The Indian Investor's Blog

Spammers Note: You will not be published

2008-07-22T11:11:00.002+05:30

Some random idiots are posting spam comments on this blog. They do not understand two things:

Spamming 60 posts does not provide a better chance to be published. I will select all and reject, and it takes me one click. And when I know spammers will do this I will wait till they run out of steam.
I don't care anymore what they write because the minute I see their URL or name in there I will simply delete the comments.

These guys supposedly provide "tips". Here's one tip to them: Stop wasting your time, and behaving like outdated losers.

Obviously they aren't making any money off trading - if they were they wouldn't be doing this - that's why they get miserably desperate. In terms of internet etiquette, these are the low-life lumps of lard that make our online time less productive.

(Some people say the fact that you get spam means you're famous. But not this - these people will spam even their mother's site.)

Proposed Rupee Futures in a Regulatory Vice

2008-07-21T12:11:00.005+05:30

Vikram Murarka on the upcoming rupee futures:

The lot size has been kept at a mere $1,000, which is just about Rs 42,500 at today’s rate....To put things in perspective, the value of one lot of rupee futures is going to be half that of one lot of the Mini Nifty.
...Corporates are supposed to access the market only to hedge their forex exposures, not for speculative purposes...Cut to the futures market. Since there will be no delivery involved, all the trades will be termed speculative....even if a small exporter were to ‘hedge’ himself on the futures market, when it comes to realising rupees against his dollar receivables, he would still need to transact with a bank, which would charge him a steep 20 paise per dollar... let us suppose that skilled speculative trading gives rise to profits. Will corporates want to pay capital gains tax thereon...RBI’s report prescribes a client level open position limit of $5 million...

(Emphasis mine)

Lots of issues, but definitely better than no futures at all. Hopefully the RBI will react fast to market action and change or ease regulations accordingly.

Innovative Uses for Annual Reports

2008-07-19T16:57:00.004+05:30

Shrinidhi Hande has an interesting take on what his investment strategy is: (Hat Tip: Anand Gadiyar):

With disappointment I looked at the pile of annual reports…and a damage control idea hit me. Tried to lift all those annual reports together and found the combined weight heavy enough. Next day when I heard old paper wala passing in front of my house, I called him and handed over all these annual reports. He looked at them with contempt and gracefully weighed them in his balance. When he gave me cash in exchange of these ‘old paper’ I realized that I have made more money by selling these annual reports than by means of dividends received.
So here’s my new renewed investment strategy for this financial year-Invest in companies which send big, thick and heavy annual reports. That way you’re returns increase.

Darn funny. And I think there are good uses of such annual reports - for instance, wasn't it the public report of Enron that made the first set of short sellers see how badly they had managed the company? Also you can use them as a weapon in case you feel like throwing something, but it isn't financially beneficial if the object at the other end is, for instance, a TV.

I have my own little need for these reports. Where I stay it's very windy and I like to keep the windows open. My study door has no doorstop. My one year old son would push or remove any external doorstop I use at floor level. Annual reports come in handy:

That's the Ranbaxy annual report out there. Another door has Reliance. I am company agnostic.

The Scorecard of Predictions and Statements

2008-07-19T10:19:00.006+05:30

This weekend I thought I'd go back to my posts long long back - my patience ran out at 2007 - and see if I had made grand and silly predictions about the great future, and how those predictions panned out.

Someone told me recently that the 4 most used words in the Mumbai Stock Market are "I told you so.". And I hate that phrase. So this is not an "I told you so" funda - it's just a personal report card, to see how the statements of a a random stock market viewer like me have panned out. It means nothing more than that I got bloody lucky.

Jan 2007: The lack of irrational exuberance

No irrational exuberance yet. Everyone's a skeptic. Everyone's a muh-bola-bear. This is the time for smart investors to buy, and buy into the right shares. In fact, there will be small, healthy corrections every few days - choose that time to buy.
...I bought BHEL at 2120 on Jan 15; simply believing that a strong order book deserves a better valuation. .... most likely I will sell if the share moves beyond 2800 within three months. [Which I did, later]
...
The sun has not set on the bull market. Not in this year. I have bought an exchange traded fund, the NiftyBEES, which tracks the Nifty- I believe that within three years, I will see a return of 50%. Individual stocks of course, are bigger growth stories than that; I'm buying my picks.

Hmm. The Nifty was at 4100 then (and it's back to that level now). In the interim it had gone up 50%, to 6300, so technically I'm on reasonable ground there. I haven't sold my NiftyBEES (not all of it) so I'm also technically stupid. BHEL did well, so did Reliance, but not DRL. And the sun did not set on the bull market in 2007, so I give this post +5.

Feb 2007: Is the Nifty Overvalued?

The Nifty trades near its all time high, at 4214 today. Is this too high? We have come up more than 60% from the June 14, 06 low of 2632. Everyone seems to be skeptical and is waiting on the sidelines, but is this market really overheated?
...
I expect the budget to boost earnings, but pare down speculative growth. That will probably not affect the Nifty very much, and almost definitely will push earnings growth to stay at current levels. That leaves room for growth from here - the market is at a high, but it's definitely not overvalued.

Ok, sorta reasonable in the short term (1 year timeframe). So +1 perhaps.

March 2007: Big dips: how to choose stocks in a downturn

Reliance and IPCL will merge and the benefit will entirely go to Reliance....At the current price of Rs. 1285, RIL shareholders will have a company of P/E 15 or so - which, at the rate it's been growing, is remarkably cheap.
...
Bajaj Auto at 2500! It was up to 3000 a couple months back! But that is no reason to buy, because 3000 could have been simply too high an expectation.
...interest rate hikes and slowing growth in retail lending will take its toll, and perhaps SBI will not grow at 20% or more in the next few months.

Reliance is up, Bajaj is stagnant, and SBI did go up to some 2,400 so I was wrong. Net 0 marks. Btw, I still agree with this post: Timing the market is a good thing.

