'Stocks have risen too much, too soon...' - The 5 Minute WrapUp by Equitymaster
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'Stocks have risen too much, too soon...'

Oct 5, 2009

In this issue:
» India no match for China here
» Greenspan is at it again
» Investors await 2QFY10 results with great anticipation
» Indian Govt does not approve 'vulgar' salaries for CEOs
» ...and more!

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Alongside derivatives, we believe that excel spreadsheets could rank as one of the most powerful financial innovations of the modern era. Change a few assumptions here and there and if you are influential enough, you can have the entire markets sway to your tunes. And what better example of this fascination with spreadsheets than the current stock market rally. At a time when things on the ground have not improved as rapidly, we have witnessed what could be called as one of the biggest stock market rallies of all time. And it is not just us who believe so. Even Dr Doom, Nouriel Roubini seems to be thinking along the same lines.

Talking to Bloomberg, Roubini opined that the markets have gone up too much, too soon, too fast. "The real economy is barely recovering while markets are going this way. If growth doesn't rebound rapidly, "eventually markets are going to flatten out and correct to valuations that are justified. I see a growing gap between what markets are doing and the weaker real economic activities," is how Roubini chose to put it across. Indeed, it's not just Roubini but several experts who have continued to warn that the stock markets have run ahead of fundamentals and some correction seems to be in order. While the situation is not as bad in India as other developed economies, another 15%-20% gains from here in a very short time and even we could be there. Hence, please invest with a very close eye on valuations.

 Chart of the day
China recently completed 60 years of communist existence and during this period, has become one of the most powerful nations on earth. Today's chart of the day shows one of the reasons why India has not quite been able to match the dragon nation in its march towards a high growth path. While India's current account deficit (a deficit means that a country imports more than it exports while a surplus means the opposite) has remained mostly in the negative in the years mentioned below, China has remained in surplus for all the years under consideration. Infact, it has even managed to increase its trade balance in the latter years, leading to huge accumulation of foreign exchange reserves.

Source: The Asian Development Bank

In yet another example of not hitting where it hurts the most, the Indian Government has asked India Inc not to dole out salaries that could well be called as 'vulgar' to its CEOs. While such a step is indeed laudable, we believe that it could be a far more productive use of the Government's time if they had focused on trying to rein in corruption, an evil that is far more dangerous to the country's well being than something like CEO salaries. Important to add that while India figures consistently in the list of world's most corrupt nations, the corporate culture of 'vulgar' salaries is not so widespread in India as other developed markets like the US. Therefore, the government could be better off tackling corruption rather than its obsession with austerity and CEO pay packets.

Do you think Indian government should prioritize tackling corruption rather than regulating CEO salaries and embarking on an austerity drive? Tell us.

The man was much feted during his tenure as the chairman of the US Federal Reserve. Today, he is much reviled as the person who let liquidity bubble reach disastrous proportions. But there is one thing that remains unchanged between then and now - he gets media attention. We are talking about Alan Greenspan. In an interview on an US broadcast service, Greenspan has cautioned that a new stimulus plan is not the solution to kick starting the US economy at a time when its unemployment rates are the highest since 1983. He says, "The focus has got to be on trying to get the economy going, but you also have to be careful that in trying to do too much it can actually be counterproductive. It's far better to wait and see how this momentum that's already begun to develop in the economy carries forward."

In our opinion, the 'cheap-money' nature of stimulus plans around the world has definitely created the danger of runaway inflation and asset bubbles in the days ahead. Still, we find it ironical that words of caution are coming from the man under whose nose one of the greatest asset bubbles in several decades was created.

Ahead of the results season for the September quarter performance of corporate India, most market participants are waiting with bated breaths. The results will kick off on the 9th of October with Infosys' numbers. What makes this time's results more significant is the fact they will serve to provide important indications as to how much of the supposed economic recovery has trickled down to the bottomline of the companies. The good news is that a strong set of numbers is likely to set into motion another round of earnings upgrades by analysts, thus propelling stocks higher. At the same time if they turn out to be disappointing, do not be surprised to see the Sensex go lower in the short term. Overall the expectation is that though there will be no great surprises on the revenue front, margins may see an expansion on the back of lower interest costs and lower commodity prices as compared to the same time last year.

