Saturday, September 13, 2008

Laymen Brothers versus Lehman Brothers

The entire world is now talking about the Lehman Brothers Inc., which is the latest American Bank to fail. Experts are now discussing how the bank, which boasts itself the cream employees from world best universities, could have failed.

Let, the experts discuss about the Lehman Brothers and the laymen like us may discuss the story of the “Layman” Brothers who have also failed recently in our Indian markets. Layman is nothing but the person who lives in the heart and soul of every retail investor of India. The “Layman” comes out as a new “Avatar” just before the market is going to peak out. His brother is “Expert” who lives in the brains of Analysts (both Indian and Foreign), Panelists, Investment Bankers and News Papers/ News Channels. This is the story of the latest “Avatar” of “Layman”

Original Lehman Brothers

Our own Layman Brothers

The story of Layman Brothers

Once upon a time, a ‘Layman’ lived in India. He was following the stock market for quite some time without having invested in it. He wanted to earn from the stock market boom but always having fears of losing.

One fine day (early 2007) he decided to seek the help of his brother who is an ‘Expert’ and a living encyclopedia.

That point of time, entire world was discussing about “Yen Carry Trade” and so the Expert too. He explained Layman in detail about the vicious cycle of funds flow from one part of the world to another part and winding up of such fund flow is dangerous to Indian markets. He further asked the Layman to closely track the JPY-USD trade. Simple funda: If JPY appreciates our market will fall and vice versa. Layman was just wondering why he should not track INR-USD. But he didn’t ask because the person who told him to track was an “Expert”

Also came in, Subprime crisis. Mr. Alan Greenspan warned the world about the Subprime Crisis. Expert started analyzing the Balance Sheets of NYSE (New York Stock Exchange) listed Companies forgetting our own NSE listed Companies. Expert explained the Layman in detail about Securitization CDO, MBS, ARM, Credit Squeeze, Monoline Insurance, etc and etc. He also told that entire world would have problems because of housing crisis in US. Layman did not understand much about the terminology given by the Expert and whatever he knew was just that the tiny piece of land he had bought near his “Halli” was having good appreciation on paper within a short period of time from his purchase.He was wondering whether Subprime crisis would impact the paper appreciation of his tiny landholding. Layman started reading high-end financial magazines and tried to learn how to escape from such crisis. He could find no answer. Still, he was happy that he was too becoming a market player.

Till that point of time, Layman had not started to invest in equity markets. Expert was always telling bad things about the Indian market. He had given multiple reasons. EPS, P/E, Historical P/E, Comparison between BRIC countries (India was the costliest market then), infrastructure bottlenecks, political weaknesses etc and etc. Layman started wondering whether he could ever make any investment in the Stock Market, which never stayed at lower levels for longer period of time that was enough to make any investment decision.

Suddenly one fine morning (August 2007), Layman got a tip from a “taxiwala” about a fundamentally strong penny stock, which could give many folds returns. This time Layman ignored Expert's advice and invested a small amount himself on an experimental basis. From the next day onwards, the stock was always on upper circuits, Our Layman got excited and started looking for tips from every corner. He was also passing the tips to other laymen as well as to our own Expert. This point of time (December 2007) our market was firing on all cylinders whereas western markets were crumbling down because of Subprime crisis.

Now, Expert had to give up his own inertia and he had to concur with our Layman. He told Layman. “No need to worry. Subprime Crisis means cutting of interest rates in US, which will increase fund flows to India and take the markets further up”. Layman continued to invest on tips.

Expert had also devised a new “Decoupling Theory”. India is long-term story. Indian market is a structural bull market. India will become a developed country by 2050 (Layman started wondering what would be his age by then if at all he be alive then). Expert applied various technical and fundamental studies to discover that Sensex would reach 54321.09 points by 12.March.2045.

Every day, Expert discovered new hidden gems from small and midcap sector and termed them as multi-baggers. (For a brief period, Layman also became an Expert himself and started discovering hidden gems on his own).
There is a different story, which tells Layman became a multi-beggar after having invested in such multi-baggers. Expert analyzed the saving pattern of Layman and found that the equities form lesser part. Expert told Layman to invest 80 minus Layman’s age percentage of his savings in equities. Layman was now die hard to increase his equity holdings to maximum possible level. Never mind to borrow and invest.

Decoupling gone. Coupling came. Our markets started tumbling down (late January 2008). Initial Reaction from Expert was that the correction was due to some technical problems (margin issues and liquidity crunch due to Reliance Power IPO) and strong Indian fundamentals remain the same. Layman was complaining that he was not allowed to buy any stock, which he liked, and also available at damn cheap price because of technical snag happened at the broker terminals and stock exchanges. After the technical snag is over, Layman started to pick the stocks at damn cheap prices (10-20% lower than the peak levels). He was happy that he was entering the market at the right time and right levels. He started dreaming what he would do with the returns going to be generated in the next few years. For some time, he was in heaven.

Bear Stern came then (March 2008). Market crashed and the stocks crumbled. But Layman was unperturbed. Layman was wondering he should have more money to pick the stocks, which became further cheap. It was Expert’s turn to advise Layman to closely follow global market trends. Layman started gluing to News Channels throughout the day and night. Layman used to get up from bed with Nikkei in the early morning, have coffee with Kospi and read newspapers with Hong Seng. Layman had lunch with European markets and dinner with US markets.

