Do it yourself

Tuesday, June 2, 2015

To cut or not to cut is not the question

Thought for the day

"The only thing to do with good advice is to pass it on. It is never of any use to oneself."

- Oscar Wilde (Irish, 1854-1900)

Word for the day

Agog (adj)

Highly excited by eagerness, curiosity, anticipation, etc.

(Source: Dictionary.com)

Malice towards none

Reports suggest that the government is considering Exit Exam for MBBS doctors.

What problem does this exam seek to solve?

Can't Munna Bhai pass this exam also by proxy?

Do we have Munna Bhais only in Medical profession?

To cut or not to cut is not the question

The GDP date for 4QFY15 has further queered the pitch for Gov. Rajan.

The government authorities are claiming that the data shows that the economic recovery is taking off and rate cut at this point in time will provide the necessary escape velocity. The finance minister himself has publically coaxed Gov. Rajan to cut rates to help the struggling industry and infrastructure developers.

The independent economists however are discounting the recent GDP data as accounting miracle that is not fully corroborated by the evidence available from other sources like corporate financial results, consumption data, industrial production numbers, credit data and other lead indicators. The general view is that economy is still taxing slowly towards the runway and take off is at least couple of quarters away.

The analysts community is mostly expecting a 25bps cut followed by a long pause. Flipping through various reports, I could find little reasoning behind this expectation. Most of it is "just like that".

In my view, the rate decision of Gov Rajan this morning will be driven more by "INR" than "Industry".

Given the elevated level of stress on corporate balance sheets, as evident from the FY15 annual accounts, low demand environment, and poor credit growth despite comfortable liquidity conditions threeo things are more than clear - (a) few bankers want to take risk of giving fresh money to a stressed corporate or even a new project; (b) few corporate balance sheet will justify further lending even if rate fall by 50bps; and (c) some aggressive bankers may be chasing households with high priced relatively small ticket consumer loans, compromising prudent norms and laying foundation for a credit bubble 4-5yrs down the lane.

Under these circumstances a 25bps repo cut would be mostly redundant.

Gov. Rajan would not like to make a bigger cut, as it would risk further strengthening of already strong INR; force more liquidity infusion for buying USD; and thereby weakening the fight against price rise.

From market perspective I will not be too enthusiastic about a rate cut this morning. A sharp rise in financials may provide some short selling opportunities.

A cursory scrutiny of the FY15 annual accounts of profit making private sector undertakings shows a distinct trend of tax refunds and interest on tax refunds. State Bank of India alone reported Rs10bn interest income on IT refunds.

The official claims of no Tax Terrorism need to be closely examined by analysts in light of this trend. An informal interaction with many large tax payers and PSU managers suggests that the practice of forcing tax payers to pay higher advance tax to achieve tax collection targets is still prevalent. This "terrorist" way of deficit financing belies the government claims of "peace" with tax payers. Given that the rate of interest payable on IT refunds is higher than the present 365d treasury bill yields, it also does not make much financial sense.

Monday, June 1, 2015

Investors should think beyond 2015

Thought for the day

"I am so clever that sometimes I don't understand a single word of what I am saying."

- Oscar Wilde (Irish, 1854-1900)

Word for the day

Polymathy (adj)

Learning in many fields; encyclopedic knowledge.

(Source: Dictionary.com)

Malice towards none

Congress party is losing the plot at unbelievably fast pace!

Investors should think beyond 2015

The events like summer Char Dham yatra in Uttrakhand hills and Kumbh Mela etc., provide a good opportunity to meet people from across the country and assess the general mood.

My team traveled to the holy shrines of Sri Kedarnath and Sri Badrinath in Garhwal Himalayas last week and had the opportunity to interact with over 500 people from 13 states.

The key points that emerged from these interactions could be summarized as follows:

(a) The general mood of the people could be described best as despondent.

(b) People across the demographic chart are feeling elevated level of stress, financially as well as socially.

(c) The disposable income and tendency to spend is showing a marked improvement over the level seen a few years ago. The traditional high propensity to save is waning slowly.

(d) The number of private vehicles visiting the holy shrines has multiplied. The administration has taken virtually no note of the trend, as could be seen from the parking arrangements. NGT also need to take a note.

(e) People in general are satisfied by the incumbent government at the Center. Most people from rural areas believe Niyat (intention) is more important than the Seerat (Deeds). The general sense is that PM Modi needs to be given more time and full support.

