Vijay Kumar Gaba: July 2013

Tuesday, July 30, 2013

No need to read between the lines

In the first quarterly review of monetary and credit policy RBI presented a very dismal picture of the economy with little hope. Although RBI did express hope of a slow progress going forward in the FY14, it gave little support to the view.

We read some headlines of the documents and see no need to read between the lines.

Global economy

· Global recovery prospects remain weak.

· Global commodity price cycle stay benign, but with upside risks to crude prices.

· Global financial markets have entered into a period of fresh turbulence.

Indian economy

· Slowdown persists in the Indian economy. Slow-paced recovery likely to shape later in 2013-14.

· Aggregate demand continued to remain weak. Improvement in aggregate demand requires overcoming high consumer price inflation and infrastructure bottlenecks. Corporate investment intentions remain subdued.

· Corporate leverage has increased gradually. Contagion from global bond sell off generates stress in Indian markets. Policy recalibration became necessary with increased macro-financial risks. Amplifying macro-financial risks warrant cautious monetary policy stance.

· Risk aversion impacting credit, as asset quality concerns persist. Sectoral deployment of credit indicates deceleration across most sectors.

· Headline inflation moderates but upside risks persist. Revisions in administered prices restrict the moderation in inflation. Pass-through of exchange rate depreciation could offset benefits from falling commodity prices.

· Agriculture growth is expected to pick up.

· Industrial sector growth remains subdued. Supply bottlenecks constraining core industries.

· Services sector signals slowdown in growth.

· Real wage growth moderates in the recent period, driven by higher inflation in rural areas. Employment scenario weakened during 2011-2013.

· Combined government finances budgeted to improve in 2013-14. Fiscal consolidation resumed during 2012-13 mainly through expenditure cutbacks.

· Vulnerability indicators show further worsening. External debt rose further in Q4 of 2012-13. Trade deficit continues to be a concern in Q1 of 2013-14. CAD may moderate in 2013-14, but risks to its financing remain.

To read the full document click on the following link:

http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/M290713FC66587B599.pdf

Thought for the day

“Perhaps in time the so-called Dark Ages will be thought of as including our own.”

- Georg C. Lichtenberg (1742-1799)

Word of the day

Coaptation (n):

A joining or adjustment of parts to one another.

(Source: Dictionary.com)

Shri Nārada Uvāca

Will Haryana police slap sedition charges against the Congress leader who alleged that Rajya Sabha seats are sold for Rs100cr and therefore denigrated the Parliament of the country?

Remember, a cartoonist was charged with sedition for drawing a cartoon of the Parliament a few month ago!

Monday, July 29, 2013

A Nightmare

In past couple of months RBI has taken some steps apparently aimed at stemming the slide in value of Indian currency (INR) against USD. These measures broadly target (a) liquidity in financial system to stem speculative demand for USD; (b) gold imports to control current account deficit; and (c) encouraging capital flows especially through causing debt yields to rise.

Though it may be little early draw any conclusion on the efficacy of these steps in achieving the desired outcome; so far we have not seen much impact. INR continues to be in Rs59-60/USD band and sentiments continue to be bearish on currency.

However, there are many side effects that are manifesting in various measures. For example, gold smuggling has reportedly grown four fold in 1QFY14 as compared to the same period previous year. Rate expectations have hardened substantially as reflected in failed OMO. Rate sensitive sectors like financials, realty and capital intensive debt laden infrastructure have seen massive erosion in their market value. Investors have suffered heavy losses on their debt portfolios.

With cost of capital rising, the stress in financial system is only expected to rise further. The investment climate shall remain challenging for an extended period of time, especially when the political and executive leadership of the country is mostly dysfunctional. Some recent surveys have indicated that situation is not likely to improve in any substantial measure even after general elections next year.

The milieu obviously is worrisome. Many analysts have drawn comparison to the situation in 1990s that was marked by economic turmoil, political instability, geopolitical tension, and global crisis. The consequences were serious like prolonged bear phase in capital markets, virtual collapse of banking system, high rates, inflation and slower economic growth. The god part was serious economic and financial sector reforms.