Then came again decoupling but again on the wrong side. Global markets became stable whereas we continued to tumble down. Now it is the Expert’s turn to discover that FIIs are going out of India and entering into producer countries such as Brazil, Russia etc.

Along with earlier woes came, Inflation worries. For some time Expert was maintaining that inflation is going up because of “Base Effect”. Suddenly Inflation numbers jumped into double figures.

Expert visited vegetable shops, groceries and other stores and discovered that prices had already gone up.

American experts went one step ahead and said that the commodity prices went up (internationally) because Indians were eating more.

Expert declared that this was only a supply side problem and nothing to do with the demand side. Government has to remove the infrastructure bottlenecks and there was no need for increase in the interest rates. Layman too believed Expert’s thesis.

Federal Reserve Cut rates whereas RBI increased rates. Layman was clueless.

Expert maintained that Indian inflation is a supply side problem and asked the Layman to follow monsoon data that too for the “Agriculturally important states like Maharashtra, Andhra Pradesh and Karnataka”. Laymen started following weather reports.
As a result Layman went with Rain Coat and Umbrella on sunny days and without any protection on rainy days. Layman caught “cold and cough” and got a name “idiot” from his wife and other friends.

In the mean time, Layman was confused by the various government authorities giving different dates (right from October 2008 to March 2009) on which the double-digit inflation would become a single digit inflation. Interest rates hardened. He was wondering for the first time about the cost of funds involved in holding the investments, which have already depreciated by over 70-80%. Expert did not lose his heart. He maintained that Equities were best asset class in the times of inflation.

Expert later discovered that Indian inflation is”Imported Inflation” as International Oil prices are the main culprits for Indian inflation. Layman started wondering how it is so, as the Indian Government is not passing much of the international price rise to Indian customers. Even at this point of time, Layman dare not question Expert’s wisdom.

Many things happened in between, 1-2-3 agreement, survival of the trust vote of the central government, derivative woes of Indian Corporate, NSG approval of Indo-US Nuclear Deal, US Banks getting closed, IIP data, CPI , WPI, P-Notes etc and etc. Layman became a master of all and jack of none.

For every rise of 200 points (Sensex), Expert gave new targets 18,000, 20,000 and 25,000. For every fall of 200 points, Expert gave targets 13,000, 12,000 and even 9,000. Layman had not worked this much mathematics even in his school days. Layman started to sleep with a calculator.

On the global side too, Expert had earlier told Dollar was weakening against Euro and other major currencies because of slowing down of US economy. Now the same Expert has started telling Europe slow down is worse than USA and hence US Dollar strengthens against other currencies.

IT companies derive major part of their income from US and other western countries in terms of Dollars. Expert advised Layman to buy IT stocks as Rupee is weakening against Dollar. Later Layman found where is the question of more rupees when there is no Dollar to come in as there is an overall global weakness. Now it is Expert turn to discover the same and tell to sell IT stocks. Layman is wondering now whether to Buy Low Sell High or to Buy High and Sell Low.

Expert told commodities have a life cycle of 15 years, which has started only 3 years back. Still a lot more remains. Gold mines had been closed. No fresh oil discovery since forty years. No major mine discovery for coal, steel and non ferrous metals. Layman invested gold when it was at $1000 per ounce, which reversed to sub $800 levels in no time. Oil came back to sub $100 per barrel. Expert then declared that commodity price fall was good for India as it is a consumer/importer country. Hence, Stock Market should go up only.

Nothing has worked so far in favor of Layman’s adventure into stock markets. For every inch rise, there is a foot fall. To add his woes Subprime Crisis resurfaced and Lehman Brothers failed. Expert immediately revisited the Subprime crisis as the Lehman Brothers’ fall became an issue.Our market started crashing down once again. Expert's latest discovery is that our market is falling as Lehman Brothers are selling in the market.

But, Layman is not having any clue. He has started wondering whether there will be any take over bid for his own investments, from US Treasury Department as it did for Freddie and Fannie. . Now Layman is in a big dilemma whether he could ever sell his stocks in the market with a profit.

However, Expert continues to live happily as ever giving new definitions and discoveries for every rise and fall.

Happy Ending

Now it is left to the Reader to decide what's right and what's wrong with Layman Brothers and Lehman Brothers.


வால்பையன் said...

very nice post,
please give some idea's about trading
my mail

my blog is

Maximum India said...

Dear Arun,

Thanks for the complements.

I visited your blogs. Happy to see such versatility.

You will get various reports on economy and equity markets from hereonwards.

Rohan said...

Your article is really something with a eye towards the common man, will recommend it to my collegues.

'' Must read""

It would be great if you could send me updates on your new articles and also some research.

Best of Luck

Anonymous said...


Ram said...

Very Nice!

Anonymous said...

Hey, liked your article. Especially the way you chronicled the expert comments which ranged from structural bull market, when the Indian Stock market was booming to the allegation that India was eating too much. Nicely written. Good effort.


Maximum India said...

Thank you prithwish for the comments

Anonymous said...

Your blog keeps getting better and better! Your older articles are not as good as newer ones you have a lot more creativity and originality now keep it up!

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