Investment Driven Economy to Consumption Driven

Today's ET editorial ( http://epaperbeta.timesofindia.com/Article.aspx?eid=31815&articlexml=Go-for-a-Single-GST-Rate-of-About-03102017014017 ) suggests that government should adopt a single rate of 14% for GST.

This set me thinking. India is an investment driven economy. Capital Formation with private and public investments determines the growth in the economy. For the past few years, private investments have dried up leading to lower than targetted or potential growth.

When BJP came to power, all of us had a great hope that the economy will revive. BJP's economic policies will be directed towards high growth and away from entitlement economics. However, Rahul Gandhi's "suit boot ki sarkar" jibe seems to have made BJP cautious and sympathetic towards entitlement/socialist economics. The result of this cautiousness is that BJP has wasted a golden opportunity to convert India from an investment driven economy to consumption driven economy. With the implementation of GST, BJP could have seized the initiative and set a single reasonable rate of GST. Instead, in order to cater to the socialists, it has 4 rates of GST plus luxury/sin surcharges resulting in a complicated system.

Consumption is viewed as evil by government but if you want high growth, high consumption is essential. Due to socialist mindset, goods have been divided into essential and luxury and attempt is to tax luxury at ridiculous rates. Is the government missing that people have aspirations? India is a young country and youngsters like good things in life. It would have been a stupendous opportunity for the government to cater to this young crowd, have a single rate of GST and encourage consumption of even luxury goods.

The Prime Minister has pushed through the bullet train program inspite of all opposition and lot of sarcasm/criticism. Consumption is not bad and getting the latest and best is to be encouraged. High price does not mean luxury. Quality comes at a price. So to tax a mercedes at a rate higher than maruti alto sends a message that government wants you to drive a maruti alto and not graduate to a Merc.

These are early days and government and GST council can and seize upon this opportunity by following advise given by ET editorial and set country on to high growth path and also encourage consumption of quality goods.

Theory of Votebank Politics

Indian economy has lost momentum and now even 6% growth looks doubtful. How does one explain this kind of situation arising from an expected 9-10% growth. I ascribe this to VoteBank politics and my analysis goes as follows:

Congress is anti-growth as growth will eliminate poverty. Elimination of poverty will not allow it to practice votebank politics and act as Messiah of the poor, backward and minorities. It had to put brakes on fast growing economy and also make sure that the fiscal situation worsens, surest way to keep country poor and backward.

It therefore unleashed Jairam Ramesh, an intellectual and allowed him free hand in halting all the projects that were going on. A politician would have found ways and means to let the projects continue and required compliance on a forward basis. Not the intellectual minister. For him it is either black or white or as he prefers to call it - go or no go. Once Jairam Ramesh managed to stop several large projects and created the nervousness amongst industrialists, he was moved to another ministry to carry out even more damages (though ostensible posture was he was being shifted as a punishment). And lo and behold, we had the Land Acquisition Bill unleashed on us, which required farmers to be paid 6 times the market value of land. So Jairam Ramesh first stopped all ongoing projects, then ensured no new projects can be launched since land acquisition will become impossible. Agenda 1 of putting brakes on fast growing economy achieved without people/industrialists realising what hit them.

Then comes the Agenda 2 of ruining the fiscal situation. High crude prices and refusal to let diesel prices be raised helped achieve this Agenda to a large extent. However to make sure that this Agenda is not derailed, Congress came up with the brilliant idea of Food Security Bill. This will ensure a huge burden on exchequer, offer opportunities to middlemen to pilfer the treasury of the country and the aid meant for poor will never reach the poor. Of course, we have been taught that dont give men a fish but teach him to fish. Growth will give poor the method of fishing but we cant allow that so give him fish i.e. ration or subsidised foodgrains. Never mind if the foodgrains meant for him never reach him but the politician can claim to have done his deed and claim credit.

Growth also leads to higher tax revenues and can improve the fiscal situation. Putting a brake on growth ensures fiscal situation doesnt improve.

Poor fiscal situation leads to depreciation of the currency, leads to high interest rates as govt needs to borrow, leads to high inflation as govt will print money to meet non-development led deficit and lead to erratic growth, destroying the confidence of investors. We are back to pre-1996 era of Congress rule (of 50 years). And the surest sign of this was given by the Hon'ble Finance Minister who while talking about inflation and high interest rates reminded Parliament of similar situation of 1980 and how growth rebounded back the next year. Obviously when rupee depreciates, growth will rebound for a year only to retreat back the next year. I wont be surprised if we see negative growth in some quarters over next 3 years. A -25% compression in Capital Goods sector is the first sign of things to come.

It is obvious why Congress does not like India Shining slogan.

Democracy with so-called benevolent politicians practicing votebank politics is probably the worst kind of government that people can have. Dictators/fascists/autocrats at least get criticised and dont get sympathy of people but with a democratic form of government, politicians do exactly what dictators/fascists/autocrats do and get accolades for working for betterment of lives of poor. Except for a lone crusader Anna Hazare who has shown politicians in their true colours.

Icing on cake of votebank politics is the blatant and shameless legitimisation of arsonic activities by the Govt. What i am referring to is the gift of Rs 3600 crore Indu Mills to RPI Activists who illegally occupied the mills and refused to vacate it. And of course none of the political parties dare oppose this move of the government (even a feeble or token opposition is absent) for fear of backlash.

I also believe that high corruption leads to high generation of black money sucking out legitimate liquidity from the system and leading to perpetually higher rates of interest and high inflation. This is very symptomatic of pre-96 era. Interest rates came down only post-98 and this resulted in lower inflation and led to golden period of consistent high growth.

Most of the large developmental infrastructure projects like telecom, roads, power took off in the non-Congress ruled era.

The sad part is that party which helped show India's potential is plagued by infighting and failing to seize the opportunity presented by Congress. Each leader of BJP wants to become the Prime Minister (at least that is the general public perception) and therefore we dont see a coherent strategy to counter the misgovernance of the country from India's largest opposition party.

Technical View Oct 13, 2011

Markets after hitting a bottom of 15745 have risen to 17000 levels where they face multiple resistances.

First is the double top at 17200. Then are the gaps at 17358-664 and 18005-37. It has filled one gap of 16833-17000.

Markets will require tremendous strength to overcome these resistances, possibly gap ups, which looks difficult in the current environment.

On the downside levels of 16400-600 should prove crucial.

Banks and Power Sector Exposure

Bank stock valuations have been hit due to exposure to Power sector and uncertainty related to availability of fuel and PPAs. However if one looks at the groups that are developing these projects, are these worries really justified?

Biggest capacity expansion is by NTPC, followed by RPower, Adanis, Tata Power, Lanco, Jaypee, Jindals etc. Only Lanco maybe considered weaker amongst this and could cause problems to Banks. However it is foremost in terms of capacities actually commercialised and to be commercialised.

Have any of these groups really defaulted to the banks?

Ability of analysts to swing the mood of institutional investors on the basis of some theme (i guess mainly to market their research) is really amazing. Some broking houses actually held roadshows to assess the exposure of banks to power sector and impact that it would have on their earnings and balance sheet.

And for most banks exposure to power sector is less than 5% of their total advances. Power projects typically will have annuity of 25-30 years so a couple of bad years can really be made up.

After more than 25 years, i still cant understand how and why market chooses to react so violently to issues like this and completely decimate the valuations. Maybe because i belong to the school of thought who thinks equity is for the long term and quarterly earnings are less important than the long term prospects.

Europe -- Migration to where the jobs are could be the solution

There should be a simple solution to the problems of Europe. Greece can first stop paying interest on bonds (or ask for a moratorium for 1-2 years), restructure the economy (that is the difficult part, more on it follows), get back in business. Banks which get hit due to restructuring will get support/bail out from their own governments. This way nobody pays for others' sins.

In India we had massive cleaning up of the banking system in the 90s. Restructuring of bank loans happens regularly. So this solution is implementable.

The difficult part is to restructure the economy. That means creating jobs which will pay well and therefore govt support reduces. Europe including Greece are losing competitiveness in mfg. Efforts of the developed world to globalise so that access to markets in developing economy is available seem to have backfired on them as with globalisation, mfg shifted and technology transfer became easy. This problem gets exaceberated by the lifestyle enjoyed by Europeans. I have come across several comments branding Europeans as "Lazy" and "not willing to work". These are comments from Indian companies who acquired businesses in Europe and had tough time getting people to work (meaning work longer hours beyond the official working hours). Greece reportedly has severest problem here with people retiring in 40s and most people working in govt.

