Do it yourself

Tuesday, January 13, 2015

Whatsapp GIMMs

Thought for the day

"Every truth has two sides; it is as well to look at both, before we commit ourselves to either."

- Aesop (Greek, 620-560BC)

Word for the day

Fritter (v)

To squander or disperse piecemeal; waste little by little (usually followed by away)

(Source: Dictionary.com)

Teaser for the day

Reports suggest Congress party has told Delhi assembly candidates to manage their election expenses from personal resources.

The logical next step would be auctioning of tickets in Bihar, WB and UP assembly elections!

Whatsapp GIMMs

Since announcement of general elections early last year there has been overwhelming media coverage of the random utterances of some leaders who are mostly irrelevant in national picture and often derided as religious fundamentalist in media.

The coverage has become more intense and frivolous in equal measure since the Narendra Modi led NDA government has assumed office.

Without delving into myriad of conspiracy theories discussed with brilliant alacrity at prime time TV and social media, I must admit that it has certainly added another wrinkle on the already tense brows of investors.

To ascertain how much this trend should concern investors I decided to use my Christmas vacation for visiting some key pilgrimages and centers of learning in the states of Madhya Pradesh, Uttar Pradesh and Uttrakhand.

Despite excruciating weather conditions, I was relieved to discover that all hoopla is confined to customary Indian discussion over tea (Chai pe Charcha) and no one is really losing sleep over it. Trust me it has no socio-economic relevance at all.

In my view, the media discussion over the issue of India being in danger of dissipating into a sanctimonious state is nothing more than an extension of guilt inducing morning messages (GIMMs) we receive on our social media accounts, more so on Whatsapp. These messages mock us for not caring enough for our families, elders, friends, society, soldiers, poor, sick, environment, country, et. al., ignoring our health, and falling prey to the hideous designs of MNCs poisoning our food plates etc.

Most of these messages also contain a standard solution for overriding the guilt induced by the message - "make everyone you know also feel guilty by forwarding the message"! We are therefore redeemed of our guilt almost as quickly as we finish reading the message. Of late, of course many users have started ignoring GIMMs altogether.

So I assure the investors and businesses not to worry a bit about this. This changes nothing.

More specifically, I would like to share the following:

(a) The people like Sakshi Maharaj and Sadhavi Niranjan Jyoti have been saying these things since eternity. There is nothing new there. The only thing that has changed is that they are getting national media coverage now because of change in their political status.

In fact, I discovered that both of them have done commendable work for upliftment of the most unprivileged and neglected section of the society. They have worked hard and selflessly for their empowerment and elevation with reasonable degree of success.

The problem as I perceive is the communication and perception gap.

The national media that mostly works from the confines of plush studios in Delhi and Mumbai, perhaps does not fully appreciate the local context and language or does not find it exciting enough for their audience. On the other hand, these parochial leaders who are firmly rooted in their constituencies may not be articulate enough to put their views across to the national audience in a secular manner.

The best and happy part is that leaders' constituency is fully in sync with them. The media's audience is also intelligent enough not to take its frivolities much seriously. The guilt inducing prime time TV discussions are relevant only till the time viewer decides to flip the channel.

(b) Since May 2014 verdict, the competition to get entry into mainstream BJP has intensified multifold. Not only the leaders from the affiliated organizations are now more eager to join mainstream politics, many local leaders of opposition parties are showing interest; and some religious leaders are also keen to gain proximity with the seat of power.

This intensity of competition is prompting a lot of local leaders to use radical means to gain immediate recognition & acceptance with national leadership. I suspect that most miscellaneous agitations, like the one against movie "PK", are strategic moves towards this goal.

Fortunately, scholars and politically indifferent religious leaders (who form 99.9% of the total) do not see issues like "love -Jihad", "PK", "ghar vapsi" etc. as a serious threat to the religion or the State.

(c) In Varanasi, Allahabad, Ujjain, Haridwar & Rishikesh, I could find no buyer amongst youth, children and their parents for Sanskrit as a compulsory subject. The fan club is limited to some elite and mostly redundant. Even Pandas of Haridwar want their children to study English & computers.

I would also like to misuse this opportunity to express my views about the movie "PK", since I was forced to watch it (against my wish), to understand the agitation against the film.

I found the movie a poor work of art. To me it appeared a incoherent collage of Whatsapp GIMMs and jokes with no story. The social message which the makers of the film ostensibly intend to convey is totally uninspiring and cliché.

