A warning too little, too late?

Oct 5, 2011

In this issue:
» Why the central bankers appear as Gods?
» US wooing Chinese, Indian shoppers
» India's answer to Apple's iPad?
» Has gold lost its safe haven status?
» ...and more!
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They are supposedly the precursory warnings for investors. They are supposed to alert investors about the possible risks to their investment well before it reflects in the asset price. But the ratings given out by rating agencies unfortunately have miserably failed to do just that.

Back in 2008, rating agencies found themselves in an embarrassing position after their best rated securities turned junk with the collapse of Lehman Brothers. The billions of dollars in losses to investors came at a time when rating agencies were still struggling to ratify their views. In 2011, the US' credit rating was downgraded when the economy's poor fundamentals were already reflecting in its currency's exchange rate. Moody's has chosen to downgrade PSU banking behemoth State Bank of India after it posted record low quarterly profits and stock price corrected by more than 35% in the past 12 months. What it all suggests is that the rating agencies have done too little of their job, too late.

Indian rating agency Crisil's latest update on poor profit potential of India Inc. too comes with similar baggage. At a time when interest rates have already peaked, warnings on debt burdens seem myopic. Also, the fact that companies may find demand moderating with uncertainty in global economy is well factored into stock prices. Further most of these concerns are very short term in nature and hardly impact long term valuations.

Hence for investors to take investing decisions based on opinions of rating agencies is a tough call. They are often at risk of following the herd and missing the underlying potential in asset valuations. At the same time, a contrarian opinion to that of rating agencies may not always yield results. It is best that investors take an independent opinion on the asset that they are looking to invest into so that they do not miss the bus on some really profitable opportunities.

Do you think that ratings downgrade most often come too late? Share your comments or post them on our Facebook page

 Chart of the day
While the controversy over the quality of centers of excellence in higher education (like the IITs) gather steam, we thought that it would be interesting to check if there are sufficient number of them to fulfill the need of the masses. As today's chart shows India had 1 college offering professional courses for every 22 high schools in the country in 2010. This certainly means that the competition amongst students is intense for admission to professional courses. Also the fact that this ratio has decreased since 1995 is also an encouraging sign. However, this gives no indication about the quality of institutions and the curriculum.

Data source: RBI, Ministry of Human Resource
As per the Ministry of Human Resource Development, professional colleges are the ones offering courses in
engineering, technology, architecture, medicine and teaching

For any modern economy, the central bankers do appear as Gods. For they seem to be the only ones capable of printing money and thus, creating something of value out of nothing. Indeed, save for the crisis of 2008, every time an economy like the US has gone into a slowdown, central bankers have come to the rescue and have helped avert a major financial crisis. However, things have been different since 2008. No matter what they have done, the crisis has refused to abate. This despite the action steps being bigger and bolder than what the world has been witness to in the past few decades. Naturally, the god like status of central bankers has taken a big hit. To be true to them though, these bankers never demanded that they be treated as Gods. It was mostly the media that bestowed them with such titles. Probably it would help if they take a leaf from the book of Mr Duvvuri Subbarao, our own top central banker. Subbarao is of the view that a central bank cannot tell the markets what to do. It has to take the market signals as given. In fact, he has gone so far so as to say that the central bank decisions get more validity if the market endorses them. Whether god-like or not, this attitude has certainly saved India quite a few economic blushes in the past.

The US is leaving no stone unturned in bolstering its sagging economy. While earlier efforts to plod the US consumer to spend more proved futile, the country is now banking on overseas consumers to spend in the US and give its economy a much needed shot in the arm. Indeed, the country is looking to attract consumers from the fast growing economies such as China, India and Brazil to the US by making it easy for them to get US tourist visas to travel. Various incentives to be provided to these shoppers are also being worked upon. One big problem that overseas travelers are facing while applying for a US visa is the long queues. That is why, the US government is looking to staff the consulate offices more adequately and cut down on the waiting times. Further, a bill has also been introduced in the US Congress, which would require visas to be processed in 12 days and authorise the use of videoconferencing to conduct visa interviews. US policymakers estimate that these efforts would result in shoppers from overseas spending around US$ 859 bn over the next decade, creating 1.3 m new jobs. Certainly, the rising incomes of the developing nations are leading its citizens to seek a better standard of living. But whether they will take the bait that US is offering and play their part in boosting the latter's economy remains to be seen.

Apple Inc unveiled its iPhone 4S last night. It received a lukewarm response. However, India is all set to beat this news. It has introduced to the market a tablet computer which will go on sale in December this year. This tablet has the frills. It would run on the popular android platform, have a decent memory space, use cloud storage and have a Wi-Fi for internet access. But the best part is that it would cost only US$ 35. This means that you would pay just Rs 1,750 for this. Compare this with the Rs 10,000 to Rs 15,000 price tags of other tablet computers and you may think that you are getting a fantastic deal. In fact if you compare it with the Rs 30,000 plus that you pay for Apple's iPad, the Indian tablet appears to be a steal. The tablet is an initiative undertaken by the Ministry of Human Resources and Development and has been developed by a company managed by a Canadian of Indian descent.

The government is rightfully all excited about this breakthrough in the world of technology. A cheaper tablet would be a boon particularly for the student community which would be able to exploit the tablet technology without paying a higher price for it. But would the tablet really be successful? While it is too early to comment on that, however, the key thing to watch out for would be its performance. The ministry is excited that India would prove that it is not just China which can compete on price points. However, we sincerely hope that the quality of the product is much better than that of the Chinese goods. The latter unfortunately has a habit of letting down customers when it comes to quality.

