a. Banking: Over the years the biggest and the richest fortunes have been made by bankers. No doubt about it. Goldman Sachs, Morgan Stanley, the grandfather of them all J P Morgan, Citibank. Is there anybody who doubts about their profitability? I think not. They may once in a while go through a lot of criticism and problems but their profitability has never been in doubt.

In the Indian scenario if you had invested Rs. 10 in the Hdfc Bank IPO (you could have bought it for Rs. 40 on listing, if you did not invest in the IPO) the share is today worth Rs. 1920 (192 times in 13 years) as well as a regular dividend which was far greater than the fixed deposit interest in the same bank. That too tax free, vow banking is profitable. In fact banking is so profitable that even Psu banks make lots of profits.

b. Broking: Brokerage is a very very profitable industry after crossing a basic minimum. If your break-even volume is say Rs. 10 crores a day – every rupee of trade beyond this figure is very profitable. Also clients may sell on day 1 and buy on day 5 – the float helps. If you understand the profitability of this business you will not wonder why Hdfc, Icici, Kotak, Axis, Dhanalaxmi, Citibank, Hsbc, SBI, Bank of Baroda ….and the others are all either in the broking business or desperate to enter this business. Companies like Indiainfoline, Indiabulls, Networth Stockbroking, Platinum, Motilal Oswal, Sharekhan, Karvy, Geojit, Religare, Birla Money, Reliance Capital, Tata Securities, Cholamandalam, DBS, – so many LISTED brokers are ONLY INTO broking. So profitability must be very, very good to sustain so many players. Also with a growing market capitalisation all these companies must be very, very profitable. I am saying profitable because all these companies get good price earning ratios (means good profitability and nice future prospects).

c. Fund / Wealth Management: This is of course the most profitable business in the financial service industry. There are more wealth managers in the Forbes List than people who have come there because of good wealth management . Even in the Indian context there are 43 mutual fund companies (called asset management companies). All of them are likely to be very profitable in 3-5 years time – by when the market is expected to go to 10 times its existing size (DNA, Sikka of Reliance Capital). Even the small ones like Quantum or Benchmark will be profitable – so the profitability of Reliance, SBI, Icici Prudential is more or less guaranteed. A part of this business is the Portfolio Management Services – which is also likely to be very profitable  – look at the number of players in the PMS business (available on the SEBI website). Nobody has exited this business in the past 15 years except 2-3 companies who did not have deep pockets to stay on in the business for enough time.

d. Life Insurance: This again must be very profitable in the long run for the shareholder of the business (never mind that the profits have come from over-pricing the products for the consumer!). There are 21 players now in the field and another 20 foreign players are waiting to enter this arena. Hdfc, Icici, Kotak, SBI, Religare, Birla, – the same names that are there in the mutual fund industry are present here. Obviously this is a more profitable business and that is the reason that more talented people, better paid and trained are deployed in this industry compared to the mutual fund industry. The commissions for selling life insurance also is quite high and commissions in the region of 90% is NOT UNHEARD OF, however the mean could be lower.

e. Financial products distribution: the people who are not manufacturers of financial products but are just distributing it also find it worthwhile to do only this. Assuming about 10,000 agents for each company make a living out of selling these products, that is a big army out there is it not?

So…what is at stake in the SEBI vs. IRDA fight over ULIPs?

well the stake of the shareholders of the financial services Industry. If you are not a shareholder in the financial services industry – SBI, HDFC, HDFC BANK, Icici, Kotak, ……you are missing something and you have nothing at stake.

If you hold ULIPs, chill you have nothing to worry (as of now) in all this media hype about the regulator’s turf war…just switch channels and watch IPL. Till I do a story on fixing @ IPL….

Let us look at the dollar – it looks like the dotcom boom – when we were all sure that the tech stocks can only go up. Or the real estate boom of 2007 when we were all sure that Indian real estate can only go up – and then we know what happened. Now let us see something about the dollar:

- it has been beaten, battered and bruised. It could be very close to the bottom if not the bottom.

- US has a massive deficit, very close to zero interest rates (Ok not zero your money will double in 7200 years if you invest in it!!)

- huge social security deficit – social security may default in 2020 if not in 2019?

-countries like India dumped dollars (to acquire gold) – poor signaling for the big holders

- Bernanke grilled at the recent hearings – he got butchered by the senators.

Wait…how can the dollar go up? All that I have said are against the dollar..have I not?

Well read ahead:

the dollar’s bad news is already priced in? Perhaps the market has overdone the pessimism in hammering down the price. The bad news is really over done?

- Asian companies will pick up distressed assets and create some demand for the dollar – apart from Asian tourists finding it cheaper to travel to and tour US.

- the demand for American dollars will slow down in Afghanistan and Iraq

- Japan, Eurozone, and UK are not doing too great either – and the world does not trust the balance sheets from those companies at all compared to the US.

All this could see the dollar strengthening – remember Citibank, Pepsi, Coke, McDonalds are big beneficiaries of the Asia growth stories – and they all remit huge profits back home…

so a strong dollar in 2010 …and the tech doing well…possible, correct? Well, it is at least a view!

