Search Now


Sunday, March 11, 2007

Techno - Weekly Newsletter

Download here

Emkay - Amtek Auto

Download here

IDBI Capital- Gremach Infrastructure Equipments Projects IPO

Download here

India upgrade reflects strong prospects: S&P

India is the 13th country currently rated by Standard & Poor's (S&P) that has made the transition to investment grade from speculative grade, and signals the first time the coutry has moved back into this category since 1991.

According to a special report released on India, S&P said the upgrade on India's ratings to investment grade reflects the country's strong economic prospects and external balance sheet and its deep capital market, which supports a weak but improving fiscal position.

Download here


ASK Raymond James, in a report released on March 8, has upgraded its rating on Gujarat State Petronet to BUY from HOLD.

The report said: "In Budget 2007, the government has awarded infrastructure status to companies that lay and operate natural gas pipel ines. We believe this to be a key positive for Gujarat State Petronet (GSPL) resulting in tax savings for new pipeline contracts (starting with RIL contract from FY09).

"In addition to this, Shell has recently announced that it would be landing 24 LNG cargos at its Hazira terminal in FY08 resulting in increased volumes for GSPL. We have accordingly revised our earnings estimates upwards by 39% to Rs3.2 (Rs2.3 earlier) in FY08E and Rs3.6 in FY09E (Rs3.3 earlier) led by 65% growth in volumes in FY08 and tax rate coming down to 25% in FY09. We expect 38.6% CAGR growth in revenues over FY06-09E and 61.8% CAGR growth in PAT (based on our revised estimates) over the same period.

"The stock trades at 14x revised FY08E earnings and 12.3x revised FY09E earnings. We have revised our 1-year price target to Rs60 (DCF value at 11.9% WACC and 2% terminal growth rate) from Rs53 earlier. We are accordingly upgrading GSPL from Hold to Buy."

Download here

KRC Investment Idea - Ballrampur Chini & Cherry Pick for the week 12 - 16 March

Download here

South Asian overs

The World Cup will see different countries wielding willows to vye for the biggest trophy of them all. They shouldn't bother, exults Suveen K Sinha - the future belongs to players from the Indian sub-continent.

Social historian Ramchandra Guha, in his A Corner of A Foreign Field, recounts the paradox that was Ram Manohar Lohia, the socialist leader.

Lohia once held forth to journalists about how cricket stood for the Empire, and how if we threw out Nehru, “the last Englishman to rule India”, we could go back to kabaddi. After the scribes left to file their stories, Lohia walked across to the nearest paanwallah, asked for paan and, chewing it, continued: “Kya Hanif (a doughty Pakistani batsman) out ho gaya kya?”

Cricket, just like numerous other modern sports, originated in England and spread with the Union Jack. Englishmen, from sailors to soldiers to generals, sought to tackle homesickness by indulging in a bit of cricket. (Nirad C Chaudhuri once said that to the Englishman abroad literature was the wife and sport the mistress.) Naturally, when India became free, Anglophobe nationalists wished that the game would leave India’s shores with its erstwhile masters.

In the ensuing years, quite the opposite happened. Cricket, with its emphasis on finesse and skill, its own hierarchy that gelled with the caste system, and intolerance of physical contact, became ingrained in the Indian psyche.

Sociologist Ashish Nandy opens his whimsical book, The Tao of Cricket, with: “Cricket is an Indian game accidentally discovered by the English. Like chilli, which was discovered in South American and came to India only in medieval times to become an inescapable part of Indian cuisine, cricket, too, is now foreign to India only according to the historians and the Indologists.”

What is unfolding now is a reverse spread of the game. Just like English sailors and soldiers three centuries ago, the South Asian migrants — merchants, shopkeepers, pickle makers, plantation workers and software writers — have become the new missionaries of cricket. Feeding off the immense popular appeal and financial muscle that the game enjoys in the sub-continent, they are sustaining the game in parts of the world where it is in recession and sustaining it in new ones.

“Indians and Pakistanis are very mobile people and a large number has migrated in the last 30-40 years. They are found all over. To them cricket comes easier than, say, rugby,” says Guha.

He recounts that there were only two Gujarati speaking players in the 1987 World Cup sponsored by Reliance, the conglomerate controlled by a Gujarati family. One was Deepak Patel of New Zealand and the other Babu Memon of Zimbabwe. (The Indian team had Kiran More, a Gujarati, but his mother tongue is Marathi.)

The next World Cup begins in the Caribbean in three days and a look at the names, surnames and ethnicity of players throws up no less than 23 players — two playing elevens and an extra — of South Asian origin in the teams of Bermuda, Canada, England, Kenya, The Netherlands, New Zealand, Scotland and West Indies.

Taking into account the 15 each of India, Pakistan and Bangladesh, that makes it no less than 68 players at the tournament whose origins lie in the undivided India. And we have not counted Sri Lanka’s Muttiah Muralitharan — given the geographical proximity, it is only to be expected — and Australia’s Stuart Clark, whose parents, both of them English, met in India. “South Asians are the new ambassadors of the game. Largely, the future propagation of the game is in these hands,” says commentator Harsha Bhogle.

South Asians, first taken to the West Indies as plantation workers by the British, have constituted a long-established and growing lineage of cricketers there. Rohan Kanhai (after whom Sunil Gavaskar named his son), Sonny Ramadhin and Alvin Kallicharran are legends, though Darren Ganga is not. When West Indies take on Pakistan in the opening fixture of the Cup, Ramaresh Sarwan, Shivnarine Chanderpaul and Denesh Ramdin will look more like their opponents.

Guyana and Trinidad’s teams look much like their populations — half Indian. Rayad Emrit was man of the match when Trinidad won last year’s Caribbean first-class title and Sewnarine Chattergoon matched him when Guyana won the one-day championship.

Cricket historian Boria Majumdar asked a bunch of West Indian cricket legends last week whether they saw the future of West Indian cricket in East Indian hands. “They said they did not see anyone as East Indian, that everyone was a Caribbean. But think about it. Who are the people that consider cricket their life? It is the South Asians. These people are giving the game what it needs,” says Majumdar.

Significantly, it’s not only the fringe teams — Bermuda, Canada, Kenya, The Netherlands, Scotland — but also the major ones that have players of South Asian origin as vital cogs. Jeetan Shashi Patel of New Zealand follows in the footsteps of Deepak Patel — both right-arm off spinners, but no relation — who created a sensation at the 1992 World Cup when Martin Crowe made him open the bowling.

There are around 20 million people of Indian descent living in other countries. Britain has two million of Indian and Pakistani origin. South Africa has another million, where Hashim Amla is a rising Test star. Already the first player of Asian descent to score a century for South Africa, Amla, who comes from Durban’s long-established Indian community, proclaims his Muslim allegiance with a flowing beard.

What’s more, the future of cricket in the land of its birth rests on brown shoulders. The 2004 Champions Trophy in England, held somewhat unwisely at the beginning of the soccer season, drew just two full houses. One was the final at the Oval, which, like any other tournament final, was sold out in advance. The other was the India-Pakistan game.

Already, those playing the game in England have begun to reflect the hues of its following.

For long, England’s cricket structure has been condemned as overtly and institutionally racist. A 1997 study from the Centre for Sport Development Research at Roehampton Institute documented the two-tier structure in club cricket, one for whites and another for blacks and Asians.

The tradition of Asians playing for England dates from 1896 and Prince Kumar Ranjitsinhji’s century-making debut against Australia, the first of three Indian princes to accomplish the feat.

But in later decades, not many Asians managed to establish themselves as England regulars.

Things promised to — but did not — change when Chennai-born Nasser Hussain, whose family migrated to England when he was five, became the first of Asian origin to be appointed the captain of the national team.

But Hussain, often emphatically and always consciously, emphasised his “Englishness”. It helped that he looked and spoke like the British. (It did not matter that his father Joe [Jawad] Hussain, who ran the Ilford Cricket School in Essex, did not hide his ethnicity.)

English players continued to be sceptical of touring India. When they came, instead of trying to be a part of the milieu, like the Australians, they remained cold and aloof.

This was most evident during the 2001-02 tour of India. The England squad, on their visit to Hyderabad, was invited by Mohammad Azharuddin to have dinner at his home. Only four went — all of Asian origin.

Mark Ramprakash tried to counter his mates’ scepticism by once saying that “being in London and England presents much more of a risk than being in India”. But Ramprakash, a very promising batsman and a county star, never quite grew roots in the national team.

The real change is knocking on the doors now and he wears a patka and beard. Already, fans in the stands can be seen wearing fake beards and cheering for Madhusuden Singh — Monty — Panesar, even his already fabled misfields. He is the best England spinner in 30 years and is, along with the likes of Andrew Flintoff, reviving interest in a game that had been elbowed to the obscurity of the inside pages in England’s newspapers by soccer and rugby.

Panesar is all Indian. His closest childhood friend is Nitin Parsooth and Nitin’s dad is Monty’s manager. His “guru” is Hitu Naik. A family friend, Naik gave Monty the most important piece of advice: just turn it as much as you can no matter where it pitches. As a practising Sikh, Monty does not drink alcohol.

As a student, while his friends succumbed to the munchies, Monty would be cooking himself Punjabi recipes. As the first Sikh to play for England, Panesar is just the role model that league officials hope will persuade other talented youngsters from the Asian communities in Luton, Bedford, Wellingborough and Northampton to play mainstream cricket.

“Monty is popular because he shows his emotions. He gets excited if he takes a wicket. English cricket is otherwise so bland. He is obviously bad at fielding but has been working hard at it and people love his underdog status,” says Bhogle.

At the World Cup, England will most likely give the new ball to Sajid Mahmood, a product of one of the northern towns that have experienced racial conflict, whose family came from Pakistan. Mahmood built his skills playing in the streets of Bolton, where fellow players included his cousin Amir Khan, Britain’s silver-medal-winning boxing star of the Athens Olympics and now a rising professional. His teammate for the World Cup, Ravi Bopara’s parents are from India.

Vikram Solanki, Kabir Alir, Owais Shah and Usmaan Afzaal have played for England in recent times. Solanki spent his early days in Udaipur, Rajasthan. With an Indian father and English mother, Solanki speaks Hindi and is a practising Hindu. Northamptonshire’s Bilal Shafayat is on the threshold of national honours.

When Sahafayat was captain of England Under-19, the team had five boys from an Asian background. At the last count, 30 players of Asian origin were active on the county circuit. As most Asian-Britons come from the West Midlands, it’s no surprise that Worcestershire has a large number of them in its squad.

Many counties have openly stated their desire to attract players from all communities and even implemented strategies to bring this about. The Yorkshire Cricket Board’s Black and Ethnic Forum — Yorkshire is the snootiest and most racial of all counties — might point to the 2004 selection of Ajmal Shahzad.

These are the outcome of Britain’s second generation of South Asians retaining their passion for cricket.

“There has been an opening-up of the mind. The first generation of Asians were busy setting up shops and earning a living. The second generation is more affluent and more British. Their acceptability has grown in the last 15 years,” says Bhogle.