While the world may be getting skeptical about the bubbles being created in the Chinese economy, policy makers in the dragon nation are in no mood to sacrifice growth. The Chinese government's reluctance to rein in economic stimulus measures has been evident in its assurance about the credit growth in the country falling to 'reasonable' levels. China's astonishing rate of credit growth early this year (nearly 100% YoY) appears to be moderating, albeit only on a relative basis. The country's banks were disbursing Rmb 1.5 trillion on an average every month for the first quarter of 2009 to pump prime the economy. The government also offered US$ 586 bn stimulus to build railways, roads and power plants. China's central Bank, the People's Bank of China has declared that it will maintain a relatively loose monetary policy while the YoY growth rate for incremental loans remains aggressive at 30% currently.

The benign inflation party may be about to get over. And the reversal is most likely to be sharp and big in its scope. Infact, as per a leading daily, the WPI could touch as much as 7% by March end, driven primarily by rising food prices. Important to add that this is higher than the rate the RBI is comfortable with. Hence, it will be interesting to see what path the RBI will adopt going forward. Is it going to upset the status quo or will it start tightening its purse strings.

Well, if the word that is coming out of some of the top personnel of the RBI is to be believed, it is going to be more a case of the former than the latter. In other words, a benign monetary policy may continue and rightly so. Since economic growth is still a concern, it will not make a lot of sense to suck the liquidity out of the system. However, if inflation is seen getting out of hand, then some tightening could indeed take place as the central bank is known to have done in the past. For the time being though, let the low interest rate party continue.

In the meanwhile, profit booking seems to have taken its toll on the Indian markets as the BSE-Sensex was down more than 1% at the time of writing. Telecom blue chips were amongst the biggest losers. While most Asian indices closed mixed today, Europe was trading largely in the positive.

 Today's investing mantra
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money." - Warren Buffett

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17 Responses to "'Stocks have risen too much, too soon...'"

yogesh dave

Feb 14, 2010

Dear Sir,
It is fine that you are helping to new and small Investors.


b k walia

Jan 8, 2010

I think stock market has not risen too much because most of the stocks are below the rates were on jan 2007. correction is a saperate part it will be required for the stability ofmarket. But it is depend on how much correction is going on.



Jan 7, 2010



anish poojara

Oct 11, 2009

Many of the CEOs drawing these vulgar salaries are attending office because their fathers/grandfathers set up the company. Surely there are enough smarter IIM/IIT candidates and other professional managers who could do the same job better and for a fraction of the salary.

It is also interesting to note that these guys take a percentage of the net profit in additon too. Are they willing to take a percentage of the loss as well if it happens.

I would love to enter into partnerships where I get a share of the profit and have nothing to do with the losses.


K. G. Rao

Oct 9, 2009

Tell us, since 'Stocks have risen too much, too soon...', do you find yrselves on the horns of a dilemma, with yr various subscriber schemes, in which you feel you HAVE to find a suitable stock to recomment every week. At some stage, when in yr words caution is the need of the hour, maybe valuations will be such that there just wont be any worthwhile stocks to recommend. I would suggest that your promised 52 recs a yr (I refer to StSelect), need not necessarily be every week, but can be grouped acording to circumstances. Unless, of course, u say that the basket of worthwhile stocks ling term is such that there will always be a few good picks every week?

Another reason in favour of irregular distribution over the year, if a correction is round the corner it makes sense not to buy now but a little later at lower prices?

