Economy 2010 - General predictions

Folks, it has been a long time since I posted something. The last several months have been great and at least from a professional stanpoint was fun. I know I made some predictions in the middle of last year about the economy and some of you are going to taking me to stock for some of the predictions. I predicted a 9K for DOW, but as you may know we have crossed 10K and the apparent crisis that we encountered in the fall of 2008 is no more a crisis. Banks are making more money (in some cases more than 2007) using cheap funding provided by the Fed and the support given to them by the taxpayers. Fed has been actively involved in buying up mortgages, almost a trillion worth, that the rates have reached such low levels, it has spurred a considerable interest in the housing market. The other prediction that I made regarding unemployment, seems to hold true and the recovery in the broader US economy has been happening without any addition to the job market. Still, the US economy is not out of the woods yet by any stretch of imagination - as I had said earlier, it is going to take some sort of innovation revolution, just like the technology spending that we had in the late 90s to at least see a ray of light that the recovery is adding jobs.

One area where revolution is very ripe is in the area of mobile technology. More and more people have access to cell phones and more and more they are turning to them to make decisions on buying, selling and all the fun stuff. The technology that is currently available, even in the latest edition of smartphones is not enough to push the envelope into the space where PCs are currently dominant, which means more work needs to be done. We are in the periphery of the revolution and eventually, in the next 5 years, we will be using cellphones to operate ATMs, vending machines and all. I know it is happening in some countries like Finland and Japan - but it has not reached a mass scale, that can lift us out of using outmoded technologies like PCs yet.

Another area, that is expected to lead us out of the slump is the green revolution. All major companies, seem to be doing something related to this, but there is no coherence in where all of them are headed. There are several initiatives planned for - but the wild card in this is going to be China and India. These are the two countries that are expected to have a tremendous growth in consumption and production of several products at least in relative terms when compared to the developed world - that whatever action they do with respect to energy consumption and production will set the trends for the 22nd century.

I predict a combination of mobile technology and green revolution will lift us out of "slump" and radically change the way we do things in the next 4-5 years. Hope you are all here to challenge me on this prediction.

Is the economy turning around for real

The last few weeks have been interesting when it comes to economy. Instead of green shoots, the experts are suggesting that there is a real positive momentum with regards to growth and things are going to get better. The consumers have started spending more and the housing sector has started to turn around.

Looks like, the economy which was destined for a free-fall after the fall of Lehman brothers has found a floor and has started bumping again. But it is time to ask this question - are these good stories for real? Will it be sustainable? For example, take the housing sector - here the first-time buyers are rushing in to claim a tax credit that expires by the end of this year. This proposal has definitely boosted the housing sector (at least for the houses, that a first time buyer can afford - not all the houses, read mansions) but is this a long-lasting recovery in the housing market? Another example - take consumer spending. This consumer spending metric includes the purchase of automotive vehicles. This has been driven primarily by the "Cash for clunkers" program. We have to see if these good stories were true because of government programs or the long road to recovery has started. Only time will tell.

AIG, the much maligned insurance company for all the right reasons, has suddenly become a favorite of the investors. This company's stock experienced a three digit percentage growth (>200%) in the last several weeks and also turning in a profit in the most recent quarter. Suddenly, how come this company has become so favored by the investors when a few months ago this was pilloried as a poster child of bad behavior - I do not know. Its stock was trading for less than a dollar and the government owns more than 80% of AIG. Is this because of some short covering or any fundamentals - let's wait and see.

My personal prediction regarding stock market - DOW will settle down to 9000 or 9200 by the end of the year. It may have overshot a little bit with a lot of investors taking risks expecting returns that they saw in 2007. But still the most fundamental metric, earnings - is not in line with whatever the earnings were in 2007 and the investors should not price the stocks at some unreasonable multiples. Eventually, commonsense will drive the investing decisions and we will settle down to some number between 9000 and 9200 by the end of the year.

Prediction regarding economy - The economy will grow - albeit the growth will be a jobless one. The unemployment rate will cross the double digits and by the second quarter of 2010, the unemployment will start decreasing slowly. Since US economy is directly correlated to the well-being of the consumer, [70% of the GDP is due to the consumers] the growth in US economy will be extremely sluggish. It needs some kind of innovation spark like the dotcom boom to bring down the unemployment to levels below 5%. Let's see what will happen....

