RBI Governor on a Concall for the first time

The Reserve Bank of India for the first time ever held a Concall with analysts and researchers.

- Transcript of the Concall [mp3, pdf]

A great step forward really!

the great trade collapse?

"Indeed, the 2008-9 plunge in world trade was one for the record books. What it mainly reflected was the fact that modern trade is dominated by sales of durable manufactured goods — and in the face of severe financial crisis and its attendant uncertainty, both consumers and corporations postponed purchases of anything that wasn’t needed immediately. How did this reduce the U.S. trade deficit? Imports of goods like automobiles collapsed; so did some U.S. exports; but because we came into the crisis importing much more than we exported, the net effect was a smaller trade gap.

But with the financial crisis abating, this process is going into reverse. Last week’s U.S. trade report showed a sharp increase in the trade deficit between August and September. And there will be many more reports along those lines.

So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.

Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.

And I’m not sure the Obama administration gets it, either. The administration’s statements on Chinese currency policy seem pro forma, lacking any sense of urgency."

....extracted from the following article:

http://www.nakedcapitalism.com/2009/11/china-lambastes-us-for-fueling-global-carry-trade.html

The NREGS is taking serious proportions...

...according to this article in the Financial Express. Some of the interesting points from the article are:

• Expenditure on the NREG has gone up from Rs 12,074 crore in 2006-07 to Rs 19,279 crore in 2007-08, and further to Rs 36,153 crore in 2008-09.
  

• There were 2.12 crore households demanding employment in 2006-07. The numbers rose to 3.43 crore in 2007-08 and to 4.52 crore in 2008-09.
  

• Total person days of employment created have shot up from 90 crore in the first year to 144 crore in the second, and 339 crore in the third.

I think the above are serious numbers and maybe they had a significant impact on the results of the just concluded General Elections. In 2004, when the NDA ran its India Shining campaign, a large part of that shine was confined to urban areas, leaving the rural folks wondering whether they really lived in such a shining India? The result of which was there for us to see...NDA lost heavily despite almost everyone on the street predicting a win for the NDA.

Fast forward to 2009 and I think we have a repeat, although the shining and the non-shining parts seem to have switched corners. It's the rural India that is really shining today. Multiple years of decent precipitation, substantial increase in MSPs, debt loan waiver and now this super cool NREGS (which in fact in my view is the second best thing to have happened to our country since the Right to Information Act!). This is because, it is a well known fact that most of the small and marginal farmers or farm labourers are hugely underpaid in India. Till the NREGS came to existence, most of such farmers workers were paid in the range of Rs.40-60 per day! Imagine, any of us living in this part of the world earning that kind of a salary and compare it with the kind of work & effort being undertaken in return? It's a joke really. However, with NREGS, the government in one shot has more than doubled the average remuneration paid to farm workers to above Rs.100 per day. Now because the government offers atleast Rs.100 per day, private employers have to offer more than that to attract workers. And they are doing exactly that; in some parts of the country, private employers are now offering Rs.120-130 per day plus food to hire contract farmers/labourers. It a significant change, and a good one!

Never been so satisfied and hopeful of the future...

...than after looking at today's election results. For a change, I am not sulking too much to not have committed more to my equity investments...I still have about 20-25% of my portfolio in cash! But, it does not matter, I am more happy as a citizen today.

emotion and intellect...

...faith & reason, [are] at loggerheads. On the one side, [is] pale cast of rational thought, of logic suspended on a thin thread all too easily broken; on the other [is] the raging fury of passionately held irrational beliefs, reflected in the holocausts of past and present history.

(beautifully worded - a small nugget from the book - The Psychology of Technical Analysis).

good or bad?

We realise how good is good, only when we see/experience or read about the bad!

Misbehaved rally?

Action in the last three trading sessions:

• Essar Oil Ltd. up 72%
  
• Reliance Industrial Infrastructure Ltd. up 102%
  
• Jai Corp Ltd. up 46%
  

when i see the above happening, i fear its a misbehaved rally that may not last for too long!

