Hype Dark (Politics)

Short: Income Long: Growth

2010-03-02T12:43:12Z

Apologies for the extended absence from my post as political/financial contributor to HD. Now for the business end of things:

Growth stocks have outpaced income stocks in general over the last bull run 2001-2007. Cheap liquidity sloshed into growth stocks in the form of leveraged positions, and resulted in... well, growth. Income stocks were relegated to lower positions, as investors sought aggressive, active, alpha-origin returns rather than the more passive income from dividend yielding stocks. Those few which managed to be both, ie financial institutions, crashed horrifically over the GFC period (Great Financial Crisis, as it is now being called).

Some investment managers are suggesting a shift in fundamental risk appetite towards income stocks, as investors look for a smaller yet more reliable source of capital growth. In theory this would be a good portfolio management move, and is a play that comes right out of the textbook. A stock with a yield of 6%, say Vodafone, could shift over +-20% per annum yet still pay out 6% year on year. For a longer term investor, long-dedicated fund manager, pension funds or other deep horizon investors, the interim beta doesn't matter as to them their investment is crystallised for the next 5-10 year period. Investors who thus have a fundamentally conservative outlook on financial markets (those who believe markets are always correct in the long term), combined with those who think that income is a safer capital growth stream than price increases, are likely to flock to dividend stocks. Correct?

Well, in theory there are multiple drivers which determine where liquidity is directed. A massive contributor is government interference into market forces.
On the 6th of April, new taxation laws will come into effect, meaning that the top 1% of income earners (150k+ total comp) will be subjected to a wealth destroying, punitive income taxation rate of 50% over and above other taxes. What effect will this have on investment patterns? There are two factors

1. Income from dividends that is taken out as income is considered "income" for taxation purposes, and will be hit by the 50% income tax. This means that the effective rate of taxation upon dividends will come to 42.5% after deductibles.

2. Capital gains are only levied on realised profits from capital growth. And even then, the rate of the levy is 18%, with the first 10k being tax free.

Thus as we see dividend payouts being increasingly costly post 6th April, we must question which investor/ manager would be happy with returns that are instantly 10% lower post-tax? The tax bracket being hit by the chancellor and PM are overwhelmingly the upper-middle "investor" classes, who have a vast influence on stock beta due to active investment decisions either via brokers or wealth managers. Thus the effects of their liquidity directions could spark off a new trend.

Under this path of thinking, liquidity would be siphoned out of income stocks and into growth stocks. Since income stocks are a fundamentally long-term play, it stands to reason that depressed asset prices will continue in perpetuity, or until a change in the tax regime. If this occurs, the prominence that investors and companies pay to dividends may diminish rapidly. A focus on stock price growth could factor in capital reserves under book value, or the capital saved from nonpayment of dividends could be used to expand the business and thus rally security prices. Perhaps, in time, dividends will become a thing of the past.

NB This logic applied primarily to UK LSE listed securities. The effect on global equity markets is speculated to be minimal.

Indian Election Results

2009-05-16T11:19:26Z

So the results have just been coming in, with a huge surprise. While my favoured alliance in this election was crushed to pieces, the emergence of a strong UPA majority is most welcome.

As for my predictions pre-poll, it was a mixed bag. The third front was totally routed, Mayawati was annihilated at the polls. My faith in democracy was partially restored.

I predicted the huge upset in West Bengal + the smaller upset in Kerala, and the Indian voters duly followed. Have we seen the end of the Communists in their last bastions of West Bengal and Kerala?

What I didn't see was INC(i) totally wiping the floor with their opposition in Rajasthan, Maharashtra and Uttar Pradesh. These "hindu heartlands" rejected the rhetoric of Varun Gandhi, the diffidence of LK Advani, the communal anti-brahminism of Mayawati and the left in-toto.

So what does this hold for the future? India shall be left with a stronger parliament, controlled by the INC. Is that a bad thing? In days past I would have certainly said so. My critique of the INC is that they have ruled for over 50 of the 60+ years that India has been independent. Where did they deliver progress? In my mind only two: Indira and Manmohan have created progress in the agricultural and economic fields respectively.

My view of Congress has changed from one of total loathing, to recognising that Congress is not really a true political party. They stand for nothing other than the Indian constitution and secularism. What separates the BJP from them? Nothing much... a few token anti-muslim statements is about it, and that's not much to base a government or a society on.

