Do it yourself

Friday, July 15, 2016

Birdwatch - 2

"I've not seen in my lifetime any politician who is a heroic figure. The manipulation that all politicians use on one level or another is so transparent."

—Dean Koontz (American, 1945—)

Word for the day

Skerrick (n)

A small piece or quantity; a bit, e.g., Not even a skerrick of cake was left.

Malice towards none

Yesterday I Saw a socialist MP from Uttar Pradesh, who apparently comes from a extremely poor socio-economic background.

He needed one person to hold his mobile phone and another one to carry his briefcase.

I hope someday SC will intervene to end these feudal luxuries of our elected politicians and public servants.

First random thought this morning

In past couple of decades, I have heard umpteen number of people clamoring for conferring of Bharat Ratna and other honors to the legendary hockey player Major Dhyan Chand. Unfortunately, I have not seen the legend playing on the field. I am not sure how many of those who clamor for the maestro actually have seen him playing.

But I have seen Mohd. Shahid playing, and trust me he was no less a master of the game. He has inspired a whole generation of hockey players. He is struggling for his life in a Gurgaon hospital. And I have not heard anyone praying for him.

Birdwatch - 2

Continuing from yesterday (see here) let me try to answer the two questions that are agitating many minds.

It is critical to note that I do not claim to be any expert in financial markets, economics or politics. I try to see things from a student's glasses. However, being a student who does not like to cram the text books or the notes given by his teachers, my answers are deeply influenced by my observations and intuitions. Needless to say that I do not normally score good marks. Regardless, I am usually happy with the results.

Now coming to the issues under consideration.

As I stated yesterday, since most of the events being feared today are either political or have material involvement of the political establishments across the world. Any collapse in the financial markets due to these reasons will therefore reflect strongly on the efficacy of political establishments of the present day. This is therefore a less likely event in the near term (2-3years at least).

From my experience I am convinced that the politicians are the most ingenious people around. They can think of solutions, and have the courage to implement these, an economist or an analyst would not even dare imagine. Helicopter money in global parlance and MNREGA in the local parlance are just a couple of examples.

Thus, for market to collapse either of the two conditions need to be met:

(a) The political backstop to the markets, in the form of unlimited liquidity, is removed, thus creating a condition of freeze (ala 2008-09) that would cause uncontrollable perspiration at temples of traders; or

(b) The present political establishment completely loses its credibility with people and replaced by an alternative regime, which would essentially be an authoritative (read communist or fascist) regime which could unstintingly write off public debt and redistribute wealth of the rich. (also read here)

The following are some illustrative events that may cause material volatility in the financial market and qualifying as black swan.

· Global investors’ patience with US politicians runs it complete course. USD declines without a proper succession plan in place. With no fiat alternative in place, the world is forced to adopt gold standard after a chaotic year in the global financial system and market place.

· In their act of extreme desperation terrorists launch a massive attack on cyberspace materially impacting the global communication systems.

· The imbalances in the internal economy of the US grow beyond control leading to eruption of a civil war leading to renewed aggression for secession by resource rich states.

· Post couple of more large exits (France and Italy), Germany attempts to take control of indebted smaller European nations to safeguard his financial interest and in the process create a strategic alliance (as opposed to mere financial) of European nations. This leads to emergence of multiple poles in a largely unipolar world. Rise in Sino-Japan rivalry may provide further impetus to polarization. This could eventually lead to end of the era of peace that has existed post WWII. Given the demographic changes since WWII, EU and Japan could be major losers in the process. China emerges as a strong pole in the global strategic balance.

· The recovery in commodity prices, which is mostly a correction in prolonged bear market, collapses precipitously, pulling the world into a recession – the deepest and worst ever.

Now coming to brass-tacks - what should I'll be doing today morning with my investments.

Well, I am fully invested and have no intention to sell for now. I am fully prepared to see 10-15% fall in my portfolio without panicking.

Thursday, July 14, 2016

Birdwatch

Thought for the day

"I don't write a quick draft and then revise; instead, I work slowly page by page, revising and polishing."

—Dean Koontz (American, 1945—)

Word for the day

Tourbillion (n)

A whirlwind or something resembling a whirlwind.

Malice towards none

After BJP made a Punjabi CM of Haryana, the Congress Party appoints a Punjabi as UP PCC President.

Will this become a trend, ending the caste based politics, or these two just isolated instances?