May 2007: I exited Balaji Telefilms at 230, and it's Rs. 168 now, so +5 there. Mentioned SRF target 300 from price 171, and it's at 120 now, so -5. I said Exit all IT and the IT index has fallen from 5250 then to some 3500 now. So +5.

June 2007: In a post on DLF:

Be careful, folks. This is not the peak yet, and we still have to see the buildup of massive exuberance. But it seems to be coming. Be wary, and keep your stop losses handy.

Feel good post. But nothing in there really, so no marks.

July 2007: Sold BHEL at 1650. Sure, it's at 1500 today but it did go to 2200+, but still profit is profit so +5. Exited SRF at a loss (but I already gave it -5 earlier). Gave Infy a target of 1600 (it was 1900 then and 1550 now), +5 there.

August 2007: The subprime problem is worse than we think. That's interesting - didn't remember I wrote it that early. +10.

Sep 2007: Riding the wave. This was my official note of riding the momentum:

Before every steep fall in the market, there has been a euphoric rise. I believe this is that rise for us. If we go up hard, we will fall hard. I'm not sitting on the sidelines - no, that is giving up too much of this opportunity. I'm just giving myself a 10% cushion.

No marks, but feel good.

Oct 2007: More momentum

I'm now up 28%, higher than the index move (finally!).
...
We are in the middle of irrational exuberance. I say "middle" because no one will know the end until after it happens. Yet, there needs to be massive retail participation before it all falls down, like Ring-a-ring-a-roses.

Okay. +5.

Nov 2007: The End Game Begins. And my predictions for the year after last Diwali:

Reasons:

US financial market is going to collapse. Lots of reasons for that, but I don't like it one little bit.
Hedge fund redemptions are on and the impact will be visible post Nov 15.
The new mark to market accounting rules for financial institutions gets visible on Nov 15, and already some banks have revealed assets they own, that they have NO idea what their worth is, and that are greater than the capitalised base of the banks. Duh.
The Indian market data does not look good. Futures have moved to discounts from premiums, and there is a lot of call writing. The option data shows a lack of big investor participation on the buy side at least.
Distribution in large stocks, accumulation in midcaps. Yes, the retail investor is getting in. Time to move out and wait for the inevitable.
Trading distortions all over the world and accounting indicates that investors will churn out their profitable assets (read: India). And this is exactly what is happening.

Ok this sorta worked out. Also mentioned the Ambac/MBIA downgrade impact, way back in December.

In Jan 2008 I ended up buying stocks that went down a lot (and I got stopped out) but also in there was, "our market is overheated. At a 25 P/E we are pushing the envelope. To tell you NOT to invest would be stupid, and I now believe the market has a while to go before we come crashing down.". Both smart and stupid at the same time! Also "Simply sell now" (Jan 18), and I made money from the crash.

Feb 08: Bullish on Gold (not much of a move till now), "I am bearish on IT even now" (silly as IT stocks probably moved up from there) and Nifty not yet attractive (Fab. Nifty down another 25% from there).

That's it. The rest is too recent to grade. Overall I got 60,000 marks. Because I know you don't have the patience to count, and this is my blog and I can give myself as many marks as I please.

It was good to see what I'd written in the past. Just to see if I was off my rocker - and many times, I was - and my transition from this fundamental driven investor to momentum trader and finally to automated trading systems. It's been a fine ride - each of the above have made money for me - and as always, I feel I've just been incredibly lucky. Thanks for reading.

Dead Cat Bounce

2008-07-18T20:41:00.003+05:30

The Sensex closed above 13,500 and the Nifty near 4100 today. Things seem to look good, and suddenly you will start getting calls from brokerage houses and see news of the Sensex on the front page.

Had you stopped looking at the markets for a long time and suddenly found the interest again? Don't bother. If you're looking for another place to sell stocks, this may be your chance. The Nifty P/E is still 17+, and (shudder) EPS is CONTRACTING. Means forget growth, we're struggling to just keep even dammit.

The current Nifty EPS is 233. This is even lower than it was in May - because of bad results. And not just Q4 08, we are seeing horrendous results in Q1 09. The IT biggies have done their thing, and still the EPS hasn't bumped up. What's it going to take to grow 20%? LEt's see- End August 07, the Nifty EPS was 220. That means to go till there we need to be at 264 by end august. Heck, just to justify P/E we need to be at 256 (16% EPS growth, 16% P/E)

With most companies yet to declare results, and potentially one or two huge losses coming from the likes of BPCL, it's looking very difficult. Let's see how it goes - and remember, all that matters is EPS growth. It's not revenues, or income, or profit. It's EPS that matters.

(For traders of course, even that doesn't matter. Only price. Which works for me - we've consistently been doing well the last few weeks; systems are now working to our advantage. We're slightly down this month; a system couldn't handle the volatility and we had to throw it out after some underperformance. But the remaining ones have actually done very well in these times.)

As much as I would like it to move much further I don't have too many hopes going forward. This is a typical fierce bear market rally, which could last a while or just a few days - but volumes suggest there are fresh bakras being herded in and that someone's going to get [more] hurt. But such are the markets. Gotta keep it interesting.

I'm happy being bored to death waiting for my little program to say "Buy X amount of this" and "Sell X amount of that". Bored is better than broke.

The Fall of the Indian Retail Mall

2008-07-18T11:12:00.002+05:30

From DNA: Plunging sales see retailers quit malls:

ETAM, the French lingerie brand that has a joint venture with Kishore Biyani's Future Group, recently pulled out of Palm Beach Galleria mall in Navi Mumbai, together with six other retailers such as grocery chain Foodland Fresh and Manoranjan sarees.

