Why Equity rises when the Bonds fall? (Ref: 09-049)

1)

Why Equity rises when the Bonds fall? (Ref: 09-049)

Bonds and Equity always have inseparable relationship. They tend to go together - sometime one step back or forward. Rarely they act out of step with each other.

The reason is Bond prices rise, when the interest rates fall. If interest rates fall, the Corporate profit also tend to go up, so the equity market picks up the clue and it rises too. Bonds are the leaders, Equities are the followers.

Further, bond market is several times larger than equity market for the simple reason that large investors are interested in yield, that is rate of return by way of interest. Solid bond investors never touch equity by 10 feet pole.

Of late, however, the relationship is faltering. The equities are rising and bonds are falling - in other words - equities are trying to lead the bonds - but it never happens - at least history shows.

When the banks are marching up in never ending parade of declaring losses into billions, why the equities are rising. The reason appear to be - equities are rising by default.

The mortgage market is almost dead and still worsening, the bond market is still reeling under the stress of sub-prime crisis, the banks are considered the most risky bet to park one's money because no one knows which bank is under water and how deep they are?

The large investors, pension funds, mutual funds, are finding increasingly difficult to find a place to park the money. They know that -
- Bonds are worst bets due to credit defaults.
- Market interest rates are rising. (do not look at FED rates) - not good for bonds as well as equity
- Mortgage markets are still faltering. It used to be one of the world's safest investments - but now - no longer
- Treasuries are not considered attractive, because of perception that FED is done with reducing interest rate. if the rates rise, the treasury yield rises ( or the bond prices start falling)
- Commercial Paper market is also dead.
- Banks are considered unsafe because no one knows how many skeletons are inside the closet.
- Gold, commodities, and food grains have gone up almost twice or thrice - making them risky bests
- the only remaining fort is "equity" so money flows down to equity.

How long this inverse relationship will last? No easy answers. If the credit crunch eases, the bonds will rebound and money which is parked in equities for so long, will flow back into bonds from equity.

So next time, when the bonds begin to rise, the equity may fall, although the equity too has to rise if history is the guide.

This time around, the history will not repeat itself. The excess money now found in equity will begin to flow into bonds from equities. So, when the general expectation is for equity to rise with the bonds, almost reverse will happen. That is called "Market Surprise"

Kalidas, Hong Kong
15/5/2007

2)

HPCL: When I mentioned the target of over Rs 2400 in 3 years time, why should there be hesitation to buy at Rs 230 level or so.

As per MYIRIS financial, HPCL made a profit of Rs 1571 crores and with only 33 crore shares outstanding, EPS is Rs 46 - pays Dividend of Rs 18 per share or 7.65% yield , higher than Savings interest.

HPCL do not appear to have accounted for Oil Bonds issued by GOI in lieu of oil subsidy. If you recall, I said clearly that all oil majors will have to account for either interest income from Oil Bonds (Investment) or as outright income (straight profit)

Due to taxation angle, these majors may not recognize this as outright income. However, HPCL did seem to have received oil bonds over Rs 6400 crores in 2007 alone as per the following figures: (This should have been recognized as outright income because these are non-refundable bonds.)

Investments...7127 Cr (2007)...825 Cr (2006)... 825 Cr (2005)
Total Debt....10517 Cr (2007)..6664 cr(2006)...2185 cr (2005)

In other words, the Investment is shown by increasing the total debt on liability. This is not company's debt to outside world, but Government of India's debt to these oil companies.

IF CORRECTLY ACCOUNTED FOR
If you divide additional Rs 6400 crores (as Income and not as Investment) with 33 crores equity shares, it works out to Rs 193 per share. Imagine, what will happen to the share price when this is accounted for as EPS later.)

I have no control how the company accounts for certain part of its operation, as Income or Investment (when it is not).

GOI is under pressure to do away with oil subsidy altogether. Social responsibility does not favor quicker actions, as primary concern of GOI is to fight inflation, and if oil subsidy is lifted at this stage, the inflation might spike up to double digits.

Note that Oil Bonds carry higher interest of about 8% to 10%. If that is the case, the extra investment of Rs 6400 crores will give this year extra interest income of Rs 640 crores or Rs 19 EPS against full year of normal EPS of Rs 46. The cash dividend of Rs 18 will multiply in years to come.

If there are few stocks in the market, which you can buy and forget for next 10 years, THIS IS IT with BPCL and IOC. They making tons of money and I will wager on them with my major investment into them.

Please note that intrinsic value of these oil major is extremely high. Their real estates were acquired at few paise per square feet and you know where the real estate value today after 60 years.