First random thought this morning

After Uttrakhand now comes Arunachal Pradesh!

Nabam Tuki might not enjoy majority in the house and the State may head for fresh elections soon. To that extent SC verdict may not change much in the State.

However, in terms of enunciating principles for (mis) use of Article 356, powers of the governor, and constitutional validity of the legislative work done by a duly elected assembly, under the leadership of a CM (or PM) whose appointment to the office is later declared invalid by the court - this judgment could be a landmark, in addition to the S. R. Bomai judgment.

Birdwatch

The clan of birdwatchers who claim to have spotted Black Swans on the horizon is growing by the day. From the "prospects of Grexit" to "vote for Brexit" a host of experts have sounded alarm bells - loud and louder - to join the clan.

There is little doubt that the non-conventional monetary policies followed by large central bankers, and consequent rise in political and geo-political tensions, have prepared created a bounteous breeding ground for the Black Swans to come flocking. However, the heard of birdwatchers eagerly waiting for them is so huge and cacophonous, that expecting them to take the bait sounds almost ridiculous.

In simple terms -

I fully appreciate the concerns of the experts and agree with them that the global economy is stuck in a gridlock and it is not possible to accelerate the growth in any meaningful measure from the current level.

I also completely agree that the current trend in the monetary policy being pursued by the likes of ECB, BoJ, PoBC et. al. is mostly irreversible.

I share their concerns for the poor savers who are primary victims of the financial repression being perpetrated by the central bankers, in concurrence with their political masters.

Where I differ is that - I do not believe that the events like Brexit; unlimited money printing by ECB, BoJ etc.; tension in South China Sea; shenanigans of North Korean premier; rate hike by US Federal Reserve; ISIS gruesome attacks on civilian targets; Donald Trump getting elected as the next US President; some Italian and Chinese Banks taking the Lehman route to salvation; have the potential to cause the market collapse of the proportion seen in 2008-09.

I strongly feel that all these conditions (in my view these do not qualify to be termed as "problems") have been mostly created by the politicians and not an outcome of independent market dynamics. The solution to these problem therefore has to be political. Mere correction in asset prices will be of no help.

With a ridiculous volume of bonds yielding negative return, gold & silver having risen over 25%, so called safe haven currencies (USD, CHF, JPY) having seen material inflows, it may not be easy to decipher what is "risk-off" and what is "risk-on" trade in the current circumstances.

In my view therefore any collapse in not imminent.

This might raise two questions -

(a) If not these what could cause a collapse in the global financial system; and

(b) What should an investor be doing this morning - Buy, Sell or Hold?

I will try to answer these questions in my dummy ways tomorrow.

Wednesday, July 13, 2016

FA-u-Q

Thought for the day

"Nothing gives us courage more readily than the desire to avoid looking like a damn fool."

—Dean Koontz (American, 1945—)

Word for the day

Churrasco (n)

Meat cooked over an open fire.

Malice towards none

Is it time to appoint a Rural Economist as RBI governor?

Since, we have already tried market economists, development economists, career bureaucrats and bankers.

First random thought this morning

Close to full marks in quantitative subjects like Mathematics and Physics is fine.

But in humanities?

This is absurd!

This suggests that we still living under the Macaulay's spell. We are not allowing our children to think freely and express their thoughts in their language. We want them to be conformist in the colonial sense.

FA-u-Q

With so many emotions running concurrently, the present atmosphere in the Indian equity market distinctly resembles a traditional Indian wedding ceremony.

The market participants are happy, greedy, fearful, somber, repentant, hopeful, jealous, boastful, swaggering, inebriated, hasty and ruined all at the same time.

This is neither new, nor unusual. Most periods of market surge against all odds have seen witnessed similar scenes. The most recent being 1Q2015 and prior to that 1H2007.

In these times, it is common to frequently hear some uncomfortable questions (FA-u-Q). Overwhelmed with hope, fear and greed, these questions are uncomfortable because I cannot answer those questions with any degree of certainty or confidence in the argument. Some of the questions, I am afraid to hear are as follows:

How much more from here?

The potential upside in a rising market and downside in a falling market are always daily rolling targets. Technical targets are usually conditional (e.g., “if market rises above this level, it could go to that level else…) and generally do not account for exceptional moves. Price targets based on fundamental valuation and historical discounting trends are dependent on materialization of multitude of complex forecast regarding likely revenue, profitability, cash flows, capex, project execution, policy environment etc.

