LinkedIn IPO: Peeling Back the Onion

I write a guest post for Startupcentral, India’s most authoritative venue for information on startup companies, VCs, PE players and deal making activity in that space. Read on…LinkedIn IPO: Peeling Back the Onion

Who’s Managing Your Money?

About an year back I was part of a team that studied the habits of Indian investors about how they manage their wealth. Some traits were common across the demographics – Advisors were not trusted (they are merely product pushers), too much information overload, no way to understand a 360 degree view of current wealth and so on. When it came to the high net worth individuals (those with an investible surplus of greater than five million US Dollars), there was another refrain that we heard several times. “I really don’t know much about the advisors. I have people to deal with them. They do everything for me”. This implied a commutation of trust – from the financial advisor to the personal assistant(s). I also had the opportunity to witness first hand how such personal assistants to high networth individuals are given VIP treatment by the wealth managers and get their own personal tasks executed by these wealth managers. It was quite evident that two things had happened. One, the power of wealth was surrogated to the gatekeepers who by definition should have played a mere fiduciary role on behalf of the HNI and two, the wealth advsiors were treating these gatekeepers as their client.

In light of the embezzlement that happened by a Relationship Manager at Citibank defrauding his clients – mostly high net worth ones – this not-so-subtle switch of relationships and power becomes important. It so transpired in the case that this Relationhip Manager had managed to get blank forms, power of attorneys and in some cases financial instruments signed by his clients which he went on to use in illegally moving funds from their accounts (included in this roster of clients is someone who had started Daksh and later sold it IBM. This person included Vikram Pandit in his police complaint). I suspect that at least in some cases the clients really had no idea of what they were doing, because there were gatekeepers. It also is not above suspicion if there were collusion between the Relationship Manager and the gatekeepers (nothing has come out on that as yet though). The promise made by the relationship manager to his “clients” was a 2-3% return per month. Now anyone, including my seventy year old mother, would know that such returns are just impossible (else, Puri, the relationship manager would not have been working for a salary). I find it difficult to imagine a conversation between Puri and Sanjiv Aggarwal that gets to this point and where Aggarwal pulls out his Mont Blanc and starts signing those blank forms. Such conversation between Puri and a gatekeeper with a promise of kickbacks – not too difficult to imagine.

The moot point here is that the supply side malaise in form of rogue advsiors is just one dimension of the problem. There is a structural demand side issue as well and this cannot be labeled as an education deficit challenge. The problem is with individuals surrogating their money management responsibilities to questionable fiduciaries and taking a hands-off approach. A systemic behavioral problem takes more time to solve than mere correcting operational principles, which Citi is probably doing right now.

How sustainable is my rally?

Indian stocks scaled this morning highs not seen since Jan 2008. The bellwether Sensex crossed 20,000 and the Nifty crossed 6,000 as soon as markets opened. Scaling big-figure marks in India – and possibly elsewhere – makes news, though the markets have fallen below those high-water marks in afternoon trade. Studying market components in any large up or down move provides interesting insights, mostly about the breadth of the market, the “flavors” and overall about the sustainability of the move. The graph below shows the CNX NIFTY in the past five years (Left axis, blue line) and the spread between % changes in the CNX NIFTY and CNX MIDCAP INDEX (spread measured in basis points, on the right axis, red line).

Typically one expects the mid-caps to expand faster in a rally (widening the spreads. As seen in the highlighted area of the graph), but this time around, even as the index has reached close to lifetime highs, this hasn’t been the case.

This could mean one of two things. One, investors have gotten smarter and not pushing valuations in the mid-cap space as large caps march ahead. Two, the frenzy is yet to begin. Take your pick.

PS: Deepak Shenoy has a trademark well-thought article on the markets.

Disclosure: I am net long in the market, though I have pared my positions substantially.

