Value-Stock-Plus

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Saturday, April 29, 2006

The Devil In Fineprint

This article appeared in The Times of India sometime in February 2006. It is a real eye opener.
IT firm Geodesic’s stock has had a meteoric rise over the last year. Yet, a recent research report unearths some curious accounting practices, says Dinesh Narayanan

For some strange reason, a few technology companies across the world manage to rustle up exuberance that borders on the irrational. And then, the stock markets, pregnant with hope, propel prices through the sky. Dig a little deeper, and what emerges is a story of, well, hype. Closer home, Geodesic Information Systems, a stock market darling, fits the bill. Touted as one among a handful of next generation IT product companies, Geodesic was started in 1999 by four young entrepreneurs—Pankaj Kumar, Kiran Kulkarni, Mahesh Murthy and Prashant Mulekar. Geodesic made headlines when it announced the launch of Mundu, an instant messenger that allows the user to chat across different services at the same time. So if you’re chatting on Yahoo, Mundu messenger allows you to simultaneously access MSN, Google, Indiatimes and Rediff. The excitement this software generated rubbed off on the firm’s stock price. Coupled with the right kind of noises the company made, the stock price rose by over 175% in the year up to November 2005. A Rs 2 paid-up share of the company trades at over Rs 225 on the stock exchanges. Interest in the company is so high that foreign investors now own more than half of it. Many more want a piece of it. In November last year, prompted by requests from clients, foreign broking firm CLSA decided to take a close look at the stock’s fundamentals. The 11-page CLSA report, a copy of which is in TOI’s possession, wasn’t very flattering. For one, Geodesic had very high cash and equivalents—Rs 41 crore—surely a sign of robust health. The six-year-old fledgling had net profits of Rs 18 crore on sales of Rs 40 crore for 2004-05. When CLSA looked closer, it was stumped. Apparently, 83% of the cash in hand were cheques in hand. Mind you, it isn’t quite the same as cash in the bank. That was just Rs 6.3 crore and investments accounted for Rs 4.7 crore. In fact, investments had dwindled from the previous year’s level of Rs 12 crore, a reflection on the firm’s poor treasury operations considering the way equities and mutual funds have performed. Geodesic’s management has an explanation: they claim the money was deployed in various i n t e r- c o r p o r at e deposits and mutual fund schemes that were withdrawn at the end of the year. So the redemption payments were shown as cheques in hand. “Also the company received payments from some clients, which for their cash management purposes, were issued to Geodesic towards the year-end. All these cheques have been encashed immediately and paid to creditors with the balance invested in mutual funds,’’ it said. Yet the company did have a few large creditors waiting. Sundry creditors had jumped to Rs 12.1 crore (77% of expenditure) from a mere Rs 32 lakh in the previous year. That was pretty high for a company which spends mostly on salary, conveyance and software development, CLSA thought. Geodesic’s explanation: the rise was partly because of payments due for capital expenditure and also some implementation services. The broking firm also found it odd that employees’ salaries, on average at Rs 30,000, was rather low by industry standards. That employees were compensated by stock options didn’t find too many takers at CLSA. How then, did Geodesic manage to keep its attrition rate low at 2-3%, the broking firm asked? On its part, Geodesic argued that after including ESOPs (employee stock options), the average salary works out to about Rs 90,000 per month, which helped them attract and retain talent. However, CLSA has pointed out, if ESOPs expense were to be considered at Rs 60,000 per employee, then Geodesic’s reported profit would be lower by Rs 6 crore or 30%. Consider the math: at current prices, the total gain per employee is Rs 100 per option and a cumulative gain of Rs 6 crore to the employees (as mentioned by the company) from options of 2004-05, CLSA said. However, it says, in earlier years such gains would not have boosted employees profits as the share was trading as low as Rs 20-30 apiece. “FY03 and FY04 were critical years for product development at Geodesic as its Mundu messenger platform was being developed and perfected,’’ the report said. At the same time, Geodesic appeared to be quite liberal with accounting for software development expenses of Rs 2.8 crore for Mundu and Rs 2.3 crore for Hamarashop Retail Kiosk in the year. It merely capitalised them. Criticising the practice, CLSA said, “...even though allowed by accounting law, it is not a conservative accounting policy to capitalise developmental expenditure in our view.’’ The report also quotes Geodesic as saying that the company earned Rs 1 crore per annum from Indiatimes for its Mundu messenger. Sources at Indiatimes told TOI that the company paid much less than that claimed by Geodesic. When contacted, the company said that as a policy it does not comment on individual clients. The broking firm also found it odd that promoters should sell their holdings in a company that held tremendous promise. Over the last four years, promoters’ holding have more than halved to 25%. Even in absolute numbers, the holdings have reduced from about 2.4 crore shares to about 1.5 crore shares, despite a 1:1 bonus issue in February last year.

A Geodesic spokesperson said: “Recently there has been an imputation that Geodesic’s promoters have been exiting the company. We would like to clarify that it’s actually the reverse. The total value of Geodesic shares sold by the promoters was Rs 10 crore—not even 1% of the company’s market capitalisation of Rs 1,300 crore. A major portion of stock sales by Geodesic promoters was in favour of institutional shareholders, with the proceeds of the sales being invested in Geodesic as preference shares or highly priced preferentially allotted shares. The promoters’ investment in Geodesic is a significant Rs 300 crore (at current market value).’’ For Geodesic, there could still be a jackpot at the end of the rainbow. But if one were to look at the track record of IT firms like Infosys and Wipro, the market tends to reward those that stick to conservative and transparent accounting practices. Source: The Times of India Mumbai Edition

Posted by toughiee at 9:34 PM | Permalink | Comments | links to this post

Investing: The mirror says it all!

Source: EM In making an investment decision, apart from returns, there is one more very important factor that weighs heavy on investors' minds - risk. Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns.

A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn. However, what stockbuyers generally fail to understand is that, apart from these external factors, there is one very big 'risk-factor' that is very inherent (or internal) to them. This internal risk is that of 'indiscipline'.

By indiscipline, we mean that stockbuyers tend to forget the basic scruples of safe and sound investing, as they are then lured by the high probability of earning 'a big bang for their buck'. These times when everything around seems promising and that the stock markets are rising incessantly (as happened in the most of 2003), discipline generally gives way to chaos. And this leads to even the best of investors putting their money into the worst of stocks believing that their invested company is the 'next big thing'. Ironically, as just these very times when stockbuyers need to stick to the fundamentals of sound investing, they seem to forget these (the fundamentals).

