Interesting read. It was published by Rick Bookstaber in his blog. The seven habits are as follows:
1. No independent risk reporting
2. A change for the worse in the critical risk numbers
3. Increased use of derivatives
4. High level of secrecy
5. Growth in headcount and lifestyle
6. Decline in assets under management
7. Lackluster performance in recent years
Gives a sense of deja vu, right?
Its worth reading the detail. The link is as below:
Interesting read (I am not saying this, Warren Buffet is):
“I get figures on 70-odd businesses, a lot of them daily,” said Warren Buffett yesterday. “Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes awhile. There were a lot of excesses to be wrung out and that process is still under way and it looks to me like it will be under way for quite a while. In the [Berkshire Hathaway] annual report, I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true…
“I had a cataract operation on my left eye about a month ago and I thought maybe now I'll be able to see green shoots. We're not seeing them. Whether it's retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we've never seen it for a simple thing like electricity. So it hasn't happened yet. It will happen. I want to emphasize that. But it hasn't happened yet.”
Today's Bloomberg headline read thus: US Durable Goods Orders Unexpectedly Climb in Sign Recession is Easing. Again there is a story of green shoot sprouting. Unfortunately we continue to hear intermittent stories of green shoots and rising stockmarkets only to be pulled back to the depth of despair after a new set of bad news invade the market and the stocks tank. All of these events leave me wondering as to whther these are simply straws that are painted green and everybody is trying catch onto some straw or the other hoping that things would turn around soon.
The previous green shoot seemed to be sudden improvement in exsiting home sales number via-a-vis expectation.
Existing-home sales (reported yesterday) fell 3.6% from May 2008. Sales in May 2009 rose 2.4% from April to 4.77 million. Fact, however, is these are not strictly comparable since we are trying to compare revised to unrevised numbers. Once again, the prior monthly number was revised downwards (4.68 million down to 4.66 million). However, today is a different day and a different home sales number emerged. Purchases of new homes in the U.S. unexpectedly fell in May as builder discounts failed to keep pace with the foreclosure-driven slump in prices for resales. Sales decreased 0.6% to an annual pace of 342,000 after a revised 344,000 rate in April that was lower than previously estimated. Fact is without bigger price cuts, builders may keep losing market share as the unemployment rate and foreclosures climb, aggravating the drop in resale prices. The recent jump in mortgage rates may hurt demand even more, threatening to undermine the stabilization in construction that’s emerged so far this year.
Clearly we are trying to catch onto some straw to make us feel good. One should brace for more bad news to come.
Earlier when the Sensex tanked by around 60%, there were far many people who felt that the markets have turned cheap. But after dithering for some time, the market gathered momentum, and how. Many investors felt left out as the market started to move up following increasing flow of FII money. Things took an even dramatic turn post the election results and this was epitomized by the fact that, for the first time, the market was closed in just one minute of trade i.e. first circuit after 40 seconds of trading and the second after 20 seconds. Not surprising, because suddenly India has become the cynosure of all eyes, with possible fast forward on the reform front becoming the catalyst. Hence, India experienced a net FII inflow of $5.5bn this year, which is roughly about 25% of the $23 billion that flowed to the emerging markets.
And, that’s a worry. As can be seen from the chart, the run up has been too sharp for comfort. I have got values of Sensex P/E since 1991. Nowhere has the run–up (after every bottom) been as sharp as has happened now. The P/E rose by nearly 71% in the last six and a half months (from its November low). The run-up has been even sharper during the last two and a half months as the P/E spiked by close to 60%. During the last 19 years, this happened only once during end 1991.
It’s quite possible that the rally will soon become a victim of its own swift success as the market has now moved from being under valued to being fairly valued or even over valued. While the market may not be as over valued by historical standards but the sharp run-up is a major cause for concern. So a major tailwind that propelled stocks has now disappeared.
Valuing equities is always hard, but it is particularly tricky amid the current turmoil. It is not very clear how the fundamentals of the economy — including corporate profits — pan out. At this point in time, there is more optimism in the market than is justified be real economic data.
It’s also uncertain how government stimulus (which was a major booster for GDP growth in Q1 2009 will continue to perk up the economy.
