This bubble indicator gives real early warnings...

Apr 20, 2011

In this issue:
» A closer look at the NBFC IPOs is a must...
» Will the US dollar top the contest for the ugliest currency?
» Why India needs a sovereign wealth fund...
» Will Buffett pay for David Sokol's misdeeds?
» ...and more!

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It is just a matter of looking around for cues. And one could come across plenty these days if you are looking for investment related risks. Political crisis, debt defaults and sovereign credit risks have kept the overall investment horizon bleak in global markets. Japan's natural disaster added another dimension to the risk landscape.

India has remained largely isolated from these risks all this while. The economy does have its share of worries in the form of price rises and higher interest rates. Poor execution rate of infrastructure projects has been a dampener for long. So obviously investors have factored these into their return estimates. But notwithstanding these concerns, there is another risk that investors often tend to overlook. That of 'over-optimism'.

Power was a sector every investor wanted to get a pie of until the execution problems came to the fore. The start of the 11th 5 year plan period (2007-2012) boosted investor interest to the US$ 500 bn opportunity in this sector. And the success of the power sector IPOs in 2007-08 reflected that. Construction stocks were predicated to be the next mutibaggers until the 2008 subprime crisis hit. Until then every construction and real estate player received a warm welcome on the bourses.

Ironically, some of the initial public offerings (IPOs) of non banking financial companies (NBFCs) in recent months brought us back the nostalgia of the power and real estate IPOs. With the RBI guidelines offering more leeway to the NBFC sector, the fortunes for some of the players have never looked better. But others have not spared the opportunity to cash in on the over-optimism. Some of the new NBFC business may not be sustainable. Others may find acute difficulty in sustaining profits. And the rest do not need capital at all except to make the promoters rich. But all have queued up in the primary markets to lure investors. We believe that this is one of the earliest warning signals of risks building up in the sector. And investors would be better off being choosy than succumbing to the over optimistic sentiments about the sector.

Do you think the fortunes of the NBFC sector IPOs could turn out to be like that of the power and construction IPOs? Let us know your views or post them on our our facebook page.

 Chart of the day
Although the literacy rates may have improved over the past decade, India still remains in the most nascent stage when it comes to familiarity with the World Wide Web. The internet penetration in the country remains abysmal at 7% until February 2011. What makes the internet numbers even more disappointing is the fact that India lags way behind the BRICs. Not just that even some of the lesser developed and socially conservative economies like Indonesia, Jordan and Tunisia are better off than us.

Data source: The Economist

Dr Doom, Marc Faber is at it again. Speaking to CNBC recently, he has continued to argue that US dollar is in a contest for the ugliest currency. He further added that while the dollar could rebound in the short term, he maintains his long term view that the value of the US dollar will drop to zero. It is difficult not to see merit in his argument. Currency like any other form of debt is an obligation secured by an asset. The asset in this case being a nation's GDP. All is well until there is a feeling that a nation's GDP will be able to fulfill the obligation. However, dire consequences follow when the realization dawns that the obligations have increased so much that the underlying asset can no longer justify it. In such a case, the value of a currency can drop precipitously. This is exactly the same scenario that Faber is trying to outline. Currently, there seems to be an overhang of the US dollar in the system. Well beyond the capability of the US GDP to honor the value of the same. Thus, dumping the US dollar and rushing to relative safety of gold and silver looks like the best strategy out there.

Food inflation has been a serious headache for the Indian government. And so the India Meteorological Department's (IMD's) forecast of a normal monsoon this year must surely have come as a relief for the government. The agricultural ministry is of the view that a record crop of cereals, oil-seeds, pulses and cotton was achieved in FY11 and the prospects of a bumper harvest in the monsoon-fed 'kharif' season augurs well for the country. A normal monsoon is important as it means less migration from the rural areas and more disposable incomes in the hands of the rural population. This then translates into higher sales for Indian companies. Further, the commodity market would also see lower volatility which would help in bringing down overall inflation. That said, Indian cannot entirely rest on monsoon to drive agricultural growth going forward. The key is to make adequate investments in irrigation techniques and better seeds among others so that the overall agricultural productivity is improved.

"The country should consider setting up a sovereign wealth fund". These are the words of our Chief economic advisor, Mr. Kaushik Basu. As per him, India needs to follow the footsteps of her Asian peers and set up a sovereign wealth fund (SWF). This would help the country in becoming financially viable and would further broaden India's objective as a global player. A SWF is usually a state owned fund that invests in financial assets across the board. The fund is typically created by countries that have a budgetary surplus and little or no international debt. The fund acts as a stabilization mechanism during the boom and busts of the economy. It can also be set up as a savings fund that can save for the future generations. Such a fund would be a welcome move for India to ensure a stable growth in the years to come. It can also help the country in becoming a serious global player by giving it a mechanism to invest in assets outside of the country. But considering that the country's fiscal deficit has been expanding, this may remain a distant dream. However, if it is set up in a hurry, then the fund may instead prove to be a curse and end up having an inflationary impact on the already inflated asset prices.