But see what the government is doing. That is worrisome. The great P C told us the impact of the 6th Pay Commission would be about Rs. 15,000 crores. The impact on Maharashtra alone is Rs. 18000 crores. Look at what Obama is doing – he is printing notes so fast that more money will chase less goods. China, India and Brazil are questioning the logic of having the US $ as the reserve currency. The dollar has to go down and go down fast. Again inflation.

This takes us to what Ronald Reagen said. Two of his quotes are very famous. The first one is “Trust, but Verify”. The second one is what he said about inflation. He warned us to be ever vigilant of a threat “as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

Just what was he talking about?

It wasn’t Iranian terrorists… A Russian nuclear sub… Or some of Castro’s henchmen.

No. Reagan was talking about the thief that robs us all… Inflation!

In fact he was warning us against Governmental action. For example Obama should have let Citibank and General Motors die. Government of India should let Air India die. When the inefficient get oxygen, the efficient ones start stuttering and wondering how to breathe. Sheila Dixit of course takes the cake. She finds price of pulses high so she announces ’subsidised’ pulses in Delhi. This will mean all the inexpensive (price) and cheap (quality) pulses will find their way to the Public Distribution Scheme. Fantastic for all till there is some food poisoning case in Delhi out of the poor quality!

Second she is sending a signal to the poor all over the country that the state can do something please either ask your state to do it, or migrate to Delhi! Poor signal to the rest of the country, what say?

A good environment, stability, growing income etc. are sure signs of a successful organisation (company, country or a human being) – this allows him/ the organisation to borrow ASSUMING that the success of his past will continue. Similarly the USA now continues to borrow continuously. This could be harmful. Allowing the market to solve the problem is a far better solution than the US government print notes and bail out the ‘toxic’ banks.

The fact that the government is ‘trying’ to solve the problem is a big hassle – the market does not understand what to buy and what to sell! If Warren Buffet’s cost of funds is higher than Citibank (TARP) – this is a big noise in the market. It sends out a poor signal about Buffet and makes Citi look healthy. Some of this mess will be sorted out easily – but the more jumbled signals remain.

So be careful. In such times gold is a good asset. However, gold may be in the midst / end of a great 3+ years of a bull run.

George Mathew & Swarup Chakraborty of Indian Express Mumbai have done the following story:

At a time when banks are slashing home loan and other lending rates, they are quietly hiking the interest rates on credit card outstandings.

Since October 2008 banks have raised interest rates on credit cards, some by over 4 per cent per annum. The interest charges of leading card issuer SBI Cards, have gone up to 3.35 per cent interest per month, or 40.2 per cent per annum, on roll-over credit. In October 2008, it used to charge 3.10 per cent per month, or 37.8 per cent per annum, as finance charges.Standard Chartered Bank has hiked the interest rate to 3.49 per cent per month, or 41.88 per cent per annum, this month as against 3.40 per cent per month, or 40.80 per cent per annum earlier.

Citibank too raised the rates and 3.5 per cent per month (37.8-42 per cent per annum) from around 3.10 per cent as finance charges.”
My story starts here: the charges are on a monthly basis WITH MONTHLY COMPOUNDING – the interest charged per month figure is correct, but the per annum rates are WRONG.
Here is how it looks:

SBI – was charging 44% per annum, now it is charging 48% per annum
Standard Chartered bank was charging 48.49 …now it is 49.36% per annum
Citibank was charging 44.24% …now it is 51.11%
So the increase is a reasonable 4% by SBI and 7% by Citibank.
Hey guys at RBI….why is the Anglo Saxon continuing to milk us?

When you lend money to a bank (which may be insolvent even as you are lending) or to a country (which technically cannot become insolvent like USA) there is lesser risk than when you invest in equities. Why is this so? Frankly I think it is because civil servants, ministers and the powers that be keep more money in debt instruments and less in equity instruments!

When Global Trust Bank was in operation it obviously had many shareholders, vendors, employees, and fixed deposit holders. Then the bank audited by the great Pricewaterhouse Hyderabad failed, the government stepped in. It did not ask the vendors why it chose to supply, at what price etc. but went and protected the vendors, employees and its fixed deposit holders. Pertinent to note that all the 3 categories would have chosen to supply their ware (things, time and money respectively) KNOWING the risk, and therefore seeking a risk premium. What this means is a person would have left a Rs. 4 lakh job in SBI and come to GTB at 11 lakhs, a vendor would have priced his supplies at 10% premium, the fixed deposit holder would have got a 3% premium vis-a-vis the fixed deposit of SBI. However when it came to protection, the only guy who paid (pays) the FULL RISK premium is the equity holder. Now with Satyam it is an action replay. Similarly if you are a FD holder in Citibank USA you get protected in all this sham. However, if you are a holder of Citi equity, you have been had.

So Obama, Deepak Parekh, Company Law Board, P C Gupta, are all creating a moral hazard in the corporate sector. All the stake holders should share the suffering – singling out the equity holder will ensure that we cannot grow the equity culture. If we want to become a country of investors from a country of just savers, we should not allow such risk mispricing by behaviour. Mr. Deepak Parekh who has made most of his wealth from the equity markets should appreciate this point of view. I hope he does!

