One more bites the dust. Root cause is the same . The real estate bubble in US and the sub prime mess. WaMu as they call it had deposits of $ 307 Bn and several Billion USD junk assets.
JP Morgan is planning to buy the Company after Federal Bank (Fed)took over the Bank and its assets forcibly. This is supposed to be the 7 th largest bank in USA. To get a perspective, this is like one of our large PSU Banks in India, may be a Corporation Bank or Union Bank or something going down.Just imagine the kind of commotion that will cause.
USA is a country which has the knack of having such major scams inspite of all this talk of great regulations , but they also seem to have the resilience to deal with it with a lot less damage than others would do. No running away from the fact that the damage is extensive, but only thing is they do damage control better than others. That is no consolation. One can always ask, as to why they let things get to that stage.
It appears the first ball park figure of overall loss of around $ 500 bn is right or atleast the figure will be therabouts.
While a lot of shares in the Indian markets are hitting their lows of last one year and in some cases last 2-3 years, quite a lot of shares are holding up also. I don't see a great fall in the US Markets. It has fallen from 13 k or therabouts to around 11k. One would have expected worse fall. You never know, there can be more fall.
But on the Indian markets, one finds that a number of good shares have come down substantially.
Almost everybody knows that this is not going to last forever. Inspite of that, how many have the guts to go out and buy shares now. I think the people who brave it out are in for a windfall at the end of 2 years may be.
Till date, I have not been one of the brave ones, partly because one wants to pay off loan committments and partly because one is also not certain.
One can be very objective when giving advise . I just wish, I can be as detached as I am in taking my own advise as I am when giving advise. I would most probably stand to gain .
Market Cap of good companies are selling at below their book value and quite a few are selling at 1/3 rd their topline and at PE s of 4-5
Of course , PE s can change quickly if profits come down next quarter, but will it be an everlasting phenomenon. Definitely not .
What would be the best strategy. Best would be to invest in good shares and not in risky ones since even the good ones are selling at attractive prices .
Oil marketing Companies are a real wonder. The market cap is all around 7000 Crs or therabouts both HPCL and BPCL. The facilities ,refining etc, land , etc would be worth 4-5 times that
Govt's bull headedness in making them bear the subsidy burden is keeping them low.
They will be worth atleast 6-7 times the current market value if the market is freed or atleast the Marketing Companies are not asked to bear the burden.
Friday, September 26, 2008
Tuesday, September 23, 2008
Indian temples,Indian small towns
It is always a great pleasure getting in to History , going around places in India ( not that I have done much ), especially the temples, after all India of the past, social activities were centred around the temple.Spending time inside a large temple especially the ones down south is almost therapeutic.
Most fascinating thing is that most of the reasearch on India's past seems to have been done by the Europeans. Just have a look at the programmes on Discovery.
One of course has this bias, having spent the earliest part of one's life in a small temple town in south India.
If one had had a nice childhood with good things to remember, you naturally have good memories of the place and everything about the place is good.
The big courtyards in the temple, the high ceilings inside the temple, the big mantaps , especially the peripheral ones which are not that much frequented by the tourists are all great, serene, peaceful .
Once you get in to that, you get in to a state where you don't want things to change. You want that to be never ending . Some kind of eternity. I don't have a great felicity with words and may be not quite able to capture the feeling in words.
Such small temple towns are almost ambitionless. People move around , carry out their daily chores which are quite simple, go to the temple as a matter of daily routine. Do something for a living but life is woven around simple things.
The general millieu makes one ambitionless, but one questions oneself as to what is the big deal. No ambition, so be it ? Ambition for what ? Fame, money and power ?
For an individual this is okay, but for a society to move forward , of course you need ambition.
There are not too many great leaders people who move things without the prospect of making a name for themselves.Benefit to the society is a major by product , in fact it is bigger than the the intended product , that is fame and name for oneself.
From a societal point of view, ambition does help. I have always admired industrialists , great educationists ,builders of instituitions and organisations.
Pursuit of searching for truth and men of science whose only motivation is that , are a minority.
