Wednesday, October 22, 2008

Capital preservation mode

Most of my friends know that I have been in a capital preservation mode for quite some time now. There is nothing that I would like better than to able to preserve the purchasing power of my capital for the next couple of years. (i.e a 0% real return would be considered a crowning achievement )

I do not have an answer to the questions that I had way back in December 2007. But the scenario that I had expected seems to be unfolding. The Fed is fighting to inflate and at some point it should succeed ( i.e arrest fall in nominal prices). Whether the US goes the Wiemar way or manages a 1970s rerun is still a matter of great debate.

Given this scenario & its impact on India, my inclination has been to hedge with investments in diversified asset classes with the hope that the losses in one can be offset by gains in another. Just to give you a feel of how confused I am, here is a break up of my portfolio over the past year. (And yeah I took my advice given on this blog in Dec 2007 and only have money that I can afford to lose on the stock market.)

Oct 2007
85% Stocks
5% ETF Gold
10% Cash

Dec 2007
75% Stocks
18% Liquid Funds
5% ETF Gold
2% Cash

March 2008
35% Stocks
40% Liquid funds
5% ETF gold
20% Cash

Oct 2008
20% Stocks
7% Short term Gilts
33% FD in public sector banks
5% FMP
15% Gold ( both physical & ETF)
17% Cash in public sector banks
3% Cash in other banks

Tuesday, August 19, 2008

Should we prepare for a 70s rerun ?

The present government has successfully moved India back to the nineties.

Would the next government takes us back to the seventies ? By that I mean
  • Will our taxes sky rocket ?( Marginal Tax rate was as high as 97.5% in 1971 !)
  • Will ULCA, FERA and other such acts make a comeback ?
  • Will banks be nationalized once more ?
  • Will Gold controls be reimposed ( I know it is a late 60s act rather than a 70s one )
  • Will possessing 1000 rupee notes become illegal again ?
Whether we move back to the seventies or bounce back to the noughties would depend on who comes to power. My guess would be
  • A Congress/Left would push us back to the seventies,
  • A Congress/Riff Raff would slowly move us in the direction of the noughties
  • A Congress majority would put us clearly in the noughties
  • A BJP/Riff Raff combo would also move us in the noughties direction
  • A BJP majority would put us clearly in the noughties
  • A Riff Raff with outside support from either the Congress/BJP would leave us in status quo ( i.e stuck firmly in the nineties)
  • A Riff Raff/Left combo could even take us back to the seventies in double quick time
Just my opinion. As usual feel free to disagree.

Wednesday, June 25, 2008

Taming Inflation

India's inflation numbers last week stood at 11.05% and will most likely go up when next week's numbers are out ( Base effect + The effect of the oil price hike flowing through the system ). The government is reaching out into its 1950s & 1970s idea cupboard for solutions to fight the inflation.

The government would do well instead to think of solutions that are more appropriate for India in 2008. The two big difference between 1970 & now is
1) The public sector no longer is the dominant force in the industrial land scape.
2) The middle class has grown in size. It has a rosier outlook to the future & has mortgaged parts of future earnings to improve its current life style.

A 1970s response of price caps & increased interest rates is just going to result in shortages on one hand & an angry middle class on the other hand. A better response would be to cut the exorbitant indirect taxes that the government charges. The steps that the government should take are

1) Slash Cenvat rates for excise to 12% from the current rates of 14%/
2) Slash service tax to 12% from the current 12.5%
3) Remove the cess on excise & service taxes
4) Move petrol & diesel to "declared goods" list , and let the oil companies price it at market driven prices

With these measures the inflation worry will disappear and will be replaced by the "Where will we find the money for all our pet schemes" worry. The excise cut impact will most likely be offset by rising production and the already risen prices ( i.e these measures will stop the further rise of prices, but are unlikely to roll them back, so excise duty would any way be higher than what the government had budgeted).
For the tax losses to the state government on petrol & diesel, the central government could hand over the oil bonds that it has been paying the oil companies.

Will the centre follow this approach ? From the RBI action yesterday ( raising CRR & Repo rates by 0.5%) it looks like the Government continues to live in the past. Will RBI at least be sensible this time by letting the Rupee appreciate against the Dollar( or better still force the rupee appreciation by dumping the enormous quantities of fast depreciating US Dollars that it owns ?) . We will have to wait and see.

Monday, June 23, 2008

Will things change?