This is where the 'behavioral' aspect of investing gains importance. And this is the time when a stockbuyer, before making the next investment (say investment 'X') should look into a mirror, and ask certain strict questions to himself. First, he needs to ask whether he understands his investment 'X' as well as he thinks he does. This would include:

  • asking whether the investor has enough experience of similar kind in the past. This is like, when an investor is thinking of investing in say, Tisco, he should ascertain what has been his previous experience with the company;

  • asking what has been other people's track record in the past in making a similar kind of investment;

  • ascertaining how much returns should his investment 'X' generate for him to break-even after his taxes and cost of making the investment. This would make clear the price that he would be ready to pay for the value of the investment 'X'.

Secondly, the stockbuyer needs to ask himself as to what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong. This would then involve:

  • asking whether he has adequately allocated his assets (into equity, debt, insurance) to tide over losses from his investment 'X';

  • asking whether he has a track record of controlled behaviour (i.e. acknowledging that he made a mistake) or else he would be a part of the overall chaos when things go wrong;

  • asking whether he is relying on a well-calculated approach and what is his tolerance level of risk. He could find out his tolerance level by studying his past losses.

Now, while the answer to the first question (i.e. whether the stockbuyer understands his investment 'X' as well as he thinks he does) would be indicative of the 'confidence' level of the stockbuyer, the answer to the second (i.e. what would be his reaction in case his 'correct' analysis about investment 'X' goes wrong) would speak about the 'consequences' in times his investment decision goes wrong. If the stock buyer has clear answers for all the abovementioned questions, he would only make his larger task (of making investment 'X') easier. Thus, before you (as an investor with a long-term horizon of 2 to 3 years) invest, make sure that you have pragmatically ascertained your probability of being right and as to how would you react to the consequences of being wrong. Always, look at the downside before the upside. And always, look into the mirror before investing!

Posted by toughiee at 12:10 PM | Permalink | Comments | links to this post

Thursday, April 27, 2006

Buy, sell or hold? Mr Analyst, will you please advise?

by Vivek Kaul/ DNA Money No, an analyst will only tell you when to buy or hold, not when to sell. These analysts are a bunch of crooks and the worst type of crook is a crook that wears a suit and is interviewed on CNBC — Mitch Zacks in Ahead of the Market Anjali Shah, an anchor with a leading business channel, had reached a stage in life when she sees her friends gradually getting married. And so this metrosexual Indian woman had started feeling the pangs of loneliness. She met Rakesh Ahuja, an equity analyst, on a marriage website and they were about to meet. Click here for the full story.

Posted by toughiee at 6:46 PM | Permalink | Comments | links to this post

Wednesday, April 26, 2006

Peak Earnings

Valuations are expensive across sectors as every single sector in India (except technology) is trading at a steep premium to its own long-term average. One of the biggest mistakes any investor can make is to forget the concept of cyclicality of earnings, that earnings oscillate around a long-term trend and the fact that earnings cannot grow faster than nominal GDP indefinitely. To compound this mistake at the top of a market cycle, investors start paying peak multiples for these peak earnings. Normally, all investors are taught to adjust the multiples you are willing to pay to take into account the cyclicality of earnings. Therefore, one must pay lower multiples for peak profits and high multiples on depressed profits. However, at the top of a market cycle, investors lose this discipline and agree to pay top-of-cycle multiples on the peak of cycle profits and this normally will happen whenever investors start believing that we have entered a new era, where-in earnings can de-link from nominal GDP indefinitely.
Click here for the whole story.

Posted by toughiee at 8:58 PM | Permalink | Comments | links to this post

Penny Stocks: You Get What You Pay For : Dr. Tejinder Rawal

The author is a regular writer on stock market related issues. He is an eminent Chartered Accountant. He invites comments at tsrawal@gmail.com

  • Click here to download the above mentioned article.
  • For more information on Mr. Rawal click here. Please note that the page has many articles by the author on investments.
  • Mr. Rawal also runs his own blog here.

Posted by toughiee at 7:52 PM | Permalink | Comments | links to this post

Market Timing & Information Overload

Click on the image for clearer view
Source: DNA Money

Posted by toughiee at 7:34 PM | Permalink | Comments | links to this post

India Strategy by ICICI

Lighten up for this rollercoasterThe best time to invest is when you have money.

This is because history suggests it is not timing which matters, it is time. — John Templeton

Click here for the report.

Posted by toughiee at 6:14 PM | Permalink | Comments | links to this post

'Gold may rise 10-fold if Dow triples' : Marc Faber

The outlook for the precious metal depends on how much money Federal Reserve will print says Dr. Marc Faber.
Marc Faber, who told investors to bail out of US stocks a week before the 1987 Black Monday crash and began recommending commodities at the end of 2001, said gold may rise 10-fold in the next 10 years.
Click here for the full article.

Posted by toughiee at 5:22 PM | Permalink | Comments | links to this post

Monday, April 24, 2006

Are commodities riskier than equity?

by Vijay Bhambwani/ DNA Money The usually less volatile commodity markets have shocked players in the last three sessions with a tidal wave of high volatility, unmanageable losses and a higher threat perception. Are commodities riskier than equities, then? In this writer's opinion, the avalanche of volatility descended upon the global markets last week thanks to silver. Recent months have seen silver gaining from near Rs 11,000 levels around Diwali time to the recent Rs 23,000-plus levels in April. This is an appreciation of over 100% in seven months. Surely this return is rarely seen even in equity markets. Click here for the full story.

Posted by toughiee at 8:13 PM | Permalink | Comments | links to this post

India Strategy by Enam Securities

"Hedge against an external shock"

Click here to download the report.

Posted by toughiee at 8:11 PM | Permalink | Comments | links to this post

CIO Round Table Conference

Book Release and the CIO Investor and Fund Managers’ Roundtable was held at Bombay Stock Exchange on 25th January 2006.”
  • For full transcripts of the Book Release Function Part I.
  • For full transcripts of the CIO Investor and Fund Managers’ Roundtable Part II
  • For more Click here

Posted by toughiee at 5:35 PM | Permalink | Comments | links to this post

Morgan Stanley underweight on India

India to underperform Vs peers
Morgan Stanley has gone underweight on Indian markets. They believe that the India story is a liquidity-driven one and therefore they are cautious.
Click here for the full article.

Posted by toughiee at 5:20 PM | Permalink | Comments | links to this post

Quarterly results: Do?s and Don?ts...

Source: EM
Amidst various corporate actions that investors look forward to, the attention to the quarterly results cannot be understated. Given the kind of interest that quarterly numbers have evoked over the past few years, we thought it would be useful to highlight what to look for in a quarterly result from an investor?s standpoint? Here are the do?s and the don?ts of the same.

