Tuesday, May 17, 2016

I'm not going anywhere, neither do markets


Thought for the day
"If I could explain it to the average person, I wouldn't have been worth the Nobel Prize."
— Richard P. Feynman (American, 1918-1988)
Word for the day
Cunctator (n)
A procrastinator; delayer.
Malice towards none
After all is said and done, India will not be Congress Mukt, as by the end BJP would have become more Congress than the GoP itself.
The skeptics should watch TMC which is more communist than the CPM.
First random thought this morning
The famous Mumbai Dabbawallahs have evoked global interest. The British Royalty is impressed and so are management czars at elite Harvard Business School. The alcohol supply chain in Gujarat also deserves a place in the hall of fame for management wonders.
Regardless of the bitter rivalary between CM Nitish Kumar and PM Narendra Modi, the bootleggers in Bihar must be learning a lot from their Gujarati counterparts.

I'm not going anywhere, neither do markets

"Sell in May and go away", theme is playing well in global equity markets. Global investors are on a frantic selling spree, as not seen in past five years. Even though India, along with a couple of other emerging market have not witnessed much selling from global investors, the market is evidently worried.
In principle I dislike to be a contrarian. In my view, the natural tendency of people is to be conformist. In financial markets' context, being contrarian is mostly counterintuitive. In some cases it could be opportunistic, but mostly it is found to be egotistic waywardness. Sometime people, usually those who have recently made some exceptional gains, use this as indulgence at the cost of a small pie of such gains.
I have studied many contrarian views and ideas and also examined the success of these views and ideas in anteriority. There have been many isolated cases of large gains being made through contrarian ideas/view. But most contrarian investors who did not convert to conformism, soon after, have usually perished.
Most successful legendary investors have conformed to the classical investment theory. They have made money and left a rich legacy. The contrarians have made and lost money, enjoyed ephemeral glory, and live only in folklores.
In this backdrop, I would now like to answer the worries of my readers.
(a)   In past eight years since the global financial crisis (GFC), research spanning millions of reams has been published, analyzing the global debt, fiscal constraints, limitations of non-conventional monetary policies, Chinese slowdown, Japanese stagnation, Commodity meltdown and American economy's frequent flirting with recession.
       Contrarians have been predicting demise of USD as reserve currency, a widespread armed conflict, disintegration of common Euro area.
       Everything is entered in spreadsheets and factored in forecasts. There is nothing left to imagination. I believe events like Brexit, China hard landing (CNY drastic devaluation), massive Oil defaults in USA, and prolonged slowdown in commodity economies may not led global financial markets to "crash".
       If something could lead to crash, that is unknown and therefore people are not worried about that.
(b)   The endgame of ongoing abnormalities - negative rates, ever expanding central bank balance sheet, and commodities glut is also well documented and known. No one has any doubts about that. I therefore believe endgame is more likely to be orderly than chaotic.
(c)    It's may not be TINA alone that is driving foreign investors towards Indian markets. For a larger part, it could be the realization that Indian economy has gathered the required escape velocity to enter into a higher orbit and there is some exceptional profit to be made. TINA will not be able to protect us if the take off fails. But we still have two years.
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Monday, May 16, 2016

Nifty: Still in consolidation mode, greed rising

Thought for the day
"Reality must take precedence over public relations, for nature cannot be fooled."
— Richard P. Feynman (American, 1918-1988)
Word for the day
Obviate (v)
To anticipate and prevent or eliminate(difficulties, disadvantages, etc.) by effective measures; render unnecessary: to obviate the risk of serious injury.
(Source: Dictionary.com)
Malice towards none
VK and ABD are on their way to become all time great in history of cricket, i.e., till a new star emerges on the horizon.
First random thought this morning
The stock Apple is down 27% in past 52 weeks and presently trades at ~10x trailing twelve months earning. The Indian consumer durable stocks with no innovation, little technology leadership, and no cash on balance sheet trade at 20-50x. The market could be irrational longer than usual but not till eternity. The question is who will be left holding the baton when the sun finally sets at the horizon.

Nifty: Still in consolidation mode, greed rising

Nifty sustained its weekly break down point of 7730 for second consecutive week (see here) and ended 1% higher on weekly basis.
On midterm charts, it appears much stronger as compared to couple of weeks ago. In my view it may consolidate for 3-4 weeks in broader 7690-8140 range and make a big move thereafter. At this point in time I would rate the probability of move being in north direction as 67%.
I will therefore be buying all the dips henceforth.
Two things are noteworthy for traders. One, after a long time, last week both FPI and DII were net buyers on weekly basis; though the level of activity and volumes were low. Two, the "greed" has again started to dominate "fear".

