Vijay Kumar Gaba: August 2016

Wednesday, August 31, 2016

Alice in the wonderland

Thought for the day

"No man is a failure who is enjoying life."

—William Feather (American, 1889-1981)

Word for the day

Mirabila (pl noun)

Marvels; Miracles.

Malice towards none

Is India giving away too much space to US or just allowing US its due space, correcting historical anomalies?

First random thought this morning

Yesterday a leading national newspaper prominently carried the news of Nupur Talwar, mother of Aryushi Talwar, getting three week parole for attending to her ailing mother.

This in my view aptly reflects the degeneration of mainstream media.

Alice in the wonderland

In my endeavor to set a crude matrix that will provide some sort of signal to get into the bunkers before the lightening does strike, I have been reading the works of many experts who are acclaimed for having seen the 2008-09 global financial crisis well in advance.

On the basis of my impression from their works, I may classify them in five broad categories:

(a) Fearsome: These are large investors and seasoned money managers who have serious stakes in the financial markets. They are fearful about the inevitable collapse, but have chosen to stay invested. Naturally they are invested in so called safe havens, driving the value of USD, CHF, US and German treasuries, etc. to bubble levels. The more they are afraid, the more air they are pumping into the bubble.

(b) Fear mongers: These are mostly unscrupulous bankers, economists and analysts who are consistently creating an environment of fear amongst various market participants and stakeholders to maximize their gains. Based on their forecasts, many a times unsubstantiated, they are able to pursue decision makers into a transaction that is mostly unnecessary.

(c) Fearless: These are mostly money managers and small to midsized traders who are always there to take advantage of greed & fear inequilibrium in the market. These mostly move around the globe in herds, acting in tandem. Their entry and exit in an asset class, market or geography causes massive rise in volatility.

(d) I said so variety: These are mostly academicians who propagate multiple, often vague, inadequate, inconsistent and/or self contradicting, economic theories in the market so as to claim the status of an Oracle at a later date. I any event, but mostly collapse, they proudly claim "I said so". Well funded by public money, mostly, they are at no loss situation, in any eventuality.

(e) Data dependent: These are mostly official statements of various central bankers, global financial institutions, and governments. These are expressed in extremely measured words and are said to be data dependent. Though watched carefully for each word and punctuation mark in some cases (e.g., US Fed), in recent time these have lost their credibility. Mostly the fearless type use these statements to further their cause in the market.

From my careful readings of various statements, reports and writings of a number of experts from the said five categories, I have concluded that most of them are as clueless about the timings and immediate trigger for the Endgame, as me or any of my readers.

That is obviously not a matter of comfort for me; but it is motivation enough to break away from the popular wisdom and develop own matrix and signals. Right or wrong - only time could tell.....to continue

Tuesday, August 30, 2016

No black swans here

Thought for the day

"Every social injustice is not only cruel, but it is economic waste."

—William Feather (American, 1889-1981)

Word for the day

Venial (adj)

Excusable; trifling; minor: a venial error; a venial offense.

Malice towards none

Does a brilliant performer in any field really need a medal or award for recognition?

First random thought this morning

Being traumatized by frequent call drops at my home, I reluctantly decided to take few steps back and apply for a MTNL fixed line basic telephone. And it was just a beginning of massive surprise.

I applied by filling a simple online form (no documents and no fees). Within 24hrs two executives of MTNL were at my doorsteps, very humbly requesting for an address proof, ID, photograph and Rs. 500 as fee. They insisted that I just sign the form they had brought and they will fill it up themselves from my address and ID documents. Within 48hrs my telephone was ringing and I was free from the agony of frequent call drops!

No black swans here

The US federal Reserve Chairperson Janet Yellen very bravely asserted in her latest speech that “case for an increase in the federal funds rate has strengthened in recent months”.

The skeptics are taking it for an academic hypothesis; ruling out any action in the near future.

The market participants are divided in their opinion. In my view, this division will likely keep market in its current state of indecision till 21-22nd September when FOMC meets next decides on the Fed policy rates. It is entirely possible that we see some sell off in couple of days prior to the decision day.

In my extremely parochial understanding of the global economics, regardless of a token hike here and there, I find it hard to see any case for any material hike in interest rates even in 2017.

