Thursday, April 23, 2009

Markets continue to play fiddle

Take a look at Bloomberg`s headlines at 10.32 AM IST even as the Indian stock markets were rising in early trade :-

•Bank of America`s Lewis May Face SEC Review of Merrill Disclosure to Cuomo

•Treasury Prepares Chrysler Bankruptcy as General Motors Nears Deadline Too

•Asian Stocks Fluctuate Amid Earnings Concerns; KDDI Declines, Mizuho Gains

•Banks May Struggle to Raise Money After Stress Tests as Bad Assets Triple

•China Adds 454 Tons of Gold to Reserves, Xinhua Reports; Price Advances

•Pound Weakens Versus Dollar, Yen on Report U.K. Debt Rating May Be at Risk

•`Dutch Disease` Hinders Malaysia`s Economic Growth, Morgan Stanley Says

•Thai Prime Minister Abhisit Lifts State of Emergency Imposed After Riots

•Sri Lankan Fighting Escalates as UN Makes `Urgent` Plea for Civilian Aid

Wednesday, April 22, 2009

Markets playing a fiddle while Rome is burning down

Good news is that the markets are in a bottoming out phase.

The bad news is that the worst blow is yet to come and that has yet not been factored in.

Here're some aspects not factored in yet :-

- Impact of GM bankruptcy/ restructuring

- After the fictional profits in Q1, US banks will start reporting massive loan losses in successive quarter on the back of credit card and other loan losses. This is going the the final straw and break the back of many a banks, irrespective of what Tim Geithner’s stress test results might say.

- US GDP will remain negative through the whole of 2009. UK, China and Japan will keep sliding down the hill.The impact of this contraction on Indian economy, during rest of 2009, will be far severe than is currently being factored in.

- Indian economy growth slowdown will continue and we'll continue to report less than 5% GDP growth for all the quarters for calendar 2009

I believe the state of the markets now to be like the Nero who was playing a fiddle while Rome burned down.

Tuesday, April 21, 2009

Geithner says banks well funded, are they really?

Stocks staged a rally yesterday on US Treasury Secretary Timothy Giethner’s statement that vast majority of US Banks have more capital than they need (Geithner Says `Vast Majority' of U.S. Banks Have More Capital Than Needed)

That is a little hard to believe when IMF has come with a revised estimates of $2.7 Trillion losses in the US financial system and the need for additional $250 Billion of capital (Global banking losses to hit $4 trillion)

Of course Geithner did sound a note of caution about the weakness in the US financial system, but that doesn’t seem to have been reported too widely (Geithner: Most Banks Well Capitalized)

The profits from banks like Citigroup and Bank of America (BoFA) are all non cash profits arising due to the government relaxing the mark to market rules and dubious benefits arising out of some other accounting standards

Citigroup Loss at $ 1.7 B : The truth behind reported profits

When governments do a Ponzi

Both Citigroup and BoFA have been candid enough to admit the increasing credit losses and possibilities of higher losses in the upcoming quarters. However what they have probably failed to mention (or they might not have realized yet) is that they have not provided enough for upcoming losses. The losses across the US banking system are likely to be far more than estimated by the banks themselves, and that is something neither factored in by the banks or the stock markets

The way the US stock market rallied yesterday reminds me of an old quote – “ Nero was playing the fiddle while Rome burned”

Monday, April 20, 2009

Real Profits (Loss?) of Bank Of America

Even Bank of America would have posted a net loss had it not been for similar adjustments. $2.2 B is the profit booked related to FAS 159 adjustment. Dont know the number for the MTM adjustment of securities yet, but am sure that number would have converted the $2.5 B net profit of BoFA (profit available to common shareholder)  into a net loss.

This apart, BoFA has been candid about its increasing credit losses and has clearly mentioned possibility of a great hit on that account in the coming quarters

Saturday, April 18, 2009

Citigroup Loss at $ 1.7 B : The truth behind reported profits

The $1.6 B profit of Citibank is not because it is doing any better, but because of some ‘lucky accounting’ as a WSG Blog post very rightly put is.

