World
Pre and post effects of US Fed policy decision
Being a widely expected event, the increase in interest rates by the US Fed has already been factored in by the markets. Still, it would be interesting to find out if the US Fed will take into account the Chinese monetary action in its policy announcement
 
As legend has it, the iconic banker, JP Morgan, was once asked for guidance on the stock market by a young investor, still wet behind his ears. After considerable thought, he is famously said to have remarked, with a grave face “it will fluctuate”. The story is probably apocryphal but the problem is real. No one knows in which direction the market will move nor do we know why, although post facto rationalisation is bread and butter for many people who prefix Analyst, Fund Manager or Portfolio Manager prior to their names.
 
Stock prices usually reflect three parameters like fundamentals or corporate earnings, liquidity and sentiments. Although stock prices do go ahead of fundamentals and, as the last financial crisis showed us, they can do so significantly; eventually, over long periods, corporate earnings and stock prices move in tandem. Performance of the economy and of the corporate sector is a key determinant of stock returns. 
 
In India, over the past 10 years, stocks have returned approximately 15% annualised.  Corporate earnings have also grown at more or less at the same rate. However, there is absolutely no correlation between earnings and stock returns over relatively shorter periods. In 2010, for example, while earnings did not grow much, stocks rose by about 81%.    
 
One of the key features of the last decade has been that the global economy has been awash with liquidity. This has been primarily due to high savings in countries like China, Japan and the oil producing countries. This liquidity was substantially boosted by the accommodative and liberal policies of central bankers – initially the US, later joined by Japan and European Central Bank (ECB). 
 
Sentiments comprise the third leg of the trinity impacting stock prices. Quite like a beautiful young mind, sentiments are very fickle and we have no idea which way they will turn. Although, their impact is likely to be ephemeral, during this short period, sentiments can negate the impact of fundamentals as well as of liquidity.
 
Why the above is relevant is because of the interplay of fundamentals and liquidity currently taking place in the US and quite naturally, its impact on the rest of the world. Economic theory tells us that the first, and foremost, response to a recession must be the availability of sufficient liquidity. This is exactly what the US Federal Reserve (US Fed) did in response to the severe crisis of 2008. It reduced interest rates drastically, pumped in money by purchasing bonds and opened up its windows for anyone willing to borrow against collateral. Undoubtedly, this succeeded in limiting the impact of the crisis, which would have resulted in a far more severe recession, possibly a depression, but for the liquidity enhancement by the US Fed. 
 
This policy of easy money, popularly termed quantitative easing, or QE, has run its course now. The US Fed is widely expected to increase interest rates for the first time in nearly a decade during its next policy review on 16 December 2015. The reversal has the potential to destabilise financial markets not only in the US, but globally. In some ways, being a widely expected event, the increase in interest rate has already been factored in by markets. However, the impact of such significant events can never be predicted accurately and we may see significant churn in the market. Bonds, which have enjoyed a good run over the last few years, may see a drop in prices, as may stock prices. The increased level of consumption in the US, which was based on high asset prices induced demand, may shrink leading to lower possible growth. Money may move out of emerging markets creating instability in both the economy and the markets. Merely a hint of such reversal, hidden in garbled Fed wordings in September 2013, had led to significant instability in emerging economies. 
 
A significant determinant of the response would be the guidance the US Fed provides about the future and the possible pace of increase in interest rates. The US Fed has predicated reversal of QE on performance of the economy, most critically, the growth rate of national income and unemployment rate. Weak growth will slow the reversal. However, if there is evidence that growth is back on track and back for good, the US Fed will increase interest rates faster over time.
 
What this implies is that we will either have a poorly performing economy with low interest rates and easy money supply. Alternatively, if the economy is expected to perform well, the interest rates will go up and the era of easy money will be over. For the markets, it is a choice between the devil and the deep sea. We had earlier mentioned fundamentals of the economy and liquidity as two parameters impinging on the stock markets. Quite clearly, we can have either one or the other being favourable but not both in the coming years. 
 
