The Indian Investor's Blog

Where are the taxes?

2009-11-23T02:05:00.005+05:30

John Mauldin asks: If this is recovery, where are the taxes?

I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we're in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.
There is a very revealing study by the Pew Center on state taxes, called "Beyond California" (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.
On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. You can see how your state fares at http://downloads.pewcenteronthestates.org/Beyond_California_Appendix.pdf.
The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (www.theliscioreport.com)
Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government figures show that retail sales were down 1.5% in September from the previous month and 5.8% year-over-year. So how do we keep seeing headlines about retail sales being up, as unemployment keeps rising?

Coming to India - and looking at total taxes, I find the picture just as rough. Here's the tax data till September:

(Click for a larger image)

Tax collections are down about 8% from April this year. September was the first month where the monthly collections were HIGHER than last year, but there have been one-time events like the second part of the payout to government employees (60% of arrears) that was made in September. In all the government isn't getting nearly as much revenue as the growing India story demands.

Direct taxes (think Income tax) seem to have gone up a little bit, a 4% growth with about 1.73 trillion (lakh crore) collected till October end , versus 1.67 trillion last year October end. (I really need to chart this)

There's two issues here - our tax collections which grew at a 20-30% clip in the last few years, from greater reporting and solid growth, have come down to negative or flat levels. This has two bearings:

The deficit, at 6% of GDP (or Rs. 3 trillion) isn't going to come down much until tax revenues pick up. Our other sources of income are the fees from licensing like NELP and 3G allocations, and from divestment - won't quite add up to bridge the divide. And public expenditure (check the link) is going up at 33% or so.
Where's the 6% GDP growth that we're talking about? How come people aren't paying a lot more in income and other taxes? (In times of 8% GDP growth, taxes grew 40-50% yoy) Maybe it's just the first few months and things will get better in the last six months of the year. But with bank credit stalling at 9.7% (yoy growth) I hardly see the signs that there's a big recovery happening.

Will be interesting to see how this evolves. In the markets, we're back above 5000 levels, and with a P/E of 20+ again and a dividend yield of 0.99%, which is discounting a growth story that doesn't quite seem to be there yet. As for taxes - they have to grow - I'm hoping the Diwali sales growth will show up in the indirect tax collections (data for Oct will be released in December). Watch this space.

Off Topic: Global Warming Emails Reveal Potential Fraud

2009-11-21T22:13:00.004+05:30

The Global Warming debate has just gotten more intense. Recently, a major GW advocacy center, the University of East Anglia's Climate Research Unit was hacked into, and about 62 MB worth of email communication and other data was "made available" on a public FTP server in Russia.

No big deal? Well, it turns out that the emails reveal a sinister plot - that scientists were "fudging" or deleting or hiding data in order to prove their point, which is that Global Warming exists. One email talks about a scientist applying "tricks" to make sure the data would "hide the decline", referring to temperatures - you can't have declining temperatures in a global warming paper, can you? Others talked about how it was a "travesty" that they can't account for the lack of warming - so instead of questioning if there is global warming, they question the data.

If these guys were in the stock market, they would start by saying the market is wrong, so let's assume that prices are much higher than they are today, because they should be.

But I digress.

Excellent reads on the topic are:

Ed Morissey's post with individual email snippets.
News Post on wattsupwiththat.com - read the comments.
An explanation of the "trick" by Stephen McIntyre (mirrored)
Investigate Magazine on the controversy
Rightofcourse posts with links in both directions to keep you busy

I'm hugely skeptical about global warming, in the sense that we cause it and that we can do anythign to reverse it. Specifically three questions are of concern:

Are we warming? Sure it seems like that in some cities, but not really - Delhi has had 48 degree summers for a long time, which is more than what we see today. Bangalore has been much cooler the last two years. And globally, even with the CRU data, we seem to be cooling at the surface level over the last 10 years - a fact mentioned in one of those emails as a problem because it couldn't be explained by the global warming theory.
Still, you could manipulate the data into believing we are warming. But I'm unconvinced until data shows up - the lack of unified data points is niggling.
If we are warming, are we warming too much? Most studies take the last 1000 years or so - which is ridiculously small. And even there, the data is very shady - the last few years' data is highly suspect because the metrics keep changing. First, the 1000 year problem.
Consider this: If the entire Earth's history was condensed into 24 hours, then dinosaurs would appear at 10:40 pm (imagine!) and home sapiens have lasted about 4 seconds. All of recorded history - 5000 years - is in one-tenth of a second. The last 1000 years are about 20 milliseconds on that scale. Can you imagine anyone predicting anything about "global warming" based on SUCH RIDICULOUSLY INSIGNIFICANT DATA POINTS?
And then you have the shady data problem. From bad locations of weather stations, to unreliable stratospheric measurements, to refusing to admit data/analysis if it's not a published in a "peer reviewed" journal, even if the work is correct. Now it's even worse with CRU folks saying on emails that they're happy to hide any data that refutes the hypothesis; and will take legal help to do so.
(Read McIntyre's blog, Climate Audit, for some views)
And lastly, have we done anything to influence global warming? I have my doubts. The data aspects of it all are too long to type, but it's evident to me that we are blind to long term phenomena simply because we don't have enough of a window, in any timeframe that is significant to the lifespan of cold and hot cycles of the earth. That means things might seem like they're happening now (even if you take the claims that we are warming at face value) but it doesn't mean that they wouldn't have happened - we simply seem to be consistent with small margins of error up or down when you look at the 10,000 year picture.
Instead we focus on carbon - stupid thing to do, IMHO, carbon dioxide is actually good and isn't quite indicative of warming (CO2 levels have been going up in the last 100 years but surface temperatures have not). Wouldn't it be better to learn to live with the impact of warming, rather than spending so much money trying to curb CO2 emissions?
For the record, pollutants are horrible and those need to go. But good ole CO2, cutting that out is a out of line.

I'm a skeptic and not entirely on the other side, so I'm happy to be corrected. I am totally not interested in statements like "this scientist says this, and he is reputed and has 30 years of experience and has so many papers published bla bla bla". That kind of crap doesn't work - reputed people have been known to be wrong, and they have been wrong in the climate debate many times too. I hate ad-hominem arguments, so I'd rather focus on the argument.

And earlier climate scientists used to say that the skeptics are funded by the oil companies and so the incentives are all wrong. Well, with the amount of funding and reputation that global warming brings today, the incentives are all wrong on the other side too; for a GW scientist to say "there is no global warming, our data says it" is career suicide, and they will do what is needed to protect their turf, as is evident from the email leaks. So: Suspect everything, trust nothing.

Well, if the world doesn't agree and still goes nuts on CO2, I'll do my bit for global warming by breathing in more often than I breathe out. Or I'll fudge the data to say I did so.

Linkfest: Outrage, China, Mutual funds off Trading Terminals

2009-11-18T01:06:00.003+05:30

Links for reading:

Main Street tells Wall Street, "Get A Real Job" (Bloomberg)
In the 14 years I’ve written columns for Bloomberg News, I’ve had plenty of feedback from investors who said they lost money at the hands of corrupt brokers, plus a steady stream of vitriol from financial executives who say I’m clueless, stupid, and deserve to lose my job.
I have never, though, been bombarded with anything like the fury and frustration expressed this time by people far removed from Wall Street, ranging from computer programmers to administrative assistants to the caretaker of an estate. Typically a handful of e-mails will float in; this time the number topped 60 and counting.
It's just starting, but it's too little, and obviously too late. With US unemployment (disguised as "U6") at 17% and counting, there's increasing amounts of despair in the real economy while the financial institutions are smoking something else. It's now obvious that the powers are on the side of the financials - so I think there will be a lot more anger before they even acknowledge that a sense of fairness must prevail.
Naked Capitalism: China Lambastes Dollar "Carry Trade", Diverting Attention from its Currency Manipulation
Excellent article on how the US policy is geared towards helping banks recapitalize easily, with low interest rates (you can't get lower than zero) and high spreads. To understand this - how easy is it for you to make a profit if you know you can buy from a market and sell it to the "Fed" at a slight profit? That's the kind of game going on with things like Mortgage Backed Securities and so on. Plus, the idea is to spike asset prices rather than clean up banks.
More importantly though, on China, Yves Smith says it like no one else can. China's massive growth has been because of a conveniently pegged Yuan; the US can't cut it's debt levels unless it runs a current account surplus - which will spell death for China's export led economy. China hasn't a right to scream Wolf, says Yves, as it was a problem they started by buying up dollars and pegging the Yuan in the first place. Great read.
Mutual funds will soon be traded from brokerage terminals. Sub-brokers are, after all, present in every small town in the country; and allowing them to sell mutual funds provides a distribution reach no one else has. Unfortunately this will mean some entry loads again, in the form of brokerage. But that, at 0.5% must feel a lot lesser than the 2.25% the funds used to charge.
John Paulson buys 2% of Citibank, sells 2 million Goldman shares. He made a killing shorting sub-prime, and now he's buying out the guys the government owns. Sweet. Don't read too much into the GS sale, though.
John Mauldin forwards Hugh Hendry's commentary (Eclectica, November 2009) - a fantastic read on the Dollar, China's huge inventory and capacity and Why Deflation is more likely in the next year than Inflation.

