Do it yourself

Wednesday, May 13, 2015

Love me or hate me, you can't ignore me

Thought for the day

"It is Homer who has chiefly taught other poets the art of telling lies skillfully."

- Aristotle (Greek, 384-322BC)

Word for the day

Moppet (n)

A young child.

(Source: Dictionary.com)

Malice towards none

It is perhaps for the first time that PLA has not done any adventure before a Indo-China summit.

Love me or hate me, you can't ignore me

The incumbent government will complete first year in office in couple of weeks. Considering the high expectations it raised amongst all stakeholders, it is natural that assessment of its first year performance is evoking keen interest.

Media, political commentators, opponents, supporters, business, friends, etc. are all evaluating the performance on the parameters that suit them most. Unfortunately, many do not sound objective in their endeavor.

Media and opponents were elated to find ammunition against PM Modi in Arun Shourie's outburst against the government. English media in particular has been overtly critical of the Modi government.

Many businesspersons, e.g., Deepak Parekh and Adi Godrej, have expressed dissatisfaction over government's conduct. Though some like Ratan Tata have advocated giving some more time before a meaningful could be assessment is made.

The opposition parties have alleged in the Parliament that PM Modi is focusing too much on image building through his much hyped overseas tours and ignoring important business.

A India TV-C Voter survey telecast on Monday, found that a majority of people believe that PM Modi today appears anti-poor and anti-farmer; his image has taken serious beating in past one year; and Sushma Swaraj is the best performing minister in his cabinet.

If we juxtapose this criticism from various quarters what we get is:

* The government has neither worked for poor not the rich. Poor find it pro-industry and industrialist find it too socialist.

* Media finds that that PM Modi has undermined the authority of his ministers, especially Rajnath Singh (here) and Sushma Swaraj (here). But people find them most efficient ministers.

* Critic feels too much centralization in PMO is affecting execution. Ministers and bureaucrats feel too much federalization is undermining their authority.

Good, Bad and Ugly of Modi government

Not satisfied with the objectivity of the popular surveys on the assessment of one year performance of the incumbent government, I decided to conduct the one by myself.

Though, my sample is unscientific and tiny, I found the results consistent and plausible.

For records, I spoke to 74 people across 8 states. Profession wise, the sample included small farmers, traders, industrialist, politicians, bankers, students, home makers, government employees, unemployed and petty workers. The sample covered the lower and middle part of the economic strata. The higher echelon went unrepresented. Community wise, it covered six primary religions, and all four caste segments. 12 women participated in the survey. About 10 respondents were from villages.

There was no structured questionnaire. The survey was based on free discussions. Respondents were not prompted towards anything specific. They were requested to give their free and fair assessment.

The key highlights of the responses received are as follows:

The Good

April CPI Inflation at 4.87%; lowest in four months

* The global image of the country has improved materially. Though it may not mean immediate economic benefits, the country shall reap multiple benefits in the long term.

* The government has successfully managed the communal environment in the country. Though, the fringe elements within and outside the government have consistently raked up controversies, the government remarkably stayed secular and neutral.

* The government has initiated healthy debate on vital issues like corruption, freedom of expression, federalism, freedom of religion, etc.

* There is a healthy feeling of competition amongst opposition ruled states to compete with center on performance and governance issues.

* The government has tried to build upon the existing institutions, policies and programs. It has not tried to disrupt the status quo in most respects.

* It has successfully maintained a corruption free image.

* The disaster management capabilities have shown remarkable improvement.

* The government has taken some positive steps to improve center state relations.

* The government has seriously pursued key economic reforms like land acquisition, GST, financial inclusion, fiscal corrections and improvement in delivery system.

* PM Modi has successfully managed to keep the BJP at safe distance from the government.

The Bad

March IIP growth slows to 2.1%, the lowest level since Oct 2014;

IIP rose 2.8% in FY15

* The government is taking too long to finalize the structure of the executive. The confusion in the bureaucracy over the line of authority is impeding execution.

