The Supreme Court has cancelled 122 licenses issued by then telecom minister A Raja to telecom companies, saying that they were granted in an arbitrary and unconstitutional manner. Raja had, in 2008, granted spectrum licenses to many companies at a price of Rs. 9,000 cr. which was strangely much lower than the 3G auctions which fetched 69,000 cr for a much smaller number of licenses. Some of these companies turned around and sold stake to foreign companies at a much much higher valuation, meaning that the spectrum had been underpriced, and the process was manipulated so that other parties don’t bid.

The losers are Uninor (Unitech + Norway’s Telenor), Loop Tele, Sistema Shyam (Shyam Tele + Sistema), Etisalat DB (Swan tele + Dubai’s Etisalat), S-Tel, Videocon, the Tata Docomo piece and (some) Idea.

Of the newer players, the bulk of the subscribers are with Uninor.

These guys, as a whole, don’t have a lot of subscribers. Only 66 million (6.6 crore) out of total of 89.3 crore subscribers are with the new fellows – though honestly I don’t have bifurcated figures of Tata Docomo versus Tata’s other services.

These licenses will be auctioned. We don’t know when, how or how much. The court has said four months – within which time the current licensees can continue to operate.

My Notes

• The govt must be thanking their stars – an auction means money for financing what seems to be a horrendous fiscal deficit. If so, they’ll auction the spectrum before March (or if not, it’s something worthwhile next year).
• There’s a large ecosystem that the licensees had created – from hiring people to buying equipment to taking debt to working with partners like call centers and data providers. This ecosystem will suffer, or at least stay in limbo.
• Banks have talked a little about their exposure, which they say is not significant. But I don’t think they currently have an idea of how much they are exposed to. The domino effects will ensure there are bits of bad news on a regular basis in the next few months.
• The uncertainty may cause certain users to attempt to move, but I honestly doubt that’s an issue. If you were a Uninor prepaid subscriber, you might not explicitly move, you’ll just let your currency expire and buy another sim from someone else.
• Most of these subscriber numbers are overreported anyway. Do you really believe, honestly, that India has 89 crore mobile connections currently active? Of a population of 120 crore, where a good number are non mobile wielding children, others live in areas too remote for cellphone coverage, and only a tiny percentage has more than one mobile?
• Is this good for Airtel or Idea? Well, to be honest, when there are auctions, there will be more players coming in and they will have the supreme court sanction that their entry is clean. Airtel has a murky past as well, when they got spectrum in a non-auction method – if someone goes to court, even that spectrum may be deemed to have been underpriced and may go to auction. There is no clarity; and the guys that are “clean” will have a slight advantage. I don’t think the advantage is so much, even if it’s temporary.
• This is not really about auctions versus first come first serve. That would be too silly. The point is that there were bribes given to subvert the specific process that was used to get spectrum, by the parties involved. So they suffer. It is entirely likely that earlier granted spectrum was also mired in bribery, and if that is found, then those licenses will also be cancelled. The court has made it fairly clear that it is this particular case that is a bother, and that will explain why their action seems so harsh.

Even then, the Airtel stock is up big, and the Unitech stock is down big. But after much analysis the issue will throw up news over a regular period, and will cause some level of uncertainty about investing in India. However, it is a good step that will strengthen the process of handing out lucrative pieces of what is public property.

I would like to also see such a transparent auction process on media advertisements by the government (for tenders, or regular ads of performance, or notices). Also for mines, for iron ore, for coal. This will stifle industry for a while, but we can handle it. The auction-versus-FCFS argument does hold water, especially in the context of a transparency act like an RTI.

91 day T-Bills have been slowly showing signs of stress, as the weekly auctions show. Yields are now at 8.81%, just a little short of the 8.89% high made in October.

It’s important to note that while most auctions till December were of 4,000 cr., the auctions in Jan were for Rs. 6,000 cr, and the one on Feb 1 was for 9,000 cr. The size is pre-announced; we will have only 9,000 cr. worth 91 day T-Bill auctions for each week in February, and then Rs. 8,000 cr. for each week in March.