Pratap Bhanu Mehta has written a wonderful column today in Indian Express. Touching stuff.The worst part is that this could have been written 20 years ago, and it would still have reflected the reality then ( except the hopeful part, where he expects the expanding economy to provide opportunities, something no one could have told us when we were younger.)

With the cut-off marks for admissions rising, it is hard to know what genuine consolation to give to thousands of disappointed students. We can say to them: don’t interpret your inability to get into a college of your choice as your personal failure. It is our collective failure. Obdurate politicians, control-freak bureaucracies, insecure academics, ideas of social justice conceived in bad faith, the poverty of our imaginations, and our preference for control over freedom, levelling over distinction, have all conspired to ensure that you get very few choices. Consequently, that half an extra mark seems life-defining.

Thursday, June 05, 2008

Call their bluff

The Government has finally bitten the bullet & hiked fuel prices. As expected those that enjoy power without responsibility & those that think they have no responsibility are yelling for a roll back. The Government is finally now in a position to call their bluff.

The Government should wait for the agitation against the fuel price hike to reach a crescendo (which I expect it will in another couple of days) and then go ahead and declare diesel & petrol as "declared goods". This would mean that the exorbitant sales tax that state governments charge will be capped at 4%. This should bring down the fuel cost to below what prevailed before the hike.

For example in Hyderabad
Petrol price per litre before hike: Rs 51.1
Petrol price per litre after hike: Rs 56.65
Petrol price per litre if petrol is taxed at 4%: Rs 44.30

This allows the government the leeway to even let the oil companies set the price based on global prices, thus removing a huge headache for the government.

This move would lead to shortfall in the money available to the state governments. but that should not worry the Congress too much. The Congress does not have too many state governments, while those that are shedding crocodile tears on the behalf of the common man have a number of states under their belt. The opposition would find it difficult to protest this move as their wish to protect the common man would have been conceded (It is just that their governments will have to foot the bill instead of the centre!). Also the states having lower money to spend would increase Congress' chance of making a come back in these states.

Wednesday, May 28, 2008

One tight slap

Here is a possible response to the Petroleum Minister's proposal to levy a cess on income tax payers in lieu of a hike in the price of fuel. Get hold of your neighbourhood Congress man and give him one tight slap. Sounds ridiculous ? But that is exactly what the minister is trying to do. He dare not pass the price increase to the consumers of fuel so he has decided to hit a soft target i.e the income tax payer. We the people cannot give the minister the one tight slap that he deserves so we hit another target. How different is that ?

Monday, May 26, 2008

Bangalore is still under represented

Bangalore now sends 28 representatives to the Karnataka assembly ( Up from 16 after the recent delimitation exercise). Even after this massive increase in the number of MLAs it sends, Bangalore is still under represented by 8 to 9 MLAs. Imagine having 36-37 MLAs for Bangalore. The whole political landscape changes even more dramatically than what has happened in the 2008 elections

Here is the analysis based on the data supplied by the Election Commission

Average Number of Voters per constituency = 179336
Total Deviation for Greater Bangalore = 1552437
Under Representation = 1552437/179336 = 8.66

Yelahanka 241439 62103
K.R. Pura 308339 129003
Byatarayanapura 265952 86616
Yeshvanthapura 265174 85838
Rajarajeshwarinagar 301531 122195
Dasarahalli 291000 111664
Mahalakshmi Layout 218552 39216
Malleshwaram 194147 14811
Hebbal 100986 -78350
Pulakeshinagar 184980 5644
Sarvagnanagar 301976 122640
C.V. Raman Nagar 219663 40327
Shivajinagar 166829 -12507
Shanti Nagar 184138 4802
Gandhi Nagar 222144 42808
Rajaji Nagar 183301 3965
Govindraj Nagar 246476 67140
Vijay Nagar 253321 73985
Chamrajpet 214503 35167
Chickpet 207906 28570
Basavanagudi 226320 46984
Padmanaba Nagar 219637 40301
B.T.M. Layout 212808 33472
Jayanagar 189232 9896
Mahadevapura 275328 95992
Bommanahalli 261058 81722
Bangalore South 379115 199779
Anekal 237990 58654

Here is the data for all constituencies

Friday, May 23, 2008

Fund of Funds & Poll of Polls

Long long ago unsophisticated investors were guided to invest in mutual funds. They were told that since they did not have either the expertise or the time to select individual stocks, they should leave it to a professional to manage their stock investment. In those days selecting a fund was easy. You had about 20-25 odd funds and you just had to pick a few of them to invest in and you were done. Then thousands of funds bloomed (OK I exaggerate , only hundreds of funds bloomed) and each had varying risks and return profile. Selecting which fund to invest in became a nightmare. The unsophisticated investor was then guided to a fund of funds ( i.e a mutual fund that would select the best funds to invest in, and these selected funds would in turn invest in individual stocks etc ).

