Tuesday, 9 August 2016

Sohini Andani- Fund Manager, SBI MF on ET Now - Meet Your Fund Manager, 06 Oct 2015

Sunday, 15 March 2015

SEC- Plan Of Action On Firms "Admission of Misconduct"

For decades, the Securities and Exchange Commission has allowed companies and individuals to make settlements without admitting any wrongdoing. Even a company committing an egregious sin that cost investors millions of dollars could walk away from the proceedings without ever acknowledging its role.

But in mid-2013 the agency declared that it was doing an about-face.

“Heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution,” Andrew Ceresney, the S.E.C.’s head of enforcement, said in a June 2013 email to his lieutenants.

The program represented a seismic shift in approach, but in practice it is still in its early stages. After two years, the S.E.C. has generated admissions of culpability in 18 different cases involving 19 companies and 10 individuals. Given the hundreds of settlements struck by the S.E.C. over this time, it is clear that most of the time defendants are still being allowed to settle without admitting to or denying the agency’s allegations.

S.E.C. officials say this age-old practice saves it from having to bring — and possibly lose — a case in court, allows the agency to return money to victims more quickly and conserves resources for other investigations.
Nevertheless, S.E.C. enforcement officials say they believe the policy change has sent a crucial message. “Requiring admissions adds a powerful tool in appropriate cases, and it has been extremely successful and positive,” Mr. Ceresney said in a recent interview. “In cases where we have obtained admissions, it adds accountability, and that has been very important.”

In determining what kinds of cases are likely to be subject to such treatment, the S.E.C. has given itself wide latitude.
In her first speech on the subject in September 2013, Mary Jo White, the S.E.C. chairwoman, cited four criteria for such cases:
■ The case harmed a large number of investors.
■ It posed a significant risk to the market.
■ Admission of culpability would let investors decide if they should deal with a person or entity in the future.
■ Disclosing the case’s facts would send a message to the market.

The following year, in another speech, Ms. White added further criteria. Admissions of culpability might be required if misconduct was intentional or if a defendant obstructed an investigation. “The new protocol continues to evolve and be applied,” she said.

As the policy evolves, it has raised concerns among securities lawyers. They contend that the broad criteria for cases fail to provide enough guidance on behavior that will attract scrutiny.
Lewis D. Lowenfels, co-author of “Lowenfels and Bromberg on Securities Fraud,” a leading treatise in the area, called for more analytical clarity.

“The S.E.C. should draft guidelines as to when the agency intends to demand admissions of facts and acknowledgments of violations of law in order to settle their enforcement actions,” he said. “Otherwise market participants are left with attempting to interpret vague and conflicting tea leaves from speeches by the S.E.C. chair.”

Mr. Ceresney said that the S.E.C. believed it had telegraphed the terms of its policy change clearly and consistently. But the SEC enforcement manual has not been updated to reflect it.

And the S.E.C. acknowledges that these cases require the same judgment calls that many of its other enforcement decisions do. For instance, even if behavior meets some or all of its stated criteria, the agency may not push for an admission of wrongdoing. It may decide that other aspects of a settlement — like a steep penalty — are severe enough.

An analysis of the cases in which the S.E.C. has secured admissions of misconduct certainly shows a wide array of facts and types of infractions.

Some of the 18 cases required acknowledgments of violations of law, while others involved lesser admissions of the S.E.C.’s findings of facts.

Most of the companies in these cases were financial firms. The other settlements involved Chinese affiliates of the big four United States accounting firms; Lions Gate, an entertainment company; and Standard & Poor’s, the ratings agency that admitted to facts stating how it misrepresented its methodology for assessing several commercial mortgage-backed securities in 2010 and 2011.

About one-third of the cases involved very large entities. They include a 2013 settlement with JP Morgan Chase arising from the London Whale debacle; a 2014 matter against Bank of America for  a major disclosure violation; and a failure-to-register case against  Credit Suisse, also in 2014. This year, the agency brought an action against Oppenheimer & Company, which admitted a violation of securities laws involving penny stock sales for customers. In 2014, Scottrade, the discount brokerage firm, acknowledged that it had failed to provide the S.E.C. with accurate information about trades.

When the S.E.C. has demanded admissions, it says it usually gets them. If a defendant balks, the S.E.C. can respond with litigation. Consider a 2014 case against Wedbush Securities, a large stock trading firm. The S.E.C. contended that Wedbush had inadequate risk controls in its business. Initially, the firm refused to admit to the allegations. After the S.E.C. brought the case before an administrative law judge, Wedbush settled, acknowledging the S.E.C.’s findings and paying a $2.44 million penalty.