Nifty showing no sign of weakness as yet

...as greed begins to dominate fear yet again

 

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Friday, May 13, 2016

Colletral damage

"Flowers are restful to look at. They have neither emotions nor conflicts."
— Sigmund Freud (Austrian, 1956-1939)
Word for the day
Eldritch (adj)
Eerie; weird; spooky.
Malice towards none
In a country where even the statements of senior ministers are often brushed aside as "personal view", not the official stand of the party or the government, why a map published by some sundry publisher should be a matter of "national interest" or "sedition".
First random thought this morning
In one of the popular David Dhawan flicks, the heroine initially falls for the bad guy. She would not listen to any sane advice, not even her father. It was only towards the climax that she realizes her mistake. All ends well but not before a great deal of drama is enacted. There is no suspense. All viewer could exactly anticipate the endgame; and there are no surprises in the end.
The traders in Indian equities are much like the front row audience of that movie. They are clapping and whistling at the good, enjoying the rhetoric of the bad, showing no nervousness of anxiety - anticipating that all is inevitably gonna end well.
But what if this script has some twist in the tail?

Colletral damage

Continuing from Tuesday (see here).
In my view, the bigger ecommerce story is unfolding in B to B segment. This story is likely to grow much bigger in the times to come.
Unlike the mostly half baked and over-enthusiastic ideas in the B to C space, the enterprises in this space are founded on strong ideas based on innovation and commercial viability. Intellectual property is a key valuation element in this segment and forms a major entry barrier.
Unfortunately, I do not find any investing opportunity in this segment where a small investor like me could fit in.
I was perhaps little early in anticipating the colossal damage that would eventually be caused as we approach the day of judgment in the whole ecommerce mania. Like a stupid who reaches the venue of an Indian wedding well in time, I have been subjected to uncharitable adjectives and ridicule. But being a veteran of NBFC mania of mid 1990s, Dotcom bubble of late 1990s and cheap credit fueled bubble in reality and infra space in mid 2000s, I still prefer to be early than being late.
Undoubtedly, this time the direct exposure of household investors to this mania is not significant. To this extent one could argue that bursting of this bubble may not hit financial markets with same intensity as the previous ones.
I am really not sure about this at this point in time. But, I certainly see huge collateral damage whenever this bubble bursts. For example, consider the following:
(a)   The sector has emerged as one of the largest provider of incremental employment, particularly to semi-skilled youth. A burst in this bubble will leave many of them unemployed; with little chance of alternative employment. Most of these are contract laborers with no social security, little savings, relatively higher personal expense level and high aspirations.
       The pain will be much higher as compared to burst of first dotcom bubble where the unemployed were mostly middle class skilled people and employable elsewhere.
(b)   Though the business model is equity based, many of these companies might have working capital and equipment loans from banks with little or no realizable value.
(c)    The stability and growth in commercial real estate space in past couple of years is mostly driven by ecommerce ventures. The burst will surely hurt the sector, and consequently the lenders too.
(d)   Fancy salaries and perks in the sector might be driving a part of sales of luxury housing, big cars and other premium articles. Expect a material slowdown there.
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Thursday, May 12, 2016

Accounting is never a real problem

Thought for the day
"If you can't do it, give up!"
— Sigmund Freud (Austrian, 1956-1939)
Word for the day
Snuggery (n)
A comfortable or cozy room.
Malice towards none
The Uttrakhand misadventure of BJP will be forgotten soon.
But the price Congress would need to pay to Mayawati, may continue to reflect on UP elections.
First random thought this morning
Historically all developed markets have grown exploiting 3Ms of underdeveloped economies - Money, Materials and Manpower. What has made the difference are the other 3Ms, viz., Military power, Management and Marketing skills.
Logically therefore, a developing economy which is aiming to join the ranks of developed economy needs to develop the later 3Ms and reverse the flow of first set of 3Ms.
None in the BRICs seems to fit the jacket so far.