Their findings have possibly benefited society to a great extent. But for conversion of these people's ideas in to commercial reality you need selfish and ambitious people and leaders who are looking for riches and fame etc
Most fascinating thing is that most of the reasearch on India's past seems to have been done by the Europeans. Just have a look at the programmes on Discovery.
One of course has this bias, having spent the earliest part of one's life in a small temple town in south India.
If one had had a nice childhood with good things to remember, you naturally have good memories of the place and everything about the place is good.
The big courtyards in the temple, the high ceilings inside the temple, the big mantaps , especially the peripheral ones which are not that much frequented by the tourists are all great, serene, peaceful .
Once you get in to that, you get in to a state where you don't want things to change. You want that to be never ending . Some kind of eternity. I don't have a great felicity with words and may be not quite able to capture the feeling in words.
Such small temple towns are almost ambitionless. People move around , carry out their daily chores which are quite simple, go to the temple as a matter of daily routine. Do something for a living but life is woven around simple things.
The general millieu makes one ambitionless, but one questions oneself as to what is the big deal. No ambition, so be it ? Ambition for what ? Fame, money and power ?
For an individual this is okay, but for a society to move forward , of course you need ambition.
There are not too many great leaders people who move things without the prospect of making a name for themselves.Benefit to the society is a major by product , in fact it is bigger than the the intended product , that is fame and name for oneself.
From a societal point of view, ambition does help. I have always admired industrialists , great educationists ,builders of instituitions and organisations.
Pursuit of searching for truth and men of science whose only motivation is that , are a minority.
Their findings have possibly benefited society to a great extent. But for conversion of these people's ideas in to commercial reality you need selfish and ambitious people and leaders who are looking for riches and fame etc
Friday, September 19, 2008
Good times and bad times, never last forever- Markets
Good times do not last all through and by the same token nor do bad times last forever.
History has a strange way of bringing us back to our feet. In good times, a peek in to the past, tells us that good times are not going to last forever.It helps bring some balance in to our actions. It could be continuous buying in anticipation of the stocks rising on a continuous basis.
History has a strange way of bringing us back to our feet. In good times, a peek in to the past, tells us that good times are not going to last forever.It helps bring some balance in to our actions. It could be continuous buying in anticipation of the stocks rising on a continuous basis.
As is the case , generally, people go long in a bull market. Dud shares also go up along with the good ones. Dud shares , because of the low base prices , promise a much higher rise . Most fall for that. In a bull market which goes bust, one generally finds that there are more people loosing money than the numbers who have made money.Total money gained should equal total money lost in a short period, but the no of people who have gained are much less ( per capita money made is more ) compared to the number of people who lose money ( per capita loss is less ).
Still the people who lose are the ones who are least prepared and least capable of taking that kind of loss .
Reverse is true in a bear market. Even stars get hammered. Very few have the guts to pick even good shares ( including yours truly). Nobody knwos the bottom. There are two factors which play out.
One is the desire to buy at the lowest price, nobody wants to be told that that they could have bought something at a lower price than what they have bought it for
Second is fear. When very few are buying shares, going against the tide is diificult. The comfort of a crowd and being part of several is not there. This requires a lot of courage.
The shares are bound to go up after a few months or a few years.
I am directing this write up only at long /medium term buyers. Short term is a completely different game ( if some one happens to drop in)
In a bear market majority of the crowd sell out before the market bottoms out. In this case also , the number of sellers are generally more than the number of buyers.
Rest in next or sometime later
Wednesday, September 17, 2008
Financial derivatives muddle
To most, these words, Financial derivative is associated with High Finance, meaning something very few understand. The people associated are viewed with awe. These people are paid high salaries. Show huge profits, the organisations are high profit earners and they go bust once in 10-20 years and bring down a lot of people once in 30-40 years. The experts who were running the show , atleast the top brass walk away with huge money . The whole exercise is front ended, first profits, then tank and run away. It is not that this is intentionally done. The business model ( see earlier post) is skewed in favour of initial success ( apparent not real) and later burst.
What is in it apart from the incentive to take high risks . Direct invetsments are very few. The investment is an investment on an investment on an investment of ......... It is derived several several setps down so much so that the original invetsment is forgottten or hardly undertsood.
