Commentary

Subra debunks the myth that real estate prices can’t fall. I agree with him. Real estate prices have fallen big time in the past, and will continue to when there is a crisis. And there is a crisis going on right now.

Only sellers in Parsvnath, says Moneycontrol.The stock is down 10% at the lower circuit. But then we are at two year lows and looking worse.

Both houses adjourned because the opposition had an uproar on the price rise. This is policy and action paralysis. With over 54 bills that need to be passed, this is stalemate. There is no point having elected reps if they cant have a decent discussion in parliament.

China’s PMI (prelim estimate) came down to 48 from 51 in October. This is preliminary, but a <50 number indicates contraction, which is not very good. In the same article, they show comparative inflation in the BRIC countries:

India’s benchmark wholesale-price inflation was 9.73 percent in October. By comparison, consumer prices rose 7 percent in Brazil, 5.5 percent in China and 7.2 percent in Russia in the same month.

A brilliant Guide To The Eurozone Crisis by Percy Mistry.

After the BSE cancelled all futures trades in Mahurat trading on Diwali due to a rogue algo program, SEBI has decided to investigate high frequency trading for risk management.

The stock market regulator, the Securities and Exchange Board of India (SEBI), said that it will do a thorough review of the risk management system in high frequency or algorithmic trading. Such an exercise aims to stop repetition of the Muhurat trading mishap on the Bombay Stock Exchange (BSE).

On October 26, the BSE was forced to annul all the derivatives trades. It said that it observed large movements in Sensex futures during the special session, conducted as Muhurat trading, for Diwali. This has again raised the question of risk management measures in high frequency trading.

But the reason heard that the BSE annulled all trades was that one member stood to lose 100 cr. That member should have been forced to lose that 100 cr. , one thinks, to send a message that if you screw up, it’s your problem. But no, now they will investigate if algo traders have “risk control”.

I’ll tell you what is likely to happen. SEBI will ask for an audit. The algos are too complex to be actually revealed, so each algo firm will do some random demonstration of how well their risk functions work, and SEBI will be satisfied. Nothing will change; if they try to change the rules at the exchange itself, in terms of capital requirements, even regular prop shops will get affected and that is a no-no.

More interesting is this part:

The SEBI chairman endorsed the concerns of the trading community that trading costs, of buying and selling shares, have gone up. “Time has come to re-look. SEBI is in dialogue with the Government, which will take steps at an appropriate time,” he assured.

The Finance Ministry is working on a proposal to reduce the Securities Transaction Tax (STT), which is levied on buying and selling of shares in the cash and the derivatives markets. At the same time, the Ministry plans to amend the Stamp Duty Act to have a uniform duty nationwide.

Removing STT will hugely help algo traders, most of whom are darn scared of doing option trades that involve being long options to expiry, simply because STT takes away everything. I’ll expand if anyone’s interested.

The awesome Devangshu Datta writes about Behavioural Quirks:

Very few investors have the self-awareness required to analyse their own performances as objectively. Even fewer possess the self-discipline to change bad methods. Yet, it often doesn't take much in terms of time or trouble. All it really takes is the humility to admit that not all losses are due to ill-fortune.

Before entering into investing, an individual needs to ask himself a few questions. One is, how much is he prepared to lose? A second is, what is the minimum return he wants? The third is, how long is he prepared to wait for those returns? If the answers are honest and realistic, he has a template for investing methods. He knows his risk:return profile.

The idea is to have a little discipline. But like common sense, it’s hard to find!

(Disclosure: DD is a dear friend, but he’s awesome anyhow)

MF Global has filed for bankruptcy as the European debt crisis claimed its first big profile victim in the broker-dealer space. The company, led by ex-Goldman Chief and ex-US-Senator Jon Corzine, went belly up after a series of bets on Euro debt went sour – largely the 50% haircut on Greek bonds as agreed recently.

The bankruptcy, the seventh-largest by assets in U.S. history, is reminiscent of 2008 when Lehman Brothers collapsed at the height of the financial crisis. But market participants said the impact from this collapse, far smaller, would likely be contained.

MF Global traders and counterparties were left scrambling and confused on Monday, as MF Global halted its shares, but did not file for bankruptcy until well after the U.S. markets had opened.

…

Three traders wearing MF Global jackets were seen leaving the Chicago Board of Trade prior to the opening of pit trading and floor sources told Reuters they had been turned away after their security access cards were denied.

The New York Federal Reserve suspended MF Global from conducting new business with the central bank. CME Group Inc, IntercontinentalExchange Inc and Singapore Exchange Ltd and Singapore's central bank all halted the broker's operations in some form except for liquidations.

I had visited the MF Global India office in Mumbai, in 2008, where we’d had some business when I was part of Moneyoga. The place was great and honestly I thought they were one of the most refined brokers out there. I hope the people there are safe, even if the bankruptcy will take its toll.

This doesn’t look like another Lehman. But hey, even Lehman didn’t look like Lehman when it first happened.