In fact, the case appears to be that even a token hike might have to be supported by adequate monetary easing to support the feeble economic momentum that we see in the USA.

Therefore, I am not at all worried about a 25bps rate hike (not my base case) on 22nd September. What I am worried about is the ponzi in the bond market, that has already assumed alarming proportions and burgeoning by the minute.

To quote a recent post of David Stockman:

"...the global bond market has become a giant volcano of uncollectible capital gains. For example, long-term German bunds issued four years ago are now trading at 200% of par.

Yet even if the financial system of the world somehow survives the current mayhem, the German government will never pay back more than 100 cents on the dollar.

What that means is there will eventually be a multi-trillion dollar bond implosion as speculators and bond fund managers alike scramble to cash-in their capital gains at the first sign that the global bond markets are breaking and heading back to par or below. And it is not just the “winners” who will be stampeding for the exists." (for full post see here)

In my view, everyone knows the endgame. It's going to be a disaster of mega proportion for the savers, pensioners, investors, global financial markets, governments and anybody else one could name. Therefore, this event, whenever it occurs will not qualify to be a black swan event.

The winner would be the one, who could see the first signs of the beginning of the end. I am yet to read or hear any intelligent ideas on this topic; though billions of reams of papers and terabytes of virtual data has been consumed on the related guesswork.

Now when everyone is doing it, why can't I. So let me try it in next few days.

Monday, August 29, 2016

Nifty: near term sluggishness, but no signs of a collapse

Thought for the day

"An invitation to a wedding invokes more trouble than a summons to a police court."

—William Feather (American, 1889-1981)

Word for the day

Truepenny (n)

A trusty, honest fellow.

Malice towards none

Task force to win Olympic medals!

genius!!

Ain't it?

First random thought this morning

The boisterous herd of global traders and punters has found a new worrytoy in the Italian constitutional referendum, to play with. The referendum is likely to take place in late November.

This is after Brexit did not play exactly the way this herd may have wanted it to; and Trump appears offering much less resistance to Hillary, than earlier anticipated.

Italian referendum is being marketed as critical for EU survival.

Nifty: near term sluggishness, but no signs of a collapse

The momentum in the market has completely collapsed, as the market participants wait for a material trigger.

As suggested last week (see here) the market participants, and hence markets, may continue remain in the wait'n'watch mode for few more trading sessions.

In the mean time Nifty is close to completing a good correction on the daily charts, obliterating most of the overbought conditions. 8490 on closing basis is a strong support on daily charts.

The corrective formations on the weekly charts are also showing encouraging signs. Despite three consecutive negative weekly closings, there is no sign of a collapse taking place there.

I shall be watching India VIX and volume charts closely for pick up in the momentum. A bottoming out in VIX, which is at almost lowest level in two years, shall trigger a 10% very fast move in the market.

My wager, like the majority view, would be on an the up move.

Thursday, August 25, 2016

Unexciting denouncment of Rexit drama

Happy Janamashtami to all our readers.

The next post of the Morning Trekk will be on Monday, 29 August 2016

Thought for the day

"There is nothing as sweet as a comeback, when you are down and out, about to lose, and out of time."

—Anne Lamott (American, 1954)

Word for the day

Mountebank (n)

Any charlatan or quack.

Malice towards none

Shri Mohan Bhagwat is neither helping Hindus, nor Hindutava, nor Hindustan!

First random thought this morning

Flood in Bihar and Assam is an annual occurrence since past many decades. It has been regularly impacting the normal lives of millions of poor and helpless people, besides causing extensive economic damage.

There are ministries and departments for flood control. Relief packages are announced every year by the central and respective state administrations.

But we have not heard about any Plan to solve the problem on a sustainable basis. This makes the whole planning process look like a farce; and concern of politicians for poor questionable.

Unexciting denouncment of Rexit drama

The denouncement of the Rexit drama is rather unexciting. Those who were anticipating a twist in the tail are obviously disappointed.

The industry & markets have ostensibly hailed the announcement of Dr. Urjit Patel's as the new RBI governor in place of the outgoing governor Dr. Raghuram Rajan, as a measure to maintain continuity in the policy environment.