Startup Mode Once Again, Yay!

2009-11-14T23:32:00.004+05:30

At the ripe age of 35, I have decided it's time to go into startup mode again; so the corporate slavery will end on November 30 - I hope - and I'll be a free man again. While it's boring to run over the details, there are just three factors that drove my decision:

Lack of a life. I know some people have no problem spending 12 hours cooped up in an office looking at market data flowing on a computer screen. I used to do it too. But now I've realized I don't want to.
I need serious upside. A pot of gold at the other end. A chance to make disproportionately large amounts of money. An asset that I will own even if I am hit by a bus (and don't die).
I can do it. I have a "buffer" that allows me to be able to pursue that pot of gold for a certain period of time; and I've zero debt.

I think jobs are great for a majority of people, and it's admirable that some manage to be entrepreneurial even when inside a large company. And most jobs nowadays give you great upside - fat bonuses, profit shares or stock options (those are all great, just not available in every job). But I still think I ought to aspire for something more. Excuse me while I get on a soap box.

You can do many things with money. You could live like there's no tomorrow, or borrow your way into buying whatever you like, affordable or not. Or, you could scrounge and scrounge and save every paisa until you're too old to spend it, so you give it to your children. Or take the route of saving a little and spending a little: you'll grow old, you'll see what you've got and take that world tour with a lot of pictures that you can put on Facebook and Picasa and make the non-retirees envious.

I grossly overgeneralize but these are pretty much the options I see in being perennially employed. Wealth is a means to live life, and the accumulation of retirement money is bit by bit, little by little. It becomes secondary to everything else, especially once you're spending less than you're earning; and from time to time, you push back by buying an expensive house, or piling on expensive debt. Once in a while you get taken by an insurance salesman selling crappy endowments or ULIPs (I did). But it hardly bothers you - after all, it's a few thousand rupees, you'll earn it back. You'll get to a crore or two in net worth by the time you retire and things will be great.

The risk? You have a personal disaster which your insurance doesn't cover (and it doesn't cover much nowadays) and aren't able to work anymore. The money tap stops flowing, the net worth isn't enough, and you have to borrow to meet deficits (much like governments nowadays) - and hope that things get better soon. Some manage to eke it out, others make sacrifices like asking their children to support them, and yet others can't make it and lose it all. In most of the movies of the 80s, and in a number of middle class houses, stories like this are bandied about; the survivors are heroes, the failures are victims of destiny.

(If you've read Taleb, it's this very aspect of it that he DOESN'T dwell on when he talks about doctors versus lucky people - and it's this risk that counters the other side to a very large extent)

I can't be like that. I have family history of asthma, diabetes, high blood pressure, thyroid disorders and heart disease. The risk, for me, is simply too great.

There's a completely different route. You build something. You own it now. Eventually it has hugely positive cash flow (i.e. it pays you a lot more than you have to pay to maintain it); or it can be sold for a much higher rate because of the value added, brand built etc. Some people did it buying houses - not much by way of a value add, but they just got lucky that the housing model worked when they needed it to. Or buying shares - again, luck favoured the brave, except those who invested in Arvind Mills.

But that again is tough to influence; external factors out of your control will impact your returns and you have little by way of actually influencing increase in value by adding brand value or other value addition. Think, instead, of a different example: a blog or a book. You write, and reap rewards - mostly small, insignificant numbers unless you write about little boy wizards with a mark on his forehead (Note: in case you're wondering, it's already been done). Unless you're REALLY bad you will see some kind of an income stream for which your maintenance cost is next to zero. And you CAN value-add to increase the blog or book's revenue stream over time.

You can build a business. The scale and size of it are under your control - or mostly so, in that you can do a considerable amount to improve its value. It will of course still be a job; you'll have to come in daily, and unless you learn to delegate well, you can't be disabled and hope you'll still have some income. But it gives you the chance to do so, unlike a regular job. You might get external investors or buyers and have that sudden pay-off that hugely scales your networth and you retire and all that.

Huge risks are that businesses don't necessarily scale and that you might end up worse than a job. And of course, you're stuck if the business area screws up, like starting a dot com in February 2000.

And lastly, you can invest in other businesses. Not in the stock markets - you can do that anyway. But in growing private ventures where you get a chance to influence the outcome. Since it doesn't take all your time, you can "diversify" - do multiple business areas, work with different types of full-time entrepreneurs, and write blogs and get invited to conferences with name tags prefixed with "Angel", even though you don't quite feel that halo over your head. The payoff can be disproportionately large if any one venture succeeds; but you must nurture all of them, because if you don't do justice to any one, it might be the one that succeeds and no one likes a free rider.

The payoffs are different but obviously the last two have one fact working for them: you can influence the outcome. And given the disproportionate gains that happen in successful startups, you tilt odds in your favour compared to investing in just the stock market or in real estate. High payoff, influenceable odds - now that's a bet worth taking.

(You might say that failure is rife too. Sure it is. But the cost of losing isn't quite as high in the era of cheaply startable businesses. To a thick skinned person like me, there's no fear of shame - I couldn't care less what anyone else thinks.)

I'd love to be the last - the investor. It needs money I don't have. But at least I'm collecting skills to be able to advice/mentor/connect startups once I do get the money. I've been the business (co) owner and will be going down that route again. But that disproportionate payoff - that is absolutely essential, I've decided. So it'll be that way unless I run out of whatever I have left. (Disclaimer: I got enough buffer for emergencies, child education and all that. So it's not just as whimsical as I make it sound)

What am I going to do? Something I love doing. [Work devoid of passion doesn't usually have mega-payoffs.] Details are sketchy and I'll talk about it once I've worked it all out. My skills are in financial technology space; my interest areas are in startups, social media, reducing intermediation costs and in education, my priority is to get healthy and keep quality family time while I'm on the drawing board.

(The older I get the more I realize exactly what I DON'T want to do. Arbitrage, for now, is one of them, and day-trading is another - been there, done that, but the trade-off of having one's brain turn to jelly is too expensive.)

I'll stop abruptly because this has gone on way longer than it should have. Most of you won't even have gotten here, but hey this is a blog and once in a while I'm entitled to write what I really think, even if it seems irrelevant. Thanks for listening, and I appreciate your comments.

Remembering the Fall of the Berlin Wall

2009-11-09T18:18:00.001+05:30

Twenty years ago, the Berlin wall fell. Thirty five years ago, I was born. Not that there's any connection.

A post I'd made in a different blog is something I wanted to repost today. The remaining pieces of the wall at Potsdamer Platz, Berlin. And behind it, a symbol of what Germany has grown to become.

(And right in front of it, is a woman wondering why her crazy husband is taking so many pictures)

Buffet: Wolf in Sheep's Clothing

2009-11-08T19:10:00.003+05:30

Barry Ritholtz is really pissed off.

