Tuesday, August 24, 2010

The Era of New Normal

It has been 6 years since Goldman sachs chief economist coined the term BRICs which refers the growing economic power houses Brazil,Russia,India and China.This term is still is widely popular and used by many when talking about export,GDP,stocks etc.More about BRIC definition

Off late the market is buzzed with new word "New Normal".

More than two years after the start of the financial crisis, markets and economies are showing signs of recovery, yet the many factors affecting them remain complex and the outlook is still uncertain. PIMCO calls this the New Normal,a world in which growth prospects may be lower and long-held assumptions about portfolio allocations are being challenged

They call this is as new normal then that means there should be a old normal also right.when did it start?
It was a period characterized by declining interest rates beginning around 1982, a transition to low inflation beginning in the late 70s, accelerated use of financial leverage, increasingly complex financial innovation and loose regulation.    

 So what are effects of it ?
All of this led to a period of reliable growth of around 6%–7% nominal GDP,this  growth led to appreciation of most assets: bonds, stocks, real estate and commodities. The key to this asset appreciation was, of course, financial leverage, but also operational leverage. In an environment of consistent growth companies can gear their plants, equipment and human resources to take advantage of that predictability in order to produce returns and return on equity. That was the old normal.
what is New Normal?

The new scenario has a number of implications for both growth and investment. For instance, we expect nominal GDP growth rates to trend lower in the New Normal, probably around 3%–4%. And because of the financial and operational deleveraging we are seeing, returns on assets will likely be half of what they were during the previous 10–20 years. And the deleveraging, re regulation and de-globalisation that will weigh on growth is likely to be the new model in the foreseeable future.

More can be found at this location:

Talks about housing bubble and its implications on economy as a whole'The New Normal' for business

The era of cheap credit, which was the fuel of the economic growth engine, is definitely behind us. The shadow banking system that helped sustain it has collapsed, and quite rightly regulators are looking at ways to shut that door for good.

Therefore investors should not view this world by comparing with the conditions in past and not to expect the similar kind of run in stocks,bonds,real estate etc ..

Monday, August 23, 2010

Extensible Business Reporting Language

The RBI is angry over Public Sector Banks  not using technology in there business process. Seems there are using manual inference in complying data to RBI.Can get more information at this RBI-puts-IT-challenged-PSBs-on-notice

Given the circumstances, RBI has said it will come out with a road-map, giving banks a deadline for compliance. RBI's own plans to use IT to supervise banks better and generate more frequent data hinges on banks' adoption of technology. RBI plans to introduce a new system using XBRL (Extensible Business Reporting Language) which allows its computers to communicate directly with the servers in banks and pull out the required information

Some time back  did a googly about this reporting format but  could not get much learning resources at that time.. but not this time...a place to know more about future business reporting format resource

Wall Street

Nasdaq and PricewaterhouseCoopers team up to launch an XBRL-pilot program that will allow firms to view SEC filings

So what is this all about? Its XML: the next big thing . Tags that help machines interpret data could transform e-business and simplify the exchange of information. Artcile from IBM about XML  and XBRL has the  ability to simultaneously display and reveal context of financial information is one of the primary motivations behind this language

Why will Financial Professionals Use XBRL?

Why would an Accounting or Financial professional use XBRL? Some of the benefits of using XBRL include:

  • Cuts down on data manipulation
  • Facilitates paper-less financial reporting
  • Conforms to industry-accepted methods
  • Can cut time required to perform various accounting tasks
  • Major software vendors will incorporate XBRL
  • Permits interchangeability of data
  • Analysis of multiple company financial information improves
More can be found in the links provided

Saturday, August 21, 2010

Nifty Index Analysis ...Part1

Its around the same time 3 years ago our Markets started making new highs at rapid pace and now after 3 years we in the same phase. At that time the so called Analysts predicted Nifty to reach 7000 by 2008 December. Yep it moved but towards south, Nifty was around 3500 in Dec 2008. 

