Driver's query regarding MF's and overvaluation

A driver asked me if investing in mutual funds was a great way to make money, given that interest rates for government saving schemes were on the decline, after reading an article about them in
Ananda Vikatan.
I wonder if this is a classic pointer to the overvaluation of the markets or whether we should look out for a query of a chauffer in NY or London asking about the Indian markets, as it is the FII which are driving up valuations!

some investor conference presentations

some investor conference presenations are available here at Kotak Securities insitutional investor site. It does not require a log in, as of now but i couldn't find them on the company's retail site. Perhaps, they are aimed at giving institutions an edge! The presentations include a trend line extention presentation of Roopa Purushothaman, Associate economist, Goldman Sachs.

is your demat A/C safe?

The depository system in India, where investors can hold shares and other securities in electronic form, has been touted as great success. Sure, in number terms, that is the case, as there are 6 million accounts in one of the depositories (NSDL) today, and the system was launched only around 2000.
But have enough safeguards been put to ensure that the system cannot be manipulated? Unfortunately, that has not been the case. The path to high demeratialisation has been short circuited by involving stock brokers in the system. There is no great barrier to stop the stockbrokers who hold investor’s shares to transfer them to their own account. Many of broker-depository participants have closed down and some random cases of investor fraud have come to light especially in Kolkotta.
Imagine a situation, where a broker faces default. He could then dip into his investor accounts and make good his losses. He could supply the investor with fake statements, which is the easiest thing to do and provide some forged delivery instruction slips (similar to check leaves) to the depository. If the victim is an old person or financially illiterate he may never notice the fraud.
By allowing a broker, who has a tremendous conflict of interest in holding securities, to become a player in the system, the security of the entire stock market has been compromised.

Extremely bullish and bearish market will put the system at risk and it will be the time brokers will have the greatest temptation to dip into the brokers account, if they are on the verge of default due to wrong bets.

PS: The delivery instruction slips of even top depository participants have no security features on them. They could be easily duplicated by the local printer or a high quality photocopier!

Harshad Mehta's dream come true!

Harshad Mehta, the biggest bull ever in the India stock markets, had a vision of unemplyment being reduced drastically due to the employment opportunity offered by the Indian capital markets. He even made a presentation to the then RBI governor S Venkitaramanan to that effect and it is said that he was politely shown the door.
But now stock broking firm Indiabulls is helping make Harshad Mehta's unrealised dream a reality. "We are looking to hire about 1,500 management trainees (this year), all for sales and marketing. Last year, we had hired about 570 of them, of which 483 still work with us,"
says Gagan Banga, national sales and marketing head at Indiabulls in Business Standard.
Other broking firms are following suit. I think it is a whopping number by any stretch of imagination. Perhaps, broking firms can surpass IT in employment figures.
I can only hope that there is no correlation between the longevity of the greatest Indian bull and Indiabulls!

last leg of market rally?

In the final phase of the market rally, in the Indian markets the non banking finance company (NBFC) stocks rise, as market players buy into them as they struggle to justify valuations elsewhere. Goldman Sacs has bought into Reliance Capital, Cholamandalam finance is on the rise, First Leasing has spurted and a bevy of venture capitalists and investors have lined up to invest in the Shriram group.
This, i believe, means that the market will take a final heave before a significant fall.
ps: i do believe NBFC s, which is essentially a terminology for finance firms which donot accept demand deposits, have some great business and offer tremendous value. HDFC and Goldman Sacs are NBFCs! But for the Indian market to value them decently they have to attached a "bank" in their surname as Kotak mahindra did or see some further financial reform.

Headless IDBI headed for a merger

It is very interesting to find IDBI, which is headed for a merger with IDBI Bank, to be without a chairman and managing director during the period! I have always believed that the merger was like a sick old man sleeping with a virgin girl to get rid of his disease. It is an age old remedy which continues to be doled out, and the result is never different - Both end up dead.
In human anatomy, a badly wounded person say with bullet wounds, is often compared to a ballon with many pin pricks. The ballon can be kept inflated for very long period of time provided adequate air is carefully pumped in. Similarly, a human being bleeding from many gun shots can be kept alive for extended time by pumping in large quantities of blood. (When Indira Gandhi was shot, the doctors , it is said, did debate whether to keep her alive in a brain dead state for 10-20-30 years till a cure is found!).
In the world of finance too, an institution which is bleeding can be kepy alive by pumping in money and providing it young, strong institutions to partner in bed, oops sorry to merge. then survival can be ensured, atleast for long periods of time. That seems to be strategy at IDBI.

free market curber is new SEBI chief

Mr M Damodaran has been appointed the new SEBI chief. The new post he has wrangled is a tribute to his adroitness in navigationing the corridors of power rather than his financial or managerial ability. He, ofcourse, does have the luck of being at the right place . The turnaround of UTI was more than aided by the booming market, while his brief stint at IDBI was a pointer to his excellent ability to get his way in the finance ministry.
But really bothers me is that he is non believer in the free market system. Why else would he choose to merge IDBI Bank, which was in the private sector, with the goverment owned and decayed IDBI. In the US, market regulators have had a strong capital market backgroud with most of them from the stock brocking freternity. In India, i was hoping somebody who understands the system like RH Patil could be given the top job. I guess the Indian financial system has a really long way to go.

Chinese stock markets closed for a week!