The influx has raised the debate of loyalty. Bhogle recalls the vociferous support the Indian team enjoyed on its last tour to England in 2002. “Every game was like a home game.” On Pakistan’s tour of England last year, thousands of British citizens shouted for Inzamam-ul-Haq’s team. Things became ridiculous with Pakistan fans calling Sajid Mahmood a “traitor”.

The family members of some players have been reported to continue supporting the countries of their origin. But things are changing with the passage of generations and the entry of players of Asian origin in the national team as well as the playing elevens of counties. And now, there are signs that British Asians have begun to provide their full-throated support to England.

If this trend picks up steam, cricket in England may recover lost ground. First, because of the sheer numbers Asians constitute a very large ethnic group. Secondly, the moneybags chasing cricket in the sub-continent may begin to look upon England as viable market.

The next logical stop, of course, would be the United States. It is a long shot, but the first signs have emerged. On a recent visit to a US university to deliver a lecture, Majumdar, emerging out of the Boston railway station, was recognised and stopped by a hotdog seller, Kundan Govindass. Govindass leases out his stall to someone else between May and September, when he devotes himself to the local cricket tournaments.

Pramod Mistry, a California-based tour operator appointed by the International Cricket Conference and a friend of Majumdar’s, has his packages to the World Cup sold out. “At least 20,000 from the US and 15,000 from Canada will go the Caribbean for the World Cup,” he says.

But the most telltale sign came a few years ago. The serving US ambassador to India at that time, in a speech to Confederation of Indian Industry, said President Bush had developed his foreign policy much the same way as the captain of a cricket team approaches an international Test match. The President, he said, was not interested in limited overs.

The game has entered the lingo of the top echelons. What next? Shouts for LBW?

Wkly Preview: Sensex may drift to 11,800

The Sensex continued to exhibit high volatility for yet another week. The index began the week on a negative note, mirroring the meltdown in market indices across the globe, and the Sensex tumbled to a low of 12,344 (S3 mentioned last week was 12,315) on Monday.

The index, however, in the process gave two major negative signals. One, the break of its previous low of 12,800, and, two, the break of 12,635, a crucial support.

Following which, the index is now likely to drift to lower levels of 11,800 in the coming days. In case, if the index fails to hold 11,800, then the index may drop to 10,500.

On the upside, the index will now have to cross the 13,800-mark to arrest the current downtrend. On the other hand, a sustained stay below the 12,635-mark could trigger accelerated downmove.

Coming back to last week’s performance, the Sensex after touching a low of 12,344, bounced back smartly to touch a high of 13,145 — an intra-week pullback of 802 points. The Sensex ended the week almost unchanged at 12,885 — down one point.

Similarly, the Nifty tumbled to a low of 3555, and then rallied sharply to a high of 3796 — a swing of 241 points — before settling with a loss of nine points at 3718 for the week ended March 9. This week, the Sensex is likely to face resistance around 13,175-13,260-13,350, and may find support around 12,595-12,505-12,415.

On the other hand, weekly support levels for the Nifty are placed at 3625-3600-3570, while the index may face resistance around 3810-3840-3870.

IPOs fail to deliver the money

72 per cent scrips lose all gains made in a month.

Seventy-two per cent of the stocks are back to square one in just a month. They have wiped out all the gains made when the Sensex touched its lifetime high of 14,678 on February 8.

The worst-performing stocks are automobiles, cement, steel, real estate, construction, infrastructure, chemicals, textiles, pharmaceuticals, aluminium, copper, offshore shipping, airways, housing, fast-moving consumer goods, public sector banks, oil refining companies and sugar.

But for a handful of stocks such as Reliance, Bharti Airtel, ICICI Bank, HDFC, Kotak Mahindra Bank and a few others, investors would have been much worse off.

The first blow came from the sugar sector from April 2006 onwards. Bajaj Hindusthan, which was ruling around Rs 550 touched a low of Rs 250 in June 2006 and further slumped to Rs 170. So was the case with Balrampur Chinni and other sugar stocks. The reasons for sugar stocks leaving a bitter taste are excess supply and a sharp decline in global prices.

Metal stocks were the other big loser. The acquisitions by Tata Steel and Hindalco, coupled with a decline in global prices of steel and non-ferrous metals pushed metal stocks back to the lows seen seven months ago. The Tata Steel scrip is now back to the June 2006 level after steel manufacturers rolled back prices.

The cement stocks are also on a slippery slope after the government cut customs duty by 12.5 per cent. They were spooked by a possible ban on cement exports.

The dual excise duty in the Budget to curb price rise completed the rout. India Cements, Grasim, Gujarat Ambuja, ACC and many others fell between 25 per cent and 50 per cent in a month.

Automobile stocks are on a crash course too. Tata Motors is now quoted at its lowest level of June 2006, while TVS Motors has gone far below Rs 50. Maruti too has fared badly, as did Hero Honda and Bajaj Auto.

Among the FMCG scrips, Hindustan Lever, Colgate, Gillette, Tata Tea, Nirma and many others have declined by over 30 to 40 per cent and most of them have gone below the June 14 levels.

Chemicals and fertilisers is the other sector which has gone out of favour. Nagarjuna Fertilisers has fallen to its original level of Rs 10 from a high of Rs 19.

Construction and real estate stocks such as Unitech, Sobha Developers, Parsvanath and Lok Housing have dropped by over 50-80 per cent.

India: Where Shipping Is Shaky

Obstacles that triple driving time are routine for truckers on the subcontinent's poor road system. But upgrade plans aren't exactly on the fast track

Say the words "road trip" in India, and you won't hear shouts of excitement. Journeying from Point A to Point B in this country is bad enough for normal motorists; but for shipping companies and their drivers, it's pure torment.
And the so-called Golden Quadrilateral, more than 3,000 miles of new highway being built between India's major cities, doesn't begin to fill the roadway deficit. "The GQ is only a marginal improvement," says Cyrus Guzder, chairman and managing director of AFL, India's largest logistics firm, in Mumbai.

Much of the new highway system, which is supposed to be finished this year, is just four traveling lanes without a central divider. "They've broadened the road and made a passing lane. This is not an expressway," says Guzder. "We only have 1,000 miles of separated expressway. We need 8,000 to make any difference."

Even now, any trip between two major Indian cities takes three days, compared with making the same journey in Europe in one.

To understand the difficulties facing truckers on India's highways, consider a routine trip from New Delhi in the north to Bangalore in the south. The route is just 1,500 miles, yet it often takes four to five days. Drivers are bedeviled by traffic jams, prohibitions on traveling through major cities during daylight hours, and long delays at state border crossings.

The route passes through five states and the New Delhi Metropolitan District. At each border, drivers must stop and pay a tax. In some states they have to stop twice.

Guzder figures a driver will lose 14 to 16 hours waiting at border stations on this trip. On top of the cost of paying taxes and the delays involved, drivers often have to pay bribes to government functionaries to get clearance to pass, Indian business leaders say.

One other snag: The state of Madhya Pradesh is notorious for "dacoits," gangs of criminals who ambush trucks at night and steal their cargo. Many truckers prefer not to travel through there at night, or wait until they can join a convoy that offers them some security.

Right now, trucks average about 20 mph on the New Delhi to Bangalore route. AFL's Guzder figures that if there were real expressways and no required stops at borders, the drivers could perhaps double that speed. He also calculates that they could save 15% of their costs on fuel and wear and tear.

The Indian government seems to get it. "This is a big problem," admits Dayanidhi Maran, the country's IT and telecommunications minister. "We're very much aware of the fact that growth is happening so fast and our infrastructure isn't able to handle it. We realize we have to do much more and move faster."

But eliminating bureaucracy and building new expressways have proven difficult for India to manage, so the dream of speedy transit on multilane expressways isn't likely to come true any time soon.

Building Opportunity in India

By putting $10 billion into the country's infrastructure, Cayman Islands-based real estate investor Trikona Capital plans to do well by doing good

The rich parts of India are like a handful of diamonds scattered on a sunny beach. There's a lot of hot sand between the shiny bits. In places such as the Delhi suburb of Gurgaon, the outskirts of Hyderabad, and around the high-tech capital of Bangalore, new buildings rise from the ground with breathtaking speed. Yet elsewhere, the real estate boom stimulated by the country's fast-growing high-tech industry has barely made a mark. The hang-ups: poor infrastructure, convoluted land ownership rules, and an out-of-date financial system.
Cayman Islands-based Trikona Capital, one of the world's largest investors in real estate projects, has a simple prescription for these problems: "If you're socially conscious, you can do something about it," says Aashish Kalra, a co-founder and managing director. By that he means financiers can accelerate Indian projects and improve their returns if they invest some of their capital in building infrastructure like roads, bridges, hospitals, and even low-income housing. "If you do the right thing for society, you're creating the opportunity—and you make your profit," says Kalra. He expects the firm to reap more than a 25% return on every project it finances in India.

Development experts applaud what Trikona is doing. "The fact that companies like Trikona are paying attention to the social infrastructure bodes well, and I believe should be a new trend that other developers could follow," says Srinath Koganti, a professor at the Delhi School of Architecture & Planning.

Foreign direct investment in Indian real estate began to take off in the past couple of years, after the central government began lifting restrictions. A November study by the Associated Chambers of Commerce& Industry of India projected that foreign investors would sink about $2 billion into Indian real estate in the fiscal year ending in March, helping to fuel a commercial real estate market that topped $12 billion last year and is growing at 25% to 30% a year, according to investment bank Edelweiss Capital.

In spite of a lot of announcements and excitement, however, not much of the foreign money has found its way into bricks and mortar. "It has made a start, but it will be a couple of years before we see FDI (foreign direct investment) materializing on the ground," says Manish Grover, associate director in India of Jones Lang LaSalle, the Chicago real estate service firm.

Trikona is in the vanguard. It became active in India only last year, but it has committed to investing $10 billion over the next several years. Its strategy is to form partnerships with local investment and construction companies, and, in most of its projects, there's a social component. For instance, last October it entered a partnership to build a 1.37 million-square-foot condominium development in central Mumbai that will include 2,500 free apartments for low-income city dwellers. The goal is to help overcrowded Mumbai become a more livable city and a better environment in which to do business.

Outside Mumbai, Trikona is financing the construction of a new 127-acre township in Thane, a city with a population of about 1 million. In addition to erecting commercial and residential buildings, the developers are sprucing up the old parts of town and working with a large health-care provider to establish a first-rate hospital. Without excellent medical care, it would be hard to attract tenants and home buyers.

One of the big hang-ups for real estate developers in India has been the tangle of land rights. Sometimes several people own a tiny plot of land, and many tiny plots must be purchased to assemble a large tract. Developers are forced to track down and negotiate with all the owners. Trikona has found a way to get around that obstacle: by investing in large government-sponsored infrastructure projects. That way, the government acquires land adjacent to new highways that is available for development and unencumbered by ownership claims. For example, Trikona has invested in ITNL, which is developing several major public-private highway projects throughout the country. "We now have access to thousands of miles of land along the highway—one of the largest land banks in India," says Kalra.

