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Readings: Crash, Reflation, Lewis, RelCapital


The main point now –although I started writing this post in the morning – is that the markets have fallen. In two days, we’ve fallen about 2.5%, from a Nifty value of 5278 to 5150. On the back of a hefty US rise last evening, I thought it was a little surprising, but then most markets are down – other than the Nikkei. The Shanghai index is looking weaker as their government tries to curtail growth, and the Greek bailout of 120 billion euros has made people ask: If this is the story, what happens with Portugal or Spain?

An old article: Michael Lewis on the 15 year old Jonathan Lebed, labelled as a Stock Manipulator by the SEC, but did nothing that is different from what people in the “analyst” industry seem to do. (HT: Shyam)

An excerpt of The Great Reflation (HT: John Mauldin). The more I read about history, the more I realize we don’t learn from it. Each time it’s different but still the same. But if you look back and see, the attitude of cheap money and bailouts started in 1987 and has continued ever since. More in a different essay, but consider this: Flooding the market with money saved some damage in the 1987 stock market crash. Japan was the bailout of gargantuan proportions, where the economy continues to muddle through to this day. LTCM was bailed out in the late nineties, the markets were flooded with money in 2000-01, and then again in 08-09. We’ve had a cheap money run of amazing proportions, to attempt to reflate the global economy. In pockets, we’ve done it. But the effects of moral hazard; those don’t seem to have affected us.

One more point in that article – the Greek bailout is 30% IMF funds. These are inferior to all other greek loans (i.e. they get paid last). That sucks, not just for Americans, but also for India which is now a net giver to the IMF. India has $4 billion in the IMF, though admittedly smaller than America which has $37B.

Reliance Capital announces that it will shift focus to just five verticals – Asset Management, Brokerage, Consumer Finance, Life and General insurance. This would be very blase news, unless you consider that it was revealed on the same day it revealed really crappy results. The consolidated EPS is just 17.63, a 57% drop from last year’s Rs, 41.35. The stock has come crashing from the 742 levels to close at 721 today, but that’s not indicative – the markets have fallen nearly that much.

Bond yields meanwhile continue to fall. The new 10-year benchmark at 7.8% last week has moved to 7.66% today, a yield-drop of 14 basis points which means a bond price rise of about 1%. The old 10 year bond was trading at the 8% levels early last week. Why do we need new benchmark bonds? In this case the old bond matures in January 2010. That’s nine financial years away, since our financial year ends in March. For something 10 financial years away we need stuff that matures after April, therefore the new bond.


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