Month: December 2008

As the year 2008 ends – the beginning of the year seems like a distant memory. The year 2008 started with a big bang and markets all over the world were doing great. The Indian benchmark Sensex rose to about 21000 during 2008 and made all sorts of all time highs along the way.

Oil peaked at $147 and was well on its way to $200. US Dollar was going strong, China was going strong – and then Subprime happened.

Suddenly the spectacular rise in real-estate, oil, gold, stock markets, cotton and hog prices gave way to an equally spectacular fall in every imaginable asset (except the USD and Yen).

Credit Default Swaps, Bailout Plans, 0% Yields and Quantitative Easing entered the lexicon of the common man, and we witnessed bankruptcies and foreclosures – from Shanghai to Las Vegas.

The movement of the BSE Sensex during 2008 epitomizes the roller-coaster ride of 2008. The first half of the year was great and the second half of year just kept getting worse.

The Sensex has lost more than 10,000 points in six months – something that has never happened before. Every country in the world is reeling under the shadows of at least a long drawn recession and possibly a depression as well.

Since the fall has been so sharp – the year 2009 should end better than where we stand today. Things may get a little worse before they improve – but by the end of the next year – the scary memories of today will be a distant dream.

Wish you all a very happy and prosperous 2009.

Wishing all readers of OneMint a Merry Christmas and a very Happy, Profitable and Prosperous New Year.

Have a look at the two charts below. The first one is the way the S&P has moved over the past few years. The next chart shows data from Google Trends. It shows the search volume for the phrase – “Stock Market” .

When I did the search on Google Trends – I was pretty sure, that I would find some trends between how the market behaves, and what people are searching on Google. But I was really astonished to see how similar both charts look for the latter part of 2008. A steep decline in both charts.

The same thing can be seen mid 2007 too – steep decline in both charts. To a lesser degree – the decline is present in the middle of 2006 also.

It seems that every market fall – also leads to a fall in people googling – “stock market”. There is some relationship between the spikes and busts in both charts, and makes for interesting reading. I am fairly certain this is just interesting reading – post the event – and will not help in predicting a fall. The reason for that is there is no way to tell – how far the rise will be; before dipping. It could be a short spike – like the one in 2007 or a bigger spike – like the one in 2008.

I just finished reading “The Little Book of Bull Moves in Bear Markets” by Peter Schiff and there is an interesting prediction about the 2012 US presidential election in the book.

The book was published before the results of the current elections were out and Peter Schiff has actually made a prediction about

1. Who will win this election?
2. What will he do?
3. How will it influence the 2012 election?

This is really interesting because very few people are thinking four years ahead right now as they are busy worrying about the next few recessionary months.

The Prediction

Peter Schiff has got one out of the three right, but, that was probably the easier one. According to Mr. Schiff, Mr. Obama is going to make the government bigger, than it currently is, and push America deeper in the recession. The increase in government spending and regulation will cause bigger problems than today and by the end of Mr. Obama’s term, people will recognize the root of the problem – more government and less free markets.

At that time, people will want a candidate who promises to reduce the role and size of the government and someone like Ron Paul will get a good shot at the presidency in 2012.

These are pretty bold statements from someone who manages millions of dollars of investor money. If he gets it wrong too often, and on record (writing a book about it), it will ruin his reputation to manage money and attract capital. Only time will tell how accurate his statements are, but he has shown real boldness by making such predictions.

When I reached India for a three week vacation early this week – the first thing I noticed was that the only Paid Phone Booth left in our apartment complex had closed.

A lot of Mom n Pop stores have extra phones installed in them – through which, customers can make paid phones call. These phones are usually installed in a booth – hence the name.

India adds about 8 – 10 million mobile phone subscribers in a month, and has about 300 million mobile phone subscribers in total. In terms of rate of growth – it is second only to China in this market.

India also has the cheapest telephone rates in the entire world. Mobile phones are also very cheap, and can start with as little as thousand rupees or about 20 dollars.

All these factors make mobile phones ubiquitious, and you will rarely find anyone without a mobile phone.

Video killed the Radio Star?

New technology will always replace older technology, and only a company that constantly reinvents and innovates (even move to another industry) can survive in the market place.

As an investor, it is always better to stay away from companies that operate in industries where major game changing technologies are showing up in the marketplace.

For this reason, I have carefully stayed away from at least two industries – Newspapers and Publishing and Fixed Line Telephone operating companies.

The Internet is changing the newspaper market in a profound manner, and while a lot of the newspaper companies may reinvent and innovate – there are simply too many other stocks to pick from.

Mobile phones are already replacing landlines and I am away from those stocks also.

In my mind, these are easier decisions. The harder decisions are things like the leather industry. The green movement is growing, and more and more people are shunning leather. However, the rate of change doesn’t seem to be of an alarming magnitude. In general, it seems that our love for shoes is more than our love for goats.

Another interesting industry is the mobile phone service providers. I have recently used quite a bit of Voice Over Internet Protocol (VoIP) phones – and they are lot cheaper than mobile phones, and get you the same voice quality.

I believe VoIP will rise considerably with the rise in internet penetration in countries like India, and will have a substantial market share in the telephone market. However, this doesn’t seem to be such a threatening factor to mobile phones in the near term.

A lot of these industries will be substantially different in the next ten years or so and if you watch closely – you will find examples of a lot of businesses that are dying slowly around you. As an investor you want to spot these dying businesses, and get away from them.

A Saudi millionaire has offered to pay $10 million for the shoe – that was hurled at President Bush in Iraq.

Fed has more or less said that they are going to print as much money – as needed – to put the economy back on track.