Hey, I live close by and I was in the mall two days ago. Not only have the above shops gone, three of the six small shops in the food court have vanished. (Two large restaurants, a bread variation shop and two veg restaurants are all that are left). This could be because the attraction of the multiplexes is down, due to Fame setting up at the Raghuleela mall close by.

The mall scene here is mega oversupplied. There are four malls within a kilometer or two of each other. Raghuleela, Center one, City Center and Palm Beach Galleria. Another mall in Sanpada, Full Stop, is completely empty for six months and unoperational. Next to Palm Beach Galleria and City Center (which are next to each other) there are about 6 more massive complexes coming up, no doubt intended as shopping and office complexes. And there's Haware's Fantasia mall in Vashi and Centurian in Nerul, both of which are near completion.

And this is just Navi Mumbai - the Nerul/Vashi area. Add to this malls in Kharghar (5km away) and Belapur (2km), and you'll see the pattern go nuts. Mumbai has a greater density of people so malls should be more profitable. But this problem is going to be there in Delhi and Bangalore as the footfalls don't really justify the high rents.

The National Capital Region (NCR) has also seen the exit of retailers in the recent months with outlets such as Tuscan Verve and Maya's Toy Store moving out of DLF City Centre owing to poor sales.
...
Big malls in Bangalore, the country's IT capital and home to wealthy techies, is seeing vacancy levels of 50 to 90 per cent. Eva Mall on Brigade Road, Bangalore's high street, has seen the closure of all its retailers and the mall owner is re-drafting sub-lease agreements with new tenants.
Purva Pavilion, in Church Street, has been half empty for the last four years and Sigma Mall, on Cunningham Road, has seen 50 per cent of small stores moving out.
Globus, the apparel retail chain of Mumbai-based Rajan Raheja group, closed two stores in Bangalore. The chain had plans to open 100 stores in the next four years, but now it expects to open those stores in the next five to six years, given the high property costs and unavailability of real estate on time.

Bad news and then more bad news, everywhere. Remember how the funda worked:

"Premium" apartments come up
Malls come up nearby saying ok, these guys need to shop
Apartment rentals and prices go up saying oh there are so many malls nearby. "Developed" area.
Mall rentals go up saying look at the real estate prices here.
Some big retailer sets up shop and promptly loses money but terms it a long term investment.
Everyone else says heck, if he can lose money, so can we, so they also do the same thing.

Now someone's knocked some sense into everyone's head. (It's called "reality") So as real estate prices have come off the highs, and retailers vanish, soon mall and house rentals will follow. Ghost malls are likely to be common as developers, now flush with cash after the boom, decide they will "ride it out". They'll pay interest - increasing rates, btw - until they can bear it no more.

Then they will give in and do anything and everything to get people back. Reduce rentals. Get diversified shops (not just apparel, which seems to be the case now).

But that will happen only after this great recession.

ICICI in more trouble?

2008-07-16T13:11:00.003+05:30

From Sify, in March 2008:

ICICI Bank's investments in credit derivatives could be four times previous estimates at $6 billion, analysts said on Wednesday. Budget 2008-09
"ICICI Bank has clarified that there is some more exposure at its 100 per cent owned international subsidiaries. In fact, its total exposure works out to $6 billion ($2.2 billion in credit derivatives and the rest in fixed income instruments)," Morgan Stanley's Anil Agarwal, Anil Bang and Mansi Shah, said in a note to clients.
The trio warned that though the underlying credit quality on these instruments remains strong, ICICI's mark to market losses could rise as global credit conditions are likely to worsen.
"ICICI Bank's subsidiaries in the UK and Canada have invested $500 million in credit derivatives and taken a loss of $35 million as of January. Moreover, they have a fixed-income book of $3.8 billion, which is a bit out of money," Agarwal, Bang and Shah said.

I don't know if the $6 billion estimate is ICICI's - the article indicates it is that of the analysts, which I wouldn't quite trust. But if it's true, the markets have actually tanked more, and fixed income market values are down due to rising interest rates everywhere.

Another interesting bit is this:

The ICICI Bank stock shed 1.15 per cent on Wednesday to end at Rs 960.
Interestingly, not a single analyst has yet given a 'sell' call on the share. Most of them have retained their 12-month price target between Rs 1,300 and Rs 1,550.
JP Morgan analysts Sachin Sheth, Sunil Garg and Amit Premchandani said at current valuations, the stock remains attractive.
"We believe it is time to buy at these very cheap valuations, given upcoming branch openings, medium-term improvement in low-cost deposit mix, tapering off of non performing loans, and bottoming out of retail growth," they wrote.

Current quote for ICICIBank: Rs. 530. Can't trust predictions.

Reading: Financial Innovation

2008-07-15T12:44:00.004+05:30

Susan Thomas has an excellent presentation on why our financial system is practically archaic; the licence raj still exists there and stifles all innovation. (Source: Ajay Shah)

The license-permit raj in Indian finance

No new domestic banks can start operating without RBI permission.
All foreign banks put together can start 18 branches a year.
Only banks and PDs can become members of the bond exchange.
Banks are banned from trading in equity derivatives or commodity derivatives.
Currency futures / interest rate futures are not permitted.
Wheat (and several other commodity) futures are banned.
Credit derivatives are banned.
Lending government bonds is banned.
Repos on corporate bonds are not permitted.
Covered interest parity arbitrage is mostly blocked for banks and impossible for everyone else.
Two companies are not permitted to do an OTC derivatives transaction against each other. One counterparty has to be a bank.

We need to free controls and create better markets. What's the point of a system that refuses to promote liquidity, and transactions? There have been problems worldwide, but that is so in EVERY market - equity, bond, commodities - we haven't stopped trading them altogether have we? It's time to learn and implement rules that promote markets but regulate - instead of ditching markets altogether. Will RBI let up?

Nothing will change until after the next elections. RBI isn't doing much to control inflation, and hopefully is starting to hit the dollar now - it's dropped from 43.2 to 42.8 in the last five days.

