The most dangerous thing to do in a bull market

Oct 20, 2010

In this issue:
» Shoplifting losses highest in India
» China raises key interest rates
» US to blame for capital flows in emerging Asia
» FMCG sales in rural India has slowed down
» ...and more!!

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The global financial crisis has been touted as the biggest since the Great Depression of the 30s. Economies around the world slipped into recession or witnessed a slowdown. Stockmarkets also took a severe beating. Not only individuals, but corporates and countries with huge debt burdens struggled to keep head above water. India was no exception. Individuals who had borrowed to invest into equities burnt their fingers very badly. But sadly, not many have learnt any lessons from this catastrophe.

Take the Coal India IPO for instance. Millions of investors are scrambling to get a slice of this IPO. It's not only because this IPO is the biggest in India so far. There are other factors too driving this enthusiasm. For starters, the US and Europe are still down in the dumps. Thus, foreign investors are putting money by the dozen in emerging markets in India. The perception then is that stockmarkets in India will continue to rise. As a result of which IPOs would also yield attractive returns. So strong is this mindset, that investors have begun treading on dangerous ground. They are borrowing in this bull market to invest in new issues.

In this regard, an article in Economic Times has quoted a trader - "I decided to take a Rs 9-crore loan for the Coal India IPO so that I can leverage my own fund of Rs 1 crore. This would increase my chances of getting more shares in the allotment 10 times and help me make a killing."

Surely, a 10% gain (assuming that he get entire allocation of Rs 10 crore) can double his net worth almost overnight but a 10% fall can also wipe out his entire net worth. And it is this downside that he is not paying any attention to. Indeed, this kind of speculation is what has led to the downfall of many investors in the past. And is bound to do so in the future.

 Chart of the day
India's retail sector may be booming on the back of a burgeoning middle class and rise in incomes. But it has laid bare its perils as well. As today's chart of the day shows, India towers over its peers when it comes to retail losses due to shoplifting. India is certainly making its presence felt in the global arena. But statistics such as these will only serve to tarnish its image.

Data Source: The Economist

The currency movements that are happening right now are not for the faint hearted. One week, you see the Euro going down dramatically and the next week, it is the turn of the US to do so. Thus, it is becoming extremely difficult to make sense of what is going to happen to the world's major currencies. An article in FT has tried to throw some light on the issue and we believe it has done a pretty good job of it. It has highlighted how the strength of the Euro is no accident. Firstly, the Eurozone's exports roughly equal its imports. Thus, it does not have to rely on outsiders to fund its current account deficit.

The same is not the case with US who runs a very high current account deficit and hence, has to rely on outsiders to fund the same. This dependence makes the US dollar susceptible to random fluctuations. Secondly, the European Central Bank (ECB) is more robust than the US Federal Reserve. This is because while the ECB can easily phase out its liquidity support given to banks, the Fed cannot do the same as its investments are tied up in assets which do not have a very efficiently functioning market. Lastly, weaker Eurozone members have already announced austerity measures. However, the US seems far from doing it. Infact, it is pursuing a policy of exactly the opposite kind. Thus, unless the US engages in some real reforms, the dollar is likely to remain weak.

A double digit growth rate is something that many nations in the world can dream about. But China, for which anything less than 10% growth has been a taboo so far, now thinks otherwise. The dragon nation has taken the first step towards curbing its heated growth rate. China has raised the key interest rates by 0.25% for the first time since 2007. Worries about inflation and asset bubbles seem to have finally occupied the prime spot in the economy's foremost concerns. And to top it all, a currency war that may end up with China compromising on its export market share, may shave off growth further. Despite India so far being very proactive with its anti-inflation tools, price rises have been difficult to control. With the large chunk of capital inflows finding their way into the two fastest growing economies, balancing growth and inflation is set to be a tough task.

While the Indian markets are reaching their all time highs, the Indian mutual fund industry isn't smiling as yet. This is given that mutual fund investors are flooding the exit gate of the industry and on their way out! As per a leading business daily, mutual funds have lost around 1.7 m equity folios in the April-September 2010 period. This represents almost 4% of the total equity folios that the industry has. The report attributes this to investors cashing out as stock markets inch towards all-time highs.

Some fund houses have however clarified that the money they are losing in equity funds due to these account closures, is coming back to them through their fixed income schemes.

US has blamed the rest of the world for causing problems in its own economies through their currency manipulations. Now, the World Bank is blaming US policies for creating bubbles in emerging Asia. World Bank's Chief Economist warned that the surging capital flows to the emerging Asian economies is a direct result of US policies. This capital is seeking high returns and is resulting in higher valuations of markets in Asia. The World Bank fears the impact that the flight of this capital may have on the emerging economies. It fears that such an event may lead to a repeat of the 1997 Asian crisis. It has warned the countries to put adequate measures to control such a scenario. Many Asian countries have already started putting mechanisms in place to control capital flows into their markets. Let's hope India puts in some more mechanism before things get really out of hand.

Everyone is trying to tap into India's growth story. With over 70% of the population coming from rural India, these consumers are key to our domestic consumption growth. FMCG companies are rapidly expanding their rural outreach in order to tap into this potential. They are trying to move deeper into the hinterland and introduce innovative smaller packages with very low price points.

However, consumption of food and beverages, accounting for almost 75% of total FMCG sales in rural areas has slowed down. Sales of these products have fallen during the first 8 months of the year due to increased prices, led by high food price inflation. Demand from rural India, is very elastic. These consumers are price sensitive and switch their preferences easily. But FMCG biggies are still positive. Good monsoons so far should help cool inflation. This will be right in time for them to boost sales during the Diwali season.