* The government has not made any credible effort to improve skill development.

* The corruption at lower level continues to be as rampant as before.

* The prices of essential commodities are not coming down, though rate of inflation may have come down.

* The government is focusing on big agenda, ignoring smaller issues that impact day to day life of people.

* The working conditions have worsened under the current government.

* The government is planning a shift from established subsidy provision system to enablement in a "knee-jerk" fashion. The transition management is poor and painful.

* The government is obsessed with image management. It reacts too much and too fast to criticism.

* The government has wasted too much time and resources on state elections, compromising on economic agenda.

* The government has nothing for women safety and gender equality, besides routine publicity and issuing appeals to people.

* The PM Modi has compromised on competence and experience to accommodate loyalty and clean image in construction of his team.

The Ugly

* The execution on key projects is poor and worsening.

* The government has virtually nothing to ease financial stress in the economy. The banking system is in similar dire strait as it was in mid 1990s. If not handled proactively, the situation will become unmanageable.

* The unemployment situation has worsened.

Trivia

Yet another set of tremors rocked north India yesterday.

Poseidon is really angry.

Who is bothering him most?

(a) Rahul Gandhi

(b) Narendra Modi

(d) Judiciary

(e) India Inc.

(f) ISIS

(g) ISI

(h) EU

(j) US

(I) Other, pl specify

Some interesting reads

Productivity Is Down: Are U.S. Workers Slacking Off?

Thought for the day

"It is Homer who has chiefly taught other poets the art of telling lies skillfully."

- Aristotle (Greek, 384-322BC)

Word for the day

Moppet (n)

A young child.

(Source: Dictionary.com)

Malice towards none

It is perhaps for the first time that PLA has not done any adventure before a Indo-China summit.

Tuesday, May 12, 2015

Your Bharat vs. My Bharat

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

Baleful (adj)

Full of menacing or malign influences; pernicious.

(Source: Dictionary.com)

Malice towards none

Where would you fit Sunny Leone in the "Idea of India"?

Trivia

Two individuals - Ms. J. Jayalalithaa and Mr. K. V. Kamath - dominated the headlines yesterday.

Ms. Jayalalithaa regained her right to Tamil Nadu CMship after Karnataka High Court exonerated her all charges of holding disproportionate assets. The verdict came two days after Mumbai High Court showed exemplary promptness in admitting Salman Khan's appeal against lower court order and granted him bail pending decision on his appeal.

Because of these decisions, a large section of society is raising question on the entire justice delivery system, blaming it to be squarely pro rich & powerful.

The appointment of Mr. K. V. Kamath as first chief of US$100bn BRIC Bank has also surprised some. The outburst of Deepak Parekh and Arun Shourie against the government (both were speculated to be front runner for the post) had made it clear that they are not in the reckoning.

The question that is bothering some at Raisina Hills is what made Kamath supersede Subba Rao, Bimal Jalan and Urjit Patel. Raghuram Rajan had already denied his interest or consideration.

Some interesting reads

Growth prompts many in FMCG to bet on rural segment

Slump in infra projects belies recovery story

Car sales grow 18.14% in April, fastest in 30 months

Brazil's Only Hope Is Mr. Market

Monday, May 11, 2015

Care for the big elephant sitting right to ya

Thought for the day

"The duty of rhetoric is to deal with such matters as we deliberate upon without arts or systems to guide us, in the hearing of persons who cannot take in at a glance a complicated argument or follow a long chain of reasoning."

- Aristotle (Greek, 384-322BC)

Word for the day

Defenestrate (v)

To throw (a person or thing) out of a window.

(Source: Dictionary.com)

Malice towards none

Why all celebrity friends of Salman Khan chose to visit him unshaven and disheveled.

Care for the big elephant sitting right to ya

The sharp corrections in equity prices accompanied with material rise in implied volatility, as seen in past few trading sessions, is definitely disconcerting for all market participants, especially short term traders.

