Do it yourself

Tuesday, October 27, 2015

A visit to Bihar

"It means, people who are in high and responsible positions, if they go against righteousness, righteousness itself will get transformed into a destroyer."

—A. P. J. Abdul Kalam (Indian, 1931-2015)

Word for the day

Kakistocracy (n)

Government by the worst persons; a form of government in which the worst persons are in power.

(Source: Dictionary.com)

Malice towards none

The Grand Alliance victory in Bihar might compel the Congress Party to leave national leadership to "Allied Forces"!

So a loss in Bihar may actually be a step further for BJP in its Congress Free India mission.

First random thought this morning

Ganga Tera Paani Amrut - is one of the most popular Hindi film song. No Hindu ritual is complete without using Ganga Jal. Then why is that the Gangatic plains of Bihar have high incidence of deadly diseases like cancer!

A doctor in Balia say Ganga bring more toxins into the State's food plate than anything else. "Ganga Jal, Tobacco and Alcohol cause more deaths in Bihar than anything else", he said with a grim face.

A visit to Bihar

I'd travelled to Bihar in 2013, along with my team, as part of our Discover India tour. Traversing through this land of rich heritage, bountiful nature and brilliant people was a rather disappointing experience.

Abysmal poverty, poor social and physical infrastructure, completely fractured political establishment, disinclined administration and deeply divided society on caste lines ‑ we saw a little reflection of much acclaimed 10%+ growth beyond a few large and tier two towns. (read more here)

After two years, when InvesTrekk™ team traveled to this politically and economically critical state again, nothing seems to have changed. In fact it would not be untrue if we say that the things have changed for the worst.

The election campaign this time is aggressive, technology intensive, bitter and thoroughly confused.

The usual fervor seen during the election time in this State with high degree of political awareness was nowhere to be seen. The populace is generally stressed, skeptic and disenchanted. This is true for all sections of the society cutting across socio-economic divide.

We sincerely believe that if the last two rounds of growth spurts in Indian economy were driven by western and southern regions, the next round of spurt could come only from eastern and central regions.

These regions are rich in resources, account for a majority of young population and hence have higher propensity for consumption, have seriously underdeveloped social and physical infrastructure base thus higher investment appetite.

Therefore, the objective of our visit was not merely to assess the mood of electorate. The idea is also to assess the preparedness of this region to attract investment and likelihood of any material rise in consumption.

Key observations

This time we travelled through 27 of 38 districts covering all 9 divisions of the State. The key observations of our team are as follows:

(a) The state of agriculture in this predominantly agrarian state continues to be pathetic. Frequent floods, uneconomical holdings, poor marketing and storage infrastructure, lack of formal credit, social biases, fragmented and inefficient food processing industry and high incidence of land related litigation are major reasons cited for lower agriculture contribution to the state economy.

(b) Low agri income and miniscule industrial base has resulted in large labor migration from the state in past 3 decades. This is a strong vicious cycle which the administration is finding difficult to break despite sizable rise in social sector spending. Bihar economy therefore continues to be substantially dependent on the economic growth in the industrialized states like Maharashtra, Gujarat and Tamil Nadu, as a large component of the Bihar growth could also be attributed to the repatriated money by laborers working in other states

(c) With rise in personal vehicle population, poor local road network has become a common complaint even in remote villages. However, inadequate power and poor water management continue to be the most regretted infrastructure bottlenecks.

(d) In past few years the willingness to educate children has increased materially. The rise in public investment in education infrastructure is visible in most parts of the state. However, most teachers in schools and private coaching centers are unfit to be even high school students. Education is certainly leading to rise in aspiration. But the competitiveness and employability quotient of graduates remains very low. Frustration rather than knowledge & competitiveness appears to be the primary outcome.

(e) Despite socialist regime in the state for past 25yrs, the socio-economic disparities continue to grow. While it is certainly a matter of extensive research, prima facie the higher economic growth in the State could be just an offshoot of growth in other parts of the country leading to higher remittances, higher social sector spending, and haphazard private construction activities in all 14 urban agglomerates.

