Do it yourself

Wednesday, February 18, 2015

Toffees on trees and fish on streets

Thought for the day

"It is the mark of an educated mind to be able to entertain a thought without accepting it."

- Aristotle (Greek, 384-322BC)

Word for the day

Celerity (n)

Rapidity of motion or action; quickness; swiftness.

(Source: Dictionary.com)

Teaser for the day

In Indian politics, last week who said to whom: "Revenge is a dish that tastes best when served cold!"

Toffees on trees and fish on streets

A popular Gulzar song from 1980 Hindi film Khoobsurat, coaxed people to break rules and think out of box. The current popular market sentiment seems to have taken the cajoling far too seriously. Investors are actually looking for toffees on trees and expecting to find fish running on streets.

Speaking to some large investors/traders, businessmen and analysts in Mumbai last weekend, I discovered the following:

(a) There is an absolute consensus that USD shall gain further strength from here. However, the opinion is divided on INRUSD trends. The estimate vary from (a) Stronger INR vs. USD; to (b) a materially weaker INR vs. USD to (c) a gradually depreciating INR vs. USD.

Most opinions are based on the premise that current account gains are structural due to medium to long term shift in energy price equilibrium.

Most believe that there is strong, almost unchallenged TINA factor behind FII flows to India.

Many believe the weakness in oil based middle east economies and strength in US economy will accelerate remittances - in former case due to fear and in latter case due to abundance.

(b) There is a conspicuous race to offer innovative arguments in support of higher valuations - much like 1999-2000 when obscene ICE valuations were justified using "differentiating" valuation techniques.

(c) Lower inflation, higher growth and falling rates is an overwhelming consensus. No one is willing to account for a Lehman type collapse.

Only a couple of people accepted my argument that it is not only about "inflation", i.e., rate of change. It is also about the price levels which are becoming unaffordable for lower middle class in most cases, especially when wages are stagnating and employment market is intensely competitive.

Higher prices and stagnate or slowly rising wages do not support the higher saving higher investment matrix.

(d) Most concerns were expressed in feeble voices, clearly emitting fear of being singled out or losing on the market rally.

(e) The hope is seen driven by vision statements like "Make in India", "Clean India", "Ease of Business", "Red Carpet for Red Tape" etc.

Paradoxically, positioning is similar to 1980's era of pseudo socialism and no growth. MNCs and domestic oligarchs (holding myriads of licenses) did well and commanded higher popularity amongst investors and therefore higher valuations. Similar is the situation today.

The underlying trade, as someone beautifully put it, is entirely on the small luxuries that large masses are now enjoying - biscuit, noodles, tampons, motor cycles, dental cream, watches, shoes, fans & coolers, etc. The "Growth" is just driver of hope; far from converting into a trade.

Top right corner

Thought for the day

"How did it get so late so soon? Its night before its afternoon. December is here before its June. My goodness how the time has flown. How did it get so late so soon?"

- Dr. Seuss (American,1904-1991)

Word for the day

Rapacious (adj)

Given to plunder; Seizing by force; Grasping; Greedy.

(Source: Dictionary.com)

Teaser for the day

Should Congress Party make up with Anna by agreeing to his agenda?

What is there for it to lose?

Top right corner

The recent India trip of US president Barack Obama may or may not be important from economic standpoint; but it may most likely mark a watershed in India's foreign policy and could have far reaching implications for global strategic balance.

The expert may differ, but I clearly saw an eagerness on Indian side to cross over to US camp or if I may use cold war jargon from Soviet Bloc to NATO Bloc. In the process, India could have given formal burial to the NAM movement it co-founded six decades ago.

In words of Geeta Anand (WSJ) "India finally came out this week after years in the closet, declaring itself a firm friend of America.

The country’s Cold War commitment to non-alignment died long ago as the guiding foreign-policy principle for the world’s second-most-populous nation. But its obituary wasn’t written until this week."

The widespread economic cooperation that developed seen post Lehman collapse is no longer visible. EU and US monetary policies are diverging far apart.

If we juxtapose this event to the series of events that have taken place in past few months, e.g., isolation of Russia and Pakistan by western countries, China coming closer to Russia by extending financial help and escalating tension with Japan and South Korea, US re-establishing relations with Cuba, and OPEC virtually disintegrating, the world is heading towards polarization, not seen since end of cold war.

In my view, it is for Germany to decide whether it will be a bi-polar or a tri-polar world.

