Month: November 2009

The garlic bubble

I first came across China’s garlic bubble on the Economist, which said prices in China’s garlic growing capital – Jinxiang have risen 40 times since March. China produces as much as 75% of the world’s total garlic, and is the biggest producer in the world.

Here are the ostensible reasons for this garlic mania:

1. Ward off H1N1: Some schools are mandating their students to eat garlic with lunch every day, as they believe it wards off H1N1. This seems to have triggered a price rise because people are buying garlic as prevention to this virus. So much for people worried about actually getting the vaccine.

2. Reduced garlic plantings last years: Garlic prices had collapsed last year, and farmers moved to other crops reducing the land under cultivation. This led to reduced supply this year, and when demand built up, there wasn’t enough garlic to go around for everyone.

3. Garlic hoarding: There are reports that coal mine bosses are engaged in hoarding garlic. They buy garlic and haul it between warehouses keeping supply low, and fueling the price rise.

4. Increased exports: There is increased garlic demand from abroad, possibly for the H1N1 reason, and this is also fueling the fire.

5. Speculation: Increased liquidity is funneling money into various assets, and garlic happens to be one of them. Combined with the other factors, speculative trading is leading to price rise. Among all reasons, I think this one must contribute the maximum.

Just like demand from India and China didn’t explain the rise in oil prices sufficiently, just the demand and supply factors can’t explain this spectacular gain in garlic prices.

Amazing what goes on around the world.

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Interesting Reads 28th November 2009

I hope you had a great week, and are looking forward to the weekend. Here are some great reads that I came across this week:

Posts

Optionshouse review @ The Digerati Life

Equifax credit report @ Smarter Wallet

The Bad Management Stimulus @ Dilbert Blog

When currency futures market dominates @ Ajay Shah

Rights and wrongs at Lloyds Banking @ Neil Collins

A contrarian conundrum @ Reformed Broker

Outsized capital inflows @ Ajay Shah

Rupert Murdoch has it backwards @ Seth Godin

4 ways to profit from a falling dollar @ DR

Blaming it on Obama @ Baseline Scenario

The holidays begin @ Bad Money Advice

USDA Home loan program @ Darwins Finance


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IDFC Real Estate Equity Mutual Fund NFO

IDFC has filed a draft prospectus with SEBI, and is coming out with an open ended mutual fund targeted at the real estate sector.

This fund will primarily invest in shares of real estate oriented companies in India. The asset allocation will be as follows:

Asset Class Range of allocation
Equity and related instruments of companies engaged in real estate related activity 65 – 100%
Debt and money market instruments 0 – 35%

As you can see from the above allocation, the fund intends to invest in shares of companies related in real estate. It will not invest in real estate directly. The percentage allocation may vary, but the basic idea of the fund is to get investors exposure to the real estate sector in India.

Let’s take a look at the sectors that are considered to be related to real estate:

  1. Developer: These are the companies that acquire land, get clearances, architect and plan the projects.
  2. Construction Companies: These companies engage in manufacture of cement, steel, glass, paints, lightings, heavy machinery required for construction and the like.
  3. Buyer: These companies will provide housing finance, paints, air-conditioning and such.

Other Facts

The minimum investment amount in this IDFC real estate equity NFO is Rs.5,000. The fund has a growth and a dividend option, and further the dividend option has a reinvestment option.

The fund will charge 2.50% of weekly average net assets as recurring expenses. There is no entry load, and a 1% exit load if the investor redeems his units within a year.

The Real Estate Story

There are plenty of real estate mutual funds launched in the Indian market to take advantage of the real estate sector. The rationale behind these is that rising per capital income along with a movement to nuclear families, and increased home ownership will boost the real estate sector and increase its contribution to the GDP.

The problem with this story is that in the past price of real estate companies have far exceeded the underlying values, and real estate companies saw their stock prices falling greatly from the peak.

This is a equity real estate fund which is exposed to the same risks, and you could if prices in the underlying stocks fall, — you could see substantial erosion in your investment.

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Birla Sun Life T – 20 Fund NFO

Birla Sun Life has filed a draft offer document with SEBI for its new mutual fund, — Birla Sun Life T – 20 Equity Fund. This is a close ended equity mutual fund that will invest in stocks of top 20 growth companies. This fund will allocate 65 – 100% of its net assets in equity and equity related instruments, and 0 – 35% of its assets in debt and money market instruments. The duration of the scheme is 3 years, and there will be a dividend and growth option of it. The fund will charge expenses estimated up to 2.50% of average weekly net assets.

