Lies, Damned lies and Statistics

Statistics is the science of producing unreliable facts from reliable figures. - Evan Esar

Admission: I absolutely respect our RBI governor Raghuram Rajan.

Confession: I am not a statistician, but I have attended a course on Econometrics during my MBA. And, from what little I have learned there, I can tell you that you can torture your data to the point it say what you want it to say.

The recent report on composite state development index that was prepared under the chairmanship of Mr. Raghuram Rajan was, for the lack of better word, a half ass job. It is complete noise. It hurts when someone you admire produces a work like this.

I didn’t really understand what possible objective it served, though I am assured it is not a political one, although there was a brief twitter war on the issue of Gujarat being called a less developed state. You can read the full report here.

During my MBA classes, our professor always warned us about the situations when statistical exercise will throw out some outcome that might look nonsensical. You should in that case, take hard look at the variables used. You should check for double counting of data, high correlation fallacy and simply using wrong variables. Well, seems all three errors happened in this report.

Many experts in the field have already reviewed it well, some of them do not agree with it including the sole dissenting voice in the panel, Dr. Shaibal Gupta. You can read some of the  reviews and criticism here, here, here and here. Key criticism of the report are highlighted below:

·       Why to include SC/ST share in population when it is an independent variable and all other variables are dependent variables (outcome variables). Independent variable in this case means it is beyond the realm of any state government to control the number of SC/ST population in their state. So, why to assign points to state based on this variable.

·      Why connectivity index, SC/ST population, female literacy, education all get the same weightage, when we know one is more important than the other.

·       In the real world, can Gujarat be ranked as same as Mizoram and fare worse than Tripura? Maybe I am blind to the development happening in our Northeastern states, but I don’t know anyone wanting to go there to work and live.

·       Why did not use per capita income instead of monthly consumption when per capita income also factors in the employment opportunities available in the state. Migrants sending money to home state could simply drive consumption and may not truly reflect the needs of the residents.

·       How reliable is the source of monthly consumption data when the national surveys used to collect this data have credibility issues.

PS: There is no data available, atleast in the report, wherein you can compare how each state fared on different variables used in index construction.

Weekly Market Commentary - Sept 23 - Sept 27, 2013

Overall, trades seeking to play the Fed-RBI announcement continued to unwind this week and took markets down with them. As second quarter results are upon us and street is not too excited with business environment and expects the results to be boring, indices are failing to find new catalyst to hold their ground. Sensex lost 2.6%, Nifty lost 3.0% and CNX Midcap was down by 0.5% this week.

Monday – Sensex down by 1.8%, Nifty down by 2.0%, Midcap down by 1.0%
Markets crumbled as investors’ sky-high expectations from the newly appointed RBI governor meets the realities on the ground. As Raghuram Rajan went on making inflation fighting his topmost priority and tightened liquidity, rate sensitives stocks such as banks took a heavy beating.

Tuesday - Sensex up by 0.1%, Nifty up by 0.0%, Midcap up by 0.2%
Banks continued to see heavy selling as Moody cut the SBI’s local currency and senior unsecured debt rating to lowest investment grade to Baa3 while changing the financial strength outlook to negative. Moody blamed the current weak financial position of bank’s promoter, Indian government as the reason for decline in asset quality, profitability and capital of public sector banks such as SBI.

Wednesday - Sensex down by 0.3%, Nifty down by 0.3%, Midcap up by 0.4%
Investors continue to square off the trades set up in the wake of Fed-RBI meetings previous week, ahead of derivative expiry on Thursday. Financial Technologies stock plunged as its auditor Deloitte Haskins bailed out on the firm and withdrew their audit report after claiming that firm’s financial statements are not reliable.

Thursday – Sensex up by 0.2%, Nifty up by 0.1%, Midcap down by 0.1%
Markets continued to stay volatile as investors unwind their positions on F&O expiry day but ended up little higher as RBI tried to give the market a reprieve by announcing a possibility of conducting OMO to ensure sufficient liquidity in the system.

Friday – Sensex down by 0.8%, Nifty down by 0.8%, Midcap flat
October F&O series started on a mute note with markets now turning to corporate earnings announcements expected in October to be low to modest, at best. Banks stayed under pressure as Raghuram went on questioning the strategy of central bankers around the world to keep the interest rates low to stimulate growth.

The Kinda Sutra

Almost everyone has a funny story about where they used to think babies came from. Sundance Documentary short, "The Kinda Sutra," is a look at people's youthful misconceptions about conception. Thought provoking stuff. And in case you're still not sure how babies are made, the kids at the end of the film break it down.

Hat Tip: Alpha Ideas

Weekly Market Commentary - Sept 16 - Sept 20, 2013

India, since Fed announced its tapering plans, got its act together and has done quite well in pushing some key reforms in parliament. RBI on its part took some controversial, but crucial steps to stem the decline in rupee that followed the Fed announcement. Now, when Fed has put a halt on its tapering plans, we all can just keep our fingers crossed and hope that Indian govt. does not become complacent and let go off this lifeline. We hope that reform momentum continues and we get our house in order before the next shitstorm hit us.

Sensex gained 2.7%, Nifty gained 2.8% and CNX Midcap was up by 1.3% this week.

Monday – Sensex flat at 0.0%, Nifty down by 0.2%, Midcap down by 0.5%
Investors were disappointed on Monday as RBI released its WPI inflation figures. RBI while formulating its policies uses WPI data along with CPI as an anchor. According to data released on Friday, retail inflation dropped in August. However unlike retail inflation, WPI rose to six month high to 6.1% in August (July – 5.79%). Market is anticipating that upturn in WPI will make it difficult for newly appointed RBI governor to cut rates.

Tuesday - Sensex up by 0.3%, Nifty up by 0.2%, Midcap down by 0.3%
Investors remain cautious ahead of two key events this week. On Sept 18, Fed will take decision on whether to continue to taper and by how much. Street is expecting tapering of $5-$10 billion every month. Anything above or below that range can cause sharp movements in the indices. Raghuram Rajan has decided to unveil its maiden policy on Sept 20 after getting a handle on Fed announcements. These two events together may hold key to future movements of Indian indices.

Wednesday - Sensex up by 0.8%, Nifty up by 0.8%, Midcap up by 0.5%
Expectations from Fed meeting continue to weigh on the markets. Markets closed higher as FIIs continue to build positions in the Indian markets.

Thursday – Sensex up by 3.4%, Nifty up by 3.7%, Midcap up by 2.9%
Fed surprised the market with announcement of deferring its tapering plans and instead decided to continue with its stimulus amid weak economic growth in US. I already highlighted in June that how the timing of tapering is suspicious as US economy, and with it global economy, continues to struggle. Markets celebrated the decision as day of reckoning for many of emerging economies like India, has deferred to some unknown date in the future.

Friday – Sensex down by 1.9%, Nifty down by 1.7%, Midcap down by 1.3%
In his maiden policy, Raghuram Rajan stumped the investors with a repo rate hike. Repo rate is now 7.25%. Rajan made it clear that fighting the inflation and exchange rate management is his top priority, so there is a need of liquidity tightening. RBI, in a bid to lower the cost of capital of banks, reduced the MSF by 75 bps from 10.25% to 9.5% and slashed the minimum daily CRR requirement from 99% to 95%.