Time for a more liberal market regime, and while the time for it was last year, it's not too late even now.

Abysmal by US standards, Okay by ours

2008-07-14T12:14:00.004+05:30

An interesting video: (From Calculated Risk) Such a house should be a steal for us in India - we're so used to buying houses without cabinets, without any woodwork whatsoever, and obviously, no appliances. We're kinda grateful to the builder if he gave us plumbing in working condition.

Our housing standards have got to go up. They seem to have, in Delhi; most other places they just give you a dump with walls.

Dark Pools and Algorithmic Trading

2008-07-14T10:30:00.003+05:30

From Economic Times: Dark pools threaten the existence of LSE, NYSE and Euronext:

Dark pools, to put it simply, are essentially trading platforms and exchanges that match block institutional orders, bypassing the main exchanges completely in off-market deals, and don't publish stock quotes. The geeky jargon in the circuit is primarily because it's been made possible by increasingly sophisticated technology like algorithmic trading tools. Algorithmic trading, says one study, will account for more than 50 % of all shares that change hands in the US by 2010.
Why dark pools? Since most bids and offers on say, LSE, NYSE or Nasdaq are shown publicly, trading on these exchanges is like, as one report says, "playing poker with an open hand."
Dark pools, by contrast, guarantee absolute anonymity and secrecy to buy-side traders worried about revealing their strategies, accesses available liquidity outside the exchanges, and is only reported to the light side post-trade. It is, of course, all intensely regulated and painstakingly legal – dark pools have taken off in Europe only after the introduction of MiFID, which discourages internalisation of trades, and Regulation NMS in the US.

India has anonymous exchange systems anyhow at the retail end, and members of the exchange are disallowed from squaring off trades themselves - i.e. matching orders without sending them to the exchanges. With DMA, even institutional orders may become anonymous. Of course the knowledge of the order flow may exist with the broker (who needs to account for margining etc.) but that's only postdictive i.e. only after the order is sent to the exchanges.

Indian tax laws discourage off market trades too - you pay more tax on non-exchange-traded transactions so you are likely to trade on the exchange as much as possible.

The need for a dark pool isn't apparent here yet, given that the order matching systems even allow masking of trade volumes (you can see a different quantity than is actually asked for). Also, algorithmic trading isn't very popular (thank goodness for that, it's our future business model).

But there is need for it in the stock lending system for short selling. That bit currently reveals too much - needs to get pared down.

I have no doubt that should SEBI be lax about it, dark pools will start in India eventually. It already exists in most OTC derivatives like forex, where banks have trading desks that match order flow. When the stock markets get heavily liquid and full of algo traders, there will be a need to hide information. The future is bright. Or dark, whichever way you see it.

Infosys Q1 09: Tough Outlook

2008-07-13T09:50:00.005+05:30

Infy's results are out - well actually were out of Friday and the stock got beaten up both in India and the U.S. The stock was down 7% in India and 13% in the U.S. The USD Rupee rate was at 42.87 versus a 43.2 rate seen a day earlier.

EPS at 22.75. Growth was about 20%.
Projected EPS for the full FY is around 100. Next quarter is around 24.
Now this is all with the rupee at 43.04. What happens if rupee falls again? They have only $811 million as hedge (which is not even one quarter's revenue).
27% of business comes from banking and financial services. Most of this must be in US/Europe. The banks and FIs there are, pardon my french, fubared. News as of now: IndyMac goes bust, Freddie and Fannie show signs of collapse, LEH is tottering on the brink, subprime mortgage resets raising their ugly head and a credit crisis of epic proportions in progress.
The usual first thought is that outsourcing will increase. But if there's not enough business itself, what's the point? Even stuff like infrastructure management for banks - like maintenance of software and hardware - is going to be impacted as banks fire employees, cut costs, and lower targets. Efficiency is not a driver now - you need transaction volume to drive efficiency.
Dollar EPS growth is only 16%. If we assume the dollar will go back to Rs. 40 we will end up with about that much growth on INR. Assuming Rs. 95 or so as EPS going forward, and a 16 P/E, both of which I think are a little high, we still get a price of Rs. 1,520. Compare that to current price, after the steep fall, of Rs. 1,676.
They have 7400 cr. in cash, but that translates to only Rs. 130 per share, and is potentially the only thing that can get them to higher growth - if they acquire, acquire, acquire. Infy's been loathe to buy product based companies, or buy intermediaries where their revenues can be transaction based (rather than fee based). This is the time - stuff is cheap and going to get cheaper. In five years, any purchases made now will reap rewards. But you can't keep thinking of share prices in the interim - if they're going down, let them go down a few years; you can't live quarter to quarter.
Having said that I would rather not lose money on the stock, so I'd get out if I owned any shares. After it shows the drive, and after the stock starts to rebound or even cross its last highs of 2100+, maybe then it's worth a dekho.
If you think about it, other IT companies that have lesser cash should be impacted MUCH more than Infy, if they haven't been hammered yet.

Disclosure: No positions, but we may end up taking some if our systems say so. I have very few discretionary positions on - Infy isn't one of them - the rest are system determined and they react to prices, so I can't predict if I will have a position.

Stock Chart Reading: A very quick tutorial

2008-07-12T22:05:00.004+05:30

So you first draw lines: (Source)

Then you add some cute little dots and some other squiggly stuff below. Write intelligent things next to them. (Source)

Then you step into stage two - where there aer lines, curves, little numbers from 1 to 5, the alphabets A to Z, and if possible lots of numbers written on the right hand side coloured in blue, red, green, black and yellow. Note carefully that the dots and lines will intersect all over the place and you must write the numbers and digits next to such intersections, not randomly suspended in space. (Source)

Then you can graduate to the absolute peak of chart analysis, where you even tilt your charts sideways and have multiple consecutive squigglys, arrows, coloured marks, numbers, digits, multiple curves intersecting each other and also the other lines, and notes on the side: (Source)

Beyond this you reach areas which I can only dream of, such as not just recognising patterns but patiently identifying a one-time sudden unexpected event otherwise called a black swan. (Source)

Notes:
1) This is a joke.
2) I would actually read more into (some of) the charts above. Except the last one.
3) This is not meant to berate technical analysis or any of the bloggers above. I think they do a commendable job.
4) But it was worth a little time on Saturday, no?

