Do it yourself

Wednesday, February 18, 2015

"Good" as a noun

Thought for the day

"It is clearly better that property should be private, but the use of it common; and the special business of the legislator is to create in men this benevolent disposition."

- Aristotle (Greek, 384-322BC)

Word for the day

Contrite (adj)

Deeply affected with grief and regret for having done wrong; Penitent.

(Source: Dictionary.com)

Teaser for the day

AIB Roast - is unacceptable because (a) it hits where it hurts most, at the core of our Hippocratic morality; and (b) it is truly f****g s**t.

"Good" as a noun

I often wonder how many of us usually rely on IMD weather forecasts to plan our day? and how many of us judge the winter cold by the minimum temperature and summer heat by the maximum temperature recorded on a given day?

Hand on my heart - I could not care less for IMD forecast in planning for my daily schedule; a tiny shiver does travel up my spine when I hear about day's minimum temperature in winters and few droplets of sweat do appear on my temple when I hear about day's maximum temperature in summers. It is also true that it makes absolutely no difference to my life beyond these ephemeral feelings.

I know, till this point there would be little disagreement. Even those disagreeing may want to nod in agreement just to keep me in good humor.

But I do not want to stop here. I want to apply this ratio to the macro economic data issued by the government other agencies! This would certainly ruffle some feathers. A large majority of economist and analyst community who rely heavily on the "periodic official data" for their livelihood would strongly resent any attempt to trivialize the importance of such data.

To test my hypothesis I discussed the issue with some consumers, producers and investors. The key take away are follows:

(a) An executive with a midsized cement producers suggested that they do use GDP multiplier to forecast the cement demand for their investor presentations, but in real life the decision to increase/curtail production and add/reduce production capacities are strictly based on actual sales and feedback from dealers. GDP multiplier for demand forecast is mostly a post facto decision justification tool.

(b) A middle class home maker tells me that inflation number you people discuss on television and newspapers means nothing to her. It is monthly outgo from her purse that matters and that amount is rising consistently for past one decade.

(c) The sweet shop owner in my neighborhood market says that his sales are growing much faster as compared to 2003-2007 period. GDP growth deceleration from 9% to 5% does not matter to him. The inflation inside his shop has recorded over 15% CAGR in past five years. The wages though are stagnating for past couple of years.

(d) "The change of GDP growth rate by changing the methodology does not get my engineer daughter a decent job", is what an investor had to say.

Trust me, I am not at all cynical. I fully understand and appreciate the importance of empirical data as a critical input in future planning. But I suspect the utility of forecasts based on extrapolation of empirical data using the great gift of Bill Gates to mankind (MS Excel) for my investment decisions.

My favorite Robert Pirsig noted in Lila "Quality is Good as a Noun". I agree.

PSBs - trade - ok, investment "no-go"

Thought for the day

"The worst form of inequality is to try to make unequal things equal."

- Aristotle (Greek, 384-322BC)

Word for the day

Obviate (v, trn)

To prevent by interception; to anticipate and dispose of or make unnecessary.

(Source: Dictionary.com)

Teaser for the day

Stakes put on Delhi election:

AAP - 100%, its "double or quit" for them.

Cong - 0%. Even a win here does not help them nationally.

BJP - 5%. Does not matter much in national picture. However if they lose, the PM gets a monkey on his back for 5yrs.

PSBs - trade - ok, investment "no-go"

From the periodic monetary policy statement of RBI governor and views expressed by him in customary press conference post policy statement four things stand out, in my view:

(a) The policy making at RBI has definitely moved to global standards. It is purely data driven and no longer rely on the subjective assessment of RBI and political expediency. The governor made it amply clear that if the GDP data to be announced on 9th February and the budget provisions warrant a change in rates he is willing to do it outside periodic policy reviews.

(b) Doubling the remittance limit under LSR (Liberalized Remittance Scheme) from USD1,25,000 to USD2,50,000 marks the end of emergency measures taken to protect BoP in summer of 2013. The limit was reduced from USD2,00,000 to USD75,000 and later enhanced to USD1,25,000.

This comes after lifting most restriction on gold imports applied in 2013.

In my view this has three implications:

(i) Many had interpreted the move back then as return of capital controls. The governor has addressed all those concerns in definite terms.

(ii) This demonstrate the confidence of RBI in BoP situation.

(iii) It clearly highlights the intention of RBI to maintain INR/USD at current or slightly higher level. It is therefore clear that RBI has reconsidered its earlier bias towards importing deflation. This measure when read along with inflation outlook (6% in Jan' 2016) makes it amply clear.

(c) By allowing banks to offer differential interest rates on term deposits based on the callability feature (meaning locked in fixed deposits can be offered higher rate of interest), the pitch has been further queered from FMP business of mutual funds. If, as expected, the finance minister also removes the tax arbitrage between FMP and bank deposits, the banks may gain substantial cost advantage over mutual funds insofar as the cost of funds is concerned.

The idea seems to make market efficient by removing apparent inefficiencies.

(d) RBI wants banks to play a more active role in restructuring of bad assets - through change of management or otherwise.

The governor admitted that a fair bit of stress still remain in asset quality and banks are not willing to cut lending rates as yet.

The market reaction to the policy statement in my view was more of a correction of huge build up in the preceding sessions, rather than any reflection on the policy stance itself.

I guess, we are reaching that point faster where PSU banks will become a "good trade". However, as a matter of policy I would maintain "no go" policy for investment in any PSU stocks.

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.