Stock market & finance - totally democratic

"I did find that the stock market and finance was a totally democratic business. On Wall Street they don't give a damn who you are or what color or religion you are - they only care about whether you know anything, which I believe is one of the best things about the money business".

by Richard Russell in this note "Deep inside the Dow" by John Mauldin.

When the boring turns beautiful...

...and where beauty starts getting eschewed - what stage of the stock market are we in?

Is the "long-term" in danger?

Peter Bernstein has authored some really insightful books on finance and investments in the past. He recently penned an article in the Financial Times - "The Flight of the Long Run". As always, a thought-provoking article. I've pasted the entire article below:

Link to the original article [here], sourced from the Financial Times

---

The “long run” used to be one of the most popular topics among investors, particularly institutional investors. In recent months, discussion of the long run has disappeared from view.

Indeed, the possibility the long run has run away is one of the few pieces of good news I have been able to find in the financial and economic turmoil of recent months.

The cold statistics have hardly been encouraging for the traditional view. On a total return basis, the Ibbotson data show that the S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts.

These data are not to be taken lightly.

If the long-run expected return on bonds in the future were higher than the expected return on equities, the capitalist system would grind to a halt, because the reward system would be completely out of whack with the risks involved. After all, from the end of 1949 to the end of 2000, the S&P 500 provided a total annual return of 13.1 per cent, while long Treasuries could grind out only 5.8 per cent a year.

But does this history really tell us anything about what lies ahead? Neither the awesome historical track record of equities nor the theoretical case is a promise of a realised equity risk premium. John Maynard Keynes, in an immortal observation about the future, expressed the matter in simple but obvious terms: “We simply do not know.”

Relying on the long run for investment decisions is essentially relying on trend lines. But how certain can we be that trends are destiny? Trends bend. Trends break. Today, in fact, we have no idea where any trend lines might begin or end, or even whether any trend lines still exist.

As Lord Keynes in one of his best known (and wisest) observations, reminded us: “The long run is a misleading guide to current affairs. Economists set themselves too easy, too useless a task if in the tempestuous seasons they only tell us that when the storm is past the ocean will be flat.” To Lord Keynes, the tempestuous seas are the norm. We cannot escape the short run.

There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realised.

Recent experience raises a different but perhaps an even more serious question relating to the long run. How do you frame a view of the long run from early 2009? The world has a ruptured financial system showing only fragile signs of recovery. The economic recession now encompasses the whole world. The speed of economic decline is without precedent. Government intervention is also without precedent, in its magnitude, depth, and complexity. Fiscal deficits are reaching numbers no one dreamed about even 12 months ago, yet they will have to be financed.

What kind of a long run is this mess going to produce? Was Bill Gross correct when he wrote for the December 2008 issue of Pimco’s Investment Outlook that “capitalism is and will remain a going concern, that risk-taking – over the long run – will be rewarded, but only from a starting price that correctly anticipates the economy’s growth and its share of after-tax corporate profits within it?”

Can capitalism remain “a going concern” after an extended period characterised by massive government intervention into the economy – and bail-outs of firms that would otherwise have failed? To what extent will the “going” in Mr Gross’s vision be tied to government intervention in these forms and magnitude? Or is Mr Gross’s optimism justified? Will we be able to unwind the role of government in the capitalist system as we know it and go back to the status quo ante?

Will our economy and society emerge so risk-averse after these experiences that years will have to pass before we return to a system naturally generating vibrant economic growth and a renewed willingness to both borrow and lend? Or will we head in the opposite direction, where faith in ultimate bail-outs will justify the wildest kind of risk-taking? Or will the entire structure collapse from government debts and deficits that turn out to be so unmanageable that chaos is the ultimate result?

We can neither answer those questions nor can we claim they are a complete list of the possibilities. The unknown today seems more than usually unknown. Then my whole point remains the same. The long run is an impenetrable mystery. It always has been.

---

Take a look around...

