GalaTime

• Business Standard: 59% stocks on BSE are illiquid

Over 59 per cent of stocks traded on the Bombay Stock Exchange (BSE) and 22 per cent of stocks traded on the National Stock Exchange (NSE) have been identified as illiquid by the exchanges based on their trading activity during June 2008.

The monthly turnover on BSE and NSE in these stocks has plummeted sharply from over Rs 6,000 crore in January 2008 to Rs 2,950 crore in March 2008 and to Rs 562 crore in June 2008.

This is a head-ache for brokers, hedge funds and system traders (like us)!

• BCA Research: U.S. Dollar: Next Carry Trade Financing Vehicle?

• Prudent Bear: Voodoo Banking

Clients often sought “alignment” of interests requiring banks to take risk positions in transactions. This evolved into the “principal” business as banks increasingly made high risk investment in transactions. In some banks, this evolved into a model where the bank acted purely as “principal” rolling back the clock to the days of J.P. Morgan. Banks convinced themselves of the strategy on the basis that the risks were acceptable (it was their deal after all!), the risk could be always sold off at a price (market were liquid) and (the real reason) high returns.

Banks have sold risky assets where the seller has provided the buyer with favourable terms. Banks have sold leveraged loans on the basis that the bank lends the buyers 75-80% of the price at below market rates. Sellers have given undertakings that if future asset sales are at lower prices than that paid by the buyer then the seller will compensate the purchaser. These provisions have allowed banks to sell assets at prices that avoid the need to further mark down its positions. This creates uncertainty about the value of bank assets. Further write-downs in asset values cannot be discounted.

• Economic Times: PSEs free to park funds in any MFs

The government has allowed CPSEs to park 30% of their cash surplus either in equity or debt instruments or money market mutual funds.

Taken together these companies own about Rs 4 lakh crore in surplus funds. This means with proper investment plans about Rs 1.33 lakh crore can come in to the kitty of mutual funds soon. Companies like ONGC and BSNL have shown their interest in investing their money in mutual funds and have already submitted the plans to the nodal ministries.

• Financial Express: MFs accumulate Rs 20,000 cr cash for deployment

MFs are sitting on Rs 23,545 crore of cash that is waiting to be deployed in the market. Of this Rs 19,214 crore lies with existing MFs, while the remaining Rs 4,331 crore has been mobilised through the NFOs.

Out of the entire mutual funds industry, diversified equity funds were having cash of Rs 7,859 crore (8.64 per cent of the total assets) at the end of March against Rs 4,773 crore (4.46 per cent of total assets) in January 2008.

• NY Times: Debt Collection Done From India Appeals to U.S. Agencies

Americans are used to receiving calls from India for insurance claims and credit card sales. But debt collection represents a growing business for outsourcing companies, especially as the American economy slows and its consumers struggle to pay for their purchases.

Encore pays its collectors in India an average base salary of 17,000 rupees ($425) a month, and they earn bonuses — sometimes more than $1,000 a month — for getting customers to pay. In contrast, collectors in the United States, make about $6,500 a month.

• Business Standard: Time for a U-turn

Public sector banks, which were quoting in the range of 1.5-2.5 times one-year forward price-to-book value before the market mayhem, are now quoting between 1-1.5 times. Similarly, for private banks, the valuation has fallen from 4.5-6 times to 2.5-3.5 times.

Credit growth has slowed down from over 30 per cent last year to about 22 per cent as on March 28 – below RBI’s expectations of 24-25 per cent in FY08.

The March 2008 quarter is expected to be comparatively weak, due to a host of issues like slowing credit growth, higher deposit rates, mark-to-market hit on bond portfolio affecting trading profits among others. The net interest income and operating profit of public sector banks is expected to grow in single digits year-on-year; the best case scenario is a 15 per cent growth while some banks may also see a decline. Net profit is likely to grow in the same range.

• Mint: Institutional investors expect a slow start to short-selling
  

Short-selling for institutional investors as well as a securities lending and borrowing (SLB) mechanism becomes operational this week, but experts say institutional investors will be preoccupied with the other measure that will be implemented on Monday—the imposition of margins for all institutional trades in the cash market.

The capital market regulator has now stipulated that even cash trades by institutional investors will be margined, just as they are in the case of retail participants. To start with, margins would have to be paid a day after the trade, and from 16 June, margins would have to be paid up front like by any other investor. These requirements are likely to take centre-stage this week.

• Hindu Business Line: Volatile equity markets make structured products attractive

Structured products are good for customers unwilling to take high risks. The minimum amount for investing in such structured products is about Rs 10 lakh and the maturity period is usually three to five years.