(f) The administration does not appear to be in sync with the government. People in general believe it to be highly inefficient and corrupt. Most block and district level officials we spoke to cited routine interference in their working by politicians and non-compliant elements supported by these politicians. Law and order machinery is found grossly inadequate, unresponsive, and corruptible.

(g) The ongoing State assembly elections are tough to call. In the course of campaign NDA has lost the early advantage and appears to be losing further ground. After two rounds of elections, the advantage is with Nitish Kumar who is gaining at the expense of BJP. In our assessment, the grand alliance is heading towards a comfortable majority.

I shall be discussing these and many other aspects of our Bihar visit in detail in subsequent posts.

Monday, October 26, 2015

Nifty: At the tipping point

Thought for the day

"One of the very important characteristics of a student is to question. Let the students ask questions."

—A. P. J. Abdul Kalam (Indian, 1931-2015)

Word for the day

Schlemiel (n)

An awkward and unlucky person for whom things never turn out right.

(Source: Dictionary.com)

Malice towards none

Post Bihar elections, BJP may want to review its retirement policy.

Experience after all has "Value", in fact lot of value.

First random thought this morning

1,25,000 good teachers would do much more good to Bihar than Rs1,25,000 crore economic package.

The parents are more willing than ever, students are more enthusiastic than ever, the government is more supportive than ever, the money being spent is more than ever - the only missing piece perhaps is a the teacher! Given that Bihar can regain its glory in two decades.

Nifty: At the tipping point

Nifty has reached a critical level from midterm perspective.

On monthly charts, Nifty has successfully completed the bearish H&S pattern that began to form in October 2014. Nifty corrected 1000 points in this process from monthly close high of 8902 (February 2015) to monthly close low of 7948 (September 2015) in seven months.

At Friday close of 8295, Nifty is now poised at the falling trend line within a broader 8year channel.

The market momentum has slowed down considerably in past few weeks. The monetary stimulus by PoBC and anticipated further easing by ECB next week could prompt some dovish comment from US Fed next week (meeting on 28the October) could potentially create some momentum but closing above 8300 in November would critical for breaking the downward trend.

The more likely scenario in my view is that the falling trend line resistance will be sustained in November also.

Bihar election results would provide more momentum to market than ECB or PoBC actions.

Monday, October 19, 2015

Nifty: Reaching the tipping point

Thought for the day

" Look at the sky. We are not alone. The whole universe is friendly to us and conspires only to give the best to those who dream and work."

—A. P. J. Abdul Kalam (Indian, 1931-2015)

Word for the day

Shirk (v)

To evade (work, duty, responsibility, etc.).

(Source: Dictionary.com)

Malice towards none

Should the popular TV channel Zindagi that mostly shows Pakistani serials be banned and all those who watch it be termed seditionists?

First random thought this morning

Delhi's famous Raavan markets in Tagore Garden is facing serious slowdown in business. The demand for effigies of the supreme symbol of evil is down by 25-30% this year. The economics is not the only reason behind the slow down. Youths' indifference and question mark over the supremacy of Raavan amongst the evil could be some of the reasons.

A small survey of young people to find reasons has thrown some interesting questions. For example, a female DU student quipped "Raavan sounds like a saint in front of modern days politicians and religious gurus, why to burn this poor chap!" A young CA feels "where is Ram who will kill Raavan, we have Raavans only!" Some school students at a metro station feel the trouble of going to RamLila and Raavan burning is not worth taking. They would rather "sit at home and play Angry Bird".

Nifty: Reaching the tipping point

Nifty completed the bullish inverse H&S pattern as expected a couple of weeks ago (see here), giving a decent exit to local participants as is evident from two weeks of continuous domestic outflows and fading momentum.

At 8238 weekly close, Nifty looks good for some more gains. However, fading overall momentum and peaking oscillators suggest that the gains may not be material from the current positions.

