Writedown of losses

The Article below explains how and why brokerage houses writedown partial losses over a period of time. The same applies to big banks and it is supposed that they would writedown the loses over a period of time (say for next 8 quarters). As a result there maynot be any significant bull run in near future.

Business Standard -
NBFCs of brokerages refrain from announcing one-time hit due to margin funding. A good number of non-banking financial companies (NBFCs) belonging to big brokerages are keeping themselves from announcing a one-time hit by losses arising out of margin funding following the market meltdown in the early part of this calendar. Instead, the broking houses are carrying forward these huge losses as loans under recovery, and announcing only minuscule bad debts. Through this move, say experts, these broking firms can avoid making huge provisions for losses and, to a great extent, neutralise a possible negative impact on their share prices. Stock prices normally take a hit if a company's provisioning or writedowns is huge, they say. It's surprising to know that provisioning and losses announced by brokerage houses do not form even 1 per cent of the entire margin funding business. Chartered accountants say brokerages can carry forward their losses for six to eight quarters, after which they will have to show it on their books.

However, they can avoid mention of any loan as loss, even after two years, if the matter is sub judice.'Typically, what most of them would do is make small provisions for NPAs every quarter, so the loss amount does not seem to be too big. Eventually, they would also try and offset these losses with their profits in the coming quarters,' says an accountant.In the last three years when the share prices were shooting up, the NBFCs of top broking houses made a killing by lending money to investors at an interest rate as high as 18-25 per cent.While the NBFCs earned high interest rates, their broking arms benefited from commissions earned from the share transactions. Conservative estimates put the size of the margin-funding market at Rs 10,000 crore during the market peak of 20,000-plus levels.The funding reached unparalleled proportions as brokers aggressively pushed for loans to small retail clients too. Investors typically bring in some portion of the money to purchase shares, while the broking outfits (through their NBFCs) finance the remaining amount. The shares are then kept in the name of the NBFC.In a rising market, when an investor chooses to book profits, he gets his portion of the contribution and the gains. The broking firm takes home its funds and the interest amount.This led to a bubble-like situation as investors were seduced into paying more for a stock than its fundamental value. Margin-funding trades were also responsible for the huge volumes generated in recent times. 'However, when the market crashed, the entire system collapsed like a pack of cards, leaving the broking houses with piles of bad debts,' explains a dealer, while stressing that the margin-funding business is now down by over 60 per cent.Currently, the brokerages have huge NPAs and bad debts. They're now moving the courts. 'Such cases drag on for years, and it will not be surprising if the brokerages do not announce any writedowns in some cases on the pretext that they are still in the court of law,' says the accountant.

Trading strategies - Technicals

There has been enormous research on trading methodologies to be pursued by any rational and intelligent investor. Volumes have been written but none provide a definite path. I believe that if a path did exist to make assured profits, then imagine a market where every investor follows the same pronciple! Will all make profit ? Who would sell when the theroy says one to buy? !!!

Non exists dear friend. W. D. Gann (one of the most controversial and successful traders) had charted out numerous predefined technical analysis. But they are so complex and incomprehensive (especially when you are not sure whether to implement all or a few of the rules laid down) that it is impractical to follow them.

Technical charts may provide you some guidance - resistance, supports and moving averages but they cannot be solely relied upon on deciding which stocks to pick and which stocks to sell.
Purchases should be made on a company's fundamentals or news (speculation). The later can give hansome profits or leave you nowhere!

But I would rather view Gann's principles from the philosophical angle - which advices one to show restraint on greed and be unnerved by losses. Stock market is essentially different from any other form of business - in other cases of life 'you' are the actor and your efforts get reflected; but in the market its too huge for any single participant to control ( leave out the stories of influencial people who can change credit policies or set the company rules ). Other forms of insider news is stictly unfair though they have significant impact on determining stock prices.

"... it turns out for all practical purposes there is no such thing as stock picking skill. It's human nature to find patterns where there are none and to find skill where luck is a more likely explanation ..." - William Bernstein, The Intelligent Asset Allocator

Rally in a Bear Market

It's quite a common occurance to have a rally in a bear market. These are the mechanisms that are used time and again for the bigger players to exit the market.

