Industrial Disease

The Indian manufacturing sector output growth has slowed down for the second successive month in June to its weakest level since Sep ’10. Markit compiles this index in association with HSBC.

The commentary accompanying the press release says:

 

 The momentum in the manufacturing sector slowed in June as sequential growth in output and new orders decelerated further. Even with growth easing, tight capacity is still showing up in rising backlogs of work and a lengthening in supplier delivery times. On the inflation front, input costs accelerated, while output prices rose less fast. These numbers confirm that tight capacity and monetary tightening is constraining growth. However, inflation pressures are still firmly in place, calling for further policy rate hikes to anchor inflation expectations.

In other words: brace up for more rate hikes in the near future?

Tsunami of Cash

Source: https://pepperstone.com

Kochi

Was here … on official duty!!

Promoters Pledging Shares

When you shop around for paper, add this to your due diligence list, if not done already. Actually this now seems to be the latest reason to dump stocks – bearish as we all are at the moment. Since early 2009, the smart investor set has been wary about of putting their money in stocks which have a high proportion of pledged promoter shares. It was in early 2009 that the market regulator, SEBI, made it mandatory for promoters of listed companies to declare in case they pledge their company’s shares with their lenders. We should thank Satyam’s Raju for ushering in this rule, but how many of you check this aspect before investing? This is certainly a risk, especially in today’s environment of escalating interest rates. The lender might invoke a margin call and affect a massive sell-off of the pledged shares of the borrower thus effectively crashing the price and trapping unsuspecting lemmings like us.

Geetanjali Trading and Investments Pvt. Ltd. (a promoter group company of Asian Paints) pledged c10.85% of total outstanding shares of the company ostensibly for the purpose of using the line of credit to buy back its own shares from the open market (which they indeed went ahead and did)! The move was obviously meant for the gallery – that we have immense faith in our company but this trade looks real risky to me. There are other examples, like GTL Limited, GTL Infrastructure, Orchid Chemicals, S Kumars, etc. I am pointing to falls in the range of 15% – 25% in a single session!! In Dec, 2010, investors fell freely when large brokers/financiers raised margin calls on shares like Ruchi Soya, KS Oil, Karuturi Global and Ackruti City. There are two avenues of risk down this road: one is if the promoter is unable to repay the loans (discussed above) or if stock market crashes (on unrelated news) result in the financiers making margin calls on the promoters, which if unmet, result in dumping of the shares in the open market by the lenders which causes the price to pummel further. This is what seems to have happened in the case of Orchid Chemicals recently.

Here are some names of companies whose promoters have pledged a very high percentage (> 70%) of their shareholding and whose shareholding is by itself quite significant (> 30%):

Gujarat Pipavav; Tata Coffee; Pipavav; DB Realty; Advanta…

I guess the following sanity checks should be performed by Indian lemmings before they invest:

– try to find out what proportion of the promoter’s shares are pledged. If a promoter who owns 70% of the outstanding shares pledges 10% of his bag, it’s not too risky as some of the recent instances where some promoter group entities have pledged as much as 70% – 80% of their lot.

– at what price were they pledged? If closer to the recent highs, then you need to be very cautious.

– has the stock price corrected substantially after the promoter took the loan?

– where did this loan money go? (difficult one to answer, I know)

Be careful of this aspect, in case you were not aware. All types of markets work on leverage…and all financial crises are the effects of extreme leverage.

Backtesting and Paper Trading

Two areas that I am interested in back testing with historical data and also do some paper trading for some time are:

– Investing in penny stocks. Not trading.

– Options and futures and related structures

Successful traders have successful strategies that once start as mere ideas in their heads. While most of the novice traders would dump money on an idea/strategy right upfront, an experienced trader always lets the idea mature and slosh around in his head. He supplants the idea with data validations that come in the form of the two activities listed above.

The process would typically go something like:

Back test → Paper trade → Live trade (small size) → Live trade (full size)

If you cannot back test (lack of data, lack of or lack of access to programming skills, etc.) you should at least paper trade and test drive the strategy. Only after proving the existence of an edge or some type of positive expectancy in your strategy, should one consider moving into live trading with small sizes.

I have just about broken even whenever I have tried to “play” with derivatives. I understand the math a bit but have yet to come to terms with the greeks in live practise. I never did any backtesting or simulated trading before and just took positions based on my gut of where the underlying would go. I guess that is what made the difference for in almost all cases, the underlying did move in the direction I had intended, but I still ended up losing money on most of the trades!

Microsoft Acquisitions and Investments

This is too good an infographic to miss uploading here. This is by Robin Richards and the file is really huge but luckily there is a full size version on zoom.it for you to get down to the micro level.