The other T-Bills – 182-day and 364-day – are going at lower yields.

Consider that the 10 yr. bond closed at 8.14% yesterday, and you’ll see how inverted the yield curve is!

The Nifty crossing the 200 Day Moving Average today, ending at 5,236 and breaking back up after exactly 9 months (the cross-under was May 1, 2011). Maybe it was a pregnant bear market.

(Click for larger picture)

Even the technical chart shows that we are at an inflexion point:

The current level is just about where the action has reversed in the recent past (though we have seen one move in October go all the way to the 5400 levels before coming back).

The MACD shows some leveling out from this point, with the downside crossover looking imminent. It’s just quite likely the upmove consolidates here before making the next move – up or down. A call spread above 5400 would be nice, but prices right now aren’t too exciting at Rs. 48 for the 5400 call. But that would be the trade, at this point – write the 5400 call, buy the 5500 or 5600 call, if the pricing gets attractive. 

The HSBC Markit Purchasing Managers Index (PMI) has moved substantially up to 57.5. Numbers above 50 indicate expansion, and below 50 are contraction.

While demand has recovered, inflation remains high, according to the press release. This can only mean that we are going to need further measures to curb inflation. The impact of a strong dollar hasn’t quite hit us as yet, it seems. (Either that, or it’s the exporters that are buying!)

The 12.4% return on the Nifty in January is an incredible start to the year, and the best return of the last 30months.

As you can see, the number of double digit positive months are way too few, with two in 2007 and 2009 and one in 2007. This is also the second highest January return for the Nifty ever, since 1994 (and there wasn’t much trading on the NSE then).

The Sensex has a lower return of 11.2%.

Wonder what Feb will bring!

I write at Yahoo: The School Of Hard Knocks

Many of us desire to make money from the stock markets, because it doesn't seem to take a lot of skill. After all, like a casino, all you need is one good trade. That's what we read about — the success stories of investing talk about how Warren Buffett bought into Coke, or Rakesh Jhunjhunwala bought Titan, or Paulson shorted sub-prime mortgages or such.

While these investors — and many others — have benefited from the huge success of a few stocks, there are thousands, even millions, of other investors who lost much of their money chasing performance. And not just speculating, but even with deep, well researched analysis. A stock that seemed like a steal three years ago is still a steal; they have higher profits, and a lower stock price. In another ten years, they might still have the same stock price. The "value trap" attracts people who think luck plays no role in investing, that all it takes is good analysis.  Value traps are lessons you don't learn about in books; real life teaches you instead.

I attend the School of Hard Knocks, and every time I think I'm close to graduating, I fail the next test. Here are four mistakes I've made and hopefully, learnt from.

Chasing Highs and Lows

On twitter, when I mention that a stock has fallen 10%, I get a quick response — "Is it time to buy?" Usually, it is not — it's a warning sign. But what we like is to have "caught the low" — bought it when the stock was at the bottom. This is unlikely to happen — you may catch a bottom once or twice, but it's like a falling knife that'll slice through you. When Satyam fell rapidly from over 200 to 80 in December 2008, I had decided to pick up a few shares, assuming that it was just a "margin call" or something. The news about Mr. Raju's announcement waltzed in a few minutes later, that he had lied about the company's financials all along. I sold the stock — intra-day — at Rs. 65 or so. It still languishes around those levels three years later. What I thought was a "low" at Rs. 80 went all the way to Rs. 20.

I want to sell the highs too. I held a share called Reliance Petroleum Limited (RPL) which was bought in its IPO at Rs. 60. The stock went to Rs. 240 and I decided to sell. Yet, I felt those pangs of regret as the stock went to Rs. 300. Even with a very good profit — 300% in less than two years — I felt bad that I couldn't make some more?

For the record, I have picked highs and lows; I have bought at the high and sold at the low more often than the other way around.

The Desire to "know".

