New jargon on the street

Thought for the day

”The woods are lovely, dark and deep. But I have promises to keep, and miles to go before I sleep."

-          Robert Frost (American, 1874-1963)

Word for the day

Malversation (n)

Misconduct, corruption, or extortion in public office.

(Source: Dictionary.com)

Teaser for the day

After telecom licenses, coal blocks, should SC look at cases of large land allotment also?

New jargon on the street

I had the most uneventful visit to India's financial capital early this week. I met some large investors, business consultants, equity analysts, wealth managers and businessmen.

Despite a stupendous run in the stock market on the back of stable macros, political stability not seen in past three decades, improving US economy, huge foreign flows, return of domestic risk appetite after six long years, super success of couple of IPOs, I found the mood on the street rather underwhelming. The Euphoria seen during the interactions early this summer had given way to suspicion and confusion.

Though hope still survives and there is no major disbelief, the certainty of "Good Times" in immediate term is widely doubted.

I learned some latest jargon on the street, i.e., "Quality Bubble", "Power Consumer" and "I of the BRICS".

Few things in particular I find pertinent to share with my readers.

·         Quality bubble is a popular term for the crowded trade in high quality stocks that has led the valuations to cross over to bubble territory. This is probably first time that Indian equity markets are witnessing beginning of an economic and therefore market cycle beginning with such high valuations in quality stocks. Usually this happens at much later stage in the bull market.

The worrisome part is that nobody is showing any willingness to go down on the quality ladder and look at the relatively cheaper peers.

·         There appears to be a consensus that availability of electricity is going to improve substantially in next 2-3years. The power industry consultant I met confirmed that while PLF at thermal plants may substantially improve in next 12-15months, and substantial wind and solar capacities will likely become operational in next 24-48 months. The market has sensed this trend. Most electrical appliance manufacturers have seen their market value rising 2-4x in past few months. No one is yet betting on power producers or capital equipment suppliers.

·         In past one year India has decoupled from its BRICS peers in terms of macro improvement. With EU, Japan and most of Asia not looking great, India is becoming a center of hope (outside USA) for investors.

·         The cyclical rally that was expected to gain momentum after unexpected election results in May'14 has completely fizzled out. With industry leaders like DLF, BHEL, JP Associates, SBI, and L&T etc. giving away all the gains seen in past few months. The exporters (IT, Pharma and Auto) and consumers have led the rally so far. They now appear tired.

·         The derivative traders are frustrated by record low implied volatility.

The market participants and observers are therefore perplexed about the next market move. I will share my take on this tomorrow.

By-polls and markets

The market reacted negatively to the recent by-poll results in which the ruling BJP has received serious setback, especially in the state of Uttar Pradesh.

In my view, the market participants should be encouraged by the current political trend as it will more likely:

(a)          Lend further urgency to the efforts of the government to put the things in order insofar as the economic growth and development agenda is concerned;

(b)          Push the hardline elements within BJP to fringes.

(c)           Motivate scattered opposition to unite to make it BJP vs. the rest in coming elections as well as in the parliament. This brings a strong (though hostile) opposition in place to exercise necessary check and balance on the government. This may also mark the end of fractured coalition politics.

(d)          As Amit Shah will emerge as the biggest loser after all this. His brand of polarizing politics will face serious challenge in forthcoming elections.

Some part of the correction is also ongoing due to jitteriness over what Fed will conclude tomorrow evening.

In my view, a change in guidance for rate hike may not be due as yet. However, if it does happen, this could disturb markets in the short term.

This could be a good opportunity for investors looking to buy for long haul.

Mythology of bubbles

Thought for the day

”I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do."

-          Leonardo da Vinci (Italian, 1452-1519)

Word for the day

Geep (n)

The hybrid offspring of a goat and a sheep

(Source: Dictionary.com)

Teaser for the day

If BJP makes a government in Delhi and works for common good, in 2018 no one will remember how the government was formed.

For all you know AAP may not even be there to remind people! 

Mythology of bubbles

In Hindu mythology, once the forces of good (Sura) and evil (Asura) had a protracted battle. The battle lasted so long that both the groups exhausted all their resources and valor. Completely tired, wounded, frustrated and exhausted, they approached the savior Lord Vishnu. The Savior advised them to go and explore the great ocean to find new resources and vigor to make a fresh beginning.