Seasonality and cyclicality: Some sectors are cyclical and seasonal (consumer sectors, paints, engineering) in nature and therefore, financials have to be appropriately compared. For example, on an average, the fourth quarter of the fiscal year contributes to as high as 40% of BHEL?s full year revenues. Without going into the complexities of accounting methods, engineering companies generally tend to book revenues upon the completion of a project, which happens towards the end of the year. It is for this reason that the revenue contribution of the fourth quarter is important.

Similarly, paint, automobiles and durable sales are seasonal in nature (sales are higher during festive seasons).

QoQ and MoM: Drawing from the previous point, at times, it is popular in the stock market circles to estimate quarter-on-quarter and month-on-month growth i.e., comparing the number of cars sold in the third quarter with the second quarter of the same fiscal year as a base. Quarterly projections of company?s financials and monthly sales volume projections have practical difficulties. For instance, month-on-month comparisons of auto sales can throw a totally wrong picture because of seasonality.

At times, a company, on a QoQ basis, may post a 'slower than expected' growth and the stock gets punished. In this context, investors would be better off if less importance is given to jargons like ?above expectations?, ?below expectations? and ?inline with our estimates?. Quarter-on-Quarter comparisons could be useful while analyzing those sectors where the demand-supply dynamics are not highly seasonal or cyclical (like software).

A quarter is just three months: As we mentioned earlier, what quarterly performance does is enabling long-term investors to stay ?updated?. Though a long-term investor is unlikely to change his view on a stock based on just a single quarter?s performance, if there are some concerning factors, it will enable the investor to re-look the assumptions based on which the investment decision was taken in the first place. Even here, analysis of the last four quarters will give a much broader picture than a single quarter. In fact, the longer one goes into the past, the better it is.

The issue of annualizing: It is common practice among investing circles to annualize quarterly performance in order to estimate what the full year numbers would look like. For example, if a company has reported earnings per share (EPS) of Rs 10 for the first six months in a fiscal year, it is easier to assume that the full year EPS will be Rs 20. But factors like seasonality and cyclicality may have been overlooked and this may distort the picture.

Some other checklists?

  • During mergers/de-mergers and acquisitions, the YoY change in net profits may be distorted. So, comparisons on a like-to-like basis will show the true picture. Most of the top rung corporates that are investor friendly tend to provide investors with this information.

  • There are corporates who revise the previous year financial numbers so that the current quarter numbers growth rate ?pleases? investors. It is therefore, important to read the notes to the quarterly results and understand if there are accounting policy changes. We feel that there is a strong requirement from the regulator as well as from the corporate side to take measures to curb this kind of a practice of consistently revising past numbers. Globally, accounting scams have eroded wealth of shareholders and hope we do not have to face a similar situation in the future in India.

  • Though the quarterly performance of some corporates may show a decline in net profit, it is also important to understand what happened in the same quarter in the previous year. What if there was some extraordinary income due to a sale of asset in the previous year? In this case, analyzing the results by excluding the extraordinary items will show the true picture.

To conclude?

Management?s work with a ten-year view: The long-term objectives of the company do not change every quarter. Credible managements typically devise business plan with a long-term view. Though ?long-term? may be one year for stock market circles, ?long-term? is typically ten years for corporates. While managements might spell out short-term (quarterly, half-yearly, or yearly) plans, investors need to find out that these fit into the long-term objectives of the company.

Judging corporate performance on a quarterly basis also exercises pressure on the management to resort to short-term measures, which may prove to be expensive from a long-term standpoint. It is also the responsibility of shareholders to tone down expectations and allow corporates to move the company towards its long-term objective of creating wealth for shareholders. Over a period of time, this will enable investors to separate wheat from the chaff.

Posted by toughiee at 2:20 PM | Permalink | Comments | links to this post

Markets: Don't pull the plug yet

by Ajay Jindal/ ETBB The market's breathtaking rise continues. For the first time, serious divergence of opinion is beginning to emerge amongst market players about future returns. Some top broking firms have come up with a fairly bearish outlook.

A top foreign broker pegs the sensex fair value for end-'06 at 8500 levels — about 30% down from current levels. A leading Indian broking house has offered 9500 levels as a reasonable year-end target — about 20% down from current levels. Click here for the full article.

Posted by toughiee at 2:16 PM | Permalink | Comments | links to this post

Are retail investors earning enough?

Source: ETBB The Indian retail investor is getting poorer. This is not good news. But the evidence is irrefutable, notwithstanding the fact that we have perhaps the best regulatory system in the world, one of the most educated and enlightened finance ministers, a good equity cult and a booming economy.
Click here for the full article.

Posted by toughiee at 2:14 PM | Permalink | Comments | links to this post

Sunday, April 23, 2006

Sugar Sector Report by Batlivala & Karani

Click here to download the report.

Posted by toughiee at 7:28 PM | Permalink | Comments | links to this post

Saturday, April 22, 2006

Greed & Fear Report by CLSA

Land fever - Bombay It is called the DLF Cup. GREED & fear refers to two days of one-day cricket matches between India and Pakistan held in Abu Dhabi this week. The interesting point is the name of the sponsor. For DLF is the name of the Delhi-based property developer whose pending IPO will mark confirmation that India is in the midst of a nationwide property boom. The market talk is that DLF, which built Gurgaon, will be valued at between US$25-30bn. This would leave its controlling shareholder KP Singh, who plans to sell only 10% of the company, as one of the world's richest men. Yet it is apparently the case that six months ago many people in the Bombay-centric Indian stock market did not even know what DLF was, due to the localised nature of the Indian property business.It has been a theme of GREED & fear for sometime that India is a classic asset-inflation story where the present bull market is likely to culminate in extreme overvaluation with stocks rerated on their land holdings.
This view is maintained. Still, returning to the country this week after five months, it is clear that there is now general recognition of the national property boom that is under way. This was not the case last year. In central Bombay, prices have gone seemingly silly. The most recent example is a 3,475sf apartment in Nariman Point in Bombay, which was sold at Rs63,000/sf (equivalent to US$1,400/sf or US$15,070/sq m), according to today's edition of The Times of India. The boom, as is only to be expected, is now spreading to outlying areas. Steep price rises have already been seen in cities like Bangalore, Chennai and Poona, as well as of course Delhi and Gurgaon. And catch-up trades will now occur in places like Calcutta (see GREED & fear Black hole revisited, 17 November 2005) and Jaipur where the word is that the IT companies are due to set up new facilities just as they have already done in the West Bengal capital. But the key point is that it is a nationwide boom that is under way based on the availability of reasonably cheap credit, rising incomes and, most importantly, a dramatic increase in consumer confidence.
Click here to download the report.