Had it not been for some of this lucky accounting, Citigroup would have posted a loss of $ 1.7 B..!

The impact is due to an accounting rule called FAS 159 and government relaxing the market to market accounting rule as mentioned in my earlier posts. (When governments do a Ponzi)

As I had mentioned in my previous post, these accounting rules will allow banks across the world to post ‘unreal’ profits.

The accounting rule FAS 159 will sound a little funny. Here’s how it works. Assume Citibank has taken loan worth $ 100. However, because of the poor performance of the bank, the market value of that loan is now just $75. The fall happens because the Citibank lender are ready to ‘sell’ the loan to anybody who will buy it just for $75, because they feel that Citibank might go down under. In such a circumstance, FAS 159 allows Citibank to book a fictional ‘profit’ of $ 25 (100 minus 75). The assumption is that Citibank can anytime buy back its own debt from open market at $ 75 and in which case it obviously doesn't have to pay anybody the remaining $25 and hence that’s a profit.

WSJ blog : Citigroup: Did It Really Earn $1.6 Billion? Not Really.

And how much such ‘profit’ has Citigroup booked in Q1 – hold your breath – it a $ 2.7 Billion…!

Barring this, the loss would have been around $ 1B

Over and above this, due to relaxation of mark to market rules, Citigroup has been able to avoid booking losses of another around $ 0.7 B. Had these rules also not been relaxed, the total loss would have gone up from $ 1 B to $ 1.7B.

The bad news doesn’t stop here. Citigroup and whole of US banking system are going to be hit by massive losses in credit card, auto loan, student loans and commercial credit , in addition to mortgage losses. These losses will be far in excess of the  current provisioning. Citigroup’s investor presentation (Citigroup Q1 2009 Investor Presentation) itself is very revealing. It shows the US as well as Citibank's net consumer credit loss curve going up like a mountain slope. And with unemployment expected to keep increasing through at least the first half of 2010, the US banking system is sitting on another time bomb.

Monday, April 13, 2009

When governments do a Ponzi

  • When a private person does Ponzi , he is called Madoff. When a government runs a Ponzi scheme like US-64, what should it be called ?
  • When corporate fudge books of accounts they are called Enrons and Satyams. When governments (India and US) suspends MTM rules and relax provisioning for ‘restructured debts’ allowing corporates to inflate profit, what should they be called?
  • When corporates miss estimates, the top honcho goes. What happens when governments fail to acknowledge a recession/ slowdown till it is all over us. Or the government gives an estimate of 9% GDP rise while the actual turns out to be less than 5 %.
  • When corporates are slow to act to changing economic scenario, the company goes into a huge loss and again the top honcho goes. When governments are slow to react it is called TALF/ TARP / PPIP/ Fiscal Stimulus

Its when governments indulge in such Ponzi schemes and fudging, that a illusion of well being is created when actually things are bad. US government was not willing to accept a recession, till the time things went from bad to worse and beyond, losing precious time. Indian government kept clinging to the 10% GDP growth estimates when things were falling apart all over the world and US had already accepted a recession.

It’s when such illusions are created that banks like Wells Fargo will post a profit , banks like Citibank and JP Morgan will make public statements that they will make profits in Q1-09, and many Indian corporates will post good results. This, at a time, they are sitting on MTM losses, but don’t need to disclose those as the government has ‘suspended’ (allowed to fudge?) the books of accounts.

It’s when such illusions are created that Indian Banks will post far higher profits, because the government has ‘allowed’ the banks not to book a loss on such ‘restructured loans’, on which they would have had to otherwise book a loss.

And its when such illusions are created that the stock markets rise in a false sense of optimism.

And when the reality hits, it hits really hard.

Thursday, April 9, 2009

The faster it rises – the harder it will fall

The current bull run is a great example of irrational exuberance.