One share of Reliance (Rs 2650) earns Rs 85 EPS and pays a dividend of Rs 10 per share (0.37% Yield) . If one switches from 1 share of RIL into buying 11 shares of HPCL, he will earn Rs 11x18 = Rs 198 in dividend alone against Rs 10 paid by RIL.

HPCL has built in massive value whereas RIL is bloated. Its book value is Rs 432 (share prices are 6 times the book value) whereas HPCL understated book value is Rs 282 against share price of Rs 235, that is, it is trading at 4/5th of book value. If we take into account the oil bonds as income, the book value of HPCL will shoot up to Rs 475 - higher than RIL and the stock is trading at less than 10% of the value of RIL.

DO NOT buy LIC, keep money in banks, buy property, buy other stocks, invest into PPF: BUY only HPCL, BPCL and IOC with at least 3 to 5 years time frame.

If it does not work in 5 years, buy a gun and shoot me down with my written consent in your favor.

For Spicejet, yes, it is a good value. It has lots of takeover appeal. Right now, oil prices are against them, but traffic flow is rising at unprecedented level. This is the area of growth.

When bigger airlines want to expand, they will hunt for smaller air bird like Spicejet. Wait patiently. However, be discreet at your level of investment. Increase holding only when the company returns to profit in absolute terms. ( I have not seen their latest earnings)

Kalidas, Hong Kong
16/5/2008

3)

Reply to brb-1 on (16-May-08 11:26 ) Ref: 09-051R

Seasons and tax years are different in USA and India.

In USA, the Financial year is a calendar year (Jan-Dec) whereas in India, it is April-March. People having losing position sell in December and buy back in January, because US tax law allow only physically booked losses. In India, people sell in March and buy back in April (so the markets are rising in India now) to book the losses physically and buy back same stock again in April.

Similarly, seasons are different in USA and India. In India, Our children have holidays in April to May end and schools resume in June. This is why people travel more during this period. (summer vacation)

In USA, the vacation starts only in July and ends in September. This is the summer vacation for Americans and other Europeans as well. The Americans travel more during this busy season during which the gas consumption is at its peak. This is the period during which the funds manager take holidays with their families. The market begin to rise from first week of October in USA when the fund/pension fund managers return from holidays. The rally continues until second week of December when the tax related selling takes hold of the market.

One has to be discreet before applying other countries' norms or rules or practices to India. There are cultural preferences and also differences which need to be observed.

For example, the marriage season starts from November and peaks in January. In America there is no marriage season. They simply do not believe in stars or astrology. This is why Gold prices rise during marriage season in India.

When the Lever Brothers, parent of Hindustan Lever, invented a new famous add for 'Surf' in which there were 3 pictures close to each other. In the left, a lady frowns upon the dirty linen. In the second, she dips the dirty linen into Surf detergent. In the third on the right, she smilingly takes out the linen 'super white' with all dirt gone.

This AD was one of the most successful campaign. The sales rose almost 50% to 80% everywhere. However, in one of the major market, Middle East, it plunged by almost 90%.

Lever executives were baffled, so did were the British Advertisement companies, who were unable to understand the psyche of the Middle East consumers. Finally, they engaged one small marketing company in Middle East who gave the damning evidence.

He found that the Middle East were mostly Arabs and Moslems who read from 'Right to Left' and not from 'Left to Right' like in western countries. So the illiterate Arab / Moslem women thought that the super white cloth was dipped into Surf, which when taken out, it turned into dirty rag. 'Why should we buy such clumsy product?' complained these women to local marketing man.

Lever brothers then realized that they forgot to switch the pictures in conformity with Urdu / Arabic language. They corrected immediately, and the sales rose several fold, I was told.

Monsoon starts in India from June and continues till August end and up to Mid September. The demand of steel and cement ebbs during this season which moderate the growth of this sector. The food prices go down during successful monsoon and if the monsoon is not kind, the food prices gallop in months to come.

I hope you understand what I mean. Do not follow other countries blindly. This is where most learned scholars make the mistakes, in following charts and numbers, without correlating them with the country's preferences, likes, dislikes and other factors.

My father taught me one simple idiom, when I was a child. He told me ' Common Sense is rarely common, USE IT. And, he said further, DO not waste intelligence, when the commons sense will do.

Once the famous writer Carolene Baum of Bloomberg got very angry at my comments and she wrote me back to take her off the mailing list. Lack of space does not permit me here - some other time.

Kalidas, Hong Kong
16/5/2008

4)

for shia

Every bachelor waits too long for a beautiful bride. And finally, he finds himself over age, and selects whatever comes his way.