These are in the form of non-convertible debentures and listed on the NSE, governed by SEBI guidelines.

Assuming that the product is linked to Nifty, the issuer may promise that if the Nifty gives 100 per cent returns, then the structured product will give 105 per cent. To ensure this, the issuer invests part of the money in risk-free fixed deposit.

The balance will be invested in equities or other high-return instruments. The capital can be protected from the portion invested in the fixed deposit, even if the market falls. In the normal circumstances, the investor in any case will get higher returns — the interest from the fixed deposit plus returns from the equity.

• Business Standard: FCCB shadow looms over corporate profits

Several companies that have issued foreign currency convertible bonds (FCCBs) face the prospect of not having these bonds converted into equity unless the stock markets stage a strong comeback. This implies that these corporations may have to pay back the amounts they borrowed together with the interest.

What could compound the problem is that many of these firms do not account for the debt. In other words, they are not providing for the borrowings on an annual basis over the life of the instrument. According to a study by a leading brokerage, accounting for the loan and the interest would, on an average, knock off at least 12% of the profits in FY09 and about 10% in FY10.

It was less than 6 months ago that FCCBs were helping these fine folks make a bunch of moolah. So, make profits on the way up, and dont account for it on the way down. Nice deal if you can get it!

• Mint: Companies shelve capital market plans

The meltdown in the equity markets has taken its toll on the capital raising plans of Indian firms. Investment bankers estimate that at least 13 Indian companies have stalled plans of raising nearly Rs25,000 crore from the equity markets and say this could just be the beginning of the trend.”

Most of the Indian firms that have scrapped their plans were planning qualified institutional placement (QIP)—a kind of private placement that listed companies can make to a set of institutional buyers such as banks, mutual funds, insurance companies, foreign investors and venture capital funds.

The cost of borrowing for Indian firms has gone up from 100 basis points over the six-month London inter-bank offered rate (Libor) to 400-500 basis points over Libor over the past six months.

• Economic Times: Nifty at 6950, Sensex 22880 by July 2008

There is a clear-cut demarcation in the earlier bull phases of 1992 and 2000 and the current bull phase. The earlier bull phases were more or less driven by a handful of market operators who eventually got crushed under their huge outstanding positions.

The age-old concepts of stock valuation have become more or less redundant in view of the structural changes in the market mechanism. As long as the flow of funds remains intact and the settlement in derivative segment continues to be “cash settled”, there is no threat whatsoever to the ongoing bull phase.

This time, its different. Cash flows don’t matter. Valuations dont matter. Common sense is useless!

This would be a good time to do a reality check on stock market predictions. As of market open, the Sensex is at 15200 and the Nifty is at 4550. What is the probability of them meeting these July ‘08 targets?

• Reuters: India fund assets to reach $440 bln by 2012 - McKinsey

The total assets under management (AUM) in India would grow by 33% every year to reach as much as $440 billion by 2012 with mutual funds and portfolio management services as key driver.

The retail segment would grow by between 36% and 42% annually to $160 billion to $200 billion by 2012 . . .

Huge opportunity!

• Bloomberg: Hedge Funds Reel From Margin Calls Even on Treasuries

While lenders are most unsettled by credit consisting of real estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasuries, considered the world’s safest securities, because of the price fluctuations in the bond market.

On AAA asset-backed securities, banks are demanding a 15% haircut, up from 3% last summer. Corporate bond haircuts have gone to 10% from 5%, bankers said.

“If you’re going to dance with the devil, there comes a time when your toes are going to be stepped on,” Cruden said. “Prime brokers are there to do business, not be your friend.”

Several choice quotes in there.

• Morgan Stanley: Credit Market Developments: It’s Not Just Their Problem

The average CDS for non-investment grade bonds has shot up to 592bp currently from 216bp as of end-September 2007, while that for investment grade has increased to 171bp from 40bp as of end-September 2007. The Indian paper has suffered a similar fate, with CDS rates rising to 200-480bp from the lows of 60-100bp in July 2007. If this trend continues, foreign capital-raising will become difficult.

We believe that capital inflows into India could slow to US$30-40 billion over the next 12 months compared with US$106 billion in the last 12 months, unless there is a dramatic turnaround in the global credit market environment.

We estimate that GDP growth will slow to 7% during the quarter ending December 2008 from 8.9% during the quarter ended September 2007.

Watch the USD:INR rate, and bank credit growth in the coming months.

• Economist: Money for old hope

Imagine a business in which other people hand you their money to look after and pay you handsomely for doing so. Even better, your fees go up every year, even if you are hopeless at the job. It sounds perfect.

