The Cuckoo Clock - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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20 SEPTEMBER 2008

For us to better understand why the Indian stock markets are in a free fall, a quick history of clock making.

The cuckoo clock strikes with repeated precision at a pre-set time, usually every hour. A great feat of mechanical accuracy. According to Wikipedia, the first cuckoo clock was invented in 1629. In present days, notes Wikipedia, the cuckoo clock may be powered by a quartz battery with recorded sounds of a cuckoo's cry and the sound of water in the background.

Wikipedia should note the emergence of a human equivalent of a cuckoo clock: the string of traders and short-term investors laced between New York, Tokyo, Hong Kong, and London. With other wannabe cities like Sydney, Singapore, Shanghai, Mumbai, Dubai, and Frankfurt chiming in for good measure.

This human cuckoo clock was invented sometime in 2003, around the time when global "investors" (and I use the word "investors" with a lot of reluctance) discovered the magic elixir of hedge funds as a way to be rewarded for not taking on any risk. The ultimate magic potion: take no risk and make money. (Needless to say, the magical potions are all ending up as poison in everyone's water - but that is another story.)

Cuckoo chants
The human cuckoo clock begins with the first chime in New York - the closing bell which is struck at 4 pm New York time to mark the end of trading in the US stock markets. On Wednesday, September 17th the cuckoo in New York rang alarm bells: the Dow Jones Industrial Average of 30 stocks was down -449 points. That was at 1.30 am India time, Thursday, September 18th.

Sydney opened on Thursday, September 18th at 10 am (5.30 am India time) and immediately lost -4%.
When Tokyo opened at 9 am (6.30 am India time), it slid -3%.
When Hong Kong opened at 10 am (7.30 am India time), the markets fell -4%.

Guess what India did when the markets opened at 10 am local time? Yep, we also followed the global cuckoo chain and fell -4%.

But, before the cuckoo clock could hum along its negative tones to Europe, the central banks of the world stepped in. At 8 am London time (at the start of the European trading day), the leading central banks announced a USD 247 billion concerted effort to "spray" the world with dollars. This had the immediate effect of the cuckoo singing a different tune.

Table 1: Helping wind-up the cuckoo clocks: money injected by global central banks
European Central Bank USD 110 billion
Bank of Japan USD 60 billion
Bank of England USD 40 billion
Swiss National Bank USD 27 billion
Bank of Canada USD 10 billion
Total banking power USD 247 billion

Another day, another cuckoo tune
Because of this dollar spray, the London markets opened higher and the Asian cuckoos that were still open for business, changed their tune - and direction. Stocks in Tokyo, Hong Kong, and Mumbai recovered sharply from their lows and some even closed with a marginal gain.

As the sun sets in India, the Dow opens. And as I write this at 9 pm India time, the Dow was up sharply - based on the news of the money injection by the central banks - and then began to slip. So the European stock markets are not trading with any conviction in either direction. They see the nervousness in the Dow cuckoo and they don't quite know which way to close. Their end of trading day is near and they need to make a decision on what tune their cuckoo should sing. They decide to end the day down -0.5%. If the Dow goes up while Europe is asleep, they will make up for their stupidity the next day!

And so life will go on and the cuckoo clocks around the world will keep their humming and singing with their eye-on-each-other approach.

Like children in a school choir who don't quite know the words to a song and look at each other trying to figure out what words to sing next.
Chances are they will get it wrong.

And they will be admonished by their teacher for not knowing their words.

How this cuckoo came to our nest.
All of this would be quite cute and nice - except that the constant buzz of the hedge fund managers (with their short term pools of capital) trying to mimic the cuckoo tunes has quite an impact on our finances and our wealth. And on our mental health!

The Indian media - like the global cuckoo clock - is awash with news on the collapse of Bear Stearns, Lehman Brothers, and AIG.

Like the cuckoo clock, they remind us of the "big" news and warn us of impending danger and doom.

But of what economic relevance are these companies to India?
If one is measuring the relevance to "India" as in the 1 billion people and the economic activity of these 1 billion people, the answer is close to zero.
Not zero. But close to zero.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.


Other Views on News:

» TGIF: Thank God It's a (Mutual) Fund!
Every time there is disturbing information emanating from a company, investors worry how the stock markets will react. Read on...

» Deep value what?
A strategy report on Lehman Brothers' website (which still exists!) talks about the benefits of investing in value stocks... Read on...


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