Economix

Indian stock market - Up, up and away

2010-09-19T22:29:00.000-07:00

To start with let me introduce my friend's site here - www.deals22.com, which is more of a deals directory accumulating available deals. Check this for electronics, flights, clothes & apparels & more.

Amid all confusion, indian markets continue to climb up beyond logic. As the consumer psychology works, perhaps markets are destined to move a bit more before receding simply because small investors might start feeling cheated. In the last few weeks, mutual funds have been receiving redemption requests at 2X-3X of normal times. This suggests that small investors are cautious and are booking profits expecting markets to correct but if this doesn't happen, they might start flocking D-street again.

The same psyche also applies to FDI funds as they have a responsibility to their investors and they can't just sit on cash for very long.

Yummy southindian treat

2009-07-14T21:45:00.000-07:00

This weekend we had chance visit to CP and after a short but expensive shopping spree, my friend suggested we go to Sarvana bhavan, a restaurant famous for its southindian delicacies. For me this was a first time and being a big fan of Sagar Ratna chain, I was a little sceptical. But I must say that I loved the food, its definitely better than Sagar anyway.

Well this place is located on the Leo Tolostoy Marg near CP, just adjacent to the McDonalds. I was warned that there would 1/2 - 1 hr waiting in the evening but we were lucky to get inside in just 10 minutes. The place is pretty crowded for obvious reasons but is hygenic and the service is decent. The wait time outside is completely worth it and the idli's, the vada's, the uttapam's, the dosa's and the traditional southindian food are just mouthwatering. To top this, they also have a sweet shop where you can enjoy mysore Pak, an amazing delicacy.

Overall, a very nice place to enjoy authentic southindian food and a must visit restaurant for all those who love to succumb to the temptation.

Hangover! time to cheer

2009-07-08T22:40:00.000-07:00

With all the fun and excitement of shogi trip flushed out of my system by the monday blues, i was feeling slightly tired in the evening and was not in a mood for a movie. But some of my friends were going for this "Hangover" and i decided to join them anyway and boy, it was a good decision.

This is a seriously hilarious flick with no loose ends. The movie keeps you glued to your seat and is a laugh riot. The story revolves around 4 friends out in LA for a bachelor party. After a long, wild night, they wake up to find a real tiger in the toilet, a bed thrown out of the window, one of them married to a stripper and the groom missing.

The rest of the movie is a chase to find the groom and to iron out all the mischeaves of the night.
A thorughly enjoyable story that leaves you smiling all the way to your home.

Solace @ Shogi (Shimla)

2009-07-06T22:40:00.000-07:00

Delhi is one of the worst locations you could find yourself in if it is a weekend break you are contemplating. You can take any of the 6 arterial roads to get out of the city and ride in your boxy car for over 300 Km and find nothing. When I say nothing, I obviously mean nothing. I mean if you are one of those folks who visit relatives for weekend breaks, you might get lucky but if you are looking for a romantic, cool getaway, you are out of your luck.

But this weekend after a really long time, we came across a spot near shimla where you can be among the wilderness and can enjoy a cold beer without worrying about your boss, office or any of those other trivial things that make life dull.

Shogi is a small village, about 90 Km from Kalka on kalka-shimla highway. Best way to reach shogi from Delhi is to travel via howrah kalka mail that leaves delhi at 9 50 PM and reaches kalka early in the morning. From there you can take a cab or a shimla bound bus to reach shogi.

Shogi doesn't offer a lot of options for the stay but parkwood and oakwood are 2 of the better resorts. our stay at parkwood was very peaceful with great food, snacks and drinks. This resort offers fantastic views of the valley below and provides almost every amenity you could ask for, right from comfortable beds and modern bathrooms to running hot water.

On the activity side, shogi offers the following activities -
1. Take a day off to relax amid the lush green surroundings
2. Just sit on the hilltop with your friends and do what the french do best, "parler de tout et de rien"(to speak of everything and nothing)
3. Enjoy a cold beer as mentioned earlier on a moonlit night
4. In case you really get time to move beyond these obvious and very appealing activities, you can take an obstacle course or go for a hike in the hills

Overall shogi is one place that is close enough to delhi and that offers great views, amazing scenaries and wonderful service for a 2-3 day trip if you are looking to run away from city life.

Where is the stock market headed?

2009-06-24T02:58:00.001-07:00

So if you follow markets with a dream in your eyes, are your dreams going to come true in near future? Are markets really headed for the heights it achieved before this crash?