FMPs: Waiting for RBI's decision in July

2008-07-12T12:23:00.004+05:30

A lot of fixed maturity plans have been opened up as new fund offers in the recent past. Investors are being told to invest, as the return now reaches a salivating 11% (indicative) for a year's tenure.

But remember a simple funda: Inflation is 11.89%. That is just the current figure - as we've seen, the past data has been dramatically adjusted upward later, nowadays literally every revision is 1% higher - so 11.89% could actually be 13%.

Given that, and given that inflation is increasing every week, we need to target returns of 15% or more. To fight inflation, RBI will need to tighten, meaning removing liquidity and increasing the cost of funds by raising interest rates. Even for the near future, the next RBI meet in July end will likely involve moves to tighten. Which then should increase yields going forward - meaning that compared to 11% today, in all likelihood, FMPs will be indicating 12% or more in August.

So wait till the RBI July meet before taking on a term commitment like an FMP.

For now I'd suggest short term liquid funds or debt funds. And in August if possible take up only FMPs for a 9 month tenure if possible (as rates are likely to increase further).

When we reach 16 to 17% yields I would find long term government bonds attractive. (or funds that hold them) A 10 year bond will attractive, not for long term investment, but because I expect interest rates to fall back below 10% within 10 years, and the falling yield will raise prices of these bonds dramatically in the interim.

ABXes going nuts again

2008-07-11T10:48:00.003+05:30

The ABX indices seem to be hitting newer and lower lows.

ABX is based on the various tranches of CDOs of subprime mortgage loans (see here for more, and thanks Calculated Risk). Simple funda: if they go down, then the people who hold them are making m2m losses every day.

In my last post in June, I'd seen the 07-2 AAA index at 52; now it's at 43. This means someone is only willing to pay 43 cents for each dollar of a "AAA" loan. The phrase "AAA" has no meaning anymore - it's just Another Asinine Acronym.

Credit losses are now going to mount. My Subprime Phase 3 in end-May talked about why I thought the credit crisis was rearing it's ugly head again: now we're right at the point where it should hit the fan.

Fannie Mae and Freddie Mac, reeling from record losses, are practically insolvent. Lehman looks really unhappy on the charts, down some 60% in the last three months. Financial stocks are hitting the bottoms, and suddenly everyone's running for cover - and they will announce results soon.

In India I can't imagine more carnage. Since May end, we have lost 20% on our indices - in less than 45 days. While we may be in for a bounce - even sellers need to take a break - we can't stay isolated from world events for too long. For instance, if Citi goes down, it may want to get rid of it's stake in public companies in India, like HDFC, where it owns a substantial interest. Lehman does too - look for shareholders named "LB Holdings" etc. on the exchange. The resulting unwinding can trigger another run for us.

How to trade this? React is better. We have already taken most of the hit that was going to impact the market, so we may not be too sensitive to bad news. Still, next time the index falls 10% in three days, there's not much room in there for support so it will fall further. I just hope we hit lower circuit a couple days so that the pain is over in a few days. But if I look at histories of crashes, that just doesn't happen. Slow pain, over weeks and months.

For all practical purposes our major fast pain is over. Now it's slow poison time. Gotta go on a diet.

The Idiot Wave

2008-07-10T20:35:00.002+05:30

From Brett Steenbarger's blog:

While rummaging through my attic, I discovered a collection of old manuscripts from Robert Nudnik Idiot, a physiologist and researcher into natural phenomena and the movements of stock markets. It was during Dr. Idiot's research that he made a surprising discovery: the recurrence of the number 10 in all human bodies he studied. With amazing regularity, each human body had ten fingers, divided into two groups of five. Not content to settle on this discovery, Dr. Idiot proceeded to study the feet of his subjects. He was amazed to find the same pattern of 10 repeated in two groups of five toes.

You can guess what it alludes to, and this is darn funny. The great thing about the wave theories and fibonacci concepts is that if you get 10 such experts in a room you can ask them all the same question and get 10 different answers, each of which will be mathematically correct.

I usually cringe when I hear stuff like Gann fans, the "third of the fifth, but it could be an extension", fibonacci retracements etc. I find them extremely difficult to accurately test on a back-testing platform. But it seems to work for a lot of people, so heck, let them be, I say.

Still, that post was darn funny.

Confessions Of The Number Crunchers

2008-07-07T18:10:00.006+05:30

From Rediff: (The confession of a finance professional)

Every morning across the country, we the finance professionals begin our work as meticulously as the parrot-astrologers mentioned above, but with a crucial difference. Instead of the parrots we use laptops, and instead of the unsophisticated printed booklets, we rely on Microsoft office.
Without Excel spreadsheets and Power Point we will instantly be rendered hors de combat. Ask us any question about anything we will answer you only through these tools - even if it means introducing ourselves, our company or our services. We will use jargons or acronyms even for silly things. We have our own grammar for our operations.
The idea is to bamboozle our clients and give them an impression of being in a hurry. If a client is a multi-product company we would advice them on de-merging and concentrate on core competencies. If it is a single product company we would ask them to diversify to de-risk themselves. Never mind, in both cases we are actually experimenting with our clients at their cost.
And should a client have a rupee term loan we would advice them on a foreign currency loan and exactly the reverse should they have a forex loan. For the former we would predict the depreciation of the dollar, for the latter, the appreciation of the dollar. Who said cheese for the goose is cheese for the gander?
If we find a non-finance professional on the other side of the table we reckon that they are lambs to the slaughter. When we encounter fellow finance professionals on the other side, things are no different. After all, he would be compassionate to our cause, understand our jargons and empathise with our constraints.