In our view, we would be pretty fortunate if the situation turns out to be like 1990s only. The nightmare is that we might end up travelling back to 1965-1975 era. For example, consider the following:

(a) With an onerous responsibility to provide cheap food to 800mn people, the food grain trade may likely get nationalized at state level. Rationing, hoarding, black marketing, restriction on interstate trade, crop mismanagement etc may stage comeback. The trial is already on with the government setting up vegetable shops in Mumbai.

(b) Unable to manage stress, most power and commercial road projects could get devolved on financial institutions and thus get nationalized.

(c) With CAD worsening beyond control, import restrictions, capital controls, and currency peg are implemented and smuggling becomes profitable and fashionable. Gold smuggling is already back.

(d) The Hindu rate of growth becomes norm. A couple of days ago Montek Singh feared that 12^th Plan growth may be under 5%.

(e) With control over everything, the government becomes most powerful leading to emergency like conditions. Misuse of CBI and pressure on CAG shows the intent.

The only good part is that Bollywood will also get its themes like Roti Kapda aur Makan, Khoon Pasina, Deewar etc. back.

Thought for the day

“Men are nearly always willing to believe what they wish.”

- Julius Ceasar(100-44BC)

Word of the day

Dispositive (Adj):

Involving or affecting disposition or settlement.

(Source: Dictionary.com)

Shri Nārada Uvāca

LK Advani says BJP will make a new record in next general election.

The little bird murmurs that only record BJP as a national party has - 2 seats in 1984 elections!

Friday, July 26, 2013

As you sow, so shall you reap

On Wednesday evening Swiss cement major Holcim announced ownership restructuring of its Indian operations. In short, Holcim pared its economic interest in ACC from ~50% to ~30% by effectively transferring ~20% economic interest to minority shareholders of Ambuja Cement at ~20% premium to the current market price.

In consideration Holcim got Rs35bn in cash and ~10% additional economic interest in Ambuja Cement. The deal apparently has no tax or duty payout, as it is effected through Mauritius based entity and therefore enjoys the benefits of DTAA (Double Taxation Avoidance Agreement).

The investors, analysts and commentators are crying foul, as they feel that minority shareholders have been shortchanged by Holcim and investment case for both the Indian entities has been seriously damaged.

In our view, the deal (a) does disregard the interests of the minority shareholders of Ambuja Cement; and (b) may erode value of ACC minority shareholders in due course as the stock get de-rated due to likely lower focus from parent entity.

Nonetheless, the deal prima facie appears within the four walls of the extant legal and regulatory framework of the country.

While refraining from commenting on the morality of the deal, we would certainly like to remind the institutional investors and analysts who are crying foul over this deal that only a few months ago they had lambasted the government over implementation of GAAR (General Anti-(tax) Avoidance Rules).

Though the initial protests were related to retroactive implementation, they were mostly convinced that implementing GAAR would be detrimental to the financial markets and therefore investors’ interest. They pressurized the government to defer the implementation.

In our view, this deal structure would have been very different if GAAR was in force as Holcim might have to shell out tax on sale of 20% economic interest in ACC.

In our view, this will certainly be not the only instance where both minority shareholders as well exchequer are shortchanged. We may see many more such deals given the vulnerability of our government. Watch out for notification of relaxed FDI norms in telecom etc. In our view, presently the government is not in a position to do anything that may adversely affect the interest of foreign investors. In any case, even if it wishes, it cannot do anything till next July when the next regular budget will be presented by the new government.

This will not only severely hit the already feeble confidence of equity investors in India, but also have long term policy implications.

As we highlighted yesterday, instead of playing the game of cat and mouse over every news item, policy action, corporate action – investors, particularly institutional investors, should evaluate the situation on the basis of conceptual framework of finance and economics.

Thought for the day

“History will be kind to me for I intend to write it.”

- Winston Churchill (1874-1965)

Word of the day

Grammatology (n):

The scientific study of systems of writing.

(Source: Dictionary.com)

Shri Nārada Uvāca

Could Kohli be Virat enough to become new God of Indian cricket?

