Avatar – Beyond your imagination

You must be wondering what a movie review has got to do on a finance blog. But when US$ 250 mn goes into the making of the movie, it deserves its mention rightfully here.

Before going for the movie, I had read a few reviews about it wherein the critics had said “there are no words to describe AVATAR”. Now having seen the movie, I find myself in the place of those critics, at a lose of words to describe the most memorable cinematographic experience of our lifetimes.

Avatar has changed the meaning of Pandora for ever, at least for me. It takes your imagination to a completely new level and it wipes out the memories of any science-fiction you have ever seen or imagined. It seems James Cameroon is showing you a world that every child in us would want to be in; a world where there is purity and love for every form of life, where there are glowing grasses and flowers and birds brighter than the colours of rainbow and to beat it all mountains which float in the air!!! The feeling is so beautiful that it makes you cry for the love of it and makes you want to stretch your hand and heart out to touch it, feel it and embrace it! It is a dream that you might have dreamt to be a part of, and induces in you a slight envy for the one who are living it.

Avatar is the first movie wherein humans invade another planet, while since childhood we have been fed on movies of aliens attacking planet earth and to be more precise attacking America. The movie highlights the selfishness which has grown among our race and the extent to which we can go to make money and fame. Moreover the humans are striving to extract a material from Pandora which they themselves call Unobtamium!! Thankfully there are some good people among us who given an opportunity would want to permanently reside in Pandora and give up planet Earth sans the artificial luxuries which they would get on Earth.

I hope no Indian director attempts a remake of Avatar as I do not wish to see a modern day or futuristic Ramayana. Its not that I doubt their movie making capabilities, but am quite convinced about their failure at science fictions. To wrap it up, must say this is one movie which would linger on your minds for a long time and would obviously be your benchmark for any science fiction 3D movie in future. I really hate calling Avatar a science fiction as it seems more real than our real world. What is also interesting is that Cameroon is not looking to make big money from the movie. As he says he would be more than happy even if the movie breaks even as his dream of 15 years has been fulfilled through AVATAR.

Recovery from abyss...

GDP and industrial activity data emerging from across the globe suggests that may be spring season is in the offering globally. However early in 2009, the global economy was staring into the abyss. Only in the middle of the year did green shoots appear: leading indicators stabilised and later improved. As the year wore on, the green shoots blossomed: economies stabilised and in rising numbers returned to growth. Generally, what is seen is that deep economic downturns are followed by strong recoveries. However, there is also the evidence that recessions that are accompanied by financial crises tend to be followed by subpar recoveries. I think that we are facing such a sub-par recovery globally at this moment.

Private debt has been replaced by government debt, particularly in the US and the UK and to a lesser extent in the eurozone. The financial sector is under government pressure to trim down. Regional outlooks differ though. Emerging markets did not suffer in the recession the way developed economies did and their prospects are relatively bright in my view. In the US, consumers are struggling with high debts and low income growth, while the eurozone may not benefit from an export led recovery the way it has in the past. Thus, what I expect is an initial bounce in economic activity to peter out over the course of 2010, although I do not foresee a double-dip recession. May be we could see stabilization in 2010, but am quite confident that we would not be able to match returns of 2009 wherein we got anywhere between 50-120% return from the emerging markets (adjusted for dollar rates).

Advance tax numbers for Q3FY10 look good

It is a mixed bag as far as the overall numbers are concerned. Tata Chemicals and Tata Sons have disappointed with Rs 40 crore versus Rs 83 crore and Rs 20 crore versus Rs 40 crore year-on-year (YoY). But there has been resurgence of sorts in the Tata Group with Tata Steel impressing Rs 650 crore versus Rs 260 crore followed by Tata Power Rs 81 crore versus Rs 29 crore.

Banking sector:

Banking Sector, which has been a star so far as previous quarters are concerned, but not so much this time around a few banks have disappointed Bank of India Rs 102 crore versus Rs 370 crore, Central Bank of India Rs 138 crore versus Rs 163 crore. HDFC is Rs 320 crore versus Rs 280 crore. So the banking sector not performing as well as it had in the previous quarters.

Auto sector:

We have impressive numbers from that auto sector. Tata Motors paying Rs 100 crore versus Rs 0 crore (NIL) we have M&M paying Rs 195 crore versus Rs 4.5 crore and Bajaj Auto paying Rs 320 crore versus Rs 105 crore.

