Thursday, August 16, 2007

What to do in this painful market ?

I am writing this note amidst the turmoil in the US Market and its consequent effect on Global Markets. Amazing is the global integration which is existing in the current operation of financial market. Few of the veterans had experienced it during Asian Crisis where Long Term Capital Management got busted but the impact was seen less in the Indian Market because of the fact that India was still going through some transformational changes in terms of investment cycles.

Everything started with Sub Prime Mortgages. You would think why there are repercussions of the same in financial market. Financial instruments created in last one decade allow you to leverage a financial institution to a large extent. It’s like me lending you money backed by Assets. I, in turn, go with an instrument called mortgaged security to the market and ask for money so that I can run my business by lending more. This was leveraged to such an extend that the ripple effect of the same is found in Timbaktu too.

Where do we go from here?

Last week, there was fear that large financial institutions would be impacted to a large extent. But it was not believable. There was good analysis provided by a writer in Yahoo Finance who mentioned that the mortgage market is miniscule to impact the financial market. And I guess he was right to a large extent. There are mortgages of the nature of Jumbo, Sub Prime etc. The impact was from the Sub Prime Mortgages where housing loans were provided to a category of Ninja Borrowers. NINJA here means NO INCOME, NO JOB and NO ASSET. If you try to logical think over it, it would be really a small market out of the large pool of asset based mortgages.

Well, I would think that this should settle down soon, now that the biggest Mortgage Lender – Countrywide Financials looks as troubled and there would be someone to bail them out or it would get busted.

Where do we go from here as far as Emerging Markets, especially India, are concerned?

There would a bounce back early next week but there would be one more pain day in the market globally. The Indian Market should settle somewhere between 13500 – 14000. I am not God to accurately predict that but this is my gut feeling based on the emotional play in the market. Moreover, India is fundamentally going through an investment phase where the money has been borrowed a@ LIBOR + 1 % in case of most of the big corporate. So, there is no dearth of money for the Corporate. Fundamentally, the profit growth can be somewhere between 15 % -18 % for the next 5 years and if it holds true, it can really a good steady market growth for the next 5 years where market can go to 25000 too.

So, hold on to your investments and let this emotional play settle down and enjoy the Bull Run in the market.

Wednesday, June 6, 2007

Instl biz attracts global brokerages, local firms on toes

Look out for Indiainfoline, Prime Securities and Emkay.
There is a war brewing on the Dalal Street. The entry of foreign firms in the institutional broking business may put domestic brokers on the backfoot, reports CNBC-TV 18.

It is a business that is too important to ignore or resist any longer. Rs 200 crore every day is the giant institutional broking market for you and what with unprecedented foreign and domestic mutual funds flow.

The lure of this lucre is undeniable. And that is why after exiting his institutional broking joint venture with Morgan Stanley, Nimesh Kampani told CNBC TV18 he was willing to rent an institutional broker until he rebuilt his business.

Nimesh Kampani, Chairman, JM Financial, said "If you can not build it you can always rent it. If I have a corporate client, I can say I do not wanna lose you. I want to work with you and will rent someone in the time being. I could rent Morgan Stanley, CLSA, UBS, Credit Suisse; I could say this deal work with me."

Not just rent, a few months later Kampani was also looking to acquire. Rumour mills pointed at a deal with institutional broking house - SSKI. Nothing has happened yet but SSKI is surely up for sale. And, it should attract bees like honey. After all leading global players like Goldman Sachs, Credit Suisse , Lehman Brothers and BNP Paribas are taking quick steps to launch their institutional business in India.

Frederic Amoudru, Chief Executive and Country Manager, BNP Paribas, says "Clearly, we want to have a strong focus on institutional business. In East Asia we have good franchise and we are big. We want to replicate that in India using our strong connection and deep penetration with FII clients across the region."

As more foreign institutions leverage that 'connection' they could to eat into the business of many domestic brokers who focus on trading shares for the institutional clients.

A precursor to consolidation some would say, but yet others believe that with the pie getting bigger everyone can join the party.

V Gopinath, MD, SBICAP Securities, says "It is a function of the Sensex. But I would say a 30%-35% growth can be taken for granted."

