The Market Vision Chronicle
Welcome to MarketVision’s first newsletter, the Weekly Chronicle. We wish you a very Happy New Year! In this letter you’ll find a summary of a fraud that could happen, easily, to any of us, market charts and an view on short-term debt mutual funds. Read on!
Yet Another Fraud
The headlines screamed out another fraud, just as 2010 was to pass. Shivraj Puri, a relationship manager at Citibank, Gurgaon, had supposedly taken 300 crores from a bunch of high net-worth investors. He would show a fake SEBI circular that seemingly allowed guaranteed fixed rates of 2-3 percent per month, or 24-36 percent per year.
Except the money stopped coming back.
The question remains – who are these blockheads who invested in a scheme offering guaranteed returns? In this day and age? It turns out they weren’t blockheads at all. One of them, Sanjeev Aggarwal, founded Daksh and sold it to IBM, and now runs a venture capital firm called Helion Advisors. A person that smart – was it just greed or was he a victim of a serious fraud?
From news reports, Sanjeev has lost 32 crores; Puri took blank forms signed from him and used that to embezzle money.
Question: Why do smart people sign blank forms?
Answer (from banking system): Because it’s the way this business is run, silly. There are so many forms to be signed. If rich people had to sign all the forms after they had been filled, and signatures taken for every transaction, which could happen many times a day, then nothing would work.
Question: But why were so many signatures required?
Answer: Because each transaction needs to be signed by the investor, silly. How else can the regulators be sure that the transaction was authorized by the investor?
Question: But it was a blank form! The investor didn’t know what the transaction was, because it was filled in later. Right?
Answer: Yes, but…
Question: So the investor, who is a smart fellow, overrode a system where a signature was required precisely to protect him from frauds. He signed blank forms, giving the fraudster full control of his money, to save a few minutes of time every day. Right?
Question: And if we, people who may have only 1 or 2 lakhs to invest, do something like this, the very same media and rich people will say – look, his stupidity, why did he sign blank forms?
Answer: (looking in some other direction) So what did you have for lunch today?
The point is that:
The fraud was one of abusing trust – Citibank had appointed Puri as a “wealth advisor”, which has a fiduciary duty, meaning that Puri and Citi needed to give only advice that they knew was good. Even if Puri was trying to commit fraud, it was the duty of Citi’s risk divisions to ensure that the checks and reporting were in place – such as, a report would be sent directly to the customer rather than through Puri, or that accounts would be audited regularly. Citi’s risk management is to blame, although being Citi, they will do whatever it takes to avoid the rap.
(Citi has done things like this earlier. Read Sucheta Dalal’s “The Scam” for details – they never admit mistakes in India. One story was about how Citi’s PMS scheme then took 90 lakhs from PFC and gave it to the Birla Family)
The story doesn’t end with Citi. Moneylife reports that Kotak duped an investor of Rs. 2.27 crore, again by taking cheques and inflating values.
What can you do to protect yourself? Understand that a “wealth management” solution can easily become a “wealth reduction” solution if you don’t track your investments closely. If you don’t have tons of money, you are unlikely to get media attention, so you have to be double careful. Don’t sign blank forms. Make sure you track your investments regularly, either yourself or by third party advisors. Don’t rely on one institution on person to manage your money. Better still: manage your money yourself.
Markets and Charts
Tells you how much our markets have gone up.
Technical Note: However we have had an MACD crossover and the fall has increasing volume. With ATR – Average True Range – widening but below recent peak levels, we’re likely to see more volatility. At this point I wouldn’t trust a pullback upwards, unless we cross the last peak.
To many of you this seems like Greek. At MarketVision, we’ll explain with videos what this means but here’s a quick primer:
(The weekly letter won’t always contain these kinds of charts - only when they get interesting).
Reasons: Interest Rate Hike Expectations
Oh, we’ll hear them tell us reasons for the fall – Inflation and interest rate hikes. Primary Articles Inflation is at 20%, which is obviously a concern.
Now, this is not a reason – we knew the interest rate hikes were coming. Look at the inflation chart – does it look like inflation’s under control? The blue line is getting steeper! This wasn’t out of the blue – only now, it’s getting more and more a surety. The sell-off is a fact, the reasons are speculation.
Liquidity is tough – with 1 year rates sitting around 7.2% for T-Bills and for 1 year Swaps (OIS). More details on this next week and on the blog. As liquidity gets more tight and interest rates look to increase, equity can’t be a great place to be in. That is something that should worry us – but then, we should fall much more; at these levels the markets are still overpriced. Something to think about, especially when reasons are thrown at us.
The Baltic Dry Index – an often-watched measure of the supply/demand of “dry” item carrying ships (as compared to “wet” stuff like crude-oil) is at a one-year low.
This isn’t a great global sign, but with Chinese inflation going up and their trying to control it, chances are that dry ore shipments will reduce and that should temper some of the gains in metals. Watch Metals here – Hindalco, Tata Steel, SAIL and Sterlite.
What’s the story? Is global growth slowing down? Will it be forced to slow down? I don’t know – and honestly, it’s too early to call. What matters is that prices are falling – reasons always come later – and the best thing to do right now is to respect your stop losses.
Short-Term FundsHave some money that you might need in the short term? I do – money for my son’s school fees, which I’ve saved up to a lumpsum, is now looking to be paid over the next year. It has been in equity funds (and gold!) till now, but when it’s time to pay out I move that much money over to safe avenues. My idea was to move money for the next two years of fees, withdrawing every quarter.
But banks are offering horrendously low rates for fixed deposits. A three month deposit gives you a ridiculous 5.5 to 6%. And to top it all, the income gets taxed in my hands, even if I held the deposit for more than a year. I’m not being greedy – even the government is paying 7.1% for 90-day T-Bills, and we all know the government is safer than a bank. Why, then, should we live with lower rates?
You might also invest in FMPs – Fixed Maturity Plans. Value Research gives you the low-down on the risk involved; but the fear here is that funds take your money and put it into “non-safe” avenues. Recently, FMPs gave money to real-estate companies; that just changes the fear from a good return ON capital to a fear of return OF capital.
Not. For. Me.
On an analysis a month or so ago, I found that short-term debt funds seemed to have done reasonably well, with returns of over 8% (annualized). Some of them were able to keep money in short term investments of less than a few months of maturity; that allowed them to rotate money, and get the best interest rate available. In the Commercial Paper and Certificate-of-Deposit markets – where trades run into crores each and only the big players and mutual funds can participate – healthy banks and corporates are offering 9% for short-term deposits of a year or less. These funds buy this paper and collect the interest, but keep the tenures short enough that if the rates go up, the investments mature and the money can be put into the newer, higher rates.
Better still, they are more efficient for taxes. If I hold the investment for a year, I get to call it a long-term capital gain, and am allowed indexation for inflation. In simple terms, if I get 8% return, the first 6% is free (if that is the declared inflation rate), and I pay a smaller 20% tax on the excess 2% only.
For what I need within a year, I choose the dividend option – where only 15% dividend tax applies, and that is less than my tax rate.
Three funds I’ve found useful– not the best in the league, but I’ve actually put money into them myself:
Exit loads are important – why get into a product that’ll charge you a big fee if you leave? I’m not getting married to a fund. And the best thing – I invest online (through my HDFC bank account) and get the money in a day; liquid enough for me.
(This is not advice, obviously. I’m just telling you what I did. At MarketVision, our intention is to educate. Advice on the other hand, is personal, private and customized, hardly what you would expect in a public newsletter. Just setting the goal posts.)