LAMENTATIONS OF GREECE - Part II

Euro is proving to be Man Made Financial Disaster!

On 2nd Feb 2012, Financial Thoughts have suggested that exit of Euro by Greece is good for the country. It was plain logic. After the stringent austerity measures put forth at the recommendation of Germany (reminding the colonial rule of 19th century?), by 2020 Greece will still have 120% Debt/GDP ratio! (For details see http://www.financialviewsonline.com/2012/02/lamentations-of-greece.html)

This was level of Debt/GDP ratio when the Greece crisis began couple of years ago! If the policy of austerity still fails to reduce it after a decade, it is common sense that the austerity is not the right medicine.

However, the Greece departure is sure create a big mess. It could be as disastrous as Lehman or even worse - or there is a fair chance that since the event of Greece departure is not a 'black swan' most of the financial world would be prepared.

Financial Thoughts is worried about the consequences to its stock portfolio. We have been searching for the comments and thoughts by the veteran investor and Guru of Gurus, Warren Buffet. We haven't seen any other than that during the recently concluded annual shareholders meeting of Berkshire, he has predicted a good performance of his company. We hope he will come out with his views soon.

We believe there is time till end of June 2012 before Greece officially declares its exit.

Those who are courageous can play a George Soros of 1992 - akin to the manner he made tons of money betting against the weak GBP. The Euro, at least in the short term, is on the weak footing.

The question is how to protect the stock portfolios. As financial thoughts mentioned earlier http://www.financialviewsonline.com/2011/07/nasty-experiment-called-euro-part-ii.html as long as Euro is in existence, there will be troubles.

Euro is proving to be a man made financial disaster. Financial thoughts is now concerned with how to protect the portfolio - there are several options, take short positions, buy puts, create straddles, create synthetic positions, take DITM/DOTM option positions, etc. However, an idea about the extent of damage that can be caused is required

Ludicrous socialism policy of UPA

It is well known that Mrs Sonia Gandhi’s strategy is to pamper the poor for votes & don't care much about others - majority of India's 1.1 billion population is poor. Roughly 10% of India is super rich, 20-30%% middle class and they pay most of the taxes to keep up the Government. About 60%-70% are stated to belong to 'poor' section without much incentive to improve - as they are pampered in the wrong manner. Instead of giving hand-outs they must be given chances to work hard towards success.

As part of pampering the poor, free/ subsidised food, cloth, etc is flowing to the BPL (Below Poverty Line) class. For example, a southern state Kerala provides 1 Kg rice for Rs 1/- to the poor class. With average daily wage of around Rs 350 -500/- (monthly income of Rs 10k-15k) in the state, this lopsided socialism is creating undesirable behaviour among the population. It is easy for a labourer earning this level of wage to qualify themselves into BPL category and enjoy free/subsidies. No wonder even the middle class segments in the country is trying to get into BPL category to get benefits. As usual, the lopsided policies of Indian Govt. is not providing any incentives to work hard towards success. Instead, it encourages the population to be BPL.

But the middle class of India which exceeds 250 million exceeds the combined population of several leading European nations including Britain, Spain, France, Germany, etc. and adds a lot to the Indian economy is being ignored. Why? They are not the vote bank just as  National Democratic Alliance (NDA), led by the Bharatiya Janata Party, realised in 2003. After putting up a spectacular economic performance, they lost elections .

It is pertinent to note that during 2002-2003 period US kept its interest rate low at 1% and India was able to reduce its rates to record lows as well, thanks to then bold RBI Governer, Bimal Galan and NDA, led by Vajpayee who initiated the world class National Highway program. Compared to that currently, the interest rates in the US is all time low; however current RBI Governer did not reduce the rates to help the business in India. UPA led by Mrs. Sonia is a far cry from NDA led by Mr. Vajpayee. The result is the slowing economy. No wonder Indian Manufacturing data for March 2012 was in negative territory.

Recently Forbes magazine has put out a list of the world's billionaires, of which fifty-five of them are Indians. About half of them belong to Baniya caste (traditionally business class) who comprise less than 5% or 55 million of Indian population. The heartland of India , where most of the quantity (60%-70%) resides, is missing from this list. Bihar, Bengal , Jharkand, Utterkand, Chattisghad, Madhya Pradesh, Odisha, Uttar Pradesh have little or no representation. Remember these are some of the resource rich, mineral rich territories in India. The skillset of the successful indians and poor indians are different. Instead of pumping free / hugely subsidized goods to 60%-70% of the population - that results in huge deficits - Govt must embark upon schemes to improve the skillset.