Here are some more brickbats for Warren Buffet and company. A Berkshire Hathaway shareholder has sued Buffett and the board of directors over David Sokol's alleged insider trading. The lawsuit has pointed that Buffett violated Berkshire's code of conduct by failing to investigate the holdings of Sokol. Mason Kirby, the plaintiff in this case, has demanded that Sokol should hand over any improper gains to Berkshire. Further, he has also appealed that Buffett and Charlie Munger should compensate for the damage that has been caused to the company's reputation and goodwill.

The end result of this court battle is anybody's guess. But some things are quite certain. The incident has dented Buffett's reputation and has also raised the need for tighter controls and corporate governance at his mammoth conglomerate.

The world order seems to have shifted. India's exports to traditional destinations like Japan, USA and Europe have witnessed a slowdown. These countries are still in recovery mode, from the crisis. However, India's exports touched US$ 246 bn in the financial year 2011. It recorded highest ever growth of 38% YoY! This came in much higher than the target figure of US$ 200 bn. Bulk of the demand came in from newer geographies such as Latin America and Africa.

Going forwards as well, India's bilateral trade agreements with South Korea, Malaysia, Singapore, etc, and the Association of South East Asian Nations (ASEAN) will be beneficial. India has an ambitious target of reaching US$ 450 bn in exports by FY14. However, infra bottlenecks and the rising cost of credit continue to plague exports, especially those in the small and medium sectors. These need to be carefully monitored for India to achieve its longer term targets. With higher crude price, one more thing to be watched is the rising import bill.

Some good set of FY11 results helped the benchmark indices in the Indian stock market to add to the early gains backed by buying interest in index heavyweights. At the time of writing, the BSE Sensex was trading higher by 274 points (1.5%). Most Asian markets closed in the positive today with Korea and Japan leading the gainers. Europe has also opened on a positive note.

 Today's investing mantra
"To carry one's eggs in a great number of baskets without having the time or opportunity to discover how many have holes in the bottom is the surest way of increasing risk and loss." - Warren Buffett

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8 Responses to "This bubble indicator gives real early warnings..."

R Sathyamurthy

Apr 22, 2011

@M.Krishnan, WB suggests that too much diversification without proper analysis will be as much risky as it will be when one doesn't diversify and have concentrated holdings. His argument against diversification is that you may compromise on the quality of the stocks as you may not be able to track each company in your portfolio and that might result in even higher losses than a concentrated portfolio.

It should be noted that WB prefers concentrated holdings in high quality companies.


Krishna Kanth

Apr 21, 2011

The euphoria & the unfound frenzy for the NBFC Stocks would recall those memories. But i find a crucial difference between that & this. The NBFC's businesses are operational & most of them are at least reportedly profitable. At least they are not long gestation projects like Real estate or Power.

As a duped investor of NBFCs twice, I can vouch that their business record is n't very assuring ethically & the credentials of many are dubious !!!



Apr 21, 2011

There is no doubt about it, NBFC sector is going to be next bubble in the Stock Market.


Anil Seth

Apr 21, 2011

An experiment that is India if it is to succeed we must have an honest banking system. The current banking system is based on mutual back scratching. The roll over of past due loans, the over valuation of underlying securities offered for collateral, the accomodation of favoured customers behind bent rules, the desire of the captains of the banking industry to earn their pensions over and above the 'meager' pentions offered by the Bank, all contribute in allowing the so called promoters of Real Estate companies and Power companies to project a financially sound position to the public based on the 'false' banking support.
They thenm go on to blowinto the bubble which eventually bursts, like it is going to happen in the Real Estate, Construction and Power Sectors.
While in the aftermath of the bubble burst the creative captains of these industry will LAUGH ALL THE WAY TO THE BANK AND JOIN THE ALREADY LAUGHING BANKERS.


hemant damle

Apr 20, 2011

I feel NBFC IPOs will also be same as of power and construction IPOs.


p.r varadarajan

Apr 20, 2011

This is food inflation. Why not follow Gandhian Hazare's village model to avert migration to cities. This will enable rurual people live and be rich with dignity using rurual resources. Why no politician is interested in this model of rural development. Present population is capable of buying anything this rurual populace produce if it is affordable and of daily needs. I understand that the whole wholesale trade in food, fruits and vegetable are in the hands of State political mafia who hike the prices at their will. This is 100% true of Tamilnadu


D. Kapadia

Apr 20, 2011

You have commented that Internet penetration in the country is very low compared to othe countries. This is mainly for the reason that the internet recurring cost is very high in the country. A middle class family find it difficult to pay monthly rentals for interenet along with other regular expenses. In other countries the recurring cost is low considering the standard of living there.



Apr 20, 2011

I am unable to understand today investing mantra, can
somebody explain it, please.

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