Due to an unexpected outbreak of rationality (and perhaps embarrassment), the Treasury department has rejected requests of Goldman Sachs and Berkshire Hathaway to purchase Tax Credits from Fannie Mae.
This paper transaction would have provided precisely zero value to the taxpayers, and allowed these firms to add to the piles of bailout monies already received by avoiding billions of dollars in taxes otherwise legally owed. It would have been a license to steal.
The sheer arrogance, the colossal gall involved boggles the mind.
And while we expect this sort of behavior from the Vampire Squid — they take pride at Goldman in not just being whores, but in being the highest paid callgirls in town — it is stunning to see such behavior from the usually politically astute Oracle Tentacles of Omaha. For Warren Buffett’s Berkshire Hathaway to team up with Goldman Sachs (which he now owns a healthy chunk of) is a bit of a revelation: We have been spun by his genteel manner, his aw shucks down-home-isms, his off Wall Street, less bloodthirsty approach to investing, into somehow believing he was different.
We have been duped.
We should not have been. Buffett has been the biggest shareholder in Moody’s — a collection of filthy whores and pederasts who were one of the main contributors to the economic collapse — should have raised serious questions as to his judgment in our minds. That he sat by silently as they did their worst, sodomizing the nations credit system for fun and profit was a powerful indictment of Buffett as someone far different than his public persona. In retrospect, as Moody’s was helping to destroy America’s financial system, his merely spouting off aphorisms about about Financial WMDs now looks too cute by half.
Those of you who used to respect Warren Buffett might consider moving him off your increasingly short list of participants in the marketplace who behave ethically. This crude attempt to steal billions — coming on the heels of the bullshit about “Investing in America” by buying Railroads — is a shock to me; perhaps that is a testament to my naivete.
Perhaps the Oracle of Omaha has been infected by a new flu variant, the H1N1 GS mutation. It is usually non fatal to the host, but destroys its reputation . . .

This is probably the toughest stance I've seen Barry taking; but it is disgusting that people are taking the system for a royal ride. Goldman is considered scum anyhow, so their doing this isn't all that surprising. But Buffet? He does well with straight talk, but the walk isn't quite that straight, it seems.

Barry also references a Rolfe Winkler post I'd spoken about and got some tough comments on. It's becoming more evident now that Buffett, for all his talk, isn't quite the saint he's made out to be.

Berkshire made a healthy profit this quarter, though that's a mark-to-market game; the real businesses seem to show slack and he's trying to keep it lean there.

If the anger against these people trying to game the system doesn't blow up, we'll see the Buffetts and Goldmans make even more money at the cost of a lonely taxpayer. But the anger's just starting to show - probably a year more of this craziness will be needed before someone gets really ticked off. It's starting to appear slowly - Elizabeth Warren, Chairman of the Congressional Oversight Panel, is appalled that "financial institutions could think that they could take taxpayer money and then turn around and act like it's business as usual. I don't understand how they can't see that the world has changed in a fundamental way, that it is not business as usual when you take taxpayer dollars.".

It's disconcerting that the lessons of this crisis are all screwed up, and that people are still taking advantage of the now explicit taxpayer backstop. We're learning to lie [let's not mark to market], to fabricate positive news out of the most negative [US Unemployment at 17%? Dress it up as better than something else] and to cow down to threats that banking failures will crush everyone. If there ever was a time that thieves can look back and remember fondly, this is it.

RBI Buys 200 Tons Of Gold From The IMF

2009-11-08T15:12:00.002+05:30

The Reserve Bank of India has bought 200 tons of gold from the IMF. The deal was done around $1045 per ounce, which means they'll pay a little less than $7 billion for it. The IMF had announced that it would sell around 400 tons of gold - that's 400,000 kgs of the yellow metal - and India's managed to get half in.

Now the RBI is paying hard cash for the gold, meaning they won't pay using IMF Special Drawing Rights or any such. There's speculation that the RBI sold US T-Bills to pay for it. Which causes people to think the US will get all jittery because oh my god, people are running away from the dollar!

That is just silly.

India has 280 billion dollars of reserves. This $7 billion deal is like a drop in the ocean. There are not that many 200 ton deals to go around, and we can't diversify enough using gold, and if we tried too hard every country will do it and drive the price of gold to crazy levels.

Which is good for my son's education fund. But I digress.

Gold is around 6% of our total forex reserves - less than $15 billion. That the RBI is buying is interesting but only on influencing sentiment. There is simply no way to diversify the $280 billion easily. China's got about 3 times our Gold reserves, and has been stockpiling commodities for a long time. Still, that doesn't make a dent on their dollar dependance.

So it might be just posturing. With the US Fed saying things like "Exceptionally low rates for extended periods of time", there is probably a fear that the dollar will be toilet paper except toilet paper is cleaner. This could be a signal that more of such measures will be taken. But the US will be hardly bothered about a piddly 7 billion - in fact they'll probably not be bothered until it's too late. In the interim, it's better to do larger diversifications (set up infra funds using the reserves, buy different currencies, lend money to companies here and buy lots of companies abroad).

Gold, though, is an interesting interim play. I'll stay long on it for a bit.

Bank Credit Growth in Single Digits

2009-11-08T00:45:00.007+05:30

RBI's friday press release on the Scheduled Bank Business in India as of Oct 23 shows a slight problem with Credit Growth, which is now at 9.69%, the lowest in (at least) three years.

Here's a chart of credit growth in the last three years:

(Click for a larger image)

Now it's possible there's a seasonal impact; Diwali last year was in November and this year, it was in October. Credit should usually peak during Diwali, one would think. If you take monthly averages (the reports are fortnightly so usually two figures are available per calendar month), there isn't too much of a visible impact of seasonality - or you would see spikes in Oct/Nov. This year has been bad throughout, but look at October, it's a two story building in a land of skyscrapers.

(Click picture for a larger image)

The underlying figures show food credit dropping by 6,000 cr. and non-food credit dropping 15,000 cr. in the fortnight from Oct 9 to 23. That's not great news, considering Diwali was on the 17th. What, people took loans and paid them back just after Diwali? I don't think so!

The drop in credit growth isn't quite followed by a drop in deposits - which dropped only 8,000 cr. Banks are still parking upwards of 1 lakh crore - a trillion rupees - every single day in the reverse repo window. This doesn't make sense - the reverse repo pays 3.25%, a lot lesser than deposits demand.

RBI is trying to push for credit growth, but at the same time wants to control inflation if it rears its ugly head. For that, the Statutory Liquidity Ratio, or what is mandated for banks to invest in Government securities, is back to 25%, a 100 bps revision upwards. And importantly, windows that were opened for NBFCs to borrow directly from the RBI have been closed. (Normally, only banks can borrow from RBI)

More importantly perhaps, is the increase of provisioning for commercial real estate loans. To simplify: when a bank lends money it is required to "provision" some of that money from capital against that loan.(not from the deposits or any other money it borrows, but it's equity). This used to be 0.4% for Commercial Real Estate loans - it's now 1%. That should scare off banks from overlending to this sector, just a little bit.

But all of this was done after Oct 23 - the date of the last available credit growth statistic. In about 15 days we'll see how banks have lent AFTER the RBI policy change; it's horrific to see a sub 10% credit growth number when your economy is supposed to be growing at 6% (typically credit grows a 2.5 to 3x multiple of GDP growth).

I'll do another post on bank results - they seem to have done lousy in the banking area and well in the trading area, which reflects in credit statistics; after all, if you're making enough money trading, why bother to lend? This sounds like it applies universally. But these are famous last words...

Grantham's quarterly - Markets being silly again

2009-11-01T16:28:00.003+05:30

Jeremy Grantham's Must-Read Quarterly for Q3 09 has way too many good points to quote. He slams the current financial system and the key players like Bernanke, Summers, Reckless Homebuilders, Overspenders and under-savers, Banks too big to fail, the US Auto industry and (obviously) the overpaid financial types. He predicts a 22% fall in the S&P (to below 860) but, in the light of very low interest rates, continued risk taking.