Posted by toughiee at 7:35 PM | Permalink | Comments | links to this post

Ranking 10 Places to Find Stock-Picking Ideas: John Dorfman

Are you looking for stocks in all the wrong places?

Some places are more fertile scouting grounds than others. Here, in David Letterman style, are 10 places you can scout, with my favorites at the end.

Click here for the article.

Posted by toughiee at 5:28 PM | Permalink | Comments | links to this post

How To Use Rapidshare ?

A quick and painless step by step that explains how Rapidshare works and how to quickly download files from Rapidshare links.

  1. Begin by simply click the link or by copying the link into your web browser.
  2. Scroll down to the bottom of the page.
  3. Press the FREE button to start the download. Upon click the FREE button, a second, similar page will load.
  4. Scroll down to the bottom of the second page.
  5. Find the download counter; you must wait until the counter finishes before the download will begin.
  6. After waiting for the counter to finish or by using the trick, a third page will appear. Scroll down to the bottom of the third page.
  7. The file name will appear with a code to begin the download. Copy the code exactly how it is provided and click the link to begin the download. This will prompt the user to save the file.

Posted by toughiee at 4:09 PM | Permalink | Comments | links to this post

What if India grows like China?

Source: UBS

Report by Matt Fernley

Click here to download the report.

Posted by toughiee at 4:07 PM | Permalink | Comments | links to this post

Friday, April 21, 2006

The Stir-fried World

by Andy Xie/ Morgan Stanley
The global financial system is running the global economy. First, it is maximizing global growth by pushing up the currencies of high-inflation economies to contain their interest rates, which results in credit growth in a lower inflation and lower interest rate environment. Speculative capital funds the resulting current account deficit.
Second, it is keeping down the currencies of low inflation economies, pushing up their asset prices (mainly property and equity) to boost credit demand. Their current account surpluses are tending to shrink.
Third, it is pushing up commodity prices to give developing economies more consumption power. Their current account surpluses are tending to rise. They usually have resource stabilization funds and are the most effective in recycling money back into the deficit economies.
Click here for the entire article

Posted by toughiee at 11:14 PM | Permalink | Comments | links to this post

Of 'competitive advantage' and more...

Source: EM
Ever imagined 'why Infosys is what Infosys is', or for that matter 'why HLL is what HLL is'? What is that 'edge' that separates these companies from the rest in their respective industries? What 'competitive advantages' do these companies hold, and hold them tight, which have helped them grow in both good times and bad? Well, we are here to discuss about what 'competitive advantages' should companies have for them to grow with sustainability over the long term and create wealth for their stakeholders. And in this course, we shall try and understand the 'Competitive Advantage' model of the legendary management guru, Michael Porter.

Well, competitive advantages can come from ethical leadership and execution strengths such as those held by Infosys, or from distribution systems and scale like those enjoyed by HLL, which also enjoys a recognizable brand. All of these qualities allow companies to maintain high returns on capital and equity, and stay profitable over the long term (while there might be occasional blips in performance due to changing dynamics of the company/industry in which they operate.

Porter's model for Competitive Advantage In his famous book, "Competitive Advantage: Creating and Sustaining Superior Performance", Porter describes how a firm can put the three dynamic yet generic competitive strategies of cost leadership, differentiation and focus into practice. It highlights, for example, how a firm can differentiate itself from its rivals and create a superior business model that lasts over a long period of time.

Cost leadership: This advantage is often achieved by economies of scale. Companies that have the ability to manage growth while building up scale are the ones that are able to hold fort higher than their competitors. A business achieves economies of scale as a result of producing (or selling) more for a reduced average cost. This is gained by distributing fixed costs (costs that do not change as a result in a change of production, like rent, salaries and insurance premium) over an increased number of products. Economies of scale are often incentives for businesses to grow. This is because many small businesses cannot compensate for a sufficient increase in production and sales because of current resources (production space, number of employees and budget) and, therefore, cannot practice economies of scale. Because of reduced costs, businesses can price their products to be more profitable. Examples of Indian companies that benefit from this competitive advantage are Bharat Forge (second biggest forging company in the world), Tata Steel (India's largest steel producer) and Hero Honda (world's largest motorcycle manufacturer).

Differentiation: This involves creating a product that is perceived as unique by its consumers. For this strategy to be successful, the unique features or benefits should provide superior value to customers. And since they (customers) see the product as unrivaled and unequaled, the price elasticity of demand (changes in demand relative to changes in prices) tends to be reduced. Differentiation also tends to make customers more loyal towards 'the' brand. This can provide considerable insulation from competition. Areas of differentiation can be product (i-flex's Flexcube core banking solution), distribution and sales (HLL), marketing and services (Bharti Tele). Now, while maintaining the differentiation advantage, a company cannot ignore its cost position. In all areas that do not affect its differentiation, it should try to decrease costs.

Focus: Following a 'focused' strategy, a company sets out to be 'the' best in a business segment or a group of business segments. A company typically looks to gain a competitive advantage through effectiveness rather than efficiency. This strategy of making a mark in the industry is most suitable for relatively small firms but can be used by any company across any value chain. Examples of 'focus' are well entrenched in companies like Geometric Software (PLM solutions) and IDFC (infrastructure financing).

Conclusion We believe that gaining a competitive advantage is the key especially for mid-size Indian companies to perform well and survive in today's highly globalised and intensely competitive markets. Gaining an upper hand in any of the three advantages mentioned above is very important in today's global markets when firms face global competition. Moreover, as Indian companies (both big and small) take their first steps forward towards becoming global giants, there is an ardent need for them to effectively translate their broad competitive strategies into specific actions required to gain competitive advantage. And that will consequently provide a competitive advantage to 'long-term' investors in the 'long-term' India growth story.

Posted by toughiee at 12:15 PM | Permalink | Comments | links to this post

Thursday, April 20, 2006

Who are you?

Source: Equitymaster.com

In India, a democratic country that believes in freedom of speech, every Indian citizen has a view. And when it comes to stock markets, it is often very difficult to change the perception. As someone rightly said, there is nothing called long-term investor and short-term investor, but there are informed investors and uninformed investors. We believe that there is one more class, apart from these set of investors. The trader or punter or the sattawalla.