Thursday, July 25, 2013

Game of Tom and Jerry

For once every one in the world appears to be playing the game of cat and mouse. All appear to be running in circles, falling, rising, trying hard to outsmart others and in the process hurting themselves badly. The bad part is that spectators who are not in the arena are being forced to pay for these games which are not even funny.

Ben Bernanke is playing with financial markets. Fully aware that his seemingly innocuous comments at some random symposium might cause billions of losses/gains in a matter of few hours – he is not showing any reluctance in making those comments. Markets, fully aware that QE is a matter of fact and could be withdrawn only and only if economic conditions improve substantially to warrant such withdrawal are swinging wildly at each such comment. Ben does retreats to his den after each such wild swing but only to reappear a little later.

The global research and rating agencies are also playing a similar game in a different arena. Fully aware that these random data has no meaning in the present global macro context – they are frequently emitting drivel only to clean it up the next day. The financial markets swing to each such emission, and make poor investor a little more poor. Euro Zone PMI which totally contradicts the employment and trade data, China trade data which contradicts the PMI and consumption data, UK house prices which contradict every other economic indicator are but a few examples of this game.

Financial analysts might be playing against God – trying to foresee things that are not even likely to happen. Many are full time busy guessing the date of QE withdrawal/tapering and rate hikes. Some saw great rotation from debt to equity. Others found great rotation from commodities to equity more interesting. Someone is highlighting great rotation from ‘smart investors’ to ‘dumb investors’ as in USA institutional investors turn largest seller of equities since 2008 and household investors are piling up. Some Gurus have been busy predicting EM to DM great rotation since 2008; and with some Japanese renaissance is the only passion.

We see little problems in attempting to foresee these supposedly long term trends. The problem however does arise when they suggest a trade today based on their hypothesis into eternity.

Back home, RBI and FM are playing an interesting game. FM is promising heaven on earth, fully aware that we are slithering fast into hell. RBI is not buying any of their promises and tightening with singular focus on prices. Befuddled investors and analysts are listening to both, believing both and jumping up and down, losing substantial hope, confidence and money in the process.

The mute spectators, poor household investors have lost money in equity, bonds, treasuries, liquid funds, real estate silver and gold. With CPI at ~13%, the agony could only exacerbate in coming days. At this point cannot even tell them “Cash is King”.

In this melee, the mother of all mayhem could be seen in the ensuing monsoon session of the Parliament beginning 8^th of August.

Thought for the day

“It was only literally hours after the wedding when he felt he didn't have to keep up the facade.”

-Trisha Goddard (1957-)

Word of the day

Sidle (v):

To move sideways or obliquely.

(Source: Dictionary.com)

Shri Nārada Uvāca

Reports suggest that the Royal Baby may support struggling UK economy tremendously.

A study has suggested that he may add £245mn in additional sales, as Britons celebrate the birth of prospective King.

Should Rahul Gandhi take a leaf out of this episode and help the struggling Indian economy?

Wednesday, July 24, 2013

On the straight road - V

In past few days we have tried to highlight that the above potential growth in India during 2004-08 on the back of easy credit availability & loose monetary policies has led to serious misallocation of capital and other resources in the country. The recent abandoning of some large projects is certainly a hint of growing realization to this effect.

Besides, the politics of “competitive majoritism” has also led to irrevocable government commitments towards flagrant welfare spending. Though, this has certainly provided some sustainable spending capability to the humongous bottom of Indian pyramid.

This clearly suggests that government and corporate finances are likely to remain under pressure for protracted period. Therefore, in our view, capex, PSUs, credit themes may not work in Indian markets till the time necessary corrections are carried out.

In this context, in our view, the only secular theme in India is that 1.25billion stomachs are to be fed and 1.25billion bodies are to be covered. Even with 50% filled stomach and covered bodies, we will have enough scope for so called consumer oriented companies to continue growing, albeit not at a pace many would like to see. But this is the only valid argument for investing in Indian equities. All other arguments, in our view, suffer from limited view, as we highlighted yesterday.

Now, insofar as the argument against valuation of consumer stock is concerned – it is a valid argument from limited view point, i.e., when we evaluate these companies in isolation from the macro context. Otherwise, if x% of funds have stay invested in Indian equities these have to find way in this secular theme only (besides of course ITeS which is largely a proxy for US recovery) till some other theme emerges; which in our view is at least 12-15months away.