Well if you listen to all the stock advisers and the panel analysts then you will gather that by July 2010, markets will breach 25,000. :-)

But looking at the present earning rate of companies and their income statements, you can realize that most of the companies whose stock is trading at all time high are not really delivering on terra firma. Their profits are down, revenues have taken a hit and there is no real growth expected in the next 2-3 quarters. Then how come the stocks are at an all time high? P/E ratios have crossed 1000 mark for a few stocks. 1000, a P/E ratio of 1000 means that if the share of the company is available at 1000 bucks, it earns a profit of just 1. Normally a P/E between 5-20 is considered ok depending on the industry and the growth rate of business but 1000 P/E means you can go short on these companies with your eyes closed and your monitors on. Sooner or later, these companies are going to lose momentum and fall back sharply. Nothing and i repeat nothing can support such high P/E levels.

Beware of the stock tips that you recieve from your relatives, friends and TV analysts. Either the person providing the advice is not smart enough to understand the dynamics of market and is acting on tips himself or he has a hidden agenda involved.

Take a back seat, enquire about the fundamentals of the company, study the business model and then invest your hard earned money.

ROI under scanner

2009-06-19T04:49:00.001-07:00

Now lets assume that you have somehow reached a consensus and have finalized your business metric. Good now start tracking it. But as soon as you start getting the data, you realize that you are getting traffic from different sources. The money spent on each of the source is different and the tracked metric has a different value. In other words, each source has a different ROI.

The next buzzword is "optimization". You want to optimize the money spent on advertising and increase your ROI. For this you need to stop going to some sources and promote other sources till they saturate, but the problem is to know where to draw the line. What is the ROI, below which you don't want to advertise and above which you want to promote?

It is a general practice to use average as the beacon below which you press the panic button. Several businesses use average as the sacred no. below which to demote and above which to promote. But is average really a good number? Let me use an adage, I heard from a statistics professor of mine - "Average is a bad thing, remember the guy who drowned in a river that on average was only 4 feet deep."

The point is that average can be skewed BIG TIME due to outliers. Lets take an example. If you are riding a bus with commoners, the average of the bus passengers could be a few thousand Rs. a month but if at the next stop, the Ambani Duo board the bus for some unexplained reason, the average salary of the bus passengers can go through the roof. This is because the 2 newcomers earn more than few crores every month. These passengers are considered outliers and they skew the averages from 1000's to 100000's.

A better option is to keep an eye on the median, mode and average before deciding where to draw the line. You can also use frequency table in case you are stats savvy and that will give you a much better perspective.

Marketing Mirage

2009-06-01T05:31:00.000-07:00

Marketing is a very interesting domain. You know, you hardly ever get the credit for what you achieve but you get loads of s*** when things go wrong even without your help. ;-)

Presently my main focus is online marketing and I am glad that it offers quick analysis of achievement or performance improvement. But with experience and after several discussions, I have come to realize that the metric on which efficacy of online advertising should measured is elusive and always under argument.

Lets see, if we have a site that sells sports equipment, should the online adv. be measured on the traffic coming to the site or on leads generated through online adv. or on the online sales through traffic source. This is a case where you can atleast target a particular segment and maybe show your ads to relevant clients.

First, suppose I choose traffic to the site as the metric, then problem could be that the SEM manager starts driving irrelevant traffic to the site and the overall sales remain stagnant but the cost of marketing goes up. ---> ROI moves down, so not a good metric.
* traffic to site could be a good metric for SEO campaigns but not SEM campaigns

Now lets select leads generated as the metric. This means that no. of forms filled on site through online traffic is the new metric. This metric could be a good metric if your conversion rate of leads is stable and not very random. But this requires cooperation from marketing, design and tech teams as various forms in different colors, formats, position and length have to be tried on before settling for the best.
---> ROI might move up inc ase of stable conv. rate, could be good metric.

Now consider the online sales as the metric. This is the best metric business wise, but could be difficult to target. You need to bring in people who will buy from your store. How do you target them? You can use SEM account to get you focused traffic but the intention to buy is not conveyed in the searches. This only gives a vague parameter on which to improve performance.
---> could be a great metric, but difficult to employ and optimize.

PLR, SLR, CRR, repo rates cut - is it really worth it for common man?

2008-11-07T21:03:00.000-08:00

The speculation on rate cuts has been all over the media, be it newspapers, TV or magazines. Everyone is hoping to get some relief from RBI and finance ministry in form of interest rate cuts. But do these rate cuts really change much for the common man on street? The answer is indirectly, of course, it affects the common man. The corporates can borrow at lower rates, can get the credit to boost their production or in most cases for the operating cash requirements easily. The banks get the liquidity more easily and can cope with redemption's happening due to insecurity in market. It also helps in controlling the market crash a bit. All these things affect the common man here or there in a touch and go manner but not directly.

