Friday, November 21, 2008

The Bigger fool game

The bigger fool game has come to an end. The party has stopped, but the music has just begun for those who have been caught in this bigger fool game. Brokerage houses, financial engineers and more than anything else the real estate players have all been caught on the wrong foot. They are all loaded with debt on their balance sheets, and with partly paid assets which will fetch 20 paisa to a dollar.

The euphoria of land bank valuations mean, that when the double bubble of stocks and real estate burst all the investors in this sector were left and high and dry. Stocks losing more than 95% from their peaks. The real estate bell weathers Unitech and DLF which painted the growth and development story have been equally badly hit.

Even though it is going to be incredibly painful, we sincerely hope that the real estate players get into a deleveraging mode sooner rather than later. Few players have started making the right noise, with sales of non core assets, raising capital through whatever sources they can, others are still playing the blame game. Interest rates shot up, requesting bail out packages, bank loans and the moon from the government. They are bargaining with the government for sops and cheaper interest rates against dropping real estate prices!! Incredulous, do they really have a choice is what baffles me?

If they don’t sell, they go belly up, banks will put pressures, investors will put pressure, and the sahukaars in real estate lending business will gobble them, if they don’t do that. So for god sake stop calling the bluff, and do what you anyways you need to do. You are not doing the country, FM or anyone favor by reducing prices of property, honestly you guys have no choice and no holding power either. For the first time I see, the otherwise fragmented and dog eat dog industry of real estate bargaining in a joint fashion with the Government. I hope Mr. Chidambaram calls the bluff, tells them, tighter lending norms, pay for your own excesses, and if you don’t wish to cut prices, suit yourself, you are the only ones who will left holding the baby. Make no mistake those who cut prices first will be there standing last. There are no ivory towers, and there is no place to hide.

Housing loan at 7% when Fixed deposit rates are 11%??? Please spare us we can live without another stupid bailout, where tax payers are whipped, financial system put to danger, to support unscrupulous real estate players. I know Mr. Chidambaram is wise enough to know what is going on, but I hope he does not fall to the pressure of elections, showing cheaper homes as a victory of old slogan of roti kapda aur makaan, and gives stupid concessions to these guys.

Another sector where a similar game is being played is the airlines sector, where the monopolistic premium domestic airline Companies have been holding the government to ransom, and getting ATF prices cut by the aviation minister, where surprisingly the retail prices of petrol diesel are left unchanged. Today ATF is cheaper than petrol on per litre basis, so much for a welfare state. The public at large are subsidizing people who fly. It happens only in India. In spite of all this air fares for the premium airlines have only headed north, and not to forget the occupancy south. With an understanding between the two leading private airlines Company on fares, there is very little choice in the premium segment for the corporate flyer, so they were hoping this will boost the traffic. Alas! Old India and smart India comes to the fore, the occupancy heads further south, with even Corporate travelers likes us more than willing and happy to travel through low cost carriers which have been proactive in reducing prices and increasing the occupancy.

If the leading airlines, don’t stop playing this bluff with the government for more sops, excise cuts and holding those things to ransom to reduce prices, and the government calls bluff, the airlines will bleed themselves to death. In India, if you have to survive you have to accept the market realities and reduce fares. Period. No pacts, no understandings will work sir, yes, unless of course our illustrious politicians are willing to bend backwards to accommodate this heresy of airlines. Gentlemen are premium airlines, please keep the fares up, someone is going to get to buy your fleet at close to peanuts.

Its always fun to see the music stop in this bigger fool game. Now we are having another round in all countries, where people are predicting doomsday scenario. As things become cheaper, the risk perception of over-payment instead of becoming lower increases beats me. I know there is a systemic change ahead that we see coming, and even at current levels I will be afraid of investing in US markets, where the pain is going to be huge and to an extent unsustainable.

