Crude Oil Shock - Again and Yet Again.

I have been 'off' from blogging for a long long time but that doesn't mean I have been away from trying to understand the stock markets. While browsing through my unpublished and incomplete posts, I realized that one of the articles was about how in 2015, the crash was inexplicable and that every sector was impacted. It was an event I had never seen in the years of trading (till then).

The last 2 odd months, Covid-19 has created a round of panic selling and immediately followed by frenzied buying. What I saw in these last 2 months trumps my previous inference. I saw Dow Jones hit 7% circuit breaker not once or twice but 3 times. That's a first for me in 20 years of trading. Crude slumped to hit multi-decade lows. Again a first. Job losses across industry sectors never seen after the Great Depression of 1929, another first. A Phoenix-like rise of the markets never seen before and today, WTI Crude Contract hitting a low of -$37.63. How does crude oil contract go negative?

The answer from various sources is that there's no storage available for the crude oil. Why no storage? Because of Covid-19, demand has been less and the oil production (though lower than usual) has not stopped. So all the oil being produced needs to be stored somewhere and there's no space to store.

So will the stock markets crash during the day on Apr 21, 2020? Dow Jones Index @ 1517 Hrs on Apr 20, 2020 doesn't show any signs of a crash.

Its a wait and watch.

Risk - Is it Constant?

Recently, during a lunch with a friend, we got talking about the stock markets and the perceived risks.

Some of the questions my friend posed during the conversation and my responses is what I have tried to re-capture here.

How do I take calculated risks while buying stocks? I feel that we can't 'calculate' risks especially in the stock markets. We can employ strategies to mitigate the risk but not necessarily 'accurately' calculate it. Our lifetime is finite, our ability to process knowledge is finite, our money which we can put into the market is finite, our efforts to put all this together is finite. So how can we manage or for that matter calculate the multiple variables and the infinite combinations thereof which contribute to risk. Focus on risk mitigation.

Why is risk in a trade constant at the same time relatively different?

In any trade the risk for gain and loss for any party is the same. After all, a trade is entered when a buyer and seller agree on a transaction price. Unfortunately, the counter trade is not always with the same party with whom you initiated the trade.

Let's assume that for every trade we enter we are either willing to make or lose in the ratio of 2 : 1.

Now if I enter trade (buy a stock) with the same ratio in mind and I am willing to make Rs 20 and lose Rs. 10.

On the other had you entered the same trade to make Rs. 10 and lose Rs. 5.

In both scenarios, the ratio of win-loss risk is the same but the risk is relatively different. The above ignore the fact of how the risk is valued by the individual (you or me) differently.

If you plotted it on a risk appetite (y-axis) vis-a-vis age (x-axis) graph; the plot of this graph will be more like a parabola (almost).

By drawing a line for any value for risk (parallel to x axis), it will meet at the parabola at 2 different points of the graph. Does it mean that the individual's risk appetite at two points in his life is the same? Actually, it never is. Here again, risk is the same but it actually is different.

I may have oversimplified my case above and there will be enough number of people who will argue against it but then complicating any situation need not necessarily gave you a more accurate answer.

In our lives (and so in the stock markets), we are always living (and trading) by guesstimates and approximations of huge number of variables. We try to improve our approximations by making some of the variables as constants. This is nothing but an act of risk mitigation than risk calculation.

When To Buy and When Not To Sell - Part 2

In the first part of this series, I had shared some 'life experiences' of friends and family who have attempted 'success on the stock markets'. I'll re-use these experiences to share the Do's and Don'ts I have learnt, practiced and continue to improve on.

Here are some of my general views about the markets:

Don't follow opinions of analysts on business news channels.
- If they were so good, they would not be on TV. They would have been making money themselves.
- Most of them do not bet their money on the stocks they advise.
- Good news about stocks you have bought only confirms your bias about your stock. Bad news about the same stock does not help you make a decision to sell.
- Business newspapers will always have more BUY recommendations that SELL or HOLD. The reasons are:

• Get you to enter the trade; once you have bought, then only SELL or HOLD recommendations become applicable

• There are higher chances that you don't own the stock. If you already owned the stock, then a BUY recommendation confirms your bias about your stock pick

- BUY, STRONG BUY, ACCUMULATE are irrelevant in the context of buying a stock.
- Similarly, SELL, STRONG SELL, REDUCE is equally irrelevant when selling a stock.

- Most irrelevant is NEUTRAL, HOLD. Does it mean our educated analysts do not know what to do?