In real life, the rate cuts make small dents in the wall that separates common man from larger dreams. The dream of owning a house, the dream of graduating from a scooter to a car and so on.
These rate cuts can make the loan EMI smaller but only by a small percentage. For 75 basis point cut or 0.75 % cut, a 20 year, 50 lakh loan EMI comes down from 51,000 to 49,500. I mean, its still unaffordable for most of the people and if you have gone shopping inIndian real estate market then you must be aware that 50 lakhs may or maynot get even a small house.

Perhaps the need of the hour is to promote more affordable housing, instead of promoting all residential projects. Most of the builders are investing in lavish, lifestyle apartments and focusing on affordable housing. These builders also enjoy the benefits like subsidized lands in certain cases but these benefits never get passed onto the public.

Inflation defies all odds

2008-11-06T20:12:00.000-08:00

This weeks inflation numbers confirm the doubts I posted in my last entry. With the cheaper credit being available in markets, inflation figures have started moving north again. And now as the PLR is being cut by PSU banks to make loans cheaper, it will make sure that inflation stays put.

On the other hand, the petrol and diesel prices have been reduced to 45 % of what they were 3-4 months back but there has not been any cut in Indian markets. Now, if you pay a little attention you will see that trucks that carry all the common goods run on fuel. And if the fuel prices are high then goods prices are going to be high as well because the transportation costs are high and these will be passed onto the consumers.

Citing this as a simple example, does it not make sense to cut the fuel prices to relax the inflation?
But as always Indian economy follows a lag routine.

Cut the rates dude, says the PM and FM

2008-11-05T09:39:00.000-08:00

The new rate cut policy for RBI is expected to do wonders in Indian market by making sure credit is available easily. But tell me is'nt that the root cause for inflation. But they say, that beast has been tamed for now. Inflation is creeping down slowly as demand reduces in markets and commodity prices crashed. But by relaxing bank norms and slashing CRR and SLR, is'nt RBI creating a favorable scenario for Indian banking crisis.

Just to explain,
CRR is cash reserve ratio - the % of total money that banks have to keep with RBI. If the CRR is higher, banks have less money to lend and viceversa.

SLR is statutory liquidity ratio - it is the % of money banks have to invest in government securities. Again, the higher SLR is, lower is the amount available for lending and viceversa.

Fall of the sub-prime market - 2

2008-11-05T09:19:00.000-08:00

I have got unfinished business.

So, I am back to finish the story of the fall.
Since 2000, the property prices in US were going up due to increased demand and the interest rates were going south. Together these 2 factors made sure that people invested even more to make a quick buck.

In 2004, as fed started raising interest rates in US to counter the inflation and control the economy, the mortgage rate also started rising. Increasing interest rates and stabilizing prices in home markets, slowly made people realize that perhaps they will not make as much money as they expected from their investments in property and some of these people started selling, putting more pressure on prices.

Also higher interest rates made sure that the credit unworthy people default due to higher installments. So all in all situation was getting similar to what we have in Indian markets now. Indian property market has seen tremendous growth in past few years and now with higher interest rates and credit crunch, we are preparing for a fall in prices.

So in brief, prices started going down causing foreclosures (where banks come and claim your house against default of loan). Banks were happy as they thought the houses will pay for the loans but as situation worsened prices dropped even more and banks could not find buyers for these properties. The spiral downwards had begun.

Now lets look into the payment for those institutions that had invested in CDO's. Remember, the regular payment to these institutions was to be sourced for installments against the loans. Now after defaults people stopped making installments and as banks could not sell and make payments, these institutions started claiming their insurances or CDS. This lead to further pressure on insurance companies and on banks causing them to go bankrupt.

AIG and Lehmann are just 2 examples. We will be talking on this insurance game later on as well. But well that perhaps is an abrupt ending for this post.

Finally, the fall of sub-prime market -1

2008-10-29T21:58:00.000-07:00

As I discussed in previous blogs , due to the lowering of the interest rates and easing of loan formalities banks had disbursed immense loans to non-credit worthy folks. This extra special effort to increase the credit circle had enhanced their probability of taking a fall exponentially.

After 2004, fed started raising the interest rates again slowly. this was a measure to control inflation and to reduce the trade deficit. Trade deficit refers to the difference in the earning via exports and payments via imports. So if a country is exporting more than it imports then the trade deficit is negative and viceversa. Common sense tells us that it makes more sense to have a negative trade deficit as it allows a country to earn.