Maybe one solution is to export people to where there are jobs and these expats support the local economy (like the gulf employees support Kerala's economy). Given the smallness of population of Europe, the world will have enough jobs for people willing to work. China, India, Canada, Australia, Germany, France, UK, US should allow migration from the affected countries. They can have minimum visa quota.

An unusual solution but one which will work.

And then we are back in business.

Quotes Proverbs Sayings

Only in finance can an old idea be held up as novel and hugely profitable. In

fields such as chemistry or physics, progress is cumulative. In finance, progress

is cyclical. - James Grant

Budget 2010

My takes on budget:

· I I like the cut in personal income tax. It leaves a large sum in hands of consumers. With 50% of population below 25 years of age, such a large cut will spur consumption. And the recovery last year is led by consumption with companies like Nestle, P&G, HUL, Pantaloon, Asian Paints, Castrol, Hero Honda, Bharti all showing tremendous volume growth.

·

I d I don’t think the government will achieve the non-plan expenditure number. It will be overshot by 10% or so resulting in increase in fiscal deficit by 100 bps (from 550 to 650 bps).

·

St S Structural reforms are a positive.

o Govt has set up petroleum regulator and is now setting up coal regulator.

o They have also talked about reforming the judiciary and bringing down the time to settle cases from 15 years to 3 years by FY12. This can be a big positive for attracting international investors.

o They have brought oil deficit within budget and not through oil bonds. Expect some announcement on petroleum prices deregulation. Move to increase diesel prices by Rs. 2.50 is indicative of resolve to get finances in order.

o Reduction in fertiliser subsidy.

o GST from April 2011.

o New Tax code, new companies bill and new regulations for financial sectors are some of the other things which government is focussed on in an effort to deliver better governance.

· B Budget is likely to fuel inflation. I expect margins in this quarter to fall due to higher raw material prices. Increase in excise duty and petroleum prices would add to cost push inflation. Results for march quarter will be impacted due to pressure on margins across all industry segments.

· F Focus on infrastructure through PPP continues. This should ensure GDP growth of over 10% in next 2 years (my own assessment is if we get road sector right, growth could accelerate to 12% per annum in 3 years).

o We are going to see significant addition to power capacities over next 4 years.

o Roads are already upto 9 kms per day from less than a km a day and expected to reach targeted 20kms a day by June.

o Urban infrastructure projects in many cities taking off.

· R Revenue growth, specially direct taxes, maybe much greater than forecast. I remember in Chidambaram’s time direct tax revenues were growing at 40% per annum.

FM has played to the gallery by giving a fiscal deficit number which the market was looking for (though looks extremely difficult to achieve). However I would be cautious in the markets as valuations are determined by actual profits of the companies and large cap stocks are already stretched on valuations and this quarter should see significant margin pressures.

And I expect inflation to pick up significantly leading to tightening of interest rates. So watch this factors as biggest risks to markets.

Enjoy

A Lifelong pursuit of Leisure --- Aditya Puri

A lifelong pursuit of leisure
There is no management bestseller on how to optimise leisure, but we can claim to be experts on the subject after listening to Aditya Puri over a two-hour lunch at the ITC Grand Central’s Kebabs & Kurries, write
Shyamal Majumdar and Sidhartha K . The man, who has just been voted India’s best CEO in Finance Asia magazine’s annual poll of investors and analysts, says his management mantra has been inspired by a cartoon he saw in one foreign newspaper. One half of the cartoon showed the boss neck-deep in work while others outside were having a whale of a time. The other half showed the boss taking a nap while others were all glued to their computers.
“I am sure you know which half of the cartoon is my favourite,” the HDFC Bank MD and CEO says, ordering a lassi .Puri must be the only CEO in the world who doesn’t carry a mobile or laptop; leaves office at 5:30 pm sharp; doesn’t work on weekends, giving him enough time to grow exotic vegetables & fruits at his Lonavla farmhouse; takes at least one long annual leave; and skips networking dinners to pursue other interests such as listening to music and reading.
He has recently added one more must to his daily routine: Talking non-stop to his 10-month-old grandson whenever he is around. “Both of us understand each other’s language perfectly,” Puri says with a hearty laugh.
The 58-year old CEO started his drive to optimise leisure rather early in life. A brilliant student, he was deliberately lax in high school so that his father couldn’t force him into an engineering degree, pursuing which required “extra hard work”. He preferred to graduate in commerce from Punjab University and later qualified as a chartered accountant.
He also recounts how his boss at Citi once asked him whether everything was all right since he had been leaving office a bit early. Puri was then posted in Kolkata. “No Sir, I am working very hard and am in office until it’s dark,” Puri told his boss, without realising that evening descends around 4:30 pm in the eastern part of the country during winter. His boss advised him to look at his watch also before leaving.
Puri orders tandoori rotis ,assorted kebabs and achicken dish and says he is an excellent cook. Well, almost. That’s because he knows the recipes but never cooks himself as his idea of cooking is to issue instructions with a beer in hand. “Giving ideas is my job; there are better people to execute it,” he says. Not surprising, as that’s roughly the same principle he follows rigorously in his work life as well.
However, one thing he has never lacked is his passion to make it big in life and to plan for it meticulously. A young Puri quietly resented the fact that he did not have the ‘pull’ —an euphemism for contacts —that was necessary those days to get a good job. His father, an Indian Air Force officer, didn’t know anybody who could get him a good civilian job, but Puri was thrilled when his mother told him one day that he could easily count on the biggest ‘pull’ of them all. Who is that, an eager Puri asked his mother. ‘ Uparwallah ’(God) was the lady’s answer.
His heart sank then, but Puri hasn’t forgotten that conversation and feels that’s what steeled him to the fact that he has to plan his career every step of the way. He left his job as an accountant at Mahindra & Mahindra to join Citibank because he wanted to move around the world —and to stay in a flat that was as big and comfortable as his cousin’s, who was a Citi banker.
The food is delicious and Puri looks pleased with his choice of the menu. He also remembers the stunned look on his boss’s face when he chose Saudi Arabia over New York as his first foreign posting. The reason was simple: There was a 60 per cent hardship allowance for Saudi Arabia which meant that he could save his entire salary.
Later in life, he decided to go down two notches in the hierarchy to take up a marketing job as he knew an operations job alone wouldn’t take him too far in the bank. The meticulous planning paid off and he soon found himself as the country head of Citi Malaysia. The job gave him many things, one of them being a one-and-a half-acre mansion in one of Kuala Lumpur’s tony localities.
He was also one of the top 50 in Citi to get stock options.
Life, however, changed in 1994 when he met HDFC Chairman Deepak Parekh who offered him the job of heading HDFC Bank, which had just got alicence. What sealed the deal was his father’s illness (“As the eldest son, I didn’t want to live with the guilt of enjoying the material comforts of a Citi job in Malaysia when my father needed me the most”) and Parekh’s assurance that he would get a free hand to run the bank. Nothing else mattered; neither the stock options, nor the tiny Mumbai flat and the makeshift office that consisted of Puri, his table and the many rats that would often feast on the cables.
It’s time for dessert and Puri opts for mango while ordering falooda for us. We realise we haven’t spoken a word about HDFC Bank as yet and that time is running out. Puri, however, makes up for the lost time and gives a fascinating account of what he calls common-sense banking. HDFC Bank, he says, has never let a retail customer over-borrow and has not lent to companies that over-extended themselves.
The bank gets most of its funding from retail depositors, sticks to its credit standards and pricing and follows plain conservative banking. HDFC Bank has been growing at over 30 per cent every year since its inception 15 years back. Many other banks have done so, too, but unlike them, HDFC Bank has never given up its risk-reward balance. Its focus, says Puri, is neither entirely top-line nor bottom-line, but on its customer base.
The bank is also a major player in settlement of commodities and has launched a ‘Kisan Gold Card’ under which farmers who borrow money for buying seeds and fertilisers are required to deposit their produce in an accredited warehouse. The bank, Puri says, is touching people’s lives in rural areas in many other ways, one of them being the hugely successful jewellery loan scheme which monetises idle assets.
The lunch is over, and Puri returns to his favourite topic of how he has enough time on his hands — always. But dig a little deeper, and the CEO in him takes over. Despite the distance he keeps from backbreaking work, Puri says he knows exactly what is happening at each of the bank’s 1,400-plus branches. “If there is an over-withdrawal of cash at some branch, the information reaches me within an hour —wherever I am. For that, you don’t need cell phones; you only need to put proper systems in place.” Though he doesn’t attend networking dinners, he makes it a point to meet clients at their offices during office hours. “Besides, I have reached a stage in life where I don’t have to network any longer; people need to network with me,” he says, as we wait at the portico for his BMW to come in.
Quickly realising this is contrary to his leisure optimisation theory, Puri says he doesn’t need to plan for life after retirement as he has already “retired himself from work”. For a change, he doesn’t sound too convincing.
India’s top bank CEO has fine-tuned his work so efficiently that he has oodles of time for his favourite pastimes
LUNCH WITH BS ADITYA PURI