(f) Most people are amused by the sudden invigoration of Rahul Gandhi. We could find none who is taking it seriously or believing this phase of activism to last till 2019 elections.

(g) The people from Bihar were rather concerned about the prospects of Laly-Nitish combine wining in Bihar elections. BJP appears to party of choice. People were however skeptic about the infighting in the state unit.

(h) Akhilesh Yadav appears to have made a remarkable recovery in UP after 2014 general election rout.

(i) Till a few years back, the farmers and rural laborers used to be joyous and ecstatic for being able to undertake this highly propitious pilgrimage. They would not complaint about the lack of facilities, dishonest transporter and shopkeepers etc. This time it was not the case. Most people were complaining and appear undertaking the pilgrimage as a matter of obligation.

(j) The signs of distress and devastation from the 2013 floods were visible all along the route. The local people were cynical about government help and alleged huge scam.

My conclusion is that economy might take more than two quarter to bottom out. The private consumption may dip little further before picking up. The popular media debate over PM Modi losing popularity may be little misplaced.

Nifty: Once in eight year opportunity on the anvil

From weekly charts of Nifty it is clear that the market may be headed down to its major trend support range of 7630-7860 in next 18-20 weeks. There is a reasonable probability of briefly testing a lower level of 7200 in this period.

As stated a couple of week ago (see here), Nifty may peak between 8550-8630 range in next 12 trading sessions.

A fall below 7860 on weekly basis will turn the risk reward extremely positive and provide a once in 8yr cycle (2013-2021) buying opportunity.

Weekly Nifty chart for past one decade. Source: Falcon)

Tuesday, May 19, 2015

The earnings' show so far

Thought for the day

"To see and listen to the wicked is already the beginning of wickedness."

- Confucius (Chinese, 551-479BC)

Word for the day

Cacophonous (adj)

Having a harsh or discordant sound.

(Source: Dictionary.com)

Malice towards none

Can Rahul Gandhi sustain his new found aggression till 2019?

Most of the issues he raising are likely to fizzle out in next one year itself.

The earnings' show so far

Asian Paints' 4Q results provide further evidence of slowdown in consumer demand. The company could sustain profitability due to lower raw material prices, which has again been the trend across the consumer segment.

A primary analysis of the results and consequent corporate commentaries brings out the following broad trends:

(a) The consumption demand has slowed down considerably, and likely to remain subdued for another quarter, primarily due to poor show in rural income. However, most managements have guided for gradual pickup from 2HFY16.

(b) Both the consumer durable and FMCG companies have managed the cost well and improved margins on normalized basis. None of the management so far has guided any material deterioration in the demand and price conditions going forward.

(c) Exporters (IT and Pharma) have suffered due to poor demand conditions in some key markets like Europe, and Latin America. The cross currency headwinds have hit most companies. However, unlike 2008-09, most companies have managed their currency exposures well and no material forex losses have been reported.

(d) Industrial segment has expectedly suffered due to poor investment demand. However, most large companies have been able to meet the subdued expectations. The stress in visible in mid and small cap, especially highly indebted companies.

(e) Reality sector companies have reported mixed results so far. The well managed south based companies have reported decent numbers and have guided decent growth going forward.

(f) Financial companies and banks have reported huge rise in delinquencies in restructured assets. The credit growth has been on the lower side. However, the cost efficiencies have improved across the board. Operation numbers are as per expectations or better.

SC clears doubts on obligation to buy power from green sources

In a precedent-setting judgement pronounced last week, the Supreme Court of India has laid down that owning a captive power plant does not absolve a company of its obligation to purchase part of its power consumption from green sources, such as wind and solar.

The judgement implies that the various companies who have not been buying green power by taking shelter under a legal ambivalence, now face enforcement of their obligations.

The case pertains to an appeal of Vendanta group’s Hindustan Zinc Ltd against a 2012 verdict of the Rajasthan High Court, which said that the State electricity regulatory commission was right in imposing the ‘renewable purchase obligation’ on the company, even though the company runs its own captive power plants, of about 475 MW capacity.

“The renewable purchase obligation imposed upon captive power plants and open consumers through the impugned regulation cannot in any manner be said to be restrictive or violative of the fundamental rights conferred on the appellants…..we do not find any reason to interfere with the impugned judgement (of the Rajasthan High Court),” the apex Court’s order said.

