Do it yourself

Wednesday, October 29, 2014

Half empty or half full - II

Thought for the day

”Whoever fights monsters should see to it that in the process he does not become a monster. And if you gaze long enough into an abyss, the abyss will gaze back into you."

- Friedrich Nietzsche (German, 1844-1900)

Word for the day

Odontoid (adj)

Of or resembling a tooth.

(Source: Dictionary.com)

Teaser for the day

If your right eye causes you to stumble, gouge it out and throw it away. It is better for you to lose one part of your body than for your whole body to be thrown into hell. And if your right hand causes you to stumble, cut it off and throw it away. It is better for you to lose one part of your body than for your whole body to go into hell. (Mathew 5:29-30, New testament)

Half empty or half full - II

...continuing from yesterday

The domestic environment appears reasonably stable at present. Macro indicators are showing signs of bottoming out. Especially, fiscal deficit and inflation numbers, two major worries of global investors, appear steady and under control. BoP situation, though not comfortable, does not sound precarious. Currency and rates are also stable and are expected to show some positive momentum in months to come.

The business and investor confidence has definitely improved in past few months, especially since May'14 election results. Consequently flows to the risk assets, especially equities, have improved materially.

The government appears moving on many problem areas. Hope is that many investment bottlenecks might get removed in next 12months. There is material evidence to suggest that the financial stress may ease in next 12months due to legislative and administrative efforts clearing hurdles in recommencing the work on stuck projects.

There are good chances that the investment and credit demand may bottom out soon and begin to look up. Though currently it is struggling at cycle low levels.

This feel good about domestic economy juxtaposed to fear of Europe running out of option, Japan failing to take off and China's hard landing present the dilemma I suggested yesterday.

Despite all the sentimental positivity, the fact remains that on day to day basis Indian markets are susceptible to high volatility caused by sudden infusion/withdrawal of funds by global investors.

So far this year FIIs have pumped about US$35bn in Indian financial markets. Around 60% of this money has come in Indian debt and 40% in equities. Going by past experience (2009) selling even to the extent of US$10bn in a span of 2months could cause havoc in equity, debt and currency markets.

Such situation is not totally unfathomable.

Given that most emerging markets are fundamentally much less resilient at this point in time, as compared to 2008-09, subsequent EM outperformance as a class may not occur this time.

India, this morning looks poised to do relatively better in case of a global slowdown and consequent risk off, notwithstanding the volatile correction in the market in the early phase.

However, this hope is predicated on the optimism that the new government will be able to put the economy back on track in next few months, before the global contagion, if any, reaches the Indian shores.

I am personally inclined to believe that in next 6-9 months we shall see necessary corrections to make economy resilient enough to weather any external shock with minimal damage. The fall in market will therefore, in my view, be an opportunity to buy.

I see the glass definitely half full!

Tuesday, October 28, 2014

It's half full

Thought for the day

”You have your way. I have my way. As for the right way, the correct way, and the only way, it does not exist."

- Friedrich Nietzsche (German, 1844-1900)

Word for the day

Realpolitik (n)

Political realism or practical politics, especially policy based on power rather than on ideals.

(Source: Dictionary.com)

Teaser for the day

RSS is now virtually ruling the country.

Enthused by success in Maharashtra election, MIM is now seeking to spread in UP and Bihar.

Who should worry most?

It's half full

I have no problem in accepting that swinging between greed and fear, the investor in me is little confused. Nothing unusual. Conflicting signals from global and domestic economies and financial markets do often put you in such a quandary.

The indications from the global markets are such that the decoupling of G3 is taking place at rather accelerated pace. The consensus appears to be suggesting that US economy is going to do relatively better; whereas Euro zone and Japan will mostly fail in their struggle with deflationary forces. Strengthening USD will only exacerbate the deflationary pressure as commodity prices take a hit.

Many analysts and economists appear confident (see here) that the end game of Mario Draghi's "whatever it takes" strategy is much closer than it appears. it is only a matter of time before Europe is faced with sovereign defaults and consequent banking crisis.