...is a famous theme song from the movie - Mission Impossible II. The song has interesting lyrics, part of which says:

----------------
...its like russian roulette
when your placin your bet
so dont be upset
when your broke
and your done
cuz i'm a be the one till i jet(i'm a be the one til i jet)
i know why you wanna hate me
i know why you wanna hate me
i know why you wanna hate me
cause hate is all the world has even seen lately
i know why you wanna hate me
i know why you wanna hate me
now i know why you wanna hate me
cause hate is all the world has even seen lately
why you wanna hate me
cause hate is all the world has even seen lately
why you wanna hate me
cause hate is all the world has even seen lately
does anybody really know the secret
or the combination for this life
and where they keep it
its kinda sad when u don't know the meaning
but everything happens for a reason (everything happens for a reason)...
-------------------

sounds a lot like the overall sentiment prevailing in the stock market these days! But it's times like these that set the base for out-sized returns in the future. The skill really lies in surviving the turmoil, both, emotionally and ofcourse financially!

Live to fight another day, literally!

The saga continues...its Lok Housing now!

Lok Housing made the following disclosure [link] during the just concluded quarter:

"The global economy in general and the real estate industry in particular is passing through recessionary scenario, which has resulted in to financial melt down of un-precedential scale. From time to time the Company had entered several agreements for sale of plots, properties, development rights and constructed units held by it as stock in trade. In accordance with the consistently followed accounting policy of the Company, sales revenue and profit thereon were recognised at the time of entering in to such agreements to sell. Due to the financial melt down and Severe economic recession, some of the parties with whom the Company had entered in to agreement to sell have failed to meet their commitments and considering the overall interest of the Company, the agreement for sale entered in to in the past financial years and in respect of which revenues already recognized have been mutually terminated / cancelled. The Company has been legally advised that though the agreements for cancellation of sales have been entered in to during this quarter (being October to December 2008), but since cancellation of sales pertains to sales recognised earlier, the financial statements of the period during which sales and profits were recognised needs re-construction / amendment, on the doctrine of "Relation back". The Company shall amend the financial statements of earlier years and get the same approved in the next general body meeting. Accordingly no effect in respect of cancellation of sale agreements has been given in the financial statements of this quarter. During the quarter under review the Company has entered in to 53 agreements for cancellation of sales made in the earlier financial years, the sale value of which is Rs 282.14 crores and the resulting loss / reversal of profit recognized earlier being Rs 225.01 crores" (This is all of what Lok Housing earned in the last three years!)

Are financial shenanigans at play here??...and the worst part is accounting policies in India seem to allow it happily. It's about time, accounting of sales for real estate companies is changed. You simply cannot allow companies to book sales in their income statements purely on the basis of a purchase/sale agreement with the real cash coming in after a few months/years and in case of companies like Lok Housing, NEVER!


Update: I have a detailed article on this on Dr.Ajay Shah's blog [link]

Warren Buffett's Letter to Shareholders for 2008...

...is available here [link].

Berkshire Hathaway's annual report is available too [link].

The two documents are a must read for anyone, aspiring or seasoned investors.

Adv hindsight: Peter Schiff got it bang on in 2006...

...on the US economy and the then still upcoming debt crisis. If the video is for real, then one must give the guy huge credit for being able to see what many of his peers could not even comprehend!



...also have a look at the contemptuousness of the other "experts"... and i thought "dissent" was an ugly word only in this part of the world!

source for the link:
http://www.contrarianvalueinvesting.com/2009/02/03/why-wall-street-will-never-get-it-right/

P&G's official reply...

...to Rohan Shah's letter has been posted on capitalideasonline.com. Click here to access the letter from P&G's Indian representatives and here to read a previous mention of this letter on this blog.

The message implicit in the response is quite simple:

We will do as we please, but nevertheless thanks for taking the pains to write a letter to us.

We appreciate your effort, but you can take a walk.

Heads - I am bruised, Tails - I am crushed...

...where Heads means a company reported numbers that were "either in-line with the street estimates" or were "better than expected", and where Tails means a company reported poor numbers for the just concluded quarter ended Dec 2008.

Further, where "I am bruised" means that the stock witnessed a small decline in price or remained unchanged (more or less!), and where "I am crushed" means the stock is sharply down since the current earnings season began.

Some of the companies drawing Heads include Oriental Bank of Commerce, Axis Bank, HDFC Bank, Wyeth Ltd. etc...where each of these companies reported healthy growth in profits given the current business environment and yet each of them is down by anywhere between 7-20% since the beginning of the year.

