Tuesday, August 25, 2009

Where do we go now?

I remember a interesting exchange that Taleb had written in one of his books either the “ Black Swan” or “ Fooled by randomness”, I cant recollect which one.

In one of the customary morning meetings that are part of all securities firms one of the traders asked him what would he assign a higher probability to the markets going up or down next week. Taleb’s view was that he would assign a higher probability of the markets going up.

The trader asked him his follow up question on what Taleb’s position was. He replied he was going short on the market which of course perplexed the trader.

It is a interesting exchange. The trader of course missed the point that what is important is not just about the probability of the market moving in a particular direction but how much can the market move in a particular direction.

So there could be a 70% probability of the market moving up 10% and a 30% probability of the market moving down 40%. The payoff in the probability matrix of the market moving down is much higher.

Why did this thought cross my mind? The current market seems to be poised at a interesting juncture. Though the momentum seems to indicate a higher probability of it moving up, the quantum of downside if it plays out will be much higher.

Where do we go
Where do we go now
Where do we go
Sweet child o' mine - Guns & Roses

Thursday, August 6, 2009

Profit Growth versus EPS growth

Sales up 15%. Profit up 20%.

I am sure you have seen a lot of advertisements over the last few days which look fairly similar. So where is the gap in this storyline? Does all this profit growth necessarily translate into EPS growth? The answer is no and that’s where we miss the wood for the trees.

There is a lot of equity dilution that is happening out there in the marketplace. All these QIP’s / GDR’s that the markets are applauding, ultimately lead to equity dilution. A lot of FCCB’s are getting repriced post negotiations to current market prices which are leading to substantially larger equity dilutions.

Preferential allotments are happening to promoter groups at substantially lower prices because of depressed stock prices over the last six months. And of course there is always Esops which expand the equity base.

The devil as they say is always in the details and in this case the EPS numbers.