Miscellaneous sectors:

Hindalco Rs 100 crore versus Rs 40 crore, UltraTech Rs 90 crore versus Rs 65 crore and L&T Rs 270 crore versus Rs 312 crore. This is the preliminary trend as of now but we have got to look at few more crucial sectors like Pharma and IT

Insurance and investment awareness

Insurance has different connotations for different people. For a financial sales person it means insurance premium targets to be met, for a family man, its a sense of security for his family and for some others it might be one of the options of saving on tax without much consideration for the real purpose of insurance as they do not see the need for it.

However it think it is important for everyone to understand that the real purpose of insurance is to provide for uncertainties and unexpected negative outcomes. The risk appetite differs from individual to individual and accordingly financial consultants recommend different classes of assets with different riskiness. Ones investment in insurance should also reflect one's risk appetite. At the forefront i would like to highlight that there should be a clear cut distinction between investment and insurance. ULIP is one product which was the baby of the financial industry and offered the investors a mix of both worlds - investment and insurance. Infact many ad taglines highlighted this issue - "investment bhi, insurance bhi, dono saat saat".

What a layman fails to understand is that he is falling short on both fronts, investment and insurance. The ULIP offers very low insurance coverage and also a significant proportion of the money put in goes as expenses in the first three years of the coverage, thus reducing the investment value as well. Infact the ineffectiveness of ULIPs can be felt in bearish markets when you realise that the insurance coverage on the ULIP is very low and would not be sufficient to meet the needs of your family in your absence and the NAV has also fallen sharply so your portfolio investment value has also eroded. I would say ULIPs are more suited for bullish markets but that too are better investment vehicles rather than insurance.

Always buy one pure term plan for your insurance needs and have investments in mutual funds if you cannot manage your equity portfolio yourself. Infact i would say ETFs (Exchange Traded Funds) clearly stand out as a better option to mutual funds also. It has been observed over a large sample size over 15-20 years time period that very few mutual funds could actually outperform the benchmark indices. ETFs provide you returns which are in line with index return and have very low margin of error. There is no entry and exit load and you only pay the brokerage like any other equity transaction, which is minimal. Doing an SIP into ETFs is a wise idea and you do not need fund managers to manage your money.

Now coming back to insurance, realise that have an insurance for every liability and every asset. Insure your assets like home, car, life, etc. Also insure your liabilities like home loans and other loans. But then also avoid over-insurance as then you might just end up paying premiums which could be avoided. Understand your risk taking capacity and your assets and liabilities and act accordingly. If in doubt contact your financial advisors, but don't take any product they push without understanding its implications....

Is China the next Dubai

To question China's relentless and inevitable rise to the top of the world's economic pyramid today is to invite ridicule. Investors like Jim Rogers have long thought that China is the only worthy investment story on Planet Earth. Anthony Bolton, the United Kingdom's answer to Peter Lynch, recently threw his hat in the ring, emerging from retirement and moving to Hong Kong to start a China fund. Other China bulls have predicted that the Chinese stock market could overtake the United States in terms of market capitalization within three years.

This is heady stuff for a country that didn't even merit its own chapter in the World Bank's "The East Asian Miracle: Economic Growth and Public Policy," published only 15 years ago. Back then, it was all about Japan and the Asian Tigers -- Taiwan, Singapore, Hong Kong, and South Korea. Even today, China is a story of remarkable contrasts. Yes, it boasts currency reserves of $2.3 trillion, making it, by that measure, the richest country in the world. But China also is a country where 200 million people live on less than $5 a day. Understanding that China's rise won't happen without some serious bumps along the road is the key to making -- and keeping -- money from the "China Miracle." Is China the Next Dubai: Lessons from the Tiny Emirate Superficially, Dubai's rapid development from speck of dust in the desert to mirage made real is not that different from China. Cheap financing combined with world-class aspirations fueled Dubai's property boom that included the world's tallest building, the Burj Dubai. Dubai property prices doubled between 2005 and 2008, as commercial and residential real estate in the middle of the endless desert became as expensive as cramped quarters in New York and London. The emirate's rulers even targeted a China-beating annual GDP growth of 11% to 2015. Eighteen months later, the vacancy rate for Dubai office buildings is 40%, even as planned new construction is set to double the city's office space over the next two years. China bulls will dismiss uncomfortable comparisons with Dubai with a knowing chortle. After all, the population of China is a thousand times greater than the tiny emirate's. And Dubai's $50 billion GDP is less than the economic wealth that China has generated in the last three months. Yet, perhaps this is precisely the reason you should pay attention to the rising din of China critics. Even as the media falls all over itself to praise the remarkable efficacy of China's $585 billion stimulus package, "Bond King" Bill Gross of PIMCO made investors squirm when he observed that the all-knowing economic philosopher kings running the Chinese economic show may inflate... gasp!... a bubble of their own.