More the exuberance, the more are the risk overlooked.

Markets have not factored in some really bad news :-

  • US GDP for Q4 likely to come in at negative 6.5 %
  • US Banks insolvent - TARP /TALF/ MTM adjustment is in right direction - but will not prevent nationalization or pseudo nationalization and breakup of banks. MTM adjustment will provide an artificial lifeline for a few quarters.
  • Worst than expected macroeconomic news from US and rest of the world.
  • India Q4 GDP likely to come in at 5 % types, possibly sub 5%
  • India corporate results will come in worst than expected.

The current bull run is very likely being driven by a section of large investors, who will eventually make some quick money at the cost of retail investors.

However for the long term investor (8 years plus kind of holding period) this is as good a time as any other.

In any case I do believe that the period from March to Aug ‘08 is a bottom formation period. What I find a little difficult to believe is that this particular run is a beginning of a bull run. I expect retest of the Oct 08 lows.

Saturday, April 4, 2009

Bear Market Rally : make hay while the sun shines

The current rally is looking more and more like a bear market rally.

This is even though my stand remains that the markets will bottom out between March ‘09 and Aug ‘09 and that what we see currently is a bottom formation happening.

Key reason why I think so :-

  • Per my estimates for a bottom, I was expecting another capitulation and retest of the Oct ‘08 lows. That has not happened yet.
  • Lot of negative news is yet to be factored in. These include:-
    • GM going bankrupt (or at least a very painful restructuring)
    • Banks like Citigroup getting fully nationalized and broken up into pieces
    • Far worse than expected corporate results for the March ‘09 quarter
    • Far worst than expected news on global macroeconomic scenario

Wednesday, April 1, 2009

Bottom formation happening

My key position stand’s remain the same as before:-

  • Stock market to hit the bottom in March’09 to Aug’09 period and immediately start on a path to recovery.

  • Worst news on the economic front – Globally and from India – is yet to come – and will come in during April ’09 to Sept ’09 period. Very initial stages of economic recovery in Oct’09 to March’10 period. However, the recovery will move along very slowly during 2010

  • Sensex likely to go up to 40K (min 25K) by Sept 2013 and 80K (min 45K) by 2016.

Sensex - 10K in one year and 80 K in eight years !

Preponderance of Bad News - 8K Sensex? - and what should an investor do

Here’s some perspective on some of the more recent developments in India and across the globe:-

Current rally: This is the fourth time the Sensex has crossed the 10000 mark after the Oct ‘08 lows. Looks more of a suckers rally. I expect at least another ‘capitulation’. However I’ll admit that this is something I am not so sure about. My basic assumption is that the March to August is the bottom period and this is as far as I can comfortably go in terms of strong estimates.

Indian Economy: Worst yet to come. Some of the Feb and March ’09 data elements, especially manufacturing index could show temporary upticks. GDP growth for Q4 ’09 likey to be sub 5%.

US Economy: Worst news yet to come. Unemployment will peak at 10%. GDP growth will remain negative for rest of the year. The good news is that the new government is taking aggressive action to contain the crisis and that is halting the rate of downslide (though the downslide will continue for a while)

World Economy : The world economy overall will in a recessionary more for the rest of the year, driven primarily by the recession in US , Developed Europe, China (sub 5% GDP) and Japan.

Bottom Formation : What you see now is a classic bottom formation being formed, the saucer shaped bottom at the beginning of an uptrend. Could the markets go down to sub 8K levels again? Very likely. But I have no doubt that the bottom is getting formed.

Stock Investment Strategy: The past six months have been a great time for the long term investor and the next six months too will remain so. I invested 50% of my free cash a month or so back. Plan to invest the remaining 50% at the next capitulation. And if this the bull run, then will probably invest around 14000 levels, since the markets can go that high before retesting Oct ’08 lows.But again, the allocation and timing of investments needs to be cutomized to needs and profile of each individual investor