Can you spot YOU?
Informed InvestorUninformed Investor

Trader/ Punter/ Sattawala

My view on…
Stock market isAn efficient platformScamsCasino
Equities areBetter investment avenueVery riskyFast money
Risk profile isModerateWhat is the risk?Who cares?
Return expectations isModerateIf it works, it worksminimum 100%, in one month
Investment horizon is3 to 5 yearsShort-term worksLess than 1 day
Buying strategyRegular investorwhen market is close to peakWhat strategy?
Fundamental analysisWorksMakes sense, but…Who cares? What is the target price?
Company managementExtremely importantIndifferentDoes not matter
Technical analysisNot my cup of teaSeem to work at timesWhat is the target price?
Research Report isA balanced scorecardWhat is the target price?What is the stop loss?
Stock price reflectsGrowth prospectsNot so clearDon’t care
A broking firm is the one thatDoes what I sayKnows in and out of marketsGives tips
Media/Newspapers areUsed as updatesExperts in equitiesSource for tips
Harshad Mehta/Ketan ParekhUnlikely role modelsMade moneyThe Gurus
Rumour millDoesn’t get swayedEasily swayedFast cash

Before investing a single penny in stocks, just identify 'Who am I'? The rest should not be difficult.

Posted by toughiee at 5:42 PM | Permalink | Comments | links to this post

Fewer shares mean higher valuations, too

by Nish Kotecha/ DNA Money
India is the most expensive market in Asia followed closely by Hong Kong.
The Indian stock market's stellar run up since the start of 2006 by some 20% (even after falling 3.6% in the last week) raises the question: Are we in a bubble or is there more left in the fuel tank to propel the market higher?

While there are many factors that influence the value of individual stocks and the market as a whole, liquidity is the most powerful. Brokers estimate that the BSE Sensex trades at a financial year 2007 earnings multiple of 17 times (current price divided by forecast earnings). This places India in pole position as the most expensive market in Asia followed closely by Hong Kong at 15.5 times the forward earnings, even though the corporate growth levels expected from Hong Kong are higher than India for the same period. Indian stocks are clearly expensive, but are they likely to get cheaper?

Click here for the full article.

Posted by toughiee at 5:20 PM | Permalink | Comments | links to this post

India - Overheating concerns seem overdone: Credit-Suisse

We forecast that GDP in India will grow by 8.1% in FY05/06 and 8.5% in FY06/07 versus consensus forecasts of 7.5% and 7.3%, respectively. Our viewon India is more optimistic than the market’s in large part because we do not see the constraints on growth many in the market fear.
In particular:
• We judge India’s current account deficit to be sustainable and not a constraint on growth. The most recent trade data suggest that the rapid deterioration in the trade deficit since H1 2004 is stabilizing. Portfolio flows only account for 35% of total capital flows and one of the main determinants is GDP growth. We expect the balance of payments to improve in FY06/07. We are revising our USD/INR forecast to 43-43.5 from 44.5 by end-2006.
• Our analysis suggests that the central bank (RBI) will be able to manage liquidity conditions over the next three to six months to prevent a credit crunch. This is despite credit growth of over 30% year on year compared to 18% yoy deposit growth. Fiscal and monetary policy tools on the part of the state governments and central bank are available to inject liquidity in the next three to six months.
Click here to download the report

Posted by toughiee at 5:16 PM | Permalink | Comments | links to this post

The tip-ping point only the mavens know

by Vivek Kaul & Nikhil Lohade/ DNA Money Investors want brokers to always give them tips. But what they forget is that brokers make money only when they sell or buy.

"A broker," said this Mr. Thatcher, "is a true parasite. He is the most overpaid individual in the world. He doesn't produce anything. He doesn't make shoelaces, he doesn't tell you the law, he doesn't make the traffic move. He just takes orders, like a clerk, and for this - do you see the size of those commissions? Fantastic! When trading gets light, brokers scream, they want to raise the commissions. But when the trading goes from five to ten million shares a day, do we hear that commissions are being reduced? We do not. The brokers just sit there piling up money." — Adam Smith (not the famous economist) in The Money Game

Kantilal Shah, on his son's advice, has changed his long-time stock broker. It has been almost a week and there has been no communication whatsoever from his new broker. His old brokers used to keep him informed all the time, giving him weekly tips, and making him buy and sell regularly.

The lack of communication from the new broker made him wonder, "Is this new guy worth all the money he is charging me?"

When he could not take it anymore, Shah called up his broker and gave him a piece of his mind. The broker, taken aback, tried to explain. "But Mr Shah, it's smooth sailing for your investments right now. And if at all there had been a buying opportunity or selling situation, we would have definitely let you know."

"But my last broker used to keep me informed almost on a daily basis and also make me buy and sell regularly. You are not doing anything," responded Shah.

Shah is the kind of client stock brokers love to have. Adam Smith, The Money Game, says

"... the investors who really follow the market, the ones who call up all the time, ninety percent of them really don't care whether they make money or not". As Smith further points out, "If they make a little money, they're happy, if they lose a little money, they're not too unhappy. What they want to do is to call you up. They want to say, 'How's my stock? Is it up? Is it down? What about the earnings? What about the merger? What's going on? And they want to do this every day, they want a friend, they want someone on the telephone, they want to be a part of what's going on".

And to all the questions investors pose, brokers always seem to have the answers. Very few brokers seem to be in the habit of saying I don't know.

But what these investors forget, or are not really bothered about it, is that the broker makes money when the investors buy or sell. No broker has ever made money with an investor holding on to his stock investments. As Smith points out, "They could put you in some stock that would go up ten times, but then they would starve to death, they only get commissions when you buy and sell. So they keep you moving."

These days, stock brokers have got into equity research as well. The reports they bring out list fundamental reasons as to why investors should buy or sell a particular stock. If the report has a buy recommendation, it also has a certain target price, which the analysts expect the stock to reach. Beyond this, the investors are supposed to sell the stock. But what has been observed is that once the stock breaches the target price, a new report with a buy recommendation and an increased target price comes out.

This probably happens because the broker himself owns the stock and does not want the price to fall. There is conflict of interest in this case, even if you build in checks. The fact remains that the owner of both the brokerage and the equity research is the same. Equity research remains a cost function, whereas brokerage activities essentially bring in the revenue.

(The example is hypothetical)

Posted by toughiee at 1:33 PM | Permalink | Comments | links to this post

Wednesday, April 19, 2006

(Humor) The safest way to double your money

...is to fold it over (...its a stockmarket proof strategy!!) :-)

Posted by toughiee at 9:04 PM | Permalink | Comments | links to this post

Value Investing Encyclopedia

To navigate the Value Investing Encyclopedia, simply click on one of the categories below:

  • Books
  • Investors
  • Terms

Courtesy: Gannon On Investing Blog

Posted by toughiee at 8:48 PM | Permalink | Comments | links to this post

Contrarianism and Negativity

by Geoff Gannon
Undervalued stocks usually suffer either from contempt or neglect. In some sense, I suppose it's true that there are beloved bargains out there; they just aren't beloved enough. But, I don't think you're going to find too many of those. Even though a stock may be a bargain when it trades at a higher than market multiple, I haven't seen many bargain stocks that were actually better liked than both their peers and stocks in general.
I spend most of my time looking at stocks that suffer from neglect rather than contempt. That's one of the great virtues of small cap stocks. There are so many small cap stocks that a few are always suffering from neglect. Most investors only have time for the hottest names in small caps. Otherwise, they would have to look at thousands and thousands of individual businesses.
Click here for the entire story.

