Money distribution…….

Last week, auto sales numbers came out. It was not impressing; in fact it did revoke some thoughts. Apart from Maruti and Hyundai, no other company is positive on sales. This message makes it clear that people are not buying automobiles.

Urbane-Media-Start-Up-PostReal Estate sales are down for quite some time, which means people are not buying homes either. Inventories of apartments are moving up on a regular basis which is placing severe pressure on the finances of real estate developers. It is just time, that the developers will do distress sales of their holdings which will still supress the markets.

On the other side inflation is cooling down, fuel prices getting eased has given a lot of cushion on the inflation. Wholesale price index has moved into deflation. This again means that people are not buying more of essential products because only if there is no demand can the prices move down.

Does this mean that people don’t have cash to spend, which is not likely because there have been good increments in salaries.

Where does all the money go? One area where it can go is investments. Even there we don’t see a big pick up, though compared to previous years the savings rate this year is a little higher, which is the reason Mutual Funds gave a big support when the markets fell this time. They had purchased stocks to the tune of 22600 Crores in the last 8 months.

So, if investments are not happening, and people are not spending, where is the money going. Obviously, it cannot be stored in the back yard though. A little guessing on this idea, made me think that there is indulgence spending happening in the economy. People are spending money on things that are not of much value. Off late India has become a booming place for start-ups. Every other day there are at least a few start-ups coming out and the beauty is that all of them want to corner market share to show their investors and get funded. And when funding happens, there is more pressure to scale up so that the investors take exit and give way for the next level of investors.

Buy3get3To achieve this goal, almost all of them are playing the discount game. The public today are lured to offers, even if they don’t require a product, for the sake of discounts, they buy things. Buy three get three free. The product price may be ₹5000, which is sold at ₹7000, the buyer feels he makes a 30% profit and buys this merchandise, even though he does not require the 3 that comes free of cost. Whereas for the seller it is a win-win, he would have already got his investment because the merchandize that comes free are those that were inventory that was considered waste and all of its cost had been factored into the existing pricing.

The end result is buying something that did not have much use and having it stored in the house. The inventory that was to be lying at the seller’s godown now takes a place into many buyers’ residences. The loss is distributed, while the buyer is not much worried about not using the purchased products.

startup-keySimilar situations are happening around the country, thereby sucking liquidity from the markets. And there is one more interesting thing happening now in our country. A couple of decades back, in every house the only word that was familiar was software. Software not only took space on the computers, it went into all the nooks and corners of the country. Every house had a software engineer, either working in India or abroad churning big sums as salaries. Since they were earning big money, they were splurging in expenses too. All of a sudden shirts cost upward 3K, shoes above 5K. Real estate sky rocketed all because of demand and there was money chasing these merchandize.

Inequality started showing largely in the economy. A poor man walking with his kid across the road can see through the glass panes of a pizza outlet where the family of a software engineer is wasting food, half eaten and half left because he had judged that he has a big appetite only to realize that his stomach got full with half the quantity. Keeping the food on the table his kids are enjoying a softee from which the ice-cream is melting through the hands of the kid. While at the same time the poor man who is watching this has no money to buy a square meal to his child who doesn’t have a good clothing to wear.

Money just flew away and got accumulated with the software people. Now, after 2 decades, the people who are funding the start-ups are the very same software engineers from their savings. They have so much money, which they want to multiply even faster; in the bargain they are taking wild bets on the start-up companies.

In reality what is happening is that the hoard of money earned is now getting distributed in the form of discounts. The people who beared the brunt of low paying jobs while our software guys took away fat salaries are the people who are most sorts after by the start-ups for their companies to show market strength. All the start-up companies will not see the light of listing in the stock markets which is the ultimate exit point for the Angels and Venture capital investors (Almost all these investors are one time software engineers).

The winning percentage here is less than 5%, if 100 ideas come out as businesses, only 2-3 businesses will get listed. There will buyouts and merciless killings of companies happening in the coming years, in all this drama that is going to happen, the money that is going to be used is from the Angel and Venture capital investors

This kind of spending is not good for the economy. This start-up bubble will soon go into thin air and by that time the distribution would have been fully through.

If the public are smart, each family can easily make a couple of lakhs using the discounts that are dished out by these new age companies. As the money gets distributed, it will move from the hoarders to where it is required.

Be smart, make use of all the apps and take as money as possible from these deep pocket investors, who mostly do not know the dynamics of investing. One thing is good here; this loss to the Angels and Venture capital funds is not going to hurt anyone, because it is a bigger level gambling that is happening in our country now.

So, enjoy the journey, make money in the bargain.

One serious message to the public, when these companies come out into the market to get listed, doesn’t invest in them blindly. Almost all of them are under loss; don’t get sucked by the hype. You were already killed once by sacrificing your dreams when they made big salaries, now, don’t feed in again. Stay out and watch the fun.

Volkswagen emission crisis..

On22nd September SENSEX reeled down above 2%. This was not a big tremor to the public because they got used to such shakeouts since the Volkswagen LogoAugust 24th fall post China crisis. This time the story turned towards the other part of the globe, EUROPE, where there was a mostly calm situation apart from the known fact that the European economy is almost a stagnant economy. Volkswagen has cheated the US authorities by using a faulty emission test norm to sell about 11 million cars fitted with a poor performing diesel engine. Whereas, the company had been advertising across the US stating that their cars come with the cleanest diesel engine.

Now, the company is recalling 11 million cars from the market to fix this issue and it has earmarked more than 6billion euros to meet the crisis. The US government has filed a case against the company claiming damages to the tune of $18 billion. Its CEO Winterkorn, admitted to have screwed up the company for good. Volkswagen stock loses 48% value in 2 days since the issue got reported. The company being the beacon of engineering excellence in Germany, an automobile behemoth controlling most of the prominent brands under its ownership like Audi, Skoda, Porsche etc.,

The impact of this scandal to the global markets has been multilevel. Due to Volkswagen’s huge exposure in the auto sector and the prominent brands it owned, there are a number of companies globally, who are vendors to the groups businesses in Europe as well as across the globe. All these companies will get affected. Germany being the hub of Automobile engineering, there are a lot of Indian companies who own facilities in Germany and across Europe. Some of the big names are Motherson Sumi, Amtek India, Bharat Forge. All these companies have already taken a big hit on their stock prices.

Amtek is into a bigger default, already faltered on a 800 Crore debt and has about 15K Crores which are not likely to be serviced. This issue is going to take many of the PSU Banks and some Mutual Funds into hardship.

At a time when the world markets are under pressure due to the commodities meltdown, this issue added fire. The beauty here is that, the Beetle carautomobile industry segment was the leader in the last year’s market gains. There were many companies in the Auto Ancillary sector that gave very high profits to their shareholders. Now, within a year the same sector has become party to huge loss of wealth. This makes us realize that, anything that shines cannot shine for ever or at least cannot continue to hold the strength regularly. If someone has been invested in the auto stocks by virtue of their understanding of the industry growth, they should have already moved out of the investments, else will suffer losses now. The damage that is being played out is pretty huge and will take a lot of time to recover.

In our portfolio, we had big time exposure to auto stocks, mainly in the ancillary segment. A couple of weeks back our system had helped us move out of them to a larger extent. When auto stocks were in rally mood we had more of them, now as they enter into troubled zone, the exposure has got reduced by a natural process.