Companies drawing Tails include Divis, Reliance Capital, Zee, etc...where each of these companies fared poorly (it wasn't a disaster though!) only to lose a third of their market value in a little more than a months time!

It seems as though stock prices have just one desire - to keep losing value; little by little every week! Looks a lot like 2001-02 and early 2003, isnt it?

Ofcourse, we all know what followed then, dont we? :)

Open letter to Chairman & CEO, P&G USA...

...written by Rohan Shah (on 30th Jan '09) is available on Capitalideasonline.com (a very useful site for anyone interested in stocks and stock markets). The letter is pasted below:

To:

P&G
USA

Kind Attn: Mr. A.G. Lafley

I write to you today as a minority shareholder (and on behalf of other minority shareholders) of Procter & Gamble Hygiene & Healthcare Ltd. the Indian-listed subsidiary of Procter & Gamble, Inc. USA with about 30% of its equity ownership with the Indian public.

I have been a great admirer of Procter & Gamble - the company, its products, and its policies on corporate governance and responsibility to society. Inspired by such a great culture and the continuous praise and support received by two of the world's most respected businessmen (Warren Buffett & Charlie Munger), I bought some interest in the Indian subsidiary of P&G - P&G Health & Hygiene Ltd.

However, I was surprised to experience that there existed significant differences between the culture at the Indian subsidiary and its parent, for reasons detailed below:

1. P&G Health & Hygiene has surplus cash reserves of about Rs.200 crores (approx USD 45 million).

2. These were given as loans to P&G Home Products(a 100% owned subsidiary of P&G-USA, the parent) from which most of the company's products are being introduced. In short, the funds of the listed company were being used by the parent's 100% owned subsidiary, with no benefit to us as minority shareholders.

3. Myself and other shareholders then wrote to the company requesting them to utilize these surplus funds for the growth of the listed subsidiary by introducing new products from our parent's vast portfolio. This was denied by the Indian management in subsequent interactions, and minority shareholders were impressed upon that these surplus funds would not be utilized for P&G Home Products and would be eventually distributed as a special dividend. As per the last balance sheet, the said funds have indeed been received back from P&G Home Products and we now await the special dividend. (for your information, this amount has now been given to P&G Home Products from the surplus funds of Gillette India Ltd, another of your Indian listed subsidiaries, This is again not the quality of corporate governance expected out of any of P&G's subsidiaries).

However, the reason for me writing to you today is on a larger issue being that of our company's ultimate survival and being fair to all stakeholders in the long term.

Currently as you know, P&G Hygiene & Healthcare Ltd (listed subsidiary) has two strong products i.e. Vicks and Whisper which are growing at respectable rates in the markets. However, no new products are being introduced and this has started worrying minority shareholders like me that 'a company with no new products clearly means that the company is not evolving, and it will eventually lead to stagnation, death and extinction'.

In your recent visit to India, you mentioned about the excellent Indian demographics & rising purchasing power and how P&G would be at the heart of innovation and introducing new products into this largely untapped market. We were hoping that our listed subsidiary would have a large part to play in this growth story. And thus, I write to you seeking your help and intervention in this matter. P&G USA already owns about 70% of P&G Hygiene & Healthcare, so why not introduce all products thru this company into India? This will be a great reference point for other multinational companies operating 100% subsidiaries in India and work wonders for the P&G brand, corporate image and enhance its high respect in the mind of Indians.

I am sure you will agree with me that when a company does fulfill all its obligations to all its stakeholders, it has a rub off effect on its customers and vice versa. Therefore, if the minority shareholders, who are large in number, start having a perception that the responsibility to it and in turn the Corporate Social Responsibility is not being fulfilled, the question that begs the answer is - for how can such a company survive in the perception of the consumers? Have there not been numerous such examples in the world when there is no congruence - the products and revenue streams of a company have dwindled? What is good for the majority shareholders should also be good for minority shareholders, which epitomizes the Corporate Governance and in turn the Corporate Social Responsibility. I'm sure you would agree that the future of consumer companies is dependent on the '% of mind share' rather than '% of market share'

I now await your positive action which would be in line with P&G’s Corporate Governance Report "your company's reputation is earned by our conduct: what we say, what we do, the products we make, the services we provide and the way we act and treat others. As conscientious citizens and employees, we want to do what is right. For your company and P&G's global operations, this is the only way to do business" It will also be in line with the principles of Warren Buffett, Charlie Munger and Ben Franklin - "There is a huge line dividing what is legal and what is moral"

Thanking you,

Yours truly

Rohan Shah

-------End of letter-------

I completely agree with Rohan.

