Vijay Kumar Gaba: June 2015

Tuesday, June 30, 2015

The road less traveled has its own perils

Thought for the day

In struggling against anguish one never produces serenity; the struggle against anguish only produces new forms of anguish."

- Simone Weil (French, 1909-1943)

Word for the day

Stinkaroo (n)

Something markedly inferior in quality

(Source: Dictionary.com)

Malice towards none

Is there any study to assess what is the role of incest in worsening sex ratio in India?

The road less traveled has its own perils

The week expectedly started with Greece. Monday morning was overwhelmingly dominated by Greek talk. By the time markets opened, I had already participated in many discussions.

"What is happening in Greece?" Why people are discussing it 5am in the morning! my wife a student of Music and blissfully oblivious about finance, wondered.

"I am praying for Gexit. A vacation in Santorin at cost of Bangkok would then be possible!", a dear friend exclaimed.

"Should I sell everything at the market opening? Will the fall of Greece be as bad as the fall of Lehman Bros?" worried a traders.

"Tell me what to buy this morning, should market open materially lower", an investor who had been looking to increase his equity allocation, inquisitioned.

Unfortunately, I could offer no intelligent input to none of them.

All I could think was that "in 2008 the world reached a point where two roads diverged into the woods; and the world took the one less traveled. Seven years and few trillion dollars down the road, we find ourselves standing at the same fork we left in 2008, only more wearied and less sure about ourselves."

I feel taking the path less traveled was the right strategy back in 2008, as the conventional path was severely damaged and blocked. But the world outside US should have returned to the conventional path the moment US chose to ditch the global cooperation forged in 2008. Following the US was another option available.

If it appears Greek to you, let me get back to simple English.

To understand the problem of Greece and many other countries in Europe and find a sustainable solution, it is essential to understand the root cause.

The core of the European problem lies in the blatant fiscal profligacy in post War era. Both European governments and people have spent way too much more than they have earned in past few decades. Large socialist governments, high wages, inflexible labor markets, huge subsidies ensured that the fortunes collected through industrial evolution and colonial expansion were squandered. The industry thus moved to Asia, constricting the new avenues of employment.

To make things worse, the human lives lost in the two wars were never adequately replenished, making the demography old and dependent on pension. The virtuous cycle of economic development has been replaced by the vicious cycle of adverse demography. Most European nations have more people to provide for than the tax payers.

In post war era, despite all the mistrust, US kept its door open to the talent and capital from across the world. The mass emigration of talented people and real capital to US from Europe has left Europe way behind in technological evolution.

Following the unconventional monetary policy like US is no solution for Europe for the simple reason - US could grow at 3-4% and repay its debt and Europe cannot grow and cannot service its debt.

NEXT POST WILL BE PUBLISHED ON 7-JUL-15

Monday, June 29, 2015

Lull before the storm

Thought for the day

"The intelligent man who is proud of his intelligence is like the condemned man who is proud of his large cell."

- Simone Weil (French, 1909-1943)

Word for the day

Tenderfoot (n)

A raw, inexperienced person; novice

(Source: Dictionary.com)

Malice towards none

Narendra Bhai's friend Barack's country has embraced Yoga.

Will Barack's friend Narendra Bhai's country embrace Gay marriage?

Or we just believe in saying our Mann ki Baat, without bothering about others' Mann ki Baat.

Lull before the storm

As expected last week (see here) Nifty faced strong resistance in the 8350-8386 range and failed to sustain outside this range.

The momentum in the market slowed down considerably despite F&O expiry last week. Volumes were low. Volatility persisted at lower levels. Market breadth was even. FPI selling seen in past two weeks subsided. So did the DII buying. Bonds markets were also subdued with benchmark yields mostly unchanged, despite failure of RBI auction on Friday.

For the week, Nifty is critically placed at the break out point. A positive break out might take Nifty to the higher trading range of 8470-8850.

Failure to breakout may however led the market retreat to 7900 level with a rendezvous in 8170-8210 range.

Given the worsening domestic political environment and Greek referendum scheduled for Sunday, 5th July, it is less likely that a clear direction will emerge this week.

Friday, June 26, 2015

True and fair

Thought for the day

"Deprived of meaningful work, men and women lose their reason for existence; they go stark, raving mad."

- Feodor Dostoevsky(Russian, 1821-1881)

Word for the day

Ennui (n)

A feeling of utter weariness and discontent resulting from satiety or lack of interest; boredom:

(Source: Dictionary.com)

Malice towards none

What is morality and what is legality; and why should they cohabit; and how could morality be tangent on the legality.

True and fair

Someone raised a very pertinent question - should driving below speed limit be equivalent to driving above speed from viewpoint of the legality of the action?

In a scenario when everyone is driving at the stipulated speed limit, the safety of the vehicles and people riding in those vehicles would be endangered in equal proportion if someone decides to drive either below or over the stipulated limit.