That business exists. It is called fund management. Charley Ellis, a veteran observer, explains that fees in the industry tend to grow at around 15% a year because markets rise by an average of 8% and savings grow by 5-6%.

. . . most fund managers do not compete on price. Instead, they persuade their clients to select their funds on the basis of past performance, even though there is little evidence to show that this is a good predictor of future success.

Nor can investors be sure that the intermediaries who sell the funds—brokers, advisers and bankers—will steer them in the right direction. These middlemen often get a cut of the fund managers’ fees, so they have little interest in recommending low-cost alternatives.

And yet, ULIPs are a million times more popular than index ETFs. It’s a tragedy!

• Index Universe: Investors Join Traders In ‘Perfect Storm’ For Currency ETFs

The combination of more economists forecasting a prolonged weakening in the greenback and record-high price gains are providing both fundamental and technical analysts with a field day.

The result is something akin to a perfect storm in drawing attention to a rather new form of ETF investing, says Joe Baker, a longtime advisor at Alcus Financial Group in Mt. Pleasant, S.C.

“I’ve never seen this much interest in currency ETFs before,” he said with a laugh. “There’s just a pile of money coming into these funds now.”

Currency ETFs as a whole make up about 5% of the firm’s long-term-oriented portfolios. Some more aggressive traders prefer to use up to 10% of their total assets in various currency ETFs.

• Forbes: The Coming Death Of Indian Outsourcing

. . . wages are rising in India. The cost advantage for offshoring to India used to be at least 1:6. Today, it is at best 1:3. Attrition is scary. Jobs that are low value-added and easily automatable should and will disappear over the next decade.

As the 1:3 cost structure becomes 1:1.5, it will soon become inefficient to use Indian labor. Why not Oklahoma or British Columbia? For many Europeans, Eastern Europe has already become more compelling than India. The pure labor arbitrage equation will no longer balance.

Assuming a 15% year-to-year salary hike rate, and a 2007 cost advantage of 1:3 in favor of India, if U.S. wages remain constant, India’s cost advantage disappears by 2015.

Catchy headline. “Death” unlikely. Wonder if the author has checked the latest wage differential for employees in legal processing, equity research, etc. Talking about 7 years hence (2015), perhaps we should check on what people were predicting 7 years ago. Oh well - gotta keep churning *something* out for consumption.

• von Mises Institute: The Trouble with Prosperity

the Fed is trading–figuratively–at forty times earnings, five times book value, and it is yielding nothing, because people now believe in the integrity and the efficacy of managed currencies. They believe furthermore–and even more remarkably–in the clairvoyance of these intrabeltway economic planners known as central bankers.

A successful operator in the stock market is someone who gets on the right side of the primary trend and stays there. He does not object if the motive force of the primary trend is an excess creation of credit by the central bank, aided and abetted by an unprincipled Treasury.

A guy like Warren Buffet is not going to come out and say, we shouldn’t buy Coca Cola at forty times earnings because we know that all these things end badly. Wall Street is intrinsically and necessarily unprincipled in the sense that it does not operate day-to-day with an eye towards what is right and what is wrong. It is the citadel of expediency.

It’s a fairly old piece, but quite an interesting read.

• NY Times: Keep It Simple, Says Yale’s Top Investor

Don’t try anything fancy. Stick to a simple diversified portfolio, keep your costs down and rebalance periodically to keep your asset allocations in line with your long-term goals.

For most people, he recommends a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult.

For most individual investors, he said, copying the strategies of institutions like Yale is virtually impossible: big investors have access to fund managers and arcane strategies that are beyond the reach of most people.

. . . it is fruitless for individual investors to pick stocks.

• Skoch, Google Video: C B Bhave

• John Mauldin’s Investors Insight: The Dash To Trash And The Grab For Growth

The growth universe appears to be made up of two kinds of stocks. Firstly, the ones we would expect to find within this universe - the Googles, Apples and RIMMs of the world. These stocks have extraordinary cash flow growth embedded within their market price (in excess of 40% p.a. over the next 10 years) - surely madness. The second sort of stock in the growth universe are cyclicals masquerading as growth stocks. Some of the general industrials and the miners are priced for quite incredible long-term growth.

. . . there are two major flaws in the decoupling arguments. Firstly, people always forget lags at the turning points in cycles. So if the US housing bubble bursting brings down the US consumer, it is ludicrous to assume that highly export-dependent nations will be able to withstand a demand drought. Secondly, the decoupling arguments reek of cognitive dissonance - the desire to hold two contradictory viewpoints simultaneously. Those who now speak of decoupling used to talk of globalisation. This is oxymoronic, you can believe in one or the other but not both.