Subprime crisis is far from over. It is reported that every month 250,000 foreclosures are taking place, that means that Primary Lenders seized the assets and sell them out, with entire profit and losses belonging to them, leaving ZERO for the secondary holders. Thus the total loss per month is 250,000 x US$ 0.25 Million (US$ 250000 mean average price per home) = US$ 62.5 Billions. Against this amount, the secondary derivatives issued (which were bought by ICICI Bank and SBI and also BOI) were 6 times or US$ 375 Billions per month. Deducting $ 62.5 Billions for primary lenders, the holders of secondary derivatives are US$ 300 Billions PER MONTH. Since the Primary lender has seized the primary mortgage assets, and leaves nothing to secondary holders, the secondary derivative holders are losing at the rate of US$ 300 Billions per Month. Their valuation is ZERO and may be they are not recognizing in their books, but they will have to. When $300 Billions, the size of India's entire FOREX reserve, is disappearing every month, where is the question of 'End of Subprime'.

Profits, EPS, P/E are the good old fundamentals. When markets crash - money normally flows into the bond markets. But nope - the situation in bond market is too poor, the returns in teasury is far too low.

Giant banks have started issuing shares, bonds to face their loss/crisis. This is no growth story.
When big banks start loosing out credit tightens, sensex falls, margin calls come into play and we/you loose!

Soros and theory of reflexivity

Legendary investor George Soros was of the view that equities market was a total chaos - and the sooner one accepts it the better. He was of the view that its not always that the company's fundamentals determine the stock price (or equilibrate) but rather the stock prices can change a company's fundmentals in ways such as M & A. Stock prices being primarily a function of the perception people have, it is important to identify the inclination of the people towards a particular stock.

I would differ to some extent - in major index stocks its price is controlled/governed by the sal/purchases by QIB and HNIs etc. These being educated and rational woulf try to identify what rest of the markets think and conclude. Thus when each of the major entities think otherwise the common thinking may prevail. Its similar to a paradox. Let's illustrate - let the rational/intelligent participant be X and the rest of the market (excluding X ) be Y. Thus with X and Y together makes the universal set. X tries to identify how Y would interpret the market and accordingly steps counter measures - so if Y thinks stock A would perform X thinks its time to sell A. Similarly the other way round. But there are many participants who would think with the same logic - as a result we get the complementary set of expectations. Thus it would be really difficult to think as separate identity - i.e. there is no such thing like 'I' and the 'rest of market'. Its a sum total!

Monetary supply and Inflation

Government of India can print any number of notes.
There are two ways of generating Currency Notes, some may take physical form and other in the form of book entry.
One is through 'Deficit Financing' where the government of India's total expenditure exceeds total income from all sources - Income Tax, Excise duty, Central Sales Tax, Value Added Tax, Import duty etc. Supposing Net Expenditure for 2008 is say -80,000 crores. Since the GOI does not have money, it gives credit or print notes to the extent of Rs 80000 crores.

Secondly through FOREX intervention. When the lot of dollars or other Forex currencies come to India, they need to be converted into rupees before they could buy stocks, bonds or make direct investment. The foreign investor has to buy Rupee from the market which will cause Rupee demand to exceed the demand, so the rupee appreciates. In this case, no currencies are printed. However, when RBI at the instance of GOI decides to intervene in the FOREX market to 'sterilize' Rupee currency's rise, it ask the Foreign Investor not to go to the market and buy the Rupee. Instead, RBI give special rate to the foreign investor to buy dollars in 'off market' and give him the credit to his current account with any bank (book entry). For instance, if Citibank approaches RBI to sell US$ 500 Millions on behalf of its Mutual fund customer, it will get better rate, say Rs 41 instead of market rate of Rs 40, so it saves about 2.5% on exchange. RBI then gives credit of Rs 2050 crores by buying US$ directly from the Citibank. This avoids selling of dollar and buying of rupee in the market, so rupee exchange rate remains same. Had Citibank sold $500 Millions in the market, rupee might have appreciated to say Rs 39 or it would have got 5% less than what it would have got by selling to RBI. In short, Money Supply (called M1) increases in the market. The book entry slowly gets converted into real money because when Citibank buys the stock, it has to pay in rupees, and that rupee will circulate in the marketplace. This is a suicidal policy; it does not increase the good, but merely increases money supply. The equilibrium between Goods and Currency in circulation is adversely affected as result of which 'Inflation' in the system increases.
This second type of practice is adopted by most Asian countries including Japan, which have highly inflationary effect.

One cannot pay Rupee to IMF to discharge the debt. The debt was contracted in US$, so you have to buy US$ by selling rupee in the marketplace to pay off the debt. If what you say was possible, practically every country will discharge its debt by printing more notes. USA is exception. Because it was used as Intervention Currency, or common currency, US government was encouraged to issue more notes and contract debts. Since the debt was issued in US$ or its own currency, it will pay off the creditors by printing more notes. This is what it is doing. It borrows from the world, and the President Bush go on giving Tax Rebates to its citizens at will, because he can afford to, because the world is foolish in giving more value to dollar.