Impact of the order

The Supreme Court’s order brings clarity to the point as to whether or not companies that have captive power plants are covered by the law that mandates green power purchase.

Some other companies had impleaded themselves in the case, filing counter affidavit with the Supreme Court — Ultratech Cements, Mangalam Cements, Binani Cements, Trinetra Cements, Shree Cement, Rajasthan Textile Mills Association, DCM Shriram Consolidated Ltd, JK Tyre Industries and Lucid Coloids Ltd.

“All other interlocutory applications for impleadment/ intervention/ stay/ directions are disposed off,” the order says.

As such, the order will have far reaching implications on India Inc. Vishal Pandya, Founder of REConnect, a consultancy that operates in the area of renewable energy certificates trading, observes that several High Courts have stayed the imposition of RPO on captive power producers.

“With the Supreme Court, these stays will become redundant,” Pandya said.

“The order will provide support to the State electricity regulators to impose RPO regulations more forcefully and enforce them effectively,” he said. (Business Line)

Oil prices rise on Middle East fighting; OPEC output in focus

Oil prices edged up on Monday following fighting in Iraq and Yemen, but Iranian comments that OPEC was unlikely to cut output as well as signs of strengthening U.S. production capped gains.

Front-month Brent futures were up 12 cents at $66.93 a barrel by 0556 GMT. U.S. crude rose 26 cents to $59.95.

Prices were supported by concerns that conflict in Iraq and Yemen could disrupt supplies after Islamic State militants said they had taken control of the Iraqi city of Ramadi in a big blow to the government.

In Yemen, a Saudi-led coalition resumed air strikes against Houthi militia in Aden, a port-city on the shores of key Middle East oil routes.

Despite these Middle East conflicts, analysts said oil markets remained oversupplied, and that the glut could worsen if U.S.-production picked up and output by producer-club OPEC remained strong.

"Oil prices appear to have outpaced the improvement in underlying fundamentals," Barclays said on Monday.

Iran's Deputy Oil Minister Rokneddin Javadi told Reuters on Monday that OPEC was unlikely to cut output at its next meeting in June, and that Iran hoped its crude exports would return to pre-sanctions levels of 2.5 million barrels per day (bpd) within three months once a deal to lift an oil embargo is finalised.

A deal over Iran's disputed nuclear programme between Tehran and world powers could see sanctions on Iran lifted if a more permanent pact is finalised in June. Because of the sanctions, Iranian oil exports have fallen to about 1 million bpd since 2012, mainly to Asia.

In the United States, Goldman Sachs said that despite an expected dip in output in the second half of this year, production would increase by 205,000 bpd in 2016. (Reuters)

...Gold too climbs to fresh three-month high

Gold jumped for a fifth straight session on Monday, climbing to fresh three-month highs, as soft U.S. data bolstered hopes the Federal Reserve would not hike interest rates soon.

The metal has been supported in recent days by sluggish U.S. economic data, which has hurt the dollar and altered expectations regarding the Fed's monetary policy.

The dollar languished around a three-month low against the euro on Monday, after weak data on U.S. industrial production and consumer sentiment.

The weak data bolstered views the economy was not recovering strongly enough for the U.S. central bank to raise rates from record lows. This has supported non-interest-paying bullion, which would have seen demand decline with higher rates. (Reuters)

58% of Indian employers facing talent crunch

Notwithstanding the recovery in job market, 58 per cent of India employers are finding it difficult to fill positions and there is a significant talent shortage in accounting and finance sector, a survey showed.

Globally, 38 per cent of employers face talent shortage. In India, however, the number stood at 58 per cent, ManpowerGroup's 10th annual Talent Shortage Survey said today.

Even though talent crunch persists for Indian companies, they are better off than last year. In 2014, 64 per cent of employers said they faced difficulty in finding the right people.

"The demand index for IT and accounting professionals have been on a continuous rise. Focus on technology up-gradation and better financial access will drive the sectors growth in the coming months," said A G Rao Managing Director of ManpowerGroup India.

Employers in India are finding it most difficult to fill jobs in accounting and finance, IT staff, secretaries, receptionists, administrative assistants and office support.