But if the interest rates are low, then it makes sense for people to borrow and buy goods. And if by chance the currency is strong ie. people can buy more for $1 then it makes even more sense to buy on credit. This in-turn puts pressure on economy.

With china refusing to float its currency and US interest rates at all time low in 2003-4, the consumption was at a ll time high and the national saving rate for US came down to 1%. We will speak more about the US saving rate later on but suffice it will to say that US citizens were spending more than they could afford. And to counter this situation, Fed was raising rates.
Whew.

Happy Diwali to all

2008-10-28T05:57:00.001-07:00

Wish you all a happy and prosperous Diwali.
May all your dreams come true this festive season.

Repo rate - housing loan rate relation (interest rate)

2008-10-26T07:28:00.000-07:00

The recent market crash has left people high and dry. Banks have been facing liquidity crisis. Liquidity crisis is a phenomenon where banks or individuals do not have enough cash to honor their debt obligations. To counter this situation RBI has opted for Repo rate cut by 1% to induce and inject liquidity into the system.

Repo rate is the rate at which banks and financial institutions can borrow from RBI for short durations. The duration can vary between overnight borrowing to 1 week. The lower the repo rate, the cheaper is the fund availability to the banks. Reduction of repo rate allows banks to borrow cash from RBI at a lower rate to meet their obligations.

Whether this rate cut leads to reduction in housing loan rates or PLR remains to be seen. Usually, repo rate cuts translate into reduction of interest rates and housing loan rates. This is simply a result of cheaper availability of funds to banks. But since the repo rate ensures short duration funds to the banks whereas the loans are long term, banks need confidence measures from RBI that the repo rate will remian same for some time. This then allows banks to work out their short term borrowing against long term lending.

CDO's and CDS's - The keywords

2008-10-23T21:33:00.000-07:00

It is interesting that 2 keywords which form the center of all the economic meltdown, remain a mystery to anyone not involved in investment banking. In this post, I will try to explain not only the meaning but also the functioning of these keywords in relation to the sub-prime mess.

CDO and CDS are the two instruments or vehicles created by investment banks to lower the risks involved in sub-prime lending. As the markets started to crack during the dotcom bust in 2000-01, people lost trust in the markets and started hoarding the money. As a result,Liquidity (the amount of money available in markets) started drying up which further pushed the markets down. if the markets are in bad condition then the fund flows to safe deposits with banks and government securities as they offer lower but safer returns. But as people start to save, they reduce their consumption putting pressure on industries and economy.

Reproduced with the permission of Mortgage-X.com

To counter this phenomenon, US government started reducing deposit rates and interest rates to lure people to borrow and consume more. Over a period of 3 years interest rates were reduced by 50%. This action boosted people to invest in homes and borrow heavily. The government also lowered the discretion for loan borrowing and allowed loans to be given without thorough paper work and checks. Here we take a break to understand the concept of credit score.

Credit Score -

Usually the credit worthiness of an individual is measured on a credit score. This credit score evolves out of payment history of the individual. 800 is the perfect score and 620 is the cutoff score for the loans which means anyone with a scoreless than 620 should not be granted loan.

And we are back -

To make maximum profits banks started lending at breakneck speed and soon were offering loans even to jobless people but at a slightly higher interest rate (usually +2%) to counter for their unemployment. These loans came to be known as Sub-prime loans and were offered to people with credit score of less than 620. On the hindsight, one can argue that sub-prime loans were much more riskier than Prime loans but at that time it seemed to be in vogue and the best idea ever devised.

Now, the banks and institutions making sub-prime loans were commercial banks and the mortgage institutions and investment banks were not in the picture. But the greedy investment banks can not stay away from lucrative opportunity for long. But they can not directly lend to the individuals so they had to create an instrument to get involved.

Voila, I-banks created CDO's (Collaterized debt obligation). They argued that if bank gives a sub-prime loan then there is small chance that the individual will default. But if bank gives sub-prime loans to 10,000 individuals then the risk of default reduces as not all individuals will default at the same time. This model reduces the chances of default and makes the loans safer. Using this model, I-banks bought mortgages and created pools of individual mortgages into CDO's and started selling pieces of these CDO's to financial institutions. These institutions received the installment payments from loan bearers in return and the rate of return was higher than the market. Since the CDO's were covered by properties and default chances were very small, these were granted AAA rating by Moody's and other rating organizations. AAA is the best rating for any bond in US.