It’s not uncommon for market valuations to rise in the latter stages of a recession, because stock prices tend to move in anticipation of a recovery. That means prices — or the “P” in the P/E ratio — often recover before earnings do. But they don’t usually expand this fast.
A big surge in P/E ratios may be warranted if the recession ends soon and profits recover quickly. However, the fundamentals do not point out to While there are some signs that the situation might improve, a major surge in profit is unlikely. Hence such a spike in P/E seems to be unsustainable.
In other words, instead of betting on the “P” in the P/E ratio, stock investors are banking on the “E.” But at today’s prices, realised “E” is likely to play spoilsport.
The IIP number released today shows a YoY growth of 1.4% i.e April’09 as against April’08. This is purported as a sign that the end of slump round the corner. Or does it? Personally, however, I am not convinced. The growth in April IIP can, to a large extent, be linked to general election related spending frenzy than to a general increase in economic activity. Also, it seems to be more of a statistical phenomenon rather than an indication of real recovery. A closer scrutiny of the index series reveals thus.
The latest Index number is 270.1, this is indeed 1.4% higher than what it was in April’08 i.e 266.3. But that is where the good news end. The index number was the lowest since November’08, which was at 267.6. Subsequently the numbers were 284, 284.8, 274.2 and 302.6. This means that the index number was down by nearly 11% MoM i.e April’09 as against March’09. More importantly, the growth of 1.4% in April’09 vis-à-vis April’08 was mainly possible due to lower base effect as the index in April’08 (266.3) dipped substantially (nearly 13%) as compared to the Index in March’08 (304.9).
Hence whether the growth of 1.4% in April is an aberration or a real indication of an end of slump can only be confirmed if the forthcoming IIP numbers do indicate a continuous increase in economic activity. Till then, let’s keep our fingers crossed and hope that this is a real green shoot and not some moss covering.
Now, not only Geithner is dancing to the Chinese tune, in fact the world is dancing with joy as China shows some signs of bottoming out.
There were two important pieces of news yesterday with regard to Chinese economy. Despite the weak external demand that continues to hurt the Chinese manufacturers, people are starting to believe that the Chinese stimulus package is working. Such inference has been drawn by two sets of PMI numbers that were released. The official PMI fell slightly from 53.5 to 53.1 in April, which is the third straight month when PMI recorded a value above 50, thereby implying economic expansion. The CLSA PMI for April also showed a second consecutive reading above 50, as it rose from 50.1 to 51.2 (a 10 month high figure).
Result? The GM bankruptcy was nowhere is the mind of the investors. Hence the MSCI Global index shot up 1.4% to its highest level since last November. Emerging markets advanced 2.6% and now up 55% from the lows. Asian equities climbed 2.9%, led by a 4.0% surge in the Hang Seng index to 18,888. But gains were broad based right across the continent, with Japan up 1.6%, the Kospi rising 1.4% and the Shanghai index rallying 3.4%. European marts are up 2.7% (up now in five of the last six sessions). In fact, virtually stock indices of every country were in the green.
Clearly the world is trying to live on Chinese steroid. Welcome to a new world order.
As I have been reiterating all these months, global issues continue to plague the Indian economy. The export import data released today confirms my fear. India's exports in the month of April was down by as much as 33.2% as compared to the same month in the previous year. A fall of this magnitude was last seen 14 years back. Exports touched $10.74 billion, in April 2009-10, as against $16.08 billion a year ago.
A look at the monthly trend reveals that exports have dropped for the seventh month in a row. So much so that despite exports rising by 30% during the first six months of the previous fiscal year, the overall growth for the full year 2008-09 was a mere 3.4%.
For the current year, while the official expectation is of a flat growth, I am inclined to believe that we will see a contraction of our exports this year.
On the positive side, imports would also remain under control what with lower oil prices and a none too impressive growth likely to play an important role. For April, a 58% drop in oil import led to a sharp fall in overall imports, resulting in a narrow trade deficit of $5 billion in April, against $8.7 billion a year ago. I expect a shrinkage in overall trade deficit this year.