At the close of the market on 12^th July 2016 I could say that if Nifty sustains above 8418 level and manages to close above 8530, we could see it going to 8650 level soon. Else, it would fall to 8328 and then to 8060 level. However, if 1QFY17 results disappoint, GST bill is not passed in monsoon session, CNY devaluation accelerates, Brexit process starts earlier than expected, and/or July sales figures for auto and cement remain sluggish, we may see market correcting sharply.

If this does not make sense, well it actually does not. I am just trying to evade a straight answer to an uncomfortable question.

This stock is 2x in past three month. Is it still a buy?

The broader market indices are at all time high. Over 100 stocks have risen more than 100% in past three months. The question is how much more these stocks could rise?

Again there could be no straight answer to this. I can just remind that the markets are not that inefficient these days. The information arbitrage has diminished materially in past few years. The 'Eureka' movements have to be rare. If these are frequent, there must be something seriously amiss.

Should I buy midcap or large cap

Large cap ‑ midcap-small cap; long term ‑ short term; value investor – speculator etc. is nothing but jargon created to unnecessarily complicate the process of investment and compel investors to seek professional advice.

Stocks like Nestle, Britannia, Colgate, ABB, AB Nuvo, Ashok Leyland, Hind Zinc, BEL, Bharat Forge are termed midcap.

Investors who bought large cap RIL, HUL, Sun Pharma, Bharti Airtel etc. a year ago are regretting. While those who bought micro cap stocks in sugar, textile, cement etc. sectors are rejoicing.

In my view, the approximate correct answer would be buy the companies which are relevant in today’s context, for the period they are likely to remain relevant at today’s price.

Tuesday, July 12, 2016

After all, being fearful is not a bad idea - 3

Thought for the day

"Human beings can always be relied upon to exert, with vigor, their God-given right to be stupid."

—Dean Koontz (American, 1945—)

Word for the day

Egalitarian (adj)

Asserting, resulting from, or characterized by belief in the equality of all people, especially in political, economic, or social life.

Malice towards none

The cabinet reshuffle has at least settled that Ms. Irani and Ms. Bharti are not the BJP's chief ministerial candidate in UP.

First random thought this morning

The media is trying to project the transfer of Ms. Irani from HRD ministry to Textile ministry as 'demotion' reflecting on her poor performance as HRD minister.

I do not understand the logic. Textile ministry has been the mainstay of employment generation in the country since independence. It still continues to be a sector where the central policies are a key determinant of growth. Whereas education primarily being a state subject, HRD minister's role is more advisory, besides being administrating a handful of central institutions and universities.

Moreover, if HRD has JNU, Textile Ministry has NIFT.

After all, being fearful is not a bad idea - 3

In past couple of months, my readers have raised more queries regarding currency than equities. This does not sound unusual to me.

In past one decade or so, our society has been integrating with the global economy at much faster rate than a common man would realize at once. An analysis of kitchen (fruits, pulses, bakery, confectionary, crockery, appliances etc.), kids desk (stationary, bags, books, toys, movies, cartoons, etc.), bedroom (clothes, accessories, shoes, slippers, lights, ACs, TV, wall paper, tiles, flooring), and office space (vehicles, appliances, equipments) etc. would show that imported stuff (including assembled from imported components) occupies prominent space in our daily life.

Mind you, it is not just true for the typical upper middle class urban household. This is in fact more true for a middle or lower middle class semi urban or semi rural household. In fact, I will not be completely off the mark, if I say that the whole Consumer Revolution in India (rising propensity to consume amongst people staying at the middle and bottom of the demographic pyramid) is primarily built around the cheap imports (popularly referred to as "Chinese" in generic terms) of both consumables and durables.

Persistent suppression of CNY by China; intense war between JPY (Japan) and KRW (Korea); fall in global commodity prices; and financial crisis in Europe — at a time when in India (a) affordability and propensity to consume is rising; (b) liberalization of domestic retail trade and foreign trade is gathering pace; (c) foreign investments are being encouraged through FDI route; and (d) INR is relatively stable with one of the best yields amongst EM peers — are certainly aiding the trend.

The precipitous fall in GBP on account of Brexit vote may see another major round of currency adjustments. We have already seen ~2% devaluation in CNY, ~4% devaluation in JPY. INR has however stood its ground. This implies the flood of imported consumable (and durables) is likely to worsen further.