Ask Atal Bihari Vajpayee, he will confirm this. He did become Prime Minister at the fag end of the career and could not last more.

May be you are right. However, can you guess when the Government will change the policy on subsidy? Follow these stocks well and buy some when you feel that they are refusing to go down further.

Marriage is always preceded by engagement. So before you marry to Oil Majors, better engage with them for a while and take some position. Waiting is good, but too long wait is as much disastrous to wealth as the too much of smoking is injurious to health.

5)

for jasavi

Never touch any broker's or investment bank's stock during financial crisis or severe stock market correction. One can lose almost 90%. Look around you who is in trouble? UBS (investment bank), Citicorp (Investment bank + broker (Solomon Smith Barney); Lehman Brothers (Broker+Investment Bank); Merrill Lynch (Broker + Investment Bank); Morgan Stanley (Broker + Investment Bank) and failed Bears Stearns (Broker)

Recently, Bloomberg also reported that most of Indian brokers are in deep troubles because their customers did not pay up when the SENSEX tanked 3000 points. They are still not treating these bad debts as such or even NPA. they are advised by their Chartered Accountants not tp provide for another 8 quarters (or 2 years), possibly because Law of Limitation invalidates the bad debts after 3 years.

I would not even look at the name you mentioned. these are all story stocks and people talk them up by rumoring their relationship with one or the other Ambanis. Even house cleaner of Ambani, if he floata a company, may get boost for share price only because he is related to or involved in day to day activity of Ambanis.

Brokers strength is only 'people' who bring in the business. The computer terminals or glossy offices are all facades. If leading partner leaves the firm, he takes with him another 10 followers and their accounts.

Not much difference between a broker and a street woman. take your pick.

Kalidas, Hong Kong
16/5/2008

6)

for sonali thakur

ONGC? Not really. It is a bit pricey. Refineries are much cheaper than ONGC. for example, ONGC EPS is Rs 71/shr (after bonus issue) which places the P/E at 13.31 and Dividend payout is Rs 31/shr (the dividend yield is 3.26% - Dividend Amount/Current Market price %)

Compared to this consider HPCL P/E of below 6 and dividend yield above 7% which is almost twice than ONGC

Further, Oil prices have seen continuous rise for over 4 months.

Higher Oil prices help oil producers like ONGC who benefit from higher oil price. The Refineries suffer if the oil prices rise, because they can not pass on entire cost to the consumer due to price control.

Refineries have 'inverse' relationship to oil prices. If oil prices drop, the refineries benefit. If oil prices rise, they lose out.

It is anybody's guess whether oil prices will continue to rise inspite of 50% rise in last 6 months.

We therefore take a bet that they may correct or they may not go as fast as they did in the past.

The better bet is therefore 'refineneries'. However, ONGC is also having refining business under MRPL (87% stake). ONGC wanted to foray into 'retail outlets' but dropped the plan due to possible disqualification for claiming subsidy. Read the following news out (12/5/08) produced in MYIRIS

QUOTE

The public sector behemoth has decided to put on hold its retail outlets foray on the backburner. The company which has licences for 1,600 retail outlets, including 500 outlets under Mangalore Refineries and Chemicals (MRPL) has decided not to go ahead except its pilot retail outlet launched sometime ago adjacent to Mangalore Refinery project at Mangalore.

The government has been compensating only oil marketing Companies (OMCs) such as the Indian Oil Corporation, the Hindustan Petroleum Corporation and the Bharat Petroleum Corporation for under recoveries.

UNQUOTE

However, one can take some position in ONGC during oil price correction (Right now it is better to buy Refineries which are cheaper due to high oil prices) One can buy 85% in refineries like BPCL, HPCL or IOC and 15% for ONGC/MRPL combined.(with Essar Oil in non-GOI sector). I do not prefer RPL/RIL due to almost absurd valuations. They are more hyped up stocks than any other.


Kalidas, Hong Kong

7)

for guest,

Motilal Oswal's report is not forward looking. It relies on historical behaviur of the GOI, that the oil subsidy will continue unabated, and oil refiners will continue to be impacted by the nagative price control in India.

However, it ignores that the Government of India has started issuing Oil Bonds at high rate of interest to compensate the under recovery. If Oil Majors sell these bonds in the market, they will have to credit the proceeds to their P/L account, which was right thing to do.

Let us see how the entries originated, so that one will have clear idea what should have been and what should be in future.

