China Banks lend US $ 181 billion dollars in 9 months of 2009

Chinese banks advanced a record $1.27 trillion yuan (i.e. US $ 181 billion dollars) of new credit in the first nine months of the year, an increase of about 150 percent from a year earlier, prompting the nation’s banking regulator to warn of rising risks.

This is more than the cumulative advance of all Indian Banks cumulative till date.

The next bubble would surely be closer home

Credit Default Swaps

I have today understood the lay man's meaning of the derivative product - Credit Default Swaps.
It simply means person A is the beneficiary of the insurance policy of person B and person A has an option to kill person B.

No wonder AIG, Bear Sterns & Lehman etc could not assess the risk associated with their lives. They are like person B in my above example.

Ups & Downs in Timing

The 10% fall after the budget was an over-reaction. We call is over-sold situation. That was last week.

This week the markets are up 10% in 3 days. I call is irrational buying. Sell if you want to survive.

The old saying and investment advice - you cannot time the market was proved drastically wrong last two weeks.

What I only have to say is -
You cannot time the market. You can also not create wealth if you do not time the market.

Time and Tide waits for no man

Pareto's Rule

Pareto's Rule of 80 - 20 is very much applicable for the market too.
80% of the profit is made by 20% of the investors (this is what I have always heard) or
20% profit is made by 80% investors.
So its better to be with the 20% in order to make super-normal profits, else invest in Index ETFs or Index Funds.

QIPs Impact

What kind of companies are raising capital?. This group is populated by companies who were verge of bankruptcy. The real estate sector has been the major beneficiary of this cheap money rush.

But on the business end, what are they exactly doing with the money. Basically repaying high cost debt. So there is a shift in the capital structure of companies from debt to equity.

If one analyses the performance of real estate sector, the performance of the companies has been propelled by the used of debt financing. In financial management parlance this is called Financial Leverage. This boosted their performance in good times and made them cash starved during the credit crises.

Now the sector is using the money to repay high cost debt. This will reduce their financial leverage. What it will also do is probably reduce the EPS for the shareholder. This is also because the new capital is not going to be invested in new projects but it is only going to restructure the capital structure of the company.

My guess is the dilution is going to be heavy and the sector would be an underperformer for the next 2 years minimum.

Importance of Operating Leverage

The concept of leverage is very well evident in todays market. All financial services, media & entertainment sector and a host of other service industries operate on high operating leverage. The biggest component of the fixed cost is salary. In good years this high OL has propelled their results, however in bad times like in 2008, these companies had no option but to cut fixed costs and reduce their break even points.

Nature of Employee Cost

Is employees cost a fixed or variable cost in Service Industry?

Hedge Funds

What are Hedge Funds?
Hedge funds are private pooled investment limited partnerships which fall outside many of the rules and regulations governing mutual funds. Hedge funds therefore can invest in a variety of securities on a leveraged basis. Today, the term hedge fund refers not so much to the hedging techniques hedge funds may employ as it does to their status as private investment partnerships. There are other unregistered pools of investments that are similar to hedge funds such as venture capital funds, private equity funds and commodity pools which are not categorised as hedge funds.
Some of the key characteristics of hedge funds include:
- Exemption from many of the rules and regulations governing mutual funds. Hedge funds therefore are not required to meet disclosure requirements and are prohibited from public advertising and soliciting investors directly or through a registered broker-dealer.
- Flexibility in their investment options. Hedge funds can use short selling, leverage and derivatives. This enables them to deliver non-market correlated returns
- Wide dispersion in investment returns, volatility and risk
- Linking compensation to performance with compensation of managers based on a percentage of the hedge fund’s capital gains and capital appreciation. In addition, hedge fund managers often invest their own money in their fund.
Difference between hedge funds and mutual funds
Hedge funds have a structure similar to mutual funds in that they are both pooled investment vehicles that accept investors’ money and invest it on a collective basis in publicly traded securities. There are, however, many important distinctions:
- Mutual funds are highly regulated and restricted in the variety of investment options. Hedge funds are less regulated and therefore have a wider range of investment options.
- Mutual funds are measured on relative performance such as a market index or other mutual funds. Hedge funds are expected to deliver absolute returns.
- Hedge funds are often specialised and operate within an industry or speciality that requires a particular expertise- Mutual funds remunerate managers based on percent of assets under management. Hedge funds remunerate managers with performance related investment fees. Hedge fund managers typically charge a 2% basic fee plus a 20% performance fee. Fund of hedge funds operators typically charge an additional 1.5% in basic fees and up to 10% in performance fees.
- The future performance of mutual funds is dependent to a greater extent than that of hedge funds on the direction of equity markets.
- Hedge funds have much larger minimum investments (average $1m) than mutual funds. Usually very little of the investment manager’s own money is invested in mutual funds.
- While mutual funds are available to the general public, hedge funds usually face many restrictions in selling their product. In the US, for example, an individual needs to be an accredited investor (annual income over $200,000 or net worth over $1m) in order to invest in a hedge fund.

Source: Hedge Fund, City Business Series-International Financial Services,London

Recession - A perspective

RECESSION – A perspective
9th November 2008
With IMF cutting world GDP forecast for the second time during this year, it is now certain that majority of the G7 countries are headed for a very severe recession which would last for a bitter 2 years plus.
What typically would happen in a recession in any country is:
a. Economic Output would fall.
b. Jobs would be lost.
c. Consumer spending & confidence is battered.
d. Investment climate takes a beating and risk aversion sets in.
And one can go on and on….
However what would happen if countries like US, entire Europe, Japan got into recession together? One might wonder its not the first time we have faced such a situation. Yes you are right but this would be the first recession post serious globalization has taken place in the world economy. This is also the only recession in the last ten decades where the trigger is the banking and financial services sector.
One may also argue that recession in developed countries would not mean that emerging/developing and less developed countries would also face the same situation. My answer to this would be yes, although developing countries are not heading into a recession the higher single digit growth rates would surely fall in the coming six to nine months. I so not agree with the RBI/Govt./Finance Ministers ambitious growth rate of 7% for India (Its more an election gimmick). Our GDP can’t grow beyond 5.5% next year. Anything above that would be a bonus. We would see the first effect in the industrial production numbers over the coming 6 months once production cuts are affected in the coming months.
All this would mean business would slow down, consumer spending & confidence will fall, property prices would crash, stock markets would continue to remain in intensive care unit, RBI would infuse liquidity to help the economy recover etc.
The stocks markets would be headed back to its lows of October 2008 before February 2009. The effect on property prices would be with a lag. Expect property prices to fall anywhere between 15 – 40 % in various heated pockets of the country by April – June 2009. Even though the interest rates and inflation would taper down over the coming months the real effective interest rate would continue to be in the negative territory. The only place where you could make money is ……….do let me know.
I may go terribly wrong with these predictions but who cares its better to have a view and go wrong rather than have none.
So it’s a good time to cut the fab, focus on your health, mind rather that money and seek divine intervention.
Vikram Shivram