Giant Robot....my favourite childhood show :-)
Wednesday, February 25, 2009
Some "Lead indicators" to predict Economic Performance:
1) Bank Credit Growth: Increase in Bank Credit Disbursal can indicate a future increase in the GDP, since this credit will be used for higher production, etc. According to an ICICI report, this parameter leads the GDP growth by 2 quarters.
2) Baltic Dry Index: It captures the trade that happens through the sea route (& since most of this trade is Raw Materials, it can give a lead indication of the GDP growth.) I don’t know by what period this parameter will lead the GDP growth, but it will obviously be dependent on the Average Lead time for converting these raw materials into finished goods.
A "Lead indicator" to predict Stock Market Performance, based on GDP:
1) M-cap to GDP ratio: This estimate is a popular method of looking at whether the markets have bottomed out or not. As a rule of thumb, it is believed that when market-capitalisation to gross domestic product (GDP) ratio goes above one, the equity market starts getting attractively valued. “For instance, the average m-cap to GDP ratio for Sensex has averaged between 45-48% and in December 2007, this ratio was 1.78 and the rest is history,” says Bagchi of ICICIdirect.
Will kp on updating this, if i am able to maintain interest in it :-)
Came across this article, after a few days of writing the above post. This article seems to corroborate one of the above lead indicators:
Banks' health key to pick-up in world eco: David Buick
Published on Tue, Mar 17, 2009 at 17:11 , Updated at Wed, Mar 18, 2009 at 10:51
Source : CNBC-TV18
David Buick, Partner at BGC, sharing his views on global market concerns, said, �The whole key to the kingdom, as far as everybody is concerned, is the health of the banking sector. When that improves, I think you will find that the pick-up in the world economy improves correspondingly quickly.�
Buick said there might be one more sell-off before a positive push towards the end of 2009 is seen.
Here is a verbatim transcript of the exclusive interview with David Buick on CNBC-TV18. Also see the accompanying video.
Q: In these four-five days, the markets have had a very positive reaction. But do you believe the underlying economic situation has changed to an extent where we can say we can leave everything behind and expect the markets to continue on a roll?
A: No, I don�t. I don�t think there is always a natural correlation between stock market behaviour and economic behaviour. One thing we have got in the last few days is a very positive comment by [US Federal Reserve Chairman] Ben Bernanke to the degree that he believes that the recession in the US could be nearly over by the end of the year and that, in 2010, there will be some growth.
Then, of course, we have had some indication from the G-20 meeting that the mood is to deal with the toxic asset situation, as well as introduce quantitative easing in the US. This, together with the fact that there is some evidence over a theory in the UK and in Europe, that banks are beginning to lend again and also that the commercial bond markets improving, has improved sentiment.
But we do know that there are huge problems in the next few months, for instance, the auto industry in the US or unemployment in the UK. The unemployment scenario in the UK is going to hit two million tomorrow and will probably be up above three million by the end of the year.
So, the general situation, as you normally find equities a little ahead of economic activity, we feel that the underlying tone is quite good. But there may be one more sell-off before we see a very positive push towards the end of 2009.
Q: What you are saying is that the credit seizure has gone out of the market and perhaps we are starting to see the capital market system work again. But what about the fact that we had a bull run in real estate, commodities, equities, together and there has been a massive destruction of wealth? What happens to that kind of money coming back, investors coming back? How much of a lag is that?
A: I think it is a very similar lag. I think it is probably three months behind. But there is still � despite the most appalling erosion of wealth � quite a lot of money waiting in the wings. We genuinely believe that this will actually find its way back in the market. We need to see a little bit more in terms of Tim Geithner, the US Treasury Secretary, agreeing to a sensible plan for the bank bailout with the Congress, which he is yet to do, and he is three weeks behind schedule.
This is a very complicated issue. But the whole key to the kingdom as far as everybody is concerned, is the health of the banking sector. When that improves, I think you will find that the pick-up in the world economy improves correspondingly quickly.