The idea behind launching the Birla T – 20 mutual fund is that diversification beyond a certain point leads to diminishing returns without any corresponding benefits.

By having about 20 stocks or related instruments in its portfolio, the fund plans to minimize risk (by buying across sectors and market capitalizations), and at the same time leave scope for appreciation. To protect itself from concentration risk, the mutual fund will not invest more than 20% of its assets in just one sector.

Having a small number of funds also allows the fund manager to focus much better on every holding, as they don’t have to look at a whole bunch of securities.

The norm is having 20 companies, but the prospectus says that the number of companies under the fund can go up to 25 at the discretion of the fund manager and also when the assets under management goes beyond 1000 crores

You are probably wondering how they will decide which 20 or 25 stocks will Birla Sun Life T – 20 hold, and the answer to that is the fund manager will decide whether a particular stock makes the cut or not.

The factors that will be taken into account to make a decision are valuation, consistent past performance, future growth prospect, company management, and future expansion plans.

The minimum application amount for this fund is Rs. 5000. There is no entry and exit load, but investors aren’t allowed to exit the mutual fund before the end of the expiry period.

Only time will tell how well the fund plays out and performance of the scheme largely depends on the stock picking skills of its fund manager – Mr. Ankit Sancheti who is also the fund manager of Birla Sun Life Dividend Yield Plus, Birla Sun Life Basic Industries, Birla Sun Life Long Term Advantage Fund, and joint manager of Birla Sun Life Commodities Equity Fund.

A last note about risk of investing in the Birla Sun Life T – 20 fund, — this is an equity oriented fund that will invest in a relatively lesser number of stocks. Equity markets are inherently risky, and investing in this fund means that you are exposing yourself to the normal risks of investing in shares, which can ultimately lead to significant erosion of capital.

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Fun Global ETF Portfolio

Patrick J left an interesting comment last week about a portfolio with a certain asset allocation. This is what he had in mind:

30% — Large Cap,

30% — Europe,

10% — Small Caps,

10% — Emerging,

10% — Bonds and

10% — China

So, I tried creating a portfolio with ETFs that had these components to see how well it did in the last five years.

I did this in a pretty unscientific manner by going to the iShares website, and finding ETFs that correspond to these descriptions. I didn’t look for the lowest cost ones, or the ones that made the most sense. I could give a number of reasons for not doing that; but in fact, I took the easy way out for this.

With that in mind, here are five ETFs that I think will work for this purpose and their annualized returns in the last five years.

Type ETF Return
Large Cap S&P 500 Growth Index Fund (IVW) 1.51%
Europe MSCI EMU Index Fund (EZU) 7.38%
Emerging MSCI Emerging Market Index Fund (EEM) 17.20%
Small Morningstar Small Core Index Fund (JKJ) 3.27%
Bonds Barclays Aggregate Bond Fund (AGG) 4.92%
China FTSE Xinhua China Index Fund (FXI) 20.83% (This is the return of the underlying index)

These returns are no surprise, and since past returns are no guarantee of future returns, you shouldn’t extrapolate this too much. The thing that pretty much jumps out is that you had to be in the emerging markets to make good money in the past five years. Will the next five be like this? – I have no idea.

This exercise amazed me with the number of options I had. Within iShares itself, there were several funds that are categorized as small caps, emerging nations etc. and there are several other ETFs and mutual funds that offer the same type of funds.

It is difficult to select which fund to select even if you have a good idea of what you want to start with.

I think you have to think of at least three things before deciding to buy a fund:

Fund Type: I think fund type will probably be the first parameter. So, if you are looking to invest in Europe, do you want to invest in just the developed part, the emerging part or the entire continent? With that in mind, you can narrow down your choices.

Cost: Once, you have that laid out, the next thing is to look at cost or expense ratio of the funds.  You want to make sure you get the fund with the lowest expense ratio as compared with its peers.

Volume: You also want to make sure that the fund has sufficient volumes, and you will be able to get out easily if the need arises.