A friend who had $1,000 in currency asked me if it was a good time to convert to rupees. I said I had no idea. He laughed, and asked me why I was in the finance business if I didn't know. But I honestly didn't know if:

a)      He should care where the rupee or dollar would go, in a one-off transaction, not being a trader

b)      The dollar would move further up — and therefore my friend could get a few more rupees for his dollars

c)       Any prediction would be to simply assuage my friend's need for an answer.

We all wish we could know, which is why astrology is so popular. But we don't.  The markets have asymmetrical information; different participants know different things. An investor may be aware of a problem that you and I don't — and if he sells heavily, the stock collapses; with the information we have, the stock looks attractive, but is it?

I've been trapped enough times thinking that I know more than the market — but more often than not, I've been the ignorant one. In the face of the knowledge that one doesn't really know, what's the right action? Not invest or trade? That would be pointless, because investing or trading, even with incomplete information, can lead to substantially higher returns.

Now I prefer to act another way. I expect this stock to go up. But if it comes down to X, I'll sell, assuming something happened that I didn't know. This is called a "stop loss", but it's more of a "stop the pain of not admitting my ignorance".

The Revenge Trade

And just when I've admitted I was wrong, the stock stops falling and goes back up to new highs. This short-circuits my brain, and I feel like the universe has just conspired against me.

The desire for revenge has made me jump back into a stock, only to watch the temporary move reverse and again come back to hurt me. Usually, such a trade has no logic; it's just a strong feeling that losses in one stock must be recovered from the same stock.

In the school of hard knocks, revenge is an F.

The Perspective: Percentages and Absolutes

Consider the proposal where if you invest Rs. 20,000 in certain (80CCF) bonds, you don't get taxed on that amount. With all sorts of calculations, you hear that you're really investing Rs. 14,000 (since you would have paid Rs. 6,000 as tax on that money, in the highest marginal tax bracket) And then, you get back Rs. 26,000 in five years, making your return 13.2%.

While the 13% is attractive, the entire exercise allows you to earn Rs. 12,000 in five years (assuming the 6,000 in tax saving, and 6,000 in interest).That's Rs. 2,400 per year, or Rs. 200 per month. When you are earning more than Rs. 8 lakhs per year — that's at the highest tax bracket — the amount saved is significantly lower than the joy you feel by hearing "13%".

I have bought stock options for Rs. 100, which tripled in one day. I was overjoyed — 200% in one day. Now let's see: 365 days in a year, 200% a day — that makes me…very stupid. The point here is not just that I can't find such trades every day (and I'll lose my shirt on many of them), it's also that the amount I can invest in options has to necessarily be small, because you can lose 100%. If I invest just 2% of my portfolio on a single trade, and I double my money, the real profit on my total portfolio is just 2%. Nothing to write home about.

Absolutes and percentages both matter; when you get a high percentage return on a single trade, the school of hard knocks tells you to evaluate the overall return on your portfolio instead. You don't appreciate a car that has a great steering wheel if its engine misfires, its headlamps don't work and the seat is uncomfortable. You don't praise one good trade if you have three equal (or worse!) bad ones burning your portfolio.

Perhaps you invested five years ago, when the India story was going strong and they told you, like they told me, that India was the next big thing. Five years have gone, India's GDP and per capita income have doubled, car sales have quadrupled, and yet, markets have returned a miserable 4% per annum, just about beating the savings deposit rate. India's stock market behaves very differently from the rest of India, we learn, as we pass through another year in the school of hard knocks.

There’s been some brouhaha about a new feature at Cleartrip which tells you how many seats are left (at the mentioned price) when you search for tickets.

A post on moocube called “The Cleartrip Hurry Algorithm” started doing the rounds of the Indian web, with the author accusing Cleartrip of trying to make people “hurry” to buy a ticket by conveniently cloaking the “(at the mentioned price)” in the visual interface. You get to see something like:

and the moocube blog writer believes that gives the false impression that the plane is nearly full – his subsequent searches with more passengers indicates the flight isn’t full at all.