The Chinese version of capitalism can be perplexing at times, to say the least. The Shanghai and Shenzhen Stock Exchanges, the most prominent symbols of a free market system, will open on Wed, Feb 16, after a week long holiday for the annual spring festival! I wonder how investors feel about the lack of liquidity during the period. Perhaps, they take consoliation from Warren Buffet, who says he does not care if the markets are closed for five years!

TV Interviews and stock price rise

I wonder if any B-school student is doing a correlation analysis study between stock price increases and TV interviews. The moment a CEO or an analyst talks about a stock, there is heightened activity and the scrip usually begins its northward march.
Take the case of Subex systems - one of its promoters sold a 14 % stake and the stock was under some selling pressure. As soon as the CEO Subash Menon began to explain the move on the NDTV profit, the stock began to shoot up. It vaulted from Rs 398 to 440.. The explaination may have satisfied a kindergarten student but the resultant move upwards was very curious.
Then, on CNBC an analyst put a strong buy out on Ennore Foundries, the stock shot up from Rs 200 to Rs 215.
With the growing power of the media, i wonder if "TV Interview analysis" will one day rank on par with fundamental and technical analysis!

market overvaluation and dud stocks

Is the Indian stock market overvalued? watch any business channel, and even the most conservative analyst will only say that the market is "fully priced". So, how does one go about figuring if "Mr Market" is in a very good mood and stocks have more than priced in their future earnings?
The broad market trades at a PE of 16 and earning growth is expected in to be in the region of 15-20%. The ensures a PEG ratio of 1 or less, which the bulls will argue is an indicator that the market is valued modestly.
I believe any acedemic argument on valuation can be easily countered by another explanation, which leads to no conclusion situation.
But how about tracking a stock, which you know for sure has no fundamental operations and marketing itself aggresively to the financial community. If the stock reaches absurd heights, then one can be sure of market overvaluation. In this bull run, i have chosen Teledata Informatics, an IT services company, which i believe has no fundamental operations and marketing itself very well, as an indicator. The stock was trading about Rs 13 a year ago, and has more than tripled to Rs 45. The co. heavily advertises about some govt. contracts it has won, which makes wonder about the margins! I would say Rs 45 is a ridiculous price to pay for the stock, which in turn reflects market overvaluation!
I wouldnt trust manic Mr Market with my cash now!

PE=4=EXP; PE=100=CHEAP!

Traditional price earning ratio tells us lower the PE ratio , cheaper the stock and vice versa.
But there are times, when the reverse applies. This is especially true in the cyclical world of commodities. When earning peak in these stocks, the PE is at a all time low and when there is a marginal profit the PE is at a all time high. So, when a sugar firm is going through sweet times, it trades at a PE of 4 or 5, and when it makes a marginal profit the PE can be 100 or 1000.
(just take an example of a sugar co. with a equity of Rs 10 crore and earning of Rs 40 crore during the peak year and a marginal profit of Rs 1 crore during the bottom of the cycle. See how the PE moves when the market price fall from Rs 200 to Rs 40)
So, to argue that a sugar or another commodity stock is cheap at a PE of 4 is erronous. But that what an analyst did on CNBC while marketing a sugar stock, i think balarampur chini, which he was ofcourse already holding. The sad thing is the analyst knew the truth of commodity PEs but chose to ignore it!

Olam International - An Indian export to the Singapore Exchange

Olam Intl, a global agri commodity sourcing firm, with strong Indian roots has recieved great response for its listing on the Singapore Exchange - the institutional portion of the float has been subscribed 16 times. and the retail part is yet to open. The firm set up by Sunny Verghese, and the Kewalram Chanrai Group in Nigeria, in 1989, has enjoyed tremedous growth and has become a global multinational in its field. It has largely chosen to bypass India expect for manpower requirement and operates out of Singapore for tax purposes. It is aggresive recruiter in top Indian B-schools and pays quite a lot. It would have been a great addition to the Indian capital markets but i am happy to see Nigeria exporting something other than scams and unrefined crude!

Buffet's wisdom from a student's eye

I came across a blog of a student's learnings from Warren Buffet's annual meet, after it featured in Whitney Tilson's investment newsletter.

The blog, really moved me by the simplicity and the depth of the message and reinforced my view that Buffet is a capitalistic philosopher rather than just a great investor.
It is certainly a "must look up".

Shanghai loss is Mumbai's gain

Various reasons have been attributed to the great run the Indian markets had on Jan 28 and 31. The market has gained about 100 points on the Nifty in the two days.

But one factor that seems to missed the radar of market analysts is the possibility of foriegn funds switching from China to India.

It does seem a rather stupid statement at first glance. After all the Chinese economy is booming and it seems the place to be and Jim Rogers has a Chinese nanny for his child , so he/or she can learn the language.

But take a look at this. Even as the Chinese economy expands by 9.5%, the Shanghai stock market closed at a six year low on Monday, Jan 31.

"Shanghai stock market dove below 1,200 points, closing Monday at 1,191.82, a six-year record low. Analysts ascribed the decline to the uncertainty and low sentiment around the coming week-long holiday." says a Chinese newspaper.

Why should the markets plunge to a new low when the economy is booming? Surely, a week-long holiday cant be the reason! Do the markets know something we dont.????
Is a great rush of fund from China to India in the offing? I dont have a clue, but would be uneasy about stocks pegged to the Chinese story!