Are you getting complacent with rising stock prices?

Oct 25, 2010

In this issue:
» India Inc's love with foreign loans hasn't faded
» Bonds becoming the cynosure of retail investors' eyes
» It's not just about inflation versus deflation now: Marc Faber
» US banks still have too much of rotten stuff, says Jim Rogers
» ...and more!!

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Only in stock markets do trees grow to the skies. And in bull markets, people actually start believing that this can happen! Investors start to take rising stock prices for granted. They in fact start to believe that the dream run would never end. In short, they become complacent. And if a bull market lasts for long (as it has in India), complacency becomes a habit. More often than not, such a period of complacency ends in a big shock as stock prices crash (as in 2008 and early 2009).

Since the bull-run started in India in March 2009, stock prices have risen several fold. The Sensex itself is up almost 2.5 times. As we see now, valuations look expensive across the board. A flood of stock market experts is seen on the business channels predicting how the future is going to be even brighter. The success of IPOs is being termed as matters of national pride. And thus a renewed sense of complacency seems to be creeping in.

This we believe could get shattered by even a whiff of problem in the Indian economy or even the western world that is still reeling under severe economic strain. We have seen FIIs' fickleness in the past. And all those who are raising toasts to the FIIs faith in the 'Indian story', might have to pay a heavy price in the future.

See, we are not trying to act as party-poopers. We are just cautioning you against getting complacent seeing stock prices rising continuously. Being on guard with your investments is the key here, as always.

So, are you getting complacent with rising stock prices? Share with us, or post your comments on our Facebook page.

Data Source: CMIE Prowess

 Chart of the day
As Indians, our liking to everything that is 'foreign' is a known thing. This goes for Indian companies as well. We are talking about their affinity to foreign loans - in the form of external commercial borrowings (ECBs). As today's chart shows, the share of ECBs in India Inc.'s total borrowings rose sharply in the heydays of FY07 and FY08 before falling a bit in the crisis of FY09 and FY10. Given that interest rates in global markets are way below what Indian banks charge, we do not see this share of ECBs falling from here on.

Data Source: CMIE Prowess

Leave aside institutional investors, the vast section of Indian retail investors that is famous for a high savings rate is the centre of interest for companies needing long term capital. Even if it comes at a relatively higher cost to the fund raiser! The recent mega successes of big ticket IPOs and bond issues had more than the institutional investors' hands in it. Their retail portions evinced sufficient attention and got subscription several times the issue.

SBI, which was the first bank to have such a long term bond issue, will however shell out higher price for attracting retail investors. As against this, issuing the bonds to insurance companies or the likes would have come cheaper. The logic of doing so seems to be rooted in bringing more maturity to the Indian bond market. Nevertheless, it may be only the infrastructure bonds that have fiscal benefits that may be more acceptable to issuers. This is because the latter will also have cost advantage. All said, issuing bonds should not become another case of 'raising as much money when available'.

Marc Faber is one of the big picture guys who we really like and follow. Faber spoke to The Daily Reckoning recently and as usual, had some good investment wisdom to offer. Faber opined that it is not just about inflation versus deflation now. He observed that we live in a globalised world and in such an economic system, there are chances that both the 'flations' co-exist. Thus, while the developed world remains engulfed in a potentially deflationary environment, there is a lot of inflation happening in emerging economies.

Faber also argued that taxation is nothing but a form of inflation. This is because it is not easy to say 'I m going to tax you and you will pay the tax'. This does not work as per Faber. There are strong chances that these taxes are rolled over onto other people. They can be rolled over to the consumer and so on. Thus, this is the real problem with respect to fiscal policies, opines Faber. One just doesn't know who will end up holding the bag whenever a tax is imposed. Indeed, we couldn't have agreed more.

The US banks were the biggest beneficiary of the fiscal stimulus doled out by the US government in 2008. The main idea was to provide them help till they could clean up their mess and get back on their feet. However, their troubles are far from over.

As per renowned investor Jim Rogers, these banks still have 'too much of rotten stuff' on their balance sheet. The subprime crisis triggered problems related to mortgage backed securities are still giving rise to weak balance sheets. This is leading to several banks requesting the bigger banks to repurchase their mortgage backed securities. And as history tells this will just lead to weaker balance sheets for the bigger banks. Now there are talks of another fiscal stimulus that will be given to the US economy. Looks like the banks will just get another lifeline. But will they wake up this time and throw out all the garbage? We are not so sure!

Indian markets had a strong day today. The BSE-Sensex was trading with gains of around 180 points (0.9%) at the time of writing this. Metal and realty stocks were leading the gainers' pack today. Most other key Asian markets also closed strong today, led by China (up 2.6%), Hong Kong (up 0.5%) and Singapore (up 0.4%).