As a consumer its certainly music to my year.

But as a local businessman dealing in domestic stuff, I would be worried. Despite all anti-dumping and other measures, I may be losing my market share to these "imported" stuff. I would envy my fellow businessmen who have moved to trading in and/or assembly of imported stuff.

I would be worried as an administrator also. Structurally, it does not augur well for the country's foreign trade balance. Should a 2013 like BoP crisis recur before Make in India starts yielding results.

Other side impact of currency volatility could be that the technology and process knowledge transfer that had accelerated in past one decade takes a hit as the manufacturing stays back or relocate to Americas; thereby impeding India’s endeavor to transform itself from supplier of raw material and low cost converter — the reliance on imports may rise, whereas the value addition in exports declines.

Also Read

After all, being fearful is not a bad idea -1

After all, being fearful is not a bad idea - 2

Monday, July 11, 2016

Nifty willing to move up, waiting for some tailwind

Thought for the day

"Somebody asked me about the current choice we're being given in the presidential election. I said, Well, it's like two of the scariest movies I can imagine."

—Dean Koontz (American, 1945—)

Word for the day

Velleity (n)

A mere wish, unaccompanied by an effort to obtain it.

Malice towards none

Will adopting Calendar Year as Financial Year help the cause of "Ease of Doing Business" and "Integration of Indian Economy into Global Economy (Globalization)"?

First random thought this morning

Traditionally popular Hindi films have highlighted the contemporary trends and problems, like gold smuggling, food hoarding, drug abuse, unemployment, Naxalism, terrorism, mafia dominance, corruption, child and women abuse, etc.

The glamorization of traditional sports like Hockey, running and wrestling in recent films indicates that these sports are regaining their popularity. Whatever the reason, these have the potential to be developed as a major source of employment and state revenue (entertainment tax and tourism).

Nifty willing to move up, waiting for some tailwind

Nifty consolidated last week, ending almost unchanged from the previous week. Though both domestic and foreign funds were net sellers, the non-institutional buying supported the market well. As suggested last week, the Greed continues to be dominant sentiment at present.

This week also most of the action may be witnessed in the broader markets.

Nifty is placed much better as compared to two week ago in terms of trading indicators. However at present it lacks the required momentum to make a decisive move in either direction.

The present consolidation pattern may continue this week also. A risk on trade in global market on the back of strong US job data and likely further monetary easing by ECB and BoJ, could provide some tailwind.

Positive developments on GST legislation, a couple of result surprises could add to the momentum in the following week.

For now, Nifty has a strong support around 8065 level and faces resistance in 8388 -8418 range. Two consecutive close above 8418 may take Nifty to 8560-8630 range in no time. For Bank Nifty a good support exists at 17300 level. A close above 18460 may take it beyond 19K mark soon.

Friday, July 8, 2016

After all, being fearful is not a bad idea - 2

Thought for the day

"If I were to do a foundation, it would be to promote solar energy. And I'm worried about drilling for oil. I think it is harming the earth, 'cos it drains the layer of oil under the surface, and that could be causing earthquakes. It's like we're giving the earth arthritis. I don't know if that sounds crazy."

—Debbie Harry (American, 1945-)

Word for the day

Remontant (adj)

Blooming more than once in a season.

Malice towards none

Why Priyanka Gandhi Vadra should be a matter of debate - within and outside Congress?

First random thought this morning

A serious socio-economic reform would be to "Nationalize the rituals of birth, marriage and death."

Given that a large part of the distress amongst lower socio-economic strata could be traced to the obligatory spending on these rituals, government taking over these rituals would rid them of serious financial burden. On the side, it might end the profligacy of well-off who splurge mindless on these rituals, for the sake of vanity.

Readers' thoughts are welcome on this subject. Would write in detail soon.

After all, being fearful is not a bad idea - 2

The unconventional methods used by the influential global central bankers since 2008, have definitely complicated the context of financial markets.

As I have stated earlier also, for a simpleton like me who:

(a) does not understand the economics beyond its first lesson which says all economic decisions involve a trade off and price of things having economic value is determined by their demand and supply at that given point in time;

(b) does not know how to simulate data on Microsoft Excel Sheet to suit my likings;

(d) seriously believes that numbers invariably follow the good story

The more I try to comprehend how the movement in global currencies and bond yields would impact my investment portfolio which is largely India centric, the more I feel disillusioned.