After the sharp decline in the fall of 1929, the S&P 500 rallied 46% from its low in November to the rally high of April 12, 1930. It then, of course, fell by over 80%. But on April 12 it was once again overpriced; it was down only 18% from its peak and was back to the level of June 1929. But what a difference there was in the outlook between June 1929 and April 1930! In June, the economic outlook was a candidate for the brightest in history with effectively no unemployment, 5% productivity, and over 16% year-over-year gain in industrial output. By April 1930, unemployment had doubled and industrial production had dropped from +16% to -9% in 5 months, which may be the world record in economic deterioration. Worse, in 1930 there was no extra liquidity flowing around and absolutely no moral hazard. "Liquidate the labor, liquidate the stocks, liquidate the farmers"2 was their version. Yet the market rose 46%.
How could it do this in the face of a world going to hell? My theory is that the market always displayed a belief in a type of primitive market efficiency decades before the academics took it up. It is a belief that if the market once sold much higher, it must mean something. And in the case of 1930, hadn't Irving Fisher, arguably the greatest American economist of the century, said that the 1929 highs were completely justified and that it was the decline that was hysterical pessimism? Hadn't E.L. Smith also explained in his Common Stocks as Long Term Investments (1924) - a startling precursor to Jeremy Siegel's dangerous book Stocks for the Long Run (1994) - that stocks would always beat bonds by divine right? And there is always someone of the "Dow 36,000" persuasion higher prices in previous peaks must surely have meant something, and not merely have been unjustified bubbly bursts of enthusiasm and momentum.
Today there has been so much more varied encouragement for a rally than existed in 1930. The higher prices preceding this crash (that were far above both trend and fair value) had lasted for many years; from 1996 through 2001 and from 2003 through mid-2008. This time, we also saw history's greatest stimulus program, desperate bailouts, and clear promises of years of low rates. As mentioned six months ago, in the third year of the Presidential Cycle, a tiny fraction of the current level of moral hazard and easy money has done its typically great job of driving equity markets and speculation higher. In total, therefore, it should be no surprise to historians that this rally has handsomely beaten 46%, and would probably have done so whether the actual economic recovery was deemed a pleasant surprise or not. Looking at previous "last hurrahs," it should also have been expected that any rally this time would be tilted toward risk-taking and, the more stimulus and moral hazard, the bigger the tilt. I must say, though, that I never expected such an extreme tilt to risk-taking: it's practically a cliff! Never mess with the Fed, I guess. Although, looking at the record, these dramatic short-term resuscitations do seem to breed severe problems down the road. So, probably, we will continue to live in exciting times, which is not all bad in our business.

Grantham's letters are always great reads!

Indian markets have fallen some 12% in the last 10 days and such a feeling is probably past us. But the whole articles is worth reading, in any frame of mind.

Stratfor: China's Real Estate Bubble

2009-11-01T07:26:00.002+05:30

Stratfor has an excellent article on China's soaring real estate prices and a potential impact:

On Sept. 10, China Overseas Land and Investment, a Hong Kong-listed company and a subsidiary of state-owned China State Construction Engineering Corp., purchased a prime piece of real estate in the Putuo district in downtown Shanghai. The company paid 7.006 billion yuan ($1.026 billion) for the undeveloped property, which will amount to an average of 22,409.3 yuan ($3,283.9) per square meter of floor space (just in land costs) once the designed residential building is constructed.

Heh. BPTP had bid just about that much - 5010 cr. or $1 billion - for a 95 acre plot in Noida, but it decided it didn't quite want to pay that much, a little while later. Just sayin'.

The government began this [real estate] privatization process by making a private dwelling a “commodity” and granting the purchaser the right to own a newly built house for 70 years. (Likewise, the developer who buys the property on which residential or commercial buildings are to be constructed may own that property for 70 years.) Home ownership in China could now be a sound financial investment.
Thus, the residential real estate market would boom in almost every urban area in China — and particularly in the “first-tier” and “second-tier” cities (only Beijing, Shenzhen, Guangzhou and Shanghai are in the first tier, with more than 20 cities, and mostly provincial capitals or coastal ports are in the second tier). But rising land prices would eventually put housing prices out of reach for the general public. In Dongguan, a coastal second-tier city in Guangdong province, land prices averaged 4,957 yuan ($726.42) per square meter in 2007, a more than 500 percent increase from 2003, while personal disposable income increased 24 percent during the same period (from 20,526 yuan [$3,008] to 27,025 yuan [$3,960] per year).

That's about Rs. 3000 per square foot - prices easily payable in "second tier" Indian cities of Bangalore, Pune and Hyderabad, especially in 2007.

A 2006 survey conducted by the National Development and Reform Commission showed that the average ratio between housing prices and income was approaching 12:1 in many large and middle-size cities in China (in Beijing it had reached 27:1). Twelve to one is significantly higher than the World Bank’s suggested affordability ratio of 5:1 and the United Nations’ 3:1. The problem was compounded by the fact that, of the more than 80 percent of Chinese who owned their own homes in urban areas (generally considered cities with populations of more than 20,000), 54.1 percent were making monthly mortgage payments that constituted 20 percent to 50 percent of their monthly incomes.

Er, let's see the situation in India. For a standard 5:1 price to income rate, a person earning Rs. 12 lakh can afford a property worth Rs. 60 lakh. With 10% down and a loan of Rs. 54 lakh at 9%, the person will pay 48.5K per month, or 48.5% of his monthly income. (oh and tax will take away another 15-20%, so the person isn't left with nearly enough)

At 12:1 people in India won't be able to afford loans at our interest rates - China's interest rates must be abysmally low. I'm trying to get sources of loan-to-income or price-to-income in India, but there's not much out there that is unbiased.

As housing prices continue to rise, a parallel trend is manifesting itself — rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that, by the end of 2008, the average vacancy rate for “commodity housing” (as opposed to welfare housing) in Beijing was 16.64 percent, and vacancies reached as high as 30 percent in some districts. Most of these vacant houses, however, are not unsold ones. They have been purchased by investors as speculative investments. While there are fewer and fewer ordinary people who can afford to buy houses, there is still excessive demand for investment housing — pressure that continues to drive up the prices.
This closed loop in the Chinese real estate market is facilitated by the country’s political and bureaucratic system. In China, all land is initially owned by the state, and local governments have the sole authority to sell it. And income from property taxes and land sales are a primary source of revenue for local jurisdictions. According to estimates by the State Council’s Development and Research Center, tax revenue from the land in some jurisdictions accounts for 40 percent of the local budget. Moreover, net income from land sales accounts for more than 60 percent of the local governments’ extra-budgetary revenue. The soft budget and lack of accountability to the people reinforces the local governments’ incentive to expand their real estate investments without much concern for cost or impact on public services.
..
One typical strategy is for a developer to buy a big chunk of urban land from the local government but leave the land undeveloped, or build on only a small portion of it, thereby keeping the housing supply limited. Despite various state policies to lower land prices in order to make homes more affordable, local government officials and real estate developers control the land auctions. When a lower sale price is dictated from above, it is easy enough for the local sponsors to officially deem the auction a failure. Even when the developer does build houses on the property, a speculative investor, working hand in hand with the developer and government officials, can bribe both parties to ensure that he can buy all the houses at a low volume price and keep them off the market, thereby maintaining a limited supply and high prices.

Anecdotal evidence: This is quite the case in India as well. Mumbai's land mafia keeps land and apartment supply limited, and there's widespread collusion with government officials. In Gurgaon, a broker told me that a new project by a certain builder was not selling because some of his other projects in the vicinity had still some listed flats with investors looking to sell at low prices. So the builder purchased all such flats to push up the price of a "new" project - a strategy that's useful once in a while but fails when everyone overbuilds.

With 70 percent of real estate investment in China coming from bank loans, a dramatic drop in land values could send shock waves throughout the economy. There are already signs of decline. In Shenzhen, one of China’s first-tier cities, real estate prices have been dropping for the past two years (30 percent for housing), and many developers and speculators have suffered great losses. The threat looms in other large cities such as Beijing and Shanghai and may be emerging in many second-tier cities as well.

It's useful to keep in perspective India's bubble as well. While real estate has been going up the last few months, and more IPOs are on the anvil, there is a significant chance that the bubble that didn't quite burst in the last two years is on its way to a final hurrah. Like balloons, you never know how much they'll grow before they pop - and like balloons, it's safer to watch from a distance.

Einhorn VIC speech: Banks Even More "Too Big To Fail"

2009-10-27T08:17:00.004+05:30

David Einhorn's speech at the Value Investing Congress. Great read, even in the tired but roaring bull market: Einhorn Vic 2009 Speech

Mortgage Prepayment Penalty To Be Removed?

2009-10-18T00:37:00.002+05:30

ET: RBI may shelve prepayment penalties on home loans

The Reserve Bank of India (RBI) plans to direct banks to stop levying penalty on pre-payment of retail loans, heeding to a long-standing demand of borrowers availing of floating rate loans who find benefits of periodical interest rate cuts eluding them.
“The right to avail of loans at lower rates of interest should not be curtailed by prepayment penalties. We will direct banks to do away with the prepayment penalty in case of loans disbursed in future,” said an RBI official. However, the banking regulator is yet to decide on whether this benefit should be given to existing borrowers, he said, requesting anonymity.