I am sure there are several other factors, but these three are the minimum that I’d look at, if I had to get into any of these funds.

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Amazon Gift Card Review

The first thing that struck me about the Amazon gift card was the ability to customize it. This is nothing unique to Amazon, and a lot of companies like Best Buy and Target offer this, but it is a nice little feature to have.

I say that because gift cards are not as personal as a real gift, so it’s nice to see that you can customize the Amazon gift card, and make it slightly more personal.

You can send a personalized e-card, which can include a picture, song and message with your gift card and that makes it even more personal.

Amazon Gift Card Delivery Options

Amazon offers a lot of choice in the way you can get a gift card. You can choose one of the following options.

Mail a gift card: You can buy a gift card, and have it mailed to your friend or family member. This may take up to seven days, and shipping is free. The disadvantage of having a gift card mailed is that physical gift cards can’t be customized, and they just have a single design. This may mean the world to some people, while make no difference to others.

Email a gift card: If you don’t want to wait out the shipping period, — you can get the gift card emailed instead.

Print a gift card: If you want to present the card yourself, but can’t wait for it to be delivered, you can print it as well. Buy it online, and print it out to deliver it yourself, without having to wait the shipping period.

Amazon Gift Card Denominations

Amazon is pretty flexible with its gift card denominations. You can buy an Amazon gift card with any value between $5 and $5000. The only gift cards that are pre-denominated are the physical gift cards which need to be shipped in 3 – 5 business days. Otherwise, even the physical gift cards that are mailed to you do not have a predetermined denomination, and you can select the value of your gift card.

Customizing Amazon Gift Cards

Amazon has a lot of pictures categorized for occasions that can be used in your gift cards. For example, — you can use this cute little picture of a stork on your gift card, if you want to wish someone on the birth of their baby girl. There are several other pictures like this, which can give a personal touch to your gift card.

Amazon Baby Girl Gift Card

There is Kindle Gift card too, but all it does is have a picture of the Kindle on it. I am not sure who will find this useful (apart from Amazon itself). If you wanted to gift someone a Kindle, you’d buy that instead of the card.

How do I use my Amazon Gift Card?

Amazon Gift Card can be used at Amazon and Endless.com.

You can use your gift card in two ways.

  1. If you have the gift card, but are not sure what to buy then login to your account, and click on “Your Account” on the top right corner.
  2. On the next page look for the “Payment Section” and click on – “Apply a Gift Certificate / Card to Your Account”
  3. On the next page, enter your card number, and click on “Redeem Now”.

When you buy something after this, the balance will be deducted from your gift card first, and only if it doesn’t cover the entire price, will your credit card be debited.

The second way of using the Amazon Gift Card is to enter the promotional code, when you are placing the order through the shopping cart or using – “Buy with 1 click”. The amount will be deducted from your gift card, and if it doesn’t cover the entire purchase price, — your credit card be debited.

Here is a page from Amazon that has more details on this process.

Amazon says that once you enter the code on their website, they store it for you, and you don’t need to enter it subsequently. I haven’t tried this, but I’d expect that if money is left on my gift card, it will be deducted first before Amazon debits my credit card. Only when my gift card is exhausted, will my credit card be touched.

Can I use the Amazon Gift Card to buy anything?

No.

For starters, you can’t use the gift card to buy another gift card. Sometimes Amazon promotes items by bundling them up with a gift card, and offering a discount of sorts. You can’t use your gift card to buy such items as well.

Some third party sellers don’t accept it, and there are certain other exceptions. I couldn’t find a list of the exceptions on Amazon’s website, just the fact that they do exist. So, your best bet would be to try out the gift card on everything and see if it works. If anyone knows a better way, please let me know, and I’ll update the post accordingly.

Conclusion

Personally, I try to buy gifts instead of gift cards, because they carry a lot more emotion. I’d use it if I knew someone who shops a lot from Amazon, but couldn’t think of a good gift for them. The card itself is convenient to buy and Amazon’s wide range of products mean that it won’t be too hard to use either.

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Economy and your Finances Carnival 22nd Nov 2009

Welcome to the November 22, 2009 edition of this carnival.

TIP Guy presents Shortlisting Five Companies for Potential Long Term Investment Analysis posted at TIPBlog.in.