Insofar as India is concerned, I believe that in the emerging global scenario, her economic and strategic interest are better aligned with US and its allies. In past 'pseudo neutrality' and tactical alignment with Russia and has not helped much.

It would be interesting to watch, how much integration of India's economic and strategic interests the USA accepts and allows. A deeper cooperation would allow India (a) to overcome its capital & technology inadequacies; and (b) greater access to developed markets in west.

The downside could be elevated threat perception at borders on all the side. (Sri Lanka is showing little hesitation in standing next to China). It would also be challenging to bring around the sizable population that still harbors anti-USA sentiments.

However, since the government has already decided to move ahead whole heartedly, it is for USA to reciprocate with some tangibles, before we build some investment themes on these developments.

Today, there is no hurry and no worry. If I am thinking in right direction, we will have enough time and space to move on the top right corner of the Sensex graph.

Thursday, January 29, 2015

Sustainability vs. speed

Thought for the day

"Unless someone like you cares a whole awful lot, nothing is going to get better. It's not. "

- Dr. Seuss (American,1904-1991)

Word for the day

mot juste (n)(French)

The exact, appropriate word.

(Source: Dictionary.com)

Teaser for the day

Three things BJP could have avoided:

(a) Not holding Delhi elections last summer.

(b) Publicly acknowledging AAP as main opposition.

(c) Turning this tiny election into a critical one by lending the face of PM to it.

Sustainability vs. speed

In summer of 2013, the tribal villages of Niyamgiri in Odisha, unanimously rejected the proposal of Orissa Mining Corporation (OMC) and Vedanta group to mine bauxite from Niyamgiri hills and forests under the Forest Rights Act of 2006. The decision was widely hailed as historic.

Two years later, similar situation is emerging in the forests of Chhattisgarh. As many as 17 gram sabhas, falling under Hasdeo-Arand coalfield, have passed a resolution opposing the reallotment of coal mines and have written to higher authorities seeking dialogue on the issue.

The entire area was declared a "no-go" zone by the previous UPA regime. However, in October last year, the Forest Survey of India (FSI), the government's top body for assessing and monitoring forests, carried out a fresh assessment at behest of the environment ministry and recommended that nearly 90% of coal bearing forest areas could be opened up for mining. FSI suggested that mining be barred in just 11% of forest areas with proven reserves of the dry fuel.

Mining was to be permitted in 4,62,939 hectares of the 6,48,750 hectares of coal-bearing forests that were assessed. "India can't afford to keep 30% of its coal-bearing forests out of bounds. We need to increase power generation, don't forget that there are as many as 400 million people who have no access to electricity and power is crucial for industrial growth. As of now coal is the mainstay of the country's energy basket," a senior official said, explaining the need to open larger areas for coal mining.

With the beginning of fresh allotment of coal blocks by the Centre, villagers of North Chhattisgarh, the area which is rich in coal reserves, have intensified their protest against the move.

The protagonists of faster economic development are dismissing the protests as yet another mischief of foreign funded NGOs who are allegedly paid to stop India from becoming an economic super power!

The pragmatic ones would ask, what is the fun in faster development if it is not sustainable?

The austere and humanitarian Gandhians would say the goal (faster economic growth to eliminate poverty) is important, and means are equally important.

I say, a key economic reform would be to earnestly hand over the ownership of natural resources to “the public”, instead of few ministers controlling the resources. The trusteeship of all the natural resources may be vested in the local body of people. The local people should determine how these resources should be exploited. Industry based on these resources if developed on co-operative model with equitable ownership of (i) local people (ii) financial investors and (iii) technical experts who would manage the business, the growth could be fast, equitable, and sustainable.

Participative democracy after all does not end with casting of votes - it actually begins from there.

Wednesday, January 28, 2015

Swinging between reason and hope

Thought for the day

"I like nonsense, it wakes up the brain cells. Fantasy is a necessary ingredient in living, it's a way of looking at life through the wrong end of a telescope. Which is what I do, and that enables you to laugh at life's realities."

- Dr. Seuss (American,1904-1991)

Word for the day

Subrogate (v)

To put into the place of another; substitute for another.

(Source: Dictionary.com)

Teaser for the day

Obama bhai is gone. Let's sit and count tangibles - "kya khoya, kya paya".