Posted by toughiee at 8:41 PM | Permalink | Comments | links to this post

Non financial factors may correct emerging mkts: Marc Faber

According to Investment Guru, Marc Faber, the rapid rise in the emerging markets is a matter of concern. He says that the markets are heading towards a correction.
Click here for the complete interview.

Posted by toughiee at 6:12 PM | Permalink | Comments | links to this post

India Strategy Report by Motilal Oswal

Strong underlying growth and a series of earnings upgrades has resulted in a 74% return in the BSE Sensex during FY06. As the Indian stock markets have continued their upward march, delivering 20% return during 4QFY06 and 74% return during FY06, the Sensex is already at the top end of our revised 12-month target range of 9,600-11,800. We believe that at current levels, the markets are fairly valued and recommend buying stocks that offer secular growth at reasonable premium.
While the long-term India story remains intact…
The longer-term India story remains intact. The economy is expected to enter the fourth consecutive year of 7-8% GDP growth, which is unprecedented. Strong balance sheets of Indian companies, rapid scale-up to global size through organic and inorganic initiatives, visibility of earnings CAGR of 15% over next few years, and high standards of transparency and corporate governance will ensure increased allocation to Indian equities. We expect investors to make healthy returns, provided the investment horizon is longterm. … the Indian stock markets are now fairly valued
While the long-term India story continues to be positive, we would like to underscore that the markets are now trading at the higher end of our target Sensex band. On several parameters, market valuations are now above historical averages and leave little margin of safety in the event of any disappointment in corporate profit growth. However, valuations are still well below the levels witnessed at the height of the previous bull runs.
While the markets appear fairly valued, they are still far from the bubble valuations witnessed during the previous bull runs. The current momentum of strong inflows from both domestic and foreign investors will be the most important determinant of the near term market performance.
Buy secular growth at reasonable premium
We note that the valuation premiums of some secular growth sectors have contracted and there is an opportunity to buy growth at relatively lower premium. We would classify large cap IT, wireless, private-sector banks, and two-wheelers in this category. We believe that such sectors/stocks offer a better risk-reward trade-off and the current market expectations on these companies are in sync with their past financial performance.
Our preferred bets are Bharti, Infosys, SBI, HDFC Bank, Hero Honda and Maruti.
Click here to download the report. (pdf file - 1.7mb)
  • Additional India Strategy Reports click here

Posted by toughiee at 5:38 PM | Permalink | Comments | links to this post

Stockmarkets: The 'outsourcing' theme...

The markets have rebounded this week, after a short but fairly brutal correction last week. Software majors - Infosys and TCS - reported encouraging results, and, more importantly, they expect a strong year of growth ahead, with stable margins. Thus, on the back of this strong business outlook, the bulls have taken the markets soaring towards the next historical highs!

At current levels, the BSE Sensex trades at a price-to-earnings multiple of 21.5 times its trailing 12-month earnings. This is not cheap by any standards, and is a clear indication that the markets expect over 20% growth in corporate earnings from the Sensex companies over the next year (FY07). Any hiccups on this front could lead to a downward re-alignment of expectations. The FY06 results that are yet to come will provide some insight into where we could be headed.

In this write-up, we give a perspective on a few sectors that we believe will be driven by the broad theme of 'outsourcing'. These sectors are typically driven by exports and are non-cyclical, with clients resorting to outsourcing/offshoring their processes, product development and back end manufacturing from low-cost countries like India. India's major competitive advantage - labour cost arbitrage - is the driving force for these activities and its superiority over competitors like China and Eastern Europe. Going forward, a move up the value chain is vital for the longer-term survival of these industries, as the labour cost advantage slowly but surely starts to erode.

Software The success of the Indian software industry is well known by now. Companies like TCS, Infosys and Wipro have become synonymous with the success of India's 'new-age economy' and services sector. We chronicle here, a few major reasons as to why the industry has grown at such a fast clip over the past few years.

Key factors and trends driving growth

  • Started with labour cost arbitrage - labour costs in India anywhere between 30% to 60% of labour costs in developed countries

  • The 'Global Delivery Model' perfected by Indian companies, resulting in considerably enhanced efficiencies and cost savings for clients

  • Increasing acceptance of offshoring by global corporations

  • A shift from billion-dollar 'total outsourcing' deals to a break-up of such deals to different vendors, a trend known as 'Strategic Global Sourcing'

  • An increase in the offshore component of global IT spending, and huge potential - the total amount offshored as of now is just US$ 30 bn, compared to the potential of US$ 330 bn (NASSCOM-McKinsey Report 2005)

  • Greater willingness of corporations to go in for 'discretionary outsourcing'

  • Strong growth in high-end services like package implementation and consulting, resulting in the next phase of growth

Auto ancillaries While India's success in the offshoring of IT services is now globally known, the country also has the ability to replicate the success of the software sector in other sectors, such as auto ancillaries.

Key factors and trends driving growth

  • Similar labour cost advantages of Indian companies - labour costs for Bharat Forge at around 6% of sales, while for global competitors, it is over 25% of sales

  • Strong design and engineering skills of Indian companies at lower cost, aided by good availability of engineering talent in the country

  • Overall cost synergies - setting up of a manufacturing plant in India would entail around 30% to 40% lower costs when compared to setting up of the same plant in developed countries

  • Greater involvement of auto ancillary companies with global clients, through production of more critical parts

Such factors are also expected to drive industries such as pharma and textiles. Global pharma companies are resorting to partnering with Indian companies for activities such as contract manufacturing, contract research (collectively known as CRAMS) and clinical trials outsourcing. The labour cost advantage and strong technical talent in the country are critical factors that are driving growth in these areas.

While we strongly believe in the long-term prospects of these sectors, we have not mentioned the risks that may impact their fundamentals. These could include factors such as a slowdown in the global economy, resulting in corporations tightening their wallets, spiraling crude oil prices, rising global interest rates, political factors, such as an outcry against offshoring, particularly in conservative regions like Europe, ever-increasing competition for scarce human talent, the emergence of other outsourcing/offshoring destinations, resulting in reduced competitiveness for India, and an unfavourable policy environment.