Incremental Revenues - Fact or Fiction

Last week, I got a chance to look at a tool that was developed by a company called Advanced Predictive Technologies. This tool cultivates the culture of Test and Learn. Say, you are planning to put together a marketing campaign initiative, this tools gives you the flexibility to test the effectiveness of the campaign on a small sample before you roll it out to the whole population. The idea behind this is great but the users of this tool need to be extremely cautious in interpreting the results of their promotion. The reason why these kinds of tools are profligating the industry landscape is to provide some sort of a platform and a strutured framework that can systematize the process of isolating the benefits for the thousands of initiatives being rolled across a corporation.

Each of the initiative claims to add an incremental x% to the top-line revenues over and above all the initiatives that are already in effect. At times, you get a feeling the amount of incremental revenue that each of the initiatives bring to the table, if you add them up is greater than the base business itself. An interesting analogy would be the value of derivatives from a financial product is greater than the underlying financial product itself.

At some point, I would like to design a tool (if somebody has something like that already in place - please let me know) that clearly identifies what the base business value is and layer in - each of the incremental benefits from different initiatives. Eventually this representation of the base business and incremental uplifts along with the costs of implementing each of the initiatives should become part of annual reports that can allow some sophisticated investors to make appropriate investing decisions.

Business Intelligence

I came across a great blog authored by one of my friends Karthikeyan Sankaran. This is a well-written blog written from a practitioner's perspective. The link to the blog is given below.

http://www.beyeblogs.com/karthikonbi/

I am getting a feeling that some people do not have enough perspective about life. For them I suggest a movie - Goodwill Hunting. This is a great movie that gives you an idea of what perspective is all about.

On a related note, some are so bad - that they just want to put you in a spot deliberately. They do not get it because they do not have the knowledge - they have probably worked in the same field for thousands of years and they know they are coasting. These are the guys who fear the unknown and try to prevent others from reaching their potential by putting in ridiculous curbs whenver possible.

Credit crisis - Great Recession of 2008 and 2009

I have been following the financial crisis the last several months and it is fascinating. The amount of incredible failures that could happen in the last few months seems to suggest the so called market values are fleeting at best, nailing the fundamentals of efficient market theory. I still tend to believe in facets of efficient market theory but I cannot fathom a company valued at $170 per share getting reduced to $2 in a span of 12 to 18 months. Just see the list of companies that went under in the last few months - Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Wachovia, Washington Mutual and indirect failures like GM, Chrysler and many others. The root cause is blamed on the subprime borrowers, extraordinary low interest rates and an expectation that the house prices will keep on increasing. Because of low interest rates, there was a huge demand for housing, resulting in huge amounts of borrowing by the households and then by banks. Some of the investment banks had leverage ratios of 30 to 1. That is for every one dollar of asset they own, they had 30 dollars of debt. In some markets like California, Nevada, Arizona and Florida the house prices kept on increasing while the growth in incomes remained stagnant. This was an indicator used by many hedge funds to bet against the housing market. This is where credit default swaps (CDS) come in.

CDS is a fascinating instrument that allows you to make bets on specific credit events like debt downgrades, default etc. Here you pay an insurer a premium every month so that if the credit event were to happen - the insurer will make you whole by giving you back the face value of the credit instrument that you had betted on. This is a great instrument that allows you to transer the risk of owning a credit instrument to somebody else for a premium. The CDS market is an OTC market [euphemism for very little regulation] and anybody can bet on a specific credit event. For example, I can bet that AIG can default on its debt even though I have no stake in either their debt or shares. It is like a horse race where you can bet on a horse even though you do not own the horse or not invested in its success. At least in horse racing people know it was for fun. In casinos, you can bet on events like Wimbledon, French Open, Superbowl and may such events. The horse-racing and casino gambling are strictly treated as entertainment gambling events and gamblers and casino holders know about it. Casinos are strictly regulated in the sense that they should hold enough cash reserves if a casino were to lose a gambling event. As an aside, in all casinos the odds are stacked in favor of casinos and in the long run casinos will always win.