To derive some support from historical perspective, please consider the following:

In early 1990s’ commodities were over 40% (Present 9%). Remember ACC, TISCO and SAIL fascination of Harshad Mehta. In late 1990s’ ITeS weight was over 40% (present 11%). In 2007 infra/capex/real estate was over 35% (present 7.25%). ABB, Siemens, Suzlon etc. exited and rest is down by 60-90%.

Presently, financials are 29% and these have to go a long way down (below 15% at the least) for the cycle to get completed. This may happen by some exits and a lot of price correction.

The consumers (autos, telecom, textile, FMCG and pharma) were at the core of the Indian markets for over 100 years. These presently account for 27% of Nifty (including Asian paints). We expect these and ITeS together to go up to over 50% in next 12-15months by way some new inclusions, e.g., Dabur, Idea, Tech Mahindra, Havells, Tata Global, Zee entertainment, etc. and some by way of irrational price exuberance in HUL, ITC, M&M, Asian Paints, etc.

We suggest using the expected market correction to buy some of these tier two names.

Thought for the day

“Poisons and medicine are oftentimes the same substance given with different intents.”

-Peter Latham (1984-)

Word of the day

Quillet (n):

A subtlety or quibble

(Source: Dictionary.com)

Shri Nārada Uvāca

Is Shakeel Ahmed’s tweet an act of sedition?

Police, which arrested couple of young girls and a cartoonist a few months back, may want to answer!

Tuesday, July 23, 2013

On the straight road - IV

Once upon a time, there lived six blind men in a village. One day the villagers told them, "Hey, there is an elephant in the village today."

They had no idea what an elephant is. They decided, "Even though we would not be able to see it, let us go and feel it anyway." All of them went where the elephant was. Every one of them touched the elephant.

"Hey, the elephant is a pillar," said the first man who touched his leg.

"Oh, no! it is like a rope," said the second man who touched the tail.

"Oh, no! it is like a thick branch of a tree," said the third man who touched the trunk of the elephant.

"It is like a big hand fan" said the fourth man who touched the ear of the elephant.

"It is like a huge wall," said the fifth man who touched the belly of the elephant.

"It is like a solid pipe," Said the sixth man who touched the tusk of the elephant.

They began to argue about the elephant and every one of them insisted that he was right. A wise man was passing by and he saw this. He stopped and asked them, "What is the matter?" They said, "We cannot agree to what the elephant is like." Each one of them told what he thought the elephant was like. The wise man calmly explained to them, "All of you are right. The reason every one of you is telling it differently because each one of you touched the different part of the elephant. So, actually the elephant has all those features what you all said."

"Oh!" everyone said. There was no more fight. They felt happy that they were all right.

The moral of the story is that there may be some truth to what someone says. Sometimes we can see that truth and sometimes not because they may have different perspective which we may not agree too. So, rather than arguing like the blind men, we should say, "Maybe you have your reasons." This way we don’t get in arguments. (Source: Jain World)

A similar situation has arisen in Indian equity markets in past few months. There is strong disagreement amongst analysts, commentators, investors and observers with respect to valuations and therefore sustainability of current price level.

The disagreement, in our view, is a consequence of limited view each seems to be taking.

In our view, under the present circumstances, it would be more appropriate to take a holistic macro view of the market. Views based purely on earnings multiple or assets using extrapolation of near term historical data may probably not lead to accurate conclusions.

A non-linear view considering wider historical perspective and socio-political context may be necessary to make a valid argument for staying invested in Indian equity markets….to be continued

Monday, July 22, 2013

On the straight road - III

Over the weekend we searched through a multitude of investment gospel in our quest to find a reason for investing in so called Public Sector Enterprises or simply PSUs.

Not one, not even for argument sake, gave an iota of hint that in any circumstance one might consider investing even a tiny amount in a business:

(a) where the management lacks transparent and accountability;

(b) where the management is corrupt, incompetent and/or instable;

(d) that operates under highly inconsistent policy environment;

(e) that does not have control over pricing its products;

(f) that is often forced to deal will bankrupt customers;

(g) where senior executives are appointed on the basis other than expertise in the area of operation;

(h) which are riddled with excessive bureaucracy but management has no control over the appointments, promotions and compensation.