Excellent article.

I can imagine the scene. There is nothing more motivated to sell than a finance professional who's not yet met his numbers. Hell hath no fury as a finance professional scorned.

And if you're a finance professional, read Michael Lewis' Recession 101. (Hat tip: Mohit) Which ends with:

The goal isn't to get people to like you. That would be too much to ask. The position to which you aspire, recession champion, is inherently unsympathetic. You are the man on the lifeboat with his own private stash of food and water. The goal is merely to get people to tolerate you, and dissuade them from organizing themselves against you. Do this well enough and by the time they realize what you've done, the next boom will have begun, and they'll treat you as their hero.

The Sensational Sensex EPS Story

2008-07-06T19:20:00.003+05:30

So I read through some past projections of the Sensex EPS as of March 09.

Kotak Securities' MD says 975-1000. (Feb 08)
Nilesh Shah, ICICI Prudential AMC says 1000. (Mar 08)
K.R. Choksey (or so it says) points to 1040. (Feb 08)
India Infoline Report: 1000 to 1050 (Feb 08)

Don't diss these people, those were very different days. Now where are we today?

As of July 4, Sensex is at 13454, and P/E as given in the BSE web site is 16.61. This translates to an EPS of Rs. 810.

To get to Rs. 1,000 we need 25% growth over the next 9 months. Annualised, that is 33% growth! [Correction: The Sensex EPS is as of March 08, so we need only 25% growth. But I stand with the rest of the figures - maybe a 10 or 20 buck higher EPS on the sensex in 09. Thanks Ninad for the feedback.] With Inflation, interest rates, global slowdown, this is going to be really tough. If we get to 900 by March 09, that would be good - and 12 P/E there is about 10,800 on the Sensex.

This is just something to have in mind when people tell you that at 12,000 Sensex P/E is 12, and darn cheap and all that.

To Believe or Not To Believe

2008-07-05T23:04:00.003+05:30

I got inspired by Monster.com and searched on their site for the various jobs they advertise in their TV spots.

Bharatnatyam dancer: No results, but there's a part time assignment for someone with a dance background.
Cricket Player: You can find jobs to coach or write about cricket or join a cricket portal but no jobs for anyone that wants to play, like the guy wearing a full cricket batting outfit shown in the ads.
Rock Star: Zero.
Chef: Huge exception- lots of jobs.

So technically, you shouldn't believe the ads. You're probably laughing at me - who believes ads anyway? This dude is off his rocker already.

I'm also not sure how much to believe any bank's profit and loss statements for this quarter, given that: (Economic Times)

In a bid to boost their trading books at the end of the first quarter of 2008-09, a few banks have entered into deals to sell bonds at inflated prices in end-June only to buy them back soon after to classify them as long-term investments. The sale at inflated price enables the bank to post a trading profit at the end of the quarter.
The bank that buys the bond avoids making any provision as it classifies the bond as a part of its “held to maturity” portfolio. According to RBI norms, banks do not need to make any provision for fall in market value in the case of bonds that will be held to maturity.
The bank that purchased the bond at an inflated price gets compensated by doing a similar deal with the bank which sold the bond originally. Such deals are not possible in regular government bonds which are heavily traded and, therefore, have a ready reference price. But in the case of bonds issued by state governments (known as state development loans), trading volume is thin and prices can be manipulated. These were very significant, especially in the state development loans which were auctioned in the last week of June.

Nice huh. What's next, real estate companies selling land to each other?

This is going to be an era of disbelief. That's why recovery takes so long; the trust takes a long time to come back.

Arguments against Automated Trading

2008-07-05T12:43:00.003+05:30

I've been speaking with a few people lately and also looking at the comments on trading systems. A number of people feel that this concept of an "automated trading system" is very strange and it simply won't work.

Most people quote that they have seen a thousand of them earlier and they didn't work. While I understand systems tend to fail (especially after they are public for a while), I am willing to bet that most systems "appear" to fail because of the lack of discipline. Most people fear for their life after a few bad trades and have no real way to prove that a system has indeed stopped working; so they throw out the system.

If there's a series of losses the position sizing techniques (always only risk a percentage of equity, post losses) should keep the position down - but a discretionary impact may be to stop real money and paper trade the next few trades, until there is confirmation that the system has gone bust. Or, to put lesser money in. The concept of throwing out a system on a few trades is probably the most attractive to a human mind, yet, the logical thing is to await some quantitative proof that the system no longer works.

The other problem people have is they are incredulous. How can a system that is computerised and requires no human intervention, perform at any consistent rate? But that's precisely why it does, because it has no human emotion to contend with. The more humans get involved in trades, the more likely it is for mistakes to happen. Now there are many traders who are excellent at intuition, and the vast majority of trades happen on "gut feel" - so there is always the feeling of a loss of control when you let it all happen in an automated way. But you can't back-test "gut feel" and you can't establish how something might have worked in the past when it's based on intuition.

This goes for a lot of fundamental stuff too. People say that's better because it's a more logical way to invest. I doubt it. Fundamentals are scary in these times when companies will lie through their teeth to prevent their stock from falling, or scream buyback, or ask for SEBI to investigate - anything to protect their stock price. You can't trust anything anyone says - at least one thing you can trust is the stock price! And the concept of buy and hold will soon be apparently flawed, as people who bought RNRL at 212 and DLF at 1200 realise how interesting life becomes when you buy and hold for a long time.