If the previous film of Mr. Hirani "3 Idiots" was most overrated, "PK" beats that hands down, regardless of the money it collects. The fact that it has earned record money is in itself a justification of the phenomenon this film seeks to denounce, i.e., gullibility of common Indian citizenry. Otherwise, Nirmal Baba, Asaram, Satpal Maharaj et. al. and Indo-Pak love stories have already been filmed and discussed at length in all media. This films brings out nothing new.

Surprisingly, No One protested against Amir Khan (brand ambassador for India Tourism) defacing the wall of historic Red Fort and urinating on it or mocking Bhojpuri language.

I could not understand what the filmmaker wants to convey by suggesting that it is innocuous to steal from people who "dance" in their vehicles.

Insofar as the controversial Lord Shiva depiction is concerned, I would suggest Mr. Hirani to watch the Mahabharat parody in Jane Bhi Do Yarron.

Monday, January 12, 2015

Reflective but not shakin'

Thought for the day

"Our insignificance is often the cause of our safety."

- Aesop (Greek, 620-560BC)

Word for the day

Expatiate (v)

To write at length or in considerable detail.

(Source: Dictionary.com)

Teaser for the day

So much hoopla for Delhi assembly elections!!!

Will someone try examining the viability and profitability of carving out NDMC area as national capital and merging the rest of Delhi into Haryana and giving Chandigarh to Punjab?

Would it help in solving the problems of water, electricity, congestion, and of course cost of governance?

Reflective but not shakin'

"Early in the morning time
Late in the middle of the night
Whenever this chill comes over me
I wanna hug you with all of my might
That's right and I'm sweatin'
Oh, yeah you got me shakin'
Mmm, you got me sweatin'
Ohh, yeah you got me shakin' girl."

-Jack White

It's a nice warm feeling to be back on my writing desk after a hiatus' of little over two weeks.

I note that since Christmas not much has changed in terms of benchmark equity indices; crude and EUR have though broken down. There is a perceptible change in the market context. Investors are certainly much more circumspect today as compared to three weeks ago.

I had expected this to occur in my last note of 2014, but not that soon.

Besides the deterioration in global economy due to factor like deflationary pressures; failure of ECB, BoJ and PoBC in reviving growth through monetary stimuli, and renewed Eurozone integrity concerns, ostensibly some domestic concerns are also bothering investors. In my assessment two major domestic factors are making investors' little jittery.

Firstly, despite successfully projecting a big picture, the incumbent government has so far been rather parsimonious on specifics that would spur the domestic growth especially in a challenging global environment.

Some steps that have been taken, e.g., Land Acquisition & Coal Ordinance and spectrum auction plans do not appear very coherent and therefore have been subject to severe criticism. The encouraging points are very few, the most notable one being progress on PMJDY and GST implementation. The adverse market conditions have also clouded the program to raise resources through PUS equity sales. To make the matter worse, a stronger USD, along with fiscal pressure, is keeping the rate cut outlook slightly clouded.

People who had pinned hopes for material reforms in union budget for FY16 have been earnestly prompted to have a re-think.

Secondly, some voices from government and allied quarters which sound incongruous to the inclusive development agenda of the government have also definitely impacted the investors' sentiments.

Though the government has so far done almost nothing that should raise suspicion of deviation from the committed agenda for faster, sustainable and inclusive economic development, the sundry public utterances and unmindful media bytes are being used to project that the PM Narendra Modi may not be in full control of his government's agenda. Frivolous controversies like the one relating to movie "PK" have perhaps soured the taste a little bit.

I have been often expressing my views on the first factor and it is widely known that I am not sanguine about the prospects of economic growth in near term. Insofar as the second factor is concerned, to me presently it appears a purely political phenomenon with no economic implications.

I actually spent large part of my Christmas vacation visiting some major centers of pilgrimage and religious learning to understand the phenomenon. Tomorrow I would share some interesting learning from this trip. Later this week I would deal with more mundane issues like market directions and trading strategy in the near term.

Wednesday, December 24, 2014

Season's Greetings

Wish all the readers a Merry Christmas and a Happy New Year.

I will be back with next page of my Diary on 12th January 2015.

2015: Market outlook...the battle continues

Thought for the day

"To succeed in life, you need two things: ignorance and confidence."

- Mark Twain (American, 1835-1910)

Word for the day

Rubricate (adj)

To mark or color with red.

(Source: Dictionary.com)

Teaser for the day

By VHP definition all Pakistani and Bangladeshi Muslims are converted Hindus.

Then why Bangladeshi Muslims are illegal in India?

2015: Market outlook...the battle continues

On December 16, 2013 when I sat to write my outlook for the year 2014, the conditions were mostly reverse of what we have on our hand today.