(i) which are egalitarian in their operating mission and more often work for social cause rather than optimization of profit.

(j) which need political sanctions for managing their capital structure.

In our view, most of India’s PSEs, suffer from these limitations and hence may not qualify to be good investments.

Moreover, the speed with which we are heading towards crisis would inevitably bring our audacious government on knees in front of foreign investors and most of the economy will be opened up to them for attracting capital flows. No one will remember that we almost sacrificed the government over trivial issue of opening few Wal-Mart stores

Under these circumstances, most public sector undertakings should crumble. Many like BHEL may not be able to withstand the increased global competitive intensity. The rest like Coal India will be sacrificed at the altar much like BSNL, MTNL and Air India (all coveted monopolies at one time). The nightmare would be LIC going the UTI way, given that it is being made to scavenge all the political s#$t every morning.

The majority shareholder (government) has consistently and blatantly oppressed the minority shareholders in these companies – by not allowing them to fix the prices of their products, raise capital when required, make investments where and when desirable and disallowing the managements to restructure their costs (especially employee cost) during downturns. Moreover, there is no legal guarantee that the current fuel pricing mechanism will continue for, say next 5years.

We continue to suggest avoid on all PSUs, notwithstanding anything. Short sell banks, BHEL, BEML and BEL.

Thought for the day

“Goals are important. Means are equally important”

- Unknown

Word of the day

Rendezvous (v):

To assemble at an agreed time and place.

(Source: Dictionary.com)

Shri Nārada Uvāca

Anyone who travelled to the WORLD CLASS T-3 terminal of Delhi airport on Saturday will certainly have some questions in mind?

So would those who heard BJP President Rajnath Singh’s criticism of English language!

After all Mr. Modi is promising a WORLD CLASS economy to the Indian public.

Friday, July 19, 2013

On the straight road - II

We maintain our 8000 Bank Nifty target in next 12months.

Financials especially banking sector is at core of the Indian equity markets. In past few months benchmark indices have shown a divergent trend from the financial sector, as consumers, pharma and IT have held the benchmark indices at higher levels while financials have corrected sharply. YTD Bank Nifty is down over 10%, whereas Nifty is higher by ~2%. This being inarguably the most over owned sector has evoked more concerns amongst investors.

InvesTrekk Research has consistently maintained its underweight stance on Indian banking sector for past one year. The reasons for our negative view on Indian banking sector, especially PSU are simple. Consider the following:

(a) It is common knowledge that a large section of India’s capital intensive long gestation enterprises is under tremendous financial stress. These enterprises engaged in critical infrastructure sector like roads, power, ports, airports, telecom, metals & mining etc. are vital to aggregate health of the economy. Besides, SME segment that is critical for overall employment and consumption growth, is also reeling under lower demand, high input cost and higher financing cost.

It would be unreasonable to expect that Indian economy can sustain even 5-6% growth level without these enterprises participating, as the government’s fiscal condition doesn’t allow it to invest on its own.

The economic recoveries have never occurred when a large number of corporate balance sheets are under extreme stress. This stress therefore has to consolidate in fewer hands. Traditionally, the consolidation process has seen banks taking over the major share of financial stress on their balance sheets. The ‘B’ in the P/B ratio of banks is therefore subject to substantial lower revision.

(b) Unless the financial stress consolidation process makes substantial progress, we may not see credit growth to industrial sector returning on sustainable basis. The rising number of stalled and abandoned projects and sharp fall in new project announcement is testimony to this fact. It clouds the income forecast for banks. The present forecast of ‘E’ in P/E and ‘R” in ROA therefore may not make much sense.

(c) We believe that a large amount of sub-standard and loss assets have either been masquerader as restructured assets or refinanced. The transaction usually involves hike in interest rates and transaction fee. High interest and fee income of banks despite slowing businesses and deteriorating asset quality could be explained by this. Obviously, it is not sustainable as in most cases neither principle not interest and fee are recoverable.