I wake up way too early, following stringent baby-care regulation that parents should get little or no sleep, and find some time to write in. I’ve been in and out of news, as worldwide, investors and traders participate in the markets with a “WTF” expression.

I watched the action in the last four days entirely on my GPRS connection on the mobile phone, maybe once an hour or lesser. The decreased frequency always changes attitude; when you don’t have instant data to react to, you can sit back and think about larger trends, not smaller ones. Certain things that have passed my mind.

What happened to Dubai, Ireland and Iceland? I don’t have the answer, but at the time each of these countries were in a financial crisis the world shuddered and shivered and all that. When Dubai World threatened to partially default, I even wrote a post about the panic it caused. Yet, they’re not mainstream conversation today, even if they’re not entirely out of the woods yet.

But the main point is: look how short-term the panic thinking is, in general. For every Lehman, there are many other panic creators that promise a world wide breakdown of the financial system, and yet, nothing big happens. Like they say, economists have predicted eight of the last three recessions – markets have expected 100 of the last two.

Having said that, the real impact of the globalization of finance might be that these three are just pieces of a much larger crisis, that’s starting to unwind with Europe and the US today. Still, much of the panic at the time wasn’t about a small fall, it was about how that particular news event would destroy the world. Which hasn’t happened (yet).

Where are our taxes?

The central government revenues show a sorry state of affairs:

Yes, the non-tax revenues are lower because the 3G and BWA auctions got the government 100,000 cr. last year, but even after removing that, the increase is tiny.

Taxes are up just 1.1%.

Our fiscal deficit – till July – is 228,000 cr; compare that to the total deficit last year of 369,000 cr. (till March).

What’s with all the startup gyan?

My twitter feed and now my email is full of random events and webinars and seminars and long articles about the startup “ecosystem” in India. We need some evangelism for sure, to help people understand the niceties of starting up, funding opportunities, networking and generic feel-good publicity.

But recently, I see that the people building an “ecosystem” are getting much louder than the startups themselves. There are few exits to speak about – I will do an article about this someday – and because that is so discouraging, the startup “enablers” talk about other things like how you should conserve money as a startup. Duh. Anyone who has started up knows this from day one, unless they had way too much money to bother.

You need depth for the gyan, like Paul Graham or VentureHacks. And of course, like these guys, you need to participate in the startup story and make big money, otherwise it’s not really inspiring.

*****

That ends my disconnected post. I’ll come back with more. Main programming is paused for the time being.

Markets all around the world are crashing.

• India was down 4%
• Indonesia: -9%
• Hang Seng: -5%
• CAC (France): -5%
• DAX (Germany): -5%
• FTSE (UK): –4.6%
• The US S&P 500 is down about 4% as I write.
• Gold is down 3% in USD
• The Rupee went to 49 to a US Dollar today

First, we want to know the reasons. Even if they are ahead of us:

The US is in a mess. The Fed announced that it will sell short term treasuries and buy long term bonds – the 10 year is at 1.8% now, a ridiculously low number. The Fed said yesterday that it sees “significant downside risks to the economic outlook”.Housing prices, though flattening out towards the bottom, aren’t recovering fast enough and unemployment remains high. The dollar is now the image of safety. (I don’t think that’ll last for more than a year more – if you own dollars, you might want to track things closely)

Greek Default: Yes, it is going to default, we just don’t know when. The feeling is that banks are going to be in a soup, largely because there is uncertainty about their positions. It’s only when the actual default occurs that we’ll know, and honestly, you might see markets go UP when that happens.

Europe is in a bigger mess. They have overleveraged banks, they have hugely indebted countries, they have panicky governments that don’t really like each other. They have a loose monetary union without the fiscal responsibilities, because of which no one wants to take the hit for someone else’s mistakes, even if everyone benefited from it. There is either a mega-bailout in the offing or the complete collapse of the Euro (and most of the Euro area banks). Given that Germany and France will probably live through a massive system crash, I believe the latter is more likely today; but you can never underestimate megalomania and the ability of banks to lobby.

China’s slowing. Their early PMIs have been seen going down to below 50 (contraction) and the feeling now is that they’re doing their best to hide real data from the global market. Recent statements show that local counties have taken on enormous amounts of debt, that if assumed by the center (it’ll have to be) will end up being more than their GDP. They have a real estate bust happening.

India will slow down. Say what you will, but our interest rates are designed to slow us down, and they will eventually. The government has become a non-entity – nothing is moving. We have a consolidation waiting, and we will get it – it might result in extremely low GDP growth and possibly take out a number of leveraged players out of the reckoning.

Japan has the fallout of Fukushima weighing on it and a massive debt piled up, the Middle East has people on the streets fighting for freedom, New Zealand saw a GDP growth of just 0.1%.

Enough reasons?

Now let’s shut me up with my gyan.

It doesn’t matter why we went down. This is not anything new, much is known for nearly a year now. What matters is: What Are You Going To Do About It?

ICICI Bank is down 7% and HDFC Bank 9% in the US markets. The Indian ETF (INDY) Is down 6%. We’ll open low tomorrow and the intraday traders are likely to jump on to the short side. We’ll see another leg down before we see a leg up.