Following the advice, both the groups went to the great ocean and explored it extensively. During their exploration they discovered huge amount of wealth and resources that included the nectar that would immortalize the consumer and venom that would destroy whoever consumes it.

Realizing that if the evil forces get the access to nectar and other resources found during the exploration it would seriously jeopardize the interest of the forces of good, Lord Vishnu tricked the forces of evil and appropriated the entire nectar for consumption by the forces of good.

Lord Vishnu also requested the almighty Lord Shiva to absorb the venom so that it does not harm anyone and the balance of the universe is maintained. Obliging, Lord Shiva drank the entire venom and preserved it in his throat.

Post this the forces of good became more powerful. But whenever they deviated from the path of common good, they were overpowered by the evil forces and dethroned. Each time only after a great deal of repentance they would be rehabilitated with the help of Lord Vishnu, Lord Shiva or the Mother Supreme.

Over the years I have realized that it is not just a mythological story to be heard during religious ceremonies and forgotten immediately thereafter. It is also not a usual morality emphasizing victory of good over evil. It is much beyond. This applies to all aspects of life, even economics.

In modern economic parlance, the ocean exploration is akin to the period of irrational exuberance that eventually lead to building of a 'bubble' in the economic sphere.

Bubbles are initiated when all the participants get tired, frustrated and exhausted from prolonged economic weakness. At that point in time, all the stakeholders muster the courage and supported by the 'authority' do things they would never do in normal times. They do excessive and seemingly irrational borrowing, investing and spending. Capacities are built to the scale unfathomable during normal times.

The nectar or the good that emerges from these bubbles is shared by all. However the venom is consumed only by the financial investors who invariably end up poorer after every bubble is burst.

If you are not able to correlate to what I am saying - imagine would India be a ITeS superpower without Y2K or technology bubble during late 1990s! Had we built so many houses, roads, malls, power plants, cement plants etc. during last decade but for a credit bubble! Would capital be so easily and cheaply available to Indian entrepreneurs without a QE bubble in the west! ...to continue tomorrow

Yet another midway diversion proposed

Thought for the day

”If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me."

-          William Shakespeare (English, 1564-1616)

Word for the day

Maudlin (adj)

Tearfully or excessively sentimental.

(Source: Dictionary.com)

Teaser for the day

Does Arvind Kejriwal know that you could only buy the things which are put on sale by the present owners!

Yet another midway diversion proposed

A recent Deutsch Bank research report highlighted that India is witnessing emergence of a "clear and internally coherent economic model" that includes "export oriented manufacturing, heavy infrastructure building and urbanization". in a material shift away from "India’s current services-driven growth trajectory" This emerging model is found akin to "an East Asian growth model based on the mass deployment of labour and capital".

The DB analysts believe that "The new strategy will require keeping the Rupee weak and dramatically expanding the financial system. International experience shows that the model can generate growth and jobs, but sustaining such rapid financial expansion is not without risks."

The report highlights that while India's export growth so far has been driven by services, auto sector has demonstrated that with right kind of policy support Indian enterprise could do well in global manufactured product market also.

The key to shift would be our ability to substantially augment energy supply to the industry and "ability of the domestic financial sector to sustain rapid expansion".

The Prime Minister Narendra Modi in his public discourse has strongly emphasized on the need for expansion of manufacturing sector to create jobs for millions of youth joining the work force every year. In fact during his election campaign Congress leader Rahul Gandhi had also echoed the same sentiments.

In April 2013 in a series of five articles (see side bar) I had expressed my concerns over frequent midway diversions on core issues taken by Indian policy makers.

I still feel that he current socio-economic mess in the country is outcome of total adhocism in policy and program formulation & implementation, non compliance with the comprehensive socio-economic structure conceived in the Constitution, and lack of committed leadership, especially in past three decades.

The political establishment has so far mostly failed in justifying the midway diversion from the prescribed socialist framework taken in mid 1980’s. The obduracy shown by successive governments in relinquishing enormous amount of discretions enjoyed by political establishment has been a consistent obstruction in the way to evolve the intended quasi capitalist or neo-socialist policy framework that would lead to sustainable and faster growth.

A brief spell of high growth, which many may find accidental in hindsight, has probably misplaced the popular aspirations and thus added to the complexity of the problem.