A case from last summer illustrates how the new policy has continued to evolve. That matter, involving a lawyer for two corporate directors, indicates that the S.E.C. will also press for an admission of wrongdoing if it thinks such a move will help it in a suit filed against another party in the same matter.

The case dates to 2010 when the S.E.C. filed a civil suit against Samuel E. Wyly and Charles J. Wyly, directors who sat on the boards of Michaels Stores, Sterling Software, Sterling Commerce and what is now Scottish Re. The regulator accused the Wylys of evading reporting requirements and won the matter at trial last year. Its position was aided by admissions it had secured from Mihael French, a lawyer for the Wylys.

So far, the S.E.C.’s moves appear to enjoy broad support among its five commissioners, who approve its enforcement actions. Since the policy change went into effect, the commissioners have approved every case.

For now, because the S.E.C.’s criteria are so broad, almost any kind of case might qualify for treatment under the policy. It will be revealing to see how the S.E.C. uses its new power.

Sunday, 8 March 2015

Giffen Good

A good for which demand increases as the price increases, and falls when the price decreases. A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand which states that quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve. A Giffen good is typically an inferior product that does not have easily available substitutes, as a result of which the income effect dominates the substitution effect. Giffen goods are quite rare, to the extent that there is some debate about their actual existence. The term is named after the economist Robert Giffen.

The most commonly cited example of a Giffen good is that of the Irish potato famine in the 19th century. During the famine, as the price of potatoes rose, impoverished consumers had little money left for more nutritious but expensive food items like meat (the income effect). So even though they would have preferred to buy more meat and fewer potatoes (the substitution effect), the lack of money led them to buy more potatoes and less meat. In this case, the income effect dominated the substitution effect, a characteristic of a Giffen good.
However, critics of this textbook example point to the fact that Ireland was in the grip of a severe famine at the time, and because of the shortage of potatoes – which led to higher prices – it was unlikely that people could have consumed more of them.
A more recent – and perhaps better – example of a Giffen good is offered by a 2007 study by Harvard economists Robert Jensen and Nolan Miller. Jensen and Miller conducted a field experiment in two provinces in China – Hunan, where rice is a dietary staple, and Gansu, where wheat is the staple. Randomly selected households in both provinces were given vouchers that subsidized their purchase of the staple food.
The economists found strong evidence of Giffen behavior exhibited by Hunan households with respect to rice. Lowering the price of rice through the subsidy caused reduced demand by households for rice, while increasing the price (by removing the subsidy) had the opposite effect. The evidence with regard to wheat in Gansu was weaker because two of the basic conditions for Giffen behavior were not fully observed, i.e. that the staple good should have limited substitution, and households should be so poor that they consume only staple foods.

Saturday, 7 March 2015

Govt wants Sebi to regulate money market

The government has proposed to amend the Reserve Bank of India (RBI) Act to take away money market regulatory powers from the central bank and bring it under the purview of the Securities and Exchange Board of India (Sebi).

Though the proposal wasn’t mentioned in Finance Minister Arun Jaitley’s Budget speech, the Finance Bill proposes to amend sections 45U and 45W of the RBIAct, which effectively takes away the central bank’s powers to regulate government securities and other money market instruments.

The amendment to section 45W says, “Any direction issued by the Reserve Bank of India, in respect of security, under chapter III D of the Reserve Bank of India Act, shall stand repealed.”

Usha Thorat, former deputy governor of RBI, said, “Certain powers in relation to regulating money market instruments and products and derivatives based on these instruments were given to RBI in 2005-06 by amending the RBI Act and this happened after a lot of discussion. Now, with this amendment in the Finance Bill, all these provisions are proposed to be withdrawn. RBI was given responsibility for financial stability and the power to regulate forex and money markets was given to RBI to enable it to fulfill its mandate for financial stability.

“Before such sweeping changes are brought about through the Finance Bill, there has to be an understanding of the purpose for such changes and whether these are indeed in the interest of financial stability. It has to go through a lot of discussion and dialogue.”

If the proposed amendments go through, regulations relating to the issuance and investment of commercial papers, inter-bank repo or any other repo and reverse repo used as instruments to raise liquidity by keeping these as collateral as government securities will no longer be in RBI’s hands.

To be sure, these amendments are not an extension of the Public Debt Management Act, which essentially deals with primary issuance of government securities. After the proposal is enacted, public debt management will be under the purview of Public Debt Management Agency, not RBI.