I am trading the market down, and I’m looking for good stocks to buy. Pure India consumption stories. There was a great monsoon; farmers will have money, especially after the MSP supported farm economy. They’ll buy bikes and tractors and TVs and toothpaste. I’ll identify but buy only on the way up (who cares if I miss a little bit).

I’m also respecting the trend. This is a strong downtrend. In this there will be sharp rallies, but the big trades will be on the short side. Discipline and stop losses are key.

Lastly, borrowing from the Hitchhikers Guide, do not panic. Everything can wait. I will miss hundreds of great trades, if I had reacted a split second after some news. It doesn’t matter – the idea isn’t to trade for five minutes, it’s to find sustainable trends and stick with them. There is more work now finding good opportunities than ever, because the market gives you too much news.

A recent item said “Markets do very well at handling one crisis at a time, but it loses itself when you get many pieces of bad news together”. It’s now that the panic has set in because of massive uncertainty. Any level of certainty will calm the markets, but certainty will only come after something gives. Expect that over the weekend. Expect large moves. Expect to feel knots in stomachs. The heat is on, and if you’re in the kitchen, you’re going to feel it.

Dan Ariely writes about financial behaviour: 

Typically, a financial adviser takes 1% of assets under management—annually!—to balance a portfolio, and makes investment decisions on the basis of our answers to two questions: (1) “How much of your current salary will you need in retirement?” (2) “What is your risk tolerance on, say, a 10-point scale?”

Frankly, I think highly trained monkeys could do the same basic job given answers to those two questions. Certainly algorithms can do it, probably with many fewer errors. This is just not something for which we should pay 1% of assets under management. But the real reason we should not pay for it is that those questions don’t help optimize our portfolios.

To prove this, I asked many people those two questions. The most common answer to the first one was 75%. After some probing, I learned that most people named that amount because they’d heard it as a rule of thumb from financial advisers and from the media. You can see the inane circularity: Financial advisers are asking customers a question that the customers are answering with what the advisers have told them is the right response.

When I changed the question to “How do you want to live in retirement?” and costed out where people wanted to live, what they wanted to do, and so forth, I discovered that they would actually need almost twice as much: about 135%. (Think about how much money you would need if you had nine extra hours a day in which to spend it.)

I also asked people the risk question, varying the labels on the ends of the scale. I told some that the low end was 100% in cash and the high end was 85% in stocks and 15% in bonds. I told others that the low end was 100% in bonds and the high end was 100% in derivatives. Regardless of the labels, people chose somewhere near 5, depending on whether they felt slightly more or slightly less willing to take risk than what they thought of as average.

So what do we have? A service that costs 1% a year and is based on two not very useful questions.

Emphasis mine, of course.

I agree with him. 1% of AUM to answer these two basic questions is highly inappropriate. 1% of AUM to answer ANY such questions is highly inappropriate.

But the important thing is that such questions are always going to be subjective, that you can’t have standard formulas, that the concept of planned retirement is a myth. In that context I invite you to read my own myth: How much do I need to retire?

You will never really know, until you retire, what your real costs are. I know people who spend a lot lesser. And I know those who spend more; from an office car to having to pay for petrol and driver, paying more for groceries because they have more meals at home, and of course, the desires of retirement like larger screen TVs and more air conditioning. Retirement is a state of mind; for all practical purposes, my current life seems like a retirement. However, I’m spending lesser than I did when I was employed, and even that is likely to change next year. I could have hardly predicted this.

We assume 6% inflation – it could be much more or less. We assume stocks will return 12% over a long term – in the US, the last 10 years have returned less than that IN TOTAL. In fact, from 1996, when Greenspan said “Irrational Exuberance”, the Dow has returned approximately 75%, a pathetic 3.9% per year. In India, the Nifty over the same term has given us around 10% per year, most of it in the few years since . 15 years is a long enough term; people at 45 now need to wonder if the next 15 will reflect the US.

We assume lower risk taking abilities even for ourselves, after retirement. But for a person whose needs are satisfied, the risk taking ability is substantially higher; if my mother had sold my dad’s stocks after he passed away, she would be left with about 2x that money rather than the 25x his stocks returned. (Note also that the index gave just 5x since then) Risk is not something you can quantify even you were bitch-slapped in the face.

(In that sense, the Ariely experiment was flawed. If you ask people how much risk they want to take after retirement, they will choose the politically correct answer.)

If I had constructed a plan with utmost care 10 years ago, I would have been wrong about nearly everything. About when I wanted to retire, about how much money I needed to spend, about how inflation would affect me. If I construct it now, I will be wrong. The only thing I can think of is: make a plan, and then adapt as you go along.

So the right answer to “How much should I save for retirement” is: it depends. And even for that, you can’t charge the 1% of AUM, unless of course, you choose to live in the real world, where if you put TV ads showing people playing with their grandchildren despite having white hair, people will throw money at you. We live in the dirty world of instant gratification, and we’re willing to pay 1% of AUM for that.