Good news and bad news - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Good news and bad news A  A  A

PRINTER FRIENDLY | ARCHIVES
13 DECEMBER 2008

There is a little bit of good news and a whole lot of bad news for Indian stockmarkets; which would you like first?

Reminds me of the same question a doctor once asked a critically ill patient. When the patient asked for the good news first, the doctor said that he had 24 hours to live! Heck, if THATs the good news, what could possibly be bad

There is a little bit of good news and a whole lot of bad news for Indian stockmarkets; which would you like first?

Reminds me of the same question a doctor once asked a critically ill patient. When the patient asked for the good news first, the doctor said that he had 24 hours to live! Heck, if THATs the good news, what could possibly be bad news? The doctor said he tried to get through to the patient the previous day but was not able to!

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The little bit of good news is that, at least for now, the political class seems to have realised the huge anger against it by the people and have, at least temporarily, stopped living in their fantasy world. They were paragons of virtue in Parliament, agreeing not to carp at each other’s folly for purely political scoring points.

Bravo! One wishes you were mature enough to realise this before several tragedies and terror attacks made you do so. Good news is that the new Home Minister, P Chidambaram, took a regular commercial flight instead of a special, commandeered, flight, on his travel.

Bravo! One wishes they cease to behave like erstwhile maharajas, masters of all they surveyed whose right there were none to dispute! One wishes they see the farce of lining the streets with cops whenever they visit cities, an unnecessary expense at a time when frugality is the crying need of the hour. Traffic cops lining streets to clear the way for a visiting President or PM does nothing for his/her security and lots for the ego. Mr Chidambaram made an eloquent appeal to respect our policemen and security forces; let the President and Prime Minister set the example by doing away with the profligate pomp and panoply of a past era.

Election results in 5 states revealed a pro-incumbency trend; only in Rajasthan did the Congress wrest control from BJP. Interestingly, the electorate returned Governments with a majority (slightly under in Rajasthan).

Bravo! One hopes the electorate is sending a signal to politicians that it is fed up of accommodative politics in which meaningful action is not taken. The results also suggest that the electorate is voting in Governments which have performed on the economic front and dismissing those that have so failed. Bravo! If, indeed, this is the message, the General elections would focus on economic performance instead of spreading divisive hatreds.

LIC has announced its willingness to invest some Rs 12,000 crores in equity upto March, which should absorb some of the selling pressure.

IL&FS Investment managers has managed to raise a second $ 895 m. real estate fund. If it buys prudently over the next year, distressed real estate stock, the fund should give a good performance.

The Government revealed a Rs 30,000 crore fiscal stimulus package, including an increase in planned expenditure and benefits to exporters and small home borrowers. This, combined with the fact that global markets had rallied earlier, led the BSE-Sensex to bounce 162 points on Monday and 492 points on Wednesday (Tuesday was a holiday). It ended the week at 9690, up 724. The NSE-Nifty was up 206 at 2921.

Now for the bad news.

The global economic slowdown is far from over. It has started showing in India as well, where the index of industrial production in Oct fell 0.4%, the first fall in 15 years! Global economies are in recession and people are comparing it to the great depression of 1929. It is sobering to realise that US GDP fell 29% during that depression, wages fell 40% and unemployment hit 25%. GDP has so far not fallen, wages are so far up 3.7%, upto Aug 08 and unemployment in the US is at 6.1%. House prices, though down, have still some way to fall.

Despite a significant fall in petrol prices (crude oil is down from $ 147/b to under 45 now), US car sales are down some 30% and the 3 nameplate automakers, GM, Ford, and Chrysler, have had to ask for a bailout, which the US Congress refused. India, too, is witnessing a significant drop in sale of autos and in two wheelers, which would continue. State Governments, such as Maharashtra, which levy a stiff one time registration fee on purchase of a vehicle, must also look at a fiscal stimulus by reducing it.

Now comes some more news of scandalous, unbridled, greed. Former Chairman of Nasdaq, Barnard Midoff, has been charged with fraud, apparently having lost $50b. in a hedge fund managed by him, which operated like a ponzi scheme. Now note this - assets under management were $ 17 b. How on earth can one individual lose so much money, three times the money entrusted to him?

Thus, although valuations look attractive now, investors would have plenty of time to buy as the economic effects of the global meltdown ripple across the globe. Fundamentals may also look attractive, such as oil at under $45, and falling (some opine it could fall to $ 30), inflation in India at 8% and falling and declining interest rates. However, even with lower interest rates there is lower demand for consumption and even less for investment.