Matthew Paulson presents Tips for Using Your Credit Cards Wisely For Black Friday and Cyber Monday posted at American Consumer News.

SpendOnLife.com presents 72% of U.S. Adults Fear Online Identity Theft posted at SpendOnLife.

Peggy Stoppelmoor presents Ultimate Guide To China Yuan ETF Investing posted at ETFdb.

Debt

Tom @ Canadian Finance Blog presents How To Improve Your Credit Score – Canadian Finance Blog posted at The Canadian Finance Blog, saying, “Here are a few tips on how you can improve your credit score.”

The Smarter Wallet presents FreeCreditReport.com Review: Not a Free Credit Report posted at The Smarter Wallet,

Economics

Master Your Card presents Track Your Favorite Credit Card Legislation posted at Master Your Card.

David Carlson presents Inflation Controversy posted at Dual Income No Kids, saying, “This article is about the inflation controversy, or more specifically how inflation is calculated and why there is disputes about what the inflation figure really is.”

Continue reading “Economy and your Finances Carnival 22nd Nov 2009”

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Interesting Reads November 21st 2009

I did a post on ICICI Home Finance Fixed Deposits this week, and it got a comment from a reader complaining about their service. This may come as a surprise to other readers, who probably don’t read comments on older posts, but this kind of thing is very regular here. There are plenty of comments about people who didn’t get refunds or don’t know the status of their investments.

To my surprise, the customer service team at ICICI Bank left a comment to the post, and said they were sorry about the trouble, and will work with the commenter. Unfortunately, when I emailed the commenter, it bounced, so I have no way of knowing whether they went back to the original post, and read the bank’s response. I hope they come back to the post, or find it in any other way.

That was the most interesting thing that happened here last week, and now on to some other interesting stuff from the blogosphere.

Articles

How to legally decrease the interest rate on your credit cards @ Money Ning

The Blue Collar Recession @ Weakonomics

My SUV will beat your hybrid and save the economy @ The Financial Samurai

Worst finder ever @ Dilbert Blog

Is buy and hold investing fool’s gold @ Dough Roller

Gift cards pros and cons @ Cash Money Life

Options House Review @ The Digerati Life

Online Savings Accounts @ The Smarter Wallet

Carnivals

Festival of Frugality

Carnival of Twenty Something Finances

Carnival of Money Hackers

Carnival of Financial Planning

Carnival of Indian Stocks

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Is P/E Ratio a fair indicator of market levels?

Last week I had a guest post at The Smarter Wallet discussing the concept of Cyclically Adjusted P/E Ratio (CAPE), which is essentially – P/E Ratio after taking into account earnings for the last ten years (adjusted for inflation).

One of the takeaways of that post was that CAPE gives you a fair indication of the price level a market is currently trading at. This is because the highest CAPE of the US Markets has been 46, while the lowest CAPE has been 6. The average has been 15, and any time CAPE is above or below that, — there is a tendency to revert back to 15.

This reminded me of a post I did almost one year ago about Warren Buffet’s hamburgers, and market levels.

That post had a graph of the P/E Ratio of Nifty for the last ten years. Here is how that graph looked like. Remember, this data is till Nov 2008.

pe-value-of-nifty-jan-08

One look at the graph above indicates that the market was at relatively lower levels, and hamburgers were cheap.

Here is how the same graph would look like if we update data for the last year. This graph shows that the market has recovered, and has gone back above the average.

PE Nifty Till Nov 2009

If you are a short term trader, then this information is useless is for you. Even if the market goes down to a P/E of 10, there is nothing that says it won’t fall to 5.

If you invest cash that you might need in the near future, this information is still useless for you. If the market goes down, and you need the cash, there is not much you can do except for sell at a loss.

However, if you are a long term investor, who invests his surplus in the stock market, this information can be useful. It can save you from investing at peaks, and selling at bottoms. If you have a long enough horizon, can wait for the market to rebound, and invest in fundamentally good companies, — this ratio can help you get bargains.

The caveat here is that the P/E Ratio is one among many indicators that help understand the market; an undue focus on just this measure will be counterproductive. But, if you aren’t already using this measure as part of your analysis, — it’s time you take a closer look at it.

If you have come this far, then I probably don’t need to remind you, but there is no harm in repeating that this is just the opinion of your humble blogger, and not investment advice that you should act upon.

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