Hrush Bhatt, co-founder at Cleartrip, pitched in very quickly with an explanation. Airline ticket pricing is “bucketed” – up to a certain number of seats, you get a certain price, and then onwards a higher price will apply. The interface therefore means there are “n” seats left at this price, not that the plane’s filling up. In fact if you “hover” over this red box you see the missing “at this price”.

The interface, admits Bhatt, is not really conveying the right impression, and others claim in the comments that a lie is a lie. The intentions are not malafide, though, because in some cases you may search for 1 ticket and get a “5 seats left” – indicating that even this bucket isn’t full; a strategy that would be inconsistent if the intent was to intentionally mislead a customer. But it’s best to convey the right image, and it looks like they’ll address that soon. Sadly, Bhatt also tried to malign the author of the post, calling him a liar for not mention

What I learn from this:

• As a business owner, you have to respond to detailed accusations like the moocube post. And fast. But you mustn’t respond to haters and trolls – and they will litter the comments of any negative feedback post anyhow.
• You must admit your mistakes but avoid looking arrogant. People are irrational, they will accept the strategy of “hurry, buy now” from a real estate agent who pretends that a project is sold out when it’s not, or from a movie hall that says “nearly sold out” but you find it empty walking in. But not from you, the website that sells plane tickets. That’s how people are. You don’t call them out for lying when they accuse you of lying – it’s counterproductive.
• Don’t let an episode like this make you think “I shouldn’t do this”. We’ll all make mistakes, the idea is how well we respond to them. Cleartrip gets a lot of publicity for both having done a rush job and for hurrying to clear it up. That’s better than no publicity. In a service business you get recognized for action; and sometimes it’s better to have to apologise than to endlessly argue about whether you should do it at all. [Yes, caveats apply, but you know what I’m saying, no?]
• What the heck is with the “scratched out” numbers – 35,255 for one image, 72,403 in the other? I suppose one might make the argument that those are not fares anyone is expected to pay, but will people take offense to that next? [I doubt it, because that’s less highlighted in comparison]

I personally don’t book on Cleartrip because I get better prices directly from the airlines, where refunds or rescheduling is cheaper as well. (I used to be able to allocate seats, but the silly DGCA has removed that privilege) But I think they have a nice interface and are out there running a good business in a field that is ridiculously competitive.

To end an off-topic post, here’s Seinfeld on airline travel:

The Securities and Exchange Board of India, the market regulator, has upped the minimum investment in Portfolio Management Services (PMS) to Rs. 25 lakh. The earlier minimum was Rs. 5 lakh. This applies immediately for new clients; for existing ones, additional investments need to top up to at least Rs. 25 lakh.

Many brokerages and independent managers offer PMS products, where a manager trades the stock markets, and the Rs. 5 lakh minimum was supposed to deter people who couldn’t really afford to lose that money. (I’m not sure how the higher limit helps, but I suppose it does deter the less well-to-do from losing their shirts)

The unfortunate problem with PMS products has been their overall misuse. There are good PMS products, mind you, and many are offered by smaller, boutique investment advisors; these are usually not available to the masses (reference-only). But the vast majority of what you hear are abused in many ways:

• High fees+Brokerage: typical models use a 2 and 20 – 2% as management fees and 20% of the profits (above a hurdle rate). Typically, when offered by brokers, they also charge a hefty brokerage and churn portfolios.
• Ditching the product when they can’t make hurdle rates. In 2008, a large fund abruptly stopped the PMS service after losing 30%, simply because they would now need to make that back, and then a profit, before they could charge the profit share fees.
• PMS pooling: Funds were placed in a pool account and then traded. Then profits and losses were assigned to clients. This was supposed to be appropriately assigned, but in practice, there were “favoured” PMS accounts which got allocated more of the profits (and lower losses). This was stopped by SEBI by banning pooling, by making segregation into individual demat accounts compulsory. But the practice continues when it comes to derivatives (where there is no demat).
• Misselling: A customer was duped in a Kotak PMS (Moneylife) with a dud product that was dressed up and mis-sold.
• Bad performance: Many products tend to perform much worse than regular mutual funds or indexes. Much of this is attributed to risk taking, but it’s because the high commission structure – PMS companies will pay advisors 2% to 5% upfront for getting them money – requires a higher return to compensate.