Some one defined Capitalism as 'wealth shared unequally' and Socialism as 'poverty shared equally'. It seems that current UPA believes in the latter!

Why can't Dr.Manmohan Singh be an effective PM?

Recently, Financial Times (of UK) dated 17 Apr 2012 carried an article on India. Some of the interesting points (embellished with Financial Thought views) are given below:

1. India is in fact turning back to its model of 1970s when Indira Gandhi stifled Indian businesses and focused on poverty (eradication). They nationalized banks such as Bank of Baroda who would have rivaled HSBC or Stan Chart today. BoB had operations in ME and Africa while a few south based banks were active in Far East.

2. Socialism is making an entry through back door. It believes in equal distribution. Since socialism hardly creates wealth, often it means "Poverty distributed equally' while the able escape to the west.

3. Narasimgha Rao gave his then FM free hand in the matters of Finance, unlike Indira Gandhi.

FT goes on to say that Sonia Gandhi tries to imitate her mother in law, Indira Gandhi. It is reported (not FT) that someone is going to make a movie on Indira Gandhi. However, Financial Thoughts is not a fan of Indira Gandhi, although some of her decisions such as 1971 War, 1983 Blue Star operation may get a few points. But Indian economy was a disaster during those days. An Indian economist familiar with the benefits of poverty alleviation of 'Reforms' pleaded to liberate the economy from license raj, however he just was ignored by Indira Gandhi, possibly because she thought of herself good in economics?

It took Narasimgha Rao to give economic freedom to India; however it seems to be taken away slowly.

India's own industrialists feel discouraged by the economic policies (read 1970 socialism) and they have billions to invest. They are looking outside to invest - say a place like UAE, which hosts several illustrious businessmen who conduct business hassle free with rest of the world. Or ask why Swaraj Paul or Mittal, why they left India in the 1960s and 1970s. Given the kind of policies adopted by Sonia Gandhi (re-appointment of 1980s FM Pranab Mukherjeee, selection of relatively unknown Mrs. Patil as President) brings dejavu experience of Indira Gandhi, back in action!

Modern days need modern leaders - turning to the failed model of 1970 defies logic.

Many have often wondered why an eminent person like Dr. Manmohan Singh (who did a lot for the country) seems uninitiated or lacks motivation he showed in the 1990s. FT article provides some good insight on the backseat driving . Moreover, Indian PM has friends like 'Mamatha Banerjee'. With such friends, who needs enemies!

Is Income Tax department a mother-in-law?

Recently, a moneycontrol article (dated 8^th April 2012) has stated that India is expected to grow at 6.1% in calendar year (CY) 2012, similar to the pace recorded in Q4 2011

The Government and RBI may not be able achieve reduction in inflation through their policies, but definitely they know how to achieve reduction in India's growth from 10% to 6% levels.

As Financial Thoughts mused earlier in this blog, with the kind of high interest rates in India, the cost of capital shoots up impacting business confidence

Not only RBI is trying to hamper the growth, but a recent report in Indian Express has shown that Income Tax department has also joined the wagon. Their duty is to scare the FDI away (imagine the impact on India's current account balance & employment of its educated youth).

In a thought-provoking article in the Indian Express, Jaithirth Rao tells about the harassment that the income-tax department has heaped on the BPO industries which have caused a shift of BPO businesses from India to the Philippines and other more ‘reasonable’ Countries.

The income-tax department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down.

The income-tax department is reportedly making frequent and arbitrary changes in rules and says that this has resulted in vicious harassment of Indian IT and BPO industries.

No wonder these things happen when we have a 1980 Finance Minster (Pranab Mukherjee) presenting 2012 budget. In 1980, income tax department was like a vicious mother-in-law for the business community. For a period, from 1991 there were progressive FMs. (i.e. Manmohan Singh, Yashwant Singha and Chidambaram), irrespective of whether it was BJP or Congress.