Swinging between reason and hope

The sunrise cottage industry in US - the shale oil - has reportedly begun to feel the heat of crashing oil prices. If media reports are to be believed "Collapsing crude prices are confronting scores of smaller U.S. oil producers with the grim choice of either shutting older high-cost wells or burning through cash in the hope of riding out the downturn".

In Asia, last month the Chinese industrial companies’ reported their steepest decline in profits in at least three years, underscoring the challenge facing the nation’s former growth drivers as the economy slows and commodity prices slump. As per the National Bureau of Statistics Industrial profits fell 8 percent in December from a year earlier, the biggest drop since at least October 2011, according to data compiled by Bloomberg.

The most credible cue to slack in global economy however was presented by the Catterpillar management in their latest earnings call:

"We expect world economic growth to only improve modestly in 2015. The relatively slow growth in the world economy and continued weakness in commodity prices—particularly oil, copper, coal and iron ore—are expected to be negative for our sales."

"The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in our sales and revenues outlook. Current oil prices are a significant headwind for Energy & Transportation and negative for our construction business in the oil producing regions of the world. In addition, with lower prices for copper, coal and iron ore, we've reduced our expectations for sales of mining equipment. We've also lowered our expectations for construction equipment sales in China. While our market position in China has improved, 2015 expectations for the construction industry in China are lower".

Many, including myself, believe that the Fed’s QE programs didn’t work as expected, and it took huge bond purchases to achieve modest to moderate results. In fact to make it sound successful, Fed had to tout it as an interest rate too, inasmuch as it did put downward pressure on longer-term interest rates.

As Bob McTeer noted in his recent post "the impact of the ECB’s new program depends on how euro banks treat their new reserves. If they hoard them as in the U.S., it will take a lot of bond purchases to provide a little stimulus.

If they use their excess reserves for new lending, their program will be more successful than the U.S. program and need not last as long. A difference that may prove to be key is that, while the U.S. pays 25 basis points on bank reserves (including excess reserves), the ECB has a negative 75 basis point rate. The “return” on excess reserves will thus be lower in Europe by a full percentage point. The behavior of the European banks, especially vis-à-vis reserve utilization will be instructive."

The equity market excitement on ECB QE may therefore be not without reason and hope

Tuesday, January 27, 2015

5km in 2hrs

Thought for the day

"When at last we are sure, You've been properly pilled, Then a few paper forms, Must be properly filled. So that you and your heirs, May be properly billed."

- Dr. Seuss (American,1904-1991)

Word for the day

Apposite (adj)

Being of striking appropriateness and relevance; very applicable; apt.

(Source: Dictionary.com)

Teaser for the day

XYZ Channel
Breaking News: Our latest survey - Will President Obama's rally at Rajpath on 26th January help BJP in Delhi Election?

Yes - 55.4%

No - 28.2%

Can't say - 16.4%

5km in 2hrs

To all those who were afraid of global liquidity tightening post conclusion of US Federal Reserve's (Fed) bond buying program (QE-3) last quarter, I have been assuring that in the new world economic order QE is a matter of fact and it is not going away anytime sooner.

Last week, ECB chief Mario Draghi promised to infuse more liquidity in the global economic system during 2015-16 than what the Fed had withdrawn during 2014.

It is for more enlightened minds to debate:

(a) How much the sense of economic well being currently prevalent in the USA has to do with various QE programs of Fed, especially in light of the results to the contrary in Europe and Japan?

(b) Whether the malice in European economy has the same characteristics as the malice in US economy which Fed tried to cure through QE?

(c) Whether the objective of ECB's QE program, viz., achieving close to but not more than 2% inflation could still be achieved if China continues to decelerate and Japan accelerates the export of deflation and emerging markets are crushed by the war of currencies?

(d) Gold has gained 22% in EUR terms and 18% in CAD terms YTD; So have silver, CHF (Swiss Franc), US, Japanese and German bonds. To an ordinary person like me, Europe looks like following into the same endless pit as Japan did few decades ago. How QE will make it different?

Back home, I heard FM promising to the global investing community at Davos, some big bang announcements in Union Budget for FY16. The public utterances of various government functionaries indicate that the incumbent administration is keen to return to 8% growth path quickly. This is really a noble endeavor and all should support it, even if it means suffering some disadvantages (e.g., higher tax) ad interim.

The newly formed NITI Ayog (Policy Commission), will however have lot to worry about the repercussions of higher growth. Consistent 8% economic growth will mean that our economy will double in 9years. A great and inspiring thought!