1 more article published in Economic Times on 30th Mar 09, high-lighting the following 2 lead indicators of Equity markets:
1) Dividend payout by companies
2) Yield on Govt bonds (Inversely proportional relationship)
"Around a year back, we at ETIG had devised a simple and more intuitive way of estimating the right market level –tracking trends in the dividend payouts by companies. The historical data suggests that the movement in benchmark indices closely follow the long-term trends in dividends , albeit with a lag. This should not be surprising. After all, the prevailing stock price is nothing but the current value of all future dividend payouts by the company. Whenever the Nifty trendline overshoots the dividend line, it declines to close the gap and vice versa. This happened during the dot-com bust of 2000, the stock market crashes of May 2004 and June 2006. And whenever dividend outgrows index, the Nifty catches up albeit with a lag such as was the case in 2003 and 2004."
"The above prognosis is supported by various macro and non-equity indicators. One of the most obvious is the yield on the government bonds, which is currently on an upward curve. The government has announced plans to auction bonds worth a whopping Rs 240,000 crore in the next six months. Such a heavy borrowing programme will not sail through at the current interest rate levels. The government will necessarily have to juice up its bonds offering with higher yields. This will have a cascading effect on the entire economy, including the stock market. If the borrowing costs of the best borrower in town go up, the interest rates applicable to corporates and individuals will just shoot up. While this will raise India Inc’s interest payments and lower profitability, it will further diminish the demand for interest rate sensitive products such as passenger cars, commercial vehicles, high-end consumer durables and housing. All this is negative news for the equity market. Anyway, there is always a negative correlation between interest rates and return on equities. Being a risky asset, equities thrive in an environment of low interest rates and easy money."
Here's 1 more article on the Lead Indicators of the economy (courtesy: economic times)...Here they are tracking "new orders less inventories", which i think can be linked to the "Baltic dry index" indicator...
Goldman economist sees signs of US gloom lifting
2 Apr 2009, 0641 hrs IST, REUTERS
CHICAGO: The US economy is showing the first signs in months that it could be getting ready to crawl out of a long recession, the top economist
at Goldman Sachs said on Wednesday.
Jim O'Neill, Goldman's head of global economic research, said among key leading indicators, the measure of "new orders less inventories," derived from the Institute for Supply Management March factory report was a bright light.
That data point is included in Goldman's monthly "Global Leading Indicators" index. At +9 in March, against -0.7 in February, it was "the best sign for a few months that the severity of the US recession might be easing," O'Neill said while giving a presentation to the Chicago Council on Global Affairs.
Goldman Sachs' current forecast is for the US economy to shrink by 1.3 per cent in 2009 before growing by 2.8 per cent in 2010. O'Neill said he looked for the Federal Reserve to keep up its "aggressive" measures to turn around financial conditions damaged by the credit crisis that started in 2007.
"And I think if those things don't work, they will do more," he said, quipping that the moves could include "hiring the helicopters and dropping money from the sky."
China last month proposed a sweeping overhaul in the global monetary system, suggesting the U.S. dollar could eventually be replaced as the world's main reserve currency by the IMF's Special Drawing Right. O'Neill, acknowledged as one of the world's top currency analysts, said such a "radical shift in the role of the dollar" was not "close."
China's idea will be most interesting if it is paired with more flexibility in the rate of its currency, the renminbi, O'Neill said. "If it isn't, it's not of much use at all."
The current situation of 1 of the above lead indicators:
Business Daily from THE HINDU group of publications
Thursday, Apr 09, 2009
Bank chiefs see tough year ahead; bad debts may go up
‘Credit growth likely to slip to 18% this year’.
Large number of accounts are being restructured to cope with recession
Net Interest Margins are likely to fall steeply in the fourth quarter
Mumbai, April 8 The year ahead is going to be tougher than expected for the banking sector as banks grapple with slowing credit growth, rising delinquencies and declining margins.
