Cash is King - 2010 Version

Cash is King - 2010 Version

A couple of days back, I came across an article which spoke about Warren Buffett holding 34% cash levels in his Berkshire Hathway portfolio as on September 30, 2010.

I've generally been increasing my cash levels for a while now.

Today, I came across this interview with another big name - Jeremy Grantham. Read this one:

• Legendary Investor Jeremy Grantham says "Sell this rally - Hold Cash!"

Lots of TV analysts and experts have also been crying themselves hoarse that our markets in India are grossly overvalued. And have been recommending that we be cautious. That we ought to increase cash levels. That we ought to be booking profits. That though the "Long-term India Story" remains intact, we ought to be wary in the short term.

I have a contrarian question:

• If so many folks are so cautious, and if so many retail guys have not participated in the rally, is it not logical that we're not anywhere close to the top, based on all the bubbles that we've experienced in the last couple of centuries?

My own answer to the above question:

Yes, indeed. We are nowhere near the top. Here's why:

• There is a good chance that with all the guys who are waiting in the wings with loads of cash, every dip will be bought into. Especially by Indian retail investors and the domestic institutions, who have actually been booking profits regularly during the past 6-8 months.
• The BIG MONEY coming from all the quantitative easing will need to be deployed. Certainly they are not going to invest in the crisis ridden markets of US or Europe. Nor will they invest in debt at yields pretty close to zilch. They will much rather park their money in good quality growh stories. Where else can they find such stories other than in the emerging markets, including India?
• The 21000 of 2008 and 21000 of 2010 are very different. A good many corporates have increased their earnings. A lot of them have restructured their leveraged balance sheets and cleaned up their acts. Many of them are much leaner, having learned their lessons. Operational efficiencies have improved. Even the reform agenda of the government has gathered some momentum. Valuations, certainly, are not as rich and as obscene as they were in January 2008.
• Even in the midst of all the corruption, there appears to be lots of political stability. We actually have a situation where there is competition to support the government. That too, publicly stated on National Television. Believe me, Manmohan Singh's position appears to be quite safe. And as long as you have political stability, one key danger for the markets is gone.
• People will make noises about inflation, but go to the malls, theatres, cricket stadiums, airports, book shops, restaurants, jewellery shops, etc. You'll be amazed at the speed with which products are flying off the shelves. You'll wonder about the existence of such a creature called poverty.

Having said all the above, you must be wondering why I'm still increasing my cash levels.

Reasons are two-fold:

• Churning of the portfolio. Some stocks have zoomed way beyond 2008 valuations. We ought to be selling them. Others are grossly undervalued, especially in the midcap space. We ought to be looking at them carefully.
• There is a lot of global economic uncertainty. In times of uncertainty, I've often come across completely inexplicable and violent levels of volatility in share prices. This volatility is a scary scenario for those who seek stability. There are others who thrive in such volatility. I prefer to think that volatility is good for me. Gives me a lot of opportunities both to get in at low levels and to get out at comparitively high levels.

So, what's the conclusion?

Simple ... ... ... ... ... ...

• Keep selling anything that you feel is overvalued today. Irrespective of what your cost price was. Profit in your bank account is better than profits in your demat account. And don't worry about whether or not the share that you just sold continues to go up further. It is always possible to have perfect 20-20 vision - in hindsight.
• Keep cash in your kitty.
• Keep buying anything that you like and you feel is undervalued today. People make more money by buying at a low price than by selling at a high price.
• And remember, you can never, never ever, catch the bottom and the top - except with some crazy luck. And I wouldn't count on getting lucky.

Let me end with a quote from Jeremy Grantham (from the interview referred to earlier in this post):

• "Cash has a virtue that people don't appreciate fully. And that is its optionality. In other words, if anything crashes and burns in value - say the U.S. stock market, if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value."

Guess that it applies to us in India as well!

Take care. Happy investing!