A few days back Bank of Japan failed to buy the desired amount of bonds, under its QE bond buying program for want of adequate supply. With benchmark yields firmly below 0.5% mark, JPY also looks set to take a plunge along with Euro. The investors are clearly not buying the claims and promises of Shinzo Abe or Mario Draghi's at par value.

Remember, despite the 2008-09 post Lehman fright, the "deleveraging" at global level did never take place. To the contrary, in past three years it has risen rather sharply.

(Reproduced from Mauldin Economics)

This possibility sets global emerging markets, including India, against a potent threat of collapse. The emerging economies, inter alia, face a prospect of substantially weaker currencies, rendering them uncompetitive in global markets, sudden and sharp reversal of capital flows, sustained lower commodity prices (for economies largely dependent on commodity exports).

Remember, all this will likely happen when innovative and unconventional monetary ideas would appear losing popularity and acceptability...to continue

Thursday, October 23, 2014

Investment strategy for Samvat 2071

Markets pregnant with hope

The Vikram Samvat 2071 begins on a positive note. The government appears in full control of the situation. Unlike past five years, no one is talking about paralysis, non-governance and corruption.

The macroeconomic indicators are stable and look poised to improve over next couple of years. Despite poor monsoon, the government has been able to reign food prices within controllable limits.

The measures taken by the incumbent government in past five months indicate clearly that a large part of the problem was perhaps administrative in nature. An assertive leadership with a decisive mandate and progressive strategy ensures that administrative efficiencies are improved materially.

The government so far has taken a non-confrontationist approach to legislative hindrances. However, recent electoral victories should embolden it to pursue legislative agenda aggressively.

No normal delivery this time also

Some women have this tendency of difficult deliveries. They usually face problems like abnormal BP, Swelling on face and feet, elevated level of blood sugar, nausea, piles, etc. and a cesarean section is required for delivering the child. Whereas many others have a perfectly normal pregnancy period and a normal delivery.

My experience is that our Mother India falls in the first category.

The entire development and growth process in India is usually chaotic, unpredictable and painful. Save for some exceptional projects like Mars Mission, the final delivery is often delayed and does not conform to set quality standards.

I do not see any change in the general trend this time also. Nevertheless, I am confident that a normal healthy child will be delivered in time.

In the meantime, the external environment will cause volatility and mood swings. Investors should better factor in these more likely problems in their investment strategy. Energy price volatility may remain a serious concern.

Market outlook

Near Term (3 months)

I expect market to remain volatile in near term. Nifty may move in a large range of 7650-8250 for next three months.

At present ~8000 level the risk reward appear marginally adverse. However any correction below 7850 level could be used to take long trading positions.

I would strongly suggest avoiding any short positions in Indian market over next couple of years.

Short term (3-6 months)

I expect Nifty to remain volatile with a marginal positive bias over next six months period. Global events like European crisis and monetary stimulus would materially influence the day to day market movements.

Domestic events including budget for FY16 would prove to be positive for the market.

Save for a drastic global event like Lehman collapse (not improbable), Nifty should move closer to 8500 on upper side and should not fall below 7420 level.

Strong buying opportunities will emerge closer to 7700 Nifty level.

Mid-term (6-24 months)

I expect Nifty to make a strong positive move over next two year with upper bound at 10800. The risk reward at present from this perspective is positive.

Wednesday, October 22, 2014

An act of desperation

Thought for the day

”In the name of God, stop a moment, cease your work, look around you."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Xyst (n)

A garden walk planted with trees.

(Source: Dictionary.com)

Teaser for the day

This question is for all those who talk passionately about nationalism, honesty and governance.

Name the seven sister states of north east, and their respective chief ministers?

Do you know who is Manik Sarkar?

An act of desperation

Despite deep invasion of technology in my normal life, I have still kept the monkey in me alive. I like to do many things in the traditional way. Reading morning newspaper is one of these things. I like to break my fast every morning while reading the latest news from around the country and familiarizing myself with divergent views of various experts. Not to say, I like the aroma of newsprint as much as I like my Darjeeling tea.

