc. Temporary Internet Filesd. Settingse. Check for newer version of stored pagesf. Set to " Every visit to the page. "
After checking the above, we request you to go to:
1. Tools 2. Internet Options 3. Security 4. Click on Custom Level 5. Ensure that everything is enabled
Then click on:
1. Default Level 2. Ensure that the security level under this section is Medium Low
For your information, the below mentioned settings as per preferred requirement which is more compatible with ICICI Direct:
1. Operating system ( Window )2. Browser ( Internet Explorer 5 or 6 )3. Internet Service Provider ( VSNL or MTNL )4. Connection ( Dial Up Connection and LAN )
In CASH delivery based trading, the shares would be credited to your demat account on Trading+2 working day. Suppose if you had purchased shares on Monday (trading T-day), Tuesday will be the T+1 working day and Wednesday will be the T+2 working day. On T+2 working end of the day the shares would be credited. Once the shares are credited to your demat account, you can sell the shares.
If you want to sell the shares which are purchased on same day (i.e., trading day in "Cash"), you can go for sell link and you can place the sell order. If the stock is under rolling segment, you can buy and sell on same day under cash segment.
In cash you would be unable to short sell the shares. You need to have the shares in your demat account before selling.
The Margin and Margin Plus trading can be done only in market hours. The margin option is enabled only in the market hours in buy or sell link.
In Margin and Margin Plus trading you can short sell the shares.
Margin trading is known as an intra day trading wherein if you place a buy order, you will have to place a sell order by the end of the day (i.e., 2:40) or vice versa. The transaction placed by you in margin either needs to be squared off or needs to be converted to delivery before the end of settlement.
In case you fail to convert or square off your positions the system would automatically place a square off order by the end of the settlement. Also margin trading is funded by certain percentage of cash trading i.e., you need not require to pay 100% of the transaction amount while placing the order. The margin segment also enables you to short sell shares i.e., sell shares though they are not available in your demat balances.
However, in cash trading if you do not square off you would receive the shares in your demat account directly. In cash segment you need to have 100% of cash while placing a buy order and you need to have shares in your account while placing a sell order.
To trade in margin all you will have to do is just select the margin option from the product down on the buy or sell page. All the other factors while placing the order would remain the same.
Only the initial margin would be blocked at the time of placing the order. For example:
You want to place a buy order for 100 shares @ Rs.4,000 of INFTEC and the margin percentage for the same is 10% then the margin amount blocked would be:
100 * 4000 * 10% = Rs.40,000.
This means that you would be required to allocate at least Rs.40,000 to take a position in margin segment.
For placing the square off order (if you had purchased, then for placing the sell order), select the Margin Positions link, in that you find "Square off" link, click the same and place the square off order.
For viewing the stocks which are tradable in Margin and Margin Plus trading, we request you to follow the below procedure:
1. Login to our website www.icicidirect.com.2. Select "Stock List" option in "Equity" section.3. Select "Product" as Margin/Margin Plus.4. Select "Exchange" as NSE.5. Click on "Go" button.
Once you follow the procedure, you would be able to see the list of stocks which are tradable under Margin/Margin Plus. You can also check the margin percentage required for a particular scrip.
Margin PLUS trading offers an order placement feature through which you can take a intra-day position in the equity segment and at the same time, place a cover order for this position specifying the Stop Loss Trigger Price and the limit price. This cover order will help you to limit the loss, if any, on the position.
How does Margin Plus work?At the time of taking a position in Margin Plus, you would also be required to specify a Stop Loss Order, and hence limiting your loss to that extent. Since the risk is now limited to the difference between your Buy/Sell rate and the Stop loss Order price, margin will be primarily based on this difference.
FeaturesMargin Plus is available for intraday trading in more than100 stocks on www.icicidirect.com site.Margin requirement could be as low as 5%. Helps to limit your loss through a Stop Loss Order. Open Margin Plus positions can be closed any time before the End of Settlement timings as specified by ICICIdirect.com Auto Square off process to help you close your open positions at the End of the Day. How to place a Margin Plus order?Allocate the funds for trading in Equity segment. Select the link "Margin Plus order" on the trading page. Select the Buy/Sell option and the Stock for trading. (Orders may be placed only during market hours)The first Buy/Sell order has to be a market order. At the time of placing this order, also select a cover Stop Loss Trigger Price (SLTP) order. Example of a Margin Plus order: If you place a buy order in Margin Plus for 100 shares of XYZ Co at market price, then your order will look like: Buy order at Rs.100 (got executed at Market price) for 100 shares. Cover order (Sell order) SLTP Rs.98. Limit Price (Rs.98 minus 5% of Rs.98) Rs.93. Where as, 5% is a minimum difference for the script as per Stock List. In this Scenario Margin Blocked per share will be: Rs.100 - Rs.93 = Rs.7.00
Hence, total margin blocked will be Rs.700 (Rs.7 * 100).
You have to square of your position by 2:45 p.m. Otherwise system places the square off order at market price.
Once you place the order, if you want to track your profit or loss you are making at that moment, you may check the same from "MarginPlus Position" link.
If you are in profits and if you want to square off your position, you have to select the "Modify" option, the square off order page opens and select the order type as "Market" and "Submit". Once you do the same the order would be executed at the current market price.
If you are going in losses, SLTP would be triggered once market price matches with the SLTP and you will be out of the market.
We like to inform you that there is an option called as BTST.
BTST means Buy Today Sell Tomorrow. The BTST is used only for selling the stocks. After purchasing the stocks, if you want to sell the stocks before they credit to your demat account, you go for BTST facility.
Incase you purchase some shares today and if you want to sell the shares tomorrow or day after tomorrow, you have to check whether that stock is having Buy Today and Sell Tomorrow (BTST) option or not. For crediting the shares into your account it takes Trading day T, T+1 and T+2 working days.
If you want to sell your scripts in BTST on T+1 or T+2 working day, you need to sell them from the "Security Projection" option which is in the Equity Trading page. If that script is under BTST you find a link called "BTST Sell" and you have to click that link and you will be getting a BTST Sell page from where you can place the order on T+1 or T+2 working day to sell the shares and this BTST facility is available only under NSE Exchange.
Generally, if you want to sell shares in BTST, you need to check whether the stock is listed under BTST segment or not. To check the same you need to follow the below mentioned procedure:
Visit our site www.icicidirect.com. Go to "Stock List" option. Give the Stock name in Stock option . Select the Exchange as NSE. Under Product drop down box, select BTST. Click "Go".Once you click, you will be able to know whether the share which you have given is listed under BTST or not.