Better Safe Than Sorry

The financial world is just getting tougher. An asset valued at $80/sh plummets to $2/sh in a matter of a month. Bear Stearns’s balance sheet of $400bn will be severely eroded. This bad news had had immense negative impact on global financial markets. What better example of globalization than a US company going bust in US and liquidating its assets in India. If you peruse through the fund action data for Friday, you will find that Bear Stearns sold huge quantities of stocks like Dabur Pharma, Bombay Rayon, C C construction and CEAT among others erasing significant amounts of Market Capital and Sentiment. What is of concern is the transparency of news flow. Two days back, the CEO of Bear Stearns Alan Schwartz comforts the market that there is no reason to worry which gave a record breaking rup up to the markets. Today, one wakes up to see once dominant investment bank on life support system from fed and fellow friend JP Morgan. No one has an idea as to how many ailing patients we are dealing with. There are rumors of Lehman Bros going the Bear Stearns way and who is it question that until the air clears.

The point I am driving at is the uncertain environment we are in, exposed to whims and fancies of the US markets. Further, what worries is the kind of speculative activity across currencies and commodities. There seems to be no cover to hide. Swiss franc is appreciating fast breaking 1.0 level to US dollar. Yen is appreciating faster breaking the 100 to US dollar and going all the way to 96. Crude getting stronger by the day breaching $110/bbl level. Gold crossing $1000/oz level all the way to $1032. Unless the dust settles the strategy to sit tight on cash seems like a good strategy. Its better to be safe than sorry.

ICICI Bank – Markets react excessively

Markets reacted to the news flash from CNBC-TV18 on the mark to market losses set off by ICICI Bank as if it was a bolt from the blue. Stock was down 9% immediately after the news broke and was significantly down even after the management clarified the situation (though not coherently) closing the day with a loss of over 5%. Even though most of them did not cover this subject in their Q3 earnings reports, the brokerages came out with reports the next day and made it look as a harmless piece of information known to all Toms and all Harrys in the market. But the fact is, the market wisdom was more confused than ignorant of the exposure of the bank in the international markets right from the beginning. Thus reminding all of us that “Markets react. Markets react excessively.”

Markets believed that the bank had exposure of $1.6bn when infact it has $5.9bn. The losses were also ambiguous before the expose. This information asymmetry is what markets reacted to.

Should there be a reason for long term investors of the stock to worry? The credit derivatives subscribed to are from Indian corporates who are not exposed to sub prime crisis in US directly. Also, the investments in UK and Canadian subsidiaries are predominantly in corporate bonds and remaining in government treasuries. More than 85% of these are rated ‘A’ and above. The icing on the cake is that is if these are held to maturity, the write off amounts to the most part may be written back.

Is it a good time to enter? Here is a perspective. The writedowns of $265mn in this financial year works to only Rs7 per share. Not a significant impact. Consider this: For the entire 12 month target price from different brokerages are listed below. The average target price is Rs 1504. Assuming that the foreign subsidiaries would have funding pressure going forward because of liquidity concern in the world and considering no contribution to the bottomline, the target price comes to Rs 1430. This is 60% premium to the current market price of Rs 894. 60% return in 12 months considering worst case scenario!
Citigroup-Rs 1510
JP Morgan-Rs 1628
Merrill Lynch-Rs 1450
Motilal Oswal-Rs 1416
UBS-Rs 1515

Hypocrites???

Consider This:
There are these rich, greedy, supposedly intelligent investment bankers in United States. What did they do? They created complicated structured products which even the Mensa geniuses fail to comprehend. They set up an environment where well groomed - white collared officers loan to people who do not deserve get loans. These people default creating Non Performing Loans (NPLs) that produce a butterfly effect and take the entire credit market with it. The most smartest people cannot still figure out how much could be the bad loans/margin calls/write downs. Fed cut the interest rates at multiple instances. Govt lends billions of dollars of tax payers money. How do we react? We tear our shirts, thump the tables, laugh aloud and cheer the equity markets to new highs.
Now Consider This:
A very intelligent and soft spoken Indian Finance Minister, takes the pain to estimate the agricultural Non Performing Loans. These are neither 'Structured' nor hard sold. These are plain vanilla loans given to hard working souls that toil day in and day out to feed more than a billion inhabitants of this planet. How do we react? We scratch our heads, tear our shirts, beat the tables, cry out aloud and steer the equity markets to new lows.
So much for Hypocracy!