Mr. Madoff conned some very rich people, and, a few charities in what appears to be one of the biggest Ponzi schemes ever – worth some 50 billion dollars!

Maybe I was not noticing, but, I really don’t recall when was the last time that we were barraged by such incessant bad or unusual news in such a short period of time.

Even more importantly, it seems to me that most of the news is focused on drivel and doesn’t even touch the main issues remotely.

The fact that a US president has become so unpopular – both at home and abroad – that people are aiming shoes at him, and, others paying millions for them – points to a deeper malaise – than just, one frustrated man.

The fact that the Fed plans to print money to come out of the recession, and not one expert has spoken about improving productivity to get out of the ditches shows the short term thinking – that is hallmark of the times. Can a country simply come out of its troubles by printing money?

How could one man run a 50 billion dollar business with nothing more than paper assets? Is there any regulation in the market at all?

Almost all that we see or hear today are just symptoms.

In a world of instant gratification – no one has the time to diagnose symptoms to know the disease.

Is it just me, or has the world gone crazy?

Oh, yeah, then there was the case of that Taiwanese member of parliament who snatched the wig off the head of a member of the ruling party – to bare a mostly bald head.

Is it still just me?

Fear and Greed are the two driving forces of any market. Greed inflates prices: gets more and more people to jump in the bandwagon and buy the stock, commodity or tulip bulbs and drive prices to a level where they are no longer sustainable and become a bubble.

When greed overcomes the market; no one talks about fear. Greed completely eclipses out fear and the fact that people usually have a short term memory also does quite a bit of good. In times of bull market rallies, people forget what it was like a few months or few years ago and what it meant to be fearful.

During the real estate bubble, investors forgot about the fear and panic that accompanied the dot com bubble. This time it is different – everyone will tell you. The fact that the market collapsed and crashed just a few years ago doesn’t help to keep things in perspective and the market heads for one more collapse.

This is just human psychology, and has nothing to do with the country or even century you are in. The first speculative bubble was recoded during the 1600s in what is now Netherlands. It is recorded that prices reached such a high that at one point – 12 acres of land were offered for one variety of a Tulip bulb!

At that time greed was on its high and had completely eclipsed fear. One reason given by historians for the high prices of tulip bulb contracts was that people expected that there will be a parliamentary decree that will void the smaller contracts of tulip bulbs and limit the risk of the buyer.

During the dot com bubble the greed was fed by the assumption that old economic cycles are not applicable to new technologies and the internet will completely change our lives.

Whatever be the reasons: when greed grips the market it overshadows fear completely and makes people forget how scared they were just a few years ago.

Past Greed and Future Greed

Fear works in much the same manner, and, when fear grips the market it eclipses future greed and exagerrates past greed.

People have lost a lot of money in the current financial crisis and they are attributing much of it to the greed of Wall Street Bankers, Hedge Fund Managers, Real Estate Brokers and their like.

Everywhere there are cries about how greedy people at Wall Street have ruined the savings of Main Street. Fear has gripped the market and greed is the culprit.

People are not talking about future greed though, not yet in any case. No one is asking – where the next bubble will form?

Markets are gripped with fear and are blaming past greed, but, that completely eclipses out the fact that there will be future greed.

There are a few seasoned investors who are talking about where the next big move is going to come in – green energy, gold, agriculture, emerging markets etc. but their voice has been crowded out by the cries of fearful investors.

Greed and Fear work beautifully in tandem and complement each other perfectly.

India has started off its efforts to boost the sagging housing market. While the markets have cheered the steps of the State Bank to boost the housing market – these steps look eerily familiar to the artificially low interest rates during the Greenspan era – that led to the housing market boom and bust in the United States.

Here’s a look at the new measures:

1. Cheaper Loans: The Public Sector Banks have announced that housing loans up to Rs.20 lakhs will be given out at 8.5 – 9.5% per annum for a tenure of 20 years till 30th June 2009. After that, interest rates are expected to go up to the 10% mark – they currently hover at.

Similarly housing loans up to Rs. 5 lakhs (20 year tenure) - will be given out at a maximum interest rate of 8.5% for the first five years

2.  Lower Margin Requirement: The minimum margin requirement for a home loan for less than Rs. 5 lakhs has been reduced to 10%. It was earlier around 20 – 25%. That means that you can now own up a home by footing only 10% down. The margin for the – less than Rs. 20 lakh loan – has been reduced to 15%.

3. Fee waiver and and other freebies: The Public Sector Banks wil waive off fees like – application charges and remove pre – payment penalties. Home-owners will also be given free insurance on their loans.

About four – fifths of all home loans disbursed in India fall under the less than Rs. 20 lakh category, and, these steps are expected to stimulate the housing demand, by, about Rs. 20,000 crores. Since, these rates and fees are artificially lowered – the banks are expected to take a hit of about 2 – 3% on their margins.

A Housing Boom or a Housing Bust?

These artificial measures will lead to stimulating the housing market, which should really be deflating a little. The Indian housing market has rallied up so much in the last few years; that owning a home has become out of the reach of a large segment of the population.

The rents have not risen as widly as the housing prices and in a lot of places the rental yield is less than 1 percent!

People were buying second and third houses – expecting prices to go up, and this was turning into a massive speculative bubble.

The recent slowdown helped stabilize prices a bit, and the market was taking corrective action . The government is intervening with the market adjustments, tinkering with interest rates, and trying to boost demand artificially.

This may well be the beginning of inflating a bubble – much bigger than what this economy will be able to handle when it bursts a few years down the line.