The other jobs that are most in demand in India this year include, teachers, engineers, communications staff, sales manager, engineers, communications staff, sales manager, executives, legal staff and researchers.

As per the survey, around 13 per cent of Indian employers said talent shortages are having a negative impact on their ability to meet client needs.

However, few employers are putting in place strategies to address the talent crunch problem, the survey added. (ET)

For first time in 20 years, Indian mobile phone sales drop

Mobile sales dropped 14.5% in Q1 (January to March) 2015, on a quarter-to-quarter basis, compared to Q4 (October to December) 2014; from 62 million handsets in Q4 2014 to 53 million handsets in Q1 2015.

The decline in smartphone sales from quarter-to-quarter was 7.14%. Cheaper “feature” phones performed worse, with an 18.3% sales decline over the same period.

FM seeks rate cut from RBI

Trivia

Each crisis that materially disrupts social, physical, or economic life of people institutes some changes of far reaching implications.

For example, a cardiac arrest forces material changes in the life style of the person. The national emergency imposed by Mrs. Gandhi changed the socio-political fabric of the Indian society forever. The currency crisis of late 1990s changed the economic structure of countries like Thailand and South Korea.

The global financial crisis that started 2007-08 is also shaping many changes of far reaching impact in global markets.

While the non-conventional monetary policies used to diffuse the crises are still being tested and yet to find recognition in the economic text books, the new stringent norms for banking, cross border investments, money laundering, and leash on fiscal profligacy of many countries are some changes of far reaching implications that are already coming into effect.

One serious change that is increasingly becoming evident is the global aid for poverty alleviation due to fiscal constraints of the donor nations. The stress and non-compliance in the aid receiving jurisdictions is rising and may continue to rise in coming years. Africa that emerged as favored investment destination a decade ago must be "under review" at investment banks.

You may also want to read the following:

Euro Wreaks Havoc on Carry Trades in Rally Almost No One Foresaw

Tspiras Endgame Nears as Greek Bank Collateral Evaporates

Chinese Maternity Tourists and the Business of Being Born American

Fed's Evans says FOMC could look at rate hike in June

Monday, May 18, 2015

NIFTY: Constrained by a long leash

Thought for the day

"In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of."

- Confucius (Chinese, 551-479BC)

Word for the day

Rhapsodic (adj)

Extravagantly enthusiastic; ecstatic.

(Source: Dictionary.com)

Malice towards none

Indians are drinking more and young.

The abortion rate amongst Indian teens is rising at alarming pace.

Tell me the catalysts for these trends.

I mean besides, item numbers, item girls, Maggie Noodles, and denim trousers!

NIFTY: Constrained by a long leash

Technically speaking, the Indian equity markets are positioned at interesting juncture from near term as well as short term perspective.

Near Term (1 to 36 trading sessions)

In the near term NIFTY is close to completing a reverse head shoulder pattern (H&S) (see chart on next page). It has also made a higher bottom, suggesting buying support above 8050 level.

A close above 8325 will conform the H&S breakout and will open the way for up move till short term resistance range of 8550-8630.

On the other hand a close below 8120 will negate the H&S formation and trigger a move towards short term support of 7860.

The most likely scenario in my view is that NIFTY may complete H&S pattern breaking 8325 this week and making a move towards 8550 level in next 3-18 trading sessions.

Short term (1 to 108 trading sessions)

In the short term NIFTY appears to be established in a downward slopping channel. The current bounds of this channel are 8630-7860.

Three consecutive close outside these bounds will violate the trend and open the gate for a 7% NIFTY move in the following 1 to 42 trading sessions. This scenario looks less likely as on date.

Medium term (108 to 324 trading sessions)

The medium term uptrend has been violated and must take some time get re-established.

As per current trend the medium term NIFTY range is 7860-9450. Failure to close above 8630 in next 54 trading sessions will move the range lower to 7200-8320. However, three consecutive close above 8630 in next 54 trading sessions will sustain NIFTY in the current range.

At present, the chances of breaking this range are miniscule.

Nifty: Near Term uptrend likely

Selling pressure recedes, breadth better, IV higher but moderate

Global Markets Last Week

Fed, data take center stage

Investors will watch for any change in the economic outlook from housing data and remarks by various Federal Reserve speakers next week, while retailers will take over on the earnings front as the first-quarter reporting season trickles to its end.

