Tuesday, March 31, 2009

Indian stocks: substantial currency losses?

Until sometime last year, betting on Indian rupee appreciation seemed like a sure shot one way bet. The BRICs 2050 hoopla certainly helped ignite the animal spirits. Corporations who should have been hedging currency risks actually started speculating instead, trying to “benefit” from their currency exposure.(See this paper and presentation which further explore the existence of one way currency bets amongst private sector companies in India)

Well, came across an article which documents the extent of this activity. It discusses the possibility that the Indian companies could face currency translation losses of approximately 20% of their profits in the current quarter. This number might actually be on the low side as all companies do not disclose their foreign currency borrowings separately. (Note that Indian companies only have to disclose their balance sheet once a year, and Indian fiscal year runs from April - March). I suspect a few sectors/companies could face the brunt of these losses. From the Financial Express:

The rupee has depreciated by about 21 per cent over the past one year. As a result, the borrowing cost is higher by nearly Rs 45,000crore. From Rs 2.1 lakh crore to Rs 2.54 lakh crore.The aggregate profits of these 849 companies in 2007-08 was Rs 2.4 lakh crore. This is estimated to have fallen to Rs 2.2 lakh crore by 2008-09. Thus, the Rs 45,000 crore hit would eat away about 20 per cent of the profits before tax of these companies.

There are two caveats. First, the estimate made above could be slightly lower than the actual borrowings of companies because all companies do not disclose their foreign currency borrowings separately. Secondly, some individual companies, possibly some very large companies, could be hit significantly more severely than the average 20 per cent estimated above.

If this wasn’t bad enough, the Confederation of Indian Industries (CII) has requested the “changing of accounting rules” so that companies can avoid taking a charge for this loss in the upcoming quarter (I wonder why they weren’t requesting this when these same companies were booking profits because of currency effects 2-3 years earlier?). From the same article:

The Confederation of Indian Industry (CII) has proposed that the losses (or gains) arising from changes in the value of foreign currency assets and liabilities because of exchange rate fluctuations not be charged to the profit and loss account of the period of this change. The fear is that because the rupee has depreciated substantially in recent months, companies may be forced to report large losses in the coming quarter ended March 2009, and also in the annual financial statements that end in March 2009.

India is already facing extra scrutiny thanks to Satyam, and this proposal for a hasty and haphazard accounting change could worsen investor confidence in the Indian markets.

Stay tuned.

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Friday, March 27, 2009

Book Review: Tipping Point by Malcolm Gladwell

I recently read Malcolm Gladwell's Tipping Point and wanted to review it. Tipping Point is the name given to that one dramatic moment in an epidemic when everything can change all at once. It essentially describes natural events and phenomena which exhibit the properties of geometric progression with an exponential growth. A small increase in a cause(input) can have an exponentially big effect (output). Change becomes obvious at one dramatic moment.

I especially liked the part where he discusses how your social environment plays a bigger role in shaping your personality and intelligence than heredity. Peer groups shape your character and personality more then your parents do. Your dorm roommate is a bigger determinant of your college performance than the quality of the college you go to!

He talks about the changes in our society: the rise of isolation, particularly among teens, and the rise of immunity in communication. Teens construct their own social and material worlds. We've given them time to spend amongst themselves and less time in the company of adults.

If you are interested in reading a more detailed review of the book, you can read this Wikipedia page. You can buy the book from Amazon by clicking on the link below:

The book basically talks about the three rules of epidemics and the three types of people responsible for spreading them.

The three rules of epidemics:
  1. The law of the few: Similar to the Pareto Principle (the 80/20 rule:20% of the people are responsible for 80% of the effects). A very small number of people are linked to everyone else in a few steps, and the rest of us are linked to the world through those special few. Social circle in reality is a pyramid.

  2. The Stickiness Factor. There are specific ways of making a contagious message memorable: relatively simple changes in the presentation and structuring of information can make a big difference in how much of an impact it makes.

  3. The power of context: Human beings are a lot more sensitive to their environment than they seem. Behaviour is a function of social context. For instance, it becomes hard to keep up with a social group when it's size increases beyond 150. (This number is actually called the Dunbar number. Read this Economist article for more info)

The three types of people who spread social epidemics:
  1. Connectors : People with a gift for bringing the world together. Connectors are people whom all of us can reach in only a few steps because, for one reason or another, they manage to occupy many different worlds and subcultures. This is a function of curiosity, self-confidence and energy. We rely on them to give us access to opportunities and worlds to which we don’t belong.

  2. Mavens : Unselfish accumulators of knowledge. A maven is someone who wants to solve other people’s problems, generally by solving his own. Mavens have the knowledge and the social skills to start word-of-mouth epidemics. What sets them apart is not so much what they know but how they pass it along. The fact that mavens want to help, for no other reason than because they like to help, turns out to be an awfully effective way of getting someone’s attention.

    Mavens are data banks. They provide the message. Connectors are the social glue: they spread it. Information overload makes the role of Maven important. In a world dominated by isolation and immunity, principles of word of mouth are very important, highlighting the role of a maven and a connector.

  3. Salesmen: Have the skills to persuade us when we are unconvinced of what we are hearing. Love helping people.

While the Tipping Point has some very good points and interesting anecdotes, a minor quibble I have with works in this genre is that I can actually summarize the main ideas in a single page. It’s a good read and has some interesting insights, but not sure how applicable it is in everyday life.

But still definitely worth a read!

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Tuesday, March 24, 2009

Long hiatus.

It’s been a long time!

Firstly, I apologize for being completely out of the loop. In a 6 month span, I went from being a single guy, to getting engaged, and finally being married last month. Between wooing future Mrs. Fundamental Insights, enjoying Southern California weather, family excursions to the many places around here and the wedding preparations, I’ve been busy :-)

The world has changed and it certainly feels like the end of an era. Writing in the pre-Fannie-Freddie, pre-Lehman, pre-crisis era seemed so different. While blogs like the Big Picture, Baseline Scenario, Investment Postcards, Paul Kedrosky and John Mauldin kept me in the loop, this was possibly one such time where the value of not doing anything trumped trying to time or divine the manic-depressive swings in the various asset classes.

Whenever I think of “investment success”, I’m reminded of Jim Rogers. He shorted the markets sometime in late-1999 early 2000, before embarking on a multi-year world tour. Sometimes things feel so obvious, being blissfully unaware of the daily and weekly gyrations and news flow is probably a good thing.

Initially I had started out to write about both technology and finance. However, the events in the financial arena completely trumped everything else. I’d like to thank everyone who commented or emailed me in the meantime. I don’t claim to have the right answers. Writing this blog will continue to be a great learning experience and I hope to get back to more regular updates.

Thanks for reading!

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