05.25.09
Golden Monday, Rahul Baba ‘Jai Ho’ & the Matty-Gilly-Jumbo tango…
Enjoying myself at the sight of discomfort of others. Not a nice thing to do I know. But it’s been fun nevertheless watching bears squirm on TV after the events of last week. Election results truly were a Black Swan event for all those who were caught short as the markets froze after hitting 2 circuits - ending up more than 17% on Monday with the ‘mighty’ sum of 300cr traded in about 45 seconds before exchanges had enough!
For a change Indian voters have given a strong mandate(relative to electoral results of the past 2 decades) and there are significant opportunities for UPA government to redress all the wrongs of the past 5 years of inaction. With a more confident Rahul Gandhi now steering the Congress party the space occupied by regional parties might well compress in the future - particularly in the Hindi heartland which have been held hostage by divisive politics of religion and caste for the past 2 decades. Hopefully BJP too will finally and firmly reinvent itself into the Vajpayee era pro-development party while keeping it’s strong Hindu identity intact. There is enough political space for a right of centre national party with Hindu leanings that keeps in check a left of centre Congress party. Especially since the Congress has in the past shown its tendency to appease minorities for the sake of holding on to power. But there is no place for the politics of hatred and Taliban like narrow mindedness that zealous pro-BJP fringe outfits have demonstrated in places like Orissa, UP and now Karnataka.
In sports the IPL II season wound down finally last week and 3 ageless warriors held center stage for the umpteenth time. Hayden showed that he still thrives in big world stage competitions by scoring the most runs this season. Adam Gilchrist showed Delhi(which I thought was the best team) in the semifinals that he’s still the most destructive batsman in the world on big match days. And our own Anil Kumble demonstrated throughout the season and in the final what a inspiring captain can do to revive a team’s fortunes . Maybe in hindsight India could well have done even better if Anil and not Sourav Gangully had taken over after the Sachin Tendulkar & post match-fixing fiasco era of captaincy.
09.20.06
The follies of Economic Forcasting
I’ve been came across this nice article America’s ‘Hollywood economy‘ written by Paul B Farrell in Marketwatch about the inaccuracies of economic forecasting.[Link thru The Big Picture] He writes about how investors have a natural tendency to be bulls or bears and so perceive incoming information with that bias. Paul says that “all investors are trapped in their cocoon of illusions, where economic predictions and market forecasts have far more power than any created by Hollywood’s best illusionists … and they’re far more elusive until it’s too late“. He goes on to state that William Sherden’s findings summarized in “The Fortune Sellers: The Big Business of Buying and Selling Predictions are still relevant today. I’m quite surprised at how familiar some of those 10 main points Sherden arrives at are. In very simple layman words:
- Economic forecasts are not much better than guesswork
- Economists are rarely right about transition points in economic cycles
- Long term forecasts are particularly inaccurate
- Forecasters, ideologies used for forecasts are inconsistent across all aspects of economic forecasts
- Consensus forecasts do not improve accuracy
- Forecasters are affected too by their bullish/bearish bias
- More data/sophistication does not improve forecasts since the world economy is rapidly evolving
- Forecasting has actually deteriorated in recent decades
Paul concludes that it’s useless trying to time the markets based on macroeconomic forecasts and that one should just focus on attaining a well diversified portfolio that’ll work in any given scenario. Well I’ve given up getting all worked up about global macroeconomic cycles some time back. Finally figured out that most of the people who achieved above market returns in the long run focussed their attention primarily on company specific trends. A nice quote by Peter Drucker which is cited in the article sums up the futility of the current debate on the state of the US economy best.
“Anybody who tells you that he understands the American economy ought to be sent to teach modern dance.” – Peter Drucker
08.21.06
The problems with scale…
I have experienced a fair bit of management high handedness in my limited experiences of working for others. In my case most of these acts of callousness and cruelty were actually committed by normal people not evil monsters or egomaniacs. On reflection I guess apart from work related anxieties, the main cause was an acceptance by people in positions of authority that such acts were a part of corporate life. Also sometimes these incidents had their roots in an unwillingness to go beyond strictly defined corporate guidelines. Subjectivity of any sort is generally discouraged and preset rules and regulations were held sacrosanct.
An incident that typifies such behaviour seems to have happened to a cousin of mine yesterday. A brilliant student through school and in graduation, her academic record had one striking blot. In class XII she had barely managed passing grades while in the rest of her academic years stood firm among top 3-4 students. One would imagine any half decent HR person to instinctively inquire what lay behind that glaring inconsistency. But in her case that bit of basic courtesy wasn’t to be and she was deemed not fit after having passed the rigorous qualifying tests held earlier.