This is how the artist describes his project:

Infographic showing the acquisitions and investments of Microsoft, done as a tube map with each coloured line representing a different industry for each acquisition or investment.  Where the stations meet is where the two industries overlap.  The key at the bottom displays information about the location on the map of the station (company) the year of acquisition or investment

Global Employment Outlook

US Default?

China notes that the United States is “playing with fire” if it agrees to default on its debt. Quite unwittingly and a bit reluctantly this will most definitely force countries like China to try to prop up the USD by purchasing more and more of the defaulted treasuries as they get dumped (mostly by US domestic holders of such treasuries). What a debt trap! China seems to have invested as much as 70% of its $3 trillion foreign currency reserves in US Treasuries! The posture taken by the Chinese is all about their concern that the money that they have invested in US Treasuries is safe, the reality is that the US wouldn’t care as much even if a “technical default” causes a fall in the USD. But countries exporting to USA would get killed – therefore in order to protect their exports, countries such as China, Brazil, even India, might be prompted to buy more to help hold down their currencies from appreciating.

The picture on the right shows the distribution of the lenders to the US Government. The main worry of the US would be that such a technical default would likely cause a ratings downgrade which would in-turn increase funding costs; raise interest rates; depress house prices and slide the economy back into a recession. And of course crash stock markets and shoot up gold. US benchmark 10 year Treasury yields are already hovering near their historic lows of 3%. Now, just what trigger would these notes need to start yielding higher again? A massive sell-off?

Assorted articles on the internet (I’ve pulled most of the ideas for this post from Reuters) seem to be placing the chances of a US default at near zero and many people are obviously dismissing the idea as ludicrous – but stop and think about what would happen if this really plays out like this. We’d know by mid August when some chunk of treasuries are up for redemption and payments. The chart on the top (click to enlarge) shows the US debt levels and the corresponding increasing in its debt ceiling levels. Now, the US Government cannot borrow more than its debt ceiling level and since it breached that level in May 2011, the Senate needs to vote in an increase of the debt ceiling. The reason why people are calling for a “technical default” is that a delay in voting for raising the debt ceiling may give time for economic forces to play themselves out and things to settle and solutions to emerge. Like a cooling off period. Before upping the ceiling. Most certainly it sounds like the political opponents of President Obama trying to generate real bad press and image for him by making the US Government “default technically” and then coming in to the rescue by voting to support the resolution to up the ceiling. That may be why the Treasury Secretary and the Fed people are saying that the results to the world economy will be disastrous if the US defaults.

While the idea of the US defaulting does indeed appear crazy, nitpickers are therefore qualifying a “technical default” as being a different situation as compared to a real “failure to pay” kind of an event. The latter is catastrophic. The former is more like a pause that people do when enjoying a lavish luncheon buffet. They pause for breath, beam at their table-mates and reach out for their wine or water to catch their breath. Continuous eating, while supplying loads of calories, can be quite tiring. It also makes you a glutton. Take a look at this chart that I’ve sourced from Reuters (US online edition). How long can someone keep eating and eating and eating?

iPhone 3G Availability

I have lost count of the number of calls made to Apple stores and random walks at other retail electronics shops made in the past few days! My knowledge of jailbreaks, locked down sims, white vs. black, dual cameras, gsm vs cdma has gone up a notch. Interesting map of the world from Wikipedia that shows the extent of current iPhone 3G availability. Dark blue = the 6 countries which got the original iPhone (also got the iPhone 3Gs in 2008). Light blue = countries where the iPhone 3GS is now available.

Return of the Diaspora

Here’s an infographic that I stumbled upon. The desire to return to India certainly surfaces when you talk to Indians living and working in the US over the past 8 – 10 years. I guess there is a threshold after which NRIs would typically drop the idea of returning and get on with their life here. I guess a very few of the older professionals would develop an ear for drums of a different beat and shift eastwards. These typically might be your very successful Information Technology professionals who have amassed loads of money and want to actualize some higher purpose in life by moving to their country of origin. The rest of the NRI professionals may just continue to work here in the US.

I had earlier written about the book “The Next 100 Years: A Forecast for the 21st Century” by George Friedman, where the author makes the point that countries with ageing working populations will compete against each other for talent. I am not aware about the credibility of www.corp-corp.com (name sure sounds shady) but if the survey is true and is scientific, then this seems to be a correction in the bull run in Indian immigration history. First trained Indian professionals migrated to India in droves – a sizeable and noticeable proportion of them became very successful in the United States – US faced a recession and India “seemed” to be growing rapidly – they returned to India with comfortable savings and no monetary worries – found it difficult to adjust and realised that the Indian growth story played out differently – returned to the US and if they couldn’t (due to retirement or losing out in the rat race) encouraged their offspring and other youngsters to migrate to the US, thus responding to United States’ campaign to attract skilled immigrants.

Wonder what George Friedman will say to this little bit of crystal ball gazing of mine. But then he has hardly mentioned India in his book.