Managing your wealth

Every human act is served better with a goal. Lack of it is like driving aimlessly. You can chance upon a serene waterfall amidst a lush of green, but the odds are stacked heavily against you. The same goes for managing one’s money or wealth. One, however, has to consider some frame-of-mind issues before passing a blanket judgment. Example, a younger yet earning generation may not be so goal oriented in nature when compared to how a mature generation goes about wealth management.

There has been a recent spurt of online services providing goal oriented wealth management services (besides the promise of aggregating scattered repositories of wealth information to give a holistic picture). Most of these are North America based like Mint and FutureAdvisor. There are ones in India too like this and this

I have setup a poll to understand wealth creation processes. Your responses will help me better understand your inclination towards the wealth creation process

Image courtesy Rediff.com

Stocks at $0, 3 million percent price gains and fat fingers

“Today’s market was neither orderly nor efficient nor trustworthy. It was just a bunch of computers making ugly, messy love with each other. And your money hung in the balance.”, Evan Newman, WSJ

If it were September 2008 not many eyebrows would have frowned on the matter of the Dow dropping 1000 (998 to be fair) points. But one and a half years has made us and the VIX extremely complacent, so it was no wonder that the world went into a collective bellyache at what happened at Wall Street last night (night, yes, I am based in India and was blissfully sleeping when the psychedelic financial histrionics were happening in downtown Manhattan). So what happened exactly?

Stocks had started selling off at around 1430 hours and at around 1440 two large blocks of P&G shares (possibly sell orders) were put on for trade. P&G tanked by some $14 (on a base of $62) and it is entirely likely that algorithms took over and compounded the problem

Unlikely question at a quiz competition: What is common to the following stocks? Exelon Corp, Boston Beer, Accenture, CenterPoint Energy, TransMontaigne Partners, Impax Labs. Answer: All these stocks traded at $0 for a while (microscopic while, but still) yesterday. Penny stocks took a new and eerie definition on Wall Street

Some quarters believed that a possible stalemate from the UK Elections contributed to the sell-off. This is yet another instance of fitting facts to an outcome. Then there was Sothebey’s (BID) stock that opened trade at $33, pushed up to – hold your breath – $100,000, before closing at $33. Nice return for a day – if your trades do not get canceled!

Rumors have it that someone in Citigroup, with fat fingers (or weak hearing, or both) entered a trade to sell $16 billion of Dow Futures instead of $16 million. Here is a problem that I have often faced with the million-billion phonetics.  Without a very clear diction and the 100 Hz frequency set to the correct slot in your vocal equalizer, it is quite possible to mis-utter (and consequently have it mis-head) the denomination. It is an easy trap to fall into – this business of coining rhyming denominations – but if you were a trader on Wall Street yesterday you would know the pain. Note to whoever-it-may-concern: Zetabyte, petabyte and such are fine to make my friend’s two year old giggle, but just keep in mind this day. Interestingly, this is least likely to happen in India with its lakhs (ten to the power of five) and Crores (ten to the power of seven) convention of value, which are phonetically as far away as Mahmoud Ajamadinejad is from Hilary Clinton are on matters of foreign policy

Coming to India – in another few hours, a Supreme Court bench will pronounce judgment on the natural gas supply issue that is plaguing two large industrial groups – interestingly owned by two warring brothers (Mukesh Ambani controlled RIL, which is stalling gas supply to the Anil Ambani controlled RNRL, citing low prices). Obviously the market has made its call – it expects the verdict to go against RNRL (blue line in chart), which would be quite a shame

Image courtesy: Ghetty Images

Charts and Quotes: Yahoo! Finance

Large Cap, Mid Cap and Small Cap

A friend at Goldman Sachs quipped about the recent rally in small cap stocks in India. “Small caps are always the last leg in the bull market and the first leg in the bear market”, he professed. Conventional wisdom would tend to agree, but what about performance? I pulled the numbers for India and the graph shows two interesting points

1. Since 2009 – in the rally that looks like should correct some time soon, small cap performance > mid cap performance > large cap performance. No real surprises here
2. Since 2003, small and mid caps have actually risen more during bull markets compared to large caps and have fallen less during bear markets compared to the large caps. This is a touch unexpected

Please leave comments with your thoughts why this could happen.

