Weekly Newsletter of Finance Club, NMIMS Hyd Volume Volume Fourth Edition January 30, 2013 IN THIS ISSUE Indian Government Bond Market Overview Indian Equity Market Overview Ponzi Schemes Stock Market Jargon Indian Government Bond Market Overview This week s benchmark yield on ten year government bonds has not changed when compared to last week s closing. The yield has lost in the beginning of the week due to the absence of bond sale. Later, the yield has gained in the wake of profit booking by the investors. Investors are moving cautiously due the most awaited rate cut by the central bank. 7.890 7.880 10 Year Govt Bond Yield 7.882 7.870 7.860 7.865 7.867 7.870 7.850 7.850 7.840 7.830 Source: Bloomberg Indian Equity Market Overview This week the two benchmark indices Sensex and Nifty rose by 0.32% and 0.17% respectively. Market sentiments this week were driven by the mixed Q3 results of many companies. Hopes of rate cuts from RBI also accelerated the market with SENSEX closing at its two year high. Investors are acting very cautiously ahead of the RBI monetary review on Tuesday. Some other factors which drove the market this week are: Many companies reported their Q3 profits in line with the expected returns. (L&T, NTPC, HDFC) Maruti surprised the market with better than expected returns. With the country about to post its lowest growth in a decade, hopes of rate cuts increased with inflation moving to its lowest level in 3 years resulting in better investor confidence in the market. A tariff hike by telecom operators resulted in a growth in the shares of the telecom sectors. Finance Club, NMIMS Hyd Page 1
Real Estate stocks were one of the biggest gainers with most of them reporting a cut in their debts. Corporate governance problems in several MidCap companies resulted in a fall in some of the Midcap shares. FIIs which have pumped over 3 billion dollars in the market are now placing bullish bets (Buying tendency resulting in a rise in stock prices). SENSEX 20,150.00 20,100.00 20,101.82 20,103.53 20,050.00 20,000.00 19,950.00 19,900.00 19,981.57 20026.61 19,932.78 19,850.00 19,800.00 Source: Bombay Stock Exchange S&P CNX NIFTY 6100 6080 6060 6040 6020 6000 5980 6082.3 6074.65 6048.5 6054.3 6019.35 Source: National Stock Exchange Article Excerpt: Ponzi Schemes and its Effect on the Developed World 1 Ponzi Scheme and its Origin: Ponzi Scheme is a fraud scheme that was started by Charles Ponzi in the year 1920. In this scheme, investors are paid returns from their own money or money paid by the subsequent investors rather than the profit generated by the organization. Charles Ponzi started it as 1 Ending the Era of Ponzi Finance by The Boston Consulting Group Finance Club, NMIMS Hyd Page 2
business that would buy postal reply coupons in Italy and exchange them with stamps in the US. This was an arbitrage business which took advantage of the price difference. Charles Ponzi attracted investors by promising them high returns but instead of investing their money in stamps, he used the money of subsequent investors to pay high returns to the previous investors. This resulted in extraction of huge amounts of profits, investors lost around USD 20 million (approximately USD 225 million) by the time scheme collapsed. The second-biggest Ponzi Scheme was done by Bernard Madoff, a Hedge Fund Manager in New York. This resulted in losses of USD 20 billion in 2008. Currently, the developed economies are facing the effect of Ponzi Scheme. Ponzi Schemes in the Developed World: The Developed Nations of the World are in huge public and private debt due to the Global Financial Crisis. According to a study by Bank for International Settlements (BIS), the combined debt of government, private households and nonfinancial companies in 18 countries of the OECD, increased from 160 percent of GDP in 1980 to 321 percent in 2010, leading to increase in Debt-GDP ratio. These economies have borrowed intensely from the future to meet their current consumption, putting a pressure on the next generations. This will also lead to a slowdown in the growth of the economies. Thus steps should be taken to achieve political and economic stability because another recession can start anytime. Apart from debt, the Ponzi Scheme in the developed also exacerbated by hidden liabilities of government and companies. It is the younger generation that pays for the older generation which is mainly due to increase in life expectancy rates in the developed world. Steps that the Developed World should take to Overcome Ponzi Scheme: There are some steps that the Developed World can take to reduce debt, increase GDP and end the era of Ponzi Schemes. Elimination of Debt: It is important to finish the existing debt in the economies. Most of the debts that exist will not be paid for and there will be defaults in the future. Debt can be managed through write-offs, restructuring, increase in taxes, and inflation. Though this will result in losses