Now markets catch Japanese flu

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Informative article, from rediff...

Now markets catch Japanese flu
Chandnee Sinha
August 17, 2007

The Bombay Stock Exchange Sensitive Index or the Sensex as it is popularly known has fallen by around 350 points from Thursday's close, at the time of writing this. On Thursday (August 17, 2007) the stock market fell by 643 points. So in less than two days time, the stock market has fallen by 1000 odd points.

One of the reasons pointed out has been the meltdown in the subprime home loan markets in the United States. The other main reason for this fall has been the unwinding of the yen carry trade. In this piece lets try and understand how the "mild mannered" Japanese can impact the Sensex.

When Americans sneeze India catches cold
The Japanese economy over the years has not been growing at all. To encourage people to go out and spend money, and hence ensure that companies earn money and the economy grows, the Japanese central bank (there equivalent of the Reserve Bank of India [Get Quote]) has held interest rates at around zero per cent levels since March 2001.

So it makes immense sense for investors to borrow in the Japanese currency, yen, at almost zero per cent interest rates, and invest anywhere in the world.
Lets take a case of an investor who borrowed 12000000 yen in the middle of January 2007. Back then one US dollar got you around 120 yens. So the money was first converted into dollars. At 120 yens a dollar, the investor got $100,000 (12000000/120). This $100,000 was then invested in an emerging market like India.
But to invest in India, you need rupees. US dollars, won't do. Hence the $100,000 was then converted into rupees. At that point of time one US dollar was worth around Rs 44. Hence the $100,000 got the investor Rs 44,00,000 or Rs 44 lakh to be precise. This was invested in the Indian stock market. The Sensex on January 15 was at 14, 129.64.

Between January 15, 2007 and August 16, 2007 when the Sensex closed at 14,358.21, it has given a return of 1.62 per cent. Hence the Rs 44 lakh invested by the investor in India would have amounted to Rs 44.71 lakh as on August 16, 2007.
Now lets us say the investor decides to get out of the stock market on August 16, 2007. He sells out his investments for Rs 44.71 lakh and first converts the money to US dollars. Currently one US dollar is worth around Rs 41. Hence at this rate he gets $ 109,053 (Rs 44 lakh/41).

He had taken the loan originally in the Japanese yen, and hence the US dollars need to be converted into yen. Currently one US dollar is worth 112 yen. At this rate $109,053, gives 12213947 yen. This means a profit of 213947 yen or 1.78 per cent on an investment of 12000000 yen for the investor.

This is the way yen carry trade happens. Now the million dollar question is "Why is this leading to the Indian stock markets falling?"

To understand this, we first need to understand why is the yen carry trade investor selling out of the Indian markets, or unwinding as the jargon goes.
The Japanese yen has been appreciating against the US dollar since late June, when it touched 124 yens to a dollar. Currently one US dollar is worth around 112 yens. With the yen appreciating the carry trade investor is getting lesser Japanese yen, for every US dollar. This is a losing proposition for him, since he needs to repay his loan in the Japanese yen.

If instead of 112 yens to a dollar, the carry trade investor got 124 yens to a dollar now, as he was in late June, he would have made a profit of 1522585 yen or 12.7 per cent on an investment of 12000000 yen.

So as we can see, the appreciation of the yen to 112 yens to a dollar, has led to the profit of the carry trade investor coming down drastically to 1.78 per cent.
The current feeling in the foreign exchange markets is that the yen will keep appreciating against the US dollar, due to various reasons. So if the yen were to appreciate to 110 yens to the US dollar, and the Sensex remained around the yesterdays level, the investor would make a loss of around 0.03 per cent. At 108, yens to a dollar, the loss would increase to 1.85 per cent.

Its obvious that no investor wants to make a loss. To avoid making a loss the yen carry trade investor is selling out at the current levels.

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Cheers,
Niteen S Dharmawat
Mobile: 9850571857


IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.

Re: IDBI Accumulate - Updates

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IDBI is moving up again and has closed today at Rs 125. It was recommended at Rs 70 on 05 Mar 2007 and has seen a fantastic run since then. In last 5 months it appreciated by 78.5%. Long term investors should hold it. They should not get bothered by sub-prime market or anything like that if you are a real long term investor.

Happy investing.

Cheers,
Niteen S Dharmawat
Mobile: 91-9850571857

IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above.