The same seems to be playing out in the exit poll field. The exit polls for Karnataka has thrown up so many possibilities, that one probably needs a poll of these polls to decide which way the election results would go. I am sure some astute pollster will come up with this idea and hopefully exit polls can go back to being one number that is at least expected to be right in theory if not in practice.

Monday, May 12, 2008

Possible explanation for the mother of disconnects

Anantha Nageswaran who writes the wonderful column Bare Talk in Mint had an article titled " The mother of disconnects". He was puzzled at the disconnect between US economic news and US stock markets. I have been puzzled too, but here is a possible explanation, that I can think, for the market behaving the way it is.

1) Most people have bought into the theory that one needs to invest in the stock market with a long term view. So bad news is not getting as many people to flee the markets as it would have a few years ago. So fewer sellers than expected.
2) The liquidity that the Fed is pumping into the system is going into the commodities & stock market, keeping both elevated.
3) In ordinary circumstance, this excess liquidity should have caused the dollar to nosedive. The presence of Central banks ( primarily PBoC) is keeping the dollar from depreciating quickly. Instead it is falling at a pace which China ( and possibly other countries ) are comfortable with and which will allow them to adjust without great social upheaval.
4) What else can one invest in ? Overvalued bonds ? Fast depreciating real estate ? Keep it as cash and watch raging inflation eat it ? Short the market & find that the market is irrational longer than you can be solvent ?

BTW people waiting for the "great crash" may be disappointed. It might be a slow grind down. Waiting with cash ( US dollar) is not going to help either ( Inflation !). Agri commodities seem to be in their own bubble. Investing in gold is fraught with danger ( Not much danger if the Fed continues its current " to heck with inflation" stance) as Fed can quickly change its stance ( Given a pliant media, it will also be sold as the very thing that will end the inflation and therefore is great for America). Oil is possibly the only asset class that may withstand any adverse Fed policy. If any of you know of any other way of preserving capital over the next couple of years,it would be wonderful if you me know about it.

Wednesday, April 23, 2008

Wake up call for the railways ?

Here is a story that will set the alarm bells ringing in the Indian Railways

From The Telegraph

A consumer court has awarded Rs 50,000 as compensation to a man harassed by unauthorised passengers who barged into his reserved coach while he was travelling with his family.

The court held the Indian Railways guilty of deficiency in service and directed it to pay a litigation cost of Rs 5,000 in addition to the compensation to Sunil Kumar Gupta, who is Tihar Jail’s law officer.

Gupta said he, his wife Poonam and their two children were forced to stay awake during their overnight journey from Delhi to Jammu three years ago.

“Such a situation speaks volumes about the working of the railways as extraneous considerations on the part of officials allow unauthorised passengers to occupy reserved seats,” said New Delhi district consumer forum president K.K. Chopra. He held the railways liable for “deficiency in service, mental agony and harassment”.

The railways argued he should have approached the travelling ticket examiner (TTE) or pulled the chain. “It is the duty of the TTE to come to the compartment to... ensure that passengers who paid sleeper charges are provided berths,” the forum said.

If every passenger decides to sue the Indian Railways for this, often seen, deficiency in service, and the courts decide to award the same compensation, I expect to see the Indian Railways becoming insolvent in a matter of weeks if not months.

Thursday, March 06, 2008

Time to move the placement calendar ?

The placement season on most engineering campuses begin in the month of June. By September the majority of the batch is placed. These students are expected to join their jobs in the month of June the following year. This essentially translates to companies having to forecast their man power requirements 9 to 12 months ahead.
The 2001 US Technology slowdown prompted quite a few software companies to defer their job offers (or sometimes even rescind). The US recovery that year was quick, and life was back to normal. The 2008 job scene may be a lot different. I expect more companies to rescind (or defer for longer than 6 months).

For the current batch, nothing much can be done. For the future batches, I hope they move their placement calendar to Mar-Jun i.e. the tail end of the eighth semester. This should hopefully mitigate the problem of deferred/rescinded jobs. If the jobs scene is bad, at least the students will get an early heads up and can then invite more companies for placement.