In your interest.
Online Personal Finance Magazine
No beating about the bush.
At the market peak of 21,000, Vishal Kampani predicted on CNBC that there will be no pullback. The market has crashed by more than 1,700 points after that confident prediction. Why are experts often wrong?
The daily parade of experts on Indian TV channels is more entertaining than enlightening. This is because the experts are often wrong. Most interestingly, exactly like the retail investors, they are often very bullish at the very top of a market rally and extremely pessimistic at the bottom.
The latest example of this is the comment by Vishal Kampani, MD of JM Financial, speaking to CNBC TV18 on 11th November. The channel asked Mr Kampani about his "own call on markets… do you think we still have got headroom out here or do you think we will get capped sometime soon?" To this question, Mr Kampani replied with supreme confidence: "We do have some headroom here. There is 10% upside case very easily possible driven by strong liquidity and global flows."
CNBC asked again, "Are you predicting some kind of a pullback? Is that possible because last time there was a mild pullback in October, which had stopped at 6,000 or just below it?" Mr Kampani was as emphatic and specific about this question too: "I don't expect the mild pullback in the short-term. The flows are very strong - even if you look at the macro-trends across the world, it seemed to be stable. There is obviously a QE2 happening in the US, which increases liquidity by almost $75 billion every month for the next couple of months. So the macro-trends are very strong. The only big risk factor can be China. If China has a significant slowdown - but I wonder what the policymakers can do in China to slow it down."
This conversation was being broadcast when the Sensex was just shy of 21,000. The very next day, the pullback, that seemed impossible, started.
The Sensex was down 432.20 points on the 12th. There was some rally (152.80 points on the 15th) the next working day, but the Sensex fell again on the 16th, an even bigger fall of 444.55.
Buyers simply disappeared. After further bouts of sharp decline, including today, the Sensex is at 19,691.84, a fall of 1400 points (on a closing basis and 1700 points on intraday basis) from the fateful day that Kampani predicted that there will be no pullback.
All this is no reflection on either the channels or on the experts. After all they mean well. And why blame Indian channels and Indian experts? It is the same all over the world.
The point is, "experts" are habitually poor predictors.
There are two reasons why forecasts are often wrong and those two factors often interact to create a bigger error. One, stocks do not follow fixed patterns, which leads to errors and two, the human mind is too prone to emotions while making predictions, especially about something that is uncertain. A million factors influence the market and these factors are ever-changing, leaving even the most experienced investors out of depth at times.
To this if you add typical human frailties like greed, hope, fear etc.; it is no surprise that many top investors and traders with decades of success and experience behind them have suddenly gone belly-up.
Experts have been wrong ever since they have been trying to predict. David Dreman, in his 1979 book Contrarian Investment Strategy, examined the forecasts of financial experts over 50 years starting in 1929. Dreman found that their forecasts consistently, dramatically underperformed. They beat the market just 23% of the time. Dreman gave many stunning examples. Here is one. At the end of 1971, Institutional Investor magazine polled more than 150 money managers in for their top picks. By end-1974, the experts' top 10 picks were down an average of 67%. In February of 1970 in a New York conference, fund managers were polled for what stock they thought would be the top performer that year. The favourite was National Student Marketing (NSM).
From its February high, the shares of NSM dropped 95% over the next five months! At the same conference, the experts said airlines would be the best performer. The airline sector fell by 50% that year.
People love forecasts. The more specific the figure and the more specific the date of occurrence, the more people are hooked. In the highly uncertain world of markets, certainty is a straw they hang on to desperately. This is why newspapers ask "experts" and TV channels poll brokers (of all people) to predict the Sensex next year.
It may be entertaining - but is useless for investment.
The most laughable is the brokers' research announcing short-term "target prices" on stocks. These short-term targets are rarely met but that does not stop the securities industry from continuing with the charade of dishing out these forecasts quarter after quarter because investors like to lean on these "target prices" as an additional confirmation of their purchase. There is a market saying which captures this well. Experts can predict a date. Or they can predict a move. But they can never predict a move by a given date.
Alternately conservative and liberal policies and regulations by the Chinese authorities have resulted in the real estate bubble getting bigger and increasing inflation
Back in June I wrote a column about the Chinese real estate bubble. Recently we know that the Chinese authorities have been tightening, but often we do not know how much and in what ways. Apparently, neither do the Chinese authorities. On November 15, the state media newspaper the China Daily announced that China's four biggest state banks had used up their full-year credit quotas for property developers and would stop extending new loans to them for the rest of the year.
The paper cited a source from the ministry of housing and urban-rural development and quoted several unnamed executives from the banks. For example, one anonymous credit department executive at the Industrial and Commercial Bank of China (ICBC) was quoted as saying, "It is impossible to extend fresh loans to developers."
What is interesting is that the same newspaper printed a story 10 hours later denying the report. China Daily wrote: "China's top four banks rejected reports that they would stop lending to real estate developers for the remainder of the year." So we have a state newspaper quoting a ministry that was quoting an executive from a state-owned bank, which statement was later denied by the same state newspaper quoting information from the same state-owned banks. Is this sloppy journalism or an intentional 'mistake'? My bet is the latter.