Here are some thought provoking statistics. India's current workforce is estimated to be about 500 m. Out of this, only about 35 m are in the organised sector. Further, of this 35 m, about 20 m are government employees. The private organised sector adds only 15 m formal jobs to India's large and burgeoning workforce. Thus, a majority of India's current workforce is void of any kind of protection or regulation. But the problem does not end there.

A Mint report points out that India is likely to add 110 m new workers to its labour force over the next 10 years. In some senses this is a good thing. The GDP growth of any country is a combination of labour force growth (new people entering the workforce and contributing to GDP) and productivity growth (current workforce increasing its contribution). Thus in light of the earlier mentioned statistics, it is evident that the need of the hour is to ensure the smooth and productive absorption of these new workers to the workforce. That is where the focus needs to be. Otherwise, we may end up making our basic advantage into a detrimental disadvantage.

 Today's investing mantra
"A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage, etc." - Charlie Munger

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12 Responses to "Are you getting complacent with rising stock prices?"

Murali Krishnan K

Oct 26, 2010

If you want to be 'in the market' you shd get complacent. I don't believe being 'cautious' as you do very often. The great good, ethical companies like Tata Group and L & T too fell sharply. They rose up back into action and swing, is a different matter. The 'loss' was there on the D Date. So long as one plays in the market, with excess liquidity, this kind of things shall continue to happen.


Mrityunjai Atreya

Oct 26, 2010

Here the main issue is that retail investor do not book the loss at the right time. They keep holding the stock in anticipation that prices will rise again and keep holding the stock. Once the stock is under heavy pressure its not easy to part away with heavy losses already incurred. I say, retail investors need to keep a point where they should be booking losses, in case market falls. Avoid averaging.


Rattan Kumar

Oct 26, 2010

Re: Workforce statistics: You are looking at the problem the wrong way around. To my mind having 2 or 10 more Fords or Microsofts is not the answer. What we have is the small industry / entrepreneurship - an average unit employing 1 - 15 workers.
That is a strength not a liability.
By all means increase regulation to protect workers but it is far better for a person to say "I want to set up something" than ask "Where is my dole? I don't have a government job." as Westerners seem to be doing increasingly. So we should be making it easier for entrepreneurs to start and grow by helping with finance, marketing and other skills. The MSM Ministry was trying something like this online. More should do so.


Sumantra Roy

Oct 25, 2010

I congratulate you from the bottom of my heart for cautioning your subscribers just at the right moment.
Let me draw your attention to something esoteric which is a warning to the entire Global stock market published in YouTube.The date is in between 8th and 15th November 2010 something like 2008 crash will initiate.Well, I am not claiming this video from a psychic is 100% to be trusted upon but let us be on guard.

Sumantra Roy



Oct 25, 2010

Dear Sir,

I completely agree with you. Markets are at a high PE multiple of about 26. Historically no index sustains above 20 for too long.

Like Peter Lynch says, in the long term only earnings matter, which sadly hasnt grown much for the nifty stocks. EPS is 2008 was around 225 and now it is at 240.
However assets have grown which means heavy capital expenditure incurred not resulting in proportionate increase in earnings.

I have many economic indicators to share and will be glad to contribute.
I must say your newsletters are a reflection of my thoughts and we are of one mind. I am a big fan of both Marc Faber, George Soros, Warren Buffet,Jim Rogers, etc.I even started studying Autrian School of economics following their lead.




Oct 25, 2010

sir, i have already in loss , can i sell my stock now to recover on low price in near future ?


Amit Sengupta

Oct 25, 2010

Why not? I had come across a prediction about Sensex 21000 in Jul, 2010, 26000 in July2011 and 31000 in July2012. But thanks for the caution sign board.



Oct 25, 2010

I share your concnern. I only hope that investors do not go for penny stocks due to high valuation seen in frontline stocks. Yes, I am confident that the readers of this newsletter will not go in for penny stocks.



Oct 25, 2010

The point is to hold your investments. Follow the oracle of omaha. You just hold on to the stories that you feel will do exceptionally well in the next 20 years. If the market falls then buy more, if the market rises then do a sip. I have followed this technique for the last five years and believe me i have done better than most people. I invest in twenty companies and do a sip and when the markets tank i buy more. I have made more than 30% per annum following this technique.


Jolly Kollamparambil

Oct 25, 2010

Being complacent is a basic human habit. Time and again we face the ups and down in life, yet forget to learn a lesson or forget the lesson as soon as we start tasting success after failure. Stock Market is no exception.

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