Market Commentary: May 27th, 2010: 12:00 pm (PST). Posted by Manu Walia
The Fickle Nature of Capital Markets!!! Where are we headed???
Market Commentary: May 24th, 2010: 9:50 am (PST). Posted by Manu Walia
Is the European Crisis a Re-run if the American Financial Meltdown???
Market Commentary: May 18th, 2010: 9:00 am (PST). Posted by Manu Walia
It is easy to how the prevalence of media plays into our greed and fear especially in regards to the stock market. In the classic movie “Wall Street” released in 1987, Michael Douglas who played the role of ruthless investor Gordon Gecko, says to Buddy an ambitious broker “…the illusion has now become a reality”. This particular phrase is used to describe a painting that was bought a few years ago for $30,000 which Gecko can sell for over $300,000, hence the illusion. We believe that the European contagion is truly an illusion, either in our mind or the rest of the world. The entire Greece’s GDP is smaller than the economy of Ohio. The total debt of California is larger than that that of Greece. So why are we so wrapped up in this contagion and predicting Armageddon. We believe that one of the most important factors in investor psychology is the significant impact of the US financial system’s debacle in 2008-09. Investors think later and act first based on the news blurbs they see on media. The ease with which news has started to be disseminated has a major impact on investor behavior in our view. Watching protest in Greece has a larger impact than reading about an upcoming $20 billion debt payment that Greece needs to repay for its survival. In other words, the increased trading activity due to the advent of technology could be a deterrent for individual retail investors. When a large hedge fund has the ability (by default because of its large size) to move the markets, it weakens the confidence of smaller individual investors. Even though free markets are an efficient way to bring equilibrium, there are ways that regulators can and should explore to bring longevity to the system and method of investing. One way to curtail hyperactivity is to increase the tax burden on short term trading activity. In addition, there should be added incentive for long term holders. Again, the point we are making is not one sided but the idea of exploring facets that will bring investor confidence and encourage delayed gratification as opposed to instant gratification.
Market Commentary: May 10th, 2010: 9:50 am (PST). Posted by Manu Walia
Our commentary posted on Friday, May 7th mentioned our belief that the European Union should come to the European debt aid rather quickly. A coincidence in our view but the European Union announced a massive bailout plan that has infused significant confidence in the global capital markets. It is important to understand the impact of the bail out plans that major industrialized and emerging regions have brought about to preemptively protect respective financial infrastructure.
The World’s total GDP is approximately $55 trillion dollars and as can be observed by the chart above, majority of the countries with larger GDP’s, with an exception of Japan have National debt in the ratio of 60-70%. In other words, it is analogous to having personal debt of $70,000 for an individual making a gross annual salary of $100,000. At a 7% rate of interest, this debt will be paid off in 30 years with an annual payment of approximately $5,500. The trick is that the debt doesn’t increase and the annual salary of the individual keeps pace with inflation. The key difference between a country’s government and an individual is that the government can print money. In the individual’s case he/she can go out and apply for another credit card and increase its debt. In both cases, one has to be cognizant of the debt servicing ability of the entity. As mentioned above, the total worldwide GDP is approximately $55 trillion with total National debt of approximately $28 trillion. The cost associated with servicing this debt is about $1.4 trillion for an interest only loan at an annual interest rate of 5%. Considering the growth of the overall worldwide economy, we can liberally calculate approximately $1.32 trillion growth from the BRIC (Brazil, Russia, India and China), USA, Europe and the Rest of the World. If these assumptions are remotely close the reality then we are merely covering the interest payments for the world’s national debt. The point we are trying to make is that the overall productivity in the world needs to increase dramatically to control our behavior to access credit. Looking at the macro global environment with increasing debt, we would encourage investors to gravitate towards regions with higher growth and disposable income. These regions include areas of South East Asia, especially China and India. In addition, we would recommend staying away from US and European government debt. More to come as the markets evolve with the new twist in Europe…
Market Commentary: April 24, 2010: 2:30 am (PST). Posted by Manu Walia We believe that perception drives markets. Obviously fundamental economic numbers and data carve the aggregate investor perception. Since August 2009, we have been in the camp of focusing on unemployment and 2010 corporate earnings. Majority of US corporations who have announced earnings for Q1, 2010, have surprised investors and in addition have also raised expectations for the foreseeable future. In other words the perception of earnings robustness is still intact. That was our main point from the very beginning. As long as the US corporate communication is positive, we as investors will continue to fuel markets. For example, most regional banks have announced that their real estate portfolios are stabilizing and corporate loan delinquencies have if not diminished have improved. The truth and primarily the expectation of improving economic conditions have fueled the markets for the last thirteen months. Recently, there has been a lot of political rhetoric to bring about financial reform in the areas that attributed to the recent collapse of the US financial infrastructure. The main endeavor is to somehow control activities within major financial services organizations, which catalyzed greed and in turn attributed to the system near collapse. Why is it that we as a society spend tremendous amount of time on trying to justify events after they have happened and further try to solve the same problems in hind sight. Yes, there is some pertinence in putting controls in place or having specific rules of any game, but how can a capitalistic society get rid of the basic human instinct; Greed and Fear. Without being philosophical, if we need to shape our society so that we as a group do better for the entire human race, we need to think a bit less for ourselves and more for the betterment of society. One would say that that is too vague and more so what that really means. We don’t believe that government intervention can truly make the radical changes we need in the continuum of society. We believe that the entire society needs to be nurtured in a different way than we have been accustomed to. The commonality between, Dalai Lama, Mother Teresa, Bill Gates and Warren Buffet is that they are all very wealthy individuals. Not necessarily wealthy from their wallets but from character. The commonality comes from being at a stage of self actualization. All of the above individuals have been in the state of giving their wealth to society in one way or another. They all come from different walks of life but have one common character: they were all at the point of self actualization when they started dedicating their lives to society. Unfortunately, our society instills the need to accumulate material things as trophies to create a position in society. Instead of viewing micro sectors of society, our government should start to focus on the big picture and attempt to change the facet of the societal character. It is easy for me to say, but we can not solve this problem overnight. I don’t even think that we can solve it over decades, but we can sure try to be entrepreneurial for the betterment of the masses as opposed to a few individuals. PLEASE REVIEW MARKET COMMENTARY ARCHIVED ON A MONTHLY BASIS DISCLAIMER:
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