Investor's have a "Left out feeling...."

Stock markets have rebounded 70% to 13,900 levels (25th May) from its recent lows it touched on 9th Mar.’09 (Sensex 8,160), however lot of investor’s have missed on the major rally, including the MFs & HNIs.
Now the serious investor will not like to miss the next up move, but the big question is which way is the market headed now….? Let me give you a quick checklist before touching upon this question …..

What has changed in last few months?
a) Stimulus packages announced few months back seemed to show it tickle down effect.
b) Companies (Read US Bank & Finance Co.’s) have declared positive numbers (albeit with some accounting jugglery).
c) World leader’s has come together to handle this problem of global slow down, as it is effecting the developed nations more then others,
d) Economic growth is bottoming out (atleast falling at lower rates).
e) Business Confidence and Purchase Manager Index is showing sign of revival and confidence.

Back home in India:
a) UPA Govt. is back in power, more stronger then before.
b) RBI has moved Interest rates down and over next few months Banks would be in position to also lower rates further (once the high rate deposits come up for renewal around Sep/Oct’09).
c) Headline Inflation rate is close to zero and expected to remain at lower end for next few months, due to high base effect (WPI had touched double digits in 1st week of Jun’08 and had peaked in Aug’08).

However much more needs to be done on global economic front:
a) Problems created by developed nations cannot be solved overnight.
b) The economic conditions continue to be challenging, un-employment rate in US is inching towards 10% mark,
c) UK as well Japan has shown negative GDP growth for qrt. ended Mar’09.
d) After UK’s AAA stable outlook rating been changed to negative, it seems to be turn of US AAA rating downgrade

Thus all in all, still a mixed data. Markets are expected to remain volatile. For India the near term triggers are:
1. Union Budget
2. Announcement of other key portfolio at the centre
3. Monsoon forecast
4. Oil price movement
5. FII flows

While Investor should remain cautious, they need to continue with discipline investing and remain invested for the core holding. (I continue advocate SIP style of investing).

Markets have run up quite fast and thereby have build in lot of expectation, especially on reforms front. Any negative surprise from budget may not be welcomed.

For the bottom line answer question – Should I enter now or wait? – My view would be that if you want to punt and play short term – you better don’t go long now and if you investment horizon is 4 to 5 years, then you can start getting your feet’s wet now and done wait of the big wave to hit the shore.
Jetha N.Punjabi

2 + 2 = ?.....Answer depends on whom you are asking this question

An Accounts professor once in the college canteen, over a cup of coffee, asked a group of three students, in their first year of management studies, a simple question - How much do you thing is 2 + 2 ?..... been post-graduate management students, they were sure that professor was not looking for simple straight forward answer ......

First student from a Engineering background said the answer to this to be precise will be between 3.999 and 4.001,

Second student from Advertising and Mktg. background, was very loud and confident that it will be 22,

Finally third student from Accounting & Finance background in a low tone answered in professor's ears - How much you want it to be ?

.......but jokes apart, I was searching for similar answers when i saw some great results been declared by US Banks for qtr. ended Mar'09, who till few months were struggling to survive and US Govt. had to pitch in and lend funds so that they can see the next day.

After some reading I got some clarity and I thought of sharing the same with you. The case in point is that of Citibank....

CITI reported net income of $1.6 billion (appro. Rs. 8,000 crores) during the first quarter (Jan-Mar09), up from a loss of $5.1 billion (Jan-Mar08) a year ago...digging deeper into the numbers reveled the following:

1. It has booked profit of $2.7 Bn on decline of its own debt.

The Bond (Tradeable Debt) issued by it say at $100 is traded in Mkt. at $30, hence under US accounting rules, it can book one-time gain, equivalent to the decline in its bonds because, in theory, it could buy back its debt cheaply.

However in reality it is just a paper profits, it would be real profit, if it actually buys it from the open mkt. and cancel the bonds in its books.

2. Bank has made lower provisions for future loses. Loss provision was reduced to $2.1 Bn in Jan-Mar'09 from $3.4 Bn provided in Oct-Dec'08. Thus improving profit for the qtr. by $2.1 Bn.

This is surprising because on one hand we see the US economy is in negative growth path (-ve 6.1% for Jan-Mar09 qtr. & -ve 6.3% for qtr. Oct-Dec'08, to be specific), job losses nearing 10% (presently at 8.5%). These job losses will result in rising defaults in Housing EMI, Credit card dues, Auto loans, personal loan EMI and other consumer loans.

3. FASB altered rule # 157 provides more flexibility

This is mother of all flexibility and subjectivity allowed in accounting in recent history. This altered rule allows American banks to value toxic assets "at their own discretionary judgement".

This "mark-to-mkt" provision is now more of "mark-to-make-believe" accounting, which enable US Banks to conceal losses and use obscure methods and models to inflate their balance sheets. The amount that has been hidden behind this rule is left to your own judgement and quantification.

As the CITIBANK commercial Ad. runs....."CITI never sleeps.....indeed accounting creativity has been put to good use, during these tough times."