If this happens, there will be a huge renewal of interest in home loans, but it can only happen if the bond market is eased up considerably. Interest rate futures need to go up to 20 years, and shorting bonds has got to get easier. This is so the term mismatch of banks (borrowing short and lending long) can be hedged appropriately. Repossession of homes on default should become faster too - that is happening anyhow.

The hit will be taken by private banks (not all, Axis bank is already offering loans under 9% with no prepayment penalty) and by NBFCs like HDFC and LIC Housing Finance. Securitization may help some of them but the RBI isn't too keen on making it a diseased market on steroids like it is abroad. (i.e. there will continue to be a lot of regulation)

They should mandate a single PLR per bank too, and a violation should make all home loans carry the highest risk weights (destroys leverage and the bank's profit margins). But anything to make the market more transparent and less dishonest is a good thing. Banks can tighten up and refuse to lend to real estate - but hey, where else can they lend?

Happy Diwali 2009!

2009-10-18T00:09:00.003+05:30

First, wish y'all a great Diwali and a fabulous year ahead.

Last year, I posted on Diwali about the year ahead. And I was largely wrong. The index has reached a one year high, with a near 96%: it was definitely worthwhile to have invested in the index. The real estate market hasn't crashed - apart from a few smaller towns. Mumbai and Delhi are rocking. India didn't go into a recession in terms of negative GDP growth. The dollar is at 45, a little bit below 50 but it stayed at 50 for most of the year. I have not yet lost any meaningful amounts of weight.

Some of it might look like it came true - interest rates did fall, equities did look good sometime in the year, and some individual stocks gave their 100-200%. Pension funds did move in. Sure, some job losses happened. But this is all small stuff - I won't sweat it and easily say I got it wrong.

But I'm not going to stop trying, because you never know what you do that makes you win a Nobel prize nowadays. So here's the market stuff for next year.

Chinese real estate markets are going to tank. Sometime in the middle of 2010 perhaps, and coincide with a number of ARM resets in the US. This will somehow reveal why India and a lot of other countries are impacted by this, though no one has a clue just yet. I wish I could be specific, but I'm no soothsayer.
India's going to have a real estate boom/bust cycle yet again. This is likely to be a really short one, largely because the last one didn't get over properly. This time it'll be the investors that hurt as much as the random retail buyer.
But commercial RE? That will take a hit all over India. We'll finally see some real estate moves into smaller towns, and the bigger towns will take a hit.
Oil prices will slowly ease back after showing spiky behaviour. Some of this will be related to demand loosening, and yet others to regulation that disallows speculation in commodities.
Gold will continue to hit all time highs; there is likely to be a 10-20% drop in the year though, but it will roll back up.
Equities will see a lot of interest from organized funds like pensions, insurance and other long term saving schemes. That will provide a floor around the 3000 levels on the Nifty. We won't see a new all time high in the broad indices (I'm going out on a limb on this one) and we will see a 30%+ drop in the year.
I will, as usual, attempt to do something more constructive in my life in terms of building a future for myself, giving more time to family, teaching my son to say "left" and "right" (instead of "yeft" and "yight" right now) and other items of similar importance, learning to write, taking a good long break, and finally, losing weight.

If nothing but the last one comes true, I will consider it a great year. Money is for living, not the other way around. Happy investing in the next year, folks.

RBI Governor Subbarao Speaks on Emerging Market Exit from Stimulus

2009-10-11T21:50:00.003+05:30

RBI Governor Subbarao speak with a lot of unanswered questions, in Istanbul. ("Emerging Market Concerns: An Indian Perspective")

From the perspective of Emerging Market Economies (EMEs) and particularly for that of India, I will highlight five concerns. These are: first, timing of exit from the accommodative monetary policy in the context of rising food price-led inflation but still weak growth; second, the possibility of another surge in capital flows, especially if we turn out to be an outlier in withdrawal of monetary stimulus; third, monetary transmission mechanism as it is evolving from the crisis period; fourth, return to fiscal consolidation and quality of fiscal adjustment; and finally, the implications of the efforts towards financial stability on financial inclusion and growth.
...
Although inflation pressures emanating from higher food prices may limit the scope for monetary policy action, there are implications for inflation expectations. Furthermore, unlike the major advanced economies, growth remains positive. Real GDP growth was 6.7 per cent in 2008-09 and is expected to be 6.0 per cent (with an upward bias) as per the Reserve Bank’s July 2009 projections. In view of the country specific features, we may need to exit from accommodative monetary policy earlier than advanced economies. This calls for careful management of trade-offs: growth concerns warrant a delayed exit, but inflation concerns call for an earlier exit. An early exit on inflation concerns runs the risk of derailing the fragile growth, while a delayed exit may engender inflation expectations.

He says Inflation is high on the CPI front, we have a current account deficit of 2.6%, and we're a consumption based economy (private consumption is 55% of GDP).

Major central banks – such as the US Fed, the ECB, the BoE – have flushed their financial systems with unprecedented amount of liquidity. Till the first quarter of 2009, this liquidity was finding its way back to the central banks as excess reserves because of risk aversion.
Risk appetite is now returning. There are signs of recovery in portfolio investments to the EMEs. For instance, portfolio investments by FIIs in the Indian equity market amounted to US$ 13.6 billion in the period April 1-September 18, 2009 as against outflows of US$ 5.2 billion in the corresponding period of 2008 reflecting a turnaround of almost US$ 19 billion.
Moreover, as noted above, in view of incipient inflationary pressures, policy rates in our case may have to be tightened ahead of those in advanced economies. The resultant larger interest differential may attract larger capital inflows. Will capital inflows be modest or turn into a flood as in 2007? The latter concern is particularly relevant in view of abundant liquidity in the major advanced economies. What will the implications be for exchange rates? In India, the current account is in modest deficit; hence large and volatile capital flows can impose macroeconomic costs.

This is where I disagree. Increase in policy rates isn't going to increase portfolio flows - that is so pre-financial-crisis thinking. First, look at the situation - banks haven't cut their deposit rates much, and neither have public saving schemes. FII investments in government bonds have a stupidly silly cap. Still, the money went out, even with corporate bonds offering juicy 10-12% yields.

Second, the last time we had a capital inflow flood, we had low, not high rates. That was 2007; and the liquidity flow that happened then is literally being copied today as we speak - if we have to worry about the flood of capital inflow, that time is now, not after we increase rates. (The Rupee has appreciated to Rs. 46.4 to the dollar - a 5% rise - in the last week or so).

And finally, if we bump up rates, we will eventually stymie growth. We have a crappy non-transparent Corporate bond market. We have foreign investment limits in the only really transparent bond market - government bonds that is. When that is the case, you won't get risk-averse inflows. But the risk capital, the biggest constituent of the "capital inflow" flood we have already received, Mr. RBI, will flow out because your rate increases will slow things down.

Emerging market central banks have three options in managing capital flows. The first option is for the central bank not to intervene in the forex market and let the exchange rate bear the burden of adjustment. Will undue exchange rate appreciation not further widen the current account and what will the implications be for future sustainability? Will exchange rate appreciation help to contain inflation? These are the questions to address if this option is adopted.
Second, the central bank can intervene in the forex market, but refrain from sterilisation. Such an approach runs the risk of excessive growth in monetary and credit aggregates which can lead to higher inflation as well as credit and investment booms and create financial fragility.
The third option is to sterilise the interventions. Irrespective of the method of sterilisation, the financial cost of sterilisation in terms of national balance sheet is obviously ultimately borne by the government even though direct costs may be borne by separate agencies. Sterilised intervention can exacerbate fiscal pressures, but this needs to be assessed against the benefits of macro-financial stability.

For those of you who find this difficult - option 1: let the rupee appreciate, that will reduce inflation (because commodities are linked to the dollar), but it hurts our exports and thus causes current account deficits to widen. Option 2: Hold the rupee down, but that will involve printing hajaar rupees to buy dollars. That will cause inflation and madness. Option 3: Hold rupee down and then use sterilization measures like selling bonds to keep the rupees from flooding the system. We did this once, and it doesn't seem to help.

I would go with Option 1 - and not just because I want to spend lesser rupees on buying that Amazon Kindle. It's fairer - we are a consumption economy, so let the rupee grow, we'll eventually start using the dollars to import hajaar stuff and it'll be more well balanced. But I think the RBI will go with 3 - a very short sighted measure.