This was the message conveyed by bank chiefs in their consultative pre-credit policy meeting with the Reserve Bank of India Governor, Dr D. Subbarao, here on Wednesday.
Talking to reporters immediately after the meeting, Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India, and Chairman, Indian Banks’ Association, said that credit growth will get moderated this financial year.
The credit growth in 2009-10 could at best be 18 per cent as against 27-28 per cent in last fiscal, said Mr M.V. Nair, Chairman, Union Bank of India.
Analysts have also been predicting a lower credit growth in the current fiscal. Broking firm, Angel Broking in a recent report said, “We expect credit growth to go down in FY2010 to 15-17 per cent as fresh investment demand becomes less forthcoming.”
The meeting was called to gauge the outlook for the year and to seek bankers’ feedback.
Bankers said a large number of accounts are being restructured following the RBI advice to help borrowers to cope with the recession. Although this could provide a temporary relief, rising delinquency continues to remain a serious concern.
The NPAs will go up this year as asset quality will be a problem. If there is a further downturn in the economy, it will affect the bank’s asset quality further, Mr Narayanasami said.
Bankers also apprised the RBI that Net Interest Margins (NIM) are likely to fall steeply in the fourth quarter of the just ended fiscal because of the high funding costs. Although deposit rates started coming down in mid-February, they are still high and will continue to ease slowly. However, as the impact of the cut in benchmark prime lending rates is immediate, this has put pressure on NIM. Therefore, further BPLR reduction may not happen for some time, said bankers.
The interest rates and subsidised interest rates cannot come down further, Dr K.C. Chakraborty, Chairman and Managing Director, Punjab National Bank.
Although the RBI has not directly told banks to cut lending rates, there is enough signal from the current repo and reverse repo rates, said Mr Narayanasami.
“It is in the banks’ own interest to bring down lending and deposit rates. They are trying to bring down their cost of funds. More banks will cut their deposit rates in the next fortnight,” he said.
The RBI on its part assured bankers that the Government borrowing programme would be managed smoothly by combining it with Open Market Operations and bond redemptions under the Market Stabilisation Scheme.
Though inflation may turn negative for a brief period, there are no fears of deflation, the Governor assured bankers.
Wednesday, February 18, 2009
To put things in reference: My gtalk status msg said “Dow down 4%, and Sensex in Green…Now THAT’S Decoupling :P” (frankly, this was more of an aberration, & hence the intention of the msg was more to mock on all the economists who wasted hours on proving the decoupling theory before the Indian markets finally gave in to the US-led slowdown).
vamsee: hmm nice status
full decoupling tab hi hoga jab indian consumers r the main customers for companies
me: too diffcultt
vamsee: ya...but poss
population ka faida uthana chahiye
me: jus chkd....exports is only close to 15% of gdp
in china it is >30
yaar am telling u
these politican idiots
r interested in eating money
instead they shd put money in infra, defence, etc
so much employment, so much gdp, development too
me: so with figures, we wud b better off than china in the global mess
y do u think ppl flocked to usa frm the 50s?
me: but rmmbr we discussed on this earlier
its not only on 15% yaar
guess global mess shd affect the remaining 85% too
vamsee: ya dats true
me: demand reductions due to lower incomes etccccc
vamsee: dats y govt shd take steps to stimulate the economy
instead of just pumping in money
and not knowing whr it ends up (i suspect corporate honchos, politicans, bureaucracy to eat a good chunk of it)
do u think the crisis will worsen
as in another lehman type incident is pending?
talks abt fiscal deficit too
me: hehe..i dont knw abt any incidents pending etc
but wid job-cuts, companies shutting -down, it isnt a gr88 picture rite
all this even if it recovers will tk time to build up
vamsee: yaar ppl flocked to us coz of 3 main reasons:
1. excellent infra
2. very good security and defence
3. Favorable business environ, laws, policies, etc
think for ne country to develop, these 3 are essential
and i feel india shd start wid all these 3 now, it is high time
me: The time to fix the roof is when the sun is shining.