1 Barrel of Crude oil = 159 Litres
Current Price = US$ 127/Brl or $ 0.80 per liter
Add transportation cost @ 10% + $ 0.08 per liter
Add Insurance (inflammable) + $ 0.02 per liter
TOTAL = $ 0.90 per liter
ADD ImportDuty @ 10% = $ 0.09 per litre (Customs+CVD+Cess)
Landed Cost = $ 0.99 per liter
Add Local Transportation 7% = $ 0.11 per liter (Port to Refinery)
CIFD - Factory = $ 1.06 per liter
@ Rs 42.50/$ = Rs 45.05 per liter
Operating Cost @4% = Rs 1.80 per liter
ADD Transportation cost 6% = Rs 2.70 per liter (Refinery to Pump)
TOTAL COST = Rs 48.55 per liter
ADD Refining Margin (presumed)= Rs 10.00 per liter
Normal Realizable Cost: = Rs 58.55 per liter (ignoring taxes)
Market Price of Refined Oil = Rs 54.00 per liter
Recoverable shortfall = Rs 4.55 per liter

There are two ways of accounting.

ONE:
Dr. Customer Rs 54.00 (Sale Price)
Dr. Government Rs 4.55 (Shortfall)
Cr. Sales Rs 58.55

In this case, the profit margin could have been 8% of sales (Rs 54-Rs 48.55 = Rs 4.4t5/54= 8.42%) The Balance sheets shows the NPM just 1.92%. That means that Government's liability is not physically brought on books, but kept 'off balance sheet'. We have to rule out this option.

SECOND:

Customer Dr. Rs 54.00 (Balance Sheet, Asset item)
Sales Cr. Rs 54.00(Profit & Loss Account)
Operating Cost Dr. Rs 48.55(Profit& Loss Account)
ADD Refining Margin Rs 4.45(Instead of Rs 10)
total Operating Cost Rs 53.00
Sales realization Rs 54.00
Profit Before Tax Rs 1.00 (or 1.85%-Rs 1/Sales Price 54 in %)
Actual Profit Margin as per HPCL report for 31/3/2007 is about 1.92%.

This is plausible. The difference of full refining margin of Rs 10 Less Margin Charged to the customer Rs 4.55 = Rs 5.45 is recoverable from the Government which is kept as 'Off Balance Sheet' item to be treated as income on Actual Cash receipt basis.

When the GOI issued compensatory oil bonds, they should have taken it to the P/L Account, but they did not. Instead, they appear to have accounted for as under:

Debit - Assets (Investment) - Value of Bonds received
Credit- GOI account (Liability) - value of Bonds Received

Now, this is not HPCL liability to the GOI. The government has given oil bonds to HPCL in compensation. The correct treatment should have been credit to P/L Account.

This is where most brokers and analysts, including Chartered Accountants, appear to make serious mistake in valuation of assets and the profits. They analyzed the surface only. They did not go beyond surface to find out the truth.

HPCL can keep it on its books or sell it out in the market without paying anything to the government. And when it realizes the cash, it will be forced to treat as Income because in the event of sale, HPCL has no liability to give the money back to government.There is nothing to prevent HPCL to sell these bonds in the market (for which LIC is reported to be biggest buyer)

Please note that my above figures may not be entirely accurate. It is based on reasonable guesswork with margin of error 10% on either side.

Kalidas, Hong Kong
17/5/2008

8)

for champion224

You are in best sectors - IT and Gas - and I have mentioned almost 3 months ago to go long strongly in Gas related stocks like GAIL, Petronet, GSPL (Gujarat State Petronet), IGL (Indraprashtha Gas Ltd) and perhaps RNRL if it wins the case against RIL for continuing supply of gas to its projects at concessionary rates.

I like Infosys than TCS and also ASDL oir Allied Digital (around Rs 900 now) who are now in the process of raising FCCB to the extent of US4 100 Millions for which road show is going on in USA.

Right now I do not have position in any of them as I am 100% cash and will not buy for another month or so. I will let the subprime crisis play out fully before I take a holy dip into ganges, what you call BSE and NSE

MTNL is one of the stock I will own. It is totally debt free company and received over Rs 2400 crores of Income Tax refunds. (The amount is between Rs 1600 crores and 2400 crores)

Regardless of the market it is one of the best stock to own, The companies who have least debt or debt free like MTNL in growing sector. ITC is another gem to own. In today's environment, Cash is the king, and there can not be better candiates than MTNL and ITC.

Food sectors and consumer sector is another defensive and yet aggressive sector because of rising food prices. We have to see their valuations though.

Phrmaceuticals is the next bet.

Kalidas, Hong Kong
18/5/2008

9)

for Guest,

Great! If it is already accounted for in the YE 31-12-2007 (9 months), that means that there are operational losses. How come?

I will have to look at the financial, especially notes, which are generally not available except in Annual Report.

I will reassess on the basis of information supplied by you and come back soon.