(d) RBI has given enough panic signals in past six months, though it has so far not taken any decisive action to stem the rot. Politics rather than economics and commerce clearly seems to be the dominating factor.

(e) The excitement over new licenses is also not comprehensible. If things progress normally, the banking license should become open ended and therefore command no premium. Business wise, it will be long before any new bank makes money.

Thought for the day

“Life is really simple, but we insist on making it complicated.”

- Confucius (551-479BC)

Word of the day

Gobbet (n):

A lump or mass.

(Source: Dictionary.com)

Shri Nārada Uvāca

What should Indians pray for – a strong US recovery followed by QE tapering and rate tightening or US recession and continuation of QE and low rates?

Thursday, July 18, 2013

On the straight road - I

Yesterday we suggested that investors may follow a rather simple investment style to achieve their investment goals. It is highly likely that most find this path boringly long and apparently less rewarding, but in our view this is the only way sustainable returns could be obtained over a longer period of time.

In our view, taking contrarian view (infrastructure), speculating policy changes (e.g., QE tapering, gas pricing, FDI rules relaxation etc.) anticipating short term performance (e.g., monthly sales, quarterly profits etc.) or arbitrage on information/rumor of a corporate action are some examples of circuitous roads or short cuts that usually lead us nowhere.

Taking straight road means investing in businesses that are likely to do well (sustainable revenue growth and profitability), generating strong cash flows; have sustainable gearing; timely adapt to the emerging technology and market trends, and most important have consistently enhanced shareholder value.

These businesses need necessarily not be in the “hot sectors” like commodities in early 1990’s, ITeS in late 1999s, or infrastructure and financials in 2004-07.

In next few days we shall discuss why contrarianism or lottery seeking attitude to investing might not be the right one and may expose investors to greater losses.

We begin by an argument against investing in infrastructure sector in India. Admittedly, the argument may be little too late in the day and benefits from hindsight. Nonetheless, it is still valid and deserves consideration.

In our view, the “need” for infrastructure, both social and physical, in India is tremendous. However, despite 8%+ growth of five year and manifold rise in government support for society especially poor and farmers who happen to constitute over 2/3^rd of India’s population, the “demand” for infrastructure has not grown substantially. The affordability and accessibility to basic amenities like roads, power, sanitation, education, health, transportation, housing etc, is still low.

As per recent government admission almost 2/3^rd population cannot afford to buy basic cereals at market price and therefore need to be subsidized. Only 10% of adult population has access to some formal source of financing. Ever rising losses of state electricity boards highlight incapacity or unwillingness of people to pay power bills. The loss incurred by much acclaimed Bandra - Worli sea link in the heart of Mumbai highlights low affordability to pay toll tax for using roads.

The optimism on the sector was consequence of overconfidence and indulgence of administration and corporates who sought to advance the demand for civic amenities to make abnormal profits. This was not only a classic case of capital misallocation, but also misgovernance by allowing a select few take advantage of policy arbitrage.

The collective wisdom of market has understood that the business model of most of so called infrastructure firms is unsustainable. Those taking a contrarian stand may realize it the hard way. We suggest revisiting the sector after 3years or 5year if you like so.

Thought for the day

“A person should not be too honest. Straight trees are cut first and honest people are cheated first.”

- Kautilya (350-275BC)

Word of the day

Scabrous (Adj):

Full of difficulties.

(Source: Dictionary.com)

Shri Nārada Uvāca

The concessions being offered by the beleaguered government are signs of desperation not reforms.

Someone would need to answer, if FDI in defense and telecom etc could have been relaxed so effortlessly, why the government kept waiting for 9 long years.

Anyway, given the policy mess, the government may not find many takers this morning. Rather Mittal and POSCO have exited projects.

Wednesday, July 17, 2013

Roads, ropes and trampoline

“No one was ever lost on a straight road.”

The conventional wisdom guides that roads are meant for moving forward; ropes are meant for tying and anchoring and trampolines are meant to get momentary high without moving an inch forward.

Usually, the chances of reaching the planned destination are highest if the traveler takes a straight road. Similarly, the chances are least if you just ride a trampoline. Walking on ropes may sometimes give you limited success.