The incident says volumes about the real estate boom in China, inflation in China, the government's attempts to control the economy and problems associated with distortions of information.
What is clear is that the Chinese are worried about the rise of inflation. The People's Bank of China (PBoC) said that the reason it raised interest rates was to manage "inflation expectations and consolidating the results of real-estate adjustment policies." And it went on to blame a part of the problem on "loose monetary policies in major economies", meaning the United States.
One of the problems with the Chinese economy is that it is still very much dominated by central authorities in Beijing. These authorities have ironically put their faith in the one thing that the government often disregards: the law. The Chinese government likes to try to control its economy, and specifically the real estate market, with regulations. They should know better.
They have been through this before. Starting in late 2007, the Chinese started to put on the brakes for their property markets. Rather than just raise interest rates, they used regulatory methods, including things like credit ceilings, higher down payments, restrictions on third homes and increasing bank's reserve requirements.
The problem with these restrictions is that they don't really work. During the last bubble, banks were supposed to demand a 40% down payment from families seeking second mortgages, but many turned a blind eye if the loan applicant did not hold another property, even if other family members did. They were also supposed to give loans only if the borrower had a certain size apartment, but they never checked.
When the first regulations don't work, the government pushes the brakes a little harder. They use stronger and stronger restrictions and eventually overshoot. By May 2008 prices had fallen by 30%. And the sales volume in Shanghai was 50% lower than a year earlier.
The Chinese reacted to the crash like all other governments have. They started stimulating their economy with a vengeance. In 2009, the government ordered the state-owned banks to start lending, and lend they did. They lent a record 9.6 trillion yuan ($1.4 trillion) in 2009. If the US stimulus had been on a similar size relative to GDP, it would have been $6 trillion.
This year they reigned in the loans a bit, but not much. Their loan target is 7.5 trillion yuan, but that has almost certainly been exceeded. In September alone, China's total lending-including loans from smaller commercial banks-reached 500 billion yuan, far exceeding a previous estimate of 280 billion yuan. In contrast, in 2008 only 4 trillion yuan ($585 billion) was extended in new loans.
It is not surprising that this wall of money created a real estate bubble. The only real question is why it didn't create more inflation. The answer is that it probably has. The reported inflation is 4.4%, but it could be much more. Food prices are up an annualized 10%, 18 staple vegetables are up 62.4%, ginger is up 89.5% and garlic is up 95.8%. Price controls are being considered.
So, now the cycle is repeating itself. This year the government started tightening in February. Like price controls on food, none of these regulations will work. To try to rein this deluge will no doubt take stronger and stronger measures. The Chinese government is desperately trying to avoid what occurred in 2008, which is why the disparity of information is hardly surprising. But since it is using the same tools, undoubtedly it will have the same result. Unfortunately this time, the effects will reach far beyond China.
Company plans to acquire manganese reserves in South Africa, but poor infrastructure could increase costs significantly, says an official
Manganese Ore India Limited's (MOIL ) plans to acquire vast reserves of manganese in South Africa could prove costly for the company as the country lacks infrastructure and logistic facilities, a senior MOIL official told Moneylife.
"We are in initial stage of talks. Out of 5,000 million tonnes of manganese reserves in the world, South Africa owns 4,000 million tonnes. However, there are problems of logistics, power and infrastructure and the country meets only 20% of the world's requirements even though it has 80% of the reserves. The proposed investments in that country could be costly for us," said the MOIL official.
The company is also eyeing manganese reserves in Turkey and Congo. However, the official refused to comment on the progress of the both countries' reserves.
"The company may also form a joint venture for the acquisitions overseas reserves," added the official.
MOIL Limited, which accounts for about 50% of the manganese production in the country, will launch its initial public offering (IPO) comprising 33,600,000 shares on 26th November. Media reports say that the company is likely to raise Rs1,500 crore through the IPO. The issue will close for institutional bidders on 30th November and on 1st December for retail investors.
The government has not disclosed the price band per share, which is likely to be announced on 22nd or 23rd November, said K J Singh, chairman and managing director, MOIL Limited.
"The government will divest 10% stake in MOIL, while the Madhya Pradesh and Maharashtra governments will sell 5% each. Maharashtra and Madhya Pradesh own 9.62% and 8.81%, respectively," Mr Singh added.
The company is setting up two ferro-alloy projects in separate joint ventures with Steel Authority of India Limited (SAIL) and Rashtriya Ispat Nigam Limited (RINL) to increase the share of value-added products in the company's basket, said Mr Singh. The 50:50 joint ventures will be operational by July 2012, he added.
The joint venture with SAIL will be located at Bhillai and have capacity of 1.06 lakh tonnes with an investment of Rs400 crore, while the RINL joint venture will take about Rs200 crore investment and have capacity of 57,000 tonnes.
The company intends to increase production capacity from 1.1 million tonnes to 1.5 million tonnes as demand from steel sector, the largest consumer of manganese, is growing rapidly, said the company.
IDBI Capital, Edelweiss Capital and JP Morgan are the managers of the issue.