If A is dependent on B which is dependent on C , which is dependent on D and so on, the investor in A will hardly get down to D to assess the true worth of D before investing in A. He will possible try , but visibility gets poorer and poorer.
May be I will give an example in a future post to bring out the point. I am sure one will get the drift of the argument
You can go back to Long Term capital Management ( LTCM ) which was promoted by 2 Nobel Laureates in Economics , Scholes and Merton amongst others.
The business model was to borrow heavily and use the money to bet on arbitrage opportunities. In simple terms if A has a certain definite relationship to B and due to imperfect market conditions at play, the relationship gets skewed in the short term, bet on the market and put your money till the relationship is restored.
Theoretically it is very good and one has unlimited time and money ,one can bet this way and make money. The limiting factor is that sometimes such imperfect conditions prevail any length of time and money to support that and the time to support that may be exhausted. One may have to square off the positions.
This was what happened in LTCM. They bet on Interest arbitrage and currency arbitrage and in a lot of cases a combination of both.
Just to illustrate the point. let us assume that I keep buying share A or Commodity X in anticipation of a price increase . Let us also assume that I have borrowed the money for a short time. If I have bought at Rs 100 and can hold on to a maximum period of 1 month. At the end of 1 month, I have to sell the share to realise the money and pay back my loan. The share price could have come down to Rs 95. This means that I end up losing money. If I had indefinite time limit, I can carry on till the price reaches a level where I could make profit. This could be my conviction and could turn out to be true.
They were so highly leveraged that they not only lost their own Capital but also lost their neighbour's and neighbour's neighbour's
What is in it apart from the incentive to take high risks . Direct invetsments are very few. The investment is an investment on an investment on an investment of ......... It is derived several several setps down so much so that the original invetsment is forgottten or hardly undertsood.
If A is dependent on B which is dependent on C , which is dependent on D and so on, the investor in A will hardly get down to D to assess the true worth of D before investing in A. He will possible try , but visibility gets poorer and poorer.
May be I will give an example in a future post to bring out the point. I am sure one will get the drift of the argument
You can go back to Long Term capital Management ( LTCM ) which was promoted by 2 Nobel Laureates in Economics , Scholes and Merton amongst others.
The business model was to borrow heavily and use the money to bet on arbitrage opportunities. In simple terms if A has a certain definite relationship to B and due to imperfect market conditions at play, the relationship gets skewed in the short term, bet on the market and put your money till the relationship is restored.
Theoretically it is very good and one has unlimited time and money ,one can bet this way and make money. The limiting factor is that sometimes such imperfect conditions prevail any length of time and money to support that and the time to support that may be exhausted. One may have to square off the positions.
This was what happened in LTCM. They bet on Interest arbitrage and currency arbitrage and in a lot of cases a combination of both.
Just to illustrate the point. let us assume that I keep buying share A or Commodity X in anticipation of a price increase . Let us also assume that I have borrowed the money for a short time. If I have bought at Rs 100 and can hold on to a maximum period of 1 month. At the end of 1 month, I have to sell the share to realise the money and pay back my loan. The share price could have come down to Rs 95. This means that I end up losing money. If I had indefinite time limit, I can carry on till the price reaches a level where I could make profit. This could be my conviction and could turn out to be true.
They were so highly leveraged that they not only lost their own Capital but also lost their neighbour's and neighbour's neighbour's
Business Model of Investment bankers
Read an interesting piece by TT Rammohan on the flawed business model of the Investment bankers.
Three out of the five have folded up or sold out
Bear sterns
Merryl Lynch
Lehmann Bros
Morgan Stanley ( still alive and kicking )
Goldman Sachs ( still alive )
He makes a forceful point as to how the model is skewed towards high risk. Employees have a incentive to take high risk , show money in the short term, make their bonuses and scoot off
If there had been an investment forthe medium or long term, by the time the true colors of the Investment shows off, the employee would have eaten up his bonus or in a lot of cases moved on
There is no carry over of Bonus to offset against possible negative bomus in future .
I think the genesis was Sub prime in the present instance. One would think that this is the last leg. Indian markets can possibly go down to 9000. Of course I am no expert. Only thing I can see is that there are quite a lot of shares going at theire three year lows. Market Caps of a quite a few good companies are abysmally low. As is the general case, in a bull market duds also get overpriced and in a bear market, even stars get underpriced.