The developments in global financial markets in past couple of weeks highlight that presently very few persons are interested in taking the straight road. Though there are many, like the legendary Warren Buffet, who continue to vehemently advocate this path, most may find this path long and boring.

The market reactions to past two Fed statements, RBI action on Monday evening, Infosys results last week, and government’s announcements regarding proposed changes in natural gas pricing policy all suggest that jumping on trampoline is the most preferred activity these days amongst investors.

The central bankers across the world are seen preferring to walk the tight rope. US Federal Reserve is focused on employment, BoJ is focused on deflation, ECB is focused on maintaining integrity of Euro and RBI is focused on price levels. All of them claim reasonable degree of success in achieving their limited stated objectives.

But what about other problems? For example, RBI did manage to control prices and might also be able to stem the INR slide beyond Rs60/USD level in the short term. However, in the process, it lost focus on deteriorating growth, employment, asset quality, and consequently financial stability. Having lost critical time and exhausted most policy tools, RBI may soon find that it has reached the end of rope without falling, but it means nothing.

Investors may too find it in due course that by jumping up and down with every bit of news (actually not only NEWS, but on casual remarks of Bernanke et. al. made at random symposiums) they are only losing their vital energy and time without moving an inch forward.

In simpler words, we suggest that investors should take a straight road howsoever long, boring or painful the journey may be. Invest in businesses that are likely to do well (sustainable revenue growth and profitability), generating strong cash flows; have sustainable gearing; timely adapt to the emerging technology and market trends, and most important have consistently enhanced shareholder value.

Expecting next policy move, especially in the current environment, is fraught with high risk. Historically, the business that are impacted by volatility in policy formulation, have seldom rewarded minority shareholders – public sector enterprises being the best examples.

The economic recoveries have never occurred when over half the corporate balance sheets are under extreme stress. This stress therefore has to consolidate in fewer hands. Financials therefore will see much worse days going forward. Our target ‑ Sub-8000 on Bank Nifty in next one year.

Thought for the day

“There is no good in arguing with the inevitable. The only argument available with an east wind is to put on your overcoat.”

- James Russell Lowell (1819-1891)

Word of the day

Fribble (v):

To act in a foolish or frivolous manner; trifle.

(Source: Dictionary.com)

Shri Nārada Uvāca

Manish Tiwari perhaps forgot that a large part of our population lives on Rs17/day. Therefore, Rs.5 is indeed a big deal for an average Indian.

Thursday, July 11, 2013

Choose between short term pain or perpetual agony

Conventional economists have long argued that monetary and the real economies interact in a limited way through the determination of nominal quantities such as prices, wages, exchange rates and so forth. Therefore although a change in the quantity of money may create short term disruptions, the real economy would eventually settle at the same long term equilibrium as before. Implying that at 'normal' levels of money, a change in the money supply will not alter the long term economic equilibrium.

In short, additional money made available to people, without any additional productive capacities made available, makes no difference to real economy. It just increases the price of existing goods in the same proportion as the additional money available.

The problem however occurs when the supply of additional money becomes a constant and that too in an abnormal proportion. This not only disrupts the short term equilibrium but alters the structure of long-term equilibrium too. This is precisely what is happening in the case of economies that have followed excessively loose monetary policies for an extended period of time. In fact, this has impacted the emerging economies which fell prey to this slush of excess money and let their medium to long term equilibrium altered, believing that this excess money is ‘normal’ and would remain a constant.

India unfortunately is one such economy that has allowed the structure of its real economy tempered, though still not irretrievably, by easy money in past 10-15years. For example, consider the following:

The excess money or credit that got created out of thin air has not flown equally to all. It rather has got concentrated in few hands. However, the illusion of growth and prosperity has engulfed all. The aggregate numbers have become gigantic; and it has led to ballooning of the aspirations of the underprivileged to unsustainable levels.

Given that we are democracy that works on “relative majoritism” feeding these aspirations has become a central subject of competitive politics. The state finances are therefore in a structural long term pressure with no exit in sight.