Combing back to CDS, there was very little regulation on how much reserves the insurance companies need to hold in order to make the CDS buyers whole. The last few years, there have been a lot of transactions involving buying and selling CDS and the biggest insurance company that had a lot of CDS contracts outstanding was AIG. As some of you may know, AIG is an insurance behemoth - having interests all over the world. They had a stellar credit rating [AA or AAA, if I remember right] - which means they can be given credit at a very low interest rate. Being a trustworthy insurance company, with a very good credit rating, makes you think that they know what they are doing. They entered into lots of contracts with hedge funds and other banks worth at least half a trillion dollars. AIG bet that the companies that the hedge funds are making their bets on - like the Lehmans of the world and Citibanks of the world - will not fail and they have taken sufficient precautions to protect themselves in case something happens. Their assumption was companies like Lehman which is a 150 year old institution and Citibank, the biggest and the most global bank in terms of assets would not fail and the money they get in terms of premium from the hedge funds is free money.

But things started happening very fast - first Bear Stearns faced a classic "run on the bank" in March where they were so short on cash that they were forced to merge with JP Morgan for a mere pittance. The Bear Stearns building was morth more than the price that JP Morgan paid for this purchase. Then Fannie Mae and Freddie Mac collapsed and they have to be taken over by the government and then the biggest event of all - Lehman brothers collapsed. Hedge funds and investment banks that predicted these events were naturally demanding that they be made whole which in turn made the insurers [like AIG and other hedge funds] to come up with the impossible task of coming up with huge amounts of money overnight. Also because of the Lehman brothers' event, banks did not trust one another - that they just kept hoarding on the cash reserves that they got and did not lend money to other banks and other investment activities pushing the LIBOR rates up. This resulted in other rates, like adjustable rate mortgages which are anchored of LIBOR to go up as well. Typically, if borrowing rates go up then the investment activities come down and the companies have to take actions to sustain themselves as going concerns. This involves cutting jobs, benefits, salaries, reducing capital investment decisions etc. that can have devastating effects on the economy. On some days, the US Treasury were the most sought after investments, driving down yields of the 3-month Treasury rates to negative values.

The US government realized the ripple effects of these events were so devastating that the government ended up bailing out AIG by investing almost $170B and started pumping in huge amounts of money to the tune $700B into commercial banks and investment banks. It also became a major player in buying mortgage backed securities, started guaranteeing bank debts and reduced the benchmark interest rates to near zero. These actions were taken within a span of 15-30 days. Inspite of all these, and a coordinated global effort to reduce the after-effects of the credit shocks, the unemployment rates continued to raise and in US it currently stands at 9.4%. The fourth quarter GDP contracted by more than 5-6%.

Some of the events that happened here have probably happened in the 1930s - the era of Great Depression when hundreds and thousands of banks failed and the unemployment rate reached 25%. The events that are happening now [2008, 2009] are being branded as Great Recession, since the effects have not reached the Great Depression levels. But some of the remedial effects that were put in place, like FDIC after Great Depression cushioned the effects of this crisis.

Small and simple

These are the things that make us ponder over simple things in life. This song especially captures a lot of them. If you get a chance, please see the following clip on youtube.

http://www.youtube.com/watch?v=J_RKWIz5dyE

It is great and refreshing. All the investment bankers and workaholics should listen to this song to get a perspective.

Road Trip to Midwest

Hello folks!! After a long time I am posting something again!! In the last 3 months a lot happened. Pranav has grown older by 3 months (You guessed it right!!) He is talking a lot. We are waiting for him to start speaking in sentences pretty soon!! He has a very infectious smile and he is pretty active. We are definitely enjoying his company. Wish it could be true for his grandparents!!

Anyway, we had a very early summer vacation. We set out on a long road trip during the Memorial Day weekend. We packed all our stuff in our recently bought Honda Civic (BTW, this is a great car for long road trips.) and headed out to Midwest. The trip was initially going to be only to Chicago. We decided to stopover in St. Louis enroute to Chicago since Divya's cousins (Ramya and Radhika) wanted us to come there at least for a day.

