Do it yourself

Wednesday, June 7, 2017

Enraptured by pied pipers

Thought for the day

"The idea of God is the sole wrong for which I cannot forgive mankind."

—Marquis de Sade (French, 1740-1814)

Word for the day

Vim (n)

Lively or energetic spirit; enthusiasm; vitality.

Malice towards none

RaGa reportedly reading Gita and Upnishada so that he could tell BJP & RSS - "You've got it all wrong guys!"

First random thought this morning

I believe every act of a person (including institutions and authorities) should have an objective. Aimless actions take us back in evolution, closer to monkeys.

I am curious to know what could be the objective of searching house and office of a suspected violator of law, after 7-8yrs when the alleged violation was committed. Do they really believe that the evidence will be waiting for them after so long? And if they do believe so, would it be correct to presume that the alleged violator is a conman, especially if he did not bother to destroy the evidence of his alleged wrongdoing in 7 long years despite being warned several times?

Enraptured by pied pipers

As a keen student of financial markets, I have been observing the behavior of the households who buy and sell shares of publically listed companies. I intentionally avoid assigning terms like "investors", "traders", "speculators" and "punters" etc. to these households. These terms, in my view, carry a specific meaning; and most of the households, who buy and sell shares in Indian stock markets, could not be fitted into any one of these categories.

During my research for PhD 15yrs back, I had asked a large number of individuals - "why do you buy and sell shares of publically listed companies?" Based on their responses, I classified them into three categories:

Category I: An overwhelming majority of the respondents were found to be buying or selling shares just for entertainment. They seek some kick, a sense of adventure in this activity. They could hardly make a difference between the activities of buying & selling shares and riding a roller coaster.

People under this category deployed a miniscule part of their networth, usually less than 2%, in this activity. A 2x rise in the value of their stocks will give them some bragging rights, though it would not make much difference to their lifestyle. Similarly, a loss of 50% in the value of their stocks, would hardly make any difference. People under this category are mostly active during the bull phase of the market, and hibernate during the bear phase.

The people in this category make returns similar to bank deposits or less.

Category II: A small proportion of respondents believed that buying equity shares is akin to buying lottery tickets or playing in a casino. They would usually allocate a defined sum out of their savings for this activity, in the hope of hitting a jackpot some day. They would mostly bet on penny stocks that show a tendency to multiply in value in very short span of time; fully understanding that the risk to their capital is 100%.

The people under this category usually end up losing 50-100% of money deployed, which they obviously do not mind.

Category III: A miniscule number of respondents were actually found to be investing in the underlying businesses while buying shares of a listed company. These people have substantial exposure to these investments, related to their networth. These people in past 25yrs have made tons of money from stocks.

In past five years, a new category of individuals is seen evolving.

In past five years, the number of money managers has grown exponentially. Many of these money managers have generated stupendous returns from stock markets. Besides, we have seen popularity of successful investors and traders rising tremendously. The portfolios of these money managers and popular investors/traders are widely available on social media.

Enraptured by these pied pipers of stock markets, many individuals have started investing meaningfully through money managers and by following the Star investors/traders. This is a significant structural change in Indian stock markets....to continue tomorrow.

Tuesday, June 6, 2017

Real Estate - Market feed back

Thought for the day

"Social order at the expense of liberty is hardly a bargain."

—Marquis de Sade (French, 1740-1814)

Word for the day

Notabilia (plural noun)

Matters, events, or items worthy of note.

Malice towards none

Is the undue focus of media & people on star kids Taimur and Aradhya a case of child abuse?

First random thought this morning

Household power back up is a reasonably large industry, mostly in MSME sector. The business of assembly, sales and repair & maintenance of power back up equipment (inverters and UPS) and batteries employs a large number of people, especially in perennially power deficit areas of UP and Bihar.

The 24X7 power supply would essentially mean closure of this entire chain of business. Youth could probably adjust in some other business by re-skilling, but there are many middle aged people in this trade who would nowhere to go!

Real Estate - Market feed back

In past couple of week, I have met many people engaged in the business of real estate - developers, financiers, brokers, construction material suppliers. I also spoke with some prospective buyers.

I find it pertinent to share my assessment of the current state of affairs in this vital sector of the economy. I may however clarify that this assessment may suffer from the inadequacy of the my sample and therefore need necessarily not apply on all India basis.

(a) Most real estate developers were of the opinion that once RERA is notified in all the states, the new launches will dry up for 2-3yrs as the developers get used to the new norms.

Micro developers who can complete project without presales are best placed to benefit from RERA.

