You can see 'Irrational Exuberance' here...

Oct 7, 2009

In this issue:
» The hey-days of the dollar are numbered
» After drought farmers now cope with flood
» Telecom stocks find no takers
» Steel capacities may remain on paper
» ...and more!

------- To All Warren Buffett Fans -------
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00:00
 
When was the last time you read or heard the words 'irrational exuberance'? Maybe as recent as 2008. Yale university economist Robert Shiller wrote a book with the same title way back in 2000. His book "Irrational Exuberance" hit the shelves in March 2000, the same month the tech-stock bubble struck a sharp pin. A few days before Alan Greenspan famously used the phrase "irrational exuberance" in a December 1996 speech, Shiller had been at lunch with the then Fed chairman, arguing that the stock markets were irrational. Shiller's first book focused exclusively on the stock market. A substantially revised edition of 'Irrational Exuberance' was published in April 2005, which included a new chapter on what Shiller believed was the bubble in residential real estate. What happened eventually, as they say, is history. Given this kind of reputation of these words, we were all ears when Nobel laureate economist Joseph Stiglitz used them again very recently.

Mr. Stiglitz has pointed out that the unemployment situation in the US will keep worsening and should be the focus for policy makers. He therefore believes that the gains in the global stock market show investors have been 'irrationally exuberant' about a recovery. A glimpse at valuations shows that his observation could not be further from truth.

We do not need to look at the US markets to know more about the 'irrational exuberance' phenomenon. But can find the same here in our domestic markets itself. The trailing 12-month price to earnings (P/E) ratio of the benchmark Sensex as well as the BSE Midcap and Smallcap indices has come dangerously close to their record highs. At such times, investment in stocks calls for that extra degree of caution.

However, this could well be true from a near term perspective. Over the long term though, we believe that the India growth story remains intact. Indeed, very few nations offer such compelling opportunities as India. Thus, while stocks would remain one of the most attractive asset classes to invest in, how about doing it the way the world's best investor, Warren Buffett has done it. Click here to know more.

Source: CMIE

00:57
 Chart of the day
The most important reason why Indian households could evade the kind of economic turmoil that was endured by those in the developed countries was their low leverage. Characteristically known to be debt-averse, Indian households have for long tried to avoid borrowing to fulfill their consumption needs. And this habit came to their rescue this time. As today's chart of the day shows, Indian households are the least indebted as compared to their counterparts in countries like US, Japan and France. However, as banks get more aggressive in financial inclusion and credit cards find their way to smaller pockets, the scenario could soon be changing.

It is important to make sure that the leverage does not reach unviable proportions, as in the case of the US.

Source: National Housing Bank

01:42
 
Pessimism for the US dollar continues to gain ground. All the major currencies of the world were seen rising against the greenback yesterday. Even the Indian rupee rose to a 12-month high against the dollar. The negative mood was not restricted to currencies alone. The yellow metal gold also surged, setting a new record of US$ 1,045 per ounce. Apparently, the markets were jolted by news that a few gulf countries were planning to drop dollar for trading in oil and instead, choose a basket of major currencies. While the countries involved in the talks have denied the news, the dollar is on such a shaky foundation that the denial could not arrest the fall in the greenback.

Whether the US authorities like it or not, the writing clearly seems to be on the wall. Against opponents that are getting increasingly powerful, economically as well as politically and amidst problems that are of its own making, it will be quite difficult to retain the dollar's dominance. Indeed, the Roman dinar, the Spanish reale and the British Pound to give a more recent example, have all fallen from the perch of the world's dominant currency. Slowly but steadily, the dollar seems to be heading there as well. Hence, if you are overly reliant on the US dollar for your financial well being, make sure you diversify yourself.

02:31
 
The monsoons this year have caused much grief to Indian farmers. After weak rainfall in the traditional monsoon season, which led to a drought, the recent floods have led to a great deal of devastation. As per Bloomberg, heavy rains in Maharashtra, India's sugar bowl, has damaged cane crops just ahead of harvests. While the extent of the damage is not yet known, this only adds upward pressure on sugar prices which have already more than doubled this year. While the vagaries of nature are under no one's control, we believe it throws up some larger questions on India's ability to handle the fickleness of the weather gods. On a broader level, we should seriously consider the impact of climate change which seems to be right at our doorsteps now.

03:00
 
Following Reliance Communications' price cut for its mobile services, investors now expect other companies to follow suit, and with adverse consequences. And they (investors) are right in their thinking. This is given that the Indian telecom war has always been fought on the price turf. This time is going to be no different. However, the level of company-wise impact will only be determined once the dust settles.