Unfortunately, I don't have surplus money to invest. Have to sit on existing investments and hops things will turn around
They are all down in the dumps.
Three out of the five have folded up or sold out
Bear sterns
Merryl Lynch
Lehmann Bros
Morgan Stanley ( still alive and kicking )
Goldman Sachs ( still alive )
He makes a forceful point as to how the model is skewed towards high risk. Employees have a incentive to take high risk , show money in the short term, make their bonuses and scoot off
If there had been an investment forthe medium or long term, by the time the true colors of the Investment shows off, the employee would have eaten up his bonus or in a lot of cases moved on
There is no carry over of Bonus to offset against possible negative bomus in future .
I think the genesis was Sub prime in the present instance. One would think that this is the last leg. Indian markets can possibly go down to 9000. Of course I am no expert. Only thing I can see is that there are quite a lot of shares going at theire three year lows. Market Caps of a quite a few good companies are abysmally low. As is the general case, in a bull market duds also get overpriced and in a bear market, even stars get underpriced.
Unfortunately, I don't have surplus money to invest. Have to sit on existing investments and hops things will turn around
They are all down in the dumps.
Monday, September 15, 2008
Oh mann,financial markets lynched
Quite dramatic, Lehmann Bros filing for Bankruptcy, Merryl Lynch being bought over by Bank of America and AIG ( American International Group -AIG ) seeking some $ 40 Bn assistance form the Govrenment
Dow went down by 500 points , around 4.5 %. On the brighter side, crude pries have cooled off to a saner $ 93 , USD has been appreciating against all currencies
US Financial markets regulatory authorities are supposed to be the most organised and one of the best. Notwithstanding that, most of the large scale financial disasters keep happening without apparent warning in the US Markets
The recent one , of course appears to be the delayed fallout of Sub prime crisis. Merryl Lynch in fact was one of the first to come out with that , a few months back. Lehmann was a bit of a surprise.
Sad part is, that each time this kind of thing happens in the US Markets, it takes a huge personal toll, in terms of people losing their savings, their pension plans, people losing jobs in plenty
In India, atleast , we still are not supposed to invest the PF ( Provident fund which is the equivalent of pension in US ) in the stock markets. While the returns have been depressed, it atleast did not shock people on the verge of retirement. If and when the Govt gives the go ahead to invest in stock markets, they should have strict norms and also , some part of it should be to towards some kind of an Insurance to prevent erosion of Capital .
I am not sure how the Govt will handle this .
On a different but slightly related topic, now that Crude has slipped down, most of the so called experts have started predicting $ 80 per barrel. Similar thing is happening with INR USD
When USD was going down to INR 40, experts predicted INR 35, now that the trend has reversed and the USD is ruling at INR 45, experts will start predicting INR 50
Dow went down by 500 points , around 4.5 %. On the brighter side, crude pries have cooled off to a saner $ 93 , USD has been appreciating against all currencies
US Financial markets regulatory authorities are supposed to be the most organised and one of the best. Notwithstanding that, most of the large scale financial disasters keep happening without apparent warning in the US Markets
The recent one , of course appears to be the delayed fallout of Sub prime crisis. Merryl Lynch in fact was one of the first to come out with that , a few months back. Lehmann was a bit of a surprise.
Sad part is, that each time this kind of thing happens in the US Markets, it takes a huge personal toll, in terms of people losing their savings, their pension plans, people losing jobs in plenty
In India, atleast , we still are not supposed to invest the PF ( Provident fund which is the equivalent of pension in US ) in the stock markets. While the returns have been depressed, it atleast did not shock people on the verge of retirement. If and when the Govt gives the go ahead to invest in stock markets, they should have strict norms and also , some part of it should be to towards some kind of an Insurance to prevent erosion of Capital .
I am not sure how the Govt will handle this .
On a different but slightly related topic, now that Crude has slipped down, most of the so called experts have started predicting $ 80 per barrel. Similar thing is happening with INR USD
When USD was going down to INR 40, experts predicted INR 35, now that the trend has reversed and the USD is ruling at INR 45, experts will start predicting INR 50
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