Post Script 1: Since the great depression, US micro caps have returned twelve million percent profits. Go, beat that.

Post Script 2: This is the 100th post in this blog. You had the choice to read a thousand things on the internet. I am humbled that you chose to read me. Thank you.

Life After the Recession: The New World Order

Outlook Business, a noted business magazine published by the Outlook group, ran an essay competition. The theme was the subject of this post. My entry to the competition did not win the first prize (and hence wasn’t published by the magazine). This post was my submission – perhaps my readers will find it worthwhile to read.

The popular joke goes that the world will not be worse off if the weather-men predicted the economy and economists returned the favor. Dangers associated with predictions multiply manifold when the subject is the economy and the time horizon distant. However, with some generality it can be argued that the current financial calamity has three main protagonists. Prognosticating their behavior and roles should provide a reasonable understanding of what to expect when sunshine returns to warm up economies around the globe. The trinity of Capital Markets, Business Institutions and Governments form the core cast of this drama, and also subjects of our investigation.

Capital Markets

Capital Markets are sitting ducks when it comes to apportioning economic blame after a crisis and it has been no different this time around. In the current situation, some of it is deserved. Capital Markets famously failed their masters who relied too much on its self-correcting mechanism. All constituents of the markets brought in their share of economic and policy narcotics that created a heady cocktail and predictably left a global hangover the day after. As retribution, all constituencies will have to take body blows. The sell-side players have taken the most bullets and will emerge very different on the other side. It is entirely likely that a lot of specialized boutique investment and advisory houses will give serious competition to monolithic investment banks, which will struggle to bring the same easy-liquidity driven advisory-cum-financing value proposition of yester years.

The buy-side, i.e. investors, may learn that it is fallacious to ask a barber whether one needed a haircut. Unfortunately their woes are not entirely over. Their main parameter of decision making – instrument ratings from oligopolistic Rating Agencies – has been mired in incentive-conflicts and that is least likely to go away. Left with little choice, the investor fraternity will have to spend more in their internal due-diligence creating a model that may evolve in the same way as buy-side Research has over the past decade. And that could finally drown the Rating Agencies in the same way sell-side Research has been impacted in the past few years.

The direct or indirect impact of effort duplication or increased compliance invariably is increased costs. Even as a lot of OTC instruments make way into standard-claused-exchange-traded ones, higher cost of surveillance and risk management will lead to higher transaction costs for participants. The only bright lining to this silver cloud of gloom is Technology, which capital markets will embrace more than ever before. Increased reliance on algorithmic trading, automated routing to best liquidity pools, automated trading desks, cutting down latency between front office and middle office and such other will have many positive impacts. Given the declining cost structure of technology, wider adoption will offset other rising costs of doing business. Also, it will bring about a systemic efficiency in the flow of information and capital, resulting in lesser friction in the capital market machinery. All this till human fallibility drives us to the next crisis.

Business Institutions

Marketing Guru Seth Godin famously said (and named a book) – “Small is the new Big”. Disappearance of Lehman Brothers, General Motors and other household names in the broking business should prompt Godin to write a sequel. The recession has stripped the last garb off colossal conglomerates that held onto business models and ideas of the past as they lugubriously dragged their bureaucratic organizations nowhere. While transnational conglomerates will still flourish, their businesses and operations will reflect nimbleness of start-up companies. Divisional management structures will become predominant just so the fire of innovation, so often found lower down the ranks, is not dowsed by monolithic organizational designs. Smaller companies are now much less afraid of their T-Rex sized competitors because the downturn has clearly thrown up the latter’s vulnerabilities. These nimble, specialized, technocratic organizations will drive innovations in the post recession world. As example, the automotive industry will see numerous innovations across platforms, products and components with complete democratization of innovation – across functions, geographies and size of companies.