Very large developers with land bank may take upto 1-2yrs to develop the ecosystem envisaged under RERA to be able to launch new projects. Medium sized developers without any land bank may take much longer to get back in the business.

There is much concern about the status of incomplete projects. There is a fear that there could be considerable delay in completion of these projects as registration under RERA could take time.

There is an expectation that due to supply disruption, the real estate prices may not fall much from current levels. Moreover, many feel, that the prices may have already bottomed out and due to higher cost and compliance levels, the prices may move higher in next one year.

The private real estate construction activity in UP is standstill due to a variety of reason - shortage of sand, government pressure where approvals are suspicious, RERA, demonetization, high circle rates etc.

Small and midsized property dealers and brokers, who have been facing stiff competition from online property brokers and facilitators, fear for their existence.

(b) Most developers felt that mass rental projects under affordable housing segment, would be a massive growth area in next couple of decades.

(c) Prospective home buyers are ambivalent as yet. However, most agree that they need to buy a house and any indication of price hike will prompt them to expedite their decision.

(d) Both midsized cement companies I met, suggested that prices of cement may not rise in near term. Both suggested that price coordination amongst producers is weakening. Cost pressure are easing, as coke and fuel prices seems to have peaked. GST is seen marginally beneficial due to input credit allowance.

(e) Appliances, fittings and furnishing manufacturers, distributors, retailers and consumers are sanguine about the strong demand in near term. None of them appears sharing pessimism of real estate developers. Up-trading and viability (better power supply, women also working, etc) are the key words here.

Thursday, June 1, 2017

The 4th D: Disintermediation

Thought for the day

"The time you enjoy wasting is not wasted time."

—Bertrand Russel (British, 1872-1970)

Word for the day

Keysmash (n)

A random string of letters and symbols typed out on a keyboard or touch screen, used to signal intense emotion in written communication.

Malice towards none

Please consider selling BSNL also when you sit to take a decision on Air India!

First random thought this morning

Though the benchmark indices are sustaining at their all time high levels, the common question one often hears these days, from the market participants, is "why the market is so bad?"

I can distinctly correlate this feeling to the overall macro picture.

The government is presenting macro data in a manner that generates an instant feeling of "all is well". But when people look at their individual P&L and balance sheets (or salary slips), they are seriously disappointed.

Cycle-rickshaw fare from metro station to my house is same for past 3years.

Wednesday, May 31, 2017

Democracy, Demography and Demand

Thought for the day

"Much that passes as idealism is disguised hatred or disguised love of power."

—Bertrand Russel (British, 1872-1970)

Word for the day

True-Blue (adj)

unwaveringly loyal or faithful; staunch; unchangingly true.

Malice towards none

For a second assume Pakistan executes the death sentence awarded to Kulbhushan Jadhav.

What will be our reaction:

(a) Will we declare war on Pakistan and invade Lahore?

(b) Will we terminate all diplomatic and trade relations with Pakistan, declaring it to be an enemy?

(c) Will we at least execute couple of Pakistani prisoners in our jails, without fait trial?

If the answer to all the above if "No"; then what's the deal with all this TV drama?

First random thought this morning

As per media reports, the government has 'asked' central public sector enterprises (CPSEs) to bear the cost of 543 "Sabka Saath, Sabka Vikas Sammelan" being held to propagate the achievement so the government in first three years of its five year term.

It raises many questions in my mind. For example—

(a) If the government has done good work for people, shouldn't the people (the beneficiaries) know it? Why would they need to attend a government function to know, what the government has done for them?

(b) What about the rights of minority shareholders of listed CPSEs. Why should they bear the costs of government publicity?

Democracy, Demography and Demand

Many people often speaks about 3Ds, viz., Democracy, Demography and Demand, as key strengths of Indian economy. Even our prime minister has highlighted these as key factors in economic development and growth of the country.

From the view point of Indian equity markets also these 3Ds form the basis of a many investment strategies. Global investors also find young demography, large upwardly mobile middle class, political stability with near unanimity on core economic and fiscal policies, attractive for investing risk capital.

In my view, these 3Ds remain the key challenge for faster, higher and sustainable economic growth of India. To capitalize on 3Ds we need to maintain a balance between these; which is a delicate task.

Firstly, the pseudo socialist and quasi feudal nature of our democracy often leads to wasteful expenditure, policies and plans focused on winning a elections rather than achieving sustainable economic growth and development, serious misallocation of capital and sub-optimal of resources.

We have seen politicians creating undue demand for color televisions, smart phones, laptop computers etc. by manipulating the process of democracy.