Absence of any major economic event and trickling foreign flows may keep the momentum slow but positive. Expect Nifty to gain 1-3% more from the current levels in the near term. The range for this week thus could be 8010-8470. A close below 8010 will confirm the completion of up move.

The short term (3-6 months) trend still remains downward.

Friday, October 16, 2015

Reign your temptations

Thought for the day

"How quick come the reasons for approving what we like!"

—Jane Austen
(British, 1775-1817)

Word for the day

Otiose (adj)

Being at leisure; idle; indolent.

(Source: Dictionary.com)

Malice towards none

Many seem to be implying that if you had chosen not to protest in 1975, 1984, 2002, 2013 - you have seized your right to protest!

Someone remind them that Lord Krishna acted only when Shishupal abused him for 101st time.

Reign your temptations

The current result season has expectedly started on a low note. Industry leaders like TCS, HUL and ZEE have posted results which were below even moderate expectations. More importantly, the managements of these companies are not sounding particularly optimistic about the prospects in near future.

The management of HUL has categorically confirmed many trends that I have been highlighting from time to time (see here). For example:

(a) The premium segment has done well while the economy segments have faced pressure. (See here)

(b) Rural demand has moderated and outlook remains uncertain in view of multiple constraints - lower farm income, slower wage rate growth, moderate growth in government's social sector spending and lower remittances from laborers migrated to urban centers. (Also see here)

(c) Only a part of the lower commodity prices is reflecting in the bottom line of corporates. The raw material advantage is obliterated by higher advertisement and marketing spend (A&M), larger discounts and rising wage cost etc. The pricing power has diminished considerably and competition intensified.

It is interesting to note that the higher A&M spend of consumer companies is reflected in ZEE's results (37% growth in advertizing revenue). But poor subscription growth has normalized this advantage.

On the global market side, both Infosys and TCS have highlighted muted near term outlook on moderate demand growth, persistent pricing pressure and rising costs. HCL Tech has also guided short term caution in near term. (See here and here).

On domestic investment demand front, the recent guidance from the management of L&T is noteworthy. (see here)

All this leads me to believe that we may see material downward revision in current earnings estimates once the current result season is over.

Currently, the consensus FY17e Sensex earnings estimates are around Rs1850 (down from Rs. 2050 in April 2015). Thus, at 27k Sensex is trading 14.6x FY17 earnings, close to its long term average of 15.5x one year forward multiple.

In my view, these earnings estimates may come down by another 5-8%, led by IT, industrials and consumers. In which case, the upside potential in next 12months, from the current levels, will be further moderated to 6-8%.

I am tempted to believe that the current India enthusiasm amongst foreign investors may sustain in 2016 also, leading to re-rating of Indian markets to higher multiples.

But finding ideas to execute my temptations will be a tough ask. All I want is already expensive. All that I do not want at current prices, I will not buy at 10% higher prices, no matter what.

My trader friends are suggesting buying November Nifty straddle for Bihar election results. I am not too inclined, but will take a call once my team comes back from Bihar post Dussehra holidays.

Thursday, October 15, 2015

Protecting the vulnerable

Thought for the day

"I have been a selfish being all my life, in practice, though not in principle."

—Jane Austen
(British, 1775-1817)

Word for the day

Cognoscenti (n)

Persons who have superior knowledge and understanding of a particular field, especially in the fine arts, literature, and world of fashion.

(Source: Dictionary.com)

Malice towards none

What is the raison d'être of Shiv Sena today?

Protecting the vulnerable

Indian government has raised tariff barriers on import of steel, aluminum, vegetable oils, etc. in recent weeks to protect the domestic manufacturers from global dumping.

This week India's three copper majors — Hindalco Industries, Vedanta Ltd and Hindustan Copper Ltd—have reportedly warned (see here) "the government that the sector is facing an imminent shutdown in the face of a surge in cheaper imports from Japan and ASEAN countries, which could jeopardise the Narendra Modi-led government's 'Make In India' initiative.

Operating at 75% of capacity, the industry has cautioned about further cuts in production that could impact 10,000 jobs, blaming free trade agreements or FTA which would allow an influx of duty-free copper by 2021, for making the entire sector unviable.