Thanks again.

Kalidas, Hong Kong
19/8/2007

10)

Reply to Guest on (19-May-08 12:03 ) Ref: 09-052R

REJOINDER

The following items appears in the accounts:

QUOTE
Oil Bonds issued by the Government of India towards under-recoveries suffered by the Corporation on sale of sensitive
petroleum products during 2006-07 for Rs.4,929.89 crores (2005-06 : Rs.2,344.86 crores), have been accounted under `Recovery under Subsidy Schemes'.
UNQUOTE

It does not say clearly whether it has been credited to Profit & Loss account. We also do not find any entry 'Recovery under Subsidy Scheme' under the Revenue head.

Had they been accounted for to the credit of P/L accounts, there would not have been any reference to this item, and it could have been shown as extra income after Sales

The reference in notes could have been 'off balance sheet items'

Following items are appearing under Investments (See Balance Sheets) for YE 31-03-2007 ( it will be much more in YE 31-03-2008)

INVESTMENTS: 1,756.84 (2005) ...4,027.64 (2006) 7,127.47 (2007)

As you can see that Investments have risen almost 80% in 2007 over 2006. Also the liability is shown to have increased by almost Rs 2300 crores in 2007 over 2006 (CL & Provisions) which is nearly value of Oil Bonds (2600 crores)2R
It very much appears that Oil Bonds are shown as Investments and not credited to P/L Account. We have to write to the Auditors or read very clearly from Annual Report for the YE 31-12-2008 when it is published.

Anyway, thanks for going into figures. My reading of figure is different. Unless they specify very correctly that they have been accounted for as 'Income' and not 'Investments' then only we have to reassess this counter. I hope you will agree to that.

Kalidas, Hong Kong
19-05-2008

11)

Reply for Guest (subbi) on (18-May-08 15:35 )

You have perfectly valid point. The yield from Crude Oil is not 100% as presumed by me. You are also right that many bye products are also made from the crude. Yes, my analysis is flawed to that extent.

I do not have idea what is the actual yield of Petrol, diesel, aviation fuel, Kerosene from Crude and how much each by-product (as named by you) is produced (% terms). Further, each by products has different value attached to it. I am not oil professional, and any input will be welcome so that very accurate picture could be presented to other boarders.

However, I do not think that subsidy is almost Rs 30 to Rs 35 per liter. Each by products also realizes some proceeds over which there is no price control.

May I mention that the purpose of my write up was from financial angle - how Oil Bonds are accounted for in the books of Refineries? It was just to determine how much the profit is understated, which hides the true value of the refineries. This has significant impact on the stock prices. To me, these refineries are unpolished gems highly undervalued in overvalued market.

Kalidas, Hong Kong
20/5/2008

12)

Reply to TVMonly on (18-May-08 13:55 ) Ref: 09-052R

J P Morgan Chase

I must complement you for one of the best question on banking, finance and sub prime crisis. Unless one reads the news thoroughly, then thinking over it, and comparing events happening around us, he would not have known why amongst all banks, J P Morgan Chase (JPMC) had been excepted. Are they really doing so well or is there something really wrong with them which they want to hide.

I have replied to this question long time ago, may be in late December 2007 or Mid January 2008. I will therefore avoid repetition except that -
- When I left the broking business 5 years ago, JPMC was reported to have derivative exposure of over US$ 30 Trillions. They were rumored to have 'shorts' on Silver, Rand, Oil and many other sensitive commodities which were not USA's domain.
- Citi and JPMC always move along together. What happens to Citi happens to JPMS. They were together in Latin American crisis, Enron, Crude oils, and precious metals like Gold, Silver, Platinum etc.
- Another major player was venerable GE (of USA) that is, General Electric, who also happens to be large derivative player. Troubles are coming to GE whose share price performance for over last 3 years is 'pathetic'.
- They were aided and abetted by AIG - the insurance giant who is also reeling under the weight of derivatives.
- I always maintained that JPMC was more susceptible to crisis than Citigroup. Somehow, the troubles at Citi was magnified and at JPMC pigmified.
- When Bear Stearns collapsed, the FED gave as much as $ 30 Billions to save the BS and gave this massive line of credit at abnormally low interest of 2% for over 30 years on virtually non-recourse basis. Almost everyone believe that BS was saved by JPMS, but I believe that real troubles were at JPMC and they were saved by FED under the guise of saving BS.
- And did JPMC save BS after getting $ 30 Billions? No, they fired 9000 top employees creating massive unemployment. BS employees were high end earners of $ 120K or more, paying about $ 30,000 taxes to the exchequer. The loss of tax revenue to the Treasury is as under:

