|»5 Minute Wrap Up by Equitymaster|
On This Day - 1 SEPTEMBER 2010
Are you like a frog in heating water?
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Well, we don't know whether the current generation of frogs is intelligent enough to understand this mystery. But we are sure the stock market investors generally do not take a leaf out of this. So, when stock prices rise or fall fast, investors get into or get out of them. But when the rise or the fall is slow (like the slowly heating up water), investors take that as the new normal. In such a scenario, they create this self belief that stock prices will continue to move up, or they'll continue to move down.
We are seeing something similar happening now. The Indian economy is showing signs of renewed strength. And cheap global liquidity is flowing in great abundance. This is taking Indian stock prices higher (except the minor volatility we see every now and then).
But we believe that buying into any rally as of now can be dangerous. This is given that the global economy is still hanging on the fine thread of stimulus. Stocks remain reasonably valued, and corporate earnings are not showing signs of sustaining.
So a better way now for you would be to get cautious with your investing. Be patient and wait for the right valuations. After all, you would not like to be a frog in water that is slowly heating up, but can burn you later.
ULIPs have now attained a new investor friendly avatar! They seek to offer limited options to investors and charge lower fees. Also instead of mimicking mutual fund schemes, ULIPs will now have a larger insurance component. We wonder if such an attempt would bring back investor faith to the product. Mired in allegations of mis-selling, ULIPs may have to go a long way before they really become 'investor-friendly'.
Rogers laments, "In America, Bernanke just says we'll print more money, we'll spend more money, even though the US is now the largest debtor nation in the history of the world." Central banks are destroying the saving and investing class, he states. We are going to have a lot more currency turmoil over the next 2 or 3 years because of the huge imbalances that exist in the world. The world economy is still in trouble. Owning real assets, opposed to paper assets, will be a good way to insulate oneself from these imbalances.
Hence it came as a shock to us when SEC dropped all charges against the rating agency on grounds of 'uncertainty in jurisdictional nexus'. This means that SEC (based in the US) wasn't sure if they were judicially responsible for punishing Moody's for giving wrongful ratings in Europe! It's funny that SEC realised this three months after it filed the charges for the same. Interesting to see how muscle and wealth power can help one get out of the soup so easily.
However, the real worry is whether India's GDP growth numbers are actually correct in the first place? The 8.8% YoY growth is as per 'supply-side' estimates arrived from sectors like agriculture, industry and services. However, 'demand side' estimates arrived from private and government consumption, investment and net exports peg the GDP growth number at only 3.7% YoY. This huge gap between the different growth estimates is confusing. Some experts believe that the lack of demand is the real culprit behind the high inflation. Some point out that the method of calculation itself might be flawed.
So, what's the response of the ministry of statistics? "We have checked the data. There is some seasonal impact as well as some differences in import and export figures which can't be simply calculated on the basis of inflation." Caught in all these technicalities, all the common man can hope is to participate in all this growth and pray for food prices to come down.
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