For the US Fed, this is uncharted territory since the world has never witnessed the extent of easy money policy pursued over past few years. Arguably, the severity of the crisis demanded extent of the response. But, the reversal of the policy will test the acumen of the US Fed, which must ensure that it is as painless as possible. This is easier said than done since the world has no prior experience in this regard. Economic theory is of little help here, since the impact of various options available to the US Fed cannot be tested in a lab. Theories of economics can only be applied in the real world, with consequences that are real. 
 
There are two other factors we need to consider in this regard. Firstly, the ECB and the Japanese Central Bank are likely to continue, may be, and even pursue their monetary easing policy with greater conviction. Deflation is playing havoc with the two economies and monetary easing is one way of combating deflationary forces. This may dilute the reversal of QE by the US Fed.
 
Secondly, China has become an extremely critical piece of the puzzle. Over the last decade, China consistently purchased US Treasury Bonds to prevent its own currency from appreciating. It did not want an overvalued renminbi to affect its exports negatively. It has over this period accumulated about $4 trillion in reserves, although only about 60% to 65% are in US treasuries.  
 
Now however, China does not want its currency to depreciate and is following exactly a reverse policy by selling foreign exchange and buying renminbi. The impact is also exactly the opposite of US Fed QE.  In a sense, China’s selling of US treasury securities has pre-empted the reversal of the QE by the US Fed and increase in interest rate has already been injected into the market. (Information about China is scanty, and often unreliable, but estimates suggest that it has been selling $60 billion worth of US treasuries for the last few months. China is such a big player in the global scheme of things and, quite clearly, it does not shy away from demonstrating its strength). I am not really certain that the global economy can withstand simultaneous tightening by the two largest economies of the world. It would, of course, be interesting to find out if the US Fed will take into account Chinese monetary action in its own policy announcements. All in all, these are fairly interesting times ahead for the global economy and the financial markets. 
 
(Sunil Mahajan, a financial consultant and teacher, has over three decades experience in the corporate sector, consultancy and academics.)

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Ladakh region frozen, biting cold in Kashmir Valley
Leh and Kargil towns in the Ladakh region remained frozen at minus 12 degrees Celsius on Monday while the biting cold continued in Kashmir Valley.
 
"The minimum temperature was recorded at minus 12.2 degrees Celsius in Leh while it was minus 12.1 degrees Celsius in Kargil town of Ladakh region on Monday," an official from the local Met office told IANS.
 
"These two towns were the coldest in Jammu and Kashmir on Monday," the official said.
 
"The minimum temperature in Srinagar city was two degrees Celsius on Monday. It was minus 4.1 degrees Celsius in Pahalgam and minus 10 degrees Celsius in Gulmarg."
 
"The minimum temperature was recorded at 6.8 degrees Celsius in Jammu city and Katra town, 0.6 degrees Celsius in Batote, 0.3 degrees Celsius in Bannihal and minus one degrees Celsius in Bhaderwah town," the official said.
 
The official said rain or snow is likely to occur during the next 24 hours at isolated places in Jammu and Kashmir.
 
Biting cold has been causing problems to the people of the valley.
 
Although the 40-day long period of extreme cold known as 'Chillai Kalan' is still a week away. Beginning on December 21, Chillai Kalan ends on January 31 each year.
 
During this period all the water bodies of Kashmir Valley including lakes, rivers and streams freeze while the roads become extremely slippery in the morning and the evenings.
 
The good thing about Chillai Kalan is that the snowfall replenishes the perennial reservoirs that feed the rivers, streams and lakes in Kashmir during the months of summer.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Associated Journal issuing shares to Young Indian is defrauding minority shareholders: Shanti Bhushan
Shanti Bhushan talks exclusively to Sumeet Mehta on the law of meetings and how directors of Associated Journal misused their fiduciary position for helping Gandhi family to grab control of AJL by undervaluing and issuing shares to Young Indian
 
Sumeet Mehta (SM): As you told me on the phone, your Late Father was a freedom fighter and went to jail on numerous occasions, and as a prosperous lawyer he supported Associated Journals Ltd by buying some shares. How many shares did your Late Father subscribe to? 
 