What we are amused about is that a number of brokers have already changed their views on telecom stocks. This comes as their knee jerk reaction to these developments. Interestingly, these very brokers had a positive view on telecom stocks just a few days back. Now a small change in the environment (small with respect to the long-term future of the industry) has made them release 'Sell' recommendations on telecom stocks across the board. Good for their business (as this would lead to more transactions and therefore more commissions) but bad for investors who buy and sell based on their advice!

While we are also concerned about some telecom companies for their aggressiveness in gaining market share, some others still offer tremendous value for long-term investors.

03:38
 
LN Mittal, CEO of ArcelorMittal is reported to have recently said that his company may pull out of its US$ 20 bn plan to build greenfield steel projects in Jharkhand and Orissa if the land acquisition problems are not resolved soon. However, despite such grave land acquisition problems stifling the growth of industry, union steel minister Virbhadra Singh remains as optimistic as ever. In a recent interview he expressed that it is essential that India achieve steel capacity of 124 m tonnes by 2012 and about 150 mt by 2015. This is because since April, the demand for steel in the country is growing at a much faster rate of 6.6% compared with a production growth rate of 2.7%. Over and above that, he expects demand to start rising at more than 10% a year once India is back on a 9% plus GDP growth trajectory. But with land acquisition turning out to be such a big stumbling block, we hope these targets by the government don't remain just targets, as they often do.

04:15
 
While the global financial crisis highlighted the importance of the IMF especially when it came to bailing out depressed economies, its MD Dominique Strauss Kahn wants to expand the institution's role. This, at a time when the world is shifting its focus from financial crisis to economic recovery. However, this may not be that easy as many of its members are not ready to give power to an IMF they say is controlled too much by rich nations. Kahn has envisaged making IMF a US$ 1 trillion fund that would help prevent the global imbalances that led to the crisis. This would also prevent the need to build up currency reserves during times of growth. The problem that IMF faces is getting all the countries to accept his proposal as most of them will have their own agenda. Also, many of the emerging nations such as China for instance are bound to ask for a greater say in matters. While the proposal is indeed in the right direction, at present though, it seems a dream at best!

04:46
 
Meanwhile, the BSE-Sensex moved below the dotted line after opening in the positive today. At the time of writing the BSE-Sensex was trading 35 points lower. As for global markets, while other Asian markets closed a mixed bag, the European markets have opened higher.

04:55
 Today's investing mantra
"You can't see the future through a rear view mirror." - Peter Lynch

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9 Responses to "You can see 'Irrational Exuberance' here..."

G.P.Sangal

Oct 8, 2009

Interesting and relevant reading.

Thanks.

Like 

b k nehete

Oct 8, 2009

We know and are convinced of your importance in researching the stocks/markets.Consequently we as long time subscribers value your advice and trade/invest stocks
from time to time.We also know Warren Buffett and his advice is definitely valuable.
However don't you think it is too much of Warren Buffett in your every message of yours making him and you cheap(?) You seem to put everything on Warren Buffet.Do you mean to shoulder off your responsibility and put on to Warren Buffett? Warren Buffet is in his place and you are in yours.Why don't you put reference of him occassionally and repose our cofidence on you more??

Like 

mohan pillai

Oct 7, 2009

well,the sensex rise has been too fast particularly from a dismal low in march 2009 to dizzy heights in Oct 2009. One need not be a financial expert to understand the market,since the market runs on rumor and manipulations alone. It is high time we see the writing on the wall and understand the implications,and invest carefully.

Regarding the green back losing luster, this should have happened at least 5 years back, with US internal debt running to 15 trillion dollars,it is surprising the dollar has still some value

Like 

Amit Marwah

Oct 7, 2009

A quick feedback - please can you update this letter to include the day's important statistics like SENSEX CLOSE, GOLD CLOSE, NASDAQ CLOSE, TOP 5 GAINERS, TOP 5 LOSERS OF THE DAY, TOP 5 BUSINESS HEADLINES. You know what I mean? This will make the letter one comprehensive update for the day.

Like 

Chandrasekar

Oct 7, 2009

Rains may have damaged crops say by 50%,but I believe all decan region sugar mills will sing love song later.

Like 

rajindra manral

Oct 7, 2009

what shares to buy.
should money be invested in mutual funds
is taking loan better than buying outright from own money

Like 

sunilkumar tejwani

Oct 7, 2009

dear sirs,
as per your own admission, markets have reached near bubble territory. scrip wise don't you think some scrips like Maruti, Jindal Steel, Sterlite, Educomp, SBI & some other banking stocks have reached alarming heights. Should one book out or still hold at current valuations?

Like 

vinodshah

Oct 7, 2009

Future never comes back door

Like 

S.K.KUNDRA

Oct 7, 2009

. politicians have a knack of making statements,whichthey do not have any intentions of honouring.But your write ups are bold,thought provoking,anti herd mentality and standalone in approach
which requires a lot of courage of conviction.keep up doing a good job.

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