In the eternal war between the forces of Fear and Greed, the forces of fear then had exhausted most of their ammunition, e.g., EU disintegration, Grexit, PIGS default, hyper-inflation resulting from the Mints printing money incessantly, Iran reneging, Currency war erupting and endangering emerging economies, hard landing of Chinese economy, etc. Whereas the forces of Greed had just got fresh batch of ammunition – stable job market in US, housing boom in UK and US, stable financial markets in EU, stronger USD, Chinese growth crawling up, moderate or no inflation, US financials back in business, lower commodity prices, US energy revolution, and mostly stable & peaceful conditions in hot beds like Pakistan, Afghanistan, Iraq, Iran, Libya, Yemen, Sri Lanka (except smaller pockets like Syria).

Filled by hope, the outlook for 2014 therefore was mostly optimistic.

Sadly it is not the today. In a reversal, the forces of Greed appear exhausted this time. The global scene has turned windy, wet and depressing and narrative has turned scary.

Moreover, the domestic scenario which was filled with hope a strong government that will be able to deliver very fast on economic agenda, is also circumspect. The PM, Narendra Modi, appears struggling to bring all his supporters on the same page insofar as the priorities of the government is concerned. At least in public discourse Feudalistic idea of Nationalism seems to be dominating the socio-economic concerns.

Lack of ideas to implement the PM's vision of economic reforms & development, poor innovation skills, and extreme risk aversion amongst Team Modi is not lending any credible support to the forces of Greed either.

The forces of Fear are likely to get fresh ammunition during 2015 when further – the disinflationary impact of stronger USD gains strengthens its roots, US Fed begins to raise policy rates, EU and Japan slither deeper into recession, commodity universe continue to sink and the impact of fall in commodity prices begins to reflect on global financial system.

Like before, many battles of this ongoing global war will be fought in India too. Indian politicians continue to side with the Fearful, providing them with enough ammunition and food to survive.

Inarguably, the investors’ sentiment at present is positive about the cyclical recovery. But never in history the cyclical recoveries have began with benchmark indices ruling close to their all time high levels and bond yields also at such high levels. The current cycle could therefore be short, shallow and volatile. Investor positioning and market internals are clearly pointing towards that. The market implied volatility, volumes and breadth continues to remain low. The volume concentration in top 15 traded stocks is close to all time high.

My outlook for the Indian equity markets for 2015 is as follows:

(a) The marketplace will witness an intense battle between the forces of Fear and Greed and in my view, forces of the Fear will have an upper hand.

(b) 1H2015 may be more volatile whereas 2H2015 will mostly be calm and cold.

(c) The market will have more opportunities for traders than investors. The quality stocks may continue to trade at exorbitant premium and therefore may not offer much in terms of investment opportunity. The cyclical will continue to be confronted by the prospects of weak recovery in at least1H2015 and hence continue to move in a trading range with much higher volatility.

(d) There is little chance of any material re-rating of Indian equities, so the return expectations will remain muted in the range of 10-13%.

(e) The bond yields may not correct much from the current level, as the fiscal pressure may remain intact and global cost of capital rises.

(f) Save for a drastic global event like Lehman collapse (not improbable), Nifty may move in a larger range of 7420 - 9400. Strong trading buying and leveraging opportunities will therefore emerge in to 7850-8000 Nifty range.

My strategy for 2015 will therefore be as follows:

Strategy: More trading needed to meet return target

· Retain equity allocation to overweight.

· Increase allocation to trading from present 10% of equity allocation to 25%.

· Target 15% absolute return in the risk portfolio over next five years.

· Normalize overweight on global pharma and IT.

· Continue NIL weight to underweight on global commodities.

· Increase exposure to domestic Cyclicals, excluding minerals and metals, in 2H2015.

· Maintain overweight on domestic consumers including consumer staples and healthcare.

· Stay invested in longer duration debt.

· Plan for lower tax benefits on financial investments.

· Avoid PSU in general. Selective policy neutral companies could however be considered on case to case basis.

Tuesday, December 23, 2014

2015: Earnings picture still hazy, valuations not crazy

Thought for the day

"Apparently there is nothing that cannot happen today."

- Mark Twain (American, 1835-1910)

Word for the day

Beatific (adj)

Giving joy, blessing or making exceedingly happy

(Source: Dictionary.com)

Teaser for the day

Could VHP set the clock back insofar as economic deterioration of India since 19th century is concerned?

2015: Earnings picture still hazy, valuations not crazy

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could." Rudiger Dornbusch

The dictum of Rudi Dornbusch has proved itself time and again. It is true for the present state of Indian economy and therefore corporate earnings also.