After witnessing a volatile post noon session, the Indian markets were trading on a flat note with the BSE-Sensex trading lower by about 20 points at the time of writing. While stocks from the capital goods and healthcare spaces saw some interest today, those from the metal and realty spaces were amongst the top losers. Weakness was seen in stocks from across Asia as well, with Hong Kong and Japan ending lower by about 0.9% and 1.7% respectively. However, Chinese markets ended with marginal gains.

 Today's investing mantra
"Obviously the stock market is quite irrational in thus varying its valuation of a company proportionately with the temporary changes in its reported profits. A private business might easily earn twice as much in a boom year as in poor times, but its owner would never think of correspondingly marking up or down the value of his capital investment." - Benjamin Graham

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4 Responses to "The most dangerous thing to do in a bull market"


Oct 21, 2010

Equity master..Five minute wrap up...20th Oct 10
India towers over its peers when it comes to retail losses due to shoplifting

Mmmmm.....interesting. Should be useful too, for us in India. Is it absolute shoplifters or shoplifters per thousand head of population? Absolute shoplifters rings a bell. I have a confession to make that'll explain it. I once stole a neck pillow from a Hotel in the US. I'm sometimes outraged by their Hotels' daylight robbery, suave and polished, but robbery all the same. I flaunted it as hand baggage when I was flying back, simply holding it in my hand. This is absolute shoplifting. Not kleptomania. Not stealth on the sly. Not catch me if you can or Cops and Robbers game that Behavioural Science pioneer Eric Berne describes. It is absolute shoplifting. Brahman the Absolute, in action in the Relative.

Some years ago I happened to watch a little known movie, 'If it's Tuesday, this must be Belgium'. There's a klepto in the movie. His exploits are exposed with touching humour, almost 'O'Henryesque'. We feel neither sorry for him nor angry with him. We just laugh and laugh at all the things he stole that finally burst out of his suitcase which falls and breaks open. By the way, the movie is a beautiful spoof of packaged whirlwind tourism, which comes out in the title itself : we go to so many places and countries, mainly in Europe,in so short a time, we lose count of days; eventually we end up saying, eh, if it's Tuesday it must be Belgium!

I'm parochial like mad. No one should lift his little finger against India. History is on my side like on no one else'. All bad things in India are due to colonialism. All good things are our ancient heritage. Megasthanes has recorded in Indica that locks were unknown in India unlike anywhere else. Shoplifting is a cousin of piracy on the high seas done by the likes of Drake et al. The Economist is published from London. Need I say more?

We have Harischandra and Gandhi. Satyam Eva Jayate is our motto. For every shoplifter, there are a hundred decent autorickshaw drivers who traced passengers who had left behind costly baggage in their vehicles and handed it over to them. I have read of dozens of such cases. Please get full details from the Commissioner of Chennai and other metros who may have the actual records. I think our 'peer countries' of whom the Economist speaks about maybe our peers in this too.
How many cabbies in London have returned valuables or any other things left in their cabs by absentminded passengers?

Seriously friends, let's get ready for more mud getting thrown at us. For more and more studies that will establish that India is as rotten as her weather, her stinking cities, her uncouth and hypocritical people, her Dharavis and what have you. Let's get ready for more and more hacking of our important servers. We are the world's largest democracy with the lowest mean age of population, and our economic juggernaut has started rolling. If we don't learn to be humble for our faults and carry our confidence arising out of our strengths with grace we're in for trouble. If we blindly follow the economic growth model of other countries that is de riguer in today's world, we'll be in for more trouble. Let's fashion our own growth model based on science and technology reaching out to the masses that can reduce disparities of many kinds we are now carrying as the albatross around our necks.

At the same time, and even more importantly, let's be aware that societies that have jettisoned faith and morality as science grew are now in many an existential dilemma at the personal and social level. I'm not saying it. A candidate for the US presidency who went ahead and became the President, Obama, said it : “we should rebuild morality”. I'd say faith can help. Seculiarism is 'peculiarism' when it says lots of bad things have happened in the name of religion so let's just get rid of all religions. It should be the opposite : 'in spite of religions so many horrible things have happened ; imagine what brutes we'd be without them'

Let's handle every brickbat, perceived or real, as an opportunity to set our house in order, seize every criticism as a stimulus and a catalyst for corrective action, and move ahead among nations as a people trying their damnedest to get better, not with a view to jockeying for power but to expressing the innate human passion for excellence, individual and collective. If we do that, maybe we would be remembered for some time at least in the river of history as a people who did their bit for good when their time came.

How do you act upon society and rid it of bad things like shoplifting? It's just a small tip of an iceberg, isn't it? You don't act upon society. You just act. Period. We concentrate at our individual levels. We pay our taxes, repay our debts, reward good people with a smile and a nod, do an honest day's work and earn our salaries and not just draw our salaries, spend time with our kids so they learn papa or mama don't lie or break a promise, and heave an honest sigh for the crook. Society improves when society improves. Let's trust there is a reverse osmosis of good crossing the membrane of social interactions and diluting the bad on the other side, what?



Oct 20, 2010

Borrowing Rs 8 crores to invest in IPO is one of the best ways to make black money white -with all the 70,000 crore liquidity flowing from from the CWG!



Oct 20, 2010

frequent reviews are very useful.



Oct 20, 2010

ur msg is very usefull in share trading.. but i request u to suggest me some company to invest for intraday as well as long term investment

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