While Trikona is spreading its money around liberally, new financing techniques are needed if India is to quickly upgrade its tattered infrastructure. Until recently, there were no municipal and state bond markets. Laws have been passed to open things up, but local governments and financial firms have been slow to capitalize on the changes. In the meantime, Kalra urges India's central government to allow foreign direct investment in municipal bonds. "We have a great equity market and a pathetic bond market," he says. "Once we create a bond market that resembles our equity markets, that's the missing link."

He's optimistic about the country's prospects, however. Kalra grew up in India and remembers a time when people who wanted a car had to wait 10 years; and getting a phone line could take five. "All of these (infrastructure) problems are solved if you throw enough money at it," he says. "The good news is that India now has the growth rate to attract the money."

The Trouble With India

Crumbling roads, jammed airports, and power blackouts could hobble growth

When foreigners say Bangalore is India's version of Silicon Valley, the high-tech office park called Electronics City is what they're often thinking of. But however much Californians might hate traffic-clogged Route 101, the main drag though the Valley, it has nothing on Hosur Road. This potholed, four-lane stretch of gritty pavement—the primary access to Electronics City—is pure chaos. Cars, trucks, buses, motorcycles, taxis, rickshaws, cows, donkeys, and dogs jostle for every inch of the roadway as horns blare and brakes squeal. Drivers run red lights and jam their vehicles into any available space, paying no mind to pedestrians clustered desperately on median strips like shipwrecked sailors.

Pass through the six-foot-high concrete walls into Electronics City, though, and the loudest sounds you hear are the chirping of birds and the whirr of electric carts that whisk visitors from one steel-and-glass building to the next. Young men and women stroll the manicured pathways that wend their way through the leafy 80-acre spread or coast quietly on bicycles along the smooth asphalt roads.

With virtually no mass transit in Bangalore, Indian technology firm Infosys Technologies Ltd. spends $5 million a year on buses, minivans, and taxis to transport its 18,000 employees to and from Electronics City. And traffic jams mean workers can spend upwards of four hours commuting each day. "India has underinvested in infrastructure for 60 years, and we're behind what we need by 10 to 12 years," says T.V. Mohandas Pai, director of human resources for Infosys.

India's high-tech services industry has set the country's economic flywheel spinning. Growth is running at 9%-plus this year. The likes of Wal-Mart (WMT ), Vodafone (VOD ), and Citigroup (C ) are placing multibillion-dollar bets on the country, lured by its 300 million-strong middle class. In spite of a recent drop, the Bombay stock exchange's benchmark Sensex index is still up more than 40% since June. Real estate has shot through the roof, with some prices doubling in the past year.

But this economic boom is being built on the shakiest of foundations. Highways, modern bridges, world-class airports, reliable power, and clean water are in desperately short supply. And what's already there is literally crumbling under the weight of progress. In December, a bridge in eastern India collapsed, killing 34 passengers in a train rumbling underneath. Economic losses from congestion and poor roads alone are as high as $6 billion a year, says Gajendra Haldea, an adviser to the federal Planning Commission.

For all its importance, the tech services sector employs just 1.6 million people, and it doesn't rely on good roads and bridges to get its work done. India needs manufacturing to boom if it is to boost exports and create jobs for the 10 million young people who enter the workforce each year. Suddenly, good infrastructure matters a lot more. Yet industry is hobbled by overcrowded highways where speeds average just 20 miles per hour. Some ports rely on armies of laborers to unload cargo from trucks and lug it onto ships. Across the state of Maharashtra, major cities lose power one day a week to relieve pressure on the grid. In Pune, a city of 4.5 million, it's lights out every Thursday—forcing factories to maintain expensive backup generators. Government officials were shocked last year when Intel Corp. (INTC ) chose Vietnam over India as the site for a new chip assembly plant. Although Intel declined to comment, industry insiders say the reason was largely the lack of reliable power and water in India.

Add up this litany of woes and you understand why India's exports total less than 1% of global trade, compared with 7% for China. Says Infosys Chairman N.R. Narayana Murthy: "If our infrastructure gets delayed, our economic development, job creation, and foreign investment get delayed. Our economic agenda gets delayed—if not derailed."

The infrastructure deficit is so critical that it could prevent India from achieving the prosperity that finally seems to be within its grasp. Without reliable power and water and a modern transportation network, the chasm between India's moneyed elite and its 800 million poor will continue to widen, potentially destabilizing the country. Jagdish N. Bhagwati, a professor at Columbia University, figures gross domestic product growth would run two percentage points higher if the country had decent roads, railways, and power. "We're bursting at the seams," says Kamal Nath, India's Commerce & Industry Minister. Without better infrastructure, "we can't continue with the growth rates we have had."

The problems are even contributing to overheating in the economy. Inflation spiked in the first week of February to a two-year high of 6.7%, due in part to bottlenecks caused by the country's lousy transport network. Up to 40% of farm produce is lost because it rots in the fields or spoils en route to consumers, which contributes to rising prices for staples such as lentils and onions.

India today is about where China was a decade ago. Back then, China's economy was shifting into overdrive, but its roads and power grid weren't up to the task. So Beijing launched a massive upgrade initiative, building more than 25,000 miles of expressways that now crisscross the country and are as good as the best roads in the U.S. or Europe. India, by contrast, has just 3,700 miles of such highways. It's no wonder that when foreign companies weigh putting new plants in China vs. India to produce global exports, China more often wins out.

China's lead in infrastructure is likely to grow, too. Beijing plows about 9% of its GDP into public works, compared with New Delhi's 4%. And because of its authoritarian government, China gets faster results. "If you have to build a road in China, just a handful of people need to make a decision," says Daniel Vasella, chief executive of pharmaceutical giant Novartis (NVS ). "If you want to build a road in India, it'll take 10 years of discussion before you get a decision."

Blame it partly on India's revolving-door democracy. Political parties typically hold power for just one five-year term before disgruntled voters, swayed by populist promises from the opposition, kick them out of office. In elections last year in the state of Tamil Nadu, for instance, a new government was voted in after it pledged to give free color TVs to poor families. "In a sanely organized society you can get a lot done. Not here," says Jayaprakash Narayan, head of Lok Satta, or People Power, a national reform party.

Then there's "leakage"—India's euphemism for rampant corruption. Nearly all sectors of officialdom are riddled with graft, from neighborhood cops to district bureaucrats to state ministers. Indian truckers pay about $5 billion a year in bribes, according to the watchdog group Transparency International. Corruption delays infrastructure projects and raises costs for those that move ahead.

Fortunately, after decades of underinvestment and political inertia, India's political leadership has awakened to the magnitude of the infrastructure crisis. A handful of major projects have been completed; others are moving forward. Work on the Golden Quadrilateral—a $12 billion initiative spanning more than 3,000 miles of four- and six-lane expressways connecting Mumbai, Delhi, Kolkata, and Chennai—is due to be completed this year. The first phase of a new subway in New Delhi finished in late 2005 on budget and ahead of schedule. And new airports are under construction in Bangalore and Hyderabad, with more planned elsewhere. "We have to improve the quality of our infrastructure," Prime Minister Manmohan Singh told a gathering of tech industry leaders in Mumbai on Feb. 9. "It's a priority of our government."

Singh, in fact, is promising a Marshall Plan-scale effort. The government estimates public and private organizations will chip in $330 billion to $500 billion over the next five years for highways, power generation, ports, and airports. In addition, leading conglomerates have pledged to overhaul the retailing sector. That will require infrastructure upgrades along the entire food distribution chain, from farm fields to store shelves.

Envisioning a brand-new India is the easy part; paying for it is another matter. By necessity, since the country's public debt stands at 82% of GDP, the 11th-worst ranking in the world, much of the money for these new projects will have to come from private sources. Yet India captured only $8 billion in foreign direct investment last year, compared with China's $63 billion. "Having grandiose plans isn't enough," says Yale University economics professor T.N. Srinivasan.

Just about every foreign company operating in India has a horror story of the hardships of doing business there. Nokia Corp. (NOK ) saw thousands of its cellular phones ruined last October when a shipment from its factory in Chennai was soaked by rain because there was no room to warehouse the crates of handsets at the local airport. Japan's Maruti Suzuki says trucking its cars 900 miles from its factory in Gurgaon to the port in Mumbai can take up to 10 days. That's partly due to delays at the three state borders along the way, where drivers are stalled as officials check their papers. But it's also because big rigs are barred from India's congested cities during the day, when they might bring dense traffic to a standstill. Once at the port, the Japanese company's autos can wait weeks for the next outbound ship because there's not enough dock space for cargo carriers to load and unload.

India's summer monsoons wreak havoc, too. Even relatively light rains can choke sewers, flood streets, and paralyze a city, while downpours are devastating. Two years ago, Florida-based contract manufacturer Jabil Circuit Inc. saw shipments of computers and networking gear from its plant near Mumbai delayed for five days after an epic storm. "In our business, five days is a really long time," says William D. Muir Jr., who oversees Jabil's Asian operations.

Companies often have no choice but to make the best of a bad situation. Cisco Systems Inc. (CSCO ), the American networking equipment giant, has had a research and development office in India since 1999 and already has 2,000 engineers in the country. To supply the country's fast-growing telecommunications industry, Cisco decided last year to try its hand at making some parts locally. In December it contracted with another company to build Internet phones in the southeastern city of Chennai. Although Cisco says the quality of the workmanship is up to snuff, it has to fly parts in because the ports are so slow—and getting them to the factory right when they're needed is proving nettlesome. "We believe in manufacturing in India, but we don't believe in logistics in India—yet," says Wim Elfrink, Cisco's chief globalization officer. Elfrink adds that unless the Chennai operation demonstrates it can run as efficiently as Cisco setups elsewhere, it won't go into full production as planned this summer.

Even the world's largest maker of infrastructure equipment is constrained by India's feeble underpinnings. General Electric Co. (GE ) last year sold $1.2 billion worth of gear such as power generators and locomotives in India, more than double what it billed in 2005. To meet that surging demand, it is scrambling to find a location where it can manufacture locomotives in partnership with India Railways. But when GE dispatched three employees to survey a potential site the railway favored in the northern state of Bihar, the trio returned discouraged. It took five hours to drive the 50 miles from the airport to the site, and when they got there they found...nothing. "No roads, no power, no schools, no water, no hospitals, no housing," says Pratyush Kumar, president of GE Infrastructure in India. "We'd have to create everything from scratch," including many miles of railroad tracks to get the locomotives out to the main lines.

But there is a silver lining for GE and other international giants: India's infrastructure deficit could yield huge opportunities. American executives who traveled to India last November on the largest U.S. trade mission ever were tantalized by the possibilities. Jennifer Thompson, director of international planning at Oshkosh Truck Corp. (OSK ), viewed construction projects where swarms of workers carried wet concrete in buckets to be poured. That told her there's great potential in India for selling Oshkosh's mixer trucks. "There are infrastructure challenges, but we see a lot of opportunities to help them meet those challenges," she says.

That explains why so many multinationals are flocking to India. Take hotel construction: In a country with only 25,000 tourist-class hotel rooms (compared with more than 140,000 in Las Vegas alone), companies including Hilton (HLT ), Wyndham (WYN ), and Ramada have plans for 75,000 rooms on their drawing boards. Or consider telecom. Because of deregulation and ferocious demand, India boasts the fastest growth in cell-phone service anywhere, with companies adding some 6 million new customers a month. No wonder Britain's Vodafone Group PLC (VOD ) just ponied up $11 billion for a controlling interest in Hutchison Essar, India's No. 4 mobile carrier. U.S. private equity outfits also want in on the action. On Feb. 15, Blackstone Group and Citigroup announced they are teaming up with the Indian government and the Infrastructure Development Finance Corp. to set up a $5 billion fund for infrastructure investments in India.