In good times several companies had tapped international markets through instruments like FCCBs or low interest bearing debt instruments convertible into equity. The conversion prices being far above current market price, this would entail a repayment liability on companies such as Pyramid Saimira Theater, which has, consequently, reduced the conversion price from Rs 454 to 246. There is still a problem, as the price is Rs 45.

Ironically, whilst a downward revision in FCCB conversion price issued to foreign investors is considered a practical necessity, one wonders why it is not a considered option for domestic issues. Tata Sons is likely to convert their warrants in Tata Power, as the price is 46% below the conversion price; earlier the Birla group had forgone conversion in Hindalco. Maybe there would be a public outcry if this is done by domestic promoters, since we are more suspicious of the motives of our own promoters than of foreign institutional investors.

It would be nice if the new Finance Minister, Manmohan Singh, can tell the tax department to stop eyeing with suspicion, its tax payers, something that would be done more frequently as tax revenue dries up. The tax department has threatened to scrutinise any advance tax payment which is 10% below the previous one. This is nonsense!

He would also right a big wrong by removing the fictitious distinction between an ‘investor’ and a ‘speculator’, with the latter asked to pay higher tax. The distinction is completely arbitrary, vesting solely with the assessing authority, and thus a breeding ground for corruption. It is corruption that is at the root of all our problems, including the ones resulting in the terrorist attacks. Mr Singh, increase the tax, if you wish, on capital gains, but do away with arbitrary distinctions that only breed corruption; you, as an honest man, must realise this.

The Government has withdrawn its affidavit in the RIL-RNRL gas dispute and the case has now been postponed to January. When the augean stables are being cleaned, speed of judicial decisions should be top of the list. We just cannot, as a nation, afford to let a precious natural resource lie unexploited, at a time when there is such a major economic slowdown, simply because of slowness in the process.

The Government must also understand the consequences of its own actions. After the telecom ministry stopped payment of ADC (Access Deficiency Charges) to players like BSNL, for providing telephony to unviable rural areas, the Department of Telecom has the absurd gall to question BSNL for its fall in revenue! The tender issued earlier for massive expansion of capacity by BSNL was also stalled, on the complaint of a non selected bidder (BSNL, being a Government company, has to go through a slower tender process whilst its private sector rivals can expand faster).

One hopes that politicians and bureaucrats take good governance seriously and take economic management, not political brownie points, as their raison de etre.

Should the rally continue, as it may, for another few hundred points, investors should consider getting lighter and bunkering down for what is going to be a very tough 2009. news? The doctor said he tried to get through to the patient the previous day but was not able to!

--------------------------------- Investor Survey ---------------------------------

The Equitymaster Investor Survey (December 2008)

Make your collective opinion count. Take the Survey Now!

It's designed to take no more than 2 minutes of your precious time! Click here.
----------------------------------------------------------------------------

The little bit of good news is that, at least for now, the political class seems to have realised the huge anger against it by the people and have, at least temporarily, stopped living in their fantasy world. They were paragons of virtue in Parliament, agreeing not to carp at each other’s folly for purely political scoring points.

Bravo! One wishes you were mature enough to realise this before several tragedies and terror attacks made you do so. Good news is that the new Home Minister, P Chidambaram, took a regular commercial flight instead of a special, commandeered, flight, on his travel.

Bravo! One wishes they cease to behave like erstwhile maharajas, masters of all they surveyed whose right there were none to dispute! One wishes they see the farce of lining the streets with cops whenever they visit cities, an unnecessary expense at a time when frugality is the crying need of the hour. Traffic cops lining streets to clear the way for a visiting President or PM does nothing for his/her security and lots for the ego. Mr Chidambaram made an eloquent appeal to respect our policemen and security forces; let the President and Prime Minister set the example by doing away with the profligate pomp and panoply of a past era.

Election results in 5 states revealed a pro-incumbency trend; only in Rajasthan did the Congress wrest control from BJP. Interestingly, the electorate returned Governments with a majority (slightly under in Rajasthan).

Bravo! One hopes the electorate is sending a signal to politicians that it is fed up of accommodative politics in which meaningful action is not taken. The results also suggest that the electorate is voting in Governments which have performed on the economic front and dismissing those that have so failed. Bravo! If, indeed, this is the message, the General elections would focus on economic performance instead of spreading divisive hatreds.

LIC has announced its willingness to invest some Rs 12,000 crores in equity upto March, which should absorb some of the selling pressure.

IL&FS Investment managers has managed to raise a second $ 895 m. real estate fund. If it buys prudently over the next year, distressed real estate stock, the fund should give a good performance.