Interest differential loss on $ 30 Billions per year:
$ 30 Billions ( Normal Interest Rate 5% - Concessionary Rate 2%)
= $ 30 Billions x 3% per year x 30 years = $ 27,000 Mln
ADD: Loss of Tax revenue on BS employees fired: = $ 270 Mln
( 9000 employees x $ 30K) counting for 1 year
ADD: Unemployment Allowance to these 9000
Employees @ 30K for 6 months = $ 270 Mln
TOTAL LOSS TO TREASURY = $ 27,540 Mln

In other words, FED would lose out $ 27.5 Billions over 30 years in financing JPMC presuming that they will pay back. Since the facility is 'non recourse', FED or American Tax payers would lose about $ 60 Billions in saving so called Bears Stearns whereas real beneficiary was JPMC

In other words, the real troubles were brewing at JPMC but BS was used as 'ploy' to save JPMC. In any case, BS was not worth $ 30 Billions at all, when the entire company was thrown away at less than $ 2 Billions.

In my opinion, the most troubled bank could have been JPMC but the finger was pointed to Citigroup. When the trouble comes, everyone manipulates.

Kalidas, Hong Kong
20/5/2008

13)

FED gave JPMS $30 Billions to save Bears Stearns and JPMC fired 55% of their staff.

Is is not the fact that it is FED who created 'unemployment'.

It is like 'someone' gives 'supari' to some 'bhai' and ask him to kill the 'target'.

Replace 'someone' with FED; 'supari' with $ 30 Billions; 'bhai' with JPMC and 'target' with Bear Stearns. Nice equation.

Kalidas, Hong Kong
21/5/2008

14)

Reply to hindlevernet on (15-May-08 22:37 )

Sorry for late reply.

I am not a technical analyst, though I happen to know some basic skills. Most technical analysts are backward looking, not forward looking. I read them because their analysis is read by most people who get influenced, and that is what make the market.

In stock market where 99 persons go one way, only remaining one, chooses the alternative route on his own, and that is where I belong.

It is not the question of reading the data or information. The skill lies on what to read (the question you asked), how to read, where to read and how to relate the other events which may have influence on the stock prices.

I read a lot on Bloomberg (My wife used to tell me that Bloomberg was my first wife and she second) - that is the most authentic source of factual data without any hype. I read Financial Times, Smart Money, INO, in USA and Capital market, MyIris, Moneycontrol in India. Of course Economic Times, Business Standard, Business India on Line (Hindu). I dislike the Indian media because there is always hype in the news and the figures are often suggestive, misrepresentative and misleading.

I read the leading news information sources like BBC and Financial Times which relay the news properly.

It is difficult for me to say that how did I acquire the strength in my analysis. I am originally a Science graduate with specialization in Chemistry and Physics. that was way back in 1968. Then I became a banker for 19 years and remained stock broker for over 16 years. meanwhile I became a Law graduate and also did Cost Accounting which trained me well in numbers.

However, my mentor was my father who taught me to observe the things around me, analyze why they happen and then relate with other news. He also taught me that ' forget Geometry, Calculus, Algebra and learn only Arithmetic - that is what will help you in your practical life'. This is how I learnt the numbers.

My advice to you is Read, think, digest and then act. Observation is the main strength for me, so develop that skill, which will be useful in almost every other faculty. Try to read the information source who disseminate bare data without any hypes, and relate them with other events. Ignore the source of media which have more Advertisements. Those media have lots of hypes in everything they broadcast.

Historical events are always important. That teach you why certain things happened. However, those events do not portray the circumstances in which they happened, so bare analysis in posteriority by today's Analysts are often speculative.

I also made number of mistakes; everyone does. that is the part of learning process.

Kalidas, Hong Kong
21/5/2008

15)

Reply to Guest on (18-May-08 22:05 ) Ref: 09-054R

When a person reaches the old age, his desire to make more money wanes, risk taking ability reduces, and instincts for capital preservation prevails over risk of even moderate kinds. Safety of capital is the motto for them. There were not much of equity investments during your father's prime days, so they do not want to take a risky bet on such investment. Share bazaar used to be called 'Satta Bazaar' only 2 decades ago.

There is nothing wrong the way your father makes investments now, in Fixed Assets or Land or renting out the properties to earn reasonable return on capital. Such investments rarely turn to Zero, and so long as there is not much borrowings in the property bought at high end, if at all, the downside is not as much as equity has.

it is like matured tree does not yield much fruits. People tend to nurture 'growing plants' which are relatively young which can give better yield. Compare yourself as 'growing plant' and treat your father as 'matured tree'.