Coal India's Offer for Sale - Reason to Invest?

Many years ago I had done an analysis on IPOs of 2010 and also had discussed Coal India as part of the list. See - "IPOs of 2010 - A Reflection"

A few facts of the Coal India IPO.
- Discovered price after closure of book-building - Rs. 245.00
- Listing Date: November 4, 2010
- Closing price on day of listing: Rs. 342.35
- % Return on day of listing: 39.73%
- Issue was oversubscribed by 15 times.

Since the day of listing and till Jan 29, 2015 the company has given dividend 7 times for a total of Rs. 569/-. Please remember the share price falls (at the minimum) to the extent of the dividend paid on the ex-dividend date.


Today's Offer for Sale (OFS) was oversubscribed at 1.1 times at the base price of Rs. 358/-. Taking the closing price from the day of listing and the base price, the annualized gain (across the 4 years) is 1.14%.

I have considered the closing price on listing day as that is the 'discovered price' after the stock has gone through the gyrations of the stock market. The price of a share in the stock market takes into account many factors and hence is a more accurate reflection of the true value of the stock than what merchant bankers decide during an IPO / FPO / OFS.

So here are my inferences:
- Despite the coal shortage in  the country and the monopoly Coal India enjoys, its output has not increased substantially since the time of its IPO. If it had, the share price should have been much higher today.
- OFS route is the quickest route to sell shares. In the last few years, instead of "Follow-on Public Offer" (FPO), the government (in order to meet its disinvestment targets) has been using OFS route.
- Why the OFS route? The government can coerce its other companies (like LIC, SBI, etc.) to buy the shares and ensure the OFS is successful.
- Coal India was trading at Rs. 394/- on Jan 27, 2015, a day before the OFS date was announced, a drop of 10% in 3 trading days.

OFS is a route where the promoter is trying to offload his holdings to make a quick buck. The share price will fall slightly more in the following week when the shares are allotted to the people who subscribed to the issue. It could be a better opportunity to buy the share then!

If a company has great prospects, then the promoter should be either using the cash reserves to expand capacities or perhaps doing a buy-back if the share price does not reflect the true value of its future business.

Paying huge dividends, FPOs, OFS, etc. especially by Government companies is to just find a way to generate revenue to meet their budgetary targets and in turn window dress the fiscal deficit. :-)

Is India a Potential Case for a Sub-Prime Crisis?

We all have heard about the sub-prime crisis (2008) which brought the world economy to its knees. Many of us have heard about the root cause of the issue, perhaps understood (well or vaguely) the cause-reason relationship how it caused the financial markets to fail.

Without going into the complexities of what took place in US, let me comment if a similar 'sub-prime' crisis can occur in India.

Few definitions in order:
Sub-prime: A borrower who has a poor debt repayment history or a poor credit score.

Sub-prime loans: Typically the interest on these loans are higher than the loans extended to people with a good credit score.

Credit Score: A rating / score assigned by a Credit Bureau (in India it is CIBIL) based on multiple parameters. Some of the parameters include number of loans (any type of loans, credit cards), amount of loans taken, repayment history, age, income reported (through tax filings).

I recently applied for my credit report and found an interest statistic shared in the report alongwith my credit score.

In India, CIBIL score are given in a range of 300 to 900. A score of less than 650 is considered poor credit rating and a greater than 800 is an excellent credit rating.
The reports indicates and I quote "57.6% of all new loans sanctioned during last 1 year falls in the category of people having a score of greater than 800".

"80.5% of all new loans sanctioned had a score of greater than 750"

"Only 4.7% of all new loans sanctioned had a score of less than 650"

The above statistics allows me to infer the following:
- Majority of Indians (individuals) have very good / excellent credit score 
- Defaults (non-payment of dues on loans, credit cards, etc.) is potentially low in our country.
- We may not have a 'sub-prime' crisis in India soon.

What makes me wonder is if Indians are good at repayment of their dues, then why have our Banks being reporting higher NPAs (Non Performing Assets) over the last few years?

If individuals are not the reason why NPAs are increasing but corporates (who also take commercial loans) who are the culprits then shouldn't we have stronger checks and balances when loans are issued to them? Shouldn't there be stronger regulations to recover these loans?

Unfortunately, this is where our banking industry struggles. Our banks just don't have enough 'teeth to bite' wilful defaulters. E.g. Kingfisher and its flamboyant owner gets away by not paying back what he (his companies) owes to banks.

For more about Credit Bureaus