The highlight comes at the end of the week with Fed Chair Janet Yellen speaking on the economic outlook on Friday. Any hint of a downgrade to the economy could signal a delay in monetary policy tightening; central bank watchers now expect the Fed to begin raising interest rates in September.

Yellen will be preceded by Chicago Fed President Charles Evans, who will talk about policy on Monday and Wednesday in Europe. The San Francisco Fed's John Williams takes his turn on Thursday, a day after minutes of the Fed’s April meeting are due.

Yellen signaled earlier this year that the Fed will likely start raising borrowing costs later this year, even before inflation and wages have returned to normal levels.

"From Yellen, markets want to know whether or not she continues with that direction," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"Any color that you can give to the debate on expectations for liftoff will certainly be picked up by the market." (Reuters)

Friday, May 15, 2015

Should I celebrate!

Thought for the day

"Different men seek after happiness in different ways and by different means, and so make for themselves different modes of life and forms of government."

- Aristotle (Greek, 384-322BC)

Word for the day

Syzygy (n)

An alignment of three celestial objects, as the sun, the earth, and either the moon or a planet

This is the only word in English language with 3 y's in it.

(Source: Dictionary.com)

Malice towards none

Why "suit-boot" is derogatory?

Should I celebrate!

India's wholesale prices fell at a faster-than-expected annual rate of 2.65 percent in April, their sixth straight fall, mainly on the back of plunging oil prices, government data showed on Thursday.

The data compared with a 2.30 percent year-on-year fall forecast by economists in a Reuters poll and a provisional 2.33 percent annual decline in March.

One of the most important piece of statistics, producer prices index (WPI) lost its glory last year to Dr. Raghuram Rajan's preference for consumer prices as primary policy consideration.

As a common man, I fail to understand how something that has been a critical input in economic decision making for decades suddenly become irrelevant.

The people who used to wait for the weekly (later monthly) WPI data with abated breadth do not even register it. Business channels also do not waste much time discussing this out of favor child any longer.

Nevertheless, I see some merit in discussing it.

From monetary policy standpoint, it might have become less important, but from economic assessment viewpoint it remains a critical input.

A persistent negative reading, highlights to me one or more of the following:

(a) Lack of pricing power amongst producers;

(b) Poor demand environment;

(d) Stronger currency that makes imports cheaper.

I do not see any reason for celebration here.

Sadly, contrary to popular belief, I feel rate cut of 25-50bps may not help the situation in any material portion.

Please help me if you could!

Alarmed at the poor linguistics skills of her eighth standard students, my daughter's Hindi teacher advised the class to read a Hindi newspaper daily.

Being a Hindi enthusiast myself, I was thrilled to hear the idea. But within three days I am scared and afraid of confronting the girl who has just stepped in her teens.

She wonders why we should be living at a place where crime is the way of life. People are angry - with themselves, with their neighbors, and with the system. Women, old and children do not feel safe even in their homes. Heinous and unforgivable crimes like rape of children and murder of old parents is considered mundane. An otherwise brave girl, she was feeling scared even in going to school yesterday.

I do not know where the lies the fault line.

* Whether the system has grossly mismanaged society by raking up their aspirations far beyond the ability to service them? and/or

* Is the society as whole is getting increasingly frustrated by the system and people have decided take the matter in their own hand? and/or

* Were we always like this and it is just that these instances of crime are being highlighted now? and/or

* Media is unduly focusing more on the negative energy within the society, playing with the fear psychosis for short term commercial gains? and/or

* Is our economic system focusing too much on quantitative aspects of growth, leaving behind the qualitative aspects for a later day? and/or

To make my daughter little comfortable, I took her to a senior police officer. From his counsel, I get a sense that in system's eyes perhaps crime against women, children and old is not even a real problem. It is mostly an illusion created by motivated groups like political parties, rival communities or even religious sects to settle some old scores!

After listening the senior cop, my daughter's anxiety has been somewhat relieved. But, I am struggling to incorporate the fear of my daughter into my investment model.

I strongly believe that widespread social anguish and frustration must reflect on the economy in some way or the other.

Low productivity, frequent disruptions, worker-management mistrust, lower predictability are some obvious implications.

Stretching it little further may help conclusions like maverick political experimentations by people (like AAP in Delhi).

But still, I am intrigued as to how to build all this into an investment model and profit from that.

Please help me if you could!