Stock markets behave like a voting machine...

...in the short term, while in the long term they act like a weighing machine", said Benjamin Graham in his bible on investing, Security Analysis, the sixth edition of which has just been released, a highly recommended book.

We've had two nearly full trading sessions since the news about the fraud at Satyam Computers was made public. During this period, the voting machine has been working overtime (literally, given that volumes on the stock exchanges have shot up significantly, up from an average of around 6-700 million shares on the NSE to over a billion shares per session).

So, what are the votes (in case of the Nifty 50 companies) indicating?

Top Losers (since the Satyam announcement):

1). Reliance Communications -25.0%
2). DLF -22.2%
3). Suzlon -22.1%
4). Unitech -21.8%
5). Reliance Infrastructure -20.2%


Top gainers:

1). Hindustan Unilever +6.8%
2). Sun Pharma +5.7%
3). TCS +5.5%
4). Maruti +4.0%
5). Wipro +3.3%


Intuitively (again in the short term, i.e.), the companies voted out (the top losers category), seem appropriately placed...isn't it !?!

Thank you, Mr.Raju...

...for taking away the last piece (the Cash Flow Statement) of the Annual Report, which many of us analysts used to once trust as a reliable source of financial information.

And also for writing this letter. I truly believe you've opened a Pandora's box so far as corporate governance is concerned. Some of the things I hope to learn over the next few days is:

1). How can a Company have "zero" cash on books and yet be able to show cash & bank balance of over Rs.5000 crore? (banks provides fake FD certificates? or the Company forges bank statements/certificates?

2). In the last 3-4 years, the Company claims to have paid Corporate tax of close to Rs.800 crores. On what; profits, which profits?

3). Cash = zero, debtors = overstated by 2000 crore, balance sheet size = 8000 crore, actual b/s size = ???

4). What statements (followed by actions) will come from PWC (the auditor-in-Chief @ Satyam), SEBI, Department of Company Affairs and GoI? (Will Satyam be auctioned-off under the aegis of GoI to various IT companies in India?).

Prof. Verma is right on (link1 & link2). GoI must take this up, and quickly.

King Solomon & Happy New Year

Here's a small but an awesome story, which i think is quite apt for the times we live in -

One day King Solomon decided to humble Benaiah Ben Yehoyada, his most trusted minister. He said to him, "Benaiah, there is a certain ring that I want you to bring to me. I wish to wear it for Sukkot which gives you six months to find it." "If it exists anywhere on earth, your majesty," replied Benaiah, "I will find it and bring it to you, but what makes the ring so special?" "It has magic powers," answered the king. "If a happy man looks at it, he becomes sad, and if a sad man looks at it, he becomes happy." Solomon knew that no such ring existed in the world, but he wished to give his minister a little taste of humility. Spring passed and then summer, and still Benaiah had no idea where he could find the ring. On the night before Sukkot, he decided to take a walk in one of the poorest quarters of Jerusalem. He passed by a merchant who had begun to set out the day's wares on a shabby carpet. "Have you by any chance heard of a magic ring that makes the happy wearer forget his joy and the broken-hearted wearer forget his sorrows?" asked Benaiah. He watched the grandfather take a plain gold ring from his carpet and engrave something on it. When Benaiah read the words on the ring, his face broke out in a wide smile. That night the entire city welcomed in the holiday of Sukkot with great festivity. "Well, my friend," said Solomon, "have you found what I sent you after?" All the ministers laughed and Solomon himself smiled. To everyone's surprise, Benaiah held up a small gold ring and declared, "Here it is, your majesty!" As soon as Solomon read the inscription, the smile vanished from his face. The jeweler had written three Hebrew letters on the gold band: gimel, zayin, yud, which began the words "Gam zeh ya'avor" -- "This too shall pass."



Resolution for 2009, therefore, is:-

1). Invest We Must (in Equities) in 2009 & one of the other (& more important one) is

2). Vote We Must, with all Due Diligence.

Happy New Year to all.

Out of the woods? Well, almost there...

In the first quarter of the current calender year, we had a whole host of hammers hitting on our head:

- Inflation (rising, and rapidly to historic highs 12-14%).
- Ballooning import bill (thanks to crude oil rallying to USD 140 a barrel)
- Rapidly deteriorating Corporate India's earnings quality
- Cost of financing shooting through the roof, thanks to the RBI
- Slowly, but surely drying up of domestic liquidity, owing to the Global Financial Crisis.
- Last but not the least, historically high valuations and euphoria on Dalal Street

Result: Sensex & Nifty posted their single largest peak-to-valley drop of close to 60%.

Flash-forward to the last week of Dec'08 and we NO LONGER have the problem of:

- inflation, which is soon expected to drop below 5%
- a ballooning import bill due to rising crude oil prices thanks to a 70% drop in intl. prices of crude oil
- high cost of financing, thanks to a sharp interest cuts seen in the past few weeks
- easing of domestic liquidity, thanks again to RBI's cuts in the CRR, SLR, et al.

And yet: The Sensex and the Nifty continue to struggle. They are now threatening to breach / kiss their October lows. They may, they may not. But, that doesn't matter. What matters is the fact that we are NO longer staring at an ever worsening macro economic situation. And, that to my mind is a big "Go-Ahead" in itself to make investments for the long haul.

One important factor that is still worsening is Corporate India's performance. Dec'08 numbers are likely to one of the worst we've seen in recent history. But, then as the broader macro-economic variables like interest rates, inflation, easing of liquidity, etc. keep improving, performance of companies will surely follow suit, albeit with a small lag. And, as we all know, markets are forward-looking, so maybe we may soon (even if painstakingly slowly) be out of the woods.

What I've not accounted for in this note is a possible war breakout btwn India & Pakistan or a Third Front taking centre stage in India politics in the coming general elections. Both are highly unlikely, but not impossible...

If not now, when? If not at these, then at what prices?

The 13th Wealth Creation Study organized by Motilal Oswal was held on the 19th December. Among those present included- Rakesh Jhunjhunwala, Raamdeo Agrawal, Sanjoy Bhattacharya and Ramesh Damani. The key speakers exuded great confidence [read the full transcript] in the India Growth story, which to my mind remains pretty much intact irrespective of what the stock markets makes us believe.

Consider the following:

- With a real GDP growth of around 5% over the next decade (a pessimistic estimate) and an inflation of around 5% we are looking at Nominal GDP growing at the rate of "atleast" 10%, which will also reflect in Corporate India's earnings.

- We are still way behind in terms of our physical infrastructure, be it Roads & Highways, Ports, Airports, Hospitals, etc. , when compared some of the other developing nations like CHina, Korea, etc. The investment boom in India has only begun and right now we are only seeing a temporary slowdown.

- Unlike many economies in the West, we will have no bank/insurance company going down under, we have no housing crisis (except for within the developers, and well, they deserve it!), we have no over-leveraged consumers that live beyond their means, we have a corporate sector that is leveraged within a comfortable range whichever one looks at them - Debt to Equity or Interest Coverage, we have a huge middle class building up that will lead to massive explosion in demand for consumer goods over the next decade, the list is really endless...


Bottomline:

Growth will not be a problem so far as India as an investment destination is concerned, its the price that one pays for the investment that will determine returns over the next decade. And it is this factor that is now in the favour of the long term investor...


Dr. Ajay Shah has similar views [link]

I agree with him 100% on the fact that 2009 will indeed be a stock pickers market. It's time to work @ 150% capacity utilization :)