Then Tata Motors, Cholamandalam, Hindustan Oil exploration, Tata Investment corporation, Hindalco, announced their rights issues. Just to be liquid for these right issues, I sold again. When the issue actually came, I was sitting on cash, but had no desire to fill the rights form. So again am sitting on cash. I think God protects people who do not know what they are doing.

Other than God I should also thank Ken Fisher for his book – “Only 3 things that Count”. This book MADE me learn 2 things -

1) it is all right to be in equities during slow downs, but in fmcg and pharma rather than infrastructure and banking

2) Even if you do not believe in ‘timing’ if a portion of your portfolio can be save from the blood bath, your overall returns over long periods of time can be better than blind ‘time in the market game’.

However for all the readers I have a few lessons from 2008:

1. Like me, if you get lucky, do not argue against luck, protect your money.

2. Know the difference between skill and luck. I had luck so I sold enough shares to pay for the rights (and additional shares too!). If I had skill I would have sold much more, sold Kotak Bank, bought puts on Icici bank, sold Tata Steel and Hindalco.

3. Stock picking is tough – Bear Sterns, Lehman, Citibank, Morgan Stanley. Closer home Satyam, Cholamandalam, Dlf, etc.

4. Diversification did not help! – Debt in Nagarjuna group was wiped out. If you put money in a real estate pms, you lost.

5. Liquidity: when you need your money, if you do not get it, it is not there!

6. Leveraging which made you look smart in a bull run, can wipe you out in a bear phase.

7. Indexing works, indexing works, indexing works. Believing in ULIPs for wealth creation or Mutual fund investing based on Advisor’s skills and hoping to out performing the index is a nice fantasy like Santa Claus.

8. If your Advisor or fund manager has no transparency or you do not understand equity trading – you are better off in ppf.

9. Past performance is as useful as last year’s weather pattern on a particular day to carry an umbrella. If you get wet, do not blame the forecast.

Frankly, I think some desirable fall out of this meltdown will be as follows:

Financial services will see a drop in salaries: Compared to useful industries like engineering, pharma, health, etc. the salaries in the financial services sector is too high. A big auto manufacturer will have say 20 people earning upwards of Rs. 50 lakhs (Rs. 5 million or about $ 110,000) per annum. However, even a loss making life insurance company which is at the bottom of the chain will have 20 people. This so called “shortage” of skill sets will disappear and salaries will come down to earth from the stratosphere.

Shareholders are still in the red: The life insurance industry may be charging the sun, moon and the earth for its products but companies are still in the red. The financial services industry broke one cardinal rule – the risk was taken (is being taken) by the shareholder, but the rewards are being reaped by the employee. Leveraging your balance sheet by a ratio of 40 will be done only by bankers with no morals or scruples. However in India we have seen “conservative” NBFC with a leverage of 10.

How the distributor is rewarded will change: Currently about 3% of the distributors may understand goal setting, budgeting, risk profiling, asset allocation, client servicing, etc. They have no guts to ask the client for fees – but they survive because the mutual fund and the life insurance companies are willing to pay him. This is not because they love him, but because they love the cheques that he brings! Hopefully paying commissions will be made unlawful – and the client will have to pay a fee for the services. This will ensure that many mutual funds, life insurance companies, and share brokerage firms will wonder how to live.

Penalty may be high: A big retailer from the South has defaulted on the Inter corporate loans and bank loans – to the extent of Rs. 25 crores. A big housing company which had a lot of short term borrowings -invested in long term loans – is finding it difficult to raise money. IN India such companies would have got away earlier – now they will find closure a serious possibility a la Citibank.

What will be the implication for the Indian markets? Well, the willingness to spend or invest will go down. So industries which are not cash surplus – retail, life insurance, mutual funds, etc. will surely see a slow down. Airlines and hotel industries will see the survival of the richest and death of the weak. A few banks will close down – if the “gora” is not allowed into India in 2009.

What you can do is just relax, continue your SIPs and watch Animal Planet or Cartoon Network. Stop watching horror channels (some think of them as frenzy channels) which make you itch for action.

The worry is for people who lend to the governments.

As the government can print its own money – it just prints a $ 100 note and tells you that this is “worth $ 100” and we have to believe it! It is not possible for a private sector guy to do it.

What I mean is simple – when the Japenese investor in 1985 (or thereabouts) invested in US bonds, he was told that the $ is worth about 300 Yen. He felt happy.

Now (if it is a 30 year bond it will mature in 2015) he is being told that the $ is worth about 100 Yen. If the present trend continues (which I do not argue against or fully agree with) the $ may be worth 90 Yen.

Thus the Japenese investor HAS already lost 66% of his capital. If this is not a default, it is purely technical! So God bless the investor!

And worse may still be coming – Alan Greenspan says – there are more defaults in the US banking system. So now you know why some banks are not going to sleep! Could it be merrill? Could it be Citibank? What about JP Morgan ? Or Morgan Stanley? One shudders…