Wednesday, October 28, 2009

Shaking the apple tree- The unsafe Liquid Funds

An interesting article on money market mutual funds :

In India, the name given is 'Liquid' funds. Here we have instances of some funds in the past that have broken the buck ( given negative returns on one or more days) and yet continue in business.
In the Liquid funds, more than 90% of the Assets belong to corporate investors including banks. Often, banks borrow in call money and invest in the mutual funds to arbitrage. This kind of an industry structure is fragile. I know of corporates who invest in Liquid Funds for tax arbitrage. The dividend receipts are tax free.
The net result is that since the corproate sector provides the bulk of the corpus, the mutual fund industry has totally neglected the retail (let us call it non-corporate) segment.
The only way the industry will get its focus right is if the government stops corporates and banks from investing in mutual funds. This can be done either by executive fiat (Only resident / non- resident indian individuals can invest in domestic mutual funds) or by tax legislations ( investment income of any kind for corporates will be treated as 'speculative' income).
Towards 2008 middle to end, a lot of mutual funds held "commercial papers" of real estate companies, which were in reality 'illiquid'. Most of them were 'rolled' over ( a ponzi evergreening scheme if ever) or sold to a group company before due date. There were defaults and liquid fund redemptions were an issue. Regulators and investors have conveniently forgotten it.
The worst are the banks that invest in Mutual Funds. Firstly they run out of risk limits on many companies to whom they lend beyond reason. often, the money they invest in the mutual funds is used to lend to these companies! So, in effect, they circumvent all legislation and regulations.
Like everything else in India (especially where you have a dumb regulator like RBI), change will be forced only by a catastrophe.

Don't yet kill the american banker..

The bankers are betting that the money they were given by the feds will be worth less next year than it is this year. So they exchange it for everything and anything, confident that when it comes time to pay it back it will be even easier to come by than it is now.

So far the bet has gone their way. Copper has doubled. Gold is up 20%. Stocks markets all over the world are up 60%. Foreign currencies, too, have beaten the dollar.

Will the wager against the dollar continue to pay off? Well, that’s the big question. If so, you should stay in stocks, gold and commodities. If not, you should move to cash.

But it hardly matters to the gamblers. They’re playing with someone else’s money! If the bets go well, they pay themselves huge bonuses. If they go badly...well...hey...gimme a bailout!

But you can’t blame the bankers. They’re performing a very valuable service. They are helping to separate fools from their money. Too bad we taxpayers are the fools...

From a column in “Daily Reckoning”- (

This clearly explains the ‘invaluable’ service bankers are doing to humanity and we should not grudge them their bonuses. After all, this is one instance where a small number of people make a huge difference to the entire universe.
Unfortunately, the world has chosen to ignore Shakespeare (Neither a lender nor a borrower be). In fact, at the heart of every banking led crises (I do not think there is any other kind) is debt. Straight debt, sovereign debt, packaged debt, re-packaged debt, microfinance scam, leasing scam, etc. The list is endless. Paper money ultimately is only paper. So long as we believe in the illusion, the world economic growth behaves as if it is on steroids. Without this illusion, probably, the developed world will be at a steady state (with zero growth) and the developing world will possibly struggle to remain in place because they will have no ‘currency’ of trust. Left to their own resources, the poor cousins in the world will become poorer. It is only the bankers who create this wonderful ‘feel good’ without any money, that the world is able to grow. We are also all stuck with America, whether we like it or not. The rich have their money in dollar. If you have a weak dollar, you become poorer. America dominates the world through its wonderful bankers. Even at the peak of the crisis, they made sure that the shrewdest banker was fattened with the flesh of the other bankers. So, don’t yet throw the banker away.

Cheers. Have a great day.

Wednesday, October 21, 2009

Fund Managers - Ethical Dilemma???

The recent news of Mr Rajaratnam, of Galleon, is sure to spark a debate on the Fund Managers and the definition of 'insider' trading.