Frankly, u hv me worried with the weekly contradiction between a recommendation and the need to be cautious about valuations. What is the answer?


indubhushan raina

Oct 6, 2009

Is he need of the time to curb corruption or to curb curbing the salaries of CEO's or renumeration of the govt officers.or of MP's as also beeing voiced from some other quarters. Thse , in my opinion, are nothing but attention diversionary tactics but are generally successful since we as a common man have affinity to buy and enjoy such stories.
India is very low on the ranking of removal of corruption-Singapore is highest on the ranking of removal of corruption, Singapores's renumeration structure ,whether for CEO's or for politicians running the administration or the general employees is also the heighest-the official salary of ministers esceeds US$ 1.000,000 a year.where do renumerations in India stand compared to above. So if we have to make an apple to apple comparison -an income index must also be prepared by those who are computing the corruption index and reported side by side of corruption index for each country -these above said issues could be debated after above data is made public.
When china was defeated by Britishers in the past century, the reason of China's defeat was attributed to to vast and strong British industry which was supporting the Britisf army brom the back. It is in the history that China had resolved to surpass the British industry. They have done , but where are we ? Our real term Industry growth is only a fraction of the same and we are contented with the same and happy with a bulging FE Reserve even though it primarily accounts for inflows of FII's and NRI's.This is evident from the Graph attached with your note "TRADE SURPULS INDIA NO MATCH FOR CHINA"
So the main issue that emerges is main challenge before us is how to increase Exports and Decrease Imports and FE Remittamnces out of the country. Increase in domestic renumerations say to CEO"s or The politicians or the employees will only add wealth to the nation which will percolate down to the poorest and make their standard up.
Summing up the issues are
-when will our farm hand get renumeration near to a farm hand in Europe or Singapore
-when will our workers in private sector and public sector oand govt sector get renumeration near to their counterpart in Europe or Singapore
-when will our exports reach the level of China ,do we have an export strategy
-when will we stop making issues out of non issues



Oct 6, 2009


For an otherwise sane person, you occasionally come out with absurd positions that makes us wonder whether you are sometimes under the influence of banned substances!

An instant case is the following question to which you seek reader response:

Do you think Indian government should prioritize tackling corruption rather than regulating CEO salaries and embarking on an austerity drive?

I do not know what the two activities have to do with each other. Are you suggesting that the government has resources for only one of the two, and in choosing one, must necessarily forego the other?

Here is process of taking these false choices, and moving towards reductio ad absurdum:

- Do you think Indian government should prioritize tackling farmer suicides than controlling corruption?
- Do you think Indian government should prioritize tackling terrorist activities than dealing with farmer suicides?
- Do you think Indian government should prioritize tackling external security threats than dealing with terrorist activities?

Clearly you expect the government to do all of the above! What is the resource constraint because of which one activity has to be chosen and another abandoned?

You would be overtly dishonest, if by compiling the responses to your phony question, you conclude that your readers do not want CEO salaries examined by the government. MLAs and directors of family controlled companies are the two categories of employees who are able to determine their own salaries. Surely your own examination of hundreds of balance sheets of companies have given you ample evidence of cases where salary levels and salary increase have no relation to companies' performances or the directors' contribution.



Jack Russel

Oct 6, 2009

According to me your comparison between India and China has bit of soft feelings towards the former.....China started opening up its market in the 1970's whereas India did it in the 1990's....So i think it would be really interesting if you can compare the impact in the first ten years post opening up of the economies of the respective countries....In China it has been more than 30 years since the opening up of the economies whereas in India it is only in the last 15 years or so....Please throw some light on this



Oct 5, 2009

Perhaps stocks have risen too soon; perhaps they shouldn't have fallen in the first place - this is herd mentality in the technology era (we aped the West when there was nothing wrong with India in the first place). Are we going to wait indefinitely whilst foreigners reap the benefits of our rising market, or are we going to start believing in our own country's strengths?


Mahipal Singh

Oct 5, 2009

Dear sir,
How can u say that stocks have risen too much too soon... if you see most of the stocks are down even to their june 09 high,leave aside the yearly high. Only hand full of stocks are yrly high and taking the sensex to high, I think it is not the true reflection of the market. true reflection of the market will be only when the sensex is calculated on full market.

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