Planning counts, plans don't

Planning counts, plans don’t’
NIIT Chief Narrates The Story Of A Successful Enterprise
Shelley Singh NEW DELHI
IN THE ongoing Power of Ideas programme, the 254 participants who have made it to the final shortlist are fine-tuning their business plans before they meet investors for funding. They would do well to look at how successful entrepreneurs penned their own plans. Let’s hear from the pioneer of computer learning in India. Back in the winter of 1981, Rajendra S Pawar, chairman, NIIT, wrote the first plan about bringing computers and people together. That plan translated into the company which heralded computer training in India and later got into software services, as well. The 15-page business plan, written in pencil on paper (the kind used in dot matrix printers with holes on the sides) by Mr Pawar in the cool climes of the Uttarakhand hills with ripe fresh apples all around led to the company starting operations in five cities — Delhi, Mumbai, Chennai in 1982 and Kolkata and Bangalore in 1983. Those were early days and soon, the three co-founders Mr Pawar, Vijay K Thadani and P Rajendran were writing another plan in 1984-85. This time it ran into a few 100 pages and “was a vision document that looked 10 years ahead,” recalls Mr Pawar. In the pre-reforms, pre-globalisation era, Mr Pawar was able to peer into the future and realise that computers will be important, but people will not know how to use them and what to do with them. It was this gap that was filled via NIIT. The Rs 1,148-crore company has trained over five million learners at over 8,000 education centres across 40 countries over the years. Today, when we ask him about the business plans that young entrepreneurs should have, the pioneer is quick to say, “Planning is more important than the business plan itself. When you are conceptualising a business, the plan will probably be the third or the fourth step. Entrepreneurs have to visualise an opportunity, see the gaps in the future and understand what is the unmet need they are trying to fulfil via their proposed business endeavours.” In essence, budding entrepreneurs should visualise the future and then work backwards. At the same time, they need to look at both the demand side and the supply side of the business. And one key point from Mr Pawar is that, “entrepreneurs must have their head in the clouds and feet on the ground.” Well, you should think big and be sure that you can deliver. “An entrepreneur must look at the unsolved problem with head in the clouds and feet on the ground to be able to meet the demands of that future. You have to bounce to-and-fro ferociously between the ground and the clouds to build a successful organisation,” Mr Pawar points out. In a plan, while numbers (such as revenue projections, profits, employees and so on) are important, visualising the future and working towards that goal is more significant. The right time and a bit of luck is also important. In NIIT’s case, it was Rajiv Gandhi’s emphasis on technology that helped the company and later the Y2K problem and the whole reforms process acted as a catalyst. There are plans that fail too. “Little failures are part of the game. Plans should be constantly evolving, a static plan will fail. Also, if you think like a manager it may not work as managers work to small tolerances while entrepreneurs work to huge tolerances. Don’t forget that an entrepreneur by definition pushes the envelope, goes into unchartered territory and builds a team with great chemistry. Humility is also the key.” Else, the best laid plan sans any planning might just remain on paper.