Investors should understand that this is not a recommendation of any stock or stocks in the above-mentioned industries. We have given a broader, macro perspective about the major growth drivers for these industries over the long-term. As an investor, one should always look at individual companies in these sectors that are most likely to benefit from the growth story. Given that the BSE Sensex is at high levels, a bottom-up approach would be most appropriate. And finally, the last step would involve valuations - buying the business at lower than its fair value. Only then can the purchase be justified.

Source: EM

Posted by toughiee at 1:14 PM | Permalink | Comments | links to this post

Tuesday, April 18, 2006

Tata Steel: Best is likely behind us by Merill Lynch

Reiterate Neutral on full valuation
We believe the best of the stock performance is now likely behind us since we expect earnings to peak in FY07; the stock is trading at a premium to the replacement value and has re-rated from one-year forward EV/EBITDA of 3x to 5x. We would be looking for Buying opportunities should the stock trade at below replacement value and the steel price environment continues to remain positive.
Our estimate of Tata Steel’s pure steel EV/ton of US$859 is at premium to replacement cost of US$730/t On a sum of parts basis we value Tata Steel’s iron ore at US$1.17bn and coal at US$750m. Excluding investments in Natsteel & Millenium; market value of stakes in Tata Motors and Tata Power and free cash & cash equivalent, we arrive at steel EV/ton of US$859. If we do not exclude market value of stakes in group cos (given the very limited possibility of encashing these stakes in the medium term), we arrive at steel EV/ton of US$1017, a 39% premium to the replacement value.
Steel cycle – is there further upside?
In line with regional trends, domestic steel prices have rebounded ~30% from their bottom in Jan 2006, but are still 9% lower than the peak in 1Q FY06. We believe further upside to prices is limited since at current prices of US$450/ton, the marginal steel producer in China is profitable. As a result Chinese production is rising sharply leading to higher net exports – up 67% m-o-m in March 2006. Raising EPS estimates but likely in the price
We have increased our estimates in FY07 by 23% and in FY08 by 19% as steel prices have rebounded more than our expectations. We now expect EPS to grow 13% in FY07 to Rs75. However, we think this is in the price with the stock having gone up 66% since Jan 2006.
Click here to download the report

Posted by toughiee at 7:57 PM | Permalink | Comments | links to this post

Pharmaceuticals: Robust Outlook for Q4FY06 by Merill Lynch

Robust Outlook for Q4FY06.
We expect sector performance to be robust for the March quarter with average sales growth of 25% YoY EBITDA growth of 48% YoY and PAT growth of 58%YoY. Q4 Sector highlights.
Strong YoY domestic market growth. Our expectation of strongdomestic market growth for most pharma players in Q4 is largely driven by the bounce-back from a low base in the previous corresponding quarter which was impacted by VAT-led de-stocking at the distributor level.
EBITDA margin improvement due to higher exports in both CRAMS and generics business. We note that this is also being helped by the lower base in the previous corresponding quarter for certain companies like Reddy’s.
Continuing high SG&A/ R&D spend. Like in the previous quarters,most companies focusing on front-end US operations like Ranbaxy, Reddy’s, Cadila will continue to incur higher SG&A and R&D spend during the quarter; however the impact of this spend in terms of approvals/launches is expected to be felt only from mid 2006.
No change in generics pricing environment. The gross margin trend of three major companies – Ranbaxy, Dr. Reddy’s and Caraco (Sun Pharma) – will likely be a strong indicator of any change in US generic pricing
environment for the quarter.
We expect similar level of price pressure in US in Q4 as in Q3.
Click here to download the report. (pdf file - 113kb)

Posted by toughiee at 7:44 PM | Permalink | Comments | links to this post

Short Selling & Keynes 'Figure' Theory

Source: DNA Money
Click on the image for clearer view

Posted by toughiee at 5:12 PM | Permalink | Comments | links to this post

Indian market expensive, be stock specific now: Mobius

Indian markets have good momentum but it is expensive, valuations are stretched and one has to be stock specific now, says Templeton Asset Management Company MD Mark Mobius. He further adds that he is bullish on commodities due to rising prices.
Click here for the entire interview.

Posted by toughiee at 5:08 PM | Permalink | Comments | links to this post

Monday, April 17, 2006

The World in 2050 by PriceWaterhouseCoopers

How big will the major emerging market economies get and how can the OECD compete? by John Hawksworth
Click here to download the report. (pdf file - 425kb)

Posted by toughiee at 8:05 PM | Permalink | Comments | links to this post

Foreign Hand Series: 'We are in a bear market rally'

Source: ET BB
The ET Big Bucks series on top global investment experts brings to you Jeremy Grantham, the chairman and chief strategist of Grantham, Mayo and Van Otterloo or GMO for short.
If you are a retail investor who likes reading about investment gurus, you better read this. Jeremy Grantham is right up there in the top league of Wall Street legends.
His firm, GMO, manages around $120bn of assets — twice the size of the entire Indian mutual fund industry. GMO is bullish on emerging markets. Its Emerging Market Fund has around $19bn in assets, making it amongst the biggest players in emerging markets.
GMO has a diversified mix of products and targets various assets classes: equities (US, global, emerging markets) bonds, currencies and even timber. It offers plain-vanilla funds and a whole range of hedge funds.
It has a decent track record, outperforming benchmark indices in many of its funds. One strategist doesn’t get to run more than $100bn without a solid track record, and an extremely keen eye on the future.
Jeremy Grantham goes to extreme lengths to see the future. In February ’06, for example, GMO released a seven-year forecast of expected returns from various asset classes. These asset classes comprise just about the entire investment universe for most investors.
Try to get the enormity of it, this man has a seven-year view on all possible asset classes. Phew! This view apparently comes from a huge exercise. GMO surveyed around some 2000 experts as part of the exercise.
ET Intelligence Group analysts Muthukumar K and Ajay Jindal spoke to Mr Grantham to get his views on future returns. His views aren’t rosy at the moment. Read on to find out more:
Click here for the complete interview.

Posted by toughiee at 5:10 PM | Permalink | Comments | links to this post

Markets: What next?

Source: BS SI With the market swinging between unbridled optimism and violent corrections, investors need to take stock of their risk appetite. Stock market investors are a confused lot. They undergo bouts of wild joy when they see the stock market scale greater heights pushing up the value of their investments. For the past three years, the stock market has risen about 300 per cent with intermittent corrections. At every stage, investors have been worried on how far the rally would go further, and every correction has caused enough worries. The 922 point volatility in the Sensex in the past four trading sessions has jittered investors once again. So what should an investor do: stay invested, invest more or sell? Are the Indian stock markets over-valued? Is there any upside left? Can the phenomenal rise in the stock market over the last three years sustain? Have all the good things come to an end? These are the questions that cloud the mind of every investor. Click here for the complete article.

