'Tips' that may cost you dearly

Sep 7, 2010

In this issue:
» India is the flavour of the season
» Krugman is bearish on the US economy
» India, China GDP growth way higher than peers
» Food subsidy bill is set to balloon this year
» ...and more!!

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Broking firms are struggling to stay alive. And they seem to be doing so at the cost of investors. Brokers, especially the small ones, are doing all that they can to generate enough business. And a leading business daily has reported that brokers are encouraging their clients to trade more in shares of midcaps and small caps. They are cutting funding costs and pushing short term trading strategies. More so because stockmarkets are rising and they want to capitalise on this trend as much as they can.

Investors would do well to stay away from such broking firms and the 'tips' that they offer. At the end of the day, these are all moves to bolster their already sagging business. That they are going to benefit investors in any way is seriously questionable. The notion that markets are rising and so this is the time to book some profits will not enable investors to create wealth in the long term.

What investors need to do instead is research thoroughly the companies that they want to invest in. Strong financials and good managements should be given high importance. And then valuations have to be given due consideration. It should be noted that investing is a long term activity. Frequent trading adds only to the wealth of the brokers and no one else. And that too at the expense of the investors themselves. Thus, they would do well to stay away from brokers that keep pushing short term trading strategies.

 Chart of the day
With the recovery in the US and Europe not displaying signs of really taking off, India and China continued to hog the limelight. As today's chart of the day shows, China and India have once again marched ahead of their peers as far as GDP growth in the Apr-June quarter is concerned. Although there are talks of growth slowing down, especially in China, both these countries are most likely to top the table in the coming quarters as well. Especially since the scenario for the developed world remains bleak as ever.

Data Source: The Economist

Yesterday, Indian stocks hit a new 31-month high. And in the process, took their year to date growth to a shade over 6%. This is in stark contrast to 18% and 5% drop witnessed in Chinese and Brazilian stocks respectively. Russia too hasn't done all that well despite remaining fairly undervalued. India thus clearly seems to be the flavour of the season amongst the BRIC nations in the post sub- prime world. FIIs are finding India's mostly domestic driven growth story and its Government's new found resolve to tackle public finances too hard to resist. Little wonder, they have poured in nearly US$ 13 bn into India so far this year. Infact, experts predict the figure to top the record reached in 2007. What more, even global private equity funds are quite keen to play their India cards. Thus, money should not be a problem for Indian equities from the looks of it.

What could cause concern though are the current high valuation levels. Thanks to the gains in the last year and a half, Indian markets are now trading at above their average valuation levels of the past 5 years. Besides, inflation, which is much higher than that prevailing in other BRIC nations, could prove to be another party pooper should the RBI start becoming more hawkish. This then is turning out to be the biggest dilemma for investors. Should they or should they not invest in the India growth story currently? We believe that an investor with a horizon of 3-5 years will do his return no harm even if he invests at current levels. For the long term India growth story still remains intact.

Noted American economist Paul Krugman maintains his bearish stance on the US economy. And his thoughts cannot be ignored. As for his current outlook on the US economy, he says, "It's all downhill from here." This is a scary prediction for the world's largest economy, especially given that it is just sputtering to get back in recovery mode.

Krugman adds, "GDP is growing below potential; employment, even if you focus just on private employment, is growing more slowly than the working-age population. If you ask how long it will take us to return to, say, 5% unemployment on the current track, the answer is forever."

We believe it is hard to reject Krugman's macro outlook. This is given that he has been spot-on with regards to the macro picture in the last few years. And we do not think this time will be any different!

As much as US Fed chief Ben Bernanke would like tax cuts and zero interest costs to pull the economy out of recession, his logic does not seem to be working. And experts like economist Kenneth Rogoff believe that Bernanke's dislike for inflation may not do the economy any good. He believes that at present it is more important for Americans to get jobs and spend their earnings. Tax cuts for one will not benefit the non payers. Secondly the tax savings may be saved and not spent. These could further delay the economic recovery the Fed is betting on. Thus Rogoff opines that Bernanke should target higher inflation and aim to bring down the debt levels in the economy in the longer term.

To keep a check on the deficits, India's Prime Minister, Mr. Manmohan Singh, has been protesting against the distribution of free food in the country. This may make him appear inhuman to the advocates of the poor. However, if the latest figures of the food subsidy are any benchmark, then his protests may appear justified. The government has already spent Rs. 256 bn on food subsidies in the first four months of the year and the subsidy bill is likely to hit Rs. 750 bn for the full year.

The department of food and public distribution system (PDS) has blamed the poor storage and distribution system for the increase in the subsidy bill. They claim that cost of procurement and storage of the food grains has gone up. However, the prices at which these are sold to the poor have remained stagnant. Interestingly, they have stated that nearly 40% of the entire subsidy amount was due to the operational expenses related to storage of the food grains. It is indeed ironical that Government spends a bomb on operational expenses and still lets millions of tonnes rot in the open but at the same time is averse to give it to people who really cannot afford it.

As you probably know, private sector debt was at the heart of the global financial crisis. The question is, how could such a large amount of debt and of such dubious quality pile up in the first place? Especially in mortgage lending to households. Due to inadequate regulation, if the Bank for International Settlements (BIS) is to be believed. BIS recommends that banks should recognise their losses at an early stage as well as rebuild their capital to help bring down the overall private sector debt. On a positive note it adds "Growth rebounds rather quickly. We take this as indication that it is possible to reduce debt and still experience healthy growth". However, in order to achieve this policymakers have to first fix the problems in the banking system.

After opening in the green, markets have continued to sustain some positive momentum. The BSE-Sensex was trading 57 points higher at the time of writing this. Stocks from the consumer goods and metals space saw good gains. Realty and banking stocks were at the receiving end. Sentiments were mixed in the rest of Asia's major markets. Hong Kong was the top gainer, up 0.4%, while Japan was down 0.8%.

 Today's investing mantra
"The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable." - Warren Buffett

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3 Responses to "'Tips' that may cost you dearly"


Sep 7, 2010

The concerned Ministry should use modern methods of storing foodgrains and if they cannot store for longterm should distribute to the poor. The department concerned is accountable to the public and it's their duty to see that it's ensured. There's no point in the low income generating public being taxed at every levels and here we have losses of this sort.


Om Prakash Sharma

Sep 7, 2010

It is alright for the PM to say that it is not possible to distribute food stock free and also that the Judiciary should keep away for passing orders on Governance.But who allowed this situation to develop at the first place. During NDA regime itself the deveopment of Godown was mooted. What happened to that idea.
Blaming it on others is easiest in the world. Pl deliver PM.


K.G. Rao

Sep 7, 2010

Re the PM saying food cannot be doled out free, nobody including EQM seems to appreciate that all the Supreme Court said was, instead of letting foodgrains rot it would be better to distribute free. And are they wrong? Is it better to let stocks rot? Nobody said anything about giving the whole population . It would make sense, if storage facilities are inadequate, to move the amounts expected to be at the end of their storage life to PDS distribution points, and if even that cannot be done the just set up a free distribution point at the warehouse! Anything's better than letting it rot in our scenario. If u agree, please hammer it home.

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