The current consensus estimates for FY16 and FY17 corporate earnings are running at 17-18%. Most of these estimates appear to be discounting a sharper economic recovery in FY15-FY17 than what the actual trends so far are showing.

To the credit of analysts, we have seen some serious downgrades in past three months, the forecasts however still appear more optimistic. In my view, it is a clear case of hope rather than data driving the analysis.

As per Credit Suisse research, so far, industrials and materials have driven the downgrades. In fact, over the last two years, seven out of ten sectors have seen net downgrades to their FY16 earnings.

On disaggregate basis, of late there have been suggestions that while the commodity producers may see even sharper downgrade post 3QFY15 results, we may see upgrade returning to the commodity consumers, especially consumers and automobile. The data for November 2014 has shown some promise especially in core sectors. However, the recent commentaries of the managements of sector leaders like HUL, Hero Honda, and Maruti is not very encouraging suggesting a disconnect.

In my view, expecting any dramatic turnaround in at least 1H2015 may cause disappointment. Given the low level of capacity utilization and high operating leverage, the outlook for revival of capex and therefore industrial sector remains little hazy.

The financial sector has shown strong earnings growth in recent quarters. However, doubts over asset quality cloud the earnings' profile of most state owned banks and NBFCs.

In absence of a material growth in the demand, most of the earnings growth appear to be coming from cost rationalization, lower finance cost and expected better utilization.

The comforting part so far is that the aggregate valuations have not entered the helm of unfairness; though it could not be said about individual sectors.

In my view, we are not likely to see any major surprise on earnings front during 2015. It will mostly be the continuation of existing trend - marginal deterioration in 1H2015 and a gradual improvement in 2H2015.

I also do not see much probability of re-rating of PE multiples. Though, the de-rating is possible, should the global risk aversion accelerate.

Monday, December 22, 2014

2015: Global narrative is scary

Thought for the day

"You can't depend on your eyes when your imagination is out of focus."

- Mark Twain (American, 1835-1910)

Word for the day

Larrikin (adj)

Disorderly; Rowdy.

(Source: Dictionary.com)

Teaser for the day

Should the Representation of the People Act, be amended to add the following ground for automatic disqualification of elected representatives:

"If he/she stands or speaks in the house without explicit permission of the presiding officer."

2015: Global narrative is scary

In past three months the global narrative has turned really scary. I am sure, Santa this year will have a really tough time, for the number of prayers are going to be much larger, louder and desperate.

I find myself thoroughly incapable in expressing the fear in my own words, as I do not feel it with the same intensity, sitting at a distance. I am therefore reproducing some popular sentiments.

China will be the focus of many, many boardroom discussions around the world next year. Unlike most previous years, the topic won’t be whether to double down on China—it will be whether to hold or even reduce exposure to a particular sector or the country overall. With China experiencing lower growth, greater competition, and more volatility, it won’t only be multinational companies having these conversations. (McKinsey & Co.)

A look at the long-term charts of the DXY Index shows just how massive the potential reversal of this trend is; and based on Raoul’s roadmap, the sheer size of the reversal gives us a strong hint of the degree of carnage that will be wrought upon a world in which the dollar carry trade has reached somewhere between $5 trillion and $9 trillion. (Mauldin economic)

Greece is back, front and centre — just as it was at the beginning of the euro crisis in 2010 and at the depths of the euro crisis in 2011. The only difference is that now, after several more years of depressionary policies have been foisted upon the people of that proud nation, the likelihood of an establishment victory (and thereby a continuance of the status quo) is far less than at either of those previous junctures. (Mauldin economic)

Do you want to know if the stock market is going to crash next year? Just keep an eye on junk bonds. Prior to the horrific collapse of stocks in 2008, high yield debt collapsed first. And as you will see below, high yield debt is starting to crash again. The primary reason for this is the price of oil. The energy sector accounts for approximately 15 to 20 percent of the entire junk bond market, and those energy bonds are taking a tremendous beating right now. This panic in energy bonds is infecting the broader high yield debt market, and investors have been pulling money out at a frightening pace. And as I have written about previously, almost every single time junk bonds decline substantially, stocks end up following suit. (The Economics Collapse)

In the last two Absolute Return Letters I have argued why one should expect global GDP growth to be below average over the next decade or so, why interest rates should, as a consequence, remain low and why equity returns should also disappoint. (Absolute Return Partners)