In my experience of being on the sell side and interacting with the fund managers, I can say is that they are always looking for an 'extra' edge. They want information first. Typically, the business given to the broker is dependent on how much and how early is 'news' given to the fund manager by the broker. When the fund manager meets a company, I have rarely seen them asking for anything exclusively. If at all, they analyse as to how well the broker knows the company and uses the broker with the best contact, to get news about a company.
Yes, many things the fund managers do, will be borderline as regards absolute ethics are concerned. It is only when a fund manager uses his position to get some personal favour does it cross the boundary. For instance, we had a fund manager who used to pass advance information about his impending trades to a big time broker. The broker would use it to make money, given the poor liquidity of the local stock markets. Of course, he was sacked, but then promptly hired by another large fund house, whose sponsor was close to the broker. I have seen more cases of broker dishonesty or of fund managers passing more business to a particular broker (for obvious reasons) for reasons other than merit.
Yes, there are talks of some fund managers who have made fortunes by passing more business to a broker and by passing on inside info. Also, there have been cases, where a broker does trading based on advance information from a fund manager and then shares the spoils with the fund manager. There are fund managers who have done this and got away.
The competition amongst the brokers is so severe, that they look at every angle to snare a fund manager in to giving more business. Naturally this path becomes a trap for some fund managers, who cannot resist the lure of easy and quick bucks.
I have also met 'foreign' investors, who used to make a point that they want information ahead of others. For instance, I have received requests from fund managers to give them advance notice about any research report that contains any opinion change.
The investment industry structure is such that it encourages or fosters dishonesty. On the buy side, there is everyday pressure on the fund manager to deliver returns better than his peers. The pressure comes from his own sales team. On the sell side, the broker salesman is under pressure to get more business, which he can only do through making his client'churn' as much as possible. And, also to get more business from a fund manager than what is logically coming to him. To do this, he has to give and extra edge to teh fund manager. This can only be in the form of unpublished information or rumour or manufactured gossip.
Insider trading has always existed. After reading Mr. Warren Buffet's bio, you are not sure whether all the practices he did, would pass muster today.
So, I am sure that dishonesty in this industry is endemic and nothing will cure it

Tuesday, October 13, 2009

RBI authorised black money

Now one can forget the hassle of carrying large pactkets or cash for bribing someone. Just walk in to a bank and buy some'prepaid' gift cards with VISA or Mastercard branding. You can buy in lots below 50,000 rupees without giving any identity proof. You get a prepaid card, with stored value. Unlike many gift cards that can only be cashed at designated outlets, this can be used to draw cash from any ATM.
The receipient can just keep the card for as long as he pleases. In a tax raid, these cards are unlikely to get noticed, given that people are used to seeing multiple cards. And it is so convenient. The bribe can be paid in the government offices itself, since you are not carrying cash, but mere plastic!!

Of course, the RBI will not do anything. Someone has to 'bring it to their notice'.
This can happen only in our country, where on one hand we talk about corruption and on the other, we have the government owned banks facilitating in creating 'black' money!!

These can also be used overseas, so you can imagine the possibilities!!!
Mera Bharat Mahaan...

Monday, October 5, 2009

IPO fever. -- Cashing in on greed

The list of companies that want to foist IPO's is dominated by property companies. This is simply because the property companies have got stuck with land and unsold property funded by debt. Inability to deliver on payments collected because they diverted money to buying more land.
It is unlikely things will change. These IPOs will get 'fixed' by arranged subscriptions by their lead managers and other professional agencies. Laddering will be in full play. Add to that, the unsavoury practice of "IPO Financing" by the NBFC's ( RBI naturally turns a blind eye to this, because nobody has brought it to their attention) will pull in subscriptions. And mandates will be awarded on the basis of price (whichever lead manager promises highest price, gets the business).
Of course, real estate is just one. We will have a lot of greenfield things, like mega power projects etc which will be priced on earnings visible only through a binocular.
Time to be cautious. But history tells me that suckers never learn.

Saturday, October 3, 2009

The IPO con - Stay far away... Balakrishnan / Investing~Losers’ Game

A view about IPO's in India.