The other thing Subbarao notes is that the RBI has limited means to make monetary policy flow in this direction (i.e. reducing rates). That I think doesn't apply on the other side - one whiff of RBI increasing rates and all the PLRs, BPLRs and other lending rates will go up immediately.

It needs to be recognized that after a crisis, with the benefit of hindsight, all conservative policies appear justified. But excessive conservatism in order to be prepared to ride out a potential crisis could thwart growth and financial innovation. The question is what price are we willing to pay, in other words, what potential benefits are we willing to give up, in order to prevent a black swan event? Experience shows that managing this challenge, that is to determine how much to tighten and when, is more a question of good judgement rather than analytical skill. This judgement skill is the one that central banks, especially in developing countries such as India, need to hone as they simultaneously pursue the objectives of growth and financial stability.

Say what you will, this was an incredibly well written speech. And while Subbarao doesn't yet answer his questions - maybe because it defeats the purpose to say it before he does it - he brings across the context beautifully.

There's still zany asset price bubbles to deal with, though. Look at stocks and real estate. In that perspective, we are still a diseased economy on steroids. It feels great, but if we don't slow down and rest a bit, we'll be worse when the steroids stop. And it doesn't matter that the world is on heavier steroids.

Can't Outsource Due Diligence on Homes to the Financing Bank

2009-10-11T00:58:00.004+05:30

A new ICICI Home Finance advertisement on TV (no link) shows a young man telling his dad about his decision to buy a house. The father wisely tells the son about the scrutiny, background checks and legal work required to ensure the property is all ok - the son says "ho gaya" (done) and points to an executive sporting an ICICI badge.

SBI Home Finance, in a recent ad, also promises "security" of knowing the correct background work has been done by the very stable.

This is a horrible image to sell to customers, when the reality is in fact very different.

First, note that all home loans in India are full-recourse loans. Meaning, if you default then they can sell the house - if the sale yields less than the loan amount, they can take other assets from you.

This means you can't just mail in your keys and say goodbye to the loan (like the US allows). This also means banks have not enough reason to do "background checks" or scrutinize the property you have taken a loan for. If the collateral gets stuck because of some legal issue, you're still liable for the loan. They can take something else you own, like your car, and FSM forbid, your cellphone.

The incentives are just not there for a bank to really investigate a property they lend against - and it shows. Recently, I noted how ICICI double lent against the same property - they gave two different loans against the same underlying property - is that enough "legal scrutiny" for you? Of course, that case was even more zany because they had originated the other loan also, making an even bigger mockery of their "scrutiny" process that the good son in that advertisement was relying on.

Banks tend to charge "legal costs" during the loan process - in Bangalore, it used to be 10-15K per flat. Still, the work is shoddy because of misaligned incentives again, as the person who is doing the work (the lawyer) isn't accounting the person who is paying (you). If you hired a lawyer yourself you might get a better investigation done.

The correct thing to do would be to ignore these ads and do the right amount of due diligence yourself. In the US, banks tend to have no recourse other than the property so they must scrutinize the loan properly; even then they found the bubble in securitization was enough to palm off the risk to other buyers, and "loosened" scrutiny for both the underlying homes (inflating quotes) and borrowers (allowing very low quality creditors in).

In India, they have full recourse, so if you're a rich buyer they won't care about the property so much. Some banks even take "guarantors" apart from property papers; if the property isn't enough, and you vanish, they will go after the guarantor. So the only thing that hurts the banks is a slow legal system; but that's starting to change. And it WILL change for the "faster", in the 20 year tenure that you pay your loan on. So if the banks get to foist a bad property on you, it will be your problem; so do the diligence yourself. You don't want to be in a situation where you get a big loan on a property, the property gets stuck in a legal case, and the bank comes running to seize your other assets. You can't say, "But you did the scrutiny" - the bank will somehow develop amnesia.

(As for exactly what kind of diligence: Ranges from getting full ownership history of the property, various government approvals, any court cases, appropriate copies of Powers of Attorney if any, builder history, running advertisement for x days soliciting no-objection etc. A laywer will know best)

Reliance 1:1 Bonus and the Brouhaha

2009-10-10T14:08:00.005+05:30

Reliance, after years of ignoring shareholder demands, has finally decided to give that 1:1 bonus. Last year, they quoted large investors as being concerned about the accounting implications, which is why they ditched announcing a bonus. But this apparently didn't exist this year. My personal feeling is they waited so the RPL merger would be complete, and then announced it.

So is the big brouhaha warranted? For most investors it makes ZERO difference. The share price will come down by half, and the number of shares will double, on the announced "ex-date". That means your net worth does not change. With the shares priced lower, it might become more affordable so liquidity *may* increase - but with a company like Reliance which is already hugely liquid, there shouldn't be any impact.

Does it matter to the company? No. Whatever is being distributed as "bonus" shares is simply a recapitalization of reserves. (Read "Of Shares, IPOs And Stock Markets" for background) Reserves are created by accumulation of profit (whatever is left over after paying dividends). For Reliance this is a HUGE amount - since they have been immensely profitable over the years. They can even give a 10:1 bonus and still have reserves left over.

(RIL has over 100K crores - a trillion rupees - in reserves, with only about 2000 cr. as the face value of equity shares. Some of it has complex implications with debt and FCCBs but there is a HECK of a lot left over)

A lot of people think a "bonus" is a good thing. It's no big deal at all, in companies like Reliance, unless they were to do a 1:5 split or something bringing the price below Rs. 500 (then a lot more people get interested, for some reason). It used to be a tax saving scheme but even that's been plugged now. Some say this will increase dividend - but by and large, dividend yield remains constant (so it's more a function of the stock price, not the number of shares outstanding) Reliance is paying Rs. 13 per share dividend this year. Next year, they might not pay more than Rs. 6.5 per share (unless they increase profits a lot), so income remains the same.

The company made Rs. 105 per share last year which, after the bonus issue will be Rs. 52.5 per share; the current share price at Rs. 2100 discounts past earnings 20 times, and I expect a post bonus price of about 1050 to 1100 per share. The word 'bonus' is very positive to hear, but like most things in the financial world, things aren't as great as they sound.

Direct Tax Grows [Only] 3.69% in H1 2010

2009-10-06T22:08:00.003+05:30

ET: Direct tax kitty grows 3.69%

The Centre has collected 3.10 per cent more in direct taxes in September at Rs 64,737 compared to the same period last year.
With this, the mop-up from direct taxes for the first half of the fiscal has touched Rs 1,52,625 crore, an increase of 3.69 per cent over the corresponding period a year ago.
The growth in government's corporate tax kitty for the fist half of this fiscal was more pronounced at 5.55 per cent over last year's. In the first six months, Rs 1,00,572 was collected in corporate taxes compared to Rs 95,283 crore last year, the Central Board of Direct taxes in a statement
However, Personal Income Tax collection for the first half at Rs 51,897 crore saw only a marginal rise of 0.38 per cent over last fiscal. The figures include Securities Transaction Tax and residual Fringe Benefit Tax and Banking Cash Transaction Tax.

Isn't 3.7% growth in tax collections slightly low for an economy that's supposed to grow at 8%? Agri growth won't be great, what with the drought and all, so corporates should make up, one thinks.

Government double standards: Reduce CEO pay, but we'll keep our bungalows

2009-10-05T21:15:00.002+05:30

A government dictat, or the threat of it, does not rile me much anymore; especially when the Congress government rules. Oh well, any government, but they've had the biggest chunk of time in power. Still, once in a while, their spokespersons make statements that are simply intolerable because they reek of double standards.

Salman Khursheed is our Minister of State for Corporate Affairs. (which, incidentally, does not involve snooping into whether Bharti went to bed with Vodafone, though that might be a better use of his time). He went on the rampage against "vulgar" salaries being paid by the private sector to their CEOs, saying that he could "hardly shut his eyes on what salary CEOs are going to take". We can be liberal, he said, but not vulgar, referring perhaps to the fact that some people other than politicians have actually made some money and worked hard, which must be anathema to the Congress Party.

This stinks. The government spends an obscene amount of money in Delhi just propping up people like Khursheed. He stays, supposedly, at 2, Motilal Nehru Place,New Delhi-110011 which is in the heart of Lutyen's Delhi. That house is probably worth 50 crores now, but let's just take the rental value - about Rs. 10 lakhs per month? Why not give it up, and go live in a house in Delhi that he OWNS, if he wants to be austere? Why foist his austerity on us, when it was his government's stupid policy of forgiving farmer loans, overpaying fertilizer subsidies and running obscene oil subsidy bills?