for creditors and holders of financial wealth and higher taxes for tax payers, it will also help in ending existing debt in the economies. Reduction of Unfunded Liabilities: Government should raise the retirement age, reduce social-insurance payments and manage health care systems for greater efficiency. These measures can help in reducing government spending on social welfare benefits. Increase in Government Efficiency: Government can be made more efficient by making the social welfare system more efficient, reducing the number of public employees as a percentage of total population. New entrants must be encouraged to increase competition in the economies. Manage Labour Scarcity: Developed nations need to take steps to reduce the declining labour. Efforts should be taken to increase participation of elder generation in the workforce, increasing women participation and encouraging family formation to contribute to larger working population. Finance Club, NMIMS Hyd Page 3
Development of Immigration Policy: These developed nations should be open to immigrants. The aim should be encouraging well educated immigrants from outside. Such immigrants will contribute to economic growth and development of the nation. Thus countries need to develop smart immigration policies. Investment in Education: Investment in education can lead to growth in per capital GDP of the country. Developed nations should focus on improving average education levels, improving the quality of teaching. Government should also support bright and intelligent students and encourage innovation and entrepreneurship. Government should invest in Universities and ensure that topics related to future growth and development are taught in the Universities. Reinvestment in Assets: There is a need for reinvestment in public infrastructure and public assets. Airports, railways systems, highway networks and energy grids should be modernized. Government should also involve private sector in these activities as it will improve strategic planning and governance, reduce process complexity and improve prioritization and selection of projects. Government should also encourage private investment Increase in Raw-Material Efficiency: Business should aim at increasing production efficiency of supply chain. Companies should invest in material-efficient products to meet the changing consumer needs. Government should encourage development of policies for efficient technology. Global Cooperation: Though the competition will increase in the World, it is important that the Countries must cooperate only then can the problems be solved, else it will result in Beggar-thy-Neighbor leading to slower economic growth. Emerging economies should focus more on domestic consumption as compared to export based growth. Innovation: Developed world should invest in productive workforce and encourage technologists to innovate and entrepreneurs to start new business. Many government policies are designed to protect traditional industries which inhibit innovation. Thus antitrust policies should be developed to encourage innovation to achieve economic growth. Thus, the fraudulent Ponzi scheme can be put to an end only when society, government and companies cooperate. Only when the debt-gdp ratio decreases in the developed nations will they prosper. Jargon: Stock Markets Bull Market It refers to a financial market of a set of securities in which prices rise or are expected to rise. Bull market is characterised by increased optimism, investor confidence and expectations of greater returns from the market. If a person is optimistic and believes a stock will go up then he is called a bull and is said to have a bullish outlook. Finance Club, NMIMS Hyd Page 4
Bear Market It refers to a market condition in which the financial market of a set of securities is falling or is expected to fall. It is the exact opposite of bull market and is characterised by pessimism, loss in investor confidence and there is anticipation of further losses in the securities. If a person is pessimistic and expects a stock to go down, then he is referred to as a bear and is said to have a bearish outlook. Bulls vs Bears Stock markets is nothing but an interplay of the regular demand and supply hence, it is generally the tussle between the bulls and the bears which drives the market upwards and downwards. When there is positive sentiment regarding a stock, the bulls dominate and the stock rises. On the other hand, when there is pessimistic view regarding a stock then the bears dominate and the stocks fall. Pigs Pigs are those investors who buy on hot tips and invest in companies without doing their due diligence. Professional traders love pigs because it is in their losses that the bulls and bears reap profits. No wonder people say, Bulls make money, Bears make money but the pigs just get slaughtered! NMIMS (Hyderabad) Finance Club Blog @ http://nmimsfinclub.wordpress.com/ Finance Club, NMIMS Hyd Page 5