Jim Rogers Interview-- Fund Managers can become Farmers

FUND MANAGERS CAN BECOME FARMERS
Even if you are outright bearish, don’t SHORT THE MARKET. Stocks could touch crazy levels, but they may be in CURRENCIES WHICH ARE WORTHLESS. Indeed, a sovereign default and currency turmoil COULD RATTLE WORLD MARKETS in a year or two. In a chat with ET, global investor JIM ROGERS says cotton, silver and sugar can be hot picks. Read on...
At one stage we were inundated with gloomy forecasts, which were further reinforced by the IMF and World Bank. And then suddenly stocks surged — something most were not prepared for. How risky is the market today? Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed... so, it’s going into stocks and real assets such as commodities. It’s a mistake what they are doing. It’s giving short-term pleasure, but there’s long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road. The American bond market is already beginning to go down dramatically as people realise that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money. Stocks are rising even as fiscal deficit is widening. Somewhere it has to snap... It’s going to snap. Later this year, next year, we are going to have currency problems, maybe even a currency crisis. I don’t know with which currency — maybe with the pound sterling, maybe with the US dollar, who knows. It maybe with something none of us have at the moment. When you have a currency crisis, stocks will be affected, many things will be affected. It is not sound, what’s happening out there in the world. In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end. They are doing many of the same mistakes now. What’s different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time. What do you do? No politically-elected government can afford so much pain, unemployment and hardships... America could have. America just had an election. The guy was elected in November and he could have come in the beginning of a four-year term and said the guys before me were hopeless idiots. They ruined things. We have to solve this problem. We have to take some pains now. But don’t worry, we will get through this pain, and in two to three years or four years, things would be fine. And he could have been reelected. If the pain comes in 2010, 2011 or 2012, there will be nobody he can blame. Especially, if things go bad later, the opposition will say, wait a minute, 2009 looked good. The next guy is going to say you did it... But you are right. It’s very difficult for an elected government. You have a newlyelected government in India. Whenever you have a new government they can take some of the pain. You recently said that you would invest in China and Sri Lanka but not in India. Aren’t you betting on the new government in India? I was trying to make a point that if anyone wants to invest in this particular part of the world, the best place would be Sri Lanka. Because it looks like the 30-year war is coming to an end. Throughout history, if you go to a place after the war ends you usually find everything very cheap, everyone is demoralised, people are just depressed and there are enormous opportunities if you have energy. In my view, investing in Sri Lanka in May 2009 is probably a better bet than Pakistan, Bangladesh, India or some of the other countries nearby. Let’s hope the new Indian government does something. I have heard wonderful things from Indian politicians for 40 years. And rarely do they produce. It’s not the first time that the Congress party has been in the power. If they mean it, India’s going to be one of the greatest development stories in the next 20 years. But I don’t know if they mean it. What kind of reforms? Why isn’t the currency convertible, why isn’t foreign capital encouraged, why isn’t foreign expertise encouraged, why is it so protectionist? Why are farmers only allowed to own five hectares? India should be the greatest farming nation in the world. You have the soil, the weather, you have everything and yet an Indian farmer can own only five hectares. How can an Indian farmer compete with a guy in Ireland who can own 1,000 hectares or a guy in Brazil who can own 5,000 hectares? Smart people don’t become farmers. Because what’s the future? Whenever prices start going up, Indian politicians ban futures trading, as if futures trading makes prices go up. It’s the craziest and the most absurd thing in the whole world. Prices go up because there is a reason for prices to go up. Last year you were buying only Chinese stocks. Why? The market collapsed in October-November. That’s when I bought more Chinese shares. I have not bought any Chinese shares since then. I have not bought shares anywhere in the world since then. My way of participating in what’s going on now is to buy commodities. In my view, commodities are the only place where fundamentals are improving. Farmers can’t get loans for fertilisers now, even though inventories of food are the lowest in decades. Nobody can get a loan to open a mine. So, you will have supplies of everything continuing to decline. What else are you looking at while investing? There are some industries in India that would do exceedingly well in the next few years, one of which is water. You have a horrible water problem. China also has a horrible water problem. So, I bought water companies in China. There are some great opportunities if America falls off the face of the earth. China is spending hundreds of billions of dollars to solve the agricultural problem. So, I am buying agricultural stocks and water stocks in China. There are other industries in India which have a great future. I am very bullish on Indian tourism. Wherever I go for speeches around the world I tell people, if you have to go to one country in your lifetime, you should go to India. Your government is going to re-build the military, they say. So, there’s going to be great opportunities here. Also, they may build the infrastructure. So, I see many opportunities in India. The possibility of a sovereign default in the developed world could further depress sentiments. You think it’s possible? In 1918, the UK was the richest and the most powerful country in the world. Within one generation it was in shambles, within two-and-a-half generations it defaulted. The UK defaulted in 1970s and had to be bailed out by the IMF. Many of the countries in the developed world are in serious trouble right now. Iceland has already defaulted. I think there could be a currency crisis because of sovereign debt problems later this year, next year or 2011. Developed nations have defaulted before. Remember the Asian crisis. It was a default of one kind or the other. It has happened before and it will happen again. Are you worried about any particular market or region? I am glad that I have no investments in the UK. Neither long, nor short. I am convinced that it’s in trouble. I am worried about the US. I have sold nearly all of my US dollars. I always had some as I am an American citizen. But I see serious problems developing there. Those two of the big developed countries are the ones that I see with the most likely problems. But the problem is that it never works that way. Everybody is sitting here watching the UK and US and it may happen in say Portugal or some place we haven’t thought of and it will come suddenly to surprise us all. If US unemployment touches the 10%-mark, it would further impact retail sales. How bad could this be for Asia? Let’s pick on China for a minute. If you sell to Wal-Mart in the US and if you are a Chinese supplier you know there is a problem. And you are going to be suffering. Any company that deals with the West is going to have problems. On the other hand, companies that are in the water-treatment business in Asia will care less if the West disappears. They are too busy making money, too busy going to work everyday. What kind of commodities will smart money chase? Can money be made in crude? I own gold but think silver is better right now. Natural gas is cheaper than oil right now, but I own them all. If you want to buy crude, you should probably buy cotton. Because all farmers in the US are planting corn to turn into energy. That means they are not going to plant any cotton. The best way to play crude oil is to buy cotton. Right now, there are huge subsidies around the world for farmers to plant corn, maize, for instance, so that they can be converted into energy. If energy prices go higher, there will be even more of that. If everybody plants his fields with soya, corn or palm oil to turn it into oil or energy then no one is going to plant cotton. And you can make a lot more money in cotton than oil. Between oil and gold, buy cotton. Between oil and gold buy silver. The other way to invest in oil is to buy sugar as everybody is converting a lot of sugar into energy. Silver is so much cheaper on a historic basis. And gold is near its all-time high. Silver is 75% below its all-time high. So, I would suspect that silver and cotton are going to do better than gold and oil. Global population is close to its peak and genetically-modified crops will increase productivity. What makes you so bullish on agriculture? It doesn’t matter. The world has been consuming more than it produced. Food inventories are at a multi-decade low. And we haven’t had any bad weather. We had isolated cases of droughts and things. That may never happen again. But if it does, the prices of food would go through the roof. If there is climate change taking place, the best way to participate is through agriculture or through agriculture products. There are many positive things happening. Right now, there is a shortage of everything in agriculture — seeds, fertilisers, tractors, tractor tyres. We have a shortage of farmers because farming has been a horrible business for the past 30 years. What kind of a market are you witnessing now? It’s a bear market rally. I was going to say I don’t think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000. Which is one reason why I am not shorting stocks right now. Because there is a possibility of this sort of a thing. There is a possibility that stocks could go through unheard of levels, but would be in worthless currency. That naturally brings us to the debate on a new international reserve currency Several countries have raised the issue once again. The US dollar is terribly flawed right now. Something has to be done to the US dollar and something will be done just as something was done about the pound sterling. After World War II, people stopped using the pound sterling and converted to the dollar for many reasons. Something’s going to be done about the dollar. We are much closer to be doing something about it or will be forced to do something about it. India was forced to change in 1991 and the world will be forced to change the currency situation in the foreseeable future. There is already an underlying fear that this mountain of cash will chase assets and eventually force central banks to mop up liquidity. How do you think this would play out? I know they all say, ‘Don’t worry, we will reverse gears and take the excess liquidity out in time.’ I don’t believe them for a minute. No one has ever done it that way. When central bankers started trying to, it caused so much pain that they quickly reversed or have got rid of that central banker and put somebody else in. I just don’t think they could do it. That’s why I am worried about the bond market and the inflation. If all central banks do it together, that’s going to lead to higher unemployment, riots in the streets, civil unrests. Your track record as an investor has been more than impressive. But in today’s market can you replicate your performance of the past 20 years? One can. I probably cannot as I am not spending enough time at it. But it can be done. There are going to be people who we will read about in 20 years having made legendary fortunes starting now. In the 1930s there were people who built huge fortunes and laid the foundations like Templeton. He started in the 1930s. He saw opportunities and took advantage. These are people who saw great advantages and opportunities in the 1930s, acted and became fantastic suc cesses. There may be somebody out there now. I don’t know who she is. Maybe she is in Brazil, China or India. What will you tell a confused fund manager who seeks your advice? Become a farmer. The world has tens of thousands of hotshot fund managers right now. If I am correct, the financial communi ty is not going to be a great place to be in for the next 30 years. We have many periods in history when financial people were in charge, we had many periods when people who produced real goods were in charge — miners, farmers, etc. The world, in my view is changing and is shifting away from the fi nancial types to producers of real goods, and this is going to last for several decades as it always has. This may sound strange but it always happens this way. Ten years from now, it may be farmers who will drive the Lamborghinis and the stock brokers will drive tractors or taxis at best. Interviewed by George Smith Alexander & Sugata Ghosh

Financial Crisis, Stimulus Package etc

Size of the financial crisis is clearly becoming unmanageable. Unfortunately after allowing failure of Lehman Bros, focus of governments is on preventing any more bank failures and thereby of the system. Obviously the markets have not liked this policy and is clearly reflected in the market price of the banking stocks and the drubbing that indices have received.

Question is what is more important, stopping bank failures or reviving economy? Is there any other option?

I believe that while equity of stockholders is completely wiped off, it is time that write offs by deposit holder is given a serious consideration. What if the depositors are asked to take a 10-20% loss on amounts deposited (and maybe compensated in form of 0-coupon long dated bonds). This will free up precious resources of government and restore the health of the financial system pronto.

If losses are borne by those who are supposed to have lost, the system will normalise far more quickly. 10-20% loss of depositors will prevent full-scale bank failures and at the same time provide the capital to the banks and also confidence to start functioning again.

National Humiliation

I fully agree with what Arvind Lavakare has stated. Add to this the corruption that is plaguing our nation. Unless we get out of votebank politics and corruption, our nation will never become a great nation.