However, it had been quite irksome since the traditional Indian festival season started two weeks back. The front page of the newspaper is now placed at 5th or 7th page. First 4-6 pages are cramped with ugly, but I must say alluring, promotion campaigns of retailers and real estate developers.

The sheer intensity of the promotion campaign provoked the little cynic within me. It took me to all major wholesale and retail markets and malls of Delhi in past three days. I thoroughly enjoyed my stroll in the narrow lanes of Sadar Bazar, Chandni Chowk, and adjoining wholesale markets.

But most of the wholesalers did not share my joy. In particular I spend some time with my old friends who sell garments, dry fruits, decorations and lights, toys, sanitaryware, and packing material. I also spent some time at couple of high fashion stores at an upscale mall in South Delhi.

I would like to share the following key points of the feedback I received and things I observed with my readers.

(a) The sales volumes are definitely and substantially lower than past two years. It is not the effect of online shopping. The wholesalers I met cater mostly to rural markets in north and central India. Poor monsoon has impacted the purchasing power in these areas.

(b) The packing material guy tells me that the volumes are almost 10% lower this year despite lower prices. In his experience this should translate into 15% lower consumption demand.

(d) Electrical hardware and sanitaryware demand from retail segment is similar to last year (that was not great in itself). However, demand from realty sector is materially lower.

(e) The festival related demand of decorations, lighting, toys, gifts etc. is 30% lower as compared to past two years.

(f) The Independence Day Sale is still continuing in many malls. Many retailers have re-negotiated their rentals lower, but the electricity and maintenance cost is still high rendering the business mostly unprofitable.

(g) Sweets volumes are down 10-15%. Only a part of this could be attributed to the shift towards confectionary items like chocolates etc.

(h) The average ticket size at jewelery shops is almost 25% lower this year.

(i) The traffic on Delhi roads is thinner and faster as compared to last year.

In light of this I find it hard to swallow the comments of few large retailer in newspaper, suggesting that the sales this Diwali are much better. Moreover, I see the large full page advertisements as an act desperation, the cost of which shall reflect in 3QFY15 numbers.

Tuesday, October 21, 2014

Good times are dawning

Thought for the day

”He never chooses an opinion; he just wears whatever happens to be in style."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Ethos (n)

The fundamental character or spirit of a culture; the underlying sentiment that informs the beliefs, customs, or practices of a group or society;.

(Source: Dictionary.com)

Teaser for the day

Major seat contributors for BJP in Haryana"

Robert Vadra - 10 Seats

O. P. Chautala - 10 Seats

AAP - 10 Seats

Dera Sacha Sauda - 10 Seats

Navin Jindal - 3 Seats

Others (including Modi and Amit Shah) - 4 Seats

Good times are dawning

The results of just concluded Maharashtra and Haryana assembly elections have confirmed that the transformation of Indian socio-political order that begun with summer general elections is progressing well.

I have had the annoyance of watching, reading and listening to a variety of analysis over election results in past 48hours. I am sure, many readers of this letter also share my agony.

Considering that the number of TV channels, social media platforms, papers and websites presenting 24hr live analysis and debate over election result has grown manifold in past few years, the number of analysts and commentators has also grown proportionately. This should have logically added to the depth of the discussion and breadth of the views. Unfortunately I do not find this to be the case.

I see most of the celebrated analysts and commentators beating the same old bush, i.e., caste equation and religious preferences etc. This suggests that elite of the Indian society is perhaps totally disconnected with the transforming realities. This also explains the series of defeats which elitist Congress Party has suffered in past 3years particularly.

In my view, the key highlights of the two assembly election results are as follows:

(a) The "AAP effect" has played a major role in BJP's victory, both the states. The youth and women are no longer opinion takers. They are taking their own independent decisions; in some cases just to assert themselves against family domination. Consequently, caste and religious identities are fast diminishing in their political influence.

(b) After Yadav clan in UP, Chautalas, Bishnois, Pawars, Munde etc. have been reasonably successful in recent elections at individual level. This confirms my view that dynasties are an integral part of Indian culture, traditions, history and even religion. It would be unreasonable to expect it not to be part of politics.