Hope they will make Pranab Mukherjee the next Indian President and bring back Chidambaram as FM so that Indian businesses can breathe and the confidence in Indian Economy is retained such that FIIs and FDIs continue to flow into the nation.

Who is the Star Analyst since 1960s?

Warren Buffet has mentioned once that whenever he wants to have a laugh, he reads Analyst reports.  Is he joking? We will see this later. Everyone who is investing in stock market or share market is interested in analyst reports. They believe that such reports will show how to invest, where to invest and guide through the vagaries of stock exchanges.

Recently, on 12th Mar 2012, there was an article in Financial Times that most of the analysts are now more positive in their outlook for 2012 and hence the stock market may move up. (Analysts views still hold some good fire power!)

In order to understand the value of listed companies, many investors refer to the Analysts forecasts. They also refer – sometimes pay hard earned money – to get the valuation done by them. This is because of the information advantages Analysts perceived to have:

1.      They study the competitors and may be able to arrive at meaningful conclusions. If a steel manufacturer in a country suffers poor performance it could be due to some common industry factors, which the analyst can apply to other companies in the same sector.
2.      They also subscribe or have access to studies and reports on general economy, industry, etc. which a common man may not have.  Based on such information, they may be able to forecast the future cash flows of the business with more realistic assumptions
3.      Analysts sometimes visits the companies they track and get more information . This puts retail investors who rely on public information at a terrific disadvantage. That is why Warren Buffet mostly advises the retail investors – who don’t have the time and patience- to invest in index funds.
4.      Better analytical tools and techniques. Professional analysts can use information such as cost of capital, profit retention, profit margins trend, impact of introduction of new products, impact of shifting the production base to China (as has been recently done by Nokia) in a professional manner and assess the impact on cash flows. A non-finance retail investor may find such task equivalent to ‘climbing’ the Everest. How to invest and where to invest questions always linger around!

Does all this mean that Analysts are always successful in understanding the business dynamics of the companies they follow in such a manner that they are able to take advantage? No is the answer. Many studies have highlighted this. It is equivalent to Moody’s or S&P  giving investment rating to some company (e.g. Lehman) , which just collapses a few months later. Similarly, a company recommended by an Analyst may shut down the shop a few months later. Well, it is the nature of the game. There are several reasons for that – but we don’t delve into that ; however would like to mention that some analysts report may be written to serve vested interests! .  Let us focus something more interesting.

Most analysts focus on EPS while the fundamental valuation techniques advocate the reliance on other metrics such as FCF, EBITDA, etc. It is quite possible that sometimes Analysts miss the significant shifts in the Market, Industry or Company itself. There is significant value in identifying the significant differences between analysts forecasts  or valuation and real facts. That may offer a wonderful business opportunity. Many of Warren Buffet investments falls in such categories – the best example is American Express which he invested heavily, committing a significant proportion of the partnership’s assets in mid 1960s, when the general (Analysts) view on the company was otherwise. Warren Buffet also focused on stock market or share market to park his money. However he approached the questions how to invest and where to invest in a different manner.

Although Warren Buffet says that he laughs at a few bad (or written to misguide) anaytical reports, his own strong point is analysis. He is the best in analysis since late 1950s or early 1960s, ever since he read and digested the book 'Security Analysis' by Ben Graham &Dodd. However, to the techniques mentioned in the book, he added his own secret receipe. This is the secret of his success. (Although he tells a few things now and then, the real strategy may not be fully disclosed yet - just as magician won't tell all his secrets.)

Of course, Warren Buffet himself is an excellent analyst and Financial Thoughts believes there are (& were) several other excellent analysts in the stock market or share market. Why then many analysts are not as successful as him? Well it is due to the personality factors and circumstances – in his younger days, Warren Buffet got the best mentor one could ever imagine. Possibly, it is time that Warren Buffet also mentors a few Analysts. Moreover, during 1970s, he developed necessary leadership and motivating skills that 100+ smart CEOs report to him, either directly or indirectly.

Warren Buffet seems to believe in the motto ' It is wise to be otherwise' while taking decisions on how to invest and where to invest. For him stock market or share market is always a best friend helping to take decisions on where to invest

Forbes revenge on Warren Buffet

Recently, Forbes magazine carried an article which miserable tries to ‘belittle’ Warren Buffet. The title was “Warren Buffett CEO Porn Gone Wild”. What a distasteful title! The content is even more horrible. It goes on to criticize Warren Buffet for some innocent statement. The article tries to establish that Warren Buffet is a villain or insensitive person.