The Government revealed a Rs 30,000 crore fiscal stimulus package, including an increase in planned expenditure and benefits to exporters and small home borrowers. This, combined with the fact that global markets had rallied earlier, led the sensex to bounce 162 points on Monday and 492 points on Wednesday (Tuesday was a holiday). It ended the week at 9690, up 724. The Nifty was up 206 at 2921.

Now for the bad news.

The global economic slowdown is far from over. It has started showing in India as well, where the index of industrial production in Oct fell 0.4%, the first fall in 15 years! Global economies are in recession and people are comparing it to the great depression of 1929. It is sobering to realise that US GDP fell 29% during that depression, wages fell 40% and unemployment hit 25%. GDP has so far not fallen, wages are so far up 3.7%, upto Aug 08 and unemployment in the US is at 6.1%. House prices, though down, have still some way to fall.

Despite a significant fall in petrol prices (crude oil is down from $ 147/b to under 45 now), US car sales are down some 30% and the 3 nameplate automakers, GM, Ford, and Chrysler, have had to ask for a bailout, which the US Congress refused. India, too, is witnessing a significant drop in sale of autos and in two wheelers, which would continue. State Governments, such as Maharashtra, which levy a stiff one time registration fee on purchase of a vehicle, must also look at a fiscal stimulus by reducing it.

Now comes some more news of scandalous, unbridled, greed. Former Chairman of Nasdaq, Barnard Midoff, has been charged with fraud, apparently having lost $50b. in a hedge fund managed by him, which operated like a ponzi scheme. Now note this – assets under management were $ 17 b. How on earth can one individual lose so much money, three times the money entrusted to him?

Thus, although valuations look attractive now, investors would have plenty of time to buy as the economic effects of the global meltdown ripple across the globe. Fundamentals may also look attractive, such as oil at under $45, and falling (some opine it could fall to $ 30), inflation in India at 8% and falling and declining interest rates. However, even with lower interest rates there is lower demand for consumption and even less for investment.

In good times several companies had tapped international markets through instruments like FCCBs or low interest bearing debt instruments convertible into equity. The conversion prices being far above current market price, this would entail a repayment liability on companies such as Pyramid Saimira Theater, which has, consequently, reduced the conversion price from Rs 454 to 246. There is still a problem, as the price is Rs 45.

Ironically, whilst a downward revision in FCCB conversion price issued to foreign investors is considered a practical necessity, one wonders why it is not a considered option for domestic issues. Tata Sons is likely to convert their warrants in Tata Power, as the price is 46% below the conversion price; earlier the Birla group had forgone conversion in Hindalco. Maybe there would be a public outcry if this is done by domestic promoters, since we are more suspicious of the motives of our own promoters than of foreign institutional investors.

It would be nice if the new Finance Minister, Manmohan Singh, can tell the tax department to stop eyeing with suspicion, its tax payers, something that would be done more frequently as tax revenue dries up. The tax department has threatened to scrutinise any advance tax payment which is 10% below the previous one. This is nonsense!

He would also right a big wrong by removing the fictitious distinction between an ‘investor’ and a ‘speculator’, with the latter asked to pay higher tax. The distinction is completely arbitrary, vesting solely with the assessing authority, and thus a breeding ground for corruption. It is corruption that is at the root of all our problems, including the ones resulting in the terrorist attacks. Mr Singh, increase the tax, if you wish, on capital gains, but do away with arbitrary distinctions that only breed corruption; you, as an honest man, must realise this.

The Government has withdrawn its affidavit in the RIL-RNRL gas dispute and the case has now been postponed to January. When the augean stables are being cleaned, speed of judicial decisions should be top of the list. We just cannot, as a nation, afford to let a precious natural resource lie unexploited, at a time when there is such a major economic slowdown, simply because of slowness in the process.

The Government must also understand the consequences of its own actions. After the telecom ministry stopped payment of ADC (Access Deficiency Charges) to players like BSNL, for providing telephony to unviable rural areas, the Department of Telecom has the absurd gall to question BSNL for its fall in revenue! The tender issued earlier for massive expansion of capacity by BSNL was also stalled, on the complaint of a non selected bidder (BSNL, being a Government company, has to go through a slower tender process whilst its private sector rivals can expand faster).

One hopes that politicians and bureaucrats take good governance seriously and take economic management, not political brownie points, as their raison de etre.

Should the rally continue, as it may, for another few hundred points, investors should consider getting lighter and bunkering down for what is going to be a very tough 2009.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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