But imagine, double the number of houses, cars, motorcycles, schools, hospitals, teachers, doctors, rail & air travelers; double the consumption of water, electricity, coal, petrol, copper, aluminum, zinc, vegetable, fruits, cotton, etc.; and double the garbage and carbon emission in just 9years.

Sitting in front of my TV and watching the special Republic Day Parade, I think, we are not ready. Anyone who has ventured out on Delhi roads in past one week, would agree that just 5year period of 8%+ growth has badly stressed the infrastructure we built over five decades.

So rather than focusing on Big Bang, let's do small things that make life comfortable for the citizenry and side by side build infrastructure for next phase of high growth.

Friday, January 23, 2015

Not so random thoughts

Thought for the day

"If there existed no external means for dimming their consciences, one-half of the men would at once shoot themselves, because to live contrary to one's reason is a most intolerable state, and all men of our time are in such a state."

- Leo Tolstoy (Russian,1828-1910)

Word for the day

Pyrophoric (adj)

Capable of igniting spontaneously in air.

(Source: Dictionary.com)

Teaser for the day

The rich and famous have forgiven and forgotten Kejriwal almost as fast as they had embraced AAP!

Not so random thoughts

Following on the heels of Swiss and Danish Central Banks, the Bank of Canada also delivered a shocking surprise to the market by unexpectedly cutting its key policy rate by 25bps. Apparently, the Canadian move came in response to a sharp drop in oil prices hitting the commodity-dependent economy, that is expected to grow by just 1.5 percent in the first half of this year compared with the central bank's previous forecast of 2.4 percent.

The move, in my view, should be seen as "no confidence" in the ECB's "whatever it takes" policy.

On a side note ECB has just repeated its pledge by committing yet another trillion Euros to the ongoing bond buying program that has brought the cost of borrowing for infamous PIGS below US government bonds.

I subscribe to the fears that the probability of a widespread movement against deeper integration of Europe may erupt before the common currency area slithers into a Japanese style labyrinth of lost decades.

Back home, in a decision that may have far reaching impact, CCEA has decided to give flexibility to state governments to set retail price of PDS sugar that has been kept unchanged at Rs 13.50 per kg since 2002. On implementation of this decision the Centre would reportedly continue to give the sugar subsidy for state purchases at Rs 18.50 per kg. The balance subsidy, if any, would have to be borne by the respective state governments.

The direct implication is that it may make fixing of sugar cane prices in a more rational manner to keep the cost of production under control and helping the industry and farmers to grow together. In the states like Uttar Pradesh, sugar cane pricing has been a controversial issue since ever. The industry had consequently stopped growing long ago.

However, in my view, the more important implication is the Signal that would travel from the Union Government to the Federal States. The State Government need to understand that in the process assigning of a true federal structure to the Union of India, as promised by the PM Modi, the States will have to assume more responsibilities as well. Deeper and stricter fiscal discipline may just be an additional responsibility.

Nonetheless, this decision should heartened RBI and global investors who are closely looking for hints of a quality fiscal consolidation.

As per some media reports, the Finance Minister may be considering extending some taxations to bank deposits for more than three year term. This move may be good for banking sector and industry as well, inasmuch as it brings more long term money to the struggling banking sector. However, the benefit would come mostly at the expense of mutual fund industry.

The small savings sector that is likely to suffer most from PM Jandhan Yojna (Prime Minister Financial Inclusion Program) may also see some adverse impact due to this move also.

Pertinent to note that the State Governments are largest beneficiaries of the deposits collected under various small saving schemes.

Wednesday, January 21, 2015

Make vs. buy

Thought for the day

"Historians are like deaf people who go on answering questions that no one has asked them."

- Leo Tolstoy (Russian,1828-1910)

Word for the day

Afflated (adj)

Having inspiration; inspired

(Source: Dictionary.com)

Teaser for the day

Akar Patel compares Congress Party with Mogul dynasty!

Guess to whom he is being unreasonable!

Make vs. buy

At 7.4%, Chinese economy recorded its lowest rate of expansion in 24years in the year 2014. The consensus amongst global economists appears that the momentum may slow down further in the current year due to cooling property market and stressed financial system. Though the government is trying, through a series of modest stimulus measures, to maintain the economic activities around the current levels, analysts are assigning material probability to a hard landing in China.