Jetha N.Punjabi

Personal Finance - How to approach your investments now ?

With financial markets and global economies undergoing very uncertain and unprecedented difficulties, it is very important you don't make any more mistakes and come out safer thru. these challenging times. I personally feel tough times will last for few more quarters.

The following are some of actions suggested which can act as a general guide:

1. Don't lose sight of your medium to long term goals (e.g. Higher education, House, marriage expenses, Retirement kitty and such large and important commitments which I also refer to as important mile- stones). Plan and invest for it on regular basis, earlier you start, easier it becomes.
2. After setting aside funds for liquidity and emergency needs (Thumb rule is to keep 4 to 6 months household expense in the form of cash or in savings a/c.), clear out your liabilities (if any), specially all the high cost ones first , viz. Credit card dues, Personal loans, Vehicle loans and other personal loans taken at high rates.
3. Pre-pay housing loan, in part or full, if you have surplus liquidity. You may also consider switching to linked bank accounts offered by many housing loan financier. Under this a/c. facility, you can deposit the surplus funds that may be available with you from time to time and you can withdraw the same at any time by issue of cheque, cash withdrawal,etc, just like the way you use your normal bank a/c. The advantage here being you are charged interest only on the loan portion outstanding (net of these temporary advance payments) and no pre-payment penalty is charged. At the same time you don't lose the liquidity advantage.
4. Earmark portion of the funds that should be invested in the stock market and use SIP's (Systematic Investment plans) route. Investing in Index Fund or Large-cap fund would be a safer option. Small allocation (based in risk appetite) may be kept for investing in Mid-cap and small-cap funds.
5. Take personal insurance. Start with pure term plan first - here the premium is the lowest and coverage higher. Avoid combination of insurance & investment from a insurance product.
6. Invest for your tax savings, if not already done, as year ending is just round the corner. Options like PPF & 5 yrs. bank deposits, provide attractive returns.
7. Invest regularly in Gold. ETF's are better options then Physical gold and jewellery. Treat this as part of your currency holding and don't expect returns on the same. Here the thumb rule is to invest 7% to 10% of your total investments.
8. Balance available should be preferably invested in Debt/fixed Income products of high quality (AAA rated) and having good liquidity (for early exit).
9. Avoid taking fresh loan and postpone availing it wherever possible.
10. I personally avoid taking loans for consumption items (e.g. Holidaying) or investing in a depreciating asset(e.g. Car, fancy mobiles,etc.).

All the above suggestion are general in nature and may not be applicable to all of you. It is always better to consult a financial advisor for each specific case. If you need my help pls. send me an email with your query.

Happy Investing.

My thoughts on the Market......

World Markets
So far not much is perceived to have come out of Obama's promised financial and Economy boosting miracles. Stock Markets continues to trade in a range and are still awaiting the major trigger (Positive or Negative) to take further direction.

Meanwhile some bit of optimism was generated from China introducing some more measures for boosting its economy, by reducing import tariffs on raw material and components imports.

Bank of England in meeting scheduled for today is expected to cut its key rate to 1% (eventually heading towards zero percent).

However I still feel that we are yet to see the worse and while it comes it may stay and last for longer period, then most of us are expecting.

India :

As expected Inflation rate headed down and for the week ended Jan 24 it dips to 5.07%, down from its previous week level of 5.64%. The effect of the second recent cut in the fuel prices (following the weak global oil prices over last few months) will soon be reflected in the WPI. Headline inflation rate is expected to touch sub 3% level by Mar'09 end.

Bond yield spread between the bench mark 10 yr Gilt and AAA rated (PSU & Private) is also expected to contract from current 3.5% - 4% range to 2.5% - 3% range over next 6 to 9 months. This gives opportunities to ride the expected rally in AAA bonds, mainly for two reasons - one expectation of fall in overall interest rates over short and medium term and second due to expected reduction in spread levels between Gilts and High quality traded bonds. For most of the investors, using the Income fund route will be the better option to invest (advantage of holding a diversified bond portfolio) and selecting those fund schemes which have bias towards holding PSU bonds (to minimise credit as well market risk). (Word of caution: Borrowing program of Govt. over next few weeks / months, can distort the yield curve and it may also results in crowding-out of Non-Govt. borrowers, mainly PSU & Pvt. sector borrowers and thereby lead to increase in overall interest rates).

With Qrtly results seasons been over, corporates as well as investors are bracing up for tougher time ahead, as next few qtrs. will continue to be challenging for India Inc.

Next week's Vote-on-Account Budget is expected to be populist, with the ruling party keeping a eye on forth coming General election (Apr09-May09). It not being a full fledged union budget, no changes in the taxes rates will be announced.

Market has also build-in the political risk, as no single party is expected to gain majority and projection of likely composition of the future multi- party Govt. ,is still blur.

All in all, it is time to sit on the side line as far as stock market is concerned and try to cash in on the expected rally (even though marginal) in Gilts and Fixed Income products.

Quotes, Thoughts......

"Some men see things as they are and say why... I dream of things that never were and say why not." ...George Bernard Shaw