Further, if the P&G group has no interest in expanding its product portfolio in India, then they should simply delist their companies (PGHH & Gillette India) and do it at a fair price. But, keeping the stock listed and NOT adding any products to their portfolio is simply 'unfair' to shareholders, minority or otherwise.

MNCs that have short-circuited their Indian shareholders in the past have faced two outcomes:

• they are rated poorly on the stock markets
• their overall business performance has been sub-optimal
  

This list includes companies such as Merck, Novartis, Pfizer, etc. To get a clearer picture, one needs to simply compare their performance (both, on the bourses and in their businesses) with those of Hindustan Unilever, 3M India, Glaxo India, Aventis, Areva, etc.

On a tangent note, maybe the Government of India can do away with all the restrictions on foreign direct investment in India and introduce one simple rule for anyone willing to invest in India:

"MNCs may own a maximum of 51% in any company they plan to set-up in India, the remaining 49% should necessarily be divested to the Indian public by way of an Initial Public Offer"

The impact:

- This will resolve a lot of problems and issues that the GoI is currently facing when it comes to allowing FDI in banking, insurance, telecom, et al.

- It will also do away with the issue of MNCs short-circuiting minority shareholders, given that under the new rules, any company / JV formed by MNCs will have to be divested in favour of Indian public.

Place of economics in learning

Here's a nice post on the importance of economics in our daily lives and how we don't give the kind of attention and importance that it deserves. The entire article has been pasted below:

To Which Defunct Economist Are You Currently Enslaved?

January 18, 2009 10:24 PM by Justin Ptak

John Maynard Keynes once wrote that "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."

Economic theory does indeed have quite a large impact on our lives that is far greater than most any of us are willing to admit or understand. Policymakers and politicians guide fiscal policy, set monetary policy, and collaborate on financial regulations that impact almost every transaction in the market place. These theorists and philosophers all begin with a set of ideological constraints that frame their world view. Will you sit back and allow them to create the rules of the game?

As Ludwig von Mises stated in one of the concluding chapters of Human Action on The Place of Economics in Learning:

"Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man's human existence...

There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen. In such vital matters blind reliance upon "experts" and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people's domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake...

Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen."

Source: http://blog.mises.org/archives/009256.asp

How I learned to stop worrying and ignore volatility...

...is a nice little strategy note released by Michael Mauboussin. [link to the article]

The article talks about the times we live in and what strategy a long term investor can adopt. The note is timely and insightful to read. Mauboussin concludes the note with the following advice:

1. Decide if you can be or should be a long-term investor. There’s nothing sacred about it—you just have to make sure you properly align your thinking, policies, and processes around your time horizon.

2. Don’t overbet. Constantly consider the problem of induction and the deleterious effects of leverage and incentives.

3. Work to reduce stress and maintain perspective. Some documented ways to lower stress include:
a. Exercise
b. Maintain and cultivate social connections (family & friends)
c. Get sleep and maintain a healthy diet

4. Don’t dwell on short-term portfolio moves. Sidestep loss aversion if possible.

5. Remember the story from Abraham Lincoln. He recounted that an Eastern monarch once charged his wise men to invent him a sentence that would be true in all situations. They came back with the words: “And this, too, shall pass away.” As Lincoln said, this phrase “chastens in the hour of pride, and consoles in the depths of affliction.” This too shall pass and long-term investors stand well to gain. I agree. [link1, link2]

Greatest hits collection on Investing Widsom...

...compiled by the Value Investor Insight team, is a useful document. It's available for free and can be downloaded from here [link].