No business channel wants you to read this!

Jul 6, 2011

In this issue:
» Chinese local government debt is understated, says Moody's
» Economic data not fully trustworthy, feels RBI Governor
» Broking industry going through a crisis of sorts
» Alan Greenspan does not want a QE3
» ...and more!
----------------------------- A Good Time To Sell Bad Stocks -----------------------------

It's never too late to get rid of 'bad stocks'.

After all, you never know how bad a market crash could get.

But what are these 'bad stocks'? How do you identify them?

For answers to these questions, and more,click here to read on...


Next time you are watching TV, try comparing the format of a popular business channel with that of a sports channel. The similarities between the two will leave you shocked perhaps. Just as a sports channel has a pre-game show, a half-time show and a post-game wrap up, a business channel too would have a pre-market commentary, a lunch time programming and a post market wrap up. Little wonder, it provides the same thrill to an investor as a sports channel would do to a sport enthusiast. But is it always meant to be that way? Certainly not. Investing is a serious long term activity and by portraying it as a short term, portfolio churning exercise, akin to some sport, the business channels are doing a big disservice to the investing community we believe.

Do not believe us? Let us delve into this excellent illustration by a leading business daily that will help nail the point we are trying to make. There is certainly no doubt in anyone's mind that most business channels are big advocates of frequent portfolio repositioning. This strategy not only makes your broker rich at your expense, it also leads to another very important drawback. That of frequently staying out of the market. And this may not be a very good idea. For it could result into a situation where one ends up missing some of the biggest moves of the stock market.

Research has shown that by missing the ten best days since January 2001, an attractive return of 16% per year turns into a mediocre return of just around 8% per year. And what happens if you miss the 25 best days? Well, the returns reduce to a puny 0.8% per year, way below what even a fixed deposit offers. Hence, it is very important to understand that a business channel will have plenty of reasons for every upswing and downswing in the market. But this doesn't mean that you should base your portfolio decisions on the same. You would be much better off not watching the channels and instead, focusing on fundamentally good stocks and staying invested for the long term.

Do you think watching business channel adds value to your long term returns? Share your views with us or you can also comment on our Facebook page.

 Chart of the day
The all important wheat procurement drive came to an end recently. As shown in the chart of the day below, the Food Corporation of India lifted a record 27.9 m tonnes, thus comfortably crossing the previous record set last year itself. As per reports, this record procurement came in the wake of country's largest harvest of 82 m tonnes in the Rabi season. It should be noted that the total wheat and rice stocks in the country now stand more than thrice the quantity mandated by strategic and buffer stock norms. This has prompted the Government to think of grain exports so that space for the Kharif crop can be created.

*achieved till now
Source: The Financial Express

The list of economic data that is released by the US authorities in a month can run into pages. That makes us wonder if the policymakers there indeed make any use of it. But unfortunately the little that policymakers in India have access too is not reliable! The RBI is the only policymaker in India keeping a close watch on economic numbers. And we are not surprised to know that the governor is most frustrated with the quality of data that he has to rely on. The RBI governor Dr Subbarao recently expressed his concern over the incorrectness of economic data based on which the monetary policy decisions are taken.

That inflation based on WPI metric is faulty is anybody's guess. For the WPI index takes into account archaic items like typewriters that are these days found only in museums. But the unemployment numbers too seem to be giving an utterly wrong picture. The industrial production (IIP) data has been extremely volatile for even experts to make an educated guess. With such incompetency in economic data gathering, it is most unfortunate that we expect the RBI to do wonders with its policy decisions.

If you have called up your broker in the last 6-8 months you might have heard him say "Sir, we have lowered our commission structure for our valued clients". Stiff competition meant this was something which was on the cards for brokers to capture the increasing market pie. However, operating at such thin yields was practically unsustainable over the longer term. And this is reflected in the current state of affairs prevailing at major brokerage houses in India. It seems that the Indian broking industry is in a crisis of sorts. Falling yields (due to higher derivative volumes), rising costs and lack of retail participation has resulted in a huge cash flow crunch. It may be noted that at least 18 broking firms have surrendered their NSE membership as their operations have turned unviable. Quite a few renowned broking houses have also wound up their research desks as a measure of cost control.

Considering that broking is a cyclical industry this is something which has not come as a surprise to many. However, this time it could be different. The current slowdown is due to a structural change in the industry where the smaller players are either leaving the business or are getting marginalized. Or else what could have explained their misery when the Sensex is at 19,000! So, once the tide turns, the larger players who survived may get the entire share. And we know what happens to the prices (commission structure) when few players dominate the market.

He is the man credited with starting the zero interest regime in the US which led to excess spending by Americans before it all culminated in the global financial crisis. And the same man today is driving home the point that the Fed's measures to tackle US problems through quantitative easing programs have not really worked. We are talking of none other than the former US Fed chairman Mr Alan Greenspan.

When the crisis began, the US Fed chose to deal with it by pumping billions into the financial system and prop up the economy. It was followed by another round of quantitative easing (popularly referred to as QE2) which was a massive US$ 600 bn bond buyback program. None of these programs have really worked as spending has not taken off and unemployment in the US continues to remain at high rates. All of which has translated into US not really showing any sustainable recovery. What these programs have in fact done is drive down the value of the dollar and wreak havoc on the government's finances. Alan Greenspan has said that he would be surprised if there was a QE3 because it would continue erosion of the dollar. While logic favours no more rounds of quantitative easing; whether the US Fed chooses to heed the same is the million dollar question.

We heard of the Greek debt crisis. Then came the Euro debt crisis. Then we read stories of how US has mountains of debt that led to its economic crisis. Now here's another one. This time, the crisis is closer home and involves China. As per rating agency Moody's, the quantum of Chinese local government debt has been understated by US$ 540 bn. This puts the Chinese banks at risk. How? The Chinese banks have a huge exposure to the local government debt. In the event that there is a slowdown in the overall Chinese economy, this would lead to debt defaults. This in turn would cause turmoil in the banking system of the country. We have already seen this happening in places like Greece and Ireland. And therein lies the risk. The banking system is pivotal to the success of any country. Unfortunately, the fiscal stimulus package that China announced in 2008 helped out its infrastructure and industry. But it has now become a curse for its banks.

Meanwhile, indices in the Indian stock market lost their early morning gains today and the BSE Sensex was trading slightly below breakeven at the time of writing. Heavyweights like ICICI Bank and SBI were seen driving majority of the losses. While other Asian indices closed mixed today, Europe has opened on a negative note.

 Today's investing mantra
"The chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions." - Benjamin Graham

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22 Responses to "No business channel wants you to read this!"

Francis M Fernandes

Jul 6, 2011

It is better not to watch business channels. You will be confused. If you watch in the same channel, one expert will say "buy" and the next expert will say"sell". If both are good in their research work,how could they give such wide view on that particular day for the same stock. They may be having their reasons but should we watch such channels? Our own view for our own money is far better.


Chandra N S

Jul 6, 2011

Watching Business Channels builds my long term wealth?

Well, the thought itself is funny.

If only watching Business Channels were really capable of building my wealth, what more is needed? I will resign from doing every productive thing and simply watch 5 business channels 20 hours a day 6 days a week in 4 different regional languages (and also learn a few more regional languages to understand business news).


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