What makes it more poignant is that my cousin had a very valid answer to that absent question. Her father, a policemen bravely serving our nation, was killed by millitants days before the exams. It’s a wonder she actually passed in the first place. The biggest surprise for me is that such an oversight ocurred in an organisation oft touted in our media as one of best employers in our country. ‘Think scale’ that’s the blurb in one of Infosys’s recent annual reports that talks with pride about them finally arriving on the global scene. Sadly while reaching there it seems to have lost or scaled back on some of the core values that their founders like talking about so much to the media.
08.13.06
A little less cloudy…
“I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going” – Peter Lynch
Wish I was as astute as Peter Lynch to stay focussed on the companies in my portfolio. All I’ve been doing the last few weeks is trying to gauge the rapidly deterioting macro-economic conditions and their possible impact on our stock markets. At least Big Ben paused giving our markets a respite for a few weeks. It’s confusing following economic forecasts since invariably all the possible scenarios seem to be so well argued. The pessimistic view has a lot going for it at this stage I guess. Business cycles rarely last more than 4 years and we have had such strong world economic growth since 2003. Also with the US so dependent on a few sectors for their growth, that at transition times like now it gets a bit scary to think of the consequencies of their economy toppling over one day.
But on the other hand a lot has changed in the composition of the world economy even though US is still the dominant force driving it. The emergence of China and the rest of the emerging countries has made inflation less of a worry for developed nations. And so far the productivity gains from outsourcing and the bombardment of cheap exports from China seems to have offset the effect of rising commodity prices and a weak geopolitical climate to a large extent. Maybe then there exists a case for a soft landing with growth moderating rather than dramatically slowing down in the next 2 years.
FII’s meanwhile seem to have it all figured out in their reports with their pretty graphs and all kinds of zany statistics supporting their viewpoint. I do get all mesmerized with their rationale for a while but then their advocated strategies have not worked so well in our stock markets in the recent past. The data they use for their impressive graphs is probably not as reliable as in the West, with too many parts of our economy not captured in the official statistics. So to devise top down strategies based on macro-economic data is bound to falter more times than not. Far easier to concentrate one’s energy on individual companies that one has followed for years. And this quarter it has been a splendid show by almost every company in my portfolio. No margin pressures, lots of solid sales growth and strong guidance for the year ahead. Guess it’s time for me to go back to following Mr Peter Lynch’s advice…
08.10.06
Big Bull RKJ survives for now…
Last week SEBI quietly let Rakesh Kumar Jhunjhunwalla(RKJ), the big bull of the current Indian stock market bull run, off the hook in an old stock price manipulation scandal dated July 2002. He had apparently recommended certain stocks giving specific price targets in the media back then. Being the slick operator he is, those stocks miraculously gained amazing volumes and achieved those targets in mere months. SEBI later found out in their investigations that RKJ had already created large long positions in those stocks by using illegally sourced money from many leading NBFC’s(IL&FS, Cholamandalam Investment & Finance Ltd, Citicorp Finance (India), Birla Global Finance Ltd and Kotak Mahindra Finance Ltd). Those positions were held with numerous brokers who then indulged in circular trading to ramp up the prices to the mentioned targets. RKJ coolly bailed out of the stocks once all this was achieved, being reckless enough as to sell huge quantities on single days(full text of SEBI report).
Somehow SEBI which conducted due diligence of the trading books of the concerned entities only found guilt in the sourcing of funds ! RKJ, who is also often rumoured to be fooling around in the markets with Reliance group’s spare change, apparantly doesn’t even get a reprimind. In stark contrast SEBI has been quite active in the last 18 months, suspending various analysts from giving recommendations in the media for having indulged in cross trades(selling stocks after recommending them on air).
Not sure if it’s just SEBI being wary of making a move against a well connected RKJ or a case of not keeping extensive records back in 2002. But circumstantial evidence would suggest that RKJ continues to use the similar tactics even today. His owned(operated?) stocks like BEML, Praj Industries, Sintex, Nagarjuna Constructions, Titan and many smaller obscure co’s like Panama PetroCem all show very strange price movements from time to time before important company specific events like quarterly results or bagging of big orders. Also nowadays the major game seems to be to ramp up prices in 3-4 weeks and then get the company to issue a preferential offer to FII’s or other institutions. The company gets funds for capital expenditure while the operator gets a commission for ramping up the prices. This was a common refrain in NCC, Panama PetroChem, Sintex and Praj in the last 2 years.
Bottomline: Now RKJ has big holdings in at least 3 stocks in my portfolio so I should be very careful. The US is possibly at the end of the present economic expansion cycle and our liquidity fed bull run might fizzle out soon. Also in our markets scandals have a way of abruptly breaking out at such times. Time to be on guard.