The stock market has reacted very positively to these protection measures. All major metal producers' stocks have surged 10-30% in past few days.

These protective measures may be desirable to protect the domestic industry from temporary cyclical adjustments in the global markets. In fact most developed countries have used these measures quite often.

However, in case of structural adjustments in global markets, the utility and desirability of these measures is highly questionable.

In my view, it is matter of wider debate whether the current slowdown is merely a temporary cyclical adjustment or it is part of a wider structural adjustment necessitated by the damages inflicted on the global economy by the recent global financial crisis (GFC).

The debate may remain inconclusive for many years, and may even last till the adjustments are fully carried out.

Under the circumstances I do not find myself competitive enough to comment on the desirability or otherwise of these protective measures in Indian context. Though I feel bad that in this festival season my favorite sweets will be expensive by 20% due to expensive ghee and sugar.

Insofar as the trading the up move in metal and sugar stocks is concerned, I would prefer to let it go; despite being highly tempted to short sell.

In this context, I would like reproduce a recent blog post of my favorite Bob McTeer. Incidentally, I fully agree with his views.

"The Trans-Pacific Partnership: Are We Up To The Challenge?

“What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.” —Henry George

To close our borders to imports, that is. And to those who think exports are okay but imports are not, and that countries who have a surplus in trade with us are “killing us,” Henry also pointed out that:

“To have all the ships that left each country sunk before they could reach any other country would, upon protectionist principles, be the quickest means of enriching the whole world, since all countries could then enjoy the maximum of exports with the minimum of imports.”

The Trans-Pacific Partnership trade pact is about to test the economic literacy of the American public and politicians. I’m not optimistic that it will pass because we all understand and appreciate the benefits of freer foreign trade. Henry George would probably be disappointed. It may pass, however, because the balance of lobbying power could tilt in its favor. In other word, business interests desiring better access to foreign markets may beat the protectionists. I’ll take it that way too, if necessary.

The TTP is a trade pact among 12 Pacific Rim countries: the United States, Canada, Mexico, Peru, Chile, Australia, New Zealand, Brunei, Japan, Malaysia, Singapore, and Vietnam. These countries reportedly account for about 40% of global trade. The TTP is supposed to represent the administration’s tilt toward Asia.

I haven’t read the agreement and don’t know the details. I’m pretty sure I would regard the safeguards included for labor and environmental standards as watering it down. I’d rather have my trade pacts neat, but in this day and age I understand that won’t happen.

My limited purpose here is to arm the good guys who favor freer trade with some ammunition against specious arguments we’ll be hearing against it.

The main argument proponents use against freer trade is that it will cost jobs. Will it? Yes, of course some jobs will be lost as imports substitute for domestic production. But just as many jobs will likely be gained as exports expand. There will be job losses, but not necessarily net job losses.

This offsetting of job losses with job gains doesn’t just depend on luck. Automatic economic mechanisms will produce that outcome. When we import more, the exporting countries earn more dollars with which to purchase imports from us. If they don’t, on a multilateral basis, the dollar will depreciate against foreign currencies and make our imports more costly in dollars and our exports cheaper in foreign currencies. Flexible exchange rates tend to promote balance between our job creating exports and job killing imports. You can’t import without exporting an equivalent value over time. You can’t export without importing an equivalent value over time.

The problem is that job losses from imports or movement of production abroad are visible and easily identifiable. The job gains from exports or import substitution are less so. It’s the old seen versus the unseen problem.

So far I’ve concentrated on the jobs question. On production. We should not forget that exports are the cost of trade while imports are the benefits of trade. We are all consumers and we all benefit when output expands because of increased trade, just as we benefit when new technology increases production. All the focus in political debates is on the producer and jobs. Some of us make a living by producing something that is exported. All of us benefit from more plentiful imports.

Speaking of debates, ‘they are killing us’ usually refers to countries that have a trade surplus with us. I guess for us to kill them we have to have the surplus. This is silly.