It is well known that Warren Buffet wants the 1% rich of the US must pay more as taxes. He repeatedly has shown that his secretary pays more tax than him in relative terms. 


Financial Thoughts have shared it views on this on an article in this blog titled “Another proof that Warren Buffet is the Most Intelligent investor !! dated 29^th Sep 2011. We analyzed the strong logic based on which Warren Buffet supports more tax on the rich.


During the same period, Forbes has vehemently opposed to raise taxes on 1% rich class. The owner of Forbes magazine, who seems to be reluctant to part with his money as taxes, has personally written an (rather unconvincing) article stating that why the rich cannot afford to pay more tax. (It reminds French Revoluation days of 1789, where the rich also held the same view) 


The opposing stance by Forbes and Warren Buffet is evident. Arguably, WB stance is good for both US and the rich class as we have analysed in the blog dated 29th Sep 2011.


In order to avoid paying more tax, it seems that the powerful 1% is buying out some ‘experts’ who is circulating articles how increasing taxes on rich could cripple the country! The main argument is that if the taxes are increased, then the incentive to invest will be lost for the rich 1% of the US.  However, such arguments don't hold water.


It is people like Warren Buffet, who has shown his courage to express his opinion independently – just as his contranian approach he has displayed in some of his best investment decisions (e.g. Amex in 1960s).


However, some midgets don’t understand this. Hence, they decide to criticize and make fun of great people by giving the pen to imbeciles.

All people who believe in fairness and logic must discard such articles and publications (on Warren Buffet) to its right place – the dust bin!

LAMENTATIONS OF GREECE

“Frustrated with Greece’s inability to meet two years of targets for cutting the deficit and selling off state assets, donor countries are also insisting on more control over how Greece spends the money” screamed a recent prominent news item in the recent days (source bloomberg.com)

It is a very uneasy feeling when creditors breathe down the neck . In the case of companies, the owners suffer while the employees look for alternatives. If the company is large and/or the owners are smart they stack away most of their wealth beyond the reach of creditors.

But when countries are indebted, then the population suffers. In the case of Greece, the common currency has created a new kind of “financial apartheid”. The steps taken are plunging Greece into further indebtedness & discomfort. In fact the decisions are not taken for the benefit of Greece; but for France. To save French banks, Greeks suffer.

By 2020, the Greece debt/GDP ratio will exceed 135%.

Greece is in permanent recession ever since it declared in 2008 that its debt/GDP ratio is 120%.  Now the headlines say that by 2020 this ratio will be 129%! Greece is the only economy that registered a decline of 7% during 2011, when most other economies recorded better growth rates. By 2020, the Greece debt/GDP ratio will exceed 135%, if the economic decline at 7% continues!! The way the ECB and other fellow Eurozone nations treat Greece, that is bound to happen !!

Coming back, what are the negotiators doing? All the so called cuts are sham. There are reports that ECB bought the Bonds of Greece at deep discounts and now wants the value almost at par! Remember this is the European Central Bank and the equivalent of Fed Reserve. Can you imagine Fed Reserve is trying to make money out of the misfortune of a US State?

Currency Union without Political Union is the Joke of the Century

California was a bankrupt state in the US post 2008 Financial Crisis. Since political union and economic union was same, California got breathing space. However, the smaller and weak country like Greece is being stifled by larger players of Europe.

Taking a bold decision, by 2020, the Greece debt/GDP ratio will drop below 90%.

A better option is to follow Argentina of 2001. Possibly, a default in unavoidable!. But the choice of its former currency ‘drachma’ gives Greece much needed economic freedom to devaluate it to such a level where its exports become cheaper! Tourists will flock into the historic and beautiful country, its exports will shoot up in such a manner that the GDP will grow soon. Like Argentina it will be back to normal - by2020. And it will not be saddled with debt and low growth that will make its debt/GDP ratio 129%.

If Greece gets out of Euro by 2020, its debt/GDP level will much better position to the envy of Spain and other countries who still allow their monetary policy hijacked by those in Brussels, Paris and Berlin.

Greece should take a bold decision – Get out of EURO!