But there is no denying that smaller Indian brokerages could lose foreign clients to the new foreign brokers in town. All this competition is also telling on margins. That is why many domestic brokers are fast adding more products and services like realty advisory and cross border transacting to their portfolio. After all how long can you depend on the Dalal Street.

Sunday, May 13, 2007

Timing the Market

People often glibly issue warnings against "timing the market" without thinking about the underlying assumptions. What is "timing the market"? It is usually taken to mean buying (selling) when you think a share is due for immediate appreciation/depreciation. However, we all buy (sell) only when we expect gains inside a time frame we consider acceptable. And time frames can be very flexible.

To a day-trader, "immediate" is the next 15 minutes. For a position-trader, it could mean within the same derivative settlement -that may be several weeks. For a medium-term investor, it is a deal that incurs short-term capital gains – that is, within the same year. For a long-term investor, it may mean a full business cycle– that could be several years.

The flexibility of time frames is partly personal convenience. You find it most convenient to oversee your investments on a weekly or monthly basis. So, you choose a month or week as your time frame.

But there is also a sound mathematical reason why investment time frames are flexible. Share prices are fractal. Like other fractal quantities, they fluctuate indistinguishably across different time frames.

The easiest way to understand this is to examine price trends across different time frames. Say you take printouts of 5-minute bars, daily bars, weekly bars and monthly bars. Now black out the price values and timestamps. It's impossible to say which time-series represents what periodicity. This is typical fractal behaviour. Another example is a map of a physical location such as a coastline. If you don't know the scale, the same map could represent a continental coastline or five metres of beach.

The fractal nature of share prices means that, if you pick the right direction, across your chosen time frame, you make money. It doesn't matter what time frame you choose; you must pick the right direction. That means, you have to "time the market", whatever your chosen time frame.

This is where investment philosophy breaks into several different schools. The "random walkers" say it doesn't matter what shares you pick, across what time frames. If the market is efficient, your return will be random. If you're lucky you will make lots of money and if you're unlucky, you'll lose a lot.

The value investors say that if you buy sound businesses cheap over long time frames, you beat the street. The technical analysts believe that if you study the specifics of price movements, and buy or sell when you can decode the trends, you beat the street.

All three schools boast spectacular successes. All three schools also boast spectacular failures. Any system which offers you personal comfort is more likely to work for you. There is another question where market philosophies differ. Let's say a stock is down across a given time frame but the underlying business isn't bankrupt. Should you buy or sell?

The random walkers would suggest tossing a coin – previous price should not influence future trends according to them. The value investors say buy. The business is sound; you're getting it cheap. The technical analysts say that you shouldn't buy until a trendreversal. In fact, you should sell to make profits on the downturn.

Both the value investment school and technical analysts have some logic on their side; both methods can work or fail. If the value-investor has misjudged the fundamentals, he loses. The technical analyst will, at the least, forego profits and he may lose heavily if he shorts at the wrong moment.

After all that philosophising, consider a specific case – the universe of Indian stocks, minus the 300 largest. Over the past year, this "sub-300" set has underperformed bigger stocks. Over the past three years, it has outperformed. And, this universe contains many sound businesses.

Pick the right ones and you're buying them cheap. Of course, they may lose some more ground so long as the current trend continues. But if you pick the right ones and then mix in a rough 2:1 ratio with bigger stocks, you're creating a low-risk portfolio with a decent upside. But it may take another three years or longer to generate good returns.

Can you do this and thus, time the market over a period of about three years? DSPML is betting that it can, by launching a new Micro Cap closed end fund which will aim to do precisely this. The Micro Cap Fund will turn open-ended three years later so that is the effective minimum time frame. I like the concept because just one ten-bagger will balance off several mediocre picks. And the sub-300 universe is a good place to look for ten-baggers.

DSPML Micro Cap Details:
Type of scheme: Close-ended equity scheme
NFO closes: May 25, 2007
Minimum investment: Rs 10,000
Cost per unit: Rs 10
Entry load: Nil during NFO
Exit load : 0%-4% (if held for more than 36 months or sold within 12 months of allotment)
Mandate: Stocks that are not part of the top 300 by market capitalisation will constitute 65%-100% of portfolio. Stocks in the top 300 will be allocated 0%-35% of portfolio.

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