Home loan disbursals

HDFC being one of the top home loan lenders in India, its home loan disbursal trends are a good indicator to guage the home loan market. The trends as shown by the charts below indicate that the home loan growth had started slowing down only during September 2008. Read more!

Lessons from the bear market

The following is the list of lessons that i have learnt during the bear market. 1. Retail Investor: I used to think about retail investors 'buying', 'selling', 'are not into the market yet' etc so as to time the market [which is a unfruitful exercise], until i have realized that i am the retail investor who is swayed by greed & fear. 2. History: There is a lot to learn from the history of the market as well as the companies we analyze. It is essential that the history should favor us when we are making investment decisions. 3. Aim small miss small: This is the famous quote from the movie "The patriot". Dont try to make a killing in the market. Aim small such as 15 to 20% a year and do increase your chances, by investing only when the chances are very much favorable. This is applicable even if your invested amount is small, because there are no shortcuts, you need to wait and have patience. 4. Growth & Business models: There is a lot worse that could happen from good idea than a mediocre one (Benjamin graham). So you might find businesses with good business models, exponential growth etc, but that doesnt in any way guarantee your returns. 5. Bear Vs Bull Market: I like the bear market very much because it is this period in which you will be more curious, so the market can teach you a lot if you are willing to listen. During bull market's we feel confident, learn little and spend most of the time in searching for that odd bargain which has 20 to 30% rally left and it often turns out to be a costly mistake. 6. Analytic skills: Do underestimate your analytic skills about the growth or earnings or value of a company. Stocks that will go up in a falling market are an exception rather than the norm. So if you make an investment decision when the market is cheap [Historic PE, PB ratios are one such indicator], and it turns out to be dumb, you will do good on an average. Because as the rising tide lifts all the boats, a market surge will cause even the dumbest stocks to go up. Read more!

Index PE patterns

There is an interesting pattern in the PE ratios for the S&P CNX 500 index which is a broad based index with 500 stocks. The below chart indicates that the most of the time S&P CNX 500 hovers between a range of 11-20 in the past 13 years X axis - PE (Price Earnings) | Y axis - No of Days similar PE was held Data considered for the above chart [1996 to Current (05th May 2009)] Infact the concentration is so much so that the index hovered 90% of the time between the PE of 10 and 21 as highlighted in the below chart. So the index near 10 PE relatively cheaper and the index near 21 is relatively expensive. The current PE for the S&P CNX 500 index is 16.14. It has also been observed that the PE hovers between 10 & 20 for almost all the indices. Read more!

CBLO

The following is a link to an interesting money market instrument called CBLO [Collateralized Borrowing and Lending Obligation]. CBLO is a discounted money market instrument which enables banks and other market participants to borrow and lend funds via electronic book entry. It imposes an obligation on the borrower/lender to return the money borrowed/receive the money lent, at a specified future date. The underlying charge on securities is held in custody (with CCIL) for the amount borrowed/lent. So in essence it is kind of a market for NBFC's, banks, mutual funds etc to lend and borrow money. The interesting thing about it is that by knowing the current CBLO rates we can make a calculated guess on whether there is a cheap availability of money or not in the market and the direction of the future interest rates. For example consider the current CBLO rate from the CCIL site at 2.70 which is 55 paise lower than the current Reverse Repo rate [The rate at which RBI borrows money from the banks] of 3.25%. So it makes sense for banks to borrow from the CBLO market and sell it to RBI at a cool 55 paise profit. So it indicates that there is money being deployed by various entities at cheaper rates to what RBI has been administering. Which means that it is safer for banks to borrow money from CBLO and sell it to RBI at a profit, which is less riskier than providing retail loans, which will affect the economic growth. So most probably the interest rates are going to go down as there is less productive lending happening by the banks. Banks continue to park surplus funds with RBI despite rate cut Read more!