In rural and semi-urban areas, motor cycle has replaced bicycle as a mandatory dowry item. These days, it is almost impossible to marry your daughter if you cannot afford a motorcycle in dowry. Smart phones also find place in most ‘demand lists’. Many old aged villagers argue that it is a collateral damage of better road and telecommunication connectivity.

It is clear that our society is defying the classic McGregor's evolutionary pyramid and moving directly from sustenance to aspirational consumption. The demand thus created is neither desirable nor sustainable, in my view.

Secondly, the youngest demography in the world is like a vast reservoir of unexploited energy. If not channelized properly, it can destroy the very core of our social fabric. The rising number of poorly educated, inadequately skilled underemployed, unemployed and employed in disguise youth is no strength for the economy. It is indeed a serious weakness.

On one hand, India is failing in her duties towards the international community (see here); on the other hand we seems to be fast running out of ideas for managing this vast and invaluable resource for our economic good.

Rise in petty crimes, instances of civil unrest, deterioration in general compliance standards are just few prominent consequences.

Misled by aspirational consumption and tall political promises, our businesses and middle class consumers have advanced their investment demand. Consequently, we are witnessing severe stress in many sectors of the economy. While more than 40% of households still live without proper electricity, our power plants are running at 50% PLF. Most toll roads are reporting losses. Besides, telecom companies are reporting losses and FMCG companies are witnessing sustained margin erosions.

Tomorrow I will discuss about the fourth D, viz., Disintermediation, that is challenging our economy, investors and businesses.

Tuesday, May 30, 2017

3rd Market Participant Survey

Thought for the day

"Men who are unhappy, like men who sleep badly, are always proud of the fact."

—Bertrand Russel (British, 1872-1970)

Word for the day

Hedonism (n)

Devotion to pleasure as a way of life, e.g., The later Roman emperors were notorious for their hedonism.

The doctrine that pleasure or happiness is the highest good.

Malice towards none

Will a uniform GST of 28% on movies mean no "tax free" movies post July 2017?

First random thought this morning

So many students appear to have scored near perfect scores in subjects like Political Science, History, Literature, Psychology in recently announced CBSE 12th class results.

To me this means that the system encourages only those students who are conformist. The examiners are trained to punish the students who like to differ and offer alternate views on history and political issues. This cannot be a good sign for a progressive society.

If I am HRD minister, I would assign 75% marks to debates, group discussions, and presentations in humanities, economics and business studies and 25% to written examination that tests writing skills, and basic understanding of broad principles. Pure science subjects, accounting, maths could remain as they are.

3rd Market Participant Survey

Last weekend, I repeated my annual survey of market participants, randomly selected from my phone contact list. This time I selected a larger sample (49) against 30odd on past occasions.

The objective was simple, viz., to assess the mood of the market. as usual, the people I called were a boring mix of investment managers, credit managers, corporate bankers, equity analysts, economist, wealth managers, insurance brokers, some seasoned investors and few corporate treasury managers. Each conversation lasted 10-25minutes.

As usual, I asked one simple question to all the people I had called – “what are you most excited about and what is bothering you most at this point in time?” Unlike the last time, the responses this time were more in unison. People mostly appeared hopeful but could not cite any concrete reasons for their optimism. Macro data was the only thing they could cite with conviction.

Admittedly, my sample suffers from inadequacies, but only 8 out of 49 people appeared confident about the direction of markets and economy even for next six months.

The key highlights of my impromptu conversation with market experts could be listed follows:

(a) Considering that the markets have been turbulent for most of last week, all the people I called appeared surprisingly free and interested in talking to me. Most were interested in discussing politics, GST and a variety of individual stocks from midcap and small cap arena. It seemed that everyone is very much into the markets and invested to the capacity.

This, in my experience, usually occurs close to the market top of a market cycle.

(b) There is an old saying in context of financial markets – “in good times few market participants have time for gaining knowledge; and in bad times few are inclined”. From my discussion it appeared that not many people are bothering to go below headlines and beyond front pages. Yet another sign of market topping.

(d) When specifically asked, opinion was vertically divided on the threat of China slow down. However, everyone agreed that should this exacerbate, Indian markets will sink into a deep bear phase. Surprisingly, most appeared bullish on INR.

(e) 32/49 felt that rates have already bottomed and may not fall from here in couple of years. No one was therefore bullish on recovery real estate. Though as a cautious footnote people exuded optimism over affordable housing.

(f) Rural consumption and public investments are consensus favorite themes. No one is willing to care about the contrary data on these.