It is easier, under the circumstances, for equity traders to get overwhelmed and focused on daily price movements. Thus increasing the chances of missing the big elephant present in the room and committing avoidable mistakes many fold.

I strongly agree with the view that the happening in stock market, domestic and global, developed and emerging, is only a side show. The primary event is taking place in the bond markets.

The global markets might have derived some comfort from the latest statement of the US Federal Reserve (Fed) in which reference to timeline for raising policy rates was omitted altogether. But the fact remains that most investors and analysts are apprehensive about imminent end to zero and sub-zero yield regime. Bond investors, after years of rising prices and big returns, are bracing for the return of 'normalcy' in debt market.

The sudden and sharp rise in commodity prices, despite continuing poor economic data across the world, and rise in US bond yields indicate that the long bond and short commodity trade has begun to unwind.

The process is slow and not unidirectional as the opinion on direction of global rates is not yet unanimous.

The more prominent view is that the US rates are inevitably headed higher. Hence, going forward the US yields and USD carry trade unwinding will accelerate, and the long bond unwinding shall gain more momentum. Given the exorbitant level of leverage in the bond markets, the unwinding will obviously be torrential and extremely painful once some clarity on timeline of the "Lift" emerges. Legendary Warren Buffet and Bill Gross subscribe to this view.

The other view, certainly not a small minority, is that US economic conditions are far from suitable for a "Lift" as yet. The bond bull markets, in their view, has many more miles to go before it ends.

Good years ahead for Indian equities

The rise in global rates and bond yield may be a terrible news for global financial markets in the near term.

A whole generation of dealers, traders and investors has now been raised on low rates. The strategies and tactics these people have so far used are completed untested for a bear market in bonds.

In an environment where half of world's outstanding bonds trade at zero or negative yield, equity analysts and traders in their twenties and early thirties are used to discounting future cash flows of companies at zero or even negative rates. Their valuation models and investment strategies may perhaps not account for 4-6-8% discounting rates.

In simpler terms, at near zero discounting rate you need low earnings growth to be bullish about a company's stock and could accord higher P/E. However, if you have to discount the future cash flows by higher discounting factor, the required earnings growth for the same P/E multiple would be much higher.

This could be good news for Indian equities in medium term.

The rising cost of capital in global market may have three impact on Indian economy and markets.

(a) The cost of capital may rise for Indian companies. But this could be offset by higher availability as the savings rates go up in developed world with rise in yields.

(b) The INR may weaken against USD, GBP and EUR as the higher rates push up these currencies.

(c) Indian equities may look cheaper in relative terms, as higher discounting factors and lower earnings growth (due to stronger currencies and lower demand due to higher rates), push up valuation of equities in the developed world.

This translates into the following in investment strategy terms:

1. The companies which are inadequately capitalized or whose business model is highly capital intensive but which have poor balance sheet/credit rating would face trouble due to rising cost of capital. These businesses should be mostly avoided.

2. Exporters who are competitive on product and technology front shall gain further strength and remain preferred investments.

3. The companies with strong balance sheets and higher RoEs would remain the most preferred investments. The relatively higher valuations may become more reasonable in medium term (3-5yrs).

Contempt of popular mandate

As expected, the finance minister seems to have virtually given in to the pressure of FPIs over issue of MAT demands for previous periods. The matter has been referred to an expert committee; which in Indian parlance is nothing but an euphemism for avoiding a stand on any controversial issue. In recent times we have seen this tactics used successfully to bury GAAR.

The moot point is what did prompt the government to kick the can in the instant case. Was it the fear of collapse in financial markets due to some mindless selling by the "concerned" FPIs? or the government is truly doubtful about the legal validity of the tax demand raised on FPIs from outside DTAA jurisdictions.

In case the former is true - it is unfortunate. The markets which cannot sustain couple of billion dollars worth of selling by investors who have pumped in US$9bn in just past four months, need some serious restructuring.

However, if the latter is true, it is much more serious matter. It raises questions over the credibility of the promises made by the government both inside and outside the Parliament.