(c) The voters are now giving decisive mandate in almost all the elections. I view Maharashtra mandate decisive in favor of NDA. I believe BJP could have got 144+ if they had broken alliance with Shiv Sena in New Delhi, Mumbai (BMC) and other local bodies in Maharashtra.

(d) The Indian politics is acquiring a distinct regional character, as envisaged in our constitution. The regional aspirations and expectations are dominating the political discourse and agenda. Though, Narendra Modi led BJP is trying to give it a national hue, the core of the Union remains in preservation and promotion of the discrete regional identities. BJP's victories in states are predicated on strong regional leaders with distinct local identities. This was the core strength of pre-Indira Congress Party also. It was only the complete centralization of power under Indira Gandhi, that led to emergence of stronger regional parties.

De-centralization of power in politics and within homes, federalization of governing structure, and clear mandate for governance, accountability and transparency - I guess achhe din sach mein anne wale hain (Good times are truly dawning).

Also read:

Mandate 2014: Decisively Transformative

Ganpati is son of Shiva

Sunday, October 19, 2014

Change in market context

Thought for the day

”In all history there is no war which was not hatched by the governments, the governments alone, independent of the interests of the people, to whom war is always pernicious even when successful."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Bel-esprit (n)

A person of great wit or intellect.

(Source: Dictionary.com)

Teaser for the day

I am a young political aspirant.

Please give me two good reasons why should I join the Congress Party.

Change in market context

The domestic political events and global market movement last week highlight a change in short term market context.

The reverses suffered by the Congress Party in recent Haryana and Maharashtra assembly elections have further strengthened the ruling BJP. The government is now in an even better position to pursue its socio-economic agenda of inclusive growth. The results are also a serious setback for the practices of "crony capitalism" and "crony socialism", traditionally followed by ruling political parties and political coalitions.

The short term negative could be deeper acrimony at personal level leading to internecine political non-cooperation prejudicial to common good.

The reduced propensity of "crony capitalism" could also cause pain to a lot of enterprises traditionally dependent on political patronage. Financial markets and investors will not remain untouched by this pain. DLF might be only be a small indicator of this trend.

Much awaited reforms in administrative pricing mechanism of diesel and gas prices, material administrative reform in employment regulations have certainly strengthened the optimism over agenda of the new government.

Globally, the markets got impregnated with the hope of a new round of monetary stimulus.

US monetary authorities are visibly perturbed at the prospect of EU slipping into deep recession and Euro taking a massive plunge. Many are already talking about a reversal of "tapering" and beginning of a fresh round of QE.

ECB is under pressure to enlarge the scope of its monetary stimulus and increase the extent of monetary support.

The bond market rally has surprised many economists and investors. The underlying theme seems to be total disbelief in fiscal stability that is claimed to have been achieved post 2009 collapse.

The "crash" in commodities, from energy to metals to food, has exacerbated the imbalance in the global economy. The producers are facing a serious fiscal and economic challenge at a time when most large consumers are witnessing slowdown in consumption.

These event confirm my long standing belief, viz., For next five years at least, the upside triggers in Indian equities would mostly be domestic, e.g., improvement in macro fundamentals, improved political environment post 2014 election, inflation peaking out next year on high base effect, peaking of rates, improvement in external trade, and pick up in investment cycle.

Whereas The downside risk to the market would mostly be due to external factors. Historically, large FII flows in a short period of time have caused huge volatility in Indian equity markets. A reversal of USD carry trade, if and when US Fed decides to moderate liquidity conditions in US, will certainly cause this event.

I do not believe that these events require any immediate change in investment strategy. Nevertheless, this does warrants a review..........to continue

Friday, October 17, 2014

Cheaper food prices do not cure sick metabolism

Thought for the day

”Better a diamond with a flaw than a pebble without."

- Confucius (Chinese,551-479BC)

Word for the day

Mythomane (n)

A person with a strong or irresistible propensity for fantasizing, lying, or exaggerating.

(Source: Dictionary.com)

Teaser for the day

Should Congress sack A. K. Anthony for misguiding the party on reasons for loss in 2014 general elections?