VST Ind dividend risk reward analysis

VST industries currently is trading at 220/- and gives a dividend of 20/- so essentially a yield of 9.09%. If we consider it as a bond then it is yielding more than the current fixed deposit yields of 8-8.5%, but what is the risk/reward of investing in this stock. A simple interest calculation would tell us that to give an interest of 20/-, at 8.5% the principal should be around (20*100)/8.5 = 235/- and the below are the calculations. The below table indicates the return part of it, what happens to be risk. Risks ====== 1. Company would reduce/skip the dividend From the below chart it can be seen that the probability of VST industries continuing the dividend is high. 2. Interest rates go up over 10% actually forcing the stock to come down. Inflation is currently hovering around 5+ and interest rates around 8+, This is the macroeconomic risk associated with this stock. The best indicator for interest rates is the repo rate which is rate at which banks can borrow from the RBI. I could only gather data for the past five years on repo rate from RBI which is as shown below. The data for past five years is not enough in making investment decisions, as it is a very short period, but unfortunately i could only get that graph. If we consider that there is a probability of us entering a 10+ repo rate period is once in 5 years, there is a 20% risk of loosing money on this only due to high interest rates in the next five years Read more!

Option to invest in Commodities

A new interesting theme based fund was launched by Birla Sun Life mutual fund which plans to invest the proceeds businesses that have exposure to commodities. There are three plans in which an investor can invest. Global Multi Commodity Plan: Invest in companies that have business exposure to energy, water, precious metals, agriculture related businesses. Global Precious Metals Plan: Invest in companies that have business exposure to precious metals like gold, silver, platinum. Global Agri Plan: Invest in companies that have business exposure to agriculture related businesses. Link to the Fund Brochure span> Read more!

ICSA cashflow

I have seen many of my readers raise a red flag on ICSA regarding cash flow as the cash flow is negative for the past three years fo the company. This is a very valid red flag but lets see on how important is it. Cash flow: Is the money that comes out of a business every year. For example you put 100 rupees as capital in starting a business and you get 20 rupees profit. Now watching the opportunity you borrow 80 rupees from a bank and use it for raw material or other operational costs. By the end of the year if you have not sold the products as you are in the process creating products, you would have spent more money than what you have received the profit for. This, the cash flow shows it as negative. Now when we analyse a company we need to check for cash flow as it cannot be negative for a number of years because a business should ultimately generate cash rather than always using it. Now see the above figures by ICSA. For a company doubling every year it is difficult to say that the business is eating cash rather than generating it, because a lot of the revenues would be in the process of realisation at most point of times. Ex: Pantaloon Retail is cash flow negative for the past four years. Read more!

Macro ratios review

Market Capitalisation(MCAP): The market capitalisation of all the stocks listed on BSE is currently around 30 lakh crore down from 47 lakh crores in July 08 [A drop of 36%].BSE indices highlights. Gross Domestic Product(GDP): The GDP for the year 2007-08 is around 43 lakh crore at current prices as reported by the Ministry of Statistics press release showing a growth rate of 13.6 per cent over the GDP estimates for 2006-07 at 39.6 lakh crore up from 38 lakh crore MCAP/GDP Ratio: Now if we calculate the Market Capitalisation/GDP ratio, it would be 30/39.6 lakh crore or 75% of current GDP which is a considerble improvement given the same analysis done in July 2008 and Jan 2008 gave the ratios of 109% and 180% respectively. So the market seems to be undervalued by 25% but we should be careful that GDP will most probably be lower in Q2 and the rest of the year. Dividend/Bond yield: The dividend yields notched up from 1.00 to 1.14 (Aug 2008) but at the same time bond yields stayed around the same at around 9.5%. So the dividend/bond yield ratio also improved from 10.5% in Jan 2008 to 12.0% July 2008. Previous posts: Market Capitalisation Vs GDP Jan 2008 Market Capitalisation Vs GDP July 2008 Dividend Bond yields and 52 week high lows Read more!