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Vikrant Sitani's  Instablog

Vikrant Sitani
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Vikrant Sitani, CFA is currently working at well known Financial Services Company. Vikrant holds MBA from Virginia Commonwealth University and is Chartered Accountant from India.
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  • Robert Shiller Vs Prof Siegel CAPE Ration

    September 2, 2013

    Clash of the Cape crusaders

    Robert Shiller's warnings about the internet stock...also doubled between 2003 and 2007. Robert Shiller "Emotions and heightened attention to...desire to get into the game," warned Robert Shiller in 1999. "Such is irrational exuberance... By John Authers

    Above is the link to the article in FT.com and some perspective on that article.

    So I must say this is an interesting read. Beyond the interesting read, don't know how to really use this. Now to complete the analysis, Behavioral Finance professors perspective should have been included.

    Ask the Verizon Board and the Vodafone Board or the Microsoft and Nokia Board. They each just did one of the biggest transactions in their Board. They probably ignored the analysis mentioned in the article in determining the value of the transaction.

    I am just speculating, but probably they must have used DCF analysis in determining the value of the deal. Most important transactions are done with DCF and the shortcuts of how to determine the value just does not exist in the real world.

    Now both well known academics came up with the theory and both happen to be right at the respective time. One of the biggest reasons for stock market growth in 1990s was the tech boom and the increase in productivity in economy due to tech boom. Obviously Prof Siegel proved to be right. This boom lead to bubble and crash of the stock market Prof Shiller proved to be right. Prof Shiller has been saying about the bubble since 1996 and he was wrong for 4 years until the market crashed. With the crash, his popularity grew.

    Now coming up with various shortcuts in determining the value may be helpful and ofcourse the historical perspectives gives us analysis on how the markets have behaved during various cycles. Somehow I have not heard financial advisers advising their clients on divesting or investing in the stock markets based on these theories. Sometimes have heard financial advisers use Prof Siegel's theory for advising clients for investing in the stock market. But they have used that theory consistently in the bull market and bear market.

    I am a big fan on the analysis of both the academic professors and regularly read their articles, but cannot take their analysis to my company management as a basis of divestment or investment in the market.

    Sep 03 9:44 PM | Link | Comment!
  • Is Consumer's Budget Really Stretched?

    In one hears the earnings transcript for Walmart. One gets a feeling that economy is not growing as the comparable sales from last year and have shown virtually no growth.

    However when you start reading other earning transcripts like Whole Foods WFM, one gets a different opinion. Whole foods comparable stores are not only up, however there store count is also up and they are growing.

    Amazon sales are significantly up from last year. Of course they don't have a comparable store as they are one big store.

    What can be inferred is that 3 MM customers of whole Foods are doing much better, therefore they are buying more as compared to last year and some of the customers are migrating to Whole Foods stores. Therefore there is no growth in the produce section of WMT. Additionally TV sales is now happening more on the web. AMZN is grabbing the share of electronics from the stores of WMT.

    The probable inference to blame the unemployment and the consumer financial weakness on lack of growth at Walmart (WMT) is incorrect.

    Aug 25 3:13 PM | Link | 1 Comment
  • Quantitative Easing And Stock Market And Foreign Currency.

    Martin Feldstein in a recent WSJ Op-ed has written about Fed's QE program. There is a popular notion that there is a direct correlation between QE program and the Stock Market. Increase in QE causes the markets to go up and any signs of stopping or reducing the Fed's QE cause the market to drop.

    The Japanese Nikkei is up 50% in the past 4 months ever since the Bank of Japan indicated that it will have their own version of QE. This kind of correlation leads to incorrect conclusion that QE and Stock market growth has 1 to 1 correlation between them. Yen Dollar exchange rate in the past 4 years has gone from 100 Yen to 1 Dollar to 80 Yen to 1 Dollar and now currently back to 100 Yen to 1 Dollar. The financial media has two different versions for the effects of QE. One is that there is a flow of money from outside Japan into Equities therefore the stock market is up. Now what happens to the cash generated by sales by domestic investors is not mentioned. The other effect is on the foreign exchange market, the start of carry trade by Japanese investors is mentioned in the press as cause of drop in exchange rates. The flow of money from Institutions investors from outside Japan in Japanese stock market is excluded in the Yen devaluation against dollar.

    Martin in his article has mentioned that Earnings of companies have grown by about 50% since the recession peaked and the PE ratio of stocks has dropped from 21 to 17. The drop in PE ratio is a sign of reduced demand from investors. Increase in QE probably does not encourage investors to dump bonds and buy equities. Had this be true the PE ratio would have increased. Ultimately over longer period what really matters for share prices is underling cash flows represented by earnings. Some of the popular stories mentioned in the press are just stories. It probably drives some investors, to ride into market, which causes momentum and momentum is a very popular driver of the market. It is okay to be part of momentum, but when to get out of the wave is quite tricky and investors should take note of that.

    May 12 10:56 PM | Link | 1 Comment
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