The recession has also brought under light a fair amount of hidden skeletons in corporate closets. Investors have every right to be peeved at appalling standards of corporate governance across the world. Unfortunately the long-only investor fraternity has little incentive to display the level of investor activism that would force better corporate governance and management. It is here that Hedge Funds and Private Equity investors, given their single-minded focus on generating alpha, will play a larger role in the future. Businesses that pride on good management and governance will be a step ahead in attracting the right kind of investors and at lower cost of capital.

Many commentators have predicted an economic (and hence political) demise of the United States. The more probable scenario however is a decline in the US’ relative economic strength  – both in terms of its share in global wealth and its currency. Once Americans start living within their means, the consumption deficit created by them will have to be filled by consumption-power and internal-demand centric countries like India and China (not Russia – it being a commodity centric economy). This shift of consumption will compel multinational businesses to look at these countries in a totally different light. Local strategies, local supply chains, local business models catering to local demographics and trends will gain prominence over blind replication of global practices. Local leaders and managers will not only become important for global organizations, but Boardrooms – and I daresay CEO suites – will see more Indian and Chinese names than ever before.

Governments

The trouble with Capitalism, they say, is that it is the only broken system that works. A fair number of economies around the world currently function as State owned capitalist machines (Marx must be tossing in his grave). This inherent dichotomy has resulted in Governments assuming three roles – namely, Shareholders (from covert or overt nationalization), Market Makers (buying up troubled assets and providing liquidity windows) and Policy Makers (traditional reason for having a Government). The first two roles are reluctant and thorny crowns that the rulers have been forced to place on their heads and they should relinquish these sometime soon. And they will. However, like a newbie investor who has tasted his first fruit of speculative profit, some Governments will be more inclined to intervene in businesses in the future citing current success as an excuse. Government policies are likely to face the conundrum of tactical supervision versus strategic foresight – and at least for the medium term that might be resolved in favor of the former. This will most likely result in either a proliferation of watch-dog agencies or increased government participation in these institutions or both. Long term nation building, especially for countries that need strong forward looking leadership, might suffer the most.

Perhaps the most quoted line in the context of change is Lord Tennyson’s – “the old order changeth yielding place to new”. Irrespective of how the new order shapes up, the fact that it will see increased regulation, state intervention and rising importance of countries blessed with demographic-dividend is most likely. Curiously, the cornerstone of this evolution can be traced back to the next line of the same Tennyson poem – “…and God fulfils himself in many ways, lest one good custom should corrupt the world”.  Laissez-faire market structures, over-leveraged personal, corporate and national lifestyles, and by-a-few-for-a-few style growth cannot be called “good customs” but they sure did corrupt the world. These are edifices the new world order will strive to stamp out.

Post Script: Gopal Ranganath, General Manager, Jet Airways, won the first prize in the contest. You can read his essay here. Yes, it deserved to win.

Image Courtesy: Blue Fountain Media

R.I.P. Peter L Bernstein

His book “Against The Gods” allured me into the exciting world of financial risk management. I have never invested in gold – and have advised, unsuccessfully, to all my women acquaintances – after the compelling arguments in his book “The Power of Gold: The History of Obsession”. In fact every book of his evoked thought and helped me understand the capital markets better. Peter L Bernstein – money manager, author, publisher and also a WW II spy – died on Friday at the age of 90.

I can only echo Justin Fox – I want to be like Bernstein when I grow up.

Rest in peace, Sir.

Basking in Shame

They are the ones who have – or ought to have – their fingers on the pulse of a company they cover. Their intellect is what investors trust. They are the ones who go through a company’s business and financials with a fine tooth comb, unrelenting in their persuasion of the truth, unforgiving in their wrath when they discover a wrong. They are the High Priests for the investing fraternity. They are the Analysts.

It would be funny if it were not sad how many times this tribe has failed the world when it most needed them. A group that was tasked to lead through foresight ended up championing the hackneyed phrase that hindsight is 20/20. Time and again Financial Analysts have shown that they really do not add any more probability points for an investor who is taking aim with his dart at the universe of stocks in search of a sound investment.