In Europe, so far, Germany has been repatriating gold since 2012 from the US and France, The Netherlands has repatriated 122.5 tonnes a few weeks ago from the US, soon after Marine Le Pen, leader of the Front National party of France, penned an open letter to Christian Noyer, governor of the Bank of France, requesting that the country’s gold holdings be repatriated back to France; and now Belgium is making a move. Who’s next? And why are all these countries seemingly so nervous to get their gold ASAP on own soil? (Grant Williams)

In short, between Europe and Japan, thanks to the BOJ and ECB, there will be literally no bonds that will make their way from the primary to the secondary market! Which means only one thing: those looking for the marginal, and only, source of high quality collateral in 2015, will find it coming right out of 1500 Pennsylvania Avenue, NW in Washington. And that assumes, very generously, that that other famous institution located on Constitution Avenue Northwest doesn't come out of hibernation and resume soaking up collateral on its own if and when the S&P500 finally corrects from its unprecedented, and manipulated, bubble levels. (Goldman Sach via Zero Hedge)

Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world's financial stability, the Bank for International Settlements has warned.

The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47pc. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars.

A chunk of China's borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s, which hid their real level of exposure as the 1929 debt trauma was building up. (BIS via Telegraph)

Do you remember seeing old pictures of the Great Depression which depicted “lines?” There were two types, bread lines and also lines to the front doors of banks. While we don’t see any bread lines today, trust me, there are bread lines in every single state and long ones at that. Nearly 50 million people in the U.S. survive on SNAP, EBT cards or whatever they are called in your state. Can you imagine the “confidence” it would instill if each day on your way to work you saw massive lines of people waiting for breakfast? Or, when you came home from work you turn on your television only to see long lines again, this time for supper? I can see it now, some reporter out on the street giving us the “good” unemployment, inflation or GDP news with a line of people in the background waiting for food. My point? False economic news would be harder to “sell” and even harder to “stomach” (pun intended). (Bill Holter in Miles Franklin Blog)

It was during this period at the end of the 1960s and the beginning of the 1970s that the Bretton Woods system of fixed exchange rates was breaking down, with key developments in 1971 and 1973. There was much academic debate over fixed versus flexible exchange rates. More economists appeared to support fixed rates, but the other side had the advantage of being led by Milton Friedman. As it turned out, however, flexible rates were not “chosen” but were what was left when fixed rates collapsed. My take away from that period most relevant today is that it is foolish to try to save a fixed exchange rate after it has come under severe attack. I’ve heard talk all day on the large amount of reserves held by Russia and whether they would be used to defend the collapsing Ruble. In my opinion, that would be a total waste of resources. The only cure for a Ruble down 50 percent is to let it go down even more, until the market recognizes the undershoot. (Bob McTeer)

Friday, December 19, 2014

2015: Rural income - no material improvement seen

Thought for the day

"Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence."

- John Adams (American, 1735-1826)

Word for the day

Chutzpa (n)

Unmitigated effrontery or impudence; gall.

(Source: Dictionary.com)

Teaser for the day

By blocking business in Rajya Sabha, is Congress vindicating BJP's behavior during 2004-2014?

2015: Rural income - no material improvement seen

Almost two third of the Indian consumers derive their livelihood directly from the rural economy, including farming, horticulture, animal husbandry, cottage industry, forestry, etc. The rural economy directly supports a large number of industrial enterprise, like crop protection, farm equipment, transportation, food processing, etc.; besides providing material indirect support to industries like textile, consumer staples, durable, and services such as financial services, trade and communication etc.

Anecdotally, we know that the health of rural economy is important from political and fiscal perspectives also. Since independence, problems in rural economy have invariably led to fiscal deflections and political instability.

While the budget allocation to the rural sector has increased steadily, the investment in the sector has been on the decline in past two decades.

Source: Planning commission

Consequently, we have not witnessed any sustainable rise in productivity. The agriculture sector growth had remained anorexic and highly volatile in past two decades.

The rural income had however shown a tendency to rise in past one decade due to a variety of factor, especially rise in rural wages, higher support prices for farm produce, rise in demand and prices for animal produce, and higher farm subsidies.

Most of these drivers have shown distinct signs of fatigue in past couple of years. The recent commentary by most consumer product companies suggests that this fatigue is for real and there are no signs of rejuvenation as yet.

The government of the day has certainly won the battle at WTO by ensuring continuing subsidy support to Indian farmers. But it might just have weakened its position in the war against low productivity and structural reforms in the farm sector.

Record global food production and the early forecasts of 2015 El Nino conditions are also not helpful for Indian rural income in 2015. Lower diesel prices is the just one major positive I can contemplate at this point in time.