Flying Donkey

Friday, March 17, 2006

The Great Indian Market Crash of 2006

The BSE is trading at more than 21 times its Price to Earning ratio. In simple terms, it will take an investor more than 21 years to recover the cost of his investment, not taking growth into account. This is obviously very simplistic argument, but you get the drift. To give you a perspective, the Dow Jones Industrial Average (DJIA) is trading around 22 times.

Yes, Indian stock market is now at the same price point as the US. This, despite the fact that there is about 250-550 basis point country risk premium attached to the Indian stock discount rate. This is nothing short of hyper-irrational exuberance. These kind of valuations are not justified even on a growth adjusted basis. Even considering a generous 11% growth rate for non agriculatural sectors, this translates into a PEG of 1.91. This compares unfavorably with the PEG of DJIA, which stands at 1.6.

A brief, and informal, survey done by yours truly of ordinary Indian seems to suggest that most of them have stopped pumping-in more money into stocks for now. There is a general feeling that the market is overvalued.

Then why is the market not correcting? The answer seems to be the FIIs. More than 20% of the money invested in the market is by these institutions. Why are they still in the market if it is overvalued? The answer is twofold: i) Lack of alternatives; and ii) Fear of market impact.

i) Over the last few years, hundreds of Indians have taken advantage of the buzz surrounding India and gained a foothold in the foreign financial markets as India experts. These guys are now caught in the spin cycle that they created. For them to pull out of the Indian market means losing their sway in their firms. If Indian market goes down, they go down with it. This escalation of committment is like playing the Russian Roullette - You keep pressing the trigger and if the market goes up, you win. But eventually, they will have to come to the loaded chamber...just a matter of time.

ii) Some of the saner money managers are stuck in the market for another reason. There is no one to buy from them. And if they unload their holdings, the market will not be able support the supply and they will drive down the prices.

Either way, the result is not pretty. So what do they do? One word - PROPAGANDA. They organize investor conferences, bring out pie-charts and spreadsheets and convince each other that the market is solid. They do all this in air-conditioned hotels and sanitized campuses of major companies. What they try to forget about is the woefully lagging infrastructure - shortfall in energy, crumbling roads, slow judicial process.

In short, they are loading-up the table with heavy goods, but not reinforcing the weak legs of the table. Eventually, the table has to fall under its own weight.

So what is going to happen? A rudimentary analysis seems to indicate that we are looking at about a 25-50% correction. This range was calculated by rationalizing the P/E as well as the PEG ratios.

For a healthy and growing developing country, P/E in the range of about 16 is what one would expect. This P/E is 25% less than the the P/E of 21 that we are seeing in the market. This is how I got the lower range of the correction.

PEG of BSE is close to 2 right now. An ideal PEG is around 1. This supplies the upper range of our correction, which is 50%.

The current optimistic estimates of Indian market capitalization place it around $900 billion. So, based on my analysis, it would seem that the market stands to lose between $225-$450 billion over the short term.

Monday, March 13, 2006

Pervert Nation

Hindustan Times had another article on eve-teasing today. Apparently, the studs of Delhi are so macho that they have to demonstrate their virility by grabbing breasts of random girls, in front of the girls' parents.

Oh my wonderous nation...the superpower in waiting. How glorious will be your future now that you have spawned such fine male specimens. The world stands in awe of the 8% GDP growth. But little does it realize that this is just a ploy to attract gori kudis so that the virile progeny of Mother India can warm their hands on their unresponsive breasts.

Girls in India can rest assured that all their sexual fantasies will be fulfilled as soon as they step out of the house, thanks to our desh ke laal. These mini Chunkey Pandeys know what the ladies want...even if the ladies themselves don't know it.

Afterall, why go to Bangkok when you can park your cock in some aunty's behind in a jam-packed bus. She wants know it. Which girl doesn't like randoms penises pushing against her body.

Also, why deprive the elederly of the pleasure? If some old woman is waiting for a bus at the end of a busy day, all she really wants is to get in your Mercedes and get raped by you. Hell...nobody can accuse the Indian male of age discrimination.

Somewhere up there is a happy mom, her eyes tearing up...her little boy is all grown up.

India: Miles to Go

Over the last few years, there has been a new found confidence in India, and rightly so. Indian economy has grown at an average rate of 6%+ over the last five years, the per capita is approaching the inflection point of $600, and the world is finally waking up to the Indian economic juggernaut.

In short, in the marathon race of global commerce, India has been running like a true sprinter. Compared to the 70s and the 80s, this is truly amazing. At this rate, India will double its economy about every decade.

But there are some sobering facts that need to be looked at before we start dreaming of the second coming of the golden age of India. The question one should be asking this growth sustainable?

India needs massive investments in infrastructure and some additional help from the gods to sustain this level of growth. Critical areas of development exist that will need to suck up the next wave of investments.

India is woefully lagging in meeting its energy needs. It has about 110 GW of installed capacity. This is about quarter that of China and about tenth that of the US. Indians have 13 MMBTUs of energy available per capita as opposed to 35 of the Chinese. It needs dedicated electricity to power its manufacturing and service industry.

The drinking water availability of India remains a big concern. By 2010, India would have approached the UN defined stress line of per capita availability of water. History tells us that rise and fall of civilazations has been predicated on the availability of water. This is a big concern and has the potential of derailing the economy.

Despite these elephants in the room, the Indian stock market has been behaving like it was the developed market. Indian valuations on a relative basis are approaching all time highs. At the current valuations, Indian companies are starting to become more expensive than companies almost anywhere else in the world.

Whats the drawback you ask? Outflow of investments!

Currently, more than 20% of the capital in the stock markets is from Foreign Institutional Investors (FIIs). There is a surprising unanimity in the the foreign capital markets that India is overpriced. We are looking at a significant pullback of investments and profit-taking. Thus, just when we need the billions and billions of dollars to fund the infrastructure spending, we will be seeing a net outflow of funds.

Thursday, March 02, 2006

Hijacking of India

New York Times published a less than enthusiastic article today about Bush's trip to India. I'm sure this article is well balanced and well researched (unless Jason Blair is the ghost writer), but the only lasting impression that remained with me is the threat of suicide bombing by a Mumbai Muslim youth. I'm not sure how credible this statement is, or if it was even made, but it left me feeling angry and frustrated.

A nation of 1.1 billion people, 66% of whom admire USA (according to Pew Research), and the one thing that people take away from this article is that Indians want to suicide bomb America, and yes, they will even get visas to do that. I am disappointed by the biased reporting of NYT, but I am even more disappointed by what's happening in India.

Everyone I know supports and loves America, yet a minority opinion is being presented as the opinion of India. The people demonstrating in Delhi, Mumbai and Hyderabad have shown a reckless disregard for the majority by their demagoguery.

Why is it that these people hate Bush so much...because he invaded Iraq? I'm sure a lot of Indians share that opinion, but they still welcome Bush's visit and US-India ties as they believe that it will benefit India. Are these demonstrators suggesting that they are more concerned about some distant middle-eastern country than their own country?

The majority has allowed madrassa-educated fanatics to control the message that goes out of India. In US and worldwide media, the message is that Indians are burning US flags and cursing Bush. The same Indians who are taking away US jobs are wishing ill of them.

The majority has allowed the very perception of India to be hijacked. We worked so hard to change the perception from snake charmers to IT wizards. Now, these guys are trying to paint us as reactionary jehadists.

As a democracy, it is important that all viewpoints be allowed. The key here is 'ALL'. In this case, a narrow fanatical viewpoint that is antithetical to India is being presented. If Indians don't wake up and respond to it, we'll soon wake up under the crescent moon.