While the Rs. 25 lakh minimum doesn’t do much about the above abuse, it helps raise the bar – hopefully, people at that level will read more about the abuse and ask tough questions before they invest. However, noting how high-barrier investment products have been abused around the world (like a Norwegian town being sold US subprime securities), I wouldn’t hold my breath.

The RBI has provided rates that banks used to give for one year deposits, all the way back to 1976. Here’s a plot of the “high” rates today (9.25 to 10%).

Much of the 90s was a 10 to 12% rate, and I remember that many bonds (IDBI etc.) offered 12%-14% to retail buyers. (We still own some 17 year bonds at 14% or so, which mature in 2016. )

When you invest in a fixed deposit, the interest you receive is taxed as income. At the highest tax bracket, you pay 30% on that interest. That means a bank FD that gives you 10% really only gives you 7%. Even if you a a longer term investor in the FD, you pay interest every year. (And the bank deducts 10% as TDS before you even see it)

The government has allowed certain entities to give you tax free interest; if you are an investor for the long term, 10 to 15 years, in certain infrastructure companies. Two of them have already issued bonds (PFC and NHAI) and if you missed those, you can subscribe to the next two coming up from Jan 27: HUDCO and IRFC.

* Retail applications are for individuals, for under Rs. 5 lakh, and the higher interest rate is only for the first allotment. Any sale of the security will drop the interest down to the “Others” level.

The bonds will list on the NSE and BSE, and if you can’t get in now, you can buy them off the exchange. (PFC and NHAI bonds will list soon) and the interest will still be tax free. However, in the above two issues, the “coupon” rate paid on the bond will drop, for retail investors.

Since the bond interest is tax free, this is equivalent to a high interest yielding fixed deposit based on the tax bracket you are in. That is, if you had an interest rate of 30% at your highest tax bracket, a coupon rate of 8.35% means an equivalent FD of 12.08%.

But this is a silly comparison. There is no liquidity – of course the bonds are listed but there’s no guarantee that there will be someone willing to buy. Even if there is, the price someone may be willing to pay could be far lesser – in terms of effective yield – than the price you want (An FD can always be returned early with no loss of principal and perhaps a little penalty on the interest) This is like a 15 year FD.

You needn’t invest in an FD to get a similar return, of course. If you’re thinking of exiting in a few years, you may be better off with a longer term FMP, where the post tax returns are around 9-10% nowadays. These mutual funds lock you in similarly, and are listed, but the interest is not taxed till maturity; they tend to yield between 9-11% (this is the rate for long term commercial bonds nowadays) and the fact that you get an indexation benefit will make much of the gain non-taxable.

(A 9% return with inflation at 8% means only the excess 1% is chargeable to tax – even at the highest bracket you’ll make 8.70%)

The comparison, for those who are thinking of this bond as a 1 to 5 year investment, is better off with a similar tenure FMP, or if you choose to be a little creative, with a bond fund.

I strongly believe that we have overcomplicated our options. Thinking in terms of “you can’t compare this with a gilt fund” etc. are simply skirting the issue. People like to think in terms of “debt” versus “equity”, and then long versus short term. FD is debt, as is a bond fund, as is a HUDCO bond. If interest rates fall, a bond fund and the HUDCO bond will increase in market price, but nothing changes with the FD. If you are in for more than five years, and believe that interest rates will fall to below current levels, the HUDCO or IRFC bond is a good idea.

If you’re in for less than five years, consider a longer term FMP or a bond fund instead.

If you’re retired, these bonds are fabulous, because they give you cash flow on which you need to pay no taxes. And for fifteen years!

And finally if you’re a short term investor with the idea that you’ll speculate on these bonds, the trade will clear itself when the PFC/NHAI bonds list either Friday or Monday. Wait to see if there’s a listing gain available.