I will not be surprised if Dow falls another 50-60% from here. (for posterity sake, Dow is at 7500 today, and I am not ruling a possibility of Dow going below 4000). Why I say so? One of the biggest frauds of all time the US Dollar is threatened, the country which was consuming everything produced all over the world and paying off by printing currency, may not be able to do so anymore. We all know what happens when a currency collapse. What happened to Rouble and then to Russia which marked the end of cold war. I think we are back to becoming a multipolar world, where China will become extremely important pole and India will get more important than what it has been. European Union will become important too. Public+private debt to GDP ratio of 350%, rising unemployment, closing manufacturing capacities, textiles, airlines, now automobile, US in for real rough weather. In real terms, honestly I think US economy will make a mockery of these predictions of recession of 1-2%, the degrowth over the next 3-4 years could be as high as 15-20% of the GDP.

The Leadership Challenge

Would like to wish Mr. Obama all the best for what is going to be the most difficult time to be American President since time immemorial, couple that with hostile global climate, dependency on outsiders for oil, limited ability to fund your defence spends, in times of crisis, a crumbling financial institution. Really the only light at the end of the dark long tunnel for US is that of an oncoming train. Leadership will be extremely important in this era for US. We pray that adverse situation does not unleash the hawk in American President and they are patient and virtuous enough to weather the tough times ahead without looking at war as tools to assimilate resources.

The world also needs leadership in addressing environmental issues, and to address the depletion of energy resources and to keep in check the monster of global warming to drown precious land and coastal areas. Clean energy is also need to be tapped and developed for better health, more self dependence and for the sake of our great grand children. Yeah, I am an optimist, they will be born and we will not have a doomsday before that.

The leadership challenge is not only for US, where the challenge is managing its citizens, its hopes, its fears, and to tide through the painful times, by making right sacrifices, and by finding ways to reinvent their positioning for the economy. The challenge for China and also to an extent India is much greater. China, India and European Union need to take the responsibility of world leaders with compassion, objectivity and fairness. They need to be assertive to do away with inefficiencies with consideration that the troubled landing of US economy has a human face to it.

US on the other hand will need to be made more responsible, will have to undertake sacrifices and should be given surplus budget targets for every year, absorbing as much dollars as they can from the world economy while sacrificing its consumption growth. We are in bad times anyways and surely cant afford another bubble in US economy, I am not sure US will be able to afford this one either. The greed of cornering all resources, crude, mines, commodities have beggared them. As they mother earth has enough in it for everyone’s need but not for their greed.

Another challenge for the world leaders will be a spiritual one, where the virtues of goodness, honesty, sacrifice will have to be extolled once again, against the creed of greed. We will need to be compassionate towards the excesses of US too.

We pray that the world gets strong, compassionate and foresighted leaders, who rise above their national interests to embrace the world and become world leaders. Who stand up and say, they care for the starving children in Africa, who bother about the alienation of the Muslim world, who take measures to address the daily loss of flora and fauna, who imbibe and extol virtues of goodness, mutual respect, sanitation, equality and are not overtly swayed by greed, excesses of power and corruption of mind. I pray one day I will be one of them.

This world deserves much better, we deserve much better. Lets take a pledge, when we die we will leave the world better than what it is today.

Friday, September 12, 2008

When Markets Tank

There is music in stock market panic. There is pleasure in seeing gloomy faces of men once famous and rich by putting more and more money and less and less time in stock market investments. Making money, after all has never been easy, and the moment it starts appearing too easy there is something wrong about it. As they used to say in 2007, the only way you cannot make money on stock market is if it is closed.

Today, there are different scenes, people are looking for recluse in FMPs, and stocks aren’t as sexy as they used to be. The roving queries for the next big tips have started getting muted. But they haven’t jumped the ship yet. One look at the money inflow from Mutual Funds suggests, there is fresh inflow every month, and most of the liquidity being taken away is essentially FII money. People are skeptical, people are scared, but they haven’t jumped ship yet.

Tops and Bottoms

Signs of markets bottoming out are as visible to the discerning eye as the signs of markets topping out. The markets top when you cant track the number of public issues hitting the markets, and their valuation being done on anything else but earnings. When you start hearing about innovative valuation methodologies like Price/Imagination ratio, eyeballs, footfalls, landbanks, embedded valuations, the next big story, its not the same this time, that’s the time to get scared. When everyone asks for tips, is the time to be cautious, and when everyone starts talking about the multi-baggers they made and start offering you advice that is the time to run.