This is why people tend to find hidden gems in the equity market, called the 'Growth Stocks' which are relatively young, not much known, have brighter prospects.

Since the equity markets have grown several folds in last 20 years or so, the old theory of not investing more than 25% of investable amount does not hold good any more. In old days, the return from Fixed Income like Fixed Deposits, Recurring Deposits used to be high because interest rates were in double digits.

Why others? I made my capital from Fixed Income instruments, like Fixed Deposits, during India' FOREX crisis in 1992, when the interest rates on our NR/NR deposits went up to 19% (23% on Cumulative Basis) and I made over 350% in Deep Discount Bonds (DDB) of IDBI and SIDBI and Sardar Sarovar. IDBI floated a scheme in which you can invest Rs 27000 repayable Rs 10 Lakhs in 25 years. When the interest rates started falling, IDBI redeemed the bonds at Rs 120,000 after ten years or Rs 93000 gain or 344% in 10 years or 34.4% Annual Average Simple return.

You invest in fixed income instruments, especially bonds, when the long term interest rates are very high. I used these gains to invest into Bank stocks that gave me 800% return in just under 4 years All these were possible because of fixed income investments.

Your father is not wrong, at the same time, he is not right because equity investments were virtually non existent in his prime days. You can not make him change his tracks now.

Instead focus on your investments. If you enter the market during very low end, you may increase equity weightage to even 80%.

I was almost 85% invested into equities when I bought equity shares of banks as above. The dividend yield was exceeding bank deposits, and that is why, instead of keeping the money with banks such as BOI or IOB or Syndicate Bank, it was wiser to invest them into same banks' shares earning tax free dividend income.

India is certainly on growth path than at any time in the past. People are more educated, earn more, have more investment alternative, yearning for knowledge has never been greater before, Internet changed the lives of many younger people than old people like your father.

May be you may invest more (80%) when the market corrects severely, If you do not want to wait, may be you can chose good quality stocks and invest up to 30% in equities.

So do not fight with the conservatism of your father with your liberal attitude. This is what called 'Generation Gap' and your children too will look upon you with same contempt as you do now, when you reach the age of your father.

% allocation between assets is a 'Dynamic Process'. You allocate more when the risk is less and reward more. you go on increasing or reducing % allocation to each segment of assets on merits

Kalidas, Hong Kong
21/5/2008

16)

for jasavi

No views on this scrip. Generally, I avoid buying any 'stock broker's ' stock during financial turmoil. A broker's business or strength or weakness is never known to even insiders.

I just do not look at the 'Brokers' Stocks' at this point of time. I buy them only when I see the distinct shift in the market sentiments on the upside.

Kalidas, Hong Kong'21/5/2008

17)

for mdbariwal

The target of IFCI at Rs 1000 in the midst of financial turmoil is 'irrational exuberance'. There is nothing to suggest upward swing in IFCI lending activity, and the only speculation revived now is the stake sale which may not add much value.

The stock is cheap relatively, but there are no specific events that merit attention.

Be modest in your target. Range is much narrower than even before.

Kalidas, Hong Kong'
21/5/2008

18)

Reply1 to Money_Bear+Bull (Ram) on (21-May-08 21:34 ) Ref: 09-055R

My present business is in primary metal (Steel, Stainless Steel etc) and to less extent in base metals like Aluminum, Copper, Zinc etc.

Being a finance man for almost 35 years, and having studied the pattern of future trades and derivatives from time to time, I have a feeling that :
- The current rise in metal prices is 30% fundamental, 40% due to weakness in US$ and rest of 30% due to derivatives.
- There is not much demand-supply imbalance as totted out by many analysts all around the world.
- The demand for primary metals increases several fold only at times of war, where warheads use steel. Due to tremendous economic crisis, the Warlord - USA does not have that much power or conviction to wage a war of large scale. The new President, if it is not McCain, but Obama (Democrat) will be more conciliatory like Bill Clinton.
- Steel and Cement are brothers and sister. They go together. Whenever you see massive rise in steel NOT accompanies by rise in consumption of cement, it is the first indication that the concerned nation is building more weaponry or WMD (Weapons of Mass Destructions)

I will tell you, and only I can tell you, that the present rise in metal, oil, precious metals is due more to reversal of derivative trades than imbalances in supply and demand.

This forum does not enable HTML message, otherwise I would have produced tables and charts to support the following facts. I will come to specific of your question later in this post.

Earlier, almost 5 years ago, the future trades ( 2 to 4 years forward) in these commodities were being conducted at massive discount, for the simple reason to depress the prices in spot market to control (or manipulate) the inflation index.