Is China the Next Dubai: The Sin of Over-investment? Much like little bubble brother Dubai, the problem in China is best summed up in a single word: "over-investment." Even as U.S. and global consumers are closing their wallets , China is building more steel, more factories, and more malls for which there is almost no demand. Much like in Dubai, many Chinese skyscrapers stand empty, even as whole new cities are being built where the vacancy rates are as high as 75%.

One blogger described one of Beijing's leading malls, "The Place," as "stunningly dysfunctional, catastrophic... with fifty percent of the eateries in the basement boarded up. There is simply too much stuff, too many stores and no buyers." Perhaps no project better illustrates China's dilemma than the spectacular, $450 million Bird's Nest Olympic stadium, designed to last for 100 years and withstand a magnitude-8 earthquake. Yet, the stadium now stands empty, with paint peeling ignominiously from its slick girders. "You build it and they will come" is a better Hollywood movie plot, than a sustainable development strategy. Scratch the surface behind China's impressive growth numbers, and they tell an unsettling story. Consider that 19 out of 20 dollars of China's GDP growth this year is from investment in fixed assets -- empty malls, ghost cities, and tens of thousands of bridges that lead to nowhere. China is investing at a pace like no other country in history.

Post-war Germany achieved a peak investment to GDP ratio of 27% in 1964; Japan's peaked at 36% in 1973, and South Korea's at 39% in 1991. The comparable number in China today is 50%-plus. Yet, not only are the Chinese building a lot of stuff they don't need, they also are getting a heck of a lot less bang for their buck. From 2000 to 2008, it required $1.5 in debt to produce $1 of GDP in China. Today, it takes $7 of credit to yield $1 of growth in GDP. No one has done that poorly since, well, the bad old days of the Soviet Union. Is China the Next Dubai: Enron Revisited? The knives are coming out to make money on China's collapse. Jim Chanos, founder of the investment firm Kynikos Associates and iconic short seller, has put the Chinese market in his sights. Chanos made his reputation -- and a good chunk of his fortune -- as one of the first Wall Street analysts to see that Enron's earnings were pure fiction. Chanos believes that much like Enron, inconsistencies in China's statistics -- like the surging numbers for car sales but flat statistics for gasoline consumption -- confirm that the Chinese are simply cooking their books. The Chinese even have a phrase for ripping off foreigners: "Neng pian, jiu pian" -- "If you can trick them, then trick them."

The bad news is that, if Chanos is right, the collapse of the Chinese economy will be 100 times worse for the global economy than the brief hiccup that was Dubai. If China's economy stops running hard, it will have profound effects on its ability to finance the exploding U.S. deficit. In Chanos' view, the slowdown in China may be as big of a watershed event for world markets as the subprime collapse was in the United States. Little wonder that he is betting the farm on shorting China's economy. For students of financial history, the coming collapse of China is as painfully obvious today as it will be to others with the benefit of 20/20 hindsight. That doesn't mean that China won't eventually emerge as a global economic power. After all, the rise of the United States from a tiny country of 2.2 million people in 1800 to the world's leading power a century later was punctuated by at least half a dozen financial manias followed by depressions.

But as the British economist John Maynard Keynes observed, "in the long run, we're all dead." If you have a shorter time horizon, batten down your investment hatches. The investment seas may get rough.