A supplementary question that could arise out of this inquisition is - whether something done (slow driving) to avoid being caught in an unlawful act (fast driving) should be equally culpable as the unlawful act itself?

After an annoying argument with myself, I concluded that driving slower than the flow of the traffic is perhaps more perilous to the safety of other people than the fast driving. Because slow driver induces the trailing drivers to jump the lane and overtake his/her vehicle and in the process creates multiple chances of occurrence of an accident. Whereas the fast driver just himself jumps the lane and creates just one chance of an accident, should he lose the control of his vehicle.

I know it will make me hugely unpopular with many tax payers, but I find it very pertinent to extrapolate this logic to the debate of tax avoidance vs. tax planning (saving).

(a) A public company taking business decision based primarily on tax saving considerations should be equally culpable as the company that avoids paying due taxes. For example, a film producing company investing in a windmill!

(b) The tax concessions provided by the government for inducing investment in a specific geographical location, even though not necessarily in the best interest of the minority shareholders also need to be evaluated by the same yardstick.

Why the minority shareholders of a company (whose consent is not sought for making substantial investments) should be burdened with the obligation of aiding the development of a backward region?

Many projects that were primarily conceived to take advantage of backward area have become unviable due to poor infrastructure, higher operational cost, etc. The losses are suffered by the lenders, ancillary investors, families of the people rendered unemployed,

The implications are - (i) investors are induced to invest in a business, they might normally not have done but for tax saving; (ii) government loses on revenue with no direct or indirect benefit at all; (iii) it does not add any economic value to the issuer company or its existing shareholders.

Why then the government should allow this blatant tool of tax avoidance in the garb of tax planning?

Thursday, June 25, 2015

A stich in time!

Thought for the day

"The cleverest of all, in my opinion, is the man who calls himself a fool at least once a month."

- Feodor Dostoevsky(Russian, 1821-1881)

Word for the day

Otiose (adj)

Being at leisure; idle; indolent.

(Source: Dictionary.com)

Malice towards none

In a society where history is quintessentially intertwined with religion & mythology and laced with guilt - how science could progress.

A stich in time!

At the recently concluded annual general meeting of the Reliance Industries Limited, the management of company presented some glimpses of their strategy for the telecom business under Reliance Jio brand.

While the analysts are divided over the extent of damage it might inflict to the existing players, three things are clear:

(a) The Indian telecom industry shall see enhanced competition and pricing pressure in next couple of years. The consolidation and elimination process will continue and perhaps accelerate.

(b) Most players will have to incur material amount of capital expenditure (capex) in next few years to protect their market share and growth.

(c) Though the primary battleground will be "data"; the voice, smart phone and tower infrastructure segments will also see increased competitive intensity.

This essentially means that (a) debt of all major telecom players will remain at elevated level; (b) the financial stress of marginal players and consequently lenders will rise; (c) the lenders may be reluctant to fund further capex of even major players given already leveraged balance sheets and moderate profitability growth visibility.

The solution may come from further equity dilution or higher foreign equity contribution, at the expense of extant shareholders.

Another negative from existing investors' viewpoint would be that the transformation of Indian telecom industry from a high growth industry to a utility is pushed further back by at least 3years. The dividend paying ability of major players will remain constricted.

So while I eagerly wait for full fledged 4G services at promised rate of Rs400/month, I continue to ignore telecom companies for investment.

From policy perspective, I believe the government has been unfair to the industry.

The government has been consistently supporting the Textile industry in the country for past many decade. The primary consideration for such support has been the large number of people employed by the industry.

However, anecdotally I find that incrementally telecom sector has employed much more people than the traditional textile industry. During my travels across the country, I have noticed that mobile telephony has provided respectable and profitable self-employment to millions in past one decade.

The government has however only exploited this sector. Rather than recognizing the sellers of pre-paid cards, mobile repair shops, mobile accessories' sellers as MSME, the local civic authorities often harass them and treat them with contempt. These businesses are seldom considered favorably for organized financing.

May be the policy makers are waiting to see that the businesses in this sector also go the traditional textile industry way before making any concessions for them!

The scenario is neither improbable nor too distant in the future.

Wednesday, June 24, 2015

Let it go!

Thought for the day

"There is no subject so old that something new cannot be said about it."

- Feodor Dostoevsky(Russian, 1821-1881)

Word for the day

Definiens (n)

Something that defines, especially the defining part of a dictionary entry.

(Source: Dictionary.com)

Malice towards none

Government is considering tax rebate for encouraging use of credit card.

Does promoting the use of debt not violate the "Indian Culture"?

Why no champion of "Hindu Rashtra" is seen protesting?

Let it go!

