Saturday, January 03, 2009

Jobs, Stocks and Real estate - A tale of two Valley's

Many comments to my previous post pointed out to the worsening job market with layoffs and hiring freezes the order of the day in the US and India. Its no suprise then that stocks markets in both places have taken a beating anticipating a downturn and restricted credit availability due to lack of credit worthiness. Why will a bank lend 300k to someone whose job in on shaky ground ? Over the holidays I met few friends and we discussed this issues and I heard horror story after horry story on how Indian Hi-Tech engineers who have purchased housing over the past 3 years are well under 200k of their purchase price. Now many of the folks are getting laid of and it is not a pretty sight.

I met another friend of mine who is a manager in a top networking company. He said all across the company they are retrenching contractors and he has lost 50% of this contract staff over the last month. No guesses for figuring out the name of this offshoring company - Infosys. When we add up the loss of revenue for all the retrenched onsite Infosys employees who are billed at $115k but paid between 60-80k, the final number is pretty omnious. Add to that the loss of offshore resources which are retrenched who will swell the bench strength to levels not seen ever. It doesn't take a genius to figure out that the guidance from management going forward will be poor. Based on the drops in marigns I expect we can easily see a drop of 50% in the Infy stock price. Buying an April 09 put at $15.00 for 0.75 cents is probably a worthwhile risk taking play. If one is more risk averse maybe the 20$ put works better.

Its a nobrainer that the stock market in India will take a beating once these numbers are announced. All the suckers who have bought the market thinking the RBI stimulus will boost the economy will again get massacared.

The loss of jobs, leading to the decline of the stock market will logically lead to a drop in real estate. All the RBI rhetoric to lower rates will yield no effect if the job situation is dismal. We have to realise that the Indian bubble was fuelled on the legs of a strong job market and low credit rates. Now the market has lost one of its legs. As the author of the world is flat argued, A housewife in Japan is saving more then average and financing the housing boom in the US which in turn financed the tech industry which financed the offshoring contract shops. With the US housing turning on its back, there is an upheaveal to be felt by all the downstream interconnected companies which in turn has to effect jobs in India and subsequently housing.

All the decoupling morons have been proven wrong and this anecdote vindicates the simplicty with which markets can operate without all the bumbo jumbo math of CDO's

Thanks to anon for posting this video

Barons article on the Indian stock market. Says wait for 15 months. They definitely have a crystal ball

Saturday, January 3, 2009

Why India Won’t Rebound Soon

India’s stock market may look attractive after its massive slide, but there’s probably more pain to come. A host of economic and political challenges could keep a new bull market at bay for more than a year.
FOR THOSE TEMPTED TO WADE INTO THE INDIAN STOCK MARKET with a view to making a quick killing after its massive slide, consider the advice that Punch magazine once gave a person who was about to marry: Don’t.

Although India’s benchmark Sensex has fallen about 55% from its peak a year ago, the market is still not attractive as a short-term investment. November’s terror attacks in Mumbai aren’t even the half of it: The Indian economy, valuation issues and broad political uncertainty all argue for real caution…

“Even as absolute valuations have corrected, India’s relative valuations remain rich,” says Ridham Desai, India Strategist at Morgan Stanley. The market’s price-to-earnings multiple, based on expected earnings for the next 12 months, is 60% higher than that of emerging markets as a group. And its price-to-book ratio is a whopping 72% higher.

India fares no better on the dividend-yield front. The roughly 2% dividend yield on the Sensex pales in comparison to what is available in some of the more advanced economies. The dividend yield for the Australian market, for example, is an eye-popping 6.5%, while most other regional markets offer yields well north of 5%.

Seshadri Sen, Associate Director, Research and India strategist at Macquarie Capital Securities, says that even though the Indian markets are trading at just nine times forward earnings, investors need to exercise caution in interpreting that multiple.

“With all the earnings cuts that we have seen from companies, what appears cheap may not be so,” he says. “We are seeing a fairly sharp slowdown in the economy, but it remains to be seen whether the markets have discounted all the bad news that is in store.”

The Bottom Line:

A new bull market in India may be at least 15 months away, thanks to a host of economic and political challenges.

Here is an article on a AAA rated housing loan which was sold at 10 cents on the dollar

TheHouse.pngMichael Phillips of the Wall Street Journal tells the story of a shack in Arizona owned by a woman who hasn't worked in 13 years that was valued at $130,000 two years ago by a crooked appraiser and mortgaged by a broker who was paid $10,000 in fees and took no loan risk.