Still, value works - and can be backtested - if there is a measure for value. You can check things like how far below we are from a long term moving average, how much cash a stock has in comparison to price, how much of past earnings growth over say 5 years is reflected in the P/E. These concepts can be back tested, and even automatically traded (imagine, automated fundamental trading!) The concept there may yield far too few trades - maybe a few a year - but may be far more attractive in the long term (10+ years)

Lastly people are cynical about such systems. They think it's a fad, it will go away. Yes, sorta like fundamental investing "went away". Or stock markets "go away". There are examples of HUGE profits from such systems - look at DE Shaw, Jim Simons of Rennaissance Technologies, Ken Griffin of Citadel or Man Investments. These guys manage billions and billions of dollars, through automated systems, and make a ton of money - some put their annual income (performance fees + management fees) as upwards of $1.5 billion. That's enough to silence most critics - because you only need one such case to DISPROVE the argument that systems don't work.

I'm not saying other forms of investing don't work. Warren Buffett's has, obviously, and so have those of Peter Lynch or Rakesh Jhunjhunwala. Or even the discretionary trading of John Arnold or Steve Cohen. But that doesn't mean pure automated systems don't work - they do, as the performance of the big hedge funds mentioned above are well known.

My aim, and Kaushik's, is to become that kind of automated trading firm for the Indian markets. Obviously we lack the money (otherwise life would be different) to invest in the technology and the connectivity/membership required to make this happen. Also the track record necessary to attract the right kind of money. Keeps us excited!

Oil at $145 and Indian Oil Companies In Danger

2008-07-04T09:38:00.002+05:30

Oil refineries are fighting a political battle now - of not being allowed to export their products and having to support a "managed" price of petrol and diesel to offset the losses to public oil marketing companies.

With Oil at record highs one might think companies like RIL, ONGC which own refineries are in great shape. Unfortunately with the political scenario unwinding, it does not seem so. The Samajwadi party, which is expected to replace the left in the ruling coalition, has demanded that oil refinery outputs be banned from exports and that a "windfall" tax be applied on their profits.

The windfall tax is so stupid I find it difficult to even talk about it. We have to have a free economy and the ability to make unlimited profits without people questioning the quantity. Jeez, who cares what quantity of profits one makes - the more the better, that's the way this country will grow! Instead you should tax the software sector because they don't bloody get taxed at all. For oil companies in SEZs I support full taxation, but no "excess" taxation.

And why is the export ban stupid? India has one of the few refineries outside the US that can process the heavy sour crude produced by the middle east. To ban petrol and diesel exports is to simply create a higher demand for light sweet crude outside India, because of the drop in supply of the processed fuels worldwide. This results in a higher crude price, and we largely import crude, so uhm where is the benefit again?

Second: These companies aren't around for charity. If you push them to the wall they will scale down or shut operations to counter regulation. As simple as that. Now you don't get any fuel cheaper either, and crude prices still go up and lots more people lose jobs and the SP feels like an absolute dolt. Amar Singh should be made to campaign from Jamnagar.

Third: We'll lose a lot of the export revenue. I don't have the figures but I think oil refinery output exports are bigger than the whole software sector. Are we ok losing that much dollar inflow, when there is a net dollar outflow from FIIs and the RBI is holding on to their sacred dollars for dear life? Something has got to give.

But these are rational arguments. Politics is rarely rational. And things are going to get much worse as elections come on.

Trading Systems: Getting Beaten Up By Volatility

2008-07-04T00:20:00.004+05:30

Man what a wild two days. Up 5% on one and then down 4% the very next day. Volatile times! Yes, yes, I'd predicted a rally on Wednesday and it turned out right but don't read too much into that, it was pure luck.

Okay, so why are we still so badly mauled? This is a time to be careful and please, respect those stop losses. I'm expecting another bounce soon, we're back to oversold territory.

Unfortunately this volatility ripped apart our systems. The two intraday systems made money on all the last three days - Tuesday going down 4%, Wednesday up 5% and Thu down 4%. On one system we are up nearly 10% in July (3 trading days) and the other, we're up 15%. Pretty good.

Our longer term systems got hosed pretty badly (in our view). One system is up only 1.5% in the last three days, and the other is down nearly 9% (which is lousy even if the system isn't designed to take this kind of volatility). Net of all four systems, we are at +0.33% for the month (each system has a different amount of money on it). With the index falling about 3% in the same time, we have done better, but this is not satisfactory - we should have gotten better results.

(Note: I'm not comparing earlier times. FTR, June has been kind to us: 9.9% returns versus a Nifty drop of -17%, and half of May - our first system went online on May 15 - was at 1.46% versus Nifty drop of -2.81%)

Am I going to reveal what's in the system? No. We need to run our money on it and this is our sole source of income - there is no way I will jeopardize that right now. And, we will eventually move into a money management role and then OTHER people's wealth will run on these (or variations of these) - and I don't want to let that opportunity go either.

But one thing is for sure: This is a SIMPLE system which takes only ONE factor into consideration: Stock Price. We trade only liquid stocks, and the systems look ONLY at price. If anything else is used it is volume (in determining which stock to trade). Sometimes the simpler the system, the better.

I will see if I can post a small graph of our systems (since we had real money behind it) versus the Nifty. I know this is just me showing off, but what the heck, I feel proud of it.

I think this field will soon need smart programmers. If you're interested in this field and have some ideas, touch base with me (deepakshenoy at gmail). What will be needed is people with a mind to automate, and the ability to code - not the trader who wants to put discretion into every trade. Meaning: if you think you have to be there to know the current news, the data, what people are saying etc. before buying or selling, we aren't going to gel. Eventually we want to create a hedge fund where all trading is done by computers and only a few people will exist - and make a lot of money.

When they say inflation they really mean inflation

2008-07-02T21:09:00.004+05:30

How would you like two cholo-mint for this note: (from Yahoo, hat tip Sanjeev)

This is worth one (Indian) buck. Today. Tomorrow it might not, because Zimbabwe is having some 165,000 percent inflation. I don't even know what that means, but if I get it right inflation is about 18% per HOUR (not compounded). So on Thursday this is 25 paise, and on Friday this is one anna (6 1/4 paise).