It was a national humiliation

Arvind Lavakare

Arvind Lavakare may be 71, but the fire in his belly burns stronger than in many people half his age. The economics post-graduate worked with the Reserve Bank of India and several private and public sector companies before retiring in 1997. His first love, however, remains sports. An accredited cricket umpire in Mumbai, he has reported and commented on cricket matches for newspapers, Doordarshan and AIR. Lavakare has also been regularly writing on politics since 1997, and published a monograph, The Truth About Article 370, in 2005.
Hang your heads in shame, my countrymen. Do it because a dozen-odd terrorists traveled 500 nautical miles of the Arabian sea from Karachi to Mumbai's Gateway of India, just opposite the grandiose Taj Mahal Hotel and proceeded to humble the city of 16.4 million into utter helplessness for over 48 hours even as over 125 civilians and some distinguished professional security men lost their lives to the hand grenades and rifle bullets of a fanatical mindset. It was a humiliation worse than the drubbing the Chinese army gave us in 1961.
It was because our motherland, India, is a soft nation, tested and proven so several times. Despite the weighty evidence of Clement Atlee, the Britain's post World War II prime minister to the contrary, the Congress party brainwashed the entire nation, including the press, that it was the non-violence strategy of Mohandas Karamchand Gandhi that brought us independence.
Atlee had expressed fears regarding the rage of Subhash Chandra Bose's Indian National Army as a reason for its decision to give us independence; another reason was that World War II had liquidated the British Empire and left it to ration even eggs to the citizens of England. But Gandhi disliked Bose's guts and gumption and Nehru sent the officers of the valiant INA to a secret trial in the Red Fort.
Thus, even as the Congress of Gandhi and Nehru, his pampered disciple, ahimsa, non-violence, became the motto of our motherland. So bad has this become over the last 60 years that today even killing a stray dog on the street, however vicious and sick, has become a crime, courtesy another Gandhi, Maneka by name.
Take the more serious issue of terrorism. Excepting during the Khalistan uprising in the eighties that was ultimately doused by K.P.S. Gill and his brave police force, our country's approach to terrorism has all along been tepid and timid, castrated and impotent.
Because almost all the terrorist acts in recent years have involved Muslims as the perpetrators, and because of the Congress fetish of appeasing the minority Muslim community at any cost, our soft national psyche inherited from Gandhi, our response to terrorism has become a combination of impotence and vote bank politics sought to be covered by rhetoric and pleas for peace.
At every stage of our every "encounter" with a terrorist act, our collective national response has been reactive rather than active, defensive rather than offensive. Public statements are issued, action is promised. Period. Nothing else really happens.
At the base of it all is the shameful fact that we choose to be confused by terrorism. We are not sure whether to treat it as a law and order problem or as an act of war against the nation. Our elite journalists of the print and TV/radio world are not even sure as to whether to describe those who indulge in an act of terror as "militants" or "terrorists".
Reams of newspaper reports are testimony to this confusion. The latest Mumbai drama was no different as one prominent TV channel kept on describing the killed terrorists as "militants". Politicians are, or choose to be, equally confused in this simple matter.
Yes, it is a simple matter because the English dictionary will tell you that a militant is one who confronts, face to face, not one who wears a mask; and this militant does not wield an AK 47 or throws hand grenades or detonates a bomb with remote control mechanism.
Further, we have had the phrase "terrorism act" well defined in one of our Constitutional documents right from 1985.
Called "The Constitution (Application to Jammu and Kashmir) Order", it empowered Parliament to enact any law to prevent "terrorist acts" and went on to define "terrorist act" as "any act or thing by using bombs, dynamite or other explosive substances or inflammable substances or firearms or other lethal weapons or poisons or noxious gases or other chemicals or any other substances (whether biological or otherwise) of a hazardous nature." By corollary, the perpetrator of a "terrorist act" is a "terrorist If you get your concepts right; the right action will follow --- provided you love your country more than your political party or your own advancement in political circles.
Tragically, that hasn't happened in our country so far and is unlikely to ever happen till, heaven forbid, a colossal and unbelievable act of terror paralyses the entire country into a daze.
Just recall some events of recent years. The UPA government that came in 2004 quickly repealed the Prevention of Terrorist Act (POTA) which the Vajpayee-led NDA government had introduced after the ghastly attack in December 2001.
It was not withdrawn because of its stringent features but because it was allegedly misused against the minorities (read Muslims). The basic fact was that the Congress, which heads the UPA sarkar, wanted to appease and win over the Muslims with one more lollipop.
Amusingly enough, any call by the BJP for the re-introduction of POTA or some such tough law is counterattacked by the Congress. "Did your POTA prevent the attack on the Akshardham Temple?" they ask.
Forgotten in this child-like question is that it was POTA that secured the conviction of Afzal Guru. Forgotten is that the acceptance of a confession to the police as evidence (considered a draconian legal provision) was what led to the conviction under TADA of Rajiv Gandhi's assassins.
In several other areas as well, our successive governments have failed to act in ways so crucial to minimize, if not totally stop, the reign of terror that now occurs so frequently that from a tragedy it has become a joke for the cynic.
Take the policing of our urban areas which are the focal points of terrorism. Lt General Sinha recently disclosed that in the last sixty years after Independence the number of police stations in the country has increased by a laughable 15 per cent over the figure of 12,000 that existed then.
In contrast, he says, our population has increased four times in that same period even as policing has become so much more complex than before.
Further, whatever police force available is overworked but underpaid, apart from being manipulated and exploited by their political bosses. That is why, at least Mumbai's policemen, and policewomen , look so unfit, almost obese, and so blank in face.
Ditto with our Intelligence force. Marginal increase in their strength has occurred, but assignments include assessment of likely performance of the ruling party in the coming elections. And why the National Security Advisor should have been involved so much in the Indo-US nuclear deal as he actually was is a mystery.
Then there's the human rights industry and our politicians' concern for it much beyond national interest. And there's that impractical concern for "guilty beyond reasonable doubt" even in matters of terrorism. If cockroaches had votes and rats had a religion, our politicians would enact a law prohibiting killing of those two living species as well.
Imagine the People's Democratic Party of Jammu & Kashmir granting pensions from government to families of slain terrorists. Imagine, the Prime Minister himself disclosing his sleepless night over the plight of the mother of an Indian Muslim held in police custody in Australia on suspicion of being involved in a bomb blast but not over the plight of mothers of thousands of his innocent countrymen killed in terrorist violence.
Imagine two Cabinet Ministers oppose the ban on SIMI despite the latter's proven guilt. Imagine one Cabinet Minister wanting all illegal migrants from Bangladesh to be given full citizenship rights, when it is well-known that many among them have links with terrorists. Imagine another Cabinet Minister approving of a University vice chancellor's decision to deploy funds provided by a foreign government to be utilized for the legal defence of two of his University students accused of involvement in terrorist violence.
Imagine, lastly, that amounts running into thousands of crores have been spent on the Haj subsidy for Muslims but the security of our very long coastline on the west is so ill-funded that terrorists can come from Karachi across the Arabian Sea to Mumbai without being spotted.
Contrast all of this is typically indolent-cum-idealistic-cum-selfish Indian attitude to the stark realism and patriotism of the USA when 9/11 occurred in 2001. One thing that nation did shortly after that dastardly day was the enactment by the USA Congress of what's come to be known as the USA Patriot Act. That nomenclature is really an acronym, and the full name of that legislation is "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001". If a name can arouse emotions, that one certainly does. And however draconian that law has been, it has prevented the recurrence of 9/11.
Unless the whole young nation of ours forgets non-violence as a magic mantra and unless our politicians show a commitment similar to that of the USA to engage in a literal war against terror, we shall continue to allow just about a dozen-odd terrorists to humiliate an entire nation for over 48 hours, even as a naïve Prime Minister calls the Pakistan chief of intelligence to share info with us.

Sorry state of India's Infrastructure Projects --- Hijacked by Politicians

Delhi court gets to bottom of highway project delays
The Times Of India, 19 December ,2008,Mumbai

Slams Day-To-Day Meddling By Govt In NHAI Affairs

The Delhi high court seems to have hit upon the root cause of why crucial highway projects across the country have been moving at a snail’s pace in the past few years. And the discovery has left the court both shocked and angry.

The HC found that the ministry of surface transport and highways was indulging in “day to day interference’’ into the affairs of the National Highways Authority of India (NHAI), a statutory body granted functional autonomy by Parliament. The court was so aghast by the fact that NHAI has seen five chairmen in the past twoand-a-half years that it recommended that a law be enacted to ensure that heads of public enterprises have fixed tenures of 3 to 5 years. A division bench comprising Justices Mukul Mudgal and Manmohan said the Law Commission and Centre should seriously consider bringing in such a law which “in our opinion will ensure transparency, efficiency and accountability’’.
The HC’s stinging indictment comes close on the heels of widespread criticism of Union surface transport minister T R Baalu’s reported role in the recent change of guard in the NHAI, which saw N Gokulram being transferred out. There have also been allegations of repeated interference by the ministry resulting in stalling of key highway projects across India.

The court’s strong remarks came while deciding a batch of petitions filed by infrastructure companies assailing NHAI’s shortlisting of bidders for construction of the Hyderabad-Vijaywada section of National Highway 9. In its verdict, HC quashed a government circular rejecting the candidacy of one of the petitioner, GMR, to participate in the bidding process even as it upheld co-petitioner Reliance Infrastructure being declared ineligible.

“The actions of the Union of India...indicates that not only autonomy granted to NHAI by Parliament through a statute enacted in this regard has been curtailed and eroded, but NHAI is sought to be reduced to a mere department of the ministry of road transport and highways,’’ the HC noted.