That 10 lakhs a month adds up to a fair bit, one would think, for a person whose primary role seems to be to keep making silly statements. But it doesn't end there. We, the tax payers, pay for their servants, their transport, their security, their phone bills and of course the few crores they spend when they scream and rant and adjourn parliament because they want to do su-su.

Choices: a) we spend our money, or b) they spend our money. That decision, to me, is very easy.

Khursheed warns against being ostentatious. Oh yes, having FOUR cars is not very austentatious; his wife and him own a Scorpio, a Gypsy, a Jeep and an Innova. He owns a flat in Delhi and 11 acres in Farrukhabad, UP. Khursheed's has declared 75 lakhs in FDs in only his name. And this is just the declared assets; which we must believe is all he has, otherwise we are vulgar.

CEO pay has been debated in a lot of countries; the latest is to limit bonuses and make them more in line with real profits (not ones invented out of thin air). That is perfectly understandable. But to limit salaries in what is a real profit making enterprise is overreaching and unnecessary; after all such salaries involve payment of tax to the government (rather than keeping them in a zero-tax SEZ or something), and then the money is spent so the money trickles down to those who don't have it.

When a company like Reliance, which makes a NET profit of over 15,000 cr. per annum, pays its CEO a salary, including perks, of Rs. 44 cr. , it is hardly "vulgar". But to understand that will require the application of logic, and I must beat myself with a stick for expecting too much of our politicians.

I say spend it. We've saved way too much. They're going to debase our currency anyway through inflation. Setting limits on CEO salaries is going to be a waste of time - they will find a way around it anyhow. Better, perhaps, to ask them to spend as much and more; some of that money will find its way to the poor, and some of it, FSM forbid, into government coffers as well.

Too much ranting. Sorry.

Algo Trading Scaling Up in India

2009-10-01T01:11:00.003+05:30

LiveMint: Algo trading "encouraging" in India, says Goldman

The resurgence of interest in the Indian markets in the past six months has spawned a new phenomenon—the growth of direct market access and algorithmic trading facilities offered by brokers. Goldman Sachs, a leader among sell-side electronic trading service providers globally, has had reasonable success since launching this facility in India early this year.
...
Goldman Sachs has been offering direct market access to its clients since 2008, a few months after the Securities and Exchange Board of India allowed these facilities for institutional investors. In early 2009, it offered its electronic trading clients three algorithmic trading strategies and last month it expanded this to nine algorithms. Siddharth Chhabria, head of India sales for Goldman Sachs Electronic Trading, says, “A large number of orders placed with Goldman for the Indian markets are using the direct market access route. Of this, as much as 90% are orders that use algorithms. The most popular algorithms are based on liquidity-seeking strategies due to the lack of depth in liquidity in many securities in India.”
For instance, one strategy popular with Goldman’s clients is “participate”, which works a large order on an exchange by placing small limit orders or “child orders”, depending on the existing liquidity in the stock. The algorithm watches market action on a tick-by-tick basis to keep in line with the exact liquidity situation in the stock and at any given time there are a number of child orders at different price points to participate in the existing liquidity.

There is enormous action in this space, and I can actually see bots placing orders in various options (and yanking them off nearly instantly) every so often. So much that the NSE decided enough is enough and will charge a penalty for "too many unexecuted orders" - a charge of 1 paise to 4 paise per order if the order to execution ratio is greater than 100 to 1.

Execution algorithms take precedence - for mutual funds or for the buy side, getting "VWAP", or "Volume Weighted Average Price" may be useful for large orders (and to know they aren't being stiffed by the broker). An algorithm can easily split orders into small parts and use tick-based liquidity information to get as close to the VWAP - reported by the exchange - as possible.

With the great squid perking up electronic trading in India, liquidity flows will be enormous. As a retail trader can you get electronic trading access? There is just one electronic trading platform I know of - and it's a bit expensive - Interactive Brokers. Yes, they are in India now.

Gold is a Reasonable Investment: GW

2009-09-30T09:12:00.002+05:30

George Washington writes in at Naked Capitalism on whether Gold is a Reasonable Investment.

It's an excellent compendium of links, articles and opinion on Gold. Some points:

Gold, considered a hedge against inflation, does well in deflationary environments too. And if the environment involves devaluing currencies it goes up - like the purchasing power of gold did during the Great Depression and in the last 10 years.
There's some evidence that while gold loses some sheen in the early part of a deflationary period, it climbs in the later part; the Yen-Gold chart is provided.
Short term interest rates near 0% are good for gold.
Government distrust - of the type happening in the US (we in India have never trusted our governments) - is positive for Gold.
It's the currency-of-last-resort, so panics induce buying.
China will buy dips and effectively put a floor on gold prices.

Linkfest: Shadow Inventories, New Normals, Bridges to Nowhere

2009-09-29T00:02:00.005+05:30

Random links:

U.S. "Shadow Inventory" Crosses 7 million houses. With real estate developers going gung-ho again in India, and rising RE prices, it might be cheaper to invest in the US rather than locally - and there you get much better than the 2-3% rental yields you get here.
But the situation in India is not as good as they make it out to be. It's highly non-transparent, very broker-cartel controlled and there's a looming hungama about Diwali. Prices going up? DLF's latest offering in Capital Greens "Phase 2" Delhi, at 7,500 a square foot was lapped up, they say. And yet, you see online ads of sellers in Phase 1 - to be ready much earlier than phase 2 - at 5,500. Been tracking real estate prices in Gurgaon, Navi Mumbai and Bangalore - rates are NOT going up.
John Mauldin welcomes you to the New Normal - where the U.S. needs to create an average of 250K jobs a month, to get back to 5% umemployment in five years. That's not been seen anytime in the last 10 years, or in average 10 year periods, or even the best 10 years of the last 20. They need to create those jobs, for sure. And I have a strong feeling this will result in the going away of jobs from other places, if it has to.
Natural Gas has exploded up 60% in the last month. Yet, the storage capacity of gas has been reached, says Bloomberg. If it wasn't such a bitch to transport, the Ambani brothers would have stopped fighting over these issues long back. Oh, and the government's lopsided policy of "gas allocation" at different prices to different industries doesn't quite help. Will the glut crush them all?
India's Credit Growth, as of Sep 11, is less than 14% - the lowest in the recent three years or so. Banks are raising capital betting on a turnaround; they expect it to scale to 20%. The RBI seems to agree. With the sixth pay commission hike arrears - worth 17,500 cr. - being released in September, the next month should see some improvement in consumer good sales, and provide glitter to Diwali. We'll have to see if it sustains after the earlier-than-usual Diwali season is through.
Interesting reading on China's Investment Boom: The Great Leap into the Unknown (HT @lukkha) China has more spare cement capacity (340m tonnes) than the consumption of India, USA and Japan combined! (And in India's we're going nuts adding to capacity) The story has a lot more fascinating details like how China has overtaken Japan in the infamous "Bridges to Nowhere" madcap infrastructure spending metric. An example: they had to use 380 kg. of dynamite to blow up a bridge in Sichuan so they could rebuild it and thus "spend the stimulus money".