So, the I-banks took the individual sub-prime loans off the balance sheet of mortgage companies and commercial lenders but again sold pieces of CDO's back to these banks. Uptill this point, I-banks were minting money without actually getting their hands dirty. They were buying a product from market, modifying it and selling it back to the market. They also retained some of these CDO's with them for investment.

But a wise ass went a step further. He thought that since their is a infinitesimal chance of CDO defaulting, what if we can start selling insurance against these CDO defaults. Since CDO's will noit default all the premium we earn will be profit. The idea seemed amazing and I-banks got busy creating a new instrument for this purpose. They came out with CDS (Credit default swap). This is an instrument that gurantees the buyer insurance against CDO default. So, I-banks started selling CDO's to the financial organizations and then also started insuring these CDO's.

Sub-Prime on the lighter side

2008-10-23T05:37:00.001-07:00

Interesting Slide show on how subprime mess came around

Subprime

View SlideShare presentation or Upload your own.

SlideShare Link

On the top of the world

2008-10-22T03:54:00.000-07:00

Year 2000-01
The US stock index, NASDAQ peaked on March 10, 2000 to 5048 points, more than double its value just a year before. Few reasons contributing to the severe market fall after March 10 were -

A multimillion dollar sell order was placed on several large internet companies like IBM, Dell, Cisco on March 13 (Monday). People suggest that it was a coincidence but one can never be sure. The markets tanked 4% on opening to 4879, the largest pre-market fall in an year.
The second major reason could be sited as the declaration by the Federal court that Microsoft was indeed a monopoly. This shook the confidence people had in software companies.
The third reason was reduced expenditure by US companies as the Y2K issue got resolved for most of the companies by the start of year 2000. This caused a drop in revenue for a lot of software companies.

All these reasons combined together to bring around 9% drop in NASDAQ in 6 days and NASDAQ closed at 4580 on March 15. By 2001, the markets fell in full flow and several companies burnt their venture capital never actually recording any profit. This crash caused individual investors to flee the markets with their investments, looking for a better investment opprtunity.

Begining of the end

2008-10-21T19:31:00.000-07:00

Year 1998-99
US stock market was thriving on the dotcom boom. Everyday new internet companies were being floated as it was the "in thing". The markets loved these companies and their stock soared the day they listed on the bourses (Stock exchange) and within a few days the stock prices defied the Mt. Everest. There was no particular asset backing the mind boggling stock price and the business was based on immense growth and acquiring customers at the expense of making losses. This new business trend was christened the new economic order of the new millennium.

Traditionally, a stock rises in value as the company experiences growth and increases its cashflow and assets. But in internet domain, company had no assets and were not making profit but their stocks were being sold like hot cake as they expected to mint money later on by monetizing their customer base. However, no one had the faintest notion about how that monetizing will happen and how the internet companies will make the promised fortunes.

Companies like Enron took benefit of this situation and created new business domains. Enron started trading energy on exchanges and introduced a new concept of accounting, "Mark to Market". I will discuss the various accounting practices in a separate post but suffice it will to say that Enron planned to count its chicken even before the eggs were laid. The basic idea of this new accounting practice was to project future revenues and record them immediately. This promised immense growth to Enron even before their projects like Dabhol in India which was never even completed. Enron also created artificial demand by curbing supply of electricity in California and combined with their auditing partner, Arthur Anderson, which authorised all their practices, they kept on playing with the markets.

Humble Beginings

2008-10-21T09:20:00.000-07:00

Everyday, as I watch the money markets tumble and scared investors discussing the future of their investments, I think. I think about the story preceding this mess, the unforeseen tragedy of events and russian roulette of greed. I think about the long term effects of this crisis and whether it will affect the Indian growth story. I also think about the man on street who invested in share markets and who now grapples with bits and pieces of news and yearns to make the head and tail of the situation.

TV programs talk about the devaluation of Rupee against the Dollar, the price correction in commodity markets, speculation based oil price volatility, CRR cuts and repo rate cuts but none of this explains the true situation to a common man. Nobody explains how and why jobs are being slashed across the industry and why in-spite of all efforts everyday prices for household goods are rising. Common man deserves to understand the effects of so called "policy changes" on his daily life.

Through this blog, I try to explain the economic turmoil and the day to day changes in simple language. Mind you, I am not an expert. But my interest in economics and the fact that I was pursuing my MBA when the US housing bubble burst pushed me to delve deeper. The topic intrigued me and I worked on a paper on "Sub-prime lending", thereby gathering information and understanding of the underlying issues.