But while the laws of supply and demand would argue that India's infrastructure gap can be filled, that logic ignores the corrosive effect of the country's politics. To gain the favor of voters, Indian politicians have long subsidized electricity and water for farmers, a policy that has discouraged private investment in those areas. That's what wrecked the now-infamous Dabhol Power plant. In the late 1990s, Enron, GE, and Bechtel spent a total of $2.8 billion building a huge complex near Mumbai capable of producing more than 2,000 megawatts of electricity. But a government power authority set prices so low that it was uneconomical for Dabhol to operate, and the whole deal fell apart. (The plant, taken over by an Indian organization, now runs only fitfully.) A 2001 law was supposed to create a framework to support private investment in power generation. But according to American construction company executives, it's not working well. "Everybody knows what needs to be done, but they have great difficulty doing it," says one of the Americans. "If the party in opposition offers subsidized power, the party in power has to give subsidized power to get reelected."

Politicians who refuse to play the game pay a steep price. N. Chandrababu Naidu, the former chief minister of the state of Andhra Pradesh, transformed the state capital of Hyderabad from a backwater into a high-tech destination by building new roads, widening others, and aggressively carving out land for factories and office parks. Google (GOOG ), IBM (IBM ), Microsoft (MSFT ), and Motorola (MOT ) have all built R&D facilities there.

His reward? Voters tossed him out of office two years ago. During his decade in power, Naidu didn't do enough for rural areas, and his challenger promised to channel state funds into irrigation projects and electricity subsidies. "Naidu thought economics were more important than politics. He was wrong," says V.S. Rao, director of the Birla Institute of Technology & Science in Hyderabad. Naidu, 56, is plotting a comeback in elections two years hence. This time, he's preaching a new gospel. "You can't just target growth," says a chastened Naidu. "You have to create policies that make the wealth trickle down to the common man."

But even when politicians say they're beefing up infrastructure, it rarely helps the poorest Indians. Agriculture is stagnant in part because of a lack of the most rudimentary of roads to get to and from fields. N. Tarupthurai, for instance, scratches out a living from a five-acre plot in Jinnuru, a village in northeastern Andhra Pradesh. But his fields are more than a mile from the nearest paved road, so each day the 40-year-old Tarupthurai must carry his tools, seeds, fertilizer, and crops down a dirt path on his back or on his bicycle. "I have asked for a road, and the government says it's under consideration," says the mustachioed, curly-haired farmer. Then he shrugs.

One reason little practical help makes it from the seats of power to India's impoverished villages is that so much money gets siphoned off along the way. With corrupt officials skimming at every step, many public works projects either go over budget or are never completed. "You figure that 25% of the cost goes to corruption," says Verghese Jacob, head of the Byrraju Foundation, which promotes rural development. "And then they do such a bad job that the road falls apart in one year and has to be patched over again," Jacob says as he jostles along in a car on a potholed byway outside Hyderabad.

None of the solutions to India's infrastructure challenges are simple, but business leaders, some enlightened government officials, and even ordinary citizens are chipping in to make things better. The most potent weapon India's reformers have against corruption is transparency. Last October a new right-to-information law went into effect requiring both central and state governments to divulge information about contracts, hiring, and expenditures to any citizen who requests it. The country is also putting to work its vaunted technology prowess to police the government. Officials in 200 districts are using software from Tata Consultancy Services Ltd. to help monitor a government program that offers every rural household a guarantee of 100 days of work per year. Most of this labor goes into public works. To minimize "leakage," the TCS software tracks every expenditure—and makes all of the information available real-time on a Web site accessible to anyone.

Sometimes frustrated Indians take matters into their own hands. Tired of spending four-plus hours a day in traffic, Aruna Newton last fall helped organize something of a women's crusade to speed up infrastructure improvements. Nearly 15,000 volunteers now monitor key road projects and meet with state officials to press for action. They even enlisted the state chief minister's mother, who helped get his attention. "It's about the collective power of the people," says Newton, a 40-year-old vice-president for Infosys. "I just wish building a road was as easy as writing a software program."

Increasingly, companies trying to expand in India have the government as a willing partner rather than a roadblock. The state of Andhra Pradesh rolled out the red carpet last year for MAS Holdings Ltd. of Sri Lanka, South Asia's largest garment manufacturer. It promised subsidized electricity, new access roads, and even a deepwater port if the company would place a huge industrial park on the southern coast. Now MAS Holdings plans to build a cluster of factories that will eventually employ 30,000 production workers. And it chose India over China. "The government support was absolutely vital," says John Chiramel, India director for MAS Holdings. "If we can work together, there's no stopping growth in this country."

A key to getting massive projects off the drawing boards is forming public-private partnerships where the government and companies share costs, risks, and rewards. In 2005, India passed a groundbreaking law permitting officials to tap such partnerships for infrastructure initiatives. Developers ante up most of the money, collect tolls or other usage fees, and eventually hand the facilities back to the government.

The first project to take advantage of the new law is the $430 million international airport scheduled to open next year in Bangalore. The facility is designed to handle 11.5 million passengers per year—nearly double the capacity of the overburdened existing airport. It will be owned by a private company, which will turn it over to the Karnataka state government after 60 years. Global engineering and equipment giant Siemens (SI ) is helping to build the facility, and Switzerland's Unique Ltd. will manage it. These companies are also equity investors. The state had to contribute just 18% of the cost. Without such an arrangement, Karnataka wouldn't be getting a new airport.

A lot of India's hopes rest on the airport deal's success. If it proves the viability of public-private partnerships, more such ventures could come pouring in. A visit to the site instills confidence. Project manager Sivaramakrishnan S. Iyer is a crusty veteran of mammoth infrastructure ventures throughout South Asia and the Mideast. Wearing a scuffed hardhat, with a two-day growth of white stubble on his face, he surveys the site from a 2.5-mile-long bed of crushed granite that will be the runway. Work goes on seven days a week, 18 hours a day. Iyer is intent on wrapping up on schedule in April, 2008. "We have the will to do it, and it will be done," he says.

Will the airport open on time? That's not within Iyer's control. Two government authorities are responsible for building the road that leads to the airport, and they're locked in a dispute over how to do it. Work hasn't started.

And so it goes in India. Unless the nation shakes off its legacy of bureaucracy, politics, and corruption, its ability to build adequate infrastructure will remain in doubt. So will its economic destiny.

Business Today - The Bubble in Real Estate

Download here

Bear Hug

When the Chinese dragon sneezes, and when economists in America start using the word recession, it's inevitable that most of the world markets that matter will catch a cold. Yet, if you compare the Sensex's performance with the world's leading indices over the past fortnight, it would appear that the Indian markets have been battered the most. For instance, between February 19 and March 5, the Sensex lost 14 per cent; the Shanghai Composite shed 7 per cent in this period, and the Dow was down 5 per cent, till March 2 (see Battered and Bruised). That's because for Indian investors, these global cues served as a well-timed alert to trigger off a sell spree in a market that was hovering in the overvalued zone. On 2008 forward earnings, the Sensex on an earnings per share of Rs 840 was trading at a price-earnings multiple (p-e) of 18 times.

Perhaps the biggest trigger for the global bearish phase is the appreciation of the yen-and if Indian markets got hit badly it's also courtesy their new-found appetite for Japanese portfolio investment. According to estimates, Japanese investors would have pumped in roughly $1.3-1.5 billion (Rs 5,720-6,600 crore) into domestic stocks in the past 15-18 months. "Investors squaring off their trades due to the strengthening of yen has been the reason for the fall in equities across markets," says Rushabh Sheth, Managing Director, Karma Capital. "The Indian market is no more isolated and any global event will have an impact on our market," he adds for good measure. Indeed, a host of big global investors resorted to squaring off yen carry-trade (borrowing in yen and investing in other currencies, mainly the dollar) in the past fortnight. This is because the till-recently weakening yen has suddenly strengthened versus the dollar. In India, foreign institutional investors (FIIs) in four sessions till March 1 were net sellers to the tune of $0.7 billion in the cash segment and $0.27 billion in index futures. "Apart from the impact of collateral damage, tightening of the rates in Europe, news of Chinese regulators tightening their grip over companies on issue of price rigging, tightening of rates in the mortgage market in the us and announcement of ex-chief of Federal Reserve, Alan Greenspan, of a possible recession in the us have led to jitters among global investors," says Nilesh Shah, President, Kotak Asset Management Company. Adds Rajesh Boghani, Retail Dealer, Parag Parikh Financial Advisory: "The market has broken its support level of 12,800 and the next resistance level is 10,880-11,000. And given the current market environment touching those levels looks possible." "Due to short-term concerns (rising interest rates and inflation), post-correction, I see the Sensex consolidating more in 'U' manner than in a 'V' manner like before. It will take at least six months for the Sensex to touch a new high; by the year-end it will hit 15,000," says Shah.

The ongoing correction may have coincided with the Finance Minister's Union Budgetary proposals, but P. Chidambaram might have just been a victim of bad timing (the Chinese crash took place a day before the announcement of Budget 2007). The good news, though, is that most traders feel that the India story is still intact. "Being among the fastest growing economy and markets, it is not possible for global investors not to be invested in the Indian market," says Boghani. This time around, however, the turnaround might just take a wee bit longer-around six months is the consensus on Dalal Street.

Primary Bloodbath
Crackdown on a recently-listed stock makes IPO investors panic.

Even as the broader markets slipped into a free-fall last fortnight, the stocks of recently-listed initial public offerings (IPOs) got hammered to pulp. Of the 69 companies that IPOed between April 2006 and February 2007, nearly 60 per cent of them were trading below offer price. The trigger for this rough treatment was an interim order by the Securities Exchange Board of India (SEBI), banning promoters of recently-listed construction company Atlanta from the markets. The regulator's concerns had to do with unfair trading practices. According to the order, SEBI has prima facie evidence that the promoters and its close entities have indulged in price-rigging and have also misused the funds garnered through IPO. Atlanta lost a little over a fourth of its market cap since the order; other IPO stocks weren't spared, with a few of them plunging by 30 per cent between 21 and 28 February (the Sensex lost 8.8 per cent in that period). Merchant bankers point out that the fear is that SEBI may be in the process of investigating some more recently-listed companies. SEBI officials aver that the surveillance department is on the job.

Money Column

Remember, nine months ago when the market suddenly collapsed when it seemed to be smoothly sailing over the 12,000 mark. That caught most investors unawares. It bounced soon after, again catching investors by surprise. Yet the volatility saw a certain class of funds provide good returns for their unit holders. Since then, the price movements continue unabated. The market has lost 1,245 points in the last two weeks since February 9. The swinging market often leads to huge differences in the spot and futures markets. And here's where arbitrage funds step in. They make the best use of the markets (MIS)pricing mechanisms to generate returns for you.

