September 15, 2008

A failure a week

First it was Bear stearns, but the US treasury (similar to our Finance ministry) and the Fed (similar to our RBI) engineered a bailout. Bear stearns, an investment bank was bought out by J P morgan, a commerical bank, in March. This bailout was done to calm the markets and reduce systemic risk.

Well, next in line were
Freddie Mac and Fannie Mae which were nationalized (federal takeover) for the same reason last week. Now this week it is the turn of Lehman brothers which seems to be on the verge or ready to file for bankruptcy protection. Merrill lynch, another Investment bank and brokerage, is in merger talks with Bank of america. After Lehman brothers, Merrill lynch seems to be the weakest firm and so it could come under attack.

More companies at risk
AIG, one of the largest insurers has fallen by 30% and is at risk now. So is washington mutual, another large bank. So we have a situation where the credit crisis (acutally bad investments on part of the banks and institutions) is now engulfing the financial system. Finally the S*** is hitting the fan !

We could very well see a domino effect and the US government may decide not to bail out any more companies. We could be in for some nasty times.

What does it mean for us ?
So how does it effect us ? Well if you are into medium to long term investing, not much. Actually the panic could create opportunities for us in india. I really don’t see Indian companies getting impacted (other than IT or export oriented companies due to a possible recession in the US and other economies). The impact for IT companies in the long run should not be too much. However there could a short term impact in companies with a high percentage of revenue in the BFSI segment.

All this mess, makes you wonder what kind of risk our banks and financial services firms are taking. I am repeatedly reminded of this statement by warren buffett

‘When you combine ignorance with leverage you get some pretty interesting results’

12 comments:

VISHNU said...

Hi Rohit,

Market is great..I am finding lot of bargains..Calling my Broker (He infact asked "who is VISHNU ?")..Bid two stocks at huge quantities. Not sure whether is cconfirmed..But one great day....If it further falls..I will keep buying with large quantities

Vishnu

Rohit Chauhan said...

hi vishnu
you seem to be creating a controlling position in the stocks :) ? just joking

i am doing nothing ..expect the market to worsen and i think we will a lot more bargains now ..fear is setting in now

regards

rohit

karthik said...

Hey Rohit,

What impact do you think this crisis will have on private banks like ICICI?.. Is there a chance for them also to fold?

Rohit Chauhan said...

Hi karthik

On the face of it, i think that could be a low probability event. icici is too big to fail ..that said, icici has some CDS and derivative exposure ..so these banks are going to have some marked to market losses (which may be temporary).
however i do have may savings with icici bank and plan to analyse the bank for risk

regards
rohit

Mahesh Kshirsagar said...

Hello Rohit,
I am a fan of your blog. I think there are lots of bargains in the market right now. Interestingly Buffett has been buying something. His cash is reduced to 31 billion from almost 44 billion he was holding for 3-4 years!

amit said...

Rohit what are your views about HTMT Global solutions,they seem to have a huge book value,surplus cash in hand,a book value of 270 and spot closing at 220......also they are giving a dividend of 10 rupees,cudnt quite understand,could you throw some light onto it.

regards,
amit

Rohit Chauhan said...

Hi mahesh
true ..there are definitely bargains in the indian and possibly the US market. buffett seems to have reduced the cash position and it is likely to reduce further in the current turmoil.
amit - i have not looked at HTMT. will let you know once i have a look at it
regards
rohit

Anonymous said...

Hi Rohit,
About Ultramarine & Pigments, you had written in past almost a year ago. that time price was at 70% discount. Do you still see that after one year the valuations are in line with 2007? Also I have sent you the simple valuation sheet for your generous feedback according to that, Approximate Intrinsic value of Ultramarine is around 109 and CMP is at 67% discount to that. Do you still value this stock as Deep Value Stock?

Waiting for your kind reply.
Thanks
Ani

Anonymous said...

Hi Rohit,
I have tried to calculate the Intrinsic value based on the method mentioned in this PDF by Robert Hagstrom. Please have a look here
http://www.sfu.ca/~poitras/BUFFET.pdf

regards
Ani

Amit said...

niit tech has come down to 93. Seems like a good time to accumulate it..BEL is also at 850 levels..Rohit what your views at these level?

VISHNU said...

Rohit,

Good article by MINT on Financial statement frauds by Compnaies..http://www.livemint.com/2008/09/17232942/1200-listed-Indian-companies.html

All the value investors should understand the motives of management before looing at the statements.(Ex Private companies undserstate their revenue /profit and Listed companies overstate their revenue / profit)

Regards
Vishnu

Rohit Chauhan said...

Hi ani
ultramarine has not dropped much in the crash. however their BPO/IT business could come under further pressure.

hi amit
NIIT tech could be affected by the turmoil in the BFSI space ..so their topline could get impacted. that said, i feel the market is overreacting. BEL - i cannot see any link between the credit crisis and BEL ..so it cheaper than before.

vishnu - thanks ..will look at the link ..so did you purchase go through ?

regards
rohit