The Oil trouble continues --- Indian Oil has no money to buy crude

State-Run Oil Co Needs $3Bn Every Month

IOC has no money,
bonds to buy crude


Sanjay Dutta TNN 26th July 2008

New Delhi: Oil’s relentless rally till the last fortnight combined with government lethargy in issuing bonds to make up losses on fuel sales have put Indian Oil Corporation in a spot. The flagship refiner-marketer has run out of money as well as the Centre’s IOUs—which the company has been encashing for foreign exchange—to buy crude.
Indian Oil needs roughly Rs 12,000 crore ($3 billion) every month to buy crude but loses Rs 413 crore daily on fuel sales. As a result, the company has been borrowing heavily from banks and incurring further expense on interest. Lately, it has also been encashing the bonds under an RBI mechanism. In June, IndianOil used up the last of the bonds it had to raise about Rs 9,900 crore through the RBI mechanism. It is now left with bonds worth about Rs 4,300 crore that had already been securitised for raising funds from the overnight call market.

Indeed, IndianOil—as also HPCL and BPCL—has been running on borrowed money. “Our borrowing had reached Rs 42,000 crore in May. In June, it came down to Rs 35,000 crore but if another tranche of bonds does not come through quickly, the borrowings will rise again,’’ a top IndianOil executive said. The company board sometime back had cleared an enabling provision to raise the borrowing limit to Rs 80,000 crore.

The oil ministry has asked the finance ministry for over Rs 50,600 crore bonds to partially make up the losses during the first half of 2008 calendar. The ministry has sought Rs 14,956.17 crore bonds for the last quarter of 2007-08 and Rs 35,672.70 crore more for the first quarter of 2008-09. The total loss on fuels in 2007-08 has been put at Rs 70,579 crore.

Ironically, the situation has been created by none other than the government itself. The government refused to raise pump prices or reduce taxes periodically and let the losses pile up as oil kept climbing. Till last fortnight, the oilmarketers were losing Rs 16.70 on each litre of petrol, Rs 27.61 on diesel, Rs 38.09 on kerosene and Rs 338.53 on each cylinder of cooking gas. This is after the government raised pump prices on June 4 by Rs 5 a litre for petrol and Rs 2 a litre of diesel and Rs 20 per cooking gas cylinder. The government is expected to review the prices in October, but another round of price increase looks unlikely in an election year. If pump prices do not go up and crude remains in the $130 a barrel range, IndianOil reckons it will close the year with a Rs 121,015 crore loss.

CANSLIM --- HOW TO PICK STOCKS

http://www.canslim.net/what.htm

What is CAN SLIM®?CAN SLIM® is a formula created by William J. O'Neil, who is the founder of the Investor's Business Daily and author of the book How to Make Money in Stocks - A Winning System in Good Times or Bad.
Each letter in CAN SLIM® stands for one of the seven chief characteristics that are commonly found in the greatest winning stocks. In his book, he cites many examples including:
Texas Instruments, whose price rose from $25 to $250 from January 1958 to May 1960
Xerox, which went from $160 to the equivalent of $1340 from March 1963 to June 1966
Syntex, which leaped from $100 to $570 in the last six months of 1963
Dome Petroleum advanced 1000% in the 1978-1980 market
Prime Computer rose 1595% in the 1978-1980 market
Limited Stores' 3500% increase from 1982 to 1987.
The C-A-N-S-L-I-M characteristics are often present prior to a stock making a significant rise in price, and making huge profits for the shareholders!
O'Neil explains how he conducted an intensive study of 500 of the biggest winners in the stock market from 1953 to 1990. A model of each of these companies was built and studied. Again and again, it was noticed that almost all of the biggest stock market winners had very similar characteristics just before they began their big moves.
C - A - N - S - L - I - M
C = Current quarterly earnings per share.
They should be up a minimum of 25% - 50% over the year earlier. In fact, of the 500 best performing stocks O'Neil studied in the 38 years from 1953 to 1990, three out of four had earnings increases averaging more than 70% in the latest publicly reported quarter before the stocks began their major price advance. The one out of four that didn't show solid quarterly increases did so in the very next quarter, and those increases averaged 90%!
C - A - N - S - L - I - M
A = Annual earnings per share.
There should be meaningful growth over the last five years. The annual compounded growth rate of earnings in the superior firms should be from 25% to 50%, or even more, per year. With all of this emphasis on earnings, it is important to understand something about Price-Earnings Ratios (P/E). Factual analysis of the greatest winning stocks shows that P/E ratios have very little to do with whether a stock should be bought or not! In fact, you will automatically eliminate most of the best investments available if you're not willing to by a stock that trades with a high P/E. Remember earlier when I mentioned Xerox? In 1960 it traded at a 100 P/E - before it went up 3300% from $5 to $170 (adjusting for the stock splits). Genentech was priced at 200 times earnings in November 1985, and it bolted 300% in the next 5 months. Syntex sold for 45 times earnings in 1963, before it advanced 400%. For years analysts have misused P/E ratios, and it's amazing to me how so many people will still ask about a company's P/E before they ask about a company's earnings growth.
C - A - N - S - L - I - M
N = New product/management/price high.
Usually it is a new product or service that causes the big earnings acceleration we're looking for. Consider these examples:
Rexall's new Tupperware division, in 1958, helped the stock go from $16 to $50.
Thiokol came out with new rocket fuels for missiles back in 1957-1959. The stock blasted from $48 to the equivalent of $355.
In 1957-1960, Polaroid came out with the "picture in a minute" self-developing camera, the stock went from $65 to $260. Then in 1965-1967 they came out with a color-film version. The stock repeated with an amazing, split adjusted, rise from $23 to $133.
Syntex, in 1963, began marketing the oral contraceptive pill. In six months the stock soared from $100 to $550.
Computervision stock advanced 1235% in 1978-1980, with the introduction of Cad-Cam factory automation equipment.
Price Company went up 15 fold in 1982-1986 while opening their chain of wholesale warehouse membership stores.
Get the point? 95% of the greatest winners in the 38 year study O'Neil conducted were companies that had a major new product or service.
The other important thing to consider is the price of the stock. Most people miss the biggest winners in the market because of what O'Neil refers to as "the great paradox" of the stock market. It is hard to accept, but the stocks that seem too high and risky to the majority usually go higher and what seems low and cheap usually goes lower. If you don't think this is true, I challenge you to look in an old newspaper from a few months ago and observe a good number of stocks highlighted because they hit new highs and new lows. Then see where they are today. Most of the highs will be higher, and the lows will be even lower.
C - A - N - S - L - I - M
S = Supply/Demand: Small Cap + Volume
Supply and demand dictates the price of almost everything in your life. The law of supply and demand is more important than all the analyst opinions on Wall Street. The price of a stock with 400 million shares is hard to budge up because of the large supply of stock available. Yet, if a company has only 2 or 3 million shares outstanding, a reasonable amount of buying can push the price up rapidly because of the small available supply. If you are choosing between two stocks to buy, one with 60 million shares outstanding and one with 10 million shares, with all other factors equal, the smaller one will usually be the bigger mover. Stocks that have a large percentage owned by top management are generally better prospects. Again referencing O'Neil's 38 year study, more than 95% of the companies had less than 25 million shares outstanding when they had their greatest period of earnings improvement and stock price performance.
Foolish stock splits can hurt a stock's performance. Watch out for companies that split their stock 2 or 3 times in just a year or two. The splitting creates a larger supply and may make a company's stock performance more lethargic, like many "big cap" companies. Large holders who thinking of selling are often inclined to sell their 100,000 share positions before a 3-for-1 split would have them looking to sell 300,000. Smart short sellers (an infinitesimal group) pick on stocks beginning to falter after enormous price runups and splits, realizing that the potential number of shares for sale (particularly by funds) has dramatically been increased.
C - A - N - S - L - I - M
L = Leader
People often buy stocks they're comfortable and familiar with, like an old pair of shoes. Usually these are draggy, slow-pokes rather than leaping leaders. It is really important to look at how your stock is performing in relation to the overall market. The 500 best performing stocks from 1953 to 1990 averaged a relative price strength of 87 (scale of 1-99) just before they began their major advances in price. Avoid laggard stocks and look for genuine leaders.
C - A - N - S - L - I - M
I = Institutional Sponsorship
It takes big demand to move a stock significantly higher in price. Institutional buyers are the most powerful source. You don't need a large number of institutional owners, but should have at least a few. No institutional sponsorship in a stock is a bad sign because odds are that many institutional investors looked at the stock and passed it over. The things we are looking for with C-A-N-S-L-I-M are really signs that the bigger money (mutual funds, banks, insurance companies, pension funds, etc.) is coming into the stock. See that there is a better-than-average performance record by at least a few of the institutional owners.
Another good thing about some institutional sponsorship is that it provides buying support for the stock. Beware of stocks that become "over owned". By the time performance is so obvious that almost all institutions own it, it is probably too late. Pay attention to whether the number of institutional owners is increasing or decreasing.
C - A - N - S - L - I - M
M = Market Direction
You can be right on everything else, but if you are wrong about the direction of the broad market you are still likely to lose money. The best way to analyze the overall market is to follow and understand every day what the general averages are doing. The difficult to recognize, but meaningful changes in the behavior of the market averages at important turning points is the best indicator of the condition of the whole market.
What signs should you look for to detect a market top? On one of the days in the uptrend, the total volume for the market will increase over the preceding day's high volume, but the Dow's closing average will show stalling action, or substantially less upward movement, than on prior days.
The spread between the daily high and low of the market index will likely be a bit larger than on the earlier days. Normal market liquidation near the market peak will only occur on one or two days, which are part of the uptrend. The market comes under distribution while it is advancing! This is one of the reasons so few people know how to recognize distribution (selling).
Immediately following the first selling near the top, a vacuum exists where volume may subside and the market averages will sell off for four days or so. The second, and probably the last early chance to recognize a top reversal is when the market attempts it's first rally, which it will always do after a number of days down from it's highest point. If this first attempt to bounce back follows through on the third, fourth, or fifth rally day either on decreased volume from the day before, or if the market average recovers less than half of the initial drop from it's former peak to the low, the comeback is feeble and sputtering when it should be getting strong. Frequently the first attempt at a rally during the beginning of a downtrend will fail abruptly. Possibly after a one day resurgence, the second day will open up strong, only to sell off toward the end of the day and suddenly close down.
After an advance in stocks for a couple of years, the majority of the original price leaders will top, and you can be fairly sure the overall market is going to get into trouble. It is very important to pay attention to the way the leading stocks are acting.
C - A - N - S - L - I - M