Last year, many fund houses launched derivative or arbitrage funds, and most outperformed their benchmarks by considerable margins. As arbitrage funds seek to capitalise on price differences between cash and derivatives, they managed to leverage on the bullish trends of the market. It provides fund managers with large enough spreads to make successful arbitrage gains.

But arbitrage funds, unlike an equity product, aren't too risky. They essentially aim to protect your capital by locking on to risk-free strategies that take advantage of the price differences. They aim to lock in the gains and realise them when futures contracts expire. An arbitrage fund is more like a fixed income fund. Says Delhi-based Mukesh Gupta, MD, Wealthcare Securities: "Derivative funds don't take naked exposures to equity. Returns from these instruments are predictable, and more tax efficient. Corporates and high net worth individuals usually opt for these funds."

As a result, these funds are best suited for investors who generally park their money in fixed deposits or bonds. "These funds have primarily been working well with those investors who have been parking their money in fixed deposits or bonds, and are tailored to increase the investor's base in a conservative market," says Nilesh Shah, Chief Investment Officer (CIO), Prudential ICICI Asset Management Company.

Arbitrage funds as a category have generated superior returns as compared to a host of offerings within the debt mutual funds industry, but with varying amounts of volatility. In view of the volatility of this product, this category should bode well for investors with a minimum time horizon of at least six months. "Rising interest rates have made returns from income funds unpredictable and sometimes negative. Liquid fund returns are not adequate. Moreover, returns from these instruments are not tax efficient," says Gupta.

Arbitrage Secrets

Essentially, arbitrage funds buy a stock in the cash market and sell its futures simultaneously to lock in the price difference. This is also called the arbitrage spread. This spread is realised irrespective of the stock's price at expiry. There's a simple way in which it works. Say 'A' stock trades in the cash (spot) market and the futures market. Since the underlying stock is the same, the only factor accounting for different prices for spot and futures is the interest rate, which is also called the cost of carry. If equal but opposite positions are taken in the spot and futures markets, there is no equity exposure, because it cancels out. But one can earn the cost of carry (equal to the interest).

Here's how it works with specific stocks. On March 31, 2005, Punjab National Bank (PNB) was selling in the cash market at Rs 398.4046 and on the same date, futures (delivery April 28) were selling at Rs 403.2024. By buying PNB in the cash market for Rs 398.4046 and selling PNB futures for Rs 403.2024, one pockets the difference in price of Rs 4.7978. Hence, the profit from the transaction works out to 15.16 per cent per annum.

Fund houses such as UTI, which manage a Rs 300 crore-plus spreadFund, contend that the equity scenario may well remain robust over the long term, leading to extended spreads. Arbitrage funds have a mix of equity and equity-related securities and debt instruments in their portfolios and have been actively chasing these opportunities. It's not always that the markets will have big spreads because arbitrageurs are quick to cash in. But on days of extreme price movements, there's some chance that the arbitraging spreads could be higher, leading to higher yields for the funds.

Their performance will, in future, generally depend on two factors. Firstly, how much spreads a fund can lock-in courtesy of high volatility in the market, and secondly, how high are the yields on low credit risk, short-term debt instruments. Most fund managers are also of the view that arbitrage funds have come of age and there will be more of them in the future. "Till now, mf firms have been providing general products like large-cap equity funds, income funds and hybrid funds, and now that that space is almost saturated, they are looking at specialised catering to varying risk appetite across investor classes," says Shah. More specialised products like thematic funds, derivative funds, structured products and alternate asset class funds will be the order of the day, says Shah.

Among the usual debt funds, derivative funds generated superior returns as compared to a host of offerings within the debt mutual funds industry, but with varying amounts of volatility. But due to the short-term vagaries of the market, this category should bode well for investors with a minimum time horizon of at least six months. Investors looking for a shorter period face the risk of lower returns as compared to a debt fund, because of the arbitrage opportunities. Not all fund houses are enthused by these products because their returns are lower. "These funds generally have low returns ranging between 5 and 9 per cent," asserts Mumbai-based consultant Gaurav Mashruwala. "These have been popular with people who feel that these are new products and have something assured to offer, but over a period time, they could lose appetite," he adds.

But going by the way the market's moving, more funds are coming out with arbitrage funds. Benchmark Asset Management has filed a draft offer document for a 100 per cent equity arbitrage fund. Since June 2006, 100 per cent arbitrage funds have been allowed. Earlier, funds could invest only a part of their corpus in arbitrages. Because of their strategy of locking-in to returns, these funds may make better returns than a liquid fund. However, entry is restricted to certain days in most derivative funds. Fund inflows and outflows have to coincide with the expiration of futures contract or the strategy of the fund. Some funds allow redemptions only after the settlement of derivative contracts.

Options Galore

There are about half-a-dozen funds that make up the category at the moment. These funds, mf circles believe, generally have the scope of outdoing the average short-term options, including liquid funds, because of their strategy. Prudential ICICI Blended Plan A is among the first derivative schemes that enjoys tax treatment of an equity scheme. The minimum and maximum exposure the scheme intends to have to equities and derivatives is 65 and 80 per cent, respectively. The fund manager seeks to capture the spread which is higher than the returns being generated by the debt portfolio. Apart from that, ICICI Pru Blended Plan B caters to international clients. It's a conservative fund offering lower allocation to equity and equity-related instruments.

UTI spread Fund is the latest entrant in the derivative segments. As per the offer document, the scheme strives to maintain varying asset allocation depending upon the market movement. The scheme can have an exposure of up to 90 per cent in equities when there's high opportunity. But Benchmark Derivative Fund, which is India's first derivative fund, is open for subscription only on the last day of the month due to expiry of contracts. Fund managers try to find arbitrages that maximise the gains.

JM Equity and Derivative Fund is a retail savvy derivative fund due to its low investment amount. The scheme has high exit loads to ensure that the investors stay for a longer period of time. From the same fund house, the JM Arbitrage scheme enjoys the tax treatment that equity funds are offered. The scheme maintains an exposure of 65 per cent to equities with a maximum cap of 80 per cent. Kotak Cash Plus offers flexibility of liquidity for the investor. He can enter and exit on any working day. This scheme usually rolls over its position to generate higher returns.

Check out the strategy of the arbitrage fund before signing on the dotted line. If you are looking for pure arbitrage strategies, then go for a fund that has a higher exposure to equity arbitrages. Arbitrage funds are meant for risk-averse investors who want equity exposure. Essentially, arbitrage funds are for investors who seek "debt-plus" returns with low risk.

The straight Advantage
There are endowment plans and there's Jeevan Saral with a flexible life cover plan. Is it for you?
Nitya Varadarajan

If you aren't happy with the rigidity of traditional term plans because there's no return on your investment or aren't comfortable with the uncertainty of the payback in a unit linked plan where returns are highly dependent on the market, endowment schemes could turn out to be what you are looking for. Endowment plans have two advantages: insurance and savings.

In vanilla endowment plans, a policy holder pays regularly during the term of the policy. But if the policy holder dies during the policy term, the nominee gets the death benefit, including the sum assured and the accumulated bonus. If the policy holder survives, he gets the survival benefit and all the bonuses. But there's another plan that allows for partial surrender without penalties and yet keeps much of your benefits intact. In fact, Life Insurance Corporation's Jeevan Saral is not dependent on one's age or term of the policy, unlike many other endowment plans.

For a monthly premium of just Rs 100, one gets a life cover worth Rs 25,000. Additionally, the cover increases every year by the amount of yearly premium you pay, so in many ways it's like an increasing cover benefit plan. Besides, LIC's Jeevan Saral offers your premium back if five annual premiums have been paid, excluding the first year premium.

As this is a flexible plan, opt for the maximum term, which is till the age of 70 or a term of 35 years. Jeevan Saral is a 'for profit' plan, you cannot surrender the policy for 10 years-the minimum lock-in period, if you want to receive loyalty additions, which are paid out after 10 years. But you can surrender 'a portion' of the policy any time. Loyalty additions are payable even if death occurs. However, under this policy, the premium and risk cover reduces after each 'withdrawal'.

Jeevan Saral comes closer to a term plan with premium payback. Says Rahul Aggarwal, CEO, Optima Risk and Management Services, "This is a plan that could suit all sections of society, particularly those whose incomes are uncertain.'' According to Aggarwal, the plan has a very low premium for the cover offered. "The plan has been designed in such a manner to prevent lapses, so it ensures some cover till maturity. That is why it is finding many takers,'' he says.

Returns for the policy are not that great, but decent enough (see The Maturity Benefits). "Jeevan Saral does not offer annual bonuses because of the plan's innate withdrawal flexibility which would make annual computations difficult,'' says Ramakrishnan, a retired actuary from LIC. "But loyalty additions in Jeevan Saral are equivalent to terminal bonuses of other policies and would not be lower than those,'' he says. But for a premium of Rs 100 a month without the hassle of a health check-up, Jeevan Saral fills a gap for individuals looking for lower life covers, with the added benefit of returns.

The Saral Edge
Against other insurance plans, Jeevan Saral stands apart.

Jeevan Saral
PREMIUM COST: Highly affordable
EASY ENTRY: @ Rs 1,200/ year
FLEXIBILITY: Allows for partial surrenders, its key USP
RETURNS: Below average compared to Post Office and other financial instruments
SCORE ON SIMPLICITY: Agent not required
RISK COVER OR RETURN? Risk primarily, but there are rewards

Pure Term Insurance
PREMIUM COST: Highly affordable
EASY ENTRY: Starts at Rs 3,000/ year, depending on company
RETURNS: No returns. Some term plans offer a premium back; but no bonuses
SCORE ON SIMPLICITY: Agent's help is needed

Traditional Endowment Insurance
EASY ENTRY: Starts at Rs 5,000/ year, depending on company
RETURNS: Returns better than Jeevan Saral, but poor compared to other financial instruments
SCORE ON SIMPLICITY: Agent's help is needed
RISK COVER OR RETURN? Greater emphasis on return

Unit Linked Plans
EASY ENTRY: Starts at Rs 5,000/ year, depending on company
FLEXIBILITY: Allows for withdrawal from fund
RETURNS: Depends entirely on fund mix; risk cover is guaranteed only in a Capital Guarantee ULIP plan
SCORE ON SIMPLICITY: Agent's help is needed
RISK COVER OR RETURN? Emphasis only on return


Irrespective of entry age and the term of the policy, the premium is Rs 1,200 for a cover of Rs 25,000 and in multiples thereof

Opting for a maximum term up to age 70 or a term of 35 years is best as the policy allows for partial surrender with full maturity benefits and loyalty benefits till the surrender period

Unlike a ULIP plan offering similar flexibility, you can compute the exact money you will receive at any time and add to it loyalty additions of a conservative minimum of 6 per cent, though this could be more

The amount by which the annual premium can be reduced has to be a multiple of Rs 600 and should not be less than Rs 1,200

After a partial surrender, the sum assured payable on death reduces and term and accident rider benefits get correspondingly reduced

Super Saver
Embarking on your savings plan early enough will earn you a lot more than you can imagine.
Clifford Alvares

If you embark on a savings strategy and stick to it for long enough, there's a guaranteed chance that you will make money, loads of it, over time. Anyone who saves money knows that it adds up to a tidy sum. But run the numbers for yourself and you will be startled by the results. Assume you are 25, and that you will retire at 65. If you save Rs 5,000 a month for 40 years that grows at 10 per cent per annum (calculated monthly), it balloons to over Rs 3.46 crore.