Regards,

N

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What will be the next trigger for the flight of FIIs?

What will be the next trigger for the flight of FIIs?

All of us and our brothers have been told ad nauseum about the liquidity driven rally that we're enjoying on Indian bourses right now. Apparently, the FIIs are pumping in money into India as if there's no tomorrow.

Big names from the big Fund Houses like Reliance Mutual Fund, L & T Mutual Fund, etc. feel that the India Story, being as attractive as it is, will continue to see the inflow of FII money. In hoardes.

Conservative folks like the ones from MoneyLife question the inflows without giving specific reasons as to why the inflows can quickly and violently turn into outflows.

Here are a few of my thoughts on the plausible causes for such outflows:

• Simple profit-booking urge, followed by the herd mentality
• Crisis in some corner of the world, followed by the herd mentality - Crisis can occur in
• US - With the mortgage and/or foreclosure mess
• US - Job loss mess
• China - Forex rate mess
• France / Germany - Xenophobia and the repercussions
• Afganistan / Iran / Pakistan - The Taliban & repercussions thereof
• Kashmir - Pakistan - India & repercussions thereof
• Expansionary policies of China - The South China Sea islands, Arunachal Pradesh, Taiwan, Tibet, Skirmishes with Japan, etc.
• The Korea problem going out of hand
• Re-emergence of some new medical emergency like Swine Flu
• Natural calamities like an earthquake / tsunami / floods
• A data-entry error leading to a sudden crash in some global market, followed by the herd mentality
• Interest rates going up in US / Europe
• Danger of inflation in India
• Earnings not matching expectations in India
• Earnings downgrades by Indian corporates
• IIP slowing down in India
• Political uncertainty catching up with India (due to some electoral reverses for the Congress)
• Mercurial Mamata Bannerjee / Karunanidhi withdrawing support for some reason
• Sudden death of a key political leader - due to natural causes or due to the efforts of an assasin
• Increase in violence due to naxals
• Increase in the Telengana problem
• North-east Blockade re-starting in places like Meghalaya
• The re-emergence of the Ayodhya problem either due to the far-right BJP / RSS / VHP types or due to the fundamentalist fringe elements of the Muslim fraternity
• Sudden rule changes by folks from SEBI / RBI with respect to key policies like interest rates, M & A norms, de-listing rules, Capital controls, etc.
• Adverse changes in either the Direct Taxes code or GST

Believe me, once the outflows start - for any reason whatsoever, the herd mentality will ensure that it will quickly turn into a flood.

And, domestic insitutions will not be able to hold up the markets because:

• They can't - The figures of funds available with them vis-a-vis the funds likely to go out through FIIs will just not be comparable
• They won't - Being the smart folks that they are, they will at best make a few token purchases to satisfy the Government, but the real money will be invested only if and when the markets have settled down at sufficiently attractive levels.

If you are a long-term investor,

• Book at least partial profits
• Sell all your cats and dogs - with or without profits
• Don't build aggressive long positions
• Keep enough cash
• Don't wait for the bottom to buy - Buy on the way down for every 5-8% correction in the Nifty

Regards,

N

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Bank Failures in the US

Bank Failures in the US

And their implications to all of us

Take a look at this graph:

• https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfllyQmPBFd7U3qgIWhNOxazKN2Nj2o9HJB8ynyk0Rg6W3PfrxquSy3hVQBBRBf8NrTyd5TQGKlbblo2JtvpnyKE7xiIGxGA3MfJ8_Vl4AipEHhUo5TTQyeW0VCStMgQGEizqBoAMViNxD/s1600-h/FDICassets.jpg

Some points to note:

• The above does not include banks that have been bailed out because they are "too big to fail"
• Nor does it include investment banks like Lehman
• And still, there are folks who are already talking about green shoots and a quick recovery
• And expect us to believe the same!

