Sudip Bandyopadhyay’s Blog

There’s a joke about a man unable to get to sleep while staying at a hotel in Las Vegas.  He goes down to the roulette table, puts $5 on black and wins. He keeps betting and rides an amazing streak, finally holding well over $1m in chips. Deciding to trust Lady Luck one last time, he loses everything. Returning to his wife in the hotel room, she asks how he did.  “Not too bad. I lost five bucks.”

Like the gambler, many of Bernie Madoff’s long-time investors had amassed wealth on paper, but their loss was only their initial “investment”. The rest was an accounting fiction. They thought they had it, though, and that gave them satisfaction. In this sense, the money’s power was magnified - it was simultaneously theirs and Madoff’s.  In his work on the 1929 crash and its aftermath, John Kenneth Galbraith described this phantom sum as “the bezzle”.  “There’s a kind of psychic wealth because there are two parties laying claim to the same pot of gold,” says Richard Parker of Harvard University’s Kennedy School of Government, who recently published a biography of the economist.  Galbraith wrote that the bezzle was always present but that it swelled during booms and shrank after a crash.  “In good times people are relaxed, trusting, and money is plentiful,” Galbraith wrote.  “But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed.”

The sub prime crisis, the collapse of US Banks and Financial Institutions, the Madoff Scam and the recent fraud unveiled at Satyam has given rise to the call for tighter regulations across the world.  For the sake of business, economy and shareholders across the globe, let us hope that matured decision making prevails over such strong sentiments.  The collapse of once revered Enron triggered a regulatory panic in US resulting in Sarbanes Oxley legislation enacted in July’02.  Despite the good intentions Sarbanes Oxley has come with a host of costly and undesirable consequences that do little to protect the shareholders.  The most troubling effect has been on smaller firms.  Mandatory paper work and bureaucracy have hit these companies the hardest.  It has also failed to protect the shareholders from frauds like the Satyam Saga.  US economy and the financial markets clearly lost out to UK during the phase 2002 -08, driving companies away from Sarbanes Oxley.

Markets continued to remain under pressure in the week gone by with indices falling by 2%. Global economic data released from the U.S. and Europe during the week ignited fresh concerns of the painful effects of the ongoing recession in these economies, which consequently impacted market sentiment in local markets also.

The news about Nortel Networks Corp, North America’s biggest telephone equipment maker, filing for bankruptcy also shocked the market sentiments and increased investor concerns on more economic pain ahead.  Meanwhile Crude oil prices have continued to nosedive sharply, having fallen almost 23% in the last two weeks, touching a low of $33 per barrel. The fall in crude prices was on account higher job losses in the U.S. and after the U.S. energy information administration forecasted a drop of more than 8 lac barrels per day (bpd) in the world consumption this year.  Also the European Central Bank cut its benchmark interest rate by 50 basis points to 2.0 % which is a record low, as the deepening recession pressed policy makers into action. Within the euro region recent economic data has showed that Germany’s economy, which is the euro zone’s biggest contributor, shrunk by 1.5-2.0 % in the fourth quarter of 2008 and one is expected to see a further contraction in 2009 also.

On the domestic front, IIP data for Nov 08 was a ‘positive’ surprise at 2.4% as against a consensus estimate of -0.80% and 4.5% a year ago. This growth as compared to Oct 08 was mainly due to a better performance of the Manufacturing sector (2.4% yoy) and Consumer non durable goods (7.3% yoy).  Inflation has also continued to moderate and has touched a new 11 month low of 5.24% from 5.91% last week.  With inflation moving southwards, and the government giving feelers that another round of fuel price cut likely to be announced soon, we expect inflation to reduce further which is likely to make way for more monetary action in RBI’s expected monetary meet by this month end.

Earnings season which started last week has not provided any positive surprises for the markets so far. FIIs remained aggressive sellers through the week post Saytam saga. Also domestic institutional participation was bleak. The current status of the market is highly oversold with focus getting shifted to mid cap and small cap segment. On the downside Nifty has managed to stay above crucial support of 2700. High volatility could be witnessed, during the week.  Any positive action by the government on the petroleum product pricing front would give a boost to the market.  Expectations are also building for further RBI monetary policy action.

( ** this is the transcript of the weekly column I write for Economic Times )