Cheaper food prices do not cure sick metabolism

The conspiracy theories on falling oil prices are stretching it too far, in my view. I guess, most theories ignore that materially lower prices could cause more harm to the global economy than the higher prices.

It is pertinent to note that the breakeven price for North America shale gas, which is popularly believed to be the primary reason behind fall in global crude prices, is much higher. Since 2007 the fiscal breakeven for crude oil has also risen materially for most producers.

As per some estimates, "If crude prices stay low for long, almost all the major oil producers will have to start dipping into their foreign reserves to fund their welfare states and military apparatus. The "fiscal break-even" price needed to cover the budget is $130 for Iran, $115 for Algeria and Bahrain, $105 for Iraq, Russia, and Nigeria, and almost $100 even for Abu Dhabi. The Saudis themselves are probably well above $90 by now.

This means that they will have to sell holdings of foreign bonds, assets, and gold to plug the gap. Russia has run through $7bn in recent days defending the Rouble. The scale of this could be huge, and it comes at a time when China has stopped accumulating reserves for its own reasons, taking away the biggest global source of fresh purchases."

Therefore, saying that Saudis are targeting a lower price to squeeze enemies like Iran, Russia, and the Caliphate does not make much sense to me.

I believe it is more of a function of economic and financial factors.

On economic side we have seen decline in consumption growth while supply has grown consistently. China could be a prominent factor in slower consumption demand, as the debt fueled economic growth has a taken a breather and outlook appears subdued at best. But it would interesting to evaluate the collective contribution of factors like (a) demography especially in Europe and Japan; (b) fiscal correction in Europe, US and many emerging markets like India leading to lower government spending, lower subsidies, and higher taxation; (c) better energy efficiency; (d) substitution effect due to higher use of renewable; (d) Fissure in OPEC cartel as Iraq and Libya produce more to finance reconstruction work, Iran produces more and sell cheap to fight global sanctions, and non OPEC swing producers Russia and USA also produce more and consume less.

In most of these cases, the lower prices may not stimulate more consumption and hence push the demand supply equilibrium to lower levels. The lower revenue for producing countries and financial stress on producers in North Americas who have borrowed heavily to produce relatively expensive shale gas, could cause seriously damage the global financial stability, which in any case is heavily predicated on the persistently loose monetary policy.

Moreover, a weaker fiscal ability of producers to pursue welfare and development agenda, could refuel the simmering civil unrest and strengthens non-state disruptive elements.

To conclude, in my view, lower commodity prices due to lower demand is seldom good for the economy. It is like poor appetite due to sick metabolism, which structurally weakens the body. Lower prices either due to more supply or higher productivity is what we should desire.

Thursday, October 16, 2014

Lucky oye!

Thought for the day

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

- Confucius (Chinese,551-479BC)

Word for the day

Habitué (n)

One who habitually frequents a place.

(Source: Dictionary.com)

Teaser for the day

High Court has disqualified 5 HJC MLAs with retrospective effect.

Does it render the legislative decision taken with their votes void ab initio?

Lucky oye!

Yesterday I expressed my concerns over investors in Indian markets relying too much on PM Modi's luck and lower global energy prices. I feel a prudent investment strategy needs to evaluate sustainability of both.

Insofar as the "luck" part is concerned, it is rather simple. Considering PM's lucky time started 14yr ago, some caution would be in order.

Energy prices are far more complex. This involves too many, often diverging, consideration - from geo-political, economic, to financial.

To test the sustainability of current or even lower crude prices, I divide these reasons into three distinct categories - (a) speculative factors predicated on various conspiracy theories; (b) financial reasons arising from currency and commodity market dynamics; and (c) economic reasons based on global consumption/strategic storage demand and supply dynamics.

Conspiracy theories

Numerous conspiracy theories are floating around to explain the precipitated fall in global crude prices, despite escalating geo-political tension especially in the Middle East Asia and Eastern Europe. For example, energy analyst Akhil Handa highlighted the following chatter in the energy markets.