The conduct of various political parties in the Parliament has already cast dark clouds over the entire legislative process. Given the minority status of NDA in Rajya Sabha and adversarial attitude of opposition parties over most government agenda, there is little certainty over any legislative business.

As I write this today, the critical economic legislations like GST Bill face uncertainty due to partisan brinkmanship. The prospects of laws relating to land acquisition, real estate sector regulation, and black money regulation also look poor.

While it is difficult to determine who is at fault (government or opposition) for this legislative logjam - the economy and poor shall suffer, and so would markets.

Politically speaking, both the Congress and BJP appear losing in this internecine battle and the regional parties are gaining at their expense. To me it is a contempt of the popular mandate.

Three decades of falling rates may be coming to an end

Warren Buffett is famous for his long-term bets on companies that he thinks are cheap.

Conversely, he's not known for short positions.

But in an interview with CNBC's Becky Quick, Buffett revealed one asset class he would short.

"If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it," he said.

These long term bonds have effectively been a bull market for three decades as falling rates translated to higher bond prices.

Regarding interest rates, Buffett noted that if rates were to increase to more normal levels, stock prices would look expensive.

While he said he would short long-term bonds if he could, he also said that he couldn't.

"But that not my game, and it can't be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued. I'll put it that way."

Trivia

Speaking in typical desi lingo, Mr. N. R. Narayana Murthy now has high connection in British government.

Traditionally, such people are bracketed in a special category within our society, so that we could exploit their high connections for furtherance of our petty vested interests.

Remember Shahrukh Khan and Irrfan Khan starrer "Billu".

Some interesting reads

Inequality, Immigration, and Hypocrisy

The Return Of Peak Oil

Why the British election matters to the United States

April PMIs Provide More Evidence BRICs Are Buckling

Thursday, May 7, 2015

Shivering at 41°C

Thought for the day

"It usually takes me more than three weeks to prepare a good impromptu speech."

- Mark Twain (American, 1835-1910)

Word for the day

Bafflegab (n)

Confusing or generally unintelligible jargon.

(Source: Dictionary.com)

Malice towards none

Being Human!

Shivering at 41°C

The popular commentary may be seeking to associate the recent fall in stocks prices with local issues like retroactive taxation of the past income of certain foreign investors; prospects of a deficient monsoon; legislative logjam; uninspiring corporate performance; etc.

Inarguably these factors are weighing on the investor's sentiments. But focusing only on domestic issues may not be prudent from investment strategy perspective.

There are some distinct signals emerging from global market place indicating that global economy might just be preparing to hit a rough patch. These signals must be sending creepy jitters down many spines.

The people who follow global trade as an indicator of the health of global economy, the picture has become as gloomy as it was during 2008-09.

The global container freight rates have just plummeted in past couple of months to much below the cost of ship operations. The US inventories are piling up. Manufacturing data is worsening in China, EU, India and Japan. Australia has cut the rates to lowest level ever.

Commodities higher, bonds down - preparing for the "Lift"

The markets are clearly showing massive unwinding in short commodities and long bond trade. The correction in equity prices seems to be incidental only. This in my view is in preparation for the US Fed "Lift" expected later this summer.

Chinese bulls are tired

As per recent Bloomberg report - "For Chinese investors with a sense of history, the nation’s world-beating equity rally is looking long overdue for a reversal.

The bull market turned 883 days old on Tuesday, topping China’s previous record by 56 days, after a 119 percent surge in the Shanghai Composite Index since December 2012. Even if the advance is measured from June 2013 -- when the gauge narrowly avoided a bear-market drop of 20 percent -- it’s still the second longest since Chinese bourses opened for trading in 1990.

The rally’s age is concerning in a market notorious for how quickly it can turn from boom to bust: the 194-day average lifespan of Shanghai bull markets is the shortest among the world’s 10 biggest bourses and compares with the 1,625-day mean for the Standard & Poor’s 500 Index since 1965. The Chinese measure lost 4.1 percent on Tuesday as traders sold some of this year’s top-performing shares.