The rush to accumulate cheap credit has lead to excessive debt both at government as well as corporate level in past 7years. This has brought a lot of unmanageable demand forward in time. For example, over 50GW power projects were initiated and fertilizer policy was made when the feed stock supply chain to fuel the power and fertilizer plants was far from ready. The capacity to pay unaffordable toll was not there when over 5000km of toll roads were commissioned. Many of these power plants are lying idle and so are numerous industrial projects conceived based on supply assumptions from these plants. Many toll roads have become unviable or are lying uncompleted.

If we believe that this misallocated capital and unmanageable changes in consumption patterns are short term phenomenon, the correction is sure going to be extremely painful- prepare for it. And if we think that these are long term changes – there is no “great India story” as essayed by numerous analysts and strategists.

Thought for the day

“If you do not change direction, you may end up where you are heading.”

Lao Tzu

Word of the day

Layette (n):

An outfit of clothing, bedding, etc., for a newborn baby.

(Source: Dictionary.com)

Shri Nārada Uvāca

100% FDI in telecom!

How does it help the ailing economy?

First, with the extant wavering policy environment it is difficult to believe that global players will jump in straight away.

Second, even if they do, it would essentially mean another round of disruptive pricing, implying further problems for existing players.

Wednesday, July 10, 2013

Is it decoupling again?

The popular commentary these days is suggesting, rather aggressively, that the largest economy the USA has overcome all its problems – unemployment, fiscal deficit, public debt, housing market, household leverage and above all growth and investment cycle. In the same breadth it is also mentioned that emerging markets that have thrived on the excessive liquidity created by US Federal Reserve are destined for a painful grind to dust as the Ben Bernanke starts withdrawing the liquidity.

In our view, nothing could be farther from truth. The USA still has over 7% of its workforce unemployed. Number of people surviving on food stamps is highest in recent decades. Growth for the current year is expected to be mere 2%. Investment cycle is far from robust. Deficit has come down on spending cuts, but continues to be threateningly high. This is when Fed had been printing 24X7. A lunch break of 45minutes is expected to worsen things again. Moreover, with 3/4^th of global population in despair, a USA recovery could only be unfathomable.

As Howard Kunstler of Kunstler.com puts it:

“The coordinated effort to devalue gold - so as to maintain the sagging reputation of the world’s re$erve currency - has had the effect mainly of funneling it out of weak hands in the west to strong hands in the east, to countries that at one time or another we regarded as adversaries. China and Russia have been backing up their respective trucks at the gold warehouse loading dock, and before too long they will have yuan and rubles with more credibility than the US dollar.

For the moment, holders of weakening currencies are seeking refuge in seemingly “stronger” dollars in bubbling equity markets. Many more dollars have been stashed on the balance sheets of the Federal Reserve in the form of bonds purchased in galumphing bales since 2009 - only the catch is that many of these bonds are worthless, especially the mortgage-backed securities. The collateral exists in the form of mold-infused sheetrock, swimming pools with algae blooms, and strip malls left with a single tenant: the wig shop. The Fed will never be able to unload this hoard of garbage, even if it “tapers” its buying of new garbage. The dollars that the Fed creates out of nothing are trapped in this fetid backwater of rotting capital, destined to go nowhere - surely not into activity that produces real wealth, or the means to continue being civilized.”

The conventional economists may argue that the disruptions created by the excess money are at best temporary and changes in the money supply do not affect the 'real' economy, e.g., patterns of trade, production and consumption. The additional dollars make no additional productive capacity available and they alter no tastes. Therefore, the economy eventually will settle at the same long term equilibrium as before.

However, as we see in the current context the disruptions are so large that these may threaten to alter the character of the real economy and “long term” may be too “long” to be relevant.

…to be continued

Thought for the day

“The woods are lovely, dark and deep

But I have promises to keep,

And miles to go before I sleep,

And miles to go before I sleep.”

- Robert Frost (1874-1963)

Word of the day

Edacity (n):

Voraciousness; appetite.

(Source: Dictionary.com)

Shri Nārada Uvāca

Defense ministry asks armed forces to cut fuel usage by 40%.

Would it not be better if the governments asks its ministers, MPs, MLAs etc. to save fuel? More savings could perhaps be achieved if Public Sector employees could be told not to use official vehicle for private use.