Similarly, when AUMs start decreasing, dividend yields for growing Companies start exceeding the interest rates, people start talking about cash bargains and the stellars of the bull run starts falling like nine pins that is the time to get into it. America has started to see those signs, where the architects of innovative structures like sub-prime securities being sold multiple times over, the bankers have started going bankrupt and housing is in doldrums. In India, the real estate stocks have seen a tumble, but my sense is, till the time we see panic selling in the real estate markets couples with a few takeovers, few guys going virtually bankrupt, and the markets would not have bottomed out. The effect of Chinese recession is yet to seep in, the hefty mutual fund redemptions are yet to kick in, that is the time markets are going to get really sexy.

The taste of Saliva and the lump in my throat

Just the taste of Saliva, when you think of such a market scenario, makes my eyes glow, makes my heart warm, I can’t wait for the thud, can’t wait for the opportunities to buy things at price of dirt. I have been investing, but I am also in cash. Now that the high tide is over, the panic stricken brokers, the high-flying bankers, the insightful analysts all stand naked today in front of the world. People have lost their lives fortunes; few will lose their houses too in very new future. I empathize and understand their pain, but like in life so in markets, its not the most intelligent, it’s not the smartest, it is always the person with the strongest character who is standing the last. Only those whose long term resolve and character are stronger than bouts of fear and greed will survive. For all my love for the stock market, I hope I read this post in every market excess to remind myself of my long term resolve and discipline in investing. I have made my mistakes, I have even repeated my mistakes, but I sincerely hope I will learn from each of them. For everyone else and for myself too the war is not over, far from it, (actually it is never over) just remember whenever you loose a bet “don’t lose the lesson”.

Friday, August 22, 2008

Let your Blood Boil

“We can change history but we can’t change Geography”- Atal Behari Vajpayee

Unfortunately, the current lots of politicians are doing just the opposite; they are changing geography and repeating the history of being meek. The image of India as a soft state and a soft target keeps getting more firmly etched, with repeated attacks at India’s major cities, killing innocent people with impunity. What is even more disturbing is the intelligentsia of the country falling prey to years of violence, terror induced by our neighbor in Kashmir, advocating creation of another unfriendly neighbor called Kashmir.

With neighbors, like Pakistan, Kashmir, Bangladesh and China on all sides of the border, indulging in guerilla warfare, inducing terror hit and run tactics and the ever increasing weaponry capability and arsenal is making India’s security fears increase by the day. The Central Government’s meek response to each such attack or for the internal terror forces like the naxalites who now have footprints over 170 out of 602 districts of the country. The authorities just refuse to get out of their slumber.

I still remember the terror struck faces of parliamentarians on that ill fated 13th December, 2001 attack. Ill fated for two counts, the brave soldiers of our security forces lost lives, and second none of the parliamentarians did. Honestly, those are the true faces of the rulers of the country, meek, and terror struck for their own security, but indifferent to loss of lives of a billion respected citizens of this country.

The POTA was repealed, giving further impunity to the terrorist forces. I know there will be plenty of human rights activists and international experts baying for your blood, but the only way to stem the rot is the way we did it in Punjab. Lets get the military organized, lets get the intelligence centralized and coordinated, lets fix responsibilities, lets do the combing of our own territory, and sanitize it for once and for all, lets suffocate them financially, and lets cut their regular supply of ration. There will be excesses, but the price needs to be paid, for years of negligence, for decades of fear and for submitting to their evil designs time and again.

Let Kargil be not forgotten, but even more important is to remember, Mumbai trains, tbe blasts in 1992, the serial blasts in Bangalore, in Jaipur, in Ahmedabad, the designs in Surat, the Naxalite operations in Bihar, UP, Chhattisgarh, M.P, West Bengal, the plight of the north eastern states, and yes Kashmir too. Remember the mutilation of our BSF soldiers, being returned to us like hanging goats up for the flame. Let your blood boil. Lets resolve, that we will leave behind a much more peaceful and secure India for our future generation, not the one which is threatened by all sides by unfriendly neighbors and from enemy within.

Our neighbors will not get any better, (may be with an exception of China) Pakistan and Bangladesh will continue to be the pests they are, but if we refuse to be meek, and hand it down to them with our preparedness, alertness, they will think a hundred times.