“There’s no need to chase stocks at this level,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “Lots of stocks are not justified by current prices.”

This is happening despite Monetary stimulus, reform speculation at state-owned companies, record margin trading, and largest ever retail participation."

...as global economy struggles

Indian equities to continue struggling

As I suggested a few days ago (see here), the Indian equities are currently undergoing a normal correction. In this correction Nifty should find the rock between 7860-8096 range.

In this case the benchmark indices should move in a downward sloping channel making a lower top - lower bottom formation over next six months.

The large cap will materially outperform the mid and small cap in this phase.

The probability of a full 20% correction that would end the current bull market looks remote at this point in time. But may need some allowance to be made, should Nifty closes below 7860 in next 10 trading sessions.

Trivia

Received the following message form a dear friend and regular reader:

"Was reading yesterday's ET - feedback from industry in Modi's one year in Govt.

Didn't know whether to laugh or cry.

The major cribs:

1) We can't meet him when we want to.

2) He doesn't let us influence the appointment of ministers or bureaucracy.

3) He is not fixing our problems.

4) He is no longer pro-industry.

5) There is concentration of power and decision making at the PMO

Imagine, the top industrialists of the country requiring to meet the PM so that they can run their business and clean up their balance sheets!

Essentially they don't want the government to interfere as long as things happen their way and want the government's help the moment things get difficult."

That is why I say, the effort to bring Achhe Din for the country on sustainable basis may be really painful for stock markets in the short term.

The sadistic relief is that this government continues to remain market centric and may not do much to disturb it.

This is however only that - a sadistic relief.

Because we all know too well that by focusing too much on financial markets by compromising on the necessary corrections (or reforms if you like) in the real economy would inevitably bring down the stock and bond prices as we approach the dénouement.

Some interesting reads

Is bull market in Chinese stocks ending?

...as signs of trade collapse emerge

Wednesday, May 6, 2015

It's not just about politics or Congress

Thought for the day

"There are basically two types of people. People who accomplish things, and people who claim to have accomplished things. The first group is less crowded."

- Mark Twain (American, 1835-1910)

Word for the day

Diurnal (adj)

Of or belonging to the daytime.

(Source: Dictionary.com)

Malice towards none

Is there anything called "Indian" culture?

It's not just about politics or Congress

Many people have raised objection to the comparison of Rahul Gandhi with Amitabh Bachchan in my yesterday's post. Some feel that it unreasonably reflects on the Gandhi scion while the other feel that he is no comparison to Mr. Bachchan.

I refuse to get drawn into this controversy. My objective was just to draw, which in my view was, an easily comprehendible analogy to highlight the current state of the Congress Party and its leaders. I had no intention to compare two individuals.

One comment in particular needs clarification. My dear friend and a reputable equity analyst chided me - "Which hit did Rahul deliver before this slump hit him?"

To this I may clarify that my point needs to be understood in the right perspective. I stated that presently the Indian politics is totally personality driven. The parties have been relegated to somewhere backstage. Thus it is popular to invoke Rahul Gandhi's name while referring to the Congress Party. It again has nothing to do with any individual per se.

I would also like to highlight that understanding the current political paradigm and the likely directions it could move is critical for investment strategy.

A continuation of the current state of quandary with respect to economic growth model could potentially push Indian economy down permanently into the realm of so called Hindu Rate of growth (~5% in new context), I fear.

I strongly believe that the inherent austerity, industriousness and enterprising skills of the Indian populace are sufficient to attract capital needed to provide escape velocity for moving the Indian economy into higher orbit.

It is fashionable and correct to say that whatever growth and development has been achieved so far is in spite of the government and not because of it.

Limiting the role of government to developing and maintaining the institutional framework relating to law & order, sovereignty, external security & relations, municipal functions, inter-state relations and facilitating trade & commerce, may improve economic conditions much faster than otherwise.