Warren Buffet's Tenets

http://www.investorweb.com.au/school/buffett.asp

Warren Buffett Methodology
Content
Who Is Warren Buffett?The Warren Buffett Investment MethodologyBuffett's TenetsSummary of Buffett's Investment Process

Who Is Warren Buffett?
Warren Buffett is Chairman of Berkshire Hathaway Inc., a holding company, with interests in several subsidiaries engaged in a number of diverse business activities. Included in these subsidiaries is GEICO Corporation, the seventh largest auto insurer in the United States. Publicly traded companies include a 10.5% holding in American Express Company, 8% of The Coca-Cola Company, 9.5% of Federal Home Loan Mortgage Corporation, 8.5% of The Gillette Company, 16.5% of The Washington Post Company and 8% in Wells Fargo & Company. Berkshire Hathaway Inc. also has holdings or owns several private companies.
The Warren Buffett Investment Methodology
Warren Buffett's investment methodology is based on the following 12 tenets.
Buffett's Tenets
Business Tenets
Is the business simple and understandable?
Does the business have a consistent operating history?
Does the business have favourable long-term prospects?
Management Tenets
Is Management rational?
Is Management candid with its shareholders?
Does management resist the institutional imperative?
Financial Tenets
Focus on return on equity, not earnings per share
Calculate "owner earnings"
Look for companies with high profit margins
For every dollar retained, make sure the company has created at least one dollar of market value
Market Tenets
What is the value of the business?
Can the business be purchased at a discount to its real value?
Summary of Buffett's Investment Process
When Buffett invests, he sees a business whilst most investors see a stock price. According to Buffett, the investor and the business person should look at the company in the same way, because they both want essentially the same thing. The business person wants to buy the whole company and the investor wants to buy portions of the company. Buffett believes that in the long run, the price of the stock should approximate the change in value of the business. He believes it is foolish to use short-term prices to judge a company's success. Instead, he lets his companies report their value to him by economic progress. Once a year, he checks several key variables:
Return on beginning shareholder's equity
Change in operating margins, debt levels and capital expenditure needs:
The company's cash generating ability
If these economic variables are improving then Buffett concludes that the share price should reflect this in the long term.
Buffett avoids companies that are in need of major overhauls. He will only purchase companies that have shareholder-orientated managers. His investment methodology follows a four step process.
Step 1: Turn off the stock market
Buffett does not have a stock quote service in his office. He believes that by owning shares in an outstanding business for a number of years, what happens in the market on a day-to-day basis is inconsequential.
Step 2: Don't worry about the economy
Except for his preconceived notions that the economy has an inflation bias, Buffett dedicates no time or energy to analysing the economy. He prefers to buy a business that has the opportunity to profit regardless of the economy.
Step 3: Buy a business not a stock
Before investing in a company Buffett addresses the following key questions:
Is the business simple to understand?
Does the business have a consistent operating history?
Does the business have favourable long-term prospects?
Is management rational?
Is management candid with its shareholders?
Does management avoid the institutional imperative – irrationality?
From a financial point of view Buffett advocates.
Focus on return on equity, not earnings per share – a true measure of annual performance because it takes into consideration the company’s ever-growing capital base, the ratio of operating earnings to shareholders equity.
Calculate the "owner earnings" – Buffett seeks out companies that generate cash in excess of their needs as opposed to companies that consume cash. To determine owner earnings add depreciation and amortisation charges to net income and then subtract the expenditures the company needs to maintain its economic position and unit volume
Look for companies with high profit margins
For every dollar that has been retained, make sure the company has created at least one dollar of market value – to calculate this subtract from the company’s net income, all dividends paid to shareholders. Add the company’s retained earnings over a 10-year period. Then find the difference between the company’s current market value an its market value 10 years ago. If the change in the market value is less than the sum of retained earnings, the company is going backwards.
Then from a market perspective Buffett asks:
What is the value of the business – the value of the business is determined by the estimated cash flows expected to occur over the life of the business discounted at an appropriate interest rate. Buffett uses the 30-year US Treasury bond rate to discount expected cash flows.
Can the business be purchased as a significant discount to its real value – Buffett’s rule is: purchase the business only when its price is at a significant discount to its value.
Importantly, it is only at the final step that Buffett looks at the stock’s market price.
Buffett believes that whilst calculating the value of the business is not difficult, problems can arise when an analyst wrongly estimates a company’s future cash flow. Buffett deals with this problem in two ways:
He increases his chances of correctly predicting future cash flows by sticking with businesses that are simple and stable in character; and
He insists that each company he purchases there must be a margin of safety between the purchase price and the determined value.
Step 4: Manage a portfolio of Businesses
Buffett believes that wide diversification is only required when investors do not understand what they are doing. "On the other hand if you are a know-something investor able to find five to ten sensibly priced companies that possess long-term competitive advantages, conventional diversification makes no sense to you".
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Sam Walton's Ten Rules

Sam Walton 1918 - 1992

Sam Walton, the founder of Wal-Mart, grew up poor in a farm community in rural Missouri during the Great Depression. The poverty he experienced while growing up taught him the value of money and to persevere.

After attending the University of Missouri, he immediately worked for J.C. Penny where he got his first taste of retailing. He served in World War II, after which he became a successful franchiser of Ben Franklin five-and-dime stores. In 1962, he had the idea of opening bigger stores, sticking to rural areas, keeping costs low and discounting heavily. The management disagreed with his vision. Undaunted, Walton pursued his vision, founded Wal-Mart and started a retailing success story. When Walton died in 1992, the family's net worth approached $25 billion.

Today, Wal-Mart is the world's #1 retailer, with more than 4,150 stores, including discount stores, combination discount and grocery stores, and membership-only warehouse stores (Sam's Club). Learn Walton's winning formula for business.

Rule 1: Commit to your business. Believe in it more than anybody else. I think I overcame every single one of my personal shortcomings by the sheer passion I brought to my work. I don't know if you're born with this kind of passion, or if you can learn it. But I do know you need it. If you love your work, you'll be out there every day trying to do it the best you possibly can, and pretty soon everybody around will catch the passion from you — like a fever.

