The current economic policy implications

The RBI's policy review has not changed any thing other than the perception that inflation is still weighing heavily on its mind and the plummeting growth also now has started to trouble it. The governor has been reluctant to commit with a time line for the reversal of interest rates hikes but has given enough indication that down the line it will have to be done. I see it as a meek approach, he could have well spoken with certainty that the next time it will be moderated.

There is no question that if the demand pull is there, the supply side should be strengthened too and the supply can come in plenty when you have incentivize the investment climate and reduced the costs of operations through availability of cheap finance. This is how the progress comes about. Its not that curbing demand by monetary measures over longer period is the only option , in fact is a wrong thing to do for extended period.

It is also to be understood that the present inflation pressure is due to dilution of currencies all over the world. The US mitigated its woes through printing dollars, the answer to EU's problem lies in diluting the Euro's value. The stronger economies of Europe will have to eventually provide for purchase of debts of weaker nations by creating supply of Euros. This kind of back-door taxation spread all over the economy of Europe can only help, however, it will be something like rewarding the irresponsible economies which are weaker too. We in India resort to this by measures aimed at helping the poorer of the population without being overly concerned but then we a single nation. The Europe now is single currency area but many nationalities. This leaves the scope for not digesting to help the weaker. Europe has to learn to be single entity also politically to be able to address issues having wider implications.

I think that the future for the financial markets and the economies may be fraught with damning possibilities but to let it translate only in terms of cheaper equity is not right. The debt related securities should be supposed to be more at risk if the currency supply shrinks but the equities will still be having value. Reversely if there is expansion of money supply the equities will be ever more desirable assets. The bullion will be a burden in first scenario and welcome the second scenario.

The recent loss of value of rupee viz-a-viz the other currencies tells that now a larger part of India can be bought against a smaller piece of other nations. Suppose there is further extension in this very direction, do you think it would be in any way possible to consider the equation balanced. I think not because India's assets are far more valuable than this equation suggests. So, over time, adjustments will happen and in the mean time Indian exporters will be making hay. India can profit out of exports as the labour is surplus here. If some part of products is imported costlier, the whole of it remains cheaper than earlier but allows Indians to have more work at hand. The govt should look at removing constraints in manufacturing and should amend the labour laws and improve the taxation structure without loss of time. VAT regime should be made universally applicable for freer movement of goods within the country and allow for producers to optimise the production levels and achieve economies of scale. Cheaper per unit production cost will make us still more competitive in international market. China's achievements in the past have been due solely to this situation ie cheaper Yuan, optimal production level and lesser legal compliance burden and no such corruption that hinders production...kbk

Reasons to remain in equity

The economic scenario has remained fluid and no rational assessment was possible due to concerns having roots overseas. Only the basic strength of Indian economy and more particularly the bigger Indian corporates gives me courage to tell you once more that equity investment is a better option and hence you should be more inclined to keep your funds in equities in accordance with your age and risk profile. This means that the younger of you may remain in equity pocket as younger people have longer period for letting the investment fructify.

It may seem to you that right when the interest rate is going up I have been telling you what I told above. I need to explain to you the situation and the main points guiding me have been the following :

A) the RBI has been busy raising the Repo and Rverse Repo rate due mainly to address the inflationary situation. They have done it lastly today itself by 25 bps and the Repo and Reverse Repo stand at 8.5pc and 7.5pc while the CRR has been kept unchanged at 6 pc. In my vew the rate increases in medium term do not adversely affect the corporates. The possibility of readjustment right after the moderation of inflation leaves scope of good appreciation in equity prices. You may well appreciate that while rates have been going up the collective performance of corporates has still shown positive growth over the past quarters since the rate hikes have been taking place.

B) the market is flat since Oct 2007 ie it stays at the same level now as was the level in Oct 2007. But, the important point is that the sales have nearly doubled , the profits have also nearly doubled while the Price to Book Value ratio has come down under 2.9 from above 4 in Oct 2007. Typically the net-worth of companies acts as support for Indian corporates as the this counters inflation in a beautiful way. This should be understood against the back-drop of Indian economy's still nascent state which has an enormous room for growth given the demographic advantage and the ever increasing proportion of population actively participating in recountable economic activity. This ensures robust GDP growth for some more time to come besides making capital as more precious asset than bullion etc.

