The return of the bubble

I am not going to question whether we are witnessing another ‘tech bubble’ or not. Because, we certainly are and the recent spate of valuations merely proves this fact. LinkedIn has gone public today morning (May 21’ 11) and its share price shot up by a massive 109%, from $45 to $94.25. What do the calculations tell us – a P/E ratio is 554. Does it command such humungous premium? I seriously doubt it.

There is certainly a difference between the tech bubble of the 1990’s and the one we are witnessing today. Today, the companies have successfully proved their business models and are not just mere start-ups. Let us consider the popular examples of Facebook, Twitter, Groupon (www.groupon.com), Zynga (www.zynga.com), whose premium valuations are under the scanner now. Each one of them has a successful business model for the last couple of years. They have got a subscriber base in hundreds of millions. They have reported positive returns of millions of dollars, in the last year. But the companies in the 90s were either start-ups or in their initial phases, with no proven track record. Some of them were bought out by larger players, and the larger ones absorbed huge losses later – e.g., Yahoo’s purchase of Geocities. And many of them died of bankruptcy.

But, do the companies of contemporary times command these huge premiums? I feel that rather the companies demanding such premiums, it’s the investors who are queuing up madly for such companies. And the interesting question is why these ‘tech companies’? A few reasons are – Firstly, lack of choice. The US is still reeling under the tragedy of the recession and with lacklustre growth. Even though the results of certain sectors like autos, retail are looking optimistic, they are not guaranteed. And the housing sector is yet to rebound and could take its own sweet time to show any signals of coming back to life. Secondly, it is the valuations of these tech companies by some financial majors, without any supporting fundamentals. And it is the classic cycle which starts all over again. HNIs start to buy these stocks privately, followed by hedge funds (or could be vice-versa) and finally the company goes public with unimaginable valuations, only at the loss of the retail investor. Also called the ‘Bandwagon effect ‘by management graduates like me!

And this time I wish a healthy correction happens soon and bring back to meaningful and deserving valuations, rather than waiting for more tech companies to join the bandwagon, only to burst the bubble finally.

Who gains when crude prices go up?

Oil marketing companies (OMCs) in red - A common statement in today's news. But why are they in Red?

Let us say international crude oil prices are hovering around US$ 110 per barrel. That translates to about Rs 4,950 per barrel. Each barrel contains about 158.76 litres. So, effectively crude oil costs Rs 31.2 per litre. Now, add the cost of refining it to petrol or diesel. According to an oil company official, the refining cost is about 52 paise per litre. Add about Rs 6 as capital costs for the refinery. Then there's the cost of transportation (Rs 6) and dealer's commission (Rs 1.05). So, adding all that, the price of petrol comes to about Rs 44.77 per litre. But how much are we actually paying for petrol? With the recent hike in petrol prices, we are paying almost Rs 65-70 per litre. Who is the culprit - government. Government (both centre and state) charge huge levies on petrol, diesel etc and gains a lot when the prices of international crude go up, because they tax these products with a percentage of basic price and not a fixed price per litre.

So, while the common man is feeling the pinch of hiked prices every time, the government has the last laugh, with their coffers filled from these levies!

PS: above numbers may not be accurate, but an idea of the various components that are added to the cost of petrol.

Leadership Deficit

I have seen the I.O.U.S.A videos on youtube.com. They are nice videos to explain "the economics of the US problems" to a common man. And the most striking point it made is the Leadership deficit, which is the larger problem than the Savings or Trade deficits of US.

So, I was rewinding the last few years in my mind and the leaders who presided the White House. Each one of them is just a politician and the actual person who heads Treasury is a former Wall Street honcho. So, there is a clear gap of leadership to steer the massive US economy safely. Comparing with only India may be a narrow argument, but has a logic to it. Our central banks were headed by economists who held their primary duty of economic stability, improving the standards our financial system and who have written hard rules, which only proved to save us when the whole world was sinking in 2008.