Rule 2: Share your profits with all your associates, and treat them as partners. In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations. Remain a corporation and retain control if you like, but behave as a servant leader in your partnership. Encourage your associates to hold a stake in the company. Offer discounted stock, and grant them stock for their retirement. It's the single best thing we ever did.

Rule 3: Motivate your partners. Money and ownership alone aren't enough. Constantly, day by day, think of new and more interesting ways to motivate and challenge your partners. Set high goals, encourage competition, and then keep score. Make bets with outrageous payoffs. If things get stale, cross-pollinate; have managers switch jobs with one another to stay challenged. Keep everybody guessing as to what your next trick is going to be. Don't become too predictable.

Rule 4: Communicate everything you possibly can to your partners. The more they know, the more they'll understand. The more they understand, the more they'll care. Once they care, there's no stopping them. If you don't trust your associates to know what's going on, they'll know you really don't consider them partners. Information is power, and the gain you get from empowering your associates more than offsets the risk of informing your competitors.

Rule 5: Appreciate everything your associates do for the business. A paycheck and a stock option will buy one kind of loyalty. But all of us like to be told how much somebody appreciates what we do for them. We like to hear it often, and especially when we have done something we're really proud of. Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They're absolutely free — and worth a fortune.

Rule 6: Celebrate your success. Find some humor in your failures. Don't take yourself so seriously. Loosen up, and everybody around you will loosen up. Have fun. Show enthusiasm — always. When all else fails, put on a costume and sing a silly song. Then make everybody else sing with you. Don't do a hula on Wall Street. It's been done. Think up your own stunt. All of this is more important, and more fun, than you think, and it really fools competition. "Why should we take those cornballs at Wal-Mart seriously?"

Rule 7: Listen to everyone in your company and figure out ways to get them talking. The folks on the front lines — the ones who actually talk to the customer — are the only ones who really know what's going on out there. You'd better find out what they know. This really is what total quality is all about. To push responsibility down in your organization, and to force good ideas to bubble up within it, you must listen to what your associates are trying to tell you.

Rule 8: Exceed your customer's expectations. If you do, they'll come back over and over. Give them what they want — and a little more. Let them know you appreciate them. Make good on all your mistakes, and don't make excuses — apologize. Stand behind everything you do. The two most important words I ever wrote were on that first Wal-Mart sign: "Satisfaction Guaranteed." They're still up there, and they have made all the difference.

Rule 9: Control your expenses better than your competition. This is where you can always find the competitive advantage. For twenty-five years running — long before Wal-Mart was known as the nation's largest retailer — we've ranked No. 1 in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you're too inefficient.

Rule 10: Swim upstream. Go the other way. Ignore the conventional wisdom. If everybody else is doing it one way, there's a good chance you can find your niche by going in exactly the opposite direction. But be prepared for a lot of folks to wave you down and tell you you're headed the wrong way. I guess in all my years, what I heard more often than anything was: a town of less than 50,000 population cannot support a discount store for very long.

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And Now it is RBI's turn to rescue the Oil Companies

Oil firms can sell more bonds via special window

BS Reporter / Mumbai June 12, 2008, 4:07 IST





Public sector oil marketing companies (OMCs) have another reason to cheer with the Reserve Bank of India today allowing additional amount of bonds to be sold through the special market operations to ease the liquidity pressure on these companies.

On May 30, RBI had decided to allow the three public sector OMCs – Indian Oil Corpoation, Hindustan Petroleum and Bharat Petroleum – to sell the oil bonds issued to them through designated banks to help them avoid selling them at a discount. It had, however, put a ceiling of Rs 1,000 crore for a single day.

In a late evening statement today, RBI said that it has decided to enhance the ad-hoc ceiling to Rs 1,500 crore a day.

So far, only IndianOil has sold bonds through the special window.

A NewsWire 18 report said that RBI bought Rs 955 crore of 8.40%, 2025 oil bond today from IndianOil. Yesterday the largest OMC encashed bonds worth Rs 950 crore and has been almost exhausting the limit alone.

The move comes at a time when crude oil prices have been hovering over the $130 a barrel mark and is putting fresh pressure on the OMCs to generate cash.

Though the government has allowed a marginal increase petrol, diesel and cooking gas prices, these companies are still facing liquidity pressure and the gains from have been eroded with the Indian basket, or the price at which OMCs buy crude, has crossed the $125 a barrel mark. On Tuesday the cost of the Indian basket was estimated at $130 a barrel.

Apart from the special window for oil bonds, RBI had also provided OMCs the facility to purchase foreign exchange through designated banks at market exchange rate.

Government's less than half hearted measures

Govt raised prices of petroleum products but the raise is clearly insufficient. Total deficit is now at Rs. 245,000 crores (and every dollar increase in oil prices increases it by USD 700 mn--at current exchange rate).

Price rise will reduce deficit by Rs.22,000 crores and duty reduction will reduce deficit by Rs. 22,000 crores both totalling Rs. 45,000 crores. We still have a gap of Rs. 200,000 crores.

This is proposed to met by oil bonds (banking system)-- Rs. 95,000 crores and upstream companies ---Rs. 45,000 crores, a total of Rs. 140,000 crores. This leaves a gap of Rs. 60,000 crores for which no provision is made.

Money is not going to come from thin air and this gap may have been left in the hope that oil prices will come down and the actual deficit will be lower. It is disastrous to manage economic affairs on hope.

And in any case, what the government is saying is that Rs. 200,000 crores has to be met by oil companies and banking system. Question is whether these sectors have such financial resources and what happens to the long term economic health of these institutions?

And what shall be do in 2009-10? Where is the money going to come from? Remember in 2007-8, oil companies and banking systems have already funded Rs. 70,000 crores.

Keynes vs Monetarists

An interesting article appeared in Mint (WSJ of India) couple of days ago. It talks of Keynesian economics (his solution for 1929 depression was to dig roads and fill them)- which believed in fiscal stimulus and the monetary economics -- which believes in controlling economy through interest rate changes.

today we are in an era where fiscal discipline is assumed (so keynesian economics is dead) and monetary policy is used the world over. in india also, over the past few years we have seen importance of budget being reduced and it is the RBI's policy which is eagerly awaited.

fiscal deficit works if it reaches the intended beneficiaries-- thus dig roads and fill them would lead to money reaching the poor -- but if fiscal deficit goes to fund subsidies, it has proved disastrous-- recent examples would be countries like Argentina, Brazil, Zambia etc.

monetary policy also has to be used carefully--- if its focus is only inflation control, which is how it is being used world over, will hurt growth--- too much tightening hurts growth and too liberal would lead to excesses in economy including asset bubbles, as has happened in USA.

it is my view that our current set of policy makers are all strict monetarists--- Dr. Manmohan Singh, Dr Rangarajan and YV Reddy and their policies are hurting growth. also strict monetary policy would assume fiscal discipline which is lacking in India.

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Views
Keynes has a lot to teach us
John Maynard Keynes was born 125 years ago this week. Three giants —Keynes, Milton Friedman and Friedrich Hayek— dominated 20th century economics and continue to be relevant in this century.  Keynes had led a successful revolution against the mainstream economics of his time. He was also a man of practical action. Keynes has been closely identified with a style of economic policy which believes that monetary policy is often toothless and that fiscal policy is the best antidote to slowdowns and recessions. This was the conventional wisdom in the three decades after the end of World War II. A very crude version of Keynesian policy even went so far as behaving as if huge government deficits were not much of a problem. There was often a gap between what the great man said and how his many disciples interpreted him. The Keynesian consensus fell apart in the 1970s as stagflation gripped the Western world. Monetarism made a comeback, and since then we have come to believe that central banks hold the key to stable economies. The successive bubbles blown by central banks over the past decade and the growing power of financial markets has cut into both the credibility and efficacy of monetary policy. There are signs that fiscal policy is making a comeback. Even the International Monetary Fund has softened its opposition to bigger fiscal deficits. (Fiscal deficits of the type India has will continue to be a worry.) But there is another Keynes who has a new relevance in our times. He was a student of probability. Uncertainty and expectations play a big role in his economic writings. He believed that investment in an economy is driven by something as subjective and psychological as "animal spirits". Keynes was also a master speculator. He understood both power of financial markets and their shortcomings. "Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done," he famously wrote. How true.