Above should help you understand some basics of Monetary Management. Note there is no free market for currency in India.

Gold fortunes when markets crash!

Gold becomes critical when the stock markets crash - often it has become the norm that when markets crash gloablly the fund flows into to buy gold, thus driving the price of gold higher and viseversa.

Hence this posting on Gold - as now with the markets crashing people are flocking to buy gold and numerous banks are selling gold bars and mudras etc. It is important to understand the weightage price breakup.

Often people confuse in the conversion of 1 ordinary Oz & 1 Troy Ounce.

1 troy ounce ......= 31.10grams (Rounded off to 2 decimal)

1 Ordinary Ounce = 28.35 Grams or 1 Pound = 16 Oz = 453.6 gm

Current International Price = US$ 876 per Troy Ounce(1 Troy Oz= 31.10)

Price per Gram ................... = US$ 876/31.10 = $28.17

Price for 10 Gram ............... = US$ 281.70

Import duty@ 2% ............. = US$ 5.63

Importation Cost/Ins ........ = US$ (X)

Total Import Cost (CIF).......... = US$ 287.33

(ignoring X)Rupee Rate (Customers) ......... = Rs 41.02

Import Cost per 10 Gm in Rs........= Rs 11,786.28

Local Sales Tax @ 2% ..........= Rs 235.72

Bank's Profit Margin ..............= say,

Hence TOTAL SELLING PRICE ...............= Rs 12,022.00 + X + Y

Banks' Rate to Customer .............= Rs 13,500

Difference ........................= Rs 13,500 - Rs 12,022

Bank's Gross Margin ...............= Rs 1,478 (or 12.22%)

Even if we add the Bank's profit and Transportation cost of about 2.22%, the Bank's profit margin comes to 10%. Now, the difference between 1 Troy Ounce and 1 Ordinary Ounce = 31.10 - 28.35 = 2.75 or 9.70%.

USA PRACTICE: Visit American Precious Metal Exchange who charges normal international prices for the gold bar. However, if some one ask for Gold Coins or other form with Assaying certificate, the charges are significantly higher.IN APMEX, they also buy back the bar which trades at premium to international prices. So, if you want to sell, you also get the higher price.many cases you are a big loser. The moment you buy the gold, you are losing straight away 10% because they will never buy backIt is said that BUYERS BEWARE.

Selfish Gene!

This article is on the famous writing of Richard Dawkins - The Selfish Gene.
I feel we have very little idea on how the genes operate - and the whole world of ours is nothing but void. All of us are programmed by some unknow power (God ?) ... little robots moving about. Each and every damned activity is a result of genes - yes even our very thinking process and what we call 'rational' thinking.

Just imagine how co-ordinated the process is - an astronaut staying three months in space has a decreased bone density! Eeeehhh - doesn't it seem like a Terminator 2 movie - the system automatically discards what is unnecessary and adapts to the environment. a low gravitation force on the surface of the moon does not necessitate a strong skeleton.

Recall stem cell - a sperm and an ova - forms a single cell and that itself diversifies into multiple functions/organs over a period of time. So who dictates which cell will become what ? Genes.
It will takes years to reveal the power of genes.

Now the obvious question of surrounding/environment. How does that affect us ? Will clones grow up the same way. No. They would interact with the external universe. What if if I keep two clones under the same test conditions. This is impossible - as even in case of protons and neutrons according to quantum theory (Pauli's exclusion principle)! Where on the earth can you create identical universe on a macrolevel that is observable.

Crazy!

Crash in Indian viz Global Market

The current stock market crash was due long time back. This time it may have ridden the waves of subprime crisis - US slowdown and recession are just the tip. The most interesting thing is the situation has been kept under cover - even at present some banks (eg ICICI etc ) have not disclosed their losses. Same with major US and other global banks and i-banks. What seems that they plan to disclose their billion $ losses spread out over quarters.

Warren Buffet's prediction 'the recession is deeper than most people think' is an indicator in that direction.

Prologue

I have been thinking quite sometime - how about posting my ideas on the web. Then ... it came across who cares about reading my posts ... and what difference does it make to anybody for that matter!
But then all of a sudden it came across - I have quite a bit of diversified experience in life ... why not put it on board.

I will be classifying my posts into a number of categories - life, science, finance and ... n crazy miscellaneous.