Shanti Bhushan (SB): My father had five preference shares whereas Jawaharlal Nehru had only three. Each preference share was Rs 100/= whereas each ordinary share was only Rs 10/=.
 
SM: As you stated on the phone, after your father's sad demise, you have not yet transferred the shares in name of his legal heirs (you and your siblings). What is your assessment on timelines to get your name listed in Shareholders' Register so that you can initiate action against the Directors of AJL?
 
SB: It might take a couple of months to get the names of heirs substituted.
 
SM: What is your view on Directors of AJL issuing shares to Young India and what are the reasons why it is illegal and / or unethical?
 
SB: It was in my opinion unethical and illegal and an abuse of their powers by the Directors to issue nine crore shares of Rs 10/= each to Young Indian – a company with only four shareholders Sonia and Rahul Gandhi with 76 % shares and two of their loyalists Motilal Vora and Oscar Fernandes with 12 % each. The Directors are in a fiduciary position with the shareholders and are required to act in the best interest of the shareholders. Associated Journals is said to be having assets worth Rs 2,000 crores in several cities. The debt was only 90 crores. It could have easily sold or even mortgaged any small asset to raise Rs 90 crores to pay off the debt and retain the company and its assets in the hands of its existing shares without hurting them by making them irrelevant and putting all the assets of the company in the hands of four people. This was a totally malafide act of the Directors. Kapil Sibal has said that preference shareholders had no voting rights. Perhaps under this impression they might not have sent any notice of the EGM to preference shareholders. If so the meeting would be illegal and any decision taken therein null and void. Even preference shareholders had the right to vote under Sec 87 as no dividends had been paid for more than three years.
 
SM: You have stated that your family has not received any notice for AGM / EGM of AJL at your residence at Allahabad. Can you elaborate this and share more light on legal implications of this issue of non-receipt of notice of any General Body Meeting by any shareholder?
 
SB: The settled law of meetings is that if a single member has not been given a notice of the meeting it shall become a nullity.
 
SM: How do you propose to initiate action against Directors of AJL and which are the sections of Companies Act, 2013 that Directors of AJL could have possibly violated?
 
SB: A petition may be filed before the Co Law Board for seeking the quashing of the issue of nine crore shares to the co Young Indian.
 
SM: In case Directors of AJL are held guilty for this issue of shares to Young India in a wrongful manner, what are the implications for Gandhi Family, Directors and Shareholders of Young India, and Directors of AJL? 
 
SB: The Gandhis will be deprived of the control of all these assets.

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COMMENTS

Rajendra Ganatra

12 months ago

HILARIOUS!

1. Congress gives loan of Rs. 90 crore to AJL. This is illegal.
2. Though congress can easily recover Rs. 90 crore by liquidating a part of 2000 crore worth of assets of AJL, it doesn't do it. Instead it hatches a criminal conspiracy to help the some folks to gobble up valuable & revenue generating AJL assets.
3. As a part of conspiracy, congress sells Rs. 90 crore loan in AJL to YIL controlled by Gandhis (with 76% shareholding) for a paltry Rs. 50 lakhs through debt assignment. Resultant loss of Rs. 89.50 crore to congress denotes blatant misuse of public money to enrich some folks.
3. Having stepped in the shoes of the lender, YIL swaps the loan for AJL's equity and takes control of AJL's huge income generating assets.
4. YIL is structured as not for profit company as a ruse since it has all the flexibility to use the money without "distributing" the surplus (profit).
5. One can see YIL's "Master details" at:
http://mca.gov.in/DCAPortalWeb/dca/Compa...
It had authorised & paid up capital of Rs. Five lakh on the date of incorporation on 23/11/2010.
6. YIL clearly emerges as a shell formed to appropriate huge assets. Without going into the legality of the transaction, the income tax authority can levy huge tax demand. But that's a smaller issue. The fraud underlying the transaction will invoke CrPC!
No wonder the high court ruling has caused hysterical reaction from some folks!