In my view, the whole episode exposes the inherent incongruence of the investment and business strategies; and is unfortunate to that extent. For example, consider the following:

(a) The Reserve Bank of India is an 81year old institution. It has withstood all tests of the time and emerged stronger. This one of the few public institutions which have impeccable and unblemished track record of performance.

Though governor may be working as a guiding force, denying the role of the technical teams working at RBI in policy making may be ignorant and unfortunate.

Assumption that an individual could be more important than the institution itself is preposterous. Moreover, it violates the whole thesis of India being an attractive investment and business destination. The episode forces me to raise serious doubts over the:

(i) seriousness of the celebrated global investors, who created ruckus over retirement of the incumbent governor;

(ii) competence of the Indian media in economic matters, which took the lead from casual statements of celebrities and created an environment of fear and suspicion amongst the common public, especially the investors in financial markets;

(iii) intentions of the political leaders from the opposition parties, who intervention in the matter was opportunistic, totally out of turn, unnecessary and apparently not in the national interest;

(b) Assigning the bird adjectives to a RBI governor is unfortunate and contemptuous. This incorrectly suggests that the governors servants of their prejudices and/or are incompetent to judge the change in the circumstances underlying the policy formulation.

Is it so difficult to accept that the macro fundamentals and economic realities have changed materially since 2013 when Dr. Rajan assumed the charge of RBI governor's office. Dr. Patel needs to take decision under current circumstances

(c) Those clamoring for Dr Rajan, are not exactly celebrating the entry of Dr. Patel - who stands for everything Dr Rajan did and is considered more hands on to the Indian economy and businesses. Why? Do they fear that Dr. Patel, having worked closely for Indian businesses and global investors, knows much more about their "ways and means" as compared to Dr. Rajan whose experience was mostly academic.

Wednesday, August 24, 2016

All is not Well!

Thought for the day

"My coming to faith did not start with a leap but rather a series of staggers from what seemed like one safe place to another."

—Anne Lamott (American, 1954)

Word for the day

Whigmaleerie (n)

A whimsical or fanciful ornament or contrivance; gimmick.

Malice towards none

Now you know why AAP is running its publicity campaign on public money - It has no money left of its own!

First random thought this morning

A Reuters headlines yesterday screamed "Naming of new RBI chief shows Modi government regains composure after Rajan shock". It was promptly carried out by the local media and discussed at various forum including social media.

I wondered - "when did the government lost if composure over the issue of extending the term of extant governor. It was the studio experts, some celebrated markets experts and opposition leaders who lost their composures and added sinister motives to the government decision.

All is not Well!

Target Corporation Inc of USA, one of the largest customers of Welspun India terminated its business relationship with the Vendor alleging that Welspun substituted Egyptian cotton with a cheaper variant of cotton while supplying it bedsheets.

Reportedly, Wal-Mart Stores Inc, Welspun's third-biggest customer, is also reviewing the company's cotton certification records, and if found irregular, it may also consider cancelling the contracts with the company.

Welspun in a conference call on Monday stated that it was investigating the product specification issue and would hire a Big Four accountancy firm to review its supply processes. The company was evasive in answering the specific queries and completely failed in assuring the investors.

Already two days have elapsed since the issue had first arisen. However, we have not heard anything from the government authorities on this.

One may argue that it is purely a business matter and government may not have any role in this. But I strongly disagree. I believe that these kind of matters have serious implications for the economy and markets and therefore require serious and prompt government intervention.

At this point in time we do not know if the allegations against the company are true. Nonetheless, it is pertinent to consider the following points in this regard:

(a) The company is one of the leading exporters of the bad and bath linen from the country. It claims to be exporting to over 50 countries. If the allegations against the company are proven correct, it may seriously damage the image of other Indian exporters also.

(b) As of end FY16 the company has a net debt of over Rs2500cr and an annual interest outgo of over Rs200cr. A contagion effect of Target Corp's action may lead to more order cancellations, thus jeopardizing the debt servicing capabilities of the company. We have seen similar instances in case of some diamond merchants. To this extent it could be a systemic problem.

(d) We are already witnessing a serious quality assurance crisis in the pharmaceutical industry due to callousness of a few players. We may not want this contagion to spread to other industries also.

My simple point is that if our government is serious about its Make in India mission, it needs to build a strong quality assurance and audit mechanism to ensure that all manufacturing in and exports from the country adhere to the top global standards.