I have a deficit with just about everybody I deal with. I buy food at the grocery store, gasoline at my local service station, get hair cuts from my barber. I have a deficit in trade with all of them because I don’t sell them anything. I have a surplus with a couple of firms I sell my services to, witch, so far, covers my deficits. My balance of trade is multilateral, not bilateral.

It’s the same with countries. We don’t have to match our purchases from each country with sales to the same country. Our surplus with some covers our deficits with others. The fact that we’ve had a trade deficit for several years covered by a surplus in capital flows does not change the principles. In the first place, its a fairly stable deficit. But, more importantly, The various balancing mechanisms, including exchange rates discussed earlier, work on the capital accounts as well. A deficit or a surplus tend to bring about their own cures over time.

Consider trade between the citizens of Texas and the citizens of California, or any other state. Since we don’t keep the records, we don’t know which has a deficit and which has a surplus. But we can be confident that corrective forces are at work, automatically, without policy intervention.

The two quotes from Henry George are devastating to the protectionist argument. However, the most famous argument against protectionism came from my hero, Frederick Bastiat, who fought the free-trade battles in France in the mid-1800s. He used wit and sarcasm to make his case. He wrote a fictitious letter to the French Parliament on behalf of the French candlemakers arguing forcefully for the shutting out of the sunlight from houses to sustain the prosperity of the candlemakers. The sunlight was, after all, unfair competition. All they wanted was a level playing field."

Wednesday, October 14, 2015

Strategy update - II

Thought for the day

"Vanity working on a weak head, produces every sort of mischief."

—Jane Austen
(British, 1775-1817)

Word for the day

Bromide (n)

A platitude or trite saying.

(Source: Dictionary.com)

Malice towards none

All said and done - may I dare ask "Who is this Mr. Kulkarni and what business does he have with Mr. Kasuri?"

Strategy update - II

The global financial crisis and consequent economic challenges have provided India with a great opportunity to consolidate her position in the global order - economic as well as geopolitical.

Factors like a 1.25bn strong mostly conservative society, young demography, a strong leadership fully committed to democratic traditions, large pool of English speaking workers, well developed market system, underdeveloped economy with good appetite for investment - make India standout in a world struggling with fast aging and highly indebted societies, torn with civic unrest arising from massive unemployment and geopolitical strife.

It is really unfortunate that at this critical point in time when the entire nation needs to come together and avail this opportunity, every one appears to be quarreling not only with each other, but also with self believes.

· PM Modi has to fight uncooperative opposition and the opponents within broader Sangh Parivar. BJP as a party appears struggling to accept India in the present shape and form. For many undoing the 1947 partition is on top of the agenda. Some of them would even like to go back and undo the British and Moghul rules also.

· Socialist movement that has been hostage to feudal elements for past 25yrs and has degenerated badly, is melting under the pressure of its own internal contradictions. Social justice to them is now synonymous with the interest of their respective families.

· The comatose communist movement is too desperate to save its nest in the Lutyens' Delhi.

· The Congress Party is crumbling under the blind ambitions and incompetence of its first family. At top of their agenda is to secure maximum media coverage so that they remain relevant till next election; even if this media coverage comes at the expense of national interest.

· The wise men (academics, writers, intelligentsia, and artists, etc.) and media — who bear the responsibility to lead the society on a righteous path by showing the light of knowledge are too busy in trifling gimmickry and hence not helping the situation either.

Do not make a mistake - as an investor I am not worried about all this mess. In my strategy I have factored all this commotion.

I am a firm believer in the grit, righteousness, perseverance, tolerance, integrity, austerity, frugality and competence of my fellow countrymen. These characteristics shall allow our economy to sustain and grow - may be not at a rate in double digit as many would like, but at a pace good enough to sustain the interest of investors and businessmen.

I do not usually entertain the thoughts of higher and faster growth potential, radical economic or social reforms.

The earnings season has started on expected lines, with Infosys reiterating what they said a month earlier and what HCL Tech echoed a couple of weeks before. I am not worried about the market falling on poor earnings. In fact I waiting for opportunities to invest at lower levels.