C) it has been observed that the Indian equities go up in geometric progression after a long period of lull (extending beyond four-five years). This is partly due to lack of depth and partly due to design by some market participants. In view of this those who miss the bus don't have any safe chance of boarding it later. So safety lies in remaining invested in equities at the moment and being prepared to see some temporary dilution of values which may happen due to some developments in world markets or some precipitate govt action. Being ready to forego the interest earning is another aspect but it gets neutralized due to the nominal returns on equities being the same as the bank interest (it means that since the PE ratio at present is under twelve the nominal return on investment remains at over eight percent)...kbk

4 Basic Elements of Stock Value

The ancient Greeks proposed earth, fire, water and air as the main building blocks of all matter, and classified all things as a mixture of these elements. Investing has a similar set of four basic elements that investors use to break down a stock's value. In this article, we will look at the four ratios and what they can tell you about a stock.

Earth: The Price-to-Book Ratio (P/B) Made for glass-half-empty people, the price-to-book (P/B) ratio represents the value of the company if it is torn up and sold today. This is useful to know because many companies in mature industries falter in terms of growth but can still be a good value based on their assets. The book value usually includes equipment, buildings, land, and anything else that can be sold, including stock holdings and bonds. With purely financial firms, the book value can fluctuate with the market as these stocks tend to have a portfolio of assets that goes up and down in value. Industrial companies tend to have a book value based more in physical assets, which depreciate year after year according to accounting rules. In either case, a low P/B ratio can protect you - but only if it's accurate. This means an investor has to look deeper into the actual assets making up the ratio.

Fire: Price-to-Earnings Ratio (P/E) The price to earnings (P/E) ratio is possibly the most scrutinized of all the ratios. If sudden increases in a stock's price are the sizzle, then the P/E ratio is the steak. A stock can go up in value without significant earnings increases - this happened most recently in the tech bubble - but the P/E ratio is what decides if it can stay up. Without earnings to back up the price, a stock will eventually fall back down. The reason for this is simple: a P/E ratio can be thought of as how long a stock will take to pay back your investment if there is no change in the business. A stock trading at $20 per share with earning of $2 per share has a P/E ratio of 10, which is sometimes seen as meaning that you'll make your money back in 10 years if nothing changes. The reason stocks tend to have high P/E ratios is that investors try to predict which stocks will enjoy progressively larger earnings. An investor may buy a stock with a P/E ratio of 30 if he or she thinks it will double its earnings every year (shortening the payoff period significantly). If this fails to happen, then the stock will fall back down to a more reasonable P/E ratio. If the stock does manage to double earnings, then it will likely continue to trade at a high P/E ratio. You should only compare P/E ratios between companies in similar industries and markets.

Air: The PEG Ratio Because the P/E ratio isn't enough in and of itself, many investors use the price to earnings growth (PEG) ratio. Instead of merely looking at the price and earnings, the PEG ratio incorporates the historical growth rate of the company's earnings. This ratio also tells you how your stock stacks up against another stock. The PEG ratio is calculated by taking the P/E ratio of a company and dividing it by the year-over-year growth rate of its earnings. The lower the value of your PEG ratio, the better the deal you're getting for the stock's future estimated earnings. By comparing two stocks using the PEG, you can see how much you're paying for growth in each case. A PEG of 1 means you're breaking even if growth continues as it has in the past. A PEG of 2 means you're paying twice as much for projected growth when compared to a stock with a PEG of 1. This is speculative because there is no guarantee that growth will continue as it has in the past. The P/E ratio is a snap shot of where a company is and the PEG ratio is a graph plotting where it has been. Armed with this information, an investor has to decide whether it is likely to continue in that direction.

Water: Dividend Yield It's always nice to have a back-up when a stock's growth falters. This is why dividend-paying stocks are attractive to many investors - even when prices drop you get a paycheck. The dividend yield shows how much of a payday you're getting for your money. By dividing the stock's annual dividend by the stock's price, you get a percentage. You can think of that percentage as the interest on your money, with the additional chance at growth through the appreciation of the stock. Although simple on paper, there are some things to watch for with the dividend yield. Inconsistent dividends or suspended payments in the past mean that the dividend yield can't be counted on. Like the water element, dividends can ebb and flow, so knowing which way the tide is going - like whether dividend payments have increased year over year - is essential to making the decision to buy. Dividends also vary by industry, with utilities and some banks paying a lot whereas tech firms invest almost all their earnings back into the company to fuel growth.