From Congress (I) to INC

Coming to the Congress Party now.

In my view, the dissipation of Congress Party started in 1975 with the imposition of national emergency. The process of decay accelerated a bit in 1984 as some Shatraps started to question the leadership of Rajiv Gandhi. Rajiv Gandhi's assassination added some more decibel to dissenting voices. Anointment of Sonia Gandhi as party chief ruffled many more feathers. Though the electoral victories of 1980, 1984, 1991, 2004 and 2008, which were mostly outcome of poor opposition and not necessarily due to strong positioning of the Congress Party itself, helped maintaining the facade of unity and supremacy of the family.

After a series of electoral debacle since 2012, and near decimation in 2014 general elections, the facade is slowly coming off.

From media reports, the Congress Party may appear to be in revival mode, but truth may be far from it. The true state of affairs is that the party barely exists in most populated states like UP, Bihar, West Bengal, Tamil Nadu, and Jharkhand. It has been out of Power for more than a decade in states like Gujarat, MP, Chhattisgarh and Odisha.

Greater media coverage for Rahul Gandhi may change nothing in this state of affair. Raising issues like Land Acquisition & home buyers' plight and blocking important legislative business in parliament with add little precious to the dwindling fortunes of the party.

These tactics do not solve any of the five major problems afflicting the party; which could be summarized as follows:

(a) Consistent erosion in traditional support base

Congress party has failed in recognizing that the younger party joins politics as profession and not as a selfless service to the nation. They prefer to join parties or organizations which provide an opportunity to fulfill their aspiration to reach at the top.

Congress party offers no such prospects - (i) The positions at the top are dedicated to the chosen few; (ii) The party is not in a winning position in majority of constituencies; (iii) The brand Congress no longer evoke respect and dedication; (iv) In many regional alliances the Party has accepted to be minor partner.

So unless the Congress party presents a political paradigm that appeals to the aspiration of youth, it may not add to its support base on sustainable basis.

(b) Legacy of 6 decades of sub-optimal performance

Sub-optimal performance of successive Congress governments since independence takes away from the Congress Party any moral right to criticize failure of any other government.

The Congress Party needs to present an economic paradigm that shows the potential for higher, faster and sustainable economic growth.

The leadership need to inspire the youth, ethnic groups, community leaders, business community and global Indians through its actions and programs.

(d) Feudal arrogance.

The language normally used by the party in its public discourse smacks of feudal arrogance. "We gave you this and that" is no longer acceptable to the people born after economic liberalization in 1991.

The language of the public discourse of the party needs to change to reflect a cooperative and collaborative approach towards politics.

(e) Cultural alienation of the party

In its desperation to achieve short term goals of winning elections, the Congress Party has positioned itself as a group of atheist who stand distant from the religion, traditions and culture of dominant ethnic groups.

This needs to change. The Party needs to understand that regardless of technology, urbanization and economic progress, we are a society where people walking hundreds of miles barefoot carrying Kanwars in the month Shravan; people carrying the Palki of Sai Baba; people visiting Tirupati Bala ji, Amarnath, Vaishno Devi, Guruvayyur, Char Dham etc.; households hosting Ganpati and Durga Maa, and number of Tazias in various Muharram processions is rising exponentially every year.

The Party failed to recognize that even communists in West Bengal participated in Durga Puja with same zest as non-communists to stay in touch with people.

I have highlighted in past (see Mandate 2014: Definitely Transformative) that In Indian context, Indian National Congress, as it existed before independence is the only viable alternative to the right wing politics.

In case the present Congress Party fails to broadbase itself to regain the prominence it enjoyed in pre-independence period, the motley group of degenerated socialists will continue to occupy that space and this is not a good news for the economy of the country.

I have also mentioned that raking up issues like Land Acquisition will not help Congress Party in any manner whatsoever - for (a) Congress' apathy is mostly responsible for the plight of the farmers and (b) "No land" is much bigger problem than the land. (see "Land" does not get you votes, "No Land" does and Part II).