Congress is the supreme monster of Indian politics. It is fed by the dutiful electorate, who have an intrinsic bias towards it. However the body of the beast follows its head. When the head is weak, Congress is weak. When the head is strong, Congress is strong. The only solution is to have a strong leader for Congress. Manmohan ably plays that role in an intellectual capacity now, but when Rahul Gandhi ascends to his "birthright"... what of India then? Which way will the beast turn?

Whoever leads Congress, leads India. Its as simple as that. On paper, Congress is a noble party with solid fundamentals. The fact that they have rarely delivered is more a measure of the ineptitude of its leaders than of itself.

Moosric Outlook on Indian Elections

2009-05-05T14:13:22Z

Mayawati and BSP to expand seat base massively in UP

Bihar to be split by RJD, JDU. Laloo's RJD to emerge with higher seat tally. RJD to support third front

Tamil Nadu- insignificant in long run, seats to be split either way but leader to join third front

Congress to increase seat share in andhra

BJD to sweep comprehensive victory in Orissa. BJD to join third front

Maharashtra to swing towards Shiv Sena and BJP in the aftermath of Mumbai attacks.MNS to be routed.

Biggest upset set for West Bengal. Congress party to gain seats, Communists to be butchered in the polls
(primarily driven by voter dissatisfaction over the handling of Tata's nano plant closure)

Modi to consolidate power in Gujrat, expand vote share while maintaining seat ratios.

Overall

Congress : To do better in Kerala, West Bengal

BJP : Consolidation of power bases. NDA to lose 10 seats

Third Front : To emerge with 110 seats, challenging the other two parties for power. 3-way split followed by a
coalition of Congress-Third Front, Manmohan to be ousted on wishes of third front.

Mayawati assumes PM role. Prophecies of Kali Yuga fulfilled, Indian business decays as Dalit quotas enforced in private sector. Educational institutions' reputation in tatters resulting from increased OBC + shedule caste quotas.

Cattle Governance

2009-04-27T12:18:09Z

Political doctrines explained via cows. Yup, semi-plagiarised...

FEUDALISM: You have two cows. Your lord takes some of the milk.

PURE SOCIALISM: You have two cows. The government takes them and puts them in a barn with everyone else's cows. You have to take care of all of the cows. The government gives you as much milk as you need.

BUREAUCRATIC SOCIALISM: You have two cows. The government takes them and put them in a barn with everyone else's cows. They are cared for by ex-chicken farmers. You have to take care of the chickens the government took from the chicken farmers. The government gives you as much milk and eggs as the regulations say you need.

FASCISM: You have two cows. The government takes both, hires you to take care of them and sells you the milk.

PURE COMMUNISM: You have two cows. Your neighbors help you take care of them, and you all share the milk.

RUSSIAN COMMUNISM: You have two cows. You have to take care of them, but the government takes all the milk.

CAMBODIAN COMMUNISM: You have two cows. The government takes both of them and shoots you.

DICTATORSHIP: You have two cows. The government takes both and drafts you.

PURE DEMOCRACY: You have two cows. Your neighbors decide who gets the milk.

REPRESENTATIVE DEMOCRACY: You have two cows. Your neighbors pick someone to tell you who gets the milk.

BUREAUCRACY: You have two cows. At first the government regulates what you can feed them and when you can milk them. Then it pays you not to milk them. Then it takes both, shoots one, milks the other and pours the milk down the drain. Then it requires you to fill out forms accounting for the missing cows.

ENRON VENTURE CAPITALISM:You have two cows.You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more.Sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public buys your bull.

A FRENCH CORPORATION:You have two cows.You go on strike, organise a riot, and block the roads, because you want three cows.

A JAPANESE CORPORATION:You have two cows.You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk.You then create a clever cow cartoon image called 'Cowkimon' and market it worldwide.

A GERMAN CORPORATION:You have two cows.You re-engineer them so they live for 100 years, eat once a month, and milk themselves.

AN ITALIAN CORPORATION:You have two cows, but you don't know where they are. You decide to have lunch.

A RUSSIAN CORPORATION:You have two cows.You count them and learn you have five cows. You count them again and learn you have 42 cows.You count them again and learn you have 2 cows. You stop counting cows because your sobering up and open another bottle of vodka.