“We are bullish on emerging markets and bullish on the Indian equities market as well,” 
Its Ridiculous to hear from a Chief Strategist
“We continue to like the infrastructure story; it is a global story. We are upbeat on engineering and construction services and also on steel,”
Still Countries like Greece and Spain are unable to come out of the Real Estate bubble created at that time

Anyway leaving that and its not in  my agenda to prolong that topic.Here i was looking at how Indian Markets reacted to Global Effects and how Quickly Market got a turnaround. I took a few sectors and compared how it performed vs Nifty. I had to take them out separately for scaling purpose

  1.  Below is Bank Nifty in Comparison with Nifty. Bank Nifty and Nifty Reached Peak at same time in Feb-Mar 2008. From then on slide Started and Bank Nifty Underperformed Nifty and the Lehman Crisis made Nifty to Reach its lowest point . After that it was moving together for some 1 year and off late from April2010 it started Over Performing Nifty and is setting new Highs.

     2. Infrastructure sector index also reached peak in Feb 2008 and slide started from then and it underperformed nifty by a margin till 2009 mid, But the thing which is interesting here is margin by which its underperformed is increased. That implies Infra sector has not come out of blues or Infra stocks at that time were quoting at irrational  prices. Anyway if heard of JP Morgan analyst comments and believe him then its Good time to buy selective Stocks like Noida Toll Gate,Lanco,GMR at right price. BTW whats the right price ? :) BTW check this Lodha Devlopers

     3. IT sector started lagging the market at the Peak Level and carried the same level till 2009 and now on 2010 it overtook Nifty and is Overpowering. Going Forward from good domestic demand to IT and few negatives else where i assume it will closely follow nifty 
    4. Many Like MidCaps cause its easy to identify growth stocks in it and off late MidCaps started to Over perform Nifty and is all set to give tough for nifty
    5. Realty sector just like infra sector is lagging the market and it suffered the most from the Bubble followed by crisis. Real Estate reminds me of DLF and Unitech(Alleged Scam). Both the stocks suffered a lot from real estate price crash as well as huge debt on its books. I guess the Hangover for real estate stocks is not over and still they are unable to reach the past glory .Here comes Lodha tallest building for ultra Rich  
 Thats all for now will come up with more in another post

Tuesday, August 10, 2010

When is Next Financial Crisis ?

Now a days everyone is talking about when is next financial crisis going to come up and in it what form its going to come up ?. A school going kid asked her father Jamie Dimon Chief Executive Officer of  JPMorgan Chase & Co.  "what is financial crisis"? , with a smile he said that "its event which occurs once in 5 to 7 years" And he went to say the same thing to Financial Crisis Inquiry Commission .The point he is talking is we should be getting ready for another crisis anytime from now.

To Reduce the chance of happening another crisis is not to ban products which increase speculation but to make the products more transparent and allowed over regulatory body( like a exchange). Most of the products like OTC derivatives which are widely believed to be cause of crisis should be regulated and thereby reducing the risk.

At the same time they(economists,traders,investors) say a debt bomb and mother of all bubbles ..(Chinese Debt) is still raising and one small pin can burst it in coming days. From the vast amount of literature on web one can say that Chinese real estate prices  multiplied in past 2-3 years due to easy lending by Chinese banks and they cannot sustain to easy lending practices for very long time .
Here are couple of new items:
Pricking the bubble
Fitch warns China banks face big 'bubble risk'

The important thing over here is how much of its market is correlated with India in larger time frame. I believe we have a strong correlation with Chinese economy and also we might face the same problems in coming days. The exceptional growth we had in past few years is generated with debt(its kind of PONZHI Scheme which only government can run...borrow money to pay the bill ) and creating growth with debt is not all a bad idea.But for how many years we can stimulate the growth with this debt is the question.

And coming to shorter time frame Once the RBI starts increasing the interest rate to tackle inflation or removing stimulus ,it might lead to situation where it will become hard to sell houses by real estate companies or companies finding tougher to borrow money etc which in turn might lead to asset price fall which again has domino affects on banks balance sheet.

And if u look at my previous post of Chance of India Defaulting?  one can see that we might face huge redemption pressure in coming years. To repay the small amount in 2010 and to meet to the government funding gap for this year it already dis-invested a lot of companies and many more in line in this year. If they carry on like this am not sure how many of PSUs can remain with public in future and how our future generation will share the burden will be determined in coming days(years)  :)