Then Phillips tracks the loan through Wells Fargo to HSBC, where it was packed into a mortgage-backed security, rated Triple-A by Moody's and S&P, and sold to, among others, the Oklahoma Teachers pension plan and PIMCO.

Thursday, January 01, 2009

Happy new year and hurrah for 2008

Tis the time of the year to reflect on the year gone by and to plan ahead. As most people will agree 2008 was the year to bury leverage for good. Borrowers with good credit saw rates go up regardless and there were no prizes to be won for being a good kid and being frugual in your livestyle. Everyone got hit pretty bad. The difference being that the prudent investor still can rebound whenever the market turns, however the speculator is bankrupt and will have to restart his life from scratch to recoup the money back lost in the de-leveraging process.

2008 also put an end to the lot of myths about real estate
1. Real estate never goes down. Oops it just did.

2. Black money will support the market. Oops Black money speculators lost heavily in the market.

3. NRI's will come in droves. Oops NRI's lost jobs and returned back with empty pockets thanks to the decline in their 401k's and stock investments

4. Outsourcing will increase inspite of US downturn. Another big OOPS. With the collapse of Wall St. institutions, the need for systems engineering has collapsed as well. Add to that except for the top 4 outsourcing vendors, none can differentiate themsevles in any way and are competing by lowering prices. We all know what happens when prices go down!!

5. Sensex was supposed to hit 25000. Oops it closed at 9600 for 2008. If one takes the closing Sensex of Dec 31st 2005 of 9300, we had a massive gain of 3% over 3 years, annualized at 1% per year. Fantastic achivement by any standards, Dalal Street Einstiens.

As we move into 2009 I'm expecting the following for Indian real estate.

1. RBI will cut PLR to get loan rates to 2004 levels.

2. It is best to buy property nearing completion from investors. There is no point in buying directly from the builder when there are thousands of flats which are held by bleeding speculators.

3. We will see investors dumping flats as their jobs situation worsens. US is going thru major layoffs and that will have an effect on the Indian market was well. Some work will get outsourced but that gain will be compensated by the loss of Wall St business, some of which have closed for good. We will see layoffs and paycuts in the Indian industry in general, IT or otherwise.

4. NRI's who plan to live abroad will dump their holdings in India. It is cheaper to buy primary or investment property in the US with a better rental yield and lower mortgage then to keep their holdings in India. 2009 will bring out all these rats out of their holes.

5. Media will keep proping prices by issuing advertorials. The more research the buyer does the better. If it sounds too good, stay away. If they promise you the moon, you will get to live on it.

6. All the Abdullah's and Bindas Bhai's of India, cannot prevent humpty dumpty from having a big fall yet again in 2009. 2008 was the year of denial. 2009 is the year of acceptance.

To all the readers, commentators, bulls, bears or otherwise Have a Happy, Safe and Prudent 2009. We all learn from the collective knowledge, information and opinions we share. Happy posting.

Monday, December 29, 2008

Outlook money article on the real estate meltdown

A comprehensive article on the state of the real estate industry vindicates what people on this blog have been saying all along. Prices have to fall in line with affordability for buyers to bite. Those who leverage beyond their means will get wiped out. Speculate and Die is the mantra of real estate. Right now the black money operators have been swindeled by the construction companies who have promised astronomical profits but now are facing wipeouts. Unfortunately no one will shed tears for these undeserving and corrupt hooligans.
Wait! Real Estate Meltdown Ahead

“Do deewane shehar mein, raat mein yaa dopahar mein,

Aabodana dhoondhte hain, ek aashiyana dhoondhte hain...”

These lines from the 1977 classic Hindi film Gharonda would, in brief, encapsulate the struggles that most people go through while buying a home, especially so in the last 2-3 years. Residential property prices crashed in the mid-1990s, and it took till 2002-03 for them to start rising again. When they did, however, the progress was rapid. Within a short span of time, the prices had risen so much that the budget buyer, who comprises the bulk of the market, was left out in the cold.

This would possibly have continued had real estate developers not been overtaken by international events of a scale that they could not anticipate. The US sub-prime crisis triggered recessionary forces globally. That, in turn, crashed volumes in the Indian property market to a trickle. “Going forward, the market will remain slow and transaction volumes will remain low,” says Anshuman Magazine, chairman and managing director, CB Richard Ellis South Asia, a realty consulting firm.

For homebuyers though, things are getting better. A correction in property prices is already underway. In the following pages, we try to figure out what you should do if you are in the market to buy or sell, and how to arrive at a reasonable price, give or take a bit, at which to strike a deal.