But if you start, say, just five years later at the age of 30 and save the same amount for 35 years, your corpus adds up to a little Rs 1.89 crore. That's a loss of more than Rs 1.56 crore in five years. For most people, that could spell the difference between a cosy retirement and a struggled one. There are many benefits of starting a savings plan early. The power of compounding ensures that you make your money grow the fastest during the later years.

The Options

Most financial planners are advising the young investors to start immediately on a savings plan. "Even if you start five years late, the kind of impact it has on your financial corpus of the future is enormous," says Amar Pandit, Chartered Financial Planner (CFP), My Financial Advisor, a financial planning firm, adding, "The sooner you start, the better it is for you." Not only that, one must also make sure that savings instruments that one chooses has a compounding element built into it. Instruments such as the public provident fund (PPF), stocks and mutual funds (MFs) enjoy the benefits of compounding, whereas other vehicles such as insurance don't.

Financial planners like Pandit recommend a pay yourself first concept for today's youth. "Youngsters focus far too much on spending," he says, adding, "but if they focus on paying themselves rather than others, they will gain a lot. If you cannot control your spending, make sure you pay yourself first." Among the easiest ways to start on a savings plan immediately is to open an automatic debit account facility where a periodic constant amount gets socked away every month. One must do this at the beginning of the month just as you get your paycheck. You can temporarily park your funds in an open-end mutual fund or floater fund till you find the right equity fund to invest for the long-term. Once you've begun, start a systematic investment plan (SIP) with the fund for the long haul.

The Plan

Additionally, financial planners recommend that you start with saving at least 25 per cent of your gross salary if you are on the younger side so that you can have a sizeable corpus in a short period of time. Higher savings are the building blocks of creating wealth and take a staggered approach to investing as against saving all at one go.

Thirty-somethings who have nothing in their bank account may have to start with a much higher savings budget of around 30-35 per cent annually. That's because of the loss of time and because compounding works harder in the later years. And those in their 40s who previously ignored savings have to allocate close to 40 per cent to catch up with retirement. Consider this, a 30-year-old targeting savings, say Rs 12,000 for 30 years, accumulates a little over Rs 1.97 crore at the age of 60. But anyone who starts five years later has to up the yearly outflow to over Rs 20,000 to reach close to the same corpus. That means an investor, who neglects saving earlier, puts an additional burden on his savings allocations in the latter years.

But even if you aren't able to up your savings ante, it's better that you start with modest sums rather than not start at all. Says Pandit: "Even if you postpone your savings for a year, it makes a lot of difference in the long run." You don't need to start on an aggressive savings plan. Increase your savings rate modestly by starting from, say, 10 per cent of your income in the first year to 12 per cent the next year and 15 per cent and so on. Even that will go a long way in making the most of your cost of savings.

Financial planners say that to begin to save, you must start identifying and reach realistic goals. In other words, you must set a target of the corpus you want to achieve at the end of 30 years, and then break it down into smaller targets of five or 10 years. Over the longer haul, step up your targets and keep scaling up the savings plan. Says Pandit: "Set a savings target and an asset allocation plan and compare it periodically to see where you stand." If you are falling behind your targets, then make adjustments in your lifestyle to update your plan. That's the only way to "keep up with the Joneses".

Destination Caribbean

A sporting carnival draws its own kind of tourists. But the ICC Cricket World Cup 2007 is a one of its kind tourism attraction. It is not very often that one gets a chance to go to the West Indies. After all, it is the first time that the World Cup is going to be held in the Caribbean, the land of beautiful beaches. Besides, the next World Cups of 2011, 2015 and 2019-to be held in the subcontinent, Australia, New Zealand and England, respectively-have been decided and it could be a while before you get an excuse to savour the Caribbean experience.

For most people, the Caribbean is not the most accessible of places which explains why families in India prefer options like a holiday in Europe or the United States. Of course, Asia and Australia are large attractions. There are some issues like flight connectivity in the West Indies which has prevented most Indians from taking a holiday to that part of the world. With an attraction like the World Cup, there appears to be more than one reason to get your bags together and head to that part of the world. So, what deals beckon the traveller?

Shyam Kartikeya, Business Head, SOTC Sport Abroad, says the objective has been to give something more exciting and different to the tourist. "Our target has been the high net-worth individuals (HNIS) like CEOs, MDs and the large corporates. The West Indies, the way we see it, can be a family destination," he says. SOTC, last week, reduced the cost on some of its twin-sharing packages by Rs 1 lakh. For sometime now, the West Indies has had a paucity of hotels and the current World Cup has resulted in hotel tariffs quite literally hitting the roof. One would be lucky to get a hotel room for $500 (Rs 22,000) per night which in most cases comes with a pretty steep rider-you will have to check in for at least seven nights.

Help has come from players like SOTC who are offering tourists the option of getting on to a cruise within the Caribbean. The cruise will take you to the destinations depending on which package you have opted for. This is what the tourist does-fly into the Caribbean after a stopover in London. In the Caribbean, the first landing destination is Bridgetown in Barbados. Here is where you get on to the cruise.

"The West Indies is far away and there have been concerns about the quality and availability of accommodation. The West Indies has been positioned as a resort and our packages are on land," says Gautam Sharma, Head (Marketing & Financial Services), Thomas Cook India Limited (TCIL). His company offers tourists the option of staying in resorts located in places like Antigua and Barbados, which means you get to watch matches being played there. You could choose a package which, for instance, could be for seven nights, in Antigua which will include all meals, a 24-hour snack service and unlimited land and water sports at the resort -all this is apart from the cricket, of course.

Most people in the travel and tourism industry agree that this is a one-time opportunity for tourists to enjoy the World Cup and also the destination. "For those who think it is expensive, we say there is the excitement of watching cricket. The West Indies can be a family destination with a lot of things to do," says Kartikeya. Sharma states that TCIL has over 200 corporate clients. "Our focus is on the corporate segment interested in cricket," he adds.

For an individual who loves to travel, West Indies, perhaps, seems to be a destination that's considered largely inaccessible. If there is an option of a cruise or a resort or a hotel, it's certainly worth a look. And, what's more, the West Indies bears a great deal of similarity to places like Goa. Yes, the whole trip has very few deals, but this is really a one-time opportunity. So, if sun and sand and cricket beckon you, start packing your bags. The Caribbean carnival is about to start.

The Caribbean Experience
Thomas Cook's packages:

Challenge with Down Under

Seven nights accommodation at Antigua's Sandals resort
All meals, 24-hour snacks and unlimited premium drinks
Tickets for two Super 8 India games at Antigua


Double delux room Rs 1.60 lakh
Prices per person (twin sharing basis)

Cricket Lover's Delight

Seven nights accommodation at the Almond Beach Village Resort, Barbados
Economy class air ticket on Virgin Atlantic
All meals, 24-hour snacks and liquor
Tickets for two Super 8 India games at Barbados


Double superior deluxe garden/pool view room Rs 3.10 lakh
Prices per person (twin sharing basis)

The Grand Finale

Eight nights accommodation at Bougainvillea Resort, Barbados
Economy class air ticket on Virgin Atlantic
Bed and breakfast included
Tickets for semi-final in Lucia and final in Barbados


Double standard room Rs 3.10 lakh
Prices per person (twin sharing basis)

Cruise with Cricket
SOTC's packages:

Encounter in Barbados

12 cruise nights aboard Carnival "Destiny" cruise ship visiting Barbados and Grenada
Choice of meals on board
Tickets for three Super 8 India games at Barbados


Ship's interior cabin Rs 2.88 lakh
Ocean view cabin Rs 3.37 lakh
Cabin with balcony Rs 3.89 lakh
Suite with balcony Rs 4.78 lakh
Prices per person (twin sharing basis)

Final Mission

Eight Cruise nights aboard Carnival "Destiny" cruise ship visiting St Lucia for the semi-final and Barbados for the final
Choice of meals on board
Tickets for the St Lucia semi-final and the Barbados final


Interior cabin Rs 3.88 lakh
Ocean view cabin Rs 4 lakh
Ocean view cabin with balcony Rs 4.40 lakh
Suite with balcony Rs 5.30 lakh

Down Under Action in Antigua

Seven hotel nights at a luxury resort
Buffet meals with your stay
Tickets for two Super 8 India games at Antigua


Prices per person (twin sharing basis) Rs 2.50 lakh
Assumption: India makes it to the Super 8 level, and plays at the specified venues