We just cannot become a major manufacturing and export hub with our Jugaad mindset - both inside and outside the government

Tuesday, August 23, 2016

From "darkness" to "light"

Thought for the day

"My idea of absolute happiness is to be in bed on a rainy day, with my blankie, my cat, and my dog."

—Anne Lamott (American, 1954)

Word for the day

Me-tooism (n)

The adopting of policies, methods, products, etc., similar or identical to those of a peer, rival, or competitor.

Malice towards none

Rajan's Exit - "Rexit".

Patel's entry - "Pentry"!

First random thought this morning

After BJP was reduced to 2 Lok Sabha seats in 1984, it took a countrywide Rathyatra and demolition of a structure in a small dusty town at the banks of river Saryu in Eastern UP (popularly known as Babri Mosque and Birth Place of Lord Rama) to resurrect the fortunes of the party.

Now we are down to 2 medals in Olympic, after a rather surprising 6 in 2012 London Olympics. The morale of the players and coaches must be thoroughly destroyed, notwithstanding the celebrations over Malik-Sindhu achievements.

What would it take to restore this morale? Certainly not a government committee!

From "darkness" to "light"

From discussions with traders and MSME businessmen, it is abundantly clear that their primary grouse is that the parallel or cash economy has significantly weakened due to various legal and administrative measures initiated by the incumbent government.

Never in my life I have seen so much reluctance to accept payments in cash in India.

Empowered with advanced technology, data access and favorable legal & regulatory framework, the taxmen appear increasingly fearless and less compromising. Adding to the taxmen's aggressive pursuits is the worsening law & order conditions in large parts of the country that is making burglars, robbers and ransom seeker etc. increasingly fearless and more adventurist.

The small traders and businessmen are thus finding it extremely difficult to conduct their business in the "conventional" way. Full implementation of GST may mark a watershed for these businesses.

This is in fact a great news for the long term health and prospects of the economy. But the disruption in near term could be perilous for a majority of this group - that has so far successfully avoided compliance with tax laws.

The argument that the government should have planned the transition from "non-compliance & partial compliance to full compliance" in a gradual fashion is not only hollow but also appear flirting with immorality. Blaming the "system" for non-compliance is not a sustainable defense, either.

Indubitably, the near term implications of this shift from "black" to "white" to "darkness" to "light" may however be material.

On economic side, this move away from cash economy is leading to tighter liquidity resulting in lower inventories, poor channel credit, lower capacity additions, unemployment and distress liquidation in business as diverse as FMCG and real estate. Both the leaders in FMCG space - Dabur and HUL, did hint at this phenomenon in their recent presentations.

On the political side, this might alienate the small business and traders, who have been traditional supporters of BJP, away from the party and likely in the Congress camp. Although as of now there is little evidence of this.

In my view, investment implications of this phenomenon could be as follows:

(a) The businesses like FMCG, real estate, housing material, auto component, domestic pharma etc, where cash transaction have been material part of the trade might have to compromise on margins to grow - partly financing channel inventory and compliance cost.

(b) The organized retailing may grow faster than earlier estimates.

(d) The credit growth of NBFCs and Banks may not truly reflect the economic growth.

(e) GST implementation may see lower economic growth in the initial phase.

Monday, August 22, 2016

Nifty: wait'n'watch game may end soon

Thought for the day

"I am going to try to pay attention to the spring. I am going to look around at all the flowers, and look up at the hectic trees. I am going to close my eyes and listen."

—Anne Lamott (American, 1954)

Word for the day

Opacus (adj)

(of a cloud) dense enough to obscure the sun or moon.

Malice towards none

Olympics are over.

Let's go back to Cricket now.

First random thought this morning

Last week when I called on a landline in Delhi and heard the "the person you called is busy on the other line" message first in Punjabi, I realized Punjabi might have become first language of Delhi, without me knowing it. Nothing wrong in it, but it's just that no one bothered to inform me.

On the other hand PM has directed removal of 200 odd NRI supporters of Khalistan from the list of people who are barred from entering Indian shores. Again nothing wrong in it. But pardoning "traitors" without answering the debate on frequent misuse of the law relating to sedition seems odd.

We all know elections in Punjab are due and promise to be fierce one!