Unfortunately, the current state of affair is that movements in global currencies and bond yields have become an important factor to analyze in construction and maintenance of an investment portfolio - regardless of country you live in and asset class you invest in. From precious metals to agro commodities, from real estate to bank deposits and from equities to bonds, the prices and return on all asset classes across world is being impacted.

An overwhelmingly large majority of global commentators, market analysts, economic thinkers and money managers are portending a bloody end to the current mess.

As I said yesterday, history is providing no guidance at all in the present context; since noting today is like anything in the history.

In four decades since 1976, investment grade bonds have provided 7.47% CAGR with very little volatility. S&P500 has also returned over 3% CAGR in this period, though with a little higher volatility as compared to bonds.

The reputable Bill Gross of Janus capital, in his recent communication quoted from GMO’s Ben Inker communication to their clients "while it is obvious that a 10-year Treasury at 1.85% held for 10 years will return pretty close to 1.85%, it is not widely observed that the rate of return of a dynamic “constant maturity strategy” maintaining a fixed duration on a Barclays Capital U.S. Aggregate portfolio now yielding 2.17%, will almost assuredly return between 1.5% and 2.9% over the next 10 years, even if yields double or drop to 0% at period’s end. The bond market’s 7.5% 40-year historical return is just that – history. In order to duplicate that number, yields would have to drop to (-)17%!"

Gold bulls are obviously enthusiastic. But perhaps they are borrowing too much from history. .....to continue to Tuesday

Thursday, July 7, 2016

After all, being fearful is not a bad idea

Thought for the day

"It's amazing to me to see how bands evolve and how they take all their influences and come up with their own sound."

—Debbie Harry (American, 1945-)

Word for the day

Transmogrify (v)

To change in appearance or form, especially strangely or grotesquely; transform.

Malice towards none

What's reason for Jayant Sinha's transfer from Finance to Civil Aviation:

(a) over-exposure to media;

(b) his father's criticizing PM;

(c) poor performance;

(d) needed at Civil Aviation as new policy gets implemented;

(e) All of the above;

(f) None of the above

First random thought this morning

Anil Madhav Dave is appointed new Environment Minister of the country. Unlike Mr. Javdekar, Mr. Dave brings baggage to the ministry. He has been a green activist, closely associated with river conservation. Like Mr. Javdekar he is also an RSS parachrak, but unlike his predecessor, Mr. Dave proudly proclaim his allegiance publically.

I guess, industry might experience some conflicts in the Green Ministry in coming months.

After all, being fearful is not a bad idea

Wonder why would someone buy a 30year bond with negative yield to maturity (YTM), implying that after 30years he expects to receive less money in nominal terms than he is investing today. As per various estimates globally over US$30trn worth of global bonds are trading at negative YTM on nominal basis. Besides an overwhelmingly large portion of ~US$225trn global debt is trading at close to 1% YTM (meaning negative real returns).

There could be several reasons for someone to invest in a negative YTM security. For example, if one—

(a) Expects inflation to stay negative for a long period of time, thus enhancing the value of money; or

(b) Does not have enough space at home to keep currency or his/her home is not safe for keeping his money; or

(c) Does not have faith in present days currencies and believes that the redemption will occur in a different & stronger currency; or

(d) Does not expect any debasement of currency in which the bonds are denominated; or

(d) Believes that a bigger fool is waiting outside his door, ready to buy the bonds at even higher price than what he is paying. (This is my favorite reason!)

Whatever the reason, one thing is certain that this is an anomalous situation that cannot sustain for long; although as someone said - "irrationalities may last longer than expected".

As a tiny investor concerned mostly with the investments in INR assets, I have little reason to be afraid.

· I still get one of the best available nominal yields globally on my debt portfolio.

· Thanks to the inflation hawk as RBI governor, my real yield is also positive.

· My home currency (INR) is stable, and has in fact appreciated against a host of currencies.

· My home economy is being widely touted as an oasis in the growth starved world.

· I have reason to believe that my government may default on its obligations. (In fact India is one of the handful of countries which have not seen any sovereign defaults in the recorded history. All major countries, including USA, UK, Russia, etc. have experienced sovereign defaults at some point in time history.)

But the fact is that most of us, including myself, are scared. Most of this fear is emanating from the uncertainty and helplessness, since the conditions are unprecedented and the history books are not providing any pertinent guidance......to continue