Market pull tests religious sentiment

In May 2006, when the Sensex, Bombay Stock Exchange’s benchmark index, first crossed 12,000, a Muslim investor approached Ashraf Mohamedy, managing director of Idafa Investments, with a question.
The investor wanted to know whether it was halal—or permissible—under Islam to invest in the stock of Mid-Day Multimedia Ltd, a publishing company that runs a popular afternoon paper here and, like a lot of papers these days in India, features photographs of scantily clad women.
Mohamedy, who heads Idafa, one of two Indian Shariah—or Islamic-law compliant—brokerages in India, responded by immediately striking the publisher off his list of companies in which a Muslim can invest without running afoul of his religious principles. Mohamedy’s logic: the photographs were harmful to the readers of the tabloid. “Anything harmful to anybody is un-Islamic,” he says.
Fast-forward to today. The Sensex has risen to 13,049 points after a roller-coaster ride that saw it cross 14,000 points last month, even though Mid-Day Multimedia’s shares have actually dropped from Rs72 to about Rs37 since May.
But even as Islamic investment and banking services are gaining ground in many parts of the world, Indian Muslims, bereft of most Shariah-compliant offerings, are finding themselves torn between the urge to invest in a booming stock market—up a whopping 47% in 2006—and strict religious edicts that bar them from earning income based on either speculation or through interest-generating products.
“Even educated Muslims are not sure if they can invest in the stock market,” says Farid Batawala, a Mumbai-based trader. “Most of them still hoard wealth and hide stacks of money in their pillows and mattresses.”
Outside India, over 300 institutions spread across West Asia, Europe, Asia and America now offer Shariah-compliant banking and financial services with assets valued at $500 billion, according to an FTSE Global market report released in March 2006. HSBC Amanah, the global Islamic banking division of HSBC Group, alone has 110 million customers for its Shariah-compliant banking in 77 countries. The products are widely marketed and accessible to Muslim investors. But in India, home to 150 million Muslims, there are just two brokerages—Idafa and Parsoli Corporation Ltd, with a combined customer base of just around 2,000 clients—that currently offer formal Shariah-compliant investment services.
“We did explore the demand for Amanah in the Indian context and met the Reserve Bank of India in this regard but currently the regulatory environment for banking in India does not permit us to launch Amanah,” says Nicholas Winsor, head of personal finance at HSBC India, even as he notes that the “Muslim wealth is substantial in India.”
HSBC isn’t alone in not being able to cater to this potentially lucrative segment. Deutsche Bank, ABN Amro, UBS and Citigroup also offer Islamic financial products and services globally but not in India.
Earlier this week, the government said in Parliament that there was no plan to set up an Islamic bank in India, throwing water on some media reports that Prime Minister Manmohan Singh had appointed a committee to explore the idea.
On Saturday, Parsoli is organizing what it bills as the first “Islamic Investment Opportunities” conference in Mumbai to discuss Shariah-compliant opportunities, complete with a separate enclosure for women and arrangements, during the day-long conference, for Zohar prayers.
But, notwithstanding the nascent efforts by Idafa and Parsoli, the paucity of opportunities isn’t any better in equities than it is with banking and mutual funds.
Consider Faisal Ahmed, a Bangalore-based incense manufacturer. He has been playing in the market for about three years, dealing with both losses in day trading and his father’s angst over doing something haram, or forbidden by Islam. Ahmed says he has met dozens of religious experts seeking advice on investments in the stock market. Each time he meets an expert, he has had to explain that owning shares was not necessarily a speculative activity as it involved owning a piece of the company. “They know about the Koran and I know about the market but it was difficult to make a meeting ground of the two,” says the 35-year-old.
Ahmed, who is always collecting religious advice on investing, would have benefited greatly from India’s first seminar last month on Islamic investing, where 1,100 fellow investors—most of them Muslims—discussed the pros and cons of playing the stock market. The conference was organized by Zafar Sareshwala, managing director of Parsoli, the Ahmedabad-based brokerage firm which also launched an Islamic financial portal at the event.
Parsoli has been around for 15 years and is a publicly-traded entity. Sareshwala says his Shariah-compliant stock index has mirrored the rapid rise of the Sensex. His apparent success, even if with a very small client base, has attracted attention, especially overseas. Germany’s Baader Wertpapierhandelsbank AG, the largest securities trading firm in Germany and owner of Baader Bank, recently took a 30% stake in Parsoli. While Indian Muslims may not be beating a path to his doorstep, India’s sizzling stock market is fuelling Sareshwala’s plans to launch a fund, along with Baader Bank for West Asian investors interested in Shariah-compliant firms in India.
Sareshwala has tried to build investor confidence by teaming up with religious scholars such as Mufti Abdul Qayoom, who is also an investor in the stock market. “Traditionally, Muslims did not enter the market because they equated it with gambling,” says Qayoom. “But now they see that there are opportunities to make money in a halal way.”
Indeed, more Muslims seem to be starting to dip their toes in the market if Idafa’s numbers are any indicator. Mohamedy says that of his investor base of about 1,000, some 350 have come on board just in the past year.
With its three television sets tuned to financial channels, Idafa’s office in a dilapidated building in Crawford Market has the trappings of a regular brokerage, though the excitement is definitely muted—in part because day trading, where money is made off intra-day volatility, is forbidden under Shariah. Still, Mohamedy says his clients’ average annual returns this past year has been between 30% and 40%.
Mohamedy updates his list of Shariah-compliant stocks at regular intervals. At the moment, the list includes roughly 15% of the listed stocks on Indian bourses—780 of 4,600. He meticulously avoids stocks of hotels, liquor companies, banks, tobacco firms, pesticides and genetically modified crop companies. He also avoids companies involved in gaming and manufacturing products such as asbestos because of their environmental impact. Islamic practices also do not allow investing in companies whose debt is more than a third of their market capitalization and receivables are less than 5%.
To be sure, not every Muslim investor is always Shariah-compliant. One of Mohamedy’s clients is Roshan Naik, the 75-year-old mother of Indian television’s most famous Muslim preacher, Zaquib Naik. Naik, who has been investing in the market for more than three decades, says she did invest in hotel and other non-halal stocks in her early days though she has since pruned her portfolio to Shariah-compliant stocks in deference to her preacher son. And she is a devout Muslim when it comes to not having a bank savings account or even an insurance policy.
While Islamic tenets were meant to discourage profiting from speculation and gambling, applying them to modern times can sometimes be problematic. Insurance, for instance, is an area where a dearth of Islamic offerings is particularly noticeable.
“I really feel that I should be insured,” says Tariq Qureshi, a Mumbai-based trader, who exports meat, garments and machinery. But when it comes to shares, he is definitely taking the high road. “There are many stocks we want to buy,” he says. “But we also have to think of the world after.”

Inverted reasoning and its consequences

In a classic, “ An Investor’s Anthology”, there is a brilliant piece by George Selden written in 1912.

“It is hard for the average man to oppose what appears to be the general drift of public opinion. In the stock market this is perhaps harder than elsewhere; for we all realize that the prices of stocks must, in the long run, be controlled by public opinion. The point we fail to remember is that public opinion in a speculative market is measured in dollars, not in population. One man controlling one million dollars has double the weight of five hundred men with one thousand dollars each. Dollars are the horsepower of the markets—the mere number of men does not signify.

This is why the great body of opinion appears to be bullish at the top and bearish at the bottom. The multitude of small traders must be, as a plain necessity, long when prices are at the top, and short or out of the market at the bottom. The very fact that they are long at the top shows that they have been supplied with stocks from some source.

Again, the man with one million dollars is a silent individual. The time when it was necessary for him to talk is past—his money now does the talking. But the one thousand men who have one thousand dollars each are conversational, fluent, verbose to the last degree.

It will be observed that the above course of reasoning leads up to the conclusion that most of those who talk about the market are more likely to be wrong than right, at least so far as speculative fluctuations are concerned. This is not complimentary to the “moulders of public opinion,” but most seasoned newspaper reader will agree that it is true. The daily press reflects, in a general way, the thoughts of the multitude, and in the stock market the multitude is necessarily, as a logical deduction from the facts of the case, likely to be bullish at high prices and bearish at low.

It has often been remarked that the average man is an optimist regarding his own enterprises and a pessimist regarding those of others. Certainly this is true of the professional trader in stocks. As a result of the reasoning outlined above, he come habitually to expect that nearly every one else will be wrong, but is, as a rule, confident that his own analysis of the situation will prove correct. He values the opinion of a few persons who he believes to be generally successful; but aside from these few, the greater the number of the bullish opinions he hears, the more doubtful he becomes about the wisdom of following the bull side.

This apparent contrariness of the market, although easily understood when its causes are analyzed, breeds in professional traders a peculiar sort of skepticism—leads them always to distrust the obvious and to apply a kind of inverted reasoning to almost all stock market problems. Often, in the minds of traders who are not naturally logical, this inverted reasoning assumes the most erratic and grotesque forms, and it accounts for many apparently absurd fluctuations in prices which are commonly charged to manipulation.

For example, a trader starts with this assumption: The market has had a good advance; all the small traders are bullish; somebody must have sold them stock which they are carrying; hence the big capitalists are probably sold out or short and ready for a reaction or perhaps for a bear market. Then if a strong item of bullish news comes out—one, let us say, that really makes an important change in the situation—he says, “Ah, so this is what they have been bulling the market on! It has been discounted by the previous rise.” Or he may say, “They are putting out this bull news to sell stocks on.” He proceeds to sell out any long stocks he may have or perhaps to sell short.

His reasoning may be correct or it may not; but at any rate his selling and that of others who reason in a similar way is likely to produce at least a temporary decline on the announcement of the good news. This decline looks absurd to the outsider and he falls back on the old explanation “All manipulation.”

The same principle is often carried further. You will find professional traders reasoning that favorable figures on the steel industry, for example, have been concocted to enable insiders to sell their steel; or that gloomy reports are put in circulation to facilitate accumulation. Hence they may act in direct opposition to the news and carry the market with them, for the time at least.

The less the trader knows about the fundamentals of the financial situation the more likely he is to be led astray in conclusions of this character. If he has confidence in the general strength of conditions, he may be ready to accept as genuine and natural a piece of news which he would otherwise receive with cynical skepticism and use as a basis for short sales. If he knows that fundamental conditions are unsound, he will not be so likely to interpret bad news as issued to assist in accumulation of stocks.

The same reasoning is applied to large purchases through brokers known to be associated with capitalists. In fact, in this case we often hear a double inversion, as it were. Such buying may impress the observer in three ways:

  1. The “rank outsider” takes it a face value, as bullish.
  2. A more experienced trader may say, “If they really wished to get the stocks they would not buy through their own brokers, but would endeavor to conceal their buying by scattering it among other houses.”
  3. A still more suspicious professional may turn another mental somersault and say, “They are buying through their own brokers so as to throw us off the scent and make us think someone else is using their brokers as a blind.” By this double somersault such a trader arrives at the same conclusion as the outsider.

The reasoning of traders becomes even more complicated when large buying or selling is done openly by a big professional who is know to trade in and out for small profits. If he buys 50,000 shares, other traders are quite willing to sell to him and their opinion of the market is little influenced, simply because they know he may sell 50,000 the next day or even the next hour. For this reason great capitalists sometimes buy or sell through such big professional traders in order to execute their orders easily and without arousing suspicion. Hence the play of subtle intellects around big trading of this kind often becomes very elaborate.

It is to be noticed that this inverted reasoning is useful chiefly at the top or bottom of a movement, when distribution or accumulation is taking place on a large scale. A market which repeatedly refuses to respond to good news after a considerable advance is likely to be “full of stocks.” Likewise a market which will not go down on bad news is usually “bare of stock.”

Between the extremes will be found long stretches in which capitalists have very little cause to conceal their position. Having accumulated their lines as low as possible, they are then willing to be known as the leaders of the upward movement and have every reason to be perfectly open in their buying. This condition continues until they are ready to sell. Likewise, having sold as much as they desire, they have no reason to conceal their position further, even though a subsequent decline may run for months or a year.

It is during a long upward movement that the “lamb” makes money, because he accepts facts as facts, while the professional trader is often found fighting the advance and losing heavily because of the overdevelopment of cynicism and suspicion.

The successful trader eventually learns when to invert his natural mental processes and when to leave them in their usual position. Often he develops a sort of instinct which could scarcely be reduced to cold print. But in the hands of the tyro this form of reasoning is exceedingly dangerous, because it permits of putting an alternate construction on any event. Bull news either (1) is significant of a rising trend of prices, or (2) indicates that “they” are trying to make a market to sell on. Bad news may indicate either a genuinely bearish situation or a desire to accumulate stocks at low prices.

The inexperienced operator is therefore left very much at sea. He is playing with the professional’s edged tools and is likely to cut himself. Of what use is it for him to try to apply his reason to stock market conditions when every event may be doubly interpreted?

Indeed, it is doubtful if the professional’s distrust of the obvious is of must benefit to him in the long run. Most of us have met those deplorable mental wrecks, often found among the “chairwarmers” in brokers’ offices, whose thinking machinery seems to have become permanently demoralized as result of continued acrobatics. They are always seeking an “ulterior motive” is everything. They credit—or debit—Morgan and Rockefeller with the smallest and meanest trickery and ascribe to them the most awful duplicity in matters which those “high financiers” would not stoop to notice. The continual reversal of the mental engine sometimes deranges its mechanism.