I feel the country needs to comprehensively review the constitutional framework for evolving a wider consensus on the policy direction for sustainable socio-economic development in the current context. Blindly following East Asia model of capital and energy intensive growth may not be ideal in our context.

I will write more on the current flavor "Make in India" next week.

Related articles

A midway diversion to nowhere

A midway diversion to nowhere - Disinvestment

A midway diversion to nowhere – Foreign capital

A midway diversion to nowhere – Energy policy

A midway diversion to nowhere – youth policy

Some books to finish and few places to visit

Thought for the day

”Maids want nothing but husbands, and when they have them, they want everything."

-          William Shakespeare (English, 1564-1616)

Word for the day

Plebeian (adj)

Vulgar; common; crude or coarse in nature or manner.

(Source: Dictionary.com)

Teaser for the day

TRS chief says "Will bury anyone who dares disrespect Telangana"!

What could be worst disrespect to the motherland than suggesting that it is capable of being disrespected by any tom dick harry?

Some books to finish and few places to visit

In past few days, I have outlined my thoughts on hurdles Indian economy faces in achieving a sustainable 8%+ growth path.

Positively, many readers have appreciated that there is little on the ground which could kick start the virtuous cycle of "higher income - saving - consumption - investment - income" in near term.

Most also agree that morning star is now visible and signs of a brilliant dawn are emerging on the horizon.

Some active participants in the equity markets have however suggested that hurdles in achieving higher savings and investment rate should not be deemed as "no profit making opportunity" in the market in near term. I could nothing but agree with them. I receive plenty of "stupendous trade" ideas every morning. Many of them actually go up 2-20% for several days.

Every day morning I find a slew of companies which traded at their all time high levels. Admittedly, I have never heard about 70% of these companies. A preliminary enquiry shows a large number of these "multi baggers" have little to show in their financial statements. Surprisingly, their profits jump with investor's sentiments and ebb accordingly. Obviously I am not at all excited about these "circuit hitters".

The tremendous response to some recent IPOs also reminds of exuberant times seen during 1989-90, 1994, 1999, 2005-07.

But what is catching my attention is small bubbles on the surface of services sector suggesting a strong undercurrent and high temperature underneath. Retailers, e-commerce platform providers, logistic services, pharma R&D, ITeS, telecom, entertainment, E&C contractors have all seen their market value burgeoning exponentially. Many players in this space have been able to raise risk capital at rather elevated valuations in recent past. Though comparatively smaller in overall macroeconomic context, this space appears to have decoupled and moving ahead alone.

I am a big fan of enterprise, innovation, large scale and ideas that directly touch of people. However, I do not like to invest in businesses (a) I fail to understand; (b) where visibility of positive cash flows is low; or (c) where valuations are high just on hopes.

I would therefore be very selective in venturing in this space. I guess I have enough time at my hand to make the selection. The nagging feeling I get from conditions in Europe provides me comfort that soon there will be an opportunity to buy at my will. I need stand in long queue at the upper circuit freeze level to buy any stock.

This soon however may not be tomorrow morning or next week. But that is fine with me. I have some books to finish and few places to visit. I can therefore wait little longer without getting bored.

For those getting itchy I would suggest studying the market behavior during July 2007 when subprime problem first hit the market and September 2008 when Lehman actually collapsed. The yield curves across Europe are also depicting a story.

Why bother about things you can't help

Thought for the day

” Let the one among you who is without sin be the first to cast a stone. "

-          Jesus Christ

Word for the day

Cavil (int. verb)

To raise trivial objections; also, a trivial objection

(Source: Dictionary.com)

Teaser for the day

If religion of Sanskrit is Hindu, what is the religion of English, Urdu, Tamil, Bangla, Malyalam, Sindhi, Gujarati, Marathi, Punjabi, French, German....?

Why bother about things you can't help

I am fortunate to have critics who are most charitable in their criticism. For past two weeks especially they are leaving nothing to imagination., Some of them have even picked up selective Punjabi expletives to express their frustration with me.

Their main objection is to my nonchalance to seemingly exciting events and data, e.g., Ukraine, Pakistan, Gaza, ECB stimulus, Fed tightening, etc. My point is that anything which can be clearly seen by the last person standing on the street (that is me) is not worth bothering about. So is not which even the likes of Yellen and Draghi cannot see.