A CHINESE CORPORATION:You have two cows. You have 300 people milking them. You claim that you have full employment, and high bovine productivity, and arrest the newsman who report the real situation.

PURE ANARCHY: You have two cows. Either you sell the milk at a fair price or your neighbors try to take the cows and kill you.

LIBERTARIAN/ANARCHO-CAPITALISM: You have two cows. You sell one and buy a bull.

UK: You have two cows. The elected representative of your neighbours comes and takes away one cow, kills it and distributes the beef to your neighbours. A bureaucrat then comes along and demands that you give him your obliged amount of milk... but since you only have one cow you cannot meet the obligation. He then takes your other cow as a fine and gives it to an asylum seeker. You move to Switzerland.

SURREALISM: You have two giraffes. The government requires you to take harmonica lessons.

The warped logic behind the London demonstrations

2009-04-12T14:33:22Z

Today in London we witnessed one of the largest demonstrations we have seen against the Sri Lankan government's ongoing war against the LTTE. My thoughts on those demonstrations, as a moderate Sinhalese who is more often than not highly critical of the actions of the Sri Lankan government, are as follows, and in my argument I make a single assumption: that the sole concern of such demonstrations is to prevent the further deaths of innocent civilians caught in the crossfire.

First, I would like to say that yes, we see your point. We see the news, the youtube videos, and the pictures of the hundreds of innocent civilians who are caught in the cross fire. As a Sri Lankan, I too am appalled by the deaths of my fellow countrymen.

But such demonstrations demanding that the Sri Lankan govt. immediately agree to a ceasefire are misplaced.

It is widely acknowledged that these innocent civilians are being held as human shields by the LTTE itself. This has been confirmed by various International Agencies which have been providing humanitarian assistance in the area. In fact, the United Nations has repeatedly called on the LTTE to cease using innocent civilians as human shields, and just today, the Co-Chairs comprising of the likes of Japan and the EU have also followed suit. Thus, I think it fair to say that there is credible evidence that those innocent civilians are being held against their will by the LTTE.

If that be the case, then isn't the more logical course of action for all those who are concerned about the deaths of these innocent civilians to call for the LTTE to cease this cruel practice? If, as the claim is, the foremost concern is the safety of those innocent civilians, then should not the rallies, the hunger strikes, and the incessant chanting be channelled towards convincing the top brass of the LTTE to let those innocents leave the war zone, so that the LTTE can face the Sri Lankan Army on its own? (without the help of innocent women and children?)

It is indisputable that the Sri Lankan government is winning this war. Any military analyst will know that the only reason the LTTE continues to fight today is because it continues to use innocent civilians as human shields. The LTTE, which claims to fight for the Thamil people, are more than willing to sacrifice the lives of those very people simply to save themselves from defeat. If one has the interests of those innocent civilians as their sole concern in calling for a ceasefire, then how can it be that the demand is against the Sri Lankan government to call a ceasefire, and not for the LTTE to cease its cowardly practice of using innocent women and children to save itself from defeat? And regrettably, if that is not one of the demands, then the only logical conclusion one can make is that such demonstrators are seeking the survival of the LTTE under the pretext of saving the innocent Sri Lankans that are caught in the crossfire â�� a most alarming conclusion.

To put an end to collateral damage, one needs to put an end to the war. To put an end to the war, mere demonstrations about collateral damage will not suffice. It did not bear fruit with the Israel/Palestine conflict, and it will not do so here. Instead, one needs to address the underlying problem that is the cause of the war. The cause of the war is a terrorist organisation seeking a separate state, an aim that is unsurprisingly unacceptable to a sovereign nation. But if that organisation were to recognize that continued fighting simply places the lives of thousands of innocent civilians it claims to represent at the risk of death, and release those civilians from their clutches, this war would end tomorrow, and consequently, the end of collateral damage would follow. There would be no more gunfire; there would be no more death.

A few concluding words to a rational thinker: if you claim to solely have the interests of the innocent civilians caught in the crossfire at heart, then it is only logical that you take the course of action that is most likely to prevent further innocent deaths. The LTTE is 95% militarily defeated, and they will not come back from this. If that be the case, then is it reasonable to ask the imminent victor to cease the war? Instead, is it so unreasonable to ask for the LTTE to release these civilians and ensure their safety?