Since the Chinese economy has been the most powerful engine of demand in past two decades, the weakness there has naturally spilled into the economies which have been feeding the Chinese demand for commodities - most notably minerals and metals. Economies from Australia, Canada, Chile, Venezuela, Middle East, South and East Africa to Indonesia are struggling with stock piles of commodities and prices are crashing to levels not seen in many years.

This is the background in which India has is reemerging from a decade of hiatus. The incumbent government intends to initiate a manufacturing renaissance. This would essentially need huge investments in building physical infrastructure and rise in aggregate demand for all commodities. The demand starved world is thus naturally exited about India - leadership, economy and markets.

The PM Modi has struck all the right cords so far. His mantra of 3D (democracy, demography and demand) has appealed to global community. The recent utterances of reputable global leaders, economists, policy makers, and investors show that his charisma as "divine intervention" has transcended beyond borders.

The Indian stock markets scaling new highs when most emerging markets appear struggling, indicates the investors' enthusiasm towards Indian assets.

I also share much of their enthusiasm, but with some caution. I believe that transition from a agro economy to industrial economy will be slow and excruciating. Expecting quick results may lead to avoidable disappointment. Please note that:

(a) Most of the claimed "Demand" in India is still "Need". The "capacity to pay" that is quintessential to "Demand" is still low.

(b) The "Democracy" is both the strength and weakness of India in economic context. Unlike China, it is not an easy order here to override sustainability concerns and regional aspirations for faster economic growth. Socio-political consideration would continue to take precedence over pure economic concerns.

(c) The "Demography" is a still a raw strength. Without substantial investment in "gender equality" and "skill development" this resource cannot be exploited fully.

Another point to ponder is with China likely to ebb low for considerable time, should we be looking at exploiting the idle capacities there to our advantage or create redundancies here!

Tuesday, January 20, 2015

Water, oil and PM's 3D

Thought for the day

"The changes in our life must come from the impossibility to live otherwise than according to the demands of our conscience, not from our mental resolution to try a new form of life."

- Leo Tolstoy (Russian,1828-1910)

Word for the day

Daunt (v)

To discourage; lessen the courage of

(Source: Dictionary.com)

Teaser for the day

For BJP, from a distance of 35k feet, Kiran Bedi looks no different from Sakshi Maharaj; semantics apart.

Water, oil and PM's 3D

"Next War will be fought over water" has been a popular dictum since past few decades. While till date the peak oil theory has been challenged seriously and proved wrong time and again, there appears little challenge to the ever looming threat of a global water crisis.

I wonder whether the investors who are sounding so bullish on ONGC, would be equally interested, if not more, if water corporations of the states of UP, Punjab, Bihar, and Maharashtra, which perhaps control the largest amount of country's water resources, are corporatized and make a public offering of their shares!

If you argue that I am comparing apples with oranges, I concede. I believe, water boards develop and distribute a much more precious natural resource and touch more lives in comparison to ONGC. In our country the insatiate demand for safe drinking water is much higher as compared to fossil fuel. We have seen more elections won or lost on the issue of water as compared to fuel. So, water represents the PM Modi's 3D (demand, demography and democracy) much more closely than fossil fuel produced by ONGC.

My point is simple and small. If I feel the state water boards are in a state of junk and make no investment sense, so does ONGC. Though it does provide some interesting trading opportunities which could be availed by professional traders and fund managers who are skillful enough to do that.

A number of thinkers and policy makers shared their views on the present day government at ET Global Business Summit. Almost all sounded positive on the government and bullish on the Indian economy. I found some notes worth saving, for example:

(a) "The government will depend on a partnership with private sector for investment-led growth, but will blend sound economics with political wisdom and repel any greedy corporate effort to grab resources cheap". (The minister for coal, power and renewable energy Piyush Goyal).

(b) "Higher education leads to a slowdown in risk taking. Think of what would have happened to the computer industry had Steve Jobs, Bill Gates, and Larry Ellison stayed in school — they are all college dropouts. These people were made to be entrepreneurs. Had someone like Bill Gates stayed at school would have ended up as a manager, or a consultant. So that is my comment on university education.

On the other hand, school is not just helpful, it is a condition, it is necessary." (Nassim Nicholas Taleb)

(c) "Raising rates will lead to a complete panic by a generation of traders who have not seen interest rates rise before." (Nassim Nicholas Taleb)

These comments should warn the traders who are (a) unreasonably optimistic of companies perceived closer to the government (b) complacent about the rate hike cycle in the USA.