Performance of Analysts in the Satyam fiasco is no different. Brokerage houses (institutions that hire the Analysts) have been almost falling over each other to shed positive light on a stock that now isn’t even worth the electricity it takes to show the blinking ticker on a trading screen. Here is a snapshot of – even I am tired of using the phrase – irrational exuberance. A collective display of irrational exuberance actually (and this is just between 01-Dec-08 to date).

Information Analytics in Investment Banks: The Key to Survival (and differentiation)

Diminishing  (if not disappearing) customers, cost scale-backs both inside the firm and outside, a severely choked supply chain of raw material (money) and an equally choked pipeline – pretty much a representative sliver of the current day investment banking business. Even-yesterday’s true-blue business in the capital markets is struggling to just make its ends meet today. So besides eating a bit of the humble pie, what can these banks do, at strategic, tactical and operational levels, to not just weather this storm but emerge stronger once it has weathered off?

Strategic: Explore new business models: The traditional business of highly geared balance sheets used to create opaque assets is over. Not explicitly, but the Glass-Steagall Act has made a quiet comeback as investment banks mimic commercial banks. All this however does not mean that the business of investment banking is dead – companies will still need money and deal-making will still need to happen. That said, the focus is definitely going to move to favor the boutiques and niche firms that bring about a focused capability model – at least in the short to medium term. The surviving bulge-bracket firms too will move to create sector specializations within their generic asset-class driven organizational structures to counter the boutique model. Doing this analytically will be the key, as the management goes about understanding volume and transaction momentum multi-dimensionally across sectors and asset classes and overlay the internal data with macro-economic prognoses.

Tactical: Explore new revenue opportunities: Decisions at the tactical level will have to be much more analytical for the simple reason that resources will be scarce and competition for them very high. During sunshine days, investment banks splurged on information systems, both internal information and external market data. Smart banks will seize this opportunity to bring the information from these two types of systems together to create a much richer intelligence infrastructure for the decision makers. Additionally, strategy department of banks must now look around the industry more than ever before and tools that allow them analyze market share and wallet share will significantly enhance the bank’s ability to both position its products and services as well as accurately target sectors (could not help a bit of unabashed self promotion – check this really neat thing from Thomson Reuters). Significant amount of internal information in a bank resides in memos and e-mails. Besides being amorphous, such information has been traditionally neglected by information managers who failed to create actionable insights from such unstructured content. This is the right time to correct that huge wrong. Internationally diversified investment banks will realize the benefits of disproportional liquidity and possible decoupling of either economies or sectors. However timely dissemination of geo-dispersed information and creating a global, collaborative information system will still remain a challenge for the banks

Operational: Do more with less: Some amount of downsizing is inevitable but it is worthwhile to remember that now is the time to excel in service quality and deepen client relationships. Operational decision makers in investment banks – mostly relationship managers and Associates – will demand that information intelligence is delivered quicker and in a much more actionable and interactive manner than ever before. Analytics like understanding common attributes between most profitable customers and then creating such clusters across other decision making dimensions will result in more efficient targeting. Pricing pressure is inevitable in such troubled times so banks would want to proactively investigate existing fee structures conjointly with other dimensions like sectors, geography and asset classes to possibly detect under-pricing and over-pricing situations and react before the competition – or worse – the client does. Collaboration will become a huge advantage for banks that are well diversified – across sectors, asset classes and geographies. Information system architects must take cognizance and build systems that allows the banks to reap benefits of collaboration synergies.

2008 has been the annus horribilus for investment banks and 2009 does not promise to redeem any of that pain. On the other hand the banks who had the going just about as stressful as an afternoon at the Hamptons would witness Darwinian pressures to evolve into better information processing and assimilating machine than what the easier times forced them to be. And when the tide turns, these banks will be the ones leading the pack.