Friday, May 26, 2017

Is it a case of Cognitive dissonance?

Thought for the day

"Patriotism is the willingness to kill and be killed for trivial reasons."

—Bertrand Russel (British, 1872-1970)

Word for the day

Cantankerous (adj)

Disagreeable to deal with; contentious; peevish, e.g., A cantankerous, argumentative man.

Malice towards none

Where would you place the dignity of a human being, in your order of priority?

Would you like "if" and "but" to be used when it comes to your dignity?

First random thought this morning

According to various legends related to the medieval king Vikramaditya, his throne, studded with 32 statues of fairies, had two qualities: (a) the throne would allow only such people to sit on it who would possess qualities of a noble and strong human being; and (b) anyone who would sit on the throne would automatically acquire the qualities of a great king, e.g., valor, justice, magnanimity, foresight etc.

We the people of India continue to believe that the thrones of CM and PM etc possess similar qualities. We sincerely believe that any crook, anarchist, bigot, or criminal will become a noble king as soon as he/she sits on the throne!

Is it a case of Cognitive dissonance?

Under normal circumstances the economic behavior of a person should be a subset of his general behavior.

For example, the outlook about socio-political and geopolitical environment shall normally reflect in the business strategy.

If one believes that the disharmony, strife and stress is likely to rise in the society and politicians do not have an appropriate strategy to deal with social strife and unrest, then such person should normally—

(a) not be investing in fresh capital in business;

(b) should be looking to minimize leverage;

(d) should be seeking to geographically diversify his assets by investing or hoarding in foreign assets; and

(e) certainly look to minimize his exposure to the state.

Similarly, if an investor or businessman believes that geopolitical risks are rising to a specific jurisdiction, he should be diversifying his economic assets away from such jurisdiction.

Now applying this thought to the current Indian context, we get a mixed picture.

If we accept the trends in media, social media and popular political discourse at their par value - our country is facing heightened degree of social stress and unrest; and elevated level of geopolitical threats.

Politically, our country not stands vertically divided, with about 45% voters supporting the incumbent government and the parties supported by over 35% trying to stitch together a united opposition. Such polarization has occurred in Indian politics almost after 4 decades.

Total dominance of an individual (PM Modi) over the day to day executive functions in states comprising more than 65% of India's population shall also alarm an investor or businessman. While this dominance brings many positives, it also raises the specter of (a) erratic policy changes, e.g., abolition of currency; (b) probability of a full scale war (I would say from 0% under MMS to 5% under Modi, is a 5x jump in risk perception), etc.

Regardless of these trends and circumstances, we have seen that—

(a) domestic investors have increased their stakes in risky assets (small and midcap securities) materially, while investment in gold has fallen;

(b) the growth in insurance is not commensurate with the risk perception;

(c) The exposure to government (deposits in PSU banks, participation in government projects, gold bonds etc.) has increased materially;

(d) outward FDI has fallen dramatically and outward remittances have not shown any acceleration;

(e) corporate debt stays at elevated level, and the ownership has moved away from banks to public......to continue next week

Wednesday, May 24, 2017

Political paradigm needs to change

Thought for the day

"It has been said that man is a rational animal. All my life I have been searching for evidence which could support this."

—Bertrand Russel (British, 1872-1970)

Word for the day

Ultracrepidarian (n/adj)

An ultracrepidarian person.

Noting or pertaining to a person who criticizes, judges, or gives advice outside the area of his or her expertise

Malice towards none

Regardless of the recent severe correction in broader markets, it appears that we shall see a huge wealth effect in Indian middle class as investment in equity grows and markets do well over next five years.

Real Estate and Travel will be two notable beneficiaries of this effect.

First random thought this morning

The market participants have this tendency to discover a trade from every event that is discussed on TV. From state elections to unrest in Kashmir. GST is a popular discussion these days, and there are thousands of "Research Reports" suggesting a trade on GST. Many of these reports have already declared the winners and losers from GST; much like the way it is done within hours of FM reading his budget speech every year.

In my view, market will adjust to GST in 3-4months. The readjustment will happen in a manner that it becomes even for most. Middle class will pay a little more and government will take home a little more. The disruption in unorganized businesses may happen in long term only.

No business might gain directly from GST. All tax savings may have to be passed to consumers. The gain could come from higher demand in future as prices stabilize and yearly tax fluctuation is controlled.

Political paradigm needs to change

Over past six weeks, I have discussed my ideas about the factors that could provide necessary escape velocity to the Indian Economic for transcending to a higher orbit.