At the time of Iraq invasion, spot crude prices were $ 28 whereas 2 years forwards were traded at $ 18 ( I mentioned this before in this forum). Normally, the futures used to dictate the spot prices. However, the Arabs started controlling Spot market by constantly reducing output at that time with the result that 'Spot prices started dictating the Future prices' It happened in other metals notably in Zinc, Nickel and Copper where the futures (18 months forward) used to be at discount at 10% or more.

When the spot markets tightened, the future operators came under 'short squeeze' and they had to roll over the contract at higher prices, without paying cash difference substantially.

However, when the present fiasco in sub-prime emerged and derivative market collapsed, the roll over market came to an end, and the counter parties refused to roll over the contract and asked their clients to buy back the short position at heavy premium and settle in cash.

These reversal of future trades account for major rise in the metal, base metal, primary metal, precious metal, and Crude oil prices. for instance, today Oil Futures for 2015 and 2016 trades at premium at US$ 141 against spot price of $ 134. Imagine a short seller who sold 100,000 barrels of crude oil few years back at say $ 18 or $ 40, finds difficult to roll over, and has to settle in cash to close out the position, he will have to pay 100,000 brl x $ 94 or US$ 9.4 Millions or Rs 40 crores, against his original investment of 3% of contract value at that time (3% of 100,000 x $40 = $ 120,000) He not only loses his entire capital of Rs 60 lakhs but also additional Rs 40 crores.

Having said that the current rally will peter out as soon as short squeeze eases out. It is more like Harshad Mehta pushing up ACC stock price to Rs 10,000 by squeezing the shorts by insisting on physical delivery on spot market.

Coming to your specific stocks, read the rejoinder (not enough space here)

Kalidas, Hong Kong
22/5/2008

NOTE:
This is my last post except the Rejoinder, because of my overseas travel

19)

Reply2 to Money_Bear+Bull (Ram) on (21-May-08 21:34 ) Ref: 09-056R

REJOINDER

Coming to your specific stocks, please note the following:

- Normally, the commodity stocks command very low P/E - about 5 to 6, because of lack of excitement. Anyone can work out their earnings by multiplying their production capacity with current market prices of respective metals.
- The stocks move higher or lower due to expectation of surprises on upside or downside. Such element is absent in commodity stocks. It is more like ' a naked woman is seksually less appealing than a fully clothed one' Do you remember the famous 'Khalnayak' song - 'Choli ke pichhe kya hai?'
- Crude oil prices have gone up by over 40% in last 4 months without any consolidation, that poises it for massive corrections in very short time. When all brokers start clamoring for $ 150 or $ 200, the correction time is very near. These are the same analysts and brokers who were totting out oil prices at less than $ 10 when it was trading at $ 28 based on 2 years forward prices at $ 18.
- When the Crude falls precipitately, $ will rebound. Do not ever underestimate the 'Financial Re-Engineering skills' of Americans. All those professors, mathematicians, Nobel Laureates are busy in working out strategy how to crash the rising oil prices.
- If $ strengthens (though fundamentals are still against it) due to above event, almost all metals will fall flat, except the precious metals like Gold and Silver and Platinum (they too will suffer but less in % terms)
- Rupee at the moment is on downward trend. Refineries are buying crude by selling rupee and buying $ or Euro. This aspect is in favor of the stocks you specified.
- Some of your stocks are Government of India concerns, who behave like Bureaucrats. They do not capitalize on profit by selling aggressively in the spot market or in futures. They are downright stupid managements. They are guided more by Government directives to control the price rise, by not jacking up the prices, limiting the profit potentials.
- Are they good Buy? If they are not at their peak, and about 30% below the peak prices, Yes -otherwise ride the rally to get out to book the profit. Profit is yours if it is in your pocket, otherwise paper gains disappear as fast as they appeared.
- REMEMBER, there are always matching sellers and buyers in the market place. If you are buying, then someone is selling, from either from his own long positions (most cases) or from borrowed stocks (like hedge funds). They just take the opposite views of the buyer at all the time.
- Honestly, I have not personally studied the stocks you have mentioned. If you have studied them, remove the hype and consider the above factors before making buying and selling decisions. I would have loved to answer specifically, but I do not have much time at my command right now. My detailed write up should help you in any case.

This is definitely my LAST POST today. I will be absent for until 12/6/2008 and may possibly resume on 15/6/2008 or later. Kindly excuse me - right now the market is reeling under pressure in USA due to fears of high inflation, FED's stance not to reduce the interest rates (they may have to if the market corrects by 1000 points) and Dow Jones has fallen below the support level of 12780.

Kalidas, Hong Kong
22/5/2008