Jingo

12 months ago

It's a shame that many congressmen have chosen to be nothing more than stooges of gandhis.. People of india need to wake up to the reality that this country and its citizens have been deprived of basic human rights for pretty much all of last 300 years..first underwriting and then under Gandhi/ Nehru family.. Not that the BJP has done its image any good by not properly developing the states ruled by it. For instance, I am not sure what's the difference, as far as mumbai is concerned, of the time when Cong-Ncp combine was ruling and now when BJP Shiv Sena combine is ruling..

Coming back to the AJL case, the blatant efforts by gandhis to deflect attention from their wrong doing by claiming political vendetta is worthy of treated as toilet paper.

I believe that the present dispensation has to fast track the cases involving politicians so that public comes to know if everyone 's misdeeds.

Meenal Mamdani

12 months ago


The lay public which does not understand finance or legal matters is dependent on the reputation of the person opining to decide whether what he is saying is valid. In this case, Mr. Shanti Bhushan has a stellar reputation so one trusts his opinion.
But, the reporter should help the lay public understand the issues involved by explaining the matter in clear easily understandable language; namely what is wrong in this action, what should have been done, the gravity of the offense committed, and whether it is justified to call people to court to resolve this matter.
Why can't a person depose under oath in the convenience of her/his office and the deposition submitted as evidence?
If the judge needs to cross examine the person, then it would be reasonable to ask her/him to be present in court.
Otherwise this smacks of harassment.

REPLY

Rajesh Kumar Singh

In Reply to Meenal Mamdani 12 months ago

That's not how the criminal cases are prosecuted in India. Personal appearance is critical. It means the accused is submitting himself/herself to judicial scrutiny. This is not a case filed by the state. The matter actually should be taken up suo-moto by the SEBI. AJL is a public limited company. Subramanian Swamy is not an investigator or a prosecutor. So, even the investigating and prosecuting authority has to be determined and the court has to take a view in the matter. In the mean time SEBI must begin investigating the case.

Gopalakrishnan T V

12 months ago

What is the role of SEBI in such matters? Is it not supposed to protect the interests of share holders by ensuring that the Companies involved act as per the laws of the land and the all share holders interests have been legally and financially protected? Any way the Herald case is an interesting one and the shareholders get an opportunity to understand their rights.

manoharlalsharma

12 months ago

Interesting subject to study to long term share holders , buying as mothers' safe gift and all equity inverses also to learn by the given instance.

TIHARwale

12 months ago

“In its judgment… the High Court has held that no question of criminality, even on a prima facie basis arises at this stage. Paragraph 36 of the judgment says ‘It needs no reiteration that this is not the stage to even prima facie opine that the ingredients of any of the alleged offences exist to justify putting petitioners on trial or not. Any observation made in this regard by the trial court or this court shall have no bearing when the case of the petitioners is considered at the charge state’. if this is indeed the position then the trial court judge who accepted the plea of Dr. Swamy need to made accountable for her action of summoning Sonia and others. Shanti Bhushan may share his views on the above.

REPLY

Rajesh Kumar Singh

In Reply to TIHARwale 12 months ago

The HC could not have taken any other view than this. It cannot determine the culpability. The trial court has to do that. HC will take a view after the judgement of the trial court. That was the process the trial court was following when it was stopped from doing so. The trial court was within its rights to summon Sonia and insist on a personal appearance. Summon is a summon and not an indictment. There are a whole lot of issues involved. The investigating and prosecuting agency has to be determined. Subramanian Swamy is neither an investigator nor a prosecutor. In my view the Trial court should initiate the process of seizing and sealing the documents at AJL, Congress Party, ROC, etc. It should debar the directors of AJL from taking any decisions until the pendency of the case. This is a good case and brings to the fore the serious issue of defrauding shareholders and investors by the Board of Directors by its malafide actions and decisions.

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