vamsee: well said na
me: haa...too gud :-)
vamsee: yaar fiscal deficit or no deficit
spending karna tho padega infra par
me: haa par wat tht article says also makes sense
mayb thr r other areas whr money can flow currently rather than infra spending
short term is a focus
long term mite be handled wen the sun's up again :-)
vamsee: yaar the way i see it
real estate is a vital sector for any economy
so spending on infra (atleast real estate related prjs) would be beneficial to prop up this sector, provide employment, improve gdp
whr else shd the money flow?
me: nt sure i agree to tht totally
yaar infra spending i agree is definitely needed
but as frm tht article, it most probably would not reap benefits quickly
(other than just creating jobs)
vamsee: yup not for short term
me: Plus tht wud be a Growth oriented outlook (more of a proacitve approach)
but i think nw its hig time to focus on being reactive
try to save companies frm shutting down
dats true...but how?
how can u save, say a motor company?
will it not be very micro level
instead thr shd be a key macro variable which shd be tackled...put money in that macro variable
me: isnt tht y u c a lot of stimulus packages
vamsee: which wud trickle down to all the reqd sectors
me: pumping money
to spur demand
ok..a lil confused ....do u think any difference between making cars now and constructing a road
a lil lame i agree, but thts wat we mean rite
both wud create jobs, demand fr raw matls, which wud trickle donw
vamsee: yaar lots of other things matter here...cars hav always been luxury in india...so ppl even if they hav money, wont spend on cars
but roads is sth which will generate employment and create income for ppl
which they can further use for other products
me: 2 things:
one: construcing tht road will take quite sme time
two: in the current fiscal deficit situation, do we hv enuf money fr creating the road....OR is saving the motor company more easy money-wise
vamsee: yes construction will take time, but wont it create employment? wont it boost the construction companies, steel manufacturers, and other raw material related companies? and money keeps going into roads for a few yrs
unlike a motor co, which 1. might not use the money properly 2. wont create new jobs (let alone save those which hav to go) 3. one time investment
me: to the first point, any industry has a supporting grp of vendor industries
fr example, even a motor company growth has to affect steel manufacturers
otherwise, not use the money properly
dont hv much of a comment here, except, its the govt, the politicians...who do u think cn better emplye money...govt or private sector
create jobs: its all a cycle...if u can save the loss of jobs, u mite nt nd to craete as many jobs..as i said, a cycle
one time investment: i didnt get :-)
vamsee: last point...put money once
in rds...put money continuously
me: my take: roads are reqd now, but maybe nt xactly a priority with the liquidity etcc constraints
vamsee: ok...so basically we agree on one thing
govt has to spend :P
vamsee: whr shd the govt money go is debatable
vamsee: yes, investing in infra is not a one time thing...so it can wait for sometime
but start tho ho na chahiye
me: also, guess govt is doin gud on tht (spending) front, luking at the fiscal deficitv :P
ha start toh hona chahiye...BUT
fix the roof when the sun shines :)
vamsee: know wot
vamsee: in many developed countries, they hav a very good source of revenue from fines
hmm makes sense
vamsee: like traffic fines, fines for corporate offences, etc etc
me: & we cum to the root: corruption
vamsee: yeah exactly
that is basically reforms and policies (point 3 i mentioned)
i believe that even before putting money, some policy issues shd be addressed
me: yaa agree
more of an idealistic thing :)
vamsee: yaar india mein biz friendliness is very low
unlike us, which is in the top 3
india is arnd 80 i think
me: ohh...tht includes wat...getting credit, no bribes etccc ???
vamsee: no no...ease of starting a biz types
vamsee: indicator of bureaucracy, in a way
me: hmm ok