Tuesday, October 13, 2015

Strategy update

Thought for the day

"Selfishness must always be forgiven you know, because there is no hope of a cure."

—Jane Austen
(British, 1775-1817)

Word for the day

Divulgate (v)

To make publicly known; publish.

(Source: Dictionary.com)

Malice towards none

No one has any doubts that the Congress Party is playing as 12th man in the Bihar Polls.

No one dare ask the leadership — "what's the plan?"

Strategy update

Continuing from last week (see here) I present my thoughts on the appropriate investment strategy in accordance with the emerging economic trends.

Trend 1: Economic growth will remain slow to moderate for FY17 too, as the global economy struggles with Chinese slow down, EU and Japan stagnation, and US policy adjustment.

The capacity utilization in India which is presently at much below optimum level, may not improve so as to motivate capex even in FY17; regardless of lower rates. The growth will therefore mostly come from consumption and productivity improvements.

Technology, innovation and services will therefore remain top investment themes. Replacement cycle, especially in utilities and public services, appears an interesting theme to me; in particular power T&D, public transport, financial service look most promising.

Trend 2: The process of elimination to begin forthwith. The global capacities rendered redundant by Chinese slow down and down commodity cycle will get to play a major role in Indian growth. Global E&C services companies will get to play a larger role in Indian growth economics.

The inefficient domestic players, not only less productive small and medium enterprises (SME), but also large PSU and private enterprises, will face serious existential threat from global competition. The government protections like defense set off clause and tariff barriers and FDI limit etc. may be eased materially to maintain growth rate and overcome shortages of capital. To me therefore the Indian businesses of global corporations are preferred over pure domestic E&C services and capital goods companies.

Trend 3: Despite lower inflation and positive real rates the growth in private consumption will remain skewed in favor of upper middle class and rich. Middle class discretionary spend will be constrained by lower employment and wage growth, higher education, health and skilling expenses.

The consumption stock, all richly valued, may not see any major sell-off due to lower growth, but a time correction looks more likely. I would therefore mostly prefer luxury and a little necessity in consumption. For example, I would prefer BMW/Merc over Alto, Fan and Led over AC, Premium liquor over cigarette, dental hygiene over biscuits etc.

Trend 4: Cost of doing business is likely to increase due to higher taxes, stricter compliance norms, enhanced social responsibility standards, transparent and accountable administration, etc.

I would therefore prefer, companies paying full taxes, are already fully compliant and socially responsible as opposed to those known for efficient tax management and political connections.

Trend 5: Inclusive and sustainable growth would indubitable mean faster and deeper growth of financial sector.

I have been underweight on financials (zero weight for PSU banks for last three years). I guess this would need a change now. Will let you know when I figure out how to do this.

Monday, October 12, 2015

Nifty: Greed paving way for fear, very slowly

Thought for the day

"There are people, who the more you do for them, the less they will do for themselves."

—Jane Austen
(British, 1775-1817)

Word for the day

Jejune (adj)

Without interest or significance; dull; insipid.

Lacking knowledge or experience; uninformed

(Source: Dictionary.com)

Malice towards none

Earth quack with epic center in Delhi - first in many decades. No damage done.

Mother Nature has warned!

Please do not let this warning go unheard!

Nifty: Greed paving way for fear, very slowly

Since the current up move in Indian market started from September 2013, last month for the first time large caps have outperformed the broader markets. Also for the first time in many months, domestic investors were net sellers in equity when foreign investors were net buyers.

This combined with the fact that the market has been losing momentum for many weeks, is sufficient indication that the investor at large are turning cautious about equities.

I shall be closely watching for a material fall in market breadth, volatility and fund flows. The first indication of acceleration in all three together will be the best opportunity to short Indian equities.

The moot point is whether the market could surprise and rise materially from here.

I feel, the risk reward at this point in 5:2, i.e., 10% downside for every 4% rise in benchmark indices. The ratio is much worst is case of broader market indices.