Outlook for global equity markets – Persistence of irrationality

Someone has rightly said, “the best way to lose money is to look for a rational investment strategy in the stock market”.
With markets around the world playing with the nerves of all investor class, be it big or small, no one has the faintest clue as to where we are headed. Each one is looking towards the other for some definitive clues to give some sense of where we are heading but to then its like a blind man guiding another one. The memory of equity markets are very small and with the rally as sharp as the current one having taken everyone by surprise, people are now feeling left out. These are the same people who were all predicting that the worst is yet to come and more downside is there.

Now every 5-10% dip in the markets is seen as a buying opportunity by this same class of ‘investors’ / ‘traders’. It is this class of people who are giving all the support to the markets on the downside. Whether we call it god’s gift or shere irrationality, only time would tell. One thing is for sure,”money can neither be created nor destroyed, it only changes hands”. We all know the old and time tested and all so cliche teaching of wallstreet “buy low sell high”. What is confusing is that there is no scale to measure high and low. what might seem a high for someone, might be the low for another, else there would be no transaction in the first place. If everyone in the market had the same levels in mind, then there would be no buyers at higher levels and no sellers at the bottom. So it is important to understand that value is a measure whose magnitude and boundaries varies from person to person. It is this basic feature which sustains all trades in the world, be it in any form. Equity trades are no less different and as long as this irrationality persists in the market, we could continue to see higher levels in global equity markets, unless we are awaken one fine morning with the realization that all is not well, like the credit burst of 2008! Till then play to the music of the market….

Sideways till the edge of sanity!!

1. We are seeing the Indian markets trade sideways for almost two weeks now. Some say its the lull before the storm while others say its forming a strong base before the next upmove. You may be in either camp, but i would want to be very careful, be it storm or base formation!! Either of the parties could be right, the storm could take us higher or pull us down, the base formation could be the bottom or a plateau being formed and we could fall off the cliff edge!!
   The bottomline remains that we are here to make money in the equity markets. The risk reward ratio should be favourable else it makes no sense guessing the direction of market movement and getting caught on the wrong foot and losing money in the process. This has been the case with many people over the past few months. When they thought, we were set to see a correction and went short on the markets, they burned their fingers. Similarly when an upmove was imminent, they lost money in options as markets traded flat and option premiums eroded due to time value. So what should one do in order to maintain one’s sanity in these markets. Here are a few things which could help the investor class preserve its sanity in these volatile and uncertain markets:
   Understand your risk appetite - Its cliche but should be remembered, higher return expectation would always be accompanied by higher risk. One would say its difficult to gauge one’s risk appetite. I would say ask a few simple questions and the answers would tell you if you are risk averse or high risk taker. Would you prefer getting assured return of 8% per annum with capital protection or a chance to make 25% profit or a loss of 25% (capital erosion of 25%)? If you choose 1st option, you are no doubt risk averse and it is advisable to stay away from equities at these volatile times. If you feel you have the capacity to withstand a 25% capital erosion in the short time, then jump into the equity markets and make a killing but be ready to get rude shocks now and then.
   Play Derivatives safely – Derivatives are like financial time bombs, ready to explode. Don’t buy derivatives with the same mindset as if you are buying a stock. First of all derivatives expose you to leverage and secondly derivatives should be better used for hedging rather than taking naked positions. Options is all the more dangerous as we are seeing in current markets. Option premium erodes drastically with time and with the month end expiry coming close, it would tend to become zero! One safe way to play F&O is, do options for the 1st two weeks of a month and in the 3rd and 4th week play only in futures. This would save you from the pain of losing all the option premium incase your call on markets went wrong.
   Invest for long term – Make two separate portfolios. One for the long term wherein you would keep building the nest for the golden years. The other portfolio could be the short term trading portfolio which would satiate the trading nerve in you. Never mix the two. Quite often what is seen is that you buy something for trading and when it goes into loss you say to yourself “this is a long term investment”. Clearly avoid doing such mistakes. By doing so you are making a long term portfolio of junk (heard on the street type of) stocks. Build quality portfolio for long term and trade on news and rumours for the short term.
   Build cash reserve before trading in equities – Always invest that much money into equities which you would not want to touch in the short term. Remember equities could give you a rude shock in the short term and your hard earned money could remain blocked when you need it in the near term. For short term money, its idle to park it into debt instruments.
   Each investors case varies from the other and it is imperative that one does a thorough self analysis before entering the markets. One simple thumb rule is that play with that much money in F&O which you are willing to lose without getting sleepless nights.