Speaking to analysts on Wednesday, RBI Governor Raghuram Rajan had said the proposed amendments weren’t part of the finance minister’s Budget speech. Answering a question on the shifting of regulatory powers over debt markets from RBI, Rajan said he expected the proposed changes wouldn’t take place. “On the shifting of regulatory powers over debt markets from RBI, there are some clauses in the Finance Bill referring to this. But the finance minister’s speech did not contain any reference to this; the speech generally flags the important actions of the government. I am not worried this will happen,” Rajan had said.

The proposal to shift the power to regulate money market operations from RBI was made by the Financial Sector Legislative Reforms Commission. Though there were exhaustive discussions on most other proposals by the council, the proposal to shift money regulations from RBI wasn’t discussed.

Friday, 6 March 2015

India standout performer among BRIC countries: Mark Mobius, Templeton EM Group

As a foreign investor and a long-term bull on India, how do you see the 3.9% fiscal deficit target tied with an 8-8.5% growth for FY16? Do you see potential improvements on both fronts over the next two years?

Mark Mobius: What was good in this budget was the fact that they are going to increase capital spending. I understand that could be very important, because India needs a lot more transport infrastructure, which should increase productivity throughout the country.The fact that they are reducing subsidies by 9% and more importantly, using direct cash transfers to make it more efficient, is also a very good move. Perhaps most important of all is the reduction in corporate income tax from 30% to 25% over a four-year period. It should increase capital spending in the private sector. So, all of those moves are quite good. They should help in pushing the economy forward.

The world over, central banks are in monetary easing mode. How much of a boost can it give to ailing global growth? Will India stand out with a strong performance due to fiscal support?

Mark Mobius: India really stands out now. We are talking about 7% growth this year, which means India is well up to the Chinese growth rate. It probably has greater potential going forward.
If you compare India to the other BRIC countries like Brazil and Russia, it comes across as really outstanding.

What investment call would you make for India post Budget 2015? Would it call for more allocation, a status quo of profit-booking after a dream 30% plus return over the last 12 months?

Mark Mobius: Usually what we see is the profitability of companies. If we look at 7% GDP increase in the economy, a good increase in profitability for companies should be achievable.

Do you think the government did enough on infra spending? Do you see India being innovative here and will it lure you to invest more into the Indian infra, railway, road, logistics space, etc.?

Mark Mobius: That is one of the things that they have opened the door to. They are also looking at non-budget financing for infrastructure. Hopefully, that would include private sector participation — either in joint projects with the government or by way of some other systems.
That would be a very good way to increase capital spending in infrastructure more rapidly. But of course, it requires much more clarity on the part of government in terms of committing to programmes. It will enable the private sector to make adequate profits on those investments. It has been done elsewhere, and there is no reason why India cannot do it.

Will the rupee hold out post the Budget? What does the fiscal policy mean for rate cuts in India, and how much more cuts do you anticipate?

Mark Mobius: With inflation coming down — and probably it will continue to come down as a result of efficiency gains — there is a good chance that we will see lower and lower rates. It is good for the economy. There is no reason to think that this cannot be achieved in India.Like all other emerging market currencies, the rupee too has weakened over the last few years. But I think that could change if the India economy continues to grow at this pace.

The rating agencies had called for an improvement in income growth and fiscal deficit to review India's investment grade. How much of that matters to an FII such as you? As of now, it does seem that it may take a while before India is upgraded to BBB status. Your take?

Mark Mobius: India can be upgraded pretty quickly if it achieves the kind of growth that we are looking at. More importantly, if the expectation of increase in tax income turns true, it will enable the government to improve its budget picture.
So, yes, I would say India can be upgraded by the rating agencies. 

Tuesday, 29 July 2014

Emerging Markets Exposure

Comments about substantially stretched stock valuations from Janet Yellen on July 21, 2014 spooked the market and sent prices of the major U.S. indexes lower. When volatility in the U.S. market increases, it is often a natural reaction to look at pulling money out of U.S. equities. In many cases, traders reactively put their money to work in other areas of the world that experience better-than-average growth, like emerging markets. Vanguard Emerging Markets VIPERS. As the name suggests, this ETF seeks to track the performance of a basket of companies that are located in emerging market countries. Taking a look at the chart below, you’ll find that this ETF has risen more than 7% over the past three months and it is currently trading near its 52-week high.