 Accounting is never a real problem

Since Tuesday evening, I've got numerous calls from the readers, worried about the impact of the reported amendment in the Indo-Mauritian double tax avoidance treaty. Regardless of the market reaction in near term, I believe that most of the fears are unfounded and mostly stem from piecemeal thinking.
Firstly, from what I hear, I find that people believe that with the proposed changes, all the other things will remain the same. Which fortunately will not certainly be the case. Secondly, this amendment in the treaty is not a standalone event. It must be seen as just another measure in the series of globally coordinated efforts to make global financial system and cross border investments more stable and transparent, in the wake of the global financial crisis in 2008-09.
We have already seen changes in Swiss secrecy norms; deeper information sharing on tax evasion and money laundering; stringent norms for black money; and proposal to implement GAAR. This amendment therefore must be seen as a "reform" measure, that market is always craving for.
Coming specifically to this particular event, it is important to understand the implications, direct & indirect.
The proposed amendment "enables" the government to tax capital gains arising from sale of moveable assets in the hands of the entities resident in Mauritius. So far these entities could only be taxed only in Mauritius.
In this context, the following must be noted:
(i)    The amendment, if ratified by the parliament and duly notified, shall apply only to the assets acquired after March 2017. All assets acquired prior to that shall continue to be treated as per the extant provisions.
(ii)   Long term capital gains (holding period 12 months for listed equities and 24 months for unlisted equities) in India are taxed at zero rate. Hence, the amendment will have virtually no impact on FDI, which is normally long term investment.
(iii)  Short term capital gains is taxed @ 15% in India. Assets acquired by genuine Mauritius residents post 31 March 2017 will attract this tax, subject to 50% tax rebate in two year period of FY18 and FY19. The key is that you pay tax only if you make "Profit" in short term.
This amendment thus removes the long pending anomaly of differential tax treatment of domestic and foreign investors. This measure may also discourage short term hot money flowing into domestic market and causing avoidable volatility. Moreover, it must be understood that FPI investment is no charity. FPIs invest if they see prospects of making profits, not to save taxes. So, our markets will continue to get flows if they offer relatively better tax adjusted returns to the investors.
I do not believe that likely accounting problem for P-Note holders is a valid argument against this amendment. I believe that proposal of disclosure of ultimate beneficiaries' details mandatorily was getting implemented in next 3yrs, and GAAR would have overridden this treaty anyways.
 
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Wednesday, May 11, 2016

Dotcom 2.0

Thought for the day
"Children are completely egoistic; they feel their needs intensely and strive ruthlessly to satisfy them."
— Sigmund Freud (Austrian, 1956-1939)
Word for the day
Jeremiad (n)
A prolonged lamentation or mournful complaint.
Malice towards none
The Congress President made an emotional speech while campaigning in Kerala.
The speech had some parallels to the last speech of Mrs. Indira Gandhi in Odisha.
In the meantime the Congress Vice President has reported threats to his life.
What's happening?
First random thought this morning
My all time favorite Saratchandra once wrote "There is no eternal truth. The truth we consider eternal are mostly contemporary and lose their relevance and acceptance with change in time, place and circumstances."
For ages people believed Earth to be flat & stationary and Sun rotating around it. The venom which is medicine for snakebite is deadly poison for a healthy person. Once British Empire, USSR and German wall all looked like lasting till eternity. Only a few years back, INC appeared like the only party competent to rule India.

Dotcom 2.0

From my recent interaction with some e-commerce entrepreneurs, PE fund managers, angle investors and VCs who have invested in these ventures, I could get little insight into this business model.
By all means, the ecommerce business in India is still in infancy stage. Regardless of few Unicorns, the space is replete with half baked & ill conceived ideas, most of which may be commercially and financially unviable.
There is absolutely no doubt that e-commerce and m-commerce business will grow exponentially in next one decade. As a consumer I will definitely benefit from the economies of scale and convenience.
But as an investor, I am not sure. In fact, I am worried about the collateral damage that will inevitably be caused due to very high failure rate in this space.
I would like to share some random thoughts on the sector with my readers.
(a)   In my view, the B to C (business to consumer) product sales and delivery business in India will be dominated by 3-4 large market places and manufacturers themselves. The business may get highly localized in terms of warehousing and delivery once clarity on taxes emerges and GST is implemented. Small and medium sized businesses will increasingly want to sell through large market places rather than selling directly. The logistic matrix for the business, as it exists today, may undergo serious changes in next three years.
(b)   The 3 D's of the B to C model, i.e., Discounting, Discomfort (lingerie, sexual health products etc.) and cash on Delivery may diminish in relevance as the market and audience get mature.
(c)    The services will grow faster than product. But the revenue model will have to change. No one is willing to pay for the services, arguing that even Google, Facebook and Whats App do not charge us.
(d)   The largest opportunity is in financial services, health advisory and education & training.
(e)    The services such as market place for used articles, matrimonial services, job search etc. be in demand but not financially viable.
       The positioning of the market place for used article is particularly poor. One, the business lacks and entry barrier or innovation. Two, no one stops, Amazon to add another icon on its home page to provide this service. Three, the marketing tactics used by these entities ("Sell your useless and old stuff") is inappropriate. No one is interested in buying "useless" stuff.
 
(f)           There is a serious lack of innovation in India. Most ideas are borrowed and may not be suitable to Indian markets and consumers at large. Targeted at a select class of customers, these ideas are not scalable and hence not financially viable - just as sustenance farming....to continue
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Tuesday, May 10, 2016

I see it half full!