No Element Stands Alone P/E, P/B, PEG, and dividend yields are too narrowly focused to stand alone as a single measure of a stock. By combining these methods of valuation, you can get a better view of a stock's worth. Any one of these can be influenced by creative accounting - as can more complex ratios like cash flow. As you add more tools to your valuation methods though, discrepancies get easier to spot. From the Greeks' four basic elements, we now have more than 100, some of which exist so briefly that we wonder if they count, and none of them are named water, earth, air, or fire. In investing, however, these four main ratios may be overshadowed by thousands of customized metrics, but they will always be useful stepping stones for finding out whether a stock's worth buying.
 
by Andrew Beattie

Andrew Beattie is a managing editor and contributor at Investopedia.com. He operates the Wandering Wordsmith blog. Courtesy: Investopedia

Salute to Anna

Anna is second Marattha after Shivaji who shook Dilli. The satraps in Delhi wanted in every way to some how make the Anna move fail. The parliament has approved with support from all its quarters the demands of Anna which were so far anathema . His movement will be remembered through ages even in the next Yuga or Kalpa. The wily politicians have capacity to scuttle any public demand for clean administration but this time they have had no other choice. In the aftermath many are going to lose their stature like Sibal, Singhvi and Tewari . Salute to Anna and salute to Gandhi and most of all salute to the humble masses ...kbk

Stop misuse of state taxing power

The world is in a sort of turmoil and it is purely man made. We know that the world's basic resources are limited and may remain sufficient to cater to need of humanity if there is right distribution and judicious exploitation. Here lies the need to look back at the socialistic philosophy that had a bad beating towards the end of last century. The crux of the matter is that the mechanisation and automation devised under the break-through in the shere of science and technology have rendered the world's resources very very short of the requirement of feeding the industry.

The technology is no more helping us, it is in fact pushing our world society in stressful times. Such times have come at juncture where some nations have still to taste the fruits of modern production and process and some find theopinionmselves incapable to go beyond the level achieved so far. The financial system adopted by the world's advanced nations have started to back-fire. The post retirement provisions in developed world have put too much pressure while the additional natural resource discoveries have fallen short. The mega machines can deliver any amount of good to consume but feeding such machines is not possible and hence economic order is going out gear. The required balance can be brought back if a thoughtful plan is made with clear conscience by the nations of world in consultation with each other.

The first step has to be that the govts stop accepting to provide any more than the life sustaining income to people in retirement or people out of employment. This level can be different for every country depending on the level of development achieved. The delivery of relief for such sections of population should be in most straight manner and with minimal expense entailed in distributive exercise. The rest of the people should be taxed enough to cover such expenses on the need based basis without any transfer of liability to future or to future generations . This will do away with issuance of public debt paper for this or that. Indebtedness of state will always unduly benefit some and punish some today and also later. The responsibility will also be difficult to fix as who distorted how much and when if the taxing power of the state will be mis-used in the it has been done.

The second step for the order in society is to have limits imposed on individual consumption irrespective of the income generated. This is a difficult area to be looked into but unless it is done the policies will be so manipulated that eventually stressful conditions arrive. It has never been the case the incomes have been earned in proportion to service rendered to society. Much of the incomes earned come due to being at right place at right time or being at the right side of a faulty policy or scheme or by purely conniving deceitfully.

The markets of the world have become positive after the Jackson Hole summit. Bernanke hasn't used the QE 3 tool but has indicated that it remains a tool in his hand if there is need for it later on . I told you earlier and I am telling you now also that the predicament that Europe and US find themselves in can only be tackled by use of quantitative expansion. The regain of health would come when there is no further mis-use of state's taxing power to back the borrowing programmes. I have talked at length in earlier posts about the need to have a world currency that will not be expanded at will and also the need to keep interest rates in line with the market without any overt influence . My basic ideas may not be liked by people as opinions differ but I can assure you that more you would reflect on them more value will be found by you. I say this because what I have been saying for last many years in respect of these matters have not been out of tune with the developments later on ...kbk