 Looking at Components

For traders who want to diversify their holdings outside of the U.S., it is a good idea to check out the components of VWO for interesting picks. The top holdings of the fund are shown in the table below and these choices make ideal selections for traders looking to trade the emerging markets.

Company (Ticker) Weighting (%)
Taiwan Semiconductor Manufacturing Co. Ltd(TSM). 2.9
Tencent Holdings Ltd. (TCTZF) 2.0
Petroleo Brasileiro SA 1.7
China Construction Bank Corporation (CICHY) 1.5
China Mobile Ltd. 1.4

 Looking To Semiconductors For Growth

As the internet of things continues to take hold, semiconductors continue to play an ever increasing role in our everyday lives. The long-term growth prospects for this sector are very lucrative and there are few companies with the cost structure of TSM. For those of you who don’t know, TSM is engaged in manufacturing, selling and packaging integrated circuits and many types of semiconductor devices on a very large scale.

The stock has had an amazing run over the past five years with gains of more than 100 percent. Recent weakness is being looked at by many traders as a reversion to the mean and could be an ideal time for long-term traders to take a position. You’ll see that the price has historically been able to find support near the 200-day moving average, but it hasn’t bounced off this level as nicely as many of its large-cap U.S. counter parts. Stop-loss orders should be set below the 200-day moving average, but some room should be given due to the emerging markets' nature of inherent volatility.

The Bottom Line
With recent comments on stretched stock valuations by Janet Yellen, it is a natural reaction for active   traders to look overseas for growth. In many cases, checking out the components of major emerging   markets ETFs such as the Vanguard Emerging Markets VIPERS can provide valuable insights for those looking to develop a watch list. As discussed above, you’ll find that Taiwan Semiconductor        Manufacturing Co. Ltd.TSM had a tremendous run over the past five years. Generally speaking, it is very uncommon to see companies with market caps of more than $50 billion double in value over five years. Luckily for TSM investors, there aren't major technical signals showing this trend will reverse any time soon.

Tuesday, 28 January 2014

Reported Earnings-True Measure Of Stock Performance

Variability Of Earnings & Risk Assessment-
Anything that increases the variability of earnings (e.g., recession, write-offs or poor business decisions) increases the unpredictability of earnings and therefore increases the risk of the stock.
A focus on definitions of earnings other than reported earnings may cause investors to underestimate the risk of a company.
If investors value a company “ Up “ the income statement and as a result believe the company is of higher quality than it might truly be, the company’s valuation will be higher & the cost of capital lower.
Investors should generally prefer to value companies “ Down “ the  income statement in order to get a better assessment of the risks of the company and to be compensated correctly for those risks.
During the Technology Bubble when investors were valuing companies on price-to-sales ratios, investors had simply handed the tug-of-war rope to the companies without even putting up a fight.
Search For Grail-
There has been strong evidence amassed regarding the efficacy of incorporating reported earnings into stock selection and style rotation strategies , but investors continual search for the ‘ Holy Grail ‘ puzzles many.
It is yet to be found strategies based on any of these supposedly superior measures that outperform reported earnings, but investors’ disbelief and their searches for “New & Improved “measures continue.
The Results-
During the last several years, valuing companies “Down “the income statement would have clearly benefitted portfolio performance.
15-Year Annualized Return Of Selected Value Strategies
Low P/E – 15.8%
Low P/CF - 13.6% (Price To Cash Flow)
Low P/S – 11.4% (Price To Sales)

Average 12-Month Price Return Of Selected Value Strategies
Low EV/EBITDA – 12.3% (Enterprise Value To EBITDA)
Low P/E – 16.7%
Low P/CF – 14.8%
Low P/B- 13.7% (Price To Book Value)
Low P/S- 13%

One of the prime tenets is that reported earnings are the ultimate drivers of stock prices.
Focusing on definitions of earnings other than reported earnings may cause investors to underestimate the risk of a company.
A hypothetical “Tug-Of-War “exists between the investor and company over a company’s valuation. Companies generally attempt to guide investors to value their stocks as far up the income statement as possible in order to better mask variability.
Why search for a new “Holy Grail “? We have yet to find strategies based on any of these supposedly superior measures that outperform reported earnings, but investors’ disbelief and their searches for “New & Improved” measures continue.

Q1. Does low P/E wok across the markets equally?

Q2. P/E may work best in the US, but may be flawed when applied across borders. Enterprise value to EBITDA may work better. Your thoughts?

Q3. Were the ratios you used forward-looking or trailing?

Q4. If purchase of low P/E consistently works with and across markets, what does that say about the efficiency of markets? Why does the strategy work?