I like to factor in my strategy all that is known and/or expected, whether quantifiable or not, and keep enough flexibility to accommodate any black swan that may chose to visit unannounced. This saves me from reacting to every news headline or getting excited over every hint of trouble.

I understand it is unfair to use this column to take on my critics, but who said life is fair!

Now coming back to normal business, I have been emphasizing that the Indian economy may not sustainably return to the path of high growth (8%+), in next 5years unless the virtuous cycle of "higher income - saving - consumption - investment - income" gets kick started. So far we have not seen any evidence of this happening.

The upward revision in growth estimates so far is coming from expectation of faster execution and administrative efficiencies. New investments are not on the horizon of analysts and economists so far.

The corporate profit growth in past couple of quarters is also mostly driven by cost efficiencies and better export demand. There is no evidence of pricing power returning to producers or material rise in consumer demand.

In my (over) simplistic assessment the following pieces need to fall in place before the virtuous growth cycle led by investment and credit is kicked in.

(a)   More money needs to flow in the hands of consumers so that consumption demand and household savings could grow at faster rate.

(b)   Credit worthiness of enterprise engaged in high gestation capital intensive infrastructure  projects needs to improve.

(c)   Lending capability of financial institutions needs to improve materially both in quantitative and qualitative terms.

(d)   Enabling industrial, fiscal and sustainability policy environment needs to be firmly put in place.

(e)   Monetary policy needs to ensure that the foreign flows are not used to feed asset price bubble like during 1991-1995 and 2003-2007 but are strictly channelized to built productive assets and social & physical infrastructure.

In next few days, I shall discuss these points in some more detail. All suggestions, comments and views (even with expletives) are welcome at vijaygaba.investrekk@gmail.com

Solve the puzzle

Thought for the day

”For if you love those who love you, what reward have you? Do not even the tax collectors do the same?"

-          Jesus Christ

 

Word for the day

Bletting (n)

The ripening of fruit, especially of fruit stored until the desired degree of softness is attained.

(Source: Dictionary.com)

 

Teaser for the day

Pakistan gets its own AAP moment.

There are lesson for all - Anna, Quadri, Kejriwal, Imran, Manmohan, Sharif and Modi!

 

Solve the puzzle

In past couple days some market commentators and analysts have made seriously buoyant forecasts about Indian equity markets, almost disregarding the global unease about the bond and equity rallies in developed markets. It certainly feels good to hear calls for 10000 Nifty level in next 6-7months translating into 25% return from the current levels.

The latest trigger for the bulls is the GDP data for 1QFY15, which came at 5.7%, though not unexpectedly. As I suggested yesterday, the stream of latest data, including GDP data for 1QFY15 and PMI numbers for past 6months, support optimism about "worst is over". There is however little to suggest that the virtuous cycle of higher savings, investments, credit and consumption is likely to get kick started tomorrow morning.

I feel the latest GDP data needs to be seen in this context. Even a prima facie look at the CSO press release of 1QFY15 GDP data raises some questions. For example, consider the following:

(a)   Good rabi crop is reflected in strong Agriculture growth. But this number is corroborated by private consumption which fell, continuing the trend of past many quarters.

(b)   Strong growth in construction sector growth did not reflect in banking and real estate sector growth. From other data we know that infrastructure construction, especially roads, has not done well in that period.

(c)   Government consumption expenditure rose, perhaps due to election related spending. However, considering that over 60% government spending is done on social sector, the decline in social sector growth is difficult to explain.

(d)   Rise in investment also is not corroborated by decline in financing, banking and insurance sectors. The credit growth number for the corresponding period also do not confirm this.

(e)   Gold might have contributed much to lower imports number. Oil import is also lower. Both these are not sustainable.

(f)    Mining growth is purely due to lower base, as the coal and iron ore production data does not confirm this sharp rise.

(g)   The shortages in power supply belie the spectacular rise in electricity and gas production.

(h)   Rise in manufacturing and exports could be due to other economies doing well rather than Indian economy doing well. Lower consumption number confirms this.

I would like this puzzle to get resolved before changing my investment strategy from overweight consumption and exports to overweight investment and credit. For now I am sitting tight. I shall though look at rebalancing my portfolio this month to take care material outperformance in certain stocks.