We have seen some serious developments in some of these areas in past decade or so. In fact, the progress has accelerated materially in recent years. However, a lot of work still remains to be done; especially on qualitative front. The areas where we have seen material progress in quantitative terms, the quality seems to have remained mostly ignored.

For me it remains a matter of debate whether we want to develop economically on the mostly western parameters, or we should focus on our ethos and measure the economic development & growth in terms of dignity of human life, peace of mind, social harmony, motivation for scientific enquiry & spiritual pursuit, and commitment to universal brotherhood.

Nonetheless, even in terms of popular parameters, we have a long distance to cover before we think of transcending to a higher economic orbit. In particular, social equity and sustainability are two critical and popular concerns that have remained mostly unaddressed despite all the political rhetoric and shenanigans.

To conclude my monologue, I suggest that the present political structure of the country is not very conducive for a higher trajectory of economic growth and development either in terms of popular parameters or in terms of quintessential Indian ethos.

A study of the history of Indian politics would suggest that unlike western democracies only an abysmal minority of Indian voters are strongly committed to a political or socio-economic ideology.

The political discourse in India is usually dominated by contemporary issues and personalities. The economic issues raised during elections are mostly confined to the slogan of poverty alleviation. In recent times corruption has also become a popular electioneering slogan.

Perhaps, no political party seems to have taken issues of poverty alleviation or corruption seriously. Therefore no one has bothered even to outline a conceptual or ideological framework for solving these problems.

Ideologically, the Congress Party abandoned the most acceptable and perhaps most suitable Gandhian Socialism in favor of Nehruvian Socialism that was a poorly mixed concoction of Leninist central planning (central ownership and management of resources and businesses) and British colonial legacy (discretionary patronage to the faithful and loyal).

The model was certainly at cross-purpose with the constitutional federal structure. Poverty, poor governance and corruption were natural off-springs of this system.

BJP started with Deen Dayal Updhaya's Integral Humanism. However, in 1990s it adopted Gandhian Socialism (which is not too far moved from the Integral Humanism) as the principal doctrine.

The present leadership has presented a concoction of Integral Humanism and Laissez-faire model used by some developed economies principally USA.

Politically leadership preaches "Human Being" as the fulcrum of policy making. Whereas the executive is more focused on "Business", "Markets" and "Macroeconomics" as central themes. The conflict is for everyone to see. The consequence is that we seem to be moving in no direction.

The people at the left end of the spectrum exercised significant sway on the bottom of the pyramid in Indian society since independence. They controlled most of labor unions. Though divided between Marx, Lenin and Mao they still were the preferred choice of landless, oppressed and intelligentsia. There was a time when being poor, intelligent (economist, thinker, poet) or rebellious meant being communist.

The things however began to change in late 1980s post dismantling of USSR and the German wall. The Lenin and Marx were relegated to the history lessons. The economic reforms initiated in China under Deng Xiaoping's supremacy, further pushed back the traditional Marxists.

Insofar as the Lohiaites (socialist parties occupying the left of the center space in Indian politics) are concerned, they deserted both Lohia and his ideologue Gandhi as soon as they came into power. Degenerated into motley feudals, they mostly have no commitment to any economic idea and mostly follow the Congress Party's status quoits agenda.

The rise of Aam Aadmi Party (AAP) from a massively popular anti-corruption civil society movement 4years back had given hope and raised expectations of people. This party had no ideological baggage and promised to address the problems as they exist, without any legacy concerns.

This party has also degenerated into a motley group of egotists, having no commitment to their raison d'être.

In my view, a continuation of the current state of quandary with respect to economic growth model is a major hindrance in our path to higher growth orbit.

I strongly believe that the inherent austerity, industriousness and enterprising skills of the Indian populace are sufficient to provide escape velocity for moving the Indian economy into higher orbit.

Limiting the role of government to developing and maintaining the institutional framework relating to law & order, sovereignty, external security & relations, municipal functions, inter-state relations and facilitating trade & commerce, may improve economic conditions much faster than otherwise.

PS: I have received a lot of comments and queries on this series of notes. I am preparing a consolidated response to all these comments and queries. If you have any more comments or queries, please mail me at investrekk@gmail.com.

Read with the following

The 10 Propellers

Growth is a collective, consistent and continuous effort

First piece in place

Non Compliance - impediment to growth

Well begun, but little done

Water & Electricity

Make growth sustainable and equitable

Save Ganga & Yamuna first, Saraswati can wait

Taxing farmers may yield nothing

Take factories to farms

Improving farm income