I was just thinking about the implications of bank failures:

When a loss-making private company from Mumbai fails (or a PSU like Air India or HMT Watches unit or a textile mill from Tirupur),

1. A few people lose jobs (say, 10000 folks)
2. A few suppliers lose business (at least partially)
3. The government loses some revenues
4. A few investors (only those shareholders who've bought the failed company's shares) lose some money
5. A couple of days / weeks / months of strikes, bandhs, etc. follow in places like Kolkata or Mumbai or wherever the unit might be located 
6. And life goes on ... ... ... ... ...

However, when an Indian Bank goes bust or a Global Trust bank goes bankrupt,

• All the above things (Points 1-5 above) happen; And, in addition,
• All the thousands / lakhs of depositors
  • Lose lots of money
  • Get part of the money from Deposit Insurance Corporation, Government, etc. after remaining stuck for at least a year or two
  • Salvage some of their money - which they promptly take out and re-deploy in even safer avenues (like NSCs, postal deposits, etc.), which in turn contribute the least for economic growth of the country as well as to the financial well-being of the depositors
• All the hundreds / thousands of creditors are stuck between a rock and a hard place:
• They need to repay all their loans to the re-constituted entity, if any or to the liquidator - perhaps ahead of schedule
• In any case, they will no more get the additional instalments of loans that were originally promised by the bank - for instance, their OD facilities will suddenly get frozen
• They will get into an extremely severe liquidity crunch - because they need money immediately
• All of them will simultaneously try to get over their liquidity crunch by approaching (often) the same set of other banks / lenders - and their sense of desparation will be widely known in the market.
• For obvious reasons, they will be very poor risks, compared to their situation that prevailed prior to the failure of the bank
• This, in turn, will result in
  • Their not getting any fresh credit limits
  • If at all they get any money, it will be at obnoxious terms, at much higher rates of interest, with tough conditionalities
  • Their cost structure will shoot up
  • Their management focus will shift from business issues to liquidity issues
  • Their margins will go for a toss
  • There will be a live danger of their going bankrupt themselves!
• And life goes often comes to a standstill for them ... ... ... ... ...
• Depositors in other banks become equally wary - If Bank A can fail, so can Bank B - "So, let me be safe now than sorry later" - resulting in risk averse behaviour, which is pehaps good at the individual level, but certainly not good for the economy as a whole
• Likewise, bankers in general will become much more risk-averse than usual while giving loans - resulting in lesser loans being sanctioned AND at higher rates of interest

Considering all the above, the bank failure data in US is scary, to say the least! We should remember that when US sneezes, the rest of the world develops Swine Flu!

I will not pay much credence to stories of Green Shoots - I'll certainly be quick to book profits in shares and slow to pick up any risky investments.

Regards,

N

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The Next Big Crisis - Credit Card Defaults

The Next Big Crisis - Credit Card Defaults

Take a look at this link:

• http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN2415584020090624

What's disconcerting is not merely the contents of the article which talks about "an estimated NPA of 10.62% of all credit card dues", but the fact that the figures are bandied about as being almost routine and normal.

In contrast, the corresponding figure in India is likely to be a very low single digit figure. And, most Indians don't have a credit card in the first place.

Watch out for the next crisis!

Regards,

N

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Getting to know more about the root cause of our Financial Meltdown

Getting to know more about the root cause of our Financial Meltdown

I've been reading hell of a lot these days about the bear market that we're suffering, past bear markets, potential solutions, etc. Many of the articles sound impressive. However, the one that's given below apparently gets to the root cause:

• http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

One of the most educative pieces that I've come across thus far!

Regards,

N

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Insights into the Financial Mess that the world is into!

Insights into the Financial Mess that the world is into!

Interesting insights, indeed:

• http://freakonomics.blogs.nytimes.com/2008/09/18/diamond-and-kashyap-on-the-recent-financial-upheavals/#more-3097

Since my comments are unlikely to add value to the excellent article, I offer none!

Regards,

N

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