Attempt to corner Russia

Saudi not cutting the production and US increasing production to contain Russia, which derives almost half of its revenue through oil and oil-linked gas sales. According to Sberbank CIB, if oil prices average the current level of $90, then Russia would run a 1.2 per cent budget deficit in 2015 and needs oil to be at about $104 to balance its budget. US and EU have already imposed sanctions on Russia as a reprisal of Russia's Crimea annexation and Eastern Ukraine overtures.

Saudis playing tricks to retain control of oil market

The plot thickens with another conspiracy theory doing the rounds. The Saudi has seen the oil price stable through international geo-political crisis, first by increasing production to accommodate Iran, Syria and Sudan's decreasing production and then by accommodating Iraq's rising production. Saudi has acted as the only global swing producer, which was in control of both its oil production and economy to maintain the price stability.

However with the increase in US oil production- up almost 70 percent in the last 6 years and at its highest since 1986, the Saudi's appear losing control over global oil market. In a bid to restore balance Saudi could be playing its cost advantage against the higher cost shale oil producers. In this scenario, Saudi will perhaps have to let oil prices slide to $75-80 and let it stay there for a while for some US drillers to move out of the businesses and hence pricing power to get restored back with Saudi.

Saudi has already made the first move by reducing its benchmark official selling price to levels lower than the 2008 levels. The adjustment to selling price can be a precursor to major adjustments to production, which will have to eventually follow in case the demand scenario remains weak, in contrast to many market observers belief that Saudi will be able to maintain its market share.....to continue

Tuesday, October 14, 2014

Devil's advocate

Thought for the day

”Death and life have their determined appointments; riches and honors depend upon heaven."

- Confucius (Chinese,551-479BC)

Word for the day

Accidence (n)

The rudiments or essentials of a subject.

(Source: Dictionary.com)

Teaser for the day

List names of 21 politicians whose political career will end on 19th October 2014!

Devil's advocate

The IIP growth data for August 2014 mandates a reality check on Indian economy. It validates our premise that investment led growth is not a valid theme as yet.

In my view the IIP growth data for September may not be substantially better than August . Given the sub-optimal monsoon this year and slow service sector growth, 2QFY15 GDP growth may not meet rather optimist expectations.

Though I do not see a material let down in the optimism over new government in immediate term, the GDP growth forecasts may likely see some downward revision.

In this context the precipitated fall in global energy prices in past six months is critical. Lower energy prices are providing strong support to economic optimism in the country. This single factor is catalyzing optimism over Balance of Payment, inflationary and therefore rate expectations, improvement in domestic power production through cheaper import of coal and gas, improvement in financial stress levels as the struck infra and power sector projects become viable due to lower rates and higher availability of fuel.

When I try to build in a rising energy price scenario in my investment portfolio, the likely outcome is rather unpleasant.

Hypothetically, a 20% rise in crude and international coal prices from here will make macro situation look much more precarious than even 2011-12. The diesel deregulation plans will be deferred again. Electricity prices will go up by another 20-25%. Global demand will take a further hit impacting exports. CAD will worsen. INR will depreciate further and faster. Inflationary expectations will rise materially forcing RBI to break the pause on rates. Savers will be crushed as real rates take a further dip, leading to sharper decline in already receding savings rate. Financial stress will rise as more projects become unviable due to higher rates, lower demand, waning pricing power.

In short we will have a serious problem of stagflation at a time when global money markets will be tighter and investment climate seriously clouded.

Remember that post Lehman collapse decline in global energy prices, we had seen a sharp reversal from mid 2009. This occurred without any material improvement in global economic conditions. Therefore, a 20% rise in energy price scenario may not be entirely hypothetical.

It is therefore critical to examine the global energy market trends and make a realistic assessment about how sustainable could the current energy prices be.

Another factor that needs to be evaluated is whether global deflationary conditions are really good for Indian economy or these just provide a temporary feel good in terms of lower import bill.

Many commentators and analysts are relying on the "luck" of PM Narendra Modi for continuous improvement in economic conditions. I see their point. But my astrologer suggests that PM is likely to hit a rough patch in 2015.

...more on this tomorrow