Thought for the day
"Men are strong so long as they represent a strong idea they become powerless when they oppose it."
— Sigmund Freud (Austrian, 1956-1939)
Word for the day
Turpitude (n)
Vile, shameful, or base character; depravity.
Malice towards none
How valid is the argument of "potential job losses" against banning socially harmful and economically unproductive industries like fire crackers, tobacco products, etc?
First random thought this morning
Investors in ecommerce ventures like Flipkart, Jabong, Zomato, Housing.com, etc. have noted serious erosion in their valuations.
Should RBI be worried about bank's exposure to these companies' working capital funding? Also do the loans to fund fancy houses and cars of the executives of these startups need any red flag?
Does government need to review their "Startup India" model?
Or let it be! We'll cross the bridge when we reach there.

I see it half full!

Last week I mentioned about three key risks to Indian equities in the near to short term (see here).
The risk of water shortage hampering growth has resonated with the readers most, for obvious reasons. Many of them are facing it in their routine daily life.
However, the other two have evoked a rather ambivalent response.
Some traders have exposure to commodity reflation trade (mostly through steel, cement and sugar) whereas many others are regretting the "miss" and looking to buy on dips. The overwhelming feeling is that state protection is inevitably permanent and will likely increase from the current levels.
E-commerce has little direct exposure of domestic investors. Only a handful of ultra high networth individuals and some corporates have invested through various AIFs. The exposure of course is not meaningful, relative to their networth, and therefore not concerting as yet. On the contrary, private equity funds (mostly funded by foreign capital) are a seriously worried lot. The value of their funds has seen massive erosion. They have been forced to cut on costs. The commitment to future projects is filled with skepticism.
My views on this are as follows:
I believe in the forecast of an overall normal monsoon. I feel last week's reversal in Southern Oscillation Index (SOI) should further ease concerns about a serious delays in arrival of rains. Having said this, I believe that—
(a)   This normal monsoon will mostly bring macro corrections in FY17 - normalization of food inflation expectations, relatively higher farm sector growth, lower financial stress in rural sector and hope of investment revival. 9MFY17 may not see much growth in rural consumption or farm sector investment. The conditions may improve only after a normal Rabi harvest in spring of 2017.
       Nonetheless, if 1QFY17 and 2QFY17 results lead to unwinding of the "hope" trade, it will be a good opportunity for investors to aggressively bet on consumption theme - white goods, two wheelers, and construction material included.
       A serious correction in banks and NBFCs will be an opportunity to build a financial overweight portfolio.
(b)   I am too naive to intelligently analyze near term commodity trade. Nonetheless, I don't see global growth picking up momentum anytime soon.
       I am confident that Chinese economy will witness a protracted correction period and may not rebound hurriedly. It's not only excess capacities, unsustainable debt or non-democratic corrupt administration. I am more worried about demography, global positioning and rise of nationalism in the west.
       I therefore see a much deeper and longer bear market in global commodities, gold included.........to continue tomorrow

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Monday, May 9, 2016

Nifty: Gathering momentum to make a "move"

Thought for the day
"A man who has been the indisputable favorite of his mother keeps for life the feeling of a conqueror."
— Sigmund Freud (Austrian, 1956-1939)
Word for the day
Flivver (n)
Something of unsatisfactory quality or inferior grade.
(Source: Dictionary.com)
Malice towards none
Outside the Islamic nations, two largest democracies - USA and India - are perhaps the most racist and sexist.
Why so?
First random thought this morning
As per reports India aims to create an additional 190 mtpa capacity by 2025-26. Approximately $1 billion investment is required to develop 1 mtpa steel capacity, implying a need for US$190bn investment requirement for the struggling industry.
Has someone examined leasing massive global idle capacities under 25-30yrs contracts.

Nifty: Gathering momentum to make a "move"

Last week I had mentioned that benchmark indices are close to an inflection point (see here). I mentioned ranges 7730-8013 (for Nifty) and 16270-17270 (fro Bank Nifty) on weekly closing basis in which these indices may consolidate before making their next bigger move.
Both the indices ended the week very close to the lower bound of their expected range, (7733 for Nifty and 16296 for Bank Nifty).
The global markets are jittery. The domestic markets have lost considerable momentum in past two weeks. Benchmark indices are poised precariously to their significant support level. But I do not see any sign of weakness in the market.
In my view, markets should rebound after consolidating some more around the present level. The intraweek volatility might surge materially as result season picks up momentum and more core sector stocks declare their results in next 2-3weeks.
For now I may reiterate what I said last week. I shall be watching the following points closely over next 2weeks to take a call on the market direction during June -October period.
Nifty: Weekly close below 7730 for a break down and 8013 for break out.
Bank Nifty: Weekly close below 16270 for a break down and 17270 for a breakout.

Nifty: Momentum weakens, but no sign of a break down as yet.

Bank Nifty: Limited upside, but not breaking down as yet

 

 
 
 
 
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