Microfinance In a Spot Of Trouble

2009-09-24T01:37:00.002+05:30

Ketaki Gokhale in the WSJ: "A credit crisis is brewing in Microfinance"

Here in Ramanagaram, a silk-making city in southern India, Zahreen Taj noticed the change. Suddenly, in the shantytown where she lives, lots of people wanted to loan her money. She borrowed $125 to invest in her husband's vegetable cart. Then she borrowed more.
"I took from one bank to pay the previous one. And I did it again," says Ms. Taj, 46 years old. In four years, she took a total of four loans from two microlenders in progressively larger amounts -- two for $209, another for $293, and then $356.
At the height of her borrowing binge, she says, she bought a television set. The arrival of microfinance "increased our desires for things we didn't have," Ms. Taj says. "We all have dreams."
Today her house is bare except for a floor mat and a pile of kitchen utensils. By selling her TV, appliances and jewelry, she cut her debt to $94. That's equal to about a fourth of her annual income.
Around Ramanagaram, the silk-making city where Ms. Taj lives, the debt overload is stirring up social tension. Many borrowers complain that the loans' effective interest rates -- which can vary from 24% to 39% annually -- fuel a cycle of indebtedness.
In July, town authorities asked India's central bank to either cap those rates or revoke lenders' licenses. "Otherwise, the present situation may lead to a law-and-order problem in the district," wrote K.G. Jagdeesh, deputy commissioner for the city of Ramanagaram, in a letter to the central bank.
Alpana Killawala, a spokeswoman for the Reserve Bank of India, said in an email that the central bank doesn't as a practice cap interest rates for microlenders but does press them not to charge "excessive" rates.
Meanwhile, local mosque leaders have started telling people in the predominantly Muslim community to stop paying their loans. Borrowers have complied en masse.
The mosque leaders are also demanding that lenders give them an accounting of their finances. The lenders say they're not about to comply with that.
The repayment revolt has spread to other communities, including the nearby city of Channapatna, and could reach further across India, observers say.
"We are very worried about this," says Vijayalakshmi Das of FWWB India, a company that connects microlenders with financing from mainstream banks. "Risk management is not a strong point for the majority" of local microfinance providers, she adds. "Microfinance needs to learn a lesson."

Microfinance has taken the fancy of many lenders, getting venture funded, PE funded and funded up the wazoo. And they won't give up too easily, as SKS writes:

Ms. Gokhale reports that there is an over-indebtedness problem in one slum in one city in one state of India and goes on to assert that this indicates that there is a "credit crisis brewing in 'microfinance." Such a sweeping generalization based on anecdotal information from one neighborhood is absurd.
To the contrary, the data suggest a very different picture. Microfinance institutions in India, which serve 22 million clients, have consistent repayments rates of 95% and above—repayments that clients could not make if they were not generating regular income, given the weekly repayment schedule that most microfinance institutions follow.
In fact, the Microfinance Information Exchange (MIX), the Washington-based non-profit information platform, reports that the average repayment rate of leading MFIs in India—which have the lion's share of clients— is 98%. My own institution, SKS, which serves over 5 million clients spread across 70,000 villages and slums of India, has a 99% repayment rate. Meanwhile, our portfolio received a PR1+, the highest safety rating, from an independent external rating agency, for a debt instrument slated to list on the Indian stock exchange.

Er, but if you repay loans by taking other loans it will definitely show up as a high repayment rate? And as for an "independent credit rating agency" rating them PR1+, haven't we learnt enough already from their fantastic performance so far? The rating PR1 could mean "Paid to Rate 1+", for all I care.

Other Micro Finance Institutions (MFIs) answer here. (Unitus, Ujjivan)

The WSJ doesn't usually take badly researched articles, so I would be hesitant to label it unsound and run with the MFIs. Some of the points they make are valid - that it's perhaps wrong to use one city as a benchmark, and that other factors like religious tensions or a downturn in the silk industry could impact that city.

(Btw, Ramnagaram - where Sholay was shot, and the origin of "Ramgarh ke vaasiyon" - has a lovely set of boulders and small rocks for climbing/bouldering, and I used to visit often when I was in Bangalore.)

Some of the excuses the MFIs put out - like the problem is restricted to two cities, etc. doesn't quite gel right; it feels like an overdefensive posture. Plus, they talk about the benefit of Microcredit - no one denies that. The problem is in expecting default rates to be low, and uncorrelated, an assumption that may no longer be valid when debt spirals occur, and when community resistance builds up.

Traditionally, money lenders belonged to the same region/geography/community - so there were social costs to defaulting; now, the lender is just a faceless external organization. If enough people took loans, they could just get together and default, with only a positive social impact (togetherness). As unsecured loan providers, the MFIs will have no recourse.

It may just be the beginning. MFIs can only make money when the defaults are too high for banks to provide lending, but low enough so the MFIs can get away without having to use strong-arm tactics for recovery. If the defaults get too large, the MFI will be in trouble. And once these customers get on their feet, the banks will grab them and the MFIs may end up only making commissions on selling bank loans. (A positive will be for the MFIs to become NBFCs or banks themselves)

RBI has a paper out, on expanding the definition of "Business Correspondent", which now includes nearly anyone in a rural setting. The fight for the rural consumer is on; and it's not just loans now. I hope they all get enough knowledge to build businesses, invest in equities and debt (not just FDs) and buy proper insurance; that will be the next phase of the Indian Growth Story.

Inflation at 0.12%, cause for worry?

2009-09-22T23:39:00.005+05:30

A little late perhaps, but the most recent inflation chart:

(Click for a larger image)

If the prices continue at the long term trend levels we will see index levels of 245 in JFM 2010. That corresponds to the 2009 levels of about 228; inflation will be around 7.5% then. Will the RBI be pressured to raise rates?

Food price inflation has been around 15% already, and sugar prices have gone seriously up worldwide. Wheat, while decreasing worldwide, has held steady (despite a pretty good supply this year). And the dollar has stayed at the 48 levels, regardless of what people say is "liquidity" and "inflow". The RBI seems to be actively intervening - what else can explain the $5-6bn we add every week to the reserves. But in the face of rising inflation a weaker dollar will help since most commodities are marked to international prices. But again, will the RBI bite?

It's an inflexion point for the economy, in a number of ways.

SoS: Stopped out of everything.

2009-09-22T22:57:00.004+05:30

So 5,000 has been broken on the Nifty and the WIDE stops on the Short Only strategy have been hit. I was expecting a move up but was thinking it would stop before this - guess it was not to be.

Crappy return, of course - a negative 10% in just about a year. Not surprising for a short strategy; and I'm sure if I had real money on it things would be different. It's very strange, actually, to have no real money backing this strategy; I'm sure if I did I would manage it better (and who wants to lose this much!)

When we planned Moneyoga I remember hearing that this "virtual" portfolio stuff is only a learning exercise - the real test is the emotional damage the volatility of real money can do. Which is true, I guess - I've been strangely unattached to the losses of a "virtual" strategy, and been on the wrong side of most of the move!

There will be a time to return, and given we are currently way overpriced, the only thing I'll do is setup Nifty puts on it. A better way to short perhaps is to find stocks that have very short term underperformance and take small bets on those - in a bull rally it's tough to hold shorts on a fast moving stock. HDFC is still way overvalued, but to short it weakness must build; and there is absolutely no sign of weakness.

The blowout will come, but when, from which level? That's not a question worth answering - the Taleb bet might be the only useful one, when you spend small amounts buying what will give you an outsized return in one of the following months.

IMF wants to sell 408 tons of gold, China's thinking of buying

2009-09-21T18:08:00.003+05:30

IMF plans to sell 12.5% of its gold reserves, 403 tons worth:

The International Monetary Fund has approved a sale of 403 metric tonnes of gold reserves, in a move likely to raise $13bn (£8bn) of cash to replenish its coffers for lending to low-income countries hit by the global economic downturn. The sale amounts to roughly an eighth of the institution's stockpile of the precious metal and comes as gold prices hit record highs, boosted by investors seeking safety away from volatile stockmarkets.

This is a well timed announcement, and would have brought the price of gold down in usual circumstances. But these are not usual circumstances.

China is thinking of buying from the IMF. Given the 2.2 trillion of the increasingly value-losing dollar reserve, China needs a hedge or a way out. They say they'll only buy at a big discount, but it's not a big deal: the $13 bn this will generate for the IMF will not do much to diversify the reserves. Given the $10-15 billion in gold traded per day, they wouldn't be able to get a lot of gold out from the real markets even if they wanted, and that would really drive up prices. China's diversification strategy includes commodities of all sorts - they have stockpiled everything from iron ore to aluminium and copper. Still, nothing that can make a serious dent on the $2.2 trillion they hold.

India might also pitch in - and try to buy a part of this to keep the $280bn of reserves in gold (only $10 bn is currently in gold).

What this will do is temporarily set up a floor price on gold, as a good friend told me yesterday. Gold just crossed $1000 an ounce, and in India trades at 1600 rupees a gram (though Goldbees, the ETF, trades at 1575).

The total amount of gold ever mined is the order of 150K tonnes. That at $1000 an ounces is about $4.5 trillion. To give you context, the amount of money in print in just the US is about $8.3 trillion. It's unlikely that this precious metal will be able to hedge dollar exposure very much, but you can bet that some countries are going to give it a shot.