International gold prices have fallen sharply in recent times. For Indians, however, gold prices have not declined to that extent thanks to significant depreciation of the Indian rupee against the US dollar. Anyway, after donning the crown of a 'safe haven' for a pretty long time, gold skeptics have started questioning the sanctity of that belief. On many occasions, investors have flocked to gold when other asset classes have been on a decline. So the cause of worry this time around is that gold prices have fallen in tandem with other assets. However, there is some consolation for gold bugs. According to one Wall Street Journal columnist, the recent gold sell-off was triggered by investors who were facing losses on other investments and sold gold to raise funds. On the other hand, long term investors such as exchange-traded funds have hardly sold.

So is this the time to buy or sell gold? In reality, nobody can answer that question accurately; the reason being that gold's value is almost impossible to quantify. It has few economic uses and thus, it's value is not determined by demand and supply. People buy gold for different set of reasons. Some buy it as a hedge against inflation, some buy it as a store of value and so on. As such, gold's value is based on how economic variables and other asset classes perform. And that's a very, very complex thing to predict.

After treading in the positive territory for most of the early session, profit booking in banking and commodity stocks led the Indian indices into the negative territory. At the time of writing, the BSE Sensex was trading lower by 28 points. Most other Asian markets are also in the red. However, Europe has opened on a positive note.

 Today's investing mantra
"Markets can remain irrational longer than you can remain solvent." - John Maynard Keynes

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10 Responses to "A warning too little, too late?"

sarat palat

Jan 12, 2012

At the end of the day, instead of depending on outside agencies comments and views, the invester should invest only on the basis of home work done by him.



Oct 12, 2011

One of the reason's for poor results for SBI is the change in guard at the top. Every time there is a change in guard at the top. The new SBI management first cleans the house (causing SBI to report poor results..) then starts on a clean slate.. So I dont think the SBI rating issue is that serious.. and SBI will jump back with better results in the future..
With Regards to US Central bank trying to pump the economy but failing to do so.. the fact is that the "Gatekeepers" are the Big banks and the Big banks have kept the liquidity out of the market.. even though the FED has increased the Monetary base to 2.65 Trillion dollars.. the Big banks have placed 1.57 trillion dollars "Extra" with FED (Central Bank) and the end result is the current monetary base of the economy is 460 billion dollars less than what it was in Oct 2008..
This holding of money in reserves has caused 492 banks to fail since 2008 till date and has resulted in a consolidation of the banking business.. in US.

So is the US Economy collapse a collateral damage for the real reason "Consolidation of banking business"

Fed data shows that the power to stimulate the economy has passed from the FED into the hands of the big banks as they can now at the click of a button release 1.57 trillion into the market.. the scary thing is at M3 levels this would translate to 15.7 billion dollars.. The mother of bubbles is in creation.. right now..

=happy investing


Ranjith Menon

Oct 7, 2011

A rating downgrade which does not raise an eyebrow means its useless. If a downgrade raises eyebrows, it means the rating agency knows something we do not.

Hence all these downgrades of US sovereign debt and that of SBI is simply a non event.


M Baskaran

Oct 6, 2011

I also feel the rating agencies come out late on their so called "warnings" and all the negatives are already factored in! and it doesnt help the investor real time... I do hope that banks are the backbone of any economic growth, once the growth recovers, the banking will comeback with viguor and all these banking stocks will fare well... but then u cant predict when it happens and we have to take it as it comes....rating agencies have to put extra effort in coming out with their ratings at the right times but not later the event itself...
M Baskaran



Oct 5, 2011

Rating agencies have no real clue of what is going to happen.They go by herd mentality and reflect what the markets preceive. more over most of the rating agencies have ulterior motives. For a investor it is better he does his homework than depend on rating agencies



Oct 5, 2011

Sure,it is tooo late!It was expected at least before 8months.Rackless financing in previous years...dangerly mountaining NPA..subsidised int.rates...at the order of the north block..Mr.Pratip,Chairman confessed yesterday that we should hv used resources more carefully..but he wrongly quoted his rating negatively two times today in Press meet..by saying banks rating as D- instead of D+..shocking error!!!!worst seems NOT over yet!


Dr R Kapur

Oct 5, 2011

Rating agencies get paid just like brokers for recommending certain shares. It is now well known that the stock market is manipulated by the so called stock experts. They come on TV channels, write in Newspapers- white or pink or other hues or publish newsletters and magazine to mislead the gullible investors. No wonder the stock market is called DALAL street!



Oct 5, 2011

they always come late.they bolt the door after the horse runs away.



Oct 5, 2011

Rating agencies are useless. There will always be insiders who are better aware of a company's situation than the rating agencies can interpret using publicly available data. These insiders will often trade on this information and cause unexplained (at that time) price movements. Technical traders will then jump on this price movement and further the trend. By the time the rating agencies publish their ratings, the stock has already moved far too much to be of benefit to anybody. There is still some movement, but its mostly due to the public data released by the company itself, not due to Rating agencies downgrades/upgrades.
Hence rating agencies should disband themselves and let individual/institutional investors do their own research and then invest.


Sharat Sinha

Oct 5, 2011

Public sectors banks in India are all controlled by goverment. With recent loan waiver schemes their asset quality has detoriated. It is SBI now but it may be followed by Bank of India. Other banks may also follow the suit.

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