> ----- Original Message -----
> From: "Niteen S Dharmawat"
> To: "Niteen S Dharmawat" < ndharmawat@india.com>
> Subject: Re: IDBI Accumulate
> Date: Thu, 28 Jun 2007 17:47:19 +0530
>
>
> Hi,
>
> I asked to accumulate IDBI at Rs 70 on 05 Mar 2007. Now the stock
> has touched 52 weeks high 113.90 which is an appreciation of 63% in
> just 3.5 months. Those who are short term traders can book the
> profits at these levels and rest, long term investors, can still
> remain in the stock. Remember the long term target is at least Rs
> 150.
>
> No new exposure at this level in this stock.
>
> Cheers,
> Niteen S Dharmawat
> Mobile: 91-9850571857
>
> IMPORTANT DISCLAIMER: Investment in equity shares has its own
> risks. Sincere efforts have been made to present the right
> investment perspective. The information contained herein is based
> on analysis and up on sources that we consider reliable. I,
> however, do not vouch for the accuracy or the completeness thereof.
> This material is for personal information and I am not responsible
> for any loss incurred based upon it & take no responsibility
> whatsoever for any financial profits or loss which may arise from
> the recommendations above.
>
> > ----- Original Message -----
> > From: "Niteen S Dharmawat"
> > To: ndharmawat@india.com
> > Subject: Re: IDBI Accumulate
> > Date: Fri, 09 Mar 2007 18:39:28 +0800
> >
> >
> > You would remember that I had mentioned that IDBI holds 13% of
> > NSE. This is further development in the NSE stack. Please read
> > on. IDBI can provide lucrative results... Hold it or accumulate
> > it at current levels...
> >
> > Source: http://www.thehindubusinessline.com/businessline/blnus/05091207.htm
> >
> > Morgan Stanley, Citigroup, Actis buy 6 per cent stake in NSE
> > MUMBAI: Morgan Stanley, Citigroup Inc and global private equity
> > investor Actishave signed agreements with eight investors to buy
> > a total 6 per cent stake in the National Stock Exchange (NSE),
> > the stock exchange has said.
> >
> > Morgan Stanley will buy a 3 per cent stake in NSE, while
> > Citigroup will pick up 2 per cent. Actis will buy a 1 per cent
> > stake, the NSE said in a statement.
> >
> > Industrial Development Bank of India, State Bank of India, SBI
> > Capital Markets Ltd., Corporation Bank, Union Bank of India, Bank
> > of Baroda, Canara Bank and Oriental Bank of Commerce are the
> > institutions selling stakes in the NSE.
> >
> > Industrial Development Bank is selling a 2 per cent stake, while
> > the State Bank of India is offloading a 1.5 per cent stake. The
> > others are selling less than one per cent stakes. NSE did not
> > disclose the value of the deal.
> >
> > In January, the NYSE Group, General Atlantic, Goldman Sachs and
> > Softbank Asian Infrastructure Fund signed agreements with a
> > consortium of investors to pick up a total 20 per cent stake in
> > the NSE, the country's largest bourse in terms of average daily
> > traded volumes.
> >
> > The Government rules prevent any single investor from holding
> > more than 5 per cent in bourses. Foreign direct investment in
> > bourses is capped at 26 per cent.
> >
> > Cheers,
> > Niteen S Dharmawat
> > Mobile: 91-9422348493
> >
> > IMPORTANT DISCLAIMER: Investment in equity shares has its own
> > risks. Sincere efforts have been made to present the right
> > investment perspective. The information contained herein is based
> > on analysis and up on sources that we consider reliable. I,
> > however, do not vouch for the accuracy or the completeness
> > thereof. This material is for personal information and I am not
> > responsible for any loss incurred based upon it & take no
> > responsibility whatsoever for any financial profits or loss which
> > may arise from the recommendations above.
> >
> >
> > > ----- Original Message -----
> > > From: "Niteen S Dharmawat" < ndharmawat@india.com>
> > > To: "Niteen S Dharmawat"
> > > Subject: Re: IDBI Accumulate
> > > Date: Mon, 05 Mar 2007 21:28:05 +0800
> > >
> > >
> > > Hi,
> > > Hope you all remember this mail. Now with in 2 months we have
> > an > opportunity to accumulate IDBI. I am a conservative investor
> > so > did not recommend or buy at 79 level and stock touched 100+
> > with > in no time. In that process we loose on the opportunity to
> > buy > but we safegaurd our interest when the stock plummets.
> > >
> > > But now the stock price is close to 70 which definitely offers
> > > value for money. long term buy... for sure...
> > >
> > > Cheers,
> > > Niteen S Dharmawat
> > > Mobile: 91-9422348493
> > >
> > > IMPORTANT DISCLAIMER: Investment in equity shares has its own >
> > risks. Sincere efforts have been made to present the right >
> > investment perspective. The information contained herein is based
> > > on analysis and up on sources that we consider reliable. I, >
> > however, do not vouch for the accuracy or the completeness >
> > thereof. This material is for personal information and I am not >
> > responsible for any loss incurred based upon it & take no >
> > responsibility whatsoever for any financial profits or loss which
> > > may arise from the recommendations above.
> > >
> > >
> > > > ----- Original Message -----
> > > > From: "Niteen S Dharmawat" < ndharmawat@india.com>
> > > > To: ndharmawat@india.com
> > > > Subject: IDBI Accumulate
> > > > Date: Thu, 11 Jan 2007 13:09:04 +0800
> > > >
> > > >
> > > > Dear All,
> > > >
> > > > IDBI holds 13% of NSE, which works out to US$ 260 Mn or Rs.
> > 16 > > per share. IDBI has similar investments in clearing >
> > corporation, > Care, NSDL, SIDBI etc. Good to accumulate between
> > > Rs 70-75 from > a long term perspective. Currently trading
> > near > 79.
> > > >
> > > > Cheers,
> > > > Niteen S Dharmawat
> > > > Mobile: 91-9422348493
> > > >
> > > > IMPORTANT DISCLAIMER: Investment in equity shares has its own
> > > > risks. Sincere efforts have been made to present the right >
> > > investment perspective. The information contained herein is
> > based > > on analysis and up on sources that we consider
> > reliable. I, > > however, do not vouch for the accuracy or the
> > completeness > > thereof. This material is for personal
> > information and I am not > > responsible for any loss incurred
> > based upon it & take no > > responsibility whatsoever for any
> > financial profits or loss which > > may arise from the
> > recommendations above.