• Bloomberg: Death of VaR Evoked as Risk-Taking Vim Meets Taleb’s Black Swan

Value at risk, the measure banks use to calculate the maximum their trades can lose each day, failed to detect the scope of the U.S. subprime mortgage market’s collapse as it triggered more than $130 billion of losses since June.

Lehman uses four years of historical data to calculate VaR, with a higher weighting given to more recent time periods, while Morgan Stanley provides VaR calculations using both four years and one year of market data.

All of the risk-measurement tools failed to prepare Merrill for the unforeseen declines on triple-A rated securities backed by subprime mortgages . . .

Talk about timing - Taleb’s ‘The Black Swan’ is practically selling itself! Wonder how widely VaR is (ab)used in India.

• Psychology Today: 10 Ways We Get the Odds Wrong

The human brain is exquisitely adapted to respond to risk—uncertainty about the outcome of actions. Faced with a precipice or a predator, the brain is biased to make certain decisions. Our biases reflect the choices that kept our ancestors alive. But we have yet to evolve similarly effective responses to statistics, media coverage, and fear-mongering politicians. For most of human existence, 24-hour news channels didn’t exist, so we don’t have cognitive shortcuts to deal with novel uncertainties.

The physiological consequences of overestimating the dangers in the world—and revving our anxiety into overdrive—are another reason risk perception matters. It’s impossible to live a risk-free life: Everything we do increases some risks while lowering others. But if we understand our innate biases in the way we manage risks, we can adjust for them and genuinely stay safer—without freaking out over every leaf of lettuce.

• Bloomberg: Stock Market Decline Delays Highest Number of IPOs in 10 Years

Tumbling equity markets prompted 24 companies this month to halt plans for initial public offerings, the most in at least a decade.

The Bloomberg IPO Index, which tracks new stocks in their first year of trading, dropped 9% in the past year, while the Standard & Poor’s 500 Index declined 6.4%.

• TraderFeed: From Trader to Hedge Fund

. . . few traders end up making the leap to funds, even when they have talent. The reason is that most hedge funds are looking for multifaceted portfolio managers, not directional traders of single asset classes.

. . . being a successful trader and being a successful portfolio manager are different skill sets. A trader knows his or her market in depth–particularly at a short time frame–and masters particular strategies or setups. A portfolio manager has to know multiple markets and trade multiple strategies often across multiple time frames.

• Business Standard: The ultimate crisis machine - Sebi`s risk management

Our concern is with index futures — for the US markets, the margin to contract value ratio is around 6 to 7%; for India, 10 to 15% and on January 24, it was a whopping 17.3% for Nifty futures.

. . . the increasing frequency of sharp moves in a few minutes of opening (the P-notes crisis in October 2007, and other crises in May 2006, May 2004, and so on) is not due to the market being too far up, or excessive speculation, or even the erroneous assumption of low margins required for trading. It is due primarily to the dud system of margining that we in India have adopted. As always, we have instituted a policy “in the name of the aam aadmi”; and as always, the policy hurts them the most.

. . . margins for a Nifty futures contract rose by 50 per cent between January 18 (Rs 29,955) and January 24 (Rs 45,000).

• Business Today: The dough in distribution

So with banks and brokers ruling the roost, the future doesn’t appear too bright for stand-alone distributors. Although individual agents are still a force to reckon with in insurance, in mutual funds the days of the individual distributor might just be numbered. What makes their task that much more difficult is the manufacturers themselves, many of whom are eyeing the distribution pie by floating separate companies to market third-party products.

• Bloomberg: Stock Drop Pulls 38 Indexes Into Bear Market; Banks Lead Plunge

The MSCI World Index’s 3% decline yesterday, the steepest since 2002, left benchmarks in France, Mexico, Italy and 35 other countries at least 20% below their highs in the last year. The Standard & Poor’s 500 Index may post its biggest decline since 2001 when the U.S. market resumes trading today after the Martin Luther King Day holiday, futures showed.

Even with MSCI World valuations at the cheapest since at least 1995, some of the biggest investors say stocks may fall further.

• Business Standard: 110 sectors lose 10%-plus market-cap

Of the 129 sectors tracked by Business Standard’s research bureau, 110 sectors - including sugar, power, construction, refining, steel products and financial institutions - lost heavily over the last one week, wiping out over 10% of their individual market value.

Out of these sectors, energy, capital goods, telecom, select utilities and steel stocks witnessed a much steeper fall in terms of percentage and value.