Probably no better general rule can be laid down than the brief one, “Stick to common sense.” Maintain a balanced, receptive mind and avoid abstruse deductions. A few further suggestions may, however, be offered:

If you already have a position in the market, do not attempt to bolster up your failing faith by resorting to intellectual subtleties in the interpretation of obvious facts. If you are long or short of the market, you are not an unprejudiced judge, and you will be greatly tempted to put such an interpretation upon current events as will coincide with your preconceived opinion. It is hardly too much to say that this is the greatest obstacle to success. The least you can do is to avoid inverted reasoning in support of your own position.

After a prolonged advance, do not call inverted reasoning to your aid in order to prove that prices are going still higher; likewise after a big break do not let your bearish deductions become too complicated. Be suspicious of bull news at high prices, and of bear news at low prices.

Bear in mind that an item of news usually causes but one considerable movement of prices. If the movement takes place before the news comes out, as a result of rumors and expectations, then it is not likely to be repeated after the announcement is made; but if the movement of prices has not preceded, then the news contributes to the general strength or weakness of the situation and a movement of prices may follow.



It is axiomatic that inexperienced traders and investors, and indeed a majority of the more experienced as well, are continually trying to speculate on past events. Suppose, for example, railroad earnings as published are showing constant large increases in net. The novice reasons, “Increased earnings mean increased amounts applicable to the payment of dividends. Prices should rise. I will buy.”

Not at all. He should say, “Prices have risen to the extent represented by these increased earnings, unless this effect has been counterbalanced by other considerations. Now what next?”

It is a sort of automatic assumption of the human mind that present conditions will continue, and our whole scheme of life is necessarily based to a great degree on this assumption. When the price of wheat is high farmers increase their acreage because wheat-growing pays better; when it is low they plant less. I remember talking with a potato-raiser the above custom. When potatoes were low he had planted liberally; when high he had cut down his acreage—because he reasoned that other farmers would do just the opposite.

The average man is not blessed—or cursed, however you may look at it—with an analytical mind. We see “as through a glass darkly.” Our ideas are always enveloped in a haze and our reasoning powers work in a rut from which we find it painful if not impossible to escape. Many of our emotions and some of our acts are merely automatic responses to external stimuli. Wonderful as is the development of the human brain, it originated as an enlarged ganglion, and its first response is still practically that of the ganglion.

A simple illustration of this is found in the enmity we all feel toward the alarm clock which arouses us in the morning. We have carefully set and wound that alarm and if it failed to go off it would perhaps put us to serious inconvenience; yet we reward the faithful clock with anathemas.

When a subway train is delayed nine-tenths of the people waiting on the platform are anxiously craning their necks to see if it is coming, while many persons on it who are in danger of missing an engagement are holding themselves tense, apparently in the effort to help the train along. As a rule we apply more well-meant, but to a great extent ineffective, energy, physical or nervous, to the accomplishment of an object, than to analysis or calculation.

When it comes to so complicated a matter as the price of stocks, our haziness increases in proportion to the difficulty of the subject and out ignorance of it. From reading, observation and conversation we imbibe a miscellaneous assortment of ideas from which we conclude that the situation is bullish or bearish. The very form of the expression “the situation is bullish”—not “the situation will soon become bullish”—shows the extent to which we allow the present to obscure the future in the formation of our judgment.

Catch any trader and pin him down to it and he will readily admit that the logical moment for the highest prices is when the news after it comes out—if not at the moment, at any rate “on a reaction.”

Most coming events cast their shadows before, and it is on this that intelligent speculation must be based. The movement of prices in anticipation of such an event is called “discounting,” and this process of discounting is worthy of a little careful examination.

The first point to be borne in mind is that some events cannot be discounted, even by the supposed omniscience of the great banking interests—which is, in point of fact, more than half imaginary. The San Francisco earthquake is the standard example of an event which could not be foreseen and therefore could not be discounted; but an event does not have to be purely an “act of God” to be undiscountable. There can be no question that our great bankers have been as much in the dark in regard to some recent Supreme Court decisions as the smallest “piker” in the customer’s room of an odd-lot brokerage house.

If the effect of an event does not make itself felt before the event takes place, it must come after. In all discussion of discounting we must bear this fact in mind in order that our subject may not run away with us.

On the other hand, an event may sometimes be over-discounted. If the dividend rate on a stock is to be raised from four to five per cent, earnest bulls, with an eye to their own commitments, may spread rumors of six or seven per cent, so that the actual declaration of five per cent may be received as disappointing and cause a decline.

Generally speaking, every event which is under the control of capitalists associated with the property, or any financial condition which is subject to the management of combined banking interests, is likely to be pretty thoroughly discounted before it occurs. There is rarely any lack of capital to take advantage of a sure thing, even though it may be known in advance to only a few persons.

The extent to which future business conditions are known to “insiders” is, however, usually overestimated. So much depends, especially in America, upon the size of the crops, the temper of the people, and the policies adopted by leading politicians, that the future of business becomes a very complicated problem. No power can drive the American people. Any control over their action had to be exercised by cajolery or by devious and circuitous methods.

Moreover, public opinion is becoming more volatile and changeable year to year, owing to the quicker spread of information and the rapid multiplication of the reading public. One can easily imagine that some of our older financiers must be saying to themselves. “If I only had my present capital in 1870, or else had the conditions of 1870 to work on today!”

A fair idea of when the discounting process will be completed may usually be formed by studying conditions from every angle. The great question is, when will the buying or selling become most general and urgent? In 1970, for example, the safest and best time to buy the sound dividend-paying stocks was on the Monday following the bank statement with showed the greatest decrease in reserves. The market opened down several points under pressure of liquidation, and many standard issues never sold so low afterward. The simple explanation was that conditions had become so bad that they could not get any worse without utter ruin, which all parties must and did unite to prevent.

Likewise in the Presidential campaign of 1900, the lowest prices were made on Bryan’s nomination. Investors said at once, “He can’t be elected.” Therefore his nomination was the worst that could happen—the point of time where the political news became most intensely bearish. As the campaign developed his defeat became more and more certain, and prices continued to rise in accordance with the general economic and financial conditions of the period.

It is not the discounting of an event thus known in advance to capitalists that presents the greatest difficulties, but cases where considerable uncertainty exists, so that even the clearest mind and the most accurate information can result only in a balancing of probabilities, with the scale perhaps inclined to a greater or less degree in one direction or the other.

In some cases the uncertainty which precedes such an event is more depressing than the worst that can happen afterward. An example is a Supreme Court decision upon a previously undetermined public policy which has kept business men so much in the dark that they feared to go ahead with any important plans. This was the case at the time of the Northern Securities decision in 1904. “Big business” could easily enough adjust itself to either result. It was the uncertainty that was bearish. Hence the decision was practically discounted in advance, no matter what it might prove to be.

This was not true to the same extent of the Standard Oil and American Tobacco decisions of 1911, because those decisions were an earnest of more trouble to come. The decisions were greeted by a temporary spurt of activity, based on the theory that the removal of uncertainty was the important thing; but a sensational decline started soon after and was not checked until the announcement that the Government would prosecute the United States Steel Corporation. This was deemed the worst that could happen for some time to come, and was followed by a considerable advance.

More commonly, when an event is uncertain the market estimates the chances with considerable nicety. Each trader backs his own opinion, strongly if he feels confident, moderately if he still has a few doubts which he cannot down. The result of these opposing views may be stationary prices, or a market fluctuating nervously within a narrow range, or a movement in either direction, greater or smaller in proportion to the more or less emphatic preponderance of the buying or selling.

Of course it must always be remembered that it is dollars that count, not eh number of buyers or sellers. A few great capitalists having advance information which they regard as accurate may more than counterbalance thousands of small traders who hold an opposite opinion. In fact, this is the condition very frequently seen.

Even the operations of an individual investor usually have an effect on prices pretty accurately adjusted to his opinions. When be believes prices are low and everything favors an upward movement, he will strain his resources in order to accumulate as heavy a load of securities as he can carry. After a fair advance, if he sees the development of some factor which might cause a decline—though he doesn’t really believe it will—he thinks it wise to lighten his load somewhat and make sure of some of his accumulated profits. Later when he feels that prices are “high enough,” he is a liberal seller; and if some danger appears while the level of quoted values continues high, he “cleans house,” to be ready for whatever may come. Then if what he considers an unwarranted speculation carries prices still higher, he is very likely to sell a few hundred shares short by way of occupying his capital and his mind.

It is, however, the variation of opinion among different men that has the largest influence in making the market responsive to changing conditions. A development which causes one trader to lighten his line of stocks may be regarded as harmless or even beneficial by another, so that he maintains his position or perhaps buys more. Out of a worldwide mixture of varying ideas, personalities and information emerges the average level of prices—the true index number of investment conditions.

The necessary result of the above line of reasoning is that not only probabilities but even rather remote possibilities are reflected in the market. Hardly any event can happen of sufficient importance to attract general attention which some other process of reasoning cannot construe our old friend of the news columns to the effect that “the necessary a large volume of business,” may influence some red-blooded optimist to buy 100 Union, but the grouchy pessimist who has eaten too many doughnuts for breakfast will accept the statement as an evidence of the scarcity of real bull news and will likely enough sell 100 Union short on the strength of it.

It is overextended speculator who causes most of the fluctuations that look absurd to the sober observer. It does not take much to make a man buy when he is short of stocks “up to his neck.” A bit of news which he would regard as insignificant at any other time will then assume an exaggerated importance in his eyes. His fears increase in geometrical proportion to the size of his line of stocks. Likewise the overloaded bull may begin to “throw his stocks” on some absurd story of a war between Honduras and Roumania [sic], without even stopping to look up the geographical location of the countries involved.

Fluctuations based on absurdities are always relatively small. They are due to an exaggerated fear of what “the other fellow” may do. Personally, you do not fear a war between Honduras and Roumania; but may not the rumor be seized upon by the bears as an excuse for a raid? And you have too many stocks to be comfortable if such a break should occur. Moreover, even if the bears do not raid the market, will there not be a considerable number of persons who, like yourself, will fear such a raid, and will therefore lighten their load of stocks, thus causing some decline?

The professional trader, following this line of reasoning to the limit, eventually comes to base all his operations for short turns in the market not on the facts but on what he believes that facts will cause others to do—or more accurately, perhaps, on what he sees that the news is causing others to do; for such a trader is likely to keep his fingers constantly on the pulse of buying and selling as it throbs on the floor of the Exchange or as recorded on the tape.

The non-professional, however, will do well not to let his mind stray too far into the unknown territory of what others may do. Like the “They” theory of values, it is dangerous ground in that it leads toward the abdication of common sense; and after all, other may not prove to be such fools as we think they are. While the market is likely to discount even a possibility, the chances are very much against out being able to discount the possibility profitably.

In this matter of discounting, as in connection with most other stock market phenomena, the most useful hint that can be given is to avoid all efforts to reduce the movement of prices of rules, measures, or similarities and to analyze each case by itself. Historical parallels are likely to be misleading. Every situation is new, though usually composed of familiar elements. Each element must be weighed by itself and the probable result of the combination estimated. In most cases the problem is by no means impossible, but the student must learn to look into the future and to consider the present only as a guide to the future. Extreme prices will come at the time when the news is most emphatic and most widely disseminated. When the point is passed the question must always be, “What next?””