So this is how we did it. We left Atlanta on May 25th Afternoon. The drive was pretty reasonable. The weather was picture perfect for driving. We touched the states of Georgia, Tennessee and Kentucky on the 25th. We had booked a room in a Holiday Inn Express in Paducah, Kentucky (At least my job helps us in getting something cheap!! ) after 350 and odd miles. We figured out Pranav would be able to withstand around 6-7 hours in his carseat. We stayed there for the night and had breakfast the next day morning and left for St. Louis, Missouri on 26th morning. We crossed Illinois enroute to St. Louis, Missouri. We were able to reach St. Louis at around 11:00 AM on 26th morning. Had lunch there. Saw Keshav and family. We had a chance to meet Ramya and company for the first time. (BTW, we have a great picture of Divya getting 'emotional' as soon as she saw Ramya.) We had a great dinner in "Cheesecake factory" on that night courtesy Ramya and her husband. After coming back, we also got a chance to meet Murali, Renuka and their kids. Had a very good conversation with Murali. We were talking till 2:00 AM that night. We retired to our beds at around 2:30AM and woke up at around 6:00 AM on 27th morning. A short note - I think I was able to drive home the Hindu viewpoint on all the issues that may have triggered enough arguments. Hopefully I did not hurt anybody's sentiments, political or otherwise.

On 28th after lunch, we set out for Schaumburg, Ill (My cousin's place..) We reached Schaumburg at around 5:30PM on 27th afternoon. We had our dinner there and got a chance to see their finished basement. It was exceptionally well done basement. I believe as of now, these guys have the "hottest" house among the couples that I have known so far. We played with their kids and retired to bed early that afternoon. Next day morning (28th May) we went to the Swaminathan mandir (BAPS) in Schaumburg. That mandir was absolutely magnificient. I have great respect for Gujaratis. After seeing this mandir, I really respect their organization and ability to do grandiose things without "government" assistance or intervention. We had a great time there and for lunch we got a chance to go to Jay's place. He is one of my University of Florida friends. We got a chance to meet his wife as well for the first time. I was told she was very very interested in cooking and trying out different delicacies. (Asked Divya to take note of this - as there is no dearth in talent from my side in tasting different delicacies.. But nothing has happened so far to that end... Let's see!!). Chicago was unusually hot that day, it was around 35-36C on that day. So we had to drop our plans for going to a park. Anyway, we played basketball, Pranav shot his first basket on that day. On that day, my Perimma and Perippa were expected to land in the Chicago trip for their summer vacation. (This has been a ritual for the last 4-5 years for them.. Wish my parents were like them!!) . Got a chance to meet them. Pranav played great with the kids and he had a great time. We have the entire video of his antics and it is pretty fun to watch. The next day, we started our long trip back to Atlanta. While coming back, we made sure that we got all delicacies made specially for me by my dear patti (Avakkai and Deepavali Lehyam). While coming back, we were able to cover the first half of the trip around 350 and odd miles in 5 hours and we reached our hotel in Elizabethtown, Kentucky at around 5:00PM. We were expecting that we would reach there between 7:00PM and 8:00PM. But we covered that distance in tremendous time. We went to bed early that day, thinking that we can wake up early and have a headstart. But we woke up at around 6:30PM and after breakfast it was around 8:30 AM when we left the hotel. We slowly headed down to Atlanta, this portion of the road trip seemed to be laborious. But we made it somehow and reached Atlanta at around 3:00 PM in the afternoon. We had our lunch and prepared for the dinner, started our cleaning process because of the trip and eventually retired to bed at around 8:30 PM on 29th night.

I would suggest you guys get onto maps.google.com and check out the directions for Atlanta to St. Louis; St. Louis to Schaumburg, Ill and Schaumburg,Ill to Atlanta, Georgia. Hats off to google for the satellite imagery as well. Anybody, including Martians can see our home now, courtesy Google.

This trip was great and we got a chance to meet a lot of people. It was also a chance for Pranav to see some our relatives and it was overall a great experience. I wish everybody goes on a long road trip. We seriously missed some company, cause for this entire road trip would have been much more memorable if we had more people on board..

This roadtrip posting has been long overdue as Divya was planning to do it. She is still planning and let us see when she wants to get to it. Enjoy this and we have another interesting roadtrip experience to share with you that we did immediately after this. I (or Divya) will try to write about this very soon. In the meantime, you guys have a great time.

Signing off!! and expecting India to be a Hindu rashtra soon!!!

Divya's mysore rasam

Last week Divya made "Mysore" rasam. It was the first time in the last 3 years, I can associate the Mysore rasam with the original "Mysore" rasam. Even though it was kind of tamarind-heavy it was reasonably close to the original. Hats off to Divya for that dish. Since coming back from Bharat, Divya is on fire when it comes to cooking. Let us all hope that she continues her form for years to come.