Last week, the government raised the import duties on flat steel products to 10.0% from 7.5% and on long products to 7.5% from 5.0%. Higher import duties on steel products are intended to ease some of the downward pressure on domestic steel prices from cheaper Chinese steel imports.

As per Moody's, Indian steel prices have dropped 27% over the past 12 months owing to a 70% increase in cheaper imports, one third of which came from China. As of the quarter ended 31 March 2015, cheaper imports led to a 6% decline in realized per tonne prices at Tata Steel, versus a year earlier, and a 10% decline at JSW Steel during the same period.

(Via Moody's)

Kotak Research believes that the 2.5% hike in import duties on steel products to 7.5% on long and 10% on flat steel products is too modest to cheer domestic steelmakers in view of the sharp decline in global steel prices. Benefits will be limited given the large imports under free-trade-agreements and high domestic premiums over import offers.

What I would like to understand is that:

(a) If the global commodity deflation due to demand slowdown in China, Europe, and many emerging markets is a realty and it is likely to persist for many more years, how long and how far the government of India is going to protect Indian producers?

I appreciate all the arguments that would be offered in support of this action - but I fail to understand that when the domestic consumer will get the full advantage of global correction in commodity prices.

(b) Would it not be a better strategy to support the consumers of commodities by subsidizing imports so that they could optimize their capacity utilization, begin a virtuous cycle of lower prices in the economy, may be at the expense of few producers who are not globally competitive in the current environment.

Tuesday, June 23, 2015

Look at what you own, Sensex may mislead you

Thought for the day

"Man, so long as he remains free, has no more constant and agonizing anxiety than find as quickly as possible someone to worship."

- Feodor Dostoevsky(Russian, 1821-1881)

Word for the day

Swashbuckler (n)

A swaggering swordsman, soldier, or adventurer; daredevil.

(Source: Dictionary.com)

Malice towards none

Has Bangladesh finally replaced Pakistan in terms of popular cricketing rival of India?

Look at what you own, Sensex may mislead you

The recently concluded result season (4QFY15) was one of the worst in past one decade. The Sensex earnings fell 7% yoy, led primarily by commodities. More companies missed the earnings forecasts of analysts as compared to the companies which met or beat the forecasts. Pharma sector perhaps disappointed most. Consumers, particularly discretionary, also let down the street expectations.

The most disappointing feature was broad based revenue contraction led by both price erosion as well capacity underutilization.

Though most analysts have put up a brave face - downgrading FY16 earnings but upgrading FY17 earnings, top line contraction, first since 2009, must be giving some jitters.

In the whole India story, demand has always been a given. 1.25bn strong population with burgeoning middle class and more than 2/3rd workforce has always supported the assumption of resilient underlying demand.

Now if even in "peacetime" this demand has shown contraction, it needs a close examination. This examination is also important given the fact that revenue growth has been on the decline ever since 2008 (except a stimulus and pay commission led bounce in FY10).

I believe that we need to examine the competitive strength of India Inc in the emerging global and domestic environment. It is probable that even many large companies may not survive in the changing competition landscape. The lost pricing power and market share may never be regained. Though we may see an "aggregate revival", it may not matter much if the companies I own do not grow in their business and profitability.

Monday, June 22, 2015

Greed still outweighs fear: Market crash not imminent

Thought for the day

"Much unhappiness has come into the world because of bewilderment and things left unsaid."

- Feodor Dostoevsky(Russian, 1821-1881 )

Word for the day

Inviolable (adj)

incapable of being violated; incorruptible; unassailable

(Source: Dictionary.com)

Malice towards none

Why Lalu and Nitish are taking LKA side, who they believe to be the original villain of Secularism?

Greed still outweighs fear: Market crash not imminent

Since the all time high level recorded by Nifty on 4 March 2015, small cap and midcap stocks have mostly outperformed the benchmark. Despite rising threat perception, persistent selling by FPIs and worsening technical parameters, broader markets have continued to outperform last week. Though the small cap did worse than midcap last week, the scale is still tilted towards "greed" in the battle of bulls (greed) and bears (fear).

It is therefore not appropriate to expect a market crash anytime soon.

The market is more likely to move in a sideways trading range with a distinct downward bias.

For the week, NIFTY faces strong resistance in 8350-8386 range. A minor support zone exists in 7980-8015 range. A strong short term support exists at 7860 level

Friday, June 19, 2015

Irony of middle child - II

Thought for the day

"I hold it to be the inalienable right of anybody to go to hell in his own way. "

- Robert Frost (American, 1874-1963)

Word for the day

Lackadaisical (n)

Without interest, vigor, or determination; listless; lethargic.

(Source: Dictionary.com)

Malice towards none

Wonder, when non-congress parties will stop citing non-performance of Congress in last 60yrs as a defense for their non-performance!

Irony of middle child - II

The decision of CCEA to hike interest subvention for EWS and LIG housing is a most welcome. I am happy to see that the government is thinking on the lines which I truly believe to be correct.