Posted by toughiee at 4:58 PM | Permalink | Comments | links to this post

Infosys turns Rs 10,500 to Rs 2 cr!

Source: BS SI
Can you believe that an Indian company, which just managed to get through subscription of its first initial public offering (IPO) thirteen years ago, has posted 2,00,000% returns?
Click here for the the complete article.

Posted by toughiee at 4:55 PM | Permalink | Comments | links to this post

Saturday, April 15, 2006

The Joel Greenblatt Way : Grow Rich "Not Trying Very Hard"

By Brian Zen, SuperinvestorDigest.com
Would you like to earn 30% a year and turn $11,000 into $1 million in 17 years while "not trying very hard"?
If you would, I urge you to start by making a mere $20 purchase of "The Little Book That Beats The Market" by Joel Greenblatt. In the book, you will find a "magic formula" and the operating steps towards your millions.
The beauty of the magic formula is that it can be summarized in one sentence. Are you ready?
Click here for the complete article.

Posted by toughiee at 10:34 PM | Permalink | Comments | links to this post

India Strategy Report by ABN Amro

Turning cautious The BSE Sensex has surged 25% since January 2006, with most of the gains coming over the past month. We believe valuations are excessive and see signs the market is becoming overheated. Weadvise investors to take profit. The Indian market looks overvalued by around 10%
We were quite bullish about the Indian market at the beginning of the year, andmaintained our view after the announcement of the 2006 Budget. However, the BSE Index has surged 25% since January 2006, with most of the gains coming over thepast month. We continue to be upbeat on India as a solid investment story over thelong term, but think a near-term correction should be just around the corner. Webelieve long-term investors should stay invested. We believe the market has nowreached a stage where valuations are looking excessive, and see signs that themarket is becoming overheated. We believe the BSE Sensex is overvalued by around 10%, and estimate current fair value for the index should be around 10,881 -implying the market will likely move in line with expected earnings growth of 15-17%for FY07F. The market seems to have been rerated sharply with no significant changein macro fundamentals over the past month. We believe valuations now discount partof the FY08 forecasts. However, we see little potential for significant earningsupgrades for FY07 and FY08.The market could correct or move sideways Excluding ONGC and Reliance, the BSE Sensex is trading at a PE of 21.4x FY07F and17.9x FY08F. This looks expensive considering earnings growth (excluding ONGC and Reliance) of 23% for FY07F and 19% for FY08F. The 10-year bond yield is 7.5% currently and interest rates have hardened over the past few months. New issues inthe IPO market are priced aggressively, in our view, leaving little room for investors to make money. Our other concerns are firming up of metal prices and a possible increase in oil-product prices after the state elections. We see room fordisappointment, unless there are significant earnings upgrades to support the rapidupswing. FII flows seem to have rerated the market, which we believe is not backedby significant earnings upgrades. We advise investors to wait for FY08 earningsvisibility to improve before making fresh commitments.Model portfolio and top picks - move to defensivesWe downgrade the auto sector to Neutral (from Overweight), as share prices haverallied sharply since the beginning of the year. We raise our weighting on pharma andmaintain Overweight on IT. We increase our weighting on ONGC, given its underperformance year to date and we believe the negatives are mostly discounted.We have added Glenmark Pharma and HPCL in our model portfolio. Our top picks are BHEL, TCS, Infosys, Dr Reddy's Labs, Tata Motors, Bharti Televentures, Grasim, UTIBank, and HDFC.
Click here to download the report.
Additional India Strategy Reports:
  • India Strategy Reports (updated)

Posted by toughiee at 2:45 PM | Permalink | Comments | links to this post

Friday, April 14, 2006

Global Investors & EM

Global investors have become so comfortable with the emerging markets that there is hardly any difference today between the rates of interest on bonds from developed nations and those from emerging markets. Or, in other words, spreads on emerging market bonds are wafer thin. This shows that investors believe that putting their money in, say, an Indonesia is not far more risky than putting it in a Germany. The result: bonds and equities from emerging markets have outperformed other asset classes over the past five years or so.

Sober minds have been cautioning against giddy-headed euphoria about emerging markets, both in India and elsewhere. While there is little doubt that the economic fundamentals of countries and compa- nies in Asia, East Europe and Latin America have improved remarkably in recent years, the risk of markets in these regions toppling because of an external shock persist.

The International Monetary Fund (IMF) says in its new Global Financial Stability Report that the improvement in economic fundamentals can explain only half of the 422-basis-point drop in emerging markets bond spread since 2003. External factors account for the other half. We commonly hear analysts speaking of how loose monetary policy in the US has driven up bond (and equity prices) in the emerging markets; and how a tightening of US interest rates could harm the prices of financial assets here. That’s why traders and investors hang on to every announcement made by the US Federal Reserve.

Are they barking up the wrong tree? Of far greater significance than US monetary policy is investors’ perception of global financial risk, says the IMF. It is the single most important factor in the Fund’s econometric model on bond spreads. An increase in risk perception by one standard deviation causes spreads to increase by 29 per cent. A corresponding change in the Fed funds futures rate and the volatility in the Fed funds futures market will lead to a 10 per cent rise in bond spreads, respectively.

In effect, what this means is that when assessing external risks, analysts would do well to focus on a factor that is even more important than US monetary policy — and that is risk perception.

The Chicago Board Options Exchange created the VIX volatility index in 1993. It measures the market’s expectations of near-term volatility as reflected in the options prices of the S&P 500 stock index. The VIX index is popularly regarded as a “investor fear gauge” by derivative traders. It is currently at historically low levels, indicating that risk tolerance is at record highs. Investors in Indian bonds and stocks would be well advised to keep an eye on the VIX index to figure out which way the smart money is moving.

Source: BW

Posted by toughiee at 7:39 PM | Permalink | Comments | links to this post

FMCG: Poised for long term growth

Executive Summary 1- Strong GDP growth and rising income levels have been boosting demand in India. Robust growth in organized retailing, too, is providing a fillip to urban markets while favorable agricultural growth and lower per capita consumption is improving rural demand for consumer goods, leading to accelerated growth in overall consumer demand. 2 - Dependence of agriculture on the monsoons still remains a concern while higher crude oil prices pose a threat to input costs. Nevertheless, higher input prices are expected to be offset by price hikes as, with revived demand, pricing power is expected to have returned to the sector. 3 - Those with strong cash flows are strengthening their position by making acquisitions to complement their present product range and also making a foray into less penetrated categories. 4 - In view of the expected continuing economic growth, the Sector should grow by 9% a year Top picks- ITC, HLL, Nestle and Dabur
Click here to download the report.
Source: PL

Posted by toughiee at 7:27 PM | Permalink | Comments | links to this post

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