Nifty: wait'n'watch game may end soon

In the July series of derivative contracts Nifty closed at 8666.30, the same as the closing last Friday.

In the intervening three week period we had most of the quarterly results, GST, RBI policy, FOMC minutes, BoE Policy, Olympics, etc. done.

In this period of consolidation, Nifty has gained significant technical strength and looks all set to move higher.

In my view it is the Currently it is the reluctance of the participants and not the resistance that is stopping Nifty from moving up - Longs are reluctant to sell or add up; Shorts are reluctant to double up or book loss.

Difficult to say what will make participants more confident and take aggressive positions, but technical indicators are suggesting that this game of wait'n'watch is coming to a close in next couple of weeks.

In the meantime, Nifty has a strong support at 8490 and a resistance in 8864-8888 range. Bank Nifty has no credible resistance till 20600 mark.

(Nifty chart for derivative expiries since 2001)

Friday, August 19, 2016

Some random observations

Thought for the day

"If a farmer fills his barn with grain, he gets mice. If he leaves it empty, he gets actors."

—Walter Scott (Scottish, 1771-1832)

Word for the day

Lief (adv)

Gladly; willingly. E.g., I would as lief go south as not.

Malice towards none

Wildfire in California and floods in Louisiana - the Superpower looks so poor and helpless!

First random thought this morning

A new star, brand ambassador for gender equality, epitome of women power, and ray of hope for millions of oppressed girls, has emerged in Sakshi Malik.

The bronze medal she won at Rio is not just that. It is a consolation for millions of Indian who bet their pride on Olympic medal. It would also be used as justification for the Rio visit of many who actually have little to do with the sports.

The party at Social media will continue till 4.00AM in the morning!

Some random observations

The very sight of the daily routine at the Indo-Pak border near Amritsar (Wagha Border) evokes a great deal of enthusiasm and ardor amongst most citizens. Inasmuch, it has become a symbol of the traditional rivalry between the two nations.

A recent trip to the Terai region of Uttar Pradesh, provided a good deal of insight into this rivalry and a host of other issues that have material socio-economic & political implications; and therefore could have some bearing on the investment strategy also.

Firstly, a casual chit chat with Punjabi farmers in the Terai, who mostly belong to families which migrated to this side of the border at the time of partition in 1947, unambiguously suggested that their decision to cross over was purely based on the fear of being persecuted, and not due to any religious, nationalistic or patriotic reasons. The mass immigration might not have even taken place if the partition was peaceful and well managed by the British administrators. Persecuted, brutalized, plundered and traumatized - this section of the population hates Pakistan from the core of their hearts. (The immigration from Bangladesh, erstwhile East Pakistan, is mostly economic; hence it does not evoke similar sentiments towards that country.)

The people from other parts of the country might perhaps not share the intensity of their feelings. A national consensus on any Pak policy may therefore remain elusive; as is the case with the policy on Sri Lankan Tamils.

Secondly, when I drove through the roads of Eastern UP, it was the peak time for annual Kanwar Yatra in that part of the state. Millions of Kanwarias in safforn garb, captured most of the highways and facilities alongside it. The people ought to have been complaining for the nuisance - 24hr cacophony of loud music; violence; filth; traffic jams. Moreover, since from the Garh Mukteshwar till Shehjanpur the area is inhabited by a Muslim majority, it's always a major security risk from administration viewpoint.

But surprisingly no local resident really appeared complaining. The Hindu populace mostly see it as a "saffron deterrence" against the rising Muslim fundamentalism (a similar show of strength is seen during Eid Milad Un Nabi, Muharram and Shab-e-Barat, etc.). The rise in number of Ganpati and Durga Puja pandals is also seen manifestation of this deterrence. The Muslim populace uses it to justify the Islamic fundamentalism.

Moreover, since the participants in this annual ritual come mostly from the Bahujan Samaj, the poor and oppressed see this as a medium of social awakening. Politicians and social engineers are therefore quick to pump resources and passion in the event.

Economically, with over 25million people, mostly youth and children, already participating, this is potentially emerging as the largest and longest carnival in the world - much larger than the 10day Ganpati festival and 9day Durga Puja & Navratra festival. Thousands of "Startups" and "Standups" could be built around this.