Now continuing from yesterday (see here), I believe that the focus of policy should be on providing escape velocity to the middle and lower middle class households. Moving this tremendous mass of people to a higher economic strata will provide Indian economy the critical demand base that is necessary for higher growth on sustainable basis.

Once this mass enters the virtuous cycle of "more income-more saving-more consumption-more investment-more income", the potency to address the upliftment of the bottom of the pyramid may increase exponentially.

In post independence period the policy focus has always been away from this most potent section of the society. Both monetary and fiscal policies have focused either on the:

(a) miniscule top end of the spectrum that has led to perilous widening of socio-economic inequalities and added little to the sustainability of economic growth. In each business and economic cycle we see this section coming under stress rather easily, seek even more assistance from the government, and bring the financial system to the brink; or

(b) the large, vulnerable and politically relevant bottom of the spectrum. Historically, most of this effort has occurred without building robust delivery mechanism; has been based on ad hoc policies driven by electoral considerations; and has led to dissipation of scarce resources. In recent times, efforts have been made to improve delivery mechanism through financial inclusion and use of technology (UID) etc. This effort will certainly bear fruit in future. But if adhocism and electoral consideration continue to dominate, the results may still not be optimal.

The consequences are for everyone to see. None of the segments is satisfied.

The question is what is the way out. In my view, a combination of the following could work:

(a) Minimize capital controls. Allow foreign capital to move freely in all sectors. Make policies stable, predictable and friendly. Support competitive domestic businesses to grow and let the uncompetitive domestic businesses to fail.

(b) Provide necessary escape velocity to the middle and lower middle class households by leaving more cash in their hands for consumption and investment. High quality public health, education and transportation would help in a big way. Subsidized housing and lower taxes are must.

(c) Make a comprehensive long term sustainable support system for the bottom of the pyramid. Improving delivery mechanism, and targeting subsidies is quintessential. Make a legislation that prevents a political party claiming exclusive credit for whatever it has done with the public money. Let them claim credit for what they have achieved through spending from party funds. This may take electoral consideration out of fiscal policies.

Thursday, June 18, 2015

Irony of middle child

Thought for the day

"The best way out is always through."

- Robert Frost (American, 1874-1963)

Word for the day

Technophobia (n)

Abnormal fear of or anxiety about the effects of advanced technology.

(Source: Dictionary.com)

Malice towards none

Enforcing the constitutional pledge of office "Without fear or favor; without affection or ill will" in letter and spirit will not only get the nation rid of corruption but will also secure elected legislators against frivolous allegations.

Irony of middle child

Not being an economist, I enjoy the luxury to see the things as they appear in natural light, without bothering about the General Theory of Employment, Interest and Money, its myriad variants and even larger number of criticism.

And as I see the things in natural light, consumer inflation is primary monetary policy consideration in India, at a time (a) when most of the developed world is struggling with deflationary pressures; (b) the producer prices in India are under serious pressure; (c) the credit demand has completely collapsed; (d) exports are declining; and (e) financial system is seriously undercapitalized.

I cannot find anything that supports the current lending rates - not even consumer inflation and stronger INR.

First, inflation. In my view due to the skewed structure of current inflation its impact is not uniform for different segments of the society. In particular, the following needs to be considered.

(a) The bottom of the pyramid (~35% population that is below poverty line) may be more or less insulated from inflation. This segment mostly consumes cereals, avails subsidized public transport, education and health, lives in mud houses, footpath, urban slums, workplace, does not have paid electricity and water connections, and does not borrow much from organized sector. Lower interest rate will make their life easier as these increase employment opportunities for them, and provide greater fiscal leverage to government for increasing social sector spending.

(b) Mid and small level famers (~15% of the population) love food inflation as it augments their income. As they share many traits of the consumption pattern of BPL families, food and household inflation may not bother them much in routine life. Though the aspirations are hurt and growth is impacted. Lower interest rates will serve them materially even if it means higher inflation.

(c) The upper echelons of the society (~5% of the population) cares least about consumer inflation as their consumption vs. income ratio is extremely low. On the other hand the deflationary trend in producers' prices is hurting them badly. Most producers are struggling with poor pricing power and lack of demand. Lower interest rate and higher manufactured price inflation will help these producers. Thus investment and employment will grow.

(d) The upper middle class (~10% of the population) again is not bothered about food inflation as much as it is about higher rates. Staples' consumption may not constitute more than 20% of their household income. Lower rates may however help them grow faster in their own enterprises, and invest more in real estate, and capital markets.

(e) The non-farming middle class and lower middle class (~35% of the population) bears the most of the brunt of consumer inflation. Food, health, education, travel, etc. partake material part of their household income.

But the moot point here is "how the higher lending rates are helping this segment?" ....to continue