Every day my wealth is quadrupling, as measured in Zimbabwean dollars.

Liberating Myself With A Trading System

2008-07-01T20:56:00.003+05:30

Siddharth says in a comment to my last post:

An article on web by Ila Patnaik.
Excerpt from article "As a result we should expect to see business cycles in US and the rest of the world getting transmitted to India."
You said 'all of a sudden'. But to be bearish there must be some reasons or plain FEAR.
Precious metal is going up right now. The BKX index has gone below 60. and with the many things in US and EU coming out this week, market looks bearish and gold/oil bullish. Unless this induces positive confidence (short or long term)from the FED, ECB decisions, there may not be any positive outlook in Indian market immediately for upside?
My concern is how this all will be inconsequential to economy in India, not only exports.

I had said there that I expect an intermediate rally - and that the reason was the sudden bearishness in the air.

Now let me rephrase - the market's been bearish a while now, and there is enough reason today to justify it (inflation, growth, what not). I had said in my ultra-bear post (Why Subprime Phase 3) that we are going down - the reasons I stated have worked to some extent but honestly we haven't seen the worst of it all. Yet, when I said all of that the index was 5,000+, and we have fallen 25% from there!

All the reasons: Gold at highs, crude at highs etc. have existed for a while, and markets still moved both directions. What is impossible to work out is what data point will move the market next.

Reasons are always evident after the fact. There are no predictions that will consistently work, because all predictions are luck. Including mine, and I've been incredibly lucky so far.

I typically try to gauge investor sentiment and the volume of enthu on business TV. In volatile times (like these) we have to see volatility in both directions. The last three sessions have seen 10% falls, without much ado or fanfare, and pretty good volumes. Usually such deep and dark falls are followed by a quick sharp rally to keep people excited (this is not someone on the other side manipulating it, but the effect of a massive set of people communicating with their trades. To read more, research Game theory, Conway's Game of Life and the concept of fractals - the parallelism to life and to markets is stunning)

Typically rallies make life exciting for traders, especially in a bear market. We are now so far from our moving averages it is imperative we bounce up. If we go further down, the bounce up will be stronger, and so on.

Now this is just my gut feel, so please don't go about trading it - I have been wrong before. It's imperative you take complete responsibility for your actions - don't praise me for being right or scold me for being wrong, because it's your money and therefore 100% your decision. That goes for all other "tip" providers too - please don't rely on other people to give you information trade. You have to make your own decisions, otherwise give them your money and let them trade it.

One interesting stat: FII's, for the first time in maybe three billion years, have bought a net 200 cr. today. It comes after literally weeks and weeks of continuous selling - I don't even remember the last day they net bought.

There's always money to be made in the markets. Our systems gave us THIRTEEN short positions today. We have never, ever seen all positions in the same direction. Usually you will get some long and some short positions daily - today EVERYTHING was short. And we have decided to trade like village idiots - we don't question why, we just take the bloody trades. And we were up - literally 3 to 5% up on each system.

The takeaway for us is: don't predict, react. The systems analyse the data and tell us where the market is going. We follow. If it changes direction, we reverse. We set up the parameters, and back-test to ensure our theory is correctly tradable and results and statistics are positive. But once we start trading we don't ask why short this at this level or so on.

For instance today, we shorted IFCI, after it was 5% down. That is scary. But it ended up some 13% down - and we made 8% on that one trade. Whoa. Point is: don't ask the questions when you trade. Analyse the system only AFTER it consistently fails - otherwise just trade it. And once we set up automated trading we won't even know what positions we are in or out of, and hopefully I will be on a beach in Goa drinking beer with the winnings. But till that time, we gotta work with the trades, and we gotta stick to the system.

You can't imagine how liberating this is - to not give a damn about where the markets are going; the system will tell us. That's about all we care about. And given we've made over 10% in the systems last month, we're doing ok - have to keep creating new systems though, as these will die.

Disclosure: Short the index.

SIP of Unhappiness

2008-06-30T13:08:00.003+05:30

Systematic Investment Plan investors must not be very happy. Most SIPs on mutual funds, if started from Jan 1, 2006 when the Sensex was 9500 and the Nifty 3000, would be quite unfortunately negative in returns at this point.

From BlueChip's SIP Calculator, checking with an SIP of Rs. 10,000 since Jan 1, 2006 - a period of 30 months - gives the following returns (as of Jun 27):

HDFC Equity: -1.15%
Reliance Vision: -2.04%
Franklin India Bluechip: -0.64%
SBI Magnum Global: -7.86%
Reliance Growth: +10.23%

Most large cap funds have returned negative results, and Reliance Growth seems indeed like a knight in shining armour here.

It's strange though, because in the 30 months, only around 12 months have been spent ABOVE the current value of 14,000 on the Sensex. That means more than half the months the Nifty has been below current levels, and yet, the SIP was negative?

The reason is that the Nifty went MUCH higher, plus a lot of fees got deducted from the higher price points, therefore the bad return. In fact your performance would be worse if you had considered entry loads - which would take away 2.25% every month.

If you had invested in the Nifty BEES, an exchange traded low cost fund, you would have made +0.3% (inclusive of a dividend in Jan 07).

Worse than SIPs are those that have invested in ULIPs. Not only have they performed (largely) worse than mutual funds, they also have so many costs that investors have lost much more money.

What would be better? Not even buy-and-hold works - the best thing is to time the market. I have always said that, and I have done well for it. I understand it is not possible for everyone to do as much research as I do on the markets, but that is the job of the mutual fund managers. Surprisingly, they have failed at it, very miserably indeed.

That's also because they have no incentive to outperform. They only make a percentage of assets, no